by Adam Hartung | Jun 16, 2011 | Defend & Extend, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
Dell is a dog. From $25/share a decade ago the company rose to around $40/share around 2005, only to collapse. The stock now trades around $15, rising from recent lows of about $10. The company’s value is only $30B, only half revenues of $61B, instead of the revenue multiple obtained by most growth stocks. But then, revenues have been flat for the last 4 years — so maybe it’s time to say Dell isn’t a growth stock any longer.
And that would be correct.
In the 1990s Dell was a darling. The company could do no wrong as its revenues and valuation soared. Founder and CEO Michael Dell was a highly desired speaker at fees of $100,000+. Michael Dell was quick to tell people his success formula, which was pretty simple:
- Do no R&D. Outsource product development to key vendors (Intel and Microsoft). Focus on price and cost. Be operationally excellent! Be the best, most focused manufacturer/assembler.
- Genericize the product. Make it easy to buy, thus cheap and easy to sell.
- Sell direct rather than through distributors so you lower sales cost.
- Use supply chain practices to drive down parts cost and inventory, making it possible to compete on price and collect your funds before paying vendors.
In short, focus on operational excellence to be really fast and cheap. Faster and cheaper than anyone else.
And this success formula worked!! As long as folks wanted personal computers, Dell was the game to beat. And the company reaped the reward of PC market growth, expanding as the PC – especially the Wintel PC – market exploded.
Dell’s problems today aren’t the result of bad management. Dell has been focused, diligent, hard working and very cost conscientuous. Dell made no horrible decisions, and made no serious mistakes in its strategy or tactics. Although for a while it was vilified for weaker support from outsourced vendors in India (again, a tactic used in all parts of Dell’s strategy) that was rectified. Largely for 2 decades Dell has continued to perform better and better at its internal metrics – its success formula.
Dell’s fall from grace was due to the market shifting. Firstly, competitors figured out how to do what Dell did pretty much as good as Dell did it. No operationally oriented strategy is immune from copy-cats, and Dell discovered other companies could do pretty much what they did. It becomes a dog-eat-dog world quickly when your discussions are all “price, delivery, service” and you can’t offer something truly unique. It may not be obvious when markets are growing, and there’s plenty of business for everyone, but oh how quickly it shows up in declining margins when growth slows.
Secondly, and more importantly, the market shifted away from Dell’s primary products. PC sales are now flat to declining, depending on marketplace, as customers shift from Wintel platforms to smartphones and tablets. Despite big acquisitions in data storage and services (to the tune of $5B the last couple of years) Dell still has 70% of its revenues in PCs (55% hardware, 15% software and services.) Most of that money was spent attempting to shore up the Dell success formula by extending its core offerings to core customers. Now all future forecasts show the market will continue to move away from PCs and toward new platforms, making it impossible to create organic growth, and pinching margins in all sectors.
So, were Dell’s executives dumb, incompetent, lethargic or some combination of all 3? Actually, none of those things – as CNNMoney.com points out in “Dell’s Dilemma“. They were simply stuck. Stuck with their own best practices, doing what they do really well, and continuing to do more of it. Unable to move forward, because most attention was focused on defending and extending the old core.
Nobody knows the Dell core better than Michael Dell. His return spells only less likelihood of success for Dell. As opportunities emerged in smartphones and other markets he found it simply easier, faster, cheaper and more consistent to wait on those markets while defending the core PC business. Key vendors Intel and Microsoft, critical to historical success, were not offering new solutions for these markets, or promoting sales in them. Key customers, the IT departments in government and corporate accounts, weren’t clamoring for these new products. They wanted more PCs that were better, faster and cheaper. Dell was looking for the divine light of perfect future understanding to change the company investments – and when it didn’t emerge he kept right on plunking money into the business headed for decline.
Inside consultants (Bain and Co. is well known to be the primary strategists and tacticians at Dell) and employee experts had never-ending opportunities to improve the Dell systems, in their efforts to defend the Dell sales against other PC competitors and seek out additional expansion opportunities in targeted offshore or niche markets. Suppliers wanted Dell to keep building and promoting PCs. And customers locked-in to old platforms were just experimenting with new solutions – far from adopting anything new in the volumes that would match historical PC sales. “If just the economy comes around, I’m sure sales will return” it’s easy to imagine everyone at Dell saying.
Now Dell is in declining products, with an outdated strategy chasing a larger competitor as margins continue to remain squeezed. Nobody wants to exit this business quickly, so prices are under ever greater pressure – especially since Android tablets are cheaper than laptops already – and smartphones can be had for free from the right wireless supplier.
It’s too late for Dell. The time to act was 5 years ago. Then Dell could have set up a team to explore the market for new solutions. Dell could have been the first to offer an Android phone or tablet – the company has plenty of smart folks who could experiment and figure it out. They could have championed the Zune, and created a download store for the product to compete with iPods and iTunes (the Zune is no longer supported by Microsoft.) But there were no resources, and no permission given to try changing the success formula.
As Chromebooks are launched (“The First Google Chromebooks are On Sale Now, Here’s Everything You Need to Know” BusinessInsider.com) Dell could have been the market leader, instead of Acer and Samsung. There’s even a chance that Dell might have blunted the huge market lead Apple created since 2005 if management had just created a team with the opportunity to really discover what people would do with these new solutions. There was a time a “strategic partnership” between Dell and Google could have been a big threat to Apple. But no longer.
Apple, which put its resources into pioneering new markets the last decade has seen its value explode many-fold. It’s value is over 10x Dell. Apple has enough cash to buy Dell outright. But why would it? Dell has become a niche player – and due to its lock-in to historical best practices and its old success formula has no opportunities to grow.
All companies risk becoming marginalized. Focusing on your core products, core technology vendors and core customers leads to blindness about the possibility of market shifts. You can work yourself to death, be focused and diligent, and remain dedicated to constant improvement — even excellence! But when markets shift it’s easy to become obsolete, and fall into margin killing price wars as growth stagnates. Just look at Dell. From darling to dog in just 10 years.
If you still own DELL, the recent price rise makes this a great time to SELL. Dell has no new products, and no idea how to move into new markets. It’s commitment to its core is a death knell. And without white space to do anything new, it can/t (and won’t) transform itself into a winner.
by Adam Hartung | Aug 4, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Lock-in, Web/Tech
Things are changing pretty fast in the “tech” world. PCs are losing market share to fast growing platforms like smartphones and tablets. New competitors are becoming a lot stronger as data and applications move from corporate servers and laptops/desktops to cloud computing. Erudite journal The Economist has declared “The End of Wintel.” It’s now considered a foregone conclusion by experts globally that how we interact with digital information is moving into a new era that will not be dominated by the old Microsoft Windows + Intel platform that practically monopolized the last 15 years.
So, what are you doing to prepare? Some people will choose to react when they are forced to. Unfortunately, that will allow faster moving competitors to gain an advantage. Those that adopt these new technologies will reach customers faster, and more accurately for their needs, than businesses that delay. It’ll be hard to compete blasting out ads on billboards, or even computer browsers, when your competition reaches out and tells a customer, on their cellphone using technology from a company like Foursquare that if they stop in – just around the corner – the customer can get a free product.
According to The Wall Street Journal this is already happening in “Getting Customers to ‘Check In’ with Foursquare.” All a customer has to do is offer a review on the mobile site, possibly bringing in one of their friends that is a block away. While you’re waiting for customers to read your ad (traditional media or internet), the competition might well have reached 100 new users!
The next option is to begin using the technology. And that would be a great start! Develop some future scenarios, figure out how to beat your competition, Disrupt your old spending and behavior patterns and set up a White Space team charged with figuring out how to update your Success Formula.
But the really big winners go even further. Take for example Amazon.com. This less than 20 year old company started as an on-line book retailer. They’ve gone a lot further, building a $44B revenue stream selling more than books. In fact, selling stuff for other people as well as themselves. But beyond that, Amazon is revolutionizing publishing by developing and selling the Kindle as a digital toolkit. As people go further along the trail of moving to mobile devices and the cloud, Kindle has begun offering a range of web services to host data and applications.
Source: Business Insider
Amazon will achieve $500M revenue this year in web services – after just 4 years of business. And could achieve $1B in a year or two! By participating aggressively in the marketplace, Amazon is creating significant revenue that other retailers – such as WalMart, Target, Home Depot or Sears – isn’t even touching. While this has nothing to do with what others might call Amazon’s “core business,” this will continue to build insight to the marketplace, allowing Amazon to further grow all aspects of its revenue! What could be more important than being knowledgeable about web services?
You may not think of yourself as an electronics firm, so you shy away from implementing computer-like hardware. But you shouldn’t think that way. Today mobile chips from ARM, and soon from Intel, will be so cheap you can include them in any item over $100. Soon any item over $20. How much better could you connect with your customers if the product you sold had the equivalent of a cheap smartphone installed? You could learn how your product is used very quickly, and develop new solutions before customers even think to ask for them!
Too often, as I wrote in my Forbes column (Stop Focusing on Your Core Business), we think about our “core business” in such a way that it keeps us from doing new things. As a result, less constrained competitors figure out how to provide more powerful solutions that are more profitable. Focusing on your “core” can keep you from doing the things that are most important for future growth!
The change in technology is not an “if” proposition. Just like we moved away from mainframes, and then minicomputers, eventually to PCs we are going toward a fully connected world of cheap hardware hooking into the cloud where everyone can access data and applications. How will you participate? You won’t be able to compete if you “opt out.” If you are a spectator you can expect the Amazon-like competitors to build a big leg-up. The winners will be those who really become players. And that means pushing your scenarios to really discuss what the year 2015 could bring, study how you can leapfrog competitors, and see how you can disrupt your approach – then implement with White Space teams – to be a big winner.
by Adam Hartung | Jun 8, 2009 | Current Affairs, General, Leadership, Lifecycle
Unless you have a lot of time to research stocks, you probably invest in a fund. Funds can be either an index, or actively managed. People like index funds because you aren't relying on a manager to have a better idea. Index funds can only own those stocks on the index. Like the S&P index fund – it can only own stocks in the S&P 500. Nothing else. Interestingly, the Dow Jones Industrial Average is considered an index fund – even though I don't know what it indexes. And that is important if you are an investor who benchmarks performance against the Dow. It's even more important if you invest in the Dow (or Diamonds – the EFT for the Dow Industrials).
GM is now off the Dow ("What does GM bankruptcy mean for Index Funds?"). Because it went bankrupt, the editors at Dow Jones removed it. But it wasn't long ago that the editors removed Sears and Kodak. But not because these companies filed bankruptcy. Rather, the Dow Jones editors felt these companies no longer represented American business. So the Dow is a list of 30 companies. But what companies is up to the whim of these Dow editors. Sounds like an active management (judgement) group (fund) to me.
Go back to the original DJIA and you get American Cotton Oil, American Sugar, Distilling & Cattle Feed, Leclede Gas Light, Tennesse Coal Iron and Railroad and U.S. Leather. Household names – right? As the years went buy a lot of companies came and went off the list. Bethlehem Steel, Honeywell, International Paper, Johns-Manville, Nash Motor, International Harvester, Owens-Illinois, Union Carbide — get the drift? These may have been successful at some time, but the didn't exactly withstand "the test of time" all that well. Even some of the recent appointments have to be questioned – like Home Depot and Kraft which have had horrible performance since joining the elite 30. You also have to wonder about the viability of some aging participants, like 3M, Alcoa and DuPont. So the DJIA may be someone's guess about some basket of companies that they think in some way represents the American economy – but it's definitely subject to a lot of personal bias.
Like any basket of stocks, when the DJIA is lagging market shifts, it is not a good place to invest. And the editors are greatly prone to lagging. Like their holdings in agriculture and basic commodities years ago, through holding big industrial companies in the 1990s and 2000s. And the over-weighting of financial companies at the turn of the century when they were merely using financial machinations to hide considerable end-of-value-life problems. When the DJIA is holding companies that are part of the previous economy, you don't want to be there.
The Dow should not be a lagging indicator. Rather, given its iconic position, it should hold the "best" companies in America. Not extremely poorly performing mega-bricks – like GM. GM should have been dropped several years ago. And you should be concerned about the recent appointment of Kraft. And even Travelers.
Those companies that will do well are going to be good at information, and making money on information. So who's likely to fall off (besides Kraft)? DuPont, which has downsized for 2 decades is a likely candidate. Caterpillar is laying off almost everyone, and cutting its business in China, as it struggles to compete with an outdated industrial Success Formula. Bank of America has shown it is disconnected from understanding how to compete globally as it has asked for billions in government bail-out money. And the hodge-podge of industrial businesses, none of which are on the front end of new technologies, at United Technologies makes it a candidate — if people ever recognize that the company would quickly disintegrate without massive U.S. government defense spending. Even 3M is questionable as it has slowed allowing its old innovation processes to keep the company current in the information age.
Adding Cisco was a good move. Cisco is representative of the information economy – as are Verizon, AT&T (which was SBC and before renameing, GE, HP, Intel, IBM, Microsoft, Merck and Pfizer (if they transition to biologics from old-fashioned pharmaceutical manufacturing ways – otherwise replace them with Abbott). But all those other oldies – like Walt Disney (sorry, but the web has forever changed the marketplace for entertainment and Walt's folks aren't keeping up with the times), Boeing (are big airplanes the wave of the future in a webinar age?), Coke (they've kinda covered the world and run out of new ideas), P&G (anybody excited about Swiffer variation 87?), and Wal-Mart – which couldn't recognize doing anything new under any circumstances.
As an investor, you want companies that can grow and create a profit. And that's increasingly not the DJIA – even as it slowly adds a Microsoft, Intel and Cisco. You want to include companies in leadership positions like Google and Apple. Their ability to move forward in new markets by Disrupting their Lock-ins and using White Space to launch new projects in new markets gives them longevity. As an investor you don't want the "dogs" – so why would you want to own DuPont, et.al.?
Investors may have been stung by overvaluations in technology companies during the 1990s. But that was the past. What matters now is future growth ("Technology on the comeback trail"). And that can be found by investing in the future – not what was once great but instead what will be great. Invest for the future, not from the past. And that can be found outside the DJIA. Unless the Dow editors suddenly change the portfolio to match the shift to an information economy.
(For additional ideas about recomposing the DJIA, see my blog of 3/12/09 "Dated Dow")
by Adam Hartung | Apr 3, 2009 | Current Affairs, General, In the Rapids, Lifecycle, Openness, Science
Since before writing Create Marketplace Disruption I've been a fan of GE. The company is the only company to be on the Dow Jones Industrial Average since started 100 years ago. While so many other companies have soared and failed, GE has continued to adapt and grow. But it's been hard to be a GE proponent the last year. Even though GE continues to follow The Phoenix Principle, fears about the recession, GE's massive commercial real estate holdings, and risks in GE Capital drove the stock from $40 a year ago to $6.50!!! A whopping 84% decline!!!
I've also long been a fan of Intel. Intel transformed itself from a memory chip company facing horrible returns into a microprocessor company by maintaining a healthy paranoia about markets and competitors. The company has worked with Clayton Christensen over the years to not only keep up with sustaining innovations, but to implement Disruptive ones as well. But Intel was recession-slaughtered over the last year, losing half its value.
It's been enough to make an innovation lover cry. But, simultaneously, it's not clear that over the last year ever stock has been accurately priced for its long term value by the market. As we know, fears about bank and real estate failures have simultaneously destroyed investor confidence while pushing up cash needs. Don't forget that Warren Buffet made an insider deal to provide money to GE with warrants to buy the stock at $23 – about double the current value. So perhaps the bloodbath in these two companies went beyond what should have been expected?
Today there's more heartening news. "GE and Intel join forces on home health" is the FT.com headline.
GE and Intel both have identified that health care will be a growing market into the future, expecting the home health monitoring business alone to grow from $3B today to $7.7B by 2012. By keeping their eyes on the future, both companies are showing that they are investing based on future expectations, not just historical performance. And, both have identified opportunities that reside outside their existing health care markets, such as the medical imaging market where GE is currently strong. Thus, they are investing $250million into a new joint venture company to develop new markets.
This shows the earmarks of good White Space. It's focused on developing a growing future market, not trying to preserve an existing market position. It's outside the existing business manager's control, thus given permission to develop a new Success Formula rather than operate within existing constraints of existing businesses. And the project is given enough resources to succeed, not just get started.
Maybe now is a great time to buy stock in these companies? GE has gone out of its way recently to divulge information about its real estate and finance units to analysts in order to be more transparent. And the company is demonstrating a commitment to the behaviors, future-oriented planning and White Space, that have long helped the company grow.
Now, if we could just start seeing the kind of disruptive behavior out of Chairman Immelt that former Chairman "Neutron Jack" Welch demonstrated my comfort level could go up even more…..
