Tuesday, February 28, 2006

Irreverant Thoughts on Railroads, Transportation, and Business Strategy

Seems like every business student and manager knows the proverbial story about the demise of the railroads in the early part of the 20th century. Presumably, it’s because “they thought they were in the train business, but they were actually in the transportation business.” This is supposed to be a profound strategic insight, and you’ve probably heard some variation of it.

I myself heard it again a few days ago after a speech I gave at a corporate conference. The meeting was held at a Disney property in Orlando. Those of you who follow my blogs will find it ironic that after my last two critical pieces about the Disney/Pixar deal, I wound up speaking inside the belly of the beast. But actually, after bringing my wife and kids with me and enjoying the Disney attractions for a few days, I wound up concluding, once again, that Disney knows how to do theme parks right. They’re really good at it. Build the theme parks around high-profile proprietary animation characters, which they’ve done, and you’ve got a helluva high-growth value proposition. In my speech, I acknowledged as such, but I also pointed out that perhaps Disney’s uneven-to-dismal track record in terms of profitability, return on assets, and stock value over the past decade is due to its corruption of that value proposition. It’s not just the shameless and excess exploitation of the characters which winds up diminishing their “specialness” and diluting the Disney brand. There’s something much deeper.

What Disney has done over the past 20 years is to deviate from its core value proposition and head off into many other unrelated businesses by virtue of redefining itself as an “entertainment” company. Accordingly, any market it got into was officially classified as entertainment. During its heyday, (or low-day) Disney was into movies, TV, cable, radio, music, newspapers, book publishing, travel, cruise lines, retail stores, consumer products, special effects and engineering, theater productions, sports franchises—and, oh, yes, theme parks and animation.

You can call these markets “entertainment”, I call them unrelated businesses. There’s no way to dominate all of them. Just because you can do Mickey Mouse great doesn’t mean you can do the Mighty Ducks professional hockey team great (which Disney finally unloaded). Disney’s focus and resources got spread way thin, and its financials reflected it—which, I believe, generated the obsessive exploitation of successful cartoon characters to recoup some income.

So after my speech (which, for the record, included many other topics—I’m not obsessed with Disney!), someone in the audience asked me the railroad-transportation question. He wondered why I had criticized Disney for expanding its strategy to “entertainment” when the prevailing mythical wisdom is that railroads should have expanded their strategy to “transportation.”

Great question! Here was my response: It’s one thing to carefully build on your core strengths and markets to expand their scope and appeal. It’s quite another to willy-nilly enter markets you know nothing about. The railroad industry could have asked: How do we improve service to build share and customer loyalty and repeat business—and charge more while reducing our costs to build margins? Next questions: How can we carefully take our skills and assets to move cargo, not just people? How can we build and expand our presence in both these sectors? How can we expand these sectors themselves to insure they remain high-growth? Are their any other closely related transportation sectors where our skills and assets can organically lead to dominance and strong, profitable growth? These questions are reasonable “transportation” questions.

But using Disney’s strategic logic, the railroads would have jumped into completely unrelated areas in the holy name of “transportation”: ships, cars, bicycles, even the burgeoning air travel business. That would have been suicidal.

It’s time to reconsider the railroad vs. transportation legend because it's misleading. Or maybe it's time to just bury it altogether.

Tuesday, February 21, 2006

More Post Nuptial Thoughts on Disney and Pixar

Got some nice e-mails from my February 15 blog on Disney’s acquisition of Pixar. One reader wrote: “Well, as a single company, I agree that these traits will not work together unless a Chinese wall is built. Separately, they both leveraged each other's strengths. One thing is for sure: If Disney's product iteration practices of milking every product line for what it is worth prevails, it will kill everything that made Pixar successful.” Nicely put, though if a Chinese wall is built, what was the purpose of buying Pixar rather than simply renewing the partnership?

Ostensibly, one of the big rationales for buying Pixar was to have Pixar people teach Disney people how to do animation right. But one reader with an inside scoop into Pixar wrote me this reality flash: “Pixar wunderkinds Catmull and Lasseter and their teams were already overworked at Pixar, and now they’re expected to manage unfamiliar Disney businesses and make great films too?” Interesting point. These guys aren’t bionic.

Some readers wrote that Steve Jobs will spur the necessary revolution at Disney. Frankly, I don't expect magic from Steve Jobs. . Jobs can create disruption when he’s in control. At Disney, he may on the board of directors, and he may be the largest individual shareholder, but his role will be far more infrequent and passive than it’s been at Pixar (or Apple). He won’t play a hands-on role either strategically or operationally. Hopefully he won’t turn into a Ted Turner, whose “largest individual shareholder” status at AOL Time Warner was pretty worthless in terms of impact.

Maybe we ought to forget Jobs and look at Disney CEO Bob Iger. He’s the one that will ultimately influence whether Disney learns from Pixar, or simply devours it. One reader, an executive in the media business familiar with Disney, wrote: “Iger, being far less of a control freak than Eisner, may just see and implement the wisdom of not allowing the cat in mouse's clothing to eat the mouse that's been purring at the box office.” We'll see if good intentions play out in practice.

My favorite response came from my 10 year old son. He went to his room, did his own research and e-mailed me a link to a great article written by Catlin Moran in the May 6, 2005 issue of the London Times (http://www.timesonline.co.uk/article/0,,7-1599218,00.html) . Remember the old Muppets TV show in the ‘70’s and ‘80’s and all the famous celebrities appearing on it? My son loves the old re-runs, but says the Muppets today aren’t nearly as funny. He’s not interested in today’s Muppets. Caitlin Moran explains why. The show used to have, in her words, “a genuine air of hippy joy, anarchy and inventiveness.” Then, years after it ended, Disney bought the Muppets in 2004. Since then, Disney has rolled out The Muppets Wizard of Oz made-for-TV movie that is noteworthy for its loud brassy special effects, wisecracks, cheap gags and its deviation from the gentle innocent humor of the original. My son complains that he can’t even relate to the characters like Gonzo and Miss Piggy any more. Further, according to Moran, “the problem is that Disney tends to think of its intellectual properties in terms of merchandising opportunities”, which explains why products like Muppet ring tones and screen savers were prepared before any actual film was. Do you get what’s going on, and why I worry about the fate of Pixar?

When it’s all said and done, will Disney shareholders benefit from this deal? In the short run, conceivably yes. It wasn’t a huge acquisition, it was all in stock, the parties knew each other pretty well, and most important, Disney animation was stuck in such a mediocre place that snaring Pixar was a coup. But, in the long term, my suspicion is that a multi billion Disney will not readily be changed by a tiny company filled with irreverent crazies who live and work hundreds of miles north of the hungry corporate beast. I hope I’m wrong, for the sake of all the parents, kids and investors who loved Pixar (my family is in all three categories). But if I’m right, expect the Pixar acquisition to have negligible impact on Disney stock, and look for another little iconoclastic animation company to create the next wave of breakthroughs.

Wednesday, February 15, 2006

Buzz and Minnie Shouldn’t Have Married

I think Disney and Pixar should have kept dating instead of jumping into wedlock. They had a great thing going, and I’m afraid this marriage is going to screw things up.

Right up until January, 2006 when the lovebirds tied the knot, I was singing the praises of the decade-long Pixar-Disney alliance. During that time frame, Pixar created films and Disney co-financed, marketed and distributed them—and both parties split the generous proceeds. It was a great relationship, and the fact that Bob Iger replaced Michael Eisner as Disney’s CEO meant that the relationship could continue anew because Pixar CEO Steve Jobs liked Iger with the same magnitude that he loathed Eisner.

That was then. Now, of course, the $342 million Pixar is part of the $31 billion Disney empire. Conventional wisdom says this is a great deal. From Disney’s perspective, it certainly looks that way. Pixar was a very sexy prospect for any suitor. During the term of its partnership with Disney, Pixar unleashed a remarkable six-for-six streak of blockbuster films featuring dazzling animation technology and hugely memorable characters like Buzz Lightyear, Nemo, and Mr. Incredible. The $3.2 billion in worldwide box office sales alone garnered by the Pixar productions dwarfed the comparable figures from Disney’s own animation studios, which produced lackluster films like “Home On the Range,” “Brother Bear,”and “Treasure Planet.” It got to the point that the half dozen Pixar movies accounted for more than half of Disney Studio’s profits. How embarrassing for a company that had cut its teeth with animation—remember Mickey and Minnie, Goofy and Pluto, that sort of thing?

Taken as an entire company, Disney’s performance was even more depressing. From 2003 to 2005, Disney’s sales and profit growth were negligible compared to Pixar’s 50% growth rates. In fact, by 2005, pipsqueak Pixar was posting profit and operating margin percentages that were more than six times those of Disney—to the point that nearly half Pixar’s revenue was profit! The smaller company’s return on assets was double Disney’s—even though Pixar didn’t even release a new film in 2005.

You get the picture (no pun intended). Acquiring Pixar puts the shine back in Disney’s animation business—and its financials. Disney also gets Pixar’s proprietary technologies and its nice cash hoard. Presumably, it’ll get all of Pixar’s exemplary expertise and talent too. And the $7.4 billion purchase price (for a $342 million company!) was in stock rather than real money. For Disney, the deal looked like a no-brainer.

What does Pixar get in return that it couldn’t get from an alliance? I’m still trying to figure that out. Maybe Pixar gets some deep pocket protection just in case the next films (“Cars”, etc.) are bombs. Batting 6 for 6 over the last ten years is a remarkable feat, and maybe Pixar executives were afraid they couldn’t keep up the perfect streak, nor cushion a box-office failure, nor maintain killer financials in the face of a declining DVD industry. Maybe it’s that now Pixar people regain creative control over Woody and Buzz and all the other characters. Maybe it’s that Steve Jobs—who suffered a near-fatal illness last year-- got burnt out running both Pixar and Apple and finally wised up as to the meaning of life. Maybe Pixar executives Ed Catmull and John Lasseter just wanted more high-profile jobs. Who knows? Your guess is as good as mine, but in light of Pixar's exceptional independent successes over the past decade, none of these reasons is persuasive as a strategic justification for jumping into bed with Goliath.

Frankly, I think the reason that Pixar went 6 for 6 is because it wasn’t a huge, deep-pocket company. Pixar people had to rely on their talent, agility, edginess, boldness, passion, collaborative culture, proprietary technologies and constant innovation. Now the entire company will be thrown into the bear hug of a massive, often dysfunctional media conglomerate. Will the “Pixar way” survive? Will the Pixar people stay? A lot of acquisitions which look great on paper wind up looking crappy in practice.

In fact, I’m left wondering if the factors which created value in the partnership will destroy value in the marriage. As an independent company, Pixar was all about quality and imagination, technology and storytelling, delight and magical animation. Disney is about quantity, leverage, promotion, distribution, and merchandising. Pixar averaged one film every 18 months, and sometimes postponed a film’s launch until it was just right. And Pixar people loathed the notions of film sequels and they doubly loathed any exploitation of their beloved characters. Disney has the opposite perspective: Crank out more films faster, market the hell out of them, build sequel after sequel, and expose the characters to the hilt in as many products and venues as possible, all in the name of leverage. Within an alliance, these differences made synergistic sense, and offered a nice check-and-balance to both partners. Within an acquisition, these differences can create deep and fundamental conflict. Now couple these differences with the vast disparities in corporate traditions and cultures (agile, entrepreneurial, and egalitarian at Pixar vs. layered, bureaucratic, and turf-ist and Disney), and you have a potentially explosive cocktail that might skewer this deal alongside so many other disappointing ones.

I wish they had kept on dating. They were such a fun, power-couple. Now my fear is that once both parties settle into the post-wedding daily life of marriage, Disney might gradually strangle the goose that laid the golden eggs. I’m not a fan of spousal abuse.

Wednesday, February 08, 2006

What Makes Rupert Run?

I just enjoyed a lively breakfast with Rafael Pastor, who is the CEO of an interesting company called Vistage International, based in San Diego. Vistage is the world’s largest CEO membership organization. It offers structured development programs and peer-to-peer coaching for CEO’s of primarily small to medium-sized companies. Vistage’s track record is remarkable; on average, its member companies grow 250% faster than their non-member counterparts.

But that’s not what I wanted to talk to you about. Rafael Pastor used to be a very senior guy at Rupert Murdoch’s News Corporation, a massive media empire that touches half the world’s population. In addition to several prominent international posts, Pastor ran the company’s U.S.A. Networks International, and accordingly, he wound up regularly interacting with the great man himself. While reminiscing about his experiences at News Corp, Rafael said that Murdoch’s great leadership could be summarized by five attributes:

1. He is an instinctive visionary. Murdoch doesn’t ignore data. But what’s special about him is that unlike many “professional” managers, he doesn’t simply rely on the data to make the big decisions. He draws from all sorts of available data on markets and his company in order to keep his decisions grounded, and he trusts his own experience, knowledge, and instincts about his business. Murdoch still has that wondrous trust in his gut about where the market is going and what his company can do to capitalize on it. So don’t expect him to make big strategic decisions based strictly on a spreadsheet analysis. And don’t expect him to be afraid to take chances in pursuing big picture unchartered directions that will set News Corp apart from his competitors.

2. He has an intuitive sense of what appeals to customers. Unlike many media moguls who operate in rarified corporate atmospheres and rely on sterile market research for insights about customers, Murdoch makes it a point to really, truly understand the average customer. What are their lives about, what turns them on, what are they really like? The more a leader talks to customers, reads stories about them, asks questions about them, probes about their likes and dislikes, and observes them in action, the more he or she can feel confident about using “intuition” to make bigger decisions about what they’d be willing to buy.

3. He pays attention to details. Murdoch may sit on a $55 billion asset throne, but the man’s antennae are remarkably attentive to key operational, pricing, and marketing decisions that are germane in every pocket of his global empire. That sort of attention does two things. One, it gives everyone in News Corp the message that discipline and solid execution are expected in any leadership position. Two, it allows Murdoch to be that “instinctive” visionary and “intuitive” customer advocate without falling prey to recklessness or just plain stupidity. In my upcoming book Break From the Pack, due mid-year, I describe effective leaders as having a “passion for purpose” and a “passion for precision”. Too bad the book is already in production. I would have included Murdoch as one of my exemplars.

4. He’s an excellent dealmaker. Let’s face it, the track record of big media mergers and acquisitions stinks. (Think about the dismal deals like AOL and TimeWarner, Disney and CapMarketsABC, Viacom and CBS, Matshusita and MCA, Sony and BMG, Vivendi and Universal, just for starters). Yet here’s a guy who’s an outright serial acquirer and his track record is darn impressive. I don’t think dealmaking is part of anyone’s DNA. Rafael agreed that Murdoch’s effectiveness is in large part due to the issues in #1, 2, and 3 above. That means that his acquisitions will be attuned to cutting edge visions, deep customer needs, and a commitment to detail-rich execution. And that means they’re more likely to succeed.

5. He leads by inspiration. Murdoch, for all his wealth and power, is not what you'd call a "strong dominant" personality. He’s not particularly “charismatic” either. Yet people who work for him sense that he’s extraordinary. People want to please him. Maybe it’s his low-key devotion to his business. Maybe it’s his lack of outsized ego. Maybe it’s his ability to forge new directions while staying committed to the customers. Maybe it's that he leads by showing others that he too is honestly inspired by the work he does. All I know is that even someone as successful as Rafael Pastor still talks about Murdoch with notable admiration and attachment.

These five attributes are not part of your normal MBA curriculum, but they're worth considering and cultivating if you’re aiming for a senior leadership career.