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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simon_walden: “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.”

Absolutely true. You can’t have a business if you don’t have any money. If you’re about to go bankrupt, it’s very hard to focus on making great products.

I think what we describe is more an evolution, rather than “Jobs arrived and this is how it is”.

Cheers!

– james

Posted by jamesallworth | Report as abusive

gradstudent: “portable MP3 players existed before the iPod, and it wasn’t just Steve Jobs who noticed that it could be a potential growth industry”

I think you’re missing the point – it was the iPod that was successful. The others should have won; but Apple came along, doing what they do best – which is to make a device that they themselves wanted to use, rather than going after the market “because it was a big opportunity”. That difference in mindset is part of what makes Apple so different.

Cheers

– james

Posted by jamesallworth | Report as abusive

Interesting analysis. Perhaps it helps explain why there are so few great companies in the world as they stifle creativity and the pursuit of being the best for the sole pursuit of the buck. But this alone does not explain such incompetent dinosaurs for instance like BP. The pursuit of immediate profits has imposed a very short range vision usually no more than a year at many companies just enough to get the stock price up and for the CEO and major players to cash out. We can thank Wall Street for this myopia.

Posted by seattlesh | Report as abusive

The article makes a good point, but as others have pointed out, focusing on love instead of profit was running the company into the ground. However, keep in mind that Apple fired Steve Jobs at one point, which is when they became very conservative and almost failed completely. Jobs _came_back_ and immediately started slashing pet projects, laying off huge numbers of people, and focusing on the “masses before classes” by introducing the iMac.

His genius is not derived from inattention to profit, it’s derived from minimalism and austerity. Sometimes, their software is so simple that it doesn’t even give you everything you need! Same for hardware (lack of USB ports, etc). But in the end it always gets the job done because it makes you focus on what’s truly important. Big fat rich bloated companies (and their leaders) simply do not have the self-discipline to focus. They don’t have the discipline to do what they really believe in. Jobs’ passion lies in simplifying the world – the complex world of computers, software, and the internet. In a world that’s one big giant tangled mess, simplicity is the better mousetrap, and the world clearly beat a path to Cupertino. All because of Jobs’ personality – his personal focus on minimalism and simplicity, trying to tame a sometimes messy and complex life… and turning that personal drive into a corporate philosophy that has changed the world.

But to go back to the original point, all of this wouldn’t be possible without the money. Simplicity was the product, derived from his personal philosophy, and he realized – when looking at that tangled confused world – that people would pay for something that would make their world simpler and easier.

Posted by Nullcorp | Report as abusive

“…reminding us that profit is not the ultimate goal, but rather a consequence of something greater.”

Well if profit were not the goal wouldn’t Apple be selling its products at cost? Wouldn’t Apple be using that $75 billion in cash for something other than simply hording it? I’m sorry but any credibility this article might have had was completely tossed out the window when the writes says something akin to, “you aren’t wet, now stop standing in the ocean.”

Please, Apple has always been about profit… Apple has no internal foundation for philanthropic activity, it doesn’t even bother to match employees giving to non-profit organizations like 99% of other Fortune 500 companies…. If Scrooge were alive he would envy Apple for its miserly ways….

Clearly the writer is a worshiper of Apple and can’t see the truth smacking him across the head…

Posted by Yirmin | Report as abusive

Don’t really agree with this at all. Wasn’t Steve who once said “True artists ship”. It’s not about making a point, it’s about making a profit. Especially true from a company that hasn’t paid a dividend in how long.

You mention the iPod was such a progressive leap forward. What was the profit margin on that? As far as I know, iPads and iPhones have the best profit margins in the industry. Perhaps you have to sell 10 phones instead of 2 computers, but if the margin is favorable, does it matter?

Looking only at absolute profit instead of profit margin seems very amateurish.

Posted by Andao | Report as abusive

We can try to say all the words we can to hype Apple such as “the best experience” etc etc, repeating what we’ve heard others say and not using our own minds. There are some PC makers that give you a great experience also. Now I admit, I am an Apple fan, always have been for many many years and they make great products hands down. I use PC also, although my preference is Mac. But to say that Apple is not interested in profit is to be naive to the highest extent. Anyone who owns a business knows that if you can get cheap labor, it will allow you to mark up your product regardless of what it might be, to maximize profit. Apple makes money under the cloak of “cool” and great marketing and advertising which is key. You will NEVER see a Macbook Air at 599.99, ever …lol. We pay for the construction and parts and time, but not the labor. Do you think that any of the money from the high costs of the products go back to the laborers overseas?? No, it goes in Apples “pockets”. No we pay for “cool” because this product is “cool”. If you do your homework, alot of this technology is not new. Asia had alot of this technology in “motion” before Apple, it just never made US shores, so of course how would we know. When Apple first introduced the iPhone, folks were in a frenzy to buy them. Some buying two at one time. Then the bomb was laid: a cheaper, faster iPhone. So the same people that brought the first one, put them on Ebay, and went and brought the other…Apple made a pretty penny. Same happens with the laptops. Example: One version in January, then the same laptop, just tweaked with addition specs, released in April…everyone buys it. This tweaked version could have be released in the beginning. This is America folks, its always about money. I don’t care how you disguise it, money is the bottom line, not concern for people or giving people the “best experience” lol…capitalism at its best and Apple is no exception to the game, and they are smart, even though i love Apple. Again, im not beating on Apple, but this is the real world, real business, it is what it is. For me, if this isn’t about profit, then it will have to be proved one day. I want to walk in the Apple store and buy an Air for 499.99 or a macbook pro 17″ unibody for 799.99, or 27″ inch iMac for 1100.00, yes slashed, PC prices. Then i will say I had “the best experience”. Until then, its Capitalistic “cool” business as usual.

Posted by Dahc | Report as abusive

Best Business article I’ve ever read. Now, if a large portion of American businesses put this thinking into practice our stalled economy would be in high gear in no time. Fat chance though as every consulting firm will advise them to go in the opposite direction.

Posted by GLK | Report as abusive

The worst thing a technology company can have is a non-engineering finance-geek becoming the CEO. From that day on, all the innovations in the company start to stop. Only one this such a CEO has in mind. Make profit and profit using tools like outsourcing, layoffs, degrade quality, etc.

Posted by vze | Report as abusive

If Apple ignored profits then why does it have $70 billion in the bank? And Apple has ignored markets. There is no mid range Mac. Sorry I can’t count the iMac that forces you to accept a glossy screen and also ties processor speed to screen size. I’ve used Macs for 18 years, never bought a PC. I really need to get a newer computer and would like to stay with Apple. but I want a computer that offers features that place it between the mini and the Mac Pro and Apple refuses to enter that market. I’m close to walking away from Apple because it is all about profit and it refuses to go after the less profitable mid range market.

Posted by BenVincent | Report as abusive

The company’s support that has driven me to the point of suing them is Apple. Obviously Mr. Christiensen never tried to deal with Apple from a large organization perspective. I’ll spare you the details, but Apple’s marketing of features for enterprise networks was clearly dishonest.

When the center of gravity of computing was the enterprise, Microsoft was ascendant. Since 2000 the center of gravity has moved back to the individual customer. Jobs deserves credit for taking advantage of this shift and populating an organization with people with complementary skills.

Posted by BondBore | Report as abusive

Interesting that the author spends a lot of time exalting Apple’s eschewing of profit, yet fails to include the one statistic that might prove (or disprove) his point: The percentage of price markup of Apple products versus those of other manufacturers. My guess is that Apples percentage of profit on all of their products is significantly higher than everyone else.

What Apple truly excels at is effective marketing.

Posted by SilentBoy741 | Report as abusive

Ignoring profit?

BAHAHAHAHAHAHAHAHAHAH

Have you seen just how much Apple marks up their profits? They charge an insane amount of money for basic hardware, slap a logo and a trendy design on it, and claim that it’s “forward.”
Look up a comparison of the cost of hardware (even for end-comsumers, not just bulk-buyers) vs. the cost to buy a typical PC vs. the cost to buy a Mac with essentially the same hardware.

Posted by Nope_ | Report as abusive

I prefer to believe Steve Jobs and Apple exemplify the followng. “New product and new types of service are generated, not by asking the consumer, but by knowledge, imagination, innovation, risk, trial and error on the part of the producer, backed by enough capital to develop the product or service and to stay in business during the lean months of introduction.” W. Edwards Deming

Posted by DemingFan | Report as abusive

Did everybody forget that Jobs rescued Apple from the $%^&*() from Pepsi?
Look at what has happened at H-P after Bill and Dave left and a bunch of B-school fools took over!

Posted by oldtechie | Report as abusive

((What Apple truly excels at is effective marketing.))

Actually, Apple “truly” excels in designing devices that feel sublimely luxurious to hold in your hands. That’s what everyone else is missing.

Posted by Anonymous | Report as abusive

Mario Mano makes some truly ill informed points.

Firstly lets get it straight, Apple has been a hugely successful (read profitable) because they understand innovation.
Secondly, if Apple didn’t have a profitable line of products before they diversified into iPods etc how have they survived with just computers for 20 years?
Next, he complains about Apples high prices yet it seems that the rest of the world seems to think they are okay as they have no problem in buying.
And finally it comes as no surprise that Apple has been a much more successful company than Microsoft. Market Cap Apple $361B, Market Cap MS $219B.

Posted by terryh2c | Report as abusive

It is well known that an Apple iMac almost always costs around twice as much as a factory-assembled Windows PC. The ratio is even higher when comparing to a self-built Windows PC. Apple products have always been ridiculously expensive for the service they provide. They haven’t eschewed profits at all; they’re simply good marketers.

Posted by flyingsphinxter | Report as abusive

IBM had the original monopoly folks and they decided to let others play. They don’t do that and nothing is as we see it today, absolutely nothing. From Apple to Microsoft and all points in between there would have only been Big Blue. Comprehend.

Posted by poeg | Report as abusive

Thanks again for all the great comments. Seems we have a few sceptics lurking about the forums; for more definitive proof of what it is we’re talking about in the article, I’d encourage you to jump over here and have a read:
http://tech.fortune.cnn.com/tag/steve-jo bs-resigns/

“… and only one person, the chief financial officer, has a “P&L,” or responsibility for costs and expenses that lead to profits or losses. It’s a radical example of Apple’s different course: Most companies view the P&L as the ultimate proof of a manager’s accountability; Apple turns that dictum on its head by labeling P&L a distraction only the finance chief needs to consider.”

A lot of people have raised margins. It’s important to understand that we’ve never said they’re running the company as a not-for-profit. What we’re trying to say is that the profit isn’t what drives their decisions – and this is what sets them apart. I’ll let Jobs himself explain:
“Apple’s goal isn’t to make money. Our goal is to design and develop and bring to market good products… We trust as a consequence of that, people will like them, and as another consequence, we’ll make some money. But we’re really clear about what our goals are.”

Cheers everyone – thanks again for all the great commentary!

– james

Posted by jamesallworth | Report as abusive