by Adam Hartung | Mar 17, 2009 | Current Affairs, General, Leadership, Web/Tech, Weblogs
Today the Seattle Post Intelligencer printed its last newspaper. "Seattle Paper Shifts Entirely to the Web," reports The New York Times. There was no buyer for the paper, so Hearst Corp. shut down the print edition. In the process it laid off 145 of its 165 news staff. This leaves the Seattle Times alone printing in the market, but it is struggling financially. As people lament the closing, is this a good or a bad day?
The on-line paper already achieves about 4million hits/month, and it hasn't really started trying to be competitive on-line. The site (www.seattlepi.com) already has 150 bloggers – so you could make a case it has more reporters than were let go from the old newsroom. And it has made agreements to pick up content from Hearst Magazines, xconomy and TV Guide amongst other partners. In an article "Executive Producer Michelle Nicolosi talks about the new SeattlePI.com" at the site she says "We're going to focus on what readers are telling us they want and on what makes SeattlePI.com essential and unique….My staff and I are thrilled to have the chance to prove that an online-only news operation can make money and do a great job serving readers….Our strategy moving forward is to experiment a lot and fail fast…We have to reinvent how things are done on many fronts…We have a 'survival of the fittest' attitude about content that isn't working." Sounds a lot like White Space to me — White Space no longer encumbered by trying to keep open a printed edition that wasn't meeting customer needs at a profit.
You could make a case that this is a GREAT DAY for the organization, and its marketplace. Firstly, this organization is taking seriously the task of building a profitable on-line newspaper. Unlike most on-line news organizations that are backwater extensions of a print paper which doesn't care about the on-line market, this is an organization that must "sink or swim" – with leaders that are establishing new metrics and show every indication of using them to run a viable business. When you enter White Space, you prefer to be an early participant, so you gain understanding fast. Like the on-line www.HuffingtonPost.com which is blowing the doors off readership with its national coverage of news and politics (and mentioned frequently by the editor – another good sign, learning from the competition).
As an early participant, with a real commitment to succeed (no transfers back to the old organization here), it's not just about "the product" but the business model as well. Not discussed was how many ad salespeople were being kept on-board to push ad sales for the new organiztion. Hopefully as much energy will be placed on learning how to craft ad products that customers want and will pay for as is being placed in creating compelling content that attracts readers. We can't expect SeattlePI.com to rely on Google to sell all their ads – and I doubt the editors do either. Building a new Success Formula requires being open to revenue generation as well as production and delivery (don't forget that figuring out how to sell "clicks" was as successful to Xerox as inventing the copier.) My worry right now is that as good as the home page is – and it's good – I didn't see a button at the top, or bottom, or anywhere to "place an ad" – something I hope they address quickly. But for now I'll let it slide in the hopes that compulsive, obsessive competitiveness caused this slip (for if it did, that demonstrates the commitment to White Space that makes it work.)
What we all know is that the old days of newspapers is gone, and won't come back. (Hear that Sam Zell and folks at The Chicago Tribune and Los Angeles Times?) iPhones and Kindles are just the start of making newspapers completely obsolete – even for those who don't fancy news via computer. The faster organizations get out there to build a new Success Formula, the more likely they'll find a way to survive. And the faster they jettison old notions about what makes for "good news" and "good ad sales" the faster they'll get to that model. Those who are the first to get out there and learn have the greatest odds of becoming a winner, because they have the longest time to experiment, fail and succeed.
Here's wishing all the best to the re-energized www.SeattlePI.com. May the editors, reporters, bloggers and salespeople give us new insight to the future of news in the ubiquitously connected world.
by Adam Hartung | Mar 15, 2009 | Uncategorized
It was less than a decade ago when Time Warner bought AOL. Time Warner was going gangbusters. It had grown out of the old magazine business to be a leader in television cable programming – even buying the business run by the #1 cable entrepreneur Ted Turner. Simultaneously, AOL had become the #1 company providing internet access. At the time, people didn't just buy access to the highway (the web) in form of a communication line, in the world of dial-up and early broadband they bought into a web provider. AOL offered everything from the dial-in number to the home page and a series of tools to make web access easier for neophyte users. In all the hoopla about how Time Warner had content, and AOL had "eyeballs" (meaning people going on-line at computer screens), the merger of AOL and Time Warner was born. A very, very high priced Time Warner used stock to by a remarkably high priced AOL.
But this marriage soon became a nightmare, with fingers pointing at everyone – from the CEOs to the Boards of Directors and many people in management. AOL and Time Warner could not maintain the growth rate. Worse, people showed the first signs of moving from TV viewership to internet use, and AOL was losing share of market quickly as broadband became available. Infighting and bickering took over. Both companies, virtually all of management, was trying to build an industrial company out of what they had. Management kept talking about how it wanted to "control" customer access, "control" internet behavior, while focus remained on "scale" as they wanted to become the "largest" internet provider and the "largest" content provider. The leadership had built both companies, and raised money, using an industrial model that expected the companies to somehow use size and scale and market share to reduce industry rivalry, control vendor costs, and allow for much higher pricing to justify the equity multiple.
Oops. By 2000 we already were well into the information economy. Scale had almost no meaning – even for telecom companies that crashed as people realized even big infrastructure suppliers couldn't avoid intense competition and low prices. And as the web expanded access 100 fold, early expectations that there would be insufficient content thus making the Time Warner content priceless (news, broadcast programs, cable programs, etc.) quickly gave way to the knowledge that content could expand 1,000 fold (or 10,000 fold) when everyone had access to viewers/readers. The industrial model upon which AOL/Time Warner had been built simply would not work. And as the stock went into freefall, executives started rotating around the top offices.
Now, a new CEO has been hired. He's from Google according to Marketwatch.com in its article "With new chief in place, will AOL stand on its own?" And as the headline implies, many industry analysts are banking on a spin-out of AOL. But you have to ask, "why bother to spin out AOL now?" The notion of combining the capabilities of both has a lot of appeal – if you understand how to build an information based Success Formula.
AOL is one of the 4 top companies at reaching people on the web. AOL gets about 60% of the monthly users as Google. That's a pretty high number. The obvious issues should be: Are the current web sites the right ones to appeal to customers? Do they have competitive differentiation? Looking forward, what web sites would excite viewers and attract them? What sites would change competition? At this stage, it's really hard to imagine that we're anywhere close to identifying the maximum value web sites. With good scenario planning and competitior analysis, AOL has the resources, access and content to reposition itself as a leader for users. As Yahoo! fortunes keep declining, AOL can build content-based reasons to grow. Additionally, AOL can identify opportunities which are not already fortresses for Google, and work to build out those opportunities before Google gets there. It's an unlimited world, and AOL/Time Warner has the right resources to be a major competitor for customers and revenues.
We need to watch closely what the new CEO (Tim Armstrong) does in his first few weeks. The analysts would like for him to talk about a spin-off. That reinforces their outdated views of industrial business models and would make them feel better about themselves and their long-term calls for changing the company. But the smarter action would be for Mr. Armstrong to Disrupt the Lock-ins at AOL/Time Warner that have kept the company doing many of the wrong things for 8 years. The leaders at AOL/Time Warner have been ineffective, and the existing decision-making processes are inhibiting value creation. He must break the behavioral and structural Lock-ins that have allowed AOL/Time Warner to be a perennially bad performer.
Next he should use his experience at Google to make AOL/Time Warner start acting like Google. He needs to take advantage of his customer reach to find out what those customers want, and then open White Space projects to deliver it to them. He needs to quit focusing on the "internal assets" and refocus on the marketplace. AOL isn't going to win or lose by acting like AOL. He needs to move AOL into position to recognize the next YouTube or Twitter and get out there! Just like News Corp. was able to buy MySpace, AOL has the resources to make a difference in the market. A spin-off would leave 2 companies with outdated Success Formulas that could easily become obsolete. But by implementing White Space focused on the market AOL could create an entirely new Success Formula based on information content and information value that would have a high rate of return for the beleagured investors.
AOL CAN have a great future. It is one of the leading companies at reaching people on the web and via TV. What AOL needs to do now is figure out how you make money off the value of all the information that customer contact gives you. Google has captured every single search ever done on its engine, and never stops milking those searches to figure out how to grow and make money. AOL needs to do the same thing - figuring out how to build the right information-based model that makes serving its customers profitable.
by Adam Hartung | Mar 12, 2009 | Current Affairs, General, Leadership, Lock-in
What do you think of when someone says "The Dow"? Most people think of the Dow Jones Industrial Average – a mix of some roughly 30 companies (the number isn't fixed and does change). But very few people know the names on the list, or why those companies are selected. As time has passed, most people think of "The Dow" as "blue chip" companies that are supposed to be the largest, strongest and safest companies on the New York Stock Exchange. For this last reason, it's probably time to think about killing "The Dow." It's certainly clear that what the selection committee thought were "blue chip" a year ago was off by about 50% – with many names gone or nearly gone (like AIG, GM, Citibank) and many struggling to convince people about their longevity (like Pfizer).
Quick history: "The Dow" is named afrer the first editor of the Wall Street Journal Charles Dow (co-founder of Dow Jones, owner of the Journal) who wrote in the late 1800s. Building on his early thoughts about markets, something called "Dow Theory" was developed in the early part of the 1900s. Simply put, this said to get a selection of manufacturing companies, and average their prices (the Dow Jones Industrials). Then, get a selection of transportation companies and average their prices (the Dow Jones Transportations [see, you forgot their were 2 "Dows" didn't you]). Then, watch these averages. If only one moves, you can't be predictive, but if both moves it means that businesses are both making and shipping more (or less) so you can bet the overall market will go the direction of the two averages. So it was a theory trying to predict business trends in an industrial economy by following two rough gages – production and transportation – using stock prices. [note: the first study of Dow Theory in 1934 said it didn't work – and it's never been shown to work predicatably.]
Don't forget, in this most quoted of all market averages the third word is "Industrial." The reason for creating the average was to measure the performance of industrial companies. And across the years, the names on the list were all kinds of industrials. Only in the most recent years was the definition expanded to include banks. But that was considered OK, because above all else "the Dow" was a measure of leading companies in an "industrial" economy and the banks had become key components in extending the industrial economy by providing leverage for "hard assets".
Marketwatch.com today asked the headline question "Is the Dow doing its job?" The article's concern was whether "the Dow" effectively tracked the economy because so many of its components have recently traded at remarkably low prices per share - 5 below $10 – and even 1 below $1! Historically these would have been swapped out for better performing companies in the economy. Faltering companies were dropped (like how AIG was dropped in the last year) – which meant that "the Dow" would always go up; because the owners could manipulate the components! [the owners are still the editors at The Wall Street Journal now owned by News Corp.] But even the editor of the Dow Jones Indexes said "While we wouldn't pick stocks that trade under $10 to be in the Dow [Citi and GM] are still representative of the industries they're in, and their decline in the recent past is part of the story of the market recently."
Recently, "the Dow" has taken a shellacking. And the reasons given are varied. But one thing we HAVE to keep in mind is that any measure of "industrial" companies deserves to get whacked, and we should not expect those industrial companies to dramatically improve. In the 1950s when the thinking was "what's good for GM is good for America" we were in the heyday of an industrial economy. And that phrase, even if never really used by anyone famous, made so much sense it became part of our lexicon. But we aren't in an industrial economy any more. And the failure of GM (as well as the struggles at Ford, Chrysler and Toyota) shows us that fact. If "the Dow" is a measure of industrial companies - or even more broadly, companies that operate an industrial business model – it is doing exactly what one should expect. And to expect it to ever recover to old highs is simply impossible.
The industrial era has been displaced, and in the future high returns will be captured by businesses that operate with information-intensive business models. Google should not be placed on the DJIA. We need a new basket – a new index. We need to put together a collection of companies that represent the strength of the economy – where new jobs will be created. Companies that use information to create competitive advantage and high rates of return — like how in an industrial economy businesses used "scale" and "manufacturing intensity" and "supply chain efficiency" to create superior returns. If we want to talk about "blue chip" companies that are more likely to show economic leadership, gauge the capability to succeed and the ability to drive improved economic output, we need a list of companies that are the big winners and demonstrate the ability to remain so by their superior understanding of the value in information and how to capture that value for investors, employees and vendors.
This index is not the NASDAQ. It would include Google, currently leading this new era as Ford did the last one 100 years ago. But other likley participants would be Amazon for demonstrating that the value of books is in the content, not the paper and that the value of retailing is not the building and store. Apple has shown how music can eclipse physical devices, and is leading the merger of computer/phone/PDA/wireless connectivity. Infosys is a leader in delivering information systems in 24×7 global delivery models. Comcast is leading us to see that computers, televisions, gaming systems, telephones and all sorts of communications/media will be delivered (and used) entirely differently. News Corp. is blurring the lines of media spanning all forms of content development as well as delivery in a rapidly shifting customer marketplace. Nike, or maybe Virgin, is showing us that branding is not about making the product – but instead about connecting products with customers. Roche for its ownership of Genentech and its deep pool of information on human genetics? What's common about these companies is that they are not about making STUFF. They are about using information to make a business, and capturing the value from that information.
RIP to the Dow Jones Industrial Average. It's future value looks, at best, unclear. What we need to do now is redefine what is a "blue chip" in this new economy. What are your ideas? Who should represent the soon to be exploding marketplace for biotech solutions based on genetics? Who will lead the nanotech wave? Who would you put on this new "blue chip information index"? Send me your ideas. And in the meantime, we can recognize that even those who created and manage the venerable "Dow" aren't really sure what to do with it.
by Adam Hartung | Mar 11, 2009 | Current Affairs, General, Leadership, Lifecycle, Lock-in
All businesses hurting in today's economy must significantly change if they want to improve their performance. In the early 1900s the world saw the advent of several new machines ushering in the industrial era. But, the economy was based on agriculture – and largely the "family farm." As the industrial era expanded landowners tried to Defend & Extend their old business models by leveraging up the family farms – borrowing more and more money to plant "fencerow-to-fencerow" as it was called. Borrowers overworked the land, and with all the debt piled on when a glitch happened (a combination of drought and falling commodity prices from expansion) the mountain of debt collapsed. The beginnings of the Great Depression hit the farmers in the 1920s. The coming of the industrial revolution made old Success Formulas based on land ownership and agriculture obsolete – and no amount of debt could defer the shift forever. It took 10 years (into the 1940s) to fully transition to the new economy, and when we did Ford, GM and other industrial giants overtook the land barrons of the earlier era.
I was reminded of this today when discussing scenario planning with Diane Meister, Managing Director of Meridian Associates in Chicago. Today she sees the deteriorating Success Formulas in her clients. Companies that keep trying to apply Industrial era Success Formulas in what is now an information economy. When they aren't prepared for big shifts – it can be devastating. But those who do prepare can improve position quickly. She told me how one of her clients had an excellent business selling toys to FAO Schwartz and other top toy chains. But Meridian could see that the growth of Target created a viable scenario for a big shift in how toys would be distributed. She implored her client to prepare for possibly the failure (note – failure – not just weakness) of several big toy chains. Good thing she did, within 2 years most of her client's retail distribution was bankrupt. Only by using scenarios to prepare for a big market shift were they able to survive – in fact come out a leader – due to the big shifts happening in retail as a result of the change in markets. (Don't hesitate to contact her firm at the link – good stuff!)
As we transition into the information economy, big changes are going to happen to all businesses. The source of value, and competitiveness, has changed. Today the Allstate Insurance's CEO was quoted in Crain's "Insurer's Should Have Federal Regulator." And in an article at Marketwatch.com, "Dimon Backs Regulation", the CEO of J.P. Morgan Chase told the U.S. Chamber of Commerce he backs additional mortgage regulation. Both of these leaders are looking forward, and recognize that markets have shifted. New regulations will be critical to success. Their future scenarios show it will take a different approach to be a global competitor in 2015 – to be a winner in the global information economy that won't support industrial era Success Formulas.
Not everyone gets it. Also at Marketwatch.com in "AT&T Chief Sounds Alarm", the AT&T CEO decries rising health care costs and worries system changes will hurt his competitiveness. Wake up! What sort of scenario is he using that expects America to keep the current health care system – and the current employer-paid insurance? Even insurance companies now recognize the system is broken and needs change. In no other country are health care costs "baked in" to the cost of a company's P&L. Think about it – even where there is national health care (Britain, France, Canada, Germany, etc.) the companies don't carry the cost as a line item they must recoup via sales and margin. Elsewhere, the cost of health care is born by society through taxes. The reality is that any American company trying to compete has a whole host of incremental costs on its shoulders because we ask employers to pay in order to keep personal income taxes low. Until we change the whole basis of how America chooses to insure its population, employers are being forced to carry costs not seen by offshore competitors. In a global marketplace – this sort of "yesterday thinking" will not survive. Employers should be leading the charge for national health care – just so they can get the issue out of their plethora of problems and off the backs of their P&Ls!
Those that don't change will end up out of the game. Because they didn't do effective scenario planning, that considered the rise of "upscale discounters," FAO Schwartz (mentioned earlier) and Zany Brainy's failed — not even a Tom Hanks movie could keep customers coming in the doors. Markets are merciless in taking down companies that can't globally compete on what's important. We can prop up GM for a short time, but no country can afford to try to keep its people working (avoid unemployment costs) and insured by pumping money into a dysfunctional car company that isn't competitive. Sears has ignored the trends, and is one of the "walking dead." Once the world's greatest retailer, it built what was for years the world's tallest building (now 2nd). But now Crain's has reported in "Willis will get Sears Tower naming rights" that soon the great building the great retailer built in its home town of Chicago will likely be renamed for a London insurance company. Of course, Sears sold the building years ago in its effort to subsidize its failiing retail business – and hasn't even been a tenant in the building for decades. It won't be long before no one even remembers Sears. Sears remained Locked-in to what it once was, and ignored scenarios about a different future that would require change.
The world has shifted. If your scenarios for the future expect a return to old practices – well, that isn't going to happen. If you want to be a leader in the next economy, you better start building new scenarios TODAY!
error correction - in yesterday's blog I inadvertently said I was "not" twittering. Talk about a badly mistaken typo! I meant the opposite. I am twittering and hope you all hook up so we can tweek each other.
by Adam Hartung | Mar 10, 2009 | Current Affairs, Disruptions, General, Innovation, Leadership, Lock-in
Those of you who follow my blog should have noticed a new look and feel today! If you receive this missive in your email box via an RSS feed, I encourage you to stop by www.ThePhoenixPrinciple.com to see the new look.
As most of you know, I'm quite serious about helping organizations realize that they all can rejuvenate. It's a mission I started in 2004, and devoted my life to in 2007 when I started writing Create Marketplace Disruption. And now, in the midst of this terrible recession, it is clearer than ever that we need to realize that different phases of the lifecycle take different management approaches. And for most companies today, old fashioned notions of "focus" and "hard work" simply won't pull them out of this recession and toward better returns.
So I've rededicated myself to this mission. And part of that rededication is hiring some professional help with this website! Thanks to Public Words for the new design – and this is just a small part of what they will be doing to help me over the next year to increase the awareness of this mission and expand the base of people who want to help their organizations recharge, reignite and regrow! I'm also spending more time public speaking to companies, leadership teams, industry events and multi-company conferences about what we need to do so we can get back to growing! (If you know of groups, please let them know how The Phoenix Principle and Adam Hartung can help them get growing again.)
So, let me know what you think of the new look and feel! Your comments can help the site be more productive for us all. If you want things added, speak up! I read all comments, whether here or emailed my way, and my new team will consider them all. In addition to the look and feel, please offer your ideas for how I can drive more links, and attract more readers to our mission. Some of you offered great ideas recently (special kudo to reader Bob Morris for his insightful recommendations) about how to better use tags, technoroti tags and trackbacks. Please keep telling me places I need to link, and other things which can help grow readership. Your help in spreading the word is greatly appreciated.
Also, if you haven't noticed I'm not twittering. So you all are invited to reach out to me on Twitter – there's even a link to twitter me on the blog now! I'll be getting my facebook page up soon as well.
I read a fascinating report published today you can dowload from Bank of America claiming that this recession actually began in 2000 – and we're somewhere between 60% and 70% of the way through. Real estate could decline another 15%, and the big equity averages may drop another 20-40%! Whether that's true, or maybe we're closer to "the bottom", for most of our organizations to be prosperous again will take a different approach to management. One that overcomes Lock-in to outdated Success Formulas (often created in a previous industrial era) by obsessing about competitors to learn about market trends, never fearing disruption – internal or in the marketplace – and utilizing White Space to test new business ideas which can create better, higher return Success Formulas that fit newly evolved markets.
"Hiring Plans or Firing Plans" is the headline on Marketwatch.com. Previously, the lowest number achieved for "net hiring plans" was in 1982 when a net 1% of firms were planning to hire. But in the entire 47 years of the Manpower hiring survey (since 1962) never was the index a negative – where more firms plan to lay off than hire!!! That was until now, with the index at -1%. Just one year ago the number was +17%! (Find the complete Manpower Employment Outlook Survey at this link to their site.) More of the same "ain't going to cut it". Instead of looking for reasons to lay off workers, we have to realize that there are a lot of reasons to hire more! If we follow the right management principles – The Phoenix Principle – we can get going again! If we encourage Disruption and keep White Space alive we can continue to grow!
A past client of mine recently discovered a way to introduce a new line of products with 80% less development cost. But the new product is being delayed because the CEO feels he must lay off workers and slow down product launches – due to what he's reading about the economy. The CEO is afraid that a new product launch, which would cement the company's #1 position ahead of competitors gnawing at their position the last 4 years, would be a tough sell to the Board of Directors. The CEO is clearly focusing on the wrong thing – because his Board would be happier with growing sales and profits, and a reinforced #1 market position, than anything else! Especially now! But this company is almost afraid to grow, locked in fear of what to do next. Instead of reallocating resources to growth projects, and jettisoning "sacred cow" products that are low-profit and declining in sales volume, management prefers to follow today's popular wisdom of cutting costs, cutting new product introductions, even cutting revenues by sticking with historical products nobody is buying - so that's what they will do!!!
So, please be a part of this journey. Participate, don't just be a spectator. Provide your feedback and comments. And share the word! Nothing is more valuable than debate. Great ideas are developed in the marketplace, not in someone's head! Pass along the message, and get others involved.
This blog can now be reached directly via:
by Adam Hartung | Mar 9, 2009 | Current Affairs, Defend & Extend, General, In the Rapids, In the Swamp, In the Whirlpool, Innovation, Science
The headlines scream for an answer to when markets will bottom (see Marketwatch.com article from headline "10 signs of a Floor" here) . But for Phoenix Principle investors, that question isn't even material. Who cares what happens to the S&P 500 – you want investments that will go up in value — and there are investments in all markets that go up in value. And not just because we expect some "greater fool" to bail us out of bad investments. Phoenix Principle investors put their money into opportunities which will meet future needs at competitive prices, thus growing, while returning above average rates of return. It really is that simple. (Of course, you have to be sure that other investors haven't bid up the growth opportunity to where it greatly exceeds its future value — like happened with internet stocks in the late 1990s. But today, overbidding that drives up values isn't exactly the problem.)
People get all tied up in "what will the market do?" As an investor, you need to care about the individual business. For years that was how people invested, by focusing on companies. But then clever economists said that as long as markets went up, investors were better off to just buy a group of stocks – an average such as the S&P 500 or Dow Jones Industrials. These same historians said don't bother to "time" your investments at all, just keep on buying some collection (some average) quarter after quarter and you'll do OK. We still hear investment apologists make this same argument. But stocks haven't been going up – and who knows when these "averages" will start going up again? Just ask investors in Japan, where they are still waiting for the averages to return to 1980s levels so they can hope to break even (after 20 years!). These historians, who use the past as their barometer, somehow forgot that consistent and common growth was a requirement to constantly investing in averages.
When the 2008 market shift happened, it changed the foundation upon which "constantly keep buying, don't time investing, it all works out in the end" was based. Those days may return – but we don't know when, if at all. Investors today have to return to the real cornerstone of investing – putting your money into investments which will give people what they want in the future.
Regardless of the "averages," businesses that are positioned to deliver on customer needs in future years will do well. If today the value of Google is down because CEO Eric Schmidt says the company won't return to old growth rates again until 2010, investors should see this as a time to purchase because short-term considerations are outweighing long-term value creation. Do you really believe internet ad-supported free search and paid search are low-growth global businesses? Do you really believe that short-term U.S. on-line advertising trends will remain at current rates, globally, for even 2 full years? Do you think Google will not make money on mobile phones and connectivity in the future? Do you think the market won't keep moving toward highly portable devices for computing answers, like the Apple iPhone, and away from big boxes like PCs?
When evaluating a business the big questions must be "is this company well positioned for most future scenarios? Are they developing robust scenarios of the future where they can compete? Are they obsessing about competitors, especially fringe competitors? Are they willing to be Disruptive? Do they show White Space to try new things?" If the answer to these questions is yes, then you should be considering these as good investments. Regardless of the number on the S&P 500. Look at companies that demonstrate these skills – Johnson & Johnson, Cisco Systems, Apple, Virgin, Nike, and G.E. – and you can start to assess whether they will in the future earn a high rate of return on their assets. These companies have demonstrated that even when people lose jobs and incomes shrink and trade barriers rise, they know how to use scenario planning, competitor obsession, disruptions and white space to grow revenue and profits.
You should not buy a company just because it "looks cheap." All companies look cheap just prior to failing. You could have been a buyer of cheap stock in Polaroid when 24 hour kiosks (not even digital photography yet) made the company's products obsolete. Just because a business met customer needs well in the past does not mean it will ever do so again. Like Sears. Or increasingly Motorola. Or G.M. These companies aren't focused on innovation for future customer needs, they prefer to ignore competitors, they hate disruptions and they refuse to implement White Space to learn. So why would you ever expect them to have a high future value?
Why did recent prices of real estate go up in California, New York, Massachusetts and Florida faster than in Detroit? People want to live and work there more than southeastern Michigan. For a whole raft of reasons. In 1920 the price of a home in Iowa or Kansas was worth more than in California. Why? Because an agrarian economy favored the earth-rich heartland over parched California. In the robust industrial age from 1940 to 1960, the value of real estate in Detroit, Chicago, Akron and Pittsburgh was far higher than San Francisco or Los Angeles. But in an information economy, the economics are different – and today (even after big price declines) California homes are worth multiples of Iowa homes. And, as we move further into the information economy, manufacturing centers (largely on big bodies of water in cool climates) have declining value. The market has shifted, and real estate values reflect the shift. Unless you know of some reason for lots (like millions) of health care or tech jobs to develop in Detroit, the region is highly over-built — even if homes are selling for fractions of former values.
We seem to have forgotten that to make high rates of return, we all have to be "market timers" and "investment pickers." Especially when markets shift. Because not everyone survives!!!!! All those platitudes about buying into market averages only works in nice, orderly markets with limited competition and growth. But when things shift – if you're in the wrong place you can get wiped out!! When the market shifted from agrarian to industrial in the 1920s and '30s my father was extremely proud that he became a teacher and stayed in Oklahoma (though the dust storms and all). But, by the 1970s it was clear that if he'd moved to California and bought a house in Palo Alto his net worth would have been many multiples higher. The same is true for stock investments. You can keep holding on to G.M., Citibank and other great companies of the past — or you can admit shift happened and invest in those companies likely to be leaders in the information-based economy of the next 30 years!
by Adam Hartung | Mar 6, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
"U.S. Unemployment Rate Jumps to 25 Year High" is Crain's headline today (see article here). "Payrolls sink 651,000; jobless rate soars to 8.1%" headlines MarketWatch (see article here). It's the fourth consecutive month job losses exceeded 600,000 we are reminded, as 4.4 million becomes the latest tally of those losing jobs in this recession. Those unemployed plus those with part-time-only work has risen to 14.8% of the population – a number that the labor department says may reach 1930s proportions. There are fewer people working full time in the USA today than in 2000 – a combination of the "jobless recovery" followed by a whopping recession.
I remember 25 years ago when the unemployement numbers were this high. I was graduating business school, and there was a real fear that not all graduates would find a job (a horrible situation at a place like HBS). The economy was in terrible shape after several years of economy micro-rule under President Carter. A stickler for detail, and a workaholic, Carter had implemented complex regulations to control prices of oil and other energy products, as well as most agricultural products and commodities. The oil price shocks, combined with runaway printing of money by a highly accomodative Federal Reserve during the 1970s, had sent the American economy into "stag-flation" where growth was abysmal and inflation had skyrocketed.
In 1982, things didn't look good. And the Reagan-led republicans introduced an amazing set of recommendations to break out of the rut America's economy was in. A bold experiment was set up, to test whether "supply siders" were right and if we put our resources into creating supply (capacity) would demand follow and drive up the economy. The big test was a combination of historical tax cuts combined with increased federal spending on defense projects run by industry (in other words, changing from giving money directly to people through welfare or government jobs and instead giving money to businesses to build things – infrastructure and military.)
No one knew if it would work. Smaller government and lower taxes had been a political mantra for various political parties since the days of Benjamin Franklin. But what most Americans believed when they elected Ronald Reagan was that what had recently been tried was not working – it was time to try some new things.
Today is 2009, and while unemployment rates may look similar – not much else is like 1982. Then, marginal federal income tax rates were 80%, and most states relied heavily on "revenue sharing" money from the feds back into states to pay for many progroms – like roads and schools. Today, top rates are in the low 30s, and states have jacked up (from 2x to 10x) sales taxes, property taxes and even state income taxes to cover the loss of federal dollars. Interest rates on home mortgages were 14% to 18% in 1982 – and that was on a variable rate loan with 20% down – because you couldn't get a bank to offer a 30 year mortgage (for fear of inflaction wiping out the loan's value) and no one offered low-downpayment loans. There was a housing shortage, but people struggled to afford a home with interest rates that high! And materials cost (due to inflation) was driving up construction costs more than 12-15%/year. Today mortgages are available at 5% fixed for 30 years, and the prices of homes are dropping more than 10% annually while empty properties seem to be everywhere begging for buyers at discounted prices.
The signs of an impending collapse have been pretty clear for the last few years. First, there was the "jobless recovery." While the economists kept saying the economy was doing well, the fact that there were no new jobs was quite obvious to a lot of people. There was even considerable surprise at how robust the economy was, given that it had no job creation. But it didn't take long for several economists to recognize that the source of growth was largely a considerably more indebted consumer. From the government (federal, state or municipality) to the individual. Those who did have jobs were taking advantage of low interest rates to purchase. On metrics debt/person, debt/GDP, debt/earnings dollars, debt/payroll dollars were all hitting record high numbers as lower quality debt (lower quality because there was increasingly less earnings behind each loan) provided the economic fuel. The economic research team at no less a conservative stalwart than Merrill Lynch was predicting as early as 2006 big problems – and a revisting of 650 on the S&P 500.
Although the economy in 2005-2007 looked nothing like that of the late 1970s, it was pretty clear that a declining economy and high unemployment were soon to come. The 1980s solution, which unleashed the longest running bull market in history, dealt with the problems of the 1970s. But, as the decades passed increasingly the 1980 tools had less and less impact on sustaining growth. Cutting marginal tax rates on dividends when marginal rates on income is already at 30% has far less impact than halving tax rates on everyone! Lowering SEC regulations on capital market access for new hedge funds has less impact than deregulating pricing and labor costs for whole industries like airlines and trucking! What worked well in the past, and became Locked-in to the American economy, simply had lower marginal impact. Year after year of Lock-in produced weaker and weaker results. And opened the doors for aggressive competitors to copy those practices unleashing prodiguous competition for American companies – in places like Asia, India and South America.
All Locked-in systems become victim to these declining results. It's not that the ideas are bad, they just get copied and executed by aggressive competitors who catch up. Markets shift and needs change. People that once focused on buying a new car start focusing on how to retire. People that once wanted great schools want better parking. People that wanted cheaper and better restaurants want cheaper and better health care. The old approaches aren't bad, but trying to do more, better, faster, cheaper of the same thing simply has declining marginal benefit. Results slowly start declining, until eventually they fail to respond to old efforts at all.
Comparing our unemployment rate today to that in 1982 is an interesting historical exercise. We can see similar outcomes. And what's similar about the cause is that Lock-in to outdated practices led to declining performance. That the practices were about 180 degrees apart isn't the issue. Debating the merits of the practices in a vacuum – as if only one set of practices can ever work – simply ignores the pasasage of time and the fact that different times create different problems and require different solutions. The successful practices that fired a tremendously successful business community and stock market in the 1960s ran out of gas by the 1980s. Now, the practices of the 1980s have run out of gas in the competitive global economy of 2009. In both instances, those leading the economy – the companies, economists, banks, regulators – stayed too long with a set of Locked-in practices.
Today we need new ideas. To overcome rising unemployment requires we look to the future, not the past for our recommendations. We must start obsessing about competitors in China, Hong Kong, Singapore, Brazil, Argentina, Sri Lanka, Thailand and India – competitors we belittled and ignored for too long. We must be willing to Disrupt old practices to try new things – and use White Space to experiment. The Missile Defense Shield (mid-80s) turned out to be a project that wasn't appropriate for its time – but that we tried it gave a shot in the arm to all kinds of imaging and computing technologies which helped improve business. Those kinds of experiments are critical to figuring out how we will create jobs and economic growth in a fiercely competitive global economy where value is increasingly based on information (and neither land nor fixed assets - which dominated the last 2 long waves of growth for America).
by Adam Hartung | Mar 5, 2009 | Investing, Trends, Uncategorized
I've never met anyone who says they speculate in the stock market. My colleagues always say they are investors; people who know what they were doing and savvy about the market. But, reality is that most people speculate. Because they don't invest on underlying business value. Instead, they rely on words from "gurus" and follow trends. That, unfortunately, is speculating.
Back on 12/21/08 (just a couple of months ago) the DJIA was at 8960, the S&P 918. Looking at The Chicago Tribune for that day, the primary recommendation by analysts for 2009 was "Keep an eye on long-term horizons" and "weather out the storm". The markets were down, but don't panic. Famed investment maven Elaine Garzarelli recommended if you had $10k in cash to invest $2k in tech stocks, $2k in Citigroup Preferred, $2k in GE and $2k in an income-oriented fund. Then put $2k into a short fund to hedge your risks! She couldn't have been more dead wrong on the only two named companies – GE and C. Both are at modern, or all time, lows. Don Phillip, managing director at Morningstar, recommended investing all $10K in equities because "they've taken an unprecedented hit and are very cheap."
When you hear investment gurus, on TV or elsewhere, tell you to "stay the course, the market always recovers" they are basing their opinions on history – not the future. This isn't last year, or the last recession, or the last economy. Will all economies eventually recover? Maybe not. Will the U.S. economy recover in your lifetime? Not assured – Japan has been in a recession for over a decade! Does that mean American companies will be the ones to lead the world in the next upmarket? Not assured. These "gurus" have been dead wrong for almost a year – and at the most important time in your investment history. If they were so wrong for the last year, why are they still on TV? Why are you listening?
In the short term, stock markets are driven by momentum. When most people are buying, the markets keep going up. Even for individual stocks. Sears had no reason to go up in value after being acquired by Ed Lampert's KMart corporation. Sears and Kmart were overleveraged, earning below-market rates of return, and with assets that had long lost their luster. But because Jim Cramer of CNBC Mad Money fame knew and liked Mr. Lampert he kept talking up the stock. Other hedge fund operators thought Mr. Lampert had been clever in the past, so they guessed he knew something they didn't and they speculated in his investment. The value went up 10x – and then came down 90%. Wild ride – but in the history of markets unless you are a speculator, you should never have invested in Sears. When you hear "don't be a market timer" remember that the only way to make money in Sears was to be a market timer – you had to buy and sell at the right time because the company wasn't able to increase its value. Sears' Success Formula was out of date, and there was no sign of a plan for the future, nor obsession about market changes and competitors, nor willingness to Disrupt old behaviors nor White Space. From the beginning this was a bad investment, and it has remained that way.
Today the market remains driven by momentum. Who wants to say they are buying stocks when the major averages keep falling? What CEO wants to say he's optimistic when it's popular to present "caution"? Who wants to discuss opportunities for markets in 2015 being 3x bigger when right now demand for industrial products like cars is down 20-40%? When momentum is up, you can't find a pessimistic CEO. Nor a pessimistic investor. So the likewise is equally true.
Reality is that there are good investments today, and bad. If a business is firmly locked into the industrial economy, such as GM and Ford, making the same products in much the same way to sell to pretty much the same customers, but with new competitors entering from all around - those companies are not good investments. Regardless of the rate of economic growth or debt availability. Their Lock-in to outdated Success Formulas means that their rates of return will not improve, even if overall economic growth does. Markets have shifted, and keep shifting. Businesses that were not profitable in the old market aren't going to suddenly be better competitors in a future market. Just the opposite is more likely. Even if they survive in a foxhole for a year or two, when they come out the market will be filled with new competitors just as vicious as the old ones.
But there are businesses positioning themselves for the markets of tomorrow. Apple with its iPod, iTunes, iPhone is an example. Google with its near monopoly on internet ad placement and management as well as search. And companies that are moving toward new markets rather than remaining frozen in the old model and exacerbating weaknesses with cost cutting. Like Domino's pizza.
GM will never again be a great car company. So what's new? That was clear in 1980 when Chairman Roger Smith said the company had a limited future in autos operating as it always had. That doesn't mean GM couldn't again be a growing, healthy company if new management sent the company in search of new markets with growth opportunities. Like Singer getting out of sewing machines to be a defense contractor in the 1980s. By purchasing an old-fashioned mortgage bank, and an old fashioned investment bank/retail brokerage, Bank of America is not strengthening its position for future markets. Instead, it is fighting the last war. But any company can change its competitive position if it chooses to focus on, and invest in, new markets. And those who do it NOW will be first into the new markets and able to change competitive position. When markets shift, those who move to the new competitiveness first gain the advantage. And their position is reinforced by competitors who dive for cover through cost cuts not tied to business repositioning.
Why is GM still on the DJIA? They should have been removed years ago. That's how the Dow intelligentsia keeps the average always going up – by taking off companies like Sears and replacing them with companies that are more closely linked to where markets are going (at the time, Home Depot). If we swapped out GM for Google, and Kraft for Apple, the numbers on the DJIA would be considerably better than we see today. And if you want to make money as an investor, you have to do the same thing. You have to dump companies that are unwilling to break out of Lock-in to outdated business models and invest in companies who are heading full force into future markets. In all markets there are good investments. But you have to find the companies that plan for the future, not the past – obsess about competitors – are not afraid to Disrupt themselves and markets – and utilize White Space to test new products and services that can create growth no matter what the economy.
by Adam Hartung | Mar 4, 2009 | Current Affairs, In the Rapids, Innovation, Openness, Web/Tech
I teach college classes on innovation, as well as speak regularly on the topic. And I am frequenty asked how to determine whether new products are sustaining innovations, or disruptive ones. In 2008, the most common product I was asked about was the iPhone. To me the answer was obvious. As a phone, the iPhone was sustaining. But, as a new platform from which to do a multitude of things that went way, way beyond phone use it had the potential to be very Disruptive. For those reasons, it's initial (if expensive) ability to be sustaining, coupled with it's long-term potential to be Disruptive (and therefore wildly inexpensive), made iPhone look like an easy product to introduce yet really important as time and applications progressed. It was easy to predict the iPhone as a product that would make a big difference in the marketplace.
So far, I've not been disappointed. Today, Apple announced an iPhone application allowing it to behave like a Kindle (read article here). The Amazon.com launched Kindle was the most successful new product of 2007 and 2008 Christmas seasons, selling out production and selling in greater volumes than the initial launch of the iPod. Kindle offers the opportunity to read anything digitally – from the morning newspaper (why have a paper if you can get the info digitally), to magazines to books. Literally thousands of publications and hundreds of thousands of books. When I had to buy a Kindle device to gain this access, I had to deliberate. Yet another device to carry? But now that I can get this "library" access on a device which can also deliver internet access, text messaging, mass messaging on twitter, my PDA services and telephone connectivity — well this is pretty amazing. It keeps demonstrating the iPhone as a device not like any other device in the market — a game changer – that can bring in new users to each of the individual markets it serves by offering such strong cross-market delivery.
Just 3 months ago tech reviewers felt that "netbooks" were the next "hot" item. These downsized, book-sized laptops gave basic computer performance at a very low price. And analysts chided Apple for not participating. Forbes seemed to chide Apple recently with a headline that the company was living in denial (see article here). But a closer read shows that the headline was tongue-in-cheek. Forbes too recognized that Apple has a product in the netbook class – but it does a whole lot more – and its called the iPhone. Meanwhile, Apple doesn't intend to lose value on Macs by chasing downmarket with the larger platform.
I've told many audiences that sustaining innovations – those that do the same thing but a little better – create 67% of incremental revenue. They feel comfortable, and are easy to launch. And because they give revenue a shot, we justify doing more and more of these product variations and simple derivatives. But, disruptive products produce 85% of incremental profits. Variations and derivatives are easy for competitors to knock-off, and their value is short-lived (if they produce any value at all). Disruptive products are hard to imitate, and produce long-term profits. The iPod disrupted the music business, and now years later it still has the #1 market share as an MP3 device (despite a market attack from behemoth Microsoft with Zune) and iTunes remains #1 in music downloads even though Apple produces no music. iPod and Mac make money because they cannot be easily imitated. And the same is proving true for iPhone. It is more than it looks, and it has lots of opportunity to keep growing.
Apple demonstrates every day that even in very tough economic circumstances, if you go to where the market is headed YOU CAN GROW. You don't have to sit back and bemoan the lack of credit or the change in markets. You do need to have a clear view of where markets are headed, with vivid scenarios allowing you to track behavior and target. You also have to be obsessive about competition, and realize you must relentlessly take action to remain in front. And you can't fear Disruption as you use White Space to enter new markets and test new products. That's why Apple stock is flat in 2009, while almost everyone else has gone down in value (see chart here).
by Adam Hartung | Mar 3, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
Sears has been heading for the end of its game for several years. It's in the Whirlpool now, and we can be sure it won't come out. We can go back to when Sears dropped its catalog to see the first sign of putting costs before customers, and completely missing how competitors were changing and leaving Sears without an advantage. But the next big hurt happened when customers found out they could get credit for purchases from banks – via credit cards like MasterCard and Sears – that made it unnecessary to get a line of credit from Sears, or a Sears credit card (which eventually became Discover.) Increasingly, what made Sears stand out became difficult to find. And Sears lost market share year after year to the discounters (KMart, Target and Wal-Mart) as well as lower-priced soft goods retailers (J.C. Penney and Kohl's) and then DIY retailers that offered mowers and tools (Lowe's, Home Depot and Menards).
Why anyone would shop at Sears became a lot less clear – yet Sears kept trying to do more of what it had always done in its effort to stay alive. So hedge-fund jockey Ed Lampert swooped in and bought Sears with lots of hoopla about turning it around. But his approach was to do less of the same, not more, and he had no ideas for how to be more competitive. As he cut inventory, and cut costs, and closed stores it became easier and easier for customers to shop somewhere else. Sears was shrinking, not growing, and all the focus on the bottom line, in an effort to manage earnings rather than the business, just kept making Sears less relevant to customers, investors, vendors and employees.
Sales keep declining – down some 13% in the recent quarter (see article here). Increasingly, Sears is looking for distinction by going further down the credit quality spectrum. It's most promising "bright spot" was an increase in lay-away. Lay-away, for those not accustomed to the concept, is when people who can't get credit at all offer to put down 30-50% of the value of an item (say $100 on a $300 washer) and ask the retailer to hold it (literally, hold it in the back room) until the customer can come up with the rest of the money. Sometimes buyers will come in multiple times dropping off $10 or $20 until they come up with all the money for the washer, or a new suit, or a dress, or some tools. Only people that can't get credit at all buy on lay-away. For retailers it has the downside of increasing inventory as they wait for payment. It's the bottom-of-the-barrel for retailers that can't keep up with merchandise trends, and often requires they raise prices to cover the cost of increased inventory holding.
Increasingly there is little else Sears can do. The company has closed another 28 stores, and sales in stores remaining open the last year have declined on average more than 8% for each store (see article here). Net income has plunged 93%. Five years ago, about when Mr. Lampert took over the company, it was worth just about what it is worth today (see chart here). At that time, investors were thinking Sears (which had recently been de-listed as a Dow Jones Industrial Average component) might not survive. But those investors had a lot of dreams about Mr. Lampert turning around the company. They saw the shares increase 6-fold as analysts talked-up Mr. Lampert and his supposedly "magic touch." But all that value has disappeared. Mr. Lampert would like to blame the economy for his lack of success, but reality is that the economy only made more visible the Lock-in Sears has maintained to its outdated business model and the complete lack of Disruption and White Space Mr. Lampert has allowed during his personal direction of the company. Sears has had no chance of success as long as it remained Locked-in to a retail business model tied to the 1960s. And as retail crashed in 2008/2009 it's made obvious the complete lack of need for Sears to even exist.
Note: I was delighted with responses I received from many readers about their views on newspapers. Mostly folks told me they found the value gone, or dissipating quickly, from newspapers. Although there is still ample concern about where we'll find high-quality journalism once they disappear. Folks seem less confident in broadcast and network television – and wholly uncertain about the quality control of on-line news sources. I think we're all wondering how we'll get good news, and aware that there is bound to be a period of market disruption as the newspapers keep declining. But please keep your eyes open, and let myself and all readers know what quality news sources you find on the web. Keep the comments coming. During these periods is when new competitors lay the groundwork for new fortunes. I'd watch HuffingtonPost.com, and don't lose track of the big on-line investments News Corp. has made.
Likewise, please give me some comments (here on on the blog or via email) about where you are shopping today! Have readers all become Wal-Mart single-stop shoppers? With retail sales numbers down almost everywhere, where do you concentrate your shopping? Are you doing more on-line? Are you finding alternatives you favor during this recession. Let's share some info about what we see as the future of retailing. There are a lot of execs out there that seem in the dark. Maybe we can enlighten them!
