by Adam Hartung | Sep 15, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Web/Tech
Summary:
- There is a lot of value to recognizing early trends, and acting upon them
- That Apple is as popular as Dell for computers among college students is a trend indicator that Dell’s future looks problematic, while Apple’s looks better
- It is hard to maintain long-term value from innovations that defend & extend an historical market – they are easily copied by competitors
- Long term value comes from the ability to innovate new product markets which are hard for competitors to copy
- Dell is a lousy investment, and Apple is a good one, because Dell is near end of life for its innovation (supply chain management) while Apple has a powerful new product/market innovation capability that can continue for several years
I can think of 3 very powerful reasons everyone should look closely at the following chart from Silicon Alley Insider. It is very, very important that Apple is tied with Dell for market share in PCs among college students, and almost 2.5 times the share of HP:
Firstly, it is important to understand that capturing young buyers is very valuable. If you catch a customer at 16, you have 50 to 60 years of lifelong customer value you can try to maintain. Thus, these people are inherently worth more than someone who is 55, and only 10 to 20 years of lifetime value. While we may realize that older people have more discretionary income, many loyalties are developed at a young age. Over the years, the younger buyers will be worth considerably more.
When I was 15 popular cars were from Pontiac (the GT and Firebird) Oldsmobile (Cutlas) Dodge (Charger and Challenger) and Chevy (Camaro.) Thus, my generation tended to stay with those brands a long time. But by the 1990s this had changed dramatically, and younger buyers were driving Toyotas, Hondas and Mazdas. Now, the American car companies are in trouble because a generational shift has happened. Market shares have changed considerably, and Toyota is now #1. Keeping the old buyers was not enough to keep GM and Chrysler healthy.
That for a quarter as many college students want a Mac as want a PC from Dell says a lot about future technology purchases. It portends good things for Apple, and not good things for leading PC suppliers. Young people’s purchase habits indicate a trend that is unlikely to reverse (look at how even the Toyota quality issues have not helped GM catch them this year.) We can expect that Apple is capturing “the hearts and minds” of college students, and that drives not just current, but future sales
Secondly, it is important to note that Dell built its distinction on price – offering a “generic” product with fast delivery and reasonable pricing. Dell had no R&D, it outsourced all product development and focused on assembly and fast supply chain performance. Unfortunately, supply chain and delivery innovation are far easier to copy than new product – and new market – innovation. Competitors have been able to match Dell’s early advantages, while Apple’s are a lot harder to meet – or exceed. Thus, it has not taken long for Dell to lose it’s commanding industry “domination” to a smaller competitor who has something very new to offer that competitors cannot easily match.
Not all innovation is alike. Those that help Defend & Extend an existing business – making PCs fast and cheap – offer a lot less long term value. Every year it gets harder, and costs more, to try to create any sense of improvement – or advantage. D&E innovations are valued by insiders, but not much by the marketplace. Customers see these Dell kind of innovations as more, better, faster and cheaper – and they are easily matched. They don’t create customer loyalty.
However, real product/market innovations – like the improvements in digital music and mobile devices – have a much longer lasting impact on customers and the markets created. Apple is still #1 in digital music downloads after nearly a decade. And they remain #1 in mobile app downloads despite a small share in the total market for cell phones. If you want to generate higher returns for longer periods, you want to innovate new markets – not just make improvements in defending & extending existing market positions.
Thirdly, this should impact your investment decisions. SeekingAlpha.com, reproducing the chart above, headlines “Are 2010 Apple Shares the new 1995 Dell Shares?” The author makes the case that Apple is now deeply mired in the Swamp, with little innovation on the horizon as it is late to every major new growth market. It’s defend & extend behavior is doing nothing for shareholder value. Meanwhile, Apple’s ability to pioneer new markets gives a strong case for future growth in both revenue and profits. As a result, the author says Dell is fully valued (meaning he sees little chance it will rise in value) while he thinks Apple could go up another 70% in the next year!
Too often people invest based upon size of company – thinking big = stability. But now that giants are falling (Circuit City, GM, Lehman Brothers) we know this isn’t true. Others invest based upon dividend yield. But with markets shifting quickly, too often dividends rapidly become unsustainable and are slashed (BP). Some think you should invest where a company has high market share, but this often is meaningless because the market stagnates leading to a revenue stall and quick decline as the entire market drops out from under the share leader (Microsoft in PCs).
Investing has to be based upon a company’s ability to maintain profitable growth into the future. And that now requires an ability to understand market trends and innovate new solutions quickly – and take them to market equally quickly. Only those companies that are agile enough to understand trends and competitors, implementing White Space teams able to lead market disruptions. Throw away those old books about “inherent value” and “undervalued physical assets” as they will do you no good in an era where value is driven by understanding information and the ability to rapidly move with shifting markets.
Oh, and if you feel at all that I obscured the message in this blog, here’s a recap:
- Dell is trying to Defend its old customers, and it’s not capturing new ones. So it’s future is really dicey
- Dell’s supply chain innovations have been copied by competitors, and Dell has little – if any – competitive advantage today. Dell is in a price war.
- Apple is pioneering new markets with new products, and it is capturing new customers. Especially younger ones with a high potential lifetime value
- Apple’s innovations are hard to duplicate, giving it much longer time to profitably grow revenues.
- You should sell any Dell stock you have – it has no chance of going up in value long term. Apple has a lot of opportunity to keep profitably growing and therefore looks like a pretty good investment.
by Adam Hartung | Sep 9, 2010 | Defend & Extend, Leadership, Lock-in
Leadership
Fire The Status Quo Police
Adam Hartung, 09.08.10, 06:00 PM EDT
Their power to prevent innovation can devastate your business.
“That’s not how we do things around here.” How often have you heard that? And what does it really mean? It is said to stop someone from doing something new. It is no way to promote innovation, is it?”
That’s the lead paragraph to my latest column on Forbes.com, published yesterday evening. Forbes launched a new editorial page covering Change Management, and gave my column’s link the premier placement!
All companies want to grow. But early in the lifecycle they Lock-in on what works, and then implement Status Quo Police that intentionally do not allow anything to change. Their belief is that if nothing changes, the business will always grow. So conformance to historical norms is more important than results to them. To Status Quo Police results will return when conformance to old norms is returned!
Of course, this completely ignores the marketplace. Market shifts, created by competitors launching new technologies, new pricing models, new delivery models or other new solutions cause the value of old solutions to decline. No matter how well you do what you always did, you can’t achieve historical results. The market has shifted!
To keep any company growing you must know who the Status Quo Police are in your organization. They can be in HR, controlling hiring, promotions and pay. In Finance controlling what projects receive resources. In Marketing, tightly controlling branding, product development or distribution. The Status Quo Police are committed to keeping things tightly controlled, and saving the organization from change that could send the company in the wrong direction! No matter what the marketplace may require.
But it’s not enough to know who the Status Quo Police are, its up to leaders to eliminate them! If you want to have a vibrant, profitably growing organization you have to constantly adjust to market shifts. You have to sense what the market wants, and move to deliver it. You have to be very wary of the Status Quo, and instead be open to making changes in order to grow. To do that, you have to hold those who would be the Status Quo Police in check. Otherwise, you’ll find the obstacles to innovation and growth overwhelming!
Please read the article at Forbes, review it and comment! Let me know what you think!
by Adam Hartung | Aug 25, 2010 | Books, In the Rapids, Leadership, Lock-in
Summary:
- We are biased toward doing what we know how to do, rather than something new
- We like to think we can forever grow by keeping close to what we know – that’s a myth
- Growth only comes from entering growth markets – whether we know much about them or not
- To grow you have to keep yourself in growth markets, and it is dangerous to limit your prospects to projects/markets that are “core” or “adjacent to core”
Recently a popular business book has been Profit from the Core. This book proposes the theory that if you want to succeed in business you should do projects that are either in your “core,” or “adjacent to your core.” Don’t go off trying to do something new. The further you move from your “core” the less likely you will succeed. Talk about an innovation killer! CEOs that like this book are folks who don’t want much new from their employees.
I was greatly heartened by a well written blog article at Growth Science International (www.GrowthSci.com) “Profit from Your Core, or Not.. The Myth of Adjacencies.” Author Thomas Thurston does a masterful job of pointing out that the book authors fall into the same deadly trap as Jim Collins and Tom Peters. They use hindsight primarily as the tool to claim success. Their analysis looks backward – trying to explain only past events. In doing so they cleverly defined terms so their stories seemed to prove their points. But they are wholly unable to be predictive. And, if their theory isn’t predictive, then what good is it? If you can’t use their approach to give a 98% or 99% likelihood of success, then why bother? According to Mr. Thurston, when he tested the theory with some academic rigor he was unable to find a correlation between success and keeping all projects at, or adjacent to, core.
Same conclusion we came to when looking at the theories proposed by Jim Collins and Tom Peters. It sounds good to be focused on your core, but when we look hard at many companies it’s easy to find large numbers that simply do not succeed even though they put a lot of effort into understanding their core, and pouring resources into protecting that core with new core projects and adjacency projects. Markets don’t care about whatever you define as core or adjacent.
It feels good, feels right, to think that “core” or “adjacent to core” projects are the ones to do. But that feeling is really a bias. We perceive things we don’t know as more risky than thing we know. Whether that’s true or not. We perceive bottled water to be more pure than tap water, but all studies have shown that in most cities tap water is actually lower in free particles and bacteria than bottled – especially if the bottle has sat around a while.
What we perceive as risk is based upon our background and experience, not what the real, actual risk may be. Many people still think flying is riskier than driving, but every piece of transportation analysis has shown that commercial flying is about the safest of all transportation methods – certainly much safer than anything on the roadway. We also now know that computer flown aircraft are much safer than pilot flown aircraft – yet few people like the idea of a commercial drone which has no pilot as their transportation. Even though almost all commercial flight accidents turn out to be pilot error – and something a computer would most likely have overcome. We just perceive autos as less risky, because they are under our control, and we perceive pilots as less risky because we understand a pilot much better than we understand a computer.
We are biased to do what we’ve always done – to perpetuate our past. And our businesses are like that as well. So we LOVE to read a book that says “stick close to your known technology, known customers, known distribution system – stick close to what you know.” It reinforces our bias. It justifies us not doing what we perceive as being risky. Even though it is really, really, really lousy advice. It just feels so good – like sugary cereal for breakfast – that we justify it in our minds – like saying “breakfast is the most important meal of the day” as we consume food that’s probably less healthy than the box it came in!
There is no correlation between investing in your core, or close to core, projects and high rates of return. Mr. Thurston again points this out. High rates of return come from investing in projects in growth markets. Businesses in growth markets do better, even when poorly managed, than businesses in flat or declining markets. Where there are lots of customers wanting to buy a solution you simply do better than when there are lots of competitors fighting over dwindling customer revenues. Regardless of how well you don’t know the former or do know the latter. Market growth is a much better predictor of success than understanding your “core” and whatever you consider “adjacent.”
Virgin didn’t know anything about airlines before opening one – but international travel from London was set to boom and Virgin did well (as it has done in many new markets.) Apple didn’t know anything about retail music before launching the iPhone and iTunes, but digital music had started booming at Napster and Apple cleaned up. Nike was a shoe company that didn’t know anything about golf merchandise, but it entered the market for all things golf (first with just one club – the driver – followed by other things) by hooking up with Tiger Woods just as he helped promote the sport into dramatic growth.
Success comes from entering new markets where there is growth. Growth can overcome a world of bad management choices. When there are lots of customers with needs to fill, you can make a lot of mistakes and still succeed. To restrict yourself to “core” and “adjacent” invites failure, because your “core” and the “adjacent” markets that you know well simply may not grow. Leaving you in a tough spot seeking higher profits in the face of stiff competition — like Dell today in PCs. Or GM in autos. Sears in retailing. They may know their “core” but that isn’t giving them the growth they want, and need, to succeed in 2010.
by Adam Hartung | Aug 24, 2010 | Current Affairs, Defend & Extend, In the Rapids, Innovation, Lock-in, Web/Tech
Summary:
- It seems like the best way to find old success is to do more of what used to make you successful
- But lack of success is from market shifts, meaning you need to do more things
- Investing in what you know gets more expensive every year, with little (if any) improvement in returns
- To regain success it’s actually better to get out into new markets where you can compete with lower investment rates, generating more profitable sales
- Apple increased its sales of Macs not by focusing on Macs – but instead by becoming a winner in entirely different markets creating a feedback loop to the old, original “core”
MediaPost.com, in its article “Enterprise Sector Takes a Shine to Apple” has some remarkable statistics about Apple sales. At a time when most PC manufacturers, such as Dell and HP, are struggling to maintain even decent growth (even after the launch of upgraded Windows 7 and Office 2010) Apple is dramatically increasing its volume of Macs – and gaining market share. In last year’s second quarter:
- Mac sales jumped almost 50% in the business sector
- Mac sales jumped a whopping 200% in the government sector
- Mac sales rose over 31% in the home sector
- In Europe, Mac unit sales doubled their market share – and more than tripled their share in dollars
Yes, Macs are a small part of the market. Around 3.5% in the U.S. But, if you’re an Apple employee, supplier or investor that doesn’t matter, does it? In fact, it comes off sounding like a PC fan pooh-poohing a really astounding sales improvement. Nobody is saying the Mac will soon replace PCs (that’s more likely to happen via mobile devices where Apple has iPhone and iPad). But when you can dramatically increase your sales, especially as a $50B company, it’s a big deal.
The lesson for managers here is more unconventional. For years we’ve been told the way to grow your sales and profits is to “stick to your knitting.” To “protect your core.” The idea has been promoted that you should jettison anything that is a diversion to what you want to do best, and completely focus on what you select, and then try to out-compete all others with that product. If things don’t improve, then you need to get even more focused on your core, and invest more deeply. And hope the Mojo returns.
But that’s exactly the opposite of what Apple did. When almost bankrupt in 2001 Apple jettisoned multiple Mac products. It invested in music and entertainment products (iPod. iTouch and iTunes) to grab large sales with lower investment rates. It then rolled that success into developing the mobile computing/phone business with the iPhone and all those apps (some 250 thousand now and growing!). And it built on that success with a mobile tablet called the iPad. The Mac is now growing as a result of Apple’s success in all these other products creating a favorable feedback loop to the original “core”.
Apple spends less than 1/8th the money on R&D as Microsoft. And an even lesser amount on marketing, PR and sales. Yet, by entering new markets it gets far more “bang for its buck.” By entering new markets Apple is able to develop and launch new products, that sell in greater volumes and at higher profits, than had it stuck to being a “Mac company.” In fact, back when it only had 45 days of cash on hand, if it had stayed a “Mac company” Apple would have failed.
What we now see is that constantly re-investing in what you know drives down marginal rates of return. It keeps getting harder and harder, at ever greater cost, to drive new development and new sales with upgrades to old products. Look at the sales and profit problems at Sun Microsystems (world leader in Unix servers) and Silicon Graphics (world leader in graphics computers) and now Dell. What we’d like to think works at driving revenue and profits really raises new product costs and creates an easy target for new competitors who attack you as you sit there, all Locked-in to doing more of the same.
Contrarily, when you develop new products for new markets you grow revenues at lower cost, and thus higher profits. And you create a feedback loop that helps you get more sales without massive investments in your historical “core.” Think about Nike. It hasn’t been a “shoe company” for a very long time – but its shoes are greatly benefited by all the success Nike has in golf clubs and all those other products with a swoosh on them.
When confronted with a decision between “investing in the core” – or “protecting the mother ship” – or investing in new markets and solutions —- be very careful. Your “gut” may lead you to “in a blink” decide the obvious answer is to invest in what you know. But we are learning every quarter that this is a road to problems. You get more and more focused, and less and less prepared for the market shift that sent you into that “core focus” in the first place. Pretty soon you’re so far removed from the market you can’t survive – like Sun and SGI. It’s really a whole lot smarter to get out into new markets with White Space teams that can generate revenues with a lot less cost by being a smart, early competitor.
by Adam Hartung | Aug 23, 2010 | Current Affairs, In the Swamp, Leadership, Web/Tech
Summary:
- Market shifts can lead to new solutions that are free
- Free products often cause historical competitors to fail
- Microsoft is at great risk as the market for business applications is shifting to free solutions from Google
More than a decade ago Microsoft made the decision to bundle, at no extra charge, an encyclopedia with its software. Almost nobody had heard of Encarta, and it had never been a serious competitor to Encyclopedia Britannica. But when it came on a CD for free it stopped a lot of people from buying a new set of books for the family. It only took months for Encarta to become the #1 encyclopedia, and Encyclopedia Britannica found itself in bankruptcy. While quality is always an issue, it's very tough to compete with "free." Now Wikipedia, another free product, dominates the encyclopedia market.
For decades people paid for access to news – via newspapers and magazines. Advertisers and subscriptions paid for news. But when newswriters started offering news on the internet for free, and when readers could access news articles on the web without subscriptions, publishers found out how hard it is to compete with "free." Several magazines and newspapers have failed, and several publishers have entered bankruptcy – such as Tribune Corporation.
Now Crain's New York Business headlines "Google's Free Appls Click with Entrepreneurs." Companies are learning they can accomplish the tasks of word processing, spreadsheets, website creation and enterprise email for free via Google apps. And this is not good news for Microsoft.
Microsoft has 2 product lines that make up almost all its sales and profits. Operating systems for PCs (Windows 7) and office automation software for businesses (Office 2010). That there is now a viable offering which is free has to be very, very troubling. How long can Microsoft compete when the competitive product is, quite literally, free? If you adopt cloud computing applications, you no longer need a PC with an operating system. You can use a much simpler device. And you can use Google apps for business applications at no charge.
Microsoft is a huge company, with an incredible history. But how is it going to compete with free? And as computing becomes more and more networked, and Microsoft loses share in mobile devices from smartphones to tablets, what will be the sustaining revenue at Microsoft?
Investors in Microsoft have a lot to fear. As do its employees and suppliers. As do supply chain partners like Dell. When markets shift – especially when led by a shift to free solutions – the impact on traditional competitors can be extreme. Even the very best – such as Encyclopedia Britannica – can be destroyed. Sun Microsystems led the server business in 2000, with a +$200B market cap. Sun is now gone. Market shifts can happen fast, and when products are free shifts often happen even faster.
