Why Google Glass, Amazon Fire Phone and the Segway Failed

Why Google Glass, Amazon Fire Phone and the Segway Failed

Despite huge fanfare at launch, after a few brief months Google Glass is no longer on the market.  The Amazon Fire Phone was also launched to great hype, yet sales flopped and the company recently took a $170M write off on inventory.

Fortune mercilessly blamed Fire Phone’s failure on CEO Jeff Bezos.  The magazine blamed him for micromanaging the design while overspending on development, manufacturing and marketing.  To Fortune the product was fatally flawed, and had no chance of success according to the article.

Similarly, the New York Times blasted Google co-founder and company leader Sergie Brin for the failure of Glass. He was held responsible for over-exposing the product at launch while not listening to his own design team.


Both these articles make the common mistake of blaming failed new products on (1) the product itself, and (2) some high level leader that was a complete dunce.  In these stories, like many others of failed products, a leader that had demonstrated keen insight, and was credited with brilliant work and decision-making, simply “went stupid” and blew it.  Really?

Unfortunately there are a lot of new products that fail.  Such simplistic explanations do not help business leaders avoid a future product flop.   But there are common lessons to these stories from which innovators, and marketers, can learn in order to do better in the future.  Especially when the new products are marketplace disrupters; or as they are often called, “game changers.”


Do you remember Segway?  The two wheeled transportation device came on the market with incredible fanfare in 2002. It was heralded as a game changer in how we all would mobilize.  Founders predicted sales would explode to 10,000 units per week, and the company would reach $1B in sales faster than ever in history.  But that didn’t happen.  Instead the company sold less than 10,000 units in its first 2 years,  and less than 24,000 units in its first 4 years.  What was initially a “really, really cool product” ended up a dud.

There were a lot of companies that experimented with Segways.  The U.S. Postal Service tested Segways for letter carriers. Police tested using them in Chicago, Philadelphia and D.C., gas companies tested them for Pennsylvania meter readers, and Chicago’s fire department tested them for paramedics in congested city center.  But none of these led to major sales. Segway became relegated to niche (like urban sightseeing) and absurd (like Segway polo) uses.

Segway tried to be a general purpose product. But no disruptive product ever succeeds with that sort of marketing.  As famed innovation guru Clayton Christensen tells everyone, when you launch a new product you have to find a set of unmet needs, and position the new product to fulfill that unmet need better than anything else.  You must have a very clear focus on the product’s initial use, and work extremely hard to make sure the product does the necessary job brilliantly to fulfill the unmet need.

Nobody inherently needed a Segway.  Everyone was getting around by foot, bicycle, motorcycle and car just fine.  Segway failed because it did not focus on any one application, and develop that market as it enhanced and improved the product.  Selling 100 Segways to 20 different uses was an inherently bad decision. What Segway needed to do was sell 100 units to a single, or at most 2, applications.

Segway leadership should have studied the needs deeply, and focused all aspects of the product, distribution, promotion, training, communications and pricing for that single (or 2) markets.  By winning over users in the initial market Segway could have made those initial users very loyal, outspoken customers who would recommend the product again and again – even at a $4,000 price.

Segway should have pioneered an initial application market that could grow.  Only after that could Segway turn to a second market.  The first market could have been using Segway as a golfer’s cart, or as a walking assist for the elderly/infirm, or as a transport device for meter readers.  If Segway had really focused on one initial market, developed for those needs, and won that market it would have started a step-wise program toward more applications and success. By thinking the general market would figure out how to use its product, and someone else would develop applications for specific market needs, Segway’s leaders missed the opportunity to truly disrupt one market and start the path toward wider success.

amazon-fire-phoneThe Fire Phone had a great opportunity to grow which it missed.  The Fire Phone had several features making it great for on-line shopping.  But the launch team did not focus, focus, focus on this application.  They did not keep developing apps, databases and ways of using the product for retailing so that avid shoppers found the Fire Phone superior for their needs.  Instead the Fire Phone was launched as a mass-market device. Its retail attributes were largely lost in comparisons with other general purpose smartphones.

People already had Apple iPhones, Samsung Galaxy phones and Google Nexus phones.  Simultaneously, Microsoft was pushing for new customers to use Nokia and HTC Windows phones.  There were plenty of smartphones on the market. Another smartphone wasn’t needed – unless it fulfilled the unmet needs of some select market so well that those specific users would say “if you do …. and you need…. then you MUST have a FirePhone.”  By not focusing like a laser on some specific application – some specific set of unmet needs – the “cool” features of the Fire Phone simply weren’t very valuable and the product was easy for people to pass by.  Which almost everyone did, waiting for the iPhone 6 launch.

This was the same problem launching Google Glass.  Glass really caught the imagination of many tech reviewers.  Everyone I knew who put on Glass said it was really cool.  But there wasn’t any one thing Glass did so well that large numbers of folks said “I have to have Glass.”  There wasn’t any need that Glass fulfilled so well that a segment bought Glass, used it and became religious about wearing Glass all the time.  And Google didn’t improve the product in specific ways for a single market application so that users from that market would be attracted to buy Glass.  In the end, by trying to be a “cool tool” for everyone Glass ended up being something nobody really needed.  Exactly like Segway.

win10_holoLensMicrosoft recently launched its Hololens.  Again, a pretty cool gadget.  But, exactly what is the target market for Hololens?  If Microsoft proceeds down the road of “a cool tool that will redefine computing,” Hololens will likely end up with the same fate as Glass, Segway and Fire Phone.  Hololens marketing and development teams have to find the ONE application (maybe 2) that will drive initial sales, cater to that application with enhancements and improvements to meet those specific needs, and create an initial loyal user base.  Only after that can Hololens build future applications and markets to grow sales (perhaps explosively) and push Microsoft into a market leading position.

All companies have opportunities to innovate and disrupt their markets.  Most fail at this.  Most innovations are thrown at customers hoping they will buy, and then simply dropped when sales don’t meet expectations.  Most leaders forget that customers already have a way of getting their jobs done, so they aren’t running around asking for a new innovation.  For an innovation to succeed launchers must identify the unmet needs of an application, and then dedicate their innovation to meeting those unmet needs.  By building a base of customers (one at a time) upon which to grow the innovation’s sales you can position both the new product and the company as market leaders.


Twelve Days of Christmas for Investors

Twelve Days of Christmas for Investors

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:

  1. Stop waxing eloquently about what you did last year or quarter.  Yesterday has come and gone.  Tell me about the future.
  2. 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?
  3. 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!)
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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?
  9. 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.
  10. 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.
  11. 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.
  12. 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!

Why Apple Pay Is Likely to Succeed – Lessons from Paypal

Why Apple Pay Is Likely to Succeed – Lessons from Paypal

Will the new Apple Pay product, revealed on iPhone 6 devices, succeed?  There have been many entries into the digital mobile payments business, such as Google Wallet, Softcard (which had the unfortunate initial name of ISIS,) Square and Paypal.  But so far, nobody has really cracked the market as Americans keep using credit cards, cash and checks.

But that looks like it might change, and Apple has a pretty good chance of making Apple Pay a success.

First, a look at some critical market changes.  For decades we all thought credit card purchases were secure.  But that changed in 2013, and picked up steam in 2014.  With regularity we’ve heard about customer credit card data breaches at various retailers and restaurants. Smaller retailers like Shaw’s, Star Markets and Jewel caused some mild concern.  But when top tier retailers like Target and Home Depot revealed security problems, across millions of accounts, people really started to notice.  For the first time, some people are thinking an alternative might be a good idea, and they are considering a change.

In other words, there is now an underserved market.  For a long time people were very happy using credit cards.  But now, they aren’t as happy.  There are people, still a minority, who are actively looking for an alternative to cash and credit cards.  And those people now have a need that is not fully met.  That means the market receptivity for a mobile payment product has changed.

Second let’s look at how Paypal became such a huge success fulfilling an underserved market.  When people first began on-line buying transactions were almost wholly credit cards.  But some customers lacked the ability to use credit cards.  These folks had an underserved need, because they wanted to buy on-line but had no payment method (mailing checks or cash was risky, and COD shipments were costly and not often supported by on-line vendors.)  Paypal jumped into that underserved market.

Quickly Paypal tied itself to on-line vendors, asking them to support their product.  They went less to people who were underserved, and mostly to the infrastructure which needed to support the product.  By encouraging the on-line retailers they could expand sales with Paypal adoption, Paypal gathered more and more sites.  The 2002 acquisition by eBay was a boon, as it truly legitimized Paypal in minds of consumers and smaller on-line retailers.

After filling the underserved market, Paypal expanded as a real competitor for credit cards by adding people who simply preferred another option.  Today Paypal accounts for $1 of every $6 spent on-line, a dramatic statistic.  There are 153million Paypal digital wallets, and Paypal processes $203B of payments annually.  Paypal supports 26 currencies, is in 203 markets, has 15,000 financial institution partners – all creating growth last year of 19%.  A truly outstanding success story.

Back to traditional retail.  As mentioned earlier, there is an underserved market for people who don’t want to use cash, checks or credit cards.  They seek a solution.  But just as Paypal had to obtain the on-line retailer backing to acquire the end-use customer, mobile payment company success relies on getting retailers to say they take that company’s digital mobile payment product.


Here is where Apple has created an advantage.  Few end-use customers are terribly aware of retail beacons, the technology which has small (sometimes very small) devices placed in a store, fast food outlet, stadium or other environment which sends out signals to talk to smartphones which are in nearby proximity.  These beacons are an “inside retail” product that most consumer don’t care about, just like they don’t really care about the shelving systems or price tag holders in the store.

Launched with iOS 7, Apple’s iBeacon has become the leader in this “recognize and push” technology.  Since Apple installed Beacons in its own stores in December, 2013 tens of thousands of iBeacons have been installed in retailers and other venues.  Macy’s alone installed 4,000 in 2014.  Increasingly, iBeacons are being used by retailers in conjunction with consumer goods manufacturers to identify who is shopping, what they are buying, and assist them with product information, coupons and other purchase incentives.

Thus, over the last year Apple has successfully been courting the retailers, who are the infrastructure for mobile payments.  Now, as the underserved payment issue comes to market it is natural for retailers to turn to the company with which they’ve been working on their “infrastructure” products.

Apple has an additional great benefit because it has by far the largest installed base of smartphones, and its products are very consistent.  Even though Android is a huge market, and outsells iOS, the platform is not consistent because Android on Samsung is not like Android on Amazon’s Fire, for example. So when a retailer reaches out for the alternative to credit cards, Apple can deliver the largest number of users. Couple that with the internal iBeacon relationship, and Apple is really well positioned to be the first company major retailers and restaurants turn to for a solution – as we’ve already seen with Apple Pay’s acceptance by Macy’s, Bloomingdales, Duane Reed, McDonald’s Staples, Walgreen’s, Whole Foods and others.

This does not guarantee Apple Pay will be the success of Paypal.  The market is fledgling. Whether the need is strong or depth of being underserved is marked is unknown. How consumers will respond to credit card use and mobile payments long-term is impossible to gauge. How competitors will react is wildly unpredictable.

But, Apple is very well positioned to win with Apple Pay.  It is being introduced at a good time when people are feeling their needs are underserved.  The infrastructure is primed to support the product, and there is a large installed base of users who like Apple’s mobile products.  The pieces are in place for Apple to disrupt how we pay for things, and possibly create another very, very large market.  And Apple’s leadership has a history of successfully managing disruptive product launches, as we’ve seen in music (iPod,) mobile phones (iPhone) and personal technology tools (iPad.)


Wrong assumptions create lousy outcomes – Sony, McDonald’s, Radio Shack, Sears

Sony was once the leader in consumer electronics.  A brand powerhouse who’s products commanded a premium price and were in every home. Trinitron color TVs, Walkman and Discman players, Vaio PCs.  But Sony has lost money for all but one quarter across the last 6 years, and company leaders just admitted the company will lose over $2B this year and likely eliminate its dividend.

McDonald’s created something we now call “fast food.” It was an unstoppable entity that hooked us consumers on products like the Big Mac, Quarter Pounder and Happy Meal. An entire generation was seemingly addicted to McDonald’s and raised their families on these products, with favorable delight for the ever cheery, clown-inspired spokesperson Ronald McDonald.  But now McDonald’s has hit a growth stall, same-store sales are down and the Millenial generation has turned its nose up creating serious doubts about the company’s future.

Radio Shack was the leader in electronics before we really had a consumer electronics category. When we still bought vacuum tubes to repair radios and TVs, home hobbyists built their own early versions of computers and video games worked by hooking them up to TVs (Atari, etc.) Radio Shack was the place to go.  Now the company is one step from bankruptcy.

Sears created the original non-store shopping capability with its famous catalogs. Sears went on to become a Dow Jones Industrial Average component company and the leading national general merchandise retailer with powerhouse brands like Kenmore, Diehard and Craftsman.  Now Sears’ debt has been rated the lowest level junk, it hasn’t made a profit for 3 years and same store sales have declined while the number of stores has been cut dramatically.  The company survives by taking loans from the private equity firm its Chairman controls.

Closed Sears Store

How in the world can companies be such successful pioneers, and end up in such trouble?

Markets shift.  Things in the world change. What was a brilliant business idea loses value as competitors enter the market, new technologies and solutions are created and customers find they prefer alternatives to your original success formula.  These changed markets leave your company irrelevant – and eventually obsolete.

Unfortunately, we’ve trained leaders over the last 60 years how to be operationally excellent.  In 1960 America graduated about the same number of medical doctors, lawyers and MBAs from accredited, professional university programs.  Today we still graduate about the same number of medical doctors every year.  We graduate about 6 times as many lawyers (leading to lots of jokes about there being too many lawyers.)  But we graduate a whopping 30 times as many MBAs.  Business education skyrocketed, and it has become incredibly normal to see MBAs at all levels, and in all parts, of corporations.

The output of that training has been a movement toward focusing on accounting, finance, cost management, supply chain management, automation — all things operational.  We have trained a veritable legion of people in how to “do things better” in business, including how to measure costs and operations in order to make constant improvements in “the numbers.”  Most leaders of publicly traded companies today have a background in finance, and can discuss the P&L and balance sheets of their companies in infinite detail.  Management’s understanding of internal operations and how to improve them is vast, and the ability of leaders to focus an organization on improving internal metrics is higher than ever in history.

But none of this matters when markets shift.  When things outside the corporation happen that makes all that hard work, cost cutting, financial analysis and machination pretty much useless.  Because today most customers don’t really care how well you make a color TV or physical music player, since they now do everything digitally using a mobile device.  Nor do they care for high-fat and high-carb previously frozen food products which are consistently the same because they can find tastier, fresher, lighter alternatives.  They don’t care about the details of what’s inside a consumer electronic product because they can buy a plethora of different products from a multitude of suppliers with the touch of a mobile device button.  And they don’t care how your physical retail store is laid out and what store-branded merchandise is on the shelves because they can shop the entire world of products – and a vast array of retailers – and receive deep product reviews instantaneously, as well as immediate price and delivery information, from anywhere they carry their phone – 24×7.

“Get the assumptions wrong, and nothing else matters” is often attributed to Peter Drucker.  You’ve probably seen that phrase in at least one management, convention or motivational presentation over the last decade.  For Sony, McDonald’s, Radio Shack and Sears the assumptions upon which their current businesses were built are no longer valid.  The things that management assumed to be true when the companies were wildly profitable 2 or 3 decades ago are no longer true.  And no matter how much leadership focuses on metrics, operational improvements and cost cutting – or even serving the remaining (if dwindling) current customers – the shift away from these companies’ offerings will not stop.  Rather, that shift is accelerating.

It has been 80 years since Harvard professor Joseph Schumpeter described “creative destruction” as the process in which new technologies obsolete the old, and the creativity of new competitors destroys the value of older companies. Unfortunately, not many CEOs are familiar with this concept.  And even fewer ever think it will happen to them.  Most continue to hope that if they just make a few more improvements their company won’t really become obsolete, and they can turn around their bad situation.

For employees, suppliers and investors such hope is a weak foundation upon which to rely for jobs, revenues and returns.

According to the management gurus at McKinsey, today the world population is getting older. Substantially so. Almost no major country will avoid population declines over next 20 years, due to low birth rates.  Simultaneously, better healthcare is everywhere, and every population group is going to live a whole lot (I mean a WHOLE LOT) longer.  Almost every product and process is becoming digitized, and any process which can be done via a computer will be done by a computer due to almost free computation. Global communication already is free, and the bandwidth won’t stop growing.  Secrets will become almost impossible to keep; transparency will be the norm.

These trends matter.  To every single business.  And many of these trends are making immediate impacts in 2015.  All will make a meaningful impact on practically every single business by 2020.  And these trends change the assumptions upon which every business – certainly every business founded prior to 2000 – demonstrably.

Are you changing your assumptions, and your business, to compete in the future?  If not, you could soon look at your results and see what the leaders at Sony, McDonald’s, Radio Shack and Sears are seeing today.  That would be a shame.


The Kindle Smartphone is a Game Changer – But Not As You Think

The Kindle Smartphone is a Game Changer – But Not As You Think

Yesterday Amazon launched its new Kindle Fire smartphone.

“Ho-hum” you, and a lot of other people, said.  “Why?”  “What’s so great about this phone?”

The market is dominated by Apple and Samsung, to the point we no longer care about Blackberry – and have pretty much forgotten about all the money spent by Microsoft to buy Nokia and launch Windows 8.  The world doesn’t much need a new smartphone maker – as we’ve seen with the lack of excitement around Google/Motorola’s product launches.  And, despite some gee-whiz 3D camera and screen effects, nobody thinks Amazon has any breakthrough technology here.

But that would be completely missing the point.  Amazon probably isn’t even thinking of competing heads-up with the 2 big guns in the smartphone market.  Instead, Amazon’s target is everyone in retail.  And they should be scared to death.  As well as a lot of consumer products companies.

Amazon's new Kindle Fire smartphone

Amazon’s new Kindle Fire smartphone

Apple’s iPod and iPhones have some 400,000 apps.  But most people don’t use over a dozen or so daily.  Think about what you do on your phone:

  • Talk, texting and email
  • Check the weather, road conditions, traffic
  • Listen to music, or watch videos
  • Shopping (look for products, prices, locations, specs, availability, buy)

Now, you may do several other things.  But (maybe not in priority,) these are probably the top 4 for 90% of people.

If you’re Amazon, you want people to have a great shopping experience.  A GREAT experience.  You’ve given folks terrific interfaces, across multiple platforms.  But everything you do with an app on iPhones or Samsung phones involves negotiating with Apple or Google to be in their store – and giving them revenue.  If you could bypass Apple and Google – a form of retail “middleman” in Amazon’s eyes – wouldn’t you?

Amazon has already changed retail markedly.  Twenty years ago a retailer would say success relied on 2 things:

  1. Store location and layout.  Be in the right place, and be easy to shop.
  2. Merchandise the goods well in the store, and have them available.

Amazon has killed both those tenets of retail.  With Amazon there is no store – there is no location.  There are no aisles to walk, and no shelves to stock.  There is no merchandising of products on end caps, within aisles or by tagging the product for better eye appeal.  And in 40%+ cases, Amazon doesn’t even stock the inventory.  Availability is based upon a supplier for whom Amazon provides the storefront and interface to the customer, sending the order to the supplier for a percentage of the sale.

And, on top of this, the database at Amazon can make your life even easier, and less time consuming, than a traditional store.  When you indicate you want item “A” Amazon is able to show you similar products, show you variations (such as color or size,) show you “what goes with” that product to make sure you buy everything you need, and give you different prices and delivery options.

Many retailers have spent considerably training employees to help customers in the store.  But it is rare that any retail employee can offer you the insight, advice and detail of Amazon.  For complex products, like electronics, Amazon can provide  detail on all competitive products that no traditional store could support. For home fix-ups Amazon can provide detailed information on installation, and the suite of necessary ancillary products, that surpasses what a trained Home Depot employee often can do.  And for simple products Amazon simply never runs out of stock – so no asking an aisle clerk “is there more in the back?”

And it is impossible for any brick-and-mortar retailer to match the cost structure of Amazon.  No stores, no store employees, no cashiers, 50% of the inventory, 5-10x the turns, no “obsolete inventory,” no inventory loss – there is no way any retailer can match this low cost structure. Thus we see the imminent failure of Radio Shack and Sears, and the chronic decline in mall rents as stores go empty.

Some retailers have tried to catch up with Amazon offering goods on-line.  But the inventory is less, and delivery is still often problematic.  Meanwhile, as they struggle to become more digital these retailers are competing on ground they know precious little about.  It is becoming commonplace to read about hackers stealing customer data and wreaking havoc at Michaels Stores and Target.  Thus on-line customers have far more faith in Amazon, which has 2 decades of offering secure transactions and even offers cloud services secure enough to support major corporations and parts of the U.S. government.

And Amazon, so far, hasn’t even had to make a profit.  It’s lofty price/earnings multiple of 500 indicates just how little “e” there is in its p/e.  Amazon keeps pouring money into new ways to succeed, rather than returning money to shareholders via stock buybacks or dividends.  Or dumping it into chronic store remodels, or new store construction.

Today, you could shop at Amazon from your browser on any laptop, tablet or phone.  Or, if you really enjoy shopping on-line you can now obtain a new tablet or phone from Amazon which makes your experience even better.  You can simply take a picture of something you want, and your new Amazon smartphone will tell you how to buy it on-line, including price and delivery.  No need to leave the house.  Want to see the product in full 360 degrees? You have it on your 3D phone.  And all your buying experience, customer reviews, and shopping information is right at your fingertips.

Amazon is THE game changer in retail.  Kindle was a seminal product that has almost killed book publishers, who clung way too long to old print-based business models.  Kindle Fire took direct aim at traditional retailers, from Macy’s to Wal-Mart, in an effort to push the envelope of on-line shopping.  And now the Kindle Fire smartphone puts all that shopping power in your palm, convenient with your other most commonplace uses such as messaging, fact finding, listening or viewing.

This is not a game changing smartphone in comparison with iPhone 5 or Galaxy S 5.  But, as another salvo in the ongoing war for controlling the retail marketplace this is another game changer.  It continues to help everyone think about how they shop today, and in the future.  For anyone in retail, this may well be seen as another important step toward changing the industry forever, and making “every day low prices” an obsolete (and irrelevant) retail phrase.  And for consumer goods companies this means the need to distribute products on-line will forever change the way marketing and selling is done – including who makes how much profit.


Tesla is Smarter Than Other Auto Companies

Tesla is Smarter Than Other Auto Companies

Car dealers are idiots” said my friend as she sat down for a cocktail.

It was evening, and this Vice President of a large health care equipment company was meeting me to brainstorm some business ideas. I asked her how her day went, when she gave the response above. She then proceeded to tell me she wanted to trade in her Lexus for a new, small SUV. She had gone to the BMW dealer, and after being studiously ignored for 30 minutes she asked “do the salespeople at this dealership talk to customers?” Whereupon the salespeople fell all over themselves making really stupid excuses like “we thought you were waiting for your husband,” and “we felt you would be more comfortable when your husband arrived.”

My friend is not married. And she certainly doesn’t need a man’s help to buy a car.

She spent the next hour using her iPhone to think up every imaginable bad thing she could say about this dealer over Twitter and Facebook using various interesting hashtags and @ references.

Truthfully, almost nobody likes going to an auto dealership. Everyone can share stories about how they were talked down to by a salesperson in the showroom, treated like they were ignorant, bullied by salespeople and a slow selling process, overcharged compared to competitors for service, forced into unwanted service purchases under threat of losing warranty coverage – and a slew of other objectionable interactions. Most Americans think the act of negotiating the purchase of a new car is loathsome – and far worse than the proverbial trip to a dentist.  It’s no wonder auto salespeople regularly top the list of least trusted occupations!

When internet commerce emerged in the 1990s, buying an auto on-line was the #1 most desired retail transaction in emerging customer surveys. And today the vast majority of Americans, especially Millennials, use the web and social media to research their purchase before ever stepping foot in the dreaded dealership.

Tesla heard, and built on this trend.  Rather than trying to find dealers for its cars, Tesla decided it would sell them directly from the manufacturer. Which created an uproar amongst dealers who have long had a cushy “almost no way to lose money” business, due to a raft of legal protections created to support them after the great DuPont-General Motors anti-trust case.

When New Jersey regulators decided in March they would ban Tesla’s factory-direct dealerships, the company’s CEO, Elon Musk, went after Governor Christie for supporting a system that favors the few (dealers) over the customer.  He has threatened to use the federal courts to overturn the state laws in favor of consumer advocacy.

It would be easy to ignore Tesla’s position, except it is not alone in recognizing the trend.  TrueCar is an on-line auto shopping website which received $30M from Microsoft co-founder Paul Allen’s venture fund.  After many state legal challenges TrueCar now claims to have figured out how to let people buy on-line with dealer delivery, and last week filed papers to go public.  While this doesn’t eliminate dealers, it does largely take them out of the car-buying equation.  Call it a work-around for now that appeases customers and lawyers, even if it doesn’t actually meet consumer desires for a direct relationship with the manufacturer.

Apple’s direct-to-consumer retail stores were key to saving the company

Distribution is always a tricky question for any consumer good. Apple wanted to make sure its products were positioned correctly, and priced correctly. As Apple re-emerged from near bankruptcy with new music products in the early 2000’s Apple feared electronic retailers would discount the product, be unable to feature Apple’s advantages, and hurt the brand which was in the process of rebuilding.  So it opened its own stores, staffed by “geniuses” to help customers understand the brand positioning and the products’ advantages. Those stores are largely considered to have been a turning point in helping consumers move from a world of Microsoft-based laptops, Sony music products and Blackberry mobile devices to new iDevices and resurging Macintosh popularity – and sales levels.

Attacking regulations sounds – and is – a daunting task. But, when regulations support a minority of people outside the public good there is reason to expect change.  American’s wanted a more pristine society, so in 1920 the 18th Amendment was passed prohibiting alcohol. However, after a decade in which rampant crime developed to support illegal alcohol production Americans passed the 21st Amendment in 1933 to repeal prohibition. What seemed like a good idea at first turned out to have more negatives than positives.

Auto dealer regulations hurt competition, and consumers

Today Americans do not need a protected group of dealers to save them from big, bad auto companies. To the contrary, forced distribution via protected dealers inhibits competition because it keeps new competitors from entering the U.S. market. Small production manufacturers, and large ones in countries like India, are effectively blocked from reaching American customers because they lack a dealer base and existing dealers are uninterested in taking the risks inherent in taking these new products to market. Likewise, starting up an auto company is fraught with distribution risks in the USA, leaving Tesla the only company to achieve any success since the dealer protection laws were passed decades ago.

And that’s why Tesla has a very good chance of succeeding. The trends all support Americans wanting to buy directly from manufacturers. At the very least this would force dealers to justify their existence, and profits, if they want to stay in business. But, better yet, it would create greater competition – as happened in the case of Apple’s re-emergence and impact on personal technology for entertainment and productivity.

Litigating to fight a trend might work for a while. Usually those in such a position are large political contributors, and use both the political process as well as legal precedent to protect their unjustified profits. NADA (National Automobile Dealers Association) is a substantial organization with very large PAC money to use across Washington. The Association can coordinate election contributions at national and state levels, as well as funding for judge elections and contributions for legal defense.

But, trends inevitably win out. Today Millennials are true on-line shoppers.  They have no patience for traditional auto dealer shenanigans. After watching their parents, and grandparents, struggle for fairness with dealers they are eager for a change. As are almost all the auto buyers out there. And they are supported by consumer advocates long used to edgy tactics of auto dealers well known for skirting ethics and morality when dealing with customers. Those seeking change just need someone positioned to lead the legal effort.

Tesla wins because it uses trends to be a game changer

Tesla has shown it is well attuned to trends and what customers want. When other auto companies eschewed Tesla’s first entry as a 2-passenger sports car using laptop batteries, Tesla proceeded to sell out the product at a price much higher competitive gas-powered cars. When other auto companies thought a $70,000 electric sedan would never appeal to American buyers, Tesla again showed it understood the market best and sold out production. When industry pundits, and traditional auto company execs, said it was impossible to build a charging grid to support users driving up the coast, or cross-country, Tesla built the grid and demonstrated its functionality.

Now Tesla is the right company, in the right place, to change not only the autos Americans drive, but how Americans buy them. It’s rarely smart to refuse a trend, and almost always smart to support it. Tesla looks to be positioning itself as much smarter than older, larger auto companies once again.

Obamacare – America’s Greatest Legislation Since the Civil Rights Act?

Obamacare – America’s Greatest Legislation Since the Civil Rights Act?

Obamacare is the moniker for the Affordable Care Act.  Unfortunately, a lot of people thought the last thing Obamacare would do was make health care more affordable.  Yet, early signs are pointing in the direction of a long-term change in America’s cost of providing health services.

The November, 2013 White House report on “Trends in Health Care Cost Growth” provides a plethora of data supporting declining health care costs.  Growth in health care cost per capita at 1% in 2011 was the lowest since record keeping began in the 1960s.  Health care inflation now seems to be about the same as general inflation, after 5 decades of consistently outpacing other price increases.  And Congressional Budget Office (CBO) projections of Medicare/Medicaid cost as a percent of Gross Domestic Product (GDP) have declined substantially since 2010.

Of course, one could easily accuse the White House of being self-serving with this report.  But at a February National Association of Corporate Directors Chicago Conference on health care,

all agreed that, indeed, the world has changed as a result of Obamacare.  And one short-term outcome is American health care trending toward greater affordability.

How Obamacare accomplished this, however, is not at all obvious.

Abdication: that is the word which best desribed patient health care choices for the last several decades.  Patients simply did whatever they were told to do.  If a test was administered, or a procedure recommended, or a referral to a specialist given, or a drug prescribed patients simply did what they were told – “as long as the insurance paid.”

The process of health care implementation, how patients were treated, was specified by medical professionals in conjunction with insurance companies and Medicare.   Patients had little – or nothing – to do with the decision making process.  The service was either offered, and largely free, or it wasn’t offered.

In effect, Americans abdicated health care decision-making to others.  The decisions about what would be treated, when and how was almost wholly made without patient involvement.  And what would be charged, as well as who would pay, was also made by someone other than the patient.  The patient had no involvement in determining if there was any sort of cost/benefit analysis, or the comparing of different care options.

Insurance companies dickered with providers over pricing.  Then employers dickered with insurance companies over what would be covered in a plan, what the price would be and what percentage was paid by the insurance company and what would be paid by patients.  When a patient needed treatment either the employer’s insurance company paid, after a negotiation on price with the provider, or the insurance company did not.  And patients largely consumed whatever care was offered under their plan.

Or, if it was Medicare the same process applied, just substitute for “employer” the words “a government agency.”

Americans had abdicated the decision-making process for health care to a cumbersome process that involved medical professionals, insurance companies and employers.  While patients may have acted like health care was free, everyone knew it was not free.  But the process of deciding what would be done, pricing and measuring benefits had been abdicated by patients to this process years ago.

Obamacare moves Americans from a world of abdication to a world of accountability.  Everyone now has to be insured, so the decision about what coverage each person has, at what level and cost, is now in the hands of the patient.  Rather than a single employer option, patients have a veritable smorgasboard of coverage options from which they can select.  And this begins the process of making each person accountable for their health care cost.

When people receive treatment, by and large more is now being paid by the patient.  And once people had to start paying, they had to be accountable for the cost (higher deductibles and co-pays had already started this process before Obamacare.)  When people became accountable for the cost, a lot more questions started to be asked about the price and the benefit.  Instead of consuming everything that was available, because there was no cost implication, patient accountability for some of the cost has now forced people to ask questions before committing to treatments.

Higher accountability now has consumers (patients) asking for more choices.  And more choices pushes providers to realize that price and delivery make a difference to the patient – who is now a decision-making buyer.

In economic lingo, accountability is changing the health care demand and supply curves.  Previously there was no elasticity of demand.  Patients had no incentives to reduce demand, as health care was perceived as free.  Providers had no incentive to alter supply, because the more they supplied the more they were paid.  Both supply and demand went straight up, because there was no pricing element to stand in the way of both increasing geometrically.

But now patients are making decisions which alter demand. Increasingly they determine what procedures to have, based on price and expected outcomes. And supply is now altered based upon provider and price.  Patients can shop amongst hospitals and outpatient facilities to determine the cost of minor surgery, for example, and decide which solution they prefer.  More services, at different locations and different price points alter the supply curve, and make an impact on the demand curve.  We now have elasticity in both demand and supply.

A patient with a mild heart arythmia can decide if they really need an in-house EKG with a cardiologist review, or substitute an EKG detected from a smartphone diagnosed by an EKG tech remotely.  With both services offered at very different price points (and a host of options in the middle,) it is possible for the patient to change their demand for something like an EKG – and on to total cost of cardiac care.  They may buy more of some care, such as services they find less costly, or providers that are less pricey, and less of another service which is more costly due to the service, the provider or a combination of the two.

And thus accountability starts us down the road to greater affordability.

In distribution terms, the old system was a “wholesale system” which had very expensive suppliers with pricing which was opaque – and often very bizarre.  Pricing was impossible to understand.  Middlemen in insurance companies hired by employers tried to determine what services should be given to patients, and at what prices for the employers (not the patient) to pay.  This wholesale distribution method of health care drove prices up.  Neither those creating demand (patients) or those offering the supply (medical providers) had any incentive to use less health care or lower the price.  And often it left both the patient and the supplier extremely unhappy with how they were treated by arbitrary middle men more interested in groups than individuals.

But the new system is a retail system.  Because the patient no longer abdicates decision making to middle-men, and instead is accountable for the health care they receive and the price they pay. It is creating a far more rational pricing system, and generating new curves that are starting to balance both supply and demand; while simultaneously encouraging the implementation of new options that provide the ability to enhance the service and/or outcome at lower price points.

Obamacare is just beginning its implementation.  “The devil is in the details,” and as we saw with the government web site for exchanges there have been many, many glitches.  As with anything so encompassing and complex, there are lots of SNAFUs. The market is still far from transparent, and patients are far from educated, much less fully informed, decision makers. There is a lot of confusion amongst providers, suppliers and patients.  Regulations are unclear, and not always handled consistently or judiciously.

But, America has made one heck of a start toward containing something which has overhung economic growth since the 1970s.  The health care cost trend is toward greater price visibility, smarter consumers, more options and lower health care costs both short- and long-term.

In the 1960s Congress, and the nation, was deeply divided over passing the Civil Rights Act.  Its impact would be significant on both the way of life for many people, and the economy.  How it would shape America was unclear, and many opposed its passage.  Called for by President Kennedy, President Johnson worked hard – and with lots of strong-arming – to obtain its passage after Kennedy’s death.

After a lot of haggling, some Congressional trickery, filibustering and a lot of legal challenges, the Civil Rights Act was passed in 1964 and it ushered in a new wave of economic growth as it freed resources to add to the American economy instead of being held back.  It was a game changer for the nation, and 40 years later, it’s hard to imagine an America without the gains made by the Civil Rights Act.

Looking 40 years forward, Obamacare – the ACA – may well be legislation that is seen as an economic game changer.  Although its passage was bruising to many in the nation, it changed health care from a system of patient abdication to one of patient accountability, and thereby directed health care toward greater affordability for the country and its citizens.



How Samsung Changed the Game on Apple

The iPad is now 3 years old.  Hard to believe we've only had tablets such a short time, given how common they have become.  It's easy to forget that when launched almost all analysts thought the iPad was a toy that would be lucky to sell a few million units.  Apple blew away that prediction in just a few months, as people demonstrated their lust for mobility.  To date the iPad has sold 121million units – with an ongoing sales rate of nearly 20million per quarter.

Following very successful launches of the iPod (which transformed music from CDs to MP3) and iPhone (which turned everyone into smartphone users,) the iPad's transformation of personal technology made Apple look like an impenetrable juggernaut – practically untouchable by any competitor!  The stock soared from $200/share to over $700/share, and Apple became the most valuable publicly traded company on any American exchange!

But things look very different now.  Despite huge ongoing sales (iPad sales exceed Windows sales,) and a phenomenal $30B cash hoard ($100B if you include receivables) Apple's value has declined by 40%! 

In the tech world, people tend to think competition is all about the product.  Feature and functionality comparisons abound.  And by that metric, no one has impacted Apple.  After 3 years in development, Microsoft's much anticipated Surface has been a bust – selling only about 1.5million units in the first 6 months.  Nobody has created a product capable of outright dethroning the i product series.  Quite simply, there have been no "game changer" products that dramatically outperform Apple's.

But, any professor of introductory marketing will tell you that there are 4 P's in marketing: Product, Price, Place and Promotion.  And understanding that simple lesson was the basis for the successful onslaught Samsung has waged upon Apple in 2012 and 2013. 

Samsung did not change the game with technology or product.  It has used the same Android starting point as most competitors for phones and tablets.  It's products are comparable to Apple's – but not dramatically superior.  And while they are cheaper, in most instances that has not been the reason people switched.  Instead, Samsung changed the game by focusing on distribution and advertising!

Ad spend Apple-Samsung
Chart courtesy Jay Yarrow, Business Insider 4/2/13 and Horace Dediu, Asymco

The remarkable insight from this chart is that Samsung is spending almost 4.5 times Apple – and $1B more than perennial consumer goods brand leader Coca-Cola on advertising! Simultaneously, Samsung has set up kiosks and stores in malls and retail locations all over America.

Can you imagine having the following conversation in your company in 2010?:

"As Vice President of Marketing I propose we take on the market leader not by having a superior product.  We will change the game from features and function comparisons to availability and awareness.  I intend to spend more than anyone in our industry on advertising – even more than Coke.  And I will open so many information and sales locations that our products will be as available as Coke.  We'll be everywhere.  Our products may not be better, but they will be everywhere and everyone will know about them."

Samsung found Apple's Achilles heel.  As Apple's revenues rose it did not keep its marketing growing.  SG&A (Selling, General and Administrative) expense declined from 14% of revenues in 2006 to 5% in 2012; of course aiding its skyrocketing profits.  And Apple continued to sell through its fairly limited distribution of Apple stores and network providers.  Apple started to "milk" its hard won brand position, rather than intensify it.

Samsung took advantage of Apple's oversight.  Samsung maintained its SG&A budget at 15% of revenues – even growing it to 24% for a brief time in 2009, before returning to 15%.  As its revenues grew, advertising and distribution grew.  Instead of looking back at its old ad budget in dollars, and maintaining that budget, Samsung allowed the budget to grow (to a huge number!) along with revenues. 

And that's how Samsung changed the game on Apple.  Once America's untouchable brand, the Apple brand has faltered.  People now question Apple's sustainability. Some now recognize Apple is vulnerable, and think its best times are behind it.  And it's all because Samsung ignored the industry lock-in to constantly focusing on product, and instead changed the game on Apple.

Something Microsoft should have thought about – but didn't.

Of course, Apple's profits are far, far higher than Samsung's.  And Apple is still a great company, and a well regarded brand, with tremendous sales.  There are ongoing rumors of a new iOS 7 operating system, an updated format for iPads, potentially a dramatically new iPhone and even an iTV.  And Apple is not without great engineers, and a HUGE war chest which it could use on advertising and distribution to go heads up with Samsung.

But, at least for now, Samsung has demonstrated how a competitor can change the game on a market leader.  Even a leader as successful and powerful as Apple.  And Samsung's leaders deserve a lot of credit for seeing the opportunity – and seizing it!


And the Winner Is – Netflix!!

Last week's earning's announcements gave us some big news.  Looking around the tech industry, a number of companies reported about as expected, and their stocks didn't move a lot.  Apple had robust sales and earnings, but missed analyst targets and fell out of bed!  But without a doubt, the big winner was Netflix, which beat expectations and had an enormous ~50% jump in valuation!

My what a difference 18 months makes (see chart.)  For anyone who thinks the stock market is efficient the value of Netflix should make one wonder.  In July, 2011 the stock ended a meteoric run-up to $300/share, only to fall 80% to $60/share by year's end.  After whipsawing between $50 and $130, but spending most of 2012 near the lower number, the stock is now up 3-fold to $160!  Nothing scares investors more than volatility – and this kind of volatility would scare away almost anyone but a day trader!

Yet, through all of this I have been – and I remain – bullish on Netflix.  During its run-up in 2010 I wrote "Why You Should Love Netflix," then when the stock crashed in late 2011 I wrote "The Case for Buying Netflix" and last January I predicted Netflix to be "the turnaround story of 2012."  It would be logical to ask why I would remain bullish through all the ups and downs of this cycle – especially since Netflix is still only about half of its value at its high-point.

Simply put, Netflix has 2 things going for it that portend a successful future:

  1. Netflix is in a very, very fast growing market.  Streaming entertainment.  People have what appears to be an insatiable desire for entertainment, and the market not only has grown at a breathtaking rate, but it will continue to grow extremely fast for several more quarters.  It is unclear where the growth rate may tap out for content delivery – putting Netflix in a market that offers enormous growth for all participants.
  2. Netflix leadership has shown a penchant for having the right strategy to remain a market leader – even when harshly criticized for taking fast action to deal with market shifts.  Specifically, choosing to rapidly cannibalize its own DVD business by aggressively promoting streaming – even at lower margins – meant Netflix chose growth over defensiveness.

In 2011 CEO Reed Hastings was given "CEO of the Year 2010" honors by Fortune magazine.  But in 2011, as he split Netflix into 2 businesses – DVD and streaming – and allowed them to price independently and compete with each other for customer business he was trounced as the "dunce" of tech CEOs

His actions led to a price increase of 60% for anyone who decided to buy both Netflix products, and many customers chose to drop one.  Analysts predicted this to be the end of Netflix. 

But in retrospect we can see the brilliance of this decision.  CEO Hastings actually did what textbooks tell us to do – he began milking the installed, but outdated, DVD business.  He did not kill it, but he began pulling profits and cash out of it to pay for building the faster growing, but lower margin, streaming business.  This allowed Netflix to actually grow revenue, and grow profits, while making the market transition from one platform (DVD) to another (streaming.)

Almost no company pulls off this kind of transition.  Most companies try to defend and extend the company's "core" product far too long, missing the market transition.  But now Netflix is adding around 2 million new streaming customers/quarter, while losing 400,000 DVD subscribers.  And with the price changes, this has allowed the company to add content and expand internationally — and increase profits!!

Marketwatch headlined that "Naysayers Must Feel Foolish."  But truthfully, they were just looking at the wrong numbers.  They were fixated on the shrinking installed base of DVD subscribers.  But by pushing these customers to make a fast decision, Netflix was able to convert most of them to its new streaming business before they went out and bought the service from a competitor. 

Aggressive cannibalization actually was the BEST strategy given how fast tablet and smartphone sales were growing and driving up demand for streaming entertainment.  Capturing the growth market was far, far more valuable than trying to defend the business destined for obsolescence. 

Netflix simply did its planning looking out the windshield, at what the market was going to look like in 3 years, rather than trying to protect what it saw in the rear view mirror.  The market was going to change – really fast.  Faster than most people expected.  Competitors like Hulu and Amazon and even Comcast wanted to grab those customers.  The Netflix goal had to be to go headlong into the cold, but fast moving, water of the new streaming market as aggressively as possible.  Or it would end up like Blockbuster that tried renting DVDs from its stores too long – and wound up in bankruptcy court.

There are people who still doubt that Netflix can compete against other streaming players.  And this has been the knock on Netflix since 2005.  That Amazon, Walmart or Comcast would crush the smaller company.  But what these analysts missed was that Amazon and Walmart are in a war for the future of retail – not entertainment – and their efforts in streaming were more to protect a flank in their retail strategy, not win in streaming entertainment.  Likewise, Comcast and its brethren are out to defend cable TV, not really win at anytime, anywhere streaming entertainment.  Their defensive behavior would never allow them to lead in a fast-growing new marketplace.  Thus the market was left for Netflix to capture – if it had the courage to rapidly cannibalize its base and commit to the new marketplace.

Hulu and Redbox are also competitors.  And they very likely will do very well for several years.  Because the market is growing very fast and can support multiple players.  But Netflix benefits from being first, and being biggest.  It has the most cash flow to invest in additional growth.  It has the largest subscriber base to attract content providers earlier, and offer them the most money.  By maintaining its #1 position – even by cannibalizing itself to do so – Netflix is able to keep the other competitors at bay; reinforcing its leadership position.

There are some good lessons here for everyone:

  1. Think long-term, not short-term.  A king can become a goat only to become a king again if he haa the right strategy.  You probably aren't as good as the press says when they like you, nor as bad as they say when hated.  Don't let yourself be goaded into giving up the long-term win for short-term benefits.
  2. Growth covers a multitude of sins!  The way Netflix launched its 2-division campaign in 2011 was a disaster.  But when a market is growing at 100%+ you can rapidly recover.  Netflix grew its streaming user base by more than 50% last year – and that fixes a lot of mistakes. Anytime you have a choice, go for the fast growing market!!
  3. Follow the trend!  Never fight the trend!  Tablet sales were growing at an amazing clip, while DVD players had no sales gains.  With tablet and smartphone sales eclipsing DVD player sales, the smart move was to go where the trend was headed.  Being first on the trend has high payoff.  Moving slowly is death.  Kodak failed to aggressively convert film camera customers to its own digital cameras, and it filed bankruptcy in 2012.
  4. Dont' forget to be profitable!  Even if it means raising prices on dated solutions that will eventually become obsolete – to customer howls.  You must maximize the profits of an outdated product line as fast as possible. Don't try to defend and extend it.  Those tactics use up cash and resources rather than contributing to future success.
  5. Cannibalizing your installed base is smart when markets shift.  Regardless the margin concerns.  Newspapers said they could not replace "print ad dollars" with "on-line ad dimes" so many went bankrupt defending the paper as the market shifted.  Move fast. Force the cannibalization early so you can convert existing customers to your solution, and keep them, before they go to an emerging competitor.
  6. When you need to move into a new market set up a new division to attack it.  And give them permission to do whatever it takes.  Even if their actions aggravate existing customers and industry participants.  Push them to learn fast, and grow fast – and even to attack old sacred cows (like bundled pricing.)

There were a lot of people who thought my call that Netflix would be the turnaround tech story of 2012 was simply bizarre.  But they didn't realize the implications of the massive trend to tablets and smartphones.  The impact is far-reaching – affecting not only computer companies but television, content delivery and content creation.  Netflix positioned itself to be a winner, and implemented the tactics to make that strategy work despite widespread skepticism. 

Hats off to Netflix leadership.  A rare breed.  That's why long-term investors should own the stock.

Yes, even you can innovate to grow – learn from Skanska

I like writing about tech companies, such as Apple and Facebook, because they show how fast you can apply innovation and grow – whether it is technology, business process or new best practices.  But many people aren't in the tech industry, and think innovation applies a lot less to them.  

Whoa there cowboy, innovation is important to you too!

Few industries are as mired in outdated practices and slow to adopt technology than construction.  Whether times are good, or not, contractors and tradespeople generally do things the way they've been done for decades.  Even customers like to see bids where the practices are traditional and time-worn, often eschewing innovations simply because they like the status quo.

Skanska, a $19B construction firm headquarted in Stockholm, Sweden with $6B of U.S. revenue managed from the New York regional HQ refused to accept this.  When Bill Flemming, President of the Building Group recognized that construction industry productivity had not improved for 40 years, he reckoned that perhaps the weak market wasn't going to get better if he just waited for the economy to improve.  He was sure that field-based ideas could allow Skanska to be better than competitors, and open new revenue sources.

Skanska USA CEO Mike McNally agreed instantly.  In 2009 he brought together his management team to see if they would buy into investing in innovation.  He met the usual objections

  • We're too busy
  • I have too much on my plate
  • Business is already too difficult, I don't need something new
  • Customers aren't asking for it, they want lower prices
  • Who's going to pay for it?  My budget is already too thin!

But, he also recognized that nobody said "this is crazy."  Everyone knew there were good things happening in the organization, but the learning wasn't being replicated across projects to create any leverage.  Ideas were too often tried once, then dropped, or not really tried in earnest.  Mike and Bill intuitively believed innovation would be a game changer.  As he discussed implementing innovation with his team he came to saying "If Apple can do this, we can too!" 

Even though this wasn't a Sweden (or headquarters) based project, Mike decided to create a dedicated innovation group, with its own leader and an initial budget of $500K – about .5% of the Building Group total overhead. 

The team started with a Director of innovation, plus a staff of 2.  They were given the white space to find field based ideas that would work, and push them.  Then build a process for identifying field innovations, testing them, investing and implementing.  From the outset they envisaged a "grant" program where HQ would provide field-based teams with money to test, develop and create roll-out processes for innovations.

Key to success was finding the right first project. And quickly the team knew they had one in one of their initial field projects called Digital Resource Center, which could be used at all construction sites.  This low-cost, rugged PC-based product allowed sub-contractors around the site to view plans and all documentation relevant for their part of the project without having to make frequent trips back to the central construction trailer. 

This saved a lot of time for them, and for Skanska, helping keep the project moving quickly with less time wasted talking.  And at a few thousand dollars per station, the payback was literally measured in days.  Other projects were quick to adopt this "no-brainer."  And soon Skanska was not only seeing faster project completion, but subcontractors willing to bake in better performance on their bids knowing they would be able to track work and identify key information on these field-based rugged PCs.

As Skanska's Innovation Group started making grants for additional projects they set up a process for receiving, reviewing and making grants.  They decided to have a Skansa project leader on each grant, with local Skansa support.  But also each grant would team with a local university which would use student and faculty to help with planning, development, implementation and generate return-on-investment analysis to demonstrate the innovation's efficacy.  This allowed Skansa to bring in outside expertise for better project development and implementation, while also managing cost effectively.

With less than 2 years of Innovation Group effort, Skanska has now invested $1.5M in field-based projects.  The focus has been on low-cost productivity improvements, rather than high-cost, big bets.  Changing the game in construction is a process of winning through lots of innovations that prove themselves to customers and suppliers rather than trying to change a skeptical group overnight.  Payback has been almost immediate for each grant, with ROI literally in the hundreds of percent. 

You likely never heard of Skanska, despite its size.  And that's because its in the business of building bridges, subway stations and other massive projects that we see, but know little about.  They are in an industry known for its lack of innovation, and brute-force approach to getting things done.

But the leadership team at Skanska is proving that anyone can apply innovation for high rates of return. They

  • understood that industry trends were soft, and they needed to change if they wanted to thrive.
  • recognized that the best ideas for innovation would not come from customers, but rather from scanning the horizon for new ideas and then figuring out how to implement themselves
  • weren't afraid to try doing something new.  Even if the customer wasn't asking for it
  • created a dedicated team (and it didn't have to be large) operating in white space, focused on identifying innovations, reviewing them, funding them and bringing in outside resources to help the projects succeed

In addition to growing its traditional business, Skanska is now something of a tech company.  It sells its Digital Resource stations, making money directly off its innovation.  And its iSite Monitor for monitoring environmental conditions on sensitive products, and pushing results to Skanska project leaders as well as clients in real time with an app on their iPhones, is also now a commercial product.

So, what are you waiting on?  You'll never grow, or make returns, like Apple if you don't start innovating.  Take some lessons from Skanska and you just might be a lot more successful.