Over the past few weeks, I’ve talked about the dangers of disruptive innovation. I’ve presented Christensen’s initial theory, then explored other factors that can contribute to disruption, and last week illustrated how dangerous disruption can be to industries and companies and YOU.
It certainly seems like an unstoppable juggernaught if your industry is “disrupted”.
So let’s go back to the first example of a disrupted industry – mobile phones- to see if all is lost.
The mobile phone industry was certainly disrupted. Nokia is no more, Blackberry is no more, Samsung is barely breaking even, Xiaomi is under pressure. All appears to be doom and gloom in the mobile phone industry.
Except for Apple!
Who has managed to avoid all the challenges, Apple and its ubiquitous and expensive iPhone.
Disruption Theory’s originator, Clayton Christensen has twice hailed the demise of Apple’s foray into mobile, in 2007, when he said that the iPhone would not succeed. And in 2012, when he predicted that Apple’s iOS integrated iPhones and iPads would succumb to Samsung’s and Google’s open and modular approach. But even he got it wrong.
Let’s recap on Apples mobile phone success over the years
Apple is the light grey portion of the above graph of mobile phone shipments, still going strong through 2015 despite all the disruptions. Apple has continued to be a major player in mobile despite its extraordinarily high cost and locked-in operating system. But this volume sales chart tells less than half the story as Apple looks like small fish in a big industry, let’s look at profits in this industry.
So what did Christensen get so wrong and what has Apple got so right – that they can claim over 90% share of mobile phone industry profits resisting all “disruption” so far?
I think the challenge to disruption theory here, is two fold, firstly as i mentioned earlier the disruption theory emerged from Christensen’s analysis of primarily business-to-business (B2B) markets. A key characteristic and influencing bias in his initial work is basing a theory on a collection of markets where purchase decisions are made rationally and objectively by business managers and purchasing managers working to a constrained budget rather than being made by the general public acting as consumers. B2B decisions typically are based on a pure dollars and cents review of available technical specifications rather than being influenced by actual users experience of using a product and users willingness to pay more for a better experience.
While Consumers do care about dollars and cents too, we also care about a host of other factors — things like ease of use, quality of user experience, brand image and what their friends are using. Marketing departments spend millions to understand the subtle differences that make consumers buy one product and not another. It’s a well-studied field. Most B2B and tech companies, however, know nothing about it. A recent impact of this lack of knowledge of marketing is “BYOD”- bring your own device (to work).
When I first started at work I was really happy to have a IBM computer using Windows, which morphed into a Dell laptop running Windows and a blackberry linked to it for email at home. At the time (2010) there really wasn’t anything else to use at work. Yes you could use an Apple Mac at home, but the operating system didn’t mix well with Microsoft, and, well, it was just a machine for doing work on and was too expensive for most companies to invest in thousands of Macs.
The break out for Apple was when it migrated it Operating system into a host of portable devices… iPods, iPhones, iPads… more and more people fell in love with Apples OS, and some ended up buying Macs. But it was the ubiquity of the iPhone that brought BYOD… executives now had reason to purchase one and desired to use it, and the accompanying iPad to do work on. Plus outmoded Blackberries and cheap and cheerful Dells, and Lenovos and Acers using an increasingly aged and creaking windows environment became too troublesome for tech savvy millennials to use. They found their Apple environments had a much better user experience and plus now had all the necessary business software. Companies became faced with having to accommodate these changes and even supply company iPhones to executives with the demise of Blackberry. So why not accomodate Apple throughout the workplace
Apple figured out – through a lengthly relationship with its computer consumers – how to understand needs and wants in terms of creating a fantastic user experience on computers and to bake this experience into their new mobile products. Other B2B focused tech companies, run typically by feature and cost focused engineers, who engaged in B2B discussions with purchasing managers and IT engineers just thought that consumers, like businesses, would look purely at technical specifications (speed, battery life, screen size etc) and pricing, and make good well supported logical decisions.
Well, consumers don’t all buy that way…
The second element of Apple’s success in repelling disruption is in terms of their strategy selection and implementation. I’ve posted previously about strategy, and a simple means of understanding this is covered by Porter’s work on strategic advantage…
Apple clearly understood that its strategic advantage was in differentiation. With this strategy they could command a consistently high price through laser-like focus on pleasing their customers through exceptional user experience- the basis of their differentiation.
Samsung got into mobile phones with a cost leader strategy. Their Korean base enabled them to build phones for much less than european competitors, and the features were similar to Nokia and Blackberry.
Samsung became jealous of Apples margins and profits and sought to replicate this. They listened to Apple customers desires. Then mimicked Apple adding features to their phones- the classic first move in Christensen’s disruption theory. Samsung began building more expensive phones. But as the operating system wasn’t theirs to enhance, and was freely available to all, they were only able to tag along with what Android provided them. They did try to improve Android for their phones but this wasn’t a success.
Samsung was then disrupted by Xiaomi because both offered great generic phones with the same generic operating system, except one sold for much less. There was no differentiation in the Samsung offer, compared to Xiaomi, so why pay a premium when there is no differentiation. Apple was able to seamlessly integrate both mobile technology with locked operating system to create a distinctive experience that linked phone, computer, iPad, and watch. Samsung really had a cost leadership position but forgot this as it added features, costs and increased pricing.
In Samsung attempting to mimic Apple and change their strategy from low cost to differentiated, Samsung ended up in the middle. Samsung’s system was insufficiently differentiated to draw in high price Apple consumers and not low priced enough to fend of Xiaomi and other manufacturers. These new entrants were able to use their low cost location or Government support or shareholder funding to undercut Samsung in their super low-cost strategy. The fact that these new manufacturers could offer the latest Android OS environment as Samsung enabled them to easily mimic Samsung’s user experience, leaving customers thinking why should I pay double the price for a Samsung when a Xiaomi has the same experience at half the price?
Insufficiently differentiated and insufficiently cheap, Samsung firmly landed in “stuck in the middle”.
As a profitable organisation with shareholders wanting a return on investments and managers incentivised to produce these, Samsung initially avoided becoming embroiled in a profit destroying price cutting war with Xiaomi. Samsung doubled down on tech innovation, adding more and more features, increasing price to try to win more high value users. This price-war avoidance enabled newer low cost manufacturers the lee way to create a market for themselves, initially with super cheap phones then moving to mimic Samsung’s feature innovation and yet retain super low retail pricing.
My first lesson from Apple’s story is to clearly understand and to commit to your strategy. Whether your strategy is Cost leadership vs Distinctiveness vs Focus … those companies which have been disrupted, i believe have lost sight of their fundamental strategy and resulting successful business model in the search for growth. The disrupted looked at either their differentiated competition or cost leader competition and saw customers they would like to have to grow in size. They listened to other people’s customers who seduced them to leave their strategy and to fall into the middle ground.
My second lesson is to seek to influence external factors leading to disruption- legacy issues, or Government issues, or shareholder issues, or bad management. Otherwise your competition will use these weaknesses to destroy you.
With this type of volatile and uncertain and complex and ambiguous business environment, how you can possibly succeed? Next week I’ll address this.