Michael Dell has put together a hedge fund, one of his largest suppliers and some debt money to take his company, Dell, Inc. private. There are large investors threatening to sue, claiming the price isn't high enough. While they are wrangling, small investors should consider this privatization manna from heaven, take the new, higher price and run to invest elsewhere – thankful you're getting more than the company is worth.
In the 1990s everybody thought Dell was an incredible company. With literally no innovation a young fellow built an enormously large, profitable company using other people's money, and technology. Dell jumped into the PC business as it was born. Suppliers were making the important bits, and looking for "partners" to build boxes. Dell realized he could let other people invest in microprocessor, memory, disk drive, operating system and application software development. All he had to do was put the pieces together.
Dell was the rare example of a company that was built on nothing more than execution. By marketing hard, selling hard, buying smart and building cheap Dell could produce a product for which demand was skyrocketing. Every year brought out new advancements from suppliers Dell could package up and sell as the latest, greatest model. All Dell had to do was stay focused on its "core" PC market, avoid distractions, and win at execution. Heck, everyone was going to make money building and selling PCs. How much you made boiled down to how hard you worked. It wasn't about strategy or innovation – just execution.
Dell's business worked for one simple reason. Everybody wanted PCs. More than one. And everybody wanted bigger, more powerful PCs as they came available. Market demand exploded as the PC became part of everything companies, and people, do. As long as demand was growing, Dell was growing. And with clever execution – primarily focused on speed (sell, build, deliver, get the cash before the supplier has to be paid) – Dell became a multi-billion dollar company, and its founder a billionaire with no college degree, and no claim to being a technology genius.
But, the market shifted. As this column has pointed out many times, demand for PCs went flat – never to return to previous growth rates. Users have moved to mobile devices such as smartphones and tablets, while corporate IT is transitioning from PC servers to cloud services. iPad sales now nearly match all of Dell's sales. Dell might well be the world's best PC maker, but when people don't want PCs that doesn't matter any more.
Market watchers knew this. That's why Dell's stock took a long ride from its lofty value on the rapids of growth to the recent distinctly low value as it slipped into the whirlpool of failure.
If you think adding debt to Dell will save it from the market shift, just look at how well that strategy worked for fixing Tribune Corporation. A Sam Zell led LBO took over the company claiming he had plans for a new future, as advertisers shifted away from newspapers. Bankruptcy came soon enough, employee pensions were wiped out, massive layoffs undertaken and 4 years of legal fighting followed to see if there was any plan that would keep the company afloat. Debt never fixes a failing company, and Dell knows that. Dell has no answer to changing market demand away from PCs.
Now the buzzards are circling. HP has been caught in a rush to destruction ever since CEO Fiorina decided to buy Compaq and gut the HP R&D in an effort to follow Dell's wild revenue ride. Only massive cost cutting by the following CEO Hurd kept HP alive, wiping out any remnants of innovation. Now HP has a dismal future. But it hopes that as the PC market shrinks the elimination of one competitor, Dell, will give newest CEO Whitman more time to somehow find something HP can do besides follow Dell into bankruptcy court.
Watching as its execution-oriented ecosystem manufacturers are struggling, supplier Microsoft is pulling out its wallet to try and extend the timeline. Plundering its $85B war chest, Microsoft keeps adding features, with acquisitions such as Skype, that consume cash while offering no returns – or even strong reasons for people to stop the transition to tablets.
Additionally it keeps putting up money for companies that it hopes will build end-user products on its software, such as its $500M investment in Barnes & Noble's Nook and now putting $2B into Dell. $85B is a lot of money, but how much more will Microsoft have to spend to keep HP alive – or money losing Acer – or Lenovo? A billion here, a billion there and pretty soon it adds up to a lot of money! Not counting losses in its own entertainmnet and on-line divisions. The transition to mobile devices is permanent and Microsoft has arrived at the game incredibly late – and with products that simply cannot obtain better than mixed reviews.
The lesson to learn is that management, and investors, take a big risk when they focus on execution. Without innovation, organizations become reliant on vendors who may, or may not, stay ahead of market transitions. When an organization fails to be an innovator, someone who creates its own game changers, and instead tries to succeed by being the best at execution eventually market shifts will kill it. It is not a question of if, but when.
Being the world's best PC maker is no better than being the world's best maker of white bread (Hostess) or the world's best maker of photographic film (Kodak) or the world's best 5 and dime retailer (Woolworth's) or the world's best manufacturer of bicycles (Schwinn) or cold rolled steel (Bethlehem Steel.) Being able to execute – even execute really, really well – is not a long-term viable strategy. Eventually, innovation will create market shifts that will kill you.
Bernie Ebbers (of WorldCom) and Jeff Skilling (of Enron) went to prison. Less well known is Conrad Black – the CEO of Sun Times Group – who also went to the pokey. What do they have in common with Rupert Murdoch – besides CEO titles? The famous claim, “I am not responsible” closely allied with “I’ve done nothing wrong.” While Murdoch hasn’t been charged with crimes, or come close to jail (yet,) there is no doubt people at News Corp have been charged, and some will go to jail. And there is public outcry Murdoch be fired.
Investors should take note; three bankruptcies killed 2 of the organizations the ex-cons led and investors were wiped out at Sun Times which barely remains in business. What will happen at News Corp? Given the commonalities between the 4 leaders, I don’t think I’d want to be a News Corp. stockholder, employee or supplier right now.
How in the world could something like this happen?
Like the infamous trio, Rupert Murdoch was, and is, a leader who defined the success formula of his company. As time passed, the growing organization became adroit at implementing the success formula, operating better, faster and cheaper. Loyal managers, who identified with, and implemented intensely, the success formula were rewarded. Those who asked questions were let go. Acquisitions were forced to conform to the success formula (such as MySpace) even if such conformance created a gap between the business and market needs. Business failure was not nearly as bad as operating outside the success formula. Failure could be forgiven – but better yet was finding a creative way to make things look successful.
Supporting the company’s success formula – its identity, cultural norms and operating methods – using all forms of ingenuity became the definition of success in these companies. This ingenuity was unbridled, even rewarded! Even when it came to skirting the edge of – or even breaking – the law. Cleverly using outsiders to do “dirty work” was an ingenious way to create plausible deniability. Financial machinations were not considered a problem if there was any way to explain changes. Violating accounting conventions not really an issue if done in the pursuit of shoring up reported results. Moving money wherever necessary to avoid taxes, or fines, and pay off executives or their friends, not really a big deal if it helped the company implement its success formula. Any behavior that reinforced the success formula, as the leader expressed it, made employees and contractors successful.
Do the ends justify the means? Of course! As long as the results appear good, and the leader is taking home a whopping amount of cash, everything appears “A-OK.”
Is this because these are crooks? Far from it. Rather, they are dedicated, hard working, industrious, smart, inventive managers who have been given a clear mission. To make the success formula work. Each small step down the ethical gangplank was a very small increment – and everyone believed they operated far from the end. If they got away with something yesterday, then why not expect to get away with a little more today? What are ethics anyway? Relative, changeable, difficult to define. Whereas fulfilling the success formula creates clear, measurable outcomes!
What is the News Corp’s Board of Directors position? The New York Times headlined “Murdoch’s Board Stands By as Scandal Widens.” Mr. Murdoch, like any good leader implementing a success formula, made sure the Board, as well as the executives and managers, were as dedicated to the success formula as he. Through that lens there are no difficult questions facing the Board. Everything was done to defend and extend the success formula. Mr. Murdoch and his team have done nothing wrong – except perhaps a zealous pursuit of implementation. What’s wrong with that? Why should the Board object?
Could this happen to you, and your organization? It may already be happening.
Answer this option, what’s more important to you and your company:
Focusing on and identifying market trends, and adapting your strategy, tactics, products, services and processes to align with emerging future trends, or
Focusing on execution. Setting goals, holding people to metrics and making sure implementation remains true to the company’s history, strengths and core capabilities, customers and markets? Rewarding those who meet metrics, and firing those who don’t?
If it’s the latter, it’s an easy slide into Murdoch’s very uncomfortable public seat. Very few will end up with an Enron Sized Disaster, as BNET.com headlined. But failure is likely. Any time execution is more important than questioning, implementation is more important than listening and conforming to historical norms is more important than actual business results you are chasing the select group of leaders exemplified today by Mr. Murdoch.
Here are 10 questions to ask if you want to know how at risk you just might be. If even a couple of these ring “yes,” you could be confidently, but errantly, thinking everything is OK :
Is loyalty more important than business results? Do you have people working for you that don’t do that good a job, but do exactly what you want so you keep them?
Do you hold certain aspects of your business as being beyond challenge – such as technology base, meeting key metrics, supporting historical distributors (or customers) or operating according to specified “rules?”
Do you ask employees to operate according to norms before asking if they have a better idea?
Does HR tell employees how to do things rather than asking employees what they need to succeed?
Do employee and manager reviews have a section for asking how well they “fit” into the organization? Are people pushed out that don’t “fit?”
Before there was Facebook, the social media juggernaut which is changing how we communicate – and might change the face of media – there was MySpace. MySpace was targeted at the same audience, had robust capability, and was to market long before Facebook. It generated enormous interest, received a lot of early press, created huge valuation when investors jumped in, and was undoubtedly not only an early internet success – but a seminal web site for the movement we now call social media. On top of that, MySpace was purchased by News Corporation, a powerhouse media company, and was given professional managers to help guide its future as well as all the resources it ever wanted to support its growth. By almost all ways we look at modern start-ups, MySpace was the early winner and should have gone on to great glory.
But things didn’t turn out that way. Facebook was hatched by some college undergrads, and started to grow. Meanwhile MySpace stagnated as Facebook exploded to 600 million active users. During early 2010, according to The Telegraph in “Facebook Dominance Forces Rival Networks to Go Niche,” MySpace gave up on its social media leadership dreams and narrowed its focus to the niche of being a “social entertainment destination.” As the number of users fell, MySpace was forced to cut costs, laying off half its staff this week according to MediaPost.com “MySpace Confirms Massive Layoffs.” After losing a reported $350million last year, it appears that MySpace may disappear – “MySpace Versus Facebook – There Can Be Only One” reported at Gigaom.com. The early winner now appears a loser, most likely to be unplugged, and a very expensive investment with no payoff for NewsCorp investors.
What went wrong? A lot of foks will be relaying the tactics of things done and not done at MySpace. As well as tactics done and not done at Facebook. But underlying all those tactics was a very simple management mistake News Corp. made. News Corp tried to guide MySpace, to add planning, and to use “professional management” to determine the business’s future. That was fatally flawed when competing with Facebook which was managed in White Space, lettting the marketplace decide where the business should go.
If the movie about Facebook’s founding has any veracity, we can accept that none of the founders ever imagined the number of people and applications that Facebook would quickly attract. From parties to social games to product reviews and user networks – the uses that have brought 600 million users onto Facebook are far, far beyond anything the founders envisioned. According to the movie, the first effort to sell ads to anyone were completely unsuccessful, as uses behond college kids sharing items on each other were not on the table. It appeared like a business bust at the beginning.
But, the brilliance of Mark Zuckerberg was his willingness to allow Facebook to go wherever the market wanted it. Farmville and other social games – why not? Different ways to find potential friends – go for it. The founders kept pushing the technology to do anything users wanted. If you have an idea for networking on something, Facebook pushed its tech folks to make it happen. And they kept listening. And looking within the comments for what would be the next application – the next promotion – the next revision that would lead to more uses, more users and more growth.
And that’s the nature of White Space management. No rules. Not really any plans. No forecasting markets. Or foretelling uses. No trying to be smarter than the users to determine what they shouldn’t do. Not prejudging ideas so as to limit capability and focus the business toward a projected conclusion. To the contrary, it was about adding, adding, adding and doing whatever would allow the marketplace to flourish. Permission to do whatever it takes to keep growing. And resource it as best you can – without prejudice as to what might work well, or even best. Keep after all of it. What doesn’t work stop resourcing, what does work do more.
Contrarily, at NewsCorp the leaders of MySpace had a plan. NewsCorp isn’t run by college kids lacking business sense. Leaders create Powerpoint decks describing where the business will head, where they will invest, how they will earn a positive ROI, projections of what will work – and why – and then plans to make it happen. They developed the plan, and then worked the plan. Plan and execute. The professional managers at News Corp looked into the future, decided what to do, and did it. They didn’t leave direction up to market feedback and crafty techies – they ran MySpace like a professional business.
And how’d that work out for them?
Unfortunately, MySpace demonstrates a big fallacy of modern management. The belief that smart MBAs, with industry knowledge, will perform better. That “good management” means you predict, you forecast, you plan, and then you go execute the plan. Instead of reacting to market shifts, fast, allowing mistakes to happen while learning what works, professional managers should be able to predict and perform without making mistakes. That once the bright folks who create the strategy set a direction, its all about executing the plan. That execution will lead to success. If you stumble, you need to focus harder on execution.
When managing innovation, including operating in high growth markets, nothing works better than White Space. Giving dedicated people permission to do whatever it takes, and resources, then holding their feet to the fire to demonstrate performance. Letting dedicated people learn from their successes, and failures, and move fast to keep the business in the fast moving water. There is no manager, leader or management team that can predict, plan and execute as well as a team that has its ears close to the market, and the flexibility to react quickly, willing to make mistakes (and learn from them even faster) without bias for a predetermined plan.
The penchant for planning has hurt a lot of businesses. Rarely does a failed business lack a plan. Big failures – like Circuit City, AIG, Lehman Brothers, GM – are full of extremely bright, well educated (Harvard, Stanford, University of Chicago, Wharton) MBAs who are prepared to study, analyze, predict, plan and execute. But it turns out their crystal ball is no better than – well – college undergraduates.
When it comes to applying innovation, use White Space teams. Drop all the business plan preparation, endless crunching of historical numbers, multi-tabbed Excel spreadsheets and powerpoint matrices. Instead, dedicate some people to the project, push them into the market, make them beg for resources because they are sure they know where to put them (without ROI calculations) and tell them to get it done – or you’ll fire them. You’ll be amazed how fast they (and your company) will learn – and grow.
But markets shift, and what we did loses its ability to create growth
Out of high growth comes Lock-in to old practices that blind us to potential market changes which could create price wars or obsolescence
Lock-in gets in the way of seeing emerging market shifts
Ikea is doing well now, but it is already seriously locked-in on an aging strategy
Will Ikea continue succeeding as it runs into Wal-mart and other price-focused competitors?
Will Ikea be able to adapt to changing markets as developed economies improve?
“If it works, do more of it” is a famous coaching recommendation. “Nothing succeeds like success” is another. Both are age old comments with simple meanings. Don’t overthink a situation. If something works, keep on doing it. And the more it works, the more you should “keep on keepin’ on” as once famous pop song lyrics recommended. One could ask, why should you try doing anything else, if what you’re doing is working? Many people would sagelyl recommend another common comment, “if it ain’t broke, don’t fix it!”
And this seems to be the philosophy of the new CEO at Ikea, Mikael Ohlsson as descibed in an Associated Press article on Chron.com, the web site for the Houston Chronicle, “New Ikea CEO Cuts Prices, Targets Frugal U.S. Families.”
A lifelong Ikea employee, Mr. Ohlsson joined Ikea right out of college in 1979 as a rug salesperson. He’s watched the company grow dramatically across his career. And he’s watched the company essentially grow by doing one thing – make home goods people need cheaply, figure out how to keep shipping and distribution costs to a minimum, and offer them directly to customers through your own stores. All designed to keep prices at a minimum. Most people would applaud him for focusing on doing more of the same.
And certainly today Ikea’s strategy is benefitting from the “Great Recession,” as we’ve come to call it. A flat economy, no job growth, little income growth, rampant unemployment, declining home values and limited credit access has helped Americans move along the road of penny-pinching.
Somewhat stylish, but primarily low-priced, furniture and other goods long appealed to college students. The fact that most of the furniture was designed for very economical shipping was a big plus with students that changed dorms and apartments frequently. Low price, in addition to the fact that most students are poor, was a benefit in case someone had to leave the stuff behind due to a longer move, downsizing, or simply lost their abode for a while. That the furniture and some of the other items didn’t hold up all that well wasn’t such a big deal, because nobody intended to keep it once school ended and they could afford something better.
But recent cheapness has caused a lot more people to start buying Ikea. That has contributed to a lot more growth than the company originally expected in developed countries like the USA. As sales grew, the company has been pushing year after year to keep lowering costs – and prices. The CEO proudly touted his ability to relocate manufacturing and distribution in order to drive down U.S. prices on several items. In language that sounds almost like Wal-Mart, he talks about constantly driving down cost, and price, in order to appeal to Americans – and even continental Europeans – in the throes of being cheap. Cost, cost, cost in order to sell cheap, cheap, cheap seems to have worked well for Ikea.
And that’s the worry foundation owners should have (Ikea is not publicly traded, it is owned by a foundation.) Ikea is rapidly catching the Wal-Mart Disease (see this blog 13 October). Focusing on execution, in order to lower cost, keep lowering price and expecting the market to expand. This will eventually lead to two very unpleasant side effects:
Eventually Ikea will run headlong into Wal-Mart. And other price-focused competitors in the USA and other countries. In doing so, margins will be crimped, as will growth. When 2 (or more) companies compete on cost/price it creates a price war, and if it’s between Ikea and Wal-Mart expect the war to be incredibly bloody (this is also bad news for Microsoft shareholders, who are going to increasingly see Ikea join other competitors in pressuring Wal-Mart’s strategy.)
What will happen to Ikea’s growth if the market shifts? What will happen if customers quit focusing on price, and start looking for better products (longer lasting, higher quality materials, increased sturdiness – for examples)? Or if they want different designs? Or they get tired of the long drives to those huge Ikea stores, and prefer shopping closer to home? Quite simply, what will happen to Ikea’s growth if something besides price retakes importance for customers in developed countries?
There is no doubt Ikea has had a great run. But in large part, fortuitous economic events played a big role. The rising percentage of youth going to colleges, as well as the large migration of developing country students to developed country universities, helped propel the need for affordable items appealing to students. Then the economic faltering post-2000, combined with the banking crisis, created a very slow economy in developed countries. Suburbanization gave Ikea the opportunity to build massive stores at affordable cost to which customers could flock. For 30 years these trends benefitted companies with a price focus – such as Ikea (and Wal-Mart). And all the company had to do was “more of the same.”
But will that remain the long-term trend? As households downsize, home prices stabilize then recover, developed economies improve, jobs grow again and incomes start rising is it possilble that customers will want something beyond low price?
And when that happens, will Ikea find itself so locked-in to its strategy that it cannot adjust to market shifts? What will it do with those manufacturing centers, distribution hubs and huge stores then? How will it be able to recognize the change in customer needs, and alter its merchandise – and stores – to meet changing needs? Or will Ikea rely far too long on improving execution of the strategy that got it where the company is today? Will its decision-making processes, designed to improve execution, keep Ikea making cheap furniture and other goods long after competing on price is sufficient?
Ikea is likely to do well for at least a couple more years. But one can already see how the company, and its CEO, have locked-in on what worked early in the company lifecycle. And now the focus is on executing the old strategy – reinforcing what the company locked-in upon. And there doesn’t seem to be a lot of concern about dealing with potential market shifts.
Most worrisome of all was the CEO’s comment, “I tend not to look so much at competition.” In a very real way, this shows a blindness towoard looking for price wars and market shifts. A blindness toward identifying emerging trends. A blindness toward identifying there may be groth opportunities in a year or two that are better than simply continuing to do what Ikea has always done. And even for a fast growing company, luckily positioned in the right place at the right time, this is something to be worried about.
$150billion. That's a lot of money. And that's how much shareholder value has increased at Apple since Steve Jobs returned as CEO. Can you think of any other CEO that has aided shareholder wealth so much? Do any of the cost cutting CEOs in manufacturing companies, financial services firms, or media companies see their share prices rising like Apple's?
Fortune has declared this "The Decade of Steve" in its latest publication at Money.CNN.com. Such over-the-top statements are by nature intended to sell magazines (or draw page hits). But the writer makes the valid point that very few leaders impact their industry like Apple has the computer industry, under Jobs leadership (but not under other leaders.) Yet, under his leadership Apple has also had a dramatic impact on the restructuring of two other industries – music and mobile phones/computing. And a company Mr. Jobs founded, Pixar, had a major impact on restructuring the movie business (Pixar was sold to Disney, and has played a significant role in the value increase of that company.) So with Mr. Jobs as leader, no less than 4 industries have been dramatically changed – and huge value created for shareholders.
No cost-cutting CEO, no "focus on the core" CEO, no "execution" CEO can claim to have made the kind of industry changes that have occurred through businesses led by Steve Jobs. And none of those CEO profiles can say they have created the shareholder value Mr. Jobs has created. Not even Bill Gates or Steve Ballmer can claim to have added any value this decade – as Microsoft's value is now less than it was when the millenia turned. Despite the relative size difference between the market for PCs and Macs (about 10 to 1) today Apple has more cash and marketable securities than the entire value of the historically supply-chain driven Dell Corporation.
Mr. Jobs is constantly pushing his organization to focus on the future, about what the markets will want, rather than the past and what the company has made. It was a decade ago that Apple created its "digital lifestyle" scenario of the future, which opened Apple's organization to being much more than Macs. Jobs obsesses about competitors and forces his employees to do the same, to make sure Apple doesn't grow complacent he pushes all products to have leading edge components. Mr. Jobs embraces Disruption, doesn't fear seeing it in his company, doesn't mind it amongst his people, and works to create it in his markets. And he makes sure Apple constantly keeps White Space projects open and working to see what works with customers – testing and trying new things all the time in the marketplace.
Following these practices, Apple pulled itself away from the Whirlpool and returned to the Rapids of Growth. Almost bankrupt, it wasn't financial re-engineering that saved Apple it was launching new products that met emerging needs. Apple showed any company can turn itself around if it follows the right steps.
As companies are struggling with value, people should look to Apple (and Google). Value is not created by cost cutting and waiting for the recession to end. Value is created by seeking innovations and creating an organization that can implement them. Especially Disruptive ones. Whether he's the CEO of the decade or not I can't answer. But saying he's one heck of a good role model for what leaders should be doing to create value in their companies is undoubtfully true.
