2 Reasons for Apple’s Distortion on Tech Sector Profitability

I received the below chart from Business Insider Monday, which highlights that without Apple the technology sector profits would be down 3% this year vs. with them profits are up 7%.  Why is Apple out performing and at such a degree against the back drop of all other technology sector companies?

Source: Chart of the Day from Business Insider
Without Apple, the tech sector's profits would have been off by 3% in 2011, according to this chart from Barclays Capital. With Apple, profits are up 7%.

There are many possible explanations and many have come before me trying to explain either the “Steve Jobs effect” or that the Apple  brand is the main component. Two points I think are at play are 1) differentiation and 2) marketing capabilities (the Big “M” marketing not marketing communications). And yes, brand is at play and I will show you that too.

First consider this statistic on differentiation, 80% of managers say their company is strongly differentiated but only 10% of customers agree (C. Zook and J.Allen, “The Great Repeatable Business Model”, Harvard Business Review, November 2011).  I think this is more true than most technology executives would allow themselves to admit. Unfortunately for those companies, this is within any organizations full control to find relevant differentiate in their respective markets.

Source: Chris Zook and James Allen, “The Great Repeatable Business Model”, Harvard Business Review, November 2011

The second is marketing capabilities, Keen’s body of academic research we know that a 1% increase in market orientation and marketing capabilities yields a 6% increase in return on assets. This coupled with a brand impact for Technology firms where 1% increase in brand equity drives over $650 million in additional cash flow the next year or over $1.3 billion in market capitalization.

Source: Keen Strategy Research
The bottom line is Apple is excelling at creating meaningful differentiation and has built the right market orientation and capabilities to manage the business and as a result the brand. Apple is also taking advantage of arbitrage (whether they realize it or not) because in the technology sector companies just are not as good on these dimensions and hence there is more upside for a firm that can get this formula right.

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