by Adam Hartung | Nov 3, 2011 | Innovation, Leadership, Lock-in, Web/Tech
How much access do your employees have to Facebook, Twitter, Linked-in, GroupOn, FourSquare, and texting in their daily work, on their daily technology devices? Do you encourage use, or do you in fact block access, in the search for greater security, and on the belief that you achieve higher productivity by killing access to these “work cycle stealers?” Do you implement policies keeping employees from using their own technology tools (smartphone or tablet) on the job?
In 1984 the PC revolution was still quite young. Pizza Hut was then a division of PepsiCo (now part of Yum Brands,) and the company was fully committed to a set of mainframe applications from IBM. Mainframe applications, accessed via a “green screen” terminal were used for all document creation, financial analysis, and even all printing. The CIO was very proud of his IBM mainframe data center, and his tight control over the application base and users.
In what seemed like an almost overnight series of events, headquarters employees started bringing small PC’s to work in order to build spreadsheets, create documents and print miscellaneous memos. They found the new technology so much easier to use, and purchase cost so cheap, that their productivity soared and they were able to please their bosses while leaving work on time. A good trade-off.
The CIO went ballistic. “These PCs are popping up like popcorn around here – and we have to kill this trend before it gains any additional momentum!” he decried in an executive meeting. PCs were “toys” that lacked the “robustness” of his mainframe applications. If users wanted higher productivity, then they simply needed to spend more time in training.
Additionally, if he didn’t control access to computing cycles, and activities like printing, employees would go berserk using unnecessary resources on projects they probably should never undertake. He was servicing the corporation by keeping people on a narrow tool set – and it gave the company control over what employees could do as well as how they could do it making sure nothing frivolous was happening. For all these reasons, plus the fact that he could assure security on his mainframe, he felt it important that the CEO and executive team commit with him that PCs would not be allowed in Pizza Hut.
Retrospectively, he looks foolish (and his efforts were unsuccessful.) PCs unleashed a wave of personal productivity that benefitted all early adopters. They not only let employees do their work faster, but it allowed employees to develop innovative solutions to problems – often dramatically lowering overhead costs for many management tasks. PCs, of course, swept through the workplace and in only a decade most mainframes, and their high cost, air conditioned data centers, were gone.
Yet, to this day companies continue to use “best practices” as a tool to stop technology, and productivity improvement, adoption. Managers will say:
- We need to control employee access to information
- We need to keep employees focused on their job, without distractions
- We must control how employees do their jobs so we minimize errors and improve quality
- We need to control employee access externally for security reasons
- We need consistency in our tool set and how it is used
- We made a big investment in how we do things, and we need to leverage that [sunk cost] by forcing greater use
- We need to remember that management are the experts, and it is our job to tell people how to do their jobs. We don’t want the patients running the hospital!
It all sounds quite logical, and good management practice. Yet, it is exactly the road to productivity reduction, innovation assassination and limited growth! Only by allowing employees to apply their skills and best thinking can any company hope to continuously improve its productivity and competitiveness.
But, moving from history and theoretical to today’s behavior, what is happening in your company? Do you have a clunky, hard to use, expensive ERP, CRM, accounting, HR, production, billing, vendor management, procurement or other system (or factory, distribution center or headquarters site) that you still expect people to use? Do you demand people use it – largely for some selection of the 7 items above? Do you require they carry a company PC or Blackberry to access company systems, even as the employee carries their own Android smartphone or iPad with them 24×7?
Recently, technology provider IFS Corporation did a survey on ERP users (Does ERP Mean Excel Runs Production?) Their surprising results showed that new employees (especially under age 40) were very unlikely to take a job with a company if they had to use a complex (usually vendor supplied) interface to a legacy application. In fact, 75% of today’s users are actively seeking – and using – cloud based apps or home grown spreadsheets to manage the business rather than the expensive applications the corporation supplied! Additionally, between 1/3 and 2/3 of employees (depending upon age) were actively seeking to quit and take another job simply because they found the technology of their company hard to use! (CIO Magazine: Employees Refusing to Use Clunky Enterprise Software.)
Unlike managers invested in historical decisions, and legacy assets, employees understand that without productivity their long-term employment is at risk. They recognize that constantly shifting markets, with global competitors, requires the flexibility to apply novel thinking and test new solutions constantly. To succeed, the workforce – all the workforce – needs to be informed, interacting with potential new solutions, thinking and applying their best thoughts to creating new solutions that advance the company’s competitiveness.
That’s why Fast Company recently published something all younger managers know, yet shocks older ones: “Half of Young Professionals Value Facebook Access, Smartphone Options Over Salary.” It surprised a lot of people to learn that employees would actually select access over more pay!
While most older leaders and managers think this is likely because employees want to screw off on the job, and ignore company policies, the article cites a Cisco Connected World Technology Report which describs how these employees value productivity, and realize that in today’s world you can’t really be productive, innovative and generate growth if you don’t have access – and the ability to use – modern tools.
Today’s young workers aren’t any less diligent about work than the previous generation, they are simply better informed and more technology savvy! They think even more long-term about the company’s survivability, as well as their ability to make a difference in the company’s success.
In other words, in 2011 tools like Linked-in, Facebook, Twitter et. al. accessed via a tablet or smartphone are the equivalent of the PC 30 years ago. They give rapid access to what customers, competitors and others in the world are doing. They allow employees to quickly answer questions about current problems, and find new solutions. As well as find people who have tried various options, and learn from those experiences. And they allow the employee to connect with a company problem fast – whether at work or away – and start to solve it! They can access those within their company, vendors, customers – anyone – rapidly in order to solve problems as quickly as possible.
At a recent conference I asked IT leaders for several major airlines if they allowed employees to access these tools. Uniformly, the answer was no. That may be the reason we all struggle with the behavior of airlines, I bemoaned. It might explain why the vast majority of customers were highly sympathetic with the flight attendant that jettisoned a plane through the emergency exit with a beer in hand! At the very least, it is a symptom of the internal focus that has kept the major airlines from pleasing 85% of their customers, while struggling to be profitable. If nobody has external access, how can anybody make anything better?
The best practices of 1975 don’t cut it in 2012. The world has changed. It is more important now than ever that employees have the access to modern tools, and the freedom to use them. Good management today is not about telling people how to do their job, but rather letting them figure out how to do the job best. Implement that practice and productivity and innovation will show themselves, and you’re highly likely to find more growth!
by Adam Hartung | Oct 27, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Innovation, Leadership, Web/Tech
There is a big cry for innovation these days. Unfortunately, despite spending a lot of money on it, most innovation simply isn't. And that's why companies don't grow.
The giant consulting firm Booz & Co. just completed its most recent survey on innovation. Like most analysts, they tried using R&D spending as yardstick for measuring innovation. Unfortunately, as a lot of us already knew, there is no correlation:
"There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues. Many companies — notably, Apple — consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return. Meanwhile, entire industries, such as pharmaceuticals, continue to devote relatively large shares of their resources to innovation, yet end up with much less to show for it than they — and their shareholders — might hope for."
(Uh-hum, did you hear about this Abbott? Pfizer? Readers that missed it might want to glance at last week's blog about Abbott, and why it is a sell after announcing plans to split the company.)
Far too often, companies spend most of their R&D dollars on making their products cheaper, operate better, faster or do more. Clayton Christensen pointed this out some 15 years ago in his groundbreaking book "The Innovator's Dilemma" (HBS Press, 1997). Most R&D, in most industries, and for most companies, is spent trying to sustain an existing technology – not identify or develop a disruptive technology that would have far higher rates of return.
While this is easy to conceptualize, it is much harder to understand. Until we look at a storied company like Kodak – which has received a lot of news this last month.
Kodak invented amateur photography, and was rewarded with decades of profitable revenue growth as its string of cheap cameras, film products and photographic papers changed the way people thought about photographs. Kodak was the world leader in photographic film and paper sales, at great margins, and its value grew exponentially!
Of course, we all know what happened. Amateur photography went digital. No more film, and no more film developing. Even camera sales have disappeared as most folks simply use mobile phones.
But what most people don't know is that Kodak invented digital photography! Really! They were the first to create the technology, and the first to apply it. But they didn't really market it, largely because of fears they would cannibalize their film sales. In an effort to defend & extend their old business, Kodak licensed digital photography patents to camera manufacturers, abandoned R&D in the product line and maintained its focus on its core business. Kodak kept making amateur film better, faster and cheaper – until nobody cared any more.
Of course, Kodak wasn't the first to fall into this trap. Xerox invented desktop publishing but let that market go to Apple, Wintel suppliers and HP printers as it worked diligently trying to defend & extend its copier business. With no click meter on the desktop publishing equipment, Xerox wasn't sure how to make money with it. So they licensed it away.
DEC pretty much created and owned the CAD/CAM business before losing it to AutoCad. Sears created at home shopping, a market now dominated by Amazon. What's your favorite story?
It's a pattern we see a lot. And nowhere worse than at Microsoft.
Do you remember that Microsoft had the Zune player at least as early as the iPod, but didn't bother to develop the technology, or market, letting Apple take the lead in digital music and video devices? Did you remember that the Windows CE smartphone (built by HTC) beat the iPhone to market by years? But Microsoft didn't really develop an app base, didn't really invest in the smartphone technology or market – and let first RIM and later Apple run away with that market as well.
Now, several years too late Microsoft hopes its Nokia partnership will help it capture a piece of that market – despite its still rather apparent lack of an app base or breakthrough advantage.
Microsoft is a textbook example of over-investing in existing technology, in an effort to defend & extend an existing product line, to the point of "over-serving" customer needs. What new extensions do you want from your PC or office software?
Do you remember Clippy? That was the little paper clip that came up in Windows applications to help you do your job better. It annoyed everyone, and was disabled by everyone. A product development that nobody wanted, yet was created and marketed anyway. It didn't sell any additional software products – but it did cost money. That's defend & extend spending.
How much a company spends on innovation doesn't matter, because what's important is what the company spends on real breakthroughs rather than sustaining ideas. Microsoft spends a lot on Windows and Office – it doesn't spend enough on breakthrough innovation for mobile products or games.
And it doesn't spend nearly enough on marketing non-PC innovations. We are already well into the back end of the PC lifecycle. Today more bandwidth is consumed from mobile devices than PC laptops and desktops. Purchase rates of mobile devices are growing at double digits, while companies (and individuals) are curtailing PC purchases. But Microsoft missed the boat because it chose to defend & extend PCs years ago, rather than really try to develop the technology and markets for CE and Zune.
Just look at where Microsoft spends money today. It's hottest innovation is Kinect. But that investment is dwarfed by spending on Skype – intended to extend PC life – and ads promoting the use of PC technologies for families this holiday season.
Unfortunately, there are almost no examples of companies that miss the transition to a new technology thriving. And that's why it is really important to revisit the Kodak chart, and then look at a Microsoft chart.
(Chart 10/27/11)
Do you think Microsoft, after this long period of no value increase, is more likely to go up in value, or more likely to follow Kodak? Unfortunately, there are few companies that make the transition. But there have been thousands that have not. Companies that had very high market share, once made a lot of money, but fell into failure because they invested in better, faster, cheaper rather than innovation.
If you are still holding Kodak, why? If you're still holding Microsoft, Abbott, Kraft, Sara Lee, Sears or Wal-Mart — why?
by Adam Hartung | Oct 12, 2011 | Current Affairs, Defend & Extend, eBooks, In the Rapids, In the Whirlpool, Innovation, Leadership, Lifecycle, Lock-in, Transparency, Web/Tech
Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.) Now that’s a serious growth stall, which should worry all investors. Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion. Faster than most people think.
After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors. Not just Target, that is almost as low price and has better merchandise. Wal-Mart’s monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots. Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise. Aldi beats Wal-Mart hands-down in groceries. Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices. And companies like Kohl’s and J.C. Penney offer more fashionable goods at just slightly higher prices. On all fronts, traditional retailers are chiseling away at Wal-Mart’s #1 position – and at its margins!
Yet, the company has eschewed all opportunities to shift with the market. It’s primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com). Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) – sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive – as shown by the last 9 quarters.
On top of this, the retail market is shifting pretty dramatically. The big trend isn’t the growth of discount retailing, which Wal-Mart rode to its great success. Now the trend is toward on-line shopping. MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:
- In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
- Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.
This trend has been emerging for over a decade. The “retail revolution” was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt. And that problem is worsening as the trend on-line keeps shrinking the traditional market. Several retailers are expected to fail. Entire categories of stores. As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!
While Wal-Mart is huge, and won’t die overnight, as sure as the dinosaurs failed when the earth’s weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.
The winners will be on-line retailers, who like David versus Goliath use techology to change the competition. And the clear winner at this, so far, is the one who’s identified trends and invested heavily to bring customers what they want while changing the battlefield. Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:
- Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
- Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
- Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
- Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
- Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
- Amazon built on the mobility trend when its suppliers, publishers, didn’t respond by creating Kindle – which has revolutionized book sales.
- Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the “Wal-Mart Slayer“
Each of these actions were directly related to identifying trends and offering new solutions. Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy. Just look at sales of Kindle books:
Source: BusinessInsider.com
Unlike Wal-Mart customers, Amazon’s keep growing at double digit rates. In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase. Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to 80,000 per day unit sales for iPad2. Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.
While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base. Despite only a few month’s experience, Amazon is bigger than Google Offers, and is growing at least 20% faster.
After 1980 investors used to say that General Motors might not be run well, but it would never go broke. It was considered a safe investment. In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model. Wal-Mart is an identical story, only it won’t have 3 decades of slow decline. The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete.
Given that gladiators, at best, end up bloody – and most often dead – investing in one is not a good approach to wealth creation. However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors. Amazon today is a really good opportunity.
by Adam Hartung | Oct 4, 2011 | Current Affairs, Defend & Extend, Film, In the Rapids, Innovation, Leadership, Television, Transparency, Web/Tech
Reed Hastings, the CEO of Netflix, has long been considered a pretty good CEO. In January, 2009 his approval ranking, from Glassdoor, was an astounding 93%. In January, 2010 he was still on the top 25 list, with a 75% approval rating. And it's not surprising, given that he had happy employees, happy customers, and with Netflix's successful trashing of Blockbuster the company's stock had risen dramaticall,y leading to very happy investors.
But that was before Mr. Hastings made a series of changes in July and September. First Netflix raised the price on DVD rentals, and on packages that had DVD rentals and streaming download, by about $$6/month. Not a big increase in dollar terms, but it was a 60% jump, and it caught a lot of media attention (New York Times article). Many customers were seriously upset, and in September Netflix let investors know it had lost about 4% of its streaming subscribers, and possibly as many as 5% of its DVD subscribers (Daily Mail).
No investor wants that kind of customer news from a growth company, and the stock price went into a nosedive. The decline was augmented when the CEO announced Netflix was splitting into 2 companies. Netflix would focus on streaming video, and Quikster would focus on DVDs. Nobody understood the price changes – or why the company split – and investors quickly concluded Netflix was a company out of control and likely to flame out, ruined by its own tactics in competition with Amazon, et.al.
(Source: Yahoo Finance 3 October, 2011)
This has to be about the worst company communication disaster by a market leader in a very, very long time. TVWeek.com said Netflix, and Reed Hastings, exhibited the most self-destructive behavior in 2011 – beyond even the Charlie Sheen fiasco! With everything going its way, why, oh why, did the company raise prices and split? Not even the vaunted New York Times could figure it out.
But let's take a moment to compare Netflix with another company having recent valuation troubles – Kodak.
Kodak invented home photography, leading it to tremendous wealth as amature film sales soared for seveal decades. But last week Kodak announced it was about out of cash, and was reaching into its revolving credit line for some $160million to pay bills. This latest financial machination reinforced to investors that film sales aren't what they used to be, and Kodak is in big trouble – possibly facing bankruptcy. Kodak's stock is down some 80% this year, from $6 to $1 – and quite a decline from the near $80 price it had in the late 1990s.
(Source: Yahoo Finance 10-3-2011)
Why Kodak declined was well described in Forbes. Despite its cash flow and company strengths, Kodak never succeeded beyond its original camera film business. Heck, Kodak invented digital photography, but licensed the technology to others as it rabidly pursued defending film sales. Because Kodak couldn't adapt to the market shift, it now is probably going to fail.
And that is why it is worth revisiting Netflix. Although things were poorly explained, and certainly customers were not handled well, last quarter's events are the right move for investors in the shifting at-home video entertainment business:
- DVD sales are going the direction of CD's and audio cassettes. Meaning down. It is important Netflix reap the maximum value out of its strong DVD position in order to fund growth in new markets. For the market leader to raise prices in low growth markets in order to maximize value is a classic strategic step. Netflix should be lauded for taking action to maximize value, rather than trying to defend and extend a business that will most likely disappear faster than any of us anticipate – especially as smart TVs come along.
- It is in Netflix's best interest to promote customer transition to streaming. Netflix is the current leader in streaming, and the profits are better there. Raising DVD prices helps promote customer shifting to the new technology, and is good for Netflix as long as customers don't change to a competitor.
- Although Netflix is currently the leader in streaming it has serious competition from Hulu, Amazon, Apple and others. It needs to build up its customer base rapidly, before people go to competitors, and it needs to fund its streaming business in order to obtain more content. Not only to negotiate with more movie and TV suppliers, but to keep funding its exclusive content like the new Lillyhammer series (more at GigaOm.com). Content is critical to maintaining leadership, and that requires both customers and cash.
- Netflix cannot afford to muddy up its streaming strategy by trying to defend, and protect, its DVD business. Splitting the two businesses allows leaders of each to undertake strategies to maximize sales and profits. Quikster will be able to fight Wal-Mart and Redbox as hard as possible, and Netflix can focus attention on growing streaming. Again, this is a great strategic move to make sure Netflix transitions from its old DVD business into streaming, and doesn't end up like an accelerated Kodak story.
Historically, companies that don't shift with markets end up in big trouble. AB Dick and Multigraphics owned small offset printing, but were crushed when Xerox brought out xerography. Then, afater inventing desktop publishing at Xerox PARC, Xerox was crushed by the market shift from copiers to desktop printers – a shift Xerox created. Pan Am, now receiving attention due to the much hyped TV series launch, failed when it could not make the shift to deregulation. Digital Equipment could not make the shift to PCs. Kodak missed the shift from film to digital. Most failed companies are the result of management's inability to transition with a market shift. Trying to defend and extend the old marketplace is guaranteed to fail.
Today markets shift incredibly fast. The actions at Netflix were explained poorly, and perhaps taken so fast and early that leadership's intentions were hard for anyone to understand. The resulting market cap decline is an unmitigated disaster, and the CEO should be ashamed of his performance. Yet, the actions taken were necessary – and probably the smartest moves Netflix could take to position itself for long-term success.
Perhaps Netflix will fall further. Short-term price predictions are a suckers game. But for long-term investors, now that the value has cratered, give Netflix strong consideration. It is still the leader in DVD and streaming. It has an enormous customer base, and looks like the exodus has stopped. It is now well organized to compete effectively, and seek maximum future growth and value. With a better PR firm, good advertising and ongoing content enhancements Netflix has the opportunity to pull out of this communication nightmare and produce stellar returns.
by Adam Hartung | Sep 26, 2011 | Current Affairs, Defend & Extend, Disruptions, In the Whirlpool, Innovation, Leadership, Transparency, Web/Tech
The media has enjoyed a field day last week amidst the ouster of Leo Apotheker as Hewlett Packard’s CEO and appointments of former Oracle executive Ray Lane as Executive Chairman and former eBay CEO Meg Whitman as CEO. There have been plenty of jabs at the Board, which apparently hired Mr. Apotheker without everyone even meeting him (New York Times), and plenty of complaining about HP’s deteriorating performance and stock price. But the big question is, will Meg Whitman be able to turn around HP?
Ms. Whitman is the 7th HP CEO in a mere 12 years. Of those CEOs, the only one pointed to with any attraction was Mark Hurd. He did not take any strategic actions, but merely slashed costs – which immediately improved the profit line and drove up the short-term stock price. Actions taken at the expense of R&D, new product development and creating new markets, leaving HP short on a future strategy when he was summarily let go by the Baord that hired Apotheker.
And that indicates the strategy problem at HP – which is pretty much a lack of strategy.
HP was once a highly innovative company. We all can thank HP for a world of color. Before HP brought us the low-priced ink-jet printer all office printing was black. HP unleashed the color in desktop publishing, and was critical to the growth of office and home printing, as well as faxing with their all-in-one, integrated devices.
But then someone – largely Ms. Fiorina – had the idea to expand on the HP presence in desktop publishing by expanding into PC manufacturing and sales, even though there was no HP innovation in that market. Mr. Hurd expanded that direction by buying a service organization to support field-based PCs.
This approach of expanding on HPs “core” printer business, almost all by acquisition, cost HP a lot of money. Further, supply chain and retail program investments to sell largely undifferentiated products and services in a hotly contested PC market sucked all the money out of new products development. Every year HP was spending more to grow sales of products becoming increasingly generic, while falling farther behind in any sort of new market creation.
Into that innovation void jumped Apple, Google and Amazon. They pushed new mobile solutions to market in smartphones and tablets. And now PCs, and the printers they used, are seeing declining growth. All future projections show an increase in mobile devices, and a sales cliff emerging for PCs and their supporting devices. Simultaneously as mobile devices have become more popular the trend away from printing has grown, with users in business and consumer markets finding digital devices less costly, more user friendly and more adaptable than printed material (just compare Kindle sales and printed book sales – or the volume of tablet newspaper and magazine subscriptions to printed subscriptions.) HP invested heavily in PC products, and now that market is dying.
Now HP is in big trouble. There are plenty of skeptics that think Ms. Whitman is not right for the job. What should HP under Ms. Whitman do next? Keep doubling down on investments in existing markets? That direction looks pretty dangerous. IBM jumped out years ago, selling its laptop line to Lenovo for a tidy profit before sales slackened. With all the growth in smartphones and tablets, it’s hard to imagine that strategy would work. Even Mr. Apotheker took action to deal with the market shift by redirecting HP away from PCs with his announced intention to spin off that business while buying an ERP (enterprise ressource planning) software company to take HP into a new direction. But that backfired on him, and investors.
Mr. Apotheker and Carol Bartz, recently fired CEO of Yahoo, made similar mistakes. They relied heavily on their personal past when taking leadership of a struggling enterprise. They looked to their personal success formulas – what had worked for them in the past – when setting their plans for their new companies. Unfortunately, what worked in the past rarely works in the future, because markets shift. And both of these companies suffered dramatically as the new CEO efforts took them further from market trends.
The job Ms. Whitman is entering at HP is wildly different from her job at eBay. eBay was a small company taking advantage of the internet explosion. It was an early leader in capitalizing on web networking and the capability of low-cost on-line transactions. At eBay Ms. Whitman needed to keep the company focused on investing in new solutions that transformed PC and internet connectivity into value for users. As long as the number of users on the internet, and the time they spent on the web, grew eBay could capitalize on that trend for its own growth. eBay was in the right place at the right time, and Ms. Whitman helped guide the company’s product development so that it helped users enjoy their on-line experience. The trends supported eBay’s early direction, and growth was built opon making on-line selling better, faster and easier.
The situation could not be more different at HP. It’s products are almost all out of the trend. If Ms. Whitman does what she did at eBay, trying to promote more, better and faster PCs, printers and traditional IT services things will not go well. That was Mr. Hurd’s strategy. “Been there, done that” as people like to say. That strategy ran its course, and more cost-cutting will not save HP.
In 2020 if we are to discuss HP the way we now discuss Apple’s dramatic turnaround from the brink of failure, Ms. Whitman will have to behave very differently than her past – and from what her predecessor and Ms. Bartz did. She has to refocus HP on future markets. She has to identify triggers for market change – like Steve Jobs did when he recognized that the growing trend to mobility would explode once WiFi services reached 50% of users – and push HP toward developing solutions which take advantage of those market shifts.
HP has under-invested in new market development for years. It’s acquisition of Palm was supposed to somehow rectify that problem, only Palm was a failing company with a failing platform when HP bought it. And the HP tablet launch with its own proprietary solution was far too late (years too late) in a market that requires thousands of developers and a hundred thousand apps if it is to succeed. The investment in Palm and WebOS was too late, and based on trying to be a “me too” in a market where competitors are rapidly advancing new solutions.
There are a world of market opportunities out there that HP can develop. To reach them Ms. Whitman must take some quick actions:
- Develop future scenarios that define the direction of HP. Not necessarily a “vision” of HP in 2020, but certainly an identification of the big trends that will guide HP’s future direction for product and market development. Globalization (like IBM’s “smarter planet”) or mobility are starts – but HP will have to go beyond the obvious to identify opportunities requiring the resources of a company with HP’s revenue and resources. HP desperately needs a pathway to future markets. It needs to be developing for the emerging trends.
- A recognition of how HP will compete. What is the market gap that HP will fulfill – like Apple did in mobility? And how will it fulfill it? Google and Facebook are emerging giants in software, offering a host of new capabilities every day to better network users and make them more productive. HP must find a way to compete that is not toe-to-toe with existing leaders like Apple that have more market knowledge and extensive resoureces.
- HP needs to dramatically up the ante in new product development. Innovation has been sorely lacking, and the hierarchical structure at HP needs to be changed. White Space projects designed to identify opportunities in market trends need to be created that have permission to rapidly develop new solutions and take them to market – regardless of HP historical strengths. Resources need to shift – rapidly – from supporting the aging, and growth challenged, historical product lines to new opportunities that show greater growth promise.
Apple and IBM were once given almost no chance of survival. But new leadership recognized that there were growth markets, and those leaders altered the resource allocation toward things that could grow. Investments in the old strategy were dropped as money was pushed to new solutions that built on market trends and headed toward future scenarios. HP is not doomed to failure, but Ms. Whitman has to start acting quickly to redirect resources or it could easily be the next Sun Microsystems, Digital Equipment, Wang, Lanier or Cray
by Adam Hartung | Sep 15, 2011 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Science, Web/Tech, Weblogs
Carol Bartz was unceremoniously fired as CEO by Yahoo’s Board last week. Fearing their decision might leak, the Chairman called Ms. Bartz and fired her over the phone. Expeditious, but not too tactful. Ms. Bartz then informed the company employees of this action via an email from her smartphone – and the next day called the Board of Directors a bunch of doofusses in a media interview. Salacious fodder for the news media, but a distraction from fixing the real problems affecting Yahoo!
Unfortunately, the Yahoo Board seems to have no idea what to do now. A small executive committee is running the company – which assures no bold actions. And a pair of investment banks have been hired to provide advice – which can only lead to recommendations for selling all, or pieces, of the company. Most people seem to think Yahoo’s value is worth more sold off in chunks than it is as an operating company. Wow – what went so wrong? Can Yahoo not be “fixed”?
There was a time, a decade or so back, when Yahoo was the #1 home page for browsers. Yahoo! was the #1 internet location for reading news, and for doing internet searches. And, it pioneered the model of selling internet ads to support the content aggregation and search functions. Yahoo was early in the market, and was a tremendous success.
Like most companies, Yahoo kept doing more of the same as its market shifted. Alta Vista, Microsoft and others made runs at Yahoo’s business, but it was Google primarily that changed the game on Yahoo! Google invested heavily in technology to create superior searches, offered a superior user experience for visitors, gave unique content (Google Maps as an example) and created a tremendously superior engine for advertisers to place their ads on searches – or web pages.
Google was run by technologists who used technology to dramatically improve what Yahoo started – seeing a future which would take advantage of an explosion in users and advertisers as well as web pages and internet use. Yahoo had been run by advertising folks who missed the technology upgrades. Yahoo’s leadership was locked-in to what it new (advertising) and they were slow with new solutions and products, falling further behind Google every year.
In an effort to turn the tide, Yahoo hired what they thought was a technologist in Carol Bartz to run the company. She had previously led AutoCad, which famously ran companies like IBM, Intergraph, DEC (Digital Equipment) and General Electric owned CALMA out of the CAD/CAM (computer aided design and manufacturing) business. She had been the CEO of a big technology winner – so she looked to many like the salvation for Yahoo!
But Ms. Bartz really wasn’t familiar with how to turn an ad agency into a tech company – nor was she particularly skilled at new product development. Her skills were mostly in operations, and developing next generation software. AutoCad was one of the first PC-based CAD products, and over 2 decades AutoCad leveraged the increasing power of PCs to make its products better, faster and relatively cheaper. This constant improvement, and close attention to cost control, made it possible for AutoCad on a PC to come closer and closer to doing what the $250,000 workstations had done. Users switched to the cheaper AutoCad not because it suddenly changed the game, but because PC enhancements made the older, more costly technology obsolete.
Ms. Bartz was stuck on her success formula. Constantly trying to improve. At Yahoo she implemented cost controls, like at AutoCad. But she didn’t create anything significantly new. She didn’t pioneer any new platforms (software or hardware) nor any dramatically new advertising or search products. She tried to do deals, such as with Bing, to somehow partner into better competitiveness, but each year Yahoo fell further behind Google. In a real way, Ms. Bartz fell victim to Google just as DEC had fallen victim to AutoCad. Trying to Defend & Extend Yahoo was insufficient to compete with the game changing Google.
The Board was right to fire Ms. Bartz. She simply did what she knew how to do, and what she had done at AutoCad. But it was not what Yahoo needed – nor what Yahoo needs now. Cost cutting and improvements are not going to catch the ad markets now driven by Google (search and adwords) and Facebook (display ads.) Yahoo is now out of the rapidly growing market – social media – that is driving the next big advertising wave.
Breaking up Yahoo is the easy answer. If the Board can get enough money for the pieces, it fulfills its fiduciary responsibility. The stock has traded near $15/share for 3 years, and the Board can likely obtain the $18B market value for investors. But “another one bites the dust” as the song lyrics go – and Yahoo will follow DEC, Atari, Cray, Compaq, Silicon Graphics and Sun Microsystems into the technology history on Wikipedia. And those Yahoo employees will have to find jobs elsewhere (oh yeah, that pesky jobs problem leading to 9%+ U.S. unemployment comes up again.)
A better answer would be to turn around Yahoo! Yahoo isn’t in any worse condition than Apple was when Steve Jobs took over as CEO. It’s in no worse condition than IBM was when Louis Gerstner took over as its CEO. It can be done. If done, as those examples have shown, the return for shareholders could be far higher than breaking Yahoo apart.
So here’s what Yahoo needs to do now if it really wants to create shareholder value:
- Put in place a CEO that is future oriented. Yahoo doesn’t need a superb cost-cutter. It doesn’t need a hatchet wielder, like the old “Chainsaw Al Dunlap” that tore up Scott Paper. Yahoo needs a leader that can understand trends, develop future scenarios and direct resources into developing new products that people want and need. A CEO who knows that investing in innovation is critical.
- Quit trying to win the last war with Google. That one is lost, and Google isn’t going to give up its position. Specifically, the just announced Yahoo+AOL+Microsoft venture to sell ad remnants is NOT where Yahoo needs to spend its resources. Every one of these 3 companies has its own problems dealing with market shifts (AOL with content management as dial-up revenues die, Microsoft with PC market declines and mobile device growth.) None is good at competing against Google, and together its a bit like asking 3 losers in a 100 meter dash if they think by forming a relay team they could somehow suddenly become a “world class” group. This project is doomed to failure, and a diversion Yahoo cannot afford now.
- In that same vein, quit trying to figure out if AOL or Microsoft will buy Yahoo. Microsoft could probably afford it – but like I said – Microsoft has its hands full trying to deal with the shift from PCs to tablets and smartphones. Buying Yahoo would be a resource sink that could possibly kill Microsoft – and it’s assured Microsoft would end up shutting down the company piecemeal (as it does all acquisitions.) AOL has seen its value plummet because investors are unsure if it will turn the corner before it runs out of cash. While there are new signs of life since buying Huffington Post, ongoing struggles like firing the head of TechCrunch keep AOL fully occupied fighting to find its future. Any deal with either company should send investors quickly to the sell post, and probably escalate the Yahoo demise with the lowest possible value.
- Give business heads the permission to develop markets as they see fit. Ms. Bartz was far too controlling of the business units, and many good ideas were not implemented. Specifically, for example, Right Media should be given permission to really advance its technology base and go after customers unencumbered by the Yahoo brand and organization. Right Media has a chance of being really valuable – that’s why people would ostensibly buy it – so give the leaders the chance to make it successful. Maybe then the revolving door of execs at Right (and other Yahoo business units) would stop and something good would happen.
- Hold existing business units “feet to the fire” on results. Yahoo has notoriously not delivered on new ad platforms and other products – missing development targets and revenue goals. Innovation does not succeed if those in leadership are not compelled to achieve results. Being lax on performance has killed new product development – and those things that aren’t achieving results need to stop. Specifically, it’s probably time to stop the APT platform that is now years behind, and because it’s targeted against Google unlikely to ever succeed.
- Invest in new solutions. Take all that wonderful trend data that Yahoo has (maybe not as much as Google – but a lot more than most companies) and figure out what Yahoo needs to do next. Rip off a page from Apple, which flattened spending on the Mac in order to invest in the iPod. Learn from Amazon, which followed the trends in retail to new storefronts, expanded offerings, a mobile interface and Kindle launch. Yahoo needs to quit trying to gladiator fight with Google – where it can’t win – and identify new markets and solutions where it can. Yahoo must quit being a hostage to its history, and go do the next big thing! Create some white space in the company to invest in new solutions on the trends!
Of course, this is harder than just giving up and selling the company. But the potential returns are much, much higher. Yahoo’s predicament is tough, but it’s been a management failure that got it here. If management changes course, and focuses on the future, Yahoo can once again become a market leading company. Sure would like to see that kind of leadership. It’s how America creates jobs.
by Adam Hartung | Sep 7, 2011 | Employment, Innovation, Leadership, Politics, Transparency, Web/Tech
Friday we learned, as the New York Daily News headlined, “August 2011 Jobs Report: NO Net Jobs Created.” U.S. unemployment, and underemployment, remain stubbornly stuck at very high levels. This situation is unlikely to improve, as reported at 24×7 Wall Street in “August Lay-off Plans Up 47%” with the latest Challenger Gray report telling us 51,144 people are soon getting the axe. No wonder we saw a dramatic decline of nearly 15 points, to 44.5, in the Conference Board’s Consumer Confidence Index – near record-low levels.
This has all the Presidential candidates talking about jobs, and President Obama signed up to deliver a jobs speech to Congress.
The problem actually goes beyond just jobs. Buried within consumer concerns lies the fact that for most people, their incomes are going nowhere. Adjusted for inflation, almost everyone is making less now than they did when the millenium turned. Generally speaking, about 15% less than 11 years ago! Most family incomes are about where they were in 1998. For the wealthiest, income since the mid-1960s has grown only about 1.5%/year on average. For everyone else the improvement has only been about .5%/year. And universally almost all of that increase occurred between 1992 and 2000 (for anyone who wonders about Bill Clinton’s resurgent popularity, just look at incomes during his Presidency compared to every other administration on this chart!)
Source: “U.S. Household Incomes: A 42 Year Perspective” Doug Short, BusinessInsider.com
But will anything the President, or the candidates, recommend make a difference?
So far, the politicos keep fighting the last war, and seem surprised that nothing is improving. The recommendations for putting people back to work in factories, such as autos and heavy equipment, or building roads simply defies the reality of work today. America has not been a manufacturing-dominated jobs country for over 60 years! All job creation has been in services!
Source:”Charting the Incredible Shift From Manufacturing to Services” Doug Short, BusinessInsider.com
For this entire period, productivity has been climbing. Just 50 years ago most people spent 1/3 to 1/2 their income on food. No longer. Today, few spend more than 5 to 10%, and everyone can enjoy an automobile, telephone, television and computer – regardless of their income! We have all the stuff anyone could want, and in many cases a lot more of some stuff than we need – or want!
The old notion of “what’s good for G.M. (General Motors) is good for America” is simply no longer true! As we recently witnessed, a multi-billion dollar bail-out of the largest American auto maker may have saved some unemployment – but it did not create an economic turn-around, or create a slew of jobs!
Today’s jobs are all in information – the accumulation, assimilation, analysis and use of information. Few “managers” actually manage people any more – most manage a data set, or a computer program, or some sort of analysis. The vast majority of “managers” have no direct reports at all! The jobs – and incomes – are all in information. Job growth is in places like Facebook, Google, Linked-in, Groupon, Amazon and Apple (the latter of which outsources all its manufacturing.)
No President or economist can manufacture jobs today. As we’ve seen, interest rates are at unprecedent low levels – yet nobody wants to take a loan to hire a new employee! In fact, business productivity is at record high levels as business keeps accomplishing more and more with fewer and fewer workers!
Source: “Corporate Efficiency is Getting Absurd” BusinessInsider.com
Public companies aren’t going broke, by and large. Most have cash balances at record levels. Only they keep using the money to buy back their own stock! Every month sees a wave of new stock buy back commitments, as 24×7 Wall Street reported “August’s New Massive Stock Buybacks… Over $30 Billion!” Business leaders find it less risky to buy back their own stock (supporting their own bonuses, by the way) than invest in any sort of growth program – something that might create jobs.
So what’s the President to do?
We need to radically jack up the investment in innovation! Think about that last period of very low unemployment and growing incomes – in the 1990s. We had the explosion in technology as people began using PCs, the internet, mobile phones, etc. New technology introduced new business ideas (mostly services) and created a rash of growth! And that created new jobs – and higher incomes. Innovation is the jobs engine – not trying to save another tired manufacturing company, or pave another highway or extend another bridge! Today those projects simply do not employ very many people, and the “trickle down” affect of a highway project creating more jobs has disappeared!
Bloomberg/BusinessWeek reported in “Failing at Innovation? Bank On It“
- Government spending on higher education has been declining since the 1970s reducing the number of graduate students and innovation projects
- Federal share of R&D has been less than 1% since 1992 – all while corporate R&D spending has declined dramatically! The days of spending “to put a man on the moon” has disappeared, as we fairly quietly mothballed the space program and commence to dismantle NASA
- The number of entrepreneurs is actually declining! There were fewer startups with 1 or more employees in 2007 (before the financial collapse and ensuing economic mayhem) than in 1990
- New companies are not employing people. In the 1990s the average startup employed 7.5 people, but now the number is 4.9
- Meanwhile “infrastructure” spending today is the same as it was in 1968!
We’ve done a great job of cutting taxes, but we’ve simultaneoously gutted our investment in R&D, innovation and doing anything new! If you wonder where the jobs went it wasn’t oversees, it was into higher corporate cash levels, more stock buybacks, increased bank reserves and dramatically higher executive compensation!
We don’t need more tax cuts – because nobody is investing in any new projects! We don’t need more unemployment insurance, because that – at best – delays the day of reconning without a solution.
Here’s what we do need today:
- Implement a tax on corporate stock buybacks. At least as great as the tax on corporate dividends. Buybacks simply drain the economy of investment funds, with no benefit. At least dividends give returns back to shareholders – who might invest in a new company! And if buybacks are taxed, executives might start investing in projects again!
- Quit giving such large depreciation allowances for physical assets. We don’t need more buildings – we’re overbuilt as we are right now! Again, it’s not “things” that make up our economy, it’s services!
- Re-introduce R&D credits! Give businesses a $3 tax break for every dollar spent in R&D and new product development! Prior to President Reagan this was considered normal. It’s not a new idea, just one that’s been forgotten. If we can give credits for oil and gas drilling, which creates almost no jobs, why not innovation?
- Cut payroll taxes on the self-employed and small business. Today self-employed pay 2x the payroll taxes, so it’s a big dis-incentive to entrepreneurship. Give start-ups a break by lowering employment taxes on small employers – say less than 50 employees.
- Allow investors in start-ups to write off up to 2x their losses. It takes away a lot of the risk if you can get most of your money back from a tax break should your investment fail. And for all those corporations that abhore taxes this would incent them to invest in small enterprises that have new ideas they’d like to see developed.
- Remember the Small Business Administration (SBA)? Re-activate it by giving it $100B (maybe $200B) to guarantee bank loans of small businesses. Bank lending has ground to a halt as banks eliminate risk – so let’s get them back into their primary business again. In WWII the government guaranteed every loan for the construction of the Liberty Ships – and behold business built 2,751 of the things in 4 years!
- Increase funding for higher education. Increase the grants for science, engineering and new product research at America’s universities. Increase grants for students in science and engineering, and allow students to deduct out-of-pocket educational expenses from their taxes. Allow corporations to deduct all the expense of employee education – uncapped! Allow corporations to deduct the university grants they make!
- Invest in today’s digital infrastructure. Once we paid to send men to the moon – and a flood of innovation (from microwave ovens to powdered drinks and frozen food) followed. Today we should invest in a nationwide WiFi network that’s everywhere from rural forests to city buildings – and make it all FREE. Digital networks are the highways we need today – not concrete ribbons. Create tax deductions for people to buy smartphones, tablets and other products that drive innovation, and make it easy for innovators to network for solutions to emerging needs.
- Streamline the process for small companies to test and sell new bio-engineered products. The existing complicated process is a legacy of big companies and traditional pharmaceutical research. Make it easy for entrepreneurs to test and launch the next wave of medical technology based on the new bio-sciences. Offer federal-backed safety insurance to protect small businesses that show efficacy in new solutions.
These are just 9 ideas. I’m sure readers can think up 90 more (in fact, I challenge you to offer them as comments to this blog.) If we invest in innovation, we can create a lot of jobs. But we need to start NOW!
by Adam Hartung | Aug 24, 2011 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
“You’ve got to be kidding me” was the line tennis great John McEnroe made famous. He would yell it at officials when he thought they made a bad decision. I can’t think of a better line to yell at Leo Apotheker after last week’s announcements to shut down the tablet/WebOS business, spin-off (or sell) the PC business and buy Autonomy for $10.2B. Really. You’ve got to be kidding me.
HP has suffered mightily from a string of 3 really lousy CEOs. And, in a real way, they all have the same failing. They were wedded to their history and old-fashioned business notions, drove the company looking in the rear view mirror and were unable to direct HP along major trends toward future markets where the company could profitably grow!
Being fair, Mr. Apotheker inherited a bad situation at HP. His predecessors did a pretty good job of screwing up the company before he arrived. He’s just managing to follow the new HP tradition, and make the company worse.
HP was once an excellent market sensing company that invested in R&D and new product development, creating highly profitable market leading products. HP was one of the first “Silicon Valley” companies, creating enormous shareholder value by making and selling equipment (oscilliscopes for example) for the soon-to-explode computer industry. It was a leader in patent applications, new product launches and being first with products that engineers needed, and wanted.
Then Carly Fiorina decided the smart move in 2001 was to buy Compaq for $25B. Compaq was getting creamed by Dell, so Carly hoped to merge it with HP’s retail PC business and let “scale” create profits. Only, the PC business had long been a commodity industry with competitors competing on cost, and the profits largely going to Intel and Microsoft! The “synergistic” profits didn’t happen, and Carly got fired.
But she paved the way for HPs downfall. She was the first to cut R&D and new product development in favor of seeking market share in largely undifferentiated products. Why file 3,500 patents a year – especially when you were largely becoming a piece-assembly company of other people’s technology? To get the cash for acquisitions, supply chain investments and retail discounts Carly started a whole new tradition of doing less innovation, and spending a lot being a copy-cat.
But in an information economy, where almost all competitors have market access and can achieve highly efficient supply chains at low cost, there was no profit to the volume Carly sought. HP became HPQ – but the price paid was an internal shift away from investing in new markets and innovation, and heading straight toward commoditization and volume! The most valuable liquid in all creation – HP ink – was able to fund a lot of the company’s efforts, but it was rapidly becoming the “golden goose” receiving a paltry amount of feed. And itself entirely off the trend as people kept moving away from printed documents!
Mark Hurd replaced Carly, And he was willing to go her one better. If she was willing to reduce R&D and product development – well he was ready to outright slash it! And all the better, so he could buy other worn out companies with limited profits, declining share and management mis-aligned with market trends – like his 2008 $13.9B acquisition of EDS! Once a great services company, offshore outsourcing and rabid price competition had driven EDS nearly to the point of bankruptcy. It had gone through its own cost slashing, and was a break-even company with almost no growth prospects – leading many analysts to pan the acquisition idea. But Mr. Hurd believed in the old success formula of selling services (gee, it worked 20 years before for IBM, could it work again?) and volume. He simply believed that if he kept adding revenue and cutting cost, surely somewhere in there he’d find a pony!
And patent applications just kept falling. By the end of his cost-cutting reign, the once great R&D department at HP was a ghost of its former self. From 9%+ of revenues on new products, expenditures were down to under 2%! And patent applications had fallen by 2/3rds
Chart Source: AllThingsD.com “Is Innovation Dead at HP?“
The patent decline continued under Mr. Apotheker. The latest CEO intent on implementing an outdated, industrial success formula. But wait, he has committed to going even further! Now, HP will completely evacuate the PC business. Seems the easy answer is to say that consumer businesses simply aren’t profitable (MediaPost.com “Low Margin Consumers Do It Again, This Time to HP“) so HP has to shift its business entirely into the B-2-B realm. Wow, that worked so well for Sun Microsystems.
I guess somebody forgot to tell consumer produccts lacked profits to Apple, Amazon and NetFlix.
There’s no doubt Palm was a dumb acquisition by Mr. Hurd (pay attention Google.) Palm was a leader in PDAs (personal digital assistants,) at one time having over 80% market share! Palm was once as prevalent as RIM Blackberries (ahem.) But Palm did not invest sufficiently in the market shifts to smartphones, and even though it had technology and patents the market shifted away from its “core” and left Palm with outdated technology, products and limited market growth. By the time HP bought Palm it had lost its user base, its techology lead and its relevancy. Mr. Hurd’s ideas that somehow the technology had value without market relevance was another out-of-date industrial thought.
The only mistake Mr. Apotheker made regarding Palm was allowing the Touchpad to go to market at all – he wasted a lot of money and the HP brand by not killing it immediately!
It is pretty clear that the PC business is a waning giant. The remaining question is whether HP can find a buyer! As an investor, who would want a huge business that has marginal profits, declining sales, an extraordinarily dim future, expensive and lethargic suppliers and robust competitors rapidly obsoleting the entire technology? Getting out of PCs isn’t escaping the “consumer” business, because the consumer business is shifting to smartphones and tablets. Those who maintain hope for PCs all think it is the B-2-B market that will keep it alive. Getting out is simply because HP finally realized there just isn’t any profit there.
But, is the answer is to beef up the low-profit “services” business, and move into ERP software sales with a third-tier competitor?
I called Apotheker’s selection as CEO bad in this blog on 5 October, 2010 (HP and Nokia’s Bad CEO Selections). Because it was clear his history as CEO of SAP was not the right background to turn around HP. Today ERP (enterprise resource planning) applications like SAP are being seen for the locked-in, monolithic, buraucracy creating, innovation killing systems they really are. Their intent has always been, and remains, to force companies, functions and employees to replicate previous decisions. Not to learn and do anything new. They are designed to create rigidity, and assist cost cutting – and are antithetical to flexibility, market responsiveness and growth.
But following in the new HP tradition, Mr. Apotheker is reshuffling assets – closing the WebOS business, getting rid of all “consumer” businesses, and buying an ERP company! Imagine that! The former head of SAP is buying an SAP application! Regardless of what creates value in highly dynamic, global markets Mr. Apotheker is implementing what he knows how to do – operate an ERP company that sells “business solutions” while leaving everything else. He just can’t wait to get into the gladiator battle of pitting HP against SAP, Oracle, J.D. Edwards and the slew of other ERP competitors! Even if that market is over-supplied by extremely well funded competitors that have massive investments and enormously large installed client bases!
What HP desperately needs is to connect to the evolving marketplace. Quit looking at the past, and give customers solutions that fit where the market is headed. Customers aren’t moving toward where Apotheker is taking the company.
All 3 of HP’s CEOs have been a testament to just how bad things can go when the CEO is more convinced it is important to do what worked in the past, rather than doing what the market needs. When the CEO is locked-in to old thinking, old market dynamics and old solutions – rather than fixated on understanding trends, future scenarios and the solutions people want and need bad things happen.
There are a raft of unmet needs in the marketplace. For a decade HP has ignored them. Its CEOs have spent their time trying to figure out how to make old solutions work better, faster and cheaper. And in the process they have built large, but not very profitable businesses that are now uninteresting at best and largely at the precipice of failure. They have ignored market shifts in favor of doing more of the same. And the value of HP keeps declining – down 50% this year. For HP to change direction, to increase value, it needs a CEO and leadership team that can understand important trends, fulfill unmet needs and migrate customers to new solutions. HP needs to rediscover innovation.
by Adam Hartung | Aug 18, 2011 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Web/Tech
The business world was surprised this week when Google announced it was acquiring Motorola Mobility for $12.5B – a 63% premium to its trading price (Crain’s Chicago Business). Surprised for 3 reasons:
- because few software companies move into hardware
- effectively Google will now compete with its customers like Samsung and HTC that offer Android-based phones and tablets, and
- because Motorola Mobility had pretty much been written off as a viable long-term competitor in the mobile marketplace. With less than 9% share, Motorola is the last place finisher – behind even crashing RIM.
Truth is, Google had a hard choice. Android doesn’t make much money. Android was launched, and priced for free, as a way for Google to try holding onto search revenues as people migrated from PCs to cloud devices. Android was envisioned as a way to defend the search business, rather than as a profitable growth opportunity. Unfortunately, Google didn’t really think through the ramifications of the product, or its business model, before taking it to market. Sort of like Sun Microsystems giving away Java as a way to defend its Unix server business. Oops.
In early August, Google was slammed when the German courts held that the Samsung Galaxy Tab 10.1 could not be sold – putting a stop to all sales in Europe (Phandroid.com “Samsung Galaxy Tab 10.1 Sales Now Blocked in Europe Thanks to Apple.”) Clearly, Android’s future in Europe was now in serious jeapardy – and the same could be true in the USA.
This wasn’t really a surprise. The legal battles had been on for some time, and Tab had already been blocked in Australia. Apple has a well established patent thicket, and after losing its initial Macintosh Graphical User Interface lead to Windows 25 years ago Apple plans on better defending its busiensses these days. It was also well known that Microsoft was on the prowl to buy a set of patents, or licenses, to protect its new Windows Phone O/S planned for launch soon.
Google had to either acquire some patents, or licenses, or serously consider dropping Android (as it did Wave, Google PowerMeter and a number of other products.) It was clear Google had severe intellectual property problems, and would incur big legal expenses trying to keep Android in the market. And it still might well fail if it did not come up with a patent portfolio – and before Microsoft!
So, Google leadership clearly decided “in for penny, in for a pound” and bought Motorola. The acquisition now gives Google some 16-17,000 patents. With that kind of I.P. war chest, it is able to defend Android in the internicine wars of intellectual property courts – where license trading dominates resolutions between behemoth competitors.
Only, what is Google going to do with Motorola (and Android) now? This acquisition doesn’t really fix the business model problem. Android still isn’t making any money for Google. And Motorola’s flat Android product sales don’t make any money either.
Source: Business Insider.com
In fact, the Android manufacturers as a group don’t make much money – especially compared to industry leader Apple:
Source: Business Insider.com
There was a lot of speculation that Google would sell the manufacturing business and keep the patents. Only – who would want it? Nobody needs to buy the industry laggard. Regardless of what the McKinsey-styled strategists might like to offer as options, Google really has no choice but to try running Motorola, and figuring out how to make both Android and Motorola profitable.
And that’s where the big problem happens for Google. Already locked into battles to maintain search revenue against Bing and others, Google recently launched Google+ in an all-out war to take on the market-leading Facebook. In cloud computing it has to support Chrome, where it is up against Microsoft, and again Apple. Oh my, but Google is now in some enormously large competitive situations, on multiple fronts, against very well-heeled competitors.
As mentioned before, what will Samsung and HTC do now that Google is making its own phones? Will this push them toward Microsoft’s Windows offering? That would dampen enthusiasm for Android, while breathing life into a currently non-competitor in Microsoft. Late to the game, Microsoft has ample resources to pour into the market, making competition very, very expensive for Google. It shows all the signs of two gladiators willing to fight to the loss-amassing death.
And Google will be going into this battle with less-than-stellar resources. Motorola is the market also ran. Its products are not as good as competitors, and its years of turmoil – and near failure – leading to the split-up of Motorola has left its talent ranks decimated – even though it still has 19,000 employees Google must figure out how to manage (“Motorola Bought a Dysfunctional Company and the Worst Android Handset Maker, says Insider“).
Acquisitions that “work” are ones where the acquirer buys a leader (technology, products, market) usually in a high growth area – then gives that acquisition the permission and resources to keep adapting and growing – what I call White Space. That’s what went right in Google’s acquisitions of YouTube and DoubleClick, for example. With Motorola, the business is so bad that simply giving it permssion and resources will lead to greater losses. It’s hard to disaagree with 24/7 Wall Street.com when divulging “S&P Gives Big Downgrade on Google-Moto Deal.”
Some would like to think of Google as creating some transformative future for mobility and copmuting. Sort of like Apple.
Yea, right.
Google is now stuck defending & extending its old businesses – search, Chrome O/S for laptops, Google+ for mail and social media, and Android for mobility products. And, as is true with all D&E management, its costs are escalating dramatically. In every market except search Google has entered into gladiator battles late against very well resourced competitors with products that are, at best, very similar – lacking game-changing characteristics. Despite Mr. Page’s potentially grand vision, he has mis-positioned Google in almost all markets, taken on market-leading and well funded competition, and set Google up for a diasaster as it burns through resources flailing in efforts to find success.
If you weren’t convinced of selling Google before, strongly consider it now. The upcoming battles will be very, very expensive. This acquisition is just so much chum in the water – confusing but not beneficial.
And if you still don’t own Apple – why not? Nothing in this move threatens the technology, product and market leader which continues bringing game-changers to market every few months.
by Adam Hartung | Jul 28, 2011 | Books, Current Affairs, Defend & Extend, eBooks, In the Rapids, Innovation, Leadership, Television, Web/Tech
“It’s easier to succeed in the Amazon than on the polar tundra” Bruce Henderson, famed founder of The Boston Consulting Group, once told me. “In the arctic resources are few, and there aren’t many ways to compete. You are constantly depleting resources in life-or-death struggles with competitors. Contrarily, in the Amazon there are multiple opportunities to grow, and multiple ways to compete, dramatically increasing your chances for success. You don’t have to fight a battle of survival every day, so you can really grow.”
Today, Amazon(.com) is the place to be. As the financial markets droop, fearful about the economy and America’s debt ceiling “crisis,” Amazon is achieving its highest valuation ever. While the economy, and most companies, struggle to grow, Amazon is hitting record growth:
Source: BusinessInsider.com
Sales are up 50% versus last year! The result of this impressive sales growth has been a remarkable valuation increase – comparable to Apple!
- Since 2009, valuation is up 5.5x
- Over 5 years valuation is up 8x
- Over the last decade Amazon’s value has risen 15x
How did Amazon do this? Not by “sticking to its knitting” or being very careful to manage its “core.” In 2001 Amazon was still largely an on-line book seller.
The company’s impressive growth has come by moving far from its “core” into new markets and new businesses – most far removed from its expertise. Despite its “roots” and “DNA” being in U.S. books and retailing, the company has pioneered off-shore businesses and high-tech products that help customers take advantage of big trends.
Amazon’s earnings release provided insight to its fantastic growth. Almost 50% of revenues lie outside the U.S. Traditional retailers such as WalMart, Target, Kohl’s, Sears, etc. have struggled in foreign markets, and blamed poor performance on weak infrastructure and complex legal/tax issues. But where competitors have seen obstacles, Amazon created opportunity to change the way customers buy, and change the industry using its game-changing technology and capabilities. For its next move, according to Silicon Alley Insider, “Amazon is About to Invade India,” a huge retail market, in an economy growing at over 7%/year, with rising affluence and spendable income – but almost universally overlooked by most retailers due to weak infrastructure and complex distribution.
Amazon’s remarkable growth has occurred even though its “core” business of books has been declining – rather dramatically – the last decade. Book readership declines have driven most independents, and large chains such as B. Dalton and more recently Borders, out of business. But rather than use this as an excuse for weak results, Amazon invested heavily in the trends toward digitization and mobility to launch the wildly successful Kindle e-Reader. Today about half of all Amazon book sales are digital, creating growth where most competitors (hell-bent on trying to defend the old business) have dealt with stagnation and decline.
Amazon did this without a background as a technology company, an electronics company, or a consumer goods company. Additionally, Amazon invested in Kindle – and is now developing a tablet – even as these products cannibalized the historically “core” paper-based book sales. And Amazon has pursued these market shifts, even though these new products create a significant threat to Amazon’s largest traditional suppliers – book publishers.
Rather than trying to defend its old core business, Amazon has invested heavily in trends – even when these investments were in areas where Amazon had no history, capability or expertise!
Amazon has now followed the trends into a leading position delivering profitable “cloud” services. Amazon Web Services (AWS) generated $500M revenue last year, is reportedly up 50% to $750M this year, and will likely hit $1B or more before next year. In addition to simple data storage Amazon offers cloud-based Oracle database services, and even ERP (enterprise resource planning) solutions from SAP. In cloud computing services Amazon now leads historically dominant IT services companies like Accenture, CSC, HP and Dell. By offering solutions that fulfill the emerging trends, rather than competing head-to-head in traditional service areas, Amazon is growing dramatically and avoiding a gladiator war. And capturing big sales and profits as the marketplace explodes.
Amazon created 5,300 U.S. jobs last quarter. Organic revenue growth was 44%. Cash flow increased 25%. All because the company continued expanding into new markets, including not only new retail markets, and digital publishing, but video downloads and television streaming – including making a deal to deliver CBS shows and archive.
Amazon’s willingness to go beyond conventional wisdom has been critical to its success. GeekWire.com gives insight into how Amazon makes these critical resource decisions in “Jeff Bezos on Innovation” (taken from comments at a shareholder meeting June 7, 2011):
- “you just have to place a bet. If you place enough of those bets, and if you place them early enough, none of them are ever betting the company”
- “By the time you are betting the company, it means you haven’t invented for too long”
- “If you invent frequently and are willing to fail, then you never get to the point where you really need to bet the whole company”
- “We are planting more seeds…everything we do will not work…I am never concerned about that”
- “my mind never lets me get in a place where I think we can’t afford to take these bets”
- “A big piece of the story we tell ourselves about who we are, is that we are willing to invent”
If you want to succeed, there are ample lessons at Amazon. Be willing to enter new markets, be willing to experiment and learn, don’t play “bet the company” by waiting too long, and be willing to invest in trends – especially when existing competitors (and suppliers) are hesitant.
