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Technology Stocks : Silicon Graphics, Inc. (SGI)

SGI 91.87

+1.8%

Dec 5 3:59 PM EST

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To: Bill Holtzman who wrote (1426)	5/14/1997 7:07:00 AM
From: Shibumi	of 14451

>>Mark, Thanks very much for the info. Would you say that it basically came down to the difference between an engineering perspective and an entrepreneur/maarketing one? Bill<< I actually think that the basic difference is a business philosophical one: a belief in horizontal integration versus vertical integration. As IBM, HP, Sun, and others have shown, vertical integration can be very profitable. Microsoft and Intel are probably the most famous horizontally integrated companies -- and their results have obviously been superb. The trap on vertical integration is that you need to constantly push up the value chain towards the customer to capture higher margins while the trap on horizontal integration is that your margins typically suffer as you push volume. With all of this said, what I tend to look for are horizontally integrated companies that have high margins because they establish some type of franchise/monopoly to the customer. Again, Microsoft and Intel are clear examples of this -- I think that Computer Associates and Cisco are also examples although the primary value that they deliver is sales/service oriented (each is a strange hybrid of a horizontally-oriented company doing a great job of service). I've always believed SGI could become an amazing example of this -- they have a franchise in high performance graphics that no one can currently touch. I'd invest in SGI in a minute if they'd switch to a horizontal strategy -- but if they did, they'd have to fundamentally restructure the company -- so it makes sense to me that they won't do it until it's almost too late, i.e., competition will force them into it so that they're reacting to as opposed to creating change.

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