Prioritize Great Products

Marketing and even strategy are irrelevant without great product design and a great product. As noted in Becoming Steve Jobs, Apple was nearly bankrupted when Windows 95 was released and was better than the Macintosh OS -- a better competing product caused Macintosh sales to tank. Becoming Steve Jobs, by Brent Schlender and Rick Tetzeli (Random House, 2015). Pixar overcame early troubles through a great product -- "Toy Story" -- that led to a successful IPO. Id. NeXT succeeded because the company's great OS made it an attractive acquisition target (NeXT was acquired by Apple). Id. Conversely, NeXT struggled early on because it failed to create a great computer for its target market. Id. Google's success flows from a great search engine. Great products are core to a company's success.

Without a well-designed, well-engineered product, the best sales, marketing, and strategy have a muted or immaterial impact. You need a compelling product first. I think this is why Tim Cook is always emphasizing how Apple is focused on making "great products." Compelling products are the priority and drive a company's long term success or failure -- not marketing, sales, strategy, or financial measures of capital efficiency. A company that focuses too much on sales or marketing or capital efficiency has lost sight of what made it successful in the first place -- a compelling product.

So How Do You Make a Compelling Product?

Great products are designed around jobs-to-be-done. See Concepts page and discussion of Clayton Christensen. As noted in Horace Dediu's podcast with Bob Moesta, Critical Path #146, a company can think about jobs-to-be-done by looking at the functional, emotional, and social "energies" that surround a consumer's purchase decision. Functional energy refers to the physical effort expended in making the purchase. Emotional energy refers to any anxiety, fear, uncertainty, pleasure, security, or ease involved in the purchase. Social energy refers to concerns about what other people will think about the purchase.

In the podcast Dediu and Moesta also discuss the Kano Model of Quality, which says that products consist of the following attributes:

  1. Basic attributes: Attributes that must be present for the consumer to buy, like an affordable price, enough computer memory to store all the consumer's media, basic customer service, etc.
  2. Performance attributes: Measurable feeds and speeds like horsepower, engine size, zero to 60 acceleration time, battery life, number of pixels, etc.
  3. Excitement attributes: Subtle details that are often hard to quantify but that create delight or excitement, like the tactile qualities of sports car controls, the sound or smell of a car engine, the way a product is packaged, etc.

Looking at functional, emotional, and social energy, it's easy to see why the Google Glass hasn't sold well. It's expensive and has been difficult to try out, which raises the functional energy needed to purchase in addition to increasing negative emotional energies like buyer anxiety and uncertainty. And the social energy of the Google Glass seems tremendously negative -- potential buyers are obviously concerned about how people will react to someone who may be surreptitiously recording them.

With the Apple Watch, Apple's online and retail stores reduce the functional energy needed to make the purchase. Apple's retail stores reduce negative emotional energies like anxiety and uncertainty while increasing positive emotional energies like pleasure, security, comfort, and ease. Apple's brand strength conveys status, making the social energy of the Watch a positive. Excitement attributes -- subtle details -- also seem to work in favor of the Watch, whether it's product packaging or haptic feedback or clasps on the Watch bands.

In looking at products like the Google Glass and Apple Watch, the first order question is not whether the product is a logical part of a grand strategy, but whether the product itself is a great product. Is the Apple Watch a great product? Is Google Glass a great product? Is Google still coming up with innovative, great new products, or are its products more market/sales driven? Do recent European Commission filings -- regarding possible search engine bias in favor of Google sites -- suggest Google is too focused on sales and is losing its focus on a great search engine/product? Is Amazon coming up with great, innovative new products? Is the Fire Phone a great product? These are important questions in assessing a company's long term success or failure.

The Importance of People and Collaboration; Investing Issues 

Great products require lots of good ideas. These ideas come from teams of great people collaborating well together, not from just one person. With complex, cutting edge products, one person can't do it all. Hence the critical importance of: (1) hiring the best people; and (2) creating an environment that fosters candid, free-flowing communication/collaboration among these people. See post titled The Rational Management Checklist.

From an investing perspective, it's also worth noting that the typical retail investor probably can't assess whether an industrial/b2b product is "great" and well-targeted on a job-to-be-done. That's because a retail investor normally lacks hands-on experience or deep knowledge of b2b products. With b2b companies a retail investor has to rely more on portfolio diversification and financial ratios/metrics.

Conversely, retail investors can use and directly experience consumer products, allowing them to subjectively assess whether a company is making great products and/or whether a company's products are improving or deteriorating.

The author owns stock shares of Apple.