Why Apple Vs. Exxon?

America’s largest corporations always pay close attention to their industry rivals. For instance, who can forget the riveting moment when Bill Gates and Steve Jobs clashed on stage over Apple’s Mac vs. PC ad campaign? Or the time when Exxon and Mobil, the two largest firms in the energy industry, decided to merge?

It’s less common, of course, when firms in different industries compete with each other. Nevertheless, Apple and Exxon are now doing so for the mantle of America’s most valuable company. A year ago, Apple astonished the capital markets by surging past Exxon to become #1 in terms of market capitalization. But just last week, Exxon returned the favor and passed a slumping Apple to regain the top spot.

On the one hand, the track records of these two companies can be attributed to the internal capabilities of the firms themselves. But on the other hand, these recent swings in market valuations also reveal something meaningful about the computer and energy industries.

A Pillar of Stability

Exxon Mobil is a venerable firm; it can trace its roots all the way back to 1870. That year, only a decade after Colonel Edwin Drake of the Seneca Oil Company launched the contemporary energy industry with the discovery of oil in Titusville, Pennsylvania, John D. Rockefeller incorporated the Standard Oil Company.

By 1890, just two decades after its incorporation, Standard Oil controlled almost 90% of all of the refined oil in the United States. When the Supreme Court declared the firm to be an “unreasonable” illegal monopoly in 1911, the firm was split into 33 distinct organizations. The two largest successor firms were Standard Oil of New Jersey and Standard Oil of New York; they respectively later evolved into Exxon and Mobil.

In other words, the firm now known as Exxon Mobil has existed (together or apart) as one of the largest firms in the world for well over a century. But what of Apple, the firm that it is now battling for the title of America’s most valuable corporation?

Continuous Reinvention

Apple Inc. did not even exist until Steve Jobs and his two partners formed the firm in the 1970s. Its first great burst of growth occurred in the 1980s, when its primary rival was IBM. In fact, its “1984” Super Bowl television commercial about its Big Blue adversary has become one of the most widely admired marketing events in contemporary business history.

Apple then experienced a period of decline during the 1990s; it came perilously close to filing for bankruptcy during the decade. Its most widely remembered event during this era was the announcement of a noteworthy $150 million investment in the weakened Apple by a dominant Microsoft, featuring a gigantic on-screen image of Bill Gates towering over an on-stage Steve Jobs.

Of course, Apple’s market valuation eventually surpassed Microsoft’s during the rise of today’s internet era. Apple has introduced one radically successful product innovation after another, while Microsoft continues to strive to design products and services that can compete in the evolving market.

Seismic Shifts

It may be inappropriate, however, to attribute changes in the recent fortunes of Apple and Microsoft to differences in the abilities of the organizations. After all, the computer industry is inherently prone to seismic shifts every twenty years or so.

For example, IBM’s decade of dominance in the 1960s coincided with the development of mainframe computers. But demand for computing power shifted dramatically towards desktop devices during the 1980s, enabling the emergence of Microsoft Corporation. Likewise, the growth of the internet during the 2000s then empowered the rejuvenation of Apple.

When an industry experiences an era of continuous transformation, its market leaders inevitably struggle to remain dominant against younger and nimbler competitors. In other words, their competitive strengths become weaknesses, and stability itself becomes a handicap.

The “New” Electric Car

The energy industry, on the other hand, has experienced stability for over a century. Most automobiles, for instance, have been powered by internal combustion engines throughout this entire period. And oil burner technology has not fundamentally evolved since M.A. Fessler and others developed the technology during the early 1900s.

Indeed, Standard Oil and its descendants have been the beneficiaries of a remarkable era of stability in the energy industry. Even our newest technologies, such as the electric automobile motors of the current century, can trace their ancestries to vehicles like the Davenport car of 1837, the Morrison automobile of the late 1800s, and the Columbia Mark Runabout of the early 1900s.

So if you feel inclined to marvel at the sustained track records of companies like Exxon Mobil or the volatile histories of firms like Apple and Microsoft, you might wish to avoid attributing all the credit (or blame) to the firms themselves. After all, they might merely be serving as the beneficiaries (or as the bearers of the burdens) of their respective industries.

Steve Jobs: Contrarian

Much praise has been lavished — and deservedly so — on the life and legacy of Steve Jobs in the days following his untimely demise at the age of 56. Although comparisons to historic figures like Thomas Edison and Henry Ford may be a bit strained, we can all certainly agree that Jobs’ emphasis on product design and quality helped transform the consumer technology industry.

Absent from the initial wave of obituaries, though, was a focus on the contrarian approach that Jobs repeatedly employed throughout his storied career. Time and again, Job made decisions that left the pundits scratching their heads in confusion, decisions that nevertheless led to eventual success.

Some of those decisions represented conscious choices to repudiate fundamental principles of modern business theory. Others represented the implementation of highly risky tactics that are seldom successful in the contemporary economy, but that Jobs nevertheless managed to implement effectively.

Repudiating The Academics

Several years ago, Apple hired Dean Joel Podolny away from the Yale School of Management to manage Apple University, the firm’s internal training function. Dean Podolny was also assigned the task of creating a series of written case studies, for use in Apple’s training programs, that captured the essential principles and theories that Jobs employed during his tenure.

The cases themselves might be difficult to integrate into a traditional university curriculum, given Apple’s propensity to repudiate various fundamental tenets of traditional MBA lesson plans. Consider the principle of product obsolescence, for instance; firms are generally advised to extend the life cycles of their products, and not to consciously speed their obsolescence.

But Jobs continually developed new products that cannibalized existing Apple lines. Sales of iPod music players, for example, plummeted once Apple incorporated their core functions into the iPhone. And the iPad didn’t simply take business away from other laptop and netbook computer manufacturers; it apparently drained sales from the MacBook line as well.

Some professors might protest that Apple was simply combining complementary functions in new packages, in the manner that consumer product manufacturers sell soap and shampoo in toiletry travel packages, or spoons and forks in cutlery sets. But at the time that Apple combined its mobile music player with its new telephone, for instance, the pair of functions resided in entirely different industries.

Sony had not originally contemplated the placement of a telephone in its Walkman; likewise, Motorola had never attempted to play music through its Razr. The integration of music by the iPhone, and its resulting cannibalization of the iPod line, was thus a truly groundbreaking decision.

Rolling The Dice

Other decisions authorized by Jobs were not necessarily repudiations of classic business theories per se, and yet they represented highly uncertain “rolls of the dice” that paid off for Apple. Indeed, they were reflections of a corporate culture that embraced entrepreneurial risk-taking at the highest level.

Apple’s decision to rehire Jobs in 1996 after firing him in 1985, for example, represented an astonishing about-face by the firm’s Board of Directors. Although it is not unprecedented for corporate founders to return to the helms of their organizations after having retired or resigned to pursue other endeavors, the rehiring of a fired CEO was undoubtedly a risky choice for the firm.

Then, shortly after his return to the CEO position, Jobs reached out to Microsoft and secured a direct $150 million capital infusion. Such equity investments are likewise not unprecedented in nature, but the manner in which Jobs introduced and then defended the transaction startled the public. At the 1997 Macworld Expo, Bill Gates himself unexpectedly appeared “live” on an immense view screen, looming over the audience in a manner that reminded some viewers of Big Brother’s presence in Apple’s seminal 1984 Super Bowl ad.

Furthermore, throughout his tenure at Apple, Jobs repeatedly took the risk of striving for product simplicity in an industry that continued (and still continues) to grow increasingly complex over time. Although some simple designs, such as the minimalist Mac Cube, failed in the market place, others — such as the single button iPod, iPhone, and iPad — succeeded wildly. That’s why, for instance, many psychologists now recommend giving iPads to individuals with autism because of their ability to master its simple commands.

The Test Of Time

Ultimately, though, the most impressive accomplishment of Steve Jobs’ career may be his success in maintaining Apple’s position at the forefront of technological innovation for an astounding 35 years. During that time, numerous competitors have risen and fallen, including Xerox, Wang, Compaq, and Yahoo. None was able to maintain a tradition of creative leadership that stretched from the mainframe focused year of 1976 to the cloud computing era of 2011.

Indeed, the sheer longevity of Apple’s reign may represent the greatest legacy of a man in an industry where life cycles are measured in months and years, not decades. And now the attention of the technology community will turn to Tim Cook, Jobs’ successor, to observe whether he will be able to maintain Apple’s track record of accomplishment.

HP: Goodbye Personal Computers, Hello Services!

Do you remember when basketball legend Michael Jordan announced his retirement shortly after winning his third consecutive world championship with the Chicago Bulls? Or when football Hall of Fame quarterback John Elway retired after leading his Denver Broncos to their second consecutive Super Bowl win?

Quitting “on top,” while occupying the champion’s position, has been an admirable tradition of professional sports figures for many years. It is, however, far more unusual for leading businesses to walk away from their own dominant market shares.

Nevertheless, that is exactly what market share leader Hewlett Packard (HP) recently announced it would do in the personal computer business. And Michael Dell, founder and CEO of HP’s closest rival, did nothing to disguise his glee.

Call It Compaq

To be fair, HP never claimed to maintain a longstanding tradition in the personal computer industry. In fact, the Silicon Valley icon has always focused more intensively on test equipment, servers, calculators, printers, and similar devices.

In 2001, though, then-CEO Carly Fiorina authorized HP’s purchase of Compaq, the world’s second largest personal computer company. That allowed the newly combined HP-Compaq entity to leap-frog Dell and become the market leader. HP and Dell then shared the top two spots in the global personal computer industry from 2003 to 2010 (except for 2009, when Acer briefly nudged past Dell to snare the #2 position), and have engaged in a spirited rivalry throughout that time.

That explains Michael Dell’s bit of biting sarcasm when HP surprised the world by announcing that it would sell or spin off its personal computer business. Dell “tweeted,” via a posting on his public Twitter page, the following sardonic suggestion: “If HP spins off their PC business….maybe they will call it Compaq?”

The IBM Thinkpad

Although it is indeed highly unusual for a firm with the leading share of a market to voluntarily sell or spin off its business, HP’s move is somewhat reminiscent of IBM’s decision to sell its once-dominant Thinkpad personal computer division to Lenovo in 2005. In each situation, a successful computer manufacturer concluded that it could optimize profits by refocusing on service lines of business instead of on manufacturing activities.

In a broader sense, this strategy is reflective of the general shift from a manufacturing (and agricultural) economy to a service economy in the United States. Other iconic American manufacturing firms, such as Kodak to Xerox, have implemented similar initiatives.

Are these firms following sound business strategies? And are they helping, or hurting, the American economy and the prosperity of its citizens?

Shifting To Services

The financial accounting model is arguably constructed in a manner that leads investors to favor service organizations over manufacturing firms. That is because manufacturers often need to borrow significant amounts of capital to invest in the construction of buildings and the purchase of equipment; on the other hand, service firms can simply and cheaply utilize human labor (or, even more profitably, automated programs and other functions) to earn revenues.

By avoiding large investments in long term assets, service firms tend to post higher Return On Investment (ROI) and Return On Asset (ROA) statistics. Such performance measurements are closely tracked, and highly valued, by professional investment advisers.

This distinction explains why corporations from Marriott to McDonald’s have shifted from property ownership contracts to franchising and management service contracts over time. IBM, and now HP, appear to have adopted this strategy too.

Can America Prosper?

Although individual corporations can improve their financial results by shifting away from manufacturing activities, can entire nations do so as well? Can America and other nations continue to prosper if they surrender their capabilities to produce tangible goods?

America was once the dominant global manufacturing powerhouse; in fact, it still rivals China for the position of the world’s largest manufacturer. But the American service sector outgrew its manufacturing sector during the late 1950s; today, the service economy is more than twice the size of the manufacturing economy in terms of GDP.

Meanwhile, America has prospered for over half a century while undergoing a long term evolution from the manufacturing sector to the service sector. And although the American financial services industry continues to exhibit weakness, other service industries — such as health care, for instance — are expected to display strong growth well into the future.

The Hamburger vs. Facebook

America’s service sector employees are occasionally caricatured as burger flippers, working for minimum wage at fast food outlets. However, its service economy also encompasses software programmers who are admired around the world; many Egyptians, for instance, publicly thanked Facebook and Google for their roles in facilitating their successful political revolution.

It is always painful, of course, for nations to watch domestic manufacturing industries lose market share to foreign competitors. Nevertheless, firms like HP may indeed find success by aggressively shifting to service offerings, and may yet lead the American economy back to prosperity by doing so.