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Apple's Secret: Ruthless Strategy

Apple has topped Fortune magazine's list of "Most Admired Companies" four years running. This month it was briefly the most valuable company in the world. Even holding the No. 2 market capitalization is pretty amazing for a company that almost died in 1997, when it was valued at less than $3 billion.

business Updated: Aug 20, 2011 16:11 IST
Washington Post
Washington Post

Everybody, it seems, wants to be like Apple. Google is buying Motorola Mobility, many observers say, so it can integrate hardware and software to be like Apple (and to enlarge its patent pool).

Last week, Joel Ewanick, the global chief marketing officer at General Motors, declared that "it's time to clearly differentiate our brand and align closer to a true global brand like Apple." Translation: We want to be like Apple.

Apple has topped Fortune magazine's list of "Most Admired Companies" four years running. This month it was briefly the most valuable company in the world. Even holding the No. 2 market capitalization is pretty amazing for a company that almost died in 1997, when it was valued at less than $3 billion.

To many people, Apple's success seems like magic. Others attribute it to cool products, good marketing, and Steve Jobs' charisma or presentation skills. Critics credit the Apple co-founder's ability to project a "reality distortion field."

In his new book "Good Strategy, Bad Strategy: The Difference and Why It Matters," Richard P. Rumelt, a strategy professor at UCLA's Anderson School of Management, offers another explanation: the ruthless execution of good strategy.

Strategy is not what many people think it is. It is not a fill-in-the-blanks mission statement blathering about how XYZ Corp. will ethically serve its stakeholders by implementing best-in-class integrated sustainable practices to grow as a global leader while maximizing shareholder value. Such bafflegab is "Dilbert"-fodder that generates cynicism and contempt. It is, at best, a big waste of time.

Neither is strategy a declaration that the ABC Co. will increase sales by 20 percent a year for the next five years, with a profit margin of at least 20 percent. Strategy is not the resolve to hunker down and try harder what Kenichi Ohmae of McKinsey criticized in a 1989 Harvard Business Review article as "do more better." Effort is not strategy. Neither are financial projections. And neither are wishes.

A strategy "is a way of dealing with a high-stakes challenge," Rumelt told me in an interview. "It's a way around the obstacles or problems in a difficult situation."

Every good strategy, he writes, includes what he calls the kernel: a "diagnosis" of the challenge ("What's going on here?"), a "guiding policy" for dealing with that challenge (the core idea often called a strategy), and a set of "coherent actions" to carry out that policy (the implementation).

For his friend Stephanie's corner grocery, Rumelt writes, the diagnosis was competition from a large 24-hour supermarket, the guiding policy was "to serve the busy professional who has little time to cook," and the coherent actions included stocking more prepared meals and opening an extra checkout stand at 5 p.m.

This strategy not only told Stephanie what to do but what she had to stop doing. Selling more prepared meals meant taking space away from the munchies for her many student customers. To focus labor expenses on the peak times for her professional customers, she closed earlier, meaning no sales from late-night study breaks. "Strategy is scarcity's child and to have a strategy, rather than vague aspirations, is to choose one path and eschew others," writes Rumelt.

A strategy is not a goal like maximizing shareholder value or keeping America safe from terrorism. It's not even a plan. It is a design a coherent approach to defining and solving a particular problem, in which the different elements have to work together.

In this analysis, Steve Jobs is not only a connoisseur and sponsor of good design. He is himself a successful designer not of products but of business strategies.

Apple's recent success has made people forget not only how close the company came to failing but also what Jobs did to turn it around when he returned as chief executive in 1997. He diagnosed Apple's problem: It was hemorrhaging cash and its product lineup was too diverse, confusing and expensive.

In response, Rumelt explains, Jobs "redesigned the whole business logic around a simplified product line sold through a limited set of outlets." He cut product offerings down to two: a desktop and a laptop, and no peripherals. He moved most manufacturing to Taiwan, cut software development, and eliminated all but one national retailer, opening a Web store to sell directly to consumers.

And, yes, Jobs also got Microsoft to invest $150 million in Apple and to commit to continuing to make Mac versions of key software. But that agreement wouldn't have helped much without the rest of the strategy. "I don't know how he learned that ruthlessness," Rumelt says. But it worked.

What Jobs did not do, the book suggests, is equally telling. He avoided all the management responses that masquerade as strategies. "He did not announce ambitious revenue or profit goals; he did not indulge in messianic visions of the future," Rumelt writes. "And he did not just cut in a blind ax-wielding frenzy."

The organization's new, coherent design bought the company time and gave it a clear identity on which to build. Apple's gutsy decision to open its own retail stores in 2001 made sense only in the context of its new strategy.

Rumelt, who is a business consultant as well as one of the most-cited scholars in his field, met Jobs in 1998, while working for Telecom Italia SpA. Rumelt congratulated Jobs on the turnaround but expressed skepticism about Apple's chances of overcoming the Windows-Intel lock on personal computers. "What are you going to do in the longer term?" Rumelt asked. "What's the strategy?"

Jobs, he recalls, "just smiled and said, 'I am going to wait for the next big thing.'"

Jobs recognized that Apple couldn't change the realities of the PC business. It needed a change in the environment that would make possible a new strategy, oriented toward growth this time rather than survival. He found that opportunity with the iPod and online music.

"Strategy is not a magic potion for overcoming any obstacle," says Rumelt. "The part that's hard to write about, that people reject, that they don't want to hear me say, is that you may be facing an obstacle you can't deal with. Choose a different obstacle. Play games you can win."

First Published: Aug 20, 2011 15:49 IST