Sunday, October 09, 2011

A Sideways Look at Apple and its Strategies


The death of Steve Jobs has caused an outpouring of commentary about his role at Apple. Most stories focus on his design skills, secrecy, showmanship, willingness to drop old products, project management and high level of product management centralization. But there is another way of looking at Apple that reveals facets of Apple’s strategy that are less discussed and which reveals some ways of succeeding not often written about. Six strategies appear less recognized and even if recognized, less imitated:
  1. The role of accidental advantage
  2. Constructed synergies
  3. Price simplification based on principles of good user interface design
  4. Software being more important than hardware
  5. Scale economies and supplier preemption
  6. The importance of active PR management and control

Accidental Advantage

One of the most missed observations about Apple is that its success in developing a digital music business was the result of Apple’s failure in the 1990s as a computer company. Record companies were almost destroyed by the emergence of illegal downloading sites such as Napster. Shell-shocked by the loss of revenues, companies were extremely reluctant to enable downloading of their music for fear that their revenues would be ruined by theft.

And along comes Apple, a marginal player in the computer business in the 1990s with a history of customer lock in. Apple’s walled garden and appliance-oriented computers combined with copy protection (referred to as digital rights management or DRM) provided a low risk ecosystem within which illegal downloading was less likely to be a problem. The record companies need for protection of their assets and revenue model could be addressed by an unsuccessful company such as the Apple of that period more easily than a more successful company such as Microsoft.

Apple built a music business because it had failed to become dominant as a computer company and because it had a small ecosystem.

Constructed Synergies and Leverage

Many companies discover great strategies accidentally. 

Honda is widely cited as having accidentally discovered that its low powered bikes were appealing to Americans. 

Perhaps less well known is the success of Deloitte. Deloitte has historically been quite conservative and slow moving. So it was no surprise to many that Deloitte was the last of accounting firms to think about divesting their consulting arm under the name Braxton. Deloitte changed its mind at the last minute, when it realized to its great surprise that as the last firm with an integrated audit/consulting offering offered a unique positioning opportunity. Because of Sarbanes-Oxley legislation, an audit firm may not offer consulting services to avoid any conflict of interest. That was why other firm spun off their consulting arms. In effect, Deloitte constructed a new business model out of its core business audit/financial consulting and a business that they had intended to spin out.

But Deloitte realized shortly before the spin out that for the 80% of the market that it did not audit, owning both accounting and consulting capabilities gave it an integrated capability its competitors would lack. For the 20% of the market that it audited, it would just forego the consulting opportunities.

Apple’s constructed advantage turned out to be equally as important.  Steve Job’s investment in Pixar, with its amazing track record of animated movie success, provided Apple with leverage that he used to gain access to one of the most important video content providers, Disney. With Disney on board, he could improve the iTunes offering and attract other video content owners. It’s unlikely that this constructed advantage was planned, but Apple and its CEO were smart enough to construct an advantage out of these disparate assets.

User Interface Design Influencing Pricing and Product Portfolio Choice

Pricing is a complicated area in most companies. It’s an area where many people have input. There is almost never one person accountable. Pricing specialists vie with the VP Sales, VP Marketing and CFO for influence.
What distinguishes Apple is the clarity of its pricing. It’s hard to identify another company that has maintained consistency of pricing clarity over such a rapidly changing product line. Many have observed that Apple typically offered three prices in the market so that customers were not cognitively confused about their choices. If for example, you wish buy an iPad you face only two decisions:
  1. Do I want the option of 3G so I connect when outside my home or office?
  2. How much memory do I wish to pay for? 16, 32 or 64 gig?
In a sense you can see these pricing options as influenced by software interaction design. Good software design typically reduces the number of choices that a user must make and it is typically goal oriented. When you have this limited palette of choices, you are more likely to buy and less likely to worry that you are making a sub-optimal decision. In the smart phone area, Apple’s limited choices make selection of an iPhone far easier cognitively than the bewildering array of Android phones.

In the same way, curated applications on the iPhone platform contrast dramatically with the lower level of quality control on Android apps, where malware has been more of a problem.

Software Not Hardware

While Apple hardware has always been praised for its industrial design, in reality the key insight of Apple over the years has been consistent: software is more important than hardware. Hardware and good design provide the skeleton, but the meat is always in the software. And software always makes iterative improvement easier and faster.   

This view may seem controversial as Apple hardware is widely praised, but consider the recent unsuccessful launch of the RIM Playbook tablet. Its performance has been criticized for being buggy and missing expected functionality such as non-RIM email.  Good hardware and an excellent QNX operating system are insufficient if the software does not work well or provide the right functionality. Just as importantly strategic schizophrenia at RIM over whether the Playbook was a consumer or business product led to messaging confusing.

In contrast consider the following four comparisons that demonstrate Apple’s consistent use of software over hardware:

Hardware emphasis
Apple emphasis
MS-DOS and Windows PCs have function keys
Functionality provided via soft and changeable menu and icon options on screen
Music playing
Traditional MP3 players typically provided control buttons for e.g. play, rewind, fast forward, go to beginning, go to end
Touchscreen interaction on iPhone, and iPod Touch not only matched existing hardware functionality but permitted new functionality such as web browsing or more generally apps
Operating system
Most hardware vendors separate the operating system from applications.
Apple provides both the operating system and much of the Pareto functional software, i.e. the software that provides most of the value for the purchaser
Integration across devices
Generally weak for most vendors. Many rely on simple copying of files.
Apple attempts to make the integration a central point of its offering via e.g. iTunes or its more recent iCloud offering.

Costs and Supplier Preemption

For those outside of the consumer electronics area, one aspect of Apple strategy is almost invisible: its procurement strategy. Over the years, Apple has pursued a strategy of locking up scarce components by committing to large purchases. With a high rate of product launch success, Apple’s commitment is lower risk than for other companies. And by preempting key scarce components, it reduces the likelihood of competitor products succeeding.

Success of the iPod was aided by Apple making large purchases of small hard drives and later flash memory. Advance purchases of the “retina” screen for the iPhone gave it significant advantage over competitors. And its massive success with the iPad gave it a procurement advantage there as well, making it difficult for competitors to match Apple’s costs and marketing budgets or obtain access to key suppliers.
Another aspect of its procurement strategy is that Apple is reported to assess the components of its value chain in one of five categories of strategic importance. The most important elements are preserved in-house.

Today, these critical areas seem to include: hardware design, operating system, content sales and integration, mobile microprocessor design and voice recognition. Critical components that Apple cannot or chooses not to possess are controlled by preemptive procurement. In contrast, commodity or novel innovations are sourced externally. When an external innovation becomes a source of competitive advantage or provides a new set of capabilities it may end up being brought in house as has happened with the music service, mobile chip design capability and SIRI voice processing.

The Impact of Regis McKenna Upon Apple

Regis McKenna, a public relations specialist was an early influence upon Apple. He has suggested in his writings that information about a company becomes part of the attributes of products offered by the company. This is a lesson that appears deeply ingrained within Apple. It accounts for the secrecy and the centralization of disclosure at the firm. It is also a lesson that many other company do not seem to appreciate today, thirty odd years after Regis wrote about it. HP’s recent announcement about its cancellation of its tablet offering and the spin out or sale of its PC division is in marked contrast to Apple’s approach to public relations and marketing messaging. HP’s mishandling of the announcement led the board to fire its CEO suggesting that they belatedly recognized the problem.

Taking a Bite Out of Apple: What Apple Tends to Get Wrong

Like any company, Apple has its strengths and weaknesses. Historically, Apple has been far less successful in building significant ecosystems around its platforms. Microsoft, often criticized for being less ruthless than Apple in discarding past technologies goes unrecognized by many for its success in building the most diverse and comprehensive computer platform and ecosystem in history. Apple has rarely been successful in marketing to businesses because when ever faced with a choice of building the next best appliance or developing its ecosystem, Apple always chooses the next best appliance at the cost of its relationship with partners in its ecosystem.

And while the app market for iPhones is large and diverse today, the loyalty of apps developers to Apple is based more upon the size of the installed base than any desire to be loyal to Apple. Practically all software developers prefer multi-platform development approaches which permit them to deliver on multiple phone operating systems (e.g. Android, Windows Phone 7 and Apple). And Apple’s pricing model, where it takes 30% or revenues actively discourages the development of native apps that only run on the iPhone. It encourages the development of browser based applications and certainly must have influenced Amazon’s decision to enter the tablet business.


Apple is a fascinating company and one that is much written about, a strange irony given its high level of secrecy. Some aspects of its strategies are stunningly obvious (design, integration, ease of use, product simplicity). Others such as those described here require more teasing out to appreciate and provide useful examples of superb strategy design and execution.

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