by Adam Hartung | Aug 21, 2015 | Current Affairs, Disruptions, Leadership, Transparency
How clearly I remember. I was in the finals of my third grade arithmetic competition. Two of us at the chalkboard, we both scribbled the numbers read to us as fast as we could, did the sum and whirled to look at the judges. Only my competitor was a hair quicker than me, so I was not the winner.
As we walked to the car my mother was quite agitated. “You lost to a GIRL” she said; stringing out that last word like it was some filthy moniker not fit for decent company to here. Born in 1916, to her it was a disgrace that her only son lost a competition to a female.
But it hit me like a tsunami wall. I had underestimated my competitor. And that was stupid of me. I swore I would never again make the mistake of thinking I was better than someone because of my male gender, white skin color, protestant christian upbringing or USA nationality. If I wanted to succeed I had to realize that everyone who competes gets to the end by winning, and they can/will beat me if I don’t do my best.
This week 1st Lt. Shaye Haver, 25, and Capt. Kristen Griest, 26, graduated Army Ranger training. Maybe the toughest military training in the world. And they were awarded their tabs because they were good – not because they were women.
In retrospect, it is somewhat incredible that it took this long for our country to begin training all people at this level. If someone is good, why not let them compete? In what way is it smart to hold back someone from competing based on something as silly as their skin color, gender, religious beliefs or sexual orientation?
Our country, in fact much of mankind, has had a long history of holding people back from competing. Those in power like to stay in power, and will use about any tool they can to maintain the status quo – and keep themselves in charge. They will use private clubs, secret organizations, high investment rates, difficult admission programs, laws and social mores to “keep each to his own kind” as I heard far too often throughout my youth.
As I went to college I never forgot my 3rd grade experience, and I battled like crazy to be at the top of every class. It was clear to me there were a lot of people as smart as I was. If I wanted to move forward, it would be foolish to expect I would rise just because the status quo of the time protected healthy white males. There were plenty of women, people of color, and folks with different religions who wanted the spot I wanted – and they would win that spot. Maybe not that day, but soon enough.
In the 1980s I did a project for The Boston Consulting Group in South Africa. As I moved around that segregated apartheid country it was clear to me that those supporting the status quo did so out of fear. They weren’t superior to the native South Africans. But the only way they could maintain their lifestyle was to prohibit these other people from competing.
And that proved to be untenable. The status quo fell, and when it did many of European extraction quickly fled – unable to compete with those they long kept from competing.
In the last 30 years we’ve coined the term “diversity” for allowing people to compete. I guess that is a nice, politically favorable way to say we must overcome the status quo tools used to hold people back. But the drawback is that those in power can use the term to imply someone is allowed to compete, or even possibly wins, only because they were given “special permission” which implies “special terms.”
That is unfortunate, because most of the time the only break these folks got was being allowed to, finally, compete. Once in the competition they frequently have to deal with lots of attacks – even from their own teammates. Jim Thorpe was a Native American who mesmerized Americans by winning multiple Gold Medals at the 1912 Olympics, and embarrassing the Germans then preaching national/racial superiority as they planned the launch of WW1. But, once back on American soil it didn’t take long for his own countrymen to strip Mr. Thorpe of his medals, unhappy that he was an “Indian” rather than a white man. He tragically died a homeless alcoholic.
And never forget all the grief Jackie Robinson bore as the first African-American professional athlete. Branch Rickey overcame the status quo police by giving Mr. Robinson a chance to play in the all-white professional major league baseball. But Mr. Robinson endured years of verbal and physical abuse in order to continue competing, well over and beyond anything suffered by any of his white peers. (For a taste of the difficulties catch the HBO docudrama “42.”)
In 2014, 4057 highly trained, fit soldiers entered Ranger training. 1,609 (40%) graduated. In this latest class 364 soldiers started; 136 graduated (37%.) Officers Griest and Haver are among the very best, toughest, well trained, well prepared, well armed and smartest soldiers in the entire world. (If you have any doubts about this I encourage you to watch the HBO docudrama “Lone Survivor” about Army Rangers trapped behind enemy lines in Afghanistan.)
Officers Griest and Haver are like every other Ranger. They are not “diverse.” They are good. Every American soldier who recognizes the strength of character and tenacity it took for them to become Rangers will gladly follow their orders into battle. They aren’t women Rangers, they are Rangers.
When all Americans learn the importance of this lesson, and begin to see the world this way, we will allow our best to rise to the top. And our history of finding and creating great leadership will continue.
by Adam Hartung | Aug 16, 2015 | Current Affairs, Disruptions, Leadership, Transparency
Last week the National Association of Corporate Directors (NACD) pre-released some results of its 2015–2016 Public Company Governance Survey. One major finding is that the makeup of Boards is changing, for the betterment of investors – and most likely everyone else in business.
Boards once had members that almost never changed. Little was required of Directors, and accountability for Board members was low. Since passage of the Securities Act of 1933, little had been required of Board members other than to applaud management and sign-off on the annual audit. And there was nothing investors could do if a Board “checked out,” even in the face of poorly performing management.
But this has changed. According to NACD, 72% of public boards reported they either added or changed a director in the last year. That is up from 64% in the previous year. Board members, and especially committee chairs, are spending a lot more time governing corporations. As a result “retiring in job” has become nearly impossible, and Board diversity is increasingly quite quickly. And increased Board diversity is considered good for business.
Remember Enron, Arthur Anderson, Worldcom and Tyco? At the century’s turn executives in large companies were working closely with their auditors to undertake risky business propositions yet keep these transactions and practices “off the books.” As these companies increasingly hired their audit firm to also provide business consulting, the auditors found it easier to agree with aggressive accounting interpretations that made company financials look better. Some companies went so far as to lie to investors and regulators about their business, until their companies failed from the risks and unlawful activities.
As a result Congress passed the Sarbanes Oxley act in 2002 (SOX,) which greatly increased the duties of Board Directors – as well as penalties if they failed to meet their duties. This law required Boards to implement procedures to unearth off-balance sheet items, and potential illegal activities such as bribing foreign officials or failing to meet industry reporting requirements for health and safety. Boards were required to know what internal controls were in place, and were held accountable for procedures to implement those controls effectively. And they were also required to make sure the auditors were independent, and not influenced by management when undertaking accounting and disclosure reviews. These requirements were backed up by criminal penalties for CEOs and CFOs that fiddled with financial statements or retaliated on whistle blowers – and Boards were expected to put in place systems to discover possibly illegal executive behavior.
In short, Sarbanes Oxley increased transparency for investors into the corporation. And it made Boards responsible for compliance. The demands on Board Directors suddenly skyrocketed.
In reaction to the failure of Lehman Brothers and the almost total bank collapse of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Most of this complex legislation dealt with regulating the financial services industry, and providing more protections for consumers and American taxpayers from risky banking practices. But also included in Dodd-Frank were greater transparency requirements, such as details of executive compensation and how compensation was linked to company performance. Companies had to report such things as the pay ratio of CEO pay to average employee compensation (final rules issued last week,) and had to provide for investors to actually vote on executive compensation (called “say on pay.”) And responsibility for implementing these provisions, across all industries, fell again on the Board of Directors.
Thus, after 13 years of regulatory implementation, we are seeing change in corporate governance. What many laypeople thought was the Board’s job from 1940-2000 is finally, actually becoming their job. Real responsibility is now on the Directors’ shoulders. They are accountable. And they can be held responsible by regulators.
The result is a sea change in how Boards behave, and the beginnings of big change in Board composition. Board members are leaving in record numbers. Unable to simply hang around and collect a check for doing little, more are retiring. The average age is lowering. And diversity is increasing as more women, and people of color as well as non-European family histories are being asked onto Boards. Recognizing the need for stronger Boards to make sure companies comply with regulations they are less inclined to idly stand by and watch management. Instead, Boards are seeking talented people with diverse backgrounds to ask better questions and govern more carefully.
Most business people wax eloquently about the negative effect of regulations. It is easy to find academic studies, and case examples, of the added cost incurred due to higher regulation. But what many people fail to recognize are the benefits. Thanks to SOX and Dodd-Frank companies are far more transparent than ever in history, and transparency is increasing – much to the benefit of investors, suppliers, customers and communities. And corporate governance of everything from accounting to compensation to industry compliance is far more extensive, and better. Because Boards are responsible, they are stronger, more capable and improving at a rate previously unseen – with dramatic improvement in diversity. And we can thank Congress for the legislation which demanded better Board performance – to the betterment of all business.
by Adam Hartung | Aug 6, 2015 | In the Rapids, Innovation, Leadership, Web/Tech
Would you like to triple your revenue next year? And have plans to keep tripling it – or more – every year into the future?
Of course you would. But is your business positioned for such explosive growth? Are you in growth markets, creating new products with new technologies that meet unmet needs and have the potential to completely change your business? Or are you stuck doing the same thing you’ve always done, a litle better, faster and cheaper in hopes you can just maintain your position?
If you’re constantly looking at your “core” markets and solutions, and you know those aren’t going to grow fast, what keeps you from changing to make your company a high growth winner?
First, most people don’t try. Leaders say it all the time, “I’m so busy running a business I don’t have time to chase rainbows. Sure technology is changing, but I don’t understand it, nor know how to use it. I’m better off investing in what I know than trying to chase trends.” That’s often followed by dragging out the old saw, usually attributed to Warren Buffet, of “don’t invest in what you don’t know – and I don’t know anything about trends.” The comfort, and ease, of repeating what you’ve always done allows lethargy to set in – so you keep doing more and more of what you’ve always done, over and again, hoping for a different result. It’s been attributed to Albert Einstein that such behavior is the very definition of insanity.
Everyone is busy. We live in a “culture of busy.” Years of layoffs and cost reductions have left most leaders simply struggling to keep up with making and selling last year’s solution. Constant busy-ness becomes a convenient excuse to not take the time to look at trends, evaluate new opportunities or consider doing things entirely differently. Busy, busy, busy – until someone knocks your business off its blocks and then you have all kinds of time on your hands.
For those who overcome these 2 built-in biases, the opportunities today are extra-ordinary. It is possible to slingshot into leadership positions with new solutions, literally from out of nowhere. If you take the time and try. Listen, and just do it – to steal from a popular ad campaign.
ikeGPS was started in 2003 as a government/military funded products research company. Focusing on the technology of lasers and cameras, they won contracts to develop and prototype new solutions with technology mostly buried in universities and labs. It was a good business, made money for the founders, and was intellectually stimulating. If not growing very fast or showing much potential of growing.
Eventually ikeGPS started making products with lasers and cameras for finding physical assets. This turned out to be quite beneficial for electric utilities, which have to maintain some 200,000 power poles in the U.S alone. EPC (Engineering, Procurement and Construction) companies like Black & Veatch, Bechtel. Burns & McDonel , FMC and Foster Wheeler had a need to find big physical things, then measure their size and location between each other and major points. For utility company suppliers like GE laser cameras for asset location were a handy, if slow growing business. Good, solid, reliable revenues, but not something that was going to create a $100M company.
So the Managing Director, Glenn Milnes, and Chief Marketing Officer, Jeff Ross, set about to see what they could do to become a $100M business. Not because anything in their history said they could do so. Rather because they wanted to make their company a bigger, faster growing and lot more valuable entity.
The first thing they identified was the trend to mobile devices. They noticed darn near everyone has one, and they were using them for all kinds of interesting things. There were thousands and thousands of apps, but none that really took advantage of the cameras to do much measuring, or integrated lasers. While they didn’t know anything about mobile operating systems, or much about the kinds of cameras in mobile phones or the software used for popular mobile camera uses – they could see a trend.
What if they could take their knowledge about lasers and cameras and figure out how to make mobile phones a lot more powerful? Could they apply what they knew into markets where they had no experience, using technologies with which they had no experience? Would it work, or waste their time? If it worked, what would they make? If they made something, who would buy it?
Despite these great questions, they wanted ikeGPS to grow, and they decided to take the cash flow from their solid, but low growth historical business and plow it into development of a new product. So they took to internal company brainstorming to see what they might do. And they came up with the very clever idea of making an add-on device that construction workers, like concrete installers, pavers, carpenters, masons and such, could use with their mobile phones to replace tape measures. Something that would be simple, easy to use, work with the phones in their pockets and be a lot more accurate than decades-old technology.
So they went to the lab and built it. They started design in October, 2013, and a year later they had a product ready to launch. – Spike! They took it to social media, Google adwords, all the low-cost ad tools available to small business today. They also went to industry trade shows, bought some ads in industry trade magazines and ads on industry specific sites. Things were OK, but it was a slow slog.
As they were preparing to launch Spike they thought, “why don’t we reach for outsiders to gain some input on this product. Let’s hear what others might have to say.” So they launched a Kickstarter campaign, offering investors the product to try. Via this route they gained the eyes and ears of early adopters.
This was when the surprise happened. The earliest adopters, and biggest fans of laser measuring via mobile devices weren’t in the construction business. They were signage companies. ikeGPS listened to their feedback, and realized they could tweek Spike to be very relevant for folks in signage. The made themselves accessible to these early adopters, and turned a few into fanatical loyalists.
With this early success, they began to downplay construction and seek signage companies. Across 2 months they placed about $20k (not millions, thousands) in ads in the 4 largest publishers to the signage industry. This led to on-line product sales, and smashing reviews.
So then they made overtures to the large franchisors of signage related shops – with retail names like Fast Sign, Sign-o-Rama, Alphagraphics, Speedy Sign, Sign World, etc — in companies like Franchise Services and Alliance Franchise. Within 6 months of launch they had stopped chasing construction customers and were full-tilt developing signage companies, to great success. Even sign supply companies llke Reece Sign saw the benefit of promoting (and even reselling) these new laser camera add-ons for mobile devices to stimulate sales and move sign design and creation into the 21st century.
After making this switch, they initial launch sold 1,200 units at $500/unit retail . But better yet, contracts for promotion and reselling has the company convinced they will blow far beyond their projection of 4,000 units in the first year.But they did not simply forget about construction. The idea was still sound, but clearly the market had not developed. So they asked themselves, “if we listened to sign guys and they told us what to do, could we listen to construction guys for advice?”
They pursued finding out more about construction, and learned the market was dominated by brand names. Few products were bought without a strong brand name – and most products are purchased through the very large home improvement chains such as Home Depot, Lowe’s, Menard’s and others. But that would be a nearly impossible task, at extremely high cost, for little ikeGPS. So they pursued finding a partner which knew the industry.
In early 2015 ideGPS announced that Stanley Black&Decker would brand and sell Spike via traditional retail. The product should be on shelves before the end of year, and substantial additional sales volumes are expected.
In 2013 100% of ikeGPS revenues were in their traditional government/military and utility markets with their bespoke device. In just one year they developed a mobile device, and launched it. In 2015 1/3 or more of their $10.5 estimated revenue will be from Spike, and they expect to at a minimum triple revenues in 2016. And they think that rate of growth is sustainable into future years.
ikeGPS shows that it IS possible to move beyond historical markets and create new products for break-out growth. You aren’t stuck in old businesses with no hope of growth. if you want to grow, and reap the rewards of growth, you can. You have to
- Want to do it
- Take time to do it
- Pay attention to trends, and support obvious trend growth
- Learn about new technologies and how you can apply them. Start with the trend technologies first, then see how to apply something new. Don’t start by trying to push what you know onto another platform. Be ethnocentric in product development, not egocentric.
- Brainstorm how to meet unmet needs
- Listen to early sales results, and go where the need is highest/selling is easiest
- Don’t forget to learn from what did not work, and see if you can overcome early weaknesses.
by Adam Hartung | Aug 2, 2015 | Current Affairs, In the Rapids, In the Swamp, Leadership, Web/Tech
eBay was once a game changer. When the internet was very young, and few businesses provided ecommerce, eBay was a pioneer. From humble beginnings selling Pez dispensers, eBay grew into a powerhouse. Things we used to sell via garage sale we could now list on eBay. Small businesses could create stores on eBay to sell goods to customers they otherwise would never reach. And collectors as well as designers suddenly discovered all kinds of products they formerly could not find. eBay sales exploded, as traditional retail started it slide downward.
To augment growth eBay realized those selling needed a simple way to collect money from people who lacked a credit card. Many customers simply had no card, or didn’t trust giving out the information across the web. So eBay bought fledgling PayPal for $1.5B in 2002, in order to grease the wheels for faster ecommerce growth. And it worked marvelously.
But times have surely changed. Now eBay and Paypal have roughly the same revenue. About $8B/year each. eBay has run into stiff competition, as CraigsList has grown to take over the “garage sale” and small local business ecommerce. Simultaneously, powerhouse Amazon has developed its storefront business to a level of sophistication, and ease of use, that makes it viable for businesses from smallest to largest to sell products on-line. And far more companies have learned they can go it alone with internet sales, using search engine optimization (SEO) techniques as well as social media to drive traffic directly to their stores, bypassing storefronts entirely.
eBay was a game changer, but now is stuck in practices that have become far less relevant. The result has been 2 consecutive quarters of declining revenue. By definition that puts eBay in a growth stall, and fewer than 7% of companies ever recover from a growth stall to consistently increase revenue by a mere 2%/year. Why not? Because once in a growth stall the company has already missed the market shift, and competition is taking customers quickly in new directions. The old leader, like eBay, keeps setting aggressive targets for its business, and tells everyone it will find new customers in remote geographies or vertical markets. But it almost never happens – because the market shift is making their offering obsolete.
On the other hand, Paypal has blossomed into a game changer in its own right. Not only does it support cash and credit card transactions for the growing legions of on-line shoppers, but it is providing full payment systems for providers like Uber and AirBnB. It’s tools support enterprise transactions in all currencies, including emerging bitcoin, and even provides international financial transactions as well as working capital for businesses.
Paypal is increasingly becoming a threat to traditional banks. Today most folks use a bank for depositing a pay check, and making payments. There are loans, but frequently that is shopped around irrespective of where you bank. Much like your credit cards, which most people acquire for their benefits rather than a relationship with the issuing bank. If customers increasingly make payments via Paypal, and borrow money via operations like Quicken Loans (a division of Intuit,) why do you need a bank? Discover Services, which now does offer cash deposits and loans on top of credit card services, has found that it can grow substantially by displacing traditional banks.
Paypal is today at the forefront of digital payments processing. It is a fast growing market, which will displace many traditional banks. And emerging competitors like Apple Pay and Google Wallet will surely change the market further – while aiding its growth. How it will shake out is unclear. But it is clear that Paypal is growing its revenue at 60% or greater since 2012, and at over 100%/quarter the last 2 quarters.
Paypal is now valued at about $47B. That is roughly the same as the #5 bank in America (according to assets) Bank of New York Mellon, and number 8 massive credit card issuer Capital One, as well as #9 PNC Bank – and over 50% higher valuation than #10 State Street. It is also about 50% higher than Intuit and Discover. Based on its current market leadership and position as likely game changer for the banking sector, Paypall is selling for about 8 times revenue. If its revenue continues to grow at 100%/quarter, however, revenues will reach over $38B in a year making the Price/Revenue multiple of today only 1.25.
Meanwhile, eBay is valued at about $34B. Given that all which is left in eBay is an outdated on-line ecommerce conglomerator, stuck in a growth stall, that valuation is far harder to justify. It is selling at about 4.25x revenue. But if revenues continue declining, as they have for 2 consecutive quarters, this multiple will expand. And values will be harder and harder to justify as investors rely on hope of a turnaround.
eBay was a game changer. But leadership became complacent, and now it is very likely overvalued. Just as Yahoo became when its value relied on its holdings of Alibaba rather as its organic business shrank. Meanwhile Paypal is the leader in a rapidly growing market that is likely to change the face of not just how we pay, but how we do personal and business finance. There is no doubt which is more valuable today, and likely to be in the future.
by Adam Hartung | Jul 25, 2015 | Current Affairs, In the Whirlpool, Leadership
This week an important event happened on Wall Street. The value of Amazon (~$248B) exceeded the value of Walmart (~$233B.) Given that Walmart is world’s largest retailer, it is pretty amazing that a company launched as an on-line book seller by a former banker only 21 years ago could now exceed what has long been retailing’s juggernaut.
WalMart redefined retail. Prior to Sam Walton’s dynasty retailing was an industry of department stores and independent retailers. Retailing was a lot of small operators, primarily highly regional. Most retailers specialized, and shoppers would visit several stores to obtain things they needed.
But WalMart changed that. Sam Walton had a vision of consolidating products into larger stores, and opening these larger stores in every town across America. He set out to create scale advantages in purchasing everything from goods for resale to materials for store construction. And with those advantages he offered customers lower prices, to lure them away from the small retailers they formerly visited.
And customers were lured. Today there are very few independent retailers. WalMart has ~$488B in annual revenues. That is more than 4 times the size of #2 in USA CostCo, or #1 in France (#3 in world) Carrefour, or #1 in Germany (#4 in world) Schwarz, or #1 in U.K. (#5 in world) Tesco. Walmart directly employes ~.5% of the entire USA population (about 1 in every 200 people work for Walmart.) And it is a given that nobody living in America is unaware of Walmart, and very, very few have never shopped there.
But, Walmart has stopped growing. Since 2011, its revenues have grown unevenly, and on average less than 4%/year. Worse, it’s profits have grown only 1%/year. Walmart generates ~$220,000 revenue/employee, while Costco achieves ~$595,000. Thus its need to keep wages and benefits low, and chronically hammer on suppliers for lower prices as it strives to improve margins.
And worse, the market is shifting away from WalMart’s huge, plentiful stores toward on-line shopping. And this could have devastating consequences for WalMart, due to what economists call “marginal economics.”
As a retailer, Walmart spends 75 cents out of every $1 revenue on the stuff it sells (cost of goods sold.) That leaves it a gross margin of 25 cents – or 25%. But, all those stores, distribution centers and trucks create a huge fixed cost, representing 20% of revenue. Thus, the net profit margin before taxes is a mere 5% (Walmart today makes about 5 cents on every $1 revenue.)
But, as sales go from brick-and-mortar to on-line, this threatens that revenue base. At Sears, for example, revenues per store have been declining for over 4 years. Suppose that starts to happen at Walmart; a slow decline in revenues. If revenues drop by 10% then every $100 of revenue shrinks to $90. And the gross margin (25%) declines to $22.50. But those pesky store costs remain stubbornly fixed at $20. Now profits to $2.50 – a 50% decline from what they were before.
A relatively small decline in revenue (10%) has a 5x impact on the bottom line (50% decline.) The “marginal revenue”, is that last 10%. What the company achieves “on the margin.” It has enormous impact on profits. And now you know why retailers are open 7 days a week, and 18 to 24 hours per day. They all desperately want those last few “marginal revenues” because they are what makes – or breaks – their profitability.
All those scale advantages Sam Walton created go into reverse if revenues decline. Now the big centralized purchasing, the huge distribution centers, and all those big stores suddenly become a cost Walmart cannot avoid. Without growing revenues, Walmart, like has happened at Sears, could go into a terrible profit tailspin.
And that is what Amazon is trying to do. Amazon is changing the way Americans shop. From stores to on-line. And the key to understanding why this is deadly to Walmart and other big traditional retailers is understanding that all Amazon (and its brethren on line) need to do is chip away at a few percentage points of the market. They don’t have to obtain half of retail. By stealing just 5-10% they put many retailers, they ones who are weak, right out of business. Like Radio Shack and Circuit City. And they suck the profits out of others like Sears and Best Buy. And they pose a serious threat to WalMart.
And Amazon is succeeding. It has grown at almost 30%/year since 2010. That growth has not been due to market growth, it has been created by stealing sales from traditional retailers. And Amazon achieves $621,000 revenue per employee, while having a far less fixed cost footprint.
What the marketplace looks for is that point at which the shift to on-line is dramatic enough, when on-line retailers have enough share, that suddenly the fixed cost heavy traditional retail business model is no longer supportable. When brick-and-mortar retailers lose just enough share that their profits start the big slide backward toward losses. Simultaneously, the profits of on-line retailers will start to gain significant upward momentum.
And this week, the marketplace started saying that time could be quite near. Amazon had a small profit, surprising many analysts. It’s revenues are now almost as big as Costco, Tesco – and bigger than Target and Home Depot. If it’s pace of growth continues, then the value which was once captured in Walmart stock will shift, along with the marketplace, to Amazon.
In May, 2010 Apple’s value eclipsed Microsoft. Five years later, Apple is now worth double Microsoft – even though its earnings multiple (stock Price/Earnings) is only half (AAPL P/E = 14.4, MSFT = 31.) And Apple’s revenues are double Microsoft’s. And Apple’s revenues/employee are $2.4million, 3 times Microsoft’s $731k.
While Microsoft has about doubled in value since the valuation pinnacle transferred to Apple, investors would have done better holding Apple stock as it has more than tripled. And, again, if the multiple equalizes between the companies (Apple’s goes up, or Microsoft’s goes down,) Apple investors will be 6 times better off than Microsoft’s.
Market shifts are a bit like earthquakes. Lots of pressure builds up over a long time. There are small tremors, but for the most part nobody notices much change. The land may actually have risen or fallen a few feet, but it is not noticeable due to small changes over a long time. But then, things pop. And the world quickly changes.
This week investors started telling us that the time for big change could be happening very soon in retail. And if it does, Walmart’s size will be more of a disadvantage than benefit.
by Adam Hartung | Jul 17, 2015 | Current Affairs, General, In the Swamp, Leadership, Lifecycle
Most analysts, and especially “chartists,” put a lot of emphasis on earnings per share (EPS) and stock price movements when determining whether to buy a stock. Unfortunately, these are not good predictors of company performance, and investors should beware.
Most analysts are focused on short-term, meaning quarter-to-quarter, performance. Their idea of long-term is looking back 1 year, comparing this quarter to same quarter last year. As a result, they fixate on how EPS has done, and will talk about whether improvements in EPS will cause the “multiple” (meaning stock price divided by EPS) will “expand.” They forecast stock price based upon future EPS times the industry multiple. If EPS is growing, they expect the stock to trade at the industry multple, or possibly somewhat better. Grow EPS, hope to grow the multiple, and project a higher valuation.
Analysts will also discuss the “momentum” (meaning direction and volume) of a stock. They look at charts, usually less than one year, and if price is going up they will say the momentum is good for a higher price. They determine the “strength of momentum” by looking at trading volume. Movements up or down on high volume are considered more meaningful than on low volume.
But, unfortunately, these indicators are purely short-term, and are easily manipulated so that they do not reflect the actual performance of the company.
At any given time, a CEO can decide to sell assets and use that cash to buy shares. For example, McDonald’s sold Chipotle and Boston Market. Then leadership took a big chunk of that money and repurchased company shares. That meant McDonalds took its two fastest growing, and highest value, assets and sold them for short-term cash. They traded growth for cash. Then leadership spent that cash to buy shares, rather than invest in in another growth vehicle.
This is where short-term manipulation happens. Say a company is earning $1,000 and has 1,000 shares outstanding, so its EPS is $1. The industry multiple is 10, so the share price is $10. The company sells assets for $1,000 (for purposes of this exercise, let’s assume the book value on those assets is $1,000 so there is no gain, no earnings impact and no tax impact.)
Company leadership says its shares are undervalued, so to help out shareholders it will “return the money to shareholders via a share repurchase” (note, it is not giving money to shareholders, just buying shares. $1,000 buys 100 shares. The number of shares outstanding now falls to 900. Earnings are still $1,000 (flat, no gain,) but dividing $1,000 by 900 now creates an EPS of $1.11 – a greater than 10% gain! Using the same industry multiple, the analysts now say the stock is worth $1.11 x 10 = $11.10!
Even though the company is smaller, and has weaker growth prospects, somehow this “refocusing” of the company on its “core” business and cutting extraneous noise (and growth opportunities) has led to a price increase.
Worse, the company hires a very good investment banker to manage this share repurchase. The investment banker watches stock buys and sells, and any time he sees the stock starting to soften he jumps in and buys some shares, so that momentum remains strong. As time goes by, and the repurchase program is not completed, selectively he will make large purchases on light trading days, thus adding to the stock’s price momentum.
The analysts look at these momentum indicators, now driven by the share repurchase program, and deem the momentum to be strong. “Investors love the stock” the analysts say (even though the marginal investors making the momentum strong are really company management) and start recommending to investors they should anticipate this company achieving a multiple of 11 based on earnings and stock momentum. The price now goes to $1.11 x 11 = $12.21.
Yet the underlying company is no stronger. In fact one could make the case it is weaker. But, due to the higher EPS, better multiple and higher share price the CEO and her team are rewarded with outsized multi-million dollar bonuses.
But, companies the last several years did not even have to sell assets to undertake this kind of manipulation. They could just spend cash from earnings. Earnings have been at record highs, and growing, for several years. Yet most company leaders have not reinvested those earnings in plant, equipment or even people to drive further growth. Instead they have built huge cash hoards, and then spent that cash on share buybacks – creating the EPS/Multiple expansion – and higher valuations – described above.
This has been so successful that in the last quarter untethered corporations have spent $238B on buybacks, while earning only $228B. The short-term benefits are like corporate crack, and companies are spending all the money they have on buybacks rather than reinvesting in growth.
Where does the extra money originate? Many companies have borrowed money to undertake buybacks. Corporate interest rates have been at generational (if not multi-generational) lows for several years. Interest rates were kept low by the Federal Reserve hoping to spur borrowing and reinvestment in new products, plant, etc to drive economic growth, more jobs and higher wages. The goal was to encourage companies to take on more debt, and its associated risk, in order to generate higher future revenues.
Many companies have chosen to borrow money, but rather than investing in growth projects they have bought shares. They borrow money at 2-3%, then buy shares – which can have a much higher immediate impact on valuation – and drive up executive compensation.
This has been wildly prevalent. Since the Fed started its low-interest policy it has added $2.37trillion in cash to the economy. Corporate buybacks have totaled $2.41trillion.
This is why a company can actually have a crummy business, and look ill-positioned for the future, yet have growing EPS and stock price. For example, McDonald’s has gone through rounds of store closures since 2005, sold major assets, now has more stores closing than opening, and has its largest franchisees despondent over future prospects. Yet, the stock has tripled since 2005! Leadership has greatly weakened the company, put it into a growth stall (since 2012,) and yet its value has gone up!
Microsoft has seen its “core” PC market shrink, had terrible new product launches of Vista and Windows 8, wholly failed to succeed with a successful mobile device, written off billions in failed acquisitions, and consistently lost money in its gaming division. Yet, in the last 10 years it has seen EPS grow and its share price double through the power of share buybacks from its enormous cash hoard and ability to grow debt. While it is undoubtedly true that 10 years ago Microsoft was far stronger, as a PC monopolist, than it is today – its value today is now higher.
Share buybacks can go on for several years. Especially in big companies. But they add no value to a company, and if not exceeded by re-investments in growth markets they weaken the company. Long term a company’s value will relate to its ability to grow revenues, and real profits. If a company does not have a viable, competitive business model with real revenue growth prospects, it cannot survive.
Look no further than HP, which has had massive buybacks but is today worth only what it was worth 10 years ago as it prepares to split. Or Sears Holdings which is now worth 15% of its value a decade ago. Short term manipulative actions can fool any investor, and actually artificially keep stock prices high, so make sure you understand the long-term revenue trends, and prospects, of any investment. Regardless of analyst recommendations.
by Adam Hartung | Jul 8, 2015 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Web/Tech
Microsoft announced today it was going to shut down the Nokia phone unit, take a $7.6B write-off (more than the $7.2B they paid for it,) and lay off another 7,800 employees. That makes the layoffs since CEO Nadella took the reigns almost 26,000. Finding any good news in this announcement is a very difficult task.
Unfortunately, since taking over as Microsoft’s #1 leader, Mr. Nadella has been remarkably predictable. Like his peer CEOs who take on the new role, he has slashed and burned employment, shut down at least one big business, taken massive write-offs, and undertaken at least one wildly overpriced acquisition (Minecraft) that is supposed to be a game changer for the company. He apparently picked up the “Turnaround CEO Playbook” after receiving the job and set out on the big tasks!
Yet he still has not put forward a strategy that should encourage investors, employees, customers or suppliers that the company will remain relevant long-term. Amidst all these big tactical actions, it is completely unclear what the strategy is to remain a viable company as customers move, quickly and in droves, to mobile devices using competitive products.
I predicted here in this blog the week Steve Ballmer announced the acquisition of Nokia in September, 2013 that it was “a $7.2B mistake.” I was off, because in addition to all the losses and restructuring costs Microsoft endured the last 7 quarters, the write off is $7.6B. Oops.
Why was I so sure it would be a mistake? Because between 2011 and 2013 Nokia had already lost half its market share. CEO Elop, who was previously a Microsoft senior executive, had committed Nokia completely to Windows phones, and the results were already catastrophic. Changing ownership was not going to change the trajectory of Nokia sales.
Microsoft had failed to build any sort of developer community for Windows 8 mobile. Developers need people holding devices to buy their software. Nokia had less than 5% share. Why would any developer build an app for a Windows phone, when almost the entire market was iOS or Android? In fact, it was clear that developing rev 2, 3, and 4 of an app for the major platforms was far more valuable than even bothering to port an app into Windows 8.
Nokia and Windows 8 had the worst kind of tortuous whirlpool – no users, so no developers, and without new (and actually unique) software there was nothing to attract new users. Microsoft mobile simply wasn’t even in the game – and had no hope of winning. It was already clear in June, 2012 that the new Windows tablet – Surface – was being launched with a distinct lack of apps to challenge incumbents Apple and Samsung.
By January, 2013 it was also clear that Microsoft was in a huge amount of trouble. Where just a few years before there were 50 Microsoft-based machines sold for every competitive machine, by 2013 that had shifted to 2 for 1. People were not buying new PCs, but they were buying mobile devices by the shipload – literally. And there was no doubt that Windows 8 had missed the mobile market. Trying too hard to be the old Windows while trying to be something new made the product something few wanted – and certainly not a game changer.
A year ago I wrote that Microsoft has to win the war for developers, or nothing else matters. When everyone used a PC it seemed that all developers were writing applications for PCs. But the world shifted. PC developers still existed, but they were not able to grow sales. The developers making all the money were the ones writing for iOS and Android. The growth was all in mobile, and Microsoft had nothing in the game. Meanwhile, Apple and IBM were joining forces to further displace laptops with iPads in commercial/enterprise uses.
Then we heard Windows 10 would change all of that. And flocks of people wrote me that a hybrid machine, both PC and tablet, was the tool everyone wanted. Only we continue to see that the market is wildly indifferent to Windows 10 and hybrids.
Imagine you write with a fountain pen – as most people did 70 years ago. Then one day you are given a ball point pen. This is far easier to use, and accomplishes most of what you want. No, it won’t make the florid lines and majestic sweeps of a fountain pen, but wow it is a whole lot easier and a darn site cheaper. So you keep the fountain pen for some uses, but mostly start using the ball point pen.
Then the fountain pen manufacturer says “hey, I have a contraption that is a ball point pen, sort of, and a fountain pen, sort of, combined. It’s the best of all worlds.” You would likely look at it, but say “why would I want that. I have a fountain pen for when I need it. And for 90% of the stuff I write the ball point pen is great.”
That’s the problem with hybrids of anything – and the hybrid tablet is no different. The entrenched sellers of old technology always think a hybrid is a good idea. But once customers try the new thing, all they want are advancements to the new thing. (Just look at the interest in Tesla cars compared to the stagnant sales of hybrid autos.)
And we’re up to Surface 3 now. When I pointed out in January, 2013 that the markets were rapidly moving away from Microsoft I predicted Surface and Surface Pro would never be important products. Reader outcry at that time from Microsoft devotees was so great that Forbes editors called me on the carpet and told me I lacked the data to make such a bold prediction. But I stuck by my guns, we changed some language so it was less blunt, and the article ran.
Two and a half years later and we’re up to rev number Surface 3. And still, almost nobody is using the product. Less than 5% market share. Right again. It wasn’t a technology prediction, it was a market prediction. Lacking app developers, and a unique use, the competition was, and remains, simply too far out front.
Windows 10 is, unfortunately, a very expensive launch. And to get people to use it Microsoft is giving it away for free. The hope is then users will hook onto the cloud-based Office 365 and Microsoft’s Azure cloud services. But this is still trying to milk the same old cow. This approach relies on people being completely unwilling to give up using Windows and/or Office. And we see every day that millions of people are finding alternatives they like just fine, thank you very much.
Gamers hated me when I recommended Microsoft should give (for free) xBox to Nintendo. Unfortunately, I learned few gamers know much about P&Ls. They all assumed Microsoft made a fortune in gaming. But anyone who’s ever looked at Microsoft’s financial filings knows that the Entertainment Division, including xBox, has been a giant money-sucking hole. If they gave it away it would save money, and possibly help leadership figure out a strategy for profitable growth.
Unfortunately, Microsoft bought Minecraft, in effect “doubling down” on the bet. But regardless of how well anyone likes the products, Microsoft is not making money. Gaming is a bloody war where Sony and Microsoft keep battling, and keep losing billions of dollars. The odds of ever earning back the $2.5B spent on Minecraft is remote.
The greater likelihood is that as write offs continue to eat away at profits, and as markets continue evolving toward mobile products offered by competitors hurting “core” Microsoft sales, CEO Nadella will eventually have to give up on gaming and undertake another Nokia-like event.
All investors risk looking at current events to drive decision-making. When Ballmer was sacked and Nadella given the CEO job the stock jumped on euphoria. But the last 18 months have shown just how bad things are for Microsoft. It is a near monopolist in a market that is shrinking. And so far Mr. Nadella has failed to define a strategy that will make Microsoft into a company that does more than try to milk its heritage.
I said the giant retailer Sears Holdings would be a big loser the day Ed Lampert took control of the company. But hope sprung eternal, and investors jumped on the Sears bandwagon, believing a new CEO would magically improve a worn out, locked-in company. The stock went up for over 2 years. But, eventually, it became clear that Sears is irrelevant and the share price increase was unjustified. And the stock tanked.
Microsoft looks much the same. The actions we see are attempts to defend & extend a gloried history. But they don’t add up to a strategy to compete for the future. HoloLens will not be a product capable of replacing Windows plus Office revenues. If developers are attracted to it enough to start writing apps. Cortana is cool, but it is not first. And competitive products have so much greater usage that developer learning curve gains are wildly faster. These products are not game changers. They don’t solve large, unmet needs.
And employees see this. As I wrote in my last column, it is valuable to listen to employees. As the bloom fell off the rose, and Nadella started laying people off while freezing pay, employee support of him declined dramatically. And employee faith in leadership is far lower than at competitors Apple and Google.
As long as Microsoft keeps playing catch up, we should expect more layoffs, cost cutting and asset sales. And attempts at more “hail Mary” acquisitions intended to change the company. All of which will do nothing to grow customers, provide better jobs for employees, create value for investors or greater revenue opportunities for suppliers.
by Adam Hartung | Jun 30, 2015 | Current Affairs, In the Swamp, In the Whirlpool, Leadership
24×7 Wall Street just released its fourth annual analysis of the worst companies to work for in America. By looking across all four reports it is possible to identify likely problems which will be valuable for investors, employees (current and prospective,) suppliers and communities to know.
Trend 1- Low minimum wages & “Wage gap” issues remain a big deal
The lists are dominated by retailers. Of the 30 unique companies identified, exactly half (15) were retailers. A handful were on the list 2 or more years. Consistently these employees complained about low wages.
By paying minimum wage, and often refusing to hire employees full time, the companies keep costs of brick and mortar store operations lower.
However, this takes a toll on employee morale as overall pay does not meet minimum living standards. Further employees feel heavily overworked and stressed, while having no job security. Often this leads to employee unhappiness with senior management, frequently offering low evaluations of the CEO – who makes 1,000 times their annual earnings.
As employees fight for higher wages, and a reduction in the “wage gap,” it will apply pressure to the sustainability of these retailers who rely on very low pay to maintain (or enhance) profits. The trend to a higher minimum wage will challenge profit growth – or maintenance – in these companies.
Trend 2 – Employees often “see change coming” and become negatively vocal
Jos. A Banks jumped onto the list as #4 in 2013. Just before a major shake-up and being acquired by Men’s Wearhouse. Family Dollar also appeared on the list in 2014 (#9,) only to be embroiled in a takeover battle with Dollar General, and finally aquired by Dollar Tree within 7 months. Office Max appeared on the list (#5) in 2012, and was acquired by Office Depot 8 months later. And, of course, Radio Shack made the list in 2012 (#3,) 2013 (#5) and 2014 (#11) only to file bankruptcy in 2015.
Employees can see when something bad is impending, likely jeopardizing their livelihoods, and start talking about it.
Similarly, growing internet threats are often picked-up by employees. hh Gregg employees started complaining loudly in 2014 (#8) as their 100% commission compensation became threatened by a growing Amazon.com. And that same year Books-A-Million was #1 on the list, as part time staffers saw the same advancing Amazon. And in 2012 Game Stop (#10) employees could see how the advancing Netflix and Hulu threatened the “core business” and started to light up the complaint section.
Trend 3 – Ignoring employee unhappiness while focusing on earnings can portend a disaster
Sears and KMart (collectively Sears Holdings) made the list in 3 of the 4 years. The stock was $66 in June, 2011, and $55 in 6/12 when it made #6. By 6/13 it had declined to $39, and made the list at #7. Starting 6/14 the stock was reasonably flat, and missed the list. But then in 6/17 the stock fell to 27 and reappeared twice – as both Sears and KMart.
Employees have consistently expressed their dismay with CEO Ed Lampert, and 80% actively dislike his leadership. After the Radio Shack experience, there is ample reason to listen more to these employees than the CEO who keeps promising a turnaround – amidst a long string of large quarterly losses and declining sales.
But this also opens the door for looking at some stocks that have defied employee unrest. Dillard’s made the list all 4 years. In 2012 the stock rose from $54 to $66, yet appeared #2 on the list. In 2013 the stock rose to $85 as it made the list #3. 2014 the stock made it to $119, and was sixth. In 2015 the stock peaked at $149, but has recently declined to $111 as it made the list #2.
Similarly Express Scripts rose from $53 in 2012 to $62 in 2013 when it appeared on the list in position #2. In 2014 it rose to $71 as it remained #2. And it 2015 the stock is at $85 as it topped the list #1.
It would be worthwhile to look at the clues employees are sending. Express Scripts employees are loudly complaining (louder than literally any other company) across multiple years of being overworked, overstressed, underpaid and without any job security. As are Dillard’s employees, who are the most outspoken in retail. How long will profit improvements be sustainable in these companies?
While the data is less clear on Dollar General, it appeared on the list as #4 in 2013. Then Family Dollar appeared on the list as #9 in 2014. Dollar General subsequently tried buying Family Dollar, and reappeared on the list as #10 in 2015. What are employees saying about the sustainability of the “dollar store” segment in a very tough retail market with growing internet competitors?
Any CEO can slash employee costs and payroll for a few years, but at some point the model simply collapses – aka, Sears Holdings and Radio Shack. Or there is a loss of identity as suffered by Office Max, Jos. A Banks and Family Dollar. It would be worthwhile for anyone to listen carefully to the feedback of these employees before investing in company equity, investing one’s livelihood as an employee, investing one’s resources to be a supplier, or investing one’s tax base as a community official.
There are a number of “one off” issues on the list. Companies appear once primarily due to bad CEO performance (Xerox, #5 this year, HP #8 in 2012 as the revolving door on the CEO office reached a high pitch.) Or due to some change in market competition.
But it is possible to look through these issues – which could become future trends but show limited insight today – to see that an aggregated employee view of leadership offers insights not always found in the P&L or management’s discussion of earnings. If you choose to put your resources into these companies, be aware of the risks warnings being sent by employees!
Please refer to the 24x7WallStreet.com site for deeper information on how the list was compiled, who is on each list, and their editor’s opinions of employee comments. 24×7 list in 2015 – 24×7 list in 2014 – 24×7 list in 2013 – 24×7 list in 2012
by Adam Hartung | Jun 14, 2015 | Current Affairs, In the Rapids, Leadership, Web/Tech
Dick Costolo was let go from his role as CEO of Twitter, to be replaced by a former CEO that was also fired. Unfortunately, it looks very strongly as if the Board made this decision for the wrong reasons.
Even though investors have been unhappy with Twitter’s share price, as CEO Mr. Costolo was doing a decent job of growing the company and improving profits. And even though analysts keep offering reasons why he was fired, it looks mostly as if this was a political decision in a company with a “soap opera” executive culture. Investors should be worried.
Let’s compare Mr. Costolo to CEO Zuckerberg’s performance at Facebook, and Mr. Bezos’ performance at Amazon. The latter two have been widely heralded for their leadership, so it sets a pretty good bar.
None of these three companies have enough earnings to matter. If you aren’t a growth investor, and you always value a company on earnings, then none of these are your cup of tea. All are evaluated on revenue and user metrics.
As you can see, Twitter’s revenue growth exceeds its comparators. Yes, its decline has been more dramatic, but we are comparing Twitter to companies that are much older and bigger. The net is to understand that revenues are growing, and at a better clip than Facebook and Amazon.
Next we should look at active monthly users. Again, these numbers are growing at all 3. And some analysts have said it is the deceleration in the rate of new user growth that doomed Mr. Costolo. But this defies logic given that during his tenure Twitter has dramatically outperformed its competition.
Lastly, let’s look at the “quality” of users. We can measure this by calculating the revenue per user. If this goes up, then the company is growing it top line by gaining more revenue per user – it is not “discounting” its way to higher volume. Instead,we can expect profits to improve based upon growth in this metric.
And here we can see that Twitter has wildly outperformed Facebook and Amazon. Twitter has grown its revenue per user by over 9-fold in the last 4 years, an excellent 75% per year compounded. Facebook, by comparison, roughly tripled its revenue/user (still very good) creating a 25%/year growth (certainly not to be sneezed at.) Amazon’s growth per user across the full 4 years was 25% – or about 4%/year.
It isn’t hard to see that Mr. Costolo has been doing a pretty good job leading Twitter.
But Twitter has had a very checkered past when it comes to leaders. Several articles have been written about the revolving door on the CEO office, with founders back-stabbing each other as money is raised and efforts are made to improve company performance technologically and financially.
The Board has shown a proclivity to spend too much time listening to rumors, and previous CEOs. Rather than focusing on exactly how many users are coming aboard, and how much revenue is generated on those users.
The returning CEO was himself previously replaced. And during his tenure there were many technical problems. Why he would be inserted, and the best performing CEO in company history shunted aside is completely unclear. But for investors, employees, users (of which I am one) and customers this change in leadership looks to be poorly conceived, and quite concerning. Mr. Costolo was doing a pretty good job.
Data on revenues came from Marketwatch for Twitter, Facebook and Amazon. Data on users (in Amazon’s case customers) came from Statista.com for Twitter, Facebook and Amazon. Charts were created by Adam Hartung (C).
by Adam Hartung | Jun 7, 2015 | Defend & Extend, In the Swamp, Innovation, Leadership, Transparency
Did you ever notice that Human Resource (HR) practices are designed to lock-in the past rather than grow? A quick tour of what HR does and you quickly see they like to lock-in processes and procedures, insuring consistency but offering no hope of doing something new. And when it comes to hiring, HR is all about finding people that are like existing employees – same school, same degrees, same industry, same background. And HR tries its very hardest to insure conformity amongst employees to historical standard – especially regarding culture.
Several years ago I was leading an innovation workshop for leaders in a company that made nail guns, screw guns, nails and screws. Once a market leader, sales were struggling and profits were nearly nonexistent due to the emergence of competitors from Asia. Some of their biggest distributors were threatening to drop this company’s line altogether unless there were more concessions – which would insure losses.
They liked to call themselves a “fastener company,” which has long been the trend with companies that like to make it sound as if they do more than they actually do.
I asked the simple question “where is the growth in fasteners?” The leaders jumped right in with sales numbers on all their major lines. They were sure that growth was in auto-loading screwguns, and they were hard at work extending this product line. To a person, these folks were sure they new where growth existed.
But I had prepared prior to the meeting. There actually was much higher growth in adhesives. Chemical attachment was more than twice the growth rate of anything in the old nail and screw business. Even loop-and-hook fasteners [popularly referred to by the tradename Velcro(c)] was seeing much greater growth than the old-line mechanical products.
They looked at me blank-faced. “What does that have to do with us?” the head of sales finally asked. The CEO and everyone else nodded in agreement.
I pointed out to them they said they were in the fastener business. Not the nail and screw business. The nail and screw business had become a bloody fight, and it was not going to get any better. Why not move into faster growing, less competitive products?
Competitors were making lots of battery powered and air powered tools beyond nail guns and screw guns, and their much deeper product lines gave them much higher favorability with retail merchandisers and professional tool distributors. Plus, competitor R&D into batteries was already showing they could produce more powerful and longer-lasting tools than my client. In a few major retailers competitors already had earned the position of “category leader” recommending the shelf space and layout for ALL competitors, giving them a distinct advantage.
This company had become myopic, and did not even realize it. The people were so much alike that they could finish each others sentences. They liked working together, and had built a tightly knit culture. The HR head was very proud of his ability to keep the company so harmonious.
Only, it was about to go bankrupt. Lacking diversity in background, they were unable to see beyond their locked-in business model. And there sure wasn’t anyone who would “rock the boat” by admitting competitors were outflanking them, or bringing up “wild ideas” for new markets or products.
According to the New York Times 80% of hiring is done based on “cultural fit.” Which means we hire people we want to hang out with. Which almost always means people that are a lot like ourselves. Regardless of what we really need in our company. Thus companies end up looking, thinking and acting very homogenously.
It is common amongst management authors and keynote speakers to talk about creating “high-performance teams.” The vaunted Jim Collins in “Good to Great” uses the metaphor of a company as a bus. Every company should have a “core” and every employee should be single-mindedly driving that “core.” He says that it is the role of good leaders to get everyone on the bus to “core.” Anyone who isn’t 100% aligned – well, throw them off the bus (literally, fire them.)
We see this phenomenon in nepotism. Where a founder, CEO or Chairperson who succeeds uses their leadership position to promote relatives into high positions.
Wal-Mart’s Board of Directors, for example, recently elected the former Chairman’s son-in-law to the position of Chairman. He appears accomplished, but today Wal-Mart’s problem is Amazon and other on-line retail. Wal-Mart desperately needs outside thinking so it can move beyond its traditional brick-and-mortar business model, not someone who’s indoctrinated in the past.
The Reputation Institute just completed its survey of the most reputable retailers in the USA. Top of the list was Amazon, for the third straight year. Wal-Mart wasn’t even in the top 10, despite being the largest U.S. retailer by a considerable margin. Wal-Mart needs someone at the top much more like Jeff Bezos than someone who comes from the family.
Despite what HR often says, it is incredibly important to have high levels of diversity. It’s the only way to avoid becoming myopic, and finding yourself with “best practices” that don’t matter as competitors overwhelm your market.
Ever wonder why so many CEOs turn to layoffs when competitors cause sales and/or profits to stall? They are trying to preserve the business model, and everyone reporting to them is doing the same thing. Instead of looking for creative ways to grow the business – often requiring a very different business model – everyone is stuck in roles, processes and culture tied to the old model. As everyone talks to each other there is no “outsider” able to point out obvious problems and the need for change.
In 2011, while he was still CEO, I wrote a column titled “Why Steve Jobs Couldn’t Find a Job Today.” The premise was pretty simple. Steve Jobs was not obsessed with “cultural fit,” nor was he a person who shied away from conflict. He obsessed about results. But no HR person would consider a young Steve Jobs as a manager in their company. He would be considered too much trouble.
Yet, Steve Jobs was able to take a nearly dead Macintosh company and turn it into a leader in mobile products. Clearly, a person very talented in market sensing and identifying new solutions that fit trends. And a person willing to move toward the trend, rather than obsess about defending and extending the past.
Does your organization’s HR insure you would seek out, recruit and hire Steve Jobs, or Jeff Bezos? Or are you looking for good “cultural fit” and someone who knows “how to operate within that role.” Do you look for those who spot and respond to trends, or those with a history related to how your industry or business has always operated? Do you seek people who ask uncomfortable questions, and propose uncomfortable solutions – or seek people who won’t make waves?
Too many organizations suffer failure simply because they lack diversity. They lack diversity in geographic sales, markets, products and services – and when competition shifts sales stall and they fall into a slow death spiral.
And this all starts with insufficient diversity amongst the people. Too much “cultural fit” and not enough focus on what’s really needed to keep the organization aligned with customers in a fast-changing world. If you don’t have the right people around you, in the discussion, then you’re highly unlikely to develop the right solution for any problem. In fact, you’re highly unlikely to even ask the right question.
