One of the seminal books on culture is Edgar Schein’s Organizational Culture and Leadership. Schein writes in the introduction:

Perhaps the most intriguing aspect of culture as a concept is that it points us to phenomena that are below the surface, that are powerful in their impact but invisible and to a considerable degree unconscious. In that sense, culture is to a group what personality or character is to an individual. We can see the behavior that results, but often we cannot see the forces underneath that cause certain kinds of behavior. Yet, just as our personality and character guide and constrain our behavior, so does culture guide and constrain the behavior of members of a group through the shared norms that are held in that group.

In Schein’s telling, things like ping pong tables and kegerators are two (small) examples of artifacts — the visible qualities of an organization. They are easy to observe but their meaning is usually indecipherable and unique to a particular group (to put it another way, copying Google’s perks is missing the point).

The next level down are espoused beliefs and values, what everyone in an organization understands consciously: “openness,” for example, or “the customer is always right”; as you might expect espoused beliefs and values devolve rather easily into cliché.

It’s the third level that truly matters: underlying assumptions. Schein writes:

Basic assumptions, in the sense in which I want to define that concept, have become so taken for granted that one finds little variation within a social unit. This degree of consensus results from repeated success in implementing certain beliefs and values, as previously described. In fact, if a basic assumption comes to be strongly held in a group, members will find behavior based on any other premise inconceivable.

The implications of this definition are profound: culture is not something that begets success, rather, it is a product of it. All companies start with the espoused beliefs and values of their founder(s), but until those beliefs and values are proven correct and successful they are open to debate and change. If, though, they lead to real sustained success, then those values and beliefs slip from the conscious to the unconscious, and it is this transformation that allows companies to maintain the “secret sauce” that drove their initial success even as they scale. The founder no longer needs to espouse his or her beliefs and values to the 10,000th employee; every single person already in the company will do just that, in every decision they make, big or small.

Microsoft’s Blindness

As with most such things, culture is one of a company’s most powerful assets right until it isn’t: the same underlying assumptions that permit an organization to scale massively constrain the ability of that same organization to change direction. More distressingly, culture prevents organizations from even knowing they need to do so. Schein continues:

Basic assumptions, like theories-in-use, tend to be nonconfrontable and nondebatable, and hence are extremely difficult to change. To learn something new in this realm requires us to resurrect, reexamine, and possibly change some of the more stable portions of our cognitive structure…Such learning is intrinsically difficult because the reexamination of basic assumptions temporarily destabilizes our cognitive and interpersonal world, releasing large quantities of basic anxiety. Rather than tolerating such anxiety levels, we tend to want to perceive the events around us as congruent with our assumptions, even if that means distorting, denying, projecting, or in other ways falsifying to ourselves what may be going on around us. It is in this psychological process that culture has its ultimate power.

Probably the canonical example of this mindset was Microsoft after the launch of the iPhone. It’s hard to remember now, but no company today comes close to matching the stranglehold Microsoft had on the computing industry from 1985 to 2005 or so. The company had audacious goals — “A computer on every desk and in every home, running Microsoft software” — which it accomplished and then surpassed: the company owned enterprise back offices as well. This unprecedented success changed that goal — originally an espoused belief — into an unquestioned assumption that of course all computers should be Microsoft-powered. Given this, the real shock would have been then-CEO Steve Ballmer not laughing at the iPhone.

A year-and-a-half later, Microsoft realized that Windows Mobile, their current phone OS, was not competitive with the iPhone and work began on what became Windows Phone. Still, unacknowledged cultural assumptions remained: one, that Microsoft had the time to bring to bear its unmatched resources to make something that might be worse at the beginning but inevitably superior over time, and two, that the company could leverage Windows’ dominance and their Office business. Both assumptions had become cemented in Microsoft’s victory in the browser wars and their slow-motion takeover of corporate data centers; in truth, though, Microsofts’ mobile efforts were already doomed, and nearly everyone realized it before Windows Phone even launched with a funeral for the iPhone.

Steve Ballmer never figured it out; his last acts were to reorganize the company around a “One Microsoft” strategy centered on Windows, and to buy Nokia to prop up Windows Phone. It fell to Satya Nadella, his successor, to change the culture, and it’s why the fact his first public event was to announce Office for iPad was so critical. I wrote at the time:

This is the power CEOs have. They cannot do all the work, and they cannot impact industry trends beyond their control. But they can choose whether or not to accept reality, and in so doing, impact the worldview of all those they lead.

Microsoft under Nadella’s leadership has, over the last three years, undergone a tremendous transformation, embracing its destiny as a device-agnostic service provider; still, it is fighting the headwinds of Amazon’s cloud, open source tooling, and the fact that mobile users had six years to get used to a world without Microsoft software. How much stronger might the company have been had it faced reality in 2007, but the culture made that impossible.

Steve Jobs’ Leadership

Shein defines leadership in the context of culture:

When we examine culture and leadership closely, we see that they are two sides of the same coin; neither can really be understood by itself. On the one hand, cultural norms define how a given nation or organizations will define leadership—who will get promoted, who will get the attention of followers. On the other hand, it can be argued that the only thing of real importance that leaders do is to create and manage culture; that the unique talent of leaders is their ability to understand and work with culture; and that it is an ultimate act of leadership to destroy culture when it is viewed as dysfunctional.

A great example of this sort of destruction was Steve Jobs’ first keynote as interim CEO at the 1997 Boston Macworld, specifically the announcement of Apple’s shocking partnership with Microsoft:

When Jobs said the word Microsoft, the audience audibly groaned. A few minutes later, when Jobs clicked to a slide that said Internet Explorer would be the default browser on Macintosh, the audience booed so loudly that Jobs had to stop speaking. When Jobs finally said the actual words “default browser” the audience booed even louder, with several individuals shouting “No!” It is, given the context of today’s Apple keynotes, shocking to watch.

Then, after Bill Gates spoke to the crowd via satellite (in what Jobs would call his “worst and stupidest staging event ever”), Jobs launched into what his biographer Walter Isaacson called an “impromptu sermon”:

If we want to move forward and see Apple healthy and prospering again, we have to let go of a few things here. We have to let go of this notion that for Apple to win Microsoft has to lose. OK? We have to embrace a notion that for Apple to win Apple has to do a really good job, and if others are going to help us, that’s great, cause we need all the help we can get. And if we screw up and we don’t do a good job, it’s not somebody else’s fault. It’s our fault. So, I think that’s a very important perspective. I think, if we want Microsoft Office on the Mac, we better treat the company that puts it out with a little bit of gratitude. We like their software. So, the era of setting this up as a competition between Apple and Microsoft is over as far as I’m concerned. This is about getting healthy, and this is about Apple being able to make incredibly great contributions to the industry, to get healthy and prosper again.

Here’s Shein:

But as the group runs into adaptive difficulties, as its environment changes to the point where some of its assumptions are no longer valid, leadership comes into play once more. Leadership is now the ability to step outside the culture that created the leader and to start evolutionary change processes that are more adaptive. This ability to perceive the limitations of one’s own culture and to evolve the culture adaptively is the essence and ultimate challenge of leadership.

Make no mistake: even though he had been gone for over a decade, Steve Jobs was responsible for that booing.

Jobs had set up Apple generally and the Macintosh specifically as completely unique and superior to the alternatives, particularly the hated IBM PC and its Windows (originally DOS) operating system. By 1997, though, Microsoft had won, and Apple was fighting for its life. And yet the audience booed its lifeline! That is how powerful culture can be — and that is why Jobs’ “impromptu sermon” was so necessary and so powerful. It was Apple’s version of Office on the iPad, and a brilliant display of leadership.

Warning Signs for Apple and Google

Over the weekend Marco Arment wrote a widely-read piece (now) called If Google’s Right About AI, That’s a Problem for Apple:

The BlackBerry’s success came to an end not because RIM started releasing worse smartphones, but because the new job of the smartphone shifted almost entirely outside of their capabilities, and it was too late to catch up. RIM hadn’t spent years building a world-class operating system, or a staff full of great designers, or expertise in mass production of luxury-quality consumer electronics, or amazing APIs and developer tools, or an app store with millions of users with credit cards already on file, or all of the other major assets that Apple had developed over a decade (or longer) that enabled the iPhone. No new initiative, management change, or acquisition in 2007 could’ve saved the BlackBerry. It was too late, and the gulf was too wide. Today, Amazon, Facebook, and Google are placing large bets on advanced AI, ubiquitous assistants, and voice interfaces, hoping that these will become the next thing that our devices are for. If they’re right — and that’s a big “if” — I’m worried for Apple…If the landscape shifts to prioritize those big-data AI services, Apple will find itself in a similar position as BlackBerry did almost a decade ago: what they’re able to do, despite being very good at it, won’t be enough anymore, and they won’t be able to catch up.

Arment is exactly right. What is fascinating, though, is that, as I wrote last week, Google has their own set of problems: users actually spend their time in social apps, mostly owned by Facebook, and while Google has a critical asset in Android, its most valuable users (from a monetization standpoint) are on iOS. How will users actually access Google’s AI capabilities (if they turn out to matter), and how will Google monetize them?

To be sure, neither company is struggling today. Apple may have failed to achieve record results for the first time in 13 years, but their 2Q 2016 revenue of $50.6 billion was more than the revenue of Microsoft, Google, and Facebook combined; Google, meanwhile, is still setting year-over-year records, with $17.3 billion in revenue.

That, though, is the challenge: BlackBerry wasn’t struggling in 2006, nor was Microsoft in 2007, or even Apple as late as 1993. There was no obvious reason to think that anything was amiss, and it was culture that ensured that whatever hints there were would be ignored. Shein again:

Culture as a set of basic assumptions defines for us what to pay attention to, what things mean, how to react emotionally to what is going on, and what actions to take in various kinds of situations. Once we have developed an integrated set of such assumptions—a “thought world” or “mental map”—we will be maximally comfortable with others who share the same set of assumptions and very uncomfortable and vulnerable in situations where different assumptions operate, because either we will not understand what is going on, or, worse, we will misperceive and misinterpret the actions of others.

And so BlackBerry thought Apple was lying about the iPhone; Steve Ballmer declared “He liked Microsoft’s chances”; and Apple, well, Apple had already decided to, in Jobs’ view, sacrifice product for profits. The time to act was at the moment of denial, not the moment of crisis.

Paths Forward

That said, both Apple and Google are still operating from positions of considerable strength going forward: iPhone growth may or may not have peaked, but it’s not going anywhere for a good long while, and the company is almost certainly working on a car. Google, meanwhile, is arguably in even better shape: the company has a massive lead in machine learning, which could manifest itself in all kinds of interesting applications, and here Android looms large.

Still, there are very obvious steps both companies could do to entrench their advantages:

Apple could partner with a company like Microsoft (again) to build out its services layer, both on the backend (Azure) and, if they want to get really radical, the front-end (combining Siri and Cortana). The most radical solution, though, would be fully opening up iOS in such a way that users could set Google (or any other company’s) services as defaults. This would foreclose any medium-term threat to the iPhone from an Android experience that is fully-infused with Google’s AI capabilities (more on the long-term problems in a moment)

Google could — should! — build a bot for Facebook Messenger. More than that, they should build an entire backend for Facebook Messenger developers. Do people want to live in Facebook? Very well, meet them there, just as Google found its user base on Windows through the browser.

Both ideas (and there are certainly others) have their issues: Apple would be foreclosing their future as a services provider, but frankly, I am extremely skeptical about this regardless. Not only does the company have the wrong organizational structure but, similar to Microsoft, the company’s overwhelming success has had far-reaching effects on the culture; in this case, the company is so focused on making physical products that it’s doubtful an effective services mentality could ever emerge, not to mention the company’s (at times disingenuous) absolutism about privacy.

Google, meanwhile, would be supporting its most dangerous competitor. At the end of the day Google and Facebook share the exact same customers — advertisers — and even though it’s not clear how Google can steal attention back it’s also not obvious that they should aid their rival.

The Curse of Culture

The biggest problem for both, though, is culture. Apple, beyond everything else — and in part because of the humiliation of that 1997 keynote — desires complete control; Google, for its part, desires information, and can’t tolerate the idea of Facebook having more.

The rigidity of both is the manifestation of the disease that affects every great company: the assurance that what worked before will work eternally into the future, even if circumstances have changed. What makes companies great is inevitably what makes companies fail, whenever that day comes.