Apple's Innovative Evolution

AppleInnovation1In 1997, Harvard Business School professor Clayton Christensen wrote a book entitled The Innovator's Dilemma in which he described a phenomenon where new technologies have a tendency to be quite disruptive in the market. Market leaders are focused on meeting the needs of their existing customers through incremental improvements in existing technologies, leaving the door open for new market entrants to leverage disruptive technologies. The disruptive technologies might initially only be attractive to a small, niche, or low-end sections of the market, but once they begin to mature and gain traction in the market, they can overtake the existing technologies with the previous market leader unable to do anything about it. 

Disruptive technology moves from the low-end to the high-end of the market over time.

Steel mills and hard drive manufacturers

For example, in the steel industry, when the mini-mill technology was developed in the 1960's, the mini-mills did not threaten the larger, established and well-integrated mills. The mini-mills used scrap steel, which was often recycled from old equipment or automobiles, and at first, the quality of the steel produced was only acceptable for the low-end of the market for products like rebar. Unlike the blast furnaces used by the established mills, the mini-mills used an electric-arc furnace which could be easily started and stopped. As a result, the mini-mills were able to scale up production when demand was high, and they could lower production when demand was lower.

This allowed the mini-mills to align their supply more closely to the market's demand and achieve higher levels of profitability than the integrated mills. The integrated mills were more than happy to give up the low-end of the market to the mini-mills, but the capture of that market share gave the mini-mills the momentum they needed to allow their technology to continue to evolve and mature so that the quality of the steel produced could move up the value chain from rebar into other bars and rods. The market share that they captured fueled their growth and the maturation of mini-mill technology; by the 1980s the mini-mills could produce structural and sheet steel that was of comparable quality to the integrated mills but at lower costs. This allowed up-start mini-mill steel companies like NuCor, now one of the largest steel companies in the world, to take the market share from the previously dominant integrated mill steel producers like US Steel and the now-defunct Bethlehem Steel. 

Another example is the history of disk drive industry. The 14-inch disks gave way to the 8-inch disks, which also gave way to the 5.25-inch and ultimately 3.5-inch disks. During each phase of the disk drive industry's evolution, the established market leaders focused on incremental improvements that were demanded by the high-end of the market, while smaller disruptive innovators targeted the low-end of the market and eventually leveraged their market share to move upstream.

Apple's disruptive innovations

In this context, it's quite striking how Apple has leveraged the phenomenon of disruptive technologies to successfully move up the value chain multiple times in multiple industries. While they competed solely in the personal computer space, Apple Computer was unable to break out from being viewed as a niche player. While the Mac had a religious following, it was unable to grow much beyond 5% market share. 

Instead of targeting IBM or Microsoft directly, Apple Computer chose rather to compete with Sony. In the 1980s, Sony had created the personal music player industry with the Walkman and held a majority of the market share. Even as the industry transitioned from cassette tapes to compact discs in the 1990s, Sony was able to maintain their market-leading position. As digital music, or MP3 players began to enter the personal music player industry in the late 1990s, Sony was focused on incremental improvements to their existing technologies as opposed to embracing the new disruptive technology of digital music.

Evolution of the iPodSteve Jobs saw the opportunity in digital music players, but observed that the products on the market were clunky, held only a few dozen songs, and the user interfaces were "unbelievably awful." That was the opening that Apple needed, and in October of 2001 they launched the iPod, a device that put "1,000 songs in your pocket." The product was designed to have a very simple user experience and to have enough capacity to carry your entire music library. The iPod achieved incredible success, and by 2004 had achieved the majority market share in not just the digital music player space, but the personal music player industry as well.

The evolution of the iPod: 2001-2010

To support the momentum of the iPod as well as to provide a more unified user experience, Apple launched the iTunes Store in the spring of 2003. Within several years, the iTunes Store had grown to be the largest music vendor in the United States, accounting for more than 70 percent of digital music sales worldwide. 

In January 2007, the iPod was dominating the market with over 70% market share. This represented a turning point for the company, as Apple Computer dropped the word "Computer" from their name to signify that computers were no longer the focus of the organization. At the same time, they also announced both the Apple TV and the iPhone, which was essentially an iPod with a built-in phone. The iPhone launched in June of 2007 and shortly thereafter in September of 2007, they launched the iPod touch, which was also powered by iPhone OS but didn't have cellular telephone capabilities.

The iPhone SDK and the App Store launched in July of 2008, and sparked what many have come to call the "App Revolution," as developers raced to create apps for the popular devices. The App Store created an ecosystem that for the first time simplified software sales and distribution to a point that it was accessible to the average consumer. With the current momentum and growth, the App Store will reach 500,000 apps by mid-2011.

When the iPad was launched in April of 2010, it targeted a usage scenario that was somewhere between a mobile phone and a laptop. For many users, the iPad did not replace either the smartphone or the laptop, but it displaced many of the uses of both of them. By the end of 2010, Apple had sold over 10 million units, capturing 95 percent of the tablet market, and if the iPad were considered a mobile PC, it captured 10 percent of that market as well—all in less than a year.

Shortly after the launch of the iPad, Apple renamed iPhone OS to be simply iOS, signaling that the future of the platform was less about any specific device and more about supporting an entire spectrum of devices. 

Evolution of the iPod Part 3Even though Apple struggled to gain significant market share in the high-end personal computer, they were able to leverage disruptive innovation to completely take over the lower-end personal music player market with the iPod. From there, they were able to leverage that foothold to gain significant market share in the mobile phone market with the iPhone. Now with the iPad, Apple has basically created a new market that is eroding the strength of the leaders in the higher-end personal computer market.

Apple is gathering momentum in its move up the value chain from the iPod to the iPhone to the iPad. Can they leverage this to market share for the Mac? What does the future hold?

In their continued march up the value chain, Apple launched the Mac App Store in January of 2011. This brought the extremely simple user experience of the iPhone/iPad App Store to a desktop and laptop computing platform. Will Apple be able to leverage their developer ecosystem and momentum in apps for the iPhone and iPad to move up into the higher-end laptop and desktop market?

It will be very interesting to see if Apple is not only able to hold its leadership position in personal music players, mobile phones, and tablet computers, but to continue to work its way up the value chain and gain significant market share in the laptop and desktop personal computer space. What does Apple have planned next? Will they bring the simplified iOS to a laptop form-factor like the MacBook Air? Will the app revolution invade the living room with an iOS-based Apple TV? Since only Steve Jobs knows, we will all just have to wait and see.

How Apple is facing the "innovator's dilemma"

March-April 2011
iOS Devices
TOC Weight: