by Adam Hartung | Nov 17, 2016 | Food and Drink, In the Swamp, Innovation, Marketing, Trends
(PAUL J. RICHARDS/AFP/Getty Images)
McDonald’s has been trying for years to re-ignite growth. But, unfortunately for customers and investors alike, leadership keeps going about it the wrong way. Rather than building on new trends to create a new McDonald’s, they keep trying to defend extend the worn out old strategy with new tactics.
Recently McDonald’s leadership tested a new version of the Big Mac,first launched in 1967. They replaced the “special sauce” with Sriracha sauce in order to make the sandwich a bit spicier. They are now rolling it out to a full test market in central Ohio with 128 stores. If this goes well – a term not yet defined – the sandwich could roll out nationally.
This is a classic sustaining innovation. Take something that exists, make a minor change, and offer it as a new version. The hope is that current customers keep buying the original version, and the new version attracts new customers. Great idea, if it works. But most of the time it doesn’t.
Unfortunately, most people who buy a product like it the way it is. Slower Big Mac sales aren’t due to making bad sandwiches. They’re due to people changing their buying habits to new trends. Fifty years ago a Big Mac from McDonald’s was something people really wanted. Famously, in the 1970s a character on the TV series Good Times used to become very excited about going to eat his weekly Big Mac.
People who are still eating Big Macs know exactly what they want. And it’s the old Big Mac, not a new one. Thus the initial test results were “mixed” – with many customers registering disgust at the new product. Just like the failure of New Coke, a New Big Mac isn’t what customers are seeking.
After 50 years, times and trends have changed. Fewer people are going to McDonald’s, and fewer are eating Big Macs. Many new competitors have emerged, and people are eating at Panera, Panda Express, Zaxby’s, Five Guys and even beleaguered Chipotle. Customers are looking for a very different dining experience, and different food. While a version two of the Big Mac might have driven incremental sales in 1977, in 2017 the product has grown tired and out of step with too many people and there are too many alternative choices.
Similarly, McDonald’s CEO’s effort to revitalize the brand by adding ordering kiosks and table service in stores, in a new format labeled the “Experience of the Future,” will not make much difference. Due to the dramatic reconfiguration, only about 500 stores will be changed – roughly 3.5% of the 14,500 McDonald’s. It is an incremental effort to make a small change when competitors are offering substantially different products and experiences.
When a business, brand or product line is growing it is on a trend. Like McDonald’s was in the 1960s and 1970s, offering quality food, fast and at a consistent price nationwide at a time when customers could not count on those factors across independent cafes. At that time, offering new products – like a Big Mac – that are variations on the theme that is riding the trend is a good way to expand sales.
But over time trends change, and adding new features has less and less impact. These sustaining innovations, as Clayton Christensen of Harvard calls them, have “diminishing marginal returns.” That’s an academic’s fancy way of saying that you have to spend ever greater amounts to create the variations, but their benefits keep having less and less impact on growing, or even maintaining, sales. Yet, most leaders keep right on trying to defend & extend the old business by investing in these sustaining measures, even as returns keep falling.
Over time a re-invention gap is created between the customer and the company. Customers want something new and different, which would require the business re-invent itself. But the business keeps trying to tweak the old model. And thus the gap. The longer this goes on, the bigger the re-invention gap. Eventually customers give up, and the product, or company, disappears.
Think about portable hand held AM radios. If someone gave you the best one in the world you wouldn’t care. Same for a really good portable cassette tape player. Now you listen to your portable music on a phone. Companies like Zenith were destroyed, and Sony made far less profitable, as the market shifted from radios and cathode-ray televisions to more portable, smarter, better products.
Motorola, one of the radio pioneers, survived this decline by undertaking a “strategic pivot.” Motorola invested in cell phone technology and transformed itself into something entirely new and different – from a radio maker into a pioneer in mobile phones. (Of course leadership missed the transition to apps and smart phones, and now Motorola Solutions is a ghost of the former company.)
McDonald’s could have re-invented itself a decade ago when it owned Chipotle’s. Leadership could have stopped investing in McDonald’s and poured money into Chipotle’s, aiding the cannibalization of the old while simultaneously capturing a strong position on the new trend. But instead of pivoting, leadership sold Chipotle’s and used the money to defend & extend the already tiring McDonald’s brand.
Strategic pivots are hard. Just look at Netflix, which pivoted from sending videos in the mail to streaming, and is pivoting again into original content. But, they are a necessity if you want to keep growing. Because eventually all strategies become out of step with changing trends, and sustaining innovations fail to keep customers.
McDonald’s needs a very different strategy. It has hit a growth stall, and has a very low probability of ever growing consistently at even 2%. The company needs a lot more than sriracha sauce on a Big Mac if it is to spice up revenue and profit growth.
by Adam Hartung | Nov 11, 2016 | Economy, Election, Investing
Traders work on the floor of the NYSE the morning after Donald Trump
won a major upset in the presidential election. (Photo by Spencer Platt/Getty Images)
Since election day there has been an enormous shift in the U.S. stock market. The Dow (Dow Jones Industrial Average – DJIA) has hit new highs. But simultaneously the NASDAQ 100 is falling. In short, most tech stocks have been creamed, while out-of-favor laggards have been bid up.
I 100% favor long-term investing. Anyone who tries to be a trader, or otherwise time the markets, is most likely going to get burned. If you want to share in the growth of America’s economy the best way is to buy stocks in good, growing companies and hold them a long time. As Warren Buffett said after the election, the American economy will be bigger, and stocks will be worth more, in 10, 20, 30 years regardless who is president.
Traders make decisions on the smallest bit of information. Often information that is nothing more than an unproven thought. Looking into the future they try to have a crystal ball, but they rarely use trend information and often use guesses.
So, after the election,
the trader theory goes that tech companies will be burned. Trump apparently
doesn’t use a computer, so he doesn’t use the Internet. And he doesn’t actually tweet, or use social media, he just blurts things out and someone else enters the blurts. So his lack of interest in technology is bad for tech companies. Further, his trade policies will create havoc with tech company supply chains that rely on manufacturing across Asia, and much on China, dramatically raising costs. Additionally these policies will cause foreign markets to purchase less tech products, damaging tech sales.
As a result, rapidly, big, successful tech stocks have been massacred:
Apple from $118 to $107, a drop of 9%
Facebook from $133 to $116, a drop of 13%
Netflix from $128 to $115, a drop of 10%
Google from $815 to $755, a drop of 7%
Amazon from $840 to $730, a drop of 13%
Yet, nothing has happened. These companies are still doing exactly the same thing they did a month ago. Apple is still the no. 1 maker and seller of mobile devices. Facebook still dominates social media, has a huge lead in social media advertising, and continues to launch additional functionality to make its site sticky for users. Netflix is still the leader in streaming and developing new original content outside of networks. Google is still the king of search and no. 1 in search advertising. And Amazon still leads all competitors in online commerce, and will have another great holiday season the next six weeks.
None of these businesses have been destroyed by the election. And the trends that drove their long-term growth remain in place. People will continue to use mobile devices for more applications, turn to social media for communicating with friends and finding information, download movies and other shows via the web, search for answers to most of their questions via search engines and buy more and more stuff online. These trends will not change, as there is pretty much no way Donald Trump or Congress can stop them.
Meanwhile, valuations of long-time laggard companies are suddenly hitting new highs. Somehow the trend to globalization will be ended, budget problems will be immediately resolved leading to greater spending capability by Congress and concerns about long-term debt build-up will disappear encouraging massive new investments in traditional infrastructure like roads and bridges. New trends will suddenly emerge that will return the basics of the U.S. economy, the sector balances, to something akin to 1984.
Thus, traders have bid up prices of old-line manufacturers. Despite exiting financial services as well as its oil and gas business, making GE much smaller than it was a decade ago, GE has jumped from $28.25 to $30.50, a gain of 8%. Caterpillar Tractor has had five straight years of revenue declines, yet it also rose from $28.25 to $30.50 for a similar 8% gain.
Remarkably GE’s P/E (price/earnings multiple) is now 24! Cat’s is an even more remarkable 53! Companies that rely on manufacturing are being priced like tech stocks – or even greater! Apple’s P/E has fallento 13, Google’s is 27 (about the same as GE) and Facebook’s P/E of 46 is lower than Caterpillar’s.
Really? In one day major, global trends have reversed course, steering the economy back to the days when Jack Welch ran GE, and Caterpillar was selling gear to a booming U.S. forestry business as well as massive volumes to China and India for building their fledgling infrastructures? People will stop buying smartphones and give up their reliance on the internet for a vast array of daily tasks? And droves of young workers trained for tech jobs are going to staff up a massive rebuilding of U.S. manufacturing plants? Displaced workers, trained on equipment now wildly antiquated and uneconomic, will be retrained overnight to operate plants with far fewer employees and lots more high-tech equipment? And boomers will quit retiring and undertake retraining – not for tech jobs but for manufacturing or equipment operator jobs?
Don’t diminish the power of a president. And don’t diminish how structural changes in tax codes, military spending and international relations can alter course. But, simultaneously, don’t diminish the power of trends.
Trends propel forward, and take people to greater productivity and a higher quality of life. All those people who voted for Donald Trump are not tech avoiders. They are mobile, socially active people who are as linked to the trends as everyone who voted for Hillary Clinton. They don’t want to return to a pre-information economy lacking in technology that has made their lives better. They still want technology in their lives, and they want that technology to become better, faster and cheaper.
And no manufacturer is going to go back to labor-intensive manufacturing. Whether they make things in the U.S. or offshore, state-of-the-art equipment means manufacturing simply uses fewer people. And the growth of e-commerce will not stop, thus continuing the trend of declining demand for retail workers. These trends may alter slightly due to tax and trade policies, but they won’t reverse.
Smart investors don’t lose sight of long-term trends. They invest in companies where the opportunity exists to grow revenues and profits because demand for those company’s products and innovations are growing. With shares of the technology leaders beaten down, one should really consider if this is a time to sell, or buy. And with shares of companies that have terrible growth records, and stagnated earnings, bid up to extraordinarily high P/E multiples one should consider if this is the time to buy or sell.
by Adam Hartung | Nov 9, 2016 | Election, Marketing
(AP Photo/Wilfredo Lee, File)
November 9, 2016 – Donald Trump is the president-elect of the United States. It is a stunning upset. What are the lessons for marketers?
First, notice that candidate Hillary Clinton actually won the popular vote. With just under 120 million votes cast, Clinton gathered about 160,000 more votes than candidate Trump. A victory of just over .1%. So it is fair to say that on this metric, number of votes, there was a win for Clinton.
But, of course, the complexity of America’s electoral college means that Trump won more electoral votes, and thus the election. Non-Americans struggle to understand the electoral college – heck, a lot of American’s don’t understand it. Put simply, it was the founding father’s method of making sure different geographies achieved representation so that more dense population areas would not control an election.
Given that everyone knew that in the end it was these votes – electoral votes – that mattered, it is important to think through the marketing implications.
Monday, pre-election, I wrote that it appeared the marketing campaign of candidate Clinton was superior to that of candidate Trump. And, given that it achieved more popular votes, it may have been a superior campaign. But since it did not achieve the goal, its worth revisiting to see where that analysis erred, and what can be learned.
Product: Candidate Trump was very, very negative. He had nothing good to say about anything the incumbent president had done, nor anything good to say about candidate Clinton. He was the epitome of negative. Although the Clinton campaign claimed it would “go high” as the Trump campaign “went low” this really did not happen. Clinton’s campaign tried to duke it out toe-to-toe on who was worst.
In the end, this hurt both candidates. Neither had great appeal to voters, and both had extremely high negatives. But by succumbing to a bruising bad-on-bad punching match the Clinton campaign missed an opportunity to present the candidate as very favorable. The candidate that punched the hardest – and no doubt with his constant attacks, including threats to indict candidate Clinton this gave candidate Trump a bit of an edge – was going to win.
Lesson -Firstly, make your product favorable. Make it something people really want. Don’t say bad things about the competition until you’ve staked your favorable position. Clinton never really achieved a favorable position with enough voters.
Second, if you’re going to get into a dirty fight, don’t bring a knife – bring a gun. In a competition of negatives, you have to be every bit as negative as the competition. No holds barred. The meanest, ugliest, hardest hitting competitor will win.
Price: Candidate Clinton absolutely failed to make the case that the incumbent’s economic policies had favored most Americans. Despite tremendous job growth, declining unemployment, record low layoffs and record high equity values there persisted a notion that the American economy was in the tank. The campaign completely failed to make the case that the policies enacted previously, and anticipated to continue with Clinton, would be good for people’s pocketbooks.
Meanwhile, candidate Trump hammered away saying that the American economy was a wreck. His appeals to reducing international trade and limiting immigration in order to create more higher paying jobs in America convinced a large number of voters that these policies would be better for the economy and most workers.
Concerns about potential debt increases and an extension of income inequality were poorly made, and did not counter the overriding sense that more jobs would come from Trump’s policies. Thus, a lot of people were swayed to Trump’s xenophobic view of how to improve America’s economy. They remain convinced that Mexico will pay for an immigration limiting wall, and scaling back (or eliminating) trading pacts like NAFTA will somehow cause an inspired growth in American manufacturing jobs, and higher levels of good paying employment.
Lesson – you have to make the economic case for your product. You have to deliver a winning value proposition. Don’t expect customers to figure it out on their own, or assume they believe in your value proposition.
Place: This is where the breakdown was greatest for Clinton, and most beneficial for Trump. On Monday I noted several indicators that the Clinton campaign would do far better at getting out the vote than Trump. And, one could say they did given that Clinton won the popular vote.
But the Clinton error was relying too heavily on dense population states. New York, Illinois, California – states with very big cities that dramatically overwhelm the rural population produced landslide votes for Clinton. But in states with a more balanced population density, such as Ohio, Florida and Pennsylvania there was an insufficient effort at making sure non-city counties turned out for Clinton.
Contrarily, the Trump campaign won the battle for place by realizing they could win the rural states with limited effort. Large geographic swaths with low population density allowed Trump to pile up electoral votes (the ones that matter) almost unchallenged. Kansas, Oklahoma, Wyoming, Nebraska, South Dakota, North Dakota – all states benefiting precisely from the electoral system the founding fathers created – were key states that the Clinton campaign ignored in its distribution strategy.
What appeared to be a Clinton campaign advantage, largely strong support by the Democratic party, overly-relied on winning population dense counties. This was effectively countered by a very good job by the Trump campaign of acquiring votes in more rural, less dense, counties. This ground game, of making sure the votes were captured county-by-county, was decisive for Trump.
Lesson – distribution matters. It may seem boring. It’s a lot less sexy than writing ad copy or focusing on PR. But it really, really matters.
Promotion: It turns out money, and extreme messaging, still matters.
The Obama campaign was masterful at using modern marketing techniques, including internet marketing, mobile and social media, to obtain support. The Bernie Sanders primary campaign also proved adept at using these tools for gaining a good following. While the Clinton campaign lifted this part of the playbook, their implementation was not as integrated, nor effective, as either Obama or Sanders. The pieces were there, but the appeal was not as targeted to specific groups and therefore not nearly as effective. Clinton’s team used these tools, but they did not invest in them with the skills exhibited by Obama or Sanders, and they failed at bringing enough minorities, youth and women to the polls.
Meanwhile, Trump’s campaign once again made the case that money matters. Large advertising programs still make a difference. Marketing is changing, but in a winner-take-all, and you only get one chance, campaign classic advertising and PR used since the 1960s really matters. Things are changing, but they have not fully changed. If you are willing to spend enough money on traditional promotional tools, they still reach most of the people. It may not be efficient, but they are still effective.
Simultaneously, the old adage “any press is good press” proved valuable once again. Tapes of Trump saying outrageous things, and outrageous tweets, served to provide ample free promotion for the candidate. While many people complained about the message content, in the end simply being constantly in the news helped people get used to a very unusual campaign style. An unorthodox approach, letting outrageous behavior become so common that customers were able to look past the negatives, allowed the constant access to become an advantage.
There are great lessons here to be learned by marketers today.
- Distribution really matters. In the internet, Amazon.com age it is easy to think that if you build it they will come. But success still requires a lot of effort to make sure your product is in the right place when people are ready to buy. And that means on the web, on social media and eventually physical location.
- The trend is toward micro-marketing with targeted messages to targeted segments. But during the evolution old, brute force tools still make a difference. To make a trend work for you, you have to work hard at building on that trend. You cannot expect success merely by adopting the trend, you have to master highlighting the trend, and making it useful for your campaign to reach customers.
- Even messages built on myth cannot be ignored, and in fact must be fought extremely hard. Chipotle’s has struggled to convince customers its food won’t make them sick, because the message was not effectively countered. Similarly, despite ample evidence of a strong economy Clinton failed to convince customers that claims of a weak economy were unfounded. The message may be mythical, but it remains important if not addressed and countered.
- Make sure customers know how they benefit from your product. Don’t be “good enough” or “comparable.” Make sure the real benefits to customers of your product are front-and-center. As Clayton Christensen says, make sure you know what job the customer wants from your product and clearly fulfill that job better than alternatives. Don’t rely on the customer to figure out why your product is superior, make the case quite clearly for them.
- Don’t expect customers to understand your pricing. Make clear your value proposition. Regardless how you price, the value proposition must be immediately understood. Link how you will get the job done for the customer to the value you provide.
by Adam Hartung | Nov 7, 2016 | Advertising, Election, Marketing
Republican presidential nominee Donald Trump debates Democratic presidential nominee Hillary Clinton during the third presidential debate. (Mark Ralston/Pool via AP)
Whoever wins tomorrow’s election, their success will have a lot to do with how they marketed their campaign. And in many ways, selling a candidate is not different from selling anything else.
Do you remember the “four Ps of marketing” from Marketing 101? They are product, price, place and promotion. Every newbie is taught not to overly rely on any one, and greatest success comes from a well planned use of all four.
Product: The candidates are about the same age and health. And while they represent very different parties, both have spent less time talking about what a great president they would be, and a lot more on what a terrible product the other candidate is. Message after message has denigrated the other, to the point where we hear most of the electorate is now less than happy with both.
Most marketers know that negative marketing is risky, because it tends to tar all products with similar negatives. Greatest sales happen when you convince people your product is superior in its own right – not just compared to alternatives. Barack Obama figured this out in both previous elections, and he was able to convince the majority of people he would be a good president. Unfortunately, in this election the competitive attacks have cancelled each other out, and neither candidate has a majority of people liking them. An opportunity lost by both candidates to make their product more appealing, and thus bringing out more people to vote for them based on policies and the core of how their presidency would make voters happy.
Price: One could say that the tax policies of Hillary Clinton make her a more expensive candidate than Donald Trump. However, the long-term cost of the debt increase from Trump means that the price of his presidency will be costlier than Clinton. Let’s just be practical and say that neither candidate has positioned themselves as the candidate better for everyone’s pocketbook.
Again, an opportunity lost. Ronald Reagan did a superb job of positioning himself as being good for people’s pocketbooks, and it helped him unseat Jimmy Carter. Barack Obama made hay out of the economic crisis as Republican George Bush left office, helping him convince voters that he would be far better for their pocketbooks – via job creation – than his opponent.
Place: This is all about “get out the vote.” Here the advantage clearly goes to Clinton. Candidate Clinton has done a superb job of building a “machine” that has turned out a record number of Democrats to early vote. And she has worked diligently with her party to make sure local support exists across the country to help take people to the polls, and encourage voting on election day. By making sure her constituents make it to vote, she will likely do far better at collecting votes than her opponent.
Additionally, candidate Clinton is not only campaigning, but she has a two former presidents campaigning for her, a sitting first lady, a sitting vice president and her key opponent from the primaries. This breadth of support, canvasing across multiple states, further puts her message into voters ears right before the election, and encourages people to go vote for her tomorrow. Her large fundraising, and ability to offer funds to down-ticket candidates, has helped make sure her message was clear at the local level.
On the other hand, candidate Trump is walking a nearly singular path, with precious little party support. While he swept the primaries, he has not built a strong machine to make sure that those beyond the party faithful – those who are undecided or independent – are going to make it to the voting booth to help him be elected. It is one thing to excite people about your product, it is another to make sure people actually invest the resources to obtain it.
In Trump’s case the advertising has been relentless, but the local machine support to turn out registered party voters, and everyone else who might enjoy his candidacy, is quite weak. One reason candidate Trump keeps saying the election is “rigged” is because he’s now realizing he failed to put in place the distribution system to get his voters to the ballot box.
Further, those who are helping candidate Trump secure his message are few and far between. Outside of family members there are few making the case to get out the vote. Despite two living former Republican presidents and one vice president available, none is helping him be elected. Likewise, despite a large number of primary opponents, most of which pledged their support for whoever won the primary, there is only one (Chris Christie) that has been a notable advocate for candidate Trump.
And the party itself has not been mobilized to get out the vote for candidate Trump. His personal wealth has allowed Trump to implement a credible campaign. But his inability, or unwillingness, to raise lots of money to invest in down-ticket races has meant he has not garnered support from other candidates running for Congress, Senate, governorships, etc. to promote his message at a more local level.
For months we have been inundated with polls. But on election day it is not someone calling your house to hear for whom you might vote. Rather, people have to leave their houses, make time in their busy days and go to the election booth – then stand in line and vote. Mr. Trump has not done the sort of job one would expect for building the support necessary to make sure voters turn out for him.
Promotion: This might be where the two marketing programs most differ.
Candidate Trump has relied on advertising. Years ago marketing programs often relied on huge ad budgets to build a brand. Companies quickly learned that if you spent a lot on advertising you could drown out a competitive message, and bring your brand to the forefront. Simply on the basis of a big ad spend, heavily reliant on television, success was once possible. And the Trump campaign has used advertising like a soap company launching a new brand. Lots and lots and lots of advertising.
Notably, there has been little use of digital, internet and mobile advertising. Little use of social media to build trends and increase brand effectiveness. The candidate himself has gone almost entirely against modern thinking about social, mobile and internet marketing by unleashing tweets which have been simultaneously shocking, and often opposed to the brand message the advertising set out to create. While entertaining, this has not met even the minimum standards of modern marketing.
Candidate Clinton has matched candidate Trump in television and other traditional media advertising. Thus, her candidacy has not been overwhelmed by competitive spending While most people are likely tired of the ads from both candidates, it is clear that when it comes to traditional ad programs Clinton’s marketing has met the competitive level necessary to neutralize any possible Trump advantage.
But internet, mobile and social marketing has been much more successful for Clinton. Barack Obama did a splendid job of using these tools to mobilize young and minority voters in previous elections. This sort of marketing often touches people much closer, and has a greater “one-on-one” appeal, even if it is a modified “one-to-many.” And the Clinton campaign has lifted those guidelines, perhaps not as effectively as the Obama campaigns, to convert Sanders constituents to her as well as independents and undecideds.
The Trump campaign relied almost wholly on advertising, and an effort at achieving greater public relations via outrageous messaging. This has kept the candidate squarely in the public eye. But every marketer will tell you that it is not possible to build high commitment for your product with advertising alone. It takes an ability to touch people on a more personal, closer to home basis. It is critical now, more than for many years, to create identification with local issues within the home and workplace, and often reinforce social relationships.
At this, the Trump campaign has been out of step with modern marketing, and overly reliant on tools that were more effective in the ’80s and ’90s. Thus his appeal outside of European heritage, Christian, white and mostly male voter groups has struggled.
The Clinton campaign’s use of these tools has spread her base considerably wider. She has been able to connect with minorities, women, people of color, people of different religions and other groups much more effectively. In tune with demographic trends in America, this greatly enhances her opportunity to obtain the largest share of market. Tied to a superior placement campaign (to get out the vote,) this use of modern tools gives her a significant advantage.
These two campaigns have lessons for all business leaders. Too often we rely on product alone to think we will succeed. But product is only part of successfully luring buyers. You also have to make sure your product is in the right place, accessible to the most people, at time of purchase.
And today budget is only a part of good promotion, because effective use of social, mobile and internet marketing tools can help you connect with your targets more closely, and more personally. New promotion tools can expand your base, identify new target markets, develop strengths in niche groups and achieve greater loyalty at lower cost.
In history, there are almost no great campaigns that were won just because a product was superior. Nor because a product was cheaper. And despite some great ad lines (“Where’s the beef?” or “Plop, plop, fizz, fizz oh what a relief it is”) advertising has limited ability to actually make a product successful. Those that win build a marketing program using all four Ps most effectively to build on trends and excite customers.
by Adam Hartung | Oct 26, 2016 | Growth Stall, Innovation, Investing, Leadership, Web/Tech
Apple AAPL -0.72% announced sales and earnings yesterday. For the first time in 15 years, ever since it rebuilt on a strategy to be the leader in mobile products, full year sales declined. After three consecutive down quarters, it was not unanticipated. And Apple’s guidance for next quarter was for investors to expect a 1% or 2% improvement in sales or earnings. That’s comparing to the disastrous quarter reported last January, which started this terrible year for Apple investors.
Yet, most analysts remain bullish on Apple stock. At a price/earnings (P/E) of 13.5, it is by far the cheapest tech stock. iPad sales are stagnant, iPhone sales are declining, Apple Watch sales dropped some 70% and Chromebook breakout sales caused a 20% drop in Mac Sales. Yet most analysts believe that something will improve and Apple will get its mojo back.
Only, the odds are against Apple. As I pointed out last January, Apple’s value took a huge hit because stagnating sales caused the company to completely lose its growth story. And, the message that Apple doesn’t know how to grow just keeps rolling along. By last quarter – July – I wrote Apple had fallen into a Growth Stall. And that should worry investors a lot.
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Companies that hit growth stalls almost always do a lot worse before things improve – if they ever improve. Seventy-five percent of companies that hit a growth stall have negative growth for several quarters after a stall. Only 7% of companies grow a mere 6%. To understand the pattern, think about companies like Sears, Sony, RIM/Blackberry, Caterpillar Tractor. When they slip off the growth curve, there is almost always an ongoing decline.
And because so few regain a growth story, 70% of the companies that hit a growth stall lose over half their market capitalization. Only 5% lose less than 25% of their market cap.
Why? Because results reflect history, and by the time sales and profits are falling the company has already missed a market shift. The company begins defending and extending its old products, services and business practices in an effort to “shore up” sales. But the market shifted, either to a competitor or often a new solution, and new rev levels do not excite customers enough to create renewed growth. But since the company missed the shift, and hunkered down to fight it, things get worse (usually a lot worse) before they get better.
Think about how Microsoft MSFT -0.42% missed the move to mobile. Too late, and its Windows 10 phones and tablet never captured more than 3% market share. A big miss as the traditional PC market eroded.
Right now there is nothing which indicates Apple is not going to follow the trend created by almost all growth stalls. Yes, it has a mountain of cash. But debt is growing faster than cash now, and companies have shown a long history of burning through cash hoards rather than returning the money to shareholders.
Apple has no new products generating market shifts, like the “i” line did. And several products are selling less than in previous quarters. And the CEO, Tim Cook, for all his operational skills, offers no vision. He actually grew testy when asked, and his answer about a “strong pipeline” should be far from reassuring to investors looking for the next iPhone.
Will Apple shares rise or fall over the next quarter or year? I don’t know. The stock’s P/E is cheap, and it has plenty of cash to repurchase shares in order to manipulate the price. And investors are often far from rational when assessing future prospects. But everyone would be wise to pay attention to patterns, and Apple’s Growth Stall indicates the road ahead is likely to be rocky.
by Adam Hartung | Oct 21, 2016 | Boards of Directors, Finance, Investing
(AP Photo/Cliff Owen, File)
Wells Fargo’s CEO John Stumpf resigned last week. This week he also resigned from the boards of directors at Chevron and Target. For those two roles he was being paid something like $650,000 per year. The interesting question is, why was he on those boards at all? Wasn’t being the CEO and on the board at one of America’s biggest banks a full-time job? After all, he was paid $19.3 million in both 2015 and 2014. You would not have thought he needed a side job to make ends meet.
Which leads to the question, are America’s boards of directors actually staffed with the right people? Ostensibly the board is responsible for governing the corporation. Directors are responsible to insure management makes the right decisions for the long-term best interests of shareholders. And legislators’ have passed multiple laws, such as Sarbanes-Oxley and Dodd-Frank, to allow the regulators, primarily at the SEC (Securities and Exchange Commission), to put real teeth (and enforcement) into directors’ responsibilities.
According to the National Association of Corporate Directors (NACD) a sitting director should do a minimum of 200 hours of work on a board every year. For larger companies committee requirements on top of general board work could easily push this to nearly 300 hours. Thus, Mr. Stumpf should have been doing at least 500 hours of work for Chevron and Target – about 12.5 weeks, or three months. Do you think he actually spent this much time on these roles, given his full time job at Wells Fargo?
This also means that Mr. Stumpf only had nine months to actually work as CEO of Wells Fargo. Maybe that was why he was so unaware of the unethical behavior at the company he led? Why would a board think it is acceptable for a CEO to work only three-fourths of the year? Not many employees have the opportunity to draw full compensation yet take off so much time.
Either Mr. Stumpf wasn’t paying enough attention to Wells Fargo, or he wasn’t paying enough attention to Chevron and Target. Yet, he was being paid very, very handsomely for all those roles. How is that good governance for any one of the three companies?
CEOs serving on additional boards is a bit like electing a governor, who is paid to run the state, and then hearing that the governor is simultaneously going to do part time work for a company or perhaps an agency of a different state. Would any state accept that their governor, state CEO, be allowed to spend three months of every year working side jobs that have nothing to do with being governor? Yet, corporate CEOs regularly take on director roles for other corporations – which in no way benefits their company’s employees, or shareholders. Why?
Further, boards are dominated by sitting or former CEOs. Why? The world moves fast toda, and there are a wealth of skills boards need to effectively govern – far beyond having a room full of CEOs. IT skills, cyber security skills, social media skills, marketing and advertising skills, branding skills, global market skills, intellectual property skills – there is a long list of skills which would greatly improve board diversity, and thereby a board’s ability to govern effectively. So why is hiring so biased toward CEOs? NACD has been asking the same question as it promotes diversity in the boardroom.
Yet, there is one group that is making hay with all that board pay. Former regulators and members of Congress. These people are required to register if they become lobbyists, and they are forced to wait a year, or more, before they can do work for government contractors. But there is nothing which stops them from joining a board of directors.
There is nothing about being a Congressman or Senator which prepares these people for corporate governance, yet this is common practice as corporations seek ways to find influence without breaking the law. But is it worthwhile to investors to have directors that were prominent in government, but perhaps lacking competency for today’s fast-paced business world? Should a directorship and the compensation be a reward for previous government work – or should it be a position of great importance looking out for the interest of the corporation?
There are currently 64 former members of Congress serving on corporate boards. According to a Harvard and Boston University study, 44% of Senators, and 11% of Congress members have landed corporate board directorships since 1992. Their average compensation, per board, is $350,000. Much better than being in Congress. Especially for a part-time job.
Former Speaker John Boehner and famous cigarette smoker, just joined the tobacco company Reynolds America board – although that may be short-lived as British American Tobacco has offered to acquire Reynolds. Former Majority leader Eric Cantor, who was up for the Speaker job when losing his last election, is now on the board of a Wall Street firm, where he earned $2 million in 2015 for bringing in new business – making him the highest paid director in this group. Former Majority Leader Dick Gephardt has accumulated $10.8 million in director compensation since retiring from Congress in 2005.
Tom Ridge, who was a governor, house member and secretary of Homeland Security – but never a businessperson – raked in $1.4 million in director compensation last year. Even former Congressman and subsequently Secretary of Defense and director of the CIA Leon Panetta made almost $600,000 in director comp last year. These fellows are obviously well connected to government leaders, but do they have a clue about how to effectively implement regulations for corporate audit, compensation or nominating and governance committee roles? Are they hired to apply good governance for investors, or to be rainmakers for the company? Or just to give them a good retirement plan?
Boards exist to protect the rights of shareholders. But do they? The issues at Wells Fargo are an example of how ineffective a board can be at oversight, given that serious problems lasted there for at least five years, and whistle-blowers were terminated for specious reasons. And the Wells board paid the CEO almost $20 million per year, while letting him work a quarter or more of each year as a director for other companies. Hard to see how those directors were doing their job.
When companies do poorly employees, investors and analysts will ask “where was the board?” Increasingly it is clear that more should be asking “who is on the board?” Boards should not be stacked with folks that have lofty titles from previous positions, but which are irrelevant to the needs of that corporation and frequently lacking the qualifications to govern effectively. Target’s investors, for example, probably would have benefited far more by a director that understood networks and cyber crime than paying Mr. Stumpf for his part-time assistance away from Wells Fargo. And with oil prices at generational lows, how did Mr. Stumpf help Chevron prepare for a new world of lower oil demand and greater supplier anxiety in the Middle East?
Sarbanes-Oxley was passed after the outrage that occurred at Enron, where the company completely failed and yet the board said it had no idea of the company’s problems. When America’s financial services industry nearly melted down Dodd-Frank was passed to put more onus on directors to understand the financials and compensation practices of their companies. But, it will most likely take yet more legislation, and more regulation, if investors are to be protected by truly independent directors that are the right people, in the right job, and feel accountable for management oversight and company outcomes.
by Adam Hartung | Oct 19, 2016 | Uncategorized, Website Element
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by Tim | Oct 18, 2016 | Testimonial, Website Element
Adam Hartung, author of Create Marketplace Disruption, was my guest speaker at a recent FEI Career Management Group Breakfast. Adam did an excellent job of enlightening the group on the concepts in his book, tying in current business events (eg. the GM Chapter 11 filing) and bringing topic relevance to the Finance executives in attendance. Adam conveyed his material with the authority one would expect from someone who had conducted extensive research but also with a sense of humor and engaging style that sparked many questions from the audience. Adam is the type of speaker who will make business leaders think differently about what they need to focus on and how to lead so they will have successful businesses not only today but in the future.
Committee Member, FEI Career Management Group
by Tim | Oct 18, 2016 | Testimonial, Website Element
It is rare that we have a speaker so engaging and so loaded with key insights that most people miss. We always pack the house when Adam speaks. He locks-in and fully engages the audience providing such relevant data that he has become a regular speaker for MENG (Marketing Executives Networking Group). Our attendees rave about Adams ability to deliver excellent content in a captivating and motivating way. I recommend Adam to anyone who wants a professional, polished speaker, who can read the audience and deliver exceptionally well!
Chapter Chair and Board Member, MENG Chicago
by Tim | Oct 18, 2016 | Testimonial, Website Element
Adam Hartung presented to our University of Chicago Booth School of Business’ Consulting Roundtable (CRT). His presentation focused on how to galvanize our companies and clients — insights that are valuable in any economy and urgent in this one. Whether in a tough times or good, Adam’s insights are applicable — companies, and individuals, have to be adaptable. Adam’s presentation demonstrated what makes a company adaptable, able to manage through a downturn or market shift, and enlightened us with the surprising strategies and stories of those companies. Our audience was engaged, asked many questions and the presentation was energizing — so much so that when the session was officially over, 70% of the attendees stayed an extra hour of further discussion.
University of Chicago
