8.1. The chasm

Research and development (R&D) is that self-centered activity that underpins tomorrow’s technological edge. Here is an, often internal, activity that, if not secret, at least arguably deserves protecting its results, if only it were to safeguard the usufruct of what it yields.

And this may explain why R&D may have been shielded from sight, having had corporate forms becoming entrenched silos. IBM conducted vast research activity that it published about, but in a form that nobody could directly exploit. In its voluminous annual “Technical Disclosure” books, IBM customarily published the past ideas and inventions and let them enter the public domain immediately, thus making them not protectable anymore. Which was also a way to neutralize lurking competition in areas outside of its direct interest.

Furthermore, there still exists that eternally conflicting marketing-research rapport within firms. A poisonous divide that renders them somewhat schizophrenic sometimes.

8.2. Amplifying the gap and progressing

You just cannot stop technology. Technology is convoluted to human evolution.

An initial remark is that R&D spending figures in general are to be taken with “a grain of salt”, because it is very tempting for a CEO to disguise a loss into an R&D expenditure, or to pad R&D expenditures, because of tax credit incentive considerations.

Even though Apple R&D expenditures have significantly increased in absolute terms, (http://www.aboveavalon.com/notes/2015/5/3/significant-rd-increase-suggests-apple-is-working-on-something-big), they remain amazingly low as a turnover percentage, for a high tech company.

Some people explain this by the incredibly small size of Apple’s product portfolio. And indeed, Apple makes almost $200B turnover with a set of products which can be all displayed on a single tabletop.

Yet, this amazing hallmark does not explain everything, because the number of product lines is less significant than the number of underlying technologies on which these products are based.

Under a small volume, a smartphone is a huge combination of various technologies, in rapid evolution. Identifying the right patents which may impact successful design choices is a major technical and legal headache.

Apple is a system integrator which outsources from other companies most of the components of its products. A situation that brings the considerable advantage of letting these external firms support the corresponding huge R&D costs.

However, on a small, and yet growing number of key technologies (for example, its Advanced RISC Machine (ARM) processors), Apple develops its own R&D, soon identified as a market differentiating factor.

The growth of Apple R&D expenditures is also related to this vertical integration, which widens the R&D perimeter.

Do not confuse this trend with the old “make or buy” strategy dilemma purported by traditional business schools, because Apple does not manufacture anything directly. The scope is more “design internally’ versus “delegate the design”.

It is also noteworthy that, when designing a high-tech device to be mass produced, many key requirements related to its “productibility” have to be taken into account. It is amazing that Apple, which does not produce anything else other than software, owns such a deep expertise on these producibility issues.

In cases where Apple decides to develop its own technology, this frequently implies the acquisition of a start-up company.

It is a common belief that buying a company is the easiest thing in the world, especially if you have Apple’s deep pockets. In fact, identifying the appropriate target, the maturity of its technology, and its long-term potential, is a daunting task, almost as difficult as developing the corresponding technology.

Compared with other companies’ track records of huge acquisition prices, Apple’s extraordinary talent to identify the technologies of the future, and to acquire them, at a reasonable price, and before its competitors, even having nobody notice, is stunning.

Also stunning is the speed at which the acquisitions translate into tangible benefits in Apple’s product line.

In the world of start-up acquisitions, failures are quite frequent, and developing innovative products is not just as simple as writing a cheque.

Some large companies have an original approach to technology watch, in setting up a venture capital structure usually based in Silicon Valley, and in principle only dedicated to making equity investments in promising starts-up. A positive sideeffect of this is that, without having to make any prospection effort, these outfits are approached by candidate start-ups looking for money. A move that returns those companies’ most accurate technological and business information, and for free. We are not aware of a dedicated similar Apple structure.

On this subject, as well as on another, the figures denote Apple’s extreme selectivity. Contrary to competitors dispersing their efforts across a large number of exploratory subjects without any clear outcome, Apple is focused on well-identified areas, which always directly relate to desirable product improvements.

When comparing the R&D amount spent by some large groups, on the one hand, and their innovations launched on the market on the other hand – even taking into account at the necessary time lag – we frequently get the impression that the R&D is just an alibi. The $9B per year of Microsoft R&D spending remains hard to see in its product pipeline.

In fact, Steve Jobs made a clear statement about this:

“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.”

Steve Jobs in Fortune (9 November 1998)
Also quoted in “TIME digital 50” in TIME digital archive (1999)

From a process maturity standpoint, we can conclude that the technology change management (TCM) process (see Appendix 2) is mastered at a very high level at Apple, and that it is of course a key success driver for a high tech company.

Behind this impressive achievement stands necessarily in the back, for each Apple product, a long-term roadmap, which is probably the most secret part of this already secret company.

In its Global Innovation 1000 Survey, Booz Allen Hamilton consultants demonstrated for the first time since 2005, a blatant decorrelation between R&D budgets and the qualitative perception of the capacity to innovate. When considering sales growth versus indexed R&D-to-sales ratio, Apple appears as out abnormal. They even added that “in 495 such analyses, similarly uncorrelated results for profitability growth, enterprise profitability (gross, operating, and net), market capitalization growth, and total shareholder return demonstrated that R&D spending has little or no impact on these indicators of success”.

A then puzzling discovery which led A. Hatchuel to declare: “Innovation policy can’t be reduced to merely managing R&D; it’s a strategic activity possessing an own governance”.