by Adam Hartung | Mar 29, 2010 | Current Affairs, Leadership, Lock-in, Web/Tech
Apple now has a market cap of $210B. Microsoft has a market cap of about $260B. To traditionalists, this must seem contradictory. Apple has fought its way into new markets, and has domination in none (except maybe the narrowly defined individual music download business). Microsoft has near monopolistic market presence in personal computer operating systems and office software. According to modern business theory from business schools, and the output of books such as Business Strategy by Michael Porter, the monopolist company has entry barriers protecting its return – and thus the ability to almost print unlimited profit. Yet this has not happened.
At SeekingAlpha.com "Apple versus Microsoft: The Value Gap is Closing" the case is made that the value difference is all due to growth. Apple's business for music devices and content is growing – quickly. Its business for mobile devices and mobile device applications is also growing very fast. Those offer substantial positive cash flow today, as well as dramatic cash flow growth in the future. So much so that many analysts wonder what Apple will do with all that money. And that doesn't even count the iPad sales which have exceeded expectations – before even available to ship. And businesses are starting to build applications for the iPad, as explained in the BusinessWeek article "Businesses want Apple's iPad, too."
On the other hand, the demand for PCs is sluggish – at best. People increasingly leave their laptop at home for extended time while the use their mobile device instead. But Microsoft is stuck in a loop of upgrade development and launch. But because of the market shift, these investments are yielding less and less return. Complexity cost is going up, and profits are going down, and growth is dropping precipitously. Products in music, mobile phones and advertising have all lost significant share to Apple, Google and others as attention has remained on the "core" business. So even though current cash flow is strong, value has gone absolutely nowhere for several years, and there's precious reason to think it will go up.
When you lose growth, even if you prop up profits with draconian cost cutting and inventory sales, you lose value. Just look at Sears/KMart. Investors were really excited when Mr. Lampert used his takeover of KMart to acquire Sears. Predictions flew that he would get Sears growing again, while simultaneously monetizing the huge real estate portfolio. But as detailed in Chicago Tribune "Sears and KMart Still Standing, but Market Share Dwindles," value has declined. Mr. Lampert has proven very good at whacking cost. But when it comes to growing revenue – something that will drive ongoing growth in cash flow for a decade or more, he's shown nothing. You can't cost cut your way to long term success.
by Adam Hartung | Feb 16, 2010 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
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.
by Adam Hartung | Aug 24, 2009 | Current Affairs, General, In the Rapids, In the Whirlpool, Leadership, Lifecycle, Lock-in, Music, Openness
"Sears Axes Ad Budget As Sales Slide" is the latest Crain's article. Revenues have been falling at Sears ever since Mr. Ed Lampert took control of the venerable Chicago retailer. His initial actions were to cut costs in order to prop up profits. Which worked for about 8 quarters. But then the impact of cost cutting cracked back like a bullwhip, shredding profits. Mr. Lampert reacted by further cutting costs to "bring them in line with sales." And the whirlpool started. Cut costs, revenue falls, cut costs, revenue falls, cut costs…… And now he largely blames the recession for Sears poor performance. As if his Lock-in, and that of the management, to old approaches had nothing to do with the dismal results now at Sears.
There are those who think these actions are smart, to bring costs "in alignment with retail trends" as Morningstar put it. But reality is Sears is now in the Whirlpool of failure. Looking at the lifecycle, they've gone past the point of no return – out of the Swamp of slow growth – and into the last stage - failure. The stores would be closed and sold to other retailers, except there's a dearth of retail buyers out there these days. Thus shareholders are stuck with underperforming real estate, constantly declining revenues and falling cash flow.
Not all retailers are seeing declining revenues. Bloomberg.com reported today "Apple May Be Highest Grossing Fifth Avenue Retailer." While Sears and others are watching sales go down, Apple's retail store revenues rose 2.5% this year – and it's Fifth Avenue store has seen traffic increase 22% this last quarter. In a town where tourists often put an emphasis on shopping, they used to ask locals how to find Bloomingdales or Saks. Now they want to know where to find the Apple store.
Markets shift. When they do, you have to change your Success Formula or your results decline. When customers change their behavior, you have to change as well or your sales and profits go down. But most leaders react to market shifts by trying to do the same thing they've always done, only faster, better and cheaper. Oops. That only leaves you chasing your tail – just like Sears. You keep working harder and harder but results don't improve. Then eventually something happens that throws you into bankruptcy, or an acquisition for your assets, and it's "game over." Meanwhile, all the time you're watching returns shrink shareholders watch value decline, employees grow disgruntled as you whittle away bonuses, benefits, pay and jobs, and vendors grow tired of the impossible negotiations for lower costs while waiting to get paid on strung-out terms. Nobody is having a good time. Just go ask the folks at Sears.
But there are always businesses that catch the market shift and use it to propel their growth. Like Apple. Once a niche and low-profit computer manufacturer, they've turned into a producer of music players, music distributor and mobile phone supplier as well as computer manufacturer. And when everyone would have said that retail is a terrible investment, they've turned into a surprisingly successful retailer as well. Appple keeps throwing itself back into the Rapids of growth, rather than slipping into the Swamp of stagnation and Whirlpool of failure.
Apple keeps going toward the market shifts. Apple's CEO (and increasingly other executives) Disrupts the company's Success Formula, always challenging the company to do new things. And White Space is constantly created where permission is given to operate outside old Lock-ins and resources are provided for the opportunity to grow. Apple could have done a half-hearted job of retailing, trying to act like Best Buy or Nike with its stores and merchandise, or only funding stores in suburban malls instead of tier 1 retail space on the very best (and most expensive) retail avenues.
The next time you're asking yourself "when will this recession end?" think about Sears and Apple. If your business acts like Sears your recession won't be anytime soon. If you keep doing more of the same, cutting costs and hoping to hold on for a recovery, your doing nothing to end the recession and it's unlikely you'll find much improvement in your business. But if you develop scenarios about the future which allow you to attack competitors, using Disruptions to change your approach and the market, then using White Space to develop new solutions you can bring this recession to an end sooner than you think. People in your business will have chances to grow, and so will your revenues and profits.
For more about how we set ourselves up for failure, and how to avoid the traps download the free ebook The Fall of GM: What Went Wrong and How To Avoid Its Mistakes.
by Adam Hartung | Jun 23, 2009 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
What is a brand worth? Do you spend a lot of time trying to "protect" your brand? A lot of marketing gurus spent the last 20 years talking about creating brands, and saying there's a lot of value in brands. Some companies have been valued based upon the expected future cash flow of sales attributed to a brand. Folks have heard it so often, often they simply assume a recognized name – a brand – must be worth a lot.
But, according to a Strategy + Business magazine article, "The trouble with brands," brand value isn't what it was cracked up to be. Using a boatload of data, this academic tome says that brand
trustworthiness has fallen 50%, brand quality perceptions are down 24%,
and even brand awareness is down 20%. It turns out, people don't think very highly of brands, in fact – they don't think about brands all that much after all.
And according to Fast Company in the article "The new rules of brand competition" the trend has gotten a lot worse. It seems that over time marketers have kept pumping the same message out about their brands, reinforcing the message again and again. But as time evolved, people gained less and less value from the brand. Pretty soon, the brand didn't mean anything any more. According to the Financial Times, in "Brands left to ponder price of loyalty," brand defection is now extremely common. Where consumer goods marketers came to expect 70% of profits from their most loyal customers, those customers are increasingly buying alternative products.
Hurrumph. This is not good news for brand marketers. When a company spends a lot on advertising, it wants to say that spend has a high ROI because it produces more sales at higher prices yielding more margin. Brand marketers knew how to segment users, then appeal to those users by banging away at some message over and over – with the notion that as long as you reinforced yourself to that segment you'd keep that customer.
But these folks ignore the fact that needs, and markets, shift. When markets shift, a brand that once seemed valuable could overnight be worth almost nothing. For example, I grew up thinking Ovaltine was a great chocolate drink. Have you ever heard of Ovaltine? I drank Tang because it went to the moon, and everyone wanted this "high-tech" food with its vitamin C. When was the last time you heard of Tang? It was once cache to be a "Marlboro Man" – rugged, virile, strong, successful, sexy. Now it stands for "cancer boy." Did the marketers screw up? No, the markets shifted. The world changed, products changed, needs changed and these brands which did exactly what they were supposed to do lost their value.
Lots of analysts get this wrong. Billions of dollars of value were trumped up when Eddie Lambert bought Sears out of his re-organized KMart. But neither company fits consumer needs as well as WalMart or Kohl's for the most part, so both are brands of practically no value. People said Craftsmen tools alone were worth more than Mr. Lampert paid for Sears – but that hasn't worked out as the market for tools has been flooded with different brands having lifetime warranties — and as the do-it-yourselfer market has declined precipitiously from the days when people expected to fix their own stuff. So a lot of money has been lost on those who thought KMart, Sears, Craftsman, Kenmore, Martha Stewart as a brand collection was worth significantly more than it's turned out to be. But that's because the market moved, and people found new solutions, not because you don't recognize the brands and what they used to stand for.
Every market shifts. Longevity requires the ability to adapt. But brand marketers tend to be "purists" who want the brand to live forever. No brand can live forever. Soon you won't even find the GE brand on light bulbs. That's if we even have light bulbs as we've known them in 15 years – what with the advent of LED lights that are much lower cost to operate and last multiples of the life of traditional bulbs. GE has to evolve – as it has with jet engines and a myriad of other products – to survive.
Think for a moment about Harley Davidson. Once, owning a Harley implied you were a true rebel. Someone outside the rules of society. That brand position worked well for attracting motorcycle riders 60 years ago. As people aged, many were re-attracted to the "bad boy" image of Harley, and the brand proliferated. A $50 jacket with a Harley Davidson winged logo might sell for $150 – implying the branding was worth $100/jacket!! But now, the average new Harley buyer is over 50 years old! The market has several loyalists, but unfortuanately they are getting older and dying. Within 20 years Harley will be struggling to survive as the market is dominated by riders who are tied to different brands associated with entirely different products.
If you see that your sales are increasingly to a group of "hard core" loyalists, it's time to seriously rethink your future. Your brand has found itself into a "niche" that will continue shrinking. To succeed long-term, everything has to evolve. You have to be willing to Disrupt the old notions, in order to replace them with new. So you either have to be willing to abandon the old brand – or cut its resources to build a new one. For example, Harley could buy Ducati, stop spending on Harley and put money into Ducati to build it into a brand competitive with Japanese manufacturers. This would dramatically Disrupt Harley – but it might save the company from following GM into bankruptcy.
The marketing lore is filled with myths about getting focused on core customers with a targeted brand. It all sounded so appealing. But it turns out that sort of logic paints you into a corner from which you have almost no hope of survival. To be successful you have to be willing to go toward new markets. You have to be willing to Disrupt "what you stand for" in order to become "what the market wants." Think like Virgin, or Nike. Be a brand that applies itself to future market needs – not spending all its resources trying to defend its old position.
Don't forget to download the new ebook "The Fall of GM" to learn more about why it's so critical to let Disruptions and White Space guide your planning rather than Lock-in to old notions.
by Adam Hartung | May 21, 2009 | Current Affairs, General, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
"Target heads toward the Crossroads" is the Marketwatch headline today. Like almost all large retailers, Target has had a tough year. Profits dropped, and Target hit a growth stall. If not careful, the company could fall away into noncompetitiveness, like KMart did. At the same time, some think Target is the only strong competitor to WalMart. Just to rough up the problem, outside investors led by raider Bill Ackman are trying to pressure Target to "restructure" and spin off its real estate into a publicly traded trust. Management isn't helped by a Wall Street Journal report "Proxy firm backs critics in Target vote" recommending shareholders vote to put Mr. Ackman on the Board. At this time, in the Flats, is when management teams are most vulnerable – and more often than not make decisions that doom the company.
It's at this time, when growth has stalled and vultures are swirling around, that management is most likely to turn to Defend & Extend Management. They look backward, and try to implement old practices hoping it will ward off attacks. They stop Disrupting, instead forcing high levels of conformance among employees. They jump into short-term cost cutting actions, which kill off new growth ideas, and shut down White Space projects to conserve cash. Instead of heading toward new markets, they emulate traditional competitors and focus on short-term actions. Unfortunately, these actions throw the company into the Swamp, hurting their ability to compete long term and making them victims of competitors. Look at Motorola, which swung from an intense high into the throws of near-failure when the executive team turned toward D&E management after Carl Icahn attacked the company. Instead of going after market growth, the D&E practices plunged the company into a cash drain leading to cataclysmic drop in sales and market share.
The worst thing Target could do is try to be Wal-Mart. Nobody can beat WalMart at being WalMart. And WalMart has its own troubles, including saturation of its stores as well as declining customer interest in its low-cost format. Recent resurgence, linked to the worst economy in 70 years, does not reflect a change in what customers want from retailers long-term. Rather, it's a short-term blip for a Locked-in Success Formula that has seen declining returns on investment for over a decade. If Target were to try emulating WalMart, in format or approach, it would be disastrous.
Nor is doing what Target always did the right thing to do. The market has shifted. What worked in 2005 cannot be assured of working in 2010. Trying to refind its "core" and do more of the same practices would again be a Defend & Extend approach which will hurt results. Amplifying those D&E practices by taking radical actions, such as spinning out its real estate in a short-term financial machination, would only reduce the variables Target can use to regain growth. Following the recommendations of raider Ackman and his Pershing Square firm will attempt to short-term spike profitability, but at the grave risk of killing the company long-term.
What Target needs to do now, more than ever, is study the market. The retail industry is under a major shift as on-line participants increase capability and share, per-store numbers struggle to maintain, and as underlying real estate values tumble. Customer expectations, from baby boomers to GenY are different than they were in 2001, and all retailers need to adapt to these changes. The retailers that do, with new approaches – perhaps mixed approaches that combine on-line with traditional, and/or combine mega-stores with specialty, etc. – will be the ones that capture share as pent-up consumer demand re-emerges in the future. What scenario of the future looks most likely to attract and retain customers in 2015?
Simultaneously, Target needs to study competitors, to define its positioning that produces best results. The good news is that the biggest competitor (WalMart) is so locked in that it's easy to predict. Target can study WalMart, Kohl's, Gordman's, J.C.Penney and others to identify what actions it can take that will avoid head-to-head battering and instead provide rapid growth. Especially by focusing on on-line competitors, including Netshops.com, much can be learned about how the market is shifting and where Target should go to maximize growth.
Above all, Target needs to take this opportunity to Disrupt old behaviors and convince employees, and shareholders, that Target will pull out all stops to become the leading retailer by 2020. WalMart is so Locked-in that it can easily decline (and if you doubt that, just look at other market leaders and how they did coming out of downturns – like GM and Sears). The right retailer, making the right decisions, can become the next leader. But not by just doing more of the same. It will take a concerted effort to open the doors for trying and doing new things.
And right now Target needs to be throwing up test stores and new concepts – White Space projects – where it can learn what will work for the next great retailing Success Formula. No amount of planning is worth as much as experimentation. The newest ideas in retailing need to be reviewed and tested to see what can work now. Maybe the time has finally arrived for home grocery shopping, for example. Who knows? What we do know is that the company that uses this market transition period to build a new Success Formula aligned with changing customer expectations will be positioned to be the new market leader.
Conventional wisdom would say that Target should cut costs, emulate WalMart, get really cheap with prices, tighten its supply chain, spin out all "non core" assets and focus on returning to practices that made a profit in 2004, 05, 06 and 07. But our studies for The Phoenix Principle showed that those practices almost always doom the competitor. Instead, at this critical lifecycle point, it's more important than ever to focus on GROWTH and return to the Rapids – otherwise you end up in the Swamp, moving along toward the Whirlpool, like Woolworths, S.S. Kresge, TG&Y, Sears, KMart and Sharper Image.
