by Adam Hartung | Jan 28, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
In a recent presentation I told the audience that they had quit printing newspapers in Detroit during the week. The audience said they weren't surprised, and didn't much care. The other day I asked a room full of college students when the last time was they looked at a newspaper (not read, just looked) – and not a single person could remember the last time. In Houston I asked two groups for the headline of the day that morning – not a single person had looked at the newspaper, and none in the group subscribed to a newspaper. Even my wife, who used to demand a Wednesday newspaper so she could receive the grocery ads, asked me why we bother to subscribe any more because she now gets the ads in the mail. This wholly unscientific representation was pretty clear. People simply don't care much about newspapers any more.
So, if you had $100 bucks to invest, and you had the following options, would you invest it in
- A professional baseball team (like the Boston Red Sox or Chicago Cubs)?
- A manhattan skyscraper?
- A newspaper?
That is exactly the question which is facing the New York Times Company (see chart here), and their decision is to invest in a newspaper. In fact, they are selling their interest in the Boston Red Sox and 19 floors in their Manhattan headquarters so they can prop up the newspaper business which saw ad revenue declines of greater than 16% – and classified ad declines of a whopping 29% (read article here). (Classified ads are for cars, lawn mowers, and jobs – you know, the things you now go to find on Craigslist.com, ebay.com, vehix.com and Monster.com and aren't likely to ever spend money on with a newspaper.)
The value of New York Times Company has dropped 90% in the last 5 years – from $50 to $5. The decline in advertising is not a new phenomenon, nor is it related to the financial crisis. People simply quit reading newspapers several years ago, and that trend has continued. Simultaneously, competition for ads grew tremendously – such as the classified ads described above. Corporate advertisers discovered they could reach a lot more readers a lot cheaper if they put ads on the internet using services from Google and Yahoo! There was no surprise in the demise of the newspaper business.
At NYT, the smart thing to do would be to sell, or maybe close, the newspaper and maximize the value of investments in About.com and other web projects (which today are only 12% of revenue) as well as Boston Sports (owner of the Red Sox) and hang on to that Manhattan property until real estate turns around in 5 years (more or less). Why sell the most valuable things you own, and put the money into a product that has seen double-digit demand and revenue declines for several years?
Of course, Tribune Company isn't showing any greater business intelligence. Management borrowed far, far more than the newspaper is worth 2 years ago through an employee stock ownership plan (can you understand "good-bye pension"?). So last week they sold the Chicago Cubs. For $900million. Tribune bought the Cubs, including Wrigley Field, 28 years ago for $20million. That's a 14.5% annualized rate of return for 28 consecutive years. Not even Peter Lynch, the famed mutual fund manager, can claim that kind of record!
Through adroit management and good marketing, they modernized the Wrigley Field assets and the Cubs team – and without ever winning the World Series drove the value straight up. As fast as people quit reading the Chicago Tribune newspaper they went to Cubs games. Who cares if the team doesn't win, there's always next year. And unlike newspapers, there aren't going to be any more professional baseball teams in Chicago (there are already two for those who don't know - Chicago's White Sox won the World Series in 2005). And they aren't building any additional arenas in downtown Chicago to compete with Wrigley Field. Here's a business with monopoly-like characteristics and unlimited value creation potential. But management sold it in order to pay off the debt they took on to take the newspaper private.
Defending the original business gets Locked-in at companies. Long after its value has declined, uneconomic decisions are made to try keeping it alive. Smart competitors don't sell good assets to invest in bad businesses. They follow the capitalistic system and direct investments where their value can grow. The New York Times may be a good newspaper – but who cares if people would rather get their news from TV and the internet – and they don't read newspapers "for fun?" When people don't read, and advertisers can get better return from media vehicles that don't have the printing and distribution costs of newspapers, what difference does it make if the outdated product is "good?" If you think the New York Times Company is cheap at $5.00 a share, you'll think it's really cheap in bankruptcy court. Just ask the employee shareholders at Tribune Company.
by Adam Hartung | Jan 27, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle, Web/Tech
Last week was quite a contrast in tech results. Google announced it had hired 99 new employees in the fourth quarter, but was planning to lay off 100. Not good news, but a veritable growth binge compared to Microsoft - that announced it was laying off 5,000 from its Windows business. To put it bluntly, people aren't buying PCs and that's the focus of all Microsoft sales. As the PC business stagnates – not hard to predict given the shift to newer products like netbooks, Blackberry's and iPhones - revenues at Microsoft have stagnated as well.
So now the pundits are predicting that Microsoft's weakness indicates an acquisition of Yahoo! is in the offing (read article here). The story goes that with things weak, Microsoft will buy Yahoo! to defend its survivability. Not dissimilar to the logic behind Pfizer's acquisition of Wyeth.
But does this really make sense? Microsoft is fully Locked-in to a completely outdated Success Formula. Mr. Ballmer has shown no ability to do anything beyond execute the old monopolistic model of controlling the desktop. Only a massive Disruption by founder Bill Gates kept Microsoft from falling victim to Netscape in the 1990s. But there hasn't been any White Space at Microsoft, and year after year Microsoft is falling further behind in the technology marketplace. Now the growth is gone in their technology. It's just a "cash cow" that is producing less cash every year. Microsoft is a boring company with boring management that has no idea how to compete against Google. They would strip out whatever market intelligence Yahoo! has left in an effort to turn the company into Microsoft. There would be nothing left of value, and a lot of cash burned up in the process.
Why shouldn't Yahoo! buy Microsoft? Google is the leader in search and on-line ad sales. The closest competitor is Yahoo!, which is so far behind it needs massive cash and engineering resources to develop a competitive attack. Yahoo! has a new CEO with the smarts and brass to Disrupt things and create a new Success Formula. Yahoo! could take advantage of the cash flow from Microsoft to develop new products, possibly products we've not thought of yet, that could create some viable competition for Google. We don't need another Microsoft, but we do need another Google! Why shouldn't Yahoo! take over the engineers and technical knowledge at Microsoft, as well as distribution, and use that to develop new solutions for web applications from possibly search to who knows what! Maybe something that moves beyond the iPhone and Blackberry!
What's the odds of this happening? Not good. That would defy conventional wisdom that the company with all the cash should win. But we all know that as investors we don't value cash in the bank, we value growth. So the company with growth opportunities, and the management to invest in new solutions, should be the one that "milks" the "cash cow." The growing company should be cutting the investment in old solutions that are near end-of-life (like Windows 7), and putting the money into growth programs that can generate much higher rates of return. By all logic of finance, and investing, Yahoo! should buy Microsoft. It's Ms. Bartz we need running a high tech company, shaking things up as the underdog ready to use White Space to develop new solutions that can generate growth. Like she did when beating Calma and DEC. Not the CEO best known for his on-stage monkey imitation and no idea how to generate growth because he's so committed to Defending & Extending the old cash business — completely missing every new technology innovation in the last decade.
Yahoo! has a chance of being a viable competitor. Yahoo! has a chance of competing against Google and pushing both companies to new solutions making the PC an obsolete icon of the past. But if Microsoft buys Yahoo!, it will do nobody any good.
by Adam Hartung | Jan 26, 2009 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Do you remember when Home Depot was a Wall Street – and customer – darling? Home Depot was only 20 years old when its incredible growth story vaulted it onto the Dow Jones Industrial Average 9 years ago, replacing Sears. Unfortunately, that youthful ascent turned out to be the company crescendo. Since peaking in value within a year, Home Depot has lost more than 2/3 of its value (see chart here). Things have not been good for the company that "changed the rules" on home do-it-yourself sales.
Along the way, Home Depot changed its CEO a couple of times. And it opened some White Space type of projects. But today, the company announced it was shutting down those projects (Expo Design Centers, YardBIRDs, HD Bath) cutting 5,000 jobs - and an additional 2,000 jobs in a "streamlining" efforts (read article here). In the process, it affirmed revenue will decline 8% this year while earnings per share will drop 24%.
Amidst this background, the stock rose 4.5%.
Home Depot is a company with a very strong Success Formula. That Success Formula met the market needs so well in the 1980s and 1990s that the company excelled beyond all expectations. But like most companies, Home Depot was a "one trick pony." It knew how to do one thing, one way. Then in the early 2000s, competitors started catching up. And Home Depot didn't have anything new to offer. The market started shifting to competitors with lower price – or competitors with even better customer service – leaving Home Depot "stuck in the middle" decent at both price and service not not best at either. And with nothing really knew to attract customers.
So Home Depot launched Expo Design Centers. It was leadership's effort to go further upmarket – to sell even higher priced home items. This was a failed effort from the start:
- Leadership did not tie its projects to any committed scenario of the future where Expo would create a leadership position. There was no scenario planning which showed a critical need for Home Depot to change.
- Expo did not learn from competitors, nor did it set any new standards that exceeded competitors. KDA and others had long been doing what Expo did – and even better! Rather than obsessing about competitors in order to realize where Home Depot was weak, and finding new ways to grow the market, Home Depot decided to launch its own idea without powerful competitive information.
- Thirdly, Home Depot did not Disrupt at all. Although Expo existed, it was never considered important to the company future. Leadership never said it needed to do anything different, nor that it felt these new projects were critical to company success. Instead, leadership let all the employees believe these projects were merely trial balloons with limited commitment.
- And, for sure, Expo and other projects did not meet the real criteria of White Space because they lacked the permission to violate Home Depot Lock-ins and the resources to really be successful.
Now, years later, with the company in even more trouble, Home Depot is closing these stores. It appears management is taking a page from Sears – the company they displaced on the DJIA – which closed its hardware and other store concepts to maintain its focus on traditional Sears. And we all know how that's worked out. Leadership is wiping out growth opportunities to save cost, in order to Defend its now poorly performing Success Formula, rather than using them to try developing a solution for declining revenues and profits. So easy to simply quit. Instead of re-orienting the projects along The Phoenix Principle to try and fix Home Depot, leadership is killing the growth potential to save cost with hopes that some miracle will return the world to the days when Home Depot grew and made above-average returns.
What do Home Depot leaders want employees, investors and vendors to anticipate will turn around this company? Even though Home Depot was a phenomenal success, once it hit a growth stall it fell amazingly fast. Not its historical growth rate, nor its size, nor its reputation was able to stop the ongoing decline that befell Home Depot once it hit a growth stall. (By the way, 93% of those companies that hit a growth stall follow the same spiraling downward path as Home Depot). As Sears has shown, a retailer cannot cost-cut its way to success. Refocusing on its "core business" will not return Home Depot to its halcyon days. And these cuts further assure ongoing company decline.
by Adam Hartung | Jan 25, 2009 | Defend & Extend, In the Swamp, Leadership, Science
Two weeks ago I blogged about R&D layoffs at Pfizer (chart here), and warned that all signs were indicating Pfizer was nearing really big trouble because it had missed the boat on new technologies as it road out its patent protection looking for new ways to extend its outdated Success Formula.
Now we hear rumors that Pfizer is planning a mega- acquisition by purchasing Wyeth (chart here) for some $65B (read article here). That's about 3 times revenue for a company growing at less than 10%/year. This acquisition will most likely keep Pfizer alive – but it's benefits for shareholders will probably be nonexistent – and probably a negative. And the impact on employees is almost sure to be a net loss.
Pfizer missed the move to "biologics" – which is the term for the new forms of disease control products that use genetics, bio-engineering and nano-technology as their basis rather than a heavy reliance on chemistry and pharmacology. As a result, its new product pipeline has not met company growth needs. So now that Pfizer is buying a company with significantly biologic solutions, Pfizer leadership is sure to argue that it is filling its pipleline gap with the new solutions and all will be good going forward.
But the reality is that there are much cheaper ways for Pfizer to get into biologics than spending $65billion – a big chunk of it cash – on a huge acquistion. With banks stopped and investors realing, there are dozens of projects in universities and small companies that are begging for funding. These range from invention stage, to well into clinical trials. If Pfizer wanted to become a successful company it would
- Tell investors and customers its scenario for the future, with insights to how the company sees growth and the investments it needs to make
- Telling investors and employees the competitors that are most important to watch, and how they plan to deal with those competitors
- Disrupting its old Success Formula. Leadership would make sure all employees and management are stopped, and recognize the company needs to make a serious change if it is to catch up with market shifts and regain viability
- It would invest in multiple solution areas and multiple projects, and the allow them to operate independently as White Space where Pfizer could learn how to modify its Success Formula in order to regain growth and success in the future.
This clearly is not what is happening at Pfizer. Instead, the company is planning to take a big cash hoard, which if it doesn't want to invest in White Space it could return to investors, and spend it on a huge acquisition. We all know that almost all big acquisitions do not achieve desired goals, and that the buying investors get the short end of the stick as the selling investors achieve a premium. Why? Because the buying leaders, like those at Pfizer, are without a solution and looking for the acquisition to cover over past sins and make them look smart and powerful. So, driven largely by ego, they overpay to get a company as if that makes them the "winner."
But what happens? We can expect that Pfizer will find out it has to do something drastic to make the overpayment potentially work, and staff cuts will quickly ensue. Probably across-the-board employee cuts in the name of "synergy", but which weakens the acquired company. Then, as it absorbs Wyeth, Pfizer will push to force its old Success Formula onto Wyeth – after all, Pfizer is the "winner". But Pfizer needed Wyeth, not vice-versa. As it cuts cost, it cuts into the value they ostensibly paid for. Many of the best at Wyeth will go elsewhere to continue competing as they know produces better results. The value of the acquisition will go down as Pfizer "integrates" the acquisition, rather than raise it.
But in a year, Pfizer will declare victory, no matter what. Pfizer's revenue has been flat for at least 4 years (stuck in the Swamp) at about $48B. Wyeth's revenue has been growing at about 10%/year and is about $22B. So in a year, Pfizer can say "Revenues are now $65B, an increase of 30%". Of course, the reality would be that revenues were down 7%. Of course they will brag about their integration project, and brag about various cost cuts implemented to streamline "execution." Pfizer leadership will say they made the right move, even if all they did was use up a cash hoard in order to delay changing the company. That, by the way, is what I call "financial machination". If you can't dazzle the investor with brilliance, make a big enough acquisition so you can baffle them with bulls***.
If you're a Wyeth investor, take the money and run. You don't want to stick around for a takeover destined to lower total value and reduce the excitement of new R&D programs and medical solutions. Go find alternative companies that need cash, and help them move forward with their new solutions. If you're a Pfizer investor, don't be fooled. If the analysts cheer the takeover, and the stock pops, it's unlikely you'll get a better time to sell. The leadership has demonstrated the last 5 years, as growth has been nonexistent and the equity value has steadily declined, that they don't know how to regain growth. This acquisition is not changing the leadership, managers nor Success Formula of Pfizer that has long been producing lower returns. This acquisition is the latest in Defend & Extend moves to protect the outdated Success Formula. If this gives you an opportunity to get out – take it! Within 2 years the "new" Pfizer will be a lot more like the old Pfizer than Wyeth.
by Adam Hartung | Jan 22, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
Microsoft announced today it intends to lay off 5,000 workers (read article here). This action, included in its announcement that Microsoft is going to miss its earnings estimate, spooked the market and is blamed for a one-day market dip (read here). The company's equity value, meanwhile, dropped to an 11-year low – out of its 33 year life (see chart here). Of course, the blame was placed on the weak economy.
But we all know that Microsoft has been struggling. The Vista launch was a disaster. A joke. Techies resoundingly ignored the product – as did their employers. Because Vista was so weak, Microsoft is looking to launch yet another operating system – just 2 years after Vista was launched. Incredible, given that Vista was more than 2 years late being launched! Additionally, in an effort to increase interest in Windows 7, the new product, Microsoft has dramatically increased the availability of beta versions for review (read here).
Microsoft was once the only game in town. But over the last few years, Linux has made inroads. Maybe not too much on the desktop or laptop, but definitely in the server world. The hard core users of network machines have been finding the cappbilities of Linux superior to Windows, and the cost attractive. Additionally, netbooks, PDAs and mobile phones are gaining share on laptops every day. Customers are finding new solutions that utilize network applications from companies such as Google are increasingly attractive. By laying off 5,000, Microsoft is not addressing its future needs – to remain highly competitive in operating systems and applications against new competitors. It is retrenching. This doesn't make Microsoft stronger. Rather, it makes Microsoft an even weaker target for those who have the company in their sites.
Why should anyone be excited about a company that is willing to cut 7.5% of its workforce while it is losing market share? Sure, the company is still dominant in many segments. But once the same could be said for Digital Equipment (DEC), Wang, Lanier, Compaq, Silicon Graphics, Sun Microsystems, Cray and AT&T. All fell victims to market shifts making them irrelevant. Not overnight – but over time irrelevant, nonetheless.
It's hard to imagine, today, a world without Microsoft domination. After all, this was a company sued by the government for monopolistic practices. Yet, we know that even market domination does not protect a company from market shifts. Microsoft's layoffs demonstrate a company planning from the past – it's former dominance – rather than planning for the future. Many industry leaders are already seeing a technology future far less dependent upon Microsoft. Shifting software solutions as well as changing uses of platforms (largely the declining importance of desktop and laptop Wintel machines) is making Microsoft less important.
Trying to Defend & Extend its past glory is not serving Microsoft well. Once, any changes in its operating system was front page news. Now, a new release struggles to get attention. Microsoft is at great risk – and its layoffs will weaken the company at a time when it cannot afford to be weakened. When Microsoft most needs to be obsessing about competitor's emerging strengths, and using Disruptions to open White Space where it can put employees to work on new solutions, Microsoft is cutting back and making itself more vulnerable to competitors now surrounding on all fronts. This should be a big concern for not only those being laid off, but those remaining as employees and those investors who have already seen a huge decline in company value.
by Adam Hartung | Jan 21, 2009 | Innovation, Leadership, Lock-in, Web/Tech
By now most people know the story of eBay. Originally, the founders were looking at the internet as a place to trade PEZ dispensers. But over the next 2 decades, eBay became the world's biggest garage sale. If you have something to sell, you can list it on eBay to a world of potential buyers. While there was a price to listing, it was small and eBay offered a nation of buyers compared to Craig's list which typically only got local buyers amidst a rash of junk listings created by their willingness to allow free listings of on-line items.
Given the current economy, you would expect eBay to be doing gangbusters. When would be a better time to unload the stuff you don't need than now? But unfortunately, eBay revenue is down 6% versus last year, and gross merchandise volume is down 12% versus year ago. Even though eBay has expanded by adding Shopping.com, Stubhub and other sites, total revenue for the Merchandise unit is down 16% versus last year. (read eBay results here)
eBay demonstrates the risk of being Locked-in to a single business model (and single Success Formula). For about 2 decades internet growth has pulled along growing revenues at eBay. Without doing anything differently, eBay grew because more and more people "discovered" the web. As unhappy customers escalated in alarming rates, and lawsuits against unsrupulous eBay suppliers mounted, eBay blithely kept close to its "core," doing more of the same and only adding businesses that helped the "core" internet business grow – such as the acquisition of Paypal to handle small internet purchase transactions. Many people thought eBay would grow forever – as the internet grew.
But now we can see that hiccups happen in all technology markets. Customers are not only using the web, they are getting more savvy. Fewer are willing to buy from unknown suppliers that may not follow through with promised products – and no back-up from eBay. Fewer folks are willing to pay for listings as skeptical buyers are less trusting of those listings – and thus they turn to the free Craig's list. Just being in the right technology market is not enough to keep a business growing.
Lock-in has served eBay well for 20 years. But "times are changing." Now customers are more sophisticated, and looking for more confidence and assurances. They don't trust the eBay model implicitly, like they once did, knowledgable about increasing fraud and lousy customer service from sales people that don't care. The simple eBay Success Formula isn't producing the results it once did.
These latest results should worry everyone who depends on eBay as a supplier, employee or investor. If things don't turn around in the next quarter, eBay will officially enter a growth stall. Even though eBay has been a huge success, like many internet companies eBay could rapidly see an equally remarkable fall. Customers and suppliers can leave eBay just as fast as they left Pets.com.
Most companies expect their Success Formulas to help them grow indefinitely. But we know that highly dynamic markets means this is extremely unlikely. Markets shift – and right now the internet market is shifting fast along with the traditional retail market. eBay is a company that has not prepared for market shifts at all, remaining exclusively tied to its original Success Formula. As a result, the company has no plan to do anything differently even though the market is changing fast. And that is the risk of companies that don't invest in scenario planning, obsessive competitor analysis and White Space during the good times. They can all too easily wake up one day to a dramatic shift in fortune with no idea what to do about it.
You don't have to be GM or Sears to be Locked-in and at risk of market shifts. Even leading companies run the risk. If you devote yourself to Defending & Extending your historical business, ignore internal Disruptions and don't implement White Space to find new opportunities for growth, you risk the business. Because no one can predict when, or how fast, markets will change putting the old business at risk.
by Adam Hartung | Jan 16, 2009 | Current Affairs, Defend & Extend, Disruptions, General, Leadership, Lock-in, Web/Tech
Sprint's prepaid mobile unit, Boost Mobile, announced today a new pricing plan. Customers can get nationwide unlimited calling, text and web access – with no roaming charges. The company President said "This plan is designed to be disruptive." (read article here)
That's a poor choice of words. All this new plan does is lower price. And the predominant reaction is that this may spur a deepening price war. There's nothing new being offered. Just a lower price. Offering more at a lower price isn't disruptive. It might challenge competitors to match that price, and hurt profits, but it isn't disruptive. It doesn't offer a new technology curve that can provide better service at lower pricing long term, it's just another step along a price discount curve.
This change might be very good for consumers. But it's not as good as a really Disruptive action. For example, cell phones were disruptive because they offered a service never before available – mobile telephoning – and offered an entirely new cost curve. In the beginning they were more expensive, so limited only to those who really needed the service. But as time went along and volume increased it became possible for wireless telephony to eclipse old fashioned land-line service. In many emerging countries wireless is the phone service – just as it is for many younger people who have no land line service in their homes relying entirely on mobile phones.
If the CEO at Sprint Mobile wants to be Disruptive he has to come up with a new solution that creates the opportunity for entirely new users who are under- or even unserved. Perhaps telephony that is free because it's linked to a simple radio. Or perhaps a telephone that can translate languages for international use. Or perhaps a phone that can scan documents and send as emails in popular applications like MSWord. Or maybe phones that offer free netmeeting services with document transport and manipulation operating simultaneously with voice service. Or these might just be new features down the road for existing phones – and not even disruptive themselves.
Disruptive innovations are not just price discounts or changes in pricing structures. They bring in new customers and offer the opportunity for dramatically lower pricing because of a different technology or solution format. And they require White Space to develop new customers that can effectively use the new technology and prove its value.
Therefore, we can expect competitors to quickly match the new pricing offered at Boost Mobile. And profits to be curbed.
by Adam Hartung | Jan 15, 2009 | Current Affairs, Defend & Extend, General, Leadership
It was only 2003 when Ed Zander joined Motorola as its new CEO. In the midst of lost market share and declining revenue, analysts were calling for massive layoffs. But, Mr. Zander layed off no one. Instead, he eliminated the executive dining room, focused all executives on customers (even staff positions) and emphasized new product releases. It wasn't long before Motorola spit out the RAZR, a product tied up in product release, and a revitalized Motorola started growing again.
The easiest thing Mr. Zander could have done was increase the already extensive layoffs. Analysts and investors were all calling for more reductions. Instead, he Disrupted long-held lock-ins at Motorola that kept products from making it to market. And Mr. Zander was rapidly named "CEO of the Year." Yes, the RAZR predated him, and he was not a new product genius. But he did unleash new products on the marketplace that created new growth and pushed Motorola back into the forefront of wireless competitors. And his push for White Space created joint product development projects with Apple, and new design centers from Brazil to Bangalore.
Unfortunately, Mr. Zander did not stick to his Diruption and White Space programs. When an outsider bought up company stock and attacked Motorola for continuing its investment in new products, Mr. Zander was cowed. He retrenched. And quickly – very quickly – Motorola found itself without exciting new product introductions. The RAZR was not replaced with additional new products. And innovations remained stuck in R&D and product development instead of making it to market. As the old joint project with Apple allowed the iPhone to hit the market, Mr. Zander found results down and himself on the market as well.
Now, Motorola is cutting heads again. Despite decades of leadership in product development in markets from two-way land mobile radios (like police radios) to television DVR boxes to mobile infrastructure towers to mobile handlhelds you would now think there are no longer any new ideas coming out of Schaumburg, IL. The replacement leadership is taking the easy road. After laying off some 3,000 employees recently Motorola has announced it intends to lay off 4,000 more (read article here). You would think there are no new product ideas at Motorola, as company leadership does what's easy — cutting costs with layoffs. Introducing new products, especially now that Apple has lost its iconic leader Steve Jobs, might produce better results. But since analysts expect layoffs, why not simply do what's easy?
Similarly, Google has announced it is laying off 100 workers (read article here). Google is the fastest growing large company in America; and possibly on the globe. Google has continued hiring new workers, expanding into cell phones and other new markets as competitors have made highly qualified employees readily available. But The Wall Street Journal has been calling for Google to stop hiring and launching new products, pointing out the economy is in a recession. Like Google is un-American for trying to continue growing when other companies are stalled. How dare they!
So now Google is laying off some of its recruiters. On the surface, it would be easy to say this is immaterial. 100 is only .5% of the 20,000+ Google employees. But why is Google doing this? Does it simply feel it must? Does it feeled compelled to lay off workers just because it can? Or because other large companies are doing so? Is this "hey, as the new kid on the block maybe we're missing something and need to play follow-the-leader"? It makes little sense why Google would want to jeapardize its future when it has an incredible opportunity to continue muscle-building its organization with some of the best and brightest folks available – only because old employers (like Motorola) aren't smart enough to take advantage of the talent.
Growth is necessary for all profit-making companies. Without growth, the business stalls and really bad things happen. When competitors start to retrench, it opens opportunities for successful companies to push forward with new growth projects. As long as the population grows, demand for products and services grows as well. Even in recessions, successful businesses grow. Layoffs are never a good thing for any company. Layoffs indicate you can't grow, and if you can't grow you simply aren't worth much. Why should you have a P/E (price/earnings multiple) of 45, or 30, or 20, or 15, or even 8 if you can't grow?
It's incredily easy to lay people off. In America, there are precious few laws preventing it. And almost no longer is there any social stigma. If you have a bad quarter, or even just a bad product launch, you can lay-off some people claiming its for the good of the business. Leaders regularly hide their bad decisions behind layoffs claiming "market conditions" are to blame for weak results. But what investors, employees, vendors and customers want from leaders isn't layoffs. They want new products, new services, new markets, new innovations that spur increased demand from added value. They want growth. Growth may not be easy, but it's necessary.
Instead of laying off 100 workers, why isn't Google deploying them into new business opportunities? Are there simply no new growth areas that could use the talent of these people Google hired out of the thousands of applicants that sought these jobs? And the same is true at Motorola. The new mobile devices CEO was hired from Qualcomm at millions of dollars expense – why isn't he putting all these engineers and product development experts to work? Why isn't he launching new products that increase the capabilities of wireless services so consumers do more calling, texting, emailing and application sharing? The easiest thing he can do is fire 3,000, 4,000 or 7,000 employees. Anyone can do that. But is it going to help Motorola grow? If not, why isn't he doing what will take the company to better competitiveness and an improved market position versus competitors? Is he simply doing what's easy, instead of what's necessary?
by Adam Hartung | Jan 14, 2009 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership
Yesterday Yahoo! announced it was replacing its old CEO with Carol Bartz, former CEO at Autodesk. Interestingly, most analysts aren't very excited – because they don't think Ms. Bartz brings the right experience to the challenge (read article on analyst reaction here.) The complaint is that Ms. Bartz is not steeped in consumer goods or advertising experience, so she's not the right person for the significant challenges facing Yahoo!
Yahoo! does not need "more of the same." Yahoo! needs to adapt to the technology requirements necessary to succeed in on-line ad placement. Google is way, way out front in internet advertising sales, and there's not a single executive at Google with experience in ad sales or consumer goods! Google has changed the game in advertising largely because it has not been Locked-in to old notions about advertising, and has instead created new competitive approaches leaving old players in the dust. And largely because its executives have eschewed historical advertising lore in favor of creating new solutions.
Yahoo! doesn't need someone with advertising experience. Yahoo! needs someone that will Disrupt the organization and change its Success Formula. And for this, Ms. Bartz may well be exactly the right person. While she led Autocad the company which changed the world of CAD/CAM (Computer-aided-design/computer-aided-manufacturing software), and in the process brought down a large GE division (Calma) and in the end crippled DEC (Digital Equipment Corp.) which was extremely dependent on CAD/CAM workstation sales. Autocad was supposedly a "toy" running on cheap PCs, but it became the software used by many engineers that was a fraction of competitor's cost and operated on machines a fraction of those needed to run competitor software.
In the process, Ms. Bartz became known as "one tough cookie." A CEO who understood that competitors gave nothing easily, and it takes a very tough smaller competitor to unseat market leaders. Year after year she led a company that brought forward new products which challenged competitors – all better financed, with larger market share and long lists of large, successful customers. And after 15 years or so Autocad emerged as the premier competitor. Isn't that the experience most needed by Yahoo!?
Meanwhile, one of the old leaders in ad sales – Chicago Tribune – is now changing its format from broadsheet to tabloid (read article here). For those not steeped in newspapers, broadsheets (like Wall Street Journal or USAToday) have long been considered "quality" journals, while tabloid format (like a magazine) has been considered a lower quality product. Although this switch is a cost saver, and any implication on journalistic quality is largely symbolic, the reality is that Tribune Corporation has slashed its journalistic staff in Chicago, L.A. (L.A. Times) and other markets to a shadow ghost of the past. In just a few years, a leading news organization has become almost irrelevant – and left two of America's largest cities with far too little journalistic oversight. Now it's trying to save itself into success (read article here).
Yahoo! is changing its CEO, and appears to be putting in place someone ready to Disrupt and install White Space. Tribune Corporation has slashed cost, slashed cost, slashed cost, increased its debt, and turned itself into a shell of what it used to be. Now the company is taking actions to lower paper cost – in an effort to again save a few more pennies. After watching its local classified advertisers go to CraigsList.com, and its display ad customers go to Google, its new leader, Sam Zell, remains unwilling to Disrupt and invest in White Space to become an effective internet news organization. Today even HuffingtonPost.com is able to offer more news on more topics faster than any news properties at Tribune Corporation to an avid internet news readership.
Following the Tribune lead, Gannett – publisher of USAToday – has announced it intends to force everyone in the company to work for one week for no pay (read article here). Apparently not even color pictures and feel-good journalism can attract advertisers. Probably because not even hotel guests care any more about getting a newspaper. Not when they log on to the wireless internet upon awakening to check e-mail and news alerts before they even open the room door to go to breakfast. Gannett will have no more success trying to save its business by forcing employees to work for free than Tribune has had with its cost cuts. Ignoring market shifts is not successfully met by trying to do more of the same cheaper.
What Gannett, Tribune Corporation and other news organizations need is their own Carol Bartz. Someone who may not be steeped in all the tradition and experience of the industry – but knows how to Disrupt the status quo and use White Space to launch new products and move toward products customers want.
by Adam Hartung | Jan 13, 2009 | Defend & Extend, In the Swamp, Leadership, Lock-in
Today one of the world's leading pharmaceutical companies announced it was cutting R&D staff (read article here). This is a very big deal because pharmaceutical companies rely on new drugs (new innovations) to extend their Success Formulas. American drug companies rely on big R&D investments, followed by big FDA approval investments. These big investments are seen as "entry barriers" that smaller companies cannot overcome, and thus provide high profits to the big drug companies. That's the core of their Success Formulas – which have been huge profit producers for more than 4 decades.
So what does it say when Pfizer lays off R&D workers? Clearly, there's less faith in the company developing the new products which will pay off. Thus, the old "entry barrier" is clearly not as valuable as it once was. But do you think we're on the brink of no new medical solutions?
Hardly. Today, genetic drug programs and other solutions are being developed and evaluated at greater numbers than ever. Only, you don't need a multi-billion dollar R&D center to develop these solutions. With the explosive knowledge expansion in bio-engineering and nano-technology breakthroughs are happening in universities, university spin-offs and start-ups of former pharmaceutical engineers. The old approach to disease treatment is reaching diminishing returns, while new approaches (namely genetic drug therapies and mechanical approaches such as nano-tech) are making rapid progress. The old "S" curve is nearing its peak, while the emerging "S" curve – that started in the 1980s with Genentech – is coming of age and entering the fast upward slope of the new "S" curve.
But unfortunately, Pfizer, Merck, Bristol Meyers and most other historical drug companies have missed this shift. They kept investing in the "traditional" (substitite "old") approach even as new approaches showed growing promise. They kept hiring M.D.s, pharmaceutical Ph.Ds, chemists and biologists. Meanwhile, bio-engineers and nano-engineers were making faster progress with new approaches. Of course initially regulators were skeptical of these new approaches, forcing additional testing — and reinforcing sustaining the old Success Formulas in the traditional "drug" companies. But it was clear to those on the leading edge of medicine that these new approaches were offering all new baselines for improvement, and possibly cures.
Now, Pfizer is (and its dominant competitors, to be sure) are in a tough spot. They hung on to the old Success Formula a really, really long time. In fact, almost 3 decades after alternative solutions began showing promise. Each year, the drugs they had protected by patents (thus proprietary) were coming closer to commercial replication and lower profitability. But each year, they redoubled their efforts in the traditional approach. Now, debt is hard to come by – and traditional solutions are even harder. But they are woefully short on the ability to offer solutions using the latest and greatest technology.
Unlike most companies, drug companies make most of their money from patented products. That means they make huge profits while there is no competition – but see dramatic (80%+) price erosion within days of losing patent protection. Thus, more than most companies, they can literally "peer over the edge" into the abyss of decline.
Pfizer just admitted it is a boat on the upper Niagra, in Canada, looking over the falls. It stayed way too long on its leisurely approach, and did noy prepare itself for the next step. On the other side are aggressive new competitors with new technology, new solutions and vastly superior results. But Pfizer has not prepared to be part of that new marketplace. So they are cutting specialized scientists in an effort to cut costs and protect profits. A bit like throwing the elderly overboard as you see your boat approaching the falls in an effort to slow your approach to the brink.
To survive long-term busineses have to evolve to new technologies. They have to overcome their dedication to old technologies and solutions in order to invest in new approaches. The have to invest in White Space which brings these new answers to the forefront, and attracts the traditionalists to move into the new market space. But unfortunately Pfizer has delayed these investments far too long. Cost cutting cannot save a Pfizer (or Merck, Bristol-Meyers, or Ely Lilly, etc.). When technology shifts, like it did from typewriters to PCs, the move happens fast and the fortunes of major players can shift dramatically (anyone remember Smith Corolla?). Pfizer is admitting it's unlikely to make the technology shift, and investors better pay close attention to the other industry leaders.
There's a new cowboy in town, he's showing he's one heck of a good shot, and it's time to pay close attention. The old sheriff may be closer to unemployment than he thinks.
