America’s middle class has been decimated. Ever since Ronald Reagan rewrote the tax code, dramatically lowering marginal rates on wealthy people and slashing capital gains taxes, America’s wealthy have been amassing even greater wealth, while the middle class has gone backward and the poor have remained poor. Losing 30% of their wealth, and for many most of their home equity, has left what were once middle class families actually closer to definitions of working poor than a 1950s-1960s middle class.
When Charles Dickens wrote “A Christmas Carole” he brought to life for readers the striking difference between those who “have” from those who “have not” in early England. If you had money England was a great place to be. If you relied on your labors then you were struggling to make ends meet, and regularly disappointing yourself and your family.
For a great many American’s that is the situation in 2015 USA.
At the book’s outset, Mr. Ebenezer Scrooge felt that his wealth was all due to his own great skill. He gave himself 100% of the credit for amassing a fortune, and he felt that it was wrong of laborers, such as his bookkeeper Mr. Cratchit, to expect to pay when seeking a day off for Christmas.
Unfortunately, this sounds far too often like the wealthy and 1%ers. They feel as if their wealth is 100% due to their great intelligence, skill, hard work or conniving. And they don’t think they owe anyone anything as they work to keep unions at bay as they campaign to derail all employee bargaining. Nor do they think they should pay taxes on their wealth as many actively seek to destroy the role of government.
Meanwhile, there are employers today who have taken a page right out of Mr. Scrooge’s book of worklife desolation. Ever since President Reagan fired the Air Traffic Controllers Union employee rights have been on the downhill. Employers increasingly do not allow employees to have any say in their work hours or workplace conditions – such as Marissa Mayer eliminating work from home at Yahoo, yet expecting 3 year commitments from all managers.
Just as Mr. Scrooge refused to put more coal in the office stove as Mr. Cratchit’s fingers froze, employers like WalMart rigidly control the workplace environment – right down to the temperature in every single building and office – in order to save cost regardless of employee satisfaction. Workplace comfort has little voice when implementing the CEOs latest cost-saving regimen.
Just as Mr. Scrooge objected to giving the 25th December as a paid holiday (picking his pocket once a year was his viewpoint,) many employers keep cutting sick leave and holidays – or, worse, they allow days off but expect employees to respond to texts, voice mails, emails and social media 24x7x365. “Take all the holiday you want, just respond within minutes to the company’s every need, regardless of day or time.”
Increasingly, those who “go to work” have less and less voice about their work. How many of you readers will check your work voice mail and/or email on Christmas Day? Is this not the modern equivalent of your employer, like Scrooge, treating you like a filcher if you don’t work on the 25th December? But, do you dare leave the smartphone, tablet or laptop alone on this day? Do you risk falling behind on your job, or angering your boss on the 26th if something happened and you failed to respond?
Like many with struggling economic uncertainty, Bob Cratchit had a very ill son. But Mr. Scrooge could not be bothered by such concerns. Mr. Scrooge had a business to run, and if an employee’s family was suffering then it was up to social services to take care of such things. If those social services weren’t up to standards, well it simply was not his problem. He wasn’t the government – although he did object to any and all taxes. And he had no value for the government offering decent prisons, or medical care to everyone.
Today, employers right and left have dropped employee health insurance, recommending employees go on the exchanges; even though these same employers do not offer any incremental income to cover the cost of exchange-based employee insurance. And many employers are cutting employee hours to make sure they are not able to demand health care coverage. And the majority of employers, and employer associations such as the Chamber of Commerce, want to eliminate the Affordable Care Act entirely, leaving their employees with no health care at all – as was the case for many prior to ACA passage.
Even worse, there are employers (especially in retail, fast food and other minimum wage environments) with employees earning so little pay that as employers they recommend their employees file for government based Medicaid in order to receive the bottom basics of healthcare. Employees are a necessity, but not if they are sick or if the employer has to help their families maintain good health.
But things changed for Mr. Scrooge, and we can hope they do for a lot more of America’s employers and wealthy elite.
Mr. Scrooge’s former partner, Mr. Jakob Marley, visits Mr. Scrooge in a dream and reminds him that, in fact, there was a lot more to his life, and wealth creation, than just Ebenezer’s toils. Those around him helped him become successful, and others in his life were actually very important to his happiness. He reminds Mr Scrooge that as he isolated himself in the search for ever greater wealth he gained money, but lost a lot of happiness.
Today we have some business leaders taking the cue from Mr. Marley, and speaking out to the Scrooges. In particular, we can be thankful for folks like Warren Buffet who consistently points out the great luck he had to be born with certain skills at this specific point in time. Mr. Buffett regularly credits his wealth creation with the luck to receive a good education, learning from academics such as Ben Graham, and having a great network of colleagues to help him invest.
Further, amplifying his role as a modern day Jacob Marley, Mr. Buffett recognizes the vast difference between his situation and those around him. He has pointed out that his secretary pays a higher percent of her income in taxes than himself, and he points out this is a remarkably unfair situation. Additionally, he makes it clear that for many wealth is a gift of birth – and “winning the ovarian lottery” does not make that wealthy person smarter, harder working or more valuable to society. Rather, just lucky.
What we need is for more wealthy Americans to have a vision of Christmas future – as it appeared to Mr. Scrooge. He saw how wealth inequality would worsen young Tiny Tim’s health, leaving him crippled and dying. He saw his employee Mr. Cratchet struggle and become ill. These visions scared him. Scared him so much, he offered a bounty upon his community, sharing his wealth.
Mr. Scrooge realized that great wealth, preserved just for him, was without merit. He was doomed to a future of being rich, but without friends, without a great world of colleagues and without the sharing of riches among everyone in order that all in society could be healthy and grow. Many would suffer, and die, if society overall did not take actions to share success.
These days we do have a few of these visionary 1%ers, such as Bill Gates, Warren Buffett and recently Mark Zuckerberg, who are either currently, or in the future, planning to disseminate their vast wealth for the good of mankind.
Yet, middle class Americans have been watching their dreams evaporate. Over the last 50 years America has changed, and they have been left behind. Hard work, well…….. it just doesn’t give people what it once did. Policy changes that favored the wealthy with Ayn Rand style tax programs have made the rich ever richer, supported the legal rights of big corporations and left the middle class with a lot less money and power. Incomes that did not come close to matching inflation, and home values that too often are more anchors than balloons have beset 2015’s strivers.
It will take more than philanthropic foundations and a few standout generous donors to rebuild America’s middle class. It will take policies that provide more (more safety nets, more health care, more education, more pension protection, more job protections and more political power) for those in the middle, and give them economic advantages today offered only wealthier Americans.
Let us hope that in 2016 we see a re-awakening of the need to undertake such rebuilding by policymakers, corporate leaders and the 1%. Let us hope this Christmas for a stronger, more robust, healthier and disparate, shared economy “for each and every one.”
There was a time, before primaries, when each party's platform was really important. Voters didn't pick a candidate, the party did. Then voters read what policies the party planned to implement should it control the executive branch, and possibly a legislative majority. It was the policies that drew the most attention – not the candidates.
Digging deeper than shortened debate-level headlines, there is a considerable difference in the recommended economic policies of the two dominant parties. The common viewpoint is that Republicans are good for business, which is good for the economy. Republican policies – and the more Adam Smith, invisible hand, limited regulation, lassaiz faire the better – are expected to create a robust, healthy, growing economy. Meanwhile, the common view of Democrat policies is that they too heavily favor regulation and higher taxes which are economy killers.
Well, for those who feel this way it may be time to review the last 80 years of economic history, as Bob Deitrick and Lew Godlfarb have done in a great, easy to read book titled "Bulls, Bears and the Ballot Box" (available at Amazon.com) Their heavily researched, and footnoted, text brings forth some serious inconsistency between the common viewpoint of America's dominant parties, and the reality of how America has performed since the start of the Great Depression.
Gary Hart recently wrote in The Huffington Post,
"Reason and facts are sacrificed to opinion and myth. Demonstrable
falsehoods are circulated and recycled as fact. Narrow minded opinion
refuses to be subjected to thought and analysis. Too many now subject
events to a prefabricated set of interpretations, usually provided by a
biased media source. The myth is more comfortable than the often
difficult search for truth."
Senator Daniel Patrick Moynihan is attributed with saying "everyone is
entitled to his own opinion, but not his own facts." So even though we
may hold very strong opinions about parties and politics, it is
worthwhile to look at facts. This book's authors are to be commended for spending several years, and many thousands of student research assistant man-days, sorting out economic performance from the common viewpoint – and the broad theories upon which much policy has been based. Their compendium of economic facts is the most illuminating document on economic performance during different administrations, and policies, than anything previously published.
Chart reproduced by permission of authors
The authors looked at a range of economic metrics including inflation, unemployment, growth in corporate profits, performance of the stock market, change in household income, growth in the economy, months in recession and others. To their surprise (I had the opportunity to interview Mr. Goldfarb) they discovered that laissez faire policies had far less benefits than expected, and in fact produced almost universal negative economic outcomes for the nation!
From this book loaded with statistical fact tidbits and comparative charts, here are just a few that caused me to realize that my long-term love affair with Milton Friedman's theories and recommended policies in "Free to Choose" were grounded in a theory I long admired, but that simply have proven to be myths when applied!
- Personal disposable income has grown nearly 6 times more under Democratic presidents
- Gross Domestic Product (GDP) has grown 7 times more under Democratic presidents
- Corporate profits have grown over 16% more per year under Democratic presidents (they actually declined under Republicans by an average of 4.53%/year)
- Average annual compound return on the stock market has been 18 times greater under Democratic presidents (If you invested $100k for 40 years of Republican administrations you had $126k at the end, if you invested $100k for 40 years of Democrat administrations you had $3.9M at the end)
- Republican presidents added 2.5 times more to the national debt than Democratic presidents
- The two times the economy steered into the ditch (Great Depression and Great Recession) were during Republican, laissez faire administrations
The "how and why" of these results is explained in the book. Not the least of which revolves around the velocity of money and how that changes as wealth moves between different economic classes.
The book is great at looking at today's economic myths, and using long forgotten facts to set the record straight. For example, in explaining President Reagan's great economic recovery of the 1980s it is often attributed to the stimulative impact of major tax cuts. But in reality the 1981 tax cuts backfired, leading to massive deficits and a weaker economy with a double dip recession as unemployment soared. So in 1982 Reagan signed (TEFRA) the largest peacetime tax increase in our nation's history. In his tenure Reagan signed 9 tax bills – 7 of which raised taxes!
The authors do not come down on the side of any specific economic policies. Rather, they make a strong case that a prosperous economy occurs when a president is adaptable to the needs of the country at that time. Adjusting to the results, rather than staunchly sticking to economic theory. And that economic policy does not stand alone, but must be integrated into the needs of society. As Dwight Eisenhower said in a New Yorker interview
"I despise people who go to the gutter on either the right or the left and hurl rocks at those in the center."
The book covers only Presidents Hoover through W. Bush. But as we near this election I asked Mr. Goldfarb his view on the incumbent Democrat's first 4 years. His response:
- "Obama at this time would rank on par with Reagan
- Corporate profits have risen under Obama more than any other president
- The stock market has soared 14.72%/year under Obama, second only to Clinton — which should be a big deal since 2/3 of people (not just the upper class) have a 401K or similar investment vehicle dependent upon corporate profits and stock market performance"
As to the challenging Republican party's platform, Mr. Goldfarb commented:
- "The platform is the inverse of what has actually worked to stimulate economic growth
- The recommended platform tax policy is bad for velocity, and will stagnate the economy
- Repealing the Affordable Care Act (Obamacare) will have a negative economic impact because it will force non-wealthy individuals to spend a higher percentage of income on health care rather than expansionary products and services
- Economic disaster happens in America when wealth is concentrated at the top, and we are at an all time high for wealth concentration. There is nothing in the platform which addresses this issue."
There are a lot of reasons to select the party for which you wish to vote. There is more to America than the economy. But, if you think like the Democrats did in 1992 and "it's about the economy" then you owe it to yourself to read this book. It may challenge your conventional wisdom as it presents – like Joe Friday said – "just the facts."
Not far from each other, in the area around Seattle, are two striking contrasts in leadership. They provide significant insight to what creates success today.
Steve Ballmer leads Microsoft, America's largest software company. Unfortunately, the value of Microsoft has gone nowhere for 10 years. Steve Ballmer has steadfastly defended the Windows and Office products, telling anyone who will listen that he is confident Windows will be part of computing's future landscape. Looking backward, he reminds people that Windows has had a 20 year run, and because of that past he is certain it will continue to dominate.
Unfortunately, far too many investors see things differently. They recognize that nearly all areas of Microsoft are struggling to maintain sales. It is quite clear that the shift to mobile devices and cloud architectures are reducing the need, and desire, for PCs in homes, offices and data centers. Microsoft appears years late recognizing the market shift, and too often CEO Ballmer seems in denial it is happening – or at least that it is happening so quickly. His fixation on past success appears to blind him to how people will use technology in 2014, and investors are seriously concerned that Microsoft could topple as quickly DEC., Sun, Palm and RIM.
Comparatively, across town, Mr. Bezos leads the largest on-line retailer Amazon. That company's value has skyrocketed to a near 90 times earnings! Over the last decade, investors have captured an astounding 10x capital gain! Contrary to Mr. Ballmer, Mr. Bezos talks rarely about the past, and almost almost exclusively about the future. He regularly discusses how markets are shifting, and how Amazon is going to change the way people do things.
Mr. Bezos' fixation on the future has created incredible growth for Amazon. In its "core" book business, when publishers did not move quickly toward trends for digitization Amazon created and launched Kindle, forever altering publishing. When large retailers did not address the trend toward on-line shopping Amazon expanded its retail presence far beyond books, including more products and a small armyt of supplier/partners. When large PC manufacturers did not capitalize on the trend toward mobility with tablets for daily use Amazon launched Kindle Fire, which is projected to sell as many as 12 million units next year (AllThingsD.com).
Where Mr. Ballmer remains fixated on the past, constantly reinvesting in defending and extending what worked 20 years ago for Microsoft, Mr. Bezos is investing heavily in the future. Where Mr. Ballmer increasingly looks like a CEO in denial about market shift, Mr. Bezos has embraced the shifts and is pushing them forward.
Clearly, the latter is much better at producing revenue growth and higher valuation than the former.
As we look around, a number of companies need to heed the insight of this Seattle comparison:
- At AOL it is unclear that Mr. Armstrong has a clear view of how AOL will change markets to become a content powerhouse. AOL's various investments are incoherent, and managers struggle to see a strong future for AOL. On the other hand, Ms. Huffington does have a clear sense of the future, and the insight for an entirely different business model at AOL. The Board would be well advised to consider handing the reigns to Ms. Huffington, and pushing AOL much more rapidly toward a different, and more competitive future.
- Dell's chronic inability to identify new products and markets has left it, at best, uninteresting. It's supply chain focused strategy has been copied, leaving the company with practically no cost/price advantage. Mr. Dell remains fixated on what worked for his initial launch 30 years ago, and offers no exciting description of how Dell will remain viable as PC sales diminish. Unless new leadership takes the helm at Dell, the company's future 5 years hence looks bleak.
- HP's new CEO Meg Whitman is less than reassuring as she projects a terrible 2012 for HP, and a commitment to remaining in PCs – but with some amorphous pledge toward more internal innovation. Lacking a clear sense of what Ms. Whitman thinks the world will look like in 2017, and how HP will be impactful, it's hard for investors, managers or customers to become excited about the company. HP needs rapid acceleration toward shifting customer needs, not a relaxed, lethargic year of internal analysis while competitors continue moving demand further away from HP offerings.
- Groupon has had an explosive start. But the company is attacked on all fronts by the media. There is consistent questioning of how leadership will maintain growth as reports emerge about founders cashing out their shares, highly uneconomic deals offered by customers, lack of operating scale leverage, and increasing competition from more established management teams like Google and Amazon. After having its IPO challenged by the press, the stock has performed poorly and now sells for less than the offering price. Groupon desperately needs leadership that can explain what the markets of 2015 will look like, and how Groupon will remain successful.
What investors, customers, suppliers and employees want from leadership is clarity around what leaders see as the future markets and competition. They want to know how the company is going to be successful in 2 or 5 years. In today's rapidly shifting, global markets it is not enough to talk about historical results, and to exhibit confidence that what brought the company to this point will propel it forward successfully. And everyone recognizes that managing quarter to quarter will not create long term success.
Leaders must demonstrate a keen eye for market shifts, and invest in opportunities to participate in game changers. Leaders must recognize trends, be clear about how those trends are shaping future markets and competitors, and align investments with those trends. Leadership is not about what the company did before, but is entirely about what their organization is going to do next.
Update 30 Nov, 2011
In the latest defend & extend action at Microsoft Ballmer has decided to port Office onto the iPad (TheDaily.com). Short term likely to increase revenue. But clearly at the expense of long-term competitiveness in tablet platforms. And, it misses the fact that people are already switching to cloud-based apps which obviate the need for Office. This will extend the dying period for Office, but does not come close to being an innovative solution which will propel revenues over the next decade.
“It’s easier to succeed in the Amazon than on the polar tundra” Bruce Henderson, famed founder of The Boston Consulting Group, once told me. “In the arctic resources are few, and there aren’t many ways to compete. You are constantly depleting resources in life-or-death struggles with competitors. Contrarily, in the Amazon there are multiple opportunities to grow, and multiple ways to compete, dramatically increasing your chances for success. You don’t have to fight a battle of survival every day, so you can really grow.”
Today, Amazon(.com) is the place to be. As the financial markets droop, fearful about the economy and America’s debt ceiling “crisis,” Amazon is achieving its highest valuation ever. While the economy, and most companies, struggle to grow, Amazon is hitting record growth:
Sales are up 50% versus last year! The result of this impressive sales growth has been a remarkable valuation increase – comparable to Apple!
- Since 2009, valuation is up 5.5x
- Over 5 years valuation is up 8x
- Over the last decade Amazon’s value has risen 15x
How did Amazon do this? Not by “sticking to its knitting” or being very careful to manage its “core.” In 2001 Amazon was still largely an on-line book seller.
The company’s impressive growth has come by moving far from its “core” into new markets and new businesses – most far removed from its expertise. Despite its “roots” and “DNA” being in U.S. books and retailing, the company has pioneered off-shore businesses and high-tech products that help customers take advantage of big trends.
Amazon’s earnings release provided insight to its fantastic growth. Almost 50% of revenues lie outside the U.S. Traditional retailers such as WalMart, Target, Kohl’s, Sears, etc. have struggled in foreign markets, and blamed poor performance on weak infrastructure and complex legal/tax issues. But where competitors have seen obstacles, Amazon created opportunity to change the way customers buy, and change the industry using its game-changing technology and capabilities. For its next move, according to Silicon Alley Insider, “Amazon is About to Invade India,” a huge retail market, in an economy growing at over 7%/year, with rising affluence and spendable income – but almost universally overlooked by most retailers due to weak infrastructure and complex distribution.
Amazon’s remarkable growth has occurred even though its “core” business of books has been declining – rather dramatically – the last decade. Book readership declines have driven most independents, and large chains such as B. Dalton and more recently Borders, out of business. But rather than use this as an excuse for weak results, Amazon invested heavily in the trends toward digitization and mobility to launch the wildly successful Kindle e-Reader. Today about half of all Amazon book sales are digital, creating growth where most competitors (hell-bent on trying to defend the old business) have dealt with stagnation and decline.
Amazon did this without a background as a technology company, an electronics company, or a consumer goods company. Additionally, Amazon invested in Kindle – and is now developing a tablet – even as these products cannibalized the historically “core” paper-based book sales. And Amazon has pursued these market shifts, even though these new products create a significant threat to Amazon’s largest traditional suppliers – book publishers.
Rather than trying to defend its old core business, Amazon has invested heavily in trends – even when these investments were in areas where Amazon had no history, capability or expertise!
Amazon has now followed the trends into a leading position delivering profitable “cloud” services. Amazon Web Services (AWS) generated $500M revenue last year, is reportedly up 50% to $750M this year, and will likely hit $1B or more before next year. In addition to simple data storage Amazon offers cloud-based Oracle database services, and even ERP (enterprise resource planning) solutions from SAP. In cloud computing services Amazon now leads historically dominant IT services companies like Accenture, CSC, HP and Dell. By offering solutions that fulfill the emerging trends, rather than competing head-to-head in traditional service areas, Amazon is growing dramatically and avoiding a gladiator war. And capturing big sales and profits as the marketplace explodes.
Amazon created 5,300 U.S. jobs last quarter. Organic revenue growth was 44%. Cash flow increased 25%. All because the company continued expanding into new markets, including not only new retail markets, and digital publishing, but video downloads and television streaming – including making a deal to deliver CBS shows and archive.
Amazon’s willingness to go beyond conventional wisdom has been critical to its success. GeekWire.com gives insight into how Amazon makes these critical resource decisions in “Jeff Bezos on Innovation” (taken from comments at a shareholder meeting June 7, 2011):
- “you just have to place a bet. If you place enough of those bets, and if you place them early enough, none of them are ever betting the company”
- “By the time you are betting the company, it means you haven’t invented for too long”
- “If you invent frequently and are willing to fail, then you never get to the point where you really need to bet the whole company”
- “We are planting more seeds…everything we do will not work…I am never concerned about that”
- “my mind never lets me get in a place where I think we can’t afford to take these bets”
- “A big piece of the story we tell ourselves about who we are, is that we are willing to invent”
If you want to succeed, there are ample lessons at Amazon. Be willing to enter new markets, be willing to experiment and learn, don’t play “bet the company” by waiting too long, and be willing to invest in trends – especially when existing competitors (and suppliers) are hesitant.
Evolution doesn’t happen like we think. It’s not slow and gradual (like line A, below.) Things don’t go from one level of performance slowly to the next level in a nice continuous way. Rather, evolutionary change happens brutally fast. Usually the potential for change is building for a long time, but then there is some event – some environmental shift (visually depcted as B, below) – and the old is made obsolete while the new grows aggressively. Economists call this “punctuated equilibrium.” Everyone was on an old equilibrium, then they quickly shift to something new establishing a new equilibrium.
Momentum has been building for change in publishing for several years. Books are heavy, a pain to carry and often a pain to buy. Now eReaders, tablets and web downloads have changed the environment. And in June J.K. Rowling, author of those famous Harry Potter books, opened her new web site as the location to exclusively sell Harry Potter e-books (see TheWeek.com “How Pottermore Will Revolutionized Publishing.”)
Ms. Rowling has realized that the market has shifted, the old equilibrium is gone, and she can be part of the new one. She’ll let the dinosaur-ish publisher handle physical books, especially since Amazon has already shown us that physical books are a smaller market than ebooks. Going forward she doesn’t need the publisher, or the bookstore (not even Amazon) to capture the value of her series. She’s jumping to the new equilibrium.
And that’s why I’m encouraged about AOL these days. Since acquiring The Huffington Post company, things are changing at AOL. According to Forbes writer Jeff Bercovici, in “AOL After the Honeymoon,” AOL’s big slide down in users has begun to reverse direction. Many were surprised to learn, as the FinancialPost.com recently headlined, “Huffington Post Outstrips NYT Web Traffic in May.”
The old equilibrium in news publishing is obsolete. Those trying to maintain it keep failing, as recently headlined on PaidContent.org “Citing Weak Economy, Gannett Turns to Job Cuts, Furloughs.” Nobody should own a traditional publisher, that business is not viable.
But Forbes reports that Ms. Huffington has been given real White Space at AOL. She has permission to do what she needs to do to succeed, unbridled by past AOL business practices. That has included hiring a stable of the best talent in editing, at high pay packages, during this time when everyone else is cutting jobs and pay for journalists. This sort of behavior is anethema to the historically metric-driven “AOL Way,” which was very industrial management. That sort of permission is rarely given to an acquisition, but key to making it an engine for turn-around.
And HuffPo is being given the resources to implement a new model. Where HuffPo was something like 70 journalists, AOL is now cranking out content from some 2,000 journalists and editors! More than The Washington Post or The Wall Street Journal. Ms. Huffington, as the new leader, is less about “managing for results” looking at history, and more about identifying market needs then filling them. By giving people what they want Huffington Post is accumulating readers – which leads to display ad revenue. Which, as my last blog reported, is the fastest growing area in on-line advertising
Where the people are, you can find advertsing. As people are shift away from newspapers, toward the web, advertising dollars are following. Internet now trails only television for ad dollars – and is likely to be #1 soon:
Chart source: Business Insider
So now we can see a route for AOL to succeed. As traditional AOL subscribers disappear – which is likely to accelerate – AOL is building out an on-line publishing environment which can generate ad revenue. And that’s how AOL can survive the market shift. To use an old marketing term, AOL can “jump the curve” from its declining business to a growing one.
This is by no means a given to succeed. AOL has to move very quickly to create the new revenues. Subscribers and traditional AOL ad revenues are falling precipitously.
But, HuffPo is the engine that can take AOL from its dying business to a new one. Just like we want Harry Potter digitally, and are happy to obtain it from Ms. Rowlings directly, we want information digitally – and free – and from someone who can get it to us. HuffPo is now winning the battle for on-line readers against traditional media companies. And it is expanding, announced just this week on MediaPost.com “HuffPo Debuts in the UK.” Just as the News Corp UK tabloid, News of the World, dies (The Guardian – “James Murdoch’s News of the World Closure is the Shrewdest of Surrenders.“)
News Corp. once had a shot at jumping the curve with its big investment in MySpace. But leadership wouldn’t give MySpace permission and resources to do whatever it needed to do to grow. Instead, by applying “professional management” it limited MySpace’s future and allowed Facebook to end-run it. Too much energy was spent on maintaining old practices – which led to disaster. And that’s the risk at AOL – will it really keep giving HuffPo permission to do what it needs to do, and the resources to make it happen? Will it stick to letting Ms. Huffington build her empire, and focus on the product and its market fit rather than short-term revenues? If so, this really could be a great story for investors.
So far, it’s looking very good indeed.
Why do some businesses (or products) seem to launch onto the scene with incredible success? According to a new book, “Enchantment” releasing March 8, 2011 (available on Amazon.com at about 50% off the list price), it is the ability to go beyond normal marketing, PR and other business practices in a way that enchants customers. Author Guy Kawasaki says that being likable, trustworthy and prepared allows you to overcome natural resistance to change and move people to accept, adopt – and even become supporters of your solution.
The book is tailor-made for entrepreneurs. Especially those in high-tech, who are looking for rapid adoption of new platforms. So when Guy sent me a copy and asked for my review I asked him for a 1-on-1 interview where I could focus on how the vast majority of people, who work away in large, less than enchanting, organizations, could gain value from reading his latest effort. I wanted him to answer “how am I supposed to be enchanting when dullness reigns in my environment?”
Here’s his finput from our meeting, and his reasons to buy and read Enchantment:
Guy’s first recommendation – “enchant your boss.” There’s a chapter in the book, but he focused on what to do if your boss is a real dullard. Firstly, don’t ever forget to make the boss’s priority your priority, because without that you won’t be effective. The more you can convince your boss the 2 of you are on the same wavelength, the more he’ll be likely to give you space. And space is what you want/need in order to start to identify the next perfomance curve. Then, if you have some space, you can start to demonstrate how new solutions could work. Use your aligned priorities to help you reframe your boss’s opinion about the future, and always ask for forgiveness if you’re found reaching a bit too far.
Secondly, enchant those who work for you. Give them a MAP. (M) is for Mastery of a new skill or technology. Give your employees permission and encouragement to master new areas that will help them grow – and put them in a position to teach you! (A) is for Autonomy. In other words, give them the space discussed above. (P) is for Purpose. Help people to see their work as having more value than just money. Add purpose to their results so they can feel great. With a MAP they can succeed, and you can too.
Thirdly, enchant your peers by working hard to be likable. Guy offers a chapter in which he deconstructs likability, and provides a series of tactics to make you more likable. This isn’t manipulation (although it may sound like it), but rather a guidebook of what to do to help your true self be more likable. With peers, the #1 objective is to be trustworthy! Show them that you can help expand the pie, so there is more success for everyone, rather than being the kind of person always lining up to get his piece first!
When you find yourself disappointed in your work, or employer, Guy recommends we take from his book the idea that you seek out a dream for what your work group, or employer, can be. Don’t accept that today is the best case, and instead promote the notion that tomorrow can always be better, more fun, more fulfilling. He believes that if you say you’re going to do something that seems impossible, and you undertake it with enchanting techniques, your behavior will become infectious. Behave like an enchanter and you will create other enchanters in the organization. (If this sounds a bit Pied Piper-ish I guess it does take some faith to follow Guy’s recommendations.)
I asked him how a Chief Enchantment Officer could help Microsoft (readers of this blog know I’ve long been a distractor of the strategy and CEO at Microsoft). Guy said he felt Micrsoft could become VERY enchanting if the company would:
- Focus on making Micrsooft more likable and trustworthy. Old behaviors were in the past. Going forward, if leadership applied itself Microsoft could implement the things in his book and drive up the company’s likability and trustworthiness amongst constituents – including customers, developers, suppliers and investors.
- Rethink the definition of a “product” to make offerings more enchanting. In Guy’s view, Apple would never say a product is good enough based upon its specifications or functionality. An iPad has to go beyond those things to offer something much more. Too many companies (not just, or even specifically, Microsoft he was clear to point out) launch “ugly” products – without realizing they are ugly! With a bit different direction, different thinking, about how to define a product they could be more enchanting, and more successful. (When I compare the iPhone or iPad to the xBox I start to clearly see the difference in product description to which Guy refers. Guy agreed with me that Kinect is a very enchanting product. Unfortunately it appears to me like Microsoft still doesn’t realize the value of this in its xBox efforts.)
- Train the organization on the importance of, value of, and ability to be enchanting. Most companies are clueless about the notion, as people work hard delivering solutions with too much of an “engineering mentality”. Apple has trained its organization so the people think about how to make products, services and solutions enchanting, and therefore non-enchanting things are unacceptable. Raise the bar for making sure solutions are likable, trustworthy and prepared for what the customer will want/need. Not merely functional. Build that into the behavioral lock-in and Guy believes any organization cannot miss success!
I told Guy that often I’m frequently pushed to believe that a company is “beyond the pale;” unable to do better, or to be better. Simply incapable fo ever being “enchanting.” Guy is convinced this is balderdash – if you want to change. He talked about Audi, which suffered horribly from problems with unintended acceleration a couple of decades ago. Audi changed itself, and now is doing quite well (according to Guy) while Toyota is suffering. It’s easy for an organization to slip into dis-enchanting behavior over time if it starts cost-cutting and obsessing about optimizing its past. But any company can become enchanting again. “Hey, look at how Apple slipped, then came back, and you can see how enchantment is possible for any company.”
I don’t know that Enchantment will solve all your business problems, but for $14 (and free shipping on Amazon.com) it’s full of ideas about how you can move a company to better performance. And surely make it a better, more compelling place to work!
Guy Kawasaki became famous as a Macintosh Evangelist for Apple back in the 1980s. His passion for creating technology products that help people’s lives, and work, improve, has been compelling for 2 decades. His blog is entitled “How to Change the World,” demonstrating how high Guy sets his sites. Guy also created and remains active in Alltop.com, a compendium of blog listings on important topics, where ThePhoenixPrinciple.com is part of the Innovation section.
What separates business winners from the losers? A lot of pundits would say you need to be efficient, cost conscious and manage margins. Others would say you need to be really good (excellent) at something – much better than anyone else. Unfortunately, that sounds good but in our fast-paced, highly competitive world today those platitudes don’t really create winners. Success has much more to do with the ability to shift. And to create shifts.
Think about Amazon.com. This company was started as an on-line retail channel for books most stores would not stock on their shelves. But Amazon used the shift to internet acceptance as a way to grow into selling all books, and eventually came to dominate book sales. Not only have most of the small book stores disappeared, but huge chains like B. Dalton and more recently Borders, were driven to bankruptcy. Amazon then built on this shift to expand into selling lots more than books, becoming a force for selling all kinds of products. And even opening itself to become a portal for other on-line retalers by routing customers to their sites, and even taking orders for products shipped from other e-tailers.
More recently, Amazon has taken advantage of the shift to digitization by launching its Kindle e-reader. And by making thousands of books available for digital downloading. By acting upon market trends, Amazon has shifted quickly, and has caused shifts in the market where it participates. And this shifting has been worth a lot to Amazon. Over the last 5 years Amazon’s stock has risen from about $30/share to about $180/share – about a 45%/year compounded rate of return!
Chart source: Yahoo Finance
In the middle to late 1990s, as Amazon was just starting to appear on radar screens, it appeared like Sears would be the kind of company that could dominate the internet. After all Sears was huge! It was a Dow Jones Industrial Average (DJIA) member that had ample resources to invest in the emerging growth market. Sears had a history of pioneering markets. It had once dominated retail with its catalogs, then became a powerhouse in free standing retail stores, then led the movement to shopping malls as an anchor chain, and even used its history in lending to develop what became Discover card, and had once shown its ability to be a financial services company and even an insurer! Sears had shifted with historical trends, and surely the company would see that it could bring its resources to the shifting retail landscape in order to remain dominant.
Unfortunately, Sears went a different direction, prefering to focus on defending its current business model. As the chain struggled, it was dropped from the DJIA. Eventually a financier, Edward Lampert, used his takeover of bankrupt KMart (by buying up their bonds) to take over Sears! Under his leadership Sears focused hard on being efficient, controlling costs and managing margins. Extensive financial rigor was applied to Sears to improve the profitability of every line item, dropping poor performers and closing low margin stores. While this initially excited investors, Sears was unable to compete effectively against other retailers that were lower cost, or had better merchandise or service, and the value has declined from about $190/share to $80; a loss of about 60% (at its recent worst the stock fell to almost 30 – or a decline of 84% peak to trough!)
Chart Source: Yahoo Finance
Meanwhile the world’s #1 retailer, Wal-Mart, has long excelled at being the very best at supply chain management, and low-price leadership in retailing. Wal-Mart has never varied from its original business model, and in the retail world it is undoubtedly the very best at doing what it does – buy cheap, sell cheap and run a very tight supply chain from purchase to sale. This excited some investors during the “Great Recession” as customers sought out low prices when fearing about their jobs and future.
But this strategy has not been able to produce much growth, as stores have begun saturating just about everywhere but the inner top 30 cities. And it has been completely unsuccessful outside the USA. As a result, despite its behemoth size, the value of Wal-Mart has really gone nowhere the last 5 years. While there has been price gyration (from $42 low to $62 high) for long-term investors the stock has really gone nowhere – mired mostly around $50.Chart Source: Yahoo Finance
Investors in Amazon have clearly fared much better than Sears or Wal-Mart
Chart Source: Yahoo Finance
Too often business leaders spend too much time thinking about what they do. They think about costs, margins, the “business model” and execution. But success really has less to do with those things than understanding trends, and capitlizing on those trends by shifting. You don’t have to be the lowest cost, or most efficient or even the most passionate. What works a lot better is to go where the trends are favorable, and give customers solutions that align with the trends. And if you do this early, before anyone else, you’ll have a lot of time to figure out how to make money before competitors try to cut your margins!
Recognize that most “execution” is about preserving what happened in the past. Trying to do things better, faster and cheaper. But in a rapidly changing world, new competitors change the basis of competition. Amazon isn’t a better classical bookseller, or retailer. It’s a company that leveraged trends – market shifts – to take advantage of new technologies and new ways of people shopping. First for books and then other things. Later it built on trends toward digitization by augmenting the production of electronic publications, which is destined to change the world of book publishing altogether – and even has impact on the publishing of everything from periodicals to manuals. Amazon is now creating market shifts, which is changing the fortunes of others.
For investors, employees and suppliers you are better off to be with the company that shifts. It has the ability to grow with the trends. And the faster you get out of those companies which are stuck, locked-in to their old business model and practices in an effort to defend historical behaviors, the better off you’ll be. Despite the P/E multiples, or other claims of “value investing,” to succeed you’re a lot better off with the company that’s finding and building on trends than the ones managing costs.
My guest blogger today is Nick Morgan, Founder and CEO of America’s leading firm for developing and coaching great speeches. Leaders, especially those who promote innovation, need to be great communicators. You are never good enough when market shifts make the stakes so high. Here Nick offers particularly good insight to everyone who finds themselves in front of an audience in 2011:
“The only reason to give a speech is to change the world.” An old friend of mine, a speechwriter, used to say that to me. He meant it as a challenge. It was his way of saying that, if you’re going to take all the trouble to prepare and deliver a speech, make it worthwhile. Change the world.
Otherwise, why bother? Preparing speeches, giving speeches, and listening to speeches—each of these activities is fraught with peril. The opportunities for failure are many, and for success correspondingly few. An oft-quoted study suggests that executives would rather die than speak. Of all their fears, public speaking is number one, and death comes much further down the list, just before nuclear war. That must explain why they often put off the task of preparing speeches to the last minute—or give the task to someone else.
If speechmaking is hard work for presenters, it’s also hard work for their audiences. Most business presentations are dreadful—boring, platitudinous, and delivered with a compelling lack of enthusiasm. People don’t remember much of what they learn from speeches—something on the order of 10 to 30 percent. With some business talks I’ve attended, that failure rate must be close to 100 percent. How many presentations have you sat through where your mind started wandering a few minutes into the talk and never really came back? Where you surreptitiously picked up your smartphone and started planning your calendar for the next millennium or two? Where you ended up more familiar with the number of acoustic tiles in the ceiling than the number of points in the outline of the speech?
So why do we bother? We bother giving speeches because of the opportunities they offer presenters with passion and a cause. There is something profound about gathering a group of people together in a hall and giving them the full force of your ideas presented live and in person. There is something essential about the intellectual, emotional, and physical connections a good speaker can make with an audience, something that cannot happen on the printed page. There is something powerful about the chemistry that happens in the moment of contact that no other medium can reproduce.
It’s what I call the kinesthetic connection. It’s something I’ve observed in over 25 years of teaching and coaching public speaking. When it happens, it’s powerful. When it’s missing, everyone feels it—even the hapless speaker.
Why People Will Always Give Speeches
We still need speeches. We need them to move audiences to action. People may learn to believe in your expertise from the printed page. But they will only be moved to action if they come to trust you from hearing and seeing you offer a solution to a problem they have. That kind of trust is visceral as well as intellectual and emotional, and it only comes from presence.
From the audience’s point of view, we still need to validate our impulse to action by seeing our champions, to test the sense of their messages and the integrity of their beings. Partly, we’re reading their nonverbal messages, those gestures and habits that we learn to interpret unconsciously for the most part, the ones that tell us something about the credibility and courage of the presenter. Partly, we’re testing to see if they can structure and present their ideas coherently in real time, abilities that tell us about how articulate and organized they are. And partly, we’re watching to see if we can find some sense of common humanity in the speaker, in order to make common cause with that speaker’s passion.
When Roger Mudd asked Ted Kennedy, on 60 Minutes in 1980, why he wanted to be president, Senator Kennedy famously fumbled the answer. Millions of Americans watched Kennedy at close hand, thanks to the eye of the camera, and judged his incoherent, rambling answer to lack credibility. The campaign was over almost before it began. Kennedy had changed the world—not in the way he intended, perhaps, but inescapably and irretrievably nonetheless. Potential backers slunk away from the Kennedy camp. Potential workers joined other campaigns. Potential voters resolved to find another candidate. And all of that happened through the faux-familiarity of television. Imagine how much more devastating it would have been in person.
Does changing the world seem like a daunting challenge? There’s good news buried in the challenge. With a powerful, audience-centered presentation, you can change the world. And that goes whether you’re talking to a small group of employees or colleagues—or a keynote audience of thousands. The principles are the same.
And there’s more good news to come: Regardless of how good you are now, you can learn how to give a better speech, one that makes a kinesthetic connection with your listeners. One that creates a sense of trust in you and moves them to action.
You Need to Listen to Your Audience
At the heart of this connection lies a counterintuitive truth: the secret to forming a strong bond between you and the people in the audience is to listen to them—from the very beginning.
Wait a minute, you say. I’m the one that has to do the talking. How can I listen to them? And what do you mean by kinesthetic? You’ve already used that word twice.
The answers to these questions are related. Let’s take the easy one first. Kinesthetic means being aware of the position and movement of the body in space. And to listen to the audience, you need to listen (and to show you’re listening) with your whole body. To give a simple example, consider the nervous executive in front of the shareholders for an annual meeting. He has some less-than-spectacular numbers to report, and everyone knows it. He’s prepared for the worst. He begins his talk with a curt, “Good morning,” arms folded, staring tensely over the audience members’ heads, looking into the middle distance, trying not to acknowledge the anger he sees in front of him. He immediately launches into a defensive talk aimed at minimizing the damage and second-guessing what the audience might ask him.
Not a pretty picture. Contrast that with a different executive in a similar pickle. She knows the meeting is going to be tough, but she’s ready. She stands up in front of the shareholders, smiles, and asks, “How are you?” Her arms are comfortably open at her sides. And she waits for a couple of seconds, making eye contact with at least one of the audience members on the right hand side of the room. Then she asks, no longer smiling, raising her eyebrows to invite response, “Are you angry about last year’s numbers? [Pause. Looking at someone else, on the left, now.] You have every right to be. We’re as disappointed as you are. Let’s talk about them. What’s on your mind?”
Not many chief executives would have the guts, frankly, to take the second approach. But which company would you rather hold stock in?
The second executive is well on the way to giving an audience-centered speech. She’s going to find kinesthetic moments to connect with her audience, and she’s begun by actually listening to them—reading their entire range of responses, including the nonverbal—from the start.
Indeed, even in this simplified example, the key to success is in making those rhetorical questions real. When you ask, “How are you?” of an audience, wait to see how some members of that audience actually are. Don’t continue until you’ve learned the answer, either verbally or nonverbally. It’s a small but vital way to begin an audience-centered talk. Success in public speaking is made up of a myriad little moments of connection like that.
And one big thing: charisma. That’s the magic quality, isn’t it? The one that everyone craves. And yet charisma doesn’t come from doing something difficult or esoteric that it takes years to master (and lots of expensive advice from speech coaches like me). We know now, thanks to the communications research of the last thirty years, what charisma is. Quite simply, it’s focused expressiveness. Expressiveness is the willingness to be open to your audience, both verbally and nonverbally. To show how you feel about your subject. To get past nervousness and self-consciousness and get to the stuff that you care about, and give that to the audience. That’s why they call it “giving a speech.” If you can unlock your own passion about the subject, and give that to the audience, in a focused way, you will be charismatic. The audience will not be able to take its eyes off you.
And so we’re back to audience-centered speaking, and kinesthetics. The only reason to give a speech is to change the world. You accomplish that by moving your audience to action. To do that, you have to be willing to listen to the audience, and to give it your passion. To get to that happy state, you need to find kinesthetic connections with the audience.
That’s audience-centered speaking in a paragraph. It’s a simple as that.
And lest you think that when I say “changing the world” I’m only talking about the big speeches (the ones that CEOs give to shareholders, for example) understand that I’m talking about every speech ever given. These principles apply to all public speaking, whether to five thousand people or five, for a grand public occasion or simply a regular meeting to report on 3Q numbers. After all, if you give a brilliant, inspiring, audience-centered presentation about those 3Q numbers, you will change the attitudes of your team in the room with you. And if you change their attitudes, you just might change their behavior. And if you change their behavior, you’ve changed the world in the only way that counts.
So that’s my wish for you in 2011: that you’ll start changing the world with every speech or presentation you give.
If you want to make sure yoru points are clear and communicated well consider contacting Nick and Public Words. Their clients have improved their communications dramatically for positive results. At the very least, pick up Nick’s books from Amazon or another source and use his recommendations – you’ll be glad you did! Reach out to Nick via his web site http://www.PublicWords.com
- When we don’t know what works, we create myths to describe what might work
- Much of business theory is little more than myth
- “Good to Great” has been a best seller, but it is not helpful for good management
- To grow business today requires abandoning management myths and aligning with changing market needs
Good to Great by Jim Collins has been a phenomenal business best seller. Almost 10 years old, it has sold millions of copies. It continues to be featured on end caps in book stores. That it has sold so well, and continues selling, is a testament to a much better book by the legendary newsperson Bill Moyers with Joseph Campbell, “The Power of Myth.” (Original PBS 2001 TV show available on DVD, or get the new release this month.)
When we don’t understand something we develop theories as to how it might work. These theories are based upon what we know, our assumptions, and our biases. They could be right, or they might not. Only testing determines the answer. However, sometimes the theory is so powerfully connected to our beliefs that we don’t want to test it – don’t feel the need to test it. And if the theory hangs around long enough, people forget it wasn’t tested. What easily happens is that “logical” theories (based upon assumptions and beliefs) that don’t explain reality become myth. And the myth becomes very comforting. Over time, the myth becomes part of the assumption set – unchallenged, and actually used as a basis for building new theories.
For example, the founder of modern medicine – Galen – didn’t understand the circulatory system. So he thought blood was oxygenated by invisible pores. As time passed it became impossible to challenge, or even test, this theory. Eventually, blood letting was developed as a medical practice because people thought the blood stored in the affected area had gone bad. It was several hundred years before Harvey, through careful testing, proved there were no invisible pores – and instead blood circulated throughout the body. Millions had perished from blood letting because of a myth. Bad theory allowed to go unchallenged and untested. It just sounded so good, so acceptable, that people followed it. Dangerous practice.
Thomas Thurston now gives us great insight to the popular myth developed by Jim Collins in Good to Great. Published by Growth Science International (http//growthsci.com) “Good to Great: Good, But Not Great” Mr. Thurston puts Mr. Collins thesis to the test. Is it a usable framework for predicting performance, and do followers actually achieve superior performance? In other words, does the advice in Good to Great work?
Mr. Thurston’s conclusions, quoted below, are quite clear, and mirror those of academics and lay people who have studied the storied Mr. Collins’ work:
- Even with the copious guidelines set forth by Collins, sorting CEOs into each category proved a highly subjective process. The classification scheme was ambiguous
- Level 5 leadership was difficult to categorize with reliability and consistency
- Our sample [100 well known firms] did not reveal any statistically significant difference in the performance of firms led by Level 5 and Not-Level 5 leaders. Performance in each category was approximately the same.
- Level 5 leadership classifications were, in practice, highly subjective and not predictive of superior firm performance.
- In other words, our results concluded that one can not predict whether a firm will perform good, great or bad based on its having a Level 5 Leader.
We like myth. It helps us explain what we previously could not explain. Like early Greek gods helped people explain the complex world around them. But, when we build our behaviors on myth it becomes extremely dangerous. We depend upon things that don’t work, and it can have serious repercussions. Mr. Collins glorified Circuit City and Fannie Mae in his book – yet now one is gone and the other in disrepute. Meanwhile his list of “great” companies have been proven to perform no better than average since his publication.
In Good to Great Mr. Collins offers a theory for business success that is very appealing. Be focused on your strengths. Get everybody on the bus to doing the same thing. Make sure you know your core, and protect it like a hedgehog protects its home. And make sure all leaders follow a Christ-like approach of humbleness, and leader servitude. It sounds very appealing – in an Horatio Alger sort of way. Work hard, be humble and good things will happen. We want to believe.
But it just doesn’t produce superior performance. There are no theories that have identified “great” leaders. Success has come from all kinds of personalities. And, despite our love for being “passionate” and “focused” on doing something really “great” there is no correlation between long-term success and the ability to understand your core and focus the organization upon it. Thousands of businesses have been focused on their core, yet failed.
What we need is a new theory of management. As the Assistant Managing Editor of the Wall Street Journal, Alan Murray, wrote in “The End of Management,” industrial era management theories about optimization and increased production do not help companies deal with an information era competitiveness fraught with rapid change and keen demands for flexibility.
Increased flexibility and success can be assured. If companies make some critical changes
- Plan for the future, not from the past. Do more scenario planning and less “core” planning
- Obsess about competition – and listen less to customers
- Be disruptive. Don’t focus on optimization and continuous improvement
- Embrace White Space to develop new solutions linked to changing market needs
This does work. Every time.
update links on Thomas Thurston 5/2014:
- We are biased toward doing what we know how to do, rather than something new
- We like to think we can forever grow by keeping close to what we know – that’s a myth
- Growth only comes from entering growth markets – whether we know much about them or not
- To grow you have to keep yourself in growth markets, and it is dangerous to limit your prospects to projects/markets that are “core” or “adjacent to core”
Recently a popular business book has been Profit from the Core. This book proposes the theory that if you want to succeed in business you should do projects that are either in your “core,” or “adjacent to your core.” Don’t go off trying to do something new. The further you move from your “core” the less likely you will succeed. Talk about an innovation killer! CEOs that like this book are folks who don’t want much new from their employees.
I was greatly heartened by a well written blog article at Growth Science International (www.GrowthSci.com) “Profit from Your Core, or Not.. The Myth of Adjacencies.” Author Thomas Thurston does a masterful job of pointing out that the book authors fall into the same deadly trap as Jim Collins and Tom Peters. They use hindsight primarily as the tool to claim success. Their analysis looks backward – trying to explain only past events. In doing so they cleverly defined terms so their stories seemed to prove their points. But they are wholly unable to be predictive. And, if their theory isn’t predictive, then what good is it? If you can’t use their approach to give a 98% or 99% likelihood of success, then why bother? According to Mr. Thurston, when he tested the theory with some academic rigor he was unable to find a correlation between success and keeping all projects at, or adjacent to, core.
Same conclusion we came to when looking at the theories proposed by Jim Collins and Tom Peters. It sounds good to be focused on your core, but when we look hard at many companies it’s easy to find large numbers that simply do not succeed even though they put a lot of effort into understanding their core, and pouring resources into protecting that core with new core projects and adjacency projects. Markets don’t care about whatever you define as core or adjacent.
It feels good, feels right, to think that “core” or “adjacent to core” projects are the ones to do. But that feeling is really a bias. We perceive things we don’t know as more risky than thing we know. Whether that’s true or not. We perceive bottled water to be more pure than tap water, but all studies have shown that in most cities tap water is actually lower in free particles and bacteria than bottled – especially if the bottle has sat around a while.
What we perceive as risk is based upon our background and experience, not what the real, actual risk may be. Many people still think flying is riskier than driving, but every piece of transportation analysis has shown that commercial flying is about the safest of all transportation methods – certainly much safer than anything on the roadway. We also now know that computer flown aircraft are much safer than pilot flown aircraft – yet few people like the idea of a commercial drone which has no pilot as their transportation. Even though almost all commercial flight accidents turn out to be pilot error – and something a computer would most likely have overcome. We just perceive autos as less risky, because they are under our control, and we perceive pilots as less risky because we understand a pilot much better than we understand a computer.
We are biased to do what we’ve always done – to perpetuate our past. And our businesses are like that as well. So we LOVE to read a book that says “stick close to your known technology, known customers, known distribution system – stick close to what you know.” It reinforces our bias. It justifies us not doing what we perceive as being risky. Even though it is really, really, really lousy advice. It just feels so good – like sugary cereal for breakfast – that we justify it in our minds – like saying “breakfast is the most important meal of the day” as we consume food that’s probably less healthy than the box it came in!
There is no correlation between investing in your core, or close to core, projects and high rates of return. Mr. Thurston again points this out. High rates of return come from investing in projects in growth markets. Businesses in growth markets do better, even when poorly managed, than businesses in flat or declining markets. Where there are lots of customers wanting to buy a solution you simply do better than when there are lots of competitors fighting over dwindling customer revenues. Regardless of how well you don’t know the former or do know the latter. Market growth is a much better predictor of success than understanding your “core” and whatever you consider “adjacent.”
Virgin didn’t know anything about airlines before opening one – but international travel from London was set to boom and Virgin did well (as it has done in many new markets.) Apple didn’t know anything about retail music before launching the iPhone and iTunes, but digital music had started booming at Napster and Apple cleaned up. Nike was a shoe company that didn’t know anything about golf merchandise, but it entered the market for all things golf (first with just one club – the driver – followed by other things) by hooking up with Tiger Woods just as he helped promote the sport into dramatic growth.
Success comes from entering new markets where there is growth. Growth can overcome a world of bad management choices. When there are lots of customers with needs to fill, you can make a lot of mistakes and still succeed. To restrict yourself to “core” and “adjacent” invites failure, because your “core” and the “adjacent” markets that you know well simply may not grow. Leaving you in a tough spot seeking higher profits in the face of stiff competition — like Dell today in PCs. Or GM in autos. Sears in retailing. They may know their “core” but that isn’t giving them the growth they want, and need, to succeed in 2010.