Reducing Rivalry by Staying Focused

One of Michael Porter's five forces is industry rivalry. Rising industry rivalry often leads to price-based competition and commoditization of competing products. Companies in an industry can reduce rivalry by: (1) pursuing a unique, hard-to-duplicate strategy;  (2) competing on non-price elements like quality, features, service, and brand image; (3) targeting different market segments with different mixes of product/price (thereby expanding the total market pie); and (4) forgoing the goal of market dominance or market leadership. See Concepts page and discussion of Michael Porter. Companies that compete based on the same product dimensions often end up engaged in price-based, zero sum competition. Companies that pursue sales growth and market dominance by broadening their product range increase the number of competitors they have to face, which increases long term rivalry and makes future corporate partnerships more difficult. In pursuing growth, these companies often compromise the unique strategies and product qualities that made them successful in the first place.

When you look at the technology and e-commerce industries, it's hard not to notice Amazon and Google's ambitious pursuit of market dominance. Google wants to dominate search and data collection to drive ad revenues. It tries to do this through proprietary Android, which is a combination of the Android Open Source Platform ("AOSP") and Google Mobile Services ("GMS" services include Google Play, Gmail, and Google Maps). OEM's that want to use the Android brand and GMS services must agree to limit any efforts to fork proprietary Android. Some major OEM's, like Samsung, sell phones with proprietary Android, which ensures Google gets the search/user data. Google also sells Nexus hardware, which runs proprietary Android, to ensure it gets search/user data.

In pursuing market dominance, however, Google has dramatically increased rivalry with other major tech players. Google's development of Android angered Steve Jobs and pushed Apple away from Google services: Eric Schmidt left Apple's board, Apple created Google Maps and started using Bing as the default search engine on iOS, and Apple has basically started trying to disengage itself from direct use of all Google services. And now bare-bones AOSP, which can function as a mobile operating system without GMS services, is coming back to bite Google: more and more low end OEM's are using AOSP alone, without GMS services, which prevents Google from gathering search/user data.

In pursuing market dominance of data collection and search -- through Android and the Nexus line -- Google has created a fragmented, intensely competitive smartphone market consisting of: (1) an openly hostile Apple, which is actively trying to move away from Google services; (2) a few major proprietary Android OEM's like Samsung (that seem to be exploring proprietary Android alternatives like AOSP and Tizen); and (3) lots of small AOSP-OEM's that provide Google with no search/user data.

While a highly competitive, fragmented market may ensure Google has access to at least some search/user data, the long term outcome of increased rivalry/fragmentation seems to be declining search/user data for Google, which indirectly depresses Google's ad prices. And over the long term, AOSP puts Google in a data collecting competition with every competing search engine (like Baidu), every competing email/mapping service, and every competing digital storefront that resides on an AOSP mobile phone.

Instead of creating a vehicle (AOSP) that increases OEM rivalry and makes it harder for Google to collect the data needed to drive ad revenues, Google could have reduced rivalry and increased data collection by partnering with major OEM's (Apple, Nokia, Blackberry, Samsung, etc.) at the outset. Google could have offered all smartphone OEM's integrated Google search and Google Maps. Apple integrated Twitter services into iOS -- maybe something similar could have been worked out with Google (I realize I'm speculating here). This approach still would have allowed Google to capture significant user/search data. Instead of working with major OEM's to reduce rivalry, however, Google increased rivalry through proprietary Android, the Nexus line, and AOSP.

Amazon also seems bent on market leadership/dominance, which is increasing rivalry and direct competition with companies like Apple and Google. With the help of AOSP, Amazon has started selling Kindle Fire tablets and phones to ensure it can sell profitable digital media and e-commerce (similar to how Google is using proprietary Android to ensure access to search/user data). In 2013 Google responded with Google Shopping Express. Apple has responded by bolstering its iBooks effort, and by partnering with streaming movie companies like Netflix.

Because Apple was already selling digital media/content through iTunes, Amazon's rivalry with Apple may have been unavoidable. What's clear, however, is that Amazon's ambition increases its rivalry with other tech players, often making it infeasible for them to partner with Amazon. Imagine if Amazon had successfully negotiated partnerships with Apple and Google. The Google Play store and Google Shopping Express may never have developed. Apple might have passed on iBooks altogether (along with other forms of digital media). Amazon could have stayed focused on profitable digital media and e-commerce rather than saddling itself with a subsidized/break-even hardware business.

Regardless of what might have been, there's no question that the blind pursuit of market dominance incentivizes competitors to defend themselves. These competitors often end up developing alternative offerings that increase industry rivalry. Rising industry rivalry increases price-based competition.

A company can reduce rivalry by staying focused, by competing to be unique, and by deepening integration around a job-to-be-done. See posts titled "Acquisitions, Rivalry, and Strategic Trade-Offs" and "Avoiding Disruption by Integrating Around a Job-to-be-Done." To date Apple has largely done this: with the possible exception of the iTunes store, Apple has stayed focused on creating integrated, easy to use computing tools. Apple moves up and down the value/supply chain only when it helps the company deliver a simpler, more seamless computing experience for end users. While the digital media on iTunes is arguably outside Apple's core hardware/software business, iTunes was necessary to create an integrated, seamless user experience for the original iPod. Interestingly, Apple may be moving away from downloaded/owned iTunes music, in favor of streaming through a Beats Music subscription, because it improves the end user experience.

Apple's focus on integrated computing tools has allowed it to avoid unnecessary rivalries, making it easy for Apple to partner with software developers, service providers, and music/media content providers. These partnerships have helped make iTunes, the App Store, and the iPhone a success. The challenge for Apple is to maintain this focus going forward.

The author owns stock shares of Apple.