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Why are companies so crazy about innovation? Why can you make so much money on it? And why Apple still makes a lot of money even though they stopped being innovative?
Let’s move 40 years back to Harvard Business School and classes of legendary professor Michael Porter. (Thread)
Let’s move 40 years back to Harvard Business School and classes of legendary professor Michael Porter. (Thread)
Michael Porter is the guy who coined the “5 forces” strategy framework.
As a strategist, he wanted to decide which industries are better or worse to enter.
Better industry = better margins and growth options. Worse industry = worse margins and growth options.
As a strategist, he wanted to decide which industries are better or worse to enter.
Better industry = better margins and growth options. Worse industry = worse margins and growth options.
As he was working on that, he defined 5 factors that describe a terrible industry:
1) The product is an undifferentiated commodity,
If you sell potatoes to Wal-Mart, your potatoes won't differ too much from other farmers' potatoes.
1) The product is an undifferentiated commodity,
If you sell potatoes to Wal-Mart, your potatoes won't differ too much from other farmers' potatoes.
2) Everyone has the same costs and access to the same technology
On your farm, you may use slightly different fertilizers and employ only high school students. But more or less, your technology and costs are the same as other farmers'.
On your farm, you may use slightly different fertilizers and employ only high school students. But more or less, your technology and costs are the same as other farmers'.
3) Buyers are price-sensitive,
Wal-Mart has small margins, so they negotiate hard with their suppliers. Which means they take the margin from your pocket and put it in their pocket.
Wal-Mart has small margins, so they negotiate hard with their suppliers. Which means they take the margin from your pocket and put it in their pocket.
4) Buyers are knowledgeable.
Wal-Mart has been doing this business for decades, and they know thousands of farmers.
They know how much you can make and how much they can press you. They know the prices on the market, small differences between potatoes, etc.
Wal-Mart has been doing this business for decades, and they know thousands of farmers.
They know how much you can make and how much they can press you. They know the prices on the market, small differences between potatoes, etc.
5) Buyers are willing to switch suppliers at a moment’s notice to get a better deal.
Wal-Mart doesn’t care if they get potatoes from you or another farmer. The product, delivery, service are mostly the same among your industry. So they can switch suppliers whenever they want.
Wal-Mart doesn’t care if they get potatoes from you or another farmer. The product, delivery, service are mostly the same among your industry. So they can switch suppliers whenever they want.
So when you look at the innovation, you can see that it is the exact opposite.
1) The product is differentiated and is not a commodity.
The 1st iPhone had its competitors but was definitely something new. As the 1st "smartphone," it was differentiated from other "dumb phones."
1) The product is differentiated and is not a commodity.
The 1st iPhone had its competitors but was definitely something new. As the 1st "smartphone," it was differentiated from other "dumb phones."
2) Everyone has different costs and access to different technology
No other Apple competitors used gorilla glass, touchscreen, and apps at the time. No one had such efficient, high-quality, and low-cost factories in China.
No other Apple competitors used gorilla glass, touchscreen, and apps at the time. No one had such efficient, high-quality, and low-cost factories in China.
3) Buyers are not price sensitive.
People could pay 3x to get the coolest gadget.
People could pay 3x to get the coolest gadget.
4) Buyers are not knowledgeable, and it’s hard to compare different products.
Most iPhone buyers (and it’s still true) didn’t compare their phones to other companies' phones. That’s Steve Jobs’s genius to make them incomparable due to their iOS. (We'll get back to it later)
Most iPhone buyers (and it’s still true) didn’t compare their phones to other companies' phones. That’s Steve Jobs’s genius to make them incomparable due to their iOS. (We'll get back to it later)
5) Buyers are unwilling to switch suppliers at a moment’s notice to get a better deal.
It’s not that people wanted to switch iPhone to Nokia or SAMSUNG at the time. They had a new cool gadget, learned a new way of using the phone, and liked their experience.
It’s not that people wanted to switch iPhone to Nokia or SAMSUNG at the time. They had a new cool gadget, learned a new way of using the phone, and liked their experience.
So what’s the conclusion?
If you want to work on a new project, see how many points (1-5) of "better industry" it has.
And although it's easier to get them when you innovate, there's a plot twist. You may not be innovative and still nail most of them. Just like Apple did.
If you want to work on a new project, see how many points (1-5) of "better industry" it has.
And although it's easier to get them when you innovate, there's a plot twist. You may not be innovative and still nail most of them. Just like Apple did.
Apple earns over 100B$ in iPhone sales not because it’s the most innovative phone on the planet.
How it's possible? Because they have nailed 4 out of the 5 factors mentioned before.
How it's possible? Because they have nailed 4 out of the 5 factors mentioned before.
1) The product is differentiated and is not a commodity at all.
NAILED.
iPhone is different than other phones. There are 'smartphones' and 'iPhones'. At least in the minds of their customers, but it's all you need.
NAILED.
iPhone is different than other phones. There are 'smartphones' and 'iPhones'. At least in the minds of their customers, but it's all you need.
2) Everyone has different costs and access to different technology.
NOT NAILED.
SAMSUNG or Huawei may even have better technology and a better cost structure than Apple. But it doesn't matter that much because there are other factors at play.
NOT NAILED.
SAMSUNG or Huawei may even have better technology and a better cost structure than Apple. But it doesn't matter that much because there are other factors at play.
3) Buyers are not price sensitive.
NAILED.
There are many jokes about overpriced iPhones. And just look at the numbers - flagship model's cost has risen from $600 in 2007 to $1,449 today.
People buy iPhones for prestige, not technology. So people don't care about the costs.
NAILED.
There are many jokes about overpriced iPhones. And just look at the numbers - flagship model's cost has risen from $600 in 2007 to $1,449 today.
People buy iPhones for prestige, not technology. So people don't care about the costs.
4) Buyers are not knowledgeable, and it’s hard to compare different products.
NAILED.
As we said - you cannot easily compare the iPhone to other phones because of its different Operating System. That was Steve Jobs' strategic genius.
NAILED.
As we said - you cannot easily compare the iPhone to other phones because of its different Operating System. That was Steve Jobs' strategic genius.
5) Buyers are unwilling to switch suppliers at a moment’s notice to get a better deal.
NAILED.
People won’t change their iPhones to SAMSUNG’s because they're in the Apple ecosystem. Switching costs are big - in terms of time and energy. Another master move from Steve Jobs.
NAILED.
People won’t change their iPhones to SAMSUNG’s because they're in the Apple ecosystem. Switching costs are big - in terms of time and energy. Another master move from Steve Jobs.
So what's the final conclusion?
It's essential to think about these 5 factors BEFORE you start working on your product.
And defend your decisions. You might get a lot of pressure, just like Steve Jobs when they wanted him to open the Apple ecosystem.
Good luck!
It's essential to think about these 5 factors BEFORE you start working on your product.
And defend your decisions. You might get a lot of pressure, just like Steve Jobs when they wanted him to open the Apple ecosystem.
Good luck!
