Profit Share, Not Market Share

The big news this week was a report from Strategy Analytics on the worldwide smartphone market. In the report, analyst Alexander Spektor estimates that Apple generated $1.6 billion dollars in operating profit from iPhone sales in the third quarter. over the same time period, Nokia made $1.1 billion. There are two comparisons that make those numbers incredible.


While neither company started off making cellphones, Nokia has a 24 year head start on Apple in the market. Both companies certainly have a command for technology which puts them on equal foot, but we have to be amazed by the speed at which Apple has managed to create all the other parts needed to be successful in the market. Just consider the variety of ways they were able to leverage distribution through the Apple Stores, and all of outreach of the AT&T partnership to sell 30 million units since the 2007 introduction.

The second piece is even more amazing. Nokia is the market leader with 35% global share. Apple is able to generate $500 million more in operating profit with 2.5% market share. Two point five percent.

Bain & Company have been huge proponents of looking for profit pools rather than chasing market share. In The Breakthrough Imperative, partners Mark Gottfredson and Steve Schaubert list four drivers that have implication for profit pools:

  1. Everyday changes in customer preference and behavior (move from soft drinks to water)
  2. Innovations, both from within your industry and outside it, that drive longer-term customer shifts (shift from indie bookstore’s 20K titles to big box bookstore 200K titles to Amazon’s 3M titles offer more choice for customers)
  3. Changes in the bargaining power of customers and suppliers (Microsoft and Intel in capture most profits in PC value chain)
  4. Changes in the business environment (move by competitors to offshore manufacturing)

Apple clearly innovated to produce a device that was a quantum leap better than the competition creating a new profit pool for them. This also ties back to Nicholas Carr’s idea of top-down disruptive innovation, but here we have some numbers to show how powerful that can be.

Disruption from Two Directions

The book I have been recommending most over the last year is Clay Christensen’s The Innovator’s Dilemma. This is not a new book as the original hardcover came out in 1997.

The media has also been referencing the book as of late, in particular journalists from Wired Magazine. Clive Thompson also invoked the Dilemma in his article earlier this year on the rise of Netbooks. Robert Capps in his article The Good Enough Revolution for October issue mentions the book in reference to bottom up innovation.

Christensen’s thesis is that established companies are designed to take advantage of “sustaining innovations”, the sorts of ideas and inventions that create incremental improvements, and these improvements provide the inspiration for new products that better meet the needs of their existing customers.

These sorts of companies are ill prepared for “disruptive innovations”–game-changing technology or resource allocation that creates a new paradigm of performance. Disruptive innovations always offer inferior performance and higher cost at the start and incumbents disregard the developments because they meet neither the needs of their customers or demands of their shareholders. This is always the mistake.

Entrant companies, often the innovators themselves, are forced to find a new set of customers who value the innovation for a different set of reasons and this allows newcomers a small beachhead to operate from. As the performance of disruptive innovations improves faster than sustaining innovations, entrants are able to move into established markets, bringing with with them their lower cost structure. Incumbents are forced up market and out of their existing profitable markets.

The examples are numerous. Nucor started with low-quality rebar and went on to disrupt the entire steel industry with electric-arc furnaces. Amazon started with books and has gone on to disrupt retail as a whole using the Internet. Look at any part of the media industry and you’ll find disruptive, bottom up innovation.

Now consider Nicholas Carr’s alternate argument. In May 2005, Carr wrote a piece for Strategy+Business acknowledging Christensen’s work while suggesting another type of disruption–from the top down.

Carr provides equally compelling examples of disruption. Consider FedEx’s move into shipping. Their premium next-day offering bested both UPS and the postal service. This provided them a beachhead into greater package-delivery market. And while Carr’s uses the iPod in his essay, the introduction of the ultra-premium iPhone is an even better example of top-down disruption from Apple.

Here is Carr’s argument:

Innovative, topnotch products are usually very costly to produce. In the early stages of their development, only a small group of power users is able to justify their purchase. But production costs tend to go down quickly, as suppliers gain experience and scale and as the prices of the underlying technologies drop. At the same time, the broader market becomes aware of the benefits of the new product and increasingly open to embracing it. The astute innovator thus is able to use a high-end niche as an outpost for launching a raid on the broader market. The top-down disruptor simply follows the cost curve into the mainstream of buyers. In the process, it redefines the industry — and secures its own competitive dominance.

Christensen and Carr are both worthy of inclusion in your mental toolbox, as disruption from either direction can be a compelling strategy for companies to pursue.

Remember When?

Sergey Brin, co-founder of Google, made a surprise appearance at Web 2.0 a few weeks ago.

The part of internet lore that I had forgotten (or quite possibly never knew) was how little economic value there was search advertising at the start. No one was willing to pay anything for those text ads next to search results. Sergey compared it to remnants in today’s market.

Today, search advertising is a $10 billion market and accounts for roughly half of all internet advertising.

It is easy now to say that ads next to a list of things people were already are looking for would be a gold mine. When Google started, the market was saying ‘no’.

SXSW – James Surowiecki

I am listening to James Surowiecki’s talk on The Wisdom of Crowds.

Who Wants To Be A Millionaire?
Experts correct 66% of the time
Crowd correct 91% of the time.

Examples of tapping into collective intelligence:
Iowa Electronic Markets
Sports – predicted all 50 state and 33 of 34 senate races
HP – sales forecast
E Lilly – drug trials
Siemens – predict software development cycles

Needs for collective intelligence to work:

  • Method to Aggregate People’s Judgement (all people equal, capture collective)
  • Diversity – more diversity means smarter crowds (all people bring different perspectives)….investment clubs–male/female clubs did better single sex clubs…experts can’t see their blind spots…exceptions bridge players and weatherman…
  • Independence – you want to people to use their own knowledge and experience…when we work hard to reach consensus, you sacrifice the best decision…this is hard—humans by nature are imitators….reputation is important to all of us…if we do what others do, it is lower risk

Tags: sxsw2006

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What’s In a Name?

Chipotle Mexican Grill had their IPO last week and the WSJ ran a short piece on the titles that company leaders use.

The customer service manager goes by “Manager of Duct Tape and Plungers”. The guy who runs creative-services is the head of “Special Weapons and Tactics”. Finally, the company’s spokeman goes by “Director of Hoopla, Hype, and Ballyhoo”.

That probably gives some indication of the kind of place it is to work. 🙂

Milwaukee looks good in the Fortune 500 looked through the recent Fortune 500 issue and found the Milwaukee and Wisconsin fared pretty well.

  • Wisconsin has 25 Fortune 1000 companies
  • The big names are Northwestern Mutual, Johnson Controls, Manpower, Kohl’s, Harley-Davison, Rockwell, and Wisconsin Energy Corporation.
  • Johnson Controls is the top ranked Wisconsin company at #71
  • In looking at metro Milwaukee, the area ranked #5 when you consider population and number of ranked companies.

Milwaukee Companies Taking a Beating

It has been a rough couple of weeks for Milwaukee-based companies.

Things started with Harley-Davidson. On April 13th, the motorcycle maker announced earnings were up 11% but that sales were flat. They lower 2005 earnings expectations and said they would cut production. The stock has dropped 22% since the announcement.

Yesterday, the highly recognized Midwest Airlines announced losses of 91 cents per share for the first quarter. They said fuel prices are up 36% over last year. On a positive note, they saw revenues grow almost 11%. Midwest’s stock is down almost 10% since the announcement.

Harley got hit because people didn’t expect the flat sales. They’ll be fine.

Midwest on the other hand I am worried about. They lost $15.9 million dollars this quarter. The company is only worth $31 million at this point. I am not sure how they can survive in this environment of high fuel costs and no ability to raise prices. I am flying with them in both June and July to do my little bit. There is improved quality of life here by having a local airline that flies direct to big cities. There is nothing that beats their Signature service. I wish them luck in the months ahead.

The GE Whole is Greater the the Sum of the Parts

When Jack Welch was running GE, there were weekly rumors that NBC was going to be sold to [insert entertainment company]. I never understood the intrigue around GE owning NBC. Jack did the deal to get NBC back, and he liked the business. He wasn’t going to sell it.

He also understood that having the network(s) created something bigger when you combined it with the industrial businesses and financial services. Last night’s episode of ER is a perfect example. The soccer mom played by Cynthia Dixon was diagnosed on a GE Lightspeed VCT and the blood clot was able to be removed with the help of a Innov 4100 system. It is not unusual for their to be GE Healthcare equipment all over the ER, but this episode was partially written to highlight the technology.

The whole is sometimes greater than the parts.

Thoughts from Boeing on A380

Randy Baseler is the Vice President of Marketing for Boeing’s Commercial Planes division.

Baseler has started what he calls a web journal. Later in the entries, he refers to having done research into web logs. I think his “web journal” needs permalinks and an RSS feed, but it is a start. I sent him an email about it. We’ll see if her responds.

Now for the thoughts. Baseler starts with this:

Along with the A380 being an engineering marvel it also represents a very large misjudgment about how most passengers want to travel and how most airlines operate.

It’s quotes like these which can come back to haunt, but I think he backs it up to a certain extent:

Airbus is calling for a significant shift in recent trends. It believes we will all fly from hub to hub, with one or more connecting flights to complete our journey. Boeing believes airlines will continue to give passengers what they want — more frequency choices and more non-stop, point-to-point flights.

Consider that Airbus says London’s Heathrow will use the most A380s during the next two decades. Yet, the 747’s share of departures at Heathrow hasn’t changed during the past twenty years. Airbus lists Tokyo’s two airports and Hong Kong’s as major A380 hubs. But at those three airports, the 747 as a percentage of departures is about half of what it was in the 1990s. If large airplanes solve congestion, the 747 departures would have been going up.

I am fascinated to see how the rivalry progresses and it is great to hear comments direct from Boeing.

[via commoncraft]

Defining Victory

There is an outstanding article in the WSJ today about how the U.S. Army is rethinking its strategy. The idea of taking down a country by capturing its leaders doesn’t work. Iraq has shown that clearly. What I find amazing about the article is how soon the Army is reconsidering its thinking.

They are changing measurements:

A recent directive, prepared by Mr. Rumsfeld’s office and still in draft form, now yields to that view. It mandates that in the future, units’ readiness for war should be judged not only by traditional standards, such as how well they fire their tanks, but by the number of foreign speakers in their ranks, their awareness of the local culture where they will fight, and their ability to train and equip local security forces. It orders the military’s four-star regional commanders to “develop and maintain” new plans for battle, hoping to prevent the sort of postwar chaos that engulfed Iraq.

They are changing their capital investments:

The Army is discarding or delaying big parts of its longstanding plans. It recently announced it has pushed back introduction of its new lightweight fighting vehicle for several years, to 2014, freeing up $9 billion. Earlier plans had called for all of the service’s combat units to be built around the light, quick, armored vehicle.

The Army now thinks it will need a mix of slower-to-deploy, heavy tanks as well as light fighting vehicles. This will allow commanders to swing quickly between tasks, the Army says, from handing out emergency rations on one block to conducting an all-out battle with insurgents on another. Commanders in Iraq have found that 70-ton tanks, which literally shake the ground as they move, can help ward off guerrilla attacks simply through intimidation.

“The answer to complexity, volatility and uncertainty is always diversity,” says Brig. Gen. David Fastabend, a senior officer in the Army’s Futures Center, which does long-range planning.

The service recently canceled its $12.9 billion program for Comanche helicopters. Instead of spending the money on 121 stealthy Comanches — designed to evade high-tech enemy radar — the Army is spending the money to buy 825 attack and cargo helicopters and planes of the sort being used daily in Iraq.

They are changing their training:

In addition to putting them through months of mock raids, the colonel also gave each officer about a dozen books on Iraqi culture and counter-insurgency operations that he expects them to read in their spare time. The Army doesn’t have a standard reading list for troops to read before deploying to Iraq, so Col. McMaster, who has a doctorate in history from the University of North Carolina-Chapel Hill, prepared his own.

The article also talks about how they are bringing experts from city planners to anthropologists to help with wargaming.

Critics will say the Army should have know this for a long time. I want to applaud the speed at which the leadership is adjusting the changing environment.

I think there is also a lesson about for business: Is your competition is same as it use to be? Are you using the same-old tactics and not getting the expected results?

LEGO gets customers involved

I absolutely love this story from Think by Peter Davidson. LEGO is allowing customers to download software, design their own building set, and then upload the design for competition against others. LEGO is going to put the winning designs into production. Winners will be awarded with design credit on the box, free sets of their design, and royalties.

Talk about getting your customers involved!

Love it!
Love it!
Love it!

Gamesmanship in the Air

I think the commercial aviation space is an interesting one to watch. It is interesting to see Boeing and Airbus joust with each other. Boeing has chosen the route of speed and efficiency with its new 7E7 development. Airbus has gone with making really big planes with its A380.

The latest is reported today in the WSJ [sub. needed]. Airbus unveiled a revised plan to develop a plane to compete with the 7E7. The A350 will supposedly have more capacity and a longer range. The design for the A350 has already needed to be updated once, after fleet managers didn’t see any real advantage to it over the A330. The A350 is basically a A330 with new wings. Any pilot certified on the A330 will be able to fly the A350.

Both companies are bickering back and forth about whose plane will be better, but the importance of the story is in the broad strokes. Boeing wanted to have 200 planes sold by the end of the year. At this point they have only sold about 50. Merely announcing a potentially new plane, Airbus slows down any traction Boeing was getting. They probably threw some engineers at the A350, but they essential spent no money to create a huge story – one that matches nicely with being the leader in aircraft sales last year and most likely this year.

I think this a brilliant move on Airbus’ part. They have market leadership and they make announcements to cement in people’s minds that they are the market leader.

P.S. Stuck right next to the A350 story on A10 is an American Airline story stating they are going to defer delivery of 54 Boeing jets. Rough PR day for Boeing.