Steve Jobs often said that someone early in his career told him, “Manage the top line, which is your business strategy, your people, the talent that you have, your products. Do all that stuff right and the bottom line will follow.”
And that has certainly been the case for Apple. But why this adage has such resonance today is that so many companies do it precisely the other way around: They focus on the bottom line.
What’s the difference? Start with the basic definitions. Both expressions, of course, refer to a company’s Profit and Loss Statement. On that statement, the Bottom Line is the net income, earnings or return on income. These figures are the hard truth. It’s the profitability you deliver to your shareholders.
Then there’s the Top Line. This normally refers to the income received for products and services before expenses are taken out. And what so many executives forget is that the Top Line indicates how well you are serving your customers. It shows if people are buying what you’re selling.
Entrepreneurs, like Steve Jobs, tend to be Top Line people. They inspire people with their vision, some new way to add value and create wealth. When that vision materializes into products beneficial to customers, revenue begins to flow.
The problem is that most entrepreneurs aren’t Bottom Line people. They tend to overspend on fulfilling their dream. And those slightly less idealistic people who invested money in their venture want a return.
So they bring a Bottom Line person to the dance. This is a CFO or CEO appointed by the board to reign in said entrepreneur. In other words, adult supervision.
Within the toddling venture there is usually an epic battle between the Top Line visionary and the Bottom Line realist. And the Bottom Line always wins out. Because the investors vote with their wallet. As long as the original idea behind the company has legs or is unique in the marketplace, their Bottom Liner can squeeze growth and profitability out of it.
Bottom Line executives figure out how to get more milk out of the cow, while feeding it less and less. This delivers more profitability. It also usually ends up killing the cow.
Why? Because professional CEOs are organization people, not visionaries. They’ve climbed the ladder by delivering great numbers. New ideas? Not so much.
Eventually, the original idea will become common place, a commodity that can be replicated by others. Then, the only way to compete profitably is to differentiate the product—come up with something new.
But wait a second, creating something new takes vision and an understanding of why consumers valued the original idea in the first place. And that went out the door with the company’s founder.
This is where visionless companies with deep pockets launch a flock of flawed products and stand back to see if any of them takeoff. They’ll also copy someone else’s products or services. Can anyone say, “Zune.” Professionals call this diversification. I brand it desperation. Companies with shallower coffers will simply try to sell themselves off to the highest bidder. Either way, what made the company successful in the first place is gone.
But this death cycle is not inevitable. Companies, like IBM, have reinvented themselves by bringing in a CEO with vision, such as Lou Gerstner. Or in Apple’s case, returning the original visionary, who could restore the company’s values and innovative drive. In other words, refocussing on the Top Line.
That said, Steve exaggerated. Go figure. Successful companies like Apple don’t just focus on the Top Line. They never take their eyes off either the top or bottom lines.
A large part of Apple’s success is that it took away Profit and Loss responsibilities from its divisions: no general managers. Instead, Apple consolidated attention to the Bottom Line in world-class Operations and Finance teams lead by Tim Cook and Peter Oppenheimer. Those teams helped Apple consistently deliver best-in-class profit margins.
The beauty of Apple’s organization is that it compels the rest of the company—Design, Engineering, Marketing, Sales—to focus on the ever so important Top Line. Which, of course, is serving customers through a continuous flow of innovative products and services that deliver on the company’s core values.
Steve’s point was that the Top Line is on top for a reason. Those companies that put the Bottom Line first are like an hourglass that’s been flipped over. It’s only a matter of time before their fortunes run out.