You gotta do it right

WalMart prides itself on great execution.  For years management has bragged about the company's ability to get things done quickly and cheaply.  But now the company has run into problems.  Revenue growth has slowed, and the future is very unclear.  A five year stock chart shows declining equity value of about $80billion.  WalMart is finding out that when innovating, it's execution skills are greatly lacking.

This week it was reported (see Tribune article here) that WalMart is going to report that it's November sales actually FELL for the first time in a decade.  This is just the latest in a string of bad news.  Included is the fact that WalMart is planning to cut back its expansion plans in response to its declining year-over-year same store sales.  The company's foray into more trendy fashion goods has flopped, with those products being pulled.  It's taking on the drug retailers with flat price generic pharmaceuticals - largely to a market yawn.  Net - WalMart monthly sales are up only half of Target's (who's 5 year chart shows they found the $80B Walmart lost).

Readers of this blog know I've long stated that WalMart's future is dicey for investors and employees.  Totally Locked In to its strategy of low cost, management has pruned any skills at innovation.  Long gone are the people who in the 1960s helped Sam Walton pioneer the innovations to drive the low cost strategy.  So now, when it needs to innovate, WalMart doesn't have the right people to do the job.  To paraphrase an old southern expression "even if the mind is willing, the flesh is weak."

WalMart desperately needs to change.  But to do that the company needs to implement White Space.  It needs to first own up to its Challenges.  It needs to tell employees, vendors, investors and customers that they see a need to change and fully intend to.  Then management needs to put in place a team that has the permission to develop a new Success Formula, reporting directly to the CEO (outside the existing management system), and fund that team with enough resources to really try something different.  All these piecemeal ideas are getting lost in failed implementations by an organization too massive and tightly directed to do anything more than run the old Success Formula.  The White Space group needs permission to develop a new store concept.  To test things their own way and prove out the new Success Formula - not just a new tactic here or there.  And then, instead of trying to push the tactic into the massive WalMart the company must migrate the traditional stores toward what works in the new Success Formula.

WalMart has done this right before.  Sam's Club is a huge success - a pioneer in the club store concept.  There WalMart followed all the rules of White Space and created a Success Formula that worked. 

If they will hire some new managers, and give them the kind of White Space they gave the Sam's Club team, WalMart could migrate toward a more successful future in a matter of months.  But if management keeps doing all these tactical actions they'll only succeed in confusing everyone.  Much to all of our dismay.

Like a Virgin

When asked about companies that are great examples of Phoenix Principle companies I like to discuss Virgin. For years Virgin was considered a small company, but it is a great example of a small company that has become very, very big by following The Phoenix Principle.  There is no doubt that the company founder, Richard Branson, had a lot to do with the company's enormous success (just as Steve Jobs has had a huge impact on the success of Apple and Pixar).  But we can look beyond the flamboyance of Branson to see that the success has had everything to do with avoiding Lock-in to a particular Success Formula and instead accepting Disruptions to constantly create and then manage White Space.

Virgin was founded as a "publishing" company, putting out its first magazine in 1968.  In 1970 I guess you could say it became a "media" company as that's when it entered mail-order music sales.  By 1971 Virgin expanced into hard assets by opening its first retail record store, and then in 1972 opening its own studio to actually produce its own content, leading to the Virgin label introduction in 1973. In 1976, Success Formula expansion continued with the opening of a nightclub in 1977.  In 1979 Virgin ignored the thinking of everyone else in the "music" industry by signing on The Sex Pistols - an outrageous band which made Virgin a well known label and very wealthy.  By 1980, Virgin was   pretty well established as a publishing/media/music company with enormous profits and great success.  This could easily have Locked-in Virgin.

Then, in 1984 the company realized it had to expand or stagnate.  But it didn't select just one project.  The company opened a potpouri of new White Space.  Virgin Atlantic Airways was opened to haul passengers, and Virgin Cargo to haul goods. A hotel was opened in Deya, Mallorca.  And Virgin Vision opened shop with a 24 hour satellite music channel.  What do these have in common?  Nothing more than each was a new opportunity to expand the company into high growth industries.  The businesses did not even share the goodness of being in high margin businesses - as practically all were markets where profits were extremely rare to nonexistent.  Thus, the second great Phoenix Principle axiom was applied.  Virgin did not dictate how these projects would succeed.  Rather, they were each given resources and permission to find a new Success Formula in markets where Locked-in competitors did poorly.

In 1994 Virgin Cola was launched as a company to compete with Coke and Pepsi.  In 1996 Virgin opened Virgin Bridal, the first mass-retail approach to the formerly cottage industry of bridal shop goods.  Virgin also partnered with a company winning the contract to build the Channel Tunnel rail link between the UK and Europe.  In 1997 the company got into the rail business full bore with 15 lines in England and plans to expand.  That year the company also launched Virgin Vie - a cosmetics company.  And Virgin Direct banking was opened in the U.K.  Why do I mention these?  Because they were just some of the projects launched in the 1980s and 1990s that did not become wildly well known successes.  Part of creating and managing White Space is trying things that don't work out.  Portfolio management says that we need a mix of projects, yet most organizations cannot stand the thought of investing in something that does not succeed.  At Virgin, managing White Space does not just mean starting new things - it also means knowing when to sell or otherwise get out.

This all got my attention recently because Virgin America will be going into service soon, carrying air passengers across the U.S. (See full article in CIO Magazine here.)  The project is a marvel at how to manage White Space, culled from decades of doing it well.  Simplification is a cornerstone, as the new enterprise is ignoring long-held "beliefs" about what works with airlines - an industry in which 160 air carriers have gone bankrupt since the deregulation in 1978.  Virgin relies heavily on vendors and contractors/consultants to get things done in the early days.  Rather than use "industry standard" software packages for critical applications like bookings/reservations and scheduling they are literally building their own; and using Linux open source code rather than proprietary source from companies like Oracle or Microsoft.  And much of the work is being done in India by companies that has never worked previously for an airline.  Virgin is demonstrating that competing means doing what your competitors don't - in order to be more flexible and develop a new competitive advantage.

Great companies are no accident.  What they have in common is a willingness to Disrupt their Lock-in and use White Space to create new Success Formulas.  Long-term, success does not come from understanding your "core competency" and optimizing it (if that were true Virgin would likely have followed the path of Playboy magazine or Sun records - the fabled company that launched Elvis but is now gone), but rather from overcoming market Challenges and developing new solutions to compete. To this day Virgin follows this path, fearing no new markets and entering with their own unique Success Formula developed in White Space.  And anyone can participate, on the company web site is a link where you an submit your own Big Idea for consideration - always on the lookout for Disruptions and opportunities.

Allstate White Space

I've long said that any company can innovate and grow.  ANY company.  This week we saw an example of a stodgy company, in one of the stodgiest industries, explain how it's possible to take the steps toward improving its long term success.  That company is Allstate - best known for it's insurance business and its decades old tag line "your in good hands with Allstate."  (See complete Chicago Tribune article here.)

I'm optimistic about Allstate, and do think it shows a high likelihood of outperforming its peers.  And not because I think they have better underwriters, better risk managers and better agents.  Nor because they are looking at all kinds of new products like pet insurance and identity theft insurance, as well as others.  Nor because they are planning to roll out new "hipper" office decor.

I'm optimistic because the fellow who's taking over as CEO shows the willingness to create and manage White Space within Allstate.  Starting in 1999, Thomas Wilson took a look at Allstate Financial and wondered why it only sold unregistered products like life insurance and annuities rather than a larger suite of products including mutual funds.  He could have studied on this question, pondered the potential market, hired consultants and generally analyzed the question unendingly.  But, instead, in his own words he said to the unit leaders "Here's $10million.  Talk to me every two weeks."

With this small act ($10million is relatively small in a $33billion company) and short directive he created White Space in Allstate.  He gave the unit permission to try new things, and the funds to execute.  He also had the unit report to him, not somewhere down in the company where potential product line conflicts would eventually destroy the innovations.  And he started his experiments in an important business, but not the legacy business, so that this unit could demonstrate success without contradicting too rapidly or strongly existing Lock-in.

He did it again in 2003.  After decades of advertising, Mr. Wilson felt the advertising was insufficient and ineffective.  So he tripled the budget, and told the ad agency to put in place a new team to develop a new program.  Not an incremental act, but instead the granting of permission to try something new and plenty of budget to make it work.  And again, he took responsibility.

Mr. Wilson wasn't "born and raised" in Allstate.  He worked in accounting, venture capital, investment banking and even the oil business (Amoco - later bought by British Petroleum [BP]) before joining this venerable company.  That may have helped him to see the need for White Space, and to take actions to create it at this huge, analytically-driven company.  Whatever has driven his actions, like a cross town fellow CEO Ed Zander at Motorola, Thomas Wilson is imbuing Allstate with White Space, and that portends very good things for investors, employees and customers.

Draining the Swamp at Sears

OK, I guess I'm dense.  For months I've been asked what I thought of the management at Sears.  And I have been pretty brutal, saying that Sears was not a viable long-term competitor against Wal-Mart, Target, Kohl's and other major retail players.  Especially as that competition intensifies.  Why Sears can't even get it's own partners in Canada to go along with an acquisition of that unit (see article here).

But in October, I finally "got it" regarding Sears.  Many newspapers reported that Sears equity value was jumping on the notion it would buy Home Depot, or another big company (see Chicago Tribune article here.)  And I realized that Mr. Lampert wasn't trying to develop a strategy to have Sears compete Sears long-term.  Nor was he converting Sears into a Real Estate Investment Trust for long-term value.  Instead, he's "draining the Swamp" to get all the cash out of it he can before it rots.

Sears and KMart are at the end of their lives.  Years of bad management has locked them into weak operations.  But in American business, we never know how to deal with a business once it's trapped in the Swamp - too busy killing mosquitos and fighting alligators to remember the primary mission.  What we need to do is get the cash out.  And that is clearly what Mr. Lampert is doing.  He's getting the cash out of Sears and its many holdings.

So, does that mean I've changed my mind on investing in Sears? Not really.  It's certainly OK to decide to exit a business in a fashion that actually creates a positive return (rather than keep running the business badly until Chapter 13 wipes out the investors and creditors).  But Sears Holdings' value has to be based upon what Mr. Lampert will do with this cash he plans to get out of Sears.  That we don't know. What will Lampert's team do to create growth?  He can't create a positive future merely as the grim reaper.  There has to be growth for investors to create long term value.  Today, you would pay a heady 23x earnings for a company who's future we know nothing about.  That's quite a premium to place on an unknown horse.

Will he invest wisely like Warren Buffet - the person he loves to be compared with? Will he invest in growth oriented enterprises like Buffet did in insurance, and later in public investments such as Coca-Cola?  We don't know.  All we know is that like Berkshire Hathaway - which is named for the textile mill Mr. Buffet bought decades ago - Sears will soon enough stop being a brand name retailer and instead become something else.

In being smart about draining the Swamp - getting out of KMart and Sears with maximum cash - the Sears management team is doing something few business people in America do.  For that, they are to be applauded. 

If you're a supplier to Sears, you'd better start looking for new customers to grow.  For customers, they would be wise to realize that Sears and KMart will never again be what they once were - and we don't know what they will be.   For investors, the story is yet to be told.  Will Sears pay out massive dividends giving investors a great return?  Or will they invest in businesses at very low valuations that show great growth opportunities? Or will they invest the money poorly?  Only time will tell.  But we can be certain that Sears is no longer a retailer - it is now a diversified investment vehicle for Mr. Lampert and his management team.  And only one of those kinds of companies has done well - a tough act to follow.