The evolving business

Feb 052012
 
how business evolves as objectives and markets change

This story originally appeared in Smart Company on February 2, 2012

Woolworths’ announcement earlier this week they are exiting the Dick Smith Electronics business ends an interesting study in how a business can evolve as their industry changes.

In the thirty years since Dick Smith sold a stake in his business to Woolworths – a few years later they bought out the rest of Dick’s equity – the electronics retail business has changed immensely.

At the beginning of the 1980s, the CB radio boom that had fuelled the growth of stores like Dick Smith Electronics was coming to an end, as was the hobbyist industry which supplied those building their own computers and other electronic devices.

In the US, the hobbyist industry included people like Paul Allen and Bill Gates – who founded Microsoft – along with Steve Wozniak and Steve Jobs, the founders of Apple Computers. Both of these companies had a lot to do with the growth of the DSE business later.

While those two industries were fading at the time Woolies bought the chain, the availability of consumer electronics was taking off as Video Cassette Recorders, car hi-fi and, later, CD players started entering the market.

At the time these were high margin items so the transition from a hobbyist store to consumer electronics chain was a lucrative move for Woolworths – something helped by Dick Smith’s penchant for publicity even though he was no longer with the store.

Eventually the steam ran out of the early wave of consumer electronics but in the mid 1990s the PC revolution took off which allowed Dick Smith Electronics to diversify again.

As personal computers were taking off, so too did the next wave of consumer technology, particularly in mobile phones, games and big screen TVs which initially had big, fat margins.

Over time, these margins began to fade as prices dropped but for Woolworths this wasn’t a problem as the beginning of the 2000s saw an explosion of easy consumer credit, allowing stores to move more products to willing consumers.

Very quickly, the consumer electronics industry became more like the low margin, high volume FMCG – Fast Moving Consumer Goods – sector that is Woolworths’ core business.

The global financial crisis heralded the end of the credit boom and now cautious, credit shy householders meant consumer electronics were no longer fast moving.

Dick Smith Electronics aren’t the only chain affected by this, Harvey Norman are suffering the same way and in the United States Best Buy and Radio Shack are in desperate straits for the same reasons.

Making things tougher for Australian retailers are store rents that are among the highest in the world. Woolworths’ decision to shut down a third of the Dick Smith outlets is a wise move as many of those stores probably have lease renewals pending.

Woolworths has done well from Dick Smith Electronics over a quarter century as the consumer electronics industry has evolved. Their story is a great example of how a business can adapt in a changing sector.

Hopefully Woolies will find a motivated buyer – one hopes not one of the clueless private equity asset strippers that have destroyed so many other retail icons in recent years.

Perhaps we’ll see a buyer who can steer the business well into the phase of consumer electronics retailing with some innovative and fresh thinking that the Australian retail sector needs right now.

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The battle between the old and the new

Feb 022012
 
How do old and new industries deal with changing industries

“We will build an America where ‘hope’ is a new job with a paycheck, not a faded word on an old bumper sticker” – Mitt Romney, US Republican Presidential candidate

“What immediate measures can be taken to protect jobs?” – French President Nicolas Sarkozy

“We want to be countries that made cars” – Kim Carr, Australian Minister for Manufacturing

Around the world the forces of protectionism are stirring to shield fading industries, businesses and fortunes from economic reality.

The most immediate target in this battle are the new industries that threaten the old.

It’s no coincidence US lawmakers want to introduce laws that will cripple the Internet in order to favour music distributors, that the US and New Zealand governments work together to shut down a cloud sharing service or that failing Australian retailers call on their government to change tax rules in order to prop up their fading sales.

The old industries appear to have the advantage; they are rich, they have political power and – most importantly for politicians – they employ lots of voters.

We shouldn’t under estimate just how far the managers and owners of the challenged industries will go to protect their failing business models, unwanted product lines and outdated work methods, which isn’t surprising as their wealth and status is built upon them.

Eventually they will lose, just as the luddites fighting the loom mills and the lords fighting the railway lines did.

The question for society and individuals is do we want to be part of yesterday’s fading industries or part of tomorrow’s economy.

We need to let our political leaders know where we’d our societies to go before they make the wrong choices.

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Misunderstanding Chinese growth

Jan 272012
 
can China save the world?

When I first visited China in the late 1980s, I was amused at all the adverts for Rolex watches and Luis Vuitton handbags lining Shanghai’s Bund and the streets of Guanzhou; “how many Chinese can afford these goods?” I asked.

The response was usually along the lines of there are a billion Chinese and if only one percent can afford these products then that’s a huge market.

Over the years since we’ve seen consumer brands pour into China only to find the markets for Western style consumer goods aren’t what they expected. Many have left with their tails between their legs.

The New York Times looked at this in their weekend story “Come On China, Buy our Stuff.”

What many misunderstand is that while there are some millions of well heeled Chinese who can afford a Rolex, the vast majority simply cannot afford a Western style consumer lifestyle.

The average Chinese income in 2010 was $4,270 per person according to the World Bank. For the United States, average income was over ten times China’s at $47,000. The average across the Europe Union is just over $32,000. India’s was only $1,330.

So any business selling into the PRC expecting to find a consumer society like those of Northern Europe, Japan, the United States or Australia’s is in for a disappointing experience. Chinese households have neither the income or access to the credit lines that drove the Western consumerist societies over the last thirty years.

For economists hoping that Chinese and Indian workers can pick up the world economy’s slack by becoming consumers on a level similar to European and US workers, they are deluded; this is at least a generation away.

According to the Nation Master web site, the US had a similar average income to what China’s current levels in 1900. While there are clearly some differences in measures, we can say today’s Chinese workers are – in wealth terms – around a century behind their US colleagues.

It may take a century for Chinese workers to catch up with Europe and North America, but it won’t happen as quickly as businesses and economists hope.

Those hoping China will take up the slack left from the excesses of the 20th Century credit boom are going to have to look for a plan B. It may be up to the rest of us to find what’s going to drive the world economy for the next twenty years.

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Losing the supply chain

Jan 242012
 
end of the supply chain

The New York Times’ weekend feature on Why Apple Manufacture iPhones in China focused on the underlying reasons why manufacturing has become concentrated in the PRC.

While much of the commentary on the article has – correctly – focused on how US manufacturing move to China is destroying the economic bases of the American working and middle classes, there’s also another serious consequence of the story; the destruction of the US supply chain.

The story itself emphasised this;

In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

While wage costs are important, far more critical are the surrounding supply chains. Without those, even if you want to manufacture in the US or anywhere else you’ll struggle to find suppliers and skilled labour.

The amazing thing with the United States is the world’s most powerful economy has managed to dismantle most of their supply chains that took a century to develop inside twenty years whil China has built up most of theirs since they joined the World Trade Organisation in 2001.

For the United States economy, the effects are more subtle and dramatic than they first appear. The accompanying video to their story illustrates how the multiplier effect, the number of jobs created in the wider economy for each industry worker is as much 4.7 for a manufacturing job, while a service sector worker is less than 1.

That means less employment and less wealth.

For the US, and most the Western world, we were able to avoid the effects of becoming less wealthy over the last decade by spending big on credit cards. Homes that would have been out of reach to the average American – or Australian, Brit or Irishman – were kept accessible by easy, cheap credit.

As that credit dries up with the end of the Twentieth Century debt supercycle, the economic basis of this model is eroding.

For most of us in the Western, developed world it means we are going to become poorer. Chinese and Indian workers might catch up with our living standards, but that standard will be at a lower level that we anticipated a decade or two ago.

The most interesting consequence of the New York Times’ story is what happens to the managerial classes?

Right now they appear to be riding high as their companies’ profits increase and they award themselves trips to the Paris Ritz and receive 50 million dollar payouts when caught cheating on their expenses.

Over time though this cannot continue as the senior managers themselves have become major cost centres which will eventually have to be reduced.

Indeed Apple, the leader in the outsourcing trend, is unique among US companies in that it had a driven, visionary leader and doesn’t have a bloated, self indulgent cohort of bureaucrats managing the business.

With every stage of the deskilling of America and the offshoring of supply chains, there’s been the belief that “it could happen to me” to various groups of workers – we’re now seeing the same process happen in white collar professions like the law are subcontracted to Indian and Philipino service providers.

Senior managers should have no illusions the same will happen to them as the search for cost savings runs out of targets in the rest of organisations.

The biggest problem though is that loss of supply chains and industry knowledge. The question is, can you rebuild that capacity in decade in the way China did?

Supply company image courtesy of Stock Xchange and Andy McMillan.

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The pay day

Jan 102012
 
how do local businesses make a return on investment

Last Sunday Mark Fletcher celebrated his 10,000th post at the Australian Newsagency Blog. In seven years of posting that’s an impressive achievement for someone running both a retail store and a software company.

In his landmark post, Mark looked at the major issues he’s covered on his blog over the last few year and one stands out as the biggest – the payoff for newsagency owners when they sell their businesses.

The failure of many newsagents to manage their businesses for day to day profit. Too many newsagents expect their pay day when they sell and do not realise that their pay day is today, tomorrow and next week … and that this determines what they will receive when they sell.

For Australian newsagencies the news is bad; their established industry is struggling in the face of technological change and regulatory changes – both of which are other points Mark raises – but more importantly the buying and selling businesses in all sectors is undergoing a fundamental economic shift.

The underlying idea is that these businesses are what Steve Blank calls “lifestyle businesses”; proprietors buy them to provide an income for their families.

For these “lifestyle businesses” to have a resale value another family is has to raise the funds to purchase the enterprise.

Therein lies the problem, most purchases of businesses are financed by bank loans secured against property.

Late baby boomers and Generation Xers – those born between 1955 and 1970 – are the obvious buyers of these businesses and they don’t have access to the same equity as their parents.

The situation is even worse for those generations following whose high education debts mean an even later entry into the property market and even less equity available should they want to buy these businesses.

For sellers, this means is buyers can’t pay the prices retiring business owners need as their nest egg to support them through twenty or thirty years of bowling or travelling in their later years.

This inter generational mismatch isn’t just restricted to Australian newsagents; it’s a problem around the Western world for business owners whose exit strategy involves selling the business as a going concern for a substantial amount.

As we reach the end of the late 20th Century credit boom, the money isn’t there for people to pay the sort of sums required by existing local business owners to retire in comfort. Even if the banks were prepared to lend the sum required, the buyer’s underlying assets can’t secure the loans and, most importantly, the cashflows aren’t there.

In an Australian newsagent context much of the cashflow has changed because of deregulation and new competition but on the bigger scale changing consumption patterns at the end of the 20th Century debt binge coupled with aging populations and restricted credit are changing the economics of family owned, small local businesses.

For the current owners of these small businesses, it means the pay day has to be today as it won’t be there tomorrow.

The danger is how many will follow the example of the large corporations who find themselves in a similar situation and respond by excessively cutting costs or chronically under-investing which is what has crippled big store retailing across the US, Australia and the UK.

Mark’s constantly pointed out that Australian newsagents have to reinvent themselves, as he celebrates seven years of blogging and 10,000th blog post it’s probably worthwhile considering how many, like the rest of us, will be working in our businesses far longer than we originally expected.

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The irrelevant operating system

Jan 082012
 
has the electronics and computer industries become boring

Last decade, people queued around the block to buy the latest version of Windows, today no-one cares. What next for a market that has become commoditised?

When you visit a website your browser reports, among other things, what type of system you’re using. Net Applications – a US based web monitoring company who analyse online browsing statistics – keep a regularly updated list of what people are using when surfing the net.

On their latest statistics, Windows XP finally fell below 50% in September 2011, just on ten years after it was released. Windows 7 is taking over from XP while Apple steadily gain market share.

These statistics show how the operating system has become irrelevant, only really dedicated geeks really care anymore about their version of Windows or whether a computer is running an Apple Mac or Microsoft product.

As most computer users are drifting to cloud computing services and consumers are increasingly using their PCs to access online games and social media sites, it doesn’t really matter anymore what systems are used as long as they work.

For many in the computer industry, this is a problem as they desperately want to sell a product in a market that has become commoditised. It’s another example of the PC industry’s broken business model.

It’s not just the computer industry with this problem, the 3D TV hype of 2010 was a desperate attempt to sell new television sets in a market that had stalled; recession hit consumers had no desire to replace their perfectly good TVs that were less than a decade old, just like Windows XP users.

This year’s Consumer Electronics Show that launches in Las Vegas this week will see similar desperation as the various PC and mobile phone manufacturers trying to generate excitement about their new products.

For the journalists and PR folk at the CES the problem is customers largely don’t care anymore. As the failure of 3D TV illustrates, consumers aren’t buying the hype.

Just as with operating systems, most customers want something that works, if you’re going to get them to replace older proven technology you’ll have to show where the new product adds value.

The era of products flying off the shelves because they are new and shiny is over – just ask Microsoft about it’s operating systems.

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The death of the netbook

Dec 282011
 
laptop_computers

“You don’t want to buy one of those of things,” said the electronics store assistant, “they don’t have much memory and the CPUs in the notebooks and ultra books are better.”

I was shopping for a cheap netbook for the kids, each of which had been saving up to buy one as they are sick of me yelling at them for playing Minecraft on my work system, and the consensus from the store staff was to do everything to steer folk away from the cheap systems.

This is understandable as most electronic store staff are on commissions, and these are lean on cheap computers. It’s much better to sell a thousand dollar unit – with upgraded warranties and accessories – than a low margin, one off unit.

For manufacturers, similar problems exists; these cheap unit cannibilised their higher priced products with better margins. Dell recently announced they are getting out the netbook market and others are following.

Netbooks themselves are in trouble as the market they addressed for cheap, portable, Internet connected devices is now largely covered by smart phones and tablets which offer better battery life and usability.

Interestingly, the battery life argument was even used by the computer store salesfolk who pointed out – correctly – that the newer laptops have better power management than their cheaper netbook cousins.

While the netbook as a category is dead; the concept itself isn’t. As the uptake of tablet computers like the iPad show, Internet connected portable devices are becoming the computer of choice for many people and the advantages of a laptop form factor; a proper tactile keyboard, USB ports and other external connectors are still attractive.

Probably the worse thing for the manufacturers and retailers is the price points are now established in customers’ minds – $400 is what people want to pay for laptops, which doesn’t bode well for those higher priced systems.

Those manufacturers can’t even get into the tablet computer market as Apple now own that sector that the PC vendors and Microsoft squandered a decade’s lead with substandard equipment and badly designed software.

Despite the best efforts of the electronic store’s salesfolk, my kids ended up buying cheap, low specced netbooks out of their savings and those systems run Minecraft quite nicely. Which is another problem for shops and manufacturers stuck with a 1990s business model.

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Building Silicon Valleys

Dec 272011
 
Can other countries or cities build a silicon valley

Don’t Give the Arnon Kohavis Your Money warns Sarah Lacy in her cautionary tale of what happens when an economic messiah comes to town promising to create the next Silicon Valley.

“Hopefully this story finds a way to circulate out to the wider audience of government officials and old money elites who have good intentions of wanting to make their city a beacon for entrepreneurship.” Writes Sarah. “Hopefully it reaches them before they get bamboozled into giving the wrong people money to make it happen.”

For 19 months I was one of those government officials and saw those good intentions up close while developing what became the Digital Sydney project, that bamboozlement is real and a lot of money does go to the wrong people.

Sarah’s points are well made, Silicon Valley wasn’t built quickly with its roots based in the 1930s electronic industry and the 1960s developments in semiconductors – all underpinned by massive US defence spending from World War II onwards.

In many ways Silicon Valley was a happy and prosperous accident where various economic, political and technological forces came together without any planning. Neither the Californian or US Governments decreed they would make the region an entrepreneurial hotbed and sent out legions of public servants armed with subsidies and incentives to build a global business centre.

This is the mistake governments – and a lot of entrepreneurs or business leaders – make when they talk about “building the next Silicon Valley”; they assume that tax free zones, incentive schemes and subsidies are going to attract the investors and inventors necessary to build the next entrepreneurial hotspot.

For governments, the results are discouraging; usually ending in failed incubators and accelerator programs all conceived by public servants who, with the best will in the world, don’t have the skills, incentives or decades long timelines to make these schemes work.

At worst, we end up with the corporate welfare model that sees governments and communities exploited like the tragic story of New London, Connecticut, where the local government spent $160 million and cleared an entire suburb for drug company Pfizer to establish their research headquarters, which they closed a few years later and left a waste dump behind.

While the New London story is one of the worst examples, this sort of corporate welfare is the standard role for most government economic agencies. The department I worked for gave subsidies to supermarket chains to open distribution centres and stores that they were going to build anyway.

One of the notable things with development agencies and the provincial politicians who oversee them is how they are easy victims for the economic messiah – it could be a pharmaceutical giant like in New London, a property developer promising Sydney will become a financial hub or a US venture capital guru flying in and promising Santiago will be the next San Francisco.

The truth is there are no short cuts; building a technology centre like Silicon Valley, a financial hub like London or a manufacturing cluster like Italy’s Leather Triangle take decades, some luck and little intervention by government agencies or outside messiahs.

Silicon Valley and most other successful industry centres are the result of a happy intersection of economics and history. The best governments can do is create the stable financial, tax and legal frameworks that let inventors, innovators and entrepreneurs build new industries.

All government support isn’t bad – Silicon Valley benefited directly and indirectly from US military and space program spending – well thought out, long term programs that help new businesses and technologies grow being the most effective.

Like a parent with a baby, the we can do is create the right environment and hope for the best. Interfering rarely works well.

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Culture clash

Dec 192011
 
Do we have a management caste like the mediaeval medici family

There is something fundamentally wrong with AOL’s media business states a Business Insider headline.

What is fundamentally wrong is quite basic to anyone who has owned or managed a business – money.

The problems at AOL illustrate the deep flaws in the “digital sharecropper” business model of putting free or cheap content on the web to harvest online advertising.

Sites like Demand Media and Huffington Post can’t make money from content if too many staff expect to get paid. Chris Anderson illustrated this best in his rebuttal to Malcolm Gladwell’s review of the book “free” where he examined the economics of his GeekDad blog and the work of its manager, Ken;

So here’s the calculus:

  • Wired.com makes good money selling ads on GeekDad (it’s very popular with advertisers)
  • Ken gets a nominal retainer, but has also managed to parlay GeekDad into a book deal and a lifelong dream of being a writer
  • The other contributors largely write for free, although if one of their posts becomes insanely popular they’ll get a few bucks. None of them are doing it for the money, but instead for the fun, audience and satisfaction of writing about something they love and getting read by a lot of people.

It’s almost touching to picture the modern day digital serf touching his flat cap and murmuring “thank you m’lud” on receiving a ha’penny from the lord of the digital manor before scampering back to working on becoming a well read, but unpaid writer.

The business model of the Geek Dad blog or the Huffington Post relies upon these unpaid writers donating their work and time –the digital sharecroppers as described by Jeff Attwood.

Low or free labour is essential to the success of these site, where the bulk of advertising income goes straight to the proprietors this model allows the digital aristocrats – Lord Chris of Wired or Duchess Arianna – to live well as the owners of these online estates.

The business model falls apart when management starts taking a cut of the profits; install a highly paid CEO and management team with their squadrons of Executive Vice Presidents or Group General Managers with the Medici-esque perks and entitlements these folk demand and the profits disappear.

AOL’s problem is it has too many highly paid managers extracting wealth from the company’s cashflow.

This is exactly the same problem print and television media empires have, once the rich rivers of gold allowed them to build up well paid management castes that are now crippling the businesses as revenues can’t support their financial burden.

Over time, online media revenues are improving. As Morgan Stanley analyst Mary Meeker pointed out in 2010 that U.S. consumers spend 28 percent of their media time online, yet in 2010 only 13 percent of ad spending goes to the Internet. As advertisers follow consumers, publishing on the web will become more profitable.

The risk for big media organisations is their money will run out before the digital renaissance arrives and when it does, they may have squandered their natural advantages by shedding quality journalists, experienced sub-editors and good editors in an effort to prop up executive bonuses.

AOL’s management problem is part of a much bigger problem across markets and industries, we can call it managerialism – there are too many highly paid managers getting in the way of the writers, engineers, scientists, artists and tradesman who add real value to their organisations.

Strangely, it may be Chris Anderson’s “free” model that kills the managerial culture as enterprises that can’t afford to pay the workers that create the organisation’s product certainly won’t be able to pay an Executive Vice President’s bonus.

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Business is fine

Dec 062011
 
Stagecoaches were dominant in the 19th Century but failed when technology changed

“I don’t need high speed broadband,” snarls the businessman in a country town, “business is fine as it is.”

A hundred years ago this year the iconic Australian horse coach company Cobb & Co went into its first bankruptcy as it declined from being the dominant transport service of rural Australia.

Cobb & Co was founded in 1854 by four young Americans in the Victorian gold rush and grew around the expansion of Australia’s rural farming and mining industries. By 1900 the company had 9,000 horses travelling 31,000km (20,000 miles) every week.

By 1924 Cobb & Co was gone. Displaced by the motor car and restrictive state government rules designed to protect their railways.

Many businesses, including the management of Cobb & Co, thought the motor car was a fad. No doubt many at the time also thought electricity was dangerous and unnecessary.

Business worked fine as it was when stagecoaches carried the mail and bullock carts carted the crops, steam engines were fine to power the farms and businesses while the telegraph was just fine for those times when a three month letter to your customers or creditors in London or New York wasn’t quick enough.

All those businesses went broke. They didn’t go broke fast, it was a slow process until one day owners realised it was all over and then the end came surprisingly quickly.

That’s where many of us our today – cloud computing might be the latest buzzword, social media might be a distraction for coffee addled children of the TV generation and the global market might be just a way to dump cheap goods and services on gullible consumers – but markets and societies are changing, just as they did a hundred years ago.

Sure, your business doesn’t need fast Internet. Business is fine.

Stage coach image courtesy of Velda Christensen at http://www.novapages.com/

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