July 7, 2008
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New York — The Wall Street Journal gave a big spread to Sharp’s $9 billion bet on LCD manufacturing today. But Sharp has had a NORTH RIVER MANAGEMENT GRADE F since we began collecting data on it in 1996 and is deep in the type of trouble that NRV’s new CORPORATE INNOVATION PROJECT is designed to solve.
The chart shows the gravity of Sharp’s difficulties. In spite of some movement over the last decade, the company is well into the Dead Zone of our Soccer Ball System for gauging the speed of operations, core to accretive innovation.
The NRV system shows exactly where Sharp needs to innovate to get out of the Dead Zone and to make innovation accretive for the long term.
To take a bet of the size Sharp proposes — between a third and a quarter of its sales on an LCD factory at Sakai the size of 32 baseball stadiums — the company should already be testing 20 days of inventory instead of the 49 it has.
The theory is that Sharp will invest only $4.3 billion of the $9 billion cost and that its suppliers, who will be housed there too, will spend the rest. This proximity will, in principle, cut Sharp’s inventory days...
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New York — Chrysler is a victim of a huge problem that plagues Japanese industry and which our new CORPORATE INNOVATION PROJECT is designed to obviate: a fatal lack of demand management. The lack of demand management in Japan is so bad that companies there have never heard of it. Chrysler’s inability to manage demand — a company problem in most of the world — plagues the entire Japanese nation, and that, in turn, is a problem for everybody who sells to, or buys from, Japan.
The chart shows how demand management works. Companies with IT good enough to generate high cash velocities also get the customer information premium that comes from those velocities. Companies without effective demand management IT have low cash velocities and, therefore, customer information deficits. Often they don’t know what they don’t know.
In Japan the chronic lack of demand management IT means that demand and supply are never synched well enough to ensure operating margins commensurate with market share or sales growth. This is how a large operator like Sony can have strong sales and weak operating margins while non-Japanese companies like Proctor and Gamble, Apple, and HTC get both high growth rates and high margins.
It is the difference between scaling profitably and not.
June 6, 2008
07:30 am | 0 recommendations | 1 comment
New York — Here is an intriguing tale of two innovators. Apple gets a NORTH RIVER MANAGEMENT GRADE A+ and Microsoft gets an A-. Since 1999, Apple has seen sales grow by four times and stock by fifteen times. Microsoft, by contrast, has seen sales grow 2.7 times and its stock fall 40%. The big difference: how they innovate.
Apple has a well-defined brand message: we manage your entertainment. Microsoft once had a clear message: we manage your work experience. But, once the company attacked Netscape with its Explorer web browser in 1995, the company lost its way and fell into a “Let a thousand flowers bloom” strategy. The latest thing is to be in the search and advertising businesses. Why? Who knows. But it is what it is.
The results are startling. Apple will overtake Microsoft in sales in about 24 months. If current sales multiples hold — no sure thing — the company would be worth $417 billion. Microsoft would be worth $343 billion, though probably less because its market cap to sales ratio is falling with its stock price. Either way, it is likely that Apple will be worth more than Microsoft in the foreseeable future.
What drives the two apart is the way they innovate. Microsoft is all over the map, from games consoles to operating systems, from advertising to office tools. And it tries to do most of its innovation in house. Apple leverages other people’s IP to move its own IP to market fast and cost-effectively, and is focused on entertainment. Apple steers clear of upstream risks in operating systems and studiously ignores markets that do not benefit its core mission.
The core cash and capital velocity data of the two companies could not be more different. Apple is 58 Cash Velocity Index points ahead, giving it far more competitive endurance. What gives Microsoft its A Grade is its operating earnings as a percent of enterprise value, 49% as opposed to Apple’s none-to-shabby 30%. Of concern to Microsoft shareholders, it has eight days of inventory compared to Apple’s five: how can this be?
A good argument can be made — indeed will be made in business schools the world over — that Microsoft lost its way taking on Netscape in 1995. This was a big mistake that has cost shareholders dearly. Microsoft trades at the same price as it did ten years ago, almost to the day. The attempted takeover of Yahoo shows that management is still badly distracted a full thirteen years later.
Yesterday, Microsoft announced that it will not follow up its failed Yahoo bid with another buying spree. Perhaps management has begun to figure this out.
The price of mismanaging innovation can be steep. Don’t go there. Join our CORPORATE INNOVATION PROJECT and stay ahead of the curve
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Tokyo – I’m often asked here what it would take to become a top player in the $400 billion global market for cellphones. Motorola’s troubles offer a once in a decade chance to displace a large supplier and the tools of NRV’s CORPORATE INNOVATION PROJECT show how this can be done.In CIP, the first step is to look at the numbers through the lens of the North River Cash and Capital Velocity Indices to see how the industry is structured. Clearly, Motorola’s departure would open a wide sales hole in the market, as the chart shows.The chart also shows other important features of the market:
- None of Motorola’s competitors stand to benefit from buying its cellphone business, now for sale.
- Any Motorola combination with another low cash velocity performer would fail.
- And none of the top cash velocity performers, like HTC and Apple, have anything to gain by acquiring Motorola.
- The top cash velocity performers are in the premium end of the market and do not suffer Motorola’s price deflation problems.
Private equity could pick up Motorola, but none of these players has the expertise to increase Motorola’s North River Velocity of Cash and Capital Indices, let alone increase them fast enough to put off the Grim Reaper.This tells us that Motorola is being taken out of the play, one way or another. The way to entry seems clear: market demand is not going down, though it is mature in many markets, and the loss of Motorola will have to be made up by somebody. Why not us?Ten percent of the global market is $40 billion — nearly twice the size of Apple in 2007 — which certainly is not shabby. Should we enter?Let’s run thought this from the top as we do in THE CORPORATE INNOVATION PROJECT and see what a successful strategy to take advantage of Motorola’s misery would look like.The wireless business is entering a period of revolutionary change that is already disrupting global markets. The last such opportunity was the introduction of digital cellular in the mid 1990s. Another one will not emerge for a generation.This new discontinuity, ushered in by a rapid shift in price-performance―much more bandwidth for much less cost―will offer us a once-in-a-generation chance to establish powerful, profitable, branded positions.To take advantage of this great opportunity, we need forward-looking, global strategies that are brandable, break cleanly with the cellular past, and are unencumbered by the priorities of today’s industry participants.In the near future, every person, literally, will be a TV station. With YouTube and Facebook, we are well on the way. We want to play a dominant role in this new market.We will, therefore, have to look well beyond Google’s text-based advertising and find new, innovative business models for mobile video entertainment. Content providers, similarly will have to monetize the “lost generation,” those young viewers who will never own a TV, just as they will never own a landline phone. To prosper, carriers too must understand these needs and learn to profit from them. CIP will have participants from these areas so we have friends from whom we can learn a lot and leverage a lot.Capturing this fast shifting global market means recognizing that:
- Wireless is on a price-performance curve. Forget the word “cellular.” This is a term for a mobile technology whose time on the price-performance curve is already in the past.
- Our North River Third Law of Information is that value always flows to the least regulated. This means that the most open and least proprietary architecture for maximum user value creation always wins.
Apple’s iPhone is so successful because it is part of a complete entertainment management ecosystem, iLife. Apple positions iLife―a three dimensional package that includes hardware (iPhones, iPods, and Macintosh computers), services (iTunes, iMovie, iDVD), and content (the movies, videos, TV and music files of others)―to extract premium value from the markets of others.We know that we should not―and cannot―simply copy Apple. But we can learn from Apple’s strategy.
- Apple focuses internal investment on key areas of differentiation, leveraging the innovation potential of its suppliers to an extraordinary degree.
- Apple targets segments where competitors are highly profitable, but careless about financial management. These are companies in North River’s “Risk Zone.”
Apple’s greatest strength with iPhone is also its greatest weakness: its ecosystem is largely proprietary. Furthermore, carriers and content suppliers view Apple as a threat to their own proprietary ecosytems. Google has correctly identified the appeal of open source software for wireless Internet devices.To gain a large role in wireless, we must foster an ecosystem where others can fill in the dimensions we cannot. CIP will play a key role here, allowing us to do what we do best and leverage the strength of others to participate profitably in one of the most rapidly inflating realms of cyberspace at minimal investment.CIP will also help us set our go/no go decision criteria.The North River Velocity Model also tells us that the sine qua non of market entry is cash and capital velocities high enough to maximize operating free cash flow, giving us the above industry OFCF-to-R&D and OFCF-to-SG&A ratios that will provide the Customer Information Premium we need to maintain a leading position.To get these velocities, our sales almost certainly have to be direct, without intermediaries, because we cannot generate competitive high cash velocities otherwise.The gating factor for market entry, therefore, is not technology or alliances, but whether or not we can establish an effective, brandable, direct sales operation. So, to design our market entry strategy, regardless of whatever we do and whatever partnerships we enter, we have to start here.Thus, CIP allows us to see what it will take to benefit from Motorola’s misery and to do it quickly, reducing costs and preventing us from wasting R&D on something that will not work if we cannot build a direct sales operation.The first piece is in place.
May 5, 2008
08:38 am | 0 recommendations | 1 comment
The collapse of the U.S. automotive industry is, without question, one of the greatest tragedies of the age. Hundreds of thousands have lost jobs already and hundreds of thousands more will follow them in the coming years.
What makes the story so compelling is the homes that will be lost, the college educations that will go unfunded, and how easy all this was to foresee and therefore to forestall.
To read the entire report on the Auto Industry, published in 2006, download the PDF here
http://www.northriver.com/AutoIndustry2006.pdf
08:01 pm | 0 recommendations | Be the first to comment
New York — It may seem tasteless to say there is good news from China,
given all its suffering from last week’s catastrophic earthquake, but
there is good news. Wal-Mart, which gets my North River Management Grade A,
will respond to quality problems on Chinese goods by demanding
“traceabality information” from Chinese suppliers. This should drive
cash velocity improvements across large sections of Chinese industry,
good news for everyone.
You can see from these data that Wal-Mart is well ahead of competitor Target, which gets my North River Management Grade C+, down from B in FY 2007, taking its stock down 17%. Wal-Mart’s North River Velocity of Cash Index
is 41 points better. But, Wal-mart has struggled with inventory
management in recent years — its signature strategy is putting more on
the shelves with fewer stockouts and less inventory than anyone else —
and its stock price has languished as a result.
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New York — The real question in the acquisition of EDS by Hewlett-Packard is, can a NORTH RIVER MANAGEMENT GRADE B company make the acquisition of a Grade D company accretive? Experience says it cannot. At an operational level, the mechanics of the two will be tough to integrate.
Hewlett-Packard has struggled mightily to get to where it is today and I have given CEO Mark Hurd much credit.
You can see large scale implementation of the data used to make these assessments in the Goldman Sachs report based on my system, PICKING CASH VELOCITY WINNERS.
Hurd’s management team may reason that applying H-P’s operational skills to EDS will improve its fundamentals — EDS’ North River Velocity of Cash Index shows that H-P’s sales operations, for example, are clearly superior — to leverage the differential sales multiples and make the deal accretive quickly. It may also reason that EDS operating margins have improved every year for the last five and that sales have finally begun to grow too.
Still, this deal is going against history, not with it, and will be hard to do. The last time H-P acquired a low grade company — Compaq — the CEO lost her job.
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New York — In my December, 2006 North River Advisor, Airbus, I warned that Airbus’
continued weaknesses while global demand for fuel-efficient, jumbo
commercial airliners explodes would attract a powerful new entrant,
probably from China.
On May 23rd last year, Boeing CEO Jim McNerney, repeated my warning. Yesterday, China
formed a national company, Airbus-style, to complete the foreclosure of
the Chinese jumbo market to Airbus, cut China’s reliance on Boeing, and
grab overseas markets. Another notch in the belt for my North River Management Grading System.
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The following chart is based on a June 15, 1994 meeting I had with Dick Jalkut, then president of NYNEX Telecommunications. Dick said that his biggest problem was his outside plant. “It is too expensive to maintain,” he told me, “and there isn’t enough capital in world markets to replace it.”
Before long Jalkut was on a mission to goose earnings by slashing costs. This gained NYNEX a 21 p/e from Bell Atlantic, well above the 17 p/e that Pacific Telesis got from SBC, to the everlasting gratitude of NYNEX shareholders.
I took a different take from Jalkut’s comment. My conclusion was that if outside plant is the problem, it is also the solution, and sketched out the progenitor of this chart, The Big Iron Free Network.
A network with no big iron has high a Velocity of Capital and a high Velocity Cash. It scales like Wal-Mart. In fact, it was in trying to figure out how Verizon could scale quickly and profitably that I created my North River Soccer Ball System — a high velocity operation with all assets and operations on the “surface” where they touch customers — based on Wal-Mart.
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To get my NORTH RIVER MANAGEMENT GRADE A and ensure profitable growth, more companies are using a “thin” propritary fabric that turns the Edison Model on its head.
These firms have adapted to market forces by rethinking the Edison model in
their favor. They are reaping above-industry sales and profit growth and many are cementing dominant market positions that will last for then next quarter century, or longer. As a result, for the first time in history, U.S. industrial R&D expenditures are falling.
More important, many Thin Fabric firms have come from nowhere, like Google, or, like Apple, appeared to be on the rocks. They scale rapidly, inhale all the operating free cash flow in their markets and quickly achieve Brand Superiority, affecting outcomes for every one of their competitors and even for firms that do not yet see them on the horizon.
A “thin” proprietary fabric leverages a wide range of process innovations across all business functions from product design to sales and service, making technology innovation ever more effective: more bang for the R&D buck.
This fabric answers industry’s growing conundrum: there is no demonstrable relationhip between R&D as a percent of sales and sales growth. Money is not an answer.
The thin fabric enables winners to move quickly, profitably, and with minimal cash and capital wait states. Many actually get negative working capital, making them superior cash engines.
