by Adam Hartung | Aug 12, 2009 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in, Weblogs
GM. Those two letters call up a lot of emotion these days. People ask,
"What went wrong?" "How could a company that large, that successful, go
bankrupt?" The less polite say: "General Motors' leadership is
corrupt." "They ignored customers." "The union killed them."
"Government interference." "Idiots."
This is the first paragraph of my new column on Forbes.com. You can read it, and future articles, in the Leadership section – Link Here.
I'm very excited to find new audiences for discussing what's caused the latest round of business problems – and failures. As well as spreading the message about how businesses can start growing again. Check out the column.
by Adam Hartung | Aug 10, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership
I've long been a fan of GE. The only company to be on the Dow Jones Industrial Average for more than 100 years. A company that has transitioned through countless businesses, willing to get into and out of many opportunities in order to find ways to keep growing. Buried deep in the heart of this company's operating principles are tools which keep it from becoming too Locked-in. The constant 360 degree evaluations, the demand for results, the willingness to disagree, the acceptance of Disruptions, the investments in White Space. These have done GE well for years, allowing the company to evolve its Identity, Strategy and Tactics.
But recently, GE has been more disappointing. The stock crashed to $6/share earlier in 2009. And now Forbes reports "Accounting Tricks Catch Up With GE". One of the misguided tools of Defend & Extend Managers is using financial machinations – in effect generating profits out of thin air by playing with the accounting rules rather than making and selling something. I talk this through at length in "Create Marketplace Disruption" (FT Press, 2008) because for the CEO of a publicly traded company, it's an easy route to take. By playing with the accounting a business looks better, allowing the CEO to do more of the same instead of more deeply investigating market shifts that jeopardize the future.
I was deeply disappointed to read where GE allowed this to happen. They counted as revenue, and profit, sales of locomotives to financial institutions – rather than end users. And the use of derivatives at GE was an outright D&E practice to try making money on financial investments that weren't so good. I've decried the use of derivatives loudly – even by Warren Buffett – in previous blogs because they are a tool designed to make weak financial practices look better. This isn't what made GE great, but apparently these were the tools of "modern management" current executives used to prop up sales and profits – instead of focusing on the business. And now the SEC has forced GE to pay a fine for its actions.
Investors, employees and vendors need to be very wary of this. It could mark a sea-change in GE. For years, top executives made their mark by developing new businesses that were attuned to shifting markets. Jet engines and NBC are just a couple of huge businesses GE entered as a result of recognizing shifting markets and the huge opportunity being created. And GE has always been quick to pull the trigger on selling a business when a market shift meant the growth was starting to slow.
But now we can see that GE has used financial machinations to make some businesses look better. These kind of D&E actions are telltales of a company slipping from Phoenix Principle actions – which help you grow – into a company that could stall. And growth stalls are deadly. Only 7% of stalled companies every consistently grow at a mere 2% ever again.
So far, we know that these actions have hurt GE pretty badly. Firstly, there's the $50million fine. You may think this is chump change to GE – but it's money that didn't go into developing a new water filtration system, for example, which could make money down the road. Or invested into a new business plan that could turn into something big. Secondly, its use of financial instruments, including derivatives, and the SEC mark has dramatically eroded investor confidence. Like I said, over $150billion in market cap eroded (about 50%) in the last year alone – and that's after a recovery from $6 to nearly $15 per share (chart here).
High performing companies do NOT resort to D&E Management. It's a Siren's song, straight from Homer's travels, to lure the company ship onto the rocky shores. It seems so simple, and it is, to protect the existing business with financial adjustments that make it look better. But reality is that these poor returns indicate the market is shifting, and that action is needed to reconnect with the shifted marketplace. Whenever executives use D&E practices, including financial machinations (even legal ones) to make the business look better they are ignoring market shifts – which undermines the organization's ability to develop new scenarios, understand the impact of emerging competitors, disrupt old practices and develop White Space projects that can help the company move forward and meet market needs.
It was the willingness to resort to D&E Management that started GM on its long path to bankruptcy. Read "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes" for more info on how easy it is to slip into a rut wiping out future returns.
by Adam Hartung | Aug 7, 2009 | Defend & Extend, Disruptions, Food and Drink, General, Leadership, Lock-in, Music, Openness, Television
"Pepsi Launches Own Music Label in China" is the BusinessWeek headline. Clearly, the Pepsi staff has some new ideas. Recently Pepsi's Chairperson, Ms. Nooyi, made a trip to China for 10 days. Apparently frustrated, she commented to the Wall Street Journal in July that she didn't see enough Disruptive thinking on the part of her folks in China. She indicated the market was robust, but it was different and would take a different approach. It now sounds like her China leadership got the message.
In addition to launching a music label, Pepsi is producing a "Battle of the Bands" show in China. It's almost like a reformatted page from the aggressive growth years of Starbucks. Instead of just expanding into a new geography (China) with the same old playbook (like the floundering WalMart), Pepsi is figuring out how to be a big success. And that may mean producing television, producing music and making people into stars. China's culture is unlike anything in the U.S. or Europe. So doing new and different things will be critical to success. When you see a business developing its own scenarios about the future, taking actions its competitors (Coke) are too hide-bound to try, acting Disruptively to compete and using White Space projects to test new ideas you simply have to be excited!
On the other hand, "Tide Turns 'Basic" for P&G in Slump" is the Wall Street Journal headline about the latest "new" product at P&G. Please remember, the departing P&G CEO was lauded for creating an innovative culture at P&G. But it appears the legacy is a culture of sustaining innovations intended to do nothing more than Defend & Extend the old P&G brands. Now slumping, P&G needs to identify market shifts more than ever, and create new solutions that help it move with market trends. Instead, the company is rushing into reverse! Management not only seem to be driving the bus looking in the rear-view mirror, but actually driving it that way as well!
Tide has been around a long time. Ostensibly a very good product. For reasons explained in the article, managers at P&G felt the best way to sell more product was to make it less good. Really. They removed some of the chemicals that help you get clothes clean, renamed it "Basic" and launched the product at a lower price. It's not "new and improved." It's not even "better." It's literally less good – but cheaper. Sort of like store brands, or private label – only maybe not as good? Doesn't that sort of obviate the whole notion of branding?
People don't ever like to go backward. We like to grow. To learn and get more out of life. When we find a product that works, why would we want a product that works less well? And the folks at P&G missed this. Only by being insanely internally focused, terribly Locked-in, can you think this is a good idea. Looking inside a person could say "well, we want to jam the shelves with more of our branded product. We want to have the word 'Tide' smeared everywhere we can. We think people so identify with 'Tide' that they'll take a worse product just to get the name brand. We're willing to create a less good product thinking that we will get sales simply because it's cheaper than the stuff people really want to buy." Seem a little mixed up to you?
When you want to grow you figure out new ways to Disrupt the marketplace. You develop new solutions, new entry points, new connections with shifting market trends. You figure out how to be the best at the right price. You don't try to give people less, and tell them they are cheap. And Pepsi clearly gets it. They are willing to expand into music recording and TV production. Stuff P&G did when it was really creative and innovative – after all, that's why we call daytime TV "soaps", because P&G produced them just to sell soap. Now we see Pepsi applying that kind of scenario planning and competitive obsession, along with White Space, to develop new market approaches. Unfortunately we can't say the same for P&G — clearly stuck on trying to cram more stuff with the word "Tide" on it through distribution.
by Adam Hartung | Aug 6, 2009 | Current Affairs, Disruptions, In the Rapids, Innovation, Openness, Web/Tech
Today a colleague emailed me an article on Cisco. He used the Wall Street Journal "send this article" function. The email had his name, the article title, the link to the article and then this:
"The Wall Street Journal Mobile Reader for iPhoneTM
delivers the latest global news, financial events, market insights and
information to keep you ahead of the curve. Get the information you depend on
plus entertainment, culture, and sports coverage when, where, and how you want
it from the most credible source for news and information. Click below to
download the WSJ Mobile Reader for free from the iTunes App Store."
Another indicator of the trend – the shift – that is affecting publishers. And increasingly affects everyone. If you want to be "in the know" you'll be using different technology than ink on paper, or a laptop. And if you want to be competitively advantaged today you are thinking about how you can use this to grow your business:
- ads for the WSJ articles delivered to iPhone?
- developing an app for your technical materials to be read on an ereader like iPhone?
- creating a way for your customers to get updates on ereaders?
- using ereaders to update your salesforce? service force?
What ideas can you think of where this really cheap, real-time technology can help you beat the competition? How can you put ereaders (iPhone, Kindle, Sony, etc.) into your scenarios about the future? What are the leading edge competitors (like Pizza Hut's iPhone app) doing? How can you Disrupt your old business model to start using this lower cost information dissemination technology? How can you Disrupt the market to deliver higher value? What White Space do you have for testing the use of ereaders, learning about their benefits and getting closer to emerging market needs?
by Adam Hartung | Aug 5, 2009 | Current Affairs, Disruptions, eBooks, General, Innovation, Leadership, Openness, Web/Tech
"Sony Unveils Pocket Size Electronic Book Reader" is the Los Angeles Times headline. According to Silican Alley Insider the new Apple tablet is a GREAT book reader. Although Steve Jobs thinks book publishers are incredibly screwed up and he's less optimistic about book sales than he was music sales when he launched iTunes. And Amazon has sold out its Kindle e-readers since they started manufacturing them two years ago.
With all these announcements, you'd think everyone knows about e-readers and the market shift happening in publishing – from books to magazines to newspapers. Even I've blogged about this for months – and the positive impact this has had on book sales as well as Amazon's revenues and profits. But:
(Link to chart and Forrester Discussion here)
Half of all people surveyed in 2Q 2009 still haven't seen or heard about e-readers.
This is important. Imagine it's 1983, and you weren't aware about personal computers and their benefits – even though the IBM PC was Time magazine's "Man of the Year" in 1982. We now know that early adopters of PCs developed new solutions for many problems – from analysis to word processing to advertising development to commercial graphics to in-house publishing to communicating via email — on and on and on. Those who understood this technology early, recognized the shift it demonstrated, had early advantages on competitors. You didn't have to compete in technology, or be a technology officianado, to take advantage of this computing shift for your advantage.
Today, ereaders are another serious market shift that early adopters can leverage. Soon newspapers and magazines will be hard to come by, or so thin (due to printing and distribution cost) that their content will be much less than desired. But ereaders allow you to keep up with journals you've come to trust. And advertisers need to be prepared to follow them onto this platform – to reach people they otherwise would miss.
If you've quit reading books because you don't have the money to spend (at $20+ apiece), desire to carry them, or the time to read them, ereaders allow you to buy and carry 350 or more books at a fraction of previous prices. You even can buy pieces of books (chapters for example) that give you what you want. Think of the shift from long-play albums/CDs to iTunes sales of single songs as an analogy. You can get the benefits of books without many of the reasons you may have quit reading them.
Would you like a repository of information you can call upon for your daily work? With e-readers you can carry an entire library, something you'll not do in paper. Or on your laptop.
Speaking of laptops – this will all be on a laptop you say – so forget ereaders. Do you really think we'll all be carrying these 7 pound monsters around in 5 years? Look at college kids today. How many do almost all their work on a phone? They use the computer only when forced to – for typing papers or building spreadsheets. Laptops are increasingly becoming much more than people want – too big, too heavy, too hot, too power hungry, too short battery life, too complicated, too much software, too many bugs, too many viruses, too expensive. Laptops will soon be like mainframes. Look at the trend. Sales of big screen laptops have cratered as netbooks, with tiny screens, have taken off. People are moving away from laptops to smaller and easier to use products – like ereaders.
Why make your salesforce, or customers, or training techs carry a laptop when an ereader will give them everything they need? They cost less, are easier to keep working, and don't get hindered with personal apps like MS Money that you didn't put on the laptop in the first place but couldn't stop. Given ereader prices, you might be able to consider an ereader disposable in 5 years. Literally, you could give a customer an ereader with all the training, specs, history, design elements, etc. of your product the way we now use a brochure. It literally might be cheaper than a 10 page glossy brochure costs to print and distribute – but with everything they need to design in your product, or operate it, or service it. Imagine an ereader in your car glove box rather than the owner's manual you never use – but the info will be catalogued, searchable, and linked to the internet so it's always current with service information.
Market shifts affect us all. Too often we say "oh that shift is obvious, and I'm surprised the current competitors aren't jumping on that." Then we ignore the shift ourselves. Competitors that make higher rates of return, and prolong those rates of return, observe these market shifts and immediately build them into future scenarios. They think about how to use these shifts to improve their competitive position, and create White Space to test the opportunities – even when they represent Disruptive change. These are Phoenix Principle companies – and the kind you want to be – because they grow more, make more money and have longer lives.
Learn how to spot market shifts and leverge them for your advantage. Don't end up like GM – out of touch and into bankruptcy. Read the new, free ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes."
by Adam Hartung | Aug 4, 2009 | Innovation, Investing, Leadership, Software
A typical headline from last week read "Microsoft, Yahoo to Begin Joint Assault on Google". After a year of negotiating, the behemoth Microsoft finally came up with an accord to get some Yahoo technology in order to be more effective with its search engine product. "Microsoft to Tap 400 Yahoo Workers in Partnership" is the Marketwatch headline today trumpeting the plan to bring Yahoo engineers to Microsoft.
Will it make a difference? If we look at the trend, it looks doubtful (slide courtesy Silicon Alley Insider):
Of course, lots of folks think this isn't a very good idea. (Cartoon Courtesy DenverPost.com):
As John Dvorak pointed out in his column: "Microsoft and Yahoo Bring Google Good News." After all, the Google's competitors just went from 2 to 1 – a 50% reduction. What's more, the remaining player is not known for expertise in internet technology – merely its money hoard. Moreover, when it used its money hoard in the past it has rarely (never?) resulted in a success. No wonder BusinessWeek headlined "Microsoft and Yahoo: Too Little, Too Late, Too Hyped."
What's more intriguing to me is what this deal says about Microsoft. The company has already missed the market shift in search and ad placement. Search is "yesterday's news". Microsoft is still trying to fight the last war, not the next one. As it has done far too often, Microsoft remained Locked-in to its old Success Formula — all about the desktop and personal computing. It has not been part of the market shift to new applications and new ways of personal automation. That has been going to RIM, Apple, Oracle and other players. Microsoft has sat on its market share in the old market, piled up cash, but not taken the actions to be a winner in the next market – the next battle for growth. Now it's joint venture with Yahoo will strip out engineers, attempt to convert them to Microsoft ways of thinking, and put them into battle with not only the largest player in search and on-line ad placement – but the only one making money. And the one introducing new technologies and products on a regular basis.
Someone asked me last week "Who's the next GM?" I think they meant "who's the next big bankruptcy." But the better question here is "Who's the giant company that everyone thinks is competitively insurmountable, but at great risk of falling from market leadership into the Whirlpool – and eventual bankruptcy?" To that I say keep your eyes on Microsoft.
The comparisons between Microsoft and GM are striking:
- Early market leaders
- Developed near monopolies
- Challenged by the trust busters
- Created very high growth rates and huge cash hoards
- Considered a great place to work, with great longevity
- Bought up competitors
- Bought up technologies, and often never took them to market
- Became arrogant to customers
- Implemented a strong Success Formula that everyone was expected to follow
- Strong leaders that kept the companies "focused"
- Dominated their local geography as employers
- Tended to talk a lot about their past, and how what they've previously accomplished
- Tended to ignore competitors
- Avoided Disruptions – late to market with every product. Tried using marketing and money to succeed rather than being first with great products and solutions
- Never allowed White Space to develop anything new
This joint venture is not White Space. Microsoft may want to be in Search and ad sales, but the company is still relying on its old business to "carry it through." They have ignored Google and other competitors, and are trying to use the old Success Formula to compete with a much nimbler and more market-attuned competitor. They have ignored Disruptive innovations, and not developed any new solutions themselves. They have refused to allow White Space to develop new solutions for shifting market needs – instead trying to push the market to buy their solutions based on old ways of doing business. Don't forget that MSN and it's search engine have been in the market since the beginning – it's not like they just woke up to discover the market existed. Rather, they just started hinting that maybe, after 15 years of failing, they aren't doing the right things.
If you still own Microsoft stock, I predict a really bumpy ride. They won't go bankrupt soon. But GM spent 30 years going sideways for investors before finally going bankrupt. That looks like the future at Microsoft. If you're a vendor, expect poor returns to create a procurement environment intending to suck all profits out of your business. If you're a customer, expect "me too" products that are late, expensive and at best "lowest common denominator" in appearance and performance. If you're an employee, expect increased turnover, lot of infighting, increased internal politics, promotions based on reinforcing the status quo rather than results, and few opportunities for personal growth.
Employees, vendors and investors of Microsoft should read the free ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes." Everyone who has to deal with shifting markets needs to.
by Adam Hartung | Aug 3, 2009 | Current Affairs, In the Swamp, Innovation, Leadership, Lock-in, Openness
"Honda's New CEO is Also Chief Innovator" is the recent Businessweek headline. Think of the contrast with GM. Both companies have seen their auto sales hurt this year. Although the downdraft at GM is about 130% of that at Honda. But the reactions to the weakness could not be different.
GM kept trying to sell more of its existing cars until it finally declared bankruptcy, dropping half its models and all its obligations. Then the same people that lead GM into bankruptcy remained in place. While the Chairman was forced out of a job in order to obtain government loans to stay alive, he was replaced by his own #2 who is just as Locked-in as the old Chairman was. Even worse, to me, was bringing back a 77 year old industry veteran to head marketing. He may have been one of the more creative of the "old guard" but he was every bit as much "old guard" as anyone — to the point of belittling Tesla and those succeeding today with electric and hybrid vehicles.
Honda reacted by replacing the CEO of Honda Motors. But the person put into the job comes from a background in R&D. Rather than trying to do more of the same, Honda's approach is to get product developers closer to customers — even at the very top job. Honda isn't leaving the same people in charge, nor even people with the same backgrounds. Honda is planning, from the outset, to use product innovation (rather than financial engineering) to get Honda Motors back on track.
And this aligns with Honda's approach to business. Where GM was once a company with multiple businesses (IT in its ownership of EDS and aviation electronics in Hughes) GM leadership sold off those assets, using profits to subsidize the ailing auto business. Comparatively, Honda has thriving businesses in robotics, factory automation, motorcycles, small yard equipment and new ventures in aircraft and elsewhere. GM reacts to market shifts by ignoring them, and trying to do what it's always done better, faster and cheaper. GM behaves as if its returns will do better if it can just do what it has always done – but more. Honda reacts to market shifts by entering new markets, developing new products and getting itself aligned with market requirements. Honda develops new solutions to changing market needs.
There is no doubt which approach is more sensible, and into which you might consider investing. Honda uses its scenarios about the future to help it develop new products and solutions. Honda obsesses about competition, offering new products for almost every niche opportunity and learning how to be profitable across the market spectrum. Honda is very open to Disrupting its old Success Formula, getting into new businesses that will help it grow even when not "core" to the company's history or its current capabilities. And Honda gives its new business leaders the White Space to succeed, with permission to do what the market requires even if different that the past and the resources to develop new solutions through ongoing market tests.
If you have any doubts about who will grow share over the next 5 years, and who will lose share, check out the free new ebook "The Fall of GM: What Went Wrong and How to Avoid Its Mistakes." Pay attention to the results of America's "Cars for Clunkers" program to see who comes out a winner. It will be important to see if this raises sales at the American companies – or elsewhere.
by Adam Hartung | Jul 31, 2009 | Current Affairs, Defend & Extend, General, In the Swamp, Innovation, Lock-in
"Deeper Recession Than We Thought" is the Marketwatch headline. As government data reporters often do, today they revised the economic numbers for 2008. We now know the start to this recession was twice as bad as reported. The 3.9% decline was the worst economic performance since the Great Depression of the 1930s. The consumer spending decline was the worst since 1951 (58 years – a very low percentage of those employed today were even born then.) Business investment dropped a full 20%. Residential investment dropped 27%. Stark numbers.
How did business people react? Exactly as they were trained to react. They cut costs. Layed people off. Dropped new products. Stopped R&D and product development. They quit doing things. What's the impact? The decline slows, but it continues. Just like growth begets growth, cutting begets more decline.
Then really interesting bad things happen.
"ComEd loses customers for first time in 56 years" is the Crain's headline. There are 17,000 fewer locations buying electricity in the greater Chicago area than there were a year ago. That is amazing. When you see new homes being built, and new commercial buildings, the very notion that the number of electricity customers contracted is hard to fathom. People aren't even keeping the lights on any more. They've gone away.
In the old days we said "go west." But that hasn't been the case. Everyone remembers the dot.com bust ending the 1990s. "Silicon Valley Unemployment Skyrockets" is the Silican Alley Insider lead. Today unemployment in silicon valley is the highest on record – even higher than the dot bust days. When even tech jobs are at a nadir, it's clear something is very different this time.
The old approaches to dealing with a recession aren't working. While optimism is always high, what we can see is that things have shifted. The world isn't like it was before. And applying the same approaches won't yield improved results. "For Illinois, recession looking milder – but recovery weaker" is another Crain's headline. Nowhere are there signs of a robust economy.
We can't expect an economic recovery on "Cars for Cash" or "Clunker" programs. By overpaying for outdated and obsolete cars we can bring forward some purchases. But this does not build a healthy market for ongoing purchases. These programs aren't innovation that promotes purchase. They are a subsidy to a lucky few so they pay significantly less for an existing product. To recover we must have real growth. Growth from new products that meet new customer needs in new ways. Growth built on providing solutions that advantage the buyer. Only by introducing innovation, and creating value, will customers (businesses or consumer) open their wallets.
Advertising hasn't disappeared. But it has gone on-line. Today you don't have to spend as much to reach your target. Instead of mass advertising to 1,000 in order to reach the 100 (or 15) you really want, today you can target that buyer through the web and deliver them an advertisement far cheaper. I didn't learn about Cash for Clunkers from a TV ad, I learned about it on the web. As did thousands of people that rushed out to take advantage of the program at its introduction – exceeding expectations. It no longer takes inefficient mass advertising through newspapers or broadcast TV to reach customers – so that market shrinks. But the market for on-line ads will grow. So Google grows – double digit growth – while the old advertising media keeps shrinking. To get the economy growing businesses (like Tribune Corporation) have to shift into these new markets, and provide new products and services that help them grow.
I live in Chicago. Years ago, in the days of The Jungle Chicago grew as an agricultural center. There was a time the West Side of Chicago was known for its smelly stockyards and slaughter houses. But Chicago watched its agricultural companies move away. They moved closer to the farms. They were replaced by steel mills in places like Gary, IN and Chicago's south side. But those too shut down, moved to lower cost locations offshore. These businesses were replaced with assembly plants, like the famous AT&T Hawthorne facility, and manufacturers such as machine tool makers. Now, for the last decade, these too have been moving away. With each wave, the less valuable work, the more menial work, shifted to another location where it could be done as good but cheaper and often faster.
Historically growth continued by replacing those jobs with work tied to the shifting market – jobs that provided more value. So now, for Chicago to grow it MUST create information jobs. The market has moved. Kraft won't regain its glory if it keeps trying to sell more Velveeta. Kraft has not launched a major new product in over 9 years. Sara Lee has been shedding businesses and cutting costs for 6 years – getting smaller and losing value. McDonalds sold its high growth business Chipotles to raise money for defending its hamburger stores by adding new coffee machines. Motorola has let mobile telephony move to competitors as it remained too Locked-in to old technologies and old products while new companies – like Apple and RIM – brought out innovations that attracted new customes and growth.
Growth doesn't come from waiting for the economy to improve. Growth comes from implementing innovation that gives us new solutions. Every market, whether geographic or product based, requires new solutions to maintain growth. If we want our economy to improve, we must change our approach. We can't save our way to prosperity. Instead we must create solutions that fit future scenarios, introduce new solutions that Disrupt old patterns and use White Space to help customers shift to these products.
If we change our approach we can regain growth. Otherwise, we can expect to keep getting what we got in 2008.
by Adam Hartung | Jul 26, 2009 | Uncategorized
"Is the Party Over for Microsoft?" is the headline at Marketwatch.com. In case you missed it, last week Microsoft reported sales and earnings, and "Microsoft declines on disappointing results" was the most appropriate headline. Sales dropped 17%. Let's see, the last time we heard about a mega-corporation with double-digit revenue declines that would have been – oh yes – GM – and Chrysler.
This blog has been brutally negative on Microsoft for over 3 years. A quick look at the long-term chart and you'll note that the stock has not come near its 2000 high this decade. It's been mired in a go-nowhere range, and has recently broken down to prices last seen in the late 1990s. For investors, Microsoft has been only a disappointment.
But that's because the company has been equally disappointing for customers. Microsoft has been very consistent about trying to "milk" it's near-monopoly in desktop operating systems and office software. Even though the market has moved, Microsoft has done little to move with it. It's applications are "more of the same." It's operating systems have become bloated, and new versions have offered practically no advantages to switch. Meanwhile, customers are learning to enjoy Linux – and Macs again – as well as Unix for servers. There's literally been nothing for customers, investors — or suppliers to get excited about. Ask Dell, itself stuck in the doldrums as a Microsoft devotee.
It's not due to a lack of opportunities in the dynamic IT world. Since 2000 we've seen the emergence of Google, which simply cleaned Microsoft's clock in search and ad placement. The world of digital music became dominant, but that was claimed by Apple. Hot websites for information became valuable – but Marketwatch and HuffingtonPost (examples) are laying claim to attracting lots of readers. Microsoft simply missed these markets. Always late, and never really in step with shifting market requirements. The company tried, failed, and just kept "clipping coupons" from its near- monopoly.
It hasn't been hard to see the market shifting. Customers were put off by Microsoft's disregard for their needs in the 1990s. They searched for better solutions, and found them. Microsoft kept being Microsoft, but the world moved. Now, Microsoft is stuck. And what are they going to do to get out of their rut?
When a company is large, has a lot of cash, and has strong market share analysts are reluctant to predict it will do poorly. But Microsoft has been so Locked-in, for so long, it has been quietly letting all new markets go to new competitors. There have been NO Disruptions to the Success Formula. Windows and Office have dominated the investments. "Taking care of the franchise" has been the mantra. That meant doing more of the same. Which got us Vista – an operating system that was over a year late to market, and very easy to ignore. There hasn't been any White Space to develop new solutions. And as a result whenever Microsoft has tried to do anything new it has been late, with inferior product, a significant lack of knowledge about what the market really wanted, and out of step with new requirements for performance and price.
Microsoft won't declare bankruptcy in 2009 – or 2010. But it's acting just like GM. It's spending all its time trying to Defend & Extend its past. But in fast changing markets, that's not enough to remain viable. In markets moving as fast as IT, it's deadly. Remember DEC? Wang? Lanier? Burroughs? Univac? IBM mainframes? Cray supercomputers? Microsoft is more like GM than it's like Google. Thus, it's future isn't hard to predict. If you're an employee, time to brush up the resume. If you're an investor, time to look for the exit.
Do'nt miss the new ebook "The Fall of GM: What Went Wrong and How To Avoid It's Mistakes"
by Adam Hartung | Jul 22, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
"Pfizer reports lower profit, revenue" is the Marketwatch headline. Unhappy news has become the norm for Pfizer shareholders. Since peaking in 2000 at just under $50/share, the stock has gone nowhere but down for the entire decade – going below $13.00 in 2009 (see Yahoo Finance chart here). You have to go back to 1997 to find the last time Pfizer was valued this lowly. Despite its ownership of several well known, branded drugs – like Viagra and Lipitor – Viagra cannot regain revenue growth or investor interest.
Leadership has done a lot of things the last 10 years to try and improve the business. In 2000, at the valuation peak, the company bought Warner Lambert. In 2002 Pfizer bought Pharmacia (the merged Upjohn/Searle company). In 2005 they spent massively on legal work to protect the remaining patent life on Lipitor. In 2006 they sold the consumer products business to Johnson & Johnson. Across the last 4 years the company has dramatically cut R&D costs for both human and animal products. And earlier this year they agreed to pay a premium to buy Wyeth. But none of this has increased valuation for the last 8 years. To the contrary, value has continued to step down again, and again, and again – losing about 70%.
The problem at Pfizer is management built a Success Formula many years ago, and keeps trying to defend it. They believe in the model of finding, or buying, blockbuster drugs – meaning a product with wide appeal. And selling this only if it has patent protection in order to generate a huge price premium. This made Pfizer huge and profitable long ago. And the company keeps trying to find a way to replay that tune, hoping to achieve the old results.
But the world has shifted. The science of pharmacology has been mined for nearly 100 years. Today, most new drugs have as many problems as benefits. Increasingly, improvement happens only in narrow population niches where genetics align with the chemical additive. Pharmacology is running out of gas. Medical science has shifted to biologics. Instead of looking for a chemical solution, the focus is on nano-tech to isolate product delivery directly to diseased cells. Or engineering to alter genes through cell modification for superior healing performance. These bio-engineering solutions are now offering far better results at far lower cost – while the costs of pharmacology skyrocket amidst diminishing returns.
Pfizer has not shifted. Pfizer management keeps trying to Defend & Extend its old business. Locked-in to the old Success Formula, leadership looks for new drugs, new therapy programs, new solutions that "fit" its approach to the market. But it simply isn't paying off. And everyone from investors to employees to suppliers is at risk. Desperately, leadership is willing to overpay for Wyeth to avoid falling into oblivion when existing drugs come off patent protection in the next few years. But everyone knows this game is nearly over. This may extend the senior leader's jobs, and their pay, it doesn't provide a return to shareholders. Unless leadrship changes the Success Formula Pfizer will never again be as profitable as it once was, or grow as it once did.
Even though it is located in New Jersey, not Michigan, and is full of phramacology Ph.Ds and medical doctors rather than mechanical engineers, Pfizer is more like GM than it would ever admit. It developed a Success Formula, and it is doing everything possible to keep it alive – rather than shift with the market. As GM has shown, no matter how big you are if you don't shift with the market eventually you go bankrupt. Size is no protection from market shifts. Too bad for investors and employees that size is the only thing leadership is trying to use to protect itself.
Don't forget to download the free ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes."
