by Adam Hartung | Aug 1, 2013 | Defend & Extend, Food and Drink, In the Swamp, Leadership
Alex Robles protests in front of a McDonald’s in 2013, in Phoenix. (AP Photo/Ross D. Franklin)
Horatio Alger wrote books in the 1800s about young poor boys who became wealthy via clean living and hard work. Americans loved the idea that anyone can become rich, and loved those stories. We love them as much today as then, clinging to the non-rich roots of successes like Steve Jobs.
Unfortunately, such possibilities have been growing tougher in America. Today U.S. income inequality is among the highest in the world, while income mobility is among the lowest. You are more likely to go from rags to riches in France or Germany than the USA. Net/net – in current circumstances your most important decision is who will be your parents, because if you are born rich you will likely live a rich life, while if you are born poor you’ll probably die poor.
Organizations like Occupy Wall Street have tried to bring the problem of inequality and jobs to the face of America – with mixed results. But the truth is that 80% of Americans will face poverty and unemployment in their lifetimes. And the biggest growth in poverty, declining marriage rates and single mother households all belong to white Americans today. These poverty related issues are no longer tied to skin color or immigration they way they once were.
It’s safe to say that a lot of Americans are sounding like the famous Howard Beale phrase from the 1976 movie “Network” and starting to say “I’m mad as hell, and I’m not going to take this any more!”
This situation has given birth to a new trend – frequently referred to as the “living wage.” A living wage allows one parent to earn enough money from a single 40 hour per week job to feed, cloth, educate, transport and otherwise lead a decent life for a family of 4. Today in America this is in the range of $13.50-$15.00 per hour.
This, of course, should not be confused with the minimum wage which is a federally (or state) mandate to pay a specific minimum hourly wage. Because the minimum wage is lower than living wage, a movement has been started to match the two numbers – something which would roughly double today’s $7.25 federal minimum wage.
This concept would have been heresy just 40 years ago. America’s Chamber of Commerce and other pro-business groups have long attempted to abolish the minimum wage, and have fought hard against any and every increase.
As the income inequality gap has widened popularity has grown for this movement, however, and now 70% of Americans support higher minimum wages, almost 3 times those who don’t. Whether effective or not, this week fast food employees took to old fashioned strikes and picket lines in New York City, Chicago, St. Louis, Milwaukee and Detroit for higher wages.
Regardless of your opinion about the economics (or politics) of such a move, the trend is definitely building for taking action.
The biggest industries affected by such an increase would be fast food and retail. And if these companies don’t do something to adapt to this trend the results could be pretty severe.
McDonald’s is the largest fast food company. And it definitely does not pay a living wage. The company recently published for employees a budget for trying to live on a McDonald’s income, and it translated into requiring employees work 2 full-time jobs. Rancor about the posted budget was widespread, as even pro-business folks found it amazing a company could put out such a document while its CEO (and other execs) make many multiples of what most employees earn.
Estimates are that a wage increase to $15/hour for employees would cost McDonald’s $8B. McDonald’s showed $10B of Gross Income in 2012, and $8B of Pre-Tax Income. Obviously, should the living wage movement pass nationally McDonald’s investors would see a devastating impact. Simultaneously, prices would have to increase hurting customers and suppliers would likely be pinched to the point of losses.
Couple this with McDonald’s laissez-faire attitude about obesity trends, and you have two big trends that don’t bode well for rising returns for shareholders. Yet, other than opposing regulations and government action on these matters McDonald’s has shown no ability to adapt to these rather important, and impactful, trends. Hoping there will be no legislation is a bad strategy. Fighting against any change, given the public health and economic situation, is as silly as fighting against regulations on tobacco was in the 1960s. But so far there has been no proposed adaptation to McDonald’s 50 year old success formula offered to investors, employees, customers or legislators.
WalMart is America’s largest retailer. And the most vitriolic opposing higher wages. Even though a living wage increase would cost customers only $12/year. When Washington, DC passed a requirement retailers pay a living wage WalMart refused to build and open 4 proposed new stores. Even though the impact would be only $.46/customer visit (estimated at $12.50/customer/year.)
It would seem such harsh action, given the small impact, is a bit illogical. Given that WalMart is already out of step with the trend toward on-line shopping, why would the company want to take such an additional action fighting against a trend that affects not only its profits, but most of its customers — who would benefit from a rise in income and buying power?
In 1914 Henry Ford was suffering from high turnover and a generally unhappy workforce. He reacted by doubling pay – with his famous “$5 day”. Not only did he reduce turnover, he became the perferred employer in his industry – and rather quickly it became clear that employees who formerly could not afford an automobile were able to now become customers at the new, higher pay scale. Apparently nobody at WalMart is familiar with this story. Or they lack the will to apply it.
Fighting trends is expensive. Yet, most leadership teams become stuck defending & extending an old strategy – an old success formula – even after it is out of date. Most companies don’t fail because the leadership is incompetent, but rather because they fail to adapt to trends and changing circumstances. Long-lived companies are those which build for future scenarios, rather than trying to keep the world from changing by spending on lobbyists, advertising and other efforts to halt (or reverse) a trend.
McDonald’s and WalMart (and for that matter Yum Brands, Wendy’s, JCPenney, Sears, Best Buy and a whole host of other companies) are largely unwilling to admit that the future is likely to look different than the past. Will that kill them? It sure won’t help them. But investors could feel a lot more comfortable (as would employees, suppliers and customers) if they would develop and tell us about their strategies to adapt to changing circumstances.
Are you looking at trends, developing scenarios about the future and figuring out how to adapt in ways that will help you profitably grow? Or are you stuck defending and extending an old success formula even as markets shift and trends move customers in different directions?
Follow Adam's coverage in press and other media
by Adam Hartung | Jul 26, 2013 | Current Affairs, Food and Drink, In the Swamp, Leadership
Both Coca-Cola and McDonald's have produced good investor returns over the last decade. From stock lows in early 2009, Coke has more than doubled. After shutting many stores and investing heavily in upgrades as well as supply chain efficiencies, over the last decade McDonald's has risen 6-fold!
But recent quarterly returns have not impressed investors as both companies failed to meet expectations. And for traders with a short-term focus both companies are off their 2013 highs. The open question now, for patient investors with a multi-year focus, is whether either, or both, companies are going to go back to long-term valuation growth (meaning they are a buy) or if their value has fizzled (meaning they are a sell)?
This question cannot be answered by looking at historical performance. As all investment documents remind us, past history is no assurance of future gains. Instead investors need to look at trends, and whether each company is positioned to take advantage of major trends as we head toward 2020.
One major trend is obesity. And not in a good way. The USA is fatter than ever, and shows no signs of thinning as one in 3 people are now considered obese. For Coke and McDonald's this is not a good thing, since their products are considered major contributors to what some call a national epidemic.
Over the last few years this trend has led schools to remove fast food and soft drink dispensers. America's first lady has started a national campaign to fight childhood obesity. And the nation's largest city's mayor has tried to make large portion sizes illegal in New York. While all of this might seem like crank activity that isn't making much difference, truth is that soda consumption per capita has been declining since 1998, and 2012 declines now put soda drinking at the lowest level since 1987!
Even if this still seems like much ado about nothing, investors should be aware of the long-term impact when products are seen as unhealthy. Cigarettes were a common consumer staple well into the 1960s, but when that product was determined to have adverse health impacts advertising was banned, consumption was restricted to adults only, dispensing was severely limited as machines were eliminated, taxes shot through the ceiling creating a 20-fold price increase and consumption was banned in buildings and many public places. None of this happened overnight, but eventually these actions caused the sales and profits of tobacco companies to decline — despite their heroic efforts to fight the trend.
If the Centers for Disease Control takse the point of view that soft drinks are a major contributor to diabetes and other obesity-related illnesses, it is not out of the realm of possibility that Coke could find itself in a situation somewhat like Phillip Morris did. If the CDC made the same determination about certain fast food items (such as double-patty burger sandwiches or large french fry orders) the amount of advertising, free toys, discounted product and super-sized packaging available to McDonald's could be severly curtailed. It could become a requirement that Coke and Big Macs have warning labels educating consumers about the possibility of long-term illness from consumption. And product sales could only be limited only to people over 18.
This may seem extreme, even bizarre, and far off into the future. But this is the direction of the trend. There seems no solution for obesity at this time, so public policy is starting to point toward doing something about consumption.
Recall that when alcohol-related deaths showed no sign of decline it didn't take long for much tougher drunk driving laws to be enacted, then for a string of adjustments lowering the level at which people were considered drunk. Public policies that took direct aim at product consumption.
Looking at the tobacco and alcohol analogies, Coke and McDonald's are behaving a lot more like the R.J. Reynolds than Miller-Coors.
Tobacco companies fought the trend, and ended up in a very expensive and long battle they inevitably lost. They denied there was any public health problem, and denied they had anything to do with the nation's, and their customers', health issues. The fight lasted a very long time. Now their customers are often ostracized, and the industry is contracting.
Liquor companies took a different approach. While not admitting anything, they aggressively promoted "responsible" consumption levels. They promoted individual abstinence (non-consumption) in group settings so there could be a "designated driver" while actively promoting product bans for people under age. They did not fight drunk driving laws, but instead worked with organizations to reduce deaths. Though far from angels, the industry players did not fight the trend, and managed to find ways to avoid the kind of bans dealt tobacco.
Coke and McDonald's today are denying the obesity problem and their contribution to it. While they both have healthier products, they remain committed to the least healthy offerings. Watch a Coke ad and you'll always see the traditional, sweetened red label product receive top billing. Likewise, you can purchase a salad at McDonald's, but the ads and promotions always feature the far less healthy burgers and fried foods which characterize the company's history.
Neither company promotes responsible consumption levels, nor does anything to discuss the importance of limiting use of their products. To the contrary, both like to promote larger package sizes and greater consumption – often beyond what almost anyone would consider healthy. Neither works aggressively to improve the quality of healthy products, nor showcases them as preferred products for customers to purchase.
One would not expect Coke or McDonald's to fail any time soon. But the trends which made them huge companies have reached an end, and new trends are headed in a direction which do not support growth. Both companies seem unwilling to recognize the new trends, and find ways to align with them. Future revenue growth is up against a difficult environement, and historical cost reduction activities leave little opportunity to improve future earnings without revenue growth. While the valuation of both companies are unlikely to remain flat, it is hard to identify the bull case for either to provide long-term investors much gain.
by Adam Hartung | Jul 18, 2013 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
Sears has performed horribly since acquired by Fast Eddie Lampert's KMart in 2005. Revenues are down 25%, same store sales have declined persistently, store margins have eroded and the company has recently taken to reporting losses. There really hasn't been any good news for Sears since the acquisition.
Bloomberg Businessweek made a frontal assault on CEO Edward Lampert's leadership at Sears this week. Over several pages the article details how a "free market" organization installed by Mr. Lampert led to rampant internal warfare and an inability for the company to move forward effectively with programs to improve sales or profits. Meanwhile customer satisfaction has declined, and formerly valuable brands such as Kenmore and Craftsman have become industry also-rans.
Because the Lampert controlled hedge fund ESL Investments is the largest investor in Sears, Mr. Lampert has no risk of being fired. Even if Nobel winner Paul Krugman blasts away at him. But, if performance has been so bad – for so long – why does the embattled Mr. Lampert continue to lead in the same way? Why doesn't he "fire" himself?
By all accounts Mr. Lampert is a very smart man. Yale summa cum laude and Phi Beta Kappa, he was a protege of former Treasury Secretay Robert Rubin at Goldman Sach before convincing billionaire Richard Rainwater to fund his start-up hedge fund – and quickly make himself the wealthiest citizen in Connecticut.
If the problems at Sears are so obvious to investors, industry analysts, economics professors, management gurus and journalists why doesn't he simply change?
Mr. Lampert, largely because of his success, is a victim of BIAS. Deep within his decision making are his closely held Beliefs, Interpretations, Assumptions and Strategies. These were created during his formative years in college and business. This BIAS was part of what drove his early success in Goldman, and ESL. This BIAS is now part of his success formula – an entire set of deeply held convictions about what works, and what doesn't, that are not addressed, discussed or even considered when Mr. Lampert and his team grind away daily trying to "fix" declining Sears Holdings.
This BIAS is so strong that not even failure challenges them. Mr. Lampert believes there is deep value in conventional retail, and real estate. He believes strongly in using "free market competition" to allocate resources. He believes in himself, and he believes he is adding value, even if nobody else can see it.
Mr. Lampert assumes that if he allows his managers to fight for resources, the best programs will reach the top (him) for resourcing. He assumes that the historical value in Sears and its house brands will remain, and he merely needs to unleash that value to a free market system for it to be captured. He assumes that because revenues remain around $35B Sears is not irrelevant to the retail landscape, and the company will be revitalized if just the right ideas bubble up from management.
Mr. Lampert inteprets the results very different from analysts. Where outsiders complain about revenue reductions overall and same store, he interprets this as an acceptable part of streamlining. When outsiders say that store closings and reduced labor hurt the brand, he interprets this as value-added cost savings. When losses appear as a result of downsizing he interprets this as short-term accounting that will not matter long-term. While most investors and analysts fret about the overall decline in sales and brands Mr. Lampert interprets growing sales of a small integrated retail program as a success that can turn around the sinking behemoth.
Mr. Lampert's strategy is to identify "deep value" and then tenaciously cut costs, including micro-managing senior staff with daily calls. He believes this worked for Warren Buffett, so he believes it will continue to be a successful strategy. Whether such deep value continues to exist – especially in conventional retail – can be challenged by outsiders (don't forget Buffett lost money on Pier 1,) but it is part of his core strategy and will not be challenged. Whether cost cutting does more harm than good is an unchallenged strategy. Whether micro-managing staff eats up precious resources and leads to unproductive behavior is a leadership strategy that will not change. Hiring younger employees, who resemble Mr. Lampert in quick thinking and intellect (if not industry knowledge or proven leadership skills) is a strategy that will be applied even as the revolving door at headquarters spins.
The retail market has changed dramatically, and incredibly quickly. Advances in internet shopping, technology for on-line shopping (from mobile devices to mobile payments) and rapid delivery have forever altered the economics of retailing. Customer ease of showrooming, and desire to shop remotely means conventional retail has shrunk, and will continue to shrink for several years. This means the real challenge for Sears is not to be a better Sears as it was in 2000 — but to become something very different that can compete with both WalMart and Amazon – and consumer goods manufacturers like GE (appliances) and Exide (car batteries.)
There is no doubt Mr. Lampert is a very smart person. He has made a fortune. But, he and Sears are a victim of his BIAS. Poor results, bad magazine articles and even customer complaints are no match for the BIAS so firmly underlying early success. Even though the market has changed, Mr. Lampert's BIAS has him (and his company) in internal turmoil, year after year, even though long ago outsiders gave up on expecting a better result.
Even if Sears Holdings someday finds itself in bankruptcy court, expect Mr. Lampert to interpret this as something other than a failure – as he defends his BIAS better than he defends its shareholders, employees, suppliers and customers.
What is your BIAS? Are you managing for the needs of changing markets, or working hard to defend doing more of what worked in a bygone era? As a leader, are you targeting the future, or trying to recapture the past? Have market shifts made your beliefs outdated, your interpretations of what happens around you faulty, your assumptions inaccurate and your strategies hurting results? If any of this is true, it may be time you address (and change) your BIAS, rather than continuing to invest in more of the same. Or you may well end up like Sears.
by Adam Hartung | Jul 10, 2013 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Television
Tribune Corporation finally emerged from a 4 year bankruptcy on the last day of 2012. Before the ink hardly dried on the documents, leadership has decided to triple company debt to double up the number of TV stations. Oh my, some people just never learn.
The media industry is now over a decade into a significant shift. Since the 1990s internet access has changed expectations for how fast, easily and flexibly we acquire entertainment and news. The result has been a dramatic decline in printed magazine and newspaper reading, while on-line reading has skyrocketed. Simultaneously, we're now seeing that on-line streaming is making a change in how people acquire what they listen to (formerly radio based) and watch (formerly television-based.)
Unfortunately, Tribune – like most media industry companies – consistently missed these shifts and underestimated both the speed of the shift and its impact. And leadership still seems unable to understand future scenarios that will be far different from today.
In 2000 newspaper people thought they had "moats" around their markets. The big newspaper in most towns controlled the market for classified ads for things like job postings and used car sales. Classified ads represented about a third of newspaper revenues, and 40% of profits. Simultaneously display advertising for newspapers was considered a cash cow. Every theatre would advertise their movies, every car dealer their cars and every realtor their home listings. Tribune leadership felt like this was "untouchable" profitability for the LA Times and Chicago Tribune that had no competition and unending revenue growth.
So in 2000 Tribune spent $8B to buy Times-Mirror, owner of the Los
Angeles Times. Unfortunately, this huge investment (75% over market
price at the time, by the way) was made just as people were preparing to
shift away from newspapers. Craigslist, eBay and other user sites killed the market for classified ads. Simultaneously movie companies, auto companies and realtors all realized they could reach more people, with more information, cheaper on-line than by paying for newspaper ads.
These web sites all existed before the acquisition, but Tribune leadership ignored the trend. As one company executive said to me "CraigsList!! You think that's competition for a newspaper? Craigslist is for hookers! Nobody would ever put a job listing on Craigslist." Like his compadres running newspapers nationwide, the new competitors and trends toward on-line were dismissed with simplistic statements and broad generalizations that things would never change.
The floor fell out from under advertising revenues in newspapers in the 2000s. There was no way Times-Mirror would ever be worth a fraction of what Tribune paid. Debt used to help pay for the acquisition limited the options for Tribune as cost cutting gutted the organization.
Then, in 2007 Sam Zell bailed out management by putting together a leveraged buyout to acquire Tribune company. Saying that he read 3 newspapers every day, he believed people would never stop reading newspapers. Like a lot of leaders, Mr. Zell had more money than understanding of trends and shifting markets. He added a few billion dollars more debt to Tribune. By the end of 2008 Tribune was unable to meet its debt obligations, and filed for bankruptcy.
Now, new leadership has control of Tribune. They are splitting the company in two, seperating the print and broadcast businesses. The hope is to sell the newspapers, for which they believe there are 40 potential buyers. Even though profits continued falling, from $156M to $89M, in just the last year. Why anyone would buy newspaper companies, which are clearly buggy whip manufacturers, is wholly unclear. But hope springs eternal!
The new stand-alone Tribune Broadcasting company has decided to go all-in on a deal to borrow $2.7B and buy 19 additional local television stations raising total under their control to 42.
Let's see, what's the market trend in entertainment and news? Where once we were limited to local radio and television stations for most content, now we can acquire almost anything we want – from music to TV, movies, documentaries or news – via the internet. Rather than being subjected to what some programming executive decides to give us, we can select what we want, when we want it, and simply stream it to our laptop, tablet, smartphone, or even our large-screen TV.
A long time ago content was controlled by distribution. There was no reason to create news stories or radio programs or video unless you had access to distribution. Obviously, that made distribution – owning newspapers, radio and TV stations – valuable.
But today distribution is free, and everywhere. Almost every American has access to all the news and entertainment they want from the internet. Either free, or for bite-size prices that aren't too high. Today the value is in the content, not distribution.
In the last 2 years the number of homes without a classical TV connection (the cable) has doubled. Sure, it's only 5% of homes now. But the trend is pretty clear. Even homes that have cable are increasingly not watching it as they turn to more and more streaming video. Instead of watching a 30 minute program once per week, people are starting to watch 8 or 10 half hour episodes back to back. And when they want to watch those episodes, where they want to watch them.
While it might be easy for Tribune to ignore Hulu, Netflix and Amazon, the trend is very clear. The need for broadcast stations like NBC or WGN or Food Network to create content is declining as we access content more directly, from more sources. And the need to have content delivered to our home by a local affiliate station is becoming, well, an anachronism.
Yet, Tribune's new TV-oriented leadership is doubling down on its bet for local TV's future. Ignoring all the trends, they are borrowing more money to buy more assets that show all signs of becoming about as valuable whaling ships. It's a big, dumb bet. Similar to overpaying for Times-Mirror. Some leaders just seem destined to never learn.
by Adam Hartung | Jun 28, 2013 | Current Affairs, Defend & Extend, In the Rapids, In the Whirlpool, Innovation, Leadership, Web/Tech
The last 12 months Tesla Motors stock has been on a tear. From $25 it has more than quadrupled to over $100. And most analysts still recommend owning the stock, even though the company has never made a net profit.
There is no doubt that each of the major car companies has more money, engineers, other resources and industry experience than Tesla. Yet, Tesla has been able to capture the attention of more buyers. Through May of 2013 the Tesla Model S has outsold every other electric car – even though at $70,000 it is over twice the price of competitors!
During the Bush administration the Department of Energy awarded loans via the Advanced Technology Vehicle Manufacturing Program to Ford ($5.9B), Nissan ($1.4B), Fiskar ($529M) and Tesla ($465M.) And even though the most recent Republican Presidential candidate, Mitt Romney, called Tesla a "loser," it is the only auto company to have repaid its loan. And did so some 9 years early! Even paying a $26M early payment penalty!
How could a start-up company do so well competing against companies with much greater resources?
Firstly, never underestimate the ability of a large, entrenched competitor to ignore a profitable new opportunity. Especially when that opportunity is outside its "core."
A year ago when auto companies were giving huge discounts to sell cars in a weak market I pointed out that Tesla had a significant backlog and was changing the industry. Long-time, outspoken industry executive Bob Lutz – who personally shepharded the Chevy Volt electric into the market – was so incensed that he wrote his own blog saying that it was nonsense to consider Tesla an industry changer. He predicted Tesla would make little difference, and eventually fail.
For the big car companies electric cars, at 32,700 units January thru May, represent less than 2% of the market. To them these cars are simply not seen as important. So what if the Tesla Model S (8.8k units) outsold the Nissan Leaf (7.6k units) and Chevy Volt (7.1k units)? These bigger companies are focusing on their core petroleum powered car business. Electric cars are an unimportant "niche" that doesn't even make any money for the leading company with cars that are very expensive!
This is the kind of thinking that drove Kodak. Early digital cameras had lots of limitations. They were expensive. They didn't have the resolution of film. Very few people wanted them. And the early manufacturers didn't make any money. For Kodak it was obvious that the company needed to remain focused on its core film and camera business, as digital cameras just weren't important.
Of course we know how that story ended. With Kodak filing bankruptcy in 2012. Because what initially looked like a limited market, with problematic products, eventually shifted. The products became better, and other technologies came along making digital cameras a better fit for user needs.
Tesla, smartly, has not tried to make a gasoline car into an electric car – like, say, the Ford Focus Electric. Instead Tesla set out to make the best car possible. And the company used electricity as the power source. By starting early, and putting its resources into the best possible solution, in 2013 Consumer Reports gave the Model S 99 out of 100 points. That made it not just the highest rated electric car, but the highest rated car EVER REVIEWED!
As the big car companies point out limits to electric vehicles, Tesla keeps making them better and addresses market limitations. Worries about how far an owner can drive on a charge creates "range anxiety." To cope with this Tesla not only works on battery technology, but has launched a program to build charging stations across the USA and Canada. Initially focused on the Los-Angeles to San Franciso and Boston to Washington corridors, Tesla is opening supercharger stations so owners are never less than 200 miles from a 30 minute fast charge. And for those who can't wait Tesla is creating a 90 second battery swap program to put drivers back on the road quickly.
This is how the classic "Innovator's Dilemma" develops. The existing competitors focus on their core business, even though big sales produce ever declining profits. An upstart takes on a small segment, which the big companies don't care about. The big companies say the upstart products are pretty much irrelevant, and the sales are immaterial. The big companies choose to keep focusing on defending and extending their "core" even as competition drives down results and customer satisfaction wanes.
Meanwhile, the upstart keeps plugging away at solving problems. Each month, quarter and year the new entrant learns how to make its products better. It learns from the initial customers – who were easy for big companies to deride as oddballs – and identifies early limits to market growth. It then invests in product improvements, and market enhancements, which enlarge the market.
Eventually these improvements lead to a market shift. Customers move from one solution to the other. Not gradually, but instead quite quickly. In what's called a "punctuated equilibrium" demand for one solution tapers off quickly, killing many competitors, while the new market suppliers flourish. The "old guard" companies are simply too late, lack product knowledge and market savvy, and cannot catch up.
- The integrated steel companies were killed by upstart mini-mill manufacturers like Nucor Steel.
- Healthier snacks and baked goods killed the market for Hostess Twinkies and Wonder Bread.
- Minolta and Canon digital cameras destroyed sales of Kodak film – even though Kodak created the technology and licensed it to them.
- Cell phones are destroying demand for land line phones.
- Digital movie downloads from Netflix killed the DVD business and Blockbuster Video.
- CraigsList plus Google stole the ad revenue from newspapers and magazines.
- Amazon killed bookstore profits, and Borders, and now has its sites set on WalMart.
- IBM mainframes and DEC mini-computers were made obsolete by PCs from companies like Dell.
- And now Android and iOS mobile devices are killing the market for PCs.
There is no doubt that GM, Ford, Nissan, et. al., with their vast resources and well educated leadership, could do what Tesla is doing. Probably better. All they need is to set up white space companies (like GM did once with Saturn to compete with small Japanese cars) that have resources and free reign to be disruptive and aggressively grow the emerging new marketplace. But they won't, because they are busy focusing on their core business, trying to defend & extend it as long as possible. Even though returns are highly problematic.
Tesla is a very, very good car. That's why it has a long backlog. And it is innovating the market for charging stations. Tesla leadership, with Elon Musk thought to be the next Steve Jobs by some, is demonstrating it can listen to customers and create solutions that meet their needs, wants and wishes. By focusing on developing the new marketplace Tesla has taken the lead in the new marketplace. And smart investors can see that long-term the odds are better to buy into the lead horse before the market shifts, rather than ride the old horse until it drops.
by Adam Hartung | Jun 21, 2013 | General, Web/Tech
If you're frequently on the go, then your smartphone or tablet is a simple tool that can keep you connected to work from virtually anywhere. However, your device is hardly useful without the right apps; consider downloading these top useful apps for business people on the go.
1. Dropbox
Image via Play.Google.com
Dropbox is perhaps the best data storage app available for mobile devices, and with over 50 million downloads, it's one of the most popular on the market. Using this app, users can access documents anywhere and from any device, similar to Apple’s iCloud. Use 2GB of free storage or upgrade to 16GB per account. Don’t worry about the security of important documents as this app features permission settings, account access information and a two-step verification process. You can store any file on Dropbox that you can store on your computer, making it convenient for any type of work. It's also easy to get extra space by recruiting friends and coworkers to sign up for this app as well.
2. Flipboard
Flipboard is a simple personalized news app that keeps you on top of the latest stories. With more than 10 million downloads, it's a popular app rated at 4.5 out of 5 stars on the PlayStore. What makes Flipboard so great is that users can choose which topics the app should show, and then users can post their favorite stories in a "personal magazine" which can share these magazines on social media sites. With a syncing feature, users can access the news topics on any device.
3. Expensify
Image via Play.Google.com
Expensify is a wonderful app for business people who travel frequently, consistently earning the number one spot on lists of the best apps for business travelers. Expensify allows users to track expenses, log mileage, upload receipts with their device's camera, file expense reports and perform various other functions to make organizing business travel simple. Use this app on an iPhone, iPad, Android device, WebOS, or Blackberry device – and download it for free.
4. Google Hangouts
With a quality video chat app, you can easily stay in touch with colleagues and business partners no matter where you are. Available on PC, Android, and Apple devices, the Google Hangouts app is easily accessible, making it simple to talk with other business people while users are out and about. It's free to use, allows multiple simultaneous conversations and with the right Internet provider users can collaborate with coworkers even if their offices are in a rural area. Google Hangouts downside is the user base is still small.
5. Priority Matrix
Priority Matrix is a simple-to-use organizational app that can help users stay on top of all their business responsibilities. With it, users can:
- Organize lists and agendas
- Set target dates
- Make a pro and con list
- And more!
6. TripIt
Image via Play.Google.com
If you're a business person who travels often, TripIt is a must-have app. TripIt links to a user's email account and automatically picks up trip confirmation numbers for any hotel, flight, or dinner reservation then organizes it into a simple itinerary. If users encounter last-minute changes or flight delays notified via email, the app automatically updates the itinerary.
Whether you travel often or just need to stay connected when you're away from work, these apps are excellent ways to make your life a bit easier.
This blog was written as a guest blog by Peyton Spencer. I appreciate her insights into apps that can make all of our lives easier.
Peyton Spencer is a graduate of Concordia University in Saint Paul. She studied Communication with an emphasis on marketing and journalism. Her writing is featured on reputable blogs such as Dom's Tech Blog and now The Phoenix Principle . In her spare time, Peyton loves experimenting with the newest technology, helping small businesses market their brand, and volunteering for non-profit organizations that are close to her heart such as Locks of Love, The Humane Society and Samaritan's Purse.
by Adam Hartung | Jun 17, 2013 | Current Affairs, Games, Innovation
If you're not a golfer, you may not understand the title. But it is important.
Sunday was the final, of four days, of the U.S. Open. Golf is clearly not as fan-favorited as soccer, football, basketball or hockey. But many people are aware of the "major" golf tournaments – just as non-horseracers know about the Kentucky Derby or Preakness. So there was more awareness than average about the sport on Sunday, and a tremendously greater amount of media coverage.
Interestingly, the big winner on the day was Octopus Pants. If you're confused – read on!
Monday morning if you opened a Yahoo! browser window and looked the top "trending now" box there, plain as day, was "Octopus pants." US Open was not there. Nor was the name of the winner – Justin Rose (who came from behind to win.) Nor the name of the leader for almost the entire tournament, and a huge crowd favorite in the sport, Phil Mickelson.
But, back in the pack, was a very good golfer named Billy Horschel. Although he's a great golfer, and a previous PGA tournament winner, was almost impossible to think he would win the U.S. Open on the final day, even though he shot a great second round (it takes 4 rounds to complete the tournament.) Barring a near-miracle, the focus would be on the leaders Sunday so there was a chance the relative newcomer would not receive much attention. [He did end up 6th – which is far better than the famous Tiger Woods, who came in 36th.]
In golf this is important because not only did it mean he would take home a smaller purse, but it also meant his value as an endorser for sponsors is lower. As a fairly new golfer to the Professional Golf Association (PGA) tournaments Mr. Horschel is known in golf circles because he plays Ping brand clubs. But few people know that for apparel Mr Horschel is sponsored by Ralph Lauren.
So, on Sunday he showed up wearing a pair of pants covered with images of Octopus. Pants that are part of the Ralph Lauren RXL line. Mr. Horschel (and the Lauren team) was smart enough to use social media (Twitter, etc.) to heighten interest in his appearance. This bit of assault on the sensibilities of golf, combined with fashion, sent interest in Mr. Horschel's apparel – if not his golf – viral. Not only were golfers looking for glimpses of Mr. Horschel's run for the leader board, but people not usually interested int the game were tuning in and keeping tabs via their mobile devices on his performance — and his pants!
Now, a combination of thinking ahead as to what he might wear, combined with some help from a smart sponsor like Lauren, and really smart use of social media marketing has helped Mr. Horschel, Lauren and Octopus Pants to become a global sensation. More interesting to more people than the tournament winner, the tournament leader and even the biggest names (including Rory McElroy, Graham McDowell, Ian Poulter, Luke Donald) in the sport — and their sponsors.
Winning often means thinking, and doing things, outside the box. Preparing to do something unconventional is important. While I'm sure there was a plan for Mr. Horschel to be much more typically attired had he been the tournament leader, Lauren's team did a great job of figuring out multiple outcomes and how to be a winner under multiple scenarios. Planning for how to win under multiple contingencies is critical in business. And having outside-the-box solutions thought through and ready to implement is the sign of a winning strategy – from different product to using unconventional marketing techniques.
While we all should congratulate Justin Rose on a big win the U.S. Open, the big winner here was Ralph Lauren – and Octopus pants!
by Adam Hartung | Jun 5, 2013 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Web/Tech
Microsoft CEO Steve Ballmer appears to be planning a major reorganization. The apparent objective is to help the company move toward becoming a "devices and services company" as presented in the company's annual shareholder letter last October.
But, the question for investors is whether this is a crafty move that will help Microsoft launch renewed profitable growth, or is it leadership further confusing customers and analysts while leaving Microsoft languishing in stalled markets? After all, the shares are up some 31% the last 6 months and it is a good time to decide if an investor should buy, hold or sell.
There are a lot of things not going well for Microsoft right now.
Everyone knows PC sales have started dropping. IDC recently lowered its forecast for 2013 from a decline of 1.3% to negative 7.8%. The mobile market is already larger than PC sales, and IDC now expects tablet sales (excluding smartphones) will surpass PCs in 2015. Because the PC is Microsoft's "core" market – producing almost all the company's profitability – declining sales are not a good thing.
Microsoft hoped Windows 8 would reverse the trend. That has not happened. Unfortunately, ever since being launched Windows 8 has underperformed the horrific sales of Vista. Eight months into the new product it is selling at about half the rate Vista did back in 2007 – which was the worst launch in company history. Win8 still has fewer users than Vista, and at 4% share 1/10th the share of market leaders Windows 7 and XP.
Microsoft is launching an update to Windows 8, called Windows 8.1 or "blue." But rather than offering a slew of new features to please an admiring audience the release looks more like an early "fix" of things users simply don't like, such as bringing back the old "start" button. Reviewers aren't talking about how exciting the update is, but rather wondering if these admissions of poor initial design will slow conversion to tablets.
And tablets are still the market where Microsoft isn't – even if it did pioneer the product years before the iPad. Bloomberg reported that Microsoft has been forced to cut the price of RT. So far historical partners such as HP and HTC have shunned Windows tablets, leaving Acer the lone company putting out Windows a mini-tab, and Dell (itself struggling with its efforts to go private) the only company declaring a commitment to future products.
And whether it's too late for mobile Windows is very much a real question. At the last shareholder meeting Nokia's investors cried loud and hard for management to abandon its commitment to Microsoft in favor of returning to old operating systems or moving forward with Android. This many years into the game, and with the Google and Apple ecosystems so far in the lead, Microsoft needed a game changer if it was to grab substantial share. But Win 8 has not proven to be a game changer.
In an effort to develop its own e-reader market Microsoft dumped some $300million into Barnes & Noble's Nook last year. But the e-reader market is fast disappearing as it is overtaken by more general-purpose tablets such as the Kindle Fire. Yet, Microsoft appears to be pushing good money after bad by upping its investment by another $1B to buy the rest of Nook, apparently hoping to obtain enough content to keep the market alive when Barnes & Noble goes the way of Borders. But chasing content this late, behind Amazon, Apple and Google, is going to be much more costly than $1B – and an even lower probability than winning in hardware or software.
Then there's the new Microsoft Office. In late May Microsoft leadership hoped investors would be charmed to hear that 1M $99 subscriptions had been sold in 3.5 months. However, that was to an installed base of hundreds of millions of PCs – a less than thrilling adoption rate for such a widely used product. Companies that reached 1M subscribers from a standing (no installed base) start include Instagram in 2.5 months, Spotify in 5 months, Dropbox in 7 months and Facebook (which pioneered an entire new marketplace in Social) in only 10 months. One could have easily expected a much better launch for a product already so widely used, and offered at about a third the price of previous licenses.
A new xBox was launched on May 21st. Unfortunately, like all digital markets gaming is moving increasingly mobile, and consoles show all the signs of going the way of desktop computers. Microsoft hopes xBox can become the hub of the family room, but we're now in a market where a quarter of homes lead by people under 50 don't really use "the family room" any longer.
xBox might have had a future as an enterprise networking hub, but so far Kinnect has not even been marketed as a tool for business, and it has not yet incorporated the full network functionality (such as Skype) necessary to succeed at creating this new market against competitors like Cisco.
Thankfully, after more than a decade losing money, xBox reached break-even recently. However, margins are only 15%, compared to historical Microsoft margins of 60% in "core" products. It would take a major growth in gaming, plus a big market share gain, for Microsoft to hope to replace lost PC profits with xBox sales. Microsoft has alluded to xBox being the next iTunes, but lacking mobility, or any other game changer, it is very hard to see how that claim holds water.
The Microsoft re-org has highlighted 3 new divisions focused on servers and tools, Skype/Lync and xBox. What is to happen with the business which has driven three decades of Microsoft growth – operating systems and office software – is, well, unclear. How upping the focus on these three businesses, so late in the market cycle, and with such low profitability will re-invigorate Microsoft's value is, well, unclear.
In fact, given how Microsoft has historically made money it is wholly unclear what being a "devices and services" company means. And this re-organization does nothing to make it clear.
My past columns on Microsoft have led some commenters to call me a "Microsoft hater." That is not true. More apt would be to say I am a Microsoft bear. Its historical core market is shrinking, and Microsoft's leadership invested far too much developing new products for that market in hopes the decline would be delayed – which did not work. By trying to defend and extend the PC world Microsoft's leaders chose to ignore the growing mobile market (smartphones and tablets) until far too late – and with products which were not game changers.
Although Microsoft's leaders invested heavily in acquisitions and other markets (Skype, Nook, xBox recently) those very large investments came far too late, and did little to change markets in Microsoft's favor. None of these have created much excitement, and recently Rick Sherland at Nomura securities came out with a prediction that Microsoft might well sell the xBox division (a call I made in this column back in January.)
As consumers, suppliers and investors we like the idea of a near-monopoly. It gives us comfort to believe we can trust in a market leader to bring out new products upon which we can rely – and which will continue to make long-term profits. But, good as this feels, it has rarely been successful. Markets shift, and historical leaders fall as new competitors emerge; largely because the old leadership continues investing in what they know rather than shifting investments early into new markets.
This Microsoft reorganization appears to be rearranging the chairs on the Titanic. The mobile iceberg has slashed a huge gash in Microsoft's PC hull. Leadership keeps playing familiar songs, but the boat cannot float without those historical PC profits. Investors would be smart to flee in the lifeboat of recent share price gains.
by Adam Hartung | May 16, 2013 | Current Affairs, General, Leadership
With the stock market hitting new highs, some people have
already forgotten about the Great Recession. If you recall 2009, things looked pretty bleak
economically. But the outlook has changed dramatically in just 4 years. And it has been a boon for investors, as even the safest indices have yielded a 250% return (>25% annualized compound return:)
Source: Bulls, Bears and the Ballot Box at Facebook.com
Meanwhile, trends have reversed direction with unemployment falling, and consumer confidence rising:
Source: Bulls, Bears and the Ballot Box at Facebook.com
Since this coincides with President Obama’s first term, I asked the authors of “Bulls, Bears and the Ballot Box,” (available on Amazon.com) which I reviewed in my October 11, 2012 column, to capture their opinions on how much Americans should attribute the equity
upturn, and improved economic prospects, to the President as we enter his second term.
Interview with Bob
Deitrick, co-Author "Bulls, Bears and the Ballot Box" (BBBB):
Q– Bob, how much credit should Americans give President
Obama for today’s improved equity values?
BBBB – Our research reviewed American economic performance
since President Roosevelt installed the first Federal Reserve Board
Chairman – Republican Marriner Eccles. We observed that even
though there are multiple impacts on the economy, it was clear that policy
decisions within each administration, from FDR forward, made a clear difference on performance. And
relatively quickly.
Presidents universally take credit when the economy does
well (such as Reagan,) and choose to blame other factors when the economy does
poorly (such as Carter.) But there
was a clear pattern, and link, between policy and financial market performance.
Although we hear almost no one in the Obama administration
taking credit for record index highs, they should. Because the President deserves
significant credit for how well this economy has done during his leadership.
The auto rescue plan has worked. American car manufacturers are still dominant and employing millions directly and in supplier companies. Wall Street reform
has been painful but it has re-instated faith amongst investors.
The markets are far more predictable than they were four years ago, as VIX numbers demonstrate greater faith and less risk.
Even for small investors, such as thoughs limited to their 401(k) or IRA investments, the average annual compound
return on stocks under President Obama has been more than
24% since the lows of March, 2009.
This is a better result than either Clinton, Reagan or FDR who were the
prior winners in our book.
Q– Bob, what policies do you think were most important
toward achieving today’s new highs?
BBBB – Firstly, let’s review just how bad things were in
2009. In 2000 America was completing the longest
bull market in history. But by
the end of President Bush's tenure the country had witnessed 2 stock market crashes, and the DJIA had fallen 58%. This was the second worst market decline in history (exceeded
only by the Great Depression,) and hence the term “Great Recession” was born.
In 2000, at the end of Clinton’s administration, the
Consumer Confidence Index was at a record high 140.
By January, 2009 this index had fallen to an historic low of 25.3. Comparatively, when Reagan took office
at the end of the economically weak Carter years the Confidence Index
was still at 74.4! Today this
measure of how people feel about the country is still nowhere near 2000 levels,
but it is almost 3 times better than 4 years ago.
Significantly, in 2000 America had a budget surplus. By 2009 surpluses were long gone and the
country was racking up historic deficits as taxes were cut while simultaneously
outlays for defense skyrocketed to cover costs of wars in Iraq and
Afghanistan. Additionally, banks
were on the edge of failing due to unregulated real estate speculation and massive derivative losses.
Today the Congressional Budget Office is reporting a $200B decrease in the deficit almost entirely due to increased revenue from a growing economy and higher taxes on the wealthiest Americans. The deficit is now only 4% of the GDP, down from over 10% at the end of Bush's administration – and projections are for it to be only 2% by 2015 (before Obama leaves office.) America's "debt problem" seems largely solved, and almost all due to growth rather than austerity.
We can largely thank a fairer tax code, improved regulation and consistent SEC enforcement. Also, major strides in health care reform – something no other President has accomplished – has given American's more faith in their future, and an increased willingness to invest.
Q– To which President would you compare Obama’s economic
performance?
BBBB– By all measures, President Obama has outperformed
every modern President.
The easiest comparison would be to President Reagan, who’s
economic performance was superb. Even though Obama's performance is better.
Reagan had the enormous benefit of two major factors:
- a significantly better economy than Obama inherited, even if afflicted by inflation
- and his two terms coincided with the highest performing
demographic years of the Baby Boomer generation.
Today's demographics have shifted dramatically. The country is much older, with fewer
young people supporting a much larger near-retirement age group. This inherent demographic fact makes
creating economic growth monumentally harder than it was 30 years ago.
Few people think of Reagan as a stimulus addict. Yet, his administration’s military
build-up added $1trillion of stimulus to the national debt ($2.3trillion adjusted for
inflation) – the opposite of what is happening during the Obama years. Many like to think
that it was tax cutting which grew the economy, but undoubtedly we now know
that this dramatic defense and infrastructure (highways, etc.) stimulus had more to do with igniting economic growth. Reagan's spending looked far more like FDR than Herbert Hoover!
Ronald Reagan tripled the national debt during his tenure, creating what today's Congressional austerity advocates might have called "a legacy of unpayable debt for our grandchildren.” But, as we saw, later growth (during Clinton) resolved that debt and created a budget surplus by 2000.
Q– Bob, President’s Obama detractors liken the Affordable
Care Act (i.e. Obamacare) to an Armageddon on business, sure to kill economic
growth and plunge the country back into recession. Do you agree?
BBBB– To the contrary, ACA levels the playing field and will
be good for economic growth. Where
previously only large corporations could afford employee health care plans, in
the future far more employees will have far more equitable coverage. Further, today employees frequently are unable to leave a
company to start a new business because they would lose health care, which in
the future will not be true.
One leading indicator of the benefits of ACA might be the performance of healthcare and biotech stocks, which are up 20-30% and leaders in the current market rally.
Q– What policies would you recommend the Obama
administration follow in order to promote economic growth, more jobs and
greater returns for investors during the second term?
BBBB- Obama needs to make the cornerstone of his second term creating new job growth. That was the primary platform of his candidacy, and it is a platform long successful for the Democratic party. If President Obama can do this and govern effectively, this could be his real legacy.
by Adam Hartung | May 3, 2013 | Current Affairs, In the Swamp, Leadership
The Dow Jones Industrial Average (DJIA) jumped to record levels – over 15,000 – today after a favorable U.S. jobs report showed 165K new jobs and a drop in unemployment to 7.5%. Politicians, economists, business leaders and investors were buoyed by economic improvements and the hope for further growth. A higher stock market is considered a great ointment for what has hurt America the last several years.
But there's a big, ugly fly in this ointment. While the indices are rising, revenues at many very large, key component companies are actually declining. And possibly worse, the revenue growth rate for large companies has been declining for at least 3 years.
Source: Marketwatch "The Tell" 5/3/13 Matt Andrejczak
As the chart shows, Caterpillar has led the revenue decline, dropping a whopping 17.5% year-over-year. But noteworthy declines included JPMorganChase dropping 15.5%, Pfizer down 12.4% and Merck down 9%. It's hard to imagine a great long-term bull market when revenues are distinctly going in a bearish direction for several stalwart companies.
It is also important to note that the rate of DJIA growth has declined markedly. In 2011 first quarter growth was 11.4% over 2010. But 2012 was only 9.4% over 2011 and 2013 came in only a paltry 3.8% over 2012. Ouch! Clearly, jobs growth will not be sustained if these organizations cannot put more money on the top line.
So why aren't these companies growing?
For companies to grow they must invest in new products, new markets and the resources to sell and deliver these new products and new markets. And that creates jobs. Think about easy to identify revenue successes like Apple (iPads,) Samsung (smartphones,) Amazon.com, Netflix, Tesla, Facebook. Proper investment leads to revenue growth opportunities.
But, unfortunately, America's leaders have reduced their investment in growth projects the last 15 years. Instead, they've been giving more money to investors — and increasingly dumping money into stock buybacks that manipulate price and help improve management bonuses!
Source: Business Insider 4/8/13; Sam Ro; Reproduced from Goldman Sachs Research
As the chart demonstrates, in 1998 42% of corporate cash was reinvested into the means of production – which creates growth. Today this has declined to only about 1/3 of available cash; a whopping 25% decline! Additionally, R&D investments which should lead to new products and higher sales, dropped from 16% of cash used a decade ago to a more meager 12%!
Where has the money gone? 13% of cash was going directly to investors, who could then invest in other companies with higher rate of return growth projects. That number has risen to 18%, which is inherently a good thing as we can hope a lot of that has been re-invested in other companies.
But 13-17% used to be spent on stock buybacks, which create no revenue or economic growth. All share buybacks do is exchange cash for shares, reducing the number of shares and changing metrics like earnings per share and thus the price/earnings (P/E) multiple. It does not create any new investment. That number has risen to a staggering 22-34% of revenues!
Net/net, in the not too distant past America's leaders were putting 70-74% of their cash to work by investing in growth projects. And 12% was going to investors for projects elsewhere. By in the mid-1990s this reinvestment rate declined to 52-55%, ushering in the Great Recession. After improving this rate has started declining again, and remains stuck no better than 60% of cash. Coupled with the 5% increase in cash being robbed from growth projects to buy back stock, the net reinvestment remains mired at 55%!
American's want jobs and a growing economy. As do people everywhere! We are excited when we see improvement. But today, the ugly horsefly in the ointment is the lack of revenue growth – and the lack of investment in growth projects. Until business leaders begin putting their corporate cash hoards into growth projects again the long-term outlook remains problematic, even if the market is hitting record DJIA highs.
