by Adam Hartung | Apr 1, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Lifecycle, Lock-in, Web/Tech
How many of these company names do you remember — Sperry Rand? Burroughs? Univac? NCR? Control Data? Wang? Lanier? DataPoint? Data General? Digital Equipment/DEC? Gateway? Cray? Novell? Banyan? Netscape?
I'm only 50, yet most of these companies were originated, became major successes, and failed within my lifetime. Now, prepare to add a couple more. In the 1980s Silicon Graphics set the standard for high-speed computing, using their breakthrough technology to open the door on graphics. There never would have been a PS3 or Wii were it not for the pioneering work at SGI. The company invented high speed graphics calculating methods that allowed for "real-time" animation on a computer, as well as "color fill" and "texture mapping" – all capabilities we take for granted on our computer screen today but that were merely dreams to early GUI users. But now SGI has disappeared according to the Cnet.com article "First GM, Now Silicon Graphics. Lessons Learned?" The company that expanded the high-speed computing market most on SGI's early lead was Sun Microsystems, building the boxes upon which the first all-computer animated movie was made – Toy Story. But 2 weeks ago we learned Sun will most likely soon disappear into the bowels of IBM ("Final Chapter for Sun Micro Could be Written by IBM" at WSJ.com)
When Clayton Christensen wrote The Innovator's Dilemma he said academics like to talk about the tech industry because the product life cycles are so short. Actually, he would have been equally accurate to say their company life cycles were so short. For business academics, looking at tech companies is like cancer researchers looking at white lab mice. Their lifespan is so short you can rapidly see the impact of business decisions – almost like having a business lab.
What we see at these companies was an inability to shift with changes in their markets. They all Locked-in on some assumptions, and when the market shifted these companies stayed with their old assumptions – not shifting with market needs. Like Jim Collins' proverbial "hedgehog" they claimed to be the world's best at something, only to learn that the world put less and less value in what they claimed as #1. Either the technology shifted, or the application, or the user requirements. In the end, we can look back and their lives are like a short roller coaster – up and then crashing down. Lots of money put in, lots spent, not much left for investors, vendors or employees at the end. They were #1, very good (in fact, exceptional), and met a market need. Yet they were unable to thrive and even survive – because a market shift emerged which they did not follow, did not meet and eventually made them obsolete.
Today we can see the same problem emerging in some of the even larger tech companies we've grown to admire. Dell taught everyone how to operate the world's best supply chain. Yet, they've been copied and are seeing their market weaken to new products supplied by different channels. Microsoft monopolized the "desktop", but today less and less computing is done on desktops. Computing today is moving from the extremes of your hand (in your telephone) to "clouds" accessed so serrendipituously that you aren't even sure where the computing cycles are, much less how they are supplied. And software is provided in distributed ways between devices and servers such that an internet search engine provider (Google) is beginning to provide operating systems (Android) for new platforms where there is no "desktop." As behemoth as these two companies became, as invincible as they looked, they are equally vulnerable to the fate of those mentioned at the beginning of this blog.
Of course, their fate is not sealed. Apple and IBM both are tech companies that came perilously close to the Whirlpool before finding their way back into the Rapids. When businesses decide their best future is to Defend & Extend past strengths they get themselves into trouble. To break out of this rut they have to spend less time thinking about their strengths, and more about market needs. Instead of looking at similar competitors and figuring out how to be better, they have to look at fringe competitors and figure out how to change with emerging market requirements. And just like they disrupted the marketplace once with their excellence, they must be willing to disrupt their internal processes in order to find White Space where they can create new market disruptions.
Today, with change affecting all companies, it is important that leaders look at the "lab results" from tech. It's important to recognize past Lock-ins, and assumptions about continuation (or return to) past markets. Markets are changing, and only those that take the lead with customers will quickly return to profitability and emerge market leaders. It's those new leading companies that will get the economy growing again, so waiting is really not an option.
by Adam Hartung | Mar 31, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Whirlpool, Leadership, Quotes
Readers of this blog know I've been very pessimistic about the future of GM for well over 2 years. And I've long extolled the need to change top management. I'm passing along some quotes from Professor Rosabeth Moss Kanter at the Harvard Business School in "Why Rick Wagoner Had to Go" at Harvard Business School publishing's web site.
"It was only a matter of time before GM's Rick Wagoner would have to go, and the board with him. I am surprised he lasted this long, a fact that also shows weakness on the board side…. In this tough economic environmnet, if you wait too long to envision and implement transformational changes you are out of the game. That holds for every industry under attack because of obsolete business models, including newspapers and big pharma…. New leaders at the top can bring a novel perspective, unburdened by the need to justify strategies of the past, and not stuck in a narrow way of thinking…. Companies finding themselves in a downward spiral need fresh views, not just redoubled efforts to do the same thing while waiting for the recession to end….. Now is the time for every company to do what GM failed to do fast enough and imaginatively enough: rethink everything. What…. takes you into the future, and what is just legacy, continued out of sentiment?"
Thanks Professor Kantor, I agree completely. GM was stuck Defending & Extending its old Success Formula, and as a result performance deteriorated to the point of failure. And it's not just GM. As the good professor points out, media companies that remain tied to newspapes have the same problem. Today the Sun Times Group, publisher of the Chicago Sun Times declared bankruptcy ("Sun Times Files for Bankruptcy" Marketwatch.com). There is no longer a major newspaper in Chicago that is not bankrupt. And this blog has covered how big pharma has stayed too long at the trough of old inventions, missing the move to biologics.
Things are bad. "All 50 states in recession for first time since the 1970s" is one of two Marketwatch.com headlines, "Global Economy to Shrink in 2009, World Bank Says." The downturn is expected to be 1.7% globally, a disaster for small and emerging economies. This is killing global trade (down 6.1%) and whipsawing countries like Russia – moving from growth last year of over 6% to a decline this year of over 4%! This is the stuff that has led to revolutions!
The only way out of this situation is for organizations to listen to the good professor, and not try to do more of the same. Markets have shifted – permanently. Management actions that are designed to weather short-term downturns, mostly by cost-cutting and conserving resources, don't work when markets shift. Instead, businesses have to develop new Success Formulas that get them out of the Whirlpool's spiral and into the Rapids of Growth. To do this requires planning based upon future senarios, not what worked before. Obsessing about competitors globally to develop new solutions. Not fearing, but rather embracing Disruptions that allow for trying new things in White Space where you have permission and resources to really develop new solutions. These 4 steps can turn around any organization – if you don't wait too long.
by Adam Hartung | Mar 30, 2009 | Current Affairs, Defend & Extend, General, In the Rapids, In the Whirlpool, Leadership, Quotes, Television
"This is the future of media. Whether in print, over the air or online — the delivery mechanism isn't as important as the unique, rich nature of the content provided." That's what the Tribune Corporation's COO, Randy Michaels, said in "Tribune Merges Conn. paper, stations" as reported on Crain's ChicagoBusiness.com. After filing bankruptcy, and seeing both newspaper subscribers and advertisers hacked away dramatically, Tribune is merging together all operations – newspaper and 2 TV stations – in Hartford, CT. They are cutting costs again.
We can hope Mr. Michaels means what he says, but excuse me if I'm doubtful. Despite the rapid acceleration of on-line news readership, and the fact that in most major markets Tribune has one or more TV stations as well as a newspaper, Tribune has never consolidated it's news operations or its advertising sales force. This is sort of remarkable. Going back at least 5 years, it made sense when gathering the news, or talking to an advertiser, to discuss how you could maximize his value for ad money spent. That meant a sharp company would have laid out programs showing how they could give advertisers access to eyeballs from all sources. But instead, at Tribune each station had its own salesforce, each newspaper, and each on-line edition of the newspaper. There was little effort to give the customer a good value for his spend – and no effort to discuss how he could transfer dollars between media to be a big winner. Even though Tribune was an early investor in the internet, it has not learned from its investment and migrated to a new Success Formula.
At a time when advertisers are unclear about how to justify their spending, a sharp media company would be explaining how many eyeballs in are in each format, the demographic profiles and the cost to reach those eyeballs. A company that really is "media independent" would have a big advantage over one trying to sell only the legacy products, because it isn't learning from the marketplace how to offer the best product at the best price and make a profit.
And Tribune had better move quickly. Arianna Huffington has announced the launch of the "Huffington Post Investigative Fund," as announced on the website HuffingtonPost.com. This is her effort to create a pool of investigative journalists for on-line sites who will do the kind of work we historically expected newspapers to do. She is throwing in $1.75million, and asking others to put up additional money. Thus giving this White Space project not only permission to figure out a "new age" model for investigative reporting, but hopefully the resources with which to experiment and learn. Whether this project will succeed or not is unclear, but that it is intended to make on-line news (and her website) more powerful and successful is clear. With each step like this, and this one she took all over the airwaves Monday discussing on multiple television stations, the case against quality of on-line news declines – and increases the on-line competition for eyeballs with television, radio and newspaper formats.
What we'd like to see is an announcement that the Tribune project in Hartford is a White Space project intended to figure out the Success Formula for future media. As we come ever closer to the "Max Headroom" world, depicted in the 1980s of a future where there is 24×7 news around all of us all the time, what no one knows for sure is how the profit model will work. Those who experiment first, and learn the fastest, will be in a strong position to be the leader.
Unfortunately, the Tribune announcement does not look like White Space. The Tribune leadership has still not Disrupted its grip on the old Success Formula. The project in Hartford looks more like a cost-saving effort, trying to defend the old newspaper, than a learning proposition. The project seems to lack the permission to do whatever is necessary to succeed (like perhaps stop printing), and it has no resources coming its way with which to experiment as it keeps trying to maintain all 3 of the legacy business units. Rather than a learning environment, this looks more like an effort to save 3 troubled businesses by cost saving - a Defend practice that doesn't work when markets shift and new competitors are trying all kinds of new things.
by Adam Hartung | Mar 28, 2009 | Current Affairs, In the Whirlpool, Leadership, Lifecycle, Quotes, Web/Tech, Weblogs
"If you don't read the newspaper you are uninformed. If you do read the newspaper you are misinformed." — Mark Twain
"All I know is what I read in the newspaper. That makes me the most ignorant man alive." —- Will Rogers
What both these great writers understood was that when you get most of your news from one source, you get only what that source chooses to tell you, and only a single interpretation of the news. Since newspapers began there has been controversy about bias in news reporting. Many famous newspapers were considered "conservative" or "liberal" based upon the political opinions of the owners. The reality is that when a newspaper reporter tells you a story, what you read – down to the word choices - is affected by the opinions and feelings of the author, as well as those of the editor and perhaps even the publisher.
The great breakthrough of the internet is you aren't restricted to a single (or possibly) two sources. You can find articles about anything from a political speech to an automobile accident published by 5, 10 maybe hundreds or thousands of sources. And for many news items the internet provides you not only multiple opportunities to read how the "facts" are told, but you can find multiple articles that interpret those facts. This plethora of coverage means that internet readers have the opportunity to be as selective, or as broad, as they choose. And it means that the ability of publishers to "control the direction" of a story is dramatically diminished. Readers, by looking across multiple sources, can determine as a group which "facts" they find accurate, and which "interpretation" they find most genuine. Because of the internet, news coverage is "democratized" in a way that has never before been possible.
Newspapers provided a method of informing the public for a very, very long time. But they have an internal weakness they cannot overcome – the printing means that only one version of a story is told and it can only be economically told once per day. The distribution method makes newspapers an "event" that occurs at "deadline", and the cost is high enough that there's only enough advertising to support the printing and distribution of one newspapers in most markets. When you get down to the printing – the "paper" in "newspaper" – it has limits that create a weakness.
The internet is disruptive because it overcomes the limitations of printing. It is available 24×7 not just to read, but to be updated and current with the latest information. A person anywhere can read input from multiple sources. The internet makes up-to-the-minute news coverage of everything available to people in rural, remote locations as quickly as it does those "on the scene", thus opening an interest in world or very local events to everyone on the planet, regardless of location. And this means this "no cost distribution" (not no cost of fact acquistion, or interpretation, or writing – just distribution) allows the internet to do what economist Joseph Schumpeter called "creatively destroy" the old value in newspapers.
Those who bemoan the loss of newspapers need to spend more time on the internet. There are so many sources for so much news that we are today the best informed society in the history of mankind. The financial problems at newspaper publishing have not diminished the quantity or quality of news coverage. Those are higher than ever. And the businesses that jump into this market, by developing networks to access the most/best news and interpretation at the lowest cost – while delivering it in a format that is easy for readers to find and absorb – will be successful. And it will be harder than ever for those trying to create the news (such as politicians and political pundits) to decry "bias" in a world where all opinions are available to everyone.
by Adam Hartung | Mar 24, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Weblogs
"Senator proposes nonprofit status for newspapers" was the headline at Marketwatch.com today. Senator Benjami Cardin, a democrate from Maryland, has proposed allowing newspapers to convert to 501(c)(3) status so their subscription and advertising revenue woujld be tax exempt, while contributions to run the papers would be tax deductible. This would allow some newspapers to stay afloat.
Let me share with you a response I received from a fellow reader of this blog:
"I watched Chris Mathews and had the same feeling. As they spoke I had visions of chiefs of Bethlehem, U.S. Steel, etc. sitting around a table in the 60s going 'continuous casting, those Japanese, that's not going anywhere.'
How can they say investigative reporting is going to be dead – there are a million reporters out there working for passion and curiosity. As a matter of fact, if I was going to be paid for a year to chase a story, seems to me a strong incentive to create a story when there really wasn't one.
I loved the way they were holding the paper and saying how people will miss the periphery articles. People will be limited to their feeds and be exposed to the rest of what's going on. I look at it as if I read an article in a newspaper that is just one take of the situation. With the internet I can drill down to get additional information and opinions. Plus get immediate commentary from experts."
Lots of people are getting "subsidy happy" these days. Money to banks, money to car companies, money to newspapers. What we must realize is that these short-term subsidies should be targeted at stopping a worse calamity. Nothing more. Sort of trading off company subsidies against even higher costs for unemployment, uninsured health care, and the costs of letting companies fail short-term. The reality is that none of these subsidized companies are sustainable as they are. The market has shifted, and their Success Formulas no longer produce positive results. They will burn up the subsidy money, as we've already seen happen at GM, and soon ask for more.
When markets shift, new competitors emerge to thrive. Provided we don't get in their way by propping up bad competitors too long with subsidies. In banking, we saw the unregulated institutions on a global scale start doing all sorts of financial services. While some of these are reverting back to regulated banks in the U.S. today so they can receive subsidies, globally we have seen the emergence of immense banks that are outside U.S. regulation. These institutions can borrow and lend globally, and are creating a new approach to financial services. We can't prop up an uncompetitive Citigroup against giant global banks making profits offshore. Likewise, globalization of manufacturing now means that good, low cost cars can be produced in Korea, China and India – making rates of return on higher cost labor in the USA, Germany and Japan harder to obtain. Additionally, many of these offshore competitors (in particular Japanese and Korean) have demonstrated they can deliver proifts on far lower volumes, thus requiring faster launch cycles and more niche products to succeed. GM lacks the manufacturing cost structure (in short-term line costs as well as labor) and the new product introduction processes to survive against these competitors. In newspapers consolidating the reporting into a daily made sense when you needed vast and costly infrastructure to print and deliver the news – no longer requirements in a web-enabled news marketplace.
Economists can make strong arguments for subsidies to help short-term dislocations. Such as helping companies in New Orleans to get back up and running due to a hurricane. That is a short-term problem not related to a market shift. But arguments for subsidies offered during market shifts are strictly "public policy" efforts trading off one policy cost for another. They cannot "save" a business. The company and its employees must use the subsidy to change their Success Formula as fast as possible, so they can compete with some product in some market where they can grow — without need for a subsidy
TARP and its other stimulus products are intended to keep some air in some parts of the boat so it doesn't sink entirely. But they aren't fixing the ship. That requires new competitors emerge that are attuned to current market needs, and have Success Formulas that produce profits based upon future markets. As the economist Schumpeter said 70 years ago, we rely upon these new entrepreneurs to give us the creative new solutions that create growth in the wake of the destruction of old businesses unable to keep up with shifting markets. Let's hope we don't spend all our money trying to keep the old battleship afloat, because we'll need some to help the newer, faster, more agile competitors grow with solutions that meet current and future needs.
by Adam Hartung | Mar 20, 2009 | Current Affairs, General, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Travel, Web/Tech
"Xerox chops earnings outlook as sales slide" is the headline on Marketwatch.com. Do you remember when Xerox was considered the most powerful sales company on earth? In the 1970s and into the 1980s corporations marveled at the sales processes at Xerox – because those processes brought in quarter after quarter of increasing profitable revenue. Xerox practically wiped out competitors – the small printing press manufacturers – during this period, and "carbon paper" was quickly becoming a museum relic (if you are under 30 you'll have to ask someone older what carbon paper is – because it requires an explanation of something called a typewriter as well [lol]).
But today, do you care about Xerox? If you have a copier, you don't care who made it. It could be from Sharp, or Canon, or anybody. You don't care if it's Xerox unless you work in a "copy store" like Kinko's or run the copy center for the corporation – and possibly not even in those jobs. And because desktop printers have practically made copiers obsolete, you may not care about copiers at all. In short, even though Xerox invented the marketplace for widespread duplicating, because the company stayed in its old market of big copiers it has seen revenue declines and has largely become irrelevant.
"U.S. airline revenue plunges for another month" is another Marketwatch.com headline. And I ask again, do you care? The airlines were deregulated 30 years ago, and since then as a group they've never consistently made money (only 1 airline – Southwest – is the exception to this discussion.) The big players in the early days included TWA, Eastern, Braniff, PanAm – names long gone from the skies. They've been replaced by Delta, American and United – as we've watched the near collapse of US Airways, Northwest and Continental. But we've grown so used to the big airlines losing money, and going bankrupt, and screaming about unions and fuel costs, that we've pretty much quit caring. The only thing frequent travelers care about now is their "frequent flier miles" and how they can use them. The airline itself is irrelevant – just so long as I get those miles and get my status and they let me board early.
When you don't grow, you lose relevance. In the mid-1980s the battle raged between Apple's Macintosh and the PC (generically, from all manufacturers) as to which was going to be the dominant desktop computer. By the 1990s that question had been answered, and as Macintosh sales lagged Apple lost relevance. But then when the iPod, iTunes, iTouch and iPhone came along suddenly Apple gained a LOT of relevance. When companies grow, they demonstrate the ability to serve markets. They are relevant. When they don't grow, like GM and Citibank, they lose relevance. It's not about cash flow or even profitability. When you grow, like Amazon with its Kindle launch, you get attention because you demonstrate you are connected to where markets are headed.
Is your business obsessing about costs to the point it is hurting revenue? If so, you are at risk of losing relevance. Like Sara Lee in consumer goods, or Sears in retailing, even if the companies are able to make a profit – possibly even grow profits after some bad years – if you can't grow the top line you just aren't relevant. And if you aren't relevant, you can't get more customers interested in your products/services, and you can't encourage investors. People want to be part of Google, not Kodak.
To maintain (or regain) relevance today, you have to focus on growth. Cutting costs is not enough. If you lose relevance, you lose your customer base and financing, and you make it a whole lot easier for competitors to grow. While you're looking internally, or managing the bottom line, competitors are figuring out the market direction, and proving it by demonstrating growth. And that's why today, even more than before, it is so critical you focus planning on future markets for growth, obsess about competitors, use Disruptions to change behavior and implement White Space to experiment with new business opportunities. Because if you don't do those things you are far, far too likely to simply become irrelevant.
[note: Thanks for feedback that my spelling and grammar have gotten pretty sloppy lately. I'm going to allocate more time to review, as well as writing. And hopefully pick up some proofreading to see if this can improve. Sorry for the recent problems, and I appreciate your feedback on errors.]
by Adam Hartung | Mar 19, 2009 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, In the Whirlpool, Leadership, Lock-in
"Nobody doesn't like Sara Lee." That was the jingle I still remember from my youth. For years we heard this on the TV, as we were coaxed to buy the delictable productss, frozen, refrigerated and fresh, offered by Sara Lee. But today, unfortunately, almost nobody likes Sara Lee anymore. Oh – the products are great – it's the company, primarily its leadership, that's a disaster.
It's tough to make money on food. After all, everyone has the same cost for the ingredients. And in the developed world, there's more than enough food to go around. For the last 50 years, to make money on food required adding to the product so it had more value. Such as freezing frozen potatoe slices rather than selling whole potatoes so french fries are more convenient - raising price and margin. Or adding preservatives and vitamins so the bread lasts longer than the other guy's, and may be a touch better for you. Or the biggest addition, advertising so you imbue the food with all kinds of personality elements urging customers to identify with the product. If you want to make money selling food, you have to taste better, prepare faster, sell cheaper and hopefully give me more value in myself — or else I'll by the generic product and kill your margin. And for a number of years, Sara Lee knew how to do this fairly well.
But then, Sara Lee stumbled. It quit launching new products and new brands. It's quality and branding was matched by competitors from Entenmann's to Little Debbie. Without innovation, the frozen, refrigerated and fresh pies, sausage and other products saw margins shrink. So Sara Lee hired a bright exec from PepsiCo to fix up the company named Brenda Barnes. Since then, the story has really gone downhill.
Ms. Barnes focused on her "problem," a low stock price, rather the market challenges Sara Lee faced. She built a 5 year plan to turn around Sara Lee. But his plan had no innovation involved. No plans for growth. Just the opposite, she intended to sell many assets to raise cash. And then use that cash to buy shares. And through this process, she would "prop up" the company stock to the benefit of shareholders. The company would be smaller – but she said it would be worth more – in some kind of weird economics. But, this stock ploy had worked for other industrial companies, she said, so it would work for Sara Lee. Since then, according to the chart at Marketwatch.com, Sara Lee stock has gone from 21 to 7! While the CEO wants to blame the tough economy for her performance, the chart shows that this "strategy" has been a dead loser since the day it was announced. Things have been downhill since long before banks trimmed their lending.
Now, in her latest move, the CEO wants to sell some more businesses. But in an FT.com article "Sara Lee Searches for Sell-off Suitor" there aren't any buyers for remaining businesses. As one analyst commented "it's a rather tired portfolio." That's a polite way of saying "when you don't innovate your business, why would someone want to buy it?" As another analyst said "it's not a very good business." Increasingly, instead of buying these product lines competitors realize they would prefer to compete against them, growing sales organically and profitably — without the headaches and cost of acquisition.
So, because the sale side of the strategy isn't working, we read in Crains ChicagoBusiness.com "Sara Lee to put stock repurchases on hold." After buying shares at $20, $18, $15, the CEO has decided not to buy shares when they are $7 – in order to conserve cash! Maybe if she had spent money on growing the business, expanding products and new business lines, using White Space to innovate new profitable opportunities the stock wouldn't be down to $7 with little interest on the part of any buyers.
Ms. Barnes tried to implement an industrial strategy when it can no longer work. Sara Lee brands aren't some kind of asset that will always go up in value. You can't just expect sales and profits to rise because you do more of the same, and cut costs. The world is highly competitive, and you have to prove the value of your business every day. Customers are demanding, and competitors are ready to steal them away in a heartbeat. You can't prop up the stock by trying to reduce the number of shares, unless you're ready to get down to $1 of revenue and 1 share left valued at $1. What good is that?
Sara Lee could have behaved very differently in 2005 – and CAN behave very differently now. The company clearly needs a new CEO that is ready to develop scenarios of the future which indicate what innovations could have high value. Instead of talking about what Sara Lee used to be, the CEO and management team needs to define what Sara Lee will be in 2015. And by obsessing about competitors, describe how Sara Lee can be a big winner. Then there needs to be Disruption in order to allow the company to consider the new business opportunities, and White Space with permission and resources to rebuild the Success Formula into one that can make above-average rates of return and grow! If Sara Lee will take these actions the company still has time to meet market challenges. But if it doesn't act fast, after 4 years of decline and a very shifted market, nobody's going to have any Sara Lee to nibble on sooner than Ms. Barnes is admitting.
by Adam Hartung | Mar 9, 2009 | Current Affairs, Defend & Extend, General, In the Rapids, In the Swamp, In the Whirlpool, Innovation, Science
The headlines scream for an answer to when markets will bottom (see Marketwatch.com article from headline "10 signs of a Floor" here) . But for Phoenix Principle investors, that question isn't even material. Who cares what happens to the S&P 500 – you want investments that will go up in value — and there are investments in all markets that go up in value. And not just because we expect some "greater fool" to bail us out of bad investments. Phoenix Principle investors put their money into opportunities which will meet future needs at competitive prices, thus growing, while returning above average rates of return. It really is that simple. (Of course, you have to be sure that other investors haven't bid up the growth opportunity to where it greatly exceeds its future value — like happened with internet stocks in the late 1990s. But today, overbidding that drives up values isn't exactly the problem.)
People get all tied up in "what will the market do?" As an investor, you need to care about the individual business. For years that was how people invested, by focusing on companies. But then clever economists said that as long as markets went up, investors were better off to just buy a group of stocks – an average such as the S&P 500 or Dow Jones Industrials. These same historians said don't bother to "time" your investments at all, just keep on buying some collection (some average) quarter after quarter and you'll do OK. We still hear investment apologists make this same argument. But stocks haven't been going up – and who knows when these "averages" will start going up again? Just ask investors in Japan, where they are still waiting for the averages to return to 1980s levels so they can hope to break even (after 20 years!). These historians, who use the past as their barometer, somehow forgot that consistent and common growth was a requirement to constantly investing in averages.
When the 2008 market shift happened, it changed the foundation upon which "constantly keep buying, don't time investing, it all works out in the end" was based. Those days may return – but we don't know when, if at all. Investors today have to return to the real cornerstone of investing – putting your money into investments which will give people what they want in the future.
Regardless of the "averages," businesses that are positioned to deliver on customer needs in future years will do well. If today the value of Google is down because CEO Eric Schmidt says the company won't return to old growth rates again until 2010, investors should see this as a time to purchase because short-term considerations are outweighing long-term value creation. Do you really believe internet ad-supported free search and paid search are low-growth global businesses? Do you really believe that short-term U.S. on-line advertising trends will remain at current rates, globally, for even 2 full years? Do you think Google will not make money on mobile phones and connectivity in the future? Do you think the market won't keep moving toward highly portable devices for computing answers, like the Apple iPhone, and away from big boxes like PCs?
When evaluating a business the big questions must be "is this company well positioned for most future scenarios? Are they developing robust scenarios of the future where they can compete? Are they obsessing about competitors, especially fringe competitors? Are they willing to be Disruptive? Do they show White Space to try new things?" If the answer to these questions is yes, then you should be considering these as good investments. Regardless of the number on the S&P 500. Look at companies that demonstrate these skills – Johnson & Johnson, Cisco Systems, Apple, Virgin, Nike, and G.E. – and you can start to assess whether they will in the future earn a high rate of return on their assets. These companies have demonstrated that even when people lose jobs and incomes shrink and trade barriers rise, they know how to use scenario planning, competitor obsession, disruptions and white space to grow revenue and profits.
You should not buy a company just because it "looks cheap." All companies look cheap just prior to failing. You could have been a buyer of cheap stock in Polaroid when 24 hour kiosks (not even digital photography yet) made the company's products obsolete. Just because a business met customer needs well in the past does not mean it will ever do so again. Like Sears. Or increasingly Motorola. Or G.M. These companies aren't focused on innovation for future customer needs, they prefer to ignore competitors, they hate disruptions and they refuse to implement White Space to learn. So why would you ever expect them to have a high future value?
Why did recent prices of real estate go up in California, New York, Massachusetts and Florida faster than in Detroit? People want to live and work there more than southeastern Michigan. For a whole raft of reasons. In 1920 the price of a home in Iowa or Kansas was worth more than in California. Why? Because an agrarian economy favored the earth-rich heartland over parched California. In the robust industrial age from 1940 to 1960, the value of real estate in Detroit, Chicago, Akron and Pittsburgh was far higher than San Francisco or Los Angeles. But in an information economy, the economics are different – and today (even after big price declines) California homes are worth multiples of Iowa homes. And, as we move further into the information economy, manufacturing centers (largely on big bodies of water in cool climates) have declining value. The market has shifted, and real estate values reflect the shift. Unless you know of some reason for lots (like millions) of health care or tech jobs to develop in Detroit, the region is highly over-built — even if homes are selling for fractions of former values.
We seem to have forgotten that to make high rates of return, we all have to be "market timers" and "investment pickers." Especially when markets shift. Because not everyone survives!!!!! All those platitudes about buying into market averages only works in nice, orderly markets with limited competition and growth. But when things shift – if you're in the wrong place you can get wiped out!! When the market shifted from agrarian to industrial in the 1920s and '30s my father was extremely proud that he became a teacher and stayed in Oklahoma (though the dust storms and all). But, by the 1970s it was clear that if he'd moved to California and bought a house in Palo Alto his net worth would have been many multiples higher. The same is true for stock investments. You can keep holding on to G.M., Citibank and other great companies of the past — or you can admit shift happened and invest in those companies likely to be leaders in the information-based economy of the next 30 years!
by Adam Hartung | Mar 3, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
Sears has been heading for the end of its game for several years. It's in the Whirlpool now, and we can be sure it won't come out. We can go back to when Sears dropped its catalog to see the first sign of putting costs before customers, and completely missing how competitors were changing and leaving Sears without an advantage. But the next big hurt happened when customers found out they could get credit for purchases from banks – via credit cards like MasterCard and Sears – that made it unnecessary to get a line of credit from Sears, or a Sears credit card (which eventually became Discover.) Increasingly, what made Sears stand out became difficult to find. And Sears lost market share year after year to the discounters (KMart, Target and Wal-Mart) as well as lower-priced soft goods retailers (J.C. Penney and Kohl's) and then DIY retailers that offered mowers and tools (Lowe's, Home Depot and Menards).
Why anyone would shop at Sears became a lot less clear – yet Sears kept trying to do more of what it had always done in its effort to stay alive. So hedge-fund jockey Ed Lampert swooped in and bought Sears with lots of hoopla about turning it around. But his approach was to do less of the same, not more, and he had no ideas for how to be more competitive. As he cut inventory, and cut costs, and closed stores it became easier and easier for customers to shop somewhere else. Sears was shrinking, not growing, and all the focus on the bottom line, in an effort to manage earnings rather than the business, just kept making Sears less relevant to customers, investors, vendors and employees.
Sales keep declining – down some 13% in the recent quarter (see article here). Increasingly, Sears is looking for distinction by going further down the credit quality spectrum. It's most promising "bright spot" was an increase in lay-away. Lay-away, for those not accustomed to the concept, is when people who can't get credit at all offer to put down 30-50% of the value of an item (say $100 on a $300 washer) and ask the retailer to hold it (literally, hold it in the back room) until the customer can come up with the rest of the money. Sometimes buyers will come in multiple times dropping off $10 or $20 until they come up with all the money for the washer, or a new suit, or a dress, or some tools. Only people that can't get credit at all buy on lay-away. For retailers it has the downside of increasing inventory as they wait for payment. It's the bottom-of-the-barrel for retailers that can't keep up with merchandise trends, and often requires they raise prices to cover the cost of increased inventory holding.
Increasingly there is little else Sears can do. The company has closed another 28 stores, and sales in stores remaining open the last year have declined on average more than 8% for each store (see article here). Net income has plunged 93%. Five years ago, about when Mr. Lampert took over the company, it was worth just about what it is worth today (see chart here). At that time, investors were thinking Sears (which had recently been de-listed as a Dow Jones Industrial Average component) might not survive. But those investors had a lot of dreams about Mr. Lampert turning around the company. They saw the shares increase 6-fold as analysts talked-up Mr. Lampert and his supposedly "magic touch." But all that value has disappeared. Mr. Lampert would like to blame the economy for his lack of success, but reality is that the economy only made more visible the Lock-in Sears has maintained to its outdated business model and the complete lack of Disruption and White Space Mr. Lampert has allowed during his personal direction of the company. Sears has had no chance of success as long as it remained Locked-in to a retail business model tied to the 1960s. And as retail crashed in 2008/2009 it's made obvious the complete lack of need for Sears to even exist.
Note: I was delighted with responses I received from many readers about their views on newspapers. Mostly folks told me they found the value gone, or dissipating quickly, from newspapers. Although there is still ample concern about where we'll find high-quality journalism once they disappear. Folks seem less confident in broadcast and network television – and wholly uncertain about the quality control of on-line news sources. I think we're all wondering how we'll get good news, and aware that there is bound to be a period of market disruption as the newspapers keep declining. But please keep your eyes open, and let myself and all readers know what quality news sources you find on the web. Keep the comments coming. During these periods is when new competitors lay the groundwork for new fortunes. I'd watch HuffingtonPost.com, and don't lose track of the big on-line investments News Corp. has made.
Likewise, please give me some comments (here on on the blog or via email) about where you are shopping today! Have readers all become Wal-Mart single-stop shoppers? With retail sales numbers down almost everywhere, where do you concentrate your shopping? Are you doing more on-line? Are you finding alternatives you favor during this recession. Let's share some info about what we see as the future of retailing. There are a lot of execs out there that seem in the dark. Maybe we can enlighten them!
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.
