Is Apple’s Magic Wearing Thinner?
Apple’s recent quarterly profits may have disappointed investors, but does this suggest that the magic is beginning to fade? The Apple strategy is proving to be both unconventional and extremely difficult to implement over a long period.
February 2 2014 by ChiefExecutive.net
Apple shipped 51 million iPhones in its first fiscal quarter ending last December. This represented a yearly gain of only 6.7 percent but it fell short of the 55 million that Wall Street expected. The miss came at the same time the company launched two new models and the inclusion of two carriers in that launch. The fiscal first-quarter numbers reinforced perceptions that Apple is now mostly selling its mobile devices to repeat customers who are upgrading to the next generation in the product line, instead of reeling in new converts to its technology.
A similar problem also appears to be looming for Samsung Electronics, which competes fiercely against the iPhone. “It looks like the high end of the smartphone market is becoming saturated,” Gartner analyst Van Baker told the Associated Press. Other analysts say devices running on Google’s Android software have been siphoning sales from the iPhone because they usually cost less and many of them feature bigger screens than the iPhone’s four-inch display. But the results highlighted potential weaknesses in Apple’s business. The iPhone, which represented more than half of the company’s overall revenue, only grew at the same rate as the rest of the market, according to Gene Munster, an analyst at Piper Jaffray. He told the Wall Street Journal that is unusual for Apple, which usually grows faster and grabs market share in quarters surrounding the release of a new smartphone such as this.
“It’s confirmation of a trend,” added Van Baker, noting that much of the industry’s growth is coming from emerging markets, where cheaper smartphones are more popular.
But some observers urge caution in reaching too soon for dire conclusions. “Apple has sustained reasonable growth given its high revenue and earnings base. Its margins are slightly lower at 37.9 per cent but still impressive for the tech sector,” comments Loizos Heracleous, Warwick Business School professor of Strategy who has researched the company extensively. “Even though Apple has achieved record revenues and profits, the growth rates of its leading products (iPhone, iPad) are reducing. This means that to recapture the rates of growth that Apple historically delivered, there should be new product introductions of the calibre of these leading products. Despite lower growth rates, Apple remains a solid company with enduring competitive advantages. These include its prowess in design, marketing, innovation, ecosystem creation, and intense operational efficiency. Even if historical growth rates are not maintained, these competitive advantages are hard to beat by competitors, at least in the near to medium term.”
Heracleous argues that Apple, in fact, has achieved the holy grail of business strategy—but that it extremely difficult to implement over time—other CEOs take note. It has achieved differentiation through innovation, but with simultaneous levels of efficiency, leading to the lowest costs of its peer group. Strategy experts like Michael Porter argue that such strategies are impossible to sustain for long because they demand contradictory investments and capital allocation. Professor Heracleous calls this a “quantum strategy” after the idea that at the quantum level of reality the same electron can be at two places at the same time.
The reason Apple is able to do this lies, in part, to its ability to concentrate its innovation in a centralized single physical space while at the same time controlling the customer experience and creating barriers to entry for competitors. But at Apple it doesn’t stop at innovation. “Efficiency was a major goal of Steve Jobs when he recruited Tim Cook in 1998 from Compaq to be Apple’s COO,” observes the Warwick Business School professor. “Cook was instrumental in driving efficiency by streamlining Apple’s manufacturing processes, supply chain, and distribution.” Contrary to IBM, GE, Siemens and nearly all the big multinationals, Apple doesn’t disperse its operations or R&D around the world. “The magic cauldron is concentrated at One Infinite Loop in California.”