​Granted, growth rates have slowed as the company has bulked up, but Amazon is on track to be the fastest company in history to reach $100 billion in sales. With current revenues of >$75 billion, Amazon reported 23% topline growth on a year-on-year basis in its Q2 results. As noted below, comparing Amazon to companies that are within +/-10% of its current revenues, Amazon’s topline growth rate is in a class by itself – as is its lack of profitability!

​Bezos’ catchphrase is reminiscent of astrophysicist Carl Sagan, who popularized public awareness of astronomy with his frequent reference to the “billions and billions” of stars in the intergalactic universe. The difference of course is that the phenomenon Sagan was referring to is truly unknowable, whereas Jeff Bezos knows precisely how individual components of his business are doing. But that’s for Bezos to know and others to guess.

​Admittedly, there are some headwinds of concern. To begin with, Amazon’s recent EPS misses have come in bunches – viz. 4 out of the last 5 quarters. Then too, some of Amazon’s current business development priorities – cloud computing and original video content development — have particularly high investment thresholds with inherently long paybacks.   More generally, the law of large numbers is catching up with Amazon, making the required size of its investment bets and risks higher. Finally, as Amazon has moved farther afield into new business ventures, it has attracted new and stronger competitors. For example, AWS, Amazon’s industry-leading cloud computing business, is encountering fierce price competition from deep pocketed, committed players such as IBM, Microsoft and Google. So it shouldn’t be surprising that Amazon’s historically thin profit margins are under additional pressure.

But strategic, growth-oriented companies who are able and willing to sustain new business development activity through cyclical business swings are often rewarded over the long term. As a case in point, Amazon’s relentless focus on new business development and market leadership has propelled its unprecedented long-term growth.

Lest there be any doubt that Jeff Bezos is continuing to manage for long-term growth, consider the comparative business performance between Amazon and two of its major competitors: Walmart, the largest global retailer and IBM, a technology leader and fast follower in cloud computing.
​
Where Do The Profits Go?
As illustrated below, Amazon performed reasonably well in generating cash from business operations in 2013: 7.4% of revenues compared to 4.9% and 17.5% for Walmart and IBM respectively. What really distinguishes these three large enterprises is how each chooses to deploy their capital. Amazon spends far more of its cash from operations on R&D and Capex – the engines of growth – than Walmart or IBM. The payoff is in topline growth: 23% for Amazon vs. low single digit or negative for its competitors. In contrast, Walmart and IBM reward their shareholders with near term gratification in the form of dividends and stock buybacks (29% and 73% of cash from operations in 2013 for Walmart and IBM respectively).

Companies who get scant attention in the marketplace despite strong products can probably relate to Rodney Dangerfield’s signature, if grammatically flawed lament: “I don’t get no respect.” ​

Unable to attract adequate consumer attention for their branded products, such companies often turn to negative advertising, mocking competitors’ products — or even worse — their customers. That is, they try to level the playing field by smacking down others rather than building themselves up.

Samsung provides a recent example of this approach.

Three months prior to the US launch of Apple’s iPhone 5 (September 21, 2012), Samsung had launched its own top-of-the line smartphone, the Galaxy S3, which included numerous features that the iPhone 5 would lack.  Yet most of the press buzz and customer interest remained focused on the breathlessly anticipated iPhone 5 sales launch.

To dramatize this perceived injustice, Samsung ran this television spot in which a mob of faux sophisticate, Apple enthusiasts kill time while waiting for the Apple store opening by babbling platitudes about rumored iPhone 5 features.  For example, one customer asks (with a look of bewildered awe):  “I heard the connector is all digital!  What does that even mean?” 

This is mockery in high art form!

It’s hard to gauge the impact of an ad campaign, but Apple went on to an all-time smartphone sales record with the iPhone 5, so obviously Samsung didn’t deter too many Apple enthusiasts from buying the object of their desire.  But Samsung Galaxy S3 sales were also reasonably strong and Samsung repeated the same advertising tactic in advance of Apple’s subsequent smartphone launch — the Apple 5s/5c — (preceded five months earlier by the Samsung Galaxy S4).  Not to be outdone, Nokia responded to all the fuss with an ad promoting its Lumina smartphone, mocking customers for their fealty to either Apple or Samsung products.

So what are we to make of ads which mock competitors’ customers?  Do they work?  And even if so, are there downsides?
The short answer is, mockery is no substitute for the need to establish a company’s own brand persona, and mocking the very customers you hope to attract can be viewed as petulant and snarky, further eroding an already weak brand.

It should be crystal clear what types of situations motivate such tactics.  Advertising mockery is utilized by companies with weak sales positions and/or brand images, who find themselves way behind market leaders with little perceived prospect of making inroads with traditional and more genteel advertising messages. So the most benign view of such tactics is that they attempt to shake prospective customers out of their comfort zones to think about a challenger company’s products in a new light.  Fair enough.

The foundation of strong brands
But how did the targets of such advertising campaigns achieve their strong brand images in the first place?
Successful brands are built on three foundations:

1. Promise
2. Trust
3. Symbolic identity

A brand promise reflects a consumer’s expectation of the benefits a well-regarded product or service will deliver.  Brands serve an important role for consumers in reducing the cognitive strain of sorting through myriad design details of complex products.  For example, consumers don’t have to understand how BMW delivers superior handling — McPherson struts, rack & pinion gear ratios, quadra-link suspensions, whatever — they just expect a BMW vehicle will deliver a pleasurable driving experience.

The corollary of course is that in order to maintain a strong brand, companies need to meet or exceed established expectations with each new product release.

In this regard, Apple would be foolhardy to rush a new product to market just to incorporate a new feature or tool, without taking the time to refine the overall design, UI, build quality and performance to expected high standards. Apple has made and kept its brand promise of refined innovation to consumers over multiple generations of new products — the legacy of Steve Jobs.  

Strong brands also convey mutual trust.  Loyal customers trust their preferred company to consistently deliver appealing products, while the company trusts the that its targeted customers will remain loyal as long as their needs are well met.  Are there technophiles or early adopters that may abandon a current product the instant a new feature is offered by a competitor?  Sure, but these customers are inherently disloyal to any brand and not worthy of a company’s pursuit, particularly if it means breaking the brand promise to core customers.  If assiduously maintained, the mutual trust between a customer and her preferred brand is difficult for competitors to dislodge.

Finally, strong brands provide comfort to consumers in reinforcing their symbolic identity, signaling membership in a desired social grouping.  For example, it’s hard to imagine a  bunch of hard-drinking, über football fan guys gathering around a big screen TV on a Sunday afternoon pounding down Amstel Light® beers with Kashi® Granola & Flax Seed Bars.  Wrong symbolic identity for this gang!

Any advertisement that makes heavy use of lifestyle images– and there are tons — is making a play to reach customers through symbolic identity.  Product placement on popular TV shows is another technique towards this end.

Luxury brands have long thrived on symbolic identity to exploit some consumers’ high willingness to pay for premium branded products that showcase their taste and wealth.  Would a  satisfied Luis Vuitton customer jump ship to a new brand which promised to deliver a stronger handbag zipper design?  Unlikely.

Relatedly, strong brands evoke strong emotional associations and imagery.  For example, when I asked my MBA students to explain why they preferred their favorite brands, the answers were often grounded in highly emotive reactions.  Some students were “inspired” by what Dove or Nike products stood for.  Another admired Luis Vuitton for its ability to “deliver a transporting emotional experience.”  And yet another relished Dunkin’ Donuts for providing “the same kiddy excitement whenever I grab a cup!”

Thus strong brands impose high emotive switching costs.  Challenger brands need to instill their own promise, sense of symbolic identity and mutual trust to dislodge brand leaders. At best, negative ads may be necessary, but they are definitely not sufficient for a weak challenger to build their own strong brand.

Case in point: Subaru’s brand rebirth
Subaru is a company on a roll.  US sales in 2013 were well over 400,000 vehicles, setting a fifth straight annual sales record. Consumer Reports recently named Subaru the second best brand in the US (just behind Lexus), and the company confidently promoted its vehicles under the tag lines: “Confidence in Motion” and “Love: It’s What Make’s a Subaru a Subaru!”

But it wasn’t always this way.  In 1991 Subaru of America was on the ropes, with an operating income margin of negative 25% on sales of ~$1 billion.  Their cars lagged far behind Toyota and Honda in brand strength, sales and price realization.  With bankruptcy looming, Subaru’s ad agency, Wieden & Kennedy — best known for its Nike account — recommended that Subaru get snarky in negative ads against its stronger rivals.

Subaru’s early-1990’s ad campaign  openly mocked customers of its stronger rivals.  One ad opened with the admonition: “A car is a car; it won’t make you handsomer or prettier and if it improves your standing with the neighbors, then you live amongst snobs.”

A second ad, mockingly asserted that “a luxury car says a lot about its owner,” followed by head shots of  officious-looking customers intoning what their car means to them, e.g.:

• Social climber: “Mine says I’m so successful I can go into debt”
• Egotist: “Mine says I’m witty beyond belief”
• Faux sophisticate: “Mine says I’m the product of superior genes”
• Aimless drifter:  “I’m another pathetic sheep following the herd”
  
  

It was if the best Subaru could say about itself was “we’re cheap and reliable and if you pay more for your car than ours, you’re a vain and shallow spendthrift.”  But adopting a low price position when you’re not the low cost producer (and actually far from it) is a decidedly losing hand, and Subaru’s chosen approach was pushing them rapidly towards oblivion.

What’s ironic is that Subaru actually did have a highly distinctive product line — or at least half of their cars fit this description.  Specifically, Subaru was one of only two companies (Audi was the other) that sold all-wheel drive (AWD) cars at the time.  These vehicles delivered superior traction and handling, particularly in adverse weather conditions, and served as a source of highly tangible competitive differentiation from mainstream market offerings.  But rather than make its AWD product distinctiveness the centerpiece of its brand “promise,” Subaru heavily promoted its less expensive front-wheel drive models which competed head-to-head with Toyota and Honda at a considerable disadvantage.  Subaru’s mocking negative ad campaign only made a bad situation worse.

Saving Subaru
How did Subaru go from the brink of bankruptcy to becoming the fastest growing car company in the US?

They completely redefined their brand around a highly differentiated, compelling consumer value proposition, and supported the repositioning with a credible, appealing marketing campaign that created a strong symbolic identity for a growing segment of customers.  Here how:

• Shortly after their “A Car is Just A Car” ad debacle, Subaru dropped all its two-wheel drive models to focus exclusively on traction-enhancing AWD sedans and station wagons.  In so doing, they walked away from products accounting for 50% of their sales at a time when they were desperately struggling for profits
• They rebuilt their organization with a new VP Marketing, VP Sales, and advertising agency (Carmichael Lynch) to relaunch the brand
• They heavily promoted Subaru’s distinctive AWD performance and traction advantages and discontinued sharp discounting
• They hired Paul Hogan (of Crocodile Dundee movie fame) as brand spokesperson for Subaru’s Australian-sounding  top-of-the-line “Outback” model, but more broadly to to help instill a strong brand image of rugged, spirited, fun vehicles
  
  

By the end of the 1990’s, Subaru had successfully cultivated a powerful and admirable brand image that has continued to propel profitable growth to this day.

Ironically, with their ill-considered mocking ad campaigns long behind them, Subaru returned to negative advertising in a 2011 with their humorous “Mediocrity” spots.  In this campaign (thinly disguised as directed against Korean car company competition), ad spokespeople promote the faux benefits of a blandly styled, taupe-colored fictitious sedan called the “Mediocrity.”  In one ad, a bland looking mother in a taupe blouse seated in front of her taupe Mediocrity says: “we’ve got two kids and a dog, so the last thing my family needs is more excitement when we drive!”  In the same ad, a bland looking spokesman (in a taupe suit of course) pulls a sheet off a new taupe Mediocrity, intoning: “Introducing the 2011 Mediocrity; a car so basic, so understated, you’ll never have to worry about your blood circulating too quickly.” 

The difference between Subaru’s negative ads of the early 1990’s and the reprise twenty years later is in tone and intent. The snarky and derisive “A Car is Just A Car” campaign attempted to tear down the legitimacy of stronger competitors at a time when Subaru didn’t think it had much positive to say about itself.  In contrast, the “Mediocrity” campaign used light-hearted humor to reinforce Subaru’s brand distinctiveness against less differentiated competitors.  The first ad campaign made you wince; the latter induced chuckles.

Even Apple has played the game
It’s interesting to note that one of the most extensive negative ad campaign ever was run by a company with perhaps the strongest brand image in the world.  Between 2006 and 2009, Apple ran 66 TV spots under the banner “Get a Mac”.  In these ads, a hip-looking young man assumes the role of a McIntosh computer in repartee with  a pudgy, nerdy-looking guy symbolizing a Windows PC. With quips, barbs, sight gags, and one-liners, the PC is repeatedly portrayed as inferior to the Mac, but the PC-guy gets most of the joke lines, and viewers are led to feel more sympathy than pity for the PC guy.  Apple used jocularity, not derision to make its points.

Throughout this period, Apple’s US personal computer market share remained mired around 7.5%.
​
So do negative ads which poke fun at competitors’ customers work?

• Arguably never if the tone is snarky and petulant
• Possibly yes, if the intent is mostly directed at enhancing an already strong brand and the tone an execution is consistent with the challenger brand’s character
• …But under any circumstances, ads which take pot shots at competitors do not substitute for the need to clearly articulate what your brand stands for.

A recurring theme in my MBA course on business strategy this semester was courage.

Executives need courage to create breakaway products that offer consumers a compelling value proposition in ways that are meaningfully different from competition. Such executives are not afraid to break from competitive norms; to go beyond the safe boundaries of incremental improvements. Think Tesla, Post-It Notes, Swiffer and Ikea.

And executives also need courage to go all-in in ensuring that the company’s resources, assets and management incentives are fully aligned to support the breakaway strategy.  Such executives become personally vested in, and identified with their business strategy, earning justified glory or job-ending rebuke, depending on outcomes.  Think Nicolas Hayek at Swatch, Steve Jobs (second time around) at Apple and Dave Barger at jetBlue.

The products and executives cited above provide inspirational stories of creative leadership, driven by  leaders who live by the credo of “no guts, no glory.”  But what are the implications for MBA graduates most of whom are about to enter the corporate workforce in entry level positions?  They are not initially in a position to exert courageous leadership.  Or are they?

A guest speaker in my class near the end of the semester — entrepreneur, author, blogger Seth Godin — urged my students to approach their first (and every) job with the mindset to “make a ruckus” and “don’t be afraid to be fired.”  In short, Godin was rendering themes from my  course in very personal terms.  Customer centricity and playing to win (as opposed to playing not to lose) are not just mantras for corporate leaders, but a code for all to live by.

Now it’s easy for financially secure elders like Godin and myself to proselytize a message of personal leadership, driven by the principles of effective strategy without fear of rocking the boat. But what if you’re just feeling your way around a new job in a new company whose paycheck is critical to repairing your post-MBA balance sheet?  How and where do you draw the line between pushing for constructive change and being a good team player in supporting your company’s current business direction?

My short answer is there is no hard line, it’s a decidedly personal decision, but nevercompromise being honest with yourself about what you’re doing and why.

It’s quite natural for students to approach their first post-MBA job with a combination of optimism and excitement.  But once on board, what would you do if you find yourself becoming  concerned and ultimately convinced that your company is headed in the wrong direction?  You have three choices:

1. Persistently push (as hard as you feel comfortable) to achieve constructive change
2. If repeatedly unsatisfied with your efforts in #1, leave for a more enlightened employment alternative
3. Ignore your misgivings and embrace corporate doctrine in the hope of kudos, bonuses and promotion down the road
   
   

If you’re inclined to slide into choice #3, you might want to rethink whether working in an environment that doesn’t respect or address your perspective and/or in any event that is headed in the wrong direction is a place you want to work over the long term. Being dishonest with yourself or ignoring your instincts is a Faustian bargain.
Here’s a hypothetical example to put this question to the test.  Suppose you accept the premise that strategy should be  formulated from an “outside-in” perspective — that is, the highest priority being to create and consistently deliver a compelling consumer value proposition. Internal capabilities, incentives and corporate policies should be aligned and managed towards supporting this end.

That all sounds reasonable enough, but the reality is that companies vary widely in their commitment to operate in such a fashion.  Watch what companies do, not what they say.  Every company says that they value their customers, but there is a wide variance in perceived customer satisfaction across industries to suggest otherwise.
​
For example, the exhibit below displays 2013 results from ACSI, a spinout from the University of Michigan, on customer satisfaction by industry on a 0-100 index scale.

​You probably shouldn’t be surprised to see that companies in the red zone — broadband/ISPs (e.g. Comcast), subscription television (e.g. Time Warner), airlines (e.g. United) and wireless telephone providers (e.g. AT&T Mobility) score quite poorly in delivering an appealing customer experience.  There are a few bright spots (e.g. jetBlue), but by and large, companies in these industries have knowingly implemented business practices that extract revenue in ways that aggravate their customers.

Now suppose you were hired in as a freshly minted MBA to manage Policy Assessment and Strategy for the Customer Service Group of one of the lower performing companies in one of these industries.  After a few months into the job, with due diligence under your belt from proprietary company surveys, auditing customer service calls and internal management interviews, you report your initial findings to your boss.

For starters, you confidently summarize what you believe to be the root causes of your company’s chronically poor customer satisfaction performance:

• Multiple hidden fees and penalties
• Deliberately confusing prices and rate plans
• Inflexible service plans that lock consumers into long-term contracts
• Bundled offerings forcing consumers to buy services they don’t value or want
• High prices
• Unresponsive or inflexible customer service
  
  

But before you go any further, your boss interrupts to limit the discussion to suggested improvements to only the last item on the list. “We have no control over the business policies of the company,” she says, “so let’s just focus on what we can control in this department.”

With MBA case studies still fresh in your mind on the success of truly customer-centric companies, you object, noting that focusing only on post-transaction customer complaints is inherently self-limiting and will ultimately reduce lifetime customer value.  But your boss adamantly asserts that corporate management is well aware of the frequency and source of complaints received by customer service, and “they’ve done their homework to determine the  profit-maximizing business model.”

You’re tempted to press further — questioning the time frame for the analysis, or whether customer churn impacts have been fully incorporated in the analysis — but your boss’ mien signals this conversation is over, at least for now.
So now what?  You’ve essentially been asked to put lipstick on a pig, whose behavior is largely outside your control.
You hopefully should get the opportunity to revisit your company’s broader business strategy questions, after having more time to gather evidence, to substantiate your recommendations and to get more savvy about internal politics.
​
But the the possibility — and likelihood, given your current position in the company — still remains that you will be unable to instigate a personally satisfying course correction in the company’s strategy.  Let’s say you’ve been at it for sixteen months, and it’s time to revisit doors #1, #2 and #3.

In 512 BC or thereabouts, the venerable Chinese general, Sun Tzu wrote The Art of War in which he proffered the following advice on military strategy:
    The highest form of generalship is to balk the enemy’s plans…the next best is to attack the enemy’s army in the field; and the
​    worst policy of all is to besiege walled cities.

Sun Tzu’s advice applies equally well in business, as disruptive new ventures are well advised not to initiate an all out war aimed at taking over incumbent market leaders’ core markets– their “walled cities.” Sebastian Thrun, the self-declared father of the modern movement to disrupt higher education with Massive Open Online Courses — aka MOOCs — has learned this lesson well.  And therein lies an instructive tale.

For those unfamiliar with this space, prior to 2011, Thrun was a tenured professor at Stanford University who taught one of the most popular computer science courses on campus, routinely packing his lecture hall with 200 students.

But after hearing Salman Khan’s inspiring TED talk in March, 2011, Thrun reckoned that he could reach a far larger global audience by transforming his course to video format.  He set out to convert his popular Stanford course to online delivery which initially featured videos produced with nothing more than a camera, a pen, and a napkin.  Despite the low initial production quality, many of his 200 Stanford students chose to switch to his video version because they could absorb the material at their own pace and on their own schedule. Eventually, the 200 student classroom dwindled to a group of 30. Meanwhile, the course’s popularity exploded online. Within two weeks of its announcement, 56,000 students from around the world had enrolled, swelling to 160,000 by the start of the virtual semester — more students than Thrun could reach in his physical classroom in 800 years.

The initial experience convinced Thrun that he could craft an even better course with interactive Web tools that adequately recreated the intimacy of one-on-one tutoring. The student value proposition seemed compelling: one of the best professors from one of the best universities teaching one of the most popular courses on his very best day (Thrun re-taped his lecture modules until perfected) — all for free!  The audacity (root for the venture’s ultimate name) and potentially vast scale of the endeavor — along with  a dash of founder hubris — prompted Thrun to leave the comfort and prestige of his tenured position at Stanford.  Thrun launchedUdacity with a $5 million Series A investment from Charles River Ventures and $300,000 of his own money.

In response to its extraordinarily successful launch — at least as measured by student enrollments —  Udacity rapidly expanded its online course offerings, and was soon joined in this space by a similar and even larger Stanford spinoff venture — Coursera — as well as by edX, a MOOC joint venture between MIT and Harvard.  Collectively, the Big 3 MOOCs soon attracted >3 million course enrollments and over $100 million in venture investment.

As these new ventures entered their second year of operation, despite the lack of a clear sense of how they would convert eyeballs to dollars, it was hard to not get swept up in the noble aspiration to democratize the availability of first rate education to every citizen of the world within reach of a computer and a broadband network.  Thrun was one of the most vocal MOOC proselytizers, explaining his decision to leave traditional academia in January 2012 by saying:
I can’t teach at Stanford again,
      I feel like there’s a red pill and a blue pill. And you can take the blue pill and go back to your classroom and lecture your students.         But I’ve taken the red pill. I’ve seen Wonderland.”  ​

​At the same time, Thrun also boldly predicted that Udacity  would profoundly disrupt the traditional university system, noting:
    In 50 years, there will be only ten institutions in the world delivering higher education and Udacity has a shot at being one of
    them.”

In essence, Thrun was declaring disruptive war on the walled cities of established universities, threatening a technological revolution that would blow up a number of cherished institutions and traditions.

Sacré bleu, could it really be that the grandchildren of today’s college students would no longer see ivy covered buildings adorned with honorific statues and gargoyles, large lecture halls filled with a mix of fascinated and napping students, tenured academic faculty pontificating on arcane research topics, guy- and gal-watching on manicured quad lawns and game day mania at college football and basketball games?!

Not so fast!
But less than two years after his bold pronouncement on the impending death of higher education as we know it, a discouraged Sebastion Thrun downgraded his messianic view and hyperbolic enthusiasm by noting:
    I’d aspired to give people a profound education–to teach them something substantial, but the data was at odds with this idea. We
    were on the front pages of newspapers and magazines, and at the same time, I was realizing, we don’t educate people as others
    wished, or as I wished. We have a lousy product.

What precipitated such a dramatic fall from grace?

For one thing, Thrun and his fellow MOOC pioneers were undoubtedly troubled by stubbornly low student completion rates, which continued to hover in single digits for most courses, despite multiple attempts to improve pedagogy and student engagement.  Then too, the path to profitability  — at least for the VC-backed, for-profit ventures, Udacity and Coursera — remained cloudy.  Simply throwing more free courses from more universities on a MOOC platform appeared unlikely to yield a viable investment return, notwithstanding attempts to add “freemium” services such as test validation, completion certificates and recruiting data services.

But perhaps the most bitter disappointment for Udacity was its widely noted failure in a pilot program to replace in-class education at San Jose State University in California.  In late 2012, Thrun proposed a partnership to California Governor Jerry Brown, who had been struggling to cope with rising tuition costs, poor student performance, and overcrowding in state universities. At a press conference the following January, Brown and Thrun announced that Udacity would open online enrollment in three subjects–remedial math, college algebra, and elementary statistics–that would count toward credit at San Jose State University, a 30,000-student public institution.

Courses were offered for $150 each, and students were drawn from lower-income neighborhood high schools and the members of SJSU’s student body for whom there was no space in conventional classrooms. The pilot’s target students were struggling to keep up with requisite levels of educational achievement, prompting Thrun to declare at a press conference:
    A lot of these failures are avoidable.  I would love to set these students up for success, not for failure.

But when test results from the first pilot courses came out, it was clear that Udacity’s online courses failed to deliver acceptable results. In particular, it was found that 74 percent or more of the students in comparable classroom courses passed, while no more than 51 percent of Udacity students passed any of the three online courses offered.
Notwithstanding the fact that this initial pilot targeted a particularly challenging student population — which in retrospect was ill-advised for a venture at such a primitive state of development —  adverse publicity led to a temporary suspension of the Udacity online course experiment. Critics — and there had been many all along the way — cheered Thrun’s comeuppance.  Some declared that the poor pilot performance was “predictable” while others lamented the “immorality” of public funds being used to pay a for-profit company to experiment on students with an unproven new approach to higher education.

Academics’ schadenfreude was understandable payback for Thrun’s hyperbolic zeal in promoting the pilot program, and many were quick to claim victory against Thrun’s unsuccessful attempt to invade their university walled city.

Immoral experimentation?
But if Thrun’s victory laps were premature, so were critics’ condemnations.

There are so many things wrong with such quick and sweeping condemnations of Udacity’s approach, intent and even morality that’s is difficult to know where to start.  But as this debate gets to the heart of the future of higher education, it is important to set down some markers.

Experimentation and fast learning from failure lies at the very heart of technological progress, so drawing sweeping conclusions from an initial pilot test demonstrates a self-serving lack of understanding of how innovation works.  As an analogy, I would hope we wouldn’t suspend research on all cures for cancer because an initial clinical trial regrettably failed to save the lives of some terminally ill patients.  Lest this sound like a deliberately draconian analogy, it is important to note that what compelled Governor Brown to seek out experimentation in this case was his recognition that California had neither the budget nor the resources to adequately educate the state’s young adults, particularly the most vulnerable students requiring remedial attention. Despite the fact that state education expenditures per capita had increased by nearly 25% over the past decade, too many young adults were failing to receive the education required to live a fulfilling, productive life.  Under the circumstances, those who so swiftly and harshly condemned the search for new solutions to a chronic and worsening education problem in California should reexamine the logic of simply throwing more money at a system that was not able to deliver acceptable results.
​
As it turns out, after a two month hiatus, Udacity’s online courses returned for a second semester, with dramatically better results. As noted in the table below, for some courses, online learning achieved better outcomes than traditional classroom formats (at a fraction of the cost).  Whether this is the result of a significantly different student sample or due to improvements made in course design between the two trials is unclear.  But that’s exactly the point.  We need continuous disciplined experimentation to determine the most cost effective approaches to higher education.  And we should learn from, not condemn inevitable setbacks along the way.

The fourth point on this list is worth noting.  In my business strategy course at a Tier 1 university, I often ask my MBA students to cite some examples of the greatest technological breakthroughs in human history.  Common responses include the wheel (big improvement!), the printing press, electricity and, for those with shorter memories, the iPhone.  Then, as I stand before a blackboard poised to record the answers, I ask my students to cite the biggest technological leaps in the history of education.  But this question usually stumps the audience, drawing only tepid responses including “chalk” and “Powerpoint”.  Hardly the stuff of technological revolution!  Indeed the structural characteristics of my class (if not the caliber of teaching) differs little from the great Socrates — a predecessor of Sun Tzu.  We both gather a limited number of pre-selected students — he under a tree, and me in a classroom — to engage in an inherently labor intensive dialogue aimed at imparting knowledge, judgment and critical thinking.

When an instructor is talented and students are engaged, this method works quite well.  However there are inevitable drawbacks to this time-honored approach: inherently high cost, inflexibility (requiring students to metaphorically “gather under a tree”), and a chronic dearth of talented teachers.  This last point is worth stressing.  Despite the widely reported increase in the costs of delivering higher education, many scholars — for example Clay Christensen andRichard Arum — have also documented declines in student learning outcomes, notably college graduates’ critical thinking and writing skills.  In short, we’re paying considerably more for and getting less from higher education.

Is there something about education that makes it uniquely immune to technological progress?
Defenders of the status quo would say yes, pointing to the numerous past failures of communication technology breakthroughs — movies, radio, television and the Internet — to live up to lofty claims of changing education forever.  So why should we believe that MOOCs — or whatever else you choose to call emerging online education formats — will be different this time?

New York Times columnist Thomas Friedman perhaps answered this question best when he said:
     Big breakthroughs happen when what is suddenly possible meets what is desperately necessary

What makes disruption of higher education “suddenly possible” is the confluence of four emerging technologies:

• Web 2.0 interactivity tools that allow much higher forms of interactive student engagement — with instructors and with each other
• Widespread high speed broadband availability
• Plummeting IT and video production costs
• Rapid advances in online pedagogical techniques, including adaptive, personalized courseware, automated grading (including free form text entry) and team-based project coordination
  
  

There have been some truly inspirational early success stories for online higher education as  captured by Coursera co-founder Daphne Koller’s mid-2012 TED talk.    But while we still have a lot of room for improvement — as Udacity’s San Jose State University experiment reveals — it’s important to remember that we’re still early in the process of redefining a set of institutions that were more than 2,500 years in the making.  And from that historical perspective, the progress achieved in exploiting disruptive technologies for higher education the past few years has been encouraging.
As for the second half of Friedman’s prediction, there should be little doubt in the “desperate necessity” to reform higher education in the US.  Recent trends  are more than discouraging, as noted below.

​These points are beginning to take a toll.  From 2010 through 2012, freshman enrollment at more than a quarter of U.S. private four-year colleges declined 10 percent or more, according to a recent analysis by The Wall Street Journal. Perhaps the most compelling evidence of the inevitability of disruptive change to higher education is captured in the chart below displaying the growing gap between tuition costs and college graduate starting salaries.

​As NYU professor Clay Shirkey has bitingly noted:
    The value of a college degree remains high in relative terms, but only because people with bachelor’s degrees have seen their
    incomes shrink less over the last few years than people who don’t have them. ‘Give us hundreds of thousands of dollars and years
    of your life so you can suffer less than your peers’ isn’t much of a value proposition. More like a ransom note, really.

So the question is only when, not whether new approaches to higher education deliver more effective and more relevant learning outcomes at lower cost.

Udacity’s pivot
In August, 2013, Udacity announced it was changing its business model, from offering an eclectic array of massive open online courses for free, to contractual arrangements with major corporations to produce targeted skill-building courses primarily aimed at prospective and current high tech employees on a fee-per-course basis.  The new strategy had two important  initiatives:

1. A partnership between Udacity, AT&T and Georgia Tech University to offer a fully accredited online MS in Computer Science for $6,600 — less than one-third of what an in-state student would pay at Georgia Tech, and one-seventh of the tuition charged to an out-of-state applicant.  AT&T kicked in $2 million of funding to subsidize the first year of operation, presumably motivated by the opportunity to recruit talented graduates.
2. A partnership with Google, Intuit, Cloudera, Autodesk, Khan Academy et al in an “Open Education Alliance” wherein the memebers will fund and help design the creation of a defined curriculum designed for students pursuing jobs in technology.  According to Udacity’s press announcement, participating members will “assist in the curation and development of a new 21st century curriculum and connect learners with opportunities in industry,” .
   
   

Once again, critics were quick to pounce, including this reaction from a widely published academic specializing in technology and education:
    Well, there it is folks. After two years of hype, breathless proclamations about how Udacity will transform higher education,
    Silicon Valley blindness to existing learning research, and numerous articles/interviews featuring Sebastian Thrun, Udacity has
    failed.

I strongly disagree with this conclusion, not borne out of a strong conviction that Thrun will succeed (he well may not), but because this condemnation is intellectually flawed in two important respects:

1. It fundamentally misunderstands the importance and frequency of business pivots in startup ventures
2. It fails to recognize that Thrun’s pivoted business model poses a far more serious threat to traditional higher education institutions than Udacity’s original approach
   
   

Let’s start with business pivots.  When an early stage venture pivots its business model, it doesnot imply that the business has failed or even that it is in dire straits.  It does mean that the venture has gained valuable insights about customer preferences and market dynamics in an initial trial of its business plan and is attempting to respond accordingly.
Business plan pivots reflect a logical and necessary evolution in developing successful businesses as the following examples attest:

• Post-It Notes languished in 3M’s research labs for five years without a convincing business plan, then failed miserably in pilot tests in four cities, where the company tried to sell “Press & Peel Pads” (as it was then called) as a glorified sticky bookmark. Two years  later, in a last ditch effort to make the product stick (sorry!), 3M re-piloted what was now called Post-It-Notes in a massive free give-away.  Thousands of sample products were sent to office managers, purchasing agents, lawyers and hospital personnel, coordinated with 3M personnel stationed at customer facilities to explain possible uses of the product.  The pivoted marketing strategy was highly successful, word-of-mouth endorsements went viral, and Post-It-Notes emerged as a billion dollar brand.
• Google received its first tranche of venture capital from Kleiner, Perkins (et al) in June, 1999 on the strength of its promising technology, but with no viable business model in place to monetize their search engine. In fact, the founders were initially opposed to “contaminating” their site with advertisements.  It took more than two years and several unsuccessful steps along the way for Google to pivot to a pay-per-click, ad-supported revenue model, and the rest is history.
• Nespresso languished for over a decade as a money-losing, slow-growing provider of single serve coffee machines and coffee pods to food service and office establishments.  A new CEO, Jean-Paul Gaillard was hired in 1988 to reenergize the franchise, and refocused Nespresso’s business on the consumer market as a high-end gourmet product.  Gaillard’s strategy pivot involved a number of a critical decisions, including selling Nespresso’s single serve coffee pods only through its own phone-order  channel and shunning mass advertising in favor of word-of-mouth referrals — both radical departures from normal business practices at Nestlé.  Although Gaillard’s strategy pivot evolved over time — Nespresso now also sells pods through its own retail boutiques and over the web — the fundamentals of the pivoted business model remained intact, propelling Nespresso to highly profitable, rapid growth (CAGR=35%!)  over the ensuing two decades.
  
  

So obviously, pivots don’t necessarily signal failure. Entrepreneurs often reverse early setbacks by incorporating market feedback to relaunch successful businesses.

After two years of operation, Udacity undoubtedly came to the conclusion that its initial MOOC business model offered very little promise of financial viability.  The company always knew thatfree is not a business model, but it also discovered that secondary sources of “freemium” revenues were unlikely to offset the high development costs of online education.
Thrun’s pivot puts Udacity in a better position to disrupt higher eduction than its initial positioning.  Why?  Because instead of trying to outdo universities at their own game — that is, delivering a wide array of college courses  — Udacity has shifted to focus on a job that higher education institutions have traditionally largely shunned: corporate training.  And in so doing, Udacity now threatens to break down a major pillar propping up the  current business model of higher education —  thereby “balking their plans,” as Sun-Tzu said millennia ago.

Recall that the (weakening) justification for traditional college education has historically the attractive returns from higher lifetime earnings.  But Udacity’s new focus threatens to profoundly undermine this rationale. If employers experience positive results in hiring high tech employees who have acquired superior job skills from Udacity’s new low cost training initiatives, student interest in attending, and employer interest in recruiting from many conventional institutions of higher education will decline.
​
Udacity is trying to bridge a serious gap in our higher education system: the disheartening disconnect between college graduates’ growing difficulty in finding emotionally and financially satisfying jobs at the same time that employers chronically complain they can’t find enough qualified employees amongst the ranks of recent college graduates.  According to a recent study from McKinsey,  while 72 percent of educational institutions believe recent graduates are ready for work, only 42 percent of employers agree. There appears to be an equally large disconnect between college administrators and the  general population on how well colleges prepare students for their careers.  This is the gap that Udacity is now trying to close.

It is far too early to tell how Udacity will fare, as its new partnership programs have yet to be fully implemented.  But a few early indicators should be taken very seriously by academic leaders of our current higher education institutions:

• It appears that a growing number of companies are prepared to become more directly involved in addressing the challenge of preparing their employees for 21st century business problems — and are putting their money where their needs are
• Students are reacting positively to the opportunity not only to acquire accredited new job skills at sharply lower costs, but to do so with improved prospects for immediate employment from participating corporate sponsors.  Over 2,300 students applied to the first entering class of Georgia Tech’s new online MS degree program in computer science.  To put this number in perspective, since Georgia Tech created its on-campus master’s degree program in in computer science in 1991, fewer than 2,000 degrees have been awarded. Under the new effort, that many online degrees could be awarded in a single year.
  
  

What are the implications for today’s higher education institutions?
It is dismaying to see so many academics rushing to dismiss innovative initiatives which seek to improve our higher education system. Resistance from incumbent stakeholders will eventually be overcome by three large and powerful constituencies poorly served by today’s status quo: the 70% of US adults who do not have a college degree, the majority of college graduates who are dissatisfied with the value of their degrees and the large number of employers challenged by a skills gap in the recruiting marketplace.  The economic potential that can be unlocked by better serving these large constituencies will continue to attract investment in alternative education delivery models from both the private and public sector.

Higher education institutions can no longer ignore their imperative to do a far better job preparing students for more demanding and fast-changing careers.   While the hubris and hyperbole of some high tech zealots have been admittedly grating, hopefully, leaders of higher education institutions now recognize that the question is no longer whether, but only how and when disruptive technologies will reshape higher educational delivery models.
As in any disrupted industry, the speed with which disruption occurs will vary widely across the higher education landscape.  Many smaller colleges that rely almost entirely on tuition revenue are already facing severe financial distress.  But no institution should feel immune from the disruptive forces at play, including the most highly endowed Tier 1 universities.

My advice to academic leaders would be to commit to two inter-related strategic imperatives.

1. Be prepared to broadly rethink the mission and priorities of higher education
   The factual evidence of a significant skills gap in college graduates’ preparedness for 21st century careers is clear. Therefore, higher education institutions need to ask themselves: what is our responsibility and action plan to address this societal problem?  Towards this end, colleges and universities will need to broadly rethink a wide array of business policies that currently inhibit the delivery of cost-effective, first-rate education.  Many of the shibboleths that define higher education today are deeply entrenched in institutional norms and academic psyches and as such, will not be easy to change.  The challenge of course is to assess future priorities and strategic imperatives from the standpoint of market and societal needs, recognizing that the way forward may be at odds with the perceived welfare of some academic stakeholders. But with long term survival at stake, the requisite strategy pivots are likely to call for very different behaviors and skill sets than found on many current campuses. As a faculty member of a Tier 1 university, I am as convinced of the ongoing value of an on-campus higher education experience as I am of the need for profound changes in how that experience is delivered. Academic leaders must be prepared to disrupt their own institutions before external forces foreclose current options.  These are not easy dialogues to initiate, but it will only get harder over time.
   
   
2. Initiate and learn from multiple experiments on new pedagogies and delivery mechanisms
   No one can claim to know the precise pace and form that disruptive learning technologies will take over the next decade.  But I would argue that it is precisely because of this inherent uncertainty that the only appropriate response is to undertake extensive low-cost iterative experiments on college campuses. Universities need to discover for themselves how to best incorporate new technologies into their on-campus and extended learning environments.  I would like to see more higher education institutions aggressively undertaking and sharing experiences from multiple digital learning experiments, including video lectures to “flip”  classrooms, MOOC courses to extend  learning reach and to gain familiarity with online pedagogical techniques, greater use of video technologies to beam global thought leaders into our classrooms, and experiments with different forms of automated grading for larger online and classroom audiences.
   
   

None of this will be easy, and there will undoubtedly be a number of painful pivots along the way.  But leaders of higher education would be well advised to heed the advice of two recent pronouncements germane to the topic at hand.  The first is from the 2006 U.S. Department of Education Task Force Report: “A Test of Leadership: Charting the Future of U.S. Higher Education” who noted that:
    History is littered with examples of industries that, at their peril, failed to respond – or even to notice – changes in the world
    around them from railroads to steel manufacturers.  Without serious self-examination and reform, institutions of higher
    education risk falling into the same trap, seeing their market share substantially reduced and their services increasingly
    characterized by obsolescence.

And the second piece of advice comes from Reid Hastings, CEO of Netflix who knows a thing or two about strategy pivots:
    If you are not genuinely pained by the risk involved in your strategic choices, it’s not much of a strategy.

​We laugh at such gratuitous boorishness, knowing of course that if we were the object of such scorn, it would be devastatingly hurtful.  Cringe-worthy behavior has been a Nicholson comedic staple for decades.

There’s an interesting backstory here with serious business implications.  Critics were quick to bury The Bucket List with every pejorative in their Thesaurus when it first came out: “preposterous” (NY Times), “cheap and flimsy” (Miami Herald) and “a cloying … lazy low-grade product” (Seattle Times).  But despite the critics’ scorn, The Bucket List went on to become an audience favorite, topping box office charts for weeks and grossing >$175 million for Warner Brothers.  Moviegoers were in essence thumbing their nose at critics and telling them: “nobody cares what you think!”

The declining relevance of movie critics underscores a broader shift transforming many industries: technology-enabled self empowerment.

Think about it.  The underlying value proposition for most companies is to sell a product or service that is too too complex, inconvenient or expensive for consumers to provide on their own.  In this regard, consumers have historically been willing to pay movie critics (indirectly through their newspaper and television subscriptions or advertising eyeballs) for the valuable service of previewing and critiquing new film releases.

But the internet has now created a platform for everyone to be a movie critic, and many moviegoers consider the “wisdom of the crowds” on sites like Rotten Tomatoes to be a more reliable guide, particularly if one can filter reviews to reflect individual preferences, as with  Netflix’ and Amazon’s recommendation engines.  Social network “Likes” have added yet another preferred alternative to the need for putative expert critics.

Technology-enabled self empowerment has or is ravaging a number of other industries, including:

• Travel agencies
• Record labels
• Metro daily newspapers
• Accounting
• Book publishing/book retailing

In each of these cases, jobs-to-be-done that were initially considered too complex for individuals to perform on their own are now easily handled by average consumers — in ways often perceived to be better, at a fraction of the cost.  For example, who needs a high commission travel agent when Expedia, Kayak or Priceline empowers consumers to plan trips on their own (each replete with “wisdom of the crowd” reviews)?  Ditto for the impacts of SoundCloud and iTunes on record labels, Google News and  Flipboard on metro dailies, TurboTax and Quickbooks on accounting and Amazon/Goodreads on book publishers and retailers.

All the news that’s fit to print
For historical industry leaders whose value proposition has been undermined by these disruptive technologies, the financial and emotional impact is no laughing matter.  When customers begin in essence telling legacy market leaders that they no longer care what the company thinks (or sells), it’s terrifying.

Take the New York Times for example. In 1896, the Times started carrying an iconic text box atop its front page embodying the hubris of a company laying claim to “All The News That’s Fit To Print.”  During the ensuing 100 years, the Times had good reason to assume that consumers could not possibly serve as their own editors in ferreting out important news stories from around the globe.  But in the post-internet era, a bevy of customizable search-driven applications now self-empower consumers to access news from a wide range of news sources and political viewpoints, including easy access to topics of personal interest that the Times maynot view as fit to print.  Add to that the emergence of Twitter, which has often become the first to break current events, and it’s clear that the Times is now competing for customer attention in a very different world.

What’s a company to do when their basis of competitive advantage that has served them so well for decades is severely undermined?   Unfortunately, the most common initial reaction is paralyzing denial, fear and anger.  What follows next ultimately determines whether a disrupted company can adapt and survive (possibly in smaller but sustainable form) or fail.

IBM provides a good example of a company that not only survived but prospered after new technologies decimated their once-dominant mainframe computer business.  After teetering on the edge of bankruptcy in the early 1990s, IBM shifted its business mix through acquisitions towards IT services, outsourcing and software to emerge as a stronger, considerably larger and more diversified company.  Disruption has been far  less kind to hundreds of brick and mortar travel agencies who were flattened by the rapid rise of online travel services.

So how has the New York Times fared?  To their credit, after experiencing early fear, uncertainty and doubt, the New York Times worked hard to remain relevant in the post-online news era.  The company has pioneered a number of innovative online news features and successfully implemented the largest general newspaper paywall in the industry to supplement its profitable but steadily declining print newspaper business. While the internet has not been kind to its bottom line, online access has broadened the Times’ print audience reach by more than 25X.  In Jack Nicholson’s parlance, more people than ever care what the New York Times thinks, albeit neither readers nor advertisers are willing to pay very much for the privilege.  Revenues at the NY Times have declined 40% over the past six years, but the company has downsized sufficiently to secure a profitable future.
​
Turmoil in the book industry
The situation is a bit murkier for book publishers and booksellers, who are losing relevance (and financial viability) in a market increasingly driven by online purchases of paper and digital books.  Technology self-empowerment is at play throughout the book publishing value chain, allowing authors to get to market without traditional publishers and readers to purchase books without bookstores.  Reflecting the shift in bargaining power, one “Big 6” publishing executive recently told me: “it used to be that aspiring authors would damn near kill to be picked up by a major publishing house; now authors with self-publishing experience under their belt come to me with the question ‘what can you do for me?!'”

In response, a number of traditional booksellers and publishing executives have reacted by decrying Amazon’s growing disruptive influence as evil, unfair and bad for society.  In support of this view, publishing executives often note that their editorial prowess has helped bring great literature to market that might otherwise have never taken form.  And booksellers are quick to point out their pivotal role in curating, displaying and recommending great reads to help struggling authors reach customers who would otherwise be unaware of promising new works. The problem with such arguments is that those dislodged by innovation in the book industry are conflating their own welfare with the marketplace as a whole. The fact is, more books are being written and read than ever before through channels which bypass the traditional book publishing industry value chain.

It is certainly true that talented editors working on behalf of traditional publishers have helped identify, refine and promote great literary works that have had considerable cultural impact.  As cases in point, kudos to J. B. Lippincott who worked intensively with first time author Harper Lee in crafting the wildly successful To Kill a Mockingbird.  Knopf’s role in bringing Julia Child’s masterpiece, Mastering The Art of French Cooking to market is another legendary publishing success story .  And of course, Bloomsbury hit the financial jackpot  when it took a flyer in 1997 on an unknown rookie children’s book writer named JK Rowling.

But it’s important to note that each of these rock star authors was initially rejected by ten or more publishers before finally finding a gatekeeper — aka publisher — who allowed their work to get to market.  For every Lee, Child or Rowling that was discovered in the pre-digital book era, there are scores of other great writers who lacked the luck, connections and/or perseverance to get their books published.  These stories were never told.

The gatekeeper role of publishers has changed of course in the post-digital book world where now any author can choose to self-publish an e-book or print-on-demand version with very little investment, and consumers can find promising new works by searching for topics of individual interest or by checking personalized wisdom-of-the-crowds recommendations on sites like Amazon or Goodreads.

What does this mean for book publishers and booksellers?

Book publishers will need to master new digital content skills to remain relevant in the post-digital market, offering authors a range of services that arguably can increase sales of books in multiple formats.  For example, Atria Books, an imprint of Simon & Schuster recently publishedA Swing for Life by Nick Faldo, incorporating QR codes in the hardcover version, enabling consumers to view instructional golf videos on mobile devices.  This tome is also available as an e-book, where multi-media clips are embedded directly in the text. Expect to see more multi-media, multiple format initiatives from traditional publishers and new entrants in the years ahead.

There is also a continuing role for traditional booksellers provided that they restructure to the realities of a smaller base of loyal customers willing to pay higher prices for valued attributes.  For example, Powell’s City of Books in Portland, Ore., has maintained an evangelistic core of customers enamored of the ambiance and expertise of their local bookseller, despite higher prices than charged by Amazon.
​
Coda
Companies that don’t want consumers to stop caring what they think or sell (and who doesn’t!) had better be prepared to continuously respond to shifts in how consumers prefer to get jobs done.  While we can chuckle at Jack Nicholson at the movies, this is no laughing matter for incumbents in industries undergoing technology-enabled self empowerment.  Many other industries are facing similar challenges, including higher education, routine medical services and licensed taxi operators.  Is your company next?

Imagine you’re a brand manager for a consumer packaged goods product, clawing for tenths of a percent of market share against aggressive national and store-brand competitors.  The pressure to add product line extensions are constant and seemingly compelling:

• Your competitors recently launched new flavors, packaging designs and value-priced variants, supported by increased promotional spending for end caps, coupons and print advertising which have begun to eat into your market share
• Your product line has begun to look stale and you haven’t had a new “story” to tell to retailers or consumers for a while
• Your company’s Big Data quants have detected pockets of untapped demand in certain ethnic, gender and geographic segments that arguably could be better served with targeted new offerings.
  
  

Each of these market signals suggests a strong incentive to push for new variants in your product lineup.  Moreover, you believe (but can’t prove) that improvements in warehouse automation and logistics systems at all levels of the supply chain have reduced the costs of coping with complexity.  Under these circumstances, marketing professionals are seemingly free to unleash their full creative talents to craft targeted offerings for ever-smaller micro-markets to boost demand.  Hallelujah!
​
Examples of product line proliferation abound:

• The typical US supermarket now carries between 30,000 to 50,000 SKUs, up from 15,000 two decades ago.
• The four major US wireless service providers now offer a total of nearly 700 pricing plans
• Across wide ranging industries including automotive, chemicals, machinery,  pharmaceuticals and fast moving consumer goods, product complexity has increased by 220% over the past 15 years while product life cycles have shrunk by 30%
• Amazon is putting pressure on manufacturers and brick and mortar retailers by putting an astonishing array of goods just a mouse click away from all consumers.  For example, if you’re in the market for dog biscuits, Amazon gives you (and Fido) well over 100 unique unique choices.

The tech sector also often falls prey to allowing excessive product-line complexity to weaken brand images and value propositions, as exemplified by Evernote. Founded in 2008, Evernote is a cross-platform, “freemium” app designed for note taking and organizing and archiving personal information. In other words, Evernote is designed to help individuals and work teams store and retrieve any information in any format on whatever devices they happen to be working on.

By 2013, the company seemed to be on a roll; it had registered eighty million users and attracted over $300 million in investment from venture capitalists who valued the company at one billion dollars. But over the next two years, the company ran into trouble. In 2015, Evernote laid off nearly 20 percent of its workforce, shut down three of its ten global offices and replaced its CEO.

It turns out that the vast majority of Evernote’s users only signed up for the free app and didn’t see enough value to upgrade to a paid subscription. Struggling to generate revenue, Evernote lost its focus
and continuously released new products that added complexity, and often performed poorly. The company developed so many features and functions that it became increasingly difficult to explain to newcomers or even veteran users exactly what the product was.

As Evernote’s former CEO Phil Libin explained, “people go and they say, ‘Oh, I love Evernote. I’ve been using it for years and now I realize I’ve only been using it for 5 percent of what it can do.’ And the problem is that it’s a different 5 percent for everyone. If everyone just found the same 5 percent, then we’d just cut the other 95 percent and save ourselves a lot of money. It’s a very broad usage base. And we need to be a lot better about tying it together.” Evernote wound up spreading itself too thin and lost sight of its core identity and primary consumer value proposition.

To avoid this common management trap, let’s pause for a reality check on the true impacts of product complexity.  The harsh reality is, the vast majority of product line extensions do not make financial sense.
Virtually every management consulting company has an online white paper outlining their approach to dealing with the problem of excessive product line complexity.  Try Googling “Product Complexity + _______” and you’ll see what I mean from McKinsey, BCG, Bain, Booz, Accenture, AT Kearney , Roland Berger et al.  Academics have also weighed in with innumerable scholarly studies on the same issue.
If you’re not familiar with the literature, I’ll spare you the effort by recounting four main takeaways:

1. Most companies have too much complexity in their product and service lines, i.e. hidden but real costs that outweigh the market benefits of product variety
2. The adverse impacts are pervasive, including increased cost, decreased quality, brand dilution, customer dissatisfaction and sometimes decreased sales due to increased forecast errors, stockouts and other factors
3. These impacts are difficult to isolate and measure, complicating corporate efforts to reign in the insidious drag of excess complexity
4. But each consulting company promises to crack the code with a 5- or 7-step process designed to optimize product assortment.
   
   

These proposed complexity reduction “solutions” are highly technocratic and frankly pretty boring exercises .  The typical approach seeks to quantify (with some simplifying assumptions) the costs and related impacts associated with each increment of product line complexity.  The art and science lies in determining the “break points” in product line complexity beyond which costs spike due to the need for expensive new production lines, warehouse space, logistics systems, etc. to cope with burgeoning product variety.  The resulting costs-as-a-function-of-complexity estimates are compared to an analysis of demand, which typically manifests an 80/20 rule, i.e., a few product variants account for the bulk of total sales.  Invariably this exercise points to an optimal point beyond which additional complexity engenders more cost than justified by minimal increases (or possibly decreases)  in revenue (see exhibit).

These solutions are analytically elegant, mathematically precise and rigorously prescriptive.  Have the quants really provided an viable approach to avoid the pervasive challenge of excess product line complexity?

Actually, no.

The problem is that these efforts typically treat the symptoms but not the root cause of excessive product line complexity.  Unless companies address the underlying drivers of bloated product lines, they are likely to slip back into bad habits after a crash complexity reduction initiative.  Not unlike yo-yo diets, when it comes to excessive product line complexity, recidivism rates are quite high.

Moreover, technocratic solutions to optimize SKU counts overlook the profoundly more important link between product line complexity and overall business strategy.  Both these points warrant explanation.
​
Why do companies tend to add too much product line complexity?
Marketing professionals pride themselves on their creativity and responsiveness to evolving customer needs.  The urge to pursue new market opportunities and/or to respond to competitive threats are considered hallmarks of strong management.

Consider for example the following rationales a brand manager might use to justify  product line extensions:

• Attack new market opportunities
• Defend a strong market share position
• Adapt to shifting consumer tastes
• Respond to competitive moves
• Preempt new entrants
  
  

Since the real costs of increasing product line complexity are widely dispersed across the organization and largely invisible, the “free” choice of attacking, defending, adapting and responding to the marketplace provides an often irresistible justification for product proliferation.

Fundamental strategic choice: broad market coverage vs. targeted distinctiveness  
By this rationale, Apple should have responded to Samsung’s introduction of a large screen smartphone a long time ago.  And Chipotle should have added a breakfast burrito. And In-N-Out Burger should have tried to appeal to new customers with a variety chicken, fish, egg and sausage menu items.  What’s wrong with these companies?!
Each of these companies has made a concerted choice to limit the range of merchandise they bring to market, focusing instead on delivering dominantly superior products in selected categories.  Limiting product complexity thus lies at the very core of these companies’ business strategy.  Their success — each has significantly outperformed sector competition —  is driven as much by what they are NOT willing to do as by what they are willing to pursue.

Take In-N-Out Burger for example.  When is the last time you heard anyone rave about the taste of McDonald’s cheeseburgers in the same reverential terms as In-N-Out’s customer evangelists?  Why is that?
On the surface, both fast food chains are selling similar products at similar price points.  But In-N-Out burgers taste better because:

• Hamburgers are made from fresh patties, delivered daily, with no freezing before use
• Buns are baked fresh on premises, multiple times per day
• Fresh vegetables are delivered daily from local area farms, strictly controlled for product quality
• Hamburgers are cooked to order, with no heat lamps before serving
  
  

If these business practices yield a consistently better tasting product, why doesn’t McDonalds replicate In-N-Out’s approach?  The answer is, they can’t, given their chosen high level of product line complexity.
Unlike In-N-Out, whose only entrée is hamburgers, and who restricts store hours to reflect  minimal menu offerings and who limits geographic coverage to territories where the quality of locally sourced food items can be strictly controlled , McDonalds has chosen to compete on the basis a broad menu choice, global store ubiquity and extended service hours (often 24X7).

But carrying such a wide array of food products around the globe complicates McDonalds’ logistics and service operations, requiring bulk shipments of frozen food products, in-store freezers, and pre-cooked orders kept warm by heat lamps in each establishment.  The resulting quality differences are very real, dictated by structural differences in the underlying product line strategies.

This isn’t a case of a right vs. wrong strategy (both have been successful), but simply a reflection of two companies that have chosen to compete on very different terms. The fact remains, product complexity DOES affect quality, and the choice of ever-expanding line extensions is never without adverse consequences.

Chipotle provides another example of competing on the basis of limited product complexity.  In a recent article, Fortune Magazine noted that: “the Chipotle menu is limited to four core basics, but it offers a range of garnishes like salsa and cheese and guacamole that can produce scores of combinations.  Chipotle serves neither dessert nor coffee (too complicated). There’s no ‘dollar menu’ or ‘limited time offers’ (too gimmicky). And While the Dulles Airport restaurant serves scrambled eggs for breakfast, Chipotle has declined to begin breakfast operations in any of its other 1,150 restaurants.”

Chipotle’s approach also demonstrates the power of “versioning”, wherein a company sharply limits its core product line offering (to control costs and enhance quality), but still caters to varying consumer tastes with low cost add-ons and accessories which are simple to provide.

Chipotle’s product line strategy was highly successful in the fast casual restaurant category, propelling the company's stock to grow  nearly 40 percent per year during the first five years of this decade.  But a series of food poisoning outbreaks in 2015 shook customer and shareholder confidence in the company's quality control processes, from which Chipotle has yet to fully recover.
​
Less Can Be More
Determining optimal product line strategy is not strictly an analytical exercise to be turned over to technocrats armed with elegant analytical models.  While companies should certainly seek to selectively  thin out non-performing product lines over time, a far more important strategic imperative is choosing the basis upon which your company wishes to compete: broad market coverage vs. targeted product superiority.

For companies like In-N-Out Burger, Chipotle’s, Apple and many others, there is no such thing as a free lunch. These companies could not have consistently achieved product superiority without explicitly choosing to limit the range of their product offerings.
​
When it comes to product line complexity, less can be more.