Leading Google – Larry Page Needs More White Space

by | Apr 1, 2011 | Current Affairs, In the Rapids, Innovation, Leadership, Openness, Transparency, Web/Tech


Summary:

  • Google is locking-in on what it made successful
  • But as technologies, and markets, change Google could be at risk of not keeping up
  • Internal processes are limiting Google’s ability to adapt quickly
  • Google needs to be better at creating and launching new projects that can expand its technology and market footprint in order to maintain long-term growth

Google has been a wild success.  From nowhere Google has emerged as one of the biggest business winners at leveraging the internet.  With that great success comes risk, and opportunity, as Larry Page resumes the CEO position this year. 

Investors hope Google keeps finding new opportunities to grow, somewhat like Apple has done by moving into new markets with new solutions.  Where Apple has built strong revenue streams from its device and app sales in multiple markets, Google hasn’t yet demonstrated that success. Despite the spectacular ramp-up in Android smartphone sales, Google hasn’t yet successfully monetized that platform – or any other.  Something like 90% of revenues and profits still come from search and its related ad sales. 

Investors have reason to fear Google might be a “one-trick pony,” similar to Dell.  Dell was wildly successful as the “supply chain management king” during the spectacular growth of PC sales.  But as PC sales growth slowed competitors matched much of Dell’s capability, and Dell stumbled trying to lower cost with such decisions as offshoring customer service.  Dell’s revenue and profit growth slowed.  Now Dell’s future growth prospects are unclear, and its value has waned, as the market has shifted toward products not offered by Dell. 

Will Google be the “search king” that didn’t move on?

When companies are successful they tend to lock-in on what made them successful.  To keep growing they have to overcome those lock-ins to do new things.  The risk is that Google can’t overcome it’s lock-ins; that internal status quo police enforce them to the point of keeping new things from flourishing into new growth markets.  That the company becomes stale as it avoids investing effectively in new technologies or solutions.

At Slacy.com (“What Larry Page Really Needs to Do to Return Google to its Start-up Roots“) we read from a former Google employee that there are some serious lock-ins to worry about within Google: 

  1. The launch coordination process sets up a status quo protection team that keeps things from moving forward.  When an internal expert gains this kind of power, they maintain their power by saying “no.”  The more they say no, the more power they wield.  Larry Page needs to be sure the launch team is saying “here’s how we can help you launch fast and easy” rather than “you can’t launch unless…”
  2. Hiring is managed by a group of internal recruiters.  When the people who actually manage the work don’t do recruiting, and hiring, then the recruits become filtered by staffers who have biases about what makes for a good worker.  Everything from resume screening to background reviews to appearances become filters for who gets interviewed by engineers and managers.  In the worst case staffers develop a “Google model employee” profile they expect all hires to fit.  This process systematically narrows the candidates, leading to homogeneity in hiring, a reduction in new approaches and new ways of thinking, and a less valuable, dynamic employee population.
  3. Increasingly engineers are forced to use a limited set of Google tools for development.  External, open source, tools are increasingly considered inferior – and access to resources are limited unless engineers utilize the narrow tool set which initially made Google successful. The natural outcome is “not invented here” syndrome, where externally created products and ideas are overlooked – ignored – for all the wrong reasons.  When you’re the best it’s easy to develop “NIH,” but it’s also really risky in fast moving markets like technology where someone really can have a better idea, and implement, from outside the halls of the early leader. 

These risks are very real.  Yet, in a company of Google’s size to some extent it is necessary to manage launches systematically, and to have staffers doing things like recruiting and screening.  Additionally, when you’ve developed a set of tools that create success on an enormous scale it makes sense to use them.  So the important thing for Mr. Page to do is manage these items in such a way that lock-in doesn’t keep Google from moving forward into the next new, and possibly big, market.

Google needs to be sure it is not over-managing the creation of new things.  The famous “20% rule” at Google isn’t effective as applied today.  Nobody can spend 80% of their job conforming to norms, and then expect to spend 20% “outside the box.”  Our minds don’t work that way.  Inertia takes over when we’re at 80%, and keeps us focused on doing our #1 job.  And we never find the time to really get started on the other 20%.  And it’s unrealistic to try dedicating an entire day a week to doing something different, because the “regular job” is demanding every single day.  Likewise, nobody can dedicate a week out of the month for the same reason.  As a result, even when people are encouraged to spend time on new and different things it really doesn’t happen.

Instead, Google needs a really good method for having ideas surface, and then creating dedicated teams to explore those ideas in an unbounded way.  Teams that have as their only job the requirement for exploring market needs, product opportunities, and developing solutions that generate profitable new revenue.  Five people totally dedicated to a new opportunity, especially if their success is important to their career ambitions, will make vastly more headway than 25 people working on a project when they can “find the time.”  The bigger team may have more capabilities and more specialties, but they simply don’t have the zeal, motivation or commitment to creating a success.  Failing on something that’s tertiary to your job is a lot more acceptable, especially if your primary work is going well, than failing on something to which your wholly dedicated.  Plus, when you are asked to support a project part-time you do so by reinforcing past strengths, not exploring something new.

Especially worrisome is Inc magazine’s article “Facebook Poaches Inc’s Creative Director.”  This is the fellow that created, and managed, the new opportunity labs at Google.  What will happen to those now?

These teams also must have permission to explore the solution using any and all technology, approaches and processes.  Not just the ones that made Google successful thus far.  By utilizing new technologies, which may appear less robust, less scalable and even initially less powerful, Google will have people who are testing the limits of what’s new – and identifying the technologies, products and processes that not only threaten existing Google strengths but can launch Google into the next new, big thing.  Supporting their needs to explore new solutions is critical to evolving Google and aiding its growth in very dynamic technologies and markets.

The major airlines all launched discount divisions to compete with Southwest.  Remember Song and Ted?  But these failed largely because they weren’t given permission to do whatever was necessary to win as a discount airline.  Instead they had to use existing company resources and processes – including in-place reservation systems, labor union standards, existing airports and gates – and honor existing customer loyalty programs.  With so many parameters pre-set, they had no hope of succeeding.  They lacked permission to do what was necessary because the airlines bounded what they could do.  Lock-in to what already existed killed them.

The concern is that Google today doesn’t appear to have a strong process for creating these teams that can operate in white space to develop new solutions.  Google lacks a way to get the ideas on the agenda for management discussion, rapidly create a team dedicated to the tasks, resource the teams with money and other necessary tools, and then monitor performance while simultaneously encouraging behaviors that are outside the Google norms.  Nobody appears to have the job of making sure good ideas stay inside Google, and are developed, rather than slipping outside for another company to exploit (can you say Facebook – for example?)

I’m a fan of Google, and a fan of the management approaches Larry Page and Google have openly discussed, and appear to have implemented.  Yet, success has a way of breeding the seeds of eventual failure.  Largely through the process of building strong sacred cows – such as in technology and processes for all kinds of activities that end up limiting the organization’s ability to recognize market shifts and implement changes.  Success has a way of creating staff functions that see themselves as status quo cops, dedicated to re-implementing the past rather than scouting for future requirements.  The list of technology giants that fell to market shifts are legendary – Cray, DEC, Wang, Lanier, Sybase, Netscape, Silicon Graphics and Sun Microsystems are just a few. 

It’s good to be the market leader.  But Larry Page has a tough job.  He has to manage the things that made Google the great company it is now – the things that middle management often locks in place and won’t alter – so they don’t limit Google’s future.  And he needs to make sure Google is constantly, consistently and rapidly implementing and managing teams to explore white space in order to find the next growth opportunities that keep Google vibrant for customers, employees, suppliers and investors.

View a short video on Lock-in and why businesses must evolve http://on.fb.me/i2dekj

Why Steve Jobs Couldn’t Find a Job

by | Feb 18, 2011 | Current Affairs, In the Swamp, Innovation, Leadership, Lock-in, Openness, Television, Web/Tech


Business people keep piling onto the innovation and growth bandwagon.  PWC just released the results of its 14th annual CEO survey entitled “Growth Reimagined.”  Seems like most CEOs are as tired of cost cutting as everyone else, and would really like to start growing again.  Therefore, they are looking for innovations to help them improve competitiveness and build new markets.  Hooray!

But, haven’t we heard this before?  Seems like the output of several such studies – from IBM, IDC and many others – have been saying that business leaders want more innovation and growth for the last several years!  Hasn’t this been a consistent mantra all through the last decade?  You could get the impression everyone is talking about innovation, and growth, but few seem to be doing much about it!

Rather than search out growth, most businesses are still trying to simply do what their business has done for decades – and marveling at the lack of improved results.  David Brooks of the New York Times talks at length in his recent Op Ed piece on the Experience Economy about a controversial book from Tyler Cowen called “The Great Stagnation.”  The argument goes that America was blessed with lots of fertile land and abundant water, giving the country a big advantage in the agrarian economy from the 1600s into the 1900s.  During the Industrial economy of the 1900s America was again blessed with enormous natural resources (iron ore, minerals, gold, silver, oil, gas and water) as well as navigable rivers, the great lakes and natural low-cost transport routes.  A rapidly growing and hard working set of laborers, aided by immigration, provided more fuel for America’s growth as an industrial powerhouse.

But now we’re in the information economy.  Those natural resources aren’t the big advantage they once were.  Foodstuffs require almost no people for production.  And manufacturing is shifting to offshore locations where cheap labor and limited regulations allow for cheaper production.  And it’s not clear America would benefit even if it tried maintaining these lower-skilled jobs.  Today, value goes to those who know how to create, store, manipulate and use information.  And success in this economy has a lot more to do with innovation, and the creation of entirely new products, industries and very different kinds of jobs.

Unfortunately, however, we keep hiring for the last economy.  It starts with how Boards of Directors (and management teams) select – incorrectly, it appears – our business leaders.  Still thinking like out-of-date industrialists, Scientific American offers us a podcast on how “Creativity Can Lesson a Leader’s Image.”  Citing the same study, Knowledge @ Wharton offers us “A Bias Against ‘Quirky’ Why Creative People Can Lose Out on Creative Positions.” While 1,500 CEOs say that creativity is the single most important quality for success today – and studies bear out the greater success of creative, innovative leaders – the study found that when it came to hiring and promoting businesses consistently marked down the creative managers and bypassed them, selecting less creative types!

Our BIAS (Beliefs, Interpretations, Assumptions and Strategies) cause the selection process to pick someone who is seen as less creative.  Consider these comments:

  • “would you rather have a calm hand on the tiller, or someone who constantly steers the boat?” 
  • “do you want slow, steady conservatism in control – or irrational exuberance?”
  • “do we want consistent execution or big ideas?” 

These are all phrases I’ve heard (as you might have as well) for selecting a candidate with a mediocre track record, and very limited creativity, over a candidate with much better results and a flair for creativity to get things done regardless of what the market throws at her.  All imply that what’s important to leadership is not making mistakes.  Of you just don’t screw up the future will take care of itself.  And that’s so industrial economy – so “don’t let the plant blow up.”

That approach simply doesn’t work any more.  The Christian Science Monitor reported in “Obama’s Innovation Push: Has U.S. Really Fallen Off the Cutting Edge” that America is already in economic trouble due to our lock-in to out-of-date notions about what creates business success.  In the last 2 years America has fallen from first to fourth in the World Economic Forum ranking of global competitivenes.  And while America still accounts for 40% of global R&D spending, we rank remarkably low (on all studies below 10th place) on things like public education, math and science skills, national literacy and even internet access! While we’ve poured billions into saving banks, and rebuilding roads (ostensibly hiring asphalt layers) we still have no national internet system, nor a free backbone for access by all budding entrepreneurs!

Ask the question, “If Steve Jobs (or his clone) showed up at our company asking for a job – would we give him one?”  Don’t forget, the Apple Board fired Steve Jobs some 20 years ago to give his role to a less creative, but more “professional,” John Scully.  Mr. Scully was subsequently fired by the Board for creatively investing too heavily in the innovative Newton – the first PDA – to be replaced by a leadership team willing to jettison this new product market and refocus all attention on the Macintosh.  Both CEO change decisions turned out to be horrible for Apple, and it was only after Mr. Jobs returned to the company after nearly 20 years in other businesses that its fortunes reblossomed when the company replaced outdated industrial management philosophies with innovation.  But, oh-so-close the company came to complete failure before re-igniting the innovation jets.

Examples of outdated management, with horrific results, abound.  Brenda Barnes destroyed shareholder value for 6 years at Sara Lee chasing a centrallized focus and cost reductions – leaving the company with no future other than break-up and acquisition.  GE’s fortunes have dropped dramatically as Mr. Immelt turned away from the rabid efforts at innovation and growth under Welch and toward more cautious investments and reliance on a set of core markets – including financial services.  After once dominating the mobile phone industry the best Motorola’s leadership has been able to do lately is split the company in two, hoping as a divided business leadership can do better than it did as a single entity.  Even a big winner like Home Depot has struggled to innovate and grow as it remained dedicated to its traditional business. Once a darling of industry, the supply chain focused Dell has lost its growth and value as a raft of new MBA leaders – mostly recruited from consultancy Bain & Company – have kept applying traditional industrial management with its cost curves and economy-of-scale illogic to a market racked by the introduction of new products such as smartphones and tablets.

Meanwhile, leaders that foster and implement innovation have shown how to be successful this last decade.  Jeff Bezos has transformed retailing and publishing simultaneously by introducing a raft of innovations, including the Kindle.  Google’s value soared as its founders and new CEO redefined the way people obtain news – and the ads supporting what people read.  The entire “social media” marketplace is now taking viewers, and ad dollars, from traditional media bringing the limelight to CEOs at Facebook, Twitter and Linked-in.  While newspaper companies like Tribune Corp., NYT, Dow Jones and Washington Post have faltered, pop publisher Arianna Huffington created $315M of value by hiring a group of bloggers to populate the on-line news tabloid Huffington Post.  And Apple is close to becoming the world’s most valuable publicly traded company on the backs of new product innovations. 

But, asking again, would your company hire the leaders of these companies?  Would it hire the Vice-President’s, Directors and Managers?  Or would you consider them too avant-garde?  Even President Obama washed out his commitment to jobs growth when he selected Mr. Immelt to head his committee – demonstrating a complete lack of understanding what it takes to grow – to innovate – in today’s intensely competitive information economy. Where he should have begged, on hands and knees, for Eric Schmidt of Google to show us the way to information nirvana he picked, well, an old-line industrialist.

Until we start promoting innovators we won’t have any innovation.  We must understand that America’s successful history doesn’t guarantee it’s successful future.  Competing on bits, rather than brawn or natural resources, requires creativity to recognize opportunities, develop them and implement new solutions rapidly.  It requires adaptability to deal with new technologies, new business models and new competitors.  It requires an understanding of innovation and how to learn while doing.  Amerca has these leaders.  We just need to give them the positions and chance to succeed!

 

Disrupt to Thrive in 2011 – Model Facebook, Groupon, Twitter

by | Jan 10, 2011 | Defend & Extend, Disruptions, Innovation, Leadership, Web/Tech


Summary:

  • Communication is now global, instantaneous and free
  • As a result people, and businesses, now adopt innovation more quickly than ever
  • Competitors adapt much quicker, and react much stronger than ever in history
  • Profits are squeezed by competitors rapidly adopting innovations
  • But many business leaders avoid disruptions, leading to slower growth and declining returns
  • To maintain, and grow, revenues and profits you must be willing to implement disruptions in order to stay ahead of fast moving competitors
  • Amidst fast shifting markets, greatest value (P/E multiple and market cap) is given to those companies that create disruptions (like Facebook, Groupon, Twitter)

All business leaders know the pace of competitive change has increased. 

It took decades for everyone to obtain an old-fashioned land line telephone. Decades for everyone to buy a TV.  And likewise, decades for color TV adoption.  Microwave ovens took more than a decade. Thirty years ago the words “long distance” implied a very big cost, even if it was a call from just a single interchange away (not even an area code away – just a different set of “prefix” numbers.) People actually wrote letters, and waited days for responses! Social change, and technology adoption, took a lot longer – and was considered expensive.

Now we assume communications at no cost with colleagues, peers, even competitors not only across town state, or nation, but across the globe!  Communication – whether email, or texting, or old fashioned voice calls – has become free and immediate. (Consider Skype if you want free phone calls [including video no less] and use a PC at your local library or school building if you don’t own one.) Factoring inflation, it is possible to provide every member of a family of 5 with instant phone, email and text communication real-time, wirelessly, 24×7, globally for less than my parents paid for a single land-line, local-exchange only (no long distance) phone 50 years ago! And these mobile devices can send pictures!

As a result, competitors know more about each other a whole lot faster, and take action much more quickly, than ever in history.  Facebook, for example, is now connecting hundreds of millions of people with billions of communications every day.  According to statistics published on Facebook.com, every 20 minutes the Facebook website produces:

  • 1,000,000 shared links
  • 1,323,000 tagged photos
  • 1,484,000 event invitations
  • 1,587,000 Wall posts
  • 1,851,000 Status updates
  • 1,972,000 Friend requests accepted
  • 2,716,000 photos uploaded
  • 4,632,000 messages
  • 10,208,000 comments

Multiply those numbers by 3 to get hourly. By 72 to get daily. Big numbers!  Alexander Graham Bell had to invent the hardware and string thousands of miles of cable to help people communicate with his disruption. His early “software” were thousands of “operators” connecting calls through central switchboards. Mark Zuckerberg and friends only had to create a web site using existing infrastructure and existing tools to create theirs.  Rapidly adopting, and using, existing innovations allowed Facebook’s founders to create a disruptive innovation of their own!  Disruption has allowed Facebook to thrive!

Facebook has disrupted the way we communicate, learn, buy and sell.  “Word of mouth” referrals are now possible from friends – and total strangers.  Product benefits and problems are known instantaneously.  Networks of people arguably have more influence that TV networks!  Many employees are likely to make more facebook communications in a day than have conversations with co-workers!  Facebook (or twitter) is rapidly becoming the new “water cooler.” Only it is global and has inputs from anyone.  Yet only a fraction of businesses have any plans for using Facebook – internally or to be more competitive!

Far too many business leaders are unwilling to accept, adopt, invest in or implement disruptions.

InnovateOnPurpose.com highlights why in “Why Innovation Makes Executives Uncomfortable:”

  1. Innovation is part art, and not all science.  Many execs would like to think they can run a business like engineering a bridge. They ignore the fact that businesses implement in society, and innovation is where we use the social sciences to help us gain insight into the future.  Success requires more than just extending the past – because market shifts happen.  If you can’t move beyond engineering principles you can’t lead or manage effectively in a fast-changing world where the rules are not fixed.
  2. Innovation requires qualitative insights not just quantitative statistics. Somewhere in the last 50 years the finance pros, and a lot of expensive strategy consultants, led business leaders to believe that if they simply did enough number crunching they could eliminate all risk and plan a guaranteed great future.  Despite hundreds of math PhDs, that approach did not work out so well for derivative investors – and killed Lehman Brothers (and would have killed AIG insurance had the government not bailed it out.) Math is a great science, and numbers are cool, but they are insufficient for success when the premises keep changing.
  3. Innovation requires hunches, not facts.  Well, let’s say more than a hunch.  Innovation requires we do more scenario planning about the future, rather than just pouring over historical numbers and expecting projections to come true.  We don’t need crystal balls to recognize there will be change, and to develop scenario plans that help us prepare for change.  Innovation helps us succeed in a dynamic world, and implementation requires a willingness to understand that change is inevitable, and opportunistic.
  4. Innovation requires risks, not certainties.  Unfortunately, there are NO certainties in business.  Even the status quo plan is filled with risk. It’s not that innovation is risky, but rather that planning systems (ERP systems, CRM systems, all systems) are heavily biased toward doing more of the same – not something new! Markets can shift incredibly fast, and make any success formula obsolete.  But most executives would rather fail doing the same thing faster, working harder, doing what used to work, than implement changes targeted at future market needs.  Leaders perceive following the old strategy is less risky, when in reality it’s loaded with risk too!  Too many businesses have failed at the hands of low-risk, certainty seeking leadership unable to shift with changing markets (GM, Chrysler, Circuit City, Fannie Mae, Brach’s, Sun Microsystems, Quest, the old AT&T, Lucent, AOL, Silicon Graphics, Yahoo, to name a few.)

Markets are shifting all around us.  Faster than imaginable just 2 decades ago.  Leaders, strategists and planners that enter 2011 hoping they can win by doing more, better, faster, cheaper will have a very tough time.  That is the world of execution, and modern communication makes execution incredibly easy to copy, incredibly fast.  Even Wal-Mart, ostensibly one of the best execution-oriented companies of all time, has struggled to grow revenue and profit for a decade.  Today, companies that thrive embrace disruption.  They are willing to disrupt within their organizations to create new ideas, and they are willing to take disruptive opportunities to market. Compare Apple to Dell, or Netflix to Blockbuster.

Recent investments have valued Facebook at $50B, Groupon at $6B and Twitter at almost $4B. Apple is now the second most valuable company (measured by market capitalization).  Why? Because they are disrupting the way we do things. To thrive (perhaps survive by 2015) requires moving beyond the status quo, overcoming the perceived risk of innovation (and change) and taking the actions necessary to provide customers what they want in the future!  Any company can thrive if it embraces the disruptions around it, and uses them to create a few disruptions of its own.

Size isn’t relevant – GM, Circuit City, Dell, Microsoft, GE

by | Dec 17, 2010 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, Leadership, Web/Tech


Summary:

  • Many people think it is OK for large companies to grow slowly
  • Many people admire caretaker CEOs
  • In dynamic markets, low-growth companies fail
  • It is harder to generate $1B of new revenue, than grow a $100B company by $10B
  • Large companies have vastly more resources, but they squander them badly
  • We allow large company CEOs too much room for mediocrity and failure
  • Good CEOs never lose a growth agenda, and everyone wins!

“I may just be your little rent collector Mr. Potter, but that George Bailey is making quite a bit happen in that new development of his.  If he keeps going it may just be time for this smart young man to go asking George Bailey for a job.” From “It’s a Wonderful Life“ an employee of the biggest employer in mythical Beford Falls talks about the growth of a smaller competitor.

My last post gathered a lot of reads, and a lot of feedback.  Most of it centered on how GE should not be compared to Facebook, largely because of size differences, and therefore how it was ridiculous to compare Jeff Immelt with Mark Zuckerberg.  Many readers felt that I overstated the good qualities of Mr. Zuckerberg, while not giving Mr. Immelt enough credit for his skills managing “lower growth businesses”  in a “tough economy.” Many viewed Mr. Immelt’s task as incomparably more difficult than that of managing a high growth, smaller tech company from nothing to several billion revenue in a few years.  One frequent claim was that it is enough to maintain revenue in a giant company, growth was less important. 

Why do so many people give the CEOs of big companies a break? Given that they make huge salaries and bonuses, have fantastic perquesites (private jets, etc.), phenominal benefits and pensions, and receive remarkable payouts whether they succeed or fail I would think we’d have very high standards for these leaders – and be incensed when their performance is sub-par.

Facebook started with almost no resources (as did Twitter and Groupon).  Most leaders of start-ups fail.  It is remarkably difficult to marshal resources – both enough of them and productively – to grow a company at double digit rates, produce higher revenue, generate cash flow (or loans) and keep employees happy.  Growing to a billion dollars revenue from nothing is inexplicably harder than adding $10B to a $100B company. Compared to Facebook, GE has massive resources.  Mr. Immelt entered the millenium with huge cash flow, huge revenues, and an army of very smart employees.  Mr. Zuckerberg had to come out of the blocks from a standing start and create ALL his company’s momentum, while comparatively Mr. Immelt took on his job riding a bullet out of a gun!  GE had huge momentum, a low cost of capital, and enough resources to do anything it wanted.

Yet somehow we should think that we don’t have as high expectations from Mr. Immelt as we do Mr. Zuckerberg?  That would seem, at the least, distorted. 

In business school I read the story of how American steel manufacturers were eclipsed by the Japanese.  Ending WWII America had almost all the steel capacity.  Manufacturers raked in the profits.  Japanese and German companies that were destroyed had to rebuild, which they progressively did with more efficient assets.  By the 1960s American companies were no longer competitive.  Were we to believe that having their industrial capacity destroyed somehow was a good thing for the foreign competitors?  That if you want to improve your competitiveness (say in autos) you should drop a nuclear bomb on the facilities (some may like that idea – but not many who live in Detroit I dare say.)  In reality the American leaders simply refused to invest in new technologies and growth markets, allowing competitors to end-run them.  The American leaders were busy acting as caretakers, and bragging about their success, instead of paying attention to market shifts and keeping their companies successful!

Big companies, like GE, are highly advantaged.  They not only have brand, and market position, but cash, assets, employees and vendors in position to help them be even more successful!  A smart CEO uses those resources to take the company into growth markets where it can grow revenues, and profits, faster than the marketplace.  For example Steve Jobs at Apple, and Eric Schmidt at Google have found new markets, revenues and cash flow beyond their original “core” markets.  That’s what Mr. Welch did as predecessor to Mr. Immelt.  He didn’t so much take advantage of a growth economy as help create it! Unfortunately, far too many large company CEOs squander their resources on low rate of return projects, trying to defend their existing business rather than push forward. 

Most big companies over-invest in known markets, or technologies, that have low growth rates, rather than invest in growth markets, or technologies they don’t know as well.  Think about how Motorola invented the smart phone technology, but kept investing in traditional cellular phones.  Or Sears, the inventor of “at home shopping” with catalogues closed that division to chase real-estate based retail, allowing Amazon to take industry leadership and market growth.  Circuit City ended up investing in its approach to retail until it went bankrupt in 2010 – even though it was a darling of “Good to Great.”  Or Microsoft, which launched a tablet and a smart phone, under leader Ballmer re-focused on its “core” operating system and office automation markets letting Apple grab the growth markets with R&D investments 1/8th of Microsoft’s.  These management decisions are not something we should accept as “natural.” Leaders of big companies have the ability to maintain, even accelerate, growth.  Or not.

Why give leaders in big companies a break just because their historical markets have slower growth?  Singer’s leadership realized women weren’t going to sew at home much longer, and converted the company into a defense contractor to maintain growth.  Netflix converted from a physical product company (DVDs) into a streaming download company in order to remain vital and grow while Blockbuster filed bankruptcy.  Apple transformed from a PC company into a multi-media company to create explosive growth generating enough cash to buy Dell outright – although who wants a distributor of yesterday’s technology (remember Circuit City.)  Any company can move forward to be anything it wants to be.  Excusing low growth due to industry, or economic, weakness merely gives the incumbent a pass.  Good CEOs don’t sit in a foxhole waiting to see if they survive, blaming a tough battleground, they develop strategies to change the battle and win, taking on new ground while the competition is making excuses.

GM was the world’s largest auto company when it went broke.  So how did size benefit GM?  In the 1980s Roger Smith moved GM into aerospace by acquiring Hughes electronics, and IT services by purchasing EDS – two remarkable growth businesses.  He “greenfielded” a new approach to auto manufucturing by opening the wildly successful Saturn division.  For his foresight, he was widely chastised.  But “caretaker” leadership sold off Hughes and EDS, then forced Saturn to “conform” to GM practices gutting the upstart division of its value.  Where one leader recognized the need to advance the company, followers drove GM to bankruptcy by selling out of growth businesses to re-invest in “core” but highly unprofitable traditional auto manufacturing and sales.  Meanwhile, as the giant failed, much smaller Kia, Tesla and Tata are reshaping the auto industry in ways most likely to make sure GM’s comeback is short-lived.

CEOs of big companies are paid a lot of money.  A LOT of money.  Much more than Mr. Zuckerberg at Facebook, or the leaders of Groupon and Netflix (for example).  So shouldn’t we expect more from them?  (Marketwatch.com “Top CEO Bonuses of 2010“) They control vast piles of cash and other resources, shouldn’t we expect them to be aggressively investing those resources in order to keep their companies growing, rather than blaming tax strategies for their unwillingness to invest?  (Wall Street Journal “Obama Pushes CEOs on Job Creation“) It’s precisely because they are so large that we should have high expectations of big companies investing in growth – because they can afford to, and need to!

At the end of the day, everyone wins when CEOs push for growth.  Investors obtain higher valuation (Apple is worth more than Microsoft, and almost more than 10x larger Exxon!,) employees receive more pay (see Google’s recent 10% across the board pay raise,) employees have more advancement opportunities as well as personal growth, suppliers have the opportunity to earn profits and bring forward new innovation – creating more jobs and their own growth – rather than constantly cutting price. Answering the Economist in “Why Do Firms Exist?” it is to deliver to people what they want.  When companies do that, they grow.  When they start looking inward, and try being caretakers of historical assets, products and markets then their value declines.

Can Mr. Zuckerberg run GE?  Probably.  I’d sure rather have him at the helm of GM, Chrysler, Kraft, Sara Lee, Motorola, AT&T or any of a host of other large companies that are going nowhere the caretaker CEOs currently making excuses for their lousy performance.  Think what the world would be like if the aggressive leaders in those smaller companies were in such positions?  Why, it might just be like having all of American business run the way Steve Jobs, Jeff Bezos and John Chambers have led their big companies.  I struggle to see how that would be a bad thing.

Yes, You Should Buy Apple

by | Oct 19, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech


Summary:

  • Apple keeps itself in growth markets by identifying unmet needs
  • Apple expands its markets every quarter
  • Apple deeply understands its competition
  • Apple knows how to launch new products quickly
  • These skills allow investors to buy Apple with low risk, and likely tremendous gains

Apple’s recently announced sales and earnings beat expectations.  Nothing surprising about that, because Apple always lowballs both, and then beats its forecast handily.  What is a touch surprising is that according to Marketwatch.com “Apple’s Decline in Margins Casts a Shadow.” Some people are concerned because the margin was a bit lower, and iPad sales a bit lower, than some analysts forecast.

Forget about the concerns.  Buy the stock.  The concerns are about as relevant as fretting over results of a racing team focused on the world land speed record which insteading of hitting 800 miles per hour in their recent run only achieved 792 (according to Wikipedia the current record is 763.)  The story is not about “expectations.”  Its about a team achieving phenominal success, and still early in the development of their opportunity!

Move beyond the financial forecasts and really look at Apple.  In September of 2009 there was no iPad.  Some speculated the product would flop, because it wasn’t a PC nor was it a phone – so the thinking was that it had no useful purpose.  Others thought that maybe it might sell 1 million, if it could really catch on.  Last quarter it sold over 4 million units.  No single product, from any manufacturer, has ever had this kind of early adoption success.  Additionally, Apple sold over 14 million iPhones, nearly double what it sold a year ago.  Today there are over 300,000 apps for iPad and iPhone – and that number keeps growing every day.  Meanwhile corporations are announcing weekly rollouts of the iPad to field organizations as a replacement for laptop PCs. And Apple still has a majority of the MP3 music download business.  While sales of Macs are up 14% last quarter – at least 3 times the growth rate of the moribund PC market!

The best reason to buy any stock is NOT in the financial numbers.  Endless opportunities to manipulate both sales and earnings allow all management teams to alter what they report every quarter.  Even Apple changed its method of reporting iPhone sales recently, leaving many analysts scratching their heads about how to make financial projections.  Financials are how a company reports last year. But if you buy a stock it should be based on how you think it will do well next year.  And that answer does not lie in studying historical financials, or pining over small changes period to period in any line item.  If you are finding yourself adopting such a focus, you should reconsider investing in the company at all.

Investors need growth.  Growth in sales that leads to growth in earnings.  And more than anything else, that comes from participating in growth markets — not trying to “manage” the old business to higher sales or earnings.  If a company can demonstrate it can enter new markets (which Apple can in spades) and generate good cash flow (which Apple can in diamonds) and produce acceptable earnings (which Apple can in hearts) while staying ahead of competitors (which Apple can in clubs) then the deck is stacked in its favor.  Yes, there are competitive products for all of the things Apple sells, but is there any doubt that Apple’s sales will continue its profitable growth for the next 2 or 3 years, at least?  At this point in the markets where Apple competes competitors are serving to grow the market more than take sales from Apple!

Apple has developed a very good ability to understand emerging market needs.  Almost dead a decade ago, Apple has now achieved its first $20 billion quarter.  This was not accomplished by focusing on the Mac and trying to fight the same old battle.  Instead Apple has demonstrated again and again it can identify unmet needs, and bring to market solutions which meet those needs at an acceptable price – that produces an acceptable return for Apple’s shareholders.

And Steve Jobs demonstrated in Monday’s earnings call that Apple deeply understands its competitors, and keeps itself one step ahead.  He described Apple’s competitive situation with key companies Google and Research in Motion (RIM) as reported in the New York Times “Jobs Says Apple’s Approach Is Better Than Google’s.” Knowing its competitors has helped Apple avoid head-on competition that would destroy margins, instead identifying new opportunities to expand revenues by bringing in more customers.  Much more beneficial to profits than going after the “low cost position” or focusing on “maintaining the core product market” like Dell or Microsoft.

Apple’s ongoing profitable growth is more than just the CEO. Apple today is an organization that senses the market well, understands its competition thoroughly and is capable of launching new products adeptly targeted at the right users – then consistently enhancing those products to draw in more users every month.  And that is why you should own Apple.  The company keeps itself in new, growing markets.  And that’s about the easiest way there is to make money for investors.

After the last decade, investors are jaded.  Nobody wants to believe a “growth story.”  Cost cutting and retrenchment have dominated the business news.  Yet, those organizations that retrenched have done poorly.  However, amidst all the concern have been some good growth stories – despite investor wariness.  Such as Google and Amazon.com. But the undisputed growth leader these days is Apple.  While the stock may gyrate daily, weekly or even monthly, the long-term future for Apple is hard to deny.  Even if you don’t own one of their products, your odds of growing your investment are incredibly high at Apple, with very little downside risk.  Just look beyond the numbers.