The End of Management – Wall Street Journal

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Summary:

• The Wall Street Journal is calling for a dramatic shift in how business is managed
• Most corporations are designed for the industrial age, and thus not well suited for today’s competition
• Change is happening more quickly, and organizations must become more agile
• CEOs today are concerned about dealing with rapid, chronic change – and obsolescence
• Resource deployment, from financial to people, must be tied more closely to market needs and not defending historical strengths

A FANTASTIC article in the Wall Street Journal entitled “The End of Management” by Alan Murray, If you have time, I encourage you to click the link and read the entire thing.  Below are some insightful quotes from the article I hope you enjoy as much as I did:

• Corporations, whose leaders portray themselves as champions of the free
  market, were in fact created to circumvent that market. They were an
  answer to the challenge of organizing thousands of people in different
  places and with different skills to perform large and complex tasks,
  like building automobiles or providing nationwide telephone service.
• the managed corporation—an answer to the central problem of the industrial age.
• Corporations are bureaucracies and managers are bureaucrats. Their
  fundamental tendency is toward self-perpetuation… They were designed and tasked, not with
  reinforcing market forces, but with supplanting and even resisting the
  market.
• it took radio 38 years and television 13 years to reach audiences of 50
  million people, while it took the Internet only four years, the iPod
  three years and Facebook two years to do the same.
• It’s no surprise that
  fewer than 100 of the companies in the S&P 500 stock index were
  around when that index started in 1957.
• When I asked members of The Wall Street Journal’s CEO Council… to name the most influential business book they had read,
  many cited Clayton Christensen’s “The Innovator’s Dilemma.” That book
  documents how market-leading companies have missed game-changing
  transformations in industry after industry
• They allocated capital to the innovations that promised the largest
  returns. And in the process, they missed disruptive innovations that
  opened up new customers and markets for lower-margin, blockbuster
  products.
• the ability of human beings on different continents and with vastly
  different skills and interests to work together and coordinate complex
  tasks has taken quantum leaps. Complicated enterprises, like maintaining
  Wikipedia or building a Linux operating system, now can be accomplished
  with little or no corporate management structure at all.
• the trends here are big and undeniable. Change is rapidly accelerating.
  Transaction costs are rapidly diminishing. And as a result, everything
  we learned in the last century about managing large corporations is in
  need of a serious rethink. We have both a need [for]… a new science of
  management, that can deal with the breakneck realities of 21st century
  change.
• The new model will have to be more like the marketplace, and less like
  corporations of the past. It will need to be flexible, agile, able to
  quickly adjust to market developments, and ruthless in reallocating
  resources to new opportunities.
• big companies… failed, not…
  because they didn’t see the coming innovations, but because they failed
  to adequately invest in those innovations. To avoid this problem, the
  people who control large pools of capital need to act more like venture
  capitalists, and less like corporate finance departments… make lots of bets, not just a few big ones, and… be willing
  to cut their losses.
• have to push power and decision-making down the organization as much as
  possible, rather than leave it concentrated at the top. Traditional
  bureaucratic structures will have to be replaced with something more
  like ad-hoc teams of peers, who come together to tackle individual
  projects, and then disband
• New mechanisms will have to be created for harnessing the “wisdom of
  crowds.” Feedback loops will need to be built that allow products and
  services to constantly evolve in response to new information. Change,
  innovation, adaptability, all have to become orders of the day.

Well said.  Traditional management best practices were designed for the industrial age.  For bringing people together to efficiently build planes, trains and automobiles.  This is now the information age.  Organizations must be more agile, more flexible, and tightly aligned with market needs – while eschewing focus on “core” capabilities. 

Companies must understand Lock-in, and how to manage it.  Instead of planning for yesterday to continue, we must develop future scenarios and prepare for different likely outcomes.  We have to understand competitors, and how quickly they can move to rob us of sales and profits.  We have to be willing to disrupt our patterns of behavior, and our markets, in order to drive for higher value creation.  And we must understand that constantly creating and implementing White Space teams that are focused on new opportunities is a key to long-term success.

With an endorsement for change from nothing less than the stodgy Wall Street Journal, perhaps more leaders and managers will begin moving forward, implementing The Phoenix Principle, so they can recapture a growth agenda and rebuild profitability.

Start Early! Waiting is Expensive – Amazon v. Microsoft

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Summary:

• We like to think we can compete effectively by waiting on others to show us the market direction
• You cannot make high rates of return with a “fast follower” strategy
• Companies that constantly take innovations to market grow longer, and make higher rates of return
• White Space allows you to learn, grow and be smart about when to get out while costs are low

“I want to be a fast follower.  Let somebody else carry the cost of learning what the market wants and what solutions work.  I plan to come in fast behind the leader and make more money by avoiding the investment.”  Have you ever heard someone talk this way?  It sounds so appealing.  Only problem is – it very rarely works!  Fast followers might gain share sometimes, but universally they have terrible margins.  Their sales come at an enormous investment cost.

Those who enter new markets early actually gain a lot, for little cost.  Take for example Amazon.com’s early entry into electronic publishing with Kindle.  Entering early gave Amazon a huge advantage.  Amazon may have appeared to be floundering, potentially “wasting” resources, but it was learning how the technology of e-Ink worked, how costs could be driven down and what users demanded in a solution.  Every quarter Amazon was learning how to find new uses for the Kindle, making it more viable, finding new customers, encouraging repeat purchases and growing.  Now Mediapost.com headlines “Review: New Kindle Kicks (Even Apple’s) B*tt.”

Now there are a raft of “fast followers” trying to catch the Kindle in the eReader market.  But the Kindle is far lighter, easier to use, with greater functionality and available at one of the market’s lowest prices.  While the cost of entry was low, Amazon learned immensely.  That knowledge is not repeatable by companies trying to now play “catch up” without spending multiples of what Amazon spent.  Amazon is so far in front of other eReaders that it’s competition is the vastly more sophisticated (and expensive) mobile devices from Apple (iPhone and iPad).  By entering early, Amazon has lower cost, and considerably more/better market knowledge, than later entrants.

We see this very clearly in Microsoft’s smart phone approach.  Microsoft got far behind in smart phones, losing over 2/3 its market share, as it focused on Windows 7 and Office 2010 the last 3 years while Resarch in Motion (RIM) Apple and Google pioneered the market.  Now the 3 leaders have millions of units in the market, low price point establishment, and between them somewhere between 400,000 and 500,000 mobile apps available. 

As reported in Mediapost.com “Microsoft Gets Serious with Windows 7 Phone” entering now is VERY expensive for Microsoft.  Microsoft spent almost $1billion on Kin, which it dropped after only a few months because the product was seriously unable to compete.  So now Microsoft is expecting to spend $500million on launch costs for a Windows 7 mobile operating system.  But it faces a daunting challenge, what with 350,000 or so iPhone apps in existence, and Google giving Android away for free (as well as sporting some 100,000 apps itself). 

The cost of entry, ignoring Microsoft’s technology development cost, to get the mindshare of developers for app development (so Windows 7 mobile doesn’t slip into the Palm or Blackberry problem of too few apps to be interesting) as well as minds of potential buyers will more likely cost well over $1B – just for communications!!  Microsoft now has to take share away from the market leaders – a very expensive proposition!  Like XBox marketing, these exorbitant marketing costs could well go on for several years.  XBox has had only 1 quarter near break-even, all others showing massive losses.  The same is almost guaranteed for the Windows 7 phone.  And it’s entering so late that it may never, even with all that money being spent, catch the two leaders!  Who are the new users that will come along, and what is Microsoft uniquely offering?  It’s expensive to buy mind and market share.

Clearly Apple and Android entered the smart phone market at vastly lower cost, and have developed what are already profitable businesses.  Microsoft will lose money, possibly for years, and may still fail – largely because it focused on its core products and chose to undertake a “fast follower” strategy in the high growth smart phone business.

We like to believe things that reinforce our behaviors.  We like to think that tortoises can outrun hares.  But that only happens when hares make foolish decisions.  Rarely in business are the early entrants foolish.  Most learn – a lot – at low cost.  They figure out where the early customers are with unmet needs, and how to fulfill those needs.  They learn how to identify ways to grow the business, manage costs and earn a profit.  And they learn at a much lower cost than late followers.  They capture mind and market share, and work hard to grow the business with new customers keeping them profitable and maintaining share.

We want to think that innovators bear a high risk.  But it’s simply not true.  Innovators take advantage of market learning to create revenues and profits at lower cost.  Companies that keep White Space projects flourishing, entering new markets generating growth, earn higher rates of return longer than any other strategy.  Just look at Cisco, Nike, Virgin, J&J and GE (until very recently).  The smart money gets into the game early, developing a winning approach — or getting out before the costs get too high!

Shift Happens – Fast – telephony

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Summary:

• Trends happen much faster than we expect
• Old solutions disappear much faster than we anticipate
• Early adopters are big winners, suppliers who expect markets to last longer are killed in end-stage price wars
• We can anticipate the failure of land line phones in just a few years (as declining demand makes infrastructure maintenance too costly)
• There are a lot of other changes coming very quickly, more quickly than many of us anticipate – putting those who are late to change at risk of survival

How long do you think you’ll keep a land-line based telephone?  From the looks of things, it may be only another year or two.  They may be as popular as an old-fashioned printing press in just 5 years.

Source:  Silicon Alley Insider from BusinessInsider.com

As the chart shows, already about a third of Americans have discontinued their land lines.  And, we can see the trend is accelerating.  This doesn’t count people that have one, but have quit using it.  From about half of a percent dropping their line each quarter early in 2007, by 2009 the trend had increased to 1.2 to 1.5 percent dropping their land lines quarterly.  And that’s normal – trends accelerate – much faster than incumbent technology suppliers predict.

Mobile phones started out with limited use.  They were big, and had short battery life.  It was sketchy if transmission quality would be good enough to hear or talk.  They were expensive to use, and had limited service areas.  In the early days, only people who had a big need used them.  It took a few years before adoption grew to where most people had one.  But then, in the last 5 years, it has become clear that almost everyone has one.  Even the old and elderly.  And many people have two – one for personal and one for business. 

When trends begin they are easy to discount.  Early versions are less good than the current solution.  Costs are high.  But early adopters have a reason to pick up the new solution.  There is some kind of unmet need that the solution fits.  From that small base, the products improve.  Most incumbent suppliers plot out a linear curve adoption curve, and expect dropping of the old solution to be some time way out in the future.

But improvements to the “fringe” solution come faster than incumbents – and even big users of incumbent technologies – expect.  Adoption starts growing faster.  Yet, the incumbent supplier will listen to big customers and expect people to keep their solutions for a long time as they gradually adopt the new:

• People will have an automobile, but they’ll hang onto the horse and buggy because roads are so poor
• He may buy a new copier, but he’ll keep the mimeo machine “just in case”
• Folks will get a phone, and email, but they’ll keep writing letters and thus need a postman daily
• People may buy refrigerators, but they’ll keep the icebox and want weekly ice delivery
• Readers will skim the web for news, but they’ll want to keep reading a daily newspaper
• PCs will be popular, but folks will hang onto that old typewriter “maybe to type envelopes or something”
• Installing spreadsheets on company PC’s will not eliminate the need for adding machines “for when we need the tape”
• Digital cameras will be convenient, but users will want the film camera for picture prints
• Installing a DVR will not eliminate the videocassette player because people “still may want to watch old tapes some day”
• People will keep their cassette players, and DVD players, even as they buy a new MP3 player because they will want to listen to the purchased collections

Actually, once someone adopts the new solution, they rapidly find no need for the old solution.  It goes to the closet, and then the trash, quickly.  And from a market perspective, once a third to a half the customers quit using a product it will disappear from use almost overnight.  From that perspective, those who depend upon traditional land line phones have plenty to worry about.  Because we’re near a third.  And smart phones keep adding more capability every month – the iPhone now has almost 300,000 apps, and Android phones have over 100,000!  It’s easy to see where the functionality, ease of use and ubiquitousness of mobile phones could make the old land line a waste of money within just 24 months!

So, what will happen to bill collectors and political phone ads (robocalls), when we quit using land lines?  Along with the loss of land lines is the loss of the traditional phone book to find people.  When will the cost of maintaining the poles and lines become so high, relative to the number of users, that we simply take them down to recycle the material?  Lots of things change when growth begins to decline for land-lines, causing the decline to happen more quickly.  And changing how we all get things done – as consumers and as businesses.  Are you prepared?

The tendency is to think change will happen slowly.  It doesn’t.  When markets shift it happens quickly.  Much more quickly than the entrenched competitor expects.  The “experts” always say the demand for the old will last much longer than happens.  He hopes to have a long life, clipping coupons, across a “maturing” market.  Instead, demand falls rapidly and remaining competitors go into price wars trying to stay alive – hoping the market will some day return to the old way of doing things.  Those who didn’t anticipate the shift rapidly run out of cash, and fail. 

Are you ready for impending market shifts?  How prepared are you for a world where

• We don’t print anything, because everyone has some kind of on-line digital document reader.  Not just books and magazines, but user instructions, warranty info, etc.
• We don’t need cash because we can Paypal transact anything using our smartphone
• Doctors can monitor all your vital statistics real time, remotely, 24x7x365.  Manufacturers can monitor use of their products 24x7x365
• So much retail is on-line that the amount of retail floor space declines 40%
• You can regrow a finger, or organ, if it is damaged
• Television and radio aren’t serially broadcast, you organize what you want when you want it.  There are no “commercials” in content delivery
• The primary way of communicating with friends and colleagues is Facebook and Twitter – forget text except for only very private communications

Profit from growth markets, not “core” markets – Virgin & Nike vs. Dell & Sears

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Summary:

• We are biased toward doing what we know how to do, rather than something new
• We like to think we can forever grow by keeping close to what we know – that’s a myth
• Growth only comes from entering growth markets – whether we know much about them or not
• To grow you have to keep yourself in growth markets, and it is dangerous to limit your prospects to projects/markets that are “core” or “adjacent to core”

Recently a popular business book has been Profit from the Core.  This book proposes the theory that if you want to succeed in business you should do projects that are either in your “core,” or “adjacent to your core.”  Don’t go off trying to do something new.  The further you move from your “core” the less likely you will succeed.  Talk about an innovation killer!  CEOs that like this book are folks who don’t want much new from their employees. 

I was greatly heartened by a well written blog article at Growth Science International  (www.GrowthSci.com) “Profit from Your Core, or Not.. The Myth of Adjacencies.”  Author Thomas Thurston does a masterful job of pointing out that the book authors fall into the same deadly trap as Jim Collins and Tom Peters.  They use hindsight primarily as the tool to claim success.  Their analysis looks backward – trying to explain only past events.  In doing so they cleverly defined terms so their stories seemed to prove their points.  But they are wholly unable to be predictive.  And, if their theory isn’t predictive, then what good is it?  If you can’t use their approach to give a 98% or 99% likelihood of success, then why bother?  According to Mr. Thurston, when he tested the theory with some academic rigor he was unable to find a correlation between success and keeping all projects at, or adjacent to, core.

Same conclusion we came to when looking at the theories proposed by Jim Collins and Tom Peters.  It sounds good to be focused on your core, but when we look hard at many companies it’s easy to find large numbers that simply do not succeed even though they put a lot of effort into understanding their core, and pouring resources into protecting that core with new core projects and adjacency projects.  Markets don’t care about whatever you define as core or adjacent.

It feels good, feels right, to think that “core” or “adjacent to core” projects are the ones to do.  But that feeling is really a bias.  We perceive things we don’t know as more risky than thing we know.  Whether that’s true or not.  We perceive bottled water to be more pure than tap water, but all studies have shown that in most cities tap water is actually lower in free particles and bacteria than bottled – especially if the bottle has sat around a while. 

What we perceive as risk is based upon our background and experience, not what the real, actual risk may be.  Many people still think flying is riskier than driving, but every piece of transportation analysis has shown that commercial flying is about the safest of all transportation methods – certainly much safer than anything on the roadway.  We also now know that computer flown aircraft are much safer than pilot flown aircraft – yet few people like the idea of a commercial drone which has no pilot as their transportation.  Even though almost all commercial flight accidents turn out to be pilot error – and something a computer would most likely have overcome.  We just perceive autos as less risky, because they are under our control, and we perceive pilots as less risky because we understand a pilot much better than we understand a computer.

We are biased to do what we’ve always done – to perpetuate our past.  And our businesses are like that as well.  So we LOVE to read a book that says “stick close to your known technology, known customers, known distribution system – stick close to what you know.”  It reinforces our bias.  It justifies us not doing what we perceive as being risky.  Even though it is really, really, really lousy advice.  It just feels so good – like sugary cereal for breakfast – that we justify it in our minds – like saying “breakfast is the most important meal of the day” as we consume food that’s probably less healthy than the box it came in!

There is no correlation between investing in your core, or close to core, projects and high rates of return.  Mr. Thurston again points this out.  High rates of return come from investing in projects in growth markets.  Businesses in growth markets do better, even when poorly managed, than businesses in flat or declining markets.  Where there are lots of customers wanting to buy a solution you simply do better than when there are lots of competitors fighting over dwindling customer revenues.  Regardless of how well you don’t know the former or do know the latter.  Market growth is a much better predictor of success than understanding your “core” and whatever you consider “adjacent.”

Virgin didn’t know anything about airlines before opening one – but international travel from London was set to boom and Virgin did well (as it has done in many new markets.)  Apple didn’t know anything about retail music before launching the iPhone and iTunes, but digital music had started booming at Napster and Apple cleaned up.  Nike was a shoe company that didn’t know anything about golf merchandise, but it entered the market for all things golf (first with just one club – the driver – followed by other things) by hooking up with Tiger Woods just as he helped promote the sport into dramatic growth.  

Success comes from entering new markets where there is growth.  Growth can overcome a world of bad management choices.  When there are lots of customers with needs to fill, you can make a lot of mistakes and still succeed.  To restrict yourself to “core” and “adjacent” invites failure, because your “core” and the “adjacent” markets that you know well simply may not grow.  Leaving you in a tough spot seeking higher profits in the face of stiff competition — like Dell today in PCs.  Or GM in autos.  Sears in retailing.  They may know their “core” but that isn’t giving them the growth they want, and need, to succeed in 2010.

Finding the old Mojo – Macs are back – Apple

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Summary:

• It seems like the best way to find old success is to do more of what used to make you successful
• But lack of success is from market shifts, meaning you need to do more things
• Investing in what you know gets more expensive every year, with little (if any) improvement in returns
• To regain success it’s actually better to get out into new markets where you can compete with lower investment rates, generating more profitable sales
• Apple increased its sales of Macs not by focusing on Macs – but instead by becoming a winner in entirely different markets creating a feedback loop to the old, original “core”

MediaPost.com, in its article “Enterprise Sector Takes a Shine to Apple” has some remarkable statistics about Apple sales.  At a time when most PC manufacturers, such as Dell and HP, are struggling to maintain even decent growth (even after the launch of upgraded Windows 7 and Office 2010) Apple is dramatically increasing its volume of Macs – and gaining market share. In last year’s second quarter:

• Mac sales jumped almost 50% in the business sector
• Mac sales jumped a whopping 200% in the government sector
• Mac sales rose over 31% in the home sector
• In Europe, Mac unit sales doubled their market share – and more than tripled their share in dollars

Yes, Macs are a small part of the market.  Around 3.5% in the U.S.  But, if you’re an Apple employee, supplier or investor that doesn’t matter, does it?  In fact, it comes off sounding like a PC fan pooh-poohing a really astounding sales improvement.  Nobody is saying the Mac will soon replace PCs (that’s more likely to happen via mobile devices where Apple has iPhone and iPad).  But when you can dramatically increase your sales, especially as a $50B company, it’s a big deal.

The lesson for managers here is more unconventional.  For years we’ve been told the way to grow your sales and profits is to “stick to your knitting.”  To “protect your core.”  The idea has been promoted that you should jettison anything that is a diversion to what you want to do best, and completely focus on what you select, and then try to out-compete all others with that product.  If things don’t improve, then you need to get even more focused on your core, and invest more deeply.  And hope the Mojo returns.

But that’s exactly the opposite of what Apple did.  When almost bankrupt in 2001 Apple jettisoned multiple Mac products.  It invested in music and entertainment products (iPod. iTouch and iTunes) to grab large sales with lower investment rates.  It then rolled that success into developing the mobile computing/phone business with the iPhone and all those apps (some 250 thousand now and growing!).  And it built on that success with a mobile tablet called the iPad.  The Mac is now growing as a result of Apple’s success in all these other products creating a favorable feedback loop to the original “core”.

Apple spends less than 1/8th the money on R&D as Microsoft.  And an even lesser amount on marketing, PR and sales.  Yet, by entering new markets it gets far more “bang for its buck.”  By entering new markets Apple is able to develop and launch new products, that sell in greater volumes and at higher profits, than had it stuck to being a “Mac company.”  In fact, back when it only had 45 days of cash on hand, if it had stayed a “Mac company” Apple would have failed.

What we now see is that constantly re-investing in what you know drives down marginal rates of return.  It keeps getting harder and harder, at ever greater cost, to drive new development and new sales with upgrades to old products.  Look at the sales and profit problems at Sun Microsystems (world leader in Unix servers) and Silicon Graphics (world leader in graphics computers) and now Dell.  What we’d like to think works at driving revenue and profits really raises new product costs and creates an easy target for new competitors who attack you as you sit there, all Locked-in to doing more of the same.

Contrarily, when you develop new products for new markets you grow revenues at lower cost, and thus higher profits.  And you create a feedback loop that helps you get more sales without massive investments in your historical “core.”  Think about Nike.  It hasn’t been a “shoe company” for a very long time – but its shoes are greatly benefited by all the success Nike has in golf clubs and all those other products with a swoosh on them.  

When confronted with a decision between “investing in the core” – or “protecting the mother ship” – or investing in new markets and solutions —- be very careful.  Your “gut” may lead you to “in a blink” decide the obvious answer is to invest in what you know.  But we are learning every quarter that this is a road to problems.  You get more and more focused, and less and less prepared for the market shift that sent you into that “core focus” in the first place.  Pretty soon you’re so far removed from the market you can’t survive – like Sun and SGI.  It’s really a whole lot smarter to get out into new markets with White Space teams that can generate revenues with a lot less cost by being a smart, early competitor.

You Gotta Worry When… – Google, Microsoft

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Summary:

• Market shifts can lead to new solutions that are free
• Free products often cause historical competitors to fail
• Microsoft is at great risk as the market for business applications is shifting to free solutions from Google

More than a decade ago Microsoft made the decision to bundle, at no extra charge, an encyclopedia with its software.  Almost nobody had heard of Encarta, and it had never been a serious competitor to Encyclopedia Britannica.  But when it came on a CD for free it stopped a lot of people from buying a new set of books for the family.  It only took months for Encarta to become the #1 encyclopedia, and Encyclopedia Britannica found itself in bankruptcy.  While quality is always an issue, it's very tough to compete with "free."  Now Wikipedia, another free product, dominates the encyclopedia market.

For decades people paid for access to news – via newspapers and magazines.  Advertisers and subscriptions paid for news.  But when newswriters started offering news on the internet for free, and when readers could access news articles on the web without subscriptions, publishers found out how hard it is to compete with "free."  Several magazines and newspapers have failed, and several publishers have entered bankruptcy – such as Tribune Corporation.

Now Crain's New York Business headlines "Google's Free Appls Click with Entrepreneurs."  Companies are learning they can accomplish the tasks of word processing, spreadsheets, website creation and enterprise email for free via Google apps.  And this is not good news for Microsoft.

Microsoft has 2 product lines that make up almost all its sales and profits.  Operating systems for PCs (Windows 7) and office automation software for businesses (Office 2010).  That there is now a viable offering which is free has to be very, very troubling.  How long can Microsoft compete when the competitive product is, quite literally, free?  If you adopt cloud computing applications, you no longer need a PC with an operating system.  You can use a much simpler device.  And you can use Google apps for business applications at no charge.

Microsoft is a huge company, with an incredible history.  But how is it going to compete with free?  And as computing becomes more and more networked, and Microsoft loses share in mobile devices from smartphones to tablets, what will be the sustaining revenue at Microsoft?

Investors in Microsoft have a lot to fear.  As do its employees and suppliers.  As do supply chain partners like Dell.  When markets shift – especially when led by a shift to free solutions – the impact on traditional competitors can be extreme.  Even the very best – such as Encyclopedia Britannica – can be destroyed.  Sun Microsystems led the server business in 2000, with a +$200B market cap. Sun is now gone. Market shifts can happen fast, and when products are free shifts often happen even faster.

Who’s Got the Money? – Visa, Mastercard, AT&T, Verizon, Discover, Paypal

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Summary: 

• By 2015 or 2020 cash, checks, debit and credit cards could disappear
• Smartphones are positioned to eliminate old financial transaction tools, as well as land line phone service and PCs
• All businesses will have to make changes to deal with new forms of payment processing, and early adopters will likely gain an advantage with customes
• There will likely be some big winners and big losers from this transition

Can you imagine a world with no cash?  It could happen soon, and how will it affect your business?

Bloomberg.com headlined “AT&T, Verizon to Target Visa, Mastercard with Smartphones.”  The business idea is to replace your Visa and Mastercard with a smartphone app that acts as your debit and/or credit card.  Doing this makes it faster and easier for smartphone users to place transactions – online or in person – without even bothering with a card or any other physical artifact.

This is a big deal, because according to Mediapost.com “Smartphones Nearly 20% of All Phones Sold.”  So smartphones are starting to be everywhere, and at current rates will replace old mobile phones in just a couple of years.  They are increasingly replacing traditional land-line service as headlined in DailyMarkets.com, “Cell Phone Only Use Hits New High of 24.5% in U.S.” People are abandoning the historical land-line telephone.

The traditional “phone company” and its services are rapidly disappearing. After all the effort Southwestern Bell put in to recreating the old “ma bell” of AT&T, it now looks like that entire business is in decline and likely  to become about as common as CB or portable AM radios.   What is the future of AT&T and Verizon if they front-end Discover as the payment processor?  Will these companies transition to become something very different than their past, and if so what will that be? Or will they be an early proponent for change but let the business value go to others – as they did in mobile phones, ISDN and other internet connectivity as well as cable entertainment?

Mediapost.com also reports “PayPal Making Micropayments a Reality.”  Which gives us the last piece of the puzzle to just about guarantee old payment methods are likely to be gone by 2020 (possibly earlier – 2015?).  People are giving up old land-line telecom for mobile, and mobile is rapidly becoming all smartphones.  Smartphones are getting apps allowing them to conduct financial transactions without the need of a credit card, debit card or (going ultra low-tech) check (no printer needed – lol – which has to be a concern for companies like Zebra that make the printers).  In fact, you can even make all kinds of payments, even really small ones under $1 – not just big ones – using your cell phone by opening a Paypal account.  What you can easily see is a future where you don’t need a wallet at all.  Everything you’ll need for financial transactions will be on your smartphone.  (How much you want to bet somebody will figure out how to put your driver’s license on the smartphone too?)

Ultra convenient, don’t you think? You won’t need a credit card, or any other card.  You won’t need a PC to do your on-line banking.  You won’t need cash for small purchases – you can even do garage sale transactions or buy gum using your smartphone.  And there’s sure to be an app that will consolidate all your payments and set up to automatically do transactions (like your mortgage or car lease) without you even having to do anything.  And all from your smartphone.  No more wallet, no more PC, no more coins or bills in your pocket.

So, what happens to cash registers, and the folks that make them?  No registers in restaurants or hotels?  What happens to desk clerks in hotels – will they be necessary?  What about cashiers in retail stores – any need?  Will banks have any need for a local branch?  Why would ATMs exist?  Quite literally a raft of companies would be affected that deal in the handling of transactions – from Visa and Mastercard to IBM and Diebold.  Even those little printers in cabs could disappear as your phone now pays the cabbie directly what the meter requires.  You could even pay modern parking meters with your smartphone!! What happens to companies that make mens and women’s wallets?  Will purses and clutches disappear from style? How much easier will it be for the IRS to track the income of people that have historically been in cash jobs?

Do your scenarios of 2015 include this kind of change in payments?  Should it?  What will be the impact on your bank?  On your credit card supplier?  Will your customers want to change how they pay?  How will you need to change your order-to-cash process?  Are you  ready to be an early adopter, thus aiding revenue generation?  Or will you let others steal sales by moving quickly to these modern payment systems?

There’s precious little that’s more important in business than collecting the money.  A new set of technologies are sure to be changing how that happens.  Will you leverage this to your advantage, or will your competitors?

Go boldly where you’ve not gone before – to grow! – Dell vs. Cisco

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Summary:

• Dell has remained focused on its core market, and as a result growth has stalled for 5 years.
• Cisco has aggressively developed entirely new markets, and it has grown 60% the last 5 years.
• To keep growing, and maintain your business value, you must CONSTANTLY keep developing new markets

Dell helped create the PC revolution.  It’s simplification of the PC business into a limited set of technologies, no R&D, then putting its energy into lowering costs by focusing on supply chain made PCs very, very cheap.  it was an idea never before attempted, and this Success Formula allowed Dell to become a household name around the world.

Unfortunately, the demand for PCs has flattened.  And competitors have learned how to match (maybe beat?) Dell’s “core capabilities.”  When markets shift, a company has to develop new markets, or risk hitting a growth stall.

Source:  Silicon Alley Insider

And that’s happened to Dell.  Revenues have not continued to grow, Dell has remained focused on its “core markets” and “core capabilities” but without growth in those “core” areas the company has been severely hampered.  Revenues are still 72% in “core” but there’s little reason to own the stock because company revenues are at best flat (despite volatility) the last 5 years.  Dell is going nowhere – except following the problems at Microsoft.  Since it’s now so late to mobile phones, any sort of tablet, or other markets with growth its unlikely Dell will be able to profitably develop any new businesses to replace the deteriorating PC market.  Dell is stuck in the Swamp, so busy fighting alligators and mosquitoes that it’s no longer growing.  It’s stuck in a low-no growth “core” market.

To remain a healthy business you have to constantly enter new markets.

Source:  Silicon Alley Insider

You may want to think of Cisco as a router, or router and switch company. That was certainly the company’s early Success Formula.  But unlike Dell, Cisco has invested heavily in other businesses.  Now Cisco revenue is 60% bigger than it was five years ago, while its percent of revenue in routers and switches has actually declined! By aggressively moving into new markets for “advanced technology” and services Cisco has improved its overall revenue, and kept the company very healthy.  It has growth precisely because it moved away from its “core” to develop new markets, new products, new solutions and new revenues.  Cisco keeps maneuvering itself back into the Rapids of growth before the current slows, and thus it avoids the growth stall eating up Dell’s value.

It is so easy to be lured into focusing on your “core”. Especially if you listen to your existing big customers.  But markets shift, and you inevitably must move into new markets.  And market shifts don’t care what your market share or your industry view.  It’s up to all leaders to stay ahead of shifts by constantly developing scenarios for new markets, studying competitors for new insights, disrupting the old Success Formula Lock-ins and setting up White Space teams to develop new revenues and keep the business growing!

5 Reasons You Should NOT buy GM stock – General Motors

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Summary:

• GM is replacing its CEO and preparing to sell equity to the public
• Don’t buy the stock.  GM will not be a market winner

“GM reports $1.3 billion in Q2 profits, Preps for Stock Sale” is the Detroit News headline.  So, are you interested in buying some GM shares?  If you do, can I interest you in a bridge I have for sale???

In addition to reporting 2 consecutive positive cash flow quarters, the CEO Ed Whitacre announced he’s leaving the post to be replaced by a different telecommunications executive, Don Akerson.  Are you excited?

There are at least xx reasons NOT to buy GM shares:

1. The company lost market share last year.  It’s slide from dominance has not stopped.  It has less than half the market share it had just 2 decades ago.
2. GM lost $12.9 billion in the same quarter last year.  There is no doubt the company brought forward costs last year to worsen the financials, thus making them look better than they should be now.  Financial machinations are common in poorly performing companies, especially around bankruptcies
3. The departing CEO, and the incoming CEO, are retired telecom execs.  How many successful (meaning growing revenues profitably) telecom companies do you know?  Now wait a minute…. right. 
4. To hit revenue targets GM increased fleet sales.  Interpret that as chasing low-margin business for volume.  It also means selling on price, not the desirability of the products to end users.
5. GMs pension funds are underfunded to the tune of some $26 billion.  When will they fulfill it? 

GM hit a growth stall in the 1970s.  Since then the company has steadily lost market share while watching profitability deteriorate to nothing.  Fewer than 7% of companies ever consistently grow a mere 2% after a stall, and there’s nothing saying GM will be in that exceptional group.

GM downsized its exciting brands.  Chevrolet is about as exciting as…..  The big “hit” car is a re-release of the Camaro – a car that was successful way about 40 years ago.  GM isn’t a leader in any new car segments, or new technologies. 

GM has no White Space.  It is run by retirees that really should go to Florida – year round.  They keep trying to do what worked for their personal careers 30 years ago – and not what will make a company succeed today.  There isn’t a single thing about GM that would make me want to own it. 

Go buy Apple.  There you get innovation, growth, new markets and a leader in several segments. 

Creating the “Best of Times” – Apple, Cisco, Virgin

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Summary:

• Your view of today will be determined by your future success
• Conventional wisdom – often called “best practices” – will lead businesses to cut costs in today’s economy, leading to a vicious cycle of reductions and value destruction.  “Best Practice” application does not improve results
• Winning companies don’t focus on past behavior, but instead seek out new markets where they can grow – Apple, Google, Virgin, etc.

To paraphrase Charles Dickens (A Tale of Two Cities) are these “the best of times” or “the worst of times?”  Few new jobs are being created in the USA, its hard to obtain credit if you’re a borrower, but there’s very little return to saving, the stock market has been sideways for a decade, asset values (in particular real estate) have plummeted while health care costs are skyrocketing.  Look in the rear view mirror at the last decade and you could say it is the worst of times. 

But the answer doesn’t lie in the rear view mirror – the answer lies in the future.  If you succeed in the next 2 years at achieving your goals, you’ll look back and say this was the best of times.

In “Do You Have the Postrecession Blues” at Harvard Business Review blogs the author tells of two shoe salespeople that show up in a remote African village.  The first sends back the message “No one here wears shoes, will return shortly.”  The second sends the message “No one here wears shoes, send inventory!”

The history of business education has been to teach managers, usually by studying historical case experiences, the “best practices” employed by previous managers. But BPlans.com tells us in an article headlined “The Bad News About Best Practices” that this is a lousy way to make decisions. “..most of the time, they won’t work for you or me. They worked for somebody, some time, in some situation, in the past.” 

The New York Times deals with fallacious best practices recommendations in “From Good to Great… to Below Average.”  Best selling Freakonomics author Steven Levitt points out that most business authors try to push somebody else’s Success Formula as the road to success.  However, the most popular of these are really very inapplicable.  Those held up as “the best practice” have most often ended up with quite poor results.  So why should someone else follow them?  Nine of eleven of Collins’ “great” companies did worse than average!

Best practices has led businesses to cut heads, slash costs, sell assets and in general weaken their businesses the last few years.  Most leaders would prefer to believe that they have somehow improved the business by eliminating workers, the skills they bring and the function they perform.  But the result is less marketing, sales, R&D, etc.  How this ever became “best practice” is now a very good question.  What company can you think about that “saved its way to success?”  The cost cutters I think about – Sears, Scott Paper, Fannie Mae Candies, etc. – ended up a lot worse for their efforts. 

These can be the best of times.  Just ask the people at Apple Cisco Systems, Virgin and Google.  These businesses are growing as if there’s no recession.  Instead of “focusing on their core” business with defend & extend efforts to cut costs, they are entering new markets.  They are going to where growth is.  Amidst all the cost-cutting, best practice applying grief these are examples of success. 

So will you continue to operate as if these are the worst of times, are are you willing to make these the best of times?  You can grow if you use scenarios and competitor analysis to find new markets, embrace disruptions to attack Lock-ins that block innovation, and implement White Space teams that learn how to develop new markets for revenue and profit growth.

Postscript – entire Dickens’ quote: It was the best of times, it was the worst of times, it was the age of
wisdom, it was the age of foolishness, it was the epoch of belief, it
was the epoch of incredulity, it was the season of Light, it was the
season of Darkness, it was the spring of hope, it was the winter of
despair, we had everything before us, we had nothing before us, we were
all going direct to heaven, we were all going direct the other way – in
short, the period was so far like the present period, that some of its
noisiest authorities insisted on its being received, for good or for
evil, in the superlative degree of comparison only.

Post-postcript – I am trying a new format for the blog.  Please provide your feedback.  I’m dropping the bold enhancements, and replacing their intent with an introductory summary.  Let me know if you like this better.  And thanks to reader Jon Wolf for his specific recommendations for improvement.