by Adam Hartung | Jun 28, 2013 | Current Affairs, Defend & Extend, In the Rapids, In the Whirlpool, Innovation, Leadership, Web/Tech
The last 12 months Tesla Motors stock has been on a tear. From $25 it has more than quadrupled to over $100. And most analysts still recommend owning the stock, even though the company has never made a net profit.
There is no doubt that each of the major car companies has more money, engineers, other resources and industry experience than Tesla. Yet, Tesla has been able to capture the attention of more buyers. Through May of 2013 the Tesla Model S has outsold every other electric car – even though at $70,000 it is over twice the price of competitors!
During the Bush administration the Department of Energy awarded loans via the Advanced Technology Vehicle Manufacturing Program to Ford ($5.9B), Nissan ($1.4B), Fiskar ($529M) and Tesla ($465M.) And even though the most recent Republican Presidential candidate, Mitt Romney, called Tesla a "loser," it is the only auto company to have repaid its loan. And did so some 9 years early! Even paying a $26M early payment penalty!
How could a start-up company do so well competing against companies with much greater resources?
Firstly, never underestimate the ability of a large, entrenched competitor to ignore a profitable new opportunity. Especially when that opportunity is outside its "core."
A year ago when auto companies were giving huge discounts to sell cars in a weak market I pointed out that Tesla had a significant backlog and was changing the industry. Long-time, outspoken industry executive Bob Lutz – who personally shepharded the Chevy Volt electric into the market – was so incensed that he wrote his own blog saying that it was nonsense to consider Tesla an industry changer. He predicted Tesla would make little difference, and eventually fail.
For the big car companies electric cars, at 32,700 units January thru May, represent less than 2% of the market. To them these cars are simply not seen as important. So what if the Tesla Model S (8.8k units) outsold the Nissan Leaf (7.6k units) and Chevy Volt (7.1k units)? These bigger companies are focusing on their core petroleum powered car business. Electric cars are an unimportant "niche" that doesn't even make any money for the leading company with cars that are very expensive!
This is the kind of thinking that drove Kodak. Early digital cameras had lots of limitations. They were expensive. They didn't have the resolution of film. Very few people wanted them. And the early manufacturers didn't make any money. For Kodak it was obvious that the company needed to remain focused on its core film and camera business, as digital cameras just weren't important.
Of course we know how that story ended. With Kodak filing bankruptcy in 2012. Because what initially looked like a limited market, with problematic products, eventually shifted. The products became better, and other technologies came along making digital cameras a better fit for user needs.
Tesla, smartly, has not tried to make a gasoline car into an electric car – like, say, the Ford Focus Electric. Instead Tesla set out to make the best car possible. And the company used electricity as the power source. By starting early, and putting its resources into the best possible solution, in 2013 Consumer Reports gave the Model S 99 out of 100 points. That made it not just the highest rated electric car, but the highest rated car EVER REVIEWED!
As the big car companies point out limits to electric vehicles, Tesla keeps making them better and addresses market limitations. Worries about how far an owner can drive on a charge creates "range anxiety." To cope with this Tesla not only works on battery technology, but has launched a program to build charging stations across the USA and Canada. Initially focused on the Los-Angeles to San Franciso and Boston to Washington corridors, Tesla is opening supercharger stations so owners are never less than 200 miles from a 30 minute fast charge. And for those who can't wait Tesla is creating a 90 second battery swap program to put drivers back on the road quickly.
This is how the classic "Innovator's Dilemma" develops. The existing competitors focus on their core business, even though big sales produce ever declining profits. An upstart takes on a small segment, which the big companies don't care about. The big companies say the upstart products are pretty much irrelevant, and the sales are immaterial. The big companies choose to keep focusing on defending and extending their "core" even as competition drives down results and customer satisfaction wanes.
Meanwhile, the upstart keeps plugging away at solving problems. Each month, quarter and year the new entrant learns how to make its products better. It learns from the initial customers – who were easy for big companies to deride as oddballs – and identifies early limits to market growth. It then invests in product improvements, and market enhancements, which enlarge the market.
Eventually these improvements lead to a market shift. Customers move from one solution to the other. Not gradually, but instead quite quickly. In what's called a "punctuated equilibrium" demand for one solution tapers off quickly, killing many competitors, while the new market suppliers flourish. The "old guard" companies are simply too late, lack product knowledge and market savvy, and cannot catch up.
- The integrated steel companies were killed by upstart mini-mill manufacturers like Nucor Steel.
- Healthier snacks and baked goods killed the market for Hostess Twinkies and Wonder Bread.
- Minolta and Canon digital cameras destroyed sales of Kodak film – even though Kodak created the technology and licensed it to them.
- Cell phones are destroying demand for land line phones.
- Digital movie downloads from Netflix killed the DVD business and Blockbuster Video.
- CraigsList plus Google stole the ad revenue from newspapers and magazines.
- Amazon killed bookstore profits, and Borders, and now has its sites set on WalMart.
- IBM mainframes and DEC mini-computers were made obsolete by PCs from companies like Dell.
- And now Android and iOS mobile devices are killing the market for PCs.
There is no doubt that GM, Ford, Nissan, et. al., with their vast resources and well educated leadership, could do what Tesla is doing. Probably better. All they need is to set up white space companies (like GM did once with Saturn to compete with small Japanese cars) that have resources and free reign to be disruptive and aggressively grow the emerging new marketplace. But they won't, because they are busy focusing on their core business, trying to defend & extend it as long as possible. Even though returns are highly problematic.
Tesla is a very, very good car. That's why it has a long backlog. And it is innovating the market for charging stations. Tesla leadership, with Elon Musk thought to be the next Steve Jobs by some, is demonstrating it can listen to customers and create solutions that meet their needs, wants and wishes. By focusing on developing the new marketplace Tesla has taken the lead in the new marketplace. And smart investors can see that long-term the odds are better to buy into the lead horse before the market shifts, rather than ride the old horse until it drops.
by Adam Hartung | Jul 5, 2009 | Web/Tech
“Burns Succeeds Mulcahy at Xerox in First Big Woman-to-Woman CEO Transition” is the Forbes headline. It’s only too bad that this headline took until 2009 to happen. It’s also too bad that gender issues, such as women CEOs, are worth headlines. But the truth is that the CEO job is still dramatically dominated by men, even though women are half the workforce and been in managerial positions for at least 30 years. Just goes to show it takes a long time for to change old Success Formulas – and its been true that Boards of Directors, and CEOs, tend to replace an outgoing executive with one much like themselves.
“Ursula Burns: An Historic Succession at Xerox” was the Businessweek headline. And not just because the new CEO is a woman. She’s also African American. African Americans have achieved much in the USA, including prominent political positions – such as America’s Presidency. But even though African Americans comprise about 10-15% of the U.S. population, it’s been a very long and arduous climb from the depths of slavery to the CEO suite. Again, old Success Formulas are repeated again and again and again – and for decades that blocked many women and African Americans from achieving the top job in America’s biggest companies.
So kudos to Xerox for building a culture that achieves parity in reviews. They’ve allowed the best and brightest in their organization to rise to the top, unencumbered by old notions about gender and race. And that is a fantastic accomplishment. We should deservedly praise the executives and Board at Xerox for adapting their human resource policies so that promotions are both gender and color blind.
But that doesn’t fix the problem at Xerox. And unfortunately, promoting another insider is likely to be the end of this once great company.
Xerox almost single-handedly killed the small offset lithography business. In the 1960s every major company had several printing presses in the basement. And print shops were everywhere to support the need for duplicate documents. Small offset press manufacturers, and support products like plates, were a huge growth industry. Until Xerox came along with a better technology, and a better pricing scheme. Xerox sold “clicks”, or paper passes through the machine, rather than the machine itself. And this allowed companies to buy far more copiers than they ever imagined. In the 1970s Xerox was THE model sales organization; itself duplicated wherever companies wanted to achieve tremendous growth.
But desktop printing spelled the end of growth for large copiers. Xerox actually had a major impact on the invention of desktop printing, with researchers at Xerox’s Palo Alto Research Center (PARC) creating many of the pieces critical for product viability. But Xerox Locked-in on its copier business, and in the 1980s when the market started shifting Xerox didn’t. By the 1990s, instead of selling millions of small printers, Xerox turned to selling complex copy centers that cost over $100,000 each and took training to operate. While personal printers popped up in offices like popcorn, the large copiers were replaced by smaller and simpler machines on each hall, or went away entirely. Xerox sales started slipping, and by century’s end Xerox was in real danger of disappearing.
The 30 year employee that stopped a complete failure was Ms. Mulcahy. She stopped the cash bleeding, and dealt with the huge debt. Xerox did not go into bankruptcy, but the company saw its revenue drop dramatically and new product launches shriveled up – or were ignored by customers looking for different solutions. Ms. Mulcahy was like the captain on a damaged submarine. She was able to plug the leaks and batten down the hatches so some of the crew survived. But in doing so the submarine kept falling further and further toward the bottom of the ocean. Xerox may be “settled in” on the ocean floor, but how is it supposed to survive? How is it supposed to grow? How is it supposed to accomplish its mission of generating high rates of return year after year?
The market for copiers is not growing, and competition in that marketplace is intense – with machines from Japanese manufacturers such as IBM, Canon and Sharp dominating the market today. Xerox cannot consider its lack of collapse a big win, because in the process it watched the market shift to a raft of new products in both desktop printing and copying where Xerox does not even compete. Competitors have launched machines that are more cost effective to use, and often have better capability. While Xerox was cutting cost, these competitors were gaining share and developing new products. These shifts have left Xerox far removed from competitive viability, even if it is less in debt and cash flow is better.
We commonly see this sort of behavior in companies after a growth stall. They appear on the brink of collapse. But then a smart leader takes dramatic action to stop the bloodletting and “firm up the balance sheet.” The company goes from huge losses to small profits, aided by financial engineering that brings forward costs to pad later P&Ls. Employees and investors breath a sigh of relief, figuring the badness is behind them and everyone can return to the good old days of making money. But these respites are short-lived. Fast enough the company comes face-to-face with customers that demand the new technology and more productive solutions. Rapidly managers realize competitors have made inroads to previously loyal customers, and price erosion is a constant fact of life. In short order, profits again turn to losses and more cutbacks happen as insufficient resources are available for funding new product development and new product launches. What looked for a bit like a big improvement in the business is quickly forgotten as the company falters again.
Americans are an optimistic lot, but there’s nothing in this executive transition that should lead us to be optimistic about the future of Xerox. Ms. Mulcahy was a long-term company veteran who did not change, or even Disrupt, the Xerox Success Formula at all during her tenure. She followed traditional practices of a company in the Swamp, taking draconian actions to delay failure. But she didn’t “fix” the revenue or new product problems. The new CEO is also a 30 year company veteran, and one even less likely to attack the old Success Formula. Where Ms. Mulcahy was from sales, and we might have expected her to undertake a market-focused set of actions, Ms. Burns is from operations and gained her success as someone who looks internally for improvement rather than toward the marketplace.
Again, congratulations to Xerox for being gender and race neutral in selecting its CEOs. But don’t expect a dramatic improvement in the fortunes at Xerox. Xerox is in big, big trouble. It needs to be in new markets it has long ignored, and it needs products the company has long eschewed. The brand has become tainted due to expensive pricing and declining sales. Xerox is so far into the Whirlpool that it is almost infeasible to think of the company becoming “great” again. It would take incredible Disruption and results from very rapid White Space. But Xerox is not skilled in these capabilities, and it doesn’t show the depth of market savvy or product innovation that would be required to make the company a leading competitor. Unfortunately, even though Xerox has successfully changed captains, it is highly unlikely the new CEO will save the ship.
