Be Wary of Quick Fixes - HP, Dell, EDS and Perot Systems

Last week was big news for technology.  Hewlett Packard announced it was killing the EDS brand name, pushing to make HP more of an integrated solutions company (like IBM).  And Dell bought Perot Systems to launch itsfirst push into services.  According to Washington Technology "HP, Dell Know They Have to Change or Die."  The article talks about the dramatically shifting marketplace (love that language!), and how these two hardware oriented companies are trying to avoid the Sun Microsystems finality by getting into services.  The author says the companies must "adapt or die," and "there's no sitting still."  He goes on to say "it may take years," but he thinks they will transition and eventually be successful.  His success forecast hinges on his belief that they must change to survive - and that will be sufficient motivation.

I love the awareness of shifting markets, and the recognition that shifts are demanding changes in these former leaders.  But I don't agree with the conclusion that future success is highly likely.  Because even with big acquisitions and name changes - HP and Dell haven't laid the groundwork to change.  They have taken some rifle shots, but they haven't followed The Phoenix Principle and that means the odds are less than 10% they will successfully transition.

Lots of companies have tried to transition via acquisition.  Heck, GM once bought EDS (and Hughes Electronics) - and look what it did for them.  Just because a company buys something doesn't mean they'll change.  McDonald's bought Chipotle, and then sold it despite double digit growth to fund acquisition of additional McDonald's.  Just because a company needs to change its Success Formula to succeed - or even survive - is a long way from proving they will do it.

Neither HP or Dell show they are building a company for the future.  Unfortunately, they look to be chasing a model built by IBM in the 1990s.  Taking action in 2009 to recreate "best practices" of 15 - 20 years ago is far from creating a company positioned for success.  There is no discussion of future scenario planning from either company - about technology use or changing business practices.  No description of their scenarios for 2015 and 2020 - scenarios that would demonstrate very high growth and payoff from their action.  To the contrary, all the discussion seems to be defensive.  They are getting into services - finally - because they realize their growth has slowed and profits are declining.  It's not really about the future, it's action taken by studying the rear view mirror.

Additionally, there is no discussion of any Disruptions at either company.  To change organizations must attack old Lock-ins.  Embedded processes - from hiring and reviews to product development and resource allocation - all exist to Defend & Extend past behavior.  If these aren't attacked head-on then organizations quickly conform any potential change into something like the past.  In the case of these companies, lacking a clear view of what future markets should look like, they have opted to forgo Disruptions.   Mr. Gerstner attacked the sacred cows around IBM viciously in his effort to transition the company into more services.  But the CEOs at HP and Dell are far less courageous.

And there's no White Space here for developing a new Success Formula aligned with market needs as they are emerging.  Instead of creating an environment in which new leaders can compete in new ways, these businesses are being instructed on how to behave - according to some plan designed by someone who clearly thinks they are smarter than the marketplace.  Without White Space, "the plan" is going to struggle to meet with markets that will continue to shift every bit as fast the next 2 years as they did the last year.

I have very limited expectations that these actions will increase the performance of either company.  I predict organic growth will slow, as "integration" issues mount and "synergy" activities take more time than growth initiatives.  They will not see a big improvement in profits, because competition is extremely severe and there is no sign these companies are introducing any kind of innovation that will leapfrog existing competitors - remember, mere size is not enough to succeed in today's marketplace.  They will largely be somewhat bigger, but no more successful.

It's easy to get excited when a company makes an acquisition off the beaten path.  But you must look closely at their actions and plans before setting expectations.  These companies could make big changes.  But that would require a lot more scenario planning, a lot more focus on emerging competitors (not the existing, well known behemoths), much more Disruption to knock back the Lock-in and White Space for building a new Success Formula.  Without those actions this is going to be another acquisition followed by missed expectations, cost cutting and discussions about size that cover up declining organic growth.

"I don't get it" is no excuse - Facebook, Linked-in, Twitter, MySpace, Plaxo

Lock-in causes us to keep moving in the same direction, to continue behaving the same way, even when competition and market shifts makes it a surety that the direction we're heading will produce poorer returns.  Blacksmiths who ignore the shift to automobiles.  Printers who ignore the shift to photocopiers.  As I often point out, unless something attacks the Lock-in, we are amazingly able to keep right on going the same direction - blithely ignoring the inevitable problems.

"I read Playboy for the articles" is a Harvard Business School Working Knowledge article which outlines just how far we all will go to avoid dealing with internal conflicts caused by undertaking behavior we know is unjustifiable. (Download full pdf text of White Paper here.)  According to the article:

• Because people do not want to be perceived as (or feel) unethical or immoral, they make excuses for their behavior—even to themselves.
• People cope with their own questionable actions in a number of ways by rationalizing, justifying, and forgetting—a remarkable range of strategies allowing them to maintain a clear conscience even under dubious circumstances.

Which leads me to the #1 excuse I hear.  "I don't get it."  I bring up to people - especially those who are over 35 - the power of modern technology tools.  For example, ask a 40 year old why two 20 year old girls sitting across a table will text each other and the answer is "I don't get it."  Tell them you know teenagers who spend more time at the computer monitor on-line than watching TV and the answer is "I don't get it."  Hear someone say "my cell phone is more important than my car" and you hear "I don't get it.'  And the biggest one of all, tell this person they need to open up accounts and go everyday to Facebook, Linked-in, Twitter, MySpace and Plaxo and you hear "you're kidding - right?  Why anyone spends time on those - I don't get it." 

Every time I hear "I don't get it" I wince.  Because that person just admitted "I'm willing to get out of step with the market, and risk having my skills become obsolete.  I'm happy doing what I do, and I don't see why I need to doing something new and different.  I'm sure the world is not evolving away from me, and I've chosen to remain Locked-in to where I've been rather than learn what's going on with these new solutions."  See what I mean?  When you read my interpretation makes you wince, doesn't it?

Our parents used to tell us when we talked on the telephone "Why don't you just go to their house, I don't get it." When we listened to rock-and-roll "Your music makes no sense, I don't get it."  When we thought everybody needed a car they'd say "We always walked, why do you need a car?  I don't get it." 

"I don't get it" is the proverbial excuse justifying Lock-in.  It allows us to walk away from a shift that's right in front of us, and remain stuck.  It allows us to feel like we're OK to remain - well -- ignorant. 

So, the next time you hear yourself saying "I don't get it" it's time to stop, Disrupt yourself, and find some time to get it.  It's time to review your willingness to remain Locked-in, and invest some resources in trying new stuff instead of Defending & Extending.  Because if you do create some White Space you can learn - and the first who "get it" will be the ones who do best in the market, getting the best results.

PART 2 - a personal extension for those with time to read.

When my son died last week, at age 21, he left a brother age 20 and a brother age 18.  He also left hundreds of friends his own age.  These people shared what all of us shared at that age - a deep desire to talk to each other, to communicate, to cry in groups, to grieve, to find things in the past that made them happy.  To capture time in a bottle by reflecting on Alex's life.  And they also shared the simple fact that they have almost no money, precious little time, and a host of responsibilities to school, family and work.

30 years ago my generation would have made a few phone calls.  Maybe a few of us gotten together for an hour.  But our talks would have been mostly a small group, and for a short time.

The last week I've been living on Facebook, Linked-in, Twitter, et.al.  I have used all these tools for at least several months, and in some cases years.  But I used these through the filters of my history.  I saw them as extensions (D&E) of old ways I communicated.  Finally, now, I get it.  These communities are an entirely different way of communicating.  I different way of building a community.  And in many ways, it is MORE vibrant and more honest than anything ever before.  LIkewise, it is real time.  And it is open to everyone. It is extraordinarily effective.  And it is unbelievably healthy.

For those who question their child's life on-line, you are looking from your historical reference.  What happens in this environment is incredibly open - thus very informative.  It is remarkably honest - in ways everyone finds very hard to be face-to-face.  And it is very fast.  There are no boundaries - no race, no origin questions, no location questions, no income questions.  It is the most egalitarian, comprehensive method of creating a self-forming community to accomplish a goal I've ever seen.  Way beyond anything I've ever seen my generation accomplish by developing plans and subsequently focusing on execution. 

Within hours, my son's friends found out he had died 500 miles away - and his Facebook page exploded.  It became a central hub to exchange information of all kinds about his accident, his life, his funeral.  Within hours almost his entire world new what happened - far faster than any "family call chains" we ever created.  As they searched to learn more, within a day someone found a video of the accident scene and the helicopter whisking him away ---- something that would have taken my generation weeks to find (if at all) and share.  And the videographer was put in contact with me, able to give me first-hand info about the accident scene. 

His brother created a new Facebook site dedicated to honoring Alex the next day.  Within hours 200 people were hooked up.  Before week end the number went to 400.  This became universe central for this topic.  There was no CEO.  No Director of communications.  Just a self-organizing activity that brought together hundreds of people who wanted to talk about Alex.  Very effective discussion.

Since Alex's 22nd birthday is 9/30 - some spontenous person said a birthday party should be thrown.  Within hours an event had been created, and hundreds were talking about whether they could attend or not (by the way, it's going to be on 10/2 in Chicago.)  All kinds of talk about who had to work, who could come, what to bring.  Again, self-organizing and spontaneous and remarkably effective.

By the time the newspaper published an article on the accident, and my son's obituary, it was so old news I don't think anybody cared.  And certainly the only people who learned this way were those who were - over 40. 

If you aren't using these tools - if you don't "get it" - this is one place I would recommend some personal White Space investment.  If you do, the payoff is extremely high.  If you don't, you're likely to find yourself as out of date as cobblers and blacksmiths faster than you think.

Big Challenges - a little time off - stay with me

To my readers:

On Sunday evening my oldest son, age 21, was killed in an automobile accident.  Life has created one very big challenge.  Things have shifted.  I'm reaching hard to think through what the next stage of my growth will be like.  How I will change.  I'll be back to everyone with normal comments probably next week.

Thank you for enjoying my blog.  Please stick with me.  I'll be back soon.

Alex Hartung - Age 21 - died just prior to midnight September 20 at St. Mary's hospital in Duluth, MN.  A mechanical engineering senior at Northern Illinois University, he was participating in a golf tournament in Hayward, WI when the accident happened, then airlifted to Duluth.  Services will be Saturday, September 26 at Anderson Funeral Home, DeKalb, IL.  Viewing/talking at 11:00am, funeral at 2:00pm, burial to immediately follow about 10 miles east of the funeral home.

Read more about Alex Hartung, including memories from his friends at: his facebook page here

Read additional memories at the Facebook group RIP Alex Hartung

Google's innovation continues

This week The Economist reviewed the innovation processes at Google.  In "Google's Corporate Culture - Creative Tension" the magazine overviews several recent innovations, and actions senior leaders are taking regarding innovation management.

While Mr. Anthony recently chastised Google for its "immature" innovation management in a Harvard Business School blog post, and somewhat The Economist does as well, for not producing more revenue from its innovations - nobody can refute that the company released yet 3 more very important innovations this week - an updated Chrome web brower, new software that allows viewing on-line newspapers in a more natural way (Fast Flip) and Google Wave for collaborative project development.  For most companies any one of these would be vaunted to market on piles of ad and PR sending.  Products less significant cause Microsoft to throw their Marketing/PR machine into overdrive.  But innovative launches are frequent enough at Google that you can completely miss some of them.  Even when they continue to change whole industries - like Google has been doing to newspaper publishers and continues.

The best line in the article says that senior Google leadership is very actively trying to counter "the conservatism that can set in as companies mature."  The good news is that even though it has 20,000 employees, Google is not "mature."  Thankfully, it remains in the Rapids of growth.  Size does not equal "maturity."  That word is more applicable to companies that begin truncating ideas and activities to optimize their existing business.  This is the direction Scott Anthony recently proposed on his HBS blog.  And it gets companies into serious trouble.

Instead, Google is working hard to keep ideas from being truncated by hierarchy or people who are focused on narrow opportunities.  Senior leaders are making themselves available to everyone in order to make sure ideas get attention - rather than vetted.  Through this they are giving permission for ideas to be developed, even when many in the company aren't supportive.  This top-level focus on granting permission to new ideas which are unconventional is a CRITICAL component of innovation success.  Second, they aren't relying on a priority process for funding (something Mr. Anthony recommends).  Instead they are making ample dollars available for ideas to push them to market quickly - and see if the innovation is accepted by the market or needs more work. 

By personally engaging at the top levels in this process, Mr. Schmidt and his team are being Disruptive.  They aren't allowing structural impediments like strategy formulation, hiring practices, tight IT systems, large historical investments or internal "experts" to Lock-in Google to its past.  This is demonstrably exceptional behavior that pushes Google into new markets and growth.  Then, by focusing on granting permission - even for things the "organization" may not initially support - and adding resources from outside normal resource allocation systems they are doing the 2 things necessary to keep White Space alive and thriving at Google.

Google has been growing, even in this very tough economy.  More importantly, it has not slowed down its releases of innovation on the marketplace that can generate future growth.  Mobile phones using its Android software are just now getting to market, and offer (along with other innovations) potentially very large revenue gains in new areas.  With smart phones and Kindle-like e-readers to outsell PCs in late 2010 Google is squarely positioned to be part of the "next wave" of personal digital productivity (along with Apple.)  And this can be explained by the company's willingness to remain Disruptive and push White Space projects --- even with 20,000 employees.

Building scenarios effectively - Zipcar, I-Go, Hertz, Enterprise, GM, Chrysler, Ford

How many cars do you own?  Odds are, it's at least 1 more than you need.  There are more licensed vehicles in the USA than there are licensed drivers - so it's clear America is loaded with cars. Now it looks like a permanent shift is developing, to less auto ownership, and it will change competition significantly.

In places as far ranging as Detroit/Ann Arbor, Chicago and San Francisco increasingly people are opting for a new approach to transportation.  Take the bus and train - yes.  Take a cab - sometimes. And for a lot of folks they are joining car-sharing companies.  According to Freep.com, "Service Lets Users Borrow a Car Whenevery they want."  Pay a flat annual fee, as low as $30 to $150, then you rent a car in your neighborhood for as little as $8.00/hour.  Right.  No monthly insurance fee, no gas charge, no parking bills.  You rent cars when you need them, and only as long as you need them.

To those of us, mostly older, this may seem heretical.  How can you give up your car?  It's long been a status symbol.  What you drive is supposed to say something about who you are.  But this is getting turned upside down.  People, lots of people, are renting by the hour and they want something very cheap and easy to park.  Cars have a place, but not in your personal parking spot at an enormous cost.

Implications are powerful.  Firstly, recognize that the USA is increasingly an urban country.  Every election we are reminded that while most the people live in cities, the electoral map is by state.  Thus, a President can be elected while losing the popular vote!  Just like the tendency across the globe, as agriculture makes less and less importance to the economy people gravitate to major urban centers.  Likewise, as manufacturing jobs move offshore from America, people shift to office work which is more centralized in urban areas than the former "factory towns."  These demographic trends have been developing for over 30 years, and show every sign of accelerating - not decreasing. 

Thus, watching what the "early movers" are doing in urban areas is really important.  We have to develop our scenarios about the future, and we can see that what happens in cities is becoming even more important than it was just a couple of decades ago.  And in cities, people are opting not to buy cars.  Nor even rent them for a day or two.  Nor are they relying on ever more costly taxis.  They are going for hourly rentals they can preschedule.

GM, Chrysler and Ford are getting very little of this business because the renters, 80%, prefer small hybrids. Hertz and other big rental car companies were being shut out, because their model was the daily rental -- largely from an airport location for a traveling business person or vacationer.

In a real way, this shows all the signs of a classic Clayton Chrstensen "Disruptive Innovation."  An unserved, or underserved, customer who cannot obtain personal transportation is able to get it.  An unconventional solution, perhaps, but it's working.  What does that tell us?  As the business grows expect the leaders to develop better and better solutions, leading to more and more people accessing the solution.  This is how we get to a very large market shift - not from the people currently served suddenly changing, but rather from the underserved market creating a new solution which gets improved and refined until it meets the needs of the majority of customers - who shift much later - but cut the legs out from under old Success Formulas.  Meaning we could get back to families having one car (circa 1948) and when a second is needed they rent by the hour - even in the suburbs!!  With insurance costs often topping $100/month for a second car, plus the cost to license and maintain it, it's less clear that multi-car ownership is as beneficial as it once was.  If a viable new solution comes along - well it just might work!

This, of course, is not a good thing for auto companies dependent on a demand rebound to fix their recent woes.  Their "good case" scenarios have people returning to adding to their personal fleets, while also returning to new car acquisition every 2 or 3 years.  If instead buyers go the direction of less ownership and less frequent purchases it will be impossible for these companies to repay the government loans.

Markets shift.  Often quickly and violently.  Far too oten, we ignore these shifts.  Because they look so different, so odd, that we believe it must be a short term phenomenon.  We expect that things will soon get "back to normal."  We have future scenarios - they are extensions of the past.  But in the post-millenial global economy people are starting to do a lot of things differently.  They aren't trying to return to old patterns.  They are developing new ones.  And if you want to compete, it's becoming crystal clear you have to change your assumptions about the future, your scenarios of the future and your approach to markets.  Before you get left so far behind you fail.

Please leave Google alone - bad advice from Harvard and Mr. Anthony

Is Google a company who's growth and innovation worry you?  Not me.  Which is why I was disturbed by a recent blog at Harvard Business School Publishing's web site "Google Grows Up."  In this article Scott Anthony, a consultant and writer for HBS, says that he thinks Google has been immature about its innovation management, and he thinks the company needs to change it's approach to innovation.  Unfortunately, his comments replay the core of outdated management approaches which lead companies into lower returns.

No doubt Google's revenues are highly skewed toward on-line ad placement.  But with the market growing at more than 2x/year, and Google maintaining (or growing) share it's not surprising that such high revenues would dwarf other projects.  Google created, and has remained, in the Rapids of growth by leading the market.  From its Disruptive innovation, offering advertising through products like Google AdWords to people who previously couldn't afford it or manage it, allowed Google to lead a market shift for advertising.  And ever since Google has implemented sustaining innovations to maintain its leadership position.  That's great management.  No reason to worry about a lot of revenue in ad placement today, with the market growing.  Not as long as Google keeps breeding lots of new, big ideas to help grow in the future.

But Mr. Anthony flogs Google for its "unrestrained" approach to innovation.  He recommends the company push hard to implement a process for innovation management - and he uses Proctor & Gamble as his role model - in order to curtail so many innovations and funnel resources to "the right" innovations.  Even though he's obviously flogging his consulting, and pushing that all "good management" requires some significant stage gate management of innovation - he couldn't be more wrong.

Firstly, P&G is far from a role model for innovation.  As recently discussed in this blog, the company recently said one of its major innovations was cutting prices on Tide while introducing less a less-good formulation.  As commenters said loudly, this is not innovation.  It's merely price cutting - taking another step on the demand/supply curve of price vs. performance.  It doesn't change the shape of the curve - it doesn't help people get a far superior return - nor does it bring in new customers who's needs were not previously met. 

In a Wall Street Journal article "P&G Plots Course To Turn Lackluster Tide," the CEO freely admits the company has had insufficient organic growth.  Additionally, his big future opportunities are to "reposition Tide," to cut the price of Cheer by another 13% and to use Defend & Extend practices to try pushing the P&G Success Formula into other countries.  Like people in China, India and elsewhere are in need of 1.5 gallon containers of laundry detergent sold through enormous stores which have big parking lots for all those cars to lug stuff home.  None of these ideas have helped P&G grow, nor helped the company achieve above-average returns, nor demonstrate the company is going to be a leader for the next 10 years in new products, new distribution systems or new business models for the developed or developing world. 

This urge to "grow up" is a huge downfall of business thinking.  It smacks of arrogance and superiority by those who say it - like they somehow are "in the know" while everyone else is incapable of making smart resource allocation decisions.   In "Create Marketplace Disruption" I provide a long discussion about how introducing "professional management' causes companies to enter growth stalls.  The very act of saying "gee, we could be more efficient about how we manage innovation" immediately applies braking power well beyond what was imagined.  If Mr. Anthony were worried about Google managers leaving to start new companies in the past (like Twitter) he should be apoplectic at the rate they'll now leave - when it's harder to get management attention and funding for new potentially disruptive innovations.

Google is doing a great job of innovating.  Largely because it doesn't try to manage innovation.  It maintains robust pipelines of both disruptive, and sustaining, innovations. Google allows everybody in the company to work at innovation - providing wide permission to try new things and ample resources to test ideas.  Then Google lets the market determine what goes forward.  It lets the innovators use supply chain partners, customers, emerging customers, lost customers and anybody who can provide market input guide where the innovation processes go.  As a result, the company has developed several new products --- such as new network applications that replace over-sized desktop apps, and a new, slimmer mobile operating system that expands the capabilities of mobile devices ---- and we can well imagine that it may be coming close to additional revenue breakthroughs.

Unfortunately, Mr. Anthony would like readers, and his clients, to believe they are better at managing innovation than the marketplace.  However, all research points in the opposite direction.  When managers start guessing at the future their Lock-ins to historical processes, products and market views consistently causes them to guess wrong.  They over-invest in things that don't work out well, and investing for really good ideas dries up.  All resource allocation approaches use things like technology risk, market risk, cost risk and revenue risk to downplay breakthrough ideas.  Management cannot help but "extend the past" and in doing so over-invest in what's known, rather than let ideas get to market so real customers can say what is valuable.

Google is doing great.  In a recession that has put several companies out of business (Silicon Graphics and Sun Microsystems are two neighbors) and challenged the returns of several stalwarts (Microsoft and Dell just 2 examples) Google has grown and seen its value rise dramatically.  To think that hierarchy and managers can apply better decision-making about innovation is - well - absurd.  It's always best to get the idea surfaced, push for permission to do things that might appear crazy at first, and get them to market as fast as possible so the real decision-makers can react, and give input, to innovation.

Too Big To Fail? Risk and protection in shifting markets - Lehman, Bank of America, Merrill Lynch, Citibank

The Real Blindness Behind The Collapse

Adam Hartung, 09.14.09, 05:00 PM EDT

The exact same failing brought down Wall Street, Detroit and Main Street's real estate speculators.

"Too big to fail" is a new phrase in the American lexicon, born in the economic crisis that gave us a bankrupt Lehman Brothers and the shotgun marriage of Merrill Lynch with Bank of America. Nobody really knows what it means, except that somehow in the banking world, central bankers can decide that some institutions--like AIG, Citigroup, JPMorgan Chase and BofA--are so big they simply have to be kept alive.

This is the first paragraph in my latest column for Forbes.  There is much EVERY business leader can learn from the collapse of Lehman.  Learn about risk, and about how to succeed in a shifting marketplace.  Please give the Forbes article a read - and put on a comment!  Everybody enjoys reading what others think! 

September 11, 2009 - United, American, Delta, Northwest, Airlines et.al.

Stealing language from FDR, September 11, 2001 is a day that will go down in infamy.  Dramatic shifts happened in the world resulting from the horrific attacks on American civilians in New York, Pennsylvania and D.C. .  But can we say that most organizations have reacted effectively to those shifts?

Few industries were more affected by the attacks than the airline industry.  Shut down for a week, revenues plummeted immediately and were hard to win back from a frightened public.  But if ever there was an industry of needing to push the "reset button" on how things worked it was airlines.  All the major players (except Southwest) had struggled with profitability, many declaring bankruptcy.  Some never emerged (like PanAm, Eastern, Braniff).  Mergers had been rampant as companies tried to expand into greater profits - unsuccessfully.  Customer satisfaction had been on a straight southeasterly direction, lower and lower, ever since deregulation.  Here was a collection of businesses for which nothing was going right, and in dire need of changing their business model.

The shut down and economic downturn provided a tremendous opportunity for the airlines to change their Success Formula.  The government allowed unprecedented communication between companies, and unions were ready to make changes, to get the air traffic system working again.  A sense of cooperation emerged for finding better solutions, including security.  Market shifts which had been happening for a decade were primed for new solutions - perhaps implementing operational methods proven successful at Southwest.

Unfortunately, everybody chose instead to extend Lock-ins to old practices and bring their airline company back on-line with minimal change.  Instead of using this opportunity to Disrupt their practices, taking advantage of a dramatic challenge to their business, and use White Space to try new approaches - to a competitor every single airline re-instituted business as usual.  To disastrous results.  Quickly profits went down further, customer satisfaction dropped further and in short order all the major players (except Southwest) were filing bankruptcies and hoping some sort of merger would somehow change the declining results.

The airlines' problems were not created by the events of 9/11/01.  But on that day long-developing market shifts become wildly apparent.  The airlines, and other industries like banking, had the opportunity to recognize these market shifts, admit their impact on future results (not good), and begin Disrupting old practices in order to experiment with new solutions that better fit changing market needs.  None did.  It wasn't long before America was mired in another long and expensive military conflict, and an extended deep recession.  For most businesses, things went from bad to worse.

Leaders need to recognize when external events pose the opportunity to Disrupt things as they've been - Disrupt the status quo - and start doing things differently.  These prime opportunities don't happen often.  Reacting with reassurances, and efforts to get back to the status quo as quickly as possible prove disastrous.  This is an emotional reaction, seeking a past sense of stability, but it creates additional complacency worsening the impact of market shifts already jeopardizing the future.  Instead, one of the most critical actions leaders can take is to leverage these market challenges into a call for Disruptions and use White Space to implement new solutions which meet market needs. 

If only the airlines had done that perhaps they could operate on-time, let customers check luggage without a charge, provide quality meals on long flights and internet access on all flights, and provide a reliable service that customers enjoy.  If they had sought to find a better solution, rather than Defending & Extending what they had always done, airline customers would be in a far better shape.  And that's a lesson all leaders need to learn from the events of 9/11 - use challenges to move forward, not try reclaiming some antiquated past.

To read how GM ended up bankrupt by refusing to recognize opportunities for changing to meet shifting market needs download the free ebook "The Fall of GM."

Buying the Business - Kraft, Cadbury and Del Monte vs. Google & Apple

When they can't figure out how to grow a business, leaders often turn to acquisitions.  This despite the fact that every analysis ever done of public companies buying other public companies has shown that such acquisitions are bad for the buyer.  Yet, after no new products at Kraft for a decade, and no growth, "Kraft shares fall on Cadbury bid, Higher offer awaited" is the Marketwatch.com headline.

Some analysts praise this kind of acquisition.  And that's when we can realize why they are analysts, in love with investment banking and deals, and not running companies.  "Kraft is demonstrating its operational and financial strength" is one such claim.  Hogwash.  After years of cost cutting and no innovation, the Kraft executives are worried they'll get no bonuses if they don't grow the top line.  So they want to take a cash hoard from all those layoffs and spend it, overpaying for someone else's business which has been stripped of cost by another CEO.  After the acquisition the pressure will be on to cut costs even further, in order to pay for the acquisition, leading to more layoffs.  It's no surprise that 2 years after an acquisition they all have less revenue than projected.  Instead of 2 + 1 = 3 (the expected revenue) we get 2 + 1 = 2.5 as revenues are lost in the transition.  But the buyer will claim revenues are up 25% (.5 = 25% of the original 2 - rather than a 12.5% decrease from what the combined revenues should be.) 

With rare exceptions, acquisitions generate no growth.  Except in the pocketbooks of investment bankers and their lawyers through deal fees, the golden parachutes given to select top executives of the acquired company, and in bonuses of the acquirer who took advantage of poorly crafted incentive compensation plans.  These are actions taken to Defend & Extend an existing Success Formula.  The executives want to do "more of the same" hoping additional cost cutting (synergies - remember that word?) will give them profits from these overpriced revenues.  There is no innovation, just a hope that somehow they will work harder, faster or better and find some way to lower costs not already found. Kraft investors are smart to vote "no" on this acquisition attempt.  It won't do anybody any good. 

Simultaneously we read in MediaPost.com, "Del Monte To Hike Marketing Spend 40%."  If this were to launch new products and expand the Del Monte business into new opportunities this would be a great investment.  Instead we read the money is being spent "to drive sales of Del Monte's core brands and higher-margin businesses."  In other words, while advertising is off market-wide Del Monte leadership is attempting to buy additional business - not dissimilarly to the goals at Kraft.  By dramatically upping the spend on coupons, shelf displays and advertising Del Monte will increase sales of long-sold products that have shown slower growth the last few years.  Del Monte may well drive up short-term revenues, but these will not be sustainable when they cut the marketing spend in a year or two.  Nor when new products attract customers away from the over-marketed old products.  Lacking new products and new solutions such increased spending does not improve Del Monte's competitiveness.

You'd think after the last 10 years business leaders would have learned that investors are less and less enamored with financial shell games.  Buying revenues does not improve the business's long term health.  A cash hoard, created by cutting costs to the bone, is not well spent purchasing ads to promote existing products - or in buying another business that is already large and mature.  Instead, companies that generate above-average rates of return do so by developing and launching new products and services.

You don't see Google or Apple or RIM making a huge acquisition do you?  Or dramatically increasing the marketing budget on old products?  Compare those companies to Kraft and you see in stark contrast what generates long-term growth, higher investor returns, jobs and a strong supplier base.  Disruptions and White Space lead these companies to new innovations that are generating growth.  And that's why even the recession hasn't shut them down.

Know when to say "no" - Chicago Sun-Times Media Group and Newspapers

I never cease to be startled by the optimism of businesspeople.  Why would anybody buy a newspaper company these days?  Yet, Crain's reports "Sun Times Sale Appears Near."  It's believed the buyers are a group of independent investors, no media experience, led by Mesirow Financial Group.

Ever heard the term "smart money?"  This is definitely not "smart money."  Just like Cerberus was none to clever to spend billions buying Chrysler a couple of years ago.  Shortly before it went bankrupt.  Too often, those with lots of money to invest become full of hubris.  They believe their experience allows them to "fix" any business.  This almost always involves cost cutting - such as letting go any sort of R&D, product development, advertising, marketing and often sales.  Assets are sold to raise cash and incur one-time write-offs (with tax deductions) and get rid of depreciation charges.  These financiers believe they can "fix" any business if they are "tough" enough to cut enough costs, and get the remaining employees "focused" on specific segments with specific products.

Only we're finding out that just doesn't work.  This sort of "company flipping" was prevalent in the early 2000s.  But it added no value, and it wasn't long before market investors quit playing.  The value of these cost-stripped businesses, with no growth potential, dropped like a stone.  Without growth, the business just keeps on shrinking.

Tribune Corporation, parent of newspaper Chicago Tribune, has already filed bankruptcy.  But it is expected to wipe out bondholders (lots of it the employee pension plan), and come out of bankruptcy.  To a market which in which fewer and fewer people read newspapers, and fewer and fewer advertisers are buying ads.  There is too much competition today for too few subscribers, and too few advertisers, in newspapers.  Sun Times Media has no major on-line presence, nor television stations.  So how will these investors make a return on their acquisition investment?

They won't.

It's hard to give up in business.  It's hard to believe that there just isn't demand for buggy whips any more.  It's hard to believe that the last remaining buggy whip manufacturers are so competitive, unwilling to give up, that they don't make much profit.  We are romanced into believing that "if you really want to be a blacksmith, there's a way to make money at it."  We want to believe that somehow if we work hard enough, if we're smart enough, we can "fix" any business.  But when the market has shifted, and demand drops, the smart leaders know to say "no."  They take their investing to where customers and demand are growing so they can make a much better rate of return.

Invest in the Rapids.  Not the Swamp.  Companies in the Swamp almost always end up in the Whirlpool.  It's hard to think Sun Times Media isn't already there - what with their negative cash flow and very small cash hoard.  Unless you know exactly how you're going to add growth to a troubled business, it's best to simply walk away.