Case study. Mastering the product turnaround.
Concept in brief.
Nailing the turnaround is one of the most valuable skills for a product leader. Windows Phone, webOS, and Yahoo each failed to meaningfully shift their market position in a winner take all market. Apple, uniquely, not only survived but thrived after beginning with less than 4% market share. In 2020 the company still has not regained 10% of the PC market. So how did it survive? Despite a weak market position, Apple survived and thrived because it stopped focusing on the broader market and developed and nurtured a dominant market position with a valued customer segment.
Concept in action.
- Reduce cash burn and extend runway. Cut initiatives aggressively to reduce the resource drain on the organization and buy the organization time to nurture a turnaround.
- Build a base. Build up your “base,” a customer segment your product dominates versus competitors. You won’t be able to win with a slice of the market; you must “win” a market segment to leverage and…
- Sell (attach) one more thing. When you have a trusted relationship with a customer segment, you can leverage that relationship overtime to sell one more thing.
In the late ’90s, a confluence of factors: Moore’s law, Wintel alliance, Windows 95’s native graphical user interfaces, and the internet brought the put the personal computing revolution in full swing. Dell Computer Corporation rode this wave like no other to a fast0growing path to market leadership.
When Steve Jobs took over as interim CEO of Apple in 1997, Mac OS stood at 4% market share((Its market share fell from 12 percent, which had made it the leader, to 4 percent, which made it an also-ran. Apple had lost $1 billion in the past year and seemed on a course to lose billions more. For years, the CEOs—first John Sculley, then Michael Spindler—had been trying to sell the company. They shopped it to the big players in global electronics—Philips, Siemens, Kodak, AT&T, IBM, Toshiba, Compaq, Sony—but they couldn’t find a buyer. Deutschman, Alan. The Second Coming of Steve Jobs (p. 39). Crown. Kindle Edition.)), a rounding error in the PC market, and no second act within sight.
Michael Dell, founder and CEO of Dell, had this advice for Jobs: “I’d shut it down and give the money back to the shareholders.”((https://www.cnet.com/news/dell-apple-should-close-shop/))
We know how this movie turned out. But even as it happened, it didn’t look like much of a turnaround.
Steve Jobs churned out hit after hit, and unless you studied closely you might have missed the how Apple Computer became a tech industry titan. Much of Apple’s turnaround is documented, but little has been analyzed beyond the glitzy launches
When the iPod launched, business news focused on the brilliance of how Apple disrupted the music industry. When the iPhone launched, the iPod was yesteryear’s news, and the tech press could only focus on the smartphone “war.” Presently Apple’s ascendant service revenue in services is the headline du jour.
But, before the iPod, before the iPhone, before the App Store, before Apple Music dethroned Spotify, there was Apple, Steve Jobs, and a paltry 4% market share. So how did they do it?
Steve Jobs returns to Apple.
“This company,” he said, “is in deep shit. But I believe if we do some simple things very well, we can save it, and we can grow it. I’ve asked you here today because I need your help. But let me tell you first what I’m going to do. My side of the bargain.”
With the pen, he drew 13 or 14 boxes on the board telling us that each box represented a project into which Apple had invested millions and sometimes hundreds of millions of dollars. With the exception of the Newton, which was designed to turn a person’s handwriting into typed text, most of the names were unfamiliar to us. They were names such as Cyberdog, OpenDoc, G4, iMac.
One by one, Jobs struck a line through the boxes. “In the past few days,” he said, “I’ve killed this one, and this one, and this one…”
When he had finished, only two boxes remained.
Turning to face us again, he said, “We’ve got to go back to doing what we do best.” As he paused, I found myself thanking God that he had said in plain English what his now silent marketing colleagues had attempted to communicate with many charts and mentions of core competencies.
I was no longer thinking about coffee. He was like coffee. The energy in the room was palpable. “The two projects that remain,” he continued, “are for products we’re calling the G4 and the iMac. They represent what we always wanted this company to be about; they’re technologically superb and visually stunning. And I’m going to bet the future of this company on them.”Excerpt from Perfect Pitch, 2007 by Jon Steel
This story highlights a masterclass on focus, pitching, and communication. But I want to focus on something else. Jobs put on a masterclass in cashflow management.
Features and product lines without a future cost your product and your company. They cost you engineering capacity as you build new features, trying not to break outdated ones, they utilize marketing resources as you try to create a narrative out of a hodgepodge of features. These features, products, and ideas also make it difficult to capture consumer mindshare, as customers struggle to understand what to make of your brand.
Jobs put on a masterclass in cashflow management.
You need to prune these features. Remove all the ideas your team does not have the resources to nurture to profitability. You’ll even need to prune your superficially profitable ideas.
Jobs’ first step was to manage the cash flow. Turning around a product and a company costs time, and time costs money. You can buy more time by better managing cash flows.
Cash flow is a combination of inflows (revenue) and outflows (expenditures). For teams that are already lean, you’ll need to focus on products, funding, and distribution channels that increase revenue. For products and companies with an established organization in need of turnaround—like Apple in 1997, you’ll need to focus on expenditures.
In his pitch, Jobs laid out a plan to reduce the number of initiatives that drew down its cash position and other resources. These actions bought the company time and flexibility for turning around its core business.
When undertaking a product turnaround, you never want to be in a position where your next idea must succeed. It forces you into unnatural acts, and a tendency to check in on the seeds you plant by digging it up every day to measure its growth.
Improving cash position by cutting has a dual benefit, it buys you more time, and increases the resources available to double down when you receive a positive signal.
To understand Apple’s next step requires looking at its 4% market share in a different light.
Let’s say you, and I decide to divide up US tax and land rights. On the one hand, you have the option to receive the land and tax rights to 96% of the country; or receive land and tax rights to 4% of the country.
But I need your answer. What’s your choice?
If you chose 96%, it makes sense. Common sense says 96% is far greater than 4%.
However, you need first to ask, “which 4%?” If you were to choose 96% blindly, you could find yourself having forfeited the rights to 90% of the nation’s GDP.((https://www.census.gov/newsroom/press-releases/2015/cb15-33.html https://www.statista.com/chart/18684/us-cities-by-gdp))
Another example comes from the automotive industry.
As of this writing, Tesla is the most valuable automotive manufacturer in the world.((https://arstechnica.com/cars/2020/07/stock-surge-makes-tesla-the-worlds-most-valuable-automaker/)) The company currently stands at 1.7% of the U.S. Automotive market share((https://www.statista.com/statistics/519579/market-share-of-tesla-in-the-united-states)). Toyota, the company Tesla just suppressed accounts for 14% of the United States market.((https://www.statista.com/statistics/249375/us-market-share-of-selected-automobile-manufacturers/))
In 2019, Tesla accounted for 29% of the US battery electric vehicle market((https://cleantechnica.com/2020/05/24/1-tesla-29-of-global-electric-vehicle-market-in-q1-2020/)) and close to 100% of the level 3 autonomous vehicle market.
Which 4% matters.
Apple did not have a random 4% of the market. Apple commanded a disproportionate share of the creative professional PC market. Their late 1997 ad campaign, ‘Think Different,’ reinvigorated that userbase((https://lowendmac.com/2013/think-different-ad-campaign-restored-apples-reputation/)) in advance of the August 1998 iMac launch.
Despite this effort, Apple’s share continued to retract as the PC market expanded. However, developers began flocking to the platform for the first time in a decade:
Over the past two years, particularly since the announcement of the iMac in May 1998, software developers have demonstrated renewed interest in the Macintosh platform. Since iMac was announced, approximately 5,000 new or revised software titles have been announced for the Macintosh platform. Additionally, Microsoft delivered a new version of their productivity software—Office 98: Macintosh Edition—in early 1998.Apple 199 10-K
Ten years later, during my time at Microsoft, Mac OS had not even approached 10% of the PC market and was still viewed as a non-competitor to many internally. However, belatedly, Microsoft realized that Apple didn’t have a minority of the PC market; instead, like Tesla and autonomous vehicles—Apple built a monopoly in a critical market segment, the premium PC market, and an evangelical relationship with the people who bought them.
Software developers that wanted to attract premium PC customers and this was just about every development team, created software for the Mac. Developers didn’t take much convincing because the odds were high that you were a Mac user yourself.
To turn around a business and a product line, you need to do more than develop a compelling platform for a customer segment. You need to build an indisputable 10x advantage versus alternatives options for that segment.
And Apple did just that. One more story.
The innovation of Apple retail
Steve Jobs wanted to bring customers into the store. He wanted a “lifestyle” store where customers could get a taste of the Apple digital lifestyle—and hopefully leave with a machine. One of the key early decisions was to locate the stores in high-traffic areas. This first decision proved to be the breakthrough but was initially universally criticized because popular locations would be expensive…
In an early strategy meeting with Jobs, Ron Johnson was presented with Apple’s entire product line: two portable computers and two desktop computers. This was before the launch of the iPod. Johnson was faced with the prospect of filling 6,000-square-foot stores with just four products. “And that was a challenge,” Johnson recalled. “But it ended up being the ultimate opportunity, because we said, ‘Because we don’t have enough products to fill a store that size, let’s fill it with the ownership experience.’” When Jobs and Johnson started thinking about the stores, they started with an unusual vision—to “enrich lives,” Johnson said. “When we envisioned Apple’s retail model, we said it’s got to connect with Apple. Very easy . . . enrich lives. Enriching lives. That’s what Apple has been doing for 30-plus years.”
First, designing the store around the customer experience is not the same as designing around the retail experience. Most retailers concentrate on how customers find and select items in the store, and then get them to spend as much as possible. But Jobs and Johnson asked themselves how the products would fit into the context of customers’ lives, their life experience. Johnson explained: “We didn’t think about their experience in the store. We said, ‘Let’s design this store around their life experience.’”Excerpt from Inside Steve’s Brain, 2009 by Leander Kahney
In the years following the iMac launch, Apple patiently built out the premium PC segment, the premium PC app ecosystem (Mac OS X), as well as a premium PC distribution channel with Apple Stores.
In short, Apple patiently developed and built its captive market. It built its base.
So what’s the next step after you developed a captive relationship with a lucrative customer segment? (What we’ll come to know as Distribution Power.)
You sell them one more thing.
Introducing the iPod.
The iPod, an ultraportable MP3 player((https://www.apple.com/newsroom/2001/10/23Apple-Presents-iPod/)), was designed as a Mac companion and remained so until two years later.
The strategy to give the team more runway((runway is a business operations term, which refers to the time a business or initiative has to show it can ‘takeoff’ (as in airplane runway) before running out of funding or support)) was vital to Apple’s survival. The iPod launched at the beginning of the 2002 fiscal year. Under a different leader, you can imagine a 2003 executive team review—”ok, we’ve been distracted by this iPod thing for long enough, our Mac volume is stagnant, and it pays the bills, it’s time to refocus on our computing business.” Upon reflection, while the iPod began as the one more thing to sell to Mac users, the Mac became the one more thing to sell to iPod users.
Through a new drumbeat of annual iPod launches, Apple created a continuous stream of market speculation about what products and markets the company would disrupt next. And with it, it attracted increasing customer segments.
A few years later, another introduction would follow. And it all resulted from a turnaround, that defines the blueprint. Even with a paltry 4% market share, the right product leader can move a market.
Most business analysis of what made Apple’s turnaround successful focuses on hardware and software integration. What’s missing is that Steve Jobs executed the same vertical integration strategy at NeXT((Steve Jobs’ unsuccessful startup, founded after leaving Apple in 1985, Apple later acquired the company which brought him back to Apple in a leadership position)). Yet, developers were not interested in developing applications for NeXT.
The difference between NeXT in 1996 and Apple in 1997 is NeXT had no base. So despite cutting edge hardware and software, they simply weren’t able to grow because they had no preferred relationship with any meaningful customer base. Their sales were random and not concentrated, diluting the company’s ability to attract developers. As product leaders, our tactics are only valuable insofar as they enable us to build a base. With NeXT Computer, software and hardware were not sufficient to establish a dominant market segment. In another context, the brand, existing relationships, and new product innovations (iMac) coupled with software and hardware integration, provided just enough to reinvigorate Apple’s shrinking developer position.
Building a runway by cutting is hard. Certainly, if Steve Jobs wasn’t independently wealthy, due to Pixar IPO, have a forceful personality, and have the history as the company founder and industry pioneer, the decision to cut 70% of the product line would have undoubtedly cost him his job. The 3,000 laid-off employees certainly had advocates and would not have gone quietly.
Even with the writing on the wall that the company is in dire straights, cutting product line and product scope will cost you social capital, but it’s the only way to preserve resources needed for a turnaround. Help the organization understand, then earn support to make the hard decision.
Building a base
Many leaders make the mistake of defining their ‘base’ by behaviors, not the job customers want to solve or their identity. For example, Nordstrom, at times, referred to its customer base as Nordstrom shoppers, which didn’t capture enough of their behavior to describe their needs or lead to many inquisitions about what gaps they were missing.
Building for a base is different from building for personas. Personas can lead you in the opposite problem, building for divergent needs. Personas lead to a tendency to develop for “both” or target different features for different personas. A base comes from designing for a segment, for example, “fashion enthusiasts” and pursue their needs relentlessly until you have a dominant share of this market.
“Attaching” one more thing
The math on this is simple and easily ignored. If you have a healthy business, you can grow your business by 20% each year by finding 20% more customers or by generating 20% more revenue from your existing customers, by “attaching” additional services or products to your customers.
There is a truism that even your best customers have more needs than the needs you currently solve.
Find one more need. Attach one more thing.
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