Innovation Matters; or Why You Care More About Apple than Kraft

Apple is launching the iPhone 5, and the market cap is hitting record highs.  No wonder, what with pre-orders on the Apple site selling out in an hour, and over 2 million units being presold in the first 24 hours after announcement. 

We care a lot about Apple, largely because the company has made us all so productive.  Instead of chained to PCs with their weight and processor-centric architecture (not to mention problems crashing and corrupting files) while simultaneously carrying limited function cell phones, we all now feel easily interconnected 24x7 from lightweight, always-on smart devices.  We feel more productive as we access our work colleagues, work tools, social media or favorite internet sites with ease.  We are entertained by music, videos and games at our leisure.  And we enjoy the benefits of rapid problem solving - everything from navigation to time management and enterprise demands - with easy to use apps utilizing cloud-based data.

In short, what was a tired, nearly bankrupt Macintosh company has become the leading marketer of innovation that makes our lives remarkably better.  So we care - a lot - about the products Apple offers, how it sells them and how much they cost.  We want to know how we can apply them to solve even more problems for ourselves, colleagues, customers and suppliers.

Amidst all this hoopla, as you figure out how fast you can buy an iPhone 5 and what to do with your older phone, you very likely forgot that Kraft will be splitting itself into 2 parts in about 2 weeks (October 1).  And, most likely, you don't really care. 

And you can't imagine why I would even compare Kraft with Apple.

Kraft was once an innovation leader.  Velveeta, a much maligned product today, gave Americans a fast, easy solution to cheese sauces that were difficult to make.  Instant Mac & Cheese was a meal-in-a-box for people on the run, and at a low budget.  Cheeze Whiz offered a ready-to-eat spread for canape's.  Individually wrapped American cheese slices solved the problem of sticky product for homemakers putting together lunch sandwiches for school children.  Miracle Whip added spice to boring sandwiches.  Philadelphia brand cream cheese was a tasty, less fattening alternative to butter while also a great product for sauces. 

But, the world changed and these innovations have grown a lot less interesting.  Frozen food replaced homemade sauces and boxed solutions.  Simultaneously, cooking skills improved.  Better options for appetizers emerged than stuffed celery or something on a cracker.  School lunches changed, and sandwich alternatives flourished.  Across Kraft's product lines, demand changed as new technologies were developed that better fit customers' needs leading to revenue stagnation, margin erosion and an increasing irrelevancy of Kraft in the marketplace - despite its enormous size.

Apple turned itself around by focusing on innovation, becoming the most valuable American publicly traded company.  Kraft eschewed innovation for cost cutting, doing more of the same trying to defend its "core," leaving investors with virtually no returns.  Meanwhile thousands of Kraft employees have lost their jobs, even though revenues per employee at Kraft are 1/6th those at Apple.   And supplier margins are a never-ending cycle of forced reductions as Kraft tries to capture their margin for itself.

Chart Source:  Yahoo Finance 18 September, 2012

Apple's value went up because it's revenues went up.  In 2007 Apple had #24B in revenues, while Kraft was 150% bigger at $37B.  Ending 2011 Apple's revenues, all from organic growth, were up 4x (400%) at $108B.  But Kraft's 2011 revenues were only $54B, including roughly $10B of purchased revenues from its Cadbury acquisition, meaning comparative Kraft revenues were $44B; a growth of (ho-hum) 3.5%/year. 

Lacking innovation Kraft could not grow the topline, and simply could not grow its value.  And paying a premium price for someone else's revenues has led to.... splitting the company in 2 in only 2 years, mystifying everyone as to what sort of strategy the company ever had to grow!

But Kraft's new CEO is not deterred.  In an Ad Age interview he promised to ramp up advertising while slashing more jobs to cut costs.  As if somehow advertising Velveeta, Miracle Whip, Philadelphia and Mac & Cheese will reverse 30 years of market trends toward different products which better serve customer needs!

Apple spends nearly nothing on advertising.  But it does spend on innovation.  Innovation adds value.  Advertising aging products that solve no new needs does not.

Unfortunately for employees, suppliers and shareholders we can expect Kraft to end up just like Hostess Brands, owner of Wonder Bread and Twinkies, which recently filed bankruptcy due to 40 years of sticking to its core business as the market shifted.  Industry leaders know this, as they announced this week they are using Kraft's split to remove the company from the Dow Jones Industrial Average. 

Companies that innovate change markets and reap the rewards.  By delivering on trends they excite customers who flock to their solutions. Companies that focus on defending and extending their past, especially in times of market shifts, end up failing. Failure may not happen overnight, but it is inevitable. 

Best Buy Isn't - Chasing Supervalu to the Bottom

In a fascinating move this week, Best Buy's septuagenarion founder (who is no longer part of the company) has started calling company execs and offering them jobs - at Best Buy!  Apparently he hopes to engage a private equity firm to take over Best Buy, and he wants to keep some of the exec team, while replacing others.  Even more fascinating is that at last some of the execs are taking his calls, and agreeing to his "job offer." Clearly these folks have lost faith in Best Buy's future.

This happens one day after the Board of Directors fired the CEO at Supervalu, parent company of such large grocery chains as Albertson's, Jewel-Osco, ACME, Shaw's and Star Markets.  Apparently this pleased most everyone, since the company has lost 85% of its equity value since he was brought in  from Wal-Mart while simultaneously killing bonuses and even free employee coffee.  Even though just last week he was paid a retention bonus by the same Board to remain in his job!

And even thought the Chairman at Wal-Mart was clearly in the thick of bribing Mexican officials to open stores south of the border, there is no sign of any changes expected in Wal-Mart's leadership team. 

What is sparking such bizarre behavior in retail?  Quite simply, industry leadership that is so stuck in the past it has no idea how to grow or make money in a dramatically changed marketplace.  They keep trying to do more of the same, while growth goes elsewhere.

Everyone, and I mean everyone, outside of retail knows that the game has changed - permanently.  Since 2000 on-line sales of everything, and I mean everything, has increased.  Sure, there were some collosal flops in early on-line retail (remember Pets.com?)  But every year sales of products on-line increase at double digit rates. It's rare to walk through a store - and I mean any store - and not see at least one customer comparison shopping the product on the shelf with an on-line vendor.

What 15 years ago was a niche seller of non-stock books, Amazon.com, has become the industry vanguard selling everything from apple juice to zombie memorabilia. Even though most industry analysts don't clump it as a direct competitor to Best Buy, Sears, and Wal-Mart - holding it aside in its own "internet retail" category - everyone knows Amazon is growing and changing shopping habits, and reducing demand in traditional stores.

The signs of this shift are everywhere.  From the complete collapse of Circuit City and Sharper Image to the flat sales, reduced number of U.S. outlets and falling per-store numbers at Wal-Mart. 

Across America drivers are accustomed to seeing retail outlets boarded up, and strip malls full of empty window space.  You don't have to be a fancy analyst to notice how many malls would be knocked down entirely if they weren't being converted to low-cost office space for lawyers, tax preparers, dentists, veterinarians and emergency clinics - demonstrably non-retail businesses.  Or to recognize an old Sears or superstore location converted into an evangelical nondenominational church.

For example, in the collar counties around Chicago vacant retail space has accumulated to over 3million square feet - a 45% increase since 2007.  In that local market retail rents have fallen to $16.76 per foot, down 29% in the last four years.  And this is typical of just about everywhere.  America simply has a LOT more retail space than it needs - and will need for the foreseeable future.  Demand for traditional retail is going down, not up, and that is a permanent change.

It is not impossible to make money in retail.  But you can't do it the way it was done in the past.  The answer isn't as simple as "location, location, location;" or even inventory.  As the new, and struggling, CEO at JC Penney has learned the hard way, it's not about "every day low price." Or even low price at all, as the former WalMart exec just fired at Supervalu learned - along with all their employees. 

Today traditional retail store success requires you have unique products, unique merchandising, sales assistance that meets immediacy needs, strong trend connectivity and effective pricing.  Just look at IKEA, Lululemon, Sephora, Whole Foods, Trader Joe's and PetSmart - for example. 

Of course there will be grocery stores.  Traditional retail will not disappear.  But that doesn't mean it will be profitable.  And trying to chase profits by constantly beating down costs gets you - well - Circuit City, Toys R Us, Drug Emporium, Pay N Save, Crazy Eddie, Egghead Software, Bradlee's, Korvette's, TG&Y, Wickes, Skagg's, Payless Cashways, Musicland -- and Supervalu.  There is more to business than price, something the vast, vast majority of retailers keep forgetting.

Fifty years ago if you wanted a TV you went to a television store where they not only sold you a TV, they repaired it!  You selected from tube-based machines made by Zenith, RCA, Philco and Magnavox.  The TV shop owner made some money on the TV, but he also made money on the service.  And if you wanted a washer or refrigerator you went to an "appliance store" for the same reason.  But the world changed, and the need for those stores disappeared. Almost none changed to what people wanted - they simply failed.

Now the world has changed again. The customer value proposition in retail is shifting from location and inventory to information. And it is extremely hard to have salespeople - or shelf tags - with comparable information to a web page, which have not only product and price info but competitive comparisons on everything.  There simply isn't enough profit in a TV, stereo, PC, CD or DVD to cover the overhead of salespeople, check-out clerks, on-hand inventory and the building. 

And that's why Best Buy had to shutter 50 stores in March.  On its way to the same ending as Polk Brothers, Grant's Appliance and Circuit City. 

Don't expect a 70 year old retailer to understand what retail markets will look like in 2020.  Or anyone trained in traditional retail at Wal-Mart.  Or anyone who thinks they can save a traditional "retail brand" like Sears.  The world has already shifted - and those are stories from last decade (or long before.) 

If you are interested in retail go where the growth is - and that is all about on-line leadership.  Sell Best Buy and put your money in Amazon.  You'll sleep better.

Why Cost Cutting Never Works - Ignore Hillshire Brands (Sara Lee)

Cost cutting never improves a company.  Period.

We've become so used to reading about reorganizations, layoffs and cost cutting that most people just accept such leadership decisions as "best practice."  No matter the company, or industry, it has become conventional wisdom to believe cost cutting is a good thing.

As a reporter recently asked me regarding about layoffs at Yahoo, "Isn't it always smart to cut heads when your profits fall?"  Of course not.  Have the layoffs at Yahoo in any way made it a better, more successful company able to compete with Google, Microsoft, Facebook and Apple?  Given the radical need for innovation, layoffs have only hurt Yahoo more - and made it more likely to end up like RIM (Research in Motion.)

But like believing in a flat world, blood letting to cure disease and that meteorites are spit up out of the ground - this is just another conventional wisdom that is untrue; and desperately needs to be challenged.  Cost reductions are killing most companies, not helping them.

Take for example Sara Lee.  Sara Lee was once a great, growing company.  Its consumer brands were well known, considered premium products and commanded a price premium at retail.  

The death spiral at Sara Lee began in 2006.  "Professional managers" from top-ranked MBA schools started "improving earnings" with an ongoing program of reorganizations and cost reductions.  Largely under the leadership of the much-vaunted Brenda Barnes, none of these cost reductions improved revenues.  And the stock price went nowhere. 

With each passing year Sara Lee sold parts of the business, such as Hanes, under the disguise of "seeking focus."  With each sale a one-time gain was booked, and more people were laid off as the reorganizations continued.  Profits remained OK, but the company was actually shrinking - rather than growing. 

To prop up the stock price all avaiable cash was used to buy back stock, which helped maximize executive compensation but really did nothing for investors.  R&D was eliminated, as was new product development and any new product launches.  Instead Sara Lee kept selling more businesses, reorganizing, cutting costs --- and buying its own shares.  Until finally, after Ms. Barnes left due to an unfortunate stroke, Sara Lee was so small it had nothing left to sell.

So the company decided to split into two parts!  Magically, it's like pushing the reset button.  What was Sara Lee is now an even smaller Hillshire Brands.  All that poor track record of sales, profits and equity value goes POOF as the symbol SLE disappears, and investors are left following HSH - which has only traded for about 2 days! No more looking at that long history of bad performance, it isn't on Bloomberg or Marketwatch or Yahoo.  Like the name Sara Lee, the history vanishes.

Well, "if you can't dazzle 'em with brilliance you baffle 'em with bull**it" W.C. Fields once said.

Cost cuts don't work because they don't compound.  If I lay off the head of Brand Marketing this year I promise to save $300,000 and improve the Profit & Loss Statement (P&L) by that amount.  So a one time improvement.  Now - ignoring the fact that the head of branding probably did a number of things to grow revenue - the problem becomes, what do you do the next year?  You can't lay off the Brand V.P. again to save that $300,000 twice.  Further, if you want to improve the P&L by $450,000 this time you actually have to find 2 Directors to lay off! 

Shooting your own troops in order to manage a smaller army rarely wins battles. 

Cost cuts are one-time, and are impossible to duplicate. Following this route leads any company toward being much smaller.  Like Sara Lee.  From a once great company with revenues in the $10s of billions, the new Hillshire Brands isn't even an S&P 500 company (it was replaced by Monster Beverage.)  And how can any investor obtain a great return on investment from a company that's shrinking?

What does create a great company? Growth!  Unlike cost cutting, if a company launches a new product it can sell $300,000 the first year.  If it meets unmet needs, and is a more effective solution, then the product can attract new customers and sell $600,000 the second year.  And then $900,000 or maybe $1.2M the third year.  (And even add jobs!)

If you are very good at creating and launching products that meet needs, you can create billions of dollars in new revenue.  Like Apple with the iPhone and iPad.  Or Facebook.  Or Groupon.  These companies are growing revenues extremely fast because they have products that meet needs.   They aren't trying to "save the P&L."

And revenue growth creates "compound returns."  Unlike the cost savings which are one time, each dollar of revenue produces cash flow which can be invested in more sales and delivery which can generate even more cash flow.  So if growth is 20% and you invest $1,000 in year one, that can become $1,200 in year two, then $1,440 in year three, $1,728 in year four and $2,070 in year five. Each year you receive 20% not only on the $1,000 you invested, but on returns from the previous years!

By compounding year after year, at20% investor money doubles in 5 years.  That's why the most important term for investing is CAGR - Compound Annual Growth Rate.  Even a small improvement in this number, from say 9% to 11%, has very important meaning.  Because it "compounds" year after year.  You don't have to add to your investment - merely allowing it to support growth produces very, very handsome returns.  The higher the CAGR the better.

Something no cost cutting program can possibly due.  Ever.

So, what is the future of Hillshire Brands?  According to the CEO, interviewed Sunday for the Chicago Tribune, the company's historically poor performance could be blamed on ----- wait ----- insufficient focus.  Alas, Sara Lee's problem was obviously too much sales!  Well, good thing they've been solving that problem. 

Of course, having too many brands led to too much lateral thinking and not enough really deep focus on meat.  So now that all they need to think about is meat, he expects innovation will be much improved.  Right. Now that HSH is a "meat focused meals" company, and the objective is to add innovation to meat, they are considering such radical dietary improvements for our fat-laden, overcaloried American society as adding curry powder to the frozen meatloaf. 

Not exactly the iPhone.

To create future growth the first act the new CEO took to push growth was ---- wait ----- cutting staff by $100million over the next 3 years.  Really.  He will solve the "analysis paralysis" which seems to concern him as head of this much smaller company because there won't be anyone around to do the analysis, nor to discuss it and certainly not to disagree with the CEO's decisions.  Perhaps meat loaf egg rolls will be next.

All reorganizations and cost reductions point to leadership's failure to create growth.  Every time.  Staff reductions say to investors, employees, suppliers and customers "I have no idea how to add profitable revenue to this company.  I really have no clue how to put these people to work productively - even if they are really good people.  I have no choice but to cut these jobs, because we desperately need to make the profits look better in order to prop up the stock price short term; even if it kills our chances of developing new products, creating new markets and making superior rates of return for investors long term."

Hillshire's CEO may do very well for himself, and his fellow executives. Assuredly they have compensation plans tied to stock price, and golden parachutes if they leave.  HSH is now so small that it is a likely purchase by a more successful company.  By further gutting the organization Hillshire's CEO can reduce staff to a minimum, making the acquisition appear easier for a large company.  This would allow a premium payment upon acquisition, providing millions to the executives as options pay out and golden parachutes enact. 

And it might give a return to the shareholders.  If the ongoing slaughter finds a buyer.  Otherwise investors will see the stock crater as it heads to bankruptcy.  Like RIM and Yahoo.  So flip a coin.  But that's called gambling, not investing.

What investors need is CAGR.  Not cost cutting and reorganizations.  And as I've said since 2006 - you don't want to own Sara Lee; even if it's now called Hillshire Brands.

 

Microsoft Win8 Tablet Is Not a Game Changer

While there is an appropriately high interest in the Win8 Tablet announcement from Microsoft today, there is no way it is going to be a game changer.  Simply because it was never intended to be.

Game changers meet newly emerging, unmet needs, in new ways.  People are usually happy enough, until they see the new product/solution and realize "hey, this helps me do something I couldn't do before" or "this helps me solve my problem a lot better."  Game changers aren't a simple improvement, they allow customers to do something radically different.  And although at first they may well appear to not work too well, or appear too expensive, they meet needs so uniquely, and better, that they cause people to change their behavior.

Motorola invented the smart phone.  But Motorola thought it was too expensive to be a cell phone, and not powerful enough to be a PC.  Believing it didn't fit existing markets well, Motorola shelved the product.

Apple realized people wanted to be mobile.  Cell phones did talk and text OK - and RIM had pretty good email.  But it was limited use.  Laptops had great use, but were too big, heavy and cumbersome to be really mobile.  So Apple figured out how to add apps to the phone, and use cloud services support, in order to make the smart phone fill some pretty useful needs - like navigation, being a flashlight, picking up tweets - and a few hundred thousand other things - like doctors checking x-rays or MRI results.  Not as good as a PC, and somewhat on the expensive side for the device and the AT&T connection, but a whole lot more convenient.  And that was a game changer.

From the beginning, Windows 8 has been - by design - intended to defend and extend the Windows product line. Rather than designed to resolve unmet needs, or do things nobody else could do, or dramatically improve productivity over all other possible solutions, Windows 8 was designed to simply extend Windows so (hopefully) people would not shift to the game changer technology offered by Apple and later Google. 

The problem with trying to extend old products into new markets is it rarely works.  Take for example Windows 7.  It was designed to replace Windows Vista, which was quite unpopular as an upgrade from Windows XP.  By most accounts, Windows 7 is a lot better.  But, it didn't offer users anything that that made them excited to buy Windows 7.  It didn't solve any unmet needs, or offer any radically better solutions.  It was just Windows better and faster (some just said "fixed.")

Nothing wrong with that, except Windows 7 did not address the most critical issue in the personal technology marketplace.  Windows 7 did not stop the transition from using PCs to using mobile devices.  As a result, while sales of app-enabled smartphones and tablets exploded, sales of PCs stalled:

Chart reproduced with permission of Business Insider Intelligence 6/12/12 courtesy of Alex Cocotas

People are moving to the mobility provided by apps, cloud services and the really easy to use interface on modern mobile devices.  Market leading cell phone maker, Nokia, decided it needed to enter smartphones, and did so by wholesale committing to Windows7.  But now the CEO, Mr. Elop (formerly a Microsoft executive,) is admitting Windows phones simply don't sell well.  Nobody cares about Microsoft, or Windows, now that the game has changed to mobility - and Windows 7 simply doesn't offer the solutions that Apple and Android does.  Not even Nokia's massive brand image, distribution or ad spending can help when a product is late, and doesn't greatly exceed the market leader's performance.  Just last week Nokia announced it was laying off another 10,000 employees.

Reviews of Win8 have been mixed.  And that should not be surprising.  Microsoft has made the mistake of trying to make Win8 something nobody really wants.  On the one hand it has a new interface called Metro that is supposed to be more iOS/Android "like" by using tiles, touch screen, etc.  But it's not a breakthrough, just an effort to be like the existing competition.  Maybe a little better, but everyone believes the leaders will be better still with new updates soon.  By definition, that is not game changing.

Simultaneously, with Win8 users can find their way into a more historical Windows inteface.  But this is not obvious, or intuitive.  And it has some pretty "clunky" features for those who like Windows.  So it's not a "great" Windows solution that would attract developers today focused on other platforms.

Win8 tries to be the old, and the new, without being great at either, and without offering anything that solves new problems, or creates breakthroughs in simplicity or performance.

Do you know the story about the Ford Edsel?

By focusing on playing catch up, and trying to defend & extend the Windows history, Microsoft missed what was most important about mobility - and that is the thousands of apps.  The product line is years late to market, short on apps, short on app developers and short on giving anyone a reason to really create apps for Win8.

Some think it is good if Microsoft makes its own tablet - like it has done with xBox.  But that really doesn't matter.  What matters is whether Microsoft gives users and developers something that causes them to really, really want a new platform that is late and doesn't have the app base, or the app store, or the interfaces to social media or all the other great thinks they already have come to expect and like about their tablet (or smartphone.) 

When iOS came out it was new, unique and had people flocking to buy it.  Developers could only be mobile by joining with Apple, and users could only be mobile by buying Apple.  That made it a game changer by leading the trend toward mobility. 

Google soon joined the competition, built a very large, respectable following by chasing Apple and offering manufacturers an option for competing with Apple. 

But Microsoft's new entry gives nobody a reason to develop for, or buy, a Win8 tablet - regardless of who manufactures it.  Microsoft does not deliver a huge, untapped market.  Microsoft doesn't solve some large, unmet need.  Microsoft doesn't promise to change the game to some new, major trend that would drive early adopters to change platforms and bring along the rest of the market. 

And making a deal so a dying company, on the edge of bankruptcy - Barnes & Noble - uses your technology is not a "big win."  Amazon is killing Barnes & Noble, and Microsoft Windows 8 won't change that.  No more than the Nook is going to take out Kindle, Kindle Fire, Galaxy Tab or the iPad.  Microsoft can throw away $300million trying to convince people Win8 has value, but spending investor money on a dying businesses as a PR ploy is just stupid.

Microsoft is playing catch up.  Catch up with the user interface.  Catch up with the format.  Catch up with the device size and portability.  Catch up with the usability (apps).  Just catch up. 

Microsoft's problem is that it did not accept the PC market was going to stall back in 2008 or 2009.  When it should have seen that mobility was a game changing trend, and required retooling the Microsoft solution suite.  Microsoft dabbled with music mobility with Zune, but quickly dropped the effort as it refocused on its "core" Windows.  Microsoft dabbled with mobile phones across different solutions including Kin - which it dropped along with Microsoft Mobility.  Back again to focusing on operating systems.  By maintaining its focus on Windows Microsoft hoped it could stop the trend, and refused to accept the market shift that was destined to stall its sales.

Microsoft stock has been flat for a decade.  It's recent value improvement as Win8 approaches launch indicates that hope beats eternally in some investors' breasts for a return of Microsoft software dominance.  But those days are long past.  PC sales have stalled, and Windows is a product headed toward obsolescence as competitors make ever better, more powerful mobile platforms and ecosystems.  If you haven't sold Microsoft yet, this may well be your last chance above $30.  Ever.

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.

 

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.

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.

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.