Electric Utilities Need to Plan Like Google – Lessons from Japan


Summary:

  • The Japanese nuclear crisis is the result of historical industry decisions to build very large facilities and transmit power to distant locations – a strategy at risk of “force majure” activities
  • U.S. electric utilities are locked-in to identical approaches to generation and transmission, which puts them at equal risk AND limits their willingness to innovate or implement new solutions
  • Historical industry approaches to planning are all based on extending the past, even though new technologies and approaches offer potentially better, and less risky, solutions. Utilities are merely one example
  • Google is expert in a far better planning approach, using scenario planning for identifying and taking to market innovations and new solutions
  • All companies, would benefit from planning like Google, rather than using traditional approaches – and several are bullet listed below
  • The electric utility industry really needs to adopt a Google approach, or everyone remains at risk

Everybody is now aware of the great radiation risk Japan faces from its damaged nuclear reactor powered electricity generators.  This has repercussions on U.S. electric utilities, as Americans have renewed concerns about the safety of similar General Electric supplied reactors. 

For example, Crain’s Chicago Business reports “Exelon Faces Regulatory Fallout After Japanese Nuclear Disaster.”  The country’s largest nuclear plant operator is facing stepped-up reviews, likely delays in expansion, and discussions about long-term viability of facilities that are 30 years into an anticipated 40 year life.  All of this threatens the viability of meeting affordable electricity needs for millions of midwestern Americans in as little as 5 years.  And it puts a lot of risk on the viability of Exelon as a going concern should the regulators require extensive re-investment to keep the plants open, or build replacements – most likely without a rate increase. All utilities dependent upon nuclear – and coal as well – for generation are now facing significant challenges.

This points out a horrible weakness in planning by most participants in America’s electric utility industry.  Almost all planning boils down to “we need to increase capacity to meet needs.  The cost of new plants, plant expansions and transmission lines from massive facilities to customers is $X, therefore, we need to lobby regulators, rate-setters and the populace to allow us a rate increase of $.xxx per kilowatt hour to cover the cost.”  Planning entirely driven by the past.  Projecting the future based upon historical demand, sources of generation, cost of fuel, etc. utilities mostly keep planning to do what they have always done, and asking regulators and customers to fund doing what they always did.  If you want anything new (like a renewables effort) then the companies want the cost for that added on top of the “business as usual” price increase.

But customers are increasingly tired of hearing about rising rates, while they are constantly trying to conserve.  The old “compact” in which the price regulators guaranteed utilities a rate of return is under considerable stress.  Increasingly, people are asking why they need to pay more, why these plants are so expensive, why the industry keeps doubling down on old technologies and fuel sources.  Customers, and regulators, are asking for innovation, but the industry offers almost nothing, because it’s planning is all about extending the past, and defending its historical approach and investments. 

Today we know that the industry’s future will not be like the past.  Increasingly customers (with government support in many cases) are demanding changes in the sourcing of electricity.  Requesting decommissioning of polluting generators (coal in particular), shut-downs of perceived risky, and now aging, nuclear facilities, more supply from renewable, or sustainable, sources — and without higher prices. 

There are a lot of new technologies available.  And some customers recommend a dramatic change in approach, from huge, centralized generation facilities to many smaller, safer, renewable generation facilities that are decentralized and closer to end-users.  But most industry veterans are unable to even consider these options, because they see no way to get to the future from today.  They are locked-in to defending and extending what the industry has always done, even if it means extending known risks, environmental concerns and creating higher prices for fuel and maintenance.

And that’s where Larry Page and Google have a lot to offer the utility industry planners.  Instead of planning from the past forward, Google plans from the future back to the present.  By helping employees develop future scenarios the leaders at Google identify far better solutions than the linear, historical planning approaches.  Once a better future is identified, then the organization is unleashed to create that future by planning backward from the scenario, figuring out how to implement it.

Wired magazine, in “Larry Page Wants to Return Google to its Start-up Roots” gives great insights to how Google has created a $30B business in a decade – using scenario planning at the heart of its approach to business.

  • Don’t fear being audacious when setting goals.  Even if you don’t reach the ultimate goal, your improvement could be game-changing for the industry and greatly benefit the early adopter
  • Instead of saying trying to help somebody with an immediate question, ask what would have the maximum impact in 10 years.  Don’t just accept more of the same, look for the best answer
  • Leaders should not fear being viewed as having stepped into the future, and returned to tell everyone what they’ve seen
  • Don’t assume that the way things are done is the best way.  Instead, ask “why is it done like that?  Is there possibly a better way?”
  • Is the obstacle to future success something that is impossible – say because of the laws of physics – or is the obstacle a need for resources – in engineering, scale design or implementation?  Don’t confuse things that can’t be done with things that simply lack resources (even if the initial resource demand seems very high)
  • When someone pitches an idea, leader’s should avoid questioning the viability.  Rather, they should offer a variation that is an order of magnitude more ambitious and ask why the latter cannot be accomplished.
  • Ask regulators what they want, and try really hard to achieve that goal rather than arguing with them. Offer creative solutions that are non-traditional, but that just might achieve the goal.  Change the conversation to achieving the goal, rather than extending the past.
  • If an idea requires creative thinking, be excited about it.  Don’t hesitate to represent unrealistic expectations.
  • Speed is really, really important.  If there is merit, rush it toward the future state as fast as possible.  Let implementation and the marketplace determine what’s successful, rather than trying to guess.
  • Do the numbers, but don’t expect those who disagree to believe your numbers.  It’s easy for people to pooh-pooh projections.  Don’t let disagreement over forecasts stop you from proceeding.
  • Don’t let potential legal problems stop you.  Take action, and deal with legal issues when, and if, they arise.

Planning for the future, and being ambitious about what that future entails, has created a slew of new products from Google that have benefited everyone around the world.  Google’s use of scenario planning to drive development and investments is a business implementation of an historical echo – asking not what Google needs from historical customers to succeed, but rather what Google can do to create something future customers will value.  Google uses planning to rush headlong into providing a growing and profitable future, rather than trying to optimize the historical solution.

Giant, centralized distribution facilities that use nuclear or fossil fuels, then sending electricity over massive distances losing upwards of 70-80% of the power in transmission, is the historical utility industry approach.  For a very long time it worked pretty darn well.  But the limitations of that approach are being seen, and felt, in many locations – causing blackouts in various regions, health risks in others, rising polution levels, rising demands for limited fuels, higher costs (especially for maintenance and upgrades) and potential deadly disasters from unexpected events of mother nature. Industry outsiders question whether America’s growth will be limited (due to supply or pricing issues) if this approach is not changed.

Lots of options exist for the electric utility industry to do things differently.  But it will take a big change in how the industry leaders plan. Maybe they’ll ask the folks at Google for a few ideas on how to change their approach to planning.  Can you imagine a future where Google managed the electric grid?

Finding the Money – Be Smarter, like IBM


You gotta love the revenue growth in companies like Apple and Google.  From 2000 to 2010 Apple revenues jumped from $8B to $65B.  Google grew from nothing to $29B.  But for some organizations, amidst market shifts, simply maintaining revenues is an enormous challenge. 

In a dynamic world, many companies are losing revenues to new competitors who seem on a suicide mission to destroy industry profitability!  In this situation, the ability to grow takes on an entirely different flavor.  As “core” markets retract (in revenues or profits,) can the company find a way to enter new markets in order to maintain revenues – and possibly grow profits? For many organizations, facing radical market shifts, moving from no-growth, declining profit markets into higher growth, better profit markets is a huge challenge.

Recall that IBM once completely dominated the computer industry.  An IBM skunk works program in Florida is credited for creating the modern day personal computer – and because of the team’s decision to  use external componentry (an IBM heresy at the time) creating Microsoft.  As the market shifted toward these smaller computers, IBM focused on defending its traditional mainframe base, eschewing PC sales entirely. By the 1990s IBM was almost bankrupt! In trying to preserve its old, “core,” mainframe business IBM completely missed the market shift and waited until its customers started disappearing before taking action.  But by then new competitors had claimed the new market!

In came an outsider, Louis Gerstner, who saw the trend toward far greater user of external services by people in information technology.  He pushed IBM from being a “hardware” company to an “IT services” provider (overly simplified explanation, to be sure) and IBM roared back as a tremendous turnaround success story.

But, what would be next?  As Mr. Gerstner left IBM the company’s “core” market was in for another huge upheaval.  Vast armies of IT consultants had been created in other companies, such as Electronic Data Systems (EDS), Computer Sciences Corporation (CSC) and audit firms such as Anderson (now named Accenture) Coopers & Lybrand and Deloitte & Touche.  This created rampant competition and margin pressures from so much capacity. 

Simultaneously, the emergence of similar armies, often even more highly trained, of consultants in India at companies such as Tata Consultancy Services (TCS) and Infosys – at dramatically lower cost and using development standards such as the Capability Maturity Model – was further transforming the landscape of service providers. More and more services contracts were going to these new competitors in foreign countries at prices a fraction of historical rates.  Domestic margins were tanking!

As IT integration and services lost its margin several big competitors began paying enormous premiums to buy customer computer shops, completely taking them over customer via a new approach called “outsourcing” – a solution offering that nearly bankrupted EDS due to the razor thin margins.  The market IBM entered to save itself, and make Mr. Gerstner famous, was no longer capable of keeping IBM a profitably growing concern.

In 2002 it was by no means clear whether IBM would remain successful, or end up again in dire straights.  But, as detailed in Fortune’s CNNMoney web site, “IBM’s Sam Palmisano: A Super Second Act” things haven’t gone too badly for IBM this decade as profits have grown 4 fold.

Rather than simply trying to do more of what Mr. Gerstner did, Mr. Palmisano lead IBM into developing a new scenario of the future, leading to the birth of the Smarter Planet program.  Not dissimilar from how Steve Jobs used Apple’s scenario planning to push the company from Macs into new growth product markets, the scenario planning such as Smarter Planet opened many doors for new business opportunities at IBM.  The result has been a dramatic increase (well more than doubling) its more profitable software sales, as well as development of new solutions for everything from global banking to transportation management, government systems and a whole lot more.  New solutions driven by the desire to fulfill the future scenario  – and solutions that are considerably more profitable than the gladiator war that had become IT services.

Ibm_pretax_income_chart

Using scenario planning to create White Space where employees can develop new solutions is a hallmark of successful companies.  By redirecting resources away from defensive activities, new solutions can be created before the proverbial roof collapses in the declining margin business. By spending money on new product development, and new market development, new revenues are generated where there is more growth – and less competition.  And that allows the company to shift with the marketplace, rather than be stuck in a bad business when it’s way too late to shift — because new competitors have already captured the new markets. 

(For a White Space primer, check out the InnovationManagement.com article “White Space Mapping – Seeing the Future Beyond the Core.”)

When markets shift the first sign is intense competition, driving down margins.  Too many leaders decide to “hunker down” and put all resources into defending the old business.  Costs are slashed and all spending is put into competitive warfare.  This, inevitably, leads to ugly results, because such behavior ignores the market shift.  Being Smarter means recognizing the market shift, and changing investments – putting more money into new projects directed at finding new revenues, and most often higher rates of return.

Not all companies are growing like Apple, Google, Facebook or Groupon.  But that doesn’t mean they aren’t on the road to growth by shifting their revenues into new markets – like IBM.  What ties these companies together is their use of scenario planning to focus on the future, rather than relying on traditional planning systems firmly tied to the past. And investing in White Space so the company can find new markets, and new solutions, before competition eliminates the margin altogether.

If Mr. Palmisano is soon to leave IBM, as the article indicates is likely, we can surely hope the Board will seek out a replacement who is equally willing to make the right investments.  Keeping the company pushing forward by developing future scenarios, and creating solutions that fulfill them. 

 

 

Why McDonald’s Isn’t Apple – and It Matters


Summary:

  • McDonald's relies on operational improvements to raise profits, these are short-lived and give no growth
  • McDonald's growth cycles, and investors forget long-term it isn't growing much at all
  • You can't depend on recurring recessions to make your business look good
  • Apple has shown how to create long-term revenue growth, and greater investor wealth, by developing new markets and solutions
  • Investors in McDonald's are likely to be less pleased than investors in Apple

Subway is now #1 in size, as "McDonald's Loses World's Biggest Title to Subway" according to Crain's Chicago Business.  The transition wasn't hard to predict, since Subway has been much larger in the USA for several years.  Now Subway has gained on McDonald's internationally.  What's striking about this is that McDonald's could see it coming, and really did nothing about it.  While Subway keeps focused on growth, McDonald's has focused on preserving its historical business.  And that bodes poorly for long-term investor performance.

For more than a decade McDonald's size has swung back and forth as it opened stores, then closed hundreds in an "operational improvement program," before opening another round of stores – to then repeat the cycle. McDonald's has not shown any US store growth for a long time, and has relied on expanding its traditional business offshore. 

Even the menu remains almost unchanged, dominated by burgers, fries and soft drinks.  "New" product rollouts have largely been repeats of decades old products, like McRib, which cycle on and off the menu.  And the most "strategic" decision we hear about was executives spending countless hours, along with thousands of franchisees, trying to figure out whether or not to reduce the amount of cheese on a cheeseburger (which they did, saving billions of dollars.)  Even though it spent almost a decade figuring out how to launch McCafe, the whole idea gets little atttention or promotion.  There just isn't much energy put into innovation, or growth at McDonald's.  Or even trying to be a leader in new marketing tools like social media, where chains like Papa John's have done much better.

Most people have forgotten that McDonald's acquired and funded the growth of Chipotle's, one of the fastest growing quick food chains.  But in 2006 McDonald's leadership sold Chipotle's to raise cash to fund another one of those operational improvement rounds.  The business that showed the most promise, that has much more growth opportunity than the tiring McDonald's brand, was sold off in order to Defend and Extend the known, but not so great, McDonald's. 

Sort of like selling your patents in order to pay for maintenance and upgrades on the worn out plant tooling.

Soon after Chipotle's sale the "Great Recession" started. And people quit dining out – or went downmarket.  Thousands of restaurants closed, and chains like Bennigan's declared bankruptcy.  As people started eating a bit more frequently in McDonald's investors cheered.  But, this was really more akin to the old phrase "even a stopped clock is right twice a day."  McDonald's was the benefactor of an unanticipated economic event.  And as the economy has improved McDonald's has cheered its improved oprations and higher profits.  But, where is future growth?  What will create long-term growth into 2015 and 2020? (To be honest, I'm not sure where this will be for Subway, either.)

This cycle of bust and repair – which will lead to another bust when a competitor or other external event challenges McDonald's unaltered success formula – is very different from what's happened at Apple.  Rather than raising money to defend its historical business (the Macintosh business) Apple actually cut back its Mac products to fund development of new businesses – the big winner being iPod and iTunes.  Then Apple focused on additional new markets, transforming smart phone growth with the iPhone and altering the direction of computing with the iPad.  Rather than trying to Defend its past and Extend into new markets (like McDonald's international efforts) Apple has created, and led, new markets.

Performance at Apple has been much better than McDonald's.  As we can see, only during the clock-stopped period at the height of the recession did investors lose faith in Apple's growth, while defaulting to defensiveness at McDonald's.

AAPL v MCD 3.11

Chart source:  Yahoo Finance

Steve Toback at bNet.com gives us insight into how Apple has driven its growth in "10 Ways to Think Different – Inside Apple's Cult-like Culture."  These 10 points look nothing like the McDonald culture – or hardly any company that has growth problems.  A quick scan gives insight to how any company can identify, develop and grow with new solutions in new markets:

  1. Empower employees to make a difference. 
  2. Value what's important, not minutiae
  3. Love and cherish the innovators
  4. Do everything important internally
  5. Get marketing
  6. Control the message
  7. Little things make a big difference
  8. Don't make people do things, make them better at doing things
  9. When you find something that works, keep doing it
  10. Think different

What's most worrisome is that the protectionist culture we see at McDonald's, and frankly most U.S. companies, is the kind that led General Motors to years of faultering results and eventual bankruptcy.  Recall that GM once bought Hughes Aircraft and EDS as growth devices (around 1980,) and opened the greenfield Saturn division to learn how to compete with offshore auto makers head-on.  But the first two were sold, just like McDonald's sold Chipotle, to raise funds for propping up the poorly performing auto business.  Saturn was gutted of its uniqueness in cost-saving programs to "align" it with the other auto divisions, and closed in the recent bankruptcy.  (Read more detail on The Fall of GM in this short eBook.)

While McDonald's isn't at risk of immediate bankruptcy, investors need to understand that it's value is unlikely to rise much.  Operational improvements are not the source of growth.  They are short-term tactics to support historical behaviors which trade off short-term profit improvement for long-term new market development.  In McDonald's case, this latest round of performance focus matched up with an economic downturn, unexpectedly benefitting McDonald's very quickly.  But long-term value comes from creating new business opportunities that meet changing needs.  And for that you need to not sell your innovations — instead, invest in them to drive growth.

Are you Enchanting? Guy Kawasaki tells how to be like Apple


Why do some businesses (or products) seem to launch onto the scene with incredible success?  According to a new book, “Enchantment” releasing March 8, 2011 (available on Amazon.com at about 50% off the list price), it is the ability to go beyond normal marketing, PR and other business practices in a way that enchants customers.  Author Guy Kawasaki says that being likable, trustworthy and prepared allows you to overcome natural resistance to change and move people to accept, adopt – and even become supporters of your solution.

The book is tailor-made for entrepreneurs.  Especially those in high-tech, who are looking for rapid adoption of new platforms.  So when Guy sent me a copy and asked for my review I asked him for a 1-on-1 interview where I could focus on how the vast majority of people, who work away in large, less than enchanting, organizations, could gain value from reading his latest effort.  I wanted him to answer “how am I supposed to be enchanting when dullness reigns in my environment?” 

Here’s his finput from our meeting, and his reasons to buy and read Enchantment:

Guy’s first recommendation – “enchant your boss.”  There’s a chapter in the book, but he focused on what to do if your boss is a real dullard.  Firstly, don’t ever forget to make the boss’s priority your priority, because without that you won’t be effective.  The more you can convince your boss the 2 of you are on the same wavelength, the more he’ll be likely to give you space.  And space is what you want/need in order to start to identify the next perfomance curve.  Then, if you have some space, you can start to demonstrate how new solutions could work.  Use your aligned priorities to help you reframe your boss’s opinion about the future, and always ask for forgiveness if you’re found reaching a bit too far.

Secondly, enchant those who work for you.  Give them a MAP.  (M) is for Mastery of a new skill or technology.  Give your employees permission and encouragement to master new areas that will help them grow – and put them in a position to teach you! (A) is for Autonomy. In other words, give them the space discussed above. (P) is for Purpose.  Help people to see their work as having more value than just money.  Add purpose to their results so they can feel great. With a MAP they can succeed, and you can too.

Thirdly, enchant your peers by working hard to be likable. Guy offers a chapter in which he deconstructs likability, and provides a series of tactics to make you more likable.  This isn’t manipulation (although it may sound like it), but rather a guidebook of what to do to help your true self be more likable.  With peers, the #1 objective is to be trustworthy!  Show them that you can help expand the pie, so there is more success for everyone, rather than being the kind of person always lining up to get his piece first!

When you find yourself disappointed in your work, or employer, Guy recommends we take from his book the idea that you seek out a dream for what your work group, or employer, can be.  Don’t accept that today is the best case, and instead promote the notion that tomorrow can always be better, more fun, more fulfilling.  He believes that if you say you’re going to do something that seems impossible, and you undertake it with enchanting techniques, your behavior will become infectious. Behave like an enchanter and you will create other enchanters in the organization.  (If this sounds a bit Pied Piper-ish I guess it does take some faith to follow Guy’s recommendations.)

I asked him how a Chief Enchantment Officer could help Microsoft (readers of this blog know I’ve long been a distractor of the strategy and CEO at Microsoft).  Guy said he felt Micrsoft could become VERY enchanting if the company would:

  • Focus on making Micrsooft more likable and trustworthy.  Old behaviors were in the past.  Going forward, if leadership applied itself Microsoft could implement the things in his book and drive up the company’s likability and trustworthiness amongst constituents – including customers, developers, suppliers and investors.
  • Rethink the definition of a “product” to make offerings more enchanting.  In Guy’s view, Apple would never say a product is good enough based upon its specifications or functionality.  An iPad has to go beyond those things to offer something much more.  Too many companies (not just, or even specifically, Microsoft he was clear to point out) launch “ugly” products – without realizing they are ugly!  With a bit different direction, different thinking, about how to define a product they could be more enchanting, and more successful.  (When I compare the iPhone or iPad to the xBox I start to clearly see the difference in product description to which Guy refers. Guy agreed with me that Kinect is a very enchanting product. Unfortunately it appears to me like Microsoft still doesn’t realize the value of this in its xBox efforts.)
  • Train the organization on the importance of, value of, and ability to be enchanting.  Most companies are clueless about the notion, as people work hard delivering solutions with too much of an “engineering mentality”.  Apple has trained its organization so the people think about how to make products, services and solutions enchanting, and therefore non-enchanting things are unacceptable.  Raise the bar for making sure solutions are likable, trustworthy and prepared for what the customer will want/need.  Not merely functional.  Build that into the behavioral lock-in and Guy believes any organization cannot miss success!

I told Guy that often I’m frequently pushed to believe that a company is “beyond the pale;” unable to do better, or to be better.  Simply incapable fo ever being “enchanting.”  Guy is convinced this is balderdash – if you want to change.  He talked about Audi, which suffered horribly from problems with unintended acceleration a couple of decades ago.  Audi changed itself, and now is doing quite well (according to Guy) while Toyota is suffering.  It’s easy for an organization to slip into dis-enchanting behavior over time if it starts cost-cutting and obsessing about optimizing its past.  But any company can become enchanting again.  “Hey, look at how Apple slipped, then came back, and you can see how enchantment is possible for any company.”

I don’t know that Enchantment will solve all your business problems, but for $14 (and free shipping on Amazon.com) it’s full of ideas about how you can move a company to better performance.  And surely make it a better, more compelling place to work!

Guy Kawasaki became famous as a Macintosh Evangelist for Apple back in the 1980s.  His passion for creating technology products that help people’s lives, and work, improve, has been compelling for 2 decades.  His blog is entitled “How to Change the World,” demonstrating how high Guy sets his sites.  Guy also created and remains active in Alltop.com, a compendium of blog listings on important topics, where ThePhoenixPrinciple.com is part of the Innovation section.

Throw away that slide rule! Use Facebook, iPhones, iPads and Groupon


My high school physics teacher spent a week teaching students how to use a slide rule.  I asked him, "why can't we just use calculators?" At the time a slide rule was about $2, and a calculator was $300.  The minimum wage was $1.14/hour.  He responded that slide rules had been around a long time, and you never knew if you'd have access to a calculator. To the day he retired he insisted on using, and teaching, slide rule use.  Needless to say, by then plenty of folks were ready to see him go.  Too bad for his students he stayed as long as he did, because that was a week they could have spent learning physics, and other important materials. Ignoring the new tool, and its advantages, was a wasteful decision that hurt him and his customers.

Yet, I am amazed at how few people are using today's new tools for business, and marketing.  At a small business Board meeting this week the head of marketing presented his roll-out of the boldest campaign ever in the business's history.  His promotion plan was centered around traditional PR, supplemented with radio and billboard ads.  I asked for his social media campaign, and after he confirmed I was serious he said he had a manager working on that.  I asked if he had a facebook page ready, the videos on YouTube, a linked-in program ready to run against targets and his twitter communications established, including hash tags? He said if those things were important somebody had to be working on them.  Two weeks from roll-out and he wasn't giving them any personal consideration.

I then asked the roughly 20 attendees, all but one of which were over 40, some questions:

  • How many of you use skype at least once/month? Answer – 5%
  • How many of you have a facebook page and check it daily? A – 15%
  • How many of you check twitter daily? A – 5%  Tweet at least 5 times/week? A – none
  • How many own and use a tablet? A – 10%
  • How many of you have a smartphone on which you've downloaded at least 10 apps? A – 10%
  • How many of you carry a laptop? A – 100%
  • Who knows the #1 company for new hires in Chicago in 2010? Answer – 5% (GroupOn)
  • Who has used a Groupon coupon? Answer – 30%

Slide rule users.

New tools are here, and adopters will be the winners. If you still think we're a nation of laptop users, you need to think again.  Laptop usage declined 20% in the last 2 years, to 2006 levels, as people have adopted easier to use technology

Declining PC Usage 2010

Chart Source: Silicon Alley Insider of BusinessInsider.com

If you are trying to pump out ads the new medium is mobile – not television, radio, outdoor or even web sites.  Have you tested the look and feel of your web site on popular mobile devices? Do you know if new users to your business are even able to access your information from a mobile device?

And, it's more likely a customer will hear about you, and obtain a review of your product or service, via Facebook than vai the web!  A CNet.com article asks the leading question "Will Facebook Replace Company Web Sites?" Want to understand the importance of Facebook, check out these same month comparisons:

  • Starbucks: Facebook likes – 21.1M, site visits – 1.8M
  • Coca-Cola: Facebook likes – 20.5M, site visits – .3M
  • Oreo: Facebook likes – 10.1M, site visits – .3M

Yes, these are consumer products.  But if you don't think the first place a potential customer looks for information on your business is Facebook, whether it's financial services, business insurance, catering or blow-molded plastic housings you need to think again.  The use of facebook is simply exploding. 

According to Business Insider, by the end of December, 2010 Facebook apps were downloaded to iPhones at a rate exceeding 500,000/day as the total shot to nearly 60million! Meanwhile the Facebook app downloads to Android devices grew to over 20million!  Blackberry Facebook users has reached 27million, bringing the total by end of 2010 to well over 100M – just on smartphones!  In September, 2010 Facebook became the #1 most time spent on the internet, passing combined time on all Google and all Yahoo sites!  With over 500million users, Facebook isn't just kids checking on their friends any longer. When somebody wants a first peak at your business, odds are great it will be done over a smartphone and likely via a Facebook referral!

Facebook minutes 9.2010

Chart Source: Silicon Alley Insider at Business Insider

As fast as smartphone usage has grown, tablet usage is on the precipice of explosion.  Tablet sales will be 6 times (or more) notebook sales in just a few years!  The second most popular product will be, of course, continued sales of advanced smartphones as the two new platforms overtake the traditional laptop.  So what's your budgeted spend on mobile devices, mobile apps and mobile marketing?

Tablet Sales Forecast 2.11

Chart Source: Silicon Alley Insider of Business Insider

And in the effort to attract new customers, if you think the route will be newspapers, radio, TV, billboards, or direct mail – think again.  Digital local deal delivery is projected to grow at least 45%/year through 2015 creating a market of over $10billion! If you want somebody to know about your product or service, Groupon and its competitors is already taking the lead over older, traditional techniques.  By the way, when was the last time you bothered to open that latest Vallasis direct mail package – or did you just throw it immediately in the recycling bin without even a look?

Groupon Market forecast 1.11

Chart Source: Silicon Alley Insider of Business Insider

So, what is your business doing to leverage these tools?  Are your marketing, and technology, plans for 2011 and 2012 still mired in old approaches and technologies?  If so, expect to be eclipsed by competitors who more quickly implement these new solutions.

Too often we become comfortable in our old way of doing things.  We keep implementing the same way, like the teacher giving slide rule instructions.  And that simply wastes resources, and leaves you uncompetitive.  The time to use these new solutions was yesterday – and today – and tomorrow – and every day.  If you don't have plans to adopt these new solutions, and use them to grow your business, what's your excuse?  Is it that much fun using the old slide rule?

 

Winners shift, Losers don’t – Buy Amazon Sell Sears and Walmart


What separates business winners from the losers? A lot of pundits would say you need to be efficient, cost conscious and manage margins.  Others would say you need to be really good (excellent) at something – much better than anyone else.   Unfortunately, that sounds good but in our fast-paced, highly competitive world today those platitudes don’t really create winners.  Success has much more to do with the ability to shift.  And to create shifts.

Think about Amazon.com.  This company was started as an on-line retail channel for books most stores would not stock on their shelves.  But Amazon used the shift to internet acceptance as a way to grow into selling all books, and eventually came to dominate book sales.  Not only have most of the small book stores disappeared, but huge chains like B. Dalton and more recently Borders, were driven to bankruptcy.  Amazon then built on this shift to expand into selling lots more than books, becoming a force for selling all kinds of products.  And even opening itself to become a portal for other on-line retalers by routing customers to their sites, and even taking orders for products shipped from other e-tailers. 

More recently, Amazon has taken advantage of the shift to digitization by launching its Kindle e-reader.  And by making thousands of books available for digital downloading. By acting upon market trends, Amazon has shifted quickly, and has caused shifts in the market where it participates.  And this shifting has been worth a lot to Amazon. Over the last 5 years Amazon’s stock has risen from about $30/share to about $180/share – about a 45%/year compounded rate of return!

Chart forAmazon.com Inc. (AMZN)Chart source: Yahoo Finance

In the middle to late 1990s, as Amazon was just starting to appear on radar screens, it appeared like Sears would be the kind of company that could dominate the internet.  After all Sears was huge!  It was a Dow Jones Industrial Average (DJIA) member that had ample resources to invest in the emerging growth market.  Sears had a history of pioneering markets.  It had once dominated retail with its catalogs, then became a powerhouse in free standing retail stores, then led the movement to shopping malls as an anchor chain, and even used its history in lending to develop what became Discover card, and had once shown its ability to be a financial services company and even an insurer!  Sears had shifted with historical trends, and surely the company would see that it could bring its resources to the shifting retail landscape in order to remain dominant.

Unfortunately, Sears went a different direction, prefering to focus on defending its current business model.  As the chain struggled, it was dropped from the DJIA.  Eventually a financier, Edward Lampert, used his takeover of bankrupt KMart (by buying up their bonds) to take over Sears!  Under his leadership Sears focused hard on being efficient, controlling costs and managing margins.  Extensive financial rigor was applied to Sears to improve the profitability of every line item, dropping poor performers and closing low margin stores.  While this initially excited investors, Sears was unable to compete effectively against other retailers that were lower cost, or had better merchandise or service, and the value has declined from about $190/share to $80; a loss of about 60% (at its recent worst the stock fell to almost 30 – or a decline of 84% peak to trough!)

Chart forSears Holdings Corporation (SHLD)Chart Source:  Yahoo Finance

Meanwhile the world’s #1 retailer, Wal-Mart, has long excelled at being the very best at supply chain management, and low-price leadership in retailing.  Wal-Mart has never varied from its original business model, and in the retail world it is undoubtedly the very best at doing what it does – buy cheap, sell cheap and run a very tight supply chain from purchase to sale.  This excited some investors during the “Great Recession” as customers sought out low prices when fearing about their jobs and future. 

But this strategy has not been able to produce much growth, as stores have begun saturating just about everywhere but the inner top 30 cities.  And it has been completely unsuccessful outside the USA.  As a result, despite its behemoth size, the value of Wal-Mart has really gone nowhere the last 5 years.  While there has been price gyration (from $42 low to $62 high) for long-term investors the stock has really gone nowhere – mired mostly around $50.Chart forWal-Mart Stores Inc. (WMT)Chart Source: Yahoo Finance

Investors in Amazon have clearly fared much better than Sears or Wal-Mart

Chart forWal-Mart Stores Inc. (WMT)Chart Source: Yahoo Finance

Too often business leaders spend too much time thinking about what they do.  They think about costs, margins, the “business model” and execution.  But success really has less to do with those things than understanding trends, and capitlizing on those trends by shifting.  You don’t have to be the lowest cost, or most efficient or even the most passionate.  What works a lot better is to go where the trends are favorable, and give customers solutions that align with the trends. And if you do this early, before anyone else, you’ll have a lot of time to figure out how to make money before competitors try to cut your margins!

Recognize that most “execution” is about preserving what happened in the past.  Trying to do things better, faster and cheaper.  But in a rapidly changing world, new competitors change the basis of competition.  Amazon isn’t a better classical bookseller, or retailer. It’s a company that leveraged trends – market shifts – to take advantage of new technologies and new ways of people shopping.  First for books and then other things.  Later it built on trends toward digitization by augmenting the production of electronic publications, which is destined to change the world of book publishing altogether – and even has impact on the publishing of everything from periodicals to manuals.  Amazon is now creating market shifts, which is changing the fortunes of others.

For investors, employees and suppliers you are better off to be with the company that shifts.  It has the ability to grow with the trends.  And the faster you get out of those companies which are stuck, locked-in to their old business model and practices in an effort to defend historical behaviors, the better off you’ll be.  Despite the P/E multiples, or other claims of “value investing,” to succeed you’re a lot better off with the company that’s finding and building on trends than the ones managing costs.  

 

 

Paid to fire! Why CEO compensation is all wrong


Since Craig Dubow took over as Gannett's CEO in 2005, Gannettblog reports that employment at the company has dropped from 52,600 to 32, 600.  So 20,000 employees, or nearly 1 in 3, have disappeared.

  • 2006 – 49,675 down 6%
  • 2007 – 46,100 down 7%
  • 2008 – 41,500 down 10%
  • 2009 – 35,000 down 16%
  • 2010 – 32,600 down 7%

Doesn't this look like dismantling the company? It is undoubtedly true that people are reading fewer newspapers than they did in 2000.  But that fact does not mean Gannett has to head toward the whirlpool of failure, slowly cutting itself into a less relevant organization.  There are a plethora of opportunities today – from creating a vital on-line news organization such as Huffington Post to moving into on-line news dissemination like Marketwatch.com to digital publishing like Amazon and its Kindle, to wholesale news distribution like the Apple iPad to on-line merchandising and ad distribution like Groupon, to —- well, let's just say that there are a lot of opportunities today to grow.  To it's credit, Gannett owns 51% of CareerBuilder.com (who's employees are all included in the above numbers).  But that one investment has been, as shown, insufficient to keep Gannett a vital, growing organization.  At this rate, when will Gannett have to stop printing those hotel newspapers?

Yet, the CEO was paid $4.7M in 2009, including a cash bonus of $1.45M for implementing cost cuts.  And that's what's quite wrong with CEO compensation America. And the problem, compensating CEOs for shrinking the company, has an enormous impact on American economic (and jobs) growth. 

It is NOT hard to cut jobs.  In fact, it is probably the easiest thing any executive can do.  CEOs can simply order across the board cuts, or they can hand out downsizing requirements by function or business line.  It's the one thing any executive can do that is guaranteed to give an improvement to the bottom line.  Any newly minted 20-something MBA can dissect a P&L and identify headcount reductions.  Anyone can fire salespeople, engineers, accountants or admins and declare that a victory.  There are lots of ways to cut headcount costs, and the immediate revenue impact is rarely obvious. So, why would we pay a bonus for such behavior? 

You can imagine the presentation the CEO gives the Board of Directors. "Our industry is doing poorly in this economy.  Revenues have declined.  But I moved quickly, and slashed xx,xxx jobs in order to save the P&L.  As a result we preserved earnings for the next 2 years.  Because of revenue declines our stock has been punished, so I recommend we take 50% (or more) of the cash saved from the headcount reductions and buy our own company stock in order to prop up the price/earnings multiple.  That way we can protect ourselves from raiders in the short term, and continue to report higher earnings per share next year (there will be fewer shares – so even if earnings wane we keep up EPS), despite the terrible industry conditions."

Oh, by the way, because the CEO's compensation is tied to profits and EPS, he is now entitled to a big, fat bonus for this behavior.  And, as Brenda Barnes did at Sara Lee, this can happen for several years in a row, leading to the company's collapse.  As the company becomes smaller and smaller, its overall value declines, even if the EPS remains protected, until some vulture – either another company, private equity firm or hedge fund-  buys the thing.  The investors lose as value goes nowhere, employees lose as bonuses, benefits, pay and jobs are slashed, and vendors lose as revenues decline and price concessions become merciless.  The community, state and nation lose as jobs and taxes disappear in the revenue decline. The only winner?  The CEO – and any other top executives who are compensated on profits and EPS.

When a company grows, compensating profits is not a bad thing.  But when a company isn't growing, well, as seen at Gannett, the incentives create perverse behavior.  CEOs take the easy, and personally rewarding route of cutting costs, escalating the downward spiral. Without growth, you got nothing.  So why isn't there a simple binary switch; if the CEO didn't grow revenues, the CEO doesn't get any bonus?  Regardless.

"What about industry conditions?" you might ask.  Well, isn't it the CEO's job to be foresightful about industry conditions and move the company into growth industries, rather than staying too long in poorly performing industries? CEOs aren't supposed to manage a slow death. Aren't they are supposed to lead vibrant, vital, growing companies that increase returns for investors, employees and suppliers?

"What about divestitures?  What if the CEO sold a business at a huge multiple making an enormous profit?" Good move!  Making the most of value is a good thing!  But, once the sale is complete, isn't the critical question "What are you going to do with that money now?"  If the CEO can't demonstrate the ability to invest in additional, replacement revenues that have a higher growth rate then shouldn't that money all be given to investors so they can invest it in something that will grow (rather than in buying company stock, for example, which just gets us back to the smaller company but higher EPS discussion above)?  CEOs aren't investment bankers, who earn a bonus based upon buying and selling assets at a profit.  Investment bankers can earn a bonus on transactions, but that's not the CEOs role, is it?  Isn't the CEO is chartered with building a growing, profitable company.

Look at the CEOs of the Dow Jones Industrial companies.  How many of them are compensated only if their company grows?  As growth in these companies has floundered the last decade, how many CEOs continued to receive multi-million dollar compensation payouts? 

If we want to grow the economy, we have to grow the companies in the economy.  And if we want to grow companies, we have to align compensation.  Rewarding shrinkage seems to have an obvious problem.

 

Why Steve Jobs Couldn’t Find a Job


Business people keep piling onto the innovation and growth bandwagon.  PWC just released the results of its 14th annual CEO survey entitled “Growth Reimagined.”  Seems like most CEOs are as tired of cost cutting as everyone else, and would really like to start growing again.  Therefore, they are looking for innovations to help them improve competitiveness and build new markets.  Hooray!

But, haven’t we heard this before?  Seems like the output of several such studies – from IBM, IDC and many others – have been saying that business leaders want more innovation and growth for the last several years!  Hasn’t this been a consistent mantra all through the last decade?  You could get the impression everyone is talking about innovation, and growth, but few seem to be doing much about it!

Rather than search out growth, most businesses are still trying to simply do what their business has done for decades – and marveling at the lack of improved results.  David Brooks of the New York Times talks at length in his recent Op Ed piece on the Experience Economy about a controversial book from Tyler Cowen called “The Great Stagnation.”  The argument goes that America was blessed with lots of fertile land and abundant water, giving the country a big advantage in the agrarian economy from the 1600s into the 1900s.  During the Industrial economy of the 1900s America was again blessed with enormous natural resources (iron ore, minerals, gold, silver, oil, gas and water) as well as navigable rivers, the great lakes and natural low-cost transport routes.  A rapidly growing and hard working set of laborers, aided by immigration, provided more fuel for America’s growth as an industrial powerhouse.

But now we’re in the information economy.  Those natural resources aren’t the big advantage they once were.  Foodstuffs require almost no people for production.  And manufacturing is shifting to offshore locations where cheap labor and limited regulations allow for cheaper production.  And it’s not clear America would benefit even if it tried maintaining these lower-skilled jobs.  Today, value goes to those who know how to create, store, manipulate and use information.  And success in this economy has a lot more to do with innovation, and the creation of entirely new products, industries and very different kinds of jobs.

Unfortunately, however, we keep hiring for the last economy.  It starts with how Boards of Directors (and management teams) select – incorrectly, it appears – our business leaders.  Still thinking like out-of-date industrialists, Scientific American offers us a podcast on how “Creativity Can Lesson a Leader’s Image.”  Citing the same study, Knowledge @ Wharton offers us “A Bias Against ‘Quirky’ Why Creative People Can Lose Out on Creative Positions.” While 1,500 CEOs say that creativity is the single most important quality for success today – and studies bear out the greater success of creative, innovative leaders – the study found that when it came to hiring and promoting businesses consistently marked down the creative managers and bypassed them, selecting less creative types!

Our BIAS (Beliefs, Interpretations, Assumptions and Strategies) cause the selection process to pick someone who is seen as less creative.  Consider these comments:

  • “would you rather have a calm hand on the tiller, or someone who constantly steers the boat?” 
  • “do you want slow, steady conservatism in control – or irrational exuberance?”
  • “do we want consistent execution or big ideas?” 

These are all phrases I’ve heard (as you might have as well) for selecting a candidate with a mediocre track record, and very limited creativity, over a candidate with much better results and a flair for creativity to get things done regardless of what the market throws at her.  All imply that what’s important to leadership is not making mistakes.  Of you just don’t screw up the future will take care of itself.  And that’s so industrial economy – so “don’t let the plant blow up.”

That approach simply doesn’t work any more.  The Christian Science Monitor reported in “Obama’s Innovation Push: Has U.S. Really Fallen Off the Cutting Edge” that America is already in economic trouble due to our lock-in to out-of-date notions about what creates business success.  In the last 2 years America has fallen from first to fourth in the World Economic Forum ranking of global competitivenes.  And while America still accounts for 40% of global R&D spending, we rank remarkably low (on all studies below 10th place) on things like public education, math and science skills, national literacy and even internet access! While we’ve poured billions into saving banks, and rebuilding roads (ostensibly hiring asphalt layers) we still have no national internet system, nor a free backbone for access by all budding entrepreneurs!

Ask the question, “If Steve Jobs (or his clone) showed up at our company asking for a job – would we give him one?”  Don’t forget, the Apple Board fired Steve Jobs some 20 years ago to give his role to a less creative, but more “professional,” John Scully.  Mr. Scully was subsequently fired by the Board for creatively investing too heavily in the innovative Newton – the first PDA – to be replaced by a leadership team willing to jettison this new product market and refocus all attention on the Macintosh.  Both CEO change decisions turned out to be horrible for Apple, and it was only after Mr. Jobs returned to the company after nearly 20 years in other businesses that its fortunes reblossomed when the company replaced outdated industrial management philosophies with innovation.  But, oh-so-close the company came to complete failure before re-igniting the innovation jets.

Examples of outdated management, with horrific results, abound.  Brenda Barnes destroyed shareholder value for 6 years at Sara Lee chasing a centrallized focus and cost reductions – leaving the company with no future other than break-up and acquisition.  GE’s fortunes have dropped dramatically as Mr. Immelt turned away from the rabid efforts at innovation and growth under Welch and toward more cautious investments and reliance on a set of core markets – including financial services.  After once dominating the mobile phone industry the best Motorola’s leadership has been able to do lately is split the company in two, hoping as a divided business leadership can do better than it did as a single entity.  Even a big winner like Home Depot has struggled to innovate and grow as it remained dedicated to its traditional business. Once a darling of industry, the supply chain focused Dell has lost its growth and value as a raft of new MBA leaders – mostly recruited from consultancy Bain & Company – have kept applying traditional industrial management with its cost curves and economy-of-scale illogic to a market racked by the introduction of new products such as smartphones and tablets.

Meanwhile, leaders that foster and implement innovation have shown how to be successful this last decade.  Jeff Bezos has transformed retailing and publishing simultaneously by introducing a raft of innovations, including the Kindle.  Google’s value soared as its founders and new CEO redefined the way people obtain news – and the ads supporting what people read.  The entire “social media” marketplace is now taking viewers, and ad dollars, from traditional media bringing the limelight to CEOs at Facebook, Twitter and Linked-in.  While newspaper companies like Tribune Corp., NYT, Dow Jones and Washington Post have faltered, pop publisher Arianna Huffington created $315M of value by hiring a group of bloggers to populate the on-line news tabloid Huffington Post.  And Apple is close to becoming the world’s most valuable publicly traded company on the backs of new product innovations. 

But, asking again, would your company hire the leaders of these companies?  Would it hire the Vice-President’s, Directors and Managers?  Or would you consider them too avant-garde?  Even President Obama washed out his commitment to jobs growth when he selected Mr. Immelt to head his committee – demonstrating a complete lack of understanding what it takes to grow – to innovate – in today’s intensely competitive information economy. Where he should have begged, on hands and knees, for Eric Schmidt of Google to show us the way to information nirvana he picked, well, an old-line industrialist.

Until we start promoting innovators we won’t have any innovation.  We must understand that America’s successful history doesn’t guarantee it’s successful future.  Competing on bits, rather than brawn or natural resources, requires creativity to recognize opportunities, develop them and implement new solutions rapidly.  It requires adaptability to deal with new technologies, new business models and new competitors.  It requires an understanding of innovation and how to learn while doing.  Amerca has these leaders.  We just need to give them the positions and chance to succeed!

 

Nokia’s Microsoft Blunder is Apple’s Win


Summary:

  • Nokia agreed to develop smartphones with Microsoft software
  • But Microsoft’s product is without users, developers or apps
  • Apple and Google Android dominate developers, app base and users
  • Apple and Google Android have extensive distribution, and customer acceptance
  • Microsoft brings Nokia very little
  • Nokia hopes it can succeed simply by ramming Microsoft product through distribution.  This will be no more successful than its efforts with Symbian
  • Apple is the winner, because Nokia didn’t select Google Android

For First Time Ever, Smartphones Outsell PCs in Q4 of 2010” headlined BGR.com.   This is a big deal, as it creates something of an inflection point – possibly what some would call a “tipping point” – in the digital technology market.  For over 2 years some of us, using IDC data such as reported in ReadWriteWeb, have been predicting that PCs are on the way to extinction – much like mainframes and mini-computers went.  Smartphone sales last quarter jumped 87.2% year-over-year to about 101M units.  Meanwhile PC sales, a market manufacturers hoped would recover as “enterprises” resumed buying post-recession, grew only 5.5% in the like period, to 92.1M units.  No doubt the installed base of the latter product is multiples of the former, but we can see that increasingly people are ready to use the newer, alternative technology.

This week Mediapost.com reported “Tablet Sales to Hit 242M by 2015.” Both NPD Group and iSuppli are projecting a 10-fold increase wtihin 5 years in the volume of these new devices, which is sure to devastate PC sales. Between smartphones and tablets, as well as the rapid development of cloud-based apps and data storage solutions, it’s becoming quite clear that the life-span of PC technology has its limits.  Soon we’ll be able to do more, cheaper, better and faster with these new products than we ever could on a PC.

This is really bad news for Microsoft.  Apple and Google dominate both these mobile markets.  As Microsoft has fought to defend its PC business by re-investing in Vista, then Windows 7 and Office 2010, the market has been shifting away from the PC platform entirely.  It’s common now to hear about corporations considering iPads and other tablets for field workers.  And it’s impossible to walk through an airport, or sit in a meeting these days without seeing people use their smartphones and tablets, purchased individually at retail, while leaving their PCs at the office.  Most corporate Blackberry users now have either an Apple or Android smartphone or tablet as they eschew their RIM product for anything other than required corporate uses.

Nokia has largely missed the smartphone market, choosing, like Microsoft, to continue investing in defending its traditional business.  Long the largest cell phone supplier, Nokia did not develop the application base or developer network for Symbian (it’s proprietary smartphone technology) as it kept pumping out older devices.  Nokia is reminiscent of the Ed Zander led Motorola disaster, where the company kept pumping out Razr phones until demand collapsed, nearly killing the company.

So the Board replaced the Nokia CEO. As discussed in Forbes on 5 October, 2010 in “HP and Nokia’s Bad CEO Selections” Nokia put in place a Microsoft executive.  Given that Microsoft had missed the smartphone market entirely, as well as the tablet market, moving the Microsoft Defend & Extend way of thinking into Nokia didn’t look like it would bring much help for the equally locked-in Nokia. Exchanging one defensive management approach for another doesn’t create an offense – or new products.

It wasn’t much of a surprise last week when the 5-month tenured CEO, Stephen Elop, announced he thought Nokia’s business was in horrible shape via an internal email as reported in the Wall Street Journal, “Nokia, Microsoft Talk Cellphones.” Rather quickly, a deal was struck in which Nokia would not only pick up the Microsoft mobile operating system, but would use their products to promote other extremely poorly performing Microsoft products. “Nokia to Adopt Microsoft Bing, Adcenter” was another headline at MediaPost.com.  Bing and adCenter were very late to market, and even with adoption by early market leader Yahoo! have been unable to make much inroad into the search and on-line ad placement markets dominated by Google.

Mr Elop went with what he knew, selecting Microsoft.  I guess he’s the new “chief decider” at Nokia.  His decision caused a break out of optimism amongst long-suffering Microsoft investors and customers who’ve gotten very little from the giant PC near-monopolist the last decade.  Mediapost told us “Study: Surge of Support for Windows Phone 7” as developers who long ignored the product entirely were starting to consider writing apps for the device.  After all this time, new hope beats within the breast of those still stuck on Microsoft.

But if ever there was a case of too little, and way, way too late, this has to be it.  Two companies long known for weak product innovation, and success driven by market domination and distribution control strategies, are partnering to take on the two most innovative companies in digital technology as they create entirely new markets with new technologies. 

RIM, the smartphone market originator, has seen its fortunes disintegrate as Blackberry sales fell below iPhones – even with over 10,000 apps.  Today Microsoft has virtually NO apps, and NO developer base as it just now enters this market, “Google Searches for Mobile App Experts” (Wall Street Journal) as its effort continues to expand its 100,000+ apps base as it chases the 350,000+ apps already existing for the iPhone.  Where Microsoft and Nokia hope to build an app base, and a user base, Apple and Google already have both, which theyt are aggressively growing. 

Exactly what going to happen to slow Apple and Google’s growth in order to allow Microsoft + Nokia to catch up?  In what fairy tale will the early hare take a nap so the awakened tortoise will be allowed to somehow, miraculously get back into the race?

Being late to market is never good.  Look at how Sony, and everyone else, were late to digitally downloaded music. iPad and iTunes not only took off but continue to hold well over 50% of the market almost a decade later.   Over the same decade Apple has held onto 2/3 of the download video market, while Microsoft’s Zune has struggled to capture less than 1/4 of Apple’s share (about 18% according to WinRumors.com). 

Apple (and Google) aren’t going to slow down the pace of innovation to give Microsoft and Nokia a chance to catch up.  Today (15 Feb., 2010) ITProPortal.com breaks news “Apple iPhone 5 to have 4 Inch Screen,” an upgrade designed to bring yet more users to its mobile device platform – away from PCs and competitive smarphones.  The same article discusses how Google Android manufacturers are bringing out 4.3 inch screens in their effort to keep growing.

So, amidst the “big announcement” of Microsoft and Nokia agreeing to work together on a new platform, where’s the product announcement?  Where’s the app base?  And exactly what is the strategy to be competitive in 2012 and 2015?  Does anyone really think throwing money at this will create the products (hardware and software) fast enough to let either catch up with existing leaders?  Does anyone think Microsoft products dependent upon Nokia’s distribution can save either’s mobile business – while Apple has just expanded to Verizon for distribution?  And Google is already on almost all networks?  And where is Microsoft or Nokia in the tablet business, which is closely associated with smartphone market for obvious issues of mobility and use of cloud-based computing architectures?

The good news here is for Apple fans.  Nokia clearly should have chosen Android.  This would give the laggard a chance of leveraging the base of technology at Google – including advances being made to the Chrome operating system and its advantages for the cloud.  No matter what the price, it’s the only chance Nokia has.  With this decision the most likely outcome is big investments by both Microsoft and Nokia to play catch-up, but limited success.  Results will not likely cover investment rates, leading Nokia to a Motorola-like outcome.  And Microsoft will remain a bit player in the fastest growing digital markets. Both have billions of dollars to throw away in this desperate effort.  But the outcome is almost certain.  It’s doubtful between the two of them they can buy enough developers, network agreements and users to succeed against the 2 growth leaders and the desperately defensive RIM.

Like I said last month in this blog “Buy Apple, Sell Microsoft.”  It’s still the easiest money-making trade of 2011.  Now thankfully reinforced by the former Microsoft exec running Nokia.

Can AOL Resurrect Itself with HuffPo Acquisition?


Summary:

  • Start-ups that flourish give themselves permission to do whatever is necessary to succeed
  • Most acquisitions kill that kind of permssion, forcing the acquired company to adopt the acquirers legacy
  • AOL’s legacy business has been dying for several years
  • AOL’s history of acquisitions has been horrible, because it doesn’t learn from the acquisitions. 
  • AOL’s acquisition, and announced integration, of Huffington Post will likely do nothing to turn around AOL, and probably leave HuffPo about as well off as AOL’s acquisition of  Bebo

After the Super Bowl Sunday Night AOL announced it’s acquisition of The Huffington Post for $350M.  Given that you can’t give away a newspaper company these days, the acquisition shows there is still value in “news” if you understand the right way to deliver it.  HuffPo’s team of bloggers has shown that it’s possible to build a profitable news organization today – if you do it right.  Something the folks at Tribune Corporation still don’t understand.

BusinessInsider.com headlined “AOL’s Huffington Post Acquisition Makes Sense for Both Sides.”  For Arianna Huffington and her investors the big cash payout shows a clear win.  They are receiving a pretty penny for their start-up.  Beyond them, it’s less clear.  AOL’s been losing subscribers, and site vistors for years.  They’ve made a number of acquisitions to spark up interest including blogs Engadget, Joystiq, ad network Tacoda and social networking site Bebo.  None of those have flourished – in fact the opposite has happened.  AOL investors lost almost all the $850M spent on Bebo as Facebook crushed it. So far, the AOL track record has been horrible!

AOL clearly hopes HuffPo will bring it new visitors – but whether that works, and whether HuffPo continues growing, is now an open question. MediaPost.com reports “AOL Starts Mapping Plans for Huffington Post.”  Unfortunately, it sounds much more as if AOL is trying to integrate HuffPo into its traditional organization – which will most likely do for HuffPo what integrating at News Corp did for MySpace – namely, layering it with “professional management,” additional systems, more overhead and rules for operating.  Or, in other words, bury it in company legacy that strangles its abilitiy to innovate and shift with rapidly emerging market needs.  The company that’s actually growing, winning in the marketplace, isn’t AOL.  It’s HuffPo.  If there’s any “integrating” needed it should be figuring out how to push AOL into HuffPo – not vice-versa.

As the New York Times headlined, this acquisition is “AOL’s Bet on Another Makeover.”  And that’s what’s wrong.  The acquisitions AOL made were pre-purchase successful because they were White Space endeavors that had close connection to the market.  The founders gave their organization permission to do whatever it took to be successful, without artificial constraints based upon legacy.  Their acquisitions have not used by AOL to create White Space with better market receptors – to teach AOL where growth lies.  Rather, AOL has hoped they can use the acquisition to defend and extend their old success formula.  AOL has hoped the acquisitions would allow them to slow the market shift, and preserve legacy operations. 

As we’ve seen, that simply does not work.  Markets shift for good reason, and the only way a business can thrive is to shift with them.  At AOL the smart move would be to let Arianna run the show!  A few months ago AOL purchased TechCrunch and ever since Michael Arrington, the founder, has been villifying AOL management for its bureaucracy and inability to adapt.  What Mr. Armstrong, the relatively new CEO at AOL misses is that AOL’s business is dead.  AOL needs to find an entirely new way of operating – and that’s what these acquisitions bring.  AOL needs to get out of the way, let the acquisitions flourish, and learn something from them.  AOL management needs to accept that the old AOL business model is rubbish, and what it must do is allow the acquisitions to operate in White Space, then learn from them!  But that’s not been the history of AOL’s purchases, and doesn’t look like the case this time.

Mr. Armstrong could learn a lot from Sir Richard Branson.  Virgin has made many acquisitions, and developed several new companies.  He doesn’t try to integrate them, or drive them toward any particular business model  From Virgin Airways to Virgin Money to Virgin Health Bank to Virgin Games (and all the other businesses) the requirement is that the business be tightly linked to market needs, operate in new ways and find out how to grow profitably.  Virgin moves toward the new markets and businesses, it doesn’t expect the businesses to conform to the Virgin model. 

I’d like to think AOL could learn from HuffPo and dramatically change.  But from the announcements this week, it doesn’t look likely.  AOL still looks like a management team desperately trying to save its old business, but without a clue how to do so.  Too bad for AOL.  Could be even worse for those who read HuffPo.