The Benefits of Technological Improvement

Technological improvements to device security have made it harder for law enforcement to gather evidence. But technological improvements -- over the larger scope of human history -- have generally improved the human condition.

In How to Fly a Horse by Kevin Ashton, Ashton comments on how weaver-Luddites destroyed automated weaving looms because they feared losing their jobs. These looms eventually led, however, to greater manufacturing efficiencies and even more advanced technologies, which led to more jobs and more educated workers. More people learned to read and obtained higher levels of education, with huge improvements in living standards. Id. This trend has continued -- in multiple industries -- through the present day.

Ashton notes that no one could have predicted or anticipated the positive long term impacts of automated looms -- it is impossible to predict all the consequences flowing from a technological improvement. Id. Ashton says that new technologies always bring new problems, but that the answer is not to restrain the new, beneficial technology but to welcome unanticipated consequences, both good and bad, inventing and problem solving along the way. Id.

Apple and other device makers have been improving their products by making them more secure. These technological improvements will produce unpredictable long term consequences. As with past technological improvements -- like the automated loom -- many of these consequences will be beneficial and improve the human condition. Unforeseeable but largely positive long term consequences shouldn't be addressed through a wide-ranging, premature, regressive legal/government mandate that retards improvement and forces device makers to damage their own software/security (destroying their own "loom").

And law enforcement has the resources/expertise needed to address the evidence problem internally -- through their own decryption efforts -- instead of trying to roll back improvements to device security through the careful selection of "bad fact" cases that create bad law and destructive legal precedent. The FBI's internal decryption efforts might not be as easy or convenient, but a trade-off in convenience seems reasonable given the unanticipated, long term societal benefits of improvements in device security.

The author owns stock shares of Apple.

Growing Users Without Growing Profits

A number of popular companies with great products or services don't seem to make much money or are losing money; some of these are closely held, making it hard to determine the extent of losses. These companies include: Uber, Tesla, Amazon, Twitter, and Evernote.

I use Uber, Twitter, and Evernote regularly -- they're invaluable to me. Yet these companies apparently lack the pricing power needed to acquire users, grow sales, and generate/grow profits.

Investors satisfied with profitless sales growth seem to be banking on speculative, undemonstrated pricing power. Many investors believe these companies can turn a profit -- and generate healthy sales and sales growth -- once they stop focusing on the "land grab" effort of acquiring new users. When this kind of speculation doesn't pan out -- either user growth slows and/or profits never materialize -- the stock can really take a beating (a la Twitter). 

Absent aggressive, successful equity fundraising, a company that grows users without growing profits is going to have a hard time investing in its business and improving its product. Uber and Tesla have been very successful fundraisers, allowing them to continue releasing new, improved products/services. At some point though, investors want profits -- they want a return on their investment. Aggressive fundraising won't work forever. If the fundraising music stops and the profits aren't there, an unprofitable company faces major problems like paying its bills and improving its product/service at a rate sufficient to compete. Companies with profitable business models can invest in product/service improvements that unprofitable companies cannot.

If a stand-alone service can't increase its user base without losing money, what alternative business model could work? How could the service still drive profits? Possibly through tight integration with a product that does make money, like an iPhone or iPad or Apple Watch. Tight hardware/service integration creates a more unique, "magical" user experience by making things faster, simpler, and more convenient. As Michael Porter notes, companies should compete to be unique rather than competing to be the best.

It's worth noting that Apple doesn't try to compete within traditional, well-defined hardware or service categories -- they compete by trying to provide the best integrated hardware/software/service experience. This point was recently emphasized in John Gruber's podcast interview of Craig Federighi and Eddy Cue (on Gruber's "The Talk Show" podcast). When questioned about whether the quality of Apple's services was slipping, Federighi and Cue both emphasized that Apple focuses on the integrated, holistic user experience, not on the specific hardware or service component (consistent with Apple's functional organizational structure, its single P&L, and Steve Jobs's advice to focus on the user experience and work backward to the technology).

Apple's in a great position to cherry pick useful services and integrate them into their products, making their products more unique and "sticky." Apple can see how Evernote has become more and more valuable and can use this knowledge to make a more attractive, useful version of Notes. Apple can look at Uber's unprofitable transportation service and find ways to provide a more unique, magical user experience through an integrated hardware/service offering driven by profitable device sales (i.e., iPhone, Apple Watch, and Apple car). Apple can use the unprofitable stand-alone service to complement/strengthen its ecosystem and its profitable hardware.

This article has been amended since it was first posted. 

The author owns stock shares of Apple.

Thinking in Reverse

Google recently removed an ad blocker called Adblock Fast from the Google Play store. This product was designed to work with Samsung's mobile Internet browser, which operates on Samsung Android phones.

Apple permits ad blocking on iOS. Apple has also publicly announced its commitment to user privacy, stressing its efforts to keep user data on the iPhone rather than gathering this data in an Apple cloud database. Some worry that Apple's machine learning and AI efforts could suffer, since data can be better analyzed in the cloud than on the device itself. 

Google's recent ad blocking decision reveals the benefits of "thinking in reverse." Rather than looking at how Apple could be hurt by forgoing user data and permitting ad blocking, think about how Google could be hurt by an advertising business model that forces it to: (1) gather and deeply analyze user data; and (2) serve up ads that users can't block. Google's model may facilitate machine learning and AI while creating a permanent competitive disadvantage when it comes to ads.

The author owns stock shares of Apple.

Landlines vs. Cellphones, Traditional Watches vs. Smartwatches

For many years the general population thought telephone landlines were "good enough." When cellphones first came along, I remember thinking they were too expensive and unnecessary. Cellphones then got smaller and cheaper, while reception and functionality also improved. Now cellphones and more specifically smartphones are much better than landlines -- almost no solicitation, the ability to block calls, reliable coverage, and a computer that fits in your pocket. 

So the landline telephone, which people thought was good enough and didn't think much about, has slowly become not good enough, at least relative to current cellphone/smartphone options. That's because what's considered good enough doesn't exist in a vacuum -- buyers decide what's good enough based on available options. A product that's widely considered good enough today may not be considered good enough five to 10 years from now.

You can imagine the same scenario unfolding with traditional watches versus smartwatches. Today many people believe the traditional watch is good enough, and they consider smartwatches expensive and unnecessary. In five to 10 years though, smartwatch functionality will be far ahead of where it is now. At that point the traditional watch may not be good enough based on other available options like smartwatches. It's not hard to imagine a slow and immense market shift from traditional watches to smartwatches.

I think this analysis may also apply to traditional cable, advertising, and privacy/security. Maybe today traditional cable is good enough. But what happens as a la carte, on demand streaming options continue to proliferate? On demand streaming is going to change the consumer's perception of good enough choice/price. Customers may start walking away from cable providers that won't unbundle their content and price the unbundled components attractively. 

With advertising and intrusions to privacy/security, most people accept some of both so they can receive free services -- for them, privacy and security is currently good enough. But this could change as interconnected devices proliferate and privacy/security becomes more important -- people could start paying more for products designed to protect their privacy/security.

The author owns stock shares of Apple. 

Control Groups and Meaningful Improvements

I just finished reading Superforecasters by Philip E. Tetlock and Dan Gardner (Crown Publishers, 2015). In the book the authors talk about how the accuracy of most forecasts is never measured. Forecasters make predictions (often too vague to be verified or refuted), and no one later gathers data to determine who's right and what forecasting methods work best. So there's no feedback loop to improve forecasting accuracy. Id.

Tetlock and Gardner make an analogy to medicine. For many years doctors relied mostly on personal experience and intuitive judgment to decide what treatments to use. Over this time treatment outcomes either didn't improve or improved slowly. Then control groups were introduced, with one set of patients receiving a placebo and one set of patients receiving the new treatment. This allowed researchers to carefully measure treatment outcomes to determine what worked, what didn't, and how treatments could be improved. This feedback loop led to rapid improvement in medical treatments and outcomes. Id.

A company making smartphones could apply these same concepts to make more meaningful product improvements. So Apple could look at iPhone usage, and the value of its latest improvements, by providing 1000 of its employees with an iPhone 6s (the control group) and 1000 of its employees with a prototype of Apple's upcoming smartphone release (the test group). It could then measure usage of both phones, including various phone features, to determine whether the latest improvements are meaningful/used or whether they're overserving/unused. Feedback from these in-house controlled studies could help keep Apple from releasing overserving products.

Because Apple is so vertically integrated, it already is well-positioned to collect usage feedback from customers. This feedback makes it easier for Apple to identify meaningful product improvements while paring back features that aren't used or are overserving. This may be one of Apple's biggest competitive advantages in designing/creating new products and improving existing products: the customer feedback loop that comes from making the "whole widget."

OEM's that rely on the Android OS, or Android software engineers who must rely on OEM's, don't make the whole widget and therefore don't get end user feedback about the entire product. And when Google and Android OEM's do get meaningful end user feedback, their ability to act on it is limited by the fact that Google must design/improve Android not just for end users, but for advertisers that pay Google to collect user data and target these users with ads. Android is designed/improved based on end user feedback and advertiser feedback.

The author owns stock shares of Apple.

Integration and Iteration

When you look at how Apple is taking smartphone customers from Android vendors, it's striking how much product/service integration has helped. Apple's integration allows it to make a continuing series of cutting edge, meaningful product improvements, while its scale allows it to offer a competitively priced -- if still high end -- product.

Android vendors relying on undifferentiated, modular/standardized product elements -- like the Android OS or Qualcomm chips -- cannot seem to match the iterative improvement of Apple's products. These vendors are at the mercy of their modular suppliers, and these suppliers aren't keeping up with Apple: Qualcomm is having difficulty matching Apple's in-house chip design, while Google is having difficulty keeping Android updated and malware free. As a result Android vendors are forced to sell an inferior, commoditized product at an unprofitable price. Companies that do this long enough go out of business -- they run out of time and money to improve margins by moving up the product improvement trajectory. See Concepts page and discussion of Clayton Christensen.

You might expect a large group of modular suppliers to eventually catch up with Apple's in-house efforts, but it doesn't seem to be happening. If anything, Apple's profitability is making its in-house efforts even harder for modular suppliers to match, since Apple has the deep pockets needed to hire the very best talent.

The author owns stock shares of Apple. 

Fragile Ideas and Prototypes

There was an interview of Jony Ive not long ago in which he talked about Apple's product design process. He said this process starts with one or two people having an abstract idea; this first step usually doesn't involve much collaboration. The abstract idea then gets turned into a physical prototype. Collaboration really takes off as the prototype is made and refined.

Ive has repeatedly noted the fragility of new ideas. You don't want team members to just say "no" to ideas -- "what if we did this?" is generally better than "no."

I used to work as a trial attorney, and have seen the tactical benefits of getting jurors to take an early fixed position. A person who takes an early yes/no position is normally reluctant to change his mind later -- no one wants to admit his initial judgment was wrong. That's why opening statements at trial are so important: my goal with opening statement was to get jurors "rooting for" my side of the case early, and to keep jurors on my side as long as possible. I sequenced trial testimony to delay the presentation of evidence that hurt my case but had to be addressed, knowing that the sooner jurors started rooting for me, and the longer they rooted for me, the less likely they'd change positions when I had to address case weaknesses.

So the key is to keep people from spiking new ideas too quickly -- get people saying "what if we did this?" or "what if we changed this?" instead of taking a fixed "no" position that will be difficult to change later. 

I also thought it was striking how Jony Ive emphasized that collaboration worked best in conjunction with a prototype. So with product development, there may be significant collaborative benefits to turning abstract ideas into physical objects. Prototypes foster collaboration by giving team members a clear focal point and something to rally around. It's also hard to say "no" to the creation and improvement of a prototype -- team members are almost forced to constructively solve problems the prototype presents.

The author owns stock shares of Apple. 

Sustaining Innovations Based on Different Capabilities

Clayton Christensen recently described Uber as a sustaining innovation -- rather than a new market or low end disruption -- since its service is generally better than existing taxicab options. "One More Time: What is Disruptive Innovation?", by Clayton M. Christensen, Michael Raynor, and Rory McDonald (Harvard Business Review, December, 2015). In his books Christensen counsels entrants to avoid competing with incumbents through a sustaining innovation. See Concepts page and discussion of Clayton Christensen. That's because incumbents will aggressively respond to companies that try to enter their markets with a better product. You can currently see this happening in the auto industry, with incumbent luxury car companies offering more electric vehicles to compete with entrants like Tesla.

Christensen believes Uber is an "outlier," and that its success may be due to the regulated nature of the taxi industry. "One More Time," by Clayton Christensen, et al. These regulations make it difficult for incumbent taxi companies to compete with Uber. This seems logical. I think, however, that the biggest problem facing traditional taxi companies is that they lack Uber's (1) resources (infrastructure, employees, capital access, etc.), (2) processes (manufacturing processes, logistical processes, software development processes, etc.), and (3) values (margin goals, priorities/culture, etc.), which together make up a company's capabilities.

Christensen discusses resources, processes, and values ("RPV") in The Innovator's Solution. In this book Christensen says entrants with a sustaining innovation usually lose to incumbents because incumbents have the RPV -- the capabilities -- needed to match the entrant's improvement. The Innovator’s Solution, by Clayton Christensen and Michael Raynor (Harvard Business School Publishing Corporation, 2003). He also says that incumbents normally lack the RPV needed to match a product or service that's a new market or low end disruption. Id. 

Looking at examples like the taxi industry -- and contrary to what Christensen theorizes -- incumbents may not always have the RPV/capabilities needed to match an entrant's sustaining innovation. Regional taxi companies lack the equity capital resources and the refined logistical and software processes needed to effectively compete with a global company like Uber. Uber offers a better service based on fundamentally different capabilities that are constantly refined on a massive scale. These different capabilities -- and their steady improvement -- allow Uber to effectively challenge incumbents despite the sustaining nature of Uber's service. The lesson here is that Christensen's RPV framework is relevant in both a disruption context and a sustaining innovation context.

So an entrant with a sustaining innovation can effectively compete with incumbents when the sustaining, better product/service is based on RPV/capabilities that are non-traditional relative to the pertinent industry. In this situation incumbents will be hamstrung by capabilities tailored around traditional/existing industry offerings, whether it's (1) a taxi company with employee-drivers and a cab fleet (competing with Uber's logistics/software and thousands of independent contractors driving their own cars) or (2) a hotel company with service-related employees and hotel-related infrastructure (competing with Airbnb's logistics/software and thousands of owners renting out their homes). In both these examples you have entrants -- Uber and Airbnb -- offering a different/better service and competing directly against incumbents for existing industry customers (what Christensen calls competing against consumption). Christensen would predict failure because of a vigorous and effective incumbent response, yet both Uber and Airbnb are succeeding because their RPV/capabilities are different from those of incumbents, making it difficult for incumbents to respond.

Applying these ideas to Apple, the original iPhone could be viewed as either a new market disruption (a personal computer for a new context/situation -- your hand or pocket) or a sustaining innovation relative to competing cell phone products from Nokia and Blackberry. See post titled The iPhone Conundrum and New Market Disruption. Regardless of how you class the original iPhone, it was built based on software and hardware capabilities that Nokia and Blackberry seemed to lack, which allowed it to gain a market foothold without a meaningful incumbent response.

One other point: a company that sells a mediocre service/product -- particularly a product that's become a monopoly either through market dominance and network effects or through regulatory protection -- leaves itself open to not only new market and low end disruption, but also sustaining innovations based on different capabilities. An uncompetitive industry environment leads to complacency and deteriorating products and services. 

This article has been amended since it was first posted.

The author owns stock shares of Apple.

Stock Valuation and Management Incentives

There's a great article in the latest Harvard Business Review (December, 2015) titled "Why Overvalued Equity is a Problem," by Roger L. Martin and Alison Kemper. The article discusses how an overpriced stock can create bad incentives for managers. When a stock is overvalued, CEO's feel pressure to meet unrealistic market expectations in terms of sales and earnings growth (otherwise they can lose their jobs). Id.

CEO's and CFO's in this situation often end up making bad decisions such as: (1) engaging in deceptive or fraudulent accounting; (2) wasting money on non-productive R&D or capital intensive projects to create the false impression of assured future growth; or (3) making overpriced acquisitions of small, trending start-ups. Id. These moves can prop up a company's stock price over the short term, or at least for the length of management's tenure.

One comment here -- if a company's stock is overvalued then it's a great time for managers to use that stock to acquire an undervalued or fairly valued company through a stock swap. See post titled The Rational Management Checklist. Additionally, if a start-up could disrupt your business through a new market or low end business model then an acquisition that looks overpriced on the surface may be reasonable from a long term perpective -- it's usually far cheaper to acquire a disruptive start-up early rather than late. See Concepts page and discussion of Clayton Christensen.

I think the greater problem the HBR article suggests is that CEO's of overvalued companies are incentivized to either falsely prop up growth expectations or pursue unsustainable growth strategies. So the CEO of a high PE company might keep making acquisitions to drive ever-higher sales -- which keeps investors excited and may help keep the stock price up -- even though the acquired companies may not have meaningful earnings or a profitable business model (or a business model that could be made profitable through the acquirer's actions). Or the CEO of a high PE company may keep adding infrastructure to drive ever-higher sales even though additional, resulting profits are negligible/unattractive (i.e., the return on capital invested in new infrastructure is less than what an investor could get if he took the same corporate cash and invested it elsewhere).

Conversely, the CEO of a low PE company is arguably incentivized to improve earnings in a less wasteful, more sustainable way. Many low PE companies don't have much in the way of cash or earnings, and their stocks are too undervalued to make stock swap acquisitions attractive. A CEO in this situation has to carefully weigh the costs and benefits of any acquisition or capital improvement/expansion project, which means the CEO must consider whether the benefits are (1) short term and illusory or (2) long term and sustainable. The HBR article suggests that on the averages the CEO's of undervalued companies should be motivated to allocate capital more wisely.

Forecasting, Breaking Questions Down, and Probabilities

I'm currently reading Superforecasters by Philip E. Tetlock and Dan Gardner (Crown Publishers, 2015). The book addresses how to improve forecasting accuracy. Two ways to do this are: (1) breaking difficult questions or predictions down into parts that can be answered or predicted more easily; and (2) assigning specific probabilities to different possible outcomes rather than simply defaulting to yes, no, or maybe (few people take time to think in terms of specific probabilities). Id.

If you're an investor these are helpful concepts to keep in mind. So an investor in Apple might have difficulty answering a question like "will Apple's earnings grow or at least stay flat over the next three to five years?", but this question becomes easier if you break it into parts:

  1. Will earnings from iPhone sales in the United States grow or at least stay flat over this time?
  2. Will earnings from iPhone sales in China grow or at least stay flat over this time?
  3. Will earnings from iPhone sales in India grow or at least stay flat over this time?
  4. Will earnings from iPhone sales in Brazil grow or at least stay flat over this time?
  5. Will collective earnings from iPad sales, Macs, and Apple Watches grow or at least stay flat over this time?
  6. Will Apple move downmarket as necessary to grow earnings in China, India, and Brazil? 

And so on . . .

You then assign a probability to each of these question subparts, digging for information that allows you to be as specific and granular as possible (e.g., a 63% estimate is better than a 60% or 70% estimate). 

Applying Superforecasters, Warren Buffett and Charlie Munger seem to follow a concentrated portfolio strategy so that they can carefully weigh the probability that each investment will succeed, thereby improving forecasting accuracy. This strategy would be impractical if Buffett and Munger diversified through a wide array of stocks -- too many holdings would make it difficult for them to carefully weigh each investment's probability of success, thereby hurting forecasting accuracy. This all dovetails with Buffett's famous quote that he'd rather be "certain of a good result [a high probability event] than hopeful of a great one [a 50/50 chance or worse]."

The author owns stock shares of Apple and Berkshire Hathaway.

The MIT Critique of Disruption Theory

I just read Andrew King and Baljir Baatartogtokh's article in the MIT Sloan Management Review (Fall, 2015) titled "How Useful is the Theory of Disruptive Innovation?" The article is a critique of Clayton Christensen's disruption theory. I thought it made a number of interesting points, including the following (with my personal comments in boldface): 

  • Based on the authors' research, incumbents often lack the capabilities needed to respond to a new entrant's product/service -- when they have the capabilities they frequently do respond. 
  • Some incumbent products/services (local meatpacking) don't show any meaningful sustaining improvement over time, so there's no opportunity for overserving. In this situation you have the opposite of overserving: the product doesn't improve at all, or doesn't improve fast enough to keep up with user needs (a perennially underserving product/service). This kind of mediocre/poor product then gets replaced by something better. The entrant's better product is often based on capabilities that the incumbent making the mediocre/poor product lacks, making it impossible for the incumbent to respond.
  • Based on the authors' research, 78% of Clayton Christensen's examples from The Innovator's Dilemma and The Innovator's Solution don't involve overserving. If accurate, this would mean the concept of low end disruption for overserved users is inapplicable to these examples. 
  • I think it's important to note that overserving isn't as relevant with new market disruption. A new market product creates an entirely new market of consumers because the entrant emphasizes different product performance attributes than those emphasized by incumbents (the vertical "P" axis). These different performance attributes either: (1) make the product affordable to people who couldn't afford prior alternatives; or (2) allow the product to be used in a new, non-traditional situation/context, creating a new market of consumers for that new context (desktop computer as mainframe for your desk, smartphone as computer for your pocket). See Concepts page and discussion of Clayton Christensen.
    • In emphasizing different performance attributes, the new market entrant creates a non-traditional "value network" with a distinctive cost structure, different suppliers, different operating processes, and different sales channels. This value network is crafted around sales to non-traditional, new market consumers.
    • Incumbents typically lack the resources, processes, and priorities -- or what you could call the desire and capabilities -- needed to transition to the new entrant's non-traditional value network. This leaves incumbents stuck in the value network they've crafted for their traditional customers, unable to compete with the entrant for non-traditional, new market consumers.
    • If the new market entrant improves its product it can eventually sell not just to new market consumers, but to the incumbents' traditional customers, taking more and more business from incumbents.
    • The point of all this is that new market disruption can occur regardless of whether incumbents are overserving their traditional customers. An incumbent could be selling widgets that don't overserve its traditional customers (e.g., corporate customers that need powerful mainframes or minicomputers) and still have an entrant launch a product that emphasizes different performance attributes and creates a new market/class of buyers (e.g., individual consumers who need desktop computers). Incumbents with a traditional value network -- and resources, processes, and priorities tailored around this network -- would have difficulty competing in this new market. The entrant could then improve its product and eventually steal traditional customers from the incumbent, even though the incumbent's widget wasn't overserving traditional customers when the entrant came into the market.
    • The big challenge for entrants trying to create a new market of consumers is creating a profitable new value network that can survive over the long term. A new market entrant needs early profits to continue improving and integrating its product around the job-to-be-done, ideally through a unique, trade-off based strategy. Otherwise the entrant ends up engaged in price-based competition with late-arriving competitors selling the same basic offering.
      • Cut-throat price competition has played out in both the Windows PC market and the Android smartphone market. Apple has survived and prospered because the new market products it introduced, the Apple II, Mac, and iPhone, improved and became more integrated/differentiated over time (largely through Apple's ecosystem approach). See Concepts page and discussion of Clayton Christensen and Michael Porter.
  • Advances and sustaining improvements in technology sometimes produce outcomes which are the opposite of those produced by overserving -- they can make the product simpler and easier to use and more accessible to less savvy consumers. They can also make the product more affordable to low end users.  
  • The authors counsel using disruption theory not for prediction, but as a warning to avoid overserving (which is typically caused by a series of meaningless sustaining improvements unconnected to the underlying job-to-be-done).

The boldfaced language discussing new market disruption has been amended since this article was first posted.

The author owns stock shares of Apple.

"Little Strokes Fell Great Oaks"

The quote above is from Ben Franklin. It's one of my favorites, and something I repeat to my children on a regular basis (they're probably tired of hearing it).

To me, the point of this quote is that you have to trust the process: it takes time and consistent day-to-day effort and practice to accomplish great things. And that's true whether you're trying to learn an instrument or a new language or whether you're trying to create an innovative new product. You have to keep chopping away to accomplish something great -- often something you or others thought was impossible.

I think this attitude is a big part of Apple's culture and success. Everyone talks about how Steve Jobs asked for the impossible and created a "reality distortion field" to convince people to achieve it, but maybe Jobs recognized that seemingly impossible things can be achieved through time, little strokes, and persistence. 

Just like people quit guitar or quit a new language because the goal is difficult to achieve and requires lots of time and little strokes, I suspect many companies quit when pursuing seemingly impossible innovations. Apple focuses and commits for the long haul, and that often leads to breakthroughs that less committed companies fail to achieve.

So this post is for my children, as is this link to the transcript from Steve Jobs's 2005 commencement speech to Stanford's graduating class.

The author owns stock shares of Apple.

Focus on the Obvious

Some quick ideas re product/service makers like Apple:

  1. Focus your resources on the obvious product -- the product most people would like to have.
  2. The desktop computer was like this. A mainframe on your desk, with mainframe-like capabilities, is obviously appealing to most people.
  3. The smartphone was like this. A computer in your pocket with the ability to surf the Internet is obviously appealing to most people.
  4. The iPad was like this. Movies, video, and every other type of content in your lap, and it could ultimately replace paper. 
  5. The Apple Watch's inherently small screen means that computer-like capabilities probably are not going to make it an obvious product most would like to have. 
  6. Maybe the most obvious/essential thing the Apple Watch can offer is state-of-the-art health monitoring re heart health, cancer risk/exposure, diabetes, and so on. Excellent health monitoring could make the Watch an obvious product most would like to have.
  7. An autonomous car seems like an obvious product most would like to have, especially if it could function like an office or living space on wheels. The two main benefits of an autonomous car are large: more safety, less wasted time.
  8. The "Internet of Things" (IoT) doesn't seem like something most people obviously want: IoT products involve additional expense and maintenance/compatability hassles. For this reason they don't seem as cheap, simple, and reliable as many manual options like flipping a switch or turning a key. IoT options seem to require consumers to pay more for a less reliable, more complex solution relative to simpler, cheaper, and more reliable manual options that offer good enough convenience.
  9. The farther you move away from obvious wants and needs the less likely you're going to have big success with a new product

The author owns stock shares of Apple.

 

Ability to Partner as Competitive Advantage

When it comes to services, Apple is in a better position to partner than any other tech company. It's difficult for Facebook or Google to closely partner with other service providers because other providers steal user attention and hurt ad sales. Horizontal service companies trying to be on all devices depend on the user's choice of their services over other services. 

A vertically integrated player like Apple doesn't care if its services dominate. Apple wants its services to be attractive and promote ecosystem stickiness, but Apple doesn't need its services to dominate to drive profits. That's because Apple's profitability is driven not by services, but by a three part mix of hardware, OS, and ecosystem. No single element of this mix dominates, and Apple can have a great ecosystem with in-house services/apps like contacts, calendar, notes, maps, and iWork, and third party services/apps provided by IBM, Microsoft, Twitter, Google, Facebook, and thousands of independent developers.

If you don't need your services to dominate or even be profitable to prosper, then you're free to partner with any service company you want. And that's what Apple does, partnering with IBM for enterprise software, Microsoft for its Office suite, and even Google for maps. These kinds of partnerships are difficult if you have a horizontal business model and you need your services to dominate to drive subscriptions or ad sales (e.g., Google search, Facebook, Evernote, etc.).

In a 2007, D5 interview Steve Jobs said he admired Microsoft's ability to partner with other companies. Apple now seems to address this issue by partnering as convenient on services while still owning the key hardware, manufacturing, and OS technologies and IP. See post titled Why Apple "Outsources" Applications and Services.

The author owns stock shares of Apple.

Focusing on the Long View and Jobs-to-be-Done

I just watched two excellent YouTube videos of lectures given by Clayton Christensen in June, 2013 at Oxford University. One of the lectures addresses key management issues/problems and one addresses the need for companies to continue investing in disruptive innovations instead of just efficiency innovations. Below are the key points from these two lectures:

  1. Disruptive innovations are the real long term drivers of growth and employment, but often look unattractive in the short term due to uncertain returns and the CapEx and new fixed assets they require, which can hurt short term profitability measures like gross margin %, return on net assets, return on capital employed, and IRR. The problem is that disruptive innovations may take five to ten years to start providing attractive returns, while management is being judged on the next quarter or the next year. For this reason management tends to favor investments in efficiency innovations, which can quickly improve short term profitability measures but which do little for the prosperity of a company going five to ten years out. Continued, repeated investment in efficiency innovations, without sufficient investment in disruptive innovations, leads to declining growth and employment, sometimes at both a company level and a country-wide level (a la Japan).
  2. The cause of the Innovator's Dilemma, whereby incumbents flee upmarket and eventually get driven out of business by new entrants, is the pursuit of profit (often reflected by the short term pursuit of a higher/target gross margin %). Christensen suggests companies give additional weight to net profit margin %, since high volumes of lower end products can be attractive on a net margin basis if they help absorb fixed overhead costs. 
  3. Management tends to game profitability measures like financial ratios. For this reason "the key is to measure profitability in ways that cause people to do good things." Businesses need to search for profitability measures that cause them to do good things
  4. Market segmentation is often done through an arbitrary classification like product category or customer demographic or geographic region. These classifications then have an outsized, damaging impact on every decision the company makes, whether it's determining who to compete against, what products and market opportunities to pursue, or how the company measures success. Arbitrary market segmentation can have a large, negative impact on what the company chooses to focus on. 
  5. The alternative way for a company to segment the market and focus its efforts is to analyze the job-to-be-done. To understand what causes a purchase decision, you have to understand what job the customer is trying to get done. Don't focus on the customer or the product category in segmenting or analyzing the market -- focus on the job-to-be-done.
  6. Once you understand the job-to-be-done performed by a product, then it becomes very clear how to improve the product (which helps prevent meaningless improvements that overserve). 
  7. A company first has to understand the job-to-be-done (including the job's functional, emotional, and social elements). It then has to determine what experiences must be delivered to satisfy this job, and what services, processes, and systems should be integrated to make these experiences happen.
  8. Companies that focus, organize, and integrate around a job-to-be-done historically have no competitors -- other companies may sell the same products or services, but they typically can't compete with an integrated, end-to-end user experience that solves a job perfectly
  9. Companies must make a conscious decision about what to focus on, ideally based around the job-to-be-done. 
  10. The job itself typically doesn't change much over time, while the means of accomplishing the job may change dramatically. Over the centuries, one such job has been fast and certain delivery of a package from point A to point B. At first the hired solution for this job was delivery by horseback, followed by train delivery, followed by airplane delivery, followed by FedEx. The job stayed the same but the hired solution changed dramatically.   
  11. Because the job-to-be-done tends to stay stable over time, companies that focus on the job are in a good position to see what's coming next and be ready for the next better solution. Companies that focus on an irrelevant, arbitrary unit of market analysis -- like the product category or the customer -- have difficulty seeing what new, better job solutions are coming and are more likely to be surprised/disrupted.
  12. Business models and businesses converge when people need different products/services at the same point in time and space. People need gasoline at the same time they need a snack or junk food, so convenience marts have merged with gas stations. 
  13. Conversely, one business model or business will diverge into two when people need the offered products/services at different points in time and space. Wal-Mart electronics merchandise is also sold by a specialized retailer like Best Buy, while Wal-Mart hardware merchandise is also sold by a specialized retailer like Home Depot. Best Buy does the most business on holidays and birthdays, which is its unique point in time and space, while Home Depot does the most business on weekends, which is its unique point in time and space.