Microsoft recently announced it was offering Windows 10 on xBox, thus unifying all its hardware products on a single operating system – PCs, mobile devices, gaming devices and 3D devices. This means that application developers can create solutions that can run on all devices, with extensions that can take advantage of inherent special capabilities of each device. Given the enormous base of PCs and xBox machines, plus sales of mobile devices, this is a great move that expands the Windows 10 platform.
The big market shift to mobile devices started back in 2007 when the iPhone began challenging Blackberry. By 2010 when the iPad launched, the shift was in full swing. And that’s when Microsoft’s current problems really began. Previous CEO Steve Ballmer went “all-in” on trying to defend and extend the PC platform with Windows 8 which began development in 2010. But by October, 2012 it was clear the design had so many trade-offs that it was destined to be an Edsel-like flop – a compromised product unable to please anyone.
And that demise is clear in the ecosystem. Microsoft has long depended on OEM manufacturers selling PCs as the driver of most sales. But now Lenovo, formerly the #1 PC manufacturer, is losing money – lots of money – putting its future in jeopardy. And Dell, one of the other top 3 manufacturers, recently pivoted from being a PC manufacturer into becoming a supplier of cloud storage by spending $67B to buy EMC. The other big PC manufacturer, HP, spun off its PC business so it could focus on non-PC growth markets.
And, worse, the entire OEM market is collapsing. For the largest 4 PC manufacturers sales last quarter were down 4.5%, while sales for the remaining smaller manufacturers dropped over 20%! With fewer and fewer sales, consolidation is wiping out many companies, and leaving those remaining in margin killing to-the-death competition.
Which means for Microsoft to grow it desperately needs Windows 10 to succeed on devices other than PCs. But here Microsoft struggles, because it long eschewed its “channel suppliers,” who create vertical market applications, as it relied on OEM box sales for revenue growth. Microsoft did little to spur app development, and rather wanted its developers to focus on installing standard PC units with minor tweaks to fit vertical needs.
Today Apple and Google have both built very large, profitable developer networks. Thus iOS offers 1.5M apps, and Google offers 1.6M. But Microsoft only has 500K apps largely because it entered the world of mobile too late, and without a commitment to success as it tried to defend and extend the PC. Worse, Microsoft has quietly delayed Project Astoria which was to offer tools for easily porting Android apps into the Windows 10 market.
Microsoft realized it needed more developers all the way back in 2013 when it began offering bonuses of $100,000 and more to developers who would write for Windows. But that had little success as developers were more keen to achieve long-term sales by building apps for all those iOS and Android devices now outselling PCs. Today the situation is only exacerbated.
By summer of 2014 it was clear that leadership in the developer world was clearly not Microsoft. Apple and IBM joined forces to build mobile enterprise apps on iOS, and eventually IBM shifted all its internal PCs from Windows to Macintosh. Lacking a strong installed base of Windows mobile devices, Microsoft was without the cavalry to mount a strong fight for building a developer community.
In January, 2015 Microsoft started its release of Windows 10 – the product to unify all devices in one O/S. But, largely, nobody cared. Windows 10 is lots better than Win8, it has a great virtual assistant called Cortana, and it now links all those Microsoft devices. But it is so incredibly late to market that there is little interest.
Although people keep talking about the huge installed base of PCs as some sort of valuable asset for Microsoft, it is clear that those are unlikely to be replaced by more PCs. And in other devices, Microsoft’s decisions made years ago to put all its investment into Windows 8 are now showing up in complete apathy for Windows 10 – and the new hybrid devices being launched.
AM Multigraphics and ABDick once had printing presses in every company in America, and much of the world. But when Xerox taught people how to “one click” print on a copier, the market for presses began to die. Many people thought the installed base would keep these press companies profitable forever. And it took 30 years for those machines to eventually disappear. But by 2000 both companies went bankrupt and the market disappeared.
Those who focus on Windows 10 and “universal windows apps” are correct in their assessment of product features, functions and benefits. But, it probably doesn’t matter. When Microsoft’s leadership missed the mobile market a decade ago it set the stage for a long-term demise. Now that Apple dominates the platform space with its phones and tablets, followed by a group of manufacturers selling Android devices, developers see that future sales rely on having apps for those products. And Windows 10 is not much more relevant than Blackberry.
Just over a week after Microsoft announces plans to replace CEO Steve Ballmer the company announced it will spend $7.2B to buy the Nokia phone/tablet business. For those looking forward to big changes at Microsoft this was like sticking a pin in the big party balloon!
Everyone knows that Microsoft's future is at risk now that PC sales are declining globally at nearly 10% – with developing markets shifting even faster to mobile devices than the USA. And Microsoft has been the perpetual loser in mobile devices; late to market and with a product that is not a game changer and has only 3% share in the USA.
But, despite this grim reality, Microsoft has doubled-down (that's doubled its bet for non-gamblers) on its Windows 8 OS strategy, and continues to play "bet the company". Nokia's global market share has shriveled to 15% (from 40%) since former Microsoft exec-turned-Nokia-CEO Stephen Elop committed the company to Windows 8. Because other Microsoft ecosystem companies like HP, Acer and HP have been slow to bring out Win 8 devices, Nokia has 90% of the miniscule market that is Win 8 phones. So this acquisition brings in-house a much deeper commitment to spending on an effort to defend & extend Microsoft's declining O/S products.
As I predicted in January, the #1 action we could expect from a Ballmer-led Microsoft is pouring more resources into fighting market leaders iOS and Android – an unwinnable war. Previously there was the $8.5B Skype and the $400M Nook, and now a $7.2B Nokia. And as 32,000 Nokia employees join Microsoft losses will surely continue to rise. While Microsoft has a lot of cash – spending it at this rate, it won't last long!
Some folks think this acquisition will make Microsoft more like Apple, because it now will have both hardware and software which in some ways is like Apple'siPhone. The hope is for Apple-like sales and margins soon. But, unfortunately, Google bought Motorola months ago and we've seen that such revenue and profit growth are much harder to achieve than simply making an acquisition. And Android products are much more popular than Win8. Simply combining Microsoft and Nokia does not change the fact that Win8 products are very late to market, and not very desirable.
Some have postulated that buying Nokia was a way to solve the Microsoft CEO succession question, positioning Mr. Elop for Mr. Ballmer's job. While that outcome does seem likely, it would be one of the most expensive recruiting efforts of all time. The only reason for Mr. Elop to be made Microsoft CEO is his historical company relationship, not performance. And that makes Mr. Elop is exactly the wrong person for the Microsoft CEO job!
In October, 2010 when Mr. Elop took over Nokia I pointed out that he was the wrong person for that job – and he would destroy Nokia by making it a "Microsoft shop" with a Microsoft strategy. Since then sales are down, profits have evaporated, shareholders are in revolt and the only good news has been selling the dying company to Microsoft! That's not exactly the best CEO legacy.
Mr. Elop's job today is to sell more Win8 mobile devices. Were he to be made Microsoft CEO it is likely he would continue to think that is his primary job – just as Mr. Ballmer has believed. Neither CEO has shown any ability to realize that the market has already shifted, that there are two leaders far, far in front with brand image, products, apps, developers, partners, distribution, market share, sales and profits. And it is impossible for Microsoft to now catch up.
It is for good reason that short-term traders pushed down Microsoft's share value after the acquisition was announced. It is clear that current CEO Ballmer and Microsoft's Board are still stuck fighting the last war. Still trying to resurrect the Windows and Office businesses to previous glory. Many market anallysts see this as the last great effort to make Ballmer's bet-the-company on Windows 8 pay off. But that's a bet which every month is showing longer and longer odds.
Microsoft is not dead. And Microsoft is not without the ability to turn around. But it won't happen unless the Board recognizes it needs to steer Microsoft in a vastly different direction, reduce (rather than increase) investments in Win8 (and its devices,) and create a vision for 2020 where Microsoft is highly relevant to customers. So far, we're seeing all the wrong moves.
Sears has performed horribly since acquired by Fast Eddie Lampert's KMart in 2005. Revenues are down 25%, same store sales have declined persistently, store margins have eroded and the company has recently taken to reporting losses. There really hasn't been any good news for Sears since the acquisition.
Bloomberg Businessweek made a frontal assault on CEO Edward Lampert's leadership at Sears this week. Over several pages the article details how a "free market" organization installed by Mr. Lampert led to rampant internal warfare and an inability for the company to move forward effectively with programs to improve sales or profits. Meanwhile customer satisfaction has declined, and formerly valuable brands such as Kenmore and Craftsman have become industry also-rans.
Because the Lampert controlled hedge fund ESL Investments is the largest investor in Sears, Mr. Lampert has no risk of being fired. Even if Nobel winner Paul Krugman blasts away at him. But, if performance has been so bad – for so long – why does the embattled Mr. Lampert continue to lead in the same way? Why doesn't he "fire" himself?
By all accounts Mr. Lampert is a very smart man. Yale summa cum laude and Phi Beta Kappa, he was a protege of former Treasury Secretay Robert Rubin at Goldman Sach before convincing billionaire Richard Rainwater to fund his start-up hedge fund – and quickly make himself the wealthiest citizen in Connecticut.
If the problems at Sears are so obvious to investors, industry analysts, economics professors, management gurus and journalists why doesn't he simply change?
Mr. Lampert, largely because of his success, is a victim of BIAS. Deep within his decision making are his closely held Beliefs, Interpretations, Assumptions and Strategies. These were created during his formative years in college and business. This BIAS was part of what drove his early success in Goldman, and ESL. This BIAS is now part of his success formula – an entire set of deeply held convictions about what works, and what doesn't, that are not addressed, discussed or even considered when Mr. Lampert and his team grind away daily trying to "fix" declining Sears Holdings.
This BIAS is so strong that not even failure challenges them. Mr. Lampert believes there is deep value in conventional retail, and real estate. He believes strongly in using "free market competition" to allocate resources. He believes in himself, and he believes he is adding value, even if nobody else can see it.
Mr. Lampert assumes that if he allows his managers to fight for resources, the best programs will reach the top (him) for resourcing. He assumes that the historical value in Sears and its house brands will remain, and he merely needs to unleash that value to a free market system for it to be captured. He assumes that because revenues remain around $35B Sears is not irrelevant to the retail landscape, and the company will be revitalized if just the right ideas bubble up from management.
Mr. Lampert inteprets the results very different from analysts. Where outsiders complain about revenue reductions overall and same store, he interprets this as an acceptable part of streamlining. When outsiders say that store closings and reduced labor hurt the brand, he interprets this as value-added cost savings. When losses appear as a result of downsizing he interprets this as short-term accounting that will not matter long-term. While most investors and analysts fret about the overall decline in sales and brands Mr. Lampert interprets growing sales of a small integrated retail program as a success that can turn around the sinking behemoth.
Mr. Lampert's strategy is to identify "deep value" and then tenaciously cut costs, including micro-managing senior staff with daily calls. He believes this worked for Warren Buffett, so he believes it will continue to be a successful strategy. Whether such deep value continues to exist – especially in conventional retail – can be challenged by outsiders (don't forget Buffett lost money on Pier 1,) but it is part of his core strategy and will not be challenged. Whether cost cutting does more harm than good is an unchallenged strategy. Whether micro-managing staff eats up precious resources and leads to unproductive behavior is a leadership strategy that will not change. Hiring younger employees, who resemble Mr. Lampert in quick thinking and intellect (if not industry knowledge or proven leadership skills) is a strategy that will be applied even as the revolving door at headquarters spins.
The retail market has changed dramatically, and incredibly quickly. Advances in internet shopping, technology for on-line shopping (from mobile devices to mobile payments) and rapid delivery have forever altered the economics of retailing. Customer ease of showrooming, and desire to shop remotely means conventional retail has shrunk, and will continue to shrink for several years. This means the real challenge for Sears is not to be a better Sears as it was in 2000 — but to become something very different that can compete with both WalMart and Amazon – and consumer goods manufacturers like GE (appliances) and Exide (car batteries.)
There is no doubt Mr. Lampert is a very smart person. He has made a fortune. But, he and Sears are a victim of his BIAS. Poor results, bad magazine articles and even customer complaints are no match for the BIAS so firmly underlying early success. Even though the market has changed, Mr. Lampert's BIAS has him (and his company) in internal turmoil, year after year, even though long ago outsiders gave up on expecting a better result.
Even if Sears Holdings someday finds itself in bankruptcy court, expect Mr. Lampert to interpret this as something other than a failure – as he defends his BIAS better than he defends its shareholders, employees, suppliers and customers.
What is your BIAS? Are you managing for the needs of changing markets, or working hard to defend doing more of what worked in a bygone era? As a leader, are you targeting the future, or trying to recapture the past? Have market shifts made your beliefs outdated, your interpretations of what happens around you faulty, your assumptions inaccurate and your strategies hurting results? If any of this is true, it may be time you address (and change) your BIAS, rather than continuing to invest in more of the same. Or you may well end up like Sears.
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.
For the last decade, Wal-Mart has been "dead money" in investor parlance. After a big jump between 1995 and 2000, the stock today is still worth less than it was in 2000. There has been volatility, which might have benefited some traders. But for most of the decade Wal-Mart's price has been lower. There has been excitement because recently the price has been catching up with where it was in 2002, even though there have been no real gains for long term investors.
What happened to Wal-Mart was the market shifted. For many years being the market leader with every day low pricing was a winning strategy. Wal-Mart was able to expand from town to town opening new stores, all pretty much alike, doing the same thing and making really good money.
Then competitors took aim at Wal-Mart, and found out they could beat the giant.
Eventually the number of towns that both needed, and justified, a new Wal-Mart (or Sam's Club) dried up. Wal-Mart reacted by expanding many stores, making them "bigger and better," even adding groceries to some. But that added only marginally to revenue, and even less marginally to profits.
And Wal-Mart tried exporting its stores internationally, but that flopped as local market competitors found ways to better attract local customers than Wal-Mart's success formula offered.
Other U.S. discounters, like Target and Kohl's, offered nicer stores with more varieties or classier merchandise – and often their pricing was not much higher, or even the same. And a new category of retailer, called "dollar stores" emerged that beat Wal-Mart's price on almost everything for the true price shopper. These 99 cent stores became really popular, and the fastest growing traditional retail concept in America. Simultaneously, big box retailers like Best Buy expanded their merchandise and footprint into more locations, dramatically increasing the competition against local Wal-Mart's stores.
But, even more dramatically, the whole retail market began shifting on-line.
Amazon, and its brethren, kept selling more and more products. And at prices even lower than Wal-Mart. And again, for price shoppers, the growth of eBay, Craigslist and vertical market sites made it possible for shoppers to find slightly used, or even new, products at prices lower than Wal-Mart, and shipped right into the customer's home. With each year, people found less need to buy at Wal-Mart as the on-line options exploded.
More recently, traditional price-focused retailers have been attacked by mobile devices. Firstly, there's the new Kindle Fire. In just one quarter it has gone from nowhere to tied as the #1 Android tablet
The Kindle Fire is squarely targeted at growing retail sales for Amazon, making it easier than ever for customers to ignore the brick-and-mortar store in favor of on-line retailers.
On top of this, according to Pew Research 52% of in-store shoppers now use a mobile device to check price and availability on-line of products as they look in the store. Thus a customer can look at products in Wal-Mart, and while standing in the aisle look for that same product, or comparable, in another store on-line. They can decide they like the work boots at Wal-Mart, and even try them on for size. Then they can order from Zappos or another on-line retailer to have those boots shipped to their home at an even lower price, or better warranty, even before leaving the Wal-Mart store.
It's no wonder then that Wal-Mart has struggled to grow its revenues. Wal-Mart has been a victim of intense competition that found ways to attack its success formula effectively.
Then Wal-Mart implemented its "Shoot Yourself in the Head" strategy
What did Wal-Mart recently do? According to Reuters Wal-Mart decided to transfer its entire marketing department to work for merchandising. Marketing was moved from reporting to the CEO, to reporting into Sales. The objective was to put all the energy of marketing into trying to further defend the Wal-Mart business, and drive up same-store sales. In other words, to make sure marketing was fully focused on better executing the old, struggling success formula.
The marketing department at Wal-Mart does all the market research on customers, trends and advertising – traditional and on-line. Marketing is the organization charged with looking outside, learning and adapting the organization to any market shifts. In this role marketing is expected to identify new competitors, new market solutions that are working better, and adapt the organization to shifting market needs. It is responsible to be the eyes and ears of the organization, and then think up new solutions addressing these external inputs. That's why it needs to report to the CEO, so it can drive toward new solutions that can revitalize the organization and keep it growing with new market trends.
But now, it's been shot. Reporting to sales, marketing's role directed at driving same store sales is purely limiting the function to defending and extending the success formula that has produced lackluster results for 12 years. Marketing is no longer in a position to adapt Wal-Mart. Instead, it is tasked to find ways to do more, better, faster, cheaper under the leadership of the sales organization.
When faced with market shifts, winning companies adapt. Look at how skillfully Amazon has moved from book seller to general merchandise seller to offering a consumer electronic device.
Unfortunately, too many businesses react to market shifts like Wal-Mart. They hunker down, do more of the same and re-organize to "increase focus" on the traditional business as results suffer. Instead of adapting the company hopes more focus on execution will somehow improve results.
Not likely. Expect results to go the other direction. There might be a short-term improvement from the massive influx of resource, but long term the trends are taking customers to new solutions. Regardless of the industry leader's size. Don't expect Wal-Mart to be a long-term winner. Better to invest in competitors taking advantage of trends.
And, worse, the entire OEM market is collapsing. For the largest 4 PC manufacturers sales last quarter were down 4.5%, while sales for the remaining smaller manufacturers dropped over 20%! With fewer and fewer sales, consolidation is wiping out many companies, and leaving those remaining in margin killing to-the-death competition.