Thursday, November 11, 2010

Apple and I.B.M. Aren’t All That Different

Very interesting article by Steve Lohr, originally published on November 6, 2010 in the New York Times.
 - Joe
Business Day
Apple and I.B.M. Aren’t All That Different
by Steve Lohr

EVERY once in while, there are symbolically intriguing historical moments in the corporate world, and one of them occurred last month. On Oct. 18, Apple and I.B.M. reported their quarterly results, and Apple’s total profit surged past I.B.M.’s.

The two companies have long been cast as polar opposites, even before Apple’s commercial during the 1984 Super Bowl that depicted a female rebel (Apple) striking a blow against a corporate Big Brother (I.B.M.).

Today, Big Blue is seen as a machine — a company that caters to big corporate and government customers and is known for steady improvement and five-year profit plans. Indeed, I.B.M.’s profit rose 12 percent for the third quarter, the 31st consecutive quarter that the company delivered higher earnings. Apple, by contrast, is seen as a consumer-product hit factory that is on a roll.

Yet I.B.M. and Apple can be viewed as the yin and the yang of high-tech innovation, as two companies with more in common than is generally understood. There is a lot of eureka invention and deep science in I.B.M.’s varied businesses, industry experts say. And Apple’s continuing success, they add, is explained in good part by its ability to make innovation a managed system, more machinelike.

I.B.M. and Apple pursue different markets, but there is a similarity in their strategies, according to David B. Yoffie, a professor at the Harvard Business School. The big shift at I.B.M., he notes, came about 15 years ago, when the company tilted increasingly toward technology services and software and relied less on hardware. (The change began under the former chief executive Louis V. Gerstner Jr. and accelerated under the current chief, Samuel J. Palmisano.)

The goal, Mr. Yoffie adds, was to build a profitable business with a lot of recurring revenue, based on service contracts and software licenses, and to attract industry partners and software developers to use its technology.

Over the last 10 years, Apple has embraced much of the same strategy — in broad strokes. The company’s partners and developers build on its iPhone and iTunes software and share with Apple their revenue for music and software applications sold on the iStore. These complementary offerings encourage more sales of Apple’s hardware, and have become money makers on their own.

“Each company has created an ecosystem of partners and developers around its core products,” Mr. Yoffie says. “And both depend on ongoing innovation.”

When Steven P. Jobs returned to Apple in 1997, the company was saddled with inefficient manufacturing, loose cost controls and bulging inventories. It lost more than $1 billion in fiscal 1997. In early 1998, Mr. Jobs recruited Timothy D. Cook, an operations expert, from Compaq, who had previously spent 12 years with I.B.M.

Under Mr. Cook, now Apple’s chief operating officer, the company is a model of lean efficiency. It holds seven days’ worth of inventory, compared with an average of more than 30 for most technology companies, analysts say.

Companies typically try to manage payments so they collect cash from customers slightly before they have to pay suppliers, thus making money by investing the cash before payments are due. Apple collects its cash in 25 days, on average, and pays its suppliers in 85 days — an extraordinary, 60-day spread that generates an extra $1 billion in cash flow a year, estimates A. M. Sacconaghi Jr., an analyst at Bernstein Research.

That achievement is made easier, Mr. Sacconaghi notes, because Apple makes its billions in profit from just a handful of products. But the scale at which it buys components for its hit products, like iPhones and iPods, gives the company some Wal-Mart-style muscle with its suppliers.

Fostering consistent innovation, experts say, requires a balance of management systems and inspirational leadership. At Apple, the inspiration wellspring is the megawatt personality of its leader, Mr. Jobs, and its ability to make consumer products that delight millions of people.

At I.B.M., the inspiration engine is more subtle and conceptual. In late 2008, Mr. Palmisano and his team settled on a theme: the deployment of scientific research and technology to tackle big challenges for business and society in fields like energy, pollution, transportation and health care. And the company has spent hundreds of millions of dollars on its “Smarter Planet” advertising campaign.

“Sure, it’s marketing, but it’s also a big idea that explains the company’s mission to the world and to its employees,” says John Kao, an innovation consultant to governments and business.

A striking difference between the companies, experts say, is in their approach to research. I.B.M. has laboratories around the world, spends $6 billion a year on research and development, and generates more patents a year than any other company. Five I.B.M. scientists have won Nobel prizes; the company’s researchers attend scientific conferences, publish papers and have made fundamental advances in computing, materials science and mathematics.

Apple, by contrast, focuses only on product innovation, not scientific invention. “Apple does research insofar as it advances their laser-focused product aspirations,” observes Michael Hawley, a computer scientist who worked for Mr. Jobs at NeXT, a pioneering but commercially unsuccessful computer company.

At Apple, the emphasis is not on the basic science of traditional research but on the “behavioral science” of the user experience, explained a former Apple manager, who spoke on condition of anonymity because he still had ties to the company.

APPLE has technical experts who constantly scout new commercial technologies, he said; they work with suppliers, often co-inventing down to the chip level. Then prototypes and initial products are produced, with constant refinements. They are shown not to focus groups or to other outsiders, but only to Mr. Jobs and his lieutenants. For example, three iPhone prototypes were completed over the course of a year. The first two were tossed out, the third passed muster, and the product shipped in June 2007, the former manager said.

“That is the rocket science — the product,” he said.