It’s About the Economy, Stupid – Lessons from the election

by | Nov 4, 2010 | Current Affairs, General, Innovation, Leadership, Web/Tech


Summary:

  • Voters whipsawed from throwing out the Republicans 2 year ago to throwing out Democrats this election
  • Americans are frustrated by a no-growth economy
  • Recent government programs have been ineffective at stimulating growth, despite horrific expense
  • Lost manufacturing/industrial jobs will never return
  • America needs new government programs designed to create information-era jobs
  • Education, R&D, Product Development and Innovation investment programs are desperately needed

“It’s the Economy, Stupid” was the driving theme used during Bill Clinton’s winning 1992 Presidential campaign.  Following the dramatic changes produced in Tuesday’s American elections, this refrain seems as applicable as ever.  Two years ago Americans changed leadership in the Presidency, Congress and the Senate out of disgust with the financial crisis and lousy economy.  Now, Congress has shifted back the other direction – and the Senate came close – for ostensibly the same, ongoing reason. What seems pretty clear is that Americans are upset about their economy – and in particular they are worried about jobs and incomes.

So why can’t the politicians seem to get it right?  After all, economic improvement allowed Bill Clinton to retain the Presidency in 1996.  If smart politicians know that Americans are “voting with their pocketbooks” these days, you’d think they would be doing things to improve the economy and jobs.  Wasn’t that what the big big bailouts and government spending programs of the last 4 years were supposed to do? 

What we can now see, however, is that programs which worked for FDR, or Ronald Reagan and other politicians in the late 1900s aren’t working these days.  Everything from Great Depression Keynesians to Depression retreading Chicago School monatarists to Laffer Curve idealists have offered up and applied programs the last 8 years intended to stimulate growth.  But so far, the needle simply hasn’t moved.  Recognizing that the economy is sick, looking at the symptoms of weak jobs and high unemployment, could it be that the country’s leaders are trying to apply old medicine when the illness has substantially changed? 

What’s missed by so many Americans today – populace and politicians – is that the 2010 economy is nothing like that of the 1940s; and bares little resemblance to the economy as recently as the 1990s.  Scan these interesting facts reported by BusinessInsider.com:

These lost jobs are NEVER coming back.  The American economy has fundamentally shifted, and it will never go back to the way it was.  Clocks don’t run backward. 

In 1910 90% of Americans were working in agriculture.  By 1970 that proportion had dropped to 10%.  Had American policy in the last century remained fixated on protecting farming jobs the country would have failed.  Only by shifting to industrialization (manufacturing) was America able to continue its growth – and create all those new industrial jobs.  Now American policy has to shift again if it wants to start creating new jobs.  We have to create information-era jobs.

But government programs applied the last 12 years were all retreaded industrial era ideas (implemented by Boomer-era leaders educated in those programs.)  They were intended to grow industrial jobs by spurring supply and demand for “things.”  Lower interest rates were intended to increase manufacturing investment and generate more supply at lower cost.  These jobs were expected to create more service jobs (retailers, schools, plumbers, etc.) supporting the manufacturing worker.  But today, supply isn’t coming from America.  Nobody is going to build a manufacturing plant in America when gobs of capacity is shuttered and available, and costs are dramatically lower elsewhere with plentiful skill supply.  We can keep GM and Chrysler on life support, but there is no way these companies will grow jobs in face of a global competitive onslaught with very good products, new innovations and lower cost.  Cheap interest rates make little difference – no matter what the cost to taxpayers.   

Other old-school programs focused on increasing demand. TARP, cheap consumer lending, tax cuts, rebates and subsidies were intended to encourage people to buy more stuff.  Consumers were expected to take advantage of the increased supply and spend the cash, thus reviving the economy.  But today, many people are busy paying down debt or saving for retirement.  Further, even when they do spend money the goods simply aren’t made in America.  If consumers (including businesses) buy 10 Dell computers or 20 uniform shirts it creates no new American jobs. Spurring demand doesn’t matter when “things” are made elsewhere.  In fact, it benefits the offshore economies of China and other manufacturing centers more than the USA!

If this new crop of politicians, and the President, want to keep their jobs in the next election they had better face facts.  The American economy has shifted – and it will take very different policies to revive it.  New American jobs will not be created by thinking we’ll will make jeans, baby food or baseballs, so applying old approaches and focusing on increasing supply and demand will not work.  America is no longer an industrial economy.

The jobs at Dell are engineering, design and managerial.  Hiring organizations like Google, Apple, Cisco and Tesla are adding workers to generate, analyze, interpret and gain insight from information.  Jobs today are based upon brain work, not brawn.  An old American folk song told the story about John Henry’s inability to keep up with the automated stake driving machine – and showed all Americans that the industrial era made conventional, uneducated hand-labor of little value.  Now, computers, networks and analytics are making the value of manufacturing work low value.  Because we are in an information economy, rather than an industrial one, pursuing growth of industrial jobs today is as misguided as trying to preserve manual labor and farm jobs was in the 1960s and 1970s.

Directionally, American politicians need to implement programs that will create the kind of jobs that are valuable, and likely, in America.  Incenting education, to improve the skills necessary to be productive in this economy, is fairly obvious.  Instead of cutting education benefits, raise them to remain a world leader in secondary education and produce a highly qualified workforce of knowledge workers. Support universities struggling in the face of dwindling state tax funds.  Subsidize masters and PhD candidates who can create new products and lead companies into new directions, and do things to encourage their hiring by American companies.

Investments in R&D and product development are likewise obvious.  America’s growth companies are driving innovation; bringing forward world-demanded products like digital music, on-line publications, global networks, real-time feedback on ad links, ways to purify water – and in the future trains, planes and automobiles that need no fossil fuels or drivers (just to throw out a not-unlikely scenario.)  For every dollar thrown at GM trying to keep lower-skilled manufacturing jobs alive there would be a 10x gain if those dollars were spent on information era jobs in innovation.  America doesn’t need to preserve jobs for high school graduates, it must create jobs for the millions of college grads (and post-graduate degree holders) working today as waiters and grocery cashiers.  Providing incentives for angel investing, venture capital and other innovation investment will have a rapid, immediate impact on job creation in everything from IT to biotech, nanotech, remote education and electric cars.

A stalled economy is a horrible thing.  Economies, like companies, thrive on growth!  Everyone hurts when tax receipts stall, government spending rises and homes go down in value while inflationary fears grow.  And Americans keep saying they want politicians to “fix it.”  But the “fix” requires thinking about the American economy differently, and realizing that programs designed to preserve/promote the old industrial economy – by saving banks that invest in property, plant and equipment, or manufacturers that have no money for new product development – will NOT get the job done.  It’s going to take a different approach to drive economic growth and job creation in America, now that the shift has occurred.  And the sooner politicians understand this, the better!

What Could Go Wrong at Ikea?

by | Nov 1, 2010 | Defend & Extend, Leadership, Lock-in


Summary:

  • When something works, we do more of it
  • But markets shift, and what we did loses its ability to create growth
  • Out of high growth comes Lock-in to old practices that blind us to potential market changes which could create price wars or obsolescence
  • Lock-in gets in the way of seeing emerging market shifts
  • Ikea is doing well now, but it is already seriously locked-in on an aging strategy
  • Will Ikea continue succeeding as it runs into Wal-mart and other price-focused competitors?
  • Will Ikea be able to adapt to changing markets as developed economies improve?

“If it works, do more of it” is a famous coaching recommendation.  “Nothing succeeds like success” is another.  Both are age old comments with simple meanings.  Don’t overthink a situation.  If something works, keep on doing it.  And the more it works, the more you should “keep on keepin’ on” as once famous pop song lyrics recommended. One could ask, why should you try doing anything else, if what you’re doing is working?  Many people would sagelyl recommend another common comment, “if it ain’t broke, don’t fix it!”

And this seems to be the philosophy of the new CEO at Ikea, Mikael Ohlsson as descibed in an Associated Press article on Chron.com, the web site for the Houston Chronicle, “New Ikea CEO Cuts Prices, Targets Frugal U.S. Families.” 

A lifelong Ikea employee, Mr. Ohlsson joined Ikea right out of college in 1979 as a rug salesperson.  He’s watched the company grow dramatically across his career.  And he’s watched the company essentially grow by doing one thing – make home goods people need cheaply, figure out how to keep shipping and distribution costs to a minimum, and offer them directly to customers through your own stores.  All designed to keep prices at a minimum.  Most people would applaud him for focusing on doing more of the same.

And certainly today Ikea’s strategy is benefitting from the “Great Recession,” as we’ve come to call it.  A flat economy, no job growth, little income growth, rampant unemployment, declining home values and limited credit access has helped Americans move along the road of penny-pinching. 

Somewhat stylish, but primarily low-priced, furniture and other goods long appealed to college students.  The fact that most of the furniture was designed for very economical shipping was a big plus with students that changed dorms and apartments frequently.  Low price, in addition to the fact that most students are poor, was a benefit in case someone had to leave the stuff behind due to a longer move, downsizing, or simply lost their abode for a while.  That the furniture and some of the other items didn’t hold up all that well wasn’t such a big deal, because nobody intended to keep it once school ended and they could afford something better.

But recent cheapness has caused a lot more people to start buying Ikea.  That has contributed to a lot more growth than the company originally expected in developed countries like the USA.  As sales grew, the company has been pushing year after year to keep lowering costs – and prices.  The CEO proudly touted his ability to relocate manufacturing and distribution in order to drive down U.S. prices on several items.  In language that sounds almost like Wal-Mart, he talks about constantly driving down cost, and price, in order to appeal to Americans – and even continental Europeans – in the throes of being cheap.  Cost, cost, cost in order to sell cheap, cheap, cheap seems to have worked well for Ikea.

And that’s the worry foundation owners should have (Ikea is not publicly traded, it is owned by a foundation.)  Ikea is rapidly catching the Wal-Mart Disease (see this blog 13 October).  Focusing on execution, in order to lower cost, keep lowering price and expecting the market to expand.  This will eventually lead to two very unpleasant side effects:

  1. Eventually Ikea will run headlong into Wal-Mart.  And other price-focused competitors in the USA and other countries.  In doing so, margins will be crimped, as will growth.  When 2 (or more) companies compete on cost/price it creates a price war, and if it’s between Ikea and Wal-Mart expect the war to be incredibly bloody (this is also bad news for Microsoft shareholders, who are going to increasingly see Ikea join other competitors in pressuring Wal-Mart’s strategy.)
  2. What will happen to Ikea’s growth if the market shifts?  What will happen if customers quit focusing on price, and start looking for better products (longer lasting, higher quality materials, increased sturdiness – for examples)?  Or if they want different designs?  Or they get tired of the long drives to those huge Ikea stores, and prefer shopping closer to home?  Quite simply, what will happen to Ikea’s growth if something besides price retakes importance for customers in developed countries?

There is no doubt Ikea has had a great run.  But in large part, fortuitous economic events played a big role.  The rising percentage of youth going to colleges, as well as the large migration of developing country students to developed country universities, helped propel the need for affordable items appealing to students.  Then the economic faltering post-2000, combined with the banking crisis, created a very slow economy in developed countries.  Suburbanization gave Ikea the opportunity to build massive stores at affordable cost to which customers could flock.  For 30 years these trends benefitted companies with a price focus – such as Ikea (and Wal-Mart). And all the company had to do was “more of the same.”

But will that remain the long-term trend?  As households downsize, home prices stabilize then recover, developed economies improve, jobs grow again and incomes start rising is it possilble that customers will want something beyond low price? 

And when that happens, will Ikea find itself so locked-in to its strategy that it cannot adjust to market shifts?  What will it do with those manufacturing centers, distribution hubs and huge stores then?  How will it be able to recognize the change in customer needs, and alter its merchandise – and stores – to meet changing needs?  Or will Ikea rely far too long on improving execution of the strategy that got it where the company is today?  Will its decision-making processes, designed to improve execution, keep Ikea making cheap furniture and other goods long after competing on price is sufficient?

Ikea is likely to do well for at least a couple more years.  But one can already see how the company, and its CEO, have locked-in on what worked early in the company lifecycle.  And now the focus is on executing the old strategy – reinforcing what the company locked-in upon.  And there doesn’t seem to be a lot of concern about dealing with potential market shifts. 

Most worrisome of all was the CEO’s comment, “I tend not to look so much at competition.”  In a very real way, this shows a blindness towoard looking for price wars and market shifts.  A blindness toward identifying emerging trends.  A blindness toward identifying there may be groth opportunities in a year or two that are better than simply continuing to do what Ikea has always done.  And even for a fast growing company, luckily positioned in the right place at the right time, this is something to be worried about.

The Myth of “Maturity” – AT&T and Microsoft

by | Oct 27, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Web/Tech


Summary:

  • We like to think of "mature" businesses as good
  • AT&T was a "mature" business, yet it failed
  • "Maturity" leads to inward focus, and an unwillingness to adjust to market shifts
  • Microsoft is trying to reposition itself as a "mature" company
  • Despite its historical strengths, Microsoft has astonishing parallels to AT&T
  • Growth is less risky than "maturity" for investors, employees and customers

Why doesn't your business grow like Apple or Google?  Is it because you think of your business, or the marketplace you serve, as "mature?" Quite a euphanism, maturity.  It sounds so good.  How could being "mature" be bad?  As children we strive to be "mature." The leader is usually the most "mature" person in the group.  Those who like good art have "mature" taste. Surely, we should want to be "mature." And we should want our businesses to reach "maturity" and have "mature" leaders who don't take unnecessary risks.  Once "mature" the business should be safe for investors, employees, suppliers and customers.

That was probably what the folks at AT&T thought.  When judge Greene broke up AT&T in 1984 the company had a near monopoly on long-distance.  AT&T was a "mature" company in a "mature" telephone industry.  It appeared as though all AT&T had to do was keep serving its customers, making regular improvements to its offering, to perpetually maintain its revenue, jobs and profitability.  A very "mature" company, AT&T's "mature" management knew everything there was to know about long distance – about everything related to communications.  And due to its previous ownership of Bell Labs and Western Union, it had deep knowledge about emerging technologies and manufacturing costs allowing AT*T to make "mature" decisions about investing in future markets and products.  This "mature" company would be able to pay out dividends forever!  It seemed ridiculous to think that AT&T would go anywhere but up!

Unfortunately, things didn't work out so well.  The "mature" AT&T saw its market share attacked by upstarts MCI and Sprint.  As a few "early adopters" switched services – largely residential and other very small customers – AT&T was unworried.  It still had most of the market and fat profits.  As these relatively insignificant small users switched, AT&T reinforced its world's largest billing system as an incomparable strength, and reminded everyone that its "enterprise" (corporate) offerings were still #1 (anybody remember AT&T long distance cards issued by your employer for use at pay phones?). 

But unfortunately, what looked like an unassailable market position in 1984 was eventually diminished dramatically as not only homeowners but corporations started shifting to new offerings from competitors.  New pricing plans, "bundled" products and ease of use encouraged people to try a new provider.  And that AT&T had become hard to work with, full of rules and procedures that were impossible for the customer to comprehend, further encouraged people to try an alternative.  Customers simply got fed up with rigid service, outdated products and high prices.

Unexpectedly, for AT&T, new markets started to grow much faster and become more profitable than long distance voice.  Data services started using a lot more capacity, and even residential customers started wanting to log onto the internet.  Even though AT&T had been the leader (and onetime monopolist – did you know broadcast television was distributed over an AT&T network?) with these services, this "mature" company continued to focus on its traditional voice business – and was woefully late to offer commercial or residential customers new products.  Not only were dial-up offerings delayed, but higher speed ISDN and DSL services went almost entirely to competitors.

And, much to the chagrin of AT&T leaders, customers started using their mobile phones a lot more.  Initially viewed as expensive toys, AT&T did not believe that the infrastructure would be built quickly, nor be robust enough, to support a large base of cellular phone users.  Further, AT&T anticipated pricing would keep most people from using these new products.  Not to mention the fact that these new phones simply weren't very good – as compared to land-line services according to the metrics used by AT&T.  The connection quality was wildly inferior to traditional long distance, and frequently calls were completely dropped!  So AT&T was slow to enter this market, half-hearted in its effort, and failed to make any profits.

Along the way a lot of other "non-core" business efforts failed.  There was the acquisition of Paradyne, an early leader in modems, that did not evolve with fast changing technology.  New products made Paradyne's early products obsolete and the division disappeared.  And the acquisition of computer maker NCR failed horribly after AT&T attempted to "improve" management and "synergize" it with the AT&T customer base and offerings. 

AT&T had piles and piles of cash from its early monopoly.  But most of that money was spent trying to defend the long distance business. That didn't work.  Then there was money lost by wheelbarrow loads trying to enter the data and mobile businesses too late, and with little new to offer.  And of course the money spent on acquisitions that AT&T really didn't know how to manage was all down the proverbial drain. 

Despite its early monopoly, high cash flow, technology understanding, access to almost every customer and piles of cash, AT&T failed.  Today the company named AT&T is a renamed original regional Bell operatiing company (RBOC) created in the 1984 break-up — Southwestern Bell.  This classically "mature" company, a stock originally considered "safe" for investing in the "widow's and orphan's fund" used up its money and became obsolete.  "Mature" was a misnomer used to allow AT&T to hide within itself; to focus on its past, instead of its future.  By being satisfied with saying it was "mature" and competing in "mature" markets, AT&T allowed itself to ignore important market shifts.  In just 25 years the company that ushered in mass communications, that had an incredibly important history, disappeared.

I was struck today when a Reuters story appeared with the headline "Sleepy in Seattle: Microsoft Learns to Mature."  There's that magic word – "mature."  While the article lays out concerns with Microsoft, there were still analysts quoted as saying that investors didn't need to worry about Microsoft's future.  Investors simply need to change their thinking.  Instead of a "growth" company, they should start thinking of Microsoft as a "mature" company.  It sounds so reassuring.  After all:

  • Microsoft has a near monopoly in its historical business
  • Microsoft has a huge R&D budget, and is familiar with all the technologies
  • Microsoft has piles and piles of cash
  • Microsoft has huge margins in its traditional business – in fact profits in operating systems and office automation exceed 100% of the total because it loses billions of dollars in other things like Bing, MSN and its incredibly expensive foray into gaming systems (xBox)
  • Markets won't shift any time soon – say to this new "cloud computing" – and Microsoft will surely have products when they are needed if there is a market shift
  • While home users may buy these new smartphones, tablets and some Macs, enterprise customers will keep using the technology they've long purchased
  • Microsoft is smart to move slowly into new markets, it shouldn't cannibalize its existing business by encouraging customers to change platforms. Going slow and being late is a good thing for profits
  • Although Microsoft has been late to smartphones and tablets, with all their money and size surely when they do get to market they will beat these upstarts Apple and Google, et. al.

Sure made me think about AT&T.  And the fact that Apple is now worth more than Microsoft.  Made me wonder just how comfortable investors should be with a "mature" Microsoft. Made me wonder how much investors, employees and customers should trust a "mature" CEO Ballmer.

Looking at the last 10 years, it seems like there's a lot more risk in "mature" companies than in "growth" ones.  We can be almost certain that Apple and Google, which have produced huge returns for investors, will grow for the next 3 years, improving cash flow and profitability just by remaining in existing new markets.  But of course both have ample new products pioneering yet more new markets.  And companies like NetApp look pretty safe, building a fast-growing base of customers who are already switching to cloud computing – and producing healthy cash flow in the emerging marketplace. 

Meanwhile, the track record for "mature" companies would leave something to be desired. One could compare Amazon to Circuit City or Sears.  Or just list some names: AT&T, General Motors, Chrysler, Xerox, Kodak, AIG,  Citibank, Dell,  EDS,  Sun Microsystems.  Of course each of these is unique, with its own story.  Yet….

Yes, You Should Buy Apple

by | Oct 19, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech


Summary:

  • Apple keeps itself in growth markets by identifying unmet needs
  • Apple expands its markets every quarter
  • Apple deeply understands its competition
  • Apple knows how to launch new products quickly
  • These skills allow investors to buy Apple with low risk, and likely tremendous gains

Apple’s recently announced sales and earnings beat expectations.  Nothing surprising about that, because Apple always lowballs both, and then beats its forecast handily.  What is a touch surprising is that according to Marketwatch.com “Apple’s Decline in Margins Casts a Shadow.” Some people are concerned because the margin was a bit lower, and iPad sales a bit lower, than some analysts forecast.

Forget about the concerns.  Buy the stock.  The concerns are about as relevant as fretting over results of a racing team focused on the world land speed record which insteading of hitting 800 miles per hour in their recent run only achieved 792 (according to Wikipedia the current record is 763.)  The story is not about “expectations.”  Its about a team achieving phenominal success, and still early in the development of their opportunity!

Move beyond the financial forecasts and really look at Apple.  In September of 2009 there was no iPad.  Some speculated the product would flop, because it wasn’t a PC nor was it a phone – so the thinking was that it had no useful purpose.  Others thought that maybe it might sell 1 million, if it could really catch on.  Last quarter it sold over 4 million units.  No single product, from any manufacturer, has ever had this kind of early adoption success.  Additionally, Apple sold over 14 million iPhones, nearly double what it sold a year ago.  Today there are over 300,000 apps for iPad and iPhone – and that number keeps growing every day.  Meanwhile corporations are announcing weekly rollouts of the iPad to field organizations as a replacement for laptop PCs. And Apple still has a majority of the MP3 music download business.  While sales of Macs are up 14% last quarter – at least 3 times the growth rate of the moribund PC market!

The best reason to buy any stock is NOT in the financial numbers.  Endless opportunities to manipulate both sales and earnings allow all management teams to alter what they report every quarter.  Even Apple changed its method of reporting iPhone sales recently, leaving many analysts scratching their heads about how to make financial projections.  Financials are how a company reports last year. But if you buy a stock it should be based on how you think it will do well next year.  And that answer does not lie in studying historical financials, or pining over small changes period to period in any line item.  If you are finding yourself adopting such a focus, you should reconsider investing in the company at all.

Investors need growth.  Growth in sales that leads to growth in earnings.  And more than anything else, that comes from participating in growth markets — not trying to “manage” the old business to higher sales or earnings.  If a company can demonstrate it can enter new markets (which Apple can in spades) and generate good cash flow (which Apple can in diamonds) and produce acceptable earnings (which Apple can in hearts) while staying ahead of competitors (which Apple can in clubs) then the deck is stacked in its favor.  Yes, there are competitive products for all of the things Apple sells, but is there any doubt that Apple’s sales will continue its profitable growth for the next 2 or 3 years, at least?  At this point in the markets where Apple competes competitors are serving to grow the market more than take sales from Apple!

Apple has developed a very good ability to understand emerging market needs.  Almost dead a decade ago, Apple has now achieved its first $20 billion quarter.  This was not accomplished by focusing on the Mac and trying to fight the same old battle.  Instead Apple has demonstrated again and again it can identify unmet needs, and bring to market solutions which meet those needs at an acceptable price – that produces an acceptable return for Apple’s shareholders.

And Steve Jobs demonstrated in Monday’s earnings call that Apple deeply understands its competitors, and keeps itself one step ahead.  He described Apple’s competitive situation with key companies Google and Research in Motion (RIM) as reported in the New York Times “Jobs Says Apple’s Approach Is Better Than Google’s.” Knowing its competitors has helped Apple avoid head-on competition that would destroy margins, instead identifying new opportunities to expand revenues by bringing in more customers.  Much more beneficial to profits than going after the “low cost position” or focusing on “maintaining the core product market” like Dell or Microsoft.

Apple’s ongoing profitable growth is more than just the CEO. Apple today is an organization that senses the market well, understands its competition thoroughly and is capable of launching new products adeptly targeted at the right users – then consistently enhancing those products to draw in more users every month.  And that is why you should own Apple.  The company keeps itself in new, growing markets.  And that’s about the easiest way there is to make money for investors.

After the last decade, investors are jaded.  Nobody wants to believe a “growth story.”  Cost cutting and retrenchment have dominated the business news.  Yet, those organizations that retrenched have done poorly.  However, amidst all the concern have been some good growth stories – despite investor wariness.  Such as Google and Amazon.com. But the undisputed growth leader these days is Apple.  While the stock may gyrate daily, weekly or even monthly, the long-term future for Apple is hard to deny.  Even if you don’t own one of their products, your odds of growing your investment are incredibly high at Apple, with very little downside risk.  Just look beyond the numbers.

The Wal-Mart Disease

by | Oct 13, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in


Summary:

  • Many large, and leading, companies have not created much shareholder value the last decade
  • A surprising number of very large companies have gone bankrupt (GM) or failed (Circuit City)
  • Wal-Mart is a company that has generated no shareholder value
  • The Wal-Mart disease is focusing on executing the business's long-standing success formula better, faster and cheaper — even though it's not creating any value
  • Size alone does not create value, you have to increase the rate of return
  • Companies that have increased value, like Apple, have moved beyond execution to creating new success formulas

Have you noticed how many of America's leading companies have done nothing for shareholders lately?  Or for that matter, a lot longer than just lately.  Of course General Motors wiped out its shareholders.  As did Chrysler and Circuit City.  The DJIA and S&P both struggle to return to levels of the past decade, as many of the largest companies seem unable to generate investor value.

Take for example Wal-Mart.  As this chart from InvestorGuide.com clearly shows, after generating very nice returns practically from inception through the 1990s, investors have gotten nothing for holding Wal-Mart shares since 2000.

Walmart 20 year chart 10-10

Far too many CEOs today suffer from what I call "the Wal-Mart Disease."  It's an obsession with sticking to the core business, and doing everything possible to defend & extend it — even when rates of return are unacceptable and there is a constant struggle to improve valuation.

Fortune magazine's recent puff article about Mike Duke, "Meet the CEO of the Biggest Company on Earth" gives clear insight to the symptoms of this disease. Throughout the article, Mr. Duke demonstrates a penchant for obsessing about the smallest details related to the nearly 4 decade old Wal-Mart success formula.  While going bananas over the price of bananas, he involves himself intimately in the underwear inventory, and goes cuckoo over Cocoa Puffs displays.  No detail is too small for the attention of the CEO trying to make sure he runs the tightest ship in retailing.  With frequent references to what Wal-Mart does best, from the top down Wal-Mart is focused on execution.  Doing more of what it's always done – hopefully a little better, faster and cheaper.

But long forgotten is that all this attention to detail isn't moving the needle for investors.  For all its size, and cheap products, the only people benefiting from Wal-Mart are consumers who save a few cents on everything from jeans to jewelry. 

The Wal-Mart Disease is becoming so obsessive about execution, so focused on doing more of the same, that you forget your prime objective is to grow the investment.  Not just execute. Not just expand with more of the same by constantly trying to enter new markets – such as Europe or China or Brazil. You have to improve the rate of return.  The Disease keeps management so focused on trying to work harder, to somehow squeeze more out of the old success formula, to find new places to implement the old success formula, that they ignore environmental changes which make it impossible, despite size, for the company to ever again grow both revenues and rates of return.

Today competitors are chipping away at Wal-Mart on multiple fronts.  Some retailers offer the same merchandise but in a better environment, such as Target.  Some offer a greater selection of targeted goods, at a wider price range, such as Kohl's or Penney's.  Some offer better quality goods as well as selection, such as Trader Joe's or Whole Foods.  And some offer an entirely different way to shop, such as Amazon.com.  These competitors are all growing, and earning more, and in several cases doing more for their investors because they are creating new markets, with new ways to compete, that have both growth and better returns.

It's not enough for Wal-Mart to just be cheap.  That was a keen idea 40 years ago, and it served the company well for 20+ years.  But competitors constantly work to change the marketplace.  And as they learn how to copy what Wal-Mart did, they can get to 90%+ of the Wal-Mart goal.  Then, they start offering other, distinctive advantages.  In doing so, they make it harder and harder for Wal-Mart to be successful by simply doing more of the same, only better, faster and cheaper.

Ten years ago if you'd predicted bankruptcy for GM or Chrysler or Circuit City you'd have been laughed at.  Circuit City was a darling of the infamous best seller "Good To Great."  Likewise laughter would have been the most likely outcome had you predicted the demise of Sun Microsystems – which was an internet leader worth over $200B at century's turn.  So it's easy to scoff at the notion that Wal-Mart may never hit $500B revenue.  Or it may do so, but at considerable cost that continues to hurt rates of return, keeping the share price mired – or even declining.  And it would be impossible to think that Wal-Mart could ever fail, like Woolworth's did.  Or that it even might see itself shredded by competitors into an also-ran position, like once powerful, DJIA member Sears.

The Disease is keeping Wal-Mart from doing what it must do if it really wants to succeed.  It has to change.  Wal-Mart leadership has to realize that what made Wal-Mart once great isn't going to make it great in 2020.  Instead of obsessing about execution, Wal-Mart has to become a lot better at competing in new markets.  And that means competing in new ways.  Mostly, fundamentally different ways.  If it can't do that, Wal-Mart's value will keep moving sideways until something unexpected happens – maybe it's related to employee costs, or changes in import laws, or successful lawsuits, or continued growth in internet retailing that sucks away more volume year after year – and the success formula collapses.  Like at GM.

Comparatively, if Apple had remained the Mac company it would have failed.  If Google were just a search engine company it would be called Alta Vista, or AskJeeves.  If Google were just an ad placement company it would be Yahoo!  If Nike had remained obsessed with being the world's best athletic shoe company it would be Adidas, or Converse.

Businesses exist to create shareholder value – and today more than ever that means getting into markets with profitable growth.  Not merely obsessing about defending & extending what once made you great.  The Wal-Mart Disease can become painfully fatal.

 

When Should Steve Ballmer Be Fired? – Microsoft

by | Oct 7, 2010 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Web/Tech


Summary:

  • Steve Ballmer received only half his maximum bonus for last year
  • But Microsoft has failed at almost every new product initiative the last several years
  • Microsoft's R&D costs are wildly out of control, and yielding little new revenue
  • Microsoft is lagging in all new growth markets – without competitive products
  • Microsoft's efforts at developing new markets have created enormous losses
  • Cloud computing could obsolete Microsoft's "core" products
  • Why didn't the Board fire Mr. Ballmer?

Reports are out, including at AppleInsider.com that "Failures in Mobile Space Cost Steve Ballmer Half his Bonus." Apparently the Board has been disappointed that under Mr. Ballmer's leadership Microsoft has missed the move to high growth markets for smartphones and tablets.  Product failures, like Kin, have not made them too happy. But the more critical question is — why didn't the Board fire Mr. Ballmer?

A decade ago Microsoft was the undisputed king of personal software. Its near monopoly on operating systems and office automation software assured it a high cash flow.  But over the last 10 years, Microsoft has done nothing for its shareholders or customers.  The XBox has been a yawn, far from breaking even on the massive investments.  All computer users have received for massive R&D investments are Vista, Windows 7 and Office 2007 followed by Office 2010 — the definition of technology "yawners."  None of the new products have created new demand for Microsoft, brought in any new customers or expanded revenue.  Meanwhile, the 45% market share Microsoft had in smartphones has shrunk to single digits, at best, as Apple and Google are cleaning up the marketplace.  Early editions of tablets were dropped, and developers such as HP have abandoned Microsoft projects. 

Yet, other tech companies have done quite well.  Even though Apple was 45 days from bankruptcy in 2000, and Google was a fledgling young company, both Apple and Google have launched new products in smartphones, mobile computing and entertainment.  And Apple has sold over 4 million tablets already in 2010 – while investors and customers wait for Microsoft to maybe get one to market in 2011.

Despite its market domination, Microsoft's revenues have gone nowhere.  And are projected to continue going relatively nowhere.  While Apple has developed new growth markets, Microsoft has invested in defending its historical revenue base. 

MSFT vs AAPL revenue forecast 4.10
Source:  SeekingAlpha.com

Yet, Microsoft spent 8 times as much on R&D in 2009 to accomplish this much lower revenue growth.  At a recent conference Mr. Ballmer admitted he thought as much as 200 man years of effort was wasted on Vista development in recent years.  That Microsoft has hit declining rates of return on its investment in "defending the base" is quite obvious.  Equally obvious is its clear willingness to throw money at projects even though it has no skill for understanding market needs sin order for development to yield anything commercially successful!

RD cost MSFT and others 2009

Source: Business Insider.com

And investments in opportunities outside the "core" business have not only failed to produce significant revenue, they've created vast losses.  Such as the horrible costs incurred in on-line markets.  Trying to launch Bing and compete with Google in ad sales far too late and with weak products has literally created losses that exceed revenues!

Microsoft-operating-income

Source: BusinessInsider.com

And the result has been a disaster for Microsoft shareholders – literally no gain the last several years.  This has allowed Apple to create a market value that actually exceeds Microsoft's.  An idea that seemed impossible during most of the decade!

Apple v msft mkt cap 05.24.10

Source: BusinessInsider.com

Under Mr. Ballmer's leadership Microsoft has done nothing more than protect market share in its original business – and at a huge cost that has not benefited shareholders with dividends or growth.  No profitable expansion into new businesses, despite several newly emerging markets.  And now late in practically every category.  Costs for business development that are wildly out of control, despite producing little incremental revenue.  And sitting on a business in operating systems and office software that is coming under more critical attack daily by the shift toward cloud computing. A shift that could make its "core" products entirely obsolete before 2020.

Given this performance, giving Mr. Ballmer his "target" bonus for last year seems ridiculous – even if half the maximum.  The proper question should be why does he still have his job? And if you still own Microsoft stock — why as well?

Far too Little, Far too Late – RIM Playbook

by | Oct 5, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech


Summary:

  • Research in Motion has launched a tablet, competing with the iPad
  • But the Playbook does not have the app base that iPad has developed
  • RIM's focus on its "core" IT customer, without spending enough energy focusing on Apple and other competitors, it missed the shift in mobile device user needs
  • Now companies, like Abbott, are starting to roll out iPads to field personnel
  • RIM's future is in jeopardy as the market shifts away from its products
  • You cannot expect your customer to tell you how to develop your product, you have to watch competitors and move quickly to address emerging market needs

Research in Motion has launched a new tablet called Playbook to compete with the Apple iPad.  But will it succeed?  According to SeekingAlpha.com "Playbook Fails to Boost Research in Motion Price Targets." Most analysts do not think the Playbook has much chance of pushing up the market cap at RIM – and except for home town Canadian analysts the overall expectation for RIM is grim.  I certainly agree with the emerging consensus that RIM's future is looking bleak.

Research in Motion was the company that first introduced most of us to smartphones.  The Blackberry, often provided by the employer, was the first mobile product that allowed people do email, look at attachments and eventually text – all without a PC.  Most executives and field-oriented employees loved them, and over a few years Blackberries became completely common.  It looked like RIM had pioneered a new market it would dominate, with its servers squarely ensconced in IT departments and corporate users without option as to what smartphone they would use.

But Apple performed an end-run, getting CEOs to use the iPhone.  People increasingly found they needed a personal mobile phone as well as the corporate phone – because they did not want to use the Blackberry for personal use. But they didn't pick Blackberries.  Instead they started buying the more stylish, easier to use and loaded with apps iPhone. Apple didn't court the "enterprise" customer – so they weren't even on the radar screen at RIM.  But sales were exploding.

Like most companies that focus on their core customers, RIM didn't see the market shift coming.  RIM kept talking to the IT department. Much like IBM did in the 1980s when it dropped PCs in favor of supporting mainframes – because their core data center customers said the PC had no future.  RIM was carefully listening to its customer – but missing an enormous market shift toward usability and apps.  RIM expected its customers to tell them what would be needed in the future – but instead it was the competition that was showing the way.

Now RIM is far, far behind.  Where Apple has 300,000 apps, and Android has over 120,000, RIM doesn't even have 10,000.  RIM's problem isn't a device issue.  RIM has missed the shift to mobile computing and missed understanding the unmet user needs.  According to Crain's Chicago Business "Chicago CEOs embrace the iPad." Several critical users – and CEOs are always critical – have already committed to using the iPad and enjoying their news subscriptions and other applications.  According to the article, Abbott, which has provided Blackberries to thousands of employees, is now beginning to roll out iPads to field personnel.  RIM's Playbook may be a fine piece of hardware, but it offers far too little in the direction of helping people discard PCs as they migrate to cloud architectures and much smaller, easier to use devices such as tablets.

RIM followed the ballyhooed advice of listening to its core customer.  But such behavior caused it to miss the shift in its own marketplace toward greater extended use of mobile devices.  RIM should have paid more attention to what competitors Apple and Android were doing – and started building out its app environment years ago.  RIM should have been first with a tablet – not late.  And RIM should have led the movement toward digital publishing – rather than letting Amazon take the lead (Kindle) with Apple close behind.  Creating valuable mobility is what the leading company with "motion" in its name should have done.  Instead of merely providing the answers to requests from core IT department customers. Now RIM has no chance of catching up with competitors.

 

HP and Nokia’s Bad CEO Selections – Neither knows how to Grow – Hewlett Packard, Nokia

by | Oct 1, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Web/Tech


Summary:

  1. HP and Nokia have lost the ability to grow organically
  2. Both need CEOs that can attack old decision-making processes to overcome barriers and move innovation to market much more quickly
  3. Unfortunately, both companies hired new CEOs who are very weak in these skills
  4. HP’s new CEO is from SAP – which has been horrible at new product development and introduction
  5. Nokia’s new CEO is from Microsoft – another failure at developing new markets
  6. It is unlikely these CEO hires will bring to these companies what is most needed

Leo Apotheker is taking over as CEO of Hewlett Packard today.  Formerly he ran SAP.  According to MarketWatch.com “HP’s New CEO Has a Lot To Prove,” and investors were less than overwhelmed by the selection, “HP Shares Slip After CEO Appointment.”  Rightly so.  What was the last exciting new product you can remember from SAP, where Apotheker led the company from 2008 until recently?  Well? 

SAP is going nowhere good.  Its best years are way behind it as the company focuses on defending its installed base and adding new bits to existing products  It’s product is amazingly expensive, incredibly hard and expensive to install, and primarily keeps companies from doing anything new.  Enterprise software packages are like cement, once you pour them in place nothing can change.  They reinforce making the same decision over and over.  But increasingly, that kind of management practice is failing.  In a fast-changing world software that can take 4 years to install and limits decision-making options doesn’t add to desperately needed organizational agility.  And during the last 10 years SAP has done nothing to make its products better linked to the needs of today’s markets. 

So why would anyone be excited to see such a leader take over their company?  If Apotheker leads HP the way he led SAP investors will see growth decline – not grow.  What does this new CEO know about listening carefully to emerging market needs?  The move to install SAP in smaller companies hasn’t moved the needle, as SAP remains almost wholly software for stodgy, low-growth, struggly behemoths.  What does this CEO know about creating an organization that can moving quickly, create new products and identify market needs to position HP for growth?  His experience doesn’t look anything like Steve Jobs, under who’s leadership Apple’s value has increased multi-fold the last decade.

Unfortunately, the same refrain applies at Nokia.  Just last week I pointed out in “Another One Bites the Dust” that Nokia was at grave risk of following Blockbuster into bankruptcy court.  Although Nokia has 40% worldwide market share in mobile phones, U.S. share has slipped to about 8% this year.  In smartphones Nokia has nowhere near the margin of Apple, even though both will sell about the same number of units this year.  Nokia once had the lead, but now it is far behind in a market where it has the largest overall share.  And that was the problem which befell Motorola – #1 for 3 years early in this decade but now far, far behind competitors in all segments and a very likely candidate for bankruptcy when it spins out a seperate cell phone business.

According to the New York Times in “Nokia’s New Chief Faces a Culture of Complacency” Nokia had a very similar product to the iPhone in 2004 but never took it to market.  The internal organization made the new advancement go through several rounds of “review” and the hierarachy simply shot it down in an effort to maintain company focus on the popular, traditional cell phones then being offered.  Rather than risk cannibalization, the organization focused on doing more of what it had done well.  Eschewing innovation for defending the old products is shown again and again the first step toward disaster.  (Would your organization use layers of reviews to kill a new idea in a new market?)

Meanwhile, when an internal Nokia team tried to get approval to launch the smart phones management’s responses sounded like:

  • We don’t know much about this technology. The old stuff we do.
  • We don’t know how big this new market might be. The old one we do
  • We can’t tell if this new product will succeed. Enhanced versions of old products we can predict very accurately.
  • We might be too early to market.  We know how to sell in the existing market.

Even though Nokia had quite a lead in touch screens, downloadable apps, a good smartphone operating system and even 3-D interfaces, the desire to Defend & Extend the old “core” business overwhelmed any effort to move innovation to market.  (By the way, do these comments in any way sound like your company?)

The new CEO, Mr. Elop, is from Microsoft.  Again, one of the weakest tech companies out there at launching new products.  Microsoft had the smart phone O/S lead just 3 years ago, but lost it to maintain investment in its traditional Windows PC O/S and Office automation software.  And again you can ask, exactly how excited have people been with Microsoft’s new products over the last decade?  Or you might ask, exactly what new products?

Both HP and Nokia need CEOs ready to attack lock-in to old technologies, old business practices, old hierarchies and old metrics.  They need to rejuvenate the companies’ ability to quickly get new products to market, learn and improve.  They need experience at early market sensing of unmet needs, and using White Space teams to get products out the door and competitive fast.  Both need to overcome traditional management approaches that inhibit growth and move fast to be first into new markets with new products – like Apple and Google.

But in both cases, it appears highly unlikely the Board has hired for what the companies need.  Instead, they’ve hired for a stodgy resume. Executive who came from companies that are already in bad positions with limited growth prospects.  Exactly NOT what the companies need.  We can only hope that somehow both CEOs overcome their historical approaches and rapidly attack existing locked-in decision-making.  Otherwise, this will be seen as when investors should have sold their stock and employees should have begun putting resumes on the street!

Get aboard, or risk getting run over – Huffington Post, Tribune Corp., Forbes.com

by | Sep 29, 2010 | Current Affairs, General, Innovation, Leadership, Openness, Web/Tech, Weblogs


Summary:

  • Traditional news formats – such as magazines and newspapers – are faltering
  • On-line editions of traditional formats are not faring well
  • Important journalists are transitioning to blogger roles to better provide news consumers what they want
  • Important journalists from Newsweek and the New York Times have joined HuffingtonPost.com as bloggers
  • Forbes.com is transitioning from traditional publishing to bloggers in its effort to meet market needs
  • The new era of journalism will be nothing like the last

In early 2006, before it completed the leveraged buyout (LBO) that added piles of debt onto Tribune Corporation I was talking with several former Chicago Tribune executives who had been placed in senior positions at the acquired Los Angeles Times.  Their challenge was figuring out how they would ever improve cash flow enough to justify the huge premium paid for the newspaper.  Unfortunately, 90% or more of their energy was focused on cost cutting and outsourcing, with almost none looking at revenue generation.

In the face of a declining subscriber base,  intense competitiion from smaller, targeted newspapers in the area, and a lousy ad market I asked both the publisher and the General Manager what they were going to do to drive revenue growth.  They, quite literally, had no ideas.  There was a fledgling effort, dramatically underfunded for the scale of the country’s largest local newspaper, to post part of the LATimes content on-line.  But the entire team was only 30 people, they were restricted to re-treading newspaper content, and mostly they focused on local sports reports (pages which drew the largest number of hits).  About a third of the staff were technical folks (IT), and half were sales – leaving very few bodies (or brains) to put energy into making a really world-class news environment worthy of the LATimes.com name.   The group head was trying to find internet ad buyers who would pay a premium to be on a well-named but woefully content-weak web-site.

Lacking any plans to drive growth, in old or new markets, it was no surprise that lay-offs and draconian cost cutting continued.  Several floors in the famous newspaper building right in downtown Los Angeles, like the Tribune Tower in Chicago, became empty.  By 2008 as much of the building was used as a movie set as used by editors or reporters! Eventually Tribune Corp. filed bankruptcy – where it has remained going on 3 years now.

When asked if the newspaper would consider adding bloggers to the on-line journal, the entire management team was horrified.  “Bloggers are not journalists,” was the first concern, “so quality would be unacceptable. You cannot expect a major journalistic enterprise to consider blogging to have any correlation with professional journalism.”  I asked what they thought about the then-fledgling HuffingtonPost.com, to which they retorted “that is not a legitimate news company.  The product is not comparable to our newspaper.  It has nothing to do with the business we’re in.”  And with that simple attack, the executives promptly dismissed the fledgling, fringe competition.

How things have changed in news publishing.  Four years later newspapers are dramatically smaller, in both ad dollars and staff.  Many major journals – magazines as well as newspapers – have discontinued print editions as subscriptions have declined.  Print formats (physical size) are substantially smaller.  While millions of internet news sites attract readers hourly, print readership has only gone down.  Major journals, unable to maintain their cash flow, have been acquired at low prices by newcomers hopeful of developing a new business model, and many well known and formerly influential news journalists have been laid off, or moved to on-line environments in order to maintain employment.

About a week ago the Wall Street Journal reported “Newsweek’s Howard Fineman to Join Huffington Post.”  This week Mediapost.com headlined “The HuffPo’s Hiring of NYT’s Peter Goodman Is More Significant Than You Think.” Rather rapidly, in just a few years, HuffingtonPost.com has become a major force in the news industry.  Well known journalists from Newsweek and the New York Times add considerable credibility to a new media which traditional publishers far too often ignored.  Much to the chagrin, to be sure, of Sam Zell and the leadership at Tribune Corporation.

Today people want not only sterile reporting, but some insight.  “What does this mean? Why do you think this happened?  Is this event important, or not, longer term? What am I supposed to do with this information?”  People want some analysis, as well as news.  And readers want the input NOW – immediately – not at some later time that meets an arbitrary news cycle. Increasingly news consumers want Bill O’Reilly or Keith Olberman (depending upon your point of view) rather than Walter Cronkite – and they’d like that input as soon as possible.

Bloggers provide this insight.  They provide not only information, but make some sense of it.  They utlize past experience and insight to bring together relevant, if disparate, facts coupled with some ideas as to what it means.  Where 4 year ago publishers scoffed at HuffingtonPost.com, nobody is scoffing any longer. 

And it’s with great pleasure, and a pretty hefty dose of humility, that I’ve become a blogger at Forbes.com (http://blogs.forbes.com/adamhartung/).  Hand it to the publisher and editors at Forbes that they are moving Forbes.com from an on-line magazine to a bi-directional, real-time site for information and insight to the world of business and economic news.  Writers aren’t limited to a set schedule, a set word length or even set topics.  Readers will now be able to visit Forbes.com 24×7 and acquire up-to-the-minute news and insight on relevant topics. 

Forbes.com is transitioning to be much more like HuffingtonPost.com – a change that aligns with the market shift.  For readers, employees and advertisers this is a very, very good thing.  Because nobody wants the end of journalism – just a transition to the market needs of 2010.  I look forward to joining you at Forbes.com blogs, and hearing your comments to my take on business and economic news.

The Value of Growth – Apple, Microsoft, Exxon

by | Sep 26, 2010 | Current Affairs, In the Rapids, Leadership, Openness, Web/Tech


Summary:

  • Apple is worth more than Microsoft today, even though Microsoft is larger, because it has better growth prospects
  • Apple is closing in on the most valuable company in the world – Exxon
  • Exxon’s value is stalled because it has no growth markets
  • Exxon once developed, then abandoned, a growth business called Exxon Office Systems
  • Apple’s value may eclipse Exxon, which has almost 8 times the revenue, because its growth prospects are so bright
  • Profitable growth is worth more than monopolistic market share – or even huge revenue

We all know that over the last 10 years Apple has moved from the brink of bankruptcy to great success.  Apple has been able to dramatically increase its revenues, growing at double-digit rates for several years.  And Apple now competes in markets like mobile computing and entertainment where its hardware and software products are demonstrating a leading position as users migrate toward different platforms (iPods and downloadable music or video, iPads and downloadable video or text, iPhones and downloadable apps of all sorts). 

Because of this profitable growth, Apple’s market value now exceeds Microsoft’s.  An accomplishment nobody predicted a decade ago.  

Apple v msft mkt cap 05.24.10
As this chart from Silicon Alley Insider shows, Apple’s profitable revenue growth has allowed its value to soar.  Even though Microsoft is larger, and dominates its market of PC operating systems and office automation software, its value has stalled due to lack of growth.  Because Apple is in very large, emerging markets with successful products it is generating a very high valuation.

In fact, Apple’s market cap is closing in on the most valuable company in the world – Exxon:

Apple vs exxon mkt cap sept-2010
Source: Silicon Alley Insider

Exxon and Apple have nothing in common.  Exxon is a petroleum company.  It’s growth almost all from acquisition.  You could say it’s nonsensical to compare the two.

But for those of us with long memories, we can remember in the early 1980s when Exxon opened Exxon Office Systems.  As the price of crude oil, and its refined products, hit record highs Exxon made record profits.  Leadership invested a few billion dollars into creating a new business intended to compete with IBM and Xerox – leading office equipment companies of the time.  But, when the price of crude oil fell Exxon abandoned this venture – by then already achieving more than $1B/year in revenue.  All the suppliers and customers were left in the lurch, and the employees were left looking for new jobs.  Within weeks Exxon Office Products disappeared.

Exxon abandoned its opportunity for growth into new markets in order to “focus” on its “core” business of oil exploration and production, oil refining, and marketing of petroleum products.  As a result, Exxon – augmented via its many acquisitions across the years – is now the world’s largest “oil” company as well as the world’s highest market capitalization company.  But it has no growth.  And thus, its value is totally dependent upon the price of oil – a commodity.  Over the last 2 years this has caused Exxon’s value to decline.

At $43B in 2009, Apple has nowhere near the revenue of Exxon’s $310B.  But what Apple has is new markets, and growth.  Someday we’ll run out of oil (long time yet, to be sure).  What will Exxon do then?  But in the case of Apple we already know there will be future revenues from all the new products for a long time after the Mac has run its course and disappeared from backpacks.  It’s that willingness to seek out new markets, to develop new products for emerging markets and constantly push for new, profitable revenues that makes Apple worth so much. 

Could Apple become the world’s most valuable company?  Possibly.  If so, it won’t be from industry domination.  That sort of monopolistic thinking drove the industrial era, and companies like AT&T as well as Exxon — and Microsoft.  What’s worth more today than monopolism is entering new markets and generating profitable growth.  It’s what once made the original Standard Oil worth so much, and it initially made Microsoft worth more than any other tech company.  Too many of us forget that profitable growth, more than anything else, generates huge value and wealth.  And that’s true in spades in 2010!