Apple's woes show wisdom of self-cannibalisation

The tech world is witnessing a turning point. Apple saw the first decline in its sales and profits in 13 years, triggering a sell-off in the financial market that wiped out US$43 billion (S$57.7 billion) of the company's market value. Such is the rough-and-tumble play of the high-tech world.

As recent as in the first quarter of this year, 68 per cent of the company's revenue came from the iPhone, while the iPad and Mac each commanded merely 9 per cent. Apple is first and foremost a mobile phone provider, which highlights the danger of over-reliance on a single product for growth.

Under Mr Steve Jobs, Apple had a track record of cannibalising its own products. In 2005, when demand for the iPod Mini remained huge, the Nano was launched, effectively destroying the revenue stream of an existing product. And while iPod sales were still going through the roof, Mr Jobs launched the iPhone which combined iPod, cellphone and Internet access into a single device. Three years after the iPhone's launch, iPad made its debut and raised the prospect of cutting into Mac desktop computer sales. So resolute was Apple's determination in trading a highly profitable business for an unknown future that Mr Jobs reportedly said: "If you don't cannibalise yourself, someone else will."

That mantra has apparently disappeared. With Mr Tim Cook, Apple has experienced unmitigated growth by exploiting its market position in emerging countries. Revenue from China has grown from 9 per cent of Apple's overall revenue in 2011 to 29 per cent in 2014. More worrisome is the lack of new products. While the Apple Watch has yet to make significant inroads, consumers saw the proliferation of different models of existing products: iPhone 6s, 6s Plus, and 6c; iPad Pro, Air 2, Mini 4 and Mini 2. What managers often fear most is when a company's new products and services with lower profit margins directly cut into the sales of existing ones. Apple is now in danger of falling into the same pattern of thinking.

Apple CEO Tim Cook with a screen displaying the iPhone 6 during a presentation at Apple headquarters in Cupertino, California, in an Oct 16, 2014 file photo. Previously, under Mr Steve Jobs, Apple had a track record of cannibalising its own products.
Apple CEO Tim Cook with a screen displaying the iPhone 6 during a presentation at Apple headquarters in Cupertino, California, in an Oct 16, 2014 file photo. Previously, under Mr Steve Jobs, Apple had a track record of cannibalising its own products. That mantra has apparently disappeared now. PHOTO: REUTERS

To be sure, consumer electronics is the fruit fly of the business world. Change is rapid and life cycles are short. In such an environment, there is little room for strategic mistakes. Misreading the market leads to diminished earnings; misread it a few times, and the company is sent packing. Still, the willingness to impose cannibalisation as a guiding principle can also be found elsewhere outside the high-technology industry.

The Mahindra Group was one of India's largest corporates. A US$16.7 billion multinational conglomerate, in 2013 it had more than 180,000 employees in 100 countries. In 2012, it won the Financial Times' "Boldness in Business" award in the emerging market category. For more than two decades, the company was the largest tractor manufacturer in India, with its tractors exported to locations such as the United States, Bangladesh, Sri Lanka, Nepal, Zambia and Zimbabwe.

Early in March this year, Mahindra announced that it was entering the agricultural equipment rental service, with a start-up enterprise named Trringo which will target the rural market area. It aims to do for the tractor market what Uber has done in transportation. Trringo will offer a digital platform to connect those looking to hire tractors and those willing to rent their self-owned machines. A location-based mapping system will bring the two together and guide them to the closest franchisee. The twist, of course, is that Mahindra is a tractor manufacturer itself too.

Behind such a bold vision of Trringo is business necessity. Insufficient and patchy rainfall for the last two years in a row has sapped the demand for products and services in rural India. Farmers are postponing decisions to buy tractors. Mr Rajesh Jejurikar, chief executive for tractor and farm mechanisation at Mahindra, pointed out that the business idea is based on the premise that tractors and other farm equipment are not available when they are needed the most. "The tech-based model will help optimise tractor usage," he said.

And if history is a guide, Mahindra's latest foray might turn out to be big business. Trringo's model is very similar to Mahindra First Choice - the group's used-car sales business, an asset-light model that targets the notorious used-car market.

An inescapable fact when developing a new business is that experimentation and organisational learning are key. A winning strategy is often recognised only after the fact. Which is why Mahindra is trying numerous initiatives to tap the "sharing economy". Rather than picking winners, the company lets a thousand flowers bloom before selecting a champion.

So from Apple to Mahindra, companies have discovered it is no longer an option to simply pursue a conservative strategy of trying to protect and extend existing products. It can only delay decline. One must develop the next growth engine before the core business begins to show signs of maturity. And the best rule of thumb is perhaps to follow in Mr Jobs' footsteps and impose canniba- lisation as a guiding principle to manage product life cycle.

• The writer is professor of strategic management and innovation at IMD, a business school headquartered in Switzerland.

A version of this article appeared in the print edition of The Straits Times on April 30, 2016, with the headline 'Apple's woes show wisdom of self-cannibalisation'. Print Edition | Subscribe