The following article is heavily inspired by one of my favourite books ever – Loonshots. The following article will highlight my main takeaways throughout the book, and my spin and iteration that you may find useful.
Introduction:
Structure:
Separate The Phases:
Dynamic Equilibrium:
Conclusion:
Introduction
Business books, trendy magazines, and conventional wisdom often proclaims that culture is the most vital aspect for an organisation. These pseudoscientific claims regarding the optimal business, always start with culture. The media boasts that “work place culture and diversity drives success”, or that “culture is a companies biggest competitive advantage”.
Now yes, whilst culture, talent, leadership style and other intangible factors are vital, there is one principle that far proceeds any other lesson when it comes to garnering a successful company.
This principle is structure. Structure is the most important aspect of a company. Not culture. Not talent. Structure.
Within this article I want to identify structure, what this means and why it is important, as well as giving ample examples of wildly innovative companies in the past whom have recognised the most vital principle, and thus have become ultra-successful.
To highlight my thoughts on structure, the following quote explains this clearly:
“Within a company, often the most important innovation is the company itself. The way in which humans are organised.”
Fundamentally at the core, a company is solely the collection of individuals centred towards a set goal. Thus, by definition, the ways in which these humans are organised and structured will evidently lead to the most successful results. A company can have the most talented staff, and the best company culture, however without the correct structures in place, all of this will go to waste.
Steve Jobs was a master in human organisation, and gardening.
Structure
What does structure mean?
Structure refers to the ways in which the humans within a company are organised.
Human organisation is the most important aspect of a company.
Separate The Phases:
Separate Artists & Soldiers:
Firstly, it is vital to separate the phases. Let’s call these two different phases within the company, soldiers and artists. The soldiers are those who are working on the franchise, or the more conventional part of the company, whereas the artists are those who are innovating at a drastic pace, and are coming up with new and often absurd ideas.
As an example, think of Apple. Apple has a range of frequent iterations namely on their pre-existing products, such as the IPhone. The team that works on these products are referred to as soldiers. Whereas, Apple also has a department of their company that focuses on radical innovations, namely the introduction of the Apple Watch, or the IPad. The team that works on these innovations is referred to as artists.
There is a fundamental reason as to why, within Apple, and every company, there must be a separation between artists and soldiers.
The reason as to why early stage projects must be sheltered from the already successful part of the company is fairly logical: early stage ideas are fragile, and can fail easily.
Think of early stage ideas as a young baby. The baby must be nurtured. The baby must be taken care of.
The last thing you want within an organisation is poor structure, for example the con-joinment between soldiers and artists, and then innovative ideas to be shot down early on.
There are probably thousands of early stage ideas that have been shot down early on, and thus failed, because of poor structure. These early stage ideas may have become revolutionary to the way humanity operates, as is true within the case of Apple. But, because these ideas never had the chance to grow, they failed and were buried.
Leaders within successful franchises so commonly dismiss new early stage ideas, via picking apart their weaknesses. This was especially true within the case of Nokia. During Nokia’s glory days, the companies innovative team approached management with the idea of a touchscreen phone, and an App Store. However, the management viewed this idea as totally absurd, and too risky. However, this ended up being the biggest failure of the company. Solely months later Steve Jobs created the IPhone, and what pursued was years of dwindling profits for Nokia, in an attempt to catch up to Apple.
Perhaps if Nokia actually gave time to the new potential innovations, allowing for nurturing of the ideas, and waiting for developments to occur, then perhaps the idea would have propelled Nokia to dominate the phone market for decades to come.
Major film studios passed on the early idea of a sexy British spy who ends up saving the world. This later became the most successful franchise within the history of film and cinema – namely the Bond series. Once again, the issue was structure. These ugly ideas would later bloom into something beautiful. However, you must give these ideas time.
As investors, commonly with intangible factors, it can be very hard to understand and compute structure.
However, to grapple with these ideas within companies is a necessity.
Intangible factors are often 10-year leading indicators of the finances of a company.
Pixar & Steve Jobs:
Ed Catmull from Pixar actually speaks towards early stage ideas – loonshots – as “ugly babies”.
“Often these new ideas are fragile, and are very far from pretty. These loonshots are not beautiful, miniature versions of the adults they will grow up to be. Instead, these ideas are vulnerable, incomplete and awkward.”
Steve Jobs made most of his financial wealth from Pixars’ IPO, however, this monetary gain was not the best takeaway for Jobs. The main takeaway for Steve Jobs was the lessons of human organisation, and more specifically, learning how to nature loonshots whilst also maintaining a franchise simultaneously.
Within the movie scene, the idea of separation of phases is highlighted really clearly. To explain, development of the twenty sixth Bond movie is an entirely different experience than development of the first episode within the franchise.
During development of the twenty sixth Bond movie, cash pours in, there is evident levels of marketing, and actors compete for roles within the series. This is not present during initial inception of the idea. These early ideas are ugly and unfinished. For James Bond’s first iteration, Sean Connery had driven milk trucks before acting. He had little experience. There was no huge que of actors waiting to play the role, neither large levels of cash pouring in.
Furthermore, new movie studios are required to separate these phases. Both phases are vital towards the success of a company. Without one phase, these companies will cease to exist.
For Pixar, it is a necessity that their soldiers continually work on already successful series, such as Toy Story, or Up, or the Incredibles. But, it is also a necessity that the artists are working on brand new radical breakthroughs in the form of new stories, characters and ideas. Once again, without these two phases the company would fail. The sole reliance on radical one-hit-wonders would lead to far too many misses, thus ruining the company. But, on the other side of the debate, the sole reliance on iterations of prior series would lead to a stagnation within interest.
Both artists and soldiers are necessary within companies. Without these two domains, the company will cease to exist.
Dynamic Equilibrium:
Role Of A Leader:
I believe that the true role of a leader is to be a gardener, whom tends to the touches and balances of information flows. A leader within a company should not be a dictator, or act like Moses – namely commanding which products fail or succeed – but instead should focus on the flow of information.
The company leader must be more like a gardener, rather than a dictator. This is incredibly important. When it comes to Steve Jobs, or any other innovative leader, these individuals were not outstandingly superior technologists.
These individuals were solely professionals at human organisation, and structure. And within the case of Jobs these lessons did not come easily.
In fact, for Jobs, he was kicked out of Apple, had a range of failed start-ups, including NeXT, and then solely joined Pixar in which he learnt the most vital lessons of structure and human organisation. Only after years of failure and disappointment did Jobs join Apple again, and save the company via the new iteration of structural improvements.
After initial success with the Apple 1, and 11, competitors suddenly started to pass by. In 1980, Atari and Radio Shack sold roughly seven times as many computers as Apple. By 1983, Commodore dominated the market, with the IBM OC, launched only two years earlier, a close second.
Apples market share dropped rapidly – over 10%. Apple’s attempt to win back the spotlight with the Apple 111 and the Lisa, projects led by Jobs until he lost interest (in one case) or was kicked off (in another), flopped.
There was a famous and legendary advertisement at the Super Bowl in 1984 that created major publicity for Apple, thus resulting is a sudden burst of sales. But, the computer was terribly slow, and had no hard drive, whilst also overheating commonly.
Steve Jobs actually insisted on having no fan, to keep the computer silent.
Macintosh sales dwindled to less than ten thousand per month, and the company experienced a string of failures and exists.
The main lesson that we can take away from this story is that, once you understand the true role of a leader, you understand that these leaders do not have to be specialists within a set industry. These leaders solely have to be gardeners – tending to human organisation and information flow.
Leaders should not be analogous to Moses, namely deciding which products fail, or succeeds (as was true within the case of early Steve Jobs), but instead these leaders must focus on information flows, and human organisation.
A leader within a company should not be a dictator, or act like Moses – namely commanding which products fail or succeed – but instead should focus on the flow of information.
Love Both Artists & Soldiers Equally:
Meta provides a great case study to look at within the modern date. Currently Meta is within a phase of mass innovation, in which Zuckerberg is attempting to radically innovate within the department of AR, and VR.
Naturally this creates two main departments for Meta, specifically those who are working on the conventional business – soldiers, and those who are working on the new loonshots – artists. Obviously is it an utter necessity to ensure that both of these departments are successful because both of these departments are key for the survival and growth of the business.
Without the use of artists, or soldiers for that matter, Meta would cease to exist, or fail comically. Both soldiers and artists are necessary for the business.
Imagine if Mark Zuckerberg was to come onto national TV, podcasts, and earnings calls and refer to the individuals (soldiers) working on the conventional Facebook business as “bozos”, or “boring workers”, or perhaps even “pointless members”. Clearly, this would become disastrous for Facebook. It is likely that many members from the Facebook department would leave after feeling unwanted, or unnecessary. In turn, this would impact not only the conventional business and it’s success, but also the new loonshot department that is reliant on capital intensive R&D.
Whilst this story may seem totally fictional, it actually is not. This is exactly what Steve Jobs did, and it caused him to fail multiple times.
Steve Jobs back in the 1970s proudly referred to his team that was working on the Macintosh as artists. But, Jobs then referred to the other people within the company, specifically those working on developing the rest of the Apple franchise as “bozos”. Apple engineers took to wearing buttons with a circle and line running through an image of Bozo The Clown.
To make matters worse, Wozniak proceeded to leave Apple and resigned very publicly after complaining about the demoralising attacks.
Steve Jobs made a huge mistake. He clearly favoured those working on loonshots and radical innovations, in comparison to the rest of the Apple franchise.
Once again this reiterates the fact that:
One must love both artists and soldiers equally.
Conclusion:
As investors, we must learn from these lessons.
Unlike financial analysis, the lessons learnt today are ones of qualitative and intangible analysis. Whilst qualitative and intangible analysis is hard to compute, these pillars are vital to understand.
Fundamentally, whilst modern wisdom speaks towards culture as the most necessary principle within a company, this is wrong.
Structure is. Human organisation is.
Culture still has importance, but structure proceeds culture.
To end, I want to remind us of the beautiful legacy of Steve Jobs through this quote:
“Being the richest man in the cemetery doesn’t matter to me. Going to bed at night saying we’ve done something wonderful… that’s what matters to me.” Steve Jobs.
