White Space benefits the smallest businesses

I talk frequently with small businesses.  Many with revenues under $1million.  And for many of these owner/operators they wonder how it can make sense to maintain White Space.  After all, they say, as a small business isn't even more important to focus on the primary business?  The allure of doing one thing is high, but in the end the best businesses always utilize White Space.

The era of drive-in theatres is almost gone.  But many of us remember when every town had one.  Did you ever wonder how Drive-ins started?  I bet you thought someone in the movie business invented the concept.  Or perhaps someone with a traditional theatre.  But that would be wrong.  In 1933 it was a parts store/gas station owner who wanted to increase his night business that opened the first drive-in theatre.  He started by experimenting with a projector and a sheet between trees.  He launched what became an entirely new theatre concept, and it became a lot bigger than his gas station. (For more on the history go here.)

Businesses of all ages and sizes need White Space.  It's in this part of the business where anything goes, not encumbered by Lock-in, that we are the most creative and capable of trying new ideas.  None of us know what will lead to the Rapids, and fast, profitable growth.  Even though lots of small businesses think they know what they should do, until they hit the Rapids and grow at double digits they are still in the Wellspring.  And the Wellspring breeds the highest number of business failures - usually because enterpreneurs Lock-in before they hit the Rapids and they don't know what will grow.  Maybe you think you're in the gas station business, only to learn your night movies are worth more than parts selling.  Only the marketplace will determine if you're in the Rapids.

Domino's thought it was in the pizza business.  For 20 years Domino's did not grow, nor did it make any money.  But when the founder realized he was in the prepared food delivery business, rather than the pizza business, he hit the Rapids and became a billionaire in just a decade.  No business is too small to benefit from White Space - and avoid the traps Lock-in lays to thwart growth.

The "Mature" word

The greatest euphemism in business is "mature."  Frequently executives and analysts will describe low growth as "maturing", as if this is OK.  Just today CBSMarketwatch (read article here) reported an analyst from Fifth Third Bank said WalMart (chart here) is a mature business -- and then goes on to say this is a good thing!  Incredibly, he thinks slower growth will lead WalMart to paying more in dividends and buy back more shares raising the stock price as it stops investing in stores.

That's what we used to call "milking" the business.  And we now know that simply doesn't work.  The thinking used to be that the cash flow was sound, due to market domination, so the cash could be paid out.  But just look at WalMart.  It's having to spend plenty of money just trying to stay in place as competitors (Target, Kohl's, JCPenney and others) keep stealing customers and revenues.  Last week WalMart cut prices on 15,000 items, which will cost billions of gross margin dollars, in an effort to get customers back into stores for Christmas shopping.  And because WalMart growth has slowed dramatically (sales in same stores are up only .8% compared to a year ago - less than inflation) the company is desperate to invest in things like Japanese grocery stores seeking something that will grow.  So the money is still flowing out of WalMart in plenty of big ways, without going into the pockets of shareholders.  Or employee pockets as they still work without benefits or overtime pay, and sometimes even over breaks - as we learned in a Pennsylvania lawsuit.

Businesses are not genetic material.  They have no biological requirement to "mature."  And businesses can't afford to "mature."  They have to constantly grow.  Without growth, they quickly will be consumed by competitors.  If we say WalMart is "mature", that is a very, very bad thing.  I agree wtih the UBS analyst who said that WalMart needs a turnaround.  But that won't happen any time soon at Locked-in WalMart.  For investors, employees, vendors and customers, the word "mature" is more devastating in business that it even is in life.

Sometimes it's just too easy

So readers of this blog know I am no fan of Wal-Mart.  The company has yielded no benefits to its investors, employees or major suppliers for almost a dedace (see equity chart here.)  Management loves being Locked-in to the outdated Success Formula, even though it does not produce satisfactory growth. 

So, given that the last 4 years Wal-Mart has failed to meet expectations for its Christmas season sales you would think it was about time they came up with a new approach, wouldn't you?  And what did they do?  According to USAToday (see article here) the company decided to whack prices down on 15,000 additional items.  Let's see, last year they cut prices on 6,000 items and revenue did not meet expectation.  So this year the obvious this is to do.............. more of the same, of course.  What didn't work will surely work if the company simply does more of it - right?????????  Does this in any way remind you of doctors that believed in blood-letting?

Wal-Mart is so stuck in the Swamp it can't even think of doing anything new.  More of the same is not a strategy.  When the tactics become too easy to predict the company becomes too easy for competitors to attack (and make my blog writing too easy.) More of the same is a death sentence when the growth slows.  With lower prices Wal-Mart's revenues and profits will suffer more, not improve.  And it's unlikely this will even benefit consumers very much, since most of them have already said they prefer to shop at Target, Kohl's, JC Penney and other retailers with better selection and better ambiance.

Would you believe?

When I was a kid - way too long ago - a comedic television show named Get Smart featured a mock spy who was terrible at lying.  When he would get caught telling a fib he would immediately try to change his story, and his first line was always "Would you believe?".  It was clear that you couldn't believe, or trust, this guy.

General Motors (see chart here) has apparently reached a new agreement with the UAW.  And the headlines screamed "Deal Gives GM Grip On Costs" (see article here.)  The Chicago Tribune article goes on to quote several industry analysts/gurus making claims that GM has now resolved the issues that caused them to fear bankruptcy just 2 years ago.  For example, the chairman of the Center for Automotive Research said "I think they're competitive on cost now.  There are no excuses after this."  The consensus is that GM can now refocus on products, and regain lost share.

Would you believe....... ? Does anyone remember the auto company's situation back in the 1970s and '80s?  They all cried "foul" that they could not compete effectively with Japanese competitors who had the benefit of a very favorable Yen exchange rate.  Because the dollar was stronger than the Yen, the auto companies claimed they could not compete.  Well, it was only a few years before the dollar fell more than 30% against the yen.  And now, following a long decline, the dollar is at an all-time low versus the Yen, which is extremely cost favorable for GM.  But do we hear any auto executive saying that their competitiveness versus the Japanese has improved?  Rather, attention has shifted to labor contracts.

Companies in the Swamp and Whirlpool leap from disaster to disaster.  Their Success Formulas are broken, and Lock-in keeps them producing poorly.  They blame poor performance on factors outside their control, because they hope the world will return to conditions which will allow their Success Formula to produce better.  They want the world to evolve toward their needs, rather than they evolve toward meeting market Challenges.  Good luck with that approach.

GM has seen its market share steadily erode for 3 decades.  And a look at the company's stock price chart shows that long term investors would have received no value (other than dividends) over that same long period.  Shifting its health care charges under a new labor contract does not change GM's competitiveness.  GM does not design, manufacture, market and sell its products as well as its competitors.  And it has not developed any new businesses with higher growth and better profits.  Most of GM's competitors now make a large percentage of their cars in the U.S. just like GM, even though they are offshore headquartered, and they are growing sales, market share and making more money. 

GM needs a Disruption and White Space - like the old Saturn division once was - to design a new Success Formula.  GM's new labor contract merely extended its demise a little longer.  Investors, employees and suppliers need to beware of big promises, anticipate business-as-usual, and prepare for more pain.

The Cost of Lock-in

Defend & Extend managers love to believe that by sticking to the Success Formula they produce the best results at lowest risk.  But, Lock-in is not free.  It has costs related to lost opportunities, as well as direct costs.  Take for example Wal-Mart (see chart here) which has offered investors no gain for over 5 years.

As detailed in previous blogs, Wal-Mart is horribly Locked-in.  It's efforts to grow internationally have failed miserably, because the company tries to extend its Success Formula into other markets where it simply doesn't work with clients.  Now we're seeing that Wal-Mart is struggling to extend that model even in the USA (see article here).  Everyone knows how Wal-Mart started in the rural markets, then went to mid-size cities and eventually into the suburbs.  Each step Wal-Mart merely did what had previously done better, faster and cheaper.  Wal-Mart did not develop the capability to adapt, but merely to further optimize. 

Now Wal-Mart is hoping to grow in the U.S. by entering major cities.  But in each city, such as New York, they are being shut out.  In 2006 they targeted Chicago.  Almost shut-out, they obtained permission for 1 store via the first ever veto of Chicago's Mayor Daly.  But now, growth has stalled and there are no new stores opening any time soon.  As the first page of the Chicago Tribune headlined "Wal-Mart Strategy Stumbles."  So as America becomes more urban, Wal-Mart is losing the opportunity to enter its last remaining domestic marketplace.

Most people are aware that part of Wal-Mart's Lock-in is to never allow unionized employees.  And Wal-Mart is merciless when controlling employee time.  In Philadelphia Wal-Mart's Success Formula cost the company $62.3million, on top of a previous award of $78.5million, as a judge ordered the company to pay workers for its labor practices (see article here).  Wal-Mart might like to brag about its ability to be low cost, but when that capability starts being judged in courtrooms, and judges order large fines, it is clear that Lock-in is standing in the way of progress rather than aiding it.

Lock-in is not free.  Companies that succeed long term learn how to update their Success Formulas by overcoming Lock-in.  Unless Wal-Mart Disrupts soon, its shareholders, vendors and employees can't expect much of a return.