Will Meg Whitman's Layoffs Turn Around HP? Nope

Things are bad at HP these days.  CEO and Board changes have confused the management team and investors alike.  Despite a heritage based on innovation, the company is now mired in low-growth PC markets with little differentiation.  Investors have dumped the stock, dropping company value some 60% over two years, from $52/share to $22 - a loss of about $60billion. 

Reacting to the lousy revenue growth prospects as customers shift from PCs to tablets and smartphones, CEO Meg Whitman announced plans to eliminate 27,000 jobs; about 8% of the workforce.  This is supposedly the first step in a turnaround of the company that has flailed ever since buying Compaq and changing the company course into head-to-head PC competition a decade ago.  But, will it work? 

Not a chance.

Fixing HP requires understanding what went wrong at HP.  Simply, Carly Fiorina took a company long on innovation and new product development and turned it into the most industrial-era sort of company.  Rather than having HP pursue new technologies and products in the development of new markets, like the company had done since its founding creating the market for electronic testing equipment, she plunged HP into a generic manufacturing war.

Pursuing the PC business Ms. Fiorina gave up R&D in favor of adopting the R&D of Microsoft, Intel and others while spending management resources, and money, on cost management.  PCs offered no differentiation, and HP was plunged into a gladiator war with Dell, Lenovo and others to make ever cheaper, undifferentiated machines.  The strategy was entirely based upon obtaining volume to make money, at a time when anyone could buy manufacturing scale with a phone call to a plethora of Asian suppliers.

Quickly the Board realized this was a cutthroat business primarily requiring supply chain skills, so they dumped Ms. Fiorina in favor of Mr. Hurd.  He was relentless in his ability to apply industrial-era tactics at HP, drastically cutting R&D, new product development, marketing and sales as well as fixating on matching the supply chain savings of companies like Dell in manufacturing, and WalMart in retail distribution. 

Unfortunately, this strategy was out of date before Ms. Fiorina ever set it in motion.  And all Mr. Hurd accomplished was short-term cuts that shored up immediate earnings while sacrificing any opportunities for creating long-term profitable new market development.  By the time he was forced out HP had no growth direction.  It's PC business fortunes are controlled by its suppliers, and the PC-based printer business is dying.  Both primary markets are the victim of a major market shift away from PC use toward mobile devices, where HP has nothing.

HPs commitment to an outdated industrial era supply-side manufacturing strategy can be seen in its acquisitions.  What was once the world's leading IT services company, EDS, was bought in 2008 after falling into financial disarray as that market shifted offshore.  After HP spent nearly $14B on the purchase, HP used that business to try defending and extending PC product sales, but to little avail.  The services group has been downsized regularly as growth evaporated in the face of global trends toward services offshoring and mobile use.

In 2009 HP spent almost $3B on networking gear manufacturer 3Com.  But this was after the market had already started shifting to mobile devices and common carriers, leaving a very tough business that even market-leading Cisco has struggled to maintain.  Growth again stagnated, and profits evaporated as HP was unable to bring any innovation to the solution set and unable to create any new markets.

In 2010 HP spent $1B on the company that created the hand-held PDA (personal digital assistant) market - the forerunner of our wirelessly connected smartphones - Palm.  But that became an enormous fiasco as its WebOS products were late to market, didn't work well and were wholly uncompetitive with superior solutions from Apple and Android suppliers.  Again, the industrial-era strategy left HP short on innovation, long on supply chain, and resulted in big write-offs.

Clearly what HP needs is a new strategy.  One aligned with the information era in which we live.  Think like Apple, which instead of chasing Macs a decade ago shifted into new markets.  By creating new products that enhanced mobility Apple came back from the brink of complete failure to spectacular highs.  HP needs to learn from this, and pursue an entirely new direction.

But, Meg Whitman is certainly no Steve Jobs.  Her career at eBay was far from that of an innovator.  eBay rode the growth of internet retailing, but was not Amazon.  Rather, instead of focusing on buyers, and what they want, eBay focused on sellers - a classic industrial-era approach.  eBay has not been a leader in launching any new technologies (such as Kindle or Fire at Amazon) and has not even been a leader in mobile applications or mobile retail. 

While CEO at eBay Ms. Whitman purchased PayPal.  But rather than build that platform into the next generation transaction system for web or mobile use, Paypal was used to defend and extend the eBay seller platform.  Even though PayPal was the first leader in on-line payments, the market is now crowded with solutions like Google Wallets (Google,) Square (from a Twitter co-founder,) GoPayment (Intuit) and Isis (collection of mobile companies.) 

Had Ms. Whitman applied an information-era strategy Paypal could have been a global platform changing the way payment processing is handled.  Instead its use and growth has been limited to supporting an historical on-line retail platform.  This does not bode well for the future of HP.

HP cannot save its way to prosperity.  That never works.  Try to think of one turnaround where it did - GM? Tribune Corp? Circuit City? Sears?  Best Buy? Kodak?  To successfully turn around HP must move - FAST - to innovate new solutions and enter new markets.  It must change its strategy to behave a lot more like the company that created the oscilliscope and usher in the electronics age, and a lot less like the industrial-era company it has become - destroying shareholder value along the way.

Is HP so cheap that it's a safe bet.  Not hardly.  HP is on the same road as DEC, Wang, Lanier, Gateway Computers, Sun Microsystems and Silicon Graphics right now.  And that's lousy for investors and employees alike.

OOPS! 5 CEOs that Should Have Already Been Fired (Cisco, GE, WalMart, Sears, Microsoft)

This has been quite the week for CEO mistakes.  First was all the hubbub about Scott Thompson, CEO of Yahoo, inflating his resume to include a computer science degree he did not actually receive.  According to Mr. Thompson someone at a recruiting firm added that degree claim in 2005, he didn't know it and he's never read his bio since.  A simple oversight, if you can believe he hasn't once read his bio in 7 years, and he didn't think it was ever important to correct someone who introduced him or mentioned it.  OOPS - the easy answer for someone making several million dollars per year, and trying to guide a very troubled company from the brink of failure. Hopefully he is more persistent about checking company facts.

But luckily for him, his errors were trumped on Thursday when Jamie Dimon, CEO of J.P.MorganChase notified the world that the bank's hedging operation messed up and lost $2B!!  OOPS!  According to Mr. Dimon this is really no big deal. Which reminded me of the apocryphal Senator Everett Dirksen statement "a billion here, a billion there and pretty soon it all adds up to real money!" 

Interesting "little" mistake from a guy who paid himself some $50M a few years ago, and benefitted greatly from the government TARP program.  He said this would be "fodder for pundits," as if we all should simply overlook losing $2B?  He also said this was "unfortunate timing."  As if there's a good time to lose $2B? 

But neither of these problems will likely result in the CEOs losing their jobs.  As obviously damaging as both mistakes are, which would naturally have caused us mere employees to instantly lose our jobs - and potentially be prosecuted - CEOs are a rare breed who are allowed wide lattitude  in their behavior.  These are "one off" events that gain a lot of attention, but the media will have forgotten within a few days, and everyone else within a few months.

By comparison, there are at least 5 CEOs that make these 2 mistakes appear pretty small.  For these 5, frequently honored for their position, control of resources and personal wealth, they are doing horrific damage to their companies, hurting investors, employees, suppliers and the communities that rely on their organizations.  They should have been fired long before this week.

#5 - John Chambers, Cisco Systems.  Mr. Chambers is the longest serving CEO on this list, having led Cisco since 1995 and championed much of its rapid growth as corporations around the world began installing networks.  Cisco's stock reached $70/share in 2001.  But since then a combination of recessions that cut corporate IT budgets and a market shift to cloud computing has left Cisco scrambling for a strategy, and growth.

Mr. Chambers appears to have been great at operating Cisco as long as he was in a growth market.  But since customers turned to cloud computing and greater use of mobile telephony networks Cisco has been unable to innovate, launch and grow new markets for cloud storage, services or applications.  Mr. Chambers has reorganized the company 3 times - but it has been much like rearranging the deck chairs on the Titanic.  Lots of confusion, but no improvement in results.

Between 2001 and 2007 the stock lost half its value, falling to $35.  Continuing its slide, since 2007 the stock has halved again, now trading around $17.  And there is no sign of new life for Cisco - as each earnings call reinforces a company lacking a strategy in a shifting market.  If ever there was a need for replacing a stayed-in-the-job too long CEO it would be Cisco.

#4 - Jeffrey Immelt, General Electric (GE).  GE has only had 9 CEOs in its 100+ year life.  But this last one has been a doozy.  After more than a decade of rapid growth in revenue, profits and valuation under the disruptive "neutron" Jack Welch, GE stock reached $60 in 2000.  Which turns out to have been the peak, as GE's value has gone nowhere but down since Mr. Immelt took the top job.

GE was once known for entering and changing markets, unafraid to disrupt how the market performed with innovation in products, supply chain and operations.  There was no market too distant, or too locked-in for GE to not find a way to change to its advantage - and profit.  But what was the last market we saw GE develop?  What has Mr. Immelt, in his decade at the top of GE, done to keep GE as one of the world's most innovative, high growth companies?  He has steered the ship away from trouble, but it's only gone in circles as it's used up fuel. 

From that high in 2001, GE fell to a low of $8 in 2009 as the financial crisis revealed that under Mr. Immelt GE had largely transitioned from a manufacturing and products company into a financial house.  He had taken what was then the easy road to managing money, rather than managing a products and services company.  Saved from bankruptcy by a lucrative Berkshire Hathaway, GE lived on.  But it's stock is still only $19, down 2/3 from when Mr. Immelt took the CEO position. 

"Stewardship" is insufficient leadership in 2012.  Today markets shift rapidly, incur intensive global competition and require constant innovation.  Mr. Immelt has no vision to propel GE's growth, and should have been gone by 2010, rather than allowed to muddle along with middling performance.

#3 - Mike Duke, WalMart.  Mr. Duke has been CEO since 2009, but prior to that he was head of WalMart International.  We now know Mr. Duke's business unit saw no problems with bribing foreign officials to grow its business.  Just on the basis of knowing about illegal activity, not doing anything about it (and probably condoning and recommending more,) and then trying to change U.S. law to diminish the legal repurcussions, Mr. Duke should have long ago been fired. 

It's clear that internally the company and its Board new Mr. Duke was willing to do anything to try and grow WalMart, even if unethical and potentially illegal.  Recollections of Enron's Jeff Skilling, Worldcom's Bernie Ebbers and Hollinger's Conrdad Black should be in our heads.  How far do we allow leaders to go before holding them accountable?

But worse, not even bribes will save WalMart as Mr. Duke follows a worn-out strategy unfit for competition in 2012.  The entire retail market is shifting, with much lower cost on-line companies offering more selection at lower prices.  And increasingly these companies are pioneering new technologies to accelerate on-line shopping with easy to use mobile devices, and new apps that make shopping, paying and tracking deliveries easier all the time.  But WalMart has largely eschewed the on-line world as its CEO has doggedly sticks with WalMart doing more of the same.  That pursuit has limited WalMart's growth, and margins, while the company files further behind competitively. 

Unfortunately, WalMart peaked at about $70 in 2000, and has been flat ever since.  Investors have gained nothing from this strategy, while employees often work for wages that leave them on the poverty line and without benefits.  Scandals across all management layers are embarrassing. Communities find Walmart a mixed bag, initially lowering prices on some goods, but inevitably gutting the local retailers and leaving the community with no local market suppliers.  WalMart needs an entirely new strategy to remain viable - and that will not come from Mr. Duke.  He should have been gone long before the recent scandal, and surely now.

#2 Edward Lampert, Sears Holdings.  OK, Mr. Lampert is the Chairman and not the CEO - but there is no doubt who calls the shots at Sears.  And as Mr. Lampert has called the shots, nobody has gained.

Once the most critical force in retailing, since Mr. Lampert took over Sears has become wholly irrelevant.  Hoping that Mr. Lampert could make hay out of the vast real estate holdings, and once glorious brands Craftsman, Kenmore and Diehard to turn around the struggling giant, the stock initially took off rising from $30 in 2004 to $170 in 2007 as Jim Cramer of "Mad Money" fame flogged the stock over and over on his rant-a-thon show.  But when it was clear results were constantly worsening, as revenues and same-store-sales kept declining, the stock fell out of bed dropping into the $30s in 2009 and again in 2012. 

Hope springs eternal in the micro-managing Mr. Lampert.  Everyone knows of his personal fortune (#367 on Forbes list of billionaires.)  But Mr. Lampert has destroyed Sears.  The company may already be so far gone as to be unsavable.  The stock price is based upon speculation of asset sales.  Mr. Lampert had no idea, from the beginning, how to create value from Sears and he surely should have been gone many months ago as the hyped expectations demonstrably never happened.

#1 - Steve Ballmer, Microsoft.  Without a doubt, Mr. Ballmer is the worst CEO of a large publicly traded American company.  Not only has he singlehandedly steered Microsoft out of some of the fastest growing and most lucrative tech markets (mobile music, handsets and tablets) but in the process he has sacrificed the growth and profits of not only his company but "ecosystem" companies such as Dell, Hewlett Packard and even Nokia.  The reach of his bad leadership has extended far beyond Microsoft when it comes to destroying shareholder value - and jobs.

Microsoft peaked at $60/share in 2000, just as Mr. Ballmer took the reigns.  By 2002 it had fallen into the $20s, and has only rarely made it back to its current low $30s value.  And no wonder, since execution of new rollouts were constantly delayed, and ended up with products so lacking in any enhanced value that they left customers scrambling to find ways to avoid upgrades.  By Mr. Ballmer's own admission Vista had over 200 man-years too much cost, and its launch still, years late, has users avoiding upgrades.  Microsoft 7 and Office 2012 did nothing to excite tech users, in corporations or at home, as Apple took the leadership position in personal technology.

So today Microsoft, after dumping Zune, dumping its tablet, dumping Windows CE and other mobile products, is still the same company Mr. Ballmer took control over a decade ago.  Microsoft is  PC company, nothing more, as demand for PCs shifts to mobile.  Years late to market, he has bet the company on Windows 8 - as well as the future of Dell, HP, Nokia and others.  An insane bet for any CEO - and one that would have been avoided entirely had the Microsoft Board replaced Mr. Ballmer years ago with a CEO that understands the fast pace of technology shifts and would have kept Microsoft current with market trends. 

Although he's #19 on Forbes list of billionaires, Mr. Ballmer should not be allowed to take such incredible risks with investor money and employee jobs.  Best he be retired to enjoy his fortune rather than deprive investors and employees of building theirs.

There were a lot of notable CEO changes already in 2012.  Research in Motion, Best Buy and American Airlines are just three examples.  But the 5 CEOs in this column are well on the way to leading their companies into the kind of problems those 3 have already discovered.  Hopefully the Boards will start to pay closer attention, and take action before things worsen.

 

Sell Google - Lot of Heat, Not Much Light

With revenues up 39% last quarter, it's far too soon to declare the death of Google.  Even in techville, where things happen quickly, the multi-year string of double-digit higher revenues insures survival - at least for a while. 

However, there are a lot of problems at Google which indicate it is not a good long-term hold for investors.  For traders there is probably money to be made, as this long-term chart indicates:

Source: Yahoo Finance May 3, 2012

While there has been enormous volatility, Google has yet to return to its 2007 highs and struggles to climb out of the low $600/share price range.  And there's good reason, because Google management has done more to circle the wagons in self-defense than it has done to create new product markets.

What was the last exciting product you can think of from Google?  Something that was truly new, innovative and being developed into a market changer?  Most likely, whatever you named is something that has recently been killed, or receiving precious little management attention.  For a company that prided itself on innovation - even reportedly giving all employees 20% of their time to do whatever they wanted - we see management actions that are decidedly not about promoting innovation into the market, or making sustainable efforts to create new markets:

• killed Google Powermeter, a project that could have redefined how we buy and use electricity
• killed Google Wave, a product that offered considerable group productivity improvement
• killed Google Flu Vaccine Finder offering new insights for health care from data analysis
• killed Google Related which could have helped all of us search beyond keywords
• killed Google synch for Blackberry as it focuses on selling Android
• killed Google Talk mobile app
• killed the OnePass Google payment platform for publishers
• killed Google Labs - once its innovation engine
• and there are rumors it is going to kill Google Finance

All of these had opportunities to redefine markets.  So what did Google do with these redeployed resources:

• Bought Motorola for $12.5billion, which it hopes to take toe-to-toe with Apple's market leading iPhone, and possibly the iPad.  And in the process has aggravated all the companies who licensed Android and developed products which will now compete with Google's own products.  Like the #1 global handset manufacturer Samsung.  And which offers no clear advantage to the Apple products, but is being offered at a lower price.
• Google+, which has become an internal obsession - and according to employees consumes far more resources than anyone outside Google knows.  Google+ is a product going toe-to-toe with Facebook, only with no clear advantages. Despite all the investment, Google continues refusing to publish any statistics indicating that Google+ is growing substantially, or producing any profits, in its catch-up competition with Facebook.

In both markets, mobile phones and social media, Google has acted very unlike the Google of 2000 that innovated its way to the top of web revenues, and profits. Instead of developing new markets, Google has chosen to undertaking 2 Goliath battles with enormously successful market leaders, but without any real advantage.

Google has actually proven, since peaking in 2007, that its leadership is remarkably old-fashioned, in the worst kind of way.  Instead of focusing on developing new markets and opportunities, management keeps focusing on defending and extending its traditional search business - and has proven completely inept at developing any new revenue streams.  Google bought both YouTube and Blogger, which have enormous user bases and attract incredible volumes of page views - but has yet to figure out how to monetize either, after several years.

For its new market innovations, rather than setting up teams dedicated to turning its innovations into profitable revenue growth engines Google leadership keeps making binary decisions.  Messrs. Page and Brin either decide the product and market aren't self-developing, and kill the products, or simply ignore the business opportunity and lets it drift.  Much like Microsoft - which has remained focused on Windows and Office while letting its Zune, mobile and other products drift into oblivion - or lose huge amounts of money like Bing and for years XBox.

I personalized that last comment onto the Google founders intentionally.  The biggest news out of Google lately has been a pure financial machination done for purely political reasons.  Announcing a stock dividend that effectively creates a 2-for-1 split, only creating a new class of non-voting "C" stock to make sure the founders never lose voting control.  This was adding belt to suspenders, because the founders already own the Class B stock giving them 66% voting control.  The purpose was purely to make sure nobody every tries to buy, or otherwise take over Google, because the founders will always have enough votes to make such an action impossible.

The founders explained this as necessary so they could retain control and make "big bets."  If "big bets" means dumping billions into also-ran products as late entrants, then they have good reason to fear losing company control.  Making big bets isn't how you win in the information technology industry.  You win by creating new markets, with new solutions, before the competition does it. 

Apple's huge wins in iPod, iTouch, iTunes, iPhone and iPad weren't "big bets."  The Apple R&D budget is 1/8 Microsoft's.  It's not big bets that win, its developing innovation, putting it into the market, shepharding it through a series of learning cycles to make it better and better and meeting previously unmet - often unidentified - needs.  And that's not what the enormous investments in mobile handsets and Google+ are about.

Although this stock split has no real impact on Google today, it is a signal.  A signal of a leadership team more obsessed with their own control than doing good for investors.  It is clearly a diversion from creating new products, and opening new markets.  But it was the centerpiece of communication at the last earnings call.  And that is a avery bad signal for investors.  A signal that the leaders see things likely to become much worse, with cash going out and revenue struggling, before too long.  So they are acting now to protect themselves.

Meanwhile, even as revenues grew 39% last quarter, there are signs of problems in Google's "core" market leadership is so fixated on defending.  As this chart shows, while volume of paid ads is going up, the price is now going down.

Source: Silicon Alley Insider

Prices go down when your product loses value.  You have to chase revenue.  Remember Proctor & Gamble's "Basics" product line launch?  Chasing revenue by cutting price.  In the short-term it can be helpful, but long-term it is not in your best interest.  Google isn't just cutting price on its incremental sales, but on all sales.  Increasingly advertisers are becoming savvy about what they can expect from search ads, and what they can expect from other venues - like Facebook - and the prices are reflecting expectations.  In a recent Strata survey the top 2 focus for ad executives were "social" (69%) and "display" (71%) - categories where Facebook leads - and both are ahead of "search."

At Facebook, we know the user base is around 800million.  We also know it's now the #1 site on the internet - more hits than Google.  And Facebook has much longer average user times on site.  All things attractive to advertisers.  Facebook is acquiring Instagram, which positions it much stronger on mobile devices, thus growing its market.  And while Google was talking about share splits, Facebook recently announced it was making Facebook email integrated into the Facebook platform much easier to use (which is a threat to Gmail) and it was adding a new analytics suite to help advertisers understand ad performance - like they are accustomed to at Google.  All of which increases Facebook's competitiveness with Google, as customers shift increasingly to social platforms.

As said at the top of this article, Google won't be gone soon.  But all signs point to a rough road for investors.  The company is ditching its game changing products and dumping enormous sums into me-too efforts trying to catch well healed and well managed market leaders.  The company has not created an ability to take new innovations to market, and remains stuck defending and extending its existing business lines.  And the top leaders just signaled that they weren't comfortable they could lead the company successfully, so they implemented new programs to make sure nobody could challenge their leadership. 

There are big fires burning at Google.  Unfortunately, burning those resources is producing a lot of heat - but not much light on a successful future.  It's time to sell Google.

CIO's - will you be relevant in 2017?

My latest bi-monthly column for CIO magazine came out in print this week.  In it I challenge CIOs to think hard about what made the role successful in the 1970s - then in the 1990s - and how it is transitioning today.  Far too many CIOs are locked in on old notions about what  made them successful - usually controlling both hardware and software and forcing managers to behave in ways acceptable to IT.  But today cloud computing, mobile devices and apps make it possible for many "users" to obviate the IT department entirely - skip the enterprise applications - and find an easy route for their information needs.

I encourage you to click through to the article on CIO.com, or ComputerWorld.com - if you're in IT it should give you something to think about regarding your role.  If you are an investor it should give you some new thoughts about what IT companies are worth your money (time to rethink Oracle and SAP, for example.)  And if you're a manager it just might embolden you to focus on your needs and fight back on IT solutions that don't work for you.

CIO Mag - http://www.cio.com/article/704934/CIOs_Will_You_Be_Relevant_in_2017_

ComputerWorld - http://www.computerworld.com/s/article/9226722/CIOs_Will_You_Be_Relevant_in_2017_

WalMart's the Titanic, and Mexican Bribery is its Iceberg - JUMP SHIP

WalMart's been accused of bribing officials in Mexico to grow its business.  But by and large, few in America seem to care.  The stock fell only modestly from its highs of last week, and today the stock recovered from the drop off to the lows of February. 

But WalMart is going to fail.  WalMart is trying to defend and extend a horribly outdated industrial strategy.

Sam Walton opened his original five and dime stores in the rural countryside, and competed just like small retailers had done for decades.  But quickly he recognized that industrialization offered the opportunity to shift the retail market.  By applying industrial concepts like scale, automation and volume buying he could do for retailing what Ford and GM had done for auto manufacturing.  And his strategy, designed for an industrial marketplace, worked extremely well.  Like it or not, WalMart outperformed retailers still trying to compete like they had in the 1800s, and WalMart was spectacularly successful.

But today, the world has shifted again.  Only WalMart is putting all its resources into trying to defend and extend its industrial era strategy, rather than modify to compete in the information age.  Because its strategy doesn't work, the company keeps wandering into spectacular failures, and horrible leadership problems.

• In 2005 WalMart's Vice Chairman and a corporate Vice President tried to use the company's size to wring more out of gift card and merchandise suppliers.  Both were caught and fired for fraud. 
• In 2006 WalMart hired a new head of marketing to update the strategy, and improve the stores and merchandise.  But upon realizing her recommendations violated the existing WalMart industrial strategy the company fired her after only a few months, and went public with character besmirching allegations that she and an ad agency executive were having an affair.  Like that (even if true, which is hotly disputed) somehow mattered to the changes WalMart needed.  Changes which were abruptly terminated upon firing her.
• In 2008 a WalMart employee became an invalid in a truck accident.  When the employee won a lawsuit related to the accident, WalMart sued the invalid employee to return $470,000 in insurance payments made by WalMart.  As if WalMart's future depended on the return of that money.
• In a cost saving move, WalMart moved its marketing group under merchandising, in order to reduce employees and the breadth of merchandise, as well as keep the company more tightly focused on its strategy.

All 3 of these incidents show a leadership team that is so entrenched in history it will do anything - anything - to keep from evolving forward.  And sd that history developed it paved a pathway where it was only a very small step to paying bribes in order to open more stores in Mexico.  Such bribes could easily be seen as just doing "whatever it takes" to keep defending the existing business model, extending it into new markets, even though it is at the end of its life.

It has come to light that after paying the bribes, the leadership team did about everything it could to cover them up.  And that included spending millions on lobbying efforts to hopefully change the laws before anyone was caught, and possibly prosecuted.  The goal was to keep the stores open, and open more.  If that meant a little bribing went on, then it was best to not let people know.  And instead of saying what WalMart did was wrong, change the rules so it doesn't look like it was wrong. 

At WalMart right and wrong are no longer based on societal norms, they are based on whether or not it lets WalMart defend its existing business by doing more of what it wants to do.

WalMart's industrial strategy is similar to the Titanic strategy.  Build a boat so big it can't sink.  And if any retailer could be that big, then WalMart was it.  But these scandals keep showing us that the water is increasingly full of icebergs.  Each scandal points out that WalMart's strategy is harder to navigate, and is running into big problems.  Even though the damage isn't visible to most of us, it is nonetheless clear to WalMart executives that doing more of the same is leading to less good results.  WalMart is taking on water, and it has no solution.  In their effort to prop up results executives keep doing things that are less and less ethical - sometimes even illegal - and guiding people down through all levels of management and employment to do the same.

WalMart's problems aren't unions, or city zoning councils, or women's rights and fair pay organizations.  WalMart's problem is an out of date retail strategy.  Consumers have a lot of options besides going to stores that look like airplane hangers, and frequently without paying a premium.  There is wider selection, in attractive stores, with better quality and a better shopping experience.   And beyond traditional retail, consumers can now buy almost anything 24x7 on-line, frequently at a better price than WalMart - despite its enormous and automated distribution centers and stores, with tight inventory and expense control.

But WalMart is completely unable to admit its strategy is outdated, and unwilling to make any changes.  This week, amidst the scandal, WalMart rolled out its latest and greatest innovation for on-line shopping.  WalMart will now allow an on-line customer to pay with cash.  After placing an order on-line they can trot down to the store and pay the cash, then WalMart will recognize the order and ship the product.

Really.  Now, if this is targeted at customers that are so out of the modern loop that they have no credit card, no debit card, no on-line checking capability and no Paypal account tied to checking - do you think they have a PC to place an online order?  And if they did go to the local library to use a computer, why would they go pay at the store only to have the item shipped - rather than simply buy it in the store and take it home immediately? 

Clearly, once again, WalMart isn't trying to change its strategy.  This is an effort to extend the old WalMart, in a bizarre way, online.  The company keeps trying to keep people coming into the store. 

Amazingly, despite the fact that there's a 50/50 (or better) chance that the CEO and a number of WalMart execs will have to be removed from their position - and could well go to jail for Foreign Corrupt Practice Act violations - most people are unmoved.  The stock has barely flinched, and option traders see the stock remaining at 55 or higher out into September.  Nobody seems to believe that all these hits WalMart is taking really matters.

A famous Titanic line is "and the band played on."   This refers to the band continuing to play song after song, oblivious to disaster, until the ship suddenly broke, heaved up and dove into the ocean leaving only those in life boats to survive.  As the Titanic was taking on water not the captain, the officers, the crew, the passengers or those listening over the airwaves wanted to accept that the Titanic would sink.

But it did.

So how long will you hold onto WalMart shares?  WalMarts growth has been declining for a decade, and even went negative in 2009.  Same store sales have declined for 2 years.  Scandals are now commonplace.  Online retailers such as Amazon and Overstock.com are stripping out all the retail growth, leaving traditionalists in decline.  WalMart may be doing better than Sears, or Best Buy, but for how long? 

WalMart has no ability to stop the economic shift from an industrial to an information age.  It could choose to adapt, but instead its leaders have done the opposite.  The retailers now succeeding are those eschewing almost all the WalMart practices in favor of using customer information to offer what people want (out of their much wider selection) when customers want it, often at surprisingly good prices.  This is the current carrying emerging retailers to better profitability - and it is the current WalMart remains intent on fighting.  Even as its executives face prison.

Sayonara Sony - How Industrial, MBA Management Killed a Great Company

Who can forget what a great company Sony was, and the enormous impact it had on our lives?  With its heritage, it is hard to believe that Sony hasn't made a profit in 4 consecutive years, just recently announced it will double its expected loss for this year to $6.4 billion, has only 15% of its capital left as equity (debt/equity ration of 5.67x) and is only worth 1/4 of its value 10 years ago!

After World War II Sony was the company that took the transistor technology invented by Texas Instruments (TI) and made the popular, soon to become ubiquitous, transistor radio.  Under co-founder Akio Morita Sony kept looking for advances in technology, and its leadership spent countless hours innovatively thinking about how to apply these advances to improve lives.  With a passion for creating new markets, Sony was an early creator, and dominator, of what we now call "consumer electronics:"

• Sony improved solid state transistor radios until they surpassed the quality of tubes, making good quality sound available very reliably, and inexpensively
• Sony developed the solid state television, replacing tubes to make TVs more reliable, better working and use less energy
• Sony developed the Triniton television tube, which dramatically improved the quality of color (yes Virginia, once TV was all in black & white) and enticed an entire generation to switch.  Sony also expanded the size of Trinitron to make larger sets that better fit larger homes.
• Sony was an early developer of videotape technology, pioneering the market with Betamax before losing a battle with JVC to be the standard (yes Virginia, we once watched movies on tape)
• Sony pioneered the development of camcorders, for the first time turning parents - and everyone - into home movie creators
• Sony pioneered the development of independent mobile entertainment by creating the Walkman, which allowed - for the first time - people to take their own recorded music with them, via cassette tapes
• Sony pioneered the development of compact discs for music, and developed the Walkman CD for portable use
• Sony gave us the Playstation, which went far beyond Nintendo in creating the products that excited users and made "home gaming" a market.

Very few companies could ever boast a string of such successful products.  Stories about Sony management meetings revealed a company where executives spent 85% of their time on technology, products and new applications/markets, 10% on human resource issues and 5% on finance.  To Mr. Morita financial results were just that - results - of doing a good job developing new products and markets.  If Sony did the first part right, the results would be good.  And they were.

By the middle 1980s, America was panicked over the absolute domination of companies like Sony in product manufacturing.  Not only consumer electronics, but automobiles, motorcycles, kitchen electronics and a growing number of markets.  Politicians referred to Japanese competitors, like the wildly successful Sony, as "Japan Inc." - and discussed how the powerful Japanese Ministry of Trade and Industry (MITI) effectively shuttled resources around to "beat" American manufacturers.  Even as rising petroleum costs seemed to cripple U.S. companies, Japanese manufacturers were able to turn innovations (often American) into very successful low-cost products growing sales and profits.

So what went wrong for Sony?

Firstly was the national obsession with industrial economics.  W. Edward Deming in 1950s Japan institutionalized manufacturing quality and optimization.  Using a combination of process improvements and arithmetic, Deming convinced Japanese leaders to focus, focus, focus on making things better, faster and cheaper.  Taking advantage of Japanese post war dependence on foreign capital, and foreign markets, this U.S. citizen directed Japanese industry into an obsession with industrialization as practiced in the 1940s -- and was credited for creating the rapid massive military equipment build-up that allowed the U.S. to defeat Japan.

Unfortunately, this narrow obsession left Japanese business leaders, buy and large, with little skill set for developing and implementing R&D, or innovation, in any other area.  As time passed, Sony fell victim to developing products for manufacturing, rather than pioneering new markets. 

The Vaio, as good as it was, had little technology for which Sony could take credit.  Sony ended up in a cost/price/manufacturing war with Dell, HP, Lenovo and others to make cheap PCs - rather than exciting products.  Sony's evolved a distinctly Industrial strategy, focused on manufacturing and volume, rather than trying to develop uniquely new products that were head-and-shoulders better than competitors.

In mobile phones Sony hooked up with, and eventually acquired, Ericsson.  Again, no new technology or effort to make a wildly superior mobile device (like Apple did.)  Instead Sony sought to build volume in order to manufacture more phones and compete on price/features/functions against Nokia, Motorola and Samsung.  Lacking any product or technology advantage, Samsung clobbered Sony's Industrial strategy with lower cost via non-Japanese manufacturing.

When Sony updated its competition in home movies by introducing Blue Ray, the strategy was again an Industrial one - about how to sell Blue Ray recorders and players.  Sony didn't sell the Blue Ray software technology in hopes people would use it.  Instead it kept it proprietary so only Sony could make and sell Blue Ray products (hardware).  Just as it did in MP3, creating a proprietary version usable only on Sony devices.  In an information economy, this approach didn't fly with consumers, and Blue Ray was a money loser largely irrelevant to the market - as is the now-gone Sony MP3 product line.

We see this across practically all the Sony businesses.  In televisions, for example, Sony has lost the technological advantage it had with Trinitron cathode ray tubes.  In flat screens Sony has applied a predictable, but money losing Industrial strategy trying to compete on volume and cost.  Up against competitors sourcing from lower cost labor, and capital, countries Sony has now lost over $10B over the last 8 years in televisions.  Yet, Sony won't give up and intends to stay with its Industrial strategy even as it loses more money.

Why did Sony's management go along with this?  As mentioned, Akio Morita was an innovator and new market creator.  But, Mr. Morita lived through WWII, and developed his business approach before Deming.  Under Mr. Morita, Sony used the industrial knowledge Deming and his American peers offered to make Sony's products highly competitive against older technologies.  The products led, with industrial-era tactics used to lower cost. 

But after Mr. Morita other leaders were trained, like American-minted MBAs, to implement Industrial strategies.  Their minds put products, and new markets, second.  First was a commitment to volume and production - regardless of the products or the technology.  The fundamental belief was that if you had enough volume, and you cut costs low enough, you would eventually succeed.

By 2005 Sony reached the pinnacle of this strategic approach by installing a non-Japanese to run the company.  Sir Howard Stringer made his fame running Sony's American business, where he exemplified Industrial strategy by cutting 9,000 of 30,000 U.S. jobs (almost a full third.) To Mr. Stringer, strategy was not about innovation, technology, products or new markets.  

Mr. Stringer's Industrial strategy was to be obsessive about costs. Where Mr. Morita's meetings were 85% about innovation and market application, Mr. Stringer brought a "modern" MBA approach to the Sony business, where numbers - especially financial projections - came first.  The leadership, and management, at Sony became a model of MBA training post-1960.  Focus on a narrow product set to increase volume, eschew costly development of new technologies in favor of seeking high-volume manufacturing of someone else's technology, reduce product introductions in order to extend product life, tooling amortization and run lengths, and constantly look for new ways to cut costs.  Be zealous about cost cutting, and reward it in meetings and with bonuses.

Thus, during his brief tenure running Sony Mr. Stringer will not be known for new products.  Rather, he will be remembered for initiating 2 waves of layoffs in what was historically a lifetime employment company (and country.)  And now, in a nod to Chairman Stringer the new CEO at Sony has indicated he will  react to ongoing losses by - you guessed it - another round of layoffs.  This time it is estimated to be another 10,000 workers, or 6% of the employment.  The new CEO, Mr. Hirai, trained at the hand of Mr. Stringer, demonstrates as he announces ever greater losses that Sony hopes to - somehow - save its way to prosperity with an Industrial strategy.

Japanese equity laws are very different that the USA.  Companies often have much higher debt levels.  And companies can even operate with negative equity values - which would be technical bankruptcy almost everywhere else.  So it is not likely Sony will fill bankruptcy any time soon. 

But should you invest in Sony?  After 4 years of losses, and entrenched Industrial strategy with MBA-style leadership focused on "numbers" rather than markets, there is no reason to think the trajectory of sales or profits will change any time soon. 

As an employee, facing ongoing layoffs why would you wish to work at Sony?  A "me too" product strategy with little technical innovation that puts all attention on cost reduction would not be a fun place.  And offers little promotional growth. 

And for suppliers, it is assured that each and every meeting will be about how to lower price - over, and over, and over.

Every company today can learn from the Sony experience.  Sony was once a company to watch. It was an innovative leader, that pioneered new markets.  Not unlike Apple today.  But with its Industrial strategy and MBA numbers- focused leadership it is now time to say, sayonara.  Sell Sony, there are more interesting companies to watch and more profitable places to invest.

Why EVERY Company Must Be a Tech Company - Apple, Amazon, Facebook, Instagram Lessons

Apple's amazing increase in value is more than just a "rah-rah" story for a turnaround.  Fundamentally, Apple is telling everyone - globally - that there has been a tectonic shift in markets.  And if leaders don't understand this shift, and incorporate it into their strategy and tactics, their organizations are going to have a very difficult future.

Recently Apple's value peaked at $600B.  Yes, that is an astounding number, for it reflects not only 50% greater value than the oil giant Exxon/Mobil (~$390B), but more than the entire value of the stock markets in Spain, Greece and Portugal combined!

Source: Business Insider.com

This astounding valuation causes many to be reticent about owning Apple shares, for it seems implausible that any one company - especially a tech company with so few employees - could be worth so much.

Unless we look at this information in the context of a major, global economic shift.  That what the world values has changed dramatically.  And that what investors are telling business (and government) leaders is that in a globalized, fast paced world value is based upon what you know, when you know it - in other words information.  Not land, buildings or the ability to make things.

Three hundred years ago the wealthiest people in the world owned land.  Wars were fought for centuries to control land.  Kings owned land, and controlled everything on the land while capturing the value of everything produced on that land.  As changes came along, reducing the role of kings, land barons became the wealthiest people in the world.  In an agrarian economy, where most human resources (and all others for that matter) were deployed in food production owning land was the most valuable thing on the planet.

But then some 120 years ago, along came the industrial reveolution.  Suddenly, productivity rose dramatically by applying new machines to jobs formerly performed by humans.  With this shift, value changed.  The great industrialists were able to capture the value of greater productivity - making people like Cyrus McCormick, Henry Ford and Andrew Carnegie the wealthiest of the wealthy.  Worth more than most states, and many foreign countries. 

The age of manufacturing was based upon the productivity of machines and the application of industrial processes to what formerly was hand labor.  Creating tools - from entignes to automobiles to airplanes - created great wealth.  Knowing how to make these machines, and making them, created enormous value.  And companies like General Motors, General Dynamics and General Electric were worth much more than the land upon which food was produced.  And the commodity suppliers, like Exxon/Mobil, feeding industrial companies captured huge value as well. 

By the middle 1900s America's farmers were forced to create ever larger farms to remain in business, and were constantly begging for government subsidies to stay alive via price controls (parity programs) and land "set-asides" run by the Agriculture Department.  By the 1980s family farms going broke by the thousands, agricultural land values plummeted and the ability to create value by growing or processing food was a struggle.  Across the developed world, wealth shifted into the hands of industrial companies from landowners.

Sometime in the 1990s the world shifted again, and that's what the chart above shows us.  Countries with little or no technology companies - no information economy - cannot create value.  On the other hand, companies that can drive new levels of productivity via the creation, management, use and sale of information can create enormous value. 

Think about the incredible shift that has happened in retail.  America's largest and most successful retailer from the 1900 turn of the century well into the 1960s was Sears.  In an industry that long equated success with "location, location, location" Sears has had, and continues to control, enormous amounts of land and buildings.  But the value of Sears has declined like a stone pitched off a bridge, now worth only $6B (1% the Apple value) despite all that real estate!

Simultaneously, America's largest retailer Wal-Mart has seen its value go nowhere for over a decade, despite its thousands of locations that span every state.  Even though Wal-Mart keeps adding stores, and enlarging stores, adding more and more land and buildings to its "asset" base the company's customer base, sales and value are mired, unable to rise.

Yet, Amazon - which has no land, and almost no buildings - has used the last 20 years to go from start up to an $86B valuation - doing much better for shareholders than its traditional, industrial thinking competitors.  In the last 5 years, Amazon's value has roughly quadrupled!

Source: Yahoo Finance

Yes, Amazon is a retailer.  But the company has learned that applying an industrial strategy is far less valuable than applying an information strategy.  As an internet leader, first with most browser formats on PCs and smartphones, Amazon has reached far more new customers than any traditional real-estate focused company.  By launching Kindle Amazon focused on the information in books, rather than the format (print) revolutionizing the market and capturing enormous value.

By launching Kindle Fire Amazon takes information one step further, making it possible for customers to access new products faster, order faster and build their own retail world without ever going to a building.  By becoming a tech company, Amazon is clearly well on the way to dominating retail, as Sears falls into irrelevancy and almost surely bankruptcy, and Wal-Mart stalls under the overhead of all that land, buildings and vast number of minimum-wage, uninsured employees.

We now must realize that value is not created by what accountants have long called "hard assets" - land, buildings and equipment.  In fact, the 2 great U.S. recessions since 2000 have demonstrated to everyone that there is no security in these - the value can decline, decline fast, and decline far.  Just because these things are easy to see and count does not insure value.  They can easily be worth less than they cost to make - or own.

Successful competition in 2012 (and going forward) requires businesses know about customers, products and have the ability to supply solutions fast with great reach.  Winning is about what you know, knowing it early, acting upon the information and then being able to disseminate that solution fast to those who have emerging needs. 

Which is why you have to be excited about the brilliant move Facebook made to acquire Instagram last week.  In one fast, quick step Facebook bought the ability to easily and effectively provide mobile image solutions - across any application - to millions of existing users. Something that every single person, and business, on the planet is either doing now, or will be doing very soon.

Source:  Wired

On a cost-per-existing-customer basis, Facebook stole Instagram.  And that's before Facebook spreads out the solution to the rest of its 780million users!  Forget about how many employees Instagram has, or its historical revenues or its assets.  In an innovation economy, if you have a product that 35million people hear about and start using in less than a year, you have something very valuable!

Kudos go to Mark Zuckerberg as CEO, and his team, for making this acquisition so quickly.  Before Instagram had a chance to hire bankers, market itself and probably raise its value 10x.  That's why Mr. Zuckerberg was Time Magazine's "Man of the Year" at the start of 2011 - and why he's been able to create so much more value for his shareholders than the CEOs of industrial companies - like say GE.

Going forward, no company can plan to survive with an industrial strategy.  That approach, and those rules, simply don't create high returns.  To be successful you MUST become a tech company.  And while this may not feel comfortable, it is reality.  Every business must shift, or die.

 

Momentum is a Killer - The Demise of RIM, Yahoo and Dell

Understand your core strength, and protect it.  Sounds like the key to success, and a simple motto.  It's the mantra of many a management guru.  Only, far too often, it's the road to ruin.

The last week 3 big announcements showed just how damning the "strategy" of building on historical momentum can be. 

Start with Research in Motion's revenue and earnings announcement.  Both metrics fell short of expectations as Blackberry sales continue to slide.  Not many investors were actually surprised about this, to be honest.  iOS and Android products have been taking away share from RIM for several months, and the trend remains clear.  And investors have paid a heavy price.

Source: BusinessInsider.com

There is no doubt the executives at RIM are very aware of this performance, and desperately would like the results to be different.  RIM has known for months that iOS and Android handhelds have been taking share. The executives aren't unaware, nor stupid.  But, they have not been able to change the internal momentum at RIM to the right issues.

The success formula at RIM has long been to "own" the enterprise marketplace with the Blackberry server products, offering easy to connect and secure network access for email, texting and enterprise applications.  Handsets came along with the server and network sales.  All the momentum at RIM has been to focus on the needs of IT departments; largely security and internal connectivity to legacy systems and email.  And, honestly, even today there is probably nobody better at that than RIM.

But the market shifted.  Individual user needs and productivity began to trump the legacy issues.  People wanted to leave their laptops at home, and do everything with their smartphones.  Apps took on a far more dominant role, as did ease of use.  Because these were not part of the internal momentum at RIM the company ignored those issues, maintaining its focus on what it believed was the core strength, especially amongst its core customers.

Now RIM is toast.  It's share will keep falling, until its handhelds become as popular as Palm devices.  Perhaps there will be a market for its server products, but only via an acquisition at a very low price.  Momentum to protect the core business killed RIM because its leaders failed to recognize a critical market shift.

Turn next to Yahoo's announcement that it is laying off 1 out of 7 employees, and that this is not likely to be the last round of cuts.  Yahoo has become so irrelevant that analysts now depicct its "core" markets as "worthless."

Source: SiliconAlleyInsider.com

Yahoo was an internet pioneer.  At one time in the 1990s it was estimated that over 90% of browser home pages were set to Yahoo! But the need for content aggregation largely disappeared as users learned to use search and social media to find what they wanted.  Ad placement revenue for keywords transferred to the leading search provider (Google) and for display ads to the leading social media provider (Facebook.) 

But Yahoo steadfastly worked to defend and extend its traditional business.  It enhanced its homepage with a multitude of specialty pages, such as YahooFinance.  But each of these has been outdone by specialist web sites, such as Marketwatch.com, that deliver everyhing Yahoo does only better, attracting more advertisers.  Yahoo's momentum caused it to miss shifting with the internet market. Under CEO Bartz the company focused on operational improvements and efforts at enhancing its sales, while market shifts made its offerings less and less relevant. 

Now, Yahoo is worth only the value of its outside stockholdings, and it appears the new CEO lacks any strategy for saving the enterprise.  The company appears ready to split up, and become another internet artifact for Wikipedia.  Largely because it kept doing more of what it knew how to do and was unable to overcome momentum to do anything new.

Last, but surely not least, was the Dell announced acquisition of Wyse. 

Dell is synonymous with PC.  But the growth has left PCs, and Dell missed the markets for mobile entertainment devices (like iPods or Zunes,) smartphones (like iPhone or Evo) and tablets (like iPads and Galaxy Tab.)  Dell slavisly kept to its success formula of doing no product development, leaving that to vendors Microsoft and Intel, as it focused on hardware manufacturing and supply chain excellence.  As the market shifted from the technologies it knew Dell kept trying to cut costs and product prices, hoping that somehow people would be dissuaded from changing technologies.  Only it hasn't worked, and Dell's growth in sales and profits has evaporated.

Don't be confused.  Buying Wyse has not changed Dell's "core."  In Wyse Dell found another hardware manufacturer, only one that makes old-fashioned "dumb" terminals for large companies (interpret that as "enterprise,") mostly in health care.  This is another acquisition, like Perot Systems, in an effort to copy the 1980s IBM brand extension into other products and services that are in like markets - a classic effort at extending the original Dell success formula with minimal changes. 

Wyse is not a "cloud" company.  Rackspace, Apple and Amazon provide cloud services, and Wyse is nothing like those two market leaders.  Buying Wyse is Dell's effort to keep chasing HP for market share, and trying to pick up other pieces of revenue as it extends is hardware sales into more low-margin markets.  The historical momentum has not changed, just been slightly redirected.   By letting momentum guide its investments, Dell is buying another old technology company it hopes it can can extend its "supply chain" strenths into - and maybe find new revenues and higher margins.  Not likely.

Over and again we see companies falter due to momentum.  Why? Markets shift.  Faster and more often than most business leaders want to admit.  For years leaders have been told to understand core strengths, and protect them.  But this approach fails when your core strength loses its value due to changes in technologies, user preferences, competition and markets.  Then the only thing that can keep a company successful is to shift. Often very far from the core - and very fast.

Success actually requires overcoming internal momentum, built on the historical success formula, by putting resources into new solutions that fulfill emerging needs.  Being agile, flexible and actually able to pivot into new markets creates success.  Forget the past, and the momentum it generates.  That can kill you.

Don't leave ObamaCare to the Attorneys!

No businessperson thinks the way to solve a business problem is via the courts.  And no issue is larger for American business than health care.  Despite all the hoopla over the Supreme Court reviews this week, this is a lousy way for America to address an extremely critical area.

The growth of America's economy, and its global competitiveness, has a lot riding on health care costs. Looking at the table, below, it is clear that the U.S. is doing a lousy job at managing what is the fastest growing cost in business (data summarized from 24/7 Wall Street.)

While America is spending about $8,000 per person, the next 9 countries (in per person cost) all are grouped in roughly the $4,000-$5,000 cost -- so America is 67-100% more costly than competitors.  This affects everything America sells - from tractors to software services - forcing higher prices, or lower margins.  And lower margins means less resources for investing in growth!

American health care is limiting the countries overall economic growth capability by consuming dramatically more resources than our competitors.  Where American spends 17.4% of GDP (gross domestic product) on health care, our competitors are generally spending only 11-12% of their resources.  This means America is "taxing" itself an extra 50% for the same services as our competitive countries.  And without demonstrably superior results.  That is money which Americans would gain more benefit if spent on infrastructure, R&D, new product development or even global selling!

Americans seem to be fixated on the past.  How they used to obtain health care services 50 years ago, and the role of insurance 50 years ago.  Looking forward, health care is nothing like it was in 1960.  The days of "Dr. Welby, MD" serving a patient's needs are long gone.  Now it takes teams of physicians, technicians, nurses, diagnosticians, laboratory analysts and buildings full of equipment to care for patients.  And that means America needs a medical delivery system that allows the best use of these resources efficiently and effectively if its citizens are going to be healthier, and move into the life expectancies of competitive countries.

Unfortunately, America seems unwilling to look at its competitors to learn from what they do in order to be more effective.  It would seem obvious that policy makers and those delivering health care could all look at the processes in these other 9 countries and ask "what are they doing, how do they do it, and across all 9 what can we see are the best practices?" 

By studying the competition we could easily learn not only what is being done better, but how we could improve on those practices to be a world leader (which, clearly, we now are not.)  Yet, for the most part those involved in the debate seem adamant to ignore the competition - as if they don't matter.  Even though the cost of such blindness is enormous.

Instead, way too much time is spent asking customers what they want.  But customers have no idea what health care costs.  Either they have insurance, and don't care what specific delivery costs, or they faint dead away when they see the bill for almost any procedure.  People just know that health care can be really good, and they want it.  To them, the cost is somebody else's problem. That offers no insight for creating an effective yet simultaneously efficient system.

America needs to quit thinking it can gradually evolve toward something better.  As Clayton Christensen points out in his book "The Innovator's Prescription: A Disruptive Solution for Health Care" America could implement health care very differently.  And, as each year passes America's competitiveness falls further behind - pushing the country closer and closer to no choice but being disruptive in health care implementation.  That, or losing its vaunted position as market leader!

Is the "individual mandate" legal?  That seems to be arguable.  But, it is disruptive.  It seems the debate centers more on whether Americans are willing to be disruptive, to do something different, than whether they want to solve the problem.  Across a range of possibilities, anything that disrupts the ways of the past seems to be argued to death.  That isn't going to solve this big, and growing, problem.  Americans must become willing to accept some radical change.

The simple approach would be to look at programs in Oregon, Massachusetts and all the states to see what has worked, and what hasn't worked as well.  Instead of judging them in advance, they could be studied to learn.  Then America could take on a series of experiments.  In isolated locations.  Early adopter types could "opt in" on new alternative approaches to payment, and delivery, and see if it makes them happy.  And more stories could be promulgated about how alternatives have worked, and why, helping everyone in the country remove their fear of change by seeing the benefits achieved by early leaders.

Health care delivery, and its cost, in America is a big deal.  Just like the oil price shocks in the 1970s roiled cost structures and threatened the economy, unmanagable health care delivery and cost threatens the country's economic future.  American's surely don't expect a handful of lawyers in black robes to solve the problem.

America needs to learn from its competition, be willing to disrupt past processes and try new approaches that forge a solution which not only delivers better than anyone else (a place where America does seem to still lead) but costs less.  If America could be the first on the moon, first to create the PC and first to connect everyone on smartphones this is a problem which can be solved - but not by attorneys or courts!

The Good, Bad and Ugly - Apple, Google and Dell

The Good - Apple

Apple's latest news to start paying a big dividend, and buying back shares, is a boon for investors.  And it signals the company's future strength.  Often dividends and share buybacks indicate a company has run out of growth projects, so it desires to manipulate the stock price as it slowly pays out the company's assets.  But, in Apple's (rare) case the company is making so much profit from existing businesses that they are running out of places to invest it - thus returning to shareholders!

With a $100B cash hoard, Apple anticipates generating at least another $150B of free cash flow, over and above needs for ongoing operations and future growth projects, the next 3 years.  With so much cash flowing the company is going to return money to investors so they can invest in other growth projects beyond those Apple is developing.  Exactly what investors want! 

I've called Apple the lowest risk, highest return stock for investors (the stock to own if you can only own one stock) for several years.  And Apple has not disappointed.  At $600/share the stock is up some 75% over the last year (from about $350,) and up 600% over the last 5 years (from about $100.)  And now the company is going to return investors $10.60/year, currently 1.8% - or about 4 times your money market yield, or about 75% of what you'd get for a 10 year Treasury bond. Yet investors still have a tremendous growth in capital opportunity, because Apple is still priced at only 14x this year's projected earnings, and 12 times next year's projected earnings!

Apple keeps winning.  It's leadership in smart phones continues, as the market converts from traditional cell phones to smart phones.  And its lead in tablets remains secure as it sells 3 million units of the iPad 3 over the weekend.  In every area, for several years, Apple has outperformed expectations as it leads the market shift away from traditional PCs and servers to mobile devices and using the "cloud." 

The Bad - Google

Google was once THE company to emulate.  At the end of 2008 its stock peaked at nearly $750/share, as everyone thought Google would accomplish nothing short of world domination (OK, a bit extreme) via its clear leadership in search and the way it dominated internet usage.  But that is no longer the case, as Google is being eclipsed by upstarts such as Facebook and Groupon.

What happened?  Even though it had a vaunted policy of allowing employees to spend 20% of their time on anything they desired, Google never capitalized on the great innovations created.  Products like Google Wave and Google Powermeter were created, launched - and then subsequently left without sponsors, management attention, resources or even much interest.  Just as recently happened with GoogleTV.

They floundered, despite identifying very good solutions for pretty impressive market needs, largely because management chose to spend almost all its attention, and resources, defending and extending its on-line ad sales created around search. 

• YouTube is a big user environment, and one of the most popular sites on the web.  But Google still hasn't really figured out how to generate revenue, or profit, from the site.  Despite all the user activity it produces a meager $1.6B annual revenue - and nearly no profit.
• Android may have share rivaling Apple in smartphones, but it is nowhere in tablets and thus lags significantly in the ovarall market with share only about half iOS.  Worse, Android smartphones are not nearly as profitable as iPhones, and now Google has made an enormous, multi-billion investment in Motorola to enter this business - and compete with its existing smartphone manufacturers (customers.)  To date Android has been a product designed to defend Google's historical search business as people go mobile - and it has produced practically no revenue, or profit.
• Chrome browsers came on the scene and quickly grew share beyond Firefox.  But, again, Google has not really developed the product to reach a dominant position.  While it has good reviews, there has been no major effort to make it a profitable product.  Possibly Google fears fighting IE will create a "money pit" like Bing has become for Microsoft in search?
• Chromebooks were a flop as Google failed to invest in robust solutions allowing users to link printers, MP3 players, etc. - or utilize a wide suite of thin cloud-based apps.  Great idea, that works well, they are a potential alternative to PCs, and some tablet applications, but Google has not invested to make the product commercially viable.
• Google tried to buy GroupOn to enter the "local" ad marketplace, but backed out as the price accelerated.  While investors may be happy Google didn't overpay, the company missed a significant opportunity as it then faltered on creating a desirable competitive product.  Now Google is losing the race to capture local market ads that once went to newspapers.

While Google chose to innovate, but not invest in market development, it missed several market opportunities.  And in the meantime Google allowed Facebook to sneak up and overtake its "domination" position. 

Facebook has led people to switch from using the internet as a giant library, navigated by search, to a social medium where referrals, discussions and links are driving more behavior.  The result has advertisers shifting their money toward where "eyeballs" are spending most of their time, and placing a big threat on Google's ability to maintain its historical growth.

Thus Google is now dumping billions into Google+, which is a very risky proposition.  Late to market, and with no clear advantage, it is extremely unclear if Google+ has any hope of catching Facebook.  Or even creating a platform with enough use to bring in a solid, and growing, advertiser base. 

The result is that today, despite the innovation, the well-known (and often good) products, and even all the users to its sites Google has the most concentrated revenue base among large technology companies.  95% of its revenues still come from ad dollars - mostly search.  And with that base under attack on all fronts, it's little wonder analysts and investors have become skeptical.  Google WAS a great company - but it's decisions since 2008 to lock-in on defending and extending its "core" search business has made the company extremely vulnerable to market shifts. A bad thing in fast moving tech markets.

Google investors haven't fared well either.  The company has never paid a dividend, and with its big investments (past and future planned) in search and handsets it won't for many years (if ever.)  At $635/share the stock is still down over 15% from its 2008 high.  Albeit the stock is up about 8.5% the last 12 months, it has been extremely volatile, and long term investors that bought 5 years ago, before the high, have made only about 7%/year (compounded.)

Google looks very much like a company that has fallen victim to its old success formula, and is far too late adjusting to market shifts.  Worse, its investments appear to be a company spending huge sums to defend its historical business, taking on massive gladiator battles against Apple and Facebook - two companies far ahead in their markets and with enormous leads and war chests. 

The Ugly - Dell

Go back to the 1990s and Dell looked like the company that could do no wrong.  It went head-to-head with competitors to be the leader in selling, assembling and delivering WinTel (Windows + Intel) PCs.  Michael Dell was a modern day hero to other leaders hoping to match the company's ability to focus on core markets, minimize investments in anything else, and be a world-class supply chain manager.  Dell had no technology or market innovation, but it was the best at beating down cost - and lowering prices for customers.  Dell clearly won the race to the bottom.

But the market for PCs matured.  And Dell has found itself one of the last bachelors at the dance, with few prospects.  Dell has no products in leading growth markets, like smartphones or tablets.  Nor even other mobile products like music or video.  And it has no software products, or technology innovation. Today, Dell is locked in gladiator battles with companies that can match its cost, and price, and make similarly slim (to nonexistent) margins in the generic business called PCs (like HP and Lenovo.)

Dell has announced it intends to challenge Apple with a tablet launch later in 2012.  This is dependent upon Microsoft having Windows 8 ready to go by October, in time for the holidays.  And dependent upon the hope that a swarm of developers will emerge to build the app base for things that already exist on the iPad and Android tablets.  The advantage of this product is as yet undefined, so the market is yet undefined.  The HOPE is that somehow, for some reason, there is a waiting world of people that have delayed purchase waiting on a Windows device - and will find the new Dell product superior to a $299 Apple 2 already available and with that 500,000 app store.

Clearly, Dell has waited way, way too long to deal with changing its business.  As its PC business flattens (and soon shrinks) Dell still has no smartphone products, and is remarkably late to the tablet business.  And it offers no clear advantage over whatever other products come from Windows 8 licensees.  Dell is in a brutal world of ever lower prices, shrinking markets and devastating competition from far better innovators creating much higher, and growing, profits (Apple and Amazon.)

For investors, the ride from a fast moving boat in the rapids into the swamp of no growth - and soon the whirlpool of decline - has been dismal.  Dell has never paid a dividend, has no free cash flow to start paying one now, and clearly no market growth from which to pay one in the future.  Dell's shares, at $17, are about the same as a year ago, and down about 20% over the last 5 years. 

Leaders in all businesses have a lot to learn from looking at the Good, Bad and Ugly.  The company that has invested in innovation, and then invested in taking that innovation to market in order to meet emerging needs has done extremely well.  By focusing on needs, rather than business optimization, Apple has been able to shift with markets - and even enhance the market shift to position itself for rapid, profitable growth.

Meanwhile, companies that have focused on their core markets and products are doing nowhere near as well.  They have missed market shifts, and watched their fortunes decline precipitously.  They were once very profitable, but despite intense focus on defending their historical strengths profits have struggled to grow as customers moved to alternative solutions.  By spending insufficient time looking outward, at markets and shifts, and too much time inward, on defending and extending past successes, they now face future jeopardy.

Microsoft's Crazy Windows 8 Bet - How you can invest smarter

This week people are having their first look at Windows 8 via the Barcelona, Spain Mobile World Congress.  This better be the most exciting Microsoft product since Windows was created, or Microsoft is going to fail. 

Why? Because Microsoft made the fatal mistake of "focusing on its core" and "investing in what it knew" - time worn "best practices" that are proving disastrous! 

Everyone knows that Microsoft has returned almost nothing to shareholders the last decade.  Simultaneously, all the "partner" companies that were in the "PC" (the Windows + Intel, or Wintel, platform) "ecosystem" have done poorly.  Look beyond Microsoft at returns to shareholders for Intel, Dell (which recently blew its earings) and Hewlett Packard (HP - which says it will need 5 years to turn around the company.)  All have been forced to trim headcount and undertake deep cost cutting as revenues have stagnated since 2000, at times falling, and margins have been decimated. 

This happened despite deep investments in their "core" PC business.  In 2009 Microsoft spent almost $9B on PC R&D; over 14% of revenues.  In the last few years Microsoft has launched Vista, Windows 7, Office 2009 and Office 2010 all in its effort to defend and extend PC sales.  Likewise all the PC manufacturers have spent considerably on new, smaller, more powerful and even cheaper PC laptop and desktop models.

Unfortunately, these investments in their core expertise and markets have not excited users, nor created much growth.

On the other hand, Apple spent all of the last decade investing in what it didn't know much about in 2000.  Rather than investing in its "core" Macintosh business, Apple invested in the trend toward mobility, being an early leader with 3 platforms - the iPod, iPhone and iPad.  All product categories far removed from its "core" and what it new well.  But, all targeted at the trend toward enhanced mobility.

Don't forget, Microsoft launched the Zune and the Windows CE phones in the last decade.  But, because these were not "core" products in "core" markets Microsoft, and its partners, did not invest much in these markets.  Microsoft even brought to market tablets, but leadership felt they were inferior to the PC, so investments were maintained in traditional PC products.  The Zune, Windows phone and early Windows tablets all died because Microsoft and its partner companies stuck to investing their most important, and best known, PC business.

Where are we now?  Sales of PC's are stagnating, and going to decline.  While sales of mobile devices are skyrocketing.

Source: Business Insider 2/14/12

Today tablet sales are about 50% of the ~300M unit PC sales.  But they are growing so fast they will catch up by 2014, and be larger by 2015.  And, that depends on PC sales maintaining.  Look around your next meeting, commuter flight or coffee shop experience and see how many tablets are being used compared to laptops.  Think about that ratio a year ago, and then make your own assessment as to how many new PCs people will buy, versus tablets.  Can you imagine the PC market actually shrinking?  Like, say, the traditional cell phone business is doing?

By focusing on Windows, and specifically each generation leading to Windows 8, Microsoft took a crazy bet.  It bet it could improve windows to keep the PC relevant, in the face of the evident trend toward mobility and ease of use. Instead of investing in new technologies, new products and new markets - things it didn't know much about - Microsoft chose to invest in what it new, and hoped it could control the trend. 

People didn't want a PC to be mobile, they wanted mobility.  Apple invested in the trend, making the MP3 player a winner with its iPod ease of use and iTunes market.  Then it made smartphones, which were largely an email device, incredibly popular by innovating the app marketplace which gave people the mobility they really desired.  Recognizing that people didn't really want a PC, they wanted mobility, Apple pioneered the tablet marketplace with its iPad and large app market. The result was an explosion in revenue by investing outside its core, in technologies and markets about which it initially knew nothing.

Apple would not have grown had it focused its investment on its "core" Mac business.  In the last year alone Apple sold more iOS devices than it sold Macs in its entire 28 year history!

Source: Business Insider 2/17/2012

Today, the iPhone business itself is bigger than all of Microsoft. The iPad business is bigger than the desktop PC business, and if included in the larger market for personal computing represents 17% of the PC market.  And, of course, Apple is now worth almost twice the value of Microsoft.

We hear, all the time, to invest in what we know.  But it turns out that is NOT the best strategy.  Trends develop, and markets shift.  By constantly investing in what we know we become farther and farther removed from trends.  In the end, like Microsoft, we make massive investments trying to defend and extend our past products when we would be much, much smarter to invest in new technologies and markets that are on the trend, even if we don't know much, if anything, about them.

The odds are now stacked against Microsoft.  Apple has a huge lead in product sales, market position and apps.  It's closest challenger is Google's Android, which is attracting many of the former Microsoft partners (such as LG's recent defection) as they strive to catch up. Company's such as Nokia are struggling as the technology leadership, and market position, has shifted away from Microsoft as mobility changed the market.

Microsoft's technology sales used to be based upon convincing IT departments to use its platform.  But today users largely buy mobile devices with their own money, and eschew the recommendations of the IT department. Just look at how users drove the demise of Research In Motion's Blackberry.  IT needs to provide users with tools they like, and use platforms which are easy and low-cost to leverage with big app bases.  That favors Apple and Android, not Microsoft with its far, far too late entry.

You can be smarter than Microsoft.  Don't take the crazy bet of always doubling down on what you know.  Put your focus on the marketplace, and identify shifts.  It's cheaper, and smarter, to bet early on trends than constantly trying to fight the trend by investing - usually at an ever higher amount - in what you know.

 

Twitter and Linked-In Drove one of 2011's Fastest Growing Companies

Everyone hears about the growth at Apple.  But far too few of us hear about great growth stories of start-up companies in non-tech industries that use today's sales tools to change the game and steal sales leadership from traditional competitors. 

Jefferson Financial, which moved its headquarters from New York to Louisville, created dramatic, rapid growth using Twitter and Linked-in to take on industry giants like Schwab and B of A's Merrill Lynch.  Readers should take this story to heart, because it shows the kind of success small and medium-sized businesses can have when they break out of traditional thinking and invest in new sales tools while stalwarts remain stuck doing the same old thing with diminishing results.

The Jefferson Financial Story - from Ron Volper, Ph.D

Companies that reduce their sales and marketing budgets in this tough economy—as most have-- are doing exactly the wrong thing. While many are trying to cut their way out of the recession, the companies that are thriving in this economy are growing their way out by investing more in sales and marketing. And by capitalizing on new trends, such as social media and technology, to reach out to their customers.
 
That's what enabled Jefferson National Financial to grow its 2010 $180 million revenues to $280 million in 2011 (a 55% annual increase!) -- and capture the dominant market share from much larger companies like Charles Schwab -- selling financial products such as variable rate annuities to registered investment advisors and their clients throughout the US.

While most industry competitors cut their sales and customer service teams in the recessionary economy, Jefferson National tripled its sales team from 2010 to 2011.  While competitors slashed advertising and marketing, Jefferson National substantially increased its advertising and marketing budget. Sound risky?  Read on for the results.

Jefferson National combined hi-tech and hi-touch. For example, it used LinkedIn, Twitter, and YouTube to reach financial advisors (the intermediaries that recommend its products) and their clients (the investors). The company capitalized on a slew of tweets and re-tweets highlighting its relocation to Louisville and the creation of 95 new high paying management jobs. Social excitement induced both the mayor and the governor to attend a celebratory event, and encouraged the governor to designate a day as Jefferson National Day - creating a low cost media following of the company, its products and its success.

Successful viral marketing combined hi-tech social involvement with classic event marketing.

Lacking anything exciting to say, many of Jefferson's competitors reduced their fees (prices) for products and services to maintain revenues.  Jefferson National was able to maintain its fees by successfully pitching its story directly to customers on-line, then following up with personal assistance, adding value and promoting a successful investor story.  As a result, after only 5 years the company increased its fund offerings from 75 to 350.

Jefferson National leveraged its technology to help financial advisors grow their practices. By hosting financial advisor webinars on how to use Linked-in and other social media to gain referrals from existing clients it created a loyal, growing set of distributors and happy clients.

Additionally, Jefferson National used technology to give financial advisors “an end to end solution” demonstrating to investors on-line, regardless location, the power of tax deferred investment growth, regardless of whether the investor was conservative or aggressive. 

The result - the company generated $1 billion in sales since inception and became the market share leader.

According to the Ron Volper Group’s recent analysis of 125 companies (including Jefferson National), 80% of companies that were successful in the 2008-2010 down market (as measured by meeting and exceeding their revenue and earnings goals and capturing market share) recognized that customer buying behavior changed, and altered their sales and marketing approach while their less successful peers kept doing "more of the same."

Unfortunately, too many companies exacerbated failure by cutting  advertising and marketing budgets.  Today customers demand 8 touches (or contacts) to make a buying decision; whereas prior to 2008 they required only 5 touches. While competition has toughened, customers have simultaneously become MORE demanding!  The winners, like Jefferson National, recognized that social media, such as Twitter, Facebook and LinkedIn are immediate and inexpensive ways to attract attention and have followers share their success messages with their networks. Simultaneously they continued to advertise and promote their products in traditional ways, appealing to the widest swath of prospects.

Most companies have not accepted the increased customer demand for increased touch, without higher prices.  Most have not modified their marketing and sales approach to take account of changes in customer buying behavior. That’s why this is a perfect time for many small and mid-sized companies to adopt new technologies.  These are the "slings" which can allow modern-day business Davids to attack lethargic Goliaths.

Thanks to my colleague Ron Volper for sending along this story.  He is a believer that anyone can grow, even in this economy.  RON VOLPER, Ph.D., is a leading authority on business development and author of Up Your Sales in a Down Market. As Managing Partner of the Ron Volper Group—Building Better Sales Teams, he has advised 90 Fortune 500 Companies and many mid-sized companies on how to increase sales in tough times and good times; and he has trained over 30,000 salespeople and executives over the past 25 years.

I hope your company can take this story to heart and find ways to incorporate new tools f0r creating growth as market shifts make old strategies less valuable, while creating new opportunities.

 

Buy Facebook, P&G's CEO told you to

Buy Facebook.  I don't care what the IPO price is.

Since Facebook informed us it was going public, and it's estimated IPO valuation was reported, debate has raged over whether the company could possibly be worth $75-$100B.  Almost nobody writes that Facebook is undervalued, but many question whether it is overvalued. 

If you are a trader, moving in and out of positions monthly and using options to leverage short-term price swings then this article is not for you.  But, if you are an investor, someone who holds most stock purchases for a year or longer, then Facebook's IPO may be undervalued.  The longer you can hold it, the more you'll likely make.  Buy it in your IRA if possible, then let it build you a nice nest egg.

About 85% of Facebook's nearly $4B revenues, which almost doubled in 2011, are from advertising.  So understanding advertising is critical to knowing why you want to buy, and hold, Facebook. 

Facebook has 28% of the on-line display ad market, but only 5% of all on-line advertising.  On-line advertising itself is generally predicted to grow at 16%/year.  But there is a tremendous case to be made that the market will grow a whole lot faster, and Facebook's share will become a whole lot larger.

At the end of January Proctor & Gamble's stock took a hit as earnings missed expectations, and the CEO projected a tough year going forward.  He announced 1,600 layoffs, many in marketing, as he admitted the ad budget was going to be "moderated" - code for cut.  While advertising had grown at 24%/year sales were only growing at 6%.  He then admitted that the "efficiency" of on-line advertising was demonstrating the ability to be much higher than traditional advertising.  In other words, he is planning to cut traditional marketing and advertising, such as coupon printing and ads in newspapers and television, and spend more on-line.

P&G spends about $10B/year on advertising.  2.5x the Facebook revenue.  Now, imagine if P&G moves 10% - or 25% - of its advertising from television (which is now a $250B market) on-line.  That is $1-$2.5B per year, from just one company!  Such a "marginal" move, by just one company, adds 1-3% to the total on-line market.  Now, magnify that across Unilever, Danon, Kimberly-Clark, Colgate, Avon, Coke, Pepsi ...... the 200 or 300 largest advertisers and it becomes a REALLY BIG number.

The trend is clear.  People spend less time watching TV and reading newspapers.  We all interact with information and entertainment more and more on computers and mobile devices.  Ad declines have already killed newspapers, and television is on the precipice of following its print brethren.  The market shift toward advertising on-line will continue, and the trend is bound to accelerate. 

Last year P&G launched an on-line marketing program for Old Spice.  The CEO singled out the 1.8 billion free impressions that received on-line.  When the CEO of one of the world's largest advertisers takes note, and says he's going to move that way, you can bet everyone is going to head that direction.  Especially as they recognize the poor "efficiency" of traditional media spending.

And don't forget the thousands of small businesses that have much smaller budgets.  Most of them rarely, or never, could afford traditional media.  On-line is not only more effective, but far cheaper.  Especially as mobile devices makes local marketing even more targeted and effective.  So as big companies shift to on-line we can expect small to medium sized businesses to shift as well, and new advertisers are being created which will expand the market even further.  This trend could lead to a much faster organic market growth rate beyond 16% - perhaps 25% or even more!

Which brings us back to Facebook, which will be the primary beneficiary of this market shift. 

Facebook is rapidly catching up with Google in the referral business.  850 million users is important, because it shows the ability Facebook has to bring people on-line, keep them on-line and then refer them somewhere.  The kind of thing that made Google famous, big and valuable with search a decade ago.  In fact, people spend much more time on Facebook than they do Google.  When advertisers want to reach their audience they go where the people are (and are being referred) and that is Facebook.  Nobody else is even close. 

The good thing about having a big user base, and one that shares information, is the ability to gather data.  Just like Google kept all those billions of searches to analyze and share data, increasingly Facebook is able to do the same.  Facebook will be able to tell advertisers how people interact, how they move between pages, what keeps them on a page and what leads to buying behavior.  Facebook uses this data to help users be more effective, just like Google does to help us do great searches.  But in the future Facebook can package and sell this data to advertisers, helping  them be more effective, and they can use it for selling, and placing, ads.

Facebook usage is dominant in social media, but becoming more dominant in all internet use.  Like how Windows became the dominant platform for PC users, Facebook is well on its way to being the platform for how we use the web.  Email will be less necessary as we communicate across Facebook with those we really want to know.  Information on topics of interest will stream to us through Facebook because we select them, or our friends refer them.  Solving problems will use referrals more, and searching less.  The platform will help us be much more efficient at using the internet, and that reinforces more usage and more users.  All the while attracting more advertisers.

The big losers will be traditional media.  We may watch sports live, but increasingly we'll be unwilling to watch streaming TV as the networks trained boomers.  Companies like NBC will suffer just as newspaper giants such as Tribune Corp., New York Times and Dow Jones.  Ad agencies will have a very tough time, as ad budgets drop their placement fees will decline concomittantly.  Lavish spending on big budget ads will also decline. 

Anyone in on-line advertising is likely to be a winner initially.  Linked-in, Twitter, Pinterest and Google will all benefit from the market shift.  But the biggest winner of all will be Facebook.

What if the on-line ad market grows 25%/year (think not possible? look at how fast the smartphone and tablet markets have grown while PC sales have stagnated last 2 years as that market shifted.  And don't forget that incremental amount could easily happen just by the top 50 CPG companies moving 10% of their budget!)?   That adds $20-$25B incrementally.  If Facebook's share shifts from 5% to 10% that would add $2-2.5B to Facebook first year; more than 50%! 

Blow those numbers up just a bit more.  Say double on-line advertising and give Facebook 20% share as people drop email and traditional search for Facebook - plus mobile device use continues escalating.  Facebook revenues could double up, or more, for several years as trends obsolete newspapers, magazines, televisions, radios, PCs and traditional thoughts about advertising.

If you missed out on AT&T in the 1950s, IBM in the 1960s, Microsoft in 1980, or Apple in 2000, don't miss this one.  Forget about all those spreadsheets and short-term analyst forecasts and buy the trend.  Buy Facebook.

Wal-Mart's "Shoot Yourself in the Head" Strategy

For the last decade, Wal-Mart has been "dead money" in investor parlance.  After a big jump between 1995 and 2000, the stock today is still worth less than it was in 2000.  There has been volatility, which might have benefited some traders.  But for most of the decade Wal-Mart's price has been lower.  There has been excitement because recently the price has been catching up with where it was in 2002, even though there have been no real gains for long term investors.

Source: YahooFinance 1/30/12

What happened to Wal-Mart was the market shifted.  For many years being the market leader with every day low pricing was a winning strategy.  Wal-Mart was able to expand from town to town opening new stores, all pretty much alike, doing the same thing and making really good money.

Then competitors took aim at Wal-Mart, and found out they could beat the giant.

Eventually the number of towns that both needed, and justified, a new Wal-Mart (or Sam's Club) dried up.  Wal-Mart reacted by expanding many stores, making them "bigger and better," even adding groceries to some.  But that added only marginally to revenue, and even less marginally to profits. 

And Wal-Mart tried exporting its stores internationally, but that flopped as local market competitors found ways to better attract local customers than Wal-Mart's success formula offered.

Other U.S. discounters, like Target and Kohl's, offered nicer stores with more varieties or classier merchandise - and often their pricing was not much higher, or even the same.  And a new category of retailer, called "dollar stores" emerged that beat Wal-Mart's price on almost everything for the true price shopper.  These 99 cent stores became really popular, and the fastest growing traditional retail concept in America. Simultaneously, big box retailers like Best Buy expanded their merchandise and footprint into more locations, dramatically increasing the competition against local Wal-Mart's stores. 

But, even more dramatically, the whole retail market began shifting on-line. 

Amazon, and its brethren, kept selling more and more products.  And at prices even lower than Wal-Mart.  And again, for price shoppers, the growth of eBay, Craigslist and vertical market sites made it possible for shoppers to find slightly used, or even new, products at prices lower than Wal-Mart, and shipped right into the customer's home.  With each year, people found less need to buy at Wal-Mart as the on-line options exploded.

More recently, traditional price-focused retailers have been attacked by mobile devices.  Firstly, there's the new Kindle Fire.  In just one quarter it has gone from nowhere to tied as the #1 Android tablet

Source: BusinessInsider.com

The Kindle Fire is squarely targeted at growing retail sales for Amazon, making it easier than ever for customers to ignore the brick-and-mortar store in favor of on-line retailers. 

On top of this, according to Pew Research 52% of in-store shoppers now use a mobile device to check price and availability on-line of products as they look in the store.  Thus a customer can look at products in Wal-Mart, and while standing in the aisle look for that same product, or comparable, in another store on-line.  They can decide they like the work boots at Wal-Mart, and even try them on for size. Then they can order from Zappos or another on-line retailer to have those boots shipped to their home at an even lower price, or better warranty, even before leaving the Wal-Mart store.

It's no wonder then that Wal-Mart has struggled to grow its revenues.  Wal-Mart has been a victim of intense competition that found ways to attack its success formula effectively. 

Then Wal-Mart implemented its "Shoot Yourself in the Head" strategy

What did Wal-Mart recently do?  According to Reuters Wal-Mart decided to transfer its entire marketing department to work for merchandising.  Marketing was moved from reporting to the CEO, to reporting into Sales.  The objective was to put all the energy of marketing into trying to further defend the Wal-Mart business, and drive up same-store sales.  In other words, to make sure marketing was fully focused on better executing the old, struggling success formula.

The marketing department at Wal-Mart does all the market research on customers, trends and advertising - traditional and on-line.  Marketing is the organization charged with looking outside, learning and adapting the organization to any market shifts. In this role marketing is expected to identify new competitors, new market solutions that are working better, and adapt the organization to shifting market needs.  It is responsible to be the eyes and ears of the organization, and then think up new solutions addressing these external inputs.  That's why it needs to report to the CEO, so it can drive toward new solutions that can revitalize the organization and keep it growing with new market trends.

But now, it's been shot.  Reporting to sales, marketing's role directed at driving same store sales is purely limiting the function to defending and extending the success formula that has produced lackluster results for 12 years.  Marketing is no longer in a position to adapt Wal-Mart.  Instead, it is tasked to find ways to do more, better, faster, cheaper under the leadership of the sales organization.

When faced with market shifts, winning companies adapt.  Look at how skillfully Amazon has moved from book seller to general merchandise seller to offering a consumer electronic device. 

Unfortunately, too many businesses react to market shifts like Wal-Mart.  They hunker down, do more of the same and re-organize to "increase focus" on the traditional business as results suffer.  Instead of adapting the company hopes more focus on execution will somehow improve results.

Not likely.  Expect results to go the other direction.  There might be a short-term improvement from the massive influx of resource, but long term the trends are taking customers to new solutions.  Regardless of the industry leader's size.  Don't expect Wal-Mart to be a long-term winner.  Better to invest in competitors taking advantage of trends.

 

 

Who's CEO of the Year? Bezo's (Amazon) or Page (Google)?

Turning over a new year inevitably leads to selections for "CEO of the Year."  Investor Business Daily selected Larry Page of Google 3 weeks ago, and last week Marketwatch.com selected Jeff Bezos of Amazon.  Comparing the two is worthwhile, because there is almost nothing similar about what the two have done - and one is almost sure to dramatically outperform the other.

Focusing on the Future

What both share is a willingness to focus their companies on the future.  Both have introduced major new products, targeted at developing new markets and entirely new revenue streams for their companies.  Both have significantly sacrificed short-term profits seeking long-term strategic positioning for sustainable, higher future returns.  Both have, and continue to, spend vast sums of money in search of competitive advantage for their organizations.

And both have seen their stock value clobbered.  In 2011 Amazon rose from $150/share low to almost $250 before collapsing at year's end to about $175 - actually lower than it started the calendar year.  Google's stock dropped from $625/share to below $475 before recovering all the way to $670 - only to crater all the way to $585 last week.  Clearly the analysts awarding these CEOs were looking way beyond short-term investor returns when making their selections.  So it is more important than ever we understand what both have done, and are planning to do in the future, if we are to support either, or both, as award winners.  Or buy their stock.

Google participates in great growth markets

The good news for Google is its participation in high growth markets.  Search ads continue growing, supplying the bulk of revenues and profits for the company.  Its Android product gives Google great position in mobile devices, and supporting Chrome applications help clients move from traditional architectures and applications to cloud-based solutions at lower cost and frequently higher user satisfaction.  Additionally, Google is growing internet display ad sales, a fast growing market, by increasing participation in social networks. 

Because Google is in high growth markets, its revenues keep growing healthily.  But CEO Page's "focus" leadership has led to the killing of several products, retrenching from several markets, and remarkably huge bets in 2 markets where Google's revenues and profits lag dramatically - mobile devices and search.

Because Android produces no revenue Google bought near-bankrupt Motorola to enter the hardware and applications business becoming similar to Apple - a big bet using some old technology against what is the #1 technology company on the planet.  Whether this will be a market share winner for Google, and whether it will make or lose money, is far from certain. 

Simultaneously, the Google+ launch is an attempt to take on the King Kong of social - Facebook - which has 800million users and remarkable success.  The Google+ effort has been (and will continue to be) very expensive and far from convincing.  Its product efforts have even angered some people as Google tried steering social networkers rather heavy-handidly toward Google products - as it did with "Search plus Your World" recently.

Mr. Page has positioned Google as a gladiator in some serious "battles to the death" that are investment intensive.  Google must keep fighting the wounded, hurting and desperate Microsoft in search against Bing+Yahoo.  While Google is the clear winner, desperate but well funded competitors are known to behave suicidally, and Google will find the competition intensive.  Meanwhile, its offerings in mobile and social are not unique.  Google is going toe-to-toe with Apple and Facebook with products which show no great superiority.  And the market leaders are wildly profitable while continuously introducing new innovations.  It will be tough fighting in these markets, consuming lots of resources. 

Entering 3 gladiator battles simultaneously is ambitious, to say the least.  Whether Google can afford the cost, and can win, is debatable.  As a result it only takes a small miss, comparing actual results to analyst expectations, for investors to run - as they did last week.

 Amazon redefines competition in its markets

CEO Bezos' leadership at Amazon is very different.  Rather than gladiator wars, Amazon brings out products that are very different and avoids head-to-head competition.  Amazon expands new markets by meeting under- or unserved needs with products that change the way customers behave - and keeps competitors from attacking Amazon head-on:

• Amazon moved from simply selling books to selling a vast array of products on the web.  It changed retail buying not by competing directly with traditional retailers, but by offering better (and different) on-line solutions which traditional retailers ignored or adopted far too slowly.  Amazon was very early to offer web solutions for independent retailers to use the Amazon site, and was very early to offer a mobile interface making shopping from smartphones fast and easy.  Because it wasn't trying to defend and extend a traditional brick-and-mortar retail model, like Wal-Mart, Amazon has redefined retail and dramatically expanded shopping on-line.
• Amazon changed the book market with Kindle.  It utilized new technology to do what publishers, locked into traditional mindsets (and business models) would not do.  As the print market struggled, Amazon moved fast to take the lead in digital publishing and media sales, something nobody else was doing, producing fast revenue growth with higher margins.
• When retailers were loath to adopt tablets as a primary interface for shoppers, Amazon brought out Kindle Fire.  Cleverly the Kindle Fire is not directly positioned against the king of all tablets - iPad - but rather as a product that does less, but does things like published media and retail very well -- and at a significantly lower price.  It brings the new user on-line fast, if they've been an Amazon customer, and makes life simple and easy for them.  Perhaps even easier than the famously easy Apple products.

In all markets Amazon moves early and deftly to fulfill unmet needs at a very good price.  And then it captures more and more customers as the solution becomes more powerful.  Amazon finds ways to compete with giants, but not head-on, and thus rapidly grow revenues and market position while positioning itself as the long term winner.  Amazon has destroyed all the big booksellers - with the exception of Barnes & Noble which doesn't look too great - and one can only wonder what its impact in 5 years will be on traditional retailers like Kohl's, Penney's and even Wal-Mart.  Amazon doesn't have to "win" a battle with Apple's iPad to have a wildly successful, and profitable, Kindle offering.

The successful CEO's role is different than many expect

A recent RHR International poll of 83 mid-tier company CEOs (reported at Business Insider) discovered that while most felt prepared for the job, most simultaneously discovered the requirements were not what they expected.  In the past we used to think of a CEO as a steward, someone to be very careful with investor money.  And someone expected to know the business' core strengths, then be very selective to constantly reinforce those strengths without venturing into unknown businesses.

But today markets shift quickly.  Technology and global competition means all businesses are subject to market changes, with big moves in pricing, costs and customer expectations, very fast.  Caretaker CEOs are being crushed - look at Kodak, Hostess and Sears.  Successful CEOs have to guide their businesses away from investing in money-losing businesses, even if they are part of the company's history, and toward rapidly growing opportunities created by being part of the shift.  Disruptors are now leading the success curve, while followers are often sucking up a lot of profit-killing dust.

Amazon bears similarities to the Apple of a decade ago.  Introducing new products that are very different, and changing markets.  It is competing against traditional giants, but with very untraditional solutions.  It finds unmet needs, and fills them in unique ways to capture new customers - and creates market shifts.

Google, on the other hand, looks a lot like the lumbering Microsoft.  It has a near monopoly in a growing market, but its investments in new markets come late, and don't offer a lot of innovation.  Google's products end up competing directly, somewhat like xBox did with other game consoles, in very, very expensive - usually money-losing - competition that can go on for years. Google looks like a company trying to use money rather than innovation to topple an existing market leader, and killing a lot of good product ideas to keep pouring money into markets where it is late and not terribly creative.

Which CEO do you think will be the winner in 2015?  Into which company are you prepared to invest?  Both are in high growth markets, but they are being led very, very differently.  And their strategies could not be more different.  Which one you choose to own - as a product customer or investor - will have significant consequences for you (and them) in 3 years. 

It's worth taking the time to decide which you think is the right leadership today.  And be sure you know what leadership principles you are adopting, and following in your organization.

Creative Destruction is not inevitable - Kodak, Hostess, Microsoft

A lot of excitement was generated this week when Mitt Romney said the words "I like to fire people."  I'm sure he wishes he could rephrase his comment, as he easily could have made his point about changing service providers without those words.  Nonetheless, the aftermath turned to a discussion of job losses, and why Bain Capital has eliminated jobs while simultaneously creating some. 

Surprisingly, a number of economists suddenly started saying that firms like Bain Capital are justified in their job eliminations because they are merely implementing "creative destruction."  Although the leap is not obvious, the argument goes that some businesses are made inefficient and unprofitable by new technologies or business processes - so buyers (like Bain Capital) of hurting businesses often cannot "fix" the situation and have no choice but to close them.  Bain Capital inevitably will be stuck with losers it has no choice but to shutter - eliminating the jobs with the company.

Unfortunately, that argument is simply not true. The only thing that allows "creative destruction" to kill a company is a lack of good leadership.  Any company can find a growth path if its leaders are willing to learn from trends and steer in the growing direction.

Start by looking at recent events surrounding Kodak and Hostess, both quickly heading for Chapter 11.  Neither needed to fail. Management made the decisions which steered them into the whirlpool of failure. 

Kodak watched the market for amateur photography shrink for 30 years - drying up profits for film and paper.  Yet, management consistently - quarter after quarter and year after year - made the decision to try defending and extending the historical market rather than move the company into faster growing, more profitable opportunities.  Kodak even invented much of the technology for digital photography, but chose to license it to others rather than develop the market because Kodak feared cannibalizing existing sales - as they became increasingly at risk! 

Hostess is making a return trip to Chapter 11 this decade.  But it's not like the trend away from highly processed, shelf stable white bread and sugary pastry snacks is anything new.  While 1960s parents and youth might have enjoyed the vitamin enriched Wonder Bread "helping grow bodies 12 ways" the trend toward fresher, and healthier, staples has been happening for 40 years.  In the 1980s when the company was known as Continental Baking profits were problematic, and it was clear that to keep what was then the nation's largest truck fleet profitable required new products as consumers were shifting to fresher "bake off" goods in the grocery store as well as brands promising more fiber and taste.  But despite these obvious trends, leadership continued trying to defend and extend the business rather than shift it.

These stories weren't "creative destruction."  They were simply bad leadership.  Decisions were made to do more of the same, when clearly something desperately different was needed! At the Harvard Business School Working Knowledge web site famed strategiest Michael Porter states "the granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results."  Failure happened because the leaders were so internally focused they chose to ignore external inputs, trends, which would have driven better decisions!

In the 1980s Singer realized that the sewing machine market was destined to decline as women left homemaking for paying jobs, and as textile industry advances made purchased clothing cheaper than self-made.  Over a few years the company transitioned out of the traditional, but dying, business and became a very successful defense industry contractor!  Rather than letting itself be "creatively destroyed" Singer identified the market trends and moved from decline to growth!

Similarly, IBM almost failed as the computer market shifted from mainframes to PCs, but before all was lost (including jobs as well as investor value) leaders changed company focus from hardware to services and vertical market solutions allowing IBM to grow and thrive. 

The failure of Digital Equipment (DEC) at the same time was not "creative destruction" but company leadership unwillingness to shift from declining mini-computer and high priced workstation sales into new businesses.

More recently, over the last decade a nearly dead Apple resurrected itself by tying into the large trend for mobility, rather than focusing on its niche Mac product sales.  Company leaders took the company into consumer electronics (ipod, ipod touch,) tablet computing and cloud-based solutions (iPad) and mobile telephony with digital apps (iPhone.)  Apple had no legacy in any of these markets, but by linking to trends rather than fixating on past businesses "creative destruction" was avoided.

There are many businesses today that are in trouble because leaders simply won't pay attention to trends.  Avon, Sears and Barnes & Noble are three companies with limited futures simply because leaders seem unable to pull their heads out of the internal strategic planning sand and look at environmental trends in order to shift.

My favorite target is, of course, Microsoft.  Nobody thinks we will be carrying laptop PCs around in 5 years.  Yet, Microsoft has been unable to recognize the trend away from PCs and do anything effective.  Its efforts in music (Zune) and mobile handsets have been indifferent, insufficiently supported and mostly dropped.  Mr. Ballmer continues to speak about a long future for PC sales even as Q4 volume dropped 1.4% according to IDC and Gartner.  Even though everyone knows this trend is due to limited PC innovation and rapidly accelerating mobile-based solutions, Microsoft blamed the problem on, of all things, floods in Thailand that restricted manufacturing output.  Really.

We'll learn soon enough just how many jobs Bain Capital created, and killed.  But those lost were not due to "creative destruction."  They were due to leadership decisions to discontinue the business rather than invest in trends and transitioning to new markets.  Creative destruction is an easy excuse to avoid blaming leaders for failures caused by their unwillingness to recognize trends and take actions to invest in them which will create winning businesses.

Drop 2011 Dogs for 2012's Stars - Avoid Kodak, Sears, Nokia, RIMM, HP, Sony - Buy Apple, Amazon, Google, Netflix

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.

They stayed too long at the (holiday) party - The Oracle and Best Buy Hangover

It's a wise person who knows never to be the last person at a business holiday party.  Things never go well for those who stay too late. 

Yet, far too many businesses stay way, way too long at their market party, focusing on the same strategy when they should have moved into new competition a whole lot earlier.

This week Oracle missed earnings estimates, and the stock fell some 14%, from $30 to under $26.  For the year, Oracle is down about a third, from it's high of $37.  The question any investor needs to ask is the one headlined by ZDnet.com "Oracle Earnings: An Aberration or Trend?"

Oracle is very, very poorly positioned for future earnings growth.  Like most big software companies, including Microsoft and SAP, Oracle built its business on the formula of large data centers running large "enterprise applications" supporting lots of independent corporate PC users. 

And it was clear fully a year (or 2) ago that market simply isn't growing.  Organizations are rapidly shifting away from hard to use, one-size-fits-all (at very high cost) enterprise software applications.  Users are moving away from PCs to mobile devices, and refusing to use clunky enterprise interfaces.  Worse, software is moving away from data centers in client-server configurations tied to PCs.  Instead, companies small and large are rapidly shifting to software-as-service (SAS) environments where the company can pay "by the use" for software maintained in the "cloud."  These solutions are scalable, cheaper to buy, cheaper to implement, vastly more flexible and operate on mobile devices a whole lot better.  If you've ever used Salesforce.com you've experienced the benefit compared to more clunky enterprise Customer Resource Management (CRM) applications.

Oracle missed this trend.  Despite all the dozens of acquisitions Oracle has made - such as buying Unix hardware provider Sun Microsystems, it largely missed the shift to cloud architectures.  It has remained far, far too long at its party, enjoying the profit-laden punch, and hoping the market would never shift.  As the customer base shrank to fewer, and ever larger, big corporations Oracle did not prepare for changes in its business the next day.  Oracle has stayed too long, and its ability to compete in new markets against more flexible solution providers such as IFS with better user interface capabilities looks really weak. 

Somehow, Best Buy fell into the same trap.  In early December the country's largest "big box" retailer announced lower earnings after cutting prices to shore up revenues.  As a result the stock dropped 20%, from about $28 to $22 - continuing a pretty much downhill slide all year of nearly 40% from its high of $36.

Best Buy felt like it was doing great after Circuit City failed.  Circuit City had been a darling of the infamous "Good to Great" text.  But Circuit City demonstrated that in a market dominated by a long-term trend away from fixed stores and toward on-line purchases, every retailer is bound to struggle. 

When Circuit City failed in 2008 investors worried that a weak economy would tank Best Buy as well.  But as all that Circuit City capacity disappeared, Best Buy was a short-term winner.

Unfortunately, Best Buy leadership confused short-term sales re-allocation with long-term trends.  They, along with a lot of other locked-in brick-and-mortar retailers, felt that things would quickly "return to normal" and Circuit City was the company caught out in the cold when the music stopped.  Best Buy chose to stay at its party too long - hoping the dancing would never stop.  Its leaders chose to ignore the long-term trend away from traditional retail toward on-line shopping.  No wonder BusinessInsider.com headlined a famed investor "Marc Andreessen: Retailers Should Be Scared About 2012."

What's surprising is how many people in business think the party will simply never end.  That everyone can keep drinking and dancing and rolling in the profits.  Even when the trends are obvious.

This 2011 holiday season, every business team should be asking itself "are we staying at the party too long?  What trends are affecting our business - and likely to bring this party to a crashing end?  What are we doing to prepare for a tough competition tomorrow." 

If you don't, it's far too easy you could end up on the downhill slide, with one heck of a horrible hangover - like Oracle and Best Buy - in 2012.

 

Buy Into Trends - Buy Chipotle Sell McDonald's

Revenue growth is a wonderful thing.  It is so much more fun to work in a growing company than one that isn't.  And high growth is possible, even in this struggling economy, if leaders focus on trends.

Take for example Chipotle.  Whether you eat there or not, Chipotle has grown rather spectacularly.  From 16 units in 1998 it grew to 500 by 2005 and has 1,100 company owned and operated stores today.  Revenues have more than doubled since 2005, to about $2B, while sales/store increased almost 12% in 2010.  And investors have been well rewarded, with a market cap increase of 6x in the last 5 years!

Chart source Yahoo.com 12.12.11

Chipotle hit on a trend it called "Food with Integrity."  While that is far from explicit, Chipotle has made a practice of talking about being "natural."  Chipotle often buys local produce for its units, claims to use "natural" meat, presumably with fewer additives, and brags about having no hormones in its dairy products.  Such claims have tied into customer trends for better nutrition, higher food safety and improved taste.  This allows Chipotle to grow in the most intensely competitive of industries, even during a struggling economic time.

Compare this with McDonald's.  This is not a random selection, as McDonald's was a 1998 investor in Chipotle, and put around $360M into the chain fueling early growth.  McDonald's was handsomely rewarded for this, receiving around $1.5B (4x) return on its investment when selling Chipotle to the public in 2006.

At the time, McDonald's was in a horrible situation. It's stock had dropped from a high of $50 in 2000 to a low of $14 in 2004.  McDonald's took the money from the Chipotle sale and invested all of it in new capital expenditures to defend the McDonald franchise.  The good news was that "turnaround" worked and McDonald's has recaptured its value, roughly doubling market capitalization the last 5 years.

One could consider both of these success stories, unless you look deeper. 

Chipotle increased its valued by 6x, McDonald's by 2x - so investors in the former did fully 3x better than the latter.  And where Chipotle is expected to increase the number of its stores by at least another 1/3 in the next few years, McDonald's struggles to find growth markets. Clearly, investors that swapped their McDonald's stock for Chipotle's stock in 2006 did far better - and have prospects of continuing to do even better still with at least some analysts expecting Chipotle to hit $400/share within a year, for another 20% pop.

Source: Yahoo.com 12.12.11

McDonald's strategy was built on a 1960s trend for speed and consistency in food.  That trend served McDonald's well for 2 decades, but is far less interesting today.  In its effort to generate revenues recently McDonald's brought us a re-introduced 20 year old product called McRib this October - a product who's ingredients have people asking questions about health and safety (TheWeek.com "What's the McRib made of, anyway?) as we learn its mostly high fat pig innards and salt.  While McDonald's has recovered from 2004, is it a platform for growth?

Chipotle is using trends to find new products, new marketing themes, and even a new store concept, Shophouse Southeast Asian Grill, for organic growth.  Where McDonald's is fixated on defending its historical business irrespective of trends, Chipotle is busy investing in current trends.

One has to wonder, what if instead of selling Chipotle, McDonald's leadership had turned upside down?  What if all that management attention had gone into exploding Chipotle's footprint faster?  Introducing even more products? And what if McDonald's had accepted the trends propelling Chipotle growth and applied them to McDonald's to give that chain a different customer value proposition and real new products?

McDonald's could have acted more like Apple.  Where McDonald's has at its core fried meat sandwiches and deep fried potatoes, Apple had its "core" the Macintosh.  But instead of investing its resources into defending its core, Apple invested in new products and markets where the trend was more favorable.  As a result its market cap grew by 4.5x during the last 5 years, compared to the more subdued 2x at McDonalds - and Apple demonstrated that even very large market cap companies can grow at very high rates when they adopt growth strategies tied to trends.

Source: Yahoo.com 12.12.11

There are a lot of businesses struggling to grow today.  But most aren't really trying.  They keep doing more of what they've always done, and hoping for a better result! They don't accept that trends go in new directions, causing markets to shift.  When markets shift, those who follow the trends do far better than those stuck trying to defend their past strategies.  It's smart to act like, and invest in, Chipotle while avoiding the rut that is McDonald's.

 

What's wrong at the U.S. Postal Service - Market Shift

There are few organizations as efficient as the U.S. Postal Service.  Really. But it is still going out of business.

Think about the Post Office's value proposition.  They send someone to almost every single home and business in the entire United States 6 days/week on the hope that there will be a demand for their service - sold at a starting price of 44 cents!  For that mere $.44 they will deliver your hand crafted, signed message anywhere else in the entire United States!  And, if you want it delivered fairly close they will actually deliver your physical document the very next day!  All for 44 cents! And, if you are a large volume customer rates can be even cheaper. 

And the Post Office has been a remarkably operationally innovative organizations. Literally billions of items are processed every week (about 700million/day;) picked up, sorted and distributed across one of the physically largest countries in the world.  The distance from Anchorage to Miami (let's ignore Hawaii for now) is a staggering 5,100 miles, which works out to a miniscule .009 cent/mile for a first class letter! Compare that to the Pony Express cost (in 1860 $10/oz and 10 days Missouri to California,) and adjusted for inflation you'll be hard pressed to find any business that has continually improved its service, at ever lower (constantly declining when adjusted for inflation) prices.

And while AMR is filing bankruptcy largely to force a new union contract, the Post Office has accomplished its record improvements wtih an almost entirely union workforce. 

Executive compensation is surprisingly low.  The CEO makes about $800,000/year. Competitor CEOs make much more.  At Fedex (the Post Office delivers more items every day that Fedex does in a whole  year) the CEO made over $7,400,000, and at UPS (the Post Office delivers more items each week than UPS does annually) the CEO made $9,500,000.  So, despite this remarkable effectiveness, the CEO makes only about 1/10th CEOs of much smaller organizations.

The Post Office understands what it must do, and does it extremely efficiently.  It knows its "hedgehog concept" and relentlessly pursues it to unparalleled performance. Yet, it is barred from raising prices, is losing money, and is now planning to close 3,700 locations and dramatically curtail services - such as overnight and Saturday delivery in a radical cost reduction effort. 

Simply put, the U.S. Postal Service is becoming irrelevant.  In the 1980s faxing was the first attack on the mail, but the big market shift began 15 years ago with the advent of email.   Now with mobile devices, texting and social media the shift away from physical letters is  accelerating.  Fewer people write letters, send bills or even pay bills via physical mail.  Are you mailing any physical holiday cards this year?  How many? 

Even the veritable "junk mail" is far less viable these days.  Coupons are used less and less - and to the extent they are used they have to be much more immediate and compelling - such as offerings from GroupOn and FourSquare et.al. which arrive at consumers by email and social media usually through a smartphone or tablet mobile device.

The Post Office didn't really do anything wrong.  The market shifted.  The Post Office value proposition simply isn't as valuable.  We don't really care if the mail delivery comes daily, in fact many people forget to check their mailbox for several consecutive day.  We don't much care that a physical letter can transit the continent overnight, because we usually want to communicate immediately.  And we don't need a physical legacy for 99.99% of our communications.

The Post Office is really good at what it does, we just don't need it.  Not any more than we need a good horse shoe or small offset printing press.

The Post Office saw this coming.  Over a decade ago the Post Office asked if it could enter new businesses in record retention (medical, income, taxation), automated bill payment, social security check administration and a raft of other opportunities that would provide government delivery and storage services to various agencies and to under-served users such as low-income and the elderly.  But its mandate did not include these services, and expansion into new markets required a change in charter which was not approved by Congress.  Thus, USPS was stuck doing what it has always done, as market shift pushed the Post Office increasingly into irrelevancy.

And that's what happens to most failed businesses.  They don't fail because they are lousy at execution.  Or because of lousy, inattentive managers.  Or even because of unions and high variable costs such as energy.  They fall into trouble because they either don't recognize, or for some other reason don't move to take advantage of market shifts.  It's not a lack of focus, management laziness or worker intransigence that kills the business.  It's an inability to do what customers really want and value, and spending too much time and money trying to ever optimize something customers increasingly don't care about.

To their credit, both FedEx and UPS have shifted their businesses along with the market.  Both do much, much more than deliver packages.  Fedex bought Kinko's and offers people their "office away from the office" globally, as well as multiple small business solutions.  UPS offers a vast array of corporate transportation and logistics services, including e-commerce solutions for businesses of all sizes.  Their ability to move with markets, and meet emerging needs has helped both companies justify higher prices and earn substantially better profitability.

The U.S. Post Office is the poster child for what goes wrong when all a company does is focus on efficiency.  More, better, faster, cheaper is NOT enough to compete.  Being operationally efficient, even low-cost, is not enough to succeed in fast shifting markets where customers have ever-growing and changing needs.  Leadership has to be able to recognize market shifts early, and invest in new growth opportunities allowing the company to remain viable in changing markets.

My generation will wax nostalgic about the post office.  We'll weave in "mail" stories with others about days before ubiquitious air conditioning, when all we had was AM radio in the car and 3 stations of black & white television stations at home.  They will be fun to reminisce. 

But our children, and certainly grandchildren, simply won't care.  Not at all.  And we better remember to keep the stories short, so they can be related in 140 characters or less if we want them saved for posterity!