Apple's Magic Formula for Innovation

While Apple’s innovation gets the headlines and Jony Ive is rightfully revered for his brilliant and simplistic designs, it was a rather mundane, non-sexy capability that enabled much of Apple's innovation success.

In fact, one of the very first things Steve Jobs did upon coming back to Apple was build out their supply chain capability, as he knew that was the key to innovate quickly with low cost. It's no coincidence that the current CEO, Tim Cook, was a supply chain guy and one of Jobs' most important early hires when he returned to Apple.

Within two years Jobs cut inventory from 2 months to 2 days. Cook famously called inventory "fundamentally evil". And when he started focusing on a device that received information like a phone (as opposed to an old PDA where you "entered" information), Jobs immediately started thinking about the complicated sourcing pieces needed to make it a reality.

(This blog was sourced from our presentation on the CFO as Strategic Architect.)

And by focusing on and sweating that key supply chain capability, Apple came up with a magic formula. Apple would pay for most of the construction cost for (or finance in some way) key suppliers in exchange for exclusive rights to the output production of the factory for a period of time and then for a discounted rate afterwards vis-a-vis any competitor.

This process ensured that Apple not only had had access to new technology quickly, but that they would have it for months and many times years before its rivals. They didn’t just innovate, they effectively locked down the manufacturing capability around any innovation making it almost impossible to duplicate in the near term.

Apple designers often worked closely with suppliers to ensure the right manufacturing standards and the right relationships. They, in effect, owned the ability to make key parts for up to three years and, after that, locked in the ability to access that technology at a lower cost than anyone else after it became commoditized.

Note how that supply chain capability perfectly dovetailed with its expertise in innovation and design. Now here’s the kicker. By some supply chain standards, Apple was horrible at product introduction. They hardly ever had enough supply meet the initial demand. But since they, in effect, had a monopoly on their innovations, not only was that irrelevant, under supply, in the form of long lines, became arguably its most powerful advertising vehicle. Every morning on a launch date all you see across the web and television is Apple lines.

That’s innovation magic.

Now in addition to locking down innovation, Apple created a virtual supply chain ecosystem that enabled it produce at an enviable cost while delivering from hundreds of suppliers. Apple guru Leander Kahney said this about current CEO Tim Cook:

the soft-spoken Alabaman pieced together Apple’s supply chain into a fierce weapon the company can use to undercut its competition, dominate resources, ship devices at unprecedented volumes and deliver products that are literally a year ahead of its competitors

That supply chain ecosystem allowed Ive and this team to create a seamless looking phone that in reality was a potpourri of electronics... and make enourmous margins.

Magic indeed.

Scott

See also: The Death of Career Paths | Managing the Board of Directors | Fixing Performance Management | Emotional Intelligence, Leadership and the Orca Brain | Apple's Magic Formula for Innovation | Stop Cascading Strategy | CFO vs. CHRO | The Ten Rules of Fulfillment