by Adam Hartung | Sep 1, 2020 | Finance, Investing, Strategy, Trends
On 8/31/20, the Dow Jones Industrial Average went through a change in composition. Out went Exxon, Pfizer and Raytheon. In came Salesforce.com, Amgen and Honeywell. This is the 8th time the Index components have changed this decade, the 13th time since 2000 and the 55th change since created in 1896. So changes are not uncommon. But, are they meaningful? Ask any academic and you’ll get a resounding “NO.” There is no stated criteria for selection, no metrics for inclusion, no breadth to the number of companies (which has changed significantly over time,) and not even a weighting for market capitalization! The DJIA has no relationship to “the market,” which could well be measured better by the S&P 500, or the Russell 3000. And it doesn’t even link to any specific industry! To academics, “the Dow” is just a random number that reflects nothing worth measuring!!
The DJIA is (currently) a group of 30 stocks selected by the editors of Dow Jones (publisher of the Wall Street Journal, owned by News Corp – which also owns Fox News – and controlled by Rupert Murdock). Despite its lack of respect by academics and money managers, because of its age – and the prestige of being selected by these editors – being on the DJIA has been considered somewhat revered. Think of it as an “editorial award of achievement” for size, profitability and perceived stability. For these reasons, over time many investors have believed the index represents a low–risk way to invest in corporations and grow their wealth.
So the daily value of the DJIA is pretty much meaningless. And being on the DJIA is also pretty much meaningless. But, investors have followed this index every trading day for 124 years. So, it is at least interesting. And that’s because it is a track on what these editors think are important very long-term economic trends.
The original Index composition looks NOTHING like 2020. American Cotton Oil Company, American Spirits Manufacturing Company, American Sugar Refining Company, American Tobacco Company, Chicago Gas Light and Coke, General Electric, Leclede Gas, National Lead, Pacific Mail Steamship Company, Tennessee Coal Iron and Railroad Company, United State Cordage Company and United States Leather Company. Familiar household names? This initial list represents the era in 1896 – an agrarian economy just on the cusp of coming into the industrial age. Not forward looking, but rather somewhat reflective of what were the biggest parts of the economy historically with a not forward.
Over 124 years lots of companies left the DJIA — were replaced – and many replacements left. Some came on, went off, and came back on again – such as AT&T, Exxon (formerly Standard Oil of New Jersey) and Chevron (formerly Standard Oil of California.) Even the vaunted GE was inducted in 1899, only to be removed in 1901 – then added back in 1907 where it stayed until CEO Jeff Immelt imploded the company and it was removed for good in 2018.
But, there has been a theme to the changes. Originally, the index was largely agricultural companies. As the economy changed, the Index rotated into commodity companies like gas, coal, copper and nickel – the materials leading to a new era of tools. This gave way to component manufacturers, dominated by the big steel companies, which created the industrial era. Which, of course, led to big manufacturing companies like 3M and IBM. And, along the way, there was recognition for growth in new parts of the economy, by adding consumer goods companies like P&G, Coca-Cola, McDonald’s, Kraft (since removed,) and Nike along with retailers like Sears (later removed,) Walmart, Home Depot and Walgreens. The massively important role of financial services to the economy was reflected by including Travelers, JPMorgan Chase, American Express, Visa and Goldman Sachs. And as health care advanced, the Index added pharmaceutical companies like Pfizer, Johnson & Johnson and Merck.
Obviously, the word “industrial” no longer has any meaning in the Dow Jones Industrial Index.
Reading across the long history of the DJIA one recognizes the editors’ willingness to try and reflect what was growing in the American economy. But in a laggard way. Not selecting companies too early, preferring instead to see that they make a big difference and remain important for many years. And a tendency to keep them on the index long after the bloom is off the rose – like retaining Kraft until 2008 and still holding onto P&G and Coke today.
The bias has always been to be careful about adding companies, lest they not be sustainable. And not judge too hastily the demise of once great companies. Disney wasn’t added until 1991, long after it was an established entertainment leader. Boeing was added in 1987, after pioneering aviation for 30 years. Microsoft added in 1999, well after it had won the PC war. Thus, the index is a “lagging index.” It reflects a big chunk of what was great, while slowly adding what has recently been great – and never moving too quickly to add companies that just might be tomorrow’s leaders.
Sears added in 1924, wasn’t removed until 1999 when its viability is questionable. Phillip Morris Tobacco (became Altria) was added in 1985, and hung around until 2008 — long after we knew cigarettes were deadly and leadership didn’t know how to do anything else. Even today we see that United Aircraft was added in 1939, which became United Technologies in 1976 and then via merger Raytheon in 2020 – before it is now removed, as all things aircraft are screeching to a pandemic halt. And Boeing is still on the Index despite the 737 fiasco and plunging sales. IBM was added in 1939, and through the 1970s it was a leader in office equipment creating the computer industry. But IBM after years of declining sales and profits isn’t really relevant any longer, yet it is still on the Index.
As for adding growing stars, GM stays on the Index until it goes bankrupt, but Tesla is yet to make consideration (largely due to lack of profit history.) Likewise, Walmart remains even though the “big gun” in retail is obviously Amazon.com (another lacking the size and longevity of profits the editors like.) McDonald’s stays on the list, despite no growth for years and even as the Board investigates its HR department for hiding abhorrent leadership behavior – while Starbucks is eschewed. And Cisco is there, while we all use Zoom for pandemic-driven virtual meetings.
So what can we take away from today’s changes? First, the Index has changed dramatically over 20 years to reflect electronic technology. IBM, Microsoft and Apple are now joined by Salesforce. Pharma company Pfizer is being replaced by bio-pharma company Amgen in a nod to the future, although almost 40 years after Genentech went public. Exxon disappears as oil prices fall to sub-zero, demand declines globally and electric cars are on the cusp of taking market leadership. And conglomerate Honeywell is added just to show the editors still think conglomerates matter – even if GE has nearly disintegrated.
Is any of this meaningful? I don’t really think so. As an award for past performance, it’s a nice token to make the list. As business leaders, however, we need to be a LOT more concerned about developing businesses for the future, based on trends, than is indicated by the components of the DJIA. Driving revenue growth and higher margins comes from doing the next big thing, not the last big thing. And, as investors, if you want to make outsized returns you have to know that a basket of largely laggards (Apple, Microsoft and Salesforce excepted) is not the way to build your retirement nest. Instead, you have to invest in companies that are creating the future, making the trends a reality for businesses and consumers. Think FAANG.
Nonetheless, after 124 years it is still sort of interesting. I guess most of us do still care what the editors of big news companies think.
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 (https://adamhartung.com/assessments/)
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by Adam Hartung | Nov 28, 2014 | Current Affairs, Innovation, Leadership, Web/Tech
Last week I gave 1,000 VHS video tapes to Goodwill Industries. These had been accumulated through 30 years of home movie watching, including tapes purchased for entertaining my 3 children.
It was startling to realize how many of these I had bought, and also surprising to learn they were basically valueless. Not because the content was outdated, because many are still popular titles. But rather because today the content someone wants can be obtained from a streaming download off Amazon or Netflix more conveniently than dealing with these tapes and a mechanical media player.
It isn’t just a shift in technology that made those tapes obsolete. Rather, a major trend has shifted. We don’t really seek to “own” things any more. We’ve become a world of “renters.”
The choice between owning and renting has long been an option. We could rent video tapes, and DVDs. But even though we often did this, most Boomers also ended up buying lots of them. Boomers wanted to own things. Owning was almost always considered better than renting.
Boomers wanted to own their cars, and often more than one. Auto renting was only for business trips. Boomers wanted to own their houses, and often more than one. Why rent a summer home, when, if you could afford it, you could own one. Rent a boat? Wouldn’t it be better to own your own boat (even if you only use it 10 times/year?)
Now we think very, very differently. I haven’t watched a movie on any hard media in several years. When I find time for video entertainment, I simply download what I want, enjoy it and never think about it again. A movie library seems – well – unnecessary.
As a Boomer, there’s all those CDs, cassette tapes (yes, I have them) and even hundreds of vinyl records I own. Yet, I haven’t listened to any of them in years. It’s far easier to simply turn on Pandora or Spotify – or listen to a channel I’ve constructed on YouTube. I really don’t know why I continue to own those old media players, or the media.
Since the big real estate meltdown many people are finding home ownership to be not as good as renting. Why take such a huge risk, paying that mortgage, if you don’t have to?
That this is a trend is even clearer generationally. Younger people really don’t see the benefit of home ownership, not when it means taking on so much additional debt. Home ownership costs are so high that it means giving up a lot of other things. And what’s the benefit? Just to say you own your home?
Where Boomers couldn’t wait to own a car, young people are far less likely. Especially in, or near, urban areas. The cost of auto ownership, including maintenance, insurance and parking, becomes really expensive. Compared with renting a ZipCar for a few hours when you really need a car, ownership seems not only expensive, but a downright hassle.
And technology has followed this trend. Once we wanted to own a PC, and on that PC we wanted to own lots of data – including movies, pictures, books – anything that could be digitized. And we wanted to own software applications to capture, view, alter and display that data. The PC was something that fit the Boomer mindset of owning your technology.
But that is rapidly becoming superfluous. With a mobile device you can keep all your data in a cloud. Data you want to access regularly, or data you want to rent. There’s no reason to keep the data on your own hard drive when you can access it 24×7 everywhere with a mobile device.
And the same is true for acting on the data. Software as a service (SaaS) apps allow you to obtain a user license for $10-$20/user, or $.99, or sometimes free. Why spend $200 (or a lot more) for an application when you can accomplish your task by simply downloading a mobile app?
So I no longer want to own a VCR player (or DVD player for that matter) to clutter up my family room. And I no longer want to fill a closet with tapes or cased DVDs. Likewise, I no longer want to carry around a PC with all my data and applications. Instead, a small, easy to use mobile device will allow me to do almost everything I want.
It is this mega trend away from owning, and toward a simpler lifestyle, that will end the once enormous PC industry. When I can do all I really want to do on my connected device – and in fact often do more things because of those hundreds of thousands of apps – why would I accept the size, weight, complexity, failure problems and costs of the PC?
And, why would I want to own something like Microsoft Office? It is a huge set of applications which contain dozens (hundreds?) of functions I never use. Wouldn’t life be much simpler, easier and cheaper if I acquire the rights to use the functionality I need, when I need it?
There was a time I couldn’t imagine living without my media players, and those DVDs, CDs, tapes and records. But today, I’m giving lots of them away – basically for recycling. While we still use PCs for many things today, it is now easy to visualize a future where I use a PC about as often as I now use my DVD player.
In that world, what happens to Microsoft? Dell? Lenovo?
The implications of this are far-reaching for not only our personal lives, and personal technology suppliers, but for corporate IT. Once IT managed mainframes. Then server farms, networks and thousands of PCs. What will a company need an IT department to do if employees use their own mobile devices, across common networks, using apps that cost a few bucks and store files on secure clouds?
If corporate technology is reduced to just operating some “core” large functions like accounting, how big – or strategic – is IT? The “T” (technology) becomes irrelevant as people focus on gathering and analyzing information. But that’s not been the historical training for IT employees.
Further, if Salesforce.com showed us that even big corporations can manage something as critical as their customer information in a SaaS environment on mobile devices, is it not possible to imagine accounting and supply chain being handled the same way? If so, what role will IT have at all?
The trend toward renting rather than owning is monumental. It affects every business. But in an ironic twist of fate, it may dramatically reduce the focus on IT that has been so critical for the Boomer generation.
by Adam Hartung | Oct 4, 2012 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Web/Tech
If you're still an investor in Hewlett Packard you must be new to this blog. But for those who remain optimistic, it is worth reveiwing why Ms. Whitman's forecast for HP yesterday won't happen. There are sound reasons why the company has lost 35% of its value since she took over as CEO, over 75% since just 2010 – and over $90B of value from its peak.
HP was dying before Whitman arrived
I recall my father pointing to a large elm tree when I was a boy and saying "that tree will be dead in under 2 years, we might as well cut it down now." "But it's huge, and has leaves" I said. "It doesn't look dead." "It's not dead yet, but the environmental wind damage has cost it too many branches, the changing creek direction created standing water rotting its roots, and neighboring trees have grown taking away its sunshine. That tree simply won't survive. I know it's more than 3 stories tall, with a giant trunk, and you can't tell it now – but it is already dead."
To teach me the lesson, he decided not to cut the tree. And the following spring it barely leafed out. By fall, it was clearly losing bark, and well into demise. We cut it for firewood.
Such is the situation at HP. Before she became CEO (but while she was a Director – so she doesn't escape culpability for the situation) previous leaders made bad decisions that pushed HP in the wrong direction:
- Carly Fiorina, alone, probably killed HP with the single decision to buy Compaq and gut the HP R&D budget to implement a cost-based, generic strategy for competing in Windows-based PCs. She sucked most of the money out of the wildly profitable printer business to subsidize the transition, and destroy any long-term HP value.
- Mark Hurd furthered this disaster by further investing in cost-cutting to promote "scale efficiencies" and price reductions in PCs. Instead of converting software products and data centers into profitable support products for clients shifting to software-as-a-service (SAAS) or cloud services he closed them – to "focus" on the stagnating, profit-eroding PC business.
- His ill-conceived notion of buying EDS to compete in traditional IT services long after the market had demonstrated a major shift offshore, and declining margins, created an $8B write-off last year; almost 60% of the purchase price. Giving HP another big, uncompetitive business unit in a lousy market.
- His purchase of Palm for $1.2B was a ridiculous price for a business that was once an early leader, but had nothing left to offer customers (sort of like RIM today.) HP used Palm to bring out a Touchpad tablet, but it was so late and lacking apps that the product was recalled from retailers after only 49 days. Another write-off.
- Leo Apotheker bought a small Enterprise Resource Planning (ERP) software company – only more than a decade after monster competitors Oracle, SAP and IBM had encircled the market. Further, customers are now looking past ERP for alternatives to the inflexible "enterprise apps" which hinder their ability to adjust quickly in today's rapidly changing marektplace. The ERP business is sure to shrink, not grow.
Whitman's "Turnaround Plan" simply won't work
Meg is projecting a classic "hockey stick" performance. She plans for revenues and profits to decline for another year or two, then magically start growing again in 3 years. There's a reason "hockey stick" projections don't happen. They imply the company is going to get a lot better, and competitors won't. And that's not how the world works.
Let's see, what will likely happen over the next 3 years from technology advances by industry leaders Apple, Android and others? They aren't standing still, and there's no reason to believe HP will suddenly develop some fantastic mojo to become a new product innovator, leapfrogging them for new markets.
- Meg's first action is cost cutting – to "fix" HP. Cutting 29,000 additional jobs won't fix anything. It just eliminates a bunch of potentially good idea generators who would like to grow the company. When Meg says this is sure to reduce the number of products, revenues and profits in 2013 we can believe that projection fully.
- Adding features like scanning and copying to printers will make no difference to sales. The proliferation of smart devices increasingly means people don't print. Just like we don't carry newspapers or magazines, we don't want to carry memos or presentations. The world is going digital (duh) and printing demand is not going to grow as we read things on smartphones and tablets instead of paper.
- HP is not going to chase the smartphone business. Although it is growing rapidly. Given how late HP is to market, this is probably not a bad idea. But it begs the question of how HP plans to grow.
- HP is going not going to exit PCs. Too bad. Maybe Lenovo or Dell would pay up for this dying business. Holding onto it will do HP no good, costing even more money when HP tries to remain competitive as sales fall and margins evaporate due to overcapacity leading to price wars.
- HP will launch a Windows8 tablet in January targeted at "enterprises." Given the success of the iPad, Samsung Galaxy and Amazon Kindle products exactly how HP will differentiate for enterprise success is far from clear. And entering the market so late, with an unproven operating system platform is betting the market on Microsoft making it a success. That is far, far from a low-risk bet. We could well see this new tablet about as successful as the ill-fated Touchpad.
- Ms. Whitman is betting HP's future (remember, 3 years from now) on "cloud" computing. Oh boy. That is sort of like when WalMart told us their future growth would be "China." She did not describe what HP was going to do differently, or far superior, to unseat companies already providing a raft of successful, growing, profitable cloud services. "Cloud" is not an untapped market, with companies like Oracle, IBM, VMWare, Salesforce.com, NetApp and EMC (not to mention Apple and Amazon) already well entrenched, investing heavily, launching new products and gathering customers.
HPs problems are far deeper than who is CEO
Ms. Whitman said that the biggest problem at HP has been executive turnover. That is not quite right. The problem is HP has had a string of really TERRIBLE CEOs that have moved the company in the wrong direction, invested horribly in outdated strategies, ignored market shifts and assumed that size alone would keep HP successful. In a bygone era all of them – from Carly Fiorina to Mark Hurd to Leo Apotheker – would have been flogged in the Palo Alto public center then placed in stocks so employees (former and current) could hurl fruit and vegetables, or shout obscenities, at them!
Unfortately, Ms. Whitman is sure to join this ignominious list. Her hockey stick projection will not occur; cannot given her strategy.
HP's only hope is to sell the PC business, radically de-invest in printers and move rapidly into entirely new markets. Like Steve Jobs did a dozen years ago when he cut Mac spending to invest in mobile technologies and transform Apple. Meg's faith in operational improvement, commitment to existing "enterprise" markets and Microsoft technology assures HP, and its investors, a decidedly unpleasant future.
