Some think the recent rash of of billionaires buying newspapers is simply rich folks buying themselves trophies. Probably true in some instances – and that benefits no one. Just look at how Sam Zell ruined The Chicago Tribune and Los Angeles Times. Or Rupert Murdoch's less than stellar performance owning The Wall Street Journal. It's hard to be excited about a financially astute commodities manager, like John Henry, buying The Boston Globe – as it has all the earmarks of someone simply jumping in where angels fear to tread.
These companies lost their way long ago. For decades they defined themselves as newspaper companies. They linked everything about what they did to printing a daily paper. The service they provided, which was a mix of hard news and entertainment reporting, was lost in the productization of that service into a print deliverable.
So when people started to look for news and entertainment on-line, these companies chose to ignore the trend. They continued to believe that readers would always want the product – the paper – rather than the service. And they allowed themselves to remain fixated on old processes and outdated business models long after the market shifted.
The leaders ignored the fact that advertisers could obtain much more directed placement at targets, at far lower cost, on-line than through the broad-based, general ads placed in newspapers. And that consumers could get a much faster, and cheaper, sale via eBay, CraigsList or Vehix.com than via overpriced classified ads.
Newspaper leadership kept trying to defend their "core" business of collecting news for daily publication in a paper format. They kept trying to defend their local advertising base. Even though every month more people abandoned them for an on-line format. Not one major newspaper headmast made a strong commitment to go on-line. None tried to be #1 in news dissemination via the web, or take a leadership role in associating ad placement with news and entertainment.
They could have addressed the market shift, and changed their approach and delivery. But they did not.
Money manager Mr. Henry has done a good job of turning the Boston Red Sox into a profitable institution. But there is nothing in common between the Red Sox, for which you can grow the fan base, bring people to the ballpark and sell viewing rights, and The Boston Globe. The former is unique. The latter is obsolete. Yes, the New York Times company paid $1.1B for the Globe in 1993, but that doesn't mean it's worth $70M today. Given its revenue and cost structure, as a newspaper it is probably worth nothing.
But, we all still want news. Nobody wants the information infrastructure collecting what we need to know to crumble. Nobody wants journalism to die. But it is unreasonable to expect business people to keep investing in newspapers just to fulfill a public good. Even Mr. Zell abandoned that idea.
Thus, we need the news, as a service, to be transformed into a new, profitable enterprise. Somehow these organizations have to abandon the old ways of doing things, including print and paper distribution, and transform to meet modern needs. The 6 year revenue slide at Washington Post has to stop, and instead of thinking about survival company leadership needs to focus on how to thrive with a new, profitable business model.
By not doing what everyone else did, breaking all the rules of traditional retail, Mr. Bezos built Amazon.com into a $61B general merchandise retailer in 20 years. When publishers refused to create electronic books he led Amazon into competing with its suppliers by becoming a publisher. When Microsoft wouldn't produce an e-reader, retailer and publisher Amazon.com jumped into the intensely competitive world of personal electroncs creating and launching Kindle. And then upped the stakes against competitors by enhancing that into Kindle Fire. And when traditional IT suppliers like HP and Dell were slow to help small (or any) business move toward cloud computing Amazon launched its own network services to help the market shift.
And that is exactly what the news industry needs today. Today's leaders are HuffingtonPost.com, Marketwatch.com and other web sites with wildly different business models than traditional paper media. WaPo success will require transforming a dying company, tied to an old success formula, into a trend-aligned organization that give people what they want, when they want it, at a profit.
And it's hard to think of someone better experienced, or skilled, than Jeff Bezos to provide that kind of leadership. With just a little imagination we can imagine some rapid moves:
distribution of all content via Kindle style eReaders, rather than print. Along with dramatically increasing the cost of paper subscriptions and daily paper delivery
Instead of a "one size fits all" general purpose daily paper, packaging news into more fitting targeted products. Sports stories on sports sites. Business stories on business sites. Deeper, longer stories into ebooks available for $.99 purchase. And repackaging of stories that cover longer time spans into electronic short-books for purchase.
Packaging content into Facebook locations for targeted readers. Tying ads into these social media sites, and promoting ad sales for small, local businesses to the Facebook sites.
Or creating an ala carte approach to buying various news and entertainment in an iTunes or Netflix style environment (or on those sites)
Robustly attracting readers via connecting content with social media, including Twitter, to meet modern needs for immediacy, headline knowledge and links to deeper stories — with sales of ads onto social media
Tying electronic coupons, and buy-it-now capabilities to ads linked to appropriate content
Retargeting advertising sales from general purpose to targeted delivery at specific readers, with robust packages of on-line coupons, links to specials and fast, impulse purchase capability
Increased use of bloggers and ad hoc writers to supplement staff in order to offer opinions and insights quickly, but at lower cost.
Changes in compensation linked to page views and readership, just as revenue is linked to same.
We've watched a raft of newspapers and magazines disappear. This has not been a failure of journalism, but rather a failure of business leaders to address shifting markets and transform old organizations to meet modern needs. It's not a quality problem, but rather a failure of strategy to adapt to shifting markets. And that's a lesson every business leaders needs to note, because today, as I wrote in April, 2012, every company has to behave like a tech company!
Doing more of the same, cutting costs and rich egos won't fix a newspaper. Only the willingness to experiment and find new solutions which transform these organizations into something very different, well beyond print, will work. Let's hope Mr. Bezos brings the same zest for addressing these challenges and aligning with market needs he brought to Amazon. To a large extent, the future of news and "freedom of the press" may well depend upon it.
Alex Robles protests in front of a McDonald’s in 2013, in Phoenix. (AP Photo/Ross D. Franklin)
Add me to the mailing list!
Horatio Alger wrote books in the 1800s about young poor boys who became wealthy via clean living and hard work. Americans loved the idea that anyone can become rich, and loved those stories. We love them as much today as then, clinging to the non-rich roots of successes like Steve Jobs.
Unfortunately, such possibilities have been growing tougher in America. Today U.S. income inequality is among the highest in the world, while income mobility is among the lowest. You are more likely to go from rags to riches in France or Germany than the USA. Net/net – in current circumstances your most important decision is who will be your parents, because if you are born rich you will likely live a rich life, while if you are born poor you’ll probably die poor.
Organizations like Occupy Wall Street have tried to bring the problem of inequality and jobs to the face of America – with mixed results. But the truth is that 80% of Americans will face poverty and unemployment in their lifetimes. And the biggest growth in poverty, declining marriage rates and single mother households all belong to white Americans today. These poverty related issues are no longer tied to skin color or immigration they way they once were.
This situation has given birth to a new trend – frequently referred to as the “living wage.” A living wage allows one parent to earn enough money from a single 40 hour per week job to feed, cloth, educate, transport and otherwise lead a decent life for a family of 4. Today in America this is in the range of $13.50-$15.00 per hour.
This, of course, should not be confused with the minimum wage which is a federally (or state) mandate to pay a specific minimum hourly wage. Because the minimum wage is lower than living wage, a movement has been started to match the two numbers – something which would roughly double today’s $7.25 federal minimum wage.
This concept would have been heresy just 40 years ago. America’s Chamber of Commerce and other pro-business groups have long attempted to abolish the minimum wage, and have fought hard against any and every increase.
Regardless of your opinion about the economics (or politics) of such a move, the trend is definitely building for taking action.
The biggest industries affected by such an increase would be fast food and retail. And if these companies don’t do something to adapt to this trend the results could be pretty severe.
Couple this with McDonald’s laissez-faire attitude about obesity trends, and you have two big trends that don’t bode well for rising returns for shareholders. Yet, other than opposing regulations and government action on these matters McDonald’s has shown no ability to adapt to these rather important, and impactful, trends. Hoping there will be no legislation is a bad strategy. Fighting against any change, given the public health and economic situation, is as silly as fighting against regulations on tobacco was in the 1960s. But so far there has been no proposed adaptation to McDonald’s 50 year old success formula offered to investors, employees, customers or legislators.
It would seem such harsh action, given the small impact, is a bit illogical. Given that WalMart is already out of step with the trend toward on-line shopping, why would the company want to take such an additional action fighting against a trend that affects not only its profits, but most of its customers — who would benefit from a rise in income and buying power?
In 1914 Henry Ford was suffering from high turnover and a generally unhappy workforce. He reacted by doubling pay – with his famous “$5 day”. Not only did he reduce turnover, he became the perferred employer in his industry – and rather quickly it became clear that employees who formerly could not afford an automobile were able to now become customers at the new, higher pay scale. Apparently nobody at WalMart is familiar with this story. Or they lack the will to apply it.
Fighting trends is expensive. Yet, most leadership teams become stuck defending & extending an old strategy – an old success formula – even after it is out of date. Most companies don’t fail because the leadership is incompetent, but rather because they fail to adapt to trends and changing circumstances. Long-lived companies are those which build for future scenarios, rather than trying to keep the world from changing by spending on lobbyists, advertising and other efforts to halt (or reverse) a trend.
McDonald’s and WalMart (and for that matter Yum Brands, Wendy’s, JCPenney, Sears, Best Buy and a whole host of other companies) are largely unwilling to admit that the future is likely to look different than the past. Will that kill them? It sure won’t help them. But investors could feel a lot more comfortable (as would employees, suppliers and customers) if they would develop and tell us about their strategies to adapt to changing circumstances.
Are you looking at trends, developing scenarios about the future and figuring out how to adapt in ways that will help you profitably grow? Or are you stuck defending and extending an old success formula even as markets shift and trends move customers in different directions?
Both Coca-Cola and McDonald's have produced good investor returns over the last decade. From stock lows in early 2009, Coke has more than doubled. After shutting many stores and investing heavily in upgrades as well as supply chain efficiencies, over the last decade McDonald's has risen 6-fold!
But recent quarterly returns have not impressed investors as both companies failed to meet expectations. And for traders with a short-term focus both companies are off their 2013 highs. The open question now, for patient investors with a multi-year focus, is whether either, or both, companies are going to go back to long-term valuation growth (meaning they are a buy) or if their value has fizzled (meaning they are a sell)?
This question cannot be answered by looking at historical performance. As all investment documents remind us, past history is no assurance of future gains. Instead investors need to look at trends, and whether each company is positioned to take advantage of major trends as we head toward 2020.
One major trend is obesity. And not in a good way. The USA is fatter than ever, and shows no signs of thinning as one in 3 people are now considered obese. For Coke and McDonald's this is not a good thing, since their products are considered major contributors to what some call a national epidemic.
Even if this still seems like much ado about nothing, investors should be aware of the long-term impact when products are seen as unhealthy. Cigarettes were a common consumer staple well into the 1960s, but when that product was determined to have adverse health impacts advertising was banned, consumption was restricted to adults only, dispensing was severely limited as machines were eliminated, taxes shot through the ceiling creating a 20-fold price increase and consumption was banned in buildings and many public places. None of this happened overnight, but eventually these actions caused the sales and profits of tobacco companies to decline — despite their heroic efforts to fight the trend.
If the Centers for Disease Control takse the point of view that soft drinks are a major contributor to diabetes and other obesity-related illnesses, it is not out of the realm of possibility that Coke could find itself in a situation somewhat like Phillip Morris did. If the CDC made the same determination about certain fast food items (such as double-patty burger sandwiches or large french fry orders) the amount of advertising, free toys, discounted product and super-sized packaging available to McDonald's could be severly curtailed. It could become a requirement that Coke and Big Macs have warning labels educating consumers about the possibility of long-term illness from consumption. And product sales could only be limited only to people over 18.
This may seem extreme, even bizarre, and far off into the future. But this is the direction of the trend. There seems no solution for obesity at this time, so public policy is starting to point toward doing something about consumption.
Recall that when alcohol-related deaths showed no sign of decline it didn't take long for much tougher drunk driving laws to be enacted, then for a string of adjustments lowering the level at which people were considered drunk. Public policies that took direct aim at product consumption.
Looking at the tobacco and alcohol analogies, Coke and McDonald's are behaving a lot more like the R.J. Reynolds than Miller-Coors.
Tobacco companies fought the trend, and ended up in a very expensive and long battle they inevitably lost. They denied there was any public health problem, and denied they had anything to do with the nation's, and their customers', health issues. The fight lasted a very long time. Now their customers are often ostracized, and the industry is contracting.
Liquor companies took a different approach. While not admitting anything, they aggressively promoted "responsible" consumption levels. They promoted individual abstinence (non-consumption) in group settings so there could be a "designated driver" while actively promoting product bans for people under age. They did not fight drunk driving laws, but instead worked with organizations to reduce deaths. Though far from angels, the industry players did not fight the trend, and managed to find ways to avoid the kind of bans dealt tobacco.
Coke and McDonald's today are denying the obesity problem and their contribution to it. While they both have healthier products, they remain committed to the least healthy offerings. Watch a Coke ad and you'll always see the traditional, sweetened red label product receive top billing. Likewise, you can purchase a salad at McDonald's, but the ads and promotions always feature the far less healthy burgers and fried foods which characterize the company's history.
Neither company promotes responsible consumption levels, nor does anything to discuss the importance of limiting use of their products. To the contrary, both like to promote larger package sizes and greater consumption – often beyond what almost anyone would consider healthy. Neither works aggressively to improve the quality of healthy products, nor showcases them as preferred products for customers to purchase.
One would not expect Coke or McDonald's to fail any time soon. But the trends which made them huge companies have reached an end, and new trends are headed in a direction which do not support growth. Both companies seem unwilling to recognize the new trends, and find ways to align with them. Future revenue growth is up against a difficult environement, and historical cost reduction activities leave little opportunity to improve future earnings without revenue growth. While the valuation of both companies are unlikely to remain flat, it is hard to identify the bull case for either to provide long-term investors much gain.
The Dow Jones Industrial Average (DJIA) jumped to record levels – over 15,000 – today after a favorable U.S. jobs report showed 165K new jobs and a drop in unemployment to 7.5%. Politicians, economists, business leaders and investors were buoyed by economic improvements and the hope for further growth. A higher stock market is considered a great ointment for what has hurt America the last several years.
But there's a big, ugly fly in this ointment. While the indices are rising, revenues at many very large, key component companies are actually declining. And possibly worse, the revenue growth rate for large companies has been declining for at least 3 years.
As the chart shows, Caterpillar has led the revenue decline, dropping a whopping 17.5% year-over-year. But noteworthy declines included JPMorganChase dropping 15.5%, Pfizer down 12.4% and Merck down 9%. It's hard to imagine a great long-term bull market when revenues are distinctly going in a bearish direction for several stalwart companies.
It is also important to note that the rate of DJIA growth has declined markedly. In 2011 first quarter growth was 11.4% over 2010. But 2012 was only 9.4% over 2011 and 2013 came in only a paltry 3.8% over 2012. Ouch! Clearly, jobs growth will not be sustained if these organizations cannot put more money on the top line.
So why aren't these companies growing?
For companies to grow they must invest in new products, new markets and the resources to sell and deliver these new products and new markets. And that creates jobs. Think about easy to identify revenue successes like Apple (iPads,) Samsung (smartphones,) Amazon.com, Netflix, Tesla, Facebook. Proper investment leads to revenue growth opportunities.
But, unfortunately, America's leaders have reduced their investment in growth projects the last 15 years. Instead, they've been giving more money to investors — and increasingly dumping money into stock buybacks that manipulate price and help improve management bonuses!
As the chart demonstrates, in 1998 42% of corporate cash was reinvested into the means of production – which creates growth. Today this has declined to only about 1/3 of available cash; a whopping 25% decline! Additionally, R&D investments which should lead to new products and higher sales, dropped from 16% of cash used a decade ago to a more meager 12%!
Where has the money gone? 13% of cash was going directly to investors, who could then invest in other companies with higher rate of return growth projects. That number has risen to 18%, which is inherently a good thing as we can hope a lot of that has been re-invested in other companies.
But 13-17% used to be spent on stock buybacks, which create no revenue or economic growth. All share buybacks do is exchange cash for shares, reducing the number of shares and changing metrics like earnings per share and thus the price/earnings (P/E) multiple. It does not create any new investment. That number has risen to a staggering 22-34% of revenues!
Net/net, in the not too distant past America's leaders were putting 70-74% of their cash to work by investing in growth projects. And 12% was going to investors for projects elsewhere. By in the mid-1990s this reinvestment rate declined to 52-55%, ushering in the Great Recession. After improving this rate has started declining again, and remains stuck no better than 60% of cash. Coupled with the 5% increase in cash being robbed from growth projects to buy back stock, the net reinvestment remains mired at 55%!
American's want jobs and a growing economy. As do people everywhere! We are excited when we see improvement. But today, the ugly horsefly in the ointment is the lack of revenue growth – and the lack of investment in growth projects. Until business leaders begin putting their corporate cash hoards into growth projects again the long-term outlook remains problematic, even if the market is hitting record DJIA highs.
JCPenney's board fired the company CEO 18 months ago. Frustrated with weak performance, they replaced him with the most famous person in retail at the time. Ron Johnson was running Apple's stores, which had the highest profit per square foot of any retail chain in America. Sure he would bring the Midas touch to JC Penney they gave him a $50M sign-on bonus and complete latitude to do as he wished.
Things didn't work out so well. Sales fell some 25%. The stock dropped 50%. So about 2 weeks ago the Board fired Ron Johnson.
The first mistake: Ron Johnson didn't try solving the real problem at JC Penney. He spent lavishly trying to remake the brand. He modernized the logo, upped the TV ad spend, spruced up stores and implemented a more consistent pricing strategy. But that all was designed to help JC Penney compete in traditional brick-and-mortar retail. Against traditional companies like Wal-Mart, Kohl's, Sears, etc. But that wasn't (and isn't) JC Penney's problem.
The problem in all of traditional retail is the growth of on-line. In a small margin business with high fixed costs, like traditional retail, even a small revenue loss has a big impact on net profit. For every 5% revenue decline 50-90% of that lost cash comes directly off the bottom line – because costs don't fall with revenues. And these days every quarter – every month – more and more customers are buying more and more stuff from Amazon.com and its on-line brethren rather than brick and mortar stores. It is these lost revenues that are destroying revenues and profits at Sears and JC Penney, and stagnating nearly everyone else including Wal-Mart.
Coming from the tech world, you would have expected CEO Johnson to recognize this problem and radically change the strategy, rather than messing with tactics. He should have looked to close stores to lower fixed costs, developed a powerful on-line presence and marketed hard to grab more customers showrooming or shopping from home. He should have targeted to grow JCP on-line, stealing revenues from other traditional retailers, while making the company more of a hybrid retailer that profitably met customer needs in stores, or on-line, as suits them. He should have used on-line retail to take customers from locked-in competitors unable to deal with "cannibalization."
No wonder the results tanked, and CEO Johnson was fired. Doing more of the tired, old strategies in a shifting market never works. In Apple parlance, he needed to be focused on an iPad strategy, when instead he kept trying to sell more Macs.
What was that old description of insanity? Something about repeating yourself…..
Expectedly, Penney's stock dropped another 10% after announcing the old CEO would return. Investors are smart enough to recognize the retail market has shifted. That newsapaper coupons, circulars and traditional advertising is not enough to compete with on-line merchants which have lower fixed costs, faster inventory turns and wider product selection.
It certainly appears Mr. Johnson was not the right person to grow JC Penney. All the more reason JCP needs to accelerate its strategy toward the on-line retail trend. Going backward will only worsen an already terrible situation.
Interestingly, this study is based wholly on statistical performance, rather than customer input. The academics utilize on-time flight performance, denied passenger boardings, mishandled bags and complaints filed with the Department of Transportation. It does not even begin to explore surveying customers about their satisfaction. Anyone who flies regularly can well imagine those results. Oh my.
So how would you expect an innovative, adaptive growth-oriented company (think like Amazon, Apple, Samsung, Virgin, Neimann-Marcus, Lulu Lemon) to react to declining customer performance metrics? They might actually change the product, to make it more desirable by customers. They might hire more customer service representatives to identify customer issues and fix problems quicker. They might adjust their processes to achieve higher customer satisfaction. They might train their employees to be more customer-oriented.
But, United decidedly is not an innovative, adaptive organization. So it responded by denying the situation. Claiming things are getting better. And talking about how it is spending more money on its long-term strategy.
United doesn't care about customers – and really never has. United is focused on "operational excellence" (using the word excellence very loosely) as Messrs. Treacy and Wiersema called this strategy in their mega-popular book "The Discipline of Market Leaders" from 1995. United's strategy, like many, many businesses, is to constantly strive for better execution of an old strategy (in their case, hub-and-spoke flight operations) by hammering away at cutting costs.
Locked in to this strategy, United invests in more airplanes and gates (including making acquisitions like Continental) believing that being bigger will lead to more cost cutting opportunities (code named "synergies".) They beat up on employees, fight with unions, remove anything unessential (like food) invent ways to create charges (like checked bags or change fees), fiddle with fuel costs, ignore customers and constantly try to engineer minute enhancements to operations in efforts to save pennies.
Like many companies, United is fixated on this strategy, even if it can't make any money. Even if this strategy once drove it to bankruptcy. Even if its employees are miserable. Even if quality metrics decline. Even if every year customers are less and less happy with the product. All of that be darned! United just keeps doing what it has always done, for over 3 decades, hoping that somehow – magically – results will improve.
Today people have choices. More choices than ever. That's true for transportation as well. As customers have become less happy, they simply won't pay as much to fly. The impact of all this operational focus, but let the customer be danged, management is price degradation to the point that United, like all the airlines, barely (or doesn't – like American) cover costs. And because of all the competition each airline constantly chases the other to the bottom of customer satisfaction – each lowering its price as it mimics the others with cost cuts.
Success today – everywhere, not just airlines – requires more than operational focus. Constantly cutting costs ruins the brand, customer satisfaction, eliminates investment in new products and inevitably kills profitability. The litany of failed airlines demonstrates just how ineffective this strategy has become. Because operational improvements are so easily matched by competitors, and ignores alternatives (like trains, buses and automobiles for airlines) it leads to price wars, lower profits and bankruptcy.
Nobody looks to airlines as a model of management. But many companies still believe operational excellence will lead to success. They need to look at the long-term implications of this strategy, and recognize that without innovation, new products and highly satisfied new customers no business will thrive – or even survive.
Marissa Mayer created a firestorm this week by issuing an email requiring all employees who work from home to begin daily commuting to Yahoo offices. Some folks are saying this is going to be a blow to long-term employees, hamper productivity and will harm the company. Others are saying this will improve communications and cooperation, thin out unproductive employees and help Yahoo.
While there are arguments to be made on both sides, the issue is far simpler than many people make it out to be – and the implications for shareholders are downright scary.
Yahoo has been a strugging company for several years. And the reason has nothing to do with its work from home policy. Yahoo has lacked an effective strategy for a decade – and changing its work from home policy does nothing to fix that problem.
In the late 1990s almost every computer browser had Yahoo as its home page. But Yahoo long ago lost its leadership position in content aggregation, search and ad placement. Now, Yahoo is irrelevant. It has no technology advantage, no product advantage and no market advantage. It is so weak in all markets that its only value has been as a second competitor that keeps the market leader from being attacked as a monopolist!
A series of CEOs have been unable to develop a new strategy for Yahoo to make it more like Amazon or Apple and less like – well, Yahoo. With much fanfare Ms. Mayer was brought into the flailing company from Google, which is a market leader, to turn around Yahoo. Only she's been on the job 7 months, and there still is no apparent strategy to return Yahoo to greatness.
Instead, Ms. Mayer has delivered to investors a series of tactical decisions, such as changing the home page layout and now the work from home policy. If tactical decisions alone could fix Yahoo Carol Bartz would have been a hero – instead of being pushed out by the Board in disgrace.
Many leading pundits are enthused with CEO Mayer's decision to force all employees into offices. They are saying she is "making the tough decisions" to "cut the corporate cost structure" and "push people to be more productive." Underlying this lies thinking that the employees are lazy and to blame for Yahoo's failure.
Balderdash. It's not employees' fault Yahoo, and Ms. Mayer, lack an effective strategy to earn a high return on their efforts.
It isn't hard for a new CEO to change policies that make it harder for people to do their jobs – by cutting hours out of their day via commuting. Or lowering productivity as they are forced into endless meetings that "enhance communication and cooperation." Or forcing them out of the company entirely with arcane work rules in a misguided effort to lower operating costs or overhead. Any strategy-free CEO can do those sorts of things.
The the fact that some Yahoo employees work from home has nothing to do with the lack of strategy, innovation and growth at Yahoo. That failure is due to leadership. Bringing these employees into offices will only hurt morale, increase real estate costs and push out several valuable workers who have been diligently keeping afloat a severely damaged Yahoo ship. These employees, whether in an office or working at home, will not create a new strategy for Yahoo. And bringing them into offices will not improve the strategy development or innovation processes.
Regardless of anyone's personal opinions about working from home, it has been the trend for over a decade. Work has changed dramatically the last 30 years, and increasingly productivity relies on having time, alone, to think and produce charts, graphs, documents, lines of code, letters, etc. Technologies, from PCs to mobile devices and the software used on them (including communications applications like WebEx, Skype and other conferencing tools) make it possible for people to be as productive remotely as in person. Usually more productive removed from interruptions.
Taking advantage of this trend helps any company to hire better, and be more productive. Going against this trend is simply foolish – regardless the intellectual arguments made to support such a decision. Apple fought the trend to PCs and almost failed. When it wholesale adopted the trend to mobile, seriously reducing its commitment to PC markets, Apple flourished. It is ALWAYS easier to succeed when you work with, and augment trends. Fighting trends ALWAYS fails.
Yahoo investors have plenty to be worried about. Yahoo doesn't need a "tough" CEO. Yahoo needs a CEO with the insight to create, and implement, a new strategy. And a series of tactical actions do not sum to a new strategy. As importantly, the new strategy – and its implementation – needs to augment trends. Not go against trends while demonstrating the clout of a new CEO.
If you've been waiting to figure out if Ms. Mayer is the CEO that can make Yahoo a great company again, the answer is becoming clear. She increasingly appears very unlikely to have what it takes.
Forbes republished its annual "Most Miserable Cities" list. It looks at employment/unemployment, inflation, incomes and cost of living, crime, weather, commute times – a pretty good overview of things tied to living somewhere. Detroit ranked first, as the most miserable city, with Flint, MI second. And my home-sweet-home Chicago came in fourth. Ouch!
There is an important lesson here for every city – and for our country.
Detroit was a thriving city during the industrial revolution. Innovation in all things mechanical led to the modern automobile; a marvelous innovation which, literally, everyone wanted. As demand skyrocketed, Henry Ford's management team developed the modern assembly line which allowed production volumes to skyrocket as well. Detroit was a hotbed of industrial innovation.
This fueled growth in jobs, which led to massive immigration to Detroit. With growth the tax base expanded, and quickly Detroit was a leading city with all the best things people could want. In the 1950s and 1960s Detroit reaped the benefits of the local auto companies, and their suppliers, as ongoing innovations drove better cars, more sales, more revenue taxes, higher property values and higher property taxes. It was a glorious virtuous circle.
But things changed.
Offshore competitors came into the market creating different kinds of autos appealing to different customers. Initially they had lower costs, and less expensive designs. Their cars weren't as good as GM, Ford or Chrysler – but they were cheap. And when gasoline prices took off in the 1970s people suddenly realized these cars were also more fuel efficient and cheaper to maintain. As these offshore competitors gained more sales they invested in making better cars, until they had quality as good as the Detroit companies, plus better fuel efficiency.
But the Detroit companies had become stuck in their processes that worked in earlier days. Even though the market shifted, they didn't. What passed for innovations were increasingly simple appearance changes as bottom-line focus reduced willingness to do new things, and offered fewer new things to do. GM and its brethren didn't shift with the market, and by the 1980s the seeds of big problems already were showing. By the 1990s profits were increasingly variable and elusive.
The formerly weak and small competitors now were more competitive in a changed market favoring smaller cars with more, and better, technology. The market had changed, but the big American auto companies had not. They kept doing more of the same – hopefully better, faster and striving for cheaper. But they were falling further behind. By the 2000s decade failure had become the viable option, with both Chrysler and GM going bankrupt.
As this cycle played out, the impact on Detroit was clear. Less success in the business base meant fewer revenue tax dollars from less profitable companies. Cost reductions meant employment stagnated, then started falling. Incomes stagnated, and people left Detroit to find better paying jobs. Property values began to fall. Income and property taxes declined. Governments had to borrow more, and cut costs, leading to declines in services. What had been a virtuous circle became a violently destructive whirlpool.
Detroit's business leaders failed to invest in programs to drive more new jobs in non-auto, non-industrial, business development. As competitors hurt the local industry, Detroit (and Michigan's) leaders kept trying to invest in saving the historical business, while the economy was shifting from an industrial base to an information one. It wasn't just autos that were less valuable as companies, but everything industrial. Yet, leaders failed at attracting new technology companies. The economic shift – the market shift – was unaddressed, and now Detroit is bankrupt.
Much as I like living in Chicago, unfortunately the story is far too similar in my town. Long an industrial hub, Chicago (and Illinois) enjoyed the benefits of growing companies, employment and taxes during the heyday of industrialism. This led to well paid, and very well pensioned, government employees providing services. The suburbs around Chicago exploded as people migrated to the Windy City for jobs – despite the brutal winters.
But Chicago has been dramatically affected by the shift to an information economy. The old machine shops, tool and dye makers and myriad parts manufacturers were decimated as that work often went offshore to cheaper manufacturers. Large manufacturers like Western Electric and International Harvester (renamed Navistar) failed. Big retailers like Montgomery Wards disappeared, and even Sears has diminished to a ghost of its former self. All businesses killed by market shifts.
And as a result, people quit moving to Chicago – and actually started leaving. There are now fewer jobs in Illinois than in the year 2000, and as a result people have left town. They've gone to cities (and states) where they could find jobs in growth industries allowing for more opportunity, and rising incomes.
Just like Detroit, Chicago shows early signs of big problems. Crime is up, with an unpleasantly large increase in murders. Insufficient income and property tax revenues led to budget crises across the board. Dramatic actions like selling city parking meters to shore up finances has led to Chicago having the most expensive parking in the country – despite far from the highest incomes. Property taxes in suburbs have escalated, with taxes in collar Lake county higher than Los Angeles! Yet the state pension system is bankrupt, causing the legislature to put in place a 50% state income tax increase! Meanwhile the infrastructure is showing signs of needing desperate work, but there is no money.
Like Detroit, Chicago's businesses (and governments) have invested insufficiently in innovation. Recent Chicago Tribune columns on local consumer goods behemoth Kraft emphasized (and typified) the lack of new product development and stalled revenue growth. Where Bay Area tech companies expect 50% of revenues (or more) from new products (or variations), Kraft has admitted it has relied on stalwarts like Velveeta and Mac & Cheese so much that fewer than 10% of revenues come from anything new.
Culturally, too many decisions in the executive suites of both the companies, and the governments, are focused on what worked in the past rather than investing in innovation. Even though the vaunted University of Illinois has one of the world's top 5 engineering schools, the majority of graduates find they leave the state for better paying jobs. And a dearth of angel or venture funding means that start-ups simply are forced coastal if they hope to succeed.
And this reaches to our national policies as well. Plenty of arguments abound for cutting costs – but are we effectively investing in innovation? Do our tax policies, as well as our expenditures, drive innovation – or constrict it? It was government programs which unleashed nuclear power and gave us a rash of innovations from putting a man on the moon. Yet, today, we seem obsessed with cutting budgets, cutting costs and doing less – not even more – of the same.
Growth is a wonderful thing. But growth does not happen without investment in innovation. When companies, or industries, stop investing in innovation growth slows – and eventually stops. Communities, states and even nations cannot thrive unless there is a robust program of investing for, and implementing, innovation.
With innovation you create renewal. Without it you create Detroit.
Microsoft needed a great Christmas season. After years of product stagnation, and a big market shift toward mobile devices from PCs, Microsoft's future relied on the company seeing customers demonstrate they were ready to jump in heavily for Windows8 products – including the new Surface tablet.
Looking deeper, for the 4th quarter PC sales declined by almost 5% according to Gartner research, and by almost 6.5% according to IDC. Both groups no longer expect a rebound in PC shipments, as they believe homes will no longer have more than 1 PC due to the mobile device penetration – the market where Surface and Win8 phones have failed to make any significant impact or move beyond a tiny market share. Users increasingly see the complexity of shifting to Win8 as not worth the effort; and if a switch is to be made consumer and businesses now favor iOS and Android.
These trends mean nothing short of the ruin of Microsoft. Microsoft makes more than 75% of its profits from Windows and Office. Less than 25% comes from its vaunted servers and tools. And Microsoft makes nothing from its xBox/Kinect entertainment division, while losing vast sums on-line (negative $350M-$750M/quarter). No matter how much anyone likes the non-Windows Microsoft products, without the historical Windows/Office sales and profits Microsoft is not sustainable.
So what can we expect at Microsoft:
Ballmer has committed to fight to the death in his effort to defend & extend Windows. So expect death as resources are poured into the unwinnable battle to convert users from iOS and Android.
As resources are poured out of the company in the Quixotic effort to prolong Windows/Office, any hope of future dividends falls to zero.
Expect enormous layoffs over the next 3 years. Something like 50-60%, or more, of employees will go away.
Expect closure of the long-suffering on-line division in order to conserve resources.
The entertainment division will be spun off, sold to someone like Sony or even Barnes & Noble, or dramatically reduced in size. Unable to make a profit it will increasingly be seen as a distraction to the battle for saving Windows – and Microsoft leadership has long shown they have no idea how to profitably grow this business unit.
As more and more of the market shifts to competitive cloud businesses Apple, Amazon and others will grow significantly. Microsoft, losing its user base, will demonstrate its inability to build a new business in the cloud, mimicking its historical experiences with Zune (mobile music) and Microsoft mobile phones. Microsoft server and tool sales will suffer, creating a much more difficult profit environment for the sole remaining profitable division.
Missing the market shift to mobile has already forever tarnished the Microsoft brand. No longer is Microsoft seen as a leader, and instead it is rapidly losing market relevancy as people look to Apple, Google, Amazon, Samsung, Facebook and others for leadership. The declining sales, and lack of customer interest will lead to a tailspin at Microsoft not unlike what happened to RIM. Cash will be burned in what Microsoft will consider an "epic" struggle to save the "core of the company."
But failure is already inevitable. At this stage, not even a new CEO can save Microsoft. Steve Ballmer played "Bet the Company" on the long-delayed release of Win8, losing the chance to refocus Microsoft on other growing divisions with greater chance of success. Unfortunately, the other players already had enough chips to simply bid Microsoft out of the mobile game – and Microsoft's ante is now long gone – without holding a hand even remotely able to turn around the product situation.
Game over. Ballmer loses. And if you keep your money invested in Microsoft it will disappear along with the company.
I nominate McDonald's for the 2012 Dickens' Award as the most Scrooge-est business behavior this season.
"Christmas is but an excuse for workers to pick their employer's pockets every 25th December" is I believe how Charles Dickens put it in "A Christmas Carol." Poor Bob Cratchet couldn't even have 1 day off per year. And in McDonald's case the company founder actually made it corporate policy to never be open on Thanksgiving or Christmas days so employees could be with family.
Bah! Humbug!
Now, there are a lot of trends McDonald's could legitimately cite when making a case for being open on Christmas – a case that could actually shed a positive light on the company:
The number of single people has risen over the last decade. This trend means that many more people now have a need for at least one meal not in a family setting on 25 December.
America has a large and storied Jewish community for whom 25 December does not have a special religious meaning. For these people enjoying their habitual norms such as eating at McDonald's would indicate an open-minded company supports all faiths.
America is a nation of immigrants. While the founders were European Christians, today America has a very diverse group of immigrants, especially from Asia and the Indian sub-continent, who follow Islam and other faiths for which 25 December has, again, no particular meaning. Offering them a place to eat on their day off could show a connection with their growing importance to America's future. An act of understanding to their impact on the country.
These are just 3, and there are likely more and better ones (please offer your thoughts in the comments section.) But truthfully, this is not why McDonald's is urging franchisees to toil on this national holiday. Instead, it is just to make a buck.
But then again, what trend has McDonald's successfully leveraged in the last… let's say 2 decades? Despite the rapid growth of high end coffee, the "McCafe" concept was a decade late, and so missed the mark that it has made no impact when competing against Caribou Coffee, Peet's or Starbucks. And it has had minimal benefit for McDonald's.
To understand the dearth of new products just go to McDonald's web site where you'll see an animated ad for the "101 reasons to eat a McRib" – that mystery meat product which is at least 30 years old and rotated on and off the menu in the guise of "something new."
McDonald's had a very rough last quarter. It's sales per store declined versus a year ago. The number of stores has stagnated, sales are stagnant, new products are non-existent. Even Ronald McDonald has aged, and apparently moved on to the nursing home. What can you think about that is exciting about McDonald's?
Desperate to do something, McDonald's fired the head of North America. But that doesn't fix the growth problem at McDonald's, it just demonstrates the company is internally fixated on blame rather understanding external market shifts and taking action. McDonald's keeps doing more of the same, year after year; such as opening more stores in emerging markets, staying open longer hours at existing locations and even opening on Thanksgiving and Christmas in the U.S.
McDonald's Ghost of Christmas past was its great strength, from its origin, of consistency. In the 1960s when people traveled away from home they could never be quite sure what a restaurant offered. McDonald's offered a consistent product, that people liked, at a consistent (and affordable) price. This success formula launched tremendous growth, and a revolution in America's restaurant industry, creating a great string of joyous past Christmases.
But the Ghost of Christmas present is far more bleak. 50 years have passed, and now people have a lot more options – and much higher expectations – regarding dining. But McDonald's really has failed to adapt. So now it is struggling to grow, struggling to meet goals, struggling to be a kind and gentle employer. Now asking its employees to work on Christmas – and ostensibly eat Big Macs.
What is the Ghost of Christmas Future for McDonald's? Not surprisingly, if it cannot adapt to changing markets things are likely to worsen. No company can hope to succeed by simply doing more of the same forever. Constantly focusing on efficiency, and beating on franchisees and employees to stay open longer, is a downward spiral. Eventually every business HAS to innovate; adapt to changing market conditions, or it will die. Just look at the tombstones – Kodak, Hostess, Circuit City, Bennigan's ….
Take time between now and 2013 to ask yourself, what is your Ghost of Christmas past upon which your business was built? How does that compare to the Ghost of Christmas present? If there's a negative gap, what should you expect your Ghost of Christmas Future to look like? Are you adapting to changing markets, or just hoping things will improve while you resist putting enough coal on the fire to keep everyone warm?
