When Apple talks about its business in public, it often recites lofty but vague concepts.
Focus on the customer. Making the best, not the most.
Lots of people say these things now because they are trendy. But they are the ideals that have made Apple the world’s most valuable company. So, while others may talk about them, Apple is implementing them on a day-to-day basis with a success that eludes most other companies.
A recent exchange of letters with the U.S. Securities and Exchange Commission gives us some more clues. The letters (the SEC’s are here and Apple’s responses are here and here) were prompted by an inquiry from the SEC after Apple announced changes to the way it was reporting earnings in 2014. That included a decision to no longer break out results of its retail stores, but instead to fold them into the results from different geographic segments.
A quick note: These types of inquiries are routine, especially when a company makes accounting changes or reporting changes. As in this case, the SEC usually just wants some things clarified.
Typically a company provides some explanations and makes some minor changes in its securities filings, as Apple agreed to do in this case. And as usually happens, the SEC said it was satisfied and no further action was taken. After the matter is closed, the letters were made public.
To be clear: This was not an investigation and there is no accusation of accounting mischief. Just routine bureaucratic exchanges with securities regulators who are doing their jobs.
To that end, a lot of the language is of the dry, boilerplate variety. But Apple’s explanations eventually do reveal some interesting tidbits.
One of the official goals of all earnings statements is to give investors “a view of the company through the eyes of management.”
In keeping with that view, Apple remains a highly centralized company. The SEC wanted a list of all the “Chief Operating Decision Makers” or CODMs. Typically, these might be the persons over the iPhone division or the person over Greater China or maybe Apple Music. People who have wide authority over spending, budgeting, products, strategy, etc.
But Apple said it has only one CODM: CEO Tim Cook.
“The development of the Company’s business strategy, as well as its R&D and corporate marketing functions, are centralized to ensure products work together seamlessly and the business strategy is consistently executed,” Apple said in its letter. “As a result, the Company is organized functionally such that no single individual or functional group has overall responsibility for a product throughout its entire lifecycle, from initial development through final sale to a customer.”
That means there isn’t an iPad person, or iPhone person, or Apple TV person whose job wholly depends on the success or failure of a single product. The company just sees each of these things as part of a whole, rather than separate products or divisions that may be competing against each other for talent or resources or attention from the CEO.
Instead, Apple defines people’s responsibilities or management areas “functionally,” that is, they are a piece of something larger and whatever they are building, the goal is to benefit the company’s entire suite of products and services as a whole.
That philosophy drives the way the CEO (or CODM in SEC lingo) makes decisions.
“While the CEO relies on the support and functional expertise of the Company’s executive management, he is ultimately responsible for evaluating and determining the actions he deems necessary to achieve the Company’s operating results,” Apple wrote. “In the process of allocating resources to R&D activities, the CODM primarily focuses on whether projects will contribute to the Company’s consolidated business strategy of expanding the Apple ecosystem through the development of integrated and interoperable products.”
To emphasize and incentivize that culture, and make sure everyone is pulling for each other and in the same direction, nobody’s compensation is based on the success or failure of a single product or service.
“Functional leaders, including those overseeing hardware engineering, operating system and applications development, operations, sales and marketing and general and administrative functions, are compensated based on the net sales and operating margin results of the entire Company,” Apple wrote. “No group or individual within the Company is measured or compensated on product profitability, and the Company does not produce financial statements by product.”
That answered some, but not all of the questions asked by the SEC, which sent a follow-up letter. Apple’s response offered a bit more insight into its operations.
The SEC, for instance, wanted to know if the CEO monitors performance by generation of a product (iPhone 5, iPhone 6, etc.). Apple, of course, said it doesn’t use those metrics to make judgments on spending, resources and development.
Again, the company sees itself as one single thing: the Apple platform. All these gadgets and service are just part of that overall experience.
“The Company is keenly focused on the relationship with its customers and their experience with the Company’s products and services,” Apple wrote. “The Company’s goal is to deliver innovative products to its customers that operate seamlessly together (the “platform”) and the Company is continuously adding to its ecosystem of services for its customers that work seamlessly across these products.”
Apple argues in its letter that this management structure gives it several advantages:
- The CEO can maintain a singular vision that “propogates” quickly to all areas of the company.
- It emphasizes “seamless interoperability” across all products. Apple cited services like Handoff, iCloud and iOS.
- Ideas and information are more easily shared across the company.
“The Company’s functional, rather than divisional, organization is one of its most distinctive aspects, especially given its size,” Apple writes. “Ordinarily, organizations of the Company’s size (whether measured in revenue, number of employees, global scope, or market capitalization) operate through separate business units, each with its own profit and loss responsibility.”
Apple points to General Electric which operates a long list of separate business units that are in many ways evaluated and run as almost entirely different companies. That may be great for judging the performance of the person running each unit; but it probably also promotes rivalry and competition rather than cooperation. (Apple doesn’t say that, but it seems inferred to me.)
At Apple, the CEO is more concerned about growing the overall number of customers across all of the company’s products, and increasing the number of products and services they use. The CEO is not so much worried about the day-to-day sales of a given product.
A final thought: Apple says in the filings that this structure is a legacy of Steve Jobs.
It’s a remarkable contrast to his early years, when Jobs was the master of pitting people against each other. In developing the Mac, he was directly competing for employees and resources inside his own company against other product divisions. His was a divisive, disruptive approach.
Now, Apple seems to have achieved a kind of Zen-like, collaborative approach where each person’s success depends on the success of everyone else. Okay, I’m sure voices get raised and there’s plenty of heated debates now and then.
Still, the entire operation and structure reinforces the message that the entire company is ultimately one team, that succeed or fails together. If you’re looking to understand just much Jobs evolved, and wonder what made him so much more successful the second time around, this is a pretty good place to look.
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