In market warfare, just as in military warfare, one of the key tools is the analysis of Critical Failure Points. The essential element is that a opponent may have mistaken assumptions about its strengths or strategy or the intentions of the opposition, and those elements constitute a set of critical failure points that can be exploited. Apple appears to be exploiting Microsoftis critical failure points.

It all started when Steve Jobs returned to Apple and ruthlessly canned any project that wasnit essential to Appleis survival: Heavy hardware discounts for any developer, the Apple Masters program, the Newton, photography and printing.

That management approach was part of a larger philosophy, later implemented, which said that any activity or project that was not making money was to be cancelled. No pet projects were maintained for image or vanity. The net result of such thinking was that Apple started to surge on all fronts in a way that would compound itself in financial growth.

The cornerstone of that approach was Mac OS X. A team of very good people who understood Unix, Avadis "Avie" Tevanian, Bertrand Serlet, Jordan Hubbard and others architected a modern approach to Unix that would lead to growth and new technologies while successfully making the painful transition from Mac OS 9 via the Blue Box/Classic.

Just like the current economic crisis, when a sequence of objective financial realities starts to domino, thereis no stopping the collective action of the whole process.

The key critical failure points are now becoming evident.

1. Vista would be good enough sway XP users to migrate because of Microsoftis past performance.
2. Because of its accumulated wealth, Microsoft could afford to engage in money losing projects to achieve broader agendas.
3. Apple would forever settle for single digit market share.

It has become clear to Microsoft lately that despite an overwhelming worldwide market share compared to Macs, that the real emerging problems is:

1. Appleis financial strength.
2. Appleis ability to define the terms of the war with the "Get a Mac" TV ads.
3. Appleis retail presence.

A good historical example of how an opponent can misjudge, in military warfare, was the 1973 Arab-Israeli war. Israel surmised that Egypt, disgraced after the six-day war in 1967, wouldnit mount another attack until they could achieve air superiority. Instead, Egypt used a combination of Soviet air defenses and Scud missiles to negate the Israel air superiority and provide an umbrella for its advancing tank forces. It was a classic case of critical failure points.

Microsoft, by comparison, has trumpeted the fact that its vast market share is an indicator of its product desirability and success instead of a legacy that could be attacked at weak points. For example, Apple is now grabbing one in three laptop dollars in retail stores.

Apple rate of growth in Mac sales, compared to the PC industry, has been running at a steady factor of two to three for some time now. Concrete financial factors like that pass fleetingly by, for the moment in news reports, but accumulate into alarming numbers over time. For example, as recently as Appleis Q2, 2006, the company sold 1,112,000 Macs. In the most recent quarter, the number was 2,611,000.

Appleis revenue growth now dwarfs Microsoftis, it has more cash on hand, and in the most recent quarter, Appleis non-GAAP profit was $2.44B compared to Microsoftis $4.37B. See chart below.

Other data from Monday shows that Open Office.org has been downloaded at least 3 million times since the launch on October 13. Of that total, there have been, to date, 320,622 Mac OS X downloads and a "staggering" 2.5 million Windows users. (Because OpenOffice can be freely distributed, the numbers from the Mozilla website are a floor.) While many customers use both, if Microsoft had captured all that revenue in equivalent MS Office sales, it would come to just under a billion US dollars, not a small piece of change.

The net result of these critical failure points in Microsoftis overall strategy is that while Microsoft continues to tout a significant market share, other economic indicators, a gathering of open source clouds, and a hard nosed approach by Apple have forced Microsoft into a defensive position that has required a US$300M ad campaign to counter the damage. When that news was unveiled, Apple, in an almost military-like counter-punch, went for the jugular and teased Microsoft for not spending that money on Vistais problems.

Apple is poised to move into double digit market share in the U.S, and from all indicators, Microsoft has few obvious strategies available in its arsenal to extricate itself from a continued defensive position and some key failure points.

 

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