Apple, the world’s highest valued company, and its relationship, both competitive and cooperative, with Samsung provide a wonderful setting to discuss some fundamental questions that relate to strategy and operations:
FIRST: Which one is the more sustainable provider of Apple’s competitive advantage: design or the business model?
- Daring Fireball’s John Gruber wrote three beautiful paragraphs to argue his view on what he termed “The New Apple Advantage“:
So let’s be lazy for a second here, and attribute all of Apple’s success over the past 15 years to two men: Steve Jobs and Tim Cook. We’ll give Jobs the credit for the adjectives beautiful, elegant, innovative, and fun. We’ll give Cook the credit for the adjectives affordable, reliable, available, and profitable. Jobs designs them, Cook makes them and sells them.
It’s the Jobs side of the equation that Apple’s rivals — phone, tablet, laptop, whatever — are able to copy. Thus the patents and the lawsuits. Design is copyable. But the Cook side of things — Apple’s economy of scale advantage — cannot be copied by any company with a complex product lineup. How could Dell, for example, possibly copy Apple’s operations when they currently classify “Design & Performance” and “Thin & Powerful” as separate laptop categories?
This realization sort of snuck up on me. I’ve always been interested in Apple’s products because of their superior design; the business side of the company was never of as much interest. But at this point, it seems clear to me that however superior Apple’s design is, it’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.
- James Allworth, co-author of How Will You Measure Your Life?, adds an important dynamic component to the argument by applying Clay Christensen’s theory to this question:
The design part of Apple’s equation is to their ability to redefine new industries as they did with the iPhone. Whether they go after the TV market next, or something else, it’s this integrated design component that will be crucial to their initial success. But compared to the business side of Apple, design actually generates much less sustained strategic advantage in any one product category, once performance in that category becomes “good enough”. The tech industry has always revolved around copying. Once folks work out how it’s done, everyone piles on. And at that point, it becomes much less about design than it does about how you operate your business.
- In summary: the answer to whether design or the operating model is the more sustainable competitive advantage is the typical MBA response to a tough question: “it depends.” The rather sophisticated reasoning involves the fact that products and services over time improve and then become “good enough” and the dimension of competition shifts. Notice that I did not say that design is a commodity and fully copyable (my personal favorite question: why can’t Lexus designs have the timeless sophistication and elegance as Mercedes?); rather, another dimension overtakes it in importance.
SECOND: What is the strategic risk behind outsourcing? In our operations strategy class we devote considerable time to discussing the relationship with operations.
- James Allworth argues that:
It is actually Apple, more than any other company, that is responsible for Samsung’s present success. How? By outsourcing as much work to Samsung as they have. And it’s impossible not to wonder whether Tim Cook’s announcement yesterday on bringing back Apple’s manufacturing to the USA is the beginnings of an attempt to rectify the problem.
- But again, James Allworth adds more nuance and sophistication to the argument: it is not as much the worry of copying the design, and Apple is not outsourcing say chip design. However, has Apple gone too far and basically allowed Samsung to copy its business model (which, in my view, is predicated on scale and simplicity)?
[Re-read the final two lines of Gruber’s argument above]: He’s right — generating that scale requires a long gestation period — one that Apple went through. And it can’t be copied without significant time and effort on the part of a competitor. But there’s one big implicit assumption here — that suppliers won’t turn around and start developing their own offering. Because when Apple went through this transformative process, where the design whittled down the broad range of offerings to just a few, and they generated the scale on the business side that accompanied that — they weren’t actually the only one to go through that process. Apple’s partners — their suppliers — went through it with them. And they’ve got very big, and very good at what they do. Samsung, obviously, is among those partners.
To conclude, we can go to the third interesting question:
THIRD: How significant is the threat that Samsung poses to Apple and what’s Apple got to do? James Allworth offers some suggestions:
So, what’s Apple got to do? In so much as it is able to trust its suppliers of key components not to become competitors, it can continue to use them. But where it can’t, or where those suppliers have already become competitors, it has only one sensible choice — replace them. It has two choices here: the first (and obvious one) is with another supplier. But that risks the same thing happening all over again — Apple nursing another supplier into a competitor. The second choice: for components and services that are critical to maintaining competitive advantage in the markets which Apple plays, Apple needs to build the components themselves.
Most companies wouldn’t be in a position do that. But Apple is almost already there. I also hear that there might be a country out there with relatively high unemployment rate, looking for some jobs to be brought back home. Funnily enough, it seems that’s just what Tim Cook is doing right now. This approach might just be a good way of on-shoring some of those untaxed offshore profits (I imagine the tax benefits for building a few factories in the US would be quite high), all the while taking away business from competitors — both current and future.
But there’s one question that still remains. In the instance of the threat that Samsung poses to Apple: is it already too late?
Design or business model? Both get Apple to the clouds. The article ignores an important reason why they’ve reached the stratosphere — the shallower aspects of trendiness and brand power. So many millions gotta have it because it says Apple. The concrete factors of design, functionality and price get left behind as superior and more economical products may sit unsold on the shelf. This kind of power is fragile, and can evaporate for no objective reason, as Microsoft can attest to.
Dave: you bring up a very good point: brand. Aside from design and operations, Apple’s an amazing marketing story. But, indeed, brand can be fragile: I am a believer that people do figure out value, so one’s the underlying value proposition lags, the brand eventually fades too. Call this another dynamic dimension to what we talked about here.
Hi Jan,
This just popped in my alerts and I thought I’d come by and say thanks for posting and pulling out some really great questions on the article. Appreciate it!
– james
James: thank you for providing the inspiration! That was a great article. best-Jan
I really appreciated the article and the comments, however I’d like to point out that the concept of branding is not separate from the design or even the business model. When people think of Apple, in fact they bring to mind the brand’s design, performance, etc., which then translates into trendy, cool, approachable, etc. If those concrete dimensions get dismissed, then the brand can’t help but lose its value.
Nicole: thank you. Fully agreed that the brand and the actual products must be, and remain, aligned to be sustained.
Hello Jan – it’s been a long time…
While I agree with Nicole that branding and associated perceptions and trends are important, I’ll add what I think is perhaps the most critical element of Apple’s long term competitive advantage. Though their product design is excellent, an owner of an Apple product quickly buys into much more than that product. With it comes much more. Any accessory can be viewed and purchased at a beautiful store with intelligent, helpful employees. The App Store and its endless applications – which may have been surpassed by Google’s in shear size (or maybe it was volume) – offers unparalleled quality and consistency. The sphere of Apple products are cohesive and interoperable. With its tight control of the entire Apple experience, they have created a compelling proposition that is much bigger than a single product and its design, cost or specifications. With that come high switching costs for the customer. As an owner of iMacs, iPhones, iPods, Apple TV, apple router and AirPlay-enabled AV receiver and printer, do I really want the life changes associated with moving to a different brand?
Though some people may cringe at the “Orwellian” level of control it takes to deliver this experience, for many the benefits in ease of use, consistency and interoperability are compelling. In the end these high switching costs and Apple’s ability to continue to grow a comprehensive and uniquely connected experience may be its biggest lever to maintaining its leadership.
Vance
Hi Vance: good to hear from you! Indeed, it has been a long time…
You are right on about the power of customer retention (and hence defending the competitive strategic position) by creating a consistent universe of products and services. I am facing those decisions myself: love my iPhone and iPad and I am considering a new computer: should I switch to Apple? It has pros and cons (I do like freedom and flexibility
Dave B is right, except for one thing. Brand is everything for Apple. They killed it with the iPod, iTunes, and the Macbook then leveraged those into retail, line extension, and brand experience success stories. People forget the importance of iTunes, and of their retail strategy, in building out their brand experience. In 2013, their products aren’t superior or more value-packed than everything else out there (in fact usability studies prove that all other factors being equal, today’s Apple products are no easier or more intuitive to novices than the competition), but these other factors have built a total brand experience that is a competitive advantage no other company comes close to.