by Adam Hartung | Jan 22, 2012 | Defend & Extend, In the Rapids, Innovation, Leadership, Lock-in, Transparency, Web/Tech
Turning over a new year inevitably leads to selections for "CEO of the Year." Investor Business Daily selected Larry Page of Google 3 weeks ago, and last week Marketwatch.com selected Jeff Bezos of Amazon. Comparing the two is worthwhile, because there is almost nothing similar about what the two have done – and one is almost sure to dramatically outperform the other.
Focusing on the Future
What both share is a willingness to focus their companies on the future. Both have introduced major new products, targeted at developing new markets and entirely new revenue streams for their companies. Both have significantly sacrificed short-term profits seeking long-term strategic positioning for sustainable, higher future returns. Both have, and continue to, spend vast sums of money in search of competitive advantage for their organizations.
And both have seen their stock value clobbered. In 2011 Amazon rose from $150/share low to almost $250 before collapsing at year's end to about $175 – actually lower than it started the calendar year. Google's stock dropped from $625/share to below $475 before recovering all the way to $670 – only to crater all the way to $585 last week. Clearly the analysts awarding these CEOs were looking way beyond short-term investor returns when making their selections. So it is more important than ever we understand what both have done, and are planning to do in the future, if we are to support either, or both, as award winners. Or buy their stock.
Google participates in great growth markets
The good news for Google is its participation in high growth markets. Search ads continue growing, supplying the bulk of revenues and profits for the company. Its Android product gives Google great position in mobile devices, and supporting Chrome applications help clients move from traditional architectures and applications to cloud-based solutions at lower cost and frequently higher user satisfaction. Additionally, Google is growing internet display ad sales, a fast growing market, by increasing participation in social networks.
Because Google is in high growth markets, its revenues keep growing healthily. But CEO Page's "focus" leadership has led to the killing of several products, retrenching from several markets, and remarkably huge bets in 2 markets where Google's revenues and profits lag dramatically – mobile devices and search.
Because Android produces no revenue Google bought near-bankrupt Motorola to enter the hardware and applications business becoming similar to Apple – a big bet using some old technology against what is the #1 technology company on the planet. Whether this will be a market share winner for Google, and whether it will make or lose money, is far from certain.
Simultaneously, the Google+ launch is an attempt to take on the King Kong of social – Facebook – which has 800million users and remarkable success. The Google+ effort has been (and will continue to be) very expensive and far from convincing. Its product efforts have even angered some people as Google tried steering social networkers rather heavy-handidly toward Google products – as it did with "Search plus Your World" recently.
Mr. Page has positioned Google as a gladiator in some serious "battles to the death" that are investment intensive. Google must keep fighting the wounded, hurting and desperate Microsoft in search against Bing+Yahoo. While Google is the clear winner, desperate but well funded competitors are known to behave suicidally, and Google will find the competition intensive. Meanwhile, its offerings in mobile and social are not unique. Google is going toe-to-toe with Apple and Facebook with products which show no great superiority. And the market leaders are wildly profitable while continuously introducing new innovations. It will be tough fighting in these markets, consuming lots of resources.
Entering 3 gladiator battles simultaneously is ambitious, to say the least. Whether Google can afford the cost, and can win, is debatable. As a result it only takes a small miss, comparing actual results to analyst expectations, for investors to run – as they did last week.
Amazon redefines competition in its markets
CEO Bezos' leadership at Amazon is very different. Rather than gladiator wars, Amazon brings out products that are very different and avoids head-to-head competition. Amazon expands new markets by meeting under- or unserved needs with products that change the way customers behave – and keeps competitors from attacking Amazon head-on:
- Amazon moved from simply selling books to selling a vast array of products on the web. It changed retail buying not by competing directly with traditional retailers, but by offering better (and different) on-line solutions which traditional retailers ignored or adopted far too slowly. Amazon was very early to offer web solutions for independent retailers to use the Amazon site, and was very early to offer a mobile interface making shopping from smartphones fast and easy. Because it wasn't trying to defend and extend a traditional brick-and-mortar retail model, like Wal-Mart, Amazon has redefined retail and dramatically expanded shopping on-line.
- Amazon changed the book market with Kindle. It utilized new technology to do what publishers, locked into traditional mindsets (and business models) would not do. As the print market struggled, Amazon moved fast to take the lead in digital publishing and media sales, something nobody else was doing, producing fast revenue growth with higher margins.
- When retailers were loath to adopt tablets as a primary interface for shoppers, Amazon brought out Kindle Fire. Cleverly the Kindle Fire is not directly positioned against the king of all tablets – iPad – but rather as a product that does less, but does things like published media and retail very well — and at a significantly lower price. It brings the new user on-line fast, if they've been an Amazon customer, and makes life simple and easy for them. Perhaps even easier than the famously easy Apple products.
In all markets Amazon moves early and deftly to fulfill unmet needs at a very good price. And then it captures more and more customers as the solution becomes more powerful. Amazon finds ways to compete with giants, but not head-on, and thus rapidly grow revenues and market position while positioning itself as the long term winner. Amazon has destroyed all the big booksellers – with the exception of Barnes & Noble which doesn't look too great – and one can only wonder what its impact in 5 years will be on traditional retailers like Kohl's, Penney's and even Wal-Mart. Amazon doesn't have to "win" a battle with Apple's iPad to have a wildly successful, and profitable, Kindle offering.
The successful CEO's role is different than many expect
A recent RHR International poll of 83 mid-tier company CEOs (reported at Business Insider) discovered that while most felt prepared for the job, most simultaneously discovered the requirements were not what they expected. In the past we used to think of a CEO as a steward, someone to be very careful with investor money. And someone expected to know the business' core strengths, then be very selective to constantly reinforce those strengths without venturing into unknown businesses.
But today markets shift quickly. Technology and global competition means all businesses are subject to market changes, with big moves in pricing, costs and customer expectations, very fast. Caretaker CEOs are being crushed – look at Kodak, Hostess and Sears. Successful CEOs have to guide their businesses away from investing in money-losing businesses, even if they are part of the company's history, and toward rapidly growing opportunities created by being part of the shift. Disruptors are now leading the success curve, while followers are often sucking up a lot of profit-killing dust.
Amazon bears similarities to the Apple of a decade ago. Introducing new products that are very different, and changing markets. It is competing against traditional giants, but with very untraditional solutions. It finds unmet needs, and fills them in unique ways to capture new customers – and creates market shifts.
Google, on the other hand, looks a lot like the lumbering Microsoft. It has a near monopoly in a growing market, but its investments in new markets come late, and don't offer a lot of innovation. Google's products end up competing directly, somewhat like xBox did with other game consoles, in very, very expensive – usually money-losing – competition that can go on for years. Google looks like a company trying to use money rather than innovation to topple an existing market leader, and killing a lot of good product ideas to keep pouring money into markets where it is late and not terribly creative.
Which CEO do you think will be the winner in 2015? Into which company are you prepared to invest? Both are in high growth markets, but they are being led very, very differently. And their strategies could not be more different. Which one you choose to own – as a product customer or investor – will have significant consequences for you (and them) in 3 years.
It's worth taking the time to decide which you think is the right leadership today. And be sure you know what leadership principles you are adopting, and following in your organization.
by Adam Hartung | Nov 11, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Web/Tech
In the back half of the 1990s Apple was clearly on the route to bankruptcy. Sun Micrososystems seriously investigated buying Apple. After a review, leadership opted not to make the acquisition. Sun’s non-officer management, bouyed on rumors of the acquisition, was heartbroken upon hearing Sun would not proceed. When Chairman Scott McNeely was asked at a management retreat why the executive team passed on Apple, he responded with “Do you think you can fix that?”
Sun leadership clearly had answered “no.” Good for a lot of us that Steve Jobs said “yes.”
Sun has largely disappeared, losing 95% of its market cap after 2000 and being acquired by Oracle. Why did Mr. Jobs succeed where the leadership of Sun, which couldn’t save itself much less Apple, feared it would fail?
For insight, look no further than the recent failure of Filene’s Basement (“Filene’s Saga Ends” Boston.com) and its acquirer Sym’s (“Retailers’s Sym’s and Filene’s Go Out of Business” Chicago Tribune.) Most of the time, when a troubled business is acquirerd not only is the buyer unable to fix the poor performer, but investments incurred by the buyer jeapardizes its business to the point of failure as well. Given the track record of corporations at fixing bad businesses, Mr. McNeely was on statistically sound footing to reject buying Apple.
Why is the track record of corporate management so bad at fixing problem businesses? Largely because most of their time is spent tyring to extend the past, rather than create a business which can thrive in the future.
The leadership of Sun didn’t see a future filled with mobile devices for music, movies or telephony. They were fixated on the Unix-based computers Sun built and sold. It was unclear how Apple would help them sell more servers, so it was a management diversion – a “poor strategic fit” – for Sun to acquire a technology intensive, talent rich organization. They passed, stayed focused on Unix servers and high-end workstations, and failed as that market shifted to PC products.
Much is the same for Filene’s Basement. A great brand, Sym’s bought Filene’s in an effort to continue pushing the discount model both Filene’s and Sym’s had historically pursued. Unfortunately, the market for discount department store merchandise was rapidly shifting to higher end middle-market players like Kohl’s, and for deeply discounted goods the internet was making deal shopping a lot easier for everyone. Because management was fixated on the old business, they missed the opportunity to make Filene’s and Sym’s a leader in new retail markets – like Amazon has done.
Remember in 2006 when Western Auto’s leader (and former hedge fund manager) Ed Lampert bought up the bonds of KMart, then used that position to acquire Sears? The market went gaga over the acquisition, heralding Mr. Lampert as a genius. Jim Cramer urged on his television program Mad Money that everyone buy Sears. Now the merged KMart/Sears company has lost much of its value, and 24×7 Wall Street claimed it was the #1 worst performing retail chain (“America’s Eight Worst-Performing Retail Chains“.)
Chart courtesy Yahoo.com 11/11/11 (note vertical scale is logarithmic)
Both KMart and Sears were deeply troubled when Mr. Lampert acquired them. But he largely followed a program of cost cutting, hoping people would return to the stores once he lowered prices. What he missed was a retail market which had shifted to Wal-Mart for the low-end products, and had fragmented into multiple competitors in the mid-priced market leaving Sears Holdings with no compelling value proposition.
Mr. Lampert has turned over management, fired scores of employees, closed stores and largely led both brands to retail irrelevancy. By trying to do more of the past, only better, faster and cheaper he ran into the buzz saw of competitors already positioned in the shifted market and created nothing new for shoppers, or investors.
And that’s why investors need to worry about Home Depot. The company was a shopper and investor darling as it maintained double digit growth through the 1980s and 1990s. But as competition matched, or beat, Home Depot’s prices – and often the capability of in-store help – growth slowed.
The Board replaced the founding leader with a senior General Electric leader named Robert Nardelli. He rapidly moved to operate the historical Home Depot success formula cheaper, better and faster by cutting costs — from employees to store operations and inventory. And customers moved even more quickly to the competition.
As the recessions worsened job growth remained scarce and eventually home values plummeted causing Home Depot’s growth to disappear. The company may be good at what it used to do, but that is simply a more competitive market that is a lot less interesting to shoppers today. Because Home Depot has not shifted into new markets, it is in a difficult situation (and considered the 5th worst performing retailer.) Who cares if you are a competitive home improvement store when your house is only worth 75% of the outstanding mortgage and you can’t refinance?
Chart source Yahoo Finance 11/11/11
And it is worth taking some time to look at Wal-Mart. The chain is famous for its rural and suburban stores selling at low prices, both as Wal-Mart and Sam’s Club. But looking forward, we see the company has failed at everything else it has tried. It’s offshore businesses have never met expectations and the company has left most markets. It’s efforts at more targeted merchandise, upscale stores and smaller stores have all been abandoned. And the company remains a serious lagger in understanding on-line sales as it has continued pouring money into defending its historical business, providing almost no return to investors for a decade.
The market is shifting, competitors have attacked its old “core,” but Wal-Mart remains stuck trying to do more, better, faster, cheaper with no clear sign it will make any difference as people change buying patterns. How can any brick-and-mortar retailer compete on cost with a web page?
Chart Source Yahoo Finance 11/11/11
All markets shift. All of them. Poor performance is most often an indication that the company has not shifted with the market. Competition in lower growth markets leads to weak revenue performance, and declining profits. Trying to “fix” the business by doing more of the same is almost always a money-losing proposition that hastens failure.
It is possble to fix a weak business. Moving with shifting markets into mobile has been very valuable for Apple investors. Two decades ago IBM shifted from hardware sales to a services focus, and the company not only escaped bankruptcy but now is worth more than Microsoft.
“Fixing” requires focusing on the future, and figuring out how to compete in the shifting market. Rather than applying cost-cutting and operational improvement, it is important to determine what future markets value, and deliver that. Zappos figured out that it could take a big lead in footwear and apparel if it offered people on-line convenience, and guaranteed taking back any products customers didn’t want (“What Other Businesses Can Learn from Zappos” CMSWire.com.) It’s sales exploded. Toms Shoes tapped into the market desire for helping others by donating a pair of shoes every time someone bought a pair, and sales are growing in double digits (CNBC video on Tom’s Shoes).
History has taught us to be pessimistic about fixing a troubled business. But that is largely because most management is fixated on trying to defend & extend the past. But turnarounds can be a lot more common if leaders instead focus on the future and meet emerging needs. It simply takes a different approach.
In the meantime, in retail it’s a lot smarter to invest in Amazon and retailers meeting emerging needs than those fixated on cost cutting and operational improvement. Be wary of Sears, Home Depot and Wal-Mart as long as management remains locked-in to its past.
by Adam Hartung | Oct 12, 2011 | Current Affairs, Defend & Extend, eBooks, In the Rapids, In the Whirlpool, Innovation, Leadership, Lifecycle, Lock-in, Transparency, Web/Tech
Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.) Now that’s a serious growth stall, which should worry all investors. Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion. Faster than most people think.
After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors. Not just Target, that is almost as low price and has better merchandise. Wal-Mart’s monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots. Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise. Aldi beats Wal-Mart hands-down in groceries. Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices. And companies like Kohl’s and J.C. Penney offer more fashionable goods at just slightly higher prices. On all fronts, traditional retailers are chiseling away at Wal-Mart’s #1 position – and at its margins!
Yet, the company has eschewed all opportunities to shift with the market. It’s primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com). Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) – sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive – as shown by the last 9 quarters.
On top of this, the retail market is shifting pretty dramatically. The big trend isn’t the growth of discount retailing, which Wal-Mart rode to its great success. Now the trend is toward on-line shopping. MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:
- In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
- Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.
This trend has been emerging for over a decade. The “retail revolution” was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt. And that problem is worsening as the trend on-line keeps shrinking the traditional market. Several retailers are expected to fail. Entire categories of stores. As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!
While Wal-Mart is huge, and won’t die overnight, as sure as the dinosaurs failed when the earth’s weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.
The winners will be on-line retailers, who like David versus Goliath use techology to change the competition. And the clear winner at this, so far, is the one who’s identified trends and invested heavily to bring customers what they want while changing the battlefield. Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:
- Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
- Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
- Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
- Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
- Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
- Amazon built on the mobility trend when its suppliers, publishers, didn’t respond by creating Kindle – which has revolutionized book sales.
- Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the “Wal-Mart Slayer“
Each of these actions were directly related to identifying trends and offering new solutions. Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy. Just look at sales of Kindle books:
Source: BusinessInsider.com
Unlike Wal-Mart customers, Amazon’s keep growing at double digit rates. In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase. Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to 80,000 per day unit sales for iPad2. Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.
While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base. Despite only a few month’s experience, Amazon is bigger than Google Offers, and is growing at least 20% faster.
After 1980 investors used to say that General Motors might not be run well, but it would never go broke. It was considered a safe investment. In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model. Wal-Mart is an identical story, only it won’t have 3 decades of slow decline. The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete.
Given that gladiators, at best, end up bloody – and most often dead – investing in one is not a good approach to wealth creation. However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors. Amazon today is a really good opportunity.
by Adam Hartung | Apr 26, 2011 | Defend & Extend, In the Rapids, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
Summary:
- Everyone discriminates in hiring – just some is considered bad, and some considered good
- Only “good discrimination” inevitably leads to homogeneity and “group think” leaving the business vulbnerable to market shifts
- Efforts to defend & extend the historical success formula moves beyond hiring to include using internal bias to favor improvement projects and disfavor innovations
- Amazon has grown significantly more than Wal-Mart, and it’s value has quadrupled while Wal-mart’s has been flat, because it has moved beyond its original biases
The long list of people attacking Wal-Mart includes a class-action law suit between former female workers and their employer. The plaintiffs claim Wal-Mart systematically was biased, via its culture, to pay women less and limit their promotion opportunities. The case is prompting headlines like BNet.com‘s “Does Your Company Help You Discriminate?”
Actually, all cultures – and hiring programs – are designed to discriminate. It’s just that some discrimination is legal, and some is not. At Google it’s long been accepted that the bias is toward quant jocks and those with highest IQs. That’s not illegal. Saying that men, or white people, or Christians make better employees is illegal. But there is risk in all hiring bias – even the legal kind. To avoid the illegal discrimination, its smarter to overcome the “natural bias” that cultures create for hiring. And the good news is that this is better for the business’s growth and rate of return!
Successful organizations build a profile of “who did well around here – and why” as they grow. It doesn’t take long until that profile is what they seek. The downside is that quickly there’s not a lot of heterogeneity in the hiring – or the workforce. That leads to “group think,” which reinforces “not invented here.” Everyone becomes self-assured of their past success, and believes that if they keep doing “more of the same” the future will work out fine. Whether Wal-Mart’s hiring biases were legal – or not – it is clear that the group think created at Wal-Mart has kept it from innovating and moving into new markets with more growth.
Markets shift. New products, technologies and business practices emerge. New competitors figure out ways of providing new solutions. Customers drift toward new offerings, and growth slows. Unfortunately, bias keeps the early winner from accepting this market shift – so the company falls into serious growth troubles trying to do more, better, faster, cheaper of what worked before. Look at Dell, still trying to compete in PCs with its supply chain focus long after competitors have matched their pricing and started offering superior customer service and other advantages. Meanwhile, the market growth has moved away from PCs into products (tablets, smartphones) Dell doesn’t even sell.
Wal-Mart excels at its success formula of big, boring, low price stores. And its bias is to keep doing more of the same. Only, that’s not where the growth is in retailing any longer. The market for “cheap” is pretty well saturated, and now filled with competitors that go one step further being cheap (like Dollar General,) or largely match the low prices while offering better store experience (like Target) or better selection and varied merchandise (like Kohl’s). Wal-Mart is stuck, when it needs to shift. But its bias toward “doing what Sam Walton did that made us great” has now made Wal-Mart the target for every other retailer, and stymied Wal-Mart’s growth.
A powerful sign of status quo bias shows itself when leaders and managers start overly relying on “how we’ve done things here” and “the numbers.” The former leads to accepting recommendations fro hiring and promotion based upon similarity with previous “winners.” Investment opportunities to defend and extend what’s always been done sail through reviews, because everyone understands the project and everyone believes that the results will appear.
Nearly all studies of operational improvement projects show that returns rarely achieve the anticipated outcomes. Because these projects reinforce the status quo, they are assumed to be highly accurate projections. But planned efficiences do not emerge. Headcount reductions do not happen. Unanticipated costs emerge. And, most typically, competitors copy the project and achieve the same results, leading to price reductions across the board benefitting customers rather than company profits.
Doing more of the same is easily approved and rarely questioned – whether hiring, or investing. And if things don’t work out as expected results are labeled “business necessity” and everyone remains happy they made the original decision, even if it did nothing for market share, or profit improvement. Or perhaps turns out to have been illegal (remember Enron and Worldcom?)
To really succeed it is important we overcome biases. Look no further than Amazon. Amazon could have been an on-line book retailer. But by overcoming early biases, in hiring and new projects, Amazon has grown more than Wal-Mart the last decade – and has a much brighter future. Amazon now leads in a large number of retail segments, far beyond books. It has products which allow anyone to take almost any product to market – using the Amazon on-line tools, as well as inventory management.
And in publishing Amazon has become a powerhouse by helping self-published authors find distribution which was before unavailable, giving us all a much larger variety of book products. More recently Amazon pioneered e-Readers with Kindle, developing the technology as well as the inventory to make Kindle an enormous success. Simultaneously Amazon now offers a series of technical products providing companies access to the cloud for data and applications.
Where most companies would say “that’s not our business” Amazon has taken the approach of “if people want it, why don’t we supply it?” Where most organizations use numbers to kill projects – saying they are too risky or too small to matter or too low on “risk adjusted” rate of return Amazon creates a team, experiments and obtains real market information. Instead of worrying whether or not the initial project is a success or failure, market input is treated as learning and used to adapt. By continuously looking for new opportunities, and pushing those opportunities, Amazon keeps growing.
Every business develops a bias. Overcoming that bias is critical to success. From hiring to decision making, internal status quo police try to reinforce the bias and limit change. Often on the basis of “too much risk” or “too far from our core.” But that bias inevitably leads to stalled growth. Because new competitors never stop beating down rates of return on old success formulas, and markets never stop shifting.
Wal-Mart should look upon this lawsuit not as a need to defend and extend its past practices, but rather a wake-up call to be more open to diversity – in all aspects of its business. Wal-mart doesn’t need to win this lawsuit neary as badly as it needs to create an ability to adapt. Until then, I’d recommend investors sell Wal-Mart, and buy Amazon.com.
Chart of WMT stock performance compared to AMZN last 5 years (source Yahoo.com)
by Adam Hartung | Nov 1, 2010 | Defend & Extend, Leadership, Lock-in
Summary:
- When something works, we do more of it
- 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.
