by Adam Hartung | Aug 15, 2012 | Current Affairs, In the Rapids, Leadership, Web/Tech
Forbes magazine labeled Groupon the world's fastest growing corporation. And that didn't hurt the company's valuation when it went public in November, 2011.
But after trading up for a couple of months, at the beginning of March Groupon turned down and has since lost 75% of its market capitalization. Groupon is now valued at about $3.6B – approaching half of what Google offered to pay for the company in 2011 before leadership decided to go public.
And nobody, absolutely nobody, can be happy about that.
Groupon pioneered the use of digital coupons in a way that created an explosive new market for local business. Paper coupon use had been declining for years. But when Groupon made it possible for on-line individuals to achieve deep discounts on products in local stores using emailed coupons masses of people started buying. From nothing in June, 2009, by June, 2010 revenues grew to an astonishing $100M. Then, between June, 2010 and June, 2011 revenues exploded 10-fold, reaching the magical $1B. Forbes was not wrong – as this was an astonishing growth accomplishment.
Google, Yahoo, Amazon and other suitors quickly recognized that this was not a fad – but a true growth market:
- People like deals, and coupons could be successful when updated to modern technology
- Local programs were extremely hard for internet-wide companies like Google, and Groupon had "cracked the code" for acquiring local-market customers
- Some Groupon programs had simply astounding results – far exceeding the offerer's expectations. The downside was the businessess complained about how much the discounts cost them as success exceeded expectations. The upside was it demonstrated the business had remarkable reach and success.
- As mobile use grows Groupon can interact with location apps like Foursquare to allow local merchants to target local customers for rapid sales. Combine that with Twitter distribution and you could have extremely effective local store targeted marketing programs – previously unavailable on the web.
- Groupon reached a scale allowing it to potentially work with national consumer goods companies like PepsiCo or P&G and their local retailers on new product launches or market specific sales programs, something not previously done via digital networks.
Ah, but problems have emerged at Groupon. Although none of them really change the above items:
Source: Business Insider August 13, 2012 Permission to reproduce: Jay Yarrow, Silicon Alley Insider Editor
This last point is extremely deadly. Groupon's growth rate has fallen from 1,000% to about 35%! Further, Groupon is dangerously close to a growth stall, which is 2 consecutive quarters of declining revenue. Only 7% of companies that incur a growth stall maintain a consistent growth rate of even 2%!! Groupon's value is completely based upon maintaining high growth. So regardless of anything else – including profitability – unless Groupon can find its growth mojo then investors are screwed!
Has the market for daily deals declined? Not according to Yelp and Amazon, which continue growing their markets. Consumers are still smarting from a bad economy, and love digital coupons. The problems at Groupon do not appear to be that the market is disappearing – but rather that management simply does not know what to do next.
Groupon was a rocket ship of growth, and founding CEO Andrew Mason deserves a lot of credit for building the sales machine that outperformed everyone else – including Google and Amazon. But the other side of his performance was complete inexperience in how to manage finances, operations or any other part of a large publicly traded corporation. Unprofessional analyst presentations, executive turnover, disrespectful comments to investors and chronic unprofitability all were acceptable if – and only if – he kept up that torrid growth pace. If he can't drive sales, what's the benefit of keeping him in the top job?
Groupon is a remarkable company, in a remarkable market. But it has incredibly tough competition. Seasoned tech investors know that as fast as Groupon sales went up, they can go down. With smart, well managed competitors in their markets there is no room for error – and no time. Groupon has to keep the growth going, or it will quickly be overwhelmed by bigger, smarter companies – remember Palm? RIM?
It's not too late for Groupon. It is #1 in its market. Groupon has the most users, the most customers and by far the most salespeople. Groupon has other products in the pipeline which solve new needs and can extend sales into other emerging market opportunities. But Groupon will not survive if it does not recapture growth – and it's time for a CEO with the experience to do just that. Mr. Mason does not appear to be the next Jeff Bezos or Steve Jobs, so Groupon's Board better go find one!
by Adam Hartung | Aug 9, 2012 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership, Web/Tech
Mark Zuckerberg was Time magazine's Person of the Year in December, 2010. He was given that honor because Facebook dominated the emerging social media marketplace, and social media had clearly begun changing how people do things. Despite his young age, Mr. Zuckerberg had created a phenomenon demonstrated by the hundreds of million new Facebook users.
But things have turned pretty rough for the young Mr. Zuckerberg.
- Facebook was pretty much forced, legally, to go public because it had accumulated so many shareholders. The stock hit the NASDAQ with much fanfare in May, 2012 – only to have gone pretty much straight down since. It now trades at about 50% of IPO pricing, and is under constant pressure from analysts who say it may still be overpriced.
- Facebook discovered perhaps 83million accounts were fake (about 9%) unleashing a torrent of discussion that perhaps the fake accounts was a much, much larger number.
- User growth has fallen to some 35% – which is much slower than initial investors hoped. Combined with concerns about fake accounts, there are people wondering if Facebook growth is stalling.
- Facebook has not grown revenues commensurate with user growth, and people are screaming that despite its widespread use Facebook doesn't know how to "monetize" its base into revenues and profits.
- Mobile use is growing much faster than laptop/PC use, and Facebook has not revealed any method to monetize its use on mobile devices – causing concerns that it has no plan to monetize all those users on smartphones and tablets and thus future revenues may decline.
- Zynga, a major web games supplier, announced weak earnings and said its growth was slowing – which affects Facebook because people play Zinga games on Facebook.
- GM, one of the 10 largest U.S. advertisers, publicly announced it was dropping Facebook advertising because executives believed it had insufficient return on investment. Investors now fret Facebook won't bring in major advertisers.
- Google keeps plugging away at competitive product Google+. And while Facebook disappointed investors with its earnings, much smaller competitor Linked-in announced revenues and earnings which exceeded expectations. Investors now worry about competitors dicing up the market and minimalizing Facebook's future growth.
Wow, this is enough to make 50-something CEOs of low-growth, non-tech companies jump with joy at the upending of the hoody-wearing 28 year old Facebook CEO. Zynga booted its Chief Operating Officer and has shaken up management, and not suprisingly, there are analysts now calling for Mr. Zuckerberg to step aside and install a new CEO.
Yet, Mr. Zuckerberg has been wildly successful. Much more than almost anyone else in American business today. He may well feel he needs no advice. But…. what do you suppose Steve Jobs would tell him to do?
Recall that Mr. Jobs was once the young head of Apple, only to be displaced by former Pepsi exec John Sculley — and run out of Apple. As everyone now famously knows, after a string of Apple CEOs led the company to the brink of disaster Mr. Jobs agreed to return and completely turned around Apple making it the most successful tech company of the last decade. Given what we've observed of Mr. Jobs career, and read in his biography, what advice might he give Mr. Zuckerberg?
- Don't give up your job. Not even partly. If you create a "shadow" or "co" CEO you'll be gone soon enough. Lead, quit or make the Board fire you. If you had the vision to take the company this far, why would you quit?
- Nothing is more important than product. Make Facebook's the best in the world. Nothing less will allow a tech company to survive, much less thrive. Don't become so involved with financials and analysts that you lose sight of your #1 job, which is to make the very, very best social media product in the world. Never stop improving and perfecting. If your product isn't obviously superior to other solutions you haven't accomplished your #1 priority.
- Be unique. Make sure your products fulfill needs no one else fulfills – at least not well. Meet unserved and underserved needs so that people talk about your product and what it does – not how much it costs. Make sure that Facebook has devoted, diehard customers that believe your products meet their needs so well they would not consider your competition.
- Don't ask customers what they want – give them what they need. Understand the trends and create future scenarios so you are constantly striving to create a better future, not just improve on history. Never look backward at what you've done, but instead always look forward at creating what noone else has ever done. Push your staff to create solutions that meet user needs so well that you can tell customers why they need your product in ways they never before considered.
- Turn your product releases into a show. Don't just run out new products willy-nilly, or on a random timeline. Make sure you bundle products together and make a big show of each release so you can describe the upgrades, benefits and superiority of what you offer for customers. People need to understand the trends you are meeting, and need to see the future scenario you are creating, and you have to tell them that story or they won't "get it."
- Price for profit. You run a business, not a hobby or not-for-profit society. If you do the product right you shouldn't even be talking about price – so price to make ridiculous margins by industry standards. At Apple, Next and Pixar the products were never the cheapest, but they accomplished what customers needed so well that we could price high enough to make margins that supported additional product development. And you can't remain the best solution if you don't have enough margin to keep developing future products.
- Don't expect products to sell themselves. Be the #1 passionate spokesperson for the elegance and superiority of your products. Never stop beating the drum for the unique capability and superiority of your product, in every meeting, all the time, never ending. People like to "revert to the mean" so you have to keep telling them that isn't good enough – and you have something far superior that will greatly improve their success.
- Never miss an opportunity to compare your products to competition and tell everyone why your products are far better. Don't disparage the competition, but constantly reinforce that you are first, you are ahead of everyone else, you are far better — and the best is yet to come! Competition is everywhere, and listen to the Andy Groves advice "only the paranoid survive." You aren't satisfied with what the competition offers, and customers should not be satisfied either. Every once in a while give people a small glimpse as to the radically different world you see in 3-5 years so they buy what you are selling in order to prepare for that future world.
- Identify key customers that need your solution and SELL THEM. Disney needed Pixar, so we made sure they knew it. Identify the customers who can gain the most from doing business with you and SELL THEM. Turn them into lead customers, obtain their testimonials and spread the word. If GM isn't your target, who is? Find them and sell them, then tell us all how you will build on those early accounts to eventually dominate the market – even displacing current solutions that are more popular. If GM is your target then make the changes you need to make so you can SELL THEM. Everyone wants to do business with a winner, so you must show you are a winner.
- Identify 5 of your competition's biggest customers (at Google, Yahoo, Linked-in, etc.) and make them yours. Demonstrate your solutions are superior with competitive wins.
- Hire someone who can talk to the financial community for you – and do it incredibly well. While you focus on future markets and solutions someone has to tell this story to the financial analysts in their lingo so they don't lose faith (and they are a sacrilegious lot who have no faith.) Keep Facebook out of the forecasting game, but you MUST create and maintain good communication with analysts so you need someone who can tell the story not only with products and case studies but numbers. Facebook is a disruptive innovation company, so someone has to explain why this will work. You blew the IPO road show horribly by showing up at meetings in a hoodie – so now you need to make amends by hiring someone who will give them faith that you know what you're doing and can make it happen.
These are my ideas for what Steve Jobs would tell Mark Zuckerberg. What are yours? What do you think the #1 CEO of the last decade would say to the young, embattled CEO as he faces his first test under fire leading a public company?
by Adam Hartung | Aug 9, 2012 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
McDonald’s is in a Growth Stall. Even though the stock is less than 10% off its recent 52 week high (which is about the same high it’s had since the start of 2012,) the odds of McDonald’s equity going down are nearly 10x the odds of it achieving new highs.
A Growth Stall occurs when a company has 2 consecutive quarters of declining sales or earnings, or 2 consecutive quarters of lower sales or earnings than the previous year. And our research, in conjunction with The Conference Board, proved that when this happens the future becomes fairly easy to predict.
Growth Stalls are Deadly
When companies hit a growth Stall, 93% of the time they are unable to maintain even a 2% growth rate. 55% fall into a consistent revenue decline of more than 2%. 1 in 5 drop into a negative 6%/year revenue slide. 69% of Growth Stalled companies will lose at least half their market capitalization in just a few years. 95% will lose more than 25% of their market value.
Back in February, McDonalds sales in USA stores open at least 13 months fell 1.4%. By May these same stores reported reported their 7th consecutive month (now more than 2 quarters) of declining revenues. And in July McDonald’s reported the worst sales decline in over a decade – with stores globally selling 2.5% less (USA stores were down 3.2% for the month.) McDonald’s leadership is now warning that annual sales will be weaker than forecast – and could well be a reported decline.
While McDonald’s has been saying that Asian store revenue growth had offset the USA declines, we now can see that the USA drop is the key signal of a stall. There was no specific program in Asia to indicate that offshore revenues could create a renewed uptick in USA sales. Now with offshore sales plummeting we can see that McDonald’s American performance is the lead indicator of a company with serious performance issues.
Growth Stalls are a great forecasting tool because they indicate when a company has become “out of step” with its marketplace. While management, and in fact many analysts, will claim that this performance deficit is a short term aberration which will be repaired in coming months, historical evidence — and a plethora of case stories – tell us that in fact by the time a Growth Stall shows itself (especially in a company as large as McDonald’s) the situation is far more dire (and systemic) than management would like investors to believe.
Something fundamental has happened in the marketplace, and company leadership is busy trying to defend its historical business in the face of a major change that is pulling customers toward substitute solutions. Frequently this defend & extend approach exacerbates the problems as retrenchment efforts further hurt revenues.
McDonald’s has reached this inflection point as the result of a long string of leadership decisions which have worked to submarine long-term value.
Back in 2006 McDonald’s sold its fast growing Chipotle chain in order to raise additional funds to close some McDonald’s stores, and undertake an overhaul of the supply chain as well as many remaining stores. This one-time event was initially good for McDonald’s, but it hurt shareholders by letting go of an enormously successful revenue growth machine.
Since that sale Chipotle has outperformed McDonalds by 3x, and it was clear in 2011 that investors were better off with the faster growing Chipotle than the operationally focused McDonald’s. Desperate for revenues as its products lagged changing customer tastes, by December, 2012 McDonald’s was urging franchisees to stay open on Christmas Day in order to add just a bit more to the top line. However, such operational tactics cannot overcome a product line that is fat-and-carb-heavy and off current customer food trends, and by this July was ranked the worst burger in the marketplace. Meanwhile McDonald’s customer service this June ranked dead last in the industry. All telltale signs of the problems creating the emergent Growth Stall.
Meanwhile, McDonald’s is facing a significant attack on its business model as trends turn toward higher minimum wages. By August, 2013 the first signs of the trend were clear – and the impact on McDonald’s long-term fortunes were put in question. By February, 2014 the trend was accelerating, yet McDonald’s continued ignoring the situation. And this month the issue has become a front-and-center problem for McDonald’s investors as the National Labor Relations Board (NLRB) has said it will not separate McDonald’s from its franchisees in pay and hours disputes – something which opens McDonald’s deep pockets to litigants looking to build on the living wage trend.
The McDonald’s CEO is somewhat “under seige” due to the poor revenue and earnings reports. Yet, the company continues to ascribe its Growth Stall to short-term problems such as a meat processing scandal in China. But this inverts the real situation. Such scandals are not the cause of current poor results. Rather, they are the outcome of actions taken to meet goals set by leadership pushing too hard, trying to achieve too much, by defending and extending an outdated success formula desperately in need of change to meet new competitive market conditions.
Application of Growth Stall analysis has historically been very valuable. In May, 2009 I reported on the Growth Stall at Motorola which threatened to dramatically lower company value. Subsequently Motorola spun off its money losing phone business, sold other assets and businesses, and is now a very small remnant of the business prior to its Growth Stall; which was brought on by an overwhelming market shift to smartphones from 2-way radios and traditional cell phones.
In February, 2008 a Growth Stall at General Electric indicated the company would struggle to reach historical performance for long-term investors. The stock peaked at $57.80 in 2000, then at $41.40 in July, 2007. By January, 2009 (post Stall) the company had crashed to only $10, and even recent higher valuations ($28 in 10/2013) are still far from the all-time highs – or even highs in the last decade.
In May, 2008 the Growth Stall at AIG portended big problems for the Dow Jones Industrial (DJIA) giant as financial markets continued to shift radically and quickly. By the end of 2008 AIG stock cratered and the company was forced to wipe out shareholders completely in a government-backed restructuring.
Perhaps the most compelling case has been Microsoft. By February, 2010 a Growth Stall was impending (and confirmed by May, 2011) warning of big changes for the tech giant. Mobile device sales exploded, sending Apple and Google stocks soaring, while Microsoft’s primary, core market for PCs (and software for PCs) has fallen into decline. Windows 8 subsequently had a tepid market acceptance, and gained no traction in mobile devices, causing Microsoft to write-off its investment in the Surface tablet. Recent announcements about enormous lay-offs, with vast cuts in the acquired Nokia handheld unit, do not bode well for long-term revenue growth at the decaying (yet cash rich) giant.
As the Dow has surged to record highs, it has lifted all boats. Including those companies which are showing serious problems. It is easy to look at the ubiquity of McDonald’s stores and expect the chain to remain forever dominant. But, the company is facing serious strategic problems with its products, service and business model which leadership has shown no sign of addressing. The recent Growth Stall serves as a key long-term indicator that McDonald’s is facing serious problems which will most likely seriously jeopardize investors’ (as well as employees’, suppliers’ and supporting communities’) potential returns.
by Adam Hartung | Jul 31, 2012 | Current Affairs, In the Whirlpool, Leadership, Lock-in
In a fascinating move this week, Best Buy's septuagenarion founder (who is no longer part of the company) has started calling company execs and offering them jobs – at Best Buy! Apparently he hopes to engage a private equity firm to take over Best Buy, and he wants to keep some of the exec team, while replacing others. Even more fascinating is that at last some of the execs are taking his calls, and agreeing to his "job offer." Clearly these folks have lost faith in Best Buy's future.
This happens one day after the Board of Directors fired the CEO at Supervalu, parent company of such large grocery chains as Albertson's, Jewel-Osco, ACME, Shaw's and Star Markets. Apparently this pleased most everyone, since the company has lost 85% of its equity value since he was brought in from Wal-Mart while simultaneously killing bonuses and even free employee coffee. Even though just last week he was paid a retention bonus by the same Board to remain in his job!
And even thought the Chairman at Wal-Mart was clearly in the thick of bribing Mexican officials to open stores south of the border, there is no sign of any changes expected in Wal-Mart's leadership team.
What is sparking such bizarre behavior in retail? Quite simply, industry leadership that is so stuck in the past it has no idea how to grow or make money in a dramatically changed marketplace. They keep trying to do more of the same, while growth goes elsewhere.
Everyone, and I mean everyone, outside of retail knows that the game has changed – permanently. Since 2000 on-line sales of everything, and I mean everything, has increased. Sure, there were some collosal flops in early on-line retail (remember Pets.com?) But every year sales of products on-line increase at double digit rates. It's rare to walk through a store – and I mean any store – and not see at least one customer comparison shopping the product on the shelf with an on-line vendor.
What 15 years ago was a niche seller of non-stock books, Amazon.com, has become the industry vanguard selling everything from apple juice to zombie memorabilia. Even though most industry analysts don't clump it as a direct competitor to Best Buy, Sears, and Wal-Mart – holding it aside in its own "internet retail" category – everyone knows Amazon is growing and changing shopping habits, and reducing demand in traditional stores.
The signs of this shift are everywhere. From the complete collapse of Circuit City and Sharper Image to the flat sales, reduced number of U.S. outlets and falling per-store numbers at Wal-Mart.
Across America drivers are accustomed to seeing retail outlets boarded up, and strip malls full of empty window space. You don't have to be a fancy analyst to notice how many malls would be knocked down entirely if they weren't being converted to low-cost office space for lawyers, tax preparers, dentists, veterinarians and emergency clinics – demonstrably non-retail businesses. Or to recognize an old Sears or superstore location converted into an evangelical nondenominational church.
For example, in the collar counties around Chicago vacant retail space has accumulated to over 3million square feet – a 45% increase since 2007. In that local market retail rents have fallen to $16.76 per foot, down 29% in the last four years. And this is typical of just about everywhere. America simply has a LOT more retail space than it needs – and will need for the foreseeable future. Demand for traditional retail is going down, not up, and that is a permanent change.
It is not impossible to make money in retail. But you can't do it the way it was done in the past. The answer isn't as simple as "location, location, location;" or even inventory. As the new, and struggling, CEO at JC Penney has learned the hard way, it's not about "every day low price." Or even low price at all, as the former WalMart exec just fired at Supervalu learned – along with all their employees.
Today traditional retail store success requires you have unique products, unique merchandising, sales assistance that meets immediacy needs, strong trend connectivity and effective pricing. Just look at IKEA, Lululemon, Sephora, Whole Foods, Trader Joe's and PetSmart – for example.
Of course there will be grocery stores. Traditional retail will not disappear. But that doesn't mean it will be profitable. And trying to chase profits by constantly beating down costs gets you – well – Circuit City, Toys R Us, Drug Emporium, Pay N Save, Crazy Eddie, Egghead Software, Bradlee's, Korvette's, TG&Y, Wickes, Skagg's, Payless Cashways, Musicland — and Supervalu. There is more to business than price, something the vast, vast majority of retailers keep forgetting.
Fifty years ago if you wanted a TV you went to a television store where they not only sold you a TV, they repaired it! You selected from tube-based machines made by Zenith, RCA, Philco and Magnavox. The TV shop owner made some money on the TV, but he also made money on the service. And if you wanted a washer or refrigerator you went to an "appliance store" for the same reason. But the world changed, and the need for those stores disappeared. Almost none changed to what people wanted – they simply failed.
Now the world has changed again. The customer value proposition in retail is shifting from location and inventory to information. And it is extremely hard to have salespeople – or shelf tags – with comparable information to a web page, which have not only product and price info but competitive comparisons on everything. There simply isn't enough profit in a TV, stereo, PC, CD or DVD to cover the overhead of salespeople, check-out clerks, on-hand inventory and the building.
And that's why Best Buy had to shutter 50 stores in March. On its way to the same ending as Polk Brothers, Grant's Appliance and Circuit City.
Don't expect a 70 year old retailer to understand what retail markets will look like in 2020. Or anyone trained in traditional retail at Wal-Mart. Or anyone who thinks they can save a traditional "retail brand" like Sears. The world has already shifted – and those are stories from last decade (or long before.)
If you are interested in retail go where the growth is – and that is all about on-line leadership. Sell Best Buy and put your money in Amazon. You'll sleep better.
by Adam Hartung | Jul 17, 2012 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
Most investors shouldn't be. Given demands of work and family, there is almost no time to study companies, markets and select investments. So smaller investors rely on 3rd parties, who rarely perform better than the most common indeces, such as the S&P 500 or Dow Jones Industrial Average. For that reason, few small investors make more than 5-10% per year on their money, and since 2000 many would beg for that much return!
Most investors would make more money with their available time by studying prices on the web and simply buying bargains where they could save more than 10% on their purchase. The satisfaction of a well priced computer, piece of furniture, nice suit or pair of shoes is far more gratifying than earning 2-4% on your investment, while worrying about whether you might LOSE 10-20-30%, or more!
And that's why you don't want to own JPMorganChase (JPMC.) Last week's earning's call was a remarkable example of boredom. Yes, Chairman and CEO Jamie Dimon and his team spent considerable time explaining how the London investment office lost $6B, and why they felt it was an "accident" that would not happen again. But the truth is that this $6B "mistake" wasn't really all that big a deal, compared to the $100B in mortgage and credit card losses since the financial crisis started!
Perhaps Mr. Dimon was right, given JPMC's size, that the whole experience was mostly "a tempest in a teapot." Throughout the call the CEO kept emphasizing that JPMC was "going to go about the business of deposits and lending that is the 'core' business for the bank." Although known for outspokenness, Mr. Dimon sounded like any other bank CEO saying "things happen, but trust us. We really are conservative."
So if a $6B surprise loss isn't that big a deal, what is important to shareholders of JPMC?
How about the unlikelihood of JPMC earning any sort of decent return for the next decade, or two?
The world has changed. But this call, and the mountain of powerpoint slides and documents put out with it, reiterated just how little JPMC (and most of its competition, honestly) has not. In this global world of network relationships, digital transactions, struggling home values and upside down mortgages, and very slow economic growth in developed countries, JPMC has no idea what "the next big thing" will be that could make its investors a 20-30% rate of return.
Yes, in many traditional product lines return-on-equity is in the upper teens or even over 20%. But, then there are losses in others. So lots of trade-offs. Ho-hum. To seek growth JPMC is opening more branches (ho-hum). And trying to sign up more credit card customers (ho-hum) and make more smalll-business loans (ho-hum) while running ads and hoping to accumulate more deposit acounts (ho-hum.) And they have cut compensation and other non-interest costs 12% (ho-hum.)
You could have listened to this call in the 1980s, or 1990s, and it would have sounded the same.
Only the world isn't at all the same.
And Mr. Dimon, and his team, knew this. That's why JPMC created the Chief Investment Office (CIO) in London, and the synthetic credit portfolio that has caused such a stir. The old success formula, despite the bailout which created these highly concentrated, huge banks, simply doesn't have much growth – in revenues or profits. So to jack up returns the bank created an extremely complex business unit that made bets – big bets – sometimes HUGE bets – on interest rates and securities it did not own.
These bets allowed small sums (like, say, $1B) to potentially earn multiples on the investment. Or, lose multiples. And the bets were all based on forecasts about future events – using a computer model created by the CIO's office. As Mr. Dimon's team eloquently pointed out, this model became very complicated, and as reality varied from forecast nobody at JPMC was all that clear why the losses started to happen. As they kept using the model, losses mounted. Oops.
But now, we are to be very assured that JPMC's leaders are paying a lot more attention to the model, and thus JPMC isn't going to have such variations between forecast and reality. So this event won't happen again.
Right.
If JPMC didn't need to use the highly complicated world of derivatives to potentially jack up its returns it would have closed the CIO before these losses happened. Now they claim to have closed the synthetic trading portfolio, but not the CIO. Think about that, if you had a unit operated by one of your very top leaders that "made a mistake" and lost $6B wouldn't you closing it? You would only keep it open if you felt like you had to.
Anybody out there remember the failure of Long Term Capital Management (LTCM?) Certainly Mr. Dimon does. In the 1990s LTCM was the most famous "hedge fund" of its day. The "model" used at Long Term Capital supposedly had zero risk, but extremely high returns. Until a $4B loss created by the default of Russion bonds wiped out all the bank's reserves and capital.
Let's see, what's the big news these days? Oh yeah, possible bond defaults in Greece, Portugal, Spain, Ireland……
The recent "crisis" at JPMC reflects a company locked-in to an antiquated business model which has no growth and declining returns. In order to prop up returns the bank took on almost unquantifiable additional risk, through its hedging operation. Even though hedging long had a risky history, and some spectacular failures.
But this was the only way JPMC knew how to boost returns, so it did it anyway. In an almost off-hand comment Mr. Dimon remarked a capable executive fired CIO Ina Drew was. And that she was credited with "saving the bank" by some of Mr. Dimon's fellow executives. Most likely her money-losing, high risk efforts were another attempt by Ms. Drew to "save the bank's returns" and thus why she was lauded even after losing $6B.
But no more. Now the bank is just going to slog it out being the boring bank it used to be. Amidst all the slides and documents there was NO explanation of what JPMC was going to do next to create growth. So JPMC is still susceptible to crisis – from debt defaults, Euro crisis, no growth economies, etc. – but shows little, if any, upside growth.
And that's why you don't want to invest in JPMC. For the last 3 years the stock has swung wildly. Big swings are loved by betting stock traders. But quarter to quarter vicissitudes are not helpful for investors who need growth so they can generate a 50% gain in 5 years when they need the money for junior's college tuition.
For that matter, I can't think of any "money center" bank worth investing. All of them have the same problem. After being "saved" they are less likely to behave differently than ever before. At JPMC leadership took bets in derivatives trying to jack up returns. At Barclay's Bank it appears leadership manipulated a key lending rate (LIBOR.) All actions typical of executives that are stuck in a lousy market, that is shifting away from them, and feeling it necessary to push the envelope in an effort to squeek out higher returns.
If you feel compelled to invest in financial services, look outside the traditional institutions. Consider Virgin, where Virgin Money is behaving uniquely – and could create incredible growth with very high returns. In a business no "traditional" bank is pursuing. Or Discover Financial Services which is using a unique on-line approach to deposits and lending. Although these are nothing like JPMC, they offer opportunity for growth with probably less risk of another future crisis.
by Adam Hartung | Jul 2, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership
Cost cutting never improves a company. Period.
We've become so used to reading about reorganizations, layoffs and cost cutting that most people just accept such leadership decisions as "best practice." No matter the company, or industry, it has become conventional wisdom to believe cost cutting is a good thing.
As a reporter recently asked me regarding about layoffs at Yahoo, "Isn't it always smart to cut heads when your profits fall?" Of course not. Have the layoffs at Yahoo in any way made it a better, more successful company able to compete with Google, Microsoft, Facebook and Apple? Given the radical need for innovation, layoffs have only hurt Yahoo more – and made it more likely to end up like RIM (Research in Motion.)
But like believing in a flat world, blood letting to cure disease and that meteorites are spit up out of the ground – this is just another conventional wisdom that is untrue; and desperately needs to be challenged. Cost reductions are killing most companies, not helping them.
Take for example Sara Lee. Sara Lee was once a great, growing company. Its consumer brands were well known, considered premium products and commanded a price premium at retail.
The death spiral at Sara Lee began in 2006. "Professional managers" from top-ranked MBA schools started "improving earnings" with an ongoing program of reorganizations and cost reductions. Largely under the leadership of the much-vaunted Brenda Barnes, none of these cost reductions improved revenues. And the stock price went nowhere.
With each passing year Sara Lee sold parts of the business, such as Hanes, under the disguise of "seeking focus." With each sale a one-time gain was booked, and more people were laid off as the reorganizations continued. Profits remained OK, but the company was actually shrinking – rather than growing.
To prop up the stock price all avaiable cash was used to buy back stock, which helped maximize executive compensation but really did nothing for investors. R&D was eliminated, as was new product development and any new product launches. Instead Sara Lee kept selling more businesses, reorganizing, cutting costs — and buying its own shares. Until finally, after Ms. Barnes left due to an unfortunate stroke, Sara Lee was so small it had nothing left to sell.
So the company decided to split into two parts! Magically, it's like pushing the reset button. What was Sara Lee is now an even smaller Hillshire Brands. All that poor track record of sales, profits and equity value goes POOF as the symbol SLE disappears, and investors are left following HSH – which has only traded for about 2 days! No more looking at that long history of bad performance, it isn't on Bloomberg or Marketwatch or Yahoo. Like the name Sara Lee, the history vanishes.
Well, "if you can't dazzle 'em with brilliance you baffle 'em with bull**it" W.C. Fields once said.
Cost cuts don't work because they don't compound. If I lay off the head of Brand Marketing this year I promise to save $300,000 and improve the Profit & Loss Statement (P&L) by that amount. So a one time improvement. Now – ignoring the fact that the head of branding probably did a number of things to grow revenue – the problem becomes, what do you do the next year? You can't lay off the Brand V.P. again to save that $300,000 twice. Further, if you want to improve the P&L by $450,000 this time you actually have to find 2 Directors to lay off!
Shooting your own troops in order to manage a smaller army rarely wins battles.
Cost cuts are one-time, and are impossible to duplicate. Following this route leads any company toward being much smaller. Like Sara Lee. From a once great company with revenues in the $10s of billions, the new Hillshire Brands isn't even an S&P 500 company (it was replaced by Monster Beverage.) And how can any investor obtain a great return on investment from a company that's shrinking?
What does create a great company? Growth! Unlike cost cutting, if a company launches a new product it can sell $300,000 the first year. If it meets unmet needs, and is a more effective solution, then the product can attract new customers and sell $600,000 the second year. And then $900,000 or maybe $1.2M the third year. (And even add jobs!)
If you are very good at creating and launching products that meet needs, you can create billions of dollars in new revenue. Like Apple with the iPhone and iPad. Or Facebook. Or Groupon. These companies are growing revenues extremely fast because they have products that meet needs. They aren't trying to "save the P&L."
And revenue growth creates "compound returns." Unlike the cost savings which are one time, each dollar of revenue produces cash flow which can be invested in more sales and delivery which can generate even more cash flow. So if growth is 20% and you invest $1,000 in year one, that can become $1,200 in year two, then $1,440 in year three, $1,728 in year four and $2,070 in year five. Each year you receive 20% not only on the $1,000 you invested, but on returns from the previous years!
By compounding year after year, at20% investor money doubles in 5 years. That's why the most important term for investing is CAGR – Compound Annual Growth Rate. Even a small improvement in this number, from say 9% to 11%, has very important meaning. Because it "compounds" year after year. You don't have to add to your investment – merely allowing it to support growth produces very, very handsome returns. The higher the CAGR the better.
Something no cost cutting program can possibly due. Ever.
So, what is the future of Hillshire Brands? According to the CEO, interviewed Sunday for the Chicago Tribune, the company's historically poor performance could be blamed on —– wait —– insufficient focus. Alas, Sara Lee's problem was obviously too much sales! Well, good thing they've been solving that problem.
Of course, having too many brands led to too much lateral thinking and not enough really deep focus on meat. So now that all they need to think about is meat, he expects innovation will be much improved. Right. Now that HSH is a "meat focused meals" company, and the objective is to add innovation to meat, they are considering such radical dietary improvements for our fat-laden, overcaloried American society as adding curry powder to the frozen meatloaf.
Not exactly the iPhone.
To create future growth the first act the new CEO took to push growth was —- wait —– cutting staff by $100million over the next 3 years. Really. He will solve the "analysis paralysis" which seems to concern him as head of this much smaller company because there won't be anyone around to do the analysis, nor to discuss it and certainly not to disagree with the CEO's decisions. Perhaps meat loaf egg rolls will be next.
All reorganizations and cost reductions point to leadership's failure to create growth. Every time. Staff reductions say to investors, employees, suppliers and customers "I have no idea how to add profitable revenue to this company. I really have no clue how to put these people to work productively – even if they are really good people. I have no choice but to cut these jobs, because we desperately need to make the profits look better in order to prop up the stock price short term; even if it kills our chances of developing new products, creating new markets and making superior rates of return for investors long term."
Hillshire's CEO may do very well for himself, and his fellow executives. Assuredly they have compensation plans tied to stock price, and golden parachutes if they leave. HSH is now so small that it is a likely purchase by a more successful company. By further gutting the organization Hillshire's CEO can reduce staff to a minimum, making the acquisition appear easier for a large company. This would allow a premium payment upon acquisition, providing millions to the executives as options pay out and golden parachutes enact.
And it might give a return to the shareholders. If the ongoing slaughter finds a buyer. Otherwise investors will see the stock crater as it heads to bankruptcy. Like RIM and Yahoo. So flip a coin. But that's called gambling, not investing.
What investors need is CAGR. Not cost cutting and reorganizations. And as I've said since 2006 – you don't want to own Sara Lee; even if it's now called Hillshire Brands.
by Adam Hartung | Jun 18, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Innovation, Leadership, Web/Tech
While there is an appropriately high interest in the Win8 Tablet announcement from Microsoft today, there is no way it is going to be a game changer. Simply because it was never intended to be.
Game changers meet newly emerging, unmet needs, in new ways. People are usually happy enough, until they see the new product/solution and realize "hey, this helps me do something I couldn't do before" or "this helps me solve my problem a lot better." Game changers aren't a simple improvement, they allow customers to do something radically different. And although at first they may well appear to not work too well, or appear too expensive, they meet needs so uniquely, and better, that they cause people to change their behavior.
Motorola invented the smart phone. But Motorola thought it was too expensive to be a cell phone, and not powerful enough to be a PC. Believing it didn't fit existing markets well, Motorola shelved the product.
Apple realized people wanted to be mobile. Cell phones did talk and text OK – and RIM had pretty good email. But it was limited use. Laptops had great use, but were too big, heavy and cumbersome to be really mobile. So Apple figured out how to add apps to the phone, and use cloud services support, in order to make the smart phone fill some pretty useful needs – like navigation, being a flashlight, picking up tweets – and a few hundred thousand other things – like doctors checking x-rays or MRI results. Not as good as a PC, and somewhat on the expensive side for the device and the AT&T connection, but a whole lot more convenient. And that was a game changer.
From the beginning, Windows 8 has been – by design – intended to defend and extend the Windows product line. Rather than designed to resolve unmet needs, or do things nobody else could do, or dramatically improve productivity over all other possible solutions, Windows 8 was designed to simply extend Windows so (hopefully) people would not shift to the game changer technology offered by Apple and later Google.
The problem with trying to extend old products into new markets is it rarely works. Take for example Windows 7. It was designed to replace Windows Vista, which was quite unpopular as an upgrade from Windows XP. By most accounts, Windows 7 is a lot better. But, it didn't offer users anything that that made them excited to buy Windows 7. It didn't solve any unmet needs, or offer any radically better solutions. It was just Windows better and faster (some just said "fixed.")
Nothing wrong with that, except Windows 7 did not address the most critical issue in the personal technology marketplace. Windows 7 did not stop the transition from using PCs to using mobile devices. As a result, while sales of app-enabled smartphones and tablets exploded, sales of PCs stalled:
Chart reproduced with permission of Business Insider Intelligence 6/12/12 courtesy of Alex Cocotas
People are moving to the mobility provided by apps, cloud services and the really easy to use interface on modern mobile devices. Market leading cell phone maker, Nokia, decided it needed to enter smartphones, and did so by wholesale committing to Windows7. But now the CEO, Mr. Elop (formerly a Microsoft executive,) is admitting Windows phones simply don't sell well. Nobody cares about Microsoft, or Windows, now that the game has changed to mobility – and Windows 7 simply doesn't offer the solutions that Apple and Android does. Not even Nokia's massive brand image, distribution or ad spending can help when a product is late, and doesn't greatly exceed the market leader's performance. Just last week Nokia announced it was laying off another 10,000 employees.
Reviews of Win8 have been mixed. And that should not be surprising. Microsoft has made the mistake of trying to make Win8 something nobody really wants. On the one hand it has a new interface called Metro that is supposed to be more iOS/Android "like" by using tiles, touch screen, etc. But it's not a breakthrough, just an effort to be like the existing competition. Maybe a little better, but everyone believes the leaders will be better still with new updates soon. By definition, that is not game changing.
Simultaneously, with Win8 users can find their way into a more historical Windows inteface. But this is not obvious, or intuitive. And it has some pretty "clunky" features for those who like Windows. So it's not a "great" Windows solution that would attract developers today focused on other platforms.
Win8 tries to be the old, and the new, without being great at either, and without offering anything that solves new problems, or creates breakthroughs in simplicity or performance.
Do you know the story about the Ford Edsel?
By focusing on playing catch up, and trying to defend & extend the Windows history, Microsoft missed what was most important about mobility – and that is the thousands of apps. The product line is years late to market, short on apps, short on app developers and short on giving anyone a reason to really create apps for Win8.
Some think it is good if Microsoft makes its own tablet – like it has done with xBox. But that really doesn't matter. What matters is whether Microsoft gives users and developers something that causes them to really, really want a new platform that is late and doesn't have the app base, or the app store, or the interfaces to social media or all the other great thinks they already have come to expect and like about their tablet (or smartphone.)
When iOS came out it was new, unique and had people flocking to buy it. Developers could only be mobile by joining with Apple, and users could only be mobile by buying Apple. That made it a game changer by leading the trend toward mobility.
Google soon joined the competition, built a very large, respectable following by chasing Apple and offering manufacturers an option for competing with Apple.
But Microsoft's new entry gives nobody a reason to develop for, or buy, a Win8 tablet – regardless of who manufactures it. Microsoft does not deliver a huge, untapped market. Microsoft doesn't solve some large, unmet need. Microsoft doesn't promise to change the game to some new, major trend that would drive early adopters to change platforms and bring along the rest of the market.
And making a deal so a dying company, on the edge of bankruptcy – Barnes & Noble – uses your technology is not a "big win." Amazon is killing Barnes & Noble, and Microsoft Windows 8 won't change that. No more than the Nook is going to take out Kindle, Kindle Fire, Galaxy Tab or the iPad. Microsoft can throw away $300million trying to convince people Win8 has value, but spending investor money on a dying businesses as a PR ploy is just stupid.
Microsoft is playing catch up. Catch up with the user interface. Catch up with the format. Catch up with the device size and portability. Catch up with the usability (apps). Just catch up.
Microsoft's problem is that it did not accept the PC market was going to stall back in 2008 or 2009. When it should have seen that mobility was a game changing trend, and required retooling the Microsoft solution suite. Microsoft dabbled with music mobility with Zune, but quickly dropped the effort as it refocused on its "core" Windows. Microsoft dabbled with mobile phones across different solutions including Kin – which it dropped along with Microsoft Mobility. Back again to focusing on operating systems. By maintaining its focus on Windows Microsoft hoped it could stop the trend, and refused to accept the market shift that was destined to stall its sales.
Microsoft stock has been flat for a decade. It's recent value improvement as Win8 approaches launch indicates that hope beats eternally in some investors' breasts for a return of Microsoft software dominance. But those days are long past. PC sales have stalled, and Windows is a product headed toward obsolescence as competitors make ever better, more powerful mobile platforms and ecosystems. If you haven't sold Microsoft yet, this may well be your last chance above $30. Ever.
by Adam Hartung | Jun 1, 2012 | Current Affairs, In the Rapids, Innovation, Leadership, Television, Web/Tech
On May 18 Facebook went public with an opening price of $38/share. Now, after just 2 weeks, it's more like $28. Ouch – a 25%+ drop in such a short time makes nobody happy. Except buyers. And if you are interested in capturing a high rate of return with little risk, this is your lucky break!
The values of publicly traded companies change, often dramatically, based upon changes in performance and investor expectations about the future. Trying to profit off fast price changes is the world of traders – and the vast majority of them lose fortunes rather than create them. Knowing how to ignore whipsaw events, and invest in good companies when they are out of favor is important to long-term wealth creation.
Investors make money by understanding product markets and the companies supplying them, then investing in companies that build upon trends to create revenue growth with high rates of return over several years. In the forgettable 1999 movie "Blast from the Past" (Brendan Fraser, Christopher Walken, Sissy Spacek) a family moves into its nuclear blast shelter in 1960 during a panic, and doesn't come out for 35 years. Fortunately, the father had bought shares of AT&T and other companies aligned with 1960 trends, and the family discovers upon re-emergence it is quite wealthy.
Creating investment wealth means acting like them, buying shares in companies building on trends so you can hold shares for years without much worry.
If ever there was a company aligned with trends, it is Facebook. The company did not create 900million users in 8 years by being lucky. Facebook is the ultimate information era company. Facebook is not a fad – any more than television or telephones were fads in 1960. Just like they provided fundamental new ways of acquiring and disseminating information Facebook is the newest, most efficient and effective way for connecting and communicating in 2012.
When television appeared the mass population said "why?" There was radio, which was cheap, and older users said TV reduced the use of imagination. And television was not available many hours per day. But it didn't take long for CBS and its brethren to prove it could attract eyeballs, and soon Proctor & Gamble started paying for programming so it could promote its soaps (remember "soap operas?") Soon other companies developed programs strictly so they could promote their products. The "Ted Mack Amateur Hour" was sponsored by Geritol, and viewers were reminded of that over and over for 30 minutes every week. Eventually the TV ad model changed, but the lesson is clear - when you can attract eyeballs it has value and there will be businesses creative enough to take advantage.
Now television watching is declining. Instead, people are spending more time on the internet – including via mobile devices. And the location attracting the most people, and by far for the most minutes per day, is Facebook. Facebook's access to so many people, so often, creates an audience many businesses and non-profits want to tap.
Further, in the networked world Facebook not only has eyeballs, it delivers up to those eyeballs some 9 million apps, and knows what everyone wants, where they come from and where they go next. Beyond the industrial-era business of selling ads (like Google,) Facebook's information business has significant value for anyone trying to promote or sell a solution. Facebook is a repository of information about people, and their behavior, never before seen, understood or developed for use.
Around the IPO, General Motors decided to drop its Facebook advertising. That freaked some investors. Cries arose that social media is somehow broken, and unable to develop a business model.
Let's keep in mind who we're talking about here – GM. Not the most innovative, forward thinking company, to put it mildly. GM, like a lot of other plodding, but big spending, large companies has approached social media like it is just television on the web – and would prefer to simply put up a television ad on a Facebook like link. Whoa! That would be akin to a 1960s TV ad that was simply the text from a newspaper ad. Nobody would read it, and it simply wouldn't work.
Television required a new kind of communication to reach customers – and social media does as well. TV required the ad be entertaining, with movement, product use demonstrations, and video plus audio to go with the words. Connecting with users was harder, but the message (and connection) could be far more robust. And that is what advertisers are being forced to learn about Facebook/Social. It has new requirements, but once understood companies can be remarkably successful at connecting with potential customers – far more than the traditional one-way approach of historical advertising.
Paid promotion on Facebook is just the tip of the iceberg – a one-way approach to advertising sure to create short-term revenue but not terribly robust. Beyond that, social media changes everything. Retail, for example, is fast shifting from pushing inventory to being all about understanding the customer and offering them what they need in an anticipatory way (think Amazon rather than Best Buy.) And nowhere can you better understand customer needs than by social media participation. By being an information company, rather than an industrial company, FB is remarkably well positioned to create growth – for everybody that figures out how to use this remarkable platform.
As Facebook's shares kept falling this week, more attention was paid to whether traditional advertisers would buy FB. And much was made about whether the "metrics" were there to justify social media investments. This micro-management approach clearly misses the main point. People are already on Facebook, their numbers are growing, their uses are growing, their time on the site is growing, and the benefits of using Facebook are growing. Trying to measure Facebook use the way you would measure a print ad – or even a Google Adword buy – is simply using the wrong tool.
When P&G first started producing television "soaps" their competition sat back and said "look at what television advertising costs, compared to print and compared to pushing products into the local stores. What is the return for each of those television shows? Can it be justified? I think it is smarter to keep doing what we've done while P&G throws money at ads you can't measure." By moving beyond the historically myopic view of trying to find returns at the micro level P&G quickly became (at the time) the world's largest consumer goods company. Early TV advertisers followed the trend, knowing their participation would create returns far in excess of doing more of the old thing. And that is the direction of social media.
There was a lot of anticipatory excitement for the Facebook IPO. Lots of people wanted shares, and couldn't buy them in advance. The public, and the Morgan Stanley investment bankers, clearly thought the shares would go up. Oops. But that's a lucky thing for investors. Especially small investors, usually unable to participate in a "hot" IPO. Now anybody can buy FB shares at a 25% discount to the offering price – a better deal than the institutional buyers that usually get the "sweet" deal little guys never see.
If you are an employee, short term you might be unhappy. But if you are an investor, be happy that worries about Greece, the Euro's future, domestic politics, a lousy jobs report and simple myths like "sell in May and go away" have been a drag on equities this month – and diminished interest in Facebook.
Buy FB shares, then forget about them for a while. What you care about isn't the value of FB shares in 4 days, 4 weeks or 4 months – you care about 4 years. If you missed the chance to buy Microsoft in 1986, or Amazon in 1997, or Apple in 2000, or Google in 2004 then don't miss this one. There will be volatility, but the trends are all in your favor.
by Adam Hartung | May 25, 2012 | Defend & Extend, In the Whirlpool, Leadership, Web/Tech
Things are bad at HP these days. CEO and Board changes have confused the management team and investors alike. Despite a heritage based on innovation, the company is now mired in low-growth PC markets with little differentiation. Investors have dumped the stock, dropping company value some 60% over two years, from $52/share to $22 – a loss of about $60billion.
Reacting to the lousy revenue growth prospects as customers shift from PCs to tablets and smartphones, CEO Meg Whitman announced plans to eliminate 27,000 jobs; about 8% of the workforce. This is supposedly the first step in a turnaround of the company that has flailed ever since buying Compaq and changing the company course into head-to-head PC competition a decade ago. But, will it work?
Not a chance.
Fixing HP requires understanding what went wrong at HP. Simply, Carly Fiorina took a company long on innovation and new product development and turned it into the most industrial-era sort of company. Rather than having HP pursue new technologies and products in the development of new markets, like the company had done since its founding creating the market for electronic testing equipment, she plunged HP into a generic manufacturing war.
Pursuing the PC business Ms. Fiorina gave up R&D in favor of adopting the R&D of Microsoft, Intel and others while spending management resources, and money, on cost management. PCs offered no differentiation, and HP was plunged into a gladiator war with Dell, Lenovo and others to make ever cheaper, undifferentiated machines. The strategy was entirely based upon obtaining volume to make money, at a time when anyone could buy manufacturing scale with a phone call to a plethora of Asian suppliers.
Quickly the Board realized this was a cutthroat business primarily requiring supply chain skills, so they dumped Ms. Fiorina in favor of Mr. Hurd. He was relentless in his ability to apply industrial-era tactics at HP, drastically cutting R&D, new product development, marketing and sales as well as fixating on matching the supply chain savings of companies like Dell in manufacturing, and WalMart in retail distribution.
Unfortunately, this strategy was out of date before Ms. Fiorina ever set it in motion. And all Mr. Hurd accomplished was short-term cuts that shored up immediate earnings while sacrificing any opportunities for creating long-term profitable new market development. By the time he was forced out HP had no growth direction. It's PC business fortunes are controlled by its suppliers, and the PC-based printer business is dying. Both primary markets are the victim of a major market shift away from PC use toward mobile devices, where HP has nothing.
HPs commitment to an outdated industrial era supply-side manufacturing strategy can be seen in its acquisitions. What was once the world's leading IT services company, EDS, was bought in 2008 after falling into financial disarray as that market shifted offshore. After HP spent nearly $14B on the purchase, HP used that business to try defending and extending PC product sales, but to little avail. The services group has been downsized regularly as growth evaporated in the face of global trends toward services offshoring and mobile use.
In 2009 HP spent almost $3B on networking gear manufacturer 3Com. But this was after the market had already started shifting to mobile devices and common carriers, leaving a very tough business that even market-leading Cisco has struggled to maintain. Growth again stagnated, and profits evaporated as HP was unable to bring any innovation to the solution set and unable to create any new markets.
In 2010 HP spent $1B on the company that created the hand-held PDA (personal digital assistant) market – the forerunner of our wirelessly connected smartphones – Palm. But that became an enormous fiasco as its WebOS products were late to market, didn't work well and were wholly uncompetitive with superior solutions from Apple and Android suppliers. Again, the industrial-era strategy left HP short on innovation, long on supply chain, and resulted in big write-offs.
Clearly what HP needs is a new strategy. One aligned with the information era in which we live. Think like Apple, which instead of chasing Macs a decade ago shifted into new markets. By creating new products that enhanced mobility Apple came back from the brink of complete failure to spectacular highs. HP needs to learn from this, and pursue an entirely new direction.
But, Meg Whitman is certainly no Steve Jobs. Her career at eBay was far from that of an innovator. eBay rode the growth of internet retailing, but was not Amazon. Rather, instead of focusing on buyers, and what they want, eBay focused on sellers – a classic industrial-era approach. eBay has not been a leader in launching any new technologies (such as Kindle or Fire at Amazon) and has not even been a leader in mobile applications or mobile retail.
While CEO at eBay Ms. Whitman purchased PayPal. But rather than build that platform into the next generation transaction system for web or mobile use, Paypal was used to defend and extend the eBay seller platform. Even though PayPal was the first leader in on-line payments, the market is now crowded with solutions like Google Wallets (Google,) Square (from a Twitter co-founder,) GoPayment (Intuit) and Isis (collection of mobile companies.)
Had Ms. Whitman applied an information-era strategy Paypal could have been a global platform changing the way payment processing is handled. Instead its use and growth has been limited to supporting an historical on-line retail platform. This does not bode well for the future of HP.
HP cannot save its way to prosperity. That never works. Try to think of one turnaround where it did – GM? Tribune Corp? Circuit City? Sears? Best Buy? Kodak? To successfully turn around HP must move – FAST – to innovate new solutions and enter new markets. It must change its strategy to behave a lot more like the company that created the oscilliscope and usher in the electronics age, and a lot less like the industrial-era company it has become – destroying shareholder value along the way.
Is HP so cheap that it's a safe bet. Not hardly. HP is on the same road as DEC, Wang, Lanier, Gateway Computers, Sun Microsystems and Silicon Graphics right now. And that's lousy for investors and employees alike.
by Adam Hartung | May 12, 2012 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Web/Tech
This has been quite the week for CEO mistakes. First was all the hubbub about Scott Thompson, CEO of Yahoo, inflating his resume to include a computer science degree he did not actually receive. According to Mr. Thompson someone at a recruiting firm added that degree claim in 2005, he didn't know it and he's never read his bio since. A simple oversight, if you can believe he hasn't once read his bio in 7 years, and he didn't think it was ever important to correct someone who introduced him or mentioned it. OOPS – the easy answer for someone making several million dollars per year, and trying to guide a very troubled company from the brink of failure. Hopefully he is more persistent about checking company facts.
But luckily for him, his errors were trumped on Thursday when Jamie Dimon, CEO of J.P.MorganChase notified the world that the bank's hedging operation messed up and lost $2B!! OOPS! According to Mr. Dimon this is really no big deal. Which reminded me of the apocryphal Senator Everett Dirksen statement "a billion here, a billion there and pretty soon it all adds up to real money!"
Interesting "little" mistake from a guy who paid himself some $50M a few years ago, and benefitted greatly from the government TARP program. He said this would be "fodder for pundits," as if we all should simply overlook losing $2B? He also said this was "unfortunate timing." As if there's a good time to lose $2B?
But neither of these problems will likely result in the CEOs losing their jobs. As obviously damaging as both mistakes are, which would naturally have caused us mere employees to instantly lose our jobs – and potentially be prosecuted – CEOs are a rare breed who are allowed wide lattitude in their behavior. These are "one off" events that gain a lot of attention, but the media will have forgotten within a few days, and everyone else within a few months.
By comparison, there are at least 5 CEOs that make these 2 mistakes appear pretty small. For these 5, frequently honored for their position, control of resources and personal wealth, they are doing horrific damage to their companies, hurting investors, employees, suppliers and the communities that rely on their organizations. They should have been fired long before this week.
#5 – John Chambers, Cisco Systems. Mr. Chambers is the longest serving CEO on this list, having led Cisco since 1995 and championed much of its rapid growth as corporations around the world began installing networks. Cisco's stock reached $70/share in 2001. But since then a combination of recessions that cut corporate IT budgets and a market shift to cloud computing has left Cisco scrambling for a strategy, and growth.
Mr. Chambers appears to have been great at operating Cisco as long as he was in a growth market. But since customers turned to cloud computing and greater use of mobile telephony networks Cisco has been unable to innovate, launch and grow new markets for cloud storage, services or applications. Mr. Chambers has reorganized the company 3 times – but it has been much like rearranging the deck chairs on the Titanic. Lots of confusion, but no improvement in results.
Between 2001 and 2007 the stock lost half its value, falling to $35. Continuing its slide, since 2007 the stock has halved again, now trading around $17. And there is no sign of new life for Cisco – as each earnings call reinforces a company lacking a strategy in a shifting market. If ever there was a need for replacing a stayed-in-the-job too long CEO it would be Cisco.
#4 – Jeffrey Immelt, General Electric (GE). GE has only had 9 CEOs in its 100+ year life. But this last one has been a doozy. After more than a decade of rapid growth in revenue, profits and valuation under the disruptive "neutron" Jack Welch, GE stock reached $60 in 2000. Which turns out to have been the peak, as GE's value has gone nowhere but down since Mr. Immelt took the top job.
GE was once known for entering and changing markets, unafraid to disrupt how the market performed with innovation in products, supply chain and operations. There was no market too distant, or too locked-in for GE to not find a way to change to its advantage – and profit. But what was the last market we saw GE develop? What has Mr. Immelt, in his decade at the top of GE, done to keep GE as one of the world's most innovative, high growth companies? He has steered the ship away from trouble, but it's only gone in circles as it's used up fuel.
From that high in 2001, GE fell to a low of $8 in 2009 as the financial crisis revealed that under Mr. Immelt GE had largely transitioned from a manufacturing and products company into a financial house. He had taken what was then the easy road to managing money, rather than managing a products and services company. Saved from bankruptcy by a lucrative Berkshire Hathaway, GE lived on. But it's stock is still only $19, down 2/3 from when Mr. Immelt took the CEO position.
"Stewardship" is insufficient leadership in 2012. Today markets shift rapidly, incur intensive global competition and require constant innovation. Mr. Immelt has no vision to propel GE's growth, and should have been gone by 2010, rather than allowed to muddle along with middling performance.
#3 – Mike Duke, WalMart. Mr. Duke has been CEO since 2009, but prior to that he was head of WalMart International. We now know Mr. Duke's business unit saw no problems with bribing foreign officials to grow its business. Just on the basis of knowing about illegal activity, not doing anything about it (and probably condoning and recommending more,) and then trying to change U.S. law to diminish the legal repurcussions, Mr. Duke should have long ago been fired.
It's clear that internally the company and its Board new Mr. Duke was willing to do anything to try and grow WalMart, even if unethical and potentially illegal. Recollections of Enron's Jeff Skilling, Worldcom's Bernie Ebbers and Hollinger's Conrdad Black should be in our heads. How far do we allow leaders to go before holding them accountable?
But worse, not even bribes will save WalMart as Mr. Duke follows a worn-out strategy unfit for competition in 2012. The entire retail market is shifting, with much lower cost on-line companies offering more selection at lower prices. And increasingly these companies are pioneering new technologies to accelerate on-line shopping with easy to use mobile devices, and new apps that make shopping, paying and tracking deliveries easier all the time. But WalMart has largely eschewed the on-line world as its CEO has doggedly sticks with WalMart doing more of the same. That pursuit has limited WalMart's growth, and margins, while the company files further behind competitively.
Unfortunately, WalMart peaked at about $70 in 2000, and has been flat ever since. Investors have gained nothing from this strategy, while employees often work for wages that leave them on the poverty line and without benefits. Scandals across all management layers are embarrassing. Communities find Walmart a mixed bag, initially lowering prices on some goods, but inevitably gutting the local retailers and leaving the community with no local market suppliers. WalMart needs an entirely new strategy to remain viable – and that will not come from Mr. Duke. He should have been gone long before the recent scandal, and surely now.
#2 Edward Lampert, Sears Holdings. OK, Mr. Lampert is the Chairman and not the CEO – but there is no doubt who calls the shots at Sears. And as Mr. Lampert has called the shots, nobody has gained.
Once the most critical force in retailing, since Mr. Lampert took over Sears has become wholly irrelevant. Hoping that Mr. Lampert could make hay out of the vast real estate holdings, and once glorious brands Craftsman, Kenmore and Diehard to turn around the struggling giant, the stock initially took off rising from $30 in 2004 to $170 in 2007 as Jim Cramer of "Mad Money" fame flogged the stock over and over on his rant-a-thon show. But when it was clear results were constantly worsening, as revenues and same-store-sales kept declining, the stock fell out of bed dropping into the $30s in 2009 and again in 2012.
Hope springs eternal in the micro-managing Mr. Lampert. Everyone knows of his personal fortune (#367 on Forbes list of billionaires.) But Mr. Lampert has destroyed Sears. The company may already be so far gone as to be unsavable. The stock price is based upon speculation of asset sales. Mr. Lampert had no idea, from the beginning, how to create value from Sears and he surely should have been gone many months ago as the hyped expectations demonstrably never happened.
#1 – Steve Ballmer, Microsoft. Without a doubt, Mr. Ballmer is the worst CEO of a large publicly traded American company. Not only has he singlehandedly steered Microsoft out of some of the fastest growing and most lucrative tech markets (mobile music, handsets and tablets) but in the process he has sacrificed the growth and profits of not only his company but "ecosystem" companies such as Dell, Hewlett Packard and even Nokia. The reach of his bad leadership has extended far beyond Microsoft when it comes to destroying shareholder value – and jobs.
Microsoft peaked at $60/share in 2000, just as Mr. Ballmer took the reigns. By 2002 it had fallen into the $20s, and has only rarely made it back to its current low $30s value. And no wonder, since execution of new rollouts were constantly delayed, and ended up with products so lacking in any enhanced value that they left customers scrambling to find ways to avoid upgrades. By Mr. Ballmer's own admission Vista had over 200 man-years too much cost, and its launch still, years late, has users avoiding upgrades. Microsoft 7 and Office 2012 did nothing to excite tech users, in corporations or at home, as Apple took the leadership position in personal technology.
So today Microsoft, after dumping Zune, dumping its tablet, dumping Windows CE and other mobile products, is still the same company Mr. Ballmer took control over a decade ago. Microsoft is PC company, nothing more, as demand for PCs shifts to mobile. Years late to market, he has bet the company on Windows 8 – as well as the future of Dell, HP, Nokia and others. An insane bet for any CEO – and one that would have been avoided entirely had the Microsoft Board replaced Mr. Ballmer years ago with a CEO that understands the fast pace of technology shifts and would have kept Microsoft current with market trends.
Although he's #19 on Forbes list of billionaires, Mr. Ballmer should not be allowed to take such incredible risks with investor money and employee jobs. Best he be retired to enjoy his fortune rather than deprive investors and employees of building theirs.
There were a lot of notable CEO changes already in 2012. Research in Motion, Best Buy and American Airlines are just three examples. But the 5 CEOs in this column are well on the way to leading their companies into the kind of problems those 3 have already discovered. Hopefully the Boards will start to pay closer attention, and take action before things worsen.
