Without having a ecosystem sharing capacity and locking in relationship contractually Apple now has an inability to deliver when there is abundant capacity to produce electronics. Aivars Lode avantce

Apple Can't Innovate or Manage Supply Chain

Apple CEO Tim Cook (Image credit: Getty Images via @daylife)

Stock in media-worship-object, Apple (AAPL), is trading about 14% below its all-time high. When Steve Jobs passed, Apple lost its source of innovation. And when supply chain expert, Tim Cook, took the CEO slot, I thought he would at least be able to make sure the trains ran on time.

But Apple’s quarterly results demonstrate that Cook can’t do that. How so? According to the Wall Street Journal, Apple fell eight cents short of earnings expectations of $8.75 a share for the quarter ending September 29. To be fair, it beat by about $100 million analysts’ revenue forecast of $35.8 billion.

A big culprit for Apple’s disappointing results and slashed stock price is simple — it can’t make enough products to meet consumer demand. According to the Journal, “Analysts say the company could sell 10 million or so iPad Minis by the end of the year, if they can make enough. Analysts have blamed supply-chain problems for lower-than-expected initial iPhone 5 sales of five million in the opening weekend.”

This makes me wonder why Tim Cook was so widely viewed as a manufacturing and supply chain guru. For example, when it comes to the iPad Mini, Apple has left itself in a bad situation — it only has one supplier for its displays.

That does not seem like a smart idea, nor is it all that wise to depend on one of your competitors to be a reliable supplier. For example, Samsung — which leads Apple in the smart phone market and is embroiled with it in a global patent lawsuit – has traditionally been a supplier of displays to Apple.

But NPD DisplaySearch’s Richard Shim toldCNET, ”We’re now starting to see the issues that [Apple] is having with Samsung.” That’s because Samsung is not supplying displays for the iPad Mini — leaving one supplier — LGD — that has worked with Apple in the past and one untested supplier, AUO.

And given AUO’s lack of experience and inability to come up to speed, Apple is in a world of hurt when it comes to meeting demand. According to Shim, “The problem is that AUO is a new supplier, and they’re not able to get to the volumes that Apple needs. So, essentially, there’s just one supplier.”

Of course, supply chain problems are not what makes Apple worshippers hearts flutter. And some might suggest that having more demand than the ability to supply it is a sign that Apple has not lost its ability to innovate.

But that begs the question: “What is innovation?” Needless to say, there is no agreement on the answer. When it comes to Apple, though, I think the answer is pretty clear: It’s the ability to dominate a big existing market — as Apple did with MP3 players (iPod), cell phones (iPhone), and tablets (iPad) – by deploying four critical 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’s 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.

What Apple has been doing since it introduced the iPad in January 2010 has been making incremental changes — often improvements (with exceptions like Apple Maps) — to its existing product lines.

Under Cook, Apple has yet to prove that it can innovate — in the sense of dominating a big existing market through these four capabilities. Nor is Cook proving himself to be a master of Apple’s supply chain.

For Apple shareholders, the message is clear: take your money and run.