by Adam Hartung | Sep 14, 2016 | Immigration, In the Rapids, Innovation, Telecom, Trends
I’m amazed about Americans’ debate regarding immigration. And all the rhetoric from candidate Trump about the need to close America’s borders.
I was raised in Oklahoma, which prior to statehood was called The Indian Territory. I was raised around the only real Native Americans. All the rest of us are immigrants. Some voluntarily, some as slaves. But the fact that people want to debate whether we allow people to become Americans seems to me somewhat ridiculous, since 98% of Americans are immigrants. The majority within two generations.
Throughout America’s history, being an immigrant has been tough. The first ones had to deal with bad weather, difficult farming techniques, hostile terrain, wild animals – it was very difficult. As time passed immigrants continued to face these issues, expanding westward. But they also faced horrible living conditions in major cities, poor food, bad pay, minimal medical care and often abuse by the people already that previously immigrated.
And almost since the beginning, immigrants have been not only abused but scammed. Those who have resources frequently took advantage of the newcomers that did not. And this persists. Immigrants that lack a social security card are unable to obtain a driver’s license, unable to open bank accounts, unable to apply for credit cards, unable to even sign up for phone service. Thus they remain at the will of others to help them, which creates the opportunity for scamming.
Take for example an immigrant trying to make a phone call to his relatives back home. For most immigrants this means using a calling card. Only these cards are often a maze of fees, charges and complex rules that result in much of the card’s value being lost. A 10-minute call to Ghana can range from $2.86 to $8.19 depending on which card you use. This problem is so bad that the FCC has fined six of the largest card companies for misleading consumers about calling cards. They continue to advise consumers about fraud. And even Congress has held hearings on the problem.
One outcome of immigrants’ difficulties has been the ingenuity and innovativeness of Americans. To this day around the world people marvel at how clever Americans are, and how often America leads the world in developing new things. As a young country, and due to the combination of resources and immigrants’ tough situation, America frequently is first at developing new solutions to solve problems – many of which are problems that clearly affect the immigrant population.
So, back to that phone call. Some immigrants can use Microsoft Skype to talk with their relatives, using the Internet rather than a phone. But this requires the people back home have a PC and an internet connection. Both of which could be dicey. Another option would be to use something like Facebook’s WhatsApp, but this requires the person back home have either a PC or mobile device, and either a wireless connection or mobile coverage. And, again, this is problematic.
But once again, ingenuity prevails. A Romanian immigrant named Daniel Popa saw this problem, and set out to make communications better for immigrants and their families back home. In 2014 he founded QuickCall.com to allow users to make a call over wireless technology, but which can then interface with the old-fashioned wired (or wireless) telecom systems around the world. No easy task, since telephone systems are a complex environment of different international, national and state players that use a raft of different technologies and have an even greater set of complicated charging systems.
But this new virtual phone network, which links the internet to the traditional telecom system, is a blessing for any immigrant who needs to contact someone in a rural, or poor, location that still depends on phone service. If the person on the other end can access a WiFi system, then the calls are free. If the connection is to a phone system then the WiFi interface on the American end makes the call much cheaper – and performs far, far better than any other technology. QuickCall has built the carrier relationships around the world to make the connections far more seamless, and the quality far higher.
But like all disruptive innovations, the initial market (immigrants) is just the early adopter with a huge need. Being able to lace together an internet call to a phone system is pretty powerful for a lot of other users. Travelers heading to a remote location, like Micronesia, Africa or much of South America — and even Eastern Europe – can lower the cost of planning their trip and connect with locals by using QuickCall.com. And for most Americans traveling in non-European locations their cell phone service from Sprint, Verizon, AT&T or another carrier simply does not work well (if at all) and is very expensive when they arrive. QuickCall.com solves that problem for these travelers.
Small businesspeople who have suppliers, or customers, in these locations can use QuickCall.com to connect with their business partners at far lower cost. Businesses can even have their local partners obtain a local phone number via QuickCall.com and they can drive the cost down further (potentially to zero). This makes it affordable to expand the offshore business, possibly even establishing small scale customer support centers at the local supplier, or distributor, location.
In The Innovator’s Dilemma Clayton Christensen makes the case that disruptive innovations develop by targeting a customer with an unmet need. Usually the innovation isn’t as good as the current “standard,” and is also more costly. Today, making an international call through the phone system is the standard, and it is fairly cheap. But this solution is often unavailable to immigrants, and thus QuickCall.com fills their unmet need, and at a cost substantially lower than the infamous calling cards, and with higher quality than a pure WiFi option.
But now that it is established, and expanding to more countries – including developed markets like the U.K. – the technology behind QuickCall.com is becoming more mainstream. And its uses are expanding. And it is reducing the need for people to have international calling service on their wired or wireless phone because the available market is expanding, the quality is going up, and the cost is going down. Exactly the way all disruptive innovations grow, and thus threaten the entrenched competition.
The end-game may be some form of Facebook in-app solution. But that depends on Facebook or one of its competitors seizing this opportunity quickly, and learning all QuickCall.com already knows about the technology and customers, and building out that network of carrier relationships. Notice that Skype was founded in 2003, and acquired by Microsoft in 2011, and it still doesn’t have a major presence as a telecom replacement. Will a social media company choose to make the investment and undertake developing this new solution?
As small as QuickCall.com is – and even though you may have never heard of it – it is an example of a disruptive innovation that has been successfully launched, and is successfully expanding. It may seem like an impossibility that this company, founded by an immigrant to solve an unmet need of immigrants, could actually change the way everyone makes international calls. But, then again, few of us thought the iPhone and its apps would cause us to give up Blackberries and quit carrying our PCs around.
America is known for its ingenuity and innovations. We can thank our heritage as immigrants for this, as well as the immigrant marketplace that spurs new innovation. America’s immigrants have the need to succeed, and the unmet needs that create new markets for launching new solutions. For all those conservatives who fear “European socialism,” they would be wise to realize the tremendous benefits we receive from our immigrant population. Perhaps these naysayers should use QuickCall.com to connect with a few more immigrants and understand the benefits they bring to America.
by Adam Hartung | Aug 31, 2016 | Economy, Employment
(Photo: AP Photo/Mel Evans)
Tuesday, New Jersey Governor Chris Christie vetoed legislation which would have raised the state’s minimum wage to $15 per hour over five years. The current rate is $8.38, and he felt it was too big an increase, too fast.
Of course the governor makes quite a bit more than the minimum wage. And although he vetoed the legislation because he is “pro-business” he has never run a business and really has no idea what the economic impact of a higher minimum wage would be on New Jersey. He assumes because it would cost more to pay low-wage workers that it would harm businesses who are contributors to his re-election. Happy Labor Day all you minimum wage workers.
What he does not consider is the ability for those businesses to pass along those higher wages by raising prices. When everyone has to pay more then it becomes possible for everyone to raise prices. Simultaneously, the low income people who make more money, and spend 100% of what they make, pass along the higher wages in increased consumption which increases business revenues. So an argument can be made that a higher minimum wage could help businesses to have happier employees who spend more and actually improve the economy overall, and for their business.
Remember
Henry Ford and his $5 day? In 1914, by cutting work hours and doubling pay Ford greatly motivated his workforce, reducing turnover and training cost. Simultaneously he improved the ability of his workers to spend more and thus grow sales for many businesses. He was just one company, but his higher pay was so successful that it caused other companies to pay more, and everyone benefited. Many historians think of this as an important event in the birth of the American middle class.
The other contributor to the growth of the middle class was unions. By WWI unions had become far more prevalent in the U.S. Unions improved working conditions, fought for the abolition of child labor, eliminated employer discrimination, improved benefits like health care and allowed employees to negotiate for higher wages. By banding together in unions employees were able to negotiate with their employer much more powerfully than for each employee to negotiate individually.
In 1928, the height of the “Gilded Age” of America, the bottom 90% of Americans earned 50.7% of the nation’s income, while the top 1% earned 23.9%. Affects of the Great Depression, and increased unionization, changed this so that by 1944 the bottom 90% was earning 67.5% of the income, while the income of the top 1% had plummeted to 11.3%.
Of course, unions and their bosses were far from perfect. Over time union clout grew, and management increasingly caved to union demands in order to avoid debilitating strikes. Some companies were drowned in worker demands, and became unproductive with feather-bedded workers and work rules that seriously harmed productivity. Meanwhile, rampant corruption among union leadership led to intense mob involvement and increased crime. Which led to a lot less support for unions among Americans — often even among the workers who were union members.
In 1979, four years after famed union leader Jimmy Hoffa disappeared after a dust-up with the mob, 34% of American workers were unionized. Today only 10% are unionized, and a large percentage of those are in government positions like teaching, law enforcement, firefighting, postal service, etc. Thirty-eight percent of workers without a college degree were unionized in 1979. Today, 11% are unionized.
And today, we have returned to the Gilded Age. Union dislike has led to implementing Right to Work laws in several states, which makes it far easier for private employers to avoid, or eliminate, unions. And changes in jobs from largely factory line work to far more desk-related (shifting from manufacturing to tech and health care) has made it less easy to find common ground among workers for unionizing. Additionally, sharp cuts in progressive income taxes, which were replaced by dramatic increases in regressive sales and property taxes, coupled with a huge increase in social security and other worker taxes has transformed America’s income portrait. Once again (2012) the top 1% take home 22.5% of America’s income, while the bottom 90% take home only 50.7%.
This dramatic shift in incomes is very prevalent in today’s election contests. There is ample talk about the displaced workers, under-employed workers and hidden unemployment. It is clear there are a lot of very wealthy people who have a lot of power to affect elections — including one candidate who won his party’s candidacy without even raising external funds! Simultaneously, there are a lot of very angry, frustrated people who want significant change — and express an aggressive dislike for the candidates of both major parties.
What is clear is that America prospered when the disparity between rich and poor was not as it is today. There was a greater sense of commonality, even as people disagreed on policies, when workers could identify with the heads of their companies and the bankers. Today, the difference between the haves and have-nots is so great that a large percentage of Americans believe they can only retire if they hit the lottery!
Throughout history income inequality has led to national overthrow, ouster of government heads, and riots. The French overturned their monarchy and became a republic when their king and queen ignored the impoverished. Filipinos threw out the Marcos regime. And home-grown American terrorists are often disenchanted with lifestyles far from their expectations.
There is clearly a need to find ways to reduce income inequality. It is incumbent upon leaders to seek out ways to improve the lives of their constituents, including their customers, suppliers and employees. And one, small act that any governor can do is simply abandon old assumptions about the horribleness of minimum wage laws – and unions as responsible for a currently weak economy — and instead take action to put a few more dollars into the hands of those who work, yet have the least.
Most Americans, including white collar workers and executives, will take the day off next Monday to celebrate Labor Day. This national holiday was created by labor unions in the 1880s, and made a national holiday in 1894 after the U.S. Army and U.S. Marshal’s Service killed multiple workers at the Pullman strike. Labor Day was instituted as a celebration of the American worker, and the economic and social achievements they accomplished. It is a time to honor those who work hard, often for not enough pay, and yet make America great.
Happy Labor Day!
by Adam Hartung | Aug 29, 2016 | Finance, Investing, Politics
(Photo: AP Photo/Andrew Harnik, File)
Last weekend, the Federal Reserve Board’s leadership met to discuss the future of America’s monetary policy. Reports out of that meeting, like reports from all Fed meetings, are long, tedious, and pretty much say nothing. Every analyst tries to interpret from the governors’ statements what might happen next. And because the Fed leadership is so vague, and so academic, the analysts inevitably never guess right.
This bothers a lot of people. There are those who want a lot more “transparency” from the Fed – meaning they want much clearer signals as to what is intended, and usually specifics as to intended actions and a timeline. Because the Fed’s meetings are so cloaked and opaque, some congress members actually want to do away with the Fed, or regulate it a lot more closely.
But for most of us, most of the time, the Fed is pretty much immaterial. When the Fed matters is when there are big swings in the economy, which happen quickly. Then their action is crucial.
Why Small Changes In Interest Rates Don’t Really Matter To Most Of Us
Take the debate right now over a quarter point rise in interest rates. How does this affect most people? Not much. If you have credit card debt, or a car loan, your interest rate is set by the financial institution. And you may hear people talk about zero interest rates, but you know your rate is a whopping amount higher than that. And you know that a quarter point change in the Federal Funds rate will not affect the interest on those loans.
Where you’ll see a difference is in a mortgage. But here, is a quarter point really important?
When I graduated business school in 1982 and wanted to buy my first home the interest rate on an annual, variable rate loan was 18.5%. My first house cost just about $100,000 so the interest was $18,500/year. Today, mortgages are around 3.5%, fixed for anywhere from 3 to 7 years. $18,500 in interest now funds a $525,000 mortgage! If interest rates go to 3.75% – which has many analysts so concerned for the economy – the home value associated with interest of $18,500 is $500,000. Probably within the negotiating range of the buyer.
So you have to borrow a LOT of money for this quarter point to matter. And it does matter to CEOs and CFOs of companies that lead corporations on the S&P 500, or those running huge REITs (Real Estate Investment Trusts) that have enormous debts. But that is not most of us. For most of us, that quarter point difference will not have any impact on our lives.
So Why Do People Pay So Much Attention To The Fed?
The Fed was originally created barely 100 years ago (1913) to try to create a more stable monetary system. But this didn’t work too well in the beginning, which led to the Great Depression. And then, to make matters worse, the conservative bent of the Fed coupled with its fixation on stable interest rates led it to actually cut the money supply as the economy was tanking. This led to a collapse in the value of goods and services, particularly real estate, and the loss of millions of jobs greatly worsening the Great Depression.
It was the depression which really caused economists to focus on studying Fed actions and the economic repercussions. A group of economists, most notably Milton Friedman at the University of Chicago, started saying that the Fed shouldn’t focus on interest rates, but rather on the supply of money. These folks were called “monetarists” and they said interest rates should float, and economists should focus on stable prices.
The 1970s – “Easy Money” Inflation
As we moved into the 1970s, and as Fed Governors kept trying to control interest rates, they found themselves creating more and more money to keep rates low, and in return prices skyrocketed. “Easy money” as they called it allowed ratcheting upward incomes, big pay raises, higher prices for commodities and inflation. Another monetarist leader, Paul Volcker, was named head of the Fed. He rapidly moved to contract the money supply, allowing those 18.5% mortgage rates to develop. Yet, this did stabilize prices and eventually rates lowered, moving down constantly from 1980 to the near zero rates of today for Treasury Bonds and other very large, low risk borrowers.
When the Great Recession hit the Fed leadership, led by Ben Bernanke, remembered the lessons of the Great Depression. As they saw real estate values tumble they were aware of the domino effect this would have on bank failures, and then business failures, just as they had occurred in the 1930s. So they flooded the market with additional currency to keep failures to a minimum, and ease the real estate collapse. This sent interest rates plummeting to the record low levels of the last few years.
Policy Must Address The Current Situation, Not Be Biased By Historical Memories
Yet, people keep worrying about inflation. Those who lived through the 1970s and saw the damage done by inflation are still fearful of it. So they scream loudly about their fear that the last 8 years of monetary ease will create massive future inflation. They want the Fed to be much tighter with money saying that all this cash will someday create inflation down the road. Their view of history is guiding their analysis. Their bias is a fear that “easy money” once caused a problem, so surely it will cause a problem again.
But economists who study prices keep saying that there are currently no signs of price escalation – that wages have not moved up appreciably in a decade, home values are barely where they were a decade ago. Commodity prices are not escalating, in fact many (like oil) are at historically low prices. The dollar is stronger because, relatively speaking, the USA economy is doing better than the rest of the developed world. As long as prices and wages remain without high gains, there is little reason to tighten money, and little reason to feel a higher interest rate is needed.
Further, past monetary increases will not cause future inflation, because monetary policy only affects what is happening now. “Easy money” today can only create inflation today, not in 3 years. And inflation is almost nowhere to be seen.
Ignore Fed “Fine Tuning.” Pay Attention When A Crisis Hits. Otherwise, It’s Up To The Politicians
The big thing to remember is that small changes in policy, such as those that might affect a quarter point change in rates, is “fine tuning” the money supply. And that has pretty nearly no affect on most of us. Where as citizens we should care about the Fed is when big changes happen. We don’t want mistakes like happened in the 1930s, because that hurt everyone. But we do want fast action to deal with a crisis like the falling real estate values and bank collapses that were happening a decade ago.
Remember, it was when the Fed targeted interest rates that the USA economy got into so much trouble. First in the Great Depression, and then in the inflationary 1970s. But when the Fed targeted prices, such as in the 1980s and the mid-2000s, it did exactly what it was created to do, maintain a stable money supply.
So don’t worry about whether analysts think interest rates are going to change a quarter point, or even a half point, in the next year. The big economic question facing us is not a Fed question, but rather “what will it take to increase investment so that we can create more jobs, and provide higher wages leading to a higher standard of living for everyone?” And that is not a question for the Fed to answer. That is up to the economic policy makers in the legislature and the White House.
by Adam Hartung | Aug 26, 2016 | In the Swamp, Investing, Retail, Trends
Photographer: Luke Sharrett/Bloomberg
Walmart is in more trouble than its leadership wants to acknowledge. Investors
need to realize that it is up to Jet.com to turn around the ailing giant. And
that is a big task for the under $1 billion company.
Relevancy Is Hard To Keep – Look At Sears
Nobody likes to think their business can disappear. What CEO wants to tell his investors or employees “we’re no longer relevant, and it looks like our customers are all going somewhere else for their solutions”? Unfortunately, most leadership teams become entrenched in the business model and deny serious threats to longevity, thus leading to inevitable failure as customers switch.
Gallery: “Walmart Goes Small”
In early September the Howard Johnson’s in Bangor, Maine will close. This will leave just one remaining HoJo in the USA. What was once an iconic brand with hundreds of outlets strung along the fast growing interstate highway system is now nearly dead. People still drive the interstate, but trends changed, fast food became a good substitute, and unable to update its business model this once great brand died.
AP Photo/Elise Amendola
Sears announced another $350 million quarterly loss this week. That makes $9 billion in accumulated losses the last several quarters. Since Chairman and CEO Ed Lampert took over, Sears and Kmart have seen same store sales decline every single quarter except one. Unable to keep its customers Mr. Lampert has been closing stores and selling assets to stem the cash drain. But to keep the company afloat his hedge fund, ESL, is loaning Sears Holdings SHLD -2.94% another $300 million. On top of the $500 million the company borrowed last quarter. That the once iconic company, and Dow Jones Industrial Average component, is going to fail is a foregone conclusion.
But most people still think this fate cannot befall the nearly $500 billion revenue behemoth Walmart. It’s simply too big to fail in most people’s eyes.
Walmart’s Crime Problem Is Another Telltale Sign Of Problems In The Business Model
Yet, the primary news about Walmart is not good. Bloomberg this week broke the news that one of the most crime-ridden places in America is the local Walmart store. One store in Tulsa, Oklahoma has had 5,000 police visits in the last five years, and four local stores have had 2,000 visits in the last year alone. Across the system, there is one violent crime in a Walmart every day. By constantly promoting its low cost strategy Walmart has attracted a class of customer that simply is more prone to committing crime. And policies implemented to hang onto customers, like letting them camp out overnight in the parking lots, serve to increase the likelihood of poverty-induced crime.
But this outcome is also directly related to Walmart’s business model and strategy. To promote low prices Walmart has automated more operations, and cut employees like greeters. Thus leadership brags about a 23% increase in sales/employee the last decade. But that has happened as the employment shrank by 400,000. Fewer employees in the stores encourages more crime.
In a real way Walmart has “outsourced” its security to local police departments. Experts say the cost to eliminate this security problem are about $3.2 billion – or about 20% of Walmart’s total profitability. Ouch! In a world where Walmart’s net margin of 3% is fully one-third lower than Target’s 4.6% the money just isn’t there any longer for Walmart to invest in keeping its stores safe.
With each passing month Walmart is becoming the “retailer of last resort” for people who cannot shop online. People who lack credit cards, or even bank accounts. People without the means, or capability, of shopping by computer, or paying electronically. People who have nowhere else to go to shop, due to poverty and societal conditions. Not exactly the ideal customer base for building a growing, profitable business.
Competitors Relentlessly Pick Away At Walmart’s Sales And Profits
To maintain revenues the last several years Walmart has invested heavily in transitioning to superstores which offer a large grocery section. But now Kroger KR -0.5%, Walmart’s no. 1 grocery competitor, is taking aim at the giant retailer, slashing prices on 1,000 items. Just like competition from the “dollar stores” has been attacking Walmart’s general merchandise aisles. Thus putting even more pressure on thinning margins, and leaving less money available to beef up security or entice new customers to the stores.
And the pressure from e-commerce is relentless. As detailed in the Wall Street Journal, Walmart has been selling online for about 15 years, and has a $14 billion online sales presence. But this is only 3% of total sales. And growth has been decelerating for several quarters. Last quarter Walmart’s e-commerce sales grew 7%, while the overall market grew 15% and Amazon ($100 billion revenues) grew 31%. It is clear that Walmart.com simply is not attracting enough customers to grow a healthy replacement business for the struggling stores.
Thus the acquisition of Jet.com.
The hope is that this extremely unprofitable $1 billion online retailer will turn around Walmart’s fortunes. Imbue it with much higher growth, and enhanced profitability. But will Walmart make this transition. Is leadership ready to cannibalize the stores for higher electronic sales? Are they willing to make stores smaller, and close many more, to shift revenues online? Are they willing to suffer Amazon-like profits (or losses) to grow? Are they willing to change the Walmart brand to something different, while letting Jet.com replace Walmart as the dominant brand? Are they willing to give up on the past, and let new leadership guide the company forward?
If they do then Walmart could become something very different in the future. If they really realize that the market is shifting, and that an extreme change is necessary in strategy and tactics then Walmart could become something very different, and remain competitive in the highly segmented and largely online retail future. But if they don’t, Walmart will follow Sears into the whirlpool, and end up much like Howard Johnson’s.
by Adam Hartung | Aug 12, 2016 | Diversity, Innovation, Teamwork, Television
Most of the time “diversity” is a code word for adding women or minorities to an organization. But that is only one way to think about diversity, and it really isn’t the most important. To excel you need diversity in thinking. And far too often, we try to do just the opposite.
“Mythbusters” was a television series that ran 14 seasons across 12 years. The thesis was to test all kinds of things people felt were facts, from historical claims to urban legends, with sound engineering approaches to see if the beliefs were factually accurate – or if they were myths. The show’s ability to bust, or prove, these myths made it a great success.
The show was led by 2 engineers who worked together on the tests and props. Interestingly, these two fellows really didn’t like each other. Despite knowing each other for 20 years, and working side-by-side for 12, they never once ate a meal together alone, or joined in a social outing. And very often they disagreed on many aspects of the show. They often stepped on each others toes, and they butted heads on multiple issues. Here’s their own words:
“We get on each other’s nerves and everything all the time, but whenever that happens, we say so and we deal with it and move on,” he explained. “There are times that we really dislike dealing with each other, but we make it work.”
The pair honestly believed it is their differences which made the show great. They challenged each other continuously to determine how to ask the right questions, and perform the right tests, and interpret the results. It was because they were so different that they were so successful. Individually each was good. But together they were great. It was because they were of different minds that they pushed each other to the highest standards, never had an integrity problem, and achieved remarkable success.
Yet, think about how often we select people for exactly the opposite reason. Think about “knock-out” comments and questions you’ve heard that were used to keep from increasing the diversity:
- I wouldn’t want to eat lunch with that person, so why would I want to work with them?
- We find that people with engineering (or chemical, or fine arts, etc.) backgrounds do well here. Others don’t.
- We like to hire people from state (or Ivy League, etc) colleges because they fit in best
- We always hire for industry knowledge. We don’t want to be a training ground for the basics in how our industry works
- Results are not as important as how they were obtained – we have to be sure this person fits our culture
- Directors on our Board need to be able to get along or the Board cannot be effective
- If you weren’t trained in our industry, how could you be helpful?
- We often find that the best/top graduates are unable to fit into our culture
- We don’t need lots of ideas, or challenges. We need people that can execute our direction
- He gets things done, but he’s too rough around the edges to hire (or promote.) If he leaves he’ll be someone else’s problem.
In 2011 I wrote in Forbes “Why Steve Jobs Couldn’t Find a Job Today.” The column pointed out that hiring practices are designed for the lowest common denominator, not the best person to do a job. Personalities like Steve Jobs would be washed out of almost any hiring evaluation because he was too opinionated, and there would be concerns he would cause too much tension between workers, and be too challenging for his superiors.
Simply put, we are biased to hire people that think like us. It makes us comfortable. Yet, it is a myth that homogeneous groups, or cultures, are the best performing. It is the melding of diverse ways of thinking, and doing, that leads to the best solutions. It is the disagreement, the arguing, the contention, the challenging and the uncomfortableness that leads to better performance. It leads to working better, and smarter, to see if your assumptions, ideas and actions can perform better than your challengers. And it leads to breakthroughs as challenges force us to think differently when solving problems, and thus developing new combinations and approaches that yield superior returns.
What should we do to hire better, and develop better talent that produces superior results?
- Put results and accomplishments ahead of culture or fit. Those who succeed usually keep succeeding, and we need to build on those skills for everyone to learn how to perform better
- Don’t let ego into decisions or discussions. Too many bad decisions are made because someone finds their assumptions or beliefs challenged, and thus they let “hurt feelings” keep them from listening and considering alternatives.
- Set goals, not process. Tell someone what they need to accomplish, and not how they should do it. If how someone accomplishes their goals offends you, think about your own assumptions rather than attacking the other person. There can be no creativity if the process is controlled.
- Set big goals, and avoid the desire to set a lot of small goals. When you break down the big goal into sub-goals you effectively kill alternative approaches – approaches that might not apply to these sub-goals. In other words, make sure the big objective is front and center, then “don’t sweat the small stuff.”
- Reward people for thinking differently – and be very careful to not punish them. It is easy to scoff at an idea that sounds foreign, and in doing so kill new ideas. Often it’s not what they don’t know that is material, but rather what you don’t know that is most important.
- Be blind to gender, skin color, historical ancestry, religion and all other elements of background. Don’t favor any background, nor disfavor another. This doesn’t mean white men are the only ones who need to be aware. It is extremely easy for what we may call any minority to favor that minority. Assumptions linked to physical attributes and history run deep, and are hard to remove from our bias. But it is not these historical physical and educational elements that matter, it is how people think that matters – and the results they achieve.
by Adam Hartung | Jul 15, 2016 | Defend & Extend, Entertainment, Games, Innovation, Lock-in, Mobile, Trends
Poke’Mon Go is a new sensation. Just launched on July 6, the app is already the #1 app in the world – and it isn’t even available in most countries. In less than 2 weeks, from a standing start, Nintendo’s new app is more popular than both Facebook and Snapchat. Based on this success, Nintendo’s equity valuation has jumped 90% in this same short time period.
Some think this is just a fad, after all it is just 2 weeks old. Candy Crush came along and it seemed really popular. But after initial growth its user base stalled and the valuation fell by about 50% as growth in users, time on app and income all fell short of expectations. And, isn’t the world of gaming dominated by the likes of Sony and Microsoft?
A bit of history
Nintendo launched the Wii in 2006 and it was a sensation. Gamers could do things not previously possible. Unit sales exceeded 20m units/year for 2006 through 2009. But Sony (PS4) and Microsoft (Xbox) both powered up their game consoles and started taking share from Nintendo. By 2011 Nintendo sale were down to 11.6m units, and in 2012 sales were off another 50%. The Wii console was losing relevance as competitors thrived.
Sony and Microsoft both invested heavily in their competition. Even though both were unprofitable at the business, neither was ready to concede the market. In fall, 2014 Microsoft raised the competitive ante, spending $2.5B to buy the maker of popular game Minecraft. Nintendo was becoming a market afterthought.
Meanwhile, back in 2009 Nintendo had 70% of the handheld gaming market with its 3DS product. But people started carrying the more versatile smartphones that could talk, text, email, execute endless apps and even had a lot of games – like Tetrus. The market for handheld games pretty much disappeared, dealing Nintendo another blow.
Competitor strategic errors
Fortunately, the bitter “fight to the death” war between Sony and Microsoft kept both focused on their historical game console business. Both kept investing in making the consoles more powerful, with more features, supporting more intense, lifelike games. Microsoft went so far as to implement in Windows 10 the capability for games to be played on Xbox and PCs, even though the PC gaming market had not grown in years. These massive investments were intended to defend their installed base of users, and extend the platform to attract new growth to the traditional, nearly 4 decade old market of game consoles that extends all the way back to Atari.
Both companies did little to address the growing market for mobile gaming. The limited power of mobile devices, and the small screens and poor sound systems made mobile seem like a poor platform for “serious gaming.” While game apps did come out, these were seen as extremely limited and poor quality, not at all competitive to the Sony or Microsoft products. Yes, theoretically Windows 10 would make gaming possible on a Microsoft phone. But the company was not putting investment there. Mobile gaming was simply not serious, and not of interest to the two Goliaths slugging it out for market share.
Building on trends makes all the difference
Back in 2014 I recognized that the console gladiator war was not good for either big company, and recommended Microsoft exit the market. Possibly seeing if Nintendo would take the business in order to remove the cash drain and distraction from Microsoft. Fortunately for Nintendo, that did not happen.
Nintendo observed the ongoing growth in mobile gaming. While Candy Crush may have been a game ignored by serious gamers, it nonetheless developed a big market of users who loved the product. Clearly this demonstrated there was an under-served market for mobile gaming. The mobile trend was real, and it’s gaming needs were unmet.
Simultaneously Nintendo recognized the trend to social. People wanted to play games with other people. And, if possible, the game could bring people together. Even people who don’t know each other. Rather than playing with unseen people located anywhere on the globe, in a pre-organized competition, as console games provided, why not combine the social media elements of connecting with those around you to play a game? Make it both mobile, and social. And the basics of Poke’Mon Go were born.
Then, build out the financial model. Don’t charge to play the game. But once people are in the game charge for in-game elements to help them be more successful. Just as Facebook did in its wildly successful social media game Farmville. The more people enjoyed meeting other people through the game, and the more they played, the more they would buy in-app, or in-game, elements. The social media aspect would keep them wanting to stay connected, and the game is the tool for remaining connected. So you use mobile to connect with vastly more people and draw them together, then social to keep them playing – and spending money.
The underserved market is vastly larger than the over-served market
Nintendo recognized that the under-served mobile gaming market is vastly larger than the overserved console market. Those console gamers have ever more powerful machines, but they are in some ways over-served by all that power. Games do so much that many people simply don’t want to take the time to learn the games, or invest in playing them sitting in a home or office. For many people who never became serious gaming hobbyists, the learning and intensity of serious gaming simply left them with little interest.
But almost everyone has a mobile phone. And almost everyone does some form of social media. And almost everyone enjoys a good game. Give them the right game, built on trends, to catch their attention and the number of potential customers is – literally – in the billions. And all they have to do is download the app. No expensive up-front cost, not much learning, and lots of fun. And thus in two weeks you have millions of new users. Some are traditional gamers. But many are people who would never be a serious gamer – they don’t want a new console or new complicated game. People of all ages and backgrounds could become immediate customers.
David can beat Goliath if you use trends
In the Biblical story, smallish David beat the giant Goliath by using a sling. His new technology allowed him to compete from far enough away that Goliath couldn’t reach David. And David’s tool allowed for delivering a fatal blow without ever touching the giant. The trend toward using tools for hunting and fighting allowed the younger, smaller competitor to beat the incumbent giant.
In business trends are just as important. Any competitor can study trends, see what people want, and then expand their thinking to discover a new way to compete. Nintendo lost the console war, and there was little value in spending vast sums to compete with Sony and Microsoft toe-to-toe. Nintendo saw the mobile game market disintegrate as smartphones emerged. It could have become a footnote in history.
But, instead Nintendo’s leaders built on trends to deliver a product that filled an unmet need – a game that was mobile and social. By meeting that need Nintendo has avoided direct competition, and found a way to dramatically grow its revenues. This is a story about how any competitor can succeed, if they learn how to leverage trends to bring out new products for under-served customers, and avoid costly gladiator competition trying to defend and extend past products.
by Adam Hartung | Jul 13, 2016 | Employment, Leadership, Regulations, Trends
This week Starbucks and JPMorganChase announced they were raising the minimum pay of many hourly employees. For about 168,000 lowly paid employees, this is really good news. And both companies played up the planned pay increases as benefitting not only the employees, but society at large. The JPMC CEO, Jamie Dimon, went so far as to say this was a response to a national tragedy of low pay and insufficient skills training now being addressed by the enormous bank.
However, both actions look a lot more like reacting to undeniable trends in an effort to simply keep their organizations functioning than any sort of corporate altruism.
Since 2014 there has been an undeniable trend toward raising the minimum wage, now set nationally at $7.25. Fourteen states actually raised their minimum wage starting in 2016 (Massachusetts, California, New York, Nebraska, Connecticut, Michigan, Hawaii, Colorado, Nebraska, Vermont, West Virginia, South Dakota, Rhode Island and Alaska.) Two other states have ongoing increases making them among the states with fastest growing minimum wages (Maryland and Minnesota.) And there are 4 additional states that promoters of a $15 minimum wage think will likely pass within months (Illinois, New Jersey, Oregon and Washington.) That makes 20 states raising the minimum wage, with 46.4% of the U.S. population. And they include 5 of the largest cities in the USA that have already mandated a $15 minimum wage (New York, Washington D.C., Seattle, San Francisco and Los Angeles.)
In other words, the minimum wage is going up. And decisively so in heavily populated states with big cities where Starbucks and JPMC have lots of employees. And the jigsaw puzzle of different state requirements is actually a threat to any sort of corporate compensation plan that would attempt to treat employees equally for common work. Simultaneously the unemployment rate keeps dropping – now below 5% – causing it to take longer to fill open positions than at any time in the last 15+ years. Simply put, to meet local laws, find and retain decent employees, and have any sort of equitable compensation across regions both companies had no choice but to take action to raise the pay for these bottom-level jobs.
Starbucks pointed out that this will increase pay by 5-15% for its 150,000 employees. But at least 8.5% of those employees had already signed a petition demanding higher pay. Time will tell if this raise is enough to keep the stores open and the coffee hot. However, the price increases announced the very next day will probably be more meaningful for the long term revenues and profits at Starbucks than this pay raise.
At JPMC the average pay increase is about $4.10/hour – from $10.15 to $12-$16.50/hour. Across all 18,000 affected employees, this comes to about $153.5million of incremental cost. Heck, the total payroll of these 18,000 employees is only $533.5M (after raises.) Let’s compare that to a few other costs at JPMC:
Wow, compared to these one-off instances, the recent pay raises seem almost immaterial. While there is probably great sincerity on the part of these CEOs for improving the well being of their employees, and society, the money here really isn’t going to make any difference to larger issues. For example, the JPMC CEO’s 2015 pay of $27M is about the same as 900 of these lowly paid employees. Thus the impact on the bank’s financials, and the impact on income inequality, is — well — let’s say we have at least added one drop to the bucket.
The good news is that both companies realize they cannot fight trends. So they are taking actions to help shore up employment. That will serve them well competitively. And some folks are getting a long-desired pay raise. But neither action is going to address the real problems of income inequality.
by Adam Hartung | Jun 27, 2016 | Finance, Trends
I’m a believer in Disruptive Innovation. For almost 100 years economists have been writing about “Creative Destruction,” in which new technologies come along making old technologies — and the companies built on them — obsolete. In the last 20 years, largely thanks to the initial insights of the faculty at Harvard Business School, we’ve seen a dramatic increase in understanding how new companies use new technologies to disrupt markets and wipe out the profitability of companies that were once clearly successful. In a large way, we’ve come to accept that Disruptive Innovation is good, and the concomitant creative destruction of the old players leads to more rapid growth for the economy, increasing jobs and the wherewithal of everyone.
But, not really everyone. The trickle to lots of people can be a long time coming. When market shifts happen, and people lose jobs to new competitors — domestic or offshore — they only know that their life, at least short term, is a lot worse. As they struggle to pay a mortgage, and find a new job, they often learn their skills are outdated. There are jobs, but these folks are not qualified. As they take lesser jobs, their incomes dwindle, and they may well lose their homes. And their healthcare.
Economists call this workplace transition “temporary economic dislocation.” Fancy term. They claim that eventually folks do enter the workplace who are properly trained, and those folks make more money than the workers associated with the previous, now inferior, technology.
That’s great for economists. But terrible for the folks who lost their jobs. As someone once said “a recession is when your neighbor loses his job. A depression is when you lose your job.” And for a lot of people, the market shift from an industrial economy to an information economy has created severe economic depression in their lives.
A person learns to be a printer, or a printing plate maker, in the 1970s when they are 20-something. Good job, makes a great wage. Secure, as printing demand just keeps rising. But then along comes the internet with PDF and JPEG documents that people read on a screen, and folks simply quit needing, or wanting, printed documents. In 2016, now age 50-something, this printer or plate-maker no longer has a job. Demand is down, and its really easy to send the printing to some offshore market like Thailand, Brazil or India where printing is cheaper.
What’s he or she to do now? Go back to school you may say. But to learn how to do what? Say it’s on-line (or digital) document production. OK, but since everyone in the 20s has been practicing this for over a decade it takes years to actually be competitive. And then, what’s the pay for a starting digital graphic artist? A lot less than what they made as a printer. And who’s going to hire the 58-62 year old digital graphic artist, when there are millions of well trained 20 somethings who seem to be quicker, and more attuned to what the publishers want (especially when the boss ordering the work is 35-42, and really uncomfortable giving orders and feedback to someone her parents’ age.) Oh, and when you look around there are millions of immigrants who are able to do the work, and willing to do it for a whole lot less than anyone native born to your country.
Source: Master Investor UK
In England last week these disaffected people made it a point to show their country’s leadership that their livelihoods were being “creatively destroyed.” How were they to keep up their standard of living with the flood of immigrants? And with the wealth of the country constantly shifting from the middle class to the wealthy business leaders and bankers? While folks who have done well the last 25 years voted overwhelmingly to remain in the EU (such as those who live in what’s called “The City”), those in the suburbs and outlying regions voted overwhelmingly to leave. Sort of like their income gains, and jobs, left.
To paraphrase the famous line from the movie Network, “they were mad as Hell and they weren’t going to take it any longer.” Simply put, if they couldn’t participate in the wonderful economic growth of EU participation, they would take it away from those who did. The point wasn’t whether or not the currency might fall 10% or more, or whether stocks on the UK exchange would be routed. After all, these folks largely don’t go to Europe or America, so they don’t care that much what the Euro or dollar costs. And they don’t own stocks, because they aren’t rich enough to do so, so what does it hurt them if equities fall? If this all puts a lot of pain on the wealthy – well just maybe that is what they really wanted.
America is seeing this in droves. It’s called the Donald Trump for President campaign. While unemployment is a remarkably low 5%, there are a lot of folks who are working for less money, or simply out of work entirely, because they don’t know how to get a job. They may laugh at Robert DiNero as a retired businessman now working for free in “The Intern.” But they really don’t think it’s funny. They can’t afford to work for free. They need more income to pay higher property taxes, sales taxes, health care and the costs of just about everything else. And mostly they know they are rapidly being priced out of their lifestyle, and their homes, and figuring they’ll be working well into their 70s just to keep from falling into poverty.
These people hate President Obama. They don’t care if the stock market has soared during his Presidency – they don’t own stocks (and if they do in a 401K or similar program they don’t care because it does them no good today.) They don’t care that he’s created more jobs than anyone since Reagan or Roosevelt, because they see their jobs gone, and they blame him if their recent college graduate doesn’t have a well-paying job. They don’t care if we are closing in on universal health care, because all they see is that health care is becoming ever more expensive – and often beyond their ability to pay. For them, their personal America is not as good as they expected it to be – and they are very, very angry. And the President is a very identifiable symbol they can blame.
Creative Destruction, and disruptive innovations, are great for the winners. But they can be wildly painful to the losers. And when the disruptions are as big, and frequent, as what’s happened the last 30 years – globalized economy, nationwide and international super banks, outsourcing, offshoring and the entirety of the Internet of Things – it has left a lot of people really concerned about their future. As they see the top 1% live opulent lifestyles, they struggle to keep a 12 year old car running and pay the higher license plate fees. They really don’t care if the economy is growing, or the dollar is strong, or if unemployment is at near-record lows. They know they are on the losing end of the stick. For them, well, America really isn’t all that great anymore.
So, hungry for revenge, they are happy to kill the goose for dinner that laid the golden eggs. They will take what they can, right now, and they don’t care if the costs are astronomical.
Despite their hard times, does this not sound at the least petty, and short-sighted? Doesn’t it seem rather selfish to damn everyone just because your situation isn’t so good?
Some folks will think that government policy really doesn’t matter that much. That actions like Brexit won’t stop they improvements coming from innovation. They think all will work out OK. They so long for a return to a previous time, when they perceived things were much better, that they are ready to stop the merry-go-round for everyone.
And they can do this. Brexit will create a Depression for the UK. The economy not only won’t grow, it will shrink. Probably for another decade. There will be fewer jobs, meaning less wealth for everyone. Those with assets will ride it out. Those who already struggled will struggle more. Lacking investment funds, private and public, there will be less investment in infratructure and the means of production, making life harder for everyone. There will be less, if any, money to invest in innovation, so there will be fewer new products to enjoy, and fewer improvements in lifestyle and productivity. The currency will be lower, so there will be fewer imports, making the cost of everything go up. In short, it will be very, painful, and costly, for everyone now that those who felt left out of the economic expansion have had their day at the polls.
Growth is a great thing. Growth creates jobs, a better lifestyle, higher productivity, more income and more wealth for everyone. But growth is NOT a given. Policies, and government actions, can stop growth dead in its tracks. The innovations we’ve all been fascinated by, and made part of our everyday lives, from smartphones to autos that last hundreds of thousands of miles and tens of years, to low cost air conditioning, to electricity nearly everywhere, to miracle drugs and gene-based bio-pharmaceuticals that have extended our lives by 30%+ in just one generation — all of these things can come to a screeching, terrible halt.
All it takes to stop the gains of innovation are policies that try to return us to a previous time. In the process of making our countries great again, we can absolutely destroy them. It is impossible to go back in time. It is not impossible to kill the means of economic growth. All we have to do is focus on constructing walls instead of creating jobs, protecting industries instead of free trade, and wrapping ourselves in the flag of sovereignty instead of collaborating globally to maximize growth. By focusing on ourselves we can absolutely hurt a lot of other people.
The politicians getting attention now are those espousing a return to some bygone era. Those who denounce the gains of innovation, and offer pity to those who’ve struggled with market disruptions. But these are not the leaders who will help people improve their lives. Those who focus on promoting innovation, attacking the concentration of wealth at the top, providing more incentives to infrastructure development, and mobilizing resources for training and new job creation can make life better for everyone.
Let’s hope everyone watches what happens in the UK last week, this week and going forward learn the long-term lesson of short-term thinking. Let’s hope that we can return to favoring growth, even a the cost of disruption and creative destruction.
by Adam Hartung | Jun 9, 2016 | Innovation, Investing, Software, Teamwork
Last week Bloomberg broke a story about how Microsoft’s Chairman, John Thompson, was pushing company management for a faster transition to cloud products and services. He even recommended changes in spending might be in order.
Really? This is news?
Let’s see, how long has the move to mobile been around? It’s over a decade since Blackberry’s started the conversion to mobile. It was 10 years ago Amazon launched AWS. Heck, end of this month it will be 9 years since the iPhone was released – and CEO Steve Ballmer infamously laughed it would be a failure (due to lacking a keyboard.) It’s now been 2 years since Microsoft closed the Nokia acquisition, and just about a year since admitting failure on that one and writing off $7.5B And having failed to achieve even 3% market share with Windows phones, not a single analyst expects Microsoft to be a market player going forward.
So just now, after all this time, the Board is waking up to the need to change the resource allocation? That does seem a bit like looking into barn lock acquisition long after the horses are gone, doesn’t it?
The problem is that historically Boards receive almost all their information from management. Meetings are tightly scheduled affairs, and there isn’t a lot of time set aside for brainstorming new ideas. Or even for arguing with management assumptions. The work of governance has a lot of procedures related to compliance reporting, compensation, financial filings, senior executive hiring and firing – there’s a lot of rote stuff. And in many cases, surprisingly to many non-Directors, the company’s strategy may only be a topic once a year. And that is usually the result of a year long management controlled planning process, where results are reviewed and few challenges are expected. Board reviews of resource allocation are at the very, very tail end of management’s process, and commitments have often already been made – making it very, very hard for the Board to change anything.
And these planning processes are backward-oriented tools, designed to defend and extend existing products and services, not predict changes in markets. These processes originated out of financial planning, which used almost exclusively historical accounting information. In later years these programs were expanded via ERP (Enterprise Resource Planning) systems (such as SAP and Oracle) to include other information from sales, logistics, manufacturing and procurement. But, again, these numbers are almost wholly historical data. Because all the data is historical, the process is fixated on projecting, and thus defending, the old core of historical products sold to historical customers.
Copyright Adam Hartung
Efforts to enhance the process by including extensions to new products or new customers are very, very difficult to implement. The “owners” of the planning processes are inherent skeptics, inclined to base all forecasts on past performance. They have little interest in unproven ideas. Trying to plan for products not yet sold, or for sales to customers not yet in the fold, is considered far dicier – and therefore not worthy of planning. Those extensions are considered speculation – unable to be forecasted with any precision – and therefore completely ignored or deeply discounted.
And the more they are discounted, the less likely they receive any resource funding. If you can’t plan on it, you can’t forecast it, and therefore, you can’t really fund it. And heaven help some employee has a really novel idea for a new product sold to entirely new customers. This is so “white space” oriented that it is completely outside the system, and impossible to build into any future model for revenue, cost or – therefore – investing.
Take for example Microsoft’s recent deal to sell a bunch of patent rights to Xiaomi in order to have Xiaomi load Office and Skype on all their phones. It is a classic example of taking known products, and extending them to very nearby customers. Basically, a deal to sell current software to customers in new markets via a 3rd party. Rather than develop these markets on their own, Microsoft is retrenching out of phones and limiting its investments in China in order to have Xiaomi build the markets – and keeping Microsoft in its safe zone of existing products to known customers.
The result is companies consistently over-investment in their “core” business of current products to current customers. There is a wealth of information on those two groups, and the historical info is unassailable. So it is considered good practice, and prudent business, to invest in defending that core. A few small bets on extensions might be OK – but not many. And as a result the company investment portfolio becomes entirely skewed toward defending the old business rather than reaching out for future growth opportunities.
This can be disastrous if the market shifts, collapsing the old core business as customers move to different solutions. Such as, say, customers buying fewer PCs as they shift to mobile devices, and fewer servers as they shift to cloud services. These planning systems have no way to integrate trend analysis, and therefore no way to forecast major market changes – especially negative ones. And they lack any mechanism for planning on big changes to the product or customer portfolio. All future scenarios are based on business as it has been – a continuation of the status quo primarily – rather than honest scenarios based on trends.
How can you avoid falling into this dilemma, and avoiding the Microsoft trap? To break this cycle, reverse the inputs. Rather than basing resource allocation on financial planning and historical performance, resource allocation should be based on trend analysis, scenario planning and forecasts built from the future backward. If more time were spent on these plans, and engaging external experts like Board Directors in discussions about the future, then companies would be less likely to become so overly-invested in outdated products and tired customers. Less likely to “stay at the party too long” before finding another market to develop.
If your planning is future-oriented, rather than historically driven, you are far more likely to identify risks to your base business, and reduce investments earlier. Simultaneously you will identify new opportunities worthy of more resources, thus dramatically improving the balance in your investment portfolio. And you will be far less likely to end up like the Chairman of a huge, formerly market leading company who sounds like he slept through the last decade before recognizing that his company’s resource allocation just might need some change.
by Adam Hartung | May 20, 2016 | E-Commerce, Investing, Retail, Trends
WalMart announced 1st quarter results on Thursday, and the stock jumped almost 10% on news sales were up versus last year. It was only $1.1B on $115B, about 1%, but it was UP! Same store sales were also up 1%, but analysts pointed out that was largely due to lower prices to hold competitors at bay.
While investors cheered the news, at the higher valuation WalMart is still only worth what it was in June, 2012 (just under $70/share.) From then through August, 2015 WalMart traded at a higher valuation – peaking at $90 in January, 2015. Subsequent fears of slower sales had driven the stock down to $56.50 by November, 2015. So this is a recovery for crestfallen investors the last year, but far from new valuation highs.
Unfortunately, this is likely to be just a blip up in a longer-term ongoing valuation decline for WalMart. And that value will be captured by those who understand the most important, undeniable trend in retail.
(c) AdamHartung.com Data Sources: Yahoo Finance and www.trend-stock-analysis-on.net
Although the numbers for WalMart’s valuation are a bit better than when the associated chart was completed last week, as you can see WalMart’s assets are greater than the company’s total valuation. This is because the return on its assets, today and projected, are so low that WalMart must borrow money in order to make them overall worthwhile. And the fact that on the balance sheet, at book value, the assets appear to be some $50B lower due to depreciation, and the difference be cost and market value.
This is because WalMart competes almost entirely in the intensely competitive and asset-dense market of traditional brick-and-mortar retail. This requires a lot of land, buildings, shelves and inventory. And that market is barely growing. Maybe 1-2%/year.
Compare t his with Amazon. Amazon has about $30B of assets. Yet its valuation is over $330B. So Amazon captures an extra value of $300B by competing in the asset sparse market of on-line retailing where it needs little land, few buildings, far less shelving and a lot less inventory. And it is competing in a market the Commerce Department says is growing at 15%/year.
The trend to on-line sales is extremely important, as it has entirely different customer acquisition and retention requirements, and very different ways of competing. Amazon understands those trends, and continues to lead its rivals. Today on-line retail is 10.5% of all non-restaurant, non-bar retail. And that 15% growth rate accounts for 60% of ALL the growth in this retail segment. Amazon keeps advancing, growing as fast (or faster) than the industry average, especially in key categories. Meanwhile, despite its vast resources and best efforts WalMart admitted its on-line sales growth is only 7% – half the segment growth rate – and its growth is decelerating.
By understanding this one trend – a very big, important, powerful trend – Amazon captures more value than the current value of ALL the Walmart stores, distribution centers and their contents. With all those assets WalMart can only convince investors it is worth about $200B. With about 13% of the assets used by WalMart, Amazon convinces investors it is worth 33% more than WalMart – over $330B. That’s $300B of value created just by knowing where the market is headed, and how to deliver for customers in that future market.
Yes, Amazon has other businesses, such as AWS cloud services and tech products in tablets, smartphones and smart speakers. But these too (some not nearly as successful as others, mind you) are very much on trends. WalMart once dominated retail technology with its massive computer systems and enormous databases. But WalMart limited itself to using its technology to defend & extend its core traditional retail business via store forecasts, optimized distribution and extensive pricing schemes. Amazon is monetizing its technology prowess by, again, leveraging trends and making its services and products available to others.
How does this apply to you? When someone asks “If you could have anything you want, what would you ask for?” most of us would start with health, happiness, peace and similar intangibles for us, our families and mankind. But if forced to make a tangible selection, we would ask for an asset. Buildings, equipment, cash. Yet, as WalMart and Amazon show us, those assets are only as valuable as what you do with them. And thus, it is more valuable to understand the trends, and how to use assets wisely for greatest value, than it is to own a pile of assets.
So the really important question is “Do you know what trends are going to be important to your business, and are you implementing a strategy to leverage those key trends?” If you are trying to protect your assets, you will likely be overwhelmed by the trend leader. But if you really understand the trends and are ready to act on them, you could be the one to capture the most value in your marketplace, and likely without adding a lot more costly assets.
