If you're not a golfer, you may not understand the title. But it is important.
Sunday was the final, of four days, of the U.S. Open. Golf is clearly not as fan-favorited as soccer, football, basketball or hockey. But many people are aware of the "major" golf tournaments – just as non-horseracers know about the Kentucky Derby or Preakness. So there was more awareness than average about the sport on Sunday, and a tremendously greater amount of media coverage.
Interestingly, the big winner on the day was Octopus Pants. If you're confused – read on!
Monday morning if you opened a Yahoo! browser window and looked the top "trending now" box there, plain as day, was "Octopus pants." US Open was not there. Nor was the name of the winner – Justin Rose (who came from behind to win.) Nor the name of the leader for almost the entire tournament, and a huge crowd favorite in the sport, Phil Mickelson.
But, back in the pack, was a very good golfer named Billy Horschel. Although he's a great golfer, and a previous PGA tournament winner, was almost impossible to think he would win the U.S. Open on the final day, even though he shot a great second round (it takes 4 rounds to complete the tournament.) Barring a near-miracle, the focus would be on the leaders Sunday so there was a chance the relative newcomer would not receive much attention. [He did end up 6th – which is far better than the famous Tiger Woods, who came in 36th.]
In golf this is important because not only did it mean he would take home a smaller purse, but it also meant his value as an endorser for sponsors is lower. As a fairly new golfer to the Professional Golf Association (PGA) tournaments Mr. Horschel is known in golf circles because he plays Ping brand clubs. But few people know that for apparel Mr Horschel is sponsored by Ralph Lauren.
So, on Sunday he showed up wearing a pair of pants covered with images of Octopus. Pants that are part of the Ralph Lauren RXL line. Mr. Horschel (and the Lauren team) was smart enough to use social media (Twitter, etc.) to heighten interest in his appearance. This bit of assault on the sensibilities of golf, combined with fashion, sent interest in Mr. Horschel's apparel – if not his golf – viral. Not only were golfers looking for glimpses of Mr. Horschel's run for the leader board, but people not usually interested int the game were tuning in and keeping tabs via their mobile devices on his performance — and his pants!
Now, a combination of thinking ahead as to what he might wear, combined with some help from a smart sponsor like Lauren, and really smart use of social media marketing has helped Mr. Horschel, Lauren and Octopus Pants to become a global sensation. More interesting to more people than the tournament winner, the tournament leader and even the biggest names (including Rory McElroy, Graham McDowell, Ian Poulter, Luke Donald) in the sport — and their sponsors.
Winning often means thinking, and doing things, outside the box. Preparing to do something unconventional is important. While I'm sure there was a plan for Mr. Horschel to be much more typically attired had he been the tournament leader, Lauren's team did a great job of figuring out multiple outcomes and how to be a winner under multiple scenarios. Planning for how to win under multiple contingencies is critical in business. And having outside-the-box solutions thought through and ready to implement is the sign of a winning strategy – from different product to using unconventional marketing techniques.
While we all should congratulate Justin Rose on a big win the U.S. Open, the big winner here was Ralph Lauren – and Octopus pants!
Microsoft CEO Steve Ballmer appears to be planning a major reorganization. The apparent objective is to help the company move toward becoming a "devices and services company" as presented in the company's annual shareholder letter last October.
But, the question for investors is whether this is a crafty move that will help Microsoft launch renewed profitable growth, or is it leadership further confusing customers and analysts while leaving Microsoft languishing in stalled markets? After all, the shares are up some 31% the last 6 months and it is a good time to decide if an investor should buy, hold or sell.
There are a lot of things not going well for Microsoft right now.
Everyone knows PC sales have started dropping. IDC recently lowered its forecast for 2013 from a decline of 1.3% to negative 7.8%. The mobile market is already larger than PC sales, and IDC now expects tablet sales (excluding smartphones) will surpass PCs in 2015. Because the PC is Microsoft's "core" market – producing almost all the company's profitability – declining sales are not a good thing.
Microsoft hoped Windows 8 would reverse the trend. That has not happened. Unfortunately, ever since being launched Windows 8 has underperformed the horrific sales of Vista. Eight months into the new product it is selling at about half the rate Vista did back in 2007 – which was the worst launch in company history. Win8 still has fewer users than Vista, and at 4% share 1/10th the share of market leaders Windows 7 and XP.
Microsoft is launching an update to Windows 8, called Windows 8.1 or "blue." But rather than offering a slew of new features to please an admiring audience the release looks more like an early "fix" of things users simply don't like, such as bringing back the old "start" button. Reviewers aren't talking about how exciting the update is, but rather wondering if these admissions of poor initial design will slow conversion to tablets.
And tablets are still the market where Microsoft isn't – even if it did pioneer the product years before the iPad. Bloomberg reported that Microsoft has been forced to cut the price of RT. So far historical partners such as HP and HTC have shunned Windows tablets, leaving Acer the lone company putting out Windows a mini-tab, and Dell (itself struggling with its efforts to go private) the only company declaring a commitment to future products.
And whether it's too late for mobile Windows is very much a real question. At the last shareholder meeting Nokia's investors cried loud and hard for management to abandon its commitment to Microsoft in favor of returning to old operating systems or moving forward with Android. This many years into the game, and with the Google and Apple ecosystems so far in the lead, Microsoft needed a game changer if it was to grab substantial share. But Win 8 has not proven to be a game changer.
In an effort to develop its own e-reader market Microsoft dumped some $300million into Barnes & Noble's Nook last year. But the e-reader market is fast disappearing as it is overtaken by more general-purpose tablets such as the Kindle Fire. Yet, Microsoft appears to be pushing good money after bad by upping its investment by another $1B to buy the rest of Nook, apparently hoping to obtain enough content to keep the market alive when Barnes & Noble goes the way of Borders. But chasing content this late, behind Amazon, Apple and Google, is going to be much more costly than $1B – and an even lower probability than winning in hardware or software.
Then there's the new Microsoft Office. In late May Microsoft leadership hoped investors would be charmed to hear that 1M $99 subscriptions had been sold in 3.5 months. However, that was to an installed base of hundreds of millions of PCs – a less than thrilling adoption rate for such a widely used product. Companies that reached 1M subscribers from a standing (no installed base) start include Instagram in 2.5 months, Spotify in 5 months, Dropbox in 7 months and Facebook (which pioneered an entire new marketplace in Social) in only 10 months. One could have easily expected a much better launch for a product already so widely used, and offered at about a third the price of previous licenses.
A new xBox was launched on May 21st. Unfortunately, like all digital markets gaming is moving increasingly mobile, and consoles show all the signs of going the way of desktop computers. Microsoft hopes xBox can become the hub of the family room, but we're now in a market where a quarter of homes lead by people under 50 don't really use "the family room" any longer.
xBox might have had a future as an enterprise networking hub, but so far Kinnect has not even been marketed as a tool for business, and it has not yet incorporated the full network functionality (such as Skype) necessary to succeed at creating this new market against competitors like Cisco.
Thankfully, after more than a decade losing money, xBox reached break-even recently. However, margins are only 15%, compared to historical Microsoft margins of 60% in "core" products. It would take a major growth in gaming, plus a big market share gain, for Microsoft to hope to replace lost PC profits with xBox sales. Microsoft has alluded to xBox being the next iTunes, but lacking mobility, or any other game changer, it is very hard to see how that claim holds water.
The Microsoft re-org has highlighted 3 new divisions focused on servers and tools, Skype/Lync and xBox. What is to happen with the business which has driven three decades of Microsoft growth – operating systems and office software – is, well, unclear. How upping the focus on these three businesses, so late in the market cycle, and with such low profitability will re-invigorate Microsoft's value is, well, unclear.
In fact, given how Microsoft has historically made money it is wholly unclear what being a "devices and services" company means. And this re-organization does nothing to make it clear.
My past columns on Microsoft have led some commenters to call me a "Microsoft hater." That is not true. More apt would be to say I am a Microsoft bear. Its historical core market is shrinking, and Microsoft's leadership invested far too much developing new products for that market in hopes the decline would be delayed – which did not work. By trying to defend and extend the PC world Microsoft's leaders chose to ignore the growing mobile market (smartphones and tablets) until far too late – and with products which were not game changers.
Although Microsoft's leaders invested heavily in acquisitions and other markets (Skype, Nook, xBox recently) those very large investments came far too late, and did little to change markets in Microsoft's favor. None of these have created much excitement, and recently Rick Sherland at Nomura securities came out with a prediction that Microsoft might well sell the xBox division (a call I made in this column back in January.)
As consumers, suppliers and investors we like the idea of a near-monopoly. It gives us comfort to believe we can trust in a market leader to bring out new products upon which we can rely – and which will continue to make long-term profits. But, good as this feels, it has rarely been successful. Markets shift, and historical leaders fall as new competitors emerge; largely because the old leadership continues investing in what they know rather than shifting investments early into new markets.
This Microsoft reorganization appears to be rearranging the chairs on the Titanic. The mobile iceberg has slashed a huge gash in Microsoft's PC hull. Leadership keeps playing familiar songs, but the boat cannot float without those historical PC profits. Investors would be smart to flee in the lifeboat of recent share price gains.
With the stock market hitting new highs, some people have
already forgotten about the Great Recession. If you recall 2009, things looked pretty bleak
economically. But the outlook has changed dramatically in just 4 years. And it has been a boon for investors, as even the safest indices have yielded a 250% return (>25% annualized compound return:)
Interview with Bob
Deitrick, co-Author "Bulls, Bears and the Ballot Box" (BBBB):
Q– Bob, how much credit should Americans give President
Obama for today’s improved equity values?
BBBB – Our research reviewed American economic performance
since President Roosevelt installed the first Federal Reserve Board
Chairman – Republican Marriner Eccles. We observed that even
though there are multiple impacts on the economy, it was clear that policy
decisions within each administration, from FDR forward, made a clear difference on performance. And
relatively quickly.
Presidents universally take credit when the economy does
well (such as Reagan,) and choose to blame other factors when the economy does
poorly (such as Carter.) But there
was a clear pattern, and link, between policy and financial market performance.
Although we hear almost no one in the Obama administration
taking credit for record index highs, they should. Because the President deserves
significant credit for how well this economy has done during his leadership.
The auto rescue plan has worked. American car manufacturers are still dominant and employing millions directly and in supplier companies. Wall Street reform
has been painful but it has re-instated faith amongst investors.
The markets are far more predictable than they were four years ago, as VIX numbers demonstrate greater faith and less risk.
Even for small investors, such as thoughs limited to their 401(k) or IRA investments, the average annual compound
return on stocks under President Obama has been more than
24% since the lows of March, 2009.
This is a better result than either Clinton, Reagan or FDR who were the
prior winners in our book.
Q– Bob, what policies do you think were most important
toward achieving today’s new highs?
BBBB – Firstly, let’s review just how bad things were in
2009. In 2000 America was completing the longest
bull market in history. But by
the end of President Bush's tenure the country had witnessed 2 stock market crashes, and the DJIA had fallen 58%. This was the second worst market decline in history (exceeded
only by the Great Depression,) and hence the term “Great Recession” was born.
In 2000, at the end of Clinton’s administration, the Consumer Confidence Index was at a record high 140.
By January, 2009 this index had fallen to an historic low of 25.3. Comparatively, when Reagan took office
at the end of the economically weak Carter years the Confidence Index
was still at 74.4! Today this
measure of how people feel about the country is still nowhere near 2000 levels,
but it is almost 3 times better than 4 years ago.
Significantly, in 2000 America had a budget surplus. By 2009 surpluses were long gone and the
country was racking up historic deficits as taxes were cut while simultaneously
outlays for defense skyrocketed to cover costs of wars in Iraq and
Afghanistan. Additionally, banks
were on the edge of failing due to unregulated real estate speculation and massive derivative losses.
We can largely thank a fairer tax code, improved regulation and consistent SEC enforcement. Also, major strides in health care reform – something no other President has accomplished – has given American's more faith in their future, and an increased willingness to invest.
Q– To which President would you compare Obama’s economic
performance?
BBBB– By all measures, President Obama has outperformed
every modern President.
The easiest comparison would be to President Reagan, who’s
economic performance was superb. Even though Obama's performance is better.
Reagan had the enormous benefit of two major factors:
a significantly better economy than Obama inherited, even if afflicted by inflation
and his two terms coincided with the highest performing
demographic years of the Baby Boomer generation.
Today's demographics have shifted dramatically. The country is much older, with fewer
young people supporting a much larger near-retirement age group. This inherent demographic fact makes
creating economic growth monumentally harder than it was 30 years ago.
Few people think of Reagan as a stimulus addict. Yet, his administration’s military
build-up added $1trillion of stimulus to the national debt ($2.3trillion adjusted for
inflation) – the opposite of what is happening during the Obama years. Many like to think
that it was tax cutting which grew the economy, but undoubtedly we now know
that this dramatic defense and infrastructure (highways, etc.) stimulus had more to do with igniting economic growth. Reagan's spending looked far more like FDR than Herbert Hoover!
Ronald Reagan tripled the national debt during his tenure, creating what today's Congressional austerity advocates might have called "a legacy of unpayable debt for our grandchildren.” But, as we saw, later growth (during Clinton) resolved that debt and created a budget surplus by 2000.
Q– Bob, President’s Obama detractors liken the Affordable
Care Act (i.e. Obamacare) to an Armageddon on business, sure to kill economic
growth and plunge the country back into recession. Do you agree?
BBBB– To the contrary, ACA levels the playing field and will
be good for economic growth. Where
previously only large corporations could afford employee health care plans, in
the future far more employees will have far more equitable coverage. Further, today employees frequently are unable to leave a
company to start a new business because they would lose health care, which in
the future will not be true.
One leading indicator of the benefits of ACA might be the performance of healthcare and biotech stocks, which are up 20-30% and leaders in the current market rally.
Q– What policies would you recommend the Obama
administration follow in order to promote economic growth, more jobs and
greater returns for investors during the second term?
BBBB- Obama needs to make the cornerstone of his second term creating new job growth. That was the primary platform of his candidacy, and it is a platform long successful for the Democratic party. If President Obama can do this and govern effectively, this could be his real legacy.
The Dow Jones Industrial Average (DJIA) jumped to record levels – over 15,000 – today after a favorable U.S. jobs report showed 165K new jobs and a drop in unemployment to 7.5%. Politicians, economists, business leaders and investors were buoyed by economic improvements and the hope for further growth. A higher stock market is considered a great ointment for what has hurt America the last several years.
But there's a big, ugly fly in this ointment. While the indices are rising, revenues at many very large, key component companies are actually declining. And possibly worse, the revenue growth rate for large companies has been declining for at least 3 years.
As the chart shows, Caterpillar has led the revenue decline, dropping a whopping 17.5% year-over-year. But noteworthy declines included JPMorganChase dropping 15.5%, Pfizer down 12.4% and Merck down 9%. It's hard to imagine a great long-term bull market when revenues are distinctly going in a bearish direction for several stalwart companies.
It is also important to note that the rate of DJIA growth has declined markedly. In 2011 first quarter growth was 11.4% over 2010. But 2012 was only 9.4% over 2011 and 2013 came in only a paltry 3.8% over 2012. Ouch! Clearly, jobs growth will not be sustained if these organizations cannot put more money on the top line.
So why aren't these companies growing?
For companies to grow they must invest in new products, new markets and the resources to sell and deliver these new products and new markets. And that creates jobs. Think about easy to identify revenue successes like Apple (iPads,) Samsung (smartphones,) Amazon.com, Netflix, Tesla, Facebook. Proper investment leads to revenue growth opportunities.
But, unfortunately, America's leaders have reduced their investment in growth projects the last 15 years. Instead, they've been giving more money to investors — and increasingly dumping money into stock buybacks that manipulate price and help improve management bonuses!
As the chart demonstrates, in 1998 42% of corporate cash was reinvested into the means of production – which creates growth. Today this has declined to only about 1/3 of available cash; a whopping 25% decline! Additionally, R&D investments which should lead to new products and higher sales, dropped from 16% of cash used a decade ago to a more meager 12%!
Where has the money gone? 13% of cash was going directly to investors, who could then invest in other companies with higher rate of return growth projects. That number has risen to 18%, which is inherently a good thing as we can hope a lot of that has been re-invested in other companies.
But 13-17% used to be spent on stock buybacks, which create no revenue or economic growth. All share buybacks do is exchange cash for shares, reducing the number of shares and changing metrics like earnings per share and thus the price/earnings (P/E) multiple. It does not create any new investment. That number has risen to a staggering 22-34% of revenues!
Net/net, in the not too distant past America's leaders were putting 70-74% of their cash to work by investing in growth projects. And 12% was going to investors for projects elsewhere. By in the mid-1990s this reinvestment rate declined to 52-55%, ushering in the Great Recession. After improving this rate has started declining again, and remains stuck no better than 60% of cash. Coupled with the 5% increase in cash being robbed from growth projects to buy back stock, the net reinvestment remains mired at 55%!
American's want jobs and a growing economy. As do people everywhere! We are excited when we see improvement. But today, the ugly horsefly in the ointment is the lack of revenue growth – and the lack of investment in growth projects. Until business leaders begin putting their corporate cash hoards into growth projects again the long-term outlook remains problematic, even if the market is hitting record DJIA highs.
JCPenney's board fired the company CEO 18 months ago. Frustrated with weak performance, they replaced him with the most famous person in retail at the time. Ron Johnson was running Apple's stores, which had the highest profit per square foot of any retail chain in America. Sure he would bring the Midas touch to JC Penney they gave him a $50M sign-on bonus and complete latitude to do as he wished.
Things didn't work out so well. Sales fell some 25%. The stock dropped 50%. So about 2 weeks ago the Board fired Ron Johnson.
The first mistake: Ron Johnson didn't try solving the real problem at JC Penney. He spent lavishly trying to remake the brand. He modernized the logo, upped the TV ad spend, spruced up stores and implemented a more consistent pricing strategy. But that all was designed to help JC Penney compete in traditional brick-and-mortar retail. Against traditional companies like Wal-Mart, Kohl's, Sears, etc. But that wasn't (and isn't) JC Penney's problem.
The problem in all of traditional retail is the growth of on-line. In a small margin business with high fixed costs, like traditional retail, even a small revenue loss has a big impact on net profit. For every 5% revenue decline 50-90% of that lost cash comes directly off the bottom line – because costs don't fall with revenues. And these days every quarter – every month – more and more customers are buying more and more stuff from Amazon.com and its on-line brethren rather than brick and mortar stores. It is these lost revenues that are destroying revenues and profits at Sears and JC Penney, and stagnating nearly everyone else including Wal-Mart.
Coming from the tech world, you would have expected CEO Johnson to recognize this problem and radically change the strategy, rather than messing with tactics. He should have looked to close stores to lower fixed costs, developed a powerful on-line presence and marketed hard to grab more customers showrooming or shopping from home. He should have targeted to grow JCP on-line, stealing revenues from other traditional retailers, while making the company more of a hybrid retailer that profitably met customer needs in stores, or on-line, as suits them. He should have used on-line retail to take customers from locked-in competitors unable to deal with "cannibalization."
No wonder the results tanked, and CEO Johnson was fired. Doing more of the tired, old strategies in a shifting market never works. In Apple parlance, he needed to be focused on an iPad strategy, when instead he kept trying to sell more Macs.
What was that old description of insanity? Something about repeating yourself…..
Expectedly, Penney's stock dropped another 10% after announcing the old CEO would return. Investors are smart enough to recognize the retail market has shifted. That newsapaper coupons, circulars and traditional advertising is not enough to compete with on-line merchants which have lower fixed costs, faster inventory turns and wider product selection.
It certainly appears Mr. Johnson was not the right person to grow JC Penney. All the more reason JCP needs to accelerate its strategy toward the on-line retail trend. Going backward will only worsen an already terrible situation.
Interestingly, this study is based wholly on statistical performance, rather than customer input. The academics utilize on-time flight performance, denied passenger boardings, mishandled bags and complaints filed with the Department of Transportation. It does not even begin to explore surveying customers about their satisfaction. Anyone who flies regularly can well imagine those results. Oh my.
So how would you expect an innovative, adaptive growth-oriented company (think like Amazon, Apple, Samsung, Virgin, Neimann-Marcus, Lulu Lemon) to react to declining customer performance metrics? They might actually change the product, to make it more desirable by customers. They might hire more customer service representatives to identify customer issues and fix problems quicker. They might adjust their processes to achieve higher customer satisfaction. They might train their employees to be more customer-oriented.
But, United decidedly is not an innovative, adaptive organization. So it responded by denying the situation. Claiming things are getting better. And talking about how it is spending more money on its long-term strategy.
United doesn't care about customers – and really never has. United is focused on "operational excellence" (using the word excellence very loosely) as Messrs. Treacy and Wiersema called this strategy in their mega-popular book "The Discipline of Market Leaders" from 1995. United's strategy, like many, many businesses, is to constantly strive for better execution of an old strategy (in their case, hub-and-spoke flight operations) by hammering away at cutting costs.
Locked in to this strategy, United invests in more airplanes and gates (including making acquisitions like Continental) believing that being bigger will lead to more cost cutting opportunities (code named "synergies".) They beat up on employees, fight with unions, remove anything unessential (like food) invent ways to create charges (like checked bags or change fees), fiddle with fuel costs, ignore customers and constantly try to engineer minute enhancements to operations in efforts to save pennies.
Like many companies, United is fixated on this strategy, even if it can't make any money. Even if this strategy once drove it to bankruptcy. Even if its employees are miserable. Even if quality metrics decline. Even if every year customers are less and less happy with the product. All of that be darned! United just keeps doing what it has always done, for over 3 decades, hoping that somehow – magically – results will improve.
Today people have choices. More choices than ever. That's true for transportation as well. As customers have become less happy, they simply won't pay as much to fly. The impact of all this operational focus, but let the customer be danged, management is price degradation to the point that United, like all the airlines, barely (or doesn't – like American) cover costs. And because of all the competition each airline constantly chases the other to the bottom of customer satisfaction – each lowering its price as it mimics the others with cost cuts.
Success today – everywhere, not just airlines – requires more than operational focus. Constantly cutting costs ruins the brand, customer satisfaction, eliminates investment in new products and inevitably kills profitability. The litany of failed airlines demonstrates just how ineffective this strategy has become. Because operational improvements are so easily matched by competitors, and ignores alternatives (like trains, buses and automobiles for airlines) it leads to price wars, lower profits and bankruptcy.
Nobody looks to airlines as a model of management. But many companies still believe operational excellence will lead to success. They need to look at the long-term implications of this strategy, and recognize that without innovation, new products and highly satisfied new customers no business will thrive – or even survive.
The iPad is now 3 years old. Hard to believe we've only had tablets such a short time, given how common they have become. It's easy to forget that when launched almost all analysts thought the iPad was a toy that would be lucky to sell a few million units. Apple blew away that prediction in just a few months, as people demonstrated their lust for mobility. To date the iPad has sold 121million units – with an ongoing sales rate of nearly 20million per quarter.
Following very successful launches of the iPod (which transformed music from CDs to MP3) and iPhone (which turned everyone into smartphone users,) the iPad's transformation of personal technology made Apple look like an impenetrable juggernaut – practically untouchable by any competitor! The stock soared from $200/share to over $700/share, and Apple became the most valuable publicly traded company on any American exchange!
But things look very different now. Despite huge ongoing sales (iPad sales exceed Windows sales,) and a phenomenal $30B cash hoard ($100B if you include receivables) Apple's value has declined by 40%!
In the tech world, people tend to think competition is all about the product. Feature and functionality comparisons abound. And by that metric, no one has impacted Apple. After 3 years in development, Microsoft's much anticipated Surface has been a bust – selling only about 1.5million units in the first 6 months. Nobody has created a product capable of outright dethroning the i product series. Quite simply, there have been no "game changer" products that dramatically outperform Apple's.
But, any professor of introductory marketing will tell you that there are 4 P's in marketing: Product, Price, Place and Promotion. And understanding that simple lesson was the basis for the successful onslaught Samsung has waged upon Apple in 2012 and 2013.
Samsung did not change the game with technology or product. It has used the same Android starting point as most competitors for phones and tablets. It's products are comparable to Apple's – but not dramatically superior. And while they are cheaper, in most instances that has not been the reason people switched. Instead, Samsung changed the game by focusing on distribution and advertising!
The remarkable insight from this chart is that Samsung is spending almost 4.5 times Apple – and $1B more than perennial consumer goods brand leader Coca-Cola on advertising! Simultaneously, Samsung has set up kiosks and stores in malls and retail locations all over America.
Can you imagine having the following conversation in your company in 2010?:
"As Vice President of Marketing I propose we take on the market leader not by having a superior product. We will change the game from features and function comparisons to availability and awareness. I intend to spend more than anyone in our industry on advertising – even more than Coke. And I will open so many information and sales locations that our products will be as available as Coke. We'll be everywhere. Our products may not be better, but they will be everywhere and everyone will know about them."
Samsung found Apple's Achilles heel. As Apple's revenues rose it did not keep its marketing growing. SG&A (Selling, General and Administrative) expense declined from 14% of revenues in 2006 to 5% in 2012; of course aiding its skyrocketing profits. And Apple continued to sell through its fairly limited distribution of Apple stores and network providers. Apple started to "milk" its hard won brand position, rather than intensify it.
Samsung took advantage of Apple's oversight. Samsung maintained its SG&A budget at 15% of revenues – even growing it to 24% for a brief time in 2009, before returning to 15%. As its revenues grew, advertising and distribution grew. Instead of looking back at its old ad budget in dollars, and maintaining that budget, Samsung allowed the budget to grow (to a huge number!) along with revenues.
And that's how Samsung changed the game on Apple. Once America's untouchable brand, the Apple brand has faltered. People now question Apple's sustainability. Some now recognize Apple is vulnerable, and think its best times are behind it. And it's all because Samsung ignored the industry lock-in to constantly focusing on product, and instead changed the game on Apple.
Something Microsoft should have thought about – but didn't.
Of course, Apple's profits are far, far higher than Samsung's. And Apple is still a great company, and a well regarded brand, with tremendous sales. There are ongoing rumors of a new iOS 7 operating system, an updated format for iPads, potentially a dramatically new iPhone and even an iTV. And Apple is not without great engineers, and a HUGE war chest which it could use on advertising and distribution to go heads up with Samsung.
But, at least for now, Samsung has demonstrated how a competitor can change the game on a market leader. Even a leader as successful and powerful as Apple. And Samsung's leaders deserve a lot of credit for seeing the opportunity – and seizing it!
It is an unfortunate fact that small businesses fail at a higher rate than large businesses. While we've come to accept this, it somewhat flies in the face of logic. After all, small businesses are run by owners who can achieve entrepreneurial returns rather than managerial bonuses, so incentive is high. Conventional wisdom is that small businesses have fewer, and closer relationships to customers (think Ace Hardware franchisees vs. Home Depot.) And lacking layers of overhead and embedded management they should be more nimble.
Yet, they fail. From as high as 9 out of 10 for restaurants to 4 out of 10 in more asset intensive business-to-business ventures. That is far higher than large companies.
Why? Despite conventional wisdom most small businesses are run by leaders committed to a single, narrow success formula. Most are wedded to their core ideology, based on personal history, and unwilling to adapt until the business completely fails. Most reject new technologies and other emerging innovations as long as possible, trying to conserve cash and wait for "more proof" change will pay off. Additionally, most spend little time investing time, or money, in innovation at all as they pour everything into defending and extending their historical business approach.
Take for example the major trend to digital marketing. Everyone knows that digital is the only growing ad market, while print is fast dying: Chart republished with permission of Jay Yarow, Business Insider 3/19/2013
Digital marketing is one of the few places where ads can be purchased for as little as $100. Digital ads are targeted at users based upon their searches and pages viewed, thus delivered directly to likely buyers. And digital ads consistently demonstrate the highest rate of return. That's why it's growing at over 20%/year!
Yet, small businesses continue to put most of their money into local newspapers and direct mail circulars. The least targeted of all advertising, and increasingly the least read! While print ad spending has declined over 80% the last few years, to 1950 levels (adjusted for inflation,) smarter businesses have abandoned the media. At large companies in 2012 38% of advertising is on digital, second only to TV's 42% – and rapidly moving into first place!
A second major trend is the move to mobile and app usage. In the last 2 years mobile users have grown and shown a distinct preference for apps over mobile web sites. App use is growing while mobile web sites have stalled: Chart republished with permission of Alex Cocotas, Business Insider 3/20/13
Even though there are over 1million apps available for iPhone and Android users, the vast majority of small businesses have no apps aligned with their business and customers. Most small businesses, late to the game in digital marketing, are content to try and add mobile capability to their already existing web site – hoping that it will be sufficient for future growth. Meanwhile, customers are going directly for apps in accelerating numbers every month! Chart republished with permission of Alex Cocotas, Business Insider 1/8/13
Rather than act like market leaders, using customer intimacy and nimbleness to jump ahead of lumbering giants, small business leaders complain they are unsure of app value – and keep spending money on historical artifacts (like their web site) rather than invest in higher return innovation opportunities. Many small businesses are spending $20k+/year on printed brochures, coupons and newspaper or magazine PR when a like amount spent on an app could connect them much more tightly with customers, add higher value and expand their base more quickly and more profitably!
The trend to digital marketing – including the explosive growth in mobile app use – is proven. And due to very low relative up-front cost, as well as low variable cost, both trends are a wonderful boon for small businesses ready to adopt, adapt and grow. But, unfortunately, the vast majoritiy of small business leaders are behaving oppositely! They remain wedded to outdated marketing and customer relationship processes that are too expensive, with lower yield!
The opportunity is greater now than during most times for smaller competitors to be disruptive. They can seize new innovations faster, and leverage them before larger competitors. But as long as they cling to old practices and processes, and beliefs about historical markets, they will continue to fail, smashed under the heal of slower moving, bureaucratic large companies who have larger resources when they do finally take action.
Marissa Mayer created a firestorm this week by issuing an email requiring all employees who work from home to begin daily commuting to Yahoo offices. Some folks are saying this is going to be a blow to long-term employees, hamper productivity and will harm the company. Others are saying this will improve communications and cooperation, thin out unproductive employees and help Yahoo.
While there are arguments to be made on both sides, the issue is far simpler than many people make it out to be – and the implications for shareholders are downright scary.
Yahoo has been a strugging company for several years. And the reason has nothing to do with its work from home policy. Yahoo has lacked an effective strategy for a decade – and changing its work from home policy does nothing to fix that problem.
In the late 1990s almost every computer browser had Yahoo as its home page. But Yahoo long ago lost its leadership position in content aggregation, search and ad placement. Now, Yahoo is irrelevant. It has no technology advantage, no product advantage and no market advantage. It is so weak in all markets that its only value has been as a second competitor that keeps the market leader from being attacked as a monopolist!
A series of CEOs have been unable to develop a new strategy for Yahoo to make it more like Amazon or Apple and less like – well, Yahoo. With much fanfare Ms. Mayer was brought into the flailing company from Google, which is a market leader, to turn around Yahoo. Only she's been on the job 7 months, and there still is no apparent strategy to return Yahoo to greatness.
Instead, Ms. Mayer has delivered to investors a series of tactical decisions, such as changing the home page layout and now the work from home policy. If tactical decisions alone could fix Yahoo Carol Bartz would have been a hero – instead of being pushed out by the Board in disgrace.
Many leading pundits are enthused with CEO Mayer's decision to force all employees into offices. They are saying she is "making the tough decisions" to "cut the corporate cost structure" and "push people to be more productive." Underlying this lies thinking that the employees are lazy and to blame for Yahoo's failure.
Balderdash. It's not employees' fault Yahoo, and Ms. Mayer, lack an effective strategy to earn a high return on their efforts.
It isn't hard for a new CEO to change policies that make it harder for people to do their jobs – by cutting hours out of their day via commuting. Or lowering productivity as they are forced into endless meetings that "enhance communication and cooperation." Or forcing them out of the company entirely with arcane work rules in a misguided effort to lower operating costs or overhead. Any strategy-free CEO can do those sorts of things.
The the fact that some Yahoo employees work from home has nothing to do with the lack of strategy, innovation and growth at Yahoo. That failure is due to leadership. Bringing these employees into offices will only hurt morale, increase real estate costs and push out several valuable workers who have been diligently keeping afloat a severely damaged Yahoo ship. These employees, whether in an office or working at home, will not create a new strategy for Yahoo. And bringing them into offices will not improve the strategy development or innovation processes.
Regardless of anyone's personal opinions about working from home, it has been the trend for over a decade. Work has changed dramatically the last 30 years, and increasingly productivity relies on having time, alone, to think and produce charts, graphs, documents, lines of code, letters, etc. Technologies, from PCs to mobile devices and the software used on them (including communications applications like WebEx, Skype and other conferencing tools) make it possible for people to be as productive remotely as in person. Usually more productive removed from interruptions.
Taking advantage of this trend helps any company to hire better, and be more productive. Going against this trend is simply foolish – regardless the intellectual arguments made to support such a decision. Apple fought the trend to PCs and almost failed. When it wholesale adopted the trend to mobile, seriously reducing its commitment to PC markets, Apple flourished. It is ALWAYS easier to succeed when you work with, and augment trends. Fighting trends ALWAYS fails.
Yahoo investors have plenty to be worried about. Yahoo doesn't need a "tough" CEO. Yahoo needs a CEO with the insight to create, and implement, a new strategy. And a series of tactical actions do not sum to a new strategy. As importantly, the new strategy – and its implementation – needs to augment trends. Not go against trends while demonstrating the clout of a new CEO.
If you've been waiting to figure out if Ms. Mayer is the CEO that can make Yahoo a great company again, the answer is becoming clear. She increasingly appears very unlikely to have what it takes.
