by Adam Hartung | Apr 9, 2015 | Current Affairs, Defend & Extend, Innovation, Leadership
This week a self-driving car built by Delphi of England completed a 9 day trip from San Francisco to New York City. The car traveled 3,400 miles, and was fully automated for 99% of the trip.
Attention has again focused on self-driving cars. There are a handful of players entering the market today, including Apple. But the most famous company by far is Google, which has put over 700,000 autonomous miles on its vehicles since pioneering the concept after winning a DARPA challenge to build a functioning prototype in 2005. In fact, we’re so used to hearing about the Google self-driving car that many of have stopped asking “Why Google? They aren’t in the auto business.”
Of course the idea of a self-driving auto is as old as the Jetson’s (and if you don’t know who the Jetson’s are you are, that was a long time ago.) And nobody should be surprised to hear that prototypes have been on the drawing board for 5 decades. But I bet you didn’t know that DuPont was once seriously engaged in such development.
In 1986 DuPont was America’s largest and most noteworthy chemical company. The company was a pioneer in petrochemicals, and was considered the company that brought the world plastic – at a time when plastic was considered a great, new invention. A leader in films of all sorts, DuPont leadership saw the opportunity for electronics to replace film in applications such as printing (where films were used in high volume for platemaking and proofing) and healthcare (where xRays and MRIs were a large film users.) They conceived of a future time when computers and monitors – digitial products – could replace analog film, and they chose to create a new business unit called Electronic Imaging to pioneer developing these applications.
As the team started they expanded the definition of Electronic Imaging to include all sorts of applications for digital imaging – and using all kinds of technologies. The breadth of analysis, and product development, included non-destructive parts testing, infrared uses such as heads-up displays and inventory identification, and radar applications. Which led the team to using a radar for automating an automobile.
In 1987 DuPont invested in a small company out of San Diego that accomplished something never done before. Using a phased-array radar hooked up to the brakes of a van, they were able to have the car recognize objects in front of the van, calculate in real time the distance between the van and these forward objects, calculate the relative speed of both objects (whether one or both were stationary or moving) and then apply braking in order to maintain a safe distance. If the forward object stopped, then the van would come to a complete stop.
This was all done with discreet componentry, and the team realized future success required developing more specific electronics, including specialized integrated chips that could operate faster and be more error-free. So they drove the prototype from San Diego to Wilmington, DE with a person behind the wheel, but relying as much as possible on the automated system to do all braking. The team collected data on location, speed, weather, traffic conditions, and many other items during the journey and prepared to take the project forward, planning to eventually build a module which could be installed in vehicles as small as cars or as large as 18-wheelers, with enough intelligence to adjust for different vehicle designs and applications (in order to calibrate for different braking distances.)
Net/net they had a working prototype. The product was expected to reduce the number of accidents by assisting drivers with braking. Multi-car pile-ups would become a thing of the past. And this device could potentially allow for better traffic flow because automated braking would reduce – maybe eliminate! – rear-end collisions. This wasn’t a self-driving car, but it was self-braking car, which would be a first step toward the sort of Jetson’s-esque vision the young team imagined.
What happened?
It didn’t take long for the older, “wiser” leadership to shut down the project. Even though several executives participated in a controlled demonstration of the prototype in an enclosed DuPont parking lot, the conclusion was that this project demonstrated just how off-track the new Electronic Imaging Department had become, and that it was clear folks needed to be reigned in and budgets cut:
- This clearly had nothing to do with film or replacing film. DuPont was a chemical company, and to the extent it had any interest in electronics it was where they were applied to potentially cannibalize film sales. Products which were not closely aligned with historical products were simply not to be pursued.
- DuPont had no history in radar, analogue electronics or development of integrated circuits. Yes, DuPont had an Electronics Department, but they sold film for solder masking and other applications of semiconductor and electronics manufacturing. DuPont was a chemical company, not a computer company or electronics company and this division was not going to change this situation.
- This product was seen as carrying too much liability risk. What if it failed? What if the car ran over a child? The auto industry was seen as litigious, and DuPont had no interest in a product that could have the kind of liability this one would generate. Yes, there was an Auto Department, but it sold films for safety glass, plastic sheets used for molding inside panels, and surface coatings which could be painted on the inside and/or outside of the vehicle. But those did not have the kind of failure possibility of this active radar device. [“By the way” the vice-Chairman asked “could that radar fry someone’s innards at a crosswalk?”]
- The market is too limited. Who would really want an automatic braking system? Given what it might cost, only the most expensive cars could install it, and only the wealthiest customers could afford it. This product was destined for niche use, at best, and would never have widespread installation.
Poof, away went the automatic automobile braking project. Once this dagger had been thrown, within just a few months everything that wasn’t printing or medical – in fact anything that wasn’t tied to printing films, xRays and MRI – was gone. Within 2 years leadership decided that for some variant of the 4 issues above the entire Electronic Imaging division was a bad idea. DuPont would be better served if it stuck to its core business, and if it spent money defending and extending film sales rather than trying to cannibalize them.
DuPont liked competing in the oceans where it had long competed. Venturing beyond those oceans was simply too risky. Today, 25 years later, DuPont is about 1/3 the size it was when its leaders launched the ill-fated Electronic Imaging division.
Google obviously has a different way of looking at the opportunity for automating automobile operation. Since winning the DARPA competition Google has spent a goodly sum building and testing ways to automate driving. And it has even gone so far as lobbying to make self-driving cars legal, which they now are in 4 states. Pessimists remain, but every quarter more people are thinking that self-driving cars will be here sooner than we might have imagined. This week’s cross-country achievement fuels speculation that the reality could be just around the corner.
Google seems happy to compete in new oceans. It dominates search, where its share is attacked every day by the likes of Yahoo and Microsoft. But simultaneously Google has invested far outside its core market, including software for PCs (Chrome) and mobile devices (Android), hardware (Nexus phones), media (Blogger, YouTube), payments (Wallet) and even self-driving cars. To what extent these, and dozens of other non-core products/services, will pay off for investors is yet to be determined. But at least Google’s leadership is able to overcome the desire to restrict the company’s options and look for future markets.
Which kind of organization is yours? Do you find reasons to kill new projects, or are you willing to experiment at creating new markets which might create dramatic growth?
by Adam Hartung | Apr 2, 2015 | Current Affairs, Defend & Extend, In the Rapids, Innovation, Leadership, Web/Tech
Microsoft launched its new Surface 3 this week, and it has been gathering rave reviews. Many analysts think its combination of a full Windows OS (not the slimmed down RT version on previous Surface tablets,) thinness and ability to operate as both a tablet and a PC make it a great product for business. And at $499 it is cheaper than any tablet from market pioneer Apple.
Meanwhile Apple keeps promoting the new Apple Watch, which was debuted last month and is scheduled to release April 24. It is a new product in a market segment (wearables) which has had very little development, and very few competitive products. While there is a lot of hoopla, there are also a lot of skeptics who wonder why anyone would buy an Apple Watch. And these skeptics worry Apple’s Watch risks diverting the company’s focus away from profitable tablet sales as competitors hone their offerings.
Looking at these launches gives a lot of insight into how these two companies think, and the way they compete. One clearly lives in red oceans, the other focuses on blue oceans.
Blue Ocean Strategy (Chan Kim and Renee Mauborgne) was released in 2005 by Harvard Business School Press. It became a huge best-seller, and remains popular today. The thesis is that most companies focus on competing against rivals for share in existing markets. Competition intensifies, features blossom, prices decline and the marketplace loses margin as competitors rush to sell cheaper products in order to maintain share. In this competitively intense ocean segments are niched and products are commoditized turning the water red (either the red ink of losses, or the blood of flailing competitors, choose your preferred metaphor.)
On the other hand, companies can choose to avoid this margin-eroding competitive intensity by choosing to put less energy into red oceans, and instead pioneer blue oceans – markets largely untapped by competition. By focusing beyond existing market demands companies can identify unmet needs (needs beyond lower price or incremental product improvements) and then innovate new solutions which create far more profitable uncontested markets – blue oceans.
Obviously, the authors are not big fans of operational excellence and a focus on execution, but instead see more value for shareholders and employees from innovation and new market development.
If we look at the new Surface 3 we see what looks to be a very good product. Certainly a product which is competitive. The Surface 3 has great specifications, a lot of adaptability and meets many user needs – and it is available at what appears to be a favorable price when compared with iPads.
But …. it is being launched into a very, very red ocean.
The market for inexpensive personal computing devices is filled with a lot of products. Don’t forget that before we had tablets we had netbooks. Low cost, scaled back yet very useful Microsoft-based PCs which can be purchased at prices that are less than half the cost of a Surface 3. And although Surface 3 can be used as a tablet, the number of apps is a fraction of competitive iOS and Android products – and the developer community has not yet embraced creating new apps for Windows tablets. So Surface 3 is more than a netbook, but also a lot more expensive.
Additionally, the market has Chromebooks which are low-cost devices using Google Chrome which give most of the capability users need, plus extensive internet/cloud application access at prices less than a third that of Surface 3. In fact, amidst the Microsoft and Apple announcements Google announced it was releasing a new ChromeBit stick which could be plugged into any monitor, then work with any Bluetooth enabled keyboard and mouse, to turn your TV into a computer. And this is expected to sell for as little as $100 – or maybe less!
This is classic red ocean behavior. The market is being fragmented into things that work as PCs, things that work as tablets (meaning run apps instead of applications,) things that deliver the functionality of one or the other but without traditional hardware, and things that are a hybrid of both. And prices are plummeting. Intense competition, multiple suppliers and eroding margins.
Ouch. The “winners” in this market will undoubtedly generate sales. But, will they make decent profits? At low initial prices, and software that is either deeply discounted or free (Google’s cloud-based MSOffice competitive products are free, and buyers of Surface 3 receive 1 year free of MS365 Office in the cloud, as well as free upgrade to Windows 10,) it is far from obvious how profitable these products will be.
Amidst this intense competition for sales of tablets and other low-end devices, Apple seems to be completely focused on selling a product that not many people seem to want. At least not yet. In one of the quirkier product launch messages that’s been used, Apple is saying it developed the Apple Watch because its other innovative product line – the iPhone – “is ruining your life.”
Apple is saying that its leaders have looked into the future, and they think today’s technology is going to move onto our bodies. Become far more personal. More interactive, more knowledgeable about its owner, and more capable of being helpful without being an interruption. They see a future where we don’t need a keyboard, mouse or other artificial interface to connect to technology that improves our productivity.
Right. That is easy to discount. Apple’s leaders are betting on a vision. Not a market. They could be right. Or they could be wrong. They want us to trust them. Meanwhile, if tablet sales falter….. if Surface 3 and ChromeBit do steal the “low end” – or some other segment – of the tablet market…..if smartphone sales slip….. if other “forward looking” products like ApplePay and iBeacon don’t catch on……
This week we see two companies fundamentally different methods of competing. Microsoft thinks in relation to its historical core markets, and engaging in bloody battles to win share. Microsoft looks at existing markets – in this case tablets – and thinks about what it has to do to win sales/share at all cost. Microsoft is a red ocean competitor.
Apple, on the other hand, pioneers new markets. Nobody needed an iPod… folks were happy enough with Sony Walkman and Discman. Everybody loved their Razr phones and Blackberries… until Apple gave them an iPhone and an armload of apps. Netbook sales were skyrocketing until iPads came along providing greater mobility and a different way of getting the job done.
Apple’s success has not been built upon defending historical markets. Rather, it has pioneered new markets that made existing markets obsolete. Its success has never looked obvious. Contrarily, many of its products looked quite underwhelming when launched. Questionable. And it has cannibalized its own products as it brought out new ones (remember when iPods were so new there was the iPod mini, iPod nano and iPod Touch? After 5 years of declining iPod sale Apple has stopped reporting them.) Apple avoids red oceans, and prefers to develop blue ones.
Which company will be more successful in 2020? Time will tell. But, since 2000 Apple has gone from nearly bankrupt to the most valuable publicly traded company in the USA. Since 1/1/2001 Microsoft has gone up 32% in value. Apple has risen 8,000%. While most of us prefer the competition in red oceans, so far Apple has demonstrated what Blue Ocean Strategy authors claimed, that it is more profitable to find blue oceans. And they’ve shown us they can do it.
by Adam Hartung | Mar 10, 2015 | Current Affairs, Defend & Extend, Leadership, Lock-in
This week marks the 6th anniversary of the stock market’s bull run, with the S&P up 206%. Only 3 other times since WWII have equities had such a prolonged, sustained growth series. Simultaneously, last week saw yet another month with over 200,000 non-farm jobs created, making the current rate of jobs growth the best in 15 years. And, in a move that has taken some by surprise, the U.S. dollar is hitting highs against foreign currencies that have not been seen in over 12 years.
It is a rare economic trifecta, and demonstrates America is doing better than all other developed countries.
It seemed an appropriate time to re-interview Bob Deitrick, Managing Director of Polaris Financial Partners, and author of “Bulls, Bears and the Ballot Box” to obtain his take on the economy. Mr. Deitrick’s book reviewed America’s economic performance under each President since the creation of the Federal Reserve, and in direct opposition to conventional wisdom concluded presidents from the Democratic party were better economic stewards than Republican presidents. When published in 2012 Mr. Deitrick predicted that the economy would continue to do well under President Obama, and so far he’s been proven correct.
AH: Since we discussed “Obama’s Miracle Market” in January, 2014 stocks have continued to rise. Has this bull run surprised you, and do you think it will continue?
Bob Deitrick: No it has not surprised us. Looking across history since Hoover, Democrats in the White House have generally presided over good stock market gains. Since Clinton was elected, Democratic administrations have done remarkably well, with both Clinton and Obama outperforming the best Republican presidents which were Eisenhower and Reagan.
Looking at the S&P 500, Clinton and Obama have performed about the same with about a 17% annual rate of return through the first 62 months of office. Which is 70% better than the approximate 10% return of Republicans.
It is worth noting that when we take a broader gauge of equities (which we used in the book,) including the more volatile NASDAQ index and the highly selective Dow Jones Industrial Average, then the market’s performance during the Obama administration is unchallenged. The last 6 years generated compound annual returns of 22.5% (including dividend reinvestment) which is the best improvement in equities of all time.
It is also worth noting that the collapse of equities has happened 3 times since 1900, and all under Republican administrations – Hoover, Nixon/Ford, Bush 43. Even Carter had a rising equities market, and the Clinton + Obama years were unparalleled.
We agree with many other analysts that this bull market is not complete. We think the stock markets are only at the half way point in a secular bull cycle which will last, in total, 8 to 12 years.
AH: It was 6 months ago when you pointed out that President Obama outperformed President Reagan on jobs growth. At that time there were many, many naysayers. Yet, August’s numbers were later revised upward to over 200,000 and every month since has continued with strong jobs growth – some nearly 300,000. Are you surprised by the strength in jobs creation, and do you think it will stall?
Bob Deitrick: Both Reagan and Obama inherited a bad jobs marketplace. Both of them saw unemployment spike into double digits early in their presidencies. And both created jobs programs that brought down the percentage of people unemployed. Obama had a lesser spike than Reagan, and during the last 5 years unemployment rate fell faster than it did under Reagan.
Both Democrats, Obama and Clinton, had big decreases in unemployment due to their policies. From peak to trough in this current administration unemployment has fallen by 5.5 percentage points, a decline of 81%. Clinton oversaw unemployment decline of 3.1 percentage points, or 73%. Both Democrats followed Bush Republican presidencies which had seen unemployment increase! During Bush 41 unemployment rose by 2 percentage points (5.4% to 7.3%,) and during Bush 43 unemployment nearly doubled from 4.2% to 8.3%. Not even the Carter presidency had unemployment increases anywhere close to the 12 years of Bush presidency.
It is also worth noting that when comparing Obama and Reagan, Reagan undertook the largest increase in non-wartime deficit spending ever. He essentially used a form of “New Deal” debt spending on infrastructure and defense to stimulate jobs production. President Obama has been able to reduce the size of the annual deficit every year since taking office, in reality shrinking the amount of money spent by the government while simultaneously creating these new jobs. The only other president to accomplish this feat was Clinton, who actually balanced the budget during his presidency.
We believe the economy is very strong, and along with other analysts think the jobs recovery will remain intact. With less war spending, lower oil prices, more people covered by insurance, and higher minimum wages consumers will continue to spend and the economy will grow. New technology products will bring more people into the workforce, and manufacturing will continue its renaissance. We expect that unemployment will continue falling toward 4.4% by summer of 2016, returning the economy to non-wartime full employment.
AH: For years many talk show hosts and guests have been declaring that the Fed was flooding the markets with cash and setting the stage for rampant inflation which would ruin the dollar and the U.S. economy. But in the last few months the dollar has rallied to rates we haven’t seen since the 1990s. Did this surprise you, and do you think the dollar will remain strong?
Bob Deitrick: We were not surprised. Ben Bernanke ranks right up there with the first ever Federal Reserve Chairman Marriner Eccles at knowing what to do to keep the American economy from collapsing in the wake of the country’s second depression. Only by re-inflating the economy with more cash, and keeping interest rates low, did America avoid a horrible repeat of the 1930s.
As a result of Democratic policies America re-invested in growth, which allowed companies to invest in plant and equipment and create new jobs, while lowering the deficit. This happened simultaneously with opposite policies being implemented in Europe and Japan (so called “austerity”) which has caused their economies to weaken. And slowed demand from Europe has reduced growth rates in China and India, all leading global investors to return to the U.S. dollar as a safe haven. It is because of our economic strength that the dollar is returning to rates we have not seen since the Clinton presidency.
Many people recall the huge increase in the dollar’s value toward the middle of the Reagan presidency. However, as the U.S. deficits, and total debt, skyrocketed the dollar plummeted. By the time Reagan left office the dollar was worth almost the same as when he entered office.
And the combination of lower taxes plus costs for waging war in the middle east sent the U.S. debt exploding again under Bush 43. What had been a balanced budget under Clinton, which had pushed the dollar almost back to post-war highs, was destroyed causing the dollar to plummet 25%.
The dollar is now up 21% against a basket of world currencies. Given ongoing European weakness and the never-ending fight over austerity we see no reason to think the Euro will make a comeback any time soon. Rather, we predict the strong U.S. economy, especially with oil prices likely to remain low (and priced in dollars,) the U.S. dollar will continue to rally. It could well go back to Clinton-era highs and possibly approach the values during Reagan’s presidency. Should this happen it would be a record improvement in the dollar by any modern administration.
AH: Any concluding comments?
Bob Deitrick: I have voted for both Republicans and Democrats, and think of myself as a centrist. Most people, by definition, are centrists. I long believed that the GOP was the party which was best for the economy. But I could tell something wasn’t adding up during the Bush 43 presidency, so I chose to research the performance of both parties.
The GOP has created an illusion that it is a better economic steward by promoting itself as the party with the better business acumen, frequently touting elected officials from business schools and with MBAs rather than law degrees. The GOP, and the media leaders who identify with the GOP, tell Americans every chance they can that Republicans are the party of financial acuity and have the policies to create economic prowess. Yet we found through our research that these claims were little more than myth. In the modern era, post Great Depression and with a strong Federal Reserve in place, Democratic administrations have been far better stewards of the economy and caretakers of the government’s wallet.
We have coached investors to be in this equity market, and remain long, since early in the Obama administration. We have continued to remain long, and coach investors that in our opinion this remains the best course. We see the economy growing due to a balanced approach to jobs creation, spending and taxation. Were there less partisanship, such as occurred during the Reagan era when the Democrat party controlled the Congress while Republicans controlled the administration, it might be possible for the economy to grow even more quickly.
by Adam Hartung | Mar 9, 2015 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership
Best Buy, the venerable electronics retailer, is hitting 52 week highs. Coming off a low of $24 in April, 2014 the current price of about $40 is a 67% increase in just 10 months. Analysts are now cheering investors to own the stock, with Marketwatch pronouncing that the last bearish analyst has thrown in the towel.
If you are a trader, perhaps you want to consider this stock. But if you aren’t an investment professional, and you buy and hold stocks for years, then Best Buy is not a stock you should own.
The bullish case for owning Best Buy is based on recovering sales per store, and recovering earnings, after a reduction in the number of stores, and employees, lowered costs. Further, with Radio Shack now in bankruptcy sales are showing an uptick as customers swing over. And that is expected to continue as Sears closes more stores on its marches toward bankruptcy. Additionally, it is hoped that lower gasoline prices will allow consumers to spend more on electronics and appliances at Best Buy.
But, this completely ignores the trend toward on-line retail sales, and the long-term deleterious impact this trend will have on Best Buy. According to the U.S. Census Bureau, on-line sales as a percent of all retail have grown from less than 2.4% in 2005 to over 7.6% by end of 2014 – more than tripling! But more critical to this discussion, all retail sales includes automobiles, lumber, groceries – lots of things where there is little or no online volume.
As most folks know, the number one category for online sales is computers and consumer electronics, which consistently accounts for about 20% of ALL online retail. In fact, about 25% of all consumer electronics are sold online. So the growth in online retail is disproportionately in the Best Buy wheelhouse. The segment where Best Buy competes against streamlined online retailers such as NewEgg.com, ThinkGeek.com and the ever-dominant Amazon.com.
So while in the short term some traditional retail customers will now shift demand to Best Buy, this is not unlike the revenue “bounce” Best Buy received when Circuit City failed. Short term up, but the long term trend continued hammering away at Best Buy’s core market.
This is a big deal because the marginal economic impact of this shift is horrific to Best Buy. In traditional retail most costs are “fixed,” meaning they can’t be changed much month to month. The cost of real estate, store maintenance, utilities and staff cannot be easily adjusted – unless there is a decision to close a gob of stores. Thus losing even a few sales, what economists call “marginal” sales, wreaks havoc on earnings.
Back in 2010 and 2011 Best Buy made a net income (’12 and ’13 were losses) of about 2.6% – or about $2.60 on every $100 revenue. Cost of Goods sold is about 75% of revenue. So on $100 of revenue, $25 is available to cover fixed costs. If revenue falls by just $10, Best Buy loses $2.50 of margin to cover fixed costs. Remember, however, that the net income is only $2.60. So losing 10% of revenue ($10 out of the $100) means Best Buy loses $2.50 of contribution to fixed costs, and that is deducted from net income of $2.60, leaving Best Buy with a meager 10cents of profitability. A 10% loss of revenue wipes out 96% of profits!
Now you know why retailers who lose even a small part of their sales are suddenly closing stores right and left.
Looking forward, online retail sales are forecast to grow by another 57%, reaching 11% of total retail by 2018. But, as we know, this is disproportionately going to be driven by consumer electronics. Which means that while sales for Best Buy stores are up short term, long term they will plummet. That means there will be more store closings, and layoffs as sales shrink. And, increasingly Best Buy will have to compete head-to-head online against entrenched, leading competitors who have been stealing market share for 10+ years.
If you want to trade on the short-term uptick in revenue, and return to slight profitability, then hold your breath and see if you can outsmart the market by picking the right time, and price, for buying and selling Best Buy. But, if you like to invest in strong companies you expect to grow for another 5 years without having to be a market timer, then avoid Best Buy.
Quite simply, it is never a good idea to bet against a long term trend. Short term aberrations will happen, and it may look like the trend has changed. But the trend to online commerce is picking up steam, not reducing. If you want to invest in retail, you want to invest in those companies that demonstrate they can capture the customer’s revenue in the growing, online marketplace.
by Adam Hartung | Jan 22, 2015 | Current Affairs, Defend & Extend, Games, In the Swamp, Innovation, Leadership, Software, Web/Tech
Yesterday Microsoft conducted a pre-launch of Windows 10, demonstrating its features in an effort to excite developers and create some buzz before consumer launch later in 2015.
By and large, nobody cared. Were you aware of the event? Did you try to watch the live stream, offered via the Microsoft web site? Were you eager to read what people thought of the product? Did you look for reviews in the Wall Street Journal, USA Today and other general news outlets?
Microsoft really blew it with Windows 8 – which is the second most maligned Windows product ever, exceeded only by
Vista. But that wasn’t hard to predict, in June, 2012. Even then it was clear that Windows 8, and Surface tablets, were designed to defend and extend the installed Windows base, and as such the design precluded the opportunity to change the market and pull mobile users to Microsoft.
And, unfortunately, that is how Windows 10 has been developed. At the event’s start Microsoft played a tape driving home how it interviewed dozens and dozens of loyal Windows customers, asking them what they didn’t like about 8, and what they wanted in a Windows upgrade. That set the tone for the new product.
Microsoft didn’t seek out what would convert all those mobile users already on iOS or Android to throw away their devices and buy a Microsoft product. Microsoft didn’t ask its defected customers what it would take to bring them back, nor did it ask the over 50% of the market using Windows 7 or older products what it would take to get them to go to Windows mobile rather than an iPad or Galaxy tablet. Nope. Microsoft went to its installed base and asked them what they would like.
Imagine it’s 1975 and for two decades you have successfully made and sold small offset printing presses. Every single company of any size has one in their basement. But customers have started buying really simple, easy to use Xerox machines. Fewer admins are sending even fewer jobs to the print shop in the basement, as they choose to simply run off a bunch of copies on the Xerox machine. Of course these copies are more expensive than the print shop, and the quality isn’t as good, but the users find the new Xerox machines good enough, and they are simple and convenient.
What are you to do if you make printing presses? You probably need to find out how you can get into a new product that actually appeals to the users who no longer use the print shop. But, instead, those companies went to the print shop operators and asked them what they wanted in a new, small print machine. And then the companies upgraded their presses and other traditional printing products based upon what that installed base recommended. And it wasn’t long before their share of printing eroded to a niche of high-volume, and often color, jobs. And the commercial print market went to Xerox.
That’s what Microsoft did with Windows 10. It asked its installed base what it wanted in an operating system. When the problem isn’t the installed base, its the substitute product that is killing the company. Microsoft didn’t need input from its installed base of loyal users, it needed input from people who have quit using HP laptops in favor of iPads.
There are a lot of great new features in Windows 10. But it really doesn’t matter.
The well spoken presenters from Microsoft laid out how Windows 10 would be great for anyone who wants to go to an entirely committed Windows environment. To achieve Microsoft’s vision of the future every one of us will throw away our iOS and Android products and go to Windows on every single device. Really. There wasn’t one demonstration of how Windows would integrate with anything other than Windows. And there appeared on intention of making the future an interoperable environment. Microsoft’s view was we would use Windows on EVERYTHING.
Microsoft’s insular view is that all of us have been craving a way to put Windows on all our devices. We’ve been sitting around using our laptops (or desktops) and saying “I can’t wait for Microsoft to come out with a solution so I can throw away my iPhone and iPad. I can’t wait to tell everyone in my organization that now, finally, we have an operating system that IT likes so much that we want everyone in the company to get rid of all other technologies and use Windows on their tablets and phones – because then they can integrate with the laptops (that most of us don’t use hardly at all any longer.)”
Microsoft even went out of its way to demonstrate how well Win10 works on 2-in-1 devices, which are supposed to be both a tablet and a laptop. But, these “hybrid” devices really don’t make any sense. Why would you want something that is both a laptop and a tablet? Who wants a hybrid car when you can have a Tesla? Who wants a vehicle that is both a pick-up and a car (once called the El Camino?) Microsoft thinks these are good devices, because Microsoft can’t accept that most of us already quit using our laptop and are happy enough with a tablet (or smartphone) alone!
Microsoft presenters repeatedly reminded us that Windows is evolving. Which completely ignores the fact that the market has been disrupted. It has moved from laptops to mobile devices. Yes, Windows has a huge installed base on machines that we use less and less. But Windows 10 pretends that there does not exist today an equally huge, and far more relevant, installed base of mobile devices that already has millions of apps people use every single day over and over. Microsoft pretended as if there is no world other than Windows, and that a more robuts Windows is something people can’t wait to use! We all can’t wait to go back to a exclusive Microsoft world, using Windows, Office, the new Spartan browser – and creating documents, spreadsheets and even presentations using Office, with those hundreds of complex features (anyone know how to make a pivot table?) on our phones!
Just like those printing press manufacturers were sure people really wanted documents printed on presses, and couldn’t wait to unplug those Xerox machines and return to the old way of doing things. They just needed presses to have more features, more capabilities, more speed!
The best thing in Windows 10 is Cortana, which is a really cool, intelligent digital assistant. But, rather than making Cortana a tool developers can buy to integrate into their iOS or Android app the only way a developer can use Cortana is if they go into this exclusive Windows-only world. That’s a significant request.
Microsoft made this mistake before. Kinect was a great tool. But the only way to use it, initially, was on an xBox – and still is limited to Windows. Despite its many superb features, Kinect didn’t develop anywhere near its potential. Cortana now suffers from the same problem. Rather than offering the tool so it can find its best use and markets, Microsoft requires developers and consumers buy into the Windows-exclusive world if you want to use Cortana.
Microsoft hasn’t yet figured out that it lost relevance years ago when it missed the move to mobile, and then launched Windows 8 and Surface to markets that didn’t really want those products. Now the market has gone mobile, and the leader isn’t Microsoft. Microsoft has to find a way to be relevant to the millions of people using alternative products, and the Windows 10 vision, which excludes all those competing devices, simply isn’t it.
There was lots of neat geeky stuff shown. Surface tablets using Windows 10 with an xBox app can now do real gaming, which looks pretty cool and helps move Microsoft forward in mobile gaming. That may be a product that sets Sony’s Playstation and Nintendo’s Wii on their heels. But that’s gaming, and historically not where Microsoft makes any money (nor for that matter does Sony or Nintendo.)
There is a new interactive whiteboard that integrates Skype and Windows tablets for digital enhancement of brainstorming meetings. But it is unclear how a company uses it when most employees already have iPhones or Samsung S5s or Notes. And for the totally geeky there was a demo of a holographic headset. But when it comes to disruptive products like this success requires finding really interesting applications that otherwise cannot be completed, and then the initial customers who have a really desperate need for that application who will become devoted users.
Launching such disruptive products has long been the bane of Microsoft’s existence. Microsoft thinks in mass market terms, and selling to its base. Not developing breakthrough applications and finding niche markets to launch new uses. Nor has Microsoft created a developer community aligned with that kind of work. They have long been taught to simply continue to do things that defend and extend the traditional base of product uses and customers.
The really big miss for this meeting was understanding developer needs. Today developers have an enormous base of iOS and Android users to whom they can sell their products. Windows has less than 3% share in mobile devices. What developer would commit their resources to developing products for Windows 10, which has an installed base only in laptops and desktops? In other words, yesterday’s technology base? Especially when to obtain the biggest benefits of Windows 10 that developer has to find end use customers (companies or consumers) willing to commit 100% to Windows everywhere – even including their televisions, thermostats and other devices in our ever smarter buildings?
Windows 10 has a lot of cool features. But Microsoft made a big miss by listening to the wrong people. By assuming its installed base couldn’t wait for a Microsoft-exclusive solution, and by behaving as if the installed base of mobile devices either didn’t exist or didn’t matter, the company showed its hubris (once again.) If all it took to succeed were great products, the market would never have shifted from Macintosh computers to Windows machines in the 1990s. Microsoft simply doesn’t realize that it lacks the relevance to pull of its grand vision, and as such Windows 10 has almost no chance of stopping the Apple/Google/Samsung juggernaut.
by Adam Hartung | Dec 24, 2014 | Defend & Extend, Disruptions
The Twelve Days of Christmas refers to an ancient festive season which begins on December 25. Colonial Americans modified this a bit by creating wreaths which they hung on neighbors’ doors on December 24 in anticipation of starting the festival of twelve days, which historically included feasts and celebrations.
Better known is the song “The Twelve Days of Christmas” which is believed to have started as a French folk rhyme, then later published in 1780 England. The song commemorates the twelve days of Christmas by offering ever grander gifts on each day of the holiday season.
So, it being Christmas Eve I am stealing this idea completely and offering my list of the 12 gifts investors would like to receive this holiday season from the companies into which they invest:
- Stop waxing eloquently about what you did last year or quarter. Yesterday has come and gone. Tell me about the future.
- Tell me about important trends that are going to impact your business. Is it demographics, aging population, the ecology movement, digitization, regulatory change, organic foods, mobility, mobile payments, nanotech, biotech… ? What are the critical trends that will impact your business going forward?
- Tell me your future scenarios. How will these trends change the way your customers and your company will behave? What are your most likely scenarios (and don’t try to be creative in an effort to preserve the status quo!)
- Tell me how the game will change for your industry over the next 1, 3, and 5 years. How will things be different for the industry, based on the trends and scenarios. The world is a fast changing place, and I want to know how this will change your industry.
- Tell me about the customers you lost last year. I gain no value from hearing about, or from, your favorite customers that love what currently do. Instead, bring me info on the customers who are buying alternative products, changing their behaviors, in ways that might impact sales. Even if these changes are only a small percentage of revenue.
- Tell me who the competitors are that are trying to change the game. Don’t tell me that these companies will fail. Tell me who the folks are that are really trying to do something new and different.
- Tell me about the fringe competitors. The ones you constantly say do not matter because they are small, or not part of the historical industry, or from some distant location where you don’t now compete. Tell me about the companies doing the new things which are seen as remote and immaterial, but are nibbling at the edges of the market.
- Tell me how you are reacting to potential game changers in your market. What are your plans to deal with disruptive competitors and disruptive innovations affecting your way of doing business? Other than working harder, faster, cheaper and planning to do better, what are you planning to do differently?
- Tell me how you intend to be a market game changer. Tell me what you intend to do that aligns with trends and leads the company toward fulfilling future scenarios as a market leader.
- Tell me what projects you are undertaking to experiment with new forms of competition, attracting new customers and creating new markets. Tell me about your teams that are working in white space to discover new opportunities.
- Tell me how you will disrupt your own organization so the constant effort to enhance the old success formula doesn’t kill any effort to do something new and different. How will you keep these experimental white space teams from being killed, or simply starved of resources, by the organizational inertia to defend and extend the status quo.
- Tell me the goals of these project teams, and how they will be nurtured and supplemented, as well as evaluated, to lead the company in new directions. Don’t just tell me that you will measure sales or profits, but rather real goals that measure market learning and ability to understand new customer behaviors.
If investors had this transparency, rather than merely reams and reams of historical data, just imagine how much smarter we could all invest.
Happy Holidays!
by Adam Hartung | Dec 18, 2014 | Current Affairs, Defend & Extend, Food and Drink, Leadership, Lifecycle
It is that time of year when many of us celebrate with an alcoholic beverage. But increasingly in America, that beverage is not beer. Since 2008, American beer sales have fallen about 4%.
But that decline has not been equally applied to all brands. The biggest, old line brands have suffered terribly. Nearly gone are old brands like Milwaukee’s Best, which were best known for being low priced – and certainly not focused on taste. But the most hurt, based on volume declines, have been what were once the largest brands; Budweiser, Miller Lite and Miller High Life. These have lost more than a quarter of their volume, losing a whopping 13million barrels/year of demand. These 3 brand declines account for 6% reduction in the entire beer market.
The popular myth is that this has been due to the rise of craft beers. And there is no doubt, craft beer sales have done well. Sales are up 80%. Many articles (including the WSJ)tout the growth of craft beers, which are ostensibly more tasty and appealing, as being the reason old-line brands have declined. It is an easy explanation to accept, and has largely gone unchallenged. Even the brewer of Budweiser, Annheuser-Busch InBev, has reacted to this argument by taking the incredible action of dropping clydesdale horses from their ads after 81 years – in an effort to woo craft beer drinkers, which are thought to be younger and less sentimental about large horses.
This all makes sense. Too bad it’s the wrong conclusion – and the wrong actions being taken.
Realize that craft beer sales are up from a small base, and today ALL craft beer sales still account for only 7.6% of the market. In fact, ALL craft beers combined sell only the same volume as the now smaller Budweiser. The problem with Budweiser sales – and sales of other big name brand beers – is a change in demographics.
Drinkers of Budweiser and Lite are simply older. These brands rose to tremendous dominance in the 1970s. Many of those who loved this brand are simply older – or dead. Where a hard working fellow in his 30s or 40s might enjoy a six pack after work, today that Boomer (if still alive) is somewhere between late 50s and 70s. Now, a single beer, or maybe two, will suffice thank you very much. And, equally challenging for sales, today’s Boomer is more often drinking a hard liquor cocktail, and a glass of wine with dinner. Beer drinking has its place, but less often and in lower quantities.
Meanwhile, Hispanics are a growing demographic. Hispanics are the largest non-white population in America, at 54million, and represent over 17% of all Americans. With a growth rate of 2.1%, Hispanics are also one of the fastest growing demographic segments – and increasingly important given their already large size. Hispanics are truly becoming a powerful buying group in American economics.
So, just as decline in Boomer population and consumption has hurt the once great beer brands, we can look at the growth in Hispanic demographics and see a link to sales of growing brands. Two significant (non-craft volume) beer brands that more than doubled sales since 2008 are Modelo Especial and Dos Equis. In fact, these were the 2 fastest growing brands in America, even though the first does no English language advertising at all, and the latter only lightly funds advertising with an iconic multi-year campaign. Together their sales total almost 5.4M barrels – which makes these 2 brands equal to 1/3 the ENTIRE craft beer marketplace. And growing 33% faster!
Chasing the myth of craft sales is doing nothing for InBev and MillerCoors as they try to defend and extend outdated brands. On the other hand, Heineken controls Dos Equis, and Constellation Brands controls Modello Especial. These two companies are squarely aligned with demographic trends, and well positioned for growth.
So, be careful the next time you hear some simple explanation for why a product or service is declining. The answer might sound appealing, but have little economic basis. Instead, it is much smarter to look at big trends and you’ll likely see why in the same market one product is growing, while another is declining. Trends – such as demographics – often explain a lot about what is happening, and lead you to invest much smarter.
by Adam Hartung | Dec 11, 2014 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Television, Web/Tech
The trend toward the death of broadcast TV as we’ve known it keeps moving forward. This trend may not happen as fast as the death of desktop computers, but it is a lot faster than glacier melting.
This television season (through October) Magna Global has reported that even the oldest viewers (the TV Generation 55-64) watched 3% less TV. Those 35-54 watched 5% less. Gen Xers (25-34) watched 8% less, and Millenials (18-24) watched a whopping 14% less TV. Live sports viewing is not even able to maintain its TV audience, with NFL viewership across all networks down 10-19%.
Everyone knows what is happening. People are turning to downloaded entertainment, mostly on their mobile devices. With a trend this obvious, you’d think everyone in the media/TV and consumer goods industries would be rethinking strategy and retooling for a new future.
But, you would be wrong. Because despite the obviousness of the trend, emotional ties to hoping the old business sticks around are stronger than logic when it comes to forecasting.
CBS predicted at the beginning of 2014 TV ad revenue would grow 4%. Oops. Now CBS’s lead forecaster is admitting he was way off, and adjusted revenues were down 1% for the year. But, despite the trend in viewer behavior and ad expenditures in 2014, he now predicts a growth of 2% for 2015.
That, my young friends, is how “hockey stick” forecasts are created. A lot of old assumptions, combined with a willingness to hope trends will be delayed, and you can ignore real data while promising people that the future will indeed look like the past – even when it defies common sense.
To compensate for fewer ads the networks have raised prices on all ads. But how long can that continue? This requires a really committed buyer (read more about CMO weaknesses below) who simply refuses to acknowledge the market has shifted and the dollars need to shift with it. That cannot last forever.
Meanwhile, us old folks can remember the days when Nielsen ratings determined what was programmed on TV, as well as what advertisers paid. Nielsen had a lock on measuring TV audience viewing, and wielded tremendous power in the media and CPG world.
But now AC Nielsen is struggling to remain relevant. With TV viewership down, time shifting of shows common and streaming growing like the proverbial weed Nielsen has no idea what entertainment the public watches. They don’t know what, nor when, nor where. Unwilling to move quickly to develop tools for catching all the second screen viewing, Nielsen has no plan for telling advertisers what the market really looks like – and the company looks to become a victim of changing markets.
Which then takes us to looking at those folks who actually buy ads that drive media companies. The Chief Marketing Officers (CMOs) of CPG companies. Surely these titans of industry are on top of these trends, and rapidly shifting their spending to catch the viewers with the most ads placed for the lowest cost.
You would wish.
Unfortunately, because these senior executives are in the oldest age groups, they are a victim of their own behavior. They still watch TV, so assume others must as well. If there is cyber-data saying they are wrong, well they simply discount that data. The Nielsen’s aren’t accurate, but these execs still watch the ratings “because it’s the best info we have” – a blatant untruth by the way. But Nielsen does conveniently reinforce their built in assumptions, and their hope that they won’t have to change their media spend plans any time soon.
Further, very few of these CMOs actually use social media. The vast majority watch their children, grandchildren and young employees use mobile devices constantly – and they bemoan all the activity on YouTube, Facebook, Instagram and Twitter – or for the most part even Linked-in. But they don’t actually USE these products. They don’t post information. They don’t set up and follow channels. They don’t connect with people, share information, exchange photos or tell stories on social media. Truthfully, they ignore these trends in their own lives. Which leaves them woefully inept at figuring out how to change their company marketing so it can be more relevant.
The trend is obvious. The answer, equally so. Any modern marketer should be an avid user of social media. Most network heads and media leaders are farther removed from social media than the Pope! They don’t constantly download entertainment, and exchanging with others on all the platforms. They can’t manage the use of these channels when they don’t have a clue how they work, or how other people use them, or understand why they are actually really valuable tools.
Are you using these modern tools? Are you actually living, breathing, participating in the trends? Or are you, like these outdated execs, biding your time wasting money on old programs while you look forward to retirement? And likely killing your company.
When trends emerge it is imperative we become part of that trend. You can’t simply observe it, because your biases will lead you to hope the trend reverts as you continue doing more of the same. A leader has to adopt the trend as a leader, be a practicing participant, and learn how that trend will make a substantial difference in the business. And then apply some vision to remain relevant and successful.
by Adam Hartung | Nov 12, 2014 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
We see it all too often. A successful business seems to lose its way. Somehow, after decades of success, its results soften, then tumble and the company becomes a victim of its competition. We scratch our heads and wonder, “why did that happen?”
Pizza Hut is well on its way to disappearing. Kind of like Pizza Inn, A&W and Howard Johnson’s. And that seems kind of remarkable considering the company at one time defined pizza for most Americans. From a fast growing franchise in the 1960s to a high profile acquisition by PepsiCo in the 1970s, to anchoring the Yum Brands spin out from PepsiCo in 1997, Pizza Hut just finished 8 straight quarters of declining same store sales. Pizza Hut was once a concept as hot as Apple Stores, but now it looks more like Sears. How could this happen?
When Pizza Hut was growing it locked in on its success formula. And one of the biggest Lock-ins was its name. Pizza Hut was a place where you ate pizza, and the buildings all looked the same with that hut-like red roof. At a time when few Americans outside the northeast ate pizza, this Wichita, Kansas founded (and headquartered until the 1990s) company told people what a pizzeria should look like, and what you should eat.
The company was ardent about controlling what franchisees served. No nachos, or other trendy foods, because they didn’t fit the pizza theme. No delivery, because good pizza required you eat it immediately from the oven. Pizza should be thick and hearty, even served in a deep dish so you have plenty of bread and feel really full. Whether anyone in Italy ever a pizza anything like this really did not matter.
And Pizza Hut would help guide customers as to what toppings they wanted — and usually there should be at least 3 – by offering pre-designed pizzas with names like “meat lovers,” “supreme,” “super supreme” or “veggie lover’s” so an uninformed clientele (originally prairie state, then midwestern, then expanding into the southwest and the south) could buy the product without a lot of fuss.
This success formula may sound cliche today, but it worked. And it worked really well for 30 years, then pretty well for another 10-15. But, eventually, doing the same thing over, and over, and over, and over had less appeal. Almost everyone in the country knew what a Pizza Hut was, what the stores looked like and what the product was like. Competitors came along by the dozens with all kinds of variations, and different kinds of service – like being in a mall, or delivering the product. Inevitably this competition led to price wars. To keep customers Pizza Hut had to lower its prices, even offering 2 pizzas for the price of one. Pizza Hut never lost track of its success formula, and never stopped doing what once made it great. But margins eroded, and then sales started declining.
Lots of people don’t care about Pizza Hut any more. They want an alternative. An alternative product, like California Pizza Kitchen or Wolfgang Pucks. Or an alternative to pizza altogether like the new “fast casual” chains such as Chipotle’s, Baja Fresh or Panera. For a whole raft of reasons, people decided that although they once ate Pizza Hut (even ate a LOT of it) they were going to eat something else.
But Pizza Hut was locked in. First, its name. Pizza. Hut. To fulfill the “brand promise” of that name everything about that store is pre-designed. From the outside to the inside tables to the equipment in the kitchen. 6,300 stores that are almost identical. Any change and you have to make 6,300 changes. Adding new product categories means reprinting 126,000 menus, changing 6,300 kitchen layouts, buying 6,300 new ovens, figuring out the service utensils for 6,300 wait staff. That’s lock-in. Making any change is so hard that the incentive is entirely toward improve what you’ve always done rather than doing something new.
Growth Stalls are Deadly
Eventually, like Pizza Hut, growth stalls. It only takes 2 quarters of declining sales to hit a growth stall, and when that happens less than 7% of businesses will ever again consistently grow at a meager 2%. Growth stalls tell us “hey, the market shifted. What you’re doing isn’t selling any more.”
But most management teams don’t think about a market shift, and instead react by trying to do more of the same. They treat this like its an operational problem. More quality campaigns, more money spent on advertising, more promotions, asking employees to work a little harder, more product for the same (or lower) price – more, better, faster, cheaper. But this doesn’t work, because the problem lies in a market shift away from your “core” that requires an entirely different strategy.
Because management is incented to ignore this shift as long as possible, the company soon becomes irrelevant. Customers know they’ve been going to competitors, and they start to realize it’s been a long time since they bought from that old supplier. They realize their interest in that old company and its products has simply gone away. They don’t pay attention to the ads. And they don’t have any interest in new product announcements. Actually, they find the company irrelevant. Even when the discounts are big, they don’t buy. They do business where they identify with the company and its products, even when those products cost more.
And thus the results start to tumble horribly. Only by now management is so far removed from market trends that it has no idea how to regain relevancy. In Pizza Hut’s case, leadership is undertaking what they’d like to think is a brand overhaul that will change its position in customers’ minds. But, unfortunately, they are doing the ultimate in defend & extend management to try and save the old success formula.
Pizza Hut is introducing a maze of new ways to have its old product, in its old stores. 10 crust choices, 6 sauce choices, 22 of those pre-designed pizza offerings, 5 different liquids you can have dribbled over the pizza, and a rash of exotic new toppings – like banana. So now you can order your pizza 1,000 different ways (actually, more like 10,000.) Oh, and this is being launched with a big increase in traditional advertising. In other words, an insane implementation of what the company has always done; giving customers an American style pizza, in a hut, promoted on TV – even most likely buying what is now considered iconic – a Super Bowl ad.
Yum Brands investors have reasons to be concerned. Pizza Hut is really important to sales and earnings. But its leaders are intent on doing more of the same, even though the market has already shifted. The prognosis does not look good.
by Adam Hartung | Oct 28, 2014 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, Leadership, Lock-in, Television
I’m a “Boomer,” and my generation could have been called the Coke generation. Our parents started every day with a cup of coffee, and they drank either coffee or water during the day. Most meals were accompanied by either water, or iced tea.
But our generation loved Coca-Cola. Most of our parents limited our consumption, much to our frustration. Some parents practically refused to let the stuff in the house. In progressive homes as children we were usually only allowed one, or at most two, bottles per day. We chafed at the controls, and when we left home we started drinking the sweet cola as often as we could.
It didn’t take long before we supplanted our parent’s morning coffee with a bottle of Coke (or Diet Coke in more modern times.) We seemingly could not get enough of the product, as bottle size soared from 8 ounces to 12 to 16 and then quarts and eventually 2 liters! Portion control was out the window as we created demand that seemed limitless.
Meanwhile, Americans exported our #1 drink around the world. From 1970 onward Coke was THE iconic American brand. We saw ads of people drinking Coke in every imaginable country. International growth seemed boundless as people from China to India started consuming the irresistible brown beverage.
My how things change. Last week Coke announced third quarter earnings, and they were down 14%. The CEO admitted he was struggling to find growth for the company as soda sales were flat. U.S. sales of carbonated beverages have been declining for a decade, and Coke has not developed a successful new product line – or market – to replace those declines.
Coke is a victim of changing customer preferences. Once a company that helped define those preferences, and built the #1 brand globally, Coke’s leadership shifted from understanding customers and trends in order to build on those trends towards defending & extending sales of its historical product. Instead of innovating, leadership relied on promotion and tactics which had helped the brand grow 30 years ago. They kept to their old success formula as trends shifted the market into new directions.
Coke began losing its relevancy. Trends moved in a new direction. Healthfulness led customers to decide they wanted a less calorie rich, nutritionally starved drink. And concerns grew over “artificial” products, such as sweeteners, leading customers away from even low calorie “diet” colas.
Meanwhile, younger generations started turning to their own new brands. And not just drinks. Instead of holding a Coke, increasingly they hold an iPhone. Where once it was hip to hang out at the Coke machine, or the fountain stand, now people would rather hang out at a Starbucks or Peet’s Coffee. Where once Coke was identified and matched the aspirations of the fast growing Boomer class, now it is replaced with a Prada handbag or other accessory from an LVMH branded luxury product.
Where once holding a Coke was a sign of being part of all that was good, now the product is largely passe. Trends have moved, and Coke didn’t. Coke leadership relied too much on its past, and failed to recognize that market shifts could affect even the #1 global brand. Coke leaders thought they would be forever relevant, just do more of what worked before. But they were wrong.
Unfortunately, CEO Muhtar Kent announced a series of changes that will most likely further hurt the Coca-Cola company rather than help it.
First, and foremost, like almost all CEOs facing an earnings problem the company will cut $3B in costs. The most short-term of short-term actions, which will do nothing to help the company find its way back toward being a prominent brand-leading icon. Cost cuts only further create a “hunker-down” mindset which causes managers to reduce risk, rather than look for breakthrough products and markets which could help the company regain lost ground. Cost cutting will only further cause remaining management to focus on defending the past business rather than finding a new future.
Second, Coca-Cola will sell off its bottlers. Interestingly, in the 1980s CEO Roberto Goizueta famously bought up the distributorships, and made a fortune for the company doing so. By the year 2000 he was honored, along with Jack Welch of GE, as being one of the top 2 CEOs of the century for his ability to create shareholder value. But now the current CEO is selling the bottling operations – in order to raise cash. Once again, when leadership can’t run a business that makes money they often sell off assets to generate cash and make the company smaller – none of which benefits shareholders.
Third, fire the Chief Marketing Officer. Of course, somebody has to be blamed! The guy who has done the most to bring Coca-Cola’s brand out of traditional advertising and promote it in an integrated manner across all media, including managing successful programs for the Olympics and World Cup, has to be held accountable. What’s missing in this action is that the big problem is leadership’s fixation with defending its Coke brand, rather than finding new growth businesses as the market moves away from carbonated soft drinks. And that is a problem that requires the CEO and his entire management team to step up their strategy efforts, not just fire the leader who has been updating the branding mechanisms.
Coca-Cola needs a significant strategy shift. Leadership focused too long on its aging brands, without putting enough energy into identifying trends and figuring out how to remain relevant. Now, people care a lot less about Coke than they did. They care more about other brands, like Apple. Globally. Unless there is a major shift in Coke’s strategy the company will continue to weaken along with its primary brand. That market shift has already happened, and it won’t stop.
For Coke to regain growth it needs a far different future which aligns with trends that now matter more to consumers. The company must bring forward products which excite people ,and with which they identify. And Coke’s leaders must move much harder into understanding shifts in media consumption so they can make their new brands as visible to newer generations as TV made Coke visible to Boomers.
Coke is far from a failed company, but after a decade of sales declines in its “core” business it is time leadership realizes takes this earnings announcement as a key indicator of the need to change. And not just simple things like costs. It must fundamentally change its strategy and markets or in another decade things will look far worse than today.
