How Samsung Changed the Game on Apple

The iPad is now 3 years old.  Hard to believe we've only had tablets such a short time, given how common they have become.  It's easy to forget that when launched almost all analysts thought the iPad was a toy that would be lucky to sell a few million units.  Apple blew away that prediction in just a few months, as people demonstrated their lust for mobility.  To date the iPad has sold 121million units - with an ongoing sales rate of nearly 20million per quarter.

Following very successful launches of the iPod (which transformed music from CDs to MP3) and iPhone (which turned everyone into smartphone users,) the iPad's transformation of personal technology made Apple look like an impenetrable juggernaut - practically untouchable by any competitor!  The stock soared from $200/share to over $700/share, and Apple became the most valuable publicly traded company on any American exchange!

But things look very different now.  Despite huge ongoing sales (iPad sales exceed Windows sales,) and a phenomenal $30B cash hoard ($100B if you include receivables) Apple's value has declined by 40%! 

In the tech world, people tend to think competition is all about the product.  Feature and functionality comparisons abound.  And by that metric, no one has impacted Apple.  After 3 years in development, Microsoft's much anticipated Surface has been a bust - selling only about 1.5million units in the first 6 months.  Nobody has created a product capable of outright dethroning the i product series.  Quite simply, there have been no "game changer" products that dramatically outperform Apple's.

But, any professor of introductory marketing will tell you that there are 4 P's in marketing: Product, Price, Place and Promotion.  And understanding that simple lesson was the basis for the successful onslaught Samsung has waged upon Apple in 2012 and 2013. 

Samsung did not change the game with technology or product.  It has used the same Android starting point as most competitors for phones and tablets.  It's products are comparable to Apple's - but not dramatically superior.  And while they are cheaper, in most instances that has not been the reason people switched.  Instead, Samsung changed the game by focusing on distribution and advertising!

 
Chart courtesy Jay Yarrow, Business Insider 4/2/13 and Horace Dediu, Asymco

The remarkable insight from this chart is that Samsung is spending almost 4.5 times Apple - and $1B more than perennial consumer goods brand leader Coca-Cola on advertising! Simultaneously, Samsung has set up kiosks and stores in malls and retail locations all over America.

Can you imagine having the following conversation in your company in 2010?:

"As Vice President of Marketing I propose we take on the market leader not by having a superior product.  We will change the game from features and function comparisons to availability and awareness.  I intend to spend more than anyone in our industry on advertising - even more than Coke.  And I will open so many information and sales locations that our products will be as available as Coke.  We'll be everywhere.  Our products may not be better, but they will be everywhere and everyone will know about them."

Samsung found Apple's Achilles heel.  As Apple's revenues rose it did not keep its marketing growing.  SG&A (Selling, General and Administrative) expense declined from 14% of revenues in 2006 to 5% in 2012; of course aiding its skyrocketing profits.  And Apple continued to sell through its fairly limited distribution of Apple stores and network providers.  Apple started to "milk" its hard won brand position, rather than intensify it.

Samsung took advantage of Apple's oversight.  Samsung maintained its SG&A budget at 15% of revenues - even growing it to 24% for a brief time in 2009, before returning to 15%.  As its revenues grew, advertising and distribution grew.  Instead of looking back at its old ad budget in dollars, and maintaining that budget, Samsung allowed the budget to grow (to a huge number!) along with revenues. 

And that's how Samsung changed the game on Apple.  Once America's untouchable brand, the Apple brand has faltered.  People now question Apple's sustainability. Some now recognize Apple is vulnerable, and think its best times are behind it.  And it's all because Samsung ignored the industry lock-in to constantly focusing on product, and instead changed the game on Apple.

Something Microsoft should have thought about - but didn't.

Of course, Apple's profits are far, far higher than Samsung's.  And Apple is still a great company, and a well regarded brand, with tremendous sales.  There are ongoing rumors of a new iOS 7 operating system, an updated format for iPads, potentially a dramatically new iPhone and even an iTV.  And Apple is not without great engineers, and a HUGE war chest which it could use on advertising and distribution to go heads up with Samsung.

But, at least for now, Samsung has demonstrated how a competitor can change the game on a market leader.  Even a leader as successful and powerful as Apple.  And Samsung's leaders deserve a lot of credit for seeing the opportunity - and seizing it!

 

And the Winner Is - Netflix!!

Last week's earning's announcements gave us some big news.  Looking around the tech industry, a number of companies reported about as expected, and their stocks didn't move a lot.  Apple had robust sales and earnings, but missed analyst targets and fell out of bed!  But without a doubt, the big winner was Netflix, which beat expectations and had an enormous ~50% jump in valuation!

My what a difference 18 months makes (see chart.)  For anyone who thinks the stock market is efficient the value of Netflix should make one wonder.  In July, 2011 the stock ended a meteoric run-up to $300/share, only to fall 80% to $60/share by year's end.  After whipsawing between $50 and $130, but spending most of 2012 near the lower number, the stock is now up 3-fold to $160!  Nothing scares investors more than volatility - and this kind of volatility would scare away almost anyone but a day trader!

Yet, through all of this I have been - and I remain - bullish on Netflix.  During its run-up in 2010 I wrote "Why You Should Love Netflix," then when the stock crashed in late 2011 I wrote "The Case for Buying Netflix" and last January I predicted Netflix to be "the turnaround story of 2012."  It would be logical to ask why I would remain bullish through all the ups and downs of this cycle - especially since Netflix is still only about half of its value at its high-point.

Simply put, Netflix has 2 things going for it that portend a successful future:

1. Netflix is in a very, very fast growing market.  Streaming entertainment.  People have what appears to be an insatiable desire for entertainment, and the market not only has grown at a breathtaking rate, but it will continue to grow extremely fast for several more quarters.  It is unclear where the growth rate may tap out for content delivery - putting Netflix in a market that offers enormous growth for all participants.
2. Netflix leadership has shown a penchant for having the right strategy to remain a market leader - even when harshly criticized for taking fast action to deal with market shifts.  Specifically, choosing to rapidly cannibalize its own DVD business by aggressively promoting streaming - even at lower margins - meant Netflix chose growth over defensiveness.

In 2011 CEO Reed Hastings was given "CEO of the Year 2010" honors by Fortune magazine.  But in 2011, as he split Netflix into 2 businesses - DVD and streaming - and allowed them to price independently and compete with each other for customer business he was trounced as the "dunce" of tech CEOs. 

His actions led to a price increase of 60% for anyone who decided to buy both Netflix products, and many customers chose to drop one.  Analysts predicted this to be the end of Netflix. 

But in retrospect we can see the brilliance of this decision.  CEO Hastings actually did what textbooks tell us to do - he began milking the installed, but outdated, DVD business.  He did not kill it, but he began pulling profits and cash out of it to pay for building the faster growing, but lower margin, streaming business.  This allowed Netflix to actually grow revenue, and grow profits, while making the market transition from one platform (DVD) to another (streaming.)

Almost no company pulls off this kind of transition.  Most companies try to defend and extend the company's "core" product far too long, missing the market transition.  But now Netflix is adding around 2 million new streaming customers/quarter, while losing 400,000 DVD subscribers.  And with the price changes, this has allowed the company to add content and expand internationally -- and increase profits!!

Marketwatch headlined that "Naysayers Must Feel Foolish."  But truthfully, they were just looking at the wrong numbers.  They were fixated on the shrinking installed base of DVD subscribers.  But by pushing these customers to make a fast decision, Netflix was able to convert most of them to its new streaming business before they went out and bought the service from a competitor. 

Aggressive cannibalization actually was the BEST strategy given how fast tablet and smartphone sales were growing and driving up demand for streaming entertainment.  Capturing the growth market was far, far more valuable than trying to defend the business destined for obsolescence. 

Netflix simply did its planning looking out the windshield, at what the market was going to look like in 3 years, rather than trying to protect what it saw in the rear view mirror.  The market was going to change - really fast.  Faster than most people expected.  Competitors like Hulu and Amazon and even Comcast wanted to grab those customers.  The Netflix goal had to be to go headlong into the cold, but fast moving, water of the new streaming market as aggressively as possible.  Or it would end up like Blockbuster that tried renting DVDs from its stores too long - and wound up in bankruptcy court.

There are people who still doubt that Netflix can compete against other streaming players.  And this has been the knock on Netflix since 2005.  That Amazon, Walmart or Comcast would crush the smaller company.  But what these analysts missed was that Amazon and Walmart are in a war for the future of retail - not entertainment - and their efforts in streaming were more to protect a flank in their retail strategy, not win in streaming entertainment.  Likewise, Comcast and its brethren are out to defend cable TV, not really win at anytime, anywhere streaming entertainment.  Their defensive behavior would never allow them to lead in a fast-growing new marketplace.  Thus the market was left for Netflix to capture - if it had the courage to rapidly cannibalize its base and commit to the new marketplace.

Hulu and Redbox are also competitors.  And they very likely will do very well for several years.  Because the market is growing very fast and can support multiple players.  But Netflix benefits from being first, and being biggest.  It has the most cash flow to invest in additional growth.  It has the largest subscriber base to attract content providers earlier, and offer them the most money.  By maintaining its #1 position - even by cannibalizing itself to do so - Netflix is able to keep the other competitors at bay; reinforcing its leadership position.

There are some good lessons here for everyone:

1. Think long-term, not short-term.  A king can become a goat only to become a king again if he haa the right strategy.  You probably aren't as good as the press says when they like you, nor as bad as they say when hated.  Don't let yourself be goaded into giving up the long-term win for short-term benefits.
2. Growth covers a multitude of sins!  The way Netflix launched its 2-division campaign in 2011 was a disaster.  But when a market is growing at 100%+ you can rapidly recover.  Netflix grew its streaming user base by more than 50% last year - and that fixes a lot of mistakes. Anytime you have a choice, go for the fast growing market!!
3. Follow the trend!  Never fight the trend!  Tablet sales were growing at an amazing clip, while DVD players had no sales gains.  With tablet and smartphone sales eclipsing DVD player sales, the smart move was to go where the trend was headed.  Being first on the trend has high payoff.  Moving slowly is death.  Kodak failed to aggressively convert film camera customers to its own digital cameras, and it filed bankruptcy in 2012.
4. Dont' forget to be profitable!  Even if it means raising prices on dated solutions that will eventually become obsolete - to customer howls.  You must maximize the profits of an outdated product line as fast as possible. Don't try to defend and extend it.  Those tactics use up cash and resources rather than contributing to future success.
5. Cannibalizing your installed base is smart when markets shift.  Regardless the margin concerns.  Newspapers said they could not replace "print ad dollars" with "on-line ad dimes" so many went bankrupt defending the paper as the market shifted.  Move fast. Force the cannibalization early so you can convert existing customers to your solution, and keep them, before they go to an emerging competitor.
6. When you need to move into a new market set up a new division to attack it.  And give them permission to do whatever it takes.  Even if their actions aggravate existing customers and industry participants.  Push them to learn fast, and grow fast - and even to attack old sacred cows (like bundled pricing.)

There were a lot of people who thought my call that Netflix would be the turnaround tech story of 2012 was simply bizarre.  But they didn't realize the implications of the massive trend to tablets and smartphones.  The impact is far-reaching - affecting not only computer companies but television, content delivery and content creation.  Netflix positioned itself to be a winner, and implemented the tactics to make that strategy work despite widespread skepticism. 

Hats off to Netflix leadership.  A rare breed.  That's why long-term investors should own the stock.

Yes, even you can innovate to grow - learn from Skanska

I like writing about tech companies, such as Apple and Facebook, because they show how fast you can apply innovation and grow - whether it is technology, business process or new best practices.  But many people aren't in the tech industry, and think innovation applies a lot less to them.  

Whoa there cowboy, innovation is important to you too!

Few industries are as mired in outdated practices and slow to adopt technology than construction.  Whether times are good, or not, contractors and tradespeople generally do things the way they've been done for decades.  Even customers like to see bids where the practices are traditional and time-worn, often eschewing innovations simply because they like the status quo.

Skanska, a $19B construction firm headquarted in Stockholm, Sweden with $6B of U.S. revenue managed from the New York regional HQ refused to accept this.  When Bill Flemming, President of the Building Group recognized that construction industry productivity had not improved for 40 years, he reckoned that perhaps the weak market wasn't going to get better if he just waited for the economy to improve.  He was sure that field-based ideas could allow Skanska to be better than competitors, and open new revenue sources.

Skanska USA CEO Mike McNally agreed instantly.  In 2009 he brought together his management team to see if they would buy into investing in innovation.  He met the usual objections

• We're too busy
• I have too much on my plate
• Business is already too difficult, I don't need something new
• Customers aren't asking for it, they want lower prices
• Who's going to pay for it?  My budget is already too thin!

But, he also recognized that nobody said "this is crazy."  Everyone knew there were good things happening in the organization, but the learning wasn't being replicated across projects to create any leverage.  Ideas were too often tried once, then dropped, or not really tried in earnest.  Mike and Bill intuitively believed innovation would be a game changer.  As he discussed implementing innovation with his team he came to saying "If Apple can do this, we can too!" 

Even though this wasn't a Sweden (or headquarters) based project, Mike decided to create a dedicated innovation group, with its own leader and an initial budget of $500K - about .5% of the Building Group total overhead. 

The team started with a Director of innovation, plus a staff of 2.  They were given the white space to find field based ideas that would work, and push them.  Then build a process for identifying field innovations, testing them, investing and implementing.  From the outset they envisaged a "grant" program where HQ would provide field-based teams with money to test, develop and create roll-out processes for innovations.

Key to success was finding the right first project. And quickly the team knew they had one in one of their initial field projects called Digital Resource Center, which could be used at all construction sites.  This low-cost, rugged PC-based product allowed sub-contractors around the site to view plans and all documentation relevant for their part of the project without having to make frequent trips back to the central construction trailer. 

This saved a lot of time for them, and for Skanska, helping keep the project moving quickly with less time wasted talking.  And at a few thousand dollars per station, the payback was literally measured in days.  Other projects were quick to adopt this "no-brainer."  And soon Skanska was not only seeing faster project completion, but subcontractors willing to bake in better performance on their bids knowing they would be able to track work and identify key information on these field-based rugged PCs.

As Skanska's Innovation Group started making grants for additional projects they set up a process for receiving, reviewing and making grants.  They decided to have a Skansa project leader on each grant, with local Skansa support.  But also each grant would team with a local university which would use student and faculty to help with planning, development, implementation and generate return-on-investment analysis to demonstrate the innovation's efficacy.  This allowed Skansa to bring in outside expertise for better project development and implementation, while also managing cost effectively.

With less than 2 years of Innovation Group effort, Skanska has now invested $1.5M in field-based projects.  The focus has been on low-cost productivity improvements, rather than high-cost, big bets.  Changing the game in construction is a process of winning through lots of innovations that prove themselves to customers and suppliers rather than trying to change a skeptical group overnight.  Payback has been almost immediate for each grant, with ROI literally in the hundreds of percent. 

You likely never heard of Skanska, despite its size.  And that's because its in the business of building bridges, subway stations and other massive projects that we see, but know little about.  They are in an industry known for its lack of innovation, and brute-force approach to getting things done.

But the leadership team at Skanska is proving that anyone can apply innovation for high rates of return. They

• understood that industry trends were soft, and they needed to change if they wanted to thrive.
• recognized that the best ideas for innovation would not come from customers, but rather from scanning the horizon for new ideas and then figuring out how to implement themselves
• weren't afraid to try doing something new.  Even if the customer wasn't asking for it
• created a dedicated team (and it didn't have to be large) operating in white space, focused on identifying innovations, reviewing them, funding them and bringing in outside resources to help the projects succeed

In addition to growing its traditional business, Skanska is now something of a tech company.  It sells its Digital Resource stations, making money directly off its innovation.  And its iSite Monitor for monitoring environmental conditions on sensitive products, and pushing results to Skanska project leaders as well as clients in real time with an app on their iPhones, is also now a commercial product.

So, what are you waiting on?  You'll never grow, or make returns, like Apple if you don't start innovating.  Take some lessons from Skanska and you just might be a lot more successful.

 

What Steve Jobs Would Tell Mark Zuckerberg

Mark Zuckerberg was Time magazine's Person of the Year in December, 2010.  He was given that honor because Facebook dominated the emerging social media marketplace, and social media had clearly begun changing how people do things.  Despite his young age, Mr. Zuckerberg had created a phenomenon demonstrated by the hundreds of million new Facebook users.

But things have turned pretty rough for the young Mr. Zuckerberg. 

• Facebook was pretty much forced, legally, to go public because it had accumulated so many shareholders.  The stock hit the NASDAQ with much fanfare in May, 2012 - only to have gone pretty much straight down since.  It now trades at about 50% of IPO pricing, and is under constant pressure from analysts who say it may still be overpriced.
• Facebook discovered perhaps 83million accounts were fake (about  9%) unleashing a torrent of discussion that perhaps the fake accounts was a much, much larger number.
• User growth has fallen to some 35% - which is much slower than initial investors hoped.  Combined with concerns about fake accounts, there are people wondering if Facebook growth is stalling.
• Facebook has not grown revenues commensurate with user growth, and people are screaming that despite its widespread use Facebook doesn't know how to "monetize" its base into revenues and profits.
• Mobile use is growing much faster than laptop/PC use, and Facebook has not revealed any method to monetize its use on mobile devices - causing concerns that it has no plan to monetize all those users on smartphones and tablets and thus future revenues may decline.
• Zynga, a major web games supplier, announced weak earnings and said its growth was slowing - which affects Facebook because people play Zinga games on Facebook.
• GM, one of the 10 largest U.S. advertisers, publicly announced it was dropping Facebook advertising because executives believed it had insufficient return on investment. Investors now fret Facebook won't bring in major advertisers.
• Google keeps plugging away at competitive product Google+. And while Facebook  disappointed investors with its earnings, much smaller competitor Linked-in announced revenues and earnings which exceeded expectations.  Investors now worry about competitors dicing up the market and minimalizing Facebook's future growth.

Wow, this is enough to make 50-something CEOs of low-growth, non-tech companies jump with joy at the upending of the hoody-wearing 28 year old Facebook CEO.  Zynga booted its Chief Operating Officer and has shaken up management, and not suprisingly, there are analysts now calling for Mr. Zuckerberg to step aside and install a new CEO.

Yet, Mr. Zuckerberg has been wildly successful.  Much more than almost anyone else in American business today.  He may well feel he needs no advice.  But.... what do you suppose Steve Jobs would tell him to do? 

Recall that Mr. Jobs was once the young head of Apple, only to be displaced by former Pepsi exec John Sculley -- and run out of Apple.  As everyone now famously knows, after a string of Apple CEOs led the company to the brink of disaster Mr. Jobs agreed to return and completely turned around Apple making it the most successful tech company of the last decade.  Given what we've observed of Mr. Jobs career, and read in his biography, what advice might he give Mr. Zuckerberg? 

• Don't give up your job.  Not even partly.  If you create a "shadow" or "co" CEO you'll be gone soon enough.  Lead, quit or make the Board fire you.  If you had the vision to take the company this far, why would you quit? 
• Nothing is more important than product.  Make Facebook's the best in the world.  Nothing less will allow a tech company to survive, much less thrive.  Don't become so involved with financials and analysts that you lose sight of your #1 job, which is to make the very, very best social media product in the world.  Never stop improving and perfecting.  If your product isn't obviously superior to other solutions you haven't accomplished your #1 priority.
• Be unique.  Make sure your products fulfill needs no one else fulfills - at least not well.  Meet unserved and underserved needs so that people talk about your product and what it does - not how much it costs.  Make sure that Facebook has devoted, diehard customers that believe your products meet their needs so well they would not consider your competition.
• Don't ask customers what they want - give them what they need.  Understand the trends and create future scenarios so you are constantly striving to create a better future, not just improve on history.  Never look backward at what you've done, but instead always look forward at creating what noone else has ever done.  Push your staff to create solutions that meet user needs so well that you can tell customers why they need your product in ways they never before considered.  
• Turn your product releases into a show.  Don't just run out new products willy-nilly, or on a random timeline.  Make sure you bundle products together and make a big show of each release so you can describe the upgrades, benefits and superiority of what you offer for customers.  People need to understand the trends you are meeting, and need to see the future scenario you are creating, and you have to tell them that story or they won't "get it."
• Price for profit.  You run a business, not a hobby or not-for-profit society.  If you do the product right you shouldn't even be talking about price - so price to make ridiculous margins by industry standards.  At Apple, Next and Pixar the products were never the cheapest, but they accomplished what customers needed so well that we could price high enough to make margins that supported additional product development.  And you can't remain the best solution if you don't have enough margin to keep developing future products.
• Don't expect products to sell themselves.  Be the #1 passionate spokesperson for the elegance and superiority of your products.  Never stop beating the drum for the unique capability and superiority of your product, in every meeting, all the time, never ending.  People like to "revert to the mean" so you have to keep telling them that isn't good enough - and you have something far superior that will greatly improve their success.
• Never miss an opportunity to compare your products to competition and tell everyone why your products are far better.  Don't disparage the competition, but constantly reinforce that you are first, you are ahead of everyone else, you are far better --- and the best is yet to come!  Competition is everywhere, and listen to the Andy Groves advice "only the paranoid survive."  You aren't satisfied with what the competition offers, and customers should not be satisfied either.  Every once in a while give people a small glimpse as to the radically different world you see in 3-5 years so they buy what you are selling in order to prepare for that future world.
• Identify key customers that need your solution and SELL THEM.  Disney needed Pixar, so we made sure they knew it.  Identify the customers who can gain the most from doing business with you and SELL THEM.  Turn them into lead customers, obtain their testimonials and spread the word.  If GM isn't your target, who is?  Find them and sell them, then tell us all how you will build on those early accounts to eventually dominate the market - even displacing current solutions that are more popular.  If GM is your target then make the changes you need to make so you can SELL THEM.  Everyone wants to do business with a winner, so you must show you are a winner.
• Identify 5 of your competition's biggest customers (at Google, Yahoo, Linked-in, etc.) and make them yours.  Demonstrate your solutions are superior with competitive wins.
• Hire someone who can talk to the financial community for you - and do it incredibly well.  While you focus on future markets and solutions someone has to tell this story to the financial analysts in their lingo so they don't lose faith (and they are a sacrilegious lot who have no faith.)  Keep Facebook out of the forecasting game, but you MUST create and maintain good communication with analysts so you need someone who can tell the story not only with products and case studies but numbers.  Facebook is a disruptive innovation company, so someone has to explain why this will work.  You blew the IPO road show horribly by showing up at meetings in a hoodie - so now you need to make amends by hiring someone who will give them faith that you know what you're doing and can make it happen.

These are my ideas for what Steve Jobs would tell Mark Zuckerberg.  What are yours?  What do you think the #1 CEO of the last decade would say to the young, embattled CEO as he faces his first test under fire leading a public company?

Why Tesla is Right, and GM and Ford are Not

The news is not good for U.S. auto companies.  Automakers are resorting to fairly radical promotional programs to spur sales.  Chevrolet is offering a 60-day money back guarantee.  And Chrysler is offering 90 day delayed financing.  Incentives designed to make you want to buy a car, when you really don't want to buy a car.  At least, not the cars they are selling.

On the other hand, the barely known, small and far from mainstream Tesla motors gave one of its new Model S cars to Wall Street Journal reviewer Dan Neil, and he gave it a glowing testimonial.  He went so far as to compare this 4-door all electric sedan's performance with the Lamborghini and Ford GT supercars.  And its design with the Jaguar.  And he spent several paragraphs on its comfort, quiet, seating and storage - much more aligned with a Mercedes S series.

There are no manufacturer incentives currently offered on the Tesla Model S.

What's so different about Tesla and GM or Ford?  Well, everything.  Tesla is a classic case of a disruptive innovator, and GM/Ford are classic examples of old-guard competitors locked into sustaining innovation.  While the former is changing the market - like, say Amazon is doing in retail - the latter keeps laughing at them - like, say Wal-Mart, Best Buy, Circuit City and Barnes & Noble have been laughing at Amazon.

Tesla did not set out to be a car company, making a slightly better car.  Or a cheaper car.  Or an alternative car.  Instead it set out to make a superior car. 

Its initial approach was a car that offered remarkable 0-60 speed performance, top end speed around 150mph and superior handling.  Additionally it looked great in a 2-door European style roadster package. Simply, a wildly better sports car.  Oh, and to make this happen they chose to make it all-electric, as well. 

It was easy for Detroit automakers to scoff at this effort - and they did.  In 2009, while Detroit was reeling and cutting costs - as GM killed off Pontiac, Hummer, Saab and Saturn - the famous Bob Lutz of GM laughed at Tesla and said it really wasn't a car company.  Tesla would never really matter because as it grew up it would never compete effectively. According to Mr. Lutz, nobody really wanted an electric car, because it didn't go far enough, it cost too much and the speed/range trade-off made them impractical.  Especially at the price Tesla was selling them. 

Meanwhile, in 2009 Tesla sold 100% of its production.  And opened its second dealership. As manufacturing plants, and dealerships, for the big brands were being closed around the world.

Like all disruptive innovators, Tesla did not make a car for the "mass market."  Tesla made a great car, that used a different technology, and met different needs.  It was designed for people who wanted a great looking roadster, that handled really well, had really good fuel economy and was quiet.  All conditions the electric Tesla met in spades.  It wasn't for everyone, but it wasn't designed to be.  It was meant to demonstrate a really good car could be made without the traditional trade-offs people like Mr. Lutz said were impossible to overcome.

Now Tesla has a car that is much more aligned with what most people buy.  A sedan.  But it's nothing like any gasoline (or diesel) powered sedan you could buy.  It is much faster, it handles much better, is much roomier, is far quieter, offers an interface more like your tablet and is network connected.  It has a range of distance options, from 160 to 300 miles, depending up on buyer preferences and affordability.  In short, it is nothing like anything from any traditional car maker - in USA, Japan or Korea. 

Again, it is easy for GM to scoff.  After all, at $97,000 (for the top-end model) it is a lot more expensive than a gasoline powered Malibu. Or Ford Taurus. 

But, it's a fraction of the price of a supercar Ferrari - or even a Porsche Panamera, Mercedes S550, Audi A8, BMW 7 Series, or Jaguar XF or XJ -  which are the cars most closely matching size, roominess and performance. 

And, it's only about twice as expensive as a loaded Chevy Volt - but with a LOT more advantages.  The Model S starts at just over $57,000, which isn't that much more expensive than a $40,000 Volt.

In short, Tesla is demonstrating it CAN change the game in automobiles.  While not everybody is ready to spend $100k on a car, and not everyone wants an electric car, Tesla is showing that it can meet unmet needs, emerging needs and expand into more traditional markets with a superior solution for those looking for a new solution.  The way, say, Apple did in smartphones compared to RIM.

Why didn't, and can't, GM or Ford do this?

Simply put, they aren't even trying. They are so locked-in to their traditional ideas about what a car should be that they reject the very premise of Tesla.  Their assumptions keep them from really trying to do what Tesla has done - and will keep improving - while they keep trying to make the kind of cars, according to all the old specs, they have always done.

Rather than build an electric car, traditionalists denounce the technology.  Toyota pioneered the idea of extending a gas car into electric with hybrids - the Prius - which has both a gasoline and an electric engine. 

Hmm, no wonder that's more expensive than a similar sized (and performing) gasoline (or diesel) car.   And, like most "hybrid" ideas it ends up being a compromise on all accounts.  It isn't fast, it doesn't handle particularly well, it isn't all that stylish, or roomy.  And there's a debate as to whether the hybrid even recovers its price premium in less than, say, 4 years.  And that is all dependent upon gasoline prices.

Ford's approach was so clearly to defend and extend its traditional business that its hybrid line didn't even have its own name!  Ford took the existing cars, and reformatted them as hybrids, with the Focus Hybrid, Escape Hybrid and Fusion Hybrid.  How is any customer supposed to be excited about a new concept when it is clearly displayed as a trade-off; "gasoline or hybrid, you choose."  Hard to have faith in that as a technological leap forward.

And GM gave the market Volt.  Although billed as an electric car, it still has a gasoline engine.  And again, it has all the traditional trade-offs.  High initial price, poor 0-60 performance, poor high-end speed performance, doesn't handle all that well, isn't very stylish and isn't too roomy.  The car Tesla-hating Bob Lutz put his personal stamp on.  It does achieve high mpg - compared to a gasoline car - if that is your one and only criteria. 

Investors are starting to "get it."

There was lots of excitement about auto stocks as 2010 ended.  People thought the recession was ending, and auto sales were improving.  GM went public at $34/share and rose to about $39.  Ford, which cratered to $6/share in July, 2010 tripled to $19 as 2011 started. 

But since then, investor enthusiasm has clearly dropped, realizing things haven't changed much in Detroit - if at all.  GM and Ford are both down about 50% - roughly $20/share for GM and $9.50/share for Ford.

Meanwhile, in July of 2010 Tesla was about $16/share and has slowly doubled to about $31.50. Why?  Because it isn't trying to be Ford, or GM, Toyota, Honda or any other car company.  It is emerging as a disruptive alternative that could change customer perspective on what they should expect from their personal transportation. 

Like Apple changed perspectives on cell phones.  And Amazon did about retail shopping. 

Tesla set out to make a better car.  It is electric, because the company believes that's how to make a better car.  And it is changing the metrics people use when evaluating cars. 

Meanwhile, it is practically being unchallenged as the existing competitors - all of which are multiples bigger in revenue, employees, dealers and market cap of Tesla - keep trying to defend their existing business while seeking a low-cost, simple way to extend their product lines.  They largely ignore Tesla's Roadster and Model S because those cars don't fit their historical success formula of how you win in automobile competition. 

The exact behavior of disruptors, and sustainers likely to fail, as described in The Innovator's Dilemma (Clayton Christensen, HBS Press.)

Choosing to be ignorant is likely to prove very expensive for the shareholders and employees of the traditional auto companies. Why would anybody would ever buy shares in GM or Ford?  One went bankrupt, and the other barely avoided it.  Like airlines, neither has any idea of how their industry, or their companies, will create long-term growth, or increase shareholder value.  For them innovation is defined today like it was in 1960 - by adding "fins" to the old technology.  And fins went out of style in the 1960s - about when the value of these companies peaked.

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!

Leadership Matters - Ballmer vs. Bezos

Not far from each other, in the area around Seattle, are two striking contrasts in leadership.  They provide significant insight to what creates success today.

Steve Ballmer leads Microsoft, America's largest software company.  Unfortunately, the value of Microsoft has gone nowhere for 10 years.  Steve Ballmer has steadfastly defended the Windows and Office products, telling anyone who will listen that he is confident Windows will be part of computing's future landscape.  Looking backward, he reminds people that Windows has had a 20 year run, and because of that past he is certain it will continue to dominate.

Unfortunately, far too many investors see things differently.  They recognize that nearly all areas of Microsoft are struggling to maintain sales.  It is quite clear that the shift to mobile devices and cloud architectures are reducing the need, and desire, for PCs in homes, offices and data centers.  Microsoft appears years late recognizing the market shift, and too often CEO Ballmer seems in denial it is happening - or at least that it is happening so quickly.  His fixation on past success appears to blind him to how people will use technology in 2014, and investors are seriously concerned that Microsoft could topple as quickly DEC., Sun, Palm and RIM. 

Comparatively, across town, Mr. Bezos leads the largest on-line retailer Amazon.  That company's value has skyrocketed to a near 90 times earnings!  Over the last decade, investors have captured an astounding 10x capital gain!  Contrary to Mr. Ballmer, Mr. Bezos talks rarely about the past, and almost almost exclusively about the future.  He regularly discusses how markets are shifting, and how Amazon is going to change the way people do things. 

Mr. Bezos' fixation on the future has created incredible growth for Amazon.  In its "core" book business, when publishers did not move quickly toward trends for digitization Amazon created and launched Kindle, forever altering publishing.  When large retailers did not address the trend toward on-line shopping Amazon expanded its retail presence far beyond books, including more products  and a small armyt of supplier/partners.  When large PC manufacturers did not capitalize on the trend toward mobility with tablets for daily use Amazon launched Kindle Fire, which is projected to sell as many as 12 million units next year (AllThingsD.com). 

Where Mr. Ballmer remains fixated on the past, constantly reinvesting  in defending and extending what worked 20 years ago for Microsoft, Mr. Bezos is investing heavily in the future.  Where Mr. Ballmer increasingly looks like a CEO in denial about market shift, Mr. Bezos has embraced the shifts and is pushing them forward. 

Clearly, the latter is much better at producing revenue growth and higher valuation than the former.

As we look around, a number of companies need to heed the insight of this Seattle comparison:

• At AOL it is unclear that Mr. Armstrong has a clear view of how AOL will change markets to become a content powerhouse.  AOL's various investments are incoherent, and managers struggle to see a strong future for AOL.  On the other hand, Ms. Huffington does have a clear sense of the future, and the insight for an entirely different business model at AOL.  The Board would be well advised to consider handing the reigns to Ms. Huffington, and pushing AOL much more rapidly toward a different, and more competitive future.
• Dell's chronic inability to identify new products and markets has left it, at best, uninteresting.  It's supply chain focused strategy has been copied, leaving the company with practically no cost/price advantage.  Mr. Dell remains fixated on what worked for his initial launch 30 years ago, and offers no exciting description of how Dell will remain viable as PC sales diminish.  Unless new leadership takes the helm at Dell, the company's future  5 years hence looks bleak.
• HP's new CEO Meg Whitman is less than reassuring as she projects a terrible 2012 for HP, and a commitment to remaining in PCs - but with some amorphous pledge toward more internal innovation.  Lacking a clear sense of what Ms. Whitman thinks the world will look like in 2017, and how HP will be impactful, it's hard for investors, managers or customers to become excited about the company.  HP needs rapid acceleration toward shifting customer needs, not a relaxed, lethargic year of internal analysis while competitors continue moving demand further away from HP offerings.
• Groupon has had an explosive start.  But the company is attacked on all fronts by the media.  There is consistent questioning of how leadership will maintain growth as reports emerge about founders cashing out their shares, highly uneconomic deals offered by customers, lack of operating scale leverage, and increasing competition from more established management teams like Google and Amazon.  After having its IPO challenged by the press, the stock has performed poorly and now sells for less than the offering price.  Groupon desperately needs leadership that can explain what the markets of 2015 will look like, and how Groupon will remain successful.

What investors, customers, suppliers and employees want from leadership is clarity around what leaders see as the future markets and competition.  They want to know how the company is going to be successful in 2 or 5 years.  In today's rapidly shifting, global markets it is not enough to talk about historical results, and to exhibit confidence that what brought the company to this point will propel it forward successfully. And everyone recognizes that managing quarter to quarter will not create long term success.

Leaders must  demonstrate a keen eye for market shifts, and invest in opportunities to participate in game changers.  Leaders must recognize trends, be clear about how those trends are shaping future markets and competitors, and align investments with those trends.  Leadership is not about what the company did before, but is entirely about what their organization is going to do next. 

Update 30 Nov, 2011

In the latest defend & extend action at Microsoft Ballmer has decided to port Office onto the iPad (TheDaily.com).  Short term likely to increase revenue.  But clearly at the expense of long-term competitiveness in tablet platforms.  And, it misses the fact that people are already switching to cloud-based apps which obviate the need for Office.  This will extend the dying period for Office, but does not come close to being an innovative solution which will propel revenues over the next decade.

Will Meg Whitman be more like Steve Jobs, or Carol Bartz?

The media has enjoyed a field day last week amidst the ouster of Leo Apotheker as Hewlett Packard's CEO and appointments of former Oracle executive Ray Lane as Executive Chairman and former eBay CEO Meg Whitman as CEO.  There have been plenty of jabs at the Board, which apparently hired Mr. Apotheker without everyone even meeting him (New York Times), and plenty of complaining about HP's deteriorating performance and stock price.  But the big question is, will Meg Whitman be able to turn around HP?

Ms. Whitman is the 7th HP CEO in a mere 12 years.  Of those CEOs, the only one pointed to with any attraction was Mark Hurd.  He did not take any strategic actions, but merely slashed costs - which immediately improved the profit line and drove up the short-term stock price.  Actions taken at the expense of R&D, new product development and creating new markets, leaving HP short on a future strategy when he was summarily let go by the Baord that hired Apotheker. 

And that indicates the strategy problem at HP - which is pretty much a lack of strategy.

HP was once a highly innovative company. We all can thank HP for a world of color.  Before HP brought us the low-priced ink-jet printer all office printing was black.  HP unleashed the color in desktop publishing, and was critical to the growth of office and home printing, as well as faxing with their all-in-one, integrated devices. 

But then someone - largely Ms. Fiorina - had the idea to expand on the HP presence in desktop publishing by expanding into PC manufacturing and sales, even though there was no HP innovation in that market.  Mr. Hurd expanded that direction by buying a service organization to support field-based PCs. 

This approach of expanding on HPs "core" printer business, almost all by acquisition, cost HP a lot of money.  Further, supply chain and retail program investments to sell largely undifferentiated products and services in a hotly contested PC market sucked all the money out of new products development.  Every year HP was spending more to grow sales of products becoming increasingly generic, while falling farther behind in any sort of new market creation.

Into that innovation void jumped Apple, Google and Amazon.  They pushed new mobile solutions to market in smartphones and tablets.  And now PCs, and the printers they used, are seeing declining growth.  All future projections show an increase in mobile devices, and a sales cliff emerging for PCs and their supporting devices.  Simultaneously as mobile devices have become more popular the trend away from printing has grown, with users in business and consumer markets finding digital devices less costly, more user friendly and more adaptable than printed material (just compare Kindle sales and printed book sales - or the volume of tablet newspaper and magazine subscriptions to printed subscriptions.)  HP invested heavily in PC products, and now that market is dying. 

Now HP is in big trouble.  There are plenty of skeptics that think Ms. Whitman is not right for the job. What should HP under Ms. Whitman do next?  Keep doubling down on investments in existing markets?  That direction looks pretty dangerous.  IBM jumped out years ago, selling its laptop line to Lenovo for a tidy profit before sales slackened.  With all the growth in smartphones and tablets, it's hard to imagine that strategy would work.  Even Mr. Apotheker took action to deal with the market shift by redirecting HP away from PCs with his announced intention to spin off that business while buying an ERP (enterprise ressource planning) software company to take HP into a new direction.  But that backfired on him, and investors.

Mr. Apotheker and Carol Bartz, recently fired CEO of Yahoo, made similar mistakes.  They relied heavily on their personal past when taking leadership of a struggling enterprise. They looked to their personal success formulas - what had worked for them in the past - when setting their plans for their new companies.  Unfortunately, what worked in the past rarely works in the future, because markets shift.  And both of these companies suffered dramatically as the new CEO efforts took them further from market trends. 

The job Ms. Whitman is entering at HP is wildly different from her job at eBay.  eBay was a small company taking advantage of the internet explosion.  It was an early leader in capitalizing on web networking and the capability of low-cost on-line transactions.  At eBay Ms. Whitman needed to keep the company focused on investing in new solutions that transformed PC and internet connectivity into value for users.  As long as the number of users on the internet, and the time they spent on the web, grew eBay could capitalize on that trend for its own growth.  eBay was in the right place at the right time, and Ms. Whitman helped guide the company's product development so that it helped users enjoy their on-line experience.  The trends supported eBay's early direction, and growth was built opon making on-line selling better, faster and easier.

The situation could not be more different at HP.  It's products are almost all out of the trend.  If Ms. Whitman does what she did at eBay, trying to promote more, better and faster PCs, printers and traditional IT services things will not go well.  That was Mr. Hurd's strategy.  "Been there, done that" as people like to say.  That strategy ran its course, and more cost-cutting will not save HP.

In 2020 if we are to discuss HP the way we now discuss Apple's dramatic turnaround from the brink of failure, Ms. Whitman will have to behave very differently than her past - and from what her predecessor and Ms. Bartz did.  She has to refocus HP on future markets.  She has to identify triggers for market change - like Steve Jobs did when he recognized that the growing trend to mobility would explode once WiFi services reached 50% of users - and push HP toward developing solutions which take advantage of those market shifts.

HP has under-invested in new market development for years.  It's acquisition of Palm was supposed to somehow rectify that problem, only Palm was a failing company with a failing platform when HP bought it.  And the HP tablet launch with its own proprietary solution was far too late (years too late) in a market that requires thousands of developers and a hundred thousand apps if it is to succeed.  The investment in Palm and WebOS was too late, and based on trying to be a "me too" in a market where competitors are rapidly advancing new solutions. 

There are a world of market opportunities out there that HP can develop.  To reach them Ms. Whitman must take some quick actions:

1. Develop future scenarios that define the direction of HP.  Not necessarily a "vision" of HP in 2020, but certainly an identification of the big trends that will guide HP's future direction for product and market development.  Globalization (like IBM's "smarter planet") or mobility are starts - but HP will have to go beyond the obvious to identify opportunities requiring the resources of a company with HP's revenue and resources.  HP desperately needs a pathway to future markets.  It needs to be developing for the emerging trends.
2. A recognition of how HP will compete.  What is the market gap that HP will fulfill - like Apple did in mobility?  And how will it fulfill it?  Google and Facebook are emerging giants in software, offering a host of new capabilities every day to better network users and make them more productive.  HP must find a way to compete that is not toe-to-toe with existing leaders like Apple that have more market knowledge and extensive resoureces.
3. HP needs to dramatically up the ante in new product development.  Innovation has been sorely lacking, and the hierarchical structure at HP needs to be changed.  White Space projects designed to identify opportunities in market trends need to be created that have permission to rapidly develop new solutions and take them to market - regardless of HP historical strengths.  Resources need to shift - rapidly - from supporting the aging, and growth challenged, historical product lines to new opportunities that show greater growth promise.

Apple and IBM were once given almost no chance of survival.  But new leadership recognized that there were growth markets, and those leaders altered the resource allocation toward things that could grow.  Investments in the old strategy were dropped as money was pushed to new solutions that built on market trends and headed toward future scenarios.  HP is not doomed to failure, but Ms. Whitman has to start acting quickly to redirect resources or it could easily be the next Sun Microsystems, Digital Equipment, Wang, Lanier or Cray

Status Quo Police - Innovation Killers

Nobody admits to being the innovation killer in a company.  But we know they exist.  Some these folks "dinosaurs that won't change."  Others blame "the nay-saying 'Dr. No' middle managers."  But when you meet these people, they won't admit to being innovation killers.  They believe, deep in their hearts as well as in their everyday actions, that they are doing the right thing for the business.  And that's because they've been chosen, and reinforced, to be the Status Quo Police.

When a company starts it has no norms.  But as it succeeds, in order to grow quickly it develops a series of "key success factors" that help it continue growing.  In order to grow faster, managers - often in functional roles - are assigned the task of making sure the key success factors are unwaveringly supported.  Consistency becomes more important than creativity.  And these managers are reinforced, supported, even bonused for their ability to make sure they maintain the status quo.  Even if the market has shifted, they don't shift.  They reinforce doing things according to the rules.  Just consider:

Quality - Who can argue with the need to have quality?  Total Quality Management (TQM,) Continuous Improvement (CI,) and Six Sigma programs all have been glorified by companies hoping to improve product or service quality.  If you're trying to fix a broken product, or process, these work pretty well at helping everyone do their job better.

But these programs live with the mantra "if you can't measure it, you can't improve it.  Measure everything that's important."  If you're innovating, what do you measure?  If you're in a new technology, or manufacturing process, how do you know what you really need to do right?  If you're in a new market, how do you know the key metric for sales success?  Is it number of customers called, time with customers, number of customer surveys, recommendation scores, lost sales reports?  When you're trying to do something new, a lot of what you do is respond quickly to instant feedback - whether it's good feedback or bad.

The key to success isn't to have critical metrics and measure performance on a graph, but rather to learn from everything you do - and usually to change.  Quality people hate this, and can only stand in the way of trying anything new because you don't know what to measure, or what constitutes a "good" measure.  Don't ever forget that Motorola pretty much invented Six Sigma, and what happened to them in the mobile phone business they pioneered?

Finance.  All businesses exist to make money, so who can argue with "show me the numbers.  Give me a business plan that shows me how you're going to make money."  When your'e making an incremental investment to an existing asset or process, this is pretty good advice. 

But when you're innovating, what you don't know far exceeds what you know.  You don't know how to meet unment needs.  You don't know the market size, the price that people will pay, the first year's volume (much less year 5,) the direct cost at various volumes, the indirect cost, the cost of marketing to obtain customer attention, the number of sales calls it will take to land a sale, how many solution revisions will be necessary to finally put out the "right" solution, or how sales will ramp up quarterly from nothing.  So to create a business plan, you have to guess. 

And, oh boy, then it gets ugly.  "Where did this number come from?  That one?  How did you determine that?"  It's not long until the poor business plan writer is ridden out of the meeting on a rail.  He has no money to investigate the market, so he can't obtain any "real" numbers, so the business plan process leads to ongoing investment in the old business, while innovation simply stalls.

Under Akia Morita Sony was a great innovator. But then an MBA skilled in finance took over the top spot.  What once was the #1 electronics innovator in the globe has become, well, let's say they aren't Apple.

Legal - No company wants to be sued, or take on unnecessary risk.  And when you're selling something, lawyers are pretty good at evaluating the risk in that business, and lowering the risk.  While making sure that all the compliance issues are met in order to keep regulators - and other lawyers - out of the business.

But when you're starting something new, everything looks risky.  Customers can sue you for any reason.  Suppliers can sue you for not taking product, or using it incorrectly.  The technology could fail, or have negative use repercussions.  Reguators can question your safety standards, or claims to customers. 

From a legal point of view, you're best to never do anything new.  The less new things you do, the less likely you are to make a mistake.  So legal's great at putting up roadblocks to make sure they protect the company from lawsuits, by making sure nothing really new happens.  The old General Motors had plenty of lawyers making sure their cars were never too risky - or interesting.

R&D or Product Development - Who doesn't think it's good to be a leader in a specific technology?  Technology advances have proven invaluable for companies in industries from computers to pharmaceuticals to tractors and even services like on-line banking.  Thus R&D and Product Development wants to make sure investments advance the state of the technology upon which the company was built.

But all technologies become obsolete.  Or, at least unprofitable.  Innovators are frequently on the front end of adopting new technologies.  But if they have to obtain buy-in from product development to obtain staffing or money they'll be at the end of a never-ending line of projects to sustain the existing development trend.  You don't have to look much further than Microsoft to find a company that is great at pouring money into the PC platform (some $9B, 16% of revenue in 2009,) while the market moves faster each year to mobile devices and entertainment (Apple spent 1/8th the Microsoft budget in 2009.)

Sales, Marketing & Distribution - When you want to protect sales to existing customers, or maybe increase them by 5%, then doing more of what you've always done is smart.  So money is spent to put more salespeople on key accounts, add more money to the advertising budget for the most successful (or most profitable) existing products.  There are more rules about using the brand than lighters at a smoker's convention.  And it's heresy to recommend endangering the distribution channel that has so successfully helped increase sales.

But innovators regularly need to behave differently.  They need to sell to different people - Xerox sold to secretaries while printing press manufacturers sold to printers.  The "brand" may well represent a bygone era, and be of no value to someone launching a new product; are you eager to buy a Zenith electronic device?  Sprucing up the brand, or even launching something new, may well be a requirement for a new solution to be taken seriously.

And often, to be successful, a new solution needs to cut through the old, high-cost distribution system directly to customers if it is to succeed.  Pre-Gerstner IBM kept adding key account sales people in hopes of keeping IT departments from switching out of mainframes to PCs.  Sears avoided the shift to on-line sales successfully - and revenue keeps dropping in the stores.

Information Technology - To make more money you automate more functions.  Computers are wonderful for reducing manpower in many tasks.  So IT implements and supports "standard solutions" that are cost effective for the historical business.  Likewise, they set up all kinds of user rules - like don't go to Facebook or web sites from work - to keep people focused on productivity.  And to make sure historical data is secure and regulations are met.

But innovators don't have a solution mapped out, and all that automated functionality is an enormously expensive headache.  When being creative, more time is spent looking for something new than trying to work faster, or harder, so access to more external information is required.  Since the solution isn't developed, there's precious little to worry about keeping secure.  Innovators need to use new tools, and have flexibility to discover advantageous ways to use them, that are far beyond the bounds of IT's comfort zone.

Newspapers are loaded with automated systems to collect and edit news, to enter display ads, and to "Make up" the printed page fast and cheap.  They have automated systems for classified advertising sales and billing, and for display ad billing.  And systems to manage subscribers.  That technology isn't very helpful now, however, as newspapers go bankrupt.  Now the most critical IT skills are pumping news to the internet in real-time, and managing on-line ads distributed to web users that don't have subscriptions. 

Human Resources - Growth pushes companies toward tighter job descriptions with clear standards for "the kinds of people that succeed around here."  When you want to hire people to be productive at an existing job, HR has the procedures to define the role, find the people and hire them at the most efficient cost.  And they can develop a systematic compensation plan that treats everyone "fairly" based upon perceived value to the historical business.

But innovators don't know what kinds of people will be most successful. Often they need folks who think laterally, across lots fo tasks, rather than deeply about something narrow.  Often they need people who are from different backgrounds, that are closer to the emerging market than the historical business.  And pay has to be related to what these folks can get in the market, not what seems fair through the lens of the historical business.  HR is rarely keen to staff up a new business opportunity with a lot of misfits who don't appreciate their compensation plan - or the rules so carefully created to circumscribe behavior around the old business.

B.Dalton was America's largest retail book seller when Amazon.com was founded by Jeff Bezos.  Jeff knew nothing about books, but he knew the internet.  B.Dalton knew about books, and claimed it knew what book buyers wanted.  Two years later B.Dalton went bankrupt, and all those book experts became unemployed. Amazon.com now sells a lot more than books, as it ongoingly and rapidly expands its employee skill sets to enter new markets - like publishing and eReaders.

Innovation requires that leaders ATTACK the Status Quo Police.  Everything done to efficiently run the old business is irrelevant when it comes to innovation.  Functional folks need to be told they can't force the innovatoirs to conform to old rules, because that's exactly why the company needs innovation!  Only by attacking the old rules, and being willing to allow both diversity and disruption can the business innovate.

Instead of saying "this isn't how we do things around here" it is critical leaders make sure functional folks are saying "how can I help you innovate?"  What was done in the name of "good business" looks backward - not forward.  Status Quo cops have to be removed from the scene - kept from stopping innovation dead in its tracks.  And if the internal folks can't be supportive, that means keeping them out of the innovator's way entirely.

Any company can innovate.  Doing so requires recognizing that the Status Quo Police are doing what they were hired to do.  Until you take away their clout, attack their role and stop them from forcing conformance to old dictums, the business can't hope to innovate.

 

Buy Apple, Sell Microsoft

The Wall Street Journal  headlined Monday, "Apple Chief to Take Leave."  Forbes.com Leadership editor Fred Allen quickly asked what most folks were asking "Where does Steve Jobs Leave Apple Now?" as he led multiple bloggers covering the speculation about how long Mr. Jobs would be absent from Apple, or if he would ever return, in "What They Are Saying About Steve Jobs."  The stock took a dip as people all over raised the question covered by Steve Caulfield in Forbes' "Timing of Steve Jobs Return Worries Investors, Fans."

If you want to make money investing, this is what's called a "buying opportunity."  As Forbes' Eric Savitz reported "Apple is More Than Just Steve Jobs." Just look at the most recent results, as reported in Ad Age "Apple Posts 'Record Quarter' on Strong iPhone, Mac, iPad Sales:"

• Quarterly revenue is up 70% vs. last year to $26.7B (Apple is a $100B company!)
• Quarterly earnings rose 77% vs last year to $6B
• 15 million iPads were sold in 2010, with 7.3 million sold in the last quarter
• Apple has $50B cash on hand to do new product development, acquisitions or pay dividends

ZDNet demonstrated Apple's market resiliency headlining "Apple's iPad Represents 90% of All Tablets Shipped."  While it is true that Droid tablets are now out, and we know some buyers will move to non-Apple tablets, ZDNet predicts the market will grow more than 250% in 2011 to over 44 million units, giving Apple a lot of room to grow even with competitors bringing out new products. 

Apple is a tremendously successful company because it has a very strong sense of where technology is headed and how to apply it to meet user needs.  Apple is creating market shifts, while many other companies are reacting.  By deeply understanding its competitors, being willing to disrupt historical markets and using White Space to expand applications Apple will keep growing for quite a while.  With, or without Steve Jobs.

On the other hand, there's the stuck-in-the-past management team at Microsoft.  Tied to all those aging, outdated products and distribution plans built on PC technology that is nearing end of life.  But in the midst of the management malaise out of Seattle Kinect suddenly showed up as a bright spot!  SFGate reported that "Microsoft's Xbox Kinect beond hackers, hobbyists."  Seems engineers around the globe had started using Kinect in creative ways that were way beyond anything envisioned by Microsoft! Put into a White Space team, it was possible to start imagining Kinect could be powerful enough to resurrect innovation, and success, at the aging monopolist!

But, unfortunately, Microsoft seems far too stuck in its old ways to take advantage of this disruptive opportunity. Joel West at SeekingAlpha.com tells us "Microsoft vs. Open Kinect: How to Miss a Significant Opportunity."  Microsoft is dedicated to its plan for Kinect to help the company make money in games - and has no idea how to create a White Space team to exploit the opportunity as a platform for myriad uses (like Apple did with its app development approach for the iPhone.)

In the end, ZDNet joined my chorus looking to oust Ballmer (possibly a case study in how to be the most misguided CEO in corporate America) by asking "Ballmer's 11th Year as Microsoft's CEO - Is it Time for Him to Go?"  Given Ballmer's massive shareholding, and thus control of the Board, it's doubtful he will go anywhere, or change his management approach, or understand how to leverage a breakthrough innovation.  So as the Cloud keeps decreasing demand for traditional PCs and servers, Brett Owens at SeekingAlpha concludes in "A Look at Valuations of Google, Apple, Microsoft and Intel" that Microsoft has nowhere to go but down!  Given the amazingly uninspiring ad program Microsoft is now launching (as described in MediaPost "Microsoft Intros New Corporate Tagline, Strategy") we can see management has no idea how to find, or sell, innovation.

We often hear advice to buy shares of a company.  Rarely recommendations to sell.  But Apple is the best positioned company to maintain growth for several more years, while Microsoft has almost no hope of moving beyond its Lock-in to old products and markets which are declining.  Simplest trade of 2011 is to sell Microsoft and buy Apple.  Just read the headlines, and don't get suckered into thinking Apple is nothing more than Steve Jobs.  He's great, but Apple can remain great in his absence.