by Adam Hartung | Jul 17, 2012 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
Most investors shouldn't be. Given demands of work and family, there is almost no time to study companies, markets and select investments. So smaller investors rely on 3rd parties, who rarely perform better than the most common indeces, such as the S&P 500 or Dow Jones Industrial Average. For that reason, few small investors make more than 5-10% per year on their money, and since 2000 many would beg for that much return!
Most investors would make more money with their available time by studying prices on the web and simply buying bargains where they could save more than 10% on their purchase. The satisfaction of a well priced computer, piece of furniture, nice suit or pair of shoes is far more gratifying than earning 2-4% on your investment, while worrying about whether you might LOSE 10-20-30%, or more!
And that's why you don't want to own JPMorganChase (JPMC.) Last week's earning's call was a remarkable example of boredom. Yes, Chairman and CEO Jamie Dimon and his team spent considerable time explaining how the London investment office lost $6B, and why they felt it was an "accident" that would not happen again. But the truth is that this $6B "mistake" wasn't really all that big a deal, compared to the $100B in mortgage and credit card losses since the financial crisis started!
Perhaps Mr. Dimon was right, given JPMC's size, that the whole experience was mostly "a tempest in a teapot." Throughout the call the CEO kept emphasizing that JPMC was "going to go about the business of deposits and lending that is the 'core' business for the bank." Although known for outspokenness, Mr. Dimon sounded like any other bank CEO saying "things happen, but trust us. We really are conservative."
So if a $6B surprise loss isn't that big a deal, what is important to shareholders of JPMC?
How about the unlikelihood of JPMC earning any sort of decent return for the next decade, or two?
The world has changed. But this call, and the mountain of powerpoint slides and documents put out with it, reiterated just how little JPMC (and most of its competition, honestly) has not. In this global world of network relationships, digital transactions, struggling home values and upside down mortgages, and very slow economic growth in developed countries, JPMC has no idea what "the next big thing" will be that could make its investors a 20-30% rate of return.
Yes, in many traditional product lines return-on-equity is in the upper teens or even over 20%. But, then there are losses in others. So lots of trade-offs. Ho-hum. To seek growth JPMC is opening more branches (ho-hum). And trying to sign up more credit card customers (ho-hum) and make more smalll-business loans (ho-hum) while running ads and hoping to accumulate more deposit acounts (ho-hum.) And they have cut compensation and other non-interest costs 12% (ho-hum.)
You could have listened to this call in the 1980s, or 1990s, and it would have sounded the same.
Only the world isn't at all the same.
And Mr. Dimon, and his team, knew this. That's why JPMC created the Chief Investment Office (CIO) in London, and the synthetic credit portfolio that has caused such a stir. The old success formula, despite the bailout which created these highly concentrated, huge banks, simply doesn't have much growth – in revenues or profits. So to jack up returns the bank created an extremely complex business unit that made bets – big bets – sometimes HUGE bets – on interest rates and securities it did not own.
These bets allowed small sums (like, say, $1B) to potentially earn multiples on the investment. Or, lose multiples. And the bets were all based on forecasts about future events – using a computer model created by the CIO's office. As Mr. Dimon's team eloquently pointed out, this model became very complicated, and as reality varied from forecast nobody at JPMC was all that clear why the losses started to happen. As they kept using the model, losses mounted. Oops.
But now, we are to be very assured that JPMC's leaders are paying a lot more attention to the model, and thus JPMC isn't going to have such variations between forecast and reality. So this event won't happen again.
Right.
If JPMC didn't need to use the highly complicated world of derivatives to potentially jack up its returns it would have closed the CIO before these losses happened. Now they claim to have closed the synthetic trading portfolio, but not the CIO. Think about that, if you had a unit operated by one of your very top leaders that "made a mistake" and lost $6B wouldn't you closing it? You would only keep it open if you felt like you had to.
Anybody out there remember the failure of Long Term Capital Management (LTCM?) Certainly Mr. Dimon does. In the 1990s LTCM was the most famous "hedge fund" of its day. The "model" used at Long Term Capital supposedly had zero risk, but extremely high returns. Until a $4B loss created by the default of Russion bonds wiped out all the bank's reserves and capital.
Let's see, what's the big news these days? Oh yeah, possible bond defaults in Greece, Portugal, Spain, Ireland……
The recent "crisis" at JPMC reflects a company locked-in to an antiquated business model which has no growth and declining returns. In order to prop up returns the bank took on almost unquantifiable additional risk, through its hedging operation. Even though hedging long had a risky history, and some spectacular failures.
But this was the only way JPMC knew how to boost returns, so it did it anyway. In an almost off-hand comment Mr. Dimon remarked a capable executive fired CIO Ina Drew was. And that she was credited with "saving the bank" by some of Mr. Dimon's fellow executives. Most likely her money-losing, high risk efforts were another attempt by Ms. Drew to "save the bank's returns" and thus why she was lauded even after losing $6B.
But no more. Now the bank is just going to slog it out being the boring bank it used to be. Amidst all the slides and documents there was NO explanation of what JPMC was going to do next to create growth. So JPMC is still susceptible to crisis – from debt defaults, Euro crisis, no growth economies, etc. – but shows little, if any, upside growth.
And that's why you don't want to invest in JPMC. For the last 3 years the stock has swung wildly. Big swings are loved by betting stock traders. But quarter to quarter vicissitudes are not helpful for investors who need growth so they can generate a 50% gain in 5 years when they need the money for junior's college tuition.
For that matter, I can't think of any "money center" bank worth investing. All of them have the same problem. After being "saved" they are less likely to behave differently than ever before. At JPMC leadership took bets in derivatives trying to jack up returns. At Barclay's Bank it appears leadership manipulated a key lending rate (LIBOR.) All actions typical of executives that are stuck in a lousy market, that is shifting away from them, and feeling it necessary to push the envelope in an effort to squeek out higher returns.
If you feel compelled to invest in financial services, look outside the traditional institutions. Consider Virgin, where Virgin Money is behaving uniquely – and could create incredible growth with very high returns. In a business no "traditional" bank is pursuing. Or Discover Financial Services which is using a unique on-line approach to deposits and lending. Although these are nothing like JPMC, they offer opportunity for growth with probably less risk of another future crisis.
by Adam Hartung | Jul 11, 2012 | Current Affairs, Defend & Extend, Disruptions, Innovation, Leadership, Lock-in
The news is not good for U.S. auto companies. Automakers are resorting to fairly radical promotional programs to spur sales. Chevrolet is offering a 60-day money back guarantee. And Chrysler is offering 90 day delayed financing. Incentives designed to make you want to buy a car, when you really don't want to buy a car. At least, not the cars they are selling.
On the other hand, the barely known, small and far from mainstream Tesla motors gave one of its new Model S cars to Wall Street Journal reviewer Dan Neil, and he gave it a glowing testimonial. He went so far as to compare this 4-door all electric sedan's performance with the Lamborghini and Ford GT supercars. And its design with the Jaguar. And he spent several paragraphs on its comfort, quiet, seating and storage – much more aligned with a Mercedes S series.
There are no manufacturer incentives currently offered on the Tesla Model S.
What's so different about Tesla and GM or Ford? Well, everything. Tesla is a classic case of a disruptive innovator, and GM/Ford are classic examples of old-guard competitors locked into sustaining innovation. While the former is changing the market – like, say Amazon is doing in retail – the latter keeps laughing at them – like, say Wal-Mart, Best Buy, Circuit City and Barnes & Noble have been laughing at Amazon.
Tesla did not set out to be a car company, making a slightly better car. Or a cheaper car. Or an alternative car. Instead it set out to make a superior car.
Its initial approach was a car that offered remarkable 0-60 speed performance, top end speed around 150mph and superior handling. Additionally it looked great in a 2-door European style roadster package. Simply, a wildly better sports car. Oh, and to make this happen they chose to make it all-electric, as well.
It was easy for Detroit automakers to scoff at this effort – and they did. In 2009, while Detroit was reeling and cutting costs – as GM killed off Pontiac, Hummer, Saab and Saturn – the famous Bob Lutz of GM laughed at Tesla and said it really wasn't a car company. Tesla would never really matter because as it grew up it would never compete effectively. According to Mr. Lutz, nobody really wanted an electric car, because it didn't go far enough, it cost too much and the speed/range trade-off made them impractical. Especially at the price Tesla was selling them.
Meanwhile, in 2009 Tesla sold 100% of its production. And opened its second dealership. As manufacturing plants, and dealerships, for the big brands were being closed around the world.
Like all disruptive innovators, Tesla did not make a car for the "mass market." Tesla made a great car, that used a different technology, and met different needs. It was designed for people who wanted a great looking roadster, that handled really well, had really good fuel economy and was quiet. All conditions the electric Tesla met in spades. It wasn't for everyone, but it wasn't designed to be. It was meant to demonstrate a really good car could be made without the traditional trade-offs people like Mr. Lutz said were impossible to overcome.
Now Tesla has a car that is much more aligned with what most people buy. A sedan. But it's nothing like any gasoline (or diesel) powered sedan you could buy. It is much faster, it handles much better, is much roomier, is far quieter, offers an interface more like your tablet and is network connected. It has a range of distance options, from 160 to 300 miles, depending up on buyer preferences and affordability. In short, it is nothing like anything from any traditional car maker – in USA, Japan or Korea.
Again, it is easy for GM to scoff. After all, at $97,000 (for the top-end model) it is a lot more expensive than a gasoline powered Malibu. Or Ford Taurus.
But, it's a fraction of the price of a supercar Ferrari – or even a Porsche Panamera, Mercedes S550, Audi A8, BMW 7 Series, or Jaguar XF or XJ - which are the cars most closely matching size, roominess and performance.
And, it's only about twice as expensive as a loaded Chevy Volt – but with a LOT more advantages. The Model S starts at just over $57,000, which isn't that much more expensive than a $40,000 Volt.
In short, Tesla is demonstrating it CAN change the game in automobiles. While not everybody is ready to spend $100k on a car, and not everyone wants an electric car, Tesla is showing that it can meet unmet needs, emerging needs and expand into more traditional markets with a superior solution for those looking for a new solution. The way, say, Apple did in smartphones compared to RIM.
Why didn't, and can't, GM or Ford do this?
Simply put, they aren't even trying. They are so locked-in to their traditional ideas about what a car should be that they reject the very premise of Tesla. Their assumptions keep them from really trying to do what Tesla has done – and will keep improving – while they keep trying to make the kind of cars, according to all the old specs, they have always done.
Rather than build an electric car, traditionalists denounce the technology. Toyota pioneered the idea of extending a gas car into electric with hybrids – the Prius – which has both a gasoline and an electric engine.
Hmm, no wonder that's more expensive than a similar sized (and performing) gasoline (or diesel) car. And, like most "hybrid" ideas it ends up being a compromise on all accounts. It isn't fast, it doesn't handle particularly well, it isn't all that stylish, or roomy. And there's a debate as to whether the hybrid even recovers its price premium in less than, say, 4 years. And that is all dependent upon gasoline prices.
Ford's approach was so clearly to defend and extend its traditional business that its hybrid line didn't even have its own name! Ford took the existing cars, and reformatted them as hybrids, with the Focus Hybrid, Escape Hybrid and Fusion Hybrid. How is any customer supposed to be excited about a new concept when it is clearly displayed as a trade-off; "gasoline or hybrid, you choose." Hard to have faith in that as a technological leap forward.
And GM gave the market Volt. Although billed as an electric car, it still has a gasoline engine. And again, it has all the traditional trade-offs. High initial price, poor 0-60 performance, poor high-end speed performance, doesn't handle all that well, isn't very stylish and isn't too roomy. The car Tesla-hating Bob Lutz put his personal stamp on. It does achieve high mpg – compared to a gasoline car – if that is your one and only criteria.
Investors are starting to "get it."
There was lots of excitement about auto stocks as 2010 ended. People thought the recession was ending, and auto sales were improving. GM went public at $34/share and rose to about $39. Ford, which cratered to $6/share in July, 2010 tripled to $19 as 2011 started.
But since then, investor enthusiasm has clearly dropped, realizing things haven't changed much in Detroit – if at all. GM and Ford are both down about 50% – roughly $20/share for GM and $9.50/share for Ford.
Meanwhile, in July of 2010 Tesla was about $16/share and has slowly doubled to about $31.50. Why? Because it isn't trying to be Ford, or GM, Toyota, Honda or any other car company. It is emerging as a disruptive alternative that could change customer perspective on what they should expect from their personal transportation.
Like Apple changed perspectives on cell phones. And Amazon did about retail shopping.
Tesla set out to make a better car. It is electric, because the company believes that's how to make a better car. And it is changing the metrics people use when evaluating cars.
Meanwhile, it is practically being unchallenged as the existing competitors – all of which are multiples bigger in revenue, employees, dealers and market cap of Tesla – keep trying to defend their existing business while seeking a low-cost, simple way to extend their product lines. They largely ignore Tesla's Roadster and Model S because those cars don't fit their historical success formula of how you win in automobile competition.
The exact behavior of disruptors, and sustainers likely to fail, as described in The Innovator's Dilemma (Clayton Christensen, HBS Press.)
Choosing to be ignorant is likely to prove very expensive for the shareholders and employees of the traditional auto companies. Why would anybody would ever buy shares in GM or Ford? One went bankrupt, and the other barely avoided it. Like airlines, neither has any idea of how their industry, or their companies, will create long-term growth, or increase shareholder value. For them innovation is defined today like it was in 1960 – by adding "fins" to the old technology. And fins went out of style in the 1960s – about when the value of these companies peaked.
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 20, 2012 | Current Affairs, In the Swamp, Lifecycle, Lock-in, Television, Web/Tech
Who can forget what a great company Sony was, and the enormous impact it had on our lives? With its heritage, it is hard to believe that Sony hasn't made a profit in 4 consecutive years, just recently announced it will double its expected loss for this year to $6.4 billion, has only 15% of its capital left as equity (debt/equity ration of 5.67x) and is only worth 1/4 of its value 10 years ago!
After World War II Sony was the company that took the transistor technology invented by Texas Instruments (TI) and made the popular, soon to become ubiquitous, transistor radio. Under co-founder Akio Morita Sony kept looking for advances in technology, and its leadership spent countless hours innovatively thinking about how to apply these advances to improve lives. With a passion for creating new markets, Sony was an early creator, and dominator, of what we now call "consumer electronics:"
- Sony improved solid state transistor radios until they surpassed the quality of tubes, making good quality sound available very reliably, and inexpensively
- Sony developed the solid state television, replacing tubes to make TVs more reliable, better working and use less energy
- Sony developed the Triniton television tube, which dramatically improved the quality of color (yes Virginia, once TV was all in black & white) and enticed an entire generation to switch. Sony also expanded the size of Trinitron to make larger sets that better fit larger homes.
- Sony was an early developer of videotape technology, pioneering the market with Betamax before losing a battle with JVC to be the standard (yes Virginia, we once watched movies on tape)
- Sony pioneered the development of camcorders, for the first time turning parents – and everyone – into home movie creators
- Sony pioneered the development of independent mobile entertainment by creating the Walkman, which allowed – for the first time – people to take their own recorded music with them, via cassette tapes
- Sony pioneered the development of compact discs for music, and developed the Walkman CD for portable use
- Sony gave us the Playstation, which went far beyond Nintendo in creating the products that excited users and made "home gaming" a market.
Very few companies could ever boast a string of such successful products. Stories about Sony management meetings revealed a company where executives spent 85% of their time on technology, products and new applications/markets, 10% on human resource issues and 5% on finance. To Mr. Morita financial results were just that – results – of doing a good job developing new products and markets. If Sony did the first part right, the results would be good. And they were.
By the middle 1980s, America was panicked over the absolute domination of companies like Sony in product manufacturing. Not only consumer electronics, but automobiles, motorcycles, kitchen electronics and a growing number of markets. Politicians referred to Japanese competitors, like the wildly successful Sony, as "Japan Inc." – and discussed how the powerful Japanese Ministry of Trade and Industry (MITI) effectively shuttled resources around to "beat" American manufacturers. Even as rising petroleum costs seemed to cripple U.S. companies, Japanese manufacturers were able to turn innovations (often American) into very successful low-cost products growing sales and profits.
So what went wrong for Sony?
Firstly was the national obsession with industrial economics. W. Edward Deming in 1950s Japan institutionalized manufacturing quality and optimization. Using a combination of process improvements and arithmetic, Deming convinced Japanese leaders to focus, focus, focus on making things better, faster and cheaper. Taking advantage of Japanese post war dependence on foreign capital, and foreign markets, this U.S. citizen directed Japanese industry into an obsession with industrialization as practiced in the 1940s — and was credited for creating the rapid massive military equipment build-up that allowed the U.S. to defeat Japan.
Unfortunately, this narrow obsession left Japanese business leaders, buy and large, with little skill set for developing and implementing R&D, or innovation, in any other area. As time passed, Sony fell victim to developing products for manufacturing, rather than pioneering new markets.
The Vaio, as good as it was, had little technology for which Sony could take credit. Sony ended up in a cost/price/manufacturing war with Dell, HP, Lenovo and others to make cheap PCs – rather than exciting products. Sony's evolved a distinctly Industrial strategy, focused on manufacturing and volume, rather than trying to develop uniquely new products that were head-and-shoulders better than competitors.
In mobile phones Sony hooked up with, and eventually acquired, Ericsson. Again, no new technology or effort to make a wildly superior mobile device (like Apple did.) Instead Sony sought to build volume in order to manufacture more phones and compete on price/features/functions against Nokia, Motorola and Samsung. Lacking any product or technology advantage, Samsung clobbered Sony's Industrial strategy with lower cost via non-Japanese manufacturing.
When Sony updated its competition in home movies by introducing Blue Ray, the strategy was again an Industrial one – about how to sell Blue Ray recorders and players. Sony didn't sell the Blue Ray software technology in hopes people would use it. Instead it kept it proprietary so only Sony could make and sell Blue Ray products (hardware). Just as it did in MP3, creating a proprietary version usable only on Sony devices. In an information economy, this approach didn't fly with consumers, and Blue Ray was a money loser largely irrelevant to the market – as is the now-gone Sony MP3 product line.
We see this across practically all the Sony businesses. In televisions, for example, Sony has lost the technological advantage it had with Trinitron cathode ray tubes. In flat screens Sony has applied a predictable, but money losing Industrial strategy trying to compete on volume and cost. Up against competitors sourcing from lower cost labor, and capital, countries Sony has now lost over $10B over the last 8 years in televisions. Yet, Sony won't give up and intends to stay with its Industrial strategy even as it loses more money.
Why did Sony's management go along with this? As mentioned, Akio Morita was an innovator and new market creator. But, Mr. Morita lived through WWII, and developed his business approach before Deming. Under Mr. Morita, Sony used the industrial knowledge Deming and his American peers offered to make Sony's products highly competitive against older technologies. The products led, with industrial-era tactics used to lower cost.
But after Mr. Morita other leaders were trained, like American-minted MBAs, to implement Industrial strategies. Their minds put products, and new markets, second. First was a commitment to volume and production – regardless of the products or the technology. The fundamental belief was that if you had enough volume, and you cut costs low enough, you would eventually succeed.
By 2005 Sony reached the pinnacle of this strategic approach by installing a non-Japanese to run the company. Sir Howard Stringer made his fame running Sony's American business, where he exemplified Industrial strategy by cutting 9,000 of 30,000 U.S. jobs (almost a full third.) To Mr. Stringer, strategy was not about innovation, technology, products or new markets.
Mr. Stringer's Industrial strategy was to be obsessive about costs. Where Mr. Morita's meetings were 85% about innovation and market application, Mr. Stringer brought a "modern" MBA approach to the Sony business, where numbers – especially financial projections – came first. The leadership, and management, at Sony became a model of MBA training post-1960. Focus on a narrow product set to increase volume, eschew costly development of new technologies in favor of seeking high-volume manufacturing of someone else's technology, reduce product introductions in order to extend product life, tooling amortization and run lengths, and constantly look for new ways to cut costs. Be zealous about cost cutting, and reward it in meetings and with bonuses.
Thus, during his brief tenure running Sony Mr. Stringer will not be known for new products. Rather, he will be remembered for initiating 2 waves of layoffs in what was historically a lifetime employment company (and country.) And now, in a nod to Chairman Stringer the new CEO at Sony has indicated he will react to ongoing losses by – you guessed it – another round of layoffs. This time it is estimated to be another 10,000 workers, or 6% of the employment. The new CEO, Mr. Hirai, trained at the hand of Mr. Stringer, demonstrates as he announces ever greater losses that Sony hopes to – somehow – save its way to prosperity with an Industrial strategy.
Japanese equity laws are very different that the USA. Companies often have much higher debt levels. And companies can even operate with negative equity values – which would be technical bankruptcy almost everywhere else. So it is not likely Sony will fill bankruptcy any time soon.
But should you invest in Sony? After 4 years of losses, and entrenched Industrial strategy with MBA-style leadership focused on "numbers" rather than markets, there is no reason to think the trajectory of sales or profits will change any time soon.
As an employee, facing ongoing layoffs why would you wish to work at Sony? A "me too" product strategy with little technical innovation that puts all attention on cost reduction would not be a fun place. And offers little promotional growth.
And for suppliers, it is assured that each and every meeting will be about how to lower price – over, and over, and over.
Every company today can learn from the Sony experience. Sony was once a company to watch. It was an innovative leader, that pioneered new markets. Not unlike Apple today. But with its Industrial strategy and MBA numbers- focused leadership it is now time to say, sayonara. Sell Sony, there are more interesting companies to watch and more profitable places to invest.
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 29, 2012 | Current Affairs, Disruptions, Innovation, Leadership, Lock-in, Openness, Transparency
No businessperson thinks the way to solve a business problem is via the courts. And no issue is larger for American business than health care. Despite all the hoopla over the Supreme Court reviews this week, this is a lousy way for America to address an extremely critical area.
The growth of America's economy, and its global competitiveness, has a lot riding on health care costs. Looking at the table, below, it is clear that the U.S. is doing a lousy job at managing what is the fastest growing cost in business (data summarized from 24/7 Wall Street.)
While America is spending about $8,000 per person, the next 9 countries (in per person cost) all are grouped in roughly the $4,000-$5,000 cost — so America is 67-100% more costly than competitors. This affects everything America sells – from tractors to software services – forcing higher prices, or lower margins. And lower margins means less resources for investing in growth!
American health care is limiting the countries overall economic growth capability by consuming dramatically more resources than our competitors. Where American spends 17.4% of GDP (gross domestic product) on health care, our competitors are generally spending only 11-12% of their resources. This means America is "taxing" itself an extra 50% for the same services as our competitive countries. And without demonstrably superior results. That is money which Americans would gain more benefit if spent on infrastructure, R&D, new product development or even global selling!
Americans seem to be fixated on the past. How they used to obtain health care services 50 years ago, and the role of insurance 50 years ago. Looking forward, health care is nothing like it was in 1960. The days of "Dr. Welby, MD" serving a patient's needs are long gone. Now it takes teams of physicians, technicians, nurses, diagnosticians, laboratory analysts and buildings full of equipment to care for patients. And that means America needs a medical delivery system that allows the best use of these resources efficiently and effectively if its citizens are going to be healthier, and move into the life expectancies of competitive countries.
Unfortunately, America seems unwilling to look at its competitors to learn from what they do in order to be more effective. It would seem obvious that policy makers and those delivering health care could all look at the processes in these other 9 countries and ask "what are they doing, how do they do it, and across all 9 what can we see are the best practices?"
By studying the competition we could easily learn not only what is being done better, but how we could improve on those practices to be a world leader (which, clearly, we now are not.) Yet, for the most part those involved in the debate seem adamant to ignore the competition – as if they don't matter. Even though the cost of such blindness is enormous.
Instead, way too much time is spent asking customers what they want. But customers have no idea what health care costs. Either they have insurance, and don't care what specific delivery costs, or they faint dead away when they see the bill for almost any procedure. People just know that health care can be really good, and they want it. To them, the cost is somebody else's problem. That offers no insight for creating an effective yet simultaneously efficient system.
America needs to quit thinking it can gradually evolve toward something better. As Clayton Christensen points out in his book "The Innovator's Prescription: A Disruptive Solution for Health Care" America could implement health care very differently. And, as each year passes America's competitiveness falls further behind – pushing the country closer and closer to no choice but being disruptive in health care implementation. That, or losing its vaunted position as market leader!
Is the "individual mandate" legal? That seems to be arguable. But, it is disruptive. It seems the debate centers more on whether Americans are willing to be disruptive, to do something different, than whether they want to solve the problem. Across a range of possibilities, anything that disrupts the ways of the past seems to be argued to death. That isn't going to solve this big, and growing, problem. Americans must become willing to accept some radical change.
The simple approach would be to look at programs in Oregon, Massachusetts and all the states to see what has worked, and what hasn't worked as well. Instead of judging them in advance, they could be studied to learn. Then America could take on a series of experiments. In isolated locations. Early adopter types could "opt in" on new alternative approaches to payment, and delivery, and see if it makes them happy. And more stories could be promulgated about how alternatives have worked, and why, helping everyone in the country remove their fear of change by seeing the benefits achieved by early leaders.
Health care delivery, and its cost, in America is a big deal. Just like the oil price shocks in the 1970s roiled cost structures and threatened the economy, unmanagable health care delivery and cost threatens the country's economic future. American's surely don't expect a handful of lawyers in black robes to solve the problem.
America needs to learn from its competition, be willing to disrupt past processes and try new approaches that forge a solution which not only delivers better than anyone else (a place where America does seem to still lead) but costs less. If America could be the first on the moon, first to create the PC and first to connect everyone on smartphones this is a problem which can be solved – but not by attorneys or courts!
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 | 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.
