What Steve Jobs Would Tell Mark Zuckerberg

Mark Zuckerberg was Time magazine's Person of the Year in December, 2010.  He was given that honor because Facebook dominated the emerging social media marketplace, and social media had clearly begun changing how people do things.  Despite his young age, Mr. Zuckerberg had created a phenomenon demonstrated by the hundreds of million new Facebook users.

But things have turned pretty rough for the young Mr. Zuckerberg. 

  • Facebook was pretty much forced, legally, to go public because it had accumulated so many shareholders.  The stock hit the NASDAQ with much fanfare in May, 2012 – only to have gone pretty much straight down since.  It now trades at about 50% of IPO pricing, and is under constant pressure from analysts who say it may still be overpriced.
  • Facebook discovered perhaps 83million accounts were fake (about  9%) unleashing a torrent of discussion that perhaps the fake accounts was a much, much larger number.
  • User growth has fallen to some 35% – which is much slower than initial investors hoped.  Combined with concerns about fake accounts, there are people wondering if Facebook growth is stalling.
  • Facebook has not grown revenues commensurate with user growth, and people are screaming that despite its widespread use Facebook doesn't know how to "monetize" its base into revenues and profits.
  • Mobile use is growing much faster than laptop/PC use, and Facebook has not revealed any method to monetize its use on mobile devices – causing concerns that it has no plan to monetize all those users on smartphones and tablets and thus future revenues may decline.
  • Zynga, a major web games supplier, announced weak earnings and said its growth was slowing – which affects Facebook because people play Zinga games on Facebook.
  • GM, one of the 10 largest U.S. advertisers, publicly announced it was dropping Facebook advertising because executives believed it had insufficient return on investment. Investors now fret Facebook won't bring in major advertisers.
  • Google keeps plugging away at competitive product Google+. And while Facebook  disappointed investors with its earnings, much smaller competitor Linked-in announced revenues and earnings which exceeded expectations.  Investors now worry about competitors dicing up the market and minimalizing Facebook's future growth.

Wow, this is enough to make 50-something CEOs of low-growth, non-tech companies jump with joy at the upending of the hoody-wearing 28 year old Facebook CEO.  Zynga booted its Chief Operating Officer and has shaken up management, and not suprisingly, there are analysts now calling for Mr. Zuckerberg to step aside and install a new CEO.

Yet, Mr. Zuckerberg has been wildly successful.  Much more than almost anyone else in American business today.  He may well feel he needs no advice.  But…. what do you suppose Steve Jobs would tell him to do? 

Recall that Mr. Jobs was once the young head of Apple, only to be displaced by former Pepsi exec John Sculley — and run out of Apple.  As everyone now famously knows, after a string of Apple CEOs led the company to the brink of disaster Mr. Jobs agreed to return and completely turned around Apple making it the most successful tech company of the last decade.  Given what we've observed of Mr. Jobs career, and read in his biography, what advice might he give Mr. Zuckerberg? 

  • Don't give up your job.  Not even partly.  If you create a "shadow" or "co" CEO you'll be gone soon enough.  Lead, quit or make the Board fire you.  If you had the vision to take the company this far, why would you quit? 
  • Nothing is more important than product.  Make Facebook's the best in the world.  Nothing less will allow a tech company to survive, much less thrive.  Don't become so involved with financials and analysts that you lose sight of your #1 job, which is to make the very, very best social media product in the world.  Never stop improving and perfecting.  If your product isn't obviously superior to other solutions you haven't accomplished your #1 priority.
  • Be unique.  Make sure your products fulfill needs no one else fulfills – at least not well.  Meet unserved and underserved needs so that people talk about your product and what it does – not how much it costs.  Make sure that Facebook has devoted, diehard customers that believe your products meet their needs so well they would not consider your competition.
  • Don't ask customers what they want – give them what they need.  Understand the trends and create future scenarios so you are constantly striving to create a better future, not just improve on history.  Never look backward at what you've done, but instead always look forward at creating what noone else has ever done.  Push your staff to create solutions that meet user needs so well that you can tell customers why they need your product in ways they never before considered.  
  • Turn your product releases into a show.  Don't just run out new products willy-nilly, or on a random timeline.  Make sure you bundle products together and make a big show of each release so you can describe the upgrades, benefits and superiority of what you offer for customers.  People need to understand the trends you are meeting, and need to see the future scenario you are creating, and you have to tell them that story or they won't "get it."
  • Price for profit.  You run a business, not a hobby or not-for-profit society.  If you do the product right you shouldn't even be talking about price – so price to make ridiculous margins by industry standards.  At Apple, Next and Pixar the products were never the cheapest, but they accomplished what customers needed so well that we could price high enough to make margins that supported additional product development.  And you can't remain the best solution if you don't have enough margin to keep developing future products.
  • Don't expect products to sell themselves.  Be the #1 passionate spokesperson for the elegance and superiority of your products.  Never stop beating the drum for the unique capability and superiority of your product, in every meeting, all the time, never ending.  People like to "revert to the mean" so you have to keep telling them that isn't good enough – and you have something far superior that will greatly improve their success.
  • Never miss an opportunity to compare your products to competition and tell everyone why your products are far better.  Don't disparage the competition, but constantly reinforce that you are first, you are ahead of everyone else, you are far better — and the best is yet to come!  Competition is everywhere, and listen to the Andy Groves advice "only the paranoid survive."  You aren't satisfied with what the competition offers, and customers should not be satisfied either.  Every once in a while give people a small glimpse as to the radically different world you see in 3-5 years so they buy what you are selling in order to prepare for that future world.
  • Identify key customers that need your solution and SELL THEM.  Disney needed Pixar, so we made sure they knew it.  Identify the customers who can gain the most from doing business with you and SELL THEM.  Turn them into lead customers, obtain their testimonials and spread the word.  If GM isn't your target, who is?  Find them and sell them, then tell us all how you will build on those early accounts to eventually dominate the market – even displacing current solutions that are more popular.  If GM is your target then make the changes you need to make so you can SELL THEM.  Everyone wants to do business with a winner, so you must show you are a winner.
  • Identify 5 of your competition's biggest customers (at Google, Yahoo, Linked-in, etc.) and make them yours.  Demonstrate your solutions are superior with competitive wins.
  • Hire someone who can talk to the financial community for you – and do it incredibly well.  While you focus on future markets and solutions someone has to tell this story to the financial analysts in their lingo so they don't lose faith (and they are a sacrilegious lot who have no faith.)  Keep Facebook out of the forecasting game, but you MUST create and maintain good communication with analysts so you need someone who can tell the story not only with products and case studies but numbers.  Facebook is a disruptive innovation company, so someone has to explain why this will work.  You blew the IPO road show horribly by showing up at meetings in a hoodie – so now you need to make amends by hiring someone who will give them faith that you know what you're doing and can make it happen.

These are my ideas for what Steve Jobs would tell Mark Zuckerberg.  What are yours?  What do you think the #1 CEO of the last decade would say to the young, embattled CEO as he faces his first test under fire leading a public company?

McDonald’s Growth Stall is Deadly

McDonald’s Growth Stall is Deadly

McDonald’s is in a Growth Stall.  Even though the stock is less than 10% off its recent 52 week high (which is about the same high it’s had since the start of 2012,) the odds of McDonald’s equity going down are nearly 10x the odds of it achieving new highs.

A Growth Stall occurs when a company has 2 consecutive quarters of declining sales or earnings, or 2 consecutive quarters of lower sales or earnings than the previous year.  And our research, in conjunction with The Conference Board, proved that when this happens the future becomes fairly easy to predict.

Growth Stalls are Deadly

Growth Stalls are Deadly

 

When companies hit a growth Stall, 93% of the time they are unable to maintain even a 2% growth rate. 55% fall into a consistent revenue decline of more than 2%. 1 in 5 drop into a negative 6%/year revenue slide. 69% of Growth Stalled companies will lose at least half their market capitalization in just a few years. 95% will lose more than 25% of their market value.

Back in February, McDonalds sales in USA stores open at least 13 months fell 1.4%.  By May these same stores reported reported their 7th consecutive month (now more than 2 quarters) of declining revenues. And in July McDonald’s reported the worst sales decline in over a decade – with stores globally selling 2.5% less (USA stores were down 3.2% for the month.)  McDonald’s leadership is now warning that annual sales will be weaker than forecast – and could well be a reported decline.

While McDonald’s has been saying that Asian store revenue growth had offset the USA declines, we now can see that the USA drop is the key signal of a stall.  There was no specific program in Asia to indicate that offshore revenues could create a renewed uptick in USA sales.  Now with offshore sales plummeting we can see that McDonald’s American performance is the lead indicator of a company with serious performance issues.

Growth Stalls are a great forecasting tool because they indicate when a company has become “out of step” with its marketplace.  While management, and in fact many analysts, will claim that this performance deficit is a short term aberration which will be repaired in coming months, historical evidence — and a plethora of case stories – tell us that in fact by the time a Growth Stall shows itself (especially in a company as large as McDonald’s) the situation is far more dire (and systemic) than management would like investors to believe.

Something fundamental has happened in the marketplace, and company leadership is busy trying to defend its historical business in the face of a major change that is pulling customers toward substitute solutions.  Frequently this defend & extend approach exacerbates the problems as retrenchment efforts further hurt revenues.

McDonald’s has reached this inflection point as the result of a long string of leadership decisions which have worked to submarine long-term value.

Back in 2006 McDonald’s sold its fast growing Chipotle chain in order to raise additional funds to close some McDonald’s stores, and undertake an overhaul of the supply chain as well as many remaining stores.  This one-time event was initially good for McDonald’s, but it hurt shareholders by letting go of an enormously successful revenue growth machine.

Since that sale Chipotle has outperformed McDonalds by 3x, and it was clear in 2011 that investors were better off with the faster growing Chipotle than the operationally focused McDonald’s.  Desperate for revenues as its products lagged changing customer tastes, by December, 2012 McDonald’s was urging franchisees to stay open on Christmas Day in order to add just a bit more to the top line.  However, such operational tactics cannot overcome a product line that is fat-and-carb-heavy and off current customer food trends, and by this July was ranked the worst burger in the marketplace.  Meanwhile McDonald’s customer service this June ranked dead last in the industry.  All telltale signs of the problems creating the emergent Growth Stall.

Meanwhile, McDonald’s is facing a significant attack on its business model as trends turn toward higher minimum wages.  By August, 2013 the first signs of the trend were clear – and the impact on McDonald’s long-term fortunes were put in question.  By February, 2014 the trend was accelerating, yet McDonald’s continued ignoring the situation.  And this month the issue has become a front-and-center problem for McDonald’s investors as the National Labor Relations Board (NLRB) has said it will not separate McDonald’s from its franchisees in pay and hours disputes – something which opens McDonald’s deep pockets to litigants looking to build on the living wage trend.

The McDonald’s CEO is somewhat “under seige” due to the poor revenue and earnings reports.  Yet, the company continues to ascribe its Growth Stall to short-term problems such as a meat processing scandal in China.  But this inverts the real situation. Such scandals are not the cause of current poor results.  Rather, they are the outcome of actions taken to meet goals set by leadership pushing too hard, trying to achieve too much, by defending and extending an outdated success formula desperately in need of change to meet new competitive market conditions.

Application of Growth Stall analysis has historically been very valuable.  In May, 2009 I reported on the Growth Stall at Motorola which threatened to dramatically lower company value.  Subsequently Motorola spun off its money losing phone business, sold other assets and businesses, and is now a very small remnant of the business prior to its Growth Stall; which was brought on by an overwhelming market shift to smartphones from 2-way radios and traditional cell phones.

In February, 2008 a Growth Stall at General Electric indicated the company would struggle to reach historical performance for long-term investors.  The stock peaked at $57.80 in 2000, then at $41.40 in July, 2007.  By January, 2009 (post Stall) the company had crashed to only $10, and even recent higher valuations ($28 in 10/2013) are still far from the all-time highs – or even highs in the last decade.

In May, 2008 the Growth Stall at AIG portended big problems for the Dow Jones Industrial (DJIA) giant as financial markets continued to shift radically and quickly.  By the end of 2008 AIG stock cratered and the company was forced to wipe out shareholders completely in a government-backed restructuring.

Perhaps the most compelling case has been Microsoft.  By February, 2010 a Growth Stall was impending (and confirmed by May, 2011) warning of big changes for the tech giant.  Mobile device sales exploded, sending Apple and Google stocks soaring, while Microsoft’s primary, core market for PCs (and software for PCs) has fallen into decline.  Windows 8 subsequently had a tepid market acceptance, and gained no traction in mobile devices, causing Microsoft to write-off its investment in the Surface tablet.  Recent announcements about enormous lay-offs, with vast cuts in the acquired Nokia handheld unit, do not bode well for long-term revenue growth at the decaying (yet cash rich) giant.

As the Dow has surged to record highs, it has lifted all boats.  Including those companies which are showing serious problems.  It is easy to look at the ubiquity of McDonald’s stores and expect the chain to remain forever dominant.  But, the company is facing serious strategic problems with its products, service and business model which leadership has shown no sign of addressing.  The recent Growth Stall serves as a key long-term indicator that McDonald’s is facing serious problems which will most likely seriously jeopardize investors’ (as well as employees’, suppliers’ and supporting communities’) potential returns.