Business is not an Olympic sport

As the world watches the Olympics this week, I was struck at how different sporting competition is from business competition. Those business leaders that make positive analogies are doomed for problems - and most likely failure.

The Olympic gymnast is a great athlete. Designed and practiced to be the best at his sport. He might have been a great baseball player, or swimmer, but he is, today, a finely tuned athlete capable of competing - and winning - at gymastics.

Likewise, the Olympic Greco Roman wrestler is a great athlete. He too is practiced to be the best at his sport. And, he too could have been a football player, or other competitor. But today, due to repetitive practice and a determined focus he is ready to compete in his one sport of wrestling.

Both of these are potential gold medal winners. But which is the more "fit"? That is impossible to say, for each is now finely tuned to a narrow field of competition. What would happen if the coach asked them to switch sports? It would be disastrous. They are capable of winning at one game, and have limited competitiveness in any other area.

What will become of these athletes when the game ends? Both will hope for endorsements and great fortune. Perhaps they will have one - at most two - more possible trips to the Olympics. And endorsements may last for a year or two. But they are almost sure to not compete in any other athletic endeavor. For, as good as they are, they are so highly specialized that their skills are not transferable to compete in another game. They will have to find entirely new careers in short order.

For business this is a recipe for disaster. Specialization leads to obsolescence. Any business that optimizes itself to compete so specifically will find itself upset by another competitor that makes a slight alteration in the "rules of the game." The dynamism of markets, and competition, assures us that no highly specialized competitor can survive long. Glory may reign for a short time, but the specialized competitor will be upset in short order.

Today's business success requires adaptability in the face of changing market conditions and competitors. New rules are created often, and the abilty to move across markets with wide skills is required for any business to remain powerful for more than a few years. Even great size, as with the wrestler, will not protect the competitor when the rules change slightly favoring speed or agility over size.

Business is not an Olympic sport. We should not confuse the testosterone laden thrill of a gold medal with the success of creating returns for shareholders. Instead, we should remember that Olympic winners are the 1 in 100,000 that made it to success. The odds were stacked far against them before they began. In business, the ability to change the competitive rules means that the odds can be stacked in your favor - as long as you remember to be adaptive in thinking and behavior in order to keep your competitor guessing and yourself in the lead.

Unfit for flight

Over the last year, United Airlines has been requesting that the U.S. government guarantee its finances so it can continue operating in the face of massive losses. The government has been reluctant to agree. Facing a cash crisis, last week United Airlines informed its employees it planned to discontinue contributions to the employee pension fund. Understandably, the employees were angered and voted "no confidence" in management. Meanwhile, the whole mess is finding its way into court for lawyers to decide the future of the airline.

Who's winning here? No one… not even customers. Lines are longer, waits are longer, on-time performance is still an issue. Customers regularly complain about harsh service from employees, a dropping of food service, poorly handled (or lost baggage), and a very unsatisfactory traveling experience. Travel agents are out of the equation; disenfranchised as commissions have practically disappeared over the last few years. So investors, employees, distributors, customers and even suppliers (Boeing, the airport authorities, etc.) are all losing.

What's the problem? Everyone who doesn't manage an airline has known that United was on a collision course with disaster for over 20 years. Their profits have been nonexistent to abysmal - even in the go-go 1990s. Every union negotiation cycle has been a request for concessions, and more concessions as their employees (from pilots to flight attendants and mechanics) have been asked to give up pay in order to keep the airline afloat. And then, on September 11, 2001 the whole system was grounded for a week. This provided everyone an opportunity to re-evaluate the future plans. Yet, as quickly as possible, United went right back to the same old, unprofitable, dismal business model.

United bought into a strategy over 30 years ago of "hub and spoke," which was fed by a desire to be the biggest airline. It was their belief, after deregulation, that the hub and spoke system would be profitable if they could only generate enough volume. Of course, this was a myth. Volume only generated more losses. The pricing mechanisms, designed to "tweak" extra profit from the system, only upset customers as it became hopelessly complicated beyond even the understanding of the employees. And, of course, no matter how much they discounted to win volume, someone else discounted even more — keeping margins at unsustainable levels for operating an ongoing business.

United became so committed to its Success Formula that it was willing to do anything to try and make it work. United has been more willing to sacrifice its profits (thus its investors), its employees (to layoffs and pay cuts), its vendors, and its customers than its failed success formula. United keeps holding out trying to make that Success Formula work - long after any average business student could see it had no hope of working.

Not to mention a competitor, Southwest Airlines, which has shown that alternative models can be far, far more successful.

Only a fool would continue to back United in its efforts to make its Success Formula work. Let's hope that fool doesn't become the taxpayers.

The Devil We Know

“Better the devil we know than the one we don’t know…" I saw this quote from a business leader the other day and realized that this pretty much sums up the logic that leads to lock-in.

Every CEO is saying today that their strategic agenda is innovation and growth. But what they’re doing instead is incrementalism and cost optimization. Why would business leaders do the opposite of what they say they’re going to do?

One reason is that innovation requires venturing into the unknown, what we call “white space.” In this creative space there is infinite potential for innovation, but there are no guarantees. In fact, most innovations fail… and failure is a career killer in Defend & Extend Management.

I’m sure that business leaders’ reasoning goes something like this: “I can put a lot of time and money into finding a breakthrough strategy which we have no way of knowing will succeed or not, OR, I can drive up short-term profits through more cost-cutting and efficiency efforts like more downsizing or squeezing our vendors. Hmmm, the first option holds the promise that we’ll be here a decade from now, but the second assures me I’ll make a big bonus this year… I think I’ll go with option 2 and study this innovation thing a bit longer…” As they say, nobody ever got fired for making the current quarter’s numbers…

Ok, so maybe that’s an exaggeration, but it is surely accurate in principle. Here’s the flaw in that logic: it assumes that avoiding innovation is the safer option. In today’s economy, if you don’t reinvent your success formula on a recurring basis—that is, take the risk of breakthrough innovation—you may not even have a decade, you may have only a couple of years. In fact, the only way to HAVE a future is to disrupt and reinvent your business.

To stay ahead, leaders and their organizations must learn to trust the devil they don’t know—to trust the future to innovation. This requires that leaders must place their confidence in their ability to figure things out when there is no proven road forward, instead of relying solely on what they already know and can prove. And that will be a big step for leaders, a step that we predict very few will make.

Ripe and Rotting

You’re either “Green and Growing” or “Ripe and Rotting.” Unfortunately most companies and even entire industries are Ripe and Rotting — they’re locked into obsolete Success Formulas and innovative companies are putting them out of business. Do you know how many of the top 500 hundred companies on the 1994 Fortune 1000 list of companies are still there today? What would you guess… 90%? 85%? Wrong. It’s about half — 55%.

That’s really amazing when you think about it. These are our biggest and most successful companies… how could this happen? What explains this? That is the question Adam and I have been trying to answer together since 1999, and that’s what this blog is dedicated to exploring.

Ripe and Rotting companies — which in our language would be companies in the “Swamp” and “Whirlpool” parts of our “River” lifecycle metaphor — cannot transform themselves because they are locked-in. They are unable to reinvent their business even when they want to, although most don’t. What they do want is to make their old Success Formula vibrant and effective again, and they do this through what we call Defend & Extend Management (D&E).

D&E management is a way of responding to marketplace challenges that enables companies to keep doing what they’ve always done; only maybe they make it better faster or cheaper. Well, it doesn’t work in today’s economy—it did 30-50 years ago when these management concepts originally became codified and eventually hardened into dogma—but not today. And that’s why so many companies are failing, and almost every company is struggling. Their basic assumptions about the economy and how to compete have become obsolete and they—and in fact the business world at large—have not made the leap to a new set of principles that does work.

That’s why the investment community tries to squash Google’s IPO instead of finding a way to transform themselves to prosper in a world where the Dutch auction is the standard for IPO’s. It’s why music companies sue their customers instead of adapting to a world where downloading individual digital songs is the norm. It’s why the major airlines cling to their hub-and-spoke business model instead of ditching it and experimenting to find a new approach where they can make some money.

Oh, and about Google’s IPO… well apparently it was successful after all. And now the media is reporting that other companies may go this route with their IPO’s (oh really??!). And the big investment companies? Their D&E response was to stay away from the IPO… and in doing so missed out on this tremendous business opportunity.

Delta's !Shocking! Layoffs

I’m shocked, shocked! Delta’s planning a layoff to stave off bankruptcy? Who would have predicted it?

Delta and the other major airlines have held a one-way ticket to bankruptcy court for years. The major airlines’ Success Formula became obsolete decades ago when Southwest Airlines was able to prove the effectiveness of their unique approach. The majors didn’t heed the warning signs then and they haven’t heeded them since.

The airlines like to blame the 9-11 tragedy for their troubles, but their problems were in place years earlier. The 9-11 challenge merely revealed how fragile the Success Formulas for the majors truly is. As soon as they hit a big pothole (or should we say “patch of rough air”), every major airline almost went under. If it weren’t for the federal bailout they would have, and some still did. But did that lead them to change? NO. Why? Lock-in to their historical Success Formulas.

And they’ve responded with Defend & Extend actions par excellence: create (or beef up) their low-cost carrier, drive for efficiencies, and today’s favorite—layoff employees. Have these worked? NO. And they won’t, because pruning actions such as these don’t address the real problem—their business model is broken and can’t be improved enough to create a positive future. It has to be disrupted and new, breakthrough strategies put in its place.

Across-the-board layoffs and salary cuts are sure signs that a company has lost the ability to deliver differentiated value to its customers. With no hope to raise prices and grow revenue, they look for cost reductions the only place they can get them — from their own employees. Seriously, what kind of future does that forebode for the company taking this approach? Its corporate anorexia.

These are the clear signs of a company—actually a whole industry—in the Whirlpool. If you have Delta frequent flier miles (or American, or United…) you’d best use them or lose them, the clock is ticking…

Google's Controversial IPO

Google’s IPO is the talk of the town today. The company’s decision to take an unconventional approach (called a “Dutch auction”) and offer shares for sale to small investors has drawn the ire and ridicule of all but a few (Fast Company magazine praises Google’s courage in their current issue, but they’re the exception).

Who knows if it will earn Google the extra hundred’s of millions of dollars that they hope for… that’s not the real story here anyway. The real issue is about Google breaking the rules for how big companies do IPO’s and the hue and cry it has raised among the entrenched investment banking community.

This is a classic example of an emerging trend that is signaling a sea change in how the established system works. The traditional way of doing IPO’s involved the investment banks determining the market price, offering the shares to their best customers, and raking in huge profits as a percent of the capital invested. A Dutch auction involves selling directly on the open market, thus avoiding much of the cost and generating significantly more capital for the company.

Google isn’t the first company to use this approach but it is the biggest. The institutional investment community is hoping and praying that it will fail… because, if it doesn’t, their way of doing business will change profoundly and they will end up big losers. Predictably, they’re doing Defend & Extend (D&E) actions to protect their Success Formula—ridiculing the approach in the press, vowing to boycott the IPO, etc.

Here’s the bad news for the entrenched institutions: the game is already over. It doesn’t matter how Google’s IPO goes, your Success Formula is doomed. Why? Because it is obsolete for today’s technology and today’s society. It has been propped up for years through oligopolistic practices, cronyism, fear-mongering and intimidation. But the evolution of Success Formulas is relentless and undeniable—yours will fail and be replaced, it is only a matter of time. However, due to your lock-in to the current system, it is unlikely you will participate in the new system that emerges.

That’s bad for the entrenched investment community, and good for just about everyone else, and that should have been their first clue that something was amiss…

Southwest Airlines in Trouble?

Most business pundits hold Southwest Airlines (SWA) up as a great model for other businesses. And rightfully so, with SWA’s terrific streak of profitable quarters. However, today’s Dallas Morning News asserts that SWA is in trouble. Apparently, costs are increasing and they’re saying that the company will soon have difficulty sustaining growth and profitability..

SWA is a great example of a company that started with a radically different Success Formula that won big in the marketplace, and they’ve certainly made it better over the years. However, their innovations have been in the nature of Defending & Extending (D&E) their original model, not transforming it. SWA is aging. It has left the “Flats” part of its lifecycle and is in the “Swamp”—this calls for reinventing their Success Formula, not merely fixing or improving it.

Before they finally die from obsolescence, the major airlines like American will take business from SWA as they lower their rates in a last ditch effort to survive. But more disturbing to SWA is the rise of smart new competitors like Jet Blue, whose Success Formula breaks even the rules that SWA plays by. We now hear talk of SWA planning to follow Jet Blue’s lead by testing seatback video systems… what a long fall for SWA.

And things are only likely to get worse for SWA now that they’ve promoted a CFO into the CEO role. Without knowing him personally, we would predict that he will behave like a typical D&E manager, focusing on costs and efficiency, and will drive the company deeper into the “Swamp.” Soon SWA may be just another sad story of a great company that stumbled…

Welcome!

This is the inaugural posting on our weblog. In this space you will be hearing from Adam Hartung . In this space, I will be exploring many different ideas about what it will take to succeed in the new economy. Adam brings a strategist’s perspectives to this dialogue.

Through these postings I hope to educate, disrupt, amuse, and provoke our readers. The topics about which I write are perhaps the most important facing business managers in today’s economy. They need to be discussed, debated, and acted on.

Here’s some starters. I think the author Jim Collins is all wet and we’ll tell you why. I think Clayton Christenson has a terrific point of view but I disagree with him in a profound way. In general, I believe that business leaders don’t know what to do to prosper in today’s economy, and most of what they’re doing not only doesn’t help, but actually accelerates their company’s demise.

I have strong points of view, but don’t pretend to think that I'm right—I simply think my models and lines of thought are very useful, while most historical management models are not because they were created for different conditions in a completely different time.

I am eager to stimulate a rich dialogue and encourage you to share your thoughts. Thank you!