Apple’s “shock & awe” innovation grows sales AND margins
Apple has just released another mind boggling set of quarterly results. In this post we try to figure out how the hell they do this.
First those results. Revenue of $28.57 billion was almost double that of a year ago. But what’s most impressive is doing this whilst INCREASING gross margin, from 39.1% to 41.7%. And this is not just a blip. Its a long term trend, as shown by the graphs below from Terminal Value.
Apple blows Michael Porter’s theory of strategy out of the water, if you needed any more convincing that his model was way past its sell-by date. He suggested that you need to pick between either differentiation OR cost leadership. Well, sorry Prof Porter. But Apple do both. They have the most distinctive product offer, and the best gross profit margin (i.e. lowest cost).
So, how do they do this?
1. Being a Leader
Its funny how many people still use Apple as an example of a “challenger” brand trying to take on the big bullies. In fact, Apple is a Leader Brand in its chosen markets. For example:
– c.70% of the tablet computing market
– 90% of the US market for PCs over $1000
Being a Leader Brand is an incredibly powerful position. It allows you to occupy the “centre-ground” in the market: the best bundle of benefits and attributes. These associations become hard-wired into our brains, and so Apple becomes the brand of choice. Of course, you need to work very hard to retain this position once you have it.
Another benefit of being a Leader Brand is “social proof”. The idea that we all want to be different and stand out is nice. But its largely fiction. We like to do what other people do. And so seeing lots of Apple users makes most of us more likely to want to do the same thing. Would you like to be Mr PC in the class of shining Apple Macs below?!
2. Shit-hot supply chain
I’d say 90% of brand experts who talk about Apple’s success only go skin deep, by focusing on communication, or maybe product design. They talk of Apple being a lifestyle brand. This is bollocks.
Of course Apple has brilliant design, both of its products and user interface. But at its heart, Apple is an engineering company. They have innovated in the way they manufacture, such as “unibody” Mac computers made of a single block of aluminium. This has helped make wow products at a competitive price. And by being a Leader Brand and getting scale, they have been able to further drive costs down, and margins up.
For example, they got off to such a flying start in tablets with the iPad that they took 90% share. Now its dropped back to c. 70%, but still twice as big as all the other me-too brands likes HP, Acer, Samsung and Blackberry added together. This gives Apple a huge advantage from a cost standpoint and makes it very hard to catch up.
3. “Shock and awe” innovation
Apple are rarely first to market. Microsoft had a tablet years ago. Other brands were selling MP3 players before Apple. And Sony and Nokia had a huge head start in mobile phones.
However, once Apple enter a market they use “shock and awe” innovation. They start with an industry-changing product. Then, they launch wave after wave of upgrade on a regular cycle. This forces competitors into a never-ending game of catch-up.
In conclusion, Apple’s success shows why its better to be a leader than a follower, and illustrates how this requires a combination of emotional appeal, but also great manufacturing and relentless waves of improvement.
