There is no denying that Apple is one of the more innovative companies in the world. However, we know that all companies can fall victim to complacency as a result of their own success. Since the launch of the iPad in 2010, Apple has not released any new products, just variations and enhancements of existing products. If you consider their R&D budget it was 12% of sales in 1997 and was at an all time low of 2% in 2011. If we reflect on the data, you can see that heavy R&D occurs around 4 years prior to major product launches. For example, the company invested heavily in 1997 in R&D (12% of sales) and launched the iPod in 2001. R&D investment sloped off until 2003 where it spent 8% of sales. This is exactly 4 years before the launch of the iPhone in 2007. In addition to the timing of R&D spend, the general trend overall is downward sloping. The company only spent 2% of sales on R&D in 2011. However, it is important to note that although the percentage of sales of R&D is decreasing the overall spend was increasing during this period. Also, if we compare Apple’s cost of goods sold (COGS) to Net Sales we see that costs are deceasing. All of this tells us that Apple is focused on general cost cutting measures over new product innovations. This is not surprising given Cook’s background as COO. However, this leads us to the question of what Apple should do regarding innovation. It appears to me that even though the general trend in R&D is decreasing as a percentage of sales, the amount of money they are pumping into it far outweighs what they were investing back in 1997. They invested only 583 million in 1997 and came up with the iPod as compared to 2.4 billion in 2011 and all we are seeing are product enhancements but no new products; therefore, the problem is not lack of R&D resources.
If the company is experiencing some inertia then one idea is to follow an aggressive acquisition strategy. As of September 2012, the company was sitting on approximately 29 billion in cash and short-term investments and as of September 27, 2013 had a 438 billion dollar market cap. This gives Apple huge acquisition power. They have taken advantage of this strategy on occasion through the acquisition of Siri in 2010 and AuthenTec in 2012. AuthenTec created the technology around Touch ID, which was just announced on September 10, 2013 as a new feature on the iPhone 5S. It appears that Apple is using its R&D dollars for integration of acquired technology as opposed to new product innovations. The key to creating new innovations is for Apple to diversify its creative capabilities. Therefore, to foster innovation, it needs to invest and acquire companies outside of their core product offerings. In addition, Apple should stand up two independent entities with the mission of creating new product innovation. By creating two separate organizations, Apple would insure competition between the two firms while maintaining autonomy. Apple could fund these organizations and treat them as start-ups. Each company would have their own independent board directors, executive structure, and culture. Their sole intent would be to compete against one another for the purpose of providing options to Apple. Creating independent companies would achieve this goal and give Apple new creative inputs that may help keep them ahead of the competition. A great example of how this can work is DARPA. DARPA stands for Defense Advanced Research Projects Agency and is profiled in a recent article in the Harvard Business Review. DARPA was created by the Pentagon in 1958 for the sole purpose “to prevent and create strategic surprise.” DARPA has created some of the most groundbreaking technologies in the world; such as, the Internet, GPS, and stealth technology. What makes it so successful is its independence, autonomy, and short-term project lifecycle, which allows them to attract some of the best and brightest scientist and researches. Apple has the ability to create the same type of scenario but in order to accomplish this; it must be willing to separate some of its creative capabilities.
There are three primary impediments to making this strategy work: time, culture and true autonomy. Let me take each one in order. The amount of time required to standup a new company is fast, but to get it operational to the point where value is being produced may take years. Two risks come to mind as a result; 1) will competitors pass them by during this time, and 2) will these independent entities actually produce anything of value given the required time to become operational? To mitigate these risks, I would propose that Apple continue investing in its own R&D operations, so in essence they would have three parties working on future innovations.
Culture is another potential impediment in that it may be difficult, time consuming, and complicated to form. Apple has a culture that has taken shape over many years of operations. They attract the best and brightest to the company as a result and have a vibe that is hard to replicate. Although I feel the new companies will be able to attract great talent, they will be competing against many other powerful brands in the market. However, their association to Apple will help alleviate some of this. Regardless, it takes energy and focus for a company to retain talent and form a productive culture.
True autonomy means that Apple will not oversee or meddle in their operations. These organizations need to be truly independent. Apple cannot instill demands on these companies. However, what Apple can do is help layout their mission. I would tell the executive leadership of these two companies to set the direction of their companies based on the assumption that Apple would want to acquire their organizations in the future. In other words, would Apple want to buy you based on your intellectual property? Beyond helping with the mission, Apple should keep its distances from day to day operations and let these companies shape themselves.
Again, the goal here is to create new innovations for Apple. Diversifying creative brainpower and giving them the autonomy and financial backing to grow could potentially help Apple stay current for many years to come.
