Think Young! Be like Cisco, Netflix and Amazon.com!

by | Feb 3, 2011 | Defend & Extend, eBooks, In the Rapids, In the Swamp, Innovation, Leadership, Lock-in, Openness


Summary:

  • Company size is irrelevant to job creation
  • New jobs are created by starting new businesses that create new demand
  • Most leaders behave defensively, trying to preserve the old business
  • But success comes from acting like a start-up and creating new opportunities
  • Companies need to do more future-based planning that can change the competitive landscape and generate more growth, jobs and higher rates of return

A trio of economists just published "Who Creates Jobs? Small vs. Large vs. Young" at the National Bureau of Economic Research. For years businesspeople have said that the majority of jobs were created by small companies, therefore we should provide loans and other incentives for small business.  At the same time, we all know that large companies employee millions of people, and therefore they have received benefits to keep their companies going even in tough times – like the recent bailouts of GM and Chrysler.  But what these researchers discovered was that size was immaterial to job creation – and this ages-old debate is really irrelevant!

Digging deeper into the data, they discovered as reported in the New York Times, "To Create Jobs, Nurture Start-Ups."  Regardless of size, most businesses over time get stuck defending their original success formula. What helped them initially grow becomes locked-in by behavioral norms, structural decision-making processes and a business model cost structure that may be tweaked, but rarely changed. Best practices serve to focus management on defending that business, even as market shifts lower the industry growth rate and profits.  It doesn't take long before defensive tactics dominate, and as the leaders attempt to preserve historical practices there are no new jobs created.  Usually quite the opposite happens as cost cutting dominates, leading to outsourcing and lay-offs reducing the workforce. 

Look no further than most members of the Dow Jones Industrial Average to witness the lack of jobs created by older companies desperately trying to defend their historical business model. But what we've failed to realize is how the same management practices dominate small business as well! Most plumbing suppliers, window installers, insurance agencies, restaurants, car dealers, nurseries, tool rental shops, hair cutters and pet sitters spend all their time just trying to keep the business going.  They look no further than what they did yesterday when making business decisions.  Few think about growth, preferring instead to just keep the business the same – maybe by the owner/operator's father 3 decades ago!  They don't create any new jobs, and are probably struggling to maintain existing employment as computers and other business aids reduce the need for labor – while competition keeps whacking away at historical margins.

So if you want to create jobs, throwing incentives at General Electric, General Motors or General Dynamics is not likely to get you very far.  And asking the leaders of those companies what it takes to get them to create jobs is a wasted conversation.  They don't know, and haven't really thought about the question.  Leaders of almost all big organizations are just trying to make next quarter's profit projection any way they can – and that doesn't involve new hiring.  After a lifetime of cutting costs and preservation behavior, how is Jeffrey Immelt of GE supposed to know anything about creating new businesses which leads to job creation? 

Nor is offering loans or grants to the millions of existing small businesses who are just trying to keep the joint running going to make any difference.  Their psychology is not about offering new products or services, and banks sure don't want to take the risk of investing in new experimental behaviors.  They have little, if any, interest in figuring out how to grow when most of their attention is trying to preserve the storefront in the face of new competitors on-line, or from India, China or Vietnam! 

To create jobs you have to focus on growth – not defense. And that takes an entirely different way of thinking.  Instead of thinking about the past you have to be obsessive about the future, and how you can do things differently!  Most of the time, business leaders don't think this way until their backs are up against the wall, looking at potential failure! For example, how Mr. Gerstner turned around IBM when he moved the company away from mainframe obsession and pointed the company toward services.  Or when Steve Jobs redirected Apple away from its Mac obsession and pushed the company into new markets for music/entertainment and smartphones.  Unfortunately, these stories are so rare that we tend to use them for a decade (or even 2 decades)! 

For years Cisco said it would obsolete its own products, and by implementing that direction Cisco has grown year after year in the tech world, where flame-outs abound (just look at what happened to Sun Microsystems, Silicon Graphics, AOL and rapidly Yahoo!) Look at how Netflix has pushed Blockbuster aside by expanding its business from snail-mail to downloads.  Or how Amazon.com has found explosive growth by changing the way we read books, now selling more Kindle products than printed.  Rather than thinking about how each could do more of what they always did, fearing cannibalization of the "core business," they are aiding destruction of their historical business by implementing the newest technology and solution before some start-up beats them to the punch!

As you enter 2011 and prepare for 2012, is your planning based upon doing more of what your business has always done?  A start up has no last year, so its planning is based entirely on views of the future.  Are you fixated on improving your operations?  A start up has no operations, so it is fixated on competitors to figure out how it can meet market needs better, and use "fringe" solutions in new ways that competitors have not yet adopted.  Are you hoping that market shifts slow, or stop, so revenue, market share and profit slides abate? A start up is looking for ways to disrupt the marketplace to it can grab high growth from existing solutions while generating new demand by meeting unmet needs. Are you trying to preserve resources in order to defend your business from competitors? A start up is looking for places to experiment with new solutions and figure out how to change the competitive landscape while growing revenues and profits.

If you want to thrive you have to grow.  To grow, you have to think young!  Be willing to plan for the future, like Apple did when it moved into new markets for music downloads.  Be willing to find competitive holes and fill them with new technology, like Netflix.  Don't fear market changes – create them like Cisco does with new solutions that obsolete previous generations.  And keep testing new ways to expand the market, even as you see intense competition in historical markets being attacked by new competitors.  That is the only way to create value, and generate new jobs!

 

Size isn’t relevant – GM, Circuit City, Dell, Microsoft, GE

by | Dec 17, 2010 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, Leadership, Web/Tech


Summary:

  • Many people think it is OK for large companies to grow slowly
  • Many people admire caretaker CEOs
  • In dynamic markets, low-growth companies fail
  • It is harder to generate $1B of new revenue, than grow a $100B company by $10B
  • Large companies have vastly more resources, but they squander them badly
  • We allow large company CEOs too much room for mediocrity and failure
  • Good CEOs never lose a growth agenda, and everyone wins!

“I may just be your little rent collector Mr. Potter, but that George Bailey is making quite a bit happen in that new development of his.  If he keeps going it may just be time for this smart young man to go asking George Bailey for a job.” From “It’s a Wonderful Life“ an employee of the biggest employer in mythical Beford Falls talks about the growth of a smaller competitor.

My last post gathered a lot of reads, and a lot of feedback.  Most of it centered on how GE should not be compared to Facebook, largely because of size differences, and therefore how it was ridiculous to compare Jeff Immelt with Mark Zuckerberg.  Many readers felt that I overstated the good qualities of Mr. Zuckerberg, while not giving Mr. Immelt enough credit for his skills managing “lower growth businesses”  in a “tough economy.” Many viewed Mr. Immelt’s task as incomparably more difficult than that of managing a high growth, smaller tech company from nothing to several billion revenue in a few years.  One frequent claim was that it is enough to maintain revenue in a giant company, growth was less important. 

Why do so many people give the CEOs of big companies a break? Given that they make huge salaries and bonuses, have fantastic perquesites (private jets, etc.), phenominal benefits and pensions, and receive remarkable payouts whether they succeed or fail I would think we’d have very high standards for these leaders – and be incensed when their performance is sub-par.

Facebook started with almost no resources (as did Twitter and Groupon).  Most leaders of start-ups fail.  It is remarkably difficult to marshal resources – both enough of them and productively – to grow a company at double digit rates, produce higher revenue, generate cash flow (or loans) and keep employees happy.  Growing to a billion dollars revenue from nothing is inexplicably harder than adding $10B to a $100B company. Compared to Facebook, GE has massive resources.  Mr. Immelt entered the millenium with huge cash flow, huge revenues, and an army of very smart employees.  Mr. Zuckerberg had to come out of the blocks from a standing start and create ALL his company’s momentum, while comparatively Mr. Immelt took on his job riding a bullet out of a gun!  GE had huge momentum, a low cost of capital, and enough resources to do anything it wanted.

Yet somehow we should think that we don’t have as high expectations from Mr. Immelt as we do Mr. Zuckerberg?  That would seem, at the least, distorted. 

In business school I read the story of how American steel manufacturers were eclipsed by the Japanese.  Ending WWII America had almost all the steel capacity.  Manufacturers raked in the profits.  Japanese and German companies that were destroyed had to rebuild, which they progressively did with more efficient assets.  By the 1960s American companies were no longer competitive.  Were we to believe that having their industrial capacity destroyed somehow was a good thing for the foreign competitors?  That if you want to improve your competitiveness (say in autos) you should drop a nuclear bomb on the facilities (some may like that idea – but not many who live in Detroit I dare say.)  In reality the American leaders simply refused to invest in new technologies and growth markets, allowing competitors to end-run them.  The American leaders were busy acting as caretakers, and bragging about their success, instead of paying attention to market shifts and keeping their companies successful!

Big companies, like GE, are highly advantaged.  They not only have brand, and market position, but cash, assets, employees and vendors in position to help them be even more successful!  A smart CEO uses those resources to take the company into growth markets where it can grow revenues, and profits, faster than the marketplace.  For example Steve Jobs at Apple, and Eric Schmidt at Google have found new markets, revenues and cash flow beyond their original “core” markets.  That’s what Mr. Welch did as predecessor to Mr. Immelt.  He didn’t so much take advantage of a growth economy as help create it! Unfortunately, far too many large company CEOs squander their resources on low rate of return projects, trying to defend their existing business rather than push forward. 

Most big companies over-invest in known markets, or technologies, that have low growth rates, rather than invest in growth markets, or technologies they don’t know as well.  Think about how Motorola invented the smart phone technology, but kept investing in traditional cellular phones.  Or Sears, the inventor of “at home shopping” with catalogues closed that division to chase real-estate based retail, allowing Amazon to take industry leadership and market growth.  Circuit City ended up investing in its approach to retail until it went bankrupt in 2010 – even though it was a darling of “Good to Great.”  Or Microsoft, which launched a tablet and a smart phone, under leader Ballmer re-focused on its “core” operating system and office automation markets letting Apple grab the growth markets with R&D investments 1/8th of Microsoft’s.  These management decisions are not something we should accept as “natural.” Leaders of big companies have the ability to maintain, even accelerate, growth.  Or not.

Why give leaders in big companies a break just because their historical markets have slower growth?  Singer’s leadership realized women weren’t going to sew at home much longer, and converted the company into a defense contractor to maintain growth.  Netflix converted from a physical product company (DVDs) into a streaming download company in order to remain vital and grow while Blockbuster filed bankruptcy.  Apple transformed from a PC company into a multi-media company to create explosive growth generating enough cash to buy Dell outright – although who wants a distributor of yesterday’s technology (remember Circuit City.)  Any company can move forward to be anything it wants to be.  Excusing low growth due to industry, or economic, weakness merely gives the incumbent a pass.  Good CEOs don’t sit in a foxhole waiting to see if they survive, blaming a tough battleground, they develop strategies to change the battle and win, taking on new ground while the competition is making excuses.

GM was the world’s largest auto company when it went broke.  So how did size benefit GM?  In the 1980s Roger Smith moved GM into aerospace by acquiring Hughes electronics, and IT services by purchasing EDS – two remarkable growth businesses.  He “greenfielded” a new approach to auto manufucturing by opening the wildly successful Saturn division.  For his foresight, he was widely chastised.  But “caretaker” leadership sold off Hughes and EDS, then forced Saturn to “conform” to GM practices gutting the upstart division of its value.  Where one leader recognized the need to advance the company, followers drove GM to bankruptcy by selling out of growth businesses to re-invest in “core” but highly unprofitable traditional auto manufacturing and sales.  Meanwhile, as the giant failed, much smaller Kia, Tesla and Tata are reshaping the auto industry in ways most likely to make sure GM’s comeback is short-lived.

CEOs of big companies are paid a lot of money.  A LOT of money.  Much more than Mr. Zuckerberg at Facebook, or the leaders of Groupon and Netflix (for example).  So shouldn’t we expect more from them?  (Marketwatch.com “Top CEO Bonuses of 2010“) They control vast piles of cash and other resources, shouldn’t we expect them to be aggressively investing those resources in order to keep their companies growing, rather than blaming tax strategies for their unwillingness to invest?  (Wall Street Journal “Obama Pushes CEOs on Job Creation“) It’s precisely because they are so large that we should have high expectations of big companies investing in growth – because they can afford to, and need to!

At the end of the day, everyone wins when CEOs push for growth.  Investors obtain higher valuation (Apple is worth more than Microsoft, and almost more than 10x larger Exxon!,) employees receive more pay (see Google’s recent 10% across the board pay raise,) employees have more advancement opportunities as well as personal growth, suppliers have the opportunity to earn profits and bring forward new innovation – creating more jobs and their own growth – rather than constantly cutting price. Answering the Economist in “Why Do Firms Exist?” it is to deliver to people what they want.  When companies do that, they grow.  When they start looking inward, and try being caretakers of historical assets, products and markets then their value declines.

Can Mr. Zuckerberg run GE?  Probably.  I’d sure rather have him at the helm of GM, Chrysler, Kraft, Sara Lee, Motorola, AT&T or any of a host of other large companies that are going nowhere the caretaker CEOs currently making excuses for their lousy performance.  Think what the world would be like if the aggressive leaders in those smaller companies were in such positions?  Why, it might just be like having all of American business run the way Steve Jobs, Jeff Bezos and John Chambers have led their big companies.  I struggle to see how that would be a bad thing.

It’s About the Economy, Stupid – Lessons from the election

by | Nov 4, 2010 | Current Affairs, General, Innovation, Leadership, Web/Tech


Summary:

  • Voters whipsawed from throwing out the Republicans 2 year ago to throwing out Democrats this election
  • Americans are frustrated by a no-growth economy
  • Recent government programs have been ineffective at stimulating growth, despite horrific expense
  • Lost manufacturing/industrial jobs will never return
  • America needs new government programs designed to create information-era jobs
  • Education, R&D, Product Development and Innovation investment programs are desperately needed

“It’s the Economy, Stupid” was the driving theme used during Bill Clinton’s winning 1992 Presidential campaign.  Following the dramatic changes produced in Tuesday’s American elections, this refrain seems as applicable as ever.  Two years ago Americans changed leadership in the Presidency, Congress and the Senate out of disgust with the financial crisis and lousy economy.  Now, Congress has shifted back the other direction – and the Senate came close – for ostensibly the same, ongoing reason. What seems pretty clear is that Americans are upset about their economy – and in particular they are worried about jobs and incomes.

So why can’t the politicians seem to get it right?  After all, economic improvement allowed Bill Clinton to retain the Presidency in 1996.  If smart politicians know that Americans are “voting with their pocketbooks” these days, you’d think they would be doing things to improve the economy and jobs.  Wasn’t that what the big big bailouts and government spending programs of the last 4 years were supposed to do? 

What we can now see, however, is that programs which worked for FDR, or Ronald Reagan and other politicians in the late 1900s aren’t working these days.  Everything from Great Depression Keynesians to Depression retreading Chicago School monatarists to Laffer Curve idealists have offered up and applied programs the last 8 years intended to stimulate growth.  But so far, the needle simply hasn’t moved.  Recognizing that the economy is sick, looking at the symptoms of weak jobs and high unemployment, could it be that the country’s leaders are trying to apply old medicine when the illness has substantially changed? 

What’s missed by so many Americans today – populace and politicians – is that the 2010 economy is nothing like that of the 1940s; and bares little resemblance to the economy as recently as the 1990s.  Scan these interesting facts reported by BusinessInsider.com:

These lost jobs are NEVER coming back.  The American economy has fundamentally shifted, and it will never go back to the way it was.  Clocks don’t run backward. 

In 1910 90% of Americans were working in agriculture.  By 1970 that proportion had dropped to 10%.  Had American policy in the last century remained fixated on protecting farming jobs the country would have failed.  Only by shifting to industrialization (manufacturing) was America able to continue its growth – and create all those new industrial jobs.  Now American policy has to shift again if it wants to start creating new jobs.  We have to create information-era jobs.

But government programs applied the last 12 years were all retreaded industrial era ideas (implemented by Boomer-era leaders educated in those programs.)  They were intended to grow industrial jobs by spurring supply and demand for “things.”  Lower interest rates were intended to increase manufacturing investment and generate more supply at lower cost.  These jobs were expected to create more service jobs (retailers, schools, plumbers, etc.) supporting the manufacturing worker.  But today, supply isn’t coming from America.  Nobody is going to build a manufacturing plant in America when gobs of capacity is shuttered and available, and costs are dramatically lower elsewhere with plentiful skill supply.  We can keep GM and Chrysler on life support, but there is no way these companies will grow jobs in face of a global competitive onslaught with very good products, new innovations and lower cost.  Cheap interest rates make little difference – no matter what the cost to taxpayers.   

Other old-school programs focused on increasing demand. TARP, cheap consumer lending, tax cuts, rebates and subsidies were intended to encourage people to buy more stuff.  Consumers were expected to take advantage of the increased supply and spend the cash, thus reviving the economy.  But today, many people are busy paying down debt or saving for retirement.  Further, even when they do spend money the goods simply aren’t made in America.  If consumers (including businesses) buy 10 Dell computers or 20 uniform shirts it creates no new American jobs. Spurring demand doesn’t matter when “things” are made elsewhere.  In fact, it benefits the offshore economies of China and other manufacturing centers more than the USA!

If this new crop of politicians, and the President, want to keep their jobs in the next election they had better face facts.  The American economy has shifted – and it will take very different policies to revive it.  New American jobs will not be created by thinking we’ll will make jeans, baby food or baseballs, so applying old approaches and focusing on increasing supply and demand will not work.  America is no longer an industrial economy.

The jobs at Dell are engineering, design and managerial.  Hiring organizations like Google, Apple, Cisco and Tesla are adding workers to generate, analyze, interpret and gain insight from information.  Jobs today are based upon brain work, not brawn.  An old American folk song told the story about John Henry’s inability to keep up with the automated stake driving machine – and showed all Americans that the industrial era made conventional, uneducated hand-labor of little value.  Now, computers, networks and analytics are making the value of manufacturing work low value.  Because we are in an information economy, rather than an industrial one, pursuing growth of industrial jobs today is as misguided as trying to preserve manual labor and farm jobs was in the 1960s and 1970s.

Directionally, American politicians need to implement programs that will create the kind of jobs that are valuable, and likely, in America.  Incenting education, to improve the skills necessary to be productive in this economy, is fairly obvious.  Instead of cutting education benefits, raise them to remain a world leader in secondary education and produce a highly qualified workforce of knowledge workers. Support universities struggling in the face of dwindling state tax funds.  Subsidize masters and PhD candidates who can create new products and lead companies into new directions, and do things to encourage their hiring by American companies.

Investments in R&D and product development are likewise obvious.  America’s growth companies are driving innovation; bringing forward world-demanded products like digital music, on-line publications, global networks, real-time feedback on ad links, ways to purify water – and in the future trains, planes and automobiles that need no fossil fuels or drivers (just to throw out a not-unlikely scenario.)  For every dollar thrown at GM trying to keep lower-skilled manufacturing jobs alive there would be a 10x gain if those dollars were spent on information era jobs in innovation.  America doesn’t need to preserve jobs for high school graduates, it must create jobs for the millions of college grads (and post-graduate degree holders) working today as waiters and grocery cashiers.  Providing incentives for angel investing, venture capital and other innovation investment will have a rapid, immediate impact on job creation in everything from IT to biotech, nanotech, remote education and electric cars.

A stalled economy is a horrible thing.  Economies, like companies, thrive on growth!  Everyone hurts when tax receipts stall, government spending rises and homes go down in value while inflationary fears grow.  And Americans keep saying they want politicians to “fix it.”  But the “fix” requires thinking about the American economy differently, and realizing that programs designed to preserve/promote the old industrial economy – by saving banks that invest in property, plant and equipment, or manufacturers that have no money for new product development – will NOT get the job done.  It’s going to take a different approach to drive economic growth and job creation in America, now that the shift has occurred.  And the sooner politicians understand this, the better!

The Myth of “Maturity” – AT&T and Microsoft

by | Oct 27, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Web/Tech


Summary:

  • We like to think of "mature" businesses as good
  • AT&T was a "mature" business, yet it failed
  • "Maturity" leads to inward focus, and an unwillingness to adjust to market shifts
  • Microsoft is trying to reposition itself as a "mature" company
  • Despite its historical strengths, Microsoft has astonishing parallels to AT&T
  • Growth is less risky than "maturity" for investors, employees and customers

Why doesn't your business grow like Apple or Google?  Is it because you think of your business, or the marketplace you serve, as "mature?" Quite a euphanism, maturity.  It sounds so good.  How could being "mature" be bad?  As children we strive to be "mature." The leader is usually the most "mature" person in the group.  Those who like good art have "mature" taste. Surely, we should want to be "mature." And we should want our businesses to reach "maturity" and have "mature" leaders who don't take unnecessary risks.  Once "mature" the business should be safe for investors, employees, suppliers and customers.

That was probably what the folks at AT&T thought.  When judge Greene broke up AT&T in 1984 the company had a near monopoly on long-distance.  AT&T was a "mature" company in a "mature" telephone industry.  It appeared as though all AT&T had to do was keep serving its customers, making regular improvements to its offering, to perpetually maintain its revenue, jobs and profitability.  A very "mature" company, AT&T's "mature" management knew everything there was to know about long distance – about everything related to communications.  And due to its previous ownership of Bell Labs and Western Union, it had deep knowledge about emerging technologies and manufacturing costs allowing AT*T to make "mature" decisions about investing in future markets and products.  This "mature" company would be able to pay out dividends forever!  It seemed ridiculous to think that AT&T would go anywhere but up!

Unfortunately, things didn't work out so well.  The "mature" AT&T saw its market share attacked by upstarts MCI and Sprint.  As a few "early adopters" switched services – largely residential and other very small customers – AT&T was unworried.  It still had most of the market and fat profits.  As these relatively insignificant small users switched, AT&T reinforced its world's largest billing system as an incomparable strength, and reminded everyone that its "enterprise" (corporate) offerings were still #1 (anybody remember AT&T long distance cards issued by your employer for use at pay phones?). 

But unfortunately, what looked like an unassailable market position in 1984 was eventually diminished dramatically as not only homeowners but corporations started shifting to new offerings from competitors.  New pricing plans, "bundled" products and ease of use encouraged people to try a new provider.  And that AT&T had become hard to work with, full of rules and procedures that were impossible for the customer to comprehend, further encouraged people to try an alternative.  Customers simply got fed up with rigid service, outdated products and high prices.

Unexpectedly, for AT&T, new markets started to grow much faster and become more profitable than long distance voice.  Data services started using a lot more capacity, and even residential customers started wanting to log onto the internet.  Even though AT&T had been the leader (and onetime monopolist – did you know broadcast television was distributed over an AT&T network?) with these services, this "mature" company continued to focus on its traditional voice business – and was woefully late to offer commercial or residential customers new products.  Not only were dial-up offerings delayed, but higher speed ISDN and DSL services went almost entirely to competitors.

And, much to the chagrin of AT&T leaders, customers started using their mobile phones a lot more.  Initially viewed as expensive toys, AT&T did not believe that the infrastructure would be built quickly, nor be robust enough, to support a large base of cellular phone users.  Further, AT&T anticipated pricing would keep most people from using these new products.  Not to mention the fact that these new phones simply weren't very good – as compared to land-line services according to the metrics used by AT&T.  The connection quality was wildly inferior to traditional long distance, and frequently calls were completely dropped!  So AT&T was slow to enter this market, half-hearted in its effort, and failed to make any profits.

Along the way a lot of other "non-core" business efforts failed.  There was the acquisition of Paradyne, an early leader in modems, that did not evolve with fast changing technology.  New products made Paradyne's early products obsolete and the division disappeared.  And the acquisition of computer maker NCR failed horribly after AT&T attempted to "improve" management and "synergize" it with the AT&T customer base and offerings. 

AT&T had piles and piles of cash from its early monopoly.  But most of that money was spent trying to defend the long distance business. That didn't work.  Then there was money lost by wheelbarrow loads trying to enter the data and mobile businesses too late, and with little new to offer.  And of course the money spent on acquisitions that AT&T really didn't know how to manage was all down the proverbial drain. 

Despite its early monopoly, high cash flow, technology understanding, access to almost every customer and piles of cash, AT&T failed.  Today the company named AT&T is a renamed original regional Bell operatiing company (RBOC) created in the 1984 break-up — Southwestern Bell.  This classically "mature" company, a stock originally considered "safe" for investing in the "widow's and orphan's fund" used up its money and became obsolete.  "Mature" was a misnomer used to allow AT&T to hide within itself; to focus on its past, instead of its future.  By being satisfied with saying it was "mature" and competing in "mature" markets, AT&T allowed itself to ignore important market shifts.  In just 25 years the company that ushered in mass communications, that had an incredibly important history, disappeared.

I was struck today when a Reuters story appeared with the headline "Sleepy in Seattle: Microsoft Learns to Mature."  There's that magic word – "mature."  While the article lays out concerns with Microsoft, there were still analysts quoted as saying that investors didn't need to worry about Microsoft's future.  Investors simply need to change their thinking.  Instead of a "growth" company, they should start thinking of Microsoft as a "mature" company.  It sounds so reassuring.  After all:

  • Microsoft has a near monopoly in its historical business
  • Microsoft has a huge R&D budget, and is familiar with all the technologies
  • Microsoft has piles and piles of cash
  • Microsoft has huge margins in its traditional business – in fact profits in operating systems and office automation exceed 100% of the total because it loses billions of dollars in other things like Bing, MSN and its incredibly expensive foray into gaming systems (xBox)
  • Markets won't shift any time soon – say to this new "cloud computing" – and Microsoft will surely have products when they are needed if there is a market shift
  • While home users may buy these new smartphones, tablets and some Macs, enterprise customers will keep using the technology they've long purchased
  • Microsoft is smart to move slowly into new markets, it shouldn't cannibalize its existing business by encouraging customers to change platforms. Going slow and being late is a good thing for profits
  • Although Microsoft has been late to smartphones and tablets, with all their money and size surely when they do get to market they will beat these upstarts Apple and Google, et. al.

Sure made me think about AT&T.  And the fact that Apple is now worth more than Microsoft.  Made me wonder just how comfortable investors should be with a "mature" Microsoft. Made me wonder how much investors, employees and customers should trust a "mature" CEO Ballmer.

Looking at the last 10 years, it seems like there's a lot more risk in "mature" companies than in "growth" ones.  We can be almost certain that Apple and Google, which have produced huge returns for investors, will grow for the next 3 years, improving cash flow and profitability just by remaining in existing new markets.  But of course both have ample new products pioneering yet more new markets.  And companies like NetApp look pretty safe, building a fast-growing base of customers who are already switching to cloud computing – and producing healthy cash flow in the emerging marketplace. 

Meanwhile, the track record for "mature" companies would leave something to be desired. One could compare Amazon to Circuit City or Sears.  Or just list some names: AT&T, General Motors, Chrysler, Xerox, Kodak, AIG,  Citibank, Dell,  EDS,  Sun Microsystems.  Of course each of these is unique, with its own story.  Yet….

Profit from growth markets, not “core” markets – Virgin & Nike vs. Dell & Sears

by | Aug 25, 2010 | Books, In the Rapids, Leadership, Lock-in


Summary:

  • We are biased toward doing what we know how to do, rather than something new
  • We like to think we can forever grow by keeping close to what we know – that’s a myth
  • Growth only comes from entering growth markets – whether we know much about them or not
  • To grow you have to keep yourself in growth markets, and it is dangerous to limit your prospects to projects/markets that are “core” or “adjacent to core”

Recently a popular business book has been Profit from the Core.  This book proposes the theory that if you want to succeed in business you should do projects that are either in your “core,” or “adjacent to your core.”  Don’t go off trying to do something new.  The further you move from your “core” the less likely you will succeed.  Talk about an innovation killer!  CEOs that like this book are folks who don’t want much new from their employees. 

I was greatly heartened by a well written blog article at Growth Science International  (www.GrowthSci.com) “Profit from Your Core, or Not.. The Myth of Adjacencies.”  Author Thomas Thurston does a masterful job of pointing out that the book authors fall into the same deadly trap as Jim Collins and Tom Peters.  They use hindsight primarily as the tool to claim success.  Their analysis looks backward – trying to explain only past events.  In doing so they cleverly defined terms so their stories seemed to prove their points.  But they are wholly unable to be predictive.  And, if their theory isn’t predictive, then what good is it?  If you can’t use their approach to give a 98% or 99% likelihood of success, then why bother?  According to Mr. Thurston, when he tested the theory with some academic rigor he was unable to find a correlation between success and keeping all projects at, or adjacent to, core.

Same conclusion we came to when looking at the theories proposed by Jim Collins and Tom Peters.  It sounds good to be focused on your core, but when we look hard at many companies it’s easy to find large numbers that simply do not succeed even though they put a lot of effort into understanding their core, and pouring resources into protecting that core with new core projects and adjacency projects.  Markets don’t care about whatever you define as core or adjacent.

It feels good, feels right, to think that “core” or “adjacent to core” projects are the ones to do.  But that feeling is really a bias.  We perceive things we don’t know as more risky than thing we know.  Whether that’s true or not.  We perceive bottled water to be more pure than tap water, but all studies have shown that in most cities tap water is actually lower in free particles and bacteria than bottled – especially if the bottle has sat around a while. 

What we perceive as risk is based upon our background and experience, not what the real, actual risk may be.  Many people still think flying is riskier than driving, but every piece of transportation analysis has shown that commercial flying is about the safest of all transportation methods – certainly much safer than anything on the roadway.  We also now know that computer flown aircraft are much safer than pilot flown aircraft – yet few people like the idea of a commercial drone which has no pilot as their transportation.  Even though almost all commercial flight accidents turn out to be pilot error – and something a computer would most likely have overcome.  We just perceive autos as less risky, because they are under our control, and we perceive pilots as less risky because we understand a pilot much better than we understand a computer.

We are biased to do what we’ve always done – to perpetuate our past.  And our businesses are like that as well.  So we LOVE to read a book that says “stick close to your known technology, known customers, known distribution system – stick close to what you know.”  It reinforces our bias.  It justifies us not doing what we perceive as being risky.  Even though it is really, really, really lousy advice.  It just feels so good – like sugary cereal for breakfast – that we justify it in our minds – like saying “breakfast is the most important meal of the day” as we consume food that’s probably less healthy than the box it came in!

There is no correlation between investing in your core, or close to core, projects and high rates of return.  Mr. Thurston again points this out.  High rates of return come from investing in projects in growth markets.  Businesses in growth markets do better, even when poorly managed, than businesses in flat or declining markets.  Where there are lots of customers wanting to buy a solution you simply do better than when there are lots of competitors fighting over dwindling customer revenues.  Regardless of how well you don’t know the former or do know the latter.  Market growth is a much better predictor of success than understanding your “core” and whatever you consider “adjacent.”

Virgin didn’t know anything about airlines before opening one – but international travel from London was set to boom and Virgin did well (as it has done in many new markets.)  Apple didn’t know anything about retail music before launching the iPhone and iTunes, but digital music had started booming at Napster and Apple cleaned up.  Nike was a shoe company that didn’t know anything about golf merchandise, but it entered the market for all things golf (first with just one club – the driver – followed by other things) by hooking up with Tiger Woods just as he helped promote the sport into dramatic growth.  

Success comes from entering new markets where there is growth.  Growth can overcome a world of bad management choices.  When there are lots of customers with needs to fill, you can make a lot of mistakes and still succeed.  To restrict yourself to “core” and “adjacent” invites failure, because your “core” and the “adjacent” markets that you know well simply may not grow.  Leaving you in a tough spot seeking higher profits in the face of stiff competition — like Dell today in PCs.  Or GM in autos.  Sears in retailing.  They may know their “core” but that isn’t giving them the growth they want, and need, to succeed in 2010.