If He's So Smart...Steve Jobs, Apple, and the Limits of Innovation

Where Apple was once one of the most profitable companies in the category, its operating profit margins have declined precipitously from 20% in 1981 to a meager 0.4% today, just one-fifth the industry average of 2%. And it isn't just the hardware manufacturers that are devouring Apple. Its chief competitor in software, Microsoft, earned $2.6 billion in its most recent fiscal quarter (ending September 30). That's nearly 15 times the $177 million in software sold by Apple in its most recent fiscal quarter and roughly equal to the profits that Apple has earned from all of its businesses over the past 14 years. In just three months.

With such examples as Apple in mind, a number of skeptics are beginning to ask whether our heedless reverence for innovation is blinding us to its limits, misuse, and risks. It's possible, they say, to innovate pointlessly, to choose the wrong model for innovation, and to pursue innovation at the expense of other virtues that are at least as important to lasting business success, such as consistency and follow-through. When it comes to economic value, Schumpeter's creative destruction may have an evil twin: destructive creation.

James Andrew, of the Boston Consulting Group, for example, argues that too many companies presume that they can boost profits merely by fostering creativity. "To be a truly innovative company is not just coming up with great new ideas, or products and services," he says. "It is coming up with ones than generate enough cash to cover your costs and reward your shareholders."

Andrew says companies can boost the odds of their success by choosing the most appropriate of three innovation models. The first and most traditional is the integrator model, in which a company assumes res-ponsibility for the entire innovation process from start to finish, including the design, manufacture, and sale of a new technology. In general, large, well-heeled companies--Intel, for example--do best with this model. Second is the orchestrator approach, in which functions such as design are kept in-house, while others, including manufacturing or marketing, are handed off to a strategic partner. This model works best when speed is of the essence, or if a company wants to limit its investment. When Porsche couldn't meet demand for its popular Boxster sports coupe in 1997, for example, it turned to Finnish manufacturer Valmet rather than open another costly plant. Finally, Andrew says, there's the licensor approach, in which, for example, a software company licenses a new operating system to a series of PC manufacturers to ensure that its product gets the widest distribution at the lowest possible investment cost. That's you, Microsoft.

From the beginning, Apple appears to have employed the integrator approach--the model with both the highest costs and highest risks. On the one hand, it was the least appropriate choice for a startup with scant financial resources and a nonexistent customer base. But it was probably the inevitable choice for Apple's innovation-venerating culture, which demanded something akin to absolute artistic control. Jobs declined to comment for this story, but he has expressed an almost mystical reverence for the power of innovation over the years. In 1995 remarks to the Smithsonian Institution, for example, he compared innovation to "fashioning collective works of art" and said it afforded "the opportunity to amplify your values" over the rest of society.

The ambition to build the "perfect machine" drove Jobs and his cofounders, A.C. "Mike" Markkula and Steve Wozniak, to strive to build everything, from hardware to software, in-house regardless of cost. Even in those early days, peers like Microsoft were moving to specialize in one dimension of computing or another. (Apple now farms out much of its manufacturing, but won't say how much.)

This pursuit of perfection also led Apple's founders to opt for a closed operating environment on the early Macintosh computers. A closed computing environment is easier to control than an open one. Applications can be written to integrate with one another seamlessly, making the system less buggy. A better user experience!

"There was a lot of elitism at the company," says engineer and Apple alum Daniel Kottke. A Reed College classmate of Jobs who later traveled with him to India, Kottke became Apple's first paid employee in 1976. "Steve definitely cultivated this idea that everyone else in the industry were bozos. But the goal of keeping the system closed had to do with ending the chaos that had existed on the earlier machines." Kottke left Apple in 1984, a year before Jobs himself was forced out.