The Big Idea

Securing a competitive spot in a market depends on the intersection of industry dynamics and the organization’s strategy that its people design and execute.

A case in point: From a classic strategy perspective, manufacturing personal computers can look like a bad bet. Overcrowded, highly commoditized, and in the grip of what looks like a slow but inexorable decline, the laptop industry has not been a particularly attractive industry for a long time.

Yet, since introducing the first Macintosh computer in 1984, Apple has endeavored to create a profitable niche in the personal computing industry, evolving and innovating over the past four decades, charging a premium for MacBook Airs and Pros that is much higher than those of their competitors.

As computing continues to evolve and migrate to mobile devices, what future should the iconic Mac play in Apple’s strategy? What does it take to succeed in such a competitive industry, one in which failure is often the result?  

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The Scenario

Looking at the laptop industry’s value chain through the lens of the industry’s competitive dynamics, the prospects are unpromising. For instance, the industry is “easy” to enter from a technological standpoint; Michael Dell started Dell Computer in his dorm room in college.  And for the most part there is little differentiation between laptop manufacturers’ offerings; over time, laptops have become an increasingly commoditized product — highly available and highly interchangeable. For BestBuy, Walmart and Amazon, that’s great news; it’s not so much for Dell or Lenovo. In this commoditized landscape, laptop manufacturers don’t have much bargaining power when it comes to prices because there are literally hundreds of nearly identical options for buyers to choose from. And on the consumer side, there is very little brand loyalty in the laptop industry. The majority of consumers looking to buy a new laptop will make their decisions based on price and specifications — processor speed or the size of the operating system — independent of brand. Finally, Microsoft’s Windows operating system and Intel microprocessors dominate the industry. The so-called “Wintel standard” gives these the system and chip makers huge leverage over PC manufacturers on the supplier side, with virtually zero pricing power left for laptop makers. The difference in margins for Microsoft versus Dell or Lenovo makes this power differential apparent.

Faced with these kinds of unfavorable market dynamics, how did Apple carve out its niche among laptop makers? And what does that mean for other organizations and industries? The answer lies in a capacity to rewrite the playbook.

The Resolution

Historically, Apple had fought back on these unfavorable conditions through a targeted strategy of vertical integration of the value chain. In order to make a laptop, you need a number of things: a processor (the brains of the computer), an operating system (the interface) and the body (to hold the components), among other elements. While competitors such as Dell and Lenovo signed onto the Wintel standard for their critical components, ceding all pricing power to those powerful suppliers, Apple went a different direction. It made a different set of choices at each stage of the value chain.

  1. Software: From its inception, Apple understood that the operating system defined the user experience. Apple had long pursued vertical integration, through which it developed its own proprietary OS, giving the company total independence from the Wintel standard and an immediate, unique competitive advantage in a market that was otherwise in thrall to suppliers like Microsoft and Intel.
  2. Design: Apple invested a huge amount in the design of its products — both in terms of its software and hardware. Steve Jobs was (in)famous for never being satisfied with the design of any Apple product. As such, vast amount of time, talent and money went into building the Mac; Apple ensured that its Mac products would not end up becoming just another commoditized laptop. It’s a decision that has given the company a pricing power unique in the market. While you can walk into a retailer and leave with a PC for $300 or less, it’s impossible to get hold of a Mac for under $1,000.
  3. Channels: The design ethos that Apple applied to the operability, look and feel of its computers extended to the way the company managed the sales of its products. Taking control of the purchasing journey and creating authentic brand experiences have placed Apple in a differentiated position, one that has helped foment powerful customer loyalty; this has made Apple stores the most profitable brick-and-mortar retail outlets on the planet.

However, such a strategy did not unfold without its challenges. Given the ubiquity of the Wintel standard, Apple and its Mac products had long been relegated to niche status, commanding single-digit market share. Apple’s do-it-their-own-way strategy was expensive even when commanding price premiums for their products.

Fortunately, a new opportunity presented itself with the rise of smartphones and mobile computing. Replicating the Mac playbook, Apple entered the market with the iPhone, marrying well-designed hardware with its innovative iOS software. The instant success of the iPhone propelled Apple to incredible new heights, making it one of the most valuable companies in the world. Free of the dominant Wintel standard in laptops, Apple was able to command a much larger market share of the mobile phone market.

The Lesson

Each step of the way in the value chain, Apple did something different. The company made deliberate, strategic decisions that allowed it to escape unfavorable industry dynamics and leave much of the competition competing on price for commoditized products.

Of course, it’s one thing to look at this and understand what Apple did; it’s another to replicate it. Steve Jobs and design chief Jony Ive were immeasurably effective at what they did. And as a company, Apple was prepared to take risks. Designing their own operating system to get out from under Microsoft, for example, was an approach that was not immediately profitable given the Mac’s small market share. The big idea was to change the dynamics of the market by pioneering new segments. The end goal was to reconfigure the game such that the company could acquire the things its competitors didn’t have: control over the supply chain, uniqueness and brand loyalty.

The company’s story is ongoing, of course. It remains to be seen if Apple’s strategy will continue to be viable as the market for mobile computing evolves and Apple continues to contend with competitors like Google’s dominant Android operating system. But for your organization, Apple’s approach to creating a more favorable position in a difficult market should give you food for thought.

If you don’t have to simply accept the market conditions you face, what are the strategic moves you can make to occupy a stronger position? Which rule book do you need to rewrite to change the competitive dynamics in your difficult industry?

The preceding is based on the case Apple Inc.: The Future of the Mac (Darden Business Publishing) by Jared D. Harris, Michael Lenox, Carson Brooks and Rebecca Goldberg.