by Adam Hartung | Aug 29, 2014 | Current Affairs, In the Whirlpool, Leadership
It’s Labor Day, and a time when we naturally think about our jobs.
When it comes to jobs creation, no role is more critical than the CEO. No company will enter into a growth phase, selling more product and expanding employment, unless the CEO agrees. Likewise, no company will shrink, incurring job losses due to layoffs and mass firings, unless the CEO agrees. Both decisions lay at the foot of the CEO, and it is his/her skill that determines whether a company adds jobs, or deletes them.
Over 2 years ago (5 May, 2012) I published “The 5 CEOs Who Should Be Fired.” Not surprisingly, since then employment at all 5 of these companies has lagged economic growth, and in all but one case employment has shrunk. Yet, 3 of these CEOs remain in their jobs – despite lackluster (and in some cases dismal) performance. And all 5 companies are facing significant struggles, if not imminent failure.
#5 – John Chambers at Cisco
In 2012 it was clear that the market shift to public networks and cloud computing was forever changing the use of network equipment which had made Cisco a modern growth story under long-term CEO Chambers. Yet, since that time there has been no clear improvement in Cisco’s fortunes. Despite 2 controversial reorganizations, and 3 rounds of layoffs, Cisco is no better positioned today to grow than it was before.
Increasingly, CEO Chambers’ actions reorganizations and layoffs look like so many machinations to preserve the company’s legacy rather than a clear vision of where the company will grow next. Employee morale has declined, sales growth has lagged and although the stock has rebounded from 2012 lows, it is still at least 10% short of 2010 highs – even as the S&P hits record highs. While his tenure began with a tremendous growth story, today Cisco is at the doorstep of losing relevancy as excitement turns to cloud service providers like Amazon. And the decline in jobs at Cisco is just one sign of the need for new leadership.
#4 Jeff Immelt at General Electric
When CEO Immelt took over for Jack Welch he had some tough shoes to fill. Jack Welch’s tenure marked an explosion in value creation for the last remaining original Dow Jones Industrials component company. Revenues had grown every year, usually in double digits; profits soared, employment grew tremendously and both suppliers and investors gained as the company grew.
But that all stalled under Immelt. GE has failed to develop even one large new market, or position itself as the kind of leading company it was under Welch. Revenues exceeded $150B in 2009 and 2010, yet have declined since. In 2013 revenues dropped to $142B from $145B in 2012. To maintain revenues the company has been forced to continue selling businesses and downsizing employees every year. Total employment in 2014 is now less than in 2012.
Yet, Mr. Immelt continues to keep his job, even though the stock has been a laggard. From the near $60 it peaked at his arrival, the stock faltered. It regained to $40 in 2007, only to plunge to under $10 as the CEO’s over-reliance on financial services nearly bankrupted the once great manufacturing company in the banking crash of 2009. As the company ponders selling its long-standing trademark appliance business, the stock is still less than half its 2007 value, and under 1/3 its all time high. Where are the jobs? Not GE.
#3 Mike Duke at Wal-Mart
Mr. Duke has left Wal-Mart, but not in great shape. Since 2012 the company has been rocked by scandals, as it came to light the company was most likely bribing government officials in Mexico. Meanwhile, it has failed to defend its work practices at the National Labor Relations Board, and remains embattled regarding alleged discrimination of female employees. The company’s employment practices are regularly the target of unions and those supporting a higher minimum wage.
The company has had 6 consecutive quarters of declining traffic, as sales per store continue to lag – demonstrating leadership’s inability to excite people to shop in their stores as growth shifts to dollar stores. The stock was $70 in 2012, and is now only $75.60, even though the S&P 500 is up about 50%. So far smaller format city stores have not generated much attention, and the company remains far behind leader Amazon in on-line sales. WalMart increasingly looks like a giant trapped in its historical house, which is rapidly delapidating.
One big question to ask is who wants to work for WalMart? In 2013 the company threatened to close all its D.C. stores if the city council put through a higher minimum wage. Yet, since then major cities (San Francisco, Chicago, Los Angeles, Seattle, etc.) have either passed, or in the process of passing, local legislation increasing the minimum wage to anywhere from $12.50-$15.00/hour. But there seems no response from WalMart on how it will create profits as its costs rise.
#2 Ed Lampert at Sears
Nine straight quarterly losses. That about says it all for struggling Sears. Since the 5/2012 column the CEO has shuttered several stores, and sales continue dropping at those that remain open. Industry pundits now call Sears irrelevant, and the question is looming whether it will follow Radio Shack into oblivion soon.
CEO Lampert has singlehandedly destroyed the Sears brand, as well as that of its namesake products such as Kenmore and Diehard. He has laid off thousands of employees as he consolidated stores, yet he has been unable to capture any value from the unused real estate. Meanwhile, the leadership team has been the quintessential example of “a revolving door at headquarters.” From about $50/share 5/2012 (well off the peak of $190 in 2007,) the stock has dropped to the mid-$30s which is about where it was in its first year of Lampert leadership (2004.)
Without a doubt, Mr. Lampert has overtaken the reigns as the worst CEO of a large, publicly traded corporation in America (now that Steve Ballmer has resigned – see next item.)
#1 Steve Ballmer at Microsoft
In 2013 Steve Ballmer resigned as CEO of Microsoft. After being replaced, within a year he resigned as a Board member. Both events triggered analyst enthusiasm, and the stock rose.
However, Mr. Ballmer left Microsoft in far worse condition after his decade of leadership. Microsoft missed the market shift to mobile, over-investing in Windows 8 to shore up PC sales and buying Nokia at a premium to try and catch the market. Unfortunately Windows 8 has not been a success, especially in mobile where it has less than 5% share. Surface tablets were written down, and now console sales are declining as gamers go mobile.
As a result the new CEO has been forced to make layoffs in all divisions – most substantially in the mobile handset (formerly Nokia) business – since I positioned Mr. Ballmer as America’s worst CEO in 2012. Job growth appears highly unlikely at Microsoft.
“CEOs – From Makers to Takers”
Forbes colleague Steve Denning has written an excellent column on the transformation of CEOs from those who make businesses, to those who take from businesses. Far too many CEOs focus on personal net worth building, making enormous compensation regardless of company performance. Money is spent on inflated pay, stock buybacks and managing short-term earnings to maximize bonuses. Too often immediate cost savings, such as from outsourcing, drive bad long-term decisions.
CEOs are the ones who determine how our collective national resources are invested. The private economy, which they control, is vastly larger than any spending by the government. Harvard professor William Lazonick details how between 2003 and 2012 CEOs gave back 54% of all earnings in share buybacks (to drive up stock prices short term) and handed out another 37% in dividends. Investors may have gained, but it’s hard to create jobs (and for a nation to prosper) when only 9% of all earnings for a decade go into building new businesses!
There are great CEOs out there. Steve Jobs and his replacement Tim Cook increased revenues and employment dramatically at Apple. Jeff Bezos made Amazon into an enviable growth machine, producing revenues and jobs. These leaders are focused on doing what it takes to grow their companies, and as a result the jobs in America.
It’s just too bad the 5 fellows profiled above have done more to destroy value than create it.
by Adam Hartung | Jul 28, 2014 | Current Affairs, Defend & Extend, In the Whirlpool, Web/Tech
Over the last couple of weeks big announcements from Apple, IBM and Microsoft have set the stage for what is likely to be Microsoft’s last stand to maintain any sense of personal technology leadership.
Custer Tries Holding Off An Unstoppable Native American Force
To many consumers the IBM and Apple partnership probably sounded semi-interesting. An app for airplane fuel management by commercial pilots is not something most people want. But what this announcement really amounted to was a full assault on regaining dominance in the channel of Value Added Resellers (VARs) and Value Added Dealers (VADs) that still sell computer “solutions” to thousands of businesses. Which is the last remaining historical Microsoft stronghold.
Think about all those businesses that use personal technology tools for things like retail point of purchase, inventory control, loan analysis in small banks, restaurant management, customer data collection, fluid control tracking, hotel check-in, truck routing and management, sales force management, production line control, project management — there is a never-ending list of business-to-business applications which drive the purchase of literally millions of devices and applications. Used by companies as small as a mom-and-pop store to as large as WalMart and JPMorganChase. And these solutions are bundled, sold, delivered and serviced by what is collectively called “the channel” for personal technology.
This “channel” emerged after Apple introduced the Apple II running VisiCalc, and businesses wanted hundreds of these machines. Later, bundling educational software with the Apple II created a near-monopoly for Apple channel partners who bundled solutions for school systems.
But, as the PC emerged this channel shifted. IBM pioneered the Microsoft-based PC, but IBM had long used a direct sales force. So its foray into personal computing did a very poor job of building a powerful sales channel. Even though the IBM PC was Time magazine’s “Man of the Year” in 1982, IBM lost its premier position largely because Microsoft took advantage of the channel opportunity to move well beyond IBM as a supplier.
Microsoft focused on building a very large network of developers creating an enormous variety of business-to-business applications on the Windows+Intel (Wintel) platform. Microsoft created training programs for developers to use its operating system and tools, while simultaneously cultivating manufacturers (such as Dell and Compaq) to build low cost machines to run the software. “Solution selling” was where VARs bundled what small businesses – and even many large businesses – needed by bringing together developer applications with manufacturer hardware.
It only took a few years for Microsoft to overtake Apple and IBM by dominating and growing the VAR channel. Apple did a poor job of creating a powerful developer network, preferring to develop everything users should want itself, so quickly it lacked a sufficient application base. IBM constantly tried to maintain its direct sales model (and upsell clients from PCs to more expensive hardware) rather than support the channel for developing applications or selling solutions based on PCs.
But, over the last several years Microsoft played “bet the company” on its launch of Windows 8. As mobile grew in hardware sales exponentially, and PC sales flattened (then declined,) Microsoft was tepid regarding any mobile offering. Under former CEO Steve Ballmer, Microsoft preferred creating an “all-in-one” solution via Win8 that it hoped would keep PC sales moving forward while slowly allowing its legions of Microsoft developers to build Win8 apps for mobile Surface devices — and what it further hoped would be other manufacturer’s tablets and phones running Win8.
This flopped. Horribly. Apple already had the “installed base” of users and mobile developers, working diligently to create new apps which could be released via its iTunes distribution platform. As a competitive offering, Google had several years previously launched the Android operating system, and companies such as HTC and Samsung had already begun building devices. Developers who wanted to move beyond Apple were already committed to Android. Microsoft was simply far too late to market with a Win8 product which gave developers and manufacturers little reason to invest.
Now Microsoft is in a very weak position. Despite much fanfare at launch, Microsoft was forced to take a nearly $1B write-off on its unsellable Surface devices. In an effort to gain a position in mobile, Microsoft previously bought phone maker Nokia, but it was simply far too late and without a good plan for how to change the Apple juggernaut.
Apple is now the dominant player in mobile, with the most users, developers and the most apps. Apple has upended the former Microsoft channel leadership position, as solution sellers are now offering Apple solutions to their mobile-hungry business customers. The merger with IBM brings even greater skill, and huge resources, to augmenting the base of business apps running on iOS and its devices (presently and in the future.) It provides encouragement to the VARs that a future stream of great products will be coming for them to sell to small, medium and even large businesses.
Caught in a situation of diminishing resources, after betting the company’s future on Windows 8 development and launch, and then seeing PC sales falter, Microsoft has now been forced to announce it is laying off 18,000 employees. Representing 14% of total staff, this is Microsoft’s largest reduction ever. Costs for the downsizing will be a massive loss of $1.1-$1.6B – just one year (almost to the day) after the huge Surface write-off.
Recognizing its extraordinarily weak market position, and that it’s acquisition of Nokia did little to build strength with developers while putting it at odds with manufacturers of other mobile devices, the company is taking some 12,000 jobs out of its Nokia division – ostensibly the acquisition made at a cost of $7.2B to blunt iPhone sales. Every other division is also suffering headcount reductions as Microsoft is forced to “circle the wagons” in an effort to find some way to “hold its ground” with historical business customers.
Today Apple is very strong in the developer community, already has a distribution capability with iTunes to which it is adding mobile payments, and is building a strong channel of VARs seeking mobile solutions. The IBM partnership strengthens this position, adds to Apple’s iOS developers, guarantees a string of new solutions for business customers and positions iOS as the platform of choice for VARs and VADs who will use iBeacon and other devices to help businesses become more capable by utilizing mobile/cloud technology.
Meanwhile, Microsoft is looking like the 7th Cavalry at the Little Bighorn. Microsoft is surrounded by competitors augmenting iOS and Android (and serious cloud service suppliers like Amazon,) resources are depleting as sales of “core” products stagnate and decline and write-offs mount, and watching as its “supply line” developer channel abandons Windows 8 for the competitive alternatives.
CEO Nadella keeps saying that that cloud solutions are Microsoft’s future, but how it will effectively compete at this late date is as unclear as the email announcement on layoffs Nokia’s head Stephen Elop sent to employees. Keeping its channel, long the source of market success for Microsoft, from leaving is Microsoft’s last stand. Unfortunately, Nadella’s challenge puts him in a position that looks a lot like General Custer.
by Adam Hartung | Aug 23, 2013 | In the Swamp, Leadership, Software, Web/Tech
Steve Ballmer announced he would be retiring as CEO of Microsoft within the next 12 months. This extended timing, rather than immediately, shows clear the Board is ready for him to go but there is nobody ready to replace him.
The big question is, who would want Ballmer's job? It will be very tough to make Microsoft an industry leader again. What would his replacement propose to do? The fuse for a turnaround is short, and the options faint.
Microsoft has been on a downhill trajectory for at least 4 years. Although the company has introduced innovations in gaming (xBox and Kinect) as well as on-line (games and Bing), those divisions perpetually lose money. Stiff competitors Sony, Nintendo and Google have made these forays intellectually interesting, but of no value for investors or customers. The end-game for Microsoft has remained Windows – and as PC sales decline that's very bad news.
Microsoft viability has been firmly tied to Windows and Office sales. Historically these have been unassailable products, creating over 100% of the profits at Microsoft (covering losses in other divisions.) But, these products have lost growth, and relevancy. Windows 8 and Office 365 are product nobody really cares about, while they keep looking for updates from Apple, Google, Amazon and Samsung.
The market started going mobile 10 years ago. As Apple and Google promoted increased mobility, Microsoft tried to defend & extend its PC stronghold. It was a classic business inflection point in the making. Everyone knew at some point mobile devices would be more important than PCs. But most industry insiders (including Microsoft) kept thinking it would be later rather than sooner.
They were wrong. The shift came a lot faster than expected. Like in sailboat racing, suddenly the wind was taken out of Microsoft's sails as competitors shot to the lead in customer interest. While people were excited for new smartphones and tablets, Microsoft tried to re-engineer its historical product as an extension into the new market.
Windows 8 tablets and Surface tablets were ill-fated from the beginning. They did not appeal to the huge installed base of Windows customers, because changes like touch screens and tiles simply were too expensive and too behaviorally different. And they offered no advantage for people to switch that had already started buying iOS and Android products. Not to mention an app availability about 10% of the market leaders. Simply put, investing in Windows 8 and its own tablet was like adding bricks to a downhill runaway truck (end-of-life for PCs) – it sped up the time to an inevitable crash.
And spending money on poorly thought out investments like the Barnes & Noble Nook merely demonstrated Microsoft had money to burn, rather than a strategy for competing. Skype cost some $8B, but how has that helped Microsoft become more competive? It's not just an overspending on internal projects that failed to achieve any market success, but a series of wasted investments in bad acquisitions that showed Microsoft had no idea how it was going to regain industry leadership in a changing marketplace going more mobile and into the cloud every month.
Now the situation is pretty dire, and now is the time for Microsoft to give up on its defend and extend strategy for Windows/Office. Customers are openly uninterested in new laptops running Windows 8. And Win 8.1 will not change this lackadaisical attitude. Nobody is interested in Windows 8 phones, or tablets. This has left companies in the Microsoft ecosystem like HP, Dell and Nokia gasping for air as sales tumble, profits evaporate and customers flock to new solutions from Apple and Samsung. Instead of seeking out an update to Office for a new PC, people are using much lighter (and cheaper) cloud services from Amazon and office solutions like Google docs. And most of those old add-on product sales, like printers and servers, are disappearing into the cloud and mobile displays.
So now, after being forced to write off Surface and report a horrible quarter, the Board has pushed Ballmer out the door. Pretty remarkable. But, incredibly late. Just like the leaders at RIM stayed too long, leaving the company with no future options as Blackberry sales plummeted, Ballmer is taking leave as sales, profits and cash flow are taking a turn for the worst. And only months after a reorganization that simply made the whole situation a lot more confusing for not only investors, but internal managers and employees.
Microsoft has a big cash hoard, but how long will that last? As its distribution system falters, and sales drop, the costs will rapidly catch up with cash flow. Big layoffs are a certainty; think half the workforce in 2 years. Equally certain are sales of divisions (who can buy xBox market share and turn it competitively profitable?) or shut-downs (how long will Bing stay alive when it is utterly unnecessary and expensive to maintain?)
But, there is a better option. Without the cash from
Windows/Office, you can't keep much of the rest of Microsoft walking. So
now is the time to cut investments in Windows/Office and put money into the
best things Microsoft has going – primarily Kinect and cloud services. A radical restructuring of its spending and investments.
Kinect is an incredible product. It has found multiple applications Microsoft fails to capitalize upon. Kinect has the possibility of becoming the centerpiece for managing how we connect to data, how we store data, how we find data. It can bring together our smartphone, tablet and historical laptop worlds – and possibly even connect this to traditional TV and radio. It can be the centerpiece for two-way communications (think telephone or skype via all your devices.) Coupled with the right hardware, it can leapfrog iTV (which we still are waiting to see) and Cisco simultaneously.
In cloud services it will take a lot to compete with leaders Amazon, IBM, Apple and Google. They have made big investments, and are far in front. But, this is the bread-and-butter market for Microsoft. Millions of small businesses that want easy to use BYOD (bring your own device) environment, and easy access to data, documents and functionality for IT, like guaranteed data back-up and uptime, and user functionality like all those apps. These customers have relied on Microsoft for these kind of services for years, and would enjoy a services provider with an off-the-shelf product they can implement easily and cheaply that supports all their needs. Expensive to develop, but a growing market where Microsoft has a chance to leapfrog competitors.
As for Bing, give it to Yahoo – if Marissa Mayer will take it. Stop the bloodletting and get out of a market where Microsoft has never succeeded. Bing is core to Yahoo's business. If you can trade for some Yahoo stock, go for it. Let Yahoo figure out how to sell content and ads, while Microsoft refocuses on the new platform for 2017; from the user to the infrastructure services.
Strong leaders have their benefits. But, when they don't understand market shifts, and spend far too long trying to defend & extend past markets, they can put their organizations in terrible jeopardy of total failure. Ballmer leaves no with clear replacement, nor with any vision in place for leapfrogging competitors and revitalizing Microsoft.
So it is imperative the new leader provide this kind of new thinking. There are trends developing that create future scenarios where Microsoft can once again be a market leader. And it will be the role of the new CEO to identify that vision and point Microsoft's investments in the right direction to regain viability by changing the game on the current winners.
by Adam Hartung | Jun 5, 2013 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Web/Tech
Microsoft CEO Steve Ballmer appears to be planning a major reorganization. The apparent objective is to help the company move toward becoming a "devices and services company" as presented in the company's annual shareholder letter last October.
But, the question for investors is whether this is a crafty move that will help Microsoft launch renewed profitable growth, or is it leadership further confusing customers and analysts while leaving Microsoft languishing in stalled markets? After all, the shares are up some 31% the last 6 months and it is a good time to decide if an investor should buy, hold or sell.
There are a lot of things not going well for Microsoft right now.
Everyone knows PC sales have started dropping. IDC recently lowered its forecast for 2013 from a decline of 1.3% to negative 7.8%. The mobile market is already larger than PC sales, and IDC now expects tablet sales (excluding smartphones) will surpass PCs in 2015. Because the PC is Microsoft's "core" market – producing almost all the company's profitability – declining sales are not a good thing.
Microsoft hoped Windows 8 would reverse the trend. That has not happened. Unfortunately, ever since being launched Windows 8 has underperformed the horrific sales of Vista. Eight months into the new product it is selling at about half the rate Vista did back in 2007 – which was the worst launch in company history. Win8 still has fewer users than Vista, and at 4% share 1/10th the share of market leaders Windows 7 and XP.
Microsoft is launching an update to Windows 8, called Windows 8.1 or "blue." But rather than offering a slew of new features to please an admiring audience the release looks more like an early "fix" of things users simply don't like, such as bringing back the old "start" button. Reviewers aren't talking about how exciting the update is, but rather wondering if these admissions of poor initial design will slow conversion to tablets.
And tablets are still the market where Microsoft isn't – even if it did pioneer the product years before the iPad. Bloomberg reported that Microsoft has been forced to cut the price of RT. So far historical partners such as HP and HTC have shunned Windows tablets, leaving Acer the lone company putting out Windows a mini-tab, and Dell (itself struggling with its efforts to go private) the only company declaring a commitment to future products.
And whether it's too late for mobile Windows is very much a real question. At the last shareholder meeting Nokia's investors cried loud and hard for management to abandon its commitment to Microsoft in favor of returning to old operating systems or moving forward with Android. This many years into the game, and with the Google and Apple ecosystems so far in the lead, Microsoft needed a game changer if it was to grab substantial share. But Win 8 has not proven to be a game changer.
In an effort to develop its own e-reader market Microsoft dumped some $300million into Barnes & Noble's Nook last year. But the e-reader market is fast disappearing as it is overtaken by more general-purpose tablets such as the Kindle Fire. Yet, Microsoft appears to be pushing good money after bad by upping its investment by another $1B to buy the rest of Nook, apparently hoping to obtain enough content to keep the market alive when Barnes & Noble goes the way of Borders. But chasing content this late, behind Amazon, Apple and Google, is going to be much more costly than $1B – and an even lower probability than winning in hardware or software.
Then there's the new Microsoft Office. In late May Microsoft leadership hoped investors would be charmed to hear that 1M $99 subscriptions had been sold in 3.5 months. However, that was to an installed base of hundreds of millions of PCs – a less than thrilling adoption rate for such a widely used product. Companies that reached 1M subscribers from a standing (no installed base) start include Instagram in 2.5 months, Spotify in 5 months, Dropbox in 7 months and Facebook (which pioneered an entire new marketplace in Social) in only 10 months. One could have easily expected a much better launch for a product already so widely used, and offered at about a third the price of previous licenses.
A new xBox was launched on May 21st. Unfortunately, like all digital markets gaming is moving increasingly mobile, and consoles show all the signs of going the way of desktop computers. Microsoft hopes xBox can become the hub of the family room, but we're now in a market where a quarter of homes lead by people under 50 don't really use "the family room" any longer.
xBox might have had a future as an enterprise networking hub, but so far Kinnect has not even been marketed as a tool for business, and it has not yet incorporated the full network functionality (such as Skype) necessary to succeed at creating this new market against competitors like Cisco.
Thankfully, after more than a decade losing money, xBox reached break-even recently. However, margins are only 15%, compared to historical Microsoft margins of 60% in "core" products. It would take a major growth in gaming, plus a big market share gain, for Microsoft to hope to replace lost PC profits with xBox sales. Microsoft has alluded to xBox being the next iTunes, but lacking mobility, or any other game changer, it is very hard to see how that claim holds water.
The Microsoft re-org has highlighted 3 new divisions focused on servers and tools, Skype/Lync and xBox. What is to happen with the business which has driven three decades of Microsoft growth – operating systems and office software – is, well, unclear. How upping the focus on these three businesses, so late in the market cycle, and with such low profitability will re-invigorate Microsoft's value is, well, unclear.
In fact, given how Microsoft has historically made money it is wholly unclear what being a "devices and services" company means. And this re-organization does nothing to make it clear.
My past columns on Microsoft have led some commenters to call me a "Microsoft hater." That is not true. More apt would be to say I am a Microsoft bear. Its historical core market is shrinking, and Microsoft's leadership invested far too much developing new products for that market in hopes the decline would be delayed – which did not work. By trying to defend and extend the PC world Microsoft's leaders chose to ignore the growing mobile market (smartphones and tablets) until far too late – and with products which were not game changers.
Although Microsoft's leaders invested heavily in acquisitions and other markets (Skype, Nook, xBox recently) those very large investments came far too late, and did little to change markets in Microsoft's favor. None of these have created much excitement, and recently Rick Sherland at Nomura securities came out with a prediction that Microsoft might well sell the xBox division (a call I made in this column back in January.)
As consumers, suppliers and investors we like the idea of a near-monopoly. It gives us comfort to believe we can trust in a market leader to bring out new products upon which we can rely – and which will continue to make long-term profits. But, good as this feels, it has rarely been successful. Markets shift, and historical leaders fall as new competitors emerge; largely because the old leadership continues investing in what they know rather than shifting investments early into new markets.
This Microsoft reorganization appears to be rearranging the chairs on the Titanic. The mobile iceberg has slashed a huge gash in Microsoft's PC hull. Leadership keeps playing familiar songs, but the boat cannot float without those historical PC profits. Investors would be smart to flee in the lifeboat of recent share price gains.
by Adam Hartung | Apr 4, 2013 | Disruptions, In the Rapids, Innovation, Leadership, Web/Tech
The iPad is now 3 years old. Hard to believe we've only had tablets such a short time, given how common they have become. It's easy to forget that when launched almost all analysts thought the iPad was a toy that would be lucky to sell a few million units. Apple blew away that prediction in just a few months, as people demonstrated their lust for mobility. To date the iPad has sold 121million units – with an ongoing sales rate of nearly 20million per quarter.
Following very successful launches of the iPod (which transformed music from CDs to MP3) and iPhone (which turned everyone into smartphone users,) the iPad's transformation of personal technology made Apple look like an impenetrable juggernaut – practically untouchable by any competitor! The stock soared from $200/share to over $700/share, and Apple became the most valuable publicly traded company on any American exchange!
But things look very different now. Despite huge ongoing sales (iPad sales exceed Windows sales,) and a phenomenal $30B cash hoard ($100B if you include receivables) Apple's value has declined by 40%!
In the tech world, people tend to think competition is all about the product. Feature and functionality comparisons abound. And by that metric, no one has impacted Apple. After 3 years in development, Microsoft's much anticipated Surface has been a bust – selling only about 1.5million units in the first 6 months. Nobody has created a product capable of outright dethroning the i product series. Quite simply, there have been no "game changer" products that dramatically outperform Apple's.
But, any professor of introductory marketing will tell you that there are 4 P's in marketing: Product, Price, Place and Promotion. And understanding that simple lesson was the basis for the successful onslaught Samsung has waged upon Apple in 2012 and 2013.
Samsung did not change the game with technology or product. It has used the same Android starting point as most competitors for phones and tablets. It's products are comparable to Apple's – but not dramatically superior. And while they are cheaper, in most instances that has not been the reason people switched. Instead, Samsung changed the game by focusing on distribution and advertising!
Chart courtesy Jay Yarrow, Business Insider 4/2/13 and Horace Dediu, Asymco
The remarkable insight from this chart is that Samsung is spending almost 4.5 times Apple – and $1B more than perennial consumer goods brand leader Coca-Cola on advertising! Simultaneously, Samsung has set up kiosks and stores in malls and retail locations all over America.
Can you imagine having the following conversation in your company in 2010?:
"As Vice President of Marketing I propose we take on the market leader not by having a superior product. We will change the game from features and function comparisons to availability and awareness. I intend to spend more than anyone in our industry on advertising – even more than Coke. And I will open so many information and sales locations that our products will be as available as Coke. We'll be everywhere. Our products may not be better, but they will be everywhere and everyone will know about them."
Samsung found Apple's Achilles heel. As Apple's revenues rose it did not keep its marketing growing. SG&A (Selling, General and Administrative) expense declined from 14% of revenues in 2006 to 5% in 2012; of course aiding its skyrocketing profits. And Apple continued to sell through its fairly limited distribution of Apple stores and network providers. Apple started to "milk" its hard won brand position, rather than intensify it.
Samsung took advantage of Apple's oversight. Samsung maintained its SG&A budget at 15% of revenues – even growing it to 24% for a brief time in 2009, before returning to 15%. As its revenues grew, advertising and distribution grew. Instead of looking back at its old ad budget in dollars, and maintaining that budget, Samsung allowed the budget to grow (to a huge number!) along with revenues.
And that's how Samsung changed the game on Apple. Once America's untouchable brand, the Apple brand has faltered. People now question Apple's sustainability. Some now recognize Apple is vulnerable, and think its best times are behind it. And it's all because Samsung ignored the industry lock-in to constantly focusing on product, and instead changed the game on Apple.
Something Microsoft should have thought about – but didn't.
Of course, Apple's profits are far, far higher than Samsung's. And Apple is still a great company, and a well regarded brand, with tremendous sales. There are ongoing rumors of a new iOS 7 operating system, an updated format for iPads, potentially a dramatically new iPhone and even an iTV. And Apple is not without great engineers, and a HUGE war chest which it could use on advertising and distribution to go heads up with Samsung.
But, at least for now, Samsung has demonstrated how a competitor can change the game on a market leader. Even a leader as successful and powerful as Apple. And Samsung's leaders deserve a lot of credit for seeing the opportunity – and seizing it!
