Vertical Integration at Lenovo vs. Outsourcing at Rivals

The Wall Street Journal has an article today about Lenovo's vertical integration strategy.  That strategy stands in stark contrast to many of the firm's rivals in the computer business (including Apple), which have outsourced many aspects of the manufacturing process.   Lenovo CEO says, "Selling PCs is like selling fresh fruit.  The speed of innovation is very fast, so you must know how to keep up with the pace, control inventory, to match supply with demand and handle very fast turnover."  Lenovo's SVP of supply chain says, "Three years ago the whole industry was saying everyone should outsource, that's the future.  [We] came to the conclusion that even though all our other competitors are going in the other direction…we can move faster if we're more vertically integrated." 

I'm surprised by the comments, and frankly, by the strategy.   Most people would agree that Apple is one of the most innovative and highly differentiated companies in the computer industry.  If Apple can achieve that type of rapid innovation without being completely vertically integrated, then why can't Lenovo?  Apple pursues vertical integration on selected components, most importantly on its operating system.  However, Apple does not keep all manufacturing in-house.   Lenovo chooses to use outsiders for its operating system (Microsoft Windows for its PCs and Google's Android for its new tablets).    Yet, Lenovo is manufacturing many hardware components in-house.   Time will tell if the strategy will pay off.   One wonders if the path to successful innovation, though, has more to do with company culture, leadership, and new product development processes, rather than with the extent of vertical integration. 

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Small Groups of Smart People: Rethinking Our Meetings

Ken Segall wrote a good column for Fast Company about his experiences working with Steve Jobs.  Segall argues for bringing together "small groups of smart people" - avoid having a huge group of people attend key meetings.   He tells an anecdote about Steve Jobs:

One particular day, there appeared in our midst a woman from Apple with whom I was unfamiliar. I don’t recall her name, as she never appeared in our world again, so for the purposes of this tale, I’ll call her Lorrie. She took her seat with the rest of us as Steve breezed into the boardroom, right on time. Steve was in a sociable mood, so we chatted it up for a few minutes, and then the meeting began. “Before we start, let me just update you on a few things,” said Steve, his eyes surveying the room. “First off, let’s talk about iMac--" He stopped cold. His eyes locked on to the one thing in the room that didn’t look right. Pointing to Lorrie, he said, “Who are you?”

Lorrie was a bit stunned to be called out like that, but she calmly explained that she’d been asked to attend because she was involved with some of the marketing projects we’d be discussing. Steve heard it. Processed it. Then he hit her with the Simple Stick. “I don’t think we need you in this meeting, Lorrie. Thanks,” he said. Then, as if that diversion had never occurred--and as if Lorrie never existed--he continued with his update. So, just as the meeting started, in front of eight or so people whom Steve did want to see at the table, poor Lorrie had to pack up her belongings, rise from her chair, and take the long walk across the room toward the door. Her crime: She had nothing to add.

Ok, so the anecdote is powerful, but probably should not be emulated.  We don't want to run around throwing people out of meetings in this fashion.   However, the principle deserves our attention.  Keep those meetings streamlined.  We get much more done if we keep our teams small and focused.  As Segall writes, "Most people know from experience that the fastest way to lose focus, squander valuable time, and water down great ideas is to entrust them to a larger group."

I can hear the pushback already.  "But shouldn't we strive to be inclusive? Isn't that required to build buy-in?"  Sure... we have to worry about including people so as to build buy-in. However, that doesn't mean that everyone needs to be at all these meetings.  We can solicit input and advice in many ways, and still have a small group focusing on the key collaborative problem-solving task in a meeting.  

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Tony Fadell: Why Self-Doubt Isn't Always A Bad Thing and Ignoring Experts Can Be a Good Thing

Thank you to the StrategyProfs.net blog for pointing me to this terrific video from iPod inventor Tony Fadell.

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Can Companies Learn from Apple?

Adam Lashinsky's article has published an article on Fortune.com titled, "3 things any company can learn from Apple." (drawn from his book to the left)  I especially love the first point.  My students know that I preach this point about "saying no" all the time! Here's the excerpt:

Say no more often. Steve Jobs was fond of saying that saying no was harder -- and more important -- than saying yes. Apple said no to making personal digital assistants, in the 90s that is. It said no for years to making a telephone-- until it said yes. Apple refused to focus on selling to businesses. It wouldn't put a USB port on the first iPad. And so on. While not every company can achieve Apple's level of Zen by rejecting seemingly good business opportunities, there isn't a company out there that wouldn't benefit by more rigorously asking itself: "Have we absolutely satisfied ourselves that we have said yes for the right reasons?" How many companies pursue revenue opportunities that any new recruit knows the company is doing to make money rather than delight customers. (An example: Jobs ridiculed the PC industry for years for the margin-boosting "crapware" that comes loaded on a PC. The crap remains.) It takes real courage to say no. But it's not like top executives aren't being compensated for brave action.

I would like to make a larger point though.  I think leaders need to be very careful about trying to draw lessons from Apple and apply them to their businesses.  First of all, Apple is a very unique animal, unlike most other firms in terms of its fundamental DNA.   Secondly, we must remember that competitive advantage derives from fit among strategy, structure, systems, culture, and people.   It doesn't come from a silver bullet - a single core competence, one particular strategic choice, a specific business principle or value.  Emulating Apple in one or two dimensions may not bring much advantage to a firm, if that choice doesn't align well with everything else a company does.  Changing a company for the better requires systemic change, not just a tweak here or there that results from a benchmarking exercise of a stellar firm.   

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Markkula's Three Principles at Apple

In Walter Isaacson's terrific new Steve Jobs biography, we find a description of the simple principles Mike Markkula outlined at Apple's inception. As my students know all too well, I love the concept that strategy is all about making trade-offs. As Michael Porter has said, "The essence of strategy is choosing what NOT to do." Take a look at principle #2 at Apple. From the firm's inception, its leaders understood the criticality of making trade-offs to create competitive advantage and build barriers to imitation. Here is an excerpt from the Isaacson's biography:

Markkula wrote his principles in a one-page paper titled “The Apple Marketing Philosophy” that stressed three points. The first was empathy, an intimate connection with the feelings of the customer: “We will truly understand their needs better than any other company.” The second was focus: “In order to do a good job of those things that we decide to do, we must eliminate all of the unimportant opportunities.” The third and equally important principle, awkwardly named, was impute. It emphasized that people form an opinion about a company or product based on the signals that it conveys. “People DO judge a book by its cover,” he wrote. “We may have the best product, the highest quality, the most useful software etc.; if we present them in a slipshod manner, they will be perceived as slipshod; if we present them in a creative, professional manner, we will impute the desired qualities.

What an amazingly simple, but powerful statement of core principles. Every entrepreneur should take note!

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Steve Jobs' Commencement Speech

I've posted this speech before, but I felt it was important to post again this morning.  If you have not seen this speech, you MUST watch.  It proves rather eerie listening to it today, but the message is so powerful.

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Does Google need an auteur?

The New York Times published an interesting article this weekend about Google and Apple. The article describes a theory outlined by blogger John Gruber at MacWorld Expo two years ago. Gruber argued that innovative firms need an auteur, someone like a film director who calls the creative shots... Like Steve Jobs does at Apple. The article suggests that Apple's auteur approach (Jobs as ultimate design arbiter) excels relative to Google's collaborative design process (many people weighing in on key choices).

I have two problems with this argument. First, I think it downplays the level of true collaboration at Apple, and discounts the true contribution of people such as Jonathan Ive. More importantly, though, I think we have to consider whether we should be generalizing based on observations of Apple. Perhaps it is a very unique firm that cannot be easily emulated. Moreover, perhaps it would be problematic to bet on the "lone genius" approach in a wide variety of other firms based on this auteur argument.

Recently, Bob Lutz made a similar argument regarding car design. He argued essentially that a dictator approach beats design by committee. However, that assumes a really capable dictator. What if the dictator is less than spectacular?

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Apple's Pile of Cash

Apple reported earnings this week, and the balance sheets shows an enormous amount of cash:  $76 billion!   For the first time, we are beginning to hear more investors clamor for clarity about what will happen with this cash.  Some even would like to see some cash returned to shareholders.  In the Wall Street Journal today, we see a quote from one investor: "If they can't find ways to use it to grow, they should be returning it to shareholders," said Tim Ghriskey, chief investment officer of Solaris Asset Management, which owns Apple stock. 


On the other hand, some investors don't mind Apple's financial strategy at all: "It provides me enormous comfort that their balance sheet is so strong," said Mike Binger, a fund manager at Thrivent Asset Management, which owns Apple stocks. As far as he is concerned, "They have the flexibility to do whatever they want with it."

I am astounded by the amount of cash on the balance sheet.  Normally, I worry about firms that have this amount of cash.  I don't want them squandering the cash on flawed acquisitions or poor diversification strategies.  The question, though, is whether Apple deserves more of a benefit of the doubt, given their tremendous track record, coupled with the fact that they are still growing very rapidly.    To me, we should worry most about a cash pile like this when we have:

1. Slowing growth at the firm's core business
2. A history at the firm of flawed diversification or acquisition strategies.
3. Poor corporate governance practices at the firm
4. A lack of opportunities for productive R&D investments

To me, Apple does not raise concerns on these four points.   However, the situation bears watching as the pile of cash continues to grow at an incredible pace.

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