Apple and the Innovator Dilemma
Transcript of Apple and the Innovator Dilemma
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APPLE AND THE INNOVATORS DILEMMA
Thursday, December 9, 2010 Tweet this article
This paper was originally written in 2010 for a Corporate Innovation class at Kellogg; please forgive
any formatting errors carried over in the conversion from PDF, as well as the excessive footnotes!
Apples unbroken string of success seems to suggest it is impervious to the Innovators
Dilemma. Why has it been so successful, and can it be replicated?
Beginning with the introduction of the iPod in 2001, Apple has had an uninterrupted string of success
in the consumer electronics segment. That success has, in turn, driven an increase in revenue of
1,116% and net income of $14 billion in 2010 compared to a loss of $25 million in 2000.1
This uninterrupted success is quite remarkable in technology, which considers upheaval a matter of
course. For example, in the PC industry, IBM pioneered the segment, and was surpassed by
Compaqs low-cost model. Then, Compaq was surpassed by Dell and its direct sales model. Now Dell
has been passed by HP with its superior retail channels. HP itself is strongly threatened by Acer and
other Asian manufacturers. Another example is the Internet: AOL gave way to Yahoo!, which in turn
has given way to Google.
THE INNOVATORS DILEMMA
In their groundbreaking article Disruptive Technologies: Catching the Wave, Joseph Bower and
Clayton Christensen gave a classic example of this sort of upheaval in the hard drive industry. Within
ten years the hard drive industry moved from the 14-inch drives that had been used in mainframes to
8-inch, then 5.25-inch, then 3.5- inch drives.2
Each time a disruptive technology emerged, between one-half and two-thirds of the established
manufacturers failed to introduce models employing the new architectureThree waves of entrant
companies led these revolutions; they first captured the new markets and then dethroned the leading
companies in the mainstream markets.3
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According to Bower and Christensen, the reason this sort of disruption occurs is because companies
listened to their customers, gave them the product performance they were looking for, and, in the
end, were hurt by the very technologies their customers led them to ignore.4
Moreover, this sort of disruption is, according to Bower and Christensen, endemic to well-run
companies.
Using the rational, analytical investment processes that most well-managed companies have
developed, it is nearly impossible to build a cogent case for diverting resources from known customer
needs in established markets to markets and customers that seem insignificant or do not yet exist. 5
LOW-END DISRUPTION
Christensen and co-author Michael Raynor expounded on the process of low-end disruption in the
book The Innovators Solution, highlighting the move from interdependent to modular solutions. In
new markets,
Companies must compete by making the best possible products. In the race to do this, firms that
build their products around proprietary, interdependent architectures enjoy an important competitive
advantage against competitors whose product architectures are modular, because the standardizationinherent in modularity takes too many degrees of design freedom away from engineers, and they
cannot optimize performanceCompanies that compete with proprietary, interdependent
architectures must be integrated.6
However, over the long-run, integrated companies produce a product that is too good, and
customers are happy to accept improved products, but theyre unwilling to pay a premium price to
get them.7 Instead customers make decisions on different vectors than performance, such as cost or
convenience. This, in turn, favors modularized solutions that allow for increased flexibility and lower
cost.
Modularity has a profound impact on industry structure because it enables independent,
nonintegrated organizations to sell, buy, and assemble components and subsystemsWhen thathappens, companies can mix and match components from best-of-breed suppliers in order to respond
conveniently to the specific needs of individual customersThese nonintegrated competitors disrupt
the integrated leader.8
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This is certainly a major aspect of what befell Apple in the 80s and 90s. Apple helped create the
personal computer category with the Apple II in 1977, and seven years later launched the Macintosh
and its revolutionary graphical user interface.9 However, the Macintosh was simultaneously too
advanced and too limited for the corporate IT departments that were the primary customers for
computers in the 1980s. More attractive were IBM and IBM-compatible PCs that provided good-enough performance with a lower price that reflected their commoditized nature. As time went on the
features offered by the Macintosh were not enough to justify its ever- increasing price premium over
computers running Windows on Intel chips, and Apple in 1997 tottered near bankruptcy.10
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Christensen and Raynor recounted this classic tale of disruption in The Innovators Solution:
During the early years, Apple Computer the most integrated company with a proprietary
architecture made by far the best desktop computers. They were easier to use and crashed much
less often than computers of modular construction. Ultimately, when the functionality of desktop
machines became good enough, IBMs modular, open-standard architecture became dominant.
Apples proprietary architecture, which in the not-good- enough circumstances was a competitive
strength, became a competitive liability in the more-than-good-enough circumstance. Apple as a
consequence was relegated to niche-player status as the growth explosion in personal computers was
captured by the nonintegrated providers of modular machines.11
THE IPOD EXCEPTION
The turnaround fostered since then by Apples prodigal founder, Steve Jobs, is well-documented and
one of the most amazing business stories of all-time. Jobs first few years were spent stabilizing the
Mac business, but Apple didnt really begin to take off until the launch of the iPod for Windows in
October 2003. That year saw an increase in revenue of 33.4% to $8,279 million and a 286% increase
in profit to $266 million.12 Yet that announcement was accompanied by increased certainty among
market observers that it would only be a matter of time until Apple faced low-end disruption, just like
they did with the Mac:
Forbes Apple Computer defied expectations and proved a viable business could be built around
digital music. And, so far, the company has done better in this arena than anyone else has. But now
the copycats are on the march, and in time theyll have the numbers on their side. If competitive
offerings gain market share or an industrywide standard is imposed, Apple would either have to adaptto market realities, making its two-part music offering less special, or leave it unchanged and watch
iPod salesand profitserode. Ive heard this story before. I didnt like how it turned out the first
time.13
Bloomberg Whatever Apples current technological lead, history is not on its side. Although it
increased its share of the digital music player market to 66% in August, according to NPD Group Inc.,
up from 28% the year before, many a tech pioneer has seen its early dominance wither. Just look at
Palm in PDAs, Nintendo in game consoles, and Apple itself in PCs. Already, rival music players offer
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more features at lower prices. Its a nascent market, and [Apple's lead] is not sustainable, says
Dave Fester, general manager of Microsofts Windows digital media division.14
BusinessWeek Its ironic that in this moment of triumph for Apple CEO Steve Jobs, the greatest
challenge yet to Apples online music dominance is emerging. This week, Microsoft announced a
marketing campaign designed to exploit iPods most obvious weakness. Dubbed Plays for Sure,
Redmonds campaign seeks to provide consumers with a guarantee that any audio- or video-playbackdevice labeled with those words will play any content file purchased legitimately from Microsoft or
licensees of its Janus digital-rights management (DRM) technology More than ever, standards
matter in the tech world. Theyre the only way to ensure universal compatibility which consumers
clearly want in fragmented markets. While Apple wins accolades for its beautifully designed, tightly
integrated products, its insistence on total control could make continued domination of this market
much harder Microsoft will probably make a steady stream of improvements in its media-player
software. Will it ever match Apple in ease of use and elegance? No but who cares, really? Many
consumers are more than happy with something thats good enough, and cheap.15
Many consumers are more than happy with something thats good enough, and cheap. Or, to put it
in technical terms, many consumers are more than happy with low-end disruptors.
Yet, those low-end disruptors never actually disrupted the iPod.16
In fact, the iPods long run at the top seemed, well, impossible. That was the word used by Gene
Munster, a Piper Jaffray analyst. Nobody can sustain an 80 percent market share in a consumer
electronics business for more than two or three years. Its pretty much impossible.17
So how did the iPod accomplish the impossible and avoid low-end disruption? While it is true that
powerful branding that established the iPod as a must-have status symbol played a role, there were
also important strategic moves Apple made to counteract low-end disruption. Moreover, Apple is
following the same strategy with the iPhone and iPad, and while it is still too early in the smartphone
and tablet industries to draw any firm conclusions about their long-term success, the iPods history
certainly portends well. This article will examine those strategies (using examples from the iPod,
iPhone and iPad) through the framework provided by Christensens model.
WHAT APPLE DOES TO ESCAPE DISRUPTION
In that model of low end disruption, there are several disparate factors at play (Figure 2).
1. The initial differentiation2. The product trajectory3. Customer needs
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4. Price
The majority of innovators tend to focus exclusively on their differentiation, and milk that advantage
for as long as possible. Apple, on the other hand, manipulates all four factors, putting off the threat
posed by the Innovators Dilemma. And then they pull off the ultimate escape act: disrupting
themselves.
THE INITIAL DIFFERENTIATION
Apples primary means of differentiation has remained remarkably consistent ever since the first
Macintosh their products have a superior user experience. While the factors that go into this
advantage are many, it has proven remarkably difficult to copy. Consider the Macintosh: Microsoft-
powered computers enjoyed an advantage in performance and features from the very beginning, yet
the Macintosh remained an extremely profitable product for over ten years for no other reason than
its ease-of-use. It was only until Windows 95 that the Windows user- experience became good
enough to lead Macintosh customers to abandon the platform for Windows computers that were
superior in every other way.
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Apples has maintained its user experience differentiation via innovative user interfaces with its other
breakthrough products. For example, the iPod introduced the click wheel and the iPhone multitouch.
However, Apple has actually expanded its user experience advantage, primarily through iTunes. Prior
to the iPod, the only way to add music to an MP3 player device was tomount the device to your
computer, and copy files over manually. All organization had to be done by hand through folders andnaming conventions, and file operations could be done on the device itself.18 In the case of the iPod,
however, iTunes on your computer completely managed the music. All a user needed to do was plug
in their iPod. In this respect the iPod and its user experience are best viewed as an entire system, not
just standalone devices (a situation that is also the case with the iPhone and iPad).
The utility and user experience of the iTunes/ iPod system was greatly expanded with the addition of
services, primarily the iTunes Store. The iTunes Music Store has had several beneficial effects on the
user experience in its original incarnation that accompanied the iPod. First, it greatly simplified the
experience of acquiring digital music, but more importantly, it also legitimized it. Second, it created
an expectation in customers for a store that would accompany the player; however, creating a store
requires much more than a bit of code or industrial design. It requires contracts with record labels,
bandwidth capacity, etc., all of which makes replicating the entire experience significantly more
difficult. Third, at least for the first six years of its existence, the store also provided a lock-in via
Apples proprietary Fairplay DRM.19 The more songs a customer bought through the iTunes Music
Store (the Music part of the name was dropped in 2006) the more likely they were to buy another
iPod.20
The iTunes App Store has had an even more transformative effect on the iPhone user experience.
First, it transformed the iPhone into a platform capable of an infinite number of use cases. Second, it
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introduced a network effect similar to the one previously enjoyed by Windows: the more people who
own iPhone, the more developers want to write apps for the platform, which attracts more users, and
on and on it goes. Third, the fact that the app store is also housed in iTunes means the payment
system is remarkably easy; more importantly, it means that most potential customers have already
put in their credit card number, a significant hurdle for any other competing platform (iTunes
currently has 160 million credit card numbers).21
The iPad has incorporated all of these advantages in the user experience to pioneer a new category
that in many respects depends on a superior user experience to be worthwhile. A tablet is severely
limited in comparison to a computer when it comes to features, and to a phone when it comes to
mobility. The only reason for a tablet device to exist is if it delivers a superior user experience, and
while few competitors to the iPad have yet to appear, it seems likely that Apples initial differentiation
will be the largest yet.
THE PRODUCT TRAJECTORY
Apples focus on user experience as a differentiator has significant strategic implications as well,
particularly in the context of the Innovators Dilemma: namely, it is impossible for a user experience
to be too good. Competitors can only hope to match or surpass the original product when it comes tothe user experience; the original product will never overshoot (has anyone turned to an inferior
product because the better one was too enjoyable?). There is no better example than the original
Macintosh, which maintained relevance only because of a superior user experience. It was only when
Windows 95 was good enough that the Macintoshs plummet began in earnest. This in some
respects completely exempts Apple from the product trajectory trap, at least when it comes to their
prime differentiation.
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However, even when you consider other more traditional features, Apple has demonstrated a
remarkable level of restraint. This especially has been the case in version 1.0 products. For example,
the original iPod lacked the more common USB connection standard, and more critically, did not work
on Windows. The original iPhone lacked features such as copy-and-paste, 3G connectivity, and
multitasking. The iPad does not have a camera and also lacked multitasking.
The net result of these omissions is that Apples version 1.0 product often falls significantly below theconsumer preference line for traditional features, meaning that adding features is more likely to bring
the product up to the consumer preference line (as opposed to extending above it). Moreover, those
features are added relatively sparingly, reducing the slope of the product trajectory line.
This creates a fascinating dynamic vis a vis the competition. The reason Apple can successfully launch
products that lack seemingly critical features is because of the intense focus on the user experience;
however, competitors usually view the lack of features as an opportunity and quickly launch products
that seem similar but with better features. However, they rarely if ever match the Apple user
experience and usually fail to compete successfully. Therefore competitors quickly iterate and launch
new products with more features. This results in the competitors products quickly overwhelming
customers with features the path supposedly reserved for the innovator! In this respect, it is the
followers who fall prey to the Innovators Dilemma.
CUSTOMER NEEDS
As a category creator, Apples first advantage is the ability to shape consumer expectations. For
example, the iPod created the expectation that music transfer to a portable player be completely
seamless, and introduced the patented click wheel. The iPhone defined the form factor and
interaction paradigm for future Internet-focused smartphones, and created the concept of an app
store. These efforts defined the direction of customer needs in a way that favored Apple.
Secondly, Apples product introductions and advertising increase the customer needs slope to more
closely match the trajectory of Apples products. An excellent example is Apples recent introduction
of Facetime, the video calling capability for iPhone 4 (later expanded to iPod Touches and Mac OS X).Several competing phones, such as Nokia smartphones, had video calling capability for years, but it
was yet another feature that customers didnt want and didnt use i.e. a feature that contributed to
the Innovators Dilemma. However, when Steve Jobs introduced the feature during a keynote address
in June, 2010, it was a full demonstration of the capability with a massive press audience. Apple then
launched an advertising campaign centered on Facetime that levered up the emotional attachment to
the product. The net result was that Facetime became a must-have feature that drove purchases and
is forcing competitors to respond.22
Third, Apples retail stores further increase the customer needs trajectory. All of Apples products are
available for unfettered use in the retail stores, and retail associates willingly spend time
demonstrating the capabilities of all of Apples products. Continuing with the Facetime example, Apple
created a special toll-free number that store visitors could call to try out Facetime from the retail
stores, demonstrating the feature and creating demand. The stores also offer trainings and
workshops that not only improve the user experience of buying an Apple product, but also ensure
that customers are exposed to and demand all of the features in a given Apple product. The net
effect is that even from a feature perspective Apple products are much less likely to outstrip customer
needs; moreover, competitors have no choice but to match every feature, but without the customer
service and ease-of-use of Apple, which creates unwieldy products.
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PRICE
Sustainable differentiation and increased consumer preference trajectories suggest higher prices and
an opportunity for competitors to be low-cost competitors. Yet the evidence suggests this hasnt
happened.
The original iPod launched in 2001 at a price point of $399 for 5 GB of storage. Its primary
competitor was the Creative Nomad Jukebox which had 20 GB of storage, although it was
significantly larger and more difficult to use. It also cost $39923
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Price References242526
The iPod did not face a large number of similar specced competitors until late 2004. However, even
then the price remained quite competitive.
By 2004, Apple was also showing its willingness to cover as many price points as possible, offering
products from $249 to $599. By 2007, the lineup had extended in both directions, and while
competitors had for the most part standardized on the same capacity as the iPods, they werent
necessarily less expensive.
Price References272829
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The iPhone is similarly competitive, primarily due to the unique nature of the wireless industry where
most phones are subsidized and customers have to agree to two-year contracts. 30 Moreover, phones
often decline in price over their lifespan in response to consumer demand (or lack thereof).
However, the iPhone has consistently been very competitive and should be going forward as the
industry has standardized on a price of $199 for smartphone with a two-year contract. According to
CNNMoney,31
On the four major wireless networksthere are 13 smartphones priced at $199 with a two-year
contract. There are no phone models with a higher starting price (add-ons like more memory can
increase the price tag), and there are more smartphones selling at $199 than at any other single price
point.
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Price references32
One reason Apple has been able to remain so price competitive is by securing its flash memory
supply, a key component in the iPod Nano, Shuffle, Touch, iPhone and iPad. In 2005, Apple reached
five-year agreements with multiple memory vendors to secure its supply at favorable prices through
2010 and foreclose competitors.33 In addition, Apple has benefitted from tremendous economies of
scale befitting its dominant position in the market. While the tablet market is still nascent, it appears
that Apple has priced the iPad very competitively as well. The entry level iPad, with a 9 screen and
Wi-Fi networking retails for $499, $629 with cellular networking. The only comparable product on the
market, the Samsung Galaxy Tab, has only a 7 screen, and retails for $600 with cellular networking.
SELF-DISRUPTION IN THE MP3 PLAYER MARKET
By enhancing the iPods initial differentiation, focusing product improvements on the user experience
and high-value features, educating customers and staying competitive on price, Apple in many ways
forestalled or downright reversed the Innovators Dilemma in the MP3 Player market. However, its
important to note that they also had the discipline to disrupt themselves.
Twice Apple introduced new models of the IPod that had smaller storage and new price points. In the
case of the iPod Mini, Apple introduced a smaller 4 GB model based on a 1 hard drive and priced it
at $249. Pundits were stunned, for a regular iPod with 15 GB of memory could be had for only $50
more. Alex Salkever of BusinessWeek, who had previously predicted the iPods disruption above,
wrote:
Less music in a device marginally smaller at about the same price. Get it? I didnt, and few others
will, either. In fact, while I was watching Jobs give his spiel, my mind replayed the infamous scene
from the cult classic mockumentary Spinal Tap where the dim rock band tries to explain that dials on
their amplifiers go to 11 and thats what makes them louder. I was left with the same sense of
befuddlement after watching Jobs show off the smaller but much wimpier miniPod. 34
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Yet the iPod Mini became a massive success, for many of the same reasons smaller size hard drives
had years before in Christensens classic example: it was smaller, more convenient, and cheaper. In
fact, the iPod Mini became Apples best-selling iPod.35
And then they killed that too. On September 7, 2005, just 20 months after the iPod Minis
introduction, Apple discontinued it and launched the iPod Nano, an even smaller device that used
flash memory and had less storage (2GB and 4GB, versus 4GB and 6GB for the Mini).36 Appledisrupted itself again using changes in the exact same sort of media (storage) that felled market
leader after market leader 30 years ago.
And now, The iPod market is decreasing every quarter, largely due to the best iPod ever introduced
in January 2007. It is more commonly known as the iPhone. Beyond creating disruption within the
MP3 player market, Apple in the end disrupted the market as a whole.
HOW APPLE DOES WHAT IT DOES
Christensen and Bower, in their original article, note that well-run companies have investment
processes focused on customer needs:
In well-managed companies, the processes used to identify customer needs, forecast technology
trends, assess profitability, allocate resources across competing proposals for investment, and take
new products to market are focused for all the right reasons on current customers and markets.
These processes are designed to week out proposed products and technologies that do not address
customers needs.37
Apple follows none of these processes. Instead:
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1. Apple focuses on customer needs related to user experience, not specifications2. Apple does not focus directly on profit3. Apple focuses on long-run currents, not short-term trends4. Apple chooses to produce only a few products, and does not fund competing proposals or
focus on diversifying
APPLE FOCUSES ON DIFFERENT NEEDS
When Christensen and Bower talk about meeting customer needs, they are concerned with
performance and specifications.
Most well-managed, established companies are consistently ahead of their industries in developing
and commercializing new technologiesas long as those technologies address the next generation
performance needs of their customers.38
However, as has been consistently noted in this article, Apple is relatively unconcerned with pure
performance; on the other hand, it is obsessed with the user experience. As Gene Munster said in an
analyst report,
Although Apple devices dont necessarily launch with the biggest numbers on its spec sheet, they
usually combine hardware advances with improved applications that resonate with consumers and
deliver usability second to none.39
Steve Jobs, when asked why people want to work for Apple, said,
Our DNA is as a consumer company for that individual customer whos voting thumbs up or
thumbs down. Thats who we think about. And we think that our job is to take responsibility for the
complete user experience. And if its not up to par, its our fault, plain and simply.40
This article has already laid out many of the strategic benefits of this intense focus on the user
experience: it creates significant differentiation, sets customer expectations, and makes it impossible
to overshoot customer needs products are never good enough with regard to the user
experience.
From an organizational standpoint, if products are never good enough, then a highly integrated
company is appropriate. Chrstensen and Raynor note in the Innovators Solution that the not-good-
enough circumstance mandate[s] interdependent product or value chain architectures and vertical
integration.
Another way to look at Apples decisions regarding its organizational structure is to think of
transaction costs: normally, in well-functioning markets, vertical integration is suboptimal. However, if
transaction costs in the vertical chain outweigh the losses due the inefficiencies of being vertically
integrated, then vertical integration could be the correct course of action. Apple thinks the exact
same way, but not about monetary cost; instead, the transaction costs they consider are the tax that
modularization places on the user experience, and it is a cost they are not willing to bear. A central
tenet is that Apple need[s] to own and control the primary technologies behind the products [it]
make[s].41
APPLE DOES NOT FOCUS DIRECTLY ON PROFIT
Jonathan Ive, Apples vice-president of Industrial Design, stated this very explicitly:
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Apples goal isnt to make money. Our goal is to design and develop and bring to market good
productsWe trust as a consequence of that, people will like them, and as another consequence well
make some money. But were really clear about what our goals are. 42
This gives Ive and the designers much more latitude when it comes to developing products. For
example, while developing the original iMac:
Ive and others visited a candy factory to study the finer points of jelly bean making. They spent
months with Asian partners, devising the sophisticated process capable of cranking out millions of
iMacs a year. The team even pushed for the internal electronics to be redesigned, to make sure they
looked good through the thick shell. It was a big risk for Jobs, Ive, and Apple. Says one rival: I
would have had to prove that transparency would increase our sales, and theres no way to prove
that. He figures Apple spends as much as $65 per PC casing, vs. an industry average of maybe
$20.43
Another example is the iPhone4 and its specialized antenna:
When Apples iPhone4 was nearing production, Foxconn and Apple discovered that the metal frame
was so specialized that it could be made only by an expensive, low- volume machine usually reserved
for prototypes. Apples designers wouldnt budge on their specs, so Gou [Foxconns CEO] ordered
more than 1,000 of the $20,000 machines from Tokyo-based Fanuc. Most companies have just one. 44
If there is ever a choice between enhancing the user experience of a product or improving its
profitability, Apple, unlike nearly any other company, chooses the former, cementing the strategic
advantages conferred by a focus on the user experience.
Apples organizational structure is similarly focused on delivering excellent products and enabling
expertise, not profit. Apple is organized functionally as seen by the structure of its executive
board.((http://www.theofficialboard.com/org-chart/apple))
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Consider the iPhone: there is no vice-president for iPhone. Rather, there is a vice-president of iOS,
the software; a vice-president of hardware engineering; a vice-president of industrial design; a vice-
president of operations; and a vice- president of product marketing. Each is of equal stature and
expected to contribute according to their function to deliver against a profit-and-loss number is
organizationally impossible.
APPLE FOCUSES ON LONG-TERM CURRENTS, NOT SHORT-TERM TRENDS
Apple only enters markets that it believes will cover the entire consumer market and which are
increasing in importance. According to Jobs,
Things happen fairly slowly, you know. They do. These waves of technology, you can see them way
before they happen, and you just have to choose wisely which ones youre going to surf. If you
choose unwisely, then you can waste a lot of energy, but if you choose wisely it actually unfolds fairly
slowly. It takes years
[Apple] realized one day that 90% of the people who use a PDA only take information out of it on the
road. They dont put information into it. Pretty soon cellphones are going to do that, so the PDA
markets going to get reduced to a fraction of its current size, and it wont really be sustainable. So
we decided not to get into it. If we had gotten into it, we wouldnt have had the resources to do the
iPod. We probably wouldnt have seen it coming.45
According to Tim Cook, Apple Chief Operating Officer, in those developing areas, We participate only
in markets where we can make a significant contribution.46
This also fits Apples structure. By focusing on delivering new-to-the-world solutions in emerging
markets, Apple ensures it is competing in the not- good-enough segment of the market where
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integrated providers are at an advantage, instead of the more-than-good-enough follower market
where modularized competitors have an advantage.
APPLE ONLY MAKES A FEW PRODUCTS VERY WELL
Given Apples market cap, it is amazing to consider that it has only four main product lines and 14
main products.
The first reason for this focus is so that Apple can deliver on the user experience. Jonathan Ive said,
When you do everything to make the very best product, it also means youre very focused on just a
few products.
This also leaves Apple free to pursue new opportunities, as in the case of the iPod. Moreover, it
makes Apples unique organizational structure possible. Dupont pioneered todays modernorganization structure with multiple profit- and-loss centers after World War I because functional
organizations simply dont scale to multiple product lines, and they wanted to sell paint in addition to
gun powder.47 When you consider the fact that Apples organizational structure is integral to its
strategy of obsessively focusing on the user experience, then limiting the product line to preserve that
structure is much more understandable.
THE BIG QUESTION
There remains, of course, one final question: exactly how do you know what products are best, what
customers need, and what constitutes a great user experience? After all, this gets back to the crux of
The Innovators Dilemma that companies fail by being too close to their customers. Apple certainly
differs from other companies in its approach to market research. According to Jobs,
We do no market research. We dont hire consultants. The only consultants Ive ever hired in my 10
years is one firm to analyze Gateways retail strategy so I would not make some of the same mistakes
they made [when launching Apple's retail stores]. But we never hire consultants, per se. We just want
to make great products.48
Instead, Apple relies on self-reflection and discipline:
Its not about pop culture, and its not about fooling people, and its not about convincing people that
they want something they dont. We figure out what we want. And I think were pretty good at
having the right discipline to think through whether a lot of other people are going to want it, too.
Thats what we get paid to do.
So you cant go out and ask people, you know, what the next big [thing.] Theres a great quote by
Henry Ford, right? He said, If Id have asked my customers what they wanted, they would have told
meA faster horse. 49
Many will read this quote and despair at ever having a Steve Jobs run their company. But I believe
that for all of Jobs brilliance, the secret of Apples success is about design and a different way of
thinking. Design at its essence, is not just about form, and not just about function. Instead, its both,
and more. It is ultimately about the user and delivering exactly what they need, not just what they
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say they want. Apple takes it as their responsibility what customers pay them for to both know
technology and customers better than customers know themselves and deliver products that truly
surprise and delight. And it is suprise and delight that builds a powerful and long-lasting brand that
goes from success to success without any dilemma at all.
Moreover, it is a way of thinking that Apple does not have a monopoly over. It requires
acknowledging that there are product attributes that cannot be measured, and that value meansmuch more than money. It also requires thoughtfulness and patience, and a broad appreciation of
people and culture. Escaping the Innovators Dilemma is about escaping the operational mindset that
is the current ideal in much of business. In short, there are few other companies like Apple because
no one dares or is allowed to think different, not because it is impossible.
Of course, its worth remembering that Henry Ford was disrupted, and rather abruptly at that. Apples
course, like all high reward ones, is also high risk. Stringently focusing on just a few products and
saying no to a hundred more requires extreme discipline on the part of the CEO, as well as significant
respect within the ranks for the CEOs decisions. Jobs has both, but whether or not his successor will
is another question. A second risk raised by Apples extreme focus is the possibility of getting it wrong
with one of their core products. Without a diversified portfolio, a significant misstep could be
extremely costly. Another challenge is maintaining the intrinsic motivation that compels employees to
create amazing products despite no direct compensation for doing that (outside of stock options).
However, the biggest risk in my mind is forgetting the lessons of the 90s when Apple was disrupted.
In many respects it seems that nearly going bankrupt drove many of the strategic decisions
recounted here, and other companies ought to better understand and emulate Apple now before
Apple itself forgets how it got here.
1. CapitalIQ.com2. Bower, Joseph and Christensen, Clayton. Disruptive Technologies: Catching the Wave
Harvard Business Review, January-February 1995, page 4-5
3. Bower, Christensen, p. 5-6 4. Bower, Christensen, p.3 5. Bower, Christensen, p.3 6. Christensen, Raynor, The Innovators Solution (Kindle Edition), Harvard Business School
Press, 2003, Retrieved from Amazon.com, Location 1603-1615
7. Christensen, Raynor, l.1629-1636 8. Figure 1, which is the basis for all the figures that follow, is adapted from Figure 5-1 in the
Innovators Solution, Christensen, Raynor, l. 1590
9. Apple, Inc. Wikipedia, http://en.wikipedia.org/wiki/Apple_Inc.10.CapitalIQ.com11.Christensen, Raynor, l. 1653 12.CapitalIQ.com13.Hesseldahl, Arik, The iPod in Perspective, Forbes, October 15, 2004
http://www.forbes.com/2004/10/15/cx_ah_1015tentech.html
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14.Burrows, Peter, Can the iPod Keep Leading the Band?, BusinessWeek, November 8, 2004http://www.businessweek.com/magazine/content/04_45/b3907064_mz011.htm
15.Salkever, Alex, A Bitter Apple Replay?, Bloomberg, October 14, 2004,http://www.businessweek.com/technology/content/oct2004/tc20041014_9962_tc056.htm]
[16. This entire article is worth reading in its entirety as it is a nearly perfect encapsulation
of the industry conventional wisdom
16.Graph compiled from http://www.theregister.co.uk/2004/10/12/ipod_us_share/,http://money.cnn.com/magazines/fortune/fortune_archive/2005/10/31/8359167/index.htm
, http://www.ibtimes.com/articles/20061004/apple-ipod-market-share.htm,
http://www.bloomberg.com/apps/news?pid=newsarchive&refer=us&sid=aSevgh8PDACE,
http://apcmag.com/apples_announces_new_ipods_itunes_8_and_an
_upgrade_for_iphone_users.htm,
http://www.afterdawn.com/news/article.cfm/2009/09/09/ipod_market_share_at_73_8_per
cent_225_million_ipods_sold_more_games_for_touch_than_psp_nds_apple,
http://www.businessinsider.com/through-may-apples-ipod-had-76-of-the-us-mp3-player-
17.Pogue, David, iPods Law: The Impossible is Possible, New York Times, September 15,2005, http://www.nytimes.com/2005/09/15/technology/circuits/15pogue.html
18.Menta, Richard, We Test Drive the Creative Nomad Jukebox, MP3newswire.net, November21, 2000, http://www.mp3newswire.net/stories/2000/nomadreview.html
19. iTunes Store, Wikipedia.com, http://en.wikipedia.org/wiki/Itunes_store 20.Notes: Apple renames iTunes Store, acquires Cover Flow, AppleInsider.com,
http://www.appleinsider.com/articles/06/09/13/notes_apple_renames_itunes_store_acquir
es_co ver_flow.html
21.McGuire, Mike; Baker, Vin, Apples iPod and iTunes Updates Keep Pressure onCompetitors; Apple TV Revamp Takes It Beyond a Hobby, Gartner, September 24, 2010
22.Gamet, Jeff, Analyst: Facetime Driving Many iPhone 4 Sales, The Mac Observer, June 24,2010,
http://www.macobserver.com/tmo/article/analyst_facetime_driving_many_iphone_4_sales
/
23.King, Brad, Apples Breakthrough iPod, Wired, October 23, 2001,http://www.wired.com/gadgets/miscellaneous/news/2001/10/47805
24.Lloyd, Dennis, A Brief History of iPod, iLounge,http://www.ilounge.com/index.php/articles/comments/instant-expert-a-brief-history-of-ipod/
25.Menta, Richard, iPod Killers for Christmas, MP3newswire.net, October 14, 2004,http://www.mp3newswire.net/stories/2004/XmasPlayers.html
26.Horwitz, Jeremy, When Apple Waits, Competitors Strike, iLounge, July 2, 2004,http://www.ilounge.com/index.php/articles/comments/analysis-when-apple-waits-
competitors-strike/
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27.Block, Ryan, Steve Jobs Live Apples The Best Goes On Special Event, Engadget,September 5, 2007, http://www.engadget.com/2007/09/05/steve-jobs-live-apples-the-
beat-goes-on-special-event/
28.Menta, Richard, iPod Killers: 30 New Players for the Holidays, MP3newswire.net, October13, 2007, http://www.mp3newswire.net/stories/7002/iPod-Killer-Holiday2007.html The
introduction to this article is quite instructive:
Since 2004 we have run our bi-annual iPod Killer Christmas/Summer series. During
this period we have reported on 215 portable players and in all of that time NOT one
single iPod Killer has emerged from the bunch. This doesnt mean there arent any
compelling portables out there, just that none have garnered enough mass market
traction to unseat the iPod. The iPod touch, for all of its niggling flaws, has set that bar
even higher and we are not even venturing into the iPhone and what it is doing in the
mobile phone market. Times are tough for the competiton, but the good news is that
they keep trying.
29.Fermoso, Jose; Duman, Danny, Wired Decides: Zune or iPod This Holiday Season?, Wired,December 8, 2007,
http://www.wired.com/gadgets/portablemusic/news/2007/12/megaplayer_smackdown
30. In the United States 31.Goldman, David, Why All Smartphones Are $199, CNNMoney.com, September 6, 2010,
http://finance.yahoo.com/family-home/article/110556/why-all-smartphones-are-same-price
32.Sources include: http://www.iphonemobilemob.com/reviews_iphone_vs_nokia_n95.htmlhttp://techcrunch.com/2007/07/25/iphone-v-blackberry-side-by-side-two-week-
comparison/ http://alatestreview-cnet.com.com/smartphones/htc-vox-s710-unlocked/4505-
6452_732329850.html?subj=HTC+Vox+S710+%28unlocked%29&tag=feed&part=alatestr
eview-cnet#reviewPage1 http://www.crn.com/blogs-op-ed/the-channel-
wire/212000498/five-reasons-to-wait-on-blackberry-bold.htm;jsessionid=yot-H6v-
lQM19ezklseo6w**.ecappj02 http://gizmodo.com/5015540/iphone-3gs-true-price-
compared http://reviews.cnet.com/smartphones/t-mobile-g1-black/4505-6452_7-
33283585.html#reviewPage1 http://crackberry.com/bold-and-8900-price-cut-t
http://news.cnet.com/8301-17938_105-10390059-1.html
http://www.pcworld.com/zoom?id=198214&page=1&zoomIdx=1
http://crackberry.com/blackberry-torch-9800-review
33.Large Apple Order Reduces NAND Flash Supply, June 2, 2006,http://news.worldofapple.com/archives/2008/07/02/large-apple-order-reduces-nand-flash-
supply/
34.Salkever, Alex, A maxiprice for Apples miniPod, BusinessWeek, January 7, 2004,http://www.businessweek.com/technology/content/jan2004/tc2004017_5927_tc056.htm
35. Jade, Kasper, Apples 4GB iPod mini outselling newer models, AppleInsider.com, May 4,2005,
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http://www.appleinsider.com/articles/05/05/04/apples_4gb_ipod_mini_outselling_newer_
models_more.html
36. iPod, Wikipedia.com, http://en.wikipedia.org/wiki/IPod 37.Christensen, Bower, p.3 38.
Christensen, Bower, p. 3
39.Milanesi, Carolina; Baker, Van, Apples iPhone 4 Hardware Tells Only Half the Story atWWDC, Gartner, June 11, 2010
40.Morris, Betsy, Steve Jobs Speaks Out, Fortune, March 7, 2008,http://money.cnn.com/galleries/2008/fortune/0803/gallery.jobsqna.fortune/4.html
41.Lashinsky, Adam, The Cook Doctrine at Apple, Fortune, January 22, 2009,http://gowest.blogs.fortune.cnn.com/2009/01/22/the-cook-doctrine-at-
apple/&t=1291631028
42.Walters, Helen, Jonathan Ive on the Key to Apples Success, Bloomberg BusinessWeek,July 8, 2009,
http://www.businessweek.com/innovate/next/archives/2009/07/jonathan_ive_th.html
43.Who Is Jonathan Ive? BusinessWeek, September 25, 2006,http://www.businessweek.com/magazine/content/06_39/b4002414.htm
44.Balfour, Frederick; Culpan, Tim, The Man Who Makes Your iPhone, BloombergBusinessWeek, September 9, 2010,
http://www.businessweek.com/magazine/content/10_38/b4195058423479.htm
45.Morris, Betsy 46.Lashinsky, Adam 47.
Tedlow, Richard, Denial (Kindle Edition), Penguin Group, 2010, Retrieved fromAmazon.com
48.Morris, Betsy 49.Morris, Betsy
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