By coolprash
March 5, 2002

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Hypercompetition 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 Business Strategy.

In brief D'Aveni says that companies compete in 4 arenas of an industry.

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 (Knowledge Base).

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 the world.

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 that).

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.

FINAL THOUGHTS
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.
Yours sincerely,
Coolprash

(source: Motley Fool.com - March 5, 2002)