Claims / C-1YKWBHRACC
EmpiricalRequires evidence
Helmer argues that timely operational excellence can establish Power during takeoff even when similar execution improvements would be competitively arbitraged in a stable business.
Evidence 5 passages
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Scale economies. To establish this advantage, Intel sees the required market share lead by the end of the explosive growth stage of the PC market. Once growth settles down, the stakes are well known and the volume leader can and will use their cost advantage to fend off competitors network economies the importance of the takeoff stage is even more pronounced with network economies network economies are often characterized by tipping point once the leader has achieved an edge in installed base most users will find it to their benefit to choose that leader for application software developers the choice of attractive microcomputer platforms was winnowed to only two choices with sufficient scale, Apple and PCs. Lacking in competitive applications, other platforms were doomed. Even for switching costs, takeoff is the critical stage. First off, switching costs are a source of power for those who get to the customer first, and a wealth of customer relationships are established in the takeoff. Secondly, in the takeoff period, customers are often struggling to find any supplier, so the price competition that will eventually arbitrage out the value of switching costs for new customers has yet to occur. The Power Progression, Takeoff So there we have it. All of Intel's sources of power were rooted in the takeoff period. Again, takeoff is this stage when differential customer acquisition can take place at favorable
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terms. which is why it presents such ideal power opportunities. There is such a high degree of flux that the normal lags in the arbitraging process are material to the outcome, resolving uncertainty, transparency, product tuning, building capacity, establishing channels, effective marketing, and so on. For Intel, Operation Crush made a crucial difference to power. In a mature business, it would have simply been part of the to-and-fro of arbitrage. What cutoff point in the growth rate marks the end of this takeoff period? It depends on the degree of flux and uncertainty, but based on my experience, 30-40% per year seems a workable choice. By this measure for the PC market, take-off probably started in 1975 with the 8080 and continued through 1983. Armed with this understanding, you can see that Intel made it in just under the wire. They made a decisive break from the peloton of competitors at a crucial time. If the PC market had forged ahead for another year or two without them, the window of opportunity would surely have closed. No breakaway would have been possible. Intel would have captured some sales, but their prospects for power would have dimmed as the opportunity for scale economies quickly receded. Put into context, if another company had won the IBM contract, Intel as we know it today would not exist. This sort of situation breeds a common form of false positive.
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This broadening of scope also applies to many particulars as well. Here's one of great import, operational excellence. In my statics discussion, I explained why operational excellence is not strategic, because it's immutable, and therefore subject to competitive arbitrage. In the high-flux shortened time frame of the takeoff stage, sufficiently timely imitation becomes less likely, and excellent execution can be highly strategic. Consider for example Apple's trajectory. The Apple II was released in 1977, and paired with VisiCalc software, it rocketed ahead, seemingly poised to own its space. The follow-on Apple III was released on May 19, 1980, 15 months before the IBM PC. Unfortunately the product was a dog, and it couldn't even roll over, although it did a pretty good play dead. The Apple III had been manufactured utilizing an immature circuit board technology, so short circuits plagued the product from the start. At one point Apple even released a technical bulletin instructing customers to drop their computers from a height of 3 inches to try to reseat dislodged chips. To make matters worse, it was a pricey box, starting at over $4,000 and going up to almost $8,000 fully loaded. Only a year later, the IBM PC was offered at $1,600. The Apple III bombed, but at the very moment when a killer product would have propelled Apple to a near insurmountable preeminence.
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Not only that, since Apple controlled the OS, their microcomputer business could have become a high-power one. Instead, that business never recovered. Apple had flubbed the take-off period. For a while they maintained a respectable business and continued to be the innovation leader, but these setbacks put them on the road to an ever-declining share in personal computers and an eventual near-death experience that could only have been reversed by the genius of a resurgent Steve Jobs. Operational excellence was crucial, and its lack caused Apple to fumble. For Intel and their microprocessor business, it was very much the converse. Without Operation Crush, it seems likely to me that Intel would have missed the IBM PC opportunity, and with it the chance to achieve an utterly dominant relative scale advantage. Operation Crush reveals another telling difference between a statics view and a dynamics view. The role of leadership. As a value investor, I consider Warren Buffett one of my heroes. I previously mentioned his insight that good managers can rarely reverse the course of a bad business. That is, one without power. Over and over, I've witnessed Buffett's axiom play out in the press. The business leaders castigated for poor management ability in the face of seemingly impossible circumstances. Yahoo, Twitter, and Zynga come to mind here. That said, when it comes
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to establishing power in the first place, make no mistake, leadership is fundamental. Operation Crush would never have happened were it not for Andy Grove's implacable, aggressive leadership. Going back further, the company would not have even pursued microprocessors were it not for the leadership of Bob Noyce. In summary, when you step back to consider how power is established in the first place, there are a lot more parts to the puzzle. Leadership, timing, execution, cleverness, and luck can all play decisive roles. Conclusion The Strategy Compass and Seven Powers As I have underscored throughout these pages, strategy's highest calling must be to serve as a real-time strategy compass. To fulfill this role, it must be distilled into a framework that is simple but not simplistic. The first seven chapters built, brick by brick, the seven powers. This is your strategy compass. Then in the final two chapters I addressed the what and when to clarify the terrain you navigating with your compass. With these ideas as your toolkit, you are now fully prepared to blaze your own path to satisfy the mantra. A route to continuing power in significant markets. This is what strategy means, and this is what you must achieve to be a success. Appendix 9.1. The Power Dynamics Toolkit
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