Apple and Efficiently Growing its Future
Organic growth is the term coined for growing internally, not via merger or acquisition. Apple has embraced this strategy over its existence, averaging only about 1 acquisition per year during the past 25 years. In contrast – during the past four years alone – Microsoft bought 45 companies, Google 40, and Cisco 30.
At first blush it would seem that since Apple isn’t ‘buying growth’ like all of the above-mentioned companies, they must be spending healthily on research and development– after all, high-end products with a superior user experience are expensive to design, right?
Turns out, Apple’s run of incredible products (and growth) has been achieved with a staggeringly low R&D spend. How low? Apple only spent $4.6 billion on R&D over the past four years, while revenues soared from $25 billion to $43 billion.
In contrast, Microsoft spent 700% that amount on R&D during the same period, a whopping $31 billion, while growing at an anemic pace, despite flippant M&A. Likewise Cisco and Intel spent about 400% as much as Apple on R&D – $19 billion and ??$23 billion respectively. These are astounding differences above Apple’s research and development spend, especially considering that during this period Apple developed the iPhone and iPad.
In fact it’s rumored that Apple brought the iPhone to market for a mere $150 million, doing so organically without acquisition outside of a touch gesture recognition company named FingerWorks.
This begs the question:how in the world did Apple grow the iPhone platform organically from zero into the most profitable cell phone business in the world with so little investment?
Such incredible execution can’t really be boiled down to a strategy, but if you talk to employees at Apple, it’s clear they feel that they need to innovate, a need that Apple really embraced after nearly dying in the late 1990s. Innovation became ingrained in Apple’s collective DNA’they learned to innovate in order to survive.
Surviving also bred an ability to focus, a focus which translates into capital efficiency because Apple is self-aware enough to stay within its bounds. Money isn’t spent on hair-brain ideas like the Courier, dumped down the drain on money-losing internet businesses, or spent ad-hoc on random acquisitions.
In contrast, innovation and survival absolutely have not been an imperative for Microsoft or Intel since the 1980’s – PC processors and Windows are each cash flow monopolies. Google is great at producing innovative products, but despite 70 acquisitions has failed to diversify its revenue stream, still getting around 95% of revenues from search.
It’s pretty clear that Apple is in a league of its own in terms of capital efficiency. Competitors are spending staggering sums on both M&A and R&D with limited results. Meanwhile Apple is innovating internally at a fraction of the cost, while cherry-picking strategic investments which tightly complement its core platforms.
It will be interesting to see whether Apple builds out its cloud strategy from within or uses strategic acquisitions to do so. John Gruber summarized how Apple is falling behind Google on this front.
If Apple’s track record of finding ways to efficiently innovate is any indication, they will be able to figure it out. And if you correlate future performance with past execution in making more with less, it’s not even a contest – Apple should continue to outpace its rivals hands down.