The way of the world is that success leads to failure.
After all, if you take top market share of an industry that's starting to soar, you can build a huge, profitable business.
But hanging on to that lead demands specialized skills -- I call them capabilities -- like designing and manufacturing CPUs or selling to information technology managers.
And when that industry declines, those capabilities will obey Say's Law -- the notion that supply creates its own demand.
Simply put, the capabilities that let you succeed during an industry's growth phase will slow you down should you try to jump on a new growth curve requiring different capabilities before the first one expires.
And that's how success is leading to decline -- if not outright failure -- at
And this suggests a fundamental flaw in the link between corporate strategy and capital markets.
Before getting into this, let's look at the disappointing reports out of Intel and Microsoft -- the duopoly supplying PCs formerly known as Wintel.
Intel reported passable corporate results. Revenues of $13.8 billion were $30 million below expectations while Intel beat the
Sadly for investors, 60% of Intel's revenues come from PCs which suffered a 9.6% decline in shipments to 64.8 million in the first quarter of 2016, according to
Intel's client computing group fell 14% from the previous quarter to $7.5 billion due to a "weaker than expected PC market," according to CFO Stacy Smith, who said in Intel's earnings call that Intel now expects the PC market to decline in the high single digits in 2016, faster than prior expectations.
That means bye-bye job for 12,000 workers at Intel -- 11% of its employees -- who will learn of their fate in the next 60 days, according to the New York Times.
Intel's PC profits are much higher than the ones it gets from selling to makers of cloud computing, mobile, and Internet-of-Things (IoT) hardware makers.
Not surprisingly, Microsoft is being buffeted by the same market forces.
It reported a drop in sales and earnings for its fiscal third quarter. Revenue fell 5.5% to $20.53 billion and net income was down 24.6% to $3.76 billion.
Microsoft has a mixed record of adapting to the long-anticipated decline in PCs.
The bad news has been that its acquisition of Nokia continues to hurt Microsoft -- its phone revenue fell 46% and it sold 73% fewer Lumias.
Its Surface tablets suggest some good news in devices -- enjoying a 61% revenue spike.
But it has enjoyed some growth in cloud services and software-as-a-service.
Revenues in its intelligent cloud business, which includes Azure, rose 8% to $6.1 billion and Office 365, its SaaS version of Office, enjoyed a 79% increase in the number of subscribers to 22.2 million.
Intel and Microsoft have jumped on new growth curves but the resulting financial performance has not propelled their shares to new highs.
Intel shares sit a depressing 57% below their September 2000 high of $74. Microsoft is doing better -- sitting 13% below its all-time December 1999 high of $58.72.
Capital Markets Versus Corporate Strategy
This leads to the mismatch between corporate strategy and capital markets.
Investors bid up shares of companies with a dominant share of a large, fast-growing market. If the company grows faster than expected each quarter, its shares will explode upwards.
But investors punish such companies if they disappoint -- either because their market is growing more slowly than they thought or the company loses share because its product is displaced by a rival offering customers more value for their money.
Disappointments mean a lower stock price -- which can make it more difficult for the company to compete.
It's not as if those big companies are unaware of this dynamic. The problem is that a big company is less efficient than a startup at turning a new concept into a product that customers will line up to buy.
Startups learn faster than big companies because they have limited resources that force them to build cheap prototypes quickly, get feedback from customers, and try again.
Big companies can't launch new products without taking much longer to make sure that lots of powerful people inside the company permit it to be released to the market.
Usually it's hard for the big company to guess right so if customers don't like the first version, the big company will start behind the startup and struggle to catch up.
Restructuring Intel and Microsoft
I am not exactly sure how to restructure Intel and Microsoft to turn the resulting pieces into leaders in fast-growing markets.
But it seems to me that Intel and Microsoft each have capabilities that they share with different product lines. Intel has hugely expensive semiconductor factories and Microsoft has a sales force that sells to businesses.
They also have capabilities that are uniquely tailored to specific product lines. I would guess that the engineers who design PC CPUs have different skills than the designers of IoT chips.
I wonder if there is a way to create separate publicly-traded companies run by entrepreneurs to target fast-growing markets.
And the declining business lines bundled with the shared resources could be sold to groups of private equity investors.
In so doing, investors could place focused bets on, say, Microsoft Cloud Enterprises or Intel IoT Group -- which enjoyed a 22% revenue spike to $651 million in the year ending March 2016.
If investors could own shares in these focused companies -- while contracting with the new owners of the shared resources -- perhaps such restructuring would better align corporate strategy with capital markets.
I think the boards of Intel and Microsoft should consider whether the costs of keeping all these businesses under the same corporate roof outweigh the benefits.
In the meantime, Microsoft - which is handling its business challenges more effectively than Intel -- looks like the better bet between these two.
