by Adam Hartung | Oct 27, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Innovation, Leadership, Web/Tech
There is a big cry for innovation these days. Unfortunately, despite spending a lot of money on it, most innovation simply isn't. And that's why companies don't grow.
The giant consulting firm Booz & Co. just completed its most recent survey on innovation. Like most analysts, they tried using R&D spending as yardstick for measuring innovation. Unfortunately, as a lot of us already knew, there is no correlation:
"There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues. Many companies — notably, Apple — consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return. Meanwhile, entire industries, such as pharmaceuticals, continue to devote relatively large shares of their resources to innovation, yet end up with much less to show for it than they — and their shareholders — might hope for."
(Uh-hum, did you hear about this Abbott? Pfizer? Readers that missed it might want to glance at last week's blog about Abbott, and why it is a sell after announcing plans to split the company.)
Far too often, companies spend most of their R&D dollars on making their products cheaper, operate better, faster or do more. Clayton Christensen pointed this out some 15 years ago in his groundbreaking book "The Innovator's Dilemma" (HBS Press, 1997). Most R&D, in most industries, and for most companies, is spent trying to sustain an existing technology – not identify or develop a disruptive technology that would have far higher rates of return.
While this is easy to conceptualize, it is much harder to understand. Until we look at a storied company like Kodak – which has received a lot of news this last month.
Kodak invented amateur photography, and was rewarded with decades of profitable revenue growth as its string of cheap cameras, film products and photographic papers changed the way people thought about photographs. Kodak was the world leader in photographic film and paper sales, at great margins, and its value grew exponentially!
Of course, we all know what happened. Amateur photography went digital. No more film, and no more film developing. Even camera sales have disappeared as most folks simply use mobile phones.
But what most people don't know is that Kodak invented digital photography! Really! They were the first to create the technology, and the first to apply it. But they didn't really market it, largely because of fears they would cannibalize their film sales. In an effort to defend & extend their old business, Kodak licensed digital photography patents to camera manufacturers, abandoned R&D in the product line and maintained its focus on its core business. Kodak kept making amateur film better, faster and cheaper – until nobody cared any more.
Of course, Kodak wasn't the first to fall into this trap. Xerox invented desktop publishing but let that market go to Apple, Wintel suppliers and HP printers as it worked diligently trying to defend & extend its copier business. With no click meter on the desktop publishing equipment, Xerox wasn't sure how to make money with it. So they licensed it away.
DEC pretty much created and owned the CAD/CAM business before losing it to AutoCad. Sears created at home shopping, a market now dominated by Amazon. What's your favorite story?
It's a pattern we see a lot. And nowhere worse than at Microsoft.
Do you remember that Microsoft had the Zune player at least as early as the iPod, but didn't bother to develop the technology, or market, letting Apple take the lead in digital music and video devices? Did you remember that the Windows CE smartphone (built by HTC) beat the iPhone to market by years? But Microsoft didn't really develop an app base, didn't really invest in the smartphone technology or market – and let first RIM and later Apple run away with that market as well.
Now, several years too late Microsoft hopes its Nokia partnership will help it capture a piece of that market – despite its still rather apparent lack of an app base or breakthrough advantage.
Microsoft is a textbook example of over-investing in existing technology, in an effort to defend & extend an existing product line, to the point of "over-serving" customer needs. What new extensions do you want from your PC or office software?
Do you remember Clippy? That was the little paper clip that came up in Windows applications to help you do your job better. It annoyed everyone, and was disabled by everyone. A product development that nobody wanted, yet was created and marketed anyway. It didn't sell any additional software products – but it did cost money. That's defend & extend spending.
How much a company spends on innovation doesn't matter, because what's important is what the company spends on real breakthroughs rather than sustaining ideas. Microsoft spends a lot on Windows and Office – it doesn't spend enough on breakthrough innovation for mobile products or games.
And it doesn't spend nearly enough on marketing non-PC innovations. We are already well into the back end of the PC lifecycle. Today more bandwidth is consumed from mobile devices than PC laptops and desktops. Purchase rates of mobile devices are growing at double digits, while companies (and individuals) are curtailing PC purchases. But Microsoft missed the boat because it chose to defend & extend PCs years ago, rather than really try to develop the technology and markets for CE and Zune.
Just look at where Microsoft spends money today. It's hottest innovation is Kinect. But that investment is dwarfed by spending on Skype – intended to extend PC life – and ads promoting the use of PC technologies for families this holiday season.
Unfortunately, there are almost no examples of companies that miss the transition to a new technology thriving. And that's why it is really important to revisit the Kodak chart, and then look at a Microsoft chart.
(Chart 10/27/11)
Do you think Microsoft, after this long period of no value increase, is more likely to go up in value, or more likely to follow Kodak? Unfortunately, there are few companies that make the transition. But there have been thousands that have not. Companies that had very high market share, once made a lot of money, but fell into failure because they invested in better, faster, cheaper rather than innovation.
If you are still holding Kodak, why? If you're still holding Microsoft, Abbott, Kraft, Sara Lee, Sears or Wal-Mart — why?
by Adam Hartung | Jun 8, 2011 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
Apple’s market value has struggled in 2011. When I ask people why, the overwhelming top 3 responses are:
- How can a company nearly bankrupt 10 years ago become the second most valuable company on the equity market?
- Apple has had a long run, isn’t it about to end?
- How can Apple be worth so much, when it has no “real” assets?
I’m struck by how these questions are based on looking backward, rather than looking into the future.
Firstly, it doesn’t matter where you start, but rather how well you run the race. What happened in the past is just that, the past. Changing technologies, products, solutions, customers, business practices, economic conditions and competitors cause markets to shift. When they shift, competitor positions change. The strong can remain strong, but it’s also possible for company’s fortunes to change drastically. Apple has taken advantage of market shifts – even created them – in order to change its fortunes. What investors should care about is the future.
Which leads to the second question; and the answer that there’s no reason to think Apple’s growth run will end any time soon. Perhaps Apple won’t maintain 100% annual growth forever, but it doesn’t have to grow at that rate to be a very valuable investment. And worth a lot more than the current value. That Apple can grow at 20% (or a lot more) for another several years is a very high probability bet:
- Apple’s growth markets are young, and the markets themselves are growing fast. Apple is not in a gladiator war to maintain old customers, but instead is creating new customers for digital/mobile entertainment, smartphones and mobile tablets. Because it is in high growth markets it’s odds of maintaining company growth are very good. Just look at the recent performance of iPad tablet sales, a market most analysts predicted would struggle against cheaper netbooks. Quarterly sales are blowing past early 2010 estimates of annual sales, and are 250% over last year (chart source Silicon Alley Insider):
- Apple’s products continue to improve. Apple is not resting upon its past success, but rather keeps adding new capability to its old offerings in order to migrate customers to its new platforms. At the recent developer’s conference,for example, Apple described how it was adding Twitter integration for enhanced social media to its platforms and introducing its own messenger service, bypassing 3rd party services (like SMS) and replacing competitive products like RIM’s BBM.
- Further, Apple is introducing new solutions like iCloud (TechStuffs.net “Apple iCloud Key Features and Price) offering free wireless synching between Apple platforms, free and seamless back-ups, and the ability to operate without a PC (even Mac flavor) if you want to be mobile-only (“The 10 Huge Things Apple Just Revealed” BusinessInsider.com). These solutions keep expanding the market for Apple sales into new markets – such as small businesses (Entrepreneur.com “What Lion Means for Small Business“) as it solves unmet needs ignored by historically powerful solutions providers, or offered at far too high a price.
Thirdly, investors wonder how a company can be worth so much without much in the way of “real” assets. The answer lies in understanding how the business world has shifted. In an industrial economy real assets – like land, building, machinery – was greatly valued. They were the means of production, and wealth generation. But we have transitioned to the information economy. Now the information around a business, and providing digital solutions, are worth considerably more than “real” assets.
How many closed manufacturing plants, retail stores or restaurants have you seen? How many real estate developers have shuttered? Contrarily, what’s the value of customer lists and customer access at companies like Amazon.com, GroupOn, Linked-In, Twitter and Facebook in today’s information economy? What’s the demand for printed books, and what’s the demand for ebooks (such as Kindle?) “Real” asset values are tumbling because they are easy to obtain, and owning them produces precious little value, or profit, in today’s globally competitive economy.
This same week that Apple announced a barrage of revenue-generating upgrades and new products asset rich Wal-Mart made an announcement as well. After a decade in which Apple’s value skyrocketed to over $330B (More than Microsoft and Intel Combined by the way), Wal-Mart’s value has gone nowhere, mired around $185B. Wal-Mart’s answer is to buy back it’s shares. The Board has authorized continuing and expanding a massive share buyback program of literally 1 million shares/day – 10% of all shares traded daily! The amount allocated is 1/6th the entire market cap! At this rate 24x7WallStreet.com headlined “Wal-Mart’s Buyback Plan Grows & Grows.. Could Take Itself Private by 2025.”
Share buybacks produce NO VALUE. They don’t produce any revenue, or profit. All they do is take company cash, and spend it to buy company shares. The asset (cash) is spent (removed) in the process of buying shares, which are then removed from the company’s equity. The company actually gets smaller, because it has less assets and less equity. (Compared to LInked-In, for example, that grew larger by selling shares and increasing its cash assets.) Over time the cash disappears, and the equity disappears. Eventually, you have no company left! Stock buybacks are an end of lifecycle investment, and should trigger great fear in investors as they demonstrate management has lost the ability to identify high-yield growth opportunities.
Wal-Mart is steeped in assets. It has land, buildings, stores, shelves, warehouses, trucks, huge computer systems. But these assets simply don’t produce a lot of profit, as competitors are squeezing margins every year. And there’s not much growth, because doing more of what it always did isn’t really wanted by a lot more people. So it has gobs of assets. So what? The assets simply aren’t worth a lot when the market doesn’t need any more retail stores; especially boring ones with limited product selection, limited imagination and nothing but “low price.”
Assets aren’t the “store of value” analysts gave them in an industrial economy, and it’s time we realize investing in “assets” is fraught with risk. Assets, like homes and autos have shown us, can go down in value even easier and faster than they can go up. Global competitors can match the assets, and drive down prices using cheap labor and operating by less onerous standards. In today’s market, assets are as likely to be an anchor on value as an asset.
I started 2011 saying Apple was a screaming buy. Today that’s even more true than it was then. Apple’s revenues, profits and cash flow are up. Sales in existing lines are still profitably growing at double (or triple) digit rates, and enhancements keep Apple in front of competitors. Meanwhile Apple is entering new markets every quarter, with solutions meeting existing, unmet needs. Because value has been stagnant, the value (price) to revenue, earnings and cash flow have all declined, making Apple cheaper than ever. It’s time to invest based on looking to the future, and not the past. Doing so means you buy Apple today, and start dumping asset intensive stocks like Wal-mart.
Update 12 June, 2011 – Chart from SeekingAlpha.com. Apple’s cash hoard grows faster than its valuation. When a company can grow cash flow and profits faster than revenues – and it’s doubling revenues – that’s a screaming buy!
by Adam Hartung | Apr 7, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Innovation, Leadership, Lock-in, Science
"GM, Segway unveil Puma urban vehicle" headlines Marketwatch.com. The Puma is an enlarged Segway that can hold 2 people in a sitting position. Both companies are hoping this promotion will create excitement for the not-yet-released product, thus generating a more positive opinion of both companies and establish early demand. Unfortunately, the product isn't anything at all like the iPod and the comparison is way off the mark.
The iPod when released with the iTunes was a disruptive innovation which allowed customers to completely change how they acquired, maintained and managed their access to music. Instead of purchasing entire CDs, people could acquire one song at a time. You no longer needed special media readers, because the tunes could be heard on any MP3 device. And your access was immediate, from the download, without going to a store or waiting for physical delivery. People that had not been music collectors could become collectors far cheaper, and acquire only exactly what they wanted, and listen to the music in their own designed order, or choose random delivery. The source of music changed, the acquisition process changed, the collection management changed, the storage of a collection changed – it changed just about everything about how you acquired and interacted with music. It was not a sustaining innovation, it was disruptive, and it commercialized a movement which had already achieved high interest via Napster. The iPod/iTunes business put Apple into the lead in an industry long dominated by other companies (such as Sony) by bringing in new users and building a loyal following.
Unfortunately, increasing the size of a product that has not yet demonstrated customer efficacy, economic viability or developed a strong following and trying to sell it through an existing distribution system that has long been decried as uneconomic and displeasing to customers is not an iPod experience. And that is what this GM/Segway announcement is trying to do.
Despite all the publicity when it was first announced, the Segway has not developed a strong following. After 7 years of intense marketing, and lots of looks, Segway has sold only 60,000 units globally – a fraction of competitive product such as bicycles, motorized scooters, motorcycles and mass transit. Segway has not "jumped into the lead" in any segment of transportation. It has yet to develop a single dominant application, or a loyal group of followers. The product achieves a smattering of sales, but the vast majority of observers simply say "why?" and comment on the high price. Segway has never come close to achieving the goals of its inventor or its investors.
This product announcement gives us more of the same from Segway. It's the same product, just bigger. We are given precious little information about why someone would own one, other than it supposedly travels 35 miles on $.35 of electricity. But how fast it goes, how long to recharge, how comfortable the ride, whether it can carry anything with you, how it behaves in foul weather, why you should choose it over a Nano from Tata or another small car, or a motorscooter or motorcycle — these are all open items not addressed.
And worse, the product isn't being launched in White Space to answer these questions and build a market. Instead, the announcement says it will be sold through GM dealers. This simply ignores answering why any GM dealer would ever want to sell the thing – given its likely price point, margin, use – why would a dealer want to sell Puma/Segways instead of more expensive, capable and higher margin cars?
Great White Space projects are created by looking into the future and identifying scenarios where this project – its use – can be a BIG winner that will attract large volumes of customers. Second, it addresses competitive lock-ins and creates advantages that don't currently exist and otherwise would not exist. Thirdly, it Disrupts the marketplace as a game changer by bringing in new users that otherwise are out of the market. And fourth it has permission to try anything and everything in the market to create a new Success Formula to which the company can migrate for rapid growth.
This project does none of that. It's use is as unclear as the original Segway, and the scenario in which this would ever be anything other than a novelty for perfect weather inner-city upscale locations is totally unclear. This product captures all the current Lock-ins of the companies involved – trying to Defend & Extend one's technology base and the other's distribution system – rather than build anything new. The product appears simply to be inferior in almost all regards to competitive products, with no description of why it is a game changer to other forms of transportation. And the project is starting with most important decisions pre-announced – rather than permission to try new things. And there is absolutely no statement of how this project will be resourced or funded – by two companies that are both in terrible financial shape.
The iPod and iTunes are brands that turned around Apple. They are role models for how to use Disruptive innovation to resurrect a troubled company. It's really unfortunate to see such wonderful brand names abused by two poorly performing companies without a clue of how to manage innovation. The biggest value of this announcement is it shows just how poorly managed Segway has been – given that it's partnering with a company that is destined to be the biggest bankruptcy ever in history, and known for its inability to understand customer needs and respond effectively.
by Adam Hartung | Apr 3, 2009 | Current Affairs, General, In the Rapids, Lifecycle, Openness, Science
Since before writing Create Marketplace Disruption I've been a fan of GE. The company is the only company to be on the Dow Jones Industrial Average since started 100 years ago. While so many other companies have soared and failed, GE has continued to adapt and grow. But it's been hard to be a GE proponent the last year. Even though GE continues to follow The Phoenix Principle, fears about the recession, GE's massive commercial real estate holdings, and risks in GE Capital drove the stock from $40 a year ago to $6.50!!! A whopping 84% decline!!!
I've also long been a fan of Intel. Intel transformed itself from a memory chip company facing horrible returns into a microprocessor company by maintaining a healthy paranoia about markets and competitors. The company has worked with Clayton Christensen over the years to not only keep up with sustaining innovations, but to implement Disruptive ones as well. But Intel was recession-slaughtered over the last year, losing half its value.
It's been enough to make an innovation lover cry. But, simultaneously, it's not clear that over the last year ever stock has been accurately priced for its long term value by the market. As we know, fears about bank and real estate failures have simultaneously destroyed investor confidence while pushing up cash needs. Don't forget that Warren Buffet made an insider deal to provide money to GE with warrants to buy the stock at $23 – about double the current value. So perhaps the bloodbath in these two companies went beyond what should have been expected?
Today there's more heartening news. "GE and Intel join forces on home health" is the FT.com headline.
GE and Intel both have identified that health care will be a growing market into the future, expecting the home health monitoring business alone to grow from $3B today to $7.7B by 2012. By keeping their eyes on the future, both companies are showing that they are investing based on future expectations, not just historical performance. And, both have identified opportunities that reside outside their existing health care markets, such as the medical imaging market where GE is currently strong. Thus, they are investing $250million into a new joint venture company to develop new markets.
This shows the earmarks of good White Space. It's focused on developing a growing future market, not trying to preserve an existing market position. It's outside the existing business manager's control, thus given permission to develop a new Success Formula rather than operate within existing constraints of existing businesses. And the project is given enough resources to succeed, not just get started.
Maybe now is a great time to buy stock in these companies? GE has gone out of its way recently to divulge information about its real estate and finance units to analysts in order to be more transparent. And the company is demonstrating a commitment to the behaviors, future-oriented planning and White Space, that have long helped the company grow.
Now, if we could just start seeing the kind of disruptive behavior out of Chairman Immelt that former Chairman "Neutron Jack" Welch demonstrated my comfort level could go up even more…..
