Noh Review on Companies & Industries - September 19, 2012

Harvard Business Review "Morning Advantage: Is Apple Too Focused on Profits?" by Sarah Green

Summary:

• Although Apple always talks about their innovation, Apple only spends 2% of revenue on R&D (Google and Microsoft 14%, Samsung 6%)  
• But, does this tell us anything about the effectiveness of their R&D spending? Apple may simply spend their R&D dollars more wisely than the other companies. Or it could be that their brand and marketing are doing the job.
• The smartphone market consists of 68% of Androids and 17% of iPhones. Apple has luxury products and their product market focus is the upper end of the economic spectrum. Their pricing is relatively high, so the lower end consumers cannot afford to buy their products. This explains why Apple's phones are losing market share.

Noh Review:
In my opinion, the argument raised by Dan Lyons (MIT Technology Review) is flawed.
1) It is not wise to talk about Apple's dedication to R&D while comparing the percentages. It is true that Apple devotes the least percentage of their revenue to R&D. But, it is important to realize that Apple's net revenue (denominator) beats many other companies' revenues by a clear mile. Let's look at some numbers here.

Apple in Fiscal Year 2011:
Revenue: US$ 108.25 billion
R&D Spending (2%): US$ 2.17 billion
Net income: US$ 25.92 billion

Samsung in Fiscal Year 2011:
Revenue: US$ 148.94 billion
R&D Spending (6%): US$ 8.94 billion
Net income: US$ 12.06 billion

Google in Fiscal Year 2011:
Revenue: US$ 37.91 billion
R&D Spending (14%): US$ 5.31 billion
Net income: US$ 9.74 billion

When Dan Lyons said 14% for Google and 2% for Apple, we all thought "Wow, that's a big difference." But, the difference seems more reasonable now that we see the actual numbers: $2.17 billion for Apple and $5.31 billion for Google. It is true that compared to Samsung and Google, Apple's R&D expenditure is quite low. But, they still spent $2.17 billion on R&D last year, which is still one of the highest in the industry.

2) The R&D expenditure amount does not indicate the effectiveness of R&D. Maybe, that $2.17 billion is the most optimal amount that Apple can efficiently handle. Just because the R&D spending is relatively low, it does not necessarily mean that the R&D payoffs are low.

3) Apple knows how to properly operate their company. With a major boost coming from their high pricing strategy and efficient spending, Apple's profit margin was at about 24% in 2011 fiscal year. This is quite comparable to Samsung's 8% profit margin. With Apple's proven efficiency, it is hard to doubt that they are not being efficient with their R&D expenditure.

Actually, everything has been working out fine for Apple. Regardless of what kind of products they release, a large portion of their consumers will always love their products. Just when the iPhone5 was announced, some critics and analysts were disappointed with the new features of the phone. They all said the new iPhone5 is far from being "innovative." But, it still broke the sales record. It was sold out within the first hour of availability, and the projected sales stand at about 58 million units. This tells us something: Apple has successfully established their brand.

Article: http://blogs.hbr.org/morning-advantage/2012/09/morning-advantage-is-apple-too-focused-on-profits.html
Apple - Press Info: http://www.apple.com/pr/library/2012/09/17iPhone-5-Pre-Orders-Top-Two-Million-in-First-24-Hours.html