Apple and its competitive advantage

Christensen’s disruption theory postulates that as a successful business grows in size, it invests a lot of resources to build features that keep their most valuable customers happy. In this process, the business looses sight of other emerging products that are catching up quickly by providing a significant value to the low end customers at a lower price.

The beauty of this theory lies in its ability to explain the rise and fall of a wide varieties of products and businesses from steel mills to digital photography. What's more intriguing are all the boundary cases that can not be explained by the disruption theory — best example being Apple and its un-disruptable business model. Apple’s iPhone, from a disruption lens can be considered a premium, incumbent product that is targeted at Apple’s high revenue customers. When new entrants like Google and its OEM partners like Samsung launched cheaper and good enough smart phones, most people including Christensen prophesied that the iPhone business model would fall. The underlying assumption was that a section of low end iPhone users would find the cheaper android phones good enough to abandon the iphone to save money. Eventually, the cheaper android phones were expected to improve their product performance and steal away more customers.

As we know today, the android phones did get better in performance. The Samsung Galaxy phones today have closed the performance gap with the iPhone. However, the fall of iPhone like all the experts predicted never happened; in fact, the iPhone today is probably one of the most successful products in the history.

The Ecosystem

If you look at Apple’s revenue tree below, Apple’s revenue is primarily driven by selling high end devices at a premium. These devices are a combination of exceptional hardware differentiated through a very user friendly software. Apple also generates a lot of revenue from services like Apple Music, iCloud and the App store. Its hard to miss the synergies here — the more Apple devices a customer buys the more likely he is to use Apple’s services like apple music or download apps from the app store.

Business Model: Apple and its revenue drivers

Over the last couple of decades, Apple has very strategically constructed a very robust ecosystem of products that act as a barrier around its high value (LTV) customers. It was strengthened by many iterative improvements and ground breaking products like the iPhone. Here are some of the factors and elements unique to Apple that make this ecosystem on of the most valuable businesses in the world.

Push forces

Iterative hardware improvements and software upgrades make the products cutting edge and compel existing customers to buy new devices and services, which increases lever B. Low cost, high impact software features like being able to take a FaceTime call or text from any of your Apple devices build great synergies between the products and remove friction from a users life and add a lot of differentiation to Apple’s products. While rivals like Samsung are playing catch up by pushing the limits of battery performance, etc., Apple will have increased the switching cost for the users and created a strong push force against the competitors trying to poach the users away from its ecosystem.

Pull forces

Every time Apple launches a successful break through product like the iPod or the iPhone, it pulls in more users in to the ecosystem, thereby pushing both the levers A and B up. This creates another type of synergy by lowering the marginal cost of customer acquisition for its other products.

Let’s say I am a new customer who bought an iPhone today at the Apple Store, its very likely that my next tablet is an iPad. I may also gift my mom an iPad on her birthday so she can FaceTime with me. I can teach her how to use it or she can sign up for a class at the nearest Apple store. See the network effects here? People often think of Facebook and Snapchat as social networks, but FaceTime and iMessage are two powerful quasi-social networks we use in our daily life — and they are a compelling reason for you to stay in the Apple ecosystem and pull others in.

Another interesting aspect to the Apple ecosystem is how a successful Apple product bridges the chasm for the future products and it becomes easier for Apple to drive the adoption new products in to the market. The best recent example being the AR kit.

“For the people who don’t care about incremental changes in phone specs or design, the differentiator between devices has always been in the unique things that each one can do — or, failing that, the convenience and ease of use of common features. Apple’s iPhone is more convenient than Google’s Project Tango devices and with iOS 11 it’ll have much better AR capabilities than its nearest premium Android rivals. So if we’re looking for the AR innovator that will take the technology into the mainstream, Apple once again looks like the likeliest suspect.


Crossing the chasm by Geoffrey Moore

Tough decisions

Product breakthroughs are very tough to deal with because they are sporadic and may not always fit neatly with your long term product strategy. In Apple’s case it was the tricky decision to retire the successful iPod to launch the next breakthrough product — the iPhone. It goes without saying that it takes a lot of courage to kill a successful cash cow like the iPod. Over the last decade, Apple has successfully launched many self cannibalizing products, the current iPad pro vs MacBook being another good example. When strategic decisions are made on the basis of customer empathy they always pays off on the long run. Apple, having sold more than 1 billion iPhones, has a much stronger ecosystem today.

Creating and Managing value

Having lost the PC era market share battles to Microsoft, Apple’s success depended on creating exceptional value for its small but loyal group of high value customers. In addition to meeting the functional use cases of its customers, Apple always did a fantastic job of meeting their emotional needs like user experience, attractiveness, etc.

Elements of Human Value

Apple has been climbing up the Maslow hierarchy with the iOS app store and more recent devices like the Apple watch. The iOS App store has evolved into a default, one stop shop with all the apps to meet a variety of human needs from self actualization to information. This makes it extremely tough for a user to make a quick switch to using other products, unless the product is a commodity like headphones, and guess what Apple now has a differentiated product for that too — Air pods.

The above competitive advantages provide Apple with the necessary time and leverage to respond carefully to changing trends and emerging technologies like AI. Like another wise strategy professor said — The essence of strategy is choosing what not to do.