Where Bartz Blew It, and What Yahoo! Needs To Do Now

by | Sep 15, 2011 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Science, Web/Tech, Weblogs


Carol Bartz was unceremoniously fired as CEO by Yahoo’s Board last week.  Fearing their decision might leak, the Chairman called Ms. Bartz and fired her over the phone.  Expeditious, but not too tactful.  Ms. Bartz then informed the company employees of this action via an email from her smartphone – and the next day called the Board of Directors a bunch of doofusses in a media interview.  Salacious fodder for the news media, but a distraction from fixing the real problems affecting Yahoo!

Unfortunately, the Yahoo Board seems to have no idea what to do now.  A small executive committee is running the company – which assures no bold actions.  And a pair of investment banks have been hired to provide advice – which can only lead to recommendations for selling all, or pieces, of the company.  Most people seem to think Yahoo’s value is worth more sold off in chunks than it is as an operating company.  Wow – what went so wrong?  Can Yahoo not be “fixed”?

There was a time, a decade or so back, when Yahoo was the #1 home page for browsers.  Yahoo! was the #1 internet location for reading news, and for doing internet searches.  And, it pioneered the model of selling internet ads to support the content aggregation and search functions.  Yahoo was early in the market, and was a tremendous success.

Like most companies, Yahoo kept doing more of the same as its market shifted.  Alta Vista, Microsoft and others made runs at Yahoo’s business, but it was Google primarily that changed the game on Yahoo!  Google invested heavily in technology to create superior searches, offered a superior user experience for visitors, gave unique content (Google Maps as an example) and created a tremendously superior engine for advertisers to place their ads on searches – or web pages. 

Google was run by technologists who used technology to dramatically improve what Yahoo started – seeing a future which would take advantage of an explosion in users and advertisers as well as web pages and internet use.  Yahoo had been run by advertising folks who missed the technology upgrades.  Yahoo’s leadership was locked-in to what it new (advertising) and they were slow with new solutions and products, falling further behind Google every year.

In an effort to turn the tide, Yahoo hired what they thought was a technologist in Carol Bartz to run the company.  She had previously led AutoCad, which famously ran companies like IBM, Intergraph, DEC (Digital Equipment) and General Electric owned CALMA out of the CAD/CAM (computer aided design and manufacturing) business.  She had been the CEO of a big technology winner – so she looked to many like the salvation for Yahoo!

But Ms. Bartz really wasn’t familiar with how to turn an ad agency into a tech company – nor was she particularly skilled at new product development.  Her skills were mostly in operations, and developing next generation software.  AutoCad was one of the first PC-based CAD products, and over 2 decades AutoCad leveraged the increasing power of PCs to make its products better, faster and relatively cheaper.  This constant improvement, and close attention to cost control, made it possible for AutoCad on a PC to come closer and closer to doing what the $250,000 workstations had done.  Users switched to the cheaper AutoCad not because it suddenly changed the game, but because PC enhancements made the older, more costly technology obsolete.

Ms. Bartz was stuck on her success formula.  Constantly trying to improve.  At Yahoo she implemented cost controls, like at AutoCad.  But she didn’t create anything significantly new.  She didn’t pioneer any new platforms (software or hardware) nor any dramatically new advertising or search products.  She tried to do deals, such as with Bing, to somehow partner into better competitiveness, but each year Yahoo fell further behind Google.  In a real way, Ms. Bartz fell victim to Google just as DEC had fallen victim to AutoCad.  Trying to Defend & Extend Yahoo was insufficient to compete with the game changing Google.

The Board was right to fire Ms. Bartz.  She simply did what she knew how to do, and what she had done at AutoCad.  But it was not what Yahoo needed – nor what Yahoo needs now.  Cost cutting and improvements are not going to catch the ad markets now driven by Google (search and adwords) and Facebook (display ads.)  Yahoo is now out of the rapidly growing market – social media – that is driving the next big advertising wave.

Breaking up Yahoo is the easy answer.  If the Board can get enough money for the pieces, it fulfills its fiduciary responsibility.  The stock has traded near $15/share for 3 years, and the Board can likely obtain the $18B market value for investors.  But “another one bites the dust” as the song lyrics go – and Yahoo will follow DEC, Atari, Cray, Compaq, Silicon Graphics and Sun Microsystems into the technology history on Wikipedia.  And those Yahoo employees will have to find jobs elsewhere (oh yeah, that pesky jobs problem leading to 9%+ U.S. unemployment comes up again.)

A better answer would be to turn around Yahoo!  Yahoo isn’t in any worse condition than Apple was when Steve Jobs took over as CEO.  It’s in no worse condition than IBM was when Louis Gerstner took over as its CEO.  It can be done.  If done, as those examples have shown, the return for shareholders could be far higher than breaking Yahoo apart.  

So here’s what Yahoo needs to do now if it really wants to create shareholder value:

  1. Put in place a CEO that is future oriented.  Yahoo doesn’t need a superb cost-cutter.  It doesn’t need a hatchet wielder, like the old “Chainsaw Al Dunlap” that tore up Scott Paper.  Yahoo needs a leader that can understand trends, develop future scenarios and direct resources into developing new products that people want and need.  A CEO who knows that investing in innovation is critical.
  2. Quit trying to win the last war with Google.  That one is lost, and Google isn’t going to give up its position.  Specifically, the just announced Yahoo+AOL+Microsoft venture to sell ad remnants is NOT where Yahoo needs to spend its resources.  Every one of these 3 companies has its own problems dealing with market shifts (AOL with content management as dial-up revenues die, Microsoft with PC market declines and mobile device growth.)  None is good at competing against Google, and together its a bit like asking 3 losers in a 100 meter dash if they think by forming a relay team they could somehow suddenly become a “world class” group.  This project is doomed to failure, and a diversion Yahoo cannot afford now.
  3. In that same vein, quit trying to figure out if AOL or Microsoft will buy Yahoo.  Microsoft could probably afford it – but like I said – Microsoft has its hands full trying to deal with the shift from PCs to tablets and smartphones.  Buying Yahoo would be a resource sink that could possibly kill Microsoft – and it’s assured Microsoft would end up shutting down the company piecemeal (as it does all acquisitions.)  AOL has seen its value plummet because investors are unsure if it will turn the corner before it runs out of cash.  While there are new signs of life since buying Huffington Post, ongoing struggles like firing the head of TechCrunch keep AOL fully occupied fighting to find its future.  Any deal with either company should send investors quickly to the sell post, and probably escalate the Yahoo demise with the lowest possible value.
  4. Give business heads the permission to develop markets as they see fit.  Ms. Bartz was far too controlling of the business units, and many good ideas were not implemented.  Specifically, for example, Right Media should be given permission to really advance its technology base and go after customers unencumbered by the Yahoo brand and organization.  Right Media has a chance of being really valuable – that’s why people would ostensibly buy it – so give the leaders the chance to make it successful.  Maybe then the revolving door of execs at Right (and other Yahoo business units) would stop and something good would happen.  
  5. Hold existing business units “feet to the fire” on results.  Yahoo has notoriously not delivered on new ad platforms and other products – missing development targets and revenue goals.  Innovation does not succeed if those in leadership are not compelled to achieve results.  Being lax on performance has killed new product development – and those things that aren’t achieving results need to stop.  Specifically, it’s probably time to stop the APT platform that is now years behind, and because it’s targeted against Google unlikely to ever succeed.
  6. Invest in new solutions.  Take all that wonderful trend data that Yahoo has (maybe not as much as Google – but a lot more than most companies) and figure out what Yahoo needs to do next.  Rip off a page from Apple, which flattened spending on the Mac in order to invest in the iPod.  Learn from Amazon, which followed the trends in retail to new storefronts, expanded offerings, a mobile interface and Kindle launch.  Yahoo needs to quit trying to gladiator fight with Google – where it can’t win – and identify new markets and solutions where it can.  Yahoo must quit being a hostage to its history, and go do the next big thing! Create some white space in the company to invest in new solutions on the trends!

Of course, this is harder than just giving up and selling the company.  But the potential returns are much, much higher.  Yahoo’s predicament is tough, but it’s been a management failure that got it here.  If management changes course, and focuses on the future, Yahoo can once again become a market leading company.  Sure would like to see that kind of leadership.  It’s how America creates jobs.

The Wal-Mart Disease

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


Summary:

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

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

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

Walmart 20 year chart 10-10

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

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

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

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

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

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

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

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

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

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