The Case For Trian’s Nelson Peltz Joining P&G’s Board

The Case For Trian’s Nelson Peltz Joining P&G’s Board

Months ago Trian’s Nelson Peltz began buying Procter & Gamble (P&G) shares.  He invested about $3.5 billion, making Trian’s ownership 1.5%.  Since then he has been lobbying, unsuccessfully, for a seat on P&G’s board of directors.  He has said that although P&G already has 10 outside directors on its 11 member board, adding him would make a tremendous difference increasing P&G’s market valuation.  P&G is now the largest company ever to engage in a proxy battle between the existing board and an outside investor.

Today, Peltz offered his plan to change P&G, continuing his attack on management, saying that P&G has not sufficiently cut costs, nor has it created growth via innovation – citing no new innovation platform since Swiffer was introduced almost 20 years ago.  He attacked the company for selling off brands without returning sufficient funds to shareholders.  He believes management’s targets are too low, and it is too easy for managers to make their bonus.  He also believes there is a need to hire more managers from outside the company.

He informed the company if he were a director he would reorganize the company to make it more streamlined, change the compensation plan, and do a better job of cutting costs.

P&G is dead set against adding Peltz, saying he would disrupt the board, and the company, in negative ways. CNBC.com reported Peltz’ claims the company is spending $100 million on the proxy fight to keep him off the board. P&G’s proxy statement puts that sum at $35 million.  Either number indicates P&G is spending a lot of money to stop the appointment of Peltz.

Nelson Peltz, Trian Partners

Nelson Peltz, Founder Trian Partners, LLC

The company defended itself, saying leadership has been growing EPS (earnings per share,) making productivity improvements, growing sales organically at 2%/year and returning huge value to shareholders.  They accuse Peltz of simply planning a split of the company into 3 parts so each can go public on its own – adding little value to shareholders while damaging the company’s ability to operate.

Unfortunately, P&G’s leadership has pretty much set itself up for this battle.  And shareholders may have good reason to add Peltz to the board in hopes of additional change.

P&G’s financial performance has been poor

Firstly, in the last 10 years the value of P&G has risen about 44%. But the S&P 500 has grown by 154.5%.  Shareholders would have done better owning the average than owning P&G.  Claims about how well P&G have done since the CEO arrived 2 years ago overlook the fact that just prior to his arrival, in November, 2014 P&G shares traded at $90-$93.85/share, which is just about where they are now.  So all that’s happened is a recovery to where things were previously, not a great success.  Shareholders have a right to be frustrated.

EPS has risen, but that has everything to do with share buybacks rather than earnings growth.  EPS has risen about 11%.  But since 2nd quarter of 2007 P&G has spent ~$61billion on share repurchases, reducing the number of shares from 3.32 billion to 2.74 billion, or 17.5%.  Rather than growing earnings, leadership has been making the capital structure smaller – and thus EPS has risen while earnings have not.  This is actually a program that goes all the way back to 1995, which indicates a long-term approach of focusing on EPS, which are manipulated, rather than earnings.

P&G has favored divestitures and share repurchases over innovation and acquisitions for growth

Meanwhile, P&G’s buyback program has been financed by a dramatic divestiture program, selling off very large businesses to raise cash.  Over the last decade major sales included:

2009 – selling the P&G pharma business
2012 – selling the water filtration business including Pur
2012 – selling Pringles (along with several other iconic brands)
2014 – selling the dog food business
2016 – selling the Duracell battery business
2016 – selling the beauty brand business

Management tried in its response to say that innovation was just fine at P&G.  But what it cited were line extensions like Tide PODs, GAIN Flings, Pampers Pants, and Oral B power toothbrush.  None of these are great new innovations launching significant sales.  None are new product platforms for high growth.  Rather they are typical sustaining innovations applied to brands that are long in the tooth.

This is typical of the long-term lack of valuable innovation at P&G. Do you recall in 2009 when the company lauded its development of the “P&G Public Toilet Database App?” Not exactly on the top 20 iTunes list.  Or do you remember in 2014 when P&G launched its “Basic” line of products, where it literally sold a less-good quality product hoping to attract a brand-conscious but quality uncaring targeted niche?  Peltz is making a good point, that leadership at P&G really has forgotten what good, long-term profit producing innovation is, while succumbing to the strategy of selling major business units (reducing revenue) then using the money to buy back shares rather than investing in future growth.

P&G has not shown it understands how trends are quickly changing its business

Meanwhile, the consumer goods industry is changing dramatically, and it is not clear that P&G’s leadership is really preparing for future changes.  P&G still relies heavily on television advertising to sell its products. But that approach had stopped generating profitable growth as far back as 2010. Back then Colgate was holding its market share, and growing revenues, on all its brands that compete with P&G while spending 25% less, and often much less, on advertising.

 

P&G is still stuck using marketing strategies that have been outdated for almost a decade. Comcast lost 90,000 subscribers in Q2, and the stock lost 7% today when Comcast management alerted investors it expects to lose 150,000 more in Q3.  And while viewership is declining, ad pricing is going up, making TV advertising a less effective and more expensive marketing tactic for consumer goods. As P&G brands have fallen further behind competitors in Instagram followers, and lack good social media programs like Wendy’s, Peltz has proposed a substantial increase in digitally savvy marketers.

P&G and Walmart logo

Simultaneously, distribution is changing dramatically.  Once P&G could rely on its product dominance to dictate space usage in grocery stores and discounters.  But the rise of e-commerce has dramatically affected these historical distribution channels.  Today the fastest growing grocer is Aldi, which eschews brands like P&G’s in favor of its own private label.  And after stunting the growth of discounters like WalMart, the leading e-commerce company, Amazon.com, has now purchased Whole Foods.  This is leading everyone to expect greater growth in on-line grocery shopping and additional at-home delivery, which undercuts the former strength P&G had in traditional brick-and-mortar stores with warehouse delivery models.

Management bragged of its $3 billion in e-commerce sales, but that is a drop in the bucket.  Is P&G ready to compete for sales in future markets where social media is more important than advertising?  Where mobile ads have more power than print, TV, radio and traditional internet banners?  Where social media groups drive more consumption behavior than company-sponsored social media pages with coupons and use recommendations?  Will P&G dominate product volume when it has to rely on Amazon.com and other sites to sell and deliver its products?  If people move to daily home deliveries, and less stock-up purchasing what will happen to P&G’s former brand advantage via high numbers of SKUs (stock keeping units) and large packaging options?

This will be an interesting proxy battle.  There is no doubt Peltz wants to shake up the board’s behavior, compensation plans, hiring programs, targets and many of the ways management runs the company.  Simultaneously, the P&G board believes it is moving in the right direction.  Large shareholders are conservative, and don’t like to create problems (P&G’s largest shareholders are Vanguard, Blackrock, State Street, BofA, Capital World, Trian, Northern Trust – which combined control 24% of P&G stock.)

But this isn’t about a complete change in the board.  It’s just a vote to add one additional member who is not happy with things the way they are.  Will these large shareholders see a need for someone to shake things up, or will they accept current leadership’s claims that things are on the right track?

It will be interesting to watch, because Peltz isn’t without some objective concerns about P&G’s future, given its performance the last decade and the amount of change facing the industry.

Apple Partners With Accenture To Build Enterprise Apps: 5 Reasons Apple Is Winning The Developer War

Apple Partners With Accenture To Build Enterprise Apps: 5 Reasons Apple Is Winning The Developer War

Everybody knows that Google’s Android has about 80-85% smartphone market share, and Apple’s iOS has only 14-19% share (depending upon quarter.) But this week tech services giant Accenture announced it was partnering with Apple to build enterprise apps for its customers, focusing initially on financial services and retail.  Despite lower unit sales Apple maintains marketplace technology leadership by capturing the enterprise app developer community – including IBM, Cisco, Deloitte and SAP.

iPhone and Android stand out in Mobile market

For most consumers an Android-based phone from one of the various manufacturers, most likely bought through a wireless provider if in the USA, does pretty much everything the consumer wants.  Developers of most consumer apps, such as games, navigation, shopping, etc. make sure their products work on all phones.  For that reason, the bulk of consumers are happy to buy their phone for $200 or less, and most don’t even care what version of Android it runs.  As a stand-alone tool an Android phone does pretty much everything they want, and they can afford to replace it every year or two.

But the business community has different requirements.

And because iOS has superior features, Apple continues to dominate the enterprise environment:

  1. All iPhones are encrypted, giving a security advantage to iOS. Due to platform fragmentation (a fancy way of saying Android is not the same on all platforms, and some Android phones run pretty old versions) most Android phones are not encrypted.  That leads to more malware on Android phones.  And, Android updates are pushed out by the carrier, compared to Apple controlling all iOS updates regardless of carrier.  When you’re building an enterprise app, these security issues are very important.
  2. iOS is seamless with Macs, and can be pretty well linked to Windows if necessary for an apps’ purpose. Android plays well with Chromebooks, but is far less easy to connect with established PC platforms. So if you want the app to integrate across platforms, such as in a corporation, it’s easier with iOS.
  3. iPhones come exactly the same, regardless of the carrier. Not true for Android phones. Almost all Androids come with various “junkware.”  These apps can conflict with an enterprise app.  For enterprise app developers to make things work on an Android phone they really need to “wipe” the phone of all apps, make sure each phone has the same version of Android and then make sure users don’t add anything which can cause a user conflict with the enterprise app.  Much easier to just ask people to use an iPhone.
  4. iOS backs up to iCloud or via iTunes. Straightforward and simple. And if you need to restore, or change devices, it is a simple process. But in the Android world companies like Verizon and Samsung integrate their own back-up tools, which are inconsistent and can be quite hard for a developer to integrate into the app. Enterprise apps need back-ups, and making that difficult can be a huge problem for enterprise developers who have to support thousands of end users.  And the fact that Android restores are not consistent, or reliable, makes this a tough issue.
  5. Search is built-in with iOS. Simple. But Android does not have a clean and simple search feature.  And the old cross-platform inconsistencies plague the various search functions offered in the Android world.  When using an enterprise app, which may well have considerable complexity, accessing an easy search function is a great benefit.

Most of these issues are no big deal for the typical smartphone consumer who just uses their phone independently of their work.  But when someone wants to create an enterprise app, these become really important issues.  To make sure the app works well, meeting corporate and end user needs, it is much easier, and better, to build it on iOS.

This allows Apple to price well above the market average

Today Apple charges around $800 for an iPhone 7, and expectations are for the iPhone 8 to be priced around $1,000.  Because Apple’s pricing is some 4-5x higher, it allows Apple’s iOS revenue to actually exceed the revenue of all the Android phones sold!  And because Android phone manufacturers compete on price, rather than features and capabilities, Apple makes almost ALL the profit in the smartphone hardware business.  Even as iPhone unit volume has struggled of late, and some analysts have challenged Apple’s leadership given its under 20% market share, profits keep rolling in, and up, for the iPhone.

By taking the lead with enterprise app developers Apple assures itself of an ongoing market.  Three years ago I pointed out the importance of winning the developer war when IBM made its huge commitment to build enterprise apps on iOS.  This decision spelled doom for Windows phone and Blackberry — which today have inconsequential market shares of .1% and .0% (yes, Blackberry’s share is truly a rounding error in the marketplace.)  Blackberry has become irrelevant. And having missed the mobile market Microsoft is now trying to slow the decline of PC sales by promoting hybrid devices like the Surface tablet as a PC replacement.  But, lacking developers for enterprise mobile apps on Microsoft O/S it will be very tough for Microsoft to keep the mobile trend from eventually devastating Windows-based device sales.

As the world goes mobile, devices become smaller and more capable.  The need for two devices, such as a phone and a PC, is becoming smaller with each day.  Those who predicted “nobody can do real work on a smartphone” are finding out that an incredible amount of work can be done on a wirelessly connected smartphone.  As the number of enterprise apps grows, and Apple remains the preferred developer platform, it bodes well for future sales of devices and software for Apple — and creates a dark cloud over those with minimal share like Blackberry and Microsoft.

Uber: Be Very Careful Before Hiring Jeff Immelt As CEO

Uber: Be Very Careful Before Hiring Jeff Immelt As CEO

We learned last week that Jeff Immelt is a front-runner to be the next CEO of Uber.  There are many reasons to be concerned about this possibility.

Uber has received nothing but bad news for a while now:

Amidst these scandals, Uber’s big investors are writing down the value of their Uber holdings by 15%. After pushing the board for new leadership, and restructuring, it appears investors are losing faith in the company.
This puts the board in the hot seat.  Investors want a new CEO that will eliminate the scandals.  They want stability at the company.  Reeling from so much bad news, they want someone atop the organization who will “right the ship” with “a steady hand on the tiller” so they can regain confidence.  Amidst the turmoil, and the need to please investors, an executive who spent 35 years at GE, and over a decade in the top job, probably sounds like a good candidate.  He’s known as a stable guy, numbers-focused, genteel, well-schooled (Harvard MBA) and above all “seasoned.”
Delete uber app screen image

But the stakes are incredibly high.  Picking the wrong person at this moment could well lead to a horrible long-term outcome.  While meeting short-term needs sounds like the #1 goal right now, for Uber to succeed means putting someone in the CEO job who can guide the tech company through a decade or more of tough decisions in a fast-paced market.  Other boards have suffered horribly from making this decision hurriedly and poorly.

Remember the CEO turmoil at Yahoo:

  • Yahoo was an early leader on the web, first in search, content distribution, on-line sales and advertising under CEO Tim Koogle from 1995-2001.
  • Due to controversies (remember when he sold Nazi memorabilia?) he was replaced by proven media exec (25 years at Warner Brothers) Terry Semel from 2001-2007. He’s the one who missed the opportunities to buy Google and Facebook.
  • Worried the company needed more pizzazz to catch leapfrogging competitors, the board brought back founder Jerry Yang for 17 months (2007-2008).
  • When sales didn’t improve the board brought in brash, blunt speaking Carol Bartz, CEO of Autodesk, to turn around the company (2009-2011.) After months of cost-cutting but no sales improvement, she was gone.
  • In January 2012 the board hired the President of Paypal, Scott Johnson, as CEO. But 5 months later he was fired for lying on his resume.
  • Amidst a need to find someone to lead the company long-term, in 2012 the board hired Google darling Marissa Mayer as CEO.  She left when Yahoo dissolved.
yahoo logo
twitter logo
apple logo

Or how about Twitter:

  • From 2007-2008 Jack Dorsey was the founder who drove growth and early funding.
  • Dorsey was replaced by Evan Williams (2008-2010) who was to supply a steadier, more seasoned hand at the top.
  • Looking to grow and go public, the board replaced Williams with Dick Costolo (2010-2015). Although the IPO went well, lack of investor enthusiasm led to stock weakness.
  • In 2015 Costolo was replaced by the returning Dorsey. He supposedly would rejuvenate the company. Since his return the stock has dropped about 50% amidst concerns regarding insufficient user and revenue growth.

But this is not a new problem in tech.  Remember the CEO litany at Apple:

  • Apple’s first CEO (1977-1981) was Michael Scott from National Semiconductor, brought in to support the inexperienced Steve Jobs and Steve Wozniak. But he was unable to get along with the founders, and built a reputation of firing those he didn’t like.
  • Mike Markkula, Apple’s early investor and 3rd employee, replaced Scott as CEO from 1981-1983.
  • Hoping to put someone with a better pedigree, more big-company experience and a steadier hand in the top job, Markkula hired John Sculley (former Pepsi CEO) to Apple’s top job in 1983. Markkula agreed with Sculley to fire the mercurial Jobs in 1985. Sculley remained CEO until 1993, when he was removed as Apple lost the war with Microsoft for corporate desktops and sales tanked.  Sculley, the much heralded, experienced corporate leader, ended up ranked the 14th worst CEO of all time by Conde Nast Portfolio.
  • The board replaced him with insider Michael Spindler (1993-1996) who tried to sell Apple to IBM, Sun and Philips, but failed.
  • Spindler was replaced by Gil Amelio (1996-1997) former CEO of National Semiconductor, who was considered the kind of mature, dedicated leader Apple needed. As Apple shares slumped to all time lows, he bought Jobs-owned NeXt.
  • Jobs (CEO 1997-2011) succeeded in convincing the Board to fire Amelio. Jobs subsequently fired the board. The rest is well documented.

Jeff Immelt is no Steve Jobs

Clearly, Uber’s board needs to find a Steve Jobs.  And by all accounts, for all his skills, Jeff Immelt is NOT a Steve Jobs.  During his tenure as CEO of GE things might have been boring, but the company also lost a third of its revenues, and a third of  its market cap.  After more than a decade of stagnation, Immelt was forced out.  It is hard to imagine he is the right person to guide Uber, a high-tech company in a fast changing marketplace filled with techie employees who want a culture of rapid growth with opportunities to build fortunes in company equity.  To maintain its value Uber needs to keep growing at 20%+/year, and Immelt has no experience creating that sort of revenue success.

So what should the board look for?  Last summer Chris Zook and James Allen of Bain & Co. published their treatise on how to lead high growth companies The Founder’s Mentality – How To Overcome the Predictable Crises of Growth .  I interviewed Chris Zook last year, and he offered great insights that would be incredibly valuable for the Uber board now:

  1. Being great is hard. Most companies are focused on going from mediocre to good, far from going from good to great. Uber is the undisputed champion in ride-sharing today.  The leader must be unassailable as a visionary.  Someone who understands how to build a GREAT company.  The last CEO may have been problematic, but he built Uber – a tremendous business success.  The new leader has to be on a par with other leaders of companies considered great by the employees (and investors) or he will not be respected, and there will be more problems, not fewer.

 

 

  1. “Next Generation CEOs” (as Zook calls them) are flexible thinkers who can figure out the hidden core, and build on it. The incoming CEO of Marvel realized its core was story telling, not comics, and directed the company into films and other growth venues. Jobs realized Apple was more than the Mac, and tied the company to offering easy-to-use products that fit emerging mobile needs. Uber’s next CEO has to go deeper than the scandals and obvious business model to understand what made Uber the leader, and expand on that nugget of strength to keep the company growing, and beating competitors.  (Software for the gig economy?  Time sharing assets?)

 

  1. Blockages are what kill companies. Most big-company CEOs are great at creating organizational blockages to create stability. They tend to be numbers first, customers and technology second.  They put in place middle managers with the primary job of stopping behaviors that could be problematic.  They instill “no” in order to stop mistakes.  Do not ever forget the Sculley/Apple experience.  The next Uber CEO has to be willing to operate in a culture with few barriers, direct access from the bottom employee to the CEO, and the ability to move quickly to deal with problems rather than attempting to eliminate the possibility of problems.
  1. The CEO has to be willing to make big bets. Today markets move fast. Leaders have to project trends, understand where customers are headed and place big bets that keep the company on top.  Think about Bezos pushing Amazon to implement Prime, and buying Whole Foods.  Think about Jobs directing Apple’s massive bet on mobile and the iPod.  Think about Reed Hastings making the big bet at Netflix on streaming, and more recently on original content.  To be a successful leader today of a growth company is not for the timid, nor for those who want to make small, progressive bets over time.  It requires vision, the willingness to make big bets and the ability to convince your employees, your board of directors and your investors to buy into that bet.

The Uber board is apparently a bit tired of their search.  Perhaps that’s because they aren’t looking for the right kind of person.  As Mr. Zook told me, you rarely find leaders with a “Founder’s Mentality” through a search firm.  You find them already competing, offering insight, doing new things in situations where the competition is intense.  Like Jobs was at Pixar, and NeXt.

The right leader is out there – we’ve seen the type in companies mentioned here, and others like Google and Facebook.  But you have to search for them intensely.  What seems very, very unlikely is that Mr. Immelt is “the right man for the job” at Uber today.

Five Reasons I Regret Writing About Millennial Entrepreneurs

Recently, I wrote a column about 10 young entrepreneurs.  Originally I titled it “10 under 20” but the Forbes editors thought that was too close to their “30 under 30” column so they changed it to “10 Great Lessons From Millennial Entrepreneurs.”  I didn’t like that title, because it implied these were “great” entrepreneurs, and I really didn’t think they were all that great.  Now that some time has gone by, I really regret having written the column.

1 – PR Inundation

I’ve written this column at Forbes for almost 7 years.  So I am pitched for unsolicited columns every day by PR firms.  On average, about 10 pitches every day. But nothing compared with the onslaught of emails I received after the millenial column.  Firm after firm, and even individuals, contacted me by email, on Facebook, Linked-in, and Twitter to tell me about some incredible young person who just absolutely needed to be written about.  You would think that every high school, and small university, in America had at least one, if not multiple, young prodigies all of which were destined to change the world.  It was an avalanche of pitches, from which I could not even begin to fully read, much less respond.

But, almost universally these businesses were not that fantastic.  Most were the modern day equivalent of someone opening a lawn service in 1960. Simple businesses that had little to distinguish them. Many had no revenues, and many were little more than somebody’s idea of a business they would like to build.  Those that had revenues were so small as to be meaningless, and almost none made any impact on their industry or competition.

The pitches were, without a doubt, the most hyped pitches I have ever received. Over and over I kept asking “why would anyone think this is in the slightest interesting?

Multitasking PR person

The only reason this is being pitched is because it involves someone under the age of 25.  And usually that someone lacks any credentials and offers no new insight to the industry or product.”

2 -Not a sustainable business

Writing an app is not a business.  Even if it sold a few thousand copies. Nor is trading baseball cards, or selling someone else’s stuff on eBay.  Nor is buying bitcoins.  By and large, 99% of the pitches were for one-product opportunities that clearly lacked any sense of being a sustainable business which could produce recurring revenue over multiple years.  Almost none had any employees, and those that did had a mere handful with no plans to scale any larger.

At best most were simply a single shot situation which generated some revenue for the millennial founder. And most could only pay the founder because the business had no overhead and a highly subsidized cost structure due to support from parents.  Many had no, or little, profits and there was nowhere near enough cash to repay traditional investors.  Because there was no cost for financing, overhead or even variable activities like payroll, these businesses could not be considered a success in any traditional sense.

3 – These were not really entrepreneurs

Jean Baptiste Say, French economist

French economist Jean-Baptiste Say coined the term entrepreneur. He used it to describe people who seek out inefficient uses of resources and capital then redeployed them into more productive, higher-profit uses.  None of the pitched businesses actually redeployed any resources.  And none really developed a new industry that created greater productivity.  These were just ideas that manifested into a product that fit an immediate need.  Most used an existing infrastructure, such as an app store, to do one thing – like sell an app.  Maybe someday they’ll write another – but there was no indication any research was happening, customer analysis or market testing to create a long-term business.

Additionally, for entrepreneurs there is some element of risk-taking.  For taking risk, by investing in something where others won’t invest, there is the opportunity for outsized returns.  But these folks didn’t take any risk at all.  It wasn’t their money they invested, but rather their family’s.  Most either lived at home, or lived in housing paid for by family (such as a college dorm room.)  Most had nothing invested in their “business” other than personal time, and if this failed there was almost nothing lost.  And most had minimal gains relative to the size of the risk they undertook with other people’s resources.

And they all lacked any sense of a business plan.  Now I’m all for innovation and trying new things, but business success requires the ability to generate ongoing revenue for a prolonged period that covers all costs and creates returns for investors.  These folks simply promoted ideas with no description of how this was to be a long-term profitable venture that succeeded for customers, suppliers and financial backers.  I found that I would not have been an investor in hardly any of these “businesses” and surely would not recommend readers to back them.

4 – These folks were big self-promoters, not business promoters

Almost to a pitch every story was about some individual – not a business success.  I was told over and over and over about how some 17, 18, 19 or 20 year old was absolutely a genius; a modern miracle of incredible business insight.  Yet, there was little to back-up these claims.  In the end, these were just young folks who had some sense of ambition and fortitude that were doing a few experiments and had (in some instances, not all) sold a few things.  But their stories really weren’t that interesting.

One young fellow washed vehicles.  He got a contract to wash trucks.  And he had expanded his truck washing capability to multiple trucking companies.  OK, ambitious and hard working.  But nothing fantastic.  No technology breakthrough.  Just a basic service that he sold cheaply enough to win some contracts.  But, he was unwilling to discuss his margins, how much he paid himself or others and how he financed the company or paid a return to his backers.  Yet, he was certain that he could franchise his truck washing business and soon enough he would be the next Ray Kroc.  He, and his PR person (and it was unclear who paid her) failed to realize that his story might be interesting in 20 years after he proved he could build the next McDonald’s making himself, his investors and his franchisees rich.

Add onto this the fact that almost all of these people had nothing good to say about anyone older.  For some reason I was informed over and again that nobody over 40 could really understand how brilliant this person is, and how guaranteed was future success.  These people universally had no value for advice from people older than them, senior woman meetingno value for those with experience (all experience was seen as irrelevant to their brilliant insight,) and no value for education.  There was no reason to study business practices, or even business history, much less anything like engineering, because they simply had taught themselves all they needed to know – and if they needed to know anything else they would teach that to themselves as well.

I kept saying to myself “get over yourself kid. You are working hard, but so are a lot of other people.  You really haven’t accomplished anything of merit yet.  And there’s not really anything here that indicates you will achieve great things.  You may win awards for just showing up at school, or at the soccer match, but in business you have a LOT more to prove than you can show up and possibly accomplish some of the basics.  Once..”

5 – No sense of how to build something, or even engage in quid pro quo

Bill Gates built a company that produced software millions of people wanted.  Steve Jobs built a company that made devices (computers initially) that millions wanted.  Henry Ford made cheap cars that millions of people wanted. Mark Zuckerberg created an interaction engine that millions of people wanted (and advertisers would pay to reach.) These founders understood that building a successful business meant combining multiple resources into an organization that functions capably to build products and markets.

If you asked them “why should I write about you?” they would answer, “to tell folks about the improvement in their life from my company’s products.”

When I asked these millennial entrepreneurs why I should write about them, the answer was “because I’m young and great and going places.”

Worse, when I pointed out that in today’s world columnists rely on readers, and therefore columnists want to know the topic will generate reads, they were without even a good idea of how a column on them would generate reads.  When I asked “will you promote this through a large social media conduit to drive readers to the column?” they responded with “but isn’t that what Forbes does, bring in readers?  I think you should write about me so Forbes readers can become enlightened.  Why should I be asked to promote your column, isn’t that what you and Forbes do?”

Conclusions

It was completely unclear to me who was paying for these PR firms.  But to them, and to the hundreds of millennials who sent me Facebook, Linked-in and Twitter messages:

  1. Quit focusing on yourself and actually accomplish something.  Don’t be proud you’re a drop-out, go finish school.
  2. Listen more and talk less.  You really don’t have much that’s interesting to say.  Pay attention to those who are older, wiser and could help you reach your goals.  You need them, and most of them don’t need you.  You’re really not as interesting as you think you are.
  3. Get some education.  Bill Gates and Steve Jobs are my age – not yours.  Every generation needs more skills than the one before it.  Mark Zuckerberg is THE exception, not the rule.  Dropping out of Harvard did not make him great.  Before you decide you have all the answers, go learn what the questions are.  Learn how to think, how to reason, before you decide you know all that’s needed to take action.
  4. Quit living on subsidies.  If your parents or grandparents or aunts and uncles are paying for your rent, or car, or supplies then you still don’t understand basic economics.  Become self-sufficient.  Make enough money to buy your own new car, buy your own house, and pay 100% of your bills – and even enough that you could afford to raise children. Until you are self-reliant it is very hard to take you seriously as a business leader.
  5. Life is NOT a one-round event.  You are very likely to live 100 years.  Do you have the skills to maintain your lifestyle for that full 100 years? Quit crowing about the 1 success (by your definition) you’ve had so far and instead figure out how you’ll lead a productive 100 year existence.  You’re only 20% of the way there.

I hear folks say we need to advance millennials onto boards of directors for public companies.  Or fund their new ventures without business plans or traditional benchmarks. Or put them into highly placed positions of major corporations. I can’t agree with that.  From what I observed, millennials are similar to all other young people. They don’t know what they don’t know.  And only time, failures, successes, education (formal and informal) and hard work will prepare them to be tomorrow’s leaders.

I started my entrepreneurial life while a college junior.  I was lucky enough to hook up with several people at least a decade older, and they found investors that were a generation older.  The company made computer hardware, and largely due to good luck as well as hard work the company was successfull, and was sold for a great return to the investors and some money for the founders.  Simultaneously I completed my undergraduate degree in 4 years, summa cum laude. What made me most excited about that experience was not trying to be featured in any journal, but rather that the folks at the Harvard Business School felt this experience was good  enough to admit me to their institution to complete an MBA.  And there is no doubt in my mind that what I learned in college, and grad school, was incredibly important to generating a lifetime of ongoing business accomplishments – long after that first company disappeared into the dustbin of obsolete technology.

Starbucks Closing Teavana Is A Long-Term Troubling Sign For Investors

Starbucks Closing Teavana Is A Long-Term Troubling Sign For Investors

Amid all the political news last week it was easy to miss announcements in the business world.  Especially one that was relatively small, like Starbucks announcement on Thursday July 27, 2017 that it was closing all 379 of its Teavana stores.  While these will be missed by some product fanatics, the decision is almost immaterial given that these units represent only about 3% of Starbucks US stores, and about 1.5% of the 25,000 Starbucks globally.

Yet, closing Teavana is a telltale sign of concern for Starbucks investors.

Starbucks founding CEO Howard Schultz returned to the top job in January, 2008,  promising to get out of distractions such as music production, movie production, internet sales, grocery products, liquor products and even in-store food sales in order to return the company to its “core” coffee business.  Since then Starbucks valuation has risen some 5.5-6 fold, from $9.45/share to the recent range of $54 to $60 per share.  A much better return than the roughly doubling of the Dow Jones Industrial Average over the same timeframe.

Yet, one should take time to evaluate what this closing means for the long-term future of Starbucks.  This is the second time Starbucks made an acquisition only to shut it down.  In 2015 Starbucks closed all 23 La Boulange bakery cafes, with little fanfare.  Now, after paying $620M to buy Teavana in 2012, they are closing all those stores.  While leadership blamed its decision on declining mall visits (undoubtedly a fact) for the closures, Teavana is not missing goals due to the Amazon Effect.  There are multiple options for how to market Teavana’s fresh and packaged products far beyond mall store locations.  Choosing to close all stores indicates leadership has minimal interest in the brand.

Starbucks’ focus leaves little opportunity for new growth

Starbucks under construction. Photo by Jamie Lytle

It increasingly appears that today’s Starbucks literally isn’t interested, or able, to do anything other than build, and operate, more Starbucks stores.  And Starbucks is clearly doubling down on its plans to be Starbucks store-centric.  The company opened 575 new units in the last year, and announced plans to open more stores creating 68,000 additional US jobs in the next 5 years.  Further, Starbucks is paying $1.3B to buy the half of its China business previously owned by a partner.  Clearly, leadership continues to tighten company focus on the “core” coffee store business for the future.

This sounds great short-term, given how well things have gone the last 8 years.  But there are concerns.  Sales are up 4% last quarter, but that is wholly based upon higher prices.  Customer counts are flat, indicating that stores are not attracting new customers from competitors.  Sales gains are due to average ticket prices increasing 5%, which is marginal and likely refers to higher priced products.  Starbucks is now relying completely on new stores to create incremental growth, since bringing in new customers to existing stores is not happening.

Frequently this stagnant store sales metric indicates store saturation.  A bad sign.  Does the US, or international markets, really need more, new Starbucks stores?  It was 2010 when comedian Lewis Black had a successful viral rant (PG version) claiming that when he observed a Starbucks across the street from another Starbucks he knew it was the end of civilization.

Lewis Black and Starbucks, end of universe rant

What happens when the market doesn’t need new Starbucks stores?

One does have to wonder when the maximum number of Starbucks will be reached.  Especially given the ever growing number of competitors in all markets. Direct competitors such as Caribou Coffee, The Coffee Bean, Seattle’s Best, Gloria Jean’s, Costa, Lavazza, Tully’s, Peet’s and literally dozens of chain and independent coffee shops are competing for Starbucks’ customers.  Simultaneously competition from low priced alternatives is emerging from brands like Dunkin Donuts and McDonald’s, now catering more to coffee lovers.  And non-coffee fast casual shops are seeking to attract more people for congregating, such as Panera, Fuddruckers, Pei Wei, TGI Friday’s and others.  All of these are competitors, either directly or indirectly, for the customer dollars sought by Starbucks.  Are more Starbucks stores going to succeed?

As McDonald’s, Pizza Hut and other fast food chains learned the hard way, there comes a time when a brand has built all the market needs.  Then leadership has to figure out how to do something else.  McDonald’s invested heavily in Boston Market and Chipotle’s, but let those high growth operations go when it decided to refocus on its “core” hamburger business – leading to heavy valuation declines.  Starbucks is closing Teavana, but should it?  When will Starbucks saturate?  And what will Starbucks do to grow when that happens?

Starbucks has had a great run.  And that run appears not fully over.  But long-term investors have reason to worry.

Is it smart to make such a huge bet on China?
Will store growth successfully continue, with all the stores that already exist?
Will direct and indirect competitors eat away at market share?

What will Starbucks do when it has reached it market maximum, and it doesn’t seem to have any emerging new store concepts to build upon?

President Trump: The 5 Reasons You Are Not A Disruptive Leader And Instead Create Chaos

President Trump: The 5 Reasons You Are Not A Disruptive Leader And Instead Create Chaos

The news was filled this week with stories about President Trump’s “unorthodox” management style. From tweeting his thoughts on replacing Attorney General Jeff Sessions, to tweeting his multiple positions on healthcare law changes, to hiring a new communications director who lets loose with expletive-laden rants, people have been left questioning what sort of leadership style President Trump is trying to display.

Donald Trump promised to be a “disruptive leader”

Donald Trump ran for office as an outsider who pledged to disrupt Washington politics.  This was a message well received by many people.  They felt that “business as usual” in national politics was not serving them well, so they wanted change.  To them a disruptor could find a way to steer national politics back onto a course that was more aligned with the conservative middle Americans.  These voters felt that a businessman entrepreneur just might be the kind of leader who could disrupt the status quo in order to get something done for them.

Unfortunately, things have not worked out that way.  And largely this can be traced to the leadership style of President Trump.  Rather than a dedicated disruptor, ready to implement change, President Trump has proven to be a chaos generator that has stymied progress on pretty nearly all issues.  Disruptions can lead to positive change.  Chaos leads to stagnation and degradation as the system searches for homeostasis and a path forward.

From early age, we are taught not to be disruptive.  Disrupting someone during school, religious ceremonies, entertainment events leads to distractions and an inability to remain focused on the goal.  Thus, we are mostly taught to listen, learn and do what we’re told.  However, we also recognize there is a time to be disruptive, because the act of intervening in the process at times can lead to far more positive outcomes than maintaining the course.

But it takes good judgement, and reasoned action, to be a positive disruptive influence.  If you are in a crowded theater and you recognize a blaze it is time to disrupt the stage presentation.  But you have a choice.  If you jump up and yell “fire” you will create chaos.  Everyone suddenly realizes a problem, but with no idea how to deal with it a thousand different solutions emerge simultaneously.  Everyone starts looking out for their own interest, and they trample those around them in an effort to implement their own plans.  Many people get hurt, and frequently the goal of saving everyone by disrupting the presentation is lost in carnage created by the bad disruption leading to chaos.

What is successful disruptive leadership?

So, if you sense a pending fire you are far smarter to develop a plan, such as activating the evacuation notices and opening the exits, prior to making an alert.  And then, instead of yelling “fire” you say to folks “an issue has developed, please make your way down the evacuation routes to the open exits while we deal with the situation.  Please remain calm so everyone can exit safely.”  Your disruption can lead to successful outcome, rather than chaos.

I’ve spent over 20 years focusing on how disruptions can lead to positive change.  And it is clear that with disruptive innovations, and disruptive business models, their success relies on leaders that understand how to implement disruptions effectively.  Leadership matters.

Disruptive leaders think very hard about their desired outcomes, and they go to great lengths to describe what those future, better outcomes will look like.  They then create a plan of action before they do anything.  While the innovation might well be known, they are very, very careful to think through how that innovation will be adopted, then nurtured to gain acceptance and hopefully become mainstream.  These leaders are very careful about their language choices, and where they communicate, in order to encourage people to accept their vision and join with their plan.  They seek adoption rather than confrontation, and they discuss the desired outcomes rather than the disruption itself.  They gain trust and build a consensus for change, and then they systematically roll out their plan, which they adjust as necessary to meet unexpected market conditions.  They gradually move people along the implementation route by relentlessly focusing on the better outcome and reducing the fear inherent in accepting the disruption.

Five ways Donald Trump fails as a successful disruptive leader:

  1. The President has not portrayed a superior outcome which he can use to rally people to his viewpoint.  Despite talking about “making America great again” there is no picture of what that looks like.  What is this future “great” America he envisions and wants us to buy into?  What are the poor outcomes of today that he will greatly improve, leading to vastly superior future outcomes?  Without a clear description of the future, it is hard to gain supporters.  For example, will changes in health care improve care?  Lower the cost? What are the benefits, the better outcomes, of change?  What is the benefit of replacing the sitting attorney general?
  2. The President has not laid out his plan for bringing people on board to his future. Look at the recent effort to implement new health care legislation. At times the President has said there is a need to repeal current legislation and replace it, but he has offered no description of what the replacement should look like.  At other times he has said to repeal current legislation, but he has offered no insight into how that would lead to better outcomes than the current legislation provides.  At yet other times he has said to do nothing, and he expressed his hope that current legislation would fail even though he admitted this would lead to an outcome far worse than the status quo.  By not creating a plan, and bringing people on board to his plan, he has created chaos in the legislative process.
  3. President’s Trumps messages are built on negative language, not positive language about the future. His messages are long on how some person or current situation is weak, rather than explaining what a strong future would look like. He frequently attacks his predecessor, or his former electoral opponent, but does little to say what is good about his Presidency or recommendations or what he is specifically going to do that will create better outcomes.  He frequently talks about firing people in his administration, but talks little about the specifics of what good work people in his administration are doing.  These language choices are exclusive, not inclusive, and they create chaos among those who work in his administration, and members of Congress.  Instead of understanding the President’s goals and objectives people are wondering “what will he say next?”  And by appointing a communications director who uses outrageous, unacceptable and incendiary language he further exacerbates the problem of everyone losing any insight to his message because we are stunned and amazed at the choice of language.
  4. President Trump has the ability to communicate from the most Presidential locations. He can provide TV, radio and internet addresses from the oval office, or the White House platform. He can invite media in for press conferences or interviews to discuss his goals and ambitions, plans and pending decisions.  Or he can make himself, or his staff, available for press interviews.  And while he does some of this, we all spend every day wondering what Tweet he will send over the Twitter social network next.  Several million people use Twitter. It is for social exchange.  For the President to announce policy positions (such as banning transgenders from military service) or evaluations of key subordinates (such as referring to the attorney general as weak) or military policy (such as opining on the potential retribution toward North Korea) via Twitter belies the nature of the office and his role.  His selection of communication venues only serves to make his comments less valuable, rather than more important.
  5. President Trump neither remains consistent in his communications, nor does he exert loyalty. Changes on health care and denouncing his own staff does not create trust. How are people in the legislature, regulatory agencies or military going to become advocates for his goals when they don’t know if he can be trusted to support their actions, or support them as employees?  If you want people to take a different course of action, to let go of the status quo, they have to trust you.  Disruptive leaders time and again must state their positions with clarity and demonstrate support for those who do their best to promote the disruptive agenda.  They battle fear of the future with clarity around their support for future outcomes those who help describe how the future will be better.

There are times for disruptive leadership.  Status quo models become outdated, and outcomes decline as a result.  Change offers the opportunity for better outcomes, and helping people migrate to new innovations helps them toward a better future.  But implementing innovation and change requires skill at being a disruptive leader.  If the process is bungled, you can look like the guy who started a deadly rampage by yelling “fire” when a more reasoned approach would have prevailed.  If you don’t follow the best practices of disruptive leadership, you will create chaos.

As Immelt Leaves GE, Investors And Employees Have Little To Cheer

As Immelt Leaves GE, Investors And Employees Have Little To Cheer

GE Chairman and CEO Jeff Immelt walks off stage after being interviewed during the Washington Ideas Forum at the Harmon Center for the Arts September 28, 2016 in Washington, DC. A proud Republican, Immelt said it would hurt the United States and cripple President Barack Obama — and the next president of the U.S. — not to agree to trade deals like theTrans Pacific Partnership (Photo by Chip Somodevilla/Getty Images)

Readers of this column know I’m not a fan of General Electric’s CEO, Jeffrey Immelt.  In May, 2012 I listed CEO Immelt as the 4th worst CEO of a large publicly traded American company.  Unfortunately, his continued tenure since then did nothing to help make GE a stronger, or more valuable company.  GE’s lead director says this is the culmination of a transition plan first developed in 2011.  One can only wonder why it took the board so incredibly long to replace the feckless CEO, and why they allowed GE’s leadership to continue destroying shareholder value.

The longer back you look, the worse Immelt’s performance appears.

Few company analysts can say they’ve followed a company for 3 years. Fewer yet can say 5 years.  Nearly none can say a decade.  Yet, CEO Immelt was in his job for 16 years – much longer than almost all business analysts or writers have followed GE.  Therefore, their lack of long-term memory often leaves them unable to give a proper overview of the company’s fortunes under the long-lived CEO.

I have followed GE closely for almost 35 years.  Ever since I graduated from HBS class of 1982 along with Mr. Immelt. Several fellow alumni worked at GE, and a large number of my BCG (Boston Consulting Group) colleagues joined GE in senior positions during the mid-1980s as GE grew exponentially. I have followed several of these alumni as the years passed allowing me to take the “long view” on GE’s performance, during Welch’s leadership and more recently since Mr. Immelt took the top job.

I was very pleased to include a positive case study of GE’s business practices in my book “Create Marketplace Distruption – How to Stay Ahead of the Competition” (Financial Times Press, 2007.)  CEO Welch used a number of internal processes to help GE leaders identify disruptive opportunities to change industries – whether markets where GE already competed or new markets.  He relentlessly encouraged entering new businesses where GE could bring something new to the game, and he put GE’s money to good use growing revenues, and market cap, enormously.  No other CEO in American history made as much value for shareholders as Jack Welch.  His leadership pushed GE to the top position in most industries, and his relentless focus on growth helped even rank-and-file employees build million dollar IRAs to go with well funded pension and retiree benefit plans.

GE’s performance could not have changed more dramatically than it has under Mr. Immelt. But there are now a number of apologists who would say GE’s smaller size, and lower valuation, are due to market conditions which were out of Mr. Immelt’s control.  They contend CEO Immelt was a good steward of the company during difficult market conditions, and the results of his tenure – notably lower revenues, lower valuation, fewer markets, fewer employees and lower community involvement – are not his fault.  They argue he did a good job, all things considered.

Balderdash. Immelt was a terrible CEO

There is an overall reluctance to say bad things about any huge American icon, and its CEO. After all, columnists and analysts who are non-congratulatory don’t usually get called by the company to be consultants, or advisors.  Or to be on the board.  And publishers of columnists who say negative things about big companies and their execs risk having ad dollars moved to more favorable journals, and often unfriendly relationships with their ad departments and agencies.  So it is far easier, and more acceptable, to sugar coat bad strategy, bad leadership and bad results.

But we should move beyond that bias. Mr. Immelt was the CEO of the ONLY company on the Dow Jones Industrial Average (DJIA) to have been on that list since it was created.  He inherited the most successful company at creating shareholder value during the 1980s and 1990s.  He surely should be held to the highest of comparative bars.

Those who say CEO Immelt was “set up to fail” are somehow making the case that Immelt would have been more successful if he had inherited a company with a bad brand image, weak history, and inadequate performance.  They are rewriting history to say Jack Welch was not a good CEO, and his outsized gains destined GE to do poorly under his successor.  That simply defies the facts – and logic.

Looking at the last 16 years of “difficult times,” when GE has struggled under Immelt’s leadership, one should ask “why did so many other companies do so well?”  After all, the DJIA has more than doubled.  The S&P 500 has almost doubled.  The Russell 2000 has almost tripled. Overall, far more companies have gone up in value than down.  Why were Immelt’s circumstances so difficult that all of those CEOs did so much better?  They dealt with the same financial meltdown, same Great Recession, same increase in regulations, same federal reserve, same government administration – yet they were able to adapt their companies, grow and increase value.

Yes, GE was huge in financial services when Immelt took the reigns, and financial services saw a major crash. But look at the performance of JPMorganChase under CEO Jamie Dimon (also a classmate of Mr. Immelt.)  JPM is stronger today than ever, growing and gaining market share and increasing its value to shareholders.  Prior to the crash, in spring 2007, GE was trading at $41/share, and now it is $29 – a decline of ~30%. Back then JPM was trading at $53, and now it is $93 – a gain of ~75%.  There obviously was a strategy to adapt to market conditions and do well.  Just not at GE.

Immelt reacted to market events, poorly, rather than having a prepared, proactive strategy

Let’s not rewrite history.  Prior to the banking crash CEO Immelt was more than happy for GE to be in the “easy money” world of finance.  Welch had created GE Capital, and Immelt had furthered its growth when lending was easy and profitable.  And he supported the enormous growth in GE’s real estate division.  When this industry faced the crash, GE faced a near-bankruptcy not because of Welch, but because of Immelt’s leadership during the over 6 years he had been CEO.  If there were risks in the system CEO Immelt had ample time to re-arrange the portfolio, reduce lending, offload financial assets and reduce exposure to real estate and mortgages.  But Immelt did not do those things.  He did not prepare for a reversal in the markets, and he did not prepare the balance sheet for a significant change of events.  It was his leadership that left GE exposed.

As GE shares fell to $7  Immelt made a famous deal with Berkshire Hathaway’s CEO Warren Buffet to increase GE’s capital base in order to stave off demise. And this deal saved GE.  But this was an extremely sweet deal for Buffett, giving Berkshire very good interest (10%) on the preferred shares and warrants allowing Buffett to buy future shares of GE at a fixed price.  Berkshire made a profit, over and above the interest, of $260M on the deal, and overall at least $1.2B.  By being prepared Buffett saved GE and made a lot of money. GE’s investors paid the price for a CEO that was unprepared.

But the changes brought about by the crash, and Dodd-Frank, were more than CEO Immelt could manage.  Thus GE exited the business selling many assets at fire sale prices.  This “turn tale and run” strategy was sold to the public as a way for GE to “focus” on its “core manufacturing business.”  Rather, it was a failure of leadership to understand how to manage this business to future success in changed markets.  Where Welch’s GE had grasped for disruption as opportunity, Immelt’s GE gasped at disruption and fled, destroying billions in GE value.

Immelt could not grow GE’s businesses, so he divested GE of many.

GE was to be the “industrial internet giant.”  GE was to be a leader in the internet-of-things (IoT) where sensors, the cloud and remote devices created greater productivity.  And, to be sure, companies like Apple,  Google and Samsung have made huge gains in this market.  Even small companies, like Nest, were able to jump on this technology shift with new products for the residential market.  But name one market where GE is the dominant IoT player.  During 16 years the internet and remote services markets have exploded, yet GE is not the market leader.  Rather it is barely recognized.

Rather than growing GE with disruptive innovations and visionary products in emerging technology markets, Immelt’s GE was primarily shrinking via divestitures. In dismantling GE Capital he eliminated the lending and real estate operations.  After decades as a leader in appliances, that division was sold. Welch built the extremely successful entertainment division around NBC/Universal, which Immelt sold.

The water business that was to be a world leader under Immelt’s vision, likewise sold – and largely to make sure GE could close the deal on selling its oil & gas unit.  Even the famed electrical distribution business, going back to the start of GE, is now close to being sold.

And what happened to all this money?  Well, about $50B went into share buybacks – which ostensibly would help shareholders.  Only it didn’t, because GE is still worth less than when buybacks started. So the money just disappeared.  At least Immelt could have paid it to shareholders as a dividend – but then that would not have boosted his bonuses.

GE’s website says Mr. Immelt wanted to create a “simpler, more valuable industrial company.”  Mr. Immelt is definitely leaving behind a simpler, much smaller and weaker company.  The brand is gone from consumer products, and severely tarnished in commercial products.  GE lacks a great product pipeline, and even a strong development pipeline due to the rampant divestitures.  When Mr. Flannery takes over as CEO he will not inherit a powerhouse company.  He will inherit a company that is shrinking and rudderless, and disconnected from most growth markets with almost no product, technology or brand advantages.  And he will report to the Chairman that created this mess, Mr. Immelt.

The most likely outcome is that Mr. Peltz and his firm, Trian Partners, will buy more GE shares and seek directorships on the board.  Then, in a move not unlike the deaths of DuPont and Dow, there will be a massive cost cutting effort to bring expenses in-line with the shrunken GE business.  R&D will be discontinued, as will product development.  Support groups will be shredded.  Customer service will be downsized.  Then the remaining pieces will be sold off to buyers, or taken public, leaving GE a dismantled piece of history.

While that may work for the capital markets, and some short-term investors will share in the higher valuation, what about the people?  People who dedicated their careers to GE, and are pensioners or current employees?  What about cities and counties where GE has been a major employer, and civic contributor?  What about customers that bought GE industrial products, only to see those products dropped due to low profitability, or little growth opportunity?  What about suppliers that invested in developing new technologies or products for GE to take to market?  What will happen to the people who once relied on GE as America’s largest diversified industrial company?

These people all have an ax to grind with the very wealthy, and now departing, CEO Immelt.  He inherited what may well have been the most successful company on earth.  He leaves behind a far weaker company that may not survive.

Why Demographic Trends Tell Us Aging and Immigration Are Crucial for Success

Why Demographic Trends Tell Us Aging and Immigration Are Crucial for Success

I write about trends. Technology trends are exciting, because they can come and go fast – making big winners of some companies (Apple, Facebook, Tesla, Amazon) and big losers out of others (Blackberry, Motorola, Saab, Sears.) Leaders that predict technology trends can make lots of money, in a hurry, while those who miss these trends can fail faster than anyone expected.

But unlike technology, one of the most important trends is also the most predictable trend. That is demographics. Quite simply, it is easy to predict the population of most countries, and most states. And predict the demographic composition of countries by age, gender, ancestry, even religion. And while demographic trends are remarkably easy to predict very accurately, it is amazing how few people actually plan for them. Yet, increasingly, ignoring demographic trends is a bad idea.

Take for example the aging world population. Quite simply, in most of the world there have not been enough births to keep up with those who ar\e getting older. Fewer babies, across decades, and you end up with a population that is skewed to older age. And, eventually, a population decline. And that has a lot of implications, almost all of which are bad.

Look at Japan. Every September 19 the Japanese honor Respect for the Aged Day by awarding silver sake dishes to those who are 100 or older. In 1966, they gave out a few hundred. But after 46 straight years of adding centenarians to the population, including adding 32,000 in just the last year, there are over 65,000 people in Japan over 100 years old. While this is a small percentage, it is a marker for serious economic problems.

Over 25% of all Japanese are over 65. For decades Japan has had only 1.4 births per woman, a full third less than the necessary 2.1 to keep a population from shrinking. That means today there are only 3 people in Japan for every “retiree.” So a very large percentage of the population are no longer economically productive. They no longer are creating income, spending and growing the economy. With only 3 people to maintain every retiree, the national cost to maintain the ageds’ health and well being soon starts becoming an enormous tax, and economic strain.

What’s worse, by 2060 demographers expect that 40% of Japanese will be 65+. Think about that – there will be almost as many over 65 as under 65. Who will cover the costs of maintaining this population? The country’s infrastructure? Japan’s defense from potentially being overtaken by neighbors, such as China? How does an economy grow when every citizen is supporting a retiree in addition to themselves?

aging-populationGovernment policies had a lot to do with creating this aging trend. For example in China there was a 1 child per family policy from 1978 to 2015 – 37 years. The result is a massive population of people born prior to 1978 (their own “baby boom”) who are ready to retire. But there are now far fewer people available to replace this workforce. Worse, the 1 child policy also caused young families to abort – or even kill – baby girls, thus causing the population to skew heavily male, and reduce the available women to reproduce.

This means that China’s aging population problem will not recover for several more decades. Today there are 5 workers for every retiree in China. But there are already more people exiting China’s workforce than entering it each year. We can easily predict there will be both an aging, and a declining, population in China for another 40 years. Thus, by 2040 (just 24 years away) there will be only 1.6 workers for each retiree. The median age will shift from 30 to 46, making China one of the planet’s oldest populations. There will be more people over age 65 in China than the entire populations of Germany, Japan, France and Britain combined!

While it is popular to discuss an emerging Chinese middle class, that phenomenon will be short-lived as the country faces questions like – who will take care of these aging people? Who will be available to work, and grow the economy? To cover health care costs? Continued infrastructure investment? Lacking immigration, how will China maintain its own population?

“OK,” American readers are asking, “that’s them, but what about us?” In 1970 there were about 20M age 65+ in the USA. Today, 50M. By 2050, 90M. In 1980 this was 11% of the population. But 2040 it will be over 20% (stats from Population Reference Bureau.)

While this is a worrisome trend, one could ask why the U.S. problem isn’t as bad as other countries? The answer is simply immigration. While Japan and China have almost no immigration, the U.S. immigrant population is adding younger people who maintain the workforce, and add new babies. If it were not for immigration, the U.S. statistics would look far more like Asian countries.

Think about that the next time it seems appealing to reduce the number of existing immigrants, or slow the number of entering immigrants. Without immigrants the U.S. would be unable to care for its own aging population, and simultaneously unable to maintain sufficient economic growth to maintain a competitive lead globally. While the impact is a big shift in the population from European ancestry toward Latino, Indian and Asian, without a flood of immigrants America would crush (like Japan and China) under the weight of its own aging demographics.

Like many issues, what looks obvious in the short-term can be completely at odds with a long-term solution. In this case, the desire to remove and restrict immigration sounds like a good idea to improve employment and wages for American citizens. And shutting down trade with China sounds like a positive step toward the same goals. But if we look at trends, it is clear that demographic shifts indicate that the countries that maximize their immigration will actually do better for their indigenous population, while improving international competitiveness.

Demographic trends are incredibly accurately predictable. And they have enormous implications for not only countries (and their policies,) but companies. Do your forward looking plans use demographic trends to plan for:

  • maintaining a trained workforce?
  • sourcing products from a stable, competitive country?
  • having a workplace conducive to employees who speak English as a second language?
  • a workplace conducive to religions beyond Christianity?
  • investing in more capital to produce more with fewer workers?
  • products that appeal to people not born in the USA?
  • selling products in countries with growing populations, and economies?
  • paying higher costs for more retirees who live longer?

Most planning systems, unfortunately, are backward-looking. They bring forward lots of data about what happened yesterday, but precious few projections about trends. Yet, we live in an ever changing world where trends create important, large shifts – often faster than anticipated. And these trends can have significant implications. To prepare everyone should use trends in their planning, and you can start with the basics. No trend is more basic than understanding demographics.

Why Investors Should Support the Tesla, SolarCity Merger

Why Investors Should Support the Tesla, SolarCity Merger

In early August Tesla announced it would be buying SolarCity. The New York Times discussed how this combination would help CEO Elon Musk move toward his aspirations for greater clean energy use. But the Los Angeles Times took the companies to task for merging in the face of tremendous capital needs at both, while Tesla was far short of hitting its goals for auto and battery production.

Since then the press has been almost wholly negative on the merger. Marketwatch’s Barry Randall wrote that the deal makes no sense. He argues the companies are in two very different businesses that are not synergistic – and he analogizes this deal to GM buying Chevron. He also makes the case that SolarCity will likely go bankrupt, so there is no good reason for Tesla shareholders to “bail out” the company. And he argues that the capital requirements of the combined entities are unlikely to be fundable, even for its visionary CEO.

musk-tesla-solarcityFortune quotes legendary short seller Jim Chanos as saying the deal is “crazy.” He argues that SolarCity has an uneconomic business model based on his analysis of historical financial statements. And now Fortune is reporting that shareholder lawsuits to block the deal could delay, or kill, the merger.

But short-sellers are clearly not long-term investors. And there is a lot more ability for this deal to succeed and produce tremendous investor returns than anyone could ever glean from studying historical financial statements of both companies.

GM buying Chevron is entirely the wrong analogy to compare with Tesla buying SolarCity. Instead, compare this deal to what happened in the creation of television after General Sarnoff, who ran RCA, bought what he renamed NBC.

The world already had radio (just as we already have combustion powered cars.) The conundrum was that nobody needed a TV, especially when there were no TV programs. But nobody would create TV programs if there were no consumers with TVs. General Sarnoff realized that both had to happen simultaneously – the creation of both demand, and supply. It would only be by the creation, and promotion, of both that television could be a success. And it was General Sarnoff who used this experience to launch the first color televisions at the same time as NBC launched the first color programming – which fairly quickly pushed the industry into color.

Skeptics think Mr. Musk and his companies are in over their heads, because there are manufacturing issues for the batteries and the cars, and the solar panel business has yet to be profitable. Yet, the older among us can recall all the troubles with launching TV.

Early sets were not only expensive, they were often problematic, with frequent component failures causing owners to take the TV to a repairman. Often reception was poor, as people relied on poor antennas and weak network signals. It was common to turn on a set and have “snow” as we called it – images that were far from clear. And there was often that still image on the screen with the words “Technical Difficulties,” meaning that viewers just waited to see when programming would return. And programming was far from 24×7 – and quality could be sketchy. But all these problems have been overcome by innovation across the industry.

Yes, the evolution of electric cars will involve a lot of ongoing innovation. So judging its likely success on the basis of recent history would be foolhardy. Today Tesla sells 100% of its cars, with no discounts. The market has said it really, really wants its vehicles. And everybody who is offered electric panels with (a) the opportunity to sell excess power back to the grid and (b) financing, takes the offer. People enjoy the low cost, sustainable electricity, and want it to grow. But lacking a good storage device, or the inability to sell excess power, their personal economics are more difficult.

Electricity production, electricity storage (batteries) and electricity consumption are tightly linked technologies. Nobody will build charging stations if there are no electric cars. Nobody will build electric cars if there are not good batteries. Nobody will make better batteries if there are no electric cars. Nobody will install solar panels if they can’t use all the electricity, or store what they don’t immediately need (or sell it.)

This is not a world of an established marketplace, where GM and Chevron can stand alone. To grow the business requires a vision, business strategy and technical capability to put it all together. To make this work someone has to make progress in all the core technologies simultaneously – which will continue to improve the storage capability, quality and safety of the electric consuming automobiles, and the electric generating solar panels, as well as the storage capabilities associated with those panels and the creation of a new grid for distribution.

This is why Mr. Musk says that combining Tesla and SolarCity is obvious. Yes, he will have to raise huge sums of money. So did such early pioneers as Vanderbilt (railways,) Rockefeller (oil,) Ford (autos,) and Watson (computers.) More recently, Steve Jobs of Apple became heroic for figuring out how to simultaneously create an iPhone, get a network to support the phone (his much maligned exclusive deal with AT&T,) getting developers to write enough apps for the phone to make it valuable, and creating the retail store to distribute those apps (iTunes.) Without all those pieces, the ubiquitous iPhone would have been as successful as the Microsoft Zune.

It is fair for investors to worry if Tesla can raise enough money to pull this off. But, we don’t know how creative Mr. Musk may become in organizing the resources and identifying investors. So far, Tesla has beaten all the skeptics who predicted failure based on price of the cars (Tesla has sold 100% of its production,) lack of range (now up to nearly 300 miles,) lack of charging network (Tesla built one itself) and charging time (now only 20 minutes.) It would be shortsighted to think that the creativity which has made Tesla a success so far will suddenly disappear. And thus remarkably thoughtless to base an analysis on the industry as it exists today, rather than how it might well look in 3, 5 and 10 years.

The combination of Tesla and SolarCity allows Tesla to have all the components to pursue greater future success. Investors with sufficient risk appetite are justified in supporting this merger because they will be positioned to receive the future rewards of this pioneering change in the auto and electric utility industries.

Trump vs. Clinton – Which Party Is Better for the Economy?

Trump vs. Clinton – Which Party Is Better for the Economy?

Donald Trump has been campaigning on how poorly America’s economy is doing. Yet, the headlines don’t seem to align with that position. Today we learned that U.S. household net worth climbed by over $1trillion in the second quarter. Rising stock values and rising real estate values made up most of the gain. And owners’ equity in their homes grew to 57.1%, highest in over a decade. Simultaneously this week we learned that middle-class earnings rose for the first time since the Great Recession, and the poverty rate fell by 1.2 percentage points.

Gallup reminded us this month that the percentage of Americans who perceive they are “thriving” has increased consistently the last 8 years, from 48.9% to 55.4%. And Pew informed us that across the globe, respect for Americans has risen the last 8 years, doubling in many countries such as Britain, Germany and France – and reaching as high as 84% favorability in Isreal.

successful-presidencyMeanwhile Oxford Economics projected that a Republican/Trump Presidency would knock $1trillion out of America’s economy, and lower the GDP by 5%, mostly due to trade and tax policies. These would be far-reaching globally, likely not only creating a deep recession in America, but quite possibly the first global recession. But a Clinton Presidency should maintain a 1.5%-2.3% annual GDP growth rate.

I thought it would be a good idea to revisit the author of “Bulls, Bears and the Ballot Box,” Bob Deitrick. Bob contributed to my 2012 article on Democrats actually being better for the economy than Republicans, despite popular wisdom to the contrary.

AH – Bob, there are a lot of people saying that the Obama Presidency was bad for the economy. Is that true?

Deitrick – To the contrary Adam, the Obama Presidency has economically been one of the best in modern history. Let’s start by comparing stock market performance, an indicator of investor sentiment about the economy using average annual compounded growth rates:
DJIA S&P 500 NASDAQ
Obama 11.1% 13.2% 17.7%
Bush -3.1% -5.6% -7.1%
Clinton 16.0% 15.1% 18.8%
Bush 4.8% 5.3% 7.5%
Reagan 11.0% 10.0% 8.8%

As you can see, Democrats have significantly outperformed Republicans. If you had $10,000 in an IRA, during the 16 years of Democratic administrations it would have grown to $72,539. During the 16 years of Republican administrations it would have grown to only $14,986. That is almost a 5x better performance by Democrats.

Obama’s administration has recovered all losses from the Bush crash, and gained more. Looking back further, we can see this is a common pattern. All 6 of the major market crashes happened under Republicans – Hoover (1), Nixon (2), Reagan (1) and Bush (2). The worst crash ever was the 58% decline which happened in 17 months of 2007-2009, during the Bush administration. But we’ve had one of the longest bull market runs in Presidential history under Obama. Consistency, stability and predictability have been recent Democratic administration hallmarks, keeping investors enthusiastic.

AH – But what about corporate profits?

Deitrick – During the 8 years of Reagan’s administration, the best for a Republican, corporate profits grew 26.82%. During the last 8 years corporate profits grew 55.79%. It’s hard to see how Mr. Trump identifies poor business conditions in America during Obama’s administration.

AH – What about jobs?

Deitrick – Since the recession ended in September, 2010 America has created 14,226,00 new jobs. All in, including the last 2 years of the Great Recession, Obama had a net increase in jobs of 10,545,000. Compare this to the 8 years of George W. Bush, who created 1,348,000 jobs and you can see which set of policies performed best.

AH – What about the wonkish stuff, like debt creation? Many people are very upset at the large amount of debt added the last 8 years.

Deitrick – All debt has to be compared to the size of the base. Take for example a mortgage. Is a $1million mortgage big? To many it seems huge. But if that mortgage is on a $5million house, it is only 20% of the asset, so not that large. Likewise, if the homeowner makes $500,000 a year it is far less of an issue (2x income) than if the homeowner made $50,000/year (20x income.)

The Reagan administration really started the big debt run-up. During his administration national debt tripled – increased 300%. This was an astounding increase in debt. And the economy was much smaller then than today, so the debt as a percent of GDP doubled – from 31.1% to 62.2%%. This was the greatest peacetime debt increase in American history.

During the Obama administration total debt outstanding increased by 63.5% – which is just 20% of the debt growth created during the Reagan administration. As a percent of GDP the debt has grown by 28% – just about a quarter of the 100% increase during Reagan’s era. Today we have an $18.5trillion economy, 4 to 6 times larger than the $3-$5trillion economy of the 1980s. Thus, the debt number may appear large, but it is nothing at all as important, or an economic drag, as the debt added by Republican Reagan.

Digging into the details of the Obama debt increase (for the wonks,) out of a total of $8.5trillion added 70% was created by 2 policies implemented by Republican Bush. Ongoing costs of the Afghanistan war has accumulated to $3.6trillion, and $2.9trillion came from the Bush tax cuts which continued into 2003. Had these 2 Republican originated policies not added drastically to the country’s operating costs, debt increases would have been paltry compared to the size of the GDP. So it hasn’t been Democratic policies, like ACA (Affordable Care Act), or even the American Reinvestment and Recovery Act which has led to home values returning to pre-crisis levels, that created recent debt, but leftover activities tied to Republican Bush’s foray into Afghanistan and Republican policies of cutting taxes (mostly for the wealthy.)

Since Reagan left office the U.S. economy has grown by $13.5trillion. 2/3 of that (67%) happened during Clinton and Obama (Democrats) with only 1/3 happening during Bush and Bush (Republicans.)

AH – What about public sentiment? Listening to candidate Trump one would think Americans are extremely unhappy with President Obama.

Deitrick – The U.S. Conference Board’s Consumer Confidence Index was at a record high 118.9 when Democrat Clinton left office. Eight years later, ending Republican Bush’s administration, that index was at a record low 26.8. Today that index is at 101.1. Perhaps candidate Trump should be reminded of Senator Daniel Patrick Moynihan’s famous quote “everyone is entitled to his own opinion, but not to his own facts.”

Candidate Trump’s rhetoric makes it sound like Americans live in a crime-filled world – all due to Democrats. But FBI data shows that violent crime has decreased steadily since 1990 – from 750 incidents per 100,000 people to about 390 today. Despite the rhetoric, Americans are much safer today than in the past. Interestingly, however, violent crime declined 10.2% in the second Bush’s 8 year term. But during the Clinton years violent crime dropped 34%, and during the Obama administration violent crime has dropped 17.8%. Democratic policies of adding federal money to states and local communities has definitely made a difference in crime.

Despite the blistering negativity toward ACA, 20million Americans are insured today that weren’t insured previously. That’s almost 6.25% of the population now with health care coverage – a cost that was previously born by taxpayers at hospital emergency rooms.

AH – Final thoughts?

Deitrick – We predicted that the Obama administration would be a great boon for Americans, and it has. Unfortunately there are a lot of people who obtain media coverage due to antics, loud voices, and access obtained via wealth that have spewed false information. When one looks at the facts, and not just opinions, it is clear that like all administrations the last 90 years Democrats have continued to be far better economic stewards than Republicans.

It is important people know the facts. For example, it would have kept an investor in this great bull market – rather than selling early on misplaced fear. It would have helped people to understand that real estate would regain its lost value. And understand that the added debt is not a great economic burden, especially at the lowest interest rates in American history.

[Author’s note: Bob Deitrick is CEO of Polaris Financial Partners, a private investment firm in suburban Columbus, Ohio. His firm uses economic and political tracking as part of its analysis to determine the best investments for his customers – and is proud to say they have remained long in the stock market throughout the Obama administration gains. For more on their analysis and forecasts contact PolarsFinancial.net]