Quality-Focused Companies

I’ve been thinking for a while about companies that focus on making the highest quality products. I wrote most of this essay several years ago, but didn’t finish editing it until now.

The companies that I’ve spent time thinking about are Patagonia (after reading Let My People Go Surfing by Yvon Chouinard), Omni Group (because I worked there), and Apple (because it’s perhaps the most well-known company in this category). Some other examples, that I won’t cover here, are Zappos and Theo Chocolate.

I started categorizing these companies as “quality-focused” after seeing a series of industry research reports in 2009 showing that Apple is far more successful than most people assume, given their market share. For example, Apple sold less than 10% of laptops in the US, but about 90% of the laptops costing more than $1000. They sold less than 2% of cellphones worldwide in 2009, yet earned 30% of the total profit in that market. (Today, they have 9% unit share and 75% of profits.) In other words, Apple sells only high-quality, value-added products that can command a wide profit margin.

I realized that Omni and Patagonia similarly have a strategy of selling high-quality, high-price, high-value products. (And I believe the products are worth their higher cost: they last longer, work better, save time and hassle, and are plain old more fun to use than the cheaper competing products in their respective markets.)

I wondered: What else do these quality-focused companies have in common? Is it an entirely different way of doing business?

The first interesting parallel I noticed was that all three companies have gone through a “crisis” period that forced the companies to clarify and strengthen their vision (goals, values, purpose) and fully commit to it. Patagonia’s growth spiraled out of control in the early nineties and the company almost went bankrupt before simplifying their product line and clarifying their goals. Steve Jobs is widely credited for rescuing Apple from demise with his razor-sharp vision for product design and his insistence on quality and simplicity. Omni, too, went through a painful transition that resulted in the loss of a co-founder and a clarified statement of the company’s mission and values.

All of these companies also go to great lengths to treat their employees well. There are flexible working hours, plenty of vacation time, convenient and healthy cafeterias, top-notch health benefits, etc. “Let My People Go Surfing” refers to Patagonia’s policy that employees are welcome to skip work every now and then when the waves are high. Apple and Omni’s offices include game rooms, movie viewing areas, and lots of couches. Salaries are generous. The reasoning behind all this has to do with the fact that you need high-quality employees to make high-quality products. One way to attract and retain high-quality employees is to make them appreciate and enjoy working with you.

Patagonia founder Chouinard frequently points out that for many (most?) companies, the real product is the company itself.  In other words, the thing that the founders, executives, board, and employees really care about is maximizing company profits, so that the company itself can be sold or the shareholders can be paid.  The products the company actually makes, and the customers who buy those products, are secondary to the “bottom line.”

By contrast, for the quality-focused companies, the actual products and customers are the real bottom line. Employees emotionally care about customers. They spend time on things that might not be “worth the effort” in a strict sense, but are simply the right thing to do for people they care about. Profitability is only important as a means to this end. As Omni’s philosophy statement puts it, “Businesses that lose money can’t make good software for very long.” Note that Apple has achieved this despite being publicly traded, i.e. with shareholders who presumably demand profit above all else. Maintaining a high-quality value structure is presumably easier for privately held companies like Patagonia and Omni Group.

The primary challenge for any quality-focused company is the need to compete against profit-focused corporations who treat their employees worse and try to rip off the high quality products. How do the quality-focused companies succeed in facing off this threat?

The first requirement is to keep the products truly high quality in a way that customers can trust. Customers will only pay extra if they trust that the high-quality claim is true. There are many ways of establishing that trust, such as always being honest (duh), establishing a consistent brand image to associate with that honesty, and having domain experts recommend your products. World-class rock climbers, skiers, etc. recommend Patagonia equipment. And computer experts in various professions recommend Omni software to their colleagues.

A second requirement is consistent innovation. You have to do this to stay ahead of the copycat competitors. In economics parlance, this gives you temporary monopolies because you have a unique product. Innovation requires creativity, and creativity requires happy employees. Research shows that people under stress, depression, pessimism, and poor health are simply not very creative. This is another part of why caring for employees is so central to making high-quality companies work.

A third requirement is that you protect your innovations, which can be done via speed to market, secrecy, and intellectual property law. Apple is notorious for the lengths to which they go to achieve secrecy. Employees working on yet-to-be-released products have to pass through four layers of security doors to get to their offices. Some emails are sent with identifiable patterns of spaces so that if the message leaks out, the perpetrator can be pinpointed. Apple also applies for dozens of patents each year. It’s harder for smaller companies to maintain a patent portfolio, so secrecy and speed to market are key.

The last requirement I will list (though there are probably many others) is the ability to focus on a narrow and exclusive set of products. Apple has an exceptionally small number of product lines; Steve Jobs has said that he is just as proud of the products he decided not to make as he is of the ones that actually made it to market. Patagonia similarly found that they had to simplify their product line to be profitable. Making high-quality products is difficult and time-consuming. The fewer products there are, the more time can be spent improving each.

My goal here is not to show that these companies are essentially the same; they have many important differences. Still, it seems that the decision to focus on high-quality products has implications for many aspects of a business’s operations and culture. Traditions and common wisdom from the wider business world may well be counterproductive for companies focused on quality.

If you run a company, make sure you understand your priorities.

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