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[We] "have a surplus of similar companies, employing similar people, with similar educational backgrounds, coming up with similar ideas producing similar things with similar prices and similar quality."
--- Kjell Nordstrom and Jonas Ridderstrale in Funky Business
.... Apparently a lot. Have you seen what's been happening to the share prices of companies like New York Times, Gannett, Knight Ridder and Dow Jones? Down, down, down, down - from 25% to 35% in the last year. Why should such great companies be struggling?
I always thought of these companies as news companies. But they think of themselves as newspaper companies. Seem subtle. Until you realize that newspaper readership is down across the board, as is advertising for newspapers. As we all know (and this blog demonstrates) most of us get most of our news from the web now. Instantaneous, customized, searchable news. We don't wait for a paper to arrive and take time to browse it.
It would seem obvious that the best newspapers, who have the best news bureaus, would be leaders in taking news to the web. And leaders in attracting readers to those sites. But, alas, they spent most of their energy in early web days Defending & Extending their hard-copy business. They feared the web and the uncertain revenue model. They waited, and waited. Now, people don't go to those sites first, or second, or often at all when they want news (for more detail see Chicago Tribune story.) And, most importantly, younger readers completely ignore these venerable names for finding their news, prefering web sites more customized to their interests.
These companies got themselves into trouble because they didn't see themselves as News companies. They ignored the challenges the web brought in the 1990's. They Defended & Extended their old Success Formulas. They reassured themselves their business would return. They failed to Disrupt their Lock-in to newsprint (what a simple, and obvious Lock-in), and they never created White Space teams with the PERMISSION to actually develop leadership in on-line news delivery (as well as a profit model for the emerging new market). Now they have a HUGE Re-invention Gap as they struggle to find a way to catch up with their customers, who are leaving them in the proverbial dust. And once again we see their employees (layoffs), vendors (cost cutting), customers (forced to find new ways to advertise effectively) and investors (losing billions of dollars in equity value) suffer.
Be careful how you refer to your business. Deadly Lock-in might start with something as simple as calling your business News versus Newspaper.
Imagine you bought stock in a small restaurant concept in 1993 (12 years ago) with a handful of restaurants. Today, that chain has expanded to 450 locations, profits have grown five-fold since turning profitable in 2004 and sales are up 33 percent in the first six months of this year after doubling between 2002 and 2004. Would you want to sell that stock?
I wouldn't either. But that's what McDonald's is doing, by selling off ownership in Chipotles. Chipotles is growing faster, and more profitably than McDonald's. But McD is saying they can't afford to invest in Chipotle, they need to sell their ownership to have others pay for continuing to grow this skyrocketing opportunity. Why? Because McD wants to focus on their 37,000 stagnant hamburger restaurants.
The urge to Defend & Extend the hamburger business is greater than the urge to grow at McDonald's. McDonald's shareholders and franchisees would all benefit from McD getting behind expanding Chipotles. The growth and profit opportunities in the new business are multiples of the hamburger business. Yet, even though the data is clear, the Lock-in to perpetuating its outdated Success Formula keeps McDonald's from taking advantage of its own opportunity. Instead of migrating McDonald's Success Formula toward this overwhelmingly successful White Space project, they are sending it out the door.
McDonald's is horribly Locked-in. Leadership doesn't understand how to Disrupt that Lock-in in order to move the company from the Swamp back into the Rapids. They only difference between McD and GM is that McD hasn't moved far enough into the Swamp. But time will tell.
For employees and investors, now's the time to run, not walk, toward Chipotle. It's always better to be in the Rapids of Growth than stuck in the Swamp of mediocre performance.
What is ESPN? Many people would say "a TV channel about sports." What an understatement. ESPN has not one, but several channels (in multiple languages) and radio channels. Beyond that ESPN is a magazine, an internet portal (over 17million hits/month), a provider of on-demand video, book publisher, apparel maker and retailer, restauranteur, video game producer, and soon to be provider of cell phone services.
Is all this just so much brand extension? I don't think so. All of these are different businesses that ESPN has entered, learned, and now makes money on. Cable TV content is a tough, low margin business with more failures than successes, yet ESPN has grown its viewership and revenues by more than double digits every year for a decade. Radio listenership has been declining for almost a decade. Periodical publishing has had negative growth in ad dollars and pages printed for over 5 years (just review the declining fortunes of New York Times and Gannett). Apparel makers and retailers are struggling with changing market tastes and offshore competitors, while restaurants is the #1 most likely to fail start-up business and video games are dominated by a handful of very large, trendy shops. And ESPN has entered all these extremely competitive businesses and turned a profit within only a few months.
ESPN has profitably grown by staying in the Rapids, rather than resting on it's original Success Formula to provide sports news over cable TV. The company has overcome its Lock-In to the past by hunting out opportunities which aren't obvious, and certainly aren't core competencies, and then openings White Space for these opportunities to succeed. Instead of trying to optimize its old Success Formula, the company keeps trying to invent a new one. Every time you'd think the growth would flatten, they run right past the market Challenges to put more projects into the Rapids for ongoing growth.
At the top of ESPN is a mild-mannered 47 year old named George Bodenheimer who for the last 7 years has led the charge into all these initiatives. Like all leaders that keep their organizations growing, he constantly Disrupts his organization. He creates White Space, and he works to make the new projects a success. He's atypical of many executives (especially media executives) in his emphasis on teamwork rather than ego, and success rather than promotion. Things simply get done - maybe not because he tries to "own" all the success and instead by unleashing his organization to succeed.
Kraft's shares have dropped about 22% in the last year. They are flat over 2 years. They are down around 25% for three years, and down 35% from their peak in 2002. Recent profit announcements affirmed that Kraft is currently making 13.5% less than it made in the same quarter a year ago.
Company CEO Deromedi explained away the poor performance with "We don't want to repeat mistakes we made in early 2003 when we raised prices and had significant share declines." So, 3 years into a restructuring the CEO says investors can hope for either sales at low profits, or less sales? (see full Chicago Tribune story)
When was the last time your boss said you could spend 3 years trying to get your job right with no performance improvement? The CEO certainly has high expectations for investor patience, doesn't he?
Kraft is completely stuck in the Swamp, as it moves toward the Whirlpool. The company never disrupted its worn out Success Formula, and keeps trying to regain the glory years when "America Spelled Cheese K-R-A-F-T" (remember that ad slogan?) Yes, it is launching a new South Beach Diet line, but because it's still using its old, poorly performing Success Formula that line is not moving the company toward a bright (and more profitable future.) The head of new products left in June. And in the last year they've sold businesses to both Wrigley and Kellogg in an effort to shore up the P&L.
Kraft's leadership needs to create some White Space and find a new future - instead of trying to resurrect Velveeta-land.
GM announced a plan to cut retiree and employee healthcare costs by $18B per year today. It also plans to cut another 8% of its workforce (25,000 jobs) on top of the 30% cut in employment it's taken over the last 5 years. Oh, and by the way, the company is investigating selling it's most profitable (and practically only) profitable business - GMAC.
Analysts cheered the actions, and the stock climbed on the news (despite reporting big losses.) What do they expect? Is GM going to save its way to prosperity?
GM is hopelessly mired in the Swamp. With losses mounting, and a corporate raider on their doorstep (Kirk Kerkorian now owns 10% of GM) you'd think leadership would recognize that the Challenges warrant some serious Disruption of their Success Formula (and not these ineffective disturbances). But no, not this leadership. They appear willing to take any action to Defend & Extend their failing Success Formula. Even if it means cutting off their supply of resources (GMAC) and cutting rations to their own troops.
Maybe Kerkorian can bring in a management team capable of really changing GM (he did team with Lee Iacocca on his takeover of MGM Grand). It's certainly clear that the current leadership has no clue how to overcome existing Lock-In.
To do something truly new and innovative requires operating in White Space. You have to get outside the box of the traditional business in order to develop a new Success Formula. And for White Space to have breakthrough results it must have Permission (as well as resources) to be breakthrough.
I spoke to a colleague recently who is head of change for a very, very large oil company. As you can imagine, profits are exceptional there these days. And he's been very eager to make some big changes in a behemoth. But, even though top management puts out lots of words about their desire to make breakthroughs, his role is constantly being pushed to "manage" incremental improvements to existing processes.
He doesn't really have permission, nor committed resources, to make breakthroughs. In this environment, he's worked hard for two years to get leadership to accept the use of virtual teams for process analysis. He's had to nudge and cajole to gain acceptance for experimenting with process changes that have saved millions of dollars while greatly improving customer and supplier relationships.
Is he failing? Not at all. His company does not perceive a serious external Challenge to their business - profits are greater than ever. Without a threat, there isn't the passion for an internal Disruption. And they haven't established White Space. If he were to try and drive breakthroughs he would be on a suicide mission that would do him, and his company, no good. So, in the current environment he's actually doing quite well. He's realized that until a Challenge promotes a Disruption his success comes from helping the organization further Defend & Extend its Success Formula. While the sledding has been slow, and sometimes frustrating, he's in fact made some great contributions.
Success requires understanding what you can do, not just what you want to do. If you're organization isn't ready for White Space then recognizing your role is to help promote D&E practices is critical. Kamikaze's have short life expectancies - and they don't do much for helping the organization succeed.
Fashion to Figure is a very small retailer that recently learned how to apply The Phoenix Principle the hard way (see full story).
When founded, the hard working Harvard MBA behind this start-up locked-in on what he thought he would need for success. Unfortunately, he was so locked into his business plan that even after he obtained seed funding he lost 9 months trying to open his first store. He kept trying to perfect his execution plan. And his investor walked.
But his investor finally got the founder to wake up, and now he realizes "the biggest thing I've learned is that it's not getting everything right as much as fixing the things you get wrong." For this young fellow it took the Challenge of losing his seed money to Disrupt his approach (taught at B-School) and get himself into White Space.
Markets are dynamic. Entrepreneurs jump in because they see opportunities that existing competitors leave available. But capitalizing on an opportunity is not about hard execution of guesses made in the business plan. Execution focus leads to Lock-In and failure. Start-up companies live in White Space, where versatility and agility are requirements for creating a Success Formula which will lead them into the Rapids.
Sailors tie up small pieces of cloth on their lines to observe changes in the wind. These pieces are called "telltales", as they give the first indications of issues which the sailor must address. We use this analogy when looking at businesses, since we find that it is very valuable to recognize the early telltales of trouble.
Management often gives the most glaring signs of a telltale problem. Last week (as reported in the Chicago Tribune), Sears Holdings' CEO, Aylwin Lewis, sent a letter to all employees. In it he placed a ban on employees carrying bags from other retailers into their jobs.
There is no doubt that it's good for retail employees to shop at their employers. But, when a CEO puts such a dictum into writing, that is a telltale of a strategy, and organization, in trouble. Such a telltale is more important than a dozen press releases of a company's strategy, it's intended plans or it's anticipated results. When a CEO takes the time to tell his employees he doesn't like their shopping patterns it shows a leadership team struggling to defend and extend a broken Success Formula rather than find a new one.
