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 | May 25, 2011 | Defend & Extend, Disruptions, In the Swamp, Innovation, Leadership, Lock-in, Openness, Transparency, Web/Tech
Nobody admits to being the innovation killer in a company. But we know they exist. Some these folks “dinosaurs that won’t change.” Others blame “the nay-saying ‘Dr. No’ middle managers.” But when you meet these people, they won’t admit to being innovation killers. They believe, deep in their hearts as well as in their everyday actions, that they are doing the right thing for the business. And that’s because they’ve been chosen, and reinforced, to be the Status Quo Police.
When a company starts it has no norms. But as it succeeds, in order to grow quickly it develops a series of “key success factors” that help it continue growing. In order to grow faster, managers – often in functional roles – are assigned the task of making sure the key success factors are unwaveringly supported. Consistency becomes more important than creativity. And these managers are reinforced, supported, even bonused for their ability to make sure they maintain the status quo. Even if the market has shifted, they don’t shift. They reinforce doing things according to the rules. Just consider:
Quality – Who can argue with the need to have quality? Total Quality Management (TQM,) Continuous Improvement (CI,) and Six Sigma programs all have been glorified by companies hoping to improve product or service quality. If you’re trying to fix a broken product, or process, these work pretty well at helping everyone do their job better.
But these programs live with the mantra “if you can’t measure it, you can’t improve it. Measure everything that’s important.” If you’re innovating, what do you measure? If you’re in a new technology, or manufacturing process, how do you know what you really need to do right? If you’re in a new market, how do you know the key metric for sales success? Is it number of customers called, time with customers, number of customer surveys, recommendation scores, lost sales reports? When you’re trying to do something new, a lot of what you do is respond quickly to instant feedback – whether it’s good feedback or bad.
The key to success isn’t to have critical metrics and measure performance on a graph, but rather to learn from everything you do – and usually to change. Quality people hate this, and can only stand in the way of trying anything new because you don’t know what to measure, or what constitutes a “good” measure. Don’t ever forget that Motorola pretty much invented Six Sigma, and what happened to them in the mobile phone business they pioneered?
Finance. All businesses exist to make money, so who can argue with “show me the numbers. Give me a business plan that shows me how you’re going to make money.” When your’e making an incremental investment to an existing asset or process, this is pretty good advice.
But when you’re innovating, what you don’t know far exceeds what you know. You don’t know how to meet unment needs. You don’t know the market size, the price that people will pay, the first year’s volume (much less year 5,) the direct cost at various volumes, the indirect cost, the cost of marketing to obtain customer attention, the number of sales calls it will take to land a sale, how many solution revisions will be necessary to finally put out the “right” solution, or how sales will ramp up quarterly from nothing. So to create a business plan, you have to guess.
And, oh boy, then it gets ugly. “Where did this number come from? That one? How did you determine that?” It’s not long until the poor business plan writer is ridden out of the meeting on a rail. He has no money to investigate the market, so he can’t obtain any “real” numbers, so the business plan process leads to ongoing investment in the old business, while innovation simply stalls.
Under Akia Morita Sony was a great innovator. But then an MBA skilled in finance took over the top spot. What once was the #1 electronics innovator in the globe has become, well, let’s say they aren’t Apple.
Legal – No company wants to be sued, or take on unnecessary risk. And when you’re selling something, lawyers are pretty good at evaluating the risk in that business, and lowering the risk. While making sure that all the compliance issues are met in order to keep regulators – and other lawyers – out of the business.
But when you’re starting something new, everything looks risky. Customers can sue you for any reason. Suppliers can sue you for not taking product, or using it incorrectly. The technology could fail, or have negative use repercussions. Reguators can question your safety standards, or claims to customers.
From a legal point of view, you’re best to never do anything new. The less new things you do, the less likely you are to make a mistake. So legal’s great at putting up roadblocks to make sure they protect the company from lawsuits, by making sure nothing really new happens. The old General Motors had plenty of lawyers making sure their cars were never too risky – or interesting.
R&D or Product Development – Who doesn’t think it’s good to be a leader in a specific technology? Technology advances have proven invaluable for companies in industries from computers to pharmaceuticals to tractors and even services like on-line banking. Thus R&D and Product Development wants to make sure investments advance the state of the technology upon which the company was built.
But all technologies become obsolete. Or, at least unprofitable. Innovators are frequently on the front end of adopting new technologies. But if they have to obtain buy-in from product development to obtain staffing or money they’ll be at the end of a never-ending line of projects to sustain the existing development trend. You don’t have to look much further than Microsoft to find a company that is great at pouring money into the PC platform (some $9B, 16% of revenue in 2009,) while the market moves faster each year to mobile devices and entertainment (Apple spent 1/8th the Microsoft budget in 2009.)
Sales, Marketing & Distribution – When you want to protect sales to existing customers, or maybe increase them by 5%, then doing more of what you’ve always done is smart. So money is spent to put more salespeople on key accounts, add more money to the advertising budget for the most successful (or most profitable) existing products. There are more rules about using the brand than lighters at a smoker’s convention. And it’s heresy to recommend endangering the distribution channel that has so successfully helped increase sales.
But innovators regularly need to behave differently. They need to sell to different people – Xerox sold to secretaries while printing press manufacturers sold to printers. The “brand” may well represent a bygone era, and be of no value to someone launching a new product; are you eager to buy a Zenith electronic device? Sprucing up the brand, or even launching something new, may well be a requirement for a new solution to be taken seriously.
And often, to be successful, a new solution needs to cut through the old, high-cost distribution system directly to customers if it is to succeed. Pre-Gerstner IBM kept adding key account sales people in hopes of keeping IT departments from switching out of mainframes to PCs. Sears avoided the shift to on-line sales successfully – and revenue keeps dropping in the stores.
Information Technology – To make more money you automate more functions. Computers are wonderful for reducing manpower in many tasks. So IT implements and supports “standard solutions” that are cost effective for the historical business. Likewise, they set up all kinds of user rules – like don’t go to Facebook or web sites from work – to keep people focused on productivity. And to make sure historical data is secure and regulations are met.
But innovators don’t have a solution mapped out, and all that automated functionality is an enormously expensive headache. When being creative, more time is spent looking for something new than trying to work faster, or harder, so access to more external information is required. Since the solution isn’t developed, there’s precious little to worry about keeping secure. Innovators need to use new tools, and have flexibility to discover advantageous ways to use them, that are far beyond the bounds of IT’s comfort zone.
Newspapers are loaded with automated systems to collect and edit news, to enter display ads, and to “Make up” the printed page fast and cheap. They have automated systems for classified advertising sales and billing, and for display ad billing. And systems to manage subscribers. That technology isn’t very helpful now, however, as newspapers go bankrupt. Now the most critical IT skills are pumping news to the internet in real-time, and managing on-line ads distributed to web users that don’t have subscriptions.
Human Resources – Growth pushes companies toward tighter job descriptions with clear standards for “the kinds of people that succeed around here.” When you want to hire people to be productive at an existing job, HR has the procedures to define the role, find the people and hire them at the most efficient cost. And they can develop a systematic compensation plan that treats everyone “fairly” based upon perceived value to the historical business.
But innovators don’t know what kinds of people will be most successful. Often they need folks who think laterally, across lots fo tasks, rather than deeply about something narrow. Often they need people who are from different backgrounds, that are closer to the emerging market than the historical business. And pay has to be related to what these folks can get in the market, not what seems fair through the lens of the historical business. HR is rarely keen to staff up a new business opportunity with a lot of misfits who don’t appreciate their compensation plan – or the rules so carefully created to circumscribe behavior around the old business.
B.Dalton was America’s largest retail book seller when Amazon.com was founded by Jeff Bezos. Jeff knew nothing about books, but he knew the internet. B.Dalton knew about books, and claimed it knew what book buyers wanted. Two years later B.Dalton went bankrupt, and all those book experts became unemployed. Amazon.com now sells a lot more than books, as it ongoingly and rapidly expands its employee skill sets to enter new markets – like publishing and eReaders.
Innovation requires that leaders ATTACK the Status Quo Police. Everything done to efficiently run the old business is irrelevant when it comes to innovation. Functional folks need to be told they can’t force the innovatoirs to conform to old rules, because that’s exactly why the company needs innovation! Only by attacking the old rules, and being willing to allow both diversity and disruption can the business innovate.
Instead of saying “this isn’t how we do things around here” it is critical leaders make sure functional folks are saying “how can I help you innovate?” What was done in the name of “good business” looks backward – not forward. Status Quo cops have to be removed from the scene – kept from stopping innovation dead in its tracks. And if the internal folks can’t be supportive, that means keeping them out of the innovator’s way entirely.
Any company can innovate. Doing so requires recognizing that the Status Quo Police are doing what they were hired to do. Until you take away their clout, attack their role and stop them from forcing conformance to old dictums, the business can’t hope to innovate.
by Adam Hartung | Sep 16, 2010 | Current Affairs, Defend & Extend, Food and Drink, Innovation, Leadership, Lock-in, Openness, Web/Tech
Summary:
- Businesses usually try defending an old solution in the face of an emerging new solution
- Status Quo Police use “cannibalization” concerns to stop the organization from moving to new solutions and new markets
- If you don’t move early, you end up with a dying business – like newspapers – as new competitors take over the customer relationship – like Apple is doing with news subscriptions
- You can adapt to shifting markets, profitably growing
- You must disrupt your lock-ins to the old success formula, including stopping the Status Quo Police from using the cannibalization threat
- You should set up White Space teams early to embrace the new solutions and figure out how to profitably grow in the new market space
When Sony saw MP3 technology emerging it worked hard to defend sales of CDs and CD Players. It didn’t want to see a decline in the pricing, or revenue, for its existing business. As a result, it was really late to MP3 technology, and Apple took the lead. This is the classic “Innovator’s Dilemma” as described by Professor Clayton Christenson of Harvard. Existing market leaders get so hung up on defending and extending the current business, they fear new solutions, until they become obsolete.
In the 1980s Pizza Hut could see the emergence of Domino’s Pizza. But Pizza Hut felt that delivered pizza would cannibalize the eat-in pizza market management sought to dominate. As a result Pizza Hut barely participated in what became a multi-biliion dollar market for Domino’s and other delivery chains.
The Status Quo Police drag out their favorite word to fight any move into new markets. Cannibalization. They say over and over that if the company moves to the new market solution it will cannibalize existing sales – usually at a lower margin. Sure, there may someday be a future time to compete, but today (and this goes on forever) management should keep close to the existing business model, and protect it.
That’s what the newspapers did. All of them could see the internet emerging as a route to disseminate news. They could see Monster.com, Vehix.com, eBay, CraigsList.com and other sites stealing away their classified ad customers. They could see Google not only moving their content to other sites, but placing ads with that content. Yet, all energy was expended trying to maintain very expensive print advertising, for fear that lower priced internet advertising would cannibalize existing revenues.
Now, bankrupt or nearly so, the newspapers are petrified. The San Jose Mercury News headlines “Apple to Announce Subscription Plan for Newspapers.” As months have passed the newspapers have watched subscriptions fall, and not built a viable internet distribution system. So Apple is taking over the subscription role – and will take a cool third of the subscription revenue to link readers to the iPad on-line newspaper. Absolute fear of cannibalization, and strong internal Status Quo Police, kept the newspapers from embracing the emerging solution. Now they will find themselves beholden to the device providers – Apple’s iPad, Amazon’s Kindle, or a Google Android device.
But it doesn’t have to be that way. Netflix built a profitable growth business delivering DVDs to subscribers. Streaming video clearly would cannibalize revenues, because the price is lower than DVDs. But Netflix chose to embrace streaming – to its great betterment! The Wrap headlines “Why Hollywood should be Afraid of Netfilx – Very Afraid.” As reported, Netflix is now growing even FASTER with its streaming video – and at a good margin. The price per item may be lower – but the volume is sooooo much higher!
Had Netflix defended its old model it was at risk of obsolescence by Hulu.com, Google, YouTube or any of several other video providers. It could have tried to slow switching to streaming by working to defend its DVD “core.” But by embracing the market shift Netflix is now in a leading position as a distributor of streaming content. This makes Netfilx a very powerful company when negotiating distribution rights with producers of movie or television content (thus the Hollywood fear.) By embracing the market shift, and the future solution, Netflix is expanding its business opportunity AND growing revenue profitably.
Don’t let fear of cannibalization, pushed by the Status Quo Police, stop your business from moving with market shifts. Such fear will make you like the proverbial deer, stuck on the road, staring at the headlights of an oncoming auto — and eventually dead. Embrace the market shift, Disrupt your Locked-in thoughts (like “we distribute DVDs”) and set up White Space teams to figure out how you can profitably grow in the new market!
by Adam Hartung | Aug 30, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
Summary:
- We like to think we can compete effectively by waiting on others to show us the market direction
- You cannot make high rates of return with a “fast follower” strategy
- Companies that constantly take innovations to market grow longer, and make higher rates of return
- White Space allows you to learn, grow and be smart about when to get out while costs are low
“I want to be a fast follower. Let somebody else carry the cost of learning what the market wants and what solutions work. I plan to come in fast behind the leader and make more money by avoiding the investment.” Have you ever heard someone talk this way? It sounds so appealing. Only problem is – it very rarely works! Fast followers might gain share sometimes, but universally they have terrible margins. Their sales come at an enormous investment cost.
Those who enter new markets early actually gain a lot, for little cost. Take for example Amazon.com’s early entry into electronic publishing with Kindle. Entering early gave Amazon a huge advantage. Amazon may have appeared to be floundering, potentially “wasting” resources, but it was learning how the technology of e-Ink worked, how costs could be driven down and what users demanded in a solution. Every quarter Amazon was learning how to find new uses for the Kindle, making it more viable, finding new customers, encouraging repeat purchases and growing. Now Mediapost.com headlines “Review: New Kindle Kicks (Even Apple’s) B*tt.”
Now there are a raft of “fast followers” trying to catch the Kindle in the eReader market. But the Kindle is far lighter, easier to use, with greater functionality and available at one of the market’s lowest prices. While the cost of entry was low, Amazon learned immensely. That knowledge is not repeatable by companies trying to now play “catch up” without spending multiples of what Amazon spent. Amazon is so far in front of other eReaders that it’s competition is the vastly more sophisticated (and expensive) mobile devices from Apple (iPhone and iPad). By entering early, Amazon has lower cost, and considerably more/better market knowledge, than later entrants.
We see this very clearly in Microsoft’s smart phone approach. Microsoft got far behind in smart phones, losing over 2/3 its market share, as it focused on Windows 7 and Office 2010 the last 3 years while Resarch in Motion (RIM) Apple and Google pioneered the market. Now the 3 leaders have millions of units in the market, low price point establishment, and between them somewhere between 400,000 and 500,000 mobile apps available.
As reported in Mediapost.com “Microsoft Gets Serious with Windows 7 Phone” entering now is VERY expensive for Microsoft. Microsoft spent almost $1billion on Kin, which it dropped after only a few months because the product was seriously unable to compete. So now Microsoft is expecting to spend $500million on launch costs for a Windows 7 mobile operating system. But it faces a daunting challenge, what with 350,000 or so iPhone apps in existence, and Google giving Android away for free (as well as sporting some 100,000 apps itself).
The cost of entry, ignoring Microsoft’s technology development cost, to get the mindshare of developers for app development (so Windows 7 mobile doesn’t slip into the Palm or Blackberry problem of too few apps to be interesting) as well as minds of potential buyers will more likely cost well over $1B – just for communications!! Microsoft now has to take share away from the market leaders – a very expensive proposition! Like XBox marketing, these exorbitant marketing costs could well go on for several years. XBox has had only 1 quarter near break-even, all others showing massive losses. The same is almost guaranteed for the Windows 7 phone. And it’s entering so late that it may never, even with all that money being spent, catch the two leaders! Who are the new users that will come along, and what is Microsoft uniquely offering? It’s expensive to buy mind and market share.
Clearly Apple and Android entered the smart phone market at vastly lower cost, and have developed what are already profitable businesses. Microsoft will lose money, possibly for years, and may still fail – largely because it focused on its core products and chose to undertake a “fast follower” strategy in the high growth smart phone business.
We like to believe things that reinforce our behaviors. We like to think that tortoises can outrun hares. But that only happens when hares make foolish decisions. Rarely in business are the early entrants foolish. Most learn – a lot – at low cost. They figure out where the early customers are with unmet needs, and how to fulfill those needs. They learn how to identify ways to grow the business, manage costs and earn a profit. And they learn at a much lower cost than late followers. They capture mind and market share, and work hard to grow the business with new customers keeping them profitable and maintaining share.
We want to think that innovators bear a high risk. But it’s simply not true. Innovators take advantage of market learning to create revenues and profits at lower cost. Companies that keep White Space projects flourishing, entering new markets generating growth, earn higher rates of return longer than any other strategy. Just look at Cisco, Nike, Virgin, J&J and GE (until very recently). The smart money gets into the game early, developing a winning approach — or getting out before the costs get too high!
by Adam Hartung | May 25, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
The leadership of Microsoft's entertainment division are leaving, as reported at TechFlash.com "Bach, Allard leaving Microsoft in Big Shift for Consumer Businesses." Whether by their own choice or by request, the issue is simply that Microsoft has not driven the XBox to a dominant position versus the Sony Playstation or the Ninendo Wii. It is competitive, but not a big winner. The entertainment division has only recently moved beyond break-even, after years of losing billions of dollars. In the high-growth gaming business, Microsoft has simply not performed, despite its vast resources. And mobile devices developed in this division have lost over half their market share in under 2 years to Apple and Google.
Some of the weakness may have been that the leaders were long-term Microsoft veterans, comfortable to Mr. Ballmer and other leaders, rather than executives committed to their markets. Messrs. Bach and Allard were not they type of leaders to challenge the Microsoft Success Formula, instead willing to accept mediocre results rather than violate Microsoft Lock-ins that would have jeopardized their careers. Microsoft was willing to lose money, and not be a big winner, as long as the division leadership didn't challenge Lock-ins or the company focus on desktop computing products.
I'm not optimistic now that the division is reporting directly to CEO Steve Ballmer. He had an enormous role in the company decision to commit vast resources to Defending the old Success Formula by massing hundreds of billions of dollars behind development and rollout of Office 2007, now office 2010, Vista and now System 7. Yet, these projects have done nothing to grow Microsoft; instead only helping the company hold onto old customers. Worse, Mr. Ballmer himself recently informed the world in his CEO Summit (as reported in Computerworld "Microsoft's Ballmer admits 'Window's Vista was just not executed well") that he's not a good leader of product development – costing the company thousands of man-years in wasted development when admittedly mismanaging Vista!
Chart source Business Insider
Now, largely due to the ongoing Defend & Extend management practices of Mr. Ballmer, Microsoft and Apple's valuations are in a dead heat. Growth at Microsoft is poor, while Apple with its multiple new products is growing much faster – causing Apple's value to catch up to what has historically been the world's largest software company.
As I commented on the recent interview for bnet.com (available as a podcast) Microsoft's Defend & Extend management practices are deeply rooted in the industrial economy. But they are insufficient for success in today's rapidly shifting marketplace. I discussed this in more depth for my keynote address at the Western Michigan Innovation & Energy Summit last week, and a second article was published in the local newspaper on Saturday "Customer is Always Right? Columnist says not for Innovative Businesses." Specifically, Microsoft's total commitment to maintaining old operating system and Office customers has created an inability to re-focus resources on high growth markets like gaming and mobile devices.
Although Microsoft has solutions – including tablet technology – it's management is Locked-in to Defending what it always did and not committing to new growth markets. Anyone who thinks Microsoft will be the major player in cloud computing, just because it has demonstrated some new products, must look closely at how poorly the company has developed these other growth markets. Technology and products are not enough when management is Locked in to protecting past markets. Microsoft is far behind Google, and has practically no catch of being a major player with so much resource dedicated to Office 2010 and System 7.
Thus investors as well as customers and employees are not doing so well at Microsoft. In the rapidly shifting technology and gaming markets, this inability to commit to new markets is deadly. For Microsoft, replacing the heads of the entertainment division is most likely analogous to rearranging the deck chairs on ocean liner Titanic. The pending outcome is rapidly becoming inevitable. Time to look for lifeboats!
