This Web journal presents articles and commentary on issues in strategy and management.
Steve Jobs enforced exellence in design
When Steve Jobs stepped down from the CEO position at Apple, many people began to reflect on the nature of his contributions. Under his leadership, Apple has become one of the most successful American companies of all time. Along with Intel, Microsoft, and Google, it has shaped much of what people experience as the new digital economy.
Steve Jobs contribution to Apple has been profound. Steve Jobs is not an engineer himself, yet he has guided Apple into being one of the great engineering companies, in the true sense of what it means to “engineer.” Apple did not invent personal computers, or the mouse and windows interface, nor did it invent digital music players, smartphones, or tablets. What it has done is to engineer products in these categories that are uniquely beautiful, efficient, easy to operate, and a joy to own and use.
This kind of design excellence is very difficult to achieve. It depends on a great many elements all working together and all working at a very high level. Like the excellence of a great film or work of music, the whole can be quickly ruined by a single false note. Steve Jobs’ special genius has been in holding to this very high standard and imposing it on the very talented engineers he has recruited to Apple. Competitors have raced to be first to market or to include the most features in their products, but have built products which are clunky and awkward in comparison to Apple’s.
To fully understand Apple, it is vital to look at the difference between its kind of excellence and cutting edge visionary technology. Back in 1993, CEO John Scully had Apple introduce a tablet called the “Newton.” It was visionary and advanced, attempting to recognize handwriting. Unfortunately, you cannot reliably do that, just as you cannot reliably implement voice recognition. When he returned to Apple in 1997, Steve Job’s killed the Newton. The secret of Apple’s excellence is not in living on the unworkable bleeding edge, but in doing exceptionally well that which can be done well with present technology.
Many people and companies want to emulate Apple and study what the company has done. I believe that in trying to learn from Steve Jobs and Apple it is very useful to pay attention to what he did not do. In compiling this short list, I have used ideas and phrases in common use by managers and business consultants:
- He did not “drive business success by a relentless focus on performance metrics.” Success came to Apple by having successful products and strategies, not by chasing metrics.
- He did not “motivate high performance by tying incentives to key strategic success factors.” Apple did not run a decentralized system based on pressuring individuals to deliver targeted business results.
- He did not have a strategy “built through participation by all levels to achieve a consensus which resolves key differences in perspectives and values.” Strategy at Apple is essentially driven from the top.
- He did not waste time on the delicate distinctions among “missions,” “visions,” and “strategies.”
- He did not use acquisitions to hit “strategic growth goals.” Growth was the outcome of successful product development and accompanying business strategies.
- He did not seek to engineer higher margins by chasing rust-belt concepts of “economies of scale.” He left such antics to HP.
Emulating Apple is not easy, but it is not impossible either. We are all surrounded by so-called high-tech products that promise much more than they deliver. I am writing this article on a Dell Inspiron 2305 that is a lovely all-in-one computer but which has a stereo sound system that cannot be heard three feet away. I expected my wife’s HTC Incredible 2 Android phone would provide a seamless interface to Google documents, but there is no such capability. RIM has built its market position on professional grade email, yet is trying to sell a tablet without email capability. Just two weeks ago I returned an HP 4500 Office Jet printer because its drivers refused to install on my Windows 7 64-bit system (a problem reported by many others over two years.)
The secret to emulating Apple lies in its efficiency at excellent design. Indeed, Apple has awakened many people to the value and joy of excellence in design. Not just the prettiness of the box, not just the simplicity of the interface, but the whole sense that a product is the best it can be, for the moment, at what it does.
Also see some of my comments in print and video at Apple Changed the Way the World Communicates.
Some readers of this Web journal may be interested in an article I published last month on Fortune.com entitled “Verizon strike: Can both sides win?“ Here is a short summary:
There are very few surprised faces from either side of the Verizon picket lines. When a labor contract signed in buoyant times expires in a bleaker era – as is the case with the company’s current 45,000-worker strike — the stage is set for conflict. . . .
Although Verizon is making decent profits, only 0.5% of its income is attributable to the slowly shrinking landline business where its unionized employees are concentrated. The difference between the wireless and wireline sides of Verizon’s house is driven by its network architecture. In the wireline business, there are hundreds of thousands of miles of individual telephone and data lines, most sagging from aging telephone poles, exposed to the elements and accidents. After a major storm in southern California it may take 10,000 truck rolls to repair the damage. That is why the wireline business needs 111,000 employees – about one-third more than the wireless business – to support revenues only two-thirds as large. . . .
In cases like these, where the pie is shrinking, management may have to legally separate the two businesses in order to avoid cross subsidization. When the business in question has no surplus, the union’s position is greatly weakened.
Turning to the union’s strategy, it is smart to push back on management before such a split is engineered, exploiting the company’s overall profitability. And, it is smart to push back at a moment when the unions have the luxury of having sympathetic ears in the White House.
But winning concessions from management in this round of contract negotiations does nothing to halt the gradual shrinkage of the wireline business. This shrinkage is a problem for more than the workers at Verizon; it affects many of the estimated 500,000 union workers in the U.S. wireline industry.
The Communication Workers union would have a much stronger position were it to use its clout across the industry to work with Congress and the administration to promote a national fiber-to-the-home initiative. Such a program would build infrastructure, create jobs, and, like Eisenhower’s Interstate highway program, would have benefits to the economy that many conservative Republicans could embrace.
In a surprise move, top union leaders called off the strike on August 20. The striking workers returned to their jobs with no new contract.
The U.S. economy needs to break its stimulus habit
On August 2, 2011, Fortune.com ran my article entitled “The U.S. economy needs to break its stimulus habit:”
In response to the disappointing second quarter performance of the U.S. economy, Ben Bernanke has suggested that the Fed may have to initiate a third round of “quantitative easing” and told Congress that it should maintain fiscal stimulus
Does the U.S. economy need another round of stimulus? Before one decides on a policy or strategy, it is important to first identify the problem. In searching for a diagnosis of the present economic situation, I am reminded of “west coast turnarounds.”
In the mid-1960s, when I was in college, one of my best friends dropped out. An indifferent student, Paul had a girlfriend and wanted to get on with life, so he went to a school for big-rig truckers. When I saw Paul again after two years, I was shocked. His eyes were sunken and shadowed and his body had gone to fat. Yet he smiled and proudly pointed out an award on his wall announcing that he was the “Driver of the Year.”
“How did you get that?” I asked. Paul dug into his pocket and pulled out a clear envelope holding a number of large black torpedo-shaped pills.
“These are west coast turnarounds,” he explained. “They let you drive from New York to San Francisco, turn around, and come back without stopping.”
I spouted the usual cautions about what he was doing.
Six months later, Paul’s girlfriend called me because she couldn’t wake him up. I arrived at their apartment at the same time as Andy, one of Paul’s truck driver colleagues. Paul sputtered awake when Andy poured water on his face. Then, Andy offered Paul some strong coffee because he “needed a stimulant.”
A chemical stimulant provides a temporary speed up, a boost that must be paid for later. Notwithstanding Paul’s award for “Driver of the Year,” taking stimulants is not a path to long-term productivity. Andy’s diagnosis that Paul needed “a stimulant” was dead wrong. Paul had been living on stimulants for so long that his body could no longer respond to them. Paul needed to recover and get back to normal.
Like its chemical analog, an economic stimulus is a temporary jolt aimed at helping the economy over a rough patch, with the cost of the jolt paid for out of normal-times incomes. Unfortunately, like Paul, the U.S. has been taking economic stimuli every quarter for a decade, pretending that a sequence of temporary jolts is the same thing as economic growth. But true per-capita economic growth is the outcome of productivity-increasing innovation. You cannot engineer true economic growth by fiddling with fiscal or monetary policy or by financing excess consumption with shaky loans.
To recount recent history, the U.S. federal government began stimulating the economy in 2001, at first in response to a recession and then in fear that 9/11 would dampen growth. During 2001-2004, the Bush administration pushed through tax cuts, offered $35 billion in tax rebates, and changed asset depreciation rules to front-load business cash flows, all presented as measures to stimulate the economy.
More important than these fiscal stimuli, the Federal Reserve began to loosen monetary policy, driving down interest rates. The economy climbed out of the 2001 recession later that year, but rates on three-month treasuries were nevertheless driven down from 4% to 3.5% by late 2002, then to 1.6% in late 2003, then to 1% in 2004, rising to a still-low 2% in 2005.
Despite a reasonably healthy economy, the Fed kept stimulating the economy with very low interest rates because there seemed to be no inflation. And there seemed to be no inflation because, down in the boiler room of the Fed, there was no meter labeled “soaring home prices.”
The massive stimulus of very low interest rates from 2003-2005 helped power the housing bubble. When the artificial stimulus of 1% interest rates was removed, home prices slowed their ascent and, as we all know, began to crater in 2007-2008. This bursting of the housing bubble ignited a new round of stimuli. Interest rates were brought to the lowest levels in history — essentially zero — where they reside today.
In 2008-2009, the government provided $65 billion in tax rebates, offering cash for clunkers and tax rebates for first-time homebuyers, spending over $750 billion to stimulate the economy. During 2009-2010, the Fed embarked on a program called “quantitative easing” in which it purchased $1.3 trillion in bank debt, mortgage-backed securities, and Treasury notes with newly created money.
Then in 2010-2011, the Fed embarked on another round of “easing” during which it created an additional $1 trillion in new bank reserves by buying bonds on the open market. The apparent purpose of this last “stimulus” was to artificially inflate stock and asset prices to make people feel richer and more likely to borrow and spend.
A decade of constant stimuli has produced the same effect as Paul’s west-coast turnarounds — a series of highs and crashes followed by a comatose condition that no longer responds to stimuli. Despite what various politicians and experts tell you, real productivity gains and real economic growth do not come from taking stimulants.
Learning the right lessons from the WWII economy
This weekend’s Wall Street Journal contains my op-ed “WWII Stimulus and the Postwar Boom.” The article takes issue with the received wisdom among many economists that WWII was a giant Keynesian stimulus, bringing an end to the Great Depression. The data about the WWII economy points in other directions.
During World War II, there was no investment in civilian infrastructure and the government placed severe restrictions on consumption. That meant significant portions of the massive government spending went toward saving and private debt repayment. Thrift restored personal balance sheets, ultimately setting the stage for the postwar boom.
During the war, roughly 11% of the workforce served in the military at low pay and little chance to consume. The civilian workforce actually shrank, but worked longer hours and take-home pay rose. But, despite the rise in disposable household incomes, consumption stayed at depression-era levels. During WWII, Americans saved an astounding 22% of their income, bulking up savings and paying down debt. By the war’s end, household debt had been lowered to levels not seen since 1924.
The article concludes:
The difficult truth is there is no easy cure for the present hangover. Myopic policies allowed credit to be pushed over its natural limit. Credit expansion shifts consumption from the future to the present, but the future has now arrived. Policies aimed at reigniting the credit-driven consumption boom of the last 25 years won’t work.
Instead of looking for a pre-election year pop, it would be wiser to focus on transitioning from credit-driven economic growth to growth that is, once again, driven by new productive investments. The key policy aims should be removing the tangle of tax, policy, regulatory and human-capital impediments to domestic private investment.
Good Strategy/Bad Strategy offers a new way to think about strategy
Good Strategy/Bad Strategy: The Difference and Why It Matters, went on sale in the U.S. last week. I invite you to take a look. Amazon offers a “look inside” and the book’s Website offers some orientation as well as access to some of the original materials used and referenced.
There are four principle aims of this book:
- To call attention to and debunk the nonsense that is labeled “strategy” in so many companies, non-profit organizations, and government agencies. A strategy is not what you wish would happen. It is a set of practical actions for moving forward. It is not a “dog’s dinner” of all the things various parties would like to see done. It is a focusing of energy and resources on a few key objectives whose accomplishment will make a real difference.
- To offer a view of strategy that is not rooted in economics. Current teaching about strategy in schools of business is largely based on the industrial-organization model of competition, with some extensions to deal with information economics and network effects. This is not wrong, but it is woefully incomplete. The concept of strategy applies outside of industry settings. Good Strategy/Bad Strategy argues that the essence of a good strategy is logical and practical coherence. Logical coherence means having policies and actions based on a sound diagnosis of the challenges being faced. To create good strategy, one must acknowledge and understand why the challenge is difficult and resistant to standard routines. Practical coherence means coordinating policies and actions on critical keystone tasks and objectives.
- To illustrate and describe how good strategies are built while, at the same time, being truthful about how difficult this is. Strategy is not easy. There are no simple tools, matrices, techniques, or fill-in-the-blanks templates that will generate good strategies. Good strategy flows from insight and very skilled judgment. At the same time, insight and judgment can be stimulated and enhanced by looking in the right places. The mid-section of the book, “Sources of Power,” discusses the tools of anticipation, concentration of effort, proximate objectives, the role of chain-link logic, the power of design-type logic, the logic of focus, good and bad growth, how to build on advantage, the importance of dynamics, and the roles of inertia and entropy in strategy work. The last section, “Thinking Like a Strategist,” shows how strategy is like a scientific hypothesis that is tested and adjusted over time, and provides some clues to help you be “less myopic than your undeliberative self.
- To be interesting. Good Strategy/Bad Strategy is opinionated and chock full of stories and examples.
Anonymity is a design flaw in the Internet
Today, CNN reports that “Hundreds of personal Gmail accounts, including those of some senior U.S. government officials, were hacked as a result of a massive phishing scheme originating from China, Google said Wednesday.”
In an 2009 interview, the director of the Center for Strategic and International Studies, said “In 2007 we probably had our electronic Pearl Harbor. It was an espionage Pearl Harbor. Some unknown foreign power, and honestly, we don’t know who it is, broke into the Department of Defense, to the Department of State, the Department of Commerce, probably the Department of Energy, probably NASA. They broke into all of the high tech agencies, all of the military agencies, and downloaded terabytes of information.” Full entry→
To see the world anew, an older way of seeing must be cast aside.
The enemy of insight is unconscious constraint. What keeps us from seeing in new ways is the burden of the old, so softly holding one’s mind in a rut that we are unaware of its smothering embrace.
Insight draws its power by restructuring a situation into a more productive form. But in this restructuring, there are costs as well as gains. To see the world anew, an older frame must be cast aside. Academic research on insight misses this issue by looking at puzzles rather than strategic problems.
A standard “insight” problem beloved by academics is the nine dots. Three rows of three dots form a square and the challenge is to draw four straight lines through all the dots without lifting your pen from the paper. The trick is to realize that the corners joining the lines you draw do not have to be placed on a dot or lie inside the imaginary square; a single triangle covers eight and a bisecting line reaches the ninth. The nine-dot problem, like the word problems used by Beeman, Bowden, and Kounios in their MRI and EEG tests, is an intellectual puzzle: it poses an initial difficulty; it must have a solution or it wouldn’t be posed; the solution is obvious once obtained. And one reaches a solution without having to cast aside deep seated ideas or valued beliefs. Full entry→
Good strategy work is based on insight
My 10:00 a.m. appointment is a student in EMBA—the Executive MBA program. About 35, she has responsibility for business planning at a health-products company. EMBA students stay at their full-time jobs, attending classes on Fridays and Saturdays. She has come to my fifth-floor office to talk about a problem at work. “We have a new CEO,” she begins, “and he has asked me to develop a new strategy for the division’s business. He wants a strategy that will deliver 15% annual growth in profits. I am really working in your course, and I enjoy the case discussions, but it all seems so vague and imprecise. What tools can I use to create a new strategy?”
There are tools in every field. To master finance one has to learn discounting, option pricing, and the more general logic of arbitrage. To become expert at marketing, one has to learn methods for estimating market response to price, promotion, and advertising and accept the discipline of thinking about how the world looks to a buyer. In strategy work, our key tools are frameworks designed to trigger and guide insight. Full entry→
Aribitrary goals don't help generate good strategies
Misunderstanding the relationship between goals and strategy is the origin of wheel-spinning frustration in many strategic retreats and planning meetings. The executives want to develop strategy, but first mistakenly try to agree on the overall goals of the company. Agreement on broad universal goals is easy but uninformative. Searching for something concrete, senior executives finally impose some arbitrary metrics, like a 15% after-tax return on capital and a 12% annual rate of growth. The group now tries to identify “strategies” for achieving these goals.
What should have been a discussion of how and where to compete devolves into an exercise in hockey-stick financial forecasting. The problem the group has experienced is that a strategy is not a plan for reaching an arbitrary goal. A strategy structures the situation, providing guidance as to how to best use the resources and insights available. Useful strategic objectives are not simply the echo of ambition; they reflect an understanding of the forces at work and seek a balance between what is desired and what is possible. Full entry→