All companies struggle with the simple question: How do you get noticed in a world of increasing clutter, make a sale and, finally, retain customers? Additionally, today, many businesses—from media to retailing — find themselves threatened by the digital storm. How do you fight cheaper, or free, options from ruining your business model? The commonsense response is: Keep improving the product quality and spend more to market your product.
Bharat Anand, a Harvard Business School professor of Strategy, in a new book, The Content Trap, argues that this approach is wrong. The solution to the problem of a slowdown, or becoming extinct, lies in recognising, exploiting and creating three kinds of connections: user connections, product connections and functional connections. Perhaps, nothing explains this better than the history of Apple.
In one of the most stunning turnarounds in corporate history, Apple came back from being a struggling computer-maker with a 3% share in the personal computer (PC) business and a $1 stock to become the most valuable company in 2011. Everyone knows that this is attributable to its three ‘insanely great’ products, as Steve Jobs, the founder of Apple, liked to say. These were: iPod, iPhone and iPad reflecting world-class innovation, ease of use and gorgeous design. These features were backed up by brilliant marketing.
According to Anand, these are appealing explanations, seemingly self-evident. But they are not sufficient, owing to an inconvenient truth, exemplified by Apple’s market success across three product generations. In Mac computers it has less than 10% market share but more than 30% in phones and tablets. iPod had market share of 70%.
Insanely great products have been a feature of Apple’s corporate history, ever since it was founded, in 1976. So, why did it struggle for 25 years, between 1976 and 2001? Insanely great products are no guarantee of corporate success, writes Anand. Thinking that they would be is a mistake Apple made during its early history, by focusing on that aspect at the expense of all else. Many media companies too have made the mistake, convinced that if they produced great content, everything else would take care of itself. This mistake is the ‘Content Trap’.
Starting with the 1984 launch of the Mac (Macintosh), Apple went head-to-head against PCs which ran Microsoft’s operating system. Macs were easier to use, more stable and cooler. Apple introduced its famed graphical user interface (imitated from Xerox) several years before Microsoft’s version. And its advertising was memorable: its 1984 “Big Brother” Super Bowl commercial aired only once during the game, and never since, remains one of the most-watched television ads in history. Yet, for two decades after the introduction of the Mac, Apple’s world market share in PCs declined steadily, touching just 1.9% in 2004. Its highest market share was 15%. Everyone else used PCs embedded with Microsoft’s bloated clunky software. Why? User connections and product connections.
“A user’s willingness to buy a personal computer depends primarily on two things: How easy is it to communicate and share information with others—friends, family, co-workers? And what is the range and quality of compatible software applications? Without those connections, a computer is virtually useless. Other features surely mattered—price, design, color, and marketing—but none so much as how many other people use that type of computer.” Apple overcame this with iPhone and iPad, where user connections did not come in the way of its insanely great products.
The second reason was product connection, more precisely ‘product complements’. To understand complements, go back to the case of Mac. In the words of Anand: “Hardware without software is useless. Treat the two as separate profit centers and neither has an incentive to price low enough to stimulate the complement’s sales. Keep third-party software developers from creating applications to accompany your product, as Apple did, and you're unlikely to succeed. In 1985, the Mac commanded only a small fraction of the applications available on the PC, and this dynamic only worsened over time.”
But iPod grew to command more than 85% share in MP3 players, thanks to Apple’s innovation and vision in introducing an MP3 player into the market, engineered to take advantage of increasing interest in digital listening. “Except, the iPod wasn’t the first such device on the market: RCA’s Lyra, Creative Labs’ Nomad, and Diamond Multimedia’s Rio X, among others, preceded it, and in some cases were more technologically sophisticated than the iPod,” reminds Anand. So, how did iPod, coming late to a market, where a six-month head-start can be crucial, beat its rivals?
“The reason for the iPod’s early success came in large part from the availability of its software complement, iTunes. Buy another MP3 player and you’d have had to go to a separate (and often obscure) site to download music. Buy an iPod and the process was simple: Go to the iTunes store, peruse more than 200,000 songs. One click and a song was transferred to your device. Steve Jobs had spent months negotiating with the major recording studios to ensure that on the day the iPod was launched, it had a song library to ensure its value. And the system was open: iTunes software could be installed on a PC, making the iPod compatible with the largest computer platform. Apple’s ability to produce a great product was not the only game changer during the last decade. Its ability to manage complements was.”
This book is brimming with such examples—from talent management agency IMG to the completely contrasting digital strategies of The Economist and Shibsted of Norway, New York Times, Star TV’s Hotstar, Tencent which is the Facebook + Whasapp of China, and so on.
User connections: This explains why the New York Times paywall was effective in 2011, although earlier paywall efforts by the paper had failed. User connections also clarify why digital may not be the real threat for book publishers and cable operators. And they point to why fledgling start-ups, such as Tencent, have grown in a decade to become among the most valuable firms on the planet. Why is it that Airbnb, Facebook, Google and others have created billions of dollars of value without creating content? They have leveraged connections.
Unfortunately, managing user connections doesn’t come naturally to companies. Companies may spout jargon such as user-centricity, but “the center of gravity in organisations tends to be products, not users.” If you are product-centric you will miss the wood for the trees. The value of newspapers is not in news; it is in classifieds. The real value of cable operators was seen to be in channels, but their real value turned out to be pipes, delivering broadband connection. The value of PC manufacturers can be ease-of-use, but the real value is in their inter-operability—being able to connect to other PC users. “Success comes not just from creating content; it comes from Creating to Connect,” writes Anand.
Product Connections: The author gives numerous examples of creating value from product connections. The music industry experienced a revival not by propping up prices, fighting pirates, or making better music, but because live performance took off. Mark McCormack enjoyed great success in the “fragile arena of talent management” not by figuring out how to identify great talent, but by creating new businesses and markets that were connected to its core product. “Once you embrace the idea of product connections, the expansion of tire companies into restaurant guides or of theaters into childcare seems not only logical but necessary.” His prescription, expand businesses to see connections, not stay narrowly focused.
Functional Connections: Functional connections are connections between choices themselves, which allow firms to differentiate themselves. Wal-Mart has had a well-known strategy of starting new stores in rural areas, doing away with regional offices (saves 2% of overheads), setting up a cluster of stores (no, they did not cannibalise on each other) and not spending money on improving the ambience of its stores. Functional connections are so strong in Wal-Mart that its model, though well-known, has been hard to replicate. The fastest-growing brokerage in America is Edward Jones. Its strategy is a series of things it will not do: no trading in own account, no selling complex products and no large hordes of advisors who remain largely anonymous. It gets away by charging $100 per trade.
This is a great book, a must-read for all business people and strategists in any organisation. The most important takeaways are: one, strategies must be rooted to your specific context; two, saying no to things that are not relevant to you; and, above all, knowing your customers, what they want and aligning your organisation to deliver it in a unique way.