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Apple, Microsoft, and the Seven Rules of Investment Decision Making

Growth doesn't just come from investment in innovation; it comes from focused, long-term investment in innovation

Steve Jobs and Bill Gates at ‘D5: All Things Digital’ conference in Carlsbad, California, 2007
Photograph: Joi Ito (Creative Commons)

When Steve Jobs took over Apple for the second time at the start of 1997, the company was going nowhere fast. Businessweek reported that Apple had a declining 4% share of the PC market, was losing over $1 billion annually, and lacked a strong investment strategy. And that was being kind. Apple’s investment focus had little, well, actual focus.

Forbes ran an article, “Steve Jobs: Get Rid of the Crappy Stuff,” in which Jobs said, “People think focus means saying yes to the thing you’ve got to focus on. You have to pick carefully…Innovation is saying ‘no’ to 1,000 things.” Jobs was a man of his word. By the end of 1998, he had killed off 97% of Apple’s offerings—reducing its product menu from 350 to 10.

By scrapping the “crappy stuff” Apple was able to concentrate on making long-term investments to jump-start growth. In four years, despite selling fewer products, the company’s market capitalization grew six times over and set the stage for long-term bets that turned Apple into the world’s largest company. In contrast, Microsoft’s market capitalization—following years of scattered decision making—dropped by two-thirds during that same period.

Corporate ADD and Midsized Firms

Corporate Attention Deficit Disorder isn’t just a large company issue. Many small and midsized companies become perpetual incrementalists in their quest for growth. The result is that many midsized companies hit highly predictable, self-induced stalls.

Because of their size and the state of their markets, midsized companies no longer have the luxury of “shotgun” investment decision making. CEB research recently found that managers at midsized companies often lack strategic direction and an ability to focus on the true drivers of long-term growth when making investment decisions. To make matters worse, many companies fail to kill underperforming initiatives—sucking resources away from growth—and are slow to make adjustments as their plans progress.

How to Get Investment Decision Making Right

We’ve found seven steps that successful midsized companies follow to get investment decision making right:

  • 1. Give Credit Where Credit’s Due: Work with HR to reward good decisions rather than just good outcomes, and reduce the threat of failure for executives if projects are killed due to negative results.

  • 2. First Things First: Be clear about the assumptions that support your growth bets, including financial returns, potential risks, and economic factors that are necessary for each project. This approach will give you greater knowledge on when to adjust, kill, or escalate investment dollars and, more importantly, the power to obtain executive buy-in on those decisions.

  • 3. Go the Whole Nine Yards: Pressure-test and prioritize assumptions to improve the quality of proposals. Test assumptions at each stage in the process as new information supports or goes against original assumptions, and then revise plans. CEB research shows that high-performing finance groups are not afraid to challenge underlying assumptions, which enables their business partners to make better decisions (see chart 1).

    Chart 1: Business Problem Framing Techniques  Percentage of FP&A Teams Rated “Effective” March 2012

  • 4. Keep Calm, and Carry On: Create a framework for rational decision making. Most decision-making processes resemble a congressional debate with personal biases, fear, and “power plays” dictating outcomes. Leave these emotions at the door, and inspire executives to thoroughly and objectively assess options at each stage. Companies that spend more time creating a rational process ultimately save time with less debate, quicker consensus, and more progress. Make every decision in the context of the ultimate goal, and stress the cost of delayed decision making.

  • 5. Easy Come, Easy Go: Establish and document signals that indicate when to increase or decrease spending at each stage of the project. These triggers will help executives make rational decisions about the project’s future. CEB found that the best companies value quick changes in investment throughout the project just as much as initial investment decisions.

  • 6. Knowledge Is Power: Track project costs, progress, strategic assumptions, and financial assumptions on an ongoing basis. This review process will keep decision making relevant to current environmental changes, which has changed considerably in the past five years (see chart 2).

    Relative Time Value

    Chart 2: Relative Time Value of Decision Making Now and in the Past

  • 7. Don’t Throw Good After Bad: Executives believe that on average 13% of projects in their growth plan should be shut down (see chart 3) and that the money would be better spent on other ventures. But companies fail to adjust resources mid-stream leading to sunk cost and missed opportunities. The best companies regularly report the trade-offs between money spent on current initiatives and other possible growth opportunities to encourage rational, growth-focused decision making.
    Growth ProjectsChart 3: “Q: Of the growth projects in your portfolio, what percentage should be shut down?”

3 Responses

  • Ricky Rick says:

    So in the final analysis, who is doing better, Steve Jobs or Bill Gates? It is very comforting to look thru the rear-view mirror & say that Steve Jobs did a better job over the years. However, MSFT still has a lot of innings left with the great thinking power of Bill Gates. Unfortunately, AAPL lost its great thinker & innovator. So don’t discount MSFT. It ain’t over ’til the fat lady sings…

  • Phil says:

    Please, Bill Gates has RETIRED from MSFT. Fact is AAPL ate MSFT’s lunch a long time ago, get over it.

  • Dave says:

    When AAPL was in real trouble at the time of the second coming of Steve Jobs it was Gates who invested in AAPL and helped save them.

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