by Adam Hartung | Oct 7, 2010 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Web/Tech
Summary:
- Steve Ballmer received only half his maximum bonus for last year
- But Microsoft has failed at almost every new product initiative the last several years
- Microsoft's R&D costs are wildly out of control, and yielding little new revenue
- Microsoft is lagging in all new growth markets – without competitive products
- Microsoft's efforts at developing new markets have created enormous losses
- Cloud computing could obsolete Microsoft's "core" products
- Why didn't the Board fire Mr. Ballmer?
Reports are out, including at AppleInsider.com that "Failures in Mobile Space Cost Steve Ballmer Half his Bonus." Apparently the Board has been disappointed that under Mr. Ballmer's leadership Microsoft has missed the move to high growth markets for smartphones and tablets. Product failures, like Kin, have not made them too happy. But the more critical question is — why didn't the Board fire Mr. Ballmer?
A decade ago Microsoft was the undisputed king of personal software. Its near monopoly on operating systems and office automation software assured it a high cash flow. But over the last 10 years, Microsoft has done nothing for its shareholders or customers. The XBox has been a yawn, far from breaking even on the massive investments. All computer users have received for massive R&D investments are Vista, Windows 7 and Office 2007 followed by Office 2010 — the definition of technology "yawners." None of the new products have created new demand for Microsoft, brought in any new customers or expanded revenue. Meanwhile, the 45% market share Microsoft had in smartphones has shrunk to single digits, at best, as Apple and Google are cleaning up the marketplace. Early editions of tablets were dropped, and developers such as HP have abandoned Microsoft projects.
Yet, other tech companies have done quite well. Even though Apple was 45 days from bankruptcy in 2000, and Google was a fledgling young company, both Apple and Google have launched new products in smartphones, mobile computing and entertainment. And Apple has sold over 4 million tablets already in 2010 – while investors and customers wait for Microsoft to maybe get one to market in 2011.
Despite its market domination, Microsoft's revenues have gone nowhere. And are projected to continue going relatively nowhere. While Apple has developed new growth markets, Microsoft has invested in defending its historical revenue base.
Source: SeekingAlpha.com
Yet, Microsoft spent 8 times as much on R&D in 2009 to accomplish this much lower revenue growth. At a recent conference Mr. Ballmer admitted he thought as much as 200 man years of effort was wasted on Vista development in recent years. That Microsoft has hit declining rates of return on its investment in "defending the base" is quite obvious. Equally obvious is its clear willingness to throw money at projects even though it has no skill for understanding market needs sin order for development to yield anything commercially successful!
Source: Business Insider.com
And investments in opportunities outside the "core" business have not only failed to produce significant revenue, they've created vast losses. Such as the horrible costs incurred in on-line markets. Trying to launch Bing and compete with Google in ad sales far too late and with weak products has literally created losses that exceed revenues!
Source: BusinessInsider.com
And the result has been a disaster for Microsoft shareholders – literally no gain the last several years. This has allowed Apple to create a market value that actually exceeds Microsoft's. An idea that seemed impossible during most of the decade!
Source: BusinessInsider.com
Under Mr. Ballmer's leadership Microsoft has done nothing more than protect market share in its original business – and at a huge cost that has not benefited shareholders with dividends or growth. No profitable expansion into new businesses, despite several newly emerging markets. And now late in practically every category. Costs for business development that are wildly out of control, despite producing little incremental revenue. And sitting on a business in operating systems and office software that is coming under more critical attack daily by the shift toward cloud computing. A shift that could make its "core" products entirely obsolete before 2020.
Given this performance, giving Mr. Ballmer his "target" bonus for last year seems ridiculous – even if half the maximum. The proper question should be why does he still have his job? And if you still own Microsoft stock — why as well?
by Adam Hartung | Aug 24, 2010 | Current Affairs, Defend & Extend, In the Rapids, Innovation, Lock-in, Web/Tech
Summary:
- It seems like the best way to find old success is to do more of what used to make you successful
- But lack of success is from market shifts, meaning you need to do more things
- Investing in what you know gets more expensive every year, with little (if any) improvement in returns
- To regain success it’s actually better to get out into new markets where you can compete with lower investment rates, generating more profitable sales
- Apple increased its sales of Macs not by focusing on Macs – but instead by becoming a winner in entirely different markets creating a feedback loop to the old, original “core”
MediaPost.com, in its article “Enterprise Sector Takes a Shine to Apple” has some remarkable statistics about Apple sales. At a time when most PC manufacturers, such as Dell and HP, are struggling to maintain even decent growth (even after the launch of upgraded Windows 7 and Office 2010) Apple is dramatically increasing its volume of Macs – and gaining market share. In last year’s second quarter:
- Mac sales jumped almost 50% in the business sector
- Mac sales jumped a whopping 200% in the government sector
- Mac sales rose over 31% in the home sector
- In Europe, Mac unit sales doubled their market share – and more than tripled their share in dollars
Yes, Macs are a small part of the market. Around 3.5% in the U.S. But, if you’re an Apple employee, supplier or investor that doesn’t matter, does it? In fact, it comes off sounding like a PC fan pooh-poohing a really astounding sales improvement. Nobody is saying the Mac will soon replace PCs (that’s more likely to happen via mobile devices where Apple has iPhone and iPad). But when you can dramatically increase your sales, especially as a $50B company, it’s a big deal.
The lesson for managers here is more unconventional. For years we’ve been told the way to grow your sales and profits is to “stick to your knitting.” To “protect your core.” The idea has been promoted that you should jettison anything that is a diversion to what you want to do best, and completely focus on what you select, and then try to out-compete all others with that product. If things don’t improve, then you need to get even more focused on your core, and invest more deeply. And hope the Mojo returns.
But that’s exactly the opposite of what Apple did. When almost bankrupt in 2001 Apple jettisoned multiple Mac products. It invested in music and entertainment products (iPod. iTouch and iTunes) to grab large sales with lower investment rates. It then rolled that success into developing the mobile computing/phone business with the iPhone and all those apps (some 250 thousand now and growing!). And it built on that success with a mobile tablet called the iPad. The Mac is now growing as a result of Apple’s success in all these other products creating a favorable feedback loop to the original “core”.
Apple spends less than 1/8th the money on R&D as Microsoft. And an even lesser amount on marketing, PR and sales. Yet, by entering new markets it gets far more “bang for its buck.” By entering new markets Apple is able to develop and launch new products, that sell in greater volumes and at higher profits, than had it stuck to being a “Mac company.” In fact, back when it only had 45 days of cash on hand, if it had stayed a “Mac company” Apple would have failed.
What we now see is that constantly re-investing in what you know drives down marginal rates of return. It keeps getting harder and harder, at ever greater cost, to drive new development and new sales with upgrades to old products. Look at the sales and profit problems at Sun Microsystems (world leader in Unix servers) and Silicon Graphics (world leader in graphics computers) and now Dell. What we’d like to think works at driving revenue and profits really raises new product costs and creates an easy target for new competitors who attack you as you sit there, all Locked-in to doing more of the same.
Contrarily, when you develop new products for new markets you grow revenues at lower cost, and thus higher profits. And you create a feedback loop that helps you get more sales without massive investments in your historical “core.” Think about Nike. It hasn’t been a “shoe company” for a very long time – but its shoes are greatly benefited by all the success Nike has in golf clubs and all those other products with a swoosh on them.
When confronted with a decision between “investing in the core” – or “protecting the mother ship” – or investing in new markets and solutions —- be very careful. Your “gut” may lead you to “in a blink” decide the obvious answer is to invest in what you know. But we are learning every quarter that this is a road to problems. You get more and more focused, and less and less prepared for the market shift that sent you into that “core focus” in the first place. Pretty soon you’re so far removed from the market you can’t survive – like Sun and SGI. It’s really a whole lot smarter to get out into new markets with White Space teams that can generate revenues with a lot less cost by being a smart, early competitor.
by Adam Hartung | Feb 28, 2010 | In the Rapids, Openness, Web/Tech
Google keeps on growing. While many companies bemoan revenue losses and poor results in 2008 and 2009, Google keeps new products flowing out the door and revenues continue to increase. New markets are being developed.
This Google revenue growth is powered by use of White Space, as CNN.com reported in "Gmail holds Graduations and Funerals." GMail labs is a White Space team that develops new applications and uses for Gmail. Its operating premise is that it should develop the products rapidly, then push into the market to get feedback. Then the team can determine what to modify and test further, what to push into the market as non-beta and what to kill. As recently demonstrated in the headlined behavior, Google is ready to keep some things and kill others based upon market feedback – not just what the internal people or analysts think.
- "This isn't the first time Gmail Labs has graduated and killed some test
features since Gmail Labs started in June 2008, but the event does
underscore an idea that Google says is key to its success as an
innovative company: Let people create products they'd use themselves,
get those products out to the public as soon as possible, and make
consumers think it's OK for things to break."
- ""At Google, in general, the philosophy is to get things out quickly in
front of our users and not make huge promises," said Ari Leichtberg,
another Google engineer"
Nothing is more accurate than real market feedback, as readers of this blog have heard me say often. Scott Anthony of Innosight recently took up this mantra in a Harvard Business Review blog "How to Kill Innovation: Keep Asking Questions." He relates how a large company with a new idea kept asking "what if" questions about a new idea. Each piece of research led to more "what if" questions. With its massive resources, the company could keep asking and researching forever, never getting real market input and never getting the innovation to market.
In traditional companies, with a new product funnel and stage gate implementation process which can take years to run through, once something moves into the market the internal "champions" are so vested in the innovation they can't stand for it to fail. Far too often, if the innovation were to fail the champions would lose their jobs – or see their careers tank. Too much analysis causes too few ideas to make it to market, and causes the organization to overspend on the innovation that does. After launch market feedback is often ignored, or manipulated, to allow the innovation to be pushed harder and longer on the hopes that with "just a little more time and effort" it will succeed.
What keeps Google growing, and attracting top talent, is its willingness to use White Space. It is willing to develop ideas quickly and obtain real market feedback. Then decide what to keep, and what not to keep. Because it moves quickly, market input shapes the offering. Market input allows the company to see what people really use, and thus worthy of additional investment. Or what people don't use, and thus needs to be dropped before too much is sunk into the idea.
When Microsoft decided to add "clippy" to its products it was a herculean effort to install it across all products. This computerized help tool has had little use, and is often despised by users. Microsoft decided to create this feature based on almost no market input, instead relying on some customer focus groups. After making the enormous investment – in lieu of many other opportunities passed over internally – Microsoft simply became "married" to the innovation. Now "clippy" is still on the applications, but is almost never used. And it gives Microsoft's products no user advantage.
All companies can grow in 2010. You need to act more like Google. Develop early stage products quickly, and get them into White Space projects which will market test them. Don't spend too much time, money and effort "what iff-ing" or doing "market research" trying to predict future customer behavior. Listen carefully for market input, then modify. Have more than one opportunity in White Space, because you don't want to over-invest in any single idea that ran the internal gauntlet. Be ready to move forward quickly with things that work, and abandon those that don't. If you use give yourself permission to test new things in White Space, and resources, you too can grow in 2010 and climb out of this recession.
