DJIA Changes – Interesting, Yet Meaningless

DJIA Changes – Interesting, Yet Meaningless

On 8/31/20, the Dow Jones Industrial Average went through a change in composition. Out went Exxon, Pfizer and Raytheon. In came Salesforce.com, Amgen and Honeywell. This is the 8th time the Index components have changed this decade, the 13th time since 2000 and the 55th change since created in 1896. So changes are not uncommon. But, are they meaningful? Ask any academic and you’ll get a resounding “NO.” There is no stated criteria for selection, no metrics for inclusion, no breadth to the number of companies (which has changed significantly over time,) and not even a weighting for market capitalization! The DJIA has no relationship to “the market,” which could well be measured better by the S&P 500, or the Russell 3000. And it doesn’t even link to any specific industry! To academics, “the Dow” is just a random number that reflects nothing worth measuring!!

The DJIA is (currently) a group of 30 stocks selected by the editors of Dow Jones (publisher of the Wall Street Journal, owned by News Corp – which also owns Fox News – and controlled by Rupert Murdock). Despite its lack of respect by academics and money managers, because of its age – and the prestige of being selected by these editors – being on the DJIA has been considered somewhat revered. Think of it as an “editorial award of achievement” for size, profitability and perceived stability. For these reasons, over time many investors have believed the index represents a low–risk way to invest in corporations and grow their wealth.

So the daily value of the DJIA is pretty much meaningless. And being on the DJIA is also pretty much meaningless. But, investors have followed this index every trading day for 124 years. So, it is at least interesting. And that’s because it is a track on what these editors think are important very long-term economic trends.

The original Index composition looks NOTHING like 2020. American Cotton Oil Company, American Spirits Manufacturing Company, American Sugar Refining Company, American Tobacco Company, Chicago Gas Light and Coke, General Electric, Leclede Gas, National Lead, Pacific Mail Steamship Company, Tennessee Coal Iron and Railroad Company, United State Cordage Company and United States Leather Company. Familiar household names? This initial list represents the era in 1896 – an agrarian economy just on the cusp of coming into the industrial age. Not forward looking, but rather somewhat reflective of what were the biggest parts of the economy historically with a not forward.

Over 124 years lots of companies left the DJIA — were replaced – and many replacements left. Some came on, went off, and came back on again – such as AT&T, Exxon (formerly Standard Oil of New Jersey) and Chevron (formerly Standard Oil of California.) Even the vaunted GE was inducted in 1899, only to be removed in 1901 – then added back in 1907 where it stayed until CEO Jeff Immelt imploded the company and it was removed for good in 2018.

But, there has been a theme to the changes. Originally, the index was largely agricultural companies. As the economy changed, the Index rotated into commodity companies like gas, coal, copper and nickel – the materials leading to a new era of tools. This gave way to component manufacturers, dominated by the big steel companies, which created the industrial era. Which, of course, led to big manufacturing companies like 3M and IBM. And, along the way, there was recognition for growth in new parts of the economy, by adding consumer goods companies like P&G, Coca-Cola, McDonald’s, Kraft (since removed,) and Nike along with retailers like Sears (later removed,) Walmart, Home Depot and Walgreens. The massively important role of financial services to the economy was reflected by including Travelers, JPMorgan Chase, American Express, Visa and Goldman Sachs. And as health care advanced, the Index added pharmaceutical companies like Pfizer, Johnson & Johnson and Merck.

Obviously, the word “industrial” no longer has any meaning in the Dow Jones Industrial Index.

Reading across the long history of the DJIA one recognizes the editors’ willingness to try and reflect what was growing in the American economy. But in a laggard way. Not selecting companies too early, preferring instead to see that they make a big difference and remain important for many years. And a tendency to keep them on the index long after the bloom is off the rose – like retaining Kraft until 2008 and still holding onto P&G and Coke today.

The bias has always been to be careful about adding companies, lest they not be sustainable. And not judge too hastily the demise of once great companies. Disney wasn’t added until 1991, long after it was an established entertainment leader. Boeing was added in 1987, after pioneering aviation for 30 years. Microsoft added in 1999, well after it had won the PC war. Thus, the index is a “lagging index.” It reflects a big chunk of what was great, while slowly adding what has recently been great – and never moving too quickly to add companies that just might be tomorrow’s leaders.

Sears added in 1924, wasn’t removed until 1999 when its viability is questionable. Phillip Morris Tobacco (became Altria) was added in 1985, and hung around until 2008 — long after we knew cigarettes were deadly and leadership didn’t know how to do anything else. Even today we see that United Aircraft was added in 1939, which became United Technologies in 1976 and then via merger Raytheon in 2020 – before it is now removed, as all things aircraft are screeching to a pandemic halt. And Boeing is still on the Index despite the 737 fiasco and plunging sales. IBM was added in 1939, and through the 1970s it was a leader in office equipment creating the computer industry. But IBM after years of declining sales and profits isn’t really relevant any longer, yet it is still on the Index.

As for adding growing stars, GM stays on the Index until it goes bankrupt, but Tesla is yet to make consideration (largely due to lack of profit history.) Likewise, Walmart remains even though the “big gun” in retail is obviously Amazon.com (another lacking the size and longevity of profits the editors like.) McDonald’s stays on the list, despite no growth for years and even as the Board investigates its HR department for hiding abhorrent leadership behavior – while Starbucks is eschewed. And Cisco is there, while we all use Zoom for pandemic-driven virtual meetings.

So what can we take away from today’s changes? First, the Index has changed dramatically over 20 years to reflect electronic technology. IBM, Microsoft and Apple are now joined by Salesforce. Pharma company Pfizer is being replaced by bio-pharma company Amgen in a nod to the future, although almost 40 years after Genentech went public. Exxon disappears as oil prices fall to sub-zero, demand declines globally and electric cars are on the cusp of taking market leadership. And conglomerate Honeywell is added just to show the editors still think conglomerates matter – even if GE has nearly disintegrated.

Is any of this meaningful? I don’t really think so. As an award for past performance, it’s a nice token to make the list. As business leaders, however, we need to be a LOT more concerned about developing businesses for the future, based on trends, than is indicated by the components of the DJIA. Driving revenue growth and higher margins comes from doing the next big thing, not the last big thing. And, as investors, if you want to make outsized returns you have to know that a basket of largely laggards (Apple, Microsoft and Salesforce excepted) is not the way to build your retirement nest. Instead, you have to invest in companies that are creating the future, making the trends a reality for businesses and consumers. Think FAANG.

Nonetheless, after 124 years it is still sort of interesting. I guess most of us do still care what the editors of big news companies think.

TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business (https://adamhartung.com/assessments/)

Give us a call or send an email.  Adam@sparkpartners.com

California Legislators – Not Even You Can Stop a Trend

California Legislators – Not Even You Can Stop a Trend

In 2019, the California legislature passed Assembly Bill, AB5 “The Gig Economy Law.” It redefined “employee” in an effort to try and dramatically reduce “contract workers.” This law is intended to force people who work to become ”employees” (of someone), and thereby receive more rights. Simultaneously it forces those who pay for work to become “employers” covering additional costs forced onto them by the legal definition of an “employee”. In other words, AB5 attempts to set back the advancement of the Gig Economy 30+ years. Last week, that law was put on hold by a California court, and California citizens will vote in November on whether requirements of AB5 should remain, or be repealed.

Go back to 1900 and there were very few “employees.” Most people just worked. But the industrial economy boomed, and with it the need to put people into factories. Showing up on time, doing a job, was crucial to the industrial economy – whether you were making car parts or pushing invoices around. We’ve all seen pictures of assembly lines in factories making shirts or lawn mowers, and assembly lines of gray steel desks where people manually processed documentation. Being an “employee” meant showing up and was central to developing the industrial economy, where lots of cogs were needed for the machine to work.

 

There is one thing stronger than all the armies in the world, and that is an Idea whose time has come.

Victor Hugo

But we’re not in an industrial economy any more. Since 1990 we’ve been transforming into the information economy (or the knowledge economy, pick your preferred term.) Automation has replaced labor, with robots making trucks while computers process documents. People don’t stand in assembly lines – machines do. Work doesn’t happen with our hands, it happens with our brains – and machines do the manual labor. Managers don’t manage people, they manage processes. As a result, companies have been realizing they need a lot fewer people.

No longer can employers consider employees for life. Rather, companies need flexibility to adjust to the fast paced marketplace. Owning resources, including labor, can feel like dragging an anchor along with your business. Yes, people are needed people to do things. But every business leader knows that the brainpower needed today is probably not what was needed yesterday and not what will be needed tomorrow. Businesses need to access the knowledge workers they need quickly and shift their resources fast in order to meet changing market conditions- agility not stability. Relationships are transactional, not societal.

This is actually good for everyone. A hundred years ago studios controlled everything about movie making, including actor salaries. Many actors (i.e. Judy Garland & Mickey Rooney) made dozens of movies, yet had very little money. But that lock was broken, and it allowed actors to sell their services to the highest bidder – leading to today’s “star economy” where actors make what they can get producers to pay. There is a set scale to employment, but every actor is a free agent able to negotiate their terms of “employment” for each project.

Major league sports is the same. Where once club owners dictated pay, today players negotiate across teams for the best contracts. It allows for negotiating the best price for the best service in an open, flexible economy. If you’re good at playing, or coaching, you negotiate with the teams to get your best price for your services.

Uber and Lyft aren’t much different from studios and sports franchisees. Once, taxi companies controlled the market. All of us spent time standing in lines, waiting on cabs, that too often were dirty and broken. Market access was controlled by taxi tokens, and so was pricing. So service deteriorated to as low as possible, while customers stood in line on Friday night hoping to get a cab home from the theatre. But Uber unleashed the market. Resources could be added, or removed, by market participants. Pricing was determined by the buyers and sellers. And pricing variability allowed for quality variations as drivers tried to acquire repeat business. Surge pricing meant you could get a ride on New Year’s eve, meeting the customer needs and with pricing to meet the supplier’s need for expanding short-term capacity.

You might not think of Kim Kardashian, Tom Brady and an Uber driver as gig workers. But they are. And this hasn’t been lost on most of us. As publishers have disappeared, writers now must sell their research and writing independently, no longer expecting a set salary and benefits from newspaper owners. Virtual office assistants abound. For almost 30 years we’ve been building a flourishing economy of “gig workers” who are looking to match their skills with market needs. Uber and Lyft are just platforms created to help match the sellers and buyers (as is FiveRR for graphics and other office services.) Their success has been due to meeting a very real market need.

Uber and Lyft have helped the trend toward individual economic independence grow, not created the trend. When you see managers, who work for a set wage, working 24x7x365 on their iPhone or other mobile device, what’s the difference between them and a “gig worker?” When it comes to getting the work done, nothing. Just how they are paid – and some serious illusions about the employee/employer compact that are wholly out of date. Increasingly, we are recognizing we are better off to maximize the value of our services working independently, and seeking out projects that can use our services as contractors, rather than going through the burden of “hiring” and “firing” across “employers” in a fast changing world. Uber didn’t put people out of work, the knowledge economy redefined work. Uber doesn’t create low pay, it just offers a market that allows for flexible capacity and variable pricing. Uber offers a platform matching buyers and sellers. And that’s something we need MORE as adaptability demands keep rising.

California legislators can see that work has changed. But their approach was backward. They are trying to push everyone – both workers and business people – into an outdated model. An industrial model of employment. That will never work. It won’t work because the economy has changed, the world has changed, needs have changed, and these trends will not reverse. Trying to rewind the clock will only cause employers to abandon markets, as Uber and Lyft did when they said they would leave California. Solutions must address trends for independence and accessibility, not try to apply 100 year old definitions to a modern problem.

Contract work is here to stay. It’s been growing for 30 years. What’s needed are better Gig Marketplace tools to help business people find the resources they need, for workers to find projects that fit their skills and that meet their societal needs.

The old model created the term “benefits” for societal needs comprised of unemployment pay, retirement pay, hazard compensation, health care, etc. and forced those costs onto the “employer.” In much of the world today these costs are born by the government, but in the USA they are still borne by “employers”. In a contractor relationship, no one is required to cover the costs of those benefits. In most businesses now, “employer” is a term with a lot less meaning since businesses need much more agility than they did in an industrial economy. During this transition from industrial to gig economy, those societal needs are not being met effectively, leading to individual suffering and much, much higher costs to society.

New solutions are required to meet these needs – instead of forcing the old model onto a new economy. Legislators and regulators need to recognize that old approaches need to be revamped.  All of these problems need new solutions – not some effort to force the industrial model onto platform providers that do little more than match needs with skills.

And this requirement for change applies to labor representation as well. The Department of Labor is an industrial era dinosaur that has little to no value in a world of work-from-home employees, outsourced manufacturing plants and easily available offshore production. Industrial era labor unions make no sense when we don’t work on assembly lines. Yet, unions are a very important part of entertainment and professional sports. Because in the latter markets leaders have adapted the union’s services to meet modern needs. Whether they realize it or not, gig workers need help with representation. But that representation must be a lot more sophisticated at helping workers than the throngs of attorneys at the AFL-CIO.

Californians would be suffer negative impacts if Uber and Lyft leave the market. And they realize that. But the solution is not the blunt axe of AB5. Thus, the law will almost surely be reversed in the next election. Then, hopefully, California will step up to the challenge of leading the country with new approaches that meet gig worker needs – expanding their markets and opportunities while building social solutions to every day needs.

TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business (https://adamhartung.com/assessments/)

Give us a call or send an email.  Adam@Sparkpartners.com

WILL KODAK SUCCESSFULLY PIVOT INTO PHARMACEUTICALS? I DOUBT IT.

WILL KODAK SUCCESSFULLY PIVOT INTO PHARMACEUTICALS? I DOUBT IT.

Yesterday (7/28/20), President Trump surprised a LOT of people announcing that via the Defense Production Act (DPA) the US government is going to give Kodak $765 million to make pharmaceuticals. The tie to current COVID-19 pandemic issues, for which the Act was invoked, is at best tenuous. Somehow the announcement seems to be more about moving pharma production back to the USA. Which is why it left me, and a lot of others, asking “why would you pick Kodak?”

Everyone knows the Kodak story. Great innovator, makes the Brownie and creates an entirely new market called “amateur photography.” From an era when almost nobody had a picture of themselves, Kodak made pictures commonplace. And the company was a wild success. The US Department of Defense asked Kodak to help them develop a way to send photos digitally from satellites to earth, and after spending a lot of taxpayer money Kodak invents digital photography. A very happy DOD allowed Kodak to keep the civilian rights to digital photography. Locked into the profits from film sales, Kodak never develops the products or market and licensed away the technology. Which doomed Kodak to the world of business history books as one of the classic business screw-ups of all time, riding film sales to death and missing the next big market wave.

Over the last 20 years there’s been nothing new to excite anyone about Kodak. They tried launching a blockchain technology-based business for photographers to manage picture rights. Way too late and poorly conceived, and lacking any demand, that went nowhere. Lacking any new ideas leadership grabbed the lightest “shiny new thing” and launched Kodak’s own cryptocurrency “KodakCoin.” Missed it? So did everyone else. In a word, Kodak was going nowhere.

I always recommend watching trends, and then pivoting your strategy to be on trend. So why didn’t the blockchain and cryptocurrency “pivots” work? Simply, Kodak brought nothing to the marketplace. They didn’t identify an un-met or under-met need and try to fill it with a better solution. Kotak just tried to jump into some shiny technology and throw it onto the marketplace hoping someone would think they needed it. They didn’t. So those pivots failed.

Big companies can pivot. IBM pivoted from a mainframe hardware company into a software and services company. And that worked because IBM understood customers had un-met and under-met needs for enterprise applications and Software-As-A-Service (SAAS) use. IBM moved from making expensive, over-developed hardware to meeting a very real customer need, and the pivot revitalized a nearly obsolete company.

Even before IBM, Singer was once a manufacturer of sewing machines. As the 1960s ended home sewing was in a tailspin, and commercial sewing was all going to Asia. Singer had nothing new to offer, while it’s primary competition (Brother) was innovating gobs of new features to make sewing better, faster, easier and cheaper. So Singer sold (all its products, manufacturing, brand name, etc) to Brother. Leadership studied the marketplace and identified a very big, growing and under-met need for defense electronics suppliers. Leadership carefully acquired leading companies with new technologies in forward looking infrared, heads up displays and others to build a leading-edge defense contractor. Note, they first identified an under-met need. Second, (via acquisition) they brought to market a lot of product innovation to improve customer performance in ways not previously utilized. The pivot was built on under-met needs and innovation.

So what is the plan for Kodak? Kodak knows nothing about pharmaceuticals, and their understanding of “chemistry” (to the extent it still exists) has NO application in pharma. (Ever heard of a joint venture called DuPont/Merck designed to apply DuPont chemistry expertise to pharma? I didn’t think so. It didn’t survive.) The plan is to build a company to make the most generic “pharmaceutical ingredients.” Not blockbuster pharmaceuticals. Literally, the very most generic ingredients. Not better ingredients. Not cheaper ingredients. Just make what already exists – and almost assuredly at a higher cost.

These Kodak ingredients are not innovative. Making them is not innovative. The reason “big pharma” doesn’t make these is because they are GENERIC products of low value, and production has moved to China and India where costs are lower. There is no innovation in these products. And Kodak has NO PLAN to add any innovation. None. Not in products, not in manufacturing process, not in markets served or customer service. Nope. Kodak plans to take 3 to 4 YEARS (any idea how fast markets move these days) to develop a plant to make a generic product that is sold on the basis of cost.

The only way this works, at all, is if the government forces, by regulation, U.S. pharma companies to buy from Kodak (in 3 to 4 years when they supposedly can make the stuff.) Otherwise, why pay the higher price? Today, American politicians constantly decry the high U.S. drug prices. So we are to expect that $765 million of taxpayer money will be spent on a plant, to make a generic compound, readily available in the world today, at a higher price, that will then be forced into American pharma products making them EVEN MORE EXPENSIVE! This is exactly how America ended up with the Bath Iron Works to make Navy ships which are the MOST expensive in the world – and thus wholly non-competitive in commercial ship production.

Does this not sound …… problematic? If we need U.S. based manufacturing for these products every single pharma company in the USA could open a plant faster, manufacturing at lower cost than Kodak, and with no quality or other regulatory concerns. There literally is no need for Kodak to become a supplier in this supply chain. And – absolutely no reason the U.S. taxpayer should be expected to teach Kodak how to “pivot” into becoming a new company. If the White House wants to use the D.P.A. to make more generic pharma compounds then it can push [insert any pharma company name you like here] to do it like they pushed G.M. to make ventilators!

Net/net – this is a pivot, and Kodak desperately needs to pivot. But this will not be a successful pivot. Because it is not targeting an unmet or under-met need. It is not utilizing innovation to create a better solution for meeting customer needs. This is making a generic product, that is readily available, at a higher cost than it is available today. Who wants this?

I’m sure Kodak shareholders are happy. Today. But this is a train wreck. Don’t expect this plant to ever make it to fruition, as the pharma companies will unwind this deal long before Kodak makes anything. And if we’re lucky, taxpayers will get some of their money back. But who knows, because this is a really stupid idea.

TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business (https://adamhartung.com/assessments/)

Give us a call or send an email.  Adam@sparkpartners.com

The Remarkable, Predictable Decline of TV

The Remarkable, Predictable Decline of TV

Seven years ago (12 December, 2012) I said it was “The Day TV Died.” There were a LOT of skeptics. At the time, TV was by far still the dominant medium. But the trends were absolutely clear – ad revenues were quickly moving toward on-line opportunities. Print was already well into the grave, and radio was sputtering along with no growth at all. Eyeball momentum had shifted on-line, and thus ads moved on-line, and it was obvious that programming dollars would soon follow – meaning that TV programming was already in Stage 4 termination.

Trends and Tech drove Netflix growth

Meanwhile, Netflix and its brethren were poised to have a fabulous, furious growth. These same trends led me to a full-throated pitch to buy Netflix nine years ago (Nov. 2010.) After Netflix made the decision to raise prices for DVD distribution in order to push people toward streaming the stock crashed, but trends indicated that customer preferences would lead Netflix to be the content winner so despite widespread despair, I called for people to buy the stock in Oct. 2011. In Jan. 2012, I made Netflix one of my top 4 picks for the year. So by Jan. 2013, I was making it clear that TV was has-been, and Netflix was the company to own.

Now, Statista has produced the numbers showing that in 2019 internet media consumption exceeded TV consumption – for the first time ever. And this trend will not stop. It was wholly predictable years ago – and the trends all say this will only accelerate. Where once the competition for entertainment was Netflix, now there is Amazon Prime, Disney+, Comcast Peacock, AT&T HBO Max and Apple TV+. The traditional networks simply don’t have a chance.

Impact of Trends

These trends are having an enormous impact on how we behave, how advertisers behave, what technology we buy, what entertainment we watch, how we use other technology like social media, how we absorb news — and more. So the question is, did you see the trends 7,8,9 years ago? Have you adjusted your strategy? Are you sure where trends are headed, and are you prepared for the future? Will you be a winner as the world changes – in a pretty predictable way – or will you lose out and say “you know, way back when……”

Mighty Oaks from Tiny Acorns Grow – Beyond Meat

Mighty Oaks from Tiny Acorns Grow – Beyond Meat

The newsletters of Adam Hartung.
Keynote Speaker, Managing Partner, Author on Trends
Adam Hartung photo

Mighty Oaks from Tiny Acorns Grow – Beyond Meat

TREND: Beyond Meat (BYND, NASDAQ)

A big, new trend is emerging. Sales of plant based protein products may be small, but growth is remarkable. Could Beyond Meat be the next Netflix?

BEYOND MEAT plant based patties

In Q3 2019, Beyond Meat’s revenue is up 2.5x (250%) vs Q3 2018 — which was up 2.5x (250%) over Q3 2017. Yes, you can say this growth is on a small base, given that last quarter was $100M revenue.

Imagine what it’s like growing that fast. Imagine the exhilaration of solving problems – like funding your accounts receivable that’s growing with accelerating orders. Or amping up production faster than ever imagined. Or meeting needs of your customers, retailers and restaurants. Or paying out big bonuses due to beating all your planned metrics.

It’s not that much fun to work at Cargill. Or Tyson Foods. Or Smithfield. Or any other traditional company producing beef, or pork, or chicken. Those are huge companies, with lots of people. But they aren’t maxing out sales and profits – and bonuses – like Beyond Meat.

It’s easy to ignore a start up. But one has to look at the relative growth of a company to judge its future. There were cracks in the growth rate at Blockbuster 6 years before it failed. And during that time, Blockbuster kept saying Netflix was a nit that didn’t matter. But Netflix was growing like the proverbial weed. Netflix wasn’t even half the size of Blockbuster when Blockbuster filed for bankruptcy.

A Threat Enters

With growth like Beyond Meat it didn’t take long to upset an entire industry biz model. Amazon still doesn’t sell as much as WalMart, but it wiped out a significant number of retailers by changing volumes enough to erase their profits. Think about the changes wrought on the advertising industry by Google, which has pretty much killed print ads. Look at what’s happened to other media ad models, like TV and radio, by Facebook’s growth. And entertainment has been entirely changed – where today the onetime distributor is one of the biggest content producers – Netflix.

In traditional marketing theory, Beyond Meat, like Netflix, is selling new products to existing markets.

Most disruptors enter the markets in the new product/new market quadrant of the Ansoff matrix. They create the new market just by entering. If they even see them as competitors, established businesses dismiss these potential disruptors because of established focus on current markets/current products with sustaining innovations. Selling new products to existing customers is the first step companies take as they start to innovate.

Kraft was on this path when they acquired a new productc with its purchase of Boca Burger in 2000.  Kellogg’s and General Foods jumped into the alternative meat products at about the same time.  Vegetarian burger substitutes threatened the success formula of meat products and were relegated to niche products. In 2018, Kraft’s incubator tried to relaunch Boca, but the smaller, more nimble start-ups had already captured consumers’ attention and reframed the market.

The Acorn Sprouts

Beyond Meat had morphed quickly into a direct competitor to the meat industry by selling this new product to existing meat customers!

Riding the trends of climate change, sustainability and organic foods, Beyond Meat is starting to look like a true game changer. It may be small, but those other companies were too (along with Tesla, don’t forget, considered immaterial by GM, et.al.) Those who are in the traditional protein market (beef especially) had better pay attention – their profit model is already under attack!!

Add me to the email list!

“The creation of a thousand forests is in one acorn.”

Ralph Waldo Emerson

What’s on your company’s radar today?

Spark Partners is here to help as your coach on trends and innovation. We bring years of experience studying trends, organizations, and how to implement. We bring nimbleness to your strategy, and help you maximize your ability to execute.

Let us do an opportunity assessment for your organization. For less than your annual gym cost, or auto insurance premium, we could likely identify some good opportunities your blinders are hiding. Read my Assessment Page to learn more.

How we can help
For more on how to include trends in your planning, I’ve created a “how-to” that you can adapt for your team.  See my Status Quo Risk Management Playbook.
Give us a call today, or send an email, so we can talk about how you can be a leader, rather than follower.  Or check out the rest of the website to read up on what we do so we can create the right level of engagement for you.
.

Hartung Recent Blog Posts on Leadership, Investing, Trends

Add me to email list!

logo-footer

GET THE BOOK

Adam's book reveals the truth about how to use strategy to outpace the competition.

Create Marketplace Disruption book

PRESS & MEDIA

Follow Adam's coverage in the press and in other media.

FOLLOW ADAM

Follow Adam's column in Forbes.

Plan for the Unseen Disruptions to Your Business…Now.

Plan for the Unseen Disruptions to Your Business…Now.

Market Threat Assessment

Recent studies of senior managers have shown that being blindsided by a disruption is the largest unresolved concern in strategy development today. 

That fear is too often real because disruption typically begins where it is least visible to management- on the fringes of the existing target markets.  And, once the disruption “pirate ship” is sighted on the horizon, not only is it probably too late, but companies react poorly.

Some research of corporate responses to disruption has shown that most companies ignore the threat, fortify existing positions or attempt to buy innovation.  The first choice is not an option for an ongoing business.  Fortification through distribution changes, product model proliferation and discounting only buys some additional time while wasting resources.  Once a disruption enters the market, there’s little time for organic innovation efforts so companies often make acquisitions attempting to buy innovation.  Sadly, given the risk profile and limited experience in innovation, these are often sustaining innovations which are swept aside by the wave of disruption.

A very large example is when Microsoft fell behind in the mobile market in 2014 and purchased Nokia, a weak player in mobile phones to get access to this market.  The joint project, the Lumina phone, failed to catch on and Microsoft’s share fell by 50%- fail.  Cisco tried to catch up with the photography trend by acquiring Pure Digital, the maker of low cost Flip cameras.  Unfortunately, shortly after the acquisition, the high-resolution sensors included in smartphones took photography to a new level.  Bye, Flip! Trend monitoring would have predicted this natural evolution as a high risk threat. 

To anticipate external changes, marketing departments have embraced big data as a powerful tool to help companies identify new markets and consumer preferences.  These tools use the past to predict the short-term future which is reasonable in a steady market.  The problem is that big data cannot anticipate dynamic disruption. 

But, you and your staff can.

As a key input to your next strategy workshop, use trends!  As a start, gather info from the people closest to your market and further using Porter’s five force model.  See my articles on Scenarios to expand these trends to actionable goals.

What’s on your company’s radar today?

We are here to help as your coach on trends and innovation. We bring years of experience studying trends, organizations, and how to implement. We bring nimbleness to your strategy, and help you maximize your ability to execute.

Go the www.adamhartung.com and view the Assessment Page. Send me a reply to this email, or call me today, and let’s start talking about what trends will impact your organization and what you’ll need to do to pivot toward greater success.

Find Opportunities Out of the Box

Find Opportunities Out of the Box

Find Opportunities Out of the Box

If your company is like most businesses, your list of new product or service ideas looks like a sales wish list- new features at a lower cost. Marketing or product management may go a step further and group the ideas into product line extensions or possibly entries into new market segments. Unfortunately, while generating revenue in the short run, this process leaves the company vulnerable to competition and missing opportunities in the long run.

Well, you are not alone. Since about 2012, the pace of innovation has slowed even in the popular market of social media. According to KeyMedia, “What was once a world of diversity and originality has slowly started to look like a bad case of déjà vu… (as platforms are) becoming more similar to each other…”

Most companies devote resources to a quadrant on the innovation matrix known as “sustaining innovation.” They improve existing products sold to existing customers. It’s low risk, true, but it’s also low return. Why do companies follow this death spiral? It’s because “innovation” has gotten a bad reputation.

According to Inc. magazine, “…many (business) people have come to equate the idea of innovation with disruptive innovation. But the fact is that for most businesses, placing big bets on high-risk ideas is not only unfeasible, it’s unwise.”

The Ansoff matrix of new and existing markets and products is usually interpreted as 4 quadrants. It is much more than that: it is a continuum between sustaining and disruptive innovation. .

Adam Hartung often tells clients, “Get out of the box, then think!” This applies directly to the Ansoff model. Once a company sees the matrix, not as fixed “boxes” but as a spectrum of opportunities, markets are viewed not as filled with risk, but filled with opportunities!

Consider Ricoh’s new “clickable paper” that combines the print channel, with an app and that integrates to social media or a website. Not disruptive in the classical sense, but an adjacent product and adjacent market segment that makes print relevant to tech savvy consumers. Or Dr. Dre’s Beats headphones that combine pre-equalized sound with noise cancellation and style- a clever and highly successful blend of existing technologies, vigorously marketed.

Uncovering these market opportunities that can deliver improved returns at a manageable risk for the firm. New products will also generate an increasing percentage of revenue leading to continued growth. Companies that master this process have a long range radar to identify potential opportunities in a process called, “continuous innovation”.

What’s on your company’s radar today?

We are here to help as your coach on trends and innovation. We bring years of experience studying trends, organizations, and how to implement. We bring nimbleness to your strategy, and help you maximize your ability to execute.

Go the website and view the Assessment Page. Send me a reply to this email, or call me today, and let’s start talking about what trends will impact your organization and what you’ll need to do to pivot toward greater success.

Reports of Facebook’s Death Are Greatly Exaggerated (Paraphrasing Mark Twain)

Reports of Facebook’s Death Are Greatly Exaggerated (Paraphrasing Mark Twain)

On July 26, 2018 Facebook set a record for the most value lost in one day by a single company.  An astonishing $119B of market value was destroyed as the shares sank more than $40.  For many investors, it was the sky falling.

As most of you know, I’ve followed Facebook closely since it went public in 2012.  And, I’ve long been an admirer.  I said buy it at the IPO, and I’m saying buy it now. Click on the title of any of the posts to read the full content.

To summarize, Facebook may be under attack, but it is barely wounded.  And it is not in the throes of demise.  The long-term trends all favor the social media’s ongoing growth, and higher values in the future.  Below I’ll offer some of my previous blogs that are well worth revisiting amidst the current Facebook angst.

FANG (Facebook, Amazon, Netflix and Google) investing is still the best bet in the market.  They have outperformed for years, and will continue to do so.  Why? Because they are growing revenues and profits faster than any other major companies in the market.  And “Growth is Good” (paraphrasing Gordon Gekko.)  If you have any doubts about the importance of growth, go talk to Immelt of GE or Lampert of Sears.

Don’t forget, for years now Facebook is more than Facebook.com.  It’s smart acquisition programs have dramatically increased the platform’s reach with video, messaging, texting and eventually peer-to-peer video.  Facebook’s leadership has built a very adaptable company, able to change the product to meet growing user (and customer) needs.

Facebook is on a path toward significant communication domination.  Facebook today is sort of the New York Times, Washington Post, Los Angeles Times and about 90% of the rest of the nation’s newspapers all in one.  Nobody is close to challenging Facebook’s leadership in news distribution, and all news is increasingly going on-line.

For all these reasons, you really do want to own Facebook.  Especially at this valuation.  It’s getting a chance to buy Facebook at its value when the year started, and Facebook is that much bigger, stronger, and adapted to changing privacy regulations that were still a mystery back then.

Oh, one last thing (paraphrasing Steve Jobs.)  Facebook actually isn’t the biggest one day drop in stock valuation, despite what you’ve read.

Stocks are priced in dollars, and dollars are subject to inflation.  So we should look at historical drops in inflation adjusted dollars.  Even though inflation has been mostly below 3% since the 1990s, from 2000 to today the dollar has inflated by 46%.  So inflation-adjusted, the biggest one day value destruction actually belongs to Intel, which lost $131B in September, 2000.  And Microsoft is only slightly in third place, having lost $117B in April, 2000.  So keep this in mind when you think about the long-term opportunity for Facebook.

Now Published!  “Facebook- The Making of a Great Company” ebook by Adam Hartung.

Click for Info and Ordering

GE Kicked Off the Dow (DJIA) – The Worst Board of Directors in America

GE Kicked Off the Dow (DJIA) – The Worst Board of Directors in America

An American epoch has ended. General Electric was part of the first ever Dow Jones Index in 1896. When the Dow Jones Industrial Average was formed in 1907 GE was a participant. GE has been the only company to remain on the index. All other original companies long ago completely disappeared.

GE did so well because its leadership had been able to constantly change the company to keep it relevant, and growing. During the century prior to hiring Jeff Immelt as CEO GE went from light bulbs to generating electricity and making all kinds of electrical infrastructure equipment, electric locomotives, mainframe computers, medical equipment, computer services, financial services, entertainment…. The list is very long.

Although not all GE CEOs were great, the Board was able to place CEOs in office who could sense market shifts and make good decisions. GE leadership thoughtfully analyzed markets, and made investment decisions to sell businesses that were not growing. And they made investment decisions to invest in trends which created growth. One of the best of these was Jack Welch, who developed the nickname “Neutron Jack” for his willingness to jettison businesses that were not growing and leading their industry, while willingly investing in entirely new growth markets where trends showed high rates of return like financial services and entertainment – wildly “non-industrial” markets.

But CEO Immelt was completely tone-deaf to the outside world. He was wholly unable to understand how to lead a team that could make good investments. Instead under Immelt’s leadership GE over-invested in historical products where they were losing advantage but trying to “keep up.” Selling businesses that were growing but faced stiff competition, rather than investing in growth. And refusing to invest in new external growth opportunities that could keep revenues increasing – and drive a higher GE market capitalization.

All the way back in 2009 I pointed out that GE was in a Growth Stall, and had only a 7% chance of consistently growing at 2%. I warned investors. At the time I said GE had to go all-out on a growth strategy, or things would turn ugly. But a lot of investors, employees – and apparently the Board of Directors – were ready to blame the Growth Stall on the economy. And blame it on Welch, who had been gone for 8 years. And say GE was lucky Immelt saved the company from bankruptcy with a loan from Warren Buffett’s Berkshire Hathaway.

Say what? Saved the company? Why did Immelt, and the Board, let GE get into such terrible shape? It was time to replace the CEO, not double down on his failed strategy.

Six years ago, May, 2012, I published in Forbes “5 CEOs that Should Have Already Been Fired.” At the time I said Immelt was the 4th worst CEO in America. I cited the 2009 column, and pointed out things really weren’t any better in 2012 than in 2009. That column had well over 1million reads. There was no way GE’s board was not aware of the column, and the realization that Immelt was a horrible CEO.

The Board of #3 (Walmart) fired Mike Duke. And the Board of #1 (Microsoft) fired Steve Ballmer. There is no real board at #2 Sears (which will file bankruptcy soon enough) because the CEO is also the largest shareholder (via his hedge fund) and he controls all board decisions. He should have fired himself, but had too much ego. But the board of GE – well it did nothing. Even though GE almost went bankrupt under Immelt, and its value was being destroyed quarter after quarter it left him in place.

I revisited the performance of these five CEOs and their companies in August, 2014 and reminded hundreds of thousands of readers – which I’m sure included GE’s Board of Directors – that company revenues had declined every year since 2009. And this string of failures had caused the company’s value to decline by 2/3. Yet, the board did nothing to replace this horrific CEO.

By March, 2017 I was so exasperated I finally titled my column “GE Needs a New Strategy and a New CEO.” Again, I detailed all the things that went wrong. It took 7 more months before the Board pushed Immelt out. But the new CEO failed to offer a better strategy, continuing to promote the notion of selling businesses to raise cash to “fix” the broken businesses – without identifying any growth strategy at all.

The only thing that can “fix” GE – save it from being dismembered and sold off – is a growth strategy. I offered how the new CEO could undertake this effort in October, 2017. But the Board, still wholly incompetent, still isn’t listening. Nobody should be surprised that GE is now removed from the Dow, and the new CEO is clearly without a clue how to find a path back to relevancy.

Too bad for investors, employees, suppliers, customers and the communities where the GE businesses reside. This didn’t have to happen. But due to an incompetent Board of Directors, which did nothing to properly govern an incompetent CEO, it did. And there’s little doubt it won’t be long before GE meets the same end as DuPont.

How Ants Kill Elephants – The Amazon.com, Sears & Walmart Story

How Ants Kill Elephants – The Amazon.com, Sears & Walmart Story

The US e-commerce market is just under 10% the size of entire retail market. On the face of it this would indicate that the game is far from over for big traditional retail. After all, how could such a small segment kill profits for such a huge industry based on enormous traditional players?

US ecommerce Statista

Yet, Sears – once a Dow Jones component and the world’s most powerful retailer – has announced it will close 100 more stores. The Kmart/Sears chain is now only 894 stores – down from thousands at its peak and 1,275 just last year. Revenue dropped 30% versus a year ago, and quarterly losses of $424M were almost 15% of revenues.

But, that ignores marginal economics. It often doesn’t take a monster change in one factor to have a huge impact on the business model. Let’s say Sales are $100. Less Cost of Goods sold of $75. That leaves a Gross Margin of $25. Selling, General and Administrative costs are 20%, so Operating Income is only $5. The Net Margin before Interest and Taxes is 5%. (BTW, these are the actual percentages of Walmart from 1/31/18.)

Now, in comes a new competitor – like Amazon.com. They have no stores, no store clerks, and minimal inventory due to “e-storefront” selling. So, they are able to lower prices by 5%. That seems pretty small – just a 5% discount compared to typical sales of 20%, 30% even 50% (BOGO) in retail stores. Amazon’s 5% price reduction seems like no big deal to established firms.

But, Walmart has to lower prices by 5% in response, which lowers revenues to $95. But the stores, clerks, inventory, distribution centers and trucks all largely remain. With Cost of Goods Sold still $75, Gross Margin falls to $20. Fixed headquarters costs, general and administrative costs don’t change, so they remain at $20. This leaves Operating Income of …$0.

(For more detailed analysis see “Bigger is Not Always Better – Why Amazon is Worth More than Walmart” from July, 2015.)

How can Walmart survive with no profits? It can’t. To get some margin back, Walmart has to start shutting stores, selling assets, cutting pay, using automation to cut headcount, beating on vendors to offer them better prices. This earns praise as “a low cost operation.” When in fact, this makes Walmart a less competitive company, because it’s footprint and service levels decline, which encourages people to do more shopping on-line. A vicious circle begins of trying to recapture lost profitability, while sales are declining rather than growing.

Walmart was (and is) huge. Even Sears was much bigger than Amazon.com at the beginning. But to compete with Amazon.com both had to lower prices on ALL of their products in ALL of their stores. So the hit to Walmart’s, and Sears’, revenue is a huge number. Though Amazon.com was a much, much smaller company, its impact explodes on the larger competitor P&L’s.

This disruption is felt across the entire industry: ALL traditional retailers are forced to match Amazon and other e-commerce companies, even though there is no way they can cut costs enough to compete. Thus, Toys-R-Us, Radio Shack, Claire’s and Bon-Ton have declared bankruptcy in 2018, and the once great, dominant Sears is on the precipice of extinction.

All of which is good news for Amazon.com investors. Amazon.com has 40% market share of the entire e-commerce business. The fact that e-commerce is only 10% of all retail is great news for Amazon investors. That means there is still an enormously large market of traditional retail available to convert to on-line sales.

The shift to e-commerce will not be stopping, or even slowing. Since January, 2010 the future has been easily predictable for traditional retail’s decline. The next few years will see a transition of an additional $2.5 trillion on-line, which is 5X the size of the existing e-commerce market!

As stores close new competitors will emerge in the e-commerce market. But undoubtedly the big winner will be the company with 40% market share today – Amazon.com. So what will Amazon’s stock be worth when sales are 5x larger (or more) and Amazon can increase profits by making leveraging its infrastructure and slow future investments?

Twenty years ago, Amazon was a retail ant. And retail elephants ignored it. But that was foolish, because Amazon had a different business model with an entirely different cost of operations. And now the elephants are falling fast, due to their inability to adapt to new market conditions and maintain their growth.
_________________________________________________________________________

Author’s Note: In June, 2007 I was asked to predict WalMart’s future. Here are the predictions I made 11 years ago:

  • “In 5 years (2012) Walmart would not have succeeded internationally” [True: Mexico, China, Germany all failed]
  • “In 5 years (2012) Walmart would no new businesses, and its revenue will be stalled” [True]
  • In 5 years (2012) Walmart would be spending more on stock repurchases then investing in its own stores or distribution” [True – and the Walton’s were moving money out of Walmart to other investments]
  • “In 10 years (2017) Walmart would take a dramatic act, and make an acquisition” [True: Jet.com]
  • “In 10 years (2017 Walmart’s value would not keep up with the stock market” [from 6/2007 to 6/2017 WMT went from $48 to $75 up 56.25%, DIA went from $134 to $180 up 34.3%, AMZN went from $70 to $1,000 up 1,330% or 13.3x]
  • “In 30 years (2037) Walmart will only be known as “a once great company, like General Motors”