Discovering the DNA of Apple's Innovation Engine

Winter 2010

The news today that Apple has sold over 2 Million iPads in the first 2 Months has prompted me to take another look at how Apple's innovation model is rewriting the innovation rule book.

We already know that Apple is recognised as a world leader in both product innovation and supply chain management practices. You may recall that Apple was the number one choice the of Corporate Executives surveyed by BCG for Business Week's Top 50 most innovative companies.

Now let's explore some more metrics that nay help us to understand what makes Apple the market innovation leader it is today.

We'll begin the journey by taking a quick look at the correlation between R&D investment and the relative position of the Apple's competitors in the Business Week list. A Booz and Company report published by GizMag late last year lists the top 20 Corporate R&D spenders as - in descending order - Toyota, Nokia, Roche Holding, Microsoft, General Motors, Pfizer,Johnson & Johnson, Ford, Novartis, Sanofi-Aventis, GlaxoSmithKline, Samsung, IBM, Intel, Siemens, Honda,Volkswagon, AstraZeneca, Cisco Systems and Panasonic.

Surprisingly, as you can see in the table I have prepared below, both Apple and Google - the Top 2 from the Business Week's innovation list - are not in the Booz & Company Top 20 list. Indeed Apple spends significantly less on R&D as a % of revenues than its competitors (e.g. Google, Microsoft & Nokia). So clearly Apple's reputation as an innovation leader isn't a reflection of the amount of money they spend on R&D.

BW Ranking	Company	R&D as % of Revenues	$ Billions
1	Apple	2.3%	1.1
2	Google	12%	2.8
3	Microsoft	14.6%	8.6
4	IBM	6.3%	5.8
5	Toyota	4.4%	9
23	Nokia	11.8%	8.7

The next logical place to look for a correlation is Advertising. In the table below I have mapped the Business Week listings against the AdAge's Top 100 Global Marketeers list. Again, largely thanks to Google, there appears to be no correlation between reputation spending and innovation reputation ranking. However Apple is spending more than its competitors on advertising as % of revenues.

BW Ranking	Company	AdAge Ranking	Advertising as % of Revenues	Advertising Spend in $ Billions
1	Apple	74	1.17%	$0.5
2	Google	No Rank	0.04%	$0.01
3	Microsoft	66	0.98%	$0.57
4	IBM	No Rank	N/A	N/A
5	Toyota	5	1.42%	$3.2
23	Nokia	80	0.89%	$0.45

Thinking the elusive element to Apple's success may be the quality of its people I examined the Revenue to Employee ratio. Again the results are mixed but Apple is a clear leader.

BW Ranking	Company	Estimated Revenue per Employee
1	Apple	$1,000,000
2	Google	$355,475
3	Microsoft	$640,258
4	IBM	$242,623
5	Toyota	N/A
23	Nokia	$411,536

With this insight I decided to widen the search to include the Fortune 500 list of the best 100 companies to work for. Surprisingly only Google (4) and Microsoft (51) rated a mention. Then I thought how about the CEO? What impact does the CEO have on a company's innovation reputation. Again I was some what surprised to discover that Apple's Steve Jobs is ranked 71 in the Fortune 500 Top CEO list while Microsoft's Steve Balmer & Google's Eric Schmidt ranked 35 and 117 respectively.

These metrics suggest that to be the innovation market leader you need to spend less than your competitors on R&D, more on your advertising and be a company that nobody wants to work for. Plus you don't need the top ranked CEO but you do need to extract 2 to 3 times more revenue from each of your employees than each of your nearest competitors.

I wonder how this conclusion sits with the latest management theories being taught in MBA courses around the globe? Certainly it isn't an image Apple would have of itself. Nor do I believe that Apple's customers, suppliers and competitors, or the media and Apple's developer community are thinking of Apple in those terms. Three years ago Apple wasn't a player in the lucrative Mobile Phone market. What's more its previous attempt to enter this highly competitive market (The Newton PDA) had disappeared without a trace a decade earlier. Today Apple has...

Developers building free software applications (Other people's time, effort and ideas)
Venture capitalists providing investment funds (Other people's money)
Media outlets providing lots of free promotion and/or content (Other People's Time, Brand and Customers)
Customers who are product champions (Other People's Time and Brand)
Market Brand Leaders building mobile apps (other people's time, effort, ideas, money, customers and brand)

With the launch of the iPhone product and the apps store in 2007 Apple has successfully leverage its brand image as the "Prince of Techno Cool" to convince others to freely contribute their ideas, resources, time, energy and capital to build both a new brand and a new market for them.

That's what makes it the undisputed innovation leader today and I guess that's what makes Apple more than just a brand. It truly is one of the world's great Lovemarks