by Adam Hartung | Apr 22, 2013 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
JCPenney's board fired the company CEO 18 months ago. Frustrated with weak performance, they replaced him with the most famous person in retail at the time. Ron Johnson was running Apple's stores, which had the highest profit per square foot of any retail chain in America. Sure he would bring the Midas touch to JC Penney they gave him a $50M sign-on bonus and complete latitude to do as he wished.
Things didn't work out so well. Sales fell some 25%. The stock dropped 50%. So about 2 weeks ago the Board fired Ron Johnson.
The first mistake: Ron Johnson didn't try solving the real problem at JC Penney. He spent lavishly trying to remake the brand. He modernized the logo, upped the TV ad spend, spruced up stores and implemented a more consistent pricing strategy. But that all was designed to help JC Penney compete in traditional brick-and-mortar retail. Against traditional companies like Wal-Mart, Kohl's, Sears, etc. But that wasn't (and isn't) JC Penney's problem.
The problem in all of traditional retail is the growth of on-line. In a small margin business with high fixed costs, like traditional retail, even a small revenue loss has a big impact on net profit. For every 5% revenue decline 50-90% of that lost cash comes directly off the bottom line – because costs don't fall with revenues. And these days every quarter – every month – more and more customers are buying more and more stuff from Amazon.com and its on-line brethren rather than brick and mortar stores. It is these lost revenues that are destroying revenues and profits at Sears and JC Penney, and stagnating nearly everyone else including Wal-Mart.
Coming from the tech world, you would have expected CEO Johnson to recognize this problem and radically change the strategy, rather than messing with tactics. He should have looked to close stores to lower fixed costs, developed a powerful on-line presence and marketed hard to grab more customers showrooming or shopping from home. He should have targeted to grow JCP on-line, stealing revenues from other traditional retailers, while making the company more of a hybrid retailer that profitably met customer needs in stores, or on-line, as suits them. He should have used on-line retail to take customers from locked-in competitors unable to deal with "cannibalization."
No wonder the results tanked, and CEO Johnson was fired. Doing more of the tired, old strategies in a shifting market never works. In Apple parlance, he needed to be focused on an iPad strategy, when instead he kept trying to sell more Macs.
But now the Board has made its second mistake. Bringing back the old CEO, Myron Ullman, has deepened JP Penney's lock-in to that old, traditional and uncompetitve brick-and-mortar strategy. He intends to return to JCP's legacy, buy more newspaper coupons, and keep doing more of the same. While hoping for a better outcome.
What was that old description of insanity? Something about repeating yourself…..
Expectedly, Penney's stock dropped another 10% after announcing the old CEO would return. Investors are smart enough to recognize the retail market has shifted. That newsapaper coupons, circulars and traditional advertising is not enough to compete with on-line merchants which have lower fixed costs, faster inventory turns and wider product selection.
It certainly appears Mr. Johnson was not the right person to grow JC Penney. All the more reason JCP needs to accelerate its strategy toward the on-line retail trend. Going backward will only worsen an already terrible situation.
by Adam Hartung | Oct 18, 2012 | Investing, Trends
If you worry about crashes and your investment returns, maybe you need to take a new approach!
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.
by Adam Hartung | May 10, 2011 | Current Affairs, In the Whirlpool, Innovation, Leadership, Lifecycle
Sears is threatening to move its headquarters out of the Chicago area. It’s been in Chicago since the 1880s. Now the company Chairman is threatening to move its headquarters to another state, in order to find lower operating costs and lower taxes.
Predictably “Officals Scrambling to Keep Sears in Illinois” is the Chicago Tribune headlined. That is stupid. Let Sears go. Giving Sears subsidies would be tantamount to putting a 95 year old alcoholic, smoking paraplegic at the top of the heart/lung transplant list! When it comes to subsidies, triage is the most important thing to keep in mind. And honestly, Sears ain’t worth trying to save (even if subsidies could potentially do it!)
“Fast Eddie Lampert” was the hedge fund manager who created Sears Holdings by using his takeover of bankrupt KMart to acquire the former Sears in 2003. Although he was nothing more than a financier and arbitrager, Mr. Lampert claimed he was a retailing genius, having “turned around” Auto Zone. And he promised to turn around the ailing Sears. In his corner he had the modern “Mad Money” screaming investor advocate, Jim Cramer, who endorsed Mr. Lampert because…… the two were once in college togehter. Mr. Cramer promised investors would do well, because he was simply sure Mr. Lampert was smart. Even if he didn’t have a plan for fixing the company.
Sears had once been a retailing goliath, the originator of home shopping with the famous Sears catalogue, and a pioneer in financing purchases. At one time you could obtain all your insurance, banking and brokerage needs at a Sears, while buying clothes, tools and appliances. An innovator, Sears for many years was part of the Dow Jones Industrial Average. But the world had shifted, Home Depot displaced Sears on the DJIA, and the company’s profits and revenues sagged as competitors picked apart the product lines and locations.
Simultaneously KMart had been destroyed by the faster moving and more aggressive Wal-Mart. Wal-Mart’s cost were lower, and its prices lower. Even though KMart had pioneered discount retailing, it could not compete with the fast growing, low cost Wal-Mart. When its bonds were worth pennies, Mr. Lampert bought them and took over the money-losing company.
By combining two losers, Mr. Lampert promised he would make a winner. How, nobody knew. There was no plan to change either chain. Just a claim that both were “great brands” that had within them other “great brands” like Martha Stewart (started before she was convicted and sent to jail), Craftsman and Kenmore. And there was a lot of real estate. Somehow, all those assets simlply had to be worth more than the market value. At least that’s what Mr. Lampert said, and people were ready to believe. And if they had doubts, they could listen to Jim Cramer during his daily Howard Beale impersonation.
Only they all were wrong.
Retailing had shifted. Smarter competitors were everywhere. Wal-Mart, Target, Dollar General, Home Depot, Best Buy, Kohl’s, JCPenney, Harbor Freight Tools, Amazon.com and a plethora of other compeltitors had changed the retail market forever. Likewise, manufacturers in apparel, appliances and tools had brough forward better products at better prices. And financing was now readily available from credit card companies.
Surely the real estate would be worth a fortune everyone thought. After all, there was so much of it. And there would never be too much retail space. And real estate never went down in value. At least, that’s what everyone said.
But they were wrong. Real estate was at historic highs compared to income, and ability to pay. Real estate was about to crater. And hardest hit in the commercial market was retail space, as the “great recession” wiped out home values, killed personal credit lines, and wiped out disposable income. Additionally, consumers increasingly were buying on-line instead of trudging off to stores fueling growth at Amazon and its peers rather than Sears – which had no on-line presence.
Those who were optimistic for Sears were looking backward. What had once been valuable they felt surely must be valuable again. But those looking forward could see that market shifts had rendered both KMart and Sears obsolete. They were uncompetitive in an increasingly more competitive marketplace. As competitors kept working harder, doing more, better, faster and cheaper Sears was not even in the game. The merger only made the likelihood of failure greater, because it made the scale fo change even greater.
The results since 2003 have been abysmal. Sales per store, a key retail benchmark, have declined every quarter since Mr. Lampert took over. In an effort to prove his financial acumen, Mr. Lampert led the charge for lower costs. And slash his management team did – cutting jobs at stores, in merchandising and everywhere. Stores were closed every quarter in an effort to keep cutting costs. All Mr. Lampert discussed were earnings, which he kept trying to keep from disintegrating. But with every quarter Sears has become smaller, and smaller. Now, Crains Chicago Business headlined, even the (in)famous chairman has to admit his past failure “Sears Chief Lampert: We Ought to be Doing a Lot Better.”
Sears once built, and owned, America’s tallest structure. But long ago Sears left the Sears Tower. Now it’s called the Willis Tower by the way – there is no Sears Tower any longer. Sears headquarters are offices in suburban Hoffman Estates, and are half empty. Eighty percent of the apparel merchandisers were let go in a recent move, taking that group to California where the outcome has been no better. Constant cost cutting does that. Makes you smaller, and less viable.
And now Sears is, well….. who cares? Do you even know where the closest Sears or Kmart store is to you? Do you know what they sell? Do you know the comparative prices? Do you know what products they carry? Do you know if they have any unique products, or value proposition? Do you know anyone who works at Sears? Or shops there? If the store nearest you closed, would you miss it amidst the Home Depot, Kohl’s or Best Buy competitors? If all Sears stores closed – every single location – would you care?
And now Illinois is considering giving this company subsidies to keep the headquarters here?
Here’s an alternative idea. Using whatever logic the state leaders can develop, using whatever dream scenario and whatever desperation economics they have in mind to save a handful of jobs, figure out what the subsidy might be. Then invest it in Groupon. Groupon is currently the most famous technology start-up in Illinois. Over the next 10 years the Groupon investment just might create a few thousand jobs, and return a nice bit of loot to the state treasury. The Sears money will be gone, and Sears is going to disappear anyway. Really, if you want to give a subsidy, if you want to “double down,” why not bet on a winner?
It really doesn’t have to be Groupon. The state residents will be much better off if the money goes into any business that is growing. Investing in the dying horse simply makes no sense. Beg Amazon, Google or Apple to open a center in Illinois – give them the building for free if you must. At least those will be jobs that won’t disappear. Or invest the money into venture funds that can invest in the next biotech or other company that might become a Groupon. Invest in senior design projects from engineering students at the University of Illinois in Chicago or Urbana/Champaign. Invest in the fillies that have a chance of winning the race!
Sentimenatality isn’t bad. We all deserve the right to “remember the good old days.” But don’t invest your retirement fund, or state tax receipts, in sentimentality. That’s how you end up like Detroit. Instead put that money into things that will grow. So you can be more like silicon valley. Invest in businesses that take advantage of market shifts, and leverage big trends to grow. Let go of sentimentality. And let go of Sears. Before it makes you bankrupt!
by Adam Hartung | Mar 25, 2011 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in
It is unlikely anyone in business or government thinks productivity is a bad thing. Productive students get their homework done faster, and learn more in the available time. Productive musicians make more recordings, and tend to learn more over their careers. And productive companies produce more goods and services with less inputs – like labor – thus offering more to customers at lower cost while making more money for investors. At a national level, the more productive we are at everything from growing wheat to making cabinets to writing smartphone apps improves the quantity of goods available to our population – growing the gross domestic product (GDP.) Improving productivity is one of the most critical activities to creating and maintaining a healthy economy, improving incomes and generating wealth.
Then why is American policy so anti-productivity?
American manufacturers today are about the most productive in the world. In the Wall Street Journal's "The Truth About U.S. Manufacturing" we learn that American factory workers are producing triple the output of 1972. The use of ever more sophisticated equipment, often with digital controls, and a higher trained workforce has made it possible to make more and more stuff with less and less labor. While considerable manufacturing has gone offshore, it is not because our workers are competitively unproductive. To the contrary, productivity is amongst the highest in the world!
Unfortunately, most of America's business/economic policy at the government level has been trying to preserve jobs that are, well, not that productive. Take for example agriculture subsidies. They pay farmers to produce less and otherwise make less productive use of land, feedstocks, grains, etc. By giving farmers (most of which are now huge corporations, not the "family farm" circa 1970 and before) subsidies it actually lowers agricultural productivity.
Similarly, bank and auto bailouts (and all subsidies to any manufacturer) in effect lowers productivity. It gives money to a bank, which makes nothing. Or to an unproductive manufacturer to keep its plant operating when the value of the output is insufficient to cover costs. These spending programs serve only to defend and extend the least productive jobs in society – jobs that are economically unviable. By spending money in these areas the government attempts to preserve the old (companies such as GM and Chrysler) at the expense of productivity.
America can create highly productive jobs
"Amazon.com On Hiring Spree" is the Seattle Times headline. Amazon has revolutionized book retailing, publishing and is changing a number of other markets as well. The result is a far more productive workforce in these industries than previous competitors. Borders, to cite a recent example, could not be nearly as efficient selling or publishing books with its out of date model, so it recently followed 90% of other book sellers into bankruptcy. The more productive company, Amazon, is hiring people as fast as it can to grow its business. Its productivity allows Amazon to sell more and create jobs.
Had the government chosen to bail out Borders there would have been a public outcry. Why should we protect the jobs of those store shelf stockers? Likewise, as the number of printed books drops, replaced by digital books, should it be government policy to subsidize book (or magazine, or newspaper) publishers/printers? Whenever a business is no longer competitively productive – whether it be agricultural, manufacturing or anything else – bailouts serve only to keep the unproductive competitor alive. Which actually harms the more competitive company that subsequently must fight the subsidized competitor.
The right policy would be to subsidize Amazon. Amazon is growing. Theoretically, the more money Amazon has the faster it could grow and the more jobs it could create. But, of course, nobody feels good about subsidizing a growing, profitable concern. And Amazon isn't asking for subsidies, anyway.
Our public investments are shifting in the wrong direction.
The right public policy is to invest in creating new Amazons. New businesses that create products and services which are desirable to customers, productively using resources and creating jobs. By helping these new businesses get going the government spending creates new markets. Government money "primes the pump" for investors. Early stage funding allows the business to get started, create a product or service, generate initial revenues, demonstrate a P&L and entice others to invest. The payback to society is a growing enterprise that creates jobs, both of which creates future tax revenues which repay the early investment funding.
The current administration touts investing in the tools for creating growth. In early February the MercuryNews.com reported on a Presidential speech in Michigan, "Obama Promotes Plan for Near Universal High-Speed Wireless." But, like previous Presidential administrations, this is just a lot of talk. While Mr. Obama may think national wireless technology to promote economic growth is good, there is no money for it. In the same article it is noted that Michigan congressional representatives, who resoundingly backed putting billions into the auto bailouts, question the efficacy of investing in emerging infrastructure tools. Protecting the past, while questioning (or opposing) investments in the future.
Unfortunately, for the last 50 years American policy has been headed in the wrong direction! Innovation investment projects peaked around the Kennedy administration (early 1960s) with several American efforts to dominate new technologies through programs such as the famous "space race." Since then, less and less has gone into America's future, and more and more has been spent preserving the past – through entitlements, military spending and tax cuts which provide less and less incentive to invest in unproven projects.
Source: Silicon Alley Insider Chart of the Day from BusinessInsider.com
Since 1953 government "pump priming" by spending on R&D for innovations has declined by 50%!!! No longer is even 1% of Gross Domestic Product spent on R&D. Businesses, which require an immediate return on investment and are generally loath to spend money on things which are uncertain, have been left to fill the vacuum. As a result, total spending has been stagnant. Worse, most spending by business is on sustaining innovations – improvements which defend and extend an existing business – rather than on breakthroughs which create new markets, and a lot more jobs (for more on sustaining innovation investments by business read Clayton Christenson's books including "The Innovator's Dilemma.") Investment in innovation has been woefully underfunded, allowing America's economic leadership position to shrink.
America is driving innovation offshore
The Wall Street Journal has reported "More Companies Plan to Put R&D Offshore." When things are equal, business will invest where the costs are lowest. With little incentive to undertake innovation in America, increasingly U.S. companies are moving their R&D — along with manufacturing, customer service, telesales, etc. — to emerging markets. And their plans are to increase this movement offshore by 50-100% by 2015!
![[EMERGING]](http://si.wsj.net/public/resources/images/MK-BK032A_EMERG_NS_20110221173344.jpg)
What will happen if innovation investments move from America into emerging markets? Will intellectual property remain an American advantage? Will new product development be done in America, or elsewhere? If the manufacturing is already in these markets, is it hard to predict that new products will increasingly be made offshore as well? Asked another way, if we outsource the innovation jobs – what jobs will America have left?
A dramatic change in American policy is needed
Last week America started bombing Libya. Part of protecting the national interest. But, this is not free – reportedly costing Americans $100M/day. Two weeks is $1.4B (probably a lot more, to be honest.). Let's not debate whether this is necessary, but rather recognize (as Roseanne Rosannadanna used to say on Saturday Night Live) "it's always something." There are programs, policies, military bases, agricultural lands, national parks and jobs to protect in every district of America – and its interests around the globe. And that's increasingly where America's money goes. Not into innovation.
So why are Americans surprised that job growth struggles? When the head of GE, a company that has moved manufacturing, information technology, engineering and R&D to offshore centers across the last decade, is made head of the U.S. jobs initiative is there much doubt? When the spending and incentives, as well as the selected leaders, have as their #1 interest preserving the past – largely in areas where American productivity lags – why would anyone expect new job creation?
America's protectionist mentality is causing its lead in innovation to slip away. The President, administration officials, Senators and Congresspeople needs to quit thinking that talking about innovation is going to make any difference in investments, or job creation. If America wants to remain globally economically vibrant it requires a change in investments – starting with more money for R&D via grants, subsidies and tax breaks.
If America wants jobs, and healthy economic growth, it needs innovation. Innovation that will create new, highly productive jobs And that requires investing in the future, rather than spending all the money protecting the past.
