JACK MIXNER STRATEGY

1+714.449.1040     www.mixnerstrategy.com

If I were to ask you what shipping technology innovation in the last fifty years was truly disruptive I'll bet that many of you would say "FedEx" and Freddie Smith's innovations related to fast shipment. You'd be wrong.

The big innovation was the creation of the container, the big steel or aluminum box that allowed trucks to easily transfer their cargos to trains or ships. Total disruption of an industry - actually the creation of an industry - occurred in the fifties and sixties. Innovations continue to solidify the strength of the innovation.

Previously, a shipper called a forwarder which picked up its products, commingled them with other shipments, delivered them to a warehouse to be commingled again with hundreds of other truckloads, literally hand-carried them aboard a ship going essentially the correct direction, and, months later, your shipment arrived (hopefully in one piece) at your destination.

The container changed all that. We all know about containers and what a container load of product speeding across the Pacific from a manufacturer to a retail operation in the US has done for the level of commerce - and profits - for all the companies involved. There's a case to be made that containers, by speeding the delivery time of final goods and raw materials, cut inventories and spawned the whole just-in-time manufacturing successes of the eighties and nineties.

Applause is in order at this point. By now, all this is pretty obvious.

So, let's say that the container was disruptive. What were it's characteristics?

• The first container shipments were highly risky as rapid interactions between trucks, trains and ships didn't exist.
• The container itself didn't exist. There were no standards on size or strength. All that came later.
• Regulations were so strict that most shippers didn't want to know about the innovation as they were willing to accept the level of profitability that the government dictated in trade for protection from competitors.
• Prices on shipping came down so low that they became, essentially, commodity-like. Lots of container shipping companies went out of business, were bought or were strung together in some sort of roll-up.
• Bigness became the goal as did speed. Peripheral innovations in dock cranes, truck and railroad access to docks and traffic patterns created ancillary new businesses in manufacturing, inventory control and forwarding.
• Since no one knew how to control growth, growth got out of hand and almost killed the industry until governments and coalitions formed to regulate prices and routes.

One man, Malcolm P. McLean, dreamed up the container business. He went near-bankrupt several times during the growth of the industry. He was lucky as the Viet Nam war required the effective shipment of goods to a location that had no organization to receive the incredible bulk of shipments that the war required. He was able to take care of government pricing and the fact that, since no one had ever done what he was doing before, he could innovate on the fly. His biggest risk was an interesting one, especially when dealing with the government: he bid all his deliveries to Viet Nam on a fixed-cost basis meaning that if he got it wrong, he lost big-time. Luckily for McLean, he figured out how to make money at containerized deliveries before he went bankrupt.

Strategically, mission became crucial. McLean realized that his business was moving cargo, not sailing ships or driving trucks (Levinson, 53). Early on, containerized shipping was a niche business (Levinson, 161). As growth occurred, the evolution from niche (with its greater profitability) to mainstream (with its lower profitability and greater volume) followed curves we are all used to. McLean survived the shift - mostly - and created a new industry, an industry that allowed much of the global growth we see today.

Reference

Levinson, Marc. The Box. How the Shipping Container Made the World Smaller and World Economy Bigger. Princeton University Press. 2006.

Posted by jackmixner at 11:15 AM | Permalink

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David Begelman was caught embezzling from the corporation. Alan Hirschfield knew it, but he delayed doing anything about it. The delay cost Hirschfield his job, ultimately, but not in the way you might think.

The Board of Directors sided not with Hrischfield, the CEO of the corporation, but with Begelman, the President of one of the divisions and close friend of many on the Board.

Yes, ultimately, Begelman lost his job, too, but only after the press and the SEC started to weigh in.

The company? Columbia Pictures in 1976.

The story is part of the lore of Hollywood, certainly one that isn't important today, you might think. Actually, it says a lot about a lot of things.

Hirschfield discovered that the Board was truly in charge of Columbia Pictures. The Board room battle became fierce during a year when Columbia was quite successful, with Hirschfield and Begelman playing large roles in that success. Of course, the Board's in charge in any corporation, even a successful one owing a lot of that success to the CEO.

Personalities played a large role, as did long friendships between Board members and senior managers.

Begelman had stolen money by fraudulently creating and endorsing company checks made out to other individuals. The right thing to do was to fire Begelman immediately and move on, or so it seems. Hirschfield delayed firing Begelman allowing internal pressures and alliances to magnify the situation, ultimately effecting morale and profitability.

So, you find something going wrong in your company, but you are not just sure who did what. The first step is to investigate, quickly. Then make a decision, act, and move on. That's obvious. Hirschfield decided to delay the obvious because the Board wanted him to. Then the fights really began. They became worse because it became not just a battle of right versus wrong, but one of alliances and power structures battling each other.

No one really won in the long run.

Pick your Board very carefully, especially in a publicly traded organization. Investigate problems quickly and then act on the findings. Finally, leave personalities and alliances out of the right versus wrong discussion.

As McClintick makes clear, this was easier said than done. It's still good advice. In the parlance of strategy, Hirschfield knew his values. The problem was that he didn't act on his values quickly enough.

Reference

McClintick, David. Indecent Exposure. A True Story of Hollywood and Wall Street. William Morrow and Company, Inc. 1982.

Posted by jackmixner at 09:41 AM | Permalink

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In 1907 there was a huge recession. The Federal Reserves System was created. Everyone said there wouldn't be another recession - ever. In 1929 we all know what happened. We forget that there was an initial, severe market break eight years earlier, in 1921. The Go-Go Years of 1969 were just the same. Everyone claimed that there couldn't be a bust. Everything was protected. They didn't know about a shudder caused by insider trading in 1966 (Brooks, 4).

Brooks wrote his history of the formation of mutual funds in the fifties and sixties and their effect on the wealth markets in 1973. It's a great historical synopsis of the sixties boom - let's call it the conglomerateur boom - and the early seventies bust that followed almost as a direct result. The parallels to the twenties pool operators (as in investment pool) are remarkable and significant, especially when you consider the investment pool boom as a parallel to the rise of the mutual fund in like fashion.

1921 mini-bust. 1929 big bust.

1966 mini-bust. 1970 big bust.

2001 "mini-bust"? 2006 big bust? Interesting.

History repeats itself.

Different players. Different stories. Same result. Interesting.

The History of the "Hedged" Fund

Buy a stock. Hedge the purchase with a short sale. Makes sense, yes? If you pool a bunch of investments together, you have the first hedge fund (Brooks, 142).  This was in 1949. The rising stock market gave the fund its biggest problem - they couldn't find enough stocks to short with. Nice problem to have. Until the mid-sixties, the initial fund had no competition. They didn't advertise. It was all amongst friends in a basically unregulated, and very profitable, marketplace. They forgot one thing: the market was always rising. Their hedges were untested. They'd end up failing with the rest of the market in the early seventies.

Sound familiar?

The History of the Conglomerate

Make your company hugely profitable. Use the stock, which now is highly priced, to buy the stocks of less highly valued companies, and create a conglomerate. That's what they were doing in the sixties. One cute little accounting wrinkle is forgotten, but still good to remember. Merge a company with a high multiple (a high P/E) with a company with a lower P/E, and, suddenly, the acquiring company with the higher P/E has an even higher P/E, which it may then use to buy another lower P/E company. It goes on and on, theoretically, and wonderfully, if you are an investor. It works for a while, yes. But, it's all a pyramid. It all fall apart eventually (Brooks, 158).

Every time I get involved in some sort of stock purchase, especially with a start-up, I hope I remember the history of the stock market. Yes, there is money to be made. Yes, consider every way you are considering to make money in the stock market. Someone probably already did it, and there might be lessons to remember.

Reference

Brooks, John. The Go-Go Years. Weybright and Talley. 1973.

Posted by jackmixner at 10:39 AM | Permalink

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What with the current debacle in the home mortgage market, we forget that this isn't the first time home mortgages wrecked the securities markets. It seems that folks have decided that this is something new. Well, time to re-think that one.

Wall Street started trading residential home mortgages in the late seventies when Salomon Brothers, realizing that the savings and loans were dominating a market place that had real possibilities for packaging loans and selling them to investors, started the ball rolling. In 1980 the mortgage market surpassed the equity markets on size alone (Lewis, 83).

A simple analysis of what happened then might include the words "hayseed" (for the thrift industry managers) and "shark" (for the Wall Street sales people). Wall Street sharks ended up bundling mortgages and selling them to the hayseed thrifts. Why? Thrifts were limited in the markets they could sell mortgages to, but, and here is the big but, they wanted to grow. How to grow? Buy mortgage backed securities from Wall Street. They were able to expand their portfolios, lessen their risks, and become more profitable, all at the same time.

We all know what happened. The thrift crisis is a thing of beauty, to be studied in Harvard case studies for years.

One thing has happened. The knowledge we gained from the thrift crisis was forgotten. Harvard - or somebody - didn't do their job. Once again we have mortgage backed securities threatening the market.

My point? Studying history is boring for some folks. At the same time, history is crucial, as it allows us to avoid mistakes that have been make before.

A little bit of soap box story telling? Probably. A good idea to check your new strategy against the history of your industry? Absolutely. You might learn something that will save you a bundle.

Reference

Lewis, Michael. Liar's Poker. Rising Through the Wreckage on Wall Street. Penguin Books. 1989.

Posted by jackmixner at 10:08 AM | Permalink

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You work on a team to create a movie. The team does its best work. Things go wrong, yes. But things also go right. Who is to know whether it will all come together in the end?

Bonfire of the Vanities was a Tom Wolfe book about the breakdown of New York City during the eighties. If Wolfe is good at anything, he is good a portraying a time and the people in it.

They made the movie some years later. Salamon was able to watch closely as Brian DePalma tried to make his masterpiece under all sorts of constraints.

The book's big. It tells a lot about movie making. What about the strategy in it all?

Who does strategy? Let's assume it is senior management's job to put a team together, go away, and put a simple plan down on paper. Then they come back, articulate the strategy to their team (hopefully in a manner that everyone understands what they mean) and, then, sit back while other implement their plans.

The management team provides guidance, advice, critiques along the way, and, if it is normal, gets so involved in the day-to-day that they forget that a plan even exists.

The Bonfire team did the same thing. The constraints of the movie business are huge and the odds of success are not so huge. The management team watched, cajoled, screamed (especially over budget) and, when things were all done and they were shown the final cut, applauded - loudly - about the "masterpiece" (Salamon, 340) DePalma had created. 

The first weekend's revenues for Bonfire were $3.1 million (Salamon, 405), a bomb by anyone's standards.

First question: Is movie production art or business? If it is business, what do you do when things are going wrong?

There are points along the way when you have a feeling something is going wrong. It happens in your business. DePalma and his team certainly recognized things were going wrong when they couldn't find film locations, or their actors weren't performing up to expectations.

They never thought about pulling the plug on the production. Too many big names were involved, and, once things got started, to pull back would have wasted too much capital.

They had to absorb their losses and move forward. Sometimes you have to do that. You just wish that you had responded earlier when things just didn't feel right.

Reference

Salamon, Julie. The Devil's Candy. The Bonfire of the Vanities Goes to Hollywood. Houghton Mifflin Company. 1991.

Posted by jackmixner at 11:04 AM | Permalink

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The conglomerate's founder figured he would just name the firm after himself and be done with it. That would be all well and good, but for one crucial fact: his last name was Slick. Slick Corporation, with it's slight tinge of larceny in its name, epitomized the go-go years of the sixties when conglomerates were created, rose to huge wealth, and, sometimes, blew up - all in the same year, or certainly, five years (Brooks, 174). 

Larceny is a pretty crucial word in that last paragraph. Because of inappropriate or inadequate accounting systems, owners of single companies figured out that by buying other companies and combining them with their current companies a crucial thing happened, at least for one year: the price of their stock compared with the earnings generated by the combined firms, rose substantially. This gave them enough new capital (the stock rose on the reportedly higher P/E ratio) to buy another company to add to the two already owned. This became a shell game in a way. All the purchases were predicated on a higher P/E and a higher stock price. A pretty cool way to make money, all in all.

This all worked marvelously, until the market, and the government, figured out what was going on and changed the accounting rules. It also didn't help when a couple conglomerates fizzled out. When investors (namely, folks who could do only one thing in finance, namely, divide the price of a stock by its earnings to figure out if it was a good stock to buy) finally figured out that all was a house of cards, the cards, indeed, came tumbling down.

Brooks book reads like a crime thriller. You can't put it down, especially Chapter VII entitled "The Conglomerateurs."

Let's say you were a CEO considering selling your business and you wanted to increase its value poste haste. Forming a conglomerate might have been the way to go as the accounting methodology at the time allowed to to almost instantaneously increase your paper valuation with no effort at all.

Do it today? Now we're getting to the real meat of it all. Conglomerate was the word for the sixties and early seventies. Synergy might be the word of the nineties and maybe the early two thousands. It still might apply. If the merger has attributes of synergy - namely, things work better because they are combined - maybe it makes sense.

My read on all this is that synergy, just like conglomerate long ago, is a risky reason to combine two companies.

Yes, this might be a good strategy to increase the value of your company short term. Longer term, it makes less sense. Maybe an exiting CEO is interested in the very short term until he or she sells and retires. If you are going to do that, be very careful and make sure you get cash for your business, as the likelihood of success of two combined companies is not very good, especially if you remember what really happened in the sixties.

Reference

Brooks, John. The Go-Go Years. Weybright and Talley. 1973.

Posted by jackmixner at 09:40 AM | Permalink

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The battle was essentially complete. Eisner was out; Bob Iger was in. Disney was under new management at long last after an epic battle for control of the board. Eisner was a lame duck awaiting his final day a couple months down the road.

Among Iger's first jobs? Dismantle the strategic planning department (Stewart, 538).

If you go back to the beginning of strategy at Disney, you see why the department was created in the first place.

Eisner was a new hire, having come aboard in September 1984. He toured the parks (which he had never visited as a kid), heard about plans for new hotels at Disney World, and met Gary Wilson the Marriott Corporation's Chief Financial Officer. Marriott had been eyeing Disney as an acquisition candidate not so long before and was involved in designing the new hotels at Disney World. Wilson had been part of the team gathering information about Disney as they prepared their bid (Stewart, 62-66). Soon as he could, Eisner hired Wilson.

Wilson almost immediately hired a series of Marriott executives to establish a strategic planning department at Disney. They had five year plans for all the divisions and targeted 20/20 growth: twenty percent growth in earnings each year and 20 percent growth in stock price each year (Stewart, 66 and 200). Leverage their cash flow to buy companies in industries related to Disney became part of the planning, especially broadcast companies (Stewart 201).

You know things are going badly for the strategic planning department when everyone starts to call it's members the "goon squad," labeling them "arrogant and insensitive" (Stewart, 231).

So, what went wrong at Disney? Stewart's point of view is pretty clear. Strategic planning's "scrutiny" coupled with Eisner's willingness to "intrude" on all sorts of matters at all levels around the company caused "dismay" among the executives (Stewart, 231), enough so that many of them were thinking about leaving.

You're a CEO. You like to know what's happening. You even like to push things to happen along the lines you select. What's wrong with that? Nothing, as long as you're a relatively small company. When you get big, things change.

Risk is avoided, opportunities missed, finance acquires new strength, power shifts to corporate staff - simply, inertia reigns (Adizes, 88).

CEOs pretty much know what to do, but sometimes they are unwilling to.

Actually, that is why Eisner was so successful. He came into a bureaucratic organization and initially had great success at shaking things up. Most of what he did worked. Ultimately, however, he couldn't stay successful. He couldn't or wouldn't trust his team to manage, even after he had broken up some of the most dysfunctional bureaucracies. That was his undoing.

Oh, yes. And what to do about strategy at Disney - or your company? My advice is, when it feels like a bureaucracy, it is a bureaucracy. Ditch the bureaucracy, if you have it. If you don't, nurture what you have.

References

Adizes, Ichak. Corporate Lifecycles. How and Why Corporations Grow and Die and What to Do About It. Prentice Hall. 1988.

Stewart, James B. Disney War. Simon & Schuster Paperbacks. 2005.

Posted by jackmixner at 01:30 PM | Permalink

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I thought relationship marketing was all about people. Make more acquaintances, build more relationships, sell more. Maybe not.

Let's redefine relationships. Let's say you're selling something. People are interested in buying, but don't really know what to pay or even whether they should buy, or what to buy. You need to help the solve the problem. The first step? Figure out how to give them something - a related product or service - free.

We have been working on this with one of my clients. He sells granite counter tops. To make the hole for the sink, he simply cuts out a bit of the sheet of granite, and, basically, throws it away. We've been talking about something different. Instead of throwing it away, he gives it, after proper edging, free, to his customer. It becomes a freebie. Customer gets a wonderful granite counter top - and a free matching cutting board. The counter top is less likely to become scratched by carving knives, looks better, lasts longer.

Why do this? Well, people ask for a bunch of quotes on counter tops, from all sorts of suppliers. My client has found a way to differentiate himself from the other suppliers. The free cutting board is enough to tip things his way.

What happened here? All things being equal, my client has tipped things his way by making them unequal. Buy from him get not only the best countertop available (I'm convinced - you ought to see his work) but get a free cutting board that matches your kitchen exactly. Who else gives that? And for free, at that.

Customers have choices. They can buy the cheapest option, which, without options, they generally will do. They could buy the most expensive option, something they're less likely to do. But, give them something free, and, amazingly, they're more likely to buy from you.

There're lots of other examples in Ariely's book. Magazine subscriptions. Homes. Basically, he points out why people make choices. If you think about how those choices are made, you can help them buy more of your products or services. Very powerful ideas. 

References.

Ariely, Dan. Predictably Irrational. The Hidden Forces That Shape Our Decisions. Harper. 2008.

Posted by jackmixner at 03:18 PM | Permalink

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IBM was at a fork in the road in 1955. They had a choice between two possibilities, one "safer" than the other.

• They could grow rapidly by focusing their efforts on computers, a risky vision at best as the number of installed computers probably numbered in the tens or hundreds.
• Or, basically, they could retain the status quo by slowing things down and focusing on what they did best, manufacture punch cards and the related rental equipment, all very profitable (Watson, 253).

What to do?

Anyone who knows anything about the Watson's - the father/son duo who consecutively managed IBM for years - knows exactly what they did. They, meaning Tom Watson's son and Al Williams, a senior manager, bet the farm, but in a good way. Their plan? Transform the company.

• They professionalized management, by installing a "chain of command, large-scale decentralization, a planning process," and "formal business policies (Watson, 253)." 
• They created an organization chart and split up some of the responsibilities that had reported to the Tom Watson, the father.
• Headquarters worried about computers and punch-card equipment. All the other products like "military products, typewriters, punch cards, and time clocks" (Watson, 254) were spun out into new divisions under their own management.

Another key change occurred away. It was driven by the market in a way, but it required a risk-taking attribute that ensured that IBM would continue to grow. The strategy is pretty simple stated: Make stuff, but don't customize it. In the IBM case that meant, sell computers, but figure out how to sell the same configuration over and over again. Yes, the initial few down the production line were hugely expensive, but over time the costs of manufacturing came down and they were able to take advantage of the scaling up of the manufacturing lines to reduce costs.

The first product IBM scaled up in this manner was a general purpose scientific computer that they pre-sold to government laboratories (Watson, 205). Later, they found out that there was only one little flaw in their plans. Their initial computer, called the Defense Computer, was initially priced at $8,000 a month. When production began, they found that the correct price might be as much as $18,000 a month (Watson, 228), obviously a big difference. First amazing discovery in computers for IBM: the customers still wanted the computer. That changed a lot of minds at IBM about the future of computers (Watson, 228).

The real transformation of IBM into a computer company didn't occur until the introduction of the IBM System 360, a 360 degree machine meant to be sold to both the scientific and business markets in all sorts of configurations. The investment came to more that $5 billion dollars, certainly a "bet the farm" undertaking. Three big problems presented themselves: hardware design for all the different configuration, and software design totaling millions of lines of code, all at the same time IBM was trying to manufacture its own electronic parts (Watson, 346-349). The biggest decision of all was whether to announce the complete line piecemeal, or to show it all at once. They chose the later and, even though they had to use mockups in the original product showings, ultimately pulled it off.

Mission statements (What is or product or service? What marketplace do we sell to?) actually play a big part in the story. Early on, IBM was a punch card company. It almost stayed that way, thus missing, almost, the huge growth in data processing in all its myriad forms.

Joe Nocera, writing in the New York Times, calls this one of the ten best business books ever. An interesting read.

Reference

Novera, Joe. The Best Business Books Ever? New York Times. 17 July 2008. http://executivesuite.blogs.nytimes.com/2008/07/17/the-best-business-books-ever-index.html?hp

Watson, Thomas J., Jr. Father Son & Co. My Life at IBM and Beyond. Bantam Books.1990.

Posted by jackmixner at 02:50 PM | Permalink

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Lots has already been said about Pausch's inspiring story. A bit of luck certainly played a part, what with a Wall Street Journal reporter paying his own way to report on the story. Charisma did as well. Pausch took the time to re-order the priorities of such lectures by addressing not only the audience, but the three children he would ultimately leave behind.

Interesting points from the section entitled "Enabling the Dreams of Others" (Pausch, 104):

• In order to help others, you have to have the time. Use time wisely.
• Pausch sees himself as a jerk growing up in that he knew all the answers and didn't listen very well. A professor befriended him and pointed out his problem. Luckily, Pausch listened - and passed it on. He shared with his students how they rated on the "Easy to get along with scale," (Pausch, 115). When they didn't listen, or chose not to understand, he intervened. They listened to what others were saying, sometimes painfully, but modified their behavior.
• Occasionally, people over-perform. What do you do? Applaud, yes. That's obvious. And what else? Assign a higher level task and see what happens.
• Start something that's bigger than you. Pausch helped create Alice, the Carnegie Mellon software teaching tool. The tool will never be complete, and that's good, say Pausch. The newer versions will get better and better (Pausch, 127) much like Disney's vision for Disneyland - it's never complete, it's always changing.

Randy Pausch can be pretty direct. He certainly lived his last months with different constraints than many of us. Practicing his time management skills became vitally important to him as he juggled his new-found glamour with the reality of a loving family who obviously will miss him.

Key points for me:

• When people over-perform, build a platform for them to shine, sometimes publicly. His classes were meant to be fun - and engaging.
• Teams are meant to work well together. Jostle them a bit when they don't, even if it means pointing out painful facts to members who are resisting. Working together is crucial. If you're failing at that, how can you fix it, now?
• Balancing work and family isn't as easy as some folks make it out to be. Keep trying.
• Finally, when thanks are in order, offer them up cheerfully.

Thank you, Dr. Pausch.

Reference

Pausch, Randy. The Last Lecture. Hyperion. 2008.

Posted by jackmixner at 02:52 AM | Permalink