The Phoenix Principle

Why Google isn't like GM

Google is growing, and GM is trying to get out of bankruptcy.  On the surface there are lots of obvious differences.  Different markets, different customers, different products, different size of company, different age.  But none of these get to the heart of what's different about the two companies.  None of these really describe why one is doing well while the other is doing poorly.

GM followed, one could even say helped create, the "best practices" of the industrial era.  GM focused on one industry, and sought to dominate that market.  GM eschewed other businesses, selling off profitable businesses in IT services and aircraft electronics.  Even selling off the parts business for its own automobiles.  GM focused on what it knew how to do, and didn't do anything else. 

GM also figured out its own magic formula to succeed, and then embedded that formula into its operating processes so the same decisions were replicated again and again.  GM Locked-in on that Success Formula, doing everything possible to Defend & Extend it.  GM built tight processes for everything from procurement to manufacturing operations to new product development to pricing and distribution.  GM didn't focus on doing new things, it focused on trying to make its early money making processes better.  As time went by GM remained committed to reinforcing its processes, believing every year that the tide would turn and instead of losing share to competitors it would again gain share.  GM believed in doing what it had always done, only better, faster and cheaper.  Even into bankruptcy, GM believed that if it followed its early Success Formula it would recapture earlier rates of return.

Google is an information era company, defining the new "best practices".  It's early success was in search engine development, which the company turned into a massive on-line advertising placement business that superceded the first major player (Yahoo!).  But after making huge progress in that area, Google did not remain focused alone on doing "search" better year after year.  Since that success Google has also launched an operating system for mobile phones (Android), which got it into another high-growth market.  It has entered the paid search marketplace.  And now, "Google takes on Windows with Chrome OS" is the CNN headline. 

"Google to unveil operating system to rival Microsoft" is the Marketwatch headline.  This is not dissimilar from GM buying into the airline business.  For people outside the industry, it seems somewhat related.  But to those inside the industry this seems like a dramatic move. For participants, these are entirely different technologies and entirely different markets. Not only that, but Microsoft's Windows has dominated (over 90% market share) the desktop and laptop computer markets for years.  To an industrial era strategist the Windows entry barriers would be considered insurmountable, making it not worthwhile to pursue any products in this market.

Google is unlike GM in that

1. it has looked into the future and recognizes that Windows has many obstacles to operating effictively in a widely connected world.  Future scenarios show that alternative products can make a significant difference in the user experience, and even though a company currently dominates the opportunity exists to Disrupt the marketplace;
2. Google remains focused on competitors, not just customers.  Instead of talking to customers, who would ask for better search and ad placement improvements, Google has observed alternative, competitive operating system products, like Unix and Linux, making headway in both servers and the new netbooks.  While still small share, these products are proving adept at helping people do what they want with small computers and these customers are not switching to Windows;
3. Google is not afraid to Disrupt its operations to consider doing something new.  It is not focused on doing one thing, and doing it right.  Instead open to bringing to market new technologies rapidly when they can Disrupt a market; and
4. Google uses extensive White Space to test new solutions and learn what is needed in the product, distribution, pricing and promotion.  Google gives new teams the permission and resources to investigate how to succeed - rather than following a predetermined path toward an internally set goal (like GM did with its failed electric car project).

Nobody today wants to be like GM.  Struggling to turn around after falling into bankruptcy.  To be like Google you need to quit following old ideas about focusing on your core and entry barriers - instead develop scenarios about the future, study competitors for early market insights, Disrupt your practices so you can do new things and test lots of ideas in White Space to find out what the market really wants so you can continue growing.

Don't forget to download the new, free ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes"

Why Bankruptcies Don't Work - Tribune Corporation and General Motors

"Tribune Company Profitability Continues to Deteriorate" is the Crain's headline.  Even though Tribune filed for bankruptcy several months ago, its sales, profits and cash flow have continued deteriorating.  The company is selling assets, like the Chicago Cubs, in order to raise cash.  But its media businesses, anchored by The Chicago Tribune, are a sinking ship which management has no idea how to plug.  While the judge can wipe out debt, he cannot get rid of the internet and competitors that are reshaping the business in which Tribune participates.  Bankruptcy doesn't "protect" the business, it merely delays what increasingly appears to be inevitable failure.

"GM Clears Key Hurdles to Bankruptcy Exit" is the BusinessWeek headline.  In record time a judge has decided to let GM shift all its assets and employees into a "new" GM, leaving all the bondholders, employee contracts and lawsuits in the "old" GM.  This will wipe out all the debt, obligations and lawsuits GM has complained about so vociferously.  But it won't wipe out lower cost competitors like Kia, Hyuandai or Tata Motors.  And it won't wipe out competitors with newer technology and faster product development cycles like Toyota or Honda.  GM will still have to compete - but it has no real plan for overcoming competitive weaknesses in almost all aspects of the business.

It was 30 years ago when I first head the term "strategic bankruptcy."  The idea was that a business could hide behind bankruptcy protection to fix some minor problem, and a clever management could thereby "save" a distressed business.  But this is a wholly misapplied way to think about bankruptcy.  In reality, bankruptcy is just another financial machination intended to allow Locked-in existing management to Defend & Extend a poorly performing Success Formula.  Bankruptcy addresses a symptom of the weak business - debts and obligations - but does not address what's really wrong -  a business model out of step with a shifted marketplace.

The people running GM are the same people that got it into so much trouble.  The decision-making processes, product development processes, marketing approaches are all still Locked-in and the same.  GM hasn't been Disrupted any more than Tribune company has.  Quite to the contrary, instead of being Disrupted bankruptcy preserves most of the Locked-in status quo and breathes new life into it by eliminating the symptoms of a very diseased Success Formula.  Meanwhile, White Space is obliterated as the reorganized company kills everything that smacks of doing anything new in a cost-cutting mania intended to further preserve the old Success Formula. 

Everyone in the bankruptcy process talks about "lowering cost" as the way to save the business.  When in fact the bankrupt business is so out of step with the market that lowering costs has only a minor impact on competititveness.  Just look at the perennial bankruptcy filers - United Airlines, American Airlines and their brethren.  Bankruptcy has never allowed them to be more competitive with much more profitable competitors like Southwest.  Even after 2 or 3 trips through the overhaul process.

Bankruptcy does not bode well for any organization.  It's a step on the road to either having your assets acquired by someone who's better market aligned, or failure.  Those who think Tribune will emerge a strong media competitor are ignoring the lack of investment in internet development now happening - while Huffington Post et.al. are growing every week.  Those who think the "new" GM will be a strong auto company are ignoring the market shifts that threw GM to the brink of failure over the last year.  Both companies are still Defending & Extending the past in a greatly shifted world - and nobody can succeed following that formula.

Don't forget to download the ebook "The Fall of GM:  What Went Wrong and How To Avoid Its Mistakes" for a primer on how to keep your business out of bankruptcy court during these market shifts.

Changing Captains on a sinking ship - Xerox

"Burns Succeeds Mulcahy at Xerox in First Big Woman-to-Woman CEO Transition" is the Forbes headline.  It's only too bad that this headline took until 2009 to happen.  It's also too bad that gender issues, such as women CEOs, are worth headlines.  But the truth is that the CEO job is still dramatically dominated by men, even though women are half the workforce and been in managerial positions for at least 30 years.  Just goes to show it takes a long time for to change old Success Formulas - and its been true that Boards of Directors, and CEOs, tend to replace an outgoing executive with one much like themselves. 

"Ursula Burns: An Historic Succession at Xerox" was the Businessweek headline.  And not just because the new CEO is a woman.  She's also African American.  African Americans have achieved much in the USA, including prominent political positions - such as America's Presidency.  But even though African Americans comprise about 10-15% of the U.S. population, it's been a very long and arduous climb from the depths of slavery to the CEO suite.  Again, old Success Formulas are repeated again and again and again - and for decades that blocked many women and African Americans from achieving the top job in America's biggest companies.

So kudos to Xerox for building a culture that achieves parity in reviews.  They've allowed the best and brightest in their organization to rise to the top, unencumbered by old notions about gender and race.  And that is a fantastic accomlishment.  We should deservedly praise the executives and Board at Xerox for adapting their human resource policies so that promotions are both gender and color blind.

But that doesn't fix the problem at Xerox.  And unfortunately, promoting another insider is likely to be the end of this once great company. 

Xerox almost single-handedly killed the small offset lithography business.  In the 1960s every major company had several printing presses in the basement.  And print shops were everywhere to support the need for duplicate documents.  Small offset press manufacturers, and support products like plates, were a huge growth industry.  Until Xerox came along with a better technology, and a better pricing scheme.  Xerox sold "clicks", or paper passes through the machine, rather than the machine itself.  And this allowed companies to buy far more copiers than they ever imagined.  In the 1970s Xerox was THE model sales organization; itself duplicated wherever companies wanted to achieve tremendous growth.

But desktop printing spelled the end of growth for large copiers.  Xerox actually had a major impact on the invention of desktop printing, with researchers at Xerox's Palo Alto Research Center (PARC) creating many of the pieces critical for product viability.  But Xerox Locked-in on its copier business, and in the 1980s when the market started shifting Xerox didn't.  By the 1990s, instead of selling millions of small printers, Xerox turned to selling complex copy centers that cost over $100,000 each and took training to operate.  While personal printers popped up in offices like popcorn, the large copiers were replaced by smaller and simpler machines on each hall, or went away entirely.  Xerox sales started slipping, and by century's end Xerox was in real danger of disappearing.

The 30 year employee that stopped a complete failure was Ms. Mulcahy.  She stopped the cash bleeding, and dealt with the huge debt.  Xerox did not go into bankruptcy, but the company saw its revenue drop dramatically and new product launches shriveled up - or were ignored by customers looking for different solutions.  Ms. Mulcahy was like the captain on a damaged submarine.  She was able to plug the leaks and batten down the hatches so some of the crew survived.  But in doing so the submarine kept falling further and further toward the bottom of the ocean.  Xerox may be "settled in" on the ocean floor, but how is it supposed to survive?  How is it supposed to grow?  How is it supposed to accomplish its mission of generating high rates of return year after year?

The market for copiers is not growing, and competition in that marketplace is intense - with machines from Japanese manufacturers such as IBM, Canon and Sharp dominating the market today.  Xerox cannot consider its lack of collapse a big win, because in the process it watched the market shift to a raft of new products in both desktop printing and copying where Xerox does not even compete.  Competitors have launched machines that are more cost effective to use, and often have better capability.  While Xerox was cutting cost, these competitors were gaining share and developing new products.  These shifts have left Xerox far removed from competitive viability, even if it is less in debt and cash flow is better.

We commonly see this sort of behavior in companies after a growth stall.  They appear on the brink of collapse.  But then a smart leader takes dramatic action to stop the bloodletting and "firm up the balance sheet."  The company goes from huge losses to small profits, aided by financial engineering that brings forward costs to pad later P&Ls.  Employees and investors breath a sigh of relief, figuring the badness is behind them and everyone can return to the good old days of making money.  But these respites are short-lived.  Fast enough the company comes face-to-face with customers that demand the new technology and more productive solutions.  Rapidly managers realize competitors have made inroads to previously loyal customers, and price erosion is a constant fact of life.  In short order, profits again turn to losses and more cutbacks happen as insufficient resources are available for funding new product development and new product launches.  What looked for a bit like a big improvement in the business is quickly forgotten as the company falters again.

Americans are an optimistic lot, but there's nothing in this executive transition that should lead us to be optimistic about the future of Xerox.  Ms. Mulcahy was a long-term company veteran who did not change, or even Disrupt, the Xerox Success Formula at all during her tenure.  She followed traditional practices of a company in the Swamp, taking draconian actions to delay failure.  But she didn't "fix" the revenue or new product problems.  The new CEO is also a 30 year company veteran, and one even less likely to attack the old Success Formula.  Where Ms. Mulcahy was from sales, and we might have expected her to undertake a market-focused set of actions, Ms. Burns is from operations and gained her success as someone who looks internally for improvement rather than toward the marketplace.

Again, congratulations to Xerox for being gender and race neutral in selecting its CEOs.  But don't expect a dramatic improvement in the fortunes at Xerox.  Xerox is in big, big trouble.  It needs to be in new markets it has long ignored, and it needs products the company has long eschewed.  The brand has become tainted due to expensive pricing and declining sales.  Xerox is so far into the Whirlpool that it is almost infeasible to think of the company becoming "great" again.  It would take incredible Disruption and results from very rapid White Space.  But Xerox is not skilled in these capabilities, and it doesn't show the depth of market savvy or product innovation that would be required to make the company a leading competitor.  Unfortunately, even though Xerox has successfully changed captains, it is highly unlikely the new CEO will save the ship.

 

The problem with Hedgehogs - Dassault & Cessna vs. Tata

Two sides of a page, two sides of strategy.  Two different approaches, two very different sets of results.

That's what struck me when I was waiting for a meeting recently.  I picked up a print edition of Businessweek laying in the reception area.  On page 13 was "Public Flac Grounds Private Jets."  A soft economy has teamed up with bad impressions of executive perks to create a huge drop in orders for private jets.  French manufacturer Dassault had 27 more cancellations than orders in the first quarter.  U.S. based Cessna had 92 cancellations, and was bracing for 150 more by today (7/1/09).  In the meantime, the company has laid off 42% of its workforce and discountinued development of its newest jet aircraft.  And the market for used aircraft is flooded, boding poorly for future sales as the used inventory seeks buyers.

Here are two companies that definitely have their "hedgehog concept" as recommended by Jim Collins.  They set out to be leaders in private aircraft manufacturing, focusing on two different continents.  And they are leaders.  They know how to do be product leaders, and they do it well.  But look what happened when the market shifted.  In dramatic fashion, they go from record profits in 2007 to barely viable.  Being really good at making planes doesn't matter when nobody wants them.

Turn the page (literally), and on page 14 was "Now, the Nano Home."  In this short article we hear about how Tata Group, which has launched the Nano automobile for under $2,000, is entering the housing development market.  While builders in the USA are failing due to the real estate crash, Tata is creating entire apartment developments.  But not U.S. style.  These apartments sell for as little as $7,800 and come as small as 218 square feet!  (There are larger and more expensive units - up to $40,000).  While this may seem crazy to Americans, it fits the market where you're trying to convince someone to leave a squatters tenement and buy something legal to live in.  It's a market I've never heard of a single American company trying to develop, yet the opportunity is huge!

So here's Tata Group, the company that started as a trading company in the 1860s, that went on to become an industrial powerhouse making chemicals, steel and industrial products.  One of, if not the, largest IT services companies on the planet.  An auto manufacturer for India that expands into the global market with an entirely new product.  Now the company enters homebuildling, but not like other companies.  Instead uniquely doing what will fit market needs.  There is no hedgehog concept to Tata Group.  Just a company that keeps looking for market needs, then develops unique products to fulfill those needs.  And builds a 150 year history of growth in the process.

Anytime you have a narrow business, focused on a single market or product line, you are at risk of market shifts that can kill you.  These shifts can come from new technologies, or different production processes, or different attributes offered by competitors.  But the fact is, markets shift.  The better you are at focusing on your hedgehog concept, the more likely it is you will eventually fail.  Just look at the companies Mr. Collins claimed were the big winners in Good to Great - Circuit City and Fannie make are good examples.  You can be really, really good at something and you end up reaching the pinnacle of expertise only to be clobbered by a market shift that sends you toppling into failure.

Think like Tata Group.  Keep your eyes open for market needs.  Then figure out new ways to fulfill them.  Especially ways that competitors won't attack.  Forget about "focus."  No American car company is even trying to make a $2,000 car - despite the fact that the only big growth markets today are China, India and other emerging markets where a cheap auto makes the most sense.  And all those big U.S. real estate developers that are declaring bankruptcy, after building billion dollar malls, U.S. condominium projects, and office parks aren't even considering building and selling $8,000 apartments to the fastest growing middle class on the globe.  They know their hedgehog concept.  But they don't know how to grow.  You'll do better to focus on growth and leave that hedgehog in his hole.

For more on how following its hedgehog concept led to the bankruptcy of GM download the free ebook "The Fall of GM".  Learn how to avoid the hedgehog mistake and keep your business growing.

When you're hot you're hot - when you're not you're not -- Starbucks & Dell

With all due respect to the great guitar playing songwriter Jerry Reed, today Starbucks and Dell continue to look like copies that were once hot - but now couldn't warm a nose in a blizzard.

"Starbucks continues food push with overhauled menu items" is the Advertising Age headline.  Starbucks closed hundreds of stores last year, saw sales in stores open a year fall 8%, and profits dropped 77%.  But they aren't bringing anything new to their business.  They are revamping the food to make it more healthy.  There's nothing wrong with introducing healthier food, but how does Chairman Schultze think this will turn around Starbucks?  The company's "return to basics" program has made it overly sensitive to retail coffee prices, while robbing the company of its highly desired cache.  An enhanced instant coffee did nothing for revenues.  And now this overhauled menu doesn't really offer anything new to excite customers.  It's still a ton of calories - even if they are healthy calories - offered at a high price.

Starbucks has given rejuvenated life to McDonald's.  Nobody expected the McCafe to be a huge success.  But Starbucks has played right into McDonald's sites by shutting down most of its "non coffee" operations and repositioning itself not as a destination but as a fast food outlet.  McDonald's reminds me of the hunter who spends all day tramping the forest in search of a deer, only to get back to his pick-up and have a big buck walk within 20 yards of his vehicle.  When he least expected to get his kill, it walked up on him.  And that's what Starbucks has done.  It's made McCafe much more viable than it appeared likely, simply because Starbucks chose to move into direct competition with McDonald's rather than continue on the new business programs it created earlier in the decade. 

Starbucks has gifted McDonald's by choosing to fight them head-on right at McDonald's strengths - operational consistency and low price.  And now Starbucks is showing complete foolishness by entering into traditional advertising - an area where McDonald's is a powerhouse (the inventor of Ronald McDonald is an expert at ad content and spending).  Even worse, Starbucks, which eschewed advertising for years, has decided to promote its new food menu by placing ads in (drumroll please) newspapers!  At a time when readership is dropping like a stone, and during summer months when seasonal readership is lowest, Starbucks is choosing to promote with the least effective ad medium available today.  Even billboards would be a better choice!  We have to ask, wouldn't the previous, much savvier, leadership have launched a wickedly intensive web marketing program to lure customers back into the stores?  Some viral videos, lots of social media chat - that sort of thing which appeals to their target buyer?  Why would anyone choose to fight a giant - like McD's - on their court, using their rules, against their resource strength?  That's not savvy competition, it's suicide.

Simultaneously the once high-flying Dell has been in the doldrums for several years.  Decades ago Dell built a Success Formula that ignored product developed, placing its energy into supply chain advantages.  Competitors have matched those operational advances, and now Dell gives consumers little reason to make you prefer their product.  Not to mention forays into service cost reductions like offshore customer support that absolutely turned off customers and sent them back into retail stores.

Now "Dell is working on a pocket web gadget" according to the Wall Street Journal headline.  Not a phone, not a netbook, not a laptop the new device is an assemblage of acquired technology into a handheld internet device.  How it will be used, and why, is completely unclear.  That it will give you internet access seems to be the big selling point - but when you can accomplish that with your iPhone or Pre, or netbook should you choose a larger format, why would anyone want this device?

Dell seems to forget that it has to compete if it wants to succeed.  It's products have to offer customers something new, something better.  That's what made the iPHone so successful - it gave users a lot more than a traditional phone.  And the same is true for Pre.  And these devices now have dozens and dozens of applications available - everything from playing video games to ordering pizza at the closest delivery joint to reading MRI screens (if you happen to be a neurologist).  Yet, this new Dell device has no new apps, and it's unclear it is in any way superior to your phone or netbook.  Dell keeps trying to think it has distribution superiority, and thus can sell anything by forcing it upon customers.  Even products that have no clear application.  Dell is Locked-in to its old Success Formula, all about operational excellence, but that model has no advantage now that people with new technology - superior technology - can match their operational excellence.

When companies remain Locked-in too long they become obsolete.  And it can happen surprisingly fast.  Every reader of this blog can remember when Starbucks seemed invincible.  And when Dell was the information technology darling.  But both companies remain stuck trying to Defend & Extend their Success Formulas after the market has shifted - and their results are most likely going to end up similar to GM.

Don't forget to download my new ebook "The Fall of GM" and send it (or the link) along to your friends and social network pals. http://tinyurl.com/nap8w8

Big Bankruptcies from Big Market Shifts - GM, Lehman, WaMu, WorldCom, Enron, etc.

In May "The Largest U.S. Bankruptcies" was published in BusinessWeek - and since then we've added General Motors to the list.  From biggest down:

1. General Motors
2. Lehman Brothers
3. Washington Mutual
4. Worldcom
5. Enron
6. Conseco
7. Chrysler
8. Thornburg Mortgage
9. Pacific Gas & Electric
10. Texaco

Did you notice that only 1 of these happened prior to 2001 (Texaco)?  As I pointed out in Create Marketplace Disruption, the number of bankruptcies has been skyrocketing from historical norms.  And the number of bankruptcies of truly huge companies has been growing at an unprecedented rate. 

Ever since the modern corporation was born, the theory has been that being large gave a company lower risk.  Since the 1940s people have believed that their jobs, and careers, are safer in big corporations.  But today big corporations are failing at a truly alarming rate.  What's changed?

Very large companies usually have a Success Formula, locked into place with hierarchy, decision-making processes, narrow strategy programs, consistent hiring processes, tight employee review processes, rigid IT infrastructure and very large investments designed to provide economies of scale.  Their approach to success was driven by the notion that with size they would create entry barriers which would protect them from competitors, allowing for years of ongoing profitability.  These practices were designed to focus the business on its core technology, products, customers and markets.  Management theorists believed that with focus came ongoing success.  They did expected businesses to be stable.  With limited change. 

But today we're seeing dramatic market shifts.  And locked-in Success Formulas are literally failing because the company, and leadership, is unable to adapt to these shifts.  During the 1950s, '60s, '70s and '80s competition was relatively stable.  But that is no longer true.  Success no longer comes from Defending & Extending what you used to do.

Dramatic improvements in telecommunications connectivity, computer assisted data accumulation and analysis, and global access to resources has changed the basis of competition.  Now businesses must adjust to an extremely dynamic marketplace.  Scale is meaningless when a new competitor can access your customers with a web page, achieve global distribution with a logistics partner, access a low-cost outsourced manufacturing plant via telephone, and provide 24x7 service with an Indian-based service contractor.  When a new technology can go from invention to market in weeks, adaptability becomes far more important than size.

The marketplace has been shifting dramatically since 2001.  In everything from manufacturing to financial services to commodities.  Yet, far too few companies are adjusting to the new competitive requirements.  Too many analysts and business leaders still seek market segments, market share and developing entry barriers.  To succeed today businesses have to overcome Lock-in to Success Formulas in order to Disrupt their old approaches and remain vital to customers through the use of White Space to develop, test and implement new solutions.  During periods of dramatic shift, those who follow these practices are far more successful.  Regardless of size. 

Don't forget to download the new ebook "The Fall of GM" for more on how the world's largest auto company failed to adjust to market shifts - and how you can avoid the GM fate by taking actions to make your business more adaptable.  

Forced innovation - Consumer goods and retail,

"Retailers cut back on variety, once the spice of marketing" is the Wall Street Journal.com headline.  It seems one of the unintended consequences of this recession will be forced consumer goods innovation!

For years consumer goods companies, and the retailers which push their products, have played a consistent, largely boring, and not too profitable Defend & Extend game.  When I was young there was one jar of Kraft Miracle whip on the store shelf.  It was one quart.  This container was so ubiquitous that it coined the term "mayonnaise jar" - everybody knew what you meant with that term.  Now you can find multiple varieties of Miracle Whip (fat free, low fat, etc.), in multiple sizes.  This product proliferation passed for innovation for many people.  Unfortunately, it has not grown the sales of Miracle Whip faster than growth in the general population. 

Do you remember when you'd go to Pizza Hut and they offered "Hawaiian Pizza?"  Pizza Hut would concoct some pretty unusual toppings, mixed up in various arrangements, then give them catchy labels.  Unfortunately, what passed internally as an exciting new product introduction was recognized by customers as much ado about nothing, and those varieties quietly and quickly left the menu.  Like the Miracle Whip example, it expanded the number of choices, but it did not increase the demand for pizza, nor revenues, nor profits.

Expanding varieties is too often seen by marketers as innovation.  I remember when Oreos came out with 100 calorie packs, and the CEO said that was an innovation.  But did it drive additional Oreo sales?  Unfortunately for Nabisco, no.  It was plenty easy to count out the number of cookies you want and put in a baggie.  Or buy fewer cookies altogether in these new, smaller packages.

These sorts of tricks are the stock-in-trade of Defend & Extend management.  Clog up the distribution system with dozens (sometimes hundreds) of varieties of your product.  Try to take over lots of shelf space by paying "stocking fees" to the retailer to put all those varieties (package sizes, flavor options, etc.) on his shelf - in effect bribing him to stock the product.  But then when a truly new product comes along, something really innovative by a smaller, newer company, the D&E manager uses the stocking fees as a way to make it hard for the new product to even reach the market because the small company can't afford to pay millions of dollars to bump the big guy defending his retail turf.  The large number of offerings defends the product's position in retail, while simultaneously extending the product's life to keep sales from declining.  But, year after year the cost of creating, launching and placing these new varieties of largely the "same old thing" keeps driving down the net margin.  The D&E manager is trying to keep up revenues, but at the expense of profits. 

Simultaneously, this kind of behavior keeps the business from launching really new products.  The previous CEO at Kraft said in 2006 that the best investment his company could make was advertising Velveeta.  His point of view was that protecting Velveeta sales was worth more than launching new products - and at that time the last new product launched by Kraft was 6 years old!  Internally, the decision-support system was so geared toward defending the existing business that it made all marginal investments supporting existing brands look highly profitable - while killing the rate of return on new products by discounting potential sales and inflating costs! 

This D&E behavior isn't good for any business.  Consumer goods or otherwise.  And it's interesting to read that now retailers are starting to push back.  They are cutting the number of product variations to cut the inventory carrying costs.  As I mentioned, if you now have 6 different stock keeping units (SKUs) for Miracle Whip in various sizes, flavors and shapes but no additional sales you more than likely have doubled, tripled or even more the inventory - and simultaneously reduced "turns" - thus making the margin per foot of shelf space, and the inventory ROI, poorer.  Even with those "shelf fee" bribes the consumer goods manufacturer paid.

For consumers this is a great thing!  Because it frees up shelf space for new products.  It frees up buyers to look harder at truly new products, and new suppliers.  The retailer has the chance of revitalizing his stores by putting more excitement on the shelves, and giving the consumer something new.  This action is a Disruption for the individual retailer - pushing them to compete on products and services, not just having the same old products (in too many varieties) exactly the same as competitors.

This action, happening at WalMart, Walgreens, RiteAid, Kroger and Target according to the article, is an industry Disruption.  It impacts the manufacturers like Kraft and P&G by forcing them to bring more truly new products to the market if they want to maintain shelf facings and revenues.  It alters the selling proposition for all suppliers, making the "distribution fees" less of an issue and turning those retail buyers back into true merchandisers - rather than just people who review manufacturer supplied planograms before feeding numbers into the automated ordering system.  And it changes what the manufacturer's salespeople have to do.

The companies that will do well are those that now implement White Space to take advantage of this Disruption.  As you can imagine, it's a huge boon for the smaller, more entrepreneurial companies that may well have long been blocked from the big retailer's stores.  It allows them to get creative about pitching their products in an effort to help the retailer compete on product - not just price.  And for any existing supplier, they will have to use White Space to get more new products out faster.  And get their salesforce to change behavior toward selling new products rather than just defending the old products and facings.

Markets work in amazing ways.  Almost never do things happen as one would predict.  It's these unintended consequences of markets that makes them so powerful.  Not that they are "efficient" so much as they allow for Disruptions and big behavior changes.  And that gives the entrepreneurial folks, and the innovators, their opportunities to succeed.  For those in consumer goods, right now is a great time to talk to Target, Kohl's, Safeway, et.al. about how they can really change the competition by refocusing on your innovative new products again!

What's the future for Chrysler? Fiat?

"Reborn Chrysler gets a European makeover" is the headline at the Detroit Free Press.  Now that Fiat is in charge, can we expect Chrysler to turn around?

There is no doubt Chrysler has been severely Challenged.  But that alone did not Disrupt Chrysler - you can be challenged a lot and still not Disrupt Lock-ins.  On the other hand, the new CEO appears to have stepped in and made significant changes in the organization structure, as well as the product line-up at Chrysler.  We also know that bankruptcy changed the union rules as well as employee compensation and retirement programs. These are Disruptions.  That's good news.  Disruptions precede real change.  No matter the outcome, the level of Disruption ensures the future Chrysler will be different from the old Chrysler.  Step one in the right direction.

But, the Fiat leadership under Sergio Marcchione appears to be rapidly installing the Fiat Success Formula at Chrysler.  The organization, product, branding and manufacturing decisions appear to be aligned with what Fiat has been doing in Europe.  So this makes our analysis a lot trickier.  Companies that effectively turn around align with market needs.  They meet customer requirements in new, better ways.  For Chrysler to now succeed requires that the American market needs are closely enough aligned with what Fiat has been doing to make Chrysler a success.

If this gives you doubts, you're well served.  It's not like Fiat has been a household name in America for a long time.  Nor have I perceived Fiat was gaining substantial share over its competitors in Europe.  Nor do I have awareness of Fiat being noticably successful in emerging auto markets like China, India or Eastern Europe.  They aren't doing as badly as Chrysler, but are they winning?

The new management is rolling in like Macarthur's team taking over Japan.  They clearly have already made many decisions, and are now focused on execution.  What worries me is

• what if the product lineup isn't really what Americans want?
• what if dealers don't make enough margin on the new lineup?
• what if the cost/quality tradeoffs don't fit American needs?
• what if competitors match their product capabilities?
• what if competitors have lower cost?
• what if competitors have measurably better quality?
• what if competitors bring out new innovations, like electric, hybrid or diesel, change the market significantly from what Fiat has to offer?
• what if customers simply have doubts about Fiat quality?
• what if customers like the Charger, Challenger and 300 more than they like the new Fiat products?

I don't have to be right or wrong on many of these questions and it portends problems for the new Chrysler/Fiat.  And that's the problem with having such a tight plan when you start a turn-around.  What if you get something wrong?  How will you know?  What will tell you early you need to change your plan fast, and possibly dramatically?  Nowhere in the article, nor elsewhere, have I read about White Space projects being created that would produce an entirely new Success Formula.  Only how Chrysler is being converted to the Fiat Success Formula.

I want the best for the new owners, employees and vendors of Fiat.  I'm really happy to see the level of Disruption.  But until we see White Space, more discussion of market testing and experimentation, as well as greater discussion of competitiors, I'd reserve judgement on the company's future.

If you read about White Space at Chrysler/Fiat please let me know.  This is a story worth watching closely.  Americans have a lot riding on the outcome - good or bad.  So if you read about Disruptions or White Space share them with me or here on the blog for everyone.

PS - Don't forget to download my new ebook "The Fall of GM" for additional insight on managing Success Formulas in the auto industry.

PPS - There have been a lot of great comments related to recent blogs.  I appreciate the personal notes, but don't hesitate to blog directly on the site.  Also, keep up the comments.  I don't feel compelled to re-comment on them all.  Suffice it to say that the quality is excellent, and comments make the blog all that much more powerful.  So please keep up the responses.

You gotta move beyond your "base" - expand beyond your "brand"

What is a brand worth?  Do you spend a lot of time trying to "protect" your brand?  A lot of marketing gurus spent the last 20 years talking about creating brands, and saying there's a lot of value in brands.  Some companies have been valued based upon the expected future cash flow of sales attributed to a brand.  Folks have heard it so often, often they simply assume a recognized name - a brand - must be worth a lot.

But, according to a Strategy + Business magazine article, "The trouble with brands," brand value isn't what it was cracked up to be.  Using a boatload of data, this academic tome says that brand trustworthiness has fallen 50%, brand quality perceptions are down 24%, and even brand awareness is down 20%.  It turns out, people don't think very highly of brands, in fact - they don't think about brands all that much after all. 

And according to Fast Company in the article "The new rules of brand competition" the trend has gotten a lot worse.  It seems that over time marketers have kept pumping the same message out about their brands, reinforcing the  message again and again.  But as time evolved, people gained less and less value from the brand.  Pretty soon, the brand didn't mean anything any more.  According to the  Financial Times, in "Brands left to ponder price of loyalty," brand defection is now extremely common.  Where consumer goods marketers came to expect 70% of profits from their most loyal customers, those customers are increasingly buying alternative products.

Hurrumph.  This is not good news for brand marketers.  When a company spends a lot on advertising, it wants to say that spend has a high ROI because it produces more sales at higher prices yielding more margin.  Brand marketers knew how to segment users, then appeal to those users by banging away at some message over and over - with the notion that as long as you reinforced yourself to that segment you'd keep that customer.

But these folks ignore the fact that needs, and markets, shift.  When markets shift, a brand that once seemed valuable could overnight be worth almost nothing.  For example, I grew up thinking Ovaltine was a great chocolate drink.  Have you ever heard of Ovaltine?  I drank Tang because it went to the moon, and everyone wanted this "high-tech" food with its vitamin C.  When was the last time you heard of Tang?  It was once cache to be a "Marlboro Man" - rugged, virile, strong, successful, sexy.  Now it stands for "cancer boy."  Did the marketers screw up?  No, the markets shifted.  The world changed, products changed, needs changed and these brands which did exactly what they were supposed to do lost their value.

Lots of analysts get this wrong.  Billions of dollars of value were trumped up when Eddie Lambert bought Sears out of his re-organized KMart.  But neither company fits consumer needs as well as WalMart or Kohl's for the most part, so both are brands of practically no value.  People said Craftsmen tools alone were worth more than Mr. Lampert paid for Sears - but that hasn't worked out as the market for tools has been flooded with different brands having lifetime warranties --- and as the do-it-yourselfer market has declined precipitiously from the days when people expected to fix their own stuff.  So a lot of money has been lost on those who thought KMart, Sears, Craftsman, Kenmore, Martha Stewart as a brand collection was worth significantly more than it's turned out to be.  But that's because the market moved, and people found new solutions, not because you don't recognize the brands and what they used to stand for.

Every market shifts.  Longevity requires the ability to adapt.  But brand marketers tend to be "purists" who want the brand to live forever.  No brand can live forever.  Soon you won't even find the GE brand on light bulbs.  That's if we even have light bulbs as we've known them in 15 years - what with the advent of LED lights that are much lower cost to operate and last multiples of the life of traditional bulbs.  GE has to evolve - as it has with jet engines and a myriad of other products - to survive.

Think for a moment about Harley Davidson.  Once, owning a Harley implied you were a true rebel.  Someone outside the rules of society.  That brand position worked well for attracting motorcycle riders 60 years ago.  As people aged, many were re-attracted to the "bad boy" image of Harley, and the brand proliferated.  A $50 jacket with a Harley Davidson winged logo might sell for $150 - implying the branding was worth $100/jacket!!  But now, the average new Harley buyer is over 50 years old!  The market has several loyalists, but unfortuanately they are getting older and dying.  Within 20 years Harley will be struggling to survive as the market is dominated by riders who are tied to different brands associated with entirely different products.

If you see that your sales are increasingly to a group of "hard core" loyalists, it's time to seriously rethink your future.  Your brand has found itself into a "niche" that will continue shrinking.  To succeed long-term, everything has to evolve.  You have to be willing to Disrupt the old notions, in order to replace them with new.  So you either have to be willing to abandon the old brand - or cut its resources to build a new one.  For example, Harley could buy Ducati, stop spending on Harley and put money into Ducati to build it into a brand competitive with Japanese manufacturers.  This would dramatically Disrupt Harley - but it might save the company from following GM into bankruptcy.

The marketing lore is filled with myths about getting focused on core customers with a targeted brand.  It all sounded so appealing.  But it turns out that sort of logic paints you into a corner from which you have almost no hope of survival.  To be successful you have to be willing to go toward new markets.  You have to be willing to Disrupt "what you stand for" in order to become "what the market wants."  Think like Virgin, or Nike.  Be a brand that applies itself to future market needs - not spending all its resources trying to defend its old position.

Don't forget to download the new ebook "The Fall of GM" to learn more about why it's so critical to let Disruptions and White Space guide your planning rather than Lock-in to old notions.

Becoming the elusive "evergreen" company - Apple vs. Walgreens

For years business leaders have sought advice which would allow their organizations to become "evergreen."  Evergreen businesses constantly renew themselves, remaining healthy and growing constantly without even appearing to turn dormant.  Of course, as I often discuss, most companies never achieve this status.  Today investors, employees and vendors of Apple should be very pleased.  Apple is showing the signs of becoming evergreen.

For the last few years Apple has done quite well.  Resurgent from a near collapse as an also-ran producer of niche computers, Apple became much more as it succeeded with the iPod, iTunes and iPhone.  But many analysts, business news pundits and investors wanted all the credit to go to CEO Steve Jobs.  It's popular to use the "CEO as hero" thinking, and say Steve Jobs singlehandedly saved Apple.  But, as talented as Steve Jobs is, we all know that there are a lot of very talented people at Apple and it was Mr. Jobs willingness to Disrupt the old Success Formula and implement White Space which let that talent come out that really turned around Apple.  The question remained, however, whether Disruptions and White Space were embedded, or only happening as long as Mr. Jobs ran the show.  And largely due to this question, the stock price tumbled and people grew anxious when he took medical leave (chart here).

This weekend we learned that yes, Mr. Jobs has been very sick.  The Wall Street Journal today reported "Jobs had liver transplant".   With this confirmation, we know that the company has been run by the COO Tim Cook and not a "shadow" Mr. Jobs.  Simultaneously, first report on the Silicon Valley/San Jose Business Journal is "Apple Claims 1M iPhone Sales" last weekend in the launch of its new 3G S mobile phone and operating system.  This is a huge number by the measure of any company, exceeded analysts expectations by 33-50%, and equals the last weekend launch of a new model - despite the currently horrible economy.  This performance indicates that Apple is building a company that can survive Mr. Jobs.

On the other side of the coin, "Walgreen's profit drops as costs hit income" is the Crain's Chicago Business report.  Walgreen's is struggling because it's old Success Formula, which relied very heavily on opening several new stores a week, no longer produces the old rates of return.  Changes in financing, coupled with saturation, means that Walgreen's has to change its Success Formula to make money a different way, and that has been tough for them to find. The retail market shifted.  Although Walgreen's opened White Space projects the last few years, there have been no Disruptions and thus none of the new ideas "stuck."  Growth has slowed, profits have fallen and Walgreen's has gone into a Growth Stall.  Now all projects are geared at inventory reduction and cost cutting, as described at Marketwatch.com in "Higher Costs Hurt Walgreen's Profits."

Now the company is saying it wants to take out $1B in costs in 2011.  No statement about how to regain growth, just a cost reduction -- one of the first, and most critical, signs of Defend & Extend Management doing the wrong things when the company hits the Flats.  And now management is saying that costs will be higher in 2009/2010 in order to allow it to cut costs in 2011.  If you're asking yourself "say what?" you aren't alone.  This is pure financial machination.  Raise costs today, declare a lower profit, in order to try padding the opportunity to declare a ferocious improvement in future year(s).  This has nothing to do with growth, and never helps a company.  To the contrary, it's the second most critical sign of D&E Management doing the wrong thing at the most critical time in the company's history.  When in the Flats, instead of Disrupting and using White Space to regain growth these actions push the company into the Swamp of low growth and horrible profit performance.

We now can predict performance at Walgreen's pretty accurately.  They will do more of the same, trying to do it better, faster and cheaper.  They will have little or no revenue growth.  They may sell stores and use that to justify a flat to down revenue line.  The use of accounting tricks will help management to "engineer" short-term profit reporting.  But the business has slid into a Growth Stall from which it has only a 7% chance of ever again growing consistently at a mere 2%.  This is exactly the kind of behavior that got GM into bankruptcy - see "The Fall of GM." 

The right stuff seems to be happening at Apple.  But keep your eyes open, a new iPhone is primarily Extend behavior - not requiring a Disruption or necessarily even White Space.  We need to see Apple exhibit more Disruptions and White Space to make us true believers.  On the other hand, it's definitely time to throw in the towel on Walgreen's.  Management is resorting to financial machinations to engineer profits, and that's always a bad sign.  When management attention is on accounting rather than Disruptions and White Space to grow the future is sure to be grim.

New ebook - The Fall of GM

Of all the companies that typified America's rise as an industrial superpower, none was more successful than General Motors.

What happened? Why has it fallen so far? GM at its biggest boasted some 600,000 well-paid employees. It will be left with something like 60,000 after it emerges from bankruptcy. How did that happen? Why did its stock price tumble from $96 per share at its height to 80 cents recently? Why did its market share shrink from one out of every two cars sold to less than one in five last quarter?

And thus begins the new ebook about the fall of GM.  In 1,000 words this ebook covers the source of GM's success - as well as what led to its failure.  And what GM could have done differently - as well as why it didn't do these things.  Read it, and share it.  Let folks know about it via Twitter.  Post to your Facebook page and groups, as well as your Linked-in groups.  As markets are shifting the fate of GM threatens all businesses.  Even those that are following the best practices that used to make money.  Let's use the story of GM -- and the costs its bankruptcy have had on employees, investors, vendors and the support organizations around the industry as well as government bodies -- as a rallying cry to help turn around this recession and get our businesses growing again!

Download thefallofgm_adam_hartung.pdf (569.3K)

http://www.thephoenixprinciple.com/ebooks/thefallofgm_adam_hartung.pdf
or
http://tinyurl.com/nap8w8

Innovation or change in Federal regulations? Not yet President Obama

Yesterday we heard announcements about reforming the federal regulators and the systems they use to manage money and banking, and now the Treasury Secretary is out selling the program to Congress "Geithner Fields Revamp Queries" Marketwatch.com.  It's touched off a big debate, as some people think the project has gone too far - and others think it hasn't gone far enough.  That's interesting, because most people think something needs to be done so the events of last summer -- a near melt-down in the banking system and a near collapse of the monetary system -- are not repeated.  So we might want to think about what was announced through the lens of The Phoenix Principle to see if we can expect much change.

Bruce Nussbaum is billed as "the innovation guru" on Businessweek.com.  He reports "President Obama Failed At Redesigning the Financial System."  Interestingly, his biggest complaint is that the President "didn't do what FDR did in the 1930s" and then attributes FDR with significantly Disrupting the government apparatus at the time.

I would agree with that assessment.  FDR attacked a bevy of Lock-ins currently then in place.  His attacks caused people to reconsider the approach then being used, which had remarkably high unemployment and long bread lines, and opened White Space to try all kinds of programs broadly referred to as "The New Deal."  Ronald Reagan 50 years later was similar.  He attacked what had become the conventional wisdom of the time, and his Disruption opened White Space which led to the greatest tax code reform ever, as well as significant changes in labor relations and government deregulation of industry.  Both are examples of Presidents that first Disrupted, and then used White Space to develop new solutions. 

President Obama has not Disrupted.  He's definitely whacked the chicken coop a bit, ruffling a lot of feathers, by doing things such as pushing for the firing of GM's Chairman/CEO.  But so far, even though he espouses change, his administration hasn't attacked any old Lock-ins.  He keeps talking about changes "within the system."  As The Phoenix Principle would predict, this sort of approach to change usually aggravates everybody - even your own supporters - and results in little significant change.  Perhaps some marginal adjustments, but since the underlying Success Formula is not attacked all the recommendations lie within it - and the Status Quo is largely preserved.

Mr. Nussbaum, in an interview on BusinessWeek.com entitled "What Should A.G. Lafley Do Next?", recommends the President appoint the former head of Proctor & Gamble to be the nations Chief Innovation Officer.  Although a novel idea, it won't make any difference.  Mr. Nussbaum's consultant-style recommendation is the kind that gets a lot of executives in trouble who end up with lofty goals, but no chance of success.  Such a move would put an embarrassing end on Mr. Lafley's career, and be an embarrassment for the President.

The federal government is a series of silo fiefdoms controlled by individual secretaries.  Mr. Nussbaum would like Mr. Lafley to use "design theory" to cut across fiefdoms in order to innovate.  Mr. Nussbaum gives Mr. Lafley credit for reorganizing P&G this way to success.  But, how exactly is someone who works for the President supposed to re-organize the administrative branch of the federal government?  Fiefdoms with their own individual mandates, leaders, staff and budgets.  Especially without a dramatic Disruption that forces everyone to agree on such a massive reorganization.  No commitment from the President will matter when the silo kings are allowed their silos.  Probably a lot of recommendations - long the domain of Presidential commissions - that say there should be more cross-departmental work.  But without a Disruption, something that rocks the apparatus to its core, there's no hope of this happening.

Despite the President's lofty goals and ambitions, he risks becoming somebody who talks about change - but doesn't accomplish much.  This may upset you, or you may be happy, depending upon your point of view.  But as a practical matter, should we expect that health care reform will be something radical - like social security and medicare were - or something much less dramatic?  The answer is now clear.  Lacking Disruptions, and when we look at the financial services reform proposed yesterday, we should expect something that will be an extension of the current system.  A bit of tweaking to how things are currently done, but largely the same.  Financial system reform left 95% of the players and their products untouched - and focused on small changes to a few institutions and a few products that are identified as central to the problems last summer.  We should expect that health care reform would leave 95% of the system and products unchanged as well.  Despite whatever rhetoric is extolled from politicians and pundits of either party.

This is not to say that the federal government does not adapt.  When attempting to do more of what it has always done better, faster, or cheaper we regularly see that such sustaining innovations are picked up quickly and used effectively.  And this was demonstrated this week when we learned that the State Department and other federal agencies were relying substantially on Twitter to receive information from Iran, and communicate with people in Iran.

For years the government apparatus relied on journalists for lots of two-way international communications.  This often created a somewhat cozy relationship between very large newspapers with feet on the street in remote and unfriendly locations with people in government.  This coziness had the really bad side effect of causing America's enemies to think most journalists were American spies working for the CIA, etc.  So what worked for journalists all too often got them jailed and sometimes killed.  But this system completely broke down the last 2 years as traditional journalism, and the newspapers, started going broke.  The journalists were laid off in droves, and the government lost its primary info feed from offshore.

What's replaced journalists for readers has been a market shift to the internet.  People have turned to bloggers, media sites and social networking for information.  This dramatic shift has wiped out the profits at newspapers, and shut down a lot of properties.  For media companies this represents wholesale change. 

But government users quickly adapted.  In their effort to Defend & Extend their roles, they became quick users of these sites as well.  And when Iran refused to allow traditional journalists outdoors - or even to report on uprisings - the government officials turned to Twitter.  And, just like the government used to ask the newspapers for help, they had no trouble asking Twitter - as reported in "U.S. asks Twitter to stay on line because of Iran vote" on MSN.com.  And, much like how The Washington Post or The New York Times responded in the past, Twitter obliged.  It was a remarkable example of "business as usual" for the government agencies - just done a little faster, better and probably cheaper.  And this, of course, reinforced to international leaders their claims that Twitter and social media sites are "tools of the U.S. governement."  In what appears "the more things change the more they stay the same" we see how easily the status quo can be reinforced, even amidst a dramatic change for the participants.

There can be reform in any government.  There even can be innovation.  But obtaining that reform requires

1. Someone develop very clear scenarios about the future that describe the need for change
2. A recognition that competitors will do better and we'll do worse if we don't change
3. A Disruption - an attack on Lock-ins that support the Status Quo
4. Using White Space to test new solutions toward which the organization can migrate as pieces are demonstrated successful.

It works.  We see it work for individuals, work teams, functional groups, businesses, industries and even for governments - like exemplified by Franklin Roosevelt and Ronald Reagan.  FDR did a marvelous job of describing a future at risk if America didn't start working again, otherwise international competitors would take over the country.  And Ronald Reagan similarly described a future that would be entirely different (free of inflation and stagnation) if changes were made - and one at risk of its long-term enemy the USSR if changes weren't made.  But if you try to shortcut these steps you get only marginal change. 

When your market slows - MOVE - Gap, Nine West, Cache,

Let's say you've had a great business selling to auto companies.  What do you do now? Wait for the American auto industry to get better, or......

Let's say you've had a great business selling to airplane manufacturers.  What do you do now?  This week is the biggest week in the airplane business.  It's the Paris Air Show, or as many call it "La Bourget" which is the name of the suburban Paris town where the show occurs.  It's the "mother of all conventions" as manufacturers of planes (and lots of military equipment beyond things that fly) try to book orders from international governments, airlines and corporations.  This year, it's doom and gloom as Marketwatch points out in "Is Paris Burning?".  Even the President of Brazil's very successful commuter jet manufacturer Embrear is saying it's too early to call a bottom in aviation sales in his interview "Not There Yet". 

There are many American businesses selling to the aviation industry.  Aviation doesn't cycle as fast as automotive, because the prices are much higher and the product lives much longer.  So it's easier to predict market moves.  We now can predict that the business will be soft for a few additional years with high confidence.  Some will choose to "double down" and try to grow share while the recession is on.  An expensive effort to find a lower cost while volume drops.  Another option would be to cut output, lay people off and wait it out.  But, unfortunately for both these options, when sales resume you can't be sure some new suppliers won't have entered the market with new products or new technology.  Both approaches could well find prices down and competition up - or even worse the market recovers with new aviation products and you're in a pitched battle to supply the industry against new competitors against whom you have no advantage.

A better idea is to move resources.  You don't have to abandon the old business, but why keep trying to live in a worsening environment?  If the market is shrinking, isn't it smart to find new markets.

Take for example the behavior in retail.  We all know that Circuit City went out of business, and lots of other retailers like Mervyn's and Filene's Basement have filed bankruptcy.  It's tough on retailers.  Especially those who keep trying to do the same thing.  But some are taking actions to change in order to be more competitive.  Nine West and some other retailers are changing their approach as reported in, "Gap, Specialty-retail stores mixing up brands."

"Consumers are interested in the best of the best.  Not the best of what your brand has to offer.  Retailers are learning not to put all their eggs in one basket.  If it doesn't work, you just get rid of it."  Now that's some advice worth listening to, offered by Marshal Cohen of NPD Group.  When markets shift, you have to shift.  Waiting around for customers to come back to you is not a viable option. 

Retailers that are growing are using test markets to try new things.  Like Nine West partnering with New Balance on a new shoe that is attracting a lot of young shoppers.  Not everything works, at Cache the store tried some new brands but the test reinforced that people were looking for the Cache brand rather than the products Cache tested.  That's the benefit of testing, you can learn.  As you learn, you can adapt and adopt new behaviors. 

Retailing is going through a massive market shift.  Those who survive have to learn a lot more about individual stores versus malls, and on-line versus in-store.  They have to learn about brands and about store brands and what people now want.  Those who don't have ongoing White Space tests are failing.  Those who are have a much better chance of surviving. 

So, if your market is shifting, you need to MOVE.  Whether you make car parts, aviation parts, furniture, windows, clothing, candy - anything - you will see your market shift because of the globalization of new technology.  When markets shift, the thing you shouldn't do is "wait it out".  That is not a viable strategy.  That's putting your head in the sand.  Just because you aren't certain what to do doesn't mean you don't take action.  And that's why White Space projects are critical - because the only way you can develop a new Success Formula is by trying it in the marketplace.   You don't want to end up like all those going out of business because they keep trying to do what they always did, only cheaper, faster or better.  You have to start doing different things.  And NOW, because the market keeps shifting more every day.

Are markets efficient? To Survive forget that myth.

Harvard Publishing recently posted an article from a professor at the London Business School, Freek Vermeulen "Can we please stop saying the market is efficient?"  The good professor's point of view was that he observed a lot of companies that were efficient which didn't survive, and several not all that efficient that did survive.  He even took time to point out where some Harvard professors had identified that companies who implement ISO 9000 often see their innovation decline!

Unfortunately, the good professor is all too correct.  If markets were efficient, we'd see performance move in a straight line.  But any follower of equities, for example, can show you where the stock of a company may have gone up, then declined 20%, then gone back to a new high, maybe to even fall back more than the original 20%, only to then climb to even greater highs.  If the market for that equity were efficient, it would never have these sorts of wild price gyrations.

Likewise, the market for products, things like copiers, aren't all that efficient.  A case I describe pretty deeply in Create Marketplace Disruption.  When Xerox brought out the 914 copier it changed the world of office copies.  But it didn't take off.  Instead, for years companies maintained their duplicating shop in the basement, using small lithographic offset presses.  This went on for years, and usually the basement shop was closed when (a) the operator retired, (b) the printing press simply gave up the ghost and was ready for the scrap heap, or (c) when the company realized it had so many copiers the basement would be better served to house copiers instead of the printing press.  The fact is that marginal economics - the very low cost of continuing to operate an alread-paid-for-press meant that it was easy to simply keep using presses long after they had any economic advantage.  Not to mention all kinds of kinks in the decision apparatus that funded things like a print shop just because the budget "always had."   But eventually, as the retirees and metal scrappers started accumulating, the market shifted.  What had been a "mixed market" of presses and Xerox copiers suddenly shifted to almost all copiers.  Xerox exploded, and the small offset press makers disappeared. 

That wasn't efficient.  There was a huge lag between when the benefits of copiers were well known and the demise of print shops.  In the end, those who had debts or equity in printing press companies suffered huge losses as the business "fell off a cliff."  There was no "orderly migration" out of the marketplace.  In a very short time, the market shifted from one solution to another.

As recently as 2007 almost every home in America had a newspaper delivered.  By 2009 the market had begun to disappear with subscriptions down over 60% in some markets.  For advertisers, the purchasing of print ads dropped by over 50% in just 24 months.  Yet, the growth of web usage and internet ads had been growing for almost a decade.  In an efficient market there would have been a smooth transition between the two, with say 5% of ads shifting every year.  Again, the economists' "orderly transition" would have applied.  There doesn't seem anything orderly if you're in a market where the newspaper has disappeared, filed for bankruptcy, or cut its pages 40% - and you're wondering how to get the local news or even the TV listings you once found in the newspaper.

Market shifts are sudden, and big.  In the later half of the 1980s the PC market shifted from 60% Macintosh to 80% Wintel in just 5 years - while growth for PCs exploded.  It didn't feel very efficient to people at Apple, the suppliers of apps for Macs or the user base.  Thousands of people in corporations were told "surrender your Mac and get a new PC next week" with no discussion, explanation or concern.

Companies that fall victim to market shifts aren't without strategists, planners or quality programs.  Many have robust TQM or Six Sigma projects.  But these are all about optimizing performance against past performance - not necessarily what the market wants.  When you optimize agains the past you depend on minimal change.  When markets shift, these "efficiency" programs can cause you to be the last to know - and the last to react.

People like to think of evolution as sort of like Continuous Improvement.  Get 5% better every year.  Like a variety of mammal might lose 1/4" of tail each generation until it no longer has one.  We now know that's not how it works.  There are winners.  They keep reproducing, get stronger and more of them every year.  Like mammals with long tails.  Meanwhile, an alternative develops - like a mammal with no tail.  Then suddenly, without expectation, the environment changes.  Tails become a big hindrance, and those with tails die off in a massive exodus.  Those without tails suddenly find they are advantaged by the lack of tails, so they begin breeding fast and getting stronger.  In short order, perhaps a single generation, the tailed mammals are gone and the no-tails become dominant.  Not very efficient, or orderly.  More like reactive to an environmental shift.

If you want to do good tomorrow, I mean one day from today, the odds are that you can accomplish that by being just slightly better at what you did yesterday.  But if you want to be good in 5 years, you may well have to do something very different.  If you wait for the market to tell you - well - you've waited too long.  By the time you know you're out of date, the competitor has taken your position.  You have no hope of survival.

We live with a lot of myths in business.  The value of efficiency, and the belief in efficient markets, are just a couple of big ones.  Kind of like the old myths about blood-letting.  Before the USA, never before in history has anyone ever tried to establish a government of self-rule.  And self-rule led America to a country dominated by businesspeople.  No longer did the king determine winners, losers, prices and behavior.  Now markets would do so.  The people who would make these markets were the emerging business folks.  But nobody knew anything about markets - except some theories about how they "should" work written by an Englishman who had grand thoughts about open-market behaviors.  So most people accepted the earliest theory - with its ideas about "invisible hands" that would guide behavior.

Markets are dramatically inefficient.  Just look at the prices of equities.  Look at the bankruptcies all around us.  GM, your local newspaper, Six Flags and your neighborhood furniture store.  People who were often efficient, but didn't understand that markets shift quickly, and very inefficiently.  They don't move in small increments - they change all at once.  And if you want to survive, you have to prepare for market shifts.  Simply working harder, faster and cheaper won't save you when the market shifts.  If you aren't ready to be part of the shift, you get left behind and won't survive.

Markets are shifting today faster than they ever have.  Telecommunications, internet connections, massive amounts of computing power, television, jet airplanes - these things have made the clock speed on changes much faster.  Market shifts that used to be seperated by decades are compressed into a few years.  If you don't plan on market inefficiencies - on market changes - you simply can't survive.

Lots of people misunderstand Darwin.  The prevailing view is that his study on the origination of species says that the strongest survive.  In fact, his conclusion was quite the opposities.  What he said was that it is not the strongest that survive, but the most adaptable.

 

Look beyond numbers to grow - Chief Marketing Officers

"The Evolving CMO" is the Brandweek headline.  According to this article, increasingly CMOs (that's Chief Marketing Officers) are becoming quite nerdly.  Whereas top marketing folks were once seen as "big idea" folks, now recruiters like Heidrick & Struggles (quoted in the article) are looking for top marketers to be analytical types who pour through on-line data to discern ad effectiveness and response rates.

It's not at all clear this is a good trend. 

Ever since marketing has been around it's been an easily derided function.  Unlike Sales, which has hands on daily contact with customers, marketers were considered more staff-like.  And much more easily let go.  Especially in companies that aren't consumer goods oriented, the first people let go in a downsizing are usually marketers.  Some companies, like Computer Sciences Corporation in services and many manufacturers of industrial products, don't have any marketers at all!  There are a lot of executives that believe marketing is a waste of money - you just need to focus on Sales.

So how should marketers deal with this lack of respect?  Increasingly, they are turning to numbers.  It appears that marketers want to overcome their Rodney Dangerfield position by being more like other parts of the company.  Product Development and engineering tend to be loaded with engineers, who like to push around numbers.  Operations folks like to analyze the plant output and quality numbers to death.  And everybody in finance tends to use numbers to make their argument.  Strategists and planners obsess over trend numbers.  Even salespeople talk about salescalls, orders, total revenues, margins - numbers.  So it seem marketers are starting to think that to gain respect they need to adopt personal, or role, Success Formulas much like others in the organization.

The problem is that numbers tend to focus you on the past, not the future.  Yes, on-line ads and click-throughs offer us a bounty of new numbers on the efficacy of ads, placements, messages, hits - all kinds of things we can run through the same analytical tools used by the rest of the company.  But does studying the recent behavior, upon which we have numbers - such as ad clicks - or of links to facebook pages - or the volume of tweets - or the respondents to a Linked-in group query -- do these things tell you what big trends are emerging?  Do they tell you whether your product line could be made obsolete by a new competitor?  That is far less likely to happen. 

All this number crunching may make marketing look more scientific, but the important question is whether it helps the company grow.  Unfortunately, most trend numbers tell us what worked well in the past.  Yet knowing that still doesn't tell you what will work in the future.  Number crunching is great for execution of a designed plan.  Midway through an ad program, analysis can help you tweak it in order to catch more viewers and grab a few more sales.  Midway through a promotion, analysis can help you understand the impact of a price change, or a product pairing, or a sales blitz so you can tweak it for maximum results.  Analysis is great for understanding what to do right now.  But we have to run our business not just for right now.  We have to run businesses to position the company where the market will be in a year, two years, five years and beyond.

There's a tendency to think that the person who has the most numbers, or does the most analysis, is the better businessperson.  I don't know how this proclivity developed, but it did.  The desire to "engineer" a business so that it has no risk, and will generate ongoing growth and profits is a powerful desire.  But reality is that we live in a highly dynamic world.  We cannot predict the future.  Most 3 to 5 year forecasts aren't off by 2% or 5% - they are off by 50%!   Having all the numbers imaginable about the past won't give you much help for dealing with a market shift.  And that's the big problem in business today - dealing with these radically shifting markets and the changes they bring so quickly.  Analysis depends too much on the future being like the past, and that just isn't so.  The world keeps changing.

Lehman Brothers, Merrill Lynch, Bank of America, Chrysler and GM were/are full of peoples deeply skilled in how to "run the numbers."  Business training the last 30 years has given us thousands of skilled analysts, deeply ingrained in how to dig up and analyze vast amounts of data - using newer and more powerful computer tools every year.  Yet, for all this analytical skill we aren't producing more revenue growth, nor more profits.  Throughout the last 30 years growth rates have declined, and profit rates have dropped.  And recently we fell off a business cliff into an amazingly deep recession.  Yet, we're drowning in a sea of data and Powerpoint slides full of analysis.  The link between running numbers and improving performance appears broken - if it ever existed at all.

Marketers should be all about growth.  And growth comes from moving beyond executing static promotional programs on existing products.  To grow you have to be flexible to enter new markets, pioneer innovation and generate new solutions.  Somebody has to lead the charge to do scenario planning that opens the collective vision to doing new things - things not visible in the numbers.  Somebody has to understand the behavior of competition to recognize the holes they are unable to address because of their Lock-in to past practices.  Somebody has to reach beyond the numbers to offer Disruptions which allow the company to move from making computers to making consumer electronics (like Apple), or from making cars to making airplanes (like Honda).  Somebody has to be willing to manage market tests that teach you how to create new markets where you have fewer competitors and higher profits as growth takes off.  And all of this work is well beyond analyzing the numbers.

I advocate that all executives pull their heads out of the numbers to undertake these tasks for growth.  Many CEOs of now defunct companies  could memorize pages and pages of financial and market numbers.  They could recite market shares, product margins, product variable costs, plant fixed costs, employee costs and segment profits from the top of their heads.  Yet, the businesses are now gone (Multigraphics, AB Dick, Wang, Digital Equipment, Western Auto and TG&Y are just a few that no longer exist).  Having a deep understanding of the numbers means you know the past.  But unless you use that to be adaptive, to prepare for and launch Disruptions, all those numbers simply get in the way of being successful.  You can know all the trees, but end up unable to save the forest.

Marketers are not given their due.  Usually they see market shifts before anyone else.  They are able to generate scenarios that are possible, but often ignored because they require change.  They know the limits of a product, and they realize when the variations and derivatives are getting long in the tooth - causing margins to slip as the cost of sales and new launches keeps rising.  They also know the company weaknesses and how they must be addressed if the company is not to become irrelevant.  They shouldn't retreat to the bastion of numbers to try and make themselves more likable.  Rather, they should lead the charge to make sure planning is about the future, not the past.  They need to keep executives paranoid about competitors.  They need to constantly bring up company shortcomings left vulnerable due to Lock-in.  And they need to champion test after test after test to keep the company growing.  In these roles, they are more important than anyone else in the company.  And vital to growth and viability.  Without marketers and the application of their skills all companies become out of step with shifting markets and inevitably fail.

Leaders make a difference - P&G, GM, AT&T

As I've given presentations around the country the last year I'm frequently asked about the role of leadership in Phoenix Principle companies.  All people can bring Phoenix Principle behaviors to their work teams and functional groups.  Yet there is no doubt that organizations do much better when the leaders are also committed to Phoenix Principle behaviors. 

Unfortunately, all too often, top leaders are more interested in Defend & Extend Management.  BusinessWeek's recent article "How to Succeed at Proctor & Gamble" talks about replacing CEO icons such as Charles Schwab, Michael Dell and Jack Welch.  Unfortunately, only one of these was a real Phoenix Principle leader - and the others ended up coming back to their organizations when the replacements tried too much D&E behavior - leaving their shareholders with far too low returns and only dreams of rising investment value.  Even more unfortunate is the fact that too many management gurus simply love to wax eloquently about leaders of big companies - regardless of their performance.  Such as Warren Bennis's description of A.G. Lafley at P&G as "Rushmorian."  Those at the top are given praise just because they got to the top.  Yet, we've all known leaders who were far from being praise-worthy.  Even the mundane can be loved by business reviewers that rely on them for money, access, ad dollars and influence.

There's a simple rule for identifying good leadership.  Grow revenues and profits while achieving above average rates of return and positioning the organizations for ongoing double digit growth upon departure.  It's not the size of the organization that determines the quality of a leader, it's the results.  We too often forget this.

Back to departing P&G CEO, Mr. Lafley.  Preparing to retire, he's taken the high ground of claiming to be "Mr. Innovation" for P&G.  Experts on innovation classify them into Variations, Derivatives, Platforms or Fundamental.  Using this classification scheme (from Praveen Gupta Managing Editor of the International Journal of Innovation Science and author of Business Innovation) we can see that Mr. Lafley was good at driving Variations and Derivatives at P&G.  But under his leadership what did P&G do to launch new platforms or fundamental new technologies?  While variations and derivatives drive new sales - "flavor of the month" marketing as it's sometimes called - they don't produce high profits because they are easily copied by competitors and offer relatively little new market growth.  They don't position a company for long-term growth because all variations and derivatives eventually run their course.  They may help retain customers for a while, but they rarely attract new ones.  Eventually, market shifts leave them weaker and unable to maintain results due to spending too much time and resource Defending & Extending what worked in the past.  Mr. Lafley has done little to Disrupt P&G's decades-old Success Formula or introduce White Space that would make P&G a role model for the new post-Industrial era. 

Too often, bigness stands for goodness among those choosing business leaders.  For example, GM is replacing departed CEO Rick Wagoner with Ed Whitacre according to the Detroit Free Press in "Former AT&T chief to lead GM."  Mr. Whitacre's claim to fame is that as a lifetime AT&T employee, when the company was forced to spin out the regional Bell phone companies he led Southwestern Bell through acquisitions until it recreated AT&T - as a much less innovative company.  Mr. Whitacre is a model of the custodial CEO determined to Defend & Extend the old business - in his case spending 20+ years recreating the AT&T judge Green took apart.  Where a judge unleashed the telecommunications revolution, Mr. Whitacre simply put back together a company that is no longer a leader in any growth markets.  Market leaders today are Apple and Google and those who are delivering value at the confluence of communication regardless of technology.

Today, few under age 30 even want a land-line - and most have no real concept of "long distance".   Can the man who put back together the pieces of AT&T, the leader in land-line telephones and old-fashioned "long distance service" be the kind of leader to push GM into the information economy?  Does he understand how to create new business models?  Or is he the kind of person dedicated to preserving business models created in the 1920s, 30s and 40s?  Can the man who let all the innovation of Ma Bell dissipate into new players while recreating an out-of-date business be expected to remake GM into a company that can compete with Kia and Tata Motors?

Any kind of person can become the leader of a company.  Businesses are not democracies. The people at the top get there through a combination of factors.  There is no litmus test to be a CEO - not even consistent production of good results.  But in far too many many cases the historical road to the top has been by being the champion of D&E Management; by caretaking the old Success Formula, never letting anyone attack it.  They have avoided Disruptions, ignored new competitors, and risen because they were more interested in "protecting the core" than producing above-average results (often protecting a seriously rotting core).  Much to the chagrin of shareholders in many cases.

Now that the world has shifted, we need people leading companies that can modify old Success Formulas to changing market circumstances.  Leaders who are able to develop and promote future scenarios that can guide the company to prosperity, not merely extend past practices.  Leaders who obsess about competitors to identify market shifts and new opportunities for growth.  Leaders who are not afraid to attack old Lock-ins, Disrupting the status quo so the business can evolve.  Leaders who cherish White Space and keep multiple market tests operating so the company can move toward what works for meeting emerging client needs.  Leaders like Lee Iacocca, Jack Welch, Steve Jobs and John Chambers.  They can improve corporate longevity by shifting their organizations with the marketplace, maintaining revenue and profit growth supporting job growth and increased vendor sales.

Investing in, or against, indexes - DJIA, GM and Cisco

Unless you have a lot of time to research stocks, you probably invest in a fund.  Funds can be either an index, or actively managed.  People like index funds because you aren't relying on a manager to have a better idea.  Index funds can only own those stocks on the index.  Like the S&P index fund - it can only own stocks in the S&P 500.  Nothing else.  Interestingly, the Dow Jones Industrial Average is considered an index fund - even though I don't know what it indexes.  And that is important if you are an investor who benchmarks performance against the Dow.  It's even more important if you invest in the Dow (or Diamonds - the EFT for the Dow Industrials).

GM is now off the Dow ("What does GM bankruptcy mean for Index Funds?").  Because it went bankrupt, the editors at Dow Jones removed it.  But it wasn't long ago that the editors removed Sears and Kodak.  But not because these companies filed bankruptcy.  Rather, the Dow Jones editors felt these companies no longer represented American business.  So the Dow is a list of 30 companies. But what companies is up to the whim of these Dow editors.  Sounds like an active management (judgement) group (fund) to me.

Go back to the original DJIA and you get American Cotton Oil, American Sugar, Distilling & Cattle Feed, Leclede Gas Light, Tennesse Coal Iron and Railroad and U.S. Leather.  Household names - right?  As the years went buy a lot of companies came and went off the list.  Bethlehem Steel, Honeywell, International Paper, Johns-Manville, Nash Motor, International Harvester, Owens-Illinois, Union Carbide --- get the drift?  These may have been successful at some time, but the didn't exactly withstand "the test of time"  all that well.  Even some of the recent appointments have to be questioned - like Home Depot and Kraft which have had horrible performance since joining the elite 30.  You also have to wonder about the viability of some aging participants, like 3M, Alcoa and DuPont.  So the DJIA may be someone's guess about some basket of companies that they think in some way represents the American economy - but it's definitely subject to a lot of personal bias.

Like any basket of stocks, when the DJIA is lagging market shifts, it is not a good place to invest.  And the editors are greatly prone to lagging.  Like their holdings in agriculture and basic commodities years ago, through holding big industrial companies in the 1990s and 2000s.  And the over-weighting of financial companies at the turn of the century when they were merely using financial machinations to hide considerable end-of-value-life  problems.  When the DJIA is holding companies that are part of the previous economy, you don't want to be there. 

The Dow should not be a lagging indicator.  Rather, given its iconic position, it should hold the "best" companies in America.  Not extremely poorly performing mega-bricks - like GM.  GM should have been dropped several years ago.  And you should be concerned about the recent appointment of Kraft.  And even Travelers. 

Those companies that will do well are going to be good at information, and making money on information.  So who's likely to fall off (besides Kraft)?  DuPont, which has downsized for 2 decades is a likely candidate.  Caterpillar is laying off almost everyone, and cutting its business in China, as it struggles to compete with an outdated industrial Success Formula.  Bank of America has shown it is disconnected from understanding how to compete globally as it has asked for billions in government bail-out money.  And the hodge-podge of industrial businesses, none of which are on the front end of new technologies, at United Technologies makes it a candidate -- if people ever recognize that the company would quickly disintegrate without massive U.S. government defense spending.  Even 3M is questionable as it has slowed allowing its old innovation processes to keep the company current in the information age.

Adding Cisco was a good move.  Cisco is representative of the information economy - as are Verizon, AT&T (which was SBC and before renameing, GE, HP,  Intel, IBM, Microsoft, Merck and Pfizer (if they transition to biologics from old-fashioned pharmaceutical manufacturing ways - otherwise replace them with Abbott).  But all those other oldies - like Walt Disney (sorry, but the web has forever changed the marketplace for entertainment and Walt's folks aren't keeping up with the times), Boeing (are big airplanes the wave of the future in a webinar age?), Coke (they've kinda covered the world and run out of new ideas), P&G (anybody excited about Swiffer variation 87?), and Wal-Mart - which couldn't recognize doing anything new under any circumstances.

As an investor, you want companies that can grow and create a profit.  And that's increasingly not the DJIA - even as it slowly adds a Microsoft, Intel and Cisco.  You want to include companies in leadership positions like Google and Apple.  Their ability to move forward in new markets by Disrupting their Lock-ins and using White Space to launch new projects in new markets gives them longevity.  As an investor you don't want the "dogs" - so why would you want to own DuPont, et.al.?

Investors may have been stung by overvaluations in technology companies during the 1990s.  But that was the past.  What matters now is future growth ("Technology on the comeback trail").  And that can be found by investing in the future - not what was once great but instead what will be great.  Invest for the future, not from the past.  And that can be found outside the DJIA.  Unless the Dow editors suddenly change the portfolio to match the shift to an information economy.

(For additional ideas about recomposing the DJIA, see my blog of 3/12/09 "Dated Dow")

Get the GM businesses growing - Sell them ALL!!

"GM reaches deal to sell Saturn to Penske" is the latest GM headline.  Although the management at GM could not figure out how to run a profitable Saturn, it has very quickly sold the business.  And within a week of selling Hummer to a Chinese company.  Sounds like a combination of low pricing, and better skills at hiring investment bankers than running a business.

The biggest lesson we can learn from this is that GM was so Locked-in to its old Success Formula that it was frozen in place, unable to take actions that would allow GM's revenue and profit to grow.  After years of doing nothing more than layoffs, GM was able to find buyers for 2 of its 3 semi-autonomous divisions almost immediately.  In other words, if GM management had to change to fix GM the team would rather fail -- wiping out the shareholders, most of the bondholder value, and eliminating thousands of jobs --  and sell assets (at a significant loss) than change.  Rather than Disrupt and use White Space to create a new GM, management preferred to declare bankruptcy, beg for billions in aid (like some impoverished third world starving nation such as Bangladesh), and give away assets in an effort to preserve the Success Formula they believe in - but which failed in the market.  These leaders have shown they don't care about anyone or anything more than they care about trying to Defend & Extend the GM legacy - Cadillac, Chevrolet, Buick and GMC.  This management doesn't want GM to succeed, they want to wind back the clock, and they'll try anything possible to see if they can make it happen.

They can't.  The clock won't rewind.  And GM's management is demonstrating why they should not be allowed to run any company - much less a major auto company.  Nor should you trust them to watch your dog - much less trust them with $60billion in financing.  Trying to preserve the past will only prolong dismal results.  They will not repay this money.

So what about Saturn?  Some think this acquisition, coupled potentially with the new ownership of Hummer, marks another shift in the auto industry.  In "Putting GM's Saturn on a different orbit" the Marketwatch commentator indicates that we may be seeing a shift away from an industrial model of manufacturers pushing cars onto dealers.  Since Penske owns many dealerships, he thinks these new independent labels may let the dealerships take the lead.  Manufacturing will have to respond, through a network of manufacturers something like Nike uses, to the retailers - who will be much more in touch with the market.

From the pixels displaying these articles to God's ear, paraphrasing an old maxim.  It would be wonderful if both Saturn and Hummer, and the soon to be independent Saab, were driven by market requirements rather than internally entrenched management trying to Defend & Extend old practices.  If they are, the odds are good that they'll push the losses at the remaining GM much higher, much faster than the management team (and probably the government overseers handing them money) expect.

But it does beg the question, if it's so easy to sell these divisions why doesn't the government simply dismantle GM and sell everything?  These are supposedly the smallest, least viable parts of GM.  And they are selling incredibly fast.  Instead of these "one-off" sales, happening at distressed prices to buyers with little competition, why not create an open market to sell everything?  Obviously the only way to get rid of the terrible GM leaders is to sell the business out from under them, leaving them with nothing to do.  So, instead of handing these incompetent GM leaders another $40B, why doesn't the government turn over assets to the investment bankers and tell them to maximize the value of a sale?  Create a bunch of bidders for the various assets (less toxic than nothing-down mortgage securities), ala the intent of bankruptcy law, so that people with new ideas (like Penske) can acquire these assets and use those ideas and innovations to convert the brands, product lines, supply chains and manufacturing plants into something more valuable?

In a sale, a new buyer could purchase plants to redeploy for windmill production, for example.  A GMC buyer could attempt to converting the brand into a competitor of Caterpillar Tractor or Komatsu.  Chevrolet might have better life as a U.S. motorcycle company.  Someone might want to turn Cadillac into an airplane company.  As crazy as these ideas sound, don't forget that Honda has entered airplane production and shows every sign of succeeding.  We know that running any part of GM like it used to be run will not work.  So why not give the innovators a shot at these tangible and intangible assets on the open market?  Wouldn't you rather see someone new, like the team at Penske Enterprises, try to do something with the rest of GM - rather than leave it in the hands of the people who say they need another $40billion to keep it alive.  Ever heard of the term "cut your losses"?

Those who listen to markets survive - even thrive.  That's what creates optimism about the future of Hummer, Saturn and Saab.  The concept that new owners will utilize new market-based scenarios with clear understanding of competitors to Disrupt these companies, then attack old Lock-ins in order to implement new behaviors, excites people.  We can imagine these new leaders using White Space to convert the design, production and distribution processes into methods that give customers what they want when they want it - achieving profits as a result.  After 3 decades of ongoing failure, we can't imagine the people running GM doing it. 

We believed in Lee Iacocca primarily because he had been fired at Ford.  He knew Chrysler was not well enough connected to customers - and that he was.  This was a guy who would cut off the top of a production car with a skill saw in order to drive it around the block as a way to test relaunching convertibles.  He wasn't afraid to develop cars people had never seen, like mini-vans, because he saw changes in customer needs.  He wasn't afraid to Disrupt the status quo and he wasn't afraid of testing new technologies, new production processes and new markets.  That's why he turned around Chrysler.  And that's what it will take to turn around Cadillac, Chevrolet, Buick and GMC.

It's too early to really know if new owners will do the right things to make these fire-sale divisions into successful businesses.  We have to look for the scenarios, Disruptions and White Space.  But we know we won't see such behavior out of GM.  If the government folks who are considering giving more money to GM really want to save jobs, grow the economy and keep the profit motive alive they need to pull back fast from funding this GM management team.  Instead, use this immediate market input (from the dividion sales) to force the courts to bust up the rest of GM and sell it to someone who just might have a truly better idea.

Competing with the Chinese

This week marks the 20th anniversary of the Chinese student uprising in Tiananmen Square, and its brutal put-down by the Chinese leadership.  Ironically, the same week GM agrees to sell its Hummer division to a Chinese company.  Quite a contrast in outcomes over 20 years.  China was then a backwater nation having very little business with the USA, and GM was still considered a dominant U.S. industrial power. 

We all know what China has accomplished in the last 20 years.  From struggling poverty, the country is now the third largest economy - and the single largest offshore holder of America's debt.  China is poised to be a superpower, and the world's largest economy within another 20 years.  How?

Within months of the Tiananmen event, in which the Chinese military slaughtered thousands of its own citizens, the Berlin Wall tumbled.  The Soviet Union evaporated, leaving behind a series of independent states poorly capitalized and ill prepared to compete internationally.  The Chinese leadership recognized this as a major market shift, and wasted no time taking action.

Step 1 was recognizing that future scenarios no longer required investing massive funds defending the world's longest contested border.  More tanks were on the Chinese/Soviet border than all the rest of the world combined - and the replacement of those tanks suddenly became non-essential. And the Chinese recognized this, and changed.  With speed exceeding anything anybody imagined, the Chinese changed all their scenarios about the future.  Instead of spending massive funds on military works, those funds could be spent elsewhere.  By reworking their future scenarios, they realized they could undertake different opportunities.  No longer were they required to do "more of the same" as they'd done for several decades.

Step 2 was recognizing the new competition.  Instead of fighting a traditional war, the Chinese would be in an economic war with the smaller eastern European nations, and India.  Dissolving  the USSR meant the Indians, who had long sparred with the Soviets while also taking aid, suddenly knew they had to rely completely on the USA - and trade.  And that meant the Chinese had a new #1 competitor, but in the new battle for trade rather than old fashioned aid.  Where before China wanted money for armaments, now they needed to invest money in production to pull dollars from U.S. business.  The new objective became competing with India, rather than the Russians.

Thirdly, they Disrupted their approach to world diplomacy.  Instead of a closed country, they became open.  Instead of investing in guns, they invested in power plants, roads and infrastructure.  On the world stage, China wanted to become the biggest winner of foreign exchange.  And the road to that win came through participating with American capitalists.  The leadership realized it needed to totally change the country's  investment patterns in order to make the country's low cost labor available, and it did so.  Almost overnight.  How, by recognizing and undertaking a Disruption in their investment patterns.

Fourth, China implemented White Space for job creation.  Suddenly, almost every city had a development zone.  They didn't need to figure out what infrastructure to buy.  All they had to do was invite the Americans in and we'd tell them what we wanted.  We'd describe the airports, power plants, telecom systems, roadways - everything we wanted to give them the work (and foreign exchange).  All they had to do was listen and do it. 

China is an example in doing things differently, changing how you compete to be very efffective, without really changing values.  People often tell me they worry that The Phoenix Principle means you have to give up your ideals.  I disagree.  Being a Phoenix organization means you're willing to adapt to market requirements, and doing so does not mean you have to change your "ethos," religion or personal values.  You merely have to adapt.  If you want to be "green" or "sustainable" or "ethical" or even "religious" you can do so.  You just have to make sure you are connected to the marketplace in ways that allows you to develop a Success Formula which creates growth.

Compared to India, the Chinese have been wildly successful.  And that's saying lot, given how incredibly successful India has been.  There is no doubt that India, too, has used outsourcing to raise foreign exchange, create jobs and grow.  But compared to China, well there's no comparison.  The Indian government is still trying to figure out how to build a highway, expand major (overcrowded) airports and provide consistent electricity to business parks in major cities.  The Indian leaders don't suffer from a lack of smart - no way - but the government keeps trying to operate the way it always has.  And that has held them back from making the investments and taking the actions which have catapulted the Chinese into the lead.  While India had a head start in 1989 (largely English speaking leadership and a strong investment in education for the elite), China has eclipsed their growth and is chasing Japan and the USA.

Through all of this, China never changed its politics.  Some people who go to China return talking about how "capitalistic" the country is.  They forget the lessons of Tiananmen Square.  China has been and remains a tightly controlled, Communist, centrally-planned country.  "China scholars see little chance for political reform" is the headline describing how the politics of China are unchanged since the days when they shot thousands of their own students, and imprisoned thousands more.  Several students taken prisoner have never been heard from again. Those that fled the country are not allowed to return - and their families were subsequently required to consider them bad Chinese. Many were held in prisons for years, and others are still in remote work camps.  China is still China, deep inside.  No more a market/capitalistic country than it ever was.  It just learned to adapt to a changing world.  (Something Chairman Mao tried to avoid - almost destroying the country.)

Coincidentally, my 21 year old son returned from a month in China yesterday evening.  He was visiting manufacturing plants and engineering schools.  We talked, and will talk more, about what the Chinese businesses and schools are doing.  Why, and exactly HOW do these schools and factories affect competition?  Competition to be a world-class engineer (he's a mechanical engineer prepping for his civil engineering master's degree), and competition for building things.  As he summed it up before crashing to sleep "they do things entirely differently than we do in America - and I can easily see why they get things done cheaply.  They do things in a uniquely Chinese way, but it meets the needs of American companies who want lower costs and market access.  This may have been my first trip to China, but it won't be my last.  It can't be if I want to remain competitive.  Maybe I need to learn Mandarin or Cantonese so I can go to one of their schools for a year."

We all have to learn to adapt.  The world changes.  Every year.  If we try to resist those changes, to Defend & Extend what we like to do, we grow further out of touch with market requirements and lose the ability to compete.  You don't have to "sell your soul" to adapt.  But you must adapt if you want to continue succeeding.  You have to make your investments based upon what will make you a winner in the future - not what made you a winner in the past.  You have to study competitors, and do those things that will make you a winner.  You have to accept Disruptions by attacking old Lock-ins, and use White Space to develop new solutions.  If you do that, even at the scale of the Chinese economy, you can have unbelievably successful results. Or at the level of an individual engineer.  If you don't the results aren't pretty.  Not pretty at all.  Just ask the employees at GM.

Shift your Success Formula, or learn Chinese - GM, Hummer

How appropriate.  "GM strikes deal to sell Hummer" headlines a Marketwatch.com article.  A day after declaring bankruptcy, Hummer with all its branding and product drawings is going to China.  It seems everything about GM is iconic - including its movement of an operating auto businesses to China.

Is this bad for America, or good?  I'd rather say it's inevitable.  In a global economy, industrial production will move to the lowest cost location.  And with a low valued currency, a very lowly paid workforce, and access to very inexpensive capital that puts China at the top of the list.  Unless you want to bring back Chairman Mao and wall-in China, the population density and government programs make it inevitable that the country will be a leader in manufacturing.

But that doesn't equate to high value.

America is the world's largest agricultural nation.  But has that made America wealthy?  Not since the 1800s has it been true that land ownership for agricultural uses made Americans - and the nation - wealthy.  As the value of agriculture declined - largely due to dramatic increases in production - America's wealth shifted to industrial production.  It was by being the largest and most productive industrial nation that America prospered during the Industrial economy.

But now, industrial production has razor thin margins.  Much like agriculture.  Over-invest in capacity, and you can end up with under-utilized (or closed) plants and not much margin from other businesses to cover the cost.  Not since the 1990s has America operated anywhere near "full capacity" on its manufacturing base.  The "good" years of the last decade were unable to produce industrial jobs, or wealth for industrial companies (i.e. - GM's bankruptcy.)

In the great battle for economic leadership, the next wave is about information.  How to obtain, use and manipulate information is where value is now created.  Steel traders can make more than steel producers today.  If you want to improve your profitability, and your longevity, you have to change your thinking from "how do I make and sell more stuff" to "what do I know they don't know, and how do I turn that into value?" 

For somebody selling autos, it's becoming a lot more important to understand customer wants and preferences than to be good at making cars.  Toyota and Honda can identify opportunities first, and put products into the market faster than anyone else.  They can maximize their product development and short-run capability to reach targets fast, and gain advantages over competitors.  Don't forget, Honda made money not just on small, high mileage cars but on a full-size pick-up called the Ridgeline (and Toyota on the Tundra).  These companies are better at using scenarios to recognize early market shifts, and clearer about competitor moves so they can position products to fulfill unique customers needs.  Even if it means launching products not traditional to their "core" - like Honda's Ridgeline, it's manufacturing robotics, and its new jet airplanes.

In the industrial era, people sought scale advantages and tried to build entry barriers against competitors.  In the information economy flexibility is equally (or more) important than size.  Recognizing customer needs and competitor actions early is more important than catering to old, devoted customer groups.  Willingness to Disrupt, and do what you must do to change the market by using White Space test projects keeps you ahead of the competition - rather than trying to Defend & Extend your "core."

For the industry, having Hummer production in China could turn out to be a good thing.  It will lower product cost.  If the distribution in the USA can gain control of the market, by recognizing customer needs and directing the production, the distributors can grab all the value away from the Chinese manufacturer.  If, on the other hand, the dealers try to act like old fashioned dealers who merely keep stock and negotiate price -- then they won't create value and margins will stink.  There are ways to make money in the information economy, even for traditional players, but it requires changing your Success Formula from industrial-era behaviors to the needs of an information-based economy.  You can follow GM - or you can try to be like Cisco.