OF THE DAY (source: Motley
Fool.com - March 5, 2002)
Hypercompetition and Apple
March 5, 2002
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and Apple Computer.
After years of loss making quarters, Steve Jobs came to the helm
of Apple Computers. I don't know whether he had read "Hypercompetition"
by Richard A. D'Aveni, but the return of Apple under Steve's command
is the textbook example for D'Aveni's groundbreaking theory on
In brief D'Aveni says that companies compete in 4 arenas of an
Cost & Quality: This is one arena. a company can have
a low cost low quality product or a high cost high quality product.
Over time the Low cost producer will increase quality and the
high cost producer will decrease prices.
Know-How and Timing: The company's knowledge base and the
timing of product releases can be very important to its success.
Procter & Gamble and IBM are two companies that have used
their strong patent portfolios to garner extra revenues of up
to a billion dollar's a year. Apple stands 13 in Technology Review's
R & D scorecard with 380 patents in 2001.
Strongholds: These are markets, geographical or product,
that the company is very strong in and are a source of continuous
sales and profits. When certain markets are a company's preserve,
K-12 and printing industry are Apple's markets, these provide
certain profits and cash flows to allow the company to attack
a competitor in its market.
Deep Pockets: A company can have a large amount of cash
reserves to help it in times of change, introduction of new products,
entry into new product markets and attacks on competitors.
Having an advantage in all these areas is not necessarily a continuous
advantage. They are all temporary sources of advantage in today's
hypercompetitive markets. There are competitors snipping at your
heels in every market. They are ready to improve the quality of
their products above yours, reduce their costs below yours. They
want your profit centers and are creating their own stashes of
cash by mergers and alliances.
Now how Steve got the company back from the brink:
1. He focused strongly on bringing cost in line with WinTel PC's.
If I remember correctly, he hired away a top manager from Compaq
to re-engineer Apple's supply chain (cost reduction).
2. He introduced radically new computers for the home and education
markets (iMac). He did this by springing a surprise on competitors
(surprise is very important to keep competitors off-balance and
stunned, preventing them from regrouping and attacking).
3. He focused on satisfying customers in strong holds like printing
and publishing, education, scientific and graphics. He made computers
and developed technologies to satisfy this market e.g. beefed
up QuickTime, robust AppleScript, cheaper computers for education
markets and a dedicated sales force for the education market.
4. Apple's CFO I guess was instructed to start building a war
chest for a couple of quarter's worth of losses. The target was
$4 billion, as that amount has been stable for the last few quarters
in the balance sheet.
How can a company gain advantages in these 4 arenas?
D'Aveni says that there are the new 7 S's (note: compared
to the old S's)
Speed: is related to the churning out of advantage after
advantage in each arena. Apple has been regularly churning out
product innovations like Airport, Mac OS X, iTunes, iMovie and
novel form factors etc.
Strategic Soothsaying: Steve Jobs setting targets to become
the center of the Digital Hub is an example of this. Steve or
any body else from the company, as far as I know, has not postulated
the next aim.
Superior Stakeholder Satisfaction: Satisfying stakeholder
is very important. The most important stakeholders are the customers.
Apple has obviously been doing very well as they won the best
Computer Support Award from ZDNet. The lowliest stakeholders are
the shareholders and company executives.
Surprise: Apple has consistently surprised customers and
competitors alike by introducing the iMac, Airport, iMovie, Final
Cut Pro and lean mean laptops like the iBook and PowerBook G4.
Shift the rules of competition: Apple shifted the rules
of competition from MHz and RAM to aesthetics. All Apple computers
look beautiful, while the competitors suck.
Signaling Strategic intent: Apple clearly in early 1997 interviews
signaled it's intent to provide better products and services to
it's customers. When Dell started to make inroads into the education
market, Apple signaled it's intent not to lose this market by
creating a focused in house sales force, appointing a vice president
for educational sales and aggressively providing discounts to
education systems around the country to make sales. Recently it
went to court to prevent Microsoft from donating used Pc's and
its software to schools.
Simultaneous & Strategic thrusts: Apple consistently
made multiple thrusts in software, hardware and customer support
How does all this help? It creates a temporary advantage (12 -
18 months). It took WinTel competitors to introduce Wi-Fi (802.11b)
almost 6 months in the form of PC cards, albeit at a much higher
price ($200 compared to apple's $100 card) and none of the elegance.
With the original iMac's form factor, Apple took the world by
storm and to come up with competing new form factors, it took
PC manufacturers almost 24 months. Even then they have never been
able to reach the Apple's level of sophistication.
LONG TERM FUTURE
As we have seen in the past, the Personal Computer market has
been oscillating between two points: aesthetics and performance.
In the late 70's computer's focused on Performance of their computers
and they became popular with hobbyist an electronics aficionados.
This lasted till early 1980's.
Apple shifted the ground from Performance to Aesthetics by introducing
the Macintosh OS. It was the most aesthetically advanced OS in
In the early 1990's Apple's World market share went down from
20% to 5% today. People were buying computer's more for their
power and performance, which was characterized by faster MHz from
Intel. For most of the decade Apple suffered to show the consumer
that Mac's with lower MHz were fast enough or better, compared
to a WinTel machine with faster processor (still trying to do
In 1998 Apple turned the pendulum towards itself by introducing
the iMac, an aesthetically good form factor.
Therefore in the PC market the pendulum of change has gone from
aesthetics to performance and back. We can expect this to continue
and hopefully Apple will be ready for the next change to performance
by having computer's ready with more GHz, faster bus speeds, better
3D processors (Raycer, the company Apple bought) etc.
When do I expect the change, soon in 2003-2004? Hypercompetition
brings smaller and smaller competitively advantageous timeframes.
Previous advantage for Mac lasted 1984-1992. PC advantage lasted
1993-1998. Mac 1998 - 2003 (approx.) Maybe even only till 2002,
then the shift to "performance" begins.
What can we continue to expect from Apple? Apple will continue
to introduce cutting edge technologies that are relevant to its
customer base and provide them with a user experience befitting
that of a Mac user. It will take advantage of the fact that it
controls hardware and software design by implementing the latest
useful technologies faster and better than it's competitors, thereby
keeping its stakeholders supremely satisfied.
Thank you for reading.
Fool.com - March 5, 2002)