by Adam Hartung | Nov 1, 2010 | Defend & Extend, Leadership, Lock-in
Summary:
- When something works, we do more of it
- But markets shift, and what we did loses its ability to create growth
- Out of high growth comes Lock-in to old practices that blind us to potential market changes which could create price wars or obsolescence
- Lock-in gets in the way of seeing emerging market shifts
- Ikea is doing well now, but it is already seriously locked-in on an aging strategy
- Will Ikea continue succeeding as it runs into Wal-mart and other price-focused competitors?
- Will Ikea be able to adapt to changing markets as developed economies improve?
“If it works, do more of it” is a famous coaching recommendation. “Nothing succeeds like success” is another. Both are age old comments with simple meanings. Don’t overthink a situation. If something works, keep on doing it. And the more it works, the more you should “keep on keepin’ on” as once famous pop song lyrics recommended. One could ask, why should you try doing anything else, if what you’re doing is working? Many people would sagelyl recommend another common comment, “if it ain’t broke, don’t fix it!”
And this seems to be the philosophy of the new CEO at Ikea, Mikael Ohlsson as descibed in an Associated Press article on Chron.com, the web site for the Houston Chronicle, “New Ikea CEO Cuts Prices, Targets Frugal U.S. Families.”
A lifelong Ikea employee, Mr. Ohlsson joined Ikea right out of college in 1979 as a rug salesperson. He’s watched the company grow dramatically across his career. And he’s watched the company essentially grow by doing one thing – make home goods people need cheaply, figure out how to keep shipping and distribution costs to a minimum, and offer them directly to customers through your own stores. All designed to keep prices at a minimum. Most people would applaud him for focusing on doing more of the same.
And certainly today Ikea’s strategy is benefitting from the “Great Recession,” as we’ve come to call it. A flat economy, no job growth, little income growth, rampant unemployment, declining home values and limited credit access has helped Americans move along the road of penny-pinching.
Somewhat stylish, but primarily low-priced, furniture and other goods long appealed to college students. The fact that most of the furniture was designed for very economical shipping was a big plus with students that changed dorms and apartments frequently. Low price, in addition to the fact that most students are poor, was a benefit in case someone had to leave the stuff behind due to a longer move, downsizing, or simply lost their abode for a while. That the furniture and some of the other items didn’t hold up all that well wasn’t such a big deal, because nobody intended to keep it once school ended and they could afford something better.
But recent cheapness has caused a lot more people to start buying Ikea. That has contributed to a lot more growth than the company originally expected in developed countries like the USA. As sales grew, the company has been pushing year after year to keep lowering costs – and prices. The CEO proudly touted his ability to relocate manufacturing and distribution in order to drive down U.S. prices on several items. In language that sounds almost like Wal-Mart, he talks about constantly driving down cost, and price, in order to appeal to Americans – and even continental Europeans – in the throes of being cheap. Cost, cost, cost in order to sell cheap, cheap, cheap seems to have worked well for Ikea.
And that’s the worry foundation owners should have (Ikea is not publicly traded, it is owned by a foundation.) Ikea is rapidly catching the Wal-Mart Disease (see this blog 13 October). Focusing on execution, in order to lower cost, keep lowering price and expecting the market to expand. This will eventually lead to two very unpleasant side effects:
- Eventually Ikea will run headlong into Wal-Mart. And other price-focused competitors in the USA and other countries. In doing so, margins will be crimped, as will growth. When 2 (or more) companies compete on cost/price it creates a price war, and if it’s between Ikea and Wal-Mart expect the war to be incredibly bloody (this is also bad news for Microsoft shareholders, who are going to increasingly see Ikea join other competitors in pressuring Wal-Mart’s strategy.)
- What will happen to Ikea’s growth if the market shifts? What will happen if customers quit focusing on price, and start looking for better products (longer lasting, higher quality materials, increased sturdiness – for examples)? Or if they want different designs? Or they get tired of the long drives to those huge Ikea stores, and prefer shopping closer to home? Quite simply, what will happen to Ikea’s growth if something besides price retakes importance for customers in developed countries?
There is no doubt Ikea has had a great run. But in large part, fortuitous economic events played a big role. The rising percentage of youth going to colleges, as well as the large migration of developing country students to developed country universities, helped propel the need for affordable items appealing to students. Then the economic faltering post-2000, combined with the banking crisis, created a very slow economy in developed countries. Suburbanization gave Ikea the opportunity to build massive stores at affordable cost to which customers could flock. For 30 years these trends benefitted companies with a price focus – such as Ikea (and Wal-Mart). And all the company had to do was “more of the same.”
But will that remain the long-term trend? As households downsize, home prices stabilize then recover, developed economies improve, jobs grow again and incomes start rising is it possilble that customers will want something beyond low price?
And when that happens, will Ikea find itself so locked-in to its strategy that it cannot adjust to market shifts? What will it do with those manufacturing centers, distribution hubs and huge stores then? How will it be able to recognize the change in customer needs, and alter its merchandise – and stores – to meet changing needs? Or will Ikea rely far too long on improving execution of the strategy that got it where the company is today? Will its decision-making processes, designed to improve execution, keep Ikea making cheap furniture and other goods long after competing on price is sufficient?
Ikea is likely to do well for at least a couple more years. But one can already see how the company, and its CEO, have locked-in on what worked early in the company lifecycle. And now the focus is on executing the old strategy – reinforcing what the company locked-in upon. And there doesn’t seem to be a lot of concern about dealing with potential market shifts.
Most worrisome of all was the CEO’s comment, “I tend not to look so much at competition.” In a very real way, this shows a blindness towoard looking for price wars and market shifts. A blindness toward identifying emerging trends. A blindness toward identifying there may be groth opportunities in a year or two that are better than simply continuing to do what Ikea has always done. And even for a fast growing company, luckily positioned in the right place at the right time, this is something to be worried about.
by Adam Hartung | Oct 27, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Web/Tech
Summary:
- We like to think of "mature" businesses as good
- AT&T was a "mature" business, yet it failed
- "Maturity" leads to inward focus, and an unwillingness to adjust to market shifts
- Microsoft is trying to reposition itself as a "mature" company
- Despite its historical strengths, Microsoft has astonishing parallels to AT&T
- Growth is less risky than "maturity" for investors, employees and customers
Why doesn't your business grow like Apple or Google? Is it because you think of your business, or the marketplace you serve, as "mature?" Quite a euphanism, maturity. It sounds so good. How could being "mature" be bad? As children we strive to be "mature." The leader is usually the most "mature" person in the group. Those who like good art have "mature" taste. Surely, we should want to be "mature." And we should want our businesses to reach "maturity" and have "mature" leaders who don't take unnecessary risks. Once "mature" the business should be safe for investors, employees, suppliers and customers.
That was probably what the folks at AT&T thought. When judge Greene broke up AT&T in 1984 the company had a near monopoly on long-distance. AT&T was a "mature" company in a "mature" telephone industry. It appeared as though all AT&T had to do was keep serving its customers, making regular improvements to its offering, to perpetually maintain its revenue, jobs and profitability. A very "mature" company, AT&T's "mature" management knew everything there was to know about long distance – about everything related to communications. And due to its previous ownership of Bell Labs and Western Union, it had deep knowledge about emerging technologies and manufacturing costs allowing AT*T to make "mature" decisions about investing in future markets and products. This "mature" company would be able to pay out dividends forever! It seemed ridiculous to think that AT&T would go anywhere but up!
Unfortunately, things didn't work out so well. The "mature" AT&T saw its market share attacked by upstarts MCI and Sprint. As a few "early adopters" switched services – largely residential and other very small customers – AT&T was unworried. It still had most of the market and fat profits. As these relatively insignificant small users switched, AT&T reinforced its world's largest billing system as an incomparable strength, and reminded everyone that its "enterprise" (corporate) offerings were still #1 (anybody remember AT&T long distance cards issued by your employer for use at pay phones?).
But unfortunately, what looked like an unassailable market position in 1984 was eventually diminished dramatically as not only homeowners but corporations started shifting to new offerings from competitors. New pricing plans, "bundled" products and ease of use encouraged people to try a new provider. And that AT&T had become hard to work with, full of rules and procedures that were impossible for the customer to comprehend, further encouraged people to try an alternative. Customers simply got fed up with rigid service, outdated products and high prices.
Unexpectedly, for AT&T, new markets started to grow much faster and become more profitable than long distance voice. Data services started using a lot more capacity, and even residential customers started wanting to log onto the internet. Even though AT&T had been the leader (and onetime monopolist – did you know broadcast television was distributed over an AT&T network?) with these services, this "mature" company continued to focus on its traditional voice business – and was woefully late to offer commercial or residential customers new products. Not only were dial-up offerings delayed, but higher speed ISDN and DSL services went almost entirely to competitors.
And, much to the chagrin of AT&T leaders, customers started using their mobile phones a lot more. Initially viewed as expensive toys, AT&T did not believe that the infrastructure would be built quickly, nor be robust enough, to support a large base of cellular phone users. Further, AT&T anticipated pricing would keep most people from using these new products. Not to mention the fact that these new phones simply weren't very good – as compared to land-line services according to the metrics used by AT&T. The connection quality was wildly inferior to traditional long distance, and frequently calls were completely dropped! So AT&T was slow to enter this market, half-hearted in its effort, and failed to make any profits.
Along the way a lot of other "non-core" business efforts failed. There was the acquisition of Paradyne, an early leader in modems, that did not evolve with fast changing technology. New products made Paradyne's early products obsolete and the division disappeared. And the acquisition of computer maker NCR failed horribly after AT&T attempted to "improve" management and "synergize" it with the AT&T customer base and offerings.
AT&T had piles and piles of cash from its early monopoly. But most of that money was spent trying to defend the long distance business. That didn't work. Then there was money lost by wheelbarrow loads trying to enter the data and mobile businesses too late, and with little new to offer. And of course the money spent on acquisitions that AT&T really didn't know how to manage was all down the proverbial drain.
Despite its early monopoly, high cash flow, technology understanding, access to almost every customer and piles of cash, AT&T failed. Today the company named AT&T is a renamed original regional Bell operatiing company (RBOC) created in the 1984 break-up — Southwestern Bell. This classically "mature" company, a stock originally considered "safe" for investing in the "widow's and orphan's fund" used up its money and became obsolete. "Mature" was a misnomer used to allow AT&T to hide within itself; to focus on its past, instead of its future. By being satisfied with saying it was "mature" and competing in "mature" markets, AT&T allowed itself to ignore important market shifts. In just 25 years the company that ushered in mass communications, that had an incredibly important history, disappeared.
I was struck today when a Reuters story appeared with the headline "Sleepy in Seattle: Microsoft Learns to Mature." There's that magic word – "mature." While the article lays out concerns with Microsoft, there were still analysts quoted as saying that investors didn't need to worry about Microsoft's future. Investors simply need to change their thinking. Instead of a "growth" company, they should start thinking of Microsoft as a "mature" company. It sounds so reassuring. After all:
- Microsoft has a near monopoly in its historical business
- Microsoft has a huge R&D budget, and is familiar with all the technologies
- Microsoft has piles and piles of cash
- Microsoft has huge margins in its traditional business – in fact profits in operating systems and office automation exceed 100% of the total because it loses billions of dollars in other things like Bing, MSN and its incredibly expensive foray into gaming systems (xBox)
- Markets won't shift any time soon – say to this new "cloud computing" – and Microsoft will surely have products when they are needed if there is a market shift
- While home users may buy these new smartphones, tablets and some Macs, enterprise customers will keep using the technology they've long purchased
- Microsoft is smart to move slowly into new markets, it shouldn't cannibalize its existing business by encouraging customers to change platforms. Going slow and being late is a good thing for profits
- Although Microsoft has been late to smartphones and tablets, with all their money and size surely when they do get to market they will beat these upstarts Apple and Google, et. al.
Sure made me think about AT&T. And the fact that Apple is now worth more than Microsoft. Made me wonder just how comfortable investors should be with a "mature" Microsoft. Made me wonder how much investors, employees and customers should trust a "mature" CEO Ballmer.
Looking at the last 10 years, it seems like there's a lot more risk in "mature" companies than in "growth" ones. We can be almost certain that Apple and Google, which have produced huge returns for investors, will grow for the next 3 years, improving cash flow and profitability just by remaining in existing new markets. But of course both have ample new products pioneering yet more new markets. And companies like NetApp look pretty safe, building a fast-growing base of customers who are already switching to cloud computing – and producing healthy cash flow in the emerging marketplace.
Meanwhile, the track record for "mature" companies would leave something to be desired. One could compare Amazon to Circuit City or Sears. Or just list some names: AT&T, General Motors, Chrysler, Xerox, Kodak, AIG, Citibank, Dell, EDS, Sun Microsystems. Of course each of these is unique, with its own story. Yet….
by Adam Hartung | Oct 13, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in
Summary:
- Many large, and leading, companies have not created much shareholder value the last decade
- A surprising number of very large companies have gone bankrupt (GM) or failed (Circuit City)
- Wal-Mart is a company that has generated no shareholder value
- The Wal-Mart disease is focusing on executing the business's long-standing success formula better, faster and cheaper — even though it's not creating any value
- Size alone does not create value, you have to increase the rate of return
- Companies that have increased value, like Apple, have moved beyond execution to creating new success formulas
Have you noticed how many of America's leading companies have done nothing for shareholders lately? Or for that matter, a lot longer than just lately. Of course General Motors wiped out its shareholders. As did Chrysler and Circuit City. The DJIA and S&P both struggle to return to levels of the past decade, as many of the largest companies seem unable to generate investor value.
Take for example Wal-Mart. As this chart from InvestorGuide.com clearly shows, after generating very nice returns practically from inception through the 1990s, investors have gotten nothing for holding Wal-Mart shares since 2000.
Far too many CEOs today suffer from what I call "the Wal-Mart Disease." It's an obsession with sticking to the core business, and doing everything possible to defend & extend it — even when rates of return are unacceptable and there is a constant struggle to improve valuation.
Fortune magazine's recent puff article about Mike Duke, "Meet the CEO of the Biggest Company on Earth" gives clear insight to the symptoms of this disease. Throughout the article, Mr. Duke demonstrates a penchant for obsessing about the smallest details related to the nearly 4 decade old Wal-Mart success formula. While going bananas over the price of bananas, he involves himself intimately in the underwear inventory, and goes cuckoo over Cocoa Puffs displays. No detail is too small for the attention of the CEO trying to make sure he runs the tightest ship in retailing. With frequent references to what Wal-Mart does best, from the top down Wal-Mart is focused on execution. Doing more of what it's always done – hopefully a little better, faster and cheaper.
But long forgotten is that all this attention to detail isn't moving the needle for investors. For all its size, and cheap products, the only people benefiting from Wal-Mart are consumers who save a few cents on everything from jeans to jewelry.
The Wal-Mart Disease is becoming so obsessive about execution, so focused on doing more of the same, that you forget your prime objective is to grow the investment. Not just execute. Not just expand with more of the same by constantly trying to enter new markets – such as Europe or China or Brazil. You have to improve the rate of return. The Disease keeps management so focused on trying to work harder, to somehow squeeze more out of the old success formula, to find new places to implement the old success formula, that they ignore environmental changes which make it impossible, despite size, for the company to ever again grow both revenues and rates of return.
Today competitors are chipping away at Wal-Mart on multiple fronts. Some retailers offer the same merchandise but in a better environment, such as Target. Some offer a greater selection of targeted goods, at a wider price range, such as Kohl's or Penney's. Some offer better quality goods as well as selection, such as Trader Joe's or Whole Foods. And some offer an entirely different way to shop, such as Amazon.com. These competitors are all growing, and earning more, and in several cases doing more for their investors because they are creating new markets, with new ways to compete, that have both growth and better returns.
It's not enough for Wal-Mart to just be cheap. That was a keen idea 40 years ago, and it served the company well for 20+ years. But competitors constantly work to change the marketplace. And as they learn how to copy what Wal-Mart did, they can get to 90%+ of the Wal-Mart goal. Then, they start offering other, distinctive advantages. In doing so, they make it harder and harder for Wal-Mart to be successful by simply doing more of the same, only better, faster and cheaper.
Ten years ago if you'd predicted bankruptcy for GM or Chrysler or Circuit City you'd have been laughed at. Circuit City was a darling of the infamous best seller "Good To Great." Likewise laughter would have been the most likely outcome had you predicted the demise of Sun Microsystems – which was an internet leader worth over $200B at century's turn. So it's easy to scoff at the notion that Wal-Mart may never hit $500B revenue. Or it may do so, but at considerable cost that continues to hurt rates of return, keeping the share price mired – or even declining. And it would be impossible to think that Wal-Mart could ever fail, like Woolworth's did. Or that it even might see itself shredded by competitors into an also-ran position, like once powerful, DJIA member Sears.
The Disease is keeping Wal-Mart from doing what it must do if it really wants to succeed. It has to change. Wal-Mart leadership has to realize that what made Wal-Mart once great isn't going to make it great in 2020. Instead of obsessing about execution, Wal-Mart has to become a lot better at competing in new markets. And that means competing in new ways. Mostly, fundamentally different ways. If it can't do that, Wal-Mart's value will keep moving sideways until something unexpected happens – maybe it's related to employee costs, or changes in import laws, or successful lawsuits, or continued growth in internet retailing that sucks away more volume year after year – and the success formula collapses. Like at GM.
Comparatively, if Apple had remained the Mac company it would have failed. If Google were just a search engine company it would be called Alta Vista, or AskJeeves. If Google were just an ad placement company it would be Yahoo! If Nike had remained obsessed with being the world's best athletic shoe company it would be Adidas, or Converse.
Businesses exist to create shareholder value – and today more than ever that means getting into markets with profitable growth. Not merely obsessing about defending & extending what once made you great. The Wal-Mart Disease can become painfully fatal.
by Adam Hartung | Oct 7, 2010 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Web/Tech
Summary:
- Steve Ballmer received only half his maximum bonus for last year
- But Microsoft has failed at almost every new product initiative the last several years
- Microsoft's R&D costs are wildly out of control, and yielding little new revenue
- Microsoft is lagging in all new growth markets – without competitive products
- Microsoft's efforts at developing new markets have created enormous losses
- Cloud computing could obsolete Microsoft's "core" products
- Why didn't the Board fire Mr. Ballmer?
Reports are out, including at AppleInsider.com that "Failures in Mobile Space Cost Steve Ballmer Half his Bonus." Apparently the Board has been disappointed that under Mr. Ballmer's leadership Microsoft has missed the move to high growth markets for smartphones and tablets. Product failures, like Kin, have not made them too happy. But the more critical question is — why didn't the Board fire Mr. Ballmer?
A decade ago Microsoft was the undisputed king of personal software. Its near monopoly on operating systems and office automation software assured it a high cash flow. But over the last 10 years, Microsoft has done nothing for its shareholders or customers. The XBox has been a yawn, far from breaking even on the massive investments. All computer users have received for massive R&D investments are Vista, Windows 7 and Office 2007 followed by Office 2010 — the definition of technology "yawners." None of the new products have created new demand for Microsoft, brought in any new customers or expanded revenue. Meanwhile, the 45% market share Microsoft had in smartphones has shrunk to single digits, at best, as Apple and Google are cleaning up the marketplace. Early editions of tablets were dropped, and developers such as HP have abandoned Microsoft projects.
Yet, other tech companies have done quite well. Even though Apple was 45 days from bankruptcy in 2000, and Google was a fledgling young company, both Apple and Google have launched new products in smartphones, mobile computing and entertainment. And Apple has sold over 4 million tablets already in 2010 – while investors and customers wait for Microsoft to maybe get one to market in 2011.
Despite its market domination, Microsoft's revenues have gone nowhere. And are projected to continue going relatively nowhere. While Apple has developed new growth markets, Microsoft has invested in defending its historical revenue base.
Source: SeekingAlpha.com
Yet, Microsoft spent 8 times as much on R&D in 2009 to accomplish this much lower revenue growth. At a recent conference Mr. Ballmer admitted he thought as much as 200 man years of effort was wasted on Vista development in recent years. That Microsoft has hit declining rates of return on its investment in "defending the base" is quite obvious. Equally obvious is its clear willingness to throw money at projects even though it has no skill for understanding market needs sin order for development to yield anything commercially successful!
Source: Business Insider.com
And investments in opportunities outside the "core" business have not only failed to produce significant revenue, they've created vast losses. Such as the horrible costs incurred in on-line markets. Trying to launch Bing and compete with Google in ad sales far too late and with weak products has literally created losses that exceed revenues!
Source: BusinessInsider.com
And the result has been a disaster for Microsoft shareholders – literally no gain the last several years. This has allowed Apple to create a market value that actually exceeds Microsoft's. An idea that seemed impossible during most of the decade!
Source: BusinessInsider.com
Under Mr. Ballmer's leadership Microsoft has done nothing more than protect market share in its original business – and at a huge cost that has not benefited shareholders with dividends or growth. No profitable expansion into new businesses, despite several newly emerging markets. And now late in practically every category. Costs for business development that are wildly out of control, despite producing little incremental revenue. And sitting on a business in operating systems and office software that is coming under more critical attack daily by the shift toward cloud computing. A shift that could make its "core" products entirely obsolete before 2020.
Given this performance, giving Mr. Ballmer his "target" bonus for last year seems ridiculous – even if half the maximum. The proper question should be why does he still have his job? And if you still own Microsoft stock — why as well?
by Adam Hartung | Oct 5, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
Summary:
- Research in Motion has launched a tablet, competing with the iPad
- But the Playbook does not have the app base that iPad has developed
- RIM's focus on its "core" IT customer, without spending enough energy focusing on Apple and other competitors, it missed the shift in mobile device user needs
- Now companies, like Abbott, are starting to roll out iPads to field personnel
- RIM's future is in jeopardy as the market shifts away from its products
- You cannot expect your customer to tell you how to develop your product, you have to watch competitors and move quickly to address emerging market needs
Research in Motion has launched a new tablet called Playbook to compete with the Apple iPad. But will it succeed? According to SeekingAlpha.com "Playbook Fails to Boost Research in Motion Price Targets." Most analysts do not think the Playbook has much chance of pushing up the market cap at RIM – and except for home town Canadian analysts the overall expectation for RIM is grim. I certainly agree with the emerging consensus that RIM's future is looking bleak.
Research in Motion was the company that first introduced most of us to smartphones. The Blackberry, often provided by the employer, was the first mobile product that allowed people do email, look at attachments and eventually text – all without a PC. Most executives and field-oriented employees loved them, and over a few years Blackberries became completely common. It looked like RIM had pioneered a new market it would dominate, with its servers squarely ensconced in IT departments and corporate users without option as to what smartphone they would use.
But Apple performed an end-run, getting CEOs to use the iPhone. People increasingly found they needed a personal mobile phone as well as the corporate phone – because they did not want to use the Blackberry for personal use. But they didn't pick Blackberries. Instead they started buying the more stylish, easier to use and loaded with apps iPhone. Apple didn't court the "enterprise" customer – so they weren't even on the radar screen at RIM. But sales were exploding.
Like most companies that focus on their core customers, RIM didn't see the market shift coming. RIM kept talking to the IT department. Much like IBM did in the 1980s when it dropped PCs in favor of supporting mainframes – because their core data center customers said the PC had no future. RIM was carefully listening to its customer – but missing an enormous market shift toward usability and apps. RIM expected its customers to tell them what would be needed in the future – but instead it was the competition that was showing the way.
Now RIM is far, far behind. Where Apple has 300,000 apps, and Android has over 120,000, RIM doesn't even have 10,000. RIM's problem isn't a device issue. RIM has missed the shift to mobile computing and missed understanding the unmet user needs. According to Crain's Chicago Business "Chicago CEOs embrace the iPad." Several critical users – and CEOs are always critical – have already committed to using the iPad and enjoying their news subscriptions and other applications. According to the article, Abbott, which has provided Blackberries to thousands of employees, is now beginning to roll out iPads to field personnel. RIM's Playbook may be a fine piece of hardware, but it offers far too little in the direction of helping people discard PCs as they migrate to cloud architectures and much smaller, easier to use devices such as tablets.
RIM followed the ballyhooed advice of listening to its core customer. But such behavior caused it to miss the shift in its own marketplace toward greater extended use of mobile devices. RIM should have paid more attention to what competitors Apple and Android were doing – and started building out its app environment years ago. RIM should have been first with a tablet – not late. And RIM should have led the movement toward digital publishing – rather than letting Amazon take the lead (Kindle) with Apple close behind. Creating valuable mobility is what the leading company with "motion" in its name should have done. Instead of merely providing the answers to requests from core IT department customers. Now RIM has no chance of catching up with competitors.
by Adam Hartung | Oct 1, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Web/Tech
Summary:
- HP and Nokia have lost the ability to grow organically
- Both need CEOs that can attack old decision-making processes to overcome barriers and move innovation to market much more quickly
- Unfortunately, both companies hired new CEOs who are very weak in these skills
- HP’s new CEO is from SAP – which has been horrible at new product development and introduction
- Nokia’s new CEO is from Microsoft – another failure at developing new markets
- It is unlikely these CEO hires will bring to these companies what is most needed
Leo Apotheker is taking over as CEO of Hewlett Packard today. Formerly he ran SAP. According to MarketWatch.com “HP’s New CEO Has a Lot To Prove,” and investors were less than overwhelmed by the selection, “HP Shares Slip After CEO Appointment.” Rightly so. What was the last exciting new product you can remember from SAP, where Apotheker led the company from 2008 until recently? Well?
SAP is going nowhere good. Its best years are way behind it as the company focuses on defending its installed base and adding new bits to existing products It’s product is amazingly expensive, incredibly hard and expensive to install, and primarily keeps companies from doing anything new. Enterprise software packages are like cement, once you pour them in place nothing can change. They reinforce making the same decision over and over. But increasingly, that kind of management practice is failing. In a fast-changing world software that can take 4 years to install and limits decision-making options doesn’t add to desperately needed organizational agility. And during the last 10 years SAP has done nothing to make its products better linked to the needs of today’s markets.
So why would anyone be excited to see such a leader take over their company? If Apotheker leads HP the way he led SAP investors will see growth decline – not grow. What does this new CEO know about listening carefully to emerging market needs? The move to install SAP in smaller companies hasn’t moved the needle, as SAP remains almost wholly software for stodgy, low-growth, struggly behemoths. What does this CEO know about creating an organization that can moving quickly, create new products and identify market needs to position HP for growth? His experience doesn’t look anything like Steve Jobs, under who’s leadership Apple’s value has increased multi-fold the last decade.
Unfortunately, the same refrain applies at Nokia. Just last week I pointed out in “Another One Bites the Dust” that Nokia was at grave risk of following Blockbuster into bankruptcy court. Although Nokia has 40% worldwide market share in mobile phones, U.S. share has slipped to about 8% this year. In smartphones Nokia has nowhere near the margin of Apple, even though both will sell about the same number of units this year. Nokia once had the lead, but now it is far behind in a market where it has the largest overall share. And that was the problem which befell Motorola – #1 for 3 years early in this decade but now far, far behind competitors in all segments and a very likely candidate for bankruptcy when it spins out a seperate cell phone business.
According to the New York Times in “Nokia’s New Chief Faces a Culture of Complacency” Nokia had a very similar product to the iPhone in 2004 but never took it to market. The internal organization made the new advancement go through several rounds of “review” and the hierarachy simply shot it down in an effort to maintain company focus on the popular, traditional cell phones then being offered. Rather than risk cannibalization, the organization focused on doing more of what it had done well. Eschewing innovation for defending the old products is shown again and again the first step toward disaster. (Would your organization use layers of reviews to kill a new idea in a new market?)
Meanwhile, when an internal Nokia team tried to get approval to launch the smart phones management’s responses sounded like:
- We don’t know much about this technology. The old stuff we do.
- We don’t know how big this new market might be. The old one we do
- We can’t tell if this new product will succeed. Enhanced versions of old products we can predict very accurately.
- We might be too early to market. We know how to sell in the existing market.
Even though Nokia had quite a lead in touch screens, downloadable apps, a good smartphone operating system and even 3-D interfaces, the desire to Defend & Extend the old “core” business overwhelmed any effort to move innovation to market. (By the way, do these comments in any way sound like your company?)
The new CEO, Mr. Elop, is from Microsoft. Again, one of the weakest tech companies out there at launching new products. Microsoft had the smart phone O/S lead just 3 years ago, but lost it to maintain investment in its traditional Windows PC O/S and Office automation software. And again you can ask, exactly how excited have people been with Microsoft’s new products over the last decade? Or you might ask, exactly what new products?
Both HP and Nokia need CEOs ready to attack lock-in to old technologies, old business practices, old hierarchies and old metrics. They need to rejuvenate the companies’ ability to quickly get new products to market, learn and improve. They need experience at early market sensing of unmet needs, and using White Space teams to get products out the door and competitive fast. Both need to overcome traditional management approaches that inhibit growth and move fast to be first into new markets with new products – like Apple and Google.
But in both cases, it appears highly unlikely the Board has hired for what the companies need. Instead, they’ve hired for a stodgy resume. Executive who came from companies that are already in bad positions with limited growth prospects. Exactly NOT what the companies need. We can only hope that somehow both CEOs overcome their historical approaches and rapidly attack existing locked-in decision-making. Otherwise, this will be seen as when investors should have sold their stock and employees should have begun putting resumes on the street!
by Adam Hartung | Sep 30, 2010 | Defend & Extend, In the Whirlpool, Lifecycle
Summary:
- Outsourcing has been very popular
- Outsourcing removes management options
- Outsourcing creates Lock-in, and makes it harder to deal with market shifts
- Most organizations see long-term performance deteriorate as a result of outsourcing
Outsourcing has been extremely popular – ever since the early 1990s. We know it has led to a lot of jobs moving out of the USA. Outsourcing manufacturing has exploded employment in China and other parts of Asia. Outsourcing information technology has exploded employment in India and parts of Eastern Europe.
Economists tell us that outsourcing has driven down the cost of everything from the clothes and household items we buy at WalMart to the cost of social marketing, ad creation and even telephone services.
But has it helped businesses be more successful? As outsourcing popularity reaches 2 decades – both domestic and offshore – we now have a lot more insight. And what we can see is that almost all outsourcing has been bad for the company that uses it! As things change, outsourcing has left them stuck competing the old way and further removed from market needs.
As my Sept. 29 column in CIOMagazine “Outourcing for the Right Reasons” (also published in ComputerWorld online under the same title) points out, the vast majority of outsourcing was done for the wrong reason. And the result has been deteriorating performance for those who outsourced.
Most companies outsourced to cut cost. The problem is, this has led to even worse lock-in than normal. Where organizations had options when they controlled the function – from manufacturing to janitorial serivces to help desks to datacenters – there were options to make changes. But when something is outsourced the contract takes away most options. The die is cast, usually for years into the future —- regardless of what might happen in the world!
Outsourcing can be used to create flexibility. But, honestly, how often have you seen it used that way? In well over 90% of cases the outsourcing is intended to cut cost – and lock-in operations. It is meant to remove options from the management discussion. Once outsourced, there is no consideration as to undertaking those efforts again. And if the outsourcing is done when business results are poor, the intent is to never revisit doing those things again. Under the banner of “outsource everything that’s not core” the management team is left with nothing to manage – except “core”!!! But if core has limited value, how do you now create a healthy business? How do you move to meet shifting needs?
Outsourcing has been a tidal wave for 15 years. Things might be cheaper, but has it made business performance better? Take a hard look at your company – and you may well realize it hasn’t helped you be a better competitor. When you outsource, how often are competitors able to equally outsource and match your short-term cost reductions? Things might be a penny cheaper, but the business is likely much less flexible, more vulnerable to market shifts, and far more locked-in to doing what it always did!
If you are seriously considering outsourcing, ask some simple questions:
- Am I doing this because I want to simplify my life, or offer the market something new?
- Am I doing this so I can “focus” on my “core” business?
- How will this advantage me versus competitors? Would emerging competitors do this?
- Can competitors do what I’m doing? Can this lead to a price war?
- How will this make me more competitive in 10 years?
- How will this make me more connected to markets?
- How will this make me more flexible to deal with shifting markets, and how will I exploit this flexibility?
- Am I doing this because I’m desperate to cut costs?
- What could I be doing instead of outsourcing to be more competitive?
by Adam Hartung | Sep 22, 2010 | Current Affairs, Defend & Extend, Film, In the Whirlpool, Leadership, Lifecycle, Lock-in, Music, Web/Tech
Summary:
- Video retailer Blockbuster (and competitor Hollywood Video) are now bankrupt
- Video rentals/sales are at an all time high – but via digital downloads not DVDs
- Nokia, once the cell phone industry leader, is in deep trouble and risk of failure
- Yet mobile use (calls, texts, internet access, email) is at an all time high
- These companies are victims of locking-in to old business models, and missing a market shift
- Commitment to defending your old business can cause failure, even when participating in high growth markets, if you don’t anticipate, embrace and participate in market shifts
- Lock-in is deadly. It can cause you to ignore a market shift.
According to YahooNews, “Blockbuster Video to File Chapter 11.” In February, Movie Gallery – the owner of primary in-kind competitor Hollywood Video – filed for bankruptcy. It’s now decided to liquidate.
The cause is market shift. Netflix made it possible to rent DVDs without the cost of a store – as has the kiosk competitor Red Box. But everyone knows that is just a stopgap, because Netflix and Hulu are leading us all toward a future where there is no physical product at all. We’ll download the things we want to watch. The market is shifting from physical items – video cassettes then DVDs – to downloads. And both Blockbuster and Hollywood Video missed the shift.
Blockbuster (or Hollywood) could have gotten into on-line renting, or kiosks, like its competition. It even could have used profits to be an early developer of downloadable movies. Nothing stopped Blockbuster from investing in YouTube. Except it’s commitment to its Success Formula – as a brick-and-mortar retailer that rented or sold physically reproduced entertainment. Lock-in. And for that commitment to its historical Success Formula the investors now will get a great big goose egg – and employees will get to be laid off – and the thousands of landlords will be left in the lurch, unprepared.
As predictable as Blockbuster was, we can be equally sure about the future of former powerhouse Nokia. Details are provided in the BusinessWeek.com article “How Nokia Fell from Grace.” As the cell phone business exploded in the 1990s Nokia was a big winner. Revenues grew fivefold between 1996 and 2001 as people around the globe gobbled up the new devices. Another example of the fact that when you enter a high growth market you don’t have to be good – just in the right market at the right time.
But the cell phone business has become the mobile device business. And Nokia didn’t anticipate, prepare for or participate in the market shift. From market dominance, it has become an also-ran. The article author blames the failure, and decline, on complacent management. Weak explanation. You can be sure the leadership and management at Nokia was doing all it possibly could to Defend & Extend its cell phone business. The problem is that D&E management doesn’t work when customers simply walk away to a new technology. It may take a few years, and government subsidies may extend Nokia’s life even longer, but Nokia has about as much chance of surviving its market shift as Blockbuster did.
When companies stumble management sees the problems. They know results are faltering. But for decades management has been trained to think that the proper response is to “knuckle down, cut costs, defend the current business at all cost.” Yet, there are more movies rented now than ever – and Blockbuster is failing despite enormous market growth. There are more mobile telephony minutes, text messages, remote emails and mobile internet searches than ever in history – yet Nokia is doing remarkably poorly. It’s not a market problem, it’s a problem of Lock-in to a solution that is now outdated. When the old supplier didn’t give the market what it wanted, the customers went elsewhere. And unwillingness to go with them has left these companies in tatters.
These markets are growing, yet the purveyors of old solutions are failing primarily because they stuck to defending their old business too long. They did not embrace the market shift, and cannibalize historical product sales to enter the new, higher growth markets. Because they chose to protect their “core,” they failed. New victims of Lock-in.
by Adam Hartung | Sep 16, 2010 | Current Affairs, Defend & Extend, Food and Drink, Innovation, Leadership, Lock-in, Openness, Web/Tech
Summary:
- Businesses usually try defending an old solution in the face of an emerging new solution
- Status Quo Police use “cannibalization” concerns to stop the organization from moving to new solutions and new markets
- If you don’t move early, you end up with a dying business – like newspapers – as new competitors take over the customer relationship – like Apple is doing with news subscriptions
- You can adapt to shifting markets, profitably growing
- You must disrupt your lock-ins to the old success formula, including stopping the Status Quo Police from using the cannibalization threat
- You should set up White Space teams early to embrace the new solutions and figure out how to profitably grow in the new market space
When Sony saw MP3 technology emerging it worked hard to defend sales of CDs and CD Players. It didn’t want to see a decline in the pricing, or revenue, for its existing business. As a result, it was really late to MP3 technology, and Apple took the lead. This is the classic “Innovator’s Dilemma” as described by Professor Clayton Christenson of Harvard. Existing market leaders get so hung up on defending and extending the current business, they fear new solutions, until they become obsolete.
In the 1980s Pizza Hut could see the emergence of Domino’s Pizza. But Pizza Hut felt that delivered pizza would cannibalize the eat-in pizza market management sought to dominate. As a result Pizza Hut barely participated in what became a multi-biliion dollar market for Domino’s and other delivery chains.
The Status Quo Police drag out their favorite word to fight any move into new markets. Cannibalization. They say over and over that if the company moves to the new market solution it will cannibalize existing sales – usually at a lower margin. Sure, there may someday be a future time to compete, but today (and this goes on forever) management should keep close to the existing business model, and protect it.
That’s what the newspapers did. All of them could see the internet emerging as a route to disseminate news. They could see Monster.com, Vehix.com, eBay, CraigsList.com and other sites stealing away their classified ad customers. They could see Google not only moving their content to other sites, but placing ads with that content. Yet, all energy was expended trying to maintain very expensive print advertising, for fear that lower priced internet advertising would cannibalize existing revenues.
Now, bankrupt or nearly so, the newspapers are petrified. The San Jose Mercury News headlines “Apple to Announce Subscription Plan for Newspapers.” As months have passed the newspapers have watched subscriptions fall, and not built a viable internet distribution system. So Apple is taking over the subscription role – and will take a cool third of the subscription revenue to link readers to the iPad on-line newspaper. Absolute fear of cannibalization, and strong internal Status Quo Police, kept the newspapers from embracing the emerging solution. Now they will find themselves beholden to the device providers – Apple’s iPad, Amazon’s Kindle, or a Google Android device.
But it doesn’t have to be that way. Netflix built a profitable growth business delivering DVDs to subscribers. Streaming video clearly would cannibalize revenues, because the price is lower than DVDs. But Netflix chose to embrace streaming – to its great betterment! The Wrap headlines “Why Hollywood should be Afraid of Netfilx – Very Afraid.” As reported, Netflix is now growing even FASTER with its streaming video – and at a good margin. The price per item may be lower – but the volume is sooooo much higher!
Had Netflix defended its old model it was at risk of obsolescence by Hulu.com, Google, YouTube or any of several other video providers. It could have tried to slow switching to streaming by working to defend its DVD “core.” But by embracing the market shift Netflix is now in a leading position as a distributor of streaming content. This makes Netfilx a very powerful company when negotiating distribution rights with producers of movie or television content (thus the Hollywood fear.) By embracing the market shift, and the future solution, Netflix is expanding its business opportunity AND growing revenue profitably.
Don’t let fear of cannibalization, pushed by the Status Quo Police, stop your business from moving with market shifts. Such fear will make you like the proverbial deer, stuck on the road, staring at the headlights of an oncoming auto — and eventually dead. Embrace the market shift, Disrupt your Locked-in thoughts (like “we distribute DVDs”) and set up White Space teams to figure out how you can profitably grow in the new market!
by Adam Hartung | Sep 15, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Web/Tech
Summary:
- There is a lot of value to recognizing early trends, and acting upon them
- That Apple is as popular as Dell for computers among college students is a trend indicator that Dell’s future looks problematic, while Apple’s looks better
- It is hard to maintain long-term value from innovations that defend & extend an historical market – they are easily copied by competitors
- Long term value comes from the ability to innovate new product markets which are hard for competitors to copy
- Dell is a lousy investment, and Apple is a good one, because Dell is near end of life for its innovation (supply chain management) while Apple has a powerful new product/market innovation capability that can continue for several years
I can think of 3 very powerful reasons everyone should look closely at the following chart from Silicon Alley Insider. It is very, very important that Apple is tied with Dell for market share in PCs among college students, and almost 2.5 times the share of HP:
Firstly, it is important to understand that capturing young buyers is very valuable. If you catch a customer at 16, you have 50 to 60 years of lifelong customer value you can try to maintain. Thus, these people are inherently worth more than someone who is 55, and only 10 to 20 years of lifetime value. While we may realize that older people have more discretionary income, many loyalties are developed at a young age. Over the years, the younger buyers will be worth considerably more.
When I was 15 popular cars were from Pontiac (the GT and Firebird) Oldsmobile (Cutlas) Dodge (Charger and Challenger) and Chevy (Camaro.) Thus, my generation tended to stay with those brands a long time. But by the 1990s this had changed dramatically, and younger buyers were driving Toyotas, Hondas and Mazdas. Now, the American car companies are in trouble because a generational shift has happened. Market shares have changed considerably, and Toyota is now #1. Keeping the old buyers was not enough to keep GM and Chrysler healthy.
That for a quarter as many college students want a Mac as want a PC from Dell says a lot about future technology purchases. It portends good things for Apple, and not good things for leading PC suppliers. Young people’s purchase habits indicate a trend that is unlikely to reverse (look at how even the Toyota quality issues have not helped GM catch them this year.) We can expect that Apple is capturing “the hearts and minds” of college students, and that drives not just current, but future sales
Secondly, it is important to note that Dell built its distinction on price – offering a “generic” product with fast delivery and reasonable pricing. Dell had no R&D, it outsourced all product development and focused on assembly and fast supply chain performance. Unfortunately, supply chain and delivery innovation are far easier to copy than new product – and new market – innovation. Competitors have been able to match Dell’s early advantages, while Apple’s are a lot harder to meet – or exceed. Thus, it has not taken long for Dell to lose it’s commanding industry “domination” to a smaller competitor who has something very new to offer that competitors cannot easily match.
Not all innovation is alike. Those that help Defend & Extend an existing business – making PCs fast and cheap – offer a lot less long term value. Every year it gets harder, and costs more, to try to create any sense of improvement – or advantage. D&E innovations are valued by insiders, but not much by the marketplace. Customers see these Dell kind of innovations as more, better, faster and cheaper – and they are easily matched. They don’t create customer loyalty.
However, real product/market innovations – like the improvements in digital music and mobile devices – have a much longer lasting impact on customers and the markets created. Apple is still #1 in digital music downloads after nearly a decade. And they remain #1 in mobile app downloads despite a small share in the total market for cell phones. If you want to generate higher returns for longer periods, you want to innovate new markets – not just make improvements in defending & extending existing market positions.
Thirdly, this should impact your investment decisions. SeekingAlpha.com, reproducing the chart above, headlines “Are 2010 Apple Shares the new 1995 Dell Shares?” The author makes the case that Apple is now deeply mired in the Swamp, with little innovation on the horizon as it is late to every major new growth market. It’s defend & extend behavior is doing nothing for shareholder value. Meanwhile, Apple’s ability to pioneer new markets gives a strong case for future growth in both revenue and profits. As a result, the author says Dell is fully valued (meaning he sees little chance it will rise in value) while he thinks Apple could go up another 70% in the next year!
Too often people invest based upon size of company – thinking big = stability. But now that giants are falling (Circuit City, GM, Lehman Brothers) we know this isn’t true. Others invest based upon dividend yield. But with markets shifting quickly, too often dividends rapidly become unsustainable and are slashed (BP). Some think you should invest where a company has high market share, but this often is meaningless because the market stagnates leading to a revenue stall and quick decline as the entire market drops out from under the share leader (Microsoft in PCs).
Investing has to be based upon a company’s ability to maintain profitable growth into the future. And that now requires an ability to understand market trends and innovate new solutions quickly – and take them to market equally quickly. Only those companies that are agile enough to understand trends and competitors, implementing White Space teams able to lead market disruptions. Throw away those old books about “inherent value” and “undervalued physical assets” as they will do you no good in an era where value is driven by understanding information and the ability to rapidly move with shifting markets.
Oh, and if you feel at all that I obscured the message in this blog, here’s a recap:
- Dell is trying to Defend its old customers, and it’s not capturing new ones. So it’s future is really dicey
- Dell’s supply chain innovations have been copied by competitors, and Dell has little – if any – competitive advantage today. Dell is in a price war.
- Apple is pioneering new markets with new products, and it is capturing new customers. Especially younger ones with a high potential lifetime value
- Apple’s innovations are hard to duplicate, giving it much longer time to profitably grow revenues.
- You should sell any Dell stock you have – it has no chance of going up in value long term. Apple has a lot of opportunity to keep profitably growing and therefore looks like a pretty good investment.
