Why Groupon Needs a New CEO

Forbes magazine labeled Groupon the world's fastest growing corporation.  And that didn't hurt the company's valuation when it went public in November, 2011. 

But after trading up for a couple of months, at the beginning of March Groupon turned down and has since lost 75% of its market capitalization.  Groupon is now valued at about $3.6B – approaching half of what Google offered to pay for the company in 2011 before leadership decided to go public. 

And nobody, absolutely nobody, can be happy about that.

Groupon pioneered the use of digital coupons in a way that created an explosive new market for local business.  Paper coupon use had been declining for years.  But when Groupon made it possible for on-line individuals to achieve deep discounts on products in local stores using emailed coupons masses of people started buying. From nothing in June, 2009, by June, 2010 revenues grew to an astonishing $100M. Then, between June, 2010 and June, 2011 revenues exploded 10-fold, reaching the magical $1B.  Forbes was not wrong – as this was an astonishing growth accomplishment.

Google, Yahoo, Amazon and other suitors quickly recognized that this was not a fad – but a true growth market:

• People like deals, and coupons could be successful when updated to modern technology
• Local programs were extremely hard for internet-wide companies like Google, and Groupon had "cracked the code" for acquiring local-market customers
• Some Groupon programs had simply astounding results – far exceeding the offerer's expectations.  The downside was the businessess complained about how much the discounts cost them as success exceeded expectations.  The upside was it demonstrated the business had remarkable reach and success.
• As mobile use grows Groupon can interact with location apps like Foursquare to allow local merchants to target local customers for rapid sales.  Combine that with Twitter distribution and you could have extremely effective local store targeted marketing programs – previously unavailable on the web.
• Groupon reached a scale allowing it to potentially work with national consumer goods companies like PepsiCo or P&G and their local retailers on new product launches or market specific sales programs, something not previously done via digital networks.

Ah, but problems have emerged at Groupon.  Although none of them really change the above items:

• Groupon was caught in an accounting snafu indicating the company overstated revenue
• Groupon hired a Google exec as COO, only to have her leave after only 5 months on the job
• Rumors have flown about the CEO's nonchalant air surrounding his job, including drinking beer at company Q&A events
• Most recently, revenue growth not only slowed – but actually declined!!  

Source:  Business Insider August 13, 2012 Permission to reproduce: Jay Yarrow, Silicon Alley Insider Editor

This last point is extremely deadly.  Groupon's growth rate has fallen from 1,000% to about 35%!  Further, Groupon is dangerously close to a growth stall, which is 2 consecutive quarters of declining revenue.  Only 7% of companies that incur a growth stall maintain a consistent growth rate of even 2%!! Groupon's value is completely based upon maintaining high growth.  So regardless of anything else – including profitability – unless Groupon can find its growth mojo then investors are screwed!

Has the market for daily deals declined?  Not according to Yelp and Amazon, which continue growing their markets.  Consumers are still smarting from a bad economy, and love digital coupons.  The problems at Groupon do not appear to be that the market is disappearing – but rather that management simply does not know what to do next.

Groupon was a rocket ship of growth, and founding CEO Andrew Mason deserves a lot of credit for building the sales machine that outperformed everyone else – including Google and Amazon.  But the other side of his performance was complete inexperience in how to manage finances, operations or any other part of a large publicly traded corporation.  Unprofessional analyst presentations, executive turnover, disrespectful comments to investors and chronic unprofitability all were acceptable if – and only if – he kept up that torrid growth pace.  If he can't drive sales, what's the benefit of keeping him in the top job?

Groupon is a remarkable company, in a remarkable market.  But it has incredibly tough competition.  Seasoned tech investors know that as fast as Groupon sales went up, they can go down.  With smart, well managed competitors in their markets there is no room for error – and no time.  Groupon has to keep the growth going, or it will quickly be overwhelmed by bigger, smarter companies – remember Palm? RIM?

It's not too late for Groupon. It is #1 in its market.  Groupon has the most users, the most customers and by far the most salespeople.  Groupon has other products in the pipeline which solve new needs and can extend sales into other emerging market opportunities.  But Groupon will not survive if it does not recapture growth – and it's time for a CEO with the experience to do just that.  Mr. Mason does not appear to be the next Jeff Bezos or Steve Jobs, so Groupon's Board better go find one!

The Good, Bad and Ugly – Apple, Google and Dell

The Good – Apple

Apple's latest news to start paying a big dividend, and buying back shares, is a boon for investors.  And it signals the company's future strength.  Often dividends and share buybacks indicate a company has run out of growth projects, so it desires to manipulate the stock price as it slowly pays out the company's assets.  But, in Apple's (rare) case the company is making so much profit from existing businesses that they are running out of places to invest it – thus returning to shareholders!

With a $100B cash hoard, Apple anticipates generating at least another $150B of free cash flow, over and above needs for ongoing operations and future growth projects, the next 3 years.  With so much cash flowing the company is going to return money to investors so they can invest in other growth projects beyond those Apple is developing.  Exactly what investors want! 

I've called Apple the lowest risk, highest return stock for investors (the stock to own if you can only own one stock) for several years.  And Apple has not disappointed.  At $600/share the stock is up some 75% over the last year (from about $350,) and up 600% over the last 5 years (from about $100.)  And now the company is going to return investors $10.60/year, currently 1.8% – or about 4 times your money market yield, or about 75% of what you'd get for a 10 year Treasury bond. Yet investors still have a tremendous growth in capital opportunity, because Apple is still priced at only 14x this year's projected earnings, and 12 times next year's projected earnings!

Apple keeps winning.  It's leadership in smart phones continues, as the market converts from traditional cell phones to smart phones.  And its lead in tablets remains secure as it sells 3 million units of the iPad 3 over the weekend.  In every area, for several years, Apple has outperformed expectations as it leads the market shift away from traditional PCs and servers to mobile devices and using the "cloud." 

The Bad – Google

Google was once THE company to emulate.  At the end of 2008 its stock peaked at nearly $750/share, as everyone thought Google would accomplish nothing short of world domination (OK, a bit extreme) via its clear leadership in search and the way it dominated internet usage.  But that is no longer the case, as Google is being eclipsed by upstarts such as Facebook and Groupon.

What happened?  Even though it had a vaunted policy of allowing employees to spend 20% of their time on anything they desired, Google never capitalized on the great innovations created.  Products like Google Wave and Google Powermeter were created, launched – and then subsequently left without sponsors, management attention, resources or even much interest.  Just as recently happened with GoogleTV.

They floundered, despite identifying very good solutions for pretty impressive market needs, largely because management chose to spend almost all its attention, and resources, defending and extending its on-line ad sales created around search. 

• YouTube is a big user environment, and one of the most popular sites on the web.  But Google still hasn't really figured out how to generate revenue, or profit, from the site.  Despite all the user activity it produces a meager $1.6B annual revenue – and nearly no profit.
• Android may have share rivaling Apple in smartphones, but it is nowhere in tablets and thus lags significantly in the ovarall market with share only about half iOS.  Worse, Android smartphones are not nearly as profitable as iPhones, and now Google has made an enormous, multi-billion investment in Motorola to enter this business – and compete with its existing smartphone manufacturers (customers.)  To date Android has been a product designed to defend Google's historical search business as people go mobile – and it has produced practically no revenue, or profit.
• Chrome browsers came on the scene and quickly grew share beyond Firefox.  But, again, Google has not really developed the product to reach a dominant position.  While it has good reviews, there has been no major effort to make it a profitable product.  Possibly Google fears fighting IE will create a "money pit" like Bing has become for Microsoft in search?
• Chromebooks were a flop as Google failed to invest in robust solutions allowing users to link printers, MP3 players, etc. – or utilize a wide suite of thin cloud-based apps.  Great idea, that works well, they are a potential alternative to PCs, and some tablet applications, but Google has not invested to make the product commercially viable.
• Google tried to buy GroupOn to enter the "local" ad marketplace, but backed out as the price accelerated.  While investors may be happy Google didn't overpay, the company missed a significant opportunity as it then faltered on creating a desirable competitive product.  Now Google is losing the race to capture local market ads that once went to newspapers.

While Google chose to innovate, but not invest in market development, it missed several market opportunities.  And in the meantime Google allowed Facebook to sneak up and overtake its "domination" position. 

Facebook has led people to switch from using the internet as a giant library, navigated by search, to a social medium where referrals, discussions and links are driving more behavior.  The result has advertisers shifting their money toward where "eyeballs" are spending most of their time, and placing a big threat on Google's ability to maintain its historical growth.

Thus Google is now dumping billions into Google+, which is a very risky proposition.  Late to market, and with no clear advantage, it is extremely unclear if Google+ has any hope of catching Facebook.  Or even creating a platform with enough use to bring in a solid, and growing, advertiser base. 

The result is that today, despite the innovation, the well-known (and often good) products, and even all the users to its sites Google has the most concentrated revenue base among large technology companies.  95% of its revenues still come from ad dollars – mostly search.  And with that base under attack on all fronts, it's little wonder analysts and investors have become skeptical.  Google WAS a great company – but it's decisions since 2008 to lock-in on defending and extending its "core" search business has made the company extremely vulnerable to market shifts. A bad thing in fast moving tech markets.

Google investors haven't fared well either.  The company has never paid a dividend, and with its big investments (past and future planned) in search and handsets it won't for many years (if ever.)  At $635/share the stock is still down over 15% from its 2008 high.  Albeit the stock is up about 8.5% the last 12 months, it has been extremely volatile, and long term investors that bought 5 years ago, before the high, have made only about 7%/year (compounded.)

Google looks very much like a company that has fallen victim to its old success formula, and is far too late adjusting to market shifts.  Worse, its investments appear to be a company spending huge sums to defend its historical business, taking on massive gladiator battles against Apple and Facebook – two companies far ahead in their markets and with enormous leads and war chests. 

The Ugly – Dell

Go back to the 1990s and Dell looked like the company that could do no wrong.  It went head-to-head with competitors to be the leader in selling, assembling and delivering WinTel (Windows + Intel) PCs.  Michael Dell was a modern day hero to other leaders hoping to match the company's ability to focus on core markets, minimize investments in anything else, and be a world-class supply chain manager.  Dell had no technology or market innovation, but it was the best at beating down cost – and lowering prices for customers.  Dell clearly won the race to the bottom.

But the market for PCs matured.  And Dell has found itself one of the last bachelors at the dance, with few prospects.  Dell has no products in leading growth markets, like smartphones or tablets.  Nor even other mobile products like music or video.  And it has no software products, or technology innovation. Today, Dell is locked in gladiator battles with companies that can match its cost, and price, and make similarly slim (to nonexistent) margins in the generic business called PCs (like HP and Lenovo.)

Dell has announced it intends to challenge Apple with a tablet launch later in 2012.  This is dependent upon Microsoft having Windows 8 ready to go by October, in time for the holidays.  And dependent upon the hope that a swarm of developers will emerge to build the app base for things that already exist on the iPad and Android tablets.  The advantage of this product is as yet undefined, so the market is yet undefined.  The HOPE is that somehow, for some reason, there is a waiting world of people that have delayed purchase waiting on a Windows device – and will find the new Dell product superior to a $299 Apple 2 already available and with that 500,000 app store.

Clearly, Dell has waited way, way too long to deal with changing its business.  As its PC business flattens (and soon shrinks) Dell still has no smartphone products, and is remarkably late to the tablet business.  And it offers no clear advantage over whatever other products come from Windows 8 licensees.  Dell is in a brutal world of ever lower prices, shrinking markets and devastating competition from far better innovators creating much higher, and growing, profits (Apple and Amazon.)

For investors, the ride from a fast moving boat in the rapids into the swamp of no growth – and soon the whirlpool of decline – has been dismal.  Dell has never paid a dividend, has no free cash flow to start paying one now, and clearly no market growth from which to pay one in the future.  Dell's shares, at $17, are about the same as a year ago, and down about 20% over the last 5 years. 

Leaders in all businesses have a lot to learn from looking at the Good, Bad and Ugly.  The company that has invested in innovation, and then invested in taking that innovation to market in order to meet emerging needs has done extremely well.  By focusing on needs, rather than business optimization, Apple has been able to shift with markets – and even enhance the market shift to position itself for rapid, profitable growth.

Meanwhile, companies that have focused on their core markets and products are doing nowhere near as well.  They have missed market shifts, and watched their fortunes decline precipitously.  They were once very profitable, but despite intense focus on defending their historical strengths profits have struggled to grow as customers moved to alternative solutions.  By spending insufficient time looking outward, at markets and shifts, and too much time inward, on defending and extending past successes, they now face future jeopardy.

Leadership Matters – Ballmer vs. Bezos

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Not far from each other, in the area around Seattle, are two striking contrasts in leadership.  They provide significant insight to what creates success today.

Steve Ballmer leads Microsoft, America's largest software company.  Unfortunately, the value of Microsoft has gone nowhere for 10 years.  Steve Ballmer has steadfastly defended the Windows and Office products, telling anyone who will listen that he is confident Windows will be part of computing's future landscape.  Looking backward, he reminds people that Windows has had a 20 year run, and because of that past he is certain it will continue to dominate.

Unfortunately, far too many investors see things differently.  They recognize that nearly all areas of Microsoft are struggling to maintain sales.  It is quite clear that the shift to mobile devices and cloud architectures are reducing the need, and desire, for PCs in homes, offices and data centers.  Microsoft appears years late recognizing the market shift, and too often CEO Ballmer seems in denial it is happening – or at least that it is happening so quickly.  His fixation on past success appears to blind him to how people will use technology in 2014, and investors are seriously concerned that Microsoft could topple as quickly DEC., Sun, Palm and RIM. 

Comparatively, across town, Mr. Bezos leads the largest on-line retailer Amazon.  That company's value has skyrocketed to a near 90 times earnings!  Over the last decade, investors have captured an astounding 10x capital gain!  Contrary to Mr. Ballmer, Mr. Bezos talks rarely about the past, and almost almost exclusively about the future.  He regularly discusses how markets are shifting, and how Amazon is going to change the way people do things. 

Mr. Bezos' fixation on the future has created incredible growth for Amazon.  In its "core" book business, when publishers did not move quickly toward trends for digitization Amazon created and launched Kindle, forever altering publishing.  When large retailers did not address the trend toward on-line shopping Amazon expanded its retail presence far beyond books, including more products  and a small armyt of supplier/partners.  When large PC manufacturers did not capitalize on the trend toward mobility with tablets for daily use Amazon launched Kindle Fire, which is projected to sell as many as 12 million units next year (AllThingsD.com). 

Where Mr. Ballmer remains fixated on the past, constantly reinvesting  in defending and extending what worked 20 years ago for Microsoft, Mr. Bezos is investing heavily in the future.  Where Mr. Ballmer increasingly looks like a CEO in denial about market shift, Mr. Bezos has embraced the shifts and is pushing them forward. 

Clearly, the latter is much better at producing revenue growth and higher valuation than the former.

As we look around, a number of companies need to heed the insight of this Seattle comparison:

• At AOL it is unclear that Mr. Armstrong has a clear view of how AOL will change markets to become a content powerhouse.  AOL's various investments are incoherent, and managers struggle to see a strong future for AOL.  On the other hand, Ms. Huffington does have a clear sense of the future, and the insight for an entirely different business model at AOL.  The Board would be well advised to consider handing the reigns to Ms. Huffington, and pushing AOL much more rapidly toward a different, and more competitive future.
• Dell's chronic inability to identify new products and markets has left it, at best, uninteresting.  It's supply chain focused strategy has been copied, leaving the company with practically no cost/price advantage.  Mr. Dell remains fixated on what worked for his initial launch 30 years ago, and offers no exciting description of how Dell will remain viable as PC sales diminish.  Unless new leadership takes the helm at Dell, the company's future  5 years hence looks bleak.
• HP's new CEO Meg Whitman is less than reassuring as she projects a terrible 2012 for HP, and a commitment to remaining in PCs – but with some amorphous pledge toward more internal innovation.  Lacking a clear sense of what Ms. Whitman thinks the world will look like in 2017, and how HP will be impactful, it's hard for investors, managers or customers to become excited about the company.  HP needs rapid acceleration toward shifting customer needs, not a relaxed, lethargic year of internal analysis while competitors continue moving demand further away from HP offerings.
• Groupon has had an explosive start.  But the company is attacked on all fronts by the media.  There is consistent questioning of how leadership will maintain growth as reports emerge about founders cashing out their shares, highly uneconomic deals offered by customers, lack of operating scale leverage, and increasing competition from more established management teams like Google and Amazon.  After having its IPO challenged by the press, the stock has performed poorly and now sells for less than the offering price.  Groupon desperately needs leadership that can explain what the markets of 2015 will look like, and how Groupon will remain successful.

What investors, customers, suppliers and employees want from leadership is clarity around what leaders see as the future markets and competition.  They want to know how the company is going to be successful in 2 or 5 years.  In today's rapidly shifting, global markets it is not enough to talk about historical results, and to exhibit confidence that what brought the company to this point will propel it forward successfully. And everyone recognizes that managing quarter to quarter will not create long term success.

Leaders must  demonstrate a keen eye for market shifts, and invest in opportunities to participate in game changers.  Leaders must recognize trends, be clear about how those trends are shaping future markets and competitors, and align investments with those trends.  Leadership is not about what the company did before, but is entirely about what their organization is going to do next. 

Update 30 Nov, 2011

In the latest defend & extend action at Microsoft Ballmer has decided to port Office onto the iPad (TheDaily.com).  Short term likely to increase revenue.  But clearly at the expense of long-term competitiveness in tablet platforms.  And, it misses the fact that people are already switching to cloud-based apps which obviate the need for Office.  This will extend the dying period for Office, but does not come close to being an innovative solution which will propel revenues over the next decade.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gladiators get killed. Dump Wal-Mart; Buy Amazon

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

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

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

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

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

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

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

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

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

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

Source: BusinessInsider.com

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

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

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

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

Let Sears Go! No Subsidies, and Sell the Stock. Invest in Groupon

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Sears is threatening to move its headquarters out of the Chicago area.  It’s been in Chicago since the 1880s.  Now the company Chairman is threatening to move its headquarters to another state, in order to find lower operating costs and lower taxes. 

Predictably “Officals Scrambling to Keep Sears in Illinois” is the Chicago Tribune headlined.  That is stupid.  Let Sears go.  Giving Sears subsidies would be tantamount to putting a 95 year old alcoholic, smoking paraplegic at the top of the heart/lung transplant list!  When it comes to subsidies, triage is the most important thing to keep in mind.  And honestly, Sears ain’t worth trying to save (even if subsidies could potentially do it!)

“Fast Eddie Lampert” was the hedge fund manager who created Sears Holdings by using his takeover of bankrupt KMart to acquire the former Sears in 2003. Although he was nothing more than a financier and arbitrager, Mr. Lampert claimed he was a retailing genius, having “turned around” Auto Zone. And he promised to turn around the ailing Sears. In his corner he had the modern “Mad Money” screaming investor advocate, Jim Cramer, who endorsed Mr. Lampert because…… the two were once in college togehter.  Mr. Cramer promised investors would do well, because he was simply sure Mr. Lampert was smart.  Even if he didn’t have a plan for fixing the company.

Sears had once been a retailing goliath, the originator of home shopping with the famous Sears catalogue, and a pioneer in financing purchases.  At one time you could obtain all your insurance, banking and brokerage needs at a Sears, while buying clothes, tools and appliances.  An innovator, Sears for many years was part of the Dow Jones Industrial Average.  But the world had shifted, Home Depot displaced Sears on the DJIA, and the company’s profits and revenues sagged as competitors picked apart the product lines and locations.

Simultaneously KMart had been destroyed by the faster moving and more aggressive Wal-Mart.  Wal-Mart’s cost were lower, and its prices lower.  Even though KMart had pioneered discount retailing, it could not compete with the fast growing, low cost Wal-Mart. When its bonds were worth pennies, Mr. Lampert bought them and took over the money-losing company.

By combining two losers, Mr. Lampert promised he would make a winner.  How, nobody knew.  There was no plan to change either chain.  Just a claim that both were “great brands” that had within them other “great brands” like Martha Stewart (started before she was convicted and sent to jail), Craftsman and Kenmore. And there was a lot of real estate.  Somehow, all those assets simlply had to be worth more than the market value.  At least that’s what Mr. Lampert said, and people were ready to believe.  And if they had doubts, they could listen to Jim Cramer during his daily Howard Beale impersonation.

Only they all were wrong.

Retailing had shifted.  Smarter competitors were everywhere.  Wal-Mart, Target, Dollar General, Home Depot, Best Buy, Kohl’s, JCPenney, Harbor Freight Tools, Amazon.com and a plethora of other compeltitors had changed the retail market forever.  Likewise, manufacturers in apparel, appliances and tools had brough forward better products at better prices.  And financing was now readily available from credit card companies. 

Surely the real estate would be worth a fortune everyone thought.  After all, there was so much of it.  And there would never be too much retail space.  And real estate never went down in value.  At least, that’s what everyone said.

But they were wrong.  Real estate was at historic highs compared to income, and ability to pay.  Real estate was about to crater.  And hardest hit in the commercial market was retail space, as the “great recession” wiped out home values, killed personal credit lines, and wiped out disposable income.  Additionally, consumers increasingly were buying on-line instead of trudging off to stores fueling growth at Amazon and its peers rather than Sears – which had no on-line presence.

Those who were optimistic for Sears were looking backward.  What had once been valuable they felt surely must be valuable again.  But those looking forward could see that market shifts had rendered both KMart and Sears obsolete.  They were uncompetitive in an increasingly more competitive marketplace.  As competitors kept working harder, doing more, better, faster and cheaper Sears was not even in the game.  The merger only made the likelihood of failure greater, because it made the scale fo change even greater. 

The results since 2003 have been abysmal.  Sales per store, a key retail benchmark, have declined every quarter since Mr. Lampert took over.  In an effort to prove his financial acumen, Mr. Lampert led the charge for lower costs.  And slash his management team did – cutting jobs at stores, in merchandising and everywhere.  Stores were closed every quarter in an effort to keep cutting costs.  All Mr. Lampert discussed were earnings, which he kept trying to keep from disintegrating.  But with every quarter Sears has become smaller, and smaller.  Now, Crains Chicago Business headlined, even the (in)famous chairman has to admit his past failure “Sears Chief Lampert: We Ought to be Doing a Lot Better.”

Sears once built, and owned, America’s tallest structure.  But long ago Sears left the Sears Tower.  Now it’s called the Willis Tower by the way – there is no Sears Tower any longer.  Sears headquarters are offices in suburban Hoffman Estates, and are half empty.  Eighty percent of the apparel merchandisers were let go in a recent move, taking that group to California where the outcome has been no better. Constant cost cutting does that.  Makes you smaller, and less viable.

And now Sears is, well….. who cares?  Do you even know where the closest Sears or Kmart store is to you?  Do you know what they sell?  Do you know the comparative prices?  Do you know what products they carry?  Do you know if they have any unique products, or value proposition?  Do you know anyone who works at Sears?  Or shops there?  If the store nearest you closed, would you miss it amidst the Home Depot, Kohl’s or Best Buy competitors?  If all Sears stores closed – every single location – would you care? 

And now Illinois is considering giving this company subsidies to keep the headquarters here?

Here’s an alternative idea. Using whatever logic the state leaders can develop, using whatever dream scenario and whatever desperation economics they have in mind to save a handful of jobs, figure out what the subsidy might be.  Then invest it in Groupon.  Groupon is currently the most famous technology start-up in Illinois.  Over the next 10 years the Groupon investment just might create a few thousand jobs, and return a nice bit of loot to the state treasury.  The Sears money will be gone, and Sears is going to disappear anyway.  Really, if you want to give a subsidy, if you want to “double down,” why not bet on a winner?

It really doesn’t have to be Groupon.  The state residents will be much better off if the money goes into any  business that is growing.  Investing in the dying horse simply makes no sense.  Beg Amazon, Google or Apple to open a center in Illinois – give them the building for free if you must.  At least those will be jobs that won’t disappear.  Or invest the money into venture funds that can invest in the next biotech or other company that might become a Groupon.  Invest in senior design projects from engineering students at the University of Illinois in Chicago or Urbana/Champaign.  Invest in the fillies that have a chance of winning the race!

Sentimenatality isn’t bad.  We all deserve the right to “remember the good old days.”  But don’t invest your retirement fund, or state tax receipts, in sentimentality.  That’s how you end up like Detroit.  Instead put that money into things that will grow.  So you can be more like silicon valley.  Invest in businesses that take advantage of market shifts, and leverage big trends to grow.  Let go of sentimentality.  And let go of Sears.  Before it makes you bankrupt!

 

Hyperdigitization: A Shift Toward Virtual

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Today’s Guest Blog is provided by Mike Meikle.  He offers some great insight to the declining value of manufacturing as producitivity continues to skyrocket, pushing all of us toward understanding and competing in markets where greater value lies in digital products rather than physical.

Summary

• Hyperdigitization is the economic shift toward “virtual” goods and services
• Manufacturing jobs have dropped 31 percent but output is at a near record $1.7 trillion.
• Economic output of Hyperdigitization is $2.9 trillion.
• Google, Facebook and GroupOn all have large revenue streams/valuations yet no physical product.
• Industrial Age economic model of static business models is rapidly fading.
• Organizations must release their innovative capabilities to survive and thrive.

Recently, I was engaged by ExecSense to give a Risk Management & Outsourcing Trends for 2011 webinar targeted for Risk Management executives.  Since I only had an hour to cover a vast amount material, I could only briefly touch on some interesting topics. One of these was Hyperdigitization, a jargon-laden term that means economic output is moving toward “virtual” goods and services.

So how does hyperdigitization tie into outsourcing trends?  As companies continue shift their business processes to outside service providers, firms will have to develop ways to protect their intellectual property and virtual output.  Since intellectual property is data, risk managers will have to develop and monitor Key Performance Indicators (KPI) and Key Risk Indicators (KRI) to ensure their firm does not sacrifice their long-term competitive advantage for short-term cost savings.  This penny-wise, pound-foolish strategy has been discussed previously by Mr. Hartung.

But before we dig further into explaining hyperdigitization, let us review an example of the current fading Industrial economic model.  One of the chief laments heard throughout the Great Recession is that America doesn’t “make” anything anymore.  Manufacturing jobs have left primarily to cheaper labor, less regulation, lower tax countries.  Without construction jobs to fall back on, this has left a broad swath of the population unemployed.  Unfortunately this high unemployment fallout is a result of our economic model shifting away from Industrial Age practices.

While the jobs may have left (down 31%) productivity boosts have pushed the U.S. manufacturing output to near record highs of 1.7 trillion dollars.  We make more goods with less people due to technological advances.  Contrary to the economic doomsayers this is a positive trend, one that has happened before (agrarian-based economy) and will undoubtedly happen again.

What does this hyperdigitization of economic output mean in real terms?  Well, based on a Gartner report, about 20 percent of U.S. economic output in 2009 or 2.9 trillion dollars. That’s nearly double the U.S. manufacturing output.  We are awash in virtual products and services.  Think about Google alone.  The company is worth $163 billion at last estimate and does not have one physical product.

Other examples are Facebook and GroupOn.  Both are projected to be worth $65 billion and $25 billion respectively.  Yet again, neither has a physical product.   These three companies have based their business models on information arbitrage; the process of mining available data for new opportunities.

So where does all this intellectual property (data) that generates billions in profit come from?  People, who are supported by a corporate culture that values innovation and measured risk taking.

As the global economy gets exponentially more competitive, organizations need to be fast, flexible and innovative; a near polar opposite of the Industrial Age business model. A large percentage of companies are still mired in outdated business practices that protect the status-quo (Extend & Defend), squash risk taking and stifle innovation.  This has especially become prevalent in the era of downsizing culminating in the practices of the Great Recession.

In order to compete in an economy driven by hyperdigitization, the human capital of an organization has to be made a priority.  Developed nation’s economies are shifting away from static business models that produce generic widgets and services.  To thrive in the hyper competitive, constantly shifting global economy, organizations will have to create and promote a culture that emphasizes and values the Information Age success triumvirate of risk taking, innovation and rapid-execution.

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.

Finding the Money – Be Smarter, like IBM

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You gotta love the revenue growth in companies like Apple and Google.  From 2000 to 2010 Apple revenues jumped from $8B to $65B.  Google grew from nothing to $29B.  But for some organizations, amidst market shifts, simply maintaining revenues is an enormous challenge. 

In a dynamic world, many companies are losing revenues to new competitors who seem on a suicide mission to destroy industry profitability!  In this situation, the ability to grow takes on an entirely different flavor.  As “core” markets retract (in revenues or profits,) can the company find a way to enter new markets in order to maintain revenues – and possibly grow profits? For many organizations, facing radical market shifts, moving from no-growth, declining profit markets into higher growth, better profit markets is a huge challenge.

Recall that IBM once completely dominated the computer industry.  An IBM skunk works program in Florida is credited for creating the modern day personal computer – and because of the team’s decision to  use external componentry (an IBM heresy at the time) creating Microsoft.  As the market shifted toward these smaller computers, IBM focused on defending its traditional mainframe base, eschewing PC sales entirely. By the 1990s IBM was almost bankrupt! In trying to preserve its old, “core,” mainframe business IBM completely missed the market shift and waited until its customers started disappearing before taking action.  But by then new competitors had claimed the new market!

In came an outsider, Louis Gerstner, who saw the trend toward far greater user of external services by people in information technology.  He pushed IBM from being a “hardware” company to an “IT services” provider (overly simplified explanation, to be sure) and IBM roared back as a tremendous turnaround success story.

But, what would be next?  As Mr. Gerstner left IBM the company’s “core” market was in for another huge upheaval.  Vast armies of IT consultants had been created in other companies, such as Electronic Data Systems (EDS), Computer Sciences Corporation (CSC) and audit firms such as Anderson (now named Accenture) Coopers & Lybrand and Deloitte & Touche.  This created rampant competition and margin pressures from so much capacity. 

Simultaneously, the emergence of similar armies, often even more highly trained, of consultants in India at companies such as Tata Consultancy Services (TCS) and Infosys – at dramatically lower cost and using development standards such as the Capability Maturity Model – was further transforming the landscape of service providers. More and more services contracts were going to these new competitors in foreign countries at prices a fraction of historical rates.  Domestic margins were tanking!

As IT integration and services lost its margin several big competitors began paying enormous premiums to buy customer computer shops, completely taking them over customer via a new approach called “outsourcing” – a solution offering that nearly bankrupted EDS due to the razor thin margins.  The market IBM entered to save itself, and make Mr. Gerstner famous, was no longer capable of keeping IBM a profitably growing concern.

In 2002 it was by no means clear whether IBM would remain successful, or end up again in dire straights.  But, as detailed in Fortune’s CNNMoney web site, “IBM’s Sam Palmisano: A Super Second Act” things haven’t gone too badly for IBM this decade as profits have grown 4 fold.

Rather than simply trying to do more of what Mr. Gerstner did, Mr. Palmisano lead IBM into developing a new scenario of the future, leading to the birth of the Smarter Planet program.  Not dissimilar from how Steve Jobs used Apple’s scenario planning to push the company from Macs into new growth product markets, the scenario planning such as Smarter Planet opened many doors for new business opportunities at IBM.  The result has been a dramatic increase (well more than doubling) its more profitable software sales, as well as development of new solutions for everything from global banking to transportation management, government systems and a whole lot more.  New solutions driven by the desire to fulfill the future scenario  – and solutions that are considerably more profitable than the gladiator war that had become IT services.

Using scenario planning to create White Space where employees can develop new solutions is a hallmark of successful companies.  By redirecting resources away from defensive activities, new solutions can be created before the proverbial roof collapses in the declining margin business. By spending money on new product development, and new market development, new revenues are generated where there is more growth – and less competition.  And that allows the company to shift with the marketplace, rather than be stuck in a bad business when it’s way too late to shift — because new competitors have already captured the new markets. 

(For a White Space primer, check out the InnovationManagement.com article “White Space Mapping – Seeing the Future Beyond the Core.”)

When markets shift the first sign is intense competition, driving down margins.  Too many leaders decide to “hunker down” and put all resources into defending the old business.  Costs are slashed and all spending is put into competitive warfare.  This, inevitably, leads to ugly results, because such behavior ignores the market shift.  Being Smarter means recognizing the market shift, and changing investments – putting more money into new projects directed at finding new revenues, and most often higher rates of return.

Not all companies are growing like Apple, Google, Facebook or Groupon.  But that doesn’t mean they aren’t on the road to growth by shifting their revenues into new markets – like IBM.  What ties these companies together is their use of scenario planning to focus on the future, rather than relying on traditional planning systems firmly tied to the past. And investing in White Space so the company can find new markets, and new solutions, before competition eliminates the margin altogether.

If Mr. Palmisano is soon to leave IBM, as the article indicates is likely, we can surely hope the Board will seek out a replacement who is equally willing to make the right investments.  Keeping the company pushing forward by developing future scenarios, and creating solutions that fulfill them. 

 

 

Throw away that slide rule! Use Facebook, iPhones, iPads and Groupon

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My high school physics teacher spent a week teaching students how to use a slide rule.  I asked him, "why can't we just use calculators?" At the time a slide rule was about $2, and a calculator was $300.  The minimum wage was $1.14/hour.  He responded that slide rules had been around a long time, and you never knew if you'd have access to a calculator. To the day he retired he insisted on using, and teaching, slide rule use.  Needless to say, by then plenty of folks were ready to see him go.  Too bad for his students he stayed as long as he did, because that was a week they could have spent learning physics, and other important materials. Ignoring the new tool, and its advantages, was a wasteful decision that hurt him and his customers.

Yet, I am amazed at how few people are using today's new tools for business, and marketing.  At a small business Board meeting this week the head of marketing presented his roll-out of the boldest campaign ever in the business's history.  His promotion plan was centered around traditional PR, supplemented with radio and billboard ads.  I asked for his social media campaign, and after he confirmed I was serious he said he had a manager working on that.  I asked if he had a facebook page ready, the videos on YouTube, a linked-in program ready to run against targets and his twitter communications established, including hash tags? He said if those things were important somebody had to be working on them.  Two weeks from roll-out and he wasn't giving them any personal consideration.

I then asked the roughly 20 attendees, all but one of which were over 40, some questions:

• How many of you use skype at least once/month? Answer – 5%
• How many of you have a facebook page and check it daily? A – 15%
• How many of you check twitter daily? A – 5%  Tweet at least 5 times/week? A – none
• How many own and use a tablet? A – 10%
• How many of you have a smartphone on which you've downloaded at least 10 apps? A – 10%
• How many of you carry a laptop? A – 100%
• Who knows the #1 company for new hires in Chicago in 2010? Answer – 5% (GroupOn)
• Who has used a Groupon coupon? Answer – 30%

Slide rule users.

New tools are here, and adopters will be the winners. If you still think we're a nation of laptop users, you need to think again.  Laptop usage declined 20% in the last 2 years, to 2006 levels, as people have adopted easier to use technology

Chart Source: Silicon Alley Insider of BusinessInsider.com

If you are trying to pump out ads the new medium is mobile – not television, radio, outdoor or even web sites.  Have you tested the look and feel of your web site on popular mobile devices? Do you know if new users to your business are even able to access your information from a mobile device?

And, it's more likely a customer will hear about you, and obtain a review of your product or service, via Facebook than vai the web!  A CNet.com article asks the leading question "Will Facebook Replace Company Web Sites?" Want to understand the importance of Facebook, check out these same month comparisons:

• Starbucks: Facebook likes – 21.1M, site visits – 1.8M
• Coca-Cola: Facebook likes – 20.5M, site visits – .3M
• Oreo: Facebook likes – 10.1M, site visits – .3M

Yes, these are consumer products.  But if you don't think the first place a potential customer looks for information on your business is Facebook, whether it's financial services, business insurance, catering or blow-molded plastic housings you need to think again.  The use of facebook is simply exploding. 

According to Business Insider, by the end of December, 2010 Facebook apps were downloaded to iPhones at a rate exceeding 500,000/day as the total shot to nearly 60million! Meanwhile the Facebook app downloads to Android devices grew to over 20million!  Blackberry Facebook users has reached 27million, bringing the total by end of 2010 to well over 100M – just on smartphones!  In September, 2010 Facebook became the #1 most time spent on the internet, passing combined time on all Google and all Yahoo sites!  With over 500million users, Facebook isn't just kids checking on their friends any longer. When somebody wants a first peak at your business, odds are great it will be done over a smartphone and likely via a Facebook referral!

Chart Source: Silicon Alley Insider at Business Insider

As fast as smartphone usage has grown, tablet usage is on the precipice of explosion.  Tablet sales will be 6 times (or more) notebook sales in just a few years!  The second most popular product will be, of course, continued sales of advanced smartphones as the two new platforms overtake the traditional laptop.  So what's your budgeted spend on mobile devices, mobile apps and mobile marketing?

Chart Source: Silicon Alley Insider of Business Insider

And in the effort to attract new customers, if you think the route will be newspapers, radio, TV, billboards, or direct mail – think again.  Digital local deal delivery is projected to grow at least 45%/year through 2015 creating a market of over $10billion! If you want somebody to know about your product or service, Groupon and its competitors is already taking the lead over older, traditional techniques.  By the way, when was the last time you bothered to open that latest Vallasis direct mail package – or did you just throw it immediately in the recycling bin without even a look?

Chart Source: Silicon Alley Insider of Business Insider

So, what is your business doing to leverage these tools?  Are your marketing, and technology, plans for 2011 and 2012 still mired in old approaches and technologies?  If so, expect to be eclipsed by competitors who more quickly implement these new solutions.

Too often we become comfortable in our old way of doing things.  We keep implementing the same way, like the teacher giving slide rule instructions.  And that simply wastes resources, and leaves you uncompetitive.  The time to use these new solutions was yesterday – and today – and tomorrow – and every day.  If you don't have plans to adopt these new solutions, and use them to grow your business, what's your excuse?  Is it that much fun using the old slide rule?

 

Why Innovation Ain’t So Easy Mr. President – Look to Google, not GE

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Summary:

• The President has called for more innovation in America
• But American business management doesn’t know how to be innovative
• Business leaders focus on efficiency, not innovation
• America has no inherent advantage in innovation
• To increase innovation we need a change in incentives, to favor innovation over efficiency and traditional brick-and-mortar investments
• We need to highlight leaders that have demonstrated the ability to create jobs in the information economy, not the “old guard” just because they run big, but floundering, companies

It was good to hear the U.S. President call for more innovation in his State of the Union address this week.  And it sounded like he wants most of that to come from business, rather than government.  But I’m reminded the President is a lawyer and politician.  As a businessman, well, let’s say he’s a bit naive.  Most businesses don’t have a clue how to be innovative, as Forbes pointed out in November, 2009 in “Why the Pursuit of Innovation Usually Fails.”

Businesses by and large are not designed to be innovative.  Modern management theory, going back to the days of Frederick Taylor, has been dominated by efficiency.  For the last decade businesses have reacted to global competitive forces by seeking additional efficiency.  Thus the offshoring movement for information technology and manufacturing eliminated millions of American jobs driving unemployment to double digits, and undermines new job creation keeping unemployment stubbornly high. 

It is not surprising business leaders avoid innovation, when the august Wall Street Journal headlines on January 20 “In Race to Market, It Pays to Be Latecomer.” Citing a number of innovator failures, including automobiles, browsers and small computers, the journal concludes that it is smarter business to not innovate. Rather leaders should wait, let someone else innovate and then hope they can take the idea and make something of it down the road. Not a ringing pledge for how good management supports the innovation agenda! 

The professors cited in the Journal article take a fairly common point of view.  Because innovators fail, don’t be one.  Lower your risk, come in later, hope you can catch the market at a future time.  It’s easy to see in hindsight how innovators fail, so why take the risk?  Keep your eyes on being efficient – and innovation is anything but efficient! Because most businesspeople don’t understand how to manage innovation, don’t try.

As discussed in my last blog, about Sara Lee, executives, managers and investors have come to believe that cost cutting, and striving for more efficiency, is the solution for most business problems.  According to the Washington Post, “Immelt To Head New Advisory Board on Job Creation.” The President appointed the GE Chairman to this highly visible position, yet Mr. Immelt has spent most of the last decade shrinking GE, and pushing jobs offshore, rather than growing the company – especially domestically.  Gone are several GE businesses created in the 1990s – including the recent spin out of NBC to Comcast.  It’s ironic that the President would appoint someone who has overseen downsizings and offshoring to this position, instead of someone who has demonstrated the ability to create jobs over the last decade.

As one can easily imagine, efficiency is not the handmaiden of innovation.  To the contrary, as we build organizations the desire for efficiency and “professional management” impedes innovation.  According to Portfolio.com in “Can Google Be Entrepreneurial” even Google, a leading technology company with such exciting new products as Android and Chrome, has replaced its CEO Eric Schmidt with founder Larry Page in order to more effectively manage innovation.  The contention is that the 55 year old professional manager Schmidt created innovation barriers. If a company as young and successful as Google struggles to innovate, one can only imagine the difficulties at traditional, aged American businesses!

While many will trumpet America’s leadership in all business categories, Forbes‘ Fred Allen is correct to challenge our thinking in “The Myth of American Superiority at Innovation.”  For decades America’s “Myth of Efficiency” has pushed organizations to streamline, cutting anything that is not totally necessary to do what it historically did better, faster or cheaper. Innovation inside businesses was designed to improve existing processes, usually cutting cost and jobs, not create new markets with high growth that creates jobs and economic growth.  Most executives would 10x rather see a plan to cut costs saving “hard dollars” in the supply chain, or sales and marketing, than something involving new product introduction into new markets where they have to deal with “unknowns.”  Where our superiority in innovation originates, if at all, is unclear.

Lawyers are not historically known for their creativity.  Hours spent studying precedent doesn’t often free the mind to “think outside the box.”  Business folks have their own “precedent managers” – internal experts who set themselves up intentionally to block experimentation and innovation in the name of lowering risk, being conservative and carefully managing the core business.  To innovate most organizations will be forced to “Fire the Status Quo Police” as I called for last September here in Forbes.  But that isn’t easy. 

America can be very innovative.  Just look at the leadership America exerts in all things “social media” – from Facebook to Groupon! And look at how adroitly Apple has turned around by moving beyond its roots in personal computing to success in music (iPod and iTunes), mobile telephony and data (iPhone) and mobile computing (iPad).  Netflix has used a couple of rounds of innovation to unseat old leader Blockbuster! But Apple and Netflix are still the rarities – innovators amongst the hoards of myopic organizations still focused on optimization.  Look no further than the problems Microsoft – a tech company – has had balancing its desire to maintain PC domination while ineffectively attempting to market innovation. 

What America needs is less bully pulpit, and more action if you really want innovation Mr. President:

• Increase tax credits for R&D
• Increase tax deductions and credits for new product launches by expanding the definition of what constitutes R&D in the tax code
• Implement penalties on offshore outsourcing to discourage the efficiency focus and the chronic push to low-cost global resources
• Lower capital gains taxes to encourage wealth creation through new business creation
• Manage the deficit by implementing VAT (value added taxes) which add cost to supply chain transactions, thus lowering the value of “efficiency” moves
• Make it much easier for foreign graduate students in America to receive their green cards so we can keep them here and quit exporting some of the brightest innovators we develop to foreign countries
• Create more tax incentives for investing in high tech – from nanotech to biotech to infotech – and quit wasting money trying to favor investments in manufacturing.  Provide accelerated or double deductions for buying lab equipment, and stretch out deductions for brick-and-mortar spending. Better yet, quit spending so much on road construction and simply give credits to people who buy lab equipment and other innovation tools.
• Propose regulations on executive compensation so leaders aren’t encouraged to undertake short-term cost cutting measures merely to prop up short-term profits at the expense of long-term viability
• Quit putting “old guard” leaders who have seen their companies do poorly in highly placed positions.  Reach out to those who really understand the information economy to fill such positions – like Eric Schmidt from Google, or John Chambers at Cisco Systems.
• Reform the FDA so new bio-engineered solutions do not follow regulations based on 50 year old pharma technology and instead streamline go-to-market processes for new innovations
• Quit spending so much money on border fences, DEA crack-downs on marijuana users and giant defense projects.  Put the money into grants for universities and entrepreneurs to create and implement innovation.

Mr. President,, don’t expect traditional business to do what it has not done for over a decade.  If you want innovation, take actions that will create innovation.  American business can do it, but it will take more than asking for it.  it will take a change in incentives and management.