15 years of consulting in niche markets

Apple investments in R&D have nothing to do with Innovation

 

Yes, there is no doubt that Apple just had its best quarter ever. After three consecutive quarters of decline in sales, Apple sold more iPhones (78.3 million compared to 74.8 million a year ago) and more Macs (5.million compared to 5.3 million a year ago), although less iPads (13.1 million compared to 16.1 million a year ago). It resulted in record quarterly revenue of $78.4 million compared to $75.9 million a year ago, and $46.9 million in the previous quarter).

The Boston Consulting Group (BCG) continues to rate Apple as the most innovative company for the 11th year in a row. The company hasn't lost its top spot for even one year.

 

However, a deeper dive into Apple's financials shows a slightly different story. In the first year that BCG ranked Apple as the most innovative company, 2005, Apple's revenue increased 68.3% and its profit increase 383% compared to the previous year, while the investment in Research and Development only increased 9.2%, which really meant a decrease in percentage of sales from 6% of sales the year before, and 8% the year before that. 68.3% revenue growth is phenomenal, considering that Apple had already generated $8.3 billion the year before. The growth in 2005 was fueled mainly by the introduction of the iPod a few years earlier. iPod sales grew 409% from 2004, and 370% the year before. The kind of hyper growth you could expect from the introduction of a disruptive product.

 

What about 2016?

Apple's revenue actually declined 7.7% in 2016 from $234 billion to $216 billion. Its profit declined even faster, 14.4% from $53.4 billion to $45.7 billion in 2016. And what about the investment in Research and Development? That actually increased from $8 billion (3% of sales) in 2015 to $10 billion (5% of sales) in 2016. Apple's investment in R&D increased 25% year over year, while revenue declined almost 8%.

"R&D investment takes a while to show results," you might say, but Apples R&D investment grew by more than 30% in each of the previous 7 years (35%, 34%, 35%, 32%, 39%, 36%, 34%). How long is it before that investment pays off? The last time Apple's R&D investment grew less than 30% annually was in 2009.

 

And in the first quarter of 2017?

While sales increased 3.3% over the first quarter of 2016, R&D investment increased by 19.4% for the same period.

 

The conclusion.

The conclusion is simple: investment in Research and Development is not the same as Innovation. The introductions of the iPod, iPhone, and iPad were radical. Those were game changers. Apple TV and Apple Watch were not. Spending more money on Research and Development is not the answer. Reviving the Culture for Creativity that Apple used to have is.

Oh, and one more thing--the Boston Consulting Group may want to revisit how it ranks the most innovative companies.

Source: Yoram Solomon, 2017

Thursday Feb 2, 2017