Did Wall Street analysts and investors alike skip the strategic management course in school? It sure seems so with numerous brokerages cutting ratings on Apple's stock due to disappointment over the company's failure to make a serious push into the low-end handset market (something investors have been clamoring for Apple to do). Yet, a poignant article in the WSJ titled "Rethinking Apple's Luxury Strategy"[i] notes that for Apple to refocus on cheaper handsets would run counter to the company's historical competitive strategy. I tend to agree.
Michael Porter, the bane of most 1st year MBA's and business undergrads, notes that a company can only effectively pursue a Cost Leadership Strategy or Differentiation Strategy, not both[ii]. Build unique products that consumers demand and are willing to pay extra for, or appeal to price conscious consumers and build expertise in manufacturing and supply chain management that lowers production costs and allows you to charge at or below market prices while sustaining competitive margins. It's not difficult to determine which strategy Apple has historically pursued. By being the first to move into the smartphone market with unique product offerings like the iPhone and a well-oiled ecosystem (think iTunes and interoperability among devices), Apple was able to differentiate itself from its peers and charge premium prices for its devices. Even as competition emerged from the likes of Google, Apple has been able to maintain higher selling prices and margins due to the ease of use of its products, reliability, sex-appeal and broad access to applications that consumers and business users demand.[iii] This same strategy has played out in the laptop market with Macbooks commanding a significant premium over similarly equipped Dell and HP products. Similarly, Apple continues to sell its high-end iPad for a premium to offerings from Microsoft and Google.
As Ian Sherr in the WSJ notes, to pursue a low-end handset strategy would mean using lower cost materials and a shift away from the "perfectionist strategy" that Steve Jobs pioneered at Apple.[iv] The immediate impact of this shift would be felt in the margins, which have remained at historically high levels vs. competitors in the industry. The low end smartphone is highly competitive with numerous Android and Windows-based device offerings from the likes of Nokia, Samsung, HTC and Blackberry.[v] Apple has competed in this end of the market primarily through older and discontinued models. The higher end market is facing competitive constraints of its own as more and more devices emerge with similar hardware and software leading to declining differentiation and more commoditization. So why should investors really be disappointed with the latest iPhone upgrades?
LACK OF INNOVATION. Despite the continued upgrades of the existing iPhone platform, the lack of true innovation has been apparent since the passing of Steve Jobs. Each new iPhone release has resulted in improved software, better screens, faster processors and sharper cameras. So what's the problem? None of these enhancements have been game-changers, but merely improvements upon existing technology. The iPod, iPhone and iPad were all game-changers, but for a company built on a differentiation strategy merely improving the existing platforms (vs. developing new unique platforms) will not be enough to keep ahead of the competition. If Apple continues to tread water and focus on enhancing instead of innovating, it is likely to face the fate of many other once-dominant technology companies. Think Motorola and Blackberry. Though neither of these companies had the breadth of Apple's product offerings today, they both failed to innovate properly and paid the ultimate price.
Liam Timmons is the president and founder of Timmons Wealth Management. Timmons Wealth Management is an independent registered investment advisor that provides highly personalized investment management and financial planning services to established professionals and their families. To learn more please visit us at TWealthManagement.com for access to our quarterly market commentary and blog.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.