Microsoft needed a great Christmas season. After years of product stagnation, and a big market shift toward mobile devices from PCs, Microsoft's future relied on the company seeing customers demonstrate they were ready to jump in heavily for Windows8 products – including the new Surface tablet.
Looking deeper, for the 4th quarter PC sales declined by almost 5% according to Gartner research, and by almost 6.5% according to IDC. Both groups no longer expect a rebound in PC shipments, as they believe homes will no longer have more than 1 PC due to the mobile device penetration – the market where Surface and Win8 phones have failed to make any significant impact or move beyond a tiny market share. Users increasingly see the complexity of shifting to Win8 as not worth the effort; and if a switch is to be made consumer and businesses now favor iOS and Android.
These trends mean nothing short of the ruin of Microsoft. Microsoft makes more than 75% of its profits from Windows and Office. Less than 25% comes from its vaunted servers and tools. And Microsoft makes nothing from its xBox/Kinect entertainment division, while losing vast sums on-line (negative $350M-$750M/quarter). No matter how much anyone likes the non-Windows Microsoft products, without the historical Windows/Office sales and profits Microsoft is not sustainable.
So what can we expect at Microsoft:
Ballmer has committed to fight to the death in his effort to defend & extend Windows. So expect death as resources are poured into the unwinnable battle to convert users from iOS and Android.
As resources are poured out of the company in the Quixotic effort to prolong Windows/Office, any hope of future dividends falls to zero.
Expect enormous layoffs over the next 3 years. Something like 50-60%, or more, of employees will go away.
Expect closure of the long-suffering on-line division in order to conserve resources.
The entertainment division will be spun off, sold to someone like Sony or even Barnes & Noble, or dramatically reduced in size. Unable to make a profit it will increasingly be seen as a distraction to the battle for saving Windows – and Microsoft leadership has long shown they have no idea how to profitably grow this business unit.
As more and more of the market shifts to competitive cloud businesses Apple, Amazon and others will grow significantly. Microsoft, losing its user base, will demonstrate its inability to build a new business in the cloud, mimicking its historical experiences with Zune (mobile music) and Microsoft mobile phones. Microsoft server and tool sales will suffer, creating a much more difficult profit environment for the sole remaining profitable division.
Missing the market shift to mobile has already forever tarnished the Microsoft brand. No longer is Microsoft seen as a leader, and instead it is rapidly losing market relevancy as people look to Apple, Google, Amazon, Samsung, Facebook and others for leadership. The declining sales, and lack of customer interest will lead to a tailspin at Microsoft not unlike what happened to RIM. Cash will be burned in what Microsoft will consider an "epic" struggle to save the "core of the company."
But failure is already inevitable. At this stage, not even a new CEO can save Microsoft. Steve Ballmer played "Bet the Company" on the long-delayed release of Win8, losing the chance to refocus Microsoft on other growing divisions with greater chance of success. Unfortunately, the other players already had enough chips to simply bid Microsoft out of the mobile game – and Microsoft's ante is now long gone – without holding a hand even remotely able to turn around the product situation.
Game over. Ballmer loses. And if you keep your money invested in Microsoft it will disappear along with the company.
In 1978 Dan White killed San Francisco's mayor George Moscone and city supervisor Harvey Milk. The press labeled his defense the "Twinkie Defense" because he claimed eating sugary junk food – like Twinkies – caused diminished capacity. Amazingly the jury bought it, and convicted him of manslaughter instead of murder saying he really wasn't responsible for his own actions. An outraged city rioted.
Nobody is rioting, but management's claim that unions caused Hostess failure is just as outrageous.
Founded in 1930 as Interstate Bakeries Co. (IBC) the company did fine for years. But changing consumer tastes, including nutrition desires, changed how much Wonder Bread, Twinkies, HoHos and Honey Buns people would buy — and most especially affected the price – which was wholly unable to keep up with inflation. This trend was clear in the early 1980s, as prices were stagnant and margins kept declining due to higher costs for grain and petroleum to fuel the country's largest truck fleet delivering daily baked goods to grocers.
IBC kept focusing on operating improvements and better fleet optimization to control rising costs, but the company was unwilling to do anything about the product line. To keep funding lower margins the company added debt, piling on $450M by 2004 when forced to file bankruptcy due to its inability to pay bills. For 5 years financial engineers from consultancies and investment banks worked to find a way out of bankruptcy, and settled on adding even MORE debt, so that – perversely – in 2009 the renamed Hostess had $670M of debt – at least 2/3 the total asset value!
Since then, still trying to sell the same products, margins continued declining. Hostess lost a combined $250M over the last 3 years.
The obvious problem is leadership kept trying to sell the same products, using roughly the same business model, long, long, long after the products had become irrelevant. "Demand was never an issue" a company spokesman said. Yes, people bought Twinkies but NOT at a price which would cover costs (including debt service) and return a profit.
In a last, desperate effort to keep the outdated model alive management decided the answer was another bankruptcy filing, and to take draconian cuts to wages and benefits. This is tanatamount to management saying to those who sell wheat they expect to buy flour at 2/3 the market price – or to petroleum companies they expect to buy gasoline for $2.25/gallon. Labor, like other suppliers, has a "market rate." That management was unable to run a company which could pay the market rate for its labor is not the fault of the union.
By constantly trying to defend and extend its old business, leadership at Hostess killed the company. But not realizing changing trends in foods made their products irrelevant – if not obsolete – and not changing Hostess leaders allowed margins to disintegrate. Rather than developing new products which would be more marketable, priced for higher margin and provide growth that covered all costs Hostess leadership kept trying to financial engineer a solution to make their horse and buggy competitive with automobiles.
And when they failed, management decided to scapegoat someone else. Maybe eating too many Twinkies made the do it. It's a Wonder the Ding Dongs running the company kept this Honey Bun alive by convincing HoHos to loan it money! Blaming the unions is simply an inability of management to take responsibility for a complete failure to understand the marketplace, trends and the absolute requirement for new products.
We see this Twinkie Defense of businesses everywhere. Sears has 23 consecutive quarters of declining same-store sales – but leadership blames everyone but themselves for not recognizing the shifting retail market and adjusting effectively. McDonald's returns to declining sales – a situation they were in 9 years ago – as the long-term trend to healthier eating in more stylish locations progresses; but the blame is not on management for missing the trend while constantly working to defend and extend the old business with actions like taking a slice of cheese off the 99cent burger. Tribune completey misses the shift to on-line news as it tries to defend & extend its print business, but leadership, before and afater Mr. Zell invested, refuses to say they simply missed the trend and let competitors make Tribune obsolete and unable to cover costs.
Businesses can adapt to trends. It is possible to stop the never-ending chase for lower costs and better efficiency and instead invest in new products that meet emerging needs at higher margins. Like the famous turnarounds at IBM and Apple, it is possible for leadership to change the company.
But for too many leadership teams, it's a lot easier to blame it on the Twinkies. Unfortunately, when that happens everyone loses.
Too many leaders spend too much effort minimizing uncertainty
Stock buybacks reflect fear of uncertainty, but are a losing investment
Good performing organizations invest in new markets, products and services
Success comes from not only investing, but in learning quickly what works (or doesn’t) and rapidly adapting
“If you don’t ever do anything, you can never screw up” my boss said.
I was 20 years old working in the blazing Oklahoma July sun at a grain elevator. I had asked the maintenance lead to modify a tool, thinking I could work faster. Unfortunately, my idea failed and my production started lagging. Offload production was slowing. I had to ask that the tool be put back to original condition, and I apologized to the elevator manager for my mistake.
That’s when he used my opening line, and went on to say “Don’t ever quit trying to do better. You’re a clever kid. Sometimes ideas work, sometimes they don’t, but if we dont’ try them we’ll never know. That’s why I agreed to your idea originally. I’ll accept a few well-intentioned ‘mistakes’ as long as you learn from them. Now go back to work and try to make up that production before end of day.”
Far too few leaders today give, or follow, such advice. The Economist recently waxed eloquently about how much today’s leaders dislike any kind of uncertainty (see “From Tsunami’s to Typhoons“). Most very consciously make decisions intended to reduce uncertainty – regardless of the impact on results! Rather than take advantage of events and trends, doing something new and different, they intentionally downplay market changes and diligently seek ways to make it appear as if things are not changing – amidst massive change! The mere fact that there is uncertainty seems to be the most troubling issue, as leaders don’t want to deal with it, nor know how.
This fear of uncertainty manifest itself in decisions to buy back stock, rather than invest in new products, services and markets. 24/7 Wall Street reported $34B in announced share buybacks in early February (2011 Stock Buybacks on Fire), only to update that to $40B by end of the month. Literally dozens of companies choosing to spend money on buying their own shares, which creates no economic value at all, rather than invest in something that could create growth! And these aren’t just companies with limited prospects, but include what have been considered growth entities like Pfizer, Astra-Zeneca, Electronic Arts, MedcoHealth, Verizon, Semantec, Yum! Brands, Quest, Kohl’s, Varian and Gamestop to name just a few.
All of these companies have opportunities to grow – heck, all companies have the opportunity to grow. But there is inherent uncertainty in spending money on something that might not work out. So, instead, they are taking hard earned cash flow and spending it on buying back the company stock. The real certainty, from this investment, is that it limits growth — and eventually will lead to a smaller company that’s worth less. Don’t forget, the only investment Sara Lee made under Brenda Barnes the last 5 years was buying back stock – and now the company has shriveled up to less than half its former size while the equity value has disintegrated. Nobody wins from share buybacks – with the possible exception of senior executives who have compensation tied to stock price.
At the Harvard Business Review Umar Haque admonishes leaders today “Fail Bigger Cheaper: A Three Word Manifesto.” Silicon valley investors, deep into understanding our change to an information economy, are far less interested in “scale” and more interested in how leaders, and their companies, are learning faster – so they see where they might fail faster – and then being nimble enough to adjust based upon what they learned. And not just to do more of the same better, but in order to identify bigger targets – larger opportunities – than originally imagined. Often the “failure” can direct the business into grander opportunities which have even higher payoffs.
That’s why we don’t see companies like Google, Apple, Netflix, Virgin, or Cisco buying back their own stock. They see opportunities, and they invest. They don’t all work out. Remember Google Wave? Looked great – didn’t make it – but so what? Google learns from what works, and what doesn’t, and uses that information to help it develop newer, more powerful growth markets.
Long ago Apple let its lack of success with the Newton PDA cause it to retrench into strictly Mac development – which took the company to the brink of disaster by 2000. Since then, by investing in new markets and new products, Apple has grown revenues and profits like crazy, making it more valuable than arch-rival Microsoft and close to being the most valuable publicly traded company.
Source: Silicon Alley Insider of BusinessInsider.com
Virgin used its success in music retailing to enter the trans-atlantic airline business (Virgin Atlantic). Since then it has launched dozens of businesses. Some didn’t work out – like Virgin Bridal – but many more have, such as Virgin Money, Virgin Mobil, Virgin Connect – to name just a handful of the many Virgin businesses that contribute to company growth and value creation.
Nobody wants to screw up. But, unless you do nothing, it is inevitable. No leader, or company, can create high value if they don’t overcome their fear of uncertainty and invest in innovation. But, hand-in-glove with such investing is the requirement to learn fast whether an innovation is working, or not. And to adapt. Some things need time for the market to develop, others need technology advances, and others need a change in direction toward different customers. It’s the ability to invest in uncertain situations, then pay attention to market feedback in order to recognize how well the idea is working, and constantly adapt to market learning that sets apart those companies creating wealth today.
Update 4/1/2011 – AOLSmallBusiness.com reminds us of another great adaptation story, based upon entering an unknown market and learning, in “Yes, Even Apple Screws Up Sometimes.” When personal computers were all text-based machines Apple introduced the Lisa as the first commercial computer to utilize on-screen icons, and a mouse for navigation, as well as other key productivity enhancers like the trash can. But the Lisa failed. Apple studied the market, kept what was desirable and modified what wasn’t, re-introducing the product as the Macintosh in 1984. The Mac was a huge success, creating enormous value for Apple which was undeterred by both the uncertainty of the fledgling PC market and its initial failure at various changes in the user interface.
“Goodbye 2010, the Year of Austerity” is the headline from Mediapost.com‘s Marketing Daily. And that could be the mantra for many, many companies. Nobody is winning today by trying to save their way to prosperity! As we move into this decade, it is important business leaders realize that the only way to create a strong bottom line (profit) is to develop a strong top line (revenue.) Recommendations:
Never be desperate. Go to where the growth is, and where you can make money. Don’t chase any business, chase the business where you can profitably growth. Be somewhat selective.
Focus efforts on markets you know best. I add that it’s important you understand not to do just what you like, but learn to do what customers VALUE.
Let go of crap, traditions and “playing it safe” actions. Growth is all about learning to do what the market wants, not trying to protect the past – whether processes, products or even customers.
More lemonade making. You can’t grow unless you’re willing to learn from everything around you. We constantly find ourselves holding lemons, but those who prosper don’t give up – they look for how to turn those into desirable lemonade. What is your willingness to learn from the market?
Austerity measures are counterproductive 99% of the time. Efficiency is the biggest obstacle to innovation. You don’t have to be a spendthrift to succeed, but you can’t be a miser investing in only the things you know, and have done before.
Communicate, communicate, communicate. We don’t learn if we don’t share. Developing insight from the environment happens when all inputs are shared, and lots of people contribute to the process.
Get off the downbeat buss. There’s more to success than the power of positive thinking, but it is very hard to gain insight and push innovation when you’re a pessimist. Growth is an opportunity to learn, and do exciting things. That should be a positive for everybody – except the status quo police.
Realizing that you can’t beat the cost-cutting horse forever (in fact, most are about ready for the proverbial glue factory), it’s time to realize that businesses have been under-investing in innovation for the last decade. While GM, Circuit City, Blockbuster, Silicon Graphics and Sun Microsystems have been failing, Apple, Google, Cisco, Netflix, Facebook and Twitter have maintained double-digit growth! Those who keep innovating realize that markets aren’t dead, they’re just shifting! Growth is there for businesses who are willing to innovate new solutions that attract customers and their dollars! For every dead DVD store there’s somebody making money streaming downloads. Businesses simply have to work harder at innovating.
Associate. Work harder at trying to “connect the dots.” Pick up on weak signals, before others, and build scenarios to help understand the impact of these signals as they become stronger. For example, 24x7WallStreet.com clues us in that greater use of mobile devices will wipe out some businesses in “The Ten Businesses The Smartphone Has Destroyed.” But for each of these (and hundreds others over the next few years) there will be a large number of new business opportunities emerging. Just look at the efforts of Foursquare and Groupon and the direction those growth businesses are headed.
Observe. Pay attention to what’s happening in the world, and think about what it means for your (and every other) business. $100/barrel oil has an impact; what opportunity does it create? Declining network TV watching has an impact – how will you leverage this shift? Don’t just wander through the market, and reacting. Figure out what’s happening and learn to recognize the signs of growth opportunities. Use market events to drive being proactive.
Experiment. If you don’t have White Space teams trying figure out new business models, how will you be a future winner? Nobody “lucks” into a growth market. It takes lots of trial and learning – and that means the willingness to experiment. A lot. Plan on experimenting. Invest in it. And then plan on the positive results.
Question. Keep asking “why” until the market participants are so tired they throw you out of the room. Then, invent scenarios and ask “why not” until they throw you out again. Markets won’t tell you what the next big thing is, but if you ask a lot of questions your scenarios about the future will be a whole lot better – and your experimentation will be significantly more productive.
Network. You can’t cast your net too wide in the effort to obtain multiple points of view. Nothing is narrower than our own convictions. Only by actively soliciting input from wide-ranging sources can you develop alternative solutions that have higher value. We become so comfortable talking to the same people, inside our companies and outside, that we don’t realize how we start hearing only reinforcement for our biases. Develop, and expand, your network as fast as possible. Oil and water may be hard to mix, but it blending inputs creates a good salad dressing.
ChiefExecutive.net headlined “2010 CEO Wealth Creation Index Shows a Few Surprises.” Who creates wealth? Included in thte Top 10 list are the CEOs of Priceline.com, Apple, Amazon, Colgate-Palmolive and DeVry. These CEOs are driving industry innovation, and through that growth. This has produced above-average cash flow, and higher valuations for their shareholders. As well as more, and better quality jobs for employees. Meanwhile suppliers are in a position to offer their own insights for ways to grow, rather than constantly battling price discussions.
Who destroys wealth? In the Top 10 list are the CEOs of Dean Foods, Kraft, Computer Sciences (CSC) and Washington Post. These companies have long eschewed innovation. None have introduced any important innovations for over a decade. Their efforts to defend & extend old practices has hurt revenue growth, providing ample opportunity for competitors to enter their markets and drive down margins through price wars. Penny-pinching has not improved returns as revenues faltered, and investors have watched value languish. Employees are constantly in turmoil, wondering what future opportunities may ever exist. Suppliers never discuss anything but price. These are not fun companies to work in, or with, and have not produced jobs to grow our economy.
Any company can grow in 2011. Will you? If you choose to keep doing what you’ve always done – well you shouldn’t plan on improved performance. On the other hand, embracing market shifts and creating an adaptive organization that identifies and launches innovation could well make you into a big winner. Next holiday season when you look at performance results for 2011 they will have more to do with management’s decisions about how to manage than any other factor. Any company can grow, if it does the right things.
I never cease to be startled by the optimism of businesspeople. Why would anybody buy a newspaper company these days? Yet, Crain's reports "Sun Times Sale Appears Near." It's believed the buyers are a group of independent investors, no media experience, led by Mesirow Financial Group.
Ever heard the term "smart money?" This is definitely not "smart money." Just like Cerberus was none to clever to spend billions buying Chrysler a couple of years ago. Shortly before it went bankrupt. Too often, those with lots of money to invest become full of hubris. They believe their experience allows them to "fix" any business. This almost always involves cost cutting – such as letting go any sort of R&D, product development, advertising, marketing and often sales. Assets are sold to raise cash and incur one-time write-offs (with tax deductions) and get rid of depreciation charges. These financiers believe they can "fix" any business if they are "tough" enough to cut enough costs, and get the remaining employees "focused" on specific segments with specific products.
Only we're finding out that just doesn't work. This sort of "company flipping" was prevalent in the early 2000s. But it added no value, and it wasn't long before market investors quit playing. The value of these cost-stripped businesses, with no growth potential, dropped like a stone. Without growth, the business just keeps on shrinking.
Tribune Corporation, parent of newspaper Chicago Tribune, has already filed bankruptcy. But it is expected to wipe out bondholders (lots of it the employee pension plan), and come out of bankruptcy. To a market which in which fewer and fewer people read newspapers, and fewer and fewer advertisers are buying ads. There is too much competition today for too few subscribers, and too few advertisers, in newspapers. Sun Times Media has no major on-line presence, nor television stations. So how will these investors make a return on their acquisition investment?
They won't.
It's hard to give up in business. It's hard to believe that there just isn't demand for buggy whips any more. It's hard to believe that the last remaining buggy whip manufacturers are so competitive, unwilling to give up, that they don't make much profit. We are romanced into believing that "if you really want to be a blacksmith, there's a way to make money at it." We want to believe that somehow if we work hard enough, if we're smart enough, we can "fix" any business. But when the market has shifted, and demand drops, the smart leaders know to say "no." They take their investing to where customers and demand are growing so they can make a much better rate of return.
Invest in the Rapids. Not the Swamp. Companies in the Swamp almost always end up in the Whirlpool. It's hard to think Sun Times Media isn't already there – what with their negative cash flow and very small cash hoard. Unless you know exactly how you're going to add growth to a troubled business, it's best to simply walk away.
