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Managing for Shareholder Value - Who Are We Kidding?
Geoffrey Moore
October 02, 2012
Look at the figure below.
It compares the 10-year stock price histories of a number of iconic tech companies, of which two, I think it would be fair to say stand out (Apple, and below it, Amazon). They are not the companies to focus on. Look at the others. I happen to have listed Cisco, HP, IBM, and Intel, all along with the NASDAQ as a reference point. But I could have added Oracle, SAP, Yahoo, Adobe, EMC, NetApp, Nokia, and Microsoft, and the graph would have looked no different. Basically, shareholder value for the overwhelming majority of the iconic, established franchises in the tech sector has not appreciated materially over the past decade. Why not?
Please don’t tell me it is the management teams. I know many of these executives. They are very good, very smart, and very committed. To be sure, there are plenty of people who are sure they are smarter than Steve Ballmer and John Chambers and Shantanu Narayan, but frankly, most of them are journalists, and they don’t count. Damn few experienced businesspeople would think they could do a better job.
And yet, two did. What did Jobs do? What is Bezos doing? Why is it so different? The answer, in my view, is simple and straightforward. Steve added three net new, uncorrelated earnings engines to the Apple franchise—in music with the iPod and iTunes, in smart phones with the iPhone and the App Store, and in tablets with the iPad—and, in the process, also revitalized his core MacIntosh PC business. So he took Apple from a one-trick pony to a four-engine rocket ship, all in less than a decade, and Apple’s stock price appreciated 7000%. Bezos during the same decade has added just one net new uncorrelated earnings engine to the Amazon franchise—Amazon Web Services—and his stock price has appreciated more than 1500%. No other established franchise has achieved a comparable outcome over the same period.
So here are my claims:
1. The only way an established franchise can appreciably increase its market cap is by adding a net new, uncorrelated earnings engine to its current portfolio of core businesses. Said another way, all future returns from its current core businesses are already priced into its stock, so incremental improvements there will not move the needle.
2. This is not lost on management. Every corporation every year presents its board with a strategic plan which includes multiple investments to create exactly this kind of net new uncorrelated earnings engine. Overwhelmingly, these new ventures get funded, often with great enthusiasm. So every year there are many, many horses in the race.
3. Now do the math. From my experience I would guess in any given year that the top 20 high tech companies have an average of three “big bet” plays in their portfolio that are targeted to pay off in the next five years big time. That would add up to 120 bets over the course of a decade. Two have been won. 118 have been lost. The league batting average is .019. This is not what one should expect from a group of major league all stars.
They say that insanity is doing the same thing over and over again and expecting a different result. By that definition, current high tech management theory must be certifiably insane. Clearly we are doing something wrong over and over and over again. The key question is, what?
I have some ideas, but before I hold forth, what do you think?
Geoff
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