by Adam Hartung | May 3, 2011 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
For the first time in 20 years, Apple’s quarterly profit exceeded Microsoft’s (see BusinessWeek.com “Microsoft’s Net Falls Below Apple As iPad Eats Into Sales.) Thus, on the face of things, the companies should be roughly equally valued. But they aren’t. This week Microsoft’s market capitalization is about $215B, while Apple’s is about $365B – about 70% higher. The difference is, of course, growth – and how a lack of it changes management!
According to the Conference Board, growth stalls are deadly.
When companies hit a growth stall, 93% of the time they are unable to maintain even a 2% growth rate. 75% fall into a no growth, or declining revenue environment, and 70% of them will lose at least half their market capitalization. That’s because the market has shifted, and the business is no longer selling what customers really want.
At Microsoft, we see a company that has been completely unable to deal with the market shift toward smartphones and tablets:
- Consumer PC shipments dropped 8% last quarter
- Netbook sales plunged 40%
Quite simply, when revenues stall earnings become meaningless. Even though Microsoft earnings were up, it wasn’t because they are selling what customers really want to buy. In stalled companies, executives cut costs in sales, marketing, new product development and outsource like crazy in order to prop up earnings. They can outsource many functions. And they go to the reservoir of accounting rules to restate depreciation and expenses, delaying expenses while working to accelerate revenue recognition.
Stalled company management will tout earnings growth, even though revenues are flat or declining. But smart investors know this effort to “manufacture earnings” does not create long-term value. They want “real” earnings created by selling products customers desire; that create incremental, new demand. Success doesn’t come from wringing a few coins out of a declining market – but rather from being in markets where people prefer the new solutions.
Mobile phone sales increased 20% (according to IDC), and Apple achieved 14% market share – #3 – in USA (according to MediaPost.com) last quarter. And in this business, Apple is taking the lion’s share of the profits:
Image provided by BusinessInsider.com
When companies are growing, investors like that they pump earnings (and cash) back into growth opportunities. Investors benefit because their value compounds. In a stalled company investors would be better off if the company paid out all their earnings in dividends – so investors could invest in the growth markets.
But, of course, stalled companies like Microsoft and Research in Motion, don’t do that. Because they spend their cash trying to defend the old business. Trying to fight off the market shift. At Microsoft, money is poured into trying to protect the PC business, even as the trend to new solutions is obvious. Microsoft spent 8 times as much on R&D in 2009 as Apple – and all investors received was updates to the old operating system and office automation products. That generated almost no incremental demand. While revenue is stalling, costs are rising.
At Gurufocus.com the argument is made “Microsoft Q3 2011: Priced for Failure“. Author Alex Morris contends that because Microsoft is unlikely to fail this year, it is underpriced. Actually, all we need to know is that Microsoft is unlikely to grow. Its cost to defend the old business is too high in the face of market shifts, and the money being spent to defend Microsoft will not go to investors – will not yield a positive rate of return – so investors are smart to get out now!
Additionally, Microsoft’s cost to extend its business into other markets where it enters far too late is wildly unprofitable. Take for example search and other on-line products: 
Chart source BusinessInsider.com
While much has been made of the ballyhooed relationship between Nokia and Microsoft to help the latter enter the smartphone and tablet businesses, it is really far too late. Customer solutions are now in the market, and the early leaders – Apple and Google Android – are far, far in front. The costs to “catch up” – like in on-line – are impossibly huge. Especially since both Apple and Google are going to keep advancing their solutions and raising the competitive challenge. What we’ll see are more huge losses, bleeding out the remaining cash from Microsoft as its “core” PC business continues declining.
Many analysts will examine a company’s earnings and make the case for a “value play” after growth slows. Only, that’s a mythical bet. When a leader misses a market shift, by investing too long trying to defend its historical business, the late-stage earnings often contain a goodly measure of “adjustments” and other machinations. To the extent earnings do exist, they are wasted away in defensive efforts to pretend the market shift will not make the company obsolete. Late investments to catch the market shift cost far too much, and are impossibly late to catch the leading new market players. The company is well on its way to failure, even if on the surface it looks reasonably healthy. It’s a sucker’s bet to buy these stocks.
Rarely do we see such a stark example as the shift Apple has created, and the defend & extend management that has completely obsessed Microsoft. But it has happened several times. Small printing press manufacturers went bankrupt as customers shifted to xerography, and Xerox waned as customers shifted on to desktop publishing. Kodak declined as customers moved on to film-less digital photography. CALMA and DEC disappeared as CAD/CAM customers shifted to PC-based Autocad. Woolworths was crushed by discount retailers like KMart and WalMart. B.Dalton and other booksellers disappeared in the market shift to Amazon.com. And even mighty GM faltered and went bankrupt after decades of defend behavior, as customers shifted to different products from new competitors.
Not all earnings are equal. A dollar of earnings in a growth company is worth a multiple. Earnings in a declining company are, well, often worthless. Those who see this early get out while they can – before the company collapses.
Update 5/10/11 – Regarding announced Skype acquisition by Microsoft
That Microsoft has apparently agreed to buy Skype does not change the above article. It just proves Microsoft has a lot of cash, and can find places to spend it. It doesn’t mean Microsoft is changing its business approach.
Skype provides PC-to-PC video conferencing. In other words, a product that defends and extends the PC product. Exactly what I predicted Microsoft would do. Spend money on outdated products and efforts to (hopefully) keep people buying PCs.
But smartphones and tablets will soon support video chat from the device; built in. And these devices are already connected to networks – telecom and wifi – when sold. The future for Skype does not look rosy. To the contrary, we can expect Skype to become one of those features we recall, but don’t need, in about 24 to 36 months. Why boot up a PC to do a video chat you can do right from your hand-held, always-on, device?
The Skype acquisition is a predictable Defend & Extend management move. It gives the illusion of excitement and growth, when it’s really “so much ado about nothing.” And now there are $8.5B fewer dollars to pay investors to invest in REAL growth opportunities in growth markets. The ongoing wasting of cash resources in an effort to defend & extend, when the market trends are in another direction.
by Adam Hartung | Apr 29, 2011 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
CIO Magazine today published my latest article for IT professionals “Why You Should Stop Worrying and Let End Users Have iPads.” (note: free site registration may be required to read the full article)
The editors at CIO agreed with me that a big change is happening in “enterprise IT.” User technology is now so cheap, and good, that employees no longer depend upon corporate IT to provide them with their productivity tools. When you can buy a smartphone for $100, and a tablet for $500, increasingly users are happy to supply their own, private, productivity tools rather than try using something they find larger, heavier and harder to use from their boss — and also something which they’ve been told for years should not have personal items on it.
The serious impact is that increasingly the users feel “burdened” by corporate IT. They become less accessible as they leave the company laptop at work – and shut off the company Blackberry after work hours. They complain about the inefficiency of corporate tools, while using personal phones and tablets to do internet searches, access networks for fast info sharing (Facebook, Twitter, Linked-in), and generally find greatest productivity by ignoring technology supplied by employers. Often tehnology that is incredibly expensive.
Leading companies are taking advantage of this trend, and supplying the latest devices to employees. They recognize that greatest good comes not from “controlling” employee technology use. Rather, productivity is greatly enhanced by encouraging employees to take advantage of newest technology in the course of their work. Thus, leaders are providing iPhones and iPads, and giving access to Facebook and YouTube through the company network.
The world of IT shifts fast. Changes in IT have often seperated winners from losers. IT leaders have to change their mindsets if they want to help their companies profitably grow. And the first step is giving users technology they want, rather than technology they too often despise.
You can also access this article by clicikng on links to the following journals:
I look forward to your opinion about this topic! Do you think IT departmernts are slow to react to new tools? Do you think the new tools are “enterprise ready?” Do you think the advantages of newer techbnology outweigh potential IT risks? Drop comments here, or on the article pages! Love to hear what others think
by Adam Hartung | Apr 26, 2011 | Defend & Extend, In the Rapids, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
Summary:
- Everyone discriminates in hiring – just some is considered bad, and some considered good
- Only “good discrimination” inevitably leads to homogeneity and “group think” leaving the business vulbnerable to market shifts
- Efforts to defend & extend the historical success formula moves beyond hiring to include using internal bias to favor improvement projects and disfavor innovations
- Amazon has grown significantly more than Wal-Mart, and it’s value has quadrupled while Wal-mart’s has been flat, because it has moved beyond its original biases
The long list of people attacking Wal-Mart includes a class-action law suit between former female workers and their employer. The plaintiffs claim Wal-Mart systematically was biased, via its culture, to pay women less and limit their promotion opportunities. The case is prompting headlines like BNet.com‘s “Does Your Company Help You Discriminate?”
Actually, all cultures – and hiring programs – are designed to discriminate. It’s just that some discrimination is legal, and some is not. At Google it’s long been accepted that the bias is toward quant jocks and those with highest IQs. That’s not illegal. Saying that men, or white people, or Christians make better employees is illegal. But there is risk in all hiring bias – even the legal kind. To avoid the illegal discrimination, its smarter to overcome the “natural bias” that cultures create for hiring. And the good news is that this is better for the business’s growth and rate of return!
Successful organizations build a profile of “who did well around here – and why” as they grow. It doesn’t take long until that profile is what they seek. The downside is that quickly there’s not a lot of heterogeneity in the hiring – or the workforce. That leads to “group think,” which reinforces “not invented here.” Everyone becomes self-assured of their past success, and believes that if they keep doing “more of the same” the future will work out fine. Whether Wal-Mart’s hiring biases were legal – or not – it is clear that the group think created at Wal-Mart has kept it from innovating and moving into new markets with more growth.
Markets shift. New products, technologies and business practices emerge. New competitors figure out ways of providing new solutions. Customers drift toward new offerings, and growth slows. Unfortunately, bias keeps the early winner from accepting this market shift – so the company falls into serious growth troubles trying to do more, better, faster, cheaper of what worked before. Look at Dell, still trying to compete in PCs with its supply chain focus long after competitors have matched their pricing and started offering superior customer service and other advantages. Meanwhile, the market growth has moved away from PCs into products (tablets, smartphones) Dell doesn’t even sell.
Wal-Mart excels at its success formula of big, boring, low price stores. And its bias is to keep doing more of the same. Only, that’s not where the growth is in retailing any longer. The market for “cheap” is pretty well saturated, and now filled with competitors that go one step further being cheap (like Dollar General,) or largely match the low prices while offering better store experience (like Target) or better selection and varied merchandise (like Kohl’s). Wal-Mart is stuck, when it needs to shift. But its bias toward “doing what Sam Walton did that made us great” has now made Wal-Mart the target for every other retailer, and stymied Wal-Mart’s growth.
A powerful sign of status quo bias shows itself when leaders and managers start overly relying on “how we’ve done things here” and “the numbers.” The former leads to accepting recommendations fro hiring and promotion based upon similarity with previous “winners.” Investment opportunities to defend and extend what’s always been done sail through reviews, because everyone understands the project and everyone believes that the results will appear.
Nearly all studies of operational improvement projects show that returns rarely achieve the anticipated outcomes. Because these projects reinforce the status quo, they are assumed to be highly accurate projections. But planned efficiences do not emerge. Headcount reductions do not happen. Unanticipated costs emerge. And, most typically, competitors copy the project and achieve the same results, leading to price reductions across the board benefitting customers rather than company profits.
Doing more of the same is easily approved and rarely questioned – whether hiring, or investing. And if things don’t work out as expected results are labeled “business necessity” and everyone remains happy they made the original decision, even if it did nothing for market share, or profit improvement. Or perhaps turns out to have been illegal (remember Enron and Worldcom?)
To really succeed it is important we overcome biases. Look no further than Amazon. Amazon could have been an on-line book retailer. But by overcoming early biases, in hiring and new projects, Amazon has grown more than Wal-Mart the last decade – and has a much brighter future. Amazon now leads in a large number of retail segments, far beyond books. It has products which allow anyone to take almost any product to market – using the Amazon on-line tools, as well as inventory management.
And in publishing Amazon has become a powerhouse by helping self-published authors find distribution which was before unavailable, giving us all a much larger variety of book products. More recently Amazon pioneered e-Readers with Kindle, developing the technology as well as the inventory to make Kindle an enormous success. Simultaneously Amazon now offers a series of technical products providing companies access to the cloud for data and applications.
Where most companies would say “that’s not our business” Amazon has taken the approach of “if people want it, why don’t we supply it?” Where most organizations use numbers to kill projects – saying they are too risky or too small to matter or too low on “risk adjusted” rate of return Amazon creates a team, experiments and obtains real market information. Instead of worrying whether or not the initial project is a success or failure, market input is treated as learning and used to adapt. By continuously looking for new opportunities, and pushing those opportunities, Amazon keeps growing.
Every business develops a bias. Overcoming that bias is critical to success. From hiring to decision making, internal status quo police try to reinforce the bias and limit change. Often on the basis of “too much risk” or “too far from our core.” But that bias inevitably leads to stalled growth. Because new competitors never stop beating down rates of return on old success formulas, and markets never stop shifting.
Wal-Mart should look upon this lawsuit not as a need to defend and extend its past practices, but rather a wake-up call to be more open to diversity – in all aspects of its business. Wal-mart doesn’t need to win this lawsuit neary as badly as it needs to create an ability to adapt. Until then, I’d recommend investors sell Wal-Mart, and buy Amazon.com.
Chart of WMT stock performance compared to AMZN last 5 years (source Yahoo.com)
by Adam Hartung | Apr 17, 2011 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
Research in Motion pioneered the smartphone business. While Motorola, Samsung and others thought the answer to market growth was making ever cheaper mobile phones, RIM figured out that corporations wanted to put phones in employee hands, control usage cost, while also securely offering email distribution and texting. Blackberry handsets and servers met user needs while providing IT departments with everything they needed.
This success formula was a winner, driving tremendous growth for RIM. People joke about their “crackberry” connecting them to their company 24×7, but it was a tremendous productivity enhancer. RIM produced a consistent string of growing revenues and earnings, meeting or exceeding projections. RIM still dominates the “enterprise” smartphone business. The overwhelming majority of mobile phones issued by companies are still Blackberries.
“RIM’s CEO is Annoyed that People Don’t Appreciate Our Profits” headlined Silicon Alley Insider. He can’t understand why the stock languishes, despite meeting financial projections. When challenged about whether or not RIM is as secure as it claims, “RIM CEO Abruptly Ends an Interview After Getting Annoyed About Security Questons” (SAI).
That the CEO is annoyed is the first of two reasons you need to sell RIMM now. If you are waiting for a recovery to old highs, forget about it. Won’t happen. Can’t happen.
The mobile phone/smartphone market has taken an enormous shift. Apple’s iPhone introduced the “app” phenomenon – allowing smartphone users to do a plethora of things on their devices that aren’t possible on a Blackberry. If we just count apps, as a baseline, iPhone users can do some 350,000 things that Blackberry users cannot. Additionally, iPhones – and increasingly Android phones – are simply a lot easier to use, with bigger touch screens, more built-in functionality and easier user navigation.
As charted in my last column, RIM has only about 5% the apps of iPhone. And less than 10% the apps of Android. Even Microsoft will soon provide more apps than Blackberry. But the CEO of RIM is stuck – defending his company and its success formula – rather than aggressively migrating the company into new products. He’s hoping all those company employees, including execs, now carrying 2 phones – their corporate Blackberry and personal iPhone – will keep doing that.
He’s letting the re-invention gap between RIMM and Apple/Google widen with every passing quarter. While no other provider offers the “enterprise solution” of RIM, increasingly the gap between the usability of new solutions and RIM is widening. It won’t be long before users won’t put up with having 2 phones – and the loser will clearly be RIM
And it won’t be long before people completely stop carrying laptops as well. Rather quickly we are seeing a market shift to tablets. Into this market RIMM launched its Playbook product last week. And that’s the second reason you need to sell RIMM.
We all know the iPad has been a remarkable success. To date, nobody has developed a tablet that users, or reviewers, find comparable. Unfortunately, RIM launched its Playbook tablet to entirely consistent reviews, such as “The Playbook: Blackberry’s ‘Unfinished’ Product” headlined at TheWeek.com. The Playbook simply isn’t comparable to an iPad – and doesn’t look like it ever will be.
Most concerning, to use a Playbook you must also have a Blackberry. Playbook relies on the Blackberry to provide connectivity – via Bluetooth. In other words, RIM is trying to keep customers locked-in to Blackberries, using Playbook to defend and extend the original company product. Playbook doesn’t even look like it’s ever intended to be a stand-alone winner. And that’s a really bad strategy.
RIM sees Playbook is seen as an extension of the Blackberry product line; the first in a transition to a new operating system for all products. Not a product designed to compete heads-up against other tablets. It lacks apps, it lacks its own connectivity, it has a smaller screen, and it doesn’t have the intuitive interface. Basically, it’s an effort to try and keep Blackberry users on Blackberries – an effort to defend and extend the original success formula.
When markets shift it is absolutely critical competitors shift with them. Xerox invented desktop publishing at its PARC facility, but tried to defend xerography and lost the new market to Apple. Kodak invented digital cameras, but tried to defend the film business and lost the new market to Japanese competitors. When the CEO tries to defend and extend the old success formula after a market shifts only bad things happen. When new products are extensions of old products, while competitors are bringing out game changers, the world only becomes uglier and uglier for the stuck, old-line competitor.
The analysts are right. RIM has no future growth. Companies are already switching into iPhones, iPads and Androids. Simultaneously, Microsoft will pour billions into helping Nokia push Windows 7 phones and future tablets the next 2 years, and that will be targeted right at “enterprise users” which are RIM’s “core.” Microsoft will spend far more resources than RIM could ever match trying to defend its “installed base.” RIMM is stuck fighting to keep current users, while the market growth is elsewhere, and those emerging competitors are quickly going to hollow out RIM’s market.
There’s simply no way RIM can increase its value. Time to sell.
Update 4/20/2011 Goldman Sachs Survey Results – CIO intention to adopt Tablets by Operating System provider:
Published in SiliconAlleyInsider.com
by Adam Hartung | Apr 11, 2011 | Current Affairs, In the Rapids, Innovation, Leadership
Today’s Guest Blog is provided by Mike Meikle. He offers some great insight to the declining value of manufacturing as producitivity continues to skyrocket, pushing all of us toward understanding and competing in markets where greater value lies in digital products rather than physical.
Summary
- Hyperdigitization is the economic shift toward “virtual” goods and services
- Manufacturing jobs have dropped 31 percent but output is at a near record $1.7 trillion.
- Economic output of Hyperdigitization is $2.9 trillion.
- Google, Facebook and GroupOn all have large revenue streams/valuations yet no physical product.
- Industrial Age economic model of static business models is rapidly fading.
- Organizations must release their innovative capabilities to survive and thrive.
Recently, I was engaged by ExecSense to give a Risk Management & Outsourcing Trends for 2011 webinar targeted for Risk Management executives. Since I only had an hour to cover a vast amount material, I could only briefly touch on some interesting topics. One of these was Hyperdigitization, a jargon-laden term that means economic output is moving toward “virtual” goods and services.
So how does hyperdigitization tie into outsourcing trends? As companies continue shift their business processes to outside service providers, firms will have to develop ways to protect their intellectual property and virtual output. Since intellectual property is data, risk managers will have to develop and monitor Key Performance Indicators (KPI) and Key Risk Indicators (KRI) to ensure their firm does not sacrifice their long-term competitive advantage for short-term cost savings. This penny-wise, pound-foolish strategy has been discussed previously by Mr. Hartung.
But before we dig further into explaining hyperdigitization, let us review an example of the current fading Industrial economic model. One of the chief laments heard throughout the Great Recession is that America doesn’t “make” anything anymore. Manufacturing jobs have left primarily to cheaper labor, less regulation, lower tax countries. Without construction jobs to fall back on, this has left a broad swath of the population unemployed. Unfortunately this high unemployment fallout is a result of our economic model shifting away from Industrial Age practices.
While the jobs may have left (down 31%) productivity boosts have pushed the U.S. manufacturing output to near record highs of 1.7 trillion dollars. We make more goods with less people due to technological advances. Contrary to the economic doomsayers this is a positive trend, one that has happened before (agrarian-based economy) and will undoubtedly happen again.
What does this hyperdigitization of economic output mean in real terms? Well, based on a Gartner report, about 20 percent of U.S. economic output in 2009 or 2.9 trillion dollars. That’s nearly double the U.S. manufacturing output. We are awash in virtual products and services. Think about Google alone. The company is worth $163 billion at last estimate and does not have one physical product.
Other examples are Facebook and GroupOn. Both are projected to be worth $65 billion and $25 billion respectively. Yet again, neither has a physical product. These three companies have based their business models on information arbitrage; the process of mining available data for new opportunities.
So where does all this intellectual property (data) that generates billions in profit come from? People, who are supported by a corporate culture that values innovation and measured risk taking.
As the global economy gets exponentially more competitive, organizations need to be fast, flexible and innovative; a near polar opposite of the Industrial Age business model. A large percentage of companies are still mired in outdated business practices that protect the status-quo (Extend & Defend), squash risk taking and stifle innovation. This has especially become prevalent in the era of downsizing culminating in the practices of the Great Recession.
In order to compete in an economy driven by hyperdigitization, the human capital of an organization has to be made a priority. Developed nation’s economies are shifting away from static business models that produce generic widgets and services. To thrive in the hyper competitive, constantly shifting global economy, organizations will have to create and promote a culture that emphasizes and values the Information Age success triumvirate of risk taking, innovation and rapid-execution.
Thanks Mike! Mike Meikle shares his insights at “Musings of a Corporate Consigliere” (http://mikemeikle.wordpress.com/). I hope you read more of his thoughts on innovation and corporate change at his blog site. I thank Mike for contributing this blog for readers of The Phoenix Principle today, and hope you’ve enjoyed his contribution to the discussion about innovation, strategy and market shifts.
If you would like to contribute a guest blog please send me an email. I’d be pleased to pass along additional viewpoints on wide ranging topics.
by Adam Hartung | Apr 7, 2011 | Defend & Extend, In the Rapids, In the Swamp, Innovation, Leadership, Web/Tech
Most folks know that Apple is now worth more than Microsoft. Although few realize the huge difference. After years of dominating as the premier “PC” company, Microsoft is now worth only about 2/3 the value of Apple – $224B versus $310B this week (or, said differently, Apple is worth about 50% more than Microsoft.) Apple’s run by Microsoft the last year has been like a rock out of a slingshot. But that’s largely because Apple grew revenues almost 50% in fiscal 2009 and 2010, while Microsoft saw revenue decline 3% in 2009, and only grow 7% in 2010, putting revenues up a net 3% over the 2 years.
What few realize is how much Microsoft spent trying to grow, but failed. A look at 2009 R&D expenditures showed Microsoft outspent all tech competitors in its class – spending 8 times what Apple spent! 
Source: Silicone Alley Insider Chart of the Day from BusinessInsider.com
What did customers and investors receive for this whopping Microsoft spend? An updated operating system and set of office automation tools to run on existing products. Nothing that created new demand, or incremental sales. On the other hand, for its much lower spending Apple gave investors upgrades to iPods, the iPhone and the operating system for the later released iPad.
Simply put, Microsoft opened the check book and spent like crazy in its effort to defend its historical PC products business. And the cost was more than just dollars. That “focus” cost Microsoft its position in other growth markets; like smartphones. Few recall that as recently as 2008 Microsoft was the leading smartphone platform: 
In order to defend its “core” business, Microsoft under-invested in smartphones and over-invested in its historical personal computing products. Now, PC growth has stalled as people are switching to new products based on cloud computing – like smartphones and tablets.
Apple is cleaning up with its investments, while Microsoft is hoping it can catch up by enticing its former executive, now the CEO at Nokia, to revamp their line using the Windows Phone 7 operating system. Good luck, because the market is already way, way out front with Apple and Android products
That was the past. What we’d like to know is whether Apple will keep growing like crazy, and whether Microsoft will do what’s necessary to grow as well. And that’s where some recent announcements point out that Apple, quite simply, is better managed. So it will grow, and Microsoft won’t.
ZDNet reported on the “changing of the guard” at Apple in March. Due to its different investment approach, iOS is now bigger than the MacOS at Apple. The “legacy” product – that made Apple into a famous company in the 1980s – has been eclipsed by the new product. And the old technology leader is graciously moving on to do research in a scientific community, while Apple pours its resources into developing products for the future.
Don’t forget, the Lisa was a product that Steve Jobs personally took to market – yet didn’t succeed. He personally remained involved, converting Lisa into the wildly successful 1980s Mac (see AOL Small Business story on history of Lisa and Mac.) You gotta love it when that CEO, and his leadership team and all the managers, can transition their loyalty and put resources into the future product line in order to keep growing! MacOS is not dead, nor is it going to be devoid of resources. But the future of Apple lies in growing the new platform, and that is where the best talent and dollars are being spent.
Comparatively, Microsoft announced this week it was changing its Chief Marketing Officer (SeattlePI.com.) And, not surprisingly, they did NOT select someone with smartphone, tablet or even gaming expertise for the role. Instead of identifying a leader who is deep into understanding the growth markets, Microsoft appointed as the next CMO the fellow who had been responsible for selling – wait – guess – Office, Sharepoint, Exchange and the other historical, legacy Microsoft products. Those products which have had no growth – only maintenance sales. Instead of reaching into the future for its leadership, CEO Ballmer once again reached into the past.
If you ever wonder why Apple is worth so much more to investors than Microsoft, just think about this moment in the marketplace. Apple is investing its best talent and resources into new products in new markets that are demonstrating growth. Microsoft, struggling with its growth, keeps placing “old guard” leaders into top positions, attempting to defend the historical business – hoping to recapture the old glory.
Too bad the market has already shifted and doesn’t care what Microsoft thinks.
When it comes to networking, cloud computing and the future of how we all are going to be productive Microsoft just isn’t in the game. And its attempt to have a fast falling Nokia save it by distributing second rate mobile products that are late to market while iPhones and Androids keep extending their lead won’t make Microsoft great again. Especially when the leadership keeps wanting, in its heart, to sell more PCs.
Apple is just better managed, because it keeps looking to the future, while Microsoft simply can’t seem to get over its past. Good thing Steve Ballmer is already rich. Too bad all the Microsoft employees aren’t.
by Adam Hartung | Apr 1, 2011 | Current Affairs, In the Rapids, Innovation, Leadership, Openness, Transparency, Web/Tech
Summary:
- Google is locking-in on what it made successful
- But as technologies, and markets, change Google could be at risk of not keeping up
- Internal processes are limiting Google’s ability to adapt quickly
- Google needs to be better at creating and launching new projects that can expand its technology and market footprint in order to maintain long-term growth
Google has been a wild success. From nowhere Google has emerged as one of the biggest business winners at leveraging the internet. With that great success comes risk, and opportunity, as Larry Page resumes the CEO position this year.
Investors hope Google keeps finding new opportunities to grow, somewhat like Apple has done by moving into new markets with new solutions. Where Apple has built strong revenue streams from its device and app sales in multiple markets, Google hasn’t yet demonstrated that success. Despite the spectacular ramp-up in Android smartphone sales, Google hasn’t yet successfully monetized that platform – or any other. Something like 90% of revenues and profits still come from search and its related ad sales.
Investors have reason to fear Google might be a “one-trick pony,” similar to Dell. Dell was wildly successful as the “supply chain management king” during the spectacular growth of PC sales. But as PC sales growth slowed competitors matched much of Dell’s capability, and Dell stumbled trying to lower cost with such decisions as offshoring customer service. Dell’s revenue and profit growth slowed. Now Dell’s future growth prospects are unclear, and its value has waned, as the market has shifted toward products not offered by Dell.
Will Google be the “search king” that didn’t move on?
When companies are successful they tend to lock-in on what made them successful. To keep growing they have to overcome those lock-ins to do new things. The risk is that Google can’t overcome it’s lock-ins; that internal status quo police enforce them to the point of keeping new things from flourishing into new growth markets. That the company becomes stale as it avoids investing effectively in new technologies or solutions.
At Slacy.com (“What Larry Page Really Needs to Do to Return Google to its Start-up Roots“) we read from a former Google employee that there are some serious lock-ins to worry about within Google:
- The launch coordination process sets up a status quo protection team that keeps things from moving forward. When an internal expert gains this kind of power, they maintain their power by saying “no.” The more they say no, the more power they wield. Larry Page needs to be sure the launch team is saying “here’s how we can help you launch fast and easy” rather than “you can’t launch unless…”
- Hiring is managed by a group of internal recruiters. When the people who actually manage the work don’t do recruiting, and hiring, then the recruits become filtered by staffers who have biases about what makes for a good worker. Everything from resume screening to background reviews to appearances become filters for who gets interviewed by engineers and managers. In the worst case staffers develop a “Google model employee” profile they expect all hires to fit. This process systematically narrows the candidates, leading to homogeneity in hiring, a reduction in new approaches and new ways of thinking, and a less valuable, dynamic employee population.
- Increasingly engineers are forced to use a limited set of Google tools for development. External, open source, tools are increasingly considered inferior – and access to resources are limited unless engineers utilize the narrow tool set which initially made Google successful. The natural outcome is “not invented here” syndrome, where externally created products and ideas are overlooked – ignored – for all the wrong reasons. When you’re the best it’s easy to develop “NIH,” but it’s also really risky in fast moving markets like technology where someone really can have a better idea, and implement, from outside the halls of the early leader.
These risks are very real. Yet, in a company of Google’s size to some extent it is necessary to manage launches systematically, and to have staffers doing things like recruiting and screening. Additionally, when you’ve developed a set of tools that create success on an enormous scale it makes sense to use them. So the important thing for Mr. Page to do is manage these items in such a way that lock-in doesn’t keep Google from moving forward into the next new, and possibly big, market.
Google needs to be sure it is not over-managing the creation of new things. The famous “20% rule” at Google isn’t effective as applied today. Nobody can spend 80% of their job conforming to norms, and then expect to spend 20% “outside the box.” Our minds don’t work that way. Inertia takes over when we’re at 80%, and keeps us focused on doing our #1 job. And we never find the time to really get started on the other 20%. And it’s unrealistic to try dedicating an entire day a week to doing something different, because the “regular job” is demanding every single day. Likewise, nobody can dedicate a week out of the month for the same reason. As a result, even when people are encouraged to spend time on new and different things it really doesn’t happen.
Instead, Google needs a really good method for having ideas surface, and then creating dedicated teams to explore those ideas in an unbounded way. Teams that have as their only job the requirement for exploring market needs, product opportunities, and developing solutions that generate profitable new revenue. Five people totally dedicated to a new opportunity, especially if their success is important to their career ambitions, will make vastly more headway than 25 people working on a project when they can “find the time.” The bigger team may have more capabilities and more specialties, but they simply don’t have the zeal, motivation or commitment to creating a success. Failing on something that’s tertiary to your job is a lot more acceptable, especially if your primary work is going well, than failing on something to which your wholly dedicated. Plus, when you are asked to support a project part-time you do so by reinforcing past strengths, not exploring something new.
Especially worrisome is Inc magazine’s article “Facebook Poaches Inc’s Creative Director.” This is the fellow that created, and managed, the new opportunity labs at Google. What will happen to those now?
These teams also must have permission to explore the solution using any and all technology, approaches and processes. Not just the ones that made Google successful thus far. By utilizing new technologies, which may appear less robust, less scalable and even initially less powerful, Google will have people who are testing the limits of what’s new – and identifying the technologies, products and processes that not only threaten existing Google strengths but can launch Google into the next new, big thing. Supporting their needs to explore new solutions is critical to evolving Google and aiding its growth in very dynamic technologies and markets.
The major airlines all launched discount divisions to compete with Southwest. Remember Song and Ted? But these failed largely because they weren’t given permission to do whatever was necessary to win as a discount airline. Instead they had to use existing company resources and processes – including in-place reservation systems, labor union standards, existing airports and gates – and honor existing customer loyalty programs. With so many parameters pre-set, they had no hope of succeeding. They lacked permission to do what was necessary because the airlines bounded what they could do. Lock-in to what already existed killed them.
The concern is that Google today doesn’t appear to have a strong process for creating these teams that can operate in white space to develop new solutions. Google lacks a way to get the ideas on the agenda for management discussion, rapidly create a team dedicated to the tasks, resource the teams with money and other necessary tools, and then monitor performance while simultaneously encouraging behaviors that are outside the Google norms. Nobody appears to have the job of making sure good ideas stay inside Google, and are developed, rather than slipping outside for another company to exploit (can you say Facebook – for example?)
I’m a fan of Google, and a fan of the management approaches Larry Page and Google have openly discussed, and appear to have implemented. Yet, success has a way of breeding the seeds of eventual failure. Largely through the process of building strong sacred cows – such as in technology and processes for all kinds of activities that end up limiting the organization’s ability to recognize market shifts and implement changes. Success has a way of creating staff functions that see themselves as status quo cops, dedicated to re-implementing the past rather than scouting for future requirements. The list of technology giants that fell to market shifts are legendary – Cray, DEC, Wang, Lanier, Sybase, Netscape, Silicon Graphics and Sun Microsystems are just a few.
It’s good to be the market leader. But Larry Page has a tough job. He has to manage the things that made Google the great company it is now – the things that middle management often locks in place and won’t alter – so they don’t limit Google’s future. And he needs to make sure Google is constantly, consistently and rapidly implementing and managing teams to explore white space in order to find the next growth opportunities that keep Google vibrant for customers, employees, suppliers and investors.
View a short video on Lock-in and why businesses must evolve http://on.fb.me/i2dekj
by Adam Hartung | Mar 31, 2011 | Current Affairs, Defend & Extend, Leadership, Lock-in
Here’s a link to a very short video (1-2 minutes) posted on Facebook today about Lock-in. Hope you enjoy! Please provide feedback and comments!
Adam Hartung on Lock-in – Why we do it, and how to be better by managing it! Includes a discussion about using social media – why it is so important, why so many people are overlooking these tools and the success application can create.
I was recently asked to be interviewed regarding most of the major themes of “Create Marketplace Disruption” and why they are timely – and important – to businesses globally. A few exerpts from those interviews have been edited, and are being sent to me for posting on YouTube and Facebook. This is the first in the series.
by Adam Hartung | Mar 30, 2011 | Current Affairs, In the Swamp, Innovation, Leadership
Summary:
- Too many leaders spend too much effort minimizing uncertainty
- Stock buybacks reflect fear of uncertainty, but are a losing investment
- Good performing organizations invest in new markets, products and services
- Success comes from not only investing, but in learning quickly what works (or doesn’t) and rapidly adapting
“If you don’t ever do anything, you can never screw up” my boss said.
I was 20 years old working in the blazing Oklahoma July sun at a grain elevator. I had asked the maintenance lead to modify a tool, thinking I could work faster. Unfortunately, my idea failed and my production started lagging. Offload production was slowing. I had to ask that the tool be put back to original condition, and I apologized to the elevator manager for my mistake.
That’s when he used my opening line, and went on to say “Don’t ever quit trying to do better. You’re a clever kid. Sometimes ideas work, sometimes they don’t, but if we dont’ try them we’ll never know. That’s why I agreed to your idea originally. I’ll accept a few well-intentioned ‘mistakes’ as long as you learn from them. Now go back to work and try to make up that production before end of day.”
Far too few leaders today give, or follow, such advice. The Economist recently waxed eloquently about how much today’s leaders dislike any kind of uncertainty (see “From Tsunami’s to Typhoons“). Most very consciously make decisions intended to reduce uncertainty – regardless of the impact on results! Rather than take advantage of events and trends, doing something new and different, they intentionally downplay market changes and diligently seek ways to make it appear as if things are not changing – amidst massive change! The mere fact that there is uncertainty seems to be the most troubling issue, as leaders don’t want to deal with it, nor know how.
This fear of uncertainty manifest itself in decisions to buy back stock, rather than invest in new products, services and markets. 24/7 Wall Street reported $34B in announced share buybacks in early February (2011 Stock Buybacks on Fire), only to update that to $40B by end of the month. Literally dozens of companies choosing to spend money on buying their own shares, which creates no economic value at all, rather than invest in something that could create growth! And these aren’t just companies with limited prospects, but include what have been considered growth entities like Pfizer, Astra-Zeneca, Electronic Arts, MedcoHealth, Verizon, Semantec, Yum! Brands, Quest, Kohl’s, Varian and Gamestop to name just a few.
All of these companies have opportunities to grow – heck, all companies have the opportunity to grow. But there is inherent uncertainty in spending money on something that might not work out. So, instead, they are taking hard earned cash flow and spending it on buying back the company stock. The real certainty, from this investment, is that it limits growth — and eventually will lead to a smaller company that’s worth less. Don’t forget, the only investment Sara Lee made under Brenda Barnes the last 5 years was buying back stock – and now the company has shriveled up to less than half its former size while the equity value has disintegrated. Nobody wins from share buybacks – with the possible exception of senior executives who have compensation tied to stock price.
At the Harvard Business Review Umar Haque admonishes leaders today “Fail Bigger Cheaper: A Three Word Manifesto.” Silicon valley investors, deep into understanding our change to an information economy, are far less interested in “scale” and more interested in how leaders, and their companies, are learning faster – so they see where they might fail faster – and then being nimble enough to adjust based upon what they learned. And not just to do more of the same better, but in order to identify bigger targets – larger opportunities – than originally imagined. Often the “failure” can direct the business into grander opportunities which have even higher payoffs.
That’s why we don’t see companies like Google, Apple, Netflix, Virgin, or Cisco buying back their own stock. They see opportunities, and they invest. They don’t all work out. Remember Google Wave? Looked great – didn’t make it – but so what? Google learns from what works, and what doesn’t, and uses that information to help it develop newer, more powerful growth markets.
Long ago Apple let its lack of success with the Newton PDA cause it to retrench into strictly Mac development – which took the company to the brink of disaster by 2000. Since then, by investing in new markets and new products, Apple has grown revenues and profits like crazy, making it more valuable than arch-rival Microsoft and close to being the most valuable publicly traded company.
Source: Silicon Alley Insider of BusinessInsider.com
Virgin used its success in music retailing to enter the trans-atlantic airline business (Virgin Atlantic). Since then it has launched dozens of businesses. Some didn’t work out – like Virgin Bridal – but many more have, such as Virgin Money, Virgin Mobil, Virgin Connect – to name just a handful of the many Virgin businesses that contribute to company growth and value creation.
Nobody wants to screw up. But, unless you do nothing, it is inevitable. No leader, or company, can create high value if they don’t overcome their fear of uncertainty and invest in innovation. But, hand-in-glove with such investing is the requirement to learn fast whether an innovation is working, or not. And to adapt. Some things need time for the market to develop, others need technology advances, and others need a change in direction toward different customers. It’s the ability to invest in uncertain situations, then pay attention to market feedback in order to recognize how well the idea is working, and constantly adapt to market learning that sets apart those companies creating wealth today.
Update 4/1/2011 – AOLSmallBusiness.com reminds us of another great adaptation story, based upon entering an unknown market and learning, in “Yes, Even Apple Screws Up Sometimes.” When personal computers were all text-based machines Apple introduced the Lisa as the first commercial computer to utilize on-screen icons, and a mouse for navigation, as well as other key productivity enhancers like the trash can. But the Lisa failed. Apple studied the market, kept what was desirable and modified what wasn’t, re-introducing the product as the Macintosh in 1984. The Mac was a huge success, creating enormous value for Apple which was undeterred by both the uncertainty of the fledgling PC market and its initial failure at various changes in the user interface.
by Adam Hartung | Mar 25, 2011 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in
It is unlikely anyone in business or government thinks productivity is a bad thing. Productive students get their homework done faster, and learn more in the available time. Productive musicians make more recordings, and tend to learn more over their careers. And productive companies produce more goods and services with less inputs – like labor – thus offering more to customers at lower cost while making more money for investors. At a national level, the more productive we are at everything from growing wheat to making cabinets to writing smartphone apps improves the quantity of goods available to our population – growing the gross domestic product (GDP.) Improving productivity is one of the most critical activities to creating and maintaining a healthy economy, improving incomes and generating wealth.
Then why is American policy so anti-productivity?
American manufacturers today are about the most productive in the world. In the Wall Street Journal's "The Truth About U.S. Manufacturing" we learn that American factory workers are producing triple the output of 1972. The use of ever more sophisticated equipment, often with digital controls, and a higher trained workforce has made it possible to make more and more stuff with less and less labor. While considerable manufacturing has gone offshore, it is not because our workers are competitively unproductive. To the contrary, productivity is amongst the highest in the world!
Unfortunately, most of America's business/economic policy at the government level has been trying to preserve jobs that are, well, not that productive. Take for example agriculture subsidies. They pay farmers to produce less and otherwise make less productive use of land, feedstocks, grains, etc. By giving farmers (most of which are now huge corporations, not the "family farm" circa 1970 and before) subsidies it actually lowers agricultural productivity.
Similarly, bank and auto bailouts (and all subsidies to any manufacturer) in effect lowers productivity. It gives money to a bank, which makes nothing. Or to an unproductive manufacturer to keep its plant operating when the value of the output is insufficient to cover costs. These spending programs serve only to defend and extend the least productive jobs in society – jobs that are economically unviable. By spending money in these areas the government attempts to preserve the old (companies such as GM and Chrysler) at the expense of productivity.
America can create highly productive jobs
"Amazon.com On Hiring Spree" is the Seattle Times headline. Amazon has revolutionized book retailing, publishing and is changing a number of other markets as well. The result is a far more productive workforce in these industries than previous competitors. Borders, to cite a recent example, could not be nearly as efficient selling or publishing books with its out of date model, so it recently followed 90% of other book sellers into bankruptcy. The more productive company, Amazon, is hiring people as fast as it can to grow its business. Its productivity allows Amazon to sell more and create jobs.
Had the government chosen to bail out Borders there would have been a public outcry. Why should we protect the jobs of those store shelf stockers? Likewise, as the number of printed books drops, replaced by digital books, should it be government policy to subsidize book (or magazine, or newspaper) publishers/printers? Whenever a business is no longer competitively productive – whether it be agricultural, manufacturing or anything else – bailouts serve only to keep the unproductive competitor alive. Which actually harms the more competitive company that subsequently must fight the subsidized competitor.
The right policy would be to subsidize Amazon. Amazon is growing. Theoretically, the more money Amazon has the faster it could grow and the more jobs it could create. But, of course, nobody feels good about subsidizing a growing, profitable concern. And Amazon isn't asking for subsidies, anyway.
Our public investments are shifting in the wrong direction.
The right public policy is to invest in creating new Amazons. New businesses that create products and services which are desirable to customers, productively using resources and creating jobs. By helping these new businesses get going the government spending creates new markets. Government money "primes the pump" for investors. Early stage funding allows the business to get started, create a product or service, generate initial revenues, demonstrate a P&L and entice others to invest. The payback to society is a growing enterprise that creates jobs, both of which creates future tax revenues which repay the early investment funding.
The current administration touts investing in the tools for creating growth. In early February the MercuryNews.com reported on a Presidential speech in Michigan, "Obama Promotes Plan for Near Universal High-Speed Wireless." But, like previous Presidential administrations, this is just a lot of talk. While Mr. Obama may think national wireless technology to promote economic growth is good, there is no money for it. In the same article it is noted that Michigan congressional representatives, who resoundingly backed putting billions into the auto bailouts, question the efficacy of investing in emerging infrastructure tools. Protecting the past, while questioning (or opposing) investments in the future.
Unfortunately, for the last 50 years American policy has been headed in the wrong direction! Innovation investment projects peaked around the Kennedy administration (early 1960s) with several American efforts to dominate new technologies through programs such as the famous "space race." Since then, less and less has gone into America's future, and more and more has been spent preserving the past – through entitlements, military spending and tax cuts which provide less and less incentive to invest in unproven projects.
Source: Silicon Alley Insider Chart of the Day from BusinessInsider.com
Since 1953 government "pump priming" by spending on R&D for innovations has declined by 50%!!! No longer is even 1% of Gross Domestic Product spent on R&D. Businesses, which require an immediate return on investment and are generally loath to spend money on things which are uncertain, have been left to fill the vacuum. As a result, total spending has been stagnant. Worse, most spending by business is on sustaining innovations – improvements which defend and extend an existing business – rather than on breakthroughs which create new markets, and a lot more jobs (for more on sustaining innovation investments by business read Clayton Christenson's books including "The Innovator's Dilemma.") Investment in innovation has been woefully underfunded, allowing America's economic leadership position to shrink.
America is driving innovation offshore
The Wall Street Journal has reported "More Companies Plan to Put R&D Offshore." When things are equal, business will invest where the costs are lowest. With little incentive to undertake innovation in America, increasingly U.S. companies are moving their R&D — along with manufacturing, customer service, telesales, etc. — to emerging markets. And their plans are to increase this movement offshore by 50-100% by 2015!
![[EMERGING]](http://si.wsj.net/public/resources/images/MK-BK032A_EMERG_NS_20110221173344.jpg)
What will happen if innovation investments move from America into emerging markets? Will intellectual property remain an American advantage? Will new product development be done in America, or elsewhere? If the manufacturing is already in these markets, is it hard to predict that new products will increasingly be made offshore as well? Asked another way, if we outsource the innovation jobs – what jobs will America have left?
A dramatic change in American policy is needed
Last week America started bombing Libya. Part of protecting the national interest. But, this is not free – reportedly costing Americans $100M/day. Two weeks is $1.4B (probably a lot more, to be honest.). Let's not debate whether this is necessary, but rather recognize (as Roseanne Rosannadanna used to say on Saturday Night Live) "it's always something." There are programs, policies, military bases, agricultural lands, national parks and jobs to protect in every district of America – and its interests around the globe. And that's increasingly where America's money goes. Not into innovation.
So why are Americans surprised that job growth struggles? When the head of GE, a company that has moved manufacturing, information technology, engineering and R&D to offshore centers across the last decade, is made head of the U.S. jobs initiative is there much doubt? When the spending and incentives, as well as the selected leaders, have as their #1 interest preserving the past – largely in areas where American productivity lags – why would anyone expect new job creation?
America's protectionist mentality is causing its lead in innovation to slip away. The President, administration officials, Senators and Congresspeople needs to quit thinking that talking about innovation is going to make any difference in investments, or job creation. If America wants to remain globally economically vibrant it requires a change in investments – starting with more money for R&D via grants, subsidies and tax breaks.
If America wants jobs, and healthy economic growth, it needs innovation. Innovation that will create new, highly productive jobs And that requires investing in the future, rather than spending all the money protecting the past.
