Milestone Group Quarterly: April 2006
Articles
Lessons of The Apple Revolution
By David Yoffie
Steve Jobs is the flavor of the month. He is the hero who rescued a dying company from the ashes and created one of the best franchises in the high tech world today. But what are the real lessons managers should glean from the Apple revolution? What can the Apple experience tell us about other companies that look to rejuvenate themselves after a decade in purgatory?
First, it is critical to remember that while Jobs saved the company, he has not yet saved the Macintosh. Mired at 2.5 to 3 percent market share, and shrinking as a percentage of overall Apple sales, the Mac remains a troubled franchise in an otherwise happy world. Despite a great operating system that dominates the Windows world in terms of elegance, usability, stability, security, etc.; despite a spectacular hardware design that puts Dell, Hewlett-Packard, and others to shame; and despite a growth rate that is the envy of the industry, the Macintosh remains the ultimate niche product.
The lesson of the Macintosh is that Apple has clung to being the last vertical player in a horizontal world. Today, economies of scale at the component layer have driven the computer industry to a horizontal structure. In the future, a similar horizontal structure will emerge in other areas of electronics, such as cell phones and consumer electronics. While Dell, HP, Lenovo and others migrated to a horizontal structure in PCs a decade ago, Apple has remained the last vestige of the old world. With the move to industry standard Intel architecture and other industry standard interfaces, Jobs is getting closer. But until he fully embraces the necessity of a horizontal solution, it will not be enough for Apple to break out of its niche.
The second lesson of Apple is that despite being relegated to a niche, Jobs did most everything else right. If your core business is in trouble, the first priority has to be save the core – the source of your cash flow, brand, and underlying capabilities. Not enough attention has been paid to Jobs’ getting the ABCs of business right: massive streamlining of the organization, outsourcing, consolidating the number of product lines from 15 to 3, reinvigorating the brand to justify the premium prices, and leveraging its core competence in industrial design. Without these moves, Apple would have been gone before the iPod saved the day.
The third lesson of Apple relates to the timing of strategic moves. In the 1980s and 1990s, Apple was always one strategic step behind. It missed the opportunity to proliferate its operating system in the 1980s and again in the early 1990s; it missed the opportunity to conquer new markets, such as China, when they were greenfield opportunities; and it missed the chance to be a dominant player in peripherals, such as printers, where it held early leads. In each case, Apple moved too late, and missed the window.
With the iPod and the move to Intel architecture, Jobs hit the strategic windows just right. First, two years ago, I thought that Apple was highly vulnerable with its high priced MP3 players (the lowest priced iPod was $250). Just when I thought that Jobs was about to repeat the mistakes of the past, by maintaining high price products and missing the mass market, Jobs delivered the mini, the Shuffle, and then the Nano in rapid succession to cover all price points.
Second, Apple’s shift to Intel has been a risky move: although the new CPUs are critical to allow Apple compete in the high performance and smaller form arenas, it could cause customers to delay purchases until new software is available, slowing down an already vulnerable Macintosh business. But here again, Jobs’ timing was exquisite: by making the shift now, when the iPod business was surging, he could manage the transition. It may be a tough year, but two years earlier, the whole company might have been at risk; two years later, the Macintosh business might have been irrelevant.
Fourth, the most important exception to horizontal strategies winning the day is when companies can create razor and blade models – one of the most powerful business models in any industry. Whether we are talking about Gillette razors (and blades), HP printers (and ink), or Sony Playstations (and games), when razors and blades work, they tend to have long product cycles, with sustainable profits. Razor and blades generally work best when firms give away durable goods (razors or game machines) and sell tightly integrated disposables (razors or games) at premium prices.
Jobs’ brilliance was in reversing the model: give away the disposable (offer music at cost) and sell the durable good (iPods) at premium prices. In effect, Jobs discovered the blade and razor model. The power of the iPod today is that most iPod consumers, which represent roughly 70% of the market, are locked in for the long haul. New, and possibly better products may come to market, but it could be years before the majority of iPod users will be at risk. And in high technology, years are an eternity.
There is a lot to learn from Apple and its revolution. First, don’t be fooled: just having a better product is not a recipe for long-term success. You can have a better product, just like Apple, but if you fail to anticipate and exploit the horizontalization of your part of the electronics industry, you, too, will be relegated to a niche. Second, when the core is worth saving, save the core. Too many companies leap to the future without preserving assets that are essential to long-run prosperity. Third, timing is everything: miss the window, and the technology world is not forgiving. And fourth, blades and razors may be the new business model for next generation of digitally converged products.
Professor David B. Yoffie is the Max and Doris Starr Professor of International Business Administration at Harvard Business School. A member of the HBS faculty since 1981, Professor Yoffie served as chairman of the HBS Strategy Department from 1997-2002 and chairman of the Advanced Management Program from 1999-2002. Professor Yoffie currently chairs Harvard's Young President's Organization program and teaches a popular second year MBA course, Strategy & Technology.
Professor Yoffie's research and consulting have focused on competitive strategy, technology, and international competition. Outside of HBS, Professor Yoffie's activities include being on the Board of Directors of Intel Corporation, Charles Schwab Corporation, and Spotfire Corporation.
Professor Yoffie's writings on business strategy and technology have been widely published. Professor Yoffie is the author or editor of eight books. His latest book, co-authored with Mary Kwak, is Judo Strategy (Harvard Business School Press, 2001). His other recent books include Competing in the Age of Digital Convergence (Harvard Business School Press, 1997), and Competing on Internet Time: Lessons from Netscape and Its Battle with Microsoft (Free Press, 1998, co-authored with MIT Professor Michael Cusumano). Professor Yoffie has written extensively for the New York Times, the Wall Street Journal, and the Harvard Business Review. |
