by Adam Hartung | May 3, 2012 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Web/Tech
With revenues up 39% last quarter, it's far too soon to declare the death of Google. Even in techville, where things happen quickly, the multi-year string of double-digit higher revenues insures survival – at least for a while.
However, there are a lot of problems at Google which indicate it is not a good long-term hold for investors. For traders there is probably money to be made, as this long-term chart indicates:
Source: Yahoo Finance May 3, 2012
While there has been enormous volatility, Google has yet to return to its 2007 highs and struggles to climb out of the low $600/share price range. And there's good reason, because Google management has done more to circle the wagons in self-defense than it has done to create new product markets.
What was the last exciting product you can think of from Google? Something that was truly new, innovative and being developed into a market changer? Most likely, whatever you named is something that has recently been killed, or receiving precious little management attention. For a company that prided itself on innovation – even reportedly giving all employees 20% of their time to do whatever they wanted – we see management actions that are decidedly not about promoting innovation into the market, or making sustainable efforts to create new markets:
- killed Google Powermeter, a project that could have redefined how we buy and use electricity
- killed Google Wave, a product that offered considerable group productivity improvement
- killed Google Flu Vaccine Finder offering new insights for health care from data analysis
- killed Google Related which could have helped all of us search beyond keywords
- killed Google synch for Blackberry as it focuses on selling Android
- killed Google Talk mobile app
- killed the OnePass Google payment platform for publishers
- killed Google Labs – once its innovation engine
- and there are rumors it is going to kill Google Finance
All of these had opportunities to redefine markets. So what did Google do with these redeployed resources:
- Bought Motorola for $12.5billion, which it hopes to take toe-to-toe with Apple's market leading iPhone, and possibly the iPad. And in the process has aggravated all the companies who licensed Android and developed products which will now compete with Google's own products. Like the #1 global handset manufacturer Samsung. And which offers no clear advantage to the Apple products, but is being offered at a lower price.
- Google+, which has become an internal obsession – and according to employees consumes far more resources than anyone outside Google knows. Google+ is a product going toe-to-toe with Facebook, only with no clear advantages. Despite all the investment, Google continues refusing to publish any statistics indicating that Google+ is growing substantially, or producing any profits, in its catch-up competition with Facebook.
In both markets, mobile phones and social media, Google has acted very unlike the Google of 2000 that innovated its way to the top of web revenues, and profits. Instead of developing new markets, Google has chosen to undertaking 2 Goliath battles with enormously successful market leaders, but without any real advantage.
Google has actually proven, since peaking in 2007, that its leadership is remarkably old-fashioned, in the worst kind of way. Instead of focusing on developing new markets and opportunities, management keeps focusing on defending and extending its traditional search business – and has proven completely inept at developing any new revenue streams. Google bought both YouTube and Blogger, which have enormous user bases and attract incredible volumes of page views – but has yet to figure out how to monetize either, after several years.
For its new market innovations, rather than setting up teams dedicated to turning its innovations into profitable revenue growth engines Google leadership keeps making binary decisions. Messrs. Page and Brin either decide the product and market aren't self-developing, and kill the products, or simply ignore the business opportunity and lets it drift. Much like Microsoft – which has remained focused on Windows and Office while letting its Zune, mobile and other products drift into oblivion – or lose huge amounts of money like Bing and for years XBox.
I personalized that last comment onto the Google founders intentionally. The biggest news out of Google lately has been a pure financial machination done for purely political reasons. Announcing a stock dividend that effectively creates a 2-for-1 split, only creating a new class of non-voting "C" stock to make sure the founders never lose voting control. This was adding belt to suspenders, because the founders already own the Class B stock giving them 66% voting control. The purpose was purely to make sure nobody every tries to buy, or otherwise take over Google, because the founders will always have enough votes to make such an action impossible.
The founders explained this as necessary so they could retain control and make "big bets." If "big bets" means dumping billions into also-ran products as late entrants, then they have good reason to fear losing company control. Making big bets isn't how you win in the information technology industry. You win by creating new markets, with new solutions, before the competition does it.
Apple's huge wins in iPod, iTouch, iTunes, iPhone and iPad weren't "big bets." The Apple R&D budget is 1/8 Microsoft's. It's not big bets that win, its developing innovation, putting it into the market, shepharding it through a series of learning cycles to make it better and better and meeting previously unmet – often unidentified – needs. And that's not what the enormous investments in mobile handsets and Google+ are about.
Although this stock split has no real impact on Google today, it is a signal. A signal of a leadership team more obsessed with their own control than doing good for investors. It is clearly a diversion from creating new products, and opening new markets. But it was the centerpiece of communication at the last earnings call. And that is a avery bad signal for investors. A signal that the leaders see things likely to become much worse, with cash going out and revenue struggling, before too long. So they are acting now to protect themselves.
Meanwhile, even as revenues grew 39% last quarter, there are signs of problems in Google's "core" market leadership is so fixated on defending. As this chart shows, while volume of paid ads is going up, the price is now going down. 
Source: Silicon Alley Insider
Prices go down when your product loses value. You have to chase revenue. Remember Proctor & Gamble's "Basics" product line launch? Chasing revenue by cutting price. In the short-term it can be helpful, but long-term it is not in your best interest. Google isn't just cutting price on its incremental sales, but on all sales. Increasingly advertisers are becoming savvy about what they can expect from search ads, and what they can expect from other venues – like Facebook – and the prices are reflecting expectations. In a recent Strata survey the top 2 focus for ad executives were "social" (69%) and "display" (71%) – categories where Facebook leads – and both are ahead of "search."
At Facebook, we know the user base is around 800million. We also know it's now the #1 site on the internet – more hits than Google. And Facebook has much longer average user times on site. All things attractive to advertisers. Facebook is acquiring Instagram, which positions it much stronger on mobile devices, thus growing its market. And while Google was talking about share splits, Facebook recently announced it was making Facebook email integrated into the Facebook platform much easier to use (which is a threat to Gmail) and it was adding a new analytics suite to help advertisers understand ad performance – like they are accustomed to at Google. All of which increases Facebook's competitiveness with Google, as customers shift increasingly to social platforms.
As said at the top of this article, Google won't be gone soon. But all signs point to a rough road for investors. The company is ditching its game changing products and dumping enormous sums into me-too efforts trying to catch well healed and well managed market leaders. The company has not created an ability to take new innovations to market, and remains stuck defending and extending its existing business lines. And the top leaders just signaled that they weren't comfortable they could lead the company successfully, so they implemented new programs to make sure nobody could challenge their leadership.
There are big fires burning at Google. Unfortunately, burning those resources is producing a lot of heat – but not much light on a successful future. It's time to sell Google.
by Adam Hartung | May 2, 2012 | Defend & Extend, Lock-in, Web/Tech
My latest bi-monthly column for CIO magazine came out in print this week. In it I challenge CIOs to think hard about what made the role successful in the 1970s – then in the 1990s – and how it is transitioning today. Far too many CIOs are locked in on old notions about what made them successful – usually controlling both hardware and software and forcing managers to behave in ways acceptable to IT. But today cloud computing, mobile devices and apps make it possible for many "users" to obviate the IT department entirely – skip the enterprise applications – and find an easy route for their information needs.
I encourage you to click through to the article on CIO.com, or ComputerWorld.com – if you're in IT it should give you something to think about regarding your role. If you are an investor it should give you some new thoughts about what IT companies are worth your money (time to rethink Oracle and SAP, for example.) And if you're a manager it just might embolden you to focus on your needs and fight back on IT solutions that don't work for you.
CIO Mag – http://www.cio.com/article/704934/CIOs_Will_You_Be_Relevant_in_2017_
ComputerWorld – http://www.computerworld.com/s/article/9226722/CIOs_Will_You_Be_Relevant_in_2017_
by Adam Hartung | Apr 26, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
WalMart's been accused of bribing officials in Mexico to grow its business. But by and large, few in America seem to care. The stock fell only modestly from its highs of last week, and today the stock recovered from the drop off to the lows of February.
But WalMart is going to fail. WalMart is trying to defend and extend a horribly outdated industrial strategy.
Sam Walton opened his original five and dime stores in the rural countryside, and competed just like small retailers had done for decades. But quickly he recognized that industrialization offered the opportunity to shift the retail market. By applying industrial concepts like scale, automation and volume buying he could do for retailing what Ford and GM had done for auto manufacturing. And his strategy, designed for an industrial marketplace, worked extremely well. Like it or not, WalMart outperformed retailers still trying to compete like they had in the 1800s, and WalMart was spectacularly successful.
But today, the world has shifted again. Only WalMart is putting all its resources into trying to defend and extend its industrial era strategy, rather than modify to compete in the information age. Because its strategy doesn't work, the company keeps wandering into spectacular failures, and horrible leadership problems.
- In 2005 WalMart's Vice Chairman and a corporate Vice President tried to use the company's size to wring more out of gift card and merchandise suppliers. Both were caught and fired for fraud.
- In 2006 WalMart hired a new head of marketing to update the strategy, and improve the stores and merchandise. But upon realizing her recommendations violated the existing WalMart industrial strategy the company fired her after only a few months, and went public with character besmirching allegations that she and an ad agency executive were having an affair. Like that (even if true, which is hotly disputed) somehow mattered to the changes WalMart needed. Changes which were abruptly terminated upon firing her.
- In 2008 a WalMart employee became an invalid in a truck accident. When the employee won a lawsuit related to the accident, WalMart sued the invalid employee to return $470,000 in insurance payments made by WalMart. As if WalMart's future depended on the return of that money.
- In a cost saving move, WalMart moved its marketing group under merchandising, in order to reduce employees and the breadth of merchandise, as well as keep the company more tightly focused on its strategy.
All 3 of these incidents show a leadership team that is so entrenched in history it will do anything – anything – to keep from evolving forward. And sd that history developed it paved a pathway where it was only a very small step to paying bribes in order to open more stores in Mexico. Such bribes could easily be seen as just doing "whatever it takes" to keep defending the existing business model, extending it into new markets, even though it is at the end of its life.
It has come to light that after paying the bribes, the leadership team did about everything it could to cover them up. And that included spending millions on lobbying efforts to hopefully change the laws before anyone was caught, and possibly prosecuted. The goal was to keep the stores open, and open more. If that meant a little bribing went on, then it was best to not let people know. And instead of saying what WalMart did was wrong, change the rules so it doesn't look like it was wrong.
At WalMart right and wrong are no longer based on societal norms, they are based on whether or not it lets WalMart defend its existing business by doing more of what it wants to do.
WalMart's industrial strategy is similar to the Titanic strategy. Build a boat so big it can't sink. And if any retailer could be that big, then WalMart was it. But these scandals keep showing us that the water is increasingly full of icebergs. Each scandal points out that WalMart's strategy is harder to navigate, and is running into big problems. Even though the damage isn't visible to most of us, it is nonetheless clear to WalMart executives that doing more of the same is leading to less good results. WalMart is taking on water, and it has no solution. In their effort to prop up results executives keep doing things that are less and less ethical – sometimes even illegal – and guiding people down through all levels of management and employment to do the same.
WalMart's problems aren't unions, or city zoning councils, or women's rights and fair pay organizations. WalMart's problem is an out of date retail strategy. Consumers have a lot of options besides going to stores that look like airplane hangers, and frequently without paying a premium. There is wider selection, in attractive stores, with better quality and a better shopping experience. And beyond traditional retail, consumers can now buy almost anything 24×7 on-line, frequently at a better price than WalMart – despite its enormous and automated distribution centers and stores, with tight inventory and expense control.
But WalMart is completely unable to admit its strategy is outdated, and unwilling to make any changes. This week, amidst the scandal, WalMart rolled out its latest and greatest innovation for on-line shopping. WalMart will now allow an on-line customer to pay with cash. After placing an order on-line they can trot down to the store and pay the cash, then WalMart will recognize the order and ship the product.
Really. Now, if this is targeted at customers that are so out of the modern loop that they have no credit card, no debit card, no on-line checking capability and no Paypal account tied to checking – do you think they have a PC to place an online order? And if they did go to the local library to use a computer, why would they go pay at the store only to have the item shipped – rather than simply buy it in the store and take it home immediately?
Clearly, once again, WalMart isn't trying to change its strategy. This is an effort to extend the old WalMart, in a bizarre way, online. The company keeps trying to keep people coming into the store.
Amazingly, despite the fact that there's a 50/50 (or better) chance that the CEO and a number of WalMart execs will have to be removed from their position – and could well go to jail for Foreign Corrupt Practice Act violations – most people are unmoved. The stock has barely flinched, and option traders see the stock remaining at 55 or higher out into September. Nobody seems to believe that all these hits WalMart is taking really matters.
A famous Titanic line is "and the band played on." This refers to the band continuing to play song after song, oblivious to disaster, until the ship suddenly broke, heaved up and dove into the ocean leaving only those in life boats to survive. As the Titanic was taking on water not the captain, the officers, the crew, the passengers or those listening over the airwaves wanted to accept that the Titanic would sink.
But it did.
So how long will you hold onto WalMart shares? WalMarts growth has been declining for a decade, and even went negative in 2009. Same store sales have declined for 2 years. Scandals are now commonplace. Online retailers such as Amazon and Overstock.com are stripping out all the retail growth, leaving traditionalists in decline. WalMart may be doing better than Sears, or Best Buy, but for how long?
WalMart has no ability to stop the economic shift from an industrial to an information age. It could choose to adapt, but instead its leaders have done the opposite. The retailers now succeeding are those eschewing almost all the WalMart practices in favor of using customer information to offer what people want (out of their much wider selection) when customers want it, often at surprisingly good prices. This is the current carrying emerging retailers to better profitability – and it is the current WalMart remains intent on fighting. Even as its executives face prison.
by Adam Hartung | Apr 4, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Web/Tech
Understand your core strength, and protect it. Sounds like the key to success, and a simple motto. It's the mantra of many a management guru. Only, far too often, it's the road to ruin.
The last week 3 big announcements showed just how damning the "strategy" of building on historical momentum can be.
Start with Research in Motion's revenue and earnings announcement. Both metrics fell short of expectations as Blackberry sales continue to slide. Not many investors were actually surprised about this, to be honest. iOS and Android products have been taking away share from RIM for several months, and the trend remains clear. And investors have paid a heavy price.
Source: BusinessInsider.com
There is no doubt the executives at RIM are very aware of this performance, and desperately would like the results to be different. RIM has known for months that iOS and Android handhelds have been taking share. The executives aren't unaware, nor stupid. But, they have not been able to change the internal momentum at RIM to the right issues.
The success formula at RIM has long been to "own" the enterprise marketplace with the Blackberry server products, offering easy to connect and secure network access for email, texting and enterprise applications. Handsets came along with the server and network sales. All the momentum at RIM has been to focus on the needs of IT departments; largely security and internal connectivity to legacy systems and email. And, honestly, even today there is probably nobody better at that than RIM.
But the market shifted. Individual user needs and productivity began to trump the legacy issues. People wanted to leave their laptops at home, and do everything with their smartphones. Apps took on a far more dominant role, as did ease of use. Because these were not part of the internal momentum at RIM the company ignored those issues, maintaining its focus on what it believed was the core strength, especially amongst its core customers.
Now RIM is toast. It's share will keep falling, until its handhelds become as popular as Palm devices. Perhaps there will be a market for its server products, but only via an acquisition at a very low price. Momentum to protect the core business killed RIM because its leaders failed to recognize a critical market shift.
Turn next to Yahoo's announcement that it is laying off 1 out of 7 employees, and that this is not likely to be the last round of cuts. Yahoo has become so irrelevant that analysts now depicct its "core" markets as "worthless."
Source: SiliconAlleyInsider.com
Yahoo was an internet pioneer. At one time in the 1990s it was estimated that over 90% of browser home pages were set to Yahoo! But the need for content aggregation largely disappeared as users learned to use search and social media to find what they wanted. Ad placement revenue for keywords transferred to the leading search provider (Google) and for display ads to the leading social media provider (Facebook.)
But Yahoo steadfastly worked to defend and extend its traditional business. It enhanced its homepage with a multitude of specialty pages, such as YahooFinance. But each of these has been outdone by specialist web sites, such as Marketwatch.com, that deliver everyhing Yahoo does only better, attracting more advertisers. Yahoo's momentum caused it to miss shifting with the internet market. Under CEO Bartz the company focused on operational improvements and efforts at enhancing its sales, while market shifts made its offerings less and less relevant.
Now, Yahoo is worth only the value of its outside stockholdings, and it appears the new CEO lacks any strategy for saving the enterprise. The company appears ready to split up, and become another internet artifact for Wikipedia. Largely because it kept doing more of what it knew how to do and was unable to overcome momentum to do anything new.
Last, but surely not least, was the Dell announced acquisition of Wyse.
Dell is synonymous with PC. But the growth has left PCs, and Dell missed the markets for mobile entertainment devices (like iPods or Zunes,) smartphones (like iPhone or Evo) and tablets (like iPads and Galaxy Tab.) Dell slavisly kept to its success formula of doing no product development, leaving that to vendors Microsoft and Intel, as it focused on hardware manufacturing and supply chain excellence. As the market shifted from the technologies it knew Dell kept trying to cut costs and product prices, hoping that somehow people would be dissuaded from changing technologies. Only it hasn't worked, and Dell's growth in sales and profits has evaporated.
Don't be confused. Buying Wyse has not changed Dell's "core." In Wyse Dell found another hardware manufacturer, only one that makes old-fashioned "dumb" terminals for large companies (interpret that as "enterprise,") mostly in health care. This is another acquisition, like Perot Systems, in an effort to copy the 1980s IBM brand extension into other products and services that are in like markets – a classic effort at extending the original Dell success formula with minimal changes.
Wyse is not a "cloud" company. Rackspace, Apple and Amazon provide cloud services, and Wyse is nothing like those two market leaders. Buying Wyse is Dell's effort to keep chasing HP for market share, and trying to pick up other pieces of revenue as it extends is hardware sales into more low-margin markets. The historical momentum has not changed, just been slightly redirected. By letting momentum guide its investments, Dell is buying another old technology company it hopes it can can extend its "supply chain" strenths into – and maybe find new revenues and higher margins. Not likely.
Over and again we see companies falter due to momentum. Why? Markets shift. Faster and more often than most business leaders want to admit. For years leaders have been told to understand core strengths, and protect them. But this approach fails when your core strength loses its value due to changes in technologies, user preferences, competition and markets. Then the only thing that can keep a company successful is to shift. Often very far from the core – and very fast.
Success actually requires overcoming internal momentum, built on the historical success formula, by putting resources into new solutions that fulfill emerging needs. Being agile, flexible and actually able to pivot into new markets creates success. Forget the past, and the momentum it generates. That can kill you.
by Adam Hartung | Mar 20, 2012 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
The Good – Apple
Apple's latest news to start paying a big dividend, and buying back shares, is a boon for investors. And it signals the company's future strength. Often dividends and share buybacks indicate a company has run out of growth projects, so it desires to manipulate the stock price as it slowly pays out the company's assets. But, in Apple's (rare) case the company is making so much profit from existing businesses that they are running out of places to invest it – thus returning to shareholders!
With a $100B cash hoard, Apple anticipates generating at least another $150B of free cash flow, over and above needs for ongoing operations and future growth projects, the next 3 years. With so much cash flowing the company is going to return money to investors so they can invest in other growth projects beyond those Apple is developing. Exactly what investors want!
I've called Apple the lowest risk, highest return stock for investors (the stock to own if you can only own one stock) for several years. And Apple has not disappointed. At $600/share the stock is up some 75% over the last year (from about $350,) and up 600% over the last 5 years (from about $100.) And now the company is going to return investors $10.60/year, currently 1.8% – or about 4 times your money market yield, or about 75% of what you'd get for a 10 year Treasury bond. Yet investors still have a tremendous growth in capital opportunity, because Apple is still priced at only 14x this year's projected earnings, and 12 times next year's projected earnings!
Apple keeps winning. It's leadership in smart phones continues, as the market converts from traditional cell phones to smart phones. And its lead in tablets remains secure as it sells 3 million units of the iPad 3 over the weekend. In every area, for several years, Apple has outperformed expectations as it leads the market shift away from traditional PCs and servers to mobile devices and using the "cloud."
The Bad – Google
Google was once THE company to emulate. At the end of 2008 its stock peaked at nearly $750/share, as everyone thought Google would accomplish nothing short of world domination (OK, a bit extreme) via its clear leadership in search and the way it dominated internet usage. But that is no longer the case, as Google is being eclipsed by upstarts such as Facebook and Groupon.
What happened? Even though it had a vaunted policy of allowing employees to spend 20% of their time on anything they desired, Google never capitalized on the great innovations created. Products like Google Wave and Google Powermeter were created, launched – and then subsequently left without sponsors, management attention, resources or even much interest. Just as recently happened with GoogleTV.
They floundered, despite identifying very good solutions for pretty impressive market needs, largely because management chose to spend almost all its attention, and resources, defending and extending its on-line ad sales created around search.
- YouTube is a big user environment, and one of the most popular sites on the web. But Google still hasn't really figured out how to generate revenue, or profit, from the site. Despite all the user activity it produces a meager $1.6B annual revenue – and nearly no profit.
- Android may have share rivaling Apple in smartphones, but it is nowhere in tablets and thus lags significantly in the ovarall market with share only about half iOS. Worse, Android smartphones are not nearly as profitable as iPhones, and now Google has made an enormous, multi-billion investment in Motorola to enter this business – and compete with its existing smartphone manufacturers (customers.) To date Android has been a product designed to defend Google's historical search business as people go mobile – and it has produced practically no revenue, or profit.
- Chrome browsers came on the scene and quickly grew share beyond Firefox. But, again, Google has not really developed the product to reach a dominant position. While it has good reviews, there has been no major effort to make it a profitable product. Possibly Google fears fighting IE will create a "money pit" like Bing has become for Microsoft in search?
- Chromebooks were a flop as Google failed to invest in robust solutions allowing users to link printers, MP3 players, etc. – or utilize a wide suite of thin cloud-based apps. Great idea, that works well, they are a potential alternative to PCs, and some tablet applications, but Google has not invested to make the product commercially viable.
- Google tried to buy GroupOn to enter the "local" ad marketplace, but backed out as the price accelerated. While investors may be happy Google didn't overpay, the company missed a significant opportunity as it then faltered on creating a desirable competitive product. Now Google is losing the race to capture local market ads that once went to newspapers.
While Google chose to innovate, but not invest in market development, it missed several market opportunities. And in the meantime Google allowed Facebook to sneak up and overtake its "domination" position.
Facebook has led people to switch from using the internet as a giant library, navigated by search, to a social medium where referrals, discussions and links are driving more behavior. The result has advertisers shifting their money toward where "eyeballs" are spending most of their time, and placing a big threat on Google's ability to maintain its historical growth.
Thus Google is now dumping billions into Google+, which is a very risky proposition. Late to market, and with no clear advantage, it is extremely unclear if Google+ has any hope of catching Facebook. Or even creating a platform with enough use to bring in a solid, and growing, advertiser base.
The result is that today, despite the innovation, the well-known (and often good) products, and even all the users to its sites Google has the most concentrated revenue base among large technology companies. 95% of its revenues still come from ad dollars – mostly search. And with that base under attack on all fronts, it's little wonder analysts and investors have become skeptical. Google WAS a great company – but it's decisions since 2008 to lock-in on defending and extending its "core" search business has made the company extremely vulnerable to market shifts. A bad thing in fast moving tech markets.
Google investors haven't fared well either. The company has never paid a dividend, and with its big investments (past and future planned) in search and handsets it won't for many years (if ever.) At $635/share the stock is still down over 15% from its 2008 high. Albeit the stock is up about 8.5% the last 12 months, it has been extremely volatile, and long term investors that bought 5 years ago, before the high, have made only about 7%/year (compounded.)
Google looks very much like a company that has fallen victim to its old success formula, and is far too late adjusting to market shifts. Worse, its investments appear to be a company spending huge sums to defend its historical business, taking on massive gladiator battles against Apple and Facebook – two companies far ahead in their markets and with enormous leads and war chests.
The Ugly – Dell
Go back to the 1990s and Dell looked like the company that could do no wrong. It went head-to-head with competitors to be the leader in selling, assembling and delivering WinTel (Windows + Intel) PCs. Michael Dell was a modern day hero to other leaders hoping to match the company's ability to focus on core markets, minimize investments in anything else, and be a world-class supply chain manager. Dell had no technology or market innovation, but it was the best at beating down cost – and lowering prices for customers. Dell clearly won the race to the bottom.
But the market for PCs matured. And Dell has found itself one of the last bachelors at the dance, with few prospects. Dell has no products in leading growth markets, like smartphones or tablets. Nor even other mobile products like music or video. And it has no software products, or technology innovation. Today, Dell is locked in gladiator battles with companies that can match its cost, and price, and make similarly slim (to nonexistent) margins in the generic business called PCs (like HP and Lenovo.)
Dell has announced it intends to challenge Apple with a tablet launch later in 2012. This is dependent upon Microsoft having Windows 8 ready to go by October, in time for the holidays. And dependent upon the hope that a swarm of developers will emerge to build the app base for things that already exist on the iPad and Android tablets. The advantage of this product is as yet undefined, so the market is yet undefined. The HOPE is that somehow, for some reason, there is a waiting world of people that have delayed purchase waiting on a Windows device – and will find the new Dell product superior to a $299 Apple 2 already available and with that 500,000 app store.
Clearly, Dell has waited way, way too long to deal with changing its business. As its PC business flattens (and soon shrinks) Dell still has no smartphone products, and is remarkably late to the tablet business. And it offers no clear advantage over whatever other products come from Windows 8 licensees. Dell is in a brutal world of ever lower prices, shrinking markets and devastating competition from far better innovators creating much higher, and growing, profits (Apple and Amazon.)
For investors, the ride from a fast moving boat in the rapids into the swamp of no growth – and soon the whirlpool of decline – has been dismal. Dell has never paid a dividend, has no free cash flow to start paying one now, and clearly no market growth from which to pay one in the future. Dell's shares, at $17, are about the same as a year ago, and down about 20% over the last 5 years.
Leaders in all businesses have a lot to learn from looking at the Good, Bad and Ugly. The company that has invested in innovation, and then invested in taking that innovation to market in order to meet emerging needs has done extremely well. By focusing on needs, rather than business optimization, Apple has been able to shift with markets – and even enhance the market shift to position itself for rapid, profitable growth.
Meanwhile, companies that have focused on their core markets and products are doing nowhere near as well. They have missed market shifts, and watched their fortunes decline precipitously. They were once very profitable, but despite intense focus on defending their historical strengths profits have struggled to grow as customers moved to alternative solutions. By spending insufficient time looking outward, at markets and shifts, and too much time inward, on defending and extending past successes, they now face future jeopardy.
by Adam Hartung | Feb 29, 2012 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Web/Tech
This week people are having their first look at Windows 8 via the Barcelona, Spain Mobile World Congress. This better be the most exciting Microsoft product since Windows was created, or Microsoft is going to fail.
Why? Because Microsoft made the fatal mistake of "focusing on its core" and "investing in what it knew" – time worn "best practices" that are proving disastrous!
Everyone knows that Microsoft has returned almost nothing to shareholders the last decade. Simultaneously, all the "partner" companies that were in the "PC" (the Windows + Intel, or Wintel, platform) "ecosystem" have done poorly. Look beyond Microsoft at returns to shareholders for Intel, Dell (which recently blew its earings) and Hewlett Packard (HP – which says it will need 5 years to turn around the company.) All have been forced to trim headcount and undertake deep cost cutting as revenues have stagnated since 2000, at times falling, and margins have been decimated.
This happened despite deep investments in their "core" PC business. In 2009 Microsoft spent almost $9B on PC R&D; over 14% of revenues. In the last few years Microsoft has launched Vista, Windows 7, Office 2009 and Office 2010 all in its effort to defend and extend PC sales. Likewise all the PC manufacturers have spent considerably on new, smaller, more powerful and even cheaper PC laptop and desktop models.
Unfortunately, these investments in their core expertise and markets have not excited users, nor created much growth.
On the other hand, Apple spent all of the last decade investing in what it didn't know much about in 2000. Rather than investing in its "core" Macintosh business, Apple invested in the trend toward mobility, being an early leader with 3 platforms – the iPod, iPhone and iPad. All product categories far removed from its "core" and what it new well. But, all targeted at the trend toward enhanced mobility.
Don't forget, Microsoft launched the Zune and the Windows CE phones in the last decade. But, because these were not "core" products in "core" markets Microsoft, and its partners, did not invest much in these markets. Microsoft even brought to market tablets, but leadership felt they were inferior to the PC, so investments were maintained in traditional PC products. The Zune, Windows phone and early Windows tablets all died because Microsoft and its partner companies stuck to investing their most important, and best known, PC business.
Where are we now? Sales of PC's are stagnating, and going to decline. While sales of mobile devices are skyrocketing.
Source: Business Insider 2/14/12
Today tablet sales are about 50% of the ~300M unit PC sales. But they are growing so fast they will catch up by 2014, and be larger by 2015. And, that depends on PC sales maintaining. Look around your next meeting, commuter flight or coffee shop experience and see how many tablets are being used compared to laptops. Think about that ratio a year ago, and then make your own assessment as to how many new PCs people will buy, versus tablets. Can you imagine the PC market actually shrinking? Like, say, the traditional cell phone business is doing?
By focusing on Windows, and specifically each generation leading to Windows 8, Microsoft took a crazy bet. It bet it could improve windows to keep the PC relevant, in the face of the evident trend toward mobility and ease of use. Instead of investing in new technologies, new products and new markets – things it didn't know much about – Microsoft chose to invest in what it new, and hoped it could control the trend.
People didn't want a PC to be mobile, they wanted mobility. Apple invested in the trend, making the MP3 player a winner with its iPod ease of use and iTunes market. Then it made smartphones, which were largely an email device, incredibly popular by innovating the app marketplace which gave people the mobility they really desired. Recognizing that people didn't really want a PC, they wanted mobility, Apple pioneered the tablet marketplace with its iPad and large app market. The result was an explosion in revenue by investing outside its core, in technologies and markets about which it initially knew nothing.
Apple would not have grown had it focused its investment on its "core" Mac business. In the last year alone Apple sold more iOS devices than it sold Macs in its entire 28 year history!
Source: Business Insider 2/17/2012
Today, the iPhone business itself is bigger than all of Microsoft. The iPad business is bigger than the desktop PC business, and if included in the larger market for personal computing represents 17% of the PC market. And, of course, Apple is now worth almost twice the value of Microsoft.
We hear, all the time, to invest in what we know. But it turns out that is NOT the best strategy. Trends develop, and markets shift. By constantly investing in what we know we become farther and farther removed from trends. In the end, like Microsoft, we make massive investments trying to defend and extend our past products when we would be much, much smarter to invest in new technologies and markets that are on the trend, even if we don't know much, if anything, about them.
The odds are now stacked against Microsoft. Apple has a huge lead in product sales, market position and apps. It's closest challenger is Google's Android, which is attracting many of the former Microsoft partners (such as LG's recent defection) as they strive to catch up. Company's such as Nokia are struggling as the technology leadership, and market position, has shifted away from Microsoft as mobility changed the market.
Microsoft's technology sales used to be based upon convincing IT departments to use its platform. But today users largely buy mobile devices with their own money, and eschew the recommendations of the IT department. Just look at how users drove the demise of Research In Motion's Blackberry. IT needs to provide users with tools they like, and use platforms which are easy and low-cost to leverage with big app bases. That favors Apple and Android, not Microsoft with its far, far too late entry.
You can be smarter than Microsoft. Don't take the crazy bet of always doubling down on what you know. Put your focus on the marketplace, and identify shifts. It's cheaper, and smarter, to bet early on trends than constantly trying to fight the trend by investing – usually at an ever higher amount – in what you know.
by Adam Hartung | Jan 30, 2012 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
For the last decade, Wal-Mart has been "dead money" in investor parlance. After a big jump between 1995 and 2000, the stock today is still worth less than it was in 2000. There has been volatility, which might have benefited some traders. But for most of the decade Wal-Mart's price has been lower. There has been excitement because recently the price has been catching up with where it was in 2002, even though there have been no real gains for long term investors.
Source: YahooFinance 1/30/12
What happened to Wal-Mart was the market shifted. For many years being the market leader with every day low pricing was a winning strategy. Wal-Mart was able to expand from town to town opening new stores, all pretty much alike, doing the same thing and making really good money.
Then competitors took aim at Wal-Mart, and found out they could beat the giant.
Eventually the number of towns that both needed, and justified, a new Wal-Mart (or Sam's Club) dried up. Wal-Mart reacted by expanding many stores, making them "bigger and better," even adding groceries to some. But that added only marginally to revenue, and even less marginally to profits.
And Wal-Mart tried exporting its stores internationally, but that flopped as local market competitors found ways to better attract local customers than Wal-Mart's success formula offered.
Other U.S. discounters, like Target and Kohl's, offered nicer stores with more varieties or classier merchandise – and often their pricing was not much higher, or even the same. And a new category of retailer, called "dollar stores" emerged that beat Wal-Mart's price on almost everything for the true price shopper. These 99 cent stores became really popular, and the fastest growing traditional retail concept in America. Simultaneously, big box retailers like Best Buy expanded their merchandise and footprint into more locations, dramatically increasing the competition against local Wal-Mart's stores.
But, even more dramatically, the whole retail market began shifting on-line.
Amazon, and its brethren, kept selling more and more products. And at prices even lower than Wal-Mart. And again, for price shoppers, the growth of eBay, Craigslist and vertical market sites made it possible for shoppers to find slightly used, or even new, products at prices lower than Wal-Mart, and shipped right into the customer's home. With each year, people found less need to buy at Wal-Mart as the on-line options exploded.
More recently, traditional price-focused retailers have been attacked by mobile devices. Firstly, there's the new Kindle Fire. In just one quarter it has gone from nowhere to tied as the #1 Android tablet
Source: BusinessInsider.com
The Kindle Fire is squarely targeted at growing retail sales for Amazon, making it easier than ever for customers to ignore the brick-and-mortar store in favor of on-line retailers.
On top of this, according to Pew Research 52% of in-store shoppers now use a mobile device to check price and availability on-line of products as they look in the store. Thus a customer can look at products in Wal-Mart, and while standing in the aisle look for that same product, or comparable, in another store on-line. They can decide they like the work boots at Wal-Mart, and even try them on for size. Then they can order from Zappos or another on-line retailer to have those boots shipped to their home at an even lower price, or better warranty, even before leaving the Wal-Mart store.
It's no wonder then that Wal-Mart has struggled to grow its revenues. Wal-Mart has been a victim of intense competition that found ways to attack its success formula effectively.
Then Wal-Mart implemented its "Shoot Yourself in the Head" strategy
What did Wal-Mart recently do? According to Reuters Wal-Mart decided to transfer its entire marketing department to work for merchandising. Marketing was moved from reporting to the CEO, to reporting into Sales. The objective was to put all the energy of marketing into trying to further defend the Wal-Mart business, and drive up same-store sales. In other words, to make sure marketing was fully focused on better executing the old, struggling success formula.
The marketing department at Wal-Mart does all the market research on customers, trends and advertising – traditional and on-line. Marketing is the organization charged with looking outside, learning and adapting the organization to any market shifts. In this role marketing is expected to identify new competitors, new market solutions that are working better, and adapt the organization to shifting market needs. It is responsible to be the eyes and ears of the organization, and then think up new solutions addressing these external inputs. That's why it needs to report to the CEO, so it can drive toward new solutions that can revitalize the organization and keep it growing with new market trends.
But now, it's been shot. Reporting to sales, marketing's role directed at driving same store sales is purely limiting the function to defending and extending the success formula that has produced lackluster results for 12 years. Marketing is no longer in a position to adapt Wal-Mart. Instead, it is tasked to find ways to do more, better, faster, cheaper under the leadership of the sales organization.
When faced with market shifts, winning companies adapt. Look at how skillfully Amazon has moved from book seller to general merchandise seller to offering a consumer electronic device.
Unfortunately, too many businesses react to market shifts like Wal-Mart. They hunker down, do more of the same and re-organize to "increase focus" on the traditional business as results suffer. Instead of adapting the company hopes more focus on execution will somehow improve results.
Not likely. Expect results to go the other direction. There might be a short-term improvement from the massive influx of resource, but long term the trends are taking customers to new solutions. Regardless of the industry leader's size. Don't expect Wal-Mart to be a long-term winner. Better to invest in competitors taking advantage of trends.
by Adam Hartung | Jan 22, 2012 | Defend & Extend, In the Rapids, Innovation, Leadership, Lock-in, Transparency, Web/Tech
Turning over a new year inevitably leads to selections for "CEO of the Year." Investor Business Daily selected Larry Page of Google 3 weeks ago, and last week Marketwatch.com selected Jeff Bezos of Amazon. Comparing the two is worthwhile, because there is almost nothing similar about what the two have done – and one is almost sure to dramatically outperform the other.
Focusing on the Future
What both share is a willingness to focus their companies on the future. Both have introduced major new products, targeted at developing new markets and entirely new revenue streams for their companies. Both have significantly sacrificed short-term profits seeking long-term strategic positioning for sustainable, higher future returns. Both have, and continue to, spend vast sums of money in search of competitive advantage for their organizations.
And both have seen their stock value clobbered. In 2011 Amazon rose from $150/share low to almost $250 before collapsing at year's end to about $175 – actually lower than it started the calendar year. Google's stock dropped from $625/share to below $475 before recovering all the way to $670 – only to crater all the way to $585 last week. Clearly the analysts awarding these CEOs were looking way beyond short-term investor returns when making their selections. So it is more important than ever we understand what both have done, and are planning to do in the future, if we are to support either, or both, as award winners. Or buy their stock.
Google participates in great growth markets
The good news for Google is its participation in high growth markets. Search ads continue growing, supplying the bulk of revenues and profits for the company. Its Android product gives Google great position in mobile devices, and supporting Chrome applications help clients move from traditional architectures and applications to cloud-based solutions at lower cost and frequently higher user satisfaction. Additionally, Google is growing internet display ad sales, a fast growing market, by increasing participation in social networks.
Because Google is in high growth markets, its revenues keep growing healthily. But CEO Page's "focus" leadership has led to the killing of several products, retrenching from several markets, and remarkably huge bets in 2 markets where Google's revenues and profits lag dramatically – mobile devices and search.
Because Android produces no revenue Google bought near-bankrupt Motorola to enter the hardware and applications business becoming similar to Apple – a big bet using some old technology against what is the #1 technology company on the planet. Whether this will be a market share winner for Google, and whether it will make or lose money, is far from certain.
Simultaneously, the Google+ launch is an attempt to take on the King Kong of social – Facebook – which has 800million users and remarkable success. The Google+ effort has been (and will continue to be) very expensive and far from convincing. Its product efforts have even angered some people as Google tried steering social networkers rather heavy-handidly toward Google products – as it did with "Search plus Your World" recently.
Mr. Page has positioned Google as a gladiator in some serious "battles to the death" that are investment intensive. Google must keep fighting the wounded, hurting and desperate Microsoft in search against Bing+Yahoo. While Google is the clear winner, desperate but well funded competitors are known to behave suicidally, and Google will find the competition intensive. Meanwhile, its offerings in mobile and social are not unique. Google is going toe-to-toe with Apple and Facebook with products which show no great superiority. And the market leaders are wildly profitable while continuously introducing new innovations. It will be tough fighting in these markets, consuming lots of resources.
Entering 3 gladiator battles simultaneously is ambitious, to say the least. Whether Google can afford the cost, and can win, is debatable. As a result it only takes a small miss, comparing actual results to analyst expectations, for investors to run – as they did last week.
Amazon redefines competition in its markets
CEO Bezos' leadership at Amazon is very different. Rather than gladiator wars, Amazon brings out products that are very different and avoids head-to-head competition. Amazon expands new markets by meeting under- or unserved needs with products that change the way customers behave – and keeps competitors from attacking Amazon head-on:
- Amazon moved from simply selling books to selling a vast array of products on the web. It changed retail buying not by competing directly with traditional retailers, but by offering better (and different) on-line solutions which traditional retailers ignored or adopted far too slowly. Amazon was very early to offer web solutions for independent retailers to use the Amazon site, and was very early to offer a mobile interface making shopping from smartphones fast and easy. Because it wasn't trying to defend and extend a traditional brick-and-mortar retail model, like Wal-Mart, Amazon has redefined retail and dramatically expanded shopping on-line.
- Amazon changed the book market with Kindle. It utilized new technology to do what publishers, locked into traditional mindsets (and business models) would not do. As the print market struggled, Amazon moved fast to take the lead in digital publishing and media sales, something nobody else was doing, producing fast revenue growth with higher margins.
- When retailers were loath to adopt tablets as a primary interface for shoppers, Amazon brought out Kindle Fire. Cleverly the Kindle Fire is not directly positioned against the king of all tablets – iPad – but rather as a product that does less, but does things like published media and retail very well — and at a significantly lower price. It brings the new user on-line fast, if they've been an Amazon customer, and makes life simple and easy for them. Perhaps even easier than the famously easy Apple products.
In all markets Amazon moves early and deftly to fulfill unmet needs at a very good price. And then it captures more and more customers as the solution becomes more powerful. Amazon finds ways to compete with giants, but not head-on, and thus rapidly grow revenues and market position while positioning itself as the long term winner. Amazon has destroyed all the big booksellers – with the exception of Barnes & Noble which doesn't look too great – and one can only wonder what its impact in 5 years will be on traditional retailers like Kohl's, Penney's and even Wal-Mart. Amazon doesn't have to "win" a battle with Apple's iPad to have a wildly successful, and profitable, Kindle offering.
The successful CEO's role is different than many expect
A recent RHR International poll of 83 mid-tier company CEOs (reported at Business Insider) discovered that while most felt prepared for the job, most simultaneously discovered the requirements were not what they expected. In the past we used to think of a CEO as a steward, someone to be very careful with investor money. And someone expected to know the business' core strengths, then be very selective to constantly reinforce those strengths without venturing into unknown businesses.
But today markets shift quickly. Technology and global competition means all businesses are subject to market changes, with big moves in pricing, costs and customer expectations, very fast. Caretaker CEOs are being crushed – look at Kodak, Hostess and Sears. Successful CEOs have to guide their businesses away from investing in money-losing businesses, even if they are part of the company's history, and toward rapidly growing opportunities created by being part of the shift. Disruptors are now leading the success curve, while followers are often sucking up a lot of profit-killing dust.
Amazon bears similarities to the Apple of a decade ago. Introducing new products that are very different, and changing markets. It is competing against traditional giants, but with very untraditional solutions. It finds unmet needs, and fills them in unique ways to capture new customers – and creates market shifts.
Google, on the other hand, looks a lot like the lumbering Microsoft. It has a near monopoly in a growing market, but its investments in new markets come late, and don't offer a lot of innovation. Google's products end up competing directly, somewhat like xBox did with other game consoles, in very, very expensive – usually money-losing – competition that can go on for years. Google looks like a company trying to use money rather than innovation to topple an existing market leader, and killing a lot of good product ideas to keep pouring money into markets where it is late and not terribly creative.
Which CEO do you think will be the winner in 2015? Into which company are you prepared to invest? Both are in high growth markets, but they are being led very, very differently. And their strategies could not be more different. Which one you choose to own – as a product customer or investor – will have significant consequences for you (and them) in 3 years.
It's worth taking the time to decide which you think is the right leadership today. And be sure you know what leadership principles you are adopting, and following in your organization.
by Adam Hartung | Jan 14, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership
A lot of excitement was generated this week when Mitt Romney said the words "I like to fire people." I'm sure he wishes he could rephrase his comment, as he easily could have made his point about changing service providers without those words. Nonetheless, the aftermath turned to a discussion of job losses, and why Bain Capital has eliminated jobs while simultaneously creating some.
Surprisingly, a number of economists suddenly started saying that firms like Bain Capital are justified in their job eliminations because they are merely implementing "creative destruction." Although the leap is not obvious, the argument goes that some businesses are made inefficient and unprofitable by new technologies or business processes – so buyers (like Bain Capital) of hurting businesses often cannot "fix" the situation and have no choice but to close them. Bain Capital inevitably will be stuck with losers it has no choice but to shutter – eliminating the jobs with the company.
Unfortunately, that argument is simply not true. The only thing that allows "creative destruction" to kill a company is a lack of good leadership. Any company can find a growth path if its leaders are willing to learn from trends and steer in the growing direction.
Start by looking at recent events surrounding Kodak and Hostess, both quickly heading for Chapter 11. Neither needed to fail. Management made the decisions which steered them into the whirlpool of failure.
Kodak watched the market for amateur photography shrink for 30 years – drying up profits for film and paper. Yet, management consistently – quarter after quarter and year after year – made the decision to try defending and extending the historical market rather than move the company into faster growing, more profitable opportunities. Kodak even invented much of the technology for digital photography, but chose to license it to others rather than develop the market because Kodak feared cannibalizing existing sales – as they became increasingly at risk!
Hostess is making a return trip to Chapter 11 this decade. But it's not like the trend away from highly processed, shelf stable white bread and sugary pastry snacks is anything new. While 1960s parents and youth might have enjoyed the vitamin enriched Wonder Bread "helping grow bodies 12 ways" the trend toward fresher, and healthier, staples has been happening for 40 years. In the 1980s when the company was known as Continental Baking profits were problematic, and it was clear that to keep what was then the nation's largest truck fleet profitable required new products as consumers were shifting to fresher "bake off" goods in the grocery store as well as brands promising more fiber and taste. But despite these obvious trends, leadership continued trying to defend and extend the business rather than shift it.
These stories weren't "creative destruction." They were simply bad leadership. Decisions were made to do more of the same, when clearly something desperately different was needed! At the Harvard Business School Working Knowledge web site famed strategiest Michael Porter states "the granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results." Failure happened because the leaders were so internally focused they chose to ignore external inputs, trends, which would have driven better decisions!
In the 1980s Singer realized that the sewing machine market was destined to decline as women left homemaking for paying jobs, and as textile industry advances made purchased clothing cheaper than self-made. Over a few years the company transitioned out of the traditional, but dying, business and became a very successful defense industry contractor! Rather than letting itself be "creatively destroyed" Singer identified the market trends and moved from decline to growth!
Similarly, IBM almost failed as the computer market shifted from mainframes to PCs, but before all was lost (including jobs as well as investor value) leaders changed company focus from hardware to services and vertical market solutions allowing IBM to grow and thrive.
The failure of Digital Equipment (DEC) at the same time was not "creative destruction" but company leadership unwillingness to shift from declining mini-computer and high priced workstation sales into new businesses.
More recently, over the last decade a nearly dead Apple resurrected itself by tying into the large trend for mobility, rather than focusing on its niche Mac product sales. Company leaders took the company into consumer electronics (ipod, ipod touch,) tablet computing and cloud-based solutions (iPad) and mobile telephony with digital apps (iPhone.) Apple had no legacy in any of these markets, but by linking to trends rather than fixating on past businesses "creative destruction" was avoided.
There are many businesses today that are in trouble because leaders simply won't pay attention to trends. Avon, Sears and Barnes & Noble are three companies with limited futures simply because leaders seem unable to pull their heads out of the internal strategic planning sand and look at environmental trends in order to shift.
My favorite target is, of course, Microsoft. Nobody thinks we will be carrying laptop PCs around in 5 years. Yet, Microsoft has been unable to recognize the trend away from PCs and do anything effective. Its efforts in music (Zune) and mobile handsets have been indifferent, insufficiently supported and mostly dropped. Mr. Ballmer continues to speak about a long future for PC sales even as Q4 volume dropped 1.4% according to IDC and Gartner. Even though everyone knows this trend is due to limited PC innovation and rapidly accelerating mobile-based solutions, Microsoft blamed the problem on, of all things, floods in Thailand that restricted manufacturing output. Really.
We'll learn soon enough just how many jobs Bain Capital created, and killed. But those lost were not due to "creative destruction." They were due to leadership decisions to discontinue the business rather than invest in trends and transitioning to new markets. Creative destruction is an easy excuse to avoid blaming leaders for failures caused by their unwillingness to recognize trends and take actions to invest in them which will create winning businesses.
by Adam Hartung | Jan 4, 2012 | Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
The S&P 500 ended 2011 almost exactly where it started. If ever there was a year when being invested in the right companies, and selling the dogs, mattered for higher portfolio returns it was 2011. The good news is that many of the 2011 dogs were easy to spot, and easy to sell before ruining your portfolio.
There were many bad performers. However, there was a common theme. Most simply did not adjust to market shifts. Environmental changes, from technology to regulations, made them less competitive thus producing declining returns as newer competitors benefitted. Additionally, these companies chose – often over the course of several years – to eschew innovation and new product launches. They chose to keep investing in efforts to defend and extend historical, but troubled, businesses rather than innovate toward a more successful future.
Looking at the trends that put these companies into trouble we can recognize the need to continue avoiding these companies, even though many analysts are starting to say they may be "value stocks." Instead we can invest in the trends by buying companies likely to grow and increase portfolio returns in 2012.
Avoid Kodak – Buy Apple or Google
Few companies are as iconic as Eastman Kodak, inventor of amateur photography and creator of the star product in the hit 1973 Paul Simon song "Kodachrome." However, it was clear in the late 1980s that digital cameras were going to change photography. Kodak itself was one of the primary inventors of the core technology, but licensed it to others in order to generate cash it invested trying to defend and extend photographic film and paper sales. In my 2008 book "Create Marketplace Disruption" I highlighted Kodak as a company so locked-in to film sales that it was unwilling to even consider moving into new markets.
In 2011 EK lost almost all its value, falling from $3.85 share to about 60 cents. The whole company is now worth only $175M as it rapidly moves toward NYSE delisting and bankruptcy, and complete failure. The trend that doomed EK has been 2 decades in the making, yet like an ocean freighter collision management simply let momentum kill the company. The long slide has gone on for years, and will not reverse. If you want to invest in photography your best plays are smart phone suppliers Apple, and Google for not only the Android software but the Chrome apps that are being used to photoshop images right inside browser windows.
Avoid Sears – Buy Amazon
When hedge fund manager Ed Lampert took over KMart by buying their bonds in bankruptcy, then used that platform to buy Sears back in 2006 the Wall Street folks hailed him as a genius. "Mad Money" Jim Cramer said "Fast Eddie" Lampert was his former college roommate, and that was all he needed to recommend buying the stock. On the strength of such spurrious recommendations, Sears Holdings initially did quite well.
However, I was quoted in The Chicago Tribune the day of the Sears acquisition announcement saying the merged company was doomed – because the trends were clear. Wal-Mart was in pitched battle with Target to "own" the discount market which had crushed KMart. Sears was pinched by them on the low end, and by better operators of vertically focused companies such as Kohl's for clothing, Best Buy for appliances and Home Depot for repair and landscape tools. Sears was swimming against the trends, and Ed Lampert had no plans to re-invent the company. What lay ahead was cost-cutting and store closings which would kill both brands in a market already overly saturated with traditional brick-and-mortar retailers as long-term more sales moved on-line.
Now Sears Holdings has gone full circle. In the last 12 months the stock has dropped from $95 to $31.50 – a decline of more than two thirds (a loss of over $7B in investor value.) Sears and KMart have no future, nor do the Craftsman or Kenmore brands. After Christmas management announced a new round of store closings as same stores sales continues its never-ending slide, and finally most industry analysts are saying Sears has nowhere to go but down.
The retail future belongs to Amazon.com – which is where you should invest if you want to grow portfolio value in 2012. Look to Kindle Fire and other tablets to accelerate the retail movement on-line, while out-of-date Sears becomes even less relevant and of lower value.
Stay out of Nokia and Research in Motion – Buy Apple
On February 15 I wrote that Nokia had made a horrible CEO selection, and was a stock to avoid. Nokia invesors lost about $18B of value in 2001 as the stock lost 50% of its market cap in 2011 (62% peak to trough.) May 20 I pounded the table to sell RIMM, which lost nearly 80% of its investor value in 2011 – nearly $60B!
Both companies simply missed the market shift in smart phones. Nokia did its best Motorola imitation, which missed the shift from analog to digital cell phones – and then completely missed the shift to smart phones – driving the company to near bankruptcy and acquisition by Google for its patent library. With no game at all, the Nokia Board hired a former Microsoft executive to arrange a shotgun wedding for launching a new platform – 3 years too late. Now Apple and Android have over 400,000 apps each, growing weekly, while Microsoft is struggling with 50k apps, no compelling reason to switch and struggles to build a developer network. Nokia's road to oblivion appears clear.
RIM was first to the smartphone market, and had it locked up for years. Unfortunately, top management and many investors felt that the huge installed base of corporate accounts, using Blackberry secure servers, would protect the company from competition. Now the New York Times has reported RIM leadership as one of the worst in 2011, because an installed base is no longer the competitive entry barrier Michael Porter waxed about in the early 1980s. Corporations are following their users to better productivty by moving fast as possible to the iOS and Android worlds.
RIM's doomed effort to launch an ill-devised, weakly performing tablet against the Apple iPod juggernaut only served to embarrass the company, at great expense. At this point, there's little reason to think RIM will do any better than Palm did when the technology shifted, and anyone holding RIMM will likely end up with nothing (as did holders of PALM.) If you want to be in mobile your best pick is market leading and profitably growing Apple, with a second position in Google as it builds up ancillary products like Chrome to leverage its growing Android base.
Avoid HP and Sony – Buy Apple
Speaking of Palm, to paraphrase Senator Dirkson "that billion here, a billion there" that added up to some real money lost for HP. Mark Hurd consolidated HP into a company focused on building volume largely in other people's technology – otherwise known as PCs. As printing declines, and people shift to tablets and cloud apps, HP has less and less ability to build its profit base. The trends were all going in the wrong direction as market shifts make HP less and less relevant to consumer and corporate customers.
Selecting Mr. Apotheker was a disastrous choice, and I called for investors to dump the stock when he was hired in January. An ERP executive, he was firmly planted in the technology of the 1990s. With a diminished R&D, and an atrophied new product development organization HP is nothing like the organization of its founders, and the newest CEO has offered no clear path for finding the trends and re-igniting growth at HP. If you want to grow in what we used to call the PC business you need to be in tablets now – and that gets you back, once again, to Apple first, and Google second.
Which opens the door for discussing what in the 1960s through 1980s was the most innovative of all consumer electronics companies, Sony. But when Mr. Morita was replaced by an MBA CEO that began focusing the company on the bottom line, instead of new gadgets, the pipeline rapidly dried. Acquisitions, such as a music label, replaced R&D and new product development. Allegiance to protecting the CD and DVD business, and the players Sony made – along with traditional TVs and PCs – meant Sony missed the wave to MP3, to mobile digital entertainment devices, to DVRs and the emerging market for interactive TV. What was once a leader is now a follower.
As a result Sony has lost $4.5B in investor value the last 3 year, and in 2011 lost half its value falling from $37 to $18/share. As Apple emerges as the top consumer electronics technology leader and profit creator, closely chased by Google, it is unlikely Sony will ever recover that lost value.
Buying Apple, Amazon, Google and Netflix
This column has already made the case for Apple. It is almost incomprehensible how far a lead Apple has over its competition, causing investors to fear for its revenue growth prospects. As a result, the companies P/E multiple is a remarkably low single-digit number, even though its growth is well into the double digits! But its existing position in growth markets, technology leadership and well oiled new product development capability nearly assures continued profitbale growth for at least 5 years. Even though the stock, which I recommended as my number 1 buy in January, 2011, has risen some 30% maintaining a big position is remains an investors best portfolio enhancer.
Amazon was a wild ride in 2011, and today is worth almost the same as it was one year ago. Given that the company is now larger, has a more dominant position in publishing and is the world leader on the trend to on-line retail it is a very good stock to own. The choice to think long-term and build its user links through sales of Kindle Fire at cost has limited short-term profits, but every action Amazon has taken to grow has paid off handsomely because they accelerate the natural trends and position Amazon as the leader. Remaining with the trends, and the growth, offers the potential for big payoff this year and for years to come.
Google remains #2 in most markets, but remains aligned with the trends. It was disappointing that the company cancelled so many great products in 2011 – such as Gear and Wave. And it faces stiff competition in its historical ad markets from the shift toward social media and Facebook's emergence. However, Google is the best positioned company to displace Microsoft on all those tablets out there with its Chrome apps, and it still is a competitor with the potential for long-term value creation. It's just hard to be as excited about Google as Apple and Amazon.
Netflix started 2011 great, but then stumbled. Starting the year at $190, Netflix rose to $305 before falling to $75. Investors have seen an 80% decline from the peak, and a 60% decline from beginning of the year. But this was notably not because company revenues or profits fell, because they didn't. Rather concerns about price changes and long-term competition caused the stock to drop. And that's why I remain bullish for owning Netflix in 2012.
Growth can hide a multitude of sins, as I pointed out when making the case to buy in October. And Netflix has done a spectacular job of preparing itself to transition from physical DVDs to video downloads. The "game" is not over, and there is a lot of content warring left. But Netflix was first, and has the largest user base. Techcrunch recently reported on a Citi survey that found Netflix still has nearly twice the viewership of #2 Hulu (27% vs. 15%.)
Those who worry about Amazon, Google or Apple taking the Netflix position forget that those companies are making huge bets to compete in other markets and have shown less interest in making the big investments to compete on the content that is critical in the download market. AOL and Yahoo are also bound up trying to define new strategies, and look unlikely to ever be the content companies they once were.
For those who are banking on competitive war with Comcast and other cable companies to kill off Netflix look no further than how they define themselves (cable operators,) and their horrific customer relationship scores to realize that they are more interested in trying to preserve their old business than rapidly enter a new one. Perhaps one will try to buy Netflix, but they don't have the management teams or organization to compete effectively.
The fact is that Netflix still has the best strategy for its market, which is still growing exponentially, has the best pricing and is rapidly growing its content to remain in the top position. That makes it a likely pick for "turnaround of the year" by end of 2012 (at least in the tech/media industry) – even as investments rise over the next 12 months.
