by Adam Hartung | Nov 5, 2012 | Defend & Extend, In the Swamp, Innovation, Lock-in, Science
Many people equate spending on R&D with investing in innovation. The logic goes that R&D spending is lab spending, and out of labs come innovations. Hence, those that spend a lot on R&D are innovative.
That is faulty logic.
This chart shows R&D spending from the top 20 companies in 2011:
Chart reproduced with permission of Business Insider
Think of your own list of companies that are providing innovations which change your work, or life. Would you include Apple? Amazon? Facebook? Google? Genentech? (Here's the link to Fast Company's 50 most innovative for 2012). Note that none of these companies appear on the list of top R&D spenders.
On the other hand, as you look at the big spender list some things might be apparent:
- Microsoft is #5, spending $9B and nearly 13% of revenue. Yet, for this money in 2012 the world received updates to their aging operating system and office automation software. Both of which failed to register favorable reviews by industry gurus, and are considered far from innovative. And Nokia, which is so floundering some consider it a likely bankruptcy candidate soon, is #7! Despite spending nearly $8B on R&D Nokia is now completely reliant on Microsoft if it is to even survive.
- Autos make up a big part of the group. Toyota, GM, Volkswagen, Honda and Daimler are all on the list, spending a whopping $36B. Yet, even though they give us improvements nobody considers them (especially GM) very innovative. That award would go to little Tesla Motors. Or maybe Tata Motors in India.
- Pharmaceuticals make up the dominant industry. Novartis, Roche, Pfizer, Merck, Johnson & Johnson, Sanofi, GlaxoSmithKline and AstraZeneca are all here – spending a cumulative $54B! Yet, they have all failed to give the world any incredible new drugs, all have profit struggles, and the industry is rife with discussions about weak product pipelines. The future of modern medicine increasingly is shifting to genetic solutions, biologics and more specific alternatives to the historical drug regimes from these aging pharma R&D programs.
Do you see the obvious pattern? Most big R&D spenders are not really seeking innovations. They are spending money on historical programs, following historical patterns and trying to defend and extend the historical business. In other words, they are spending vast sums attempting to sustain (or recapture) historical success. And, as the list shows, largely doing a pretty lousy job of it.
If you were given $10,000 to invest would you select these top 20 R&D spenders – or would you look for other, more innovative companies. From a profitability, rate of return and trend perspective, most of these companies look weak – or downright horrible.
Innovators don't focus on what they spend, but where they spend it.
The companies most known for innovation don't keep spending money year after year on their old business. Instead of digging deeper into what they already know, they invest laterally. They spend money putting the pieces together in new, unique ways. They try to find new solutions to old problems, using new – even fringe – technologies. They try to develop disruptive solutions that actually change the marketplace, rather than trying to make something that already exists better, faster or cheaper.
Lots of people like to think there is "scale" in research. Bigger is better. What's more important, for investors, is that there is "diminishing returns." The more you research an area the more you have to spend to find anything new. The costs keep escalating, as the gains shrink. After investing for a while, continuing to research an area is not a good investment (although it may be very intellectually interesting.)
Most of the companies on this list would be smarter to scrap their existing R&D programs, cut the budget in half (at least,) and then invest it somewhere very different. Instead of looking deeper, they need to look wider – broader. They need to investigate alternative solutions, rather than more of the same. They need to be putting more money on fringe opportunities, and a lot less into the core.
Until they do, few on this list are very good investment bets. You'll do better investing like, and in, the real innovators.
by Adam Hartung | May 12, 2012 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Web/Tech
This has been quite the week for CEO mistakes. First was all the hubbub about Scott Thompson, CEO of Yahoo, inflating his resume to include a computer science degree he did not actually receive. According to Mr. Thompson someone at a recruiting firm added that degree claim in 2005, he didn't know it and he's never read his bio since. A simple oversight, if you can believe he hasn't once read his bio in 7 years, and he didn't think it was ever important to correct someone who introduced him or mentioned it. OOPS – the easy answer for someone making several million dollars per year, and trying to guide a very troubled company from the brink of failure. Hopefully he is more persistent about checking company facts.
But luckily for him, his errors were trumped on Thursday when Jamie Dimon, CEO of J.P.MorganChase notified the world that the bank's hedging operation messed up and lost $2B!! OOPS! According to Mr. Dimon this is really no big deal. Which reminded me of the apocryphal Senator Everett Dirksen statement "a billion here, a billion there and pretty soon it all adds up to real money!"
Interesting "little" mistake from a guy who paid himself some $50M a few years ago, and benefitted greatly from the government TARP program. He said this would be "fodder for pundits," as if we all should simply overlook losing $2B? He also said this was "unfortunate timing." As if there's a good time to lose $2B?
But neither of these problems will likely result in the CEOs losing their jobs. As obviously damaging as both mistakes are, which would naturally have caused us mere employees to instantly lose our jobs – and potentially be prosecuted – CEOs are a rare breed who are allowed wide lattitude in their behavior. These are "one off" events that gain a lot of attention, but the media will have forgotten within a few days, and everyone else within a few months.
By comparison, there are at least 5 CEOs that make these 2 mistakes appear pretty small. For these 5, frequently honored for their position, control of resources and personal wealth, they are doing horrific damage to their companies, hurting investors, employees, suppliers and the communities that rely on their organizations. They should have been fired long before this week.
#5 – John Chambers, Cisco Systems. Mr. Chambers is the longest serving CEO on this list, having led Cisco since 1995 and championed much of its rapid growth as corporations around the world began installing networks. Cisco's stock reached $70/share in 2001. But since then a combination of recessions that cut corporate IT budgets and a market shift to cloud computing has left Cisco scrambling for a strategy, and growth.
Mr. Chambers appears to have been great at operating Cisco as long as he was in a growth market. But since customers turned to cloud computing and greater use of mobile telephony networks Cisco has been unable to innovate, launch and grow new markets for cloud storage, services or applications. Mr. Chambers has reorganized the company 3 times – but it has been much like rearranging the deck chairs on the Titanic. Lots of confusion, but no improvement in results.
Between 2001 and 2007 the stock lost half its value, falling to $35. Continuing its slide, since 2007 the stock has halved again, now trading around $17. And there is no sign of new life for Cisco – as each earnings call reinforces a company lacking a strategy in a shifting market. If ever there was a need for replacing a stayed-in-the-job too long CEO it would be Cisco.
#4 – Jeffrey Immelt, General Electric (GE). GE has only had 9 CEOs in its 100+ year life. But this last one has been a doozy. After more than a decade of rapid growth in revenue, profits and valuation under the disruptive "neutron" Jack Welch, GE stock reached $60 in 2000. Which turns out to have been the peak, as GE's value has gone nowhere but down since Mr. Immelt took the top job.
GE was once known for entering and changing markets, unafraid to disrupt how the market performed with innovation in products, supply chain and operations. There was no market too distant, or too locked-in for GE to not find a way to change to its advantage – and profit. But what was the last market we saw GE develop? What has Mr. Immelt, in his decade at the top of GE, done to keep GE as one of the world's most innovative, high growth companies? He has steered the ship away from trouble, but it's only gone in circles as it's used up fuel.
From that high in 2001, GE fell to a low of $8 in 2009 as the financial crisis revealed that under Mr. Immelt GE had largely transitioned from a manufacturing and products company into a financial house. He had taken what was then the easy road to managing money, rather than managing a products and services company. Saved from bankruptcy by a lucrative Berkshire Hathaway, GE lived on. But it's stock is still only $19, down 2/3 from when Mr. Immelt took the CEO position.
"Stewardship" is insufficient leadership in 2012. Today markets shift rapidly, incur intensive global competition and require constant innovation. Mr. Immelt has no vision to propel GE's growth, and should have been gone by 2010, rather than allowed to muddle along with middling performance.
#3 – Mike Duke, WalMart. Mr. Duke has been CEO since 2009, but prior to that he was head of WalMart International. We now know Mr. Duke's business unit saw no problems with bribing foreign officials to grow its business. Just on the basis of knowing about illegal activity, not doing anything about it (and probably condoning and recommending more,) and then trying to change U.S. law to diminish the legal repurcussions, Mr. Duke should have long ago been fired.
It's clear that internally the company and its Board new Mr. Duke was willing to do anything to try and grow WalMart, even if unethical and potentially illegal. Recollections of Enron's Jeff Skilling, Worldcom's Bernie Ebbers and Hollinger's Conrdad Black should be in our heads. How far do we allow leaders to go before holding them accountable?
But worse, not even bribes will save WalMart as Mr. Duke follows a worn-out strategy unfit for competition in 2012. The entire retail market is shifting, with much lower cost on-line companies offering more selection at lower prices. And increasingly these companies are pioneering new technologies to accelerate on-line shopping with easy to use mobile devices, and new apps that make shopping, paying and tracking deliveries easier all the time. But WalMart has largely eschewed the on-line world as its CEO has doggedly sticks with WalMart doing more of the same. That pursuit has limited WalMart's growth, and margins, while the company files further behind competitively.
Unfortunately, WalMart peaked at about $70 in 2000, and has been flat ever since. Investors have gained nothing from this strategy, while employees often work for wages that leave them on the poverty line and without benefits. Scandals across all management layers are embarrassing. Communities find Walmart a mixed bag, initially lowering prices on some goods, but inevitably gutting the local retailers and leaving the community with no local market suppliers. WalMart needs an entirely new strategy to remain viable – and that will not come from Mr. Duke. He should have been gone long before the recent scandal, and surely now.
#2 Edward Lampert, Sears Holdings. OK, Mr. Lampert is the Chairman and not the CEO – but there is no doubt who calls the shots at Sears. And as Mr. Lampert has called the shots, nobody has gained.
Once the most critical force in retailing, since Mr. Lampert took over Sears has become wholly irrelevant. Hoping that Mr. Lampert could make hay out of the vast real estate holdings, and once glorious brands Craftsman, Kenmore and Diehard to turn around the struggling giant, the stock initially took off rising from $30 in 2004 to $170 in 2007 as Jim Cramer of "Mad Money" fame flogged the stock over and over on his rant-a-thon show. But when it was clear results were constantly worsening, as revenues and same-store-sales kept declining, the stock fell out of bed dropping into the $30s in 2009 and again in 2012.
Hope springs eternal in the micro-managing Mr. Lampert. Everyone knows of his personal fortune (#367 on Forbes list of billionaires.) But Mr. Lampert has destroyed Sears. The company may already be so far gone as to be unsavable. The stock price is based upon speculation of asset sales. Mr. Lampert had no idea, from the beginning, how to create value from Sears and he surely should have been gone many months ago as the hyped expectations demonstrably never happened.
#1 – Steve Ballmer, Microsoft. Without a doubt, Mr. Ballmer is the worst CEO of a large publicly traded American company. Not only has he singlehandedly steered Microsoft out of some of the fastest growing and most lucrative tech markets (mobile music, handsets and tablets) but in the process he has sacrificed the growth and profits of not only his company but "ecosystem" companies such as Dell, Hewlett Packard and even Nokia. The reach of his bad leadership has extended far beyond Microsoft when it comes to destroying shareholder value – and jobs.
Microsoft peaked at $60/share in 2000, just as Mr. Ballmer took the reigns. By 2002 it had fallen into the $20s, and has only rarely made it back to its current low $30s value. And no wonder, since execution of new rollouts were constantly delayed, and ended up with products so lacking in any enhanced value that they left customers scrambling to find ways to avoid upgrades. By Mr. Ballmer's own admission Vista had over 200 man-years too much cost, and its launch still, years late, has users avoiding upgrades. Microsoft 7 and Office 2012 did nothing to excite tech users, in corporations or at home, as Apple took the leadership position in personal technology.
So today Microsoft, after dumping Zune, dumping its tablet, dumping Windows CE and other mobile products, is still the same company Mr. Ballmer took control over a decade ago. Microsoft is PC company, nothing more, as demand for PCs shifts to mobile. Years late to market, he has bet the company on Windows 8 – as well as the future of Dell, HP, Nokia and others. An insane bet for any CEO – and one that would have been avoided entirely had the Microsoft Board replaced Mr. Ballmer years ago with a CEO that understands the fast pace of technology shifts and would have kept Microsoft current with market trends.
Although he's #19 on Forbes list of billionaires, Mr. Ballmer should not be allowed to take such incredible risks with investor money and employee jobs. Best he be retired to enjoy his fortune rather than deprive investors and employees of building theirs.
There were a lot of notable CEO changes already in 2012. Research in Motion, Best Buy and American Airlines are just three examples. But the 5 CEOs in this column are well on the way to leading their companies into the kind of problems those 3 have already discovered. Hopefully the Boards will start to pay closer attention, and take action before things worsen.
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 | Jul 20, 2011 | Current Affairs, In the Rapids, In the Whirlpool, Leadership, Web/Tech
“Buy Low, Sell High” was an industrial era investor expression. Before we shifted into an information economy, investors were admonished to invest along with economic cycles, buying during recessions, selling during booms.
In today’s information economy it’s not nearly so simple. While growth occurs, companies falter and disappear (Sun Microsystems and Silicon Graphics, for example.) Meanwhile, during bad economic periods there are flourishing growth companies.
Company performance today has much more to do with whether the company’s products and services are aligned with trends, and market shifts created by trends, than the overall economy. When revenues first show signs fo faltering, often the company fails completely, unable to react to market shifts. Competitors quickly steal customers, revenue and precious cash flow. Investors frequently have little warning, or time, before company value slides into the oblivion, leaving them with negative returns.
So now it’s more important to look at trends in where product and service markets are headed than overall economic conditions. The economy won’t save a company that’s against the trend – or hurt a company that’s delivering the market trend.
Yahoo caught the early trend toward internet usage. In the early years people didn’t quite know what to do on the internet, so content providers, aggregators, and ability to search were valuable. People like Yahoo because it gave them what they wanted, and the company flourished as it became the home page for over 80% of internet users. Advertisers loved the user base, so they bought ads.
Then the market shifted. Users gained more experience, and didn’t need the aggregation function Yahoo provided. Increasingly they wanted to find answers themselves, making the quality of search more important than content. A white page with a simple box (Google) that did great searching across the entire web overtook Yahoo’s content. And, as time progressed people started using the internet as a primary location for socially connecting with friends and colleagues, making the content aggregation even less valuable. Time spent on Yahoo as a percent of time on-line began dropping:
Source: Business Insider
But although this trend began in 2009, and was clear in 2010, Yahoo’s CEO kept pushing the same business model. She missed the trend.
The market kept right on shifting, and by 2011, Yahoo is in a very bad competitive position:
Source: Business Insider
So, nobody should be surprised that revenue would fall – correct? It’s not that the folks at Yahoo are wasteful, or not working hard. They simply are becoming out of step with the market trend. The result one would expect is worsening results in the old, “core” business – and that’s exactly what is happening:
Source: Business Insider
Meanwhile, where the eyeballs go is where the display ad revenues go as well. And with the trends, that means we would expect display ad revenu growth to move away from Yahoo – as it has done:
Source: Business Insider
So yesterday when Yahoo announced sales and earnings, it was a disappointment. What increase Yahoo had in fast growing display ads (5%) was insufficient to cover the decline in search ads (down 15%). Clearly, Yahoo missed the market shift. But, the CEO did not admit that the business model was ineffective (as results indicate.) Rather, she said the company needed more salespeople!
This proclivity to look inward, as if working harder, faster and better would “fix” Yahoo, defies the reality that the company is no longer competitive given where the market is headed. Ms. Bartz can’t succeed by trying to defend and extend the traditional Yahoo business model. Yahoo doesn’t need more salespeople, it needs an entirely different business!
Source: Business Insider
Alternatively, Apple exemplifies the other side of this coin. I have been an unabashed bull on Apple for months. Why? Because it does create solutions tightly linked to market trends. People, as consumers or in business, demand more mobility. And Apple’s products deliver that mobility more seamlessly and effectively than any other solution provider.
Apple could well have kept itself focused on Mac sales. Had it done so, it would likely be out of business today. Instead, Apple focused the bulk of its development on delivering products that fulfilled trends. The result has been expansion into new markets, which have delivered massive revenue gains.
Source: Business Insider
Last quarter Apple sold more iPhones and even more iPad tablets (9.25million units, $6.1B) than it sold Macs (~4 million units, $5.1B.) The old business has been replaced (cannibalized) by new, growing businesses that support the market trend. iPads are now 11% of the PC business overall, and growing fast as they obsolete PCs. Combined, iPads and Macs sold 13.25 million “computing devices” which would make it second in the world, behind only HP (15.3million PCs.) Bigger than Dell, for example, that has stuck to its “core” PC business.
Because Apple is all about delivering on trends, there’s really no reason to think revenues, and profits, won’t continue growing. The shift to mobility has just taken hold, and there are legions of people still without an apps-powerful smartphone (lots of Blackberry customers out there to shift.) The shift to tablets has just started. As these trends continue, Apple is continuing to develop new solutions that keep it ahead of competitors.
Where Yahoo’s CEO wants to add more salespeople, in hopes she can push outdated products, Mr. Jobs said in the earnings call yesterday “Right now we’re very focused and excited about bringing iOS5 and iCloud to our users this fall.” Yahoo is trying to do more of what it always did, as the market moves away. While Apple keeps its collective management eyes on the future – and where the market is headed – to constantly bring new solutions that deliver on the trends.
Sell Yahoo, if you haven’t already. And buy Apple. It’s all about investing with the trends.
Note: update on “Is Cisco a Value Stock? Skip It.” In the month since publishing that blog (6/23/11) Cisco has demonstrated that it is running headlong from the rapids of growth into the swamp of stagnation. Not only has it been killing off new products, but as it announced weak results the CEO has taken to a massive cutback. 11,500 employees are being laid off, or sent off to work for other companies as facilities are being sold to a Chinese company.
Worse, the CEO is now stooping to financial machinations in order to make the future look better. According to HuffingtonPost.com Cisco is taking a massive $1.3B charge. This allows Cisco to write off various costs that are old, current and even future to the current P&L. This will inflate future earnings, regardless of actual performance, while deflating current results. The net impact is P&L manipulation designed to make the company – quarter over quarter or year over year – look better than it is actually performing. Transparency is being intentionally muddled, to hide the company’s inability to provide solutions delivering on market trends.
Cisco shows all the signs of a company in a growth stall. Unable to shift with market trends, it is now shedding products, employees and assets in an effort to pad the P&L. It is “reorganizing” the company, rather than linking to market needs. Remember that fewer than 7% of companies that slip into a growth stall ever successfully maintain an ongoing 2% growth rate. Because they are focused on internal issues, and financial management – rather being clearly focused market trends.
Don’t just skip buying Cisco – if you are a shareholder, SELL!
And buy Apple.
by Adam Hartung | Jun 23, 2011 | Defend & Extend, In the Swamp, In the Whirlpool, Lifecycle, Lock-in, Web/Tech
Will Cisco be like Apple and go on to continued greatness? Or will it be more like Sun Microsystems? The answer isn’t clear yet, but the negatives are looking a lot clearer than the positives.
Cisco grew like the internet – because it supplied a lot of the internet’s infrastructure. Most of those wi-fi connections, wired and wireless, were supplied by the highly talented team at Cisco. And yet today, revenues for internet routers, switches and company services for networks account for 90% of Cisco’s sales — and its non-cash value (see chart at Trefis.com.) The problem is that those markets aren’t growing like they used to, and some are shrinking, as companies are increasingly switching to common carrier services to access cloud-based services supporting corporate needs. Just like cloud-based IT architectures put risk on Microsoft PC usage, they create similar risks for private network suppliers. Even corporations, the (in)famous “enterprise” customers for Cisco, are finding they can create security and reliability by giving up proprietary networks.
The market capitalization for Cisco has plunged some 40% the last year, and over 55% since peaking in late 2007. Those who support investing in Cisco think like the SeekingAlpha.com headline “3 Reasons Why Cisco is Oversold.” They cite a huge cash hoard (some 25% of market cap) and Cisco’s dominance in its historical “core” product markets. They hope that a revived economy will create an uptick in infrastructure spending by corporations and public entities. Or big buying in emerging countries.
Detractors become vitriolic about the company’s lost valuation, blaming Chairman/CEO John Chambers in articles like the SeekingAlpha.com “Cisco, Either Chambers Goes or I Go.” Their arguments are less about product miscues, and more intensely claiming the CEO misdirected funds into bad consumer market opportunities (Flip phone,) undeveloped new projects like virtual conferencing and an overly complicated organization structure.
What Cisco really needs is more new products in growth markets. Places where demand is growing, and the company can flourish like it did in the hey-day halcyon growth days of the internet. That was why CEO Chambers implemented a market-focused organization structure – complete with multi-layered committees – in an effort to seek out growth opportunities and fund them. Only, the organization lacked the permission and resource commitment to really allow developing most new markets and was overly complex in the resource allocation process. Instead of moving rapidly to identify and develop growth, the organization stalled in endless discussions. A couple of months ago the new org was gutted in a “refocusing” effort (typical reaction: BusinessInsider.com “Cisco’s Crazy Management Structure Wasn’t Working, So Chambers is Changing It“.)
But, if the previously more open organization couldn’t find permission to identify, fund and develop new markets, how will a “more focused” organization do so? Focus isn’t going to make companies (or households) buy more switches and routers. Or buy more network consulting services. The market has shifted, so as people move to smartphones and tablets, and cloud-based apps they access over common networks, how will an organization focused on old customers and products prove more successful? While the old organization may have been problematic, is abandoning a market-focused organization going to be an improvement? Sounds like a set-up for future layoffs.
In the drive for new products Cisco bought a very successful business in the Flip camera two years ago, which according to MediaPost.com had 26% market share. But, “Flip Camera: Dream Becomes a Nightmare” details the story of how Cisco was too late. The market quickly was shifting from digital cameras to smart phones – and sales stagnated. Cisco didn’t learn much about consumer products, or smart phones or how to launch new products outside its “core” from the experience, choosing to shut the business down and withdraw the product this spring (“Cisco Kills the Flip Camera“.) Ouch!
Clearly, Flip was a financially unsuccessful venture. But that could be forgiven if Cisco learned from the experience so it could move, like Apple, toward launching something really good (like Apple did with iPods.) But we don’t hear of any organizational learning from Flip, just failure.
And that’s too bad, because Cisco’s virtual conferencing could have great promise. Most of us now hate to travel (thanks TSA and all that great airline service!) And most corporate controllers hate to pay for business travel. The trends all point toward more and more virtual conferencing. For everything from one-on-one meetings to multi-site meetings to industry conferences for learning. This is a BIG trend, that will go well beyond a simple WebEx. Someone is going to make money with this – taking Skype to an entirely new level of performance. But given how badly Cisco managed Flip, and the new “refocusing” effort, it’s hard to see how that winner will be Cisco.
Cisco’s not yet a Sun Microsystems, so locked-in to old products it cannot do anything else and unable to grow at all. It’s not yet a Dell or Microsoft that’s missed the market shifts and is trying to spend too much money, too late on weak products against well funded, fast growing and profitable competitors.
But, the signs don’t look good. There’s no discussion about what Cisco sees itself doing new and differently in 5 years. We don’t see Cisco offering leading edge products like it did 15 years ago in its old “core” market. It’s historical market is not growing like it once did, and new competitors are changing the market entirely. The layered organization was an effort to attack old sacred cows, and limit the power of old status quo police, but now the new “focused” re-organization is reversing those efforts to find new markets for growth. “Focus” rarely goes hand-in-hand with successful innovation. We cannot find an obvious group of people focusing on new markets, with permission and resources to bring out the “next big thing” that could drive a doubling of revenues by 2017.
Unlike RIMM, the game isn’t over for CSCO. It’s markets still have some longevity. But the organization has been failing at doing the kind of new things, bringing out the new innovations, that would make it a good investment. Until management shows it knows how to find new markets and launch disruptive innovations, CSCO is not a place to invest. Don’t expect a fat dividend, and don’t expect revisiting old growth rates any time soon.
There are likely to be some good, and bad quarters. Cost management, and occasional big orders, combined with manipulating the timing of revenues and costs will allow for management to say “things are all better.” But there will be miscues and problems, and blaming of competitors and weak economic conditions in the bad quarters. Defend and extend management does not work when markets shift. Sideways is not moving forward. It’s more like treading water in the ocean – not a good strategy for rescue. Overall, I wouldn’t be optimistic.
