largest private-sector company, with average annual sales growth of 33 percent since 1998—nearly five times the average of our global chemicals industry sample.
Whether the trends that have fueled these companies’ above-average growth will continue in the years to come is, of course, another question entirely. That is why the mark of a genuinely sustainable growth engine is its abil- ity to identify and exploit new opportunities to exceed growth expectations over time. The primary way to ex- tend the life of a growth engine is through innovation— whether of new products, new business models, or both. For example, during the ten-year period we studied, Ap- ple (2) successfully transformed itself from a niche play- er in the fast-commoditizing computer business into a
Apple From Niche Player to Consumer Electronics Juggernaut
Perhaps the most dramatic example of a company that has used innovation to achieve and sustain above-average growth is the number two company on our sustainable- value-creators list: Apple. By the late 1990s, Apple’s initial pathway to growth was running out of steam. The compa- ny’s unusual proprietary approach to designing both the hardware and soware for its computers had made Apple a distinctive choice in the market for personal computers and inspired intense loyalty on the part of the company’s customers. But it had also limited the company to being a niche player in the industry and hampered its ability to compete on price.
Starting in 2002, however, Apple, led by founder Steve Jobs, began introducing a series of highly successful new products and services—the iPod, the iTunes online music service, and the iPhone—that fueled the company’s rapid transformation from a niche player in the low-growth and low-margin computer business into a consumer electron- ics juggernaut. The attractiveness of Apple’s new prod- ucts was important, but the shi wasn’t only a matter of product innovation. A key reason for Apple’s success was the company’s ability to define a workable business mod- el for downloading music—something that had eluded the music industry for years.
This combination of product innovation and business- model innovation put Apple at the very center of a market approximately 30 times the size of its original market.1 It also helped expand the company’s traditional comput- er market, as new customers became so attached to their iPods that they took another look at Apple’s computers.
leader in consumer electronics—largely through the in- troduction of the iPod music player, the iTunes online music business, and the iPhone mobile phone. (See the sidebar “Apple: From Niche Player to Consumer Elec- tronics Juggernaut.”) And U.K. grocery retailer Tesco (17) has consistently delivered above-average growth in the relatively low-growth retail sector by continuously roll- ing out new formats and channels that have allowed the company to expand into new product categories and services such as clothing, consumer electronics, fur- niture, music downloads, travel, and even personal fi- nance.10
10. See “The Multichannel Imperative,” BCG Opportunities for Ac- tion, September 2008.
(Roughly 50 percent of computer buyers in Apple’s own retail stores have never owned an Apple computer before.)
As a result of this shi, Apple has not had a negative quar- ter of year-to-year growth since March 2003 and is one of the few technology companies that is continuing to grow during the current downturn. Even better, Apple’s move into more profitable product segments has resulted in a massive improvement in margins. Since 2003, Apple’s EBITDA margin has increased almost tenfold—from 2.2 percent of revenue to 20.8 percent. As a result, the com- pany’s market capitalization has grown from $8 billion to more than $75 billion. During the five years ending in 2008, Apple’s average annual TSR exceeded 50 percent.
Apple’s innovation-focused strategy has also positioned the company to exploit the next phase in the convergence of technology, media, and entertainment. One interesting sign of this trend: Apple has consistently been the top company in BCG’s annual survey of senior executives to identify the world’s most innovative companies, and 2009 is no exception. But even more striking, when we asked re- spondents to name the five most innovative companies in their industry, Apple was selected number one not only in technology and communications but also in consumer goods. And it made the top five in retail and in media and entertainment as well.2
1. See Convergence 2.0: Will You Thrive, Survive, or Fade Away? BCG Focus, April 2007. 2. See Innovation 2009: Making Hard Decisions in the Downturn, BCG report, April 2009.