Hidden innovation: the best kind?

I suspect almost everyone is fascinated by Apple. For some, the company is a peculiar cult that holds its acolytes in thrall to blocks of glass and metal. For others, it is a benchmark against which all types of innovation can be measured (and usually found wanting). I am particularly interested in the things that are often missed in Apple’s innovation story.

The video below shows Steve Jobs addressing an audience at Apple just 8-10 weeks after he rejoined the company in 1997. The main purpose of the presentation is to show the new ‘Think Different’ advertising campaign. That’s not the bit that interests me though. Within the first minute, Jobs sets out the priorities: “We’re trying to get back to the basics of great products, great marketing, and great distribution.” I think the third of those is the most significant hidden contributor to Apple’s sustained success since then.

Jobs goes on to say (at 2’08”):

We have not kept up with innovations in our distribution. I’ll give you an example — I am sure it was talked about this morning. We’ve got anywhere from two to three months in our inventory, in our manufacturing supplier pipeline, and about an equal amount in our distribution channel pipeline. So, we’re having to make guesses 4/5/6 months in advance about what the customer wants. And we’re not smart enough to do that. (I don’t think Einstein’s smart enough to do that.) So what we’re going to do is get really simple and start taking inventory out of those pipelines — so we can let the customer tell us what they want and we can respond to it super-fast.

(By all means watch the rest of the video, but that is all that is relevant for this post.)

Those responsible for two of the three basics identified by Jobs were already part of Apple. On the product side, the designer Jony Ive had been promoted to Senior Vice President of Industrial Design, and Jobs himself led Apple’s marketing efforts. Within six months the third element, distribution, would be taken on by a new appointee — Tim Cook.

Just one year after this video, Apple launched the iMac: designed by Ive, marketed by Jobs, and built by contract suppliers appointed by Cook. The same combination underpinned successive new Apple products — new generations of iMacs, the iPod, MacBooks, the iPhone and iPad. Tim Cook became Apple COO in 2007, and was appointed CEO in succession to Steve Jobs just before Jobs died in 2011.

The Apple products we (some of us) use today may still be Ive creations and also bear the imprint of Steve Jobs’s personality in their marketing, but their success in the market is just as much Tim Cook’s doing. In a profile from 2008, he is described as “demanding and unemotional:”

Think of Cook’s contribution like this. There are two basic ways to get great profit margins: Charge high prices or reduce costs. Apple does both. The marketing and design drive consumers wild with desire and make them willing to pay a premium; Cook’s operational savvy keeps costs under control. Thus Apple is a cash-generating machine. Cook has called the company a place that is “entrepreneurial in its nature but with the mother of all balance sheets.”

Apple’s high profit margins are driven by two forces: the company is obsessed unlike any other of its size with creating products that it thinks people will love, and its supply, production, distribution and retail processes are managed more tightly than any of its competitors.

Some aspects of that tight supply chain management appear to be readily copied. Others are more innovative and unique to Apple, but depend on constants like long-term relationships with suppliers and choosing simple options rather than complex ones, even if those are exorbitantly expensive. Early examples included block-booking all available air cargo slots in advance of the iMac’s first Christmas sales period, and shipping iPods direct to retail customers from the manufacturing facilities in China. There is also no competition between product, marketing and distribution. They work as a team:

That mentality—spend exorbitantly wherever necessary, and reap the benefits from greater volume in the long run—is institutionalized throughout Apple’s supply chain, and begins at the design stage. Ive and his engineers sometimes spend months living out of hotel rooms in order to be close to suppliers and manufacturers, helping to tweak the industrial processes that translate prototypes into mass-produced devices. For new designs such as the MacBook’s unibody shell, cut from a single piece of aluminum, Apple’s designers work with suppliers to create new tooling equipment.

Can other businesses learn from this aspect of Apple’s success? Possibly very little:

How Apple is managed is one of its enduring mysteries. The idea that a company with $235 billion in sales is managed with a single P/L is fascinating in many ways.

There are obvious lessons about the need to keep inventory as low as possible, but otherwise I think the main thing is not to concentrate on obvious innovations. It may feel easier to identify novel products and services that could find a valuable place in the market, but just as much (if not more) profit might flow from making the hidden parts of the business work better. Given how different these hidden parts might be, each firm has to make its own choices.

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