Just because a company is doing well now, it doesn't mean that it will stay that way. In fact, often -- due to complacency -- the company's success sows the seeds of its future decline. The reason? Most large company CEOs are not the same people who made the company successful in the first place.
As a result, those CEOs lack a fundamental strength of successful entrepreneurs: the ability to capture new growth opportunities before their current ones decline. The rare exceptions are marathoners -- such as Jeff Bezos and Reed Hastings who I wrote about in my new book, Scaling Your Startup -- leaders who turn an idea into a company worth billions that keeps growing fast.
Why Apple Is Getting Smaller
Despite his considerable strengths, Apple CEO Tim Cook is not a marathoner and it's showing up in Apple's financial results. Indeed, in the quarter that ended in March 2019, Apple reported a 5 percent decline in revenue and a 16 percent slide in its profits -- the second consecutive quarter of declining revenue, according to the Wall Street Journal.
What's behind its revenue decline is Apple's inability to capture new growth opportunities as its most important product -- the iPhone which was introduced in 2007 -- rapidly shrinks.
Indeed, iPhone revenues fell faster -- down 17 percent -- as owners held on to their devices longer while rivals in China -- where Apple's revenue plunged 22 percent -- supplied fine products at a much lower price. Despite aggressive discounting, iPhone unit sales declined 30 percent in the quarter, noted the Journal.
How Apple Is Ignoring The Steve Jobs Way
When Steve Jobs first introduced the iPhone in 2007, he used a strategy that first worked for Apple's iPod -- creating an inexpensive way for customers to obtain the compelling content that would make Apple's innovative hardware worth owning.
For instance, Apple's iTunes store let consumers buy individual songs for as little as 99 cents -- sharing most of the revenues with the music companies and leaving very little margin for Apple after covering its costs. The thin margins on such services were an investment that spurred customers to pay such a high price for the iPhone that Apple earned gross margins as high as 71 percent in 2012.
But such high profit margins attract competitors and that is certainly the case with the iPhone. For example, in 2018, Apple's share of the smartphone market of 14.4 percent was way behind that of market leader, Samsung with 34.3 percent, according to Statista. As a result of the competition, Apple's hardware profit margins have fallen -- in the latest quarter, to 31 percent.
The remedy? Apple should target a large hardware market where it currently does not compete with a new product that taps Apple's strengths in designing hardware and managing its supply chain. If successful, that bet would create a large, rapidly-growing stream of revenue to offset the iPhone's decline. (If I knew which market that was, I would be happy to take Cook's job).
Cook's Growth Strategy Builds On His Competitive Disadvantages
But Apple is not doing that. Instead, it's discounting iPhones and offering trade-in incentives to keep consumers from switching to rival devices. And Apple is hoping that its 900 million iPhone customers will buy enough services -- such as news, payment, video, and music which now account for a mere 37 percent of its iPhone revenues -- to make up for the latter's decline.
This might be a good idea were it possible for Apple to prevail -- as it did when it introduced the iPod and the iPhone -- over less skilled competitors. But Apple does not seem to recognize that the capabilities underlying its past success -- designing hardware and managing its supply chain -- will not help Apple boost its market share in services.
In services, Cook -- whom Jobs hired to manage Apple's supply chain -- is competing against marathoners like Bezos and Hastings. For example, I doubt Apple's video service will take much market share from the likes of Netflix -- which made a successful transition from DVD-by-mail to online streaming, Amazon -- which offers free video as part of its $119 Amazon Prime two-day delivery service, and Game of Thrones purveyor, HBO.
The lesson here is simple to say and hard to do: Fight complacency by capturing new growth opportunities before your current ones decline.