by Adam Hartung | Aug 9, 2012 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership, Web/Tech
Mark Zuckerberg was Time magazine's Person of the Year in December, 2010. He was given that honor because Facebook dominated the emerging social media marketplace, and social media had clearly begun changing how people do things. Despite his young age, Mr. Zuckerberg had created a phenomenon demonstrated by the hundreds of million new Facebook users.
But things have turned pretty rough for the young Mr. Zuckerberg.
- Facebook was pretty much forced, legally, to go public because it had accumulated so many shareholders. The stock hit the NASDAQ with much fanfare in May, 2012 – only to have gone pretty much straight down since. It now trades at about 50% of IPO pricing, and is under constant pressure from analysts who say it may still be overpriced.
- Facebook discovered perhaps 83million accounts were fake (about 9%) unleashing a torrent of discussion that perhaps the fake accounts was a much, much larger number.
- User growth has fallen to some 35% – which is much slower than initial investors hoped. Combined with concerns about fake accounts, there are people wondering if Facebook growth is stalling.
- Facebook has not grown revenues commensurate with user growth, and people are screaming that despite its widespread use Facebook doesn't know how to "monetize" its base into revenues and profits.
- Mobile use is growing much faster than laptop/PC use, and Facebook has not revealed any method to monetize its use on mobile devices – causing concerns that it has no plan to monetize all those users on smartphones and tablets and thus future revenues may decline.
- Zynga, a major web games supplier, announced weak earnings and said its growth was slowing – which affects Facebook because people play Zinga games on Facebook.
- GM, one of the 10 largest U.S. advertisers, publicly announced it was dropping Facebook advertising because executives believed it had insufficient return on investment. Investors now fret Facebook won't bring in major advertisers.
- Google keeps plugging away at competitive product Google+. And while Facebook disappointed investors with its earnings, much smaller competitor Linked-in announced revenues and earnings which exceeded expectations. Investors now worry about competitors dicing up the market and minimalizing Facebook's future growth.
Wow, this is enough to make 50-something CEOs of low-growth, non-tech companies jump with joy at the upending of the hoody-wearing 28 year old Facebook CEO. Zynga booted its Chief Operating Officer and has shaken up management, and not suprisingly, there are analysts now calling for Mr. Zuckerberg to step aside and install a new CEO.
Yet, Mr. Zuckerberg has been wildly successful. Much more than almost anyone else in American business today. He may well feel he needs no advice. But…. what do you suppose Steve Jobs would tell him to do?
Recall that Mr. Jobs was once the young head of Apple, only to be displaced by former Pepsi exec John Sculley — and run out of Apple. As everyone now famously knows, after a string of Apple CEOs led the company to the brink of disaster Mr. Jobs agreed to return and completely turned around Apple making it the most successful tech company of the last decade. Given what we've observed of Mr. Jobs career, and read in his biography, what advice might he give Mr. Zuckerberg?
- Don't give up your job. Not even partly. If you create a "shadow" or "co" CEO you'll be gone soon enough. Lead, quit or make the Board fire you. If you had the vision to take the company this far, why would you quit?
- Nothing is more important than product. Make Facebook's the best in the world. Nothing less will allow a tech company to survive, much less thrive. Don't become so involved with financials and analysts that you lose sight of your #1 job, which is to make the very, very best social media product in the world. Never stop improving and perfecting. If your product isn't obviously superior to other solutions you haven't accomplished your #1 priority.
- Be unique. Make sure your products fulfill needs no one else fulfills – at least not well. Meet unserved and underserved needs so that people talk about your product and what it does – not how much it costs. Make sure that Facebook has devoted, diehard customers that believe your products meet their needs so well they would not consider your competition.
- Don't ask customers what they want – give them what they need. Understand the trends and create future scenarios so you are constantly striving to create a better future, not just improve on history. Never look backward at what you've done, but instead always look forward at creating what noone else has ever done. Push your staff to create solutions that meet user needs so well that you can tell customers why they need your product in ways they never before considered.
- Turn your product releases into a show. Don't just run out new products willy-nilly, or on a random timeline. Make sure you bundle products together and make a big show of each release so you can describe the upgrades, benefits and superiority of what you offer for customers. People need to understand the trends you are meeting, and need to see the future scenario you are creating, and you have to tell them that story or they won't "get it."
- Price for profit. You run a business, not a hobby or not-for-profit society. If you do the product right you shouldn't even be talking about price – so price to make ridiculous margins by industry standards. At Apple, Next and Pixar the products were never the cheapest, but they accomplished what customers needed so well that we could price high enough to make margins that supported additional product development. And you can't remain the best solution if you don't have enough margin to keep developing future products.
- Don't expect products to sell themselves. Be the #1 passionate spokesperson for the elegance and superiority of your products. Never stop beating the drum for the unique capability and superiority of your product, in every meeting, all the time, never ending. People like to "revert to the mean" so you have to keep telling them that isn't good enough – and you have something far superior that will greatly improve their success.
- Never miss an opportunity to compare your products to competition and tell everyone why your products are far better. Don't disparage the competition, but constantly reinforce that you are first, you are ahead of everyone else, you are far better — and the best is yet to come! Competition is everywhere, and listen to the Andy Groves advice "only the paranoid survive." You aren't satisfied with what the competition offers, and customers should not be satisfied either. Every once in a while give people a small glimpse as to the radically different world you see in 3-5 years so they buy what you are selling in order to prepare for that future world.
- Identify key customers that need your solution and SELL THEM. Disney needed Pixar, so we made sure they knew it. Identify the customers who can gain the most from doing business with you and SELL THEM. Turn them into lead customers, obtain their testimonials and spread the word. If GM isn't your target, who is? Find them and sell them, then tell us all how you will build on those early accounts to eventually dominate the market – even displacing current solutions that are more popular. If GM is your target then make the changes you need to make so you can SELL THEM. Everyone wants to do business with a winner, so you must show you are a winner.
- Identify 5 of your competition's biggest customers (at Google, Yahoo, Linked-in, etc.) and make them yours. Demonstrate your solutions are superior with competitive wins.
- Hire someone who can talk to the financial community for you – and do it incredibly well. While you focus on future markets and solutions someone has to tell this story to the financial analysts in their lingo so they don't lose faith (and they are a sacrilegious lot who have no faith.) Keep Facebook out of the forecasting game, but you MUST create and maintain good communication with analysts so you need someone who can tell the story not only with products and case studies but numbers. Facebook is a disruptive innovation company, so someone has to explain why this will work. You blew the IPO road show horribly by showing up at meetings in a hoodie – so now you need to make amends by hiring someone who will give them faith that you know what you're doing and can make it happen.
These are my ideas for what Steve Jobs would tell Mark Zuckerberg. What are yours? What do you think the #1 CEO of the last decade would say to the young, embattled CEO as he faces his first test under fire leading a public company?
by Adam Hartung | Jul 11, 2012 | Current Affairs, Defend & Extend, Disruptions, Innovation, Leadership, Lock-in
The news is not good for U.S. auto companies. Automakers are resorting to fairly radical promotional programs to spur sales. Chevrolet is offering a 60-day money back guarantee. And Chrysler is offering 90 day delayed financing. Incentives designed to make you want to buy a car, when you really don't want to buy a car. At least, not the cars they are selling.
On the other hand, the barely known, small and far from mainstream Tesla motors gave one of its new Model S cars to Wall Street Journal reviewer Dan Neil, and he gave it a glowing testimonial. He went so far as to compare this 4-door all electric sedan's performance with the Lamborghini and Ford GT supercars. And its design with the Jaguar. And he spent several paragraphs on its comfort, quiet, seating and storage – much more aligned with a Mercedes S series.
There are no manufacturer incentives currently offered on the Tesla Model S.
What's so different about Tesla and GM or Ford? Well, everything. Tesla is a classic case of a disruptive innovator, and GM/Ford are classic examples of old-guard competitors locked into sustaining innovation. While the former is changing the market – like, say Amazon is doing in retail – the latter keeps laughing at them – like, say Wal-Mart, Best Buy, Circuit City and Barnes & Noble have been laughing at Amazon.
Tesla did not set out to be a car company, making a slightly better car. Or a cheaper car. Or an alternative car. Instead it set out to make a superior car.
Its initial approach was a car that offered remarkable 0-60 speed performance, top end speed around 150mph and superior handling. Additionally it looked great in a 2-door European style roadster package. Simply, a wildly better sports car. Oh, and to make this happen they chose to make it all-electric, as well.
It was easy for Detroit automakers to scoff at this effort – and they did. In 2009, while Detroit was reeling and cutting costs – as GM killed off Pontiac, Hummer, Saab and Saturn – the famous Bob Lutz of GM laughed at Tesla and said it really wasn't a car company. Tesla would never really matter because as it grew up it would never compete effectively. According to Mr. Lutz, nobody really wanted an electric car, because it didn't go far enough, it cost too much and the speed/range trade-off made them impractical. Especially at the price Tesla was selling them.
Meanwhile, in 2009 Tesla sold 100% of its production. And opened its second dealership. As manufacturing plants, and dealerships, for the big brands were being closed around the world.
Like all disruptive innovators, Tesla did not make a car for the "mass market." Tesla made a great car, that used a different technology, and met different needs. It was designed for people who wanted a great looking roadster, that handled really well, had really good fuel economy and was quiet. All conditions the electric Tesla met in spades. It wasn't for everyone, but it wasn't designed to be. It was meant to demonstrate a really good car could be made without the traditional trade-offs people like Mr. Lutz said were impossible to overcome.
Now Tesla has a car that is much more aligned with what most people buy. A sedan. But it's nothing like any gasoline (or diesel) powered sedan you could buy. It is much faster, it handles much better, is much roomier, is far quieter, offers an interface more like your tablet and is network connected. It has a range of distance options, from 160 to 300 miles, depending up on buyer preferences and affordability. In short, it is nothing like anything from any traditional car maker – in USA, Japan or Korea.
Again, it is easy for GM to scoff. After all, at $97,000 (for the top-end model) it is a lot more expensive than a gasoline powered Malibu. Or Ford Taurus.
But, it's a fraction of the price of a supercar Ferrari – or even a Porsche Panamera, Mercedes S550, Audi A8, BMW 7 Series, or Jaguar XF or XJ - which are the cars most closely matching size, roominess and performance.
And, it's only about twice as expensive as a loaded Chevy Volt – but with a LOT more advantages. The Model S starts at just over $57,000, which isn't that much more expensive than a $40,000 Volt.
In short, Tesla is demonstrating it CAN change the game in automobiles. While not everybody is ready to spend $100k on a car, and not everyone wants an electric car, Tesla is showing that it can meet unmet needs, emerging needs and expand into more traditional markets with a superior solution for those looking for a new solution. The way, say, Apple did in smartphones compared to RIM.
Why didn't, and can't, GM or Ford do this?
Simply put, they aren't even trying. They are so locked-in to their traditional ideas about what a car should be that they reject the very premise of Tesla. Their assumptions keep them from really trying to do what Tesla has done – and will keep improving – while they keep trying to make the kind of cars, according to all the old specs, they have always done.
Rather than build an electric car, traditionalists denounce the technology. Toyota pioneered the idea of extending a gas car into electric with hybrids – the Prius – which has both a gasoline and an electric engine.
Hmm, no wonder that's more expensive than a similar sized (and performing) gasoline (or diesel) car. And, like most "hybrid" ideas it ends up being a compromise on all accounts. It isn't fast, it doesn't handle particularly well, it isn't all that stylish, or roomy. And there's a debate as to whether the hybrid even recovers its price premium in less than, say, 4 years. And that is all dependent upon gasoline prices.
Ford's approach was so clearly to defend and extend its traditional business that its hybrid line didn't even have its own name! Ford took the existing cars, and reformatted them as hybrids, with the Focus Hybrid, Escape Hybrid and Fusion Hybrid. How is any customer supposed to be excited about a new concept when it is clearly displayed as a trade-off; "gasoline or hybrid, you choose." Hard to have faith in that as a technological leap forward.
And GM gave the market Volt. Although billed as an electric car, it still has a gasoline engine. And again, it has all the traditional trade-offs. High initial price, poor 0-60 performance, poor high-end speed performance, doesn't handle all that well, isn't very stylish and isn't too roomy. The car Tesla-hating Bob Lutz put his personal stamp on. It does achieve high mpg – compared to a gasoline car – if that is your one and only criteria.
Investors are starting to "get it."
There was lots of excitement about auto stocks as 2010 ended. People thought the recession was ending, and auto sales were improving. GM went public at $34/share and rose to about $39. Ford, which cratered to $6/share in July, 2010 tripled to $19 as 2011 started.
But since then, investor enthusiasm has clearly dropped, realizing things haven't changed much in Detroit – if at all. GM and Ford are both down about 50% – roughly $20/share for GM and $9.50/share for Ford.
Meanwhile, in July of 2010 Tesla was about $16/share and has slowly doubled to about $31.50. Why? Because it isn't trying to be Ford, or GM, Toyota, Honda or any other car company. It is emerging as a disruptive alternative that could change customer perspective on what they should expect from their personal transportation.
Like Apple changed perspectives on cell phones. And Amazon did about retail shopping.
Tesla set out to make a better car. It is electric, because the company believes that's how to make a better car. And it is changing the metrics people use when evaluating cars.
Meanwhile, it is practically being unchallenged as the existing competitors – all of which are multiples bigger in revenue, employees, dealers and market cap of Tesla – keep trying to defend their existing business while seeking a low-cost, simple way to extend their product lines. They largely ignore Tesla's Roadster and Model S because those cars don't fit their historical success formula of how you win in automobile competition.
The exact behavior of disruptors, and sustainers likely to fail, as described in The Innovator's Dilemma (Clayton Christensen, HBS Press.)
Choosing to be ignorant is likely to prove very expensive for the shareholders and employees of the traditional auto companies. Why would anybody would ever buy shares in GM or Ford? One went bankrupt, and the other barely avoided it. Like airlines, neither has any idea of how their industry, or their companies, will create long-term growth, or increase shareholder value. For them innovation is defined today like it was in 1960 – by adding "fins" to the old technology. And fins went out of style in the 1960s – about when the value of these companies peaked.
by Adam Hartung | May 25, 2012 | Defend & Extend, In the Whirlpool, Leadership, Web/Tech
Things are bad at HP these days. CEO and Board changes have confused the management team and investors alike. Despite a heritage based on innovation, the company is now mired in low-growth PC markets with little differentiation. Investors have dumped the stock, dropping company value some 60% over two years, from $52/share to $22 – a loss of about $60billion.
Reacting to the lousy revenue growth prospects as customers shift from PCs to tablets and smartphones, CEO Meg Whitman announced plans to eliminate 27,000 jobs; about 8% of the workforce. This is supposedly the first step in a turnaround of the company that has flailed ever since buying Compaq and changing the company course into head-to-head PC competition a decade ago. But, will it work?
Not a chance.
Fixing HP requires understanding what went wrong at HP. Simply, Carly Fiorina took a company long on innovation and new product development and turned it into the most industrial-era sort of company. Rather than having HP pursue new technologies and products in the development of new markets, like the company had done since its founding creating the market for electronic testing equipment, she plunged HP into a generic manufacturing war.
Pursuing the PC business Ms. Fiorina gave up R&D in favor of adopting the R&D of Microsoft, Intel and others while spending management resources, and money, on cost management. PCs offered no differentiation, and HP was plunged into a gladiator war with Dell, Lenovo and others to make ever cheaper, undifferentiated machines. The strategy was entirely based upon obtaining volume to make money, at a time when anyone could buy manufacturing scale with a phone call to a plethora of Asian suppliers.
Quickly the Board realized this was a cutthroat business primarily requiring supply chain skills, so they dumped Ms. Fiorina in favor of Mr. Hurd. He was relentless in his ability to apply industrial-era tactics at HP, drastically cutting R&D, new product development, marketing and sales as well as fixating on matching the supply chain savings of companies like Dell in manufacturing, and WalMart in retail distribution.
Unfortunately, this strategy was out of date before Ms. Fiorina ever set it in motion. And all Mr. Hurd accomplished was short-term cuts that shored up immediate earnings while sacrificing any opportunities for creating long-term profitable new market development. By the time he was forced out HP had no growth direction. It's PC business fortunes are controlled by its suppliers, and the PC-based printer business is dying. Both primary markets are the victim of a major market shift away from PC use toward mobile devices, where HP has nothing.
HPs commitment to an outdated industrial era supply-side manufacturing strategy can be seen in its acquisitions. What was once the world's leading IT services company, EDS, was bought in 2008 after falling into financial disarray as that market shifted offshore. After HP spent nearly $14B on the purchase, HP used that business to try defending and extending PC product sales, but to little avail. The services group has been downsized regularly as growth evaporated in the face of global trends toward services offshoring and mobile use.
In 2009 HP spent almost $3B on networking gear manufacturer 3Com. But this was after the market had already started shifting to mobile devices and common carriers, leaving a very tough business that even market-leading Cisco has struggled to maintain. Growth again stagnated, and profits evaporated as HP was unable to bring any innovation to the solution set and unable to create any new markets.
In 2010 HP spent $1B on the company that created the hand-held PDA (personal digital assistant) market – the forerunner of our wirelessly connected smartphones – Palm. But that became an enormous fiasco as its WebOS products were late to market, didn't work well and were wholly uncompetitive with superior solutions from Apple and Android suppliers. Again, the industrial-era strategy left HP short on innovation, long on supply chain, and resulted in big write-offs.
Clearly what HP needs is a new strategy. One aligned with the information era in which we live. Think like Apple, which instead of chasing Macs a decade ago shifted into new markets. By creating new products that enhanced mobility Apple came back from the brink of complete failure to spectacular highs. HP needs to learn from this, and pursue an entirely new direction.
But, Meg Whitman is certainly no Steve Jobs. Her career at eBay was far from that of an innovator. eBay rode the growth of internet retailing, but was not Amazon. Rather, instead of focusing on buyers, and what they want, eBay focused on sellers – a classic industrial-era approach. eBay has not been a leader in launching any new technologies (such as Kindle or Fire at Amazon) and has not even been a leader in mobile applications or mobile retail.
While CEO at eBay Ms. Whitman purchased PayPal. But rather than build that platform into the next generation transaction system for web or mobile use, Paypal was used to defend and extend the eBay seller platform. Even though PayPal was the first leader in on-line payments, the market is now crowded with solutions like Google Wallets (Google,) Square (from a Twitter co-founder,) GoPayment (Intuit) and Isis (collection of mobile companies.)
Had Ms. Whitman applied an information-era strategy Paypal could have been a global platform changing the way payment processing is handled. Instead its use and growth has been limited to supporting an historical on-line retail platform. This does not bode well for the future of HP.
HP cannot save its way to prosperity. That never works. Try to think of one turnaround where it did – GM? Tribune Corp? Circuit City? Sears? Best Buy? Kodak? To successfully turn around HP must move – FAST – to innovate new solutions and enter new markets. It must change its strategy to behave a lot more like the company that created the oscilliscope and usher in the electronics age, and a lot less like the industrial-era company it has become – destroying shareholder value along the way.
Is HP so cheap that it's a safe bet. Not hardly. HP is on the same road as DEC, Wang, Lanier, Gateway Computers, Sun Microsystems and Silicon Graphics right now. And that's lousy for investors and employees alike.
by Adam Hartung | Apr 14, 2012 | Current Affairs, Leadership, Transparency, Web/Tech
Apple's amazing increase in value is more than just a "rah-rah" story for a turnaround. Fundamentally, Apple is telling everyone – globally – that there has been a tectonic shift in markets. And if leaders don't understand this shift, and incorporate it into their strategy and tactics, their organizations are going to have a very difficult future.
Recently Apple's value peaked at $600B. Yes, that is an astounding number, for it reflects not only 50% greater value than the oil giant Exxon/Mobil (~$390B), but more than the entire value of the stock markets in Spain, Greece and Portugal combined!
Source: Business Insider.com
This astounding valuation causes many to be reticent about owning Apple shares, for it seems implausible that any one company – especially a tech company with so few employees – could be worth so much.
Unless we look at this information in the context of a major, global economic shift. That what the world values has changed dramatically. And that what investors are telling business (and government) leaders is that in a globalized, fast paced world value is based upon what you know, when you know it – in other words information. Not land, buildings or the ability to make things.
Three hundred years ago the wealthiest people in the world owned land. Wars were fought for centuries to control land. Kings owned land, and controlled everything on the land while capturing the value of everything produced on that land. As changes came along, reducing the role of kings, land barons became the wealthiest people in the world. In an agrarian economy, where most human resources (and all others for that matter) were deployed in food production owning land was the most valuable thing on the planet.
But then some 120 years ago, along came the industrial reveolution. Suddenly, productivity rose dramatically by applying new machines to jobs formerly performed by humans. With this shift, value changed. The great industrialists were able to capture the value of greater productivity – making people like Cyrus McCormick, Henry Ford and Andrew Carnegie the wealthiest of the wealthy. Worth more than most states, and many foreign countries.
The age of manufacturing was based upon the productivity of machines and the application of industrial processes to what formerly was hand labor. Creating tools – from entignes to automobiles to airplanes – created great wealth. Knowing how to make these machines, and making them, created enormous value. And companies like General Motors, General Dynamics and General Electric were worth much more than the land upon which food was produced. And the commodity suppliers, like Exxon/Mobil, feeding industrial companies captured huge value as well.
By the middle 1900s America's farmers were forced to create ever larger farms to remain in business, and were constantly begging for government subsidies to stay alive via price controls (parity programs) and land "set-asides" run by the Agriculture Department. By the 1980s family farms going broke by the thousands, agricultural land values plummeted and the ability to create value by growing or processing food was a struggle. Across the developed world, wealth shifted into the hands of industrial companies from landowners.
Sometime in the 1990s the world shifted again, and that's what the chart above shows us. Countries with little or no technology companies – no information economy – cannot create value. On the other hand, companies that can drive new levels of productivity via the creation, management, use and sale of information can create enormous value.
Think about the incredible shift that has happened in retail. America's largest and most successful retailer from the 1900 turn of the century well into the 1960s was Sears. In an industry that long equated success with "location, location, location" Sears has had, and continues to control, enormous amounts of land and buildings. But the value of Sears has declined like a stone pitched off a bridge, now worth only $6B (1% the Apple value) despite all that real estate!
Simultaneously, America's largest retailer Wal-Mart has seen its value go nowhere for over a decade, despite its thousands of locations that span every state. Even though Wal-Mart keeps adding stores, and enlarging stores, adding more and more land and buildings to its "asset" base the company's customer base, sales and value are mired, unable to rise.
Yet, Amazon – which has no land, and almost no buildings – has used the last 20 years to go from start up to an $86B valuation – doing much better for shareholders than its traditional, industrial thinking competitors. In the last 5 years, Amazon's value has roughly quadrupled!
Source: Yahoo Finance
Yes, Amazon is a retailer. But the company has learned that applying an industrial strategy is far less valuable than applying an information strategy. As an internet leader, first with most browser formats on PCs and smartphones, Amazon has reached far more new customers than any traditional real-estate focused company. By launching Kindle Amazon focused on the information in books, rather than the format (print) revolutionizing the market and capturing enormous value.
By launching Kindle Fire Amazon takes information one step further, making it possible for customers to access new products faster, order faster and build their own retail world without ever going to a building. By becoming a tech company, Amazon is clearly well on the way to dominating retail, as Sears falls into irrelevancy and almost surely bankruptcy, and Wal-Mart stalls under the overhead of all that land, buildings and vast number of minimum-wage, uninsured employees.
We now must realize that value is not created by what accountants have long called "hard assets" – land, buildings and equipment. In fact, the 2 great U.S. recessions since 2000 have demonstrated to everyone that there is no security in these – the value can decline, decline fast, and decline far. Just because these things are easy to see and count does not insure value. They can easily be worth less than they cost to make – or own.
Successful competition in 2012 (and going forward) requires businesses know about customers, products and have the ability to supply solutions fast with great reach. Winning is about what you know, knowing it early, acting upon the information and then being able to disseminate that solution fast to those who have emerging needs.
Which is why you have to be excited about the brilliant move Facebook made to acquire Instagram last week. In one fast, quick step Facebook bought the ability to easily and effectively provide mobile image solutions – across any application – to millions of existing users. Something that every single person, and business, on the planet is either doing now, or will be doing very soon.
Source: Wired
On a cost-per-existing-customer basis, Facebook stole Instagram. And that's before Facebook spreads out the solution to the rest of its 780million users! Forget about how many employees Instagram has, or its historical revenues or its assets. In an innovation economy, if you have a product that 35million people hear about and start using in less than a year, you have something very valuable!
Kudos go to Mark Zuckerberg as CEO, and his team, for making this acquisition so quickly. Before Instagram had a chance to hire bankers, market itself and probably raise its value 10x. That's why Mr. Zuckerberg was Time Magazine's "Man of the Year" at the start of 2011 – and why he's been able to create so much more value for his shareholders than the CEOs of industrial companies – like say GE.
Going forward, no company can plan to survive with an industrial strategy. That approach, and those rules, simply don't create high returns. To be successful you MUST become a tech company. And while this may not feel comfortable, it is reality. Every business must shift, or die.
by Adam Hartung | Jul 14, 2011 | Investing, Leadership, Trends
When you go after competitors, does it more resemble a gladiator war – or a David vs. Goliath battle? The answer will likely determine your profitability. As a company, and as an investor.
After they achieve some success, most companies fall into a success formula – constantly tyring to improve execution. And if the market is growing quickly, this can work out OK. But eventually, competitors figure out how to copy your formula, and as growth slows many will catch you. Just think about how easily long distance companies caught the monopolist AT&T after deregulation. Or how quickly many competitors have been able to match Dell’s supply chain costs in PCs. Or how quickly dollar retailers – and even chains like Target – have been able to match the low prices at Wal-Mart.
These competitors end up in a gladiator war. They swing their price cuts, extended terms and other promotional weapons, leaving each other very bloody as they battle for sales and market share. Often, one or more competitors end up dead – like the old AT&T. Or Compaq. Or Circuit City. These gladiator wars are not a good thing for investors, because resources are chewed up in all the fighting, leaving no gains for higher dividends – nor any stock price appreciation. Like we’ve seen at Wal-Mart and Dell.
The old story of David and Goliath gives us a different approach. Instead of going “toe-to-toe” in battle, David came at the fight from a different direction – adopting his sling to throw stones while he remained safely out of Goliath’s reach. After enough peppering, he wore down the giant and eventually popped him in the head.
And that’s how much smarter people compete.
- When everyone was keen on retail stores to rent DVDs, Netflix avoided the gladiator war with Blockbuster by using mail delivery.
- While United, American, Continental, Delta, etc. fought each other toe-to-toe for customers in the hub-and-spoke airline wars (none making any money by the way) Southwest ferried people cheaply between smaller airports on direct flights. Southwest has made more money than all the “major” airlines combined.
- While Hertz, Avis, National, Thrifty, etc. spent billions competing for rental car customers at airports Enterprise went into the local communities with small offices, and now has twice their revenues and much higher profitability.
- When internet popularity started growing in the 1990s Netscape traded axe hits wtih Microsoft and was destroyed. Another browser pioneer, Spyglass, transitioned from PCs to avoid Microsoft, and started making browsers for mobile phones, TVs and other devices creating billions for investors.
- While GM, Ford and Chrysler were in a grinding battle for auto customers, spending billions on new models and sales programs, Honda brought to market small motorcycles and very practical, reliable small cars. Honda is now very profitable in several major markets, while the old gladiators struggle to survive.
As an investor, we should avoid buying stocks of companies, and management teams that allow themselves to be drug into gladiator wars. No matter what promises they make to succeed, their success is uncertain, and will be costly to obtain. What’s worse, they could win the gladiator war only to find themselves facing David – after they are exhausted and resources are spent!
- Research in Motion became embroiled in battles with traditional cell phone manufacturers like Nokia and Ericdson, and now is late to the smartphone app market – and with dwindling resources.
- Motorola fought the gladiator war trying to keep Razr phones competitive, only to completely miss its early lead in smartphones. Now it has limited resources to develop its Android smart phone line.
- Is it smart for Google to take on a gladiator war in social media against Facebook, when it doesn’t seem to have any special tool for the battle? What will this cost, while it simultaneously fights Apple in Android wars and Microsoft for Chrome sales?
On the other hand, it’s smart to invest in companies that enter growth markets, but have a new approach to drive customer conversion. For example, Zip Car rents autos by the hour for urban users. Most cars are very high mileage, which appeals to customers, but they also are pretty inexpensive to buy. Their approach doesn’t take-on the traditional car rental company, but is growing quite handily.
This same logic applies to internal company investments as well. Far too often the corporate reource allocation process is designed to fight a gladiator war. Constantly spending to do more of the same. Projects become over-funded to fight battles considered “necessity,” while new projects are unfunded despite having the opportunity for much higher rates of return.
In 2000, Apple could have chosen to keep pouring money into the Mac. Instead it radically cut spending, reduced Mac platforms, and started looking for new markets where it could bring in new solutions. IPods, iTunes, IPhones, iPads and iCloud are now driving growth for the company – all new approaches that avoided gladiator battles with old market competitors. Very profitable growth. Apple has enough cash on hand to buy every phone maker, except Samsung – or Apple could buy Dell – if it wanted to. Apple’s market cap is worth more than Microsoft and Intel combined.
If you want to make more money, it’s best to avoid gladiator wars. They are great spectator events – but terrible places to be a participant. Instead, set your organization to find new ways of competing, and invest where you are doing what competitors are not. That will earn the greatest rate of return.
