by Adam Hartung | Jun 3, 2011 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, In the Whirlpool, Leadership, Lock-in, Web/Tech
Were you ever told “pretty is as pretty does?” This homily means “don’t just look at the surface, it’s the underlying qualities that matter.” When I read analyst reviews of companies I’m often struck by how fascinated they are with the surface, and how weakly they seem to understand the underlying markets. Financials are a RESULT of management’s ability to provide competitive solutions, and no study of financials will give investors a true picture of management or the company’s future prospects.
The good:
Everyone should own Apple. The list of its market successes are clear, and well detailed at SeekingAlpha.com “Apple: The Most Undervalued Equity in Techdom.” The reason you should own Apple isn’t its past performance, but rather that the company has built a management team completely focused on the future. Apple is using scenario planning to create solutions that fit the way people want to work and live – not how they did things in the past.
And Apple managers are obsessive about staying ahead of competitors with better solutions that introduce new technologies, and higher levels of user productivity. By constantly being willing to disrupt the old ways of doing things, Apple keeps bringing better solutions to market via its ongoing investment in teams dedicated to developing new solutions and figuring out how they will adapt to fit unmet needs. And this isn’t just a “Steve Jobs thing” as the company’s entire success formula is built on the ability to plan for the future, and outperform competitors. We are seeing this now with the impending launch of iCloud (Marketwatch.com “Could Apple Still Surprise at Its Conference?“)
For nearly inexplicable reasons, many investors (and analysts) have not been optimistic about Apple’s future price. The company’s earnings have grown so fast that a mere fear of a slow-down has caused investors to retrench, expecting some sort of inexplicable collapse. Analysts look for creative negatives, like a recent financial analyst told me “Apple is second in value only to ExxonMobile, and I’m just not sure how to get my mind around that. Is it possible growth could be worth that much? I thought value was tied to assets.”
Uh, yes, growth is worth that much! Apple’s been growing at 100%. Perhaps it won’t continue to grow at that breakneck pace (or perhaps it will, there’s no competitor right now blocking its path), but even if it slows by 75% we’re still talking 25% growth – and that creates enormous value (compounded, 25% growth doubles your investment in 3 years.) When you find profitable growth from a company designed to repeat itself with new market introductions, you have a beautiful thing! And that’s a good investment.
Similarly, investors should really like Netflix. Netflix did what almost nobody does. It overcame fears of cannibalizing its base business (renting DVDs via mail-order) and introduced a streaming download service. Analysts decried this move, fearing that “digital sales would be far lower than physical sales.” But Netflix, with its focus firmly on the future and not the past, recognized that emerging competitors (like Hulu) were quickly changing the game. Their objective had to be to go where the market was heading, rather than trying to preserve an historical market destined to shrink. That sort of management thinking is a beautiful thing, and it has paid off enormously for Netflix.
Of course, those who look only at the surface worry about the pricing model at Netflix. They mostly worry that competitors will gore the Netflix digital ox. But what we can see is that the big competitors these analysts trot out for fear mongering – Wal-Mart, Amazon.com and Comcast – are locked-in to historical approaches, and not aggressively taking on Netflix. When you look at who has the #1 market position, the eyes and ears of customers, the subscriber/customer base and the delivery solution customers love you have to be excited about Netflix. After all, they are the leaders in a market that we know is going to shift their way – downloads. Sort of reminds you of Apple when they brought out the iPod and iTunes, doesn’t it?
The bad:
Google has been a great company. The internet wouldn’t be the internet if we didn’t have Google, the search engine that made the web easy and fast to use, plus gave us the ads making all of that search (and lots of content) free. But, the company has failed to deliver on its own innovations. Android is a huge market success, but unfortunately lock-in to its old mindset led Google to give the product away – just a tad underpriced. Other products, like Wave were great, but there hasn’t been enough White Space available for the products to develop into commercial successes. And we’ve all recently read how it happened that Google missed the emergence of social media, now positioning Facebook as a threaten to their long-term viability (AllThingsD.com “Schmidt Says Google’s Social Networking Problem is His Fault.“)
Chrome, Chromebooks and Google Wallet could be big winners. And there’s a new CEO in place who promises to move Google beyond its past glory. But these are highly competitive markets, Google isn’t first, it’s technology advantages aren’t as clear cut as in the old search days (PCWorld.com “Google Wallet Isn’t the Only Mobile POS Tool.”) Whether Google will regain its past glory depends on whether the company can overcome its dedication to its old success formula and actually disrupt its internal processes enough to take the lead with disruptive marketplace products.
Cisco is in a similar situation. A great innovator who’s products put us all on the web, and made us wi-fi addicted. But markets are shifting as people change their needs for costly internal networks, moving to the cloud, and other competitors (like NetApp) are the game changers in the new market. Cisco’s efforts to enter new markets have been fragmented, poorly managed, and largely ineffective as it spent too much energy focused on historical markets. Emblematic was the abandoned effort to enter consumer markets with the Flip camera, where its inability to connect with fast shifting market needs led to the product line shutdown and a loss of the entire investment (BusinessInsider.com “Cisco Kills the Flip Camera.”)
Cisco’s value is tied not to its historical market, but its ability to develop new ones. Even when they likely cannibalize old products. HIstorically Cisco did this well. But as customers move to the cloud it’s still not clear what Cisco will do to remain an industry leader. Whether Google and Cisco will ever be good investments again doesn’t look too good, today. Maybe. But only if they realign their investments and put in place teams dedicated to new, growth markets.
The ugly:
Another homily goes “beauty may be on the surface, but ugly goes clear to the bone.” Meaning? For something to be ugly, it has to be deeply flawed inside. And that’s the situation at Research in Motion and Microsoft. Optimistic investors describe both of these companies as potential “value stocks” that will find a way to “protect the installed base as an economic recovery develops” and “sell their products cheaply in developing countries that can’t afford new solutions” eventually leading to high dividend payouts as they milk old businesses. Right. That won’t happen, because these companies are on a self-destructive course to preserve lost markets which will eat up resources and leave them shells of their former selves.
Both companies were wildly successful. Both once had near-monopolies in their markets. But in both cases, the organizations became obsessed with defending and extending sales to their “core” or “base” customers using “core” technologies and products. This internal focus, and desire to follow best practices, led them to overspending on what worked in the past, while the market shifted away from them.
At RIMM the market has moved from enterprise servers and secure enterprise applications to local apps that access data via the cloud. People have moved from PCs to smartphones (and tablets) that allow them to do even more than they could do on old devices, and RIM’s devotion to its historical business base caused the company to miss the shift. Blackberry and Playbook have 1/10th the apps of leaders Apple and Android (at best) and are rapidly being competitively outrun.
Likewise, Microsoft has offered the market nothing new when it comes to emerging markets and unmet user needs as it has invested billions of dollars trying to preserve its traditional PC marketplace. Vista, Windows 7 and Office 2010 all missed the fact that users were going off the PC, and toward new solutions for personal productivity. Now the company is trying to play catch-up with its Skype acquisition, Nokia partnership (where sales are in a record, multi-year slide; SeekingAlpha.com “Nokia Deluged with Downgrades“) and a planned launch of Windows 8. Only they are against ferocious competition that has developed an enormous market lead, using lower cost technologies, and keep offering innovations that are driving additional market shift.
Companies that plan for the future, keep their eyes firmly focused on unmet needs and alternative competitors, and that accept and implement disruptions via internal teams with permission to be game-changers are the winners. They are good investments.
Big winners that keep seeking new opportunities, but fall into over-reliance (and focus) on historical markets and customers can move from being good investments to bad ones. They have to change their planning and competitive analysis, and start attacking old notions about their business to free up resources for doing new things. They can return to greatness, but only if they recognize market shifts and move aggressively to develop solutions for emerging needs in new markets.
It gets ugly when companies lose their ability to see external market shifts because they are inwardly focused (inside their organizations, and inside their historical customer base or supply chain.) Their market sensing disappears, and their investments become committed on trying to defend old businesses in the face of changes far beyond their control. Their internal biases cause reduction of shareholder value as they spend money on acquisitions and new products that have negative rates of return in their overly-optimistic effort to regain past glory. Those situations almost never return to former beauty, as ugly internal processes lock them into repeating past behaviors even when its clear they need an entirely new approach to succeed.
by Adam Hartung | May 10, 2011 | Current Affairs, In the Whirlpool, Innovation, Leadership, Lifecycle
Sears is threatening to move its headquarters out of the Chicago area. It’s been in Chicago since the 1880s. Now the company Chairman is threatening to move its headquarters to another state, in order to find lower operating costs and lower taxes.
Predictably “Officals Scrambling to Keep Sears in Illinois” is the Chicago Tribune headlined. That is stupid. Let Sears go. Giving Sears subsidies would be tantamount to putting a 95 year old alcoholic, smoking paraplegic at the top of the heart/lung transplant list! When it comes to subsidies, triage is the most important thing to keep in mind. And honestly, Sears ain’t worth trying to save (even if subsidies could potentially do it!)
“Fast Eddie Lampert” was the hedge fund manager who created Sears Holdings by using his takeover of bankrupt KMart to acquire the former Sears in 2003. Although he was nothing more than a financier and arbitrager, Mr. Lampert claimed he was a retailing genius, having “turned around” Auto Zone. And he promised to turn around the ailing Sears. In his corner he had the modern “Mad Money” screaming investor advocate, Jim Cramer, who endorsed Mr. Lampert because…… the two were once in college togehter. Mr. Cramer promised investors would do well, because he was simply sure Mr. Lampert was smart. Even if he didn’t have a plan for fixing the company.
Sears had once been a retailing goliath, the originator of home shopping with the famous Sears catalogue, and a pioneer in financing purchases. At one time you could obtain all your insurance, banking and brokerage needs at a Sears, while buying clothes, tools and appliances. An innovator, Sears for many years was part of the Dow Jones Industrial Average. But the world had shifted, Home Depot displaced Sears on the DJIA, and the company’s profits and revenues sagged as competitors picked apart the product lines and locations.
Simultaneously KMart had been destroyed by the faster moving and more aggressive Wal-Mart. Wal-Mart’s cost were lower, and its prices lower. Even though KMart had pioneered discount retailing, it could not compete with the fast growing, low cost Wal-Mart. When its bonds were worth pennies, Mr. Lampert bought them and took over the money-losing company.
By combining two losers, Mr. Lampert promised he would make a winner. How, nobody knew. There was no plan to change either chain. Just a claim that both were “great brands” that had within them other “great brands” like Martha Stewart (started before she was convicted and sent to jail), Craftsman and Kenmore. And there was a lot of real estate. Somehow, all those assets simlply had to be worth more than the market value. At least that’s what Mr. Lampert said, and people were ready to believe. And if they had doubts, they could listen to Jim Cramer during his daily Howard Beale impersonation.
Only they all were wrong.
Retailing had shifted. Smarter competitors were everywhere. Wal-Mart, Target, Dollar General, Home Depot, Best Buy, Kohl’s, JCPenney, Harbor Freight Tools, Amazon.com and a plethora of other compeltitors had changed the retail market forever. Likewise, manufacturers in apparel, appliances and tools had brough forward better products at better prices. And financing was now readily available from credit card companies.
Surely the real estate would be worth a fortune everyone thought. After all, there was so much of it. And there would never be too much retail space. And real estate never went down in value. At least, that’s what everyone said.
But they were wrong. Real estate was at historic highs compared to income, and ability to pay. Real estate was about to crater. And hardest hit in the commercial market was retail space, as the “great recession” wiped out home values, killed personal credit lines, and wiped out disposable income. Additionally, consumers increasingly were buying on-line instead of trudging off to stores fueling growth at Amazon and its peers rather than Sears – which had no on-line presence.
Those who were optimistic for Sears were looking backward. What had once been valuable they felt surely must be valuable again. But those looking forward could see that market shifts had rendered both KMart and Sears obsolete. They were uncompetitive in an increasingly more competitive marketplace. As competitors kept working harder, doing more, better, faster and cheaper Sears was not even in the game. The merger only made the likelihood of failure greater, because it made the scale fo change even greater.
The results since 2003 have been abysmal. Sales per store, a key retail benchmark, have declined every quarter since Mr. Lampert took over. In an effort to prove his financial acumen, Mr. Lampert led the charge for lower costs. And slash his management team did – cutting jobs at stores, in merchandising and everywhere. Stores were closed every quarter in an effort to keep cutting costs. All Mr. Lampert discussed were earnings, which he kept trying to keep from disintegrating. But with every quarter Sears has become smaller, and smaller. Now, Crains Chicago Business headlined, even the (in)famous chairman has to admit his past failure “Sears Chief Lampert: We Ought to be Doing a Lot Better.”
Sears once built, and owned, America’s tallest structure. But long ago Sears left the Sears Tower. Now it’s called the Willis Tower by the way – there is no Sears Tower any longer. Sears headquarters are offices in suburban Hoffman Estates, and are half empty. Eighty percent of the apparel merchandisers were let go in a recent move, taking that group to California where the outcome has been no better. Constant cost cutting does that. Makes you smaller, and less viable.
And now Sears is, well….. who cares? Do you even know where the closest Sears or Kmart store is to you? Do you know what they sell? Do you know the comparative prices? Do you know what products they carry? Do you know if they have any unique products, or value proposition? Do you know anyone who works at Sears? Or shops there? If the store nearest you closed, would you miss it amidst the Home Depot, Kohl’s or Best Buy competitors? If all Sears stores closed – every single location – would you care?
And now Illinois is considering giving this company subsidies to keep the headquarters here?
Here’s an alternative idea. Using whatever logic the state leaders can develop, using whatever dream scenario and whatever desperation economics they have in mind to save a handful of jobs, figure out what the subsidy might be. Then invest it in Groupon. Groupon is currently the most famous technology start-up in Illinois. Over the next 10 years the Groupon investment just might create a few thousand jobs, and return a nice bit of loot to the state treasury. The Sears money will be gone, and Sears is going to disappear anyway. Really, if you want to give a subsidy, if you want to “double down,” why not bet on a winner?
It really doesn’t have to be Groupon. The state residents will be much better off if the money goes into any business that is growing. Investing in the dying horse simply makes no sense. Beg Amazon, Google or Apple to open a center in Illinois – give them the building for free if you must. At least those will be jobs that won’t disappear. Or invest the money into venture funds that can invest in the next biotech or other company that might become a Groupon. Invest in senior design projects from engineering students at the University of Illinois in Chicago or Urbana/Champaign. Invest in the fillies that have a chance of winning the race!
Sentimenatality isn’t bad. We all deserve the right to “remember the good old days.” But don’t invest your retirement fund, or state tax receipts, in sentimentality. That’s how you end up like Detroit. Instead put that money into things that will grow. So you can be more like silicon valley. Invest in businesses that take advantage of market shifts, and leverage big trends to grow. Let go of sentimentality. And let go of Sears. Before it makes you bankrupt!
by Adam Hartung | Apr 17, 2011 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
Research in Motion pioneered the smartphone business. While Motorola, Samsung and others thought the answer to market growth was making ever cheaper mobile phones, RIM figured out that corporations wanted to put phones in employee hands, control usage cost, while also securely offering email distribution and texting. Blackberry handsets and servers met user needs while providing IT departments with everything they needed.
This success formula was a winner, driving tremendous growth for RIM. People joke about their “crackberry” connecting them to their company 24×7, but it was a tremendous productivity enhancer. RIM produced a consistent string of growing revenues and earnings, meeting or exceeding projections. RIM still dominates the “enterprise” smartphone business. The overwhelming majority of mobile phones issued by companies are still Blackberries.
“RIM’s CEO is Annoyed that People Don’t Appreciate Our Profits” headlined Silicon Alley Insider. He can’t understand why the stock languishes, despite meeting financial projections. When challenged about whether or not RIM is as secure as it claims, “RIM CEO Abruptly Ends an Interview After Getting Annoyed About Security Questons” (SAI).
That the CEO is annoyed is the first of two reasons you need to sell RIMM now. If you are waiting for a recovery to old highs, forget about it. Won’t happen. Can’t happen.
The mobile phone/smartphone market has taken an enormous shift. Apple’s iPhone introduced the “app” phenomenon – allowing smartphone users to do a plethora of things on their devices that aren’t possible on a Blackberry. If we just count apps, as a baseline, iPhone users can do some 350,000 things that Blackberry users cannot. Additionally, iPhones – and increasingly Android phones – are simply a lot easier to use, with bigger touch screens, more built-in functionality and easier user navigation.
As charted in my last column, RIM has only about 5% the apps of iPhone. And less than 10% the apps of Android. Even Microsoft will soon provide more apps than Blackberry. But the CEO of RIM is stuck – defending his company and its success formula – rather than aggressively migrating the company into new products. He’s hoping all those company employees, including execs, now carrying 2 phones – their corporate Blackberry and personal iPhone – will keep doing that.
He’s letting the re-invention gap between RIMM and Apple/Google widen with every passing quarter. While no other provider offers the “enterprise solution” of RIM, increasingly the gap between the usability of new solutions and RIM is widening. It won’t be long before users won’t put up with having 2 phones – and the loser will clearly be RIM
And it won’t be long before people completely stop carrying laptops as well. Rather quickly we are seeing a market shift to tablets. Into this market RIMM launched its Playbook product last week. And that’s the second reason you need to sell RIMM.
We all know the iPad has been a remarkable success. To date, nobody has developed a tablet that users, or reviewers, find comparable. Unfortunately, RIM launched its Playbook tablet to entirely consistent reviews, such as “The Playbook: Blackberry’s ‘Unfinished’ Product” headlined at TheWeek.com. The Playbook simply isn’t comparable to an iPad – and doesn’t look like it ever will be.
Most concerning, to use a Playbook you must also have a Blackberry. Playbook relies on the Blackberry to provide connectivity – via Bluetooth. In other words, RIM is trying to keep customers locked-in to Blackberries, using Playbook to defend and extend the original company product. Playbook doesn’t even look like it’s ever intended to be a stand-alone winner. And that’s a really bad strategy.
RIM sees Playbook is seen as an extension of the Blackberry product line; the first in a transition to a new operating system for all products. Not a product designed to compete heads-up against other tablets. It lacks apps, it lacks its own connectivity, it has a smaller screen, and it doesn’t have the intuitive interface. Basically, it’s an effort to try and keep Blackberry users on Blackberries – an effort to defend and extend the original success formula.
When markets shift it is absolutely critical competitors shift with them. Xerox invented desktop publishing at its PARC facility, but tried to defend xerography and lost the new market to Apple. Kodak invented digital cameras, but tried to defend the film business and lost the new market to Japanese competitors. When the CEO tries to defend and extend the old success formula after a market shifts only bad things happen. When new products are extensions of old products, while competitors are bringing out game changers, the world only becomes uglier and uglier for the stuck, old-line competitor.
The analysts are right. RIM has no future growth. Companies are already switching into iPhones, iPads and Androids. Simultaneously, Microsoft will pour billions into helping Nokia push Windows 7 phones and future tablets the next 2 years, and that will be targeted right at “enterprise users” which are RIM’s “core.” Microsoft will spend far more resources than RIM could ever match trying to defend its “installed base.” RIMM is stuck fighting to keep current users, while the market growth is elsewhere, and those emerging competitors are quickly going to hollow out RIM’s market.
There’s simply no way RIM can increase its value. Time to sell.
Update 4/20/2011 Goldman Sachs Survey Results – CIO intention to adopt Tablets by Operating System provider:
Published in SiliconAlleyInsider.com
by Adam Hartung | Feb 25, 2011 | Current Affairs, In the Whirlpool, Leadership
Since Craig Dubow took over as Gannett's CEO in 2005, Gannettblog reports that employment at the company has dropped from 52,600 to 32, 600. So 20,000 employees, or nearly 1 in 3, have disappeared.
- 2006 – 49,675 down 6%
- 2007 – 46,100 down 7%
- 2008 – 41,500 down 10%
- 2009 – 35,000 down 16%
- 2010 – 32,600 down 7%
Doesn't this look like dismantling the company? It is undoubtedly true that people are reading fewer newspapers than they did in 2000. But that fact does not mean Gannett has to head toward the whirlpool of failure, slowly cutting itself into a less relevant organization. There are a plethora of opportunities today – from creating a vital on-line news organization such as Huffington Post to moving into on-line news dissemination like Marketwatch.com to digital publishing like Amazon and its Kindle, to wholesale news distribution like the Apple iPad to on-line merchandising and ad distribution like Groupon, to —- well, let's just say that there are a lot of opportunities today to grow. To it's credit, Gannett owns 51% of CareerBuilder.com (who's employees are all included in the above numbers). But that one investment has been, as shown, insufficient to keep Gannett a vital, growing organization. At this rate, when will Gannett have to stop printing those hotel newspapers?
Yet, the CEO was paid $4.7M in 2009, including a cash bonus of $1.45M for implementing cost cuts. And that's what's quite wrong with CEO compensation America. And the problem, compensating CEOs for shrinking the company, has an enormous impact on American economic (and jobs) growth.
It is NOT hard to cut jobs. In fact, it is probably the easiest thing any executive can do. CEOs can simply order across the board cuts, or they can hand out downsizing requirements by function or business line. It's the one thing any executive can do that is guaranteed to give an improvement to the bottom line. Any newly minted 20-something MBA can dissect a P&L and identify headcount reductions. Anyone can fire salespeople, engineers, accountants or admins and declare that a victory. There are lots of ways to cut headcount costs, and the immediate revenue impact is rarely obvious. So, why would we pay a bonus for such behavior?
You can imagine the presentation the CEO gives the Board of Directors. "Our industry is doing poorly in this economy. Revenues have declined. But I moved quickly, and slashed xx,xxx jobs in order to save the P&L. As a result we preserved earnings for the next 2 years. Because of revenue declines our stock has been punished, so I recommend we take 50% (or more) of the cash saved from the headcount reductions and buy our own company stock in order to prop up the price/earnings multiple. That way we can protect ourselves from raiders in the short term, and continue to report higher earnings per share next year (there will be fewer shares – so even if earnings wane we keep up EPS), despite the terrible industry conditions."
Oh, by the way, because the CEO's compensation is tied to profits and EPS, he is now entitled to a big, fat bonus for this behavior. And, as Brenda Barnes did at Sara Lee, this can happen for several years in a row, leading to the company's collapse. As the company becomes smaller and smaller, its overall value declines, even if the EPS remains protected, until some vulture – either another company, private equity firm or hedge fund- buys the thing. The investors lose as value goes nowhere, employees lose as bonuses, benefits, pay and jobs are slashed, and vendors lose as revenues decline and price concessions become merciless. The community, state and nation lose as jobs and taxes disappear in the revenue decline. The only winner? The CEO – and any other top executives who are compensated on profits and EPS.
When a company grows, compensating profits is not a bad thing. But when a company isn't growing, well, as seen at Gannett, the incentives create perverse behavior. CEOs take the easy, and personally rewarding route of cutting costs, escalating the downward spiral. Without growth, you got nothing. So why isn't there a simple binary switch; if the CEO didn't grow revenues, the CEO doesn't get any bonus? Regardless.
"What about industry conditions?" you might ask. Well, isn't it the CEO's job to be foresightful about industry conditions and move the company into growth industries, rather than staying too long in poorly performing industries? CEOs aren't supposed to manage a slow death. Aren't they are supposed to lead vibrant, vital, growing companies that increase returns for investors, employees and suppliers?
"What about divestitures? What if the CEO sold a business at a huge multiple making an enormous profit?" Good move! Making the most of value is a good thing! But, once the sale is complete, isn't the critical question "What are you going to do with that money now?" If the CEO can't demonstrate the ability to invest in additional, replacement revenues that have a higher growth rate then shouldn't that money all be given to investors so they can invest it in something that will grow (rather than in buying company stock, for example, which just gets us back to the smaller company but higher EPS discussion above)? CEOs aren't investment bankers, who earn a bonus based upon buying and selling assets at a profit. Investment bankers can earn a bonus on transactions, but that's not the CEOs role, is it? Isn't the CEO is chartered with building a growing, profitable company.
Look at the CEOs of the Dow Jones Industrial companies. How many of them are compensated only if their company grows? As growth in these companies has floundered the last decade, how many CEOs continued to receive multi-million dollar compensation payouts?
If we want to grow the economy, we have to grow the companies in the economy. And if we want to grow companies, we have to align compensation. Rewarding shrinkage seems to have an obvious problem.
by Adam Hartung | Feb 9, 2011 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in, Weblogs
Summary:
- Start-ups that flourish give themselves permission to do whatever is necessary to succeed
- Most acquisitions kill that kind of permssion, forcing the acquired company to adopt the acquirers legacy
- AOL’s legacy business has been dying for several years
- AOL’s history of acquisitions has been horrible, because it doesn’t learn from the acquisitions.
- AOL’s acquisition, and announced integration, of Huffington Post will likely do nothing to turn around AOL, and probably leave HuffPo about as well off as AOL’s acquisition of Bebo
After the Super Bowl Sunday Night AOL announced it’s acquisition of The Huffington Post for $350M. Given that you can’t give away a newspaper company these days, the acquisition shows there is still value in “news” if you understand the right way to deliver it. HuffPo’s team of bloggers has shown that it’s possible to build a profitable news organization today – if you do it right. Something the folks at Tribune Corporation still don’t understand.
BusinessInsider.com headlined “AOL’s Huffington Post Acquisition Makes Sense for Both Sides.” For Arianna Huffington and her investors the big cash payout shows a clear win. They are receiving a pretty penny for their start-up. Beyond them, it’s less clear. AOL’s been losing subscribers, and site vistors for years. They’ve made a number of acquisitions to spark up interest including blogs Engadget, Joystiq, ad network Tacoda and social networking site Bebo. None of those have flourished – in fact the opposite has happened. AOL investors lost almost all the $850M spent on Bebo as Facebook crushed it. So far, the AOL track record has been horrible!
AOL clearly hopes HuffPo will bring it new visitors – but whether that works, and whether HuffPo continues growing, is now an open question. MediaPost.com reports “AOL Starts Mapping Plans for Huffington Post.” Unfortunately, it sounds much more as if AOL is trying to integrate HuffPo into its traditional organization – which will most likely do for HuffPo what integrating at News Corp did for MySpace – namely, layering it with “professional management,” additional systems, more overhead and rules for operating. Or, in other words, bury it in company legacy that strangles its abilitiy to innovate and shift with rapidly emerging market needs. The company that’s actually growing, winning in the marketplace, isn’t AOL. It’s HuffPo. If there’s any “integrating” needed it should be figuring out how to push AOL into HuffPo – not vice-versa.
As the New York Times headlined, this acquisition is “AOL’s Bet on Another Makeover.” And that’s what’s wrong. The acquisitions AOL made were pre-purchase successful because they were White Space endeavors that had close connection to the market. The founders gave their organization permission to do whatever it took to be successful, without artificial constraints based upon legacy. Their acquisitions have not used by AOL to create White Space with better market receptors – to teach AOL where growth lies. Rather, AOL has hoped they can use the acquisition to defend and extend their old success formula. AOL has hoped the acquisitions would allow them to slow the market shift, and preserve legacy operations.
As we’ve seen, that simply does not work. Markets shift for good reason, and the only way a business can thrive is to shift with them. At AOL the smart move would be to let Arianna run the show! A few months ago AOL purchased TechCrunch and ever since Michael Arrington, the founder, has been villifying AOL management for its bureaucracy and inability to adapt. What Mr. Armstrong, the relatively new CEO at AOL misses is that AOL’s business is dead. AOL needs to find an entirely new way of operating – and that’s what these acquisitions bring. AOL needs to get out of the way, let the acquisitions flourish, and learn something from them. AOL management needs to accept that the old AOL business model is rubbish, and what it must do is allow the acquisitions to operate in White Space, then learn from them! But that’s not been the history of AOL’s purchases, and doesn’t look like the case this time.
Mr. Armstrong could learn a lot from Sir Richard Branson. Virgin has made many acquisitions, and developed several new companies. He doesn’t try to integrate them, or drive them toward any particular business model From Virgin Airways to Virgin Money to Virgin Health Bank to Virgin Games (and all the other businesses) the requirement is that the business be tightly linked to market needs, operate in new ways and find out how to grow profitably. Virgin moves toward the new markets and businesses, it doesn’t expect the businesses to conform to the Virgin model.
I’d like to think AOL could learn from HuffPo and dramatically change. But from the announcements this week, it doesn’t look likely. AOL still looks like a management team desperately trying to save its old business, but without a clue how to do so. Too bad for AOL. Could be even worse for those who read HuffPo.
by Adam Hartung | Jan 25, 2011 | Current Affairs, Food and Drink, In the Whirlpool, Leadership
Summary:
- It sounds good to refocus a business on its core
- It sounds good to centralize for cost reductions and belt tightening as part of refocusing
- It sounds good to sell “non-essential” businesses to raise cash
- It sounds good to have a company buy back shares
- But these efforts serve to destroy the company, killing it softly as it sounds good, but guts the business of revenues and innovation
- Sara Lee’s CEO destroyed the company softly by following such a strategy
The vultures are swirling around Sara Lee. “Sara Lee Said to Get Bid from Bain, Apollo Group Exceeding $18.70 a Share” was the Bloomberg headline. JBS and Blackstone Group are reportedly considering making an offer, according to the Wall Street Journal. This has, of course, driven up the share price from its steady decline of 67% between 2006 and 2009.. But unless you’re a short-term trader, even this acquisition offer is barely going to get you back to break even for your 5 year old investment.
Source: Marketwatch.com
Five years ago Brenda Barnes took leadership at Sara Lee to much fanfare, as she broke the long-problematic glass ceiling for women executives. But her plan for Sara Lee hasn’t worked out so well. Although her compensation has been in the millions, for investors, employees and suppliers this has been a very rough 5 years.
Ms. Barnes took over Sara Lee saying it was a “hodgepodge” of inefficient brands and businesses. Her goal was to streamline Sara Lee, refocus the company and regenerate its core. That certainly sounded good.
Her first steps were to consolidate operations into a central headquarters, including all R&D for the far-flung businesses. She started cutting costs, and heads, as she reduced the number of marketers and centralized purchasing. Going after “synergies,” consolidations were forced on all functions, and the re-launched R&D was staffed at a fraction of earlier product development efforts. The intent, accomplished, was to launch fewer products, and focus on cost reductions. To many listeners, this sounded so soothing. After all, who wouldn’t think there was “fat” to be cut? Who ever believes cost-cutting reaches an end? Why not try to “milk” more out of the old products rather than undertake costly new product launches?
Simultaneously, Ms. Barnes began selling businesses. Gone was the European meats and apparel units, soon followed by the direct sales business sale to Tupperware, and the Body Care business sale to Unilever. Branded apparel was spun out as a seperate company, and the bakery business was sold to Group Bimbo [transaction not yet closed.] Revenues declined from $13.2B in June, 2008 to $10.8B in June 2010 – and after the bakery sale would fall to $8.7B – a revenue drop of 1/3 in just a few years. But this was to refocus, and generate billions of cash for share buybacks. To many that sounded good as well.
All of this streamlining, cost cutting, consolidating and refocusing did raise cash. But, for investors, quarterly dividends were cut from 19.75 cents/share in April, 2006 to 10 cents/share in August, 2006. Only recently have dividends been raised to 11.5 cents/share, but this is still a reduction of over 40% from where dividends were prior to implementing the new refocusing strategy.
After years of implementation, Sara Lee investors in 2010 were holding stock worth less, and had lower dividends, than before this new plan was put into effect.
It all sounded so good, like the lyrics of a lullaby. Refocus. Go back to the business core. Get out of non-essential businesses. Consolidate operations with belt-tightening. Centralize functions to get more done with fewer resources. Sell businesses to raise cash. And invest that cash in share buybacks that would raise the company value. (The alchemy of this last statement still mystifies me. At the end, you’ve sold all the businesses to raise money to buy the last shares – and nobody is left with anything. It’s like selling parts of the house to pay the maintenance – eventually there’s nowhere left to live. How anybody thinks this is good for any constituency of the company is hard to fathom.)
What has been accomplished under the Barnes leadership?
- The equity value cratered, only to be uplifted by a private equity takeover effort that may allow investors to regain their original investment
- Cash dividends have been gutted
- Sara Lee is now a much smaller company, with no new products and no growth plan
- Operating cash flow has declined
- Cash has been dispersed in meaningless stock buybacks that have accomplished nothing
- Tens of thousands of jobs have been lost
- Suppliers have been squeezed out, or if still selling to Sara Lee had their margins squeezed
- Downers Grove, IL ,where the headquarters is located, can link declines in commercial and residential real estate to the downfall of Sara Lee
While it may sound like a comforting song, business leadership that turns to cutting the business throws it into a growth stall from which there is almost no hope of recovery. Even though short-term there may be bragging about the effort to refocus, cut costs and raise cash, these actions simply kill the business – softly and slowly perhaps, but kill it nonetheless.
Sales and profit problems are the result of remaining stuck in old market approaches long after the market has shifted to superior solutions. The only way to “fix” the business is to get closer to the market and launch new products, technologies, processes or solutions that are aligned with emerging market trends. You can’t cost-cut, refocus or re-align a business to success. You have to grow it.
by Adam Hartung | Nov 11, 2010 | Current Affairs, In the Whirlpool, Lock-in, Web/Tech
Summary:
- Business value requires meeting future needs
- Businesses have to transition to remain valuable
- U.S. News is smart to drop its print edition and go all digital
- Print newspapers and magazines are obsolete
- Old brands have no value
- Businesses have to develop and fulfull future scenarios, and forget about what made them successful in the past. Value comes from delivering in the future, not the past
Do you know any antique collectors? They scour for old things, considered rare because they are the remaining few out of a bygone era. For some people, these old things represent something treasured about the past – perhaps a turn in technology or some aspect of society. But there is no useful purpose to an antique. You can’t use the chair as a chair, for fear you’ll break it. Mostly, old things are just that – old things. Once useful, but no longer. They are remembrances. For most of us, seeing them in a museum once in a while is plenty often enough. We don’t need a houseful of them – and would happily trade the old Schwynn bicycle from high-school days for an iPad.
So what’s the value of the Chicago Tribune, or the Los Angeles Times? With the internet, tablets and other ereaders, mobile smartphones and laptops – why would anyone expect these newspapers to ever grow in value? Yes, they were once valuable – when readers could be “current” with daily news, largely from a single source. But now these newsapapers are practically obsolete. Expensive to create, expensive to print, expensive to distribute. And largely outdated by faster news outlets providing real time updates via the web, or television for those still not on-line. They are as valuable as a stack of 45 or 33 RPM records, or 8-track tapes (and if you don’t know what those are, ask your parents.)
As much as some of us, especially over 40, like the idea of newspapers and magazines – they really are obsolete. When automobiles were first created many people who grew up riding horses said the auto would never be able to displace the horse. Autos required petrol, where horses could feed anywhere. Autos required roads, where horses could walk (or tow a cart) practically anywhere. Mechanical autos broke down, where horses were reliable day after day. And autos were expensive to purchase and use. To those raised with horses, the auto seemed interesting but unnecessary – and with drawbacks. Yet, auto technology was clearly superior – offering better speed and longer distances, and the infrastructure was rapidly coming into place. The horse was obsolete. And this change made livery stables, saddle makers and blacksmiths obsolete as well. It took only a few years.
Today, printed documents like newspapers and magazines are obsolete. They have a purpose for travelers and commuters – but not for long. Tablets are making even the travelers use of paper unnecessary. With each of the 12million iPads sold (and who knows how many Kindles and other readers) another newspaper was unnecessary on the hotel room door. So I was extremely heartened to read that “U.S. News [and World Report] is ending its print edition” on MediaLifeMagazine.com.
Some might nostalgically say this decision is the end of something grand. Contrarily, this is the smart move by leadership to help the employees, customers and suppliers all continue pushing forward. As a print product U.S. News reached its end of life. As a digital product, U.S. News has a chance of becoming an important part of future journalism. While some are concerned the future digital product is not about the same old news it used to report, the facts are that we don’t need another magazine just for news. But the rankings and industry reports U.S. News has long created have the most value to readers (and therefore advertisers) and so the editors will be focusing on those areas. Smart move. Instead of doing what they always did, the editors are going to produce what the market wants. U.S. News has a fighting chance of survival, and thriving, if it focuses on the marketplace and meeting needs. It can expand with new products as it continues to learn what digital readers want, and advertisers will support. As an obsolete weekly magazine it didn’t have any value, but as a digital product it has a chance of being worth something.
I was shocked to read in Advertising Age “Meister Brau, Braniff and 148 other Trademarks to be Sold at Auction.” Who would want to buy a trademark of an old brand? It no longer has any value. Brands and trademarks have value when they help you aspire toward something in the future. A dead brand would have the cost not only of developing value — like Google in search or Android in phones has done; or the entire “i” line from Apple, or even Whole Foods or Prada. But to resurrect Meister Brau, Lucky Whip or Handi-Wrap would mean first overcoming the old (worn out and failed) position, and then trying to put something new on top. It’s even more expensive than starting from scratch with a brand that has no meaning – because you have to overcome the old meaning that clearly did not succeed.
Value is in the future. Yes, rare artifacts are sometimes cherished, and their tangible ownership (think of historical pottery, or rare furniture) can cannote something of a bygone era that provides an emotional trigger. These occasionally (like real items from the Titanic) can be collected and valuable. But a brand? Do you want a plastic Lucky Whip tub to help you recall bad 1960s deserts? Or a cardboard Handi-Wrap box to remind you of grandma’s leftovers? In business value is not about the past, it’s entirely about the future.
For businesses to create value they have to generate and fulfull scenarios about the future. Nobody cares if you were good last year (and certainly not if you were good last decade – anybody want an Oldsmobile?) They care about what you’re going to give them in the future. And all business planning needs to be looking forward, not backward. And that’s why it’s a good thing that U.S. News is going all digital. Maybe if the turnaround pros at Tribune Corporation understood this they could figure out how to grow revenues at Tribune or the Times again, and maybe get the company out of bankruptcy. Because trying to save any business by looking at what it used to do is never going to work.
by Adam Hartung | Oct 7, 2010 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Web/Tech
Summary:
- Steve Ballmer received only half his maximum bonus for last year
- But Microsoft has failed at almost every new product initiative the last several years
- Microsoft's R&D costs are wildly out of control, and yielding little new revenue
- Microsoft is lagging in all new growth markets – without competitive products
- Microsoft's efforts at developing new markets have created enormous losses
- Cloud computing could obsolete Microsoft's "core" products
- Why didn't the Board fire Mr. Ballmer?
Reports are out, including at AppleInsider.com that "Failures in Mobile Space Cost Steve Ballmer Half his Bonus." Apparently the Board has been disappointed that under Mr. Ballmer's leadership Microsoft has missed the move to high growth markets for smartphones and tablets. Product failures, like Kin, have not made them too happy. But the more critical question is — why didn't the Board fire Mr. Ballmer?
A decade ago Microsoft was the undisputed king of personal software. Its near monopoly on operating systems and office automation software assured it a high cash flow. But over the last 10 years, Microsoft has done nothing for its shareholders or customers. The XBox has been a yawn, far from breaking even on the massive investments. All computer users have received for massive R&D investments are Vista, Windows 7 and Office 2007 followed by Office 2010 — the definition of technology "yawners." None of the new products have created new demand for Microsoft, brought in any new customers or expanded revenue. Meanwhile, the 45% market share Microsoft had in smartphones has shrunk to single digits, at best, as Apple and Google are cleaning up the marketplace. Early editions of tablets were dropped, and developers such as HP have abandoned Microsoft projects.
Yet, other tech companies have done quite well. Even though Apple was 45 days from bankruptcy in 2000, and Google was a fledgling young company, both Apple and Google have launched new products in smartphones, mobile computing and entertainment. And Apple has sold over 4 million tablets already in 2010 – while investors and customers wait for Microsoft to maybe get one to market in 2011.
Despite its market domination, Microsoft's revenues have gone nowhere. And are projected to continue going relatively nowhere. While Apple has developed new growth markets, Microsoft has invested in defending its historical revenue base.
Source: SeekingAlpha.com
Yet, Microsoft spent 8 times as much on R&D in 2009 to accomplish this much lower revenue growth. At a recent conference Mr. Ballmer admitted he thought as much as 200 man years of effort was wasted on Vista development in recent years. That Microsoft has hit declining rates of return on its investment in "defending the base" is quite obvious. Equally obvious is its clear willingness to throw money at projects even though it has no skill for understanding market needs sin order for development to yield anything commercially successful!
Source: Business Insider.com
And investments in opportunities outside the "core" business have not only failed to produce significant revenue, they've created vast losses. Such as the horrible costs incurred in on-line markets. Trying to launch Bing and compete with Google in ad sales far too late and with weak products has literally created losses that exceed revenues!
Source: BusinessInsider.com
And the result has been a disaster for Microsoft shareholders – literally no gain the last several years. This has allowed Apple to create a market value that actually exceeds Microsoft's. An idea that seemed impossible during most of the decade!
Source: BusinessInsider.com
Under Mr. Ballmer's leadership Microsoft has done nothing more than protect market share in its original business – and at a huge cost that has not benefited shareholders with dividends or growth. No profitable expansion into new businesses, despite several newly emerging markets. And now late in practically every category. Costs for business development that are wildly out of control, despite producing little incremental revenue. And sitting on a business in operating systems and office software that is coming under more critical attack daily by the shift toward cloud computing. A shift that could make its "core" products entirely obsolete before 2020.
Given this performance, giving Mr. Ballmer his "target" bonus for last year seems ridiculous – even if half the maximum. The proper question should be why does he still have his job? And if you still own Microsoft stock — why as well?
by Adam Hartung | Sep 30, 2010 | Defend & Extend, In the Whirlpool, Lifecycle
Summary:
- Outsourcing has been very popular
- Outsourcing removes management options
- Outsourcing creates Lock-in, and makes it harder to deal with market shifts
- Most organizations see long-term performance deteriorate as a result of outsourcing
Outsourcing has been extremely popular – ever since the early 1990s. We know it has led to a lot of jobs moving out of the USA. Outsourcing manufacturing has exploded employment in China and other parts of Asia. Outsourcing information technology has exploded employment in India and parts of Eastern Europe.
Economists tell us that outsourcing has driven down the cost of everything from the clothes and household items we buy at WalMart to the cost of social marketing, ad creation and even telephone services.
But has it helped businesses be more successful? As outsourcing popularity reaches 2 decades – both domestic and offshore – we now have a lot more insight. And what we can see is that almost all outsourcing has been bad for the company that uses it! As things change, outsourcing has left them stuck competing the old way and further removed from market needs.
As my Sept. 29 column in CIOMagazine “Outourcing for the Right Reasons” (also published in ComputerWorld online under the same title) points out, the vast majority of outsourcing was done for the wrong reason. And the result has been deteriorating performance for those who outsourced.
Most companies outsourced to cut cost. The problem is, this has led to even worse lock-in than normal. Where organizations had options when they controlled the function – from manufacturing to janitorial serivces to help desks to datacenters – there were options to make changes. But when something is outsourced the contract takes away most options. The die is cast, usually for years into the future —- regardless of what might happen in the world!
Outsourcing can be used to create flexibility. But, honestly, how often have you seen it used that way? In well over 90% of cases the outsourcing is intended to cut cost – and lock-in operations. It is meant to remove options from the management discussion. Once outsourced, there is no consideration as to undertaking those efforts again. And if the outsourcing is done when business results are poor, the intent is to never revisit doing those things again. Under the banner of “outsource everything that’s not core” the management team is left with nothing to manage – except “core”!!! But if core has limited value, how do you now create a healthy business? How do you move to meet shifting needs?
Outsourcing has been a tidal wave for 15 years. Things might be cheaper, but has it made business performance better? Take a hard look at your company – and you may well realize it hasn’t helped you be a better competitor. When you outsource, how often are competitors able to equally outsource and match your short-term cost reductions? Things might be a penny cheaper, but the business is likely much less flexible, more vulnerable to market shifts, and far more locked-in to doing what it always did!
If you are seriously considering outsourcing, ask some simple questions:
- Am I doing this because I want to simplify my life, or offer the market something new?
- Am I doing this so I can “focus” on my “core” business?
- How will this advantage me versus competitors? Would emerging competitors do this?
- Can competitors do what I’m doing? Can this lead to a price war?
- How will this make me more competitive in 10 years?
- How will this make me more connected to markets?
- How will this make me more flexible to deal with shifting markets, and how will I exploit this flexibility?
- Am I doing this because I’m desperate to cut costs?
- What could I be doing instead of outsourcing to be more competitive?
by Adam Hartung | Sep 22, 2010 | Current Affairs, Defend & Extend, Film, In the Whirlpool, Leadership, Lifecycle, Lock-in, Music, Web/Tech
Summary:
- Video retailer Blockbuster (and competitor Hollywood Video) are now bankrupt
- Video rentals/sales are at an all time high – but via digital downloads not DVDs
- Nokia, once the cell phone industry leader, is in deep trouble and risk of failure
- Yet mobile use (calls, texts, internet access, email) is at an all time high
- These companies are victims of locking-in to old business models, and missing a market shift
- Commitment to defending your old business can cause failure, even when participating in high growth markets, if you don’t anticipate, embrace and participate in market shifts
- Lock-in is deadly. It can cause you to ignore a market shift.
According to YahooNews, “Blockbuster Video to File Chapter 11.” In February, Movie Gallery – the owner of primary in-kind competitor Hollywood Video – filed for bankruptcy. It’s now decided to liquidate.
The cause is market shift. Netflix made it possible to rent DVDs without the cost of a store – as has the kiosk competitor Red Box. But everyone knows that is just a stopgap, because Netflix and Hulu are leading us all toward a future where there is no physical product at all. We’ll download the things we want to watch. The market is shifting from physical items – video cassettes then DVDs – to downloads. And both Blockbuster and Hollywood Video missed the shift.
Blockbuster (or Hollywood) could have gotten into on-line renting, or kiosks, like its competition. It even could have used profits to be an early developer of downloadable movies. Nothing stopped Blockbuster from investing in YouTube. Except it’s commitment to its Success Formula – as a brick-and-mortar retailer that rented or sold physically reproduced entertainment. Lock-in. And for that commitment to its historical Success Formula the investors now will get a great big goose egg – and employees will get to be laid off – and the thousands of landlords will be left in the lurch, unprepared.
As predictable as Blockbuster was, we can be equally sure about the future of former powerhouse Nokia. Details are provided in the BusinessWeek.com article “How Nokia Fell from Grace.” As the cell phone business exploded in the 1990s Nokia was a big winner. Revenues grew fivefold between 1996 and 2001 as people around the globe gobbled up the new devices. Another example of the fact that when you enter a high growth market you don’t have to be good – just in the right market at the right time.
But the cell phone business has become the mobile device business. And Nokia didn’t anticipate, prepare for or participate in the market shift. From market dominance, it has become an also-ran. The article author blames the failure, and decline, on complacent management. Weak explanation. You can be sure the leadership and management at Nokia was doing all it possibly could to Defend & Extend its cell phone business. The problem is that D&E management doesn’t work when customers simply walk away to a new technology. It may take a few years, and government subsidies may extend Nokia’s life even longer, but Nokia has about as much chance of surviving its market shift as Blockbuster did.
When companies stumble management sees the problems. They know results are faltering. But for decades management has been trained to think that the proper response is to “knuckle down, cut costs, defend the current business at all cost.” Yet, there are more movies rented now than ever – and Blockbuster is failing despite enormous market growth. There are more mobile telephony minutes, text messages, remote emails and mobile internet searches than ever in history – yet Nokia is doing remarkably poorly. It’s not a market problem, it’s a problem of Lock-in to a solution that is now outdated. When the old supplier didn’t give the market what it wanted, the customers went elsewhere. And unwillingness to go with them has left these companies in tatters.
These markets are growing, yet the purveyors of old solutions are failing primarily because they stuck to defending their old business too long. They did not embrace the market shift, and cannibalize historical product sales to enter the new, higher growth markets. Because they chose to protect their “core,” they failed. New victims of Lock-in.
