by Adam Hartung | Apr 2, 2015 | Current Affairs, Defend & Extend, In the Rapids, Innovation, Leadership, Web/Tech
Microsoft launched its new Surface 3 this week, and it has been gathering rave reviews. Many analysts think its combination of a full Windows OS (not the slimmed down RT version on previous Surface tablets,) thinness and ability to operate as both a tablet and a PC make it a great product for business. And at $499 it is cheaper than any tablet from market pioneer Apple.
Meanwhile Apple keeps promoting the new Apple Watch, which was debuted last month and is scheduled to release April 24. It is a new product in a market segment (wearables) which has had very little development, and very few competitive products. While there is a lot of hoopla, there are also a lot of skeptics who wonder why anyone would buy an Apple Watch. And these skeptics worry Apple’s Watch risks diverting the company’s focus away from profitable tablet sales as competitors hone their offerings.
Looking at these launches gives a lot of insight into how these two companies think, and the way they compete. One clearly lives in red oceans, the other focuses on blue oceans.
Blue Ocean Strategy (Chan Kim and Renee Mauborgne) was released in 2005 by Harvard Business School Press. It became a huge best-seller, and remains popular today. The thesis is that most companies focus on competing against rivals for share in existing markets. Competition intensifies, features blossom, prices decline and the marketplace loses margin as competitors rush to sell cheaper products in order to maintain share. In this competitively intense ocean segments are niched and products are commoditized turning the water red (either the red ink of losses, or the blood of flailing competitors, choose your preferred metaphor.)
On the other hand, companies can choose to avoid this margin-eroding competitive intensity by choosing to put less energy into red oceans, and instead pioneer blue oceans – markets largely untapped by competition. By focusing beyond existing market demands companies can identify unmet needs (needs beyond lower price or incremental product improvements) and then innovate new solutions which create far more profitable uncontested markets – blue oceans.
Obviously, the authors are not big fans of operational excellence and a focus on execution, but instead see more value for shareholders and employees from innovation and new market development.
If we look at the new Surface 3 we see what looks to be a very good product. Certainly a product which is competitive. The Surface 3 has great specifications, a lot of adaptability and meets many user needs – and it is available at what appears to be a favorable price when compared with iPads.
But …. it is being launched into a very, very red ocean.
The market for inexpensive personal computing devices is filled with a lot of products. Don’t forget that before we had tablets we had netbooks. Low cost, scaled back yet very useful Microsoft-based PCs which can be purchased at prices that are less than half the cost of a Surface 3. And although Surface 3 can be used as a tablet, the number of apps is a fraction of competitive iOS and Android products – and the developer community has not yet embraced creating new apps for Windows tablets. So Surface 3 is more than a netbook, but also a lot more expensive.
Additionally, the market has Chromebooks which are low-cost devices using Google Chrome which give most of the capability users need, plus extensive internet/cloud application access at prices less than a third that of Surface 3. In fact, amidst the Microsoft and Apple announcements Google announced it was releasing a new ChromeBit stick which could be plugged into any monitor, then work with any Bluetooth enabled keyboard and mouse, to turn your TV into a computer. And this is expected to sell for as little as $100 – or maybe less!
This is classic red ocean behavior. The market is being fragmented into things that work as PCs, things that work as tablets (meaning run apps instead of applications,) things that deliver the functionality of one or the other but without traditional hardware, and things that are a hybrid of both. And prices are plummeting. Intense competition, multiple suppliers and eroding margins.
Ouch. The “winners” in this market will undoubtedly generate sales. But, will they make decent profits? At low initial prices, and software that is either deeply discounted or free (Google’s cloud-based MSOffice competitive products are free, and buyers of Surface 3 receive 1 year free of MS365 Office in the cloud, as well as free upgrade to Windows 10,) it is far from obvious how profitable these products will be.
Amidst this intense competition for sales of tablets and other low-end devices, Apple seems to be completely focused on selling a product that not many people seem to want. At least not yet. In one of the quirkier product launch messages that’s been used, Apple is saying it developed the Apple Watch because its other innovative product line – the iPhone – “is ruining your life.”
Apple is saying that its leaders have looked into the future, and they think today’s technology is going to move onto our bodies. Become far more personal. More interactive, more knowledgeable about its owner, and more capable of being helpful without being an interruption. They see a future where we don’t need a keyboard, mouse or other artificial interface to connect to technology that improves our productivity.
Right. That is easy to discount. Apple’s leaders are betting on a vision. Not a market. They could be right. Or they could be wrong. They want us to trust them. Meanwhile, if tablet sales falter….. if Surface 3 and ChromeBit do steal the “low end” – or some other segment – of the tablet market…..if smartphone sales slip….. if other “forward looking” products like ApplePay and iBeacon don’t catch on……
This week we see two companies fundamentally different methods of competing. Microsoft thinks in relation to its historical core markets, and engaging in bloody battles to win share. Microsoft looks at existing markets – in this case tablets – and thinks about what it has to do to win sales/share at all cost. Microsoft is a red ocean competitor.
Apple, on the other hand, pioneers new markets. Nobody needed an iPod… folks were happy enough with Sony Walkman and Discman. Everybody loved their Razr phones and Blackberries… until Apple gave them an iPhone and an armload of apps. Netbook sales were skyrocketing until iPads came along providing greater mobility and a different way of getting the job done.
Apple’s success has not been built upon defending historical markets. Rather, it has pioneered new markets that made existing markets obsolete. Its success has never looked obvious. Contrarily, many of its products looked quite underwhelming when launched. Questionable. And it has cannibalized its own products as it brought out new ones (remember when iPods were so new there was the iPod mini, iPod nano and iPod Touch? After 5 years of declining iPod sale Apple has stopped reporting them.) Apple avoids red oceans, and prefers to develop blue ones.
Which company will be more successful in 2020? Time will tell. But, since 2000 Apple has gone from nearly bankrupt to the most valuable publicly traded company in the USA. Since 1/1/2001 Microsoft has gone up 32% in value. Apple has risen 8,000%. While most of us prefer the competition in red oceans, so far Apple has demonstrated what Blue Ocean Strategy authors claimed, that it is more profitable to find blue oceans. And they’ve shown us they can do it.
by Adam Hartung | Apr 11, 2013 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
The good folks at Wichita State (a final four contender as U.S. basketball fans know) and Purdue released their 2013 Airline Quality Rating. United Airlines came in dead last. To which United responded that they simply did not care. Oh my.
Interestingly, this study is based wholly on statistical performance, rather than customer input. The academics utilize on-time flight performance, denied passenger boardings, mishandled bags and complaints filed with the Department of Transportation. It does not even begin to explore surveying customers about their satisfaction. Anyone who flies regularly can well imagine those results. Oh my.
So how would you expect an innovative, adaptive growth-oriented company (think like Amazon, Apple, Samsung, Virgin, Neimann-Marcus, Lulu Lemon) to react to declining customer performance metrics? They might actually change the product, to make it more desirable by customers. They might hire more customer service representatives to identify customer issues and fix problems quicker. They might adjust their processes to achieve higher customer satisfaction. They might train their employees to be more customer-oriented.
But, United decidedly is not an innovative, adaptive organization. So it responded by denying the situation. Claiming things are getting better. And talking about how it is spending more money on its long-term strategy.
United doesn't care about customers – and really never has. United is focused on "operational excellence" (using the word excellence very loosely) as Messrs. Treacy and Wiersema called this strategy in their mega-popular book "The Discipline of Market Leaders" from 1995. United's strategy, like many, many businesses, is to constantly strive for better execution of an old strategy (in their case, hub-and-spoke flight operations) by hammering away at cutting costs.
Locked in to this strategy, United invests in more airplanes and gates (including making acquisitions like Continental) believing that being bigger will lead to more cost cutting opportunities (code named "synergies".) They beat up on employees, fight with unions, remove anything unessential (like food) invent ways to create charges (like checked bags or change fees), fiddle with fuel costs, ignore customers and constantly try to engineer minute enhancements to operations in efforts to save pennies.
Like many companies, United is fixated on this strategy, even if it can't make any money. Even if this strategy once drove it to bankruptcy. Even if its employees are miserable. Even if quality metrics decline. Even if every year customers are less and less happy with the product. All of that be darned! United just keeps doing what it has always done, for over 3 decades, hoping that somehow – magically – results will improve.
Today people have choices. More choices than ever. That's true for transportation as well. As customers have become less happy, they simply won't pay as much to fly. The impact of all this operational focus, but let the customer be danged, management is price degradation to the point that United, like all the airlines, barely (or doesn't – like American) cover costs. And because of all the competition each airline constantly chases the other to the bottom of customer satisfaction – each lowering its price as it mimics the others with cost cuts.
In 1963 National Airlines ran ads asking "is this any way to run an airline?" Well, no.
Success today – everywhere, not just airlines – requires more than operational focus. Constantly cutting costs ruins the brand, customer satisfaction, eliminates investment in new products and inevitably kills profitability. The litany of failed airlines demonstrates just how ineffective this strategy has become. Because operational improvements are so easily matched by competitors, and ignores alternatives (like trains, buses and automobiles for airlines) it leads to price wars, lower profits and bankruptcy.
Nobody looks to airlines as a model of management. But many companies still believe operational excellence will lead to success. They need to look at the long-term implications of this strategy, and recognize that without innovation, new products and highly satisfied new customers no business will thrive – or even survive.
by Adam Hartung | Nov 12, 2009 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, Innovation, Leadership, Openness, Television, Web/Tech
The Myth of Market Share by Richard Minitar is one of those little books, published in 2002 by Crown Business, that you probably never read – or even heard of (available on Amazon though). And that's too bad, because without spending too many words the author does a great job of describing the non-correlation between market share and returns. There are as many, or possibly more, companies with high profitability that don't lead in market share as ones that do. Even though the famous BCG Growth/Share matrix led many leaders to believe share was the key to business success. Another something that worked once (maybe) – but now doesn't.
"Moto Looks to Sell Set-Top Box Unit" is the Crain's Chicago Business headline. Motorola's television connection box business is #1 in market share. But even though Motorola paid $11B for it in 1999, they are hoping to get $4.5B today. That's a $6.5B loss (or 60%) in a decade. For a business that is the market share leader. Only, it's profitability + growth doesn't justify a higher price. Regardless of market share.
Kind of like Motorola's effort to be #1 in mobile handset market share by cutting RAZR prices. That didn't work out too well either. It almost bankrupted the company, and is causing Motorola to sell the set top box business to raise cash in its effort to spin out the unprofitable handset business.
On the other hand, there's Apple. Apple isn't #1 in PCs – by a long shot. It has about a 14% share I think. Nor is it #1 in mobile handhelds, where it has about a 2.5% market share. But Apple is more profitable than the market leaders in both markets. Today, Apple's value is almost as high as Microsoft – historically considered the undisputed king of technology companies.
Chart source Silicon Alley Insider 11/12/09
While Microsoft has been trying to Defend & Extend it's Windows franchise, its value has declined this decade. Quite the contrary for Apple.
Additionally, Apple has piled up a remarkable cash hoard with it's meager market shares in 2 of 3 businesses (Apple is #1 in digital music downloads – although not #1 in portable MP3 players).
Chart Source Silicon Alley Insider 11/11/09
"While Rivals Jockey for Market Share Apple Bathes in Profits" is the SeekingAlpha.com headline. Nokia has 35% share of the mobil handheld market. It earned $1.1B in the third quarter. With its 2.5% share Apple made $1.6B profit on the iPhone. While everyone in the PC business is busy cutting costs, Apple has innovated the Mac and its other products – proving that if you make products that customers want they will buy them and allow you to make money. While competitors behave like they can cost cut themselves to success, Apple proves the opposite is true. Innovation linked to meeting customer needs is worth a lot more money.
Bob Sutton, Stanford management professor, blogs on Work Matters "Leading Innovation: 21 Things that Great Bosses Say and Do." All are about looking to the future, listening to the market, using disruptions to keep your organization open, and giving people permission and resources to open and manage White Space projects.
If your solution to this recession is to cut costs and wait for the market to return – good luck. If you are trying to figure out how you can Defend & Extend your core – good luck. If you think size and/or market share is going to protect you – check out how well that worked for GM, Chrysler, Lehman Brothers and Circuit City. If you want to improve your business follow Apple's lead by developing thorough scenario plans you can use to understand competitors inside out, then Disrupt your old notions and use White Space to launch new products and services that meet emerging needs.
