Your Executive Newsletter for July 12th of 2019.
A New Era of "X" for Apple, How to Track Your Growth Efforts and More (Executive Newsletter July 12th 2019)
Friday, July 12th, 2019
I received multiple messages from subscribers who were expecting the newsletter last week. I took the end of last week off in observation of the long July 4th holiday weekend here in the US.

I truly apologize to those outside the US who didn't realize that and kept their eyes peeled. Next time I'll let you know ahead of time. Promise.

Now, onto this week's newsletter.

Last Monday, Steve Jobs biographer and best-selling author Walter Isaacson shocked the world with a revelation we all knew about: Apple's Tim Cook is not a product person.

During an interview with CNBC Isaacson, who spent uncountable hours with the late Jobs as he was writing Jobs biography, remembered how Apple's then CEO criticized his handpicked successor.

"In my book, Steve says how Tim Cook can do everything, and then he looked at me and said, ‘Tim’s not a product person.’"
Well, nothing new here.

We’ve all heard great things about Tim Cook, but none of those has to do with him being a great product person, or a tech visionary.

He’s got great achievements under his belt streamlining Apple’s operations and minimizing costs, and as the CEO, he’s managed Apple’s balance sheet like a pro maximizing the company’s cash yield.

But the problem is, he seems to be betting bigger on Apple’s present than in its future.

During Job’s regime, Apple went through a design era that launched some of the most successful tech products in the history of humankind.

Jobs rescued the company he co-founded from marketing guys, and put engineers and designers back on the driver seat.

That’s how he gave Apple, a company that carried his DNA, a reboot.

Here’s a rule of thumb: If marketing and sales run a company, that may be an indication that the industry has reached its maturity, and that the company is treating its core business(es) as a cash cow (see my post on an industry’s life cycle for reference).

And that’s what happened to Apple back then before Steve Jobs came back.

He then shut down businesses, stopped making products that didn’t add value to the company’s bottom line, and pivoted the organization into other directions, one of which turned out to be extremely profitable: smartphones.

Smartphones offered Apple a grand opportunity to combine elegant design and high performance, qualities for which Apple had originally be known for.

So, in a sense, Steve Jobs took Apple back to its fundamentals, and the company became profitable again, commanding insane premiums on everything it sold from computers to earplugs.

Steve Jobs was a product person, no doubt. And he pushed Jony Ive, his head of design, to make his greatest creations.

This dynamic duo put a lot of power in people’s hands creating the greatest gadgets we got to know.

Here’s another quote from Isaacson’s interview that describes the Jobs-Ives partnership at work:

"Every day when Jobs was in the office in Cupertino, he would go at midday to that sort of big locked door that went to the design studio; be brought in and everybody else would be ushered out. And he would talk table to table with Jony. They would feel not just the phone but the plug. The jack, the way the wire coiled. Jobs at his core was a product person,"
They indeed, put a dent in the universe.

But Apple’s design era died on October 5th of 2011, along with Steve Jobs.

With Tim Cook taking over, the company shifted its focus from design and performance, to cash flow and efficiency.

Nothing wrong about it.

New management implemented new pricing models, memberships and other things that helped the company maximize cash flow from its current operations.

Product design and innovation were then left to continue a path of linear improvements.

Why taking risks with radical new things when we can make more money by doing more of what we already know how to do?

All they had to do, according to themselves, was making sure that the design team was happy and had everything they needed to do their jobs.

Jony Ive was not the challenged now, but the challenger, and he had to pass his ideas through people whose focus is on profitability and keeping costs down.

He wasn’t one of the guys anymore. A new sheriff was in town.

But shareholders were happy. Why not?

Probably Steve Jobs felt that he owed shareholders more focus on profitability when he picked Tim Cook to be his successor.

And boy has he delivered!

But the problem is that, at least from the outside, Apple doesn’t seem to be working on anything that would ensure its growth in the next decade.

They seem to have missed the AI revolution, were late to cloud computing, seem to be late for self-driving cars, and people don’t buy smartphones as often as they used to before.

Oh, and Siri sucks.

Oh, and Jony Ive is leaving.

Yes, a big pile of cash can buy your way into any new business, but profits at the level Apple is used to can only be achieved by pioneering something;

... by going from zero to one, not just stepping from one to two.

So, can you help me understand what can Apple do to remain as profitable as it has been during Tim Cook’s time in charge?

Please tell me, in words my grandma can understand, what can Apple be working on right now, that could pivot the company into greener pastures?

Because if you can’t explain that to me, I warn you, it could well mean that is time to sell.

So, if this is the beginning of the era of "X" for Apple, where X was "design" during Jobs, then what the heck is X now?

Because now there’s no Stevie to save you all.

Go bears.

How to Track Growth Efforts
Let’s talk about tracking your growth efforts and evaluating your results after the fact.

Unless you can say how much each effort is contributing to your final business success you won’t be able to get the maximum out of them.

You know, when Peter Drucker said that "What gets measured gets managed", he may well have been talking about growth.

If you understand how each business unit and product is contributing to your growth, you can double down on the things that are working, pay attention to things that are not, and find opportunities for improvements.

Some time ago I found a great tool to help break down and track growth efforts called the Sources of Revenue Statement, or just SRS, published by Michael Treacy and Jim Sims in their Harvard Business Review article Take Command of Your Growth.

Making the statement is pretty straightforward but its insights are very useful.

First, you start by tracking down the sources of new sales, breaking them down in whatever way you want to present them. In this example we do it as follows:

  1. New products: Sales of new products across all segments.
  2. New markets: Sales of core products into new markets.
  3. Revenue-optimization efforts: Revenues from initiatives to improve sales, for example new pricing models, memberships or premium access.
For the sake of the example let’s say that your sales for each of these sources during a given period are as follows:

Revenues from New Initiatives (numbers in Millions):
New products $ 10
New markets  $   7
Optimization of Revenues $ 2    
Total new Revenues = $ 19
Next, you calculate the revenues from your core business by subtracting the total of new sales (the $19 million above) from the total of sales that the business made during the period.

If sales during this period were $400 million for example, up from $347 million in the last period, it means that your core business contributed $381 million (which is the difference between $400 million and our new sales of $19 million), and with that information you can now complete the breakdown of the business’s top line.
Now, here comes the tricky part. When you look at the numbers above and say that your core business grew 10 percent (by going from $347 to $381 million), you may be tempted to believe that such growth resulted from a higher market share and your sales efforts, when in fact that growth may have been driven by a generalized market growth.

If you don’t understand how those numbers break out you might be taking credit for external factors and things that were market driven, not strategy driven. To adjust these numbers properly then, you must subtract the growth portion that was driven by general market growth.

For example, if you know that the market grew on average 14 percent during that period, you can then deduce that your current sales of $381 million include $49 million that were driven by the general market growth (which is 14 percent of the $347 million in sales you made over the last period).

That means that your core business in reality only contributed $332 million this period, which is a 4 percent drop in sales. Now you should be worried because instead of growing your core business lost $15 million in sales, a serious churn rate. At that rate it will take only a few years for the entire business to disappear.

That finding alone is a growth project on its own: track down what is driving customer churn and loss of market share, find ways to fix it and once done you’ll get yourself a nice bump in sales.

Loss of market share is a serious but usually systematic problem that affects companies sometimes irreversibly, and the causes must be researched with the care and attention of a mechanic checking his own beloved car.

Finally, you can use the numbers from this exercise to create a nice waterfall that shows how revenues break down for the period which is very useful to gauge growth efforts and reallocate resources.
You could probably make a similar breakdown for profits or net earnings if you had enough information to allocate costs and prorate some accounts, but this statement of sales can give us a good starting point to understand where our profits are coming from.

Enough for this week, checking out now.

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