Why Small Business Leaders are Missing the Digital/Mobile Revolution

It is an unfortunate fact that small businesses fail at a higher rate than large businesses.  While we've come to accept this, it somewhat flies in the face of logic.  After all, small businesses are run by owners who can achieve entrepreneurial returns rather than managerial bonuses, so incentive is high.  Conventional wisdom is that small businesses have fewer, and closer relationships to customers (think Ace Hardware franchisees vs. Home Depot.)  And lacking layers of overhead and embedded management they should be more nimble.

Yet, they fail.  From as high as 9 out of 10 for restaurants to 4 out of 10 in more asset intensive business-to-business ventures.  That is far higher than large companies.

Why?  Despite conventional wisdom most small businesses are run by leaders committed to a single, narrow success formula.  Most are wedded to their core ideology, based on personal history, and unwilling to adapt until the business completely fails.  Most reject new technologies and other emerging innovations as long as possible, trying to conserve  cash and wait for "more proof" change will pay off.  Additionally, most spend little time investing time, or money, in innovation at all as they pour everything into defending and extending their historical business approach. 

Take for example the major trend to digital marketing.  Everyone knows that digital is the only growing ad market, while print is fast dying:
Chart republished with permission of Jay Yarow, Business Insider 3/19/2013

Yet AdWeek reported a new Boston Consulting Group study reveals that a mere 3% of small business ad dollars are in digital!

Digital marketing is one of the few places where ads can be purchased for as little as $100.  Digital ads are targeted at users based upon their searches and pages viewed, thus delivered directly to likely buyers.  And digital ads consistently demonstrate the highest rate of return.  That's why it's growing at over 20%/year!

Yet, small businesses continue to put most of their money into local newspapers and direct mail circulars.  The least targeted of all advertising, and increasingly the least read!  While print ad spending has declined over 80% the last few years, to 1950 levels (adjusted for inflation,) smarter businesses have abandoned the media.  At large companies in 2012 38% of advertising is on digital, second only to TV's 42% - and rapidly moving into first place!

A second major trend is the move to mobile and app usage.  In the last 2 years mobile users have grown and shown a distinct preference for apps over mobile web sites.  App use is growing while mobile web sites have stalled:
Chart republished with permission of Alex Cocotas, Business Insider 3/20/13

Even though there are over 1million apps available for iPhone and Android users, the vast majority of small businesses have no apps aligned with their business and customers.  Most small businesses, late to the game in digital marketing, are content to try and add mobile capability to their already existing web site - hoping that it will be sufficient for future growth. Meanwhile, customers are going directly for apps in accelerating numbers every month!
Chart republished with permission of Alex Cocotas, Business Insider 1/8/13

Rather than act like market leaders, using customer intimacy and nimbleness to jump ahead of lumbering giants, small business leaders complain they are unsure of app value - and keep spending money on historical artifacts (like their web site) rather than invest in higher return innovation opportunities.  Many small businesses are spending $20k+/year on printed brochures, coupons and newspaper or magazine PR when a like amount spent on an app could connect them much more tightly with customers, add higher value and expand their base more quickly and more profitably!

The trend to digital marketing - including the explosive growth in mobile app use - is proven.  And due to very low relative up-front cost, as well as low variable cost, both trends are a wonderful boon for small businesses ready to adopt, adapt and grow.  But, unfortunately, the vast majoritiy of small business leaders are behaving oppositely!  They remain wedded to outdated marketing and customer relationship processes that are too expensive, with lower yield! 

The opportunity is greater now than during most times for smaller competitors to be disruptive.  They can seize new innovations faster, and leverage them before larger competitors.  But as long as they cling to old practices and processes, and beliefs about historical markets, they will continue to fail, smashed under the heal of slower moving, bureaucratic large companies who have larger resources when they do finally take action.

 

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More than One-Quarter of SMB Websites Cannot Be Found in Online...

Small Businesses are Missing from Digital Ads Marketplace

Sell Microsoft NOW - Game over, Ballmer loses

Microsoft needed a great Christmas season.  After years of product stagnation, and a big market shift toward mobile devices from PCs, Microsoft's future relied on the company seeing customers demonstrate they were ready to jump in heavily for Windows8 products - including the new Surface tablet.

But that did not happen. 

With the data now coming it, it is clear the market movement away from Microsoft products, toward Apple and Android products, has not changed.  On Christmas eve, as people turned on their new devices and launched their first tweet, Surface came in dead last - a mere 2% compared to the number of people tweeting from iPads (Kindle was second, Android third.)  Looking at more traditional units shipped information, UBS analysts reported Surface sales were 5% of iPads shipped.  And the usability reviews continue to run highly negative for Surface and Win8.

This inability to make a big splash, and mount a serious attack on Apple/Android domination, is horrific for Microsoft primarily because we now know that traditional PC sales are well into decline.  Despite the big Win8 launch and promotion, holiday PC sales declined over 3% compared to 2011 as journalists reported customers found "no compelling reason to upgrade."  Ouch!

Looking deeper, for the 4th quarter PC sales declined by almost 5% according to Gartner research, and by almost 6.5% according to IDC.  Both groups no longer expect a rebound in PC shipments, as they believe homes will no longer have more than 1 PC due to the mobile device penetration  - the market where Surface and Win8 phones have failed to make any significant impact or move beyond a tiny market share.  Users increasingly see the complexity of shifting to Win8 as not worth the effort; and if a switch is to be made consumer and businesses now favor iOS and Android.

Microsoft's monopoly over personal computing has evaporated.  From 95% market domination in 2005 share has fallen to just 20% in 2012 (IDC, Goldman Sachs.)  Comparing devices, in 2005 there were 55 Windows devices sold for every Apple device; today explosive Apple sales has lowered that multiple to a mere 2! (Asymco).  Universally the desire to upgrade Microsoft products has simply disappeared, as XP still has 40% of the Windows market - and even Vista at 5.7% has more users than Win8 which has only achieved a 1.75% Windows market share despite the long wait and launch hoopla. And with all future market growth coming in tablets, which are expected to more than double unit volume sales by 2016, Microsoft is simply not in the game.

These trends mean nothing short of the ruin of Microsoft.  Microsoft makes more than 75% of its profits from Windows and Office.  Less than 25% comes from its vaunted servers and tools.  And Microsoft makes nothing from its xBox/Kinect entertainment division, while losing vast sums on-line (negative $350M-$750M/quarter).  No matter how much anyone likes the non-Windows Microsoft products, without the historical Windows/Office sales and profits Microsoft is not sustainable.

So what can we expect at Microsoft:

1. Ballmer has committed to fight to the death in his effort to defend & extend Windows.  So expect death as resources are poured into the unwinnable battle to convert users from iOS and Android.
2. As resources are poured out of the company in the Quixotic effort to prolong Windows/Office, any hope of future dividends falls to zero.
3. Expect enormous layoffs over the next 3 years.  Something like 50-60%, or more, of employees will go away.
4. Expect closure of the long-suffering on-line division in order to conserve resources.
5. The entertainment division will be spun off, sold to someone like Sony or even Barnes & Noble, or dramatically reduced in size.  Unable to make a profit it will increasingly be seen as a distraction to the battle for saving Windows - and Microsoft leadership has long shown they have no idea how to profitably grow this business unit.
6. As more and more of the market shifts to competitive cloud businesses Apple, Amazon and others will grow significantly.  Microsoft, losing its user base, will demonstrate its inability to build a new business in the cloud, mimicking its historical experiences with Zune (mobile music) and Microsoft mobile phones.  Microsoft server and tool sales will suffer, creating a much more difficult profit environment for the sole remaining profitable division.

Missing the market shift to mobile has already forever tarnished the Microsoft brand.  No longer is Microsoft seen as a leader, and instead it is rapidly losing market relevancy as people look to Apple, Google, Amazon, Samsung, Facebook and others for leadership.   The declining sales, and lack of customer interest will lead to a tailspin at Microsoft not unlike what happened to RIM.  Cash will be burned in what Microsoft will consider an "epic" struggle to save the "core of the company." 

But failure is already inevitable.  At this stage, not even a new CEO can save Microsoft.  Steve Ballmer played "Bet the Company" on the long-delayed release of Win8, losing the chance to refocus Microsoft on other growing divisions with greater chance of success.  Unfortunately, the other players already had enough chips to simply bid Microsoft out of the mobile game - and Microsoft's ante is now long gone - without holding a hand even remotely able to turn around the product situation.

Game over. Ballmer loses. And if you keep your money invested in Microsoft it will disappear along with the company.   

Related articles

Mobile Overtakes Desktops in 2013: Microsoft Be Warned

The iPad and the Surface: a tale of two tablets

Microsoft Sold 1 Million Surface Tablets During 2012's Q4

Why the Top 20 R&D spenders waste their money - lessons from Microsoft & GM

Many people equate spending on R&D with investing in innovation.  The logic goes that R&D spending is lab spending, and out of labs come innovations.  Hence, those that spend a lot on R&D are innovative.

That is faulty logic.

This chart shows R&D spending from the top 20 companies in 2011:

Chart reproduced with permission of Business Insider

Think of your own list of companies that are providing innovations which change your work, or life. Would you include Apple? Amazon? Facebook? Google? Genentech?  (Here's the link to Fast Company's 50 most innovative for 2012).  Note that none of these companies appear on the list of top R&D spenders. 

On the other hand, as you look at the big spender list some things might be apparent:

• Microsoft is #5, spending $9B and nearly 13% of revenue.  Yet, for this money in 2012 the world received updates to their aging operating system and office automation software.  Both of which failed to register favorable reviews by industry gurus, and are considered far from innovative.  And Nokia, which is so floundering some consider it a likely bankruptcy candidate soon, is #7! Despite spending nearly $8B on R&D Nokia is now completely reliant on Microsoft if it is to even survive.
• Autos make up a big part of the group.  Toyota, GM, Volkswagen, Honda and Daimler are all on the list, spending a whopping $36B.  Yet, even though they give us improvements nobody considers them (especially GM)  very innovative.  That award would go to little Tesla Motors.  Or maybe Tata Motors in India.
• Pharmaceuticals make up the dominant industry.  Novartis, Roche, Pfizer, Merck, Johnson & Johnson, Sanofi, GlaxoSmithKline and AstraZeneca are all here - spending a cumulative $54B!  Yet, they have all failed to give the world any incredible new drugs, all have profit struggles, and the industry is rife with discussions about weak product pipelines. The future of modern medicine increasingly is shifting to genetic solutions, biologics and more specific alternatives to the historical drug regimes from these aging pharma R&D programs.

Do you see the obvious pattern?  Most big R&D spenders are not really seeking innovations.  They are spending money on historical programs, following historical patterns and trying to defend and extend the historical business.  In other words, they are spending vast sums attempting to sustain (or recapture) historical success.  And, as the list shows, largely doing a pretty lousy job of it. 

If you were given $10,000 to invest would you select these top 20 R&D spenders - or would you look for other, more innovative companies.  From a profitability, rate of return and trend perspective, most of these companies look weak - or downright horrible.

Innovators don't focus on what they spend, but where they spend it.

The companies most known for innovation don't keep spending money year after year on their old business.  Instead of digging deeper into what they already know, they invest laterally.  They spend money putting the pieces together in new, unique ways.  They try to find new solutions to old problems, using new - even fringe - technologies.  They try to develop disruptive solutions that actually change the marketplace, rather than trying to make something that already exists better, faster or cheaper.

Lots of people like to think there is "scale" in research.  Bigger is better.  What's more important, for investors, is that there is "diminishing returns."  The more you research an area the more you have to spend to find anything new.  The costs keep escalating, as the gains shrink.  After investing for a while, continuing to research an area is not a good investment (although it may be very intellectually interesting.) 

Most of the companies on this list would be smarter to scrap their existing R&D programs, cut the budget in half (at least,) and then invest it somewhere very different.  Instead of looking deeper, they need to look wider - broader.  They need to investigate alternative solutions, rather than more of the same.  They need to be putting more money on fringe opportunities, and a lot less into the core.

Until they do, few on this list are very good investment bets.  You'll do better investing like, and in, the real innovators.

 

Beyond the Debate - Common Economic Misconceptions vs. Reality

There was a time, before primaries, when each party's platform was really important.  Voters didn't pick a candidate, the party did.  Then voters read what policies the party planned to implement should it control the executive branch, and possibly a legislative majority. It was the policies that drew the most attention - not the candidates. 

Digging deeper than shortened debate-level headlines, there is a considerable difference in the recommended economic policies of the two dominant parties.  The common viewpoint is that Republicans are good for business, which is good for the economy.  Republican policies - and the more Adam Smith, invisible hand, limited regulation, lassaiz faire the better - are expected to create a robust, healthy, growing economy.  Meanwhile, the common view of Democrat policies is that they too heavily favor regulation and higher taxes which are economy killers.

Right?

Well, for those who feel this way it may be time to review the last 80 years of economic history, as Bob Deitrick and Lew Godlfarb have done in a great, easy to read book titled "Bulls, Bears and the Ballot Box" (available at Amazon.com) Their heavily researched, and footnoted, text brings forth some serious inconsistency between the common viewpoint of America's dominant parties, and the reality of how America has performed since the start of the Great Depression. 

Gary Hart recently wrote in The Huffington Post,

"Reason and facts are sacrificed to opinion and myth. Demonstrable falsehoods are circulated and recycled as fact. Narrow minded opinion refuses to be subjected to thought and analysis. Too many now subject events to a prefabricated set of interpretations, usually provided by a biased media source. The myth is more comfortable than the often difficult search for truth."

Senator Daniel Patrick Moynihan is attributed with saying "everyone is entitled to his own opinion, but not his own facts."  So even though we may hold very strong opinions about parties and politics, it is worthwhile to look at facts.  This book's authors are to be commended for spending several years, and many thousands of student research assistant man-days, sorting out economic performance from the common viewpoint - and the broad theories upon which much policy has been based.  Their compendium of economic facts is the most illuminating document on economic performance during different administrations, and policies, than anything previously published.

Startling Results

Chart reproduced by permission of authors

The authors looked at a range of economic metrics including inflation, unemployment, growth in corporate profits, performance of the stock market, change in household income, growth in the economy, months in recession and others.  To their surprise (I had the opportunity to interview Mr. Goldfarb) they discovered that laissez faire policies had far less benefits than expected, and in fact produced almost universal negative economic outcomes for the nation!

From this book loaded with statistical fact tidbits and comparative charts, here are just a few that caused me to realize that my long-term love affair with Milton Friedman's theories and recommended policies in "Free to Choose" were grounded in a theory I long admired, but that simply have proven to be myths when applied!

• Personal disposable income has grown nearly 6 times more under Democratic presidents
• Gross Domestic Product (GDP) has grown 7 times more under Democratic presidents
• Corporate profits have grown over 16% more per year under Democratic presidents (they actually declined under Republicans by an average of 4.53%/year)
• Average annual compound return on the stock market has been 18 times greater under Democratic presidents (If you invested $100k for 40 years of Republican administrations you had $126k at the end, if you invested $100k for 40 years of Democrat administrations you had $3.9M at the end)
• Republican presidents added 2.5 times more to the national debt than Democratic presidents
• The two times the economy steered into the ditch (Great Depression and Great Recession) were during Republican, laissez faire administrations

The "how and why" of these results is explained in the book.  Not the least of which revolves around the velocity of money and how that changes as wealth moves between different economic classes. 

The book is great at looking at today's economic myths, and using long forgotten facts to set the record straight.  For example, in explaining President Reagan's great economic recovery of the 1980s it is often attributed to the stimulative impact of major tax cuts.  But in reality the 1981 tax cuts backfired, leading to massive deficits and a weaker economy with a double dip recession as unemployment soared.  So in 1982 Reagan signed (TEFRA) the largest peacetime tax increase in our nation's history.  In his tenure Reagan signed 9 tax bills - 7 of which raised taxes!

The authors do not come down on the side of any specific economic policies.  Rather, they make a strong case that a prosperous economy occurs when a president is adaptable to the needs of the country at that time.  Adjusting to the results, rather than staunchly sticking to economic theory.  And that economic policy does not stand alone, but must be integrated into the needs of society.  As Dwight Eisenhower said in a New Yorker interview

"I despise people who go to the gutter on either the right or the left and hurl rocks at those in the center."

The book covers only Presidents Hoover through W. Bush.  But as we near this election I asked Mr. Goldfarb his view on the incumbent Democrat's first 4 years.  His response:

• "Obama at this time would rank on par with Reagan
• Corporate profits have risen under Obama more than any other president
• The stock market has soared 14.72%/year under Obama, second only to Clinton -- which should be a big deal since 2/3 of people (not just the upper class) have a 401K or similar investment vehicle dependent upon corporate profits and stock market performance"

As to the challenging Republican party's platform, Mr. Goldfarb commented:

• "The platform is the inverse of what has actually worked to stimulate economic growth
• The recommended platform tax policy is bad for velocity, and will stagnate the economy
• Repealing the Affordable Care Act (Obamacare) will have a negative economic impact because it will force non-wealthy individuals to spend a higher percentage of income on health care rather than expansionary products and services
• Economic disaster happens in America when wealth is concentrated at the top, and we are at an all time high for wealth concentration.  There is nothing in the platform which addresses this issue."

There are a lot of reasons to select the party for which you wish to vote.  There is more to America than the economy.  But, if you think like the Democrats did in 1992 and "it's about the economy" then you owe it to yourself to read this book.  It may challenge your conventional wisdom as it presents - like Joe Friday said - "just the facts."

 

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 Jamie Dimon Told Us To Not Own JPMorganChase (or any other "money center" bank)

Most investors shouldn't be.  Given demands of work and family, there is almost no time to study companies, markets and select investments.  So smaller investors rely on 3rd parties, who rarely perform better than the most common indeces, such as the S&P 500 or Dow Jones Industrial Average.  For that reason, few small investors make more than 5-10% per year on their money, and since 2000 many would beg for that much return! 

Most investors would make more money with their available time by studying prices on the web and simply buying bargains where they could save more than 10% on their purchase. The satisfaction of a well priced computer, piece of furniture, nice suit or pair of shoes is far more gratifying than earning 2-4% on your investment, while worrying about whether you might LOSE 10-20-30%, or more!

And that's why you don't want to own JPMorganChase (JPMC.)  Last week's earning's call was a remarkable example of boredom.  Yes, Chairman and CEO Jamie Dimon and his team spent considerable time explaining how the London investment office lost $6B, and why they felt it was an "accident" that would not happen again.  But the truth is that this $6B "mistake" wasn't really all that big a deal, compared to the  $100B in mortgage and credit card losses since the financial crisis started!

Perhaps Mr. Dimon was right, given JPMC's size, that the whole experience was mostly "a tempest in a teapot."  Throughout the call the CEO kept emphasizing that JPMC was "going to go about the business of deposits and lending that is the 'core' business for the bank." Although known for outspokenness, Mr. Dimon sounded like any other bank CEO saying "things happen, but trust us. We really are conservative." 

So if a $6B surprise loss isn't that big a deal, what is important to shareholders of JPMC? 

How about the unlikelihood of JPMC earning any sort of decent return for the next decade, or two? 

The world has changed.  But this call, and the mountain of powerpoint slides and documents put out with it, reiterated just how little JPMC (and most of its competition, honestly) has not.  In this global world of network relationships, digital transactions, struggling home values and upside down mortgages, and very slow economic growth in developed countries, JPMC has no idea what "the next big thing" will be that could make its investors a 20-30% rate of return. 

Yes, in many traditional product lines return-on-equity is in the upper teens or even over 20%.  But, then there are losses in others.  So lots of trade-offs.  Ho-hum.  To seek growth JPMC is opening more branches (ho-hum). And trying to sign up more credit card customers (ho-hum) and make more smalll-business loans (ho-hum) while running ads and hoping to accumulate more deposit acounts (ho-hum.)  And they have cut compensation and other non-interest costs 12% (ho-hum.)

You could have listened to this call in the 1980s, or 1990s, and it would have sounded the same.

Only the world isn't at all the same.

And Mr. Dimon, and his team, knew this.  That's why JPMC created the Chief Investment Office (CIO) in London, and the synthetic credit portfolio that has caused such a stir.  The old success formula, despite the bailout which created these highly concentrated, huge banks, simply doesn't have much growth - in revenues or profits.  So to jack up returns the bank created an extremely complex business unit that made bets - big bets - sometimes HUGE bets - on interest rates and securities it did not own. 

These bets allowed small sums (like, say, $1B) to potentially earn multiples on the investment.   Or, lose multiples.  And the bets were all based on forecasts about future events - using a computer model created by the CIO's office.  As Mr. Dimon's team eloquently pointed out, this model became very complicated, and as reality varied from forecast nobody at JPMC was all that clear why the losses started to happen.  As they kept using the model, losses mounted.  Oops.

But now, we are to be very assured that JPMC's leaders are paying a lot more attention to the model, and thus JPMC isn't going to have such variations between forecast and reality. So this event won't happen again.

Right. 

If JPMC didn't need to use the highly complicated world of derivatives to potentially jack up its returns it would have closed the CIO before these losses happened.  Now they claim to have closed the synthetic trading portfolio, but not the CIO.  Think about that, if you had a unit operated by one of your very top leaders that "made a mistake" and lost $6B wouldn't you closing it?  You would only keep it open if you felt like you had to.  

Anybody out there remember the failure of Long Term Capital Management (LTCM?)  Certainly Mr. Dimon does. In the 1990s LTCM was the most famous "hedge fund" of its day.  The "model" used at Long Term Capital supposedly had zero risk, but extremely high returns.  Until a $4B loss created by the default of Russion bonds wiped out all the bank's reserves and capital.

Let's see, what's the big news these days?  Oh yeah, possible bond defaults in Greece, Portugal, Spain, Ireland......

The recent "crisis" at JPMC reflects a company locked-in to an antiquated business model which has no growth and declining returns.  In order to prop up returns the bank took on almost unquantifiable additional risk, through its hedging operation. Even though hedging long had a risky history, and some spectacular failures. 

But this was the only way JPMC knew how to boost returns, so it did it anyway. In an almost off-hand comment Mr. Dimon remarked a capable executive fired CIO Ina Drew was.  And that she was credited with "saving the bank" by some of Mr. Dimon's fellow executives. Most likely her money-losing, high risk efforts were another attempt by Ms. Drew to "save the bank's returns" and thus why she was lauded even after losing $6B.

But no more.  Now the bank is just going to slog it out being the boring bank it used to be.  Amidst all the slides and documents there was NO explanation of what JPMC was going to do next to create growth.  So JPMC is still susceptible to crisis - from debt defaults, Euro crisis, no growth economies, etc. - but shows little, if any, upside growth.

And that's why you don't want to invest in JPMC.  For the last 3 years the stock has swung wildly.  Big swings are loved by betting stock traders.  But quarter to quarter vicissitudes are not helpful for investors who need growth so they can generate a 50% gain in 5 years when they need the money for junior's college tuition. 

For that matter, I can't think of any "money center" bank worth investing. All of them have the same problem. After being "saved" they are less likely to behave differently than ever before.   At JPMC leadership took bets in derivatives trying to jack up returns.  At Barclay's Bank it appears leadership manipulated a key lending rate (LIBOR.)  All actions typical of executives that are stuck in a lousy market, that is shifting away from them, and feeling it necessary to push the envelope in an effort to squeek out higher returns.

If you feel compelled to invest in financial services, look outside the traditional institutions.  Consider Virgin, where Virgin Money is behaving uniquely - and could create incredible growth with very high returns.  In a business no "traditional" bank is pursuing.  Or Discover Financial Services which is using a unique on-line approach to deposits and lending.  Although these are nothing like JPMC, they offer opportunity for growth with probably less risk of another future crisis.

 

 

 

Why Tesla is Right, and GM and Ford are Not

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Investors are starting to "get it."

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

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

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

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

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

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

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

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

CIO's - will you be relevant in 2017?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But it did.

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

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

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

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

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

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

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

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

So what went wrong for Sony?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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