If at first you don't succeed .....

Wal-Mart has been stumped in finding a growth path for several years (see chart here).  Once one of America's fastests growing companies, Wal-Mart now trails Target, Kohl's and JCPenney's growth rates - and profit margins.  Dropping prices only went so far with shoppers in a highly competitive retail marketplace - as merchandise selection, store ambiance and store personnel also contribute to the selection of where to spend our money.

Nonetheless, Wal-mart keeps plugging away at doing the same old thing.  Never one to recognize a Challenge to its out of date Success Formula, Wal-Mart maintains its Lock-in to "low price" as the only tool for competition.  They demonstrated that they would even fire any executive with the nerve to try changing the merchandise mix when they publicly humiliated the last VP of Marketing while giving her the heave-ho.  Last Christmas they tried cutting prices to drive revenue, only to be met with yawns by shoppers. 

So, what is Wal-Mart doing now?  According to CNNMoney.com (see article here), they are..... take a guess...... cutting prices (cymbal crash heard in the distance).  Another 16,000 items are intended to see the scalpel applied, with even deeper discounting than in the previous holiday season.  We know for sure that will cut further into margins.  Whether it will drive same store sales growth..... well..... it hasn't worked for the last 6 years.

A slave to its Lock-in Wal-Mart follows the adage "if at first (or second, or 65th time) you don't succeed, try, try again."  But successful businesses know that in a dynamic marketplace that strategy is death.  The better phrase would be "If at first you don't succeed, learn something from what you did and try a different tack."  But that would require Wal-Mart be willing to Disrupt itself and use White Space to find new solutions.  And that seems to be the one thing Wal-Mart's leaders are completely unwilling to consider.

Phoenix in the Crosshairs

The CEO with the hottest seat in corporate America right now is probably Ed Zander of Motorola (see article here, see chart here.)  And well it should be hot, as recent negative results now verify Motorola is once again in a Growth Stall (see article here).  After a great couple of years, the last two quarters have been back to back negative ones.  Fewer than 7% of companies recover from a growth stall to consistently grow a mere 2%.

This isn't the first stall for Motorola.  There were several before, and just 3 - 4 years ago many investors felt that Motorola may not survive.  But a new CEO (Zander) came in, implemented a slew of Disruptions, opened up a bevy of White Space projects and Motorola started to really improve.  He ignored analyst calls for massive, widespread layoffs and instead rapidly moved new products to market (like RAZR) and started building new businesses in Motorola.  Results were stellar, and Zander was widely applauded for the changes including being named CEO of the Year by popular journals.

But these latest earnings announcements demonstrate that a post-stall recovery is very hard to maintain.  Motorola was desperately Locked-in to its failing Success Formula when Zander took over. Despite all his Disruptions and White Space projects, Motorola did not fully develop a new Success Formula, nor did it complete a migration to a new Success Formula, before slips started happening in the traditional business.  Profits dipped, and then Carl Icahn started a raid on the company. 

Unfortunately, leadership then hiccuped.  Reacting to Icahn, and the cries of stock analysts, instead of doing more Disruptions and creating more White Space to keep its focus on growth, Motorola started trying to Defend & Extend its old strategies - announcing an 11% (7,500 person) layoff would begin.  The company shut down an R&D facility at the University of Illinois in Champagne (one of the top engineering schools in the world) to save money.  And it began "reorganizing" (see article here)  The company even took to financial machinations as it focused on engineering the P&L instead of new products - as can be seen in the latest earnings news. 

From his early actions it appears Zander knows the right thing to do.  And he has continued following the original path, such as the announcement early this month that Motorola has agreed to acquire Leapstone Systems, further bolstering the network division - where growth rates and profits both exceed the mobile handset business (see article here.)  What Motorola needs now is not another change in CEO, but rather more Disruptions and White Space to push Motorola further away from the old behaviors and Lock-ins which got it into so much trouble in the 1990s, then early this decade, and now more recently.  It's not Zander that is the problem, but the truncated effort to use White Space to develop a new Success Formula and then mobilizing Motorola toward that Success Formula.

Motorola was an incredible turnaround story.  Disruptions and White Space were allowing this Phoenix Principle company to regain flight.  But right now the Phoenix is in the crosshairs of many analysts and Icahn - who are collectively calling for the CEO's head when they should be screaming for more Disruptions leading to more growth.  Motorola will not save its way to prosperity.  It must develop a new Success Formula that puts Motorola back in the Rapids - and keeps the company out of the Swamp.  If investors and employees aren't careful they'll accomplish their goal of unseating Zander, Icahn will swoop in, and then we can expect yet more heads to roll, businesses to be sold, more product development to be shuttered and after Icahn gets his cash back he'll leave Chicago with a shell where once a great company stood.

Better to let the Phoenix take flight.  If the Motorola organization and its leadership have the guts to get out of the broken down old nest and really test its wings.

Business Myths

Readers of this blog know I am no fan of Sears Holdings.  Bringing together Mr. Lampert's Lock-in to private equity cost cutting behavior with Sears' out of date Success Formula was like finding out you have cancer shortly after suffering a heart attack.  One very sick situation.

For months investors played along with Mr. Lampert's story that he would somehow save his way to prosperity for investors.  But now, after 6 years of declining revenue, and a recent report that same-store-sales are down for the second consecutive quarter (see article here), the company equity value is down almost 25% from it's April peak (see chart here).  True to form, Mr. Lampert has proposed propping up the stock price by increasing the share buyback.  At the end of the day, this financial machination will leave Sears with only one store and only 1 share of stock, but somehow Mr. Lampert indicates magic comes from this plan.

Mr. Lampert tapped into a long-held business myth.  Even though we see businesses fail every year, most of us do not really think the companies we work for, or invest in, will fail,  We adopt old-fashioned notions of business lifecycles that assert "mature" companies should accept a low growth rate, and maximize profits instead of revenues.  This Myth of Perpetuity allows people investing in, selling to, or working for even failing companies to have faith - long after such faith is poorly placed. 

The reality is that businesses either grow or die.  Businesses exist in a competitive marketplace.  If they don't grow, they get clobbered by more successful competitors.  You aren't allowed to stand still, because that makes you food for the aggressive competitor running hard to succeed.  Mr. Lampert acted as if Sears could stop growing and "milk" the business.  What he ignored was the fact that the lions were watching, and while he's trying to "milk" Sears of cash Target, Kohl's, JC Penney, Lowe's and even Home Depot have eyeballed this "cash cow" and decided to simply kill it.  They don't see any reason to allow Mr. Lampert the time to cut costs slowly and generate cash.  Not when they want those customers, the revenue and the profits they can make from increased sales --- something Sears can't produce because it's Success Formula is so out of date.

It was clear 2 years ago that Sears was unable to succeed.  Now it has hit a growth stall, and statistically it has only a 7% chance of ever again growing even 2%.  Those investors that believed in Mr. Lampert believed in myth.  Not just the myth of his heroic skills, but in the Myth of Perpetuity -- because they would not accept that the venerable Sears company was heading straight into the Whirlpool.

Record Machinations

Do you remember the old Smith, Barney televion ad where the professorial actor said "We earn money the old fashion way.  We EARN it."? 

More executives appear to need reminding of this.  In today's market report from Merrill Lynch (see info here, page 2) we learn that in the first quarter of 2007 the S&P 500 spent an incredible $117BILLION on share buybacks.  So much was spent buying back shares that it added from a full point to 1.5 points to EPS for the quarter!  In May and June IBM, WalMart and Home Depot announced share buyback plans of $50Billion (and keep in mind, just yesterday Home Depot announced real earnings would be down 18% this year! [see page 1 of same link]).   Conoco and Johnson & Johnson are announcing plans to buy back $25Billion of equity between them.

When businesses are growing they spend money on hiring employees, building plants and offices, traveling to see customers and making new products.  When they want to Defend & Extend their existing business they take the money out of such productive long-term uses and spend it instead on buying back their own stock.  An action which does not create a single job, nor new product, nor help the business create enhanced growth in revenue or profitability.  We have to be careful not to confuse financial machinations with real growth.

More, Better, Faster, Cheaper

When was the last time you enjoyed an airplane flight?  Flying is one time when as a customer the more you consume, the less happy you become.  I don't know anyone flying commercial U.S. airlines that enjoys the experience.  It's amazing, ever since deregulation annual customer surveys point to unhappy customers - and every year satisfaction declines further. 

The Locked-in airlines will tell us that customers can't expect service and low price.  And customers keep picking price.  That's not true.  Customers really don't have much choice. Airlines have Locked-in on their Success Formulas, and they pay more attention to their money-losing direct competitors than they listen to customers.  When everyone (Southwest accepted) gives lousy service, can't be on time and loses bags-- and they control 90% of the gates across America -- it's not like the customer has much choice.  So they blame the customers for being unhappy.  Give us a break!

The Chicago Tribune ran front page articles today on just how badly the airlines are performing - looking at plane crowding, delays, lost baggage and customer complaints (see articles here and here).  So what are the airlines doing about the situation?  Are they creating White Space to try new solutions?  Unfortunately, no.  Their answer is to do More, Better, Faster and Cheaper operation of an airline system that is cracking all over the place, and producing horrid results.  How will we get better service, after 3 decades of decline, by doing more of the same?

The first action the airlines promise is MORE flights.  How will that improve the situation when the system is already overcapacity, causing computer breakdowns at the airlines and in the FAA?  More flights have never solved the problem. 

United reacted by hiring a Walt Disney executive pledging to help the airline be BETTER at customer service.  Sorry, but the airlines aren't amusement parks, and customers are trying to get from A to B on time and with their bags.  The solution isn't about trotting out Mickey Mouse to put a smile on someone's face when they are 6 hours late, tired of the uncomfortable airport seating, and out of money for the overpriced airport food and lodging.  Trying to apply a veneer of happiness on top of a broken Success Formula producing lousy results will only make investors and customers more angry. 

The airlines are asking for a change in work rules so they can try to move the airplanes FASTER.  When the gates are sold out, and the system is working so close to capacity that even high wind can cause 2 hour back-ups at major airports as ripples flow the system, changing the job description for a baggage handler or gate agent isn't going to solve the problem. 

And, of course, the airlines never tire of talking about ways to cut costs so they can be CHEAPER.  They never grow weary of hammering on their employees (often unionized) that they have to take pay cuts - when many no longer even earn a living wage (especially in the major cities where airlines hub.)  Haven't the airlines heard customers?  Prices are already low.  Lower prices don't matter when you can't get where you want to be on time and with your bags!

More, Better, Faster, Cheaper are the 4 words of Defend & Extend managers who have no idea how to do anything other than maintain Lock-in to a broken Success Formula.  And in this case vendors (except for the airplane manufacturers), employees, investors and customers are all bearing the brunt of an industry that is more interested in Defending & Extending what doesn't work than in creating some White Space to develop a new solution.