by Adam Hartung | May 5, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Microsoft (chart here) announced it is backing out of its offer to buy Yahoo! (read article here). We should all breath a sigh of relief.
Twenty years ago Microsoft was well on its way to taking over the desktop in corporate America – resulting in domination in homes as well. Once Microsoft won, the amount of innovation in desktops declined. As Apple (pre-iPod) fell by the wayside Microsoft became a Locked-in machine Defending & Extending its Success Formula as users had practically no option for not only operating system but the applications – such as desktop worksheets, word processing and presentations – sold by Microsoft. Microsoft developed no internal Disruption mechanisms (save for Mr. Gates’ lone effort to launch IE and turn on Microsoft to the web), nor White Space.
Microsoft’s single minded focus on the desktop meant that it never developed any skill at developing new things. Microsoft’s acquisitions always ended up in the acquirer being swallowed, and usually the people leaving as the technology was marginalized by the "not invented here" mentality inside Microsoft. If Microsoft acquired Yahoo! we can easily predict that within short order Yahoo!’s competitiveness would decline further, making life easier for Google and destroying value for Microsoft’s shareholders. Without a Disruption, Microsoft’s organization would not value Yahoo! and without White Space Yahoo! would soon disappear into the bowels of the Microsoft machine – with so many billions of dollars lost. Microsoft has no idea how to compete for ad sales, nor how to compete in the "Web 2.0" marketplace – and their acquisition of Yahoo!, which in theory might sound good, would have been a disaster leaving the market with even less competition for Google.
Yahoo! got itself into this problem by management trying to Lock-in on a Success Formula and then Defend & Extend it in a dynamic marketplace. Remember when almost all of us opened our web browser to the Yahoo! home page? But leadership frittered their early advantage away by not maintaining Disruptions and not keeping enough White Space alive to prepare for competing with Google. But combining 2 D&E organizations is not the route to success. Rather, it’s like injecting the flu into a cancer patient.
Yahoo! needs to use this Challenges as a wake up call. Leadership needs to internally Disrupt big and fast. Start talking seriously with News Corp. about some kind of relationship to grow, including possibly joint venturing with MySpace.com. Look for anything valuable left in AOL over at Time Warner. Explore new technologies and the emerging Facebooks out there. Yahoo! needs Disruption and lots of White Space, not the closed-minded D&E mentality at Microsoft which would be sure to suck all the potential life out of this struggling competitor.
And Microsoft should start paying dividends. Big ones. Microsoft is generating huge positive cash flow from its near monopoly of the desktop. But since the company won’t Disrupt (Steve Ballmer is the quintessential D&E leader), and it has no idea how to create or manage White Space, give the money to shareholders. Let them find growth opportunities. What Microsoft most needs is new leaders – people who will Disrupt and create real White Space to develop a new future. Microsoft has to overcome the powerful Lock-ins created during the Gates/Ballmer regime if it is to be a powerful competitor in 10 years. But, if the board won’t replace the leadership then at least give the money to shareholders before management fritters it away trying to pretend this is still 1988.
At least we can all breath a sigh of relief that Microsoft (at least not yet) hasn’t thrown away a ton of money on an acquisition they don’t know how to manage, and Yahoo! hasn’t lost its opportunity to evolve to a more competitive Success Formula, and we all aren’t destined to have a monopolistic controller for internet ad buying called Google. That future will leave us with about as much creativity in the Web 2.0 marketplace as we get today out of Microsoft in desktops.
by Adam Hartung | Apr 30, 2008 | General, In the Rapids, Leadership, Lifecycle
A lot has been recently about Rupert Murdoch’s News Corpation’s (see chart here) bid to buy Newsday newspaper in New York (read overview article here.) The officianados in media are worried about concentration of media ownership – as well as the politics of Mr. Murdoch and the implications on journalism.
These are two very different issues. Mr. Murdoch is a far-right conservative, and he makes no bones about his political leanings. Since the days of William Randolph Hearst the politics of newspaper owners has been a hot topic among media elite. But is that the determinant of who should own newspapers? Their politics? If we allow free speach, then no. Whether you like Mr. Murdoch, or not.
What’s brilliant about Mr. Murdoch is his ability to modify News Corp. to meet changing environmental requirements (see News Corp web site here). While Tribune Company is struggling to admit that newspaper circulation and advertising is never going to recover to 1999 levels, News Corp. long ago moved on. News Corp doesn’t rely on newspapers, the founding business, nor television – the media of the 1960s. News Corp is a major player in internet communications owning, among other properties, MySpace.com. This is in addition to book publishing, newspapers, direct broadcast satellite, film, cable TV, and magazines. News Corp actually HAS a strategy that addresses all of media – and its fast paced change – something almost none of its competitors has. This includes AOL Time Warner – the company that hoped to dominate the web by merging traditional news with the high growth AOL that bought Netscape – but failed miserably as the traditionalists took over.
Competitors are right to be fearful of News Corp. Mr. Murdoch is a consummate Disruptor. He’s observing Challenges in the environment and forcing his company to launch White Space allowing News Corp to adapt its Success Formula and remain at the industry’s forefront. Given how people now receive news – all the many channels – his ability to consolidate New York daily print news (including his recent Dow Jones purchase which provides him The Wall Street Journal) is really irrelevant. Dominating New York print is irrelevant in the TV, Cable TV, Satellite TV, internet world. But reaching customers through all of these channels sets News Corp. apart from its competition. While real estate developer Sam Zell is trying to figure out how to maximize sales of the Cubs and Wrigley Field (Tribune properties – as is Newsday), and simultaneously stop floundering performance from his remaining declining print properties, Mr. Murdoch is a decade ahead implementing cross-media platforms to maximize value for readers and advertisers.
Most of the media elite simply are too Locked-in. Their frameworks are based in the 1980s – not 2008. You have to hand it to the competitor that uses Disruption and White Space to define a new future for the industry – and everyone else should be paranoid. Long after we’ve forgotten the newspaper failures, mergers and buyouts News Corp. is quite likely to be providing info to people globally from any media format users desire.
by Adam Hartung | Apr 28, 2008 | Defend & Extend, General, In the Swamp, Leadership
Thirty years ago The Steve Miller Band put out a son "Take the Money and Run" – and that’s exactly what the investors in Wrigley (see chart here) now need to do. Mars has made an offer to purchase Wrigley at a substantial premium, and investors get their money all in cash (read article in Chicago Tribune here and on Marketwatch here). Take it and run.
Wrigley is well known for its chewing gum – a no growth business at best. In 2005 Wrigley acquired the candy business from Kraft, including Altoids and Lifesavers. And it bought a Russian chocolate company. One would have hoped these acquisitions would have sparked White Space and growth for Wrigley – but the results have been nothing more than the sum of the parts. No internal Disruptions happened, no White Space developed and nothing new happened.
New things can happen in the sweets business. Do you remember in 1982-1985 when we Mrs. Field’s Cookies came along? Suddenly, cookies became a hot item and we paid lots more than before as we switched to cookies from many other sweets. But the good folks at Wrigley really didn’t push for more innovation, and nothing substantially new came out of these acquisitions. And Mars, the acquirer of Wrigley has done nothing exciting for several decades – practically since inventing M&Ms. And they have no plans for Disrupting or creating White Space with the Wrigley acquisition. All the analysts quoted in the articles talk about "industry consolidation" as the future road – with Cadbury selling its go-nowhere soft drinks business to buy Hershey, for example. Ho Hum. Who cares?
But, a smart reader may say, what about Warren Buffet buying into this deal (see Berkshire Hathaway chart here)? Isn’t he the savviest investor alive? Don’t be fooled by his personal sweet tooth, or the notion that he thinks gum is exciting. With the debt market collapsing beneath us due to the financial crisis, Mr. Buffet was able to do what banks used to do but now won’t – and that is make a $4B loan to finance the acquisition. For this he will gets the backing of Mars, and a premium rate of return taking advantage of a breakdown in the market. Second, he negotiated to acquire $2.1B of equity AT BELOW THE PRICE BEING GIVEN INVESTORS – meaning he has a guaranteed positive rate of return on his equity holding. He could be financing cow pie collection for all the difference the underlying business matters. Berkshire Hathaway just made a financial deal that none of us could do – and for returns none of us (nor even banks) could get. Yes Mr. Buffet is savvy. But not because he likes Wrigley. Rather, because he knows a great guaranteed return when he sees one.
For us mere mortals, limited to buying traditional stocks, take the money and run. Don’t buy Mars. Be glad you’re getting this windfall, and find something with substantial growth to invest in.
by Adam Hartung | Apr 25, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
This week a dozen high school seniors pulled a prank at their public high school in Zion, IL (read about the prank, with video, on Chicago NBC5 news website here). Apparently the boys thought up the idea of having 1 boy dress up like a gorilla, then the others dress up like bananas, and the gorilla would chase the bananas down the hallways and into the yard. A 4 minute prank. They weren’t very secretive about their prank, letting lots of fellow students as well as teachers in on it. And they even got their parents involved, having them call the boys home so they could change into the costumes during the school day. No one was hurt, no one injured, just a comical prank. There wasn’t even anything about the prank that anyone could think of that would have made it potentially dangerous – it was well planned to be just what it was and no more.
The boys have now been given a 7 day suspension by the administration. Right. Seven days of no school, no education. Let’s see, we take a few hundred 15-18 year old kids and put them into a closed environment. What are the odds they might think up something rambunctious to do? What are the odds they would try to express their personalities in non-traditional ways? What are the odds they would like to create some laughs, and possibly be remembered for a comical stunt? Could we expect this kind of thing to happen?
Of course. Watch movies going all the way back to silent days and you’ll find scene after scene of high school and college boys running pranks. Remember when the students opened the floor over the swimming pool during the dance in "It’s a Wonderful Life"? And remember how the top administrator, after hollering for about 1 minute for everyone to stop, held his nose and jumped into the pool himself? Seems like people have expected this behavior, and learned to accept it, for decades. It was part of "the rights of passage" that is American growing up. Harmless pranks are part of what happens, and for years good administrators learned to accept it, slap the hands of miscreants, and simply move on. It let young people behave improperly before they got too stressed, or too old to act-out inappropriately.
But not today. Now, even the slightest outside the box behavior leads to actions which can destroy a students GPA, restrict their extra-curricular participation and their efforts to move ahead. Straight A students that right fictional stories about guns -the fodder of many best selling mysteries – are expelled for discussing "taboo topics" in an educational setting (a recent experience in Mundelien, IL). In the Zion case, the administration threw the book at these boys because they violated so many rules. Let’s see, how critical were those violated rules – did they carry a gun, or knife, or dangerous object (no). Did they shout profanity and make threats (no). Did they attack anyone, or block the passage of any students or teachers (no). Did they threaten the authority of any teacher, administratory or security personnel (no.) No, they were suspended for 7 days for (a) wearing a costume to school (b) wearing a mask (c) disrupting the day. And the Superintendent was unapologetic on film saying "We’re basically enforcing our policy."
Right. And we wonder why our children are less accepting of authorities. Why they act as if schools are where "all the bad things happen." Children caught fighting in Zion’s school only get suspended for 5 days. But to expect a school administrator to act like a school is a place to learn – not only about geometry but about life – is expecting too much today. So they end up sending message such as this – that a simple prank is worse than an outright fistfight – or copying another students homework (not even a suspension, only a loss of grade). That the administrator appears arbitrary and completely unable to link the punishment to the nature of the violation is completely lost in the Lock-in to school rules. Rules which should be set by parents in the community – but are now set by administrators who have become wildly out of touch with their students needs in a global labor marketplace.
America relies on innovation and creativity to be competitive. The kind of creative innovation show often exhibited in pranks. We like pranks because they show us that someone has the ability to think outside the box, and we know that ability is often key to achieving success. But our schools no longer encourage, or even tolerate, creativity or innovation. Public school administrator Lock-in has eliminated that capacity – and made our schools second rate and far from providing students the most critical skills -including learning how to think rather than merely recite. Until we change the leaders, the American public school system is destined to continue its downward spiral. And the current leaders will never understand the need to change – because they are simply too Locked-in to consider any options, any Disruptions, or any White Space at all.
(PS – Don’t miss the comments on the NBC5 news link. You’ll find them overwhelmingly opposed to the school’s decision. Yet, we can be sure the school will pay no attention to these comments. Locked-in leaders never feel the need to listen to anyone outside their organization.)
by Adam Hartung | Apr 23, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
There’s a phrase used by stock brokers – "Don’t try to catch a falling javelin." They use this to describe a stock that has fallen recently – often a lot. Clients will ask "XY company stock has dropped Z percent, has it beome a good buy?" Brokers will warn the client that trying to catch that falling stock is not a safe way to invest your money.
This actually makes a lot of sense. Just look at Starbucks (see chart here). A high flyer, and a real Phoenix Principle company for many years, it created tremendous value for investors, employees and suppliers while creating many happy customers. There was lots of Disruption, and White Space galore as the company prepared for slowing sales. But in the last year the old CEO returned – and he’s doing exactly the opposite of what the company needs. As a result value has fallen – like a javelin – and there’s really no guessing how far down it will go.
This afternoon saw a rash of reports that Starbucks’ earnings are going to decline – not just miss expectations but actually decline – for the recent quarter and for the entire 2008 year versus 2007 (read Reuters’ release here). Even worse, same store sales have declined – meaning less is being sold in each store than last year. Starbucks has hit a growth stall, and that bodes very, very poorly for the company.
CEO Schultz is already making a rash of excuses for lousy performance – even blaming lower sales on lower home prices and a generally weak economy (read quotes here.) Even though it is leadership’s job to keep the company growing, especially when slowing sales are as easily predicted as this case. While making excuses, he’s shutting at least 100 stores and pulling products out of remaining ones – like the warm breakfast sandwiches. Let’s see, sales are down – so we’re going to remove products from the shelf. Right, that’s the ticket!
We don’t care if customers go into Starbucks to buy a coffee, latte, sandwich, muffin, coffee mug, coffee pot, CD, DVD, beans, glasses or MP3 download! What customers buy doesn’t matter – it just matters that we keep getting them into the store spending money! And that’s what the last CEO focused on. Creating new ways for Starbucks to make revenues and profits out of the existing footprint – while looking for new footprints in entertainment, grocery and liquor! Yet, when the old CEO returned he couldn’t wait to enforce his old Success Formula on the company – 25 years later – as if the world had never changed and Starbucks was again a 30 unit franchise. The repetitive Defend & Extend practices that worked to grow Starbucks 15 years ago are not what is now needed to keep it growing today. Starbucks was a flying javelin, but under Mr. Schultz it’s falling out of the sky very fast indeed. Investors had better run for safety!
by Adam Hartung | Apr 21, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Harley-Davidson (see chart here) has had one heck of a 20 years. If you put $100 in Harley stock in 1986, it would be worth $23,000 today. Profits have gone from $4.3million to $1billion in 2007. As boomers got older and richer they gained disposable income, and many spent a lot on Harley motorcycles.
In 2001 through 2005 Harley had to increase production every year. But last week Harley announced it’s revenue was declining 13%, and thus it is laying off 700 of its 9,000 employees and looking to possibly idle a plant (read article here). Of course management says this is just a short-term phenomenon created by the lack of easy credit and impending recession. Investors should just wait and things will work out. With the company value down about 50% since early 2007, leadership claims Harley will return to provide great investor returns. That would be an investment mistake.
While revenue has gone up, so has the average age of a Harley buyer (read background on Harley here). From age 35 in 1987, the typical Harley buyer today is 47 (read info on aging buyers here and here see chart on average age of buyers here). The typical customer earned $38,000 in 1987. By 1997 (almost a decade ago) the average income had risen to $83,000 (read income information here). By dealer statements, the bet is that today the average income is over $100,000. The reality is that Harley’s customers are slowly marching into retirement. These stats bode for a lot of troubles – retirement is not the best age for selling motorcycles. Just how old and wealthy can Harley hope to attract buyers? It’s not like Harley is selling a Rolls Royce.
For 25 years Harley has built its brand reputation for one type of motorcycle. Officianados will point out there are actually 4 kinds of Harley’s – but to most people all Harleys are variations on a simple theme of big V-Twin motorcycles that are – well – loud. For most motorcycle riders, Harleys are also incredibly expensive. Go to the #1 producer of motorcycles, Honda, and you can purchase a bike almost identical to a Harley for $8,000 to $12,000 – but most Harley’s cost north of $20,000 – some as high as $40,000! That sort of branding led to some incredible pricing which has created great profits. But it also priced out of the market more than 85% of all potential customers.
So what are 25-35 year old customers buying? Not Harleys. And as they age, why would Harley expect them to convert? Did boomers grow up and want to buy their dad’s Oldsmobile – or did they choose to purchase Mercedes and BMWs? So it is with younger buyers today. They are buying Hondas, Suzukis, Kawasakis and Yamahas – and they have no plans to ever buy a Harley. Harley’s CEO has felt he had to protect what Harley historically stood for, at the expense of attracting younger – and more – buyers. He chose to "milk" the brand of its value, and now that brand is about to see the udder go dry. Sure, there are a lot of older guys out there with Harley logos tattoed on their bodies – a testament to a great historical brand – but that’s not what’s getting tattooed on young people today. And Harley’s are not what they are riding when they make those first couple of motorcycle purchases.
The odds are not good that Harley will come roaring back with more volume, higher prices and more profits in 2 or 3 years as the recession wanes. They’ve had a great run, but their customers are aging, just like the technology in most of their products. Their product line is limited, their dealers are dedicated to rather out-of-date brand nostalgia, and their technology is frankly quite aged. Yes, Harley has done some things to attract new buyers, like launching its V-Rod with an engine designed by Porsche, but the company never Disrupted itself and the V-Rod has been an after-thought that has not built a following and has not kept up with competitive motorcycles in its class. There’s been no White Space in Harley, instead only efforts to Defend & Extend the old brand and products. That worked well for a long time – but all Success Formulas have a half-life. For Harley, this downturn will most likely be a permanent ratcheting down of volume – meaning negative growth. And for investors that is definitely not good news.
by Adam Hartung | Apr 16, 2008 | Disruptions, In the Swamp, Innovation, Leadership, Lifecycle, Openness
It’s hard to turn around a Locked-In company. But it sure is exciting to see a CEO try. And that’s what is happening at Allstate (see chart here.) I blogged previously about this historically staid company that has begun Disrupting and using White Space to chart a new course.
Taking a page from Neutron Jack Welch’s book about how to be a Disruptive leader, the CEO recently decided to implement the "80/20 Management Principle" which he picked up from Illinois Tool Works (read full article here). ITW, by the way, happens to be one of the most long-term successful companies in the U.S., with decades of experience Disrupting and implementing White Space to grow. So the Allstate CEO said "let’s implement this policy, and see if we can be a better company." It doesn’t matter if 80/20 is a great idea or not – the point is that it is Disrupting the old approaches and making people change they way they work. Mr. Welch used rules like "Be #1 or #2 in your business or get out" and created DestroyYourBusiness.com teams to Disrupt people at GE – and open White Space for new growth. For us as investors, suppliers and employees what’s critical is that the CEO is Disrupting people, and causing them to look for new ways to manage the business.
The Allstate CEO is also on a path to use White Space to "reinvent" Allstate (read article here.) Yes, he’s implementing product extensions intended to defend the historical business. But he’s being clear to call these "horizontal" products and he says they really aren’t "new." Meanwhile, he is simultaneously setting up teams to develop entirely new "vertical" products that he intends to use for changing what Allstate develops and sells. These White Space teams range from new insurance products, to new investment vehicles (like mutual funds) to hybrid products that offer both insurance and investment – but different from the old-fashioned "whole life" policies sold our parents and grandparents.
Kudo’s to CEO Wilson, the management team, Chairman and Board of Directors at Allstate. After reeling from the hurricanes, they could have attempted to persevere with business as usual. But even Warren Buffet has said that the old insurance business will see costs rise faster than revenues. At Allstate leadership is using Disruptions and White Space to create a new future that will reposition the company for customer needs in 2015 and beyond. Good for them. They are on the way to becoming a Phoenix Principle company with long-term above average returns!
by Adam Hartung | Apr 15, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Hundreds of years ago philosopher Hippocrates created an oath, and for years medical doctors subsribed to it. Dramatically paraphrased, it included the notion "Doctor, first do no harm." The objective was clear – if you go messing around with a bad situation you can make it worse. Make sure you know what you’re doing – and you know how you’re going to make things better.
We should tell modern businesspeople to swear by this same oath. Delta and Northwest airlines have announced their intent to merge and make one huge Delta (read article here). It is widely expected that very shortly United and Continental will attempt the same maneuver to create an even larger United. Now, do you think this means air travel is going to get any better? Will service improve? On-time performance? Less lost baggage? Happier gate agents and flight attendants? Better maintained aircraft?
No one believes that. Even the leading industry gurus claim the only merger benefit is theoretically this will somehow lead to lower cost – and less capacity (at a time when capacity utilization is around 80%) – which is supposed to raise prices. So we should expect basically the same sort of service, with fewer flights, and yet even more attempts to cut wages and maintenance spending to increase profits? The reality is that either (or both) of these mergers will lead to mass confusion as the companies try sorting out conflicting schedules, optimizing broken systems and negotiating new contracts.
This deal is just another effort to Defend & Extend the traditional hub/spoke airline system the major airlines have used – unprofitably – for 30 years. Things won’t get better if these companies merge – for customers, suppliers and investors they will only get worse. There’s no plan here to make a new, more profitable airline. They aren’t suddenly going to become Southwest.
Monday, Blockbuster said it wanted to buy Circuit City (read article here). Why? Blockbuster is getting killed by on-line music downloads, Netflix and On-Demand direct-to-home distribution, and pretty quickly movie downloads. Circuit City was eclipsed by Best Buy in 1990 and has been choking on the leader’s dust, barely making money ever since (despite being heralded as a "great" company in Jim Collins’ book Good to Great). As on-line sales of consumer electronics grows at over 30% per year, making life tough even for leader Best Buy, this merger is supposed to somehow make things better?
The bidder says it’s an opportunity to create a 9,300 unit group of stores – right as we start the worst consumer-led recession in 30 years! As retailers of all types are rapidly closing stores in order to avoid bankruptcy, the plan here is to get a bunch of stores under one name to sell products that are being displaced by on-line and direct-to-home models and consumers are becoming more price conscious. Right. This is nothing more than a move by Blockbuster to try Defending & Extending a retail model that has already proven to be obsolete.
The reality is that Southwest and Virgin have shown airlines that approach the industry differently can make money. Making a bigger company that uses a broken Success Formula only makes for larger losses – not a new airline. Everyone should be wary, because life will only get worse as we consolidate management of most of the system into fewer hands trying to make a broken model work. If you’re an investor, keep buying Southwest and Virgin because these mergers will provide more opportunities for the Disruptive competitors to win.
Likewise, Apple has shown us all that we’ll never go buy CDs in historical quantities. All media is quickly going digital. We don’t buy newspapers, magazines or books like we once did – we go to the internet. And very soon we won’t be buying DVDs either. New competitors are causing Blockbuster and Circuit City to faulter – and trying to make both bigger will only cause them to do worse.
These companies desperately need White Space to build new Success Formulas before they fail – and not just fail investors but customers, suppliers and the communities they serve as well. These merger efforts will not help any of them to be better competitors that offer better products with better service that meet customer needs with lower cost models. And that means they are only going to make things worse. It would be good if businesspeople could overcome their desire to "do something – anything" to save their old Success Formulas and instead only undertake actions based on plans to be better. First do no harm!
by Adam Hartung | Apr 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Microsoft (see chart here) is huge and has a lot of cash. So do you care? What made Microsoft an incredible company was how it managed to aid the growth of PC technology, making the machines every day parts of our lives. Microsoft products ranged from operating systems to desktop applications to the prolific Internet Explorer web browser. Along the way Microsoft grew incredibly fast, literally won every marketing war it engaged in, dominated its markets and made huge amounts of money. What a great past.
But what is Microsoft doing now? It’s latest operating system (Vista) took 6 years to develop, got to market almost 3 years late, and is not even adopted by half the current customers. A year after launch, Microsoft has to strong-arm PC manufacturers to load the product rather than the older version (XP). Meanwhile both Linux and Macintosh are stealing operating system share from Microsoft – a very bad sign. Users aren’t clamoring for new versions of office automation software, and growth has stymied. And after dominating the market with IE, Microsoft is now contending with Firefox in the browser market. Quite simply, Microsoft isn’t growing. It is sitting on a huge pile of cash, but can’t figure out how to invest it to generate additional growth. And investors haven’t seen any growth in company equity value the last 5 years!
So, Microsoft has offered to buy Yahoo! But why? Microsoft hasn’t offered any new insight to what it’s ownership of the #2 browser will do for customers or investors. Microsoft has merely said it has the money to spend – like a teenager with last week’s paycheck burning a hole in his pocket. If there’s no plan to launch new products, or otherwise generate growth, why spend the money on a company that is far, far behind the #1 player Google? If Yahoo! can’t maintain or grow share versus Google, what is Microsoft planning to do to change the situation? Merely owning Yahoo! won’t help Microsoft be a better company.
Microsoft slipped into the flats four years ago. Now it’s trying to Defend & Extend its past glory, but to not much success as it is losing little bits of share all over. It has a huge war chest to fight this defensive battle. But wouldn’t investors be better off if Microsoft handed out huge dividends? Why not let investors take the money and buy shares of Cisco, Google, RIMM, Oracle or other higher growth companies? Why should Microsoft management burn this cash? No one is fooled by this action – today’s Chicago Tribune headline ran with "Is Yahoo deal set up for failure?" (read article here) and the last paragraph reads "No matter who ends up with Yahoo, the people involved are not innovators" – quoting Marc Benioff CEO of Salesforce.com. "They are followers. This is not a deal about the future of the Internet. It’s about the problems of not executing in the past against Google."
If companies don’t grow, then why do they exist? Without growth, the company should be milked for maximum cash and the money given to investors who can invest in other high growth opportunities. Microsoft had a great past – but it has not maintained its focus on markets and new opportunities. It missed the networking wave – which largely went to Cisco. It missed the PDA wave (personal digital assistants) which has gone to RIMM and Palm. It missed the digital music wave which has gone to Apple. It missed the internet search and advertising wave – which has already gone to Google.
Microsoft started Defending & Extending its personal computer business, and it lost its growth. Bill Gates demonstrated a knack for developing future scenarios and identifying emerging markets. But he almost missed the web – and it took a herculean effort on his part to get the company refocused and out with IE. Mr. Gates did not build an organization that valued Disruption and invested in White Space seeking new markets early and experimenting with new Success Formulas. He relied on himself. Mr. Balmer is a classic D&E manager – not a Disruptor nor investor in White Space. So now Microsoft leadership is doing things that will just waste our time and investor money.
by Adam Hartung | Apr 9, 2008 | General, In the Rapids, Innovation, Leadership, Openness
Great companies don’t only get into new businesses, they know when to get out. Look at GE – a company that sells almost as many businesses as it buys every year. Another company following this practice is Philips (see chart here). In the U.S. few people know much about Philips – although it is a global company with many successful products in multiple businesses.
Philips sells consumer products, like radios, telephones, monitors, DVD players, cameras, webcams, Sonicare toothbrushes, Norelco razors, MP3 players and televisions. It also sells medical systems – like CT scanners, ultrasound machines and heart defibrilators. It sells lighting systems which includes everything from home light bulbs to interior designs to products for lighting the exterior of office skyscrapers or religious temples. Philips was a pioneer in developing compact disc technology and optical storage devices and is a leader in high tech plastics and printed circuit board technology. (Read about Philips at its company web site here.)
Philips generated 2007 revenues of $39billion. Founded and run out of the Netherlands, this is pretty remarkable. The Netherlands has only 16.5million people! The whole country’s population is about 2x the five buroughs of New York City – or the same as the New York metropolitan area. Yet this company is bigger than DuPont, Intel, 3M and Merck – all members of the Dow Jones Industrial Average. Founded in 1891, Philips has met the test of time, entering new markets, and growing both revenues and profits, for several decades. Well resourced, Philips has created and implemented White Space to grow for longer than almost any company in the U.S.A.
Yet, today Philips announced it was going to quit making televisions for North America (read article here). A pioneer, and leader, in flat panel televisions – a high growth product line in the consumer-centric U.S. market – Philips is abandoning manufacturing this $1.7Billion product line, shutting its Althanta headquarters. Manufacturing for the Philips and Magnavox brands will transfer to Tokyo based Funai (which makes Emerson brand as well.)
Phoenix Principle companies not only are quick to Disrupt and implement White Space, they are quick to get out as well. And here we see a large company, with big resources, walk away from manufacturing a product line that is huge WHILE GROWTH IS GOOD. Long before the business slips into the Swamp Philips is looking ahead and changing course. Rather than get trapped in a low-profit business as growth slows, they are getting out on the way up to maximize the value – while focusing precious resources on other opportunities.
All companies of all sizes can be fleet of foot. Even large and aged ones. It requires the discipline to be forward-focused on markets and opportunities rather than history focused. It requires not getting blinded to think big businesses need Defend & Extend behavior – but rather the flexibility to move fast as markets move. It requires a willingness to not rely on your own internal focus – and your own resource pool – when making decisions about future investments. It requires the skill to realize that not all White Space is worth additional investment, and there are times to get out.
Long term success requires overcoming Lock-in. Not only by consistently setting up new White Space, but knowing when to get out of White Space rather than Lock-in on its efforts. Constantly getting into new opportunities means, by definition, that not all are worth pursuing. Some get out early, and others later. It takes discipline to overcome Lock-in – and Philips has shown the knack for 10 decades.
