|Apple's Incredible Efficient Growth
May 24th 2010Organic 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.
To Outdo Rivals in Mobile Software, Samsung Turns to Outside Talent
SUWON, South Korea—Samsung Electronics Co. has long shunned outside help in favor of developing devices on its own. But as the smartphone market rapidly shifts its emphasis from hardware to software, the Korean manufacturer is realizing it must change its insular corporate culture.
Samsung has begun aggressively hiring foreign software engineers, especially in India, to build up its software prowess and keep pace with the rapid rise of rival Apple and its popular iPhone. The company is also embracing acquisitions, a turnabout in strategy for a company that has become a manufacturing juggernaut by developing its own hardware.
"The technology industry is growing very quickly and it is too much of a burden to try to do everything in-house," said J.K. Shin, president of Samsung's mobile business. "There are many qualified workers from India that are very skilled in software. And there are small companies that we can acquire that have good research and development capabilities."
Mr. Shin, whose division accounted for three-quarters of the company's $4.5 billion in profit in the first quarter, said Samsung is in talks with several software firms. "If the opportunity allows, we will do M&As," he said. "There is something in the works right now," he said, declining to provide a name of the acquisition target. He denied market rumors that Samsung would look to acquire Canada's Research In Motion Ltd. that would give it access to RIM's operating software used in smartphones for businesses.
Samsung overtook Nokia Corp. as the world's biggest handset maker by shipments in the first quarter and is also the world's biggest maker of semiconductors, flat screen TVs and smartphones.But the rise of smartphones, in particular Apple's iPhone, has made it clear that software will drive sales.
Samsung has aggressive plans to take on Apple in the smartphone arena. The WSJ's Deborah Kan speaks to Dow Jones' Yun-Hee Kim on where the fierce competition between the two companies is headed. The emphasis on software took on new urgency over the past year after GoogleInc., maker of the Android operating system prevalent in smartphones including many of Samsung's, announced it is acquiringMotorola Mobility Holdings Inc.
Also last year, Nokia and Microsoft Corp. unveiled a partnership to jointly develop smartphones based on Microsoft's Windows Phone software. Research In Motion is also coming out with a new operating system called BlackBerry 10. While Samsung has been internally developing its own mobile software for many years, its platform called Bada has proven to be unpopular among consumers. Most of its smartphones now predominantly run on Android software.
Younghee Lee, senior vice president of sales and marketing, said Samsung will continue to work with Android because it is the most popular platform currently. However, the company's strategy is to work with multiple software platforms, and to continue investing in Bada, she said.
"Samsung could benefit from some in-house software capability that would give it greater control of hardware, software and services but executing on that is becoming increasingly difficult on its own," said Neil Mawston, executive director at market research firm Strategy Analytics.
Mr. Shin points to Samsung's new top-of-the line smartphone, the Galaxy S III, which was unveiled Thursday, as an example of Samsung's new emphasis on software. While the phone is based on Google's Android operating system, Mr. Shin said Samsung engineers were able to write software for new features such as one that allows users to watch video clips while emailing on the same screen. The phone, which also has face-detection capabilities, follows users' eye movements to keep the phone switched on.
Hiring foreign engineers is a sensitive topic in South Korea, where the big conglomerates are expected to provide jobs for the country's workers. While unemployment is currently just 3%, the jobless rate for recent college graduates is about 8%.
To court foreign software engineers, Samsung is paying them more than they would make in their own countries, and people familiar with the situation say there are hundreds of Indians now working alongside local Korean employees at the headquarters of Samsung's mobile business in Suwon.
The company has two big research and development centers in India, but aggressively hiring foreign workers in Korea is a change for the company. Samsung would not say how many foreign workers it has in Korea, but they are evident in a company lunchroom at its main campus for mobile devices. "Software is where Samsung is weak," said one engineer from Pakistan, who asked that he not be named. "Hardware doesn't matter much nowadays so Samsung is placing more emphasis on software development and hiring from outside."
The company now serves curry and Halal meat in its cafeteria, which had at least 50 Indian and Pakistani employees there on Friday. "Samsung can't get to the next level unless they create an environment that can foster creativity to flourish and that's what Google does," said the software engineer.