Ready to Grow?

On March 30, 2007 Kraft is planning to complete its spin-off from Altria (see full article here.)  This long-anticipated transaction will allow Kraft to independently decide how to manage its product portfolio, and how to earn above average returns and grow.  Should investors anticipate a change in management behavior leading to much better performance when Kraft becomes independent?  Should we jump into this opportunity to buy shares before management creates abundant new value?

To expect Kraft to suddenly become more valuable would be like expecting your 1978 Plymouth Horizon to be declared a collectible and suddenly become worth a lot more money.  Not likely.

For Kraft to be worth more the company needs to launch new products.   It needs to move beyond Velveeta, Philadelphia Cream Cheese and DiGiorno pizza (its last major new product launch) to strike a chord with new customers in new market segments.  And to do that the company needs to demonstrate it can manage White Space projects that will reach these new opportunities and redesign the outdated and firmly Locked-in Success Formula.  Unfortunately, no such projects appear to be in the pipeline - at least none that anybody has reported.  Instead, over the last few years Kraft has been selling businesses (such as Altoids) because it wanted to focus exclusively on large but slow growing market segments.  The previous CEO even said he felt investing more in Velveeta advertising gave the company its greatest rate of return.  Really.

Kraft can turn around.  It wasn't a decade ago that Kellogg's was Locked-in to old business methods that had almost half of all volume given away in free offers.  But a new CEO Disrupted Kellogg by changing the metrics for measuring performance and closing outdated manufacturing plants.  He created White Space projects by opening a new R&D center and buying a new company (Keebler) just to get a new distribution system (store-door delivery rather than warehouse delivery) which he allowed to operate independently inside Kellogg.  In just 2 years Kellogg went from big problems to big wins, and the company value jumped dramatically as the other parts of Kellogg migrated to a new Success Formula.

Kraft can't save its way to prosperity.  Its returns are dependent upon finding new markets.  Until you see reports of Internal Disruptions by the new leadership - actual claims of needing to stop what they are doing and rethink - don't expect any significant change.  Until you see examples of White Space projects, don't expect much improvement in results, or any improvement in growth ---- or much increase in equity value.

Find Places to Learn

Readers of this blog know I think all companies must create and maintain White Space.  but some readers have told me that for big companies such spaces are just too hard to create and manage.  So I was delighted to read about Wrigley's recent acquisition of A. Kurkonov (see full article here.)

Everyone knows Wrigley makes chewing gum.  They've done so for years.  But recently Wrigley has started forays into a number of new areas.  They opened a new R&D center in Goose Island, IL to develop new products.  They also bought fast growing Altoids mints (from Kraft no less) and quickly launched a chocolate covered Altoids.  Both of these were small steps.

Wrigley recently spent $300million to buy the Russian chocolate company A. Kurkonov.  This is a significant investment in a business where Wrigley needs to learn.  Chocolate candy is a big step outside the old Wrigley Success Formula primarily which was focused on gum and other low priced items located near the register in the check-out line.  Now they have a business that is operated outside the Success Formula, with new products and in markets where Wrigley management can watch and learn - outside the U.S.  Wrigley can observe how the products are made and distributed, and how customer preferences vary and are changing, as well as how pricing and promotion play into the marketing mix for this market segment.  Wrigley will be able to learn how to devleop both new strategies and tactics, and do so in a foreign market away from the meddling of management focused on the old Success Formula.

As Wrigley learns how to successfully compete in "chocolates" (however that market should be defined) the company can develop a method to migrate this old "chewing gum" company into a new Success Formula [which may or may not be closely tied to chocolates, who knows?].  Management can be attracted to what works rather than trying to force ideas that don't.  And through this migration the company can develop new tactics, new strategies and eventually a new identity - in sum a new Success Formula.  And that is what White Space is all about.

Will This Make Any Difference?

Dell Computer has had a rough go the last couple of years.  They've had some batteries catch fire - not good for marketing.  And they've had some SEC investigators looking through their books - not good for investors.  But neither of these problems are really that unusual or monumental for a company the size of Dell.  The big problem has been that the company isn't making the money it once did, and it's sure not growing like it once did.  That has stripped the company of 40-50% of its value, or about $43 billion in market loss for investors (see chart here.)

So what's the response?  At the beginning of this month the Chairman and namesake, Michael Dell, announced he was removing the CEO and taking back the reigns (see full article here.) Should we now expect a turnaround?

Michael Dell pioneered the Success Formula that made Dell Computer famous.  Simply put, Dell sold directly to customers, outsourced everything they could, used other people's technology (no R&D), focused on the supply chain to shorten manufacturing and distribution cycles and kept prices low.  And anything that wasn't part of that Success Formula does not exist at Dell.  This Success Formula produced great results, and Michael Dell locked it in with every conceivable software product, metric and decision process he could.  There was/is no variation at Dell, just execution.

Unfortunately, this Success Formula was not impossible to copy.  Competitors not only matched the supply chain expertise of Dell, but added onto it with product innovations, credit terms for corporate buyers, and enhanced peripheral products that expanded the total customer purchase.  They matched Dell, and did the company one better.  So customers migrated to these competitors.  Dell didn't suddenly lose its Midas touch.  Execution hasn't faltered.  Competitors just kept getting better in this dynamic market, and execution wasn't enough to maintain sales growth and margins.

Now the king of execution is returning.  What can we expect?  More of the same, of course.  The implication, and stated objective, of Michael Dell's return is to get Dell "back on track."  That's back on track to what they did a decade ago.  Is that likely to turn around their fortunes, in a more competitive marketplace with yet more competitive variables?

Dell doesn't need more Dell.  They need more innovation.  There are no Disruptions at Dell.  And this change of leaders will not create an internal Disruption demanding change.  There is no White Space at Dell.  I blogged on this previously, and a PR employee responded (you can read the comment by going to that blog) that Dell is a great company.  But even he could not identify any White Space in Dell.  Despite my emails to him asking for any examples of White Space he could provide --- any at all.  Without White Space, how is Dell to develop a new Success Formula to produce results in 2009 like they had in 1999?

Michael Dell and his company was a fantastically successful pioneer.  His vision helped create a Success Formula that greatly assisted putting a PC on nearly every working desk and in nearly every home, not to mention in the hands of most students, salespeople, and other mobile worker in America.  But that Success Formula has already passed the point of diminishing returns.  Unless Dell learns to Disrupt and implement White Space, look for the future to be more of the recent past.  Results included.

BIAS Blindness

Is a Tattoo art?  Can a tattoo style drawing sell a product?  These are two questions I really never asked myself before, but now I'm asking them a lot.

Sometimes we can't see what's right in front of our faces.  We all suffer from BIAS - Beliefs, Interpretations, Assumptions and Strategies - that we carry around in our heads.  As we develop our Success Formulas, we Lock them in with our BIAS and we often start missing things.  And some of these can be really big trends.

The Chicago Tribune ran an article in the Business Section (yes the Business section) about the use of tattoo art in mainstream ads (see full article here).  Now, I have to admit that tattoos are not something I think about at all.  But this article pointed out that they are getting to be pretty much everywhere, on everybody.  And, as importantly, the artists are downright cheap compared to typical graphic artists used in ad production.  That really caught my attention.

Then I started to notice, and think.  The images of Anna Nicole Smith all over the TV following her untimely death showed a tattoo on her leg.  Many (maybe most?) of the performer's at this week's Grammy award seemed to have visible tattoos.  Then I realized that I see tattoos increasingly on the young people that associate with my high school and college age sons.  I had "seen" these tattoos before.  But my mind hadn't "seen" them.  Why, it was startling how popular tattoos are.  I noticed last weekend going to run errands that I identified at least a half dozen tattoo parlors within 10 miles of my northwest suburban Chicago home.  No matter what I thought, or better said what I didn't think, about tattoos they are a lot more popular and part of popular culture than I realized.

My Success Formula had never thought about tattoos.  I have held the top marketing job in a $3B manufacturing company, and worked at PepsiCo a top marketing company, and I am heavily involved in advertising graphics with clients today --- and from that I had developed a Lock-in about commercial graphics.  And that Lock-in left me completely BIASed to ignore tattoo art as a commercial graphics product.  The Tribune article showed me a market Challenge - a new art form that is growing in popularity and cheap.  And as a result I've had to Disrupt my Lock-in.  Now I'm looking for White Space to explore the possibilities this might open up for advertisers.  (As long as it doesn't include putting ink into my 50 year old white, less than menacing forearms - lol.)

We all have Success Formulas, and we Lock them in.  We develop a BIAS around them that can blind us to opportunities.  That's why it is critical that we use external stimuli to help identify market Challenges we otherwise will completely miss.  Don't become BIAS blinded to opportunities.

Wait, Too Late

Because most companies never build a capability to internally Disrupt, and they don't regularly implement White Space, they develope a Re-Invention Gap between what they do and what the market wants.  This leads businesses to milk a Success Formula too long, and not start developing a new Success Formula until too late.

Take for example Kodak.  Founded in 1881, this venerable company was synonymous with photographic film.  The company grew like mad as its founder made photography cheaper, better and available to everyone.  But then the market "matured" (that famous euphemism for slow growth) in the 1970s.  Kodak missed the digital photography wave, and in the 1990's was kicked off the Dow Jones Industrial Average.  Kodak has recently layed off nearly 30,000 employees - reaching a smallness not seen since the 1930s (see more on layoffs here.) 

Like most companies, Kodak waited too late to Disrupt and implement White Space.  The company was actually a pioneer in digital photography.  It holds over 1,000 patents.  R&D efforts in the field were strong going back nearly 30 years.  But Kodak waited to Disrupt until the film market was already long-past its peak, and the digital market was well developed and full of competitors (it was 2001 when Kodak finally introduced a digital camera line).  And because the Re-invention gap between their business (film) and the market direction (digital) had become huge, the company almost didn't survive (note Palaroid, also once a leader now no longer exists).  The jury is still out on Kodak's survivability, which has had 8 consecutive quarters of losses as it has attempted to turn itself around.

The simple fact is that companies pay too little attention to the market, and too much attention to the existing Success Formula.  By trying to Defend & Extend the Success Formula, they delay the necessary Disruptions and avoid White Space.  Far too many companies are stuck in the Swamp, spending all their time battling aligators and swatting mosquitos while completely forgetting their main objective was to drain the darn thing.  Before they know it, they are caught in the Whirlpool spinning down the drain when competitors open the plug in the swamp where they are stuck.

To avoid being too late in reacting to market Challenges, it is critical businesses implement a program of regular Disruption.  You have to practice the ability to Disrupt yourself.  And regular Disruptions create openings for multiple White Space projects which breed new Success Formulas.  Just look at Jack Welch at GE.  GE could easily have spent the 1980s and 1990s milking their businesses.  But with the aid of Neutron Jack, GE constantly Disrupted itself (some might even say "unnecessarily"), and it kept putting in place White Space projects. (remember "Destroy Your Business.com" teams that every business was required to have?)  That led to an incredible string of growth and above average returns that is almost unprecedented for a company of any size.  Institutionalized at GE is the notion that Disruptions are good and White Space projects are normal - and that is why the company keeps itself constantly ahead of competitors and out of the Swamp.

Don't wait.  Start Disrupting your organization today.  Set up some White Space.  The more you practice, the better you become.  And you'd sure prefer finding yourself in the position of GE than Kodak.

Solution Space - Health Care

It's easier to recognize a problem than it is to find a solution.  I'm sure you've noticed this.  In practically everything we do we can see the need for improvement, but we often find that nothing happens to make things better.  Even when a crisis happens,we often see lots of people discussing the problem - and some talk about potential solutions - but not much progress is made.

Take for example the U.S. health care situation.  We now have a country where 20% to 40% of the population has no health care coverage with between 30% and 50% are significantly under-insured (ranges are offered because it depends on what study you read.)  Virtually everyone agrees that this is a big problem, because the U.S. health care system is not designed to deal with the uninsured.  We hear stories of people waiting for hours in hospitals for basic care that is often poorly administered.  We hear about total health care costs rising because the uninsured drive up costs that are then born by insured patients.  And the medicare and medicaid system we are told is nearly bankrupt, unable to meet many basic needs and not providing necessary life-sustaining assistance.   Increasingly, doctors, clinics and even some hospitals refuse to take uninsured patients.

The problem has been easy to see.  In America, the system has been based upon employer-provided health care.  But, as employees have changed jobs they have lost insurance due to "pre-existing condition" clauses that deny coverage.  And people who lost jobs to downsizings lost all coverage completely.  Employment has shifted dramatically from manufacturing to services in the U.S., yet a far higher percentage of service employers offer very limited insurance, or no insurance at all.  And the vast army of those who work part-time (under 40 hours per week), have no access to insurance as employers limit their hours and limit access to coverage as a cost saving measure.  Employer-provided health insurance worked in the far more stable employment practices of the 1940s to 1970s, but the program simply isn't sufficient to meet the needs of nearly half of Americans today. 

Yesterday, Wal-Mart agreed with the largest service union in the USA (their bitter enemy, the Service Employees International Union) that dramatic changes were needed in health care coverage (see article here.)  Obviously, Wal-Mart does not believe it can provide universal coverage to its 1.3 million employees and compete.  But interestingly, the unions which have fought hard to get employees health benefits agree that far too many employers cannot be expected to offer health care and compete in a global economy.  Democrats have easily joined the ranks of those asking for a different system, but interestingly now noteworthy Republicans agree - including Howard Baker former Chief of Staff to Ronald Reagan.

So, what is to be done?  There is no shortage of opinions about the solution (see article here).  Many people want universal coverage from the federal government - but that has many detractors as well.  Some states say a universal program should be implemented state-by-state, and Massachusetts has taken this direction.  The President has offered to push for universal coverage with a series of changes to taxation of health care benefits.  Lots of ideas - but most of these have existed for well over a decade.  So it hasn't been a lack of ideas that has stopped progress toward a different solution.

What we have with Wal-Mart's announcement is a Disruption inside the business community.  A Disruption saying "stop, we have to do something different here.  The old way won't work. We're Locked-in to an outdated health care solution that must change."  Having the country's largest employer, in tandem with one of the largest unions, make this admission serves as a Disruption.

But this will make no difference  if we don't find White Space to actually create, test, pilot, learn, and define a new Success Formula for health care.  Politicians often say "we need a debate on the options."  Debates we've had.  What we need is to try new solutions, and see if they work.  We need to begin variations of the multiple scenarios so we can see what works, and what doesn't.  Massachusetts, for example, is a great experiment in a state-implemented program.  But we also need to experiment with changes to the federal systems (Medicare and Medicaid) to see what they can actually do.  And we need to experiment with subsidies and tax changes in the workplace to see what private programs can be developed.  In the end, only in White Space do we actually test possible answers and thereby develop a new solution to which people migrate.  The best solution is not the one debated to success, but instead the solution which is proven to work - and that is the solution to which people migrate.  Anyone will change when they can see a better result, and that can only happen in White Space.

This is exactly what businesses have to do as well.  The Phoenix Principle has demonstrated that whether a problem needs to be solved at the macro level (like national health care coverage) at an industry level (like national access to broadband telecommunications) or at a company, or function, work team or even an individual level Disruptions must be supplemented with White Space if a solution is actually to be developed and implemented.  New solutions don't come out of the universities or other "brain trusts".  They come out of White Space where new Success Formulas that include strategies and tactics are actually tested and demonstrated to work.  Then these new Success Formulas don't have to be foisted upon people, because the better results attract people to them.  Of course there are laggards, but we see that migration to a better result works far better than trying to debate, design, declare and then demand change - a model that almost never gets implemented nor works well.

So, we need White Space for experiments in health care coverage.  And the state programs fit as one example.  Let's hope this Disruption will lead to more experiments.  And we need more White Space in our companies, our departments and our lives so that we can experiment and find ways to produce better results.  In the end, we can equate long-term success with White Space - and we've never needed more of it than we do today.