The world changes at a fast pace in 2012, and companies need to be more nimble than ever to keep up. This is a challenge for investors trying to figure out a company's ability to adapt and change with the times. One of the main challenges is that companies are normally built to do one thing, not act like amoebas changing to their new environment every day. In fact, the list of companies that have been able to adapt to a major change in an industry is pretty short, something investors should keep in mind when looking at the companies they're investing in.
A history of failures
When an industry changes, it's usually new players, built on an innovation, that take a majority of the market share, not competitors with established positions in the aging industry. We can go all the way back to the rise of the automobile as a great example. Ford (NYSE: F ) , General Motors, and eventually Chrysler became the dominant names in the U.S. automobile industry, not companies that used to make horse carriages. The one exception, Studebaker, lasted more than 100 years through the transition from horses to automobiles, but this just highlights the rarity with which companies make major transitions in their business model.
Back then, companies had years or even decades to make changes and bring their operations up to date, but as Morgan Housel highlighted earlier this month, times have changed. The average public company now lasts less than 10 years, down from 65 years in the 1920s, because the world changes so quickly.
In recent times we can see Amazon.com (Nasdaq: AMZN ) leaving Barnes & Noble, Circuit City, and even Best Buy (NYSE: BBY ) in its retail dust. These companies tried to cut it on the Internet, but they were built as brick-and-mortar retailers and were ill equipped the make the change.
Apple (Nasdaq: AAPL ) is one of the few companies that has been able to adapt and change, continually making its own products obsolete. But that's rare, and without Steve Jobs at the helm, even Apple will eventually fail to keep up with industry changes.
Can these companies innovate?
There are four companies I'm watching ones that the competition could leapfrog.
The first is a tech giant that has a dominant market position and a history of crushing the competition: Microsoft. When Bill Gates ran Microsoft, he took pride in crushing new competition by using Microsoft's muscle to get into new businesses, as it did with Netscape. But during Steve Ballmer's tenure the company has largely failed at entering new markets. Tablets, smartphones, search, and online advertising have all become big business, and Microsoft has largely been shut out, even making some well-publicized mistakes in these markets (see aQuantive).
Next is a company that was once the Apple of its time. Sony invented the Walkman, making music more portable than it ever was before. It came to dominate video games with the PS2 as well and was a hot name in PCs and televisions for a time. But Sony is now in some commodity markets, like PCs and televisions, and has failed to innovate fast enough to keep up with companies like Apple. We'll look back fondly on Sony someday, but it won't be relevant in another decade.
Best Buy was also the coolest place around for a long time. I remember going to Best Buy just to look at the new gadgets that were on display. Today, it's become a place to go window-shopping before purchasing items on Amazon or somewhere else online. A move to a smaller store format is the company's answer, but I'm not sure that's enough to challenge more nimble competitors, or stay in business.
Finally, Hewlett-Packard (NYSE: HPQ ) has a long and proud history, but it's had a tough time adjusting to today's tech environment. It made a big bet on PCs and holds a strong position in printers, but these markets are commodities filled with competition. The revolving door at CEO hasn't helped, and I doubt the company has the chops to compete with smaller, more adaptive companies.
What to watch for
Investors need to keep an eye on the changing dynamics in computers and consumer electronics for insights into Microsoft and Hewlett-Packard's future. If PCs sales fall and more services move to the cloud, will these companies be able to build a platform that can compete with Apple, Google, and any number of companies looking to grab a piece of the cloud?
At Sony, the company's culture and level of innovation need to change to stay relevant.
Best Buy, on the other hand, may already be a lost cause. It didn't adapt to the competition fast enough, and a turnaround at this point in the game would be a rare feat.
Ideas for the road
While I've profiled the companies that have fallen behind, Apple is the rare exception of a company that has been able to adapt, disrupt itself, and continue succeeding. If you're an Apple investor wondering what risks face the company, our Apple expert has the answer as well as three reasons the company is still worth buying. It's all revealed in our exclusive report.