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How Apple Disrupts Markets and then Goes on to Dominate

2012 January 18
by Greg Satell

Who wouldn’t like to be Apple?  They make great products, consumers love them, competitors fear them and they make a ton of money.

Yet for all that’s been written about Apple, nobody’s been able to emulate them.  What’s more, little more than a decade ago, they were on the ropes.  At one point Michael Dell said he would just shut and give the money back to the investors.
Steve Jobs’ secret wasn’t that he saw what others could not, although he certainly had vision.  What made Apple special was that he had the discipline to not do what others would.  He limited himself to developing one new product at a time and focused his energies on building out existing products and platforms.  That made all the difference.

The Three Horizons Model

A good lens for understanding how Jobs innovated is the three horizons model. This tool is designed to help you manage a portfolio of innovations that will have an impact over three different time frames.

When you innovate using the three horizons model, the first horizon involves implementing innovations that improve your current operations, horizon two innovations are those that extend your current competencies into new, related markets, and horizon three innovations are the ones that will change the nature of your industry.
In general, H1 innovations tend to be incremental, while H3 are more often radical innovations.

You must have innovation efforts aimed at all three time horizons. If you only look at the exciting transformative H3 innovations, you’ll lose business to current competitors who are using incremental innovations to improve their operations. Consequently, you might have the best ideas for the future, but you’re no longer around to execute them.

On the other hand, if you only focus on H1 incremental innovations that make your current business better, you’ll end up being replaced by organisations that are driving disruptive innovations in your field. Using the three horizons framework helps balance innovation efforts between incremental and radical, which is important.

However, maintaining a balanced portfolio does not mean that you put 1/3 of your effort into each horizon. For example, Google uses a 70/20/10 split. About 70% of their innovation time and money goes into making them better at what they currently do, 20% goes to extending into new markets, and 10% aims at developing entirely new markets.

10% Blue Sky Projects

Every new Apple product started the same way.  Jobs would see something sucky and want to change it.  After he returned to Apple and launched the iMac, he looked at digital music players, concluded that they “truly sucked” and decided to do something about it. He envisioned 1000 songs in your pocket.

There was, however, a rub:  the technology did not exist to do it (which is why music players were so sucky in the first place).  His engineers cobbled together a suitable screen and battery, but couldn’t find a disc drive small enough.  A while later, on a routine trip to Japan, one of his engineers came across a 1.8 inch disc drive that Toshiba had under development.

It was just the thing.  Small enough, with a 5GB capacity or just enough to fit 1000 songs. Then came the design, the flywheel and the interface – all things that played to Apple’s strengths.  The rest, and the breakaway success of the iPod, is history.

It was a pattern that was to be repeated time and again:  Look for something sucky. Figure out what wouldn’t be sucky (i.e. 1000 songs in your pocket) and then work on technical specifications.  Of course, he could have launched the iPod sooner with a standard disc drive, but then it wouldn’t have been “1000 songs in your pocket.”

20% Look at the 4 Forces

As his biographer, Walter Isaacson pointed out, Jobs revolutionized 7 industries: personal computing, animated movies, music, tablet computing, digital publishing and retail.  Yet, no one considers Apple a conglomerate.  In fact, most consider it to be a very focused company.  The reason is that its expansions are into adjacent markets.

What’s an adjacent market?  Take a look at Porter’s 5 forces framework:

What makes Apple such a dangerous company is that they are fearless in turning the arrows outward.

They didn’t worry about Post PC computing devices like phones and tablets invading their Macintosh environment, they invaded those spaces instead.  They didn’t worry about music companies giving them lousy deals, they built their own environment.  They didn’t whine about the retail environment their wares were displayed in, they revolutionized the space.

It should be mentioned here that Apple isn’t always successful in this regard.  Their heavy handedness in demanding 30% of subscription revenues from magazine publishers appears to have flopped and their iAds program has suffered from high prices and poor service.  Nevertheless, their hits have greatly outshone their misses.

70% – Focus on Your Business

When Jobs returned to Apple, he didn’t look first at how he could change the world.  That came later.  First, he killed most of the products they were producing so that he could focus on improving operations.  He innovated not with breakthrough new products, but focused on the core desktop market that had fallen flat.

One thing that often gets overlooked is Apple’s incredible track record in operations since Steve Jobs’ return.  They not only dream up the next big thing and come up with breakthrough products in adjacent markets, they are also a low cost producer.  That’s an incredible combination.

And it didn’t just happen, but is an indication of how much focus they put on operations. After all, it was operations maestro Tim Cook who replaced Jobs, not design genius Jony Ive.  That focus on pays off not only in lower prices and higher margins, but also in their ability to improve their products significantly with each generation.

Those improved products increase scale, which improves their negotiation leverage with suppliers, which leaves room to add more features at lower cost and on it goes.

Innovative Discipline

The three horizons model is pretty simple, which begs an even simpler question:  Why doesn’t everybody do it?  The answer is discipline.

Jobs wanted to launch a tablet computer years before he actually did, but chose to do the iPhone first.  He realized that he couldn’t do both.  In other words, he limited the 10% to 10%, even if he wanted to do more.  He never attacked more than one adjacent market at a time and kept the company focused on improving existing products, even though it was the new ones that got the headlines.

Further, he resisted calls to use Apple’s enormous cash hoard to make a major acquisition and kept breakthrough new products under wraps until they were ready to launch.  His focus wasn’t on useless headlines or accolades, but focused on making products that didn’t “suck.”

And that’s the crux of the three horizons model, that business innovation is a business activity.  While we would all like to dream up the next big thing, unless we’re focused on our core market, we won’t be able to support breakthrough innovation.  If we don’t look beyond our direct competitors, we we’ll always be beholden to industry ups and downs.

– Greg Satell and Tim Kastelle
Tim Kastelle is a Lecturer in Innovation Management in the University of Queensland Business School. He blogs about innovation at the Innovation Leadership Network. You can follow him on Twitter @timkastelle.

2 Responses leave one →
  1. January 31, 2012

    Great article. I thought that I knew Apple fairly well, but the article improved my knowledge. Thank you it was a wonderful use of my time reading it. Makes me want to own Apple Stock!!!

  2. January 31, 2012

    Tomorrow’s post will be on Microsoft:-)


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