It is an unfortunate fact that small businesses fail at a higher rate than large businesses. While we've come to accept this, it somewhat flies in the face of logic. After all, small businesses are run by owners who can achieve entrepreneurial returns rather than managerial bonuses, so incentive is high. Conventional wisdom is that small businesses have fewer, and closer relationships to customers (think Ace Hardware franchisees vs. Home Depot.) And lacking layers of overhead and embedded management they should be more nimble.
Yet, they fail. From as high as 9 out of 10 for restaurants to 4 out of 10 in more asset intensive business-to-business ventures. That is far higher than large companies.
Why? Despite conventional wisdom most small businesses are run by leaders committed to a single, narrow success formula. Most are wedded to their core ideology, based on personal history, and unwilling to adapt until the business completely fails. Most reject new technologies and other emerging innovations as long as possible, trying to conserve cash and wait for "more proof" change will pay off. Additionally, most spend little time investing time, or money, in innovation at all as they pour everything into defending and extending their historical business approach.
Take for example the major trend to digital marketing. Everyone knows that digital is the only growing ad market, while print is fast dying: Chart republished with permission of Jay Yarow, Business Insider 3/19/2013
Digital marketing is one of the few places where ads can be purchased for as little as $100. Digital ads are targeted at users based upon their searches and pages viewed, thus delivered directly to likely buyers. And digital ads consistently demonstrate the highest rate of return. That's why it's growing at over 20%/year!
Yet, small businesses continue to put most of their money into local newspapers and direct mail circulars. The least targeted of all advertising, and increasingly the least read! While print ad spending has declined over 80% the last few years, to 1950 levels (adjusted for inflation,) smarter businesses have abandoned the media. At large companies in 2012 38% of advertising is on digital, second only to TV's 42% – and rapidly moving into first place!
A second major trend is the move to mobile and app usage. In the last 2 years mobile users have grown and shown a distinct preference for apps over mobile web sites. App use is growing while mobile web sites have stalled: Chart republished with permission of Alex Cocotas, Business Insider 3/20/13
Even though there are over 1million apps available for iPhone and Android users, the vast majority of small businesses have no apps aligned with their business and customers. Most small businesses, late to the game in digital marketing, are content to try and add mobile capability to their already existing web site – hoping that it will be sufficient for future growth. Meanwhile, customers are going directly for apps in accelerating numbers every month! Chart republished with permission of Alex Cocotas, Business Insider 1/8/13
Rather than act like market leaders, using customer intimacy and nimbleness to jump ahead of lumbering giants, small business leaders complain they are unsure of app value – and keep spending money on historical artifacts (like their web site) rather than invest in higher return innovation opportunities. Many small businesses are spending $20k+/year on printed brochures, coupons and newspaper or magazine PR when a like amount spent on an app could connect them much more tightly with customers, add higher value and expand their base more quickly and more profitably!
The trend to digital marketing – including the explosive growth in mobile app use – is proven. And due to very low relative up-front cost, as well as low variable cost, both trends are a wonderful boon for small businesses ready to adopt, adapt and grow. But, unfortunately, the vast majoritiy of small business leaders are behaving oppositely! They remain wedded to outdated marketing and customer relationship processes that are too expensive, with lower yield!
The opportunity is greater now than during most times for smaller competitors to be disruptive. They can seize new innovations faster, and leverage them before larger competitors. But as long as they cling to old practices and processes, and beliefs about historical markets, they will continue to fail, smashed under the heal of slower moving, bureaucratic large companies who have larger resources when they do finally take action.
Forbes republished its annual "Most Miserable Cities" list. It looks at employment/unemployment, inflation, incomes and cost of living, crime, weather, commute times – a pretty good overview of things tied to living somewhere. Detroit ranked first, as the most miserable city, with Flint, MI second. And my home-sweet-home Chicago came in fourth. Ouch!
There is an important lesson here for every city – and for our country.
Detroit was a thriving city during the industrial revolution. Innovation in all things mechanical led to the modern automobile; a marvelous innovation which, literally, everyone wanted. As demand skyrocketed, Henry Ford's management team developed the modern assembly line which allowed production volumes to skyrocket as well. Detroit was a hotbed of industrial innovation.
This fueled growth in jobs, which led to massive immigration to Detroit. With growth the tax base expanded, and quickly Detroit was a leading city with all the best things people could want. In the 1950s and 1960s Detroit reaped the benefits of the local auto companies, and their suppliers, as ongoing innovations drove better cars, more sales, more revenue taxes, higher property values and higher property taxes. It was a glorious virtuous circle.
But things changed.
Offshore competitors came into the market creating different kinds of autos appealing to different customers. Initially they had lower costs, and less expensive designs. Their cars weren't as good as GM, Ford or Chrysler – but they were cheap. And when gasoline prices took off in the 1970s people suddenly realized these cars were also more fuel efficient and cheaper to maintain. As these offshore competitors gained more sales they invested in making better cars, until they had quality as good as the Detroit companies, plus better fuel efficiency.
But the Detroit companies had become stuck in their processes that worked in earlier days. Even though the market shifted, they didn't. What passed for innovations were increasingly simple appearance changes as bottom-line focus reduced willingness to do new things, and offered fewer new things to do. GM and its brethren didn't shift with the market, and by the 1980s the seeds of big problems already were showing. By the 1990s profits were increasingly variable and elusive.
The formerly weak and small competitors now were more competitive in a changed market favoring smaller cars with more, and better, technology. The market had changed, but the big American auto companies had not. They kept doing more of the same – hopefully better, faster and striving for cheaper. But they were falling further behind. By the 2000s decade failure had become the viable option, with both Chrysler and GM going bankrupt.
As this cycle played out, the impact on Detroit was clear. Less success in the business base meant fewer revenue tax dollars from less profitable companies. Cost reductions meant employment stagnated, then started falling. Incomes stagnated, and people left Detroit to find better paying jobs. Property values began to fall. Income and property taxes declined. Governments had to borrow more, and cut costs, leading to declines in services. What had been a virtuous circle became a violently destructive whirlpool.
Detroit's business leaders failed to invest in programs to drive more new jobs in non-auto, non-industrial, business development. As competitors hurt the local industry, Detroit (and Michigan's) leaders kept trying to invest in saving the historical business, while the economy was shifting from an industrial base to an information one. It wasn't just autos that were less valuable as companies, but everything industrial. Yet, leaders failed at attracting new technology companies. The economic shift – the market shift – was unaddressed, and now Detroit is bankrupt.
Much as I like living in Chicago, unfortunately the story is far too similar in my town. Long an industrial hub, Chicago (and Illinois) enjoyed the benefits of growing companies, employment and taxes during the heyday of industrialism. This led to well paid, and very well pensioned, government employees providing services. The suburbs around Chicago exploded as people migrated to the Windy City for jobs – despite the brutal winters.
But Chicago has been dramatically affected by the shift to an information economy. The old machine shops, tool and dye makers and myriad parts manufacturers were decimated as that work often went offshore to cheaper manufacturers. Large manufacturers like Western Electric and International Harvester (renamed Navistar) failed. Big retailers like Montgomery Wards disappeared, and even Sears has diminished to a ghost of its former self. All businesses killed by market shifts.
And as a result, people quit moving to Chicago – and actually started leaving. There are now fewer jobs in Illinois than in the year 2000, and as a result people have left town. They've gone to cities (and states) where they could find jobs in growth industries allowing for more opportunity, and rising incomes.
Just like Detroit, Chicago shows early signs of big problems. Crime is up, with an unpleasantly large increase in murders. Insufficient income and property tax revenues led to budget crises across the board. Dramatic actions like selling city parking meters to shore up finances has led to Chicago having the most expensive parking in the country – despite far from the highest incomes. Property taxes in suburbs have escalated, with taxes in collar Lake county higher than Los Angeles! Yet the state pension system is bankrupt, causing the legislature to put in place a 50% state income tax increase! Meanwhile the infrastructure is showing signs of needing desperate work, but there is no money.
Like Detroit, Chicago's businesses (and governments) have invested insufficiently in innovation. Recent Chicago Tribune columns on local consumer goods behemoth Kraft emphasized (and typified) the lack of new product development and stalled revenue growth. Where Bay Area tech companies expect 50% of revenues (or more) from new products (or variations), Kraft has admitted it has relied on stalwarts like Velveeta and Mac & Cheese so much that fewer than 10% of revenues come from anything new.
Culturally, too many decisions in the executive suites of both the companies, and the governments, are focused on what worked in the past rather than investing in innovation. Even though the vaunted University of Illinois has one of the world's top 5 engineering schools, the majority of graduates find they leave the state for better paying jobs. And a dearth of angel or venture funding means that start-ups simply are forced coastal if they hope to succeed.
And this reaches to our national policies as well. Plenty of arguments abound for cutting costs – but are we effectively investing in innovation? Do our tax policies, as well as our expenditures, drive innovation – or constrict it? It was government programs which unleashed nuclear power and gave us a rash of innovations from putting a man on the moon. Yet, today, we seem obsessed with cutting budgets, cutting costs and doing less – not even more – of the same.
Growth is a wonderful thing. But growth does not happen without investment in innovation. When companies, or industries, stop investing in innovation growth slows – and eventually stops. Communities, states and even nations cannot thrive unless there is a robust program of investing for, and implementing, innovation.
With innovation you create renewal. Without it you create Detroit.
Michael Dell has put together a hedge fund, one of his largest suppliers and some debt money to take his company, Dell, Inc. private. There are large investors threatening to sue, claiming the price isn't high enough. While they are wrangling, small investors should consider this privatization manna from heaven, take the new, higher price and run to invest elsewhere – thankful you're getting more than the company is worth.
In the 1990s everybody thought Dell was an incredible company. With literally no innovation a young fellow built an enormously large, profitable company using other people's money, and technology. Dell jumped into the PC business as it was born. Suppliers were making the important bits, and looking for "partners" to build boxes. Dell realized he could let other people invest in microprocessor, memory, disk drive, operating system and application software development. All he had to do was put the pieces together.
Dell was the rare example of a company that was built on nothing more than execution. By marketing hard, selling hard, buying smart and building cheap Dell could produce a product for which demand was skyrocketing. Every year brought out new advancements from suppliers Dell could package up and sell as the latest, greatest model. All Dell had to do was stay focused on its "core" PC market, avoid distractions, and win at execution. Heck, everyone was going to make money building and selling PCs. How much you made boiled down to how hard you worked. It wasn't about strategy or innovation – just execution.
Dell's business worked for one simple reason. Everybody wanted PCs. More than one. And everybody wanted bigger, more powerful PCs as they came available. Market demand exploded as the PC became part of everything companies, and people, do. As long as demand was growing, Dell was growing. And with clever execution – primarily focused on speed (sell, build, deliver, get the cash before the supplier has to be paid) – Dell became a multi-billion dollar company, and its founder a billionaire with no college degree, and no claim to being a technology genius.
But, the market shifted. As this column has pointed out many times, demand for PCs went flat – never to return to previous growth rates. Users have moved to mobile devices such as smartphones and tablets, while corporate IT is transitioning from PC servers to cloud services. iPad sales now nearly match all of Dell's sales. Dell might well be the world's best PC maker, but when people don't want PCs that doesn't matter any more.
Market watchers knew this. That's why Dell's stock took a long ride from its lofty value on the rapids of growth to the recent distinctly low value as it slipped into the whirlpool of failure.
If you think adding debt to Dell will save it from the market shift, just look at how well that strategy worked for fixing Tribune Corporation. A Sam Zell led LBO took over the company claiming he had plans for a new future, as advertisers shifted away from newspapers. Bankruptcy came soon enough, employee pensions were wiped out, massive layoffs undertaken and 4 years of legal fighting followed to see if there was any plan that would keep the company afloat. Debt never fixes a failing company, and Dell knows that. Dell has no answer to changing market demand away from PCs.
Now the buzzards are circling. HP has been caught in a rush to destruction ever since CEO Fiorina decided to buy Compaq and gut the HP R&D in an effort to follow Dell's wild revenue ride. Only massive cost cutting by the following CEO Hurd kept HP alive, wiping out any remnants of innovation. Now HP has a dismal future. But it hopes that as the PC market shrinks the elimination of one competitor, Dell, will give newest CEO Whitman more time to somehow find something HP can do besides follow Dell into bankruptcy court.
Watching as its execution-oriented ecosystem manufacturers are struggling, supplier Microsoft is pulling out its wallet to try and extend the timeline. Plundering its $85B war chest, Microsoft keeps adding features, with acquisitions such as Skype, that consume cash while offering no returns – or even strong reasons for people to stop the transition to tablets.
Additionally it keeps putting up money for companies that it hopes will build end-user products on its software, such as its $500M investment in Barnes & Noble's Nook and now putting $2B into Dell. $85B is a lot of money, but how much more will Microsoft have to spend to keep HP alive – or money losing Acer – or Lenovo? A billion here, a billion there and pretty soon it adds up to a lot of money! Not counting losses in its own entertainmnet and on-line divisions. The transition to mobile devices is permanent and Microsoft has arrived at the game incredibly late – and with products that simply cannot obtain better than mixed reviews.
The lesson to learn is that management, and investors, take a big risk when they focus on execution. Without innovation, organizations become reliant on vendors who may, or may not, stay ahead of market transitions. When an organization fails to be an innovator, someone who creates its own game changers, and instead tries to succeed by being the best at execution eventually market shifts will kill it. It is not a question of if, but when.
Being the world's best PC maker is no better than being the world's best maker of white bread (Hostess) or the world's best maker of photographic film (Kodak) or the world's best 5 and dime retailer (Woolworth's) or the world's best manufacturer of bicycles (Schwinn) or cold rolled steel (Bethlehem Steel.) Being able to execute – even execute really, really well – is not a long-term viable strategy. Eventually, innovation will create market shifts that will kill you.
Reading reviews of Super Bowl ads I was struck by two observations:
The reviewers got the value of most ads backwards
They missed the most important ad of all – on Twitter
Super Bowl ads cost $1M+ to make. Then they cost $2M+ to air. So it is an expensive proposition. This isn't fine art, like a Picasso, with a long shelf life to create a rate of return. These ads need to pay off fast. They need to build the brand with existing and/or new customers to drive sales and make back that money now.
So let's start with one of the best reviewed ads – Chrysler's "God Made a Farmer". Reviewers liked the home-spun approach of using a dead conservative radio commentator voicing over pictures of farmers in pick-ups. Unfortunately, from a rate of return perspective my bet is this ad will end up near the very bottom.
Firstly, the 50 year trend is to urbanization. In 1900 9 out of 10 Americans had something to do with agriculture. Now it is fewer than 1 in 20. Trucks are used for lots of things, but farming makes up a small percentage. It has been a full generation since most 2nd generation Americans had anything to do with a farm. Showing people using a product in ways that almost nobody uses it, and with a message most of your target market doesn't even recognize, leaves most people confused rather than ready to buy.
Secondly, first generation Americans are changing the demographics of America quickly. First generation Americans (can I say immigrant?) proved large enough, and powerful enough, to play a spoiler role in Mitt Romney's run for the Presidency. To them, farming in America has no history, appeal or meaning to their lives.
Thirdly, no one under the age of 35 has any idea who Paul Harvey is. Perhaps Chrysler could have used Bill O'Reilly and achieved its message mission. But as it was, there were two of us +50 people who spent 5 minutes trying to tell the group watching the game at my home who Paul Harvey even was – and why he was being quoted.
A 24 year old boy watching the game with me in suburban Chicago listened to my explanation about Paul Harvey and farming. He drives a Ford F-250 4×4 pick-up. After I finished he looked me square in the eyes and said "Swing, and a miss." And that's what I'd say to Chrysler. Whoever made this ad had more money than market research and common sense.
Simultaneously, reviewers hated GoDaddy.com's "Perfect Match, Bar Rafieli's Big Kiss." This portrayed a very stereotypical engineer enjoying a long kiss with a pretty girl – referring to how the company's products well serve client needs. Reviewers found the ad in bad taste. My bet is this ad will have immediate payback for GoDaddy.com
Have you ever heard of the monstrously successful situation comedy "The Big Bang Theory?" At just about any time you can find this in reruns on at least one, if not more than one, cable channel. The show is so successful that to pull people viewers to its Monday night schedule CBS actually chose to rerun "Big Bang" episodes amidst new episodes of its other programs in January. The show thrives on the tension of male technical professionals seeking to solve the age old question of how a man can appeal to desirable ladies. Politically correct or not, the show is successful because it is a timeless message. Most boys want to be liked by girls.
Today the world of people who have technical, or quasi-technical jobs, is HUGE. GoDaddy's target audience of people buying, and servicing, web domains just happens to be mostly male under-40 men with technical or quasi-technical backgrounds. This little, tasteless demonstration may have upset the high ethics of ad execs (or has "Mad Men" unraveled that myth?) but to its target group this ad was pure gold. And same for GoDaddy.com.
But most importantly, none of these ads will have the payback of 9 words a marketer tweeted when the lights went out at the game. Because it had blown a huge wad of money on a traditional game ad the Oreo brand folks at Mondelez were watching the game with their media agency 360i. Thinking quickly the creatives came up with an idea, and the brand guys approved it – so out went the tweet from Oreo Cookies "No problem. You can still dunk in the dark."
"Booya" as my young friends say. 10,000 retweets and an entire Monday news cycle devoted to the quick thinking folks who posted this tweet. ROI? Given that the incremental cost was zero, pretty darn high. If I was investing, I'd take the tweet over the video. The equivalent of a kick return for a TD.
The world has changed. We now live in a 24×7, real-time, always-on world. We no longer wait for the weekly magazine for analysis, or the daily newspaper for information. Or even the 11:00 television daily recap. We pick up alerts on our mobile devices constantly. Receive highlights from friends on Facebook and Twitter. We want our information NOW. And those who connect to this new way of living for providing us information are not only accepted, but admired by those thriving on the social networks.
This year's Super Bowl social media postings were triple last year's; over 30million. This is the world of immediate feedback. Immediate discussion. And the place were ads need to be immediate as well. Those who understand this, and connect to it, will succeed. Others, who spend too much to make and then distribute ads on traditional media, will not. Just as newspaper ads have lost of their relevance – TV ads are destined for the same conclusion.
The good news is that Mondelez and its Oreos team was ready, and willing, to take advantage. Where were most of the other advertisers? Audi, VW and P&G's Tide also jumped in. But of all those millions spent on once-run ads, these major corporate advertisers – and their extremely highly paid ad agencies – were absent. When the easy money was to be made, they simply weren't there. Off drinking beer and watching the game when they should have been working!
Today we learned Twitter is buying Bluefin to make its information on who is tweeting, about what, in real time even better. This will be helpful for any smart advertiser. And not just the multi-billion dollar giants. The good news is anyone, anywhere in any size company can play in this real-time, on-line social media world. You don't have to be huge, or rich.
Where were you when the lights went out? Were you taking advantage of what we may later call a "once in a lifetime" opportunity?
Where will you be the next time? Are you ready to invest in the new world of social media advertising? Or are you stuck spending too much to come in too late?
Last week's earning's announcements gave us some big news. Looking around the tech industry, a number of companies reported about as expected, and their stocks didn't move a lot. Apple had robust sales and earnings, but missed analyst targets and fell out of bed! But without a doubt, the big winner was Netflix, which beat expectations and had an enormous ~50% jump in valuation!
My what a difference 18 months makes (see chart.) For anyone who thinks the stock market is efficient the value of Netflix should make one wonder. In July, 2011 the stock ended a meteoric run-up to $300/share, only to fall 80% to $60/share by year's end. After whipsawing between $50 and $130, but spending most of 2012 near the lower number, the stock is now up 3-fold to $160! Nothing scares investors more than volatility – and this kind of volatility would scare away almost anyone but a day trader!
Yet, through all of this I have been – and I remain – bullish on Netflix. During its run-up in 2010 I wrote "Why You Should Love Netflix," then when the stock crashed in late 2011 I wrote "The Case for Buying Netflix" and last January I predicted Netflix to be "the turnaround story of 2012." It would be logical to ask why I would remain bullish through all the ups and downs of this cycle – especially since Netflix is still only about half of its value at its high-point.
Simply put, Netflix has 2 things going for it that portend a successful future:
Netflix is in a very, very fast growing market. Streaming entertainment. People have what appears to be an insatiable desire for entertainment, and the market not only has grown at a breathtaking rate, but it will continue to grow extremely fast for several more quarters. It is unclear where the growth rate may tap out for content delivery – putting Netflix in a market that offers enormous growth for all participants.
Netflix leadership has shown a penchant for having the right strategy to remain a market leader – even when harshly criticized for taking fast action to deal with market shifts. Specifically, choosing to rapidly cannibalize its own DVD business by aggressively promoting streaming – even at lower margins – meant Netflix chose growth over defensiveness.
In 2011 CEOReed Hastings was given "CEO of the Year 2010" honors by Fortune magazine. But in 2011, as he split Netflix into 2 businesses – DVD and streaming – and allowed them to price independently and compete with each other for customer business he was trounced as the "dunce" of tech CEOs.
His actions led to a price increase of 60% for anyone who decided to buy both Netflix products, and many customers chose to drop one. Analysts predicted this to be the end of Netflix.
But in retrospect we can see the brilliance of this decision. CEO Hastings actually did what textbooks tell us to do – he began milking the installed, but outdated, DVD business. He did not kill it, but he began pulling profits and cash out of it to pay for building the faster growing, but lower margin, streaming business. This allowed Netflix to actually grow revenue, and grow profits, while making the market transition from one platform (DVD) to another (streaming.)
Almost no company pulls off this kind of transition. Most companies try to defend and extend the company's "core" product far too long, missing the market transition. But now Netflix is adding around 2 million new streaming customers/quarter, while losing 400,000 DVD subscribers. And with the price changes, this has allowed the company to add content and expand internationally — and increase profits!!
Marketwatch headlined that "Naysayers Must Feel Foolish." But truthfully, they were just looking at the wrong numbers. They were fixated on the shrinking installed base of DVD subscribers. But by pushing these customers to make a fast decision, Netflix was able to convert most of them to its new streaming business before they went out and bought the service from a competitor.
Aggressive cannibalization actually was the BEST strategy given how fast tablet and smartphone sales were growing and driving up demand for streaming entertainment. Capturing the growth market was far, far more valuable than trying to defend the business destined for obsolescence.
Netflix simply did its planning looking out the windshield, at what the market was going to look like in 3 years, rather than trying to protect what it saw in the rear view mirror. The market was going to change – really fast. Faster than most people expected. Competitors like Hulu and Amazon and even Comcast wanted to grab those customers. The Netflix goal had to be to go headlong into the cold, but fast moving, water of the new streaming market as aggressively as possible. Or it would end up like Blockbuster that tried renting DVDs from its stores too long – and wound up in bankruptcy court.
There are people who still doubt that Netflix can compete against other streaming players. And this has been the knock on Netflix since 2005. That Amazon, Walmart or Comcast would crush the smaller company. But what these analysts missed was that Amazon and Walmart are in a war for the future of retail – not entertainment – and their efforts in streaming were more to protect a flank in their retail strategy, not win in streaming entertainment. Likewise, Comcast and its brethren are out to defend cable TV, not really win at anytime, anywhere streaming entertainment. Their defensive behavior would never allow them to lead in a fast-growing new marketplace. Thus the market was left for Netflix to capture – if it had the courage to rapidly cannibalize its base and commit to the new marketplace.
Hulu and Redbox are also competitors. And they very likely will do very well for several years. Because the market is growing very fast and can support multiple players. But Netflix benefits from being first, and being biggest. It has the most cash flow to invest in additional growth. It has the largest subscriber base to attract content providers earlier, and offer them the most money. By maintaining its #1 position – even by cannibalizing itself to do so – Netflix is able to keep the other competitors at bay; reinforcing its leadership position.
There are some good lessons here for everyone:
Think long-term, not short-term. A king can become a goat only to become a king again if he haa the right strategy. You probably aren't as good as the press says when they like you, nor as bad as they say when hated. Don't let yourself be goaded into giving up the long-term win for short-term benefits.
Growth covers a multitude of sins! The way Netflix launched its 2-division campaign in 2011 was a disaster. But when a market is growing at 100%+ you can rapidly recover. Netflix grew its streaming user base by more than 50% last year – and that fixes a lot of mistakes. Anytime you have a choice, go for the fast growing market!!
Follow the trend! Never fight the trend! Tablet sales were growing at an amazing clip, while DVD players had no sales gains. With tablet and smartphone sales eclipsing DVD player sales, the smart move was to go where the trend was headed. Being first on the trend has high payoff. Moving slowly is death. Kodak failed to aggressively convert film camera customers to its own digital cameras, and it filed bankruptcy in 2012.
Dont' forget to be profitable! Even if it means raising prices on dated solutions that will eventually become obsolete – to customer howls. You must maximize the profits of an outdated product line as fast as possible. Don't try to defend and extend it. Those tactics use up cash and resources rather than contributing to future success.
Cannibalizing your installed base is smart when markets shift. Regardless the margin concerns. Newspapers said they could not replace "print ad dollars" with "on-line ad dimes" so many went bankrupt defending the paper as the market shifted. Move fast. Force the cannibalization early so you can convert existing customers to your solution, and keep them, before they go to an emerging competitor.
When you need to move into a new market set up a new division to attack it. And give them permission to do whatever it takes. Even if their actions aggravate existing customers and industry participants. Push them to learn fast, and grow fast – and even to attack old sacred cows (like bundled pricing.)
There were a lot of people who thought my call that Netflix would be the turnaround tech story of 2012 was simply bizarre. But they didn't realize the implications of the massive trend to tablets and smartphones. The impact is far-reaching – affecting not only computer companies but television, content delivery and content creation. Netflix positioned itself to be a winner, and implemented the tactics to make that strategy work despite widespread skepticism.
Hats off to Netflix leadership. A rare breed. That's why long-term investors should own the stock.
The Harvard Business Review recently published its list of the 100 Best Performing CEOs. This list is better than most because it looks at long-term performance of the CEO during his or her time in the job – with many on the list in service more than a decade.
#1 was Steve Jobs. #2 is Jeff Bezos – making him the greatest living CEO. It is startling just how well these two CEOs performed. During Jobs' tenure Apple investors achieved a return of 66.8 times their money. During Mr. Bezos' tenure shareholders achieved a remarkable 124.3 times return on their money. In an era when most of us are happy to earn 5-10%/year – which equates to doubling your money about once a decade – these CEOs exceeded expectations 30-60 fold!
Both of these CEOs achieved greatness by transforming an industry. We all know the Apple story. From near bankruptcy as the Mac company Mr. Jobs led Apple into the mobile devices business, and created a transformation from Walkmen, Razrs and PCs to iPods, iPhones and iPads – to the detriment of Sony, Motorola, Nokia, Microsoft, HP and Dell.
The Amazon story is all the more remarkable because it has been written in the far more mundane world of retail – not known for being nearly as fast-changing at tech.
Lest we forget, Amazon started as an on-line seller of books frequently unavailable at your local bookstore. "What's a local bookstore?" you may now ask, because through continuous upgrading of its capability to build on the advances in internet usage – across machines, browsers, wi-fi and mobile – Amazon drove into bankruptcy such large booksellers as B.Dalton and Borders – leaving Barnes & Noble a mere shell of its former self and on tenous footing. And the number of small bookshops has dropped dramatically.
But Amazon's industry transformation has gone far beyond bookselling. Amazon was one of the first, and by most users considered the best, at offering a complete on-line storefront for any retailer who wants to sell goods through Amazon's site. You can set up your inventory, display products, provide user information, manage a shopping cart and handle check out all through Amazon – with minimal technical skill. This allowed Amazon to bring vastly more products to customers; and without adding all the inventory or warehousing cost.
As digital uses grew, Amazon moved beyond the slow-paced publishers to launch the Kindle and give us eReaders displacing paper books and periodicals. But this was just the first salvo in the effort to promote additional on-line buying, as Amazon next launched Kindle Fire which at remarkably low cost gave people a tablet already set up for doing retail shopping at Amazon.
As Amazon launched its book downloads and on-line services, it built its own cloud services business to aid businesses and people in using tablets, and doing more things on-line; which further reinforced the digital retail world in which Amazon dominates.
And make no doubt about it, Kindle Fire – and the use of all other tablets – is the WalMart and other traditional brick-and-mortar retail killer. Amazon is now a player in all pieces of the transition which is happening in retail, from traditional shopping to on-line.
Demand for retail space in the USA began declining in 2009 and has not stopped. Most analysts blamed it on the great recession. But in retrospect we can now see it was the watershed year for customers to begin looking more, and buying more, on-line. Now each year growth in on-line retail continues, while demand at traditional stores wanes.
Just look at this last holiday season. To (hopefully) drive revenue stores were opening on Thanksgiving, and doing 24 and 48 hours of non-stop staffing and promotions to drive sales. But it was mostly in vain, as traditional retail saw almost no gains. Despite doing more and more of what they've always done – trying to be better, faster and cheaper – they simply could not change the trend away from shopping on-line and back into the stores.
For the last year the #1 trend in retailing has been "showrooming" where customers stand in a store with a smartphone comparison pricing on-line (most frequently Amazon) to the product on the shelf. Retailers were forced to match on-line prices, despite their higher overhead, or lose the business. And now Target has implemented a policy of price-matching Amazon for all of 2013 in hopes of slowing the trend to on-line purchasing.
Circuit City went bankrupt, which saved Best Buy as it picked up their lost business. But now Best Buy is close to failure. Same store sales at WalMart have been flat. JCPenney recruited Apple's retail store wizard as CEO – but he's learned when you have to compete with Amazon life simply sucks. Nobody in traditional retail has found a way to reverse the on-line shopping trend, which is still dominated by Amazon.
We all can learn from these two CEOs and the companies they built. First, and foremost, is understand trends and align with them. If you help people move in the direction they want to go life is easy, and growth can be phenomenal. Trying to slow, stop or reverse a trend doesn't work, and is expensive.
Second, don't ask customers what they want, instead give them what they need. Customers may be on a trend, but they will frame their requests in the old paradigm. By creating new trend-promoting products and solutions you can capture the customer and avoid head-to-head competition with the "old guard" titans selling the increasingly outdated solutions. Don't build better brick-and-mortar, make brick-and-mortar obsolete.
So, what's stopping you from growing your business like Apple or Amazon? What keeps you from being the next Steve Jobs, or Jeff Bezos? Can you spot trends and provide trend-supporting solutions for customers? Or are you stymied because you're spending too much time trying to defend and extend your old business in the face of game changing trends.
Many people equate spending on R&D with investing in innovation. The logic goes that R&D spending is lab spending, and out of labs come innovations. Hence, those that spend a lot on R&D are innovative.
That is faulty logic.
This chart shows R&D spending from the top 20 companies in 2011:
Think of your own list of companies that are providing innovations which change your work, or life. Would you include Apple? Amazon? Facebook? Google? Genentech? (Here's the link to Fast Company's 50 most innovative for 2012). Note that none of these companies appear on the list of top R&D spenders.
On the other hand, as you look at the big spender list some things might be apparent:
Microsoft is #5, spending $9B and nearly 13% of revenue. Yet, for this money in 2012 the world received updates to their aging operating system and office automation software. Both of which failed to register favorable reviews by industry gurus, and are considered far from innovative. And Nokia, which is so floundering some consider it a likely bankruptcy candidate soon, is #7! Despite spending nearly $8B on R&D Nokia is now completely reliant on Microsoft if it is to even survive.
Autos make up a big part of the group. Toyota, GM, Volkswagen, Honda and Daimler are all on the list, spending a whopping $36B. Yet, even though they give us improvements nobody considers them (especially GM) very innovative. That award would go to little Tesla Motors. Or maybe Tata Motors in India.
Pharmaceuticals make up the dominant industry. Novartis, Roche, Pfizer, Merck, Johnson & Johnson, Sanofi, GlaxoSmithKline and AstraZeneca are all here – spending a cumulative $54B! Yet, they have all failed to give the world any incredible new drugs, all have profit struggles, and the industry is rife with discussions about weak product pipelines. The future of modern medicine increasingly is shifting to genetic solutions, biologics and more specific alternatives to the historical drug regimes from these aging pharma R&D programs.
Do you see the obvious pattern? Most big R&D spenders are not really seeking innovations. They are spending money on historical programs, following historical patterns and trying to defend and extend the historical business. In other words, they are spending vast sums attempting to sustain (or recapture) historical success. And, as the list shows, largely doing a pretty lousy job of it.
If you were given $10,000 to invest would you select these top 20 R&D spenders – or would you look for other, more innovative companies. From a profitability, rate of return and trend perspective, most of these companies look weak – or downright horrible.
Innovators don't focus on what they spend, but where they spend it.
The companies most known for innovation don't keep spending money year after year on their old business. Instead of digging deeper into what they already know, they invest laterally. They spend money putting the pieces together in new, unique ways. They try to find new solutions to old problems, using new – even fringe – technologies. They try to develop disruptive solutions that actually change the marketplace, rather than trying to make something that already exists better, faster or cheaper.
Lots of people like to think there is "scale" in research. Bigger is better. What's more important, for investors, is that there is "diminishing returns." The more you research an area the more you have to spend to find anything new. The costs keep escalating, as the gains shrink. After investing for a while, continuing to research an area is not a good investment (although it may be very intellectually interesting.)
Most of the companies on this list would be smarter to scrap their existing R&D programs, cut the budget in half (at least,) and then invest it somewhere very different. Instead of looking deeper, they need to look wider – broader. They need to investigate alternative solutions, rather than more of the same. They need to be putting more money on fringe opportunities, and a lot less into the core.
Until they do, few on this list are very good investment bets. You'll do better investing like, and in, the real innovators.
This is an exciting time of year for tech users – which is now all of us. The biggest show is the battle between smartphone and tablet leader Apple – which has announced new products with the iPhone 5 and iPad Mini – and the now flailing, old industry leader Microsoft which is trying to re-ignite its sales with a new tablet, operating system and office productivity suite.
I’m reminded of an old joke. Steve the trucker drives with his pal Alex. Someone at the diner says “Steve, imagine you’re going 60 miles an hour when you start down a hill. You keep gaining speed, nearing 90. Then you realize your brakes are out. Now, you see one quarter mile ahead a turn in the road, because there’s a barricade and beyond that a monster cliff. What do you do?”
Steve smiles and says “Well, I wake up Alex.”
“What? Why?” asks the questioner.
“Because Alex has never seen a wreck like the one we’re about to have.”
Microsoft has played “bet the company” on its Windows 8 launch, updated office suite and accompanied Surface tablet. (More on why it didn’t have to do this later.) Now Microsoft has to do something almost never done in business. The company has to overcome a 3 year lateness to market and upend a multi-billion dollar revenue and brand leader. It must overcome two very successful market pioneers, both of which have massive sales, high growth, very good margins, great cash flow and enormous war chests (Apple has over $100B cash.)
Just on the face of it, the daunting task sounds unlikely to succeed.
But there is far more reason to be skeptical. Apple created these markets with new products about which people had few, if any conceptions. But today customers have strong viewpoints on both what a smartphone and tablet should be like to use – and what they expect from Microsoft. And these two viewpoints are almost diametrically opposed.
Since the initial product viewing, almost all professional reviewers have said the Surface is neat, but not fantastically so. It is different from iOS and Google’s Android products, but not superior. It has generated very little enthusiasm.
Tests by average users have shown the products to be non-intuitive. Especially when told they are Microsoft products. So the Apple-based interface intuition doesn’t come through for easy use, nor does historical Microsoft experience. Average users have been confused, and realize they now must learn a 3rd interface – the iOS or Android they have, the old Microsoft they have, and now this new thing. It might as well be Linux for all its similarity to Microsoft.
For those who were excited about having native office products on a tablet, the products aren’t the same as before – in feel or function. And the question becomes, if you really want the office suite do you really want a tablet or should you be using a laptop? The very issue of trying to use Office on the Surface easily makes people rethink the question, and start to realize that they may have said they wanted this, but it really isn’t the big deal they thought it would be. The tablet and laptop have different uses, and between Surface and Win8 they are seeing learning curve cost maybe isn’t worth it.
The new Win8 – especially on the tablet – does not support a lot of the “professional” applications written on older Windows versions. Those developers now have to redevelop their code for a new platform – and many won’t work on the new tablet processors.
Many have been banking on Microsoft winning the “enterprise” market. Selling to CIOs who want to preserve legacy code by offering a Microsoft solution. But they run into two problems. (1) Users now have to learn this 3rd, new interface. If they have a Galaxy tab or iPad they will have to carry another device, and learn how to use it. Do not expect happy employees, or executives, who expressly desire avoiding both these ideas. (2) Not all those old applications (drivers, code, etc) will port to the new platform so easily. This is not a “drop in” solution. It will take IT time and money – while CEOs keep asking “why aren’t you doing this for my iPad?”
All of this adds up to a new product set that is very late to market, yet doesn’t offer anything really new. By trying to defend and extend its Windows and Office history, Microsoft missed the market shift. It has spent several billion dollars trying to come up with something that will excite people. But instead of offering something new to change the market, it has given people something old in a new package. Microsoft they pretty much missed the market altogether.
Everyone knows that PC sales are going to decline. Unfortunately, this launch may well accelerate that decline. Remember how slowly people were willing to switch to Vista? How slowly they adopted Microsoft 7 and Office 2010? There are still millions of users running XP – and even Office XP (Office Professional 2003.) These new products may convince customers that the time and effort to “upgrade” simply means its time to switch.
Microsoft has fallen into a classic problem the Dean of innovation Clayton Christensen discusses. Microsoft long ago overshot the user need for PCs and office automation tools. But instead of focusing on developing new solutions – like Apple did by introducing greater mobility with its i products – Microsoft has diligently, for a decade, continued to dump money into overshooting the user needs for its basic products. They can’t admit to themselves that very, very, very few people are looking for a new spreadsheet or word processing application update. Or a new operating system for their laptop.
These new Microsoft products will NOT cause people to quit the trend to mobile devices. They will not change the trend of corporate users supplying their own devices for work (there’s now even an IT acronym for this movement [BYOD,] and a Wikipedia page.) It will not find a ready, excited market of people wanting to learn yet another interface, especially to use old applications they thought they already new!
Long-term, there is yet another great battle to be fought. What will be the role of monitors, scattered in homes and bars, and in train stations, lobbies and everywhere else? Who will control the access to monitors which will be used for everything from entertainment (video/music,) to research and gaming. The tablet and smartphones may well die, or mutate dramatically, as the ability to connect via monitors located nearly everywhere using —- xBox?
But, this week all discussion of the new xBox Live and music applications were overshadowed by the CEO’s determination to promote the dying product line around Windows8.
This was simply stupid. Ballmer should be fired.
The PC products should be managed for a cash hoarding transition into a smaller market. Investments should be maximized into the new products that support the next market transition. xBox and Kinect should be held up as game changers, and Microsoft should be repositioned as a leader in the family and conference room; an indespensible product line in an ever-more-connected world.
But that didn’t happen this week. And the CEO keeps heading straight for the cliff. Maybe when he takes the truck over the guard rail he’ll finally be replaced. Investors can only wake up and watch – and hope it happens sooner, rather than later.
UPDATE 16 April, 2019 – Android TV is a new emerging tech that could have a big impact on the overall marketplace. Read more about Android TV here.
I like writing about tech companies, such as Apple and Facebook, because they show how fast you can apply innovation and grow – whether it is technology, business process or new best practices. But many people aren't in the tech industry, and think innovation applies a lot less to them.
Whoa there cowboy, innovation is important to you too!
Few industries are as mired in outdated practices and slow to adopt technology than construction. Whether times are good, or not, contractors and tradespeople generally do things the way they've been done for decades. Even customers like to see bids where the practices are traditional and time-worn, often eschewing innovations simply because they like the status quo.
Skanska, a $19B construction firm headquarted in Stockholm, Sweden with $6B of U.S. revenue managed from the New York regional HQ refused to accept this. When Bill Flemming, President of the Building Group recognized that construction industry productivity had not improved for 40 years, he reckoned that perhaps the weak market wasn't going to get better if he just waited for the economy to improve. He was sure that field-based ideas could allow Skanska to be better than competitors, and open new revenue sources.
Skanska USA CEO Mike McNally agreed instantly. In 2009 he brought together his management team to see if they would buy into investing in innovation. He met the usual objections
We're too busy
I have too much on my plate
Business is already too difficult, I don't need something new
Customers aren't asking for it, they want lower prices
Who's going to pay for it? My budget is already too thin!
But, he also recognized that nobody said "this is crazy." Everyone knew there were good things happening in the organization, but the learning wasn't being replicated across projects to create any leverage. Ideas were too often tried once, then dropped, or not really tried in earnest. Mike and Bill intuitively believed innovation would be a game changer. As he discussed implementing innovation with his team he came to saying "If Apple can do this, we can too!"
Even though this wasn't a Sweden (or headquarters) based project, Mike decided to create a dedicated innovation group, with its own leader and an initial budget of $500K – about .5% of the Building Group total overhead.
The team started with a Director of innovation, plus a staff of 2. They were given the white space to find field based ideas that would work, and push them. Then build a process for identifying field innovations, testing them, investing and implementing. From the outset they envisaged a "grant" program where HQ would provide field-based teams with money to test, develop and create roll-out processes for innovations.
Key to success was finding the right first project. And quickly the team knew they had one in one of their initial field projects called Digital Resource Center, which could be used at all construction sites. This low-cost, rugged PC-based product allowed sub-contractors around the site to view plans and all documentation relevant for their part of the project without having to make frequent trips back to the central construction trailer.
This saved a lot of time for them, and for Skanska, helping keep the project moving quickly with less time wasted talking. And at a few thousand dollars per station, the payback was literally measured in days. Other projects were quick to adopt this "no-brainer." And soon Skanska was not only seeing faster project completion, but subcontractors willing to bake in better performance on their bids knowing they would be able to track work and identify key information on these field-based rugged PCs.
As Skanska's Innovation Group started making grants for additional projects they set up a process for receiving, reviewing and making grants. They decided to have a Skansa project leader on each grant, with local Skansa support. But also each grant would team with a local university which would use student and faculty to help with planning, development, implementation and generate return-on-investment analysis to demonstrate the innovation's efficacy. This allowed Skansa to bring in outside expertise for better project development and implementation, while also managing cost effectively.
With less than 2 years of Innovation Group effort, Skanska has now invested $1.5M in field-based projects. The focus has been on low-cost productivity improvements, rather than high-cost, big bets. Changing the game in construction is a process of winning through lots of innovations that prove themselves to customers and suppliers rather than trying to change a skeptical group overnight. Payback has been almost immediate for each grant, with ROI literally in the hundreds of percent.
You likely never heard of Skanska, despite its size. And that's because its in the business of building bridges, subway stations and other massive projects that we see, but know little about. They are in an industry known for its lack of innovation, and brute-force approach to getting things done.
But the leadership team at Skanska is proving that anyone can apply innovation for high rates of return. They
understood that industry trends were soft, and they needed to change if they wanted to thrive.
recognized that the best ideas for innovation would not come from customers, but rather from scanning the horizon for new ideas and then figuring out how to implement themselves
weren't afraid to try doing something new. Even if the customer wasn't asking for it
created a dedicated team (and it didn't have to be large) operating in white space, focused on identifying innovations, reviewing them, funding them and bringing in outside resources to help the projects succeed
In addition to growing its traditional business, Skanska is now something of a tech company. It sells its Digital Resource stations, making money directly off its innovation. And its iSite Monitor for monitoring environmental conditions on sensitive products, and pushing results to Skanska project leaders as well as clients in real time with an app on their iPhones, is also now a commercial product.
So, what are you waiting on? You'll never grow, or make returns, like Apple if you don't start innovating. Take some lessons from Skanska and you just might be a lot more successful.
We care a lot about Apple, largely because the company has made us all so productive. Instead of chained to PCs with their weight and processor-centric architecture (not to mention problems crashing and corrupting files) while simultaneously carrying limited function cell phones, we all now feel easily interconnected 24×7 from lightweight, always-on smart devices. We feel more productive as we access our work colleagues, work tools, social media or favorite internet sites with ease. We are entertained by music, videos and games at our leisure. And we enjoy the benefits of rapid problem solving – everything from navigation to time management and enterprise demands – with easy to use apps utilizing cloud-based data.
In short, what was a tired, nearly bankrupt Macintosh company has become the leading marketer of innovation that makes our lives remarkably better. So we care – a lot – about the products Apple offers, how it sells them and how much they cost. We want to know how we can apply them to solve even more problems for ourselves, colleagues, customers and suppliers.
Amidst all this hoopla, as you figure out how fast you can buy an iPhone 5 and what to do with your older phone, you very likely forgot that Kraft will be splitting itself into 2 parts in about 2 weeks (October 1). And, most likely, you don't really care.
And you can't imagine why I would even compare Kraft with Apple.
Kraft was once an innovation leader. Velveeta, a much maligned product today, gave Americans a fast, easy solution to cheese sauces that were difficult to make. Instant Mac & Cheese was a meal-in-a-box for people on the run, and at a low budget. Cheeze Whiz offered a ready-to-eat spread for canape's. Individually wrapped American cheese slices solved the problem of sticky product for homemakers putting together lunch sandwiches for school children. Miracle Whip added spice to boring sandwiches. Philadelphia brand cream cheese was a tasty, less fattening alternative to butter while also a great product for sauces.
But, the world changed and these innovations have grown a lot less interesting. Frozen food replaced homemade sauces and boxed solutions. Simultaneously, cooking skills improved. Better options for appetizers emerged than stuffed celery or something on a cracker. School lunches changed, and sandwich alternatives flourished. Across Kraft's product lines, demand changed as new technologies were developed that better fit customers' needs leading to revenue stagnation, margin erosion and an increasing irrelevancy of Kraft in the marketplace – despite its enormous size.
Apple turned itself around by focusing on innovation, becoming the most valuable American publicly traded company. Kraft eschewed innovation for cost cutting, doing more of the same trying to defend its "core," leaving investors with virtually no returns. Meanwhile thousands of Kraft employees have lost their jobs, even though revenues per employee at Kraft are 1/6th those at Apple. And supplier margins are a never-ending cycle of forced reductions as Kraft tries to capture their margin for itself.
Apple's value went up because it's revenues went up. In 2007 Apple had #24B in revenues, while Kraft was 150% bigger at $37B. Ending 2011 Apple's revenues, all from organic growth, were up 4x (400%) at $108B. But Kraft's 2011 revenues were only $54B, including roughly $10B of purchased revenues from its Cadbury acquisition, meaning comparative Kraft revenues were $44B; a growth of (ho-hum) 3.5%/year.
Lacking innovation Kraft could not grow the topline, and simply could not grow its value. And paying a premium price for someone else's revenues has led to…. splitting the company in 2 in only 2 years, mystifying everyone as to what sort of strategy the company ever had to grow!
Apple spends nearly nothing on advertising. But it does spend on innovation. Innovation adds value. Advertising aging products that solve no new needs does not.
Companies that innovate change markets and reap the rewards. By delivering on trends they excite customers who flock to their solutions. Companies that focus on defending and extending their past, especially in times of market shifts, end up failing. Failure may not happen overnight, but it is inevitable.
