[Rushtalk] Wrong Assumptions Create Lousy Results

John A. Quayle blueoval57 at verizon.net
Sat Sep 27 17:45:23 MDT 2014




Wrong Assumptions Create Lousy Results - Sony, McDonald's, Radio Shack, Sears

<http://www.forbes.com/sites/adamhartung/2014/09/17/wrong-assumptions-create-lousy-results-sony-mcdonalds-radio-shack-sears/#comment_reply>Comment 
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Sony was once the leader in consumer electronics. 
A brand powerhouse whose products commanded a 
premium price and were in every home. Trinitron 
color TVs, Walkman and Discman players, Vaio PCs. 
But Sony has 
<http://www.forbes.com/sites/adamhartung/2012/04/20/sayonara-sony-how-industrial-mba-style-leadership-killed-once-great-company/>lost 
money for all but one quarter across the last 4 
years, and company leaders just admitted 
<http://www.mediapost.com/publications/article/234349/sony-cites-bad-reception-in-mobile-for-projected.html?utm_source=newsletter&utm_medium=email&utm_content=headline&utm_campaign=76158>the 
company will lose over $2B this year and likely eliminate its dividend.

McDonald's created something we now call "fast 
food." It was an unstoppable entity that hooked 
consumers on products like the Big Mac, Quarter 
Pounder and Happy Meal. An entire generation was 
seemingly addicted to McDonald's and raised their 
families on these products, with favorable 
delight for the ever cheery, clown-inspired 
spokesperson Ronald McDonald.  But 
now<http://www.forbes.com/sites/adamhartung/2014/08/13/mcdonalds-growth-stall-predicts-deadly-problems/>McDonald’s 
has hit a growth stall, 
<http://247wallst.com/investing/2014/08/18/3-djia-stocks-at-real-risk-of-hitting-52-week-lows/?utm_source=247WallStDailyNewsletter&utm_medium=email&utm_content=AUG202014A&utm_campaign=DailyNewsletter>same-store 
sales are down and 
the<http://online.wsj.com/articles/mcdonalds-faces-millennial-challenge-1408928743?KEYWORDS=millennials+lose+taste+for+mcdonald%27s>millennial<http://online.wsj.com/articles/mcdonalds-faces-millennial-challenge-1408928743?KEYWORDS=millennials+lose+taste+for+mcdonald%27s> 
generation has turned its nose up creating 
serious doubts about the company's future.

Radio Shack was the leader in electronic before 
we really had a consumer electronics category. 
When we still bought vacuum tubes to repair 
radios and TVs, home hobbyists built their own 
early versions of computers and video games 
worked by hooking them up to TVs (Atari, etc.) 
Radio Shack was the place to 
go. 
Now<http://blogs.wsj.com/moneybeat/2014/09/10/analyst-on-radioshack-bankruptcy-is-imminent/>Â 
the company is one step from bankruptcy.

Sears created the original non-store shopping 
capability with its famous catalogs. Sears went 
on to become a Dow Jones Industrial Average 
component company and the leading national 
general merchandise retailer with powerhouse 
brands like Kenmore, Diehard and 
Craftsman. 
Now<http://blogs.barrons.com/incomeinvesting/2014/09/10/fitch-downgrades-sears-to-deepest-junk-ratings/>Â 
Sears’ debt has been rated the lowest level 
junk, it hasn’t made a profit for 3 years and 
<http://www.forbes.com/sites/samanthasharf/2014/08/21/sears-ceo-retailers-loss-revenue-decline-unacceptable/>same 
store sales have declined while the number of 
stores has been cut dramatically.  The company 
<http://www.forbes.com/sites/maggiemcgrath/2014/09/16/sears-borrowing-400-million-from-affiliates-of-eddie-lamperts-hedge-fund/>survives 
by taking loans from the private equity firm its Chairman controls.

Sears store closing


How in the world can companies be such successful 
pioneers and end up in such trouble?

Markets shift.  Things in the world change. What 
was a brilliant business idea loses value as 
competitors enter the market, new technologies 
and solutions are created and customers find they 
prefer alternatives to your original success 
formula.  These changed markets leave your 
company irrelevant – and eventually obsolete.

Operational excellence is insufficient to succeed

Unfortunately, we’ve trained leaders over the 
last 60 years how to be operationally 
excellent.  In 1960 America graduated about the 
same number of medical doctors, lawyers and MBAs 
from accredited, professional university 
programs.  Today we still graduate about the 
same number of medical doctors every year.  We 
graduate about 6 times as many lawyers (leading 
to lots of jokes about there being too many 
lawyers.)  But we graduate a whopping 30 times 
as many MBAs.  Business education has 
skyrocketed, and it has become incredibly normal 
to see MBAs at all levels, and in all parts, of corporations.

The output of this training has been a movement 
toward focusing on accounting, finance, cost 
management, supply chain management, automation — 
all things operrational.  Stuff easily taught, 
and with a bias for historical data analysis.

We have trained a veritable legion of people in 
how to “do things better” in business, 
including how to measure costs and operations in 
order to make constant improvements in “the 
numbers.”  Most leaders of publicly traded 
companies today have a background in finance, and 
can discuss the P&L and balance sheets of their 
companies in infinite detail.  Management’s 
understanding of internal operations and how to 
improve them is vast, and the ability of leaders 
to focus an organization on improving internal 
metrics and generating short-term profits is higher than ever in history.

But none of this matters when markets 
shift.  When things outside the corporation 
happen and make all that hard work, cost cutting, 
financial analysis and machination pretty much 
useless.  Because today most customers don’t 
really care how well you make a color TV or 
physical music player, since they now do 
everything digitally using a mobile device.  Nor 
do they think consistency is comparable to 
quality, or accept high-fat and high-carb 
previously frozen food products when they can 
find tastier, fresher, lighter 
alternatives.  They don’t care about the 
details of what’s inside a consumer electronic 
product but they can buy a plethora of different 
products from a multitude of suppliers with the 
touch of a mobile device screen.  And they 
don’t care how your physical retail store is 
laid out and what store-branded merchandise is on 
the shelves because they can shop the entire 
world of products – and a vast array of retailers 
– a“ and receive deep product reviews 
instantaneously, as well as immediate price and 
delivery information, from anywhere they carry their phone – 224×7.

“Get the assumptions wrong, and nothing else 
matters” is often attributed to Peter 
Drucker.  You’ve probably seen that phrase in 
at least one management, convention or 
motivational presentation over the last 
decade.  For Sony, McDonald’s, Radio Shack and 
Sears the assumptions upon which their current 
businesses were built are no longer valid.  The 
things that management assumed to be true when 
the companies were nicely profitable 1 or 2 
decades ago are no longer true.  And no matter 
how much leadership focuses on metrics, 
operational improvements and cost cutting – or 
even serving the remaining (if dwindling) 
currennt customers – the shift away from these 
companies’ offeringgs will not stop.  Rather, that shift is accelerating.

It has been 80 years since Harvard professor 
Joseph Schumpeter described “creative 
destruction” as the process in which new 
technologies obsolete the old, and the creativity 
of new competitors destroys the value of older 
companies. Unfortunately, not many CEOs are 
familiar with this concept.  And even fewer ever 
think it will happen to them.  Most continue 
hoping that if they just make a few more 
improvements their company won’t really become 
obsolete, and they can turn around their presumably short-term bad situation.

For employees, suppliers and investors such hope 
is a weak foundation upon which to rely for jobs, revenues and returns.

Trends matter – more than history

According to the management gurus at McKinsey, 
today the world population is getting older. 
Substantially so. Almost no major country will 
avoid population declines over next 20 years, due 
to low birth rates.  Simultaneously, better 
healthcare is everywhere, and every population 
group is going to live a whole lot (I mean a 
WHOLE LOT) longer.  Almost every product and 
process is becoming digitized, and any process 
which can be done via a computer will be done by 
a computer due to almost free computation. Global 
communication already is free, and the bandwidth 
won’t stop growing.  Secrets will become 
almost impossible to keep; transparency will become the norm.

These trends matter to every single 
business.  Many of these trends are making 
immediate impact on sales and profits in 2015. 
All will make a meaningful impact on practically 
every business by 2020 – even yours.  And these 
trends change the assumptions upon which every 
business – certainly every businness founded prior to 2000 – demonstrably.

Are you changing your assumptions, and then your 
business, to compete in the future? If not, you 
could soon look at your results and see what the 
leaders at Sony, McDonald's, Radio Shack and Sears are seeing today.

That would be a shame.

Connect with me

<http://adamhartung.com/lipstick_on_a_p/>CEO 
Lampert's management of Sears has been "lipstick on a pig"

<http://adamhartung.com/whered_you_shop/>By 2006 
it was clear America was not shopping Sears

<http://adamhartung.com/re-thinking-growth-at-mcdonalds-why-you-shouldnt-buy/>Why 
McDonald’s recent growth stall portends long-term disaster

<http://adamhartung.com/sayonara-sony-how-industrial-mba-management-killed-a-great-company/>The 
case that Sony’s demise is inevitable – from 2012

<http://adamhartung.com/the-power-of-myth-it-can-kill-you-collins-thurston/>How 
myths are born, and how they kill companies
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