by Adam Hartung | Apr 14, 2012 | Current Affairs, Leadership, Transparency, Web/Tech
Apple's amazing increase in value is more than just a "rah-rah" story for a turnaround. Fundamentally, Apple is telling everyone – globally – that there has been a tectonic shift in markets. And if leaders don't understand this shift, and incorporate it into their strategy and tactics, their organizations are going to have a very difficult future.
Recently Apple's value peaked at $600B. Yes, that is an astounding number, for it reflects not only 50% greater value than the oil giant Exxon/Mobil (~$390B), but more than the entire value of the stock markets in Spain, Greece and Portugal combined!
Source: Business Insider.com
This astounding valuation causes many to be reticent about owning Apple shares, for it seems implausible that any one company – especially a tech company with so few employees – could be worth so much.
Unless we look at this information in the context of a major, global economic shift. That what the world values has changed dramatically. And that what investors are telling business (and government) leaders is that in a globalized, fast paced world value is based upon what you know, when you know it – in other words information. Not land, buildings or the ability to make things.
Three hundred years ago the wealthiest people in the world owned land. Wars were fought for centuries to control land. Kings owned land, and controlled everything on the land while capturing the value of everything produced on that land. As changes came along, reducing the role of kings, land barons became the wealthiest people in the world. In an agrarian economy, where most human resources (and all others for that matter) were deployed in food production owning land was the most valuable thing on the planet.
But then some 120 years ago, along came the industrial reveolution. Suddenly, productivity rose dramatically by applying new machines to jobs formerly performed by humans. With this shift, value changed. The great industrialists were able to capture the value of greater productivity – making people like Cyrus McCormick, Henry Ford and Andrew Carnegie the wealthiest of the wealthy. Worth more than most states, and many foreign countries.
The age of manufacturing was based upon the productivity of machines and the application of industrial processes to what formerly was hand labor. Creating tools – from entignes to automobiles to airplanes – created great wealth. Knowing how to make these machines, and making them, created enormous value. And companies like General Motors, General Dynamics and General Electric were worth much more than the land upon which food was produced. And the commodity suppliers, like Exxon/Mobil, feeding industrial companies captured huge value as well.
By the middle 1900s America's farmers were forced to create ever larger farms to remain in business, and were constantly begging for government subsidies to stay alive via price controls (parity programs) and land "set-asides" run by the Agriculture Department. By the 1980s family farms going broke by the thousands, agricultural land values plummeted and the ability to create value by growing or processing food was a struggle. Across the developed world, wealth shifted into the hands of industrial companies from landowners.
Sometime in the 1990s the world shifted again, and that's what the chart above shows us. Countries with little or no technology companies – no information economy – cannot create value. On the other hand, companies that can drive new levels of productivity via the creation, management, use and sale of information can create enormous value.
Think about the incredible shift that has happened in retail. America's largest and most successful retailer from the 1900 turn of the century well into the 1960s was Sears. In an industry that long equated success with "location, location, location" Sears has had, and continues to control, enormous amounts of land and buildings. But the value of Sears has declined like a stone pitched off a bridge, now worth only $6B (1% the Apple value) despite all that real estate!
Simultaneously, America's largest retailer Wal-Mart has seen its value go nowhere for over a decade, despite its thousands of locations that span every state. Even though Wal-Mart keeps adding stores, and enlarging stores, adding more and more land and buildings to its "asset" base the company's customer base, sales and value are mired, unable to rise.
Yet, Amazon – which has no land, and almost no buildings – has used the last 20 years to go from start up to an $86B valuation – doing much better for shareholders than its traditional, industrial thinking competitors. In the last 5 years, Amazon's value has roughly quadrupled!
Source: Yahoo Finance
Yes, Amazon is a retailer. But the company has learned that applying an industrial strategy is far less valuable than applying an information strategy. As an internet leader, first with most browser formats on PCs and smartphones, Amazon has reached far more new customers than any traditional real-estate focused company. By launching Kindle Amazon focused on the information in books, rather than the format (print) revolutionizing the market and capturing enormous value.
By launching Kindle Fire Amazon takes information one step further, making it possible for customers to access new products faster, order faster and build their own retail world without ever going to a building. By becoming a tech company, Amazon is clearly well on the way to dominating retail, as Sears falls into irrelevancy and almost surely bankruptcy, and Wal-Mart stalls under the overhead of all that land, buildings and vast number of minimum-wage, uninsured employees.
We now must realize that value is not created by what accountants have long called "hard assets" – land, buildings and equipment. In fact, the 2 great U.S. recessions since 2000 have demonstrated to everyone that there is no security in these – the value can decline, decline fast, and decline far. Just because these things are easy to see and count does not insure value. They can easily be worth less than they cost to make – or own.
Successful competition in 2012 (and going forward) requires businesses know about customers, products and have the ability to supply solutions fast with great reach. Winning is about what you know, knowing it early, acting upon the information and then being able to disseminate that solution fast to those who have emerging needs.
Which is why you have to be excited about the brilliant move Facebook made to acquire Instagram last week. In one fast, quick step Facebook bought the ability to easily and effectively provide mobile image solutions – across any application – to millions of existing users. Something that every single person, and business, on the planet is either doing now, or will be doing very soon.
Source: Wired
On a cost-per-existing-customer basis, Facebook stole Instagram. And that's before Facebook spreads out the solution to the rest of its 780million users! Forget about how many employees Instagram has, or its historical revenues or its assets. In an innovation economy, if you have a product that 35million people hear about and start using in less than a year, you have something very valuable!
Kudos go to Mark Zuckerberg as CEO, and his team, for making this acquisition so quickly. Before Instagram had a chance to hire bankers, market itself and probably raise its value 10x. That's why Mr. Zuckerberg was Time Magazine's "Man of the Year" at the start of 2011 – and why he's been able to create so much more value for his shareholders than the CEOs of industrial companies – like say GE.
Going forward, no company can plan to survive with an industrial strategy. That approach, and those rules, simply don't create high returns. To be successful you MUST become a tech company. And while this may not feel comfortable, it is reality. Every business must shift, or die.
by Adam Hartung | May 29, 2009 | Current Affairs, In the Whirlpool, Leadership, Lifecycle
GM will file bankruptcy next week ("GM reaches swap deal, but bankruptcy still lies ahead" Marketwatch). It's likely historians will look back on this event as a major turning point in the change away from an industrial world (away from making money on "hard" assets like factories). GM was considered invincible. As were all the auto companies. The reorganizing of Ford, and bankruptcy of Chrysler will be remembered, but not likely with the impact of GM filing bankruptcy. Pick up any book on America post WWII and you'll find a discussion of General Motors. The quintessential industrial company. Destined to live forever due to its massive revenues and assets. After next week, history books will change. Altered by the previously unimaginable bankruptcy of GM. If "What's good for GM is good for America" is no longer true, what does it mean for America when GM declares Bankruptcy?
None of America's car companies will ever again be strong, vibrant auto companies. They are in the Whirlpook and can't get out. It's simply impossible. GM is now worth about $450million (at current prices of about $.80/share). It already owes the federal government $20billion – which is supposed to be converted to equity, with more equity owned by employees and converted bondholders. For most of the time since the 1970s, the average value of GM has been only $15billion (split adjusted average price $25). To again become viable GM wants the government to increase its investment to $60billion ("GM bondholders may recoup $14Billion" Marketwatch.com. That means for GM to ever be worth just the amount being supplied by the government bailout it would have to be worth $116/share – which is $20/share more than it was worth at its peak in the market blowout of 2000! (Chart here).
That means it is impossible to conceive of any way GM could ever be successful enough to achieve enough value as a car company to repay the government – and thus it has no future ability to provide dividends to private investors. Even though GM says it will be repositioned to be healthy, that simply is not true. It's no more healthy or attractive than Quasimodo, the hunchback of Notre Dame, could have ever hoped to be – or the elephant man. Helping them is charity, not a business proposition. When a company has no conceivable hope of making enough money to repay its investors it cannot attract management talent, or additional capital as assets wear out, and it eventually fails. It won't be long before the people running GM realize their future are as bureaucrats in a non-profit – but with far less psychic value than working at, for example, the Red Cross.
Meanwhile, Chrysler is downsizing dramatically as it looks for its way out of bankruptcy. As it tries to give the company to Italians to run, the company is dropping obligations it has carried for years. Even the venerable Lee Iacocca, who literally saved the company 20some years ago, will lose his pension and even his company car ("Iacocca losing pension, car in Chrysler bankruptcy" Reuters).
Ford, which restructured before this latest market shift, has not asked for bailout money. But its market share is dropping fast. Its vendors (including Visteon) are going bankrupt and Ford is guaranteeing their debt to keep them in business – with an open-ended cost not yet reflected in Ford's P&L. Even though it restructured, Ford's balance sheet is shot ("What About Ford?" 24/7 Wall Street). It has no money to design a new line of competitive vehicles.
None of these 3 companies have the wherewithal as operating businesses to replace assets. And they are competing with Japanese, Korean and Indian companies that have lower operating costs, lower fixed asset investments, higher quality and newer product lines, better customer satisfaction rates, higher profits and stronger balance sheets. Without competition it's hard to expect America's car companies to do well. When you look at competitors you realize this game can still have several more moves (especially with market intervention by government players with public policy objectives) – but the end is predicatable. Only for reasons of public policy, rather than business investment, would you continue to fund any of these American competitors.
Even though the switch from an industrial economy to an information economy began in the 1990s, historians will likely link the switch to June, 2009. (I guess that's fair, since the shift from an agrarian economy to an industrial economy began in the 1920s but wasn't recognized until the late 1940s.) Just as GM was the company that epitomized the success of industial business models, it will be the company that becomes the icon for the end of industrial models. It failed much faster, and worse, than anyone expected.
If "What's good for GM" (as in the government bailout) isn't good for America any longer – what is? For many people, this is shift is conceptually easy to understand – but hard to do anything about. They don't know what to do next; what to do differently. They fully expect to continue focusing on balance sheets and assets and the tools we used to analyze industrial companies. And those people will see their money drift away. Just like you can't make decent returns farming in a post-agrarian economy, you won't be able to make money on assets in a post-industrial economy. From here on, it's all about the information value and learning how to maximize it. It's not about old-style execution, its about adaptability to rapidly shifting markets built on information.
Let's consider CDW – a 1990s marvel of growth shipping computers to businsesses around America. CDW has pushed hardware and software onto its customers for 2 decades in its chase with Dell. But every year, making money as a push distributor gets harder and harder. And that's because buyers have so many different sources for products that the value of the salesperson/distributor keeps declining. Finding the product, the product info, inventory, low shipping and low price is now very easily accomplished with a PC on the web. Every year you need CDW less and less. Just like we've seen distributors squeezed out of travel we're seeing them squeezed out of industry after industry – including computer componentry. If CDW keeps thinking of itself as a "
;push" company selling products – a very industrial view of its business – it's future profitability is highly jeapardized.
The market has shifted. For CDW to have high value it must find value in the value of the information in its business. Perhaps like the Chicago Mercantile Exchange they could create and trade futures contracts on the value of storage, computing capacity or some other business commodity. The information about their products – production, inventory and consumption – being more profitable than the products themselves (everyone knows more profit is made by Merc commodity traders than all the farmers in America combined). Or CDW needs to develop extensive databases on their customers' behaviors so they can supply them with new things (services or products) before they even realize they need them — sort of like how Google has all those searches stored on computers so they can predict the behavior of you, or a group your identified with, before you even type an internet command. CDW's value as a box pusher is dropping fast. In the future CDW will have to be a lot smarter about the information surrounding products, services and customers if it wants to make money.
A lot of people are very uncomfortable these days. Since the 1990s, markets keep shifting fast – and hard. Nothing seems to stay the same very long. Those trying to follow 1980s business strategy keep trying to find some rock to cling to – some way to build an industrial-era entry barrier to protect themselves from competition. They try using financial statements, which are geared around assets, to run the business. Their uncomfortableness will not diminish, because their approach is hopelessly out of date. GM knew those tools better than anyone – and we can see how that worked out for them.
To regain control of your future you have to recognize that the base of the pyramid has shifted. How we once made money won't work any more. Value doesn't grow from just owning, holding and operating assets. Maximizing utility of assets will not produce high rates of return. We are now in a new economy. One where outdated distribution systems (like the auto dealer structure) simply get in the way of success. One where a focus on the product, rather than its use or customer, won't make high rates of return. With the bankruptcy of GM reliance on the old business model must now be declared over. We've entered the Google age (for lack of a better icon) – and it affects every business and manager in the world.
The future requires companies focus on markets, shifts and adaptable organizations. Successful businesses must have good market sensing systems, rather than rely on powerful six sigma internal quality programs. They have to know their competitors even better than they know customers to deal with rapid changes in market moves. They have to be willing to become what the market needs – not what they want to define as a core competency. They have to accept Disruptions as normal – not something to avoid. And they have to use White Space to learn how to be what they are not, so they remain vital as markets shift. So they can quickly evolve to the next source of value creation.
by Adam Hartung | Mar 11, 2009 | Current Affairs, General, Leadership, Lifecycle, Lock-in
All businesses hurting in today's economy must significantly change if they want to improve their performance. In the early 1900s the world saw the advent of several new machines ushering in the industrial era. But, the economy was based on agriculture – and largely the "family farm." As the industrial era expanded landowners tried to Defend & Extend their old business models by leveraging up the family farms – borrowing more and more money to plant "fencerow-to-fencerow" as it was called. Borrowers overworked the land, and with all the debt piled on when a glitch happened (a combination of drought and falling commodity prices from expansion) the mountain of debt collapsed. The beginnings of the Great Depression hit the farmers in the 1920s. The coming of the industrial revolution made old Success Formulas based on land ownership and agriculture obsolete – and no amount of debt could defer the shift forever. It took 10 years (into the 1940s) to fully transition to the new economy, and when we did Ford, GM and other industrial giants overtook the land barrons of the earlier era.
I was reminded of this today when discussing scenario planning with Diane Meister, Managing Director of Meridian Associates in Chicago. Today she sees the deteriorating Success Formulas in her clients. Companies that keep trying to apply Industrial era Success Formulas in what is now an information economy. When they aren't prepared for big shifts – it can be devastating. But those who do prepare can improve position quickly. She told me how one of her clients had an excellent business selling toys to FAO Schwartz and other top toy chains. But Meridian could see that the growth of Target created a viable scenario for a big shift in how toys would be distributed. She implored her client to prepare for possibly the failure (note – failure – not just weakness) of several big toy chains. Good thing she did, within 2 years most of her client's retail distribution was bankrupt. Only by using scenarios to prepare for a big market shift were they able to survive – in fact come out a leader – due to the big shifts happening in retail as a result of the change in markets. (Don't hesitate to contact her firm at the link – good stuff!)
As we transition into the information economy, big changes are going to happen to all businesses. The source of value, and competitiveness, has changed. Today the Allstate Insurance's CEO was quoted in Crain's "Insurer's Should Have Federal Regulator." And in an article at Marketwatch.com, "Dimon Backs Regulation", the CEO of J.P. Morgan Chase told the U.S. Chamber of Commerce he backs additional mortgage regulation. Both of these leaders are looking forward, and recognize that markets have shifted. New regulations will be critical to success. Their future scenarios show it will take a different approach to be a global competitor in 2015 – to be a winner in the global information economy that won't support industrial era Success Formulas.
Not everyone gets it. Also at Marketwatch.com in "AT&T Chief Sounds Alarm", the AT&T CEO decries rising health care costs and worries system changes will hurt his competitiveness. Wake up! What sort of scenario is he using that expects America to keep the current health care system – and the current employer-paid insurance? Even insurance companies now recognize the system is broken and needs change. In no other country are health care costs "baked in" to the cost of a company's P&L. Think about it – even where there is national health care (Britain, France, Canada, Germany, etc.) the companies don't carry the cost as a line item they must recoup via sales and margin. Elsewhere, the cost of health care is born by society through taxes. The reality is that any American company trying to compete has a whole host of incremental costs on its shoulders because we ask employers to pay in order to keep personal income taxes low. Until we change the whole basis of how America chooses to insure its population, employers are being forced to carry costs not seen by offshore competitors. In a global marketplace – this sort of "yesterday thinking" will not survive. Employers should be leading the charge for national health care – just so they can get the issue out of their plethora of problems and off the backs of their P&Ls!
Those that don't change will end up out of the game. Because they didn't do effective scenario planning, that considered the rise of "upscale discounters," FAO Schwartz (mentioned earlier) and Zany Brainy's failed — not even a Tom Hanks movie could keep customers coming in the doors. Markets are merciless in taking down companies that can't globally compete on what's important. We can prop up GM for a short time, but no country can afford to try to keep its people working (avoid unemployment costs) and insured by pumping money into a dysfunctional car company that isn't competitive. Sears has ignored the trends, and is one of the "walking dead." Once the world's greatest retailer, it built what was for years the world's tallest building (now 2nd). But now Crain's has reported in "Willis will get Sears Tower naming rights" that soon the great building the great retailer built in its home town of Chicago will likely be renamed for a London insurance company. Of course, Sears sold the building years ago in its effort to subsidize its failiing retail business – and hasn't even been a tenant in the building for decades. It won't be long before no one even remembers Sears. Sears remained Locked-in to what it once was, and ignored scenarios about a different future that would require change.
The world has shifted. If your scenarios for the future expect a return to old practices – well, that isn't going to happen. If you want to be a leader in the next economy, you better start building new scenarios TODAY!
error correction - in yesterday's blog I inadvertently said I was "not" twittering. Talk about a badly mistaken typo! I meant the opposite. I am twittering and hope you all hook up so we can tweek each other.
