Hiring for Growth

A week ago Motorola missed analyst's expectations for third quarter revenues and profits, and the stock fell (see story here).  Given that the stock price has had a great run the last year, investors might well be tempted to sell the stock, fearing a stumble in the long run of growth.

While that was page one news on the business section, on the same day Motorola made an even more interesting announcement that made page 2.  They hired a new Chief Marketing Officer (see full article here).  And the person they selected, Casey Keller from Heinz, should put bullishness back into investors.

While at Heinz, 45 year old Keller was responsible for launching the EZ Squirt line of ketchup products, which came out in green, purple and even blue.  Needless to say, a new bottle shape, and funny colors, does not drive me to buy more ketchup.  But what these launches demonstrate is that Mr. Keller knows how to get permission and funding to try new things - even in a company as staunchly boring as Heinz.  He has demonstrated he knows how to get White Space created, and he knows how to manage it for innovation.  Innovation that drove brand protection, price support and incremental revenues in an extremely "mature" product line.

Motorola actually saw its 2006 revenues grow 17% versus 2005 in the third quarter, as cell phone market share has risen from 14% to 22% since 2004.  That is not a growth stall.  But it missed estimates.  What does the company need to do now?  Why continue the development and implementation of more White Space - leading to more innovation - just as Ed Zander has done since taking the helm of the company. 

Looking around Motorola, there aren't many people with the skills for creating and managing White Space. That was not the winning personal Success Formula before Mr. Zander.  So to find a leader that understood how to identify Challenges, and then create and manage White Space Mr. Zander and the Board had to go outside.  There they found someone with the right skills - White Space management skills - that should be able to produce even more robust results in the dynamic Motorola of today.

Investors should think twice before jumping out of Motorola.  If he's as good as his past, Mr. Keller just might help Motorola keep their double digit revenue growth going.

When Giants start clubbing

Wal-Mart has started selling prescriptions priced at $4 for a month's supply (see article here.)  Why? To get more people into the stores, silly.  As I've blogged before, the world's biggest retailer has the world's biggest Lock-in, and they will do anything they can think of to keep their Success Formula unchanged.  Now they are looking to drastically cut prescription prices.

This is good news for consumers.  But what about Walgreens?  After all, they have prescription sales as a central part of their Success Formula.  What was their reaction? To say they aren't worried, because Wal-Mart is a small player in prescriptions.  In other words "we're Locked into our Success Formula, and we don't intend to change it no matter how large the Challenge."  In the face of mounting pressure by insurance companies to force insureds to order medicine on-line, and corporate support for mail-based prescription delivery, and now a frontal assault by the world's biggest retailer Lock-in allows Walgreens to blithely look the other way.

This is bad for investors in both companies.  We now have two large companies planning to club each other to the bitter end in a battle to see who's Success Formula can survive.  Along the periphery of this fight are other retailers, like CVS, Target and KMart each ignoring the Challenge to their future (according to Associated Press [see here]some have said they don't think this is an issue because customers with insurance only care about the co-pay and not the price) holding their own clubs and planning to defend themselves while putting in a few good licks as they seek to protect their individual Success Formulas.

This is simply bad management.  There is nothing but hubris in undertaking such tactics.  Smart management sees the Challenges, and reacts early.  They avoid the club fight altogether, seeking out new markets where they can prosper.  Only competitors who are Locked-in, and would rather take hits and possibly die would take on such a fight.  The result of fighting is someone eventually falls into the Whirlpool and is swept away.

Again, for consumers such club fights can be a great cost saving opportunity.  But for investors, it's time to get out of the way!  You don't want to be an idle participant in the latest bloody version of business WWF Crackdown.  You'll most likely come out a bloody mess yourself.

Merc v. BOT, Hartung quoted

The Chicago Mercantile Exchange (the Merc) is acquiring the Chicago Board of Trade (BOT).  If you're not a commodities trader, you probably don't really care.  But for millions of people who buy commodities, having a functioning liquid market for commodities is critical.  And the upcoming merger of the top two exchanges has raised many eyebrows in America's midwest.

Most importantly, the Merc was built on electronic trading.  The Board of Trade was built on pit trading.  The cultural divide is enormous to those who built a fortune in one or the other, and to those who place millions of dollars on the line every day in trades.  What will the future organization look like?  One would hope it would be a brilliiant combination of human traders and electronic capability like what is being built by the New York Stock Exchange (NYSE) and their acquired partner Archipelago.  From that merger we're seeing an ever-developing, new, seemless 24-hour equity trading market.

But, the merger of these two stalwarts is not as likely to be so easy.  As the Chicago Tribune quoted me, in this instance of two bitter rivals there is a likelihood that the entity which controls the resources and processes will emerge as the lone surviving company.  The customers will be transitioned, and only one company will exist.

This is too bad.  What the Tribune didn't have space to discuss is what should happen.  The two groups should create a White Space team dedicated to designing a merger which brings out the best of both companies.  This team must be given resources to actually develop a unique solution, and it should have independence by reporting to the top people of both companies.  This team should design a solution that utilizes the best of both company's processes, driving the best in customer satisfaction while opening commodities to even more investors.  A White Team approach to the merger would give the Merc'a investors, as well as all customers, the best solution. 

Such a merger need not be a vicious battle about who is in charge.  Although almost all do end up that way.  Instead, everyone would benefit if the merger were viewed as a Disruption.  One driven by market Challenges.  And then seen as an opportunity to create a new solution, previously not available, that can expand the market for commodities investing by not only traders but ever more corporations and individual investors.  By using a Phoenix Principle solution to the merger, including White Space, a better result could be obtained than from any one-sided approach. 

We'll have to see if the companies take an enlightened approach, or instead use "clout" to drive toward a fast, but single-sided solution.

Global Human Capital

We've added Chris Rollyson to our Blog Roll. Chris is writing about how Outsourcing can be a tremendous tool helping businesses to create additional White Space. His insights and stories of how innovation is fostered and developed via Outsourcing casts the practice in an entirely different light than mere cost cutting. He recently posted a story about how Williams Company used outsourcing in a critical role for its turnaround. Readers should give it a look at The Global Human Capital Journal .

Like Lemmings

I hear frequently about the conflict between management and investors.  The argument typically goes along the lines that management could do many exciting and strategic things if it wasn't for those pesky investors who want a consistent return on their equity.  It sounds like somehow investors know too little, and they hamstring managment's ability to succeed.  In too many occasions, however, the opposite seems to be true. 

Readers of this blog know I see McDonald's as hurting its own future.  The company has systematically been selling off its best growth prospects to protect itself from an outside investor who would like to make changes.  Recently, a number of other investors voted that sentiment.  As I blogged a few weeks ago, McDonald's offered to investors that they could trade their McDonald's stock for Chipotle shares - in an effort to finalize the sale of Chipotle and bring back in more McDonald's stock to protect itself from a hostile investor.  Last week Bloomberg reported that 262.7 million shares were tendered for the mere 18.6 million shares of Chipotle available.  The offer was 14X oversubscribed.  Indicating that a lot of investors knew a good deal when they saw it - swapping shares of a low-growth, Locked-in McDonald's for the high growth innovative Chipotle - even though its profits were lower and its P/E much higher.

But now Wendy's has decided to join the act.  As reported on 10/13, Wendy's is offering to sell its Baja chain in order to get cash to ----- buy back more Wendy's stock.  Apparently influenced by the fast run-up in McDonald's shares (which have had a very nice run this last year), Wendy's is willing to sell off its new growth machine in order to protect its aging hamburger franchise.  Rather than look to Baja as a replacement for the sagging Wendy's, which has had declining same-store revenues for 6 of the last 8 quarters, they are going to sell it in order to buy back stock to prop up the equity value in a concept that has little growth opportunity left.  In order to maximize its short-term value, Wendy's is literally trading in its White Space future.

Too often, management behaves like Lemmings.  One competitor follows another.  Lock-in doesn't exist just at the company level, but at the industry level as well.  In several industries (steel, airlines, automobiles to name a trio) we've seen competitors simply walk off the cliff as they follow a Locked-in industry paradigm that does not produce returns.  Management should listen to investors, and recognize that their chorus is not just for short-term profits.  Rather, they seek growth and a market or higher rate of return on their equity.  No private owner would expect less.  But to meet this hurdle requires creating and maintaining White Space rather than letting Lock-in turn you into a Lemming.

More, Better, Faster problems

If you don't live in Chicago or Los Angeles you might have missed a recent set of stories about problems in the newspaper industry.  The Tribune company (owner of Chicago Tribune and 9 other papers) also owns the LATimes.  Like the New York Times company, Dow Jones and many other newspaper companies, the last 2 years has seen the equity value of Tribune plummet.  Newspaper margins have been narrowing, caused by rising competition from new entrants, such as Google and other on-line sources as well as more nimble local competitors and brazen new business models from the likes of oil and railroad billionaire Philip Anschutz (articles here, here, and here).  All traditional competitors have been cutting costs, including big layoffs.

Recently, this created an enormous bruhaha between the publisher and top editor at the LATimes and the owners in Chicago.  This week things took another difficult step as the Tribune fired the LATimes publisher (article here) for outspokenly disagreeing with top management.  The newspapers are reporting on themselves as they discuss the difficulties being encountered inside the executive suite - as well as by competitors (additional coverage here).

The problem is that these companies are following other large newspapers in trying to wring more blood out of the proverbial stone.  Margins are down, and the answer they're trying to implement is "more, better, faster" of what they always did.  But, as the fired Times publisher recognized, when you try to get more out of a broken business model by working it faster and harder, all you get is worse results quicker.  You can't fix a failing Success Formula by trying to operate it better, or faster, or with fewer resources.  Those actions just help you fail faster.

The problems in these newspapers, like all newspapers, relate to more competition for readership from the internet and other targeted news products.  The old big-city newspaper "natural monopoly" has been erased by these new players.  As a result, subscribers are declining - especially in coveted younger demographics (see article on shifting readershipfrom 2005! here).  That leads to lower advertising rates and dollars, because who will pay for declining readership?  Why pay $75 for a classiifed ad for your used cars when you get one, with pictures, from Vehix.com for $39?  Why buy full page movie ads for one shot at viewership when you can get a week of repeated hits on Yahoo!?   So ad dollars have been moving to on-line media, and other new competitors.  All the fighting inside the newspaper companies about how many writers, or copy-editors or salespeople to lay off this quarter or next does not address the broken Success Formula.  It only creates a huge opportunity for the new competitors to continue stealing customers and growing.

Lock-in can kill any business.  Even the most venerable.  When market Challenges emerge that create a need to redefine the Success Formula, only the companies that Disrupt themselves and move into White Space will re-create success.  More, Better, Faster just creates more problems, and a vicious cycle that eventually leads to the Whirlpool of failure.  The LATimes has had 12 publishers in 120 years - and now 3 of those have been put in place in the last 5 years by the Tribune company.  Changing the captain will not change the destiny of a ship Locked-in on a course headed right for an iceberg.

Anyone can do it

Two very unlikely companies demonstrated this week that anyone can Disrupt and create White Space to develop a new Success Formula.  IBM and General Motors both showed signs of what any company can do. 

Last spring the leaders of IBM Disrupted their product development process when they opened it up to all employees, suppliers and their family members (read article here).  As a result, they involved 53,000 people and generated 37,000 ideas.  How, by simply asking for their input.  CEO Palmisano attacked hierarchy and sacred notions of product development in high-tech, and as a result he achieved a breakthrough in the potential to redefine IBM's Success Formula.  Now IBM is creating White Space to develop those ideas, committing (in advance!) $100million for operation InnovationJam to see what can work.  When Louis Gerstner wrote "Who Says Elephants Can't Dance" about IBM's turnaround he demonstrated that size does not preclude innovation and growth.  And now that legacy is living on in a tremendous example of just what any company can do.

Even more surprising is what is happening at GM - a company I have unabashadly beat up on the last year.  Yet, within the confines of a horribly Locked-in organization we now can see the use of White Space in product design (see complete article here.)  As recently as 2001 the hierarchy gave vehicle line executives the say on a car's appearance - the kind of analytical, cost saving process that produced such great autos as the Pontiac Aztek (don't remember it? - that's the point!).  "Design had been relegated to putting a wrapper on something that everyone else had decided what the dimensions, the proportions and the interior package were going to be", according to design head Bob Lutz.

What's different now?  "Tom Peters, a GM designer for 22 years called Lutz a 'breath of fresh air' because he lets designers start with a fresh sheet of paper." Lutz was brought in, at almost age 70 mind you, by CEO Waggoner as a Disruption to the old hierarchy.  As head of design, he reports outside the old hierarchy and directly to the CEO.  And his dedicated budget was carved out of the old product groupls.  Thus permission and resources were both granted up front, and Lutz has made the most of it.

Many people accept the notion that older companies are unable to change.  Like somehow organizations are destined to Lock-in and eventually fail.  Unfortunately there is no data to support that notion.  The ability to Lock-in and fail is just as apparent in start-ups as in behemoths.  And, behemoths can Disrupt and use White Space just as well as a start-up.  IBM has shown it's ability to do so, and we can hope they will keep up their efforts to again be reborn - continuously, like a Phoenix.  GM has a much longer and tougher road, but it can be done.  If they can just get the rest of the company to behave like Bob Lutz and his design group!