Understanding Apple's positioning: Part 4 - differentiation enhances competitive advantage and builds the case against licensing Mac OS X

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Jun
07

By: switchtoamac at: 11:55 AM on June 7, 2009 | Comments (1)

This is the fourth part in the series that analyzes the Apple product strategy with a specific emphasis on the Macintosh.  You can view part one, part two, and part three by clicking on the associated links.  In this post I argue that Apple's differentiation approach enhances the company's competitive advantage in the market and that Apple will not license Mac OS X.
It favors Apple to continue down a path that not only maintains premium positioning but also enhances it.  Apple is clearly doing this at the research and development (R&D) level.  The introduction of a new portable manufacturing process (the unibody MacBook and MacBook Pro) and a relatively fast-paced operating system release cycle are clearly a function of Apple's ever-evolving differentiated positioning.  The upcoming Mac OS X Snow Leopard (successor to Mac OS X Leopard) and iPhone OS 3.0 will continue to push the envelope and set the groundwork for continued innovation in the years to come.  Apple has never shied away from starting over.  It did this with the transition to Mac OS X, the transition to Intel processors, and the re-design of their portable Macs. Each enhancement widens the differentiation gap that competitors must narrow or copy in order to compete with Apple.   Windows Vista is a prime example.

Apple is preventing the commoditization of their business by integrating hardware and software.  PCs that run Windows or Linux are simply commodities that offer no true differentiation against a competitor's offering.  Apple on the other hand has undertaken an end-to-end integrated approach to both hardware and software design.  The resulting products are differentiated from competitor products in that Apple controls the entire stack that in turn results in a better user experience.  The end result is the ability to price their products at a premium.

An argument for why Apple will not license Mac OS X

Many have either urged Apple to license the Mac OS X operating system or questioned why it has not done so to date.  Those who have adopted either or both of these stances don't understand the strategic pitfall of licensing Mac OS X.  Simply put, licensing would undermine Apple's strategic competitive advantage and eradicate their advantage over rivals.  Besides, why would Apple provide an opening to competitors by lowering the entry barriers they have taken so many years to build and that Apple has so  fiercely protected?  Furthermore, the iPhone OS and Mac OS X are moving down parallel paths with each iteration of the operating systems becoming more and more integrated and interoperable.  Apple will continue to build features in both operating systems that the other can leverage.  Apple licensing Mac OS X to third-party computer manufacturers will not happen in the foreseeable future.

Differentiation - taking it to the next level

It is widely understood that new product development entails significant costs.  These costs are not only sunk but also fixed (once put into production via a product rollout).  At the production side, marginal costs are the primary concern as they have a direct impact on unit contribution margin (price less variable cost).  So what has Apple done with respect to Mac hardware design in an effort to enhance contribution margin?  The revolutionary step was a transition to the unibody aluminum enclosure on the MacBook and MacBook Pro.  When Apple announced the new manufacturing process it called out that prior generation portables used discrete components that each add size, weight, and the opportunity for failure.  Although they didn't mention costs its critically important to realize that discrete components also add significant costs to each notebook.  Apple redesigned the MacBook line to lower unit marginal costs while maintaining price levels.  This was a strategic move because Apple didn't lower the costs of the MacBook models!  The end result is that Apple has ensured itself a means to maintain or expand their margin on each notebook and this has a direct impact on the bottom line.  Apple is known to have higher than industry average margins on their computers and the redesign of the MacBook and MacBook Pro will surely enhance profitability.  If you haven't noticed, Mac portables have outsold Mac desktops for twelve consecutive quarters.

I'd like to highlight a few additional differentiation initiatives that Apple has performed over the past few years:
  • The release of the iLife suite of digital lifestyle applications for Mac OS X - Microsoft and third-party vendors have no answer for iLife.  iLife's integration with the Mac OS X operating system, Mac OS X applications, Mobile Me speaks to Apple's differentiated and integrated approach to hardware and software
  • Integrating an iSight camera into the design of Mac portables and the iMac desktop as well as its ability to seamlessly integrate with Mac OS X and Mac OS X applications
  • The .Mac to Mobile Me transition - the ability to sync across Apple devices, Macs, and even Windows
  • iPhone OS and Mac OS X integration, interoperability, and feature sharing
  • The continued advancements with the iPod line -  the iPod touch, the voice over feature in the iPod shuffle
With WWDC beginning tomorrow, we'll see continued evidence of Apple's differentiation strategy.  We'll see the next iteration of the Mac operating system, when Apple demonstrates an almost feature complete Mac OS X Snow Leopard.  Apple will also demonstrate and announce the latest iPhone and iPhone operating system.

Following WWDC, we'll highlight growth traps and how they can erode a company's competitive advantage.  Stay tuned!

Other Articles in the Series

1 Reader Comments

Thank you for a well presented statement of Apple's marketing. I, too, have resisted the clarion calls for Apple to lower its prices, produce a netbook, sell Mac OSX for PC's, use its billions in the bank to buy Adobe, Dell, etc.

I've shied away from these popular positions for a number of reasons. Apple should do the following, but this is mostly what it is already doing.

1. Don't fix what ain't broke. Don't change the price structure. Apple is still making money when the PC market is flat or down, so why make changes?

2. Don't introduce crippled products. The Netbooks only had the advantage of being cheap, but Apple doesn't engage in the low end markets. It innovates and creates new markets.

Besides damaging Apple's reputation for quality, A Netbook doesn't seem to be where Apple is proceeding. Why go there when there isn't even any money in it?

3. Hang onto the Cash. Don't buy up losing companies. Build your own designs rather than accept inferior software. But, use the recession to hire away great people.

The world economy is very uncertain, It seems likely that a stagnant economy will continue even though high price inflation is coming. Cash is king in uncertain times.

4. Don't sell the family jewels. Don't sell Mac OSX for PC's. Apple should do what it can to discourage clones and Hackintoshes. Perhaps, it can use the 64 bit security in Snow Leopard to freeze out illegitimate hardware.

5. Keep to your path for the future. As I look backwards, I can see how Apple has been incrementally placing bets that moved it toward the present. It took Apple 8 years to get Quicktime developed well enough so it could be useful, impressive and then, vastly superior to the competition. Most of this time, Microsoft laughed at it.

Apple needs to keep pushing the technical envelope, because this is Microsoft's Achilles heel. Microsoft Windows is not a modern, real operating system. It would take Microsoft seven to ten years to get from Windows 7 to a real operating system like Unix. Meanwhile, Apple doesn't have to reinvent the wheel, so it can produce changes, every 12 to 18 months, which Microsoft cannot keep up with. Apple must out innovate Microsoft.

Other bets are being placed now with Snow leopard; This upgrade is more than a bug fix. The 64 bit Operating System will be big, but in ways we don't yet understand. As will be ZFS, OpenCL, Grand Central, introducing the NVEDIA 9400 GPU through out its line up. These are all designed to grow into a computer which runs the Mac OS much faster and better than Windows on the same machine.

It looks as though Apple will be aiming to take a chunk of the gaming market, but it won't copy Wintel's way of doing that. Snow Leopard with 64 bit Applications should be fast. Applications through the Ap store should be cheap. This should turn Microsoft's business plan on its ear.

6. Take advantage of every hardware improvement. Perhaps, the reason that Apple hasn't developed a system using the Atom computer-on-a-chip is that Apple has its own implementation coming.

7. Create an ecosystem for a distributed computer. Prices for computer parts keep falling as processor cores multiply. The computer-on-a-chip will find it way inside every peripheral in a few years. This will change how these parts wireless work together.

The computer will stop being a single box and become six to eight specialized computers which do the same job, but do it better, faster and cheaper. And a whole lot more conveniently. But, it needs an OS which can make it all work together.

8. Take advantage of the fact that embedded Linux devises will take over routine functions such as cash Registers, Displays and front end devises for mainframe computers. Expect that there will be cheap wireless security cameras, temperature and weather gauges, lighting controls and computers placed in household equipment to report to a central location. Apple should excel in being the interface between these devises and the user.

Apple has, for the last ten years, been removing every flaw or inadequacy from its system. Apple is on the fastest hardware. It has the most secure OS. It has the sexy hardware. It has the most efficient supply chain in the market.

Apple has captured the high end of the consumer market when the rest of the computer market is stagnant -- a replacement market.

The last barrier is price, but I don't ever expect Apple to be cheap. Its current ads are fine in pointing out Windows inadequacies. But, Apple needs to sell solutions -- a better lifestyle. Apple needs to point out that better computing is worth paying more for. So, Apple need to get much better than Microsoft.

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