Disrupt to Thrive in 2011 – Model Facebook, Groupon, Twitter

by | Jan 10, 2011 | Defend & Extend, Disruptions, Innovation, Leadership, Web/Tech


Summary:

  • Communication is now global, instantaneous and free
  • As a result people, and businesses, now adopt innovation more quickly than ever
  • Competitors adapt much quicker, and react much stronger than ever in history
  • Profits are squeezed by competitors rapidly adopting innovations
  • But many business leaders avoid disruptions, leading to slower growth and declining returns
  • To maintain, and grow, revenues and profits you must be willing to implement disruptions in order to stay ahead of fast moving competitors
  • Amidst fast shifting markets, greatest value (P/E multiple and market cap) is given to those companies that create disruptions (like Facebook, Groupon, Twitter)

All business leaders know the pace of competitive change has increased. 

It took decades for everyone to obtain an old-fashioned land line telephone. Decades for everyone to buy a TV.  And likewise, decades for color TV adoption.  Microwave ovens took more than a decade. Thirty years ago the words “long distance” implied a very big cost, even if it was a call from just a single interchange away (not even an area code away – just a different set of “prefix” numbers.) People actually wrote letters, and waited days for responses! Social change, and technology adoption, took a lot longer – and was considered expensive.

Now we assume communications at no cost with colleagues, peers, even competitors not only across town state, or nation, but across the globe!  Communication – whether email, or texting, or old fashioned voice calls – has become free and immediate. (Consider Skype if you want free phone calls [including video no less] and use a PC at your local library or school building if you don’t own one.) Factoring inflation, it is possible to provide every member of a family of 5 with instant phone, email and text communication real-time, wirelessly, 24×7, globally for less than my parents paid for a single land-line, local-exchange only (no long distance) phone 50 years ago! And these mobile devices can send pictures!

As a result, competitors know more about each other a whole lot faster, and take action much more quickly, than ever in history.  Facebook, for example, is now connecting hundreds of millions of people with billions of communications every day.  According to statistics published on Facebook.com, every 20 minutes the Facebook website produces:

  • 1,000,000 shared links
  • 1,323,000 tagged photos
  • 1,484,000 event invitations
  • 1,587,000 Wall posts
  • 1,851,000 Status updates
  • 1,972,000 Friend requests accepted
  • 2,716,000 photos uploaded
  • 4,632,000 messages
  • 10,208,000 comments

Multiply those numbers by 3 to get hourly. By 72 to get daily. Big numbers!  Alexander Graham Bell had to invent the hardware and string thousands of miles of cable to help people communicate with his disruption. His early “software” were thousands of “operators” connecting calls through central switchboards. Mark Zuckerberg and friends only had to create a web site using existing infrastructure and existing tools to create theirs.  Rapidly adopting, and using, existing innovations allowed Facebook’s founders to create a disruptive innovation of their own!  Disruption has allowed Facebook to thrive!

Facebook has disrupted the way we communicate, learn, buy and sell.  “Word of mouth” referrals are now possible from friends – and total strangers.  Product benefits and problems are known instantaneously.  Networks of people arguably have more influence that TV networks!  Many employees are likely to make more facebook communications in a day than have conversations with co-workers!  Facebook (or twitter) is rapidly becoming the new “water cooler.” Only it is global and has inputs from anyone.  Yet only a fraction of businesses have any plans for using Facebook – internally or to be more competitive!

Far too many business leaders are unwilling to accept, adopt, invest in or implement disruptions.

InnovateOnPurpose.com highlights why in “Why Innovation Makes Executives Uncomfortable:”

  1. Innovation is part art, and not all science.  Many execs would like to think they can run a business like engineering a bridge. They ignore the fact that businesses implement in society, and innovation is where we use the social sciences to help us gain insight into the future.  Success requires more than just extending the past – because market shifts happen.  If you can’t move beyond engineering principles you can’t lead or manage effectively in a fast-changing world where the rules are not fixed.
  2. Innovation requires qualitative insights not just quantitative statistics. Somewhere in the last 50 years the finance pros, and a lot of expensive strategy consultants, led business leaders to believe that if they simply did enough number crunching they could eliminate all risk and plan a guaranteed great future.  Despite hundreds of math PhDs, that approach did not work out so well for derivative investors – and killed Lehman Brothers (and would have killed AIG insurance had the government not bailed it out.) Math is a great science, and numbers are cool, but they are insufficient for success when the premises keep changing.
  3. Innovation requires hunches, not facts.  Well, let’s say more than a hunch.  Innovation requires we do more scenario planning about the future, rather than just pouring over historical numbers and expecting projections to come true.  We don’t need crystal balls to recognize there will be change, and to develop scenario plans that help us prepare for change.  Innovation helps us succeed in a dynamic world, and implementation requires a willingness to understand that change is inevitable, and opportunistic.
  4. Innovation requires risks, not certainties.  Unfortunately, there are NO certainties in business.  Even the status quo plan is filled with risk. It’s not that innovation is risky, but rather that planning systems (ERP systems, CRM systems, all systems) are heavily biased toward doing more of the same – not something new! Markets can shift incredibly fast, and make any success formula obsolete.  But most executives would rather fail doing the same thing faster, working harder, doing what used to work, than implement changes targeted at future market needs.  Leaders perceive following the old strategy is less risky, when in reality it’s loaded with risk too!  Too many businesses have failed at the hands of low-risk, certainty seeking leadership unable to shift with changing markets (GM, Chrysler, Circuit City, Fannie Mae, Brach’s, Sun Microsystems, Quest, the old AT&T, Lucent, AOL, Silicon Graphics, Yahoo, to name a few.)

Markets are shifting all around us.  Faster than imaginable just 2 decades ago.  Leaders, strategists and planners that enter 2011 hoping they can win by doing more, better, faster, cheaper will have a very tough time.  That is the world of execution, and modern communication makes execution incredibly easy to copy, incredibly fast.  Even Wal-Mart, ostensibly one of the best execution-oriented companies of all time, has struggled to grow revenue and profit for a decade.  Today, companies that thrive embrace disruption.  They are willing to disrupt within their organizations to create new ideas, and they are willing to take disruptive opportunities to market. Compare Apple to Dell, or Netflix to Blockbuster.

Recent investments have valued Facebook at $50B, Groupon at $6B and Twitter at almost $4B. Apple is now the second most valuable company (measured by market capitalization).  Why? Because they are disrupting the way we do things. To thrive (perhaps survive by 2015) requires moving beyond the status quo, overcoming the perceived risk of innovation (and change) and taking the actions necessary to provide customers what they want in the future!  Any company can thrive if it embraces the disruptions around it, and uses them to create a few disruptions of its own.

Will you grow in 2011? Create wealth like Apple, Amazon, Priceline, DeVry, Colgate

by | Dec 23, 2010 | Defend & Extend, General, In the Rapids, Innovation, Leadership, Openness


“Goodbye 2010, the Year of Austerity” is the  headline from Mediapost.com‘s Marketing Daily.  And that could be the mantra for many, many companies.  Nobody is winning today by trying to save their way to prosperity!  As we move into this decade, it is important business leaders realize that the only way to create a strong bottom line (profit) is to develop a strong top line (revenue.)  Recommendations:

  1. Never be desperate.  Go to where the growth is, and where you can make money.  Don’t chase any business, chase the business where you can profitably growth.  Be somewhat selective.
  2. Focus efforts on markets you know best.  I add that it’s important you understand not to do just what you like, but learn to do what customers VALUE.
  3. Let go of crap, traditions and “playing it safe” actions.  Growth is all about learning to do what the market wants, not trying to protect the past – whether processes, products or even customers.
  4. More lemonade making. You can’t grow unless you’re willing to learn from everything around you. We constantly find ourselves holding lemons, but those who prosper don’t give up – they look for how to turn those into desirable lemonade.  What is your willingness to learn from the market?
  5. Austerity measures are counterproductive 99% of the time. Efficiency is the biggest obstacle to innovation.  You don’t have to be a spendthrift to succeed, but you can’t be a miser investing in only the things you know, and have done before.
  6. Communicate, communicate, communicate. We don’t learn if we don’t share.  Developing insight from the environment happens when all inputs are shared, and lots of people contribute to the process.
  7. Get off the downbeat buss. There’s more to success than the power of positive thinking, but it is very hard to gain insight and push innovation when you’re a pessimist.  Growth is an opportunity to learn, and do exciting things. That should be a positive for everybody – except the status quo police.

Realizing that you can’t beat the cost-cutting horse forever (in fact, most are about ready for the proverbial glue factory), it’s time to realize that businesses have been under-investing in innovation for the last decade.  While GM, Circuit City, Blockbuster, Silicon Graphics and Sun Microsystems have been failing, Apple, Google, Cisco, Netflix, Facebook and Twitter have maintained double-digit growth!  Those who keep innovating realize that markets aren’t dead, they’re just shifting!  Growth is there for businesses who are willing to innovate new solutions that attract customers and their dollars! For every dead DVD store there’s somebody making money streaming downloads.  Businesses simply have to work harder at innovating.

Fast Company gives us “Five Innovative New Year’s Resolutions:”

  1. Associate.  Work harder at trying to “connect the dots.”  Pick up on weak signals, before others, and build scenarios to help understand the impact of these signals as they become stronger.  For example, 24x7WallStreet.com clues us in that greater use of mobile devices will wipe out some businesses in “The Ten Businesses The Smartphone Has Destroyed.”  But for each of these (and hundreds others over the next few years) there will be a large number of new business opportunities emerging.  Just look at the efforts of Foursquare and Groupon and the direction those growth businesses are headed.
  2. Observe.  Pay attention to what’s happening in the world, and think about what it means for your (and every other) business.  $100/barrel oil has an impact; what opportunity does it create?  Declining network TV watching has an impact – how will you leverage this shift?  Don’t just wander through the market, and reacting.  Figure out what’s happening and learn to recognize the signs of growth opportunities. Use market events to drive being proactive.
  3. Experiment.  If you don’t have White Space teams trying figure out new business models, how will you be a future winner?  Nobody “lucks” into a growth market.  It takes lots of trial and learning – and that means the willingness to experiment.  A lot.  Plan on experimenting.  Invest in it.  And then plan on the positive results.
  4. Question. Keep asking “why” until the market participants are so tired they throw you out of the room.  Then, invent scenarios and ask “why not” until they throw you out again.  Markets won’t tell you what the next big thing is, but if you ask a lot of questions your scenarios about the future will be a whole lot better – and your experimentation will be significantly more productive.
  5. Network. You can’t cast your net too wide in the effort to obtain multiple points of view.  Nothing is narrower than our own convictions.  Only by actively soliciting input from wide-ranging sources can you develop alternative solutions that have higher value.  We become so comfortable talking to the same people, inside our companies and outside, that we don’t realize how we start hearing only reinforcement for our biases.  Develop, and expand, your network as fast as possible.  Oil and water may be hard to mix, but it blending inputs creates a good salad dressing.

ChiefExecutive.net headlined “2010 CEO Wealth Creation Index Shows a Few Surprises.” Who creates wealth?  Included in thte Top 10 list are the CEOs of Priceline.com, Apple, Amazon, Colgate-Palmolive and DeVry.  These CEOs are driving industry innovation, and through that growth.  This has produced above-average cash flow, and higher valuations for their shareholders.  As well as more, and better quality jobs for employees.  Meanwhile suppliers are in a position to offer their own insights for ways to grow, rather than constantly battling price discussions.

Who destroys wealth?  In the Top 10 list are the CEOs of Dean Foods, Kraft, Computer Sciences (CSC) and Washington Post.  These companies have long eschewed innovation.  None have introduced any important innovations for over a decade.  Their efforts to defend & extend old practices has hurt revenue growth, providing ample opportunity for competitors to enter their markets and drive down margins through price wars.  Penny-pinching has not improved returns as revenues faltered, and investors have watched value languish.  Employees are constantly in turmoil, wondering what future opportunities may ever exist.  Suppliers never discuss anything but price.  These are not fun companies to work in, or with, and have not produced jobs to grow our economy.

Any company can grow in 2011.  Will you?  If you choose to keep doing what you’ve always done – well you shouldn’t plan on improved performance.  On the other hand, embracing market shifts and creating an adaptive organization that identifies and launches innovation could well make you into a big winner.  Next holiday season when you look at performance results for 2011 they will have more to do with management’s decisions about how to manage than any other factor.  Any company can grow, if it does the right things.

 

 

Play To Win, Not “Catch up” – Colgate’s Opportunity

by | Dec 8, 2010 | Food and Drink, General, In the Rapids, Innovation, Leadership, Television, Web/Tech

Summary:

  • We too often think of competition as “head to head”
  • Smart competitors avoid direct competition, instead using alternative methods in order to lower cost while appealing directly to market needs
  • Proctor & Gamble has long dominated advertising for many consumer goods, but the impact, value and payoff of traditional advertising has declined markedly as people have switched to the web
  • New competitors can utilize internet and social media tools to achieve better brand positioning and targeted marketing at far lower cost than old mass media products
  • Colgate is in a great position to blow past P&G by investing quickly and taking the lead in internet marketing for its products
  • Eschew calls for investing in old methods of competition, and instead find new ways to compete that allow you to end-run traditional leaders

Add me to the email list.


According to a recent Advertising Age article (“To Catch Up Colgate May Ratchet Up Its Ad Spending“) Colgate has done a surprisingly good job of holding onto market share, despite underspending almost all its competitors in advertising.  This is no mean feat in consumer products, where advertising dominates the cost structure.  But the AdAge folks are predicting that to avoid further declines, and grow, Colgate will have to dramatically up its ad spending.  That would be old-fashioned, backward-thinking, short-sighted and a lousy use of resources!

Colgate competes with lots of companies, but across categories its primary competitor is Proctor & Gamble.  In toothpaste, P&G’s Crest outspends Colgate by over $25M – or about 35%.  In dishsoap Colgate spent nothing on Palmolive in 2010, compared to P&G’s spend of $30M on Dawn.  In deodorant/body soap Colgate spent about $9M on Softsoap, Irish Spring and Speedstick while P&G spent 9 times more (over $82M) on Old Spice and Secret. (Side note, Unilever spent $148M on Dove and a whopping $267M when adding in Axe and Degree!)  In pet food, Unilever spends $35M dollars more (almost 4x) on Iams than Colgate spent on Hills Science Diet.  Altogether, in these categories, P&G spent almost $158M more than Colgate (2.5x more)!  As a big believer in traditional advertising, AdAge therefore predicts that Colgate should dramatically increase its annual ad budget – and maintain these higher levels for 5 years in order to overcome its historical “underspending.”

But that would be like deciding to trade punches with Goliath! 

Why would Colgate want to do more of what P&G does the most?  While advisors try to pit competitors directly against each other, head-to-head “gladiator style” combat leaves the combatants bloody – some dead.  That’s a dumb way to compete.  Colgate has long spent in other areas, such as supporting dog rescue operations and with product specialists gaining endorsements while eschewing more general advertising.  Now, if Colgate wants to take action to grow share, it should pick up a sling (to continue the (Biblical metaphor) in its ongoing battle.  And the good news is that Colgate has an entire selection of new, alternative weapons to use today.

Across all its product categories, Colgate can utilize a plethora of new social media marketing tools.  At costs far lower than traditional mass advertising, Colgate can build promotional web programs that appeal directly to targeted consumers.  Twitter, Facebook, Foursquare, Groupon, YouTube, Google and many other tool providers allow Colgate to spend far, far less than traditional advertising to provide specific brand promotions, product information, purchase incentives (such as coupons) and product variations targeted at various niches.

With these tools Colgate can not only reach directly into buyer laptops and mobile devices, but offer specific information and incentives.  Traditional advertising, whether print (newspaper and magazine), radio, television or coupons is a low percentage tool.  Seeking response rates (or even recall rates) of just 1 to 5 percent is normal – meaning 90% percent of your spending is, quite literally, just “overhead” cost.  But with modern on-line tools it is very common to have response rates of 50% – or even higher!  (Depending upon how targeted and accurate, of course!)

Colgate is in a great position! 

It has spent much less than competitors, and maintained good brand position.  It’s biggest competitors are locked-in to spending vast sums on traditional tools that have low impact and are in declining media.  Colgate could now decide to commit itself to using the new, modern tools which are lower cost, and have decidedly more targeted results.  In this way, Colgate can get out of the “colliseum” where the gladiators are warring, and throw rocks at them from the stands.  Play its own game – to win – while letting those in the pit whack away at each other becoming weaker and weaker trying to use the old, heavy and unsophisticated tools.

Now is a wonderful time to be the “underdog” competitor.  “Media” and advertising are in transition. How people obtain information on products and services is moving from traditional advertsing and PR (public relations) focused through mass media to networks with common interests in social media.  Instead of delays in obtaining information, based upon publisher programming dates, customers are seeking immediate, and current information, exactly when they need it – on their mobile devices.  Those competitors who rapidly adopt these new tools are well positioned to be the new Davids in the battle with old Goliaths.  And that includes YOU.

 

Add me to the email list.

Groupon and Google – you too can grow explosively

by | Dec 1, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Openness, Web/Tech


Summary:

  • Most planning systems only focus on improving the existing business
  • Most value comes from identifying new market opportunities, and filling them
  • Extremely high growth can happen in any company that focuses on market needs, rather than business model optimization
  • Groupon has grown from $0 to $500M in 2 years, yet is not a technology company
  • Groupon is value at $3B to $6B in just 2 years
  • Google could continue to expand the explosive growth at Groupon
  • Any company has this opportunity, if it focuses on market needs

“You can’t get there from here.”  That’s the punch line of an old joke about a city slicker that gets lost in the country.  He sees a farmer and says “I want to get to the St. James ranch.”  The farmer thinks about the washed out road #20, the destroyed bridge on Old Ferry Road, the blocked road on Westchester due to a property dispute – and given all his known ways to get to the St. James Ranch he conludes there’s no way to make it happen.  He gives up, and recommends the traveler do the same.

And this is the conclusion far too often of most planning systems.  When I ask the executive team “how will you grow revenue by 100% next year?” (or even 15% many times) the answer is “can’t happen.  We only grew 2% last year, our product lines are becoming aged and the overall market is only growing at 5%.  We can only, maximally, hope to grow 3-5%.”  In other words, “can’t get there from here.”

But of course there’s a way.

Groupon was started in 2008 (“Groupon at $3 Billion Soars Like Silicon Valley from Chicago” Bloomberg).  Now it has about $500M annual revenue, and 2,500 employees.  While Sara Lee, Kraft, Motorola and other Chicago stalwarts are contracting – unable to find a growth path – Groupon has exploded.  Most companies are complaining about the “great recession,” and its impact on customers and sales, saying they see no way to create triple digit growth.  Yet Groupon didn’t invent any new technology, didn’t file any patents, didn’t open a “scale” manufacturing plant, didn’t buy an existing business, or raise a huge amount of money.  Groupon is now dominant in local-market advertising – without the Foursquare technology play, or a partnership with Facebook.  And it keeps adding new local markets every week.  Piling up new revenues, and profits.

What Groupon did was offer the market something it highly valued – a local-based coupon service that was easy to use.  Building on digital technology rapidly being accepted by everyone.  While most companies are trying to focus on their “core capabilities” and bemoaning a dearth of growth, Groupon’s leaders looked into the marketplace to identify an unmet need and an application of developing technology.  As good as Google AdWords is, it is expensive and not terribly good at local marketing.  Newspaper coupons are expensive to print, and simply ignored by most modern consumers.  There was a hole in what people needed, so the entrepreneurs set out to fill it.  And by meeting a need, they’ve created an explosively growing company.  As mentioned earlier, while unemployment overall in Chicago is going up, Groupon has hired 900 people over the last 2 years.

That’s what most businesspeople are loath to do these days.  After years of being trained to focus on the supply chain, and that innovation is mostly about how to cut costs in the existing business, very few are thinking about market needs.  The vast majority (almost all?) of planning is devoted to cutting costs and optimizing an existing business.  Or trying to develop an adjacent opportunity to the existing business that has limited, if any growth prospects.  And trying to find ways to take money out of the business, rather than invest. In that planning system, if you ask “how do you plan to create a half billion dollar new business in the next two years” the answer is “you can’t get there from here.” 

“Google May Acquire Groupon for $6 Billion, and It Would Be Worth Every Penny” headlines Mashable.com. Not bad for the guys who started up this distinctly non-techie company in the non-techie midwest.  Whether they sell out or not, the next fundraising is guaranteed to make them extremely wealthy folks.  There are still a lot of markets yet to be developed, and a lot more deals to be made in the existing markets, as buyers seek out discounts for products they buy regularly. 

It mashable right?  Is this a smart idea for Google?  Unless you think coupons, and deals, are dead – you have to like this investment.  There’s a reason Groupon has grown so very fast – and that lies in meeting a market need.  How fast can it grow if Google adds its skills at ad sales, email (gmail) use, user database analytics, networking connections and technology wizardry?  While $6B is a lot of money, if you can see how Groupon on its own could become a $6B revenue company within 4 years from today is it really too miuch? (Groupon has grown from $0 to $500M in just about 2 years, so does 12x growth in 4 years [just under an annual doubling] really appear that difficult?)

Smart investing doesn’t mean “hold your nose and jump” off the bridge, hoping the water is OK.  And that’s not what Groupon did, or Google might do if it acquires Groupon.  Both companies are focusing on future scenarios about how we will get things done in 2012 and beyond.  Both are thinking about the impact of existing trends, and how those will allow everyone to be more effective, efficient and successful in 3 or 5 years.  Both are developing solutions that help us be more productive by building on trends – and not merely expecting the future to look like the past.  Their planning is based upon views of the future – and that’s why they can see such greater opportunity, and create so much value.

Most business limit their planning, and investing, to doing more of what they have always done.  Better, faster, cheaper are the hallmarks of the traditional planning process output.  Expecting to get dramatic growth, or value, out of a system so narrowly focused is expecting the impossible. Creating value – big value – comes from providing solutions that meet new market needs. And that requires overcoming the limits of traditional planning – and traditional ways of thinking about investing.  Instead of doing more of what you know, you have to do more of what the market wants.  Any company can get there from here – if you simply open your planning to moving beyond the limits of what you’ve historically done.

You Should Love, and Buy, Netflix – the next Apple or Google

by | Nov 29, 2010 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness, Television, Web/Tech


Summary:

  • Most leaders optimize their core business
  • This does not prepare the business for market shifts
  • Motorola was a leader with Razr, but was killed when competitors matched their features and the market shifted to smart phones
  • Netflix's leader is moving Netflix to capture the next big market (video downloads)
  • Reed Hastings is doing a great job, and should be emulated
  • Netflix is a great growth story, and a stock worth adding to your portfolio

"Reed Hastings: Leader of the Pack" is how Fortune magazine headlined its article making the Netflix CEO its BusinessPerson of the Year for 2010.  At least part of Fortune's exuberance is tied to Netflix's dramatic valuation increase, up 200% in just the last year.  Not bad for a stock called a "worthless piece of crap" in 2005 by a Wedbush Securities stock analyst.  At the time, popular wisdom was that Blockbuster, WalMart and Amazon would drive Netflix into obscurity.  One of these is now gone (Blockbuster) the other stalled (WalMart revenues unmoved in 2010) and the other well into digital delivery of books for its proprietary Kindle eReader.

But is this an honor, or a curse?  It was 2004 when Ed Zander was given the same notice as the head of Motorola.  After launching the Razr he was lauded as Motorola's stock jumped in price.  But it didn't take long for the bloom to fall off that rose. Razr profits went negative as prices were cut to drive share increases, and a lack of new products drove Motorola into competitive obscurity.  A joint venture with Apple to create Rokr gave Motorola no new sales, but opened Apple's eyes to the future of smartphone technology and paved the way for iPhone.  Mr. Zander soon ran out of Chicago and back to Silicon Valley, unemployed, with his tale between his legs.

Netflix is a far different story from Motorola, and although its valuation is high looks like a company you should have in your portfolio. 

Ed Zander simply took Motorola further out the cell phone curve that Motorola had once pioneered.  He brought out the next version of something that had long been "core" to Motorola.  It was easy for competitors to match the "features and functions" of Razr, and led to a price war.  Mr. Zander failed because he did not recognize that launching smartphones would change the game, and while it would cannibalize existing cell phone sales it would pave the way for a much more profitable, and longer term greater growth, marketplace.

Looking at classic "S Curve" theory, Mr. Zander and Motorola kept pushing the wave of cell phones, but growth was plateauing as the technology was doing less to bring in new users (in the developed world):

Slide1
Meanwhile, Research in Motion (RIM) was pioneering a new market for smartphones, which was growing at a faster clip.  Apple, and later Google (with Android) added fuel to that market, causing it to explode.  The "old" market for cell phones fell into a price war as the growth, and profits, moved to the newer technology and product sets:

Slide2
The Motorola story is remarkably common.  Companies develop leaders who understand one market, and have the skills to continue optimizing and exploiting that market.  But these leaders rarely understand, prepare for and implement change created by a market shift.  Inability to see these changes brought down Silicon Graphics and Sun Microsystems in 2010, and are pressuring Microsoft today as users are rapidly moving from laptops to mobile devices and cloud computing.  It explains how Sony lost the top spot in music, which it dominated as a CD recording company and consumer electronics giant with Walkman, to Apple when the market moved people from physical CDs to MP3 files and Apple's iPod.

Which brings us back to what makes Netflix a great company, and Mr. Hastings a remarkable leader.  Netflix pioneered the "ship to your home" DVD rental business.  This helped eliminate the need for brick-and-mortar stores (along with other market trends such as the very inexpensive "Red Box" video kiosk and low-cost purchase options from the web.)  Market shifts doomed Blockbuster, which remained locked-in to its traditional retail model, made obsolete by competitors that were cheaper and easier with which to do business.

But Netflix did not remain fixated on competing for DVD rentals and sales – on "protecting its core" business.  Looking into the future, the organization could see that digital movie rentals are destined to be dramatically greater than physical DVDs.  Although Hulu was a small competitor, and YouTube could be scoffed at as a Gen Y plaything, Netflix studied these "fringe" competitors and developed a superb solution that was the best of all worlds.  Without abandoning its traditional business, Netflix calmly moved forward with its digital download business — which is cheaper than the traditional business and will not only cannibalize historical sales but make the traditional business completely obsolete!  

Although text books talk about "jumping the curve" from one product line to another, it rarely happens.  Devotion to the core business, and managing the processes which once led to success, keeps few companies from making the move.  When it happens, like when IBM moved from mainframes to services, or Apple's more recent shift from Mac-centric to iPod/iPhone/iPad, we are fascinated.  Or Google's move from search/ad placement company to software supplier.  While any company can do it, few do.  So it's no wonder that MediaPost.com headlines the Netflix transition story "Netflix Streams Its Way to Success."

Is Netflix worth its premium?  Was Apple worth its premium earlier this decade?  Was Google worth its premium during the first 3 years after its Initial Public Offering?  Most investors fear the high valuations, and shy away.  Reality is that when a company pioneers a growth business, the value is far higher than analysts estimate.  Today, many traditionalists would say to stay with Comcast and set-top TV box makers like TiVo.  But Comcast is trying to buy NBC in order to move beyond its shrinking subscriber base, and "TiVo Widens Loss, Misses Street" is the Reuters' headline. Both are clearly fighting the problems of "technology A" (above.)

What we've long accepted as the traditional modes of delivering entertainment are well into the plateau, while Netflix is taking the lead with "technology B."  Buying into the traditionalists story is, well, like buying General Motors.  Hard to see any growth there, only an ongoing, slow demise.

On the other hand, we know that increasingly young people are abandoning traditional programing for 100% entertainment selection by download.  Modern televisions are computer monitors, capable of immediately viewing downloaded movies from a tablet or USB drive – and soon a built-in wifi connection.  The growth of movie (and other video) watching is going to keep exploding – just as the volume of videos on YouTube has exploded.  But it will be via new distribution.  And nobody today appears close to having the future scenarios, delivery capability and solutions of Netflix.  24×7 Wall Street says Netflix will be one of "The Next 7 American Monopolies."  The last time somebody used that kind of language was talking about Microsoft in the 1980s!  So, what do you think that makes Netflix worth in 2012, or 2015?

Netflix is a great story.  And likely a great investment as it takes on the market leadership for entertainment distribution.  But the bigger story is how this could be applied to your company.  Don't fear revenue cannibalization, or market shift.  Instead, learn from, and behave like, Mr. Hastings.  Develop scenarios of the future to which you can lead your company.  Study fringe competitors for ways to offer new solutions. Be proactive about delivering what the market wants, and as the shift leader you can be remarkably well positioned to capture extremely high value.

 

 

Getting Rich vs. Getting Lost – Smartphones – Google & Apple vs. RIM, Nokia, Samsung, Microsoft

by | Nov 23, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech


Summary:

  • Most planning systems rely on extending past performance to predict the future
  • But markets are shifting too fast, making such forecasts wildly unreliable
  • To compete effectively, companies must anticipate future market shifts
  • Planning needs to incorporate a lot more scenario development, and competitor information in order to overcome biases to existing customers and historical products
  • Apple and Google have taken over the mobile phone business, while the original leaders have fallen far behind
  • Historical mobile phone leaders Nokia, Samsung, Motorola, RIM and Microsoft had the technologies and products to remain leaders, but they lacked scenarios of the future enticing them to develop new markets.  Thus they allowed new competitors to overtake them
  • Lacking scenarios and deep competitor understanding, companies react to market events – which is slow, costly and ineffective.

“Apple, Android Help Smartphone Sales Double Over Last Year” is the Los Angeles Times headline.  Google-supplied Android phones jumped from 3% of the market to 26% versus the same quarter last year.  iPhones remained at 17% of the market.  Blackberry is now just under 15%, compared to about 21% last year.  What’s clear is people are no longer buying traditional mobile phones, as #1 Nokia share fell from 38% to 27%.  Like many market changes, the shift has come fast – in only a matter of a few months.  And it has been dramatic, as companies not even in the market 5 years ago are now the leaders. Former leaders are struggling to stay in the game as the market shifts.

The lesson Google and Apple are teaching us is that companies must have a good idea of the future, and then send their product development and marketing in that direction.  Although traditional cell phone manufacturers, such as Motorola and Samsung, had smartphone technology many years prior to Apple, they were so focused on their traditional markets they failed to look into the future.  Busy selling to existing customers an existing technology, they didn’t develop scenarios about 2010 and beyond that would describe how the market could expand – far beyond where traditional phone sales would take it.  Both famously said “so what” to the new technology, and used existing customer focus groups of people who had no idea the potential benefit of a smart phone to justify their willingness to remain fixated on the existing business.  Lacking a forward planning process based on scenario development, and lacking a good market sensing system that would pick up on the early market shift as novice competitor Apple started to really change the market, these companies are now falling rapidly to the wayside. 

Even smartphone pioneer Research in Motion (RIM) was so focused on meeting the needs of its existing “enterprise” customers that it failed to develop scenarios about how to expand the smartphone business into the hands of everyone.  RIM missed the value of mobile apps, and the opportunity to build an enormous app database.  Now RIM has been surpassed, and is showing no signs of providing effective competition for the market leaders.  While the Apple and Android app base continues to explode, based upon 3rd and 4th generation product inducing more developers to sign up, and more customers to buy in, RIM has not effectively built a developer base or app set – causing it to fall further behind quarter by quarter.

Even software giant Microsoft missed the market.  Fixated upon putting out an updated operating system for personal computers (Vista then later Windows 7) it let its 45% market share in smart phones circa 2007 disappear.  Now approaching 2011 Microsoft has largely missed the market.  Again, focused clearly upon its primary goal of defending its existing business in O/S and office automation software, Microsoft did not have a forward focused planning group that was able to warn the company that its new products might well arrive in a market that was stagnating, and on the precipice of a likely decline, because of new technology which could make the PC platform obsolete (a combination of smart mobile devices and cloud computing architecture.)  Microsoft’s product development was being driven by its historical products, and market position, rather than an understanding of future markets and how it should develop for them.

We can see this lack of future scenario development and close competitor tracking has confused Microsoft.  Desperately trying to recover from a market stall in 2009 when revenues and profits fell, Microsoft has no idea what to do in the rapidly expanding smartphone market today.  Its first product, Kin, was dropped only two months after launch, which industry analysts saw as necessary given the product’s lack of advantages.  But now Mediapost.com informs us in “Return of the Kin?” Microsoft is considering a re-launch in order to clear out old inventory.

This amidst a launch of the Windows Phone 7 that has gone nowhere.  Firstly, there was insufficient advertising to gain any public awareness of the product launch earlier in November (Mediapost “Where’s the Windows Phone 7 Ad Barrage?“)  Initial sales have gone nowhere “Windows Phone 7 Lands Without a Sound” [Mediapost], with many stores lacking inventory, very few promoting the product and Microsoft keeping surprisingly mum about initial sales. This has raised the question “Is Windows Phone 7 Dead On Arrival?” [Mediapost] as sales barely achieving 40,000 initial unit sales at launch, compared to daily sales of 200,000 Android phones and 270,000 iphones! 

Companies, like Apple and Google, that have clear views of the future, based upon careful analysis of what can be done and tracking market trends, create scenarios that allow them to break out of the pack.  Scenario development helps them to understand what the future can be like, and drive their product development toward creating new markets with more customers, more unit sales, higher revenues and improved cash flow.  By studying early competitors, especially fringe ones, they create new products which are more highly desired, breaking them out of price competition (remember the Motorola Razr fiasco that nearly bankrupted the company?) and into higher price points and better earnings. Creating and updating future scenarios becomes central to planning – using scenarios to guide investments rather than merely projections based upon past performance.

Companies that base future planning on historical trends find themselves rapidly in trouble.  Market shifts leave them struggling to compete, as customers quickly move to new solutions (old fashioned notions of “exit costs” are now dead).  Instead of heading for the money, they are confused – lost in a sea of options but with no clear direction.  Nokia, Samsung, RIM and Microsoft all have lots of resources, and great historical experience in the market.  But lacking good scenario planning they are lost.  Unable to chart a course forward, reacting to market leaders, and hoping customers will seek them out because they were once great. 

Far too many companies do their planning off of past projections.  One could say “planning by looking in the rear view mirror.” In a dynamic, global world this is not sufficient.  When monster companies like these can be upset so fast, by someone they didn’t even think of as a traditional competitor (someone likely not even on the radar screen recently) how vulnerable is your company?  Do you plan on 2015 looking like 2005?  If not, how can future projections based on past actuals be valuable?  it’s time more companies change their approach to planning to put an emphasis on scenario development with more competitive (rather than existing customer) input.  That’s the only way to get rich, instead of getting lost.

 

 

Facebook’s new email client is a big deal for business

by | Nov 16, 2010 | Defend & Extend, General, Innovation, Leadership, Web/Tech


Summary:

  • Many companies block employee access to Facebook and other social network applications
  • But these environments actually improve performance
  • Social networks like Facebook allow people to be more productive, and are very inexpensive
  • Facebook’s new email client is an example of how these environments can provide companies better services at lower cost – supplanting existing email, for example
  • Those who embrace advances early gain an information advantage, as well as a cost advantage
  • The new Facebook email client is a big deal for business, and should be explored by everyone

A year ago I was on a panel at the Indian Institute of Technology global conference.  My fellow panelists were mostly IT heads from major corporations.  When it came to Twitter, Linked-in, MySpace and Facebook – the world of social networking – universally they all blocked access.  The reasons given were primarily data confidentiality (fear company information would escape) and productivity (fear employees would unproductively apply their time to personal efforts.)  They saw no advantages to social network applications, only risk.  Most of those companies – from pharmaceuticals to airlines – still deny access. 

This follows a long list of things denied employees by large employers on the grounds of confidentiality and productivity

  • employees don’t need a phone at their desk, who could they need to talk to and what do they need to say at work?  They can write letters or memos.
  • employees don’t need a personal computer.  All data should be kept on secured tapes and accessed by productive data center professionals when it makes sense.
  • employees don’t need a hard disk in their personal computer.  We must keep all data away from employees and keep them focused on using applications tied to central data repositories for productivity
  • employees don’t need laptops.  Who knows where they will go, and what employees will do with them.  They could let data escape, or spend time on personal letters and spreadsheets.
  • employees don’t need their own printers.  Send all jobs to a central printer location so we can control what is printed for confidentiality and to make sure somebody isn’t printing more than is necessary
  • employees don’t need their own cell phones.  What in the world do they need to say that can’t wait until they are in the office?  How will we keep them from wasting time on personal calls?
  • employees don’t need internet access at work.  There’s nothing on the web that is important for their work, and it opens a security hole in our operations.  If we give them internet access they’ll waste hours and hours browsing instead of working.

This list could go on for a long time, as I’m sure you can now imagine.  Confidentiality and productivity are merely excuses for those who fear new tools.  Reality is that all these new products improved productivity dramatically, helping employees get more done faster – and making them smarter on the job as well.  Organizations that rapidly adopted these (and other) technologies actually achieved superior performance, and rapidly saw their costs decline as these lower cost solutions gave more productivity at lower prices.  In most cases, something formerly proprietary and costly became available from an outside source much, much cheaper that worked a whole lot better.  Like how the Post Office displaced private messenger services – even though it did have security risks and made it possible for anyone to send a letter (see what I mean, you can go back in time forever with these examples.)

Today social media is the next “big thing” to improve productivity.  Facebook, Twitter and its counterparts offer full multi-media, real time interaction with people you know, and don’t know that well, globally.  You can find out about everything remarkably fast, and often quite accurately, at practically no cost.  No server need be bought – and you don’t even need a PC.  A cheap smartphone or tablet will give you all you want – soon to include conferencing and video chat.  And you don’t have to buy any software.  And you can connect to everyone – not just the people in your company, or on your server, or even on your network or your network service provider. According to Gartner, at MediaPost.com “Implications of a Facebook email Client” will be noticable by 2012, and universal by 2014!

And that’s why “Facebooks Not email Announcement” (as reported in LiveBlog Twitter style on ReadWriteWeb.com) is important for business.  Facebook email is going to be better, faster and cheaper than existing email – especially if you’re still using 2 decades out-of-date products like Lotus Notes!  Something Facebook doesn’t even want to call email because of its advancements.  

An email client for Facebook goes far beyond the value of a Microsoft Live server (think Hotmail+ if you’re not IT oriented).  Even GMail, for all its great features, doesn’t offer everything you get in Facebook, due to how Facebook provides integration into everything else that makes its network wildly productive for those of us who realize we live in networks.  You even have an archive, searchability – and the capability of creating multiple virtual private networks for doing all kinds of business activities in different markets! And practically free!  Using incredibly cheap devices, in multiple varieties and platforms, that employees might well purchase themselves! 

For use by everyone from execs to salespeople, businesses will soon be able to stop buying and handing out laptops.  Even PCWorld addressed the opportunity in “Social Networks to Supplant email in Business?” Businesses will soon quit operating server farms for most communications.  Even quit supporting networks for things like printing sales documents, or creating document-loaded USB drives to hand out.  With everyone on tablets and smartphones, and connected over social networks, in a couple of years “leave behinds” will be unnecessary.  Those in sales and purchasing will be able to obtain competitive reviews, and prices, and configurations almost instantaneously by asking people on their network for input and feedback. Email will become slow, and a siloed application less useful than products that sit on the network.

With each advance, new opportunities emerge.  Doctors have long been notoriously unwilling to carry laptops, or email patients.  From the operating room to test results, finding out from an M.D. what’s going on has been problematic.  Now MediaPost tells us in “Doctors Without Social Media Borders” how patient communication is rising dramatically from adoption of social media.  It lets the physician, and others in medicine, communicate faster, more productively and cheaper than anything before. And this is just one example of how behavior changes when new capabilities arise.  Formerly unmet needs are satisfied, and people shift to where they achieve greatest satisfaction.

Once email was considered the “killer app” that made everyone need a PC – and access to the web.  Social media takes email into entirely new orbits.  Getting more done, faster, with more people, using more current data, verified by more access points, across multiple media creates competitive advantage.  Those who ignore this trend will fall behind.  Those who adopt it have the opportunity to beat their competition.  Everyone knows that those who know the most, first, and are able to apply it have a big first mover advantage.  If you’re not promoting this in your company – if you are in fact blocking it – you’ll soon have no chance of remaining competitive.  You’ll just start falling behind – and the gap will widen. 

 

It’s About the Economy, Stupid – Lessons from the election

by | Nov 4, 2010 | Current Affairs, General, Innovation, Leadership, Web/Tech


Summary:

  • Voters whipsawed from throwing out the Republicans 2 year ago to throwing out Democrats this election
  • Americans are frustrated by a no-growth economy
  • Recent government programs have been ineffective at stimulating growth, despite horrific expense
  • Lost manufacturing/industrial jobs will never return
  • America needs new government programs designed to create information-era jobs
  • Education, R&D, Product Development and Innovation investment programs are desperately needed

“It’s the Economy, Stupid” was the driving theme used during Bill Clinton’s winning 1992 Presidential campaign.  Following the dramatic changes produced in Tuesday’s American elections, this refrain seems as applicable as ever.  Two years ago Americans changed leadership in the Presidency, Congress and the Senate out of disgust with the financial crisis and lousy economy.  Now, Congress has shifted back the other direction – and the Senate came close – for ostensibly the same, ongoing reason. What seems pretty clear is that Americans are upset about their economy – and in particular they are worried about jobs and incomes.

So why can’t the politicians seem to get it right?  After all, economic improvement allowed Bill Clinton to retain the Presidency in 1996.  If smart politicians know that Americans are “voting with their pocketbooks” these days, you’d think they would be doing things to improve the economy and jobs.  Wasn’t that what the big big bailouts and government spending programs of the last 4 years were supposed to do? 

What we can now see, however, is that programs which worked for FDR, or Ronald Reagan and other politicians in the late 1900s aren’t working these days.  Everything from Great Depression Keynesians to Depression retreading Chicago School monatarists to Laffer Curve idealists have offered up and applied programs the last 8 years intended to stimulate growth.  But so far, the needle simply hasn’t moved.  Recognizing that the economy is sick, looking at the symptoms of weak jobs and high unemployment, could it be that the country’s leaders are trying to apply old medicine when the illness has substantially changed? 

What’s missed by so many Americans today – populace and politicians – is that the 2010 economy is nothing like that of the 1940s; and bares little resemblance to the economy as recently as the 1990s.  Scan these interesting facts reported by BusinessInsider.com:

These lost jobs are NEVER coming back.  The American economy has fundamentally shifted, and it will never go back to the way it was.  Clocks don’t run backward. 

In 1910 90% of Americans were working in agriculture.  By 1970 that proportion had dropped to 10%.  Had American policy in the last century remained fixated on protecting farming jobs the country would have failed.  Only by shifting to industrialization (manufacturing) was America able to continue its growth – and create all those new industrial jobs.  Now American policy has to shift again if it wants to start creating new jobs.  We have to create information-era jobs.

But government programs applied the last 12 years were all retreaded industrial era ideas (implemented by Boomer-era leaders educated in those programs.)  They were intended to grow industrial jobs by spurring supply and demand for “things.”  Lower interest rates were intended to increase manufacturing investment and generate more supply at lower cost.  These jobs were expected to create more service jobs (retailers, schools, plumbers, etc.) supporting the manufacturing worker.  But today, supply isn’t coming from America.  Nobody is going to build a manufacturing plant in America when gobs of capacity is shuttered and available, and costs are dramatically lower elsewhere with plentiful skill supply.  We can keep GM and Chrysler on life support, but there is no way these companies will grow jobs in face of a global competitive onslaught with very good products, new innovations and lower cost.  Cheap interest rates make little difference – no matter what the cost to taxpayers.   

Other old-school programs focused on increasing demand. TARP, cheap consumer lending, tax cuts, rebates and subsidies were intended to encourage people to buy more stuff.  Consumers were expected to take advantage of the increased supply and spend the cash, thus reviving the economy.  But today, many people are busy paying down debt or saving for retirement.  Further, even when they do spend money the goods simply aren’t made in America.  If consumers (including businesses) buy 10 Dell computers or 20 uniform shirts it creates no new American jobs. Spurring demand doesn’t matter when “things” are made elsewhere.  In fact, it benefits the offshore economies of China and other manufacturing centers more than the USA!

If this new crop of politicians, and the President, want to keep their jobs in the next election they had better face facts.  The American economy has shifted – and it will take very different policies to revive it.  New American jobs will not be created by thinking we’ll will make jeans, baby food or baseballs, so applying old approaches and focusing on increasing supply and demand will not work.  America is no longer an industrial economy.

The jobs at Dell are engineering, design and managerial.  Hiring organizations like Google, Apple, Cisco and Tesla are adding workers to generate, analyze, interpret and gain insight from information.  Jobs today are based upon brain work, not brawn.  An old American folk song told the story about John Henry’s inability to keep up with the automated stake driving machine – and showed all Americans that the industrial era made conventional, uneducated hand-labor of little value.  Now, computers, networks and analytics are making the value of manufacturing work low value.  Because we are in an information economy, rather than an industrial one, pursuing growth of industrial jobs today is as misguided as trying to preserve manual labor and farm jobs was in the 1960s and 1970s.

Directionally, American politicians need to implement programs that will create the kind of jobs that are valuable, and likely, in America.  Incenting education, to improve the skills necessary to be productive in this economy, is fairly obvious.  Instead of cutting education benefits, raise them to remain a world leader in secondary education and produce a highly qualified workforce of knowledge workers. Support universities struggling in the face of dwindling state tax funds.  Subsidize masters and PhD candidates who can create new products and lead companies into new directions, and do things to encourage their hiring by American companies.

Investments in R&D and product development are likewise obvious.  America’s growth companies are driving innovation; bringing forward world-demanded products like digital music, on-line publications, global networks, real-time feedback on ad links, ways to purify water – and in the future trains, planes and automobiles that need no fossil fuels or drivers (just to throw out a not-unlikely scenario.)  For every dollar thrown at GM trying to keep lower-skilled manufacturing jobs alive there would be a 10x gain if those dollars were spent on information era jobs in innovation.  America doesn’t need to preserve jobs for high school graduates, it must create jobs for the millions of college grads (and post-graduate degree holders) working today as waiters and grocery cashiers.  Providing incentives for angel investing, venture capital and other innovation investment will have a rapid, immediate impact on job creation in everything from IT to biotech, nanotech, remote education and electric cars.

A stalled economy is a horrible thing.  Economies, like companies, thrive on growth!  Everyone hurts when tax receipts stall, government spending rises and homes go down in value while inflationary fears grow.  And Americans keep saying they want politicians to “fix it.”  But the “fix” requires thinking about the American economy differently, and realizing that programs designed to preserve/promote the old industrial economy – by saving banks that invest in property, plant and equipment, or manufacturers that have no money for new product development – will NOT get the job done.  It’s going to take a different approach to drive economic growth and job creation in America, now that the shift has occurred.  And the sooner politicians understand this, the better!

Yes, You Should Buy Apple

by | Oct 19, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech


Summary:

  • Apple keeps itself in growth markets by identifying unmet needs
  • Apple expands its markets every quarter
  • Apple deeply understands its competition
  • Apple knows how to launch new products quickly
  • These skills allow investors to buy Apple with low risk, and likely tremendous gains

Apple’s recently announced sales and earnings beat expectations.  Nothing surprising about that, because Apple always lowballs both, and then beats its forecast handily.  What is a touch surprising is that according to Marketwatch.com “Apple’s Decline in Margins Casts a Shadow.” Some people are concerned because the margin was a bit lower, and iPad sales a bit lower, than some analysts forecast.

Forget about the concerns.  Buy the stock.  The concerns are about as relevant as fretting over results of a racing team focused on the world land speed record which insteading of hitting 800 miles per hour in their recent run only achieved 792 (according to Wikipedia the current record is 763.)  The story is not about “expectations.”  Its about a team achieving phenominal success, and still early in the development of their opportunity!

Move beyond the financial forecasts and really look at Apple.  In September of 2009 there was no iPad.  Some speculated the product would flop, because it wasn’t a PC nor was it a phone – so the thinking was that it had no useful purpose.  Others thought that maybe it might sell 1 million, if it could really catch on.  Last quarter it sold over 4 million units.  No single product, from any manufacturer, has ever had this kind of early adoption success.  Additionally, Apple sold over 14 million iPhones, nearly double what it sold a year ago.  Today there are over 300,000 apps for iPad and iPhone – and that number keeps growing every day.  Meanwhile corporations are announcing weekly rollouts of the iPad to field organizations as a replacement for laptop PCs. And Apple still has a majority of the MP3 music download business.  While sales of Macs are up 14% last quarter – at least 3 times the growth rate of the moribund PC market!

The best reason to buy any stock is NOT in the financial numbers.  Endless opportunities to manipulate both sales and earnings allow all management teams to alter what they report every quarter.  Even Apple changed its method of reporting iPhone sales recently, leaving many analysts scratching their heads about how to make financial projections.  Financials are how a company reports last year. But if you buy a stock it should be based on how you think it will do well next year.  And that answer does not lie in studying historical financials, or pining over small changes period to period in any line item.  If you are finding yourself adopting such a focus, you should reconsider investing in the company at all.

Investors need growth.  Growth in sales that leads to growth in earnings.  And more than anything else, that comes from participating in growth markets — not trying to “manage” the old business to higher sales or earnings.  If a company can demonstrate it can enter new markets (which Apple can in spades) and generate good cash flow (which Apple can in diamonds) and produce acceptable earnings (which Apple can in hearts) while staying ahead of competitors (which Apple can in clubs) then the deck is stacked in its favor.  Yes, there are competitive products for all of the things Apple sells, but is there any doubt that Apple’s sales will continue its profitable growth for the next 2 or 3 years, at least?  At this point in the markets where Apple competes competitors are serving to grow the market more than take sales from Apple!

Apple has developed a very good ability to understand emerging market needs.  Almost dead a decade ago, Apple has now achieved its first $20 billion quarter.  This was not accomplished by focusing on the Mac and trying to fight the same old battle.  Instead Apple has demonstrated again and again it can identify unmet needs, and bring to market solutions which meet those needs at an acceptable price – that produces an acceptable return for Apple’s shareholders.

And Steve Jobs demonstrated in Monday’s earnings call that Apple deeply understands its competitors, and keeps itself one step ahead.  He described Apple’s competitive situation with key companies Google and Research in Motion (RIM) as reported in the New York Times “Jobs Says Apple’s Approach Is Better Than Google’s.” Knowing its competitors has helped Apple avoid head-on competition that would destroy margins, instead identifying new opportunities to expand revenues by bringing in more customers.  Much more beneficial to profits than going after the “low cost position” or focusing on “maintaining the core product market” like Dell or Microsoft.

Apple’s ongoing profitable growth is more than just the CEO. Apple today is an organization that senses the market well, understands its competition thoroughly and is capable of launching new products adeptly targeted at the right users – then consistently enhancing those products to draw in more users every month.  And that is why you should own Apple.  The company keeps itself in new, growing markets.  And that’s about the easiest way there is to make money for investors.

After the last decade, investors are jaded.  Nobody wants to believe a “growth story.”  Cost cutting and retrenchment have dominated the business news.  Yet, those organizations that retrenched have done poorly.  However, amidst all the concern have been some good growth stories – despite investor wariness.  Such as Google and Amazon.com. But the undisputed growth leader these days is Apple.  While the stock may gyrate daily, weekly or even monthly, the long-term future for Apple is hard to deny.  Even if you don’t own one of their products, your odds of growing your investment are incredibly high at Apple, with very little downside risk.  Just look beyond the numbers.

The Wal-Mart Disease

by | Oct 13, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in


Summary:

  • Many large, and leading, companies have not created much shareholder value the last decade
  • A surprising number of very large companies have gone bankrupt (GM) or failed (Circuit City)
  • Wal-Mart is a company that has generated no shareholder value
  • The Wal-Mart disease is focusing on executing the business's long-standing success formula better, faster and cheaper — even though it's not creating any value
  • Size alone does not create value, you have to increase the rate of return
  • Companies that have increased value, like Apple, have moved beyond execution to creating new success formulas

Have you noticed how many of America's leading companies have done nothing for shareholders lately?  Or for that matter, a lot longer than just lately.  Of course General Motors wiped out its shareholders.  As did Chrysler and Circuit City.  The DJIA and S&P both struggle to return to levels of the past decade, as many of the largest companies seem unable to generate investor value.

Take for example Wal-Mart.  As this chart from InvestorGuide.com clearly shows, after generating very nice returns practically from inception through the 1990s, investors have gotten nothing for holding Wal-Mart shares since 2000.

Walmart 20 year chart 10-10

Far too many CEOs today suffer from what I call "the Wal-Mart Disease."  It's an obsession with sticking to the core business, and doing everything possible to defend & extend it — even when rates of return are unacceptable and there is a constant struggle to improve valuation.

Fortune magazine's recent puff article about Mike Duke, "Meet the CEO of the Biggest Company on Earth" gives clear insight to the symptoms of this disease. Throughout the article, Mr. Duke demonstrates a penchant for obsessing about the smallest details related to the nearly 4 decade old Wal-Mart success formula.  While going bananas over the price of bananas, he involves himself intimately in the underwear inventory, and goes cuckoo over Cocoa Puffs displays.  No detail is too small for the attention of the CEO trying to make sure he runs the tightest ship in retailing.  With frequent references to what Wal-Mart does best, from the top down Wal-Mart is focused on execution.  Doing more of what it's always done – hopefully a little better, faster and cheaper.

But long forgotten is that all this attention to detail isn't moving the needle for investors.  For all its size, and cheap products, the only people benefiting from Wal-Mart are consumers who save a few cents on everything from jeans to jewelry. 

The Wal-Mart Disease is becoming so obsessive about execution, so focused on doing more of the same, that you forget your prime objective is to grow the investment.  Not just execute. Not just expand with more of the same by constantly trying to enter new markets – such as Europe or China or Brazil. You have to improve the rate of return.  The Disease keeps management so focused on trying to work harder, to somehow squeeze more out of the old success formula, to find new places to implement the old success formula, that they ignore environmental changes which make it impossible, despite size, for the company to ever again grow both revenues and rates of return.

Today competitors are chipping away at Wal-Mart on multiple fronts.  Some retailers offer the same merchandise but in a better environment, such as Target.  Some offer a greater selection of targeted goods, at a wider price range, such as Kohl's or Penney's.  Some offer better quality goods as well as selection, such as Trader Joe's or Whole Foods.  And some offer an entirely different way to shop, such as Amazon.com.  These competitors are all growing, and earning more, and in several cases doing more for their investors because they are creating new markets, with new ways to compete, that have both growth and better returns.

It's not enough for Wal-Mart to just be cheap.  That was a keen idea 40 years ago, and it served the company well for 20+ years.  But competitors constantly work to change the marketplace.  And as they learn how to copy what Wal-Mart did, they can get to 90%+ of the Wal-Mart goal.  Then, they start offering other, distinctive advantages.  In doing so, they make it harder and harder for Wal-Mart to be successful by simply doing more of the same, only better, faster and cheaper.

Ten years ago if you'd predicted bankruptcy for GM or Chrysler or Circuit City you'd have been laughed at.  Circuit City was a darling of the infamous best seller "Good To Great."  Likewise laughter would have been the most likely outcome had you predicted the demise of Sun Microsystems – which was an internet leader worth over $200B at century's turn.  So it's easy to scoff at the notion that Wal-Mart may never hit $500B revenue.  Or it may do so, but at considerable cost that continues to hurt rates of return, keeping the share price mired – or even declining.  And it would be impossible to think that Wal-Mart could ever fail, like Woolworth's did.  Or that it even might see itself shredded by competitors into an also-ran position, like once powerful, DJIA member Sears.

The Disease is keeping Wal-Mart from doing what it must do if it really wants to succeed.  It has to change.  Wal-Mart leadership has to realize that what made Wal-Mart once great isn't going to make it great in 2020.  Instead of obsessing about execution, Wal-Mart has to become a lot better at competing in new markets.  And that means competing in new ways.  Mostly, fundamentally different ways.  If it can't do that, Wal-Mart's value will keep moving sideways until something unexpected happens – maybe it's related to employee costs, or changes in import laws, or successful lawsuits, or continued growth in internet retailing that sucks away more volume year after year – and the success formula collapses.  Like at GM.

Comparatively, if Apple had remained the Mac company it would have failed.  If Google were just a search engine company it would be called Alta Vista, or AskJeeves.  If Google were just an ad placement company it would be Yahoo!  If Nike had remained obsessed with being the world's best athletic shoe company it would be Adidas, or Converse.

Businesses exist to create shareholder value – and today more than ever that means getting into markets with profitable growth.  Not merely obsessing about defending & extending what once made you great.  The Wal-Mart Disease can become painfully fatal.