What the NBA All-Star Game Venue Change Teaches Us About Decision-Making

What the NBA All-Star Game Venue Change Teaches Us About Decision-Making

Most leaders think of themselves as decision makers.  Many people remember in 2006 when President George Bush, defending Donald Rumsfeld as his Defense Secretary said “I am the Decider.  I decide what’s best.”  It earned him the nickname “Decider-in-Chief.” Most CEOs echo this sentiment, Most leaders like to define themselves by the decisions they make.

But whether a decision is good, or not, has a lot of interpretations.  Often the immediate aftermath of a decision may look great.  It might appear as if that decision was obvious.  And often decisions make a lot of people happy.  As we are entering the most intense part of the U.S. Presidential election, both candidates are eager to tell you what decisions they have made – and what decisions they will make if elected.  And most people will look no further than the immediate expected impact of those decisions.

However, the quality of most decisions is not based on the immediate, or obvious, first implications.  Rather, the quality of decisions is discovered over time, as we see the consequences – intended an unintended.  Because quite often, what looked good at first can turn out to be very, very bad.

NBA-All-Star-ExitThe people of North Carolina passed a law to control the use of public bathrooms.  Most people of the state thought this was a good idea, including the Governor.  But some didn’t like the law, and many spoke up.   Last week the NBA decided that it would cancel its All Star game scheduled in Charlotte due to discrimination issues caused by this law.  This change will cost Charlotte about $100M.

That action by the NBA is what’s called unintended consequences.  Lawmakers didn’t really consider that the NBA might decide to take its business elsewhere due to this state legislation.  It’s what some people call “oops.  I didn’t think about that when I made my decision.”

Robert Reich, Secretary of Labor for President Clinton, was a staunch supporter of unions.  In his book “Locked in the Cabinet” he tells the story of visiting an auto plant in Oklahoma supporting the union and workers rights.  He thought his support would incent the company’s leaders to negotiate more favorably with the union.  Instead, the company closed the plant.  Laid-off everyone.  Oops.  The unintended consequences of what he thought was an obvious move of support led to the worst possible outcome for the workers.

President Obama worked the Congress hard to create the Affordable Care Act, or Obamacare, for everyone in America.  One intention was to make sure employers covered all their workers, so the law required that if an employer had health care for any workers he had to offer that health care to all employees who work over 30 hours per week.  So almost all employers of part time workers suddenly said that none could work more than 30 hours.  Those that worked 32 (4 days/week) or 36 suddenly had their hours cut.  Now those lower-income people not only had no health care, but less money in their pay envelopes.  Oops.  Unintended consequence.

President Reagan and his wife launched the “War on Drugs.”  How could that be a bad thing?  Illegal drugs are dangerous, as is the supply chain.  But now, some 30 years later, the Federal Bureau of Prisons reports that almost half (46.3% or over 85,000) inmates are there on drug charges.  The USA now spends $51B annually on this drug war, which is about 20% more than is spent on the real war being waged with Afghanistan, Iraq and ISIS.  There are now over 1.5M arrests each year, with 83% of those merely for possession.  Oops.  Unintended consequences.  It seemed like such a good idea at the time.

This is why it is so important leaders take their time to make thoughtful decisions, often with the input of many other people.  Because the quality of a decision is not measured by how one views it immediately.  Rather, the value is decided over time as the opportunity arises to observe the unintended consequences, and their impact.  The best decisions are those in which the future consequences are identified, discussed and made part of the planning – so they aren’t unintended and the “decider” isn’t running around saying “oops.”

As you listen to the politicians this cycle, keep in mind what would be the unintended consequences of implementing what they say:

  • What would be the social impact, and transfer of wealth, from suddenly forgiving all student loans?
  • What would be the consequences on trade, and jobs, of not supporting historical government trade agreements?
  • What would be the consequences on national security of not supporting historically allied governments?
  • What would be the long-term consequence not allowing visitors based on race, religion or sexual orientation?
  • What would be the consequence of not repaying the government’s bonds?
  • What would be the long-term impact on economic growth of higher regulations on banks – that already have seen dramatic increases in regulation slowing the recovery?
  • What would be the long-term consequences on food production, housing and lifestyles of failing to address global warming?

Business leaders should follow the same practice.  Every time a decision is necessary, is the best effort made to obtain all the information you could on the topic?  Do you obtain input from your detractors, as well as admirers?  Do you think through not only what is popular, but what will happen months into the future?  Do you consider the potential reaction by your customers?  Employees?  Suppliers?  Competitors?

There are very few “perfect decisions.” All decisions have consequences.  Often, there is a trade-off between the good outcomes, and the bad outcomes.  But the key is to know them all, and balance the interests and outcomes.  Consider the consequences, good and bad, and plan for them.  Only by doing that can you avoid later saying “oops.”

PokeMon Go – How Nintendo Beat Microsoft and Sony With an End Run

PokeMon Go – How Nintendo Beat Microsoft and Sony With an End Run

Poke’Mon Go is a new sensation.  Just launched on July 6, the app is already the #1 app in the world – and it isn’t even available in most countries.  In less than 2 weeks, from a standing start, Nintendo’s new app is more popular than both Facebook and Snapchat.  Based on this success, Nintendo’s equity valuation has jumped 90% in this same short time period.

Poke'Mon GoSome think this is just a fad, after all it is just 2 weeks old.  Candy Crush came along and it seemed really popular.  But after initial growth its user base stalled and the valuation fell by about 50% as growth in users, time on app and income all fell short of expectations. And, isn’t the world of gaming dominated by the likes of Sony and Microsoft?

A bit of history

Nintendo launched the Wii in 2006 and it was a sensation.  Gamers could do things not previously possible.  Unit sales exceeded 20m units/year for 2006 through 2009.  But Sony (PS4) and Microsoft (Xbox) both powered up their game consoles and started taking share from Nintendo.  By 2011 Nintendo sale were down to 11.6m units, and in 2012 sales were off another 50%.  The Wii console was losing relevance as competitors thrived.

Sony and Microsoft both invested heavily in their competition.  Even though both were unprofitable at the business, neither was ready to concede the market.  In fall, 2014 Microsoft raised the competitive ante, spending $2.5B to buy the maker of popular game Minecraft.  Nintendo was becoming a market afterthought.

Meanwhile, back in 2009 Nintendo had 70% of the handheld gaming market with its 3DS product.  But people started carrying the more versatile smartphones that could talk, text, email, execute endless apps and even had a lot of games – like Tetrus. The market for handheld games pretty much disappeared, dealing Nintendo another blow.

Competitor strategic errors

Fortunately, the bitter “fight to the death” war between Sony and Microsoft kept both focused on their historical game console business.  Both kept investing in making the consoles more powerful, with more features, supporting more intense, lifelike games.  Microsoft went so far as to implement in Windows 10 the capability for games to be played on Xbox and PCs, even though the PC gaming market had not grown in years.  These massive investments were intended to defend their installed base of users, and extend the platform to attract new growth to the traditional, nearly 4 decade old market of game consoles that extends all the way back to Atari.

Both companies did little to address the growing market for mobile gaming.  The limited power of mobile devices, and the small screens and poor sound systems made mobile seem like a poor platform for “serious gaming.” While game apps did come out, these were seen as extremely limited and poor quality, not at all competitive to the Sony or Microsoft products.  Yes, theoretically Windows 10 would make gaming possible on a Microsoft phone.  But the company was not putting investment there.  Mobile gaming was simply not serious, and not of interest to the two Goliaths slugging it out for market share.

Building on trends makes all the difference

Back in 2014 I recognized that the console gladiator war was not good for either big company, and recommended Microsoft exit the market.  Possibly seeing if Nintendo would take the business in order to remove the cash drain and distraction from Microsoft.  Fortunately for Nintendo, that did not happen.

Nintendo observed the ongoing growth in mobile gaming.  While Candy Crush may have been a game ignored by serious gamers, it nonetheless developed a big market of users who loved the product.  Clearly this demonstrated there was an under-served market for mobile gaming.  The mobile trend was real, and it’s gaming needs were unmet.

Simultaneously Nintendo recognized the trend to social.  People wanted to play games with other people.  And, if possible, the game could bring people together.  Even people who don’t know each other.  Rather than playing with unseen people located anywhere on the globe, in a pre-organized competition, as console games provided, why not combine the social media elements of connecting with those around you to play a game?  Make it both mobile, and social.  And the basics of Poke’Mon Go were born.

Then, build out the financial model.  Don’t charge to play the game.  But once people are in the game charge for in-game elements to help them be more successful.  Just as Facebook did in its wildly successful social media game Farmville.  The more people enjoyed meeting other people through the game, and the more they played, the more they would buy in-app, or in-game, elements.  The social media aspect would keep them wanting to stay connected, and the game is the tool for remaining connected.  So you use mobile to connect with vastly more people and draw them together, then social to keep them playing – and spending money.

The underserved market is vastly larger than the over-served market

Nintendo recognized that the under-served mobile gaming market is vastly larger than the overserved console market.  Those console gamers have ever more powerful machines, but they are in some ways over-served by all that power.  Games do so much that many people simply don’t want to take the time to learn the games, or invest in playing them sitting in a home or office.  For many people who never became serious gaming hobbyists, the learning and intensity of serious gaming simply left them with little interest.

But almost everyone has a mobile phone.  And almost everyone does some form of social media.  And almost everyone enjoys a good game.  Give them the right game, built on trends, to catch their attention and the number of potential customers is – literally – in the billions.  And all they have to do is download the app.  No expensive up-front cost, not much learning, and lots of fun.  And thus in two weeks you have millions of new users.  Some are traditional gamers.  But many are people who would never be a serious gamer – they don’t want a new console or new complicated game.  People of all ages and backgrounds could become immediate customers.

David can beat Goliath if you use trends

In the Biblical story, smallish David beat the giant Goliath by using a sling.  His new technology allowed him to compete from far enough away that Goliath couldn’t reach David.  And David’s tool allowed for delivering a fatal blow without ever touching the giant.  The trend toward using tools for hunting and fighting allowed the younger, smaller competitor to beat the incumbent giant.

In business trends are just as important.  Any competitor can study trends, see what people want, and then expand their thinking to discover a new way to compete.  Nintendo lost the console war, and there was little value in spending vast sums to compete with Sony and Microsoft toe-to-toe.  Nintendo saw the mobile game market disintegrate as smartphones emerged.  It could have become a footnote in history.

But, instead Nintendo’s leaders built on trends to deliver a product that filled an unmet need – a game that was mobile and social.   By meeting that need Nintendo has avoided direct competition, and found a way to dramatically grow its revenues.  This is a story about how any competitor can succeed, if they learn how to leverage trends to bring out new products for under-served customers, and avoid costly gladiator competition trying to defend and extend past products.

Starbucks and JPMorganChase Pay Raises – Just Following Trends

Starbucks and JPMorganChase Pay Raises – Just Following Trends

This week Starbucks and JPMorganChase announced they were raising the minimum pay of many hourly employees.  For about 168,000 lowly paid employees, this is really good news.  And both companies played up the planned pay increases as benefitting not only the employees, but society at large.  The JPMC CEO, Jamie Dimon, went so far as to say this was a response to a national tragedy of low pay and insufficient skills training now being addressed by the enormous bank.

Dimon and SchultzHowever, both actions look a lot more like reacting to undeniable trends in an effort to simply keep their organizations functioning than any sort of corporate altruism.

Since 2014 there has been an undeniable trend toward raising the minimum wage, now set nationally at $7.25.  Fourteen states actually raised their minimum wage starting in 2016 (Massachusetts, California, New York, Nebraska, Connecticut, Michigan, Hawaii, Colorado, Nebraska, Vermont, West Virginia, South Dakota, Rhode Island and Alaska.)  Two other states have ongoing increases making them among the states with fastest growing minimum wages (Maryland and Minnesota.)  And there are 4 additional states that promoters of a $15 minimum wage think will likely pass within months (Illinois, New Jersey, Oregon and Washington.)  That makes 20 states raising the minimum wage, with 46.4% of the U.S. population.  And they include 5 of the largest cities in the USA that have already mandated a $15 minimum wage (New York, Washington D.C., Seattle, San Francisco and Los Angeles.)

In other words, the minimum wage is going up.  And decisively so in heavily populated states with big cities where Starbucks and JPMC have lots of employees.  And the jigsaw puzzle of different state requirements is actually a threat to any sort of corporate compensation plan that would attempt to treat employees equally for common work. Simultaneously the unemployment rate keeps dropping – now below 5% – causing it to take longer to fill open positions than at any time in the last 15+ years.  Simply put, to meet local laws, find and retain decent employees, and have any sort of equitable compensation across regions both companies had no choice but to take action to raise the pay for these bottom-level jobs.

Starbucks pointed out that this will increase pay by 5-15% for its 150,000 employees.  But at least 8.5% of those employees had already signed a petition demanding higher pay.  Time will tell if this raise is enough to keep the stores open and the coffee hot.  However, the price increases announced the very next day will probably be more meaningful for the long term revenues and profits at Starbucks than this pay raise.

At JPMC the average pay increase is about $4.10/hour – from $10.15 to $12-$16.50/hour.  Across all 18,000 affected employees, this comes to about $153.5million of incremental cost.  Heck, the total payroll of these 18,000 employees is only $533.5M (after raises.) Let’s compare that to a few other costs at JPMC:

Wow, compared to these one-off instances, the recent pay raises seem almost immaterial.  While there is probably great sincerity on the part of these CEOs for improving the well being of their employees, and society, the money here really isn’t going to make any difference to larger issues.  For example, the JPMC CEO’s 2015 pay of $27M is about the same as 900 of these lowly paid employees.  Thus the impact on the bank’s financials, and the impact on income inequality, is — well — let’s say we have at least added one drop to the bucket.

The good news is that both companies realize they cannot fight trends.  So they are taking actions to help shore up employment.  That will serve them well competitively.  And some folks are getting a long-desired pay raise.  But neither action is going to address the real problems of income inequality.

Recommended For Your Summer Reading “The Founder’s Mentality”

Recommended For Your Summer Reading “The Founder’s Mentality”

Summer is here, and everyone needs a business book or two to read.  I’m offering some thoughts on “The Founder’s Mentality” by 2 very senior partners and strategy practice heads at Bain & Company – Chris Zook and James Allen.  Bain is one of the top 3 management consulting firms in the world, with 8,000 consultants in 55 offices, and has been ranked as one of the best places to work in America by Glass Ceiling.

Since both authors are still part of Bain, they were somewhat bridled by their positions.  No partner can bad mouth current or former clients, as it obviously could reveal confidential information — and it certainly isn’t good for finding new clients who never want to be bad-mouthed by their consultant.  So one should not expect a lambasting of poorly performing companies in this review of global cases.  But after reviewing the work at their clients for over 20 years, and many other cases available via research, these fellows concluded that most companies lose the original founder’s mentality, get bound up in organizational complexity, and simply lose competitiveness due to internal focus.

Moving from mediocre to good

I interviewed Chris Zook, and found him rather candid in his observations.  When I asked why people should read this book I really liked his response “Many people have read ‘Good to Great.’ But, honestly, for many organizations the challenge today is simply to move from mediocre to good.  They are struggling, and they need some straightforward advice on how to make progress toward growth when the situation appears almost impossible.”

Founders MentalityYou should read the book to understand the common root cause of problems, and how a company can address those issues.  But this column offers some interesting thoughts from Chris about how to apply what you’ll learn from the book to address unnecessary complexity and make your organization more successful.

AH – What is the most critical step toward undoing needless, costly, time consuming complexity?

Zook – “The biggest problem are blockages built between the front line and the top staff.  Honestly, the people at the top lose any sense of what is actually happening in the marketplace – what is happening with customers.  80% of the time successfully addressing this requires eliminating 30-40% of the staff.  You need non-incremental change.  Leaders have to get rid of managers wedded to past decisions, and intent on defending those decisions.  Leaders have to get rid of those who focus on managing what exists, and find competent replacements who can manage a transition.”

AH – Market shifts make companies non-competitive, why do you focus so much on internal organizational health?

Zook – “You can’t respond to a market shift if the company is bound up in complex decision-making.  Unless a leader attacks complexity, and greatly simplify the decision-making process, a company will never do anything differently.  Being aware of changes in the market is not enough.  You have to internalize those changes and that requires reorganizing, and usually changing a lot of people.  You won’t ever get the information from the front line to top management unless you change the internal company so that it is receptive to that information.”

AH – You say simplification is critical to reversing a company’s stall-out.  But isn’t focusing on the “core” missing market opportunities?

Zook – “Analysts cheered Nardeli’s pro-growth actions at Home Depot.  But the company stalled.  The growth opportunities that external folks liked hearing about diverted attention from implementing what had made Home Depot great — the ‘orange army’ of store employees that were so customer helpful.  It is very, very hard to keep ‘growth projects’ from diverting attention to good operations, and that’s why few founders are willing to chase those projects when someone brings them up for investment.”

AH – You talk positively about Cisco and 3M, yet neither has done anything lately, in any market, to appear exemplary

Zook – “It takes a long time to turn around a huge company.  Cisco and 3M are still the largest in their defined markets, and profitable.  Their long-term future is still to be determined, but so far they are making progress.  Investors and market gurus look for turnarounds to happen fast, but that does not fit the reality of what it takes when these companies become very large.”

AH – You talk about “Next Generation Leaders.”  Isn’t that just more ageism?  Aren’t you simply saying “out with the old leaders, you have to be young to “get it.”

Zook – “Next Generation Leadership is not about age.  It’s about mentality. It’s about being young, and flexible, in your thinking.  What’s core to a company may well not be what a previous leader thinks, and a Next Gen Leader will dig out what’s core.  For example, at Marvel the core was not comics.  It was the raft of stories, all of which had the potential to be repurposed.  Next Gen Leaders are using new eyes, dialed in with clarity to discover what is in the company that can be reused as the core for future growth.  You don’t have to be young to do that, just mentally agile.  Unfortunately, there aren’t nearly as many of these agile leaders as there are those stuck in the old ways of thinking.”

AH – Give me your take on some big companies that aren’t in your book, but that are in the news today and on the minds of leaders and investors.  Apply “The Founder’s Mentality” to these companies:

Microsoft

Zook – “Did well due to its monopoly.  Lost its Founder’s Mentality. Now suffering low growth rates relative to its industry, and in the danger zone of a growth stall-out.  They have to refocus.  Leadership needs to regain the position of attracting developers to their platform rather than being raided for developers by competitive platforms.”

Apple

Zook – “Jobs implemented The Founder’s Mentality brilliantly.  Apple got close to its customers again with the retail stores, a great move to learn what customers really wanted, liked and would buy.  But where will they turn next? Apple needs to make a big bet, and focus less on upgrades.  They need to be thinking about a possible stall-out.  But will Apple’s leadership make that next big bet?”

WalMart

Zook – “One of the greatest founder-led companies of all time. Walton’s retail insurgency was unique, clear and powerful.  Things appear to be a bit stale now, and the company would benefit from a refocusing on the insurgency mission, and taking it into renewal of the distribution system and all the stores.”

It’s been almost a decade since I wrote “Create Marketplace Disruption.”  In it I detailed how companies, in the pursuit of best practices build locked-in decision-making systems that perpetuate the past rather than prepare for the future.  “The Founder’s Mentality” provides several case studies in how organizations, especially large ones, can attack that lock-in to rediscover what made them great and set a chart for a better future.  Put it on your reading list for the next plane flight, or relaxation time on your holiday.

 

 

 

 

Brexit – Economic Destruction vs. Creative Destruction

I’m a believer in Disruptive Innovation.  For almost 100 years economists have been writing about “Creative Destruction,” in which new technologies come along making old technologies — and the companies built on them — obsolete.  In the last 20 years, largely thanks to the initial insights of the faculty at Harvard Business School, we’ve seen a dramatic increase in understanding how new companies use new technologies to disrupt markets and wipe out the profitability of companies that were once clearly successful.  In a large way, we’ve come to accept that Disruptive Innovation is good, and the concomitant creative destruction of the old players leads to more rapid growth for the economy, increasing jobs and the wherewithal of everyone.

But, not really everyone.  The trickle to lots of people can be a long time coming.  When market shifts happen, and people lose jobs to new competitors — domestic or offshore — they only know that their life, at least short term, is a lot worse.  As they struggle to pay a mortgage, and find a new job, they often learn their skills are outdated.  There are jobs, but these folks are not qualified.  As they take lesser jobs, their incomes dwindle, and they may well lose their homes.  And their healthcare.

Economists call this workplace transition “temporary economic dislocation.”  Fancy term.  They claim that eventually folks do enter the workplace who are properly trained, and those folks make more money than the workers associated with the previous, now inferior, technology.

That’s great for economists.  But terrible for the folks who lost their jobs.  As someone once said “a recession is when your neighbor loses his job.  A depression is when you lose your job.”  And for a lot of people, the market shift from an industrial economy to an information economy has created severe economic depression in their lives.

A person learns to be a printer, or a printing plate maker, in the 1970s when they are 20-something.  Good job, makes a great wage.  Secure, as printing demand just keeps rising.  But then along comes the internet with PDF and JPEG documents that people read on a screen, and folks simply quit needing, or wanting, printed documents.  In 2016, now age 50-something, this printer or plate-maker no longer has a job.  Demand is down, and its really easy to send the printing to some offshore market like Thailand, Brazil or India where printing is cheaper.

What’s he or she to do now?  Go back to school you may say.  But to learn how to do what?  Say it’s on-line (or digital) document production.  OK, but since everyone in the 20s has been practicing this for over a decade it takes years to actually be competitive.  And then, what’s the pay for a starting digital graphic artist?  A lot less than what they made as a printer.  And who’s going to hire the 58-62 year old digital graphic artist, when there are millions of well trained 20 somethings who seem to be quicker, and more attuned to what the publishers want (especially when the boss ordering the work is 35-42, and really uncomfortable giving orders and feedback to someone her parents’ age.)  Oh, and when you look around there are millions of immigrants who are able to do the work, and willing to do it for a whole lot less than anyone native born to your country.

Source: Master Investor UK

Source: Master Investor UK

In England last week these disaffected people made it a point to show their country’s leadership that their livelihoods were being “creatively destroyed.”  How were they to keep up their standard of living with the flood of immigrants?  And with the wealth of the country constantly shifting from the middle class to the wealthy business leaders and bankers?  While folks who have done well the last 25 years voted overwhelmingly to remain in the EU (such as those who live in what’s called “The City”), those in the suburbs and outlying regions voted overwhelmingly to leave.  Sort of like their income gains, and jobs, left.

To paraphrase the famous line from the movie Network, “they were mad as Hell and they weren’t going to take it any longer.”  Simply put, if they couldn’t participate in the wonderful economic growth of EU participation, they would take it away from those who did.  The point wasn’t whether or not the currency might fall 10% or more, or whether stocks on the UK exchange would be routed.  After all, these folks largely don’t go to Europe or America, so they don’t care that much what the Euro or dollar costs.  And they don’t own stocks, because they aren’t rich enough to do so, so what does it hurt them if equities fall?  If this all puts a lot of pain on the wealthy – well just maybe that is what they really wanted.

America is seeing this in droves.  It’s called the Donald Trump for President campaign.  While unemployment is a remarkably low 5%, there are a lot of folks who are working for less money, or simply out of work entirely, because they don’t know how to get a job.  They may laugh at Robert DiNero as a retired businessman now working for free in “The Intern.”  But they really don’t think it’s funny.  They can’t afford to work for free.  They need more income to pay higher property taxes, sales taxes, health care and the costs of just about everything else.  And mostly they know they are rapidly being priced out of their lifestyle, and their homes, and figuring they’ll be working well into their 70s just to keep from falling into poverty.

These people hate President Obama.  They don’t care if the stock market has soared during his Presidency – they don’t own stocks (and if they do in a 401K or similar program they don’t care because it does them no good today.) They don’t care that he’s created more jobs than anyone since Reagan or Roosevelt, because they see their jobs gone, and they blame him if their recent college graduate doesn’t have a well-paying job.  They don’t care if we are closing in on universal health care, because all they see is that health care is becoming ever more expensive – and often beyond their ability to pay.  For them, their personal America is not as good as they expected it to be – and they are very, very angry.  And the President is a very identifiable symbol they can blame.

Creative Destruction, and disruptive innovations, are great for the winners.  But they can be wildly painful to the losers.  And when the disruptions are as big, and frequent, as what’s happened the last 30 years – globalized economy, nationwide and international super banks, outsourcing, offshoring and the entirety of the Internet of Things – it has left a lot of people really concerned about their future.  As they see the top 1% live opulent lifestyles, they struggle to keep a 12 year old car running and pay the higher license plate fees.  They really don’t care if the economy is growing, or the dollar is strong, or if unemployment is at near-record lows.  They know they are on the losing end of the stick.  For them, well, America really isn’t all that great anymore.

So, hungry for revenge, they are happy to kill the goose for dinner that laid the golden eggs.  They will take what they can, right now, and they don’t care if the costs are astronomical.

Despite their hard times, does this not sound at the least petty, and short-sighted?  Doesn’t it seem rather selfish to damn everyone just because your situation isn’t so good?

Some folks will think that government policy really doesn’t matter that much.  That actions like Brexit won’t stop they improvements coming from innovation.  They think all will work out OK.  They so long for a return to a previous time, when they perceived things were much better, that they are ready to stop the merry-go-round for everyone.

And they can do this.  Brexit will create a Depression for the UK.  The economy not only won’t grow, it will shrink.  Probably for another decade.  There will be fewer jobs, meaning less wealth for everyone.  Those with assets will ride it out.  Those who already struggled will struggle more.  Lacking investment funds, private and public, there will be less investment in infratructure and the means of production, making life harder for everyone.  There will be less, if any, money to invest in innovation, so there will be fewer new products to enjoy, and fewer improvements in lifestyle and productivity.  The currency will be lower, so there will be fewer imports, making the cost of everything go up.  In short, it will be very, painful, and costly, for everyone now that those who felt left out of the economic expansion have had their day at the polls.

Growth is a great thing.  Growth creates jobs, a better lifestyle, higher productivity, more income and more wealth for everyone.  But growth is NOT a given.  Policies, and government actions, can stop growth dead in its tracks.  The innovations we’ve all been fascinated by, and made part of our everyday lives, from smartphones to autos that last hundreds of thousands of miles and tens of years,  to low cost air conditioning, to electricity nearly everywhere, to miracle drugs and gene-based bio-pharmaceuticals that have extended our lives by 30%+ in just one generation — all of these things can come to a screeching, terrible halt.

All it takes to stop the gains of innovation are policies that try to return us to a previous time.  In the process of making our countries great again, we can absolutely destroy them.  It is impossible to go back in time.  It is not impossible to kill the means of economic growth.  All we have to do is focus on constructing walls instead of creating jobs, protecting industries instead of free trade, and wrapping ourselves in the flag of sovereignty instead of collaborating globally to maximize growth.  By focusing on ourselves we can absolutely hurt a lot of other people.

The politicians getting attention now are those espousing a return to some bygone era.  Those who denounce the gains of innovation, and offer pity to those who’ve struggled with market disruptions.  But these are not the leaders who will help people improve their lives.  Those who focus on promoting innovation, attacking the concentration of wealth at the top, providing more incentives to infrastructure development, and mobilizing resources for training and new job creation can make life better for everyone.

Let’s hope everyone watches what happens in the UK last week, this week and going forward learn the long-term lesson of short-term thinking.  Let’s hope that we can return to favoring growth, even a the cost of disruption and creative destruction.

 

 

Microsoft and Linked-In – Same Song, Different Key

Microsoft is buying Linked-In, and we should expect this to be a disaster.

It is clear why Linked-in agreed to be purchased.  As revenues have grown, gross margins have dropped precipitously, and the company is losing money.  And LInked-in still receives 2/3 of its revenue from recruiting ads (the balance is almost wholly subscription fees,) unable to find a wider advertiser base to support growth.  Although membership is rising, monthly active users (MAUs, the most important gauge of social media growth) is only 9% – like Twitter, far below the 40% plus rate of Facebook and upcoming networks.  With only 106M MAUs, Linked in is 1/3 the size of Twitter, and 1/15th the size of Facebook.  And its $1.5B Lynda acquisition is far, far, far from recovering its investment – or even demonstrating viability as a business.

Even though the price is below the all-time highs for LNKD investors, Microsoft’s offer is far above recent trading prices and a big windfall for them.

But for Microsoft investors, this is a repeat of the pattern that continues to whittle away at their equity value.

MSFT + LINKOnce upon a time, in a land far away, and barely remembered by young people, Microsoft OWNED the tech marketplace.  Individuals and companies purchased PCs preloaded with Microsoft Windows 95, Microsoft Office, Microsoft Internet Explorer and a handful of other tools and trinkets. And as companies built networks they used PC servers loaded with Microsoft products. Computing was a Microsoft solution, beginning to end, for the vast majority of users.

But the world changed. Today PC sales continue their multi-year, accelerating decline, while some markets (such as education) are shifting to Chromebooks for low cost desktop/laptop computing, growing their sales and share.  Meanwhile, mobile devices have been the growth market for years.  Networks are largely public (rather than private) and storage is primarily in the cloud – and supplied by Amazon.  Solutions are spread all around, from Google Drive to apps of every flavor and variety.  People spend less computing cycles creating documents, spreadsheets and presentations, and a lot more cycles either searching the web or on Facebook, Instagram, WhatsApp, YouTube and Snapchat.

But Microsoft’s leadership still would like to capture that old world.  They still hope to put the genie back in the bottle, and have everyone live and work entirely on Microsoft.  And somehow they have deluded themselves into thinking that buying Linked-in will allow them to return to the “good old days.”

Microsoft has not done a good job of integrating its own solutions like Office 365, Skype, Sharepoint and Dynamics into a coherent, easy to use, and to some extent mobile, solution.  Yet, somehow, investors are expected to believe that after buying Linked-in the two companies will integrate these solutions into the LInked-in social platform, enabling vastly greater adoption/use of Office 365 and Dynamics as they are tied to Linked-in Sales Navigator.  Users will be thrilled to have their personal information analyzed by Microsoft big data tools, then sold to advertisers and recruiters.  Meanwhile, corporations will come back to Microsoft in droves as they convert Linked-in into a comprehensive project management tool that uses Lynda to educate employees, and 365 to push materials to employees – and allow document collaboration – all across their mobile devices.

Do you really believe this?  It might run on the Powerpoint operating system, but this vision will take an enormous amount of code integration.  And with Linked-in operated as separate company within Microsoft, who is going to do this integration?  This will involve a lot of technical capability, and based on previous performance it appears both companies lack the skills necessary to pull it off.  How this mysterious, magical integration will happen is far, far from obvious, or explained in the announcement documents.  Sounds a lot more like vaporware than a straightforward software project.

And who thinks that today’s users, from individuals to corporations, have a need for this vision?  While it may sound good to Microsoft, have you heard Linked-in users saying they want to use 365 on Linked in?  Or that they’ll continue to use Linked-in if forced to buy 365?  Or that they want their personal information data mined for advertisers?  Or that they desire integration with Dynamics to perform Linked-in based CRM?  Or that they see a need for a social-network based project management tool that feeds up training documents or collaborative documents?  Are people asking for an integrated, holistic solution from one vendor to replace their current mobile devices and mobile solutions that are upgraded by multiple vendors almost weekly?

And, who really thinks Microsoft is good at acquisition integration?  Remember aQuantive? In 2007 Microsoft spent $6B (an 85% premium to market price) to purchase this digital ad agency in order to build its business in the fast growing digital ad space.  Don’t feel bad if you don’t remember, because in 2012 Microsoft wrote it off.  Of course, there was the buy-it-and-write-it-off pattern repeated with Nokia.  Microsoft’s success at taking “bold moves” to expand beyond its core business has been nothing less than horrible.  Even the $1.2B acquisition of Yammer in 2012 to make Sharepoint more collaborative and usable has been unsuccessful, even though rolled out for free to 365 users. Yammer is adding nothing to Microsoft’s sales or value as competitor Slack has reaped the growth in corporate messaging.

The only good news story about Microsoft acquisitions is that they missed spending $44B to buy Yahoo – which is now on the market for $5B.  Whew, thank goodness that one got away!

Microsoft’s leadership primed the pump for this week’s announcement by having the Chairman talk about investing outside of the company’s core a couple of weeks ago.  But the vast majority of analysts are now questioning this giant bet, at a price so high it will lower Microsoft’s earnings for 2 years.  Analysts are projecting about a $2B revenue drop for $90B Microsoft next year, and this $26B acquisition will deliver only a $3B bump.  Very, very expensive revenue replacement.

Despite all the lingo, Microsoft simply cannot seem to escape its past.  Its acquisitions have all been designed to defend and extend its once great history – but now outdated.  Customers don’t want the past, they are looking to the future.  And no matter how hard they try, Microsoft’s leaders simply appear unable to define a future that is not tightly linked to the company’s past.  So investors should expect Linked-In’s future to look a lot like aQuantive.  Only this one is going to be the most painful yet in the long list of value transfer from Microsoft investors to the investors of acquired companies.

 

How Traditional Planning Systems Failed Microsoft, and Its Board

Last week Bloomberg broke a story about how Microsoft’s Chairman, John Thompson, was pushing company management for a faster transition to cloud products and services.  He even recommended changes in spending might be in order.

Really?  This is news?

Let’s see, how long has the move to mobile been around?  It’s over a decade since Blackberry’s started the conversion to mobile.  It was 10 years ago Amazon launched AWS.  Heck, end of this month it will be 9 years since the iPhone was released – and CEO Steve Ballmer infamously laughed it would be a failure (due to lacking a keyboard.)  It’s now been 2 years since Microsoft closed the Nokia acquisition, and just about a year since admitting failure on that one and writing off $7.5B  And having failed to achieve even 3% market share with Windows phones, not a single analyst expects Microsoft to be a market player going forward.

So just now, after all this time, the Board is waking up to the need to change the resource allocation?  That does seem a bit like looking into barn lock acquisition long after the horses are gone, doesn’t it?

The problem is that historically Boards receive almost all their information from management.  Meetings are tightly scheduled affairs, and there isn’t a lot of time set aside for brainstorming new ideas.  Or even for arguing with management assumptions.  The work of governance has a lot of procedures related to compliance reporting, compensation, financial filings, senior executive hiring and firing – there’s a lot of rote stuff.  And in many cases, surprisingly to many non-Directors, the company’s strategy may only be a topic once a year.  And that is usually the result of a year long management controlled planning process, where results are reviewed and few challenges are expected.  Board reviews of resource allocation are at the very, very tail end of management’s process, and commitments have often already been made – making it very, very hard for the Board to change anything.

And these planning processes are backward-oriented tools, designed to defend and extend existing products and services, not predict changes in markets.  These processes originated out of financial planning, which used almost exclusively historical accounting information.  In later years these programs were expanded via ERP (Enterprise Resource Planning) systems (such as SAP and Oracle) to include other information from sales, logistics, manufacturing and procurement.  But, again, these numbers are almost wholly historical data.  Because all the data is historical, the process is fixated on projecting, and thus defending, the old core of historical products sold to historical customers.

Copyright Adam Hartung

Copyright Adam Hartung

Efforts to enhance the process by including extensions to new products or new customers are very, very difficult to implement.  The “owners” of the planning processes are inherent skeptics, inclined to base all forecasts on past performance.  They have little interest in unproven ideas.  Trying to plan for products not yet sold, or for sales to customers not yet in the fold, is considered far dicier – and therefore not worthy of planning.  Those extensions are considered speculation – unable to be forecasted with any precision – and therefore completely ignored or deeply discounted.

And the more they are discounted, the less likely they receive any resource funding.  If you can’t plan on it, you can’t forecast it, and therefore, you can’t really fund it.  And heaven help some employee has a really novel idea for a new product sold to entirely new customers.  This is so “white space” oriented that it is completely outside the system, and impossible to build into any future model for revenue, cost or – therefore – investing.

Take for example Microsoft’s recent deal to sell a bunch of patent rights to Xiaomi in order to have Xiaomi load Office and Skype on all their phones.  It is a classic example of taking known products, and extending them to very nearby customers.  Basically, a deal to sell current software to customers in new markets via a 3rd party.  Rather than develop these markets on their own, Microsoft is retrenching out of phones and limiting its investments in China in order to have Xiaomi build the markets – and keeping Microsoft in its safe zone of existing products to known customers.

The result is companies consistently over-investment in their “core” business of current products to current customers.  There is a wealth of information on those two groups, and the historical info is unassailable.  So it is considered good practice, and prudent business, to invest in defending that core.  A few small bets on extensions might be OK – but not many.  And as a result the company investment portfolio becomes entirely skewed toward defending the old business rather than reaching out for future growth opportunities.

This can be disastrous if the market shifts, collapsing the old core business as customers move to different solutions.  Such as, say, customers buying fewer PCs as they shift to mobile devices, and fewer servers as they shift to cloud services.  These planning systems have no way to integrate trend analysis, and therefore no way to forecast major market changes – especially negative ones.  And they lack any mechanism for planning on big changes to the product or customer portfolio.   All future scenarios are based on business as it has been – a continuation of the status quo primarily – rather than honest scenarios based on trends.

How can you avoid falling into this dilemma, and avoiding the Microsoft trap?  To break this cycle, reverse the inputs.  Rather than basing resource allocation on financial planning and historical performance, resource allocation should be based on trend analysis, scenario planning and forecasts built from the future backward.  If more time were spent on these plans, and engaging external experts like Board Directors in discussions about the future, then companies would be less likely to become so overly-invested in outdated products and tired customers. Less likely to “stay at the party too long” before finding another market to develop.

If your planning is future-oriented, rather than historically driven, you are far more likely to identify risks to your base business, and reduce investments earlier.  Simultaneously you will identify new opportunities worthy of more resources, thus dramatically improving the balance in your investment portfolio.  And you will be far less likely to end up like the Chairman of a huge, formerly market leading company who sounds like he slept through the last decade before recognizing that his company’s resource allocation just might need some change.

What Makes Snapchat Worth $20B? Trends

What Makes Snapchat Worth $20B? Trends

Snapchat filed with the SEC this week its latest fundraising.  According to TechCrunch, $1.8B cash was added to the company, bringing its current value to the range of $18-$20B.  Not bad for a company with 2015 revenues of about $59M.  And quite a high valuation for a one-product company that probably nobody who reads this column has ever used – or even knows anything about.

So why is Snapchat so highly valued?  Because revenue estimates are for $250M-$350M in 2016, and up to $1B for 2017.  From 50million daily active users in March, 2014 Snapchat has grown to 110million users by December, 2015 – so a growth rate of about 50% per year.  And this growth has not been all USA, over half the Snapchat users are from Europe and the rest of the world – and the non-USA markets are growing the fastest.  Clearly, at 20 times 2017 revenue estimates, investors are expecting dramatic growth in users, and revenue.  Numbers of the magnitude that drove the valuation of Google (over $500B) and Facebook ($340B.)

SnapchatSo what is Snapchat?  It is the complete opposite of this column.  Snapchat is like Twitter only without the text.  Of course, most of my readers don’t tweet either, so that may not help.  It is a picture or 10 second video messaging app.  But, most of my readers don’t use messaging apps either.

Think of texting, only you don’t actually text.  Instead you send a picture or short video.  That’s it. Pretty simple.   Just a way to send your friends pics and videos with your phone – although you can be creative with the pictures and make changes.

People who use Snapchat find it addictive.  They may send dozens, or hundreds, of pictures daily.  To single friends, groups, or even all their friends – since users can pick who gets the pic.

For my readers, this must seem ridiculous.  Who would want to send, or receive, several pictures every day from some, or many, of your colleagues and friends?

In 1927 Fred Bernard [trivia] popularized the phrase we use today “A picture is worth a thousand words.” And today, that is more true than ever.  Pictures are replacing words for a vast and growing segment of the population.  This is now a very fast growing trend, and it is projected to continue.

“Why is this a trend, and not a fad?” you may ask.  The answer goes to the heart of how we use language and images.  For thousands of years very few people knew how to read or write.  To promulgate information, religious and government leaders would have artists paint images that told the story they wanted spread. These images were then taken from town to town, and people were taught the stories by having someone explain the picture.  Then the image would be recalled by the population.  It was only after the advent of mass education that using written words became the primary medium for providing information.

Simultaneously, paintings were really expensive.  And early photography was expensive.  Both mediums were used primarily to memorialize a story, or event.  Thus there were relatively few of these images, and they were often treasured, hung on walls or kept in albums for later review.

Today images are extremely cheap and easy.  Almost everyone has a phone with a camera.  So it is easy to take a picture, and it is easy to view a picture.  Pictures have become free.  And if you can replace a thousand words with one photo, it is far more efficient – and thus from a resource perspective it is far cheaper (think of how long it takes to write an email as opposed to taking a picture.)  Given that this flip in resources required has happened, and that the use of mobile technology is growing worldwide and will never revert, we know that this is not s short-term fad, but rather a trend.

Once we communicated by telephone calls.  That has dropped dramatically because real-time communication takes a lot more effort to coordinate and implement than asynchronous communication.  I can email or text any time I want, and my friend can receive that message when it is convenient for her.  And she can choose to respond at her convenience, or not respond at all.  Thus email and texting exploded due to the technical capability and their improved economy. Today we  have the ability to communicate in pictures or short videos which is even more information dense, and even more economical.

I’m sure many of my readers are saying “well, that may be good for someone else, but not for me.”  And that’s good, because you read my columns.  But factually, the number of readers is destined to decrease as the number of viewers go up.  There’s a reason every time you open an on-line magazine column you are bombarded by short videos ads.  They are more communication dense and they are more successful at capturing attention – even if they do irritate you.  There’s a reason that fewer and fewer people read books, and rely instead on columns like this one to gain insights.  And there’s a reason more and more people connect on Facebook rather than sending emails – and rather than sending snail mail (when was the last time you actually mailed someone a birthday card?)  While you may not imagine using pictures to replace language, the fact is lots and lots and lots of people are making the switch, and thus it is a trend that will affect how we do many things for many years into the future.  Haven’t you ever watched a YouTube video rather than read an instruction manual?

Snapchat has capitalized on this new trend by making an app which allows you and your friends to communicate far more information a whole lot faster.  Rather than interrupting your friends with a phone call (they may be busy right now,) or writing them an email or text message, you can just send them a photo.  Have you ever used your phone to photo a label and sent it to someone who’s shopping for you?  Or taken a photo of an item so you can find an exact replacement?  That same action now can become your way of communicating – of telling your current story.  Don’t tell your friends what you had for lunch, just send a photo. Don’t tell your friends you are shopping on Madison Avenue, just take a picture.  Pictures are not archives, but rather just a fast, more compact and information filled form of communication.

Snapchat did not discover a new bio-pharmaceutical.  It did not create a breakthrough new technology, such as extended battery life.  It did not identify a sales opportunity in a far flung country.  Nor did it have a breakthrough manufacturing process.  Rather, merely by being the leader at implementing an emerging trend Snapchat’s founders have created $20billion of current value.

Now that you know this trend, what are you going to do so you can capture additional value for your business?

Why Understanding 1 Retail Trend Is Worth 50% More Than All of WalMart

Why Understanding 1 Retail Trend Is Worth 50% More Than All of WalMart

WalMart announced 1st quarter results on Thursday, and the stock jumped almost 10% on news sales were up versus last year.  It was only $1.1B on $115B, about 1%, but it was UP!  Same store sales were also up 1%, but analysts pointed out that was largely due to lower prices to hold competitors at bay.

While investors cheered the news, at the higher valuation WalMart is still only worth what it was in June, 2012 (just under $70/share.)  From then through August, 2015 WalMart traded at a  higher valuation – peaking at $90 in January, 2015.  Subsequent fears of slower sales had driven the stock down to $56.50 by November, 2015.  So this is a recovery for crestfallen investors the last year, but far from new valuation highs.

Unfortunately, this is likely to be just a blip up in a longer-term ongoing valuation decline for WalMart.  And that value will be captured by those who understand the most important, undeniable trend in retail.

Data Sources: Yahoo Finance and www.trend-stock-analysis-on.net

(c) AdamHartung.com Data Sources: Yahoo Finance and www.trend-stock-analysis-on.net

Although the numbers for WalMart’s valuation are a bit better than when the associated chart was completed last week, as you can see WalMart’s assets are greater than the company’s total valuation.  This is because the return on its assets, today and projected, are so low that WalMart must borrow money in order to make them overall worthwhile. And the fact that on the balance sheet, at book value, the assets appear to be some $50B lower due to depreciation, and the difference be cost and market value.

This is because WalMart competes almost entirely in the intensely competitive and asset-dense market of traditional brick-and-mortar retail.  This requires a lot of land, buildings, shelves and inventory.  And that market is barely growing.  Maybe 1-2%/year.

Compare t his with Amazon.  Amazon has about $30B of assets.  Yet its valuation is over $330B.  So Amazon captures an extra value of $300B by competing in the asset sparse market of on-line retailing where it needs little land, few buildings, far less shelving and a lot less inventory.  And it is competing in a market the Commerce Department says is growing at 15%/year.

The trend to on-line sales is extremely important, as it has entirely different customer acquisition and retention requirements, and very different ways of competing.  Amazon understands those trends, and continues to lead its rivals.  Today on-line retail is 10.5% of all non-restaurant, non-bar retail.  And that 15% growth rate accounts for 60% of ALL the growth in this retail segment.  Amazon keeps advancing, growing as fast (or faster) than the industry average, especially in key categories.  Meanwhile, despite its vast resources and best efforts WalMart admitted its on-line sales growth is only 7% – half the segment growth rate – and its growth is decelerating.

By understanding this one trend – a very big, important, powerful trend – Amazon captures more value than the current value of ALL the Walmart stores, distribution centers and their contents.  With all those assets WalMart can only convince investors it is worth about $200B.  With about 13% of the assets used by WalMart, Amazon convinces investors it is worth 33% more than WalMart – over $330B.  That’s $300B of value created just by knowing where the market is headed, and how to deliver for customers in that future market.

Yes, Amazon has other businesses, such as AWS cloud services and tech products in tablets, smartphones and smart speakers.  But these too (some not nearly as successful as others, mind you) are very much on trends.  WalMart once dominated retail technology with its massive computer systems and enormous databases.  But WalMart limited itself to using its technology to defend & extend its core traditional retail business via store forecasts, optimized distribution and extensive pricing schemes.  Amazon is monetizing its technology prowess by, again, leveraging trends and making its services and products available to others.

How does this apply to you?  When someone asks “If you could have anything you want, what would  you ask for?” most of us would start with health, happiness, peace and similar intangibles for us, our families and mankind.  But if forced to make a tangible selection, we would ask for an asset.  Buildings, equipment, cash.  Yet, as WalMart and Amazon show us, those assets are only as valuable as what you do with them.  And thus, it is more valuable to understand the trends, and how to use assets wisely for greatest value, than it is to own a pile of assets.

So the really important question is “Do you know what trends are going to be important to your business, and are you implementing a strategy to leverage those key trends?”  If you are trying to protect your assets, you will likely be overwhelmed by the trend leader.  But if you really understand the trends and are ready to act on them, you could be the one to capture the most value in your marketplace, and likely without adding a lot more costly assets.

Innovation – Why Bezos Succeeded, While Lampert Failed at Sears

Innovation – Why Bezos Succeeded, While Lampert Failed at Sears

Last week Sears announced sales and earnings.  And once again, the news was all bad.  The stock closed at a record, all time low.  One chart pretty much sums up the story, as investors are now realizing bankruptcy is the most likely outcome.

Chart Source: Yahoo Finance 5/13/16

Chart Source: Yahoo Finance 5/13/16

Quick Rundown:  In January, 2002 Kmart is headed for bankruptcy.  Ed Lampert, CEO of hedge fund ESL, starts buying the bonds.  He takes control of the company, makes himself Chairman, and rapidly moves through proceedings.  On May 1, 2003, KMart begins trading again.  The shares trade for just under $15 (for this column all prices are adjusted for any equity transactions, as reflected in the chart.)

Lampert quickly starts hacking away costs and closing stores.  Revenues tumble, but so do costs, and earnings rise.  By November, 2004 the stock has risen to $90.  Lampert owns 53% of Kmart, and 15% of Sears.  Lampert hires a new CEO for Kmart, and quickly announces his intention to buy all of slow growing, financially troubled Sears.

In March, 2005 Sears shareholders approve the deal.  The stock trades for $126.  Analysts praise the deal, saying Lampert has “the Midas touch” for cutting costs. Pumped by most analysts, and none moreso than Jim Cramer of “Mad Money” fame (Lampert’s former roommate,) in 2 years the stock soars to $178 by April, 2007.  So far Lampert has done nothing to create value but relentlessly cut costs via massive layoffs, big inventory reductions, delayed payments to suppliers and store closures.

Homebuilding falls off a cliff as real estate values tumble, and the Great Recession begins.  Retailers are creamed by investors, and appliance sales dependent Sears crashes to $33.76 in 18 months.  On hopes that a recovering economy will raise all boats, the stock recovers over the next 18 months to $113 by April, 2010.  But sales per store keep declining, even as the number of stores shrinks.  Revenues fall faster than costs, and the stock falls to $43.73 by January, 2013 when Lampert appoints himself CEO.  In just under 2.5 years with Lampert as CEO and Chairman the company’s sales keep falling, more stores are closed or sold, and the stock finds an all-time low of $11.13 – 25% lower than when Lampert took KMart public almost exactly 13 years ago – and 94% off its highs.

What happened?

Sears became a retailing juggernaut via innovation.  When general stores were small and often far between, and stocking inventory was precious, Sears invented mail order catalogues.  Over time almost every home in America was receiving 1, or several, catalogues every year.  They were a major source of purchases, especially by people living in non-urban communities.  Then Sears realized it could open massive stores to sell all those things in its catalogue, and the company pioneered very large, well stocked stores where customers could buy everything from clothes to tools to appliances to guns.  As malls came along, Sears was again a pioneer “anchoring” many malls and obtaining lower cost space due to the company’s ability to draw in customers for other retailers.

To help customers buy more Sears created customer installment loans. If a young couple couldn’t afford a stove for their new home they could buy it on terms, paying $10 or $15 a month, long before credit cards existed.  The more people bought on their revolving credit line, and the more they paid Sears, the more Sears increased their credit limit. Sears was the “go to” place for cash strapped consumers.  (Eventually, this became what we now call the Discover card.)

In 1930 Sears expanded the Allstate tire line to include selling auto insurance – and consumers could not only maintain their car at Sears they could insure it as well.  As its customers grew older and more wealthy, many needed help with financia advice so in 1981 Sears bought Dean Witter and made it possible for customers to figure out a retirement plan while waiting for their tires to be replaced and their car insurance to update.

To put it mildly, Sears was the most innovative retailer of all time.  Until the internet came along.  Focused on its big stores, and its breadth of products and services, Sears kept trying to sell more stuff through those stores, and to those same customers.  Internet retailing seemed insignificantly small, and unappealing.  Heck, leadership had discontinued the famous catalogues in 1993 to stop store cannibalization and push people into locations where the company could promote more products and services. Focusing on its core customers shopping in its core retail locations, Sears leadership simply ignored upstarts like Amazon.com and figured its old success formula would last forever.

But they were wrong. The traditional Sears market was niched up across big box retailers like Best Buy, clothiers like Kohls, tool stores like Home Depot, parts retailers like AutoZone, and soft goods stores like Bed, Bath & Beyond.  The original need for “one stop shopping” had been overtaken by specialty retailers with wider selection, and often better pricing.  And customers now had credit cards that worked in all stores.  Meanwhile, for those who wanted to shop for many things from home the internet had taken over where the catalogue once began.  Leaving Sears’ market “hollowed out.”  While KMart was simply overwhelmed by the vast expansion of WalMart.

What should Lampert have done?

There was no way a cost cutting strategy would save KMart or Sears.  All the trends were going against the company.  Sears was destined to keep losing customers, and sales, unless it moved onto trends.  Lampert needed to innovate.  He needed to rapidly adopt the trends.  Instead, he kept cutting costs. But revenues fell even faster, and the result was huge paper losses and an outpouring of cash.

To gain more insight, take a look at Jeff Bezos.  But rather than harp on Amazon.com’s growth, look instead at the leadership he has provided to The Washington Post since acquiring it just over 2 years ago. Mr. Bezos did not try to be a better newspaper operator.  He didn’t involve himself in editorial decisions.  Nor did he focus on how to drive more subscriptions, or sell more advertising to traditional customers.  None of those initiatives had helped any newspaper the last decade, and they wouldn’t help The Washington Post to become a more relevant, viable and profitable company.  Newspapers are a dying business, and Bezos could not change that fact.

Mr. Bezos focused on trends, and what was needed to make The Washington Post grow.  Media is under change, and that change is being created by technology.  Streaming content, live content, user generated content, 24×7 content posting (vs. deadlines,) user response tracking, readers interactivity, social media connectivity, mobile access and mobile content — these are the trends impacting media today.  So that was where he had leadership focus.  The Washington Post had to transition from a “newspaper” company to a “media and technology company.”

So Mr. Bezos pushed for hiring more engineers – a lot more engineers – to build apps and tools for readers to interact with the company.  And the use of modern media tools like headline testing.  As a result, in October, 2015 The Washington Post had more unique web visitors than the vaunted New York Times.  And its lead is growing.  And while other newspapers are cutting staff, or going out of business, the Post is adding writers, editors and engineers. In a declining newspaper market The Washington Post is growing because it is using trends to transform itself into a company readers (and advertisers) value.

CEO Lampert could have chosen to transform Sears Holdings.  But he did not.  He became a very, very active “hands on” manager.  He micro-managed costs, with no sense of important trends in retail.  He kept trying to take cash out, when he needed to invest in transformation.  He should have sold the real estate very early, sensing that retail was moving on-line.  He should have sold outdated brands under intense competitive pressure, such as Kenmore, to a segment supplier like Best Buy.  He then should have invested that money in technology.  Sears should have been a leader in shopping apps, supplier storefronts, and direct-to-customer distribution.  Focused entirely on defending Sears’ core, Lampert missed the market shift and destroyed all the value which initially existed in the great retail merger he created.

Impact?

Every company must understand critical trends, and how they will apply to their business.  Nobody can hope to succeed by just protecting the core business, as it can be made obsolete very, very quickly.  And nobody can hope to change a trend.  It is more important than ever that organizations spend far less time focused on what they did, and spend a lot more time thinking about what they need to do next.  Planning needs to shift from deep numerical analysis of the past, and a lot more in-depth discussion about technology trends and how they will impact their business in the next 1, 3 and 5 years.

Sears Holdings was a 13 year ride.  Investor hope that Lampert could cut costs enough to make Sears and KMart profitable again drove the stock very high.  But the reality that this strategy was impossible finally drove the value lower than when the journey started.  The debacle has ruined 2 companies, thousands of employees’ careers, many shopping mall operators, many suppliers, many communities, and since 2007 thousands of investor’s gains. Four years up, then 9 years down. It happened a lot faster than anyone would have imagined in 2003 or 2004.  But it did.

And it could happen to you.  Invert your strategic planning time.  Spend 80% on trends and scenario planning, and 20% on historical analysis.  It might save your business.