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

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

Source: YahooFinance 1/30/12

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

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

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

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

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

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

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

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

Source: BusinessInsider.com

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

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

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

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

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

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

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

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

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

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

 

 

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

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

Focusing on the Future

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

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

Google participates in great growth markets

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

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

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

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

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

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

 Amazon redefines competition in its markets

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

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

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

The successful CEO's role is different than many expect

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

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

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

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

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

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

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

The S&P 500 ended 2011 almost exactly where it started.  If ever there was a year when being invested in the right companies, and selling the dogs, mattered for higher portfolio returns it was 2011.  The good news is that many of the 2011 dogs were easy to spot, and easy to sell before ruining your portfolio. 

There were many bad performers.  However, there was a common theme.  Most simply did not adjust to market shifts.  Environmental changes, from technology to regulations, made them less competitive thus producing declining returns as newer competitors benefitted.  Additionally, these companies chose - often over the course of several years - to eschew innovation and new product launches.  They chose to keep investing in efforts to defend and extend historical, but troubled, businesses rather than innovate toward a more successful future.

Looking at the trends that put these companies into trouble we can recognize the need to continue avoiding these companies, even though many analysts are starting to say they may be "value stocks." Instead we can invest in the trends by buying companies likely to grow and increase portfolio returns in 2012.

Avoid Kodak - Buy Apple or Google

Few companies are as iconic as Eastman Kodak, inventor of amateur photography and creator of the star product in the hit 1973 Paul Simon song "Kodachrome." However, it was clear in the late 1980s that digital cameras were going to change photography.  Kodak itself was one of the primary inventors of the core technology, but licensed it to others in order to generate cash it invested trying to defend and extend photographic film and paper sales.  In my 2008 book "Create Marketplace Disruption" I highlighted Kodak as a company so locked-in to film sales that it was unwilling to even consider moving into new markets.

In 2011 EK lost almost all its value, falling from $3.85 share to about 60 cents.  The whole company is now worth only $175M as it rapidly moves toward NYSE delisting and bankruptcy, and complete failure.  The trend that doomed EK has been 2 decades in the making, yet like an ocean freighter collision management simply let momentum kill the company.  The long slide has gone on for years, and will not reverse.  If you want to invest in photography your best plays are smart phone suppliers Apple, and Google for not only the Android software but the Chrome apps that are being used to photoshop images right inside browser windows.

Avoid Sears - Buy Amazon

When hedge fund manager Ed Lampert took over KMart by buying their bonds in bankruptcy, then used that platform to buy Sears back in 2006 the Wall Street folks hailed him as a genius. "Mad Money" Jim Cramer said "Fast Eddie" Lampert was his former college roommate, and that was all he needed to recommend buying the stock.  On the strength of such spurrious recommendations, Sears Holdings initially did quite well.

However, I was quoted in The Chicago Tribune the day of the Sears acquisition announcement saying the merged company was doomed - because the trends were clear.  Wal-Mart was in pitched battle with Target to "own" the discount market which had crushed KMart.  Sears was pinched by them on the low end, and by better operators of vertically focused companies such as Kohl's for clothing, Best Buy for appliances and Home Depot for repair and landscape tools.  Sears was swimming against the trends, and Ed Lampert had no plans to re-invent the company.  What lay ahead was cost-cutting and store closings which would kill both brands in a market already overly saturated with traditional brick-and-mortar retailers as long-term more sales moved on-line.

Now Sears Holdings has gone full circle.  In the last 12 months the stock has dropped from $95 to $31.50 - a decline of more than two thirds (a loss of over $7B in investor value.)  Sears and KMart have no future, nor do the Craftsman or Kenmore brands.  After Christmas management announced a new round of store closings as same stores sales continues its never-ending slide, and finally most industry analysts are saying Sears has nowhere to go but down. 

The retail future belongs to Amazon.com - which is where you should invest if you want to grow portfolio value in 2012.  Look to Kindle Fire and other tablets to accelerate the retail movement on-line, while out-of-date Sears becomes even less relevant and of lower value.

Stay out of Nokia and Research in Motion - Buy Apple

On February 15 I wrote that Nokia had made a horrible CEO selection, and was a stock to avoid.  Nokia invesors lost about $18B of value in 2001 as the stock lost  50% of its market cap in 2011 (62% peak to trough.) May 20 I pounded the table to sell RIMM, which lost nearly 80% of its investor value in 2011 - nearly $60B! 

Both companies simply missed the market shift in smart phones.  Nokia did its best Motorola imitation, which missed the shift from analog to digital cell phones - and then completely missed the shift to smart phones - driving the company to near bankruptcy and acquisition by Google for its patent library.  With no game at all, the Nokia Board hired a former Microsoft executive to arrange a shotgun wedding for launching a new platform - 3 years too late.  Now Apple and Android have over 400,000 apps each, growing weekly, while Microsoft is struggling with 50k apps, no compelling reason to switch and struggles to build a developer network.  Nokia's road to oblivion appears clear.

RIM was first to the smartphone market, and had it locked up for years.  Unfortunately, top management and many investors felt that the huge installed base of corporate accounts, using Blackberry secure servers, would protect the company from competition.  Now the New York Times has reported RIM leadership as one of the worst in 2011, because an installed base is no longer the competitive entry barrier Michael Porter waxed about in the early 1980s.  Corporations are following their users to better productivty by moving fast as possible to the iOS and Android worlds. 

RIM's doomed effort to launch an ill-devised, weakly performing tablet against the Apple iPod juggernaut only served to embarrass the company, at great expense.  At this point, there's little reason to think RIM will do any better than Palm did when the technology shifted, and anyone holding RIMM will likely end up with nothing (as did holders of PALM.)  If you want to be in mobile your best pick is market leading and profitably growing Apple, with a second position in Google as it builds up ancillary products like Chrome to leverage its growing Android base.

 Avoid HP and Sony - Buy Apple

Speaking of Palm, to paraphrase Senator Dirkson "that billion here, a billion there" that added up to some real money lost for HP.  Mark Hurd consolidated HP into a company focused on building volume largely in other people's technology - otherwise known as PCs.  As printing declines, and people shift to tablets and cloud apps, HP has less and less ability to build its profit base. The trends were all going in the wrong direction as market shifts make HP less and less relevant to consumer and corporate customers. 

Selecting Mr. Apotheker was a disastrous choice, and I called for investors to dump the stock when he was hired in January.  An ERP executive, he was firmly planted in the technology of the 1990s.  With a diminished R&D, and an atrophied new product development organization HP is nothing like the organization of its founders, and the newest CEO has offered no clear path for finding the trends and re-igniting growth at HP.  If you want to grow in what we used to call the PC business you need to be in tablets now - and that gets you back, once again, to Apple first, and Google second.

Which opens the door for discussing what in the 1960s through 1980s was the most innovative of all consumer electronics companies, Sony.  But when Mr. Morita was replaced by an MBA CEO that began focusing the company on the bottom line, instead of new gadgets, the pipeline rapidly dried.  Acquisitions, such as a music label, replaced R&D and new product development.  Allegiance to protecting the CD and DVD business, and the players Sony made - along with traditional TVs and PCs - meant Sony missed the wave to MP3, to mobile digital entertainment devices, to DVRs and the emerging market for interactive TV.  What was once a leader is now a follower. 

As a result Sony has lost $4.5B in investor value the last 3 year, and in 2011 lost half its value falling from $37 to $18/share.  As Apple emerges as the top consumer electronics technology leader and profit creator, closely chased by Google, it is unlikely Sony will ever recover that lost value. 

Buying Apple, Amazon, Google and Netflix

This column has already made the case for Apple.  It is almost incomprehensible how far a lead Apple has over its competition, causing investors to fear for its revenue growth prospects.  As a result, the companies P/E multiple is a remarkably low single-digit number, even though its growth is well into the double digits!  But its existing position in growth markets, technology leadership and well oiled new product development capability nearly assures continued profitbale growth for at least 5 years.  Even though the stock, which I recommended as my number 1 buy in January, 2011, has risen some 30% maintaining a big position is remains an investors best portfolio enhancer.

Amazon was a wild ride in 2011, and today is worth almost the same as it was one year ago.  Given that the company is now larger, has a more dominant position in publishing and is the world leader on the trend to on-line retail it is a very good stock to own.  The choice to think long-term and build its user links through sales of Kindle Fire at cost has limited short-term profits, but every action Amazon has taken to grow has paid off handsomely because they accelerate the natural trends and position Amazon as the leader.  Remaining with the trends, and the growth, offers the potential for big payoff this year and for years to come.

Google remains #2 in most markets, but remains aligned with the trends.  It was disappointing that the company cancelled so many great products in 2011 - such as Gear and Wave. And it faces stiff competition in its historical ad markets from the shift toward social media and Facebook's emergence.  However, Google is the best positioned company to displace Microsoft on all those tablets out there with its Chrome apps, and it still is a competitor with the potential for long-term value creation.  It's just hard to be as excited about Google as Apple and Amazon. 

Netflix started 2011 great, but then stumbled.  Starting the year at $190, Netflix rose to $305 before falling to $75.  Investors have seen an 80% decline from the peak, and a 60% decline from beginning of the year.  But this was notably not because company revenues or profits fell, because they didn't.  Rather concerns about price changes and long-term competition caused the stock to drop.  And that's why I remain bullish for owning Netflix in 2012.

Growth can hide a multitude of sins, as I pointed out when making the case to buy in October.  And Netflix has done a spectacular job of preparing itself to transition from physical DVDs to video downloads.  The "game" is not over, and there is a lot of content warring left.  But Netflix was first, and has the largest user base.  Techcrunch recently reported on a Citi survey that found Netflix still has nearly twice the viewership of #2 Hulu (27% vs. 15%.) 

Those who worry about Amazon, Google or Apple taking the Netflix position forget that those companies are making huge bets to compete in other markets and have shown less interest in making the big investments to compete on the content that is critical in the download market.  AOL and Yahoo are also bound up trying to define new strategies, and look unlikely to ever be the content companies they once were.

For those who are banking on competitive war with Comcast and other cable companies to kill off Netflix look no further than how they define themselves (cable operators,) and their horrific customer relationship scores to realize that they are more interested in trying to preserve their old business than rapidly enter a new one.  Perhaps one will try to buy Netflix, but they don't have the management teams or organization to compete effectively.

The fact is that Netflix still has the best strategy for its market, which is still growing exponentially, has the best pricing and is rapidly growing its content to remain in the top position.  That makes it a likely pick for "turnaround of the year" by end of 2012 (at least in the tech/media industry) - even as investments rise over the next 12 months.

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.

How "Best Practices" kill productivity, innovation and growth - Start using Facebook, Twitter, Linked-in!

How much access do your employees have to Facebook, Twitter, Linked-in, GroupOn, FourSquare, and texting in their daily work, on their daily technology devices?  Do you encourage use, or do you in fact block access, in the search for greater security, and on the belief that you achieve higher productivity by killing access to these "work cycle stealers?"  Do you implement policies keeping employees from using their own technology tools (smartphone or tablet) on the job?

In 1984 the PC revolution was still quite young.  Pizza Hut was then a division of PepsiCo (now part of Yum Brands,) and the company was fully committed to a set of mainframe applications from IBM.  Mainframe applications, accessed via a "green screen" terminal were used for all document creation, financial analysis, and even all printing.  The CIO was very proud of his IBM mainframe data center, and his tight control over the application base and users. 

In what seemed like an almost overnight series of events, headquarters employees started bringing small PC's to work in order to build spreadsheets, create documents and print miscellaneous memos.  They found the new technology so much easier to use, and purchase cost so cheap, that their productivity soared and they were able to please their bosses while leaving work on time.  A good trade-off.

The CIO went ballistic.  "These PCs are popping up like popcorn around here - and we have to kill this trend before it gains any additional momentum!" he decried in an executive meeting.  PCs were "toys" that lacked the "robustness" of his mainframe applications.  If users wanted higher productivity, then they simply needed to spend more time in training. 

Additionally, if he didn't control access to computing cycles, and activities like printing, employees would go berserk using unnecessary resources on projects they probably should never undertake.  He was servicing the corporation by keeping people on a narrow tool set - and it gave the company control over what employees could do as well as how they could do it making sure nothing frivolous was happening.  For all these reasons, plus the fact that he could assure security on his mainframe, he felt it important that the CEO and executive team commit with him that PCs would not be allowed in Pizza Hut.

Retrospectively, he looks foolish (and his efforts were unsuccessful.)  PCs unleashed a wave of personal productivity that benefitted all early adopters.  They not only let employees do their work faster, but it allowed employees to develop innovative solutions to problems - often dramatically lowering overhead costs for many management tasks.  PCs, of course, swept through the workplace and in only a decade most mainframes, and their high cost, air conditioned data centers, were gone. 

Yet, to this day companies continue to use "best practices" as a tool to stop technology, and productivity improvement, adoption.  Managers will say:

1. We need to control employee access to information
2. We need to keep employees focused on their job, without distractions
3. We must control how employees do their jobs so we minimize errors and improve quality
4. We need to control employee access externally for security reasons
5. We need consistency in our tool set and how it is used
6. We made a big investment in how we do things, and we need to leverage that [sunk cost] by forcing greater use
7. We need to remember that management are the experts, and it is our job to tell people how to do their jobs.  We don't want the patients running the hospital!

It all sounds quite logical, and good management practice.  Yet, it is exactly the road to productivity reduction, innovation assassination and limited growth!  Only by allowing employees to apply their skills and best thinking can any company hope to continuously improve its productivity and competitiveness.

But, moving from history and theoretical to today's behavior, what is happening in your company?  Do you have a clunky, hard to use, expensive ERP, CRM, accounting, HR, production, billing, vendor management, procurement or other system (or factory, distribution center or headquarters site) that you still expect people to use?  Do you demand people use it - largely for some selection of the 7 items above? Do you require they carry a company PC or Blackberry to access company systems, even as the employee carries their own Android smartphone or iPad with them 24x7?

Recently, technology provider IFS Corporation did a survey on ERP users (Does ERP Mean Excel Runs Production?) Their surprising results showed that new employees (especially under age 40) were very unlikely to take a job with a company if they had to use a complex (usually vendor supplied) interface to a legacy application.  In fact, 75% of today's users are actively seeking - and using - cloud based apps or home grown spreadsheets to manage the business rather than the expensive applications the corporation supplied!  Additionally, between 1/3 and 2/3 of employees (depending upon age) were actively seeking to quit and take another job simply because they found the technology of their company hard to use! (CIO Magazine: Employees Refusing to Use Clunky Enterprise Software.)

Unlike managers invested in historical decisions, and legacy assets, employees understand that without productivity their long-term employment is at risk.  They recognize that constantly shifting markets, with global competitors, requires the flexibility to apply novel thinking and test new solutions constantly.  To succeed, the workforce - all the workforce - needs to be informed, interacting with potential new solutions, thinking and applying their best thoughts to creating new solutions that advance the company's competitiveness.

That's why Fast Company recently published something all younger managers know, yet shocks older ones: "Half of Young Professionals Value Facebook Access, Smartphone Options Over Salary." It surprised a lot of people to learn that employees would actually select access over more pay!

While most older leaders and managers think this is likely because employees want to screw off on the job, and ignore company policies, the article cites a Cisco Connected World Technology Report which describs how these employees value productivity, and realize that in today's world you can't really be productive, innovative and generate growth if you don't have access - and the ability to use - modern tools. 

Today's young workers aren't any less diligent about work than the previous generation, they are simply better informed and more technology savvy!  They think even more long-term about the company's survivability, as well as their ability to make a difference in the company's success.

In other words, in 2011 tools like Linked-in, Facebook, Twitter et. al. accessed via a tablet or smartphone are the equivalent of the PC 30 years ago.  They give rapid access to what customers, competitors and others in the world are doing.  They allow employees to quickly answer questions about current problems, and find new solutions.  As well as find people who have tried various options, and learn from those experiences.  And they allow the employee to connect with a company problem fast - whether at work or away - and start to solve it!  They can access those within their company, vendors, customers - anyone - rapidly in order to solve problems as quickly as possible.

At a recent conference I asked IT leaders for several major airlines if they allowed employees to access these tools.  Uniformly, the answer was no.  That may be the reason we all struggle with the behavior of airlines, I bemoaned.  It might explain why the vast majority of customers were highly sympathetic with the flight attendant that jettisoned a plane through the emergency exit with a beer in hand!   At the very least, it is a symptom of the internal focus that has kept the major airlines from pleasing 85% of their customers, while struggling to be profitable.  If nobody has external access, how can anybody make anything better?

The best practices of 1975 don't cut it in 2012.  The world has changed.  It is more important now than ever that employees have the access to modern tools, and the freedom to use them.  Good management today is not about telling people how to do their job, but rather letting them figure out how to do the job best.  Implement that practice and productivity and innovation will show themselves, and you're highly likely to find more growth!

Avoid the 3 card monte - Sell Abbott

The giant pharmaceutical company Abbott Labs announced today it was splitting itself.  Abbott will sell baby formula, supplements (vitamins,) generic drugs and additional products.  The pharmaceutical company, (gee, I thought that's what Abbott was?) yet to be named, will spin out on its own.  Chairman and CEO Miles White will continue at the new non-pharma Abbott, and the Newco pharma company will be headed by the company's former COO, being brought back out of retirement for the job.

The big question is, "why?"  The CEO gamely has described the businesses as having different profiles, and therefore they should be split.  But this is from the fellow that has been the most acquisitive CEO in his industry, and one of the most acquisitive in business, putting this collection together. He spent $10B on acquisitions as recently as 2009, including dropping $6.6B on Belgian drug company Solvay - which will now be espunged from Abbott.  Why did he spend all that money if it didn't make sense? And how does this break-up help investors, employees and all us healthcare customers? 

Or is this action just confusion, to leave us wondering what's going on in the company - and why it hasn't done much for any constituency the last decade.  Except the CEO - who's been the highest paid in the industry, and one of the highest paid in America during his tenure.

Mr. White became CEO in 1998, and Chairman in 1999.  Just as the stock peaked.  Since then, investors have received almost nothing for holding the stock.  Dividend increases have not covered inflation for the last decade, and despite ups and downs the share price is just about where it was back then - $50

Source:  Yahoo Finance 10/19/11

Abbott has not increased in value because the company has had almost no organic growth.  Growth by acquisition takes a lot of capital, and because purchases have multiple bidders it is really tough to buy them at a price which will earn a high rate of return. All academic studies show that when big companies buy, they always overpay.  And that's the only growth Abbott has had - overly expensive acquisitions.

Mr. White hid an inability to grow behind a flurry of ongoing acquisitions (and some divestitures) that made it incredibly difficult to realize that the company itself was actually stagnant.  Internally in a growth stall, with no idea how to come out of it.  Hoping, again and again, that one of these acquisitions would refire the stalled engines. 

This latest action is another round in Abbott's 3 card monte routine.  Where's that bloody queen Mr. White keeps promising investors, as he keeps mixing the cards - and turning them over? 

Because his acquisitions didn't work he's upping the financial machinations.  By splitting the company he will make it impossible for anyone to figure out what all that exasperating activity has been for the last decade!  He won't be compared to all those pesky historically weak results, or asked about how he's managing all those big investments, or even held accountable for the tens of billions that he spent at the "old Abbott" when he's asked questions about the "new Abbott."

But re-arranging the deck chairs does not fix the ship, and there's nothing - absolutely nothing - in this action which creates more growth, and higher profits, for Abbott shareholders.  Because there's nothing in this that produces new solutions for health care customers. 

And look out employees - because now there's 2 CEOs looking for ways to cut costs and create layoffs - like the ones implemented in early 2011!  Expect the big knife to come out even harder as both companies struggle to show higher profits, with limited growth prospects.

Along the way, like any good 3 card monte routine, Abbott's CEO has had shills ready to encourage us that the flurry of activity is good for investors.  Chronically, they talked about how picking up this business or that was going to grow revenues - almost regardless of the price paid or whether Abbott had any plan for enhancing the acquisition's value.  Today, most analysts applauded his actions as "making sense." Of course these were all financial analysts, MBAs like Mr. White, more interested in accounting than actually developing new products.  Working mostly for investment banks, they had (and have) a vested interest in promoting the executive's actions - even if it hasn't created any value. 

Meanwhile, those betting for the queen to finally show up in this game will just have to keep waiting.

Abbott, like most pharmaceutical companies, has painted itself into a corner.  There are more lawyers, accountants, marketers, salespeople and PR folks at Abbott (like all its competitors, by the way) than there are real scientists developing new solutions.  Blaming regulators and dysfunctional health care processes, Abbott has insisted on building an enormous hierarchy of people focused on a handful of potential "blockbuster" solutions.  It's a bit like the king and his court, filling the castle with those making announcements, arguing about the value of the king's court, sending out messages decrying the barbarians at the gate - while the number of people actually growing corn and creating value keeps dwindling!

Barely 100 years ago most "medicine" was sold based on labels and claims - and practically no science.  Quackery dominated the profession.  If you wanted something to help your ails, you hoped the local chemist had the skills to mix something up in his apothecary shop, using his mortar and pestle.  Often it was best to just take a good shot of opiate (often included in the druggist's powder;) at least you felt a whole lot better even if it didn't cure your illness.

But Alexander Fleming discovered Penicillin (1928), and we realized there was the possibility of massive life improvement from chemistry - specifically what we call pharmacology.  Jonas Salk sort of founded the "modern medicine" industry with his polio vaccine in 1955 - eliminating polio epidemics.  Science could lead to breakthroughs capable of saving millions of lives!  The creation of those injections - and later little pills-  changed everything for humanity. And that created the industry. 

But now pharmacology is a technology that has mostly run its course.  Like all inventions, in the early days the gains were rapid and far, far outweighed the risks.  A few might suffer illness, even death, from the drugs - but literally millions were saved.  A more than fair trade-off.  But after decades, those "easy hits" are gone. 

Today we know that every incremental pharmacological innovation is increasingly valuable in a narrower and narrower context.  10% may see huge improvement, 30% some improvement, 30% marginal to no  improvement, 20% have negative reactions, and 10% hugely negative reactions.  And increasingly, due to science, we know that is because as we trace down the chemical path we are interacting with individuals - and their DNA has a lot to do with how they will react to any drug.  Pharmacology isn't nearly as simple as penicillin any more.  It's almost one-on-one application to genetic maps.

But Abbott failed (like most of its industry competitors) to evolve.  Even though the human genome has been mapped for some 10 years, and even though we now know that future breakthroughs will come from a deeper understanding of gene reactions, there has been precious little research into the new forms of medicine this entails.  Abbott remained stuck trying to develop new products on the same path it had taken before, and as the costs rose (almost asymptotically astronomically) the results grew slimmer.  Billions were going in, and a lot less discovery was coming out!  But the leaders did not change their R&D path.

Today we all hear about patients that have remarkable recoveries from new forms of biologic medicines.  We know we are on the cusp of entirely new solutions, that will make the brute force of pharmacology look as medieval as a civil war surgeon's amputation solution to bullet wounds.  But Abbott is not there developing those solutions, because it has been trying to defend & extend its old business model with acquisitions like Solvay - and a plethora of financial transactions that hide the abysmal performance of its R&D and new product development.

Mr. White is not a visionary.  Never was.  He wasn't a research scientist, deep into solving health issues.  He wasn't a leader in trying to solve America's health care issues during the last decade.  He never exhibited a keen understanding of his customer's needs, trends in the industry, or presience as to future scenarios that would help his markets and thus Abbott's growth. 

Mr. White has been an expert in shuffling the cards - moving around the pieces.  Misdirecting attention to something new in the middle of the game.  Amidst the split announcement today it was easy to overlook that Abbott is setting aside $1.5B for settling charges that it broke regulations by illegally marketing the drug Depakote.   Changing investments, changing executives, changing  the message - now even changing the company - has been the hallmark of Mr. White's leadership. 

Now Abbott joins the list of companies, and CEOs, that when unable to grow their companies lean on misdirection.  Kraft and Sara Lee, both Chicago area companies like Abbott, have announced split-ups after failing to create increased shareholder value and laying off thousands of employees.  These efforts almost always lead to more problems as organic growth remains stalled, and investors are bamboozled by snake oil claims regarding the future.  Hopefully the remaining Abbott investors won't be fooled this time, and they'll find better places for their money than Abbott - or its Newco.

Postscript - the day after publishing this blog 24x7 Wall Street published its annual list of most overpaid CEOs in America.  #4 was Miles White, for taking $25.5M in compensation despite a valuation decline of 11.3%!

Gladiators get killed. Dump Wal-Mart; Buy Amazon

Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.)  Now that's a serious growth stall, which should worry all investors.  Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion.  Faster than most people think.

After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors.  Not just Target, that is almost as low price and has better merchandise.  Wal-Mart's monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots.  Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise.  Aldi beats Wal-Mart hands-down in groceries.  Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices.  And companies like Kohl's and J.C. Penney offer more fashionable goods at just slightly higher prices.  On all fronts, traditional retailers are chiseling away at Wal-Mart's #1 position - and at its margins!

Yet, the company has eschewed all opportunities to shift with the market.  It's primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com).  Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) - sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive - as shown by the last 9 quarters.

On top of this, the retail market is shifting pretty dramatically.  The big trend isn't the growth of discount retailing, which Wal-Mart rode to its great success.  Now the trend is toward on-line shopping.  MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:

• In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
• Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.

This trend has been emerging for over a decade.  The "retail revolution" was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt.  And that problem is worsening as the trend on-line keeps shrinking the traditional market.  Several retailers are expected to fail.  Entire categories of stores.  As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!

While Wal-Mart is huge, and won't die overnight, as sure as the dinosaurs failed when the earth's weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.

The winners will be on-line retailers, who like David versus Goliath use techology to change the competition.  And the clear winner at this, so far, is the one who's identified trends and invested heavily to bring customers what they want while changing the battlefield.  Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:

• Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
• Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
• Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
• Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
• Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
• Amazon built on the mobility trend when its suppliers, publishers, didn't respond by creating Kindle - which has revolutionized book sales.
• Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the "Wal-Mart Slayer"

 Each of these actions were directly related to identifying trends and offering new solutions.  Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy.  Just look at sales of Kindle books:

Source: BusinessInsider.com

Unlike Wal-Mart customers, Amazon's keep growing at double digit rates.  In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase.  Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to  80,000 per day unit sales for iPad2.  Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.

While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base.  Despite only a few month's experience, Amazon is bigger than Google Offers, and is growing at least 20% faster. 

After 1980 investors used to say that General Motors might not be run well, but it would never go broke.  It was considered a safe investment.  In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model.  Wal-Mart is an identical story, only it won't have 3 decades of slow decline.  The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete. 

Given that gladiators, at best, end up bloody - and most often dead - investing in one is not a good approach to wealth creation.  However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors.  Amazon today is a really good opportunity.

Where Bartz Blew It, and What Yahoo! Needs To Do Now

Carol Bartz was unceremoniously fired as CEO by Yahoo's Board last week.  Fearing their decision might leak, the Chairman called Ms. Bartz and fired her over the phone.  Expeditious, but not too tactful.  Ms. Bartz then informed the company employees of this action via an email from her smartphone - and the next day called the Board of Directors a bunch of doofusses in a media interview.  Salacious fodder for the news media, but a distraction from fixing the real problems affecting Yahoo!

Unfortunately, the Yahoo Board seems to have no idea what to do now.  A small executive committee is running the company - which assures no bold actions.  And a pair of investment banks have been hired to provide advice - which can only lead to recommendations for selling all, or pieces, of the company.  Most people seem to think Yahoo's value is worth more sold off in chunks than it is as an operating company.  Wow - what went so wrong?  Can Yahoo not be "fixed"?

There was a time, a decade or so back, when Yahoo was the #1 home page for browsers.  Yahoo! was the #1 internet location for reading news, and for doing internet searches.  And, it pioneered the model of selling internet ads to support the content aggregation and search functions.  Yahoo was early in the market, and was a tremendous success.

Like most companies, Yahoo kept doing more of the same as its market shifted.  Alta Vista, Microsoft and others made runs at Yahoo's business, but it was Google primarily that changed the game on Yahoo!  Google invested heavily in technology to create superior searches, offered a superior user experience for visitors, gave unique content (Google Maps as an example) and created a tremendously superior engine for advertisers to place their ads on searches - or web pages. 

Google was run by technologists who used technology to dramatically improve what Yahoo started - seeing a future which would take advantage of an explosion in users and advertisers as well as web pages and internet use.  Yahoo had been run by advertising folks who missed the technology upgrades.  Yahoo's leadership was locked-in to what it new (advertising) and they were slow with new solutions and products, falling further behind Google every year.

In an effort to turn the tide, Yahoo hired what they thought was a technologist in Carol Bartz to run the company.  She had previously led AutoCad, which famously ran companies like IBM, Intergraph, DEC (Digital Equipment) and General Electric owned CALMA out of the CAD/CAM (computer aided design and manufacturing) business.  She had been the CEO of a big technology winner - so she looked to many like the salvation for Yahoo!

But Ms. Bartz really wasn't familiar with how to turn an ad agency into a tech company - nor was she particularly skilled at new product development.  Her skills were mostly in operations, and developing next generation software.  AutoCad was one of the first PC-based CAD products, and over 2 decades AutoCad leveraged the increasing power of PCs to make its products better, faster and relatively cheaper.  This constant improvement, and close attention to cost control, made it possible for AutoCad on a PC to come closer and closer to doing what the $250,000 workstations had done.  Users switched to the cheaper AutoCad not because it suddenly changed the game, but because PC enhancements made the older, more costly technology obsolete.

Ms. Bartz was stuck on her success formula.  Constantly trying to improve.  At Yahoo she implemented cost controls, like at AutoCad.  But she didn't create anything significantly new.  She didn't pioneer any new platforms (software or hardware) nor any dramatically new advertising or search products.  She tried to do deals, such as with Bing, to somehow partner into better competitiveness, but each year Yahoo fell further behind Google.  In a real way, Ms. Bartz fell victim to Google just as DEC had fallen victim to AutoCad.  Trying to Defend & Extend Yahoo was insufficient to compete with the game changing Google.

The Board was right to fire Ms. Bartz.  She simply did what she knew how to do, and what she had done at AutoCad.  But it was not what Yahoo needed - nor what Yahoo needs now.  Cost cutting and improvements are not going to catch the ad markets now driven by Google (search and adwords) and Facebook (display ads.)  Yahoo is now out of the rapidly growing market - social media - that is driving the next big advertising wave.

Breaking up Yahoo is the easy answer.  If the Board can get enough money for the pieces, it fulfills its fiduciary responsibility.  The stock has traded near $15/share for 3 years, and the Board can likely obtain the $18B market value for investors.  But "another one bites the dust" as the song lyrics go - and Yahoo will follow DEC, Atari, Cray, Compaq, Silicon Graphics and Sun Microsystems into the technology history on Wikipedia.  And those Yahoo employees will have to find jobs elsewhere (oh yeah, that pesky jobs problem leading to 9%+ U.S. unemployment comes up again.)

A better answer would be to turn around Yahoo!  Yahoo isn't in any worse condition than Apple was when Steve Jobs took over as CEO.  It's in no worse condition than IBM was when Louis Gerstner took over as its CEO.  It can be done.  If done, as those examples have shown, the return for shareholders could be far higher than breaking Yahoo apart.  

So here's what Yahoo needs to do now if it really wants to create shareholder value:

1. Put in place a CEO that is future oriented.  Yahoo doesn't need a superb cost-cutter.  It doesn't need a hatchet wielder, like the old "Chainsaw Al Dunlap" that tore up Scott Paper.  Yahoo needs a leader that can understand trends, develop future scenarios and direct resources into developing new products that people want and need.  A CEO who knows that investing in innovation is critical.
2. Quit trying to win the last war with Google.  That one is lost, and Google isn't going to give up its position.  Specifically, the just announced Yahoo+AOL+Microsoft venture to sell ad remnants is NOT where Yahoo needs to spend its resources.  Every one of these 3 companies has its own problems dealing with market shifts (AOL with content management as dial-up revenues die, Microsoft with PC market declines and mobile device growth.)  None is good at competing against Google, and together its a bit like asking 3 losers in a 100 meter dash if they think by forming a relay team they could somehow suddenly become a "world class" group.  This project is doomed to failure, and a diversion Yahoo cannot afford now.
3. In that same vein, quit trying to figure out if AOL or Microsoft will buy Yahoo.  Microsoft could probably afford it - but like I said - Microsoft has its hands full trying to deal with the shift from PCs to tablets and smartphones.  Buying Yahoo would be a resource sink that could possibly kill Microsoft - and it's assured Microsoft would end up shutting down the company piecemeal (as it does all acquisitions.)  AOL has seen its value plummet because investors are unsure if it will turn the corner before it runs out of cash.  While there are new signs of life since buying Huffington Post, ongoing struggles like firing the head of TechCrunch keep AOL fully occupied fighting to find its future.  Any deal with either company should send investors quickly to the sell post, and probably escalate the Yahoo demise with the lowest possible value.
4. Give business heads the permission to develop markets as they see fit.  Ms. Bartz was far too controlling of the business units, and many good ideas were not implemented.  Specifically, for example, Right Media should be given permission to really advance its technology base and go after customers unencumbered by the Yahoo brand and organization.  Right Media has a chance of being really valuable - that's why people would ostensibly buy it - so give the leaders the chance to make it successful.  Maybe then the revolving door of execs at Right (and other Yahoo business units) would stop and something good would happen.  
5. Hold existing business units "feet to the fire" on results.  Yahoo has notoriously not delivered on new ad platforms and other products - missing development targets and revenue goals.  Innovation does not succeed if those in leadership are not compelled to achieve results.  Being lax on performance has killed new product development - and those things that aren't achieving results need to stop.  Specifically, it's probably time to stop the APT platform that is now years behind, and because it's targeted against Google unlikely to ever succeed.
6. Invest in new solutions.  Take all that wonderful trend data that Yahoo has (maybe not as much as Google - but a lot more than most companies) and figure out what Yahoo needs to do next.  Rip off a page from Apple, which flattened spending on the Mac in order to invest in the iPod.  Learn from Amazon, which followed the trends in retail to new storefronts, expanded offerings, a mobile interface and Kindle launch.  Yahoo needs to quit trying to gladiator fight with Google - where it can't win - and identify new markets and solutions where it can.  Yahoo must quit being a hostage to its history, and go do the next big thing! Create some white space in the company to invest in new solutions on the trends!

Of course, this is harder than just giving up and selling the company.  But the potential returns are much, much higher.  Yahoo's predicament is tough, but it's been a management failure that got it here.  If management changes course, and focuses on the future, Yahoo can once again become a market leading company.  Sure would like to see that kind of leadership.  It's how America creates jobs.

Why a Bad CEO is a Company Killer - Sell Hewlett Packard

"You've got to be kidding me" was the line tennis great John McEnroe made famous.  He would yell it at officials when he thought they made a bad decision.  I can't think of a better line to yell at Leo Apotheker after last week's announcements to shut down the tablet/WebOS business, spin-off (or sell) the PC business and buy Autonomy for $10.2B.  Really.  You've got to be kidding me.

HP has suffered mightily from a string of 3 really lousy CEOs.  And, in a real way, they all have the same failing.  They were wedded to their history and old-fashioned business notions, drove the company looking in the rear view mirror and were unable to direct HP along major trends toward future markets where the company could profitably grow! 

Being fair, Mr. Apotheker inherited a bad situation at HP.  His predecessors did a pretty good job of screwing up the company before he arrived.  He's just managing to follow the new HP tradition, and make the company worse.

HP was once an excellent market sensing company that invested in R&D and new product development, creating highly profitable market leading products.  HP was one of the first "Silicon Valley" companies, creating enormous  shareholder value by making and selling equipment (oscilliscopes for example) for the soon-to-explode computer industry.  It was a leader in patent applications, new product launches and being first with products that engineers needed, and wanted.

Then Carly Fiorina decided the smart move in 2001 was to buy Compaq for $25B.  Compaq was getting creamed by Dell, so Carly hoped to merge it with HP's retail PC business and let "scale" create profits.  Only, the PC business had long been a commodity industry with competitors competing on cost, and the profits largely going to Intel and Microsoft!  The "synergistic" profits didn't happen, and Carly got fired.

But she paved the way for HPs downfall.  She was the first to cut R&D and new product development in favor of seeking market share in largely undifferentiated products.  Why file 3,500 patents a year - especially when you were largely becoming a piece-assembly company of other people's technology?  To get the cash for acquisitions, supply chain investments and retail discounts Carly started a whole new tradition of doing less innovation, and spending a lot being a copy-cat.  

But in an information economy, where almost all competitors have market access and can achieve highly efficient supply chains at low cost, there was no profit to the volume Carly sought.  HP became HPQ - but the price paid was an internal shift away from investing in new markets and innovation, and heading straight toward commoditization and volume!  The most valuable liquid in all creation - HP ink - was able to fund a lot of the company's efforts, but it was rapidly becoming the "golden goose" receiving a paltry amount of feed.  And itself entirely off the trend as people kept moving away from printed documents!

Mark Hurd replaced Carly,  And he was willing to go her one better.  If she was willing to reduce R&D and product development - well he was ready to outright slash it!  And all the better, so he could buy other worn out companies with limited profits, declining share and management mis-aligned with market trends - like his 2008 $13.9B acquisition of EDS!  Once a great services company, offshore outsourcing and rabid price competition had driven EDS nearly to the point of bankruptcy.  It had gone through its own cost slashing, and was a break-even company with almost no growth prospects - leading many analysts to pan the acquisition idea.  But Mr. Hurd believed in the old success formula of selling services (gee, it worked 20 years before for IBM, could it work again?) and volume.  He simply believed that if he kept adding revenue and cutting cost, surely somewhere in there he'd find a pony!

And patent applications just kept falling.  By the end of his cost-cutting reign, the once great R&D department at HP was a ghost of its former self.  From 9%+ of revenues on new products, expenditures were down to under 2%! And patent applications had fallen by 2/3rds

Chart Source: AllThingsD.com "Is Innovation Dead at HP?"

The patent decline continued under Mr. Apotheker.  The latest CEO intent on implementing an outdated, industrial success formula.  But wait, he has committed to going even further!  Now, HP will completely evacuate the PC business.  Seems the easy answer is to say that consumer businesses simply aren't profitable (MediaPost.com "Low Margin Consumers Do It Again, This Time to HP") so HP has to shift its business entirely into the B-2-B realm.  Wow, that worked so well for Sun Microsystems.

I guess somebody forgot to tell consumer produccts lacked profits to Apple, Amazon and NetFlix. 

There's no doubt Palm was a dumb acquisition by Mr. Hurd (pay attention Google.)  Palm was a leader in PDAs (personal digital assistants,) at one time having over 80% market share!  Palm was once as prevalent as RIM Blackberries (ahem.)   But Palm did not invest sufficiently in the market shifts to smartphones, and even though it had technology and patents the market shifted away from its "core" and left Palm with outdated technology, products and limited market growth.  By the time HP bought Palm it had lost its user base, its techology lead and its relevancy.  Mr. Hurd's ideas that somehow the technology had value without market relevance was another out-of-date industrial thought. 

The only mistake Mr. Apotheker made regarding Palm was allowing  the Touchpad to go to market at all - he wasted a lot of money and the HP brand by not killing it immediately!

It is pretty clear that the PC business is a waning giant.  The remaining question is whether HP can find a buyer!  As an investor, who would want a huge business that has marginal profits, declining sales, an extraordinarily dim future, expensive and lethargic suppliers and robust competitors rapidly obsoleting the entire technology? Getting out of PCs isn't escaping the "consumer" business, because the consumer business is shifting to smartphones and tablets.  Those who maintain hope for PCs all think it is the B-2-B market that will keep it alive.  Getting out is simply because HP finally realized there just isn't any profit there.

But, is the answer is to beef up the low-profit "services" business, and move into ERP software sales with a third-tier competitor?

I called Apotheker's selection as CEO bad in this blog on 5 October, 2010 (HP and Nokia's Bad CEO Selections).  Because it was clear his history as CEO of SAP was not the right background to turn around HP.  Today ERP (enterprise resource planning) applications like SAP are being seen for the locked-in, monolithic, buraucracy creating, innovation killing systems they really are.  Their intent has always been, and remains, to force companies, functions and employees to replicate previous decisions.  Not to learn and do anything new.  They are designed to create rigidity, and assist cost cutting - and are antithetical to flexibility, market responsiveness and growth.

But following in the new HP tradition, Mr. Apotheker is reshuffling assets - closing the WebOS business, getting rid of all "consumer" businesses, and buying an ERP company!  Imagine that!  The former head of SAP is buying an SAP application! Regardless of what creates value in highly dynamic, global markets Mr. Apotheker is implementing what he knows how to do - operate an ERP company that sells "business solutions" while leaving everything else.  He just can't wait to get into the gladiator battle of pitting HP against SAP, Oracle, J.D. Edwards and the slew of other ERP competitors!  Even if that market is over-supplied by extremely well funded competitors that have massive investments and enormously large installed client bases!

What HP desperately needs is to connect to the evolving marketplace.  Quit looking at the past, and give customers solutions that fit where the market is headed.    Customers aren't moving toward where Apotheker is taking the company. 

All 3 of HP's CEOs have been a testament to just how bad things can go when the CEO is more convinced it is important to do what worked in the past, rather than doing what the market needs.  When the CEO is locked-in to old thinking, old market dynamics and old solutions - rather than fixated on understanding trends, future scenarios and the solutions people want and need bad things happen.

There are a raft of unmet needs in the marketplace.  For a decade HP has ignored them.  Its CEOs have spent their time trying to figure out how to make old solutions work better, faster and cheaper.  And in the process they have built large, but not very profitable businesses that are now uninteresting at best and largely at the precipice of failure.  They have ignored market shifts in favor of doing more of the same. And the value of HP keeps declining - down 50% this year.  For HP to change direction, to increase value, it needs a CEO and leadership team that can understand important trends, fulfill unmet needs and migrate customers to new solutions.  HP needs to rediscover innovation. 

 

 

Are You More Like Rupert Murdoch Than You Think?

Bernie Ebbers (of WorldCom) and Jeff Skilling (of Enron) went to prison.  Less well known is Conrad Black - the CEO of Sun Times Group - who also went to the pokey.  What do they have in common with Rupert Murdoch - besides CEO titles?  The famous claim, "I am not responsible" closely allied with "I've done nothing wrong." While Murdoch hasn't been charged with crimes, or come close to jail (yet,) there is no doubt people at News Corp have been charged, and some will go to jail.  And there is public outcry Murdoch be fired.

Investors should take note; three bankruptcies killed 2 of the organizations the ex-cons led and investors were wiped out at Sun Times which barely remains in business. What will happen at News Corp? Given the commonalities between the 4 leaders, I don't think I'd want to be a News Corp. stockholder, employee or supplier right now.

How in the world could something like this happen?

Like the infamous trio, Rupert Murdoch was, and is, a leader who defined the success formula of his company.  As time passed, the growing organization became adroit at implementing the success formula, operating better, faster and cheaper.  Loyal managers, who identified with, and implemented intensely, the success formula were rewarded.  Those who asked questions were let go.  Acquisitions were forced to conform to the success formula (such as MySpace) even if such conformance created a gap between the business and market needs.  Business failure was not nearly as bad as operating outside the success formula. Failure could be forgiven - but better yet was finding a creative way to make things look successful.

Supporting the company's success formula - its identity, cultural norms and operating methods - using all forms of ingenuity became the definition of success in these companies.  This ingenuity was unbridled, even rewarded! Even when it came to skirting the edge of - or even breaking - the law.  Cleverly using outsiders to do "dirty work" was an ingenious way to create plausible deniability. Financial machinations were not considered a problem if there was any way to explain changes.  Violating accounting conventions not really an issue if done in the pursuit of shoring up reported results.  Moving money wherever necessary to avoid taxes, or fines, and pay off executives or their friends, not really a big deal if it helped the company implement its success formula.  Any behavior that reinforced the success formula, as the leader expressed it, made employees and contractors successful. 

Do the ends justify the means?  Of course! As long as the results appear good, and the leader is taking home a whopping amount of cash, everything appears "A-OK." 

Is this because these are crooks?  Far from it.  Rather, they are dedicated, hard working, industrious, smart, inventive managers who have been given a clear mission.  To make the success formula work.  Each small step down the ethical gangplank was a very small increment - and everyone believed they operated far from the end.  If they got away with something yesterday, then why not expect to get away with a little more today?  What are ethics anyway?  Relative, changeable, difficult to define.  Whereas fulfilling the success formula creates clear, measurable outcomes!

What is the News Corp's Board of Directors position?  The New York Times headlined "Murdoch's Board Stands By as Scandal Widens."  Mr. Murdoch, like any good leader implementing a success formula,  made sure the Board, as well as the executives and managers, were as dedicated to the success formula as he.  Through that lens there are no difficult questions facing the Board. Everything was done to defend and extend the success formula.  Mr. Murdoch and his team have done nothing wrong - except perhaps a zealous pursuit of implementation.  What's wrong with that?  Why should the Board object?

Could this happen to you, and your organization?  It may already be happening.

Answer this option, what's more important to you and your company:

1. Focusing on and identifying market trends, and adapting your strategy, tactics, products, services and processes to align with emerging future trends, or
2. Focusing on execution.  Setting goals, holding people to metrics and making sure implementation remains true to the company's history, strengths and core capabilities, customers and markets? Rewarding those who meet metrics, and firing those who don't?

If it's the latter, it's an easy slide into Murdoch's very uncomfortable public seat.  Very few will end up with an Enron Sized Disaster, as BNET.com headlined.  But failure is likely.  Any time execution is more important than questioning, implementation is more important than listening and conforming to historical norms is more important than actual business results you are chasing the select group of leaders exemplified today by Mr. Murdoch.

Here are 10 questions to ask if you want to know how at risk you just might be.  If even a couple of these ring "yes," you could be confidently, but errantly,  thinking everything is OK :

1. Is loyalty more important than business results?  Do you have people working for you that don't do that good a job, but do exactly what you want so you keep them?
2. Do you hold certain aspects of your business as being beyond challenge - such as technology base, meeting key metrics, supporting historical distributors (or customers) or operating according to specified "rules?"
3. Do you ask employees to operate according to norms before asking if they have a better idea?
4. Does HR tell employees how to do things rather than asking employees what they need to succeed?
5. Do employee and manager reviews have a section for asking how well they "fit" into the organization?  Are people pushed out that don't "fit?"
6. Are "trusted lieutenants" moved into powerful positions over talented managers just because leaders aren't comfortable with the newer people? 
7. Are certain functions (finance, HR, IT) expected (perhaps enforcers?) to make sure everyone operates according to the historical status quo?
8. Is management meeting time spent predominantly on internal, versus external, issues?  Talking about "how to do it" rather than "what should we do?"
9. Is your advisory board, or Board of Directors, filled with your friends and co-workers that agree with your success formula and don't seek change?
10. Do your customers, employees, or suppliers learn that demonstrating dissatisfaction leads to a bad (or ended) relationship?