Why Apple Has a Strong Competitive Advantage

by Ben Bajarin   |   June 2nd, 2011

One of the primary things about being an effective technology industry analyst is that I have to clearly communicate our perspectives about the technology industry as a whole to my firms clients. This requires more than just the regurgitation of information as we gather it in the field. It requires explaining more fundamental elements of what is happening and why. It is because of this that we seem to get one question common to many of the companies that we speak with and provide services to. That question is: “Why is Apple doing so well and what can we do to compete?”

Particularly of interest to many is why Apple appears to be recession-proof while many others in the hardware business had a rough 18 months or so. There are more reasons then I have time to go into in this article as to why Apple appears to be unstoppable, so I will highlight just a few. I am a big picture strategic thinker by nature and I love thinking about and strategizing around competitive advantage and differentiation. That is why I love analyzing Apple, because they play the strategic game extremely well, particularly when it comes to developing strategies to defend their competitive advantage. There are three key areas that stick out to me as particularly defensible for Apple.

Apple’s Hardware + Software
Now this may be obvious to some, but it is incredibly significant for Apple. While the rest of the PC industry is struggling with differentiation, Apple has had it since day one. Now many may disagree with me, however I think that Apple is more of a software company than a hardware company. Of course Apple makes extremely good hardware, but that is simply because they believe they are the only ones who can make hardware worthy to run their software. Steve Jobs has been found quoting Alan Kay of Xerox Parc when he says “People who are serious about great software need to also be serious about great hardware.” This is why at its core Apple is a software company that makes specific hardware decisions in order to maximize the value of their software.

Not only do they make a great OS which sets them apart by itself, but Apple also creates extremely good “core” software ~ namely iLife. I recall a Macworld I was at several years ago when Steve Jobs said from the stage that “What Microsoft Office did for productivity, the iLife suite will do for entertainment and creativity.” Apple’s iLife software is better than most if not all the third party software for creating movies, music, DVDs and more; and the kicker is that the latest version ships with every new Mac.

This is an extremely defensible position since the vast majority of electronics companies are either hardware or software companies, not both like Apple. Any hardware company looking to do more software and vice-versa is no easy task if possible at all.

And there is one piece of software that requires an explanation all its own…

iTunes & Digital Asset Management
iTunes is one of the most strategic elements of the Apple pie. Apple, I believe, has fundamentally understood that it is not the one who owns the content who wins in the future, but he who holds the keys to the content. Which is why Apple has become not just a software company, but also a digital asset management company. Apple announced at their event on September 9th 2009 that they have the credit card account information of more then 100 million consumers through iTunes. Making them one of the biggest digital retailers, if not retailers in general, in the world. Good consumer psychology would tell us that once a consumer trusts a brand enough to set up an account and give credit card information on the assumption of future purchases (you have to give a credit card to even set up an iTunes account), the consumer will consider that retail outlet first in making purchases. Does that mean Apple will sell clothes some day? Doubtful, but it does mean that as they continually enhance the devices that consumers own, those consumer will continue to shop in Apple’s store. Amazon has had much the same success with this very thing, although Amazon’s success has mostly come with physical goods where Apple’s is mostly with digital goods.

Apple’s Retail Strategy
Many people criticized Apple when they started to create their own retail stores, citing how many companies have tried and failed miserably at owning their own storefront. However in retrospect, this has been one of the most brilliant moves they have made. There are a number of reasons why some other companies have tried owning their own storefronts and failed. Usually it boiled down to location or a lack of priority, however Apple got both of those right.

Historically Apple has been very careful about how people buy their products. Apple authorized retailers were small shops that carried all of Apple’s products and accessories and provided an outlet for support and repair. By learning the importance of controlling the retail experience and providing valuable customer services and interaction, Apple invested heavily in controlling their own retail experience.

This is significant because every other PC company currently loathes the cut-throat retail battles there are in and not a single one of them I speak with is happy with it. Yet to those PC companies it is a necessary relationship because it is the primary way consumers experience and buy their products. This is not the case for Apple. Even though they do sell at big box retailers, it is still the Apple stores that consumers prefer according to our research.

Location plays a significant role in this as well. The fact that they are in malls helps because consumers are already in shopping mode. As a part of our behavioral research week, we have noticed that consumer mentality prior to walking into any retail experience plays a significant role in the shopping experience. Costco is a great example of this that I will explore in a later article. Most consumers walk into Best Buy or other outlets with an idea in mind of what they are going to buy, mainly because they know employees are not that helpful or knowledgeable so they do a good deal of research online. There is a difference between shopping and buying in consumer behavior and generally speaking when they go somewhere like Best Buy they are buying, not shopping. This is not true of the mall where consumers generally go to shop and then to buy.

This location also plays well into Apple’s support strategy. The fact that consumers can go in and get support or repairs for their products and then get some other shopping done while they wait is a bonus. But primarily it is the priority that Apple places on their retail strategy which has set them apart from those who have tried retail, kiosk, and other outlets in the past. Apple spends top dollar on the look and feel and the in-store experience and it shows. While there is always room for improvement in Apple stores, they have assembled a strong team, experiment heavily, and listen to customers.

Lastly, because Apple owns the retail experience they also have direct conversations with their customers and potential customers. This data is invaluable for Apple as they think about future needs of their customers and how their products can help solve current and future problems for consumers.

Summary
Apple is set apart from its competition by its combination of hardware and software, by the content gate-keeper strategy embodied in iTunes, and by their successful retail strategy. While there are many other reasons in the company’s history for their success in recent years, these are the dominant themes of their astounding success. Companies looking to compete with Apple need to know that it is not impossible, however they will need to pick their battles wisely, innovate on their differentiation, focus heavily on being the best solution in the market for the problems they are trying to solve.

Ben Bajarin

Ben Bajarin is a Principal Analyst at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research. He is a husband, father, gadget enthusiast, trend spotter, early adopter and hobby farmer. Full Bio