The iPhone Conundrum and New Market Disruption

At the outset I should credit Horace Dediu at asymco.com and Ben Thompson at stratechery.com, both of whom write extensively about Apple and disruption theory. The inspiration for much of this article comes from these two great strategists. Dediu recently posted an article on asymco.com titled "Competing effectively against your most potent competitor." In the article he says that "[n]ew market disruptions take root in non-consuming contexts." In the past Dediu has referred to the iPhone as a new market disruption.

I never really grasped the idea of the iPhone as a new market disruption, because it seems like a plainly superior product -- a form of sustaining innovation -- that renders inferior feature phones obsolete. It's easier to see how the iPhone might be a new market disruption relative to functionally superior but less portable laptop PC's.

New Market Disruption

In The Innovator's Solution Christensen talks about new market disruption in the context of non-consumers who can't afford or use existing products. Existing incumbent products typically emphasize traditional performance measures/attributes like speed, quality, and reliability, and have an entire "value network," or market and operating context, tailored to the common needs of customers who prioritize traditional performance attributes. This value network is comprised of suppliers, distributors, cost structures, and internal processes.

A market entrant then introduces a new product that solves a job-to-be-done that incumbents have ignored, and that emphasizes different performance measures/attributes, like simplicity, convenience, portability, and accessibility. New performance attributes, and a new solution to an unmet job, lead to a "new market" of consumption -- or new market of consumers -- where none previously existed. New market consumers buy the entrant's product because it's more affordable and easier to use than incumbent offerings, or because it can be used in previously non-consuming situations (or on previously non-consuming occasions). The entrant's product has a value network tailored to the common needs of customers who prioritize non-traditional performance attributes/measures. Because incumbents have a value network tailored to customers who prioritize traditional performance attributes, it's difficult for incumbents to compete with the disruptive new entrant. See Concepts page and discussion of Clayton Christensen and list of sources.

The iPhone

The iPhone was a new market disruption because it emphasized the performance attribute/measure of simple, convenient, highly portable computing that could be accessed anywhere, anytime, in almost any situation (in bed, at dinner, walking, standing in line, sitting with friends, etc.). By emphasizing a new performance attribute (highly portable computing), the iPhone generated consumer demand in a previously non-consuming situation (in bed, at dinner, etc.). The iPhone satisfied a job-to-be-done for these new market users: the need for simple, anywhere/anytime computing (a job that laptops failed to address). And the iPhone created this market without drawing a meaningful competitive response from laptop manufacturers. That's because the iPhone was functionally inferior to laptops (on the traditional performance measures of speed and computing power) and had a radically different form factor. So laptop manufacturers didn't consider it a threat. Without meaningful competition the iPhone was able to gain a market foothold, and has since improved to the point where, for at least some people, it replaces a laptop.

As a phone and email/texting device the original iPhone was also, at least arguably, functionally inferior to feature phones from companies like Blackberry, but because it emphasized a different performance attribute/measure -- simple, convenient, highly portable computing -- it created a new market of users who valued anywhere/anytime computing (the new situation) more than reliable phone reception and enterprise-class email and texting. This new market of users gave the iPhone a market foothold. And while feature phone manufacturers like Blackberry and Nokia may have wanted to compete in this new market, they lacked the value network and computer making capabilities/processes needed to do so (at least early on). So the iPhone could compete as a simple portable computer without a meaningful competitive response from incumbent feature phone manufacturers. The iPhone's more traditional, feature phone-like attributes -- calling, email, and texting -- then improved over time, disrupting more and more of the feature phone business.

The iPhone is disrupting the camera business for the same reasons. Compact cameras have traditionally emphasized the performance attributes/measures of picture quality and small size. The iPhone can function as a compact camera, but it has always emphasized the performance attribute/measure of simple, convenient, highly portable computing. Early iPhone users valued highly portable computing (the new performance attribute) that's available anywhere/anytime (the new situation) more than call quality, email/texting quality, or the quality of the iPhone's built-in camera. This new market of users allowed Apple to sell enough iPhones -- with iPhone cameras -- to gain a market foothold. Camera makers lacked the value network and computer making capabilities/processes needed to competitively respond, and probably didn't consider the original iPhone camera a serious threat (since it was functionally inferior on the traditional performance measure of picture quality). The iPhone's camera has since improved, disrupting more and more of the traditional camera business.

So a different performance attribute/measure that focuses on satisfying a job-to-be-done in a new situation -- like simple, convenient, highly portable computing available anywhere, anytime -- can lead to the creation of a new market of users who value the different performance attribute/measure (portable computing) more than the traditional performance attribute/measure (high end laptop computing or call/email/texting quality or photo quality). Once the entrant gains a new market foothold based on the different performance attribute/measure (portable computing), it can then improve its product relative to traditional performance attributes/measures (whether it's computing power or call/email/texting quality or photo quality) to the point where incumbents start losing business.

When you consider the inherent difficulty of satisfying a job-to-be-done in a new situation, based on a performance attribute/measure far different than what has traditionally mattered, you can really see the advantages of being an integrated company. When it comes to new market disruption, integrated manufacturers like Apple have a big advantage over modular final assemblers. That's because integrated companies have in-house capabilities and processes that modular companies lack, giving them the ability to create an entirely new product/service that satisfies a job-to-be-done in a new situation.

The author owns stock shares of Apple.