How Apple got Bigger by Getting Better
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’ve written a couple articles now based on a story about Chick-fil-A founder Truett Cathy where back in the 1980’s when a rival was growing and starting to concern the management team, they spent time discussing how they too could get bigger in order to fend off the competition. After hearing his fill of this, Cathy pounded the table and said, “I am sick and tired of listening to you talk about how we can get bigger. If we get better, our customers will demand we get bigger.” Too many companies are caught up in simply getting bigger but those that strive to get better first, tend to ultimately get bigger as a result.
Today I want to take a look at how Apple (NASDAQ: AAPL)in becoming a better company has grown larger as a result. In a recent Fool.com article, Tim Beyers started off with the following quote by current CEO Tim Cook that I think sums up what’s made Apple better over the years, "I just want to build great products ... I think if we do that, then the other things [revenue and shareholder returns will] follow." There are two things that I think Apple does better than anyone else; their laser focus on their core products and how they manage their cash. By being better in these two areas they’ve become among the biggest companies in the world and shareholders have reaped the benefits.
The Products
Apple has done a great job in product development as they’ve built an amazing ecosystem where each product connects well with the system which helps to drive additional sales within the system. Apple does an exceptional job of taking one product within that system and continually refining it as opposed to continually spinning off similar products. Take their iPhone which is now in its fourth generation, when you go to buy a smart phone from Apple, you get the latest iPhone and it’s this simplicity that makes it easier for customers as they don’t have to do a lot of research to determine which product is best for their situation. When you compare this to rival Research in Motion (NASDAQ: BBRY), they have three current families: the Bold, the Curve and the Torch. A look at the devices on Google’s (NASDAQ: GOOG) Android system shows an amazing array of choices from over a dozen manufactures. While choice is nice to have, many studies have shown that the more choice we have the more difficult it is to make a choice and the less satisfied we are with our choice. Apple’s simplified product structure hasn’t deterred customers which has driven continual margin improvement for the product line.
While I am sure many would argue that Apple is limiting the individuality of customers by not giving them choices, the sales numbers do not lie. Apple has not only been a hit in the consumer marketplace, but they’ve been crushing RIMM in the corporate space. What Apple has further been able to do is take that next step of product revolution so that the next generation product is its best yet. While Apple doesn’t make several versions of the iPhone for example, they do work off a similar platform for other products in their ecosystem which drives future sales. If you are like me you probably started with Apple’s iPod when they first came out, eventually went on to buy an iPhone and likely will eventually get an iPad or a Mac. Apple makes it pretty easy for consumers to learn their system and then consumers can simply join new devices to the ecosystem.
The Cash
Apple has taken a lot of flak over the years for how much cash they have on the balance sheet, which has gotten louder the bigger that cash hoard has become. In an excellent Fool.com article, Morgan Housel has a great quote from Microsoft’s (NASDAQ: MSFT) founder Bill Gates on how he managed their balance sheet. Gates said, "I came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year's worth of payroll even if we didn't get any payments coming in." In the case of Microsoft they currently have about three years of cash and equivalents to annual Selling, General & Administrative (SG&A) expensive. Apple on the other hand has enough cash to pay for about eleven years of SG&A without a dime of revenue coming in. In the tech space Microsoft’s three years rank them right in the top five with Google doubling their cash hoard but still half of Apple’s.
So what does this cash afford them? Peace of mind and the ability to invest in their products and their people without being concerned about it running dry. What Apple hasn’t done with their cash that most tech firms have is wasted it on poorly timed share buybacks. Not that all buybacks are bad, but most firms are absolutely terrible in buying back their own stock to benefit shareholders and even though their cash isn’t earning much of a return in the bank, at least it isn’t being used to destroy shareholder value as has been the case with so many firms. While they did recently announce a $10 billion dollar buy back, my hope is they will be smart in how they execute it. Finally, Apple isn’t using its cash to make large acquisitions but instead has always stuck to much smaller purchases. As Apple has managed its cash better than its tech peers, the company has gotten bigger as the cash pile has grown.
While many would argue that its lack of product diversity and its lack of a plan for its cash is a problem for Apple, I think these are two of the main reasons why Apple is better than everyone else. The returns speak for themselves as Apple is now one of the most valuable and therefore biggest firms in the world. We can learn a lot from Apple, focus on getting better at what you already do well and you’ll become bigger in the process.
latimerburned owns shares of Apple and has the following options: Bull Call Spread on Apple and Microsoft and a Synthetic Covered Call on Microsoft. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
