Though critics mocked him for being wrong at the time, he was starting to look prescient as Apple’s iPhone and iPad began to steadily lose market share to Android-based smartphones and tablets.
But Christensen took no pleasure in being right.
“I truly hope that you won’t print me as somebody who has it in for Apple,” he said as he paced, his six-foot-eight frame filling his modest-sized office. After suffering from a stroke a couple of years before, he spoke slowly and deliberately. “I’m just trying to learn from them.”
Christensen had started his career with the Boston Consulting Group and cofounded an advanced materials firm before pursuing academia. In the 1990s, as Apple teetered on the edge of bankruptcy, he began studying why companies had such difficulty staying successful. The first market he examined was disk drives. What he discovered was surprising. Dominant disk drive makers were losing business to rivals with seemingly inferior drives. Companies that had made fourteen-inch-diameter drives for mainframe computers were supplanted by those that made eight-inch drives for mini computers, which were then replaced by those that made 5.25-inch drives for PCs, and so on. This phenomenon was happening even though the smaller drives had a lower capacity and a higher cost per megabyte.
Upon further exploration, Christensen concluded that the bigger companies failed to recognize the significance of the emerging smaller drives until it was too late. The fourteen-inch-drive companies didn’t think much of the eight-inch drive initially because it had a capacity of forty megabytes or less, compared to their drives, which had three hundred to four hundred megabytes. Such small drives were useless to its mainframe customers. But by focusing on their target audience, they overlooked the growing market of other customers who made smaller computers and wanted smaller drives.
He found similar trends in other industries. In retail, most department stores had ignored discount stores until they began seizing market share. While some companies like Dayton Hudson, the owners of Target Corporation, managed to stay ahead by quickly shifting their businesses to compete with the up-and-comers, others like Woolworth’s clung too long to their traditional businesses and faded away. In the steel industry, large-scale integrated mills saw their markets increasingly invaded by more efficient, low-cost minimills.
From these examples, he concluded that companies failed not because they were badly managed but precisely because they did everything they were traditionally expected to do. They listened to their customers, studied market trends, and invested in new and improved technologies that they thought their customers would want. They ignored emerging products because they were usually cheap and shoddy and didn’t meet their existing customers’ needs.
But those very actions paved the way for their own demise because there was a limit to how much they could refine their products before customers lost interest in the incremental upgrades. That was the point at which most customers were satisfied enough with their purchases and were no longer willing to pay for anything more advanced. By the time those companies paid attention to the cheap, new innovations they had initially ignored, it was usually too late. By then, the early entrants had captured new groups of customers and improved their products enough to eat into the established companies’ businesses.
“Toyota did not come to America with Lexuses,” Christensen explained. “They came with this rusty little compact in the sixties that they called the Corona. And then they went from the Corona to the Corolla, Tercel, 4Runner, and then a Lexus. General Motors and Ford were up here on the integrated-steel trajectory, making big cars for big people.”
The challenge for companies was that every new product eventually became established, ready to be disrupted by the next new thing.
Apple had been one of Christensen’s case studies. Apple was founded in 1976 as an upstart that upended the industry. While big computer makers were focused on selling mainframe and mini computers, Apple had recognized the potential of personal computers. Its first computer, the Apple I, was little more than a circuit board, “at best a preliminary product with limited functionality,” as Christensen described it. But it was successful enough for the tiny company to launch the much-improved Apple II the following year. The 1984 release of the Macintosh cemented Apple’s position as a market leader in personal computers.
Then the company hit a wall. Consumers initially paid a premium for the Mac’s ability to navigate with a mouse that could point and click on graphical images. Rival companies, however, began selling their own personal computers, loaded with Microsoft’s Windows operating system, which provided similar features. The initial models were inferior to the Mac in many ways, but they were good enough, they were cheap, and they got better every day. After years of incremental improvements by Microsoft, the release of Windows 95 brought Apple’s software superiority to a nearly complete end as it matched and exceeded the Mac in almost every feature.
In areas where it did try to innovate during this era, Apple made the classic mistake that Christensen also described in his book: It sought input from its customers. The example that Christensen picked up on was the Newton personal digital assistant (PDA). The product had some of the characteristics of a disruptive technology in that it had the potential to take sales away from laptop computers, but rather than start with modest expectations, Apple’s CEO at the time, John Sculley, saw it as a key product for the company. He invested many millions of dollars in its development as his team conducted extensive market research, focus groups, and surveys to figure out what consumers wanted. The result was a flop on the grandest scale. A seven-hundred-dollar device with insufficient power and supposed state-of-the-art handwriting recognition that was so inaccurate it was lampooned in a Doonesbury comic strip. Had Apple kept its investment and its promises modest, the 140,000 Newtons it sold in the first two years may have been considered a solid start. Instead, the device went down in history as one of Apple’s worst failures.
When Jobs returned to Apple, he turned the company back into a disrupter. In Jobs’s mind, Apple had become too corporatized during his exile. Its CEOs were professional managers who had little direct involvement in the day-to-day business and were overly focused on profits. Decisions were bogged down in endless meetings and committees. To transform Apple into an innovator once again, Jobs cut nonessential products and put the focus back on making great products. New development projects were protected and overseen by senior managers, often with input from Jobs himself. Ideas were developed, modified, vigorously debated, and sometimes even discarded at the last minute. At the same time, a new process was created so nothing fell through the cracks. Tasks were assigned a “Directly Responsible Individual,” known by its shorthand DRI. Apple also stopped depending on market research and surveys. “If I’d have asked my customers what they wanted,” Jobs quoted Henry Ford, “they would have told me, ‘A faster horse.’ ”
Instead, decisions were informed by careful observations of user behavior. When a brand-new product was released, they nurtured the category over a period of years rather than expecting a blockbuster right away.
These changes enabled Apple to disrupt industry after industry. The all-in-one iMac was affordable, stylish, and easy to use in a way that computers hadn’t been until then. The iPod paired with iTunes transformed the music industry as people began buying songs for ninety-nine cents apiece rather than entire albums. The iPhone defined the smartphone. The iPad, Jobs’s last brand-new product, was a device that no one saw a use for before Apple introduced it.
Jobs had a rare ability to maintain a sense of crisis within himself and inside the company. “If you don’t cannibalize yourself,” he used to say, “someone else will.”
But was that still true?
The trends in the mobile device market were starting to look alarmingly like the Innovator’s Dilemma scenario that Christensen had painted in his book.
When the first Android phone came out, few people took it seriously. It wasn’t attractive or intuitive compare
d to the iPhone. Its music application wasn’t as good as iTunes, and its recently launched Android app market wasn’t widely supported.
But Android phones improved. Before long, device makers, from Samsung to Motorola to Amazon.com and Barnes & Noble, launched Android-based smartphones, tablets, and e-readers, giving consumers a broader selection in terms of design and price. Google made the operating system easier to use and expanded the app market. The user experience still wasn’t as seamless as on the iPhone and iPad—Apple had the clear advantage of tightly integrated software, hardware, and services—but the technology was becoming good enough to interest consumers. Android was invading Apple’s market.
In the three months ending in June 2012, Android phones’ market share grew to 68.1 percent from 46.9 percent for the same period a year earlier. In comparison, the iPhone’s share fell to 16.9 percent from 18.8 percent. Analytics firms saw a similar trend in the tablet market as well.
Apple was not only losing low-end business, it was also beginning to face competition at the high end from companies like Samsung. Galaxy Note, a 5.3-inch smartphone/tablet hybrid that was initially scoffed at in the United States because of its awkward size, became one of its best sellers in Asia, where people couldn’t necessarily afford to buy both a high-end smartphone and tablet. Its initial retail price before subsidies was similar to the iPhone’s at around seven hundred dollars.
Would this be a repeat of Apple’s experience with Microsoft and Windows?
Christensen’s office was located in the depths of Harvard’s Morgan Hall, beyond a bright, airy atrium with a fourth-century Roman mosaic floor portraying Tethys, the sea goddess and the mother of great rivers, including the Nile. For a man of his academic stature, Christensen’s quarters were surprisingly unassuming and functional. His room was a middle unit, one among many, and his assistant occupied a cubicle in a pod with other faculty support staff. His walls were filled with books, mementos, and a collection of disk drives that he used in his classes to show the progress of technology. A blowup of a Forbes magazine cover on which he was featured was propped on a shelf in one corner. In addition to the iMac on his desk, he also owned an iPad, but his phone was a BlackBerry.
Over the years, Christensen had developed ideas about how companies could avoid being disrupted. To explain it, he used a story about helping a fast-food chain increase milk-shake sales. The company had come to him after product improvements based on customer feedback had failed to yield any tangible changes in sales or profits. So Christensen thought of the problem in a different way. He asked customers, “What job were you trying to do that caused you to hire that milk shake?”
What he found was that nearly half of the milk shakes were purchased in the morning as a diversion on long solo commutes to work. These people found milk shakes preferable to doughnuts and bagels because they were less messy and easier to handle. Thus, Christensen’s advice for improving the product was twofold: Add chunks of fruit to the shakes to add an element of unpredictability to keep the commute interesting and move the prepay dispensing machine to the front of the counter, so customers could make their purchases more quickly. Understanding the customer’s purpose made figuring out the solution much easier.
Christensen explained the same concept in another way. Transporting information during Julius Caesar’s life required a horseman and chariot. A railroad handled the same task during Abraham Lincoln’s time, while a plane was used when Franklin Delano Roosevelt was president. Now the Internet handled those functions.
“So the job actually hasn’t changed at all for two centuries or for two millennia, but the technology that you can employ to get the job done changes quite dramatically. So if you think of the structure of your market in terms of jobs to be done, then as you go through the centuries, you’re always looking. Is there a better way to get this job done?”
In Christensen’s opinion, two of the CEOs who had an instinctive understanding of this concept had been Sony’s cofounder Akio Morita and Steve Jobs.
“Part of the hardest thing about coming up with new products is to figure out a really cool set of technologies that you can implement it with and make it easy, but also figuring out something that people want to do,” Jobs had once said. “We’ve all seen products that have come out that have been interesting but just fall on their face because not enough people want to do them.”
Morita, a legendary figure on par with Jobs, was also famous for his preternatural ability to identify consumers’ needs. After starting Sony in the late 1940s, he launched hit product after hit product from portable radios and televisions to Walkman music players. In every new business he entered, he disrupted the traditional leaders.
But then Morita left. For a while, the company seemed invincible as it introduced the PlayStation game console and VAIO notebook computer. But it increasingly struggled to come up with revolutionary products. It finally stumbled with the emergence of downloadable music. Sony had started work on a portable digital music player years before Apple came out with the iPod, but it was stymied by competing interests from its music label Sony Music, which wanted to protect its sales. It also chose a proprietary technology over the more widespread MP3 format. Once it fell behind that first crucial move toward digital content, it was never able to regain its former strength.
“Both Morita and Jobs were geniuses at figuring out what they were trying to get done,” said Christensen, adding that instincts like that were difficult to transfer.
Sony had gone from being great to being merely good. Could the same happen to Apple?
Christensen was particularly troubled by a few of Apple’s tendencies. First and foremost was its policy of keeping its products, software, and services proprietary and closed. Having that kind of control over the user experience was beneficial to companies in the first years after an innovation. But Christensen considered it a handicap as the technology matured and rivals caught up.
Apple had so far escaped the trap by jumping to its next product before the previous product matured. But this worked only as long as the innovations kept coming. If Apple stopped, then its proprietary tendencies would begin working against it.
So far, Apple’s reaction to Android seemed to confirm Christensen’s concerns. In courtrooms around the world, it was devoting staggering resources in a vicious protectionist fight. At the same time, Apple was making the classic mistake of evolving along the same trajectory rather than redefining expectations.
For the first few years, when Apple launched new models with incremental improvements such as thinness, camera quality, and screen resolution, customers snapped them up even if there was no material change in design. But its devices were maturing to a point where the upgrades were in danger of overshooting what most of its customers desired in a device. The iPhone was a prime example. As the analyst Horace Dediu said in a discussion with Christensen, “We cannot get better-resolution screens than we have today with retina because our eyes cannot perceive any improvements. We don’t have improvements that we can do in terms of size because they won’t fit in our pockets. We don’t have improvements that we can see in terms of memory because, frankly, we cannot consume what’s on the device before the battery runs out.”
Even if Jobs were still around, this would have been a challenging situation. Many considered Apple to be a disruptor to itself as well as other industries. But it was debatable whether it had truly encountered a disruption like Android in recent times. Apple offered multiple versions of the iPod at various price points, but its intention with the lineup had been to sell them all to every customer for different uses. The iPhone arguably disrupted the iPod business, and the iPad the Mac business, but profit margins for the products were higher than or about the same as the categories they cannibalized.
Tim Cook was a master of spreadsheets, not innovation. Since Cook had taken charge, legions of young MBAs had been hired to help feed the new CEO’s love of data crunching. For Christensen, that was a huge red flag.
At Sony, things began to crumble after Morita’s departure in part because it too began relying on professional managers who used data and analyses to help them make decisions about product development. To be fair, it was easier for founders to think radically because they had the moral authority to take such risks. Those who followed in their stead had to justify their actions more than their predecessors ever did. The best way to do that was with evidence. When Jobs left Apple the first time, its CEO, John Sculley, discovered that he was held more accountable for his actions than Jobs.
“You can do things as a founder that you can never do as a hired manager,” Sculley recalled.
Managers like Cook also tended to overly focus on profits, the one thing that Jobs downplayed. That, in Christensen’s opinion, was what had made Apple exceptional. “Instead of having a profit motive at its core, it has something else entirely,” Christensen had noted at the time of Jobs’s resignation. “Many big companies like to pretend this is the case—‘we put our customers first’—but very few truly live by that mantra. When the pressure is on and the CEO of a big public company has to choose between doing what’s best for the customer or making the quarter’s numbers . . . most CEOs will choose the numbers.”
Haunted Empire: Apple After Steve Jobs Page 22
