by Adam Hartung | Apr 14, 2012 | Current Affairs, Leadership, Transparency, Web/Tech
Apple's amazing increase in value is more than just a "rah-rah" story for a turnaround. Fundamentally, Apple is telling everyone – globally – that there has been a tectonic shift in markets. And if leaders don't understand this shift, and incorporate it into their strategy and tactics, their organizations are going to have a very difficult future.
Recently Apple's value peaked at $600B. Yes, that is an astounding number, for it reflects not only 50% greater value than the oil giant Exxon/Mobil (~$390B), but more than the entire value of the stock markets in Spain, Greece and Portugal combined!
Source: Business Insider.com
This astounding valuation causes many to be reticent about owning Apple shares, for it seems implausible that any one company – especially a tech company with so few employees – could be worth so much.
Unless we look at this information in the context of a major, global economic shift. That what the world values has changed dramatically. And that what investors are telling business (and government) leaders is that in a globalized, fast paced world value is based upon what you know, when you know it – in other words information. Not land, buildings or the ability to make things.
Three hundred years ago the wealthiest people in the world owned land. Wars were fought for centuries to control land. Kings owned land, and controlled everything on the land while capturing the value of everything produced on that land. As changes came along, reducing the role of kings, land barons became the wealthiest people in the world. In an agrarian economy, where most human resources (and all others for that matter) were deployed in food production owning land was the most valuable thing on the planet.
But then some 120 years ago, along came the industrial reveolution. Suddenly, productivity rose dramatically by applying new machines to jobs formerly performed by humans. With this shift, value changed. The great industrialists were able to capture the value of greater productivity – making people like Cyrus McCormick, Henry Ford and Andrew Carnegie the wealthiest of the wealthy. Worth more than most states, and many foreign countries.
The age of manufacturing was based upon the productivity of machines and the application of industrial processes to what formerly was hand labor. Creating tools – from entignes to automobiles to airplanes – created great wealth. Knowing how to make these machines, and making them, created enormous value. And companies like General Motors, General Dynamics and General Electric were worth much more than the land upon which food was produced. And the commodity suppliers, like Exxon/Mobil, feeding industrial companies captured huge value as well.
By the middle 1900s America's farmers were forced to create ever larger farms to remain in business, and were constantly begging for government subsidies to stay alive via price controls (parity programs) and land "set-asides" run by the Agriculture Department. By the 1980s family farms going broke by the thousands, agricultural land values plummeted and the ability to create value by growing or processing food was a struggle. Across the developed world, wealth shifted into the hands of industrial companies from landowners.
Sometime in the 1990s the world shifted again, and that's what the chart above shows us. Countries with little or no technology companies – no information economy – cannot create value. On the other hand, companies that can drive new levels of productivity via the creation, management, use and sale of information can create enormous value.
Think about the incredible shift that has happened in retail. America's largest and most successful retailer from the 1900 turn of the century well into the 1960s was Sears. In an industry that long equated success with "location, location, location" Sears has had, and continues to control, enormous amounts of land and buildings. But the value of Sears has declined like a stone pitched off a bridge, now worth only $6B (1% the Apple value) despite all that real estate!
Simultaneously, America's largest retailer Wal-Mart has seen its value go nowhere for over a decade, despite its thousands of locations that span every state. Even though Wal-Mart keeps adding stores, and enlarging stores, adding more and more land and buildings to its "asset" base the company's customer base, sales and value are mired, unable to rise.
Yet, Amazon – which has no land, and almost no buildings – has used the last 20 years to go from start up to an $86B valuation – doing much better for shareholders than its traditional, industrial thinking competitors. In the last 5 years, Amazon's value has roughly quadrupled!
Source: Yahoo Finance
Yes, Amazon is a retailer. But the company has learned that applying an industrial strategy is far less valuable than applying an information strategy. As an internet leader, first with most browser formats on PCs and smartphones, Amazon has reached far more new customers than any traditional real-estate focused company. By launching Kindle Amazon focused on the information in books, rather than the format (print) revolutionizing the market and capturing enormous value.
By launching Kindle Fire Amazon takes information one step further, making it possible for customers to access new products faster, order faster and build their own retail world without ever going to a building. By becoming a tech company, Amazon is clearly well on the way to dominating retail, as Sears falls into irrelevancy and almost surely bankruptcy, and Wal-Mart stalls under the overhead of all that land, buildings and vast number of minimum-wage, uninsured employees.
We now must realize that value is not created by what accountants have long called "hard assets" – land, buildings and equipment. In fact, the 2 great U.S. recessions since 2000 have demonstrated to everyone that there is no security in these – the value can decline, decline fast, and decline far. Just because these things are easy to see and count does not insure value. They can easily be worth less than they cost to make – or own.
Successful competition in 2012 (and going forward) requires businesses know about customers, products and have the ability to supply solutions fast with great reach. Winning is about what you know, knowing it early, acting upon the information and then being able to disseminate that solution fast to those who have emerging needs.
Which is why you have to be excited about the brilliant move Facebook made to acquire Instagram last week. In one fast, quick step Facebook bought the ability to easily and effectively provide mobile image solutions – across any application – to millions of existing users. Something that every single person, and business, on the planet is either doing now, or will be doing very soon.
Source: Wired
On a cost-per-existing-customer basis, Facebook stole Instagram. And that's before Facebook spreads out the solution to the rest of its 780million users! Forget about how many employees Instagram has, or its historical revenues or its assets. In an innovation economy, if you have a product that 35million people hear about and start using in less than a year, you have something very valuable!
Kudos go to Mark Zuckerberg as CEO, and his team, for making this acquisition so quickly. Before Instagram had a chance to hire bankers, market itself and probably raise its value 10x. That's why Mr. Zuckerberg was Time Magazine's "Man of the Year" at the start of 2011 – and why he's been able to create so much more value for his shareholders than the CEOs of industrial companies – like say GE.
Going forward, no company can plan to survive with an industrial strategy. That approach, and those rules, simply don't create high returns. To be successful you MUST become a tech company. And while this may not feel comfortable, it is reality. Every business must shift, or die.
by Adam Hartung | Mar 29, 2012 | Current Affairs, Disruptions, Innovation, Leadership, Lock-in, Openness, Transparency
No businessperson thinks the way to solve a business problem is via the courts. And no issue is larger for American business than health care. Despite all the hoopla over the Supreme Court reviews this week, this is a lousy way for America to address an extremely critical area.
The growth of America's economy, and its global competitiveness, has a lot riding on health care costs. Looking at the table, below, it is clear that the U.S. is doing a lousy job at managing what is the fastest growing cost in business (data summarized from 24/7 Wall Street.)
While America is spending about $8,000 per person, the next 9 countries (in per person cost) all are grouped in roughly the $4,000-$5,000 cost — so America is 67-100% more costly than competitors. This affects everything America sells – from tractors to software services – forcing higher prices, or lower margins. And lower margins means less resources for investing in growth!
American health care is limiting the countries overall economic growth capability by consuming dramatically more resources than our competitors. Where American spends 17.4% of GDP (gross domestic product) on health care, our competitors are generally spending only 11-12% of their resources. This means America is "taxing" itself an extra 50% for the same services as our competitive countries. And without demonstrably superior results. That is money which Americans would gain more benefit if spent on infrastructure, R&D, new product development or even global selling!
Americans seem to be fixated on the past. How they used to obtain health care services 50 years ago, and the role of insurance 50 years ago. Looking forward, health care is nothing like it was in 1960. The days of "Dr. Welby, MD" serving a patient's needs are long gone. Now it takes teams of physicians, technicians, nurses, diagnosticians, laboratory analysts and buildings full of equipment to care for patients. And that means America needs a medical delivery system that allows the best use of these resources efficiently and effectively if its citizens are going to be healthier, and move into the life expectancies of competitive countries.
Unfortunately, America seems unwilling to look at its competitors to learn from what they do in order to be more effective. It would seem obvious that policy makers and those delivering health care could all look at the processes in these other 9 countries and ask "what are they doing, how do they do it, and across all 9 what can we see are the best practices?"
By studying the competition we could easily learn not only what is being done better, but how we could improve on those practices to be a world leader (which, clearly, we now are not.) Yet, for the most part those involved in the debate seem adamant to ignore the competition – as if they don't matter. Even though the cost of such blindness is enormous.
Instead, way too much time is spent asking customers what they want. But customers have no idea what health care costs. Either they have insurance, and don't care what specific delivery costs, or they faint dead away when they see the bill for almost any procedure. People just know that health care can be really good, and they want it. To them, the cost is somebody else's problem. That offers no insight for creating an effective yet simultaneously efficient system.
America needs to quit thinking it can gradually evolve toward something better. As Clayton Christensen points out in his book "The Innovator's Prescription: A Disruptive Solution for Health Care" America could implement health care very differently. And, as each year passes America's competitiveness falls further behind – pushing the country closer and closer to no choice but being disruptive in health care implementation. That, or losing its vaunted position as market leader!
Is the "individual mandate" legal? That seems to be arguable. But, it is disruptive. It seems the debate centers more on whether Americans are willing to be disruptive, to do something different, than whether they want to solve the problem. Across a range of possibilities, anything that disrupts the ways of the past seems to be argued to death. That isn't going to solve this big, and growing, problem. Americans must become willing to accept some radical change.
The simple approach would be to look at programs in Oregon, Massachusetts and all the states to see what has worked, and what hasn't worked as well. Instead of judging them in advance, they could be studied to learn. Then America could take on a series of experiments. In isolated locations. Early adopter types could "opt in" on new alternative approaches to payment, and delivery, and see if it makes them happy. And more stories could be promulgated about how alternatives have worked, and why, helping everyone in the country remove their fear of change by seeing the benefits achieved by early leaders.
Health care delivery, and its cost, in America is a big deal. Just like the oil price shocks in the 1970s roiled cost structures and threatened the economy, unmanagable health care delivery and cost threatens the country's economic future. American's surely don't expect a handful of lawyers in black robes to solve the problem.
America needs to learn from its competition, be willing to disrupt past processes and try new approaches that forge a solution which not only delivers better than anyone else (a place where America does seem to still lead) but costs less. If America could be the first on the moon, first to create the PC and first to connect everyone on smartphones this is a problem which can be solved – but not by attorneys or courts!
by Adam Hartung | Jan 22, 2012 | Defend & Extend, In the Rapids, Innovation, Leadership, Lock-in, Transparency, Web/Tech
Turning over a new year inevitably leads to selections for "CEO of the Year." Investor Business Daily selected Larry Page of Google 3 weeks ago, and last week Marketwatch.com selected Jeff Bezos of Amazon. Comparing the two is worthwhile, because there is almost nothing similar about what the two have done – and one is almost sure to dramatically outperform the other.
Focusing on the Future
What both share is a willingness to focus their companies on the future. Both have introduced major new products, targeted at developing new markets and entirely new revenue streams for their companies. Both have significantly sacrificed short-term profits seeking long-term strategic positioning for sustainable, higher future returns. Both have, and continue to, spend vast sums of money in search of competitive advantage for their organizations.
And both have seen their stock value clobbered. In 2011 Amazon rose from $150/share low to almost $250 before collapsing at year's end to about $175 – actually lower than it started the calendar year. Google's stock dropped from $625/share to below $475 before recovering all the way to $670 – only to crater all the way to $585 last week. Clearly the analysts awarding these CEOs were looking way beyond short-term investor returns when making their selections. So it is more important than ever we understand what both have done, and are planning to do in the future, if we are to support either, or both, as award winners. Or buy their stock.
Google participates in great growth markets
The good news for Google is its participation in high growth markets. Search ads continue growing, supplying the bulk of revenues and profits for the company. Its Android product gives Google great position in mobile devices, and supporting Chrome applications help clients move from traditional architectures and applications to cloud-based solutions at lower cost and frequently higher user satisfaction. Additionally, Google is growing internet display ad sales, a fast growing market, by increasing participation in social networks.
Because Google is in high growth markets, its revenues keep growing healthily. But CEO Page's "focus" leadership has led to the killing of several products, retrenching from several markets, and remarkably huge bets in 2 markets where Google's revenues and profits lag dramatically – mobile devices and search.
Because Android produces no revenue Google bought near-bankrupt Motorola to enter the hardware and applications business becoming similar to Apple – a big bet using some old technology against what is the #1 technology company on the planet. Whether this will be a market share winner for Google, and whether it will make or lose money, is far from certain.
Simultaneously, the Google+ launch is an attempt to take on the King Kong of social – Facebook – which has 800million users and remarkable success. The Google+ effort has been (and will continue to be) very expensive and far from convincing. Its product efforts have even angered some people as Google tried steering social networkers rather heavy-handidly toward Google products – as it did with "Search plus Your World" recently.
Mr. Page has positioned Google as a gladiator in some serious "battles to the death" that are investment intensive. Google must keep fighting the wounded, hurting and desperate Microsoft in search against Bing+Yahoo. While Google is the clear winner, desperate but well funded competitors are known to behave suicidally, and Google will find the competition intensive. Meanwhile, its offerings in mobile and social are not unique. Google is going toe-to-toe with Apple and Facebook with products which show no great superiority. And the market leaders are wildly profitable while continuously introducing new innovations. It will be tough fighting in these markets, consuming lots of resources.
Entering 3 gladiator battles simultaneously is ambitious, to say the least. Whether Google can afford the cost, and can win, is debatable. As a result it only takes a small miss, comparing actual results to analyst expectations, for investors to run – as they did last week.
Amazon redefines competition in its markets
CEO Bezos' leadership at Amazon is very different. Rather than gladiator wars, Amazon brings out products that are very different and avoids head-to-head competition. Amazon expands new markets by meeting under- or unserved needs with products that change the way customers behave – and keeps competitors from attacking Amazon head-on:
- Amazon moved from simply selling books to selling a vast array of products on the web. It changed retail buying not by competing directly with traditional retailers, but by offering better (and different) on-line solutions which traditional retailers ignored or adopted far too slowly. Amazon was very early to offer web solutions for independent retailers to use the Amazon site, and was very early to offer a mobile interface making shopping from smartphones fast and easy. Because it wasn't trying to defend and extend a traditional brick-and-mortar retail model, like Wal-Mart, Amazon has redefined retail and dramatically expanded shopping on-line.
- Amazon changed the book market with Kindle. It utilized new technology to do what publishers, locked into traditional mindsets (and business models) would not do. As the print market struggled, Amazon moved fast to take the lead in digital publishing and media sales, something nobody else was doing, producing fast revenue growth with higher margins.
- When retailers were loath to adopt tablets as a primary interface for shoppers, Amazon brought out Kindle Fire. Cleverly the Kindle Fire is not directly positioned against the king of all tablets – iPad – but rather as a product that does less, but does things like published media and retail very well — and at a significantly lower price. It brings the new user on-line fast, if they've been an Amazon customer, and makes life simple and easy for them. Perhaps even easier than the famously easy Apple products.
In all markets Amazon moves early and deftly to fulfill unmet needs at a very good price. And then it captures more and more customers as the solution becomes more powerful. Amazon finds ways to compete with giants, but not head-on, and thus rapidly grow revenues and market position while positioning itself as the long term winner. Amazon has destroyed all the big booksellers – with the exception of Barnes & Noble which doesn't look too great – and one can only wonder what its impact in 5 years will be on traditional retailers like Kohl's, Penney's and even Wal-Mart. Amazon doesn't have to "win" a battle with Apple's iPad to have a wildly successful, and profitable, Kindle offering.
The successful CEO's role is different than many expect
A recent RHR International poll of 83 mid-tier company CEOs (reported at Business Insider) discovered that while most felt prepared for the job, most simultaneously discovered the requirements were not what they expected. In the past we used to think of a CEO as a steward, someone to be very careful with investor money. And someone expected to know the business' core strengths, then be very selective to constantly reinforce those strengths without venturing into unknown businesses.
But today markets shift quickly. Technology and global competition means all businesses are subject to market changes, with big moves in pricing, costs and customer expectations, very fast. Caretaker CEOs are being crushed – look at Kodak, Hostess and Sears. Successful CEOs have to guide their businesses away from investing in money-losing businesses, even if they are part of the company's history, and toward rapidly growing opportunities created by being part of the shift. Disruptors are now leading the success curve, while followers are often sucking up a lot of profit-killing dust.
Amazon bears similarities to the Apple of a decade ago. Introducing new products that are very different, and changing markets. It is competing against traditional giants, but with very untraditional solutions. It finds unmet needs, and fills them in unique ways to capture new customers – and creates market shifts.
Google, on the other hand, looks a lot like the lumbering Microsoft. It has a near monopoly in a growing market, but its investments in new markets come late, and don't offer a lot of innovation. Google's products end up competing directly, somewhat like xBox did with other game consoles, in very, very expensive – usually money-losing – competition that can go on for years. Google looks like a company trying to use money rather than innovation to topple an existing market leader, and killing a lot of good product ideas to keep pouring money into markets where it is late and not terribly creative.
Which CEO do you think will be the winner in 2015? Into which company are you prepared to invest? Both are in high growth markets, but they are being led very, very differently. And their strategies could not be more different. Which one you choose to own – as a product customer or investor – will have significant consequences for you (and them) in 3 years.
It's worth taking the time to decide which you think is the right leadership today. And be sure you know what leadership principles you are adopting, and following in your organization.
by Adam Hartung | Dec 6, 2011 | Current Affairs, In the Whirlpool, Leadership, Transparency
There are few organizations as efficient as the U.S. Postal Service. Really. But it is still going out of business.
Think about the Post Office’s value proposition. They send someone to almost every single home and business in the entire United States 6 days/week on the hope that there will be a demand for their service – sold at a starting price of 44 cents! For that mere $.44 they will deliver your hand crafted, signed message anywhere else in the entire United States! And, if you want it delivered fairly close they will actually deliver your physical document the very next day! All for 44 cents! And, if you are a large volume customer rates can be even cheaper.
And the Post Office has been a remarkably operationally innovative organizations. Literally billions of items are processed every week (about 700million/day😉 picked up, sorted and distributed across one of the physically largest countries in the world. The distance from Anchorage to Miami (let’s ignore Hawaii for now) is a staggering 5,100 miles, which works out to a miniscule .009 cent/mile for a first class letter! Compare that to the Pony Express cost (in 1860 $10/oz and 10 days Missouri to California,) and adjusted for inflation you’ll be hard pressed to find any business that has continually improved its service, at ever lower (constantly declining when adjusted for inflation) prices.
And while AMR is filing bankruptcy largely to force a new union contract, the Post Office has accomplished its record improvements wtih an almost entirely union workforce.
Executive compensation is surprisingly low. The CEO makes about $800,000/year. Competitor CEOs make much more. At Fedex (the Post Office delivers more items every day that Fedex does in a whole year) the CEO made over $7,400,000, and at UPS (the Post Office delivers more items each week than UPS does annually) the CEO made $9,500,000. So, despite this remarkable effectiveness, the CEO makes only about 1/10th CEOs of much smaller organizations.
The Post Office understands what it must do, and does it extremely efficiently. It knows its “hedgehog concept” and relentlessly pursues it to unparalleled performance. Yet, it is barred from raising prices, is losing money, and is now planning to close 3,700 locations and dramatically curtail services – such as overnight and Saturday delivery in a radical cost reduction effort.
Simply put, the U.S. Postal Service is becoming irrelevant. In the 1980s faxing was the first attack on the mail, but the big market shift began 15 years ago with the advent of email. Now with mobile devices, texting and social media the shift away from physical letters is accelerating. Fewer people write letters, send bills or even pay bills via physical mail. Are you mailing any physical holiday cards this year? How many?
Even the veritable “junk mail” is far less viable these days. Coupons are used less and less – and to the extent they are used they have to be much more immediate and compelling – such as offerings from GroupOn and FourSquare et.al. which arrive at consumers by email and social media usually through a smartphone or tablet mobile device.
The Post Office didn’t really do anything wrong. The market shifted. The Post Office value proposition simply isn’t as valuable. We don’t really care if the mail delivery comes daily, in fact many people forget to check their mailbox for several consecutive day. We don’t much care that a physical letter can transit the continent overnight, because we usually want to communicate immediately. And we don’t need a physical legacy for 99.99% of our communications.
The Post Office is really good at what it does, we just don’t need it. Not any more than we need a good horse shoe or small offset printing press.
The Post Office saw this coming. Over a decade ago the Post Office asked if it could enter new businesses in record retention (medical, income, taxation), automated bill payment, social security check administration and a raft of other opportunities that would provide government delivery and storage services to various agencies and to under-served users such as low-income and the elderly. But its mandate did not include these services, and expansion into new markets required a change in charter which was not approved by Congress. Thus, USPS was stuck doing what it has always done, as market shift pushed the Post Office increasingly into irrelevancy.
And that’s what happens to most failed businesses. They don’t fail because they are lousy at execution. Or because of lousy, inattentive managers. Or even because of unions and high variable costs such as energy. They fall into trouble because they either don’t recognize, or for some other reason don’t move to take advantage of market shifts. It’s not a lack of focus, management laziness or worker intransigence that kills the business. It’s an inability to do what customers really want and value, and spending too much time and money trying to ever optimize something customers increasingly don’t care about.
To their credit, both FedEx and UPS have shifted their businesses along with the market. Both do much, much more than deliver packages. Fedex bought Kinko’s and offers people their “office away from the office” globally, as well as multiple small business solutions. UPS offers a vast array of corporate transportation and logistics services, including e-commerce solutions for businesses of all sizes. Their ability to move with markets, and meet emerging needs has helped both companies justify higher prices and earn substantially better profitability.
The U.S. Post Office is the poster child for what goes wrong when all a company does is focus on efficiency. More, better, faster, cheaper is NOT enough to compete. Being operationally efficient, even low-cost, is not enough to succeed in fast shifting markets where customers have ever-growing and changing needs. Leadership has to be able to recognize market shifts early, and invest in new growth opportunities allowing the company to remain viable in changing markets.
My generation will wax nostalgic about the post office. We’ll weave in “mail” stories with others about days before ubiquitious air conditioning, when all we had was AM radio in the car and 3 stations of black & white television stations at home. They will be fun to reminisce.
But our children, and certainly grandchildren, simply won’t care. Not at all. And we better remember to keep the stories short, so they can be related in 140 characters or less if we want them saved for posterity!
by Adam Hartung | Oct 12, 2011 | Current Affairs, Defend & Extend, eBooks, In the Rapids, In the Whirlpool, Innovation, Leadership, Lifecycle, Lock-in, Transparency, Web/Tech
Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.) Now that’s a serious growth stall, which should worry all investors. Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion. Faster than most people think.
After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors. Not just Target, that is almost as low price and has better merchandise. Wal-Mart’s monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots. Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise. Aldi beats Wal-Mart hands-down in groceries. Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices. And companies like Kohl’s and J.C. Penney offer more fashionable goods at just slightly higher prices. On all fronts, traditional retailers are chiseling away at Wal-Mart’s #1 position – and at its margins!
Yet, the company has eschewed all opportunities to shift with the market. It’s primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com). Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) – sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive – as shown by the last 9 quarters.
On top of this, the retail market is shifting pretty dramatically. The big trend isn’t the growth of discount retailing, which Wal-Mart rode to its great success. Now the trend is toward on-line shopping. MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:
- In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
- Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.
This trend has been emerging for over a decade. The “retail revolution” was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt. And that problem is worsening as the trend on-line keeps shrinking the traditional market. Several retailers are expected to fail. Entire categories of stores. As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!
While Wal-Mart is huge, and won’t die overnight, as sure as the dinosaurs failed when the earth’s weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.
The winners will be on-line retailers, who like David versus Goliath use techology to change the competition. And the clear winner at this, so far, is the one who’s identified trends and invested heavily to bring customers what they want while changing the battlefield. Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:
- Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
- Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
- Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
- Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
- Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
- Amazon built on the mobility trend when its suppliers, publishers, didn’t respond by creating Kindle – which has revolutionized book sales.
- Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the “Wal-Mart Slayer“
Each of these actions were directly related to identifying trends and offering new solutions. Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy. Just look at sales of Kindle books:
Source: BusinessInsider.com
Unlike Wal-Mart customers, Amazon’s keep growing at double digit rates. In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase. Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to 80,000 per day unit sales for iPad2. Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.
While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base. Despite only a few month’s experience, Amazon is bigger than Google Offers, and is growing at least 20% faster.
After 1980 investors used to say that General Motors might not be run well, but it would never go broke. It was considered a safe investment. In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model. Wal-Mart is an identical story, only it won’t have 3 decades of slow decline. The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete.
Given that gladiators, at best, end up bloody – and most often dead – investing in one is not a good approach to wealth creation. However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors. Amazon today is a really good opportunity.
by Adam Hartung | Oct 4, 2011 | Current Affairs, Defend & Extend, Film, In the Rapids, Innovation, Leadership, Television, Transparency, Web/Tech
Reed Hastings, the CEO of Netflix, has long been considered a pretty good CEO. In January, 2009 his approval ranking, from Glassdoor, was an astounding 93%. In January, 2010 he was still on the top 25 list, with a 75% approval rating. And it's not surprising, given that he had happy employees, happy customers, and with Netflix's successful trashing of Blockbuster the company's stock had risen dramaticall,y leading to very happy investors.
But that was before Mr. Hastings made a series of changes in July and September. First Netflix raised the price on DVD rentals, and on packages that had DVD rentals and streaming download, by about $$6/month. Not a big increase in dollar terms, but it was a 60% jump, and it caught a lot of media attention (New York Times article). Many customers were seriously upset, and in September Netflix let investors know it had lost about 4% of its streaming subscribers, and possibly as many as 5% of its DVD subscribers (Daily Mail).
No investor wants that kind of customer news from a growth company, and the stock price went into a nosedive. The decline was augmented when the CEO announced Netflix was splitting into 2 companies. Netflix would focus on streaming video, and Quikster would focus on DVDs. Nobody understood the price changes – or why the company split – and investors quickly concluded Netflix was a company out of control and likely to flame out, ruined by its own tactics in competition with Amazon, et.al.
(Source: Yahoo Finance 3 October, 2011)
This has to be about the worst company communication disaster by a market leader in a very, very long time. TVWeek.com said Netflix, and Reed Hastings, exhibited the most self-destructive behavior in 2011 – beyond even the Charlie Sheen fiasco! With everything going its way, why, oh why, did the company raise prices and split? Not even the vaunted New York Times could figure it out.
But let's take a moment to compare Netflix with another company having recent valuation troubles – Kodak.
Kodak invented home photography, leading it to tremendous wealth as amature film sales soared for seveal decades. But last week Kodak announced it was about out of cash, and was reaching into its revolving credit line for some $160million to pay bills. This latest financial machination reinforced to investors that film sales aren't what they used to be, and Kodak is in big trouble – possibly facing bankruptcy. Kodak's stock is down some 80% this year, from $6 to $1 – and quite a decline from the near $80 price it had in the late 1990s.
(Source: Yahoo Finance 10-3-2011)
Why Kodak declined was well described in Forbes. Despite its cash flow and company strengths, Kodak never succeeded beyond its original camera film business. Heck, Kodak invented digital photography, but licensed the technology to others as it rabidly pursued defending film sales. Because Kodak couldn't adapt to the market shift, it now is probably going to fail.
And that is why it is worth revisiting Netflix. Although things were poorly explained, and certainly customers were not handled well, last quarter's events are the right move for investors in the shifting at-home video entertainment business:
- DVD sales are going the direction of CD's and audio cassettes. Meaning down. It is important Netflix reap the maximum value out of its strong DVD position in order to fund growth in new markets. For the market leader to raise prices in low growth markets in order to maximize value is a classic strategic step. Netflix should be lauded for taking action to maximize value, rather than trying to defend and extend a business that will most likely disappear faster than any of us anticipate – especially as smart TVs come along.
- It is in Netflix's best interest to promote customer transition to streaming. Netflix is the current leader in streaming, and the profits are better there. Raising DVD prices helps promote customer shifting to the new technology, and is good for Netflix as long as customers don't change to a competitor.
- Although Netflix is currently the leader in streaming it has serious competition from Hulu, Amazon, Apple and others. It needs to build up its customer base rapidly, before people go to competitors, and it needs to fund its streaming business in order to obtain more content. Not only to negotiate with more movie and TV suppliers, but to keep funding its exclusive content like the new Lillyhammer series (more at GigaOm.com). Content is critical to maintaining leadership, and that requires both customers and cash.
- Netflix cannot afford to muddy up its streaming strategy by trying to defend, and protect, its DVD business. Splitting the two businesses allows leaders of each to undertake strategies to maximize sales and profits. Quikster will be able to fight Wal-Mart and Redbox as hard as possible, and Netflix can focus attention on growing streaming. Again, this is a great strategic move to make sure Netflix transitions from its old DVD business into streaming, and doesn't end up like an accelerated Kodak story.
Historically, companies that don't shift with markets end up in big trouble. AB Dick and Multigraphics owned small offset printing, but were crushed when Xerox brought out xerography. Then, afater inventing desktop publishing at Xerox PARC, Xerox was crushed by the market shift from copiers to desktop printers – a shift Xerox created. Pan Am, now receiving attention due to the much hyped TV series launch, failed when it could not make the shift to deregulation. Digital Equipment could not make the shift to PCs. Kodak missed the shift from film to digital. Most failed companies are the result of management's inability to transition with a market shift. Trying to defend and extend the old marketplace is guaranteed to fail.
Today markets shift incredibly fast. The actions at Netflix were explained poorly, and perhaps taken so fast and early that leadership's intentions were hard for anyone to understand. The resulting market cap decline is an unmitigated disaster, and the CEO should be ashamed of his performance. Yet, the actions taken were necessary – and probably the smartest moves Netflix could take to position itself for long-term success.
Perhaps Netflix will fall further. Short-term price predictions are a suckers game. But for long-term investors, now that the value has cratered, give Netflix strong consideration. It is still the leader in DVD and streaming. It has an enormous customer base, and looks like the exodus has stopped. It is now well organized to compete effectively, and seek maximum future growth and value. With a better PR firm, good advertising and ongoing content enhancements Netflix has the opportunity to pull out of this communication nightmare and produce stellar returns.
by Adam Hartung | Sep 26, 2011 | Current Affairs, Defend & Extend, Disruptions, In the Whirlpool, Innovation, Leadership, Transparency, Web/Tech
The media has enjoyed a field day last week amidst the ouster of Leo Apotheker as Hewlett Packard’s CEO and appointments of former Oracle executive Ray Lane as Executive Chairman and former eBay CEO Meg Whitman as CEO. There have been plenty of jabs at the Board, which apparently hired Mr. Apotheker without everyone even meeting him (New York Times), and plenty of complaining about HP’s deteriorating performance and stock price. But the big question is, will Meg Whitman be able to turn around HP?
Ms. Whitman is the 7th HP CEO in a mere 12 years. Of those CEOs, the only one pointed to with any attraction was Mark Hurd. He did not take any strategic actions, but merely slashed costs – which immediately improved the profit line and drove up the short-term stock price. Actions taken at the expense of R&D, new product development and creating new markets, leaving HP short on a future strategy when he was summarily let go by the Baord that hired Apotheker.
And that indicates the strategy problem at HP – which is pretty much a lack of strategy.
HP was once a highly innovative company. We all can thank HP for a world of color. Before HP brought us the low-priced ink-jet printer all office printing was black. HP unleashed the color in desktop publishing, and was critical to the growth of office and home printing, as well as faxing with their all-in-one, integrated devices.
But then someone – largely Ms. Fiorina – had the idea to expand on the HP presence in desktop publishing by expanding into PC manufacturing and sales, even though there was no HP innovation in that market. Mr. Hurd expanded that direction by buying a service organization to support field-based PCs.
This approach of expanding on HPs “core” printer business, almost all by acquisition, cost HP a lot of money. Further, supply chain and retail program investments to sell largely undifferentiated products and services in a hotly contested PC market sucked all the money out of new products development. Every year HP was spending more to grow sales of products becoming increasingly generic, while falling farther behind in any sort of new market creation.
Into that innovation void jumped Apple, Google and Amazon. They pushed new mobile solutions to market in smartphones and tablets. And now PCs, and the printers they used, are seeing declining growth. All future projections show an increase in mobile devices, and a sales cliff emerging for PCs and their supporting devices. Simultaneously as mobile devices have become more popular the trend away from printing has grown, with users in business and consumer markets finding digital devices less costly, more user friendly and more adaptable than printed material (just compare Kindle sales and printed book sales – or the volume of tablet newspaper and magazine subscriptions to printed subscriptions.) HP invested heavily in PC products, and now that market is dying.
Now HP is in big trouble. There are plenty of skeptics that think Ms. Whitman is not right for the job. What should HP under Ms. Whitman do next? Keep doubling down on investments in existing markets? That direction looks pretty dangerous. IBM jumped out years ago, selling its laptop line to Lenovo for a tidy profit before sales slackened. With all the growth in smartphones and tablets, it’s hard to imagine that strategy would work. Even Mr. Apotheker took action to deal with the market shift by redirecting HP away from PCs with his announced intention to spin off that business while buying an ERP (enterprise ressource planning) software company to take HP into a new direction. But that backfired on him, and investors.
Mr. Apotheker and Carol Bartz, recently fired CEO of Yahoo, made similar mistakes. They relied heavily on their personal past when taking leadership of a struggling enterprise. They looked to their personal success formulas – what had worked for them in the past – when setting their plans for their new companies. Unfortunately, what worked in the past rarely works in the future, because markets shift. And both of these companies suffered dramatically as the new CEO efforts took them further from market trends.
The job Ms. Whitman is entering at HP is wildly different from her job at eBay. eBay was a small company taking advantage of the internet explosion. It was an early leader in capitalizing on web networking and the capability of low-cost on-line transactions. At eBay Ms. Whitman needed to keep the company focused on investing in new solutions that transformed PC and internet connectivity into value for users. As long as the number of users on the internet, and the time they spent on the web, grew eBay could capitalize on that trend for its own growth. eBay was in the right place at the right time, and Ms. Whitman helped guide the company’s product development so that it helped users enjoy their on-line experience. The trends supported eBay’s early direction, and growth was built opon making on-line selling better, faster and easier.
The situation could not be more different at HP. It’s products are almost all out of the trend. If Ms. Whitman does what she did at eBay, trying to promote more, better and faster PCs, printers and traditional IT services things will not go well. That was Mr. Hurd’s strategy. “Been there, done that” as people like to say. That strategy ran its course, and more cost-cutting will not save HP.
In 2020 if we are to discuss HP the way we now discuss Apple’s dramatic turnaround from the brink of failure, Ms. Whitman will have to behave very differently than her past – and from what her predecessor and Ms. Bartz did. She has to refocus HP on future markets. She has to identify triggers for market change – like Steve Jobs did when he recognized that the growing trend to mobility would explode once WiFi services reached 50% of users – and push HP toward developing solutions which take advantage of those market shifts.
HP has under-invested in new market development for years. It’s acquisition of Palm was supposed to somehow rectify that problem, only Palm was a failing company with a failing platform when HP bought it. And the HP tablet launch with its own proprietary solution was far too late (years too late) in a market that requires thousands of developers and a hundred thousand apps if it is to succeed. The investment in Palm and WebOS was too late, and based on trying to be a “me too” in a market where competitors are rapidly advancing new solutions.
There are a world of market opportunities out there that HP can develop. To reach them Ms. Whitman must take some quick actions:
- Develop future scenarios that define the direction of HP. Not necessarily a “vision” of HP in 2020, but certainly an identification of the big trends that will guide HP’s future direction for product and market development. Globalization (like IBM’s “smarter planet”) or mobility are starts – but HP will have to go beyond the obvious to identify opportunities requiring the resources of a company with HP’s revenue and resources. HP desperately needs a pathway to future markets. It needs to be developing for the emerging trends.
- A recognition of how HP will compete. What is the market gap that HP will fulfill – like Apple did in mobility? And how will it fulfill it? Google and Facebook are emerging giants in software, offering a host of new capabilities every day to better network users and make them more productive. HP must find a way to compete that is not toe-to-toe with existing leaders like Apple that have more market knowledge and extensive resoureces.
- HP needs to dramatically up the ante in new product development. Innovation has been sorely lacking, and the hierarchical structure at HP needs to be changed. White Space projects designed to identify opportunities in market trends need to be created that have permission to rapidly develop new solutions and take them to market – regardless of HP historical strengths. Resources need to shift – rapidly – from supporting the aging, and growth challenged, historical product lines to new opportunities that show greater growth promise.
Apple and IBM were once given almost no chance of survival. But new leadership recognized that there were growth markets, and those leaders altered the resource allocation toward things that could grow. Investments in the old strategy were dropped as money was pushed to new solutions that built on market trends and headed toward future scenarios. HP is not doomed to failure, but Ms. Whitman has to start acting quickly to redirect resources or it could easily be the next Sun Microsystems, Digital Equipment, Wang, Lanier or Cray
by Adam Hartung | Sep 7, 2011 | Employment, Innovation, Leadership, Politics, Transparency, Web/Tech
Friday we learned, as the New York Daily News headlined, “August 2011 Jobs Report: NO Net Jobs Created.” U.S. unemployment, and underemployment, remain stubbornly stuck at very high levels. This situation is unlikely to improve, as reported at 24×7 Wall Street in “August Lay-off Plans Up 47%” with the latest Challenger Gray report telling us 51,144 people are soon getting the axe. No wonder we saw a dramatic decline of nearly 15 points, to 44.5, in the Conference Board’s Consumer Confidence Index – near record-low levels.
This has all the Presidential candidates talking about jobs, and President Obama signed up to deliver a jobs speech to Congress.
The problem actually goes beyond just jobs. Buried within consumer concerns lies the fact that for most people, their incomes are going nowhere. Adjusted for inflation, almost everyone is making less now than they did when the millenium turned. Generally speaking, about 15% less than 11 years ago! Most family incomes are about where they were in 1998. For the wealthiest, income since the mid-1960s has grown only about 1.5%/year on average. For everyone else the improvement has only been about .5%/year. And universally almost all of that increase occurred between 1992 and 2000 (for anyone who wonders about Bill Clinton’s resurgent popularity, just look at incomes during his Presidency compared to every other administration on this chart!)
Source: “U.S. Household Incomes: A 42 Year Perspective” Doug Short, BusinessInsider.com
But will anything the President, or the candidates, recommend make a difference?
So far, the politicos keep fighting the last war, and seem surprised that nothing is improving. The recommendations for putting people back to work in factories, such as autos and heavy equipment, or building roads simply defies the reality of work today. America has not been a manufacturing-dominated jobs country for over 60 years! All job creation has been in services!
Source:”Charting the Incredible Shift From Manufacturing to Services” Doug Short, BusinessInsider.com
For this entire period, productivity has been climbing. Just 50 years ago most people spent 1/3 to 1/2 their income on food. No longer. Today, few spend more than 5 to 10%, and everyone can enjoy an automobile, telephone, television and computer – regardless of their income! We have all the stuff anyone could want, and in many cases a lot more of some stuff than we need – or want!
The old notion of “what’s good for G.M. (General Motors) is good for America” is simply no longer true! As we recently witnessed, a multi-billion dollar bail-out of the largest American auto maker may have saved some unemployment – but it did not create an economic turn-around, or create a slew of jobs!
Today’s jobs are all in information – the accumulation, assimilation, analysis and use of information. Few “managers” actually manage people any more – most manage a data set, or a computer program, or some sort of analysis. The vast majority of “managers” have no direct reports at all! The jobs – and incomes – are all in information. Job growth is in places like Facebook, Google, Linked-in, Groupon, Amazon and Apple (the latter of which outsources all its manufacturing.)
No President or economist can manufacture jobs today. As we’ve seen, interest rates are at unprecedent low levels – yet nobody wants to take a loan to hire a new employee! In fact, business productivity is at record high levels as business keeps accomplishing more and more with fewer and fewer workers!
Source: “Corporate Efficiency is Getting Absurd” BusinessInsider.com
Public companies aren’t going broke, by and large. Most have cash balances at record levels. Only they keep using the money to buy back their own stock! Every month sees a wave of new stock buy back commitments, as 24×7 Wall Street reported “August’s New Massive Stock Buybacks… Over $30 Billion!” Business leaders find it less risky to buy back their own stock (supporting their own bonuses, by the way) than invest in any sort of growth program – something that might create jobs.
So what’s the President to do?
We need to radically jack up the investment in innovation! Think about that last period of very low unemployment and growing incomes – in the 1990s. We had the explosion in technology as people began using PCs, the internet, mobile phones, etc. New technology introduced new business ideas (mostly services) and created a rash of growth! And that created new jobs – and higher incomes. Innovation is the jobs engine – not trying to save another tired manufacturing company, or pave another highway or extend another bridge! Today those projects simply do not employ very many people, and the “trickle down” affect of a highway project creating more jobs has disappeared!
Bloomberg/BusinessWeek reported in “Failing at Innovation? Bank On It“
- Government spending on higher education has been declining since the 1970s reducing the number of graduate students and innovation projects
- Federal share of R&D has been less than 1% since 1992 – all while corporate R&D spending has declined dramatically! The days of spending “to put a man on the moon” has disappeared, as we fairly quietly mothballed the space program and commence to dismantle NASA
- The number of entrepreneurs is actually declining! There were fewer startups with 1 or more employees in 2007 (before the financial collapse and ensuing economic mayhem) than in 1990
- New companies are not employing people. In the 1990s the average startup employed 7.5 people, but now the number is 4.9
- Meanwhile “infrastructure” spending today is the same as it was in 1968!
We’ve done a great job of cutting taxes, but we’ve simultaneoously gutted our investment in R&D, innovation and doing anything new! If you wonder where the jobs went it wasn’t oversees, it was into higher corporate cash levels, more stock buybacks, increased bank reserves and dramatically higher executive compensation!
We don’t need more tax cuts – because nobody is investing in any new projects! We don’t need more unemployment insurance, because that – at best – delays the day of reconning without a solution.
Here’s what we do need today:
- Implement a tax on corporate stock buybacks. At least as great as the tax on corporate dividends. Buybacks simply drain the economy of investment funds, with no benefit. At least dividends give returns back to shareholders – who might invest in a new company! And if buybacks are taxed, executives might start investing in projects again!
- Quit giving such large depreciation allowances for physical assets. We don’t need more buildings – we’re overbuilt as we are right now! Again, it’s not “things” that make up our economy, it’s services!
- Re-introduce R&D credits! Give businesses a $3 tax break for every dollar spent in R&D and new product development! Prior to President Reagan this was considered normal. It’s not a new idea, just one that’s been forgotten. If we can give credits for oil and gas drilling, which creates almost no jobs, why not innovation?
- Cut payroll taxes on the self-employed and small business. Today self-employed pay 2x the payroll taxes, so it’s a big dis-incentive to entrepreneurship. Give start-ups a break by lowering employment taxes on small employers – say less than 50 employees.
- Allow investors in start-ups to write off up to 2x their losses. It takes away a lot of the risk if you can get most of your money back from a tax break should your investment fail. And for all those corporations that abhore taxes this would incent them to invest in small enterprises that have new ideas they’d like to see developed.
- Remember the Small Business Administration (SBA)? Re-activate it by giving it $100B (maybe $200B) to guarantee bank loans of small businesses. Bank lending has ground to a halt as banks eliminate risk – so let’s get them back into their primary business again. In WWII the government guaranteed every loan for the construction of the Liberty Ships – and behold business built 2,751 of the things in 4 years!
- Increase funding for higher education. Increase the grants for science, engineering and new product research at America’s universities. Increase grants for students in science and engineering, and allow students to deduct out-of-pocket educational expenses from their taxes. Allow corporations to deduct all the expense of employee education – uncapped! Allow corporations to deduct the university grants they make!
- Invest in today’s digital infrastructure. Once we paid to send men to the moon – and a flood of innovation (from microwave ovens to powdered drinks and frozen food) followed. Today we should invest in a nationwide WiFi network that’s everywhere from rural forests to city buildings – and make it all FREE. Digital networks are the highways we need today – not concrete ribbons. Create tax deductions for people to buy smartphones, tablets and other products that drive innovation, and make it easy for innovators to network for solutions to emerging needs.
- Streamline the process for small companies to test and sell new bio-engineered products. The existing complicated process is a legacy of big companies and traditional pharmaceutical research. Make it easy for entrepreneurs to test and launch the next wave of medical technology based on the new bio-sciences. Offer federal-backed safety insurance to protect small businesses that show efficacy in new solutions.
These are just 9 ideas. I’m sure readers can think up 90 more (in fact, I challenge you to offer them as comments to this blog.) If we invest in innovation, we can create a lot of jobs. But we need to start NOW!
by Adam Hartung | Jul 8, 2011 | Books, Current Affairs, In the Rapids, Leadership, Lifecycle, Openness, Transparency, Web/Tech, Weblogs
Evolution doesn’t happen like we think. It’s not slow and gradual (like line A, below.) Things don’t go from one level of performance slowly to the next level in a nice continuous way. Rather, evolutionary change happens brutally fast. Usually the potential for change is building for a long time, but then there is some event – some environmental shift (visually depcted as B, below) – and the old is made obsolete while the new grows aggressively. Economists call this “punctuated equilibrium.” Everyone was on an old equilibrium, then they quickly shift to something new establishing a new equilibrium.
Momentum has been building for change in publishing for several years. Books are heavy, a pain to carry and often a pain to buy. Now eReaders, tablets and web downloads have changed the environment. And in June J.K. Rowling, author of those famous Harry Potter books, opened her new web site as the location to exclusively sell Harry Potter e-books (see TheWeek.com “How Pottermore Will Revolutionized Publishing.”)
Ms. Rowling has realized that the market has shifted, the old equilibrium is gone, and she can be part of the new one. She’ll let the dinosaur-ish publisher handle physical books, especially since Amazon has already shown us that physical books are a smaller market than ebooks. Going forward she doesn’t need the publisher, or the bookstore (not even Amazon) to capture the value of her series. She’s jumping to the new equilibrium.
And that’s why I’m encouraged about AOL these days. Since acquiring The Huffington Post company, things are changing at AOL. According to Forbes writer Jeff Bercovici, in “AOL After the Honeymoon,” AOL’s big slide down in users has begun to reverse direction. Many were surprised to learn, as the FinancialPost.com recently headlined, “Huffington Post Outstrips NYT Web Traffic in May.” 
Source: BusinessInsider.com
The old equilibrium in news publishing is obsolete. Those trying to maintain it keep failing, as recently headlined on PaidContent.org “Citing Weak Economy, Gannett Turns to Job Cuts, Furloughs.” Nobody should own a traditional publisher, that business is not viable.
But Forbes reports that Ms. Huffington has been given real White Space at AOL. She has permission to do what she needs to do to succeed, unbridled by past AOL business practices. That has included hiring a stable of the best talent in editing, at high pay packages, during this time when everyone else is cutting jobs and pay for journalists. This sort of behavior is anethema to the historically metric-driven “AOL Way,” which was very industrial management. That sort of permission is rarely given to an acquisition, but key to making it an engine for turn-around.
And HuffPo is being given the resources to implement a new model. Where HuffPo was something like 70 journalists, AOL is now cranking out content from some 2,000 journalists and editors! More than The Washington Post or The Wall Street Journal. Ms. Huffington, as the new leader, is less about “managing for results” looking at history, and more about identifying market needs then filling them. By giving people what they want Huffington Post is accumulating readers – which leads to display ad revenue. Which, as my last blog reported, is the fastest growing area in on-line advertising
Where the people are, you can find advertsing. As people are shift away from newspapers, toward the web, advertising dollars are following. Internet now trails only television for ad dollars – and is likely to be #1 soon:
Chart source: Business Insider
So now we can see a route for AOL to succeed. As traditional AOL subscribers disappear – which is likely to accelerate – AOL is building out an on-line publishing environment which can generate ad revenue. And that’s how AOL can survive the market shift. To use an old marketing term, AOL can “jump the curve” from its declining business to a growing one.
This is by no means a given to succeed. AOL has to move very quickly to create the new revenues. Subscribers and traditional AOL ad revenues are falling precipitously.
Source: Forbes.com
But, HuffPo is the engine that can take AOL from its dying business to a new one. Just like we want Harry Potter digitally, and are happy to obtain it from Ms. Rowlings directly, we want information digitally – and free – and from someone who can get it to us. HuffPo is now winning the battle for on-line readers against traditional media companies. And it is expanding, announced just this week on MediaPost.com “HuffPo Debuts in the UK.” Just as the News Corp UK tabloid, News of the World, dies (The Guardian – “James Murdoch’s News of the World Closure is the Shrewdest of Surrenders.“)
News Corp. once had a shot at jumping the curve with its big investment in MySpace. But leadership wouldn’t give MySpace permission and resources to do whatever it needed to do to grow. Instead, by applying “professional management” it limited MySpace’s future and allowed Facebook to end-run it. Too much energy was spent on maintaining old practices – which led to disaster. And that’s the risk at AOL – will it really keep giving HuffPo permission to do what it needs to do, and the resources to make it happen? Will it stick to letting Ms. Huffington build her empire, and focus on the product and its market fit rather than short-term revenues? If so, this really could be a great story for investors.
So far, it’s looking very good indeed.
by Adam Hartung | May 25, 2011 | Defend & Extend, Disruptions, In the Swamp, Innovation, Leadership, Lock-in, Openness, Transparency, Web/Tech
Nobody admits to being the innovation killer in a company. But we know they exist. Some these folks “dinosaurs that won’t change.” Others blame “the nay-saying ‘Dr. No’ middle managers.” But when you meet these people, they won’t admit to being innovation killers. They believe, deep in their hearts as well as in their everyday actions, that they are doing the right thing for the business. And that’s because they’ve been chosen, and reinforced, to be the Status Quo Police.
When a company starts it has no norms. But as it succeeds, in order to grow quickly it develops a series of “key success factors” that help it continue growing. In order to grow faster, managers – often in functional roles – are assigned the task of making sure the key success factors are unwaveringly supported. Consistency becomes more important than creativity. And these managers are reinforced, supported, even bonused for their ability to make sure they maintain the status quo. Even if the market has shifted, they don’t shift. They reinforce doing things according to the rules. Just consider:
Quality – Who can argue with the need to have quality? Total Quality Management (TQM,) Continuous Improvement (CI,) and Six Sigma programs all have been glorified by companies hoping to improve product or service quality. If you’re trying to fix a broken product, or process, these work pretty well at helping everyone do their job better.
But these programs live with the mantra “if you can’t measure it, you can’t improve it. Measure everything that’s important.” If you’re innovating, what do you measure? If you’re in a new technology, or manufacturing process, how do you know what you really need to do right? If you’re in a new market, how do you know the key metric for sales success? Is it number of customers called, time with customers, number of customer surveys, recommendation scores, lost sales reports? When you’re trying to do something new, a lot of what you do is respond quickly to instant feedback – whether it’s good feedback or bad.
The key to success isn’t to have critical metrics and measure performance on a graph, but rather to learn from everything you do – and usually to change. Quality people hate this, and can only stand in the way of trying anything new because you don’t know what to measure, or what constitutes a “good” measure. Don’t ever forget that Motorola pretty much invented Six Sigma, and what happened to them in the mobile phone business they pioneered?
Finance. All businesses exist to make money, so who can argue with “show me the numbers. Give me a business plan that shows me how you’re going to make money.” When your’e making an incremental investment to an existing asset or process, this is pretty good advice.
But when you’re innovating, what you don’t know far exceeds what you know. You don’t know how to meet unment needs. You don’t know the market size, the price that people will pay, the first year’s volume (much less year 5,) the direct cost at various volumes, the indirect cost, the cost of marketing to obtain customer attention, the number of sales calls it will take to land a sale, how many solution revisions will be necessary to finally put out the “right” solution, or how sales will ramp up quarterly from nothing. So to create a business plan, you have to guess.
And, oh boy, then it gets ugly. “Where did this number come from? That one? How did you determine that?” It’s not long until the poor business plan writer is ridden out of the meeting on a rail. He has no money to investigate the market, so he can’t obtain any “real” numbers, so the business plan process leads to ongoing investment in the old business, while innovation simply stalls.
Under Akia Morita Sony was a great innovator. But then an MBA skilled in finance took over the top spot. What once was the #1 electronics innovator in the globe has become, well, let’s say they aren’t Apple.
Legal – No company wants to be sued, or take on unnecessary risk. And when you’re selling something, lawyers are pretty good at evaluating the risk in that business, and lowering the risk. While making sure that all the compliance issues are met in order to keep regulators – and other lawyers – out of the business.
But when you’re starting something new, everything looks risky. Customers can sue you for any reason. Suppliers can sue you for not taking product, or using it incorrectly. The technology could fail, or have negative use repercussions. Reguators can question your safety standards, or claims to customers.
From a legal point of view, you’re best to never do anything new. The less new things you do, the less likely you are to make a mistake. So legal’s great at putting up roadblocks to make sure they protect the company from lawsuits, by making sure nothing really new happens. The old General Motors had plenty of lawyers making sure their cars were never too risky – or interesting.
R&D or Product Development – Who doesn’t think it’s good to be a leader in a specific technology? Technology advances have proven invaluable for companies in industries from computers to pharmaceuticals to tractors and even services like on-line banking. Thus R&D and Product Development wants to make sure investments advance the state of the technology upon which the company was built.
But all technologies become obsolete. Or, at least unprofitable. Innovators are frequently on the front end of adopting new technologies. But if they have to obtain buy-in from product development to obtain staffing or money they’ll be at the end of a never-ending line of projects to sustain the existing development trend. You don’t have to look much further than Microsoft to find a company that is great at pouring money into the PC platform (some $9B, 16% of revenue in 2009,) while the market moves faster each year to mobile devices and entertainment (Apple spent 1/8th the Microsoft budget in 2009.)
Sales, Marketing & Distribution – When you want to protect sales to existing customers, or maybe increase them by 5%, then doing more of what you’ve always done is smart. So money is spent to put more salespeople on key accounts, add more money to the advertising budget for the most successful (or most profitable) existing products. There are more rules about using the brand than lighters at a smoker’s convention. And it’s heresy to recommend endangering the distribution channel that has so successfully helped increase sales.
But innovators regularly need to behave differently. They need to sell to different people – Xerox sold to secretaries while printing press manufacturers sold to printers. The “brand” may well represent a bygone era, and be of no value to someone launching a new product; are you eager to buy a Zenith electronic device? Sprucing up the brand, or even launching something new, may well be a requirement for a new solution to be taken seriously.
And often, to be successful, a new solution needs to cut through the old, high-cost distribution system directly to customers if it is to succeed. Pre-Gerstner IBM kept adding key account sales people in hopes of keeping IT departments from switching out of mainframes to PCs. Sears avoided the shift to on-line sales successfully – and revenue keeps dropping in the stores.
Information Technology – To make more money you automate more functions. Computers are wonderful for reducing manpower in many tasks. So IT implements and supports “standard solutions” that are cost effective for the historical business. Likewise, they set up all kinds of user rules – like don’t go to Facebook or web sites from work – to keep people focused on productivity. And to make sure historical data is secure and regulations are met.
But innovators don’t have a solution mapped out, and all that automated functionality is an enormously expensive headache. When being creative, more time is spent looking for something new than trying to work faster, or harder, so access to more external information is required. Since the solution isn’t developed, there’s precious little to worry about keeping secure. Innovators need to use new tools, and have flexibility to discover advantageous ways to use them, that are far beyond the bounds of IT’s comfort zone.
Newspapers are loaded with automated systems to collect and edit news, to enter display ads, and to “Make up” the printed page fast and cheap. They have automated systems for classified advertising sales and billing, and for display ad billing. And systems to manage subscribers. That technology isn’t very helpful now, however, as newspapers go bankrupt. Now the most critical IT skills are pumping news to the internet in real-time, and managing on-line ads distributed to web users that don’t have subscriptions.
Human Resources – Growth pushes companies toward tighter job descriptions with clear standards for “the kinds of people that succeed around here.” When you want to hire people to be productive at an existing job, HR has the procedures to define the role, find the people and hire them at the most efficient cost. And they can develop a systematic compensation plan that treats everyone “fairly” based upon perceived value to the historical business.
But innovators don’t know what kinds of people will be most successful. Often they need folks who think laterally, across lots fo tasks, rather than deeply about something narrow. Often they need people who are from different backgrounds, that are closer to the emerging market than the historical business. And pay has to be related to what these folks can get in the market, not what seems fair through the lens of the historical business. HR is rarely keen to staff up a new business opportunity with a lot of misfits who don’t appreciate their compensation plan – or the rules so carefully created to circumscribe behavior around the old business.
B.Dalton was America’s largest retail book seller when Amazon.com was founded by Jeff Bezos. Jeff knew nothing about books, but he knew the internet. B.Dalton knew about books, and claimed it knew what book buyers wanted. Two years later B.Dalton went bankrupt, and all those book experts became unemployed. Amazon.com now sells a lot more than books, as it ongoingly and rapidly expands its employee skill sets to enter new markets – like publishing and eReaders.
Innovation requires that leaders ATTACK the Status Quo Police. Everything done to efficiently run the old business is irrelevant when it comes to innovation. Functional folks need to be told they can’t force the innovatoirs to conform to old rules, because that’s exactly why the company needs innovation! Only by attacking the old rules, and being willing to allow both diversity and disruption can the business innovate.
Instead of saying “this isn’t how we do things around here” it is critical leaders make sure functional folks are saying “how can I help you innovate?” What was done in the name of “good business” looks backward – not forward. Status Quo cops have to be removed from the scene – kept from stopping innovation dead in its tracks. And if the internal folks can’t be supportive, that means keeping them out of the innovator’s way entirely.
Any company can innovate. Doing so requires recognizing that the Status Quo Police are doing what they were hired to do. Until you take away their clout, attack their role and stop them from forcing conformance to old dictums, the business can’t hope to innovate.
