Apple Versus the Strategy Professors

Someday, Apple's now 11-year-long run of nearly unbroken triumph (I'm dating it to the launch of the iPod in November 2001) is going to end. That is just the way of the business world. The questions, of course, are when, and how.

The mood of the moment is that when might just be now (there are lots of different ideas about the how).

I wouldn't be so sure that "peak Apple" really is now. What I am pretty sure about is that the how of Apple's fall (or continued rise) will hinge on strategy — because strategy has driven its success.

How do I know that? Because strategy is all about making choices. That's what Michael Porter says, and tough-choice-making has clearly been a big part of Apple's success. Steve Jobs' revival of the company began with a decision to narrow product lines down to a handful, and its big product successes of recent years have all been defined to a large extent by what Jobs and Apple's designers decided to leave off. To quote Porter: "Strategy renders choices about what not to do as important as choices about what to do." If Tim Cook and his colleagues can keep that strategic discipline, the company has a shot at maintaining its competitive edge.

Or actually, maybe strategy is really about finding blue oceans — markets that come into existence as a company defines them. That's the path to riches described by W. Chan Kim and Renée Mauborgne, and it certainly sounds like what Apple has been up to. With the iPod/iTunes combo, the iPhone, and the iPad, the company has repeatedly given customers something that felt entirely new, that solved their problems in a way no existing product did. Now the competitive sea is getting more crowded, especially for iPhone. Apple still has an edge, in that it built that sea — "so powerful is blue ocean strategy," Chan and Mauborgne write, "that a blue ocean strategic move can create brand equity that lasts for decades." But you have to think that, to really stay on top, Apple needs to find more blue oceans to conquer. Which is a lot easier said than done.

Then again, maybe the real key to strategic success in the fast-moving fields Apple is playing in is to keep coming up with disruptive innovations — and be willing to bring them to market even when they disrupt its own products. That's Clayton Christensen's famous contribution to strategy, and you can certainly see elements of it in Apple's story. True, none of the company's three huge successes of the past 11 years (the iPod, the iPhone, and the iPad) really fit Christensen's classic disruption model of starting at the low end and moving upmarket. Christensen even said back in 2007 that the iPhone "was not truly disruptive" and probably wouldn't succeed. But it does seem reasonable to argue that a continued willingness to disrupt itself will probably be key to Apple's continued success. The iPhone has cut into iPod sales, and the iPad is hurting the iMac, and Apple seems okay with that. Microsoft, meanwhile, killed its promising Courier Tablet three years ago because of fears that its incompatibility with Windows and Office would disrupt those money-spinning franchises.

Of course, modern technology businesses have some other unique strategic characteristics. One is a tendency to move from integrated products controlled by a single company to modular ones with interchangeable parts. This is another Christensen observation, albeit a lot less famous than the one about disruptive innovation. "The companies that are most successful in the beginning are those with optimized, interdependent architectures," he and Michael Raynor write in The Innovator's Solution. "Later, architectures and industry structures will evolve toward openness and disintegration." In the beginning the integrated solution delivers better value; later, lower costs and the ability to customize favor the modular approach. This was apparent with both of Apple's early blue-ocean-creating disruptive innovations, the Apple II and the Macintosh, as the modular, relatively open PC architecture pioneered by IBM and later dominated by Microsoft and Intel eventual came to dominate markets that Apple created.

Microsoft's rise was also abetted by two other sources of competitive advantage: network effects and switching costs. A network effect transpires when the value of a product or service grows with the number of users; switching costs are just what they sound like. "The old industrial economy was driven by economies of scale," Carl Shapiro and Hal Varian write in their digital-age strategy guide Information Rules. "The new information economy is driven by the economics of networks." In the early 1990s, the modular nature of the Windows PC made it cheaper and more customizable, and as its customer base grew far larger than the Mac's it became more valuable for most customers, too. That was partly an indirect network effect — Windows' many users made it a more attractive platform to write software for, and all that software made it more valuable to users. And it was partly a direct one — having compatible software made it easier for all those users to share documents, collaborate, etc., which made the Windows platform more valuable to them. And once you had invested in all that software, it was a real pain to switch from Windows to anything else. Not that you wanted to. By 1997, when Steve Jobs came back to Apple, Windows computers were demonstrably better in almost every way than Macs (I know from experience; I had a crash-prone Mac at work and a reliable PC at home). It took the unreasoning loyalty of the Apple faithful, continued superiority in (and high switching costs for) graphic-design software, and a lot of help from Microsoft to keep Apple alive long enough for Jobs to stage a comeback.

In its second coming, Apple has been smarter about exploiting network effects (the iTunes store and the app store take advantage of indirect network effects, while Face Time and iChat take advantage of direct ones). The sheer convenience of using all its products together also creates very real switching costs — the 250 million people now using Apple's iCloud are going to think twice (or three or four times) before buying a smartphone, tablet, or computer from anybody else. But Apple is now being threatened by a set of lower-cost, modular competitors that look a lot like Microsoft and Intel back in the day. Devices from Samsung, HTC, Coolpad, and lots of other manufacturers using Google's Android operating system now account for 75% of the global smartphone market. The numbers of apps and games available for Android devices caught up with Apple's App Store total late last year, and will surely now surge far ahead. Despite the superior design and user-friendliness of Apple's devices (not to mention those stores), network effects could soon be delivering better value for most customers than Apple's sleekly integrated approach (maybe they are already). To circle back to Porter:

A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both.

My own reading of all this strategic wisdom is that unless Apple ventures out onto some more blue oceans with disruptive innovations and hard choices, it's going to find itself fighting a long and eventually unsuccessful war against its modular competitors and their powerful network effects, although switching costs will at least buy it some time.

Another takeaway might be that strategic thinking inevitably leads to mixed metaphors. The business world is just too complex to fit comfortably into any one strategic model. Porter's seems the most flexible and durable of the lot, but that's partly because it's a tool more of analysis than of prescription or prediction. I spent a little while trying to plug Apple's situation into his five-forces framework, and while it made some of the company's choices clearer to me, it certainly didn't tell me what's going to happen next.

The language of strategy is, however, more informative about Apple's predicament than most of the chatter one hears about whether the company is still cool or Tim Cook really has what it takes. I'm a fan of Amar Bhidé's anti-strategy polemic, "Hustle as Strategy," in which he argues that many of the most successful companies "concentrate on operating details and doing things well. Hustle is their style and their strategy." But while a failure to hustle could surely doom Apple, its challenge now may be that hustle alone won't be enough to keep it on top of the world. Then again, it looks as if the surest path to continued success for the company involves coming up with yet another market-defining success along the lines of the iPod, iPhone, and iPad. I'd like to see a strategy professor do that.

A couple of disclaimers: I do not profess to be strategy expert; thinking about Apple just sent me to my bookshelf and HBR's archive in search of answers. And I really didn't mean for this to be a promotional post for HBR and the HBR Press; I just happened to consult the work of a bunch of our authors because (1) it was convenient and (2) we publish most of the best strategy thinkers. Or at least we think we do.

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