Rumors are flying around Chicago about the health of Sara Lee CEO Brenda Barnes. Will she stay or leave? Some investors are wondering as well. While I join the chorus of voices that wish Ms. Barnes good health, her departure would not be a bad thing for Sara Lee investors, employees, suppliers and customers! Whether for health or other reasons, a change in the top at Sara Lee is long overdue.
As Crain's Chicago Business reported in "Sara Lee's Secrecy on CEO Barnes' Health Leaves Investors Wondering" in the 5 years Ms. Barnes has been CEO Sara Lee's value has dropped 25%, even as the S&P consumer goods index has risen by 18%! During her tenure, revenues at Sara Lee have declined 50% – largely due to asset sales from which the cash proceeds have done nothing to improve results. Currently, Ms. Barnes has a large deal on the table to sell another multi-billion dollar business in her ongoing effort to make Sara Lee a smaller and less competitive company.
There's nothing wrong with selling a business. But leaders have a responsibility to either pay the proceeds out to investors or re-invest the proceeds into new, growing businesses with high rates of return that will add more value. In Ms. Barnes case the money has been spent buying up shares of stock (the plan for any future proceeds, by the way). That has done nothing more than make the pool of shares, like the company assets, smaller. As already mentioned, these asset sales have not added anything to revenue or profit growth and thus the company value has steadily declined.
Of course, as I vilify Ms. Barnes reality is that it takes the agreement of Sara Lee's Board of Directors for this strategy to be implemented. And it takes a leadership team which agrees to go along – without offering strong dissent and driving discussion of results and long-term impact. While I make out Ms. Barnes to be a "goat" there is a lot more wrong at Sara Lee these days than simply the CEO.
Sara Lee has long been without any White Space. The company has tried to "milk" its aged brands, hoping to get more profits out of products that were much more exciting to customers in 1970 than 2010. While Jimmy Dean Sausage, Sara Lee frozen desserts and similar products were the stuff of my youth the current generation of young adults have chosen much different fare – in not only food but household and health/beauty products. Sara Lee's leadership before Ms. Barnes started the route of focusing on past sales and simply trying to give existing customers more. As a result, there has been 2 decades of insufficient scenario planning, limited competitor analysis – and no Disruptions. There has been no White Space to do anything new.
Similarly, we can easily make heroes out of CEOs in companies doing well. Steve Jobs at Apple is a case in point. During his 10 year leadership, Apple has gone from near bankruptcy to value greater than Microsoft. But this was not all Mr. Jobs. He has pushed his Board of Directors and leadership team to do more scenario planning, obsess about competitors, implement Disruptions and open White Space for doing new things. As a result, the Apple organization is now entering new markets and launching new products.
Mr. Jobs has not been without his own health concerns the last few years. Hopefully, he is doing well and will live many, many more healthy and happy years. Yet, if he chose to depart Apple for health or other reasons Apple is well positioned to continue doing well. Because as an organization it is planning correctly and implementing Disruptions and White Space – critical capabilities of Phoenix organizations.
CEOs matter. They set the tone for their organizations. Good ones understand the need to build organizations that can enter new markets – like Mr. Jobs. Bad ones spend their energy trying to Defend & Extend past results, often getting trapped in financial machinations as the organization shrinks and value disintegrates – like Ms. Barnes. But it's not all about the CEO and we shouldn't get too caught up in that single job. Good organizations have the skills to produce long-term growth and high rates of returns, and that can be built anywhere. Let's hope Sara Lee's Board wakes up to this and starts making changes in that organization soon.
The leadership of Microsoft's entertainment division are leaving, as reported at TechFlash.com "Bach, Allard leaving Microsoft in Big Shift for Consumer Businesses." Whether by their own choice or by request, the issue is simply that Microsoft has not driven the XBox to a dominant position versus the Sony Playstation or the Ninendo Wii. It is competitive, but not a big winner. The entertainment division has only recently moved beyond break-even, after years of losing billions of dollars. In the high-growth gaming business, Microsoft has simply not performed, despite its vast resources. And mobile devices developed in this division have lost over half their market share in under 2 years to Apple and Google.
Some of the weakness may have been that the leaders were long-term Microsoft veterans, comfortable to Mr. Ballmer and other leaders, rather than executives committed to their markets. Messrs. Bach and Allard were not they type of leaders to challenge the Microsoft Success Formula, instead willing to accept mediocre results rather than violate Microsoft Lock-ins that would have jeopardized their careers. Microsoft was willing to lose money, and not be a big winner, as long as the division leadership didn't challenge Lock-ins or the company focus on desktop computing products.
I'm not optimistic now that the division is reporting directly to CEO Steve Ballmer. He had an enormous role in the company decision to commit vast resources to Defending the old Success Formula by massing hundreds of billions of dollars behind development and rollout of Office 2007, now office 2010, Vista and now System 7. Yet, these projects have done nothing to grow Microsoft; instead only helping the company hold onto old customers. Worse, Mr. Ballmer himself recently informed the world in his CEO Summit (as reported in Computerworld "Microsoft's Ballmer admits 'Window's Vista was just not executed well") that he's not a good leader of product development – costing the company thousands of man-years in wasted development when admittedly mismanaging Vista!
Now, largely due to the ongoing Defend & Extend management practices of Mr. Ballmer, Microsoft and Apple's valuations are in a dead heat. Growth at Microsoft is poor, while Apple with its multiple new products is growing much faster – causing Apple's value to catch up to what has historically been the world's largest software company.
As I commented on the recent interview for bnet.com (available as a podcast) Microsoft's Defend & Extend management practices are deeply rooted in the industrial economy. But they are insufficient for success in today's rapidly shifting marketplace. I discussed this in more depth for my keynote address at the Western Michigan Innovation & Energy Summit last week, and a second article was published in the local newspaper on Saturday "Customer is Always Right? Columnist says not for Innovative Businesses." Specifically, Microsoft's total commitment to maintaining old operating system and Office customers has created an inability to re-focus resources on high growth markets like gaming and mobile devices.
Although Microsoft has solutions – including tablet technology – it's management is Locked-in to Defending what it always did and not committing to new growth markets. Anyone who thinks Microsoft will be the major player in cloud computing, just because it has demonstrated some new products, must look closely at how poorly the company has developed these other growth markets. Technology and products are not enough when management is Locked in to protecting past markets. Microsoft is far behind Google, and has practically no catch of being a major player with so much resource dedicated to Office 2010 and System 7.
Thus investors as well as customers and employees are not doing so well at Microsoft. In the rapidly shifting technology and gaming markets, this inability to commit to new markets is deadly. For Microsoft, replacing the heads of the entertainment division is most likely analogous to rearranging the deck chairs on ocean liner Titanic. The pending outcome is rapidly becoming inevitable. Time to look for lifeboats!
Do you lament "the way things used to be?" I remember my parents using that phrase. Now I often hear my peers. And it really worries me. Success requires constant growth, and when I hear business leaders talking about "the way things used to be" I fear they are unwilling to advance with market shifts.
For 5 years newspaper publishers have been lamenting the good old days, when advertisers had little choice but to pay high rates for display or classified ads. Newspaper publishers complain that on-line ads are too inexpensive, and thus unable to cover the costs of "legitimate" journalism. While they've watched revenues decline, almost none have done anything to effectively develop robust on-line businesses that can offer quality journalism for the future. Instead, most are cutting costs, reducing output and using bankruptcy protection to stay alive (such as Tribune Corporation.) Even as more and more readers shift toward the digital environment.
While most of the "major" newspapers (including Tribune owned LA Times) have been trying to preserve their print business (Defend & Extend it) HuffingtonPost.com has gone out and built a following. There's little doubt that with the last 3 years trajectory,HuffingtonPost will soon be the largest site. And reports are that HuffingtonPost.com is profitable.
In 2006 the CFO at LATimes told me he couldn't divert more resources to his web department. He felt it would be jeopardize to the print business. "After all," he said "you don't think that the future of news will be bloggers do you?" Clearly, he was unprepared for the kind of model Arianna Huffington was building – and the kind of readership HuffingtonPost.com could create.
On Tuesday I presented the keynote address at the Innovation and Energy Summit in Grand Rapids, MI – and as reported in West Michigan Business "Energy & Innovation Summit Speakers Urge Business Leaders to Seek New Businesses, Not Protect Old Ones." Defend & Extend management always "feels" right. It seems like the smart thing to try and preserve the old Success Formula, usually by cutting costs and increasing focus on primary revenue sources. But in reality, this further blinds the organization to market shifts and makes it more vulnerable to disaster. While NewsCorp and others are busy trying to think like newspapers, emerging news market competitors are developing entirely different models that attract customers – and make a profit.
That's why it is so important to use future scenarios to drive planning (not old products and customers) while passionately studying competitors. Talking to advertisers gave these publishers no insight as to how to compete, however had they spent more time watching HuffingtonPost.com, and other on-line sites, they might well have used Disruptions to change their investment models – pushing more resources to the web business. And had they set up dedicated White Space teams not constrained by old Lock-ins to traditional revenue models and goals of "avoiding advertiser cannibalization" they might very well have evolved to a more effective Success Formula necessary for competing on the internet into 2020.
I get the most heat when I talk about spending less time listening customers. But I'm not joking. To grow revenues and profits you have to go far beyond asking your customers – who are more likely to hold you back from growth than accelerate it.
BusinessInsider.com makes this point loudly in an Henry Blodgett article "Ignore the Scream's — Facebook's Aggressive Approach is Why It Will Soon Become the Most Popular Site in the World." Given how many people use Facebook, it's hard to remember that the site is only 6 years old. What we've also mostly forgotten is that Facebook wasn't even first. It followed the popular, and well financed after acquisition by News Corp, MySpace.com. Lots of companies got into social networking. But now the marketplace is dominated by Facebook – which will soon be the web's most popular site (as it closes in on Google.)
Facebook did not win by asking users/customers what they wanted. To the contrary, Facebook's leaders took the approach of offering what they perceived would be steps forward – and then letting the market react. Frequently a VERY loud contingent would be VERY upset. Screaming loudly they hated the change. But with each advancement, Facebook grew users and the site's success. Facebook didn't ask users what they wanted, nor did they ask users for permission to do new things. Facebook went into the market, and using its scenarios about the future Facebook's leaders drove toward what they expected to be a more popular site. They did it, and learned from their experience.
Too many businesses spend way too much time trying to make small advances, and miss the big shifts. Microsoft is a great example. As it launches Office 2010, Microsoft isn't trying to bring in new users to grow its base – like Facebook is doing. Instead it is trying to preserve its installed base. Nonetheless, some "loss" is a given. You can't preserve forever. If you don't bring in new customers, you can't grow because you have to replace lost ones and find incremental new ones. But what do we see in Microsoft's offerings (such as Office 2010 and System 7) that is designed to bring in new users?
Meanwhile, Google is offering more powerful and cheaper Cloud-based solutions, as Apple and Google grow the demand for mobile devices (like iPhone and iPad) that don't use Microsoft products. The big shifts are all away from Microsoft, while Microsoft's efforts at preservation are leaving these alternatives with limited competition.
Today Bnet Australia posted a podcast interview I did with Phil Dobbie, sponsored by CBS, last week. In "Disrupt To Win" we discuss the big difference between Apple and Google as compared to Microsoft. The growing companies use scenarios to develop new solutions which will appeal to new users. They keep expanding the marketplace. As new users adopt new solutions, eventually it becomes mainstream – further accelerating growth. Growth doesn't come from trying to Defend the old platform or user base, but from launching new solutions which grow the market leading to conversion and even greater growth.
Facebook is now a phenomenon, growing in 6 years from obscurity to the second largest global user base. Because, like Apple and Google, the leadership did not ask customers what they wanted (which was what MySpace.com did). Rather, they studied competitors and emerging markets to create new solutions – without worrying about cannibalization or moving faster than customers would recommend. And the leadership has been willing to overlook vocal user minorities in order to appeal to new users, thus driving more growth. You can't expect customers to deliver great growth, that has to come from aggressive scenario planning, deep competitive analysis and a willingness to Disrupt your organization and the marketplace.
Being an entrepreneur is not a part-time job. People who try starting businesses "between jobs" rarely succeed. It takes time, resources, careful listening to the marketplace and adroit adaptability to emerging needs to be a successful entrepreneur. But, as Harvard Business Review points out in "The Danger of Part Time Business Builders" too often existing companies relegate new business development to a part-time activity.
That's why creating and maintaining White Space is the 4th step of The Phoenix Principle. When you have a scenario plan, and you know how you will effectively compete you attack Lock-in to open doors for doing something new – and then you dedicate resources to doing the new thing. Growth requiresdedicated resources. One of the biggest reasons new projects fail is we expect them to get done using 15% of Frank in finance, 20% of Rebecca in real estate, 30% of Michelle in marketing, etc. Even if Larry is a dedicated leader for the growth project, how can he hope to succeed when most of the time the people on his project have their heads into doing more to manage or improve the existing Success Formula!
The majority of innovation at Proctor & Gamble is variations and derivatives, designed to Defend & Extend an old brand. Sustaining innovations meant to maintain revenues, or grow them slightly. A traditional, large organization is usually pretty good at that activity – as exemplified at places like Kraft and P&G. But these same organizations usually fail when it comes to entering new businesses because they try to "matrix" the resources for start-up; "leveraging" existing staff. These ad hoc teams, even as a task force, aren't able to really listen to new, emerging customers or challenge old Success Formula Lock-ins – so they almost always spend money, produce mediocre (at best) results and simply drift into oblivion.
Harvard Business Review discusses how P&G succeeded by using White Space in "How P&G Quietly Launched a Disruptive Innovation." By dedicating people to the project, and allowing them to violate previous Lock-ins, the Align Probiotic product team was able to identify new customers, cater to their needs, and build a solid business. Initially P&G used a traditional approach, and almost killed the product. But when a far-sighted leader decided to give a dedicated team the resources, and Permission to do what they needed to do without holding closely to P&G Lock-ins, the product became a big success.
If you'd like to hear more about how you can create and use White Space to help your organization succeed, I invite you to 2 upcoming events where I'm the keynote speaker. Next week, on May 18th, I'll be kicking off theInnovation Summit in Grand Rapids, MI. Click on the link to register for this event. On June 9 I'll be the keynote speaker at the CIO Magazine Perspectives event in Chicago. Click on the link to register for that event. All organizations, and functions within organizations, benefit from understanding how White Space is important to growth – so come along and listen to how you can apply these concepts in 2010!
Did you ever carve into a tree, then return to look at the carving years later? If you did, you would have seen that the carving is the same distance from the ground. The tree grew from the outside, from its branches, not from the bottom. The roots and trunk feed the growth, which occurs where the tree meets the environment – growing toward the sun for photosynthetic feeding.
Too many organizations, however, try to grow from the bottom rather than from the branches. Instead of looking to the environment for growth, they look inside. Instead of seeing the roots and trunk as sources of water and minerals (resources for growth) the strategists and leaders spend most of their time thinking about how to protect, or even grow, the "core" source of the tree. Far too little time is spent thinking about the environment and how to push resources where greatest growth can occur.
In a recent Harvard Business Review web posting "The Strategic Imperative Not to Hire Anybody" the author points out that many CEOs are now desirous of growth. But their approach is very flawed. They are enamored with all the headcount reductions of the last few years, and want to grow revenues without adding any additional resources. They are impressed that they grew profits by cutting employees, and now want to grow revenues and profits without any new ones. They "saved the core" by pruning branches, and expect the growth to rematerialize easily.
Discussing how these CEOs came to such a surprising position, that they should be able to grow without adding new resources, the author Walter Kiechel points out that most strategy in corporations has little to do with understanding new markets, new needs – new sunlight. Instead, strategists have been trained in how to improve the efficiency of the root system and trunk supply chain. Their focus has been on optimizing what exists, cutting resources, improving efficiency. What passes for strategy today has little to do with finding new sunlight, and competing effectively with other plants to get it. Instead, strategy is almost all internal analysis to improve how the existing tree maximizes its use of the dirt. How the tree will re-bark the old carving, and sustain its old position. Even ignoring other ground plants that are leaching away minerals and moisture, and other rapidly growing trees that are interfering with sunlight – each year coming closer to the original tree and making it impossible to find sun where it used to be plentiful.
Bloomberg-BusinessWeek makes note of this phenomenon discussing the problems at Goldman Sachs in "Goldman Sachs: Failure of Innovation." Author Rick Wartzman points out that within Goldman, and almost all other banks, the very smart MBAs from Harvard, Stanford, Columbia, Wharton and elsewhere really weren't developing products which would help the banks grow. They weren't developing new financing or investing opportunities that would generate economic growth. Instead, an internal focus led them to develop collateralized debt obligations (CDOs) which had only the intent of reducing risk and increasing return for the existing business. These were defensive, protective products intended to Defend & Extend the old products – not create anything new. Goldman wasn't creating economic growth for its clients, or itself, with CDOs. They were implementing classic D&E behavior – trying to protect the trunk.
Growth happens from the branches. On the edge of the business, where it meets the environment. Growth happens when we focus on how to competitively acquire more sunlight, and use that to maximize the value of our resources. An efficient resource delivery system is helpful, but continued optimizing of that system does not create growth. Unless there is a robust method of identifying new markets, and pushing resources toward those, you simply cannot grow. What strategists need to do is spend a lot more time thinking about markets and competitors if they want to create growth – and a lot less time thinking about how to optimize the "core." If the bankers at Goldman, Bank of America, Merrill Lynch, Citibank, etc. had done that we would have a far more robust economy now. And if leaders want to start growing in 2010 and 2011 they need to change the focus of their strategy group – and figure out how to put new resources into growth areas of the environment!
"What business are you in?" is one of the most common business questions asked. People usually want a simple answer, like "I make widgets" or "I provide widget services." A simple answer allows people to easily cubbyhole the business, and remember what it does. And many think it provides for a well run business – through a simple focus – sort of like the Kentucky Fried Chicken ad "We only do chicken, and we do chicken right." Because the business's Identity is easy to understand employees can focus on Defending that Identity.
But in reality when your Identity is tightly tied to a product or service bad things happen when demand for that item wanes — or demand turns flat while supply is ample (or possibly growing). Competitors start trading punishing blows back and forth, and profits wane as competition intensifies. Business leaders start acting like gladiators trapped in a coliseum pit, undertaking ever more dangerous actions to survive amidst punishing competitiveness. Many don't survive. As results are increasingly threatened, the business's Identity is under attack, and the tendency to Defend that Identity is extremely strong. Such defense usually grows, even as results continue deteriorating.
There is an alternative. Instead of trying to always be what you always were, you can do something different. Think about Hewlett Packard. HP started as an instrumentation company, making electronic tools, such as oscilliscopes, for engineers. But as the market shifted, HP's leaders have moved the company into new business – allowing the company to keep growing.
By entering new businesses, some organically and some via acquisition, HP has been able to continue growing sales and profits. By letting each of these businesses do whatever they need to do to succeed, by giving them permission to do what the market demands and providing these new businesses with resources, HP has been able to compete in old businesses, while developing new businesses toward which the Success Formula can migrate. Thus, HP has become a company with a less simple Identity – but it also has been able to continue years of profitable growth.
Too often, opening these White Space projects for growth causes the traditional business to feel threatened. Those in the old Success Formula will often say that the company is "abandoning its past" and "walking away from a very profitable business." Like the old story of Homer, this is a "siren's song" – very dangerously pulling you toward the rocks which can sink your ship – because each month profitabiilty is becoming more and more threatened. While it might have been a profitable business in the past, as growth slows profitability is less and less likely in the future. As sales growth slows it is important the business do its best to develop a new Success Formula so it can maintain growth.
"Has Apple Forgotten the Mac?" is a recent PCWorld article. The authors point out that as Apple's revenues have transitioned toward new businesses, such as music and now mobile computing/telephony, the Mac business receives less attention and resources. Those who support the Mac business question if Apple should spend more resources on what has recently returned to profitability.
This is the kind of internal threat that can be very risky. While the Mac is a great product, with a loyal following, and regained profitability – we can see that in the future there will be less and less need for such desktop and laptop products. Apple is migrating toward the new mobile future – and as a result it must reduce the resources on the Mac business. Each year, more resource needs to be allocated toward the new, faster growing businesses, and less invested in the slower growing traditional computing products.
Apple's Identity was once all Mac. And that nearly bankrupted the company – as it almost ran out of cash back at the century's turn. Only by overcoming its Identity as a single product company, and rapidly moving into White Space with new products in new markets, was Apple able to regain its profitable growth path.
HP and Apple both show us that an Identity, created early in the lifecycle, is very powerful. But inevitably markets shift, and the results possible from a simple, easy to understand identity will decline.Only by overcoming that original Identity via entering new markets – and using White Space to evolve the Success Formula, can a business hope to have long-term revenue and profit growth.
"CraigsList is for hookers." That's what the General Manager at the Los Angeles Times told me in 2005. In a meeting to discuss the newspaper's future profitability I pointed out that 1/3 of his newspaper's revenues came from Classified ads, and I had asked him if he was concerned about CraigsList.com. As you can tell, he was not.
At the same time, I asked him if he was concerned about on-line ads and the Google placement engine undermining his display ad business. He assured me that the internet was all for bloggers and no reputable news reader would pay much attention to on-line news. So no, he wasn't worried about internet competition to the newspaper sucking away this advertiser base. He just needed to keep old customers focused on the value of newspaper ads. In less than 6 months GM removed 70% of its newspaper ads – shifting all the money to on-line advertising – leading the auto pack on-line. And movie companies moved nearly 75% of their newspaper ad budget to on-line, while more than half of real-estate ads went on-line. Those happen to be the top 3 sources of display ad revenue for newspapers.
Today Tribune Corporation is in bankruptcy, and classified ads have dropped to a trickle for all major newspapers. Meanwhile, things are going pretty well at CraigsList and Google:
As can be seen, revenues per employee are phenomenal at CraigsList, and extremely good at Google. Much better than at the Tribune Company newspapers such as the Los Angeles Times and Chicago Tribune – despite them shedding a high percentage of employees over the last 7 years!
According to Gavin O'Malley, at OnlineMediaDaily of MediaPost.com in "CraigsList Revenues Soar: But Problems Loom" revenues at CraigsList may exceed $4M/employee/year! Margins he asserts are in the range of 75-80%! And revenues, while still small at about $125M, are growing at 25%/year (for what everyone thinks of as "free.") Albeit, this is a small business. But what if Tribune Company had paid attention back 5 years ago and invested hard in creating the world's best CraigsList – rather than ignoring it? What would the possible revenues be today? And margins? And impact on Tribune Company growth in revenues and profits?
Most companies do only a surface analysis of competition. They are so busy listening to, and reacting to, big customers it's all they can do to keep operations going and make the marginal changes to keep big customers happy. As a result, maybe they look at 2 or 3 of their most similar competitors (like other newspapers in the local market for our example.) And that will be cursory, examining total revenues, perhaps margins (if public and data is available) and a quick glimpse at impact on existing customers and any new products recently launched. But overall, very little attention is paid to competition.
And practically none is paid to "fringe" competitors. Those with different business models. Polaroid ignored digital camera manufacturers (despite licensing them technology) until Polaroid went bankrupt. Digital Equipment(DEC) ignored AutoCad – calling their CAD/CAM products "toys." Wang and Lanier said no big company would use a PC, rather than an integrated centralized system, for corporate word processing so they discounted Apple and Microsoft. Motorola largely ignored Apple in mobile phones, even after doing a joint venture with them to create and launch the RoKR. Failure lists are strewn with companies that simply ignored "fringe" competitors – saying they didn't understand the industry, the customers and how "the business works."
Large or small size is not important when studying competition, it's the ability to change how customers buy that is important. As we've seen in the case of companies like Google, Apple, eBay and Amazon we can see that fringe competitors can grow extremely fast. They can alter the competitive landscape quicker than almost any traditional corporate planning group will give them credit. Just ask the folks at Sears or Home Depot about he impact of Amazon and other on-line retailers (do you think either of those traditional retailers have anywhere near $1M revenue/employee like Amazon?) Or ask Merrill Lynch about the impact of Schwab, eTrade and ScotTrade.
The second step in The Phoenix Principle is to obsess about competition. When you're "the big gun" in the industry it can be incredibly easy to ignore fringe competitors. But do so at your risk. When profits are something like $2M to $3M per employee (as in the case of CraigsList) there is a lot of resource to invest in growth. And strong indications that the business is able to very profitably grow! Ignoring "fringe" competition – especially because you are focused on existing large customers who are Locked-In to your Success Formula – leaves you remarkably vulnerable to rapid market shifts and a really fast demise.
Many of us remember the first Apple vs. Microsoft battle. Apple pioneered much of the personal computer business, and led the innovation curve for years with its implementation of the mouse and on-screen graphics. But eventually Microsoft successfully copied the innovations with Windows, and went on to drive Apple to the brink of bankruptcy at the turn of the millenium. At that time, it was inconceivable that Apple would ever challenge Microsoft for sales domination.
But the impact of a decade of Defend & Extend Management has left Microsoft with little to no growth. Its growth in operating systems now looks like it has been a single quarter event, with the OS7 launch which has done little to drive new PC sales. Meanwhile, office automation products actually saw a net decline in revenue year-over-year last quarter. Signs of a growth stall are imminent for Microsoft – and we all know that fewer than 8% of companies ever consistently grow at a mere 2% once revenues stall for 2 consecutive quarters.
It's not often we see a big company stall, and then falter. But I've been predicting this for months through this blog. Microsoft has been working at Defending its "base" but it has done too little trying to enter new markets and find growth. As people shift to mobile devices – from the smartphone to ereaders – Microsoft simply is seeing its "base" in the PC market threatened. How many PCs will be purchased in 2015? Versus how many smartphones or iPads (there will be 12million iPads sold in 2010 alone).
This inability to maintain growth translates into serious value deterioration for investors.
We now can see that Apple is entering new markets, and gaining revenue at 20-40% per year by moving beyond Defending the Mac. Because Microsoft has not done something similar, preferring Defend & Extend Management applied to old markets rather than applying The Phoenix Principle and getting into new markets aggressively, not only is its revenue superiority threatened, but Microsoft most likely will have a lower market capitalization than Apple within a few months
If it seems like I'm beating this horse — well it's not often we see the kind of changes happen to competitors in such short time as we're seeing happen to Microsoft and Apple. It takes more than a little courage to predict the demise of a behemoth (see "Microsoft's Dismal Future" at Forbes.com) that has had near-monopolistic power in a market the way Microsoft has.
More importantly, more companies are behaving like Microsoft in 2008-2010 than acting like Apple. And that is a shame. Until management teams reverse their thinking, how can we expect America to successfully return to high industrial growth rates and job creation?
There is little about Microsoft to excite investors. I'd go so far to say that there's little more exciting about Microsoft than there is at General Motors, or AIG. These companies are huge, and were once great, but unending defense of their outdated Success Formulas is leaving them extremely vulnerable to decline and failure.
In the end, you have to ask yourself – do you want to be Microsoft in 3 years, or Apple? Do you want to be working hard to maintain revenues and valuation – or growing and driving higher value? I think most of us know which is better. It's time we start
using scenario planning to develop future plans
obsess about competitors so we learn better ways to compete
implement Disruptions to move our businesses into growth markets and
use White Space teams to help us update into new Success Formulas.
Companies that follow these 4 steps of The Phoenix Principle can expect to have a great 2011. They can perform like Apple, Google, Cisco Systems, Virgin, Nike, Johnson & Johnson. For everyone else, we can expect growth stalls and, well, …..
Apple's most recent earnings surprised almost everyone, to the topside. At SeekingAlpha.com "Apple Soars: Is this a Great Country or What" the author points out that all analysts are now calling for Apple's equity value to continue increasing. Most expect prices to achieve $330 – $350/share. Right now Apple is worth about $235B. At $330/share it is worth $300B. Microsoft is worth $273B. That means within the next few months the expectation among investors is that Apple's value will eclipse Microsoft's.
Why? Because Apple has much faster growing revenue sources than Microsoft. Despite a plethora of products, Microsoft still depends for sales and profits on PC operating system and office automation products. And that market simply isn't growing. Even Microsoft optimists are depending upon a "PC replacement cycle" to drive more sales rather than any real growth in demand.
While Microsoft has spent the last decade Defending & Extending (D&E Management) its PC business, its value has been flat. Meanwhile, Apple has developed other revenue sources:
In 2000 Apple relied on Mac sales. But now, it has 2 businesses that are as large as the computer business. While defending the Mac business has maintained its sales, using White Space to launch other businesses has more than tripled Apple's revenue. Today the iPod/iTunes business is as large as the Mac business, and the iPhone business is as large as well. Both are growing. And with estimates that already a million iPads have been sold – with some estimates of reaching 6 million units in 2010 – who knows how big the publishing business could become for Apple.
As SeekingAlpha.com points out in "Everybody Loves Apple but Who's Left to Buy It" there are ample reasons to forecast substantial revenue and profit growth for Apple – causing it to lure many more investors to own the stock. Not only hardware sales are going up, but in both the music and smartphone business Apple has the envious draw of pulling follow-on download sales – songs, videos, and apps. Thus, each device pulls a series of ongoing revenue bites.
Readers should also note how fast this has happened. What has happened to your business in the last decade? In the last 3 years? As we can see, Apple created a $20B/year business since 2007 just in the iPhone. Another $16B/year business in iPod/iTunes during the last decade. That's over $36B/year of revenue from new sources, all organic (no acquisitions) in under 10 years. And that's the power of White Space. Instead of planning how to defend an understood and predictable market (like Microsoft) Apple studied new market needs, then launched a product and gave the team Permission to do what it took to succeed – unencumbered by the history of the Mac, or Apple or any of the Lock-ins that were part of the old Success Formula. This White Space teams then spawned revenue streams that are envied by everyone.
My recent Forbes column (Microsoft's Dismal Future) portended this week's earnings announcement and the changing fortunes of these two companies. Lacking White Space, Microsoft is an uninteresting company with limited growth forecasts and negligible value growth. By using White Space Apple is growing much faster, and will soon have a higher value than "the world's largest software company."
Effective use of scenario planning, competitor analysis, disruptions and White Space can launch growth in any company. You don't need a "hot economy" to generate growth. And Apple has been demonstrating this quarter after quarter for nearly a decade – with several more good quarters coming.
