by Adam Hartung | Feb 10, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
GM is in intense negotiations with bondholders, employees (via the union) and the government over its future. At stake is nothing less than the future of America's largest auto company. A company that saw revenue decline more than 40% in January after deciding in December to idle most of its manufacturing plants.
The negotiations are focusing on whether GM can be competitive. But, unfortunately, GM seems to be directing that discussion toward cost reductions (read article here). As if all GM needs to do is somehow lower costs and it will be competitive with Toyota, which displaced GM atop the global auto industry as the world's largest in January. What customers globally know is that the issue at GM isn't just about cost (which can pretty much be translated into "union contract busting.") Customers want quality products that fit their needs, produced at high quality, with low service costs, and low cost of use (interpret – higher mileage.) It's been 20 years since the yen/dollar valuation gave Japanese manufacturers lower cost of production – and yet year after year Toyota, Honda, Subaru and Suzuki keep growing share while U.S. manufacturers keep declining.
One of the more difficult to understand articles this week was the lauding of GM's vice-chairman Bob Lutz. Mr. Lutz is more than 70 years old! He might well have been a great executive 35 years ago (in 1974) when he was an up-and-coming executive. But my how the world, and the auto industry, has changed since then. I'll never forget watching him interviewed on television about the Tesla (the electric sports car) and seeing him laugh. He literally dismissed Tesla as unimportant – not up to the standards of GM and it's industry leadership. At the time my thought was "I think you'd be a lot smarter to listen to these new guys than be so smug and ignore them." Of course, in short order, Toyota's hybrid vehicles helped lead Toyota past GM, and the approach of Mr. Lutz was looking less and less viable. Good bye, and good riddance, would be a better report for an executive who not only stayed around too long and didn't "save" GM, but ignored powerful competitors while trying to defend an outdated Success Formula.
It is time for GM, and the other domestic auto competitors, to move on. The old Success Formula has failed. It's not about just doing less well, with GM stock valued at $2.70 and the negotiation about converting bondholders to equity holders in order to get more government bailout money — the game is over. What worked for GM in the 1950s, and most of the 1960s, doesn't work any more. And the success of Toyota and Honda demonstrates that. America doesn't need Bob Lutz (and his compadres) any more – may he enjoy his retirement (which is a lot more secure than the thousands of GM retirees that weren't executives). If investors, employees and vendors of the American auto industry are to avoid even more downfall it is time to develop an entirely new game – with new leaders.
GM (and its brethren) need to quit villifying unions as the "boogeymen" causing all their problems. Management signed those union agreements – and if they weren't viable management should have dealt with them. The employees of GM - and all the citizens of Detroit, southeastern Michigan and northwester Ohio as well as the extended midwest – have a vested interest in the succes of this industry. They will agree to leadership which helps them succeed. Continue the old "company vs. union" battles will do no good. Leadership needs to be focused on offering an approach to delivering products that will energize employees and ucstomers alike.
GM must define a new future. Not one based upon a series of cost cuts – which will be matched by competitors. GM needs to demonstrate it can change its view of R&D, product development, customer finance and distribution to meet current customer needs. For GM to be viable, management must demonstrate it knows that tweaking the old model is insufficient. It's time to develop an "entirely new car company" as Roger Smith said when he funded the launch of Saturn. And America's banks, investors and auto buyers all know this.
Increasingly at GM, Disrupting the old business model seems unlikely. Current management is so Locked-in it continues searching for ways to Defend the old model, in spite of deteriorating results at the nadir of failure. If America is to invest in this company, it deserves new management which is able to develop a new company that can truly compete. It is time to demand new leaders who are not the "old guard", but instead leaders who are able to bring new products to market that are competitive by implementing White Space where these new products can be launched through new distribution. For America to keep supporting GM the company needs to move beyond old arguments about labor costs, and get serious about changing its product line and distribution system as well as its legacy employment costs. It's possible to turn around GM – but only if management will abandon its Defend & Extend Management practices and instead use Disruptions to open White Space for a better company to emerge.
by Adam Hartung | Feb 9, 2009 | Current Affairs, Food and Drink, In the Swamp, Leadership
The second step in following The Phoenix Principle to achieve superior returns is to study competitors. Better, obsess about them. Why? So you can learn from them and position your products, services and skill sets in a way to be a leader. We would hope that studying competitors would not lead a company to take on battles it's almost assured of not winning. Too bad nobody told that to Mr. Schultz at Starbucks, who seems intent on killing Starbucks since his return as CEO.
Starbucks become an icon by offering coffee shops where people could meet, talk and share a coffee – while possibly reading, or checking their email. One of the most famous situation comedies of recent past was "Friends", a show in which people regularly met in a coffee shop not unlike Starbucks. People could order a wide range of different coffee drinks, and the ambience was intended to reflect a more European environment for meeting to drink and discuss. This combination of product and service found mass appeal, and rapid growth. Meanwhile, the previous CEO rapidly moved to seize the value of this appeal by stretching the brand into grocery store sales, coffee on airlines, liquor products, music sales, various retail items, some food (prepared sandwiches and high-end snacks, mostly), artist representation and even movie making. He knew there was a limit to store expansion, and he kept opening White Space to find new business opportunities.
But then Mr. Schultz, considered the "founding CEO" (even though he wasn't the founder) came roaring back – firing the previous expansion-oriented CEO. He claimed these expansion opportunities caused Starbucks to "lose focus". So he quickly set to work cutting back offerings. This led to layoffs. Which led to closing stores. Which led to more layoffs. The company fast went into a tailspin while he "refocused."
Meanwhile competitors started having a field day. Dunkin Donuts launched a campaign lampooning the drink options and the special language of Starbucks, appealing for old customers to return for a donut – and get a latte too. And McDonald's, after years of study, finally decided to roll out a company-wide "McCafe" in which McDonald's could offer specialty coffee drinks as well. While Starbuck's CEO was rolling backward, competitors were rolling forward – and in the case of McDonald's rolling like a Panzer tank.
Now, with a big recession in force, McDonald's is making hay by siezing on its long-held position as a low cost place. Like Wal-Mart, McDonald's is in the right place for people who want to seek out brands that represent "cheap." With sales up in this recession, the company is now launching a new program to highlight its McCafe concept directly aimed at trying to steal Starbucks customers (readarticle here).
So, here's Starbucks that has "repositioned" itself back as strictly a "coffee company". And the company has been spiraling downward for over a year. And the world's largest restaurant company has its sites set right on you. What should you do? Starbucks has decided to launch a "value meal" (read article here). Starbucks is going to go head-to-head with McDonald's. Uh, talk about walking in front of a truck.
Far too often company leadership thinks the right thing to do is "focus, focus, focus" then define battles with competitors and enter into a gladiator style war to the death. And that is just plain foolish. Why would anyone take on a fight with Goliath if you can avoid it? At the very least, shouldn't you study competitors so you compete with them in ways they can't? You wouldn't choose to go toe-to-toe when you can redefine competition to your benefit.
But that is exactly what Starbuck's has done. Starbucks spent its longevity building a brand that stood for being somewhat "upmarket." You may not be able to afford a Porsche, but you could afford a good coffee in a great environment. Sure, you might cut back when the purse is slim, but you still know where the place is that gave you the great, good-inside feeling you always got when buying their product or visiting their store. Now the CEO of that company has taken to comparing the product, and the stores, to the place where kids are jumping around in the play pit – and you can smell $1.00 hamburgers cooking in the background. He's decided to offer values which compare his store, where you remember the cozy stuffed chairs and the sounds of light jazz and the smell of chocolate – with the place where you sit in plastic, unmovable benches at plastic, unmovable tables while listening to canned music bouncing off the tile (or porcelain) walls where you can wipe down everything with a mop.
You study competitors so you can be fleet-of-foot. You want to avoid the bloody battles, and learn where you can use strengths to win. Instead, Starbucks' CEO is doing the opposite. He has chosen to go head-to-head in a battle that can only serve to worsen the impression of his business among virtually all customers, while tacitly acknowledging that a far more successful (at this time) and better financed competitor is coming into his market. His desire to Defend his old business is causing him to take actions that are sure to diminish its value.
Let's see, does this possibly remind you of — let's see — maybe Marc Andreeson's decision to have Netscape go head-to-head with Microsoft selling internet browsers? How'd that work out for him? His investors? His employees? His vendors?
Studying competitors is incredibly important. It can help you to avoid bone-crushing competition. It can identify new ways to compete that leads to advantage. It can help you maneuver around better funded competitors so you can win – like Domino's building a successful pizza business by focusing on delivery while Pizza Hut focused on its eat-in pizzerias. But you have to be smart enough to realize not to try going headlong into battle with competitors that can crush you.
by Adam Hartung | Feb 8, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership
General Electric's (chart here) future earnings and valuation were recently lowered by an analyst at J.P. Morgan (read article here). Reviewing the difficulties facing GE he commented, "Former [Chief Executive Jack] Welch built a culture of earnings management that was unsustainable." One of the few times I've ever heard an analyst make excuses for management. Unfortunately, he could not be more wrong. Investors have every reason to expect GE's earnings growth to continue.
There is no doubt that the real estate bust has led to lower consumer spending, as well as big troubles for banks struggling with reserve requirements as they mark down loans. There is a "wall of worry" among consumer and business spenders alike. Yet, GE's task is to find ways to grow – even in the face of market challenges. When companies fall into a growth stall they have only a 7% chance of ever again growing at a mere 2%.
At GE we're seeing first stages of a growth stall. Why? Despite the very aggressive culture at GE, when Mr. Immelt replaced Mr. Welch he did not maintain the level of Disruption and White Space that his predecessor maintained. For whatever good reasons he had, Mr. Immelt steered GE on a course that was more predictable – and far less likely to make hard turns and hold leaders accountable. GE was very strong, and the company could continue to build on past strengths. And doing so, Mr. Immelt sustained GE largely by Defending & Extending historical practices. Along the way, acquisitions and divestitures were very predictable actions – not openings into new markets that could develop a new Success Formula.
Then the markets shifted. Very hard. And a long-term GE business called GE Capital was suddenly in a lot of trouble. This was not entirely unpredictable – but GE Capital had fallen into Defending & Extending its old business rather than really assessing what might happen. They had real estate investments, and complex hedging products that made real estate losses worse. GE Capital's reserves began disappearing overnight. Simultaneously, NBC was seeing declining revenue as ad demand fell through the floor. Again, not unpredictable given the inroads Google was making in the ad market since 2002. But NBC had fallen into believeing it could Defend & Extend its traditional business, rather than use scenarios to point out the potential shift of advertisers to the web. Even though Mr. Buffet at Berkshire Hathaway jumped in with financing, the reality was that GE had not prepared for the scenario unfolding. By slowing its Disruptions and White Space, GE fell into the same problems many of its other big company brethren fell into. Something the company had avoided under "Neutron Jack" who kept the company eyes firmly on the future while avoiding complacency in existing businesses.
Part of what made GE the incredible earnings machine it was under Mr. Welch was its extensive scenario planning which led the company to get out of businesses, and get into new ones. Under Mr. Welch GE implemented Disruptive techniques like focusing on market share (#1 or #2 was one Disruptive technique) or implementing Destroy-Your-Business.com teams to prepare for internet-based competition. But under Mr. Immelt GE did far less changing of its businesses. GE remained largely in industrial businesses, it's financial business and traditional media. Although it had extensive business interests in India, GE itself was not deeply involved in new internet-based or information-based businesses. It spun out its biggest IT business (GENPAC), reaping a huge reward which the company mostly invested in additional industrial businesses - like water production.
GE is a great company. It's the only company to be on the Dow Jones Industrial Average since the index was created. But not even GE can escape market shifts. GE was one of the first to pick up on the shift to globalization and was an early investor in offshore operations. But the last few years GE's fortunes have stymied as the company spent more energy Defending & Extending its old businesses instead of doing more in new markets. No company, of any size or age, can afford to depend on its old businesses. All businesses must prepare to compete in the future, on the requirements of future customers and against future competitors willing to maximally leverage current and developing opportunities for improvement via technology, business model or any other factor.
GE has a lot of resources, and a long-term culture of Disruption and using White Space. GE has the built-in skills to attack its old Lock-ins, find competitive opportunities and rapidly gear itself in the direction of growth. And that's what GE needs to do. Some analysts are worried that GE may have to reduce its dividend – and well GE should!!! When markets shift as rapidly as has happened this last year, its more important to develop new market opportunities than Defend a dividend payout. GE needs to move quickly to re-establish itself in growth markets for products and services that can push GE into the Rapids and pull the company out of this growth stall. Right now, investors should be demanding that Mr. Immelt act more like Mr. Welch, and push hard for Disruptions that open new White Space projects. That Mr. Immelt is on Mr. Obama's new business economic team (read article here) is not important to investors, employees and suppliers. Right now, all hands and minds need to be focused on finding new markets to regain growth for GE.
by Adam Hartung | Feb 5, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Quotes, Web/Tech
Dell had a tough day Thursday when J.P.Morgan downgraded the stock to the equivalent of a sell (read article here). The stock continues its relentless slide – despite the return of Mr. Dell as CEO (chart here). Some quotes:
- "Our downgrade … focuses squarely on the potential that Dell's PC exposure..could force the company to seek revenue offsets" interpretation – revenues should go down
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"looking for revenue from other sources, Dell could face new costst and competition that could destabilize margins and cause the company to dip into its cash reserves." interpretation – entering new markets isn't free, and new competitors will make the road tough so expect Dell to go cash negative
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"Dell gets around 60% of its total revenue from PC sales, which is an example of how exposed the company is to a market that is widely expected to shrink this year…PC unit shiptmets to fall this year by 13.5% from 2008" interpretation – this is primarily a one product company and that product is not going to grow
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"the enterprise replacement cycle … could be deferred to next year … Dell will be hard-pressed to maintain its profit margins this year as the company faces more-entrenched consumer-market competitors in Acer and Hewlett-Packard" interpretation – Dell sells mostly to companies, who are not replacing PCs, and in the consumer market Dell will find tough sledding competing with Acer and HP
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"Dell is on track with its plan to cut $3billion in costs by 2011" interpretation – Dell is cutting costs, not growing revenue
To steal from an old Kentucky Fried Chicken ad "Dell did one thing, and did it right." Dell's Success Formula worked really well, and the company grew fantastically well as it improved execution while the corporate PC market was growing. But the market shifted. Dell had not developed any White Space to enter new markets, so it was unprepared to keep growing. When revenue growth slackened, the company did not Disrupt its Success Formula, but instead kept trying to do more, better, faster, cheaper. And lacking revenue growth opportunities, the company is slashing costs in its effort to Defend its bottom line and old business model. And all that has resulted in another downgrade – and a company worth a lot less than it was worth before. Just as you would expect for a company that fell out of the Rapids and into the Swamp.
by Adam Hartung | Feb 2, 2009 | Current Affairs, Defend & Extend, Leadership, Lock-in
The U.S. banks are asking for more bailout money – and Congress is resisting (read article here.) Most people don't understand why banks are failing, and lots of them are ready to say "let them fail." But why they are failing is important – because the solution has to be linked to the diagnosis, don't you think?
Back in the old days of hyper-inflation (think 1970s) corporations developed a perverse problem. They had buildings on their balance sheet for $1million, but inflation had made the land, buildings and other assets worth $10million (or $20million). The corporations weren't allowed to mark up their assets to market value. So the banks couldn't lend them more money. As a result, fellows like T. Boone Pickens created a new business opportunity. They simply went to banks and borrowed money based on the real value of the underlying assets, and bought the corporations. Having no desire to run these companies, they often sold off the assets to pay off debt and kept the profits and the companies (and their employees) went away. They were called corporate raiders. And their existence could be traced to accounting.
When banks lend money they are required to have reserves which back up the loans. Banks can lend multiples of their reserves. They have leverage, because every dollar of reserves can create several dolalrs of new loans. As the reserves go up, they can loan more money. If they raise reserves by $1, they can loan out, say, $6.
But today, the bank loans already on the books (not new loans) - especially real estate loans – are going down in value (it's more complicated than this because of various bond offerings and insurance products on the mortgages, but the idea is pretty close). There is an accounting rule which says if a loan goes down in value, the bank has to estimate the new value of the loan and mark the loan down to market value (mark-to-market accounting). So, as real estate tumbles, the loan value tumbles. Every dollar of loan value comes straight out of reserves. This is called reverse leverage. Because if a loan goes down in value by $1, and $1 comes out of reserves, suddenly the bank has to reduce its total loan portfolio by $6 – get that? Instead of one loan being affected, suddenly a lot of loans are affected. Because one loan has to be marked down, in order to cover its reserve requirements, the bank may have to call up the local retailer and ask her to cut her inventory loan by 30% – because the bank no longer has sufficient reserves to cover all her debt. Ouch!!! One bad apple sort of starts spoiling the barrel – to use an old expression.
Suddenly, the reverse of the T. Boone Pickens opportunity happens. A few write-offs eliminate the reserves, making new lending impossible and actually (because real estate has cratered so badly) causing banks to call in perfectly good loans to cover their reserve requirements. (By the way, miss your reserve requirement and, by law, you go into default and the regulators take over your bank.) "But," you might say, "this means perfectly good debts are being called, and perfectly good loan opportunities are being ignored, just because of an accounting convention." And you would be right.
How far would you like the economy to stagnate because of an accounting convention? Sure, there was good reason for this rule. It was intended to keep banks from making questionable loans. But not many banks – not many economists – and not many accountants – expected real estate to drop 20% in value across the U.S.A.
The Japanese came across this problem in the middle-1990s. Their economy exploded in the 1980s. Real estate in Tokyo became the most expensive in the world. Ginza retail property was worth $1M per square foot! And middle-class Japanese discovered homes they had purchased for $80,000 were worth $1M! Young Japanese families buying new homes spent the $1M, and went deeply into debt. Then, the Japanese economy cooled. And real estate values tumbled.
But Japanese regulators would not let the banks write off these loans. They said "either this loan is repaid, in full, or you must write down your reserves." Banks quit lending. The Japanese economy nosedived into recession. And it has still not recovered. Stock prices, real estate prices, prices of everything have remained stuck. And the economy has not grown. After more than 12 years, the Japanese are still in a recession. You may not care, after all you don't live in Japan. But if you live in Japan you've struggled for a raise, you've struggled to pay bills, and if young you've struggled to find a job for 12 years. There are thousands of stories of highly qualified young Japanese college graduates who have never been able to find a job, thus never married – effectively never started their adult lives. Stuck. Families stuck by an extended recession as old debts are slowly, painfully slowly, repaid.
So what should America now do? Should we stick with the old accounting rules? Should we mark down loans, creating bank reserve problems? We know this means banks will ask for bailout funds – to get reserves back up. But we don't want to cover those reserve requirements – for fear the money will be spent on private jets and big bonuses. Maybe, just maybe, we should change the accounting rule.
By the way, I'm not the first with this idea by a long shot. Steve Forbes, a noted conservative, is one of the leaders for this change. He spoke to it on Meet the Press yesterday. This isn't really a hard question, is it? Why would anyone extend a recession, or create a depression, when an accounting rule is very close to the center of the problem? Something as easy to change as an accounting rule.
The issue is Lock-in. Our old enemy of the stuck corporation. Lock-in to past practices that causes the company to keep doing what it always did – even though everyone agrees there has to be change. Lock-in keeps the company on a path to sure destruction. The old accounting rules were based upon what used to be true. Thirty years ago, it was rampant inflation that gripped the U.S. economy. Double digit inflation screwed up everything business leaders and regulators had ever been taught. At one point, in 1978, President Carter went through 3 heads of the Federal Reserve (that's Bernanke's job) in under 1 year! Old accounting conventions were turning business upside down, and destroying healthy corporations. And mark-to-market (rather than acquisition cost), which allowed companies (and banks) to bring assets to "current value" was critical to a healthy economy and the management of healthy businesses.
But who's more Locked-in than economists and accountants? Not exactly known as a "progressive" group of people. Yet, the future for America is totally clear if we keep doing what's been done in the past. The government and industry forecasters have a trend that's very predictable. Without change, liquidity remains hampered, the economy remains on a downward tilt, layoffs continue and problems worsen. Something fundamentally needs to change.
So, using The Phoenix Principle, we know what's needed. Firstly, we can learn from our competitors. The Japanese situation has been studied to death, and the results are well documented. Universally, economists have demonstrated that Lock-in to old practices has hampered the Japanese economy dramatically. As the other developed countries struggle with falling real estate, the first to take action will come out the big winner. The first to find a way to move forward gets an advantage.
We now need to Disrupt! Someone has to help us stop and realize that more of the same has a clear future – and that future is not pleasant. Something has to change. Then we need to create White Space. Instead of changing the rules for all banks, we need to carve out some healthy but jeapardized banks in which to test the practice. We need to allow them to change their accounting, and watch the results. If it works, we can learn and replicate. Don't test on Citibank and Bank of America, which are huge and possibly unable to survive. Test where we can learn what works, and FAST.
Nobody wants another depression. And most people don't want to keep putting tax dollars into banks shoring up reserves. So maybe, just maybe, we should try something new. Like changing the accounting rule. Let's give it a shot, test it with some banks that are strong but struggling, and see if we can't figure out how to apply changes in a way that can get the economy going again!
by Adam Hartung | Jan 28, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
In a recent presentation I told the audience that they had quit printing newspapers in Detroit during the week. The audience said they weren't surprised, and didn't much care. The other day I asked a room full of college students when the last time was they looked at a newspaper (not read, just looked) – and not a single person could remember the last time. In Houston I asked two groups for the headline of the day that morning – not a single person had looked at the newspaper, and none in the group subscribed to a newspaper. Even my wife, who used to demand a Wednesday newspaper so she could receive the grocery ads, asked me why we bother to subscribe any more because she now gets the ads in the mail. This wholly unscientific representation was pretty clear. People simply don't care much about newspapers any more.
So, if you had $100 bucks to invest, and you had the following options, would you invest it in
- A professional baseball team (like the Boston Red Sox or Chicago Cubs)?
- A manhattan skyscraper?
- A newspaper?
That is exactly the question which is facing the New York Times Company (see chart here), and their decision is to invest in a newspaper. In fact, they are selling their interest in the Boston Red Sox and 19 floors in their Manhattan headquarters so they can prop up the newspaper business which saw ad revenue declines of greater than 16% – and classified ad declines of a whopping 29% (read article here). (Classified ads are for cars, lawn mowers, and jobs – you know, the things you now go to find on Craigslist.com, ebay.com, vehix.com and Monster.com and aren't likely to ever spend money on with a newspaper.)
The value of New York Times Company has dropped 90% in the last 5 years – from $50 to $5. The decline in advertising is not a new phenomenon, nor is it related to the financial crisis. People simply quit reading newspapers several years ago, and that trend has continued. Simultaneously, competition for ads grew tremendously – such as the classified ads described above. Corporate advertisers discovered they could reach a lot more readers a lot cheaper if they put ads on the internet using services from Google and Yahoo! There was no surprise in the demise of the newspaper business.
At NYT, the smart thing to do would be to sell, or maybe close, the newspaper and maximize the value of investments in About.com and other web projects (which today are only 12% of revenue) as well as Boston Sports (owner of the Red Sox) and hang on to that Manhattan property until real estate turns around in 5 years (more or less). Why sell the most valuable things you own, and put the money into a product that has seen double-digit demand and revenue declines for several years?
Of course, Tribune Company isn't showing any greater business intelligence. Management borrowed far, far more than the newspaper is worth 2 years ago through an employee stock ownership plan (can you understand "good-bye pension"?). So last week they sold the Chicago Cubs. For $900million. Tribune bought the Cubs, including Wrigley Field, 28 years ago for $20million. That's a 14.5% annualized rate of return for 28 consecutive years. Not even Peter Lynch, the famed mutual fund manager, can claim that kind of record!
Through adroit management and good marketing, they modernized the Wrigley Field assets and the Cubs team – and without ever winning the World Series drove the value straight up. As fast as people quit reading the Chicago Tribune newspaper they went to Cubs games. Who cares if the team doesn't win, there's always next year. And unlike newspapers, there aren't going to be any more professional baseball teams in Chicago (there are already two for those who don't know - Chicago's White Sox won the World Series in 2005). And they aren't building any additional arenas in downtown Chicago to compete with Wrigley Field. Here's a business with monopoly-like characteristics and unlimited value creation potential. But management sold it in order to pay off the debt they took on to take the newspaper private.
Defending the original business gets Locked-in at companies. Long after its value has declined, uneconomic decisions are made to try keeping it alive. Smart competitors don't sell good assets to invest in bad businesses. They follow the capitalistic system and direct investments where their value can grow. The New York Times may be a good newspaper – but who cares if people would rather get their news from TV and the internet – and they don't read newspapers "for fun?" When people don't read, and advertisers can get better return from media vehicles that don't have the printing and distribution costs of newspapers, what difference does it make if the outdated product is "good?" If you think the New York Times Company is cheap at $5.00 a share, you'll think it's really cheap in bankruptcy court. Just ask the employee shareholders at Tribune Company.
by Adam Hartung | Jan 27, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle, Web/Tech
Last week was quite a contrast in tech results. Google announced it had hired 99 new employees in the fourth quarter, but was planning to lay off 100. Not good news, but a veritable growth binge compared to Microsoft - that announced it was laying off 5,000 from its Windows business. To put it bluntly, people aren't buying PCs and that's the focus of all Microsoft sales. As the PC business stagnates – not hard to predict given the shift to newer products like netbooks, Blackberry's and iPhones - revenues at Microsoft have stagnated as well.
So now the pundits are predicting that Microsoft's weakness indicates an acquisition of Yahoo! is in the offing (read article here). The story goes that with things weak, Microsoft will buy Yahoo! to defend its survivability. Not dissimilar to the logic behind Pfizer's acquisition of Wyeth.
But does this really make sense? Microsoft is fully Locked-in to a completely outdated Success Formula. Mr. Ballmer has shown no ability to do anything beyond execute the old monopolistic model of controlling the desktop. Only a massive Disruption by founder Bill Gates kept Microsoft from falling victim to Netscape in the 1990s. But there hasn't been any White Space at Microsoft, and year after year Microsoft is falling further behind in the technology marketplace. Now the growth is gone in their technology. It's just a "cash cow" that is producing less cash every year. Microsoft is a boring company with boring management that has no idea how to compete against Google. They would strip out whatever market intelligence Yahoo! has left in an effort to turn the company into Microsoft. There would be nothing left of value, and a lot of cash burned up in the process.
Why shouldn't Yahoo! buy Microsoft? Google is the leader in search and on-line ad sales. The closest competitor is Yahoo!, which is so far behind it needs massive cash and engineering resources to develop a competitive attack. Yahoo! has a new CEO with the smarts and brass to Disrupt things and create a new Success Formula. Yahoo! could take advantage of the cash flow from Microsoft to develop new products, possibly products we've not thought of yet, that could create some viable competition for Google. We don't need another Microsoft, but we do need another Google! Why shouldn't Yahoo! take over the engineers and technical knowledge at Microsoft, as well as distribution, and use that to develop new solutions for web applications from possibly search to who knows what! Maybe something that moves beyond the iPhone and Blackberry!
What's the odds of this happening? Not good. That would defy conventional wisdom that the company with all the cash should win. But we all know that as investors we don't value cash in the bank, we value growth. So the company with growth opportunities, and the management to invest in new solutions, should be the one that "milks" the "cash cow." The growing company should be cutting the investment in old solutions that are near end-of-life (like Windows 7), and putting the money into growth programs that can generate much higher rates of return. By all logic of finance, and investing, Yahoo! should buy Microsoft. It's Ms. Bartz we need running a high tech company, shaking things up as the underdog ready to use White Space to develop new solutions that can generate growth. Like she did when beating Calma and DEC. Not the CEO best known for his on-stage monkey imitation and no idea how to generate growth because he's so committed to Defending & Extending the old cash business — completely missing every new technology innovation in the last decade.
Yahoo! has a chance of being a viable competitor. Yahoo! has a chance of competing against Google and pushing both companies to new solutions making the PC an obsolete icon of the past. But if Microsoft buys Yahoo!, it will do nobody any good.
by Adam Hartung | Jan 22, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
Microsoft announced today it intends to lay off 5,000 workers (read article here). This action, included in its announcement that Microsoft is going to miss its earnings estimate, spooked the market and is blamed for a one-day market dip (read here). The company's equity value, meanwhile, dropped to an 11-year low – out of its 33 year life (see chart here). Of course, the blame was placed on the weak economy.
But we all know that Microsoft has been struggling. The Vista launch was a disaster. A joke. Techies resoundingly ignored the product – as did their employers. Because Vista was so weak, Microsoft is looking to launch yet another operating system – just 2 years after Vista was launched. Incredible, given that Vista was more than 2 years late being launched! Additionally, in an effort to increase interest in Windows 7, the new product, Microsoft has dramatically increased the availability of beta versions for review (read here).
Microsoft was once the only game in town. But over the last few years, Linux has made inroads. Maybe not too much on the desktop or laptop, but definitely in the server world. The hard core users of network machines have been finding the cappbilities of Linux superior to Windows, and the cost attractive. Additionally, netbooks, PDAs and mobile phones are gaining share on laptops every day. Customers are finding new solutions that utilize network applications from companies such as Google are increasingly attractive. By laying off 5,000, Microsoft is not addressing its future needs – to remain highly competitive in operating systems and applications against new competitors. It is retrenching. This doesn't make Microsoft stronger. Rather, it makes Microsoft an even weaker target for those who have the company in their sites.
Why should anyone be excited about a company that is willing to cut 7.5% of its workforce while it is losing market share? Sure, the company is still dominant in many segments. But once the same could be said for Digital Equipment (DEC), Wang, Lanier, Compaq, Silicon Graphics, Sun Microsystems, Cray and AT&T. All fell victims to market shifts making them irrelevant. Not overnight – but over time irrelevant, nonetheless.
It's hard to imagine, today, a world without Microsoft domination. After all, this was a company sued by the government for monopolistic practices. Yet, we know that even market domination does not protect a company from market shifts. Microsoft's layoffs demonstrate a company planning from the past – it's former dominance – rather than planning for the future. Many industry leaders are already seeing a technology future far less dependent upon Microsoft. Shifting software solutions as well as changing uses of platforms (largely the declining importance of desktop and laptop Wintel machines) is making Microsoft less important.
Trying to Defend & Extend its past glory is not serving Microsoft well. Once, any changes in its operating system was front page news. Now, a new release struggles to get attention. Microsoft is at great risk – and its layoffs will weaken the company at a time when it cannot afford to be weakened. When Microsoft most needs to be obsessing about competitor's emerging strengths, and using Disruptions to open White Space where it can put employees to work on new solutions, Microsoft is cutting back and making itself more vulnerable to competitors now surrounding on all fronts. This should be a big concern for not only those being laid off, but those remaining as employees and those investors who have already seen a huge decline in company value.
by Adam Hartung | Jan 16, 2009 | Current Affairs, Defend & Extend, Disruptions, General, Leadership, Lock-in, Web/Tech
Sprint's prepaid mobile unit, Boost Mobile, announced today a new pricing plan. Customers can get nationwide unlimited calling, text and web access – with no roaming charges. The company President said "This plan is designed to be disruptive." (read article here)
That's a poor choice of words. All this new plan does is lower price. And the predominant reaction is that this may spur a deepening price war. There's nothing new being offered. Just a lower price. Offering more at a lower price isn't disruptive. It might challenge competitors to match that price, and hurt profits, but it isn't disruptive. It doesn't offer a new technology curve that can provide better service at lower pricing long term, it's just another step along a price discount curve.
This change might be very good for consumers. But it's not as good as a really Disruptive action. For example, cell phones were disruptive because they offered a service never before available – mobile telephoning – and offered an entirely new cost curve. In the beginning they were more expensive, so limited only to those who really needed the service. But as time went along and volume increased it became possible for wireless telephony to eclipse old fashioned land-line service. In many emerging countries wireless is the phone service – just as it is for many younger people who have no land line service in their homes relying entirely on mobile phones.
If the CEO at Sprint Mobile wants to be Disruptive he has to come up with a new solution that creates the opportunity for entirely new users who are under- or even unserved. Perhaps telephony that is free because it's linked to a simple radio. Or perhaps a telephone that can translate languages for international use. Or perhaps a phone that can scan documents and send as emails in popular applications like MSWord. Or maybe phones that offer free netmeeting services with document transport and manipulation operating simultaneously with voice service. Or these might just be new features down the road for existing phones – and not even disruptive themselves.
Disruptive innovations are not just price discounts or changes in pricing structures. They bring in new customers and offer the opportunity for dramatically lower pricing because of a different technology or solution format. And they require White Space to develop new customers that can effectively use the new technology and prove its value.
Therefore, we can expect competitors to quickly match the new pricing offered at Boost Mobile. And profits to be curbed.
by Adam Hartung | Jan 15, 2009 | Current Affairs, Defend & Extend, General, Leadership
It was only 2003 when Ed Zander joined Motorola as its new CEO. In the midst of lost market share and declining revenue, analysts were calling for massive layoffs. But, Mr. Zander layed off no one. Instead, he eliminated the executive dining room, focused all executives on customers (even staff positions) and emphasized new product releases. It wasn't long before Motorola spit out the RAZR, a product tied up in product release, and a revitalized Motorola started growing again.
The easiest thing Mr. Zander could have done was increase the already extensive layoffs. Analysts and investors were all calling for more reductions. Instead, he Disrupted long-held lock-ins at Motorola that kept products from making it to market. And Mr. Zander was rapidly named "CEO of the Year." Yes, the RAZR predated him, and he was not a new product genius. But he did unleash new products on the marketplace that created new growth and pushed Motorola back into the forefront of wireless competitors. And his push for White Space created joint product development projects with Apple, and new design centers from Brazil to Bangalore.
Unfortunately, Mr. Zander did not stick to his Diruption and White Space programs. When an outsider bought up company stock and attacked Motorola for continuing its investment in new products, Mr. Zander was cowed. He retrenched. And quickly – very quickly – Motorola found itself without exciting new product introductions. The RAZR was not replaced with additional new products. And innovations remained stuck in R&D and product development instead of making it to market. As the old joint project with Apple allowed the iPhone to hit the market, Mr. Zander found results down and himself on the market as well.
Now, Motorola is cutting heads again. Despite decades of leadership in product development in markets from two-way land mobile radios (like police radios) to television DVR boxes to mobile infrastructure towers to mobile handlhelds you would now think there are no longer any new ideas coming out of Schaumburg, IL. The replacement leadership is taking the easy road. After laying off some 3,000 employees recently Motorola has announced it intends to lay off 4,000 more (read article here). You would think there are no new product ideas at Motorola, as company leadership does what's easy — cutting costs with layoffs. Introducing new products, especially now that Apple has lost its iconic leader Steve Jobs, might produce better results. But since analysts expect layoffs, why not simply do what's easy?
Similarly, Google has announced it is laying off 100 workers (read article here). Google is the fastest growing large company in America; and possibly on the globe. Google has continued hiring new workers, expanding into cell phones and other new markets as competitors have made highly qualified employees readily available. But The Wall Street Journal has been calling for Google to stop hiring and launching new products, pointing out the economy is in a recession. Like Google is un-American for trying to continue growing when other companies are stalled. How dare they!
So now Google is laying off some of its recruiters. On the surface, it would be easy to say this is immaterial. 100 is only .5% of the 20,000+ Google employees. But why is Google doing this? Does it simply feel it must? Does it feeled compelled to lay off workers just because it can? Or because other large companies are doing so? Is this "hey, as the new kid on the block maybe we're missing something and need to play follow-the-leader"? It makes little sense why Google would want to jeapardize its future when it has an incredible opportunity to continue muscle-building its organization with some of the best and brightest folks available – only because old employers (like Motorola) aren't smart enough to take advantage of the talent.
Growth is necessary for all profit-making companies. Without growth, the business stalls and really bad things happen. When competitors start to retrench, it opens opportunities for successful companies to push forward with new growth projects. As long as the population grows, demand for products and services grows as well. Even in recessions, successful businesses grow. Layoffs are never a good thing for any company. Layoffs indicate you can't grow, and if you can't grow you simply aren't worth much. Why should you have a P/E (price/earnings multiple) of 45, or 30, or 20, or 15, or even 8 if you can't grow?
It's incredily easy to lay people off. In America, there are precious few laws preventing it. And almost no longer is there any social stigma. If you have a bad quarter, or even just a bad product launch, you can lay-off some people claiming its for the good of the business. Leaders regularly hide their bad decisions behind layoffs claiming "market conditions" are to blame for weak results. But what investors, employees, vendors and customers want from leaders isn't layoffs. They want new products, new services, new markets, new innovations that spur increased demand from added value. They want growth. Growth may not be easy, but it's necessary.
Instead of laying off 100 workers, why isn't Google deploying them into new business opportunities? Are there simply no new growth areas that could use the talent of these people Google hired out of the thousands of applicants that sought these jobs? And the same is true at Motorola. The new mobile devices CEO was hired from Qualcomm at millions of dollars expense – why isn't he putting all these engineers and product development experts to work? Why isn't he launching new products that increase the capabilities of wireless services so consumers do more calling, texting, emailing and application sharing? The easiest thing he can do is fire 3,000, 4,000 or 7,000 employees. Anyone can do that. But is it going to help Motorola grow? If not, why isn't he doing what will take the company to better competitiveness and an improved market position versus competitors? Is he simply doing what's easy, instead of what's necessary?
