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Apple's Competitive Advantage


farnamstreet
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Interesting article in Business Week on the nuts and bolts of Apple: Operations.

 

This is the world of manufacturing, procurement, and logistics in which the new chief executive officer, Tim Cook, excelled, earning him the trust of Steve Jobs. According to more than a dozen interviews with former employees, executives at suppliers, and management experts familiar with the company’s operations, Apple has built a closed ecosystem where it exerts control over nearly every piece of the supply chain, from design to retail store. Because of its volume—and its occasional ruthlessness—Apple gets big discounts on parts, manufacturing capacity, and air freight.

 

Tim Cook (the new CEO) has been known to give colleagues copies of Competing Against Time,* a book about using supply chains as a strategic weapon in business.

 

 

*Amazon affiliate, you know the deal.

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All roads lead back to innovation though. That is the only true durable advantage. Apple's products wont sell and the supply chain is meaningless without great products and consumer demand.

 

Product cycles are short, can Cook and his team really innovate in the future when Jobs's innovations run their course? (slightly rhetorical Q)

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Apple and Dell are very different companies.

Look at :

Product innovation

Brand and marketing

Retail and distribution

Supply chain

Scale

Ecosystem

Management team

 

Which of these are competitive advantages to Apple and Dell?

 

I'll give you one big example of how different they are . Tech products frequently go through disruptive cycles.

Desktops were replaced by laptops which are now starting to be replaced by tablets.

 

What happened to Dell's advantage  when people started moving from desktops to laptops?

 

What happened to Apple as people moved from desktops to laptops to tablets?

 

Which company is willing to cannibalize itself to lead the next cycle?

 

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Anyone on this board recall Windows 95.  Gates came to Toronto and did a huge press event rolling a gigantic banner down the CN Tower.  It was actually in 96 because there had been so many delays.  People lined up to buy cdroms worldwide.  Remind you of any company. 

 

Msft stock went from 8 to 55 momentarily giving it the biggest market cap in the world at around 550 b.  Now its in the mid twenties.  Msft has only maintained and grown because it is in the stickier world of business.  Aapl sells products which are totally discretionary.

 

What Aapl will see in the next few years is:

Supplier push back

Competion increasing in every market

Massive hits to profit margins

Movement away from their products due to fickle consumers faddish behaviour

 

The last item is probably of most concern.  Investing in Aapl right now is totally predicated on them being able to continuously out predict the competition, maintain brutal relationships with suppliers, and stay as a fad.  Even the Itunes store has competition coming from every direction.  The first misstep on their part where they hang a supplier with unsold parts will kill that side of the business.

 

Any slippage in earnings will force the compant to institute a dividend.  I know I will get flamed for this but there is no margin of safety with Aapl at this price.

 

Sent from mt Ipad that I love!

 

 

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Anyone on this board recall Windows 95.  Gates came to Toronto and did a huge press event rolling a gigantic banner down the CN Tower.  It was actually in 96 because there had been so many delays.  People lined up to buy cdroms worldwide.  Remind you of any company. 

 

I do remember everyone wanting Windows 95, but MSFT did dominate for the next decade after that though. Not sure it's a great comparison though. Apple is diversified across several industries, which MSFT was not at that time.

 

 

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DCG, I think the comparison is quite apt, except that Msft had a far greater competitive advantage then, than Aapl has now.  As to different industries Aapl operates in one industry which is consumer discretionary.  That basically eliminates any margin of safety.  Not saying Aapl would go out of business, just that there is no moat, of any type at all.  Any one or all of their enterprises could shrink dramatically at any time.  Msft had ongoing licence revenue that was far more sustainable than Itunes, Iphone, or Imac.  A.

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except that Msft had a far greater competitive advantage then, than Aapl has now.  As to different industries Aapl operates in one industry which is consumer discretionary.  That basically eliminates any margin of safety.  Not saying Aapl would go out of business, just that there is no moat, of any type at all.  Any one or all of their enterprises could shrink dramatically at any time.  Msft had ongoing licence revenue that was far more sustainable than Itunes, Iphone, or Imac.  A.

 

I agree with much this, at least as far as that anything could happen with Apple. Apple's moat currently revolves around their brand, distribution and scale. The key word there is of course currently. Regarding their products being consumer discretionary, I can't really argue that, except for that smart phones are becoming a bit less discretionary, at least in terms of the fact that once you have one, it's tough to live without one. Apple's market share in smartphones is still quite small though. I think a lot of the industries they're in are so large that several companies can succeed in them - there doesn't have to be one clear 'winner'.

 

And with AAPL, regarding margin of safetly, we're talking about a stock that is selling for only 14.4 current earnings (which is quite about less than the S&P!). It would be one thing if the stock was pricing in enormous growth and selling for some very high multiple (like CRM, BIDU, etc.).

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Let me begin with the following disclosure, I am a mac user and I love their operating system.

 

Apple looks like they are in a great position to take advantage of the next big consumer item-the personal computer.  Yep that's right.  Functionality and innovation of the ipad and the power of OS X (btw, I hate ios).  That said, I won't be investing in Apple. 

 

What did Apple look like 10 years ago?  What does Apple look like 10 years hence?  What has to happen for them to maintain their current relative market position.  I see Google really eating away at Apple's smartphone market.  I also have serious reservations about Apple's treatment of their customers.  Some of their actions behind the scenes are very suspect. 

 

I think Microsoft is much easier to understand 10 years out (CF's from Enterprise).  I also think they have something up their sleeve, but are content with their position and therefore are not in a rush to roll out new technologies that might benefit competitors and/or increase potential future competition-but this is just speculation.

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