The upshot of all this is that, over time, it is virtually impossible for Apple to spend as much as Microsoft on R&D. The economics just don’t work.
For a long time, Apple charged a premium for its machines in order to help float the cost of R&D for the operating system. But at a certain point Apple had to abandon that method in order to be able to compete with the PC. The fact that Microsoft can spread R&D over so many machines gives it an extreme economic advan- tage over Apple.
Being the brilliant marketer that he is, Steve Jobs recently fig- ured out how to get Apple back into the game. At his direction, the company has shed many of its product lines in order to focus its attention and resources on several key areas, like graphics and education, where Apple has traditionally excelled. Jobs realized that dominating a few key areas instead of spreading Apple too thin in multiple ones will give the company a shot at an economy- of-scale advantage.
inventory on hand. Compaq itself needed to maintain five to eight weeks of inventory, too. All told, Compaq had about 15 weeks of inventory in the pipeline at any one time.
Now, consider that the cost of building a computer goes down by 30 to 35 percent a year. That’s 2 to 3 percent a month. If a com- pany, like Dell, has two months’ less inventory, that’s a 5 to 6 per- cent economic advantage over more bloated competitors. Plus, unlike hardware vendors like Compaq, Dell sells directly to the consumer. It doesn’t have to pay resellers a margin on each machine. This gives Dell an extra 4 to 5% in leverage—the remain- ing portion of its 10 percent economic advantage.
A 10 percent competitive advantage is no small thing. When Dell was a small company, Compaq, IBM, Hewlett-Packard, and the other big boys could have tried to nip it in the bud. Greed and inertia kept them from doing so, and because of that, Dell has become dangerous to them.
A Word on Price
Most businesses are obsessed with price, but a lower price is rele- vant only if it reflects a true cost advantage over the competition.
If your company is so well managed and efficiently run that you can keep your prices consistently lower than the competition because it costsyou less, price can be a powerful weapon, because you have a true cost advantage. Otherwise, you’ll retain new cus- tomers only over the short term, until another company comes along with a sale.
The telephone industry is a prime example. My kids are always telling me they’ve switched their long-distance company again.
When they’re with Sprint, AT&T bombards them on a weekly basis with sales calls, trying to convince them to switch. AT&T usually offers to undercut Sprint’s rates by a penny a minute during cer- tain hours. If my kids decide to switch back to AT&T, similar offers flood in from Sprint. Because they haven’t been particularly impressed with either company, they blow with the wind, switching to whichever is offering the best rates that month.
The airline industry has a similar problem. So few carriers have distinguished themselves with superior service that the bulk
74 the big tech score
D O N ’ T J U D G E A B O O K B Y I T S C O V E R ; D O J U D G E A P R O D U C T
B Y I T S P A C K A G E
During my first year on Wall Street, I was knee deep in analysis of three major computer software companies: Microsoft, Lotus, and Ashton-Tate. Each had a lot going for it, and each had its own unique set of obstacles—about which the Street could argue to no end.
While I was interested in who had the best product, who had the best management, who had the best long-term vision, and all of the other traditional measuring sticks, I also became somewhat obsessed by a far less debated issue—who had the most efficient packaging.
In early 1991, I decided to analyze how much each com- pany was spending on boxing its software. This might seem a bit odd, but it led to some pretty telling information. What I found, after estimating the cost of every part of each com- pany’s packaging (through what’s called a bill of materials explo- sion), was that Microsoft’s packaging cost only $16, Lotus’s was
$34, and Ashton-Tate’s rang in at a whopping $70 per product.
The fact that the costs differed so widely for products that should have had similar packaging not only exhibited a huge economic advantage for Microsoft but also pointed to major mismanagement, especially at Ashton-Tate. Plus, the two com- panies wasting money on packaging had less remaining for advertising and R&D, functions that would greatly impact future revenue. (In fact, soon after I published my analysis, Ashton-Tate’s stock tanked, and the company was forced to sell itself to Borland.)
As they say, good things come in small packages, but—per- haps even more important in the competitive advantage arena—small packaging is a good thing.
of airline customers make a decision based solely on price and flight availability. Because none of the major national airlines con- sistently has better prices or flight schedules than its competition, virtually all customers shop around.
Companies like Southwest Airlines are an exception. South- west has been able to corner its segment of the market because it has a true cost advantage. Because Southwest utilizes ticketless travel and unassigned seats, there is no need for computerized seating. The cost of selling physical tickets (both in materials and employees) is eliminated, and the time it takes to check someone in is reduced, so Southwest has less overhead and requires fewer employees. Even more important, the airline is able to load and unload its planes so rapidly that it gets more flights per plane per day, another boon to its bottom line.
For all of these reasons, Southwest has an inherent cost advan- tage, and it passes the savings on to the customers, offering fares consistently lower than the competition’s. This further strength- ens its foothold.