Oren's blog

"Why GE Doesn't Deserve The Applause" by Oren Harari. July 22, 2008

I’m beginning to sketch out my next book and I can’t figure out how to position GE in it. Even though I’ve written some nice things about GE in prior articles and books, I have a confession to make. I’ve never completely understood the seeming success of GE’s business model, nor its titanic reputation in the business community.

You see, GE violates what I and many other experts consider a fundamental tenet of competitive advantage: Companies that are focused on dominating one market, or just a few, select, synergistic markets will perform better than companies which have a presence in numerous and disparate markets. Conglomerates spread their resources and management attention too thin over diverse businesses that often require vastly different sets of customers, value propositions, competencies, infrastructures, technologies, and networks. Research has documented the frequency with which individual companies once buried in conglomerate portfolios performed significantly better once they were divested, a.k.a. liberated from the centralized, standardized, bureaucratic tentacles of corporate conglomerate headquarters.

Bear with me on one more paragraph of “acadamese” and then I’ll deal with GE directly (or skip right to the next paragraph). The term “conglomerate discount” applies to the finding that highly diversified companies are, and should be, valued lower than less diversified companies. For example, writing in the International Journal of Theoretical and Applied Finance in 2006, Swiss professors Manuel Ammann and Michael Verhofen note that a conglomerate can be regarded as an investor’s option on a “portfolio of assets” (the companies bundled as one conglomerate package). By splitting up the conglomerate, they point out that the investor now receives a portfolio of “options on assets”; that is, the investor now has specific choices among a variety of assets that used to be part of a bundle but are now separated in the free market. Ammann and Verhofen demonstrate that for investors, the value of a free-market portfolio of options (your carefully determined choices among independent companies for investment purposes) is “always equal to or higher” than the value of simply giving you, the investor, an option on one bundled portfolio, like a conglomerate. Small wonder that conglomerates typically underperform the S & P 500.

So both in terms of performance and investment, conglomerates are a lousy bet. And since GE is a conglomerate of widely diverse companies (more on this shortly), why is GE considered the paragon of management? Well, everyone immediately points to the fact that under Jack Welch’s 20 year reign (1981-2001), GE’s market cap grew from $14 billion to $410 billion. True, but why? I suggest that it was because of Welch’s enlightened and pigheaded commitment to downsizing big fat pockets of non-value adding personnel, divesting long-standing poorly performing business units, attacking the company’s history of paralyzing bureaucracy and complacency, violently shaking up a rigid top-down hierarchy, and forcing managers to be accountable to new, aggressive performance standards. The combination of Welch’s unique leadership skills, the wealth of low-hanging company fruit to pick, and the investment community’s embrace of the practice of “managing earnings” during the 1990’s—all led to healthy financials, a rock-star status for Welch, and enthusiastic, transfixed investors (and business writers).

But everything’s changed. The low hanging fruit’s been picked, the markets have experienced constant disruption, “managing the earnings” is less tolerated, and global competition has intensified to the point that it’s much much harder to meet the famous Welch standard that every GE business be #1 or #2 in the industry. In fact, check out GE’s returns over the last 50 years and you’ll see that apart from the Welch years, the growth in stock returns has, on average, been modest. Under current CEO Jeff Immelt’s seven year tenure, GE’s stock has plummeted by 30%.

I say that it’s all because GE is a conglomerate, and a conglomerate—especially an enormous global $170 billion conglomerate like GE--is much harder to steer towards sustained success in today’s economy, even for someone like Immelt who is arguably a very accomplished business leader.

Now I’m sure that Immelt would vehemently object to my analysis. I understand from people who know him that he’s a genial guy, but the quickest way to tick him off to suggest that GE is a conglomerate. From his perspective, GE is something like an intimate union of synergistic teams operating under a common thread of culture and values.

Come on, Jeff, cut the crap. GE’s own website cites its market presence in (alphabetical order) appliances, aviation, consumer electronics, energy, finance (individual and business), health care, lighting, media, entertainment, oil, gas, rail, security and water. (By the way, that list doesn’t include the recently divested insurance and plastics businesses). There are so many diverse products and services within that classification that GE has to list them within an “A to Z” list, and that’s just for starters on a general website.

So spare me the noble rhetoric about synergy and common culture. GE is a bloody conglomerate! It’s a testament to Immelt and his management team that they’ve actually done a pretty good job of meeting growth and earnings projections while riding such a humongous multi-limbed beast. But the Street isn’t impressed, because investors seek future earnings and cash flow, and regardless of how good Immelt and his team are as leaders, they’re managing (uphill) a massive disparate structure trying to cope with massive disparate markets—and investors are rightfully skeptical.

You know what I’d tell Immelt? “Shrink and grow, baby!” Focus on just a very few fast-growth future-oriented markets that you’re already in—like alternative energy, new paradigm aviation engines and personalized medicine—and dump everything else. Okay, keep GE Capital, but shrink it, and dump NBC, dump railroad, dump appliances, dump lightbulbs, just go down the list and keep only the (few) seeds of the future. Trim the company (rather, put it on a crash diet), clean up the balance sheet, liberate a ton of cash for new investment, and focus your leadership skills towards helping GE dominate a few select future-growth sectors with innovation, customization, and scale. What worked for Welch in the ‘80’s and ‘90’s won’t work today.

I say: Jeff, if you de-conglomeratize GE, you’ll be a bigger hero than Welch. And, just in case you care, you’ll be a “super hero” in my next book.

"The Value of Dominating Underserved Markets" by Oren Harari. July 9, 2008

If you want to win a quick bet, ask your friends which car rental company is the biggest in North America. If they say Hertz or Avis, you can smile and shake your head—and pocket your winnings. Then titillate them further and say that this company is the most profitable car rental company too.

It’s Enterprise. What’s the secret? Well, first, a genuine institutional commitment to customer service--which yields an exceptional customer loyalty. (As rated by independent players like J.D. Powers and Market Matrix, Enterprise consistently receives the highest customer satisfaction scores in the industry).

But the real competitive whammy is that the company’s commitment to service, and its extraordinary growth, has been wrapped around a unique business model. Rather than competing directly against huge powerhouses like Hertz or Avis in airports and hotels, Enterprise grew by building, and dominating, a previously underserved market—in this case the “home city” market. In hindsight, it seems brilliantly obvious how often we need a car in our own town or city—like when our car needs mechanical repair, or is in an accident (or stolen), or when out-of-town relatives come stay in our home and need a car for just a couple days in the middle of their holiday, or when an out-of-town business associate quickly needs a car for a few hours in the middle of the day in order to get to a couple appointments. At that point, a nearby Enterprise office (strategically located, there’s a branch office within 15 miles of 90% of the U.S. population) will send someone to pick you up, provide you with a genuinely positive concierge service, and then after you’re done with the car, drop you off. Enterprise still dominates this lucrative market, and what’s more, the growth of the brand’s customer loyalty became so profound that Enterprise was able to expand cautiously, but profitably, into the big competitors’ airport territory.

I thought about Enterprise when I received a note from Bernard Rapoport describing his gala 90th birthday party in Washington D.C. earlier this year. I’ve written about “B” in a couple of my books. Remarkable fellow. Still very active in a variety of ventures, even after retiring ten years ago from the CEO position in the company he started over fifty years ago: American Income Life Insurance. American Income is a billion dollar insurance company has been rated by A.M. Best, one of the country's oldest and most respected insurance ratings company, as A+ (Superior) for overall Financial Strength.

But I’ll bet you’ve never heard of American Income. That’s because it doesn’t compete directly against the high-profile behemoth insurance powerhouses across all markets. (Initially, it did, and got creamed before switching direction). The company’s successes are due to the fact that it focuses on providing specialized products and unique services for what used to be an underserved market: lower income working families, labor unions, credit unions, and some professional associations. “Labor” is American Income’s core market, and I remember when I first met “B”, he told me that every employee at American Income is a card-carrying union member—including himself!

During his birthday speech, here’s how Bernard Rapoport described the origin of the American Income business model in the early 1950’s:

“When I was in New York in the early days, the company wasn’t doing well; it wasn’t growing. I looked up at the skyline and saw all the skyscrapers that belonged to the large companies like Metropolitan Life, Prudential Life, Equitable life, etc. I shook myself and said, 'I can’t compete with those companies. They’re too big! What I’m going to do is I’m going to give the big companies 235 million Americans and I’m going to take 15 million Americans for American Income.' I went to the labor leaders and told them that we were going to be the union company. Everyone in our company would be a union member and from that point on we were exceedingly successful.”

What’s the lesson that Enterprise and American Income have learned? Great customer service is a great idea, but its market and financial impacts are logarithmically expanded when that great service is applied to virgin nascent market spaces that you can ultimately dominate. So instead of rabidly competing with everyone else in the same arena for scraps of market share the way hungry dogs fight for a lone piece of meat, always look for those untapped, underserved, potentially lucrative markets—and then commit to doing whatever it takes to grow them, and “own” them.

"What Do Amazon and Zipcar Have in Common?" by Oren Harari. June 27, 2008

Some of you might respond “The answer is that Amazon is now selling Zipcars!” You’d be wrong. Some of you might respond “What the hell is a Zipcar?” That’s probably where we need to begin.

Zipcar is a Cambridge, Massachusetts-based company that allows its members to reserve a car online for rental (no waiting in line, no face-to-face human interaction at all), then go to one of numerous small facilities scattered around city neighborhoods throughout the country, then locate “their” parked car, unlock it by waving their pass card over a sensor on its windshield, grab the key hanging inside, then drive it away for the block of time they’ve reserved (at $6 to $10 an hour), and finally return the car to the same parking facility after filling up the tank. Fast-growing Zipcar boasts 200,000 members in 50 U.S. cities choosing among 5,000 cars. The company is also in Vancouver and London, and is expanding into 15 European cities. Customers tend to live smack in the middle of urban areas where driving and parking cars is a major hassle. My book agent Lynn, for example, lives in Manhattan and likes Zipcar so much that she sold her own car. As a Zipcar member, when she needs a car for a few hours, or for a day over the weekend, she simply signs up for a car and picks it up in a building within a short walk of her townhouse.

Unless you’ve been in a deep slumber for the last couple decades, Amazon needs no introduction. But did you know that Amazon’s new, fast-growing business is renting out computer capacity? Amazon has such vast, and now excess, capacity in servers and digital storage that its new category of customers is the nearly 400,000 firms that don’t want to build and maintain data centers and related infrastructure but are perfectly willing to rent it from a reliable brand like Amazon.

So what, then, do Amazon and Zipcar have in common? They have both seized a huge opportunity: frequently, customers today prefer to borrow and rent rather than to acquire and own—especially if the rental provider can make their lives easier, happier, more efficient, and more productive. Consider trends like outsourcing, “cloud computing” (computing and storing data on the Web rather than on individual local computers), InnoCentive-type web sites (where companies post thorny scientific and technological problems that their own staffs can’t figure out with the goal of attracting—with appropriate incentives-- imaginative responses from independent minds around the world), and the increased strategic allure of deep collaboration and intimate partnership among companies rather than outright acquisition. These trends are a natural offshoot of something really big: In today’s marketplace, where customers are overwhelmed by information and choices, and where vendors have to maintain lean agility and perpetual innovation—sometimes it makes a lot more financial and strategic sense to rent the best talent and resources rather than to pay big bucks (and make even bigger commitments) to own them outright.

From A to Z, Amazon to Zipcar, we’re seeing the emergence of something big. Are the leaders in your company discussing how to capitalize on it?

"This Bud's For InBev" by Oren Harari. June 20, 2008

Seems like InBev is serious about acquiring Anheuser-Busch (A-B). The Belgian brewer has made an unsolicited offer of $65 a share, or $46 billion, in cash. That’s a significant premium over A-B’s current stock price.

The financial and legal shenanigans are already taking place. A-B is looking to cut a side deal, maybe with the Mexican firm Grupo Modelo, to make itself less attractive. That has annoyed InBev CEO Carlos Brito, who warned A-B’s board that “…we believe it is important for you and your Board to understand that our proposal to combine with Anheuser-Busch by means of acquiring all Anheuser-Busch outstanding shares for $65 per share in cash is made on the basis of Anheuser-Busch’s current assets, business and capital structure.” He’ll probably have to up his bid, maybe to $70 a share. At what point does the price become untenable?

Further, a number of other strategic issues should be taken into account, and they usually aren’t because the dealmakers usually see only the financial and legal aspects and ignore the so-called “soft” stuff that can easily screw up the rosy post-merger projections. If I was advising Brito, I’d warn him about four things to pay very serious attention to:

• Good old fashioned politics. A-B is about as “American” a brand as one can imagine, Budweiser is the "King of (American) Beers", and there might be some stiff political resistance to a “foreigner” coming in—especially in a political climate where free trade and outsourcing are hot button issues. Already, Sen. Claire McCaskill, D-Mo, has formally urged the A-B board to reject the offer. Many local political groups have done the same. Is this just some normal posturing, or is it more than that? If neighbor Barack Obama of Illinois gets into the fray in an election year (remember, the Teamsters, who represent many of the A-B drivers, have endorsed him for President), things could really get interesting.

• Good old fashioned unions. Teamsters or otherwise, they don’t like the deal, and unhappy employees are not something an acquiring firm would like to inherit. This is especially salient because InBev has a history of tough approaches with unions. The company has laid off hundreds in five countries in Europe, where it’s pretty hard to lay off anyone.

• Good old fashioned differences in business philosophies. This one could be a big wild card. A-B is a marketing machine. Spend those umpteen dollars on a gazillion ads and promotions, no holds barred. Focus on innovation in marketing rather than on product development. That’s how—despite stagnant earnings and an unimpressive stock valuation-- it’s maintained a hefty market share with a pretty mundane lineup of beers. In contrast, InBev grows by acquisitions followed by aggressive cost cutting. You see the potential problem here?

• Good old fashioned fantasy thinking. In my books and articles, I’ve pointed out that there are indeed good strategic reasons for acquisitions, like obtaining cutting-edge technologies or gaining a quick entre into a fast-growing market. But InBev’s strategy is different, and far riskier: It wants to buy market share, plain and simple. With one stroke of the pen, its current tiny presence in the U.S.would balloon to a nearly 50% share of the largest beer market in the world. That sounds nice, but consider: The U.S. beer market is now fragmented and hypercompetitive, new micro breweries with tasty products and loyal fan bases are springing up left and right, and most important, the U.S. market as a whole has been growing very slowly for years. On top of that, InBev’s basic premise is that A-B’s customers will cooperate with the deal; that is, they won’t defect. But there’s no guarantee of that, as so many serial acquirers have found. And if InBev’s cost-cutting campaign wipes out A-B's expensive marketing initiatives that have propped up market share for years, the problem could be aggravated further.

So......Buyer---beware.

"How Getting Stuck in an Elevator Can Help Your Business" by Oren Harari. June 13, 2008

My wife and I recently had dinner with our friends Jean and Steve, who told us a tale that was not only amusing, but one that will help you make a very important business decision.

Seems like earlier this year, Jean and Steve went to Arizona for major league baseball’s spring training. A lot of fans do this. One day, they got tickets to a game featuring their beloved San Francisco Giants playing at Diamondback Stadium in Phoenix. They took the elevator to get to their seating level--and it got stuck. And stayed stuck.

After a few minutes of solitary waiting, Jean pressed the emergency button and sure enough, a voice from the outside came through. Muffled and blurred, but at least a voice. So far so good. Then the conversation began in earnest:

Jean: “We are stuck in the elevator.”
Voice: “Where are you?”
Jean: “In the elevator behind home plate.”
(Pause).
Voice: “Where?”
Jean: “In the elevator behind home plate, the one that goes up to the box suites.”
(Pause).
Voice: “Where are you exactly?”
Jean (a little irritated): “We’re in an elevator behind home plate at the stadium.”
Voice: “Where?”
Jean (a little more irritated): “The baseball stadium. In Phoenix.”
Voice: “Uh, where?”
Jean: (sharply): “The stadium. In Phoenix, Arizona.”
(Pause).
Voice: “Hmmm”
Jean (exasperated): “Excuse me, where are you?”
Voice: “I am in India, madam, and if you give me more specifics, I will be glad to assist you. Where are you?”

At this point, Steve muttered a few choice expletives, then took matters into his own hands. He slowly forced the elevator doors open, and both he and Jean were able to lift themselves up the three feet to the next level.

Over dinner, the story was funny, but at the time, they felt very frustrated. My wife, who has a slight phobia about elevators to begin with, said she would have panicked. Either way, it wasn’t the greatest moment in outsourcing history.

So here’s the lesson for you business leaders. In today’s global economy, you should always be looking for outsourcing opportunities, even offshore. You should do it not merely to lower your upfront costs, but just as important, you should do it to get rid of non-value-adding functions and assets that suck up your resources and distract you from focusing on the innovations in products and customer care that your company needs to thrive. It makes sense for the Diamondback leaders to outsource the telephone response unit in the elevators. They should concentrate on constantly improving amenities like the baseball team, the seat comfort, ticket selection, food, the lawn on the field, fan loyalty programs, and so on. So outsourcing elevator maintenance is a sensible idea, and frankly, with today’s global communication and information technologies, it technically shouldn’t matter that the call center work is done in India.

But—and it’s a big but—never let your outsourcing activities adversely impact the quality of your products and customer service. (Actually, an increasing number of imaginative companies are working with their outsourced partners not just to reduce costs, but to create an improved environment for products and service—but that’s another story).

In other words, don’t let your quest for short-term cost savings damage your relationship with your customer. Like many companies, Dell found this out when it had to bring back a number of call center functions from India because American customers were complaining that the service reps could not speak clearly or truly understand the subtleties of their (the customers’) problems.

Remember, the customer doesn’t differentiate between you the provider and your supply chain partners. If your partner screws up, the customer blames you—in this case, the Diamondbacks organization. So always stay on top of these supplier relationships, especially when they touch the customer. If customers are in any way distressed by the relationship, fix it or cancel it. Yes, capitalize on opportunities to farm out work that’s not your core competency, but remember that customer care must always remain your top priority.

"Authenticity Matters" by Oren Harari. June 3, 2008

In my book Break From the Pack, I argued that authenticity is essential for customer care. That is, if you want to use customer service as a point of brand differentiation and a path to competitive advantage, I wrote that “…you must genuinely believe in what you’re doing—and show it. You must commit to it with your entire heart, or you shouldn’t try it at all.” I wrote further that as a leader, you must insure that authenticity is not limited to idiosyncratic occasions or demonstrated by just a few fanatics, but rather is institutionalized so it becomes a core part of the way the firm (and all its employees) do business.

Sounds reasonable, right? Unfortunately, many customers see true vendor authenticity as a relatively rare phenomenon.

Recently, my family and I stayed on a Disney property in Orlando. Our first morning, I called downstairs to try to arrange a schedule for the day. Like most customers who don’t fit into a vendor’s carefully developed standardized “plan”, our wishes (for which we were fully prepared to pay) had some unique twists. Repeatedly, the “cast member” (Disney-speak) at the other end told me, without a drop of empathy and without a single “how about this?” alternative suggestion, that no--she couldn’t do that; no, she couldn’t answer that; no, that wasn’t her office’s responsibility; no, she couldn’t tell me who to talk with; no, no, no, no…. After 15 minutes, I was so frustrated that I finally blurted out: “I’m paying an arm and a leg for a deluxe room on your premium floor, and you’re telling me you can’t do anything for me, can you?” Her response, without a shred of embarrassment, was “That’s right.” My rejoinder was a snappy “I’m really disappointed. Good bye.” And then do you know what she said—mechanically, emotionless-- right before I hung up? I kid you not:

“Have a magical day.”

I had to laugh. They all say that at Disney. Of course, in this case, it was just words. They were as meaningless as some of those snazzy marketing promotions and noble mission statements and sweet-sounding communications memos to employees that turn out to be just words and no more. For me and my family in Orlando, that experience was more than inauthentic. It was demeaning. We managed to have a good time on our holiday, but we remembered…….

In contrast, because it’s relatively rare, customers know when they experience genuine and deep authenticity, and it affects them profoundly. Last month I was called to jury duty. I intellectually understood, and accepted, my responsibilities as a citizen. Nevertheless, I confess that I arrived at the courthouse with a mixed sense of resistance, dread and resignation.

As it turns out, I didn’t have to serve. The case was apparently plea bargained, and after several hours of waiting all 70 of us were sent home. Yet I am still blown away when I reflect upon the authenticity in the experience. First, upon arrival at the jury waiting room, I was greeted with a sincere smile by the staffers. I was thanked immediately for coming. Everyone who came was repeatedly and profusely thanked for coming. Based on the results of opinion surveys, the waiting room was Wi Fi’ed for laptops and equipped with four computer terminals for those without laptops. Coffee and tea and cookies were available. The chairs were comfortable, the room light and airy. A judge on another case came in and with warmth and humor explained how our roles fit into the process of justice and why our presence was important even if we didn’t actually serve on a jury—and he thanked us again. Whenever any of us had questions, someone on staff was available for a quick response. Every 20 minutes one of the staffers would go in front of the group and brief us on what was happening downstairs among the lawyers and how it might impact us. After answering any questions, the staffer would (each time) tell us a corny joke, then apologize for keeping us waiting, and once again thank us for being there.

Sure, we were all happy to go home after nearly four hours, but I gotta tell you—I feel a lot better about jury duty than I ever have. The experience I had wasn’t full of fancy expensive bells and whistles (like at Disney World, for example). It just had a lot of personalized and institutionalized authenticity. The place reeked of it. And that made all the difference in the world.

You know why? Here’s the secret, and whisper it to all your sales and marketing folks, to all your service people, to anyone whose work will somehow touch and impact the customer’s experience:

As customers, we are absolute suckers for authenticity.

"Welcome the Wolverines" by Oren Harari. May 21, 2008

A quick postscript to last week’s blog about Microsoft-Yahoo (and then I’m done with this subject, I promise): Speaking strictly professionally, I view Carl Icahn (the old corporate raider, greenmailer and current CEO of the hedge fund Icahn Capital) the way I would a wolverine. I see both of them as ruthless, fanatically determined, and exceedingly dangerous when crossed. Since I wrote last week’s blog castigating Jerry Yang for failing to embrace Microsoft’s lofty life-support offer of $33 a share, Carl the Wolverine has entered the fracas with the obvious question: Where the hell has Yahoo’s board of directors been all this time?

Of course, we know the answer, and the answer transcends Yahoo. Boards of directors are supposed to serve as a check to CEO power run amok. They are supposedly responsible for fiduciary oversight on behalf of shareholders. In reality, they are often a joke. In many companies, they’re cronies of the CEO (who often has chosen them). Or they’re part of a good-old-boys network operating with the implicit understanding that their job is to lob softball queries to the CEO without embarrassing him/her. Or, in a classic follow-the-money scenario, they make sure not to jeopardize their lucrative “director” gig by doing things like, well, asking uncomfortable questions and holding CEO’s accountable for dumb decision.

That’s where Icahn comes in. As a self-professed shareholder advocate, he has been a royal pain in the butt to a number of lethargically performing companies laden with entrenched executives--like TWA, Motorola, and Blockbuster, among others. Sometimes he wins, sometimes not, but his “M.O.”, often sorely needed, is to shake up the complacency of top management when corporate performance has stagnated and shareholders are long-suffering.

Icahn Capital has bought 4.3% of Yahoo shares, and along with allies like hedge fund investor John Paulson (3.7%) and old warrior T. Boone Pickens (.75%) Icahn is agitating to unseat Yahoo’s board and replace it with a new slate that would be more responsive to insanely generous offers like Microsoft’s.

Of course, before we cast Icahn as a hero, let’s remember that like all wolverines, he and his ilk can be mindlessly destructive. Sometimes, these “shareholder advocates” are so self-centered and short-term in their approach to the business (‘do whatever it takes to raise my share price so I can clear out with a fat return on my investment, damn the consequences’) that the longer term prospects of the firm are seriously damaged.

For example, I remember back in 2003, then- CEO of Kodak Daniel Carp unveiled his grand plan to dump much of the cash-cow film business, cut annual dividend by 72 percent, and plow billions into building a strong presence in the fast-growing digital imaging market. A lot of wolverine investors howled (which ironically helped depress their stock by the way). Their reasoning was that Kodak should have used its income and free cash flow not for the long-term risk of transformation, but for supplying investors with juicy dividends and for temporarily propping up the old business to get it ready for sale. Let Kodak die if the price is right, snarled the wolverines, which would have been a justifiable option if Kodak leaders were clinging to a dying business model. But they weren’t. To their credit, Kodak leaders ignored the nay-sayers and moved aggressively towards their new goals. Kodak is still shaky today, but at least it is off life support and I wish its current leaders luck.

Sometimes the wolverines lose themselves in a feeding frenzy. Remember how “Chainsaw Al” Dunlap systematically gutted Scott Paper and Sunbeam in the 1990’s? Dunlap never lacked for “shareholder advocates” who loved his approach, because they were able to bet on Dunlap to eviscerate the companies he ran and then carve up the carcasses to sell off at the most attractive prices. Who cared that what Dunlap was doing was essentially destroying companies and hence participating in a grotesque parody of “creating shareholder value”? The wolverines loved it.

Having said all this, sometimes shareholders need those wolverines when it’s clear that CEO’s and boards of directors are either paralyzed with incompetence, or serving their own interests more than shareholders’. And even though I’ve argued that Microsoft would not be wise to do this deal (see http://www.harari.com/blog/index.php?/archives/169-Poor-Goliath-Seeks-a-Bride.html), I think Icahn is absolutely correct to put public pressure on Yahoo’s directors to justify why they didn’t leap at it. I think it’s fair to state the following challenge to Yahoo’s senior leadership and board of directors: Please unveil a concrete growth plan that will arguably raise investors’ confidence to the same level of stock value that Microsoft was offering, or thanks for the memories and let someone else take the helm.

"Jerry Yang's Empty Nest" by Oren Harari. May 13, 2008

I have a friend who will be an “empty nester” this fall. The last of his kids are off to college, and he and his wife will have to figure out what to do with each other and the rest of their lives. It’s a bit scary, he confesses, but he’s up for the next phase of his mortality.

Too bad Jerry Yang isn’t. Yang, as you know, is the CEO of Yahoo, the same CEO who turned down Microsoft’s $47.5 billion acquisition offer. Those of you who follow my blogs know that I was critical of Microsoft’s pursuing this deal (see http://www.harari.com/blog/index.php?/archives/169-Poor-Goliath-Seeks-a-Bride.html). I thought it was a lousy buy. Still do.

On the other hand, from Yahoo’s end, Yang’s refusal of Microsoft’s offer is, financially speaking, astonishing. Microsoft was offering $33 a share, a 62% premium over Yahoo’s closing prices during the mating dance between the two companies. The only logical reason to turn down the deal is if your own growth strategy will yield greater value for shareholders than the Microsoft offer.

Fat chance. To be sure, Yahoo is a giant Web presence, boasting mega-traffic and an admirable 3 hour average time that visitors spend on the site per month. The only trouble is that over the past few years, the company hasn’t figured out a way to monetize that traffic into sustainable and profitable growth. Microsoft CEO Steve Ballmer offered Yang a magic bullet to solve his company’s woes in one fell swoop, and Yang threw it back in Ballmer’s face.

Yang’s rejection of Microsoft has little to do with logic. It has everything to do with psycho-logic. You see, Yahoo is Yang’s baby. He fathered (mothered?) it with David Filo. He can’t bear to see the offspring leave home forever, especially into the embrace of a new lover in Seattle. He can’t deal with the possibility of the empty nest.

It’s not about money. Yang doesn’t even take a salary at Yahoo. Based on his stock, he’s a billionaire one way or the other.

It’s about ego and fear. If Yahoo is swallowed by Microsoft, what’s Jerry going to do with the rest of his life? How will he deal with no longer being the top dog alpha male independent rock star who started and runs one of Silicon Valley’s sexiest dotcoms? How’s he going to deal with his “kid” running off to join the “Evil Empire”? As Bay Area software consultant Lloyd Kurzweil says, “He’s thinking of himself, not the company.” We all think about our own welfare, but in a publicly traded company, the CEO’s primary fiduciary responsibility ought to be to shareholders.

Over the years I’ve seen this syndrome pop up with some entrepreneurs. They can’t let go of their baby. When it’s time to sell, or even when it’s simply time to hire some new senior managers and let them run the show, or even when it’s simply time to delegate more control to existing managers, some entrepreneurs grit their teeth going forward. A few simply can’t go forward at all.

Once again, if Yang had a legitimate growth plan that would surpass Microsoft’s offer, I’d applaud his efforts to stay independent. But what is it? There are rumors about a “partnership” with Google. Even if such a partnership passed the antitrust test, I predict that Google would eat Yahoo alive. And frankly, there’d be little benefit for Google to go through the hassle.

Some say that all this is a bargaining ploy for a higher offer from Microsoft. I doubt it. I think Microsoft CEO Steve Ballmer was unwise to make the offer in the first place, but kudos to him for controlling his own ego and backing off when the ask price became absurd. Some analysts are predicting that Yahoo’s stock will sink down to $21 once the investment community is 100% certain that no Microsoft deal will happen.

$21. Compare it to $33. Then tell it to shareholders. That’s some nest Jerry Yang is protecting.

"Lessons From Swagelok" by Oren Harari. May 6, 2008

So a couple weeks ago I was in Athens, Greece, addressing a group of Swagelok executives and independent distributors of Swagelok products from Europe and Africa. (Swagelok, based in Cleveland Ohio, is a billion dollar global supplier of many vital manufacturing products like tube fittings, valves, gauges, transducers, regulators, hoses, filters, and a whole host of welding and fluid systems). My seminar was about strategic collaboration for competitive advantage, and I hope the participants learned something from it. But I myself always learn from my clients, and I'd like share with you four wonderful points that the Swagelok folks raised in the course of our discussions.

1. Simon Cooke, based in England, threw out a great observation: “Without mystery, there is no margin.” He was referring to the fact that regardless of a company’s size and marketing budget, if its product/service mix is basically conventional and “me-too”, margins will inevitably shrink. IBM CEO Sam Palmisano once echoed this sentiment: “If you do what everybody else does, you have a low margin business.” I wish more executives in all industries understood that all the size, scale, scope, reach and marketing pizzazz will not compensate in the long run for products that are mundane and “common”. It's when products and services break new ground—when they invoke some “mystery” and excitement—that margins will follow.


2. Hans-Peter Knippel, based in Germany, pointed out that one way to keep a company agile, brain-based, customer-focused and collaborative is to create digital networks that would bind all relevant constituencies—Swagelok employees, distributors, and customers, for example—together in one seamless grid. I loved this concept. Imagine, I suggested, if anyone in the Swagelok “community” could immediately access the right people in that community to obtain mission-critical information, or solve common vexing problems, or share important data and vital resources, or form a project team to pursue common goals. The capacity to digitally connect with the right people inside and outside the organization is the next wave of the future for any company, as far as I’m concerned. The people at Cisco Systems agree; they’re already pursuing what they call Cisco 3.0, the hardware building blocks for constant, real-time interaction and information exchange regardless of location. Ask your kids—they already know the enormous power of virtual communities like Facebook, MySpace and Ning. Maybe you should make sure that your company’s next consultant is no older than 16.

3. Pierre Fischer, based in Germany, with plenty of experience in Africa, observed that the most imaginative ideas about product application often come from customers in developing countries who use that product. Their resources overall are often so slim that they have to get really creative, so much so that they often use the products in a variety of ways that the vendors never anticipated. That struck a bell with me. I’ve been amazed when I’ve seen the creativity of mechanics in developing countries who fix things and make them work when they have nothing but the most rudimentary resources at their disposal. Pierre Fischer’s point is that if the vendor really “listens” to customers in developing countries—i.e., really observes what they do with products and why, rather than just view those people as a “sale”—then that vendor can glean some amazing clues as to new products, new product uses, and new markets.

4. Everyone discussed the importance of execution, and in that context the concept of time emerged. Time can either be a debilitating cost (when it drags on and on before decisions are made or things get done) or a value-adding currency (when it reflects speed and agility in individual decision-making and organizational process). Hence, the concept of “time”—as in internal cycle time, time to market, no time to waste, and don’t waste customers’ time—came up several times (no pun intended). We all agreed that businesspeople often don’t pay enough attention to time as a strategic issue and business priority. We should. If shrinking time was given as high a priority as shrinking costs (the first leads to the second, by the way), then execution would be a lot smoother, faster, more innovative, and more cost-effective.

"Lessons From Streetballers" by Oren Harari. April 24, 2008

In my most recent blogs, I’ve argued that marketing per se is not enough for building a brand. Infusing high-profile marketing onto a bland mediocre product or a me-too service is unlikely to shape a powerful, sustainable brand. I’ve argued that if a vendor offers an exceptional value proposition that creates a special customer experience, then and only then will imaginative marketing (and it’s got to be imaginative) truly serve to strengthen and sustain a brand.

Case in point: AND1.

If that means nothing to you, then you are not a genuine nitty-gritty basketball freak who sweats and fights for the ball under the net. Here’s the deal: Over the past few years, a tiny enterprise called AND1 muscled past giant Nike in the teen and young adult male basketball attire market with a product/marketing mix that was mindblowing and hard to replicate.

AND1 is a privately held company that sells its apparel wares in over 125 countries through retailers like Foot Locker and The Finish Line. The company has grown with double and triple digit rates to around $200 million since three twenty-something basketball fanatics launched it in 1993. The whole vibe of the company and the product line reeks of attitude and basketball. The company cranks out ghetto-designer basketball shoes and related paraphernalia like trash-talking basketball T-shirts and bigger baggier basketball shorts, and it does so specifically for people who love to play a no-holds-barred game in gyms and playgrounds. Its philosophy revolves around its name:

"AND 1" You get fouled, you score anyway. AND 1! Two points for the basket AND 1 additional free throw. (If you don't know what AND 1 means then don't wear our gear.)

While AND1 has attracted a small stable of NBA endorser-players like Stephon Marbury and Latrell Sprewell over the years (conventional marketing), the high-impact imaginative part of its marketing effort has revolved around its breakthrough streetball tours and videotapes. The company scoured the country for phenomenally athletic and flashy urban street basketball players, putting them together for entertaining competitive tours in packed parks and schoolyards throughout the U.S. The extraordinary threatrics and skills of the 15 hitherto unknown players, all anointed with distinct nicknames, and all African Americans except for one little white dude, were captured and sold in DVD format, often given free with shoe purchases, and presented on a regular ESPN “streetball” series.

Of course, the players on the tours and videos wear AND1 clothing and the games are like rock concerts that offer customers ancillary opportunities to purchase AND1 product. The whole deal has been a branding sensation—so much so that there’s even a spinoff video game featuring AND1 streetballers.

Thanks to these product and marketing efforts, AND1 has a fanatically loyal customer base and a distinct, trash-talking brand. Jay Gilbert, one of the founders, is clear that AND1 is literally a special brand, which means it’s not for everyone, which means it’s not aimed at a general, diffuse public that just wants to dress “cool.” Neither is it aimed at people who play sports other than basketball. (Check out the company website www.AND1.com and you'll notice that it's all about basketball; only one link seems to be about the products).

Talk about a targeted business model! As Gilbert says: "In terms of marketing, our message is first and foremost targeted to the hard-core baller. We make what he needs: shirts, shoes, shorts. The end. Our message is all about performance. If you can't play, don't wear our stuff." Unsurprisingly, they do anyway.

So what’s the lesson for the rest of us—you know, we who work in less sexy enterprises like insurance companies and auto parts suppliers? The lesson goes right back to how I began this blog: the best branding occurs when a distinctly imaginative product/service/value proposition is coupled with a distinctly imaginative marketing/promotion effort. Both conditions must exist, and the best leaders are unequivocal in insisting on reaching for both those criteria and continually raising the performance and innovation bar for both criteria.

Bottom line: If both conditions exist, your brand will flourish. And if you augment the process with a passion for the products and a love for the “game” you’re playing-- like they do at AND1--your brand will rock. Yes, even if you’re selling insurance and auto parts.

"One More Time, Don't Confuse Marketing with Branding" by Oren Harari. April 16, 2008

Some of the comments I got from readers of last week’s blog (http://www.harari.com/blog/index.php?/archives/174-Branding-My-Nikes.html)
ranged from “Great stuff, love the P/E idea” to “Hey idiot, what’s your beef against marketing, anyway?” Naturally, I commend the brilliant readers who posted a variation of the first sentiment, but I concede that I might have to be a little clearer to address the concern represented by the second sentiment.

Let me repeat my original point: Great branding is a consequence of the reliability, consistency and authenticity of the great, unique stuff (products, services) that the organization provides the marketplace. All the conditions (consistency, authenticity, uniqueness, etc.) have to be present. If they are, the customer is likely to have an exceptional experience, a predictably exceptional experience, that is, an exceptional experience he or she can count on. Once again, if all these conditions exist, then innovative marketing can definitely help build both brand equity and sales volume. If they are not all present, the impact of marketing is often questionable and iffy. Sometimes positive, sometimes irrelevant, sometimes ambiguous.

For example, prior to being bought out by Disney in 2006, Pixar’s profit metrics and market buzz were monumentally bigger than those of the much larger animation unit of giant Disney. When Pixar was independent, millions of people were devoted to the company’s films because they could count on having a uniquely delightful movie experience every two to three years, an experience with cutting edge 3D computer technology and a great, original story line with new characters that spawned separate but equal joy appeal for kids and adults. With that underlying reputation of carefully crafted unique value, it’s no surprise that a strong marketing campaign created by Pixar for each upcoming film made a lot of sense, and had a lot of impact. But--had Pixar posted an uneven track record, with occasional good films mixed in with a lot of mediocre ones and a periodic stinker, its marketing campaigns would have generated as much noise as impact.

For Toyota, marketing also makes a lot of sense. Millions of people are wedded to buying Toyotas because they can count on having a uniquely positive experience regarding quality, design, innovative technology, fair price, comfort, “feel” and after-sale service. For Toyota, marketing specific exceptional products like the Prius or Tundra spreads the good news about the already-inherent strength of the Toyota brand in addition to the unique feature of the individual products.

In contrast, consider Toyota’s Big 3 competitors. Their mega-marketing campaigns—from multiple ads in magazines to intricate product placements in films to sleazy faux Super Bowls with scantily clad models on TV -- sure haven’t helped much, have they? In fact, until last year when Toyota finally entered the world of NASCAR, all of the wildly popular motor sport’s cars were built by GM, Ford or Chrysler. How did that work out for their sales, profitability, and stock value? See what I mean?

A few years ago, Goodyear’s $60 million annual ad budget generated some very charming commercials, like the one in which parents in different parts of the world were shown enduring their kids’ whines in native languages of the universal “Are we there yet?” Nice stuff, but the problem was that Goodyear lagged behind competitors like Michelin and Bridgestone in several quality and innovation assessments. Unsurprisingly, while people enjoyed the commercials, they didn’t desert Michelin for Goodyear. The Wall St. Journal reported one Goodyear dealer saying “I didn’t have people coming in and saying, ‘I saw that cute commercial—let me see some of them tires’.”

My point is simple: Don’t equate branding with marketing. Equate branding with the consistency, reliability and integrity of the extraordinary things you will do on behalf of your customers. If you have that foundation, a little imaginative marketing will help build the brand. Otherwise--??????

One last point. I’m cynical about Disney’s upcoming “Pixar” movie: Toy Story 3. Disney has a track record of bleeding its successful products to death via overexposure in order to max out revenue (remember the three times per week “Who Wants to Be a Millionaire?” on Disney/ABC?) If Disney starts doing Toy Story 4 and 5, or Incredibles 2 and 3, you’ll know that Pixar’s soul is being strangled. And then, the brand will fizzle, and all of Disney’s mega-marketing will be for naught.

"Branding My Nikes" by Oren Harari. April 10, 2008

I don’t make it a habit to think of my work when I’m jogging. But on a run through the hills near my home a couple days ago, for some odd reason I began to think about my running shoes and my loyalty to the Nike brand. Confession: All my athletic footwear—running shoes, cross trainers, tennis shoes—has been Nike for several years. I’ll tell you why, because I think there’s an important lesson for branding here.

My loyalty to Nike has nothing to do with their ads and promotions. It has everything to do with the fact that I can count on (remember that phrase) Nike to provide me with the following:
• a great, snug fit for my size 13 extra-narrow feet.
• state-of-the-art innovative, constantly improving cushioning technologies that give a better and better support for my fragile lower back.
• a quality and durability that will make those above-two features last for the life of the shoe

That’s basically it. The fact that great athletes endorse Nike is nice. The fact that Nike shoes look cool is nice. I like both those features, I admit it. But other shoe providers boast celebrity endorsements and snazzy looks. And while I enjoyed seeing Rafael Nadal wearing “my” tennis shoes in a recent magazine ad, I’d never buy them just because he gets paid to wear his. (By the way, Marian Salzman, the ex-chief strategist at ad giant Euro RSCG Worldwide, has concluded, “People are becoming far less susceptible to the power of celebrities who are seen as shills for a brand.”)

For me and my unique needs, I buy Nike because it does a better job on those three critical variables above than any other competitor shoe I have ever tried. I can count on Nike to provide me with ongoing success on those variables, so much so that I am 100% confident of ordering product on-line (which I rarely do with other clothing retailers) and will pay whatever the asking price is.

What makes brands great is not their visibility, nor their celebrity endorsements, nor the marketing pizzazz behind them. Remember, during the 1990’s Nike and McDonald’s lost a lot of their sheen (and stock value), despite their heavy promotional strategies and the ubiquity (and near 100% recognizability) of the swoosh and the Golden Arches. Only when both companies revamped their product lines did the swoosh and arches generate a positive halo. Don’t mistake presence and recognizability for corporate vitality. Nowadays, Levi Strauss and Coke are struggling, and as I’ve explained elsewhere (see http://www.ftpress.com/articles/article.aspx?p=1180989), Starbucks' buzz and market cap have fallen—but everybody recognizes the brands.

Regardless of whether you’re in the business-to-consumer or business-to-business space, a vendor’s brand flourishes when customers can trust the vendor to provide them with a special experience and constantly evolving great products. With that excellent foundation, judicious imaginative marketing can certainly fan the flames of exposure (think Toyota and Pixar, for example) , but on its own, marketing does not make a great profitable growing brand. (And think about the fact that there are many companies, like Google and retailer Zara and tube fitting manufacturer Swagelok, which build a healthy brand solely around their unique value proposition and do practically no conventional advertising).

Tom Peters says that a brand “is a promise of the value you’ll receive.” In that spirit, I sometimes urge my clients to think about a new “P/E multiple”, one that supplements the traditional “price/earnings” metric. Think about a “Promise/Experience” metric. If, in effect, you can implicitly (not via sexy ads, but in the way you run your business) promise the marketplace that you will churn out a cool, special value in products and services-- and then actually deliver it in a way that generates a really desirable experience for the customer--the payoff in customer and investor loyalty is a genuine multiple. That’s what they do at Toyota, Pixar, Google, Zara and Swagelok, among many others.

Put simply, the way to build a break-from-the-pack brand is not by public relations campaigns, ad rollouts, logos, color schemes, viral marketing, etc. etc. Those can definitely help if you’ve got the basics down. And what are the basics? The capacity to demonstrate to the marketplace that your organization will consistently, reliably, efficiently, authentically, and quickly deliver on great things that are implicitly promised in your business model. Retired Atlanticare CEO George Lynn used to tell me that from his perspective as a hospital CEO or an individual customer—the value of any organization he buys from must be “pervasive, relevant, and credible.”

Once again, it all boils down to this: Can I count on this vendor to provide me with special value that truly matters to me? For me and my feet, it's Nike. What about you?

"Real Illusions" by Oren Harari. April 3, 2008

Jerry Flint writes a regular column on cars for Forbes magazine. In his April 7 piece, he castigates Chrysler (now owned by private equity firm Cerberus) for its “global illusions.” I think he’s right for the right reasons, and those right reasons have some important implications for leaders in any industry.

Basically, Flint’s point is that if Chrysler can’t find customers in the U.S., what makes it think that it can find customers abroad? Despite ruinous price cuts and incentives (all of which depress margins, cash flow, and product buzz), Chrysler’s U.S. sales fell 3% in 2007 to drop market share to 13%. Don’t count on a wave of cool new products in the pipeline, either. As Flint observes, Chrysler is “killing more vehicles than it’s bringing out.”

So once again: If American auto buyers aren’t itching to buy Chrysler cars, why would buyers abroad be? Especially since only two of Chrysler's models made the Consumer Reports list of recommended models for 2008. Especially since four of its models rank in the bottom ten of Consumer Reports worst cars for 2008.

So, throwing in more of my two bits, here’s the lesson for all you leaders. Yes, we operate in a truly global economy. And yes, looking beyond one’s borders for new sales opportunities is in many cases a competitive must. But no, don’t look at “going international” for sales boosts as some magic bullet for your “non-international” corporate woes. If your domestic product/service mix is unexciting or flawed, or if your domestic business model is yielding uninspired margins, earnings and stock values, then going global might boost your top line, but it won’t do anything to enhance the kinds of returns on investment that make a difference to stockholders. On top of that, remember that going global requires some serious investment in product enhancement, systems integration, human resource development, logistics, marketing, relationship management, and such. Hence, the happy dream of fat international sales can become an expensive nightmare—unless you’ve got both a solid, compelling base here at home, and the capacity to adapt and customize that solid, compelling base to other countries.

"Car Talk Meets IAC" by Oren Harari. March 24, 2008

There’s a popular weekend show on National Public Radio called “Car Talk.” The two hosts (the very knowledgeable and funny Maggliozzi brothers) act as car docs, answering people’s questions on odd, nagging, maddening auto problems. One of the periodic features of the program is called “Stump the Chumps.” In this segment, someone who had asked the hosts a question in a prior show is brought back to tell them whether their analysis and advice had been accurate. I listen to the show only sporadically, but in my experience the hosts have been correct 100% of the time.

I thought about “Stump the Chumps” when I read some reports that Barry Diller is trying to break up the conglomerate mish-mosh called IAC/InterActiveCorp—the very mish-mosh he has so assiduously put together over the past few years. IAC is a bewildering array of online sites—you know many of them: Expedia, LendingTree, Match.com, Ticketmaster, to name just a few. Two years ago, I predicted that the “synergy” that CEO Diller was touting was basically bogus. On their own, I conceded that some, maybe several, maybe even many of these companies might perform well at the operating level—if they operated as fully independent firms. But in tandem, I argued that they provided no compelling additional composite value. On the contrary, I predicted that the unfocused, practically nonexistent corporate mission of IAC (I don’t consider “synergy” a mission) and the inevitable corporate bureaucracy that would emerge would actually diminish the value that these companies could potentially offer on their own.

I documented some of my thoughts in my April 4, 2005 blog “A Synergy Fantasy”—see http://www.harari.com/blog/index.php?/archives/10-A-Synergy-Fantasy.html. I urge you to read it. I think you’ll find it both amusing and informative.

My knowledge of company ailments is nowhere near as good as Tom and Ray Maggliozzi’s knowledge of car ailments—but if I was playing Stump the Chump about my 2005 IAC analysis, I’d have hit the bulls eye. Consider a couple extracts from a March 16, 2008 New York Times feature on the company:

• “At it’s core, it is a mergers-and-acquisitions deal shop”, said one executive at the company who requested anonymity…. “IAC does not have a mission as to why you want to be all together. Its mission is nothing more than doing what is interesting to Barry.”
• “If you listened to (Diller) the months before, this is a great ball of wax,” said Mr. Vogel, the media analyst. “If it was so great six months ago, how come we are breaking it up? IAC does not seem to have any strategy. You would need a playbook to figure out what was bought and what was sold and what were the gains and what were the losses.”
• In testimony last week, John Malone (IAC’s largest shareholder) said IAC’s results “have lagged seriously behind Nasdaq and other indexes”.

I predicted it all, but I’m no genius. It’s fairly easy to predict that companies built primarily via serial acquisition (despite their executives’ lame rationalizations of “scale, scope and synergies”) will, like Wile E. Coyote, eventually accelerate towards a cliff drop off. I remember back in 2004, Cendant (a megamix of real estate services, car rentals, hotels, mortgage brokerage, time-share, truck leasing, and more) was crawling back from some near death experiences. At the time, CFO Ronald Nelson (today the company’s CEO) told Investors Business Daily: “The market viewed us as serial acquirers who couldn’t shake the narcotic of growing by acquisition. We had to convince the market we were adamant about our strategy to improve transparency, buy back stock, make no acquisitions, and provide organic growth.”

Don’t get me wrong; I’m not suggesting that M & A is a no-no. Strong successful companies are always on the prowl for judicious acquisitions. But as an investor, you’d be wise to avoid those companies whose growth depends primarily on pasting together a collage of acquisitions. That’s true even if you’ve got rock star leaders like Barry Diller and John Malone at the helm.

You know, I'm thinking about calling Car Talk to tell the Maggliozzi brothers that they inspired my latest critique of IAC, but I suspect they probably wouldn’t know what the hell I’m talking about—or care! Check out the show.

"Dear Frank" by Oren Harari. March 13, 2008

Here we go again. Every once in a while I have to stop ranting about bland myopic strategies, insipid change efforts, and dully conventional leadership styles in order to get right to the core: How your company treats your customers is a superb predictor of how successful your company will be. Ron Havner, CEO of Public Storage, the largest self-storage company and REIT in the U.S., tells me succinctly: “The next frontier in our business is the customer’s experience.”

That is why I was delighted to get a copy of a letter (not an e-mail, but a real letter!) that Phil Green sent to Frank Blake, the CEO of Home Depot. Phil is a regional sales manager for Pioneer Mobile Electronics. Phil had heard me deliver a speech to Pioneer distributors a couple months prior, and he knew I’d be interested in the experience he had with Home Depot. His experience (remember Ron Havner’s comment) no doubt helps explain why a healthy Lowe’s has taken so much business from a wounded Home Depot, despite the latter’s high-profile initiatives in mega-technologies, massive re-organizations, capital infusions, Six Sigma trainings, rock star CEO’s (remember Bob Nardelli?) and so on.

Phil’s problem was utterly mundane. He had purchased a Ruby-red Eljer toilet at a Home Depot a few years prior. Now the toilet’s base was leaking, and he wanted to replace it. He wanted a Ruby color in order to match the toilet color itself, as well as matching the Ruby colors of the refrigerator and sink that he had also purchased from the same location.

So Phil cheerfully and naively went back to the Home Depot where he had bought all these appliances, and from then on, his “experience” basically sucked. First of all, the response he received from store personnel was that it was no longer possible to get the color desired for the base, even though that store had sold him the original unit. Phil said he would be willing to buy the entire unit (list price $481.90) just to get the base color. Again, no luck. He was persistent because he had seen the toilet color on websites, but the supervisor at Home Depot was, to quote Phil, “…not very involved, and not too helpful. His attitude bordered on condescending.” The supervisor eventually, grudgingly, agreed to pursue the matter and get back to his customer.

Of course, Phil didn’t get a call. He left messages on the supervisor’s voice mail, and when he called the main switchboard of the store, and was put on “hold” (a.k.a. phone hell) indefinitely.

Now let me quote directly from Phil’s “Dear Frank” letter to CEO Blake:

“I went back to the Eljer website, and found out that Lowes also sells Eljer. Guess what? I was able to call Lowe's, and speak to a real person in the plumbing dept. He checked on the Eljer Toilet in Ruby, and called me back in 5 minutes, and said ‘we can get it.’ By then, I had discovered the Eljer part number for just the base and asked Lowe's if they could get only the base. 5 minutes later, my new Lowe's buddy called back, and said they could. The cost? $162.37. ‘By the way’, said the Lowes salesman when I visited the store to order up, ‘would you like the base delivered to your home at no additional cost?’ I thought I had died and gone to heaven.”

There it is: an utterly mundane story that is completely un-sexy to typical CEO’s and MBA graduates. Too bad, because Phil Green tells me that he and his wife plan both a complete kitchen remodel and an addition of a front porch. “Lowe's will figure prominently in our plans”, he assures me. “Home Depot will not.”

There are no villains in this little story. The Home Depot people were not mean or evil. It’s just that customer care is a strategic priority at Lowe's, and the appropriate steps, decisions and responses that impact customers positively have been institutionalized at Lowe's. As many reports have noted, this is not currently the case at Home Depot—which is why Phil Green’s experience was tarnished. If I were Frank Blake—or for that matter, any CEO in any company—and I received a letter like that, I’d go nuts. I’d realize that there must be oodles of unhappy Phil Greens, and their unhappiness is like a fire alarm—indicating that a big problem in the organization needs to be addressed right away. I’d drop everything and work urgently with my people to figure out what needs to be done to authentically prioritize customer care throughout the company and effectively institutionalize the kinds of systems, processes, cultures and staff behaviors that lead to a great customer experience. As Lowes executives will tell you, the juicy financials will follow.