5 Warning Signs to Watch for at Apple

I declined several media inquiries to comment on Steve Jobs and the impact his departure will have on Apple.  I did so because predicting the future of any company is always hard, but especially so for Apple where the secrecy is so severe.  For example, although Tim Cook has stepped in and out of the CEO role multiple times, the assumption seems to be that Jobs has retained influence on daily operations throughout the past three or four years. Clearly, Steve is quite sick and has been for a long time, which leads me to wonder to what extent Steve Jobs himself versus the IDEA of Steve Jobs has held stronger sway in Apple.  In any case, it is clear the Cook has been running a big proportion of day to day operations for years now.  But perhaps Jobs has had little more than symbolic influence for years.  If that is true -- and I have no idea if it is -- the odds that Apple will continue its impressive run might be a bit higher than pundits predict.  Regardless, in the short-term, my hunch is the capital markets have the right take on Apple (the stock is holding rock steady) as it has such great products, pizazz, stores, and operations that sudden trouble seems unlikely.

When I finally did a media interview for FT Germany yesterday, I got to thinking about Apple from an organizational and cultural perspective.  I was especially influenced by Adam Lashinsky's magnificent Fortune piece called Inside Apple.  The story that emerges from Adam's piece and other bits of information is that Apple's structure, work practices, and beliefs about how to get done are woven together to support a highly centralized model of decision-making, where very talented individuals and small teams are given specific tasks, individuals are held highly accountable for implementation, and extremely strong cultural, interpersonal, and performance pressures are present. 

Although I won't dig into the debate about trade-offs between centralization and decentralization, centralization works best when leaders face a relatively small number of important decisions, when they find ways to reduce the emotional and cognitive load on the relatively small number of people making major decisions, and tight personal, organizational, and cultural controls mean that decisions from on high are implemented quickly and without much question.  At its best, in a centralized system, there is much confidence in leaders, fast communication up and down, and relatively little time spent on dysfunctional politics (as there is no power vacuum, little second guessing, and severe penalties for ignoring or undermining orders from on high).   Although it is mighty hard to know exactly what is going on in Apple, this description seems to fit most stories and other information about the place under the shared leadership of Jobs and Cook. 

Assuming this is more or less accurate, I started wondering, what would be some signs that such a system was heading for trouble? Consider five:

1. The size of the board of directors starts to grow.  Apple has been criticized for having a board that is too small, only 7 people.  Smaller teams not only make better and faster decisions, and have better dynamics, a small board helps a senior management team move faster as there are fewer masters to serve and, on average, the speed and quality of their advice should be better.  If more members are added to Apple's board (especially if they get to 10 or more) it would suggest the board and top team are putting too many things on their plate, trying to please too many masters, and creating more complex group dynamics that will slow and complicate decision-making and implementation in both groups. 

2. The number of products expands dramatically.  When Jobs first returned to Apple, they had a huge pile of products -- he killed all of them within the year.  For example, as Jobs said ten months after his return, they had so many different kinds of Macs and other hardware that Apple employees couldn't even tell their friends which ones to buy (See this old 1998 video, especially minute 5:20 to 7:30 or so).  In contrast, look at the product line now, they only make one iPhone at a time, one iPad, and have a pretty narrow set of Macs too.  If you are going to run a highly centralized organization (as one friend of mine calls it "genius driven"), a smaller product line is especially important because, that way, the senior team need only track a relatively small number, which averts placing excessive cognitive load on them.  As I wrote here earlier, Jobs has argued that a hallmark of great companies is that they not only kill all the bad ideas, they kill most of the good ones too so they can focus on doing a few things well and not design inelegant products or experiences that reflect an effort to jam every seemingly good idea in someplace.

If Apple's product line gets bigger, especially a lot bigger, it gets harder to run the organization without delegating more major decisions.  In addition, and perhaps most crucially, when an organization has an irrationally large product line, when consumers and even insiders can't understand the logic, the real explanation often is that there are many medium power groups that have enough resources and influence to build their own hardware, software, or whatever BUT not enough power to stop others.  As a result, many medium size fiefdoms emerge, attention turns inwards to gaining political advantage over competitors, and away from what is best for the company and customers.  I saw this at GM before the bankruptcy.  This was also exactly the situation that Jobs faced when he returned to run Apple in the mid 1990s. My conversations with Apple insiders suggest that dysfunctional politics explained the big product line, not the strategy.  So a big increase in products -- and one that doesn't seem to make much sense -- would signal the team is putting too much cognitive load  on itself, moving to a more decentralized model that does not fit with other elements of Apple, and that people are spending more time battling to get THEIR product out and to kill others developed by colleagues instead of making a few INSANELY GREAT products.

3. Departures of senior executives.  One of the most consistent strengths of Apple that observers emphasize is the quality of their top team.  The same goes for their board too, with perhaps the star being the amazing Bill Campbell, one of the most renowned coaches and mentors on the planet and THE most desirable board member in Silicon Valley. Presumably, Tim Cook has had years to work with them, and the dynamics are healthy; I suspect one reason Apple is so effective partly is because of this stability.  When people start leaving any group, there is good evidence that the resulting disruption undermines group performance as it takes time for groups to absorb and learn how to work with new people.  I would be especially concerned if people who left are replaced by outsiders, as Apple clearly has distinct ways of thinking and acting that would take time for even the most able outsider to learn.  Moreover, when people start leaving a top management team at unexpectedly high rates, it often signals trouble: They are unhappy with their CEO and fellow executives, they are being forced out, or both. Note that there have been some key departures of senior executives  in recent months, so this is something to keep an eye on.  In particular, if head designer Jonathan Ive left, that would signal that something is terribly wrong.

4. Leaks to the press.  As an outsider who would like to know more about Apple, and who often talks to journalists that cover Apple, the difficulty of learning anything about the company just amazes me.  It took me a good four months to confirm that my former Stanford colleague Joel Podolny had become head of HR after hearing the first rumor it had occurred -- and of course Joel was too smart and well-socialized to answer the email I sent him asking him if the rumor was true.  While information does sometimes get out (consider Adam Lashinsky's great Fortune piece) a hallmark of Apple's culture is that people in the company take secrecy so seriously -- especially when it comes to forthcoming products and release dates (the current secrecy around the iPhone 5 being a case in point).  I have friends who work at Apple, not just Joel.  It is amazing to see what happens to them when they go to work there.. they stop talking, they won't return emails, and you learn -- if you do run into them -- not to ask them about anything sensitive.  After all, should they slip and tell you, they are putting their own jobs at risk.  Now, such paranoia, although unattractive in some ways, does have advantages in that competitors are kept in the dark and consumers don't really know when an Apple product they buy will be outdated.  Apple has been able to do an especially brilliant job of tweaking production levels (thanks to Tim Cook's amazing supply chain) and pricing so they can squeeze the most out of existing but soon to be outdated hardware and software.  Perhaps even more important, Apple's infamously effective secrecy is a sign of fantastic cultural control and individual commitment to the company. If we start seeing more leaks than in the past, it signals the strength of the bonds among people are weakening and their fear of breaking this most sacred of Apple commandments in waning -- that Apple's carrots and sticks aren't working as well as in the past.

5. Acquisitions, especially big ones.  Just this morning, I was reading some stories quoting management professors who predicted that Apple is sitting on so much money that they would probably go on a shopping spree and buy a bunch of companies.  If this happens, I would really start to worry.  Yes, small strategic acquisitions to bring specific people or specific technologies that Apple needs to move ahead are probably necessary and wise.  But if you look at research on acquisitions, especially big acquisitions, not only do they tend to fail, they do a bunch of things to organizations (especially senior teams) that would be especially deadly for Apple.  They distract leaders from the day to day operations of their firms, increase the overall cognitive and emotional load, bring in different and change resistant subcultures that are usually harder to transform than senior executives predict, they result in additions (and subtractions) to the top management team and board of directors (and thus create the group dynamics problems outlined earlier), and often broaden the product line (The Compaq/HP merger being a case in point).  As such, it seems to me that doing a big acquisition -- or worse yet, a stream of them -- would be an especially efficient way to undermine Apple's seemingly magnificent structure and culture.  Apple got big by doing a fairly small number of things very well and by doing them for themselves.

As I said at the outset, it is impossible to predict Apple's fate.  I would speculate, however, that regardless of whether all or none of the things above happen, the best bet is that Apple will slip a bit in the next decade.   One reason is simply regression to the mean, that things even out over time, so extreme outliers in any distribution tend to drift toward the average.   There are some forces that helps this process along in very successful companies.  As my colleague Jeff Pfeffer likes to say, whether it comes to a great restaurant or a great technology company, the inevitable distractions, overload, outside scrutiny,  arrogance, confusion, and fear of screwing things up (rather than focusing on making things better and better) mean, all too often, that "success ruins everything."   Regardless, regression to the mean seems to happen in most or all systems where large variance in performance is seen.  Certainly every high flying technology company that ever existed has eventually drifted toward the middle or bottom, at least for awhile.   Even the most enduring, such as IBM, have gone through some hard times and, of course, Apple had some mighty tough times in the mid 1990s. 

Meanwhile, I confess that I hope Apple continues to be great and become greater.  If the iPhone 5 is as cool as I hope, I will get one.   My old 3GS is still running strong, but I don't think I will be able to resist.  About a year ago, I had dinner with design guru Don Norman , who was once a senior executive running advanced development at Apple,  Don was quickly fired when Jobs returned.   Don, who is smart, charming, and has a sharp tongue, noted that Jobs' decision was understandable, he just wished that Steve had been a little nicer about it.  Don -- who owns both a Droid and iPhone -- made an interesting comment.  That you could argue all day about the technical pros and cons of each phone, but he pretty much always grabs the iPhone because it is just more fun and that "fun thing"  is a reflection of Steve Jobs' and Jonathan Ive's combined genius: Something no other technology company seems to ever figure out quite so well or so consistently.   If Apple can protect and keep spreading that human magic across its products, and keep running that amazing supply chain, nothing that any of us say will matter.  Their greatness will persist.

Comments

[Dyson]

Great article. Lifelong Apple user, here's hoping they stick around.

[Alexander Kjerulf]

As for warning sign #5: Here you go!

http://www.chiphazard.com/2011/09/11/apple-acquire-dropbox-800-million/

Apparently Apple tried to buy Dropbox...

[Tonyt787]

Never mind the iPhone 5 what about the iPod touch? Wehave not seen any convincing rumours about a new model this year and we are near the traditional time for an event. Could it be killed and replaced with a sim free iPhone. Also there are rumours of an Apple made TV so will we get apps on atv?

[Ally]

I loved reading this. Thanks. Such an interesting pov- as usual.

Made me wonder how the Post Jobs Era at Apple will compare with Post Welch at GE?

[Jacob Weinfeld]

Interesting points. My co-workers debated Apple this week on our blog http://www.collectiveinktelligence.com/

One contends Apple will be fine without jobs, while the other believes that they are doomed to a slow decline due to some of the same warning signs you pointed out.

[Melissa P]

I've been following this news story and find it very interesting. Thanks for sharing!

[Sheng]

Very interesting read, indeed.

[Joe Marchese]

I had a similar view on Apple in my blog when the Fortune story ran: The Leader or The System?
http://wp.me/pCoO8-24

[Matt May]

Wonderful, thoughtful insight Bob, thank you!

[Michele Renda]

Nokia... I think this was the best example ever seen.

It is very strange to see how a company that had the Apple feel (still there are a lot of Nokia fans), lost all in so short time.

[Denilson]

"when an organization has an irrationally large product line"
Hey, Nokia, I'm looking at you!
Sony Ericsson, you are not too behind either!