Jobs made Apple great by ignoring profit

By Clayton Christensen
August 29, 2011

By Clayton Christensen and James Allworth
The opinions expressed are their own.

Steve Jobs retires as the CEO of Apple with a reputation that will place him amongst the pantheon of history’s great global business leaders. Many people have written about what makes Jobs and Apple special, but I think they’re missing what truly set him apart. Jobs has succeeded by eschewing the one thing that most people view as the raison d’être for companies — profit.

When I left the industry to come to academia 22 years ago, it was driven by a set of questions that had troubled me for some time. Why was it that the best run companies in the world — companies that have had incredibly smart leaders, following carefully detailed plans and with tremendous execution ability — reliably seem to come unstuck? The answer to this question is what has become known as the theory of disruption.

In a cruel twist of irony, the pursuit of profit — something that Wall Street pushes so hard — is what leaves companies open to being displaced. As they grow, their ability to find opportunities that are big enough to sustain their growth is reduced. They become myopic; they listen only to their best customers. They focus disproportionately on their most profitable products, and strive to improve these the fastest.

The American auto manufacturers have suffered at the hand of disruption in the past few decades; they focused on their most profitable vehicles, and abandoned less profitable markets when low-cost entrants emerged. The Japanese came along with their smaller, cheaper vehicles; the Big 3 retreated upmarket all the way to SUVs and trucks. It was not long before Toyota was winning the sales race. Now, the Japanese are going through the same process, fending off the Koreans.

In short, disruption describes how the incumbents move upmarket, and leave the bottom of the market completely open for scrappy upstarts to enter. It explains the rise and fall of many great companies.

But there has always been one company that doesn’t follow that pattern. At some point in my class every year, a student raises his or her hand and asks: “What about Apple? Aren’t they a high-end, upmarket player? Why haven’t they been disrupted?”

It’s a great question. Despite being perceived as a premium, high-end player, Apple under Job’s leadership has not simply managed to avoid being disrupted by others, it has disrupted entire industries — many of them. Even more impressive, it’s disrupting itself.

I have come to the conclusion that what has made Apple so different is that instead of having a profit motive at its core, it has something else entirely. 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.

Apple never has.

As paradoxical as it is that the pursuit of profit is what causes the long-term failure of companies, I believe that Apple’s lack of focus on profitability has actually made it one of the most successful companies in the history of capitalism.

The iPod was the first indication that they were, in fact, thinking different. Here was a personal computer company, used to selling $2,000 computers, willing to take a risk on a gadget that would sell for a fraction of that price. Most big companies would not invest the time and energy to develop a device that was not nearly as profitable as their existing products, in a market that did not even exist yet. This sort of endeavor is typically the domain of start-ups. If Apple had done what most big companies do: sit down, hire some consultants to do a profitability analysis, and relied on that to make the decision, I seriously doubt that the iPod would ever have been built.

Yet build it they did, and it was the first in a string of successes where Jobs tore up the usual management playbook that leads to companies losing to disruptive competitors.

But what may be most notable is how Apple is in the process of disrupting itself right now. You almost never see this happen. The iPad — Apple’s most recent success — is disrupting the PC industry, and by extension, its Mac business. The tablet computer is going to do to the PC what the PC did to the minicomputer. Most companies cannot bring themselves to make decisions that result in the market for their existing core products being completely destroyed. When they consider it from a financial perspective, it just doesn’t make sense to create new products at the risk of jeopardizing your profitable, existing products. Don’t do it. It’s exactly that fear that has led many great companies to leave themselves vulnerable to disruption from others.

But it hasn’t affected Apple because that’s not how the company sees the world. Profitability isn’t at the center of every decision. Apple’s focus is on making truly great products — products so great that its own employees want to use them. That philosophy has made Apple one of the most innovative companies in the world.

Steve Jobs’ legacy isn’t the Mac. It’s not the iPhone. Or the iPad. His legacy is in the creation of Apple itself, reminding us that profit is not the ultimate goal, but rather a consequence of something greater.

53 comments

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Excellent article. Hopefully some CEOs will read it and learn from it but probably not.

Posted by bcp1854 | Report as abusive

One of the best posts on Apple I’ve ever read. Bloggers have consistently accused Jobs and Apple of making profit motivated decisions such as the choice to nix Flash in the mobile devices. I’ve always known that the opposite was the truth. Great companies are motivated by a Purpose and strive to make products that will improve the lives of others in some way. It’s a rewarding endeavor. And the irony is, when they do that — focus on doing great things for people — the profits take care of themselves. This is at the core of what makes Apple great and what made Pixar great. And it’s at the core of what makes the vast majority of corporate America fleeting successes, if that.

Posted by itot | Report as abusive

Just like hierarchy is second to ideas at Apple, profit is secondary to making value for money products.

Posted by JonathanJK | Report as abusive

Apple: Relevant for the last 4 years.

Posted by gowejifw | Report as abusive

How is profit not a factor if they chose to assemble products where labor is cheapest?

Posted by gowejifw | Report as abusive

what a juvenile analysis in this article.This is why journalists should stick to reporting news instead of opining on things that they know nothing about. Allow me to destroy all the arguments in this article.
Back in the late 90s, when Steve Jobs came back to Apple, Microsoft had a full and absolute strangehold on the market. Anything that Apple do didn’t matter.Remember those psychedelic looking Mac computers ? yeah those didn’t matter either. So Apple had to come up with something. It’s not like Apple exactly had any “profitable” line of products at that time. And they came up a good idea… the idea of integrating IPod media players with Music store. It was the matter of their survival as a company. With the trendy marketing campaign of iPods and iTunes they turned around the public perception of Apple. To the absolutely Jibberish argument that profits don’t matter… do you guys even know how much profit margin Apple charges on it’s devices? It’s the HIGHEST in the industry. If they really don’t care about profits, their devices wouldn’t be this costly.
Also, this implication that other companies make crappy products (because they value profits so much) is based on absolute jibberish.

Posted by MarioMano | Report as abusive

Look around you – find a ‘real’ entrepreneur. Ask them how much money they’re making. If their newer business is part of the 10% that’s been successful over a period of time, they may be making a tidy sum (or maybe not, but). Now ask how many hours it takes (currently) to make that kind of money and you’ll find that the great majority will reveal that you can make more on a per hour basis working as a manager in almost any Fortune 500 shop. Now if you want a real shock, ask them how many hours (or perhaps years would be the better time frame) that they had to work for subsistence wages in order for their enterprise to become semi-established.

Simple fact is – there is a name for people that do it just for the money. Those folks are called MERCENARIES (as well as at least one another name we tend to avoid using in mixed company) and the great bulk of successful entrepreneurs (not just Steve jobs) are not part of the mercenary demographic. And – neither are most teachers or people that manage or work for charitable organizations or people that spend their lives developing medicine for the body or the mind. The great majority of these folks do what they do because they believe that what they’re doing is something that really needs to get done. (Many times it’s just because they want to make their ‘better way of doing something’ even better and share it with other people.)

There is a pragmatic role for money of course, and this is where stellar figures like Steve Jobs are differentiated for the more pedestrian entrepreneurs. Folks like Jobs don’t just have passion – they have more passion than any one person could possibly stand to have without sharing it with every other person they can think of, and maybe every other person on the planet. And they know that in order to do that, they’re going to have to hire a lot of mercenaries to make it happen. Money then (actually business processes in general, of which cash flow is a significant part) becomes the vehicle by which the passion to share on a grander scale than would otherwise be possible.

I know that the mercenaries out there (and I know – there are a LOT of them out there – and they read Forbes and Reuters assiduously) are collectively shaking their heads at this, thinking that this is an insane proposition – and I won’t argue with you – it probably IS insane to forgo the rewards of a more mechanistic existence in exchange for lots of hard work and an unreasonably high chance at bankruptcy early (and perhaps many times) in life. What can I say to that except that it’s nice (for all of us) to live in a place where insane choices like this remain available as an option.

Posted by Decisionscience | Report as abusive

Interesting take – but only partially true.

When Jobs came back to Apple, actually everything he did was about getting the business back into profit.

He slashed the R&D budget, dramatically reduced the number of product lines [bye bye Newton, adios cloning the OS], and hacked away at the cost base.

His big hire at the time was not Jonathan Ive who was already there, but his now successor Tim Cook, who as COO sorted out the supply chain.

When the company got back to profit – it was on the back of falling revenues. Had they not have had this very short term focus on profit, they would have frankly gone out of business before they got to launch the great [and profitable] products that we all know [and in some cases, love].

Sed themselves so yes, they have disrupted themselves, but to say they haven’t focussed on profit actually undermines the enormity of Jobs’ achievement.

BTW – I wrote all of this up in my book: Creative Disruption [http://bit.ly/creativedisruption  ]

Posted by simon_waldman | Report as abusive

A lot of thoughts and concepts in one blog, although not sure the anecdotes prove the conclusion. Without reviewing 25 years of Apple financial statements, I’d guess that, in fact, Apple’s profitability has not significantly strayed downward from the S&P average. I’d also suggest that a mantra for Apple you deem as customer-centric – granted, its products undoubtedly reflect heavy user testing – I’d call an unwavering focus on technological excellence, if not arrogance. For decades this strategy resulted in what Porter would call a niche, differentiated position – high-margin, yet somewhat limited audience. Jobs wouldn’t waver as the Wintel oligopoly reached the mass market with interoperability and non-proprietary supply chain for lower priced PCs. For $1,000-$2,500 products, Apple was stuck. Instead of cannibalizing its Mac though (at least consciously though), they found that the mass market would, in fact, ‘overpay’ for a better user experience in smaller price point markets: enter the iPod ($49-$199), the iPhone ($99-$499), and the iPad ($499-$729), must haves style symbols even for the middle class. Apple had found a new, more elastic demand curve, a larger market volume, and huge growth and profits. So, either Jobs was myopic on product innovation, or, in fact, he had some very smart economists in his finance department.

Posted by jshomaker | Report as abusive

This is a bit of revisionist history. I don’t think the authors understood the context into which the iPod was introduced — portable MP3 players existed before the iPod, and it wasn’t just Steve Jobs who noticed that it could be a potential growth industry. He didn’t decide to make the iPod just because he thought it’d be cool. This is a lovely example of an academic taking his namesake theory and attempting to apply it (inappropriately) to a popular current event.

Posted by gradstudent | Report as abusive

When Internet begin, consumer satisfaction was the primary driver of AOL, Yahoo and many companies. But, larger organizations (picture the U.S. Government) get stultified, it happens every time, they begin to serve their own idea of what they should be. And ignore the idea they begin with …

Posted by Terryeo | Report as abusive

I’m a big fan of Dr. Christensen, but I’m a little disappointed with this article. Dr. Christensen has made a name for himself by being an incredibly deep thinker and noticing things others haven’t (e.g. the innovator’s dilemma). However, this article seems to be a little shortsighted. While Apple does fit nicely into the innovator’s dilemma paradigm, and has definitely been an incredible company that has changed the game in the mobile and music industry, Apple is far from proving that focusing on products as opposed to profit is what makes a great company. For every company that you could point out that has succeeded by focusing on products instead of profit, I can point out a dozen companies who have done just the opposite and have succeeded for a hundred years, compared to Apple’s mere few years of wild success. I could also point out companies who have likewise focused on cool, innovative products instead of profit and failed miserably.

Posted by Anmys | Report as abusive

I’ve always thought that Apple looks at profit much less than they look at competition.  Profit is assumed. Competition is blocked at every turn. Apple seems to me to have two brains: the business brain and the creative brain. In most companies the business stifles innovation. Jobs seemed to have a tremendous skill for balancing both-encouraging the talent of young developers and creative minds, while ensuring that their bread and butter business does not suffer. Other companies should learn from this model.

http://thebigapp.tumblr.com

Posted by Thebigapp | Report as abusive

Um no I can just as easily point to endless failures where profit was not the main focus but I have no doubt profit is the focus at Apple anyway. You only have to look at the overpriced products made in third world factories to see that they are chasing the almighty buck. I think where they outperformed the competition is in convincing so many people to buy their colourful toys for excessive prices. And line up in the rain for days to be the first to have it. That is the miracle here, these “iwhatever” things have not changed the world despite what worshippers think. The cellphone was invented decades ago (hint – Apple was not involved), the world changed then. Making it cool and adding apps did not change the world, just adding more time wasting activities to dull folks lives. Says more about the critical thinking skills of people than anything else, although it illustrates that you can never underestimate the intellect of the masses. But really I have had enough of this hero CEO worship now.

Posted by WithRespect | Report as abusive

in an interview in 2005 with All-Things-Digital, Steve Jobs synthesizes Apple’s focus in no uncertain terms: http://allthingsd.com/video/?video_id=14 098D2A-8586-483A-A1CE-8AB6721521D4

Posted by countlurpak | Report as abusive

Apple and Jobs did exactly the opposite from what the article implies. Apple at the beginning was a company as you’re writing in the article, focus on innovation and not profit, and it almost went bankrupt, until they focused on profit. Apple from a company that brings new ideas and new things, became a company going to ideas that others started and failed and having potential of extra cash flow from other uses(istores, itunes etc).IPod(Sony and other companies had mp3 players), IPhone (HTC and blackberry were in smart phones before apple), Ipad(Microsoft made a big project few years ago in making tablet PC and failed to it).As long as Apple can make new products to fuel it’s online stores, it will be successful. The problem of Apple is that the only new space to expand is the area that it has already failed Apple TV(were Microsoft, Apple and probably Google now ,have failed)

Posted by nikbeg | Report as abusive

It is true that many companies allow smaller, more-nimble competitors to “come up their tailpipe” and disrupt their businesses because they myopically focused on their current set of profitable customers rather than keeping an eye out for where things are heading (as their hungrier, smaller rivals must do), and Clayton covers this quite well in his excellent book The Innovator’s Dilemma.

But in this case, as others have mentioned, I think he’s stretching a bit to claim that mastering the innovator’s dilemma is why Apple and Jobs have been successful. Rather, it’s been because Jobs and his team have mastered the art (and it IS an art) of making their devices easily and incredibly usable and useful. Sure, being willing to disrupt your current business before someone else does anyway, helps (and will surely kill your business if you aren’t willing to self-disrupt). But that alone does not come even close to explaining how and why Apple has succeeded to the extent it has.

Posted by Randy549 | Report as abusive

I thought I might get some greater insight than “Steve Jobs rocks!” from the world’s foremost expert on innovation and growth. Oh well.

Posted by maestrobobcobb | Report as abusive

Thanks for all the great comments. From the top:

gowejifw: “How is profit not a factor if they chose to assemble products where labor is cheapest?”
Great question. I think they’re realistic enough to know that if you make a great product but the price is too high, nobody is going to use it. It can only be a great product relative to the price you charge for it, right?

Posted by jamesallworth | Report as abusive

marioMano: “do you guys even know how much profit margin Apple charges on it’s devices? It’s the HIGHEST in the industry.”
That’s the point, Mario! If they set out to try to charge with the greatest margins in the industry, they would have failed. Instead, they’ve created a string of products that provide the best experience… and as a result of that, the margins are high. it’s the order in which you set out. those margins enable them to do things like launch the retail stores, research new products, and so on. Most companies set out to go for the margins, and that’s why they don’t end up getting them.

Cheers

– james

Posted by jamesallworth | Report as abusive