Irrelevancy leads to failure – Worry for Yahoo, Microsoft, HP, Sears, etc.

The web lit up yesterday when people started sharing a Fortune quote from Marissa Mayer, CEO of Yahoo, "We are literally moving the company from BlackBerrys to smartphones."  Why was this a big deal?  Because, in just a few words, Ms. Mayer pointed out that Research In Motion is no longer relevant.  The company may have created the smartphone market, but now its products are so irrelevant that it isn't even considered a market participant.

Ouch.  But, more importantly, this drove home that no matter how good RIM thinks Blackberry 10 may be, nobody cares.  And when nobody cares, nobody buys.  And if you weren't convinced RIM was headed for lousy returns and bankruptcy before, you certainly should be now.

But wait, this is certainly a good bit of the pot being derogatory toward the kettle.  Because, other than the highly personalized news about Yahoo's new CEO, very few people care about Yahoo these days as well.  After being thoroughly trounced in ad placement and search by Google, it is wholly unclear how Yahoo will create its own relevancy.  It may likely be soon when a major advertiser says "When placing our major internet ad program we are focused on the split between Google and Facebook," demonstrating that nobody really cares about Yahoo anymore, either. 

And how long will Yahoo survive?

The slip into irrelevancy is the inflection point into failure.  Very few companies ever return.  Once you are no longer relevant, customer quickly stop paying attention to practically anything you do.  Even if you were once great, it doesn't take long before the slide into no-growth, cost cutting and lousy financial performance happens. 

Consider:

• Garmin once led the market for navigation devices.  Now practically everyone uses their mobile phone for navigation. The big story is Apple's blunder with maps, while Google dominates the marketplace.  You probably even forgot Garmin exists.
• Radio Shack once was a consumer electronics powerhouse.  They ran superbowl ads, and had major actresses parlaying with professional sports celebrities in major network ads.  When was the last time you even thought about Radio Shack, much less visited a store?
• Sears was once America's premier, #1 retailer.  The place where everyone shopped for brands like Craftsman, DieHard and Kenmore.  But when did you last go into a Sears?  Or even consider going into one?  Do you even know where one is located?
• Kodak invented amateur photography.  But when that market went digital nobody cared about film any more.  Now Kodak is in bankruptcy.  Do you care?
• Motorola Razr phones dominated the last wave of traditional cell phones.  As sales plummeted they flirted with bankruptcy, until Motorola split into 2 pieces and the money losing phone business became Google – and nobody even noticed.
• When was the last time you thought about "building your body 12 ways" with Wonder bread?  Right.  Nobody else did either.  Now Hostess is liquidating.

Being relevant is incredibly important, because markets shift quickly today. As they shift, either you are part of the trend going forward – or you are part of the "who cares" past.  If you are the former, you are focused on new products that customers want to evaluate. If you are the latter, you can disappear a whole lot faster than anyone expected as customers simply ignore you.

So now take a look at a few other easy-to-spot companies losing relevancy:

• HP headlines are dominated by write offs of its investments in services and software, causing people to doubt the viability of its CEO, Meg Whitman.  Who wants to buy products from a company that would spend billions on Palm, business services and Autonomy ERP software only to decide they overspent and can never make any money on those investments?  Once a great market leader, HP is rapidly becoming a company nobody cares about; except for what appears to be a bloody train wreck in the making.  In tech – lose customesr and you have a short half-life.
• Similarly Dell.  A leader in supply chain management, what Dell product now excites you?  As you think about the money you will spend this holiday, or in 2013, on tech products you're thinking about mobile devices — and where is Dell?
• Best Buy was the big winner when Circuit City went bankrupt.  But Best Guy didn't change, and now margins have cratered as people showroom Amazon while in their store to negotiate prices.  How long can Best Buy survive when all TVs are the same, and price is all that matters?  And you download all your music and movies?
• Wal-Mart has built a huge on-line business.  Did you know that?  Do you care?  Regardless of Wal-mart's on-line efforts, the company is known for cheap looking stores with cheap merchandise and customers that can't maintain credit cards.  When you look at trends in retailing, is Wal-Mart ever the leader – in anything – anymore?  If not, Wal-mart becomes a "default" store location when all you care about is price, and you can't wait for an on-line delivery.  Unless you decide to go to the even cheaper Dollar General or Aldi.

And, the best for last, is Microsoft.  Steve Ballmer announced that Microsoft phone sales quadrupled!  Only, at 4 million units last quarter that is about 10% of Apple or Android.  Truth is, despite 3 years of development, a huge amount of pre-release PR and ad spending, nobody much cares about Win8, Surface or new Microsoft-based mobile phones.  People want an iPhone or Samsung product. 

After its "lost decade" when Microsoft simply missed every major technology shift, people now don't really care about Microsoft.  Yes, it has a few stores – but they dwarfed in number and customers by the Apple stores.  Yes, the shifting tiles and touch screen PCs are new – but nobody real talks about them; other than to say they take a lot of new training.  When it comes to "game changers" that are pushing trends, nobody is putting Microsoft in that category.

So the bad news about a  $6 billion write-down of aQuantive adds to the sense of "the gang that can't shoot straight" after the string of failures like Zune, Vista and early Microsoft phones and tablets.  Not to mention the lack of interest in Skype, while Internet Explorer falls to #2 in browser market share behind Chrome. 

Chart Courtesy Jay Yarrow, BusinessInsider.com 5-21-12

When a company is seen as never able to take the lead amidst changing
trends, investors see accquisitions like $1.2B for Yammer as a likely future write down.  Customers lose interest and simply spend money elsewhere.

As investors we often hear about companies that were once great brands, but selling at low multiples, and therefore "value plays."  But the truth is these are death traps that wipe out returns.  Why?  These companies have lost relevancy, and that puts them one short step from failure. 

As company managers, where are you investing?  Are you struggling to be relevant as other competitors – maybe "fringe" companies that use "voodoo solutions" you don't consider "enterprise ready" or understand – are obtaining a lot more interest and media excitment?  You can work all you want to defend & extend your past glory, but as markets shift it is amazingly easy to lose relevancy.  And it's a very, very tough job to play catch- up. 

Just look at the money being spent trying at RIM, Microsoft, HP, Dell, Yahoo…………

–

Hostess’ Twinkie Defense Is a Failure

Hostess Brands filed for liquidation this week.  Management blamed its workforce for the failure.  That is straightforward scapegoating.

In 1978 Dan White killed San Francisco's mayor George Moscone and city supervisor Harvey Milk.  The press labeled his defense the "Twinkie Defense" because he claimed eating sugary junk food – like Twinkies – caused diminished capacity.  Amazingly the jury bought it, and convicted him of manslaughter instead of murder saying he really wasn't responsible for his own actions.  An outraged city rioted.

Nobody is rioting, but management's claim that unions caused Hostess failure is just as outrageous. 

Founded in 1930 as Interstate Bakeries Co. (IBC) the company did fine for years. But changing consumer tastes, including nutrition desires, changed how much Wonder Bread, Twinkies, HoHos and Honey Buns people would buy — and most especially affected the price – which was wholly unable to keep up with inflation. This trend was clear in the early 1980s, as prices were stagnant and margins kept declining due to higher costs for grain and petroleum to fuel the country's largest truck fleet delivering daily baked goods to grocers.

IBC kept focusing on operating improvements and better fleet optimization to control rising costs, but the company was unwilling to do anything about the product line.  To keep funding lower margins the company added debt, piling on $450M by 2004 when forced to file bankruptcy due to its inability to pay bills.  For 5 years financial engineers from consultancies and investment banks worked to find a way out of bankruptcy, and settled on adding even MORE debt, so that – perversely – in 2009 the renamed Hostess had $670M of debt – at least 2/3 the total asset value!

Since then, still trying to sell the same products, margins continued declining.  Hostess lost a combined $250M over the last 3 years. 

The obvious problem is leadership kept trying to sell the same products, using roughly the same business model, long, long, long after the products had become irrelevant.  "Demand was never an issue" a company spokesman said.  Yes, people bought Twinkies but NOT at a price which would cover costs (including debt service) and return a profit. 

In a last, desperate effort to keep the outdated model alive management decided the answer was another bankruptcy filing, and to take draconian cuts to wages and benefits.  This is tanatamount to management saying to those who sell wheat they expect to buy flour at 2/3 the market price – or to petroleum companies they expect to buy gasoline for $2.25/gallon.  Labor, like other suppliers, has a "market rate."  That management was unable to run a company which could pay the market rate for its labor is not the fault of the union.

By constantly trying to defend and extend its old business, leadership at Hostess killed the company.  But not realizing changing trends in foods made their products irrelevant – if not obsolete – and not changing Hostess leaders allowed margins to disintegrate.  Rather than developing new products which would be more marketable, priced for higher margin and provide growth that covered all costs Hostess leadership kept trying to financial engineer a solution to make their horse and buggy competitive with automobiles. 

And when they failed, management decided to scapegoat someone else.  Maybe eating too many Twinkies made the do it.  It's a Wonder the Ding Dongs running the company kept this Honey Bun alive by convincing HoHos to loan it money!  Blaming the unions is simply an inability of management to take responsibility for a complete failure to understand the marketplace, trends and the absolute requirement for new products.

We see this Twinkie Defense of businesses everywhere.  Sears has 23 consecutive quarters of declining same-store sales – but leadership blames everyone but themselves for not recognizing the shifting retail market and adjusting effectively. McDonald's returns to declining sales – a situation they were in 9 years ago – as the long-term trend to healthier eating in more stylish locations progresses; but the blame is not on management for missing the trend while constantly working to defend and extend the old business with actions like taking a slice of cheese off the 99cent burger.  Tribune completey misses the shift to on-line news as it tries to defend & extend its print business, but leadership, before and afater Mr. Zell invested, refuses to say they simply missed the trend and let competitors make Tribune obsolete and unable to cover costs. 

Businesses can adapt to trends.  It is possible to stop the never-ending chase for lower costs and better efficiency and instead invest in new products that meet emerging needs at higher margins.  Like the famous turnarounds at IBM and Apple, it is possible for leadership to change the company. 

But for too many leadership teams, it's a lot easier to blame it on the Twinkies.  Unfortunately, when that happens everyone loses.

 

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

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

That is faulty logic.

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

Chart reproduced with permission of Business Insider

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

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

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

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

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

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

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

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

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

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