Build A Great Product

Build A Great Product

Last week the great, inimitable Charlie Munger sadly died. There are many great, humorous and witty quotes in his spoken pocketbook of wisdom that could fill this article, but I’ll give you only one.

Munger said: “Perhaps the most important rule in management is ‘Get the incentives right.’” His longtime business partner, and fellow billionaire, Warren Buffett, has often spoken about the importance of incentives. Understand incentives, and you’ll understand the world. And it turns out that incentives are pretty key for building the future, which is the name of this blog, after all.

Every start-up and every person with a great idea (and those with terrible ideas) starts with a desire to build a great product. We all know that we should build something someone wants. Build the best “thing” you can, whether that’s an ecommerce site, a documentary, a data centre or a rocket ship. If your product feels like it was built by someone who doesn’t care in their lunch break, it’s sort of noticeable. Build a great product. Naturally, this is constrained: you can build a great product, but if costs are out of control or you can’t sell, then you’ll never have a successful business. The Saab bankruptcy is a cautionary tale: great, innovative cars, but in the end, Saab simply ran out of money. The commercialisation of innovation is as critical as the innovation itself. 

Some companies are able to sustain innovation over a prolonged period - and we should applaud and laud them - but many don’t. Sometimes this infects whole industries. In the UK, everyone knows that utility companies are awful and overpriced. But no one can break this government-supported oligopoly. In fact, they seem to want us to pay more for this terrible service.

So how do companies go from building a great product to a death spiral of stasis, decline and ultimately death? It’s a long way down, with plenty of opportunities to survive. IBM has been in this death spiral forever, and Google is seemingly intent on following. 

But it’s not inevitable: against many expectations, Microsoft came back from the dead.

What are the causes of a death spiral? Sure, there is complacency that comes from success. There’s losing focus and extending your business to places where you don’t have an edge. There’s bureaucracy. There’s regulatory capture. There’s the envy from others that comes from success. At some point, having more staff is inefficient. There’s a lack of competition.

But there is one thing, more than anything else, which I think inhibits large, once innovative corporations from continued success, and that’s paying attention to the stock market: day to day, the random walk fluctuations are nonsense, but the allure is addictive. I wince when the news presenter announces that a stock or the whole FTSE is down 2% or 5%: it simply doesn’t matter. Even more of a terrible affliction is quarterly, quarterly(!) earnings targets that management can’t miss, which can lead to dumb decisions. “Random tech company reported earnings per share of $9.60, below analyst expectations of $9.90.” Who cares what analysts think, and why don’t they care more about the quality of the underlying product? Jeff Bezos famously only spent six hours a year speaking to analysts. That’s probably about five and a half hours too much.

Let’s ask Warren Buffett to sum up: “No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant”, he once said. As with money, innovation and technology compound. If management is incentivised to hit quarterly earnings targets to satisfy Wall Street, it’s pretty damn hard to innovate. You can’t take a speculative bet. You can’t disrupt yourself. You can’t take risks. You fall foul of the Innovator's Dilemma. You listen to your CFO just a bit too much. You end up stuffing search results with more ads and forget to use the Transformer architecture your own engineers developed, for example! 

Ignore the stock market, ignore valuations, ignore the stock ticker, be happy and go back to the start: build a great product. Because if you don’t have that, you’ve got nothing else.