Steve Jobs Solved the Innovator's Dilemma | Hacker News Reader

Steve Jobs Solved the Innovator's Dilemma

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Apple is famously compartmentalised & secretive: People working on one product don't even get to go into the building where another product is being developed & the employees working on new products are pretty much forbidden from discussing them outside of their own development team as I understand things.

I would imagine that this makes it very hard for managers of existing products to kill off internal competitors. So long as the board is happy to fund it, you can develop something new without having to play internal big company politics.

This makes a lot of sense. Compare this to MS where there is alot of internal politics and competition amongst products. Short and insightful article all in all.

except for when they take their prototypes and loose them in bars

For the age of the company, their intelligence leak rate is pretty damn good.

It's a slippery slope to have teams fire-walled and competing with each other. We hear stories from the Dropbox guys that One Apple team invited them over to ask how they hacked the finder, because they didn't have access to the functionality that dropbox reverse engineered. As a recent grad at Motorola, I once heard similar stories about Motorola's PCS and semiconductor groups 10 years ago.

As I recall from interviews with the DropBox crowd, that's more because what DropBox was doing wasn't even planned functionality in the first place; they hooked into the Finder code at a fairly low level in order to get it to do what they wanted. (Anyone got a link?)

Your general point is correct of course: the price of compartmentalisation is the inability to benefit from the experience of other groups in the company.

> It had 90 days working capital on hand when > he took over — in other words, Apple was only > three months away from bankruptcy.

Sorry for my finance ignorance -- but is that description correct? I'd assume that having 90 days working capital means that you can run the company as-is for 90 days with no additional revenue. Given that Apple presumably had some stream of revenue at the time, that seems like a far cry from being "three months away from bankruptcy".

Shh. Don't think logically. It makes for a better story if you make up your own facts, like when MSFT saved Apple by giving them $150M out of the goodness of their hearts.

Working capital is short-term assets minus short-term debts. So yes, you are correct. A company could have a ton of long-term assets, but very low working-capital. It's too much of a simplification to say low working-capital means you are close to bankruptcy.

In the most basic of definitions, Days Working Capital tells you how many days you can operate before your working capital is gone. WC's equation is current assets(accounts receivable, inventory) - current liabilities(accounts payable). This tells you how well a company can pay off its short term debts.

The days working capital number tells you how well it can pay off its debt, but it can also tell you how efficient a company is. This is where the author made a mistake. A company with 10 days WC may be in better shape than a company with 90 days WC depending on how well they are operating. If a company holds almost no inventory by having suppliers who can deliver in a short time period, the company will save lots of costs by keeping inventory down, which will then lower their DWC.

Basically, if Apple stopped selling products and just sat there, they'd be bankrupt in 90 days. But this is unrealistic, and thus, the authors words were a bit over dramatic.

It is basically correct. They had ongoing revenue from sales, but also had ongoing costs related to the producing those sales, in addition to overhead from salaries, facilities, etc. What you would need to look at is their profits, because that is what adds to capital. Apple was actually losing money at the time (lost $800 million in 1996 and $1 billion in 1997)[1], so the problem may have been worse than the simplistic "three months away from bankruptcy." It is difficult to tell for sure without doing a far more in-depth analysis, but having 90 days working capital at an unprofitable company makes the "three months away from bankruptcy" assertion quite reasonable.

[1] http://files.shareholder.com/downloads/AAPL/1705877737x0xS10... (page 8), found via http://investor.apple.com/sec.cfm (yes, cfm!)

According to the article, Jobs' solution was to organize Apple around making great products. This is enough to make Christensen himself call them "freaks".

Caring first about great products makes you a freak? Something seems deeply wrong with that. (Edit: this was unclear. I agree that "freak" is accurate in the sense that this is rare. My point is that it says something staggering about our economy that it should be so rare.)

If Apple are the only ones who do this, I would sooner call everybody else the freaks.

There was a cultural revolution in business whereby people saw the role of the firm as profit-maximizing, where profit is measured on a quarter-by-quarter basis.

In that light, Jobs was crazy for focusing on the product (and letting the profits flow).

The definition of 'freak' for most people is "people who don't have sensible regard to norms". The norm for almost all companies is that the bottom line is the overriding factor.

So Jobs priorities made Apple a freak in the eyes of most managers. Apple didn't get any respect from ordinary managers before the iPhone sales took off and made the bottom line became impressive.

I have yet to work at/for a company that cared about its products.

Sure, this is how most everyone does it. But sometimes a lightning bolt lights up the night sky for a second and lets you see that it is the "freak" who is right and everyone else who is the aberration. I think we should be grateful to Steve Jobs for providing so spectacular a counterexample. He didn't just not follow convention, he built the most valuable company in the world doing it - something that, if the managerialists were right, ought to have been impossible.

I have some doubts that's that the case. why?

1. The IPAD might did some cannibalization to the mac market but in general, it brought much more profits.It was a pretty good bet that this what it would do(esp. considering apple's supply chain strengths, expected prices for android and IPAD tablets, apple's marketing value and ecosystems, etc).

2. The iPhone was launched when it was clear that mobile phone would integrate MP3 functions, and the iPod market would die. But it was more profitable than the iPod, so no dilemma here.

The real test for the innovator's dilemma is:you develop and sell a new product that might HURT your profits ,but is the future of the industry because it's better or cheaper, and you understand that having some some slice of the(smaller) future is better than nothing.

But you make these two arguments with hindsight.

1. Creating the iPad was not a good bet that it would create profits. Microsoft had tried pushing tablet computing for a decade, and they lost a lot of money doing so. The iPad was a gamble. It was not obvious, people scoffed when it was announced. "No keyboard? No SD slot? Why would I need that when I have a laptop and an iphone?"

2. Again, people scoffed when the iPhone was released. There were already phones with MP3 functionality. It wasn't clear that the phones would kill off the iPod as the iPod allowed you carry your entire music collection with you. Smartphones back then couldn't do that, nor could the iPhone for that matter. No one at the time wanted to use touch screens. The reaction was also a lot of scoffing. "You want me to pay how much for a cell phone that doesn't even have keys?!?". The iPhone was a huge gamble too.

There are two kinds of bets we're talking about.

You're talking about the bet: will our products would be successful? That's the kind of bet you have to take when you develop products, no way around it. And apple is pretty good at those gambles.

I'm talking about the bet: if this product would be successful, will we make more money , or less money(due to cannibalization) ?

Also , regarding MP3 phones. it was clear(due to moore's law), that mobile phones would have good enough MP3 players in the future.

No, it seems like we're talking about the same thing.

Also, the iPhone wasn't designed to be an mp3 player + phone. It was designed to be a really good smartphone.

No, Steve designed the iPhone to be a smartphone that people would LOVE. That was the mission of creating the iPhone.

I'm the author of the article, I'm working with Clay at the moment. Thanks for the comment.

It's subtle, but I think that most people outside of companies assume that decisions get made as you're describing above — separate questions of "will this product be successful", and "will we make money out of it". In part, the dilemma is borne out of the fact that for almost every company, those aren't separate questions at all. Think about it; you're the CEO, and someone comes along and says, "let's invest this money in new R&D for a product that may, or may not, work. if, by chance, it does work... it will take out our existing product, and we'll end up making less money on the new product than we do right now on the old one".

very few CEOs will put money down on that. they're using money from their cash cow to do what... to kill it?

the problem is one of perspective.

there's another famous example i love to quote when explaining: blockbuster and netflix. when netflix came along, blockbuster was this huge organization with massive margins and almost 100% name recognition. they looked at netflix, saw a new business emerging with a fraction of the margins that they had... why would they bother wasting their time on doing something like this? they could invest to create a netflix competitor, but if they did, it was going to cost them to do it, it may or may not be successful, and if it WAS successful, it would cannibalize their existing, high-margin business with one that was much less profitable. who would go for that?

the mistake that most companies make is that they assume that they're the only ones that are capable of challenging their existing business with a disruptive entrant. the problem is (and it sounds obvious, but so many successful companies have fallen into this trap): if they don't challenge themselves, then someone else will. from the perspective of blockbuster, with all these profitable stores dotted all around the country, the "DVD by-mail market" was not at all attractive. but to netflix, which was looking at the market from the perspective of "we don't have any business at all, so any business is great", the margins actually looked pretty good. blockbuster thought its choices were "stick with high margin business, or move to low margin business". but really, its choices were "move to low margin business, or go bankrupt".

that's the perspective thing i'm talking about; successful businesses have this tendency to view markets from the vantage point of where they stand right now. what's so noticeable about apple is that they never do that. they start from a fresh sheet of paper — what's best for the customer, not what's best from our bottom line. it's a mighty hard trick to pull off.

hope this helps. thanks to everyone for voting up the article.

cheers

-- james

> separate questions of "will this product be successful", and "will we make money out of it". In part, the dilemma is borne out of the fact that for almost every company, those aren't separate questions at all.

NOT unless you are looking at Silicon Valley companies. Here both these questions ARE different. Think Facebook, Twitter etc, the "success" (and implied "scale") is more important than whether there is a direct or immediate revenue source. That is why we see BIG disruptions in Silicon Valley and not elsewhere. Generally, VCs bear the cost for growth period and entirely new markets are created. Just because the "innovators" were not burdened with the question of making money from the get go.

James, I really appreciated the article and the additional explanation.

I tried to figure out a way to word this question, so forgive me if it isn't clear but:

Did Steve Jobs even do the right thing? What I mean by that is that if you had 10 companies would you want all those CEOs making what seems to be illogical decisions in the off chance you get an Apple?

Take Blockbuster for example, sure they obviously did the wrong thing in hindsight, but no one, and I mean no one thought netflix was going to be as successful as it was when it first started. I remember thinking, gosh, that is a lot of mailing expense for $7/month.

How many ideas came along and went that were not worth replicating? I'm sure there are tons.

There is probably some new network being worked on right now that will displace facebook in 10 years. Should facebook radically change the way they do business to adopt to that new basically unknown threat?

That's what makes it a dilemma. :) The book is well worth reading, and this is what it talks about.

>2. The iPhone was launched when it was clear that mobile phone would integrate MP3 functions, and the iPod market would die. But it was more profitable than the iPod, so no dilemma here. The real test for the innovator's dilemma is:you develop and sell a new product that might HURT your profits ,but is the future of the industry because it's better or cheaper, and you understand that having some some slice of the(smaller) future is better than nothing.

I disagree with your point that the iPhone was clearly going to be more profitable than the iPod. Data plans were expensive and the speed of AT&Ts network at the time of original release was horrendous. These obstacles alone were enough to kill the iPhone. Dropping the price from $699 to $299 and now lower really drove the explosion in demand. The margins they made on the iPhone at this point, I imagine, would call your claim into question.

Additionally, the iPod was not a one dimensional device. Apple made its real money off of iTunes exclusivity. The first gen iPhone was an insanely expensive iPod at the time with the added cost of a data plan. Apple absolutely crushed it when they created the App Store. The App Store is what ultimately catapulted the iPhone's profit margins way past the iPod. The world would look very different if the iPhone had remained an internet enabled iPod and cell phone.

According to asymco(and apple's data), the average selling price for iphones is around $650(Q2-2011).

http://www.asymco.com/2011/10/09/the-new-iphone-portfolio-an...

Fantastic Q2 2011 was a great one.

But in Q? 2007, aka date of the first iPhone release, success was not imminent. All I am suggesting is that you compare apples to apples instead of apples to oranges. You have to look at the market at the time they released the iPhone.

Chart of Avg selling price of Apple products: http://www.asymco.com/wp-content/uploads/2012/01/Screen-Shot...

Graph of iPhone activations by carrier: http://www.asymco.com/wp-content/uploads/2012/02/Screen-Shot...

From this information it is clear that the iPhone was not imminent threat to the iPod, at the time of its release. It took a full year for activations to pick up.

None of this takes into account, as I said earlier, the iPod was valuable to Apple because of the iTunes Music Store.

The iPhone was too expensive in its early stages to replace the iPod as a music player. Apple took an enormous risk with the iPhone.

No, I do not believe Apple had reason to worry about market cannibalization.

The iPod was a new product. The line was segmented well, with each having clear differences in form factor, eg you wouldn't be confused between what a nano might be useful for vs Touch. This is in contrast to electronic manufacturers that flood the market with an entire spectrum of product capability.

The iPhone and Ipad are again entirely different product lines that share the same codebase. This is not very different to Windows everywhere espoused by Ballmer. The difference is in how capable the entire organisation was in execution. Although Apple is immensely profitable, it is because it focusses on creating highly desirable products in niches that are only profitable through vertical integration.

I recall Jobs lamenting the fact that they barely make any profit on their l Laserwriterswhile HP makes all the money off toners. Apple today judiciously avoids this type commodity computing markets.

The main take away is to sell clearly differentiated products. Give them different names and use cases so that consumers cannot be confused over what each product does.

By the way it's important to recall that one of the first things that Jobs killed were the Apple clones -- an idea that HBR pushed in the 90s.

The irony now being that the Mac is from a hardware level, a PC clone...

It is now, but in 1995 it wasn't. Apple designed custom chipsets (apparently different ones for every model...) and then sold them to clone vendors at prices that didn't recoup their R&D.

Well that wasn't very clever was it.

...a PC clone running Unix!

To certain extent this analysis is right, but there's also one other company that you must consider when thinking about this, and that's Google. They have also not focused on profits, and at least, in theory, have tried to create amazing products. Unfortunately, they neither have great products or great profits. You can be like Apple and focus on building great products but keep Google in mind and ask why their stock price is stagnant for last 5 years now.

Yes, Apple focuses on products but it also focuses on profits by optimizing operations and pricing products correctly. Unfortunately, at Google, they haven't done either well. They are still a search company which runs on the grace of AdWords.

Yes, Android is successful but compared to iPhone platform it is significantly behind in terms of profits - in fact, still loosing money considering Motorola acquisition was essentially to stave off patent attacks on Android.

This is a great take on it, although I might offer that Jobs never really solved the innovator's dilemma -- he just managed it. (Solve implies the problem goes away; not sure that applies here.)

Rather, what Jobs did was willingly accept potential cannibalization of some products in favor of others. Normally, in a large company, you have teams representing core products that morph into influential forces of nature inside their organization and spend a decent amount of time and resources protecting their turf. Jobs was the central decision-making authority, and he simply wouldn't tolerate that type of environment. So, territorial fiefdoms had no chance of surviving in Jobs's pressure cooker.

They can do it because Apple hasn't optimized its organization to maximize profit. Instead, it has made the creation of value for customers its priority.

Apple's market cap would suggest that this presents a false dichotomy.

The point of the article is that Apple's profits (and, indirectly, market cap) could be even higher (at least in the short term) if they decided to focus only on this instead of great products. (That would be the wrong thing to do, of course, since a more innovative company would disrupt Apple.)

Apple's strategy, the strategy to solve the Innovator's Dilemma, shows that creating disruptive products leads to profits that are large enough to be considered a successful company, even if profits are not your primary goal.

It's really just an abuse of language. When the financial press (or, worse, the general press) writes of "profits", they often implicitly mean "short-term profits", but that's not the same thing. In particular, Apple doesn't ignore profit; they just recognize that maximizing profit is not the same as maximizing short-term profit.

The market cap of a company reflects the market's opinion on the discounted value of future cashflow. This means that a company can't generally boost its market cap any way other than increasing its profits.

I'm looking at Corning's Day of Glass video http://www.youtube.com/watch?v=6Cf7IL_eZ38 and once again, I'm being reminded of Apple's biggest weakness. There's no cross-platform functionality and that's going to be Apple's biggest problem within a decade.

Any idea how Apple might handle a dilemma like that ?

I'm sorry, what does Corning make? Glass. And, apparently, expensive concept videos.

Check out this article about why Apple doesn't bother with expensive distracting public concept products.

http://counternotions.com/2008/08/12/concept-products/

Apple's products have a bit more cross-platform functionality than Corning's at this point in time. Unless you consider transparency a cross-platform feature.

I didn't mean to imply that Apple competes with Corning.

My question is how will Apple deal with the disruptive potential of cross-platform ? It's hard to believe Apple will not be challenged by it.

And somewhat related. What's the input language going to be? Or will it be a tool that converts to one language?

My question is how will Apple deal with the disruptive potential of cross-platform ?

The web. That's why Apple has been working to make sure that Safari was standards-compliant, if "cross-platform" is going to be the future, it will more than likely happen via the web. So long as Apple can maintain a standards-compliant browser, then can compete on the web and spend their energies making sure the other aspects of their products (design, battery life, etc) are competitive.

Funny thing.

Isn't that how iPhone development was supposed to happen? Then everyone whined and complained that they wanted a native development system. Now that they have it (and it's a pretty solid one), we're supposed to whine that it's not cross-platform?

I'm guessing HTML5 and etc will help solve that problem, correct?

What do you mean by 'the disruptive potential of cross-platform'?

I don't see any great 'cross-platform' environments out there other than the web, and Apple is one of the leaders in developing that.

Remind me what companies Christiansen has run? He has been an academic/consultant his whole career.

Hm. I don't understand. Could you elaborate why that is important here?

Because there never was a "dilemma" to "solve".

The entire book is written as case studies of industries that this actually happened in. You could possibly argue that the problem doesn't apply to all industries, but its pretty hard to state that it flat out doesn't exist.

Dr Christensen wrote in his book that you have to compete with your own products before someone else comes along and disrupts your market & profits. It's a no brainer but it's a difficult decision for most companies because most incentives aren't aligned with destroying revenue, making your products obsolete, ... Dr Christensen explains the dilemma and he offers solutions. Nothing's perfect but Steve Jobs may have solved the dilemma. Steve's decision was to basically kill the iPod with the iPhone and to kill the Mac with the iPad. You can still buy iPods and Macs so you could say nothing got killed, but you probably wouldn't be able to pull off decisions like that in big companies because they have well-embedded risk-averse corporate cultures. Note: I don't mean to imply it's all about the culture.

He literally wrote the book on disruption, which I expect, from your comment, you haven't read. http://www.amazon.com/Innovators-Dilemma-Revolutionary-Busin... He doesn't need to start a company to prove his point because it's not really about startups, it's about the problems big companies have. He wouldn't be the founder or employee number 1, he would be employee 10,000, the one they get when everything starts going wrong.

I didn't say start, I said run. The dilemma he speaks of (yes I have read the book) sounds good on paper but doesn't play out in the real world, there are plenty of examples, is Coca Cola afraid of launching a new soft drink, or does Tricorn worry KFC is eroding the market of Taco Bell? Like most economics or sociology it's an elegant model that has little basis in reality.

Go read it again. I don't think you're grasping the idea of disruption as Christensen defines it. The examples you give are not disruptive products - they're just new products.

You could have Googled this : http://en.wikipedia.org/wiki/Clayton_M._Christensen#Career

He founded Ceramics Process Systems Corporation, and served as chairman and president. He founded Innosight LLC

He serves on the board of a number of others, and also works directly with a couple more.

I'm all for calling bullshit on "big name, no experience" entrepreneurs, but Clay Christensen is simple not one of them. His work is phenomenal, there is so much to learn from it.

Just because he's an academic, it doesn't follow that he's wrong.

No. If in the future a new kind of printer can "print" (chip, shape, et al) iPhones, Samsungs, etc even if Apple can catch up with this new technology it's probable that the market size of the current hardware industry will go down.

Can we say that many times the dilemma is about shrink or perish?

The point of the article (and of solving e Innovators Dilema) is that Apple would be the company selling the printers because that's what it's customers want and how it can make them happy. They wouldn't prohibit entering the new printer market because it is bad for the iPhone's profits, which is what just about every other company would do.

Can we say that many times the dilemma is about shrink or perish?

That's not what this article is about, so, while you can say it, it is pretty meaningless to TFA. If your company gets caught up in the middle of a war, it's not the innovator's dilema that could kill your company, either.

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