The real sign of Apple’s innovations – they fit on a table

$76 billion a year from a tableful of products
[Via asymco]

During the calendar year 2010 Apple spent nearly $2 billion in R&D. That is a significant increase from $714 million in 2006. However, as a percent of sales, R&D spending has decreased. Sales have grown more rapidly than resources hired to develop the products (or to sell them).

In Q4 2005 Operational Expenses (costs which are not tied directly to units of production–sometimes called fixed costs) were 14.2% of sales. In the last quarter of 2010, the ratio was 9.2%. Sales and administrative expenses (which include advertising, promotion and overhead) were 7.1% and R&D (which includes all engineering, testing) were 2.2%. As percent of sales both reached new lows.

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I mentioned this last week but this is a nice graph to see trends.

This remark was pretty cool to think about:

The efficiency with which Apple creates sales is legendary. There can be many explanations for this but the most telling evidence of causality I can find is the small number of products in the portfolio. Tim Cook stated that given the sales value, there is more concentration of product at Apple than at any other company except perhaps an oil company. All the products Apple sells can fit on one average sized kitchen table and they generated $76 billion in sales last year.

I’ve written about Apple’s approaches, as well as those of other 21st Century companies. One of the  key aspects is their efficiency – they produce a huge amount of innovative work that belies the small size of their research groups. Pixar is another example.

I worked for a company that accomplished this – Immunex. We were able to compete with much larger companies by focussing our research efforts very tightly. Not that we only worked on a few things. We worked on a lot of them.

But we only allowed a very few to pass through to real development. We did this by having a very open and transparent vetting process for projects. We examined every research project 3 times a year in a process that could be attended by everyone.

What this did is make it very hard to carry on projects purely for political reasons. In many companies, a powerful sponsor could take possession of a project and push it through, resulting in something that dies on the market; in these companies, politcal pull can bemore important than actual innovation.

Because of the social aspect of our vetting, it became much harder to say that a project would continue “Because I said so” when everyone could see that another project held better value. It decreased the ability of politicians to get a project approved.

And, since everyone’s views were heard, people could understand why a decision was made – it was made in public.

We worked hard to kill projects or put them on the backburner. But it was all done in public. And then we allowed every scientist to spend a percentage of their time working on a project – any project – that they wanted to. This not only allowed people to continue for a time even on killed projects, hoping to rejuvenate them, but allowed really creative ideas to be examined.

But, after a certain time, each of these were vetted in public. If they did not pass the public test, they were scrapped.

We developed a lot of innovative ways to foster creativity but the most important was making the discussions and decisions open to anyone, make the important decisions as early as possible and make them public.

I don’t know if Apple does the latter but it seems likely they do the former, as this from asymco suggests:

Most observers of technology are not aware of the pace of its development. It’s natural to assume that most R&D costs are in the product creation, or early phases of development. Coming up with something new must be hard. But that’s not actually true. Most R&D work is routine polishing of products and coordination late in the development cycle. “Productization” is far more resource intensive than “concepting”.

This is absolutely true – coming up with ideas is easy; making them happen is hard.

It stands to reason that making go/no-go decisions early in the pipeline is a lot less expensive than making stop-ship decisions prior to launch.

I have no specific evidence that this is the case, but I guess Apple conceives of plenty of concepts, but chooses to move forward to develop and market very few. Most companies don’t have the ability to decide early and proceed with costly R&D and marketing in order to find out whether products will “work” in the marketplace. The proliferation of flawed products is a big cause of the inefficiency of product development.

Look at so many companies. They put out lots of products hoping the market will decide which is best. They want consumers to do the hard work. How did the Kin see the light of day? Many companies just can not kill a project that has emotional and political connections. So they let it slump on through, hoping that the market sees potential.

That is why, a year after the iPad, we have 100 different copy cats, while in the years before the Ipad there was just nothing even close. Most companies have no real idea of what is successful to they copy other’s success.

But Apple, like Immunex, repeats innovation time and again because it has developed a process of killing things that do not work and, if they can, killing them before they progress very far. They may not always succeed – they have had failures – but they usually know why it failed.

I worked for a company that came up with innovative solutions for years –again and again – so I know that what Apple is doing is not only working but is reproducible.

That is what separates a 21st Century Company from a 20th Century one.

Some reasons why Apple is one of the first 21st Century companies

appleby leoncillo sabino

Reasons for Apple’s Greatness? How ‘Bout The Cook Doctrine?
[Via Mactropolis.com – Your Friendly Global Mac Community]

Asymco has a great post up titled simply ‘The Cook Doctrine’. It’s a compilation of statements from Tim Cook in a financial earnings call (for Q1 2009), while he was the Acting CEO for Apple during Steve Jobs’ leave of absence.

We believe that we’re on the face of the Earth to make great products, and that’s not changing.

We’re constantly focusing on innovating.

We believe in the simple, not the complex.

We believe that we need to own and control the primary technologies behind the products we make, and participate only in markets where we can make a significant contribution.

We believe in saying no to thousands of projects so that we can really focus on the few that are truly important and meaningful to us.

We believe in deep collaboration and cross-pollination of our groups, which allow us to innovate in a way that others cannot.

And frankly, we don’t settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when we’re wrong and the courage to change.

And I think, regardless of who is in what job, those values are so embedded in this company that Apple will do extremely well.

Taken together, these add up to one hell of a great company philosophy. They also offer cause for optimism on the company’s prospects even when Steve Jobs is no longer in charge.

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I’ve written about what some 21st Century companies will look like – The Synthetic Company part 1, part 2 and part 3.

And the strength of these organizations is that the core principles are not dependent on just one charismatic man at the top of the hierarchy.

Cook gets is. As did Lassiter at Pixar, another 21st century company until bought out by Disney. As I wrote back then:

In the Innovator’s Dilemma, Clayton Christensen discusses the difficulty organizations have in utilizing disruptive technology in novel ways. The dilemma is that often the same processes that helped make them successful now prevent them from making the leap to a new technology set. See Clay Shirky’s article on the collapse of business models for some examples.

Even when they know that they have to change and even what the changes must be, they almost always fail in making the leap.

That is mainly in the way they are organized, how they are run and the types of communities they represent.

Yet companies that have Steve Jobs organizing them seem to have been able to do this. Apple defined personal computing, it defined the graphic user interface, the laptop, the MP3 player, the smartphone, the tablet computer. Pixar defined computer generated animation.

By creating organizations where innovations are not shuttled through layers of middle management, with each layer sucking the originality out, Jobs has been able to drive disruptive innovations rather than react to them.

The most amazing thing to me is that Apple has succeeded in being a market leader during two separate paradigm shifting market wars – first the graphical user interface wars between Apple vs Microsoft and now the Internet as interface wars between Apple vs Google. Microsoft’s inability to become a major player in the new way of the world is an example of corporations failing to make the leap, of suffering the Innovator’s Dilemma.

One important aspect of these sorts of  21st Century companies is that their strength is their community. It is very hard to alter the principles of a strong, cohesive community – living in Seattle I can still see the strong Scandinavian culture present, not only in businesses but in politics.

It looks like Cook certainly gets it.


iTunes jackpot: Billions and billions

iTunes jackpot: Billions and billions
[Via Brainstorm Tech:]

Apple has paid out more than $2 billion to developers, $12 billion to music labels

Source: Asymco

Sometime in the next week or so, the zeros on the App Store countdown odometer will roll over and Apple (AAPL) will announce that 10 billion apps have been downloaded since the store opened two and a half years ago.

Asymco’s Horace Dediu has used the approaching milestone to run series of analytical charts. The first group, posted Sunday, showed that the number of apps downloaded per iOS device is accelerating and has grown from about 10 per iPhone and iPod touch in the fall of 2008 to more than 60 per iOS device today. Sometime later this year, the number of app downloads since 2008 will overtake the number of songs downloaded since 2003.

Of course, we pay for the music we buy from iTunes, while most of those apps are free. But there is money to be made supplying both kinds of content, and on Monday Dediu took a crack at estimating how much.

His conclusion: Apple has paid more than $2 billion to third-party app developers and about $12 billion to the music labels. To see his math, click here.

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I wrote about the app economy a few weeks ago. Here we have another example. Just from Apple – $2 billion to developers for products that did not exist 3 years ago. How many markets go from zero to $2 billion in that time?

The ability of groups to generate capital with rapid creative cycles drives this. It is not built on monolithic applications that take years and hundred of man-hours to develop. Quick, rapid and fast are the hallmarks of this economy.

There is a way to create a market of early adopters

change by kevindooley

Oregon must create a market of early adopters
[Via Climate Solutions]

One reason we created the New Energy Cities program at Climate Solutions was to elevate the conversation and focus on a small number of city and utility partnerships that are serious about the degree of innovation needed to create a clean, efficient energy system at the local level.

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Early adopters are a small portion of any community – the ones most in tune with new ideas and processes. The majority of people do not want new ideas or processes – they just want to continue using what they have because they know that these will work.

These doers really only change, only adopt innovative processes, when either of two things happen: 1) the people they know all change; or, 2) a thought leader they respect tells them to.

These thought leaders often act as mediators between the doers and the early adopters, two populations that often do not communicate well. The early adopters are always coming up with new things that just distract the doers.

Most communities do not have enough of these mediators and do not effectively leverage those they do have. People seldom get kudos for acting to facilitate change like this.

To create a community of change, one needs to identify and leverage these thought leaders who can effectively mediate between the early adopters and the doers. The more efficient this can be done, the more rapidly the entire community can adapt to change.