The Perils of Growth

In Becoming Steve Jobs there's a great passage about how John Lasseter of Pixar fame became attracted to the Disney/Pixar acquisition because it would eliminate pressure from Pixar shareholders for growth through TV shows and more and more products -- Pixar was a publicly traded company when it was acquired by Disney. Disney could protect Pixar from this phenomenon, allowing Pixar to stay focused on just a few great movies at any given time. Becoming Steve Jobs, by Brent Schlender and Rick Tetzeli (Random House, 2015). To me these comments are interesting because they come from the perspective of an actual product creator rather than a strategist or CEO. It seems likely that people who create really great products -- the ones who ultimately drive a company's long term success (individuals like John Lasseter and Jony Ive) -- prefer focusing on just a few things at a time. They know they can't create something lasting and great if their efforts are diluted across too many projects.

A company focused on long term, sustainable growth/success needs to do everything it can to facilitate the happiness and success of great product creators like John Lasseter or, in Apple's case, Jony Ive and Apple's other great designers and engineers -- these are the people driving sustainable long term growth.

CEO's and corporate boards must learn to tune out noise from shareholders who demand short term growth at the expense of sustainable long term growth driven by truly great products. Company leaders must create an environment where their best product creators can focus and thrive.

When a company focuses on the long term it gives itself more time to develop lots of great leaders and creators. Careful, patient organizational development allows a company to drive sustainable long term growth without diluting product quality and brand value.

The author owns stock shares of Apple.

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.

"Quality is the Best Business Plan, Period" and the Low End Dilemma

The quote above comes from John Lasseter, the chief creative officer at Pixar. A similar quote comes from a Jony Ive interview on Apple's product design process: "If it's not very good we should just stop ...." I think these quotes capture why certain companies -- BMW, Mercedes, Porsche, Ferrari, Disney/Pixar, Apple, and so on -- survive and prosper over such a long time period. They consistently focus on delivering a well-designed, high quality product, which leads to a great user experience, a strong brand, and high customer loyalty. These companies all put superior product quality ahead of affordability, allowing them to survive and grow even with limited market share.

Low cost, low end products often lack the quality needed to deliver a great user experience, which leads to disloyal customers who will trade up for a high quality alternative as soon as they can afford it. A college student driving a Ford compact looks forward to the day when he can maybe afford a BMW sedan.

This may explain why Android OEM's are losing business to Apple. It may also explain why low end companies with low margins often seem to disappear, while a few luxury brands survive for decades. In the short run the low end may be appealing, especially from a market share perspective, but in the long run low end customers defect and support the survival of high quality vendors.

The Low End Dilemma

Companies with a low end, modular business model -- that are trying to disrupt incumbents making high quality products that are arguably more than good enough -- face another big challenge: making the meaningful product improvements needed to move upmarket. When a company with a low end disruptive model can't move upmarket, it ends up wallowing in the low end, engaged in unprofitable, price-based competition. See Concepts page and discussion of Clayton Christensen.

This seems like the problem currently faced by many low end Android OEM's. These OEM's are assembling modular components while trying to move upmarket to compete with companies like Apple. The problem is that it's hard to move upmarket -- with meaningful, well-designed product improvements -- with a low end business model premised on cheap, modular components. An integrated competitor focused on high quality rather than price -- like Apple -- is better positioned to make meaningful product improvements (e.g., Apple Pay and Apple's Touch ID) that distance itself from low end, modular assemblers that must rely on superficial improvements to product appearance, components, or features.

This may be why so many Android OEM "improvements" amount to unnecessary changes or features. These changes often add complexity rather than fundamentally improving a product's convenience or ease of use.

The business prospects of a modular low end player that falls too far behind an integrated company making fundamental improvements are not good.

The author owns stock shares of Apple.

Pursue Excellence, Not Perfection

I've been writing recently about Ed Catmull's book Creativity, Inc. It's hard to overstate just how insightful the book is, often in a very nuanced way. Catmull talks about how companies that achieve a string of major product successes often lose the lean, small company qualities that made them successful in the first place. With every successful new product the company grows, new employees are hired, and costs go up. Employees feel pressure to cover costs and create yet another blockbuster product, pursuing a paralyzing type of perfection. They end up spending more and more time on excessive detail -- striving for a perfect product -- and too little time on really meaningful but risky product innovations.

As a company grows, it often loses the risk-taking spirit of a smaller business trying to survive. Pressure to create another "perfect" blockbuster product, increasing costs and employee headcount, and an imposing history of past successes: (1) lead to incrementally safer product choices; and (2) stifle the candid, free-flowing collaboration/feedback needed to generate outside the box ideas and innovations.

Pixar has addressed the problem of past successes by holding a "Notes Day" at which employees give unfettered, candid "notes" on how the company can operate in a more effective, cost efficient way. It's easier to justify risky new products, and to survive future competitive challenges, when operations are lean. This process teaches employees the importance of candid feedback and collaboration.

There's a cautionary tale here for Apple, which is a blockbuster company like Pixar. Apple has had a string of past successes, and there's certainly pressure to continue that trend. Apple has also been increasing its costs and headcount. The challenge for Apple is to maintain the vibrant, candid collaboration/feedback, and risk-taking spirit, of a smaller, leaner company.

The author owns stock shares of Apple.

Rosetta Stones and Strategic Balance

Everyone is looking for the Rosetta Stone that solves a problem quickly, easily, and consistently. They want heuristic solutions, which often work and are less brain-taxing, so they don't ask "why" and they don't think through a more balanced, nuanced solution to a difficult problem.

Steve Jobs made this point in an interview:

"Throughout the years in business I found something, which was, I'd always ask why you do things. And the answers you invariably get are, 'oh, that's just the way it's done.' Nobody thinks about things very deeply in business -- that's what I've found."

In the excellent book Creativity, Inc., by Ed Catmull (the CEO of Pixar), there's a chapter titled "The Hungry Beast and the Ugly Baby." It's a great example of deep thinking about corporate imperatives. 

Catmull talks about how growth and success can create the compulsive need to "feed the beast." As a company's sales grow, so also do its costs and employee numbers, creating the need for new products to: cover costs, keep employees busy, and continue growing. Corporations usually expand the product portfolio by making safe choices based on what's succeeded in the past (a movie sequel, for example, is a safer choice than an original new movie). As the pressure to quickly create increases, and the product portfolio expands, product quality tends to decline. 

A strategy that feeds the beast is often favored by sales and marketing people trying to safely drive increased sales. These folks tend to resist original new products or needed product changes that threaten existing sales, often leading to the company's demise at the hands of entrants following a new market or low end disruptive strategy. See Concepts page and discussion of Clayton Christensen

Safe products often feed the beast at the expense of original but fragile "ugly baby" projects. New projects look risky and ugly, especially relative to safe, high-returning product extensions, so they get rejected. Catmull says companies must learn to protect these new, fragile projects, at least for a time, giving them the chance to become great original products that help propel future growth. Although Catmull doesn't explicitly say so, it seems likely ugly baby projects are favored by people who design and engineer original new products.

Catmull says companies should respect the beast, because it creates a sense of urgency and promotes forward progress, but they should also respect and protect -- at least for a time -- the ugly babies that can become great products that propel future growth. Too much focus on the beast leads to an overemphasis on efficiency and short term returns. It also leads to derivative products and declining product quality. Too much focus on the ugly baby, and too much protection for new projects that aren't panning out, leads to poor focus and a declining sense of urgency. The beast can be destructive, but it’s still needed to push forward progress.

The key is to strike a balance between feeding the beast while still giving new, original projects reasonable time to grow into great products. Organic growth through a balanced approach is more sustainable than growth through a derivative, expanding product portfolio that's too focused on feeding the beast.

When it comes to corporate strategy, there is no Rosetta Stone, there is no simple heuristic. Managers must think, and must try and balance competing corporate needs.