Business and Strategy – Page 3

What crosses your mind when you think of an archetype of failing to recognize enormous business opportunities and renouncing innovations?

Xerox: The Worst Business Decision Ever

Xerox PARC, now an independent but wholly-owned subsidiary of Xerox, is celebrated for its pioneering technology inventions. It produced the first computer to use the desktop metaphor and mouse-driven graphical user interface (GUI) to let users interact with computers and software. They failed to capitalize on the huge opportunity. Someone else commercialized a large portion of Xerox’s ideas.

Xerox PARC invented the idea of icons, windows-based interfaces and dialogue boxes, point-and-click interfaces, local area networks, WYSIWYG (what you see is what you get) text editor and many other technological innovations that are at present part of the very underpinning of the personal computer industry. Years later, Xerox’s management even acknowledged, “whole companies have been built on inventions born at PARC.”

Xerox Palo Alto Research Center (PARC)

The fundamental flaw lies in Xerox’s strategy. Xerox’s leadership was preoccupied with determining ways to protect its mainstay, the copier business, from impending competition from Japanese companies. Xerox decided that it was a copier company and let go of the business opportunities in its technological invocations, even if PARC’s innovations had significant potential in the future of nascent personal computer industry. Steve Job’s innovation, the Apple Macintosh, borrowed from the work of PARC and created the first successful commercial computer with a graphical user interface.

The other choice that killed a great business opportunity was the decision by IBM that it was a computer company, not a software company. That made possible the rise of Bill Gates’ Microsoft Corporation, which went on to dominate the world of operating systems and applications software.

Apple's Double Irish Scheme for Tax Avoidance

Turns out that Apple might be paying about 10% of its pre-tax income in taxes as compared to a 35 percent federal corporate tax rate. However, details of Apple’s tax practices indicate that there Apple engages in merely tax avoidance. Tax avoidance is not quite unlawful. There seems to be no evidence that Apple engaged in tax evasion, which is indeed unlawful.

Apple uses a tax avoidance scheme known as The Double Irish, which came under scrutiny during the Senate testimony. Using the Double Irish scheme, Apple instituted a shell subsidiary in Ireland, an offshore tax haven, and assigned the majority its intellectual property rights to this shell subsidiary. In turn, the subsidiary charges fees and royalties and receives billions of dollars in revenue. On these receipts, Apple pays about 2% in corporate taxes in Ireland instead of the high tax rates it would pay for the same receipts in the United States.

It can be argued that the Apple’s management is indeed doing what is best for Apple’s shareholders. Apple’s senior management and the board have a fiduciary responsibility to do anything in the best interest of its shareholders, as long as such actions are lawful. Had Apple ignored this prospect of reducing its corporate tax bill by using the Double Irish scheme, the senior management and Board may possibly be accused of being negligent in their responsibilities towards shareholders.

The actual problem might just be that the Congress hasn’t taken any wide-ranging measures to make all tax avoidance schemes illegal and ensure that companies pay their fair share in taxes.

Category: Business and Strategy

The Worst Business Decision Ever (Hint: Xerox)

Apple’s Double Irish Scheme for Tax Avoidance