What Business Leaders Can Learn From Bitcoin Fanatics

What Business Leaders Can Learn From Bitcoin Fanatics

On August 15, Bitcoin rose to $4,000, I wrote a column about the crypto-currency. At the time, I thought Bitcoin was reasonably obscure, and I doubted there would be many readers. I was amazed when the column went semi-viral, and it has had almost 350,000 reads. But even more amazing was that the column generated an enormous amount of feedback. From email responses to Facebook remarks and Tweets I was inundated with people who, largely, wanted my head.

I found this confounding and fascinating. Why would an article that simply said a crypto-currency was speculative draw such an enormous response? And why such hostility? Just as I had not anticipated much readership, I certainly did not anticipate the reaction. These factors led me to research Bitcoin owners, and develop some theories on why Bitcoin is such a big deal to its enthusiasts.

1 – Bitcoin owners want the value to increase

I made the mistake of thinking of Bitcoins as a form of cash. Something to be spent. But I discovered most owners are holding Bitcoins as an asset. Because there are technical limits on how many Bitcoins can be created, and how quickly, these owners see the possibility of Bitcoin value increasing. As “investors” in Bitcoins, they don’t want anything (like a negative column) to put a damper on Bitcoin’s ability to rise.

Such speculation is not uncommon. Many people buy land, gold, silver and diamonds because they expect limited supply, and growing demand, to cause the value to rise. Other people buy Andy Warhol prints, vintage automobiles, signatures of historical people or baseball cards for the same reason. I prefer to call this speculation, but these people refer to themselves as investors in rare assets. Bitcoin investors see themselves in this camp, only they think Bitcoins are less risky than the other assets.

Regardless the nomenclature, anyone who is buying and holding Bitcoins would be unhappy to hear that the asset is risky, or potentially a bad holding. But unlike all those other items I mentioned, Bitcoins are not physical. To some extent merely owning the other assets has a certain amount of its own reward. One can enjoy a diamond ring, or a Warhol print on the wall while waiting to learn if its value goes up or down. But Bitcoins are just computer 1s and 0s, and really a new kind of asset (crypto-currency.) These investors are considerably younger on average, a bit more skittish, and considerably more outspoken regarding the future of their investment – and those who would be negative on Bitcoins.

While wanting their asset value to rise makes sense, it is rare that speculators have been as passionate as those who responded on Bitcoin. I’ve written about many companies I feared would lose value, and thus were speculative, but those columns did not create the fervor with responses like those regarding Bitcoin

2 – Confusion between Bitcoin and Blockchain technology

Blockchain is the underlying technology upon which Bitcoins are created. I have now read a few hundred articles on Bitcoins and Blockchain.

I was struck at just how confusing authors on these topics can be. They will say the two are very different, but then go on at great length that if you believe in Blockchain you should believe in Bitcoins. Few columns on Blockchain don’t talk about Bitcoins. And all Bitcoin authors talk about the wonders of Blockchain.

There is no doubt that Blockchain technology is new to the scene, and shows dramatic promise. Many large organizations are investigating using Blockchain for uses from financial transaction clearing to medical record retention. This is serious technology, and as it matures there are a great many people working to make it as trustworthy as (no, more trustworthy than) the internet. Just as the web requires some rules about URLs, domain naming, page serving, data accumulation, site direction, etc. there are serious people thinking about how to make Blockchain consistent in its application and use – which could open the door for many opportunities to streamline the digital world and make our lives better, and possibly more secure.

There were many, many people who disliked my skeptical view of Bitcoins, and based their entire argument for Bitcoinvalue on their belief in Blockchain. I was schooled over and again on the strength of Blockchain and its many future applications. And I was told that Blockchain technology inherently meant that Bitcoins have to go up in value. Buying Bitcoins was frequently referred to as investing in “Internet 2.0” due to the Blockchain technology.

It is clear that without Blockchain you could not have Bitcoins. But the case demanding one owns Bitcoin because it is built on Blockchain (“the technology of the future” as it is referred to by many) is still being developed. To them I was the one who was confused, unable to see the future they saw built on Blockchain. There were hoards of people who were almost religious in their Bitcoin faith, indicating that there was yet still more underlying their passion.

3 – As trust in government declines, there is growing trust in technology

More than ever in modern history, people have little faith in their government. In the USA, favorable opinions of Congress and its leaders are nearly non-existent. And favorable opinions for the current President started out below normal, and have gotten considerably worse. It is reported now with some regularity that Americans have little trust in the President, Congress, Courts – and the Federal Reserve.

There were, literally, hundreds of people who sent messages talking about the failure of government based currencies. Most of these examples were South American, but still these people made the point, loudly and clearly, that governments can affect the value of their currency. Thus, these Bitcoin investors had lost faith in all government backed securities, including the U.S. dollar, euro, yen, etc. They believed, fervently, that only a currency based on technology, without any government involvement, could ever maintain its value.

Today if someone is asked to give personal information for a census on their city, county, state or country they will often refuse. They want nothing to do with giving additional information to their government.

But these same people allow Facebook, Google and Amazon to watch their most private communications. Facebook records their emotions, their personal interactions, friends, complaints and a million other things going on in users’ lives to develop profiles of what is interesting to them in order to send along newsfeeds, information and ads. Google has recorded every search everyone has ever done, and analyzes those to develop profiles of each person’s interests, concerns, desires and hundreds of other categories to match each with the right ad. Amazon watches every product search made, and everything purchased to profile each person in order to push them the right products, entertainment, news and ads. And they all sell these profiles, and a lot of other personal information, to a host of other companies who do credit ratings, develop credit card offerings and push their own items for sale.

People who have no faith at all in government, and don’t believe government entities can make their lives better, leave their cookies on because they trust these tech companies to use technology to make their lives better. They believe in technology. Are these folks losing privacy? Maybe, but they see a direct benefit to what the technology operated by these tech companies can do for their lives.

For them, Bitcoin represents a future without government. And that clearly drives passion. Blockchain is a bias free, regulator free technology platform. Bitcoin is a government free form of currency, unable to be manipulated by the Federal Reserve, Exchequer of the currency, European Central Bank, Congress, Presidents, the G7, or anyone else. For the vocal Bitcoin owners, they see in Bitcoin a new future with far less government involvement, based on Blockchain technology. And they trust technology far more than they trust the current systems. They claim to not be anarchists, but rather believers in technology over human government, and in some instances even religion.

Leadership lessons from my Bitcoin journey

Often we try to explain away feedback, especially negative feedback or feedback that is hard to interpret, with easy answers. Such as, “they just want their asset to go up in value.” That is a big mistake. If the feedback is strong, it is really worth digging harder to understand why there is passion. Never forget that every piece of negative feedback is a chance to learn and grow. It is almost always worth taking the time to really understand not only what is being said, but why it is being said. There could be a lot more to the issue than face value.

If things are confusing, it is important to sort out the source of the confusion. If I’m talking about a currency, why do they keep talking about the technology? Saying “they don’t get it” misses the point that maybe “you don’t get it.” It is worth digging into the confusion to try and really understand what motivates someone. Only by listening again and again and again, and trying to really see their point of view, can you come to understand that what you think is confusing, to them is not. They aren’t confused, they see you as confused. Until you resolve this issue, both parties will keep talking right past each other.

You cannot lead if you do not understand what other people value. Their belief system may not match yours, and thus they are reaching very different conclusions when looking at the same “facts.” While I may trust the Fed and the ECB, and even banks, if others don’t then they may well have a very different view of the future.

When leaders lose the faith of those they are supposedly leading, unexpected outcomes will occur. Leaders cannot lead people who don’t trust them. Using the power of their office to force their will on others, and forcing conformance to existing processes, methods and systems can often lead to strong negative reactions. People may have no choice short-term but to do as instructed, but they may well be plotting (investing) longer term in a very different future. Failing to see the passion with which they are seeking that different future will only cause the leadership gap to widen, and shorten the time to a disruptive event.

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Understand Growth Stalls So You Can Avoid GM, JCPenney and Chipotle

Understand Growth Stalls So You Can Avoid GM, JCPenney and Chipotle

Companies, like aircraft, stall when they don’t have enough “power” to continue to climb.
Everybody wants to be part of a winning company.  As investors, winners maximize portfolio returns.  As employees winners offer job stability and career growth.  As communities winners create real estate value growth and money to maintain infrastructure.  So if we can understand how to avoid the losers, we can be better at picking winners.
It has been 20 years since we recognized the predictive power of Growth Stalls.  Growth Stalls are very easy to identify.  A company enters a Growth Stall when it has 2 consecutive quarters, or 2 successive quarters vs the prior year, of lower revenues or profits.  What’s powerful is how this simple measure indicates the inability of a company to ever grow again.

Only 7% of the time will a company that has a Growth Stall  ever grow at greater than 2%/year.  93% of these companies will never achieve even this minimal growth rate.  38% will trudge along with -2% to 2% growth, losing relevancy as it develops no growth opportunities.  But worse, 55% of companies will go into decline, with sales dropping at 2% or more per year.  In fact 20% will see sales drop at 6% or more per year.  In other words, 93% of companies that have a Growth Stall simply will not grow, and 55% will go into immediate decline.

Growth Stalls happen because the company is somehow “out of step” with its marketplace.  Often this is a problem with the product line becoming less desirable.  Or it can be an increase in new competitors.  Or a change in technology either within the products or in how they are manufactured.  The point is, something has changed making the company less competitive, thus losing sales and/or profits.

Unfortunately, leadership of most companies react to a Growth Stall by doubling down on what they already do.  They vow to cut costs in order to regain lost margin, but this rarely works because the market has shifted.  They also vow to make better products, but this rarely matters because the market is moving toward a more competitive product.  So the company in a Growth Stall keeps doing more of the same, and fortunes worsen.

 But, inevitably, this means someone else, some company who is better aligned with market forces, starts doing considerably better.

This week analysts at Goldman Sachs lowered GM to a sell rating.  This killed a recent rally, and the stock is headed back to $40/share, or lower, values it has not maintained since recovering from bankruptcy after the Great Recession.  GM is an example of a company that had a Growth Stall, was saved by a government bailout, and now just trudges along, doing little for employees, investors or the communities where it has plants in Michigan.

tesla going up a hill

Tesla- enough market power to gain share “uphill”?

By understanding that GM, Ford and Chrysler (now owned by Fiat) all hit Growth Stalls we can start to understand why they have simply been a poor place to invest one’s resources.  They have tried to make cars cheaper, and marginally better.  But who has seen their fortunes skyrocket?  Tesla.  While GM keeps trying to make a lot of cars using outdated processes and technologies Tesla has connected with the customer desire for a different auto experience, selling out its capacity of Model S sedans and creating an enormous backlog for Model 3.  Understanding GM’s Growth Stall would have encouraged you to put your money, career, or community resources into the newer competitor far earlier, rather than the no growth General Motors.

This week, JCPenney’s stock fell to under $3/share.  As JCPenney keeps selling real estate and clearing out inventory to generate cash, analysts now say JCPenney is the next Sears, expecting it to eventually run out of assets and fail. Since 2012 JCP has lost 93% of its market value amidst closing stores, laying off people and leaving more retail real estate empty in its communities.

In 2010 JCPenney entered a Growth Stall.  Hoping to turn around the board hired Ron Johnson, leader of Apple’s retail stores, as CEO.  But Mr. Johnson cut his teeth at Target, and he set out to cut costs and restructure JCPenney in traditional retail fashion.  This met great fanfare at first, but within months the turnaround wasn’t happening, Johnson was ousted and the returning CEO dramatically upped the cost cutting.

The problem was that retail had already started changing dramatically, due to the rapid growth of e-commerce.  Looking around one could see Growth Stalls not only at JCPenney, but at Sears and Radio Shack.  The smart thing to do was exit those traditional brick-and-mortar retailers and move one’s career, or investment, to the huge leader in on-line sales, Amazon.com.  Understanding Growth Stalls would have helped you make a good decision much earlier.

This recent quarter Chipotle Mexican Grill saw analysts downgrade the company, and the stock took another hit, now trading at a value not seen since the end of 2012.  Chipotle leadership blamed bad results on higher avocado prices, temporary store closings due to hurricanes, paying out damages due to a “one time event” of hacking, and public relations nightmares from rats falling out of a store ceiling in Texas and a norovirus outbreak in Virginia.  But this is the typical “things will all be OK soon” sorts of explanations from a leadership team that failed to recognize Chipotle’s Growth Stall.

chipotle employeesPrior to 2015, Chipotle was on a hot streak.  It poured all its cash into new store openings, and the share price went from $50 from the 2006 IPO to over $700 by end of 2015; a 14x improvement in 9 years.  But when it was discovered that ecoli was in Chipotle’s food the company’s sales dropped like a stone.  It turned out that runaway growth had not been supported by effective food safety processes, nor effective store operations processes that would meet the demands of a very large national chain.

But ever since that problem was discovered, management has failed to recognize its Growth Stall required a significant set of changes at Chipotle.  They have attacked each problem like it was something needing individualized attention, and could be rectified quickly so they could “get back to normal.”  And they hoped to turn around public opinion by launching nationwide a new cheese dip product in 2017, despite less than good social media feedback on the product from early customers. They kept attempting piecemeal solutions when the Growth Stall indicated something much bigger was engulfing the company.

What’s needed at Chipotle is a recognition of the wholesale change required to meet customer demands amidst a shift to more growth in independent restaurants, and changing millennial tastes.  From the menu options, to app ordering and immediate delivery, to the importance of social media branding programs and customer testimonials as well as demonstrating commitment to social causes and healthier food Chipotle has fallen out-of-step with its marketplace.  The stock has now lost 66% of its value in just 2 years amidst sales declines and growth stagnation.

We don’t like to study losers.  But understanding the importance of Growth Stalls can be very helpful for your career and investments.  If you identify who is likely to do poorly you can avoid big negatives.  And understanding why the market shifted can lead you to finding a job, or investing, where leadership is headed in the right direction.

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The Three Steps GE Should Take Now – And The Lessons For Your Business

The Three Steps GE Should Take Now – And The Lessons For Your Business

Monitor displays General Electric Co. (GE) at the New York Stock Exchange (NYSE) October, 2017. Photographer: Michael Nagle/Bloomberg

For years I have been negative on GE’s leadership.  CEO Immelt led the dismantling of the once-great GE, making it a smaller company and one worth quite a bit less.  The process has been devastating to many employees who lost their jobs, pensioners who have seen their benefits shrivel, communities with GE facilities that have suffered from investment atrophy, suppliers that have been squeezed out or displaced and investors that have seen the value of GE shares plummet.

But now there is a new CEO, a new leadership team and even some new faces on the Board of Directors.  Some readers have informed me that it is easier to attack a weak leader than recommend a solution, and they have inquired as to what I think GE should do now.  I do not see the GE situation as hopeless.  The company still has an enormous revenue base, and vast assets it can use to fund a directional shift.  And that’s what GE must do – make a serious shift in how it allocates resources.

Step 1 – Apply the First Rule of Holes

The first rule of holes is “when you find yourself in a hole, stop digging.”  (Will Rogers, 1911) This seems simple.  But far too many companies have their resourcing process on auto-pilot.  Businesses that have not been growing, and often are not producing good returns on investment, continue to receive funding.  Possibly because they are a legacy business that nobody wants to stop.  Or possibly because leadership remains ever hopeful that tomorrow will somehow look like yesterday and the next round of money, or hiring, will change things to the way they were.

In fact, these businesses are in a hole, and spending more on them is continuing to dig.  The investment hole just keeps getting bigger.  The smart thing to do is just stop.  Quit adding resources to a business that’s not adding value to the market capitalization.  Just stop investing.

Will rogers, american humorist

When Steve Jobs took over Apple he discontinued several Macintosh models, and cut funding for Macintosh development.  The Mac was not going to save Apple’s declining fortunes.  Apple needed new products for new markets, and the only way to make that happen was to stop putting so much money into the Mac business.

When streaming emerged CEO Reed Hastings of Netflix quit spending money on the traditional DVD/Video distribution business even though Netflix dominated it.  He even raised the price.   Only by stopping investments in traditional distribution could he turn the company toward streaming.

Step 2 – Identify the Trend that will Guide Your Strategy

All growth strategies build on trends.  After receiving funding from Microsoft to avoid bankruptcy in 2000, Apple spent a year deciding its future lied in building on the trend to mobile.  Once the trend was identified, all product development, and new product introductions, were targeted at being a leader in the mobile trend.

When the internet emerged GE CEO Jack Welch required all business units to create “DestroyYourBusiness.com” teams.  This forced every business to look at the impact the internet would have on their business, including business model changes and emergence of new competitors.  By focusing on the internet trend GE kept growing even in businesses not inherently thought of as “internet” businesses.

GE has to decide what trend it will leverage to guide all new growth projects.  Given its large positions in manufacturing and health care it would make sense to at least start with IoT opportunities, and new opportunities to restructure America’s health care system.  But even if not these trends, GE needs to identify the trend that it can build upon to guide its investments and grow.

Step 3 – Place Your Bets and Monetize

When Facebook CEO Mark Zuckerberg realized the trend in communications was toward pictures and video he took action to keep users on the company platform.  First he bought Instagram for $1 billion, even though it had no revenues.  Two years later he paid $19 billion for WhatsApp, gaining many new users as well as significant OTT technology.  Both seemed very expensive acquisitions, but Facebook rapidly moved to increase their growth

chess pieces and cash

and monetize their markets.  Leaders of the acquired companies were given important roles in Facebook to help guide growth in users, revenues and profits.

Netflix leads the streaming war, but it has tough competition.  So Netflix has committed spending over $6billion on new original content to keep customers from going to Amazon Prime, Hulu and others.  This large expenditure is intended to allow ongoing subscriber growth domestically and internationally, as well as raise subscription prices.

This week CVS announced it is planning to acquire Aetna Health for $66 billion.  On the surface it is easy to ask “why?” But quickly analysts offered support for the deal, ranging from fighting off Amazon in prescription sales to restructuring how health care costs are paid and how care is delivered.  The fact that analysts see this acquisition as building on industry trends gives support to the deal and expectations for better future returns for CVS.

During the Immelt era, there were attempts to grow, such as in the “water business.”  But the investments were not consistent, and there was insufficient effort placed on understanding how to monetize the business short- and long-term.  Leadership did not offer a compelling vision for how the trends would turn into revenues and profits.  Acquisitions were made, but lacking a strong vision of how to grow revenues, and an outsider’s perspective on how to lead the trend, very quickly short-term financial metrics built into GE’s review process led to bad decisions crippling these opportunities for growth.  And today the consensus is that GE will likely sell its healthcare businessrather than make the necessary investments to grow it as CVS is doing.

Successful leadership means moving beyond traditional financial management to invest for growth

In the Welch era, GE made dozens of acquisitions.  These were driven by a desire to build on trends.  Welch did not fear investing in growth businesses, and he held leaders’ feet to the fire to produce successful results.  If they didn’t achieve goals he let the people and/or the business go.  Hence his nickname “Neutron Jack.”

For example, although GE had no background in entertainment, GE bought NBC at a time when viewership was growing and ad prices were growing even faster.  This led to higher revenues and market cap for GE.  On the other hand, when leaders at CALMA did not anticipate the shift in CAD/CAM from dedicated workstations to PCs, Welch saw them overly tied to old technology and unable to recognize the trend, so he immediately sold the business.  He invested in businesses that added to valuation, and sold businesses that lacked a clear path to building on trends for higher value.

Being a caretaker, or steward, is no longer sufficient for business leadership.  Competitors, and markets, shift too quickly.  Leaders must anticipate trends, reduce investments in products, services and projects that are off the trend, and put resources to work where growth can create higher returns.

This is all possible at GE – if the new leadership has a vision for the future and starts allocating resources effectively.  For now, all we can do is wait and see……
will rogers quote: Even if you're on the right track you'll get run over if you just sit there.

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The Only Surprise At GE Was That Anyone Was Surprised

The Only Surprise At GE Was That Anyone Was Surprised

GE Sign in Schenectady, NY- Hearst Newspapers

General Electric announced quarterly results this week, and and they were pretty bad.  Profits were nowhere near expectations, and the company lowered expectations for the year.  Cash flow was also disappointing, not even strong enough to cover the dividend.  Now analysts are really negative on company prospects, and most expect the dividend to be cut.

Meanwhile the new CEO, John Flannery, is admitting to horrible results as he removes most of the previous CEO’s top execs in a leadership housecleaning.  He is promising to cut costs dramatically, and sell off an additional $20billion of businesses in order to restore a higher level cash flow.  And according to the AP, Flannery will make faster progress toward “returning GE to its industrial roots.”

In other words, CEO Flannery continues the strategy of making GE smaller, and a less hospitable workplace, that his predecessor Immelt started implementing 16 years ago.  That’s the strategy that has seen GE lose ~45% of its value since Immelt took the top job, and lose over 60% of its value since peaking at $60 in 2000.  So far, GE just keeps shrinking in size, and value, and leadership gives no indication it has a plan to grow GE revenues and profits in future markets building on major market trends.

GE logo at plant in Hungary, 2017, Bloomberg

In other words, CEO Flannery continues the strategy of making GE smaller, and a less hospitable workplace, that his predecessor Immelt started implementing 16 years ago.  That’s the strategy that has seen GE lose ~45% of its value since Immelt took the top job, and lose over 60% of its value since peaking at $60 in 2000.  So far, GE just keeps shrinking in size, and value, and leadership gives no indication it has a plan to grow GE revenues and profits in future markets building on major market trends.

 What’s most surprising is that people seem surprised by the horrible current performance, and surprised that GE is in such terrible condition.  All the way back in December, 2010 this column highlighted selections for CEO of the year, and CEO of the decade, and in doing so pointed out that GE’s Immelt was on nobody’s list.  Even though his predecessor, Jack Welch, was widely lauded.

Immelt inherited one of America’s strongest, fastest growing and most valuable companies.  But in the first few years of his leadership the company completely failed to maintain Welch’s gains, and under Immelt’s mismanagement nearly went bankrupt by not preparing for the near-collapse of financial services in the Great Recession. It was obvious then that Immelt was trying to be a “caretaker” of GE, a “steward” of its history.  But he was not an effective leader with plans for a growing future, and competitors were beating up GE in all markets.  Even upstarts like Facebook, and its CEO Mark Zuckerberg, were far outperforming the stagnating, declining GE.

 By May, 2012 it was impossible to miss the mismanagement at GE.  This column selected CEO Immelt as the 4th worst CEO of all publicly traded American companies (beaten in badness by Mike Duke of WalMart who was pushed out during allegations of international bribery and fraud, Ed Lampert of Sears who has now completely destroyed the once great retailer, and Steve Ballmer of Microsoft who over-invested in Windows and Office while missing every major tech development of the last 15 years before being forced out by the board.)  By 2012 it was time for the Board of Directors to take action and replace Immelt.  But few investors amplified this column’s cries for change, and quiet complacency set in as people simply expected GE to perform better.  Just because it was GE, it appeared, as there were no signs the company understood market trends and how to ignite growth.

Of course, performance did not improve at GE.  By April, 2015 GE was the victim of a total leadership failure.  The company was not developing any major new trends, and Immelt’s focus was on unraveling old businesses, mostly via sales to external parties, in order to increase cash.   And the cash was used for share buybacks and dividends, rather than investing in growth. A slow, and badly implemented, liquidation of one of America’s oldest, and greatest, companies was underway.

Which made GE a target for activist investors, and Trian Funds took up the challenge, investing $1.5B in GE stock and taking a seat on the GE board.  Finally, it was time for action. Immelt was pushed out and Flannery was put in, and dramatic cuts and re-organizations led the discussions. Current appearances indicate GE will be significantly dismantled, assets will be sold, and in short order GE will look nothing like the great company it once was.

But, the question remains, why did things have to become so bad before the board took action? Why were people surprised?  Why didn’t Jim Cramer scream for a leadership housecleaning 7, 5 or 3 years ago?  Why didn’t shareholders vote against CEO compensation plans on the “say-on-pay” measures, exerting their voice to change a lackluster board that was allowing an incompetent CEO to remain in the job? Why wasn’t the pension fund, constantly whittling away at retiree benefits, forcing change?  Why were so many people, so many leaders, so quiet about what was an obvious business failure? A failure that needed to be addressed, first and foremost, by replacing the CEO?

So GE’s stock value has taken a big hit of late. And now people seem surprised by the admission of how bad things really are.  What’s really surprising is that people are surprised. This was not hard to see coming.

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The Waltons Are Cashing Out Of Walmart — And You Should Be, Too

The Waltons Are Cashing Out Of Walmart — And You Should Be, Too

Employees restock shelves of school supplies at a Walmart Stores Inc. location in Burbank, CA.  Bloomberg

Last week there was a lot of stock market excitement regarding WalMart. After a “favorable” earnings report analysts turned bullish and the stock jumped 4% in one day, WMT’s biggest rally in over a year, making it a big short-term winner.  But the leadership signals indicate WalMart is probably not the best place to put your money.

WalMart has limited growth plans

WalMart is growing about 3%/year.  But leadership acknowledged it was not growing its traditional business in the USA, and only has plans to open 25 stores in the next year.  It hopes to add about 225 internationally, predominantly in Mexico and China, but unfortunately those markets have been tough places for WalMart to grow share and make profits.  And the company has been plagued with bribery scandals, particularly in Mexico.

And, while WalMart touts its 40%+ growth rate on-line, margins online (including the free delivery offer) are even lower than in the traditional Wal-Mart stores, causing the company’s gross margin percentage to decline.  The $11.5 billion on-line revenue projection for next year is up, but it is 2.5% of Walmart’s total, and a mere 7-8% of Amazon’s retail sales.  Amazon remains the clear leader, with 62% of U.S. households having visited the company in the second quarter.  And it is not a good sign that WalMart’s greatest on-line growth is in groceries, which amount to 26% of on-line salesalready.  WalMart is investing in 1,000 additional at-store curb-side grocery pick-uplocations, but this effort to defend traditional store sales is in the products where margins are clearly the lowest, and possibly nonexistent.

It is not clear that WalMart has a strategy for competing in a shrinking traditional brick-and-mortar market where Costco, Target, Dollar General, et.al. are fighting for every dollar.  And it is not clear WalMart can make much difference in Amazon’s giant on-line market lead.  Meanwhile, Amazon continues to grow in valuation with very low profits, even as it grows its presence in groceries with the Whole Foods acquisition.  In the 17 months from May 10, 2016 through October 10, 2017 WalMart’s market cap grew by $24 billion (10%,) while Amazon’s grew by $174 billion (57%.)

Even after recent gains for WalMart, its market capitalization remains only 53% of its much smaller on-line competitor.  This creates a very difficult pricing problem for WalMart if it has to make traditional margins in order to keep analysts, and investors, happy.

Leadership is not investing to compete, but rather cashing out the business

To understand just how bad this growth problem is, investors should take a look at where WalMart has been spending its cash.  It has not been investing in growing stores, growing sales per store, nor really even growing the on-line business.  From 2007-2016 WalMart spent a whopping $67.3 billion in share buybacks.  That is over 20 times what it spent on Jet.com.  And it was 45% of total profits during that timeframe.  Additionally WalMart paid out $51.2 billion in dividends, which amounted to 34% of profits.  Altogether that is $118.5 billion returned to shareholders in the last decade.  And a staggering 79% of profits.  It shows that WalMart is really not investing in its future, but rather cashing out the company by returning money to shareholders.

 “Say on pay” votes are often seen as a measure of how happy investors are with a company.  The average disapproval level on executive pay is 4.3%.  At Target, Macy’s and Kroger the disapproval is 6.1%, 6.3% and 6.9%.  Investors, however, disapprove of the compensation for WalMart’s leaders at a whopping 16.7%; nearly 4x the average and 2.5x its competition.
So very large investors, who control huge voting blocks, recognize that things are not going well at WalMart.  But, because of the enormity of the share buybacks, the Walton family now controls over half of WalMart stock.  That makes it tough for an activist to threaten shaking up the company, and lets the Waltons determine the company’s future.

Buybacks signal Strategy

Walmart annual meeting 2014, walmart.com

With WalMart’s announcement last week that it intends to spend another $20 billion on additional share repurchases, the Walton family’s strategy is clear.  They are cashing out the business.  As money comes in they are going to continue spending little on the traditional business, and in no way do they intend to invest at a level to really chase Amazon on-line.

There will be marginal enhancements.  But the vast majority of the money is being returned to them, via $20 billion in share repurchases and $1.5 billion in cash dividends annually.

Amazon spends nothing on share repurchases.  Nor does it distribute cash to shareholders via dividends.  Amazon’s largest shareholder, Jeff Bezos, invests all the company money in new growth opportunities.  These nearly cover the retail landscape, and increasingly are in other growth markets like cloud services, software-as-a-service and entertainment.  Comparing the owners of these companies, quite clearly Bezos has faith in Amazon’s ability to invest money for profitable future growth.  But the Waltons are far less certain about the future success of WalMart, so they are pulling their money off the table, allowing investors to put their money in ventures outside WalMart.

Investing your money, do you think it is better to invest where the owner believes in the future of his company?

Or where the owners are cashing out?

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Colbert Beat Fallon By Following Trends, Which Will Make CBS More Money

Colbert Beat Fallon By Following Trends, Which Will Make CBS More Money

Photo: NEW YORK, NY – FEBRUARY 19: Writers and crew of ‘The Late Show with Stephen Colbert’ attend 69th Writers Guild Awards New York Ceremony at Edison Ballroom on February 19, 2017 in New York City. (Photo by Nicholas Hunt/Getty Images)

The Late Show hosted by Stephen Colbert is now the #1 program in late night television.  This come-from-far-behind change in market leadership, overtaking The Tonight Show hosted by Jimmy Fallon, is not about politics.  It is about understanding trends and using them to create value.

Back in February, 2014 there was real concern about the future of late night television.  Audiences had peaked decades before, when Nightline was huge and competed with The Tonight Show hosted by legend Johnny Carson. By 2014 many wondered if American programming after the late news was all shifting to cable TV as audiences continued shrinking.  Producers replaced Jay Leno with Jimmy Fallon in order to revitalize viewers.  Jimmy Kimmel was moved up in time as ABC killed Nightline, hoping he could carve out a growing niche.  And David Letterman, late night’s senior statesman, was about to be replaced by cable satirist Stephen Colbert.  But these changes gathered little industry interest, because the time slots simply were not doing well for broadcasters – or advertisers.

Fallon maintained a dominant lead in the time slot as Colbert’s first year was a yawner.

As TheWrap.com reported in September, 2016, despite the fanfare of Colbert taking over hosting, he “posed no threat whatsoever to Jimmy Fallon.”  Fallon’s show maintained a huge lead. With 3.65 million viewers it bested The Late Show by over 800,000.  Colbert, with 2.82 million viewers seemed mostly trying to keep a lead over Kimmel’s 2.3 million viewers.
But, as the New York Times headlined on May 17, 2017 “Jimmy Fallon Was On Top of the World. Then Came Trump.”  During 2016 viewers were engaged in the knock-down-drag-out political battle for the Presidency.  In an effort to build on political interest, Fallon’s producers invited Donald Trump on the show.  Unfortunately, most people viewed Mr. Fallon’s interview as fluff, and given the heat of the rhetoric the critics tore into Fallon hard for an interview that fell far short of its possibilities.  Some considered it a turning point, an interview from which Fallon has yet to recover his full audience following.
jimmy fallon inteviews trump 2016 Getty
ANDREW LIPOVSKY/NBC/NBCU PHOTO BANK VIA GETTY IMAGES

Meanwhile the producers at The Late Show kept their eyes on the mood of the electorate.

They had largely let Colbert promote Democrat Clinton, and even though she lost the election noted she had won the popular vote.  As Colbert continued to criticize the President, his audience grew.  Soon, Colbert was beating Fallon in total audience – something nobody predicted just a few months earlier.  It was quite a surprise when the 2016-2017 September to May season drew to a close and it was discovered that Colbert actually won the time slot, producing a larger total audience than Fallon.  It was only about 20,000 – but it was a win few saw coming.

The Late Show writers and producers noted the historic and growing unpopularity of President Trump, and the public interest in ongoing investigations, and built the headlines into the show.  Variety headlined on 7/25/17 “Stephen Colbert’s Russia Week Lofts Late Show to Biggest Weekly Win Ever.”  Using audience trends The Late Showdevoted a week to a comical look at Russia, which saw it generate a 2.87million total audience in comparison to The Tonight Show‘s 2.42million – a beat of a whopping 450,000 viewers.

late show hillary 2017 CBS
Photo: CBS
Continuing to evaluate what interested the public, producers brought on losing candidate Hillary Clinton, long supported by the show, to create Colbert’s largest audience since launch.  The next night they brought on President Trump’s former Communications Director, Republican and Trump supporter Anthony Scaramucci, to an even bigger audience.  By August 4 Colbert bested Fallon by 900,000 viewers for its biggest weekly win ever, and Colbert was clearly the summer winner with an audience growing at 11% while competitors were losing viewers.

All of this is very good news for CBS.

NBC (NBC/Universal is a division of Comcast) is not losing money on The Tonight Show.  And in the desirable segment of those age 18-49 Fallon still has the largest audience.  But, it is a good thing for CBS to have so many new viewers.  It brings in more advertisers, and higher revenues for each ad.   This leads to more profits.

One might say that this is all about the hosts, and their political leanings.  Maybe the content is driven by host opinions.  But CBS is winning viewers because it is following trends, and matching its programming to trends.  This is growing its late night audience, while NBC’s is shrinking.

Steve Burke, chief executive of NBC Universal was quoted in the New York Times saying “I think the answer is for Jimmy to be Jimmy.”  Sounds like what a father might say about his son when the boy finds himself in a rough patch.  But I’m not so sure its the position a company CEO should take regarding a very expensive employee in the lead of a major project.

Maybe NBC’s producers should spend more time looking at trends, and figuring out how to program content that will improve The Tonight Show‘s competitiveness.  The show was upended in just one year.  What will total audience look like next May when the 2017-2018 season ends?  Will revenues and profits be unaffected if NBC’s audience keeps falling while CBS’s keeps growing?

For the rest of us, the lesson should be clear.  Nobody is relegated to always being #2.  Regardless the leader’s size, if you study trends and figure out how to leverage them you can grow, and you can become #1.

 Understanding trends and applying them to your business is the best way to invigorate growth and improve your competitiveness.

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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.