by Adam Hartung | Jan 13, 2011 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
Before there was Facebook, the social media juggernaut which is changing how we communicate – and might change the face of media – there was MySpace. MySpace was targeted at the same audience, had robust capability, and was to market long before Facebook. It generated enormous interest, received a lot of early press, created huge valuation when investors jumped in, and was undoubtedly not only an early internet success – but a seminal web site for the movement we now call social media. On top of that, MySpace was purchased by News Corporation, a powerhouse media company, and was given professional managers to help guide its future as well as all the resources it ever wanted to support its growth. By almost all ways we look at modern start-ups, MySpace was the early winner and should have gone on to great glory.
But things didn’t turn out that way. Facebook was hatched by some college undergrads, and started to grow. Meanwhile MySpace stagnated as Facebook exploded to 600 million active users. During early 2010, according to The Telegraph in “Facebook Dominance Forces Rival Networks to Go Niche,” MySpace gave up on its social media leadership dreams and narrowed its focus to the niche of being a “social entertainment destination.” As the number of users fell, MySpace was forced to cut costs, laying off half its staff this week according to MediaPost.com “MySpace Confirms Massive Layoffs.” After losing a reported $350million last year, it appears that MySpace may disappear – “MySpace Versus Facebook – There Can Be Only One” reported at Gigaom.com. The early winner now appears a loser, most likely to be unplugged, and a very expensive investment with no payoff for NewsCorp investors.
What went wrong? A lot of foks will be relaying the tactics of things done and not done at MySpace. As well as tactics done and not done at Facebook. But underlying all those tactics was a very simple management mistake News Corp. made. News Corp tried to guide MySpace, to add planning, and to use “professional management” to determine the business’s future. That was fatally flawed when competing with Facebook which was managed in White Space, lettting the marketplace decide where the business should go.
If the movie about Facebook’s founding has any veracity, we can accept that none of the founders ever imagined the number of people and applications that Facebook would quickly attract. From parties to social games to product reviews and user networks – the uses that have brought 600 million users onto Facebook are far, far beyond anything the founders envisioned. According to the movie, the first effort to sell ads to anyone were completely unsuccessful, as uses behond college kids sharing items on each other were not on the table. It appeared like a business bust at the beginning.
But, the brilliance of Mark Zuckerberg was his willingness to allow Facebook to go wherever the market wanted it. Farmville and other social games – why not? Different ways to find potential friends – go for it. The founders kept pushing the technology to do anything users wanted. If you have an idea for networking on something, Facebook pushed its tech folks to make it happen. And they kept listening. And looking within the comments for what would be the next application – the next promotion – the next revision that would lead to more uses, more users and more growth.
And that’s the nature of White Space management. No rules. Not really any plans. No forecasting markets. Or foretelling uses. No trying to be smarter than the users to determine what they shouldn’t do. Not prejudging ideas so as to limit capability and focus the business toward a projected conclusion. To the contrary, it was about adding, adding, adding and doing whatever would allow the marketplace to flourish. Permission to do whatever it takes to keep growing. And resource it as best you can – without prejudice as to what might work well, or even best. Keep after all of it. What doesn’t work stop resourcing, what does work do more.
Contrarily, at NewsCorp the leaders of MySpace had a plan. NewsCorp isn’t run by college kids lacking business sense. Leaders create Powerpoint decks describing where the business will head, where they will invest, how they will earn a positive ROI, projections of what will work – and why – and then plans to make it happen. They developed the plan, and then worked the plan. Plan and execute. The professional managers at News Corp looked into the future, decided what to do, and did it. They didn’t leave direction up to market feedback and crafty techies – they ran MySpace like a professional business.
And how’d that work out for them?
Unfortunately, MySpace demonstrates a big fallacy of modern management. The belief that smart MBAs, with industry knowledge, will perform better. That “good management” means you predict, you forecast, you plan, and then you go execute the plan. Instead of reacting to market shifts, fast, allowing mistakes to happen while learning what works, professional managers should be able to predict and perform without making mistakes. That once the bright folks who create the strategy set a direction, its all about executing the plan. That execution will lead to success. If you stumble, you need to focus harder on execution.
When managing innovation, including operating in high growth markets, nothing works better than White Space. Giving dedicated people permission to do whatever it takes, and resources, then holding their feet to the fire to demonstrate performance. Letting dedicated people learn from their successes, and failures, and move fast to keep the business in the fast moving water. There is no manager, leader or management team that can predict, plan and execute as well as a team that has its ears close to the market, and the flexibility to react quickly, willing to make mistakes (and learn from them even faster) without bias for a predetermined plan.
The penchant for planning has hurt a lot of businesses. Rarely does a failed business lack a plan. Big failures – like Circuit City, AIG, Lehman Brothers, GM – are full of extremely bright, well educated (Harvard, Stanford, University of Chicago, Wharton) MBAs who are prepared to study, analyze, predict, plan and execute. But it turns out their crystal ball is no better than – well – college undergraduates.
When it comes to applying innovation, use White Space teams. Drop all the business plan preparation, endless crunching of historical numbers, multi-tabbed Excel spreadsheets and powerpoint matrices. Instead, dedicate some people to the project, push them into the market, make them beg for resources because they are sure they know where to put them (without ROI calculations) and tell them to get it done – or you’ll fire them. You’ll be amazed how fast they (and your company) will learn – and grow.
by Adam Hartung | Dec 17, 2010 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, Leadership, Web/Tech
Summary:
- Many people think it is OK for large companies to grow slowly
- Many people admire caretaker CEOs
- In dynamic markets, low-growth companies fail
- It is harder to generate $1B of new revenue, than grow a $100B company by $10B
- Large companies have vastly more resources, but they squander them badly
- We allow large company CEOs too much room for mediocrity and failure
- Good CEOs never lose a growth agenda, and everyone wins!
“I may just be your little rent collector Mr. Potter, but that George Bailey is making quite a bit happen in that new development of his. If he keeps going it may just be time for this smart young man to go asking George Bailey for a job.” From “It’s a Wonderful Life“ an employee of the biggest employer in mythical Beford Falls talks about the growth of a smaller competitor.
My last post gathered a lot of reads, and a lot of feedback. Most of it centered on how GE should not be compared to Facebook, largely because of size differences, and therefore how it was ridiculous to compare Jeff Immelt with Mark Zuckerberg. Many readers felt that I overstated the good qualities of Mr. Zuckerberg, while not giving Mr. Immelt enough credit for his skills managing “lower growth businesses” in a “tough economy.” Many viewed Mr. Immelt’s task as incomparably more difficult than that of managing a high growth, smaller tech company from nothing to several billion revenue in a few years. One frequent claim was that it is enough to maintain revenue in a giant company, growth was less important.
Why do so many people give the CEOs of big companies a break? Given that they make huge salaries and bonuses, have fantastic perquesites (private jets, etc.), phenominal benefits and pensions, and receive remarkable payouts whether they succeed or fail I would think we’d have very high standards for these leaders – and be incensed when their performance is sub-par.
Facebook started with almost no resources (as did Twitter and Groupon). Most leaders of start-ups fail. It is remarkably difficult to marshal resources – both enough of them and productively – to grow a company at double digit rates, produce higher revenue, generate cash flow (or loans) and keep employees happy. Growing to a billion dollars revenue from nothing is inexplicably harder than adding $10B to a $100B company. Compared to Facebook, GE has massive resources. Mr. Immelt entered the millenium with huge cash flow, huge revenues, and an army of very smart employees. Mr. Zuckerberg had to come out of the blocks from a standing start and create ALL his company’s momentum, while comparatively Mr. Immelt took on his job riding a bullet out of a gun! GE had huge momentum, a low cost of capital, and enough resources to do anything it wanted.
Yet somehow we should think that we don’t have as high expectations from Mr. Immelt as we do Mr. Zuckerberg? That would seem, at the least, distorted.
In business school I read the story of how American steel manufacturers were eclipsed by the Japanese. Ending WWII America had almost all the steel capacity. Manufacturers raked in the profits. Japanese and German companies that were destroyed had to rebuild, which they progressively did with more efficient assets. By the 1960s American companies were no longer competitive. Were we to believe that having their industrial capacity destroyed somehow was a good thing for the foreign competitors? That if you want to improve your competitiveness (say in autos) you should drop a nuclear bomb on the facilities (some may like that idea – but not many who live in Detroit I dare say.) In reality the American leaders simply refused to invest in new technologies and growth markets, allowing competitors to end-run them. The American leaders were busy acting as caretakers, and bragging about their success, instead of paying attention to market shifts and keeping their companies successful!
Big companies, like GE, are highly advantaged. They not only have brand, and market position, but cash, assets, employees and vendors in position to help them be even more successful! A smart CEO uses those resources to take the company into growth markets where it can grow revenues, and profits, faster than the marketplace. For example Steve Jobs at Apple, and Eric Schmidt at Google have found new markets, revenues and cash flow beyond their original “core” markets. That’s what Mr. Welch did as predecessor to Mr. Immelt. He didn’t so much take advantage of a growth economy as help create it! Unfortunately, far too many large company CEOs squander their resources on low rate of return projects, trying to defend their existing business rather than push forward.
Most big companies over-invest in known markets, or technologies, that have low growth rates, rather than invest in growth markets, or technologies they don’t know as well. Think about how Motorola invented the smart phone technology, but kept investing in traditional cellular phones. Or Sears, the inventor of “at home shopping” with catalogues closed that division to chase real-estate based retail, allowing Amazon to take industry leadership and market growth. Circuit City ended up investing in its approach to retail until it went bankrupt in 2010 – even though it was a darling of “Good to Great.” Or Microsoft, which launched a tablet and a smart phone, under leader Ballmer re-focused on its “core” operating system and office automation markets letting Apple grab the growth markets with R&D investments 1/8th of Microsoft’s. These management decisions are not something we should accept as “natural.” Leaders of big companies have the ability to maintain, even accelerate, growth. Or not.
Why give leaders in big companies a break just because their historical markets have slower growth? Singer’s leadership realized women weren’t going to sew at home much longer, and converted the company into a defense contractor to maintain growth. Netflix converted from a physical product company (DVDs) into a streaming download company in order to remain vital and grow while Blockbuster filed bankruptcy. Apple transformed from a PC company into a multi-media company to create explosive growth generating enough cash to buy Dell outright – although who wants a distributor of yesterday’s technology (remember Circuit City.) Any company can move forward to be anything it wants to be. Excusing low growth due to industry, or economic, weakness merely gives the incumbent a pass. Good CEOs don’t sit in a foxhole waiting to see if they survive, blaming a tough battleground, they develop strategies to change the battle and win, taking on new ground while the competition is making excuses.
GM was the world’s largest auto company when it went broke. So how did size benefit GM? In the 1980s Roger Smith moved GM into aerospace by acquiring Hughes electronics, and IT services by purchasing EDS – two remarkable growth businesses. He “greenfielded” a new approach to auto manufucturing by opening the wildly successful Saturn division. For his foresight, he was widely chastised. But “caretaker” leadership sold off Hughes and EDS, then forced Saturn to “conform” to GM practices gutting the upstart division of its value. Where one leader recognized the need to advance the company, followers drove GM to bankruptcy by selling out of growth businesses to re-invest in “core” but highly unprofitable traditional auto manufacturing and sales. Meanwhile, as the giant failed, much smaller Kia, Tesla and Tata are reshaping the auto industry in ways most likely to make sure GM’s comeback is short-lived.
CEOs of big companies are paid a lot of money. A LOT of money. Much more than Mr. Zuckerberg at Facebook, or the leaders of Groupon and Netflix (for example). So shouldn’t we expect more from them? (Marketwatch.com “Top CEO Bonuses of 2010“) They control vast piles of cash and other resources, shouldn’t we expect them to be aggressively investing those resources in order to keep their companies growing, rather than blaming tax strategies for their unwillingness to invest? (Wall Street Journal “Obama Pushes CEOs on Job Creation“) It’s precisely because they are so large that we should have high expectations of big companies investing in growth – because they can afford to, and need to!
At the end of the day, everyone wins when CEOs push for growth. Investors obtain higher valuation (Apple is worth more than Microsoft, and almost more than 10x larger Exxon!,) employees receive more pay (see Google’s recent 10% across the board pay raise,) employees have more advancement opportunities as well as personal growth, suppliers have the opportunity to earn profits and bring forward new innovation – creating more jobs and their own growth – rather than constantly cutting price. Answering the Economist in “Why Do Firms Exist?” it is to deliver to people what they want. When companies do that, they grow. When they start looking inward, and try being caretakers of historical assets, products and markets then their value declines.
Can Mr. Zuckerberg run GE? Probably. I’d sure rather have him at the helm of GM, Chrysler, Kraft, Sara Lee, Motorola, AT&T or any of a host of other large companies that are going nowhere the caretaker CEOs currently making excuses for their lousy performance. Think what the world would be like if the aggressive leaders in those smaller companies were in such positions? Why, it might just be like having all of American business run the way Steve Jobs, Jeff Bezos and John Chambers have led their big companies. I struggle to see how that would be a bad thing.
by Adam Hartung | Dec 15, 2010 | Current Affairs, In the Swamp, Leadership, Openness, Television, Web/Tech
Summary:
- Business leaders are honored for creating profitable growth
- Those who create the greatest growth disrupt the status quo and change the way things are done – such as Zuckerberg and Jobs
- Too many CEOs act as caretakers, overlooking growth
- Caretakers watch value decline
- Under Welch, GE dramatically grew and he was Time’s Person of the Year
- Under Immelt, GE has contracted
- Too many CEOs are like Immelt. They need to either change, or be replaced
It’s that time of year when magazines like to honor folks for major accomplishments. This year, Time’s Person of the Year is Mark Zuckerberg, honored for leading Facebook and its dramatic change in social behavior amongst so many people. Marketwatch.com selected Steve Jobs as its CEO of the Decade – an honor several journals gave him last year!
There is of course a bias in these selections. Most journals highly favor CEOs that drive up their stock price! For example, Ed Zander was CEO of the year in 2004 for his “turnaround” at Motorola – and within 2 years he was fired and Motorola was facing possible bankruptcy. Obviously his “quick fix” (getting the RAZR out the door with a big marketing push) didn’t pan out so well over time. We’ll have to see if Alan Mulallly deserves to be CEO of the Year at Marketwatch, since it appears his selection has more to do with not letting Ford go bankrupt – like competitors GM and Chrysler – and thus reaping the benefits of customers who wanted to buy domestic but feared any other selection. Whether Ford’s “turnaround” will be a winner, or another Zander/Motorola, we’ll know better in a couple of years.
One fellow who isn’t on anybody’s list is Jeff Immelt at General Electric. His predecessor was. Given that
- GE is the oldest company on the DJIA (Dow Jones Industrial Average)
- GE is one of the most widely held of all corporations
- GE is one of the largest American corporations in revenues and employees
- GE is in a plethora of businesses, globally
- Mr. Immelt is paid several million dollars per year to lead GE
It is worthwhile to think about why he’s not on this list – whether he should be – and if not, whether he should keep his job!
Since Immelt took the helm at GE, the value has actually declined. He’s not likely to win any awards given that sort of performance. Amidst the financial crisis, he had to make a very sweet deal with Berkshire Hathaway to invest cash (via preferred shares) in order to keep GE out of bankruptcy court – a deal that has enriched Mr. Buffett’s company at the expense of GE. GE has exited several businesses, such as its current effort to unload NBC via a deal with Comcast, but it has not created (or bought) a single exciting, noteworthy growth business! GE has become a smaller, lower growth company that narrowly diverted bankruptcy. That isn’t exactly a ringing endorsement for honors!
Yes, GE has developed a nice positive cash flow, which will allow it to repurchase the preferred shares from Berkshire (Marketwatch “GE to Buy Back Buffett’s Preferreds Next Year.”) But what is Mr. Immelt doing to create future shareholder value? His plan to make a few acquisitions, pay some higher dividends (suspended when the company faltered) and repurchase equity offers shareholders very little as a way to generate high rates of return! Why would anyone want to own GE? Nobody expects the company to be a growth leader in 2012, or 2015. With its current businesses, and strategy, there is no reason to expect GE to produce double digit earnings growth – or double its equity within any reasonable investing horizon.
There’s more to being a CEO than being a “caretaker.” Mr. Immelt’s predecessor, Jack Welch, created enormous value for shareholders. Mr. Welch was willing to disurpt the GE status quo. In fact, he intentionally worked at it! He made sure business leaders were constantly challenged to find new markets, create new products, expand into new businesses, leverage new technologies and generate growth! Mr. Welch was willing to take GE into growth markets, give leaders permission to create new Success Formulas, and invest in whatever it took to profitably grow revenues. During the Welch era, competitors quaked at the thought of GE entering their markets because things were always shaken up – and GE changed the game in order to create higher rates of return. During the Welch era investors received amongst the highest rate of return on any common stock! GE value multiplied many-fold, making pensioners (invested in the stock) and employees quite wealthy – even as employment expanded dramatically. That’s why Mr. Welch was Time’s Person of the Year in 2000 — and for many the CEO of the previous decade.
Mr. Immelt, on the other hand, has done nothing to benefit any of his constituencies. Like far too many CEOs, he took a much less aggressive stance toward growth. He has been unwilling to challenge and disrupt existing leaders, or promote aggressive market disruptions through the GE business units. He has not invested in White Space projects that could continue the massive expansion started during the Welch era. To the contrary, he has moved much more slowly, and focused more on selling businesses than growing them. He has resorted to trying to protect GE – rather than keep it moving forward. As a result, the company has retrenched and actually become less interesting, less valuable and less clearly able to produce returns or create new jobs!
Mr. Immelt certainly has his apologists, and seems to securely have the support of his Board of Directors. But we should question this. It actually has an impact on the American economy (and that of several other countries) when the CEO of a company as large as GE loses the ability to create growth. The malaise of the American economy can be directly tied to CEOs who are operating just like Mr. Immelt: doing almost nothing to create new markets, new sources of revenue, new jobs. Many business journalists like to say the government doesn’t create revenue, or jobs. So who will create them when corporate leaders are as feckless as Mr. Immelt? Especially when they control such vast resources!
Congratulations to Mr. Zuckerberg and Mr. Jobs (and Mr. Hastings of Netflix who was named Fortune magazine’s CEO of the Year.) They have created substantial new revenues, profits, cash flow and return for investors. Their company’s employees, suppliers, customers and investors have all benefitted from their leadership. By disrupting the way their company’s operated they pushed into new markets, and demonstrated how in any economy it is possible to create success. Caretakers they are not, so like Mr. Welch each deserves its recent accolades.
And for all those CEOs out there who are behaving as caretakers – for all who are resting on past company laurels – for all who have watched their company value decline – for those who think it’s OK to not grow – for those who blame the economy, or government, or competitors, or customers or their industry for their inability to grow —- well, you either need to learn from these recently honored CEOs and dramatically change direction, or you should be fired.
by Adam Hartung | Dec 6, 2010 | Current Affairs, Defend & Extend, Disruptions, Food and Drink, Leadership, Lock-in
Summary:
- Business leaders like consistency
- Consistency leads to repetition, sameness, and lower rates of return
- Kraft's product lines are consistent, but without growth
- Kraft's value has been stagnant for 10 years
- Disruptive competitors make higher rates of return, and grow
- Disruptive competitors have higher valuations – just look at Groupon
"Needless consistency is the hobgoblin of small minds" – Ralph Waldo Emerson
That was my first thought when I read the MediaPost.com Marketing Daily article "Kraft Mac & Cheese Gets New, Unified Look." Whether this 80-something year old brand has a "unified" look is wholly uninteresting. I don't care if all varieties have the same picture – and if they do it doesn't make me want to eat more powdered cheese and curved noodles.
In fact, I'm not at all interested in anything about this product line. It is kind of amusing, in an historical way, to note that people (largely children) still eat the stuff which fueled my no-cash college years (much like ramen noodles does for today's college kids.) While there's nothing I particularly dislike about the product, as an investor or marketer there's nothing really to like about it either. Pasta products always do better in a recession, as people look for cheaper belly-fillers (especially for the kid,) so that more is being sold the last couple of years doesn't tell me anything I would not have guessed on my own. That the entire category has grown to only $800M revenue across this 8 decade period only shows that it's a relatively small business with no excitement! Once people feel their finances are on firm footing sales will soon taper off.
Kraft's Mac & Cheese is emblematic of management teams that lock-in on defending and extending old businesses – even though the lack of growth leaves them struggling to grow cash flow and create a decent valuation. Introducing multiple varieties of this product has not produced growth that even matched inflation across the years. Primarily, marketing programs have been designed to try keeping existing customers from buying something else. This most recent Kraft program is designed to encourage adults to try a product they gave up eating many years ago. This is, at best, "foxhole" marketing. Spending money largely just to keep the brand from going away, rather than really expecting any growth. Truly, does anyone think this kind of spending will generate a billion dollar product line in 2011 – or even 2012?
What's wrong with defensive marketing, creating consistency across the product line – across the brand – and across history? It doesn't produce high rates of return. There are lots of pasta products, even lots of brands of mac & cheese. While Kraft's product surely produces a positive margin, multiple competitors and lack of growth means increased spending over time merely leaves the brand producing a marginal rate of return. Incremental ad spending doesn't generate real growth, just a hope of not losing ground. We know people aren't flocking to the store to buy more of the product. New customers aren't being identified, and short-term growth in revenues does not yield the kinds of returns that would enhance valuation and make the world a better place for investors – or employees.
While Kraft is trying to create headlines with more spending in a very tired product, across town in Chicago Groupon has created a $500M revenue business in just 2 years! And new reports from the failed acquisition attempt by Google indicate revenues are likely to reach $2B in 2011 (CNNMoney.com, Fortune, "Google's Groupon Groping Reveals the Shifting Power of the Web World.") Where's Kraft in this kind of growth market? After all, coupons for Kraft products have been in mailers and Sunday inserts for 50 years. Why isn't Kraft putting money into a real growth business, which is producing enormous value while cash flow grows in multiples? While Groupon has created somewhere around $6B of value in 2 years, Kraft's value has only gone sideways for the last decade (chart at Marketwatch.com.)
Kraft has not introduced a new product since — well — DiGiorno. And that's been more than a decade. While the company has big revenues – so did General Motors. The longer a company plays defense, regardless of size, trying to extend its outdated products (and business model) the riskier that business becomes. While big revenues appear to offer some kind of security, we all know that's not true. Not only does competition drive down margins in these older businesses, but newer products make it harder and harder for the old products to compete at all. Eventually, the effort to maintain historical consistency simply allows competitors to completely steal the business away with new products, creating a big revenue drop, or producing such low returns that failure is inevitable.
Lots of business people like consistency. They like consistency in how the brand is executed, or how products are aligned. They like consistency in the technology base, or production capabilities. They like consistency in customers, and markets. They like being consistent with company history – doing what "made the company famous." They like the similarity of doing something again, and again, hoping that consistency will produce good returns.
But consistency is the hobgoblin of small minds. And those who are more clever find ways to change the game. Xerox figured out how to let everyone be a one-button printer, and killed the small printing press manufacturers. HP's desktop printers knocked the growth out of Xerox. Google figured out a better way to find information, and place ads, just about killing newspapers (and magazines.) Apple found a better way to use mobile minutes, taking a big bite out of cell phone manufacturers. Amazon found a better way to sell things, killing off bookstores and putting a world of hurt on many retailers. Netflix found a better way of distributing DVDs and digital movies, sending Blockbuster to bankruptcy. Infosys and Tata found a better way of doing IT services, wiping out PWC and nearly EDS. Hulu (and soon Netflix, Google and Apple) has found a better way of delivering television programming, killing the growth in cable TV. Groupon is finding a better way of delivering coupons, creating huge concerns for direct mail companies. Now tablet makers (like Apple) are demonstrating a better way of working remotely, sending shivers of worry down the valuation of Microsoft. These companies, failed or in jeapardy, were very consistent.
Those who create disruptions show again and again that they can generate growth and above average returns, even in a recession. While those who keep trying to defend and extend their old business are letting consistency drive their behavior – leading to intense competition, genericization, and lower rates of return. Maybe Kraft should spend more money looking for the next food we would all like, rather than consistently trying to convince us we want more Mac & Cheese (or Velveeta).
by Adam Hartung | Dec 1, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Openness, Web/Tech
Summary:
- Most planning systems only focus on improving the existing business
- Most value comes from identifying new market opportunities, and filling them
- Extremely high growth can happen in any company that focuses on market needs, rather than business model optimization
- Groupon has grown from $0 to $500M in 2 years, yet is not a technology company
- Groupon is value at $3B to $6B in just 2 years
- Google could continue to expand the explosive growth at Groupon
- Any company has this opportunity, if it focuses on market needs
“You can’t get there from here.” That’s the punch line of an old joke about a city slicker that gets lost in the country. He sees a farmer and says “I want to get to the St. James ranch.” The farmer thinks about the washed out road #20, the destroyed bridge on Old Ferry Road, the blocked road on Westchester due to a property dispute – and given all his known ways to get to the St. James Ranch he conludes there’s no way to make it happen. He gives up, and recommends the traveler do the same.
And this is the conclusion far too often of most planning systems. When I ask the executive team “how will you grow revenue by 100% next year?” (or even 15% many times) the answer is “can’t happen. We only grew 2% last year, our product lines are becoming aged and the overall market is only growing at 5%. We can only, maximally, hope to grow 3-5%.” In other words, “can’t get there from here.”
But of course there’s a way.
Groupon was started in 2008 (“Groupon at $3 Billion Soars Like Silicon Valley from Chicago” Bloomberg). Now it has about $500M annual revenue, and 2,500 employees. While Sara Lee, Kraft, Motorola and other Chicago stalwarts are contracting – unable to find a growth path – Groupon has exploded. Most companies are complaining about the “great recession,” and its impact on customers and sales, saying they see no way to create triple digit growth. Yet Groupon didn’t invent any new technology, didn’t file any patents, didn’t open a “scale” manufacturing plant, didn’t buy an existing business, or raise a huge amount of money. Groupon is now dominant in local-market advertising – without the Foursquare technology play, or a partnership with Facebook. And it keeps adding new local markets every week. Piling up new revenues, and profits.
What Groupon did was offer the market something it highly valued – a local-based coupon service that was easy to use. Building on digital technology rapidly being accepted by everyone. While most companies are trying to focus on their “core capabilities” and bemoaning a dearth of growth, Groupon’s leaders looked into the marketplace to identify an unmet need and an application of developing technology. As good as Google AdWords is, it is expensive and not terribly good at local marketing. Newspaper coupons are expensive to print, and simply ignored by most modern consumers. There was a hole in what people needed, so the entrepreneurs set out to fill it. And by meeting a need, they’ve created an explosively growing company. As mentioned earlier, while unemployment overall in Chicago is going up, Groupon has hired 900 people over the last 2 years.
That’s what most businesspeople are loath to do these days. After years of being trained to focus on the supply chain, and that innovation is mostly about how to cut costs in the existing business, very few are thinking about market needs. The vast majority (almost all?) of planning is devoted to cutting costs and optimizing an existing business. Or trying to develop an adjacent opportunity to the existing business that has limited, if any growth prospects. And trying to find ways to take money out of the business, rather than invest. In that planning system, if you ask “how do you plan to create a half billion dollar new business in the next two years” the answer is “you can’t get there from here.”
“Google May Acquire Groupon for $6 Billion, and It Would Be Worth Every Penny” headlines Mashable.com. Not bad for the guys who started up this distinctly non-techie company in the non-techie midwest. Whether they sell out or not, the next fundraising is guaranteed to make them extremely wealthy folks. There are still a lot of markets yet to be developed, and a lot more deals to be made in the existing markets, as buyers seek out discounts for products they buy regularly.
It mashable right? Is this a smart idea for Google? Unless you think coupons, and deals, are dead – you have to like this investment. There’s a reason Groupon has grown so very fast – and that lies in meeting a market need. How fast can it grow if Google adds its skills at ad sales, email (gmail) use, user database analytics, networking connections and technology wizardry? While $6B is a lot of money, if you can see how Groupon on its own could become a $6B revenue company within 4 years from today is it really too miuch? (Groupon has grown from $0 to $500M in just about 2 years, so does 12x growth in 4 years [just under an annual doubling] really appear that difficult?)
Smart investing doesn’t mean “hold your nose and jump” off the bridge, hoping the water is OK. And that’s not what Groupon did, or Google might do if it acquires Groupon. Both companies are focusing on future scenarios about how we will get things done in 2012 and beyond. Both are thinking about the impact of existing trends, and how those will allow everyone to be more effective, efficient and successful in 3 or 5 years. Both are developing solutions that help us be more productive by building on trends – and not merely expecting the future to look like the past. Their planning is based upon views of the future – and that’s why they can see such greater opportunity, and create so much value.
Most business limit their planning, and investing, to doing more of what they have always done. Better, faster, cheaper are the hallmarks of the traditional planning process output. Expecting to get dramatic growth, or value, out of a system so narrowly focused is expecting the impossible. Creating value – big value – comes from providing solutions that meet new market needs. And that requires overcoming the limits of traditional planning – and traditional ways of thinking about investing. Instead of doing more of what you know, you have to do more of what the market wants. Any company can get there from here – if you simply open your planning to moving beyond the limits of what you’ve historically done.
by Adam Hartung | Nov 29, 2010 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness, Television, Web/Tech
Summary:
- Most leaders optimize their core business
- This does not prepare the business for market shifts
- Motorola was a leader with Razr, but was killed when competitors matched their features and the market shifted to smart phones
- Netflix's leader is moving Netflix to capture the next big market (video downloads)
- Reed Hastings is doing a great job, and should be emulated
- Netflix is a great growth story, and a stock worth adding to your portfolio
"Reed Hastings: Leader of the Pack" is how Fortune magazine headlined its article making the Netflix CEO its BusinessPerson of the Year for 2010. At least part of Fortune's exuberance is tied to Netflix's dramatic valuation increase, up 200% in just the last year. Not bad for a stock called a "worthless piece of crap" in 2005 by a Wedbush Securities stock analyst. At the time, popular wisdom was that Blockbuster, WalMart and Amazon would drive Netflix into obscurity. One of these is now gone (Blockbuster) the other stalled (WalMart revenues unmoved in 2010) and the other well into digital delivery of books for its proprietary Kindle eReader.
But is this an honor, or a curse? It was 2004 when Ed Zander was given the same notice as the head of Motorola. After launching the Razr he was lauded as Motorola's stock jumped in price. But it didn't take long for the bloom to fall off that rose. Razr profits went negative as prices were cut to drive share increases, and a lack of new products drove Motorola into competitive obscurity. A joint venture with Apple to create Rokr gave Motorola no new sales, but opened Apple's eyes to the future of smartphone technology and paved the way for iPhone. Mr. Zander soon ran out of Chicago and back to Silicon Valley, unemployed, with his tale between his legs.
Netflix is a far different story from Motorola, and although its valuation is high looks like a company you should have in your portfolio.
Ed Zander simply took Motorola further out the cell phone curve that Motorola had once pioneered. He brought out the next version of something that had long been "core" to Motorola. It was easy for competitors to match the "features and functions" of Razr, and led to a price war. Mr. Zander failed because he did not recognize that launching smartphones would change the game, and while it would cannibalize existing cell phone sales it would pave the way for a much more profitable, and longer term greater growth, marketplace.
Looking at classic "S Curve" theory, Mr. Zander and Motorola kept pushing the wave of cell phones, but growth was plateauing as the technology was doing less to bring in new users (in the developed world):
Meanwhile, Research in Motion (RIM) was pioneering a new market for smartphones, which was growing at a faster clip. Apple, and later Google (with Android) added fuel to that market, causing it to explode. The "old" market for cell phones fell into a price war as the growth, and profits, moved to the newer technology and product sets:
The Motorola story is remarkably common. Companies develop leaders who understand one market, and have the skills to continue optimizing and exploiting that market. But these leaders rarely understand, prepare for and implement change created by a market shift. Inability to see these changes brought down Silicon Graphics and Sun Microsystems in 2010, and are pressuring Microsoft today as users are rapidly moving from laptops to mobile devices and cloud computing. It explains how Sony lost the top spot in music, which it dominated as a CD recording company and consumer electronics giant with Walkman, to Apple when the market moved people from physical CDs to MP3 files and Apple's iPod.
Which brings us back to what makes Netflix a great company, and Mr. Hastings a remarkable leader. Netflix pioneered the "ship to your home" DVD rental business. This helped eliminate the need for brick-and-mortar stores (along with other market trends such as the very inexpensive "Red Box" video kiosk and low-cost purchase options from the web.) Market shifts doomed Blockbuster, which remained locked-in to its traditional retail model, made obsolete by competitors that were cheaper and easier with which to do business.
But Netflix did not remain fixated on competing for DVD rentals and sales – on "protecting its core" business. Looking into the future, the organization could see that digital movie rentals are destined to be dramatically greater than physical DVDs. Although Hulu was a small competitor, and YouTube could be scoffed at as a Gen Y plaything, Netflix studied these "fringe" competitors and developed a superb solution that was the best of all worlds. Without abandoning its traditional business, Netflix calmly moved forward with its digital download business — which is cheaper than the traditional business and will not only cannibalize historical sales but make the traditional business completely obsolete!
Although text books talk about "jumping the curve" from one product line to another, it rarely happens. Devotion to the core business, and managing the processes which once led to success, keeps few companies from making the move. When it happens, like when IBM moved from mainframes to services, or Apple's more recent shift from Mac-centric to iPod/iPhone/iPad, we are fascinated. Or Google's move from search/ad placement company to software supplier. While any company can do it, few do. So it's no wonder that MediaPost.com headlines the Netflix transition story "Netflix Streams Its Way to Success."
Is Netflix worth its premium? Was Apple worth its premium earlier this decade? Was Google worth its premium during the first 3 years after its Initial Public Offering? Most investors fear the high valuations, and shy away. Reality is that when a company pioneers a growth business, the value is far higher than analysts estimate. Today, many traditionalists would say to stay with Comcast and set-top TV box makers like TiVo. But Comcast is trying to buy NBC in order to move beyond its shrinking subscriber base, and "TiVo Widens Loss, Misses Street" is the Reuters' headline. Both are clearly fighting the problems of "technology A" (above.)
What we've long accepted as the traditional modes of delivering entertainment are well into the plateau, while Netflix is taking the lead with "technology B." Buying into the traditionalists story is, well, like buying General Motors. Hard to see any growth there, only an ongoing, slow demise.
On the other hand, we know that increasingly young people are abandoning traditional programing for 100% entertainment selection by download. Modern televisions are computer monitors, capable of immediately viewing downloaded movies from a tablet or USB drive – and soon a built-in wifi connection. The growth of movie (and other video) watching is going to keep exploding – just as the volume of videos on YouTube has exploded. But it will be via new distribution. And nobody today appears close to having the future scenarios, delivery capability and solutions of Netflix. 24×7 Wall Street says Netflix will be one of "The Next 7 American Monopolies." The last time somebody used that kind of language was talking about Microsoft in the 1980s! So, what do you think that makes Netflix worth in 2012, or 2015?
Netflix is a great story. And likely a great investment as it takes on the market leadership for entertainment distribution. But the bigger story is how this could be applied to your company. Don't fear revenue cannibalization, or market shift. Instead, learn from, and behave like, Mr. Hastings. Develop scenarios of the future to which you can lead your company. Study fringe competitors for ways to offer new solutions. Be proactive about delivering what the market wants, and as the shift leader you can be remarkably well positioned to capture extremely high value.
by Adam Hartung | Nov 23, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
Summary:
- Most planning systems rely on extending past performance to predict the future
- But markets are shifting too fast, making such forecasts wildly unreliable
- To compete effectively, companies must anticipate future market shifts
- Planning needs to incorporate a lot more scenario development, and competitor information in order to overcome biases to existing customers and historical products
- Apple and Google have taken over the mobile phone business, while the original leaders have fallen far behind
- Historical mobile phone leaders Nokia, Samsung, Motorola, RIM and Microsoft had the technologies and products to remain leaders, but they lacked scenarios of the future enticing them to develop new markets. Thus they allowed new competitors to overtake them
- Lacking scenarios and deep competitor understanding, companies react to market events – which is slow, costly and ineffective.
“Apple, Android Help Smartphone Sales Double Over Last Year” is the Los Angeles Times headline. Google-supplied Android phones jumped from 3% of the market to 26% versus the same quarter last year. iPhones remained at 17% of the market. Blackberry is now just under 15%, compared to about 21% last year. What’s clear is people are no longer buying traditional mobile phones, as #1 Nokia share fell from 38% to 27%. Like many market changes, the shift has come fast – in only a matter of a few months. And it has been dramatic, as companies not even in the market 5 years ago are now the leaders. Former leaders are struggling to stay in the game as the market shifts.
The lesson Google and Apple are teaching us is that companies must have a good idea of the future, and then send their product development and marketing in that direction. Although traditional cell phone manufacturers, such as Motorola and Samsung, had smartphone technology many years prior to Apple, they were so focused on their traditional markets they failed to look into the future. Busy selling to existing customers an existing technology, they didn’t develop scenarios about 2010 and beyond that would describe how the market could expand – far beyond where traditional phone sales would take it. Both famously said “so what” to the new technology, and used existing customer focus groups of people who had no idea the potential benefit of a smart phone to justify their willingness to remain fixated on the existing business. Lacking a forward planning process based on scenario development, and lacking a good market sensing system that would pick up on the early market shift as novice competitor Apple started to really change the market, these companies are now falling rapidly to the wayside.
Even smartphone pioneer Research in Motion (RIM) was so focused on meeting the needs of its existing “enterprise” customers that it failed to develop scenarios about how to expand the smartphone business into the hands of everyone. RIM missed the value of mobile apps, and the opportunity to build an enormous app database. Now RIM has been surpassed, and is showing no signs of providing effective competition for the market leaders. While the Apple and Android app base continues to explode, based upon 3rd and 4th generation product inducing more developers to sign up, and more customers to buy in, RIM has not effectively built a developer base or app set – causing it to fall further behind quarter by quarter.
Even software giant Microsoft missed the market. Fixated upon putting out an updated operating system for personal computers (Vista then later Windows 7) it let its 45% market share in smart phones circa 2007 disappear. Now approaching 2011 Microsoft has largely missed the market. Again, focused clearly upon its primary goal of defending its existing business in O/S and office automation software, Microsoft did not have a forward focused planning group that was able to warn the company that its new products might well arrive in a market that was stagnating, and on the precipice of a likely decline, because of new technology which could make the PC platform obsolete (a combination of smart mobile devices and cloud computing architecture.) Microsoft’s product development was being driven by its historical products, and market position, rather than an understanding of future markets and how it should develop for them.
We can see this lack of future scenario development and close competitor tracking has confused Microsoft. Desperately trying to recover from a market stall in 2009 when revenues and profits fell, Microsoft has no idea what to do in the rapidly expanding smartphone market today. Its first product, Kin, was dropped only two months after launch, which industry analysts saw as necessary given the product’s lack of advantages. But now Mediapost.com informs us in “Return of the Kin?” Microsoft is considering a re-launch in order to clear out old inventory.
This amidst a launch of the Windows Phone 7 that has gone nowhere. Firstly, there was insufficient advertising to gain any public awareness of the product launch earlier in November (Mediapost “Where’s the Windows Phone 7 Ad Barrage?“) Initial sales have gone nowhere “Windows Phone 7 Lands Without a Sound” [Mediapost], with many stores lacking inventory, very few promoting the product and Microsoft keeping surprisingly mum about initial sales. This has raised the question “Is Windows Phone 7 Dead On Arrival?” [Mediapost] as sales barely achieving 40,000 initial unit sales at launch, compared to daily sales of 200,000 Android phones and 270,000 iphones!
Companies, like Apple and Google, that have clear views of the future, based upon careful analysis of what can be done and tracking market trends, create scenarios that allow them to break out of the pack. Scenario development helps them to understand what the future can be like, and drive their product development toward creating new markets with more customers, more unit sales, higher revenues and improved cash flow. By studying early competitors, especially fringe ones, they create new products which are more highly desired, breaking them out of price competition (remember the Motorola Razr fiasco that nearly bankrupted the company?) and into higher price points and better earnings. Creating and updating future scenarios becomes central to planning – using scenarios to guide investments rather than merely projections based upon past performance.
Companies that base future planning on historical trends find themselves rapidly in trouble. Market shifts leave them struggling to compete, as customers quickly move to new solutions (old fashioned notions of “exit costs” are now dead). Instead of heading for the money, they are confused – lost in a sea of options but with no clear direction. Nokia, Samsung, RIM and Microsoft all have lots of resources, and great historical experience in the market. But lacking good scenario planning they are lost. Unable to chart a course forward, reacting to market leaders, and hoping customers will seek them out because they were once great.
Far too many companies do their planning off of past projections. One could say “planning by looking in the rear view mirror.” In a dynamic, global world this is not sufficient. When monster companies like these can be upset so fast, by someone they didn’t even think of as a traditional competitor (someone likely not even on the radar screen recently) how vulnerable is your company? Do you plan on 2015 looking like 2005? If not, how can future projections based on past actuals be valuable? it’s time more companies change their approach to planning to put an emphasis on scenario development with more competitive (rather than existing customer) input. That’s the only way to get rich, instead of getting lost.
by Adam Hartung | Nov 18, 2010 | Current Affairs, In the Rapids, Leadership, Web/Tech
Summary:
- Most managers think it’s good to lower costs
- Most leaders focus heavily on earnings
- But focusing on costs and earnings leads to a dysmal spiral of decline
- Growth, rather than earings, distinguishes the higher value, and higher paying, companies
- Google is giving across the board pay raises and bonuses, because it has high growth
- Amazon, Facebook and Apple are hiring and paying more because they are growing
- Microsoft is cutting staff and costs, and its value is going nowhere as it focuses on earnings
- Growth is good, Greed (a focus on earnings) is the road to ruin
“Google to Give Staff 10% Raise” is the Wall Street Journal headline. All 23,000 employees (globally) will receive a 10% raise this year. At Mediapost.com in “Google Woos Troops with Cash and Raises” it is reported that additional to the 10% raise everyone will also receive at least a $1,000 cash bonus end of this year. According to CEO Eric Schmidt “We want to make sure that you feel rewarded for all your hard work.” For best performers, Google is making some pretty big (outrageous?) offers. In “Google Paying Big Bucks to Keep Talent” Mediapost reported a staff engineer was awarded $3.5 million in restricted stock to stay at the company.
Has your company announced anything similar? Hold on, didn’t you and your team work really hard? Don’t you deserve recognition for your efforts? And given your value to your employer, shouldn’t you receive something special to retain you, before you run to a higher paying job with better growth opportunities? Are we to believe all the good people, who deserve bonuses, are at Google? Or is something different going on besides just “hard work” leading to this generous cash dispersal to employees?
Google is growing like crazy. And that’s the difference. As Bruce Henderson, founder of the famous Boston Consulting Group once said, “growth hides a multitude of sins.” Growth surrounds the business with lush resources – it’s like being on the equator rather than the poles. When you grow, you can pay more to employees, and your suppliers. You can be Santa Clause, rather than the Grinch. Google is spending more money to keep, and hire, employees because other high growth companies, like Facebook, have been “stealing” them away. It’s a problem of riches in the battle to hire and keep people! Wouldn’t you like to particpate in this one?
Too many leaders confuse growth with greed (remember the famous Gorden Gekko speech from Wall Street about “Greed is Good”?) The outcome is a surplus of focus on “the bottom line” and that leads to cost cutting – which hurts growth. In the rush to show higher earnings, leaders forget earnings are the result of good management – and growth – and they begin looking for short-term ways to improve them. Greed, and the desire for more earnings now, causes them to forget that had they spent more time finding profitable growth markets yesterday the earnings today would be higher, and better. And they forget that without growth earnings are destined to decline!
Growth leads to a virtuous circle. More sales leads to more investment in new products and markets, leading to more sales, leading to more earnings, leading to more hiring, leading to higher pay, leading to better talent, leading to better ideas, leading to more new products taking you into more new markets…. a pretty fun place to work. Wheras greed leads to the whirlpool of despair. Cost cutting, product line rationalization, benefit reductions, lower (or no bonuses), headcount freezes, layoffs, no new hires, lower pay, more pressure on suppliers to cut their prices, no new product introductions, lost accounts, fewer salespeople, layoffs, outsourcing, facility closings ….. very much not a fun place to work. Where growth fuels a great company, focus on earnings inevitably kills the business.
We can see this difference when comparing performance of a few leading companies. Microsoft grew for many years. But now its strict focus on PC software has caused growth to lag. At Techflash.com (Puget Sound Business Journal product) “Hiring: Microsoft Stays Cautious as Google, Amazon Ramp Up” tells the story. Declining PC sales growth has led Microsoft to reduce its workforce by 2% globally the last year (~4,000). Google has expanded by 18% (+23,300 jobs). Since adding Kindle to its product line, and making other expansions, Amazon has added 44% to its workforce (~10,000 or 2.5 times the staff reduction at Microsoft). New products and new markets is helping Google, Facebook and Amazon grow – while focus on old markets has lowered growth at Microsoft.
Now Microsoft is attempting to save face by focusing on expense management, and earnings. Mr. Ballmer and his team hope Wall Street analysts will be happy with greed, by looking only at earnings, rather than growth. Microsoft’s CFO said “the best measure for our financial performance… comes down to EPS [earnings per share]… what we really need to do is drive earnings per share growth.” Microsoft missed the digital music wave, smartphone and tablet waves. It’s now struggling to rediscover growth, so it’s hoping to appeal to greed. Microsoft is taking the old approach of “if you can’t show you understand markets, products and growth then try to convince them you’re a good manager who can cut costs.” But how long can Microsoft manage its earnings when it’s not a significant player in the growth markets? Cost reduction is never the route to prosperity.
The last decade has seen the revenge of cost management. Coming out of the “go go” 1990s many leaders have proudly demonstrated their ability to avoid investment, cut costs, work employees harder, avoid increased pay, avoid new hires, send work to low-pay countries – and manage for the bottom line. Unfortunately, most publicly traded companies are worth less now than they were a decade ago. The DJIA and S&P 500 are worth less. The dollar has taken a shellacking. Fewer Americans are working and unemployment is higher. Tax receipts are down, and (as shown in the last election) Americans are pretty sick of a lousy economy. All this focus on earnings hasn’t done much for America’s workers, most American companies or the overall economy.
If you want to be “rewarded for all your hard work” through a big paycheck, a big raise, a big bonus – and you want employment that is filling and fun – then focus on growth. Help your company create new markets, with new products that people want. If you lead the marketplace with new applications and new solutions that fulfill unmet needs you’ll achieve good growth. Then realize earnings are a result of implementing that growth at effective prices. If you focus on the right thing – growth – then you’ll receive the results you want. Less focus on greed, with more on growth, and you might get rich.
by Adam Hartung | Nov 11, 2010 | Current Affairs, In the Whirlpool, Lock-in, Web/Tech
Summary:
- Business value requires meeting future needs
- Businesses have to transition to remain valuable
- U.S. News is smart to drop its print edition and go all digital
- Print newspapers and magazines are obsolete
- Old brands have no value
- Businesses have to develop and fulfull future scenarios, and forget about what made them successful in the past. Value comes from delivering in the future, not the past
Do you know any antique collectors? They scour for old things, considered rare because they are the remaining few out of a bygone era. For some people, these old things represent something treasured about the past – perhaps a turn in technology or some aspect of society. But there is no useful purpose to an antique. You can’t use the chair as a chair, for fear you’ll break it. Mostly, old things are just that – old things. Once useful, but no longer. They are remembrances. For most of us, seeing them in a museum once in a while is plenty often enough. We don’t need a houseful of them – and would happily trade the old Schwynn bicycle from high-school days for an iPad.
So what’s the value of the Chicago Tribune, or the Los Angeles Times? With the internet, tablets and other ereaders, mobile smartphones and laptops – why would anyone expect these newspapers to ever grow in value? Yes, they were once valuable – when readers could be “current” with daily news, largely from a single source. But now these newsapapers are practically obsolete. Expensive to create, expensive to print, expensive to distribute. And largely outdated by faster news outlets providing real time updates via the web, or television for those still not on-line. They are as valuable as a stack of 45 or 33 RPM records, or 8-track tapes (and if you don’t know what those are, ask your parents.)
As much as some of us, especially over 40, like the idea of newspapers and magazines – they really are obsolete. When automobiles were first created many people who grew up riding horses said the auto would never be able to displace the horse. Autos required petrol, where horses could feed anywhere. Autos required roads, where horses could walk (or tow a cart) practically anywhere. Mechanical autos broke down, where horses were reliable day after day. And autos were expensive to purchase and use. To those raised with horses, the auto seemed interesting but unnecessary – and with drawbacks. Yet, auto technology was clearly superior – offering better speed and longer distances, and the infrastructure was rapidly coming into place. The horse was obsolete. And this change made livery stables, saddle makers and blacksmiths obsolete as well. It took only a few years.
Today, printed documents like newspapers and magazines are obsolete. They have a purpose for travelers and commuters – but not for long. Tablets are making even the travelers use of paper unnecessary. With each of the 12million iPads sold (and who knows how many Kindles and other readers) another newspaper was unnecessary on the hotel room door. So I was extremely heartened to read that “U.S. News [and World Report] is ending its print edition” on MediaLifeMagazine.com.
Some might nostalgically say this decision is the end of something grand. Contrarily, this is the smart move by leadership to help the employees, customers and suppliers all continue pushing forward. As a print product U.S. News reached its end of life. As a digital product, U.S. News has a chance of becoming an important part of future journalism. While some are concerned the future digital product is not about the same old news it used to report, the facts are that we don’t need another magazine just for news. But the rankings and industry reports U.S. News has long created have the most value to readers (and therefore advertisers) and so the editors will be focusing on those areas. Smart move. Instead of doing what they always did, the editors are going to produce what the market wants. U.S. News has a fighting chance of survival, and thriving, if it focuses on the marketplace and meeting needs. It can expand with new products as it continues to learn what digital readers want, and advertisers will support. As an obsolete weekly magazine it didn’t have any value, but as a digital product it has a chance of being worth something.
I was shocked to read in Advertising Age “Meister Brau, Braniff and 148 other Trademarks to be Sold at Auction.” Who would want to buy a trademark of an old brand? It no longer has any value. Brands and trademarks have value when they help you aspire toward something in the future. A dead brand would have the cost not only of developing value — like Google in search or Android in phones has done; or the entire “i” line from Apple, or even Whole Foods or Prada. But to resurrect Meister Brau, Lucky Whip or Handi-Wrap would mean first overcoming the old (worn out and failed) position, and then trying to put something new on top. It’s even more expensive than starting from scratch with a brand that has no meaning – because you have to overcome the old meaning that clearly did not succeed.
Value is in the future. Yes, rare artifacts are sometimes cherished, and their tangible ownership (think of historical pottery, or rare furniture) can cannote something of a bygone era that provides an emotional trigger. These occasionally (like real items from the Titanic) can be collected and valuable. But a brand? Do you want a plastic Lucky Whip tub to help you recall bad 1960s deserts? Or a cardboard Handi-Wrap box to remind you of grandma’s leftovers? In business value is not about the past, it’s entirely about the future.
For businesses to create value they have to generate and fulfull scenarios about the future. Nobody cares if you were good last year (and certainly not if you were good last decade – anybody want an Oldsmobile?) They care about what you’re going to give them in the future. And all business planning needs to be looking forward, not backward. And that’s why it’s a good thing that U.S. News is going all digital. Maybe if the turnaround pros at Tribune Corporation understood this they could figure out how to grow revenues at Tribune or the Times again, and maybe get the company out of bankruptcy. Because trying to save any business by looking at what it used to do is never going to work.
by Adam Hartung | Nov 8, 2010 | Current Affairs, In the Swamp, Lifecycle, Web/Tech
Summary:
- Creating value requires growth, not cost reductions
- Yahoo and AOL have no growth, and no new market development plans
- Yahoo and AOL lack the resources to battle existing competitors Google and Apple
- Don’t invest in Yahoo or AOL individually, or if they merge
- Companies that generate high valuation, like Apple, do so by pioneering new markets with new products where they generate growth in revenue, profits and cash flow
Rumors have been swirling about Yahoo! and AOL merging – and Monday’s refresh led to about a 2% gain in the former, and 4% gain in the latter. But unless you’re a day trader, why would you care? Merging two failing companies does not create a more successful progeny.
AOL had a great past. But since the days of dial-up, the value proposition has been hard to discern. What innovations has AOL brought to market the last 2 years? What new technologies is AOL championing? What White Space projects are being trumpeted that will lead to new capabilities for web users if they purchase AOL products?
And the same is true for Yahoo! Although an early pioneer in on-line advertising, and to this day the location of many computer user’s browser home page, what has Yahoo! brought to market the last 2 years? In the search market, on-line content management, browser technology and internet ad placement the game has fully gone to competitor Google. Although the new CEO, Ms. Bartz, was brought in to much fanfare, there’s been nothing really new brought forward. And we don’t hear about any new projects in the company designed to pioneer some new market.
And from this merger, where would the cash be created to fight against the likes of Google and Apple? Unless one of these companies has a silver bullet, the competitors’ war chests assures “game over” for these two.
Sure, merging the two would likely lead to some capability to cut administrative costs. But is that how you create value for an internet company? What creates value is developing new markets – like AOL did when it brought millions of people to the internet for the first time. And like Yahoo! did with its pioneering products delivering news, and placing ads for companies. But since both companies have lost the willingness, capability and resources to develop new markets and products they’ve been unable to grow revenues and cash flow. The road to prosperity most assuredly does not lie in “synergistic cost reductions” across administration, selling and product development for these two market laggards.
The reason Apple is skyrocketing in value is because it has pioneered new markets. And produced enough cash to buy both these companies – if there was any value in them. SeekingAlpha.com lays out the case for almost 100million iPad sales, and a lot more iPhones, in “What Could Justify a $500 Apple Stock Price.” But beyond selling more of what it’s pioneered, Apple has not stopped pioneering new markets. Another SeekingAlpha article points out the likelihood of Apple making video chat something people will really want to use, now that it can be done on mobile devices like iPads and iPhones, in “Apple’s Future Revenue Driver: FaceTime.” It’s because Apple has the one-two punch of growing the markets it has pioneered while simultaneously developing new markets that makes it worth so much.
If you’ve been thinking a merged Yahoo/AOL is a value play – well think again. Both companies are well into the swamp of declining returns. So focused on fighting off the alligators and mosquitos trying to eat them that they long ago forgot their mission was to create new markets with new products that could carry them out of the low-growth swamp. Sell both, if you haven’t already, and don’t look back. Whether you take a loss or gain, at least you’ll leave with some money. The longer you stay with these companies the less they’ll be worth, because neither has a sail of any kind to catch any growth wind.
Apple at $500 might sound crazy – but it’s a better bet than hoping to make any money in the individual, or merged, old-guard companies. They don’t have the cash, nor the cash flow, to drive new solutions. And that’s how value is created.
