Comments

True indeed!! I have always believed that if you take care of the fundamentals, the extras will take care of themselves. Of course, it all begins with correctly defining what the fundamentals are in the first place. Hint: they are found in the place where we care about making super cool experiences, rather than on Wall Street.

Posted by frederick kambo at November 4, 2005 11:18 AM

Tom,

I agree within the business/economic context. But, guess I'm feeling particularly grumpy today and as they say, within every cynic is the heart of a disppointed romantic...I'd love to see companies investing their dollars (such as in this instance) in K-12 education programs so that our society as a whole is healthier (which in turn means a better economy, more money for everyone, sustainable companies, etc.) But, of course Wall Street would punish them for it.

Posted by Mary Schmidt at November 4, 2005 11:22 AM

At one time Warner Bros., Time Inc., and AOL invested money (and talent) into a lot of "very cool" ideas which resulted in the creation of underlying and sustainable value.

So what happened to them? Too big? Too wimpy? Too concerned with the share price? Are they in the hands of dolts?

Love your idea, Mary. I bet there would be a way to make it pay back the shareholders, too. I'm envisioning some kind of "compay schools" like the old General Motors Institute used to be. Sort of an ROTC for private industry. Maybe something along that line would be the starting point for a workable model...

Posted by Mike at November 4, 2005 11:50 AM

It surprises and disturbs me that the focus on "investing" has gone away from buying a piece of a solid, sustainable company and enjoying the benefits of them turning a profit - typically in the form of dividends - and, instead, become a speculative endeavor dominated by a day-trader mentality. Stock price is an irrational way to truly value a company, and yet that's the score most companies judge their success by.

So, yeah Tom, you're right on. I feel like a lot of new companies have learned from the dotcom era and are building businesses whose exit strategy consists of profitability for all involved rather than a quick and pricey IPO. The good news is that folks are building stonger, better businesses. The bad news is that, because they aren't doing an IPO, you can't get a piece of the action unless you're an insider.

Forunately, starting one's own business just keeps getting easier, thanks to the Internet and the constant improvements in commercially available technology. The barrier to entry is so low that one can actually spend most of their time focusing on the growth and needs of the business rather than the infrastructural details. You just need to understand how to leverage that technology to make it all work. That's been my focus lately - showing entrepreneurs, business professionals and home users how to understand the basic concepts and potential of the technology available today. I'm proud to say that it's working. Money and experience don't matter as much these days as knowledge and drive. That's definitely a good thing.

Posted by Rob Zazueta at November 4, 2005 1:26 PM

I didn't know that companies did that. What a shame...what a sham.

I'd rather be hungry
I'd rather be dead
Than to spend my whole life
Counting money in bed

(how's that for a little impromptu!)

Posted by Tom O'Leary at November 4, 2005 2:47 PM

They buy back the stock, pump up the price, and then executive management exercises their stock options. Keep an eye on the insider trading for this one.

Having less common shares outstanding improves earning per share in the long run and is one of the most common indicators of financial performance. It also ties into the P/E multiple.

Posted by Dau at November 4, 2005 4:23 PM

Hey guys,
All things said and done, how many of you would actually pay AOL more for their service - no matter how many value added services they release? Not many!

Even companies like Basecamp with highly innovative ways of creating Web 2.0 businesses are "long-tail" companies. There is a small percentage of users who will pay a small premium for "remarkable" features. It's satisfying them which is the game.

Creating such features may not - in fact DOES NOT - cost that much money relatively. So I feel that Time Warner is doing the right thing by giving the money back to shareholders!

Kudos to them!!

P.S. I'm do not own Time Warner stock.

Posted by Arun Sadhashivan at November 4, 2005 4:29 PM

I agree with your take on punctuation.

Posted by Olivier Blanchard at November 4, 2005 6:16 PM

Mary/Mike: Doesn't Ben & Jerry's do something like that? Using profit to create a corporate training program that actually results in a new, fully functioning new operation run by the people who completed the program each time? Great stuff; collaborating with the community, and especially with those normally discounted members of a community, to create a win-win-win situation.

Posted by Tom O'Leary at November 4, 2005 6:34 PM

Apologies - I know this is not right place for my comment but hope you forgive me. I attended a two day conference yesterday and today where Professor Gary Hamel was one the speakers and I have to share his one liner about mergers, Professor Hamel said "When Dinosaurs mate the outcome is rarely Gazelles" – what a brilliant summary!

Posted by Trevor Gay at November 4, 2005 6:43 PM

Yes, common example on how financial security killed creativity but here in bigger scale. I find it useful acquiring just an sponsor alike role for the "artists of enterprise". Is it there anything better they could make having just all that $M?

Posted by Omara at November 4, 2005 9:58 PM

Arun...many of these innovative, "free to the consumer" services are innovating monetezation as well as services. The Internet business bottom-line today isn't about getting money from the customer, it's about creating creative and effective affiliate relationships and targeted advertising streams. There is no upfront cost to browsers and users of Google's services for example, and yet their advertising streams generate billions. This is the beauty of online business. It's a win-win situation. Customers online expect great value and excellent service, and innovative online companies are happy to provide it, because they make big bucks from affiliates, sponsors, and advertisers who want a piece of their traffic...to be part of their buzz.

Posted by Tom O'Leary at November 5, 2005 5:06 AM

I love Google et al. (business school crush) but you miss the point - and so does everyone else by the looks of things. First of all, unless the company is very small and the stock pretty illiquid, manipulating share prices with by-in/back schemes is a lot harder than most who don't work in the market assume, largely because the amount of stock you have to purchase to impact the price in any kind of meaningful sense is so large that it would be difficult NOT to notice some kind of scheme going on. It's real 'pub punter' mentality to get so easily cynical over large corporations ... it's actually the very small businesses on the market you have to watch out for, as these go unnoticed by regulators much easier. Ironically, it is these compaines that retail investors cannot get enough of in their desperate search for the 'next MSFT'.

Google is a great company, and taking a highly advisable strategy too in staying so secretive about its movements (makes a refreshing change in the tech world), but I don't know whether I'd be so confident about buying the stock at these levels, or especially in ascerting that there is going to be any kind of big revenue generated unless they can enter the software market and compete head-on with Bill and friends.

Lastly, in response to the comments here, it is again just fallacy that investing in ''cool, meaningful'' stuff that's a benefit to society would be punished by Wall Street. This is typical 'retail-investor' short-term thnking: if you do something consistently enough, for long enough, with a high degre of success, WS will make you richer than you know ...

... just look at Bill Gates (again ;))

Summary: This whole discussion is far to ST in outlook to make for any kind of useful Management discussion.

Posted by Daniel M. Harrison at November 5, 2005 9:19 AM

You can bathe and put lipstick on a pig but it is still a pig [Dick Cheney]. Trevor - appreciate your quote.

Even though my brother-in-law's son works for TW on the upper west side [and for some reason took me to lunch at the Harvard Club] - I'm no fan of TW and AOL due to their poor finance performance of the last 5 years - they drained their investors big time and so are still le pig pork in my view - agree with Tom and Mary sentiment to audit and watch - trust but verify as Ronald Reagan said about Soviet behavior.

Freedom is being independently wealthy [1 part of it as Tom well knows] and seems once you are wealthy the scammers [WStreet and others] are always their to try to take it - caveat emptor 2006.

Posted by Sean at November 5, 2005 9:58 AM

Daniel Harrison. In my opinion you miss the point, or at least overcomplicate it. I said nothing about manipulation, etc. Perhaps my point is too simple: In a theoretical sense, if someone uses cash/earnings to take stock out of circulation it is because they were unable to find a better internal-organic growth-investment opportunity. Period. (They have decided that repurchase at the current share price is the highest yield available. Part of this, and here I go overcomplicateing, is that their ego says the shares are undervalued and that buying them back "cheap"--ie current price--provides the highest return on investment.) (Recently read a great article somewhere more or less on this topic. It said that Wall Street's antipathy to conglomerates--like TimeWarner?--stems from the fact that ye olde market via hedge funds is a better evaluator of risks than a CEO and his Board.)

Keeping it simple: If I, as principal owner, take an extra $50,000 out of the Tom Peters Company's earnings this year to spend on my kid's grad school tuition, it's because I've decided there's a better "investment return" on his education than there is on, say, spending the money on upgrading this Web site. (If I was determined to upgrade the Web site and send the kid to school, I could borrow the money from the bank, in which case I would simply be saying that the expected yield from the two investments exceeds the cost of capital/loan at Factory Point Bank of VT.)

Posted by tom peters at November 5, 2005 1:15 PM

Sean, all you say may be true,and doubtless is, but scams were not my target in this Post. I was simply lamenting the apparent inability of Mighty Corps to take bold imaginative risks.

Posted by tom peters at November 5, 2005 1:18 PM

Daniel Harrison. Coming at you again on what can be "engineered" (gotten away with in the world of publically traded companies), you seem to forget that I worked at (trained, actually, for a short while) McKinsey with Jeff Skilling. I am a great admirer of Jack Welch and Lou Gerstner. I believe that both stayed well within the law, but were master "engineers" of balance sheets and P & Ls to the benefit of their share price. In particular, Welch had GE Capital, and the degree to which one can make legal reporting decisions at a giant, complex financial services firm in ways that will help "manage" earnings is legendary.

Posted by tom peters at November 5, 2005 1:24 PM

Tom: OK, so if I read you right you are saying that maybe 'engineering' and 'manipulation' are two different words, but that they amount to the same thing (at least as far as the investor is concerned): inflated share prices which the investor is getting a raw deal on. What you are suggesting is that what Welch was doing at GE Capital was legal; what the guys at Enron et al. were doing was not: that there's the fundamental difference.

So GE (and GM for that matter) might have functioned slightly differently to how they appeared to be doing, but these were companies where there was actually revenue: and I'm saying, THAT'S the difference. There's still something there to support the business at the end of the day.

I am as excited about these 'cool' concepts as you are, believe me, and I too agree that if you believe in something strongly enough this BECOMES for you as important as the kid who you send to college, and that these 'invested dreams', if you like, shape the future, but equally I think sometimes it's easy to get too caught up in the 'cool' hype these days and forget the engines in the market that drive these experimental possibilities.

And this is where you get too simplistic. In practice there are many reasons one might realise and investment, but look at it this way: sometimes it can actually PAY to realise stock in a company and then RE-invest at the moment that capital is needed by the organisation again (for the next new hot idea/product/service whatever). The classic response is: why not keep it in the company? Well, this is where the process of 'Creative Destruction' is more volatile in practice than Schumpeter's postulation in 1946 (no criticism to the great microeconomics here; the entire deiscipline seems to me to be almost oblivious of reality): markets ebb and swell, and clever entrepreneurs realise that the 'traditional' businesses in the market can support the hot ideas by offering a regular income stream until the more volatile, high-risk equity needs to absorb that capital. (Where otherwise the capital might have been eaten up in a short-term cycle of trading that bears no reflection on what you had planned for TPG, in your example).

The irony is that the simplicity of your point limits the very scope or 'solution' you are trying to offer up here.

Posted by Daniel M. Harrison at November 5, 2005 3:25 PM

Perhaps it is over-simplistic or a bit too contrarian, but I seem to recall a very astute business observer - fella by the name of Peters, I believe - pointing out that successful companies tend to 'stick to the knitting'. I would think that, faced with an abundance of cash resulting from their management of the widget business, assuming that they have already invested as much as necessary in widget cost, quality and flexibility production technology, and assuming they have kept enough of it to fully fund widget R&D so we can be confident they are keeping up with the cutting edge of widget technology, the only wise move would be to give the cash to the stockgolders in the form of a dividend.

I get nervous when senior managers translate widget success into a confirmation that they can manage anything and everything. Thinking like that leads to people like Sara Lee thinking that being good at pie baking automatically translates into being good at underwear making - which seem to more often than not lead to major restrcturing charges when they learn the hard way that they should have - as Peters advised - stuck to that which they knew, pie baking.

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No matter how they can rationalize some logical transition from the core business to some other venture to "create value", I start to break out into cold sweat whenever one of these 'professional managers' starts talking about 'creating value'. I say, give the money to the stockholders and, should they want to invest in underwear, let them take their dividends and invest in a company managed by people that know the underwear business.

Posted by Bill Waddell at November 5, 2005 4:55 PM

Bill: your points take on a somewhat contrarian intuition.

The process of Re-Invention requires that you try out new things, develop new products/concepts/solutions, stray from the (traditional) line a little bit. If you're talking about 'sticking to the knitting' then where's the room for destroying existing presumptions and laying down new ground for development? And how is that development funded? By 'creating value', as you term it.

Tom: In this sense your 'stick to the knitting' postulation is somewhat in conflict with your whole 'Re-Invention' thing, and I have to especially highlight Google here. What makes Google great is that it doesn't stick to its original business concept but continually re-invents its corporate mission statement (which I am sure you are in agreement with).

Back to Bill: Let's say you have a company in an industry that is being hit hard by a disruptive technology, and you can't afford to stay in business with just the pure product line - like EMI (at least not LONG term, which I hope is what we're talking about here). What are you going to do? Say: we've been selling music in physical product formations for 'x' years and most of our revenue is derived from retail stores anyway so we'll 'stick to the knitting' and let the I-Tunes' of the world rip into our business at alarming rates - or Re-Invent (where is EMI-Tunes, anyway). You decide. buy a brand viagra

The point that I was making was that Tom got too simplistic about something which requires a more specific analysis, and in doing so, missed the 'ReInvention' mission statement. De-investment at points in the organization's life is not NECESSARILY a bad thing - in fact it can be beneficial in terms of capital preservation for that all-important 'hot reinvention process' (see above). Going straight for the jugular of AOLTime was fair game, but applying this specific example as a de facto statement of organizational strategy was missing the mark.

Posted by Daniel M. Harrison at November 5, 2005 5:32 PM

Just to remain to Daniel that this is the blog of the author of "Re-imagine", please pay attention again to the tittle just for double checking it has something to do with you.

Sorry: "you miss the point - and so does everyone else by the looks of things-" as starting point of any proposal is not original, not nice, not convincing and is nothing but unappropiate, whether you are going to comment on big fishes or mosquitos. What about trying a different beginning for your posts? you may end up with a clearer perspective, who knows.

To me too simplistic is never too simplistic, no matter how many persons insist in the opposite for the sake of it. An appreciation here that simplistic is not equivalent to boring re. Bill's post on some "astute business observer" that won't be that astute anymore if he carried out into practice such ideas.

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Posted by Omara at November 5, 2005 6:36 PM

I appologise for any offense caused - it wasn't intentional. I am obviously an admirer of Tom's stuff, I was just (as I assumed) participating in debate. Once again, sorry to those who might have been upset by the tone of my comments.

Posted by Daniel M. Harrison at November 5, 2005 6:49 PM

Daniel, no need to appologise. Your comments were completely objective, contextual, insightful and professional.

Posted by Tom O'Leary at November 6, 2005 4:07 AM

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Daniel, pleeeease do not apologize. I think it's a great discussion ... otherwise I'd not have chimed in. I'm not doing this Website to sell widgets, as you can see we give 99% of our stuff away. The purpose of the site is precisely this kind of discussion.

I have more to say on your superb comments above, but must attend to Sunday family affairs first.

Posted by tom peters at November 6, 2005 6:38 AM

Daniel, no need to apologise, neither I realised that some persons could take my post too personal, so I guess it probably wasn't very wise to express my views that way, sorry about it, really. I was just being passionate about some ideas, that's all and, as far as I am corcern, you are very welcome into the discussion :-)

Posted by Omara at November 6, 2005 7:40 AM female viagra canadian

I am four square in favor of risk taking and reinvention. It is when management strays too far from the core market and industry in which they have demonstrated their competence that I get nervous. Toy companies that see their future in breaking technologies that can be embedded in an entirely new theory of toys that will expand and redefine the toy market are great.

Steel companies that wake up one morning and decide to be oil companies are a travesty; or in the case I cited of Sara Lee, food companies that rationalize their business as really just consumer products and get into textiles in order to 'create value' are just too far off the reservation to make sense. As an investor, I want management to expand and innovate in their industry and their markets. On the other hand, if I had my money in US Steel back when they decided to create shareholder value through diversification and got into all sorts of businesses in which they had no knowledge (and in which they ultimately failed), I would have much preferred that they give the money to me and let me decide if I want my money in those other industries - and who I want managing it.

Investors should be able to invest in steel, foods, toys or whatever and not have to wonder what business their money will end up in tomorrow.

There is a very real problem in this country with the fact that too many senior managers see themselves as nothing more than an extension of Wall Street, and define their jobs as mergers and acquisition experts, rather than experts in the products and process technologies around which their business was built. Investors do not put money into the Widget Company so the Widget Company's financial experts can plow it into the Gadget Company. They put it into the Widget Company to stay. If they wanted their money to go into the Gadget Company, they would have invested it there in the first place.

Posted by Bill Waddell at November 6, 2005 9:21 AM

Boys will be boys in their discussions ... I apologize just for the fun of it ... Tom, $50k for grad school tuition - that is the amazing - outrageous - like health care, "higher ed" has far outpaced inflation over the last 2 decades.

I am a huge fan of education [and the Indian / Chinese et al quest for it] but paid big bucks for an MBA [then lucked out with employer paid PhD] ...

... however - enough is enough - we must find an international way to provide higher ed for all that want it - maybe make TW pay for it - and use a combination Starbucks/Microsoft/Amazon/Nordstrom/Emerald City business model to deliver it.

Posted by Sean at November 6, 2005 10:03 AM

A lot of this seems to come back to how well we manage ambiguity: how do we reconcile stick-to-the-knitting vs. re-invention; how do we reconcile simple vs. complicated or even simple vs. simplistic; how do we reconcile the need for a widget maker to be a brilliant widget maker but also a brilliant balance sheet engineer?

I think it probably takes a lot of courage and honesty to say, “We don’t see any area where we can spend our cash to develop our widget business more profitably, so we’re going to give the cash back to the stockholders.” Just look at the life expectancy of businesses in the long term and the way a lot of them market just one or two great products and then fade away or get side-tracked. Maybe the way forward is to recognise that some people and some ideas just aren't suited to the long term - we simply aren't Lou Gerstner or Steve Jobs who can bet the farm and pull it off. So perhaps we should encourage these other businesses to shine brightly and wind up in a blaze of glory. Then, all concerned can move on to the next idea and not lose the wealth the first idea generated.

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Posted by Mark JF at November 7, 2005 5:21 AM

The Nokia example is always a problem... Had they stuck to their knitting Finland would be a different country today. Their plan was insane - but it worked!

On the other hand some clients I have worked for perhaps believe in themselves too much (or should I say, they discount the capabilities of their competitors?)

My only supposition is that perhaps one can afford smaller bets in adjacent products/industries, but when it comes to a truly new market, one has to jump with both feet and pour in 50+ percent of upper management time, or not jump at all. I don't know how I would justify this to investors. (Except that in some cases it works.)

Any thoughts Tom?

Posted by Dave at November 7, 2005 7:29 AM

I loved watching that discussion about my specialist subject - simplicity. Why do we have to make anything that is simple complicated? (‘Qui Bono’ - for whose benefit?). I have always said complexity is merely the sum of simple parts. Anything can be 'unpicked' and made simple. Language and the use of words can either be a wonderfully enlightening and growing experience or it can be a damaging and demeaning experience. It has always fascinated me that every profession - yes every profession - invents a comfort language all of their own. Plumbers and plasters do it - doctors and lawyers do it – management consultants and actors do it. We all do it. I hold the opinion that it is fine to use ‘your’ language in the company of ‘your peers’ but as soon as a non member of ‘your elite club’ enters the conversation then we should speak simple, plain and clear language. When I was younger I didn't used to challenge people who spoke gobbledegook crap - now I am older I find it much easier to ask someone what the hell they mean. I just love discussions about simplicity - what a great way to start the week :-)

Posted by Trevor Gay at November 7, 2005 9:36 AM

Dave, such thoughts would take volumes to capture. But in part the "secret" is the diversity of our financial services companies. Eg, big banks and investment banks help conservative institutions take big, low risk extensions of what they're already doing. VCs help more or less semi-established Innovator Firms spread their wings. So called "Angels" provide smaller sums to crazier ideas. And Uncles and Aunts lend a God-given hand to the family Black Sheep trying something truly nutty. (Also see our latest Cool Friend interview.)

Posted by tom peters at November 9, 2005 11:57 AM