Apple Isn't Being Paranoid Enough

Image: Business InsiderThis week sees major announcements from Google and Microsoft, with Apple’s iPad Mini having launched just last week. It’s fun when you get to see competing business models tested side by side like this. As analyst Chetan Sharma has put it:

Apple’s goal is to commoditize the software, Microsoft’s goal is to commoditize the hardware, Google - both

— chetansharma (@chetansharma) June 7, 2011

This article at Tech Crunch about Apple not “Fighting Down” (i.e. keeping its prices/margins high and not getting caught up in the low-ball game) started a conversation at work that I’ll expand on here. While I agree that Apple is not (yet) on a race to the bottom, I have a slightly different take on it – I think Apple is not being paranoid enough.

By sheer coincidence I wrote on my cube whiteboard this morning a quote from (I think) Tim O’Reilly:

“Do you want to protect your future from your past, or your past from your future?”

With the iPad Mini and the iPhone 5, Apple is showing that it is more worried about protecting its past from the future at the moment. I believe this is a very dangerous posture for Apple, especially if it keeps it up for long. Sure, they’re sitting fat and happy right now, and it’s easy to project a straight line into the future of unbridled growth and prosperity. But there are enough warning signs out there that make me think they are in the midst of a Wiley Coyote moment - off the cliff but still running and not aware yet that a fall is inevitable.

I know many will think I’m crazy for saying that. Maybe I am. Maybe I will be proved wrong - I certainly don’t wish Apple ill will. The iPad continues to hugely dominate its market, and I don’t think the fall is going to happen in a few months. But, but… 

In a different context not so long ago, “Fighting down” is exactly what Apple did with iPods. Fairly soon after the expensive iPods had been around, the Shuffle and then the Nano were launched. Why? To create a firebreak against low-end competitors. The Shuffle went in to the market with such a low price (despite being very feature poor) that it essentially stifled the competition.

The mp3 player market is largely done now, but Apple never relinquished dominance due to their willingness to cover all the bases. They have taken the opposite tack with the iPhone - pretty much just one model at a time, one form factor, and price points that start high and go higher. They have made a lot of money with it for sure, but at the same time Android has taken the majority of the market. When you’re in this for an ecosystem play, that’s not a great place to be in the long run.

But iPods are relatively simple devices that are relatively easy to replicate (compared to smartphones and tablets, with all their radios, touch interfaces, OSes, etc.). The complexity of the iPad and iPhone makes it harder for others to create a dramatically lower-end strategy. So maybe Apple is being smart about not giving in to the low price war. Right now, late 2012, that is probably true. But price pressures are increasing, and coming out with an iPad Mini that is $100+ above the competition and with a screen that’s 2 years out of date (and with a design that looks weirdly wide into the bargain) does not smell of confidence.

Let’s bring it back to business model. Apple makes its money with hardware. Customers like hardware. They like good user experiences, and they like ecosystems that work smoothly and comprehensively. But what if they can buy into good quality experiences and ecosystems and get hardware that’s just about as good as Apple’s, for half the price? That’s the downside scenario for Apple. And it’s happened over and over again the in tech industry, from Macs (vs PCs) to Tivo (vs Motorola DVRs from cable providers); or Sony TVs vs Chinese off-brand TVs.

People say they like Apple’s industrial design, but actions speak louder than words, and at the end of the day, they mostly cover them with cases that lack all of Apple’s oh-so-serious design approach and sub-millimeter attention to detail. People mostly really care about what’s on the screen. Can Apple maintain its lead in user experience and ecosystems (which deliver what’s on the screen), and still keep its hardware margins over the next 2-3 years? I’m skeptical.

Reflections on a Hybrid Career

It’s not news to anyone who’s looked for a job recently that the days of a monolithic career spent at one company or in one well-defined field are over. Many of us have had to — willingly or out of necessity — rethink our career paths. It’s not always easy, but I firmly believe that the hybrid mentality and expertise this process creates is valuable to today’s fast-moving companies.

In her HBR article, “Disrupt Yourself,” Whitney Johnson discussed how Clayton Christensen’s theories of disruptive innovation can be applied to changing one’s career path in a competitive job market. Successful disruption depends on being clear about one’s strengths, but sometimes your real strengths can get buried once you start to follow a conventionally established career path. As Whitney noted in her piece, my own career is rather unconventional, and in my case, I found that what I’m really good at — research — got lost as I pursued an education and career as a designer.

Continue reading at Harvard Business Review >

Compete on Know-Why, Not Know-How

Do you know why you make the products or offer the services you do? Too often I find that companies don’t have a clear enough sense of why they do what they do. They get stuck making incremental improvements that are rooted in existing competencies, markets, and business models.

This is especially problematic when companies decide to innovate. If you don’t have a clear understanding of why you are pursuing an innovation, you risk being wasteful and ineffective, and could lack strong differentiators from incumbents. On the other hand, clear, deep, relevant insights help you stay one step ahead of competitors who may try to imitate your creations. If they can’t replicate the thinking driving your innovations, they’ll be doomed to “me too” status.

I call these types of insights core insights, a concept which I first introduced in my book, Innovation X. Core insights are a complement to the familiar notion of core competencies, which were first advocated by Gary Hamel and the late C.K. Prahalad. But whereas core competencies are about know-how, core insights are about know-why.

Continue reading at Harvard Business Review >

Ideas from the Economist Innovation Conference

Last week I had the opportunity to attend the Economist Innovation Conference, held at the Haas School of Business at UC Berkeley. It was a fast-paced (almost too fast), jam-packed event, with lots of good speakers and a heady flow of ideas. The downside to the 1-day format was that there was little time for networking, however they did make sure to get Q&A from the audience in almost every session, which was good.

Here are some of the ideas that came up during the presentations and discussions (assume that these are paraphrasings, not exact quotes):

Daniel Franklin (Economist Executive Editor) had some thoughts on what the world could look like in 2050, including some somewhat jokey company names:

• ExxonHydro (oil and water both will be the valuable resources)
• TataSoft (Indian IT company becomes a full software powerhouse)
• Google Goldman Sachs (since financial knowledge makes sense to become rolled up into Google’s storehouse)
• Shanghai Automotive (Chinese car manufacturers have taken the world stage)
• GSKPfizerNovartisAstraZenica (the logical endgame of the pharma business)
• Oxbridge Harvard (Oxford, Cambridge, Harvard combine forces)
• BollyDis - Bollywood meets Disney

Laura Tyson (Haas, UC Berkeley): On appropriate role of government in fueling innovation: Don’t forget that it was a government grant (National Science Foundation) that funded Larry and Sergey while they were at Stanford, leading to Google.

Naveen Jain (World Innovation Institute): The Kahn Academy is an interesting idea, but still a primitive version of what virtualized education could be like. It’s akin to radio stations decades ago getting into the TV business, by simply sticking cameras in front of the talking heads/actors - they hadn’t yet realized the full value of the new medium.

Stewart Brand (Long Now Foundation): We’ve been terraforming the planet for a while now. The choice we have now is not to stop terraforming, but to figure out how to do it well rather than badly, as we have been. This is a big mental shift for the environmental movement, which has historically focused on humans getting out of meddling in nature to have it return to a pristine condition. Brand argues this is no longer the best path if we want to keep the planet sustainable for our species and others.

Beth Comstock (GE): Cannibalization is a big fear for companies considering reverse innovation, where low-cost/resource innovations and brought from emerging markets into developed markets. The barriers to successful reverse innovation are not just R&D/technology, but incentives for internal adoption (will people be willing to embrace and sell the new solutions?), and the different business models required to optimally sell them.

Vijay Govindarajan (Tuck School of Business, Dartmouth College): People in poor countries don’t want cheap products. They just have a very different perception of value. To succeed in these markets you have to dramtically shift the value/price equation. For example, someone in Thailand was able to develop an artificial limb for US$35….for an elephant!

Vijay G: Companies must create value before they have permission to appropriate (take) value. This was the breakdown that occurred in 2008 - companies were taking value for themselves before others were seeing the requisite benefits.

Carl Bass (Autodesk): The rise of desktop manufacturing will undercut China as the workshop of the world. The historical equation of mass manufacturing equalling lower cost is breaking down.

Carl B: Design thinking is bunk! It’s a marketing term dreamed up by design consultants, but it has no basis in reality.

Clayton Christensen: The problem for innovators is, how do you reach consensus on a counter-intuitive notion?

Clay C: I’m not ready to call Facebook or even Google innovative companies yet. They have both had very good ideas to get started, but what they have not shown yet is that they can consistently follow those up with winning new ideas. That’s the hallmark of truly innovative organizations.

James Quigley (Deloitte): How many people here think innovation is a bad idea? [show of hands, very few!] How many have been able to get their organizations to innovate successfully [again a show of hands, a similarly low number…] Everybody wants to do it, so why are so few successful? (Incidentally, this was the question that sparked my book)

Colleen McCreary (Zynga): At Zynga, our executives are required to spend 20% of their time thinking about people [contrast with Google’s famous 20% spent on new projects]. Zynga also uses an employee net promoter score (asks, would you as an employee recommend Zynga as a place to work for a friend?)

Gina Bianchini (Mighty Bell): You know what I need as an entrepreneur? It’s not funding. It’s customers.

Netflix is Playing for the Endgame

(This article originally appeared at Harvard Business Review)

Every now and then, the business world presents us with a lab experiment that we can observe in realtime. Netflix’s announcement that it is splitting off its DVD-by-mail business from its streaming business is just such an experiment. The DVD business will now go by the name Qwikster, and the streaming business will stay under the Netflix brand. It isClayton Christensen’s innovator’s dilemma incarnate, and Netflix is very publicly trying to solve it. Like its 60% price increase did earlier this year, this move is understandably causing consternation amongst some customers. It’s a bold move, one that will cost them in the near term, but Netflix I’m sure has done the calculus and is looking at the endgame 5-10 years out, not 5-10 months.

In his blog post about the split, Hastings says:

“For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something — like AOL dial-up or Borders bookstores — do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.”

Hastings goes on to acknowledge, “It is possible we are moving too fast — it is hard to say.” This is frank admission of the complexity of the strategic landscape. The media content and distribution business is in a period of massive flux, and while we can say with near certainty what the end state will be, near-term predictions are hard to make.

About five years ago I did this somewhat tongue-in-cheek “timeline” of pivot points for a client in the TV business:

Click to Enlarge

 Half-jokingly it made the point that there is a giant hairball of complexity, consolidation and confusion that the industry is going to have to go through, but if you can survive that, the obvious end state will be that any piece of media will be available whenever an individual wants, wherever they are, on any device they like. (We’re about half way through the hairball at this point with DVD Rental vs Video-on-Demand being the current pivot point. I over-estimated the speeds at which changes would settle out, but it was never meant to be a precise timeline, just directional.)

Now consider this: there are over 200 job openings at Netflix headquarters alone (compare this to 61 openings at competitor Hulu, at all its locations.) The vast, vast majority of these are for software development of one sort or another to support the streaming business. Netflix is building a platform for the streaming/cloud end game; it is not building for the near term, or DVDs by mail.

On top of the technical skills, Netflix is building an organization tuned to the needs of a disruptive environment. This presentation on Slideshare (embedded below) paints a fascinating picture of Netflix’s culture (the Slideshare account is under Reed Hastings’ name, but I doubt it’s actually his).

Several things are worth pointing out from this lengthy document:

1. Netflix focuses on increasing “talent density” more rapidly than business complexity increases. This means demanding high performance standards of new hires, paying top dollar for them, and then giving them freedom to use their own judgment in a highly dynamic competitive and service environment.

2. It notes, “Sometimes long-term simplicity is achieved only through bursts of complexity to rework current systems.” This is exactly what Netflix is going through at this point, introducing additional complexity for a period in order to bring longer-term simplicity (i.e., focus only on streaming).

3. Netflix’s focus is on “rapid recovery”: recognize problems when they occur and fix them quickly, rather than try to predict every outcome ahead of time. This mirrors Hastings’s statement about possibly moving too fast. The presentation goes on to say, “We’re in a creative-inventive market, not a safety-critical market like medicine or nuclear power. You may have heard preventing error is cheaper than fixing it — Yes, in manufacturing or medicine…but not so in creative environments.” Music to any innovator’s ears. Some will call this naive, and certainly there can be downsides if not handled well with customer service (and Netflix has stumbled in this recently, which Hastings admits, then proceeding to clumsily talk about business models and cost structures in his letter to subscribers). But overall it’s the right approach for this context.

It’s hard to know if this document reflects reality. But I give it the benefit of the doubt for a couple of reasons. First, it’s so thorough and consistent in its message. But more important, when it comes to execution Netflix is an outstanding company (the attention to detail put into its user experience is fanatical), that it is clearly getting the best and the brightest, even though it is not the sexiest of tech companies. Netflix has set itself up with just the right type of smart, nimble, curious, and fearless organization that it needs to thrive and outwit competitors in the challenging times ahead.

Netflix will be roundly criticized from many quarters for its bold move, and it will upset and probably lose many customers. But it’s the long-term endgame that Netflix is playing for. No one ever said self-cannibalization is painless.

Culture

View more presentations from Reed Hastings