by Adam Hartung | Dec 17, 2010 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, Leadership, Web/Tech
Summary:
- Many people think it is OK for large companies to grow slowly
- Many people admire caretaker CEOs
- In dynamic markets, low-growth companies fail
- It is harder to generate $1B of new revenue, than grow a $100B company by $10B
- Large companies have vastly more resources, but they squander them badly
- We allow large company CEOs too much room for mediocrity and failure
- Good CEOs never lose a growth agenda, and everyone wins!
“I may just be your little rent collector Mr. Potter, but that George Bailey is making quite a bit happen in that new development of his. If he keeps going it may just be time for this smart young man to go asking George Bailey for a job.” From “It’s a Wonderful Life“ an employee of the biggest employer in mythical Beford Falls talks about the growth of a smaller competitor.
My last post gathered a lot of reads, and a lot of feedback. Most of it centered on how GE should not be compared to Facebook, largely because of size differences, and therefore how it was ridiculous to compare Jeff Immelt with Mark Zuckerberg. Many readers felt that I overstated the good qualities of Mr. Zuckerberg, while not giving Mr. Immelt enough credit for his skills managing “lower growth businesses” in a “tough economy.” Many viewed Mr. Immelt’s task as incomparably more difficult than that of managing a high growth, smaller tech company from nothing to several billion revenue in a few years. One frequent claim was that it is enough to maintain revenue in a giant company, growth was less important.
Why do so many people give the CEOs of big companies a break? Given that they make huge salaries and bonuses, have fantastic perquesites (private jets, etc.), phenominal benefits and pensions, and receive remarkable payouts whether they succeed or fail I would think we’d have very high standards for these leaders – and be incensed when their performance is sub-par.
Facebook started with almost no resources (as did Twitter and Groupon). Most leaders of start-ups fail. It is remarkably difficult to marshal resources – both enough of them and productively – to grow a company at double digit rates, produce higher revenue, generate cash flow (or loans) and keep employees happy. Growing to a billion dollars revenue from nothing is inexplicably harder than adding $10B to a $100B company. Compared to Facebook, GE has massive resources. Mr. Immelt entered the millenium with huge cash flow, huge revenues, and an army of very smart employees. Mr. Zuckerberg had to come out of the blocks from a standing start and create ALL his company’s momentum, while comparatively Mr. Immelt took on his job riding a bullet out of a gun! GE had huge momentum, a low cost of capital, and enough resources to do anything it wanted.
Yet somehow we should think that we don’t have as high expectations from Mr. Immelt as we do Mr. Zuckerberg? That would seem, at the least, distorted.
In business school I read the story of how American steel manufacturers were eclipsed by the Japanese. Ending WWII America had almost all the steel capacity. Manufacturers raked in the profits. Japanese and German companies that were destroyed had to rebuild, which they progressively did with more efficient assets. By the 1960s American companies were no longer competitive. Were we to believe that having their industrial capacity destroyed somehow was a good thing for the foreign competitors? That if you want to improve your competitiveness (say in autos) you should drop a nuclear bomb on the facilities (some may like that idea – but not many who live in Detroit I dare say.) In reality the American leaders simply refused to invest in new technologies and growth markets, allowing competitors to end-run them. The American leaders were busy acting as caretakers, and bragging about their success, instead of paying attention to market shifts and keeping their companies successful!
Big companies, like GE, are highly advantaged. They not only have brand, and market position, but cash, assets, employees and vendors in position to help them be even more successful! A smart CEO uses those resources to take the company into growth markets where it can grow revenues, and profits, faster than the marketplace. For example Steve Jobs at Apple, and Eric Schmidt at Google have found new markets, revenues and cash flow beyond their original “core” markets. That’s what Mr. Welch did as predecessor to Mr. Immelt. He didn’t so much take advantage of a growth economy as help create it! Unfortunately, far too many large company CEOs squander their resources on low rate of return projects, trying to defend their existing business rather than push forward.
Most big companies over-invest in known markets, or technologies, that have low growth rates, rather than invest in growth markets, or technologies they don’t know as well. Think about how Motorola invented the smart phone technology, but kept investing in traditional cellular phones. Or Sears, the inventor of “at home shopping” with catalogues closed that division to chase real-estate based retail, allowing Amazon to take industry leadership and market growth. Circuit City ended up investing in its approach to retail until it went bankrupt in 2010 – even though it was a darling of “Good to Great.” Or Microsoft, which launched a tablet and a smart phone, under leader Ballmer re-focused on its “core” operating system and office automation markets letting Apple grab the growth markets with R&D investments 1/8th of Microsoft’s. These management decisions are not something we should accept as “natural.” Leaders of big companies have the ability to maintain, even accelerate, growth. Or not.
Why give leaders in big companies a break just because their historical markets have slower growth? Singer’s leadership realized women weren’t going to sew at home much longer, and converted the company into a defense contractor to maintain growth. Netflix converted from a physical product company (DVDs) into a streaming download company in order to remain vital and grow while Blockbuster filed bankruptcy. Apple transformed from a PC company into a multi-media company to create explosive growth generating enough cash to buy Dell outright – although who wants a distributor of yesterday’s technology (remember Circuit City.) Any company can move forward to be anything it wants to be. Excusing low growth due to industry, or economic, weakness merely gives the incumbent a pass. Good CEOs don’t sit in a foxhole waiting to see if they survive, blaming a tough battleground, they develop strategies to change the battle and win, taking on new ground while the competition is making excuses.
GM was the world’s largest auto company when it went broke. So how did size benefit GM? In the 1980s Roger Smith moved GM into aerospace by acquiring Hughes electronics, and IT services by purchasing EDS – two remarkable growth businesses. He “greenfielded” a new approach to auto manufucturing by opening the wildly successful Saturn division. For his foresight, he was widely chastised. But “caretaker” leadership sold off Hughes and EDS, then forced Saturn to “conform” to GM practices gutting the upstart division of its value. Where one leader recognized the need to advance the company, followers drove GM to bankruptcy by selling out of growth businesses to re-invest in “core” but highly unprofitable traditional auto manufacturing and sales. Meanwhile, as the giant failed, much smaller Kia, Tesla and Tata are reshaping the auto industry in ways most likely to make sure GM’s comeback is short-lived.
CEOs of big companies are paid a lot of money. A LOT of money. Much more than Mr. Zuckerberg at Facebook, or the leaders of Groupon and Netflix (for example). So shouldn’t we expect more from them? (Marketwatch.com “Top CEO Bonuses of 2010“) They control vast piles of cash and other resources, shouldn’t we expect them to be aggressively investing those resources in order to keep their companies growing, rather than blaming tax strategies for their unwillingness to invest? (Wall Street Journal “Obama Pushes CEOs on Job Creation“) It’s precisely because they are so large that we should have high expectations of big companies investing in growth – because they can afford to, and need to!
At the end of the day, everyone wins when CEOs push for growth. Investors obtain higher valuation (Apple is worth more than Microsoft, and almost more than 10x larger Exxon!,) employees receive more pay (see Google’s recent 10% across the board pay raise,) employees have more advancement opportunities as well as personal growth, suppliers have the opportunity to earn profits and bring forward new innovation – creating more jobs and their own growth – rather than constantly cutting price. Answering the Economist in “Why Do Firms Exist?” it is to deliver to people what they want. When companies do that, they grow. When they start looking inward, and try being caretakers of historical assets, products and markets then their value declines.
Can Mr. Zuckerberg run GE? Probably. I’d sure rather have him at the helm of GM, Chrysler, Kraft, Sara Lee, Motorola, AT&T or any of a host of other large companies that are going nowhere the caretaker CEOs currently making excuses for their lousy performance. Think what the world would be like if the aggressive leaders in those smaller companies were in such positions? Why, it might just be like having all of American business run the way Steve Jobs, Jeff Bezos and John Chambers have led their big companies. I struggle to see how that would be a bad thing.
by Adam Hartung | Dec 8, 2010 | Food and Drink, General, In the Rapids, Innovation, Leadership, Television, Web/Tech
Summary:
- We too often think of competition as “head to head”
- Smart competitors avoid direct competition, instead using alternative methods in order to lower cost while appealing directly to market needs
- Proctor & Gamble has long dominated advertising for many consumer goods, but the impact, value and payoff of traditional advertising has declined markedly as people have switched to the web
- New competitors can utilize internet and social media tools to achieve better brand positioning and targeted marketing at far lower cost than old mass media products
- Colgate is in a great position to blow past P&G by investing quickly and taking the lead in internet marketing for its products
- Eschew calls for investing in old methods of competition, and instead find new ways to compete that allow you to end-run traditional leaders
According to a recent Advertising Age article (“To Catch Up Colgate May Ratchet Up Its Ad Spending“) Colgate has done a surprisingly good job of holding onto market share, despite underspending almost all its competitors in advertising. This is no mean feat in consumer products, where advertising dominates the cost structure. But the AdAge folks are predicting that to avoid further declines, and grow, Colgate will have to dramatically up its ad spending. That would be old-fashioned, backward-thinking, short-sighted and a lousy use of resources!
Colgate competes with lots of companies, but across categories its primary competitor is Proctor & Gamble. In toothpaste, P&G’s Crest outspends Colgate by over $25M – or about 35%. In dishsoap Colgate spent nothing on Palmolive in 2010, compared to P&G’s spend of $30M on Dawn. In deodorant/body soap Colgate spent about $9M on Softsoap, Irish Spring and Speedstick while P&G spent 9 times more (over $82M) on Old Spice and Secret. (Side note, Unilever spent $148M on Dove and a whopping $267M when adding in Axe and Degree!) In pet food, Unilever spends $35M dollars more (almost 4x) on Iams than Colgate spent on Hills Science Diet. Altogether, in these categories, P&G spent almost $158M more than Colgate (2.5x more)! As a big believer in traditional advertising, AdAge therefore predicts that Colgate should dramatically increase its annual ad budget – and maintain these higher levels for 5 years in order to overcome its historical “underspending.”
But that would be like deciding to trade punches with Goliath!
Why would Colgate want to do more of what P&G does the most? While advisors try to pit competitors directly against each other, head-to-head “gladiator style” combat leaves the combatants bloody – some dead. That’s a dumb way to compete. Colgate has long spent in other areas, such as supporting dog rescue operations and with product specialists gaining endorsements while eschewing more general advertising. Now, if Colgate wants to take action to grow share, it should pick up a sling (to continue the (Biblical metaphor) in its ongoing battle. And the good news is that Colgate has an entire selection of new, alternative weapons to use today.
Across all its product categories, Colgate can utilize a plethora of new social media marketing tools. At costs far lower than traditional mass advertising, Colgate can build promotional web programs that appeal directly to targeted consumers. Twitter, Facebook, Foursquare, Groupon, YouTube, Google and many other tool providers allow Colgate to spend far, far less than traditional advertising to provide specific brand promotions, product information, purchase incentives (such as coupons) and product variations targeted at various niches.
With these tools Colgate can not only reach directly into buyer laptops and mobile devices, but offer specific information and incentives. Traditional advertising, whether print (newspaper and magazine), radio, television or coupons is a low percentage tool. Seeking response rates (or even recall rates) of just 1 to 5 percent is normal – meaning 90% percent of your spending is, quite literally, just “overhead” cost. But with modern on-line tools it is very common to have response rates of 50% – or even higher! (Depending upon how targeted and accurate, of course!)
Colgate is in a great position!
It has spent much less than competitors, and maintained good brand position. It’s biggest competitors are locked-in to spending vast sums on traditional tools that have low impact and are in declining media. Colgate could now decide to commit itself to using the new, modern tools which are lower cost, and have decidedly more targeted results. In this way, Colgate can get out of the “colliseum” where the gladiators are warring, and throw rocks at them from the stands. Play its own game – to win – while letting those in the pit whack away at each other becoming weaker and weaker trying to use the old, heavy and unsophisticated tools.
Now is a wonderful time to be the “underdog” competitor. “Media” and advertising are in transition. How people obtain information on products and services is moving from traditional advertsing and PR (public relations) focused through mass media to networks with common interests in social media. Instead of delays in obtaining information, based upon publisher programming dates, customers are seeking immediate, and current information, exactly when they need it – on their mobile devices. Those competitors who rapidly adopt these new tools are well positioned to be the new Davids in the battle with old Goliaths. And that includes YOU.
by Adam Hartung | Dec 1, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Openness, Web/Tech
Summary:
- Most planning systems only focus on improving the existing business
- Most value comes from identifying new market opportunities, and filling them
- Extremely high growth can happen in any company that focuses on market needs, rather than business model optimization
- Groupon has grown from $0 to $500M in 2 years, yet is not a technology company
- Groupon is value at $3B to $6B in just 2 years
- Google could continue to expand the explosive growth at Groupon
- Any company has this opportunity, if it focuses on market needs
“You can’t get there from here.” That’s the punch line of an old joke about a city slicker that gets lost in the country. He sees a farmer and says “I want to get to the St. James ranch.” The farmer thinks about the washed out road #20, the destroyed bridge on Old Ferry Road, the blocked road on Westchester due to a property dispute – and given all his known ways to get to the St. James Ranch he conludes there’s no way to make it happen. He gives up, and recommends the traveler do the same.
And this is the conclusion far too often of most planning systems. When I ask the executive team “how will you grow revenue by 100% next year?” (or even 15% many times) the answer is “can’t happen. We only grew 2% last year, our product lines are becoming aged and the overall market is only growing at 5%. We can only, maximally, hope to grow 3-5%.” In other words, “can’t get there from here.”
But of course there’s a way.
Groupon was started in 2008 (“Groupon at $3 Billion Soars Like Silicon Valley from Chicago” Bloomberg). Now it has about $500M annual revenue, and 2,500 employees. While Sara Lee, Kraft, Motorola and other Chicago stalwarts are contracting – unable to find a growth path – Groupon has exploded. Most companies are complaining about the “great recession,” and its impact on customers and sales, saying they see no way to create triple digit growth. Yet Groupon didn’t invent any new technology, didn’t file any patents, didn’t open a “scale” manufacturing plant, didn’t buy an existing business, or raise a huge amount of money. Groupon is now dominant in local-market advertising – without the Foursquare technology play, or a partnership with Facebook. And it keeps adding new local markets every week. Piling up new revenues, and profits.
What Groupon did was offer the market something it highly valued – a local-based coupon service that was easy to use. Building on digital technology rapidly being accepted by everyone. While most companies are trying to focus on their “core capabilities” and bemoaning a dearth of growth, Groupon’s leaders looked into the marketplace to identify an unmet need and an application of developing technology. As good as Google AdWords is, it is expensive and not terribly good at local marketing. Newspaper coupons are expensive to print, and simply ignored by most modern consumers. There was a hole in what people needed, so the entrepreneurs set out to fill it. And by meeting a need, they’ve created an explosively growing company. As mentioned earlier, while unemployment overall in Chicago is going up, Groupon has hired 900 people over the last 2 years.
That’s what most businesspeople are loath to do these days. After years of being trained to focus on the supply chain, and that innovation is mostly about how to cut costs in the existing business, very few are thinking about market needs. The vast majority (almost all?) of planning is devoted to cutting costs and optimizing an existing business. Or trying to develop an adjacent opportunity to the existing business that has limited, if any growth prospects. And trying to find ways to take money out of the business, rather than invest. In that planning system, if you ask “how do you plan to create a half billion dollar new business in the next two years” the answer is “you can’t get there from here.”
“Google May Acquire Groupon for $6 Billion, and It Would Be Worth Every Penny” headlines Mashable.com. Not bad for the guys who started up this distinctly non-techie company in the non-techie midwest. Whether they sell out or not, the next fundraising is guaranteed to make them extremely wealthy folks. There are still a lot of markets yet to be developed, and a lot more deals to be made in the existing markets, as buyers seek out discounts for products they buy regularly.
It mashable right? Is this a smart idea for Google? Unless you think coupons, and deals, are dead – you have to like this investment. There’s a reason Groupon has grown so very fast – and that lies in meeting a market need. How fast can it grow if Google adds its skills at ad sales, email (gmail) use, user database analytics, networking connections and technology wizardry? While $6B is a lot of money, if you can see how Groupon on its own could become a $6B revenue company within 4 years from today is it really too miuch? (Groupon has grown from $0 to $500M in just about 2 years, so does 12x growth in 4 years [just under an annual doubling] really appear that difficult?)
Smart investing doesn’t mean “hold your nose and jump” off the bridge, hoping the water is OK. And that’s not what Groupon did, or Google might do if it acquires Groupon. Both companies are focusing on future scenarios about how we will get things done in 2012 and beyond. Both are thinking about the impact of existing trends, and how those will allow everyone to be more effective, efficient and successful in 3 or 5 years. Both are developing solutions that help us be more productive by building on trends – and not merely expecting the future to look like the past. Their planning is based upon views of the future – and that’s why they can see such greater opportunity, and create so much value.
Most business limit their planning, and investing, to doing more of what they have always done. Better, faster, cheaper are the hallmarks of the traditional planning process output. Expecting to get dramatic growth, or value, out of a system so narrowly focused is expecting the impossible. Creating value – big value – comes from providing solutions that meet new market needs. And that requires overcoming the limits of traditional planning – and traditional ways of thinking about investing. Instead of doing more of what you know, you have to do more of what the market wants. Any company can get there from here – if you simply open your planning to moving beyond the limits of what you’ve historically done.
by Adam Hartung | Nov 29, 2010 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness, Television, Web/Tech
Summary:
- Most leaders optimize their core business
- This does not prepare the business for market shifts
- Motorola was a leader with Razr, but was killed when competitors matched their features and the market shifted to smart phones
- Netflix's leader is moving Netflix to capture the next big market (video downloads)
- Reed Hastings is doing a great job, and should be emulated
- Netflix is a great growth story, and a stock worth adding to your portfolio
"Reed Hastings: Leader of the Pack" is how Fortune magazine headlined its article making the Netflix CEO its BusinessPerson of the Year for 2010. At least part of Fortune's exuberance is tied to Netflix's dramatic valuation increase, up 200% in just the last year. Not bad for a stock called a "worthless piece of crap" in 2005 by a Wedbush Securities stock analyst. At the time, popular wisdom was that Blockbuster, WalMart and Amazon would drive Netflix into obscurity. One of these is now gone (Blockbuster) the other stalled (WalMart revenues unmoved in 2010) and the other well into digital delivery of books for its proprietary Kindle eReader.
But is this an honor, or a curse? It was 2004 when Ed Zander was given the same notice as the head of Motorola. After launching the Razr he was lauded as Motorola's stock jumped in price. But it didn't take long for the bloom to fall off that rose. Razr profits went negative as prices were cut to drive share increases, and a lack of new products drove Motorola into competitive obscurity. A joint venture with Apple to create Rokr gave Motorola no new sales, but opened Apple's eyes to the future of smartphone technology and paved the way for iPhone. Mr. Zander soon ran out of Chicago and back to Silicon Valley, unemployed, with his tale between his legs.
Netflix is a far different story from Motorola, and although its valuation is high looks like a company you should have in your portfolio.
Ed Zander simply took Motorola further out the cell phone curve that Motorola had once pioneered. He brought out the next version of something that had long been "core" to Motorola. It was easy for competitors to match the "features and functions" of Razr, and led to a price war. Mr. Zander failed because he did not recognize that launching smartphones would change the game, and while it would cannibalize existing cell phone sales it would pave the way for a much more profitable, and longer term greater growth, marketplace.
Looking at classic "S Curve" theory, Mr. Zander and Motorola kept pushing the wave of cell phones, but growth was plateauing as the technology was doing less to bring in new users (in the developed world):
Meanwhile, Research in Motion (RIM) was pioneering a new market for smartphones, which was growing at a faster clip. Apple, and later Google (with Android) added fuel to that market, causing it to explode. The "old" market for cell phones fell into a price war as the growth, and profits, moved to the newer technology and product sets:
The Motorola story is remarkably common. Companies develop leaders who understand one market, and have the skills to continue optimizing and exploiting that market. But these leaders rarely understand, prepare for and implement change created by a market shift. Inability to see these changes brought down Silicon Graphics and Sun Microsystems in 2010, and are pressuring Microsoft today as users are rapidly moving from laptops to mobile devices and cloud computing. It explains how Sony lost the top spot in music, which it dominated as a CD recording company and consumer electronics giant with Walkman, to Apple when the market moved people from physical CDs to MP3 files and Apple's iPod.
Which brings us back to what makes Netflix a great company, and Mr. Hastings a remarkable leader. Netflix pioneered the "ship to your home" DVD rental business. This helped eliminate the need for brick-and-mortar stores (along with other market trends such as the very inexpensive "Red Box" video kiosk and low-cost purchase options from the web.) Market shifts doomed Blockbuster, which remained locked-in to its traditional retail model, made obsolete by competitors that were cheaper and easier with which to do business.
But Netflix did not remain fixated on competing for DVD rentals and sales – on "protecting its core" business. Looking into the future, the organization could see that digital movie rentals are destined to be dramatically greater than physical DVDs. Although Hulu was a small competitor, and YouTube could be scoffed at as a Gen Y plaything, Netflix studied these "fringe" competitors and developed a superb solution that was the best of all worlds. Without abandoning its traditional business, Netflix calmly moved forward with its digital download business — which is cheaper than the traditional business and will not only cannibalize historical sales but make the traditional business completely obsolete!
Although text books talk about "jumping the curve" from one product line to another, it rarely happens. Devotion to the core business, and managing the processes which once led to success, keeps few companies from making the move. When it happens, like when IBM moved from mainframes to services, or Apple's more recent shift from Mac-centric to iPod/iPhone/iPad, we are fascinated. Or Google's move from search/ad placement company to software supplier. While any company can do it, few do. So it's no wonder that MediaPost.com headlines the Netflix transition story "Netflix Streams Its Way to Success."
Is Netflix worth its premium? Was Apple worth its premium earlier this decade? Was Google worth its premium during the first 3 years after its Initial Public Offering? Most investors fear the high valuations, and shy away. Reality is that when a company pioneers a growth business, the value is far higher than analysts estimate. Today, many traditionalists would say to stay with Comcast and set-top TV box makers like TiVo. But Comcast is trying to buy NBC in order to move beyond its shrinking subscriber base, and "TiVo Widens Loss, Misses Street" is the Reuters' headline. Both are clearly fighting the problems of "technology A" (above.)
What we've long accepted as the traditional modes of delivering entertainment are well into the plateau, while Netflix is taking the lead with "technology B." Buying into the traditionalists story is, well, like buying General Motors. Hard to see any growth there, only an ongoing, slow demise.
On the other hand, we know that increasingly young people are abandoning traditional programing for 100% entertainment selection by download. Modern televisions are computer monitors, capable of immediately viewing downloaded movies from a tablet or USB drive – and soon a built-in wifi connection. The growth of movie (and other video) watching is going to keep exploding – just as the volume of videos on YouTube has exploded. But it will be via new distribution. And nobody today appears close to having the future scenarios, delivery capability and solutions of Netflix. 24×7 Wall Street says Netflix will be one of "The Next 7 American Monopolies." The last time somebody used that kind of language was talking about Microsoft in the 1980s! So, what do you think that makes Netflix worth in 2012, or 2015?
Netflix is a great story. And likely a great investment as it takes on the market leadership for entertainment distribution. But the bigger story is how this could be applied to your company. Don't fear revenue cannibalization, or market shift. Instead, learn from, and behave like, Mr. Hastings. Develop scenarios of the future to which you can lead your company. Study fringe competitors for ways to offer new solutions. Be proactive about delivering what the market wants, and as the shift leader you can be remarkably well positioned to capture extremely high value.
by Adam Hartung | Nov 18, 2010 | Current Affairs, In the Rapids, Leadership, Web/Tech
Summary:
- Most managers think it’s good to lower costs
- Most leaders focus heavily on earnings
- But focusing on costs and earnings leads to a dysmal spiral of decline
- Growth, rather than earings, distinguishes the higher value, and higher paying, companies
- Google is giving across the board pay raises and bonuses, because it has high growth
- Amazon, Facebook and Apple are hiring and paying more because they are growing
- Microsoft is cutting staff and costs, and its value is going nowhere as it focuses on earnings
- Growth is good, Greed (a focus on earnings) is the road to ruin
“Google to Give Staff 10% Raise” is the Wall Street Journal headline. All 23,000 employees (globally) will receive a 10% raise this year. At Mediapost.com in “Google Woos Troops with Cash and Raises” it is reported that additional to the 10% raise everyone will also receive at least a $1,000 cash bonus end of this year. According to CEO Eric Schmidt “We want to make sure that you feel rewarded for all your hard work.” For best performers, Google is making some pretty big (outrageous?) offers. In “Google Paying Big Bucks to Keep Talent” Mediapost reported a staff engineer was awarded $3.5 million in restricted stock to stay at the company.
Has your company announced anything similar? Hold on, didn’t you and your team work really hard? Don’t you deserve recognition for your efforts? And given your value to your employer, shouldn’t you receive something special to retain you, before you run to a higher paying job with better growth opportunities? Are we to believe all the good people, who deserve bonuses, are at Google? Or is something different going on besides just “hard work” leading to this generous cash dispersal to employees?
Google is growing like crazy. And that’s the difference. As Bruce Henderson, founder of the famous Boston Consulting Group once said, “growth hides a multitude of sins.” Growth surrounds the business with lush resources – it’s like being on the equator rather than the poles. When you grow, you can pay more to employees, and your suppliers. You can be Santa Clause, rather than the Grinch. Google is spending more money to keep, and hire, employees because other high growth companies, like Facebook, have been “stealing” them away. It’s a problem of riches in the battle to hire and keep people! Wouldn’t you like to particpate in this one?
Too many leaders confuse growth with greed (remember the famous Gorden Gekko speech from Wall Street about “Greed is Good”?) The outcome is a surplus of focus on “the bottom line” and that leads to cost cutting – which hurts growth. In the rush to show higher earnings, leaders forget earnings are the result of good management – and growth – and they begin looking for short-term ways to improve them. Greed, and the desire for more earnings now, causes them to forget that had they spent more time finding profitable growth markets yesterday the earnings today would be higher, and better. And they forget that without growth earnings are destined to decline!
Growth leads to a virtuous circle. More sales leads to more investment in new products and markets, leading to more sales, leading to more earnings, leading to more hiring, leading to higher pay, leading to better talent, leading to better ideas, leading to more new products taking you into more new markets…. a pretty fun place to work. Wheras greed leads to the whirlpool of despair. Cost cutting, product line rationalization, benefit reductions, lower (or no bonuses), headcount freezes, layoffs, no new hires, lower pay, more pressure on suppliers to cut their prices, no new product introductions, lost accounts, fewer salespeople, layoffs, outsourcing, facility closings ….. very much not a fun place to work. Where growth fuels a great company, focus on earnings inevitably kills the business.
We can see this difference when comparing performance of a few leading companies. Microsoft grew for many years. But now its strict focus on PC software has caused growth to lag. At Techflash.com (Puget Sound Business Journal product) “Hiring: Microsoft Stays Cautious as Google, Amazon Ramp Up” tells the story. Declining PC sales growth has led Microsoft to reduce its workforce by 2% globally the last year (~4,000). Google has expanded by 18% (+23,300 jobs). Since adding Kindle to its product line, and making other expansions, Amazon has added 44% to its workforce (~10,000 or 2.5 times the staff reduction at Microsoft). New products and new markets is helping Google, Facebook and Amazon grow – while focus on old markets has lowered growth at Microsoft.
Now Microsoft is attempting to save face by focusing on expense management, and earnings. Mr. Ballmer and his team hope Wall Street analysts will be happy with greed, by looking only at earnings, rather than growth. Microsoft’s CFO said “the best measure for our financial performance… comes down to EPS [earnings per share]… what we really need to do is drive earnings per share growth.” Microsoft missed the digital music wave, smartphone and tablet waves. It’s now struggling to rediscover growth, so it’s hoping to appeal to greed. Microsoft is taking the old approach of “if you can’t show you understand markets, products and growth then try to convince them you’re a good manager who can cut costs.” But how long can Microsoft manage its earnings when it’s not a significant player in the growth markets? Cost reduction is never the route to prosperity.
The last decade has seen the revenge of cost management. Coming out of the “go go” 1990s many leaders have proudly demonstrated their ability to avoid investment, cut costs, work employees harder, avoid increased pay, avoid new hires, send work to low-pay countries – and manage for the bottom line. Unfortunately, most publicly traded companies are worth less now than they were a decade ago. The DJIA and S&P 500 are worth less. The dollar has taken a shellacking. Fewer Americans are working and unemployment is higher. Tax receipts are down, and (as shown in the last election) Americans are pretty sick of a lousy economy. All this focus on earnings hasn’t done much for America’s workers, most American companies or the overall economy.
If you want to be “rewarded for all your hard work” through a big paycheck, a big raise, a big bonus – and you want employment that is filling and fun – then focus on growth. Help your company create new markets, with new products that people want. If you lead the marketplace with new applications and new solutions that fulfill unmet needs you’ll achieve good growth. Then realize earnings are a result of implementing that growth at effective prices. If you focus on the right thing – growth – then you’ll receive the results you want. Less focus on greed, with more on growth, and you might get rich.
by Adam Hartung | Oct 19, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
Summary:
- Apple keeps itself in growth markets by identifying unmet needs
- Apple expands its markets every quarter
- Apple deeply understands its competition
- Apple knows how to launch new products quickly
- These skills allow investors to buy Apple with low risk, and likely tremendous gains
Apple’s recently announced sales and earnings beat expectations. Nothing surprising about that, because Apple always lowballs both, and then beats its forecast handily. What is a touch surprising is that according to Marketwatch.com “Apple’s Decline in Margins Casts a Shadow.” Some people are concerned because the margin was a bit lower, and iPad sales a bit lower, than some analysts forecast.
Forget about the concerns. Buy the stock. The concerns are about as relevant as fretting over results of a racing team focused on the world land speed record which insteading of hitting 800 miles per hour in their recent run only achieved 792 (according to Wikipedia the current record is 763.) The story is not about “expectations.” Its about a team achieving phenominal success, and still early in the development of their opportunity!
Move beyond the financial forecasts and really look at Apple. In September of 2009 there was no iPad. Some speculated the product would flop, because it wasn’t a PC nor was it a phone – so the thinking was that it had no useful purpose. Others thought that maybe it might sell 1 million, if it could really catch on. Last quarter it sold over 4 million units. No single product, from any manufacturer, has ever had this kind of early adoption success. Additionally, Apple sold over 14 million iPhones, nearly double what it sold a year ago. Today there are over 300,000 apps for iPad and iPhone – and that number keeps growing every day. Meanwhile corporations are announcing weekly rollouts of the iPad to field organizations as a replacement for laptop PCs. And Apple still has a majority of the MP3 music download business. While sales of Macs are up 14% last quarter – at least 3 times the growth rate of the moribund PC market!
The best reason to buy any stock is NOT in the financial numbers. Endless opportunities to manipulate both sales and earnings allow all management teams to alter what they report every quarter. Even Apple changed its method of reporting iPhone sales recently, leaving many analysts scratching their heads about how to make financial projections. Financials are how a company reports last year. But if you buy a stock it should be based on how you think it will do well next year. And that answer does not lie in studying historical financials, or pining over small changes period to period in any line item. If you are finding yourself adopting such a focus, you should reconsider investing in the company at all.
Investors need growth. Growth in sales that leads to growth in earnings. And more than anything else, that comes from participating in growth markets — not trying to “manage” the old business to higher sales or earnings. If a company can demonstrate it can enter new markets (which Apple can in spades) and generate good cash flow (which Apple can in diamonds) and produce acceptable earnings (which Apple can in hearts) while staying ahead of competitors (which Apple can in clubs) then the deck is stacked in its favor. Yes, there are competitive products for all of the things Apple sells, but is there any doubt that Apple’s sales will continue its profitable growth for the next 2 or 3 years, at least? At this point in the markets where Apple competes competitors are serving to grow the market more than take sales from Apple!
Apple has developed a very good ability to understand emerging market needs. Almost dead a decade ago, Apple has now achieved its first $20 billion quarter. This was not accomplished by focusing on the Mac and trying to fight the same old battle. Instead Apple has demonstrated again and again it can identify unmet needs, and bring to market solutions which meet those needs at an acceptable price – that produces an acceptable return for Apple’s shareholders.
And Steve Jobs demonstrated in Monday’s earnings call that Apple deeply understands its competitors, and keeps itself one step ahead. He described Apple’s competitive situation with key companies Google and Research in Motion (RIM) as reported in the New York Times “Jobs Says Apple’s Approach Is Better Than Google’s.” Knowing its competitors has helped Apple avoid head-on competition that would destroy margins, instead identifying new opportunities to expand revenues by bringing in more customers. Much more beneficial to profits than going after the “low cost position” or focusing on “maintaining the core product market” like Dell or Microsoft.
Apple’s ongoing profitable growth is more than just the CEO. Apple today is an organization that senses the market well, understands its competition thoroughly and is capable of launching new products adeptly targeted at the right users – then consistently enhancing those products to draw in more users every month. And that is why you should own Apple. The company keeps itself in new, growing markets. And that’s about the easiest way there is to make money for investors.
After the last decade, investors are jaded. Nobody wants to believe a “growth story.” Cost cutting and retrenchment have dominated the business news. Yet, those organizations that retrenched have done poorly. However, amidst all the concern have been some good growth stories – despite investor wariness. Such as Google and Amazon.com. But the undisputed growth leader these days is Apple. While the stock may gyrate daily, weekly or even monthly, the long-term future for Apple is hard to deny. Even if you don’t own one of their products, your odds of growing your investment are incredibly high at Apple, with very little downside risk. Just look beyond the numbers.
by Adam Hartung | Sep 26, 2010 | Current Affairs, In the Rapids, Leadership, Openness, Web/Tech
Summary:
- Apple is worth more than Microsoft today, even though Microsoft is larger, because it has better growth prospects
- Apple is closing in on the most valuable company in the world – Exxon
- Exxon’s value is stalled because it has no growth markets
- Exxon once developed, then abandoned, a growth business called Exxon Office Systems
- Apple’s value may eclipse Exxon, which has almost 8 times the revenue, because its growth prospects are so bright
- Profitable growth is worth more than monopolistic market share – or even huge revenue
We all know that over the last 10 years Apple has moved from the brink of bankruptcy to great success. Apple has been able to dramatically increase its revenues, growing at double-digit rates for several years. And Apple now competes in markets like mobile computing and entertainment where its hardware and software products are demonstrating a leading position as users migrate toward different platforms (iPods and downloadable music or video, iPads and downloadable video or text, iPhones and downloadable apps of all sorts).
Because of this profitable growth, Apple’s market value now exceeds Microsoft’s. An accomplishment nobody predicted a decade ago.
As this chart from Silicon Alley Insider shows, Apple’s profitable revenue growth has allowed its value to soar. Even though Microsoft is larger, and dominates its market of PC operating systems and office automation software, its value has stalled due to lack of growth. Because Apple is in very large, emerging markets with successful products it is generating a very high valuation.
In fact, Apple’s market cap is closing in on the most valuable company in the world – Exxon:
Source: Silicon Alley Insider
Exxon and Apple have nothing in common. Exxon is a petroleum company. It’s growth almost all from acquisition. You could say it’s nonsensical to compare the two.
But for those of us with long memories, we can remember in the early 1980s when Exxon opened Exxon Office Systems. As the price of crude oil, and its refined products, hit record highs Exxon made record profits. Leadership invested a few billion dollars into creating a new business intended to compete with IBM and Xerox – leading office equipment companies of the time. But, when the price of crude oil fell Exxon abandoned this venture – by then already achieving more than $1B/year in revenue. All the suppliers and customers were left in the lurch, and the employees were left looking for new jobs. Within weeks Exxon Office Products disappeared.
Exxon abandoned its opportunity for growth into new markets in order to “focus” on its “core” business of oil exploration and production, oil refining, and marketing of petroleum products. As a result, Exxon – augmented via its many acquisitions across the years – is now the world’s largest “oil” company as well as the world’s highest market capitalization company. But it has no growth. And thus, its value is totally dependent upon the price of oil – a commodity. Over the last 2 years this has caused Exxon’s value to decline.
At $43B in 2009, Apple has nowhere near the revenue of Exxon’s $310B. But what Apple has is new markets, and growth. Someday we’ll run out of oil (long time yet, to be sure). What will Exxon do then? But in the case of Apple we already know there will be future revenues from all the new products for a long time after the Mac has run its course and disappeared from backpacks. It’s that willingness to seek out new markets, to develop new products for emerging markets and constantly push for new, profitable revenues that makes Apple worth so much.
Could Apple become the world’s most valuable company? Possibly. If so, it won’t be from industry domination. That sort of monopolistic thinking drove the industrial era, and companies like AT&T as well as Exxon — and Microsoft. What’s worth more today than monopolism is entering new markets and generating profitable growth. It’s what once made the original Standard Oil worth so much, and it initially made Microsoft worth more than any other tech company. Too many of us forget that profitable growth, more than anything else, generates huge value and wealth. And that’s true in spades in 2010!
by Adam Hartung | Sep 23, 2010 | Current Affairs, In the Rapids, Leadership, Openness, Travel
Summary:
- Most people misunderstand the way toward building a valuable company
- Richard Branson has developed massive wealth by finding and entering growth markets
- Success comes from developing new solutions that fulfill unmet needs – not maximizing performance of core capabilities
- Virgin is now moving into luxury hotels, a market being ignored by most investors, with new products that fit still unmet needs
Very few people are as wealthy as Richard Branson. But few people can manage like he does.
Branson started out selling records via mail-order in Britain. Over the years he got into retailing, international airlines, domestic airlines, mobile telephony, international lending (amongst other businesses) – and now his company is investing $500milion in hotels and hotel management. According to Bloomberg.com “Branson’s Virgin Group to Invest $500million in Hotels.”
Despite all we hear about how impossible it is to be an entrepreneur in Europe, Sir Branson has done quite well, building a wildly successful, profitable company. Although he didn’t follow conventional wisdom. Instead of “sticking to his core” Sir Branson has built a company that invests in opportunities which are highly profitable – regardless of the industry or market. He doesn’t grow by doing more of the same better, faster or cheaper. Instead, he takes advantage of shifting markets – getting into businesses with opportunities and exiting those that don’t earn high rates of return.
During last decade’s building boom there were a lot of high-end hotels built. Now, with the economy not growing, excess capacity has made it difficult for these to cover the mortgage. Bankers don’t want to refinance – they want out of the buildings. Occupancy has been so low that many traditional name brands, such as Ritz Carlton or Intercontinental, have been forced to abandon properties. As a result, several hotels have closed, and the property offered for sale at a fraction of original construction cost. With most investors shying away from all things real estate, prices have plummeted. Some hotels, nearly new, have sold for the value of underlying land.
And now Virgin enters the market. Although Virgin has no background in real estate or hotel management, it is clear that there is demand for luxury goods and luxury travel — if someone can make it attractive and affordable. By purchasing premier properties at a fraction (literally 10-25% of their initial cost) Virgin will be able to offer hotel guests a superior experience at an attractive price! Management sees an unmet need by high-income, well educated “creative class” customers. By getting into the market Virgin will learn, just as it did in airlines, how to meet customer expectations in a way that allows for highly profitable delivery when meeting a currently unmet need.
While some would say that if the current competitors, steeped in experience and tradition, can’t succeed Virgin should not think it can. But a Virgin executive rightly says “If you look at Virgin’s history, we have come into markets with big powerful players, where customers are generally satisfied but not in love, and we have been able to cut through that.” Well said. Virgin doesn’t do what competitors do – it develops a solution that locks competitors into their position while positioning Virgin to meet the untapped market.
Even though this opportunity is available to everyone, almost no companies are interested in buying these undervalued hotels. “It’s not our business.” “We don’t know how to operate hotels.” “We don’t invest in real estate.” “I’m too busy taking care of my current business to consider something new.” “What if we’re wrong?” These are all things people say to stop themselves from taking action to enter new opportunities with high rates of return. The magic of Virgin is its willingness to overcome Lock-in to its existing business, look for market opportunities, and then (as Nike advertises) Do It!
by Adam Hartung | Sep 19, 2010 | In the Rapids, Leadership, Openness
Summary:
- Richard Branson has built a wildly successful Virgin company on very unconventional “secrets to success”
- Most business leaders follow management theory than is built on myth
- Virgin has been wildly successful, even over the last decade when many companies have suffered, by being agile and market oriented
- It’s time to throw out traditional management, and its myths, for a different approach.
In my speaking and blogging I regularly comment on what great results have been achieved Virgin under Chairman/CEO Richard Branson. The founder, and the company, both started quite humbly. Even though nobody can easily define exactly what business Virgin is in, it has done very well. So I was pleased to read at BNet.com “Richard Branson: Five Secrets to Business Success“:
- Enjoy what you are doing. Really.
- Create something that stands out
- Create something of which you and your employees are proud
- Be a good leader – which he defines as listen a lot, ask questions, heap the praise. Don’t fire people, help them to be happy
- Be visible. Get out into the market and listen, listen, listen.
I am struck at how this is nothing like the recommendations in most management books. Let’s see what Richard Branson didn’t say:
- Sacrifice. Work hard. Be diligent. Be tough. Cut out anything unnecessary
- Find one thing to be good at and excel – search for excellence
- Know your core competency, and maximize it’s use. Avoid things that aren’t “core”
- Make sure everyone is “on the bus” doing the one thing you want to do. Get rid of anyone else
- EXECUTE! Optimize your business model. Focus on execution
- Cut costs. Run a tight ship. Tighten your belt.
- Focus on results. Run the business by the numbers
- Focus on quality – implement Six Sigma and/or TQM and/or LEAN processes
- Outsource anything you don’t absolutely have to do
- Hire the “right” leaders (or employees)
Business if full of myth. And we now know that many gurus have been recommending actions for years that simply haven’t produce long-term positive results. The companies considered “great” by Jim Collins have fared far more poorly than average. Most of the companies Tom Peters considered “excellent” have not made it to 2010 in good shape – if they even survived! Most of the 10 myths were things that simply sounded good. They appeal to the American way of training. But they haven’t helped those companies which applied these ideas succeed.
Sir Richard Branson has created businesses from selling recordings to bridal shops, international banking, traditional airlines and even a business flying people into outer space. By all the traditional recommendations, he and his company should have failed. It followed none of the recommendations for hiring, firing, focus or execution. Yet he has created billions in personal fortune, billions for investors and given thousand of people very rewarding places to work. By all counts, he and Virgin have been a success.
It’s time to give up our management myths, and learn to compete in today’s rapidly shifting market. It’s now more about listening to the market and managing an agile organization than “focusing on core” or “execution.”
by Adam Hartung | Sep 2, 2010 | Current Affairs, Defend & Extend, In the Rapids, Television, Web/Tech
Summary:
- Market shifts create losers, and winners
- Demand doesn’t decline, it just changes form – and usually grows!
- We want more entertainment and communcation – but not the old fashioned way
- Losers keep trying to sell what they have, and know
- Winners supply solutions aligned with market needs regardless of old competencies
How would you react if your customers said your product really wasn’t something they needed? Would you work hard to convince them they are wrong? Maybe try to add some features hoping it would regain their attention? Or would you start looking for what they really do need/want?
Pew Research Center, at PewSocialTrends.org headlines “The Fading Glory of the Television and Telephone” describing how quickly people are walking away from what were very recently considered absolute necessities. As a “boomer” and member of the “TV generation” I was surprised to read that only 42% of Americans now think a television is a necessity! This has been a rapid, dramatic decline from 52% last year and 64% in 2006! 1 in 5 Americans have changed their point of view about television as a necessity in just 4 years! And TV as a necessity is in an accelerating decline! I can remember when my generation went from 1 TV in the house to 1 in every room! This trend does not bode well for broadcast television networks, affiliates, advertisers, traditional production companies, television newscasters, manufacturers of TV sets and TV equipment – or many other businesses linked to TV as we know it.
Simultaneously, demand for a land line telephone has declined. Again, my generation remembers the days with one phone in the house – in some areas on a shared “party” line where multiple families shared a single phone line. The phone was in a central area so it could be shared. In the 1970s we saw things change as telephones were added to every room! Now, according to Pew, folks who consider a land-line phone a necessity has declined to only 62%, a 10% decline from just last year (68 to 62) and barely 3 in 5 Americans! Wow!
Of course, for every decline there’s a winner. 47% see the cell phone as a necessity – that’s 5 percentage points greater than the TV score, indicating mobile phones are seen as more of a necessity than television by the general population. And 34% see high speed internet as a necessity – only 9 percentage points fewer than the TV number – and more than half who see the need for a land-line phone.
Demand for entertainment and communication have not declined! If you are in television or land lines you might think so. Rather, that demand is accelerating. But it is just shifting to a different solution. Instead of the old technology, and supplier industry, people are changing to something new. First with video cassetttes, then digital video recorders (DVRs), then the plethora of available cable channels and on-demand TV, and now with on-line entertainment from YouTube to Hulu people have been changing the way they consume entertainment. Demand has gone up, but not from traditional consumption of TV, especially as viewing has switched from the TV to the computer monitor – or the hand held device.
Clearly, access to the internet (facebook, twitter, et.al.), texting and anytime/anywhere calling has increased both our access and use of one-way (such as reading web pages) and two way communication. Communication is continuing to grow, but it will be in a different way. No longer do we need a “dial tone” to communicate – and in most instances people are finding a preference to asynchronous rather than real-time communication.
These are the kind of industry transitions that threaten so many businesses. What Clayton Christensen calls “The Innovator’s Dilemma” as new solutions increase demand while making old solutions obsolete. The tendency is for the supplier of traditional solutions to say “my market is in decline.” But really, the market is growing! Just like Kodak said the demand for film was declining, when demand for photography – now in digital format – was (and is) escalating! When market shifts happen, incumbents have to resist the temptation to try “keeping” the “old customers” by undertaking Defend & Extend efforts – like adding features and functionality, while cutting price. This inevitably leads to disaster! Instead, they have to understand the shift is only going to accelerate, and develop an approach to entering the new market.
As this research comes out, Apple launched a series of new products to augment its set-top box and iPod/iTouch product lines. (San Francisco Chronicle, SFGate.com “Steve JobsUnveils Upgraded Apple TV, New iPods“) by doing so Apple recognizes that people still want entertainment – but they are a whole lot less likely to accept sitting in front of a communal television, serially deploying programming at them. They want their entertainment to be on-demand, and personalized. Why should we all watch the same thing? And why watch what some programmer at CBS, HBO or TMC wants to deliver?
Apple is bringing out products that align with the direction the market is now heading. Ping is designed to help people share program information and identify the entertainment you would like to receive. iTunes is upgrading to bring you in bite-size chunks exactly the entertainment you want, as you want it, aurally or visually. These are products which will grow because they are aligned with what the market says it wants — even more entertainment. Those who are hidebound to the old supply mechanism will simply find themselves fighting for declining revenue as demand shifts – and grows – in the new solutions
