Thursday, February 22, 2007

Why Professors Shouldn’t Make Predictions

Back in 1992, John Sculley (Apple CEO 1983-1993) made an amazing appearance before a group of executives at Harvard Business School. It was amazing not because of his brilliance, but his utter cluelessness. One comment was:

I wish we had started moving our technology to the Intel processor years ago so we had more options. Because most of the industry is taking advantage of the tremendous price drops that are going on the Intel world, and we can’t because we’re not on it, and it’s very difficult to move our technology over to that processor very quickly. So I wish we had that option, which we don’t.
As I noted in my analysis of Apple’s many failures during that decade, later in 1992 (according to Jim Carlton’s excellent book), a small team of engineers got a working prototype of Mac OS 7 working on Intel chips, but the project was abandoned when its sponsor left Apple. So if Sculley (nominally CTO) knew what was going on, he could have started the project years earlier and protected it once it launched.

Sculley’s host for the Harvard session was David Yoffie, a much more successful, famous and distinguished strategy professor than yours truly. Yoffie has written the various HBS cases on Apple, as well as a Qualcomm case that (I’m told) competes with my five cases on the company. I consider Yoffie one of the leaders in IT industry strategy, with his cases, journal articles and books. He has a Ph.D. from Stanford, has been an HBS professor since 1981, and also is a director of Intel and Charles Schwab.

However, today I found a 2004 interview of Yoffie that was very skeptical about Apple’s future. Among other things, he noted their revenues had shrunk from $11 billion to $6 billion (true). He then predicted long-term failure for Apple’s niche strategy, for its competition with Windows Vista (then called Longhorn), and Jobs’ ability to continue to succeed:
The interesting thing about teaching Apple is that when things are going bad, everybody says, "Of course." And when Apple is doing well and you begin to teach the same basic ideas and explain why it's not sustainable, there's enormous skepticism. I've seen the cycle now several times. When I first started teaching the case, things were going great and nobody believed me that Apple had problems. And then when Apple was going down, everybody said, "Yes, of course." We see these wonderful cycles in teaching where people tend to be swayed by the latest fad in the business press about Apple.

Let’s see what’s happened since Yoffie’s commentary was published:
Market cap§
Stock appreciation
Net income (2006)
Return on sales

§ As of market close Feb. 22, 2007
† 2005 is latest available

I think what Yoffie is missing is that CEOs matter. Even if Bob Sutton is right that they often don’t, in this case Apple really had an awful string of CEOs from 1983-1997: they wasted more than $2 billion on R&D and inventory-related losses, and the opportunity costs of neither improving the Macintosh nor making a winning PDA were huge. Yoffie’s first Apple case was published in 1992, which means that all the down cycles came in the past 15 years under the bozo CEOs. Meanwhile, Jobs has done the best job of the PC companies of breaking away from the PC paradigm and finding something truly new. (Can it be sustained? Who knows?)

So one take-away is that professors shouldn’t make predictions. Unlike stock analysts, we don’t make a lot of predictions, so with small numbers it’s hard for even the best to yield a Ted Williams batting average.

I also wonder whether Yoffie’s perspective has been colored by sitting inside Intel board meetings since 1989. In 2004, Apple was still outside the Intel ecosystem and Andy Grove had been predicting for a decade that Apple would fail without Intel chips. Thus my second take-away is that professors (like journalists) are human, and we should be more up front about our biases. As a result, I’ve updated my web page to list consulting clients.

Graphic credit: O’Grady’s PowerPage

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