by Adam Hartung | Oct 7, 2010 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Web/Tech
Summary:
- Steve Ballmer received only half his maximum bonus for last year
- But Microsoft has failed at almost every new product initiative the last several years
- Microsoft's R&D costs are wildly out of control, and yielding little new revenue
- Microsoft is lagging in all new growth markets – without competitive products
- Microsoft's efforts at developing new markets have created enormous losses
- Cloud computing could obsolete Microsoft's "core" products
- Why didn't the Board fire Mr. Ballmer?
Reports are out, including at AppleInsider.com that "Failures in Mobile Space Cost Steve Ballmer Half his Bonus." Apparently the Board has been disappointed that under Mr. Ballmer's leadership Microsoft has missed the move to high growth markets for smartphones and tablets. Product failures, like Kin, have not made them too happy. But the more critical question is — why didn't the Board fire Mr. Ballmer?
A decade ago Microsoft was the undisputed king of personal software. Its near monopoly on operating systems and office automation software assured it a high cash flow. But over the last 10 years, Microsoft has done nothing for its shareholders or customers. The XBox has been a yawn, far from breaking even on the massive investments. All computer users have received for massive R&D investments are Vista, Windows 7 and Office 2007 followed by Office 2010 — the definition of technology "yawners." None of the new products have created new demand for Microsoft, brought in any new customers or expanded revenue. Meanwhile, the 45% market share Microsoft had in smartphones has shrunk to single digits, at best, as Apple and Google are cleaning up the marketplace. Early editions of tablets were dropped, and developers such as HP have abandoned Microsoft projects.
Yet, other tech companies have done quite well. Even though Apple was 45 days from bankruptcy in 2000, and Google was a fledgling young company, both Apple and Google have launched new products in smartphones, mobile computing and entertainment. And Apple has sold over 4 million tablets already in 2010 – while investors and customers wait for Microsoft to maybe get one to market in 2011.
Despite its market domination, Microsoft's revenues have gone nowhere. And are projected to continue going relatively nowhere. While Apple has developed new growth markets, Microsoft has invested in defending its historical revenue base.
Source: SeekingAlpha.com
Yet, Microsoft spent 8 times as much on R&D in 2009 to accomplish this much lower revenue growth. At a recent conference Mr. Ballmer admitted he thought as much as 200 man years of effort was wasted on Vista development in recent years. That Microsoft has hit declining rates of return on its investment in "defending the base" is quite obvious. Equally obvious is its clear willingness to throw money at projects even though it has no skill for understanding market needs sin order for development to yield anything commercially successful!
Source: Business Insider.com
And investments in opportunities outside the "core" business have not only failed to produce significant revenue, they've created vast losses. Such as the horrible costs incurred in on-line markets. Trying to launch Bing and compete with Google in ad sales far too late and with weak products has literally created losses that exceed revenues!
Source: BusinessInsider.com
And the result has been a disaster for Microsoft shareholders – literally no gain the last several years. This has allowed Apple to create a market value that actually exceeds Microsoft's. An idea that seemed impossible during most of the decade!
Source: BusinessInsider.com
Under Mr. Ballmer's leadership Microsoft has done nothing more than protect market share in its original business – and at a huge cost that has not benefited shareholders with dividends or growth. No profitable expansion into new businesses, despite several newly emerging markets. And now late in practically every category. Costs for business development that are wildly out of control, despite producing little incremental revenue. And sitting on a business in operating systems and office software that is coming under more critical attack daily by the shift toward cloud computing. A shift that could make its "core" products entirely obsolete before 2020.
Given this performance, giving Mr. Ballmer his "target" bonus for last year seems ridiculous – even if half the maximum. The proper question should be why does he still have his job? And if you still own Microsoft stock — why as well?
by Adam Hartung | Oct 5, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
Summary:
- Research in Motion has launched a tablet, competing with the iPad
- But the Playbook does not have the app base that iPad has developed
- RIM's focus on its "core" IT customer, without spending enough energy focusing on Apple and other competitors, it missed the shift in mobile device user needs
- Now companies, like Abbott, are starting to roll out iPads to field personnel
- RIM's future is in jeopardy as the market shifts away from its products
- You cannot expect your customer to tell you how to develop your product, you have to watch competitors and move quickly to address emerging market needs
Research in Motion has launched a new tablet called Playbook to compete with the Apple iPad. But will it succeed? According to SeekingAlpha.com "Playbook Fails to Boost Research in Motion Price Targets." Most analysts do not think the Playbook has much chance of pushing up the market cap at RIM – and except for home town Canadian analysts the overall expectation for RIM is grim. I certainly agree with the emerging consensus that RIM's future is looking bleak.
Research in Motion was the company that first introduced most of us to smartphones. The Blackberry, often provided by the employer, was the first mobile product that allowed people do email, look at attachments and eventually text – all without a PC. Most executives and field-oriented employees loved them, and over a few years Blackberries became completely common. It looked like RIM had pioneered a new market it would dominate, with its servers squarely ensconced in IT departments and corporate users without option as to what smartphone they would use.
But Apple performed an end-run, getting CEOs to use the iPhone. People increasingly found they needed a personal mobile phone as well as the corporate phone – because they did not want to use the Blackberry for personal use. But they didn't pick Blackberries. Instead they started buying the more stylish, easier to use and loaded with apps iPhone. Apple didn't court the "enterprise" customer – so they weren't even on the radar screen at RIM. But sales were exploding.
Like most companies that focus on their core customers, RIM didn't see the market shift coming. RIM kept talking to the IT department. Much like IBM did in the 1980s when it dropped PCs in favor of supporting mainframes – because their core data center customers said the PC had no future. RIM was carefully listening to its customer – but missing an enormous market shift toward usability and apps. RIM expected its customers to tell them what would be needed in the future – but instead it was the competition that was showing the way.
Now RIM is far, far behind. Where Apple has 300,000 apps, and Android has over 120,000, RIM doesn't even have 10,000. RIM's problem isn't a device issue. RIM has missed the shift to mobile computing and missed understanding the unmet user needs. According to Crain's Chicago Business "Chicago CEOs embrace the iPad." Several critical users – and CEOs are always critical – have already committed to using the iPad and enjoying their news subscriptions and other applications. According to the article, Abbott, which has provided Blackberries to thousands of employees, is now beginning to roll out iPads to field personnel. RIM's Playbook may be a fine piece of hardware, but it offers far too little in the direction of helping people discard PCs as they migrate to cloud architectures and much smaller, easier to use devices such as tablets.
RIM followed the ballyhooed advice of listening to its core customer. But such behavior caused it to miss the shift in its own marketplace toward greater extended use of mobile devices. RIM should have paid more attention to what competitors Apple and Android were doing – and started building out its app environment years ago. RIM should have been first with a tablet – not late. And RIM should have led the movement toward digital publishing – rather than letting Amazon take the lead (Kindle) with Apple close behind. Creating valuable mobility is what the leading company with "motion" in its name should have done. Instead of merely providing the answers to requests from core IT department customers. Now RIM has no chance of catching up with competitors.
by Adam Hartung | Oct 1, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Web/Tech
Summary:
- HP and Nokia have lost the ability to grow organically
- Both need CEOs that can attack old decision-making processes to overcome barriers and move innovation to market much more quickly
- Unfortunately, both companies hired new CEOs who are very weak in these skills
- HP’s new CEO is from SAP – which has been horrible at new product development and introduction
- Nokia’s new CEO is from Microsoft – another failure at developing new markets
- It is unlikely these CEO hires will bring to these companies what is most needed
Leo Apotheker is taking over as CEO of Hewlett Packard today. Formerly he ran SAP. According to MarketWatch.com “HP’s New CEO Has a Lot To Prove,” and investors were less than overwhelmed by the selection, “HP Shares Slip After CEO Appointment.” Rightly so. What was the last exciting new product you can remember from SAP, where Apotheker led the company from 2008 until recently? Well?
SAP is going nowhere good. Its best years are way behind it as the company focuses on defending its installed base and adding new bits to existing products It’s product is amazingly expensive, incredibly hard and expensive to install, and primarily keeps companies from doing anything new. Enterprise software packages are like cement, once you pour them in place nothing can change. They reinforce making the same decision over and over. But increasingly, that kind of management practice is failing. In a fast-changing world software that can take 4 years to install and limits decision-making options doesn’t add to desperately needed organizational agility. And during the last 10 years SAP has done nothing to make its products better linked to the needs of today’s markets.
So why would anyone be excited to see such a leader take over their company? If Apotheker leads HP the way he led SAP investors will see growth decline – not grow. What does this new CEO know about listening carefully to emerging market needs? The move to install SAP in smaller companies hasn’t moved the needle, as SAP remains almost wholly software for stodgy, low-growth, struggly behemoths. What does this CEO know about creating an organization that can moving quickly, create new products and identify market needs to position HP for growth? His experience doesn’t look anything like Steve Jobs, under who’s leadership Apple’s value has increased multi-fold the last decade.
Unfortunately, the same refrain applies at Nokia. Just last week I pointed out in “Another One Bites the Dust” that Nokia was at grave risk of following Blockbuster into bankruptcy court. Although Nokia has 40% worldwide market share in mobile phones, U.S. share has slipped to about 8% this year. In smartphones Nokia has nowhere near the margin of Apple, even though both will sell about the same number of units this year. Nokia once had the lead, but now it is far behind in a market where it has the largest overall share. And that was the problem which befell Motorola – #1 for 3 years early in this decade but now far, far behind competitors in all segments and a very likely candidate for bankruptcy when it spins out a seperate cell phone business.
According to the New York Times in “Nokia’s New Chief Faces a Culture of Complacency” Nokia had a very similar product to the iPhone in 2004 but never took it to market. The internal organization made the new advancement go through several rounds of “review” and the hierarachy simply shot it down in an effort to maintain company focus on the popular, traditional cell phones then being offered. Rather than risk cannibalization, the organization focused on doing more of what it had done well. Eschewing innovation for defending the old products is shown again and again the first step toward disaster. (Would your organization use layers of reviews to kill a new idea in a new market?)
Meanwhile, when an internal Nokia team tried to get approval to launch the smart phones management’s responses sounded like:
- We don’t know much about this technology. The old stuff we do.
- We don’t know how big this new market might be. The old one we do
- We can’t tell if this new product will succeed. Enhanced versions of old products we can predict very accurately.
- We might be too early to market. We know how to sell in the existing market.
Even though Nokia had quite a lead in touch screens, downloadable apps, a good smartphone operating system and even 3-D interfaces, the desire to Defend & Extend the old “core” business overwhelmed any effort to move innovation to market. (By the way, do these comments in any way sound like your company?)
The new CEO, Mr. Elop, is from Microsoft. Again, one of the weakest tech companies out there at launching new products. Microsoft had the smart phone O/S lead just 3 years ago, but lost it to maintain investment in its traditional Windows PC O/S and Office automation software. And again you can ask, exactly how excited have people been with Microsoft’s new products over the last decade? Or you might ask, exactly what new products?
Both HP and Nokia need CEOs ready to attack lock-in to old technologies, old business practices, old hierarchies and old metrics. They need to rejuvenate the companies’ ability to quickly get new products to market, learn and improve. They need experience at early market sensing of unmet needs, and using White Space teams to get products out the door and competitive fast. Both need to overcome traditional management approaches that inhibit growth and move fast to be first into new markets with new products – like Apple and Google.
But in both cases, it appears highly unlikely the Board has hired for what the companies need. Instead, they’ve hired for a stodgy resume. Executive who came from companies that are already in bad positions with limited growth prospects. Exactly NOT what the companies need. We can only hope that somehow both CEOs overcome their historical approaches and rapidly attack existing locked-in decision-making. Otherwise, this will be seen as when investors should have sold their stock and employees should have begun putting resumes on the street!
by Adam Hartung | Sep 29, 2010 | Current Affairs, General, Innovation, Leadership, Openness, Web/Tech, Weblogs
Summary:
- Traditional news formats – such as magazines and newspapers – are faltering
- On-line editions of traditional formats are not faring well
- Important journalists are transitioning to blogger roles to better provide news consumers what they want
- Important journalists from Newsweek and the New York Times have joined HuffingtonPost.com as bloggers
- Forbes.com is transitioning from traditional publishing to bloggers in its effort to meet market needs
- The new era of journalism will be nothing like the last
In early 2006, before it completed the leveraged buyout (LBO) that added piles of debt onto Tribune Corporation I was talking with several former Chicago Tribune executives who had been placed in senior positions at the acquired Los Angeles Times. Their challenge was figuring out how they would ever improve cash flow enough to justify the huge premium paid for the newspaper. Unfortunately, 90% or more of their energy was focused on cost cutting and outsourcing, with almost none looking at revenue generation.
In the face of a declining subscriber base, intense competitiion from smaller, targeted newspapers in the area, and a lousy ad market I asked both the publisher and the General Manager what they were going to do to drive revenue growth. They, quite literally, had no ideas. There was a fledgling effort, dramatically underfunded for the scale of the country’s largest local newspaper, to post part of the LATimes content on-line. But the entire team was only 30 people, they were restricted to re-treading newspaper content, and mostly they focused on local sports reports (pages which drew the largest number of hits). About a third of the staff were technical folks (IT), and half were sales – leaving very few bodies (or brains) to put energy into making a really world-class news environment worthy of the LATimes.com name. The group head was trying to find internet ad buyers who would pay a premium to be on a well-named but woefully content-weak web-site.
Lacking any plans to drive growth, in old or new markets, it was no surprise that lay-offs and draconian cost cutting continued. Several floors in the famous newspaper building right in downtown Los Angeles, like the Tribune Tower in Chicago, became empty. By 2008 as much of the building was used as a movie set as used by editors or reporters! Eventually Tribune Corp. filed bankruptcy – where it has remained going on 3 years now.
When asked if the newspaper would consider adding bloggers to the on-line journal, the entire management team was horrified. “Bloggers are not journalists,” was the first concern, “so quality would be unacceptable. You cannot expect a major journalistic enterprise to consider blogging to have any correlation with professional journalism.” I asked what they thought about the then-fledgling HuffingtonPost.com, to which they retorted “that is not a legitimate news company. The product is not comparable to our newspaper. It has nothing to do with the business we’re in.” And with that simple attack, the executives promptly dismissed the fledgling, fringe competition.
How things have changed in news publishing. Four years later newspapers are dramatically smaller, in both ad dollars and staff. Many major journals – magazines as well as newspapers – have discontinued print editions as subscriptions have declined. Print formats (physical size) are substantially smaller. While millions of internet news sites attract readers hourly, print readership has only gone down. Major journals, unable to maintain their cash flow, have been acquired at low prices by newcomers hopeful of developing a new business model, and many well known and formerly influential news journalists have been laid off, or moved to on-line environments in order to maintain employment.
About a week ago the Wall Street Journal reported “Newsweek’s Howard Fineman to Join Huffington Post.” This week Mediapost.com headlined “The HuffPo’s Hiring of NYT’s Peter Goodman Is More Significant Than You Think.” Rather rapidly, in just a few years, HuffingtonPost.com has become a major force in the news industry. Well known journalists from Newsweek and the New York Times add considerable credibility to a new media which traditional publishers far too often ignored. Much to the chagrin, to be sure, of Sam Zell and the leadership at Tribune Corporation.
Today people want not only sterile reporting, but some insight. “What does this mean? Why do you think this happened? Is this event important, or not, longer term? What am I supposed to do with this information?” People want some analysis, as well as news. And readers want the input NOW – immediately – not at some later time that meets an arbitrary news cycle. Increasingly news consumers want Bill O’Reilly or Keith Olberman (depending upon your point of view) rather than Walter Cronkite – and they’d like that input as soon as possible.
Bloggers provide this insight. They provide not only information, but make some sense of it. They utlize past experience and insight to bring together relevant, if disparate, facts coupled with some ideas as to what it means. Where 4 year ago publishers scoffed at HuffingtonPost.com, nobody is scoffing any longer.
And it’s with great pleasure, and a pretty hefty dose of humility, that I’ve become a blogger at Forbes.com (http://blogs.forbes.com/adamhartung/). Hand it to the publisher and editors at Forbes that they are moving Forbes.com from an on-line magazine to a bi-directional, real-time site for information and insight to the world of business and economic news. Writers aren’t limited to a set schedule, a set word length or even set topics. Readers will now be able to visit Forbes.com 24×7 and acquire up-to-the-minute news and insight on relevant topics.
Forbes.com is transitioning to be much more like HuffingtonPost.com – a change that aligns with the market shift. For readers, employees and advertisers this is a very, very good thing. Because nobody wants the end of journalism – just a transition to the market needs of 2010. I look forward to joining you at Forbes.com blogs, and hearing your comments to my take on business and economic news.
by Adam Hartung | Sep 26, 2010 | Current Affairs, In the Rapids, Leadership, Openness, Web/Tech
Summary:
- Apple is worth more than Microsoft today, even though Microsoft is larger, because it has better growth prospects
- Apple is closing in on the most valuable company in the world – Exxon
- Exxon’s value is stalled because it has no growth markets
- Exxon once developed, then abandoned, a growth business called Exxon Office Systems
- Apple’s value may eclipse Exxon, which has almost 8 times the revenue, because its growth prospects are so bright
- Profitable growth is worth more than monopolistic market share – or even huge revenue
We all know that over the last 10 years Apple has moved from the brink of bankruptcy to great success. Apple has been able to dramatically increase its revenues, growing at double-digit rates for several years. And Apple now competes in markets like mobile computing and entertainment where its hardware and software products are demonstrating a leading position as users migrate toward different platforms (iPods and downloadable music or video, iPads and downloadable video or text, iPhones and downloadable apps of all sorts).
Because of this profitable growth, Apple’s market value now exceeds Microsoft’s. An accomplishment nobody predicted a decade ago.
As this chart from Silicon Alley Insider shows, Apple’s profitable revenue growth has allowed its value to soar. Even though Microsoft is larger, and dominates its market of PC operating systems and office automation software, its value has stalled due to lack of growth. Because Apple is in very large, emerging markets with successful products it is generating a very high valuation.
In fact, Apple’s market cap is closing in on the most valuable company in the world – Exxon:
Source: Silicon Alley Insider
Exxon and Apple have nothing in common. Exxon is a petroleum company. It’s growth almost all from acquisition. You could say it’s nonsensical to compare the two.
But for those of us with long memories, we can remember in the early 1980s when Exxon opened Exxon Office Systems. As the price of crude oil, and its refined products, hit record highs Exxon made record profits. Leadership invested a few billion dollars into creating a new business intended to compete with IBM and Xerox – leading office equipment companies of the time. But, when the price of crude oil fell Exxon abandoned this venture – by then already achieving more than $1B/year in revenue. All the suppliers and customers were left in the lurch, and the employees were left looking for new jobs. Within weeks Exxon Office Products disappeared.
Exxon abandoned its opportunity for growth into new markets in order to “focus” on its “core” business of oil exploration and production, oil refining, and marketing of petroleum products. As a result, Exxon – augmented via its many acquisitions across the years – is now the world’s largest “oil” company as well as the world’s highest market capitalization company. But it has no growth. And thus, its value is totally dependent upon the price of oil – a commodity. Over the last 2 years this has caused Exxon’s value to decline.
At $43B in 2009, Apple has nowhere near the revenue of Exxon’s $310B. But what Apple has is new markets, and growth. Someday we’ll run out of oil (long time yet, to be sure). What will Exxon do then? But in the case of Apple we already know there will be future revenues from all the new products for a long time after the Mac has run its course and disappeared from backpacks. It’s that willingness to seek out new markets, to develop new products for emerging markets and constantly push for new, profitable revenues that makes Apple worth so much.
Could Apple become the world’s most valuable company? Possibly. If so, it won’t be from industry domination. That sort of monopolistic thinking drove the industrial era, and companies like AT&T as well as Exxon — and Microsoft. What’s worth more today than monopolism is entering new markets and generating profitable growth. It’s what once made the original Standard Oil worth so much, and it initially made Microsoft worth more than any other tech company. Too many of us forget that profitable growth, more than anything else, generates huge value and wealth. And that’s true in spades in 2010!
by Adam Hartung | Sep 22, 2010 | Current Affairs, Defend & Extend, Film, In the Whirlpool, Leadership, Lifecycle, Lock-in, Music, Web/Tech
Summary:
- Video retailer Blockbuster (and competitor Hollywood Video) are now bankrupt
- Video rentals/sales are at an all time high – but via digital downloads not DVDs
- Nokia, once the cell phone industry leader, is in deep trouble and risk of failure
- Yet mobile use (calls, texts, internet access, email) is at an all time high
- These companies are victims of locking-in to old business models, and missing a market shift
- Commitment to defending your old business can cause failure, even when participating in high growth markets, if you don’t anticipate, embrace and participate in market shifts
- Lock-in is deadly. It can cause you to ignore a market shift.
According to YahooNews, “Blockbuster Video to File Chapter 11.” In February, Movie Gallery – the owner of primary in-kind competitor Hollywood Video – filed for bankruptcy. It’s now decided to liquidate.
The cause is market shift. Netflix made it possible to rent DVDs without the cost of a store – as has the kiosk competitor Red Box. But everyone knows that is just a stopgap, because Netflix and Hulu are leading us all toward a future where there is no physical product at all. We’ll download the things we want to watch. The market is shifting from physical items – video cassettes then DVDs – to downloads. And both Blockbuster and Hollywood Video missed the shift.
Blockbuster (or Hollywood) could have gotten into on-line renting, or kiosks, like its competition. It even could have used profits to be an early developer of downloadable movies. Nothing stopped Blockbuster from investing in YouTube. Except it’s commitment to its Success Formula – as a brick-and-mortar retailer that rented or sold physically reproduced entertainment. Lock-in. And for that commitment to its historical Success Formula the investors now will get a great big goose egg – and employees will get to be laid off – and the thousands of landlords will be left in the lurch, unprepared.
As predictable as Blockbuster was, we can be equally sure about the future of former powerhouse Nokia. Details are provided in the BusinessWeek.com article “How Nokia Fell from Grace.” As the cell phone business exploded in the 1990s Nokia was a big winner. Revenues grew fivefold between 1996 and 2001 as people around the globe gobbled up the new devices. Another example of the fact that when you enter a high growth market you don’t have to be good – just in the right market at the right time.
But the cell phone business has become the mobile device business. And Nokia didn’t anticipate, prepare for or participate in the market shift. From market dominance, it has become an also-ran. The article author blames the failure, and decline, on complacent management. Weak explanation. You can be sure the leadership and management at Nokia was doing all it possibly could to Defend & Extend its cell phone business. The problem is that D&E management doesn’t work when customers simply walk away to a new technology. It may take a few years, and government subsidies may extend Nokia’s life even longer, but Nokia has about as much chance of surviving its market shift as Blockbuster did.
When companies stumble management sees the problems. They know results are faltering. But for decades management has been trained to think that the proper response is to “knuckle down, cut costs, defend the current business at all cost.” Yet, there are more movies rented now than ever – and Blockbuster is failing despite enormous market growth. There are more mobile telephony minutes, text messages, remote emails and mobile internet searches than ever in history – yet Nokia is doing remarkably poorly. It’s not a market problem, it’s a problem of Lock-in to a solution that is now outdated. When the old supplier didn’t give the market what it wanted, the customers went elsewhere. And unwillingness to go with them has left these companies in tatters.
These markets are growing, yet the purveyors of old solutions are failing primarily because they stuck to defending their old business too long. They did not embrace the market shift, and cannibalize historical product sales to enter the new, higher growth markets. Because they chose to protect their “core,” they failed. New victims of Lock-in.
by Adam Hartung | Sep 16, 2010 | Current Affairs, Defend & Extend, Food and Drink, Innovation, Leadership, Lock-in, Openness, Web/Tech
Summary:
- Businesses usually try defending an old solution in the face of an emerging new solution
- Status Quo Police use “cannibalization” concerns to stop the organization from moving to new solutions and new markets
- If you don’t move early, you end up with a dying business – like newspapers – as new competitors take over the customer relationship – like Apple is doing with news subscriptions
- You can adapt to shifting markets, profitably growing
- You must disrupt your lock-ins to the old success formula, including stopping the Status Quo Police from using the cannibalization threat
- You should set up White Space teams early to embrace the new solutions and figure out how to profitably grow in the new market space
When Sony saw MP3 technology emerging it worked hard to defend sales of CDs and CD Players. It didn’t want to see a decline in the pricing, or revenue, for its existing business. As a result, it was really late to MP3 technology, and Apple took the lead. This is the classic “Innovator’s Dilemma” as described by Professor Clayton Christenson of Harvard. Existing market leaders get so hung up on defending and extending the current business, they fear new solutions, until they become obsolete.
In the 1980s Pizza Hut could see the emergence of Domino’s Pizza. But Pizza Hut felt that delivered pizza would cannibalize the eat-in pizza market management sought to dominate. As a result Pizza Hut barely participated in what became a multi-biliion dollar market for Domino’s and other delivery chains.
The Status Quo Police drag out their favorite word to fight any move into new markets. Cannibalization. They say over and over that if the company moves to the new market solution it will cannibalize existing sales – usually at a lower margin. Sure, there may someday be a future time to compete, but today (and this goes on forever) management should keep close to the existing business model, and protect it.
That’s what the newspapers did. All of them could see the internet emerging as a route to disseminate news. They could see Monster.com, Vehix.com, eBay, CraigsList.com and other sites stealing away their classified ad customers. They could see Google not only moving their content to other sites, but placing ads with that content. Yet, all energy was expended trying to maintain very expensive print advertising, for fear that lower priced internet advertising would cannibalize existing revenues.
Now, bankrupt or nearly so, the newspapers are petrified. The San Jose Mercury News headlines “Apple to Announce Subscription Plan for Newspapers.” As months have passed the newspapers have watched subscriptions fall, and not built a viable internet distribution system. So Apple is taking over the subscription role – and will take a cool third of the subscription revenue to link readers to the iPad on-line newspaper. Absolute fear of cannibalization, and strong internal Status Quo Police, kept the newspapers from embracing the emerging solution. Now they will find themselves beholden to the device providers – Apple’s iPad, Amazon’s Kindle, or a Google Android device.
But it doesn’t have to be that way. Netflix built a profitable growth business delivering DVDs to subscribers. Streaming video clearly would cannibalize revenues, because the price is lower than DVDs. But Netflix chose to embrace streaming – to its great betterment! The Wrap headlines “Why Hollywood should be Afraid of Netfilx – Very Afraid.” As reported, Netflix is now growing even FASTER with its streaming video – and at a good margin. The price per item may be lower – but the volume is sooooo much higher!
Had Netflix defended its old model it was at risk of obsolescence by Hulu.com, Google, YouTube or any of several other video providers. It could have tried to slow switching to streaming by working to defend its DVD “core.” But by embracing the market shift Netflix is now in a leading position as a distributor of streaming content. This makes Netfilx a very powerful company when negotiating distribution rights with producers of movie or television content (thus the Hollywood fear.) By embracing the market shift, and the future solution, Netflix is expanding its business opportunity AND growing revenue profitably.
Don’t let fear of cannibalization, pushed by the Status Quo Police, stop your business from moving with market shifts. Such fear will make you like the proverbial deer, stuck on the road, staring at the headlights of an oncoming auto — and eventually dead. Embrace the market shift, Disrupt your Locked-in thoughts (like “we distribute DVDs”) and set up White Space teams to figure out how you can profitably grow in the new market!
by Adam Hartung | Sep 15, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Web/Tech
Summary:
- There is a lot of value to recognizing early trends, and acting upon them
- That Apple is as popular as Dell for computers among college students is a trend indicator that Dell’s future looks problematic, while Apple’s looks better
- It is hard to maintain long-term value from innovations that defend & extend an historical market – they are easily copied by competitors
- Long term value comes from the ability to innovate new product markets which are hard for competitors to copy
- Dell is a lousy investment, and Apple is a good one, because Dell is near end of life for its innovation (supply chain management) while Apple has a powerful new product/market innovation capability that can continue for several years
I can think of 3 very powerful reasons everyone should look closely at the following chart from Silicon Alley Insider. It is very, very important that Apple is tied with Dell for market share in PCs among college students, and almost 2.5 times the share of HP:
Firstly, it is important to understand that capturing young buyers is very valuable. If you catch a customer at 16, you have 50 to 60 years of lifelong customer value you can try to maintain. Thus, these people are inherently worth more than someone who is 55, and only 10 to 20 years of lifetime value. While we may realize that older people have more discretionary income, many loyalties are developed at a young age. Over the years, the younger buyers will be worth considerably more.
When I was 15 popular cars were from Pontiac (the GT and Firebird) Oldsmobile (Cutlas) Dodge (Charger and Challenger) and Chevy (Camaro.) Thus, my generation tended to stay with those brands a long time. But by the 1990s this had changed dramatically, and younger buyers were driving Toyotas, Hondas and Mazdas. Now, the American car companies are in trouble because a generational shift has happened. Market shares have changed considerably, and Toyota is now #1. Keeping the old buyers was not enough to keep GM and Chrysler healthy.
That for a quarter as many college students want a Mac as want a PC from Dell says a lot about future technology purchases. It portends good things for Apple, and not good things for leading PC suppliers. Young people’s purchase habits indicate a trend that is unlikely to reverse (look at how even the Toyota quality issues have not helped GM catch them this year.) We can expect that Apple is capturing “the hearts and minds” of college students, and that drives not just current, but future sales
Secondly, it is important to note that Dell built its distinction on price – offering a “generic” product with fast delivery and reasonable pricing. Dell had no R&D, it outsourced all product development and focused on assembly and fast supply chain performance. Unfortunately, supply chain and delivery innovation are far easier to copy than new product – and new market – innovation. Competitors have been able to match Dell’s early advantages, while Apple’s are a lot harder to meet – or exceed. Thus, it has not taken long for Dell to lose it’s commanding industry “domination” to a smaller competitor who has something very new to offer that competitors cannot easily match.
Not all innovation is alike. Those that help Defend & Extend an existing business – making PCs fast and cheap – offer a lot less long term value. Every year it gets harder, and costs more, to try to create any sense of improvement – or advantage. D&E innovations are valued by insiders, but not much by the marketplace. Customers see these Dell kind of innovations as more, better, faster and cheaper – and they are easily matched. They don’t create customer loyalty.
However, real product/market innovations – like the improvements in digital music and mobile devices – have a much longer lasting impact on customers and the markets created. Apple is still #1 in digital music downloads after nearly a decade. And they remain #1 in mobile app downloads despite a small share in the total market for cell phones. If you want to generate higher returns for longer periods, you want to innovate new markets – not just make improvements in defending & extending existing market positions.
Thirdly, this should impact your investment decisions. SeekingAlpha.com, reproducing the chart above, headlines “Are 2010 Apple Shares the new 1995 Dell Shares?” The author makes the case that Apple is now deeply mired in the Swamp, with little innovation on the horizon as it is late to every major new growth market. It’s defend & extend behavior is doing nothing for shareholder value. Meanwhile, Apple’s ability to pioneer new markets gives a strong case for future growth in both revenue and profits. As a result, the author says Dell is fully valued (meaning he sees little chance it will rise in value) while he thinks Apple could go up another 70% in the next year!
Too often people invest based upon size of company – thinking big = stability. But now that giants are falling (Circuit City, GM, Lehman Brothers) we know this isn’t true. Others invest based upon dividend yield. But with markets shifting quickly, too often dividends rapidly become unsustainable and are slashed (BP). Some think you should invest where a company has high market share, but this often is meaningless because the market stagnates leading to a revenue stall and quick decline as the entire market drops out from under the share leader (Microsoft in PCs).
Investing has to be based upon a company’s ability to maintain profitable growth into the future. And that now requires an ability to understand market trends and innovate new solutions quickly – and take them to market equally quickly. Only those companies that are agile enough to understand trends and competitors, implementing White Space teams able to lead market disruptions. Throw away those old books about “inherent value” and “undervalued physical assets” as they will do you no good in an era where value is driven by understanding information and the ability to rapidly move with shifting markets.
Oh, and if you feel at all that I obscured the message in this blog, here’s a recap:
- Dell is trying to Defend its old customers, and it’s not capturing new ones. So it’s future is really dicey
- Dell’s supply chain innovations have been copied by competitors, and Dell has little – if any – competitive advantage today. Dell is in a price war.
- Apple is pioneering new markets with new products, and it is capturing new customers. Especially younger ones with a high potential lifetime value
- Apple’s innovations are hard to duplicate, giving it much longer time to profitably grow revenues.
- You should sell any Dell stock you have – it has no chance of going up in value long term. Apple has a lot of opportunity to keep profitably growing and therefore looks like a pretty good investment.
by Adam Hartung | Sep 7, 2010 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Web/Tech
Summary:
- Not even dominant industry leaders are immune to decline from market shifts
- It’s easy to focus on what made you great, and miss a market shift
- Competitors drive market shifts, not customers – so pay attention to competitors!
- AOL lost industry domination to competitors with new solutions, and now new technologies, even though it executed its Success Formula really well
- You can become obsolete really quickly when fringe competitors introduce new solutions
- Do more competitor analysis
- Keep White Space teams experimenting with emerging solutions and competing in shifting markets
Do you remember when AOL (an acronym, and updated name, for America On-Line) dominated our perception of the internet? Fifteen years ago AOL was one of the leading companies introducing Americans to the wonders of the web. Providing dial-up access (remember that?) AOL offered users its own interface, and a series of apps that helped its customers discover how the world wide web could make their lives easier – and better. At its peak, AOL had over 30 million subscribers! AOL was so commercially strong, and investors were so optimistic, that a merger with powerhouse publisher Time/Warner, which already owned CNN and HBO, was organized so AOL’s young leader, Steve Case, could take the helm and push the company forward into the digital frontier.
Along the way, something went very wrong. In an example of what happened to AOL and its products, as seen below, after pioneering Instant Messaging as an internet application AOL’s AIM user base has declined precipitously – by more than 50% – in the last 3 years:
Source: BusinessInsider.com
Of course, the same thing that once drove AOL growth is now apparent somewhere else. New markets are emerging. Instead of using PCs with instant messaging, most people today text via their mobile device! Texting isn’t just a youthful activity. According to Pew Research, on PewInternet.org in “Cell Phones and American Adults” 72% of American adults now text – up from 65% a year ago. 87% of teens text. And I’m willing to bet a lot of those teens don’t even have an instant messaging account – on any platform. The amount of “instant messaging” has grown dramatically – just not using “instant messaging” software. It’s now happening via mobile device texting.
Where AOL once dominated the landscape for digital communication, it is now becoming almost insignificant. But it wasn’t because AOL didn’t know how to execute its strategy. AOL was an industry leader, with savvy management, and a blue-ribbon Board of Directors. AOL even bought Netscape in its effort to remain the best server and client technology for a proprietary internet platform.
AOL became obsolete because the market shifted – while AOL tried holding on to its initial Success Formula. AOL did not shift as the market shifted, it has remained Locke-in to its early Identity, original Strategy and all those product Tactics that once made it great! AOL didn’t do anything wrong. It just kept doing what it knew how to do, rather than recognizing the impact of competitors and changing markets.
Shortly after AOL emerged as the market leader, competitors sprang up. First they offered dial-up access, often more cheaply. Eventually dial-up was replaced with high-speed internet access from multiple providers. Instead of using a proprietary interface, competitors Netscape and Microsoft brought out their own internet browsers, making it possible for users to surf the web directly and easily. Instead of using an AOL directory to find things, search engines such as Ask Jeeves, Alta Vista and Yahoo! Search came along that would find things across the web for users based upon their query. Email alternatives emerged, such as Hotmail and Yahoo! Mail. Eventually, one piece at a time, all the proprietary packaged products that AOL provided – including instant messaging – was offered by a competitor. And the value of the AOL packaging declined. As competitor products improved, for most users being an AOL subscriber simply had little advantage.
And now entirely new apps are coming along. As the market quickly shifts to mobile data and applications, devices like smartphones and tablets are replacing PCs. And the apps that made internet companies rich and famous are poised for decline – as users shift to the new way of doing things.
Whether the currently popular internet companies will make the next step, or end up like AOL, will be determined by whether they remain stuck on defending & extending their “core” business, or if they can shift with the market. There is no doubt that the amount of “instant messaging” is skyrocketing. It’s just not happening on the PC. Like many tasks, the demand is growing very fast. But it is via a new, and different solution. If the company sees itself as providing a PC type of internet solution, then the company will likely decline. But, alternatively, the leadership could see that demand is exploding and they need to shift – with the market – to the new solution environment to maintain growth.
Whether you are the market leader or not, you know you don’t want to end up like AOL. Once rich with resources, and a commanding market lead, AOL is now irrelevant to the latest market trends – and growth. AOL stuck to what it knew how to do. It has not shifted with changing market requirements – including changes in technology. For your company to succeed it must be (1) aware of competitors and how they are constantly changing the market – especially fringe competitors, and (2) enlisting White Space teams that are participating in the new markets, learning what works and how to migrate to capture the ongoing growth.
Postscript: I want to thank a pair of colleagues for some great mentions over the weekend. Firstly, to FMI Daily for posting to its readership about my blog on The Power of Myth. Secondly, a big thank you to Management Consulting News for referring its newsletter readers to this blog as notable, and my recent posting on the failure of Fast Follower strategy. I encourage readers to follow the links here to these sites and sign up for future information from both!!
by Adam Hartung | Sep 2, 2010 | Current Affairs, Defend & Extend, In the Rapids, Television, Web/Tech
Summary:
- Market shifts create losers, and winners
- Demand doesn’t decline, it just changes form – and usually grows!
- We want more entertainment and communcation – but not the old fashioned way
- Losers keep trying to sell what they have, and know
- Winners supply solutions aligned with market needs regardless of old competencies
How would you react if your customers said your product really wasn’t something they needed? Would you work hard to convince them they are wrong? Maybe try to add some features hoping it would regain their attention? Or would you start looking for what they really do need/want?
Pew Research Center, at PewSocialTrends.org headlines “The Fading Glory of the Television and Telephone” describing how quickly people are walking away from what were very recently considered absolute necessities. As a “boomer” and member of the “TV generation” I was surprised to read that only 42% of Americans now think a television is a necessity! This has been a rapid, dramatic decline from 52% last year and 64% in 2006! 1 in 5 Americans have changed their point of view about television as a necessity in just 4 years! And TV as a necessity is in an accelerating decline! I can remember when my generation went from 1 TV in the house to 1 in every room! This trend does not bode well for broadcast television networks, affiliates, advertisers, traditional production companies, television newscasters, manufacturers of TV sets and TV equipment – or many other businesses linked to TV as we know it.
Simultaneously, demand for a land line telephone has declined. Again, my generation remembers the days with one phone in the house – in some areas on a shared “party” line where multiple families shared a single phone line. The phone was in a central area so it could be shared. In the 1970s we saw things change as telephones were added to every room! Now, according to Pew, folks who consider a land-line phone a necessity has declined to only 62%, a 10% decline from just last year (68 to 62) and barely 3 in 5 Americans! Wow!
Of course, for every decline there’s a winner. 47% see the cell phone as a necessity – that’s 5 percentage points greater than the TV score, indicating mobile phones are seen as more of a necessity than television by the general population. And 34% see high speed internet as a necessity – only 9 percentage points fewer than the TV number – and more than half who see the need for a land-line phone.
Demand for entertainment and communication have not declined! If you are in television or land lines you might think so. Rather, that demand is accelerating. But it is just shifting to a different solution. Instead of the old technology, and supplier industry, people are changing to something new. First with video cassetttes, then digital video recorders (DVRs), then the plethora of available cable channels and on-demand TV, and now with on-line entertainment from YouTube to Hulu people have been changing the way they consume entertainment. Demand has gone up, but not from traditional consumption of TV, especially as viewing has switched from the TV to the computer monitor – or the hand held device.
Clearly, access to the internet (facebook, twitter, et.al.), texting and anytime/anywhere calling has increased both our access and use of one-way (such as reading web pages) and two way communication. Communication is continuing to grow, but it will be in a different way. No longer do we need a “dial tone” to communicate – and in most instances people are finding a preference to asynchronous rather than real-time communication.
These are the kind of industry transitions that threaten so many businesses. What Clayton Christensen calls “The Innovator’s Dilemma” as new solutions increase demand while making old solutions obsolete. The tendency is for the supplier of traditional solutions to say “my market is in decline.” But really, the market is growing! Just like Kodak said the demand for film was declining, when demand for photography – now in digital format – was (and is) escalating! When market shifts happen, incumbents have to resist the temptation to try “keeping” the “old customers” by undertaking Defend & Extend efforts – like adding features and functionality, while cutting price. This inevitably leads to disaster! Instead, they have to understand the shift is only going to accelerate, and develop an approach to entering the new market.
As this research comes out, Apple launched a series of new products to augment its set-top box and iPod/iTouch product lines. (San Francisco Chronicle, SFGate.com “Steve JobsUnveils Upgraded Apple TV, New iPods“) by doing so Apple recognizes that people still want entertainment – but they are a whole lot less likely to accept sitting in front of a communal television, serially deploying programming at them. They want their entertainment to be on-demand, and personalized. Why should we all watch the same thing? And why watch what some programmer at CBS, HBO or TMC wants to deliver?
Apple is bringing out products that align with the direction the market is now heading. Ping is designed to help people share program information and identify the entertainment you would like to receive. iTunes is upgrading to bring you in bite-size chunks exactly the entertainment you want, as you want it, aurally or visually. These are products which will grow because they are aligned with what the market says it wants — even more entertainment. Those who are hidebound to the old supply mechanism will simply find themselves fighting for declining revenue as demand shifts – and grows – in the new solutions
