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From the Very Beginning, Apple Was Born to Grow

Apple Computer founders Steve Jobs and Steve Wozniak always expected to get big. Their company was staffed, financed, and designed as if success was a certainty.

Steve Schmitt

First Impressions: The first issue of Inc. magazine featured this cover story on Apple Computer, which was then two years old and doing $15 million a year in revenue.

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A lot of small company managers talk about planning for fast growth. Professors and consultants preach the need for it. Apple Computer does it.  "We've been running Apple like a $100-million company from the word go," says A.C. ("Mike") Markkula, 35-year-old chairman and 20-percent owner of the two-year-old, privately held make of personal computers. "We anticipate growth, we count on it, and we plan for it."

All this might seem like so much bravado except that it's working precisely according to Markkula's script. Even in Apple's hometown of Cupertino, in the heart of California's booming semiconductor industry, the company is conspicuous for the speed and the orderliness of its growth. At the time the company was incorporated, in January 1977, its sales were negligible. By the end of that first year, sales totaled less than $2 million. In 1978, sales were about $15 million. And in 1979, Apple expects to top $100 million.

"I told employees, at a company meeting, that I'd take them all to Hawaii for a week if we break $100 million this year. I can hear the 'alohas' now," says Markkula. Meanwhile Apple is installing in-house data processing capacity that will serve its needs even when it hits $500 million. 

Apple's emergence as a planned company began in late 1976, when a friend introduced Markkula to two self-taught inventors, Steven P. Jobs, then 21, and Stephen G. Wozniak, then 26. They had invented an inexpensive computer, actually a keyboard built around a microprocessor. Hooked up to a TV set, the keyboard enabled computer-savvy hobbyists to work out engineering problems, manage home finances, or play video Ping-Pong.   

In a scene familiar to many entrepreneurs, demand soon outstripped the capacity of Jobs and Wozniak's garage production area, which had been established with about $1,200 from the sale of a used Volkswagen van and a programmable calculator.  The inventors were capital poor and had no management experience.

Enter Markkula, who had help key marketing jobs at Intel and Fairchild Semiconductor. At the age of 30, he had retired, a millionaire from astute stock market investments. A skier, tennis player, gymnast, ukulele player, and guitarist, he was fast getting bored with excess leisure time.

"I was just going to help these guys write a business plan," he recalls. Instead, he decided to go into business with them.

For about three months, working mainly at a table in his backyard cabaña with Jobs and Wozniak, Markkula researched the personal computer market and assessed Apple's chances to crack the field. At that time, only a few competitors had surfaced, but the numbers were growing rapidly. Then as now, explosive growth potential was the lure. Early entrants included such heavyweights as RCA and Tandy Corp.'s Radio Shack. By July 1978, more than 100 companies has jumped in, most of them small concerns with name like Parasitic Engineering and GNAT Computer. Creative Strategies International, a San Jose, California, consulting firm, predicts that dollar sales in the personal computer industry will rocket from 1977's figure of $172 million to $3.5 billion in 1982.    

Markkula was convinced that product breakthroughs would give Apple a strong competitive positions—but only if they plunged in and made a commitment to grow very big, very fast.  

"It was go for broke," says Markkula. "We had to dominate the business or go bankrupt trying." He was sure then, and he still is, that Apple's most serious competition will come from Texas Instruments and IBM—both giants committed publicly to marketing personal computers but are not yet in the race. Markkula reasoned that a start-up company such as Apple would eventually be crushed if it simply tried to carve out a nice little niche for itself. "In this explosive market, just aiming to a 10-percent market share is not viable. We anticipated extreme rates of growth. We took high risks," he says.

Planning for adequate financing was the first order of the day. Markkula invested $250,000 in the newly incorporated company in return for 20 percent of its stock and undisputed command as chairman. He then secured a line of credit, which was recently increased from the Bank of America. He also drew up contingency plans to deal with start up financial strains, which, as it turned out, did not develop. "We even planned for the slowest possible rate of payment to us by our distributors, coinciding with as high a production rate as possible. We tried to foresee everything that could go wrong, and discussed it with our banker," Markkula says.

Because his own money was invested in the company, says Markkula, he was able to approach venture capitalists from a position of strength. He raised a little more than $600,000 from such sources as the Rockefeller family's Venrock Associates, Continental Illinois Bank, Arthur Rock & Associates, and Teledyne founder Henry Singleton. "We've selected venture capitalists with a record of supporting investments, who agreed to ante up a second time if equity financing was needed," he says. He estimates that he could raise $5 million to $8 million from these sources, beyond Apple's bank credit line. But no additional financing has been needed. Retained earnings have financed the company's growth to date.

With financing secured, Markkula's planned growth strategy called for spending heavily to build a senior management group that's unusually broad in background and experience for such a small company. The first key staff decision had actually been made at no cost, at the time of incorporation, when Jobs and Wozniak agreed to let Markkula run the show. The two founders accepted positions as vice president for new products and vice president for research and development. Each owns 20 percent of Apple, the same as Markkula, and the remaining 40 percent is evenly split among venture backers and other employees.

"Jobs and Wozniak were young and bright, and also mature. They realized they had zero experience in management and if Apple was to grow as fast as we projected, we'd need able people with experience in big companies," says Markkula.

Although Markkula is chairman and clearly the top policymaker, he decided against taking over as president, as would usually be the case. "I didn't want it," he says. Instead, he reserved for himself the job of vice president for marketing, and hired Michael M. Scott, 35, from National Semiconductor Corp. for the job of president and chief executive officer. "I wanted a strong general management executive with significant experience to oversee the rapid growth I knew we'd soon have," he says. At National Semiconductor, Scott, a physicist with a marketing background, had supervised more than 6,000 production and support people in one of the company's largest efforts.

Markkula also hired Thomas Whitney from a 15-year planning career at Hewlett-Packard to be executive vice president. F. Rodney Holt was recruited from a competitor, Atari, as vice president for engineering, and an experienced patent attorney was hired. Markkula believe patient protection is critical for a growth company because under-protection in the early days can slow process later.

"We mandated in advance that we'd build a deep enough staff to allow plenty of time for planning," says Markkula. He wants his top people to spend 25% of their time on long-range planning, and another 25% on recruiting and training new key personnel. If you don't these things you'll be overrun, he claims. "Good management doesn't mean just coping with day-to-day problems. You're far better staying out of trouble in the first place."

Apple makes a point of recruiting its managers from major growth companies, because these people have confronted the kinds of growth problems Apple is just beginning to experience.  "We look to them to see down the road and predict the problems they've encountered elsewhere," says Markkula. "Then we can plan to avoid them."

The hardest key person to recruit has proved to be a senior financial officer. "It's a problem locating good risk takers," says Markkula. In the meantime, the company has relied heavily on Scott's financial abilities and on the financial experience of several outside directors.   

Consistent with Markkula's go-for-broke strategy, from the start Apple has spent heavily on advertising and promotion. The company bought costly full color ads in national magazine when it was barely in production. Last year, with its Apple II computer a sellout in many outlets, the company spent $1 million for ads and promotion, on a par with much larger firms.

"We had to gain a broad recognition in the market fast. We could not start small," declares Markkula. He's determined to make Apple's name dominant in personal computers before TI and IBM enter the field with their superior marketing firepower.   

The strategy seems to be working. At the moment, Radio Shack—whose computers are in the $600-$800 range—sells more units than Apple. But dollar sales of Apple II—which starts at just under $1,000 and can go over $2,000 with add-ons—just about match industry leader Radio Shack, Markkula believes. And he says Apple is gaining market share whereas Radio Shack appears to be leveling off.

Markkula's marketing plan is to move as quickly as possible to dominate, one at a time, the key areas of the personal computer field. "When you're small, it's hard to be all things to all people, but we'll soon be big enough to handle that," says Markkula. Apple's first effort was to sell to hobbyists, and Markkula is satisfied the company is the major force in this market segment. This year a major emphasis will be on developing sales to schools. Apple will then concentrate on the small business market, with application software and a distribution strategy aimed at businessmen.

To date, Markkula's marketing plan has depended on distributors rather than Apple's own salespeople. Apple products are in 450 independent computer hobby shops, and in nationally franchised retail operations such as Computerland. Markkula is now busy developing outlets that will attract non-hobbyist buyers.

That doesn't mean Apple is abandoning its basic home market. From the beginning the company has spent heavily to please customers who demand good looks as well as utility in items brought into their homes. The company spent $100,000 in tooling fir a stylish foam housing for Apple II—far more than most competitors who use a metal "black box" form of housing. That decision has paid off in more than good looks. The cost per unit of the foam structures has dropped about 20 percent of the cost of metal casings as production rates have increased, Markkula claims.

Apple's commitment to planning rather than coping shows clearly in its approach to internal data processing needs. In 1977, at a time when manual order-processing methods were still sufficient, Apple began an elaborate study to estimate the number of orders that would be processed in five years. With that accomplished, outside consultants spent six months identifying five potential hardware and software supplier. The company finally selected a Digital Equipment Corp. PDP 11/70, satisfied that the system will meet company need up to at least the $500-million sales level. "It takes a year to define needs," says Markkula. "Why wait? Most of us here have seen our former companies restricted in their growth by failure to plan in advance for computer needs."

Another chore that Apple accomplished early on was putting its orders, credit files, and shipping records into data banks. "Once you've built up three or four years of records, it's costly to transfer these to electronic memory," says Michael Scott.

Markkula notes that suppliers, especially in such high-demand industries as electronics, can make or break a fast growing company when demand swells unexpectedly. Apple has made a point of building credibility with its distributors and with manufacturers of components. From the start, the company was conscientious about paying both on time. "There have been times when we were the only company able to ship because we could get the parts that others couldn't," says Markkula.

In planning its physical capacities, Apple aims for maximum flexibility, with movable partitions and flexible tubings to hold electric wiring.  In one plant, floor layouts were revamped four times in nine months, but because the facility had been designed with expansion in mind, the changes didn't cause major problems. The company had always anticipated future space needs: last June, Scott asked for 5,000 sq. ft of open bay space adjoining one production area. For a while, the area remained empty, and one of his foremen chided Scott: "You'll never fill that up." Today the area is jammed from floor to ceiling with packing and shipping materials, boxes, and components.

Scott also believes that fast-growing companies should depend on outside help for staff specialties such as public relations and for the manufacture of nonproprietary components and systems. Don't worry too much about being innovative in such areas as production procedures if a cost-efficient outside alternative exists, he advises. "As long as we are protected in terms of quality assurance, there are better things to do with our time here. Our scarcest commodity at Apple isn't cash, but time to plan."

Scott is adamant, however, that growing companies should devote lots of time to committing standard policies and procedure to paper. "You need written personnel policies and a manual that say specifically how you want a purchase order to be written," he says. He reasons that when a company is growing as fast as Apple, managers don't have time to stop and tell new employees how to do everything. 

Ironically, about the only thing that Apple didn't plan in detail was its name, which sticks out in an industry dominated by contrived corporate names trying to reflect a mysterious world of bits and bytes. Jobs, who was a California "fruitarian" at the time the enterprise was moving from bedroom to garage, liked the simple, crisp, natural image of an apple. So that's what the computer and, later, the company.




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