Apple: Expectations Vs. Reality

Apple’s (AAPL) share price dropped 12 percent on Jan. 24, following the announcement of its quarterly earnings. Investors have grown concerned over Apple’s future growth prospects despite turning in a record quarter. This is a classic example of the “expectation market” of analysts and investors losing touch with the “real market” of products and customers. Apple continues to outperform its competitors on all objective criteria—profitability, product quality, brand equity—but the company has been hyped up so much, and for so long, that even a small disappointment leads to a big hit on the share price.

The trouble is, the expectation market doesn’t operate independently of the real market—there is also a feedback loop. So now the top has been called, the markets are looking to justify their newfound skepticism, and this feeds anxiety among customers and employees. From now on, every problem will be magnified, and every statement Chief Executive Officer Tim Cook makes will be picked over for signs of weakness. If prices are raised, Apple will be accused of abusing its powerful position; if prices are lowered, it means it’s scrambling to retain market share. If Apple launches too many new products, it means the company has lost the laser-like focus it had when Steve Jobs was alive; if it launches too few, it means Apple’s executives are resting on their laurels. All this negative publicity will be overstated, but unfortunately it affects the way customers behave, so it has a self-fulfilling quality.

Apple’s current situation reminds us that Newton’s Law of Gravity still holds: What goes up must come down. So what are the management lessons for a company that suddenly finds itself dominated by Newton’s Law?

When companies get into trouble, you might expect them to freeze like a deer in headlights. Actually, they do the opposite: They launch a wide range of initiatives, in scatter-gun fashion. When Steve Jobs left Apple in 1985, John Sculley moved the company into digital cameras, audio players, and TV appliances, alongside an ever-expanding range of PCs and laptops. Kodak’s slow decline through the 1990s was marked by a succession of new digital products and services, as well as new distribution models and partnerships.

In such cases, the implicit logic is that if you throw enough mud at the wall, some will surely stick. But it doesn’t. Instead, customers become confused by the proliferation of products. Employees don’t know how to prioritize their time. Boards become impatient, new executives are brought in, the sense of confusion becomes even greater, and the company ends up “grasping for salvation,” in Jim Collins’s memorable phrase.

What should CEOs do when the markets turn against them? Ignore the unsolicited advice of experts and analysts. Set a clear course, admit that the road ahead will be a bit rough, and then stick with it. Apple is still in great shape, but the confidence of customers, employees, and other stakeholders will be shaken if the company starts to appear indecisive.

One CEO who has taken this playbook to heart is Stephen Elop at Nokia (NOK). You may question whether the Nokia/Microsoft (MSFT) alliance is going to succeed, but you can’t accuse Elop of fudging the issues or flip-flopping on strategy. He has given Nokia a clear sense of direction, and in a turbulent and confusing world, that can make a real difference.

BusinessWeek.com