by Adam Hartung | Apr 15, 2010 | Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
Hi, two readings recently have really surprised me.
Firstly, Dawn Beaupariant from the public relations firm Waggener Edstrom contacted me regarding my Forbes column. I learned this firm is the PR agency for Microsoft. They took exception to my Forbes column ("Microsoft's Dismal Future"). But not because any facts were inaccurate.
Rather, it was their point of view that because OS 7 is now the largest selling OS of all time that demonstrated it was a successful product. Of course, when the television standard was changed in the USA to digital and everyone had to transition set-top boxes those also became big sellers. But it wasn't because everybody wanted the new product. More, it was the impact of a monopolist. We all know Microsoft has had a near monopoly in PC operating systems (even though every year it is losing share to Linux), so the fact that they can force people to use a new one on new machines, or upgrade, is less than an enthusiastic market endorsement of the product. For every "reviewer" who likes OS 7, there are 100 users saying "this gives me bells and whistles I don't need or want, and complicates my life. Can I simply keep my old product, or do my work on my smartphone?"
The Forbes column didn't debate whether Microsoft was likely to remain dominant in PC operating systems – that is a foregone conclusion. The issue is that markets are shifting away from PCs to mobile devices. And Microsoft has lost 2/3 its market share in mobile operating systems. And it is not developing a strong product. If people keep shifting from PCs to Blackberry's, iPhones and Androids – and PC sales start declining – in 10 years Microsoft could dominate PC OS sales (and Office applications) but it may not matter. Too bad the PR firm didn't get that.
Secondly, the PR firm claimed that Microsoft could put forward new products readily, leading to capturing dominant share in new markets. Their one claim that Microsoft had accomplished this was xBox. The PR person conveniently ignored the smartphone market, the Zune-style handheld market, the market for mobile applications (where Apple sold 2billion apps in its first 18 months), the search market (where Microsoft lags Google and would be nowhere without picking up Yahoo!'s declining business) and a host of other markets where Microsoft simply let the horse out of the barn.
To make matters worse, as Microsoft has invested to Defend the PC operating system and office products business, xBox is losing market share (exactly the point I made in the article – using the smartphone example instead)! According to IndustryGamers.com "PS3 'Steadily Increasing' Market Share Across the Globe" (Feb, 2010). Bad pick Dawn!
- The PS3 is dominant in Japan and Korea, and as of June 2008, has begun
to outsell the Xbox 360 in Europe. It is also steadily increasing its
market share in all other regions across the globe, including in the
North American market
- PS3 sales have been surging (44%
over the holidays) and SCEA senior vice president of Marketing and
PlayStation Network, Peter Dille, recently insisted that PS3
will eventually overtake Xbox 360
Most commenters have reflected my viewpoint, saying that they see Microsoft so horribly Locked-in to its old business that it is almost GM-like in its approach to new products and markets. Not a good sign. Those who defend Microsoft simply take the point of view that Microsoft is huge, has high share in PCs, and is very profitable in OS and Office Product sales. Wow, just like people defended GM was in the 1970s comparing to offshore competitors! These defenders completely miss the point that the marketplace is now rapidly shifting to new solutions, and the companies driving that shift with the most product are Apple, Google and Research in Motion (RIM)! Microsoft may look like Goliath, but it would be foolish to ignore the slings of new technology being brought to the battle by these David's with their smartphones, Chrome O/S, mail products, etc.
I was struck this week at the backward thinking offered on the Harvard Business Review blog posting "Is This Innovation Too Disruptive for My Firm." The author justifies companies sticking to their defensive positions, just as Microsoft is doing, simply because most companies fail at moving away from their "core." He seems very content to offer that since most companies can't really move into new markets well, so they might as well not try. Exactly what they are supposed to do as revenues dwindle in their "core" markets he never resolves! I guess he'd rather management simply not try to grow, and go down valiantly with the sinking ship.
Quite concerning is that he takes up the mantle of "core capability." He points out that most of the failures happen when companies move away from their "core" and therefore he recommends that all innovation remain close to the "core." His big argument is that this is lower risk. Well, Xerox remained close to core with laser printers – and how'd that work out for long-term value growth? Apple remained close to its Macintosh core and was almost bankrupt in 2000 before jumping into music and smartphones. Polaraoid stayed close to its core of instant film photography, and Kodak stayed close to its similar core. Now one is erased from the marketplace and the other is a no-growth inconsequential competitor.
Analogies are risky, but here goes. For the HBR author, his arguement isn't a lot different than "Over the last 200 years we've noticed that ships which sail out past the horizon often never return. Therefore, we recommend you never sail beyond the horizon. Clearly, this is risky and returns are uncertain – so don't do it. Ever. Very likely, there is nothing out there you will ever capture of value." Sort of sounds like those who wouldn't back Columbus – good thing he finally convinced Queen Isabella to give him 3 ships.
In 2008 and 2009 we've seen many great companies driven to bad returns. Layoffs abound. Growth has disappeared. Listen to HBR, and behave like Microsoft, and you'll never grow again. In 2010 we need a different approach – a different solution. Companies must realize that focusing on "core" capabilities, customers and markets has rapidly diminishing returns these days. You cannot succeed by focusing on Defending your business – even if it is a near-monopoly like PC operating systems! Why not? Because markets rapidly shift to new solutions that obsolete your products and even when you have high share, and high margins, sales can disappear really fast (like Xerox machine sales or amateur film sales – and probably laptop sales). If you aren't putting a big chunk of resources into GROWING in new marketplaces, by using White Space teams to drive that learning and growth, you will eventually become an historical artifact.
by Adam Hartung | Apr 19, 2009 | Uncategorized
"McDonald's CEO's compensation rose 44%" was the Crain's Chicago Business headline. In this era of focus on CEO pay, the question should be whether this is pay for performance? Yes, McDonald's has seen its business do relatively well the last year – but was that really due to the CEO? Or did an incoming tide simply raise the McDonald's boat?
The last year has generally been tough on restaurants. But McDonald's competes in a narrow part of the market focused on cheap. Like Wal-Mart, McDonald's is a huge corporation but its sales are closely tied to the performance of markets driven by low price. It wasn't long ago (less than 8 years) that McDonald's was shutting stores around the globe because performance was so poor. The company felt it had too many McDonald's. So it sold Chipotle and other assets to raise the money for closings and buying back equity shares to hold off a corporate attack. And it spent money to improve the marketing in stores, including refocusing on quality. As a result, when the economy fell apart (globally) McDonald's was in the right place at the right time.
There was nothing prescient about the decision-making at McDonald's. Quite to the contrary, the decisions taken were all about Defending the old Success Formula regardless of where the marketplace was headed. In fact, the toughest decision made during the last 18 months was whether to keep 2 pieces of cheese on the double cheeseburger or not. And its decision to raise the price on the 2-slice burger while launching another 1-slice burger to remain priced at $1 was considered a big innovation by home town newspaper Chicago Tribune ("Launch time at McDonald's"). Fortunately, the biggest recession in 70 years has encouraged people to go down-market, to McDonald's, and thus helped the company maintain sales and profits. Whether McDonald's will hold onto these gains or see them go back out with the receding tide when the economy improves is entirely unclear.
On the other hand, PepsiCo has taken a much more aggressive approach to growth in its soft drink business. Chairman and CEO Indra Nooyi has never been the kind of executive to back off from pushing for change. As a Boston Consulting Group Manager she ruffled many feathers amongst the conservative leadership in her efforts to make partner – to the point they recommended she find a career elsewhere. And, never looking back, she went on to greatly exceed the expectations of her former bosses by rocketing through Motorola and later PepsiCo all the way to the top position. Her willingness to Disrupt and implement White Space has created significant growth for the companies where she worked.
Now she's brought in Massimo D'Amori as the new head for Pepsi's soft drink business, and he's shown no hesitancy to follow her lead in Disrupting the moribund brands as detailed in the BusinessWeek article "Blowing up Pepsi." Rather than waiting for the recession to recover, he's dived into the brands changing everything from packaging to logos. He's personally been involved in the Disruptions, making sure people know that he sees now, while Coke is moving slowly and sales should be soft, to reposition Pepsi's beverage products in order to attract new customers and grow! As the new head of brands said, it's time to "rejuvenate, reengineer, rethink, reparticipate." When the economy caused weak performance quarters the anwer became "retool and reteam;" including changing more people on the senior team.
Will all this Disruption work? We know that White Space has flourished, so Disruption has taken hold. Will the White space provide a faster growing and more profitable Pepsi beverage division? We know that everything from logo design to bottles have been tested, tried and are being improved upon. The early results look good, but it's still too early to tell if Pepsi has caught Coke flat footed. But what we can be sure about is that Pepsi is doing everything it can to take advantage of the changing environment in order to be #1 in beverages – including vitamin water, sports drinks and juices as well as traditional soft drinks.
When talking about McDonald's and Pepsi it might all seem like much 'ado about nothing. What's the big deal? But reality is that size alone does not make either company immune to failure. All businesses, no matter size or age, have to adapt to changing markets or risk becoming obsolete. Polaroid invented instant photography, but has become nothing more than an historical name. Last week the Wall Street Journal reported how "Vultures vie in auction for remains of Polaroid." From 21,000 workers at its peak in 1978, the company has fallen to a mere 70 – and to a brand value of only $80million. This sort of failure can happen to any company.
When we look into 2035, which, if either, McDonald's or PepsiCo is likely to be the next Polaroid? We'd like to think neither. Yet, history indicates that McDonald's constant unwillingness to move from Defending & Extending its hamburger business puts it at risk. Of what? Maybe the next Mad Cow disease. Or the next diet craze. Or the next economic shift that leads customers out of their stores and somewhere else to eat. Or perhaps a "perfect storm" of all 3. McDonald's D&E management depends upon the future looking much like the recent past for the company to succeed. It is not really preparing for a different future. And that cannot be said for PepsiCo – where under Ms. Nooyi's leadership we see a company obsessing about competition while working passionately to position itself for future markets and future customers needs. Pepsi's willingness to Disrupt and use White Space bodes very well for the likelihood of turning around the recent growth stall, and creating longevity for the company, its investors, employees and vendors.
by Adam Hartung | Mar 9, 2009 | Current Affairs, Defend & Extend, General, In the Rapids, In the Swamp, In the Whirlpool, Innovation, Science
The headlines scream for an answer to when markets will bottom (see Marketwatch.com article from headline "10 signs of a Floor" here) . But for Phoenix Principle investors, that question isn't even material. Who cares what happens to the S&P 500 – you want investments that will go up in value — and there are investments in all markets that go up in value. And not just because we expect some "greater fool" to bail us out of bad investments. Phoenix Principle investors put their money into opportunities which will meet future needs at competitive prices, thus growing, while returning above average rates of return. It really is that simple. (Of course, you have to be sure that other investors haven't bid up the growth opportunity to where it greatly exceeds its future value — like happened with internet stocks in the late 1990s. But today, overbidding that drives up values isn't exactly the problem.)
People get all tied up in "what will the market do?" As an investor, you need to care about the individual business. For years that was how people invested, by focusing on companies. But then clever economists said that as long as markets went up, investors were better off to just buy a group of stocks – an average such as the S&P 500 or Dow Jones Industrials. These same historians said don't bother to "time" your investments at all, just keep on buying some collection (some average) quarter after quarter and you'll do OK. We still hear investment apologists make this same argument. But stocks haven't been going up – and who knows when these "averages" will start going up again? Just ask investors in Japan, where they are still waiting for the averages to return to 1980s levels so they can hope to break even (after 20 years!). These historians, who use the past as their barometer, somehow forgot that consistent and common growth was a requirement to constantly investing in averages.
When the 2008 market shift happened, it changed the foundation upon which "constantly keep buying, don't time investing, it all works out in the end" was based. Those days may return – but we don't know when, if at all. Investors today have to return to the real cornerstone of investing – putting your money into investments which will give people what they want in the future.
Regardless of the "averages," businesses that are positioned to deliver on customer needs in future years will do well. If today the value of Google is down because CEO Eric Schmidt says the company won't return to old growth rates again until 2010, investors should see this as a time to purchase because short-term considerations are outweighing long-term value creation. Do you really believe internet ad-supported free search and paid search are low-growth global businesses? Do you really believe that short-term U.S. on-line advertising trends will remain at current rates, globally, for even 2 full years? Do you think Google will not make money on mobile phones and connectivity in the future? Do you think the market won't keep moving toward highly portable devices for computing answers, like the Apple iPhone, and away from big boxes like PCs?
When evaluating a business the big questions must be "is this company well positioned for most future scenarios? Are they developing robust scenarios of the future where they can compete? Are they obsessing about competitors, especially fringe competitors? Are they willing to be Disruptive? Do they show White Space to try new things?" If the answer to these questions is yes, then you should be considering these as good investments. Regardless of the number on the S&P 500. Look at companies that demonstrate these skills – Johnson & Johnson, Cisco Systems, Apple, Virgin, Nike, and G.E. – and you can start to assess whether they will in the future earn a high rate of return on their assets. These companies have demonstrated that even when people lose jobs and incomes shrink and trade barriers rise, they know how to use scenario planning, competitor obsession, disruptions and white space to grow revenue and profits.
You should not buy a company just because it "looks cheap." All companies look cheap just prior to failing. You could have been a buyer of cheap stock in Polaroid when 24 hour kiosks (not even digital photography yet) made the company's products obsolete. Just because a business met customer needs well in the past does not mean it will ever do so again. Like Sears. Or increasingly Motorola. Or G.M. These companies aren't focused on innovation for future customer needs, they prefer to ignore competitors, they hate disruptions and they refuse to implement White Space to learn. So why would you ever expect them to have a high future value?
Why did recent prices of real estate go up in California, New York, Massachusetts and Florida faster than in Detroit? People want to live and work there more than southeastern Michigan. For a whole raft of reasons. In 1920 the price of a home in Iowa or Kansas was worth more than in California. Why? Because an agrarian economy favored the earth-rich heartland over parched California. In the robust industrial age from 1940 to 1960, the value of real estate in Detroit, Chicago, Akron and Pittsburgh was far higher than San Francisco or Los Angeles. But in an information economy, the economics are different – and today (even after big price declines) California homes are worth multiples of Iowa homes. And, as we move further into the information economy, manufacturing centers (largely on big bodies of water in cool climates) have declining value. The market has shifted, and real estate values reflect the shift. Unless you know of some reason for lots (like millions) of health care or tech jobs to develop in Detroit, the region is highly over-built — even if homes are selling for fractions of former values.
We seem to have forgotten that to make high rates of return, we all have to be "market timers" and "investment pickers." Especially when markets shift. Because not everyone survives!!!!! All those platitudes about buying into market averages only works in nice, orderly markets with limited competition and growth. But when things shift – if you're in the wrong place you can get wiped out!! When the market shifted from agrarian to industrial in the 1920s and '30s my father was extremely proud that he became a teacher and stayed in Oklahoma (though the dust storms and all). But, by the 1970s it was clear that if he'd moved to California and bought a house in Palo Alto his net worth would have been many multiples higher. The same is true for stock investments. You can keep holding on to G.M., Citibank and other great companies of the past — or you can admit shift happened and invest in those companies likely to be leaders in the information-based economy of the next 30 years!
