by Adam Hartung | Sep 15, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Web/Tech
Summary:
- There is a lot of value to recognizing early trends, and acting upon them
- That Apple is as popular as Dell for computers among college students is a trend indicator that Dell’s future looks problematic, while Apple’s looks better
- It is hard to maintain long-term value from innovations that defend & extend an historical market – they are easily copied by competitors
- Long term value comes from the ability to innovate new product markets which are hard for competitors to copy
- Dell is a lousy investment, and Apple is a good one, because Dell is near end of life for its innovation (supply chain management) while Apple has a powerful new product/market innovation capability that can continue for several years
I can think of 3 very powerful reasons everyone should look closely at the following chart from Silicon Alley Insider. It is very, very important that Apple is tied with Dell for market share in PCs among college students, and almost 2.5 times the share of HP:
Firstly, it is important to understand that capturing young buyers is very valuable. If you catch a customer at 16, you have 50 to 60 years of lifelong customer value you can try to maintain. Thus, these people are inherently worth more than someone who is 55, and only 10 to 20 years of lifetime value. While we may realize that older people have more discretionary income, many loyalties are developed at a young age. Over the years, the younger buyers will be worth considerably more.
When I was 15 popular cars were from Pontiac (the GT and Firebird) Oldsmobile (Cutlas) Dodge (Charger and Challenger) and Chevy (Camaro.) Thus, my generation tended to stay with those brands a long time. But by the 1990s this had changed dramatically, and younger buyers were driving Toyotas, Hondas and Mazdas. Now, the American car companies are in trouble because a generational shift has happened. Market shares have changed considerably, and Toyota is now #1. Keeping the old buyers was not enough to keep GM and Chrysler healthy.
That for a quarter as many college students want a Mac as want a PC from Dell says a lot about future technology purchases. It portends good things for Apple, and not good things for leading PC suppliers. Young people’s purchase habits indicate a trend that is unlikely to reverse (look at how even the Toyota quality issues have not helped GM catch them this year.) We can expect that Apple is capturing “the hearts and minds” of college students, and that drives not just current, but future sales
Secondly, it is important to note that Dell built its distinction on price – offering a “generic” product with fast delivery and reasonable pricing. Dell had no R&D, it outsourced all product development and focused on assembly and fast supply chain performance. Unfortunately, supply chain and delivery innovation are far easier to copy than new product – and new market – innovation. Competitors have been able to match Dell’s early advantages, while Apple’s are a lot harder to meet – or exceed. Thus, it has not taken long for Dell to lose it’s commanding industry “domination” to a smaller competitor who has something very new to offer that competitors cannot easily match.
Not all innovation is alike. Those that help Defend & Extend an existing business – making PCs fast and cheap – offer a lot less long term value. Every year it gets harder, and costs more, to try to create any sense of improvement – or advantage. D&E innovations are valued by insiders, but not much by the marketplace. Customers see these Dell kind of innovations as more, better, faster and cheaper – and they are easily matched. They don’t create customer loyalty.
However, real product/market innovations – like the improvements in digital music and mobile devices – have a much longer lasting impact on customers and the markets created. Apple is still #1 in digital music downloads after nearly a decade. And they remain #1 in mobile app downloads despite a small share in the total market for cell phones. If you want to generate higher returns for longer periods, you want to innovate new markets – not just make improvements in defending & extending existing market positions.
Thirdly, this should impact your investment decisions. SeekingAlpha.com, reproducing the chart above, headlines “Are 2010 Apple Shares the new 1995 Dell Shares?” The author makes the case that Apple is now deeply mired in the Swamp, with little innovation on the horizon as it is late to every major new growth market. It’s defend & extend behavior is doing nothing for shareholder value. Meanwhile, Apple’s ability to pioneer new markets gives a strong case for future growth in both revenue and profits. As a result, the author says Dell is fully valued (meaning he sees little chance it will rise in value) while he thinks Apple could go up another 70% in the next year!
Too often people invest based upon size of company – thinking big = stability. But now that giants are falling (Circuit City, GM, Lehman Brothers) we know this isn’t true. Others invest based upon dividend yield. But with markets shifting quickly, too often dividends rapidly become unsustainable and are slashed (BP). Some think you should invest where a company has high market share, but this often is meaningless because the market stagnates leading to a revenue stall and quick decline as the entire market drops out from under the share leader (Microsoft in PCs).
Investing has to be based upon a company’s ability to maintain profitable growth into the future. And that now requires an ability to understand market trends and innovate new solutions quickly – and take them to market equally quickly. Only those companies that are agile enough to understand trends and competitors, implementing White Space teams able to lead market disruptions. Throw away those old books about “inherent value” and “undervalued physical assets” as they will do you no good in an era where value is driven by understanding information and the ability to rapidly move with shifting markets.
Oh, and if you feel at all that I obscured the message in this blog, here’s a recap:
- Dell is trying to Defend its old customers, and it’s not capturing new ones. So it’s future is really dicey
- Dell’s supply chain innovations have been copied by competitors, and Dell has little – if any – competitive advantage today. Dell is in a price war.
- Apple is pioneering new markets with new products, and it is capturing new customers. Especially younger ones with a high potential lifetime value
- Apple’s innovations are hard to duplicate, giving it much longer time to profitably grow revenues.
- You should sell any Dell stock you have – it has no chance of going up in value long term. Apple has a lot of opportunity to keep profitably growing and therefore looks like a pretty good investment.
by Adam Hartung | Aug 16, 2010 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, Leadership, Web/Tech
Summary:
- Dell has remained focused on its core market, and as a result growth has stalled for 5 years.
- Cisco has aggressively developed entirely new markets, and it has grown 60% the last 5 years.
- To keep growing, and maintain your business value, you must CONSTANTLY keep developing new markets
Dell helped create the PC revolution. It’s simplification of the PC business into a limited set of technologies, no R&D, then putting its energy into lowering costs by focusing on supply chain made PCs very, very cheap. it was an idea never before attempted, and this Success Formula allowed Dell to become a household name around the world.
Unfortunately, the demand for PCs has flattened. And competitors have learned how to match (maybe beat?) Dell’s “core capabilities.” When markets shift, a company has to develop new markets, or risk hitting a growth stall.
Source: Silicon Alley Insider
And that’s happened to Dell. Revenues have not continued to grow, Dell has remained focused on its “core markets” and “core capabilities” but without growth in those “core” areas the company has been severely hampered. Revenues are still 72% in “core” but there’s little reason to own the stock because company revenues are at best flat (despite volatility) the last 5 years. Dell is going nowhere – except following the problems at Microsoft. Since it’s now so late to mobile phones, any sort of tablet, or other markets with growth its unlikely Dell will be able to profitably develop any new businesses to replace the deteriorating PC market. Dell is stuck in the Swamp, so busy fighting alligators and mosquitoes that it’s no longer growing. It’s stuck in a low-no growth “core” market.
To remain a healthy business you have to constantly enter new markets.
Source: Silicon Alley Insider
You may want to think of Cisco as a router, or router and switch company. That was certainly the company’s early Success Formula. But unlike Dell, Cisco has invested heavily in other businesses. Now Cisco revenue is 60% bigger than it was five years ago, while its percent of revenue in routers and switches has actually declined! By aggressively moving into new markets for “advanced technology” and services Cisco has improved its overall revenue, and kept the company very healthy. It has growth precisely because it moved away from its “core” to develop new markets, new products, new solutions and new revenues. Cisco keeps maneuvering itself back into the Rapids of growth before the current slows, and thus it avoids the growth stall eating up Dell’s value.
It is so easy to be lured into focusing on your “core”. Especially if you listen to your existing big customers. But markets shift, and you inevitably must move into new markets. And market shifts don’t care what your market share or your industry view. It’s up to all leaders to stay ahead of shifts by constantly developing scenarios for new markets, studying competitors for new insights, disrupting the old Success Formula Lock-ins and setting up White Space teams to develop new revenues and keep the business growing!
by Adam Hartung | Nov 18, 2009 | Current Affairs, Defend & Extend, Leadership, Travel
Most Americans pay no attention at all to the value of the U.S. dollar. As an island nation, and largely an importer of goods, all most Americans care about is how much something costs at the store. Since the vast majority of Americans never set foot on foreign soil in any year, they just don’t think about how many Euros or Yen you get for a dollar.
But they should. We now live in a global economy. People in foreign countries have a direct impact on the lives of Americans every day. And they watch the value of the dollar constantly. Just look at outsourcing – the transfer of jobs offshore. Or the cost of products at Wal-Mart – mostly made in foreign countries (China) in foreign currency values. All scenarios of the future, all planning, has to include scenarios for the value of America’s currency. And that is true for all companies, in all countries, because the U.S. dollar is the primary basis for pricing everything in the world.
There’s a great chart showing the U.S. dollar value at FXStreet.com. This shows that in 2001 the dollar compared to other currencies was at a value of 120. Since then the value has plummeted to about 75 (there was a rally earlier in 2009, but almost all of that has been given up.) This means if you went to Paris on holiday in 2001 you could buy a Euro for $.75. So taking your own personal “National Lampoon’s European Vacation” was affordable. Now, a Euro costs you almost $1.50. So, it costs twice as much. With all that value loss happening prior to 2009 (during the previous administration and the previous stock market highs.)
So you don’t plan to go to Europe on vacation, you say. That’s a good thing, because you probably can’t afford it. But, as American homes go into foreclosure, who do you suppose is buying them? To foreigners, American houses are extremely cheap. In coastal areas of Florida, as many as half of all home sales are to foreigners – and upwards of 90% of those are cash transactions – no loan! While Americans struggle with mortgages, others are buying American houses as vacation spots.
One way to think about this is how many ounces of gold does it take to buy a house? Gold is a store of value, like a house. Its limited supply and abundant uses to allow it to remain a good measure of value. InvestmentTools.com has a great chart showing the value of U.S. houses. in 1985, as America was crauling out of the horrible 1982 recession it took about 280 ounces. In 2000, the value peaked at about 780 ounces – so by global standards, American houses had tripled in value. But today, the value has declined again to 280! So globally, we’re no more wealthy now than we were at the worst recession since the Great Depression – and value is falling as we’re still in a major recession.
If Americans have trouble paying their child’s college fund, that’s not the problem for students from offshore. Many are so relatively wealthy they now can buy condo’s for $200,000 or $300,000 to live in while attending schools. They relative wealth of their offshore parents means that there are dramatically more offshore students who find an American education affordable – while Americans are finding education increasingly unaffordable for their own citizens.
To someone from outside America, the country is on sale! Because everything in America costs half – or often far less than half because America has no excise or Value Added Taxes. So people from Europe, Asia and the middle east fly to New York to go shopping – and save enough to pay for the plane ticket! Some even fly to America to buy goods from their own country because the products are cheaper priced in dollars and without the taxes!
And actually, America is acting just like a business facing foreclosure. Debts have been mounting. Each year, America sells more assets in order to pay interest on the debt. In this bad economy, as income has declined, even more asset sales happen. States are selling highways to foreigners in order to get cash today in exchange for road tolls the next 100 years. Or in Chicago – the sale of all the parking meters. Those in other countries are buying fire-sale assets to give Americans the money just to pay the interest.
Meanwhile, the debt keeps rising. Each month sales of bonds exceeds redemptions. For those buying the bonds offshore, this is pretty amazing. If a bond yields 3% (or say even 5% of 6%) that value has been overwhelming wiped out by the decline in the principle value. Remember, the dollar value of those bonds has dropped by 50% just in this decade! There’s no way to recover that through interest collection.
So why do these offshore folks buy the American bonds? It’s kind of like townspeople buying bonds to prop up a local business. If the local plant goes bust, then the jobs go away. Then the restaurant has to close shop. Then the bank has to close because the plant can’t repay its loan. So the people keep buying plant bonds to keep it open – to forestall an imminent disaster. And because they hope that the plant will someday start making enough money to repay the bonds. That it will someday see employment rise, not fall. And the restaurateur, and the machine shop owner, and the car dealer all keep buying bonds to keep the plant going. The American central bank calls those folks who buy U.S. bonds the central banks of China and other countries.
How low will the dollar go? If people quit buying bonds, really low. Increasingly, those who produce commodities like oil and gas are asking to price commodities in something other than dollars. They don’t like seeing their prices halved due to currency devaluation. If businesses don’t have to trade in dollars, then they don’t need the dollar value to remain high – and they lose interest in buying bonds to prop it up.
American’s don’t pay attention to other currencies either. So most don’t remember the 1994 Mexican Peso crisis. Mexico had incurred a huge debt, and was selling more debt from the 1970s into the 1990s. The primary source of revenue had been oil and gas sales, but prices collapsed in the 1980s, and production failed to keep up with that from other countries. There was more spending than revenue collection. When the Mexican government stopped propping up the Peso, it dropped more than 50% in a week! Currency devaluations can happen fast, and can be devastating, because suddenly a flood of buyers become sellers – reversing position and cratering the value. To keep the government and economy from collapsing the U.S. central bank stepped in to buy bonds and stop further devaluation.
This blog is sure to not be one of the more popular. Because most Americans simply don’t care about the dollar’s value
– and even more don’t understand anything about currency values. Americans are so used to assuming that the dollar will be the world’s currency, and that it will be propped up by foreign debt buyers, that they simply expect the future to be like the past.
I’m not predicting the future value of the dollar. But what’s clear is that the dollar’s value is really important to the future of your business. Whether in America, or not. What kills businesses isn’t the things management knows and plan for, it’s what they don’t plan for. And most American business planners pay very little attention to the value of the dollar. But having a robust scenario around the future value of the dollar could prove to be the difference between many winners and losers in as quick as 12 to 24 months. There are plans that can leverage these shifts in ways to create enormous value.
Is your company, as it prepares budgets for 2010, prepared to deal with a dramatic shift – up or down – in the value of the U.S. dollar? Have you considered the impact, and developed contingency plans? Do you have White Space projects that will leverage currency shifts? If you’re planning from the past, you may well not be prepared for a very different future if the U.S. dollar’s value shifts dramatically. Especially if it continues falling.
