Gladiators get killed. Dump Wal-Mart; Buy Amazon


Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.)  Now that’s a serious growth stall, which should worry all investors.  Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion.  Faster than most people think.

After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors.  Not just Target, that is almost as low price and has better merchandise.  Wal-Mart’s monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots.  Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise.  Aldi beats Wal-Mart hands-down in groceries.  Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices.  And companies like Kohl’s and J.C. Penney offer more fashionable goods at just slightly higher prices.  On all fronts, traditional retailers are chiseling away at Wal-Mart’s #1 position – and at its margins!

Yet, the company has eschewed all opportunities to shift with the market.  It’s primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com).  Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) – sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive – as shown by the last 9 quarters.

On top of this, the retail market is shifting pretty dramatically.  The big trend isn’t the growth of discount retailing, which Wal-Mart rode to its great success.  Now the trend is toward on-line shopping.  MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:

  • In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
  • Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.

This trend has been emerging for over a decade.  The “retail revolution” was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt.  And that problem is worsening as the trend on-line keeps shrinking the traditional market.  Several retailers are expected to fail.  Entire categories of stores.  As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!

While Wal-Mart is huge, and won’t die overnight, as sure as the dinosaurs failed when the earth’s weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.

The winners will be on-line retailers, who like David versus Goliath use techology to change the competition.  And the clear winner at this, so far, is the one who’s identified trends and invested heavily to bring customers what they want while changing the battlefield.  Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:

  • Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
  • Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
  • Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
  • Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
  • Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
  • Amazon built on the mobility trend when its suppliers, publishers, didn’t respond by creating Kindle – which has revolutionized book sales.
  • Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the “Wal-Mart Slayer

 Each of these actions were directly related to identifying trends and offering new solutions.  Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy.  Just look at sales of Kindle books:

Kindle sales SAI 9.28.11
Source: BusinessInsider.com

Unlike Wal-Mart customers, Amazon’s keep growing at double digit rates.  In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase.  Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to  80,000 per day unit sales for iPad2.  Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.

While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base.  Despite only a few month’s experience, Amazon is bigger than Google Offers, and is growing at least 20% faster. 

After 1980 investors used to say that General Motors might not be run well, but it would never go broke.  It was considered a safe investment.  In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model.  Wal-Mart is an identical story, only it won’t have 3 decades of slow decline.  The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete. 

Given that gladiators, at best, end up bloody – and most often dead – investing in one is not a good approach to wealth creation.  However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors.  Amazon today is a really good opportunity.

Grow like (the) Amazon to Succeed – Invest outside your “core”


“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:

Amazon sales growth July 2011
Source: BusinessInsider.com

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.

Why McDonald’s Isn’t Apple – and It Matters


Summary:

  • McDonald's relies on operational improvements to raise profits, these are short-lived and give no growth
  • McDonald's growth cycles, and investors forget long-term it isn't growing much at all
  • You can't depend on recurring recessions to make your business look good
  • Apple has shown how to create long-term revenue growth, and greater investor wealth, by developing new markets and solutions
  • Investors in McDonald's are likely to be less pleased than investors in Apple

Subway is now #1 in size, as "McDonald's Loses World's Biggest Title to Subway" according to Crain's Chicago Business.  The transition wasn't hard to predict, since Subway has been much larger in the USA for several years.  Now Subway has gained on McDonald's internationally.  What's striking about this is that McDonald's could see it coming, and really did nothing about it.  While Subway keeps focused on growth, McDonald's has focused on preserving its historical business.  And that bodes poorly for long-term investor performance.

For more than a decade McDonald's size has swung back and forth as it opened stores, then closed hundreds in an "operational improvement program," before opening another round of stores – to then repeat the cycle. McDonald's has not shown any US store growth for a long time, and has relied on expanding its traditional business offshore. 

Even the menu remains almost unchanged, dominated by burgers, fries and soft drinks.  "New" product rollouts have largely been repeats of decades old products, like McRib, which cycle on and off the menu.  And the most "strategic" decision we hear about was executives spending countless hours, along with thousands of franchisees, trying to figure out whether or not to reduce the amount of cheese on a cheeseburger (which they did, saving billions of dollars.)  Even though it spent almost a decade figuring out how to launch McCafe, the whole idea gets little atttention or promotion.  There just isn't much energy put into innovation, or growth at McDonald's.  Or even trying to be a leader in new marketing tools like social media, where chains like Papa John's have done much better.

Most people have forgotten that McDonald's acquired and funded the growth of Chipotle's, one of the fastest growing quick food chains.  But in 2006 McDonald's leadership sold Chipotle's to raise cash to fund another one of those operational improvement rounds.  The business that showed the most promise, that has much more growth opportunity than the tiring McDonald's brand, was sold off in order to Defend and Extend the known, but not so great, McDonald's. 

Sort of like selling your patents in order to pay for maintenance and upgrades on the worn out plant tooling.

Soon after Chipotle's sale the "Great Recession" started. And people quit dining out – or went downmarket.  Thousands of restaurants closed, and chains like Bennigan's declared bankruptcy.  As people started eating a bit more frequently in McDonald's investors cheered.  But, this was really more akin to the old phrase "even a stopped clock is right twice a day."  McDonald's was the benefactor of an unanticipated economic event.  And as the economy has improved McDonald's has cheered its improved oprations and higher profits.  But, where is future growth?  What will create long-term growth into 2015 and 2020? (To be honest, I'm not sure where this will be for Subway, either.)

This cycle of bust and repair – which will lead to another bust when a competitor or other external event challenges McDonald's unaltered success formula – is very different from what's happened at Apple.  Rather than raising money to defend its historical business (the Macintosh business) Apple actually cut back its Mac products to fund development of new businesses – the big winner being iPod and iTunes.  Then Apple focused on additional new markets, transforming smart phone growth with the iPhone and altering the direction of computing with the iPad.  Rather than trying to Defend its past and Extend into new markets (like McDonald's international efforts) Apple has created, and led, new markets.

Performance at Apple has been much better than McDonald's.  As we can see, only during the clock-stopped period at the height of the recession did investors lose faith in Apple's growth, while defaulting to defensiveness at McDonald's.

AAPL v MCD 3.11

Chart source:  Yahoo Finance

Steve Toback at bNet.com gives us insight into how Apple has driven its growth in "10 Ways to Think Different – Inside Apple's Cult-like Culture."  These 10 points look nothing like the McDonald culture – or hardly any company that has growth problems.  A quick scan gives insight to how any company can identify, develop and grow with new solutions in new markets:

  1. Empower employees to make a difference. 
  2. Value what's important, not minutiae
  3. Love and cherish the innovators
  4. Do everything important internally
  5. Get marketing
  6. Control the message
  7. Little things make a big difference
  8. Don't make people do things, make them better at doing things
  9. When you find something that works, keep doing it
  10. Think different

What's most worrisome is that the protectionist culture we see at McDonald's, and frankly most U.S. companies, is the kind that led General Motors to years of faultering results and eventual bankruptcy.  Recall that GM once bought Hughes Aircraft and EDS as growth devices (around 1980,) and opened the greenfield Saturn division to learn how to compete with offshore auto makers head-on.  But the first two were sold, just like McDonald's sold Chipotle, to raise funds for propping up the poorly performing auto business.  Saturn was gutted of its uniqueness in cost-saving programs to "align" it with the other auto divisions, and closed in the recent bankruptcy.  (Read more detail on The Fall of GM in this short eBook.)

While McDonald's isn't at risk of immediate bankruptcy, investors need to understand that it's value is unlikely to rise much.  Operational improvements are not the source of growth.  They are short-term tactics to support historical behaviors which trade off short-term profit improvement for long-term new market development.  In McDonald's case, this latest round of performance focus matched up with an economic downturn, unexpectedly benefitting McDonald's very quickly.  But long-term value comes from creating new business opportunities that meet changing needs.  And for that you need to not sell your innovations — instead, invest in them to drive growth.

Winners shift, Losers don’t – Buy Amazon Sell Sears and Walmart


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 forAmazon.com Inc. (AMZN)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 forSears Holdings Corporation (SHLD)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 forWal-Mart Stores Inc. (WMT)Chart Source: Yahoo Finance

Investors in Amazon have clearly fared much better than Sears or Wal-Mart

Chart forWal-Mart Stores Inc. (WMT)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.  

 

 

Think Young! Be like Cisco, Netflix and Amazon.com!


Summary:

  • Company size is irrelevant to job creation
  • New jobs are created by starting new businesses that create new demand
  • Most leaders behave defensively, trying to preserve the old business
  • But success comes from acting like a start-up and creating new opportunities
  • Companies need to do more future-based planning that can change the competitive landscape and generate more growth, jobs and higher rates of return

A trio of economists just published "Who Creates Jobs? Small vs. Large vs. Young" at the National Bureau of Economic Research. For years businesspeople have said that the majority of jobs were created by small companies, therefore we should provide loans and other incentives for small business.  At the same time, we all know that large companies employee millions of people, and therefore they have received benefits to keep their companies going even in tough times – like the recent bailouts of GM and Chrysler.  But what these researchers discovered was that size was immaterial to job creation – and this ages-old debate is really irrelevant!

Digging deeper into the data, they discovered as reported in the New York Times, "To Create Jobs, Nurture Start-Ups."  Regardless of size, most businesses over time get stuck defending their original success formula. What helped them initially grow becomes locked-in by behavioral norms, structural decision-making processes and a business model cost structure that may be tweaked, but rarely changed. Best practices serve to focus management on defending that business, even as market shifts lower the industry growth rate and profits.  It doesn't take long before defensive tactics dominate, and as the leaders attempt to preserve historical practices there are no new jobs created.  Usually quite the opposite happens as cost cutting dominates, leading to outsourcing and lay-offs reducing the workforce. 

Look no further than most members of the Dow Jones Industrial Average to witness the lack of jobs created by older companies desperately trying to defend their historical business model. But what we've failed to realize is how the same management practices dominate small business as well! Most plumbing suppliers, window installers, insurance agencies, restaurants, car dealers, nurseries, tool rental shops, hair cutters and pet sitters spend all their time just trying to keep the business going.  They look no further than what they did yesterday when making business decisions.  Few think about growth, preferring instead to just keep the business the same – maybe by the owner/operator's father 3 decades ago!  They don't create any new jobs, and are probably struggling to maintain existing employment as computers and other business aids reduce the need for labor – while competition keeps whacking away at historical margins.

So if you want to create jobs, throwing incentives at General Electric, General Motors or General Dynamics is not likely to get you very far.  And asking the leaders of those companies what it takes to get them to create jobs is a wasted conversation.  They don't know, and haven't really thought about the question.  Leaders of almost all big organizations are just trying to make next quarter's profit projection any way they can – and that doesn't involve new hiring.  After a lifetime of cutting costs and preservation behavior, how is Jeffrey Immelt of GE supposed to know anything about creating new businesses which leads to job creation? 

Nor is offering loans or grants to the millions of existing small businesses who are just trying to keep the joint running going to make any difference.  Their psychology is not about offering new products or services, and banks sure don't want to take the risk of investing in new experimental behaviors.  They have little, if any, interest in figuring out how to grow when most of their attention is trying to preserve the storefront in the face of new competitors on-line, or from India, China or Vietnam! 

To create jobs you have to focus on growth – not defense. And that takes an entirely different way of thinking.  Instead of thinking about the past you have to be obsessive about the future, and how you can do things differently!  Most of the time, business leaders don't think this way until their backs are up against the wall, looking at potential failure! For example, how Mr. Gerstner turned around IBM when he moved the company away from mainframe obsession and pointed the company toward services.  Or when Steve Jobs redirected Apple away from its Mac obsession and pushed the company into new markets for music/entertainment and smartphones.  Unfortunately, these stories are so rare that we tend to use them for a decade (or even 2 decades)! 

For years Cisco said it would obsolete its own products, and by implementing that direction Cisco has grown year after year in the tech world, where flame-outs abound (just look at what happened to Sun Microsystems, Silicon Graphics, AOL and rapidly Yahoo!) Look at how Netflix has pushed Blockbuster aside by expanding its business from snail-mail to downloads.  Or how Amazon.com has found explosive growth by changing the way we read books, now selling more Kindle products than printed.  Rather than thinking about how each could do more of what they always did, fearing cannibalization of the "core business," they are aiding destruction of their historical business by implementing the newest technology and solution before some start-up beats them to the punch!

As you enter 2011 and prepare for 2012, is your planning based upon doing more of what your business has always done?  A start up has no last year, so its planning is based entirely on views of the future.  Are you fixated on improving your operations?  A start up has no operations, so it is fixated on competitors to figure out how it can meet market needs better, and use "fringe" solutions in new ways that competitors have not yet adopted.  Are you hoping that market shifts slow, or stop, so revenue, market share and profit slides abate? A start up is looking for ways to disrupt the marketplace to it can grab high growth from existing solutions while generating new demand by meeting unmet needs. Are you trying to preserve resources in order to defend your business from competitors? A start up is looking for places to experiment with new solutions and figure out how to change the competitive landscape while growing revenues and profits.

If you want to thrive you have to grow.  To grow, you have to think young!  Be willing to plan for the future, like Apple did when it moved into new markets for music downloads.  Be willing to find competitive holes and fill them with new technology, like Netflix.  Don't fear market changes – create them like Cisco does with new solutions that obsolete previous generations.  And keep testing new ways to expand the market, even as you see intense competition in historical markets being attacked by new competitors.  That is the only way to create value, and generate new jobs!

 

What you don’t know can kill you – Facebook, Twitter, iPad, Kindle

Nancy Munro of Knowledgeshift.com posted a great blog "Technology was Blago's Enemy Again." Although many people watch The Apprentice, I'm not one.  Apparently the former governor of Illinois was a contestant, and when he was challenged to lead a project team his lack of technology skills got in the way of effectively doing the job. Although he's a smart lawyer and politician, his tool set had become outdated.  A competitive team leader who was very good at texting and other state-of-the-art technologies was able to best Governor Blagojevich's team, and the ex-governor was "fired" by Donald Trump from the show.

On the surface, this is a funny story.  But Nancy points out how it reflects the very real issues of using technology when competing.  All businesses compete every day.  Those that learn to use new technologies are able to get more done, faster and more effectively.  Those who fall into a routine of doing things the same way, and don't advance their tool set, run the risk of being knocked out of the competition.  Mr. Blagojevich's inability to use modern technology killed his chances of winning the competition.

Will you, or your business, go to any trade shows or conferences this year?  Probably.  But you'll limit attendance because you're still worried about financial performance.  How will you select where you go?  Probably by attending the ones most closely associated with your industry or business.  But think about it, are those the ones that will be most valuable?  You'll probably mostly hear what you already know, and reinforce your existing beliefs about the business.  Is that really an effective spend?

Instead, shouldn't you use the funds to learn about what you don't know?  Like how to be a world-class social marketer?  This is an amazingly fast growing area where early adopters are gaining new sales.  For example, Guy Kawasaki and the world's leaders in social marketing will be talking about how to get sales and profits from Twitter and Facebook at something called "The Smartbrief Social Media Success Summit." I'm not a shill for the conference (I'm not even speaking there), but this kind of event offers the very real opportunity of learning something you don't know – rather than reinforcing old Lock-ins and keeping you doing what you've always done.

Have you purchased a Kindle or iPad yet?  If not, how do you know what they can or can't do?  At SeekingAlpha.com "Thoughts on the iPad" offers one person's reflection on what the iPad does well, and doesn't, and where it might evolve – as well as how it compares to the Kindle.  These devices are selling in the millions – so are you and your business thinking about how to use one to help sell more products or make more money?  Yahoo and Google are both launching ad models for iPad (see Mediapost.com "Yahoo Readies Launch of Online Advertising Model"). Are you considering using this media to reach new customers?  Have you considered how one of these products embedded in what you sell might offer you a competitive advantage?  If you and your colleagues haven't tried one, experimented, how would you know?

Our businesses rarely get into trouble from something we know well.  It's what we don't know, what we ignore, that gets us in trouble.  Like Craigslist.com wiping out newspaper classified ads.  The newspapers didn't even see it coming.  On the other hand, if they had investigated and used Craigslist they could have prepared, and maybe even developed a competitive on-line product to grow new revenues! 

It's incumbent upon us to constantly expand into new markets.  We have to constantly keep White Space alive where we use resources to experiment in areas outside traditional permission.  It's easy to keep throwing all our resources into what we know, but in the end, it's what we don't know that will knock us out of the game – like poor Blago.

Change How You Do Market Research – New Book “Remote Research”

Paralysis from analysis is all too common.  Why? Because for the longest time people have assumed that it's possible to predict the future by studying history.  And there has been ample belief that if you ask customers questions, they will give you the answers which will guide your future.  Further, people want to believe that it was possible to find hidden meaning via discovering previously unseen correlations — even though almost all these sorts of low-score correlations turn out to be spurious, merely mathematical artifacts. 

Readers of this blog know that when we investigated The Phoenix Principle we learned that  traditional market research rarely improves understanding of customers or markets.  And we learned that customers are incredibly unreliable at telling you what they really want, or what they are likely to do next.

Nate Bolt of market research firm Bolt Peters now confirms this.  His recent column at Venturebeat.com "Stop Listening to Your Customers" is an indictment of traditional market research observed through his 9 years working with clients in the field.

  • "A common assumption… is that listening to
    potential customers is the best way to find out whether your product or
    idea will succeed in the market. Honestly — don’t bother."
  • "Opinions are often inconsistent with behaviors or other attitudes,
    especially when discussing hypotheticals."
  • "Remember 'Clippy" the little character that appeared in Microsoft Word years ago? That
    little bastard arose, in part, from Microsoft asking users if they
    wanted help working on their documents — everyone said, “Sure, sounds
    great.” But once people started actually using it in the real world,
    they hated it
    — it might be one of the most hated features in the
    history of computing."
  • "Never ask people what they think of your product or idea."
  • "Test ideas early by watching behavior. It’s fine if you
    don’t have a 100 percent functional interface — having eight people
    interact with a prototype or even wireframes or design mockups can be
    incredibly useful. Even recruiting strangers from the street to use your
    prototype is better than nothing."
  • "Use unorthodox methods. Companies like Apple and
    37signals make a big deal about never conducting user research. They lie… Releasing products in generations, like Apple does, provides them with
    mountains of reviews, task-specific complaints, crash reports, customer
    support issues, and Genius Bar feedback
    "

Too much money is spent on research that can never, by it's design and method, tell the business what it needs to know.  The only way to know how to compete is to get into the market.  Quit trying to analyze – go do it!  An ounce of  "doing it" is worth a kilogram of research and analysis.  Get out of the office, out of the conference room, and into the market.  Set up a White Space team and make them responsible for launching, learning, reporting and figuring out what customers want that you can sell at a profit.  That feedback is the research which is really worthwhile.  It's faster, easier to get and more accurate than anything you'll get from a market study or focus group!

Nate Bolt's new book is "Remote Research."  The link I found to the book was at RosenfeldMedia.com.

Use Disruptions, not Goals, to Succeed – GM

Many people think the best way to grow is by setting big goals – even Big Audacious Hairy Goals (BHAGs).  But increasingly we're learning that goal setting is not correlated with success.  At AmericanPublicRadio.org there's a partial text, and MP3 download, of a recent interview between General Motors leaders and a University of Arizona Professor titled "It's not always good to create goals." 

The story relates how about a decade a go, with market share hovering at 25%, GM set the goal of moving back to 29%.  It became a huge, multi-year campaign.  Lapel pins with "29" were made and all kinds of motivational programs were put in place.  The GM organization had its goal, and it was highly aligned to the goal.  But it didn't happen.  Despite the goal, and all the energy and talent put into focusing on the goal, GM continued to struggle, lose share – and eventually file bankruptcy.  The goal made no difference.

Worse, the interview goes on to discuss how goals often lead to decidedly undesirable, sometimes unethical – even illegal – behavior.  Instances are cited where goal obsession led company employees to falsify documents, even  ship bricks in place of products to meet sales targets.  No executive wants this, but goals and goal obsession – especially when there is a lot of reinforcement socially and monetarily on the goal – can become a serious problem.

Results are exactly that.  Results.  They are an outcome. They are the way we track our behaviors and activities – our decisions.  When we focus on goals – usually some sort of result – we lose track of what is important.  We have to focus on what we do.  And for most organizations a big goal merely leads people to try working harder, faster,better, cheaper.  But when the Success Formula is mis-aligned with the market – even when the whole organization is aligned on maximizing the Success Formula results will still struggle – even falter.  Goals don't help you fix a Success Formula returning poor results.  Just look at GM.

In fact, it can make matters worse.  In "White Bears and Other Unwanted Thoughts" (available on Amazon.com) the authors point out that when you try to turn a negative (a problem) into a positive (a challenge, or goal), you often achieve a rebound effect making people obsess about the problem.  Tell somebody not to think about a white bear – and it's all they think about.  When your company has a problem and you try to tell employees "hey, don't think about the problem.  Go do your job.  Work harder, increase your focus, and all will work out.  Sure share is down, but don't think about lost share, instead think about the goal of higher market share" frequently the employees will start to become obsessive about the problem.  It will reinforce doing more of the same – perhaps manicly Instead of becoming innovative and doing something new, obsessive devotion to trying to make the old methods produce better results becomes the norm.  Goals don't produce innovation – they produce repetition.

So what should you do when facing a problem?  Disruptions.  GM didn't need a big goal.  GM needed to Disrupt its broken Success Formula.  GM needed to attack a Lock-in (or two).  GM leaders needed to admit the market had shifted, and that competitors were changing the game.  GM needed to recognize, admit and encourage employees to engage in attacking old assumptions – and recognize that market share would continue eroding if they didn't do things differently.  Setting a big goal reinforced the old Lock-ins and even an aligned organization – working it's metaphorical tail off – couldn't make the outdated Success Formula produce positive results. 

Only a Disruption would have helped save GM.  After attacking some Lock-ins, like the desire to move all customers to bigger and more expensive cars, or the desire to focus on long production runs, GM should have set up White Space teams to discover new Success Formulas.  Instead of putting all its management energy and money into growing volume at Chevrolet, Cadillac, Buick and GM nameplates, General Motors leadership should have revitalized the innovative Saturn and Saab to do new things – to develop new approaches that would be more competitive.  Instead of pushing Hummer to have 3 identical cars in 3 sizes, GM leadership should have unleashed Hummer to explore the market for truly unique, limited production vehicles. GM should have allowed Pontiac to really take advantage of the design breakthroughs happening at the Australian design studio – to change the nameplate into a performance car segment leader.  By attacking Lock-ins, Disrupting, and using White Space GM really could have turned around.  Instead, by creating a BHAG GM reinforced its focus on its Hedgehog concept – and drove the company into bankruptcy.

You can see a 40 second video about the value and importance of Disruptions on YouTube here.

A 75 second video on White Space effectiveness on YouTube here.

Read free ebook on "The Fall of GM:  What Went Wrong and How To Avoid Its Mistakes"

Who to follow in 2010? – Amazon, WalMart

Happy New Year!

As we start 2010 the plan, according to The Financial Times, "WalMart aims to cut supply chain costs."  Imagine that.  Cost cutting has been the biggest Success Formula component for WalMart for its entire career.  And now, the company that is already the low cost retailer – and famous for beating its suppliers down on price to almost no profitability – is planning to focus on purchasing for the next 5 years in order to hopefully take another 5% out of purchased product cost.  How'd you like to hear that if Wal-Mart is one of your big customers?  What do you suppose the discussion will be like when you go to Target or KMart (match WalMart pricing?)

Will this make WalMart more admired, or more successful?  This is the epitome of "more of the same."  Even though WalMart is huge, it has done nothing for shareholders for years.  And employees have been filing lawsuits due to unpaid overtime. And some markets have no WalMart stores because the company refuses to allow any employees to be unionized.  This announcement will not make WalMart a more valuable company, because it simply is an attempt to Defend the Success Formula.

On the other hand according to Newsweek, in "The Customer is Always Right," Amazon intends to keep moving harder into new products and markets in 2010.  Amazon has added enormous value to its shareholders, including gains in 2009, as it has moved from bookselling to general merchandise retailing to link retailing to consumer electronics with the Kindle and revolutionizing publishing with the Kindle store.  Amazon isn't trying to do more of the same, it's using innovation to drive growth

And the CEO, Jeff Bezos freely admits that his success today is due to scenario development and plans laid 4 years ago – as Amazon keeps its planning focused on the future.  With the advent of many new products coming out in 2010 – including the Apple Tablet – Amazon will have to keep up its focus on new products and markets to maintain growth.  Good thing the company is headed that direction.

So which company would you rather work for?  Invest in?  Supply? 

Which will you emulate?

PS – "Create Marketplace Disruption:  How To Stay Ahead of the Competition" was selected last week to be on the list of "Top 25 Books to read in 2010" by PCWorld and InfoWorld.  Don't miss getting your copy soon if you haven't yet read the book.

Defend & Extend – book publishing, movie distribution,

If you try standing in the way of a market shift you are going to get treated like the poor cowboy who stands in front of a cattle stampede.  The outcome isn't pretty.  Yet, we still have lots of leaders trying to Defend & Extend their business with techniques that are detrimental to customers.  And likely to have the same impact on customers as the cowpoke shooting a pistol over the head of the herd.

Book publishers have a lot to worry about.  Honestly, when did you last read a book?  Every year the demand for books declines as people switch reading habits to shorter formats.  And book readership becomes more concentrated in the small percentage of folks that read a LOT of books.  And those folks are moving faster and faster to Kindle type digital e-book devices.  So the market shift is pretty clear.

Yet according to the Wall Street Journal  Scribner (division of Simon & Schuster) is delaying the release of Stephen King's latest book in e-format ("Publisher Delays Stephen King eBook").  They want to sell more printed books, so they hope to force the market to buy more paper copies by delaying the ebook for 6 weeks.  They think that people will want to give this book as a gift, so they'll buy the paper copy because the ebook won't be out until 12/24.

So what will happen?  Kindle readers I know don't want a paper book.  They wait.  Giving them a paper copy would create a reaction like "Oh, you shouldn't have.  I mean, really, you shouldn't have."  So the idea that this gets more printed books to e-reader owners is faulty.  That also means that the several thousand copies which would get sold for e-readers don't.  So you end up with lots of paper inventory, and unsatisfactory sales of both formats.  That's called "lose-lose."  And that's the kind of outcome you can expect when trying to Defend & Extend an outdated Success Formula.

Simultaneously, as book sales become fewer and more concentrated a higher percent of volume falls onto fewer titles.  And that is exactly where WalMart, Target and Amazon compete.  High volume, and for 2 of the 3 companies, limited selection.  This gives the reseller more negotiating clout against the publisher.   So as the big retailers look for ways to get people in the store, they are willing to sell books at below cost – loss leaders. 

So now publishers are joining with the American Booksellers Association to seek an anti-trust case against the big retailers according to the Wall Street Journal again in "Are Amazon, WalMart and Target acting like Predators?" .  Publishers want to try Defending their old pricing models, and as that crumbles in the face of market shifts they try using lawyers to stop the shift.  That will probably work just as well as the lawsuits music publishers tried using to stop the distribution of MP3 tunes.  Those lawsuits ended up making no difference at all in the shift to digital music consumption and distribution.

"Movie Fans Might Have to Wait To Rent New DVD Releases" is the Los Angeles Times headline. The studios like 20th Century Fox, Universal and Warner Brothers want individuals to buy more DVDs.  So their plan is to refuse to sell DVDs to rental outfits like Netflix, Redbox and Blockbuster.  Just like Scribner with its Stephen King book, they are hoping that people won't wait for the rental opportunity and will feel forced to go buy a copy.  Like that's the direction the market is heading – right?

If they wanted to make a lot of money, the studios would be working hard to find a way to deliver digital format movies as fast as possible to people's PCs – the equivalent of iTunes for movies – not trying to limit distribution!  That the market is shifting away from DVD sales is just like the shift away from music CD sales, and will not be fixed by making it harder to rent movies.  Although it might increase the amount of piracy – just like similar actions backfired on the music studios 8 years ago.

Defending & Extending a business only works when it is in the Rapids of market growth.  When growth slows, the market is moving on.  Trying to somehow stop that shift never works.  Only an arrogant internally-focused manager would think that the company can keep markets from shifting in a globally connected digital world.  Consumers will move fast to what they want, and if they see a block they just run right over it – or go where you least want them to go (like to pirates out of China or Korea.) 

They only way to deal with market shifts is to get on board.  "Skate to where the puck will be" is the over-used Wayne Gretzsky quote.  Be first to get there, and you can create a new Success Formula that captures value of new growth markets.  And that's a lot more fun than getting trampled under a herd of shifting customers that you simply cannot control.