by Adam Hartung | Dec 22, 2011 | In the Swamp, Leadership, Lifecycle, Web/Tech
It’s a wise person who knows never to be the last person at a business holiday party. Things never go well for those who stay too late.
Yet, far too many businesses stay way, way too long at their market party, focusing on the same strategy when they should have moved into new competition a whole lot earlier.
This week Oracle missed earnings estimates, and the stock fell some 14%, from $30 to under $26. For the year, Oracle is down about a third, from it’s high of $37. The question any investor needs to ask is the one headlined by ZDnet.com “Oracle Earnings: An Aberration or Trend?“
Oracle is very, very poorly positioned for future earnings growth. Like most big software companies, including Microsoft and SAP, Oracle built its business on the formula of large data centers running large “enterprise applications” supporting lots of independent corporate PC users.
And it was clear fully a year (or 2) ago that market simply isn’t growing. Organizations are rapidly shifting away from hard to use, one-size-fits-all (at very high cost) enterprise software applications. Users are moving away from PCs to mobile devices, and refusing to use clunky enterprise interfaces. Worse, software is moving away from data centers in client-server configurations tied to PCs. Instead, companies small and large are rapidly shifting to software-as-service (SAS) environments where the company can pay “by the use” for software maintained in the “cloud.” These solutions are scalable, cheaper to buy, cheaper to implement, vastly more flexible and operate on mobile devices a whole lot better. If you’ve ever used Salesforce.com you’ve experienced the benefit compared to more clunky enterprise Customer Resource Management (CRM) applications.
Oracle missed this trend. Despite all the dozens of acquisitions Oracle has made – such as buying Unix hardware provider Sun Microsystems, it largely missed the shift to cloud architectures. It has remained far, far too long at its party, enjoying the profit-laden punch, and hoping the market would never shift. As the customer base shrank to fewer, and ever larger, big corporations Oracle did not prepare for changes in its business the next day. Oracle has stayed too long, and its ability to compete in new markets against more flexible solution providers such as IFS with better user interface capabilities looks really weak.
Somehow, Best Buy fell into the same trap. In early December the country’s largest “big box” retailer announced lower earnings after cutting prices to shore up revenues. As a result the stock dropped 20%, from about $28 to $22 – continuing a pretty much downhill slide all year of nearly 40% from its high of $36.
Best Buy felt like it was doing great after Circuit City failed. Circuit City had been a darling of the infamous “Good to Great” text. But Circuit City demonstrated that in a market dominated by a long-term trend away from fixed stores and toward on-line purchases, every retailer is bound to struggle.
When Circuit City failed in 2008 investors worried that a weak economy would tank Best Buy as well. But as all that Circuit City capacity disappeared, Best Buy was a short-term winner.
Unfortunately, Best Buy leadership confused short-term sales re-allocation with long-term trends. They, along with a lot of other locked-in brick-and-mortar retailers, felt that things would quickly “return to normal” and Circuit City was the company caught out in the cold when the music stopped. Best Buy chose to stay at its party too long – hoping the dancing would never stop. Its leaders chose to ignore the long-term trend away from traditional retail toward on-line shopping. No wonder BusinessInsider.com headlined a famed investor “Marc Andreessen: Retailers Should Be Scared About 2012.”
What’s surprising is how many people in business think the party will simply never end. That everyone can keep drinking and dancing and rolling in the profits. Even when the trends are obvious.
This 2011 holiday season, every business team should be asking itself “are we staying at the party too long? What trends are affecting our business – and likely to bring this party to a crashing end? What are we doing to prepare for a tough competition tomorrow.”
If you don’t, it’s far too easy you could end up on the downhill slide, with one heck of a horrible hangover – like Oracle and Best Buy – in 2012.
by Adam Hartung | Dec 12, 2011 | Defend & Extend, In the Rapids, In the Swamp, Leadership
Revenue growth is a wonderful thing. It is so much more fun to work in a growing company than one that isn’t. And high growth is possible, even in this struggling economy, if leaders focus on trends.
Take for example Chipotle. Whether you eat there or not, Chipotle has grown rather spectacularly. From 16 units in 1998 it grew to 500 by 2005 and has 1,100 company owned and operated stores today. Revenues have more than doubled since 2005, to about $2B, while sales/store increased almost 12% in 2010. And investors have been well rewarded, with a market cap increase of 6x in the last 5 years!
Chart source Yahoo.com 12.12.11
Chipotle hit on a trend it called “Food with Integrity.” While that is far from explicit, Chipotle has made a practice of talking about being “natural.” Chipotle often buys local produce for its units, claims to use “natural” meat, presumably with fewer additives, and brags about having no hormones in its dairy products. Such claims have tied into customer trends for better nutrition, higher food safety and improved taste. This allows Chipotle to grow in the most intensely competitive of industries, even during a struggling economic time.
Compare this with McDonald’s. This is not a random selection, as McDonald’s was a 1998 investor in Chipotle, and put around $360M into the chain fueling early growth. McDonald’s was handsomely rewarded for this, receiving around $1.5B (4x) return on its investment when selling Chipotle to the public in 2006.
At the time, McDonald’s was in a horrible situation. It’s stock had dropped from a high of $50 in 2000 to a low of $14 in 2004. McDonald’s took the money from the Chipotle sale and invested all of it in new capital expenditures to defend the McDonald franchise. The good news was that “turnaround” worked and McDonald’s has recaptured its value, roughly doubling market capitalization the last 5 years.
One could consider both of these success stories, unless you look deeper.
Chipotle increased its valued by 6x, McDonald’s by 2x – so investors in the former did fully 3x better than the latter. And where Chipotle is expected to increase the number of its stores by at least another 1/3 in the next few years, McDonald’s struggles to find growth markets. Clearly, investors that swapped their McDonald’s stock for Chipotle’s stock in 2006 did far better – and have prospects of continuing to do even better still with at least some analysts expecting Chipotle to hit $400/share within a year, for another 20% pop.
Source: Yahoo.com 12.12.11
McDonald’s strategy was built on a 1960s trend for speed and consistency in food. That trend served McDonald’s well for 2 decades, but is far less interesting today. In its effort to generate revenues recently McDonald’s brought us a re-introduced 20 year old product called McRib this October – a product who’s ingredients have people asking questions about health and safety (TheWeek.com “What’s the McRib made of, anyway?) as we learn its mostly high fat pig innards and salt. While McDonald’s has recovered from 2004, is it a platform for growth?
Chipotle is using trends to find new products, new marketing themes, and even a new store concept, Shophouse Southeast Asian Grill, for organic growth. Where McDonald’s is fixated on defending its historical business irrespective of trends, Chipotle is busy investing in current trends.
One has to wonder, what if instead of selling Chipotle, McDonald’s leadership had turned upside down? What if all that management attention had gone into exploding Chipotle’s footprint faster? Introducing even more products? And what if McDonald’s had accepted the trends propelling Chipotle growth and applied them to McDonald’s to give that chain a different customer value proposition and real new products?
McDonald’s could have acted more like Apple. Where McDonald’s has at its core fried meat sandwiches and deep fried potatoes, Apple had its “core” the Macintosh. But instead of investing its resources into defending its core, Apple invested in new products and markets where the trend was more favorable. As a result its market cap grew by 4.5x during the last 5 years, compared to the more subdued 2x at McDonalds – and Apple demonstrated that even very large market cap companies can grow at very high rates when they adopt growth strategies tied to trends.
Source: Yahoo.com 12.12.11
There are a lot of businesses struggling to grow today. But most aren’t really trying. They keep doing more of what they’ve always done, and hoping for a better result! They don’t accept that trends go in new directions, causing markets to shift. When markets shift, those who follow the trends do far better than those stuck trying to defend their past strategies. It’s smart to act like, and invest in, Chipotle while avoiding the rut that is McDonald’s.
by Adam Hartung | Dec 6, 2011 | Current Affairs, In the Whirlpool, Leadership, Transparency
There are few organizations as efficient as the U.S. Postal Service. Really. But it is still going out of business.
Think about the Post Office’s value proposition. They send someone to almost every single home and business in the entire United States 6 days/week on the hope that there will be a demand for their service – sold at a starting price of 44 cents! For that mere $.44 they will deliver your hand crafted, signed message anywhere else in the entire United States! And, if you want it delivered fairly close they will actually deliver your physical document the very next day! All for 44 cents! And, if you are a large volume customer rates can be even cheaper.
And the Post Office has been a remarkably operationally innovative organizations. Literally billions of items are processed every week (about 700million/day😉 picked up, sorted and distributed across one of the physically largest countries in the world. The distance from Anchorage to Miami (let’s ignore Hawaii for now) is a staggering 5,100 miles, which works out to a miniscule .009 cent/mile for a first class letter! Compare that to the Pony Express cost (in 1860 $10/oz and 10 days Missouri to California,) and adjusted for inflation you’ll be hard pressed to find any business that has continually improved its service, at ever lower (constantly declining when adjusted for inflation) prices.
And while AMR is filing bankruptcy largely to force a new union contract, the Post Office has accomplished its record improvements wtih an almost entirely union workforce.
Executive compensation is surprisingly low. The CEO makes about $800,000/year. Competitor CEOs make much more. At Fedex (the Post Office delivers more items every day that Fedex does in a whole year) the CEO made over $7,400,000, and at UPS (the Post Office delivers more items each week than UPS does annually) the CEO made $9,500,000. So, despite this remarkable effectiveness, the CEO makes only about 1/10th CEOs of much smaller organizations.
The Post Office understands what it must do, and does it extremely efficiently. It knows its “hedgehog concept” and relentlessly pursues it to unparalleled performance. Yet, it is barred from raising prices, is losing money, and is now planning to close 3,700 locations and dramatically curtail services – such as overnight and Saturday delivery in a radical cost reduction effort.
Simply put, the U.S. Postal Service is becoming irrelevant. In the 1980s faxing was the first attack on the mail, but the big market shift began 15 years ago with the advent of email. Now with mobile devices, texting and social media the shift away from physical letters is accelerating. Fewer people write letters, send bills or even pay bills via physical mail. Are you mailing any physical holiday cards this year? How many?
Even the veritable “junk mail” is far less viable these days. Coupons are used less and less – and to the extent they are used they have to be much more immediate and compelling – such as offerings from GroupOn and FourSquare et.al. which arrive at consumers by email and social media usually through a smartphone or tablet mobile device.
The Post Office didn’t really do anything wrong. The market shifted. The Post Office value proposition simply isn’t as valuable. We don’t really care if the mail delivery comes daily, in fact many people forget to check their mailbox for several consecutive day. We don’t much care that a physical letter can transit the continent overnight, because we usually want to communicate immediately. And we don’t need a physical legacy for 99.99% of our communications.
The Post Office is really good at what it does, we just don’t need it. Not any more than we need a good horse shoe or small offset printing press.
The Post Office saw this coming. Over a decade ago the Post Office asked if it could enter new businesses in record retention (medical, income, taxation), automated bill payment, social security check administration and a raft of other opportunities that would provide government delivery and storage services to various agencies and to under-served users such as low-income and the elderly. But its mandate did not include these services, and expansion into new markets required a change in charter which was not approved by Congress. Thus, USPS was stuck doing what it has always done, as market shift pushed the Post Office increasingly into irrelevancy.
And that’s what happens to most failed businesses. They don’t fail because they are lousy at execution. Or because of lousy, inattentive managers. Or even because of unions and high variable costs such as energy. They fall into trouble because they either don’t recognize, or for some other reason don’t move to take advantage of market shifts. It’s not a lack of focus, management laziness or worker intransigence that kills the business. It’s an inability to do what customers really want and value, and spending too much time and money trying to ever optimize something customers increasingly don’t care about.
To their credit, both FedEx and UPS have shifted their businesses along with the market. Both do much, much more than deliver packages. Fedex bought Kinko’s and offers people their “office away from the office” globally, as well as multiple small business solutions. UPS offers a vast array of corporate transportation and logistics services, including e-commerce solutions for businesses of all sizes. Their ability to move with markets, and meet emerging needs has helped both companies justify higher prices and earn substantially better profitability.
The U.S. Post Office is the poster child for what goes wrong when all a company does is focus on efficiency. More, better, faster, cheaper is NOT enough to compete. Being operationally efficient, even low-cost, is not enough to succeed in fast shifting markets where customers have ever-growing and changing needs. Leadership has to be able to recognize market shifts early, and invest in new growth opportunities allowing the company to remain viable in changing markets.
My generation will wax nostalgic about the post office. We’ll weave in “mail” stories with others about days before ubiquitious air conditioning, when all we had was AM radio in the car and 3 stations of black & white television stations at home. They will be fun to reminisce.
But our children, and certainly grandchildren, simply won’t care. Not at all. And we better remember to keep the stories short, so they can be related in 140 characters or less if we want them saved for posterity!
by Adam Hartung | Dec 1, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Travel
Airline company AMR, owner of popular American Airlines, filed bankruptcy this week. To which most people responded “again?” The reaction was less about AMR, which is having a first-time filing, and more about airline bankruptcies overall. People are simply used to airlines failing.
Most people are so used to everything about airlines sucking that news a major filed bankruptcy simply wasn’t surprising. What they cared most about were two questions: “Is my ticket any good?” and “Do I get to keep my frequent flyer miles?”
Conceptually, business is not hard to understand. Create a product or service that people want. Make it appealing enough so people will pay enough to cover costs and make a profit, allowing you to re-invest in growth and repay your investors. Pretty simple.
But AMR, like most airlines, simply doesn’t understand this concept. Yes, people want to fly. But ever since deregulation, service has become worse and worse. Ask anyone what they think of American (or United or Delta or any “major” airline) and answers are the same. They hate them.
- Pricing is incomprehensible. You may pay $800 for a ticket, and the person beside you $200 and the reason is completely unclear.
- There is never enough room on the plane for all the carry-on luggage, but that is free while the airline charges for checking bags. What they don’t want (carry-ons) is free, what they want (check your bags) requires you pay?
- You are charged for a checked bag, but if the bag is late, damaged or items stolen you have no recourse to the airline
- When planes are late or cancelled, nobody cares how much customers are inconvenienced. Literally. You have no recourse to bad, or failed, service.
- Planes are cramped and dirty, often looking well worn – or worn out.
- Every year planes are becoming smaller and less comfortable.
- The food is gone – or wildly expensive. And that little botttle of rum costs as much as a fifth at home.
- Empllyees appear uncaring at best, or simply rude. It’s like there are way too many customers, and not enough of them, so “PLEASE stay back and do what we tell you to do!”
This list could go on forever (readers, feel free to comment on your favorite stupid policy or practice of any airline.) Why? Because the airline’s leaders have completely lost track of what business is all about. In the rush to cut prices, trying to sell that last empty seat on that midnight feeder flight to Omaha, the entire industry has driven out all the customer satisfaction, and profitability. Everyone has learned that it doesn’t matter how much you pay, the experience is going to suck. So the industry has taught customers to be price sensitive, above all else.
Shortly after deregulation Robert Crandall became AMR’s Chairman. He was a notorious cost cutter. The Wall Street Journal ran a front page article highlighting his efforts to build American, highlighting how on a flight Mr. Crandall noticed that few customers were eating the 3 black olives on their salad. He claimed to go back to company managers and tell them to remove the olives, thereby saving (ostensibly) $700,000/year. Nobody would notice, he claimed, and money was saved.
And that’s been the trajectory for American ever since. Cut this, cut that. Shave costs everywhere, including employee pay, benefits and pensions. And after 30 years, the sum total is that not only are the olives gone – the whole meal has disappeared! Where working at an airline was once considered a great job (pilot, flight attendant, gate agent or baggage handler, ) today compensation has been cut and complicated (remember tiered compensation that has 2 people doing the same job, but at different pay just because of hire date?) so that employees are largely overworked, under-appreciated and constantly being pushed by management one direction, while pulled by customers in another.
Where once we didn’t mind flying, maybe even enjoyed it,now everyone thinks of flying as the opportunity to learn what life is like as herded, and penned, livestock!
It has been a fallacy of “modern management” that leaders have a primary job to optimize the business – largely by limiting innovation and cutting costs. The famous business guru, Jim Collins (author of Good to Great,) actively advocates (IndustryWeek.com 11/29/2011) that businesses focus exactly on the kind of business optimization that has driven AMR to bankruptcy! His recommendations have inevitably lead businesses down a road of commoditization as they offer less and less to customers, and fall into vicious price wars. Ineveitably a market shift happens that undercuts their ability to compete at all!
Great companies do not fall into this trap. They constantly add customer value, utilizing new technology and business processes to improve performance. They grow revenues, rather than focus on cutting costs.
Think about how Google has made doing research easier, and placing internet advertisements. Or how Apple has improved personal music and mobile information access. Or how Whole Foods has delivered more organic and tasty products. Or how Amazon has made access to books, periodicals and much of retailing a better experience. These companies have seen their market capitalization explode as they eschewed optimization in favor of innovation to make things better – not just cheaper. Where AMR’s value went from $40/share to zero the last 5 years, you would have had big gains in these companies that focused on innovation and delivering better customer results.
Chart Source Yahoo 1 December, 2011
AMR’s leaders, and airline industry analysts, can try to put perfume on this bankruptcy pig by saying it is a “strategic action” taken to re-align costs (CuriousCapitalist.com.) That’s code for union-busting, in yet one more effort to ignore the real problem of no innovation. Rather than actually improve the airline this is more of the same old strategy – cut more olives (cost,) chasing the spiral yet further down toward even worse performance.
It’s time to be honest. AMR’s bankruptcy is a failure. Leadership’s inability to address customer needs well enough to price at a profit. Gimmicks like loyalty programs, bag charges, reservation fees, change fees, seat location fees and drink charges merely obscure the fact that the leaders cannot profitably run an airline! Their service is so poor that they cannot charge enough to cover costs. Continuing to cut costs, further hindering service, is NOT the answer in a service industry!
It certainly is prossble to make money in service industries. Most do. It is even possible to make money as an airline – just look at Southwest (which has made more profit than all its [much larager] competitors combined.) And the first step is for AMR to recognize that its strategy for 30 years is wrong! The company needs to end the cost-price spiral and introduce some innovation! Change the game AMR, or you’ll forever remain a crappy company for investors, customers and employees.
by Adam Hartung | Nov 28, 2011 | Books, Defend & Extend, Disruptions, In the Rapids, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
Not far from each other, in the area around Seattle, are two striking contrasts in leadership. They provide significant insight to what creates success today.
Steve Ballmer leads Microsoft, America's largest software company. Unfortunately, the value of Microsoft has gone nowhere for 10 years. Steve Ballmer has steadfastly defended the Windows and Office products, telling anyone who will listen that he is confident Windows will be part of computing's future landscape. Looking backward, he reminds people that Windows has had a 20 year run, and because of that past he is certain it will continue to dominate.
Unfortunately, far too many investors see things differently. They recognize that nearly all areas of Microsoft are struggling to maintain sales. It is quite clear that the shift to mobile devices and cloud architectures are reducing the need, and desire, for PCs in homes, offices and data centers. Microsoft appears years late recognizing the market shift, and too often CEO Ballmer seems in denial it is happening – or at least that it is happening so quickly. His fixation on past success appears to blind him to how people will use technology in 2014, and investors are seriously concerned that Microsoft could topple as quickly DEC., Sun, Palm and RIM.
Comparatively, across town, Mr. Bezos leads the largest on-line retailer Amazon. That company's value has skyrocketed to a near 90 times earnings! Over the last decade, investors have captured an astounding 10x capital gain! Contrary to Mr. Ballmer, Mr. Bezos talks rarely about the past, and almost almost exclusively about the future. He regularly discusses how markets are shifting, and how Amazon is going to change the way people do things.
Mr. Bezos' fixation on the future has created incredible growth for Amazon. In its "core" book business, when publishers did not move quickly toward trends for digitization Amazon created and launched Kindle, forever altering publishing. When large retailers did not address the trend toward on-line shopping Amazon expanded its retail presence far beyond books, including more products and a small armyt of supplier/partners. When large PC manufacturers did not capitalize on the trend toward mobility with tablets for daily use Amazon launched Kindle Fire, which is projected to sell as many as 12 million units next year (AllThingsD.com).
Where Mr. Ballmer remains fixated on the past, constantly reinvesting in defending and extending what worked 20 years ago for Microsoft, Mr. Bezos is investing heavily in the future. Where Mr. Ballmer increasingly looks like a CEO in denial about market shift, Mr. Bezos has embraced the shifts and is pushing them forward.
Clearly, the latter is much better at producing revenue growth and higher valuation than the former.
As we look around, a number of companies need to heed the insight of this Seattle comparison:
- At AOL it is unclear that Mr. Armstrong has a clear view of how AOL will change markets to become a content powerhouse. AOL's various investments are incoherent, and managers struggle to see a strong future for AOL. On the other hand, Ms. Huffington does have a clear sense of the future, and the insight for an entirely different business model at AOL. The Board would be well advised to consider handing the reigns to Ms. Huffington, and pushing AOL much more rapidly toward a different, and more competitive future.
- Dell's chronic inability to identify new products and markets has left it, at best, uninteresting. It's supply chain focused strategy has been copied, leaving the company with practically no cost/price advantage. Mr. Dell remains fixated on what worked for his initial launch 30 years ago, and offers no exciting description of how Dell will remain viable as PC sales diminish. Unless new leadership takes the helm at Dell, the company's future 5 years hence looks bleak.
- HP's new CEO Meg Whitman is less than reassuring as she projects a terrible 2012 for HP, and a commitment to remaining in PCs – but with some amorphous pledge toward more internal innovation. Lacking a clear sense of what Ms. Whitman thinks the world will look like in 2017, and how HP will be impactful, it's hard for investors, managers or customers to become excited about the company. HP needs rapid acceleration toward shifting customer needs, not a relaxed, lethargic year of internal analysis while competitors continue moving demand further away from HP offerings.
- Groupon has had an explosive start. But the company is attacked on all fronts by the media. There is consistent questioning of how leadership will maintain growth as reports emerge about founders cashing out their shares, highly uneconomic deals offered by customers, lack of operating scale leverage, and increasing competition from more established management teams like Google and Amazon. After having its IPO challenged by the press, the stock has performed poorly and now sells for less than the offering price. Groupon desperately needs leadership that can explain what the markets of 2015 will look like, and how Groupon will remain successful.
What investors, customers, suppliers and employees want from leadership is clarity around what leaders see as the future markets and competition. They want to know how the company is going to be successful in 2 or 5 years. In today's rapidly shifting, global markets it is not enough to talk about historical results, and to exhibit confidence that what brought the company to this point will propel it forward successfully. And everyone recognizes that managing quarter to quarter will not create long term success.
Leaders must demonstrate a keen eye for market shifts, and invest in opportunities to participate in game changers. Leaders must recognize trends, be clear about how those trends are shaping future markets and competitors, and align investments with those trends. Leadership is not about what the company did before, but is entirely about what their organization is going to do next.
Update 30 Nov, 2011
In the latest defend & extend action at Microsoft Ballmer has decided to port Office onto the iPad (TheDaily.com). Short term likely to increase revenue. But clearly at the expense of long-term competitiveness in tablet platforms. And, it misses the fact that people are already switching to cloud-based apps which obviate the need for Office. This will extend the dying period for Office, but does not come close to being an innovative solution which will propel revenues over the next decade.
by Adam Hartung | Nov 18, 2011 | Current Affairs, Innovation, Leadership
Both the Tea Party and Occupy Wall Street want to change America. That is where the similarity ends.
The Tea Party is a well organized political machine. It has clear leaders, an agenda, and it has raised substantial money it uses to promote political candidates that support its agenda. It is a marvelous example of how a grass-roots organization can become large, powerful and thrive in today's America. It has created significance – which is no small task!
Occupy Wall Street is so disorganized it doesn't even appear to have specific leadership, or hierarchy. It's even hard to label. OWS participants demonstrate a lot of anger at the status quo, but shows no clear agenda about what they would like done differently. OWS appears to have some ability to raise money for its encampments, demonstrations and legal work, but it does not appear to support any particular candidates, or even any particular regulatory platforms or Congressional issues. Easily enough, one could say it is not significant and deserves little attention.
Just looking at the Republican Presidential campaign, it is pretty clear that the Tea Party is making a difference in what candidates say, and what they do. The Tea Party clearly has impacted the political process. On the other hand, for all the media attention Occupy Wall Street receives, it is completely unclear how OWS affects government at all. Overall, or even in the Democratic party where you would expect progressives to be its best allies.
Yet, I find Occupy Wall Street more interesting than the Tea Party, and there are specific reasons I think everyone should pay attention.
For all its organizing skills, the Tea Party doesn't seem to be growing. Its communication clarity, and its ability to rally supporters, belies the fact that the group isn't becoming any larger. It has a hard core group of supporters, who are quite homogeneous, but it isn't attracting waves of new followers. As a trend, it seems to have plateaued. Whether it will have any impact outside its own relatively small group and enclaves is unclear. We have a way of seeing the same people light up at Sarah Palin speaking gigs, but we don't see much groundswell of endorsements otherwise.
On the other hand, the Occupy Wall Street participants seem to be growing (at least if we track rally participants and arrests!). There are more events, in more cities with each one seeming to bring in larger audiences. Despite incredibly weak traditional "management" OWS is growing participants, which are remarkably diverse. And apparently willing to accept criminal prosecution for their involvement!
People from all ethnicities and age groups – and even income levels – are becoming involved in OWS. It is no longer a "bunch of out of work college kids" as we see more pictures of retirees, blue collar workers, blacks, whites, asians and latinos. Each new police initiative gives us more pictures of people being pepper-sprayed, billyclubbed and dragged away that leads readers to say "that looks a lot like my (cousin, aunt, grandma, uncle, father, etc.) "
And the number of participating cities keeps growing, even becoming international. Occupy Wall Street looks like a trend, even if we don't know exactly what that trend represents! Despite lacking the focus of anti-war protests circa 1964 ("Hey, hey LBJ, how many kids did you kill today?") the events keep growing in number and attendance. – and seem remarkably drug and crime free given that we assume most participants are – well – homeless, unemployed and impoverished.
The Tea Party talks a lot about history. From generalizations about "the way things used to be," to frequent references to the 200+ year old Constitution. It appears to represent replacing the status quo with previous behaviors, including reaching back to the era before Federal income taxes and most regulatory departments – as if American had no recessions or economic problems prior to the Great Depression.
Unfortunately, even as a someone north of 50, I find it hard sometimes to connect what the Constitutional framers meant with the reality of 2011 America. Trying to relate Tea Party generalizations about "limited government" in a world where I'm happy someone assures nuclear power plant security and food safety are hard dots to find a connecting line. Often the headline sounds good ("lower taxes") but the details leave me asking how do we invest in infrastructure to compete with China in 2012?
For those who are under 35, such connections to historical perspectives are a remarkable struggle for relevancy, and appropriateness. These people want are new solutions to today's problems – and those seem to be in short supply from the Tea Party. While OWS folks all know how Ronald Reagan is, he's much less a god than he is just a former President (like Kennedy, Roosevelt, or even Lincoln.)
When reading the Tea Party agenda, there isn't a lot about innovation. For all its Libertarian viewpoints, which followers of Ayn Rand surely enjoy, how America in 2012 is going to increase investments, create jobs and become more competitive in a highly dynamic, global economy against skillful businesses from China, India, Brazil, Russia, etc is remarkably unclear.
Even though supply side economics have been institutionalized since the Reagan era, there are no strong arguments that today's problems would be helped by doing more of the same. Whereas there seems ample arguments that perhaps 30 years of doctrinaire implementation of such practices might have contributed to our current problems.
Regardless of your views on demand versus supply economics, there is a complete dearth of innovation in the Tea Party agenda, which is at the least troubling, if not problematic. How is America to regain its growth agenda by voting into office Tea Party supported candidates?
On the other hand Occupy Wall Street seems to have at its core the notion that insufficient growth is precisely the issue. The "99%" are people who, in a 2011 rendition of Howard Beale from the 1976 movie Network, have people throwing open their windows, sticking out their heads and shouting "I'm Mad As Hell and I'm Not Going to Take this Anymore." Protesters are screaming for innovation. They clearly want more investment, particularly from banks, and more hands-on management of growth to create jobs. Even if they lack any policy recommendations for how to make this happen.
It may sound a little like "mommy, I'm hungry, can you get me something to eat?" which would be naive for a 20-something to say. But with millions of them living on futons in their parent's basements, using mobile phones paid for by parents, desperately in debt with college loans and with no prospects for work — it's a cry worth hearing, don't you think? What is the answer that will allow them to apply their skills, enhance their growth – and buy a house!
The OWS people are genuinely angry. They cannot comprehend why America cannot seem to create more jobs, or provide affordable health care for its citizenry, or even deal effectively with wave after wave of property value declines and foreclosures while those at the top of the economic pyramid seem to keep doing better every year.
Even if the OWS tactics are off-putting to the vast majority, their message does attract a tremendous amount of sympathy. A lot of "regular people" (what Richard Nixon might have called the "silent majority") are asking, "why didn't the bank bailout seem to create jobs? Did we really gain by saving GM? How could we use so much government money, and seemingly still be in the same swamp? Why can't I refinance my house? Why do bankers and CEOs receive $10M bonuses after we bail out their industry?"
America has a growth problem. Has had one for a decade now. An inability to create jobs turned the first decade of this millennium into "the lost decade." For the first time ever, America ended a 10 year span with fewer people working, the stock market lower, wages lower, fewer people insured, interest income non-existent due to low yields and tax receipts down – leading all the largest population states to the edge of bankruptcy and pension-system meltdown. Like post 1995 Japan, America seems to be in a permanent "Great Recession."
And that problem has spilled over into other developed countries, with the Eurozone now struggling to deal with economic stagnation in countries such as Greece, Italy and Spain. Harsh government program belt-tightening in Greece is designed to lower the spending costs closer to revenues, but how that will put the huge number of unworking Greeks, especially younger ones, to work is completely unclear.
Throngs of unworking people in Italy and Spain are hearing that their future, as well, will involve less government assistance. But where any jobs will be created from belt-tightening is simply not addressed.
Occupy Wall Street is easy for a traditionalist to ignore. One could blame their attention on "left wing liberal media." But there's a trend here. Something worth understanding. Unless we invest in innovation to put people to work, this "movement" could become a much more serious social issue.
by Adam Hartung | Nov 11, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Web/Tech
In the back half of the 1990s Apple was clearly on the route to bankruptcy. Sun Micrososystems seriously investigated buying Apple. After a review, leadership opted not to make the acquisition. Sun’s non-officer management, bouyed on rumors of the acquisition, was heartbroken upon hearing Sun would not proceed. When Chairman Scott McNeely was asked at a management retreat why the executive team passed on Apple, he responded with “Do you think you can fix that?”
Sun leadership clearly had answered “no.” Good for a lot of us that Steve Jobs said “yes.”
Sun has largely disappeared, losing 95% of its market cap after 2000 and being acquired by Oracle. Why did Mr. Jobs succeed where the leadership of Sun, which couldn’t save itself much less Apple, feared it would fail?
For insight, look no further than the recent failure of Filene’s Basement (“Filene’s Saga Ends” Boston.com) and its acquirer Sym’s (“Retailers’s Sym’s and Filene’s Go Out of Business” Chicago Tribune.) Most of the time, when a troubled business is acquirerd not only is the buyer unable to fix the poor performer, but investments incurred by the buyer jeapardizes its business to the point of failure as well. Given the track record of corporations at fixing bad businesses, Mr. McNeely was on statistically sound footing to reject buying Apple.
Why is the track record of corporate management so bad at fixing problem businesses? Largely because most of their time is spent tyring to extend the past, rather than create a business which can thrive in the future.
The leadership of Sun didn’t see a future filled with mobile devices for music, movies or telephony. They were fixated on the Unix-based computers Sun built and sold. It was unclear how Apple would help them sell more servers, so it was a management diversion – a “poor strategic fit” – for Sun to acquire a technology intensive, talent rich organization. They passed, stayed focused on Unix servers and high-end workstations, and failed as that market shifted to PC products.
Much is the same for Filene’s Basement. A great brand, Sym’s bought Filene’s in an effort to continue pushing the discount model both Filene’s and Sym’s had historically pursued. Unfortunately, the market for discount department store merchandise was rapidly shifting to higher end middle-market players like Kohl’s, and for deeply discounted goods the internet was making deal shopping a lot easier for everyone. Because management was fixated on the old business, they missed the opportunity to make Filene’s and Sym’s a leader in new retail markets – like Amazon has done.
Remember in 2006 when Western Auto’s leader (and former hedge fund manager) Ed Lampert bought up the bonds of KMart, then used that position to acquire Sears? The market went gaga over the acquisition, heralding Mr. Lampert as a genius. Jim Cramer urged on his television program Mad Money that everyone buy Sears. Now the merged KMart/Sears company has lost much of its value, and 24×7 Wall Street claimed it was the #1 worst performing retail chain (“America’s Eight Worst-Performing Retail Chains“.)
Chart courtesy Yahoo.com 11/11/11 (note vertical scale is logarithmic)
Both KMart and Sears were deeply troubled when Mr. Lampert acquired them. But he largely followed a program of cost cutting, hoping people would return to the stores once he lowered prices. What he missed was a retail market which had shifted to Wal-Mart for the low-end products, and had fragmented into multiple competitors in the mid-priced market leaving Sears Holdings with no compelling value proposition.
Mr. Lampert has turned over management, fired scores of employees, closed stores and largely led both brands to retail irrelevancy. By trying to do more of the past, only better, faster and cheaper he ran into the buzz saw of competitors already positioned in the shifted market and created nothing new for shoppers, or investors.
And that’s why investors need to worry about Home Depot. The company was a shopper and investor darling as it maintained double digit growth through the 1980s and 1990s. But as competition matched, or beat, Home Depot’s prices – and often the capability of in-store help – growth slowed.
The Board replaced the founding leader with a senior General Electric leader named Robert Nardelli. He rapidly moved to operate the historical Home Depot success formula cheaper, better and faster by cutting costs — from employees to store operations and inventory. And customers moved even more quickly to the competition.
As the recessions worsened job growth remained scarce and eventually home values plummeted causing Home Depot’s growth to disappear. The company may be good at what it used to do, but that is simply a more competitive market that is a lot less interesting to shoppers today. Because Home Depot has not shifted into new markets, it is in a difficult situation (and considered the 5th worst performing retailer.) Who cares if you are a competitive home improvement store when your house is only worth 75% of the outstanding mortgage and you can’t refinance?
Chart source Yahoo Finance 11/11/11
And it is worth taking some time to look at Wal-Mart. The chain is famous for its rural and suburban stores selling at low prices, both as Wal-Mart and Sam’s Club. But looking forward, we see the company has failed at everything else it has tried. It’s offshore businesses have never met expectations and the company has left most markets. It’s efforts at more targeted merchandise, upscale stores and smaller stores have all been abandoned. And the company remains a serious lagger in understanding on-line sales as it has continued pouring money into defending its historical business, providing almost no return to investors for a decade.
The market is shifting, competitors have attacked its old “core,” but Wal-Mart remains stuck trying to do more, better, faster, cheaper with no clear sign it will make any difference as people change buying patterns. How can any brick-and-mortar retailer compete on cost with a web page?
Chart Source Yahoo Finance 11/11/11
All markets shift. All of them. Poor performance is most often an indication that the company has not shifted with the market. Competition in lower growth markets leads to weak revenue performance, and declining profits. Trying to “fix” the business by doing more of the same is almost always a money-losing proposition that hastens failure.
It is possble to fix a weak business. Moving with shifting markets into mobile has been very valuable for Apple investors. Two decades ago IBM shifted from hardware sales to a services focus, and the company not only escaped bankruptcy but now is worth more than Microsoft.
“Fixing” requires focusing on the future, and figuring out how to compete in the shifting market. Rather than applying cost-cutting and operational improvement, it is important to determine what future markets value, and deliver that. Zappos figured out that it could take a big lead in footwear and apparel if it offered people on-line convenience, and guaranteed taking back any products customers didn’t want (“What Other Businesses Can Learn from Zappos” CMSWire.com.) It’s sales exploded. Toms Shoes tapped into the market desire for helping others by donating a pair of shoes every time someone bought a pair, and sales are growing in double digits (CNBC video on Tom’s Shoes).
History has taught us to be pessimistic about fixing a troubled business. But that is largely because most management is fixated on trying to defend & extend the past. But turnarounds can be a lot more common if leaders instead focus on the future and meet emerging needs. It simply takes a different approach.
In the meantime, in retail it’s a lot smarter to invest in Amazon and retailers meeting emerging needs than those fixated on cost cutting and operational improvement. Be wary of Sears, Home Depot and Wal-Mart as long as management remains locked-in to its past.
by Adam Hartung | Nov 3, 2011 | Innovation, Leadership, Lock-in, Web/Tech
How much access do your employees have to Facebook, Twitter, Linked-in, GroupOn, FourSquare, and texting in their daily work, on their daily technology devices? Do you encourage use, or do you in fact block access, in the search for greater security, and on the belief that you achieve higher productivity by killing access to these “work cycle stealers?” Do you implement policies keeping employees from using their own technology tools (smartphone or tablet) on the job?
In 1984 the PC revolution was still quite young. Pizza Hut was then a division of PepsiCo (now part of Yum Brands,) and the company was fully committed to a set of mainframe applications from IBM. Mainframe applications, accessed via a “green screen” terminal were used for all document creation, financial analysis, and even all printing. The CIO was very proud of his IBM mainframe data center, and his tight control over the application base and users.
In what seemed like an almost overnight series of events, headquarters employees started bringing small PC’s to work in order to build spreadsheets, create documents and print miscellaneous memos. They found the new technology so much easier to use, and purchase cost so cheap, that their productivity soared and they were able to please their bosses while leaving work on time. A good trade-off.
The CIO went ballistic. “These PCs are popping up like popcorn around here – and we have to kill this trend before it gains any additional momentum!” he decried in an executive meeting. PCs were “toys” that lacked the “robustness” of his mainframe applications. If users wanted higher productivity, then they simply needed to spend more time in training.
Additionally, if he didn’t control access to computing cycles, and activities like printing, employees would go berserk using unnecessary resources on projects they probably should never undertake. He was servicing the corporation by keeping people on a narrow tool set – and it gave the company control over what employees could do as well as how they could do it making sure nothing frivolous was happening. For all these reasons, plus the fact that he could assure security on his mainframe, he felt it important that the CEO and executive team commit with him that PCs would not be allowed in Pizza Hut.
Retrospectively, he looks foolish (and his efforts were unsuccessful.) PCs unleashed a wave of personal productivity that benefitted all early adopters. They not only let employees do their work faster, but it allowed employees to develop innovative solutions to problems – often dramatically lowering overhead costs for many management tasks. PCs, of course, swept through the workplace and in only a decade most mainframes, and their high cost, air conditioned data centers, were gone.
Yet, to this day companies continue to use “best practices” as a tool to stop technology, and productivity improvement, adoption. Managers will say:
- We need to control employee access to information
- We need to keep employees focused on their job, without distractions
- We must control how employees do their jobs so we minimize errors and improve quality
- We need to control employee access externally for security reasons
- We need consistency in our tool set and how it is used
- We made a big investment in how we do things, and we need to leverage that [sunk cost] by forcing greater use
- We need to remember that management are the experts, and it is our job to tell people how to do their jobs. We don’t want the patients running the hospital!
It all sounds quite logical, and good management practice. Yet, it is exactly the road to productivity reduction, innovation assassination and limited growth! Only by allowing employees to apply their skills and best thinking can any company hope to continuously improve its productivity and competitiveness.
But, moving from history and theoretical to today’s behavior, what is happening in your company? Do you have a clunky, hard to use, expensive ERP, CRM, accounting, HR, production, billing, vendor management, procurement or other system (or factory, distribution center or headquarters site) that you still expect people to use? Do you demand people use it – largely for some selection of the 7 items above? Do you require they carry a company PC or Blackberry to access company systems, even as the employee carries their own Android smartphone or iPad with them 24×7?
Recently, technology provider IFS Corporation did a survey on ERP users (Does ERP Mean Excel Runs Production?) Their surprising results showed that new employees (especially under age 40) were very unlikely to take a job with a company if they had to use a complex (usually vendor supplied) interface to a legacy application. In fact, 75% of today’s users are actively seeking – and using – cloud based apps or home grown spreadsheets to manage the business rather than the expensive applications the corporation supplied! Additionally, between 1/3 and 2/3 of employees (depending upon age) were actively seeking to quit and take another job simply because they found the technology of their company hard to use! (CIO Magazine: Employees Refusing to Use Clunky Enterprise Software.)
Unlike managers invested in historical decisions, and legacy assets, employees understand that without productivity their long-term employment is at risk. They recognize that constantly shifting markets, with global competitors, requires the flexibility to apply novel thinking and test new solutions constantly. To succeed, the workforce – all the workforce – needs to be informed, interacting with potential new solutions, thinking and applying their best thoughts to creating new solutions that advance the company’s competitiveness.
That’s why Fast Company recently published something all younger managers know, yet shocks older ones: “Half of Young Professionals Value Facebook Access, Smartphone Options Over Salary.” It surprised a lot of people to learn that employees would actually select access over more pay!
While most older leaders and managers think this is likely because employees want to screw off on the job, and ignore company policies, the article cites a Cisco Connected World Technology Report which describs how these employees value productivity, and realize that in today’s world you can’t really be productive, innovative and generate growth if you don’t have access – and the ability to use – modern tools.
Today’s young workers aren’t any less diligent about work than the previous generation, they are simply better informed and more technology savvy! They think even more long-term about the company’s survivability, as well as their ability to make a difference in the company’s success.
In other words, in 2011 tools like Linked-in, Facebook, Twitter et. al. accessed via a tablet or smartphone are the equivalent of the PC 30 years ago. They give rapid access to what customers, competitors and others in the world are doing. They allow employees to quickly answer questions about current problems, and find new solutions. As well as find people who have tried various options, and learn from those experiences. And they allow the employee to connect with a company problem fast – whether at work or away – and start to solve it! They can access those within their company, vendors, customers – anyone – rapidly in order to solve problems as quickly as possible.
At a recent conference I asked IT leaders for several major airlines if they allowed employees to access these tools. Uniformly, the answer was no. That may be the reason we all struggle with the behavior of airlines, I bemoaned. It might explain why the vast majority of customers were highly sympathetic with the flight attendant that jettisoned a plane through the emergency exit with a beer in hand! At the very least, it is a symptom of the internal focus that has kept the major airlines from pleasing 85% of their customers, while struggling to be profitable. If nobody has external access, how can anybody make anything better?
The best practices of 1975 don’t cut it in 2012. The world has changed. It is more important now than ever that employees have the access to modern tools, and the freedom to use them. Good management today is not about telling people how to do their job, but rather letting them figure out how to do the job best. Implement that practice and productivity and innovation will show themselves, and you’re highly likely to find more growth!
by Adam Hartung | Oct 27, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Innovation, Leadership, Web/Tech
There is a big cry for innovation these days. Unfortunately, despite spending a lot of money on it, most innovation simply isn't. And that's why companies don't grow.
The giant consulting firm Booz & Co. just completed its most recent survey on innovation. Like most analysts, they tried using R&D spending as yardstick for measuring innovation. Unfortunately, as a lot of us already knew, there is no correlation:
"There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues. Many companies — notably, Apple — consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return. Meanwhile, entire industries, such as pharmaceuticals, continue to devote relatively large shares of their resources to innovation, yet end up with much less to show for it than they — and their shareholders — might hope for."
(Uh-hum, did you hear about this Abbott? Pfizer? Readers that missed it might want to glance at last week's blog about Abbott, and why it is a sell after announcing plans to split the company.)
Far too often, companies spend most of their R&D dollars on making their products cheaper, operate better, faster or do more. Clayton Christensen pointed this out some 15 years ago in his groundbreaking book "The Innovator's Dilemma" (HBS Press, 1997). Most R&D, in most industries, and for most companies, is spent trying to sustain an existing technology – not identify or develop a disruptive technology that would have far higher rates of return.
While this is easy to conceptualize, it is much harder to understand. Until we look at a storied company like Kodak – which has received a lot of news this last month.
Kodak invented amateur photography, and was rewarded with decades of profitable revenue growth as its string of cheap cameras, film products and photographic papers changed the way people thought about photographs. Kodak was the world leader in photographic film and paper sales, at great margins, and its value grew exponentially!
Of course, we all know what happened. Amateur photography went digital. No more film, and no more film developing. Even camera sales have disappeared as most folks simply use mobile phones.
But what most people don't know is that Kodak invented digital photography! Really! They were the first to create the technology, and the first to apply it. But they didn't really market it, largely because of fears they would cannibalize their film sales. In an effort to defend & extend their old business, Kodak licensed digital photography patents to camera manufacturers, abandoned R&D in the product line and maintained its focus on its core business. Kodak kept making amateur film better, faster and cheaper – until nobody cared any more.
Of course, Kodak wasn't the first to fall into this trap. Xerox invented desktop publishing but let that market go to Apple, Wintel suppliers and HP printers as it worked diligently trying to defend & extend its copier business. With no click meter on the desktop publishing equipment, Xerox wasn't sure how to make money with it. So they licensed it away.
DEC pretty much created and owned the CAD/CAM business before losing it to AutoCad. Sears created at home shopping, a market now dominated by Amazon. What's your favorite story?
It's a pattern we see a lot. And nowhere worse than at Microsoft.
Do you remember that Microsoft had the Zune player at least as early as the iPod, but didn't bother to develop the technology, or market, letting Apple take the lead in digital music and video devices? Did you remember that the Windows CE smartphone (built by HTC) beat the iPhone to market by years? But Microsoft didn't really develop an app base, didn't really invest in the smartphone technology or market – and let first RIM and later Apple run away with that market as well.
Now, several years too late Microsoft hopes its Nokia partnership will help it capture a piece of that market – despite its still rather apparent lack of an app base or breakthrough advantage.
Microsoft is a textbook example of over-investing in existing technology, in an effort to defend & extend an existing product line, to the point of "over-serving" customer needs. What new extensions do you want from your PC or office software?
Do you remember Clippy? That was the little paper clip that came up in Windows applications to help you do your job better. It annoyed everyone, and was disabled by everyone. A product development that nobody wanted, yet was created and marketed anyway. It didn't sell any additional software products – but it did cost money. That's defend & extend spending.
How much a company spends on innovation doesn't matter, because what's important is what the company spends on real breakthroughs rather than sustaining ideas. Microsoft spends a lot on Windows and Office – it doesn't spend enough on breakthrough innovation for mobile products or games.
And it doesn't spend nearly enough on marketing non-PC innovations. We are already well into the back end of the PC lifecycle. Today more bandwidth is consumed from mobile devices than PC laptops and desktops. Purchase rates of mobile devices are growing at double digits, while companies (and individuals) are curtailing PC purchases. But Microsoft missed the boat because it chose to defend & extend PCs years ago, rather than really try to develop the technology and markets for CE and Zune.
Just look at where Microsoft spends money today. It's hottest innovation is Kinect. But that investment is dwarfed by spending on Skype – intended to extend PC life – and ads promoting the use of PC technologies for families this holiday season.
Unfortunately, there are almost no examples of companies that miss the transition to a new technology thriving. And that's why it is really important to revisit the Kodak chart, and then look at a Microsoft chart.
(Chart 10/27/11)
Do you think Microsoft, after this long period of no value increase, is more likely to go up in value, or more likely to follow Kodak? Unfortunately, there are few companies that make the transition. But there have been thousands that have not. Companies that had very high market share, once made a lot of money, but fell into failure because they invested in better, faster, cheaper rather than innovation.
If you are still holding Kodak, why? If you're still holding Microsoft, Abbott, Kraft, Sara Lee, Sears or Wal-Mart — why?
by Adam Hartung | Oct 19, 2011 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Science
The giant pharmaceutical company Abbott Labs announced today it was splitting itself. Abbott will sell baby formula, supplements (vitamins,) generic drugs and additional products. The pharmaceutical company, (gee, I thought that's what Abbott was?) yet to be named, will spin out on its own. Chairman and CEO Miles White will continue at the new non-pharma Abbott, and the Newco pharma company will be headed by the company's former COO, being brought back out of retirement for the job.
The big question is, "why?" The CEO gamely has described the businesses as having different profiles, and therefore they should be split. But this is from the fellow that has been the most acquisitive CEO in his industry, and one of the most acquisitive in business, putting this collection together. He spent $10B on acquisitions as recently as 2009, including dropping $6.6B on Belgian drug company Solvay – which will now be espunged from Abbott. Why did he spend all that money if it didn't make sense? And how does this break-up help investors, employees and all us healthcare customers?
Or is this action just confusion, to leave us wondering what's going on in the company – and why it hasn't done much for any constituency the last decade. Except the CEO – who's been the highest paid in the industry, and one of the highest paid in America during his tenure.
Mr. White became CEO in 1998, and Chairman in 1999. Just as the stock peaked. Since then, investors have received almost nothing for holding the stock. Dividend increases have not covered inflation for the last decade, and despite ups and downs the share price is just about where it was back then – $50
Source: Yahoo Finance 10/19/11
Abbott has not increased in value because the company has had almost no organic growth. Growth by acquisition takes a lot of capital, and because purchases have multiple bidders it is really tough to buy them at a price which will earn a high rate of return. All academic studies show that when big companies buy, they always overpay. And that's the only growth Abbott has had – overly expensive acquisitions.
Mr. White hid an inability to grow behind a flurry of ongoing acquisitions (and some divestitures) that made it incredibly difficult to realize that the company itself was actually stagnant. Internally in a growth stall, with no idea how to come out of it. Hoping, again and again, that one of these acquisitions would refire the stalled engines.
This latest action is another round in Abbott's 3 card monte routine. Where's that bloody queen Mr. White keeps promising investors, as he keeps mixing the cards – and turning them over?
Because his acquisitions didn't work he's upping the financial machinations. By splitting the company he will make it impossible for anyone to figure out what all that exasperating activity has been for the last decade! He won't be compared to all those pesky historically weak results, or asked about how he's managing all those big investments, or even held accountable for the tens of billions that he spent at the "old Abbott" when he's asked questions about the "new Abbott."
But re-arranging the deck chairs does not fix the ship, and there's nothing – absolutely nothing – in this action which creates more growth, and higher profits, for Abbott shareholders. Because there's nothing in this that produces new solutions for health care customers.
And look out employees – because now there's 2 CEOs looking for ways to cut costs and create layoffs – like the ones implemented in early 2011! Expect the big knife to come out even harder as both companies struggle to show higher profits, with limited growth prospects.
Along the way, like any good 3 card monte routine, Abbott's CEO has had shills ready to encourage us that the flurry of activity is good for investors. Chronically, they talked about how picking up this business or that was going to grow revenues – almost regardless of the price paid or whether Abbott had any plan for enhancing the acquisition's value. Today, most analysts applauded his actions as "making sense." Of course these were all financial analysts, MBAs like Mr. White, more interested in accounting than actually developing new products. Working mostly for investment banks, they had (and have) a vested interest in promoting the executive's actions – even if it hasn't created any value.
Meanwhile, those betting for the queen to finally show up in this game will just have to keep waiting.
Abbott, like most pharmaceutical companies, has painted itself into a corner. There are more lawyers, accountants, marketers, salespeople and PR folks at Abbott (like all its competitors, by the way) than there are real scientists developing new solutions. Blaming regulators and dysfunctional health care processes, Abbott has insisted on building an enormous hierarchy of people focused on a handful of potential "blockbuster" solutions. It's a bit like the king and his court, filling the castle with those making announcements, arguing about the value of the king's court, sending out messages decrying the barbarians at the gate – while the number of people actually growing corn and creating value keeps dwindling!
Barely 100 years ago most "medicine" was sold based on labels and claims – and practically no science. Quackery dominated the profession. If you wanted something to help your ails, you hoped the local chemist had the skills to mix something up in his apothecary shop, using his mortar and pestle. Often it was best to just take a good shot of opiate (often included in the druggist's powder;) at least you felt a whole lot better even if it didn't cure your illness.
But Alexander Fleming discovered Penicillin (1928), and we realized there was the possibility of massive life improvement from chemistry – specifically what we call pharmacology. Jonas Salk sort of founded the "modern medicine" industry with his polio vaccine in 1955 – eliminating polio epidemics. Science could lead to breakthroughs capable of saving millions of lives! The creation of those injections – and later little pills- changed everything for humanity. And that created the industry.
But now pharmacology is a technology that has mostly run its course. Like all inventions, in the early days the gains were rapid and far, far outweighed the risks. A few might suffer illness, even death, from the drugs – but literally millions were saved. A more than fair trade-off. But after decades, those "easy hits" are gone.
Today we know that every incremental pharmacological innovation is increasingly valuable in a narrower and narrower context. 10% may see huge improvement, 30% some improvement, 30% marginal to no improvement, 20% have negative reactions, and 10% hugely negative reactions. And increasingly, due to science, we know that is because as we trace down the chemical path we are interacting with individuals – and their DNA has a lot to do with how they will react to any drug. Pharmacology isn't nearly as simple as penicillin any more. It's almost one-on-one application to genetic maps.
But Abbott failed (like most of its industry competitors) to evolve. Even though the human genome has been mapped for some 10 years, and even though we now know that future breakthroughs will come from a deeper understanding of gene reactions, there has been precious little research into the new forms of medicine this entails. Abbott remained stuck trying to develop new products on the same path it had taken before, and as the costs rose (almost asymptotically astronomically) the results grew slimmer. Billions were going in, and a lot less discovery was coming out! But the leaders did not change their R&D path.
Today we all hear about patients that have remarkable recoveries from new forms of biologic medicines. We know we are on the cusp of entirely new solutions, that will make the brute force of pharmacology look as medieval as a civil war surgeon's amputation solution to bullet wounds. But Abbott is not there developing those solutions, because it has been trying to defend & extend its old business model with acquisitions like Solvay – and a plethora of financial transactions that hide the abysmal performance of its R&D and new product development.
Mr. White is not a visionary. Never was. He wasn't a research scientist, deep into solving health issues. He wasn't a leader in trying to solve America's health care issues during the last decade. He never exhibited a keen understanding of his customer's needs, trends in the industry, or presience as to future scenarios that would help his markets and thus Abbott's growth.
Mr. White has been an expert in shuffling the cards – moving around the pieces. Misdirecting attention to something new in the middle of the game. Amidst the split announcement today it was easy to overlook that Abbott is setting aside $1.5B for settling charges that it broke regulations by illegally marketing the drug Depakote. Changing investments, changing executives, changing the message – now even changing the company – has been the hallmark of Mr. White's leadership.
Now Abbott joins the list of companies, and CEOs, that when unable to grow their companies lean on misdirection. Kraft and Sara Lee, both Chicago area companies like Abbott, have announced split-ups after failing to create increased shareholder value and laying off thousands of employees. These efforts almost always lead to more problems as organic growth remains stalled, and investors are bamboozled by snake oil claims regarding the future. Hopefully the remaining Abbott investors won't be fooled this time, and they'll find better places for their money than Abbott – or its Newco.
Postscript – the day after publishing this blog 24×7 Wall Street published its annual list of most overpaid CEOs in America. #4 was Miles White, for taking $25.5M in compensation despite a valuation decline of 11.3%!
