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Adam Hartung recently published an interesting post in Forbes entitled, “Why Not All Earnings Are Equal; Microsoft Has the Wal-Mart Disease.” Wal-Mart’s disease is defined as “constantly trying to do more of what it always did, hoping it can regain old results.”

Hartung’s point is not about these businesses per se, but about the difference between companies that are growing and companies playing defense. And while his model is clearly for public companies, the lessons for private for-profits and even not-for-profits remain relevant.

Hartung notes that while Microsoft and Apple should be valued about equally, Apple’s market capitalization is about 70% higher than Microsoft’s. Why is that? Hartung cites the Conference Board, which has found that:

When a company hits a growth stall, 93% of the time it will be unable to maintain even a 2% growth rate. 75% of the time we can expect it will fall into a no growth, or declining, revenue environment.  And 70% of the time it will lose at least half its market capitalization. That’s because the market has shifted, and the business is no longer selling what customers really want. No matter how hard management tries to recapture the past, customers have decided to move on.

Microsoft is entrenched in the fading PC and netbook market, which is eroding and certainly has lost its mojo. Apple is dominating the virtual, mobile, and tablet markets, all of which are exploding.

When a market is growing, R&D comes easily, pays off quickly, and is part of a virtuous cycle with the market — a lot of feedback, fertile development pathways, and hungry consumers.

In a stagnant or dying market, the road ahead isn’t clear, feature sets aren’t as easily dreamed up, and R&D spending is invested in maintaining what exists, not in breaking new ground. Often, it’s all done within a bureaucracy that’s more interested in self-perpetuation than customer innovation. For instance:

Microsoft spent 8 times as much on R&D in 2009 as Apple – in both dollars and as a percent of revenue – and all investors received were updates to the old operating system and office automation products.  That nearly $9B expense generated almost no incremental demand.  While revenue is stalling, costs are rising.

In addition to overspending to maintain normal revenue levels, stalled companies have to overspend to fight off interlopers. Earlier this week, Microsoft spent US$8.5 billion to acquire Skype, an expensive way to fight off Apple’s Facetime technologies, repel Cisco to some degree, and try — yet again — to resuscitate the notion of a Windows phone.

Such internal dynamics are something  we’ve all seen too often — companies over-investing in what was, missing out on what’s to come, only to see expenses rise while revenues plateau or fall, with that inevitable and chilling crossing of expense and revenue lines, a short-circuit signaling something must change.

While Hartung’s worries about investors aren’t directly relevant to most publishers, we have investors of our own — donors, advertisers, subscribers — and long-term interests in sustainability.

A recent investigation published in the Chronicle of Higher Education shows how expensive playing defense can be for universities. Institutions have had to invest their own funds in research facilities and staff to attract a decreasing amount of federal research dollars. Of the 64 institutions that doubled their own spending on research in 2009, 31 saw a drop in their rank of federal dollars. In some cases, the disparities were very large.

This is essentially like Microsoft chasing the same customer with the same product, while not looking outside the product or customer dynamic for new approaches and innovations.

The growth mode has many virtues to recommend it:

  • Pressure to reduce wasteful and futile spending on legacy projects because they’re now in the way of growth
  • Re-engagement with stakeholders and customers around what’s next instead of what was
  • Reinvigorated strategic options and strategic thinking, leading to bold moves instead of tepid steps
  • Identification, painful at times, of bureaucracy or personnel that impede progress

These are just a few of the benefits of having a philosophy that makes growth — larger audience, increased revenues, long-term breakthrough strategies — the dominant mindset. Some companies, even some not-for-profit publishers, make it a requirement that a certain percentage of revenues come from new products and new streams. This is healthy discipline.

If you’re not growing, you’re quite possibly throwing money down the drain in an effort to stay afloat.

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Kent Anderson

Kent Anderson

Kent Anderson is the CEO of RedLink and RedLink Network, a past-President of SSP, and the founder of the Scholarly Kitchen. He has worked as Publisher at AAAS/Science, CEO/Publisher of JBJS, Inc., a publishing executive at the Massachusetts Medical Society, Publishing Director of the New England Journal of Medicine, and Director of Medical Journals at the American Academy of Pediatrics. Opinions on social media or blogs are his own.


1 Thought on "If You're Not Growing, You're Shrinking — The Asymmetrical Expense of Playing Defense"

Universities long ago gave up a prime opportunity to innovate and grow by outsourcing the publication of STM journals in the post-WWII era to commercial companies, despite the fact that the very first university press, Johns Hopkins, began by publishing STM journals–a decision that has come back to haunt universities ever since. They are in danger of doing so again by not investing more in their presses’ efforts to innovate in the ebook market. The “serials crisis” may come to be followed by the “monograph crisis” if university administrators do not wake up to what is happening.

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