Computer company #1, founded in 1985 in Iowa, decided on a low-cost strategy to achieve success. The company took technologies created by other companies, repackaged them, and sold them at retail. Its innovations were limited to retail sales, focusing on telephone orders and later company-owned stores.
To reduce its costs even more, it relocated to "the middle of nowhere", South Dakota. South Dakota does not offer technological excellence, but it did offer low taxes, low wages for workers and low costs for land.
It found that it needed to do more. The low costs of South Dakota weren't enough to flourish. To grow beyond its model of selling high-end PCs by phone, and to attract top management and engineers, it relocated its base of operations to high-cost La Jolla, California, in May 1998.
Company #2 used a different business strategy: rather than trying to be the lowest-cost manufacturer, it focused on being the best.
It invested heavily in innovation. The company, founded in the Silicon Valley, established its headquarters in an area that offered some of the highest business costs, but also offered access to the top engineering talent in the world as well as a superior quality of life. It developed a reputation as a company which paid its employees exceedingly well.
Company #2's computers set the standards for the industry. Even though its products were the most expensive in the marketplace, they were cherished and built an almost cult following.
As you have likely deduced, Company #1 is Gateway computer. Company #2 is Apple Computer.
How have the two business models worked?
Gateway, which focused on cost-cutting and low prices, went public in 1993 at $3.75 (split adjusted) per share. It hit its peak in 1999 when its stock reached $84/share. But by 2007, the stock had plunged to $1.90/share. The company was sold to Acer Computer for $710 million, which shut down Gateway's direct sales operation. The entire Gateway board of directors, led by chairman Rick Snyder, resigned.
Apple Computer, which focused on innovation and premium-priced computers, is now one of the world's most valuable publicly traded corporation. It has a market cap of more than $300 billion. Its public offering was at $2.75/share (split adjusted); the stock trades today at about $340/share.
The company that built its business model on low costs and spent little on innovation failed. The company that built its business in what most would call a very high business-cost location, and invested heavily in innovation, is now one of the most valuable publicly traded corporations in the world.
Rick Snyder made his fortune with Gateway and its business model. Even though the company failed, it succeeded in making him a multimillionaire. The Gateway model does not bode well for the future of Michigan.
Clearly Snyder believes that economic success is all about cutting costs. His budget slashes funding for universities, for quality of life, and for workers.
Is Michigan destined to become the government equivalent of Gateway?