Obvious, and worrisome

Last week a phase ended when the top execs at Enron were found guilty of crimes related to the downfall of Enron.  The are likely to spend the rest of their lives in prison for "white collar crimes."  Unfortunately, those crimes cost investors, employees and suppliers billions of dollars.  No longer is "white collar crime" considered something easily forgotten.

It was a year ago that I blogged about the fall of Bernie Ebbers at Worldcom (see Dieing for Results).  At that time I mentioned that executives can easily find themselves committed to Defending & Extending old Success Formulas - leading them to be sure they've done nothing wrong despite the havoc they've visited upon so many.  The downfall of executives Lay and Skilling give an exclamation point to that blog.  They maintain their innocence because they continue to believe that their Success Formulas cannot be wrong.

More troubling than Enron last week was the $400million fining of Fannie Mae.  An organization created by congress in the 1930s to help supply mortgages for all Americans was found guilty of acting "arrogantly and unethically" by creating an environment "where the ends justified the means."  Top management "manipulated financial reports to win ill-gotten bonuses in the hundreds of millions of dollars."  (see report and full text in the Chicago Tribune.)

Have business leaders all turned unethical?  Since 1990, the number of classes on business ethics has skyrocketed, and the number of articles on the same topic has grown geometrically.  It's doubtful that any of these leaders think of themselves as unethical - especially as they spend millions defending themselves.  And they go on television proclaiming their innocence.

Rather, its an issue of personal Lock-In to old ideas of executive Success Formulas.  Executives see themselves as working hard to do what will increase the value of their companies, and themselves.  They all protest "I've broken no laws" as investigators, prosecutors and reporters tell of how their poor decisions cost billions while sometimes personally enriching themselves.  It is their Lock-in to the old notions of what an executive can do that makes them convinced they are not responsible for the damage they've wrought.

We all have personal Success Formulas and personal Lock-ins.  As leaders, these personal views often spill out into the organizations we manage.  If we are unable to see Challenges to our personal views, we are unable to Disrupt ourselves and use White Space to develop new Success Formulas.  For leaders, especially in large organizations, this can be very expensive Lock-in to the thousands of investors, employees and suppliers who depend on the company's future ability to succeed.

Appearances

This week one of America's great media companies jumped nearly 10% in value.  The Tribune Company - owner of the Chicago Tribune, Los Angeles Times, WGN superstation, the Chicago Cubs and other great assets - announced a significant stock buyback.  After falling nearly 40% over the last year, the stock made jump up.  Does this signal a good time to own this venerable company?

The Tribune Company announced that it was going to borrow a lot of money, and use the proceeds to buy back its stock.  It will sell some assets, but not most of them.  There is no plan for a significant restructuring.  Nor a big change in the business.  The company said its value is understated, so it is going to borrow money, crash its debt rating, and use the money to hopefully resurrect its moribund valuation.

Will this address the issues which has caused the 40% devaluation?  Let's see, large display advertising customers, such as auto and movie studios, have moved 20 to 40% of their newspaper advertising to Google and other on-line sources.  Classified ad customers are finding good service at much lower rates at CraigsList.com and Autotrader.com.  In entrenched markets like Baltimore, where the Tribune operates the Baltimore Sun, the well financed Examiner paper is entering the market stealing advertisers. 

The Tribune's actions are an example of Defend & Extend Management.  Management knows that the low valuation makes them a target for corporate raiders.  So they load up on debt in order to keep the outsiders from trying a takeover.  Meanwhile, the company strategy is to change very little.  And that is unfortunate, since the marketplace has significantly shifted since the Tribune became an industry leader.  Such Defend & Extend tactics will not create value for investors, and shows a much greater probability of significantly weakening a company already under attack from "new media" Challengers.

What would be good to see would be more White Space at the Tribune.  Rather than a disturbance, which may well lead to complacency, a real internal Disturbance demonstrating that the company recognizes serious change is needed.  And White Space that is funded, and given permission to develop a new Success Formula for the company.  Since we don't see those things, it's unlikely the company will sustain its recent valuation improvement.

Go, Go, Go

I love to watch soccer.  A very popular sport around the world, it's popularity is gaining every year in the U.S.  Part of the game's allure is how players will work, and work, and work to move the ball around the field for many minutes - always looking for an opportunity, a crack in the defenses - and then its POUNCE - GO, GO, GO - and if they execute within seconds its a score.  And in soccer, often a single goal makes all the difference between winning and losing.

This happens in business as well.  There can be extended periods of competition without enormous change.  But then, a crack develops, and its time to POUNCE - GO, GO, GO.

The time is now for manufacturers of home appliances.  After months of haggling with the government, Whirlpool has acquired Maytag.  And the company strategy?  Why, to gain synergistic cost benefits by closing the old home office, various plants and laying off thousands.  In other words, Whirlpool has publicly committed to a Defend & Extend strategy, which it plans to execute for the next several months.  And, since its earnings aren't what they'd like, they have no choice but to stay committed to this strategy.

So, what should GE (and other appliance manufacturers) do?  POUNCE.  All of this D&E behavior, including pushing to common systems and focusing on old assets, is creating an enormous opportunity to change the game.  Whirlpool will be working hard, but it will be strategically complacent.  For the company to succeed it relies on competitors to sit still and let them create the future as a projection of their past.  Thus, now is the absolute best time for the competitors to not behave that way.  Now is the time to bring out new products, to implement new pricing schemes for retailers and consumers, to increase the ante in advertising and promotion.  Anything that will Challenge the old marketplace and evolve it to a new level of competition. 

When Whirlpool is least able to do anything about it.

Being Locked-in makes you a competitive target.  Once you commit to an old Success Formula, your competition can use it against you.  Prepared companies will have White Space projects operating that they can blow into the market and tear the heart right out of your ability to compete.  Now is a very risky time for Whirlpool.  It's a great time for their competitors.

The sound of Thunder

According to an old Greek legend, thunder was the sound of giants falling in battles in the sky.  There's been plenty of thunder in the tech world lately.  Dell Computer, not even a decade ago considered one of the most admired American companies, has seen its market value decline by more than 40% since last summer.  Over the same period, Intel has fallen by almost the same amount.

Both of these companies have the same problem - they focused on optimizing their strategies too long, and they have missed important market shifts.  They let their Lock-in to an old Success Formula keep them from installing White Space to keep them evergreen.

Dell has long said it has the best supply chain in its industry.  It prided itself that it could take an order, make the machine, ship it and get the cash before it had to pay its vendors.  Companies globally marveled at this optimized machine, and sought insight to copy it.  But, now competitors have learned to copy Dell - and Dell has not developed any new markets that will allow it to continue its growth in revenues and profits.  Earnings are down, and there's no obvious plan for a turnaround.  The company CEO has said that he plans to invest more in the same old business model, hoping results will turn around.

Meanwhile, "Intel Inside" - the famous tag line, isn't on as many boxes as it used to be.  Long suffering, and much smaller rival AMD has been winning over customers from Intel.  Although this is largely in high-end multiprocessor servers (rather than desktop or laptop PCs), and AMD still only has about 20% of this market, people are legitimately concerned that Intel may really suffer, as once predicted by its famous CEO Andy Grove when he said that "Only the Paranoid Survive."  Even stalwart Dell, long a 100% Intel user, has switched to AMD of late.

Both companies point to just how easy it is for even very successful companies to succomb to Lock-in on their old Success Formula.  How easy it is to overlook market Challenges as they focus internally on optimization.  And, how they can begin Defending & Extending the old Success Formula rather than seeking Disruptions to it and maintaining aggressive use of White Space to spur innovation and maintain growth.

Just like Wal-Mart, any company can become too focused on its Success Formula - even those in high-tech.  History has shown that when this happens, the future risk is incredible.  Remember Compaq, DEC, Wang, Unisys - and even what happened to IBM in the 1980s?  Dell and Intel must react to their market Challenges quickly, because if they stall the losses this far are just a start to what could be an even more painful decline.

Growth vs Profits

If you want your business to be a success, attracting employees and investors alike, there's a simple solution.  You need to both grow and earn an above average rate of return.  It's the ability to both grow and make money that is attractive.  But for too many executives they see these as a trade-off.  And they give up growth in the pursuit of profits.

Do you remember the advertising jingle "Nobody Doesn't Like Sara Lee"?  Well lately, a lot of people have taken to not liking Sara Lee.  The company has lost about half its value since the late 1990s, and it is currently valued about where it was in the mid-1990s.  Since installing a new CEO and turnaround team about a year ago the company's investors have not be encouraged.

The new leadership has chosen to implement an aggressive asset sales campaign.  Rather than Disrupt the failing business by attacking Lock-in and creating White Space to innovate new solutions, they chose to try and sell their problems to someone else. They also began closing plants as they blamed poor results on industry overcapacity. The result has been disappointing prices for these assets, as others refuse to pay high for troubled brands and businesses.  The executives chose to stick with their old Success Formula, despite the poor results, claiming the payoff would be in the future.

The asset sales have continued, but the results have still not materialized.  Earnings have dropped 78%, and analysts such as Morningstar are saying that Sara Lee is struggling to capture any benefits from its restructuring.  Nonetheless, the new management team is convinced it can follow classic industry practices, such as changing its ad campaign on Jimmy Dean Sausage, in its jouney to find improved results.  The executive team is adamant that they must stick to their original plan.

So revenues are down, employment is down, valuation is down - and earnings are down.  All in the quest for a quick improvement in profits.  And there is no growth, as Sara Lee is making itself significantly smaller.  Profits vs. Growth is destroying Sara Lee.  What they will have to do is realize that what's needed is a Disruption, an attack on the industry Lock-ins that are driving this failing program, and implementing White Space where they can find a new solution - if they want people to once again like Sara Lee. 

Make that a double-profit decaf coffee

Last week Starbucks beat analyst estimates as profit rose 27%.  Same store sales were up 10%, the 57th consecutive quarter of sales increases in stores open a year or more.  Starbucks now has over 11,000 stores.  It has opened 900 so far this year, and will open 900 more before year ends.  This is definitely one heck of a growth story, and the company stock has soared 7-fold in the last 5 years.

No company can achieve that kind of growth without significant Disruptions, and lots of White Space.  Starbucks has no end to the many flavor varieties of coffee it offers.  But, it also offers tea and has seen tremendous growth from Green Tea of late.  And to keep promoting itself, the company did an advertising first as it gave away (as in free) 500,000 beverages on March 14 just to remind people it's spring and time to get out and enjoy the Starbucks stores.  And in Chicago, they are starting to sell hot sandwiches - a new test for growth.

Starbucks is not just a coffee shop, of course.  Their coffee (as beans and ground) is available in grocery stores, and they are the #1 market player in prepared coffee with their Frappucino, Iced Coffee and DoubleShot drinks, bottled and distributed by Pepsi.  You also can get Starbucks Ice Cream and Frappucino bars in most markets.  And for the late night adult crowd there's now Starbucks Coffee Liqueur at the liquor store.

But, the Starbucks White Space goes far beyond the beverages for which they are famous.  Starbucks has emerged as a major player in the music business.  In 2005, they demonstrated their growth skills as they launched and were the #1 distributor for Ray Charles final release Genius Loves Company.  Unbeknownst to many, Starbucks has a music division.  Of course it creates all its own in-store music - and offers that on CD.  But it also is a major force behind bringing new acts to market and distributing major artists such as Alanis Morissette, ColdPlay and the Dave Mathews Band.  Starbucks has even inked an agreement with the famed William Morris Agency to find new talent for them to release.

And Starbucks just co-produced the LionsGate movie Akeelah and the Bee.  Although it has gotten off to a sluggish start, the mere fact that Starbucks is into movie production demonstrates the lattitude with which the company will use White Space to drive new business opportunities. Look for tie-ins and promotions in your local store.

Could you imagine CD's or movies made and distributed by McDonald's?  Or purchasing a frozen Pizza Hut pizza at your grocer?  Why not?  Any company can keep itself constantly Disrupted and filled with White Space.  And for that, you will be rewarded with growth, and a high P/E multiple for investors.  And you can provide ALL of your employees with benefits, even health benefits for part-timers (hear that Wal-Mart?).  Everyone wins when you avoid the tendency to Lock-in on your first Success Formula and instead focus on White Space.