Business people keep piling onto the innovation and growth bandwagon. PWC just released the results of its 14th annual CEO survey entitled “Growth Reimagined.” Seems like most CEOs are as tired of cost cutting as everyone else, and would really like to start growing again. Therefore, they are looking for innovations to help them improve competitiveness and build new markets. Hooray!
But, haven’t we heard this before? Seems like the output of several such studies – from IBM, IDC and many others – have been saying that business leaders want more innovation and growth for the last several years! Hasn’t this been a consistent mantra all through the last decade? You could get the impression everyone is talking about innovation, and growth, but few seem to be doing much about it!
Rather than search out growth, most businesses are still trying to simply do what their business has done for decades – and marveling at the lack of improved results. David Brooks of the New York Times talks at length in his recent Op Ed piece on the Experience Economy about a controversial book from Tyler Cowen called “The Great Stagnation.” The argument goes that America was blessed with lots of fertile land and abundant water, giving the country a big advantage in the agrarian economy from the 1600s into the 1900s. During the Industrial economy of the 1900s America was again blessed with enormous natural resources (iron ore, minerals, gold, silver, oil, gas and water) as well as navigable rivers, the great lakes and natural low-cost transport routes. A rapidly growing and hard working set of laborers, aided by immigration, provided more fuel for America’s growth as an industrial powerhouse.
But now we’re in the information economy. Those natural resources aren’t the big advantage they once were. Foodstuffs require almost no people for production. And manufacturing is shifting to offshore locations where cheap labor and limited regulations allow for cheaper production. And it’s not clear America would benefit even if it tried maintaining these lower-skilled jobs. Today, value goes to those who know how to create, store, manipulate and use information. And success in this economy has a lot more to do with innovation, and the creation of entirely new products, industries and very different kinds of jobs.
Unfortunately, however, we keep hiring for the last economy. It starts with how Boards of Directors (and management teams) select – incorrectly, it appears – our business leaders. Still thinking like out-of-date industrialists, Scientific American offers us a podcast on how “Creativity Can Lesson a Leader’s Image.” Citing the same study, Knowledge @ Wharton offers us “A Bias Against ‘Quirky’ Why Creative People Can Lose Out on Creative Positions.” While 1,500 CEOs say that creativity is the single most important quality for success today – and studies bear out the greater success of creative, innovative leaders – the study found that when it came to hiring and promoting businesses consistently marked down the creative managers and bypassed them, selecting less creative types!
Our BIAS (Beliefs, Interpretations, Assumptions and Strategies) cause the selection process to pick someone who is seen as less creative. Consider these comments:
“would you rather have a calm hand on the tiller, or someone who constantly steers the boat?”
“do you want slow, steady conservatism in control – or irrational exuberance?”
“do we want consistent execution or big ideas?”
These are all phrases I’ve heard (as you might have as well) for selecting a candidate with a mediocre track record, and very limited creativity, over a candidate with much better results and a flair for creativity to get things done regardless of what the market throws at her. All imply that what’s important to leadership is not making mistakes. Of you just don’t screw up the future will take care of itself. And that’s so industrial economy – so “don’t let the plant blow up.”
That approach simply doesn’t work any more. The Christian Science Monitor reported in “Obama’s Innovation Push: Has U.S. Really Fallen Off the Cutting Edge” that America is already in economic trouble due to our lock-in to out-of-date notions about what creates business success. In the last 2 years America has fallen from first to fourth in the World Economic Forum ranking of global competitivenes. And while America still accounts for 40% of global R&D spending, we rank remarkably low (on all studies below 10th place) on things like public education, math and science skills, national literacy and even internet access! While we’ve poured billions into saving banks, and rebuilding roads (ostensibly hiring asphalt layers) we still have no national internet system, nor a free backbone for access by all budding entrepreneurs!
Ask the question, “If Steve Jobs (or his clone) showed up at our company asking for a job – would we give him one?” Don’t forget, the Apple Board fired Steve Jobs some 20 years ago to give his role to a less creative, but more “professional,” John Scully. Mr. Scully was subsequently fired by the Board for creatively investing too heavily in the innovative Newton – the first PDA – to be replaced by a leadership team willing to jettison this new product market and refocus all attention on the Macintosh. Both CEO change decisions turned out to be horrible for Apple, and it was only after Mr. Jobs returned to the company after nearly 20 years in other businesses that its fortunes reblossomed when the company replaced outdated industrial management philosophies with innovation. But, oh-so-close the company came to complete failure before re-igniting the innovation jets.
Examples of outdated management, with horrific results, abound. Brenda Barnes destroyed shareholder value for 6 years at Sara Lee chasing a centrallized focus and cost reductions – leaving the company with no future other than break-up and acquisition. GE’s fortunes have dropped dramatically as Mr. Immelt turned away from the rabid efforts at innovation and growth under Welch and toward more cautious investments and reliance on a set of core markets – including financial services. After once dominating the mobile phone industry the best Motorola’s leadership has been able to do lately is split the company in two, hoping as a divided business leadership can do better than it did as a single entity. Even a big winner like Home Depot has struggled to innovate and grow as it remained dedicated to its traditional business. Once a darling of industry, the supply chain focused Dell has lost its growth and value as a raft of new MBA leaders – mostly recruited from consultancy Bain & Company – have kept applying traditional industrial management with its cost curves and economy-of-scale illogic to a market racked by the introduction of new products such as smartphones and tablets.
Meanwhile, leaders that foster and implement innovation have shown how to be successful this last decade. Jeff Bezos has transformed retailing and publishing simultaneously by introducing a raft of innovations, including the Kindle. Google’s value soared as its founders and new CEO redefined the way people obtain news – and the ads supporting what people read. The entire “social media” marketplace is now taking viewers, and ad dollars, from traditional media bringing the limelight to CEOs at Facebook, Twitter and Linked-in. While newspaper companies like Tribune Corp., NYT, Dow Jones and Washington Post have faltered, pop publisher Arianna Huffington created $315M of value by hiring a group of bloggers to populate the on-line news tabloid Huffington Post. And Apple is close to becoming the world’s most valuable publicly traded company on the backs of new product innovations.
But, asking again, would your company hire the leaders of these companies? Would it hire the Vice-President’s, Directors and Managers? Or would you consider them too avant-garde? Even President Obama washed out his commitment to jobs growth when he selected Mr. Immelt to head his committee – demonstrating a complete lack of understanding what it takes to grow – to innovate – in today’s intensely competitive information economy. Where he should have begged, on hands and knees, for Eric Schmidt of Google to show us the way to information nirvana he picked, well, an old-line industrialist.
Until we start promoting innovators we won’t have any innovation. We must understand that America’s successful history doesn’t guarantee it’s successful future. Competing on bits, rather than brawn or natural resources, requires creativity to recognize opportunities, develop them and implement new solutions rapidly. It requires adaptability to deal with new technologies, new business models and new competitors. It requires an understanding of innovation and how to learn while doing. Amerca has these leaders. We just need to give them the positions and chance to succeed!
"CraigsList is for hookers." That's what the General Manager at the Los Angeles Times told me in 2005. In a meeting to discuss the newspaper's future profitability I pointed out that 1/3 of his newspaper's revenues came from Classified ads, and I had asked him if he was concerned about CraigsList.com. As you can tell, he was not.
At the same time, I asked him if he was concerned about on-line ads and the Google placement engine undermining his display ad business. He assured me that the internet was all for bloggers and no reputable news reader would pay much attention to on-line news. So no, he wasn't worried about internet competition to the newspaper sucking away this advertiser base. He just needed to keep old customers focused on the value of newspaper ads. In less than 6 months GM removed 70% of its newspaper ads – shifting all the money to on-line advertising – leading the auto pack on-line. And movie companies moved nearly 75% of their newspaper ad budget to on-line, while more than half of real-estate ads went on-line. Those happen to be the top 3 sources of display ad revenue for newspapers.
Today Tribune Corporation is in bankruptcy, and classified ads have dropped to a trickle for all major newspapers. Meanwhile, things are going pretty well at CraigsList and Google:
As can be seen, revenues per employee are phenomenal at CraigsList, and extremely good at Google. Much better than at the Tribune Company newspapers such as the Los Angeles Times and Chicago Tribune – despite them shedding a high percentage of employees over the last 7 years!
According to Gavin O'Malley, at OnlineMediaDaily of MediaPost.com in "CraigsList Revenues Soar: But Problems Loom" revenues at CraigsList may exceed $4M/employee/year! Margins he asserts are in the range of 75-80%! And revenues, while still small at about $125M, are growing at 25%/year (for what everyone thinks of as "free.") Albeit, this is a small business. But what if Tribune Company had paid attention back 5 years ago and invested hard in creating the world's best CraigsList – rather than ignoring it? What would the possible revenues be today? And margins? And impact on Tribune Company growth in revenues and profits?
Most companies do only a surface analysis of competition. They are so busy listening to, and reacting to, big customers it's all they can do to keep operations going and make the marginal changes to keep big customers happy. As a result, maybe they look at 2 or 3 of their most similar competitors (like other newspapers in the local market for our example.) And that will be cursory, examining total revenues, perhaps margins (if public and data is available) and a quick glimpse at impact on existing customers and any new products recently launched. But overall, very little attention is paid to competition.
And practically none is paid to "fringe" competitors. Those with different business models. Polaroid ignored digital camera manufacturers (despite licensing them technology) until Polaroid went bankrupt. Digital Equipment(DEC) ignored AutoCad – calling their CAD/CAM products "toys." Wang and Lanier said no big company would use a PC, rather than an integrated centralized system, for corporate word processing so they discounted Apple and Microsoft. Motorola largely ignored Apple in mobile phones, even after doing a joint venture with them to create and launch the RoKR. Failure lists are strewn with companies that simply ignored "fringe" competitors – saying they didn't understand the industry, the customers and how "the business works."
Large or small size is not important when studying competition, it's the ability to change how customers buy that is important. As we've seen in the case of companies like Google, Apple, eBay and Amazon we can see that fringe competitors can grow extremely fast. They can alter the competitive landscape quicker than almost any traditional corporate planning group will give them credit. Just ask the folks at Sears or Home Depot about he impact of Amazon and other on-line retailers (do you think either of those traditional retailers have anywhere near $1M revenue/employee like Amazon?) Or ask Merrill Lynch about the impact of Schwab, eTrade and ScotTrade.
The second step in The Phoenix Principle is to obsess about competition. When you're "the big gun" in the industry it can be incredibly easy to ignore fringe competitors. But do so at your risk. When profits are something like $2M to $3M per employee (as in the case of CraigsList) there is a lot of resource to invest in growth. And strong indications that the business is able to very profitably grow! Ignoring "fringe" competition – especially because you are focused on existing large customers who are Locked-In to your Success Formula – leaves you remarkably vulnerable to rapid market shifts and a really fast demise.
About 30 years ago Roberta Flack hit the top of the record charts (remember records anybody?) with "Killing Me Softly" – a love song. Today we have 2 examples of CEO's softly killing their shareholders, employees and investors. Definitely NOT a love song.
Sears has continued its slide, which began the day Chairman Lampert acquired the company and merged it with KMart. I blogged this was a bad idea day of announcement. Although there was much fanfare at the beginning, since day 1 Mr. Lampert has pursued an effort to Defend & Extend the outdated Sears Success Formula. And simultaneously Defend & Extend his outdated personal Success Formula based on leveraged financing and cost cutting. The result has been a dramatic reduction in Sears stores, a huge headcount reduction, lower sales per store, less merchandise available, fewer customers, empty parking lots, acres of unused real estate and horrible profits. Nothing good has happened. Nobody, not customers, suppliers or investors, have benefited from this strategy. Sears is almost irrelevant in the retail scene, a zombie most analysts are waiting to expire.
Today Crain's Chicago Business reported "Sears to Offer Diehard Power Accessories for Sale at Other Retailers." Sears results are so bad that Mr. Lampert has decided to try pushing these batteries, charges, etc. through another channel. At this late stage, all this will do is offer a few incremental initial sales – but reduce the appeal of Sears as a retailer – and eventually diminish the brand as its wide availability makes it compete head-to-head with much stronger auto battery brands like Energizer, Duralast, Optima and the heavily advertised Interstate. Sears has attempted to "milk" the Diehard brand for cash for many years, and placed in retail stores head-to-head with these other products it won't be long before Sears learns that its competitive position is weak as sales decline.
Mr. Lampert needed to "fix" Sears – not try to cut costs and drain it of cash. He needed to rebuild Sears as a viable competitor by rethinking its market position, obsessing about competitors and using Disruptions to figure out how Sears could compete with the likes of WalMart, Target, Kohl's, Home Depot, JC Penneys and other strong retailers. Now, his effort to further "milk" Diehard will quickly kill it – and make Sears an even less viable competitor.
Simultaneously, Chairperson Barnes at Sara Lee has likewise been destroying shareholder value, employee careers and supplier growth goals since taking over. During her tenure Sara Lee has sold buisinesses, cut headcount, killed almost all R&D and new product development, sold real estate and otherwise squandered away the company assets. Sara Lee is now smaller, but nobody – other than perhaps herself – has benefited from her extremely poor leadership.
As this business failure continues advancing, Crain's Chicago Business reports "Sara Lee to Spend $3B on Stock Buyback." In 2009 Sara Lee announced it was continuing the dismantling of the company by selling its body-care business to
Unilever and its air-freshener products and assets to Procter & Gamble Co. for approximately $2.2 billion. As an investor you'd like to hear all that money was being reinvested in a high growth business that would earn a significant rate of return while adding to the top line for another decade. As a supplier you'd like to hear this money would strengthen the financials, and help Sara Lee to invest in new products for growth that you could support. As an employee you'd like this money to go into new projects for revenue growth that could help your personal growth and career advancement.
But, instead, Ms. Barnes will use this money to buy company stock. This does nothing but put a short-term prop under a falling valuation. Like bamboo poles holding up a badly damaged brick wall. As investors flee, because there is no growth, low rates of return and no indication of a viable future, the money will be spent to prop up the price by buying shares from these very intelligent owner escapees. After a couple of years the money will be gone, Sara Lee will be smaller, and the shares will fall to their fair market value – no longer propped up by this corporate subsidy. The only possible winner from this will be Sara Lee executives, like Ms. Barnes, who probably have incentive compensation tied to stock price — rather than something worthwhile like organic revenue growth.
Both of these very highly paid CEOs are simply killing their business. Softly and quietly, as if they are doing something intelligent. Just because they are in powerful positions does not make them right. To the contrary, this is an abuse of their positions as they squander assets, and harm the suburban Chicago communities where they are headquartered. That their Boards of Directors are approving these decisions just goes to show how ineffective Boards are at looking out for the interests of shareholders, employees and suppliers – as they ratify the decisions of their friendly Chairperson/CEOs who put them in their Board positions. The Boards of Sears and Sara Lee are demonstrating all the governance skill of the Boards at Circuit City and GM.
It's too bad. Both companies could be viable competitors. But not as long as the leadership tries to Defend & Extend outdated Success Formulas unable to produce satisfactory rates of return. Lacking serious Disruption and White Space, these two publicly traded companies remain on the road to failure.
Seizing the White Space is a new book being launched by HBS Press (and being pre-sold on Amazon.com.) I'm very glad to read about others who are taking up the message of Create Marketplace Disruption – which first published the critical role of White Space in successfully managing any business (published in 2008 by Financial Times Press and also available on Amazon.com).
The author, Mark Johnson, is Chairman of Innosight, a consulting firm he co-founded with Clayton Christenson who's on the Harvard Business School faculty (and author of The Innovator's Dilemma also on Amazon.com). Innosight primarily focuses on consulting businesses to identify Disruptive innovations. Now the Chairman is starting to realize that implementation is as important as identifying the implementation – and he's linked it to WHITE SPACE. Great!!!
You can read his insights to how IBM and some of his other large clients have used White Space in an Harvard Business Publishinng Blog"Is Your Company Brave Enough For Business Model Innovation?" You'll quickly see that he applies The Disruptive Opportunity Matrix from chapter 10 of Create Marketplace Disruption– which is how companies have been shown to reach new businesses using White Space. It's so gratifying to read somebody else who's applied your research and come to the same conclusions!
I'm looking forward to the book. Readers please let me know what you think of the author's blog post – and the book when it comes out.
Post-script to yesterday's blog about the CEO of GM:
"Cat's Owens, Deere's Lane on short list of CEO candidates" is the AP article appearing on Crain's Chicago Business about the search for a new leader at GM. As I predicted yesterday, recruiters seem to think the ideal candidate for the job needs to be from another big industrial company. And preferably, an auto company "to understand the industry complexities." Not only is there no incentive for these highly paid executives to take a similar job, at a lot less pay, in a government funded organization — but investors shouldn't want it! GM needs change. And more change than trying to make GM into John Deere, or CAT.
John Deere has had weak results for decades. The company has been wedged between other equipment manufacturers so badly that most of its profits now come from yard tractors homeowner's buy from Home Depot. Just because the company is big, and one of the few left making equipment for which there is declining demand, is no reason to want the CEO at a turnaround like GM. Likewise, CAT is under intense competition from Komatsu, Volvo and other manufacturers who are squeezing it from all sides – jeapardizing revenues and profits. Only acquistions have kept CAT growing the last 10 years, and margins have plummeted. That leadership is not what's needed at GM either.
When will somebody speak up for the investors and start a search in the right direction? GM needs leadership that thinks entirely differently. Unwilling to accept old-fashioned industrial notions about how to lead a company. Like I recommended, go somewhere entirely different. Maybe recruit somebody from Dell or HP or Cisco that understands rapid design cycles. Or someone from Wal-Mart or Target that understands how to sell things – cheaply. Or someone from Oracle or Mozilla or Google that understands the value of software – and that the product is a lot more than the iron – so you can capture the right value. It's so disappointing to read how the "recruiting industry" is just as Locked-in as GM.
If one of you readers knows somebody on the GM Board, maybe you should send them this blog (and yesterday's) to see if they can consider searching in the right place for new leadership!
Don't miss the recent ebook, "The Fall of GM" for a
quick read on how easily any company (even the nation's largest employer) can be
easily upset by market shifts. And learn what GM could have done to avoid
bankruptcy – lessons that can help your business grow! http://tinyurl.com/mp5lrm
I've never met anyone who says they speculate in the stock market. My colleagues always say they are investors; people who know what they were doing and savvy about the market. But, reality is that most people speculate. Because they don't invest on underlying business value. Instead, they rely on words from "gurus" and follow trends. That, unfortunately, is speculating.
Back on 12/21/08 (just a couple of months ago) the DJIA was at 8960, the S&P 918. Looking at The Chicago Tribune for that day, the primary recommendation by analysts for 2009 was "Keep an eye on long-term horizons" and "weather out the storm". The markets were down, but don't panic. Famed investment maven Elaine Garzarelli recommended if you had $10k in cash to invest $2k in tech stocks, $2k in Citigroup Preferred, $2k in GE and $2k in an income-oriented fund. Then put $2k into a short fund to hedge your risks! She couldn't have been more dead wrong on the only two named companies – GE and C. Both are at modern, or all time, lows. Don Phillip, managing director at Morningstar, recommended investing all $10K in equities because "they've taken an unprecedented hit and are very cheap."
When you hear investment gurus, on TV or elsewhere, tell you to "stay the course, the market always recovers" they are basing their opinions on history – not the future. This isn't last year, or the last recession, or the last economy. Will all economies eventually recover? Maybe not. Will the U.S. economy recover in your lifetime? Not assured – Japan has been in a recession for over a decade! Does that mean American companies will be the ones to lead the world in the next upmarket? Not assured. These "gurus" have been dead wrong for almost a year – and at the most important time in your investment history. If they were so wrong for the last year, why are they still on TV? Why are you listening?
In the short term, stock markets are driven by momentum. When most people are buying, the markets keep going up. Even for individual stocks. Sears had no reason to go up in value after being acquired by Ed Lampert's KMart corporation. Sears and Kmart were overleveraged, earning below-market rates of return, and with assets that had long lost their luster. But because Jim Cramer of CNBC Mad Money fame knew and liked Mr. Lampert he kept talking up the stock. Other hedge fund operators thought Mr. Lampert had been clever in the past, so they guessed he knew something they didn't and they speculated in his investment. The value went up 10x – and then came down 90%. Wild ride – but in the history of markets unless you are a speculator, you should never have invested in Sears. When you hear "don't be a market timer" remember that the only way to make money in Sears was to be a market timer – you had to buy and sell at the right time because the company wasn't able to increase its value. Sears' Success Formula was out of date, and there was no sign of a plan for the future, nor obsession about market changes and competitors, nor willingness to Disrupt old behaviors nor White Space. From the beginning this was a bad investment, and it has remained that way.
Today the market remains driven by momentum. Who wants to say they are buying stocks when the major averages keep falling? What CEO wants to say he's optimistic when it's popular to present "caution"? Who wants to discuss opportunities for markets in 2015 being 3x bigger when right now demand for industrial products like cars is down 20-40%? When momentum is up, you can't find a pessimistic CEO. Nor a pessimistic investor. So the likewise is equally true.
Reality is that there are good investments today, and bad. If a business is firmly locked into the industrial economy, such as GM and Ford, making the same products in much the same way to sell to pretty much the same customers, but with new competitors entering from all around - those companies are not good investments. Regardless of the rate of economic growth or debt availability. Their Lock-in to outdated Success Formulas means that their rates of return will not improve, even if overall economic growth does. Markets have shifted, and keep shifting. Businesses that were not profitable in the old market aren't going to suddenly be better competitors in a future market. Just the opposite is more likely. Even if they survive in a foxhole for a year or two, when they come out the market will be filled with new competitors just as vicious as the old ones.
But there are businesses positioning themselves for the markets of tomorrow. Apple with its iPod, iTunes, iPhone is an example. Google with its near monopoly on internet ad placement and management as well as search. And companies that are moving toward new markets rather than remaining frozen in the old model and exacerbating weaknesses with cost cutting. Like Domino's pizza.
GM will never again be a great car company. So what's new? That was clear in 1980 when Chairman Roger Smith said the company had a limited future in autos operating as it always had. That doesn't mean GM couldn't again be a growing, healthy company if new management sent the company in search of new markets with growth opportunities. Like Singer getting out of sewing machines to be a defense contractor in the 1980s. By purchasing an old-fashioned mortgage bank, and an old fashioned investment bank/retail brokerage, Bank of America is not strengthening its position for future markets. Instead, it is fighting the last war. But any company can change its competitive position if it chooses to focus on, and invest in, new markets. And those who do it NOW will be first into the new markets and able to change competitive position. When markets shift, those who move to the new competitiveness first gain the advantage. And their position is reinforced by competitors who dive for cover through cost cuts not tied to business repositioning.
Why is GM still on the DJIA? They should have been removed years ago. That's how the Dow intelligentsia keeps the average always going up – by taking off companies like Sears and replacing them with companies that are more closely linked to where markets are going (at the time, Home Depot). If we swapped out GM for Google, and Kraft for Apple, the numbers on the DJIA would be considerably better than we see today. And if you want to make money as an investor, you have to do the same thing. You have to dump companies that are unwilling to break out of Lock-in to outdated business models and invest in companies who are heading full force into future markets. In all markets there are good investments. But you have to find the companies that plan for the future, not the past – obsess about competitors – are not afraid to Disrupt themselves and markets – and utilize White Space to test new products and services that can create growth no matter what the economy.
