CIOs – You can drive GROWTH

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"Too Add Value Through IT, Pick Up the Ball" headlines my latest article published by IDG group. For years IT leaders thought their job was to "keep the joint running." Today, that's insufficient.  Nobody can avoid being part of the growth agenda if they are to be a successful leader or manager. 

To drive success, and keep their jobs, IT leaders now have to move beyond simply being defensive.  Keeping the systems running, and cutting operating costs, is not enough to be a great CIO.  Too many have ended up outsourcing almost everything in order to lower costs, only to discover that IT becomes far too rigid and unable to support market needs when so many services are outsourced to third parties.

Today's CIO has to spend more time figuring out how to flexibly, adaptively, bring new solutions to both insiders and customers.  It's important CIOs not just track historical (and accounting) data, but behave like the offensive team, identifying and tracking considerably more market-based data.  And creating various future scenarios to help the company spot trends and opportunities.  On top of this, IT must demonstrate how using emerging solutions – from Salesforce.com to Groupon, Foursquare and Facebook (examples) – can reach more customers, faster – driving higher revenues.

Read how important it is for IT to become part of the growth engine at one of the locations where this article has been published:

@ CIO Magazine – @ PC World – @ Network World – @ IT World Canada – @ CIO Australia – @ ComputerWorld Norway

Additionally, read my latest article on effective strategic planning – for IT or any part of the organization – published by the Strategic Planning Society of the UK "Disrupting the Marketplace".  This article describes how to add maximum value, growing revenue, cash flow and profits, by identifying and implementing opportunities to disrupt the marketplace.  And allowing those disruptions to invade your own organization for more dynamism.

 

 

Will you grow in 2011? Create wealth like Apple, Amazon, Priceline, DeVry, Colgate

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“Goodbye 2010, the Year of Austerity” is the  headline from Mediapost.com‘s Marketing Daily.  And that could be the mantra for many, many companies.  Nobody is winning today by trying to save their way to prosperity!  As we move into this decade, it is important business leaders realize that the only way to create a strong bottom line (profit) is to develop a strong top line (revenue.)  Recommendations:

1. Never be desperate.  Go to where the growth is, and where you can make money.  Don’t chase any business, chase the business where you can profitably growth.  Be somewhat selective.
2. Focus efforts on markets you know best.  I add that it’s important you understand not to do just what you like, but learn to do what customers VALUE.
3. Let go of crap, traditions and “playing it safe” actions.  Growth is all about learning to do what the market wants, not trying to protect the past – whether processes, products or even customers.
4. More lemonade making. You can’t grow unless you’re willing to learn from everything around you. We constantly find ourselves holding lemons, but those who prosper don’t give up – they look for how to turn those into desirable lemonade.  What is your willingness to learn from the market?
5. Austerity measures are counterproductive 99% of the time. Efficiency is the biggest obstacle to innovation.  You don’t have to be a spendthrift to succeed, but you can’t be a miser investing in only the things you know, and have done before.
6. Communicate, communicate, communicate. We don’t learn if we don’t share.  Developing insight from the environment happens when all inputs are shared, and lots of people contribute to the process.
7. Get off the downbeat buss. There’s more to success than the power of positive thinking, but it is very hard to gain insight and push innovation when you’re a pessimist.  Growth is an opportunity to learn, and do exciting things. That should be a positive for everybody – except the status quo police.

Realizing that you can’t beat the cost-cutting horse forever (in fact, most are about ready for the proverbial glue factory), it’s time to realize that businesses have been under-investing in innovation for the last decade.  While GM, Circuit City, Blockbuster, Silicon Graphics and Sun Microsystems have been failing, Apple, Google, Cisco, Netflix, Facebook and Twitter have maintained double-digit growth!  Those who keep innovating realize that markets aren’t dead, they’re just shifting!  Growth is there for businesses who are willing to innovate new solutions that attract customers and their dollars! For every dead DVD store there’s somebody making money streaming downloads.  Businesses simply have to work harder at innovating.

Fast Company gives us “Five Innovative New Year’s Resolutions:”

1. Associate.  Work harder at trying to “connect the dots.”  Pick up on weak signals, before others, and build scenarios to help understand the impact of these signals as they become stronger.  For example, 24x7WallStreet.com clues us in that greater use of mobile devices will wipe out some businesses in “The Ten Businesses The Smartphone Has Destroyed.”  But for each of these (and hundreds others over the next few years) there will be a large number of new business opportunities emerging.  Just look at the efforts of Foursquare and Groupon and the direction those growth businesses are headed.
2. Observe.  Pay attention to what’s happening in the world, and think about what it means for your (and every other) business.  $100/barrel oil has an impact; what opportunity does it create?  Declining network TV watching has an impact – how will you leverage this shift?  Don’t just wander through the market, and reacting.  Figure out what’s happening and learn to recognize the signs of growth opportunities. Use market events to drive being proactive.
3. Experiment.  If you don’t have White Space teams trying figure out new business models, how will you be a future winner?  Nobody “lucks” into a growth market.  It takes lots of trial and learning – and that means the willingness to experiment.  A lot.  Plan on experimenting.  Invest in it.  And then plan on the positive results.
4. Question. Keep asking “why” until the market participants are so tired they throw you out of the room.  Then, invent scenarios and ask “why not” until they throw you out again.  Markets won’t tell you what the next big thing is, but if you ask a lot of questions your scenarios about the future will be a whole lot better – and your experimentation will be significantly more productive.
5. Network. You can’t cast your net too wide in the effort to obtain multiple points of view.  Nothing is narrower than our own convictions.  Only by actively soliciting input from wide-ranging sources can you develop alternative solutions that have higher value.  We become so comfortable talking to the same people, inside our companies and outside, that we don’t realize how we start hearing only reinforcement for our biases.  Develop, and expand, your network as fast as possible.  Oil and water may be hard to mix, but it blending inputs creates a good salad dressing.

ChiefExecutive.net headlined “2010 CEO Wealth Creation Index Shows a Few Surprises.” Who creates wealth?  Included in thte Top 10 list are the CEOs of Priceline.com, Apple, Amazon, Colgate-Palmolive and DeVry.  These CEOs are driving industry innovation, and through that growth.  This has produced above-average cash flow, and higher valuations for their shareholders.  As well as more, and better quality jobs for employees.  Meanwhile suppliers are in a position to offer their own insights for ways to grow, rather than constantly battling price discussions.

Who destroys wealth?  In the Top 10 list are the CEOs of Dean Foods, Kraft, Computer Sciences (CSC) and Washington Post.  These companies have long eschewed innovation.  None have introduced any important innovations for over a decade.  Their efforts to defend & extend old practices has hurt revenue growth, providing ample opportunity for competitors to enter their markets and drive down margins through price wars.  Penny-pinching has not improved returns as revenues faltered, and investors have watched value languish.  Employees are constantly in turmoil, wondering what future opportunities may ever exist.  Suppliers never discuss anything but price.  These are not fun companies to work in, or with, and have not produced jobs to grow our economy.

Any company can grow in 2011.  Will you?  If you choose to keep doing what you’ve always done – well you shouldn’t plan on improved performance.  On the other hand, embracing market shifts and creating an adaptive organization that identifies and launches innovation could well make you into a big winner.  Next holiday season when you look at performance results for 2011 they will have more to do with management’s decisions about how to manage than any other factor.  Any company can grow, if it does the right things.

 

 

Size isn’t relevant – GM, Circuit City, Dell, Microsoft, GE

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Summary:

• Many people think it is OK for large companies to grow slowly
• Many people admire caretaker CEOs
• In dynamic markets, low-growth companies fail
• It is harder to generate $1B of new revenue, than grow a $100B company by $10B
• Large companies have vastly more resources, but they squander them badly
• We allow large company CEOs too much room for mediocrity and failure
• Good CEOs never lose a growth agenda, and everyone wins!

“I may just be your little rent collector Mr. Potter, but that George Bailey is making quite a bit happen in that new development of his.  If he keeps going it may just be time for this smart young man to go asking George Bailey for a job.” From “It’s a Wonderful Life“ an employee of the biggest employer in mythical Beford Falls talks about the growth of a smaller competitor.

My last post gathered a lot of reads, and a lot of feedback.  Most of it centered on how GE should not be compared to Facebook, largely because of size differences, and therefore how it was ridiculous to compare Jeff Immelt with Mark Zuckerberg.  Many readers felt that I overstated the good qualities of Mr. Zuckerberg, while not giving Mr. Immelt enough credit for his skills managing “lower growth businesses”  in a “tough economy.” Many viewed Mr. Immelt’s task as incomparably more difficult than that of managing a high growth, smaller tech company from nothing to several billion revenue in a few years.  One frequent claim was that it is enough to maintain revenue in a giant company, growth was less important. 

Why do so many people give the CEOs of big companies a break? Given that they make huge salaries and bonuses, have fantastic perquesites (private jets, etc.), phenominal benefits and pensions, and receive remarkable payouts whether they succeed or fail I would think we’d have very high standards for these leaders – and be incensed when their performance is sub-par.

Facebook started with almost no resources (as did Twitter and Groupon).  Most leaders of start-ups fail.  It is remarkably difficult to marshal resources – both enough of them and productively – to grow a company at double digit rates, produce higher revenue, generate cash flow (or loans) and keep employees happy.  Growing to a billion dollars revenue from nothing is inexplicably harder than adding $10B to a $100B company. Compared to Facebook, GE has massive resources.  Mr. Immelt entered the millenium with huge cash flow, huge revenues, and an army of very smart employees.  Mr. Zuckerberg had to come out of the blocks from a standing start and create ALL his company’s momentum, while comparatively Mr. Immelt took on his job riding a bullet out of a gun!  GE had huge momentum, a low cost of capital, and enough resources to do anything it wanted.

Yet somehow we should think that we don’t have as high expectations from Mr. Immelt as we do Mr. Zuckerberg?  That would seem, at the least, distorted. 

In business school I read the story of how American steel manufacturers were eclipsed by the Japanese.  Ending WWII America had almost all the steel capacity.  Manufacturers raked in the profits.  Japanese and German companies that were destroyed had to rebuild, which they progressively did with more efficient assets.  By the 1960s American companies were no longer competitive.  Were we to believe that having their industrial capacity destroyed somehow was a good thing for the foreign competitors?  That if you want to improve your competitiveness (say in autos) you should drop a nuclear bomb on the facilities (some may like that idea – but not many who live in Detroit I dare say.)  In reality the American leaders simply refused to invest in new technologies and growth markets, allowing competitors to end-run them.  The American leaders were busy acting as caretakers, and bragging about their success, instead of paying attention to market shifts and keeping their companies successful!

Big companies, like GE, are highly advantaged.  They not only have brand, and market position, but cash, assets, employees and vendors in position to help them be even more successful!  A smart CEO uses those resources to take the company into growth markets where it can grow revenues, and profits, faster than the marketplace.  For example Steve Jobs at Apple, and Eric Schmidt at Google have found new markets, revenues and cash flow beyond their original “core” markets.  That’s what Mr. Welch did as predecessor to Mr. Immelt.  He didn’t so much take advantage of a growth economy as help create it! Unfortunately, far too many large company CEOs squander their resources on low rate of return projects, trying to defend their existing business rather than push forward. 

Most big companies over-invest in known markets, or technologies, that have low growth rates, rather than invest in growth markets, or technologies they don’t know as well.  Think about how Motorola invented the smart phone technology, but kept investing in traditional cellular phones.  Or Sears, the inventor of “at home shopping” with catalogues closed that division to chase real-estate based retail, allowing Amazon to take industry leadership and market growth.  Circuit City ended up investing in its approach to retail until it went bankrupt in 2010 – even though it was a darling of “Good to Great.”  Or Microsoft, which launched a tablet and a smart phone, under leader Ballmer re-focused on its “core” operating system and office automation markets letting Apple grab the growth markets with R&D investments 1/8th of Microsoft’s.  These management decisions are not something we should accept as “natural.” Leaders of big companies have the ability to maintain, even accelerate, growth.  Or not.

Why give leaders in big companies a break just because their historical markets have slower growth?  Singer’s leadership realized women weren’t going to sew at home much longer, and converted the company into a defense contractor to maintain growth.  Netflix converted from a physical product company (DVDs) into a streaming download company in order to remain vital and grow while Blockbuster filed bankruptcy.  Apple transformed from a PC company into a multi-media company to create explosive growth generating enough cash to buy Dell outright – although who wants a distributor of yesterday’s technology (remember Circuit City.)  Any company can move forward to be anything it wants to be.  Excusing low growth due to industry, or economic, weakness merely gives the incumbent a pass.  Good CEOs don’t sit in a foxhole waiting to see if they survive, blaming a tough battleground, they develop strategies to change the battle and win, taking on new ground while the competition is making excuses.

GM was the world’s largest auto company when it went broke.  So how did size benefit GM?  In the 1980s Roger Smith moved GM into aerospace by acquiring Hughes electronics, and IT services by purchasing EDS – two remarkable growth businesses.  He “greenfielded” a new approach to auto manufucturing by opening the wildly successful Saturn division.  For his foresight, he was widely chastised.  But “caretaker” leadership sold off Hughes and EDS, then forced Saturn to “conform” to GM practices gutting the upstart division of its value.  Where one leader recognized the need to advance the company, followers drove GM to bankruptcy by selling out of growth businesses to re-invest in “core” but highly unprofitable traditional auto manufacturing and sales.  Meanwhile, as the giant failed, much smaller Kia, Tesla and Tata are reshaping the auto industry in ways most likely to make sure GM’s comeback is short-lived.

CEOs of big companies are paid a lot of money.  A LOT of money.  Much more than Mr. Zuckerberg at Facebook, or the leaders of Groupon and Netflix (for example).  So shouldn’t we expect more from them?  (Marketwatch.com “Top CEO Bonuses of 2010“) They control vast piles of cash and other resources, shouldn’t we expect them to be aggressively investing those resources in order to keep their companies growing, rather than blaming tax strategies for their unwillingness to invest?  (Wall Street Journal “Obama Pushes CEOs on Job Creation“) It’s precisely because they are so large that we should have high expectations of big companies investing in growth – because they can afford to, and need to!

At the end of the day, everyone wins when CEOs push for growth.  Investors obtain higher valuation (Apple is worth more than Microsoft, and almost more than 10x larger Exxon!,) employees receive more pay (see Google’s recent 10% across the board pay raise,) employees have more advancement opportunities as well as personal growth, suppliers have the opportunity to earn profits and bring forward new innovation – creating more jobs and their own growth – rather than constantly cutting price. Answering the Economist in “Why Do Firms Exist?” it is to deliver to people what they want.  When companies do that, they grow.  When they start looking inward, and try being caretakers of historical assets, products and markets then their value declines.

Can Mr. Zuckerberg run GE?  Probably.  I’d sure rather have him at the helm of GM, Chrysler, Kraft, Sara Lee, Motorola, AT&T or any of a host of other large companies that are going nowhere the caretaker CEOs currently making excuses for their lousy performance.  Think what the world would be like if the aggressive leaders in those smaller companies were in such positions?  Why, it might just be like having all of American business run the way Steve Jobs, Jeff Bezos and John Chambers have led their big companies.  I struggle to see how that would be a bad thing.

Why He’s not CEO/Person of the Year – Immelt of GE

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Summary:

• Business leaders are honored for creating profitable growth
• Those who create the greatest growth disrupt the status quo and change the way things are done – such as Zuckerberg and Jobs
• Too many CEOs act as caretakers, overlooking growth
• Caretakers watch value decline
• Under Welch, GE dramatically grew and he was Time’s Person of the Year
• Under Immelt, GE has contracted
• Too many CEOs are like Immelt.  They need to either change, or be replaced

It’s that time of year when magazines like to honor folks for major accomplishments.  This year, Time’s Person of the Year is Mark Zuckerberg, honored for leading Facebook and its dramatic change in social behavior amongst so many people. Marketwatch.com selected Steve Jobs as its CEO of the Decade – an honor several journals gave him last year!

There is of course a bias in these selections.  Most journals highly favor CEOs that drive up their stock price!  For example, Ed Zander was CEO of the year in 2004 for his “turnaround” at Motorola – and within 2 years he was fired and Motorola was facing possible bankruptcy. Obviously his “quick fix” (getting the RAZR out the door with a big marketing push) didn’t pan out so well over time.  We’ll have to see if Alan Mulallly deserves to be CEO of the Year at Marketwatch, since it appears his selection has more to do with not letting Ford go bankrupt – like competitors GM and Chrysler – and thus reaping the benefits of customers who wanted to buy domestic but feared any other selection.  Whether Ford’s “turnaround” will be a winner, or another Zander/Motorola, we’ll know better in a couple of years.

One fellow who isn’t on anybody’s list is Jeff Immelt at General Electric.  His predecessor was.  Given that

1. GE is the oldest company on the DJIA (Dow Jones Industrial Average)
2. GE is one of the most widely held of all corporations
3. GE is one of the largest American corporations in revenues and employees
4. GE is in a plethora of businesses, globally
5. Mr. Immelt is paid several million dollars per year to lead GE

It is worthwhile to think about why he’s not on this list – whether he should be – and if not, whether he should keep his job!

Since Immelt took the helm at GE, the value has actually declined.  He’s not likely to win any awards given that sort of performance.  Amidst the financial crisis, he had to make a very sweet deal with Berkshire Hathaway to invest cash (via preferred shares) in order to keep GE out of bankruptcy court – a deal that has enriched Mr. Buffett’s company at the expense of GE.  GE has exited several businesses, such as its current effort to unload NBC via a deal with Comcast, but it has not created (or bought) a single exciting, noteworthy growth business! GE has become a smaller, lower growth company that narrowly diverted bankruptcy.  That isn’t exactly a ringing endorsement for honors!

Yes, GE has developed a nice positive cash flow, which will allow it to repurchase the preferred shares from Berkshire (Marketwatch “GE to Buy Back Buffett’s Preferreds Next Year.”) But what is Mr. Immelt doing to create future shareholder value?  His plan to make a few acquisitions, pay some higher dividends (suspended when the company faltered) and repurchase equity offers shareholders very little as a way to generate high rates of return!  Why would anyone want to own GE?  Nobody expects the company to be a growth leader in 2012, or 2015.  With its current businesses, and strategy, there is no reason to expect GE to produce double digit earnings growth – or double its equity within any reasonable investing horizon.

There’s more to being a CEO than being a “caretaker.”  Mr. Immelt’s predecessor, Jack Welch, created enormous value for shareholders.  Mr. Welch was willing to disurpt the GE status quo.  In fact, he intentionally worked at it!  He made sure business leaders were constantly challenged to find new markets, create new products, expand into new businesses, leverage new  technologies and generate growth!  Mr. Welch was willing to take GE into growth markets, give leaders permission to create new Success Formulas, and invest in whatever it took to profitably grow revenues.  During the Welch era, competitors quaked at the thought of GE entering their markets because things were always shaken up – and GE changed the game in order to create higher rates of return.  During the Welch era investors received amongst the highest rate of return on any common stock!  GE value multiplied many-fold, making pensioners (invested in the stock) and employees quite wealthy – even as employment expanded dramatically.  That’s why Mr. Welch was Time’s Person of the Year in 2000 — and for many the CEO of the previous decade.

Mr. Immelt, on the other hand, has done nothing to benefit any of his constituencies.  Like far too many CEOs, he took a much less aggressive stance toward growth.  He has been unwilling to challenge and disrupt existing leaders, or promote aggressive market disruptions through the GE business units.  He has not invested in White Space projects that could continue the massive expansion started during the Welch era.  To the contrary, he has moved much more slowly, and focused more on selling businesses than growing them.  He has resorted to trying to protect GE – rather than keep it moving forward.  As a result, the company has retrenched and actually become less interesting, less valuable and less clearly able to produce returns or create new jobs!

Mr. Immelt certainly has his apologists, and seems to securely have the support of his Board of Directors.  But we should question this.  It actually has an impact on the American economy (and that of several other countries) when the CEO of a company as large as GE loses the ability to create growth.  The malaise of the American economy can be directly tied to CEOs who are operating just like Mr. Immelt: doing almost nothing to create new markets, new sources of revenue, new jobs.  Many business journalists like to say the government doesn’t create revenue, or jobs.  So who will create them when corporate leaders are as feckless as Mr. Immelt? Especially when they control such vast resources!

Congratulations to Mr. Zuckerberg and Mr. Jobs (and Mr. Hastings of Netflix who was named Fortune magazine’s CEO of the Year.)  They have created substantial new revenues, profits, cash flow and return for investors.  Their company’s employees, suppliers, customers and investors have all benefitted from their leadership.  By disrupting the way their company’s operated they pushed into new markets, and demonstrated how in any economy it is possible to create success.  Caretakers they are not, so like Mr. Welch each deserves its recent accolades.

And for all those CEOs out there who are behaving as caretakers – for all who are resting on past company laurels – for all who have watched their company value decline – for those who think it’s OK to not grow – for those who blame the economy, or government, or competitors, or customers or their industry for their inability to grow —- well, you either need to learn from these recently honored CEOs and dramatically change direction, or you should be fired.

Play To Win, Not “Catch up” – Colgate’s Opportunity

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Summary:

• We too often think of competition as “head to head”
• Smart competitors avoid direct competition, instead using alternative methods in order to lower cost while appealing directly to market needs
• Proctor & Gamble has long dominated advertising for many consumer goods, but the impact, value and payoff of traditional advertising has declined markedly as people have switched to the web
• New competitors can utilize internet and social media tools to achieve better brand positioning and targeted marketing at far lower cost than old mass media products
• Colgate is in a great position to blow past P&G by investing quickly and taking the lead in internet marketing for its products
• Eschew calls for investing in old methods of competition, and instead find new ways to compete that allow you to end-run traditional leaders

According to a recent Advertising Age article (“To Catch Up Colgate May Ratchet Up Its Ad Spending“) Colgate has done a surprisingly good job of holding onto market share, despite underspending almost all its competitors in advertising.  This is no mean feat in consumer products, where advertising dominates the cost structure.  But the AdAge folks are predicting that to avoid further declines, and grow, Colgate will have to dramatically up its ad spending.  That would be old-fashioned, backward-thinking, short-sighted and a lousy use of resources!

Colgate competes with lots of companies, but across categories its primary competitor is Proctor & Gamble.  In toothpaste, P&G’s Crest outspends Colgate by over $25M – or about 35%.  In dishsoap Colgate spent nothing on Palmolive in 2010, compared to P&G’s spend of $30M on Dawn.  In deodorant/body soap Colgate spent about $9M on Softsoap, Irish Spring and Speedstick while P&G spent 9 times more (over $82M) on Old Spice and Secret. (Side note, Unilever spent $148M on Dove and a whopping $267M when adding in Axe and Degree!)  In pet food, Unilever spends $35M dollars more (almost 4x) on Iams than Colgate spent on Hills Science Diet.  Altogether, in these categories, P&G spent almost $158M more than Colgate (2.5x more)!  As a big believer in traditional advertising, AdAge therefore predicts that Colgate should dramatically increase its annual ad budget – and maintain these higher levels for 5 years in order to overcome its historical “underspending.”

But that would be like deciding to trade punches with Goliath! 

Why would Colgate want to do more of what P&G does the most?  While advisors try to pit competitors directly against each other, head-to-head “gladiator style” combat leaves the combatants bloody – some dead.  That’s a dumb way to compete.  Colgate has long spent in other areas, such as supporting dog rescue operations and with product specialists gaining endorsements while eschewing more general advertising.  Now, if Colgate wants to take action to grow share, it should pick up a sling (to continue the (Biblical metaphor) in its ongoing battle.  And the good news is that Colgate has an entire selection of new, alternative weapons to use today.

Across all its product categories, Colgate can utilize a plethora of new social media marketing tools.  At costs far lower than traditional mass advertising, Colgate can build promotional web programs that appeal directly to targeted consumers.  Twitter, Facebook, Foursquare, Groupon, YouTube, Google and many other tool providers allow Colgate to spend far, far less than traditional advertising to provide specific brand promotions, product information, purchase incentives (such as coupons) and product variations targeted at various niches. 

With these tools Colgate can not only reach directly into buyer laptops and mobile devices, but offer specific information and incentives.  Traditional advertising, whether print (newspaper and magazine), radio, television or coupons is a low percentage tool.  Seeking response rates (or even recall rates) of just 1 to 5 percent is normal – meaning 90% percent of your spending is, quite literally, just “overhead” cost.  But with modern on-line tools it is very common to have response rates of 50% – or even higher!  (Depending upon how targeted and accurate, of course!)

Colgate is in a great position! 

It has spent much less than competitors, and maintained good brand position.  It’s biggest competitors are locked-in to spending vast sums on traditional tools that have low impact and are in declining media.  Colgate could now decide to commit itself to using the new, modern tools which are lower cost, and have decidedly more targeted results.  In this way, Colgate can get out of the “colliseum” where the gladiators are warring, and throw rocks at them from the stands.  Play its own game – to win – while letting those in the pit whack away at each other becoming weaker and weaker trying to use the old, heavy and unsophisticated tools.

Now is a wonderful time to be the “underdog” competitor.  “Media” and advertising are in transition. How people obtain information on products and services is moving from traditional advertsing and PR (public relations) focused through mass media to networks with common interests in social media.  Instead of delays in obtaining information, based upon publisher programming dates, customers are seeking immediate, and current information, exactly when they need it – on their mobile devices.  Those competitors who rapidly adopt these new tools are well positioned to be the new Davids in the battle with old Goliaths.  And that includes YOU.

 

Everything Old is New Again: Oracle’s Microsoft Strategy

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Today’s guest blog is provided by Mike Meikle, hope you enjoy:

Summary

• Oracle is at the top of the heap in the Traditional Software market.
• Traditional Software market is deflating with $7 billion less profit than 2009
• Software as a Service, a component of Cloud Computing, has a forecasted 26% annual growth rate over the next five years.
• Oracle Cloud Computing strategy is muddled with bi-polar corporate marketing and platform dependency.
• Customers feel trapped with Oracle and are looking for alternatives.
• Oracle is  trapped in a classic Defend and Extend situation.
• Oracle seems to be following Microsoft in using 1990’s corporate strategy in 2011.

Throughout the 1990’s Microsoft held the dominant position in software.  Firmly ensconced in Corporate and Consumer arenas, Microsoft generated enormous profits.  With an overflowing war chest, MSFT aggressively quashed or bought out the competition – which eventually attracted the attention of the United States Justice Department.  

After a little less than 10 years, Microsoft now fights to stay relevant as multiple challengers have exposed gaping holes in its armor.  The tech giant’s senior leadership appears rudderless as product lines fail to get off the mark (Windows Phone 7) or flounder (Vista).

With this in mind let us turn toward Oracle.  Long viewed as the top Database Management System (DBMS) for the corporate world, its database software underpins much of the global information economy.  It has a large war chest stuffed with the profits created by costly traditional software licensing deals with locked-in customers.  It has used that cash to acquire new lines of business (PeopleSoft, Sun) and competitors (ATG, MySQL).

However there are some dark clouds on the horizon.  The advent of Cloud Computing is a threat to its current licensing model.  How will Oracle adapt to corporations implementing virtual servers and databases in the Cloud?  Traditional software licensing is down $7 billion industry-wide from 2009.  Meanwhile “software as a service” (SaaS) is seeing explosive growth, with a forecasted 26% annual growth rate over the next five years as a natural component of Cloud Computing.

Oracle has made some efforts to delve into the Cloud Computing fray with the Oracle Exalogic Elastic Cloud, or “Cloud-In-a-Box”, leveraging their SUN and ATG acquisitions.  However this arrives several years behind the Amazon, Google, and Microsoft triumvirate of Cloud Computing products.  Oracle’s Cloud offering will also have to overcome Oracle’s own negative statements about Cloud Computing.  CEO Larry Ellison called Cloud Computing “complete gibberish” in late 2008.

Oracle also has problems with its customers.  Chafing under the steep licensing costs and sub-standard support, nearly half are looking to shift to lower cost alternatives as they become available.  Many have felt trapped by lack of suitable replacements.  MySQL was one such competitor, but with Oracle purchasing SUN and getting MySQL in the bargain, that option disappeared.  So customers have continued to (reluctantly) fork over licensing and maintenance fees to Oracle, creating the bulk of the organization’s profit stream.  

Sound familiar?

Also, the champions of Oracle software offerings, developers, are dissatisfied with the company.  The founders of MySQL and the creator of Java, now key software offerings of Oracle, have jumped ship as a result of disagreements with Oracle’s corporate direction.

Now Oracle finds itself in is a classic Defend & Extend situation.  Nearly all their profits rely on historical licensing and maintenance for traditional software, a market that is rapidly shrinking.  Current customers are unhappy with cost and service; hungry for alternatives and ready to embrace new solutions.  But Oracle has arrived late and timidly to the Cloud Computing maketplace, attempting to leverage recently acquired assets where key personnel have left (and taking who knows how much vital market and product knowledge.)   Not only will Oracle have to struggle to differentiate itself from other Cloud offerings going forward, it will have to incorporate their newly acquired assets (including technologies) into a cohesive offering while trying to ramp up top notch service.

Oracle will have to break out of the “consistency trap” if it is to drive profits toward new growth.  New services that provide value to the customer will have to be developed and aggressively marketed. To grow future revenue and profits Oracle cannot rely on shoehorning customers into poorly fitting licensing and support models based on the fading market of yesteryear.

Or Oracle could choose to not change its old Success Formula.  For advice on that approach Oracle’s Mr. Ellison talk to Microsoft’s Mr. Ballmer to see how well his 1990’s corporate strategy is working as Microsoft stumbles into 2011.

Thanks Mike!  Mike Meikle shares his insights at “Musings of a Corporate Consigliere” (http://mikemeikle.wordpress.com/). I hope you read more of his thoughts on innovation and corporate change at his blog site.  I thank Mike for contributing this blog for readers of The Phoenix Principle today, and hope you’ve enjoyed his contribution to the discussion about innovation, strategy and market shifts.

If you would like to contribute a guest blog please send me an email.  I’d be pleased to pass along additional viewpoints on wide ranging topics.

Look for Disruption, not Consistency, to Find Superior Returns – Kraft v Groupon

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Summary:

• Business leaders like consistency
• Consistency leads to repetition, sameness, and lower rates of return
• Kraft's product lines are consistent, but without growth
• Kraft's value has been stagnant for 10 years
• Disruptive competitors make higher rates of return, and grow
• Disruptive competitors have higher valuations – just look at Groupon

"Needless consistency is the hobgoblin of small minds" – Ralph Waldo Emerson

That was my first thought when I read the MediaPost.com Marketing Daily article "Kraft Mac & Cheese Gets New, Unified Look." Whether this 80-something year old brand has a "unified" look is wholly uninteresting.  I don't care if all varieties have the same picture – and if they do it doesn't make me want to eat more powdered cheese and curved noodles. 

In fact, I'm not at all interested in anything about this product line.  It is kind of amusing, in an historical way, to note that people (largely children) still eat the stuff which fueled my no-cash college years (much like ramen noodles does for today's college kids.)  While there's nothing I particularly dislike about the product, as an investor or marketer there's nothing really to like about it either.  Pasta products always do better in a recession, as people look for cheaper belly-fillers (especially for the kid,) so that more is being sold the last couple of years doesn't tell me anything I would not have guessed on my own.  That the entire category has grown to only $800M revenue across this 8 decade period only shows that it's a relatively small business with no excitement!  Once people feel their finances are on firm footing sales will soon taper off.

Kraft's Mac & Cheese is emblematic of management teams that lock-in on defending and extending old businesses – even though the lack of growth leaves them struggling to grow cash flow and create a decent valuation.  Introducing multiple varieties of this product has not produced growth that even matched inflation across the years.  Primarily, marketing programs have been designed to try keeping existing customers from buying something else.  This most recent Kraft program is designed to encourage adults to try a product they gave up eating many years ago.  This is, at best, "foxhole" marketing.  Spending money largely just to keep the brand from going away, rather than really expecting any growth.  Truly, does anyone think this kind of spending will generate a billion dollar product line in 2011 – or even 2012?

What's wrong with defensive marketing, creating consistency across the product line – across the brand – and across history?  It doesn't produce high rates of return.  There are lots of pasta products, even lots of brands of mac & cheese.  While Kraft's product surely produces a positive margin, multiple competitors and lack of growth means increased spending over time merely leaves the brand producing a marginal rate of return. Incremental ad spending doesn't generate real growth, just a hope of not losing ground.  We know people aren't flocking to the store to buy more of the product.  New customers aren't being identified, and short-term growth in revenues does not yield the kinds of returns that would enhance valuation and make the world a better place for investors – or employees.

While Kraft is trying to create headlines with more spending in a very tired product, across town in Chicago Groupon has created a $500M revenue business in just 2 years!  And new reports from the failed acquisition attempt by Google indicate revenues are likely to reach $2B in 2011 (CNNMoney.com, Fortune, "Google's Groupon Groping Reveals the Shifting Power of the Web World.")  Where's Kraft in this kind of growth market?  After all, coupons for Kraft products have been in mailers and Sunday inserts for 50 years.  Why isn't Kraft putting money into a real growth business, which is producing enormous value while cash flow grows in multiples?  While Groupon has created somewhere around $6B of value in 2 years, Kraft's value has only gone sideways for the last decade (chart at Marketwatch.com.)

Kraft has not introduced a new product since — well — DiGiorno.  And that's been more than a decade.  While the company has big revenues – so did General Motors.  The longer a company plays defense, regardless of size, trying to extend its outdated products (and business model) the riskier that business becomes.  While big revenues appear to offer some kind of security, we all know that's not true.  Not only does competition drive down margins in these older businesses, but newer products make it harder and harder for the old products to compete at all.  Eventually, the effort to maintain historical consistency simply allows competitors to completely steal the business away with new products, creating a big revenue drop, or producing such low returns that failure is inevitable.

Lots of business people like consistency.  They like consistency in how the brand is executed, or how products are aligned.  They like consistency in the technology base, or production capabilities.  They like consistency in customers, and markets.  They like being consistent with company history – doing what "made the company famous."  They like the similarity of doing something again, and again, hoping that consistency will produce good returns. 

But consistency is the hobgoblin of small minds.  And those who are more clever find ways to change the game.  Xerox figured out how to let everyone be a one-button printer, and killed the small printing press manufacturers.  HP's desktop printers knocked the growth out of Xerox.  Google figured out a better way to find information, and place ads, just about killing newspapers (and magazines.)  Apple found a better way to use mobile minutes, taking a big bite out of cell phone manufacturers. Amazon found a better way to sell things, killing off bookstores and putting a world of hurt on many retailers.  Netflix found a better way of distributing DVDs and digital movies, sending Blockbuster to bankruptcy.  Infosys and Tata found a better way of doing IT services, wiping out PWC and nearly EDS.  Hulu (and soon Netflix, Google and Apple) has found a better way of delivering television programming, killing the growth in cable TV.  Groupon is finding a better way of delivering coupons, creating huge concerns for direct mail companies.  Now tablet makers (like Apple) are demonstrating a better way of working remotely, sending shivers of worry down the valuation of Microsoft. These companies, failed or in jeapardy, were very consistent.

Those who create disruptions show again and again that they can generate growth and above average returns, even in a recession.  While those who keep trying to defend and extend their old business are letting consistency drive their behavior – leading to intense competition, genericization, and lower rates of return.  Maybe Kraft should spend more money looking for the next food we would all like, rather than consistently trying to convince us we want more Mac & Cheese (or Velveeta).

Groupon and Google – you too can grow explosively

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Summary:

• Most planning systems only focus on improving the existing business
• Most value comes from identifying new market opportunities, and filling them
• Extremely high growth can happen in any company that focuses on market needs, rather than business model optimization
• Groupon has grown from $0 to $500M in 2 years, yet is not a technology company
• Groupon is value at $3B to $6B in just 2 years
• Google could continue to expand the explosive growth at Groupon
• Any company has this opportunity, if it focuses on market needs

“You can’t get there from here.”  That’s the punch line of an old joke about a city slicker that gets lost in the country.  He sees a farmer and says “I want to get to the St. James ranch.”  The farmer thinks about the washed out road #20, the destroyed bridge on Old Ferry Road, the blocked road on Westchester due to a property dispute – and given all his known ways to get to the St. James Ranch he conludes there’s no way to make it happen.  He gives up, and recommends the traveler do the same.

And this is the conclusion far too often of most planning systems.  When I ask the executive team “how will you grow revenue by 100% next year?” (or even 15% many times) the answer is “can’t happen.  We only grew 2% last year, our product lines are becoming aged and the overall market is only growing at 5%.  We can only, maximally, hope to grow 3-5%.”  In other words, “can’t get there from here.”

But of course there’s a way.

Groupon was started in 2008 (“Groupon at $3 Billion Soars Like Silicon Valley from Chicago” Bloomberg).  Now it has about $500M annual revenue, and 2,500 employees.  While Sara Lee, Kraft, Motorola and other Chicago stalwarts are contracting – unable to find a growth path – Groupon has exploded.  Most companies are complaining about the “great recession,” and its impact on customers and sales, saying they see no way to create triple digit growth.  Yet Groupon didn’t invent any new technology, didn’t file any patents, didn’t open a “scale” manufacturing plant, didn’t buy an existing business, or raise a huge amount of money.  Groupon is now dominant in local-market advertising – without the Foursquare technology play, or a partnership with Facebook.  And it keeps adding new local markets every week.  Piling up new revenues, and profits.

What Groupon did was offer the market something it highly valued – a local-based coupon service that was easy to use.  Building on digital technology rapidly being accepted by everyone.  While most companies are trying to focus on their “core capabilities” and bemoaning a dearth of growth, Groupon’s leaders looked into the marketplace to identify an unmet need and an application of developing technology.  As good as Google AdWords is, it is expensive and not terribly good at local marketing.  Newspaper coupons are expensive to print, and simply ignored by most modern consumers.  There was a hole in what people needed, so the entrepreneurs set out to fill it.  And by meeting a need, they’ve created an explosively growing company.  As mentioned earlier, while unemployment overall in Chicago is going up, Groupon has hired 900 people over the last 2 years.

That’s what most businesspeople are loath to do these days.  After years of being trained to focus on the supply chain, and that innovation is mostly about how to cut costs in the existing business, very few are thinking about market needs.  The vast majority (almost all?) of planning is devoted to cutting costs and optimizing an existing business.  Or trying to develop an adjacent opportunity to the existing business that has limited, if any growth prospects.  And trying to find ways to take money out of the business, rather than invest. In that planning system, if you ask “how do you plan to create a half billion dollar new business in the next two years” the answer is “you can’t get there from here.” 

“Google May Acquire Groupon for $6 Billion, and It Would Be Worth Every Penny” headlines Mashable.com. Not bad for the guys who started up this distinctly non-techie company in the non-techie midwest.  Whether they sell out or not, the next fundraising is guaranteed to make them extremely wealthy folks.  There are still a lot of markets yet to be developed, and a lot more deals to be made in the existing markets, as buyers seek out discounts for products they buy regularly. 

It mashable right?  Is this a smart idea for Google?  Unless you think coupons, and deals, are dead – you have to like this investment.  There’s a reason Groupon has grown so very fast – and that lies in meeting a market need.  How fast can it grow if Google adds its skills at ad sales, email (gmail) use, user database analytics, networking connections and technology wizardry?  While $6B is a lot of money, if you can see how Groupon on its own could become a $6B revenue company within 4 years from today is it really too miuch? (Groupon has grown from $0 to $500M in just about 2 years, so does 12x growth in 4 years [just under an annual doubling] really appear that difficult?)

Smart investing doesn’t mean “hold your nose and jump” off the bridge, hoping the water is OK.  And that’s not what Groupon did, or Google might do if it acquires Groupon.  Both companies are focusing on future scenarios about how we will get things done in 2012 and beyond.  Both are thinking about the impact of existing trends, and how those will allow everyone to be more effective, efficient and successful in 3 or 5 years.  Both are developing solutions that help us be more productive by building on trends – and not merely expecting the future to look like the past.  Their planning is based upon views of the future – and that’s why they can see such greater opportunity, and create so much value.

Most business limit their planning, and investing, to doing more of what they have always done.  Better, faster, cheaper are the hallmarks of the traditional planning process output.  Expecting to get dramatic growth, or value, out of a system so narrowly focused is expecting the impossible. Creating value – big value – comes from providing solutions that meet new market needs. And that requires overcoming the limits of traditional planning – and traditional ways of thinking about investing.  Instead of doing more of what you know, you have to do more of what the market wants.  Any company can get there from here – if you simply open your planning to moving beyond the limits of what you’ve historically done.