This article also appeared in Business Insider
June 17, 2013
Round the decay of that colossal wreck, boundless and bare, the lone and level sands stretch far away
– Percy Bysshe Shelly, “Ozymandias”
In recent weeks we have seen two developments that, to us, capture the shifting nature of all competitive advantages.
- Microsoft (MSFT), which rode to tech dominance in the 1980s and 1990s on the back of its wildly successful Windows operating system and Office suite for productivity software, is working on a comprehensive restructuring to streamline the company.
- Detroit released a restructuring proposal laying out the dire financial condition of the city, and the concessions creditors will be asked to take.
Microsoft: A Tech Giant Beset By Challenges
Microsoft provides a study in the difficulty all wildly successful companies have in searching for a second act. After leading the PC era with the dominant operating system and the dominant productivity suite, Microsoft began to lose its footing as the locus of innovation moved to the internet. In the era of prepackaged software, Microsoft became the unquestioned winner. Now, however, Microsoft is challenged by a set of competitors whose very business models present a set of asymmetric challenges.
- Amazon (AMZN): When Jeff Bezos first set out to disrupt book retailers, Microsoft was already a giant. Now, however, Amazon is a massive and proven disruptor that has successfully moved beyond books to become the default ecommerce option for many shoppers. Perhaps more worrying to Microsoft, the Amazon Web Services offering has taken off, presenting long-term challenges to the entire IT industry.
- Apple (AAPL): As an integrated hardware and software company with a robust developer network, Apple is now the company Microsoft hopes to be when it grows up. This reversal presents an object lesson in the shifting nature of any advantage.
- Google (GOOG): In many ways Google is the competitive threat that Microsoft was best prepared to address. The challenge may have been as simple as the way the Google chose to optimize itself around selling ads, while Microsoft always believed in getting paid directly for the software it produced. Nonetheless, Google’s strong market share in search has given it the financial heft to pursue long-term strategies (the most charitable way to describe the acquisition of still-struggling Motorola).
Detroit: Reduced Horizons and the Challenge of Multiple Stakeholders
Detroit rose to prominence as the hub of perhaps the most exciting industry of the first half of the 20th century. Sadly, the very concentration that allowed the city area to rise became a milestone around its neck as the auto industry faltered, struggling with a succession of external shocks and self-inflicted wounds. Today, Detroit is a city incapable of providing an acceptable level of service to its citizens, and only a drastic restructuring will allow the city’s restructuring team, led by emergency manager Kevin Orr, to right the ship.
One of the best things about distressed situations is that as the level of distress rises, there is an increasing openness to solutions that would have been taboo in normal times. Emergency Manager Kevin Orr has been very consistent in expressing the untenable situation Detroit finds itself in.
A review of Detroit’s restructuring proposal indicates that the fundamentals for Detroit have long been moving in the wrong direction:
- Population, nearly 1,850,000 in 1950, has since declined 63 percent, to 685,000.
- The unemployment rate has nearly tripled since 2000, rising to 18.3% from 6.3%.
- Property tax collections have been hit by a withering combination of declining assessed values (down $1.6 billion from 2008 to 2012) and falling collection rates (68.3% in 2011, down from 76.6% in 2008).
- A growing operating deficit; excluding debt issuance, the accumulated deficit from FY 2007 to FY 2013 is $700 million.
- The city’s Fitch credit rating has dropped from A in 2003 to CCC as of June 2012.
Percy Shelly may not have understood just how well the lesson of his poem could be applied to the financial matters. Success is never guaranteed, and dominance is always little more than a temporary market aberration.