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Apple's Innovation Problem

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Image via CrunchBase

Apple is in the news for two things -- iPrefs and a hiring freeze at Foxconn -- that highlight its innovation problem. And Google Glass helps hammer home the severity of that challenge.

iPrefs -- the clever moniker that hedge fund grandee, David Einhorn, has attached to his idea to get Apple to fork over a portion of its $137 billion cash pile -- strongly hints at Tim Cook's inability to invest that cash in new products that can snag a dominant share of a big existing market.

iPrefs would create a class of preferred shares "which he says could produce $61 a share in additional benefits for investors," according to DealBook. The name Einhorn picked is a sharp dig into Apple's jugular -- after all, its previous returns to investors came from a series of i-products -- the iPod, iPhone, and iPad.

But as I wrote, these three products all emerged from the application of four corporate capabilities:

  • Product design. Under Jobs, Apple was able to design products that people loved to own and use.
  • Supply chain management. Apple could take that design, give it to factories in Asia, and get the product delivered to customers with gross margins of 70%.
  • Ecosystem creation. Apple could persuade suppliers of content – such as music, books, movies, and Apps — that they would be better off making that content available to users of its devices.
  • Marketing. From Steve Jobs’ black turtle-neck product demonstrations, to its snazzy TV ads, to its retail stores, Apple has been able to tickle peoples’ buying bones and turn most of the world into passionate advocates for its products.

The question for investors is whether Apple can apply these capabilities to a big market that Apple has not yet tapped.

On Tuesday, my roughly 80 undergraduate strategy students discussed how Apple applied these capabilities to create dominant positions in the MP3, smart phone, and tablet markets. We then thought about what might be the next category killing product that would generate a surge in growth -- Apple TV and the wrist watch.

Since it remains unclear how these ideas might get realized, it is hard to know whether they will become big sources of revenue and profit. If Apple TV stays as it is now -- a controller that lets consumers view all their videos, music, and pictures on a TV -- is that a big enough opportunity to move Apple's revenue and profit needle? If Apple TV becomes more -- e.g., a big flat-screen device, can Apple make one better than those of existing competitors?

Meanwhile, investors are raising questions about why Foxconn decided to freeze hiring. According to BusinessWeek, Foxconn suspended recruitment at its factories in "Zhengzhou and Shenzhen and postponed the construction of a new factory."

Foxconn denied that the hiring freeze was due to the iPhone 5. Could the hiring freeze be due to Foxconn's efforts to install automated robots so it doesn't have to pay workers more and improve their working conditions? Or did more workers than expected return to its production lines after the Lunar New Year break?

It looks to me like there is not a clearcut solution for Apple's innovation problem. But with Google's Glass, it is clear that not solving this problem at Apple could cause it to fall further behind.

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