How Apple Faces the Innovator's Dilemma

In this post we'll look at the innovator's dilemma -- why big companies with talented management and a focus on customers find it so hard to innovate -- in the context of Apple. The purpose will be to identify potential ways for Apple to fail, and potential companies that could take the market from Apple.

The Innovator's Dilemma Occurs When....

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To see the innovation challenge that Apple is facing, let's start by identifying the characteristics of companies that face the innovator's dilemma.

1. Big. Big companies aren't excited by small opportunities and small markets. Apple is worth over a half trillion dollars. Do you think they are going to be excited by a market that is small -- like one that could increase its market cap by million? At this point, is it even excited by something that increases its market cap by billion? billion is 1.6% of its market cap based on the company's current valuation of right around 9 billion. Because Apple will have a tough time being interested in small markets, it leaves itself vulnerable towards a small market that can grow. In other words, a market that is only worth million or so could in time grow to be worth billions. And because the market at million is not of interest to big, established companies, it is how a new entrant could get a first mover advantage. This is classic example of how Apple faces the innovator's dilemma -- and it can face this dilemma in spite of having a talented management team that is focused on providing their existing customer base with what they want.

2. Overshoots. Another way in which companies can fail in spite of having talented innovators is when they overshoot on a given dimension. Overshooting simply means being too good at a certain thing. This may seem counter-intuitive, but beyond a certain point, customers may not be interested in incremental improvements. In the case of Apple, how much lighter or smaller does hardware need to be? How much better does the resolution need to be? At some point customers will not be impressed, and will value something else -- either an entirely new dimension or a lower price.

Overshooting is especially problematic, because companies are designed to do certain things well. For instance, Apple is designed to build great hardware. But at some point, customer demand for great hardware is satisfied, and they want something else. Can Apple deliver that "something else"? This is how a company that is new can deliver hardware that is good enough but introduce some other dimension that customers do value -- and take market share from Apple accordingly.

Potential Apple Disruptors: Facebook, Amazon, Someone New

Based on the two points listed above, there are, in my opinion, three potential disruptors Apple is vulnerable to: Facebook, Amazon, and some new startup that is probably off everyone's radar and is not near the point of being a public company. Here's a look at the arguments for each of those candidates candidates:

1. Facebook. Facebook brings a new dimension -- social integration. If Facebook were to take hardware that is good enough and make devices that were already plugged into its powerful social network, it could expose Apple's innovation dilemma; Apple is not designed to do social, and has failed every time it has tried (like with its music-based social network, Ping). I believe social media companies are overvalued, so I'm not really a believer in this viewpoint, but I do believe it fits from the perspective of innovation theory.

2. Amazon. Amazon focuses on creating products/services that are good enough and outperform on price. The Kindle Fire is a prime example; its hardware may be good enough, while it is less than half the price of Apple's iPad. Amazon is positioned to get into the phone business and possibly the television business (as Amazon Instant Video is now available on Play Station 3). This is my favorite candidate for how Apple will have trouble innovating, as I believe hardware is getting commoditized and value is shifting towards the whole ecosystem (app and media store) and price. Amazon's hardware is clearly well below Apple's, but I believe their ecosystem is better and their price obviously is.

3. New Startup. Perhaps a company like Little Bits.cc can attack Apple by starting with a market too small to be of interest. Little Bits makes what amounts to electric legos. Apple needs to focus on big markets like television sets and textbooks -- but something like Little Bits could some day evolve into sophisticated hardware that requires processes alien to Apple's modus operandi. This is how big companies like Apple fail, even when they obey their existing customer base and have an immensely talented team.

The Innovator's Solution: Create a Spin Off

The solution prescribed by Dr. Christensen for beating the innovator's dilemma is to create a spin-off: create an entirely separate organization that does not have the DNA and skill set that both enables Apple's existing market share but also leaves it vulnerable to competition.

The idea of an autonomous organization is in many ways antithetical to Apple's ideology of having a tightly integrated brand and experience. So, I find it unlikely the company will do anything to address the innovation dilemma it faces.

How Apple Faces the Innovator's Dilemma