by Adam Hartung | May 26, 2021 | Innovation, Investing, Software, Strategy, Trends
Free Trend Money!
Amazon is buying MGM film studios for something less than $9 B. Sounds like a lot of money. But since Amazon can make its own money, effectively this transaction is free. Now you must be wondering, how can Amazon make its own money? By creating “Trend Value.”
Back in 2016, before Amazon started making acquisitions like Whole Foods, its valuation (or market capitalization) was $332 B. But its assets were only worth $30 B. And remember, Amazon was not, and still isn’t, very profitable. Net income was only about $2 B at that time. That extra $300 B of valuation (10x the assets) wasn’t from earnings, but rather because Amazon was a global leader in e-commerce with about 40% market share in the USA. Because e-commerce and cloud computing were growing trends, investors gave Amazon an additional $300 B in value as a Trend Leader.
Because Amazon was riding the big trends to e-commerce it created $300 B of very real value. This very high share price allowed Amazon to keep investing in ways to grow, including making acquisitions.
Compare with Walmart. In 2016 before, Walmart bought Jet, it had almost no e-commerce. Walmart had $232 B of assets (7 times the assets of Amazon,) but it’s valuation was only $216 B (2/3 Amazon’s.) Because Walmart’s assets (and business) were concentrated in the no-growth retail world of brick-and-mortar stores its value was less than its assets! Investors were basically saying that to create value Walmart would have to sell its assets – not grow its revenues. As a result, Walmart’s Trend Value was a NEGATIVE $16 B
Six years (and a pandemic) later, and the world of e-commerce has exploded. WalMart bought Jet, eschewing adding traditional stores and instead investing in e-commerce. As a result its assets grew very little, but its market valuation improved to $399 B, an 85% enhancement. And it’s Trend Value went up to $60 B. A good thing, but still only 1/5 the 2016 Trend Value of Amazon. A $9 B acquisition would be a very notable acquisition for Walmart using up over 50% of its cash. And taking out a 2.5% chunk of its market cap, and a whopping 15% of its enhanced Trend Value.Meanwhile, since 2016 Amazon has purchased an entire grocery chain (Whole Foods) and made enormous investments in distribution centers, trucks, and other supply chain assets. That has increased Amazon’s asset base 10-fold, to about $320B. But now Amazon’s publicly traded shares are worth $1.62 TRILLION. That’s right, with a “T.” By investing in Trends (e-commerce and cloud computing services [AWS]) Amazon’s Trend Value has risen to a whopping $1,300 Billion. Amazon’s Trend Value is 21.5x Walmart’s.
By investing in Trends, Amazon created a cache of value
They used that value to make more acquisitions. Even though it made huge investments in assets – far beyond WalMart’s – its Trend Value grew even more. Now Amazon could purchase MGM for $9 B and use only 10% of its cash. But it won’t. It will use shares. But that $9 B is now only .55% of Amazon’s value – and only .7% of its Trend Value. Negligible on the balance sheet, but opening up tremendous revenue growth for Prime Video.
If you want to create money, invest in trends. Walmart was the renowned leader in retail, and computing for retail, until trends shifted the market. Now it is an also-ran compared to Amazon. And because Amazon is leading in the Trending markets of e-commerce and cloud computing it has created the money to buy MGM. Again, not with profits (which are still only $20 B) but with the Trend Value created by proper market selection and investing.
So are you creating money by investing in trends? You can literally create your own money, usable for all kinds of investments, when you invest in trends. Or are you grinding out the business, like Walmart with all those stores, but creating almost no value in the vast majority of what you do? The choice is really up to you.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. [email protected] 847-726-8465.
by Adam Hartung | May 20, 2021 | Computing, Innovation, Investing, Leadership, Software, Strategy, Trends
Stuck on the Core
This week, to almost no fanfare, a Microsoft Vice President issued a statement saying that Windows 10X (planned for 2019) would not ship in 2021. In fact, it would never ship. The technology enhancements would be integrated into existing Windows, and other products. While this gained little press, it is great news for customers and investors.
CEO Satya Nadella has officially changed the course of Microsoft. Under former CEO Ballmer the behemoth kept pouring money into Windows and Office. While the world was moving from PCs and PC servers to mobile devices and the cloud, Ballmer just kept pouring billions into old products. His slavish insistence on trying to defend & extend an old “core product line,” which every year was losing importance as PC sales slowed, was killing Microsoft — leading me to call Mr. Ballmer the worst CEO in America (my Forbes column that was by far the most read of any I ever penned.) After more than a decade as CEO, Ballmer had spent a lot of Microsoft money on new versions of its ancient product and bad acquisitions like Skype and Nokia, but he entirely missed the market shift in his customer base. In my blog post, “Microsoft, What Next?”, I described the challenges ahead to pull Microsoft out of the Growth Stall.
This chart shows just how much Microsoft has changed since Nadella took over. During Ballmer’s 13+ year leadership Microsoft’s valuation barely budged. (From left to small blue box.) But, Nadella rapidly shifted investments from Windows and Office to software as a service and cloud computing. (Graph rapidly increases.) That radical redirection enlivened both sales and earnings – and the company’s future growth prospects. In short, where the company had been locked-in to defending & extending its past, Nadella redirected the company onto trends. By doing so, he improved sales per/share 85%, the price/sales ratio from 3.3x to 9.4x, and the PEG ratio from 1.4 to 2.5. The company’s “trend value” (market cap increase over assets due to aligning with trends) since Nadella took charge has grown from $172 billion to a staggering $1.53 trillion!!! Now that is wealth creation!!!
In the years leading up to Ballmer’s firing I was a very loud critic of Microsoft. In multiple Forbes columns, (republished as blogs on my web site) I pushed for his ouster. But even more importantly I gave the company little hope of long term viability. By over-investing in outdated products it seemed most likely Microsoft would go the way of Hostess Baking, Sears, DEC and Sun Microsystems – irrelevant leading to failure. I rabidly recommended not owning Microsoft.
Microsoft Stock
2014-2021
The Impossible Just Takes a little Longer…
But Nadella achieved the improbable. Much like Jobs when he retook the reigns at Apple, Nadella quit looking (and investing) in the rear view mirror. Like Jobs, he dropped investing in PC’s. Instead he focused on the future, and where Jobs invested in mobility, Nadella has invested in the cloud. Very few companies make this kind of radical shift in resourcing projects, even when it is the obviously right thing to do. And Nadella deserves the credit for making this radical change in Microsoft, saving the company from near-oblivion while creating a very viable, valuable company in a short time. Where once I saw a company heading for infamy, now Microsoft shows all signs of leadership toward the next technology wave and longevity. Quietly saying the company has no plans for a new Windows version, which nobody cares about anyway, is a tremendous demonstration of looking forward rather than backward.
Jump the Re-Invention Gap
Do you have the insight to know when you’re company is over-investing in past solutions as markets shift? Are you like Ballmer, always making the next version of what once made you great, or are you like CEO Nadella – ready to unload your past focus in order to seek future growth? Are you letting market trends guide your investing and solution development, allowing you to de-invest in outdated technologies and products? Like Reed Hastings at Netflix, do you see the need to pivot? Netflix changed from an outdated business model (shipping DVDs and tapes) to a new model (streaming) in order to keep your company viable, and an industry leader. You must be if you want to thrive in the rapidly changing competitive marketplace of the 2020’s.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. [email protected] 847-726-8465.
by Adam Hartung | May 7, 2021 | Growth Stall, Innovation, Investing, Strategy, Telecom, Trends
Do you have any idea how powerful AOL and Yahoo once were, and how much they were once worth? Do you know how much shareholder value has been destroyed in these 2 companies in just 20 years? $221 Billion of destroyed wealth.
AOL pioneered the web as we know it today. Long before wireless, or broadband, there was “dial up service.” For young readers, that meant using a physical modem to connect your computer to a land-line telephone in order to literally dial up a connection to an internet service provider. AOL pioneered using the internet, and was the #1 connection with almost the entire marketplace. The phrase that made AOL famous back then was when you connected to AOL and it gave us the now iconic “You’ve got mail.” After connecting America, in 2000 AOL merged with Time Warner media in a deal valuing AOL at $111B.
Yahoo pioneered giving internet users news. It accumulated news from around the world on Sports, Economy and many other topics, making the news available to readers for free because it sold ads to pay the bills. In 2000 a publicly traded Yahoo was valued at $125B.
So in 2000, amidst a very extended NASDAQ internet hype, AOL and Yahoo were valued at $226B.
Image Source
This week Verizon agreed to sell the two companies to a private equity firm for $5B. That’s a loss in value of $221B in 21 years.
How does a loss of this magnitude happen? A lot of focusing on tactics, ignoring market trends and failing to adapt the company strategy to meet changing competitive dynamics. Broadband and wireless eventually made dial-up irrelevant. And despite buying some media company to try and add new content to AOL, it lost all meaning. Time Warner spun it out to the public at a value of $3.5B in 2009.
Then, Verizon thought it could build a proprietary content company to get more Verizon customers so it bought AOL in 2015 for $4.4B. Only, nobody needed another content provider by then. Google served up general content just fine, Facebook gave us content we looked at frequently, and specialized content sites like Finance (Marketwatch) and Sports (ESPN) made it impossible that late in the game to launch a general purpose content accumulator and reposter. It was a strategy for 2005, not 2015. Meanwhile, Yahoo made one tactical decision after another to shore up its old model that didn’t work. Google became vastly better at search, and vastly better at delivering content. Tactical oriented CEOs Carol Bartz and Marissa Mayer had no strategy to meet emerging needs of the 2010 decade and beyond – leading Yahoo into complete irrelevancy.
Undeterred, the Verizon owned AOL bought Yahoo in 2017 for $4.5B. After all, it seemed cheap compared to its once $125B value – right? The idea was to merge the two companies, create “cost synergies” and “scale” in users to sell more advertising. Only, neither platform had enough original content to stop the user bleed to other sites. Netflix and Google’s YouTube took everyone who wanted new content away, and there was nothing left for AOL/Yahoo to deliver. It became the internal combustion engine repair shop in a world full of EVs
Now, after spending $9.9B on the entities plus much more in acquisitions, Verizon is selling both entities to Apollo Global Management private equity for $5B – a loss of $4.4B. And Apollo thinks this is a good deal because “a high tide raises all boats” and it will win merely because the world is increasingly using the internet. Really? More people are using the web, and more often, but they’ve already shown not via AOL nor Yahoo. Facebook, Instagram, Google, Pinterest, Twitter, and a raft of other sites are gaining the traffic. What was once irrelevant remains irrelevant.
It is crucial to understand why these to GIANTS of the internet are now part of history’s dustbin. While they pioneered the market, gaining huge revenues, share and valuation, they did NOT keep their eyes on disruptive innovators who could change the market they pioneered. Broadband killed dial-up, and because AOL moved too late it died. Google overtook search, delivering more content faster and better, and Yahoo simply waited too long to react. Not unlike how Research in Motion (Blackberry) failed to see the “app wave” in mobile coming and lost its enormous lead in mobile phones to Apple and Samsung. All thought their strength in pioneering was enough – and failed to keep their eyes on external trends and new market shifts that would change competition.
I wrote a raft of columns about the mistakes made by these company CEOs from 2009 through 2017 – constantly telling readers not to buy the stocks (just search the blogs my website adamhartung.com for AOL or Yahoo.) It is extremely rare for a corporation locked into its business model and cost cutting to adjust to a rapidly shifting market. When a company does so – like Jobs turned around Apple and Nadella at Microsoft – it is the exception to be well applauded. But that is very, very rare.
And this is NOT what PE companies do. They aren’t visionary investors who put in lots of money to change companies. They cut costs, streamline operations, and add debt to get their investment back. Apollo is no different. It has no vision of the internet future that will slow Facebook, Apple, Netflix, Alphabet/Google or even Amazon. It has purchased two irrelevant brands with outdated business models, no new technology, no new market approaches and no new insight to future unmet needs. There is no doubt Apollo will not turn these around. Apollo will unload this newest Yahoo! over-leveraged to a public debt market dominated by pension funds and it will soon enough file bankruptcy, finishing the coffin.
Do you think you could turn these around? First, are you ready to turn around your own business? Are you focused on how market shifts, happening today, will change your market? Are you seeing trends, and changing your business model and technology to adjust? Are you building a business around future scenarios you’ve created to compete in 2025 and beyond with different competitors offering different solutions? Or are you relying on past strengths to carry you through the future? If you’re planning with your eyes firmly in the rear view mirror I highly recommend you learn the lesson from AOL and Yahoo – that approach will not work.
Do you know your Value Proposition? Can you clearly state that Value Proposition without any linkage to your Value Delivery System? If not, you better get on that pretty fast. Otherwise, you’re very likely to end up like encyclopedias and newspaper companies. Or you’ll develop a neat technology that’s the next Segway. It’s always know your customer and their needs first, then create the solution. Don’t be a solution looking for an application. Hopefully Uber and Aurora will both now start heading in the right directions.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. [email protected] 847-726-8465.
by Adam Hartung | Jan 29, 2021 | Growth Stall, Innovation, Investing, Strategy, Trends
On Friday, January 22, 2021 IBM announced sales and earnings results. Revenues had fallen 6.5%. The stock dropped 11%. IBM alone caused an otherwise up Dow Jones Industrial Average to decline. And, as the NASDAQ rose, largely due to tech stock improvement, IBM was the lone loser. The new CEO, in his role only 1 quarter, predictably asked for more time and investor confidence that the future would look better than the past. Investors justifiably lost confidence a long time ago.
Unfortunately, IBM’s recent performance was just a continuation of its long-term trend. Since 2000, IBM stock has gone nowhere – up a mere 5.7% in 21 years – while Apple (for example) is up some 14,000%. IBM was the 7th largest company on the S&P500 in 1976 when Apple was born. Now Apple’s revenues are 3x IBM’s, and its market capitalization is 20x higher!
A lot of blame must be laid on the former CEO, Virginia (Ginny) Rometty. CEO from 2012 to end of 2020, she took home pay of around $35M/year. But during her tenure IBM sales fell in 30 of 34 quarters! Starting shortly after being appointed, IBM suffered 20 consecutive quarters of declining revenues – a remarkably infamous achievement for any CEO!
In 2012, just as Rometty was settling into her new desk, I said Steve Ballmer was the worst CEO in America (link 1). Little did I know he would be replaced with a new CEO that would turn around Microsoft and save the company, while Rometty would replace Ballmer as absolutely the worst CEO in the tech world – and tie herself with Immelt of GE as the worst CEO in all of America.
By 2014, it was clear that Rometty was altogether wrong as CEO, and I told investors to avoid IBM altogether. In 2 years, revenues had begun their declining trend, and she was constantly on the defensive. Instead of investing in cloud computing and other emerging technology solutions, Rometty was selling IBM’s business in China (because we all know that China was not a growth market – except someone forget to tell Apple and Facebook,) and the PC business. Simultaneously Rometty was cutting R&D spending. And she took on more debt. Where was all the money going? Not into growth investments – but rather into stock buybacks where IBM had become the poster child for financial machinations and share manipulation in order to enhance executive bonuses.
Despite IBM bragging about its one-off supercomputers and interesting artificial intelligence uses, there were no new commercial products helping customers build out trends. So IBM partnered with Apple to build “enterprise apps” in iOS in late 2014. This was doomed. IBM brought nothing to this game. IBM was now wholesale saying its development would be on platforms driving revenue growth for Apple – not IBM. IBM was admitting it had a lot of resources (still) and customers, but no idea where the marketplace was headed. So IBM would help Apple grow its user base. This was great for Apple, bad for Microsoft Surface sales, but absolutely horrible for IBM.
So by 2017, IBM was in an irrecoverable Growth Stall. Twenty quarters into the job, and twenty quarters of declining sales meant IBM was in a Growth Stall which predicted a horrible future. But despite the horrific sales and earnings performance, and the resulting horrific stock performance which in no way kept up with the overall market or industry leaders, Rometty was being granted ever more compensation by a ridiculously out of touch Board of Directors. She was being rewarded for manipulating the financials, not running a good business. She clearly needed to be fired. I said so, and told investors not to expect any gains as IBM continued to shrink.
By 2018, even the most long-term of long-term investors, Warren Buffet of Berkshire Hathaway, had given up on Rometty and IBM. As I said then the writing was on the wall by 2014, so why it took him so long was hard to understand. But it was quite clear, falling revenues would lead to lower valuations, regardless how much effort CEO Rometty put into “managing earnings.” The big shock was it took the Board 2 more years to finally get rid of her — one of the 2 worst performing CEOs in American’ capitalism.
Why do I bring up all these old blogs of mine? First, to demonstrate that it IS possible to make accurate business predictions. It is straightforward, once the key trends are identified, to see what companies are building out trends, and which are not. Those who ignore trends are doomed to do poorly, and you don’t want to own their stock. If you are running your business looking internally, and thinking about how to squeeze out a few more dimes of cost you are NOT doing the right thing. You must look externally and build on trends to GROW YOUR REVENUE!
2nd, I have long preached that the #1 indicator of companies that are likely to succeed or fail lies in charting revenue growth. If revenues aren’t growing at 8-10%/year, then as an investor or company leader you need to worry. The company isn’t keeping up with inflation and general economic activity. Too few CEOs (and investors) pay enough attention to revenues. They are happy with lackluster sales while paying too much attention to expenses and managing earnings. That is never a winning strategy. If you don’t grow revenues you can’t grow cash.
3rd, you must consistently invest in innovation and new solutions that build on trends. All solutions become obsolete over time. It is imperative to constantly invest in new products, new offerings, that build on trends in order to keep revenues flowing your way. No company can succeed long unless it invests in innovation to keep itself current, and relevant with customers.
Along with Steve Ballmer and Jeffrey Immelt, Virginia Rometty will go down in history as one of the worst CEOs of this era. Like Immelt’s crushing of GE, Rometty led the demise of the once mighty IBM. You can do better. Keep your eyes on trends, focus on revenues and never stop innovating.
Do you know your Value Proposition? Can you clearly state that Value Proposition without any linkage to your Value Delivery System? If not, you better get on that pretty fast. Otherwise, you’re very likely to end up like encyclopedias and newspaper companies. Or you’ll develop a neat technology that’s the next Segway. It’s always know your customer and their needs first, then create the solution. Don’t be a solution looking for an application. Hopefully Uber and Aurora will both now start heading in the right directions.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. [email protected] 847-726-8465.
by Adam Hartung | Jan 14, 2021 | eBooks, Investing, Politics, Strategy, Trends
Chicago, and Illinois, are in big economic trouble.
- 7th straight year of population decline. Losing 235,000 people in 10 years, 3x the amount of any other state. Last year saw a decline of 79,500 people – second only to much larger New York – and the rate of people leaving is accelerating.
- Illinois has, on average, property taxes 2x the national average. If you owned the “Home Alone” house in suburban Chicago, since the movie was made in 1990 you would have paid $890,000 in property taxes.
- Chicago is the worst residential real estate market of any large city in America. While values have been rising elsewhere since the Great Recession, in the last decade, property values in Chicago have declined 20%.
- Sales tax is 9%, and on some products 10%+, one of the highest rates in the USA. On-line purchases are taxed at 10.25%, for example. Illinois is one of only 7 states to charge sales tax on gasoline. And Illinois has the highest cell phone tax in the country.
- Illinois roadway toll fees are widespread, and among the highest in the USA, with the majority of those funds going NOT to road improvement but rather into the general budget to cover state expenses.
- Illinois is 46th in private sector job growth – and would be 50th except the #1 source of job growth is government jobs. And 40% of the government workforce makes $100k+/year. The total number of jobs in Illinois December, 2019 was 6.2M – unchanged since 2015 – and up only slightly from 5.9M in 2010 – yielding a pathetically low growth rate for jobs of 1/2 of 1% (.5%) per year
- 1/3 of the state budget is pension payments, and pension debt is 26% of state GDP – highest in the country. Lots of retirees, very few new jobs to pay their pensions.
Thrive to the Future – 4 top trends for 2021 and beyond.
Gibbon wrote “The Decline and Fall of the Roman Empire” as a treatise to uncover how such a powerful empire could lose its greatness. There is no doubt, Chicago and Illinois were once great. The area was known for great jobs, great infrastructure, great transportation system, great homeownership – and for many decades considered one of the best places to live in America. Back when agriculture and manufacturing dominated the economy. But quite obviously, as the world changed, and the sources of economic value (including jobs) changed, the late, great state of Illinois kept pushing on with “business as usual” instead of changing policies and investments to re-orient for the Information Era.
Things were not destined to become this bleak. Chicago could be Austin today – but obviously it isn’t. Where Austin, and Texas, looked at trends and made investments beyond the old “core” of oil and gas, Chicago and Illinois completely failed to look at trends that indicated a clear need to change. Problems, and the path to solve them, have been obvious for years. It was easy to predict this would happen. But a chronic focus on the short-term, rather than the long-term, combined with a complete unwillingness to change how investments were made caused state and city leaders to consistently ignore warning signs and make one bad decision after another.
Indicators of Decline
I’m an expert on trend-based planning, so let’s take a look at the telltales this was coming and how those telltale indicators were ignored:
- In February, 2006 (yes 15 years ago) I wrote that Illinois was the #1 net job loss market in the country. This factoid highlighted an emerging problem in the underlying economy. The state was still considerably dependent on old-line agriculture/food giants, those businesses were crumbling and unlikely to recover as the economy shifted. Notably Kraft was in its 5th year of what was to be a turnaround (that never happened) and Sara Lee was under incompetent leadership that kept selling businesses to shore up declining revenues and earnings. The state, and city, had failed to develop an infrastructure for investment in start-up companies. There was a total lack of investment money for entrepreneurs from paternalistic large companies such as Motorola and Ameritech. And a lack of money for innovation from banks, venture capital and private equity firms. Existing businesses were aging, cutting jobs and none were focused on investing in new companies to keep the local economy tied to the emerging Information Economy [ link ]
- In February, 2009 Forbes selected Chicago as the 3rd most miserable city in the USA, citing high taxes, no job growth, infrastructure decay, congestion and bad weather. An uproar ensued – but no change. I then noted my 2006 column, and recommended a very serious Disruption in how Chicago was managing its resources. Clearly the “more of the same” strategy trying to defend its past was not working. Unless there was a disruption, Chicago would get worse – not remain the same, and certainly not get better. The signs were clear that from ’06 to ’09 nobody was thinking about the big changes needed [ link ]
- In June, 2010 it was reported that Illinois lost 260,000 jobs between 2000 and 2010 – and that was an indicator of why Chicago and the state were having so many economic problems. I recommended the city and state make significant changes in resource allocation to keep more start-ups local. The University of Illinois was the #4 engineering school in the US, but the vast majority of graduates left to one or the other coasts. Local businesses were not developing new businesses, thus not hiring these top students. Start-ups at the universities, and by recent grads, could not obtain funding, so they fled to where the money was. Economic reliance on stalled companies like Kraft, Sara Lee, Motorola, Lucent, Sears and United had created a Growth Stall that was sure to lead to additional job losses – when the best talent was right there in the state! [link ]
- I followed up a week later that same June with a column on how Mayor Daley was very popular with voters and local businesses, but he was setting up the city (and state) for failure. There was a focus on keeping the “old guard” happy, and doing so by completely ignoring opportunities for future growth. Offering tax breaks and subsidies to recruit corporate headquarters (like Boeing) created very few jobs, and was a poor use of resources that should be diverted to funding start-up tech and bio-tech companies. And financial machinations, like selling the city’s parking rights, gave a short-term lift to the budget, hiding significant weaknesses, while creating massive long-term problems. Chicago and Illinois politicians were focused on short-term actions to get votes, and ignoring the very real jobs problem that was tanking the economy. [ link ]
- By April, 2014 I was able to clearly demonstrate that my predicted economic stagnation spiral had taken hold in Illinois. Defend & Extend investments to shore up declining companies – like Sears – robbed local governments of funds for job creating programs. And a decade + of no job creation was forcing taxes up – at a remarkable rate – which kept businesses from moving to Illinois; kept them from opening software labs, coding facilities, research centers, pharma and bio-pharma production plants, etc. With no growth, but rising costs, the death spiral had begun and needed immediate attention [ link ]
- In September, 2016 the outward migration from Chicago and Illinois had become a powerful trend. Looking at demographics, the market was aging. Rising costs and no growth had pinched budgets to the limit, while pension costs had become an unsustainable burden on the state’s citizens. Just like Japan was in an aging crisis, Illinois was in an aging crisis. And this was destined to create even more problems for the economic death spiral that began before 2006. [ link ]
- So by January, 2017 the demographic tailspin was clearly creating a vacuum pulling people out of Chicago and Illinois. Fully 4 years ago it was obvious that the predicted trends had taken hold, and nothing short of an incredible disruption would save Chicago from becoming the next Detroit. Using the simplest trend planning tools made it clear that unless there was radical change in investments the Chicago empire was at its end. [ link ]
Lessons for business?
Far too many businesses act like Chicago. “Business as usual” dominates. Resources are automatically routed to defending old business lines, rather than investing in new products and solutions. Focusing plans on historical customers, products and markets create blindness to market shifts, and a reluctance to move forward to new technologies and markets. Very little energy is put into trend analysis, and plans are not built based on trends and likely future outcomes (planning from the past dominates over planning for the future.) People who point out likely future bad outcomes unless serious change is undertaken are ignored, or shouted down, or removed entirely. Short-term financial machinations (selling assets, or a business, or offering deep discounts to keep customers) create an illusion of security while long-term trends are undermining the business’ foundation.
We are experts at trend analysis, trend planning and effective resource allocation. It was clear 15 years ago that major resource reallocation was necessary for Chicago to continue growing its economy. Don’t let a fixation on doing more of the same get in the way of your future growth, like Chicago. Let us help you identify critical trends and invest smarter to build on trends and grow.
Key lessons?
First, the world is growing and leading businesses will grow. If you’re not growing, you’re dying. Just like GE and Exxon. Second, never plan from past success, but instead plan for the future. You don’t grow value by being operationally excellent, because the world is forever changing and it will make your past business less valuable even if you do run it well. Third, make sure your plans are all built on trends. Let trends be the wind in your sales, or the current under your boat, or whatever analogy you like – just be sure you’re using TRENDS to drive you business planning, product development and solutions generation. Customers buy trends and help for them to achieve the future.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. [email protected] 847-726-8465.
by Adam Hartung | Dec 29, 2020 | eBooks, Innovation, Investing, Strategy, Trends
Thrive to the Future – 4 top trends for 2021 and beyond.
When looking at America’s 8 largest companies, a LOT has changed in 15 years. Back in 2005 the most valuable company was GE. The list was dominated by oil & gas companies; ExxonMobil, BP, Royal Dutch Shell. The biggest bank (Citi) and biggest retailer (Walmart) and 1 pharma company (J&J.) There was only 1 tech company on the list (Microsoft.)
But the world has changed, and that has impacted these companies dramatically. Most had GREAT pasts, but they did not adapt to a changing world. GE’s market cap has fallen 75% as it failed to keep up with trends. Oil companies failed to move into renewables and other industries (like electric car production) and they’ve lost over HALF their value. Walmart is most noted for missing the e-commerce trend, the big banks were clobbered by the Great Recession and “big pharma” hasn’t produced a blockbuster for many years. All down significantly.
But, the value of the top 8 companies is MUCH higher than 15 years ago – 5X more. These losers were replaced by some very serious winners. From $2.1T in combined value, the top 8 are now worth $10.5T. But notably, only 1 company is still on that list – Microsoft – which is up 620%!
The list is now dominated by 7 technology companies.
And for good reason – they all followed trends. Apple, Amazon, Microsoft, Alphabet (Google,) Facebook, Alibaba and Tencent all built their strategies around developing solutions for people to follow the major trends of being mobile, operating asynchronously, supporting gig work and adding artificial intelligence (AI) to their customers. By refusing to rest on past laurels they have become the mega-giants of today. (Hartung, “Thrive to the Future – The 4 Top Trends for 2021 and Beyond)
That these companies would overtake old leaders was not a foregone conclusion – nor an obvious one to most people. Not only were the previous giants big, they had incredible reputations and extremely strong management teams. And these tech companies were not without problems.
- Apple almost went bankrupt just a few years prior to 2005, trying to be the “Mac” company. But Apple built one innovation after another helping people meet the emerging big trends – until it became the most valuable company on the planet (10 yr value increase 540%)
- Microsoft was locked in to its Windows/Office domination and seemed unable (or unwilling) to acknowledge the big trends and its value languished under a terribly myopic CEO (Ballmer.) Yet, new leadership was able to see the trends and moved radically to build out cloud services and support for alternative customer solutions that changed the company and its fortunes (10 year value increase 330%)
- Amazon was a former book seller turned general merchandiser. But Amazon started applying technology to understand its customers and help them be better shoppers, using AI to make them the leader in all things e-commerce. Simultaneously Amazon built the worlds largest and most secure cloud services business (AWS) helping support all major trends (10 year value increase 1,350%)
- Google was a search engine, with an unclear business model. But Google went to unexpected lengths to make ALL forms of information digital, and accessible, and searchable. And it monetized that digitization in ways far beyond anyone expected leading to the end of newspapers and many other publishers (10 year value increase 370%)
- Facebook was considered a fad for young people. Most business leaders thought Facebook’s users would disappear, and its young leaders would learn there was no revenue in attracting eyeballs (just as News Corps learned and shut down MySpace.) But Facebook built out the trend for social contact in a mobile, asynchronous smart way creating an entirely new business market called “social media.” Facebook looked at trends in how people connected, making brilliant acquisitions early of Instagram and WhatsApp that allowed Facebook family of products to become the #1 use of the internet (10 year value increase 450%)
Key lessons?
First, the world is growing and leading businesses will grow. If you’re not growing, you’re dying. Just like GE and Exxon. Second, never plan from past success, but instead plan for the future. You don’t grow value by being operationally excellent, because the world is forever changing and it will make your past business less valuable even if you do run it well. Third, make sure your plans are all built on trends. Let trends be the wind in your sales, or the current under your boat, or whatever analogy you like – just be sure you’re using TRENDS to drive you business planning, product development and solutions generation. Customers buy trends and help for them to achieve the future.
Do you know your Value Proposition? Can you clearly state that Value Proposition without any linkage to your Value Delivery System? If not, you better get on that pretty fast. Otherwise, you’re very likely to end up like encyclopedias and newspaper companies. Or you’ll develop a neat technology that’s the next Segway. It’s always know your customer and their needs first, then create the solution. Don’t be a solution looking for an application. Hopefully Uber and Aurora will both now start heading in the right directions.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. [email protected] 847-331-6384
by Adam Hartung | Dec 22, 2020 | eBooks, Innovation, Investing, Strategy, Transportation, Trends
Thrive to the Future – 4 top trends for 2021 and beyond.
On December 7, Uber announced it is spinning out its autonomous car development effort to a new company- Aurora. On December 8, NASA announced a large flare from the sun was going to produce auroras over the northern hemisphere. NASA’s solar flare fizzled and there was no light show. What about Uber’s Aurora?
After spending what was likely a billion dollars on development, Uber is pushing its AGV out the door, along with $400 million, to be a separate company all on its own named Aurora. After a lot of development, serious steps forward in self-driving technology, and some problems, Uber is simply walking away. Expensively. It begs the question “what went wrong.”
The #1 problem with this investment was created at the outset. What is Uber’s value proposition? That was at the very least complicated, and at the worst never quite clear. Uber was always supposed to be a lot more than an alternative to taxi and limo services. Ostensibly Uber was a tech company that matched up unused resources with people who could use those resources – which is why Uber is often lumped into discussions with AirBnB. Both are supposedly tech companies that allow the unleashing of locked-up value in underused resources to marginal users who could benefit from the marginal increase in resource capacity.
If that’s the case, why would Uber invest in autonomous car technology? That’s what went wrong. People driving their own cars as gap-filling cabs is a value delivery mechanism. It is one use of the technology in one application. The value of Uber is supposed to be its matching technology with some elaborate pricing capabilities (surge pricing, for example.) But autonomous cars were an improvement in the delivery system – an effort to eliminate the costly driver and thus compete more specifically against taxis in ferrying around people. Uber confused its Value Proposition with its Value Delivery System – and thus it made huge investments in the latter when it should have remained focused on the former.
Uber needs to refocus on its Value Proposition.
How can Uber help me unlock value in my underused resources? How can Uber help me get better access to resources, help me access underused resources? Neither of those are met if I have to turn my car into an autonomous vehicle, at my own cost. In a way it actually defeats the Value Proposition, because rather than unleashing locked-up value in my resource (car) it causes me to invest in technology I don’t need and may not even want. And as an Uber user I get no additional value from the car being driverless – that doesn’t inherently help me meet my needs any better. Overall, autonomous vehicle technology really misses the point of the Uber Value Proposition.
Lots of companies make this mistake. They get so focused on how they are delivering value that they over-invest in the Value Delivery System, and lose sight of the Value Proposition. Encyclopedias got so focused on printing books they forgot their value proposition was instant information – thus letting Google drive them out of business. Newspapers were so focused on the process of daily newspaper prep and delivery they forgot their Value Proposition and let on-line news outlets kill them. Sears and ToysRUs got so focused on running traditional stores (and traditional retail metrics) they forgot their value proposition and let Amazon steal customers away. ABC, NBC, CBS, BBC got so focused on running broadcast television networks they let streaming services (Netflix, Disney+, Hulu) steal all the entertainment eyeballs.
Uber’s mistake just happens to be really costly, and really dumb.
They should never have invested in autonomous vehicle technology. Leave that for someone who identifies a very real unmet customer need that is fulfilled with an autonomous vehicle. The leadership of Aurora first and foremost have to define their value proposition – and then figure out how to deliver that value with their technology. Nobody succeeds by inventing a technology that solves no real problem – that’s how you get Segway! Or the Amphicar that turned itself into a boat. Instead, you identify the need then develop the delivery mechanism to fulfill that need.
Do you know your Value Proposition? Can you clearly state that Value Proposition without any linkage to your Value Delivery System? If not, you better get on that pretty fast. Otherwise, you’re very likely to end up like encyclopedias and newspaper companies. Or you’ll develop a neat technology that’s the next Segway. It’s always know your customer and their needs first, then create the solution. Don’t be a solution looking for an application. Hopefully Uber and Aurora will both now start heading in the right directions.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. [email protected] 847-331-6384
by Adam Hartung | Dec 15, 2020 | eBooks, Investing, Strategy, Trends
Thrive to the Future – the 4 top trends for 2021 and beyond.
In February, Disney appointed a new CEO from inside the company. I was not a fan. He came from the traditional,old Disney businesses – studio movies and theme parks. Both of those businesses are historical artifacts, not growing, and clobbered by the acceleration of trends due to the pandemic. But…… after crashing almost 50% shortly after changing CEOs (and the pandemic hitting the USA) the stock just reached a new all time high – recovering all those losses and pushing ahead an additional 16%.
A lot of companies are complaining about how bad the pandemic has affected them. They were tied to their historical value delivery system, and working hard to keep optimizing that business model. They weren’t following trends, so when the pandemic accelerated trends to more mobile, more asynchronous work, greater use of gig resources and ever greater expectations for AI (artificial intelligence) they simply were not prepared.
But smart companies moved really fast to implement their plans for new business based on trends. For example, while everyone thought of Uber as an alternative to taxis, leadership had already been looking at changes in package distribution. They could see problems in the post office, limitations (and pricing) to UPS and Fedex, and the “last mile” delivery problem everyone local had — as well as alternatives being tested by Amazon.com. So when demand for local deliveries picked up, Uber was ready to change. In a year demand for taxi type services fell 45%, but deliveries rose 100%!! And even though it was small, freight jumped 35%. The net was that in an extremely fast changing marketplace, gross bookings for the first 3 quarters of 2020 were $40.7M vs. $46.8M in 2019. In a terrible year, Uber was ready (and able) to move fast to implement changes to keep revenues moving forward.
And Disney is another great example. Theme parks and studio entertainment seemed to be relics of a bygone era, and in 2020, demand was hit hard. Theme parks fell 37% and studio movies fell 13%. I thought Disney would go into cost cutting mode exclusively and start down the road to irrelevancy.
But I was wrong. Yes, Disney did cut employment in those two divisions. Extensively. But that was an acceleration of something bound to happen. Those businesses were shrinking and outdated. However, simultaneously, Disney poured resources into Media Networks and Direct-to-Customer, two business units highly aligned with trends! Basically, Disney went from that old-line movie and parks company to a very well positioned e-commerce vendor and competitor to Netflix!! In just 9 months. Already, Disney has 80M subscribers for Disney+, compared to Netflix 200M, and is targeting 260M by 2024!!! Disney has demonstrated it is ready to launch first run movies, at much higher prices, on its network – building out new pricing schemes as well as new business models for streaming content!
The lesson here is to be prepared for change! Don’t build your plans just on the past – past products and customers. Instead, look hard at trends and build scenarios for the future based on trends. Be ready for those trends to accelerate. And then TAKE ACTION. Don’t wait. Don’t stall. Go to the future by implementing those plans.
If you are planning based on trends you will be prepared for big changes in your “base” or “core” business. And you’ll develop plans for new solutions that meet emerging trends. So when the opportunity presents itself, like in a pandemic – or something a lot less dramatic – you’ll be ready to implement a new business. You can shift your value delivery system quickly to continue meeting the Value Proposition that you offer your customers.
Congratulations to Uber and Disney for doing good trend planning and being ready. Are you properly planning? Are you ready for change?
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. [email protected] 847-331-6384
by Adam Hartung | Nov 3, 2020 | Finance, Investing, Strategy, Trends
In September, 2015 (5 years ago) I wrote that Tesla was going to change global oil demand. Why? Because Tesla had proven there was a market shift toward electric vehicles (EV’s). Yes, the market was small. But every major auto company had seen the trend emerge, and all had EV’s on the drawing tables. Simultaneously, this was showing a shift to “electrification” at the same time that solar energy costs were dropping in price similar to computer chips in the 1990s.
The combination of shifts away from internal combustion engine (ICE) automobiles operating on petroleum, and the growth in renewable energy production from solar and wind was becoming obvious. In sailing, there are small lengths of cloth attached to the sails specifically to obtain an early read on wind direction. These are called “telltales.” Looking at Tesla and growing renewable electricity generation, the telltales gave me confidence to specifically predict it would
really hurt Exxon.
Now, 5 years later, most pundits think the world has reached “peak oil” usage, and demand for oil will only fall.Since 2015 Exxon’s equity value (XOM) has declined 65%. Due to declining demand, the company is being forced to restructure and possibly
cut its dividend as the company shrinks.
Some would look only at short-term issues like the pandemic, but the economy in China has fully recovered – yet its demand for oil has not. Or some might say that oil prices are down only because Saudi Arabia and Russia are battling over market share – but this only portends more bad news for Exxon because 2 giants with the lowest cost battling for share will only make it harder for Exxon to sell products, even at a lower price and little or no margin.
Unfortunately, the pandemic has created an acceleration in the trends that are dooming profits for oil companies like Exxon. Once business happened in physical meetings where we transported ourselves by auto or plane fueled by oil. Now, meetings are being held on-line, virtually. Increasingly individuals, and companies, have learned not only how to use this technology but that they are more productive. Less wasted commuting time, less wasted hallway conversation time, fewer interruptions, and a recognition that it is possible to cut meeting time allowing attendees to better streamline work and decision-making. Speaking of work, virtual meetings are leading to better employee concentration due to better scheduling of time for meetings, and scheduling time for individual work.
Recall 2010 and the effort put into driving to work, or flying to meetings. Exxon, GM, Ford, Boeing, United Airlines and American Airlines were economic leaders, reflecting the work methods of the Industrial Era. Exxon was one of the 30 stocks on the Dow Jones Industrial Average. But the Great Recession had taken GM off the Dow, and now declining oil demand has removed Exxon – following the path I previously predicted.
Look at current 11/2020 market capitalizations:
Exxon – $133B
General Motors – $49B
Ford – $31B
Boeing – $83B
United Airlines – $10B
American Airlines – $6B
The world has changed. Trends have prevailed. We are now more mobile-oriented, work more asynchronously and use
more gig resources. Now we connect by Zoom and travel on electrons.
REUTERS/Lucy Nicholson
Zoom market cap – $146B
Tesla market cap – $380BWhy this walk down the path of recent history? Markets shift – often a lot faster than we would like to imagine. The economic hurt on those left behind is enormous. The opportunity for new leaders even more enormous. On the back end of trends is a LOT of pain. On the front end of trends is a lot of happy, happy. It is incredibly important to pick out the telltales and incorporate them into your planning. Earlier rather than later.Let trends direct your investments and your business decisions – look forward not backward. You want to be Zoom or Tesla (or own the stocks,) not Exxon, GM or Boeing (nor own those stocks.)
If you don’t have a clear line of sight to the future, ask for help – it’s my job. Do you remember anyone else predicting this enormous shift back in 2015? Back then oil was $100/barrel and Exxon was trading at $100/share. More pundits were expecting the future to look like the past than to make a radical shift. But we are always looking at the early telltales, always developing new scenarios, always preparing for market shifts and their implications.
Did you see the trends, and were you expecting the changes that would happen to oil demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, maybe you should contact us!! We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info.
Give us a call or send an email. [email protected] 847-331-6384
by Adam Hartung | Sep 1, 2020 | Finance, Investing, Strategy, Trends
On 8/31/20, the Dow Jones Industrial Average went through a change in composition. Out went Exxon, Pfizer and Raytheon. In came Salesforce.com, Amgen and Honeywell. This is the 8th time the Index components have changed this decade, the 13th time since 2000 and the 55th change since created in 1896. So changes are not uncommon. But, are they meaningful? Ask any academic and you’ll get a resounding “NO.” There is no stated criteria for selection, no metrics for inclusion, no breadth to the number of companies (which has changed significantly over time,) and not even a weighting for market capitalization! The DJIA has no relationship to “the market,” which could well be measured better by the S&P 500, or the Russell 3000. And it doesn’t even link to any specific industry! To academics, “the Dow” is just a random number that reflects nothing worth measuring!!
The DJIA is (currently) a group of 30 stocks selected by the editors of Dow Jones (publisher of the Wall Street Journal, owned by News Corp – which also owns Fox News – and controlled by Rupert Murdock). Despite its lack of respect by academics and money managers, because of its age – and the prestige of being selected by these editors – being on the DJIA has been considered somewhat revered. Think of it as an “editorial award of achievement” for size, profitability and perceived stability. For these reasons, over time many investors have believed the index represents a low–risk way to invest in corporations and grow their wealth.
So the daily value of the DJIA is pretty much meaningless. And being on the DJIA is also pretty much meaningless. But, investors have followed this index every trading day for 124 years. So, it is at least interesting. And that’s because it is a track on what these editors think are important very long-term economic trends.
The original Index composition looks NOTHING like 2020. American Cotton Oil Company, American Spirits Manufacturing Company, American Sugar Refining Company, American Tobacco Company, Chicago Gas Light and Coke, General Electric, Leclede Gas, National Lead, Pacific Mail Steamship Company, Tennessee Coal Iron and Railroad Company, United State Cordage Company and United States Leather Company. Familiar household names? This initial list represents the era in 1896 – an agrarian economy just on the cusp of coming into the industrial age. Not forward looking, but rather somewhat reflective of what were the biggest parts of the economy historically with a not forward.
Over 124 years lots of companies left the DJIA — were replaced – and many replacements left. Some came on, went off, and came back on again – such as AT&T, Exxon (formerly Standard Oil of New Jersey) and Chevron (formerly Standard Oil of California.) Even the vaunted GE was inducted in 1899, only to be removed in 1901 – then added back in 1907 where it stayed until CEO Jeff Immelt imploded the company and it was removed for good in 2018.
But, there has been a theme to the changes. Originally, the index was largely agricultural companies. As the economy changed, the Index rotated into commodity companies like gas, coal, copper and nickel – the materials leading to a new era of tools. This gave way to component manufacturers, dominated by the big steel companies, which created the industrial era. Which, of course, led to big manufacturing companies like 3M and IBM. And, along the way, there was recognition for growth in new parts of the economy, by adding consumer goods companies like P&G, Coca-Cola, McDonald’s, Kraft (since removed,) and Nike along with retailers like Sears (later removed,) Walmart, Home Depot and Walgreens. The massively important role of financial services to the economy was reflected by including Travelers, JPMorgan Chase, American Express, Visa and Goldman Sachs. And as health care advanced, the Index added pharmaceutical companies like Pfizer, Johnson & Johnson and Merck.
Obviously, the word “industrial” no longer has any meaning in the Dow Jones Industrial Index.
Reading across the long history of the DJIA one recognizes the editors’ willingness to try and reflect what was growing in the American economy. But in a laggard way. Not selecting companies too early, preferring instead to see that they make a big difference and remain important for many years. And a tendency to keep them on the index long after the bloom is off the rose – like retaining Kraft until 2008 and still holding onto P&G and Coke today.
The bias has always been to be careful about adding companies, lest they not be sustainable. And not judge too hastily the demise of once great companies. Disney wasn’t added until 1991, long after it was an established entertainment leader. Boeing was added in 1987, after pioneering aviation for 30 years. Microsoft added in 1999, well after it had won the PC war. Thus, the index is a “lagging index.” It reflects a big chunk of what was great, while slowly adding what has recently been great – and never moving too quickly to add companies that just might be tomorrow’s leaders.
Sears added in 1924, wasn’t removed until 1999 when its viability is questionable. Phillip Morris Tobacco (became Altria) was added in 1985, and hung around until 2008 — long after we knew cigarettes were deadly and leadership didn’t know how to do anything else. Even today we see that United Aircraft was added in 1939, which became United Technologies in 1976 and then via merger Raytheon in 2020 – before it is now removed, as all things aircraft are screeching to a pandemic halt. And Boeing is still on the Index despite the 737 fiasco and plunging sales. IBM was added in 1939, and through the 1970s it was a leader in office equipment creating the computer industry. But IBM after years of declining sales and profits isn’t really relevant any longer, yet it is still on the Index.
As for adding growing stars, GM stays on the Index until it goes bankrupt, but Tesla is yet to make consideration (largely due to lack of profit history.) Likewise, Walmart remains even though the “big gun” in retail is obviously Amazon.com (another lacking the size and longevity of profits the editors like.) McDonald’s stays on the list, despite no growth for years and even as the Board investigates its HR department for hiding abhorrent leadership behavior – while Starbucks is eschewed. And Cisco is there, while we all use Zoom for pandemic-driven virtual meetings.
So what can we take away from today’s changes? First, the Index has changed dramatically over 20 years to reflect electronic technology. IBM, Microsoft and Apple are now joined by Salesforce. Pharma company Pfizer is being replaced by bio-pharma company Amgen in a nod to the future, although almost 40 years after Genentech went public. Exxon disappears as oil prices fall to sub-zero, demand declines globally and electric cars are on the cusp of taking market leadership. And conglomerate Honeywell is added just to show the editors still think conglomerates matter – even if GE has nearly disintegrated.
Is any of this meaningful? I don’t really think so. As an award for past performance, it’s a nice token to make the list. As business leaders, however, we need to be a LOT more concerned about developing businesses for the future, based on trends, than is indicated by the components of the DJIA. Driving revenue growth and higher margins comes from doing the next big thing, not the last big thing. And, as investors, if you want to make outsized returns you have to know that a basket of largely laggards (Apple, Microsoft and Salesforce excepted) is not the way to build your retirement nest. Instead, you have to invest in companies that are creating the future, making the trends a reality for businesses and consumers. Think FAANG.
Nonetheless, after 124 years it is still sort of interesting. I guess most of us do still care what the editors of big news companies think.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business (https://adamhartung.com/assessments/)
Give us a call or send an email. [email protected]