"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….
Many large, and leading, companies have not created much shareholder value the last decade
A surprising number of very large companies have gone bankrupt (GM) or failed (Circuit City)
Wal-Mart is a company that has generated no shareholder value
The Wal-Mart disease is focusing on executing the business's long-standing success formula better, faster and cheaper — even though it's not creating any value
Size alone does not create value, you have to increase the rate of return
Companies that have increased value, like Apple, have moved beyond execution to creating new success formulas
Have you noticed how many of America's leading companies have done nothing for shareholders lately? Or for that matter, a lot longer than just lately. Of course General Motors wiped out its shareholders. As did Chrysler and Circuit City. The DJIA and S&P both struggle to return to levels of the past decade, as many of the largest companies seem unable to generate investor value.
Take for example Wal-Mart. As this chart from InvestorGuide.com clearly shows, after generating very nice returns practically from inception through the 1990s, investors have gotten nothing for holding Wal-Mart shares since 2000.
Far too many CEOs today suffer from what I call "the Wal-Mart Disease." It's an obsession with sticking to the core business, and doing everything possible to defend & extend it — even when rates of return are unacceptable and there is a constant struggle to improve valuation.
Fortune magazine's recent puff article about Mike Duke, "Meet the CEO of the Biggest Company on Earth" gives clear insight to the symptoms of this disease. Throughout the article, Mr. Duke demonstrates a penchant for obsessing about the smallest details related to the nearly 4 decade old Wal-Mart success formula. While going bananas over the price of bananas, he involves himself intimately in the underwear inventory, and goes cuckoo over Cocoa Puffs displays. No detail is too small for the attention of the CEO trying to make sure he runs the tightest ship in retailing. With frequent references to what Wal-Mart does best, from the top down Wal-Mart is focused on execution. Doing more of what it's always done – hopefully a little better, faster and cheaper.
But long forgotten is that all this attention to detail isn't moving the needle for investors. For all its size, and cheap products, the only people benefiting from Wal-Mart are consumers who save a few cents on everything from jeans to jewelry.
The Wal-Mart Disease is becoming so obsessive about execution, so focused on doing more of the same, that you forget your prime objective is to grow the investment. Not just execute. Not just expand with more of the same by constantly trying to enter new markets – such as Europe or China or Brazil. You have to improve the rate of return. The Disease keeps management so focused on trying to work harder, to somehow squeeze more out of the old success formula, to find new places to implement the old success formula, that they ignore environmental changes which make it impossible, despite size, for the company to ever again grow both revenues and rates of return.
Today competitors are chipping away at Wal-Mart on multiple fronts. Some retailers offer the same merchandise but in a better environment, such as Target. Some offer a greater selection of targeted goods, at a wider price range, such as Kohl's or Penney's. Some offer better quality goods as well as selection, such as Trader Joe's or Whole Foods. And some offer an entirely different way to shop, such as Amazon.com. These competitors are all growing, and earning more, and in several cases doing more for their investors because they are creating new markets, with new ways to compete, that have both growth and better returns.
It's not enough for Wal-Mart to just be cheap. That was a keen idea 40 years ago, and it served the company well for 20+ years. But competitors constantly work to change the marketplace. And as they learn how to copy what Wal-Mart did, they can get to 90%+ of the Wal-Mart goal. Then, they start offering other, distinctive advantages. In doing so, they make it harder and harder for Wal-Mart to be successful by simply doing more of the same, only better, faster and cheaper.
Ten years ago if you'd predicted bankruptcy for GM or Chrysler or Circuit City you'd have been laughed at. Circuit City was a darling of the infamous best seller "Good To Great." Likewise laughter would have been the most likely outcome had you predicted the demise of Sun Microsystems – which was an internet leader worth over $200B at century's turn. So it's easy to scoff at the notion that Wal-Mart may never hit $500B revenue. Or it may do so, but at considerable cost that continues to hurt rates of return, keeping the share price mired – or even declining. And it would be impossible to think that Wal-Mart could ever fail, like Woolworth's did. Or that it even might see itself shredded by competitors into an also-ran position, like once powerful, DJIA member Sears.
The Disease is keeping Wal-Mart from doing what it must do if it really wants to succeed. It has to change. Wal-Mart leadership has to realize that what made Wal-Mart once great isn't going to make it great in 2020. Instead of obsessing about execution, Wal-Mart has to become a lot better at competing in new markets. And that means competing in new ways. Mostly, fundamentally different ways. If it can't do that, Wal-Mart's value will keep moving sideways until something unexpected happens – maybe it's related to employee costs, or changes in import laws, or successful lawsuits, or continued growth in internet retailing that sucks away more volume year after year – and the success formula collapses. Like at GM.
Comparatively, if Apple had remained the Mac company it would have failed. If Google were just a search engine company it would be called Alta Vista, or AskJeeves. If Google were just an ad placement company it would be Yahoo! If Nike had remained obsessed with being the world's best athletic shoe company it would be Adidas, or Converse.
Businesses exist to create shareholder value – and today more than ever that means getting into markets with profitable growth. Not merely obsessing about defending & extending what once made you great. The Wal-Mart Disease can become painfully fatal.
Their power to prevent innovation can devastate your business.
“That’s not how we do things around here.” How often have you heard that? And what does it really mean? It is said to stop someone from doing something new. It is no way to promote innovation, is it?”
All companies want to grow. But early in the lifecycle they Lock-in on what works, and then implement Status Quo Police that intentionally do not allow anything to change. Their belief is that if nothing changes, the business will always grow. So conformance to historical norms is more important than results to them. To Status Quo Police results will return when conformance to old norms is returned!
Of course, this completely ignores the marketplace. Market shifts, created by competitors launching new technologies, new pricing models, new delivery models or other new solutions cause the value of old solutions to decline. No matter how well you do what you always did, you can’t achieve historical results. The market has shifted!
To keep any company growing you must know who the Status Quo Police are in your organization. They can be in HR, controlling hiring, promotions and pay. In Finance controlling what projects receive resources. In Marketing, tightly controlling branding, product development or distribution. The Status Quo Police are committed to keeping things tightly controlled, and saving the organization from change that could send the company in the wrong direction! No matter what the marketplace may require.
But it’s not enough to know who the Status Quo Police are, its up to leaders to eliminate them! If you want to have a vibrant, profitably growing organization you have to constantly adjust to market shifts. You have to sense what the market wants, and move to deliver it. You have to be very wary of the Status Quo, and instead be open to making changes in order to grow. To do that, you have to hold those who would be the Status Quo Police in check. Otherwise, you’ll find the obstacles to innovation and growth overwhelming!
Please read the article at Forbes, review it and comment! Let me know what you think!
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.
"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.
