You want to be optimistic

Every time we hear about a company hitting a stall we want to be optimistic.  We want to believe they will turn around their situation and recover their growth. Unfortunately, once a business hits a growth stall (regardless of the cause), it has a less than 7% chance of ever sustaining growth greater than 2%/year. 

Merck hit a growth stall about a year ago when one of its products was pulled from the market.  Several other products were challenged.  The immediate result was a dramatic decline in market capitalization.  The company lost about 1/3 of its value in a day - and over about 6 months the company lost half its value.  We would love to believe the company will recover its historic growth, so value shoppers begin buying up the stock.  But the fact is that Merck has a greater than 70% chance of NEVER recovering that lost market capitalization.

We would love to blame the regulators, personal injury lawyers and even product customers for creating this stumble for Merck.  But, regardless of cause, what we do know is that for Merck to recover will require a significant change in its Success Formula.  The marketplace has shifted, competition has changed (affecting the profits of all pharmaceutical companies) and Merck must change if it is going to try and regain its lost growth.

But the company is not trying to reinvent its Success Formula.  Instead, it is trying to Defend and Extend its old Success Formula with marginal changes and cost cutting. Although the company appointed a new CEO last May, it has not really Disrupted its Lock-in (in response to these market Challenges).  It has not created White Space to develop a new Success Formula.  It keeps trying to capture the lost growth by doing more, better, faster, cheaper.

Those who have heard me speak over the last year know that I have been a constant pessimist regarding Merck.  While it's stock occasionally gains a point or two, there is no upward trajectory.  Why do I remain pessimistic?  Because, like 70% of companies that stall, Merck keep trying to "fix" its problems with tweaks.  Until the leadership Disrupts and uses White Space to reinvent, it will not address its market-based problems effectively. 

I'd love to be optimistic - but there just aren't any signs that would be prudent. 

Don't blame your customers

We all know how Apple rejuvenated itself with the iPod.  From a declining, niche player in personal computers the company took off after launching the iPod.  Taking advantage of commercially available MP3 technology, Apple stepped in after Napster was sued into oblivian to help customers accomplish their goals of building individual music libraries.

Why didn't Sony take this tack?  Sony not only had all the hardware (after all, they were leaders in radios, personal CD players and the marketplace for personal entertainment), but they actually owned a recording company -- they had the content.  Sony could have been first to build on the market Napster pioneered to reap the results.

But Sony chose to Lock-in on CDs.  It missed the MP3 wave.  And it still is.  After leading the industry wave to wipe out Napster, Sony is now leading the industry to block piracy with copy protection software.  Instead of folowing its customers and developing the marketplace, Sony keeps trying to blame its customes for its woes.  Sony keeps fighting the last war, and in the process it is alienating its customers and its most important suppliers - the recording artists.

When markets shift, those who succeed move quickly to the new competitive ground.  You can moan and groan and try to use lawyers in an effort to protect and old business, but that never works.  Customers will find the suppliers who figure out how to give them what they want.  Sony needs to wake up and align with its customers, instead of trying to find ways to protect its out-of-date (and failing) Success Formula.

Deja Vu all over again

Vornado has acquired a 1.2% stake in McDonald's (check out full Bloomberg News article.)  Does anyone remember this scenario?  It was just November, 2004 when Vornado bought 4.8% of Sears leading to Sears acquisition by Kmart.  Simply put, the Sears real estate was worth more than the stores (KMart's rebirth as Sears Holdings hasn't changed that situation, either).  Vornado has learned how to spot these opportunities - including acting as a principal in buying Toys R Us in March to capture the value of that struggling retailer's real estate.

While everyone knows that McDonald's franchises most restaurant operations, did you know the company owns about 37% of the land under those stores, and 59% of the buildings?  Once again, to sharp real estate people the land and buildings look more attractive than the hamburger operations which use them.

McDonald's reaction?  In an email McDonald's spokesperson Anna Rozenich said that McDonald's plans to stick to its current business strategy.  Over the last 5 years McDonald's has struggled with flattening demand for its products, selling off most non-hamburger operations, closing stores and restructuring.  Now an external party has emerged to question the validity of the business model.  But despite all these Challenges McD has refused to Disrupt its old Success Formula and develop new value for its shareholders, employees, vendors and customers. 

This is the operating definition of Lock-in.