Growth (vs Greed) is Good – Google, Amazon, Facebook vs Microsoft

by | Nov 18, 2010 | Current Affairs, In the Rapids, Leadership, Web/Tech


Summary:

  • Most managers think it’s good to lower costs
  • Most leaders focus heavily on earnings
  • But focusing on costs and earnings leads to a dysmal spiral of decline
  • Growth, rather than earings, distinguishes the higher value, and higher paying, companies
  • Google is giving across the board pay raises and bonuses, because it has high growth
  • Amazon, Facebook and Apple are hiring and paying more because they are growing
  • Microsoft is cutting staff and costs, and its value is going nowhere as it focuses on earnings
  • Growth is good, Greed (a focus on earnings) is the road to ruin

“Google to Give Staff 10% Raise” is the Wall Street Journal headline.  All 23,000 employees (globally) will receive a 10% raise this year.  At Mediapost.com in “Google Woos Troops with Cash and Raises” it is reported that additional to the 10% raise everyone will also receive at least a $1,000 cash bonus end of this year.  According to CEO Eric Schmidt “We want to make sure that you feel rewarded for all your hard work.” For best performers, Google is making some pretty big (outrageous?) offers.  In “Google Paying Big Bucks to Keep Talent” Mediapost reported a staff engineer was awarded $3.5 million in restricted stock to stay at the company.

Has your company announced anything similar?   Hold on, didn’t you and your team work really hard?  Don’t you deserve recognition for your efforts?  And given your value to your employer, shouldn’t you receive something special to retain you, before you run to a higher paying job with better growth opportunities?  Are we to believe all the good people, who deserve bonuses, are at Google?  Or is something different going on besides just “hard work” leading to this generous cash dispersal to employees?

Google is growing like crazy.  And that’s the difference.  As Bruce Henderson, founder of the famous Boston Consulting Group once said, “growth hides a multitude of sins.”  Growth surrounds the business with lush resources – it’s like being on the equator rather than the poles.  When you grow, you can pay more to employees, and your suppliers. You can be Santa Clause, rather than the Grinch.  Google is spending more money to keep, and hire, employees because other high growth companies, like Facebook, have been “stealing” them away.  It’s a problem of riches in the battle to hire and keep people!  Wouldn’t you like to particpate in this one?

Too many leaders confuse growth with greed (remember the famous Gorden Gekko speech from Wall Street about “Greed is Good”?)  The outcome is a surplus of focus on “the bottom line” and that leads to cost cutting – which hurts growth.  In the rush to show higher earnings, leaders forget earnings are the result of good management – and growth – and they begin looking for short-term ways to improve them. Greed, and the desire for more earnings now, causes them to forget that had they spent more time finding profitable growth markets yesterday the earnings today would be higher, and better. And they forget that without growth earnings are destined to decline!

Growth leads to a virtuous circle.  More sales leads to more investment in new products and markets, leading to more sales, leading to more earnings, leading to more hiring, leading to higher pay, leading to better talent, leading to better ideas, leading to more new products taking you into more new markets…. a pretty fun place to work.  Wheras greed leads to the whirlpool of despair.  Cost cutting, product line rationalization, benefit reductions, lower (or no bonuses), headcount freezes, layoffs, no new hires, lower pay, more pressure on suppliers to cut their prices, no new product introductions, lost accounts, fewer salespeople, layoffs, outsourcing, facility closings ….. very much not a fun place to work.  Where growth fuels a great company, focus on earnings inevitably kills the business.

We can see this difference when comparing performance of a few leading companies.  Microsoft grew for many years.  But now its strict focus on PC software has caused growth to lag.  At Techflash.com (Puget Sound Business Journal product) “Hiring: Microsoft Stays Cautious as Google, Amazon Ramp Up” tells the story.  Declining PC sales growth has led Microsoft to reduce its workforce by 2% globally the last year (~4,000).  Google has expanded by 18% (+23,300 jobs).  Since adding Kindle to its product line, and making other expansions, Amazon has added 44% to its workforce (~10,000 or 2.5 times the staff reduction at Microsoft).  New products and new markets is helping Google, Facebook and Amazon grow – while focus on old markets has lowered growth at Microsoft.

Now Microsoft is attempting to save face by focusing on expense management, and earnings.  Mr. Ballmer and his team hope Wall Street analysts will be happy with greed, by looking only at earnings, rather than growth.  Microsoft’s CFO said “the best measure for our financial performance… comes down to EPS [earnings per share]… what we really need to do is drive earnings per share growth.”  Microsoft missed the digital music wave, smartphone and tablet waves.  It’s now struggling to rediscover growth, so it’s hoping to appeal to greed. Microsoft is taking the old approach of “if you can’t show you understand markets, products and growth then try to convince them you’re a good manager who can cut costs.”   But how long can Microsoft manage its earnings when it’s not a significant player in the growth markets?  Cost reduction is never the route to prosperity.

The last decade has seen the revenge of cost management.  Coming out of the “go go” 1990s many leaders have proudly demonstrated their ability to avoid investment, cut costs, work employees harder, avoid increased pay, avoid new hires, send work to low-pay countries – and manage for the bottom line.  Unfortunately, most publicly traded companies are worth less now than they were a decade ago.  The DJIA and S&P 500 are worth less.  The dollar has taken a shellacking.  Fewer Americans are working and unemployment is higher.  Tax receipts are down, and (as shown in the last election) Americans are pretty sick of a lousy economy.  All this focus on earnings hasn’t done much for America’s workers, most American companies or the overall economy.

If you want to be “rewarded for all your hard work” through a big paycheck, a big raise, a big bonus – and you want employment that is filling and fun – then focus on growth.  Help your company create new markets, with new products that people want.  If you lead the marketplace with new applications and new solutions that fulfill unmet needs you’ll achieve good growth.  Then realize earnings are a result of implementing that growth at effective prices.  If you focus on the right thing – growth – then you’ll receive the results you want.  Less focus on greed, with more on growth, and you might get rich.

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.