Once again, Apple blew away analyst forecasts with a record quarter on record Mac and iPhone sales and profits. Firing on all cylinders doesn’t begin to describe what this company is doing to the competition.
Apple is now the fifth biggest U.S. company by market cap behind Exxon Mobil, Microsoft, Wal-Mart, and JP Morgan Chase. Hard to believe.
But how does the Cupertino company do it? How does it turn out one breakthrough product after another that redefines every market it enters? Is it all about Steve Jobs? Insanely great marketing? Innovative product design? The user experience? Sure, it’s all of that. But there’s one more thing that makes it all work. It isn’t obvious and it isn’t easy.
Even BNET’s feature The Science Behind Apple’s Magic - which did a great job of capturing many aspects of Apple’s success - missed this one. Why? Because, if it was obvious, everyone would be doing it. This aspect of Apple’s methodology is a bit complex, but I think I can break it down for you. Here we go:
Apple’s Best Kept Secret
It’s a retro concept that’s sort of counterintuitive, so bear with me. Starting with the iPod, Apple brought the concept of vertical integration back to the electronics industry. But like everything else, Apple does vertical integration differently than anyone did it before. I call it virtual vertical integration and it enables innovation in any component or subsystem or at any level in the supply chain, outsourced or not.
Industrial design, hardware, semiconductors, software, user interface, user experience, even content services, it doesn’t much matter. Whether it’s internally developed or outsourced, Apple makes every aspect of the product or service its own responsibility. If improvement is needed, Apple makes it happen.
In an industry of horizontally specialized companies, Apple has learned that it must vertically integrate its product development, and innovate, even when it’s outsourced.
The Back Story
Back in the late 90s, an executive I worked with at National Semiconductor told me he was leaving to found a startup company - Portal Player - to develop an innovative reference platform for music players. Lo and behold, one of Portal Player’s designs landed in the first iPod. Around that time, I had lunch with one of Portal Player’s board directors, an industry veteran who had seen it all but was enthralled with the way Apple had gone about putting this revolutionary device and the iTunes service together.
Since then I’ve been involved with several companies that have crossed paths with Apple and I continue to marvel at its vertically integrated mindset, which wouldn’t be possible without Apple’s unique management structure. As others have observed, Apple’s management structure is flat, hands on, obsessive. You might even call it intimate. Well, Apple manages vendors and partners much the same way. Whether it’s the hardware platform, touchpad, display, hard drive, battery, user interface, or the user experience, Apple owns it, drives innovation, and is compulsive about getting it right.
In an industry packed with competitors and gadgets, that’s the common thread in everything Apple does that sets it - and its products and services - apart. Apple owns the entire product and service, from top to bottom, outsourced or not. Sure, it’s a difficult concept to implement, but you can’t argue with the results. Sony, Samsung, Microsoft - are you paying attention?
Full Disclosure: Oddly, I’m not much of an Apple user. I do own an iPod nano, but I received it as a gift years ago. It’s a cool device, but I’m a prisoner of iTunes DRM and deeply regret having originally set up my music library with it. A few months ago I bought my first Apple product - a MacBook Pro for my wife. Just sick and tired of having to be the family IT person with all Wintel’s issues.
