by Adam Hartung | Feb 28, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Weblogs
In my last blog I commented about the failure of the newspaper in Denver, and discussed how we'll all have to start relying increasingly on news from additional sources – such as blogs. Then I went on to comment about how easy it is for a business to miss a market shift – just as the newspapers have. They could have invested more in .com sites and bloggers for the last decade – but didn't because they kept thinking their market would return to the old ways of behaving.
I would like YOUR COMMENTS. This blog tends to be my rants about all the things I see wrong in industries and companies – with the occasional catch of someone doing something right. But I would really enjoy hearing more about what all of you think. So, building on the newspaper blog, I would really enjoy having people comment along a couple of tracks:
- How do you get your news? Are you still using newspapers a lot, or not? Do you think newspapers will remain important, or not? If you're starting to use the web more for news – where do you find information that is valuable? Where do you get important news?
- Do you think your business is soft – or do you think perhaps your market is shifting and therefore will require
changes in your Success Formula to be successful in the future? How much of your business issues are due to the market, and how much are do to market shifts? Could you be in the position newspapers were in 2000 without admitting it?
I look forward to hearing from you. Please comment here on the blog, you don't have to register. Or send me your comments via email.
by Adam Hartung | Feb 27, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
The Rocky Mountain News has folded up shop. After 150 years, no more newspaper in Denver, CO. (read article here). This is newsworthy because of the size of Denver, but the trend has been obvious. The newspaper's owner (Scripps) closed the Albuquerque Tribune and Cincinnati Post last year. And this is just the beginning. Hearst has already said it may well have to close the San Francisco Chronicle within weeks. Tribune Company, parent of The Chicago Tribune and Los Angeles Times has filed for bankruptcy, as has Philadelphia Newspapers which publishes the Philadelphia Inquirer and Philadelphia Daily Journal. The American Society of Newspaper Editors has cancelled its annual convention for 2009 (read article here.)
Just as I predicted in this blog months ago, when Sam Zell leveraged up Tribune in his buyout, the odds of any particular newspaper surviving is not very good. It was 3 years ago when I was talking to the CFO at the LATimes about the future of newspapers. He felt sure that cost cutting would get the company through "a tough stretch" and then things would get better. When I asked him if he was planning to increase spending in LATimes.com or other on-line media to make sure his projection was true – he asked me what the .com had to do with the paper. He felt the paper would soon recover. Even though there were no indicators that subscriptions would reverse trend and start growing, and even though advertisers were literally saying they never intended to return on-line ad spending back to newspapers, he felt sure the paper would succeed. When I asked why, he said "if we don't report the news, who will? Bloggers??????" and with that exasperation he reinforced in his own mind that there was no option to a successful city newspaper so no need for further discussion. He could not imagine a "democratized" newsworld without editors and publishers that controlled content and writers that were limited by that control.
February 6 I gave a speech in Chicago about growth strategies in this economy. One attendee asked me "what newspapers do you read?" As I formulated my answer, my discussion with the old LATimes CFO came to mind. "I don't read newspapers any more" I had to admit. Good thing I wasn't running for vice-president! But I realized that I'd quit reading newspapers and now picked up most of my alerts from bloggers! I am signed up to various web sites, including blogs, which send me ticklers all day long and aid my web searching for news. I get more information, faster today than ever before – and reading a newspaper seems like such a waste of time! And if that's my behavior, at age 50, I'm a joke compared to people under 30 who can use the web 10x faster than me with their better tool use.
The newspapers are going the way of magazines. That is clear. When we all started watching TV, LOOK, LIFE and The Saturday Evening Post lost meaning. Not all magazines disappeared, but the general purpose ones did. Now, even those have little value. In a connected, 24×7 world newspapers simply quit making sense a decade ago. It just took longer for everyone to realize it. While the newspapers would like to blame the recession for their failure, that's simply not true. The world shifted and they became obsolete – an anachronism. People today consume more news than at any time in history – including pre-recession years like 2007. The recession has not diminished the demand for news or journalism. And advertisers are reaching out for customers just like before. But neither readers nor advertisers are going to newspapers. The action is now all on the web – which continues growing pages at double digit rates every quarter!
So where will you get your news? If you read this blog, you likely already get most news from the web. And others will also do so. Increasingly, editors that have strong opinions (be they conservative or liberal) will have less influence on what is reported. Those who can find and report the news will themselves determine what's out there to be found – and they will capture that value themselves. To use 1990s language, Bloggers are "disintermediating" publishers. And with Google able to push ads to their sites (be they on computers or handhelds), these journalists will be able to capture the ad value themselves. If you want to see the new aggregator of the future, go to www.HuffingtonPost.com. Or www.Marketwatch.com for business info. By ignoring traditional printing and distribution, they can produce multiples of the news content of old aggregators, invest in technology to keep it updated in real time 24×7.
While people are bemoaning the decline of newspapers, take heart in the benefits. How much less newsprint will be created, reducing the demand for pulp from trees? How much less recycling of old newsprint will be required? What benefits to the ecology will come? How much more access will you have to find out all sides of various issues – rather than the point of view taken by the local newspaper publisher who mostly dictated what you used to hear about an issue? How much better educated will you be? Why, given the benefits of on-line news, would anyone want to go back to newspapers?
Bemoaning the loss of newspapers is like bemoaning the decline in rail travel – it may have romantic remembrances of a previous time, but who would ever want to give up their car and wait on trains again? As you look at YOUR business – do you blame the recession for troubles when in fact there's been a market shift? Have things "softened in the short-term," or have customers moved on to seeking new solutions that better fit their needs? It's easy to act like the LATimes CFO and project a return to old market conditions. But will that really happen? Or has the market you're in shifted, leaving you with a weak future? Will you act like Sam Zell and "double down" on a business that the market is shifting away from?
In today's economy, we can all too easily let hope for a return to the good old days keep us from using more realistic explanations. If so, we can end up like those who made kerosene for lamps (expecting electricity to be too hard to install), coal for heating, and passenger cars for trains. Be careful how easily you may think that tomorrow will look like yesterday – because most of the time it won't.
by Adam Hartung | Feb 18, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle
Yesterday Crain's Chicago Business reported that Kraft expects its sales volume to fall 5% this quarter (read article here). Kraft lost market share to competitors in 75% of its businesses! Do you suppose the demand for food is declining? How about the demand for groceries? To the contrary, reports have been that people are eating less at restaurants – leading to the failure of a few chains, and the closing of several units by others – and eating more at home. We've been led to believe that sales of frozen foods and basics are up due to the poor economy and movement toward thrift. If so, why would the purveyor of many basics and frozen food say volume is expected to decline more than the economy is contracting? Why would it be losing share?
The Chicago-area Kraft executives would like to blame this good management decisions to close unprofitable lines. But do you believe that? Why would any business voluntarily cut revenues in this kind of economy? This rings more as an excuse than a real explanation of the problems within Kraft.
What we know is that Kraft has been woefully short on new products for a decade. What was the last new product you remember from Kraft? In fact, it was only a couple of years ago Kraft was selling growth businesses to "consolidate" its business behind its largest brands – like Velveeta and Mac & Cheese. Then the company raised prices last year, blaming rising commodity costs, opening the door for branded and private label competitors. Kraft is a company with very old products, and higher prices, and no indication of any innovation.
You would think with the economy moving its way, Kraft could capitalize. But when companies hit a growth stall, they lose the ability to capitalize. As they focus on optimizing old products, brands and business practices they increasingly become out-of-step with the marketplace. As markets shift, they miss shifts as they maintain internal focus on the old processes which once produced good returns, but deteriorated. The more they focus, the bigger the gap between what they do, and what the market wants. As returns keep struggling, they continue doing more of what they always did – and explain away poor results.
Kraft is a huge corporation, a recent addition to the Dow Jones Industrial Average. But the company focus is all from the past, not about the future. The company insufficiently studies competitors, and clearly eschews Disruptions. And you can look all over company documents and not find a whiff of White Space to try new things. Without innovation, and no sign of a process to lead them toward innovation, it would be a mistake to expect better performance. Even if Kraft is one of the largest consumer goods companies in America.
by Adam Hartung | Feb 15, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in, Web/Tech
In Create Marketplace Disruption I talk about how Sun Microsystems (see chart here) became wedded to a Success Formula which was tied to selling computers. In its early days Sun had to build its own systems, workstations and servers, to make its techology available to customers. As the company grew, it continued pushing the hardware, even though increasingly all of its value add was in the software. One of its more famous innovations was a software product called Java – now used all across the web. But because Sun could not figure out how to sell hardware with Java the company literally gave the product away – on the theory that growing internet use would increase demand for servers and workstations.
But like most Locked-in Success Formulas, Sun's fell into diminishing returns. The market shifted. First it's biggest buyers, telecom companies, fell into a depression early in the century. And corporate buyers struggled to maintain old IT budgets, increasingly transfering work offshore and demanding lots more performance at lower prices. Secondly, an emerging software standard, Linux, started competing with Sun at a much lower price point, and corporate buyers found this a viable solution. And thirdly, Linux and Microsoft both improved performance operating on somewhat "generic" PC hardware that was considerably cheaper than Sun's hardware, further augmenting corporate movement away from Sun.
But Sun continued to push forward with its old Success Formula. Now analysts are confused about Sun's direction, and largely think the company less likely to survive (read article here). With most analysts recommending investors sell Sun Microsystem shares, as one analyste (Rob Enderle) put it "They seem like a software company, but they are sort of like a hardware company." He added that after years of giving software away for free in efforts to entice hardware buyers Sun Microsystems is on the verge of being obsolete.
Sun Microsystems is just another example of a company so busy focusing on doing what it always did that it didn't evolve to what the market demanded – and rewarded. As software became the value, Sun did more but didn't figure out how to evolve its Success Formula to charge for it. The company remained Locked-in to its old practices, and refused to Disrupt and open White Space where it could find a more valuable Success Formula for the future. Too bad for employees, vendors and investors.
by Adam Hartung | Feb 9, 2009 | Current Affairs, Food and Drink, In the Swamp, Leadership
The second step in following The Phoenix Principle to achieve superior returns is to study competitors. Better, obsess about them. Why? So you can learn from them and position your products, services and skill sets in a way to be a leader. We would hope that studying competitors would not lead a company to take on battles it's almost assured of not winning. Too bad nobody told that to Mr. Schultz at Starbucks, who seems intent on killing Starbucks since his return as CEO.
Starbucks become an icon by offering coffee shops where people could meet, talk and share a coffee – while possibly reading, or checking their email. One of the most famous situation comedies of recent past was "Friends", a show in which people regularly met in a coffee shop not unlike Starbucks. People could order a wide range of different coffee drinks, and the ambience was intended to reflect a more European environment for meeting to drink and discuss. This combination of product and service found mass appeal, and rapid growth. Meanwhile, the previous CEO rapidly moved to seize the value of this appeal by stretching the brand into grocery store sales, coffee on airlines, liquor products, music sales, various retail items, some food (prepared sandwiches and high-end snacks, mostly), artist representation and even movie making. He knew there was a limit to store expansion, and he kept opening White Space to find new business opportunities.
But then Mr. Schultz, considered the "founding CEO" (even though he wasn't the founder) came roaring back – firing the previous expansion-oriented CEO. He claimed these expansion opportunities caused Starbucks to "lose focus". So he quickly set to work cutting back offerings. This led to layoffs. Which led to closing stores. Which led to more layoffs. The company fast went into a tailspin while he "refocused."
Meanwhile competitors started having a field day. Dunkin Donuts launched a campaign lampooning the drink options and the special language of Starbucks, appealing for old customers to return for a donut – and get a latte too. And McDonald's, after years of study, finally decided to roll out a company-wide "McCafe" in which McDonald's could offer specialty coffee drinks as well. While Starbuck's CEO was rolling backward, competitors were rolling forward – and in the case of McDonald's rolling like a Panzer tank.
Now, with a big recession in force, McDonald's is making hay by siezing on its long-held position as a low cost place. Like Wal-Mart, McDonald's is in the right place for people who want to seek out brands that represent "cheap." With sales up in this recession, the company is now launching a new program to highlight its McCafe concept directly aimed at trying to steal Starbucks customers (readarticle here).
So, here's Starbucks that has "repositioned" itself back as strictly a "coffee company". And the company has been spiraling downward for over a year. And the world's largest restaurant company has its sites set right on you. What should you do? Starbucks has decided to launch a "value meal" (read article here). Starbucks is going to go head-to-head with McDonald's. Uh, talk about walking in front of a truck.
Far too often company leadership thinks the right thing to do is "focus, focus, focus" then define battles with competitors and enter into a gladiator style war to the death. And that is just plain foolish. Why would anyone take on a fight with Goliath if you can avoid it? At the very least, shouldn't you study competitors so you compete with them in ways they can't? You wouldn't choose to go toe-to-toe when you can redefine competition to your benefit.
But that is exactly what Starbuck's has done. Starbucks spent its longevity building a brand that stood for being somewhat "upmarket." You may not be able to afford a Porsche, but you could afford a good coffee in a great environment. Sure, you might cut back when the purse is slim, but you still know where the place is that gave you the great, good-inside feeling you always got when buying their product or visiting their store. Now the CEO of that company has taken to comparing the product, and the stores, to the place where kids are jumping around in the play pit – and you can smell $1.00 hamburgers cooking in the background. He's decided to offer values which compare his store, where you remember the cozy stuffed chairs and the sounds of light jazz and the smell of chocolate – with the place where you sit in plastic, unmovable benches at plastic, unmovable tables while listening to canned music bouncing off the tile (or porcelain) walls where you can wipe down everything with a mop.
You study competitors so you can be fleet-of-foot. You want to avoid the bloody battles, and learn where you can use strengths to win. Instead, Starbucks' CEO is doing the opposite. He has chosen to go head-to-head in a battle that can only serve to worsen the impression of his business among virtually all customers, while tacitly acknowledging that a far more successful (at this time) and better financed competitor is coming into his market. His desire to Defend his old business is causing him to take actions that are sure to diminish its value.
Let's see, does this possibly remind you of — let's see — maybe Marc Andreeson's decision to have Netscape go head-to-head with Microsoft selling internet browsers? How'd that work out for him? His investors? His employees? His vendors?
Studying competitors is incredibly important. It can help you to avoid bone-crushing competition. It can identify new ways to compete that leads to advantage. It can help you maneuver around better funded competitors so you can win – like Domino's building a successful pizza business by focusing on delivery while Pizza Hut focused on its eat-in pizzerias. But you have to be smart enough to realize not to try going headlong into battle with competitors that can crush you.
by Adam Hartung | Feb 8, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership
General Electric's (chart here) future earnings and valuation were recently lowered by an analyst at J.P. Morgan (read article here). Reviewing the difficulties facing GE he commented, "Former [Chief Executive Jack] Welch built a culture of earnings management that was unsustainable." One of the few times I've ever heard an analyst make excuses for management. Unfortunately, he could not be more wrong. Investors have every reason to expect GE's earnings growth to continue.
There is no doubt that the real estate bust has led to lower consumer spending, as well as big troubles for banks struggling with reserve requirements as they mark down loans. There is a "wall of worry" among consumer and business spenders alike. Yet, GE's task is to find ways to grow – even in the face of market challenges. When companies fall into a growth stall they have only a 7% chance of ever again growing at a mere 2%.
At GE we're seeing first stages of a growth stall. Why? Despite the very aggressive culture at GE, when Mr. Immelt replaced Mr. Welch he did not maintain the level of Disruption and White Space that his predecessor maintained. For whatever good reasons he had, Mr. Immelt steered GE on a course that was more predictable – and far less likely to make hard turns and hold leaders accountable. GE was very strong, and the company could continue to build on past strengths. And doing so, Mr. Immelt sustained GE largely by Defending & Extending historical practices. Along the way, acquisitions and divestitures were very predictable actions – not openings into new markets that could develop a new Success Formula.
Then the markets shifted. Very hard. And a long-term GE business called GE Capital was suddenly in a lot of trouble. This was not entirely unpredictable – but GE Capital had fallen into Defending & Extending its old business rather than really assessing what might happen. They had real estate investments, and complex hedging products that made real estate losses worse. GE Capital's reserves began disappearing overnight. Simultaneously, NBC was seeing declining revenue as ad demand fell through the floor. Again, not unpredictable given the inroads Google was making in the ad market since 2002. But NBC had fallen into believeing it could Defend & Extend its traditional business, rather than use scenarios to point out the potential shift of advertisers to the web. Even though Mr. Buffet at Berkshire Hathaway jumped in with financing, the reality was that GE had not prepared for the scenario unfolding. By slowing its Disruptions and White Space, GE fell into the same problems many of its other big company brethren fell into. Something the company had avoided under "Neutron Jack" who kept the company eyes firmly on the future while avoiding complacency in existing businesses.
Part of what made GE the incredible earnings machine it was under Mr. Welch was its extensive scenario planning which led the company to get out of businesses, and get into new ones. Under Mr. Welch GE implemented Disruptive techniques like focusing on market share (#1 or #2 was one Disruptive technique) or implementing Destroy-Your-Business.com teams to prepare for internet-based competition. But under Mr. Immelt GE did far less changing of its businesses. GE remained largely in industrial businesses, it's financial business and traditional media. Although it had extensive business interests in India, GE itself was not deeply involved in new internet-based or information-based businesses. It spun out its biggest IT business (GENPAC), reaping a huge reward which the company mostly invested in additional industrial businesses - like water production.
GE is a great company. It's the only company to be on the Dow Jones Industrial Average since the index was created. But not even GE can escape market shifts. GE was one of the first to pick up on the shift to globalization and was an early investor in offshore operations. But the last few years GE's fortunes have stymied as the company spent more energy Defending & Extending its old businesses instead of doing more in new markets. No company, of any size or age, can afford to depend on its old businesses. All businesses must prepare to compete in the future, on the requirements of future customers and against future competitors willing to maximally leverage current and developing opportunities for improvement via technology, business model or any other factor.
GE has a lot of resources, and a long-term culture of Disruption and using White Space. GE has the built-in skills to attack its old Lock-ins, find competitive opportunities and rapidly gear itself in the direction of growth. And that's what GE needs to do. Some analysts are worried that GE may have to reduce its dividend – and well GE should!!! When markets shift as rapidly as has happened this last year, its more important to develop new market opportunities than Defend a dividend payout. GE needs to move quickly to re-establish itself in growth markets for products and services that can push GE into the Rapids and pull the company out of this growth stall. Right now, investors should be demanding that Mr. Immelt act more like Mr. Welch, and push hard for Disruptions that open new White Space projects. That Mr. Immelt is on Mr. Obama's new business economic team (read article here) is not important to investors, employees and suppliers. Right now, all hands and minds need to be focused on finding new markets to regain growth for GE.
by Adam Hartung | Feb 5, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Quotes, Web/Tech
Dell had a tough day Thursday when J.P.Morgan downgraded the stock to the equivalent of a sell (read article here). The stock continues its relentless slide – despite the return of Mr. Dell as CEO (chart here). Some quotes:
- "Our downgrade … focuses squarely on the potential that Dell's PC exposure..could force the company to seek revenue offsets" interpretation – revenues should go down
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"looking for revenue from other sources, Dell could face new costst and competition that could destabilize margins and cause the company to dip into its cash reserves." interpretation – entering new markets isn't free, and new competitors will make the road tough so expect Dell to go cash negative
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"Dell gets around 60% of its total revenue from PC sales, which is an example of how exposed the company is to a market that is widely expected to shrink this year…PC unit shiptmets to fall this year by 13.5% from 2008" interpretation – this is primarily a one product company and that product is not going to grow
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"the enterprise replacement cycle … could be deferred to next year … Dell will be hard-pressed to maintain its profit margins this year as the company faces more-entrenched consumer-market competitors in Acer and Hewlett-Packard" interpretation – Dell sells mostly to companies, who are not replacing PCs, and in the consumer market Dell will find tough sledding competing with Acer and HP
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"Dell is on track with its plan to cut $3billion in costs by 2011" interpretation – Dell is cutting costs, not growing revenue
To steal from an old Kentucky Fried Chicken ad "Dell did one thing, and did it right." Dell's Success Formula worked really well, and the company grew fantastically well as it improved execution while the corporate PC market was growing. But the market shifted. Dell had not developed any White Space to enter new markets, so it was unprepared to keep growing. When revenue growth slackened, the company did not Disrupt its Success Formula, but instead kept trying to do more, better, faster, cheaper. And lacking revenue growth opportunities, the company is slashing costs in its effort to Defend its bottom line and old business model. And all that has resulted in another downgrade – and a company worth a lot less than it was worth before. Just as you would expect for a company that fell out of the Rapids and into the Swamp.
by Adam Hartung | Jan 28, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
In a recent presentation I told the audience that they had quit printing newspapers in Detroit during the week. The audience said they weren't surprised, and didn't much care. The other day I asked a room full of college students when the last time was they looked at a newspaper (not read, just looked) – and not a single person could remember the last time. In Houston I asked two groups for the headline of the day that morning – not a single person had looked at the newspaper, and none in the group subscribed to a newspaper. Even my wife, who used to demand a Wednesday newspaper so she could receive the grocery ads, asked me why we bother to subscribe any more because she now gets the ads in the mail. This wholly unscientific representation was pretty clear. People simply don't care much about newspapers any more.
So, if you had $100 bucks to invest, and you had the following options, would you invest it in
- A professional baseball team (like the Boston Red Sox or Chicago Cubs)?
- A manhattan skyscraper?
- A newspaper?
That is exactly the question which is facing the New York Times Company (see chart here), and their decision is to invest in a newspaper. In fact, they are selling their interest in the Boston Red Sox and 19 floors in their Manhattan headquarters so they can prop up the newspaper business which saw ad revenue declines of greater than 16% – and classified ad declines of a whopping 29% (read article here). (Classified ads are for cars, lawn mowers, and jobs – you know, the things you now go to find on Craigslist.com, ebay.com, vehix.com and Monster.com and aren't likely to ever spend money on with a newspaper.)
The value of New York Times Company has dropped 90% in the last 5 years – from $50 to $5. The decline in advertising is not a new phenomenon, nor is it related to the financial crisis. People simply quit reading newspapers several years ago, and that trend has continued. Simultaneously, competition for ads grew tremendously – such as the classified ads described above. Corporate advertisers discovered they could reach a lot more readers a lot cheaper if they put ads on the internet using services from Google and Yahoo! There was no surprise in the demise of the newspaper business.
At NYT, the smart thing to do would be to sell, or maybe close, the newspaper and maximize the value of investments in About.com and other web projects (which today are only 12% of revenue) as well as Boston Sports (owner of the Red Sox) and hang on to that Manhattan property until real estate turns around in 5 years (more or less). Why sell the most valuable things you own, and put the money into a product that has seen double-digit demand and revenue declines for several years?
Of course, Tribune Company isn't showing any greater business intelligence. Management borrowed far, far more than the newspaper is worth 2 years ago through an employee stock ownership plan (can you understand "good-bye pension"?). So last week they sold the Chicago Cubs. For $900million. Tribune bought the Cubs, including Wrigley Field, 28 years ago for $20million. That's a 14.5% annualized rate of return for 28 consecutive years. Not even Peter Lynch, the famed mutual fund manager, can claim that kind of record!
Through adroit management and good marketing, they modernized the Wrigley Field assets and the Cubs team – and without ever winning the World Series drove the value straight up. As fast as people quit reading the Chicago Tribune newspaper they went to Cubs games. Who cares if the team doesn't win, there's always next year. And unlike newspapers, there aren't going to be any more professional baseball teams in Chicago (there are already two for those who don't know - Chicago's White Sox won the World Series in 2005). And they aren't building any additional arenas in downtown Chicago to compete with Wrigley Field. Here's a business with monopoly-like characteristics and unlimited value creation potential. But management sold it in order to pay off the debt they took on to take the newspaper private.
Defending the original business gets Locked-in at companies. Long after its value has declined, uneconomic decisions are made to try keeping it alive. Smart competitors don't sell good assets to invest in bad businesses. They follow the capitalistic system and direct investments where their value can grow. The New York Times may be a good newspaper – but who cares if people would rather get their news from TV and the internet – and they don't read newspapers "for fun?" When people don't read, and advertisers can get better return from media vehicles that don't have the printing and distribution costs of newspapers, what difference does it make if the outdated product is "good?" If you think the New York Times Company is cheap at $5.00 a share, you'll think it's really cheap in bankruptcy court. Just ask the employee shareholders at Tribune Company.
by Adam Hartung | Jan 27, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle, Web/Tech
Last week was quite a contrast in tech results. Google announced it had hired 99 new employees in the fourth quarter, but was planning to lay off 100. Not good news, but a veritable growth binge compared to Microsoft - that announced it was laying off 5,000 from its Windows business. To put it bluntly, people aren't buying PCs and that's the focus of all Microsoft sales. As the PC business stagnates – not hard to predict given the shift to newer products like netbooks, Blackberry's and iPhones - revenues at Microsoft have stagnated as well.
So now the pundits are predicting that Microsoft's weakness indicates an acquisition of Yahoo! is in the offing (read article here). The story goes that with things weak, Microsoft will buy Yahoo! to defend its survivability. Not dissimilar to the logic behind Pfizer's acquisition of Wyeth.
But does this really make sense? Microsoft is fully Locked-in to a completely outdated Success Formula. Mr. Ballmer has shown no ability to do anything beyond execute the old monopolistic model of controlling the desktop. Only a massive Disruption by founder Bill Gates kept Microsoft from falling victim to Netscape in the 1990s. But there hasn't been any White Space at Microsoft, and year after year Microsoft is falling further behind in the technology marketplace. Now the growth is gone in their technology. It's just a "cash cow" that is producing less cash every year. Microsoft is a boring company with boring management that has no idea how to compete against Google. They would strip out whatever market intelligence Yahoo! has left in an effort to turn the company into Microsoft. There would be nothing left of value, and a lot of cash burned up in the process.
Why shouldn't Yahoo! buy Microsoft? Google is the leader in search and on-line ad sales. The closest competitor is Yahoo!, which is so far behind it needs massive cash and engineering resources to develop a competitive attack. Yahoo! has a new CEO with the smarts and brass to Disrupt things and create a new Success Formula. Yahoo! could take advantage of the cash flow from Microsoft to develop new products, possibly products we've not thought of yet, that could create some viable competition for Google. We don't need another Microsoft, but we do need another Google! Why shouldn't Yahoo! take over the engineers and technical knowledge at Microsoft, as well as distribution, and use that to develop new solutions for web applications from possibly search to who knows what! Maybe something that moves beyond the iPhone and Blackberry!
What's the odds of this happening? Not good. That would defy conventional wisdom that the company with all the cash should win. But we all know that as investors we don't value cash in the bank, we value growth. So the company with growth opportunities, and the management to invest in new solutions, should be the one that "milks" the "cash cow." The growing company should be cutting the investment in old solutions that are near end-of-life (like Windows 7), and putting the money into growth programs that can generate much higher rates of return. By all logic of finance, and investing, Yahoo! should buy Microsoft. It's Ms. Bartz we need running a high tech company, shaking things up as the underdog ready to use White Space to develop new solutions that can generate growth. Like she did when beating Calma and DEC. Not the CEO best known for his on-stage monkey imitation and no idea how to generate growth because he's so committed to Defending & Extending the old cash business — completely missing every new technology innovation in the last decade.
Yahoo! has a chance of being a viable competitor. Yahoo! has a chance of competing against Google and pushing both companies to new solutions making the PC an obsolete icon of the past. But if Microsoft buys Yahoo!, it will do nobody any good.
by Adam Hartung | Jan 26, 2009 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Do you remember when Home Depot was a Wall Street – and customer – darling? Home Depot was only 20 years old when its incredible growth story vaulted it onto the Dow Jones Industrial Average 9 years ago, replacing Sears. Unfortunately, that youthful ascent turned out to be the company crescendo. Since peaking in value within a year, Home Depot has lost more than 2/3 of its value (see chart here). Things have not been good for the company that "changed the rules" on home do-it-yourself sales.
Along the way, Home Depot changed its CEO a couple of times. And it opened some White Space type of projects. But today, the company announced it was shutting down those projects (Expo Design Centers, YardBIRDs, HD Bath) cutting 5,000 jobs - and an additional 2,000 jobs in a "streamlining" efforts (read article here). In the process, it affirmed revenue will decline 8% this year while earnings per share will drop 24%.
Amidst this background, the stock rose 4.5%.
Home Depot is a company with a very strong Success Formula. That Success Formula met the market needs so well in the 1980s and 1990s that the company excelled beyond all expectations. But like most companies, Home Depot was a "one trick pony." It knew how to do one thing, one way. Then in the early 2000s, competitors started catching up. And Home Depot didn't have anything new to offer. The market started shifting to competitors with lower price – or competitors with even better customer service – leaving Home Depot "stuck in the middle" decent at both price and service not not best at either. And with nothing really knew to attract customers.
So Home Depot launched Expo Design Centers. It was leadership's effort to go further upmarket – to sell even higher priced home items. This was a failed effort from the start:
- Leadership did not tie its projects to any committed scenario of the future where Expo would create a leadership position. There was no scenario planning which showed a critical need for Home Depot to change.
- Expo did not learn from competitors, nor did it set any new standards that exceeded competitors. KDA and others had long been doing what Expo did – and even better! Rather than obsessing about competitors in order to realize where Home Depot was weak, and finding new ways to grow the market, Home Depot decided to launch its own idea without powerful competitive information.
- Thirdly, Home Depot did not Disrupt at all. Although Expo existed, it was never considered important to the company future. Leadership never said it needed to do anything different, nor that it felt these new projects were critical to company success. Instead, leadership let all the employees believe these projects were merely trial balloons with limited commitment.
- And, for sure, Expo and other projects did not meet the real criteria of White Space because they lacked the permission to violate Home Depot Lock-ins and the resources to really be successful.
Now, years later, with the company in even more trouble, Home Depot is closing these stores. It appears management is taking a page from Sears – the company they displaced on the DJIA – which closed its hardware and other store concepts to maintain its focus on traditional Sears. And we all know how that's worked out. Leadership is wiping out growth opportunities to save cost, in order to Defend its now poorly performing Success Formula, rather than using them to try developing a solution for declining revenues and profits. So easy to simply quit. Instead of re-orienting the projects along The Phoenix Principle to try and fix Home Depot, leadership is killing the growth potential to save cost with hopes that some miracle will return the world to the days when Home Depot grew and made above-average returns.
What do Home Depot leaders want employees, investors and vendors to anticipate will turn around this company? Even though Home Depot was a phenomenal success, once it hit a growth stall it fell amazingly fast. Not its historical growth rate, nor its size, nor its reputation was able to stop the ongoing decline that befell Home Depot once it hit a growth stall. (By the way, 93% of those companies that hit a growth stall follow the same spiraling downward path as Home Depot). As Sears has shown, a retailer cannot cost-cut its way to success. Refocusing on its "core business" will not return Home Depot to its halcyon days. And these cuts further assure ongoing company decline.
