Can you recognize a whirlpool?

American businesspeople tend to be optimistic.  No one wants to project their business is declining, and they use all kinds of changing benchmarks to make it appear like their business is improving -- even if it's not. 

Case in point - Kodak.  From peaking near $95/share in the late 1990's, by the time Kodak was removed from the DJIA (4/2004) it's value had plummeted 75% to around $25.  But then Kodak's stock recovered to $35 as its executives talked about their turnaround plan.  Ever optimistic, Kodak said it wasn't too late for them to move into digital imaging.  But now the stock is back down to $25.  Reports about the company's performance are horrible.  Sales of conventional film fell 30% in the U.S. this year.  Employment peaked at 145,000 in 1988 and now is 50,000.  And $3B of "turnaround acquisitions" have raised costs more than margins.  The fact is that Kodak is in the Whirlpool - and Kodak is far more likely to follow Polaroid into the history books than ever regain its lost value.

Much is likewise true at Sears.  After the company was removed from the DJIA in 1999 it became much more obvious to everyone that Sears was in a non-recoverable tailspin.  In 2004 real estate developers determined the company's stores were worth more empty than as Sears stores.  Nonetheless, there are those who still claim Sears Holdings will be saved by Mr. Eddie Lampert - the acquirer of the old Sears. 

But, by June of 2005 Sears was forced to slash its advertising.  Then in early September Mr. Lampert fired the CEO at Sears (Lacy) in a move to demonize someone and hold out hope for a Sears turnaround.  And now the company is planning to cut benefits for all its retirees in another effort to save its P&L.  Sears is quickly moving further into the whirlpool, destroying shareholder value with each day it invests in maintaining its old, broken Success Formula.

While "hope springs eternal from the human breast", for investors (and managers) it's much smarter to recognize a business in the Whirlpool early and manage the exit to get as much cash as possible.

Is Microsoft nearing the Flats?

It's always risky to challenge a company as large and successful as Microsoft - but read these quotes from the recent BusinessWeek article:

"Employees... feeling trapped in an organization whose past successes seem to stifle current creativity."

"Microsoft faces serious long-term challenges: the rising popularity of the Linux open-source operating system, a plague of viruses attacking its software, and potent rivals such as Google in the consumer realm and IBM (IBM ) in corporate computing. It's the company's ability to respond to these challenges that current and former employees fear is being compromised by Microsoft's internal troubles."

"When Ballmer took over, he was determined to overcome the looming challenge of corporate middle age. He pored over how-to management books such as Jim Collins' Good to Great. But since Ballmer took the helm, Microsoft has slipped the other way. The stock price has dropped over 40% during his tenure, and the company, whose revenue grew at an average annual clip of 36% through the 1990s, rose just 8% in the fiscal year that ended on June 30. That's good for a company of Microsoft's size, but it is the first time the software giant has had single-digit growth."

"..monopolies are at the root of the company's malaise. As Microsoft fought the federal government and litigious rivals, it developed an almost reflexive instinct to protect Windows and Office, sometimes at the expense of looking for groundbreaking innovations." "Every time Bill and Steve made a change to be more like other big companies, we lost a little bit of what made Microsoft special" "So much of what Microsoft is doing right now is maintenance" "Instead of coming up with the next great technology, Microsoft programmers have to cater to itsmonopolies"

"With revenue growth slowing, Ballmer has tried to squeeze more down to the bottom line to make the company more appealing to investors. In the past fiscal year he slashed $2.6 billion out of operating expenses."

Walk Away Smiling

Readers of this BLOG know I'm a big fan of companies avoiding lock-in.  I'm always pushing organizations to open White Space projects.  So you'd think that a company looking to sell a business would be someone I'd attack.

Not so quick there.

Motorola is putting out feelers to sell it's auto parts business.  Ostensibly to "focus."  That's a word reporters and investors understand.  You might think I'd say "hey, why don't you fix that business?  Why not explore new options?"

In this case, I fully support management.  For over a year now Motorola has been opening White Space right and left.  The results have been fantastic (six consecutive higher profit quarters) as Motorola has grown revenues in several new markets while breaking down old lock-ins and expanding revenues in the hotly contested cell phone business.  The company is doing practically everything right.

Now is the BEST time to walk away from the old legacy business.  Nowhere is lock-in stronger, and less valuable, than in the original legacy business.  In Motorola's case, finding a new future has been augmented by cutting its ties to the past - past practices, past metrics, past cultures and now past markets.

Sometimes developing a new future is best augmented by knowing when to walk away from the old business.  And if you've already established White Space that's producing results, you can walk away smiling.

The Wrong Stuff

"The slide into bankruptcy protection of two of the USA's largest airlines is more a result of the carriers' bad assumptions and slowness to act than the recent rise in fuel prices or the devastating terror attacks four years ago."  USAToday 9/15/05 page B1.

Woe are many of the airline companies.  They've been challenged to find a new, profitable business model.  And instead they've blamed their employees (too expensive), their customers (disloyal and cheap) and commodity traders (rising fuel prices) for their failures.  The leadership of these companies has done everything it can to continue Defending and Extending their broken Success Formula.  But not even post 9/11 federal government bailouts were enough.

When companies don't step up to their market challenges by disrupting their operations and finding new solutions then their future is easy to predict.  Too bad for America that nearly half of the industry capacity is now in bankruptcy (and thousands of jobs at risk, not to mention the strain on the federal government's Pension Benefit Guarantee system) simply because management would not stop trying to do more of what it had been doing (more, better, faster, cheaper) - an impossible plan for saving these companies.

No Silver Lining

There is no silver lining to hurricane Katrina.  The storm has laid waste to a huge area, killed thousands and left many thousands more with no homes or income.  The nation's infrastructure has been greatly harmed.  There's nothing good to be said about such a storm.

We can, and will, recover.  The critical question is "how"?  At the end of WWII Japan was left with thousands dead and homeless and it's infrastructure destroyed.  With the help of lots of U.S. aid Japan rebuilt.  It did not just rebuild what it had, but went beyond.  In several industries, let's pick steel for example, Japan made investments to have the world's leading technology and lowest cost production.  Within 10 years of WWII Japan was becoming a player in the world steel market.  By the 1970s Japan's steel industry was "cleaning up" on U.S. integrated steel manufacturers.  The actions Japan took to build a NEW infrastructure (not just rebuild) set the stage for Japan to be a world economic power twenty years later - a position it maintains to this day.

There are similar stories about the devastation in post WWII Germany, which is now a leader in many industries including chemicals and automobiles.

We must recover from Katrina.  We will.  The important thing for us to remember is that we should take this opportunity not to simply rush to rebuild what we had before - but rather to use this horrible challenge to lead us into White Space for determining how our Gulf Coast can be even more productive, more capable, a better economic leader than it was before.  We can confront not only the immediate challenge, but challenges which have been building for years as we move forward -- and in doing so make the Gulf Coast an even greater American jewel than before.  We should not shortchange our investments in planning, resource utilization nor rebuilding as we return the Gulf Coast to a vital economic region.  Now is the time to move forward and be even better than before!

White Collar Blues

There's a new book out that's well worth reading.  Bait and Switch by Barbara Ehrenreich.  There's a great review (in case you don't have time to read the whole book right now) In the Chicago Tribune by a University of Chicago Professor of history - Eric Arnesen.

Barbara's thesis is pretty simple - there are a lot of white collar people unemployed and underemployed.  So, as a quasi-anthropologist/journalist she faked up a resume, joined some networking groups and went job hunting.  What she found is all too familiar to those struggling with white collar unemployment, and simultaneously insightful.

Barbara learned that unemployed and underemployed people tend to blame themselves for their difficulties.  As if they simply didn't work hard enough, try hard enough and diligently pursue all possibilities.  Likewise, the herds of advisors in network groups, outplacement firms, job counselors and authors all put the blame for the unemployed squarely on those without good jobs and looking.  Lots of advice is "more, better, faster - and consider making yourself cheaper."  The same sort of lousy advice that gets businesses with broken Success Formulas into deeper trouble (and failure).

What Barbara also points out is that this answer is..... well...... insufficient.  The economy has changed.  The work world isn't like we were promised in school.  Globalization of skills, rapid "boom to bust" lifecycles of companies and wicked swings in market shares have made employment opportunities shorter and underemployment a fact of life.  Much of what people are suffering through isn't caused by them - but rather by a change in the working environment in which we all participate.

I regularly speak to networking groups.  I find the same phenomenon Barbara describes.  People searching for their "last job", rather than the "next job."  Individuals become locked-in to a personal Success Formula developed early in their careers, and they keep trying to find a way to make that Success Formula work.  But it won't.  The world has changed.  What's needed isn't "the old jobs" but rather for those who are looking to realize they really have to change what they are looking for, how they are looking for it and often their own primary strengths.  They have to compete in this new, transparent "information economy."  And that requires a personal implementation of The Phoenix Principle.

Those who will continue to succeed will be able to understand that the employment market has changed.  They must recognize their lock-in to old notions, and they must attack that lock-in so they can open doors to new approaches for developing their careers.  They need to disrupt themselves, internally, and create personal White Space in order to find new search processes and improve those strengths which are valuable in today's job marketplace.  The Phoenix Principle doesn't just apply to industries and companies that lock-in to old competitive structures - but to individuals as well.

Give Barbara's book a read.  And then think about what it will take for you to stop trying to Defend & Extend your career, and instead grow into a whole new set of opportunities.  We all have to face the fact that retirement age is being pushed higher and higher, and thus we'll all have to work longer.  We might as well enjoy it - and that means modifying our Success Formulas to fit the working world of the future.

Insight on Page 3

How do you read the trends in a business from the outside?  Look at the articles on page 3.  We all read the headlines.  But headlines are dictated by what's relatively interesting TODAY.  This short-term phenomenon is not a good way to interpret what's happening over time.

On Wednesday of this week (8/31/05) the Chicago Tribune business section led with articles about the business impact of Katrina.  As they should.  But when you turned the page, there were two very interesting, and short, adjacent articles on Motorola and McDonalds (courtesy of Bloomberg News).

The 4 inch by 4 inch text box on Motorola calmly reported that the company was retiring another $1B in bonds.  This is on top of $2B in bond repurchases over the last year.  Debt is down over 40% since January, 2004 and the company's credit rating by Moody's has been raised.  By the way, sales and profits have risen over 10% for 6 straight quarters.  The lower debt will allow Motorola to consider new investments in R&D and possibly acquisitions.

Meanwhile, the 2 inch by 8 inch text box on McDonald's said the company was borrowing $3B to repatriate foreign earnings in order to take advantage of a short-term government tax break.  By the way, this caused a recent 10% drop in reported earnings on top of the smallest sales gain in 2 years.  The repatriated cash will be used to extend the company's business model by opening new stores (anyone recall the store shuttering program in 2000-2001?), remodelings and paying salaries (no joke - paying salaries!).

I've written in this BLOG before about the great difference between Motorola and McDonald's.  One has disrupted itself and opened White Space to innovate - clearly moving rapidly from the Swamp back into the Rapids.  The other is practicing Defend & Extend management as it continues struggling in the Swamp.  To track performance, keep your eyes on page 3.