Wednesday, April 13, 2011

"Apple: Pioneers or Predators?"

In 1978 Apple introduced the Apple II which was the first successful home computer to enter the market. Although competitors had introduced home computers into the market prior to 1978, none offered the same ease of use as the Apple II. Sound familiar? This is the same strategy Apple used when introducing the iPod. Prior to the introduction of the iPod, Mp3 manufacturers had failed to capture substantial market share or profitability from the burgeoning digital market. In fact, the digital content market was in full operation as early as 1999 when Napster allowed "peer to peer" file sharing. The creation of Napster signaled the decline of compact discs as well as other forms of hard copy content. By creating this new digital revolution, Napster essentially created its own "Blue Ocean" as described in HBR's Blue Ocean Strategy. The article described the criteria for Blue Ocean Strategy as follows:

1. Create uncontested market space
2. Make the competition irrelevant
3. Create and capture new demand
4. Break the value/cost trade-off
5. Align the whole system of a company's activities in pursuit of differentiation and low cost

Napster managed to accomplish all but one of these criteria; they were not able to capture the new demand for digital content. Mp3 manufacturers were also unable to capture this new Blue Ocean that Napster had created. The public's demand for free digital content was ravenous but no company was able to effectively capture this market by offering the hardware to use this digital content or act as a legal vendor for the digital content. Again, Apple was not the first to enter this new market but allowed other companies to be first movers. By studying what these companies did right and what they did wrong, Apple was able to create the iPod, iTunes, and iTunes store as a way to fully integrate the hardware (iPod), software (iTunes) and distribution (iTunes store) necessary to capture this market. Through this means Apple created a product that allowed customers ease of use in purchase, management, and use of the digital content market first created by Napster.

As the "Blue Ocean Strategy" article stated, Apple has been branded by its capture of this Blue Ocean market and has employed similar strategies with its iPhone. Apple only spends 3% of its Operating Expenses on R&D, which is astounding considering that Apple is known as one of the world's foremost technological leaders. R&D is not necessary for Apple because it allows others to invest heavily into new markets and waits to build upon the innovations of others.

Question: For companies which provide consumer products, is it ever best to be a first mover or is Apple's strategy of building upon the innovations and mistakes of others the most efficient means to market share and profitability?

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