by Adam Hartung | Aug 17, 2021 | Defend & Extend, Leadership, Politics, Strategy, Trends
Afghanistan’s Fall Was Foreseeable
After 20 years of American occupation, the Taliban retook Afghanistan in a matter of days. Pundits across the news channels are expressing extreme surprise. But they should not be surprised, this speed of change was entirely predictable. The chaos in Afghanistan may seem a world away, but this unfortunate situation can offer 2 significant lessons for business.
Lesson #1 – Failure (change) always happens faster than we expect.
It took 35 years to build the infrastructure for VHS tapes, then DVDs, to become a big market. We had to open a lot of stores, and put a lot of machines in homes. Then that all became pretty much worthless in 18 months when streaming came along. We used travel agents to book air flights and hotels for 40 years, but they practically all disappeared in a year when we could book on-line. We were ardent radio listeners until iTunes and streaming services pushed radio further toward obsolescence in 6 months when the pandemic magnified these trends. Radio consumption in cars came to an abrupt halt when commuting stopped.
Fringe competitors are constantly trying to become mainstream. They never give up. Innovators keep trying new ways to serve our customers. Then, when there’s a shift in technology, regulation or another major market component they leap forward in a huge step overtaking the marketplace. The Taliban never went away. They kept getting better and waited until the USA announced its planned withdrawal. That created the opportunity and in one big step they leapt forward. Business leaders continually believe that markets will shift gradually. Leaders underestimate how well fringe competitors are prepared to move forward, and leaders fail to anticipate how quickly customers will shift buying patterns (like Afghan troops dropping their guns and fleeing.)
It’s not gradual. Change happens fast. If you see a change on the horizon, don’t think it’ll come slowly. Think like the fellow pushed off a 20 story building. At the twelfth story it’s not “so far so good,” but rather “we better prepare for disaster.” When change is going to happen, pack your parachute. Figure out how you’ll keep pushing forward. Or you’ll find a swift, hard landing.
Lesson #2 – You are either growing, or you are dying. There is no “maintenance, status quo.”
Despite two decades fighting in Afghanistan, by no measure was America becoming more popular. America’s image, trade, world standing were not improving in Afghanistan. America was fighting merely to maintain. Watch “Charlie Wilson’s War” and it’s evident America had no plans to “heap any love” on Afghanistan. No schools, agricultural assistance, preservation of mosques or other religious sites, family assistance programs, immigration. America just kept working to preserve the situation after killing Osama bin Laden. The relationship wasn’t growing, improving, becoming something beneficial to both sides. Without growth in the relationship it was deteriorating. Afghans were increasingly weary of occupation, and in a great sense ready for change.
Too often, business leaders think they don’t need to focus on growth. According to recent Gartner research only 56% of chief executives see Growth as the top priority for their firms. They don’t think they need to think about how to launch new solutions, new services, new opportunities to please their customers. They drift into preserving the status quo business, perhaps working on doing things a little faster, a little better, a little cheaper. But as time passes needs change. New needs emerge. Markets don’t stay the same, new competitors challenge old norms – challenge the status quo. The customer relationship deteriorates as new unmet needs aren’t addressed. If we aren’t helping the customer to grow, and thus growing ourselves, the market becomes dull, and ready for a major shift. Poised to be overtaken by something new.
We used to think we could create a market, then erect entry barriers to keep out competitors. Things like scale advantages, control of distribution, control of technology, regulatory limitations became the “moats” that would protect the business. And we thought with those protections we had “competitive advantage” allowing revenues, and profits, to go on infinitely. But that simply isn’t true. Fringe competitors are constantly attacking the “moat.” Things happen in the world creating opportunities for new solutions. A “reinvention gap” emerges as the old business becomes stale and customers are looking for something new. And fringe competitors are waiting for the opportunity to take action – and market share.
The only way you can remain vital is to constantly grow. You have to keep up with economic growth (3%/yr) and overall inflation (3%/year) just to remain even – without any return to shareholders. Add on 3 more points of growth to keep investors and you need to grow 9-10%/year just to sustain. Leaders too often take for granted that customers are happy, their particular market is “low growth” and they focus on the bottom line. Wrong, and deadly. Instead focus on the top line. You have to constantly grow revenues. It’s the only way you can remain vital with your customers, and the only route to success.
This analogy is not to belittle the catastrophic circumstances in Afghanistan. Under the Taliban most people will be denied the things I personally hold dear. It is a human tragedy.
But the story is one told all too often. Focusing on the bottom line, forgetting the need to grow your organization and your relationship with customers. And then thinking that any transition will take some time, providing ample room to react. I see these errors regularly. Think of Sears, ToysRUs, Hostess Baking, Sun Microsystems, Wang, GM/Ford/Chrysler, Motorola….. it’s a very long list of companies that made these two mistakes. As the newscasters harp on how fast Afghanistan fell, remember that this was a failure many years in the making. Lots of defend and extend behavior (military might) by America, far too little innovation and not meeting unmet needs (food, shelter, clean water, education, protection from harm.)
Are you on “cruise control” running your business?
Ask yourself, Are you trying to defend and extend what you’ve always done? Or are you meeting unmet customer needs, helping customers to grow and in turn growing yourself? If you’re the former, get ready for a rude awakening.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. Adam@sparkpartners.com 847-726-8465.
by Adam Hartung | Jun 12, 2017 | Defend & Extend, Innovation, Leadership
GE Chairman and CEO Jeff Immelt walks off stage after being interviewed during the Washington Ideas Forum at the Harmon Center for the Arts September 28, 2016 in Washington, DC. A proud Republican, Immelt said it would hurt the United States and cripple President Barack Obama — and the next president of the U.S. — not to agree to trade deals like theTrans Pacific Partnership (Photo by Chip Somodevilla/Getty Images)
Readers of this column know I’m not a fan of General Electric’s CEO, Jeffrey Immelt. In May, 2012 I listed CEO Immelt as the 4th worst CEO of a large publicly traded American company. Unfortunately, his continued tenure since then did nothing to help make GE a stronger, or more valuable company. GE’s lead director says this is the culmination of a transition plan first developed in 2011. One can only wonder why it took the board so incredibly long to replace the feckless CEO, and why they allowed GE’s leadership to continue destroying shareholder value.
The longer back you look, the worse Immelt’s performance appears.
Few company analysts can say they’ve followed a company for 3 years. Fewer yet can say 5 years. Nearly none can say a decade. Yet, CEO Immelt was in his job for 16 years – much longer than almost all business analysts or writers have followed GE. Therefore, their lack of long-term memory often leaves them unable to give a proper overview of the company’s fortunes under the long-lived CEO.
I have followed GE closely for almost 35 years. Ever since I graduated from HBS class of 1982 along with Mr. Immelt. Several fellow alumni worked at GE, and a large number of my BCG (Boston Consulting Group) colleagues joined GE in senior positions during the mid-1980s as GE grew exponentially. I have followed several of these alumni as the years passed allowing me to take the “long view” on GE’s performance, during Welch’s leadership and more recently since Mr. Immelt took the top job.
I was very pleased to include a positive case study of GE’s business practices in my book “Create Marketplace Distruption – How to Stay Ahead of the Competition” (Financial Times Press, 2007.) CEO Welch used a number of internal processes to help GE leaders identify disruptive opportunities to change industries – whether markets where GE already competed or new markets. He relentlessly encouraged entering new businesses where GE could bring something new to the game, and he put GE’s money to good use growing revenues, and market cap, enormously. No other CEO in American history made as much value for shareholders as Jack Welch. His leadership pushed GE to the top position in most industries, and his relentless focus on growth helped even rank-and-file employees build million dollar IRAs to go with well funded pension and retiree benefit plans.
GE’s performance could not have changed more dramatically than it has under Mr. Immelt. But there are now a number of apologists who would say GE’s smaller size, and lower valuation, are due to market conditions which were out of Mr. Immelt’s control. They contend CEO Immelt was a good steward of the company during difficult market conditions, and the results of his tenure – notably lower revenues, lower valuation, fewer markets, fewer employees and lower community involvement – are not his fault. They argue he did a good job, all things considered.
Balderdash. Immelt was a terrible CEO
There is an overall reluctance to say bad things about any huge American icon, and its CEO. After all, columnists and analysts who are non-congratulatory don’t usually get called by the company to be consultants, or advisors. Or to be on the board. And publishers of columnists who say negative things about big companies and their execs risk having ad dollars moved to more favorable journals, and often unfriendly relationships with their ad departments and agencies. So it is far easier, and more acceptable, to sugar coat bad strategy, bad leadership and bad results.
But we should move beyond that bias. Mr. Immelt was the CEO of the ONLY company on the Dow Jones Industrial Average (DJIA) to have been on that list since it was created. He inherited the most successful company at creating shareholder value during the 1980s and 1990s. He surely should be held to the highest of comparative bars.
Those who say CEO Immelt was “set up to fail” are somehow making the case that Immelt would have been more successful if he had inherited a company with a bad brand image, weak history, and inadequate performance. They are rewriting history to say Jack Welch was not a good CEO, and his outsized gains destined GE to do poorly under his successor. That simply defies the facts – and logic.
Looking at the last 16 years of “difficult times,” when GE has struggled under Immelt’s leadership, one should ask “why did so many other companies do so well?” After all, the DJIA has more than doubled. The S&P 500 has almost doubled. The Russell 2000 has almost tripled. Overall, far more companies have gone up in value than down. Why were Immelt’s circumstances so difficult that all of those CEOs did so much better? They dealt with the same financial meltdown, same Great Recession, same increase in regulations, same federal reserve, same government administration – yet they were able to adapt their companies, grow and increase value.
Yes, GE was huge in financial services when Immelt took the reigns, and financial services saw a major crash. But look at the performance of JPMorganChase under CEO Jamie Dimon (also a classmate of Mr. Immelt.) JPM is stronger today than ever, growing and gaining market share and increasing its value to shareholders. Prior to the crash, in spring 2007, GE was trading at $41/share, and now it is $29 – a decline of ~30%. Back then JPM was trading at $53, and now it is $93 – a gain of ~75%. There obviously was a strategy to adapt to market conditions and do well. Just not at GE.
Immelt reacted to market events, poorly, rather than having a prepared, proactive strategy
Let’s not rewrite history. Prior to the banking crash CEO Immelt was more than happy for GE to be in the “easy money” world of finance. Welch had created GE Capital, and Immelt had furthered its growth when lending was easy and profitable. And he supported the enormous growth in GE’s real estate division. When this industry faced the crash, GE faced a near-bankruptcy not because of Welch, but because of Immelt’s leadership during the over 6 years he had been CEO. If there were risks in the system CEO Immelt had ample time to re-arrange the portfolio, reduce lending, offload financial assets and reduce exposure to real estate and mortgages. But Immelt did not do those things. He did not prepare for a reversal in the markets, and he did not prepare the balance sheet for a significant change of events. It was his leadership that left GE exposed.
As GE shares fell to $7 Immelt made a famous deal with Berkshire Hathaway’s CEO Warren Buffet to increase GE’s capital base in order to stave off demise. And this deal saved GE. But this was an extremely sweet deal for Buffett, giving Berkshire very good interest (10%) on the preferred shares and warrants allowing Buffett to buy future shares of GE at a fixed price. Berkshire made a profit, over and above the interest, of $260M on the deal, and overall at least $1.2B. By being prepared Buffett saved GE and made a lot of money. GE’s investors paid the price for a CEO that was unprepared.
But the changes brought about by the crash, and Dodd-Frank, were more than CEO Immelt could manage. Thus GE exited the business selling many assets at fire sale prices. This “turn tale and run” strategy was sold to the public as a way for GE to “focus” on its “core manufacturing business.” Rather, it was a failure of leadership to understand how to manage this business to future success in changed markets. Where Welch’s GE had grasped for disruption as opportunity, Immelt’s GE gasped at disruption and fled, destroying billions in GE value.
Immelt could not grow GE’s businesses, so he divested GE of many.
GE was to be the “industrial internet giant.” GE was to be a leader in the internet-of-things (IoT) where sensors, the cloud and remote devices created greater productivity. And, to be sure, companies like Apple, Google and Samsung have made huge gains in this market. Even small companies, like Nest, were able to jump on this technology shift with new products for the residential market. But name one market where GE is the dominant IoT player. During 16 years the internet and remote services markets have exploded, yet GE is not the market leader. Rather it is barely recognized.
Rather than growing GE with disruptive innovations and visionary products in emerging technology markets, Immelt’s GE was primarily shrinking via divestitures. In dismantling GE Capital he eliminated the lending and real estate operations. After decades as a leader in appliances, that division was sold. Welch built the extremely successful entertainment division around NBC/Universal, which Immelt sold.
The water business that was to be a world leader under Immelt’s vision, likewise sold – and largely to make sure GE could close the deal on selling its oil & gas unit. Even the famed electrical distribution business, going back to the start of GE, is now close to being sold.
And what happened to all this money? Well, about $50B went into share buybacks – which ostensibly would help shareholders. Only it didn’t, because GE is still worth less than when buybacks started. So the money just disappeared. At least Immelt could have paid it to shareholders as a dividend – but then that would not have boosted his bonuses.
GE’s website says Mr. Immelt wanted to create a “simpler, more valuable industrial company.” Mr. Immelt is definitely leaving behind a simpler, much smaller and weaker company. The brand is gone from consumer products, and severely tarnished in commercial products. GE lacks a great product pipeline, and even a strong development pipeline due to the rampant divestitures. When Mr. Flannery takes over as CEO he will not inherit a powerhouse company. He will inherit a company that is shrinking and rudderless, and disconnected from most growth markets with almost no product, technology or brand advantages. And he will report to the Chairman that created this mess, Mr. Immelt.
The most likely outcome is that Mr. Peltz and his firm, Trian Partners, will buy more GE shares and seek directorships on the board. Then, in a move not unlike the deaths of DuPont and Dow, there will be a massive cost cutting effort to bring expenses in-line with the shrunken GE business. R&D will be discontinued, as will product development. Support groups will be shredded. Customer service will be downsized. Then the remaining pieces will be sold off to buyers, or taken public, leaving GE a dismantled piece of history.
While that may work for the capital markets, and some short-term investors will share in the higher valuation, what about the people? People who dedicated their careers to GE, and are pensioners or current employees? What about cities and counties where GE has been a major employer, and civic contributor? What about customers that bought GE industrial products, only to see those products dropped due to low profitability, or little growth opportunity? What about suppliers that invested in developing new technologies or products for GE to take to market? What will happen to the people who once relied on GE as America’s largest diversified industrial company?
These people all have an ax to grind with the very wealthy, and now departing, CEO Immelt. He inherited what may well have been the most successful company on earth. He leaves behind a far weaker company that may not survive.
by Adam Hartung | Mar 28, 2017 | In the Rapids, Innovation, Investing, Leadership
(Photo: General Electric CEO Jeffrey Immelt, ERIC PIERMONT/AFP/Getty Images)
General Electric stock had a small pop recently when investors thought CEO Jeffrey Immelt might be pushed out. Obviously more investors hope the CEO leaves than stays. And it appears clear that activist investor Nelson Peltz of Trian Partners thinks it is time for a change in CEO atop the longest running member of the Dow Jones Industrial Average (DJIA.)
You can’t blame investors, however. Since he took over the top job at General Electric in 2001 (16 years ago) GE’s stock value has dropped 38%. Meanwhile, the DJIA has almost doubled. Over that time, GE has been the greatest drag on the DJIA, otherwise the index would be valued even higher! That is terrible performance — especially as CEO of one of America’s largest companies.
But, after 16 years of Immelt’s leadership, there’s a lot more wrong than just the CEO at General Electric these days. As the JPMorgan Chase analyst Stephen Tusa revealed in his analysis, these days GE is actually overvalued, “cash is weak, margins/share of customer wallet are already at entitlement, the sum of the parts valuation points to a low 20s stock price.” He goes on to share his pessimism in GE’s ability to sell additional businesses, or create cost lowering synergies or tax strategies.
Former Chairman and CEO of General Electric Jack Welch. (AP Photo/Richard Drew)
What went so wrong under Immelt? Go back to 1981. GE installed Jack Welch as its new CEO. Over the next 20 years there wasn’t a business Neutron Jack wouldn’t buy, sell or trade. CEO Welch understood the importance of growth. He bought business after business, in markets far removed from traditional manufacturing, building large positions in media and financial services. He expanded globally, into all developing markets. After businesses were acquired the pressure was relentless to keep growing. All had to be no. 1 or no. 2 in their markets or risk being sold off. It was growth, growth and more growth.
Welch’s focus on growth led to a bigger, more successful GE. Adjusted for splits, GE stock rose from $1.30 per share to $46.75 per share during the 20 year Welch leadership. That is an improvement of 35 times – or 3,500%. And it wasn’t just due to a great overall stock market. Yes, the DJIA grew from 973 to 10,887 — or about 10.1 times. But GE outperformed the DJIA by 3.5 times (350%). Not everything went right in the Welch era, but growth hid all sins — and investors did very, very, very well.
Under Welch, GE was in the rapids of growth. Welch understood that good operating performance was not enough. GE had to grow. Investors needed to see a path to higher revenues in order to believe in long term value creation. Immediate profits were necessary but insufficient to create value, because they could be dissipated quickly by new competitors. So Welch kept the headquarters team busy evaluating opportunities, including making some 600 acquisitions. They invested in things that would grow, whether part of historical GE, or not.
Jeff Immelt as CEO took a decidedly different approach to leadership. During his 16 year leadership GE has become a significantly smaller company. He sold off the plastics, appliances and media businesses — once good growth providers — in the name of “refocusing the company.” Plans currently exist to sell off the electrical distribution/grid business (Industrial Solutions) and water businesses, eliminating another $5 billion in annual revenue. He has dismantled the entire financial services and real estate businesses that created tremendous GE value, because he could not figure out how to operate in a more regulated environment. And cost cutting continues. In the GE Transportation business, which is supposed to remain, plans have been announced to double down on cost cutting, eliminating another 2,900 jobs.
Under Immelt GE has focused on profits. Strategy turned from looking outside, for new growth markets and opportunities, to looking inside for ways to optimize the company via business sales, asset sales, layoffs and other cost cutting. Optimizing the business against some sense of an historical “core” caused nearsighted — and shortsighted — quarterly actions, financial gyrations and transactions rather than building a sustainable, growing revenue stream. Under Immelt sales did not just stagnate, sales actually declined while leadership pursued higher margins.
By focusing on the “core” GE business (as defined by Immelt) and pursuing short term profit maximization, leadership significantly damaged GE. Nobody would have ever imagined an activist investor taking a position in Welch’s GE in an effort to restructure the company. Its sales growth was so good, its prospects so bright, that its P/E (price to earnings) multiple kept it out of activist range.
But now the vultures see the opportunity to do an even bigger, better job of whacking up GE — of tearing it into small bits while killing off all R&D and innovation — like they did at DuPont. Over 16 years Immelt has weakened GE’s business — what was the most omnipresent industrial company in America, if not the world – to the point that it can be attacked by outsiders ready to chop it up and sell it off in pieces to make a quick buck.
Thomas Edison, one of the world’s great inventors, innovators and founder of GE, would be appalled. That GE needs now, more than ever, is a leader who understands you cannot save your way to prosperity, you have to invest in growth to create future value and increase your equity valuation.
In May, 2012 (five years ago) I warned investors that Immelt was the wrong CEO. I listed him as the fourth worst CEO of a publicly traded company in America. While he steered GE out of trouble during the financial crisis, he also simply steered the company in circles as it used up its resources. Then was the time to change CEOs, and put in place someone with the fortitude to develop a growth strategy that would leverage the resources, and brand, of GE. But, instead, Immelt remained in place, and GE became a lot smaller, and weaker.
At this point, it is probably too late to save GE. By losing sight of the need to grow, and instead focusing on optimizing the old business while selling assets to raise cash for reorganizations, Immelt has destroyed what was once a great innovation engine. Now that the activists have GE in their sites it is unlikely they will let it ever return to the company it once was – creating whole new markets by developing new technologies that people never before imagined. The future looks a lot more like figuring out how to maximize the value of each piece of meat as it’s carved off the GE carcass.
by Adam Hartung | Jul 15, 2016 | Defend & Extend, Entertainment, Games, Innovation, Lock-in, Mobile, Trends
Poke’Mon Go is a new sensation. Just launched on July 6, the app is already the #1 app in the world – and it isn’t even available in most countries. In less than 2 weeks, from a standing start, Nintendo’s new app is more popular than both Facebook and Snapchat. Based on this success, Nintendo’s equity valuation has jumped 90% in this same short time period.
Some think this is just a fad, after all it is just 2 weeks old. Candy Crush came along and it seemed really popular. But after initial growth its user base stalled and the valuation fell by about 50% as growth in users, time on app and income all fell short of expectations. And, isn’t the world of gaming dominated by the likes of Sony and Microsoft?
A bit of history
Nintendo launched the Wii in 2006 and it was a sensation. Gamers could do things not previously possible. Unit sales exceeded 20m units/year for 2006 through 2009. But Sony (PS4) and Microsoft (Xbox) both powered up their game consoles and started taking share from Nintendo. By 2011 Nintendo sale were down to 11.6m units, and in 2012 sales were off another 50%. The Wii console was losing relevance as competitors thrived.
Sony and Microsoft both invested heavily in their competition. Even though both were unprofitable at the business, neither was ready to concede the market. In fall, 2014 Microsoft raised the competitive ante, spending $2.5B to buy the maker of popular game Minecraft. Nintendo was becoming a market afterthought.
Meanwhile, back in 2009 Nintendo had 70% of the handheld gaming market with its 3DS product. But people started carrying the more versatile smartphones that could talk, text, email, execute endless apps and even had a lot of games – like Tetrus. The market for handheld games pretty much disappeared, dealing Nintendo another blow.
Competitor strategic errors
Fortunately, the bitter “fight to the death” war between Sony and Microsoft kept both focused on their historical game console business. Both kept investing in making the consoles more powerful, with more features, supporting more intense, lifelike games. Microsoft went so far as to implement in Windows 10 the capability for games to be played on Xbox and PCs, even though the PC gaming market had not grown in years. These massive investments were intended to defend their installed base of users, and extend the platform to attract new growth to the traditional, nearly 4 decade old market of game consoles that extends all the way back to Atari.
Both companies did little to address the growing market for mobile gaming. The limited power of mobile devices, and the small screens and poor sound systems made mobile seem like a poor platform for “serious gaming.” While game apps did come out, these were seen as extremely limited and poor quality, not at all competitive to the Sony or Microsoft products. Yes, theoretically Windows 10 would make gaming possible on a Microsoft phone. But the company was not putting investment there. Mobile gaming was simply not serious, and not of interest to the two Goliaths slugging it out for market share.
Building on trends makes all the difference
Back in 2014 I recognized that the console gladiator war was not good for either big company, and recommended Microsoft exit the market. Possibly seeing if Nintendo would take the business in order to remove the cash drain and distraction from Microsoft. Fortunately for Nintendo, that did not happen.
Nintendo observed the ongoing growth in mobile gaming. While Candy Crush may have been a game ignored by serious gamers, it nonetheless developed a big market of users who loved the product. Clearly this demonstrated there was an under-served market for mobile gaming. The mobile trend was real, and it’s gaming needs were unmet.
Simultaneously Nintendo recognized the trend to social. People wanted to play games with other people. And, if possible, the game could bring people together. Even people who don’t know each other. Rather than playing with unseen people located anywhere on the globe, in a pre-organized competition, as console games provided, why not combine the social media elements of connecting with those around you to play a game? Make it both mobile, and social. And the basics of Poke’Mon Go were born.
Then, build out the financial model. Don’t charge to play the game. But once people are in the game charge for in-game elements to help them be more successful. Just as Facebook did in its wildly successful social media game Farmville. The more people enjoyed meeting other people through the game, and the more they played, the more they would buy in-app, or in-game, elements. The social media aspect would keep them wanting to stay connected, and the game is the tool for remaining connected. So you use mobile to connect with vastly more people and draw them together, then social to keep them playing – and spending money.
The underserved market is vastly larger than the over-served market
Nintendo recognized that the under-served mobile gaming market is vastly larger than the overserved console market. Those console gamers have ever more powerful machines, but they are in some ways over-served by all that power. Games do so much that many people simply don’t want to take the time to learn the games, or invest in playing them sitting in a home or office. For many people who never became serious gaming hobbyists, the learning and intensity of serious gaming simply left them with little interest.
But almost everyone has a mobile phone. And almost everyone does some form of social media. And almost everyone enjoys a good game. Give them the right game, built on trends, to catch their attention and the number of potential customers is – literally – in the billions. And all they have to do is download the app. No expensive up-front cost, not much learning, and lots of fun. And thus in two weeks you have millions of new users. Some are traditional gamers. But many are people who would never be a serious gamer – they don’t want a new console or new complicated game. People of all ages and backgrounds could become immediate customers.
David can beat Goliath if you use trends
In the Biblical story, smallish David beat the giant Goliath by using a sling. His new technology allowed him to compete from far enough away that Goliath couldn’t reach David. And David’s tool allowed for delivering a fatal blow without ever touching the giant. The trend toward using tools for hunting and fighting allowed the younger, smaller competitor to beat the incumbent giant.
In business trends are just as important. Any competitor can study trends, see what people want, and then expand their thinking to discover a new way to compete. Nintendo lost the console war, and there was little value in spending vast sums to compete with Sony and Microsoft toe-to-toe. Nintendo saw the mobile game market disintegrate as smartphones emerged. It could have become a footnote in history.
But, instead Nintendo’s leaders built on trends to deliver a product that filled an unmet need – a game that was mobile and social. By meeting that need Nintendo has avoided direct competition, and found a way to dramatically grow its revenues. This is a story about how any competitor can succeed, if they learn how to leverage trends to bring out new products for under-served customers, and avoid costly gladiator competition trying to defend and extend past products.
by Adam Hartung | Jun 14, 2016 | Defend & Extend, Investing, Leadership, Web/Tech
Microsoft is buying Linked-In, and we should expect this to be a disaster.
It is clear why Linked-in agreed to be purchased. As revenues have grown, gross margins have dropped precipitously, and the company is losing money. And LInked-in still receives 2/3 of its revenue from recruiting ads (the balance is almost wholly subscription fees,) unable to find a wider advertiser base to support growth. Although membership is rising, monthly active users (MAUs, the most important gauge of social media growth) is only 9% – like Twitter, far below the 40% plus rate of Facebook and upcoming networks. With only 106M MAUs, Linked in is 1/3 the size of Twitter, and 1/15th the size of Facebook. And its $1.5B Lynda acquisition is far, far, far from recovering its investment – or even demonstrating viability as a business.
Even though the price is below the all-time highs for LNKD investors, Microsoft’s offer is far above recent trading prices and a big windfall for them.
But for Microsoft investors, this is a repeat of the pattern that continues to whittle away at their equity value.
Once upon a time, in a land far away, and barely remembered by young people, Microsoft OWNED the tech marketplace. Individuals and companies purchased PCs preloaded with Microsoft Windows 95, Microsoft Office, Microsoft Internet Explorer and a handful of other tools and trinkets. And as companies built networks they used PC servers loaded with Microsoft products. Computing was a Microsoft solution, beginning to end, for the vast majority of users.
But the world changed. Today PC sales continue their multi-year, accelerating decline, while some markets (such as education) are shifting to Chromebooks for low cost desktop/laptop computing, growing their sales and share. Meanwhile, mobile devices have been the growth market for years. Networks are largely public (rather than private) and storage is primarily in the cloud – and supplied by Amazon. Solutions are spread all around, from Google Drive to apps of every flavor and variety. People spend less computing cycles creating documents, spreadsheets and presentations, and a lot more cycles either searching the web or on Facebook, Instagram, WhatsApp, YouTube and Snapchat.
But Microsoft’s leadership still would like to capture that old world. They still hope to put the genie back in the bottle, and have everyone live and work entirely on Microsoft. And somehow they have deluded themselves into thinking that buying Linked-in will allow them to return to the “good old days.”
Microsoft has not done a good job of integrating its own solutions like Office 365, Skype, Sharepoint and Dynamics into a coherent, easy to use, and to some extent mobile, solution. Yet, somehow, investors are expected to believe that after buying Linked-in the two companies will integrate these solutions into the LInked-in social platform, enabling vastly greater adoption/use of Office 365 and Dynamics as they are tied to Linked-in Sales Navigator. Users will be thrilled to have their personal information analyzed by Microsoft big data tools, then sold to advertisers and recruiters. Meanwhile, corporations will come back to Microsoft in droves as they convert Linked-in into a comprehensive project management tool that uses Lynda to educate employees, and 365 to push materials to employees – and allow document collaboration – all across their mobile devices.
Do you really believe this? It might run on the Powerpoint operating system, but this vision will take an enormous amount of code integration. And with Linked-in operated as separate company within Microsoft, who is going to do this integration? This will involve a lot of technical capability, and based on previous performance it appears both companies lack the skills necessary to pull it off. How this mysterious, magical integration will happen is far, far from obvious, or explained in the announcement documents. Sounds a lot more like vaporware than a straightforward software project.
And who thinks that today’s users, from individuals to corporations, have a need for this vision? While it may sound good to Microsoft, have you heard Linked-in users saying they want to use 365 on Linked in? Or that they’ll continue to use Linked-in if forced to buy 365? Or that they want their personal information data mined for advertisers? Or that they desire integration with Dynamics to perform Linked-in based CRM? Or that they see a need for a social-network based project management tool that feeds up training documents or collaborative documents? Are people asking for an integrated, holistic solution from one vendor to replace their current mobile devices and mobile solutions that are upgraded by multiple vendors almost weekly?
And, who really thinks Microsoft is good at acquisition integration? Remember aQuantive? In 2007 Microsoft spent $6B (an 85% premium to market price) to purchase this digital ad agency in order to build its business in the fast growing digital ad space. Don’t feel bad if you don’t remember, because in 2012 Microsoft wrote it off. Of course, there was the buy-it-and-write-it-off pattern repeated with Nokia. Microsoft’s success at taking “bold moves” to expand beyond its core business has been nothing less than horrible. Even the $1.2B acquisition of Yammer in 2012 to make Sharepoint more collaborative and usable has been unsuccessful, even though rolled out for free to 365 users. Yammer is adding nothing to Microsoft’s sales or value as competitor Slack has reaped the growth in corporate messaging.
The only good news story about Microsoft acquisitions is that they missed spending $44B to buy Yahoo – which is now on the market for $5B. Whew, thank goodness that one got away!
Microsoft’s leadership primed the pump for this week’s announcement by having the Chairman talk about investing outside of the company’s core a couple of weeks ago. But the vast majority of analysts are now questioning this giant bet, at a price so high it will lower Microsoft’s earnings for 2 years. Analysts are projecting about a $2B revenue drop for $90B Microsoft next year, and this $26B acquisition will deliver only a $3B bump. Very, very expensive revenue replacement.
Despite all the lingo, Microsoft simply cannot seem to escape its past. Its acquisitions have all been designed to defend and extend its once great history – but now outdated. Customers don’t want the past, they are looking to the future. And no matter how hard they try, Microsoft’s leaders simply appear unable to define a future that is not tightly linked to the company’s past. So investors should expect Linked-In’s future to look a lot like aQuantive. Only this one is going to be the most painful yet in the long list of value transfer from Microsoft investors to the investors of acquired companies.
