Apple’s New iPad: A Disruptive Innovation

Apple's New iPad, a Disruptive Innovation

Occasionally, a new technology is introduced that disrupts the natural order of things. Apple’s iPad represents just such an innovation. The touchscreen display and navigation options make this computer a radical departure from the PC. [In this context, I am broadly defining the PC as either a desktop or laptop computer.]

With the iPad, you don’t have to use a trackpad—or mouse—to move a cursor around a screen. Instead, you use your fingers to touch and swipe the screen. In addition, the iPad is very light, weighing only 1.5 lbs (680  grams), and has a battery life of  9-10 hours, which is far greater than the battery life of the typical laptop computer. Combined, all of these features provide the user with a more direct and immediate relationship to computing: all cables, mice and other devices are gone. The iPad facilitates a “magical” experience, according to Steve Jobs. Certainly, it makes life easier for the customer.

Ease-of-use is one of the many reasons that the iPad has caught on like wildfire, becoming the biggest selling device in Apple’s history. For the quarter ending Dec 31st2011, the Cupertino-based juggernaut sold 15.4 million tablets, accounting for $9.1 billion in revenues or about 20% of the company’s total revenue. Compared with last year’s holiday quarter, tablet sales doubled.

We are witnessing what Harvard Business School’s Clayton Christensen calls a disruptive innovation.  Typically, inventions that fall into this category have characteristics that are radically different from existing products; however, initially, they offer lower performance in areas that are important to mainstream customers. For example, compared to a laptop or PC, the original iPad’s processor was slow; storage space was limited; and it wasn’t equipped with a keyboard. But over the past couple of years, Apple has significantly improved the performance of its tablet computer. Here are some of the features contained within the new IPad, which was released today:

  • High resolution retina display–2048×1536 pixels more than on an HD TV
  • A dual core CPU twice  as powerful as the A5 found in the iPad 2
  • A rear iSight camera with 5MP sensor and advanced optics, including IR filter, autofocus, face detection, and white balance
  • HD video recording (1080p resolution)
  • Voice dictation (there’s a new key on the keyboard for speaking into the iPad)
  • 4G LTE support: HSPA+ for up to 21Mbps or dual-carrier HSDPA for up to 42Mbps or LTE for a max of 72Mbps connectivity
  • Battery life is 10 hours (9 for the 4G models)

Regarding the future, Steve Jobs used the metaphor of the PC as a truck, and the iPad–or tablet–as a car.  America was originally an agrarian economy. Then, the truck was used for all tasks done on the farm. But as we developed into an urban economy, the car replaced the truck for many jobs.

The tablet will be increasingly used for consuming digital data—viewing videos and photos; reading news websites, feeds, and books; checking on e-mail & social media; and listening to music. In contrast, the PC will be used for heavy-duty tasks. One of you said it well: “typing a large document or programming a 1,000 lines of code is much easier with a full size, qwerty keyboard.” A PC with a blazingly fast processor, which is hooked up to a large display—including multi-monitor arrangements—can facilitate multitasking and productivity. Developers, professional photographers, graphic artists and hardcore gamers will probably continue to use the PC, at least in the near future.  But to quote Jobs once again, “as we move away from the farm, the car started taking over.”

And the data appear to substantiate Job’s prediction. During 2010, when the iPad was introduced, sales of PC’s outnumbered sales of tablet computers by a ratio of 20 to one. In 2011, PC’s outsold iPads by a ratio of only six to one. Horace Dediu, an analyst with Asymco in Finland, predicts that tablet sales will surpass PC sales in 2013.

In conclusion, the iPad symbolizes much more than just simply an incremental improvement in technology. It is evolving to become a PC replacement for many applications. The PC will survive, but its market share will continue to decline vis-à-vis tablet computers. This is no different than what occurred 60 years ago when televisions were invented. As a result, the audience of people who listened to radio shows declined greatly. Although the radio has endured, its share of the overall listening audience is small in comparison to TV’s market share.

Here are other instances where new technologies displaced existing technologies:

Apple and Innovative Disruption iPad Tablet Computer Replaces PC

How do you weigh in on this issue? Will Apple’s improvement of features and functionality enable the tablet computer to become a PC  replacement?

 

When Child Labor Is Ethical

Multinational corporations have experienced withering criticism for employing children in Asian factories. On the surface, this practice appears to be unethical. But is it?

When we study supply chain management, I engage my students in a discussion of this topic. Here is the scenario:

Industrial textile factory
Industrial size textile factory in developing country, workers on lunch break

“Major corporations with overseas subcontractors (such as Ikea in Bangladesh, Unilever in India, and Nike in China) have been criticized often with substantial negative publicity, when children as young as 10 have been found working in the subcontractor’s facilities. The standard response is to perform an audit and then enhance controls so it does not happen again. In one such case, a 10-year-old was fired. Shortly thereafter, the family, without the 10-year-old’s contribution to the family income, lost its modest home, and the 10-year-old was left to scrounge in the local dump for scraps of metal.” —adapted from  Principles of Operations Management

A student of mine from India said that the decision to hire the child was ethical; and the judgment to fire him was unethical. My student defended his position by stating that Americans do not understand the depth of poverty in India. In many circumstances, families rely on child labor, so that the family can survive. When he grew up, there was no compulsory education, so working did not deprive Indian school-age children from going to school. [In 2009, the Indian parliament legislated a compulsory education law for elementary school children.] Other students of mine who have grown up in developing countries—such as China and Bangladesh—have agreed with this line of reasoning.

After all, during the 19th century, the U.S. was once a developing country. For many years, we condoned the practice of employing children in the workplace. Once our standard of living improved—and universal, public education became a realistic objective—we passed child labor laws that prohibited this practice. So, in the present, does showing outrage at Ikea, Unilever and Nike amount to hypocrisy?

It is useful to examine public policy decisions through the lenses of utilitarianism. This philosophy states that, in all situations, you should act in a way that generates the greatest benefit for the greatest number of people. Everyone’s interests are considered equal. Thus, if utterly poor families are only able to survive when the children can work, it is unethical to prevent them from doing so. By permitting child labor, we are promoting the greatest good for the greatest number of people. The family remains intact as a result of the income received, while U.S. and European consumers obtain inexpensive goods from their retailers.

Although the philosophical justification for child labor is convincing, major corporations cannot withstand the negative publicity associated with these practices. Just this week, Apple indicated that they are going to have an independent firm audit its suppliers, because of criticisms over conditions at its overseas factories. So, from a public relations perspective, not a moral perspective, we cannot condone this practice.

Several years ago, Nike initiated a compromise solution. Children worked in their Vietnamese factories, but the company also provided them with food and a free education.

Do you think that it is ethical to employ underage children in factories located in developing countries? If a multinational corporation also provided educational opportunities, would that be acceptable?

Is the Announced $25 billion Settlement with Homeowners Ethical?

Mortgage Document

Unethical mortgage origination practices precipitated a $25 billion settlement with banks over alleged foreclosure abuses, including the use of forged and shoddy paperwork, a practice known as “robo-signing.” The deal will provide financial relief to an estimated one million at-risk borrowers, as described in today’s Wall Street Journal. This is a step in the right direction:  holding the financial institutions accountable for the dubious practices that they perpetuated. However, millions of mortgages owned by Fannie Mae and Feddie Mac are not covered under the deal, thereby excluding more than half of the nation’s mortgages. Moreover, the real culprits in causing the worst economic crisis since the depression are not just the banks. The government, non-bank lenders, and Wall Street are also responsible.

Paying money—rather than aggressively prosecuting wrongdoers—is never a good idea. Specifically, the settlement is poor compensation to the public for the unethical practices and crimes that were committed against it. In 2001 and 2002, members from senior management at Enron and WorldCom were prosecuted and convicted for performing various criminal acts against their stakeholders. Why have we not prosecuted the wrongdoers who precipitated the current financial crisis?

The immoral acts that I am referring to are well documented in the book Reckless Endangerment, written by Gretchen Morgenson and Joshua Rosner. Since today’s settlement pertains to mortgages, let’s look at some of the shenanigans that surrounded these products. In 2004,  lenders came up with two new types of toxic loans:

1) interest only mortgages, where borrowers simply had to pay off interest, but not principle. As a result, borrowers didn’t build up any equity.

2) negative amortization loans where the borrower paid as much interest as he wanted—any amount not paid off was simply tacked on to principle.

These two products accounted for just 6% of loans in 2003, but by 2005 they represented 29 percent of the market. They were particularly profitable for the lenders: Countrywide made 5% profits on every interest only loan between $100,000 to $200,000. Wall Street’s investment banks made even more money, by subsequently packaging them into investments called CDOs (collateralized debt obligations). Ratings agencies—such as Moody’s and Standard & Poors—then rubber stamped the securities as being AAA rated; however, they didn’t look under the hood to see what was really there. Moody’s could earn as much as “$250,000 to rate a mortgage pool with $350 million in assets, versus $50,000 in fees generated when rating a municipal bond issue of a similar size.”

Morgenson & Rosner described the entire process as being akin to a drug deal where the mortgage originators were drug pushers hanging around the school yard. The ratings agencies were the narcotics cops looking the other way. And the brokerage firms were the overseers of the cartel providing the capital to the “anything goes” lenders.

A coke dealer—who cuts their product with impure substances—knows the harmful effect that the drug will have on clients. Similarly, wall street firms that packaged impure, sub-prime loans into mortgage pools knew, well before their customers did, that the loans inside the CDOs had begun to go bad. The authors describe how in the third quarter of 2006, the traders at Goldman Sachs made bets against the same securities that their brokers were selling to their clients!

It has almost been four years since Bear Stearns fell, only to be followed six months later  by the denouement of Fannie Mae, Freddie Mac, Lehman Brothers and the American International Group. The settlement announced today represents progress, but it is inadequate recompense to the taxpayers. The leadership of the institutions that engaged in unethical practices must be held accountable. After all, they were primarily responsible for creating the current, financial morass that we are struggling to work ourselves out of.  Justice will be served only when the government redresses the larger wrongs that were committed against society.

How do you weigh in on this issue?

State of Customer Service in America

 

–My Kindle: Lost in Chicago & Found in Ashville, North Carolina

_______________________________________________________________________________

Customer Service Is About Customer SatisfactionFor service businesses, quality is all about customer service. When there is a customer service issue, companies that rise to the challenge create a bond between the firm and its customers. As such, customer service is the new marketing. This I learned from an experience that I had this summer.

Since we are passionate about tennis, in August we took a trip to Cincinnati where we saw an ATP tournament. We booked our round-trip flight from Chicago with United Airlines.

When we got home and unpacked, I realized that my Kindle was missing. I last recalled having it in my possession on the return flight, when I had put it into the seat-back pocket in front of me. I immediately got on the Internet, and attempted to look up United’s customer service phone number.

I found an 800 number, but became increasingly frustrated as I navigated countless phone trees, unable to successfully make contact with a human being. My frustration turned to anger when I learned that to communicate with United’s Customer Service department about a past incident, I either had to email customer relations or post a written letter.

The next day, I played golf and recounted my story. I ranted about the quality of customer service in the U.S. One of my fellow golfers mentioned that he knew someone who worked in a management position at United. He offered to intervene on my behalf. I accepted his kind gesture.

The next day, I got an email from a senior customer service representative at United. She did everything within her power to locate my Kindle. I got the sense that if my e-reader had found its way to Brazil, she would have tracked it down.  I learned that there were dozens of Kindles in the lost-and-found at United’s Chicago O’Hare terminal. In addition, I discovered that many travelers leave iPads and other electronic gadgets on airplanes.

Despite United’s valiant efforts to track down my errant, electronic device, the company was unable to find it. However, three months later—during the Christmas holidays—I got an email from Amazon, indicating someone had found my e-reader. Amazon gave me the individual’s phone number, and informed me that we would have to work out the terms of its return. I contacted the individual. He told me that he bought my Kindle at a flea market in Ashville, NC. He had paid $25 for it. He said that he tried to download a book from Amazon, but was advised that his newly purchased device had been stolen. Thus, he was unable to use it to buy books.

I agreed to pay the cost of shipping, if he would return it to me. He consented to this offer. I asked him how I would know where to send the check. He told me to  “look at the return address.” Within a week, I got a package containing my Kindle. The return address stated:

Santa Claus

Ashville, NC

My customer service contact at United was delighted and amazed at the story of how I got my Kindle back. She said that she would pass it along to those who needed to know. Two weeks later, I got a $100 voucher from United applicable to any flight that I book.

There are several lessons that I learned from this experience:

  • E-mail is an impersonal, frustrating medium for expressing customer service issues
  • In the final analysis, customer service is about customer satisfaction—on this count, United Air Lines won me over.
  • Most—but not all—people are honest
  • NEVER place anything of value within the seat-back pockets of airplanes.

What is your experience with the state of customer service in America?

China’s Supply Chain Rocked by 13.6% Labor Cost Increase

Asian drill press operatorThe supply chain in China, including thousands of mainland factories, is reeling from a 13.6% increase in the minimum wage, as reported yesterday by CNBC. As a result, the lowest salary is being pushed up to 1,500 yuan or $240 per month. The increase was caused by a series of strikes that occurred around the Pearl River Delta, a major Chinese industrial center.

Chinese export manufacturers in the Hong Kong area expect that the increase will result in the downsizing—or complete closing—of 1/3 of Hong Kong’s 50,000 factories in China. These suppliers are critical links in the supply chain that stretches all the way from China to Europe and the U.S.  In addition to the wage increase, another reason for the anticipated decline in Chinese production relates to the general downturn in global economic activity.

The gap between U.S. labor costs and Chinese labor costs is narrowing. In fact, a recent article in the New York Times described how GE is bringing back jobs to the U.S. at GE’s Appliance Park in Louisville, KY. In return, the union agreed to a two-tier labor structure, where the U.S. employees who are hired will be paid $10 to $15 per hour less than what the current union workers are making.

Let’s do the math.  The offshore jobs that are being backsourced to GE’s Appliance Park will result in U.S. workers making between $20,000 to $38,000 per year. The workers in China, who will receive the 13.6% increase in their minimum wages, will be making $2,880 per year. Thus, G.E.’s workers will be paid approximately 700 to 1,300 per cent more than their Chinese counterparts.  Jeffrey Immelt, GE’s CEO, is spearheading the U.S. government’s campaign to bring jobs back to the U.S. Are these new, Appliance Park jobs being brought back because of lower labor costs? Or, are political factors affecting the decision?

As discussed in an interview with a U.S. manufacturing executive who lived in China for 13 years, global manufacturers who are looking to minimize their labor costs are locating factories in Viet Nam, not China.  This strategy—chasing every cent of labor savings—requires rejiggering the supply chain every few years. Vietnam’s minimum wage is only US$85 per month (or $1,020 per year). Thus, Chinese workers are paid 282% more than Vietnamese workers. 

Although the labor differential gap between the U.S. and Asian countries is narrowing, it is still significant. Offshoring will continue to be attractive to firms with products that have

  • High labor content
  • Large Production volumes
  • Low variety
  • Low transportation costs

Products that meet these criteria—such as electronics assembly—will most likely never return to the U.S. Furthermore, in certain industries—for example, in computer and cell phone production—most of the companies that comprise the supply chain are situated in Asia.  Given this reality, moving production to the U.S. would be uneconomical. In these industries, hoping for backsourcing to happen is like waiting for an airplane to touch down that is simply not going to land [on U.S. shores].

In conclusion, the key determinant in terms of where to produce is based on total cost, not just labor cost. One must begin by looking at the manufacturing process to determine where the most economical location is. Although China’s increase in its minimum wage is significant, it is just one of many factors to consider.

What do you think? Is there a future for manufacturing in the U.S.? Given the labor differential between China and the U.S., do you think that we can still compete?