Saturday, January 13, 2007

Innovation, Commoditization, and Steve Jobs

Thursday's Wall Street Journal yielded an interesting piece on innovation. The second section of the newspaper has a new feature, entitled "The Informed Reader."

Under the subtitle, "Strategy," we are told that Columbia Business School's Bruce Greenwald once stated,

"In the long run, everything is a toaster."

This piece of idiocy was meant to warn that any product is ultimately and eventually reduced to a commodity.

Whoever thinks this is true must not be a marketer, or not have studied marketing.

The article goes on to cite MIT's Media Lab researcher Michael Schrage as finding that "innovation has a continued role, even in such staid objects as toasters and vacuum cleaners."

Schrage cites Hoover in vacuum cleaners, and GE in toasters, to highlight how even seemingly-mundane products can be revitalized, technologically repositioned, and become a source of significant new revenue growth.

Yes, you worry because anyone can produce what you do, but not everyone can emulate the design of what you do, when you do it.

And this puts a premium, of course, on continuous innovation. Or, as I see the output, consistently superior revenue growth. The successful future of a company lies in innovating any or all of the 'four Ps' of marketing- product, place, price and promotion- in order to better serve customer needs. Surrendering to price competition is the first step along the road to commoditization.

Which brings me to Steve Jobs. Jobs has proven to be a genius in his later career. But this was not always the case. Recall his serious stumble in, first, mismanaging the early successes of Apple Computer, and then recruiting John Sculley to succeed him.

In retrospect, I believe this simply demonstrated that Jobs is at his worst in a slugging match of equals, i.e., commodities. When he attempted to go toe to toe with the other personal computer makers, and Microsoft, he ended up frustrated, bored, and out of a job.

Recall, if you will, that he took a few trusted aids and started Next, which was ultimately bought back by Apple, for its object-oriented code assets.

Jobs' attempt at pushing forward a little on communications needs resulted in the failure Apple called "Newton."

In contrast, Jobs hit grand slams with his work at Pixar, and the iPod line. He is clearly at his best inventing the future, far out in front of current solutions.

In this respect, is he not rather like Thomas Edison? Like Edison, Jobs is often hustling and marketing just as fast as he's developing product. Like Edison, Jobs is egotistical, a reportedly demanding taskmaster, and short on giving named credit for much of what comes out of his development teams.

However, if anyone needs a clear example of how innovation can effect companies, look no further than Apple. With an impressario at the helm, someone who seems to simply love what he is doing, the firm has simply left Microsoft and Bill Gates in the dust when it comes to leading his firm into new, growth markets.

Yes, innovation is crucial for long-term growth in equities. One must not confuse the ability of virtually any product or service to be replicable, given time. The key is to realize that it does take time, and, in that time, the innovator can be, once again, steps ahead of the mere copiers.

For me, Frank Perdue's branding of chickens and chicken parts opened my eyes to this as a young marketing student in graduate school.

Looking back to the beginning of this piece, and the Greenwald quote, one wonders how a business school professor could be so short-sighted as to reduce innovation and marketing to a zero-sum game, confusing replication with innovative designs and solutions for customer needs.

Friday, January 12, 2007

Forecasting Economic Health with One Indicator: The Yield Curve

Monday's Wall Street Journal's Money and Investing section featured a piece on the analytical import of the prolonged yield curve inversion.

By now, everybody, even those who have not studied economics, knows that inverted yield curves have, historically, frequently been associated with recessions. The trouble is, the indicator sometimes gives false positives.

Then there is the criticism that, if forecasting a recession was that easy, why aren't these economists shorting equities already?

Those doubting the indicator allege that 'this time, it's different.' They point to global demands for a safe haven for cash. Or that 'markets have changed.'

I suppose this debate will continue until either a recession does, incontrovertibly, arrive, or the economy continues its low-inflationary growth phase for another year or so.

Perhaps the moral is that you need to use multiple forecasting methods, not just the inverted yield curve, to predict recessions. Any one tool is prone to being misled. A suite of tools, providing a sort of 'information theory' approach to the task, would be better.

In the meantime, I suppose everyone will continue to watch the yield curve and the GDP's quarterly growth numbers for the next six months with heightened 'interest,' as it were.

Thursday, January 11, 2007

GM's Bulging Inventory of 2006's "Hot" Cars

Monday's Wall Street Journal reported that GM's unsold finished goods inventories of cars have become enormous.

The article states that, at the end of December, GM

"had more than one million vehicles in stock in the U.S. That's equivalent to about 41,000 vehicles for every point of its 24.6% U.S. market share. By contrast, Toyota..., one of the world's most profitable auto makers, carried about 16,000 vehicles of inventory per point of its 15.4% market share.

Among the unsold vehicles, the piece later explains, are some of the models that GM's management felt were "hot" models for last year- the Chevrolet HHR, the Buick Lucerne, and the Saturn Aura. Some of these cars now have a 90+ day supply sitting on lots across America.

Apparently, we have yet to see the much-vaunted, newly-creative GM emerge. Because the products they evidently pinned much of their 2006 sales hopes on are sitting, unsold, in storage around the country.

GM finds itself in a vise of its own device, in that it must, on one hand, cut costs, such as inventory financing, and, yet, maintain production in order to generate cash flow to assist its 'turnaround.'

Failure to keep production levels up starves it of cash to pay its mountain of fixed liabilities relating to healthcare and pensions, but unsold inventory ties up much-needed liquidity, as well as spurs price cuts via low-interest rate sales programs.

Interestingly, GM's haphazard pricing tactics have contributed to its woes. With much car shopping initially done online now, the company's reliance on relatively higher sticker prices, coupled with the expectation of dealing on financing, causes many buyers to exclude the company's products from consideration.

Of the dilemma, GM's CFO, Fred Henderson was quoted as saying,

"This is the area where we have a lot of work to do in the future."

No kidding.

Having been in the auto business for, oh, nearly a century, with, at one time, the overwhelming market share in the American auto market, you would think GM's management would, by now, have its customers' buying behaviors down pretty well, wouldn't you?

Evidently not.

Yet another firm for which 2007 is starting out with a thud.

Tuesday, January 09, 2007

China's Dependence on Tobacco and Smoking

Last week, the Wall Street Journal ran a piece on China's dependence on tobacco as a centerpiece of its economic development.

The article focused initially on the province of Kunming, which has based much of its economic growth on the product. However, as the piece began to broaden to encompass all of China, the information began to look truly scary.

The Chinese death number is expected to double by 2005.

"One third of all Chinese men now age 29 or younger will die prematurely from tobacco-related diseases."

Allegedly, more Chinese people smoke than are in the US. One estimate of the cost to China last year from smoking was $5B, in medical expenses and lost productivity.

There are many details about the Chinese tobacco industry in the article, but I'm not really interested in recounting or commenting on them in this piece.

Rather, I have two major questions, as a result of reading the Journal piece.

First, can a country afford to either kill off its productive assets, i.e., its citizens, prematurely, and/or foot the immense medical costs for their smoking-related illnesses? Second, could tobacco become the achilles heel of the Chinese economy, in much the same way that a lack of focus on profitability and, then, borrowing in a foreign currency, were to the Japanese economy in the 1970s?

On the matter of the first question, I suggested to some friends that the Chinese economy would have to absorb a massive amount of healthcare-related costs, much as America's automakers have had to do for their retirees. My cynical friends opined that, 'no,' the Chinese would not be so burdened, because the Chinese government will simply let its smoking-induced ill citizens die without much medical care.

If that's true, then let's simply examine the consequences of that. How much premature loss of trained economic assets, in the form of a society's people, as workers, can a country sustain, before its productivity is affected? The ultra-low-wage jobs will soon migrate elsewhere, so, like all other developing economies, China will have to sustain its economic development upon creativity and productivity. How can it do that if it only gets 20-25 good years, on average, per worker, before they become ill? I don't know the exact life-expectancy loss from the Chinese smoking habit, but you get my point. It's surely a drag on the Chinese economy, if only as a simple ratio of reduced lifetime economic output per trained worker.

Thus, my second question. Could this seemingly incidental facet of Chinese society eventually torpedo its plans to dominate global economics? I guess, on one hand, premature deaths from smoking will lower the average age of the population, and reduce the pension cost problems. However, more seriously, is it possible that a significant loss of economic capacity, productivity, and skill, from premature worker deaths, could hamper China's ability to compete with healthier society's?

Will the health and producitivy penalties of tobacco in the long run offset its near-term boost to the Chinese economy? I recall that, in the late 1970s and early 1980s, the American business media was fixated on the coming economic domination of Japan. The country seemed unstoppable. Until, that is, its obsession with market share and growth, to the exclusion of profits, hollowed out its financial strength. Then, its dollar-denominated debt proved a crushing burden, because they had to service it with their own yen.

After all the loss of productivity, via healthcare and legal costs, that America has suffered from asbestos and tobacco, one would think the Chinese could build upon such lessons and avoid the same fate. Evidently, as a society, they aren't yet that smart.

Finally, for the moralists among readers of this blog, what, if anything, can other societies do, as they watch the Chinese promote the early death of their own people? Is there any appropriate action other societies can take? Or would that constitute unwanted, baseless interference in the civil affairs of another society?

McDonalds Resurgence

Last weekend's Wall Street Journal ran an article on McDonalds, the fastfood titan. Now that it's in my portfolio, the story caught my eye.

As the nearby Yahoo-sourced price chart indicates (please click on the chart to see a larger version), the company really has turned around in the last five years, and outperformed the S&P over the period.

The firm's CEO, Jim Skinner, was a part of the management team that began to improve McDonald's four years ago. He moved up to his current job when one CEO died suddenly, and the next resigned to wage a battle with cancer.

What I liked about Skinner's responses in the interview was how clear-thinking and sensible he is. For instance, he said,

"....we proved that we were getting bigger but not better. And we have to be better. Your experience today at McDonald's has to be a better experience than it was yesterday. People have limited time today. They don't want to get up and go, "Gee, I don't know. Do I think I can go to McDonald's?" "

Skinner has a clear focus on his customers' behaviors, which is always heartening in a CEO, especially in a retail business, where there are so many individual purchase decisions each day.

Later in the interview, he is quoted as saying, regarding the four-year old turnaround strategy,

"We had contributed $4B or $5B to capital expenditures and building new stores over four years, and yet we didn't have any corresponding incremental operating-income growth. So we decided to focus on our existing restaurants. Those of us that were hardcore restaurant people, which I was at the time, were saying, "Look, we've got to do a better job of delivering what we called quality, service and cleanliness on a daily basis in our restaurants." And value. Because value proposition's very important."

Skinner's remarks show how sharp this company's management team is. He related later that a considerable amount of time and effort of every senior manager is spent identifying and grooming their upcoming talent. He attributes the company's ability to 'accelerate our momentum' to 'selecting the high-potential people.'

When asked what his biggest remaining challenge is, Skinner replied,

"I worry about complacency. We're not satisfied. We have a lot of work to do."

That's what I love to read about from CEOs whose company's shares I own. Toyota's CEO says the same thing, whereas his faltering rival, Rick Wagoner of GM, feels he's on track.

I loved the things I read about Jim Skinner, and McDonald's, in the Journal piece. It impressed me so much, that, having just bought some of its shares, I had lunch there yesterday, on the way back from a midday errand.

It was everything Skinner contended. The food was well-prepared, and less expensive than I expected. The store was very clean. Though after the noon-time rush, one employee did nothing but circulate among the tables, wiping off food remnants and spraying, then wiping them clean with a disinfectant. My visit was fast, clean, and delivered familiar food. The menu even seemed simplified and easier to use than I recalled on my last visit to a McDonalds some years ago.

Needless to say, I hope the company continues to do well. At least for the next six months of my portfolio investment. Based upon Jim Skinner's interview in the Wall Street Journal, I'm confident that it will do so.

Monday, January 08, 2007

Wal-Mart's First Gaffe of 2007: Scheduling Part-Time Workers

It's 2007- a new year. Within only three days, we have the first significant Wal-Mart gaffe of the year.

Last week, the Wall Street Journal carried an article discussing Wal-Mart's latest productivity improvement approach. They are employing new, dynamic labor-scheduling software which more closely matches store staffing to customer volume, as well as observes various constraints, such as employee hours worked, overtime, etc.

These guys just don't get it, do they?

Sure, labor scheduling software can be a good thing, within limits. But in their zeal to become the most efficient retailer, Wal-Mart risks total alienation of even the few capitalists who can still defend them.

This is the type of corporate behavior that brought us unions in the first place. It's just not wise. Why would you want to go after your own employees' qualities of lives and abilities to earn reasonable livings?

To me, this is just an open invitation to be pilloried again by a now-Democratic House and Senate.

Do you wonder, as I do, if Lee Scott has any common sense at all? Perhaps these continuing gaffes are, in fact, emblematic of the core competencies, or incompetencies, of the company?

On the heels of last year's many problems- the mistaken upscale repositioning, the race-based store segmentation, the reversal on selection on an ad agency, and public relations "ambassador" Andrew Young's invectives against other minorities- we now have the world's largest retailer improving productivity seemingly on the backs of its workers.

I'm all for efficiency, but, in reality, there are advisable limits within which a company should stay, in order to not invite regulation and excess scrutiny from government. I think Wal-Mart is off to a phenomenally bad start to this new year.