Locked-in Educators

Today is "Take your children to work day."  As all of us know, there is much more to life than what's taught in school, and having children visit the workplace to obtain a sense of what goes on after school is a valuable learning experience.

Unfortunately, the educators of Illinois don't agree.  This week the Illinois state education board advised schools in Illinois to consider all children who go to work with their parents an unexcused abscence.  And, they strongly hinted that next year they would mandate such a position.  Their reason?  It's a lost day in school for these students and therefore a lost day to teach them.

Clearly, these education leaders are completely locked into their own traditional views of education.  It's not hard for all us non-educators to see the value of expanding children's horizons with such an activity.  Because we aren't locked-in to the idea of education as being something that has to happen in an official school according to a state curriculum.

Everyone runs the risk of becoming locked into their own view of what they do.  Pretty soon, the ability to think outside the box simply evaporates.  Operating the traditional Success Formula overwhelms other options.  When that happens, it's time to get outside the box so the lock-in can become obvious and new options can emerge.

RE: Dancing Elephants

I wrote recently that IBM looked like an elephant that could continue to dance (taking off on the title of Lou Gerstner's book about his days at IBM.)  Shortly after that, IBM announced quarterly earnings and its stock accelerated a 2005 decline.  A fair question might be "would I like to retract my earlier BLOG?"

Definitely not!  Yes, IBM missed its earnings projection by $05/share.  Right; a nickel.  That was about 6% lower than expected but a nickel higher than last year.  The stock sold off like you'd think they'd announced a quarterly loss - falling about 10%.  From its peak at the beginning of 2005, the stock is down about 25%.

Over the long term, the markets are efficient.  But in the short-tem -- well it's anyone's guess.  Not even the famed Peter Lynch could make money timing a market.  What makes money long-term is finding companies that can sustain success (read the latest great book on long-term investing by Jeremy Siegel for more info.)

IBM is taking actions to continue sustaining its success.  The stock might be volatile, both up and down, along the way.  But few make money trading stocks.  The way to riches in a creatively destructive world is finding companies that can sustain success.  Since its turnaround in the 1990s IBM has regained its ability to disrupt itself and demonstrate the characteistics of a long-tem sustained growth company. 

If you want a portfolio of long-term winners I would say that IBM is a company worth considering. Even moreso today.

Merge to Grow - Really!

Far too often we see companies merge in an effort to save an old Success Formula.  The goal of the acquistion is to Defend & Extend an outdated business model by bringing together two less than stellar competitors.  Because this is so common, it's easy for analysts and pundits to become very jaded regarding acquisitions and mergers.

Today, however, just the opposite happened.  Two good, high growth companies decided to merge in order to create new growth opportunities.  Rather than merging to find cost synergies, they are merging in order to find new markets, develop new products and further grow.

The two companies are Adobe and Macromedia. According to MarketWatch "Both companies said the long-rumored acquisition was not to consolidate and cut costs but to help Adobe expand into new markets, particularly in the area of providing content to mobile phones and other handheld devices....This is not a consolidation play. This is all about growth," said Bruce Chizen, Adobe's chief executive."

Because most acquisitions are about D&E, the stock market punished Adobe upon the announcement - sending it's stock down about 10%.  However, acquisitions and mergers can be very effective tools for creating white space and developing new growth opportunities.  We should keep our eyes on Adobe, and consider it for a long term investment, since this could be the move that spurs its growth for another decade. 

Can the Elephant Still Dance?

Louis Gerstner's best selling book on IBM was "Who says elephant's can't dance."  Now his successor looks to be a pretty good elephant trainer himself.

IBM has loaded itself up with more White Space projects.  This behemoth is fast moving out of hardware (selling its PC business, for example) and moving into value-added process management.  It's using both divestitures and acquisitions to disrupt itself, and then using White Space to develop new opportunities.

Read the latests article in BusinessWeek for details.  Let's just say here that if IBM keeps spawning these White Space projects it can keep itself in the Rapids for quite a long time.  You don't have to be small to succeed - just willing to be disruptive and use White Space

The HP Way

Hewlett Packard has been having a tough time the last 5 years.  As reported in Business Week, most analysts realized in 2004 that HP had stalled.  The HP printer business was the only unit making money, and growth was weak as resources were being poured into the faltering PC/server business -- which was not helped by the Compaq acquisition.

Jim Collins did a great job of describing the decades of early success at HP in Built to Last.  The HP Way gave work teams permission to create new solutions and pushed the decision making, as well as resources, as low as possible.  Great innovation was the result, and years of prosperity.

But with the acquisition of Compaq HP definitely lost its Way.  Decision making moved up, often to the CEO.  As HP adopted the Compaq Success Formula in its effort to grow PC sales management found itself focused on Defend & Extend management practices like budget slashing, R&D reductions, new product cuts and layoffs (over 17,000 since 2002).  This was not the HP Way, and business results went from bad to worse.

Now some are calling for the new CEO to even more aggressively pursue cost cutting and layoffs.  To "execute - then strategize."  That surely won't turn around HP.  What's needed is unleashing the innovation amongst those thousands of silicon valley employees.  What's needed isn't price slashing, but new products, new markets and new competitive models to deal with Dell.  HP needs to go back to creating and managing those high performance White Space teams that made it great. 

Changing leaders at HP certainly provides a pattern interrupt to the business.  If he takes the popular route with analysts, and executes more disturbances like his predecessor, he can expect to continue the string of results below expectations.  Instead, HP's new CEO needs to follow through with effective disruptions that create White Space and returns HP to the HP Way.

Retirement in the age of Creative Destruction

Those of you familiar with The Phoenix Principle are familiar with our statistical review demonstrating the high failure rates of companies.  Company longevity is far shorter than most of us realize.  One significant impact of this phenomenon affects all of our company retirement accounts.

America largely depends upon private retirement.  Social Security is considered substistence funding, and we are expected to make up the difference with either private funds or a retirement plan.  For our parents, who expected near lifetime employment, these private retirement plans were their safety net.  They depended on "the company" to fund their retirement and health care.

But let's consider someone today who wants to retire at 65.  They need to work, and pay into, a corporate retirement plan for at least 10 years, so they have to start at age 55.  And they would expect to live until 80 (the current average).  So, they want that company retirement plan to be around for at least 25 years.  Yet, when we look at performance of the S&P 500 we know that only about 1 in 3 companies (yes, only 1/3) of the S&P 500 can expect to survive for 25 years.  So where does that leave your retirement plan? 

It's even worse if you start your retirement planning at 45.  Now you need your employer to stick around for you for 35 years.  The odds of that are no better than about 1 in 4 (25%).  So, where comes the funding for the retirement plan?

Now look at the problem from a large employer's viewpoint.  US Steel and GM are just 2 recent examples (out of several dozen) where the company has said they can't afford to maintain the retirement program.  Not surprising.  Their lock in to their old Success Formula has pushed them way out into the swamp.  So what happens to those retirees?  Or those near retiring that had planned on that pension?  They have gone along for 10, 20, 30 or more years believing in the Myth of the Flats, thinking that their employer would always be there for their retirement.  But that myth is about to implode on them with painful consequences.

In an age of Creative Destruction, corporate retirement programs are little more than a wish.  If the companies don't succeed long enough to support the programs they are of little use to retirees.

Perhaps this should be part of the current debate regarding the future role, and funding, of Social Security.  For sure  it should be part of your plans for retirement.