Coco Chanel once said: “In order to be irreplaceable one must always be different.” Coco was talking about clothes and fashion, but still, I cannot think of a better notion that can fully capture the importance of creativity and originality in today’s tech world. There is no doubt that for a tech company the key to staying at the top of the heap is innovation.
But how does a company become a champion innovator? More specifically, in Apple Inc. (NASDAQ:AAPL)’s case, what is the secret to unlocking creativity and translating it into juicy profits?
It takes money to achieve innovation?
Most people associate successful innovation with excessive spending on research and development. However, unless you are a big pharmaceutical jockeying for the next blockbuster drug, you probably don’t need to spend all your cold, hard cash on research activities.
Every year, the Boston Consulting Group publishes a report revealing the 50 most innovative companies worldwide. Last year, Google Inc. (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) made it to the top ten with Apple taking the lead, once again. So, how much did they spent on R&D?
If we take a look at the chart below, which illustrates the revenues that these companies generated, as well as their R&D expenses
over the past five years , we see that the intensity at which they invested in research and development was pretty soft:
AAPL Revenue TTM data by YCharts
Yet, this relatively low reliance on research and development didn’t keep them from achieving stellar top-line growth and enhancing shareholder value. Hence, using R&D intensity to gauge a company’s effectiveness in delivering innovation is, more or less, misleading. It doesn’t say anything about how beneficial these investments are, and it most definitely does not serve as a guide for the future.
Measuring successful innovation
Overall, since a company’s ability to innovate derives primarily from its intangible assets, measuring innovation can be quite a fuzzy business. Nevertheless, we can evaluate the returns on innovation investment (ROII) by comparing the net profits from the sale of new products or services to the direct research expenditures generated in creating these new products or services.
As we can’t know precisely how much money Apple Inc. (NASDAQ:AAPL) bet on creating the iPad, we can take a look at its gross profit margin instead. At the end of the day, if a company can generate gross margin then we know that its innovation engines are working. The chart below is worth a thousand words:
AAPL Gross Profit Margin Quarterly data by YCharts
As we can see, Apple Inc. (NASDAQ:AAPL) did a bang-up job unlocking value from relatively low R&D expenses. But how? If heavy research and development spending is not a prerequisite for delivering successful innovation then what is it?
Apple’s capability around innovation
A breakthrough product may be a real money-spinner, and even capture sales that might have otherwise gone to a competitor. But
if a company truly intends to compete on innovation, a more reliable source of competitive advantage is that company’s capability around innovation; and Apple Inc. (NASDAQ:AAPL) is the epitome of successful innovation capability.
Apple, under Steve Jobs‘s supervision, chose a set of core competencies and invested in aligning those competencies to its overall growth strategy in a sustainable and inimitable way. It bet on things like its strong brand, sleek and unique design, ability to meet unmet needs, and it wooed its customers with superior ease-of-use integrated solutions. Most importantly, it knew that in order to avoid obsolescence it had to cannibalize its own products. This way, it prevented its peers from replicating its ideas, while at the same time it continued dominating the market.
However, in a post-Steve Jobs era, how can we be sure that the company will continue to drive innovation? If we use Apple’s past
performance as a guide for the future, then we know what the company is capable of achieving. However, since Steve Jobs passed away, all Apple Inc. (NASDAQ:AAPL) did was to cannibalize the iPad with the iPad mini. Even though, it was a smart move, was it enough? Over the next two years, Apple is expected to launch at least three key products: an iTV, an iWatch and a low-cost iPhone. However, the timing of these three products is probably going to shift.
On the other hand, Google Inc. (NASDAQ:GOOG) is heading toward the forefront of the field with immense opportunities in the wearable computing market. At this point, Google is one step ahead of Apple. The company is already offering to 8,000 U.S. consumers a test version of
its Google Glass, and there are rumors going on that it might be working on its own smartwatch, too.
Also, Samsung (NASDAQOTH: SSNLF) recently tipped that it plans to enter the wearable computing arena. It won’t be the first time, though. Samsung has attempted twice in the past to introduce a smartwatch, but without any noteworthy success. What if this time the Korean tech giant gets it right? Apple has been burning daylight engaging in prolonged patent litigations against Samsung while Samsung (NASDAQOTH: SSNLF) has be warming up for a dog-eat-dog fight. It’s only a matter of time until we find out who is going to win this fight. But, at this point, time is crucial.
Final thoughts
In the past, not being the first to introduce a game-changing idea didn’t prevent Apple from building blocks for phenomenal growth. Apple Inc. (NASDAQ:AAPL) didn’t invent the mobile phone, but it did re-invent the way people use mobile phones. Going forward, if Apple truly wants to live up to Steve Jobs’ legacy, it has not only to “think different,” but it also has to move fast. As I expressed in a previous article, at the moment, Apple may be taking a break between eureka moments. However, this break is causing a nasty fall in the stock price. Apple should not keep investors and customers waiting too long before they can get their hands on its “next big thing.”
The article Assessing Apple’s Innovation Capability originally appeared on Fool.com and is written by Fani Kelesidou.
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