The tyranny of mediocre

The fundamental problem with most businesses is that they’re governed by mediocre ideas,” said Bill O’Brien, the former CEO of Hanover Insurance, quoted in Presence: Human Purpose and the Field of the Future. O’Brien offers, as an example of a mediocre idea, the maximising of return on invested capital. “Mediocre ideas don’t uplift people. They don’t give them something they can tell their children about. They don’t create much meaning.”

Another, more topical example of a mediocre idea is Apple’s recent announcement that it plans to shore up its falling share price through stock buybacks and a higher dividend. As announcements from Apple go, it surely ranks as one of the least inspired in the company’s history. Here’s why.

Let’s start with an imagined rant from The Artist Formerly Known As Steve: “Are you insane? Today’s stock price is irrelevant! It can only reflect one of two things: the chronic insanity of the marketplace or the underlying value of the company. And since the insanity of the marketplace is uncontrollable, trying to control it is what? It’s insane. So the only sane thing to do is to focus on what? Focus on the underlying value of the company. And how do we do that? By continuing the flow of disruptive innovation, coupled with disruptive execution that our customers expect. Anything else is a waste of our focus.”

It’s not that stock buy-backs are a bad idea: they’re just a mediocre idea. And mediocre ideas are not what we have come to expect from Apple. Put another way, what does it tell us: that the leadership of Apple believes that the highest and best use of $100 billion is to placate jittery investors? What if they had decided to let investors stay jittery and invested the $100 billion in making the company stronger and its competitors weaker? In making a great company greater for the long run?

It’s not as if Apple has suddenly become a bad company or a bad investment. All that has happened is that Apple’s gross margins have declined for the last four quarters, the first time that’s happened since 1993. Does that make them unprofitable? No, it just makes them fractionally less profitable than they were last year.

Every leader has to deal with the tyranny of mediocre ideas. One of the hallmarks of a great company is its ability to get away with breaking the chains of that tyranny. The idea that a company must return revenue and profit growth quarter after quarter forever is unsustainable. Everyone knows that. One proof of that unsustainability is that the only things in the natural world that expand unceasingly are kudzu, bedbug populations and algae blooms; and those only expand when the overall ecology is out of balance.

If Apple is really worth the $700 per share at which it was trading last year, then the market is insane. If Apple is worth the $400 per share that it’s trading at currently, then Apple is insane if it focuses on stock manipulation. With its price-to-earnings ratio at the time of the annoucement at around 9.6; with its still-enviable gross margins around 37%; with gross revenue from sales continuing to rise; with new products in the pipeline and the most respected brand and products in the tech industry, if not the entire universe of business, Apple’s stock price is probably a good buy right now (disclaimer: I own 10 shares). If Apple is using this moment of market insanity to buy its own shares below market value, that’s a nice idea. But that doesn’t require a press conference.

Great ideas have the ability to inspire. The Tata Group’s idea to allow employees, in time of natural disaster, to volunteer to serve rescue and rebuilding efforts while still remaining on salary is a great idea. It doesn’t contribute much to the bottomline but it does build long-time equity with employees, customers and the community. It builds the power of the brand. It inspires others to serve and it blurs the line, for employees, between serving the bottomline and serving the country. If you can work for Tata and do both, it makes you want to stay and try harder. And, by the way, there’s no doubt that being the most trusted and respected company in India does add to the bottomline. Maybe not this quarter or the next, but soon, and for a long time to come.

When MP3 players arrived on the scene, music fans discovered they could convert all their music CDs to MP3 files and play them on their computers and on MP3 players. Suddenly, their music collections became portable in a way the Sony Walkman never made possible. Then, when kids learned they could share and trade their MP3 files the way they used to trade cassette tapes, the recording industry’s response was to start suing people. They sued Napster, the biggest file-sharing site and they sued students and their parents. They sued Tammy Lafky for half a million dollars for the songs her daughter traded. They sued MIT student Cassie Hunt for thousands of dollars and when she said she couldn’t pay that because of her student loans, they suggested she drop out of college and get a job to pay them. They even sued Gertrude Walton, even though she had been dead for several months. That was okay, because they didn’t care about the money as much as they cared about making their point. It was an understandable response. It was perhaps even a rational response. But it was a mediocre one.

Apple, on the other hand, looked at the reality of the market and of customer habits and realised there was a genuine market opportunity in digital market. Although they didn’t invent the MP3 player, their innovation was to strike deals with the record companies to let them sell songs on a self-contained system composed of the iTunes service and the iPod music device. Suddenly anyone with an iPod could buy and play a song for 99 cents. The MP3 player was a good invention, but inventions don’t change the world. It takes an application of the invention — like the iPod — to turn an invention into an innovation that disrupts an industry and changes the direction of society.

You be the judge: suing students who traded music files on Napster or creating a robust channel for the distribution of digital music: which was the great idea and which the mediocre one? Apple has a long history of delivering great ideas, and that’s why this announcement to shore up their stock seems so beneath them.

There’s a bit of wisdom from the Arabian Desert that says, “When the caravan passes, the dogs bark.” It looks a bit silly when the caravan masters climb off their camels and run around trying to shush the dogs. Tim Cook and the Apple leadership have only one important thing to do — only one thing they’ll want to tell their children about — and that’s to continue the flow of products and services for which they’ve become so famous. It may be that after six years of mind-blowing growth and market disruption with iPhones and iPads, they’re entering a fallow period where their business matures and their returns are simply great, instead of insanely great. If so, management’s focus needs to be on the next wave of innovation. Not on the barking of the dogs.