by Adam Hartung | Jan 14, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership
A lot of excitement was generated this week when Mitt Romney said the words "I like to fire people." I'm sure he wishes he could rephrase his comment, as he easily could have made his point about changing service providers without those words. Nonetheless, the aftermath turned to a discussion of job losses, and why Bain Capital has eliminated jobs while simultaneously creating some.
Surprisingly, a number of economists suddenly started saying that firms like Bain Capital are justified in their job eliminations because they are merely implementing "creative destruction." Although the leap is not obvious, the argument goes that some businesses are made inefficient and unprofitable by new technologies or business processes – so buyers (like Bain Capital) of hurting businesses often cannot "fix" the situation and have no choice but to close them. Bain Capital inevitably will be stuck with losers it has no choice but to shutter – eliminating the jobs with the company.
Unfortunately, that argument is simply not true. The only thing that allows "creative destruction" to kill a company is a lack of good leadership. Any company can find a growth path if its leaders are willing to learn from trends and steer in the growing direction.
Start by looking at recent events surrounding Kodak and Hostess, both quickly heading for Chapter 11. Neither needed to fail. Management made the decisions which steered them into the whirlpool of failure.
Kodak watched the market for amateur photography shrink for 30 years – drying up profits for film and paper. Yet, management consistently – quarter after quarter and year after year – made the decision to try defending and extending the historical market rather than move the company into faster growing, more profitable opportunities. Kodak even invented much of the technology for digital photography, but chose to license it to others rather than develop the market because Kodak feared cannibalizing existing sales – as they became increasingly at risk!
Hostess is making a return trip to Chapter 11 this decade. But it's not like the trend away from highly processed, shelf stable white bread and sugary pastry snacks is anything new. While 1960s parents and youth might have enjoyed the vitamin enriched Wonder Bread "helping grow bodies 12 ways" the trend toward fresher, and healthier, staples has been happening for 40 years. In the 1980s when the company was known as Continental Baking profits were problematic, and it was clear that to keep what was then the nation's largest truck fleet profitable required new products as consumers were shifting to fresher "bake off" goods in the grocery store as well as brands promising more fiber and taste. But despite these obvious trends, leadership continued trying to defend and extend the business rather than shift it.
These stories weren't "creative destruction." They were simply bad leadership. Decisions were made to do more of the same, when clearly something desperately different was needed! At the Harvard Business School Working Knowledge web site famed strategiest Michael Porter states "the granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results." Failure happened because the leaders were so internally focused they chose to ignore external inputs, trends, which would have driven better decisions!
In the 1980s Singer realized that the sewing machine market was destined to decline as women left homemaking for paying jobs, and as textile industry advances made purchased clothing cheaper than self-made. Over a few years the company transitioned out of the traditional, but dying, business and became a very successful defense industry contractor! Rather than letting itself be "creatively destroyed" Singer identified the market trends and moved from decline to growth!
Similarly, IBM almost failed as the computer market shifted from mainframes to PCs, but before all was lost (including jobs as well as investor value) leaders changed company focus from hardware to services and vertical market solutions allowing IBM to grow and thrive.
The failure of Digital Equipment (DEC) at the same time was not "creative destruction" but company leadership unwillingness to shift from declining mini-computer and high priced workstation sales into new businesses.
More recently, over the last decade a nearly dead Apple resurrected itself by tying into the large trend for mobility, rather than focusing on its niche Mac product sales. Company leaders took the company into consumer electronics (ipod, ipod touch,) tablet computing and cloud-based solutions (iPad) and mobile telephony with digital apps (iPhone.) Apple had no legacy in any of these markets, but by linking to trends rather than fixating on past businesses "creative destruction" was avoided.
There are many businesses today that are in trouble because leaders simply won't pay attention to trends. Avon, Sears and Barnes & Noble are three companies with limited futures simply because leaders seem unable to pull their heads out of the internal strategic planning sand and look at environmental trends in order to shift.
My favorite target is, of course, Microsoft. Nobody thinks we will be carrying laptop PCs around in 5 years. Yet, Microsoft has been unable to recognize the trend away from PCs and do anything effective. Its efforts in music (Zune) and mobile handsets have been indifferent, insufficiently supported and mostly dropped. Mr. Ballmer continues to speak about a long future for PC sales even as Q4 volume dropped 1.4% according to IDC and Gartner. Even though everyone knows this trend is due to limited PC innovation and rapidly accelerating mobile-based solutions, Microsoft blamed the problem on, of all things, floods in Thailand that restricted manufacturing output. Really.
We'll learn soon enough just how many jobs Bain Capital created, and killed. But those lost were not due to "creative destruction." They were due to leadership decisions to discontinue the business rather than invest in trends and transitioning to new markets. Creative destruction is an easy excuse to avoid blaming leaders for failures caused by their unwillingness to recognize trends and take actions to invest in them which will create winning businesses.
by Adam Hartung | Jan 4, 2012 | Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
The S&P 500 ended 2011 almost exactly where it started. If ever there was a year when being invested in the right companies, and selling the dogs, mattered for higher portfolio returns it was 2011. The good news is that many of the 2011 dogs were easy to spot, and easy to sell before ruining your portfolio.
There were many bad performers. However, there was a common theme. Most simply did not adjust to market shifts. Environmental changes, from technology to regulations, made them less competitive thus producing declining returns as newer competitors benefitted. Additionally, these companies chose – often over the course of several years – to eschew innovation and new product launches. They chose to keep investing in efforts to defend and extend historical, but troubled, businesses rather than innovate toward a more successful future.
Looking at the trends that put these companies into trouble we can recognize the need to continue avoiding these companies, even though many analysts are starting to say they may be "value stocks." Instead we can invest in the trends by buying companies likely to grow and increase portfolio returns in 2012.
Avoid Kodak – Buy Apple or Google
Few companies are as iconic as Eastman Kodak, inventor of amateur photography and creator of the star product in the hit 1973 Paul Simon song "Kodachrome." However, it was clear in the late 1980s that digital cameras were going to change photography. Kodak itself was one of the primary inventors of the core technology, but licensed it to others in order to generate cash it invested trying to defend and extend photographic film and paper sales. In my 2008 book "Create Marketplace Disruption" I highlighted Kodak as a company so locked-in to film sales that it was unwilling to even consider moving into new markets.
In 2011 EK lost almost all its value, falling from $3.85 share to about 60 cents. The whole company is now worth only $175M as it rapidly moves toward NYSE delisting and bankruptcy, and complete failure. The trend that doomed EK has been 2 decades in the making, yet like an ocean freighter collision management simply let momentum kill the company. The long slide has gone on for years, and will not reverse. If you want to invest in photography your best plays are smart phone suppliers Apple, and Google for not only the Android software but the Chrome apps that are being used to photoshop images right inside browser windows.
Avoid Sears – Buy Amazon
When hedge fund manager Ed Lampert took over KMart by buying their bonds in bankruptcy, then used that platform to buy Sears back in 2006 the Wall Street folks hailed him as a genius. "Mad Money" Jim Cramer said "Fast Eddie" Lampert was his former college roommate, and that was all he needed to recommend buying the stock. On the strength of such spurrious recommendations, Sears Holdings initially did quite well.
However, I was quoted in The Chicago Tribune the day of the Sears acquisition announcement saying the merged company was doomed – because the trends were clear. Wal-Mart was in pitched battle with Target to "own" the discount market which had crushed KMart. Sears was pinched by them on the low end, and by better operators of vertically focused companies such as Kohl's for clothing, Best Buy for appliances and Home Depot for repair and landscape tools. Sears was swimming against the trends, and Ed Lampert had no plans to re-invent the company. What lay ahead was cost-cutting and store closings which would kill both brands in a market already overly saturated with traditional brick-and-mortar retailers as long-term more sales moved on-line.
Now Sears Holdings has gone full circle. In the last 12 months the stock has dropped from $95 to $31.50 – a decline of more than two thirds (a loss of over $7B in investor value.) Sears and KMart have no future, nor do the Craftsman or Kenmore brands. After Christmas management announced a new round of store closings as same stores sales continues its never-ending slide, and finally most industry analysts are saying Sears has nowhere to go but down.
The retail future belongs to Amazon.com – which is where you should invest if you want to grow portfolio value in 2012. Look to Kindle Fire and other tablets to accelerate the retail movement on-line, while out-of-date Sears becomes even less relevant and of lower value.
Stay out of Nokia and Research in Motion – Buy Apple
On February 15 I wrote that Nokia had made a horrible CEO selection, and was a stock to avoid. Nokia invesors lost about $18B of value in 2001 as the stock lost 50% of its market cap in 2011 (62% peak to trough.) May 20 I pounded the table to sell RIMM, which lost nearly 80% of its investor value in 2011 – nearly $60B!
Both companies simply missed the market shift in smart phones. Nokia did its best Motorola imitation, which missed the shift from analog to digital cell phones – and then completely missed the shift to smart phones – driving the company to near bankruptcy and acquisition by Google for its patent library. With no game at all, the Nokia Board hired a former Microsoft executive to arrange a shotgun wedding for launching a new platform – 3 years too late. Now Apple and Android have over 400,000 apps each, growing weekly, while Microsoft is struggling with 50k apps, no compelling reason to switch and struggles to build a developer network. Nokia's road to oblivion appears clear.
RIM was first to the smartphone market, and had it locked up for years. Unfortunately, top management and many investors felt that the huge installed base of corporate accounts, using Blackberry secure servers, would protect the company from competition. Now the New York Times has reported RIM leadership as one of the worst in 2011, because an installed base is no longer the competitive entry barrier Michael Porter waxed about in the early 1980s. Corporations are following their users to better productivty by moving fast as possible to the iOS and Android worlds.
RIM's doomed effort to launch an ill-devised, weakly performing tablet against the Apple iPod juggernaut only served to embarrass the company, at great expense. At this point, there's little reason to think RIM will do any better than Palm did when the technology shifted, and anyone holding RIMM will likely end up with nothing (as did holders of PALM.) If you want to be in mobile your best pick is market leading and profitably growing Apple, with a second position in Google as it builds up ancillary products like Chrome to leverage its growing Android base.
Avoid HP and Sony – Buy Apple
Speaking of Palm, to paraphrase Senator Dirkson "that billion here, a billion there" that added up to some real money lost for HP. Mark Hurd consolidated HP into a company focused on building volume largely in other people's technology – otherwise known as PCs. As printing declines, and people shift to tablets and cloud apps, HP has less and less ability to build its profit base. The trends were all going in the wrong direction as market shifts make HP less and less relevant to consumer and corporate customers.
Selecting Mr. Apotheker was a disastrous choice, and I called for investors to dump the stock when he was hired in January. An ERP executive, he was firmly planted in the technology of the 1990s. With a diminished R&D, and an atrophied new product development organization HP is nothing like the organization of its founders, and the newest CEO has offered no clear path for finding the trends and re-igniting growth at HP. If you want to grow in what we used to call the PC business you need to be in tablets now – and that gets you back, once again, to Apple first, and Google second.
Which opens the door for discussing what in the 1960s through 1980s was the most innovative of all consumer electronics companies, Sony. But when Mr. Morita was replaced by an MBA CEO that began focusing the company on the bottom line, instead of new gadgets, the pipeline rapidly dried. Acquisitions, such as a music label, replaced R&D and new product development. Allegiance to protecting the CD and DVD business, and the players Sony made – along with traditional TVs and PCs – meant Sony missed the wave to MP3, to mobile digital entertainment devices, to DVRs and the emerging market for interactive TV. What was once a leader is now a follower.
As a result Sony has lost $4.5B in investor value the last 3 year, and in 2011 lost half its value falling from $37 to $18/share. As Apple emerges as the top consumer electronics technology leader and profit creator, closely chased by Google, it is unlikely Sony will ever recover that lost value.
Buying Apple, Amazon, Google and Netflix
This column has already made the case for Apple. It is almost incomprehensible how far a lead Apple has over its competition, causing investors to fear for its revenue growth prospects. As a result, the companies P/E multiple is a remarkably low single-digit number, even though its growth is well into the double digits! But its existing position in growth markets, technology leadership and well oiled new product development capability nearly assures continued profitbale growth for at least 5 years. Even though the stock, which I recommended as my number 1 buy in January, 2011, has risen some 30% maintaining a big position is remains an investors best portfolio enhancer.
Amazon was a wild ride in 2011, and today is worth almost the same as it was one year ago. Given that the company is now larger, has a more dominant position in publishing and is the world leader on the trend to on-line retail it is a very good stock to own. The choice to think long-term and build its user links through sales of Kindle Fire at cost has limited short-term profits, but every action Amazon has taken to grow has paid off handsomely because they accelerate the natural trends and position Amazon as the leader. Remaining with the trends, and the growth, offers the potential for big payoff this year and for years to come.
Google remains #2 in most markets, but remains aligned with the trends. It was disappointing that the company cancelled so many great products in 2011 – such as Gear and Wave. And it faces stiff competition in its historical ad markets from the shift toward social media and Facebook's emergence. However, Google is the best positioned company to displace Microsoft on all those tablets out there with its Chrome apps, and it still is a competitor with the potential for long-term value creation. It's just hard to be as excited about Google as Apple and Amazon.
Netflix started 2011 great, but then stumbled. Starting the year at $190, Netflix rose to $305 before falling to $75. Investors have seen an 80% decline from the peak, and a 60% decline from beginning of the year. But this was notably not because company revenues or profits fell, because they didn't. Rather concerns about price changes and long-term competition caused the stock to drop. And that's why I remain bullish for owning Netflix in 2012.
Growth can hide a multitude of sins, as I pointed out when making the case to buy in October. And Netflix has done a spectacular job of preparing itself to transition from physical DVDs to video downloads. The "game" is not over, and there is a lot of content warring left. But Netflix was first, and has the largest user base. Techcrunch recently reported on a Citi survey that found Netflix still has nearly twice the viewership of #2 Hulu (27% vs. 15%.)
Those who worry about Amazon, Google or Apple taking the Netflix position forget that those companies are making huge bets to compete in other markets and have shown less interest in making the big investments to compete on the content that is critical in the download market. AOL and Yahoo are also bound up trying to define new strategies, and look unlikely to ever be the content companies they once were.
For those who are banking on competitive war with Comcast and other cable companies to kill off Netflix look no further than how they define themselves (cable operators,) and their horrific customer relationship scores to realize that they are more interested in trying to preserve their old business than rapidly enter a new one. Perhaps one will try to buy Netflix, but they don't have the management teams or organization to compete effectively.
The fact is that Netflix still has the best strategy for its market, which is still growing exponentially, has the best pricing and is rapidly growing its content to remain in the top position. That makes it a likely pick for "turnaround of the year" by end of 2012 (at least in the tech/media industry) – even as investments rise over the next 12 months.
by Adam Hartung | Nov 11, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Web/Tech
In the back half of the 1990s Apple was clearly on the route to bankruptcy. Sun Micrososystems seriously investigated buying Apple. After a review, leadership opted not to make the acquisition. Sun’s non-officer management, bouyed on rumors of the acquisition, was heartbroken upon hearing Sun would not proceed. When Chairman Scott McNeely was asked at a management retreat why the executive team passed on Apple, he responded with “Do you think you can fix that?”
Sun leadership clearly had answered “no.” Good for a lot of us that Steve Jobs said “yes.”
Sun has largely disappeared, losing 95% of its market cap after 2000 and being acquired by Oracle. Why did Mr. Jobs succeed where the leadership of Sun, which couldn’t save itself much less Apple, feared it would fail?
For insight, look no further than the recent failure of Filene’s Basement (“Filene’s Saga Ends” Boston.com) and its acquirer Sym’s (“Retailers’s Sym’s and Filene’s Go Out of Business” Chicago Tribune.) Most of the time, when a troubled business is acquirerd not only is the buyer unable to fix the poor performer, but investments incurred by the buyer jeapardizes its business to the point of failure as well. Given the track record of corporations at fixing bad businesses, Mr. McNeely was on statistically sound footing to reject buying Apple.
Why is the track record of corporate management so bad at fixing problem businesses? Largely because most of their time is spent tyring to extend the past, rather than create a business which can thrive in the future.
The leadership of Sun didn’t see a future filled with mobile devices for music, movies or telephony. They were fixated on the Unix-based computers Sun built and sold. It was unclear how Apple would help them sell more servers, so it was a management diversion – a “poor strategic fit” – for Sun to acquire a technology intensive, talent rich organization. They passed, stayed focused on Unix servers and high-end workstations, and failed as that market shifted to PC products.
Much is the same for Filene’s Basement. A great brand, Sym’s bought Filene’s in an effort to continue pushing the discount model both Filene’s and Sym’s had historically pursued. Unfortunately, the market for discount department store merchandise was rapidly shifting to higher end middle-market players like Kohl’s, and for deeply discounted goods the internet was making deal shopping a lot easier for everyone. Because management was fixated on the old business, they missed the opportunity to make Filene’s and Sym’s a leader in new retail markets – like Amazon has done.
Remember in 2006 when Western Auto’s leader (and former hedge fund manager) Ed Lampert bought up the bonds of KMart, then used that position to acquire Sears? The market went gaga over the acquisition, heralding Mr. Lampert as a genius. Jim Cramer urged on his television program Mad Money that everyone buy Sears. Now the merged KMart/Sears company has lost much of its value, and 24×7 Wall Street claimed it was the #1 worst performing retail chain (“America’s Eight Worst-Performing Retail Chains“.)
Chart courtesy Yahoo.com 11/11/11 (note vertical scale is logarithmic)
Both KMart and Sears were deeply troubled when Mr. Lampert acquired them. But he largely followed a program of cost cutting, hoping people would return to the stores once he lowered prices. What he missed was a retail market which had shifted to Wal-Mart for the low-end products, and had fragmented into multiple competitors in the mid-priced market leaving Sears Holdings with no compelling value proposition.
Mr. Lampert has turned over management, fired scores of employees, closed stores and largely led both brands to retail irrelevancy. By trying to do more of the past, only better, faster and cheaper he ran into the buzz saw of competitors already positioned in the shifted market and created nothing new for shoppers, or investors.
And that’s why investors need to worry about Home Depot. The company was a shopper and investor darling as it maintained double digit growth through the 1980s and 1990s. But as competition matched, or beat, Home Depot’s prices – and often the capability of in-store help – growth slowed.
The Board replaced the founding leader with a senior General Electric leader named Robert Nardelli. He rapidly moved to operate the historical Home Depot success formula cheaper, better and faster by cutting costs — from employees to store operations and inventory. And customers moved even more quickly to the competition.
As the recessions worsened job growth remained scarce and eventually home values plummeted causing Home Depot’s growth to disappear. The company may be good at what it used to do, but that is simply a more competitive market that is a lot less interesting to shoppers today. Because Home Depot has not shifted into new markets, it is in a difficult situation (and considered the 5th worst performing retailer.) Who cares if you are a competitive home improvement store when your house is only worth 75% of the outstanding mortgage and you can’t refinance?
Chart source Yahoo Finance 11/11/11
And it is worth taking some time to look at Wal-Mart. The chain is famous for its rural and suburban stores selling at low prices, both as Wal-Mart and Sam’s Club. But looking forward, we see the company has failed at everything else it has tried. It’s offshore businesses have never met expectations and the company has left most markets. It’s efforts at more targeted merchandise, upscale stores and smaller stores have all been abandoned. And the company remains a serious lagger in understanding on-line sales as it has continued pouring money into defending its historical business, providing almost no return to investors for a decade.
The market is shifting, competitors have attacked its old “core,” but Wal-Mart remains stuck trying to do more, better, faster, cheaper with no clear sign it will make any difference as people change buying patterns. How can any brick-and-mortar retailer compete on cost with a web page?
Chart Source Yahoo Finance 11/11/11
All markets shift. All of them. Poor performance is most often an indication that the company has not shifted with the market. Competition in lower growth markets leads to weak revenue performance, and declining profits. Trying to “fix” the business by doing more of the same is almost always a money-losing proposition that hastens failure.
It is possble to fix a weak business. Moving with shifting markets into mobile has been very valuable for Apple investors. Two decades ago IBM shifted from hardware sales to a services focus, and the company not only escaped bankruptcy but now is worth more than Microsoft.
“Fixing” requires focusing on the future, and figuring out how to compete in the shifting market. Rather than applying cost-cutting and operational improvement, it is important to determine what future markets value, and deliver that. Zappos figured out that it could take a big lead in footwear and apparel if it offered people on-line convenience, and guaranteed taking back any products customers didn’t want (“What Other Businesses Can Learn from Zappos” CMSWire.com.) It’s sales exploded. Toms Shoes tapped into the market desire for helping others by donating a pair of shoes every time someone bought a pair, and sales are growing in double digits (CNBC video on Tom’s Shoes).
History has taught us to be pessimistic about fixing a troubled business. But that is largely because most management is fixated on trying to defend & extend the past. But turnarounds can be a lot more common if leaders instead focus on the future and meet emerging needs. It simply takes a different approach.
In the meantime, in retail it’s a lot smarter to invest in Amazon and retailers meeting emerging needs than those fixated on cost cutting and operational improvement. Be wary of Sears, Home Depot and Wal-Mart as long as management remains locked-in to its past.
by Adam Hartung | Oct 27, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Innovation, Leadership, Web/Tech
There is a big cry for innovation these days. Unfortunately, despite spending a lot of money on it, most innovation simply isn't. And that's why companies don't grow.
The giant consulting firm Booz & Co. just completed its most recent survey on innovation. Like most analysts, they tried using R&D spending as yardstick for measuring innovation. Unfortunately, as a lot of us already knew, there is no correlation:
"There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues. Many companies — notably, Apple — consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return. Meanwhile, entire industries, such as pharmaceuticals, continue to devote relatively large shares of their resources to innovation, yet end up with much less to show for it than they — and their shareholders — might hope for."
(Uh-hum, did you hear about this Abbott? Pfizer? Readers that missed it might want to glance at last week's blog about Abbott, and why it is a sell after announcing plans to split the company.)
Far too often, companies spend most of their R&D dollars on making their products cheaper, operate better, faster or do more. Clayton Christensen pointed this out some 15 years ago in his groundbreaking book "The Innovator's Dilemma" (HBS Press, 1997). Most R&D, in most industries, and for most companies, is spent trying to sustain an existing technology – not identify or develop a disruptive technology that would have far higher rates of return.
While this is easy to conceptualize, it is much harder to understand. Until we look at a storied company like Kodak – which has received a lot of news this last month.
Kodak invented amateur photography, and was rewarded with decades of profitable revenue growth as its string of cheap cameras, film products and photographic papers changed the way people thought about photographs. Kodak was the world leader in photographic film and paper sales, at great margins, and its value grew exponentially!
Of course, we all know what happened. Amateur photography went digital. No more film, and no more film developing. Even camera sales have disappeared as most folks simply use mobile phones.
But what most people don't know is that Kodak invented digital photography! Really! They were the first to create the technology, and the first to apply it. But they didn't really market it, largely because of fears they would cannibalize their film sales. In an effort to defend & extend their old business, Kodak licensed digital photography patents to camera manufacturers, abandoned R&D in the product line and maintained its focus on its core business. Kodak kept making amateur film better, faster and cheaper – until nobody cared any more.
Of course, Kodak wasn't the first to fall into this trap. Xerox invented desktop publishing but let that market go to Apple, Wintel suppliers and HP printers as it worked diligently trying to defend & extend its copier business. With no click meter on the desktop publishing equipment, Xerox wasn't sure how to make money with it. So they licensed it away.
DEC pretty much created and owned the CAD/CAM business before losing it to AutoCad. Sears created at home shopping, a market now dominated by Amazon. What's your favorite story?
It's a pattern we see a lot. And nowhere worse than at Microsoft.
Do you remember that Microsoft had the Zune player at least as early as the iPod, but didn't bother to develop the technology, or market, letting Apple take the lead in digital music and video devices? Did you remember that the Windows CE smartphone (built by HTC) beat the iPhone to market by years? But Microsoft didn't really develop an app base, didn't really invest in the smartphone technology or market – and let first RIM and later Apple run away with that market as well.
Now, several years too late Microsoft hopes its Nokia partnership will help it capture a piece of that market – despite its still rather apparent lack of an app base or breakthrough advantage.
Microsoft is a textbook example of over-investing in existing technology, in an effort to defend & extend an existing product line, to the point of "over-serving" customer needs. What new extensions do you want from your PC or office software?
Do you remember Clippy? That was the little paper clip that came up in Windows applications to help you do your job better. It annoyed everyone, and was disabled by everyone. A product development that nobody wanted, yet was created and marketed anyway. It didn't sell any additional software products – but it did cost money. That's defend & extend spending.
How much a company spends on innovation doesn't matter, because what's important is what the company spends on real breakthroughs rather than sustaining ideas. Microsoft spends a lot on Windows and Office – it doesn't spend enough on breakthrough innovation for mobile products or games.
And it doesn't spend nearly enough on marketing non-PC innovations. We are already well into the back end of the PC lifecycle. Today more bandwidth is consumed from mobile devices than PC laptops and desktops. Purchase rates of mobile devices are growing at double digits, while companies (and individuals) are curtailing PC purchases. But Microsoft missed the boat because it chose to defend & extend PCs years ago, rather than really try to develop the technology and markets for CE and Zune.
Just look at where Microsoft spends money today. It's hottest innovation is Kinect. But that investment is dwarfed by spending on Skype – intended to extend PC life – and ads promoting the use of PC technologies for families this holiday season.
Unfortunately, there are almost no examples of companies that miss the transition to a new technology thriving. And that's why it is really important to revisit the Kodak chart, and then look at a Microsoft chart.
(Chart 10/27/11)
Do you think Microsoft, after this long period of no value increase, is more likely to go up in value, or more likely to follow Kodak? Unfortunately, there are few companies that make the transition. But there have been thousands that have not. Companies that had very high market share, once made a lot of money, but fell into failure because they invested in better, faster, cheaper rather than innovation.
If you are still holding Kodak, why? If you're still holding Microsoft, Abbott, Kraft, Sara Lee, Sears or Wal-Mart — why?
by Adam Hartung | Oct 12, 2011 | Current Affairs, Defend & Extend, eBooks, In the Rapids, In the Whirlpool, Innovation, Leadership, Lifecycle, Lock-in, Transparency, Web/Tech
Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.) Now that’s a serious growth stall, which should worry all investors. Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion. Faster than most people think.
After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors. Not just Target, that is almost as low price and has better merchandise. Wal-Mart’s monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots. Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise. Aldi beats Wal-Mart hands-down in groceries. Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices. And companies like Kohl’s and J.C. Penney offer more fashionable goods at just slightly higher prices. On all fronts, traditional retailers are chiseling away at Wal-Mart’s #1 position – and at its margins!
Yet, the company has eschewed all opportunities to shift with the market. It’s primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com). Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) – sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive – as shown by the last 9 quarters.
On top of this, the retail market is shifting pretty dramatically. The big trend isn’t the growth of discount retailing, which Wal-Mart rode to its great success. Now the trend is toward on-line shopping. MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:
- In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
- Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.
This trend has been emerging for over a decade. The “retail revolution” was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt. And that problem is worsening as the trend on-line keeps shrinking the traditional market. Several retailers are expected to fail. Entire categories of stores. As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!
While Wal-Mart is huge, and won’t die overnight, as sure as the dinosaurs failed when the earth’s weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.
The winners will be on-line retailers, who like David versus Goliath use techology to change the competition. And the clear winner at this, so far, is the one who’s identified trends and invested heavily to bring customers what they want while changing the battlefield. Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:
- Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
- Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
- Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
- Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
- Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
- Amazon built on the mobility trend when its suppliers, publishers, didn’t respond by creating Kindle – which has revolutionized book sales.
- Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the “Wal-Mart Slayer“
Each of these actions were directly related to identifying trends and offering new solutions. Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy. Just look at sales of Kindle books:
Source: BusinessInsider.com
Unlike Wal-Mart customers, Amazon’s keep growing at double digit rates. In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase. Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to 80,000 per day unit sales for iPad2. Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.
While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base. Despite only a few month’s experience, Amazon is bigger than Google Offers, and is growing at least 20% faster.
After 1980 investors used to say that General Motors might not be run well, but it would never go broke. It was considered a safe investment. In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model. Wal-Mart is an identical story, only it won’t have 3 decades of slow decline. The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete.
Given that gladiators, at best, end up bloody – and most often dead – investing in one is not a good approach to wealth creation. However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors. Amazon today is a really good opportunity.
