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Apple and the Cost of Innovation.


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March 21, 2006

Apple and the Cost of Innovation.

Bruce Nussbaum

If you haven't checked out Noise Between Stations, do it right away. It's one of my favorite blogs on innovation and design--a thoughtful aggregator and originator. Noise Between Stations has a serious analysis of the Street.com's critique of Apple's spending on innovation.

Here is the take"

"The Street article compares the most recent R&D spending as a percentage of sales (”While sales have grown at a compounded annual rate of 27% over the last four years, R&D spending has grown at an average rate of just 5.6% per year over that period.“). This masks the exponential increase in recent sales (65% net sales in Q4 2005). Since innovation is a function of how people work, scaling R&D simply to match sales could be futile and possibly harmful as an organizational development change. Just because accounting usually measures R&D as a percentage of sales doesn’t mean it should be managed that way.

In absolute terms, Apple’s R&D investment is up $59 million in Q4 2005 over Q4 2004. For all we know this might be a good, sustainable R&D investment rate for them.

The IDC analyst quoted in The Street article of course doesn’t know the reasons for the drop in R&D investment (nor do I). The article does mention an equally plausible theory is that Apple is learning how to be more innovative with less money, e.g. through management innovation that ultimately leads to other kinds of innovation. And isn’t doing more (sales) with less (R&D investment) a good thing?

The comparison to other companies in Apple’s industry is a good idea, but the comparison is restricted to R&D as a percentage of sales. It ignores the effectiveness of that R&D investment vs. other factors and the directionality of the R&D-to-sales relationship. Just consider where, with regard to new markets, Apple is heading and where Sony is heading.

Where the article really misses the point, IMHO, is by saying, “But even with all of Apple’s market and business prowess, the company is still, fundamentally, a technology company.” It may not be in the IT analysts’ interest to say so, but the nature of R&D investment is changing (at least in Apple’s industry) from solving tough technical problems to solving tough design problems. "

This is good stuff. What do you think? Does Wall Street "get it" when it comes to innovation?

04:42 PM

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On Measuring the Ability to Innovate from The Webquarters

It may help to keep a simple principle in mind

Bruce Nussbaum of BusinessWeek provides an example of how Wall street is hopelessly amiss in the knowledge economy. Apparently, Apple Computer is being considered to be flagging in its innovativeness,... [Read More]

Tracked on March 24, 2006 12:46 PM

This is another example of how Wall street is hopelessly amiss in the knowledge economy. It has been widely accepted for some time now that quarterly earnings watches force an excessively myopic view on the part of corporations, and lead them to sacrifice the future in favor of the present.

Measuring success in innovation by looking at the size of the R&D budget is like figuring out how successful a song (or a film or a book) will be by measuring how long the creator took to write it.

Admittedly, analysts need yardsticks to evaluate companies, but a "something is better than nothing" approach simply does not work!

Posted by: Vivek Kochikar at March 24, 2006 12:07 PM

It is a bit sad that Apple don’t get more out of their brand and work. Why not use their fans?

Posted by: Stefan Engeseth at March 28, 2006 10:05 AM

I read this article and found it so off target that I was surprised Newsweek published it. The over simplification of the R&D spending premise completely the brilliance of Apple's positioning as a niche company a tiny market share and (comparitively) limited resources.

As examples of this look at the Mac OSX operating system compared to the iPod.

OS X has rapidly matured into a very advanced operating system. Apple has succesfully migrated it's entire user base from the old System 9 architecture and is in the process of another migration, to the Intel cpu. Apple has chosen to tightly tie its hardware and software together to control the user experience and limit the variables that would slow development and compromise quality. The development of OS X proceeds steadily with no missed deadlines and with a consistently improving feature set and significant resulting user experience improvements. To achive this, OS X leverages significant amounts of open source technology for both reasons of standards as well as development effectiveness. From an R&D perspective the development costs of OS X are tiny compared to Vista, some have estimated Microsoft QA team is larger than the entire OS X development team. By some judgements Microsoft spends between 20 and 25 times more on Vista than Apple spends on OS X, a staggering amount, yet OS X is maturing rapidly and Vista experiences constant setbacks.

Clearly, judging R&D spending by metrics derived by both revenue methods or relative product development models is foolhardy and grossly primitive.

Apple has succeeded because they start with user experience and then determine the most effective means to execute the technology (i.e. the underlying use of open souce technology such BSD unix, open GL, apache, php, mysql, ajax, browser engine and printing technology, etc.). The user experience extends to packaging, software installlation, product design, integrated applications, interface design etc. even to include clever product naming.

Clearly, it is not the amount Apple spends that is important but the much more complex and interesting way Apple is strategic about allocating its resources. Apple is, after all a tiny company with a tiny market share compared to Sony or Microsoft. It would be all to easy for them to justify the use cheaper packaging, less refined development or other cost cutting measures; however, their rationale for spending their development dollars is the interesting story, not the over simplified approach Business Week employed.

The iPod example is as interesting. Apple's flexibility in adapting its culture and approach to a high volume consumer product is once again focused on user experience consisting of a seamless eco system of iTunes and the music store.

Much more interesting stuff to think about than comparing percentages.

Posted by: Dave Z at April 11, 2006 05:47 PM


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