THE BLOG
26/08/2011 05:45 BST | Updated 25/10/2011 06:12 BST

Apple's Competitive Advantage

Apple recently reported record third quarter results with revenue up 82 percent and profits up 125 percent. By the end of this fiscal year, Apple will likely pass the $100 billion mark in sales, and will become larger than IBM.

Apple recently reported record third quarter results with revenue up 82 percent and profits up 125 percent. By the end of this fiscal year, Apple will likely pass the $100 billion mark in sales, and will become larger than IBM, something simply unthinkable just a few years ago.

Pretty remarkable!

Still, Apple's story is unique. Many have tried to explain what makes Apple innovative -- Simon Sinek offers great insights in a TED Talk on how Apple leads, thinks and communicates differently. However, I find that too many times the debate around Apple gets reduced to a debate around the presence of Steve Jobs at the helm. It seems like a company of this size and success relies only on the genius and inspiration of one person. I believe this thinking is greatly unfair and might lead observers to overlook the many competitive advantages that Apple has built over the years -- qualities that are intertwined with its way of working, its operational set up, and ultimately its DNA.

I had the opportunity to observe Apple's behaviour and choices from a privileged point of view, as CEO of a large Consumer Electronics company. I also had context to compare it with the prevailing industry policies and behaviours. From this perspective, I have thoughts on the reasons why Apple has an almost unbeatable competitive advantage that is intertwined with its organisational choices and management style and embedded in its practices. As such, it will only require solid management skills and not "genius" to consolidate and grow the company for years to come.

1) Apple says "no" much more than "yes." Whilst the mantra of Consumer Electronics (CE) companies is "expanding into new categories" and generating large volumes by multiplying the product offering, Apple has a remarkably slim product line. The company has the courage to say 'no' to a range of appealing volume opportunities if it cannot make a difference in a given category and/or create a seamless consumer experience. Even in the lean years, the company had the courage to stick to this principle, resisting many temptations to move into territories that would have ensured easy increases in volume at the expense of brand equity and operational flexibility. Ultimately, this approach has led to large volumes and huge profits.

2) Apple is organised differently from all other competitors. All Consumer Electronics companies are organised in Business Units, which tend to be fully integrated with their own R&D and P&L. The result? Essentially the Business Units are in competition with each other. Additionally, this silo-focused approach often perpetuates a cumbersome consumer experience where products of the same brand do not "talk" easily to each other, technologies are overlapping or just different for similar purposes, feature different plugs and wires and subject consumers to a lot of useless complexity. This carries a high risk of weakening the brand equity and lowering the loyalty to any company. In contrast, Apple is organised as one company and manages products, not categories. Apple has one R&D base that is common across most products, and looks at one P&L, despite its huge turnover. As a result, products are fully compatible with one another, accessories can be used on multiple products and in short, consumers enjoy a great brand experience. This approach breeds incredible trust among consumers - so much so that they are running to buy newly launched products even before they are reviewed. Of course this can only happen if you use tremendous restraint in adding new products and categories to your offering. Ultimately, the habit of saying "no" more than "yes" is critical to succeed here (see point 1).

3) Apple has an approach to product launches that is more similar to Fast Moving Consumer Goods companies than to the world of Consumer Electronics. Most Consumer Electronics companies have separate P&Ls for different categories, so each product's advertising is a percentage of its sales, generally rather low since CE is a low margin industry. A product is launched, and only if it quickly generates a large amount of sales, is it going to have a continued and substantial advertising support. If the product doesn't immediately take off, there is a fair chance that its advertising support will quickly be reduced and/or disappear. Also, CE companies typically have a very short focus on a given product. They work on a very short product replacement cycle, and keep launching new products every six months or a year. These products, with a few exceptions, are identified with a serial number, not a name, and so every six months CE companies have to rebuild almost from scratch consumers' awareness and interest around new products. Now consider Apple's approach. They launch product families that stay for a long period of time (iPhone, iPod, iPad, etc). They price them at the right price to generate competitive advertising support and solid profitability, and they build long-term launch plans, like a Procter and Gamble would do. They are willing to be patient and give time to a new concept to establish itself in consumer minds, and if it takes 2 years, so be it. Their products have a serial number too, but only on a small corner of their packaging, and instead are identified and communicated as an iPhone 2, 3 or 4, not as a 9134plfft...

4) Apple is relatively uninterested in competition. Obviously Apple wants to succeed in the marketplace and beat competition, but the company's idea of victory is linked to consumer response, much more than to the impact and respect that they generate among their competitors. A good example is their approach to industry fairs. All CE companies rush to show new concepts at the various CE fairs in Las Vegas or Berlin, and take great pride in "being first" rather than "being right." A CE company will be fundamentally happy with showing a new concept to competitors six - nine months before it is going to be available in stores, thus giving an incredible advantage to competitors to catch up and neutralize their impact in the marketplace. Apple doesn't go to industry fairs, instead it organizes Apple events right before or even after them, but during these events shows new concepts that are going to be available to the public basically "immediately."

5) Apple values the whole consumer experience more than the actual technical performance. Many of Apple's competitors take pride in creating products that feature a superior technical performance. In other words, they value what's inside more than what is outside. The basic assumption is that consumers have an obligation to understand and appreciate great technology and shouldn't be bothered by some lack of quality in the construction of products, bad design or cumbersome user interfaces. Basically CE companies are run by the mindset of engineers who look down to consumers and believe that it is their fault if they don't understand the amazing technology that they sell. Apple instead puts a huge premium on the whole consumer experience, starting with the quality of the build, the quality and sensory appeal of materials, and the excitement and ease of use of the user interfaces. Apple products are often described as "sexy," and its users talk more about this sexiness than they talk about pure technology features. In essence, Apple has mastered the art of keeping the relationship of consumers with technology easy and exciting, while still maintaining a firm grip on the "engine's" performance.

6) Apple has a healthy, rather distant relationship with retailers. Most CE retailers don't really like Apple, the same way most FMCG retailers don't like companies with strong brand equity, because they tend to resist the continued "blackmailing" around shelf presence and margins. CE companies are caught in the vicious circle of too many product introductions, products with low differentiation that rely on price positioning to succeed, short life-cycles and weak product equities that require a powerful support by trade. As a result, they tend to indiscriminately accept the growing requests of trade, with an obvious impact on margins and commercial flexibility. Also here, the strength of a "no" is used continuously by Apple and as such, dictates how products have to be priced and positioned in store. To top it off, Apple has had the courage to launch its own large scale retailing effort.

7) Apple value people and rewards them handsomely for their contribution. Managers at Apple have always been rewarded with big paychecks for their individual contributions. This approach follows logic that is much more emblematic of a Silicon Valley start up than that of the large traditional CE conglomerate. This allows Apple to recruit and retain the best talents in the world, make them feel at ease with a strong leadership, and maintain an entrepreneurial spirit throughout the organisation. Most CE competitors are Asian conglomerates which are organised around traditional reporting lines and reward systems. They are not able to attract real unique talent and also struggle to maintain the entrepreneurial spirit that guarantees extraordinary efforts and results.

For decades, large CE organisations have operated in the same way. They are tightly bound to industry practices at trade level and are surrounded by competitors who all behave in a similar way. As a result, change is slow to come and hard to accomplish. By the same token, Apple has now applied its own different approach for decades and it will be very difficult for them too to revert to more traditional industry practices.

This alone should be a guarantee of success for many years into the future.