Why EVERY Company Must Be a Tech Company – Apple, Amazon, Facebook, Instagram Lessons

Apple's amazing increase in value is more than just a "rah-rah" story for a turnaround.  Fundamentally, Apple is telling everyone – globally – that there has been a tectonic shift in markets.  And if leaders don't understand this shift, and incorporate it into their strategy and tactics, their organizations are going to have a very difficult future.

Recently Apple's value peaked at $600B.  Yes, that is an astounding number, for it reflects not only 50% greater value than the oil giant Exxon/Mobil (~$390B), but more than the entire value of the stock markets in Spain, Greece and Portugal combined!

Apple Mkt Cap v Spain-Portugal-Greece
Source: Business Insider.com

This astounding valuation causes many to be reticent about owning Apple shares, for it seems implausible that any one company – especially a tech company with so few employees – could be worth so much.

Unless we look at this information in the context of a major, global economic shift.  That what the world values has changed dramatically.  And that what investors are telling business (and government) leaders is that in a globalized, fast paced world value is based upon what you know, when you know it – in other words information.  Not land, buildings or the ability to make things.

Three hundred years ago the wealthiest people in the world owned land.  Wars were fought for centuries to control land.  Kings owned land, and controlled everything on the land while capturing the value of everything produced on that land.  As changes came along, reducing the role of kings, land barons became the wealthiest people in the world.  In an agrarian economy, where most human resources (and all others for that matter) were deployed in food production owning land was the most valuable thing on the planet.

But then some 120 years ago, along came the industrial reveolution.  Suddenly, productivity rose dramatically by applying new machines to jobs formerly performed by humans.  With this shift, value changed.  The great industrialists were able to capture the value of greater productivity – making people like Cyrus McCormick, Henry Ford and Andrew Carnegie the wealthiest of the wealthy.  Worth more than most states, and many foreign countries. 

The age of manufacturing was based upon the productivity of machines and the application of industrial processes to what formerly was hand labor.  Creating tools – from entignes to automobiles to airplanes – created great wealth.  Knowing how to make these machines, and making them, created enormous value.  And companies like General Motors, General Dynamics and General Electric were worth much more than the land upon which food was produced.  And the commodity suppliers, like Exxon/Mobil, feeding industrial companies captured huge value as well. 

By the middle 1900s America's farmers were forced to create ever larger farms to remain in business, and were constantly begging for government subsidies to stay alive via price controls (parity programs) and land "set-asides" run by the Agriculture Department.  By the 1980s family farms going broke by the thousands, agricultural land values plummeted and the ability to create value by growing or processing food was a struggle.  Across the developed world, wealth shifted into the hands of industrial companies from landowners.

Sometime in the 1990s the world shifted again, and that's what the chart above shows us.  Countries with little or no technology companies – no information economy – cannot create value.  On the other hand, companies that can drive new levels of productivity via the creation, management, use and sale of information can create enormous value. 

Think about the incredible shift that has happened in retail.  America's largest and most successful retailer from the 1900 turn of the century well into the 1960s was Sears.  In an industry that long equated success with "location, location, location" Sears has had, and continues to control, enormous amounts of land and buildings.  But the value of Sears has declined like a stone pitched off a bridge, now worth only $6B (1% the Apple value) despite all that real estate!

Simultaneously, America's largest retailer Wal-Mart has seen its value go nowhere for over a decade, despite its thousands of locations that span every state.  Even though Wal-Mart keeps adding stores, and enlarging stores, adding more and more land and buildings to its "asset" base the company's customer base, sales and value are mired, unable to rise.

Yet, Amazon – which has no land, and almost no buildings – has used the last 20 years to go from start up to an $86B valuation – doing much better for shareholders than its traditional, industrial thinking competitors.  In the last 5 years, Amazon's value has roughly quadrupled!

AMZN v WMT v SHLD chart 4.13.12
Source: Yahoo Finance

Yes, Amazon is a retailer.  But the company has learned that applying an industrial strategy is far less valuable than applying an information strategy.  As an internet leader, first with most browser formats on PCs and smartphones, Amazon has reached far more new customers than any traditional real-estate focused company.  By launching Kindle Amazon focused on the information in books, rather than the format (print) revolutionizing the market and capturing enormous value.

By launching Kindle Fire Amazon takes information one step further, making it possible for customers to access new products faster, order faster and build their own retail world without ever going to a building.  By becoming a tech company, Amazon is clearly well on the way to dominating retail, as Sears falls into irrelevancy and almost surely bankruptcy, and Wal-Mart stalls under the overhead of all that land, buildings and vast number of minimum-wage, uninsured employees.

We now must realize that value is not created by what accountants have long called "hard assets" – land, buildings and equipment.  In fact, the 2 great U.S. recessions since 2000 have demonstrated to everyone that there is no security in these – the value can decline, decline fast, and decline far.  Just because these things are easy to see and count does not insure value.  They can easily be worth less than they cost to make – or own.

Successful competition in 2012 (and going forward) requires businesses know about customers, products and have the ability to supply solutions fast with great reach.  Winning is about what you know, knowing it early, acting upon the information and then being able to disseminate that solution fast to those who have emerging needs. 

Which is why you have to be excited about the brilliant move Facebook made to acquire Instagram last week.  In one fast, quick step Facebook bought the ability to easily and effectively provide mobile image solutions – across any application – to millions of existing users. Something that every single person, and business, on the planet is either doing now, or will be doing very soon.

Instagram price per user from Wired
Source:  Wired

On a cost-per-existing-customer basis, Facebook stole Instagram.  And that's before Facebook spreads out the solution to the rest of its 780million users!  Forget about how many employees Instagram has, or its historical revenues or its assets.  In an innovation economy, if you have a product that 35million people hear about and start using in less than a year, you have something very valuable!

Kudos go to Mark Zuckerberg as CEO, and his team, for making this acquisition so quickly.  Before Instagram had a chance to hire bankers, market itself and probably raise its value 10x.  That's why Mr. Zuckerberg was Time Magazine's "Man of the Year" at the start of 2011 – and why he's been able to create so much more value for his shareholders than the CEOs of industrial companies – like say GE.

Going forward, no company can plan to survive with an industrial strategy.  That approach, and those rules, simply don't create high returns.  To be successful you MUST become a tech company.  And while this may not feel comfortable, it is reality.  Every business must shift, or die.

 

HBR -The Decade’s top Performing CEOs – Apple, Cisco, Amazon, eBay, Google


I was intrigued when I read on the Harvard Business Review web site “Do we celebrate the wrong CEOs?”  The article quickly pointed out that many of the best known CEOs – and often named as most respected – didn’t come close to making the list of the top 100 best performing CEOs.  Some of those on Barron’s list of top 30 most respected that did not make the cut as best performing include Immelt of GE, Dimon of JPMorganChase, Palmesano of IBM and Tillerson of ExxonMobil.  It did seem striking that often business people admire those who are at the top of organizations, regardless of their performance.

I was delighted when HBR put out the full article “The Best Performing CEOs in the World.”  And it is indeed an academic exercise of great value.  The authors looked at CEOs who came  into their jobs either just before 2000, or during the decade, and the results they obtained for shareholders.  There were 1,999 leaders who fit the timeframe.  As has held true for a long time in the marketplace, the top 100 accounted for the vast majority of wealth creation – meaning if you were invested with them you captured most of the decade’s return – while the bulk of CEOs added little value and a great chunk created negative returns.  (It does beg the question – why do Boards of Directors keep on CEOs who destroy shareholder value – like Barnes of Sara Lee, for example?  It would seem something is demonstrably wrong when CEOs remain in their jobs, usually with multi-million dollar compensation packages, when year after year performance is so bad.)

The list of “Top 50 CEOs” is available on the HBR website.  This group created 32% average gains every year!  They created over $48.2B of value for investors.  Comparatively, the bottom 50 had negative 20% annual returns, and lost over $18.3B.  As an investor, or employee, it is much, much better to be with the top 5% than to be anywhere else on the list.  However, only 5 of the top best performers were on the list of top 50 highest paid — demonstrating again that CEO pay is not really tied to performance (and perhaps at least part of the explanation for why business leaders are less admired now than the previous decade.)

Consistent among the top 50 was the ability to adapt.  Especially the top 10.  Steve Jobs of Apple was #1, a leader and company I’ve blogged about several times.  As readers know, Apple went from a niche producer of PCs to a leader in several markets completely unrelated to PCs under Mr. Jobs leadership.  His ability to keep moving his company back into the growth Rapids by rejecting “focus on the core” and instead using White Space to develop new products for growth markets has been a model well worth following.  And in which to be invested.

Similarly, the leaders of Cisco, Amazon, eBay and Google have been listed here largely due to their willingness to keep moving into new marketsCisco was profiled in my book Create Marketplace Disruption for its model of Disruption that keeps the company constantly opening White SpaceAmazon went from an obscure promoter of non-inventoried books to the leader in changing how books are sold, to the premier on-line retailer of all kinds of products, to the leader in digitizing books and periodicals with its Kindle launcheBay has to be given credit for doing much more than creating a garage sale – they are now the leader in independent retailing with eBay stores.  And their growth of PayPal is on the vanguard of changing how we spend money – eliminating checks and making digital transactions commonplace.  Of course Google has moved from a search engine to a leader in advertising (displacing Yahoo!) as well as offering enterprise software (such as Google Wave), cloud applications to displace the desktop applications, and emerging into the mobile data/telephony marketplace with Android.  All of these company leaders were willing to Disrupt their company’s “core” in order to use White Space that kept the company constantly moving into new markets and GROWTH.

We can see the same behavior among other leaders in the top 10 not previously profiled here.  Samsung has moved from a second rate radio/TV manufacturer to a leader in multiple electronics marketplaces and the premier company in rapid product development and innovation implementationGilead Sciences is a biopharmaceutical company that has returned almost 2,000% to investors – while the leaders of Merck and Pfizer have taken their companies the opposite direction.  By taking on market challenges with new approaches Gilead has used flexibility and adaptation to dramatically outperform companies with much greater resources — but an unwillingness to overcome their Lock-ins.

Three names not on the list are worth noting.  Jack Welch was a great Disruptor and advocate of White Space (again, profiled in my book).  But his work was in the 1990s.  His replacement (Mr. Immelt) has fared considerably more poorly – as have investors – as the rate of Disruption and White Space has fallen off a proverbial cliff.  Even though much of what made GE great is still in place, the willingness to Defend & Extend, as happened in financial services, has increased under Mr. Immelt to the detriment of investors.

Bill Gates and Warren Buffett are now good friends, and also not on the list.  Firstly, they created their investor fortunes in previous decades as well.  But in their cases, they remained as leaders who moved into the D&E worldMicrosoft has become totally Locked-in to its Gates-era Success Formula, and under Steve Ballmer the company has done nothing for investors, employees — or even customers.  And Berkshire Hathaway has spent the last decade providing very little return to shareholders, despite all the great press for Mr. Buffett and his success in previous eras.  Each year Mr. Buffett tells investors that what worked for him in previous years doesn’t work any more, and they should not expect previous high rates of return.  And he keeps proving himself right.  Until both Microsoft and Berkshire Hathaway undertake significant Disruptions and implement considerably more White Space we should not expect much for investors.

This has been a tough decade for far too many investors and employees.  As we end the year, the list of television programs bemoaning how badly the decade has gone is long.  Show after show laments the poor performance of the stock market, as well as employers.  We end the year with official unemployment north of 10%, and unofficial unemployment some say near 20%.  But what this HBR report  us is that it is possible to have a good decade.  We need leaders who are willing to look to the future for their planning (not the past), obsess about competitors to discover market shifts, be willing to Disrupt old Success Formulas by attacking Lock-in, and using White Space to keep the company in the growth Rapids.  When businesses overcome old notions of “best practice” that keeps them trying to Defend & Extend then business performs marvelously well.  It’s just too bad so few leaders and companies are willing to follow The Phoenix Principle.