Functional Needs and Irrational Wants

The iPhone is like a pocket Porsche -- it comes in iconic, arguably artistic designs like a Porsche. The difference is that it's affordable to a lot more people. Artistic, iconic design leads to strong brand value and purchase decisions driven not just driven by rational, functional needs but also by irrational wants (desire, lust, envy, communicating status, etc.). Some consumer products have an inherent artistic element that goes beyond purely functional needs: cars, smartphones, fashion, furniture, and so on. Conversely, some consumer products are almost entirely functional in nature -- people buy or use them because of functional needs, not because of irrational wants. Some examples of purely functional products/services might be: hard drives (Christensen's famous example from The Innovator's Dilemma), backhoes, commodities like steel or glass, Internet search engines, and artificial intelligence. 

If you're selling a purely functional product, Christensen's "good enough" concept is particularly important. That's because irrational wants don't come into play, and the buyer can easily determine what's good enough by comparing the product's functional, measurable performance attributes with the particular job the buyer needs to get done. So a buyer can look at a hard drive, for example, examine its data retrieval rate and storage capacity, and compare that to his functional needs -- how he'll be using the computer and how many photos, videos, and documents he needs to store -- to determine whether the hard drive is good enough or whether it overserves.

As noted in other posts, the best way to keep functional product elements from overserving is to make sure improvements are meaningful and actually used by buyers.

Another great way to prevent functional overserving is through technological leaps that change consumer expectations of what's good enough. This happens when a company comes up with a breakthrough product that makes consumers think that existing alternatives -- that consumers previously felt were good enough -- aren't good enough anymore. The consumer's perception of what's good enough isn't static: it's relative and changing depending on the latest breakthroughs and what's available in the marketplace.

If a sustaining technological leap or breakthrough creates a large enough performance gap between the breakthrough product and existing incumbent alternatives, it may allow the entrant to establish the beachhead needed to effectively enter an existing market. An entrant with a sustaining improvement/innovation normally doesn't do well because incumbents respond vigorously. The exception may be an entrant with a surprise breakthrough product that catches incumbents off-guard -- you could argue the original iPhone succeeded this way.

Two challenges for an entrant with a breakthrough product may be: (1) the lack of a recognized, trusted brand; and (2) ramping up manufacturing, distribution, and marketing fast enough to take full advantage of the sales opportunity. Incumbents are highly motivated to "fast follow" the entrant's breakthrough product with similar products. The key question here is whether incumbents can quickly acquire the capabilities needed to compete with the breakthrough. In the original iPhone's case, Blackberry and Nokia were unable to fast follow the iPhone with similar products because they lacked Apple's integrated hardware and software capabilities. As a result Apple had the time needed to ramp up iPhone production and distribution. Apple's strong brand also helped.

Returning to this post's original subject, a person buying a Porsche or an iPhone -- or any other product with an inherent artistic element -- considers (1) functional needs but is also influenced by (2) irrational wants like the desire/lust for something beautiful. The good enough standard is highly relevant to the functional needs part, but may not be very relevant to the irrational wants part. And irrational wants become even more of a factor when the product is distinguished by iconic, artistic design. So a product with an artistic element may overserve a buyer's functional needs but still be something the buyer wants to purchase because of irrational wants -- a Porsche or a Ferrari is a good example of this.  

You could almost look at a product on a sliding scale: as a product's artistic/iconic elements go up, the relevance of what's good enough -- and the danger of overserving -- go down. The ideal situation may be a product with improving artistic elements and improving functional elements: the key here is that functional elements must improve in a meaningful way that's valued by consumers (to prevent unused, overserving features that actually end up degrading functional performance and ease of use).

Applying another Christensen concept, when the buyer's "job-to-be-done" encompasses purely functional needs, overserving is a greater risk. When the buyer's job-to-be-done is broad, encompassing both functional needs and irrational wants, there's less danger of overserving. 

Art vs. Algorithms

Industrial design sometimes rises to the level of art, and art doesn't commoditize. Artistic design creates tremendous brand value and is very hard to copy, and close copies are never valued as highly as the original. Examples of companies producing iconic products and industrial art include Braun, Ferrari, Porsche, Apple, and Tesla. Industrial art has driven the brand value of each of these companies. 

Conversely, algorithms and machine learning methods can be copied, and the copy is valued just as highly as the original because the product's appeal is based purely on functional needs. Much of the theory behind algorithms comes from educational institutions and is in the public domain. As noted above, Christensen's good enough concept -- and the danger of overserving -- is much more relevant with purely functional products.

So if you're an investor, it seems to make sense to invest in companies that make products that aren't purely functional. The ideal situation may be a company that makes a product with artistic elements, and that is committed to iconic design. This kind of business model is (1) hard for competitors to copy and (2) reduces the danger of creating an overserving product (since buyers in this kind of market are driven by both functional needs and irrational wants).

This post has been amended since it was first written. 

The author owns stock shares of Apple.

Art Doesn't Commoditize

Just a quick post on whether Apple is becoming a more "art-like" company, based on the following evidence:

  • Jony Ive is promoted to Chief Design Officer;
  • Marc Newson, whose furniture and watch designs closely resemble functional art, is hired by Apple;
  • Trent Reznor, Jimmy Iovine, Dr. Dre, and Zane Lowe are hired to help curate the artistic content of Apple Music.

As noted by Horace Dediu in John Gruber's Talk Show #125 podcast, Apple seems to be moving away from algorithmic solutions toward more curated, artistic solutions that require taste and human judgment. Some people say Apple is moving into the realm of luxury or fashion. I think Apple is aiming higher than this, and wants its products and services to be so functionally and aesthetically pleasing that they rise to the level of functional art -- much like the Braun record player shown below, which was designed by Dieter Rams (whom Jony Ive repeatedly cites as a major influence) and is now shown in New York's Museum of Modern Art:

More and more it seems like Apple is being led by gifted artists who can help Apple create not just great products, but artistic products. And Apple communicates that effort to consumers by focusing on and releasing just a few products at any given time. Great artists focus on just a few things, and release/display those few things very carefully (in appropriate galleries and exhibits), to let the public know the artist's work is special. Apple does the same thing with its products. 

And from a business perspective, the beauty of this strategy is that art doesn't commoditize: because art is the nuanced outcome of thousands of intuitive judgments about what's beautiful and tasteful -- with countless decisions about brushstrokes, composition, materials, colors, and so on -- it's not fungible. While art can be closely, mechanically, and fraudulently copied, the copy is never valued as highly as the original. There's only one "Starry Night," one Dieter Rams record player (like the one above), and one Apple Watch. From a disruption theory standpoint, art is never "good enough" and really isn't judged on that basis. People don't buy an artistic object based on whether the object is good enough, they buy it because it's a source of pleasure and they want it.

Another fascinating aspect of Apple's more artistic approach is that Apple can deliver the iPhone, the iPad, and the Apple Watch to an enormous mobile device market, a global market much bigger than the one Braun catered to. Apple can deliver functional art at a mass scale. 

The author owns stock shares of Apple.

Showcasing Design and Improving Affordability Through Design

I'm currently reading Dieter Rams: As Little Design as Possible, edited by Sophie Lovell (Phaidon Press Limited, 2011) and available as an e-book. The book talks about the history of Braun, where Rams was a designer. Braun was founded in 1921. In 1967 Gillette purchased a controlling interest in Braun, and in 1984 Braun became a wholly owned subsidiary of Gillette. In 2005 P&G bought Gillette, effectively taking ownership of Braun. Over the years Braun has made a range of consumer products, including radios, televisions, hi-fi stereos, shaving products, and kitchen appliances. The company has always focused on high-end industrial design, often at the expense of short term profits. The question that came to my mind was, why didn't Braun have greater, more widespread success, allowing it to grow and survive as an independent company? Why didn't its products become more pervasive?

The only answer I could think of was that Braun failed to adequately showcase and market/distribute its products. If a company differentiates its consumer products based on superior industrial design, it has to showcase those products, almost like a functional art gallery. And the best way to showcase, and to let customers directly experience the aesthetic and functional benefits of superior design, is through an all-in commitment to company-branded retail stores (rather than showcasing and distributing product through in-store display stands at independent retailers like Target or Wal-Mart). If you're competing based on high-end industrial design, then you need to control the environment where the design is viewed, similar to how an artist carefully chooses how his art is displayed.

Imagine if Braun had showcased and distributed its products in a fashion similar to Apple's retail store efforts. Braun could have raised consumer awareness/appreciation for high-end industrial design, in addition to increasing distribution. Braun could have started small, adding retail stores as sales and product "buzz" grew.

A company can design the best consumer products in the world, but if it doesn't showcase and distribute them well, expanding distribution as appropriate, then a well-designed product won't have the impact it could. You have to give people the opportunity to try out and experience the functional and aesthetic benefits of a well-designed product.

And use good design to make products more affordable. Dieter Rams famously said that "[g]ood design emphasizes the usefulness of a product whilst disregarding anything that could possibly detract from it," that good design "does not make a product more powerful, valuable, or innovative than it really is," and that well-designed products "are not burdened with non-essentials." When a product is kept simple, intuitive, and useful, and is stripped of unnecessary, overserving features, it naturally becomes more accessible and affordable. See post titled "Apple's Design Strength Prevents Overserving." Good design enhances accessibility and affordability. Adherence to good design principles keeps products affordable, accessible, and focused on the job-to-be-done, which helps prevent low end and new market disruption. See Concepts page and discussion of Clayton Christensen.

Meaningful product improvements/innovations that solve unmet jobs-to-be-done make sense, but incumbents like Apple must avoid wasting time, money, and resources on overserving, overpriced product extensions/improvements that appear safe in the short term, but that actually leave incumbents vulnerable to low end and new market disruption. See post titled "Rosetta Stones and Strategic Balance." In growing the market for existing products, incumbents must make meaningful product improvements while still keeping products as simple and affordable as possible. In creating profitable new markets, incumbents must create useful, intuitive new products that squarely address important jobs-to-be-done.

The author owns stock shares of Apple.