A Tale of Two Computer Companies

Different leaders use different tactics to achieve their definition of success. The examination of two computer companies may provide some insight into the direction in which Rick Snyder is taking Michigan.

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?

Snyder: "Say 'NO' to Michigan

One of the key jobs of a Governor is to promote his/her state to the rest of the world. That should be pretty obvious.

In the 1970s Governor William Milliken, the moderate Republican widely viewed as perhaps Michigan's greatest governor, initiated the slogan "Say YES to Michigan". It was modified by his successor, Democrat James Blanchard, to simply "YES Michigan".

Recruiting for a state is just like recruiting students or student/athletes to a university: you know going in that no state has all the answers for everyone, so you must emphasize the best your state (or university) has to offer. Harvard sells the urban vitality of greater Boston; MSU focuses on the advantages of living in a smaller midwest city on a beautiful campus.

So here we have Rick Snyder. Instead of extolling our state's virtues, the message he is sending to businesses is "our business climate kind of sucks." In an effort to sell his tax policies, he cherry-picks the vast array of business climate studies and chooses the one that makes us look the worst.

The survey he promotes ranks the Michigan Business Tax 48th nationally. He chooses to ignore studies showing Michigan's overall business tax climate is one of THE BEST in the nation. That's like Tom Izzo telling recruits about the years MSU has not won the Big 10 championship, and ignoring the six times he's taken his team to the Final Four.

The Tax Foundation, a business-oriented group that is generally anti-business-tax and very conservative (it is chaired by a Koch brothers employee!) ranks Michigan 17th for overall for business taxes, and 2nd in the midwest. (Illinois ranks 23rd and has just raised business taxes, Wisconsin 40th, Ohio 46th. Indiana, which faces the same economic difficulties as the other states, is 10th.) Yet our Governor, in a recent presentation to the Lansing Regional Chamber of Commerce, completely ignored the favorable view of our competitive position. His representatives focused exclusively on the ranking that made us look the worst.

He also ignores a warning from the Michigan Economic Development Corporation about placing too much importance on the various rankings:

There are those who advise not the use of business climate indices altogether. Noted economist Peter Fisher in his paper for the Economic Policy Institute called Grading Places: What do Business Climate Rankings Really Tell Us, states that “...none of them actually do a very good job of measuring what it is they claim to measure, and they do not, for the most part, set out to measure the right things to begin with.” He further states “...these rankings are ignored by the business people actually making the decisions. They should be ignored by policy makers for the same reason.” This paper does not suggest that business climate indices should be ignored; rather, they should be viewed in proper perspective, understood clearly for what they are really measuring, and not overstated in their importance in business location decisions.

It is time the Governor, who is supposed to be our state's chief promoter, started promoting Michigan instead of running us down just to promote his political agenda.

And, while he's at it, it would be nice if he'd explain why some of the highest business tax states in America are also the most prosperous. Business climate is a lot more than taxes. It's infrastructure, education, public services, utility rates and reliability, climate, and quality of life. Impoverishing state government through business tax cuts might well hurt our overall business climate.

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