Apple Iphone Innovation Case Study

By 2005, the success of the iPod was fueling a rapid rise in Apple’s status and fortunes. People across the globe were purchasing the sleek portable music players in droves, especially college and high-school students.

Despite its success, Jobs was deeply concerned about the viability of the iPod business going into the future. His major concern was that music lovers, e.g. iPod owners, were being forced to carry around two devices: an ipod and a cell phone. At some point he expected the cell phone to gain the functionality of the iPod and essentially render it obsolete.

His worries were well-founded because, as he explained to the board, ever since cell phones had started shipping with built-in cameras, sales of digital cameras were in jeopardy. He was determined to not let the iPod suffer the same fate.

iPhone Lesson One: Only the Paranoid Survive

The fact that Steve Jobs was worried to begin with was an incredibly important element in his drive and motivation to develop the iPhone. Too often business leaders can tend to get comfortable and in some cases complacent with regards to shifting market trends and dynamics, usually brushing new technology or trends aside as something that only appeals to niche markets or applications. This error of thinking can lead to substantial business losses.

One great way to foster a healthy sense of paranoia regarding your business is to be hyper aware of the dynamics inside your market. This awareness can be achieved by employing a few simple tactics such as the following:

  1. Consistent face-to-face customer engagement (e.g. Jobs noticed most iPod customers always carried a cell phone as well),
  2. Intense monitoring and experimentation with new or alternative technologies (e.g. Apple’s research team that was working on touchscreens at the time),
  3. Monitoring industry dynamics regarding horizontal structure or vertical integration (see my post on industry trend analysis for details)
  4. Observing any new or different business models rising in your industry

Paranoia and awareness are a great start but eventually you have to commit to a plan of action, and that plan of action will probably entail a lot of risk and cannibalization of your existing business.

iPhone Lesson Two: Cannibalize Your Own Products (Before Someone Else Does)

Steve Jobs had this famous saying:

In business, especially in businesses that involve advanced technology, obsoletion and cannibalization are par for the course. The trick is to ensure that your core business evolves fast enough to meet the demands of the new market. Since we mentioned digital cameras, it’s worth noting that Kodak ultimately faced bankruptcy due to the collapse of the need for film and the rise of digital cameras.

For Kodak, the unfortunate part about these two graphs is that Kodak was heavily involved in the film and analog camera sales and not very involved in the digital camera sales line. Kodak could have succeeded and even grown further had they successfully transitioned over to digital rather than cling for so long to film.

But even digital cameras were not immune to the forces of new technology because in the year the iPhone first went on sale, 2007, digital camera sales peaked and ever since have been on the decline.

With the release of the iPhone, Apple positioned themselves at the center of the next wave of technology that would render both the iPod and consumer-grade digital cameras obsolete.

As the graph illustrates, even before iPod sales had peaked, Apple launched the iPhone which proceeded to directly cannibalize sales of the iPod.

iPhone Lesson Three: When Facing Market Shifts, Have a Plan A, B and C

Apple executives knew that at their core they were a computer company. Their engineering, manufacturing, sales, distribution, customer service and overall company DNA was in computer hardware and software – not mobile phones. In fact, most mobile phones were so different than computers at the time that Plan A for Steve Jobs was to partner with Motorola, the company that famously invented the cell phone, and create a phone that would have iPod functionality and run iTunes.

The result was a disaster. In September 2005 the ROKR released to the public backed by a substantial marketing campaign, including a personal endorsement from Steve Jobs. But despite high-profile marketing, ROKR sales were a disappointment and the critical reviews were terrible.

Several glaring flaws with the design doomed the ROKR from the beginning. These included:

  1. Complicated software interface
  2. Slow song transfer rates due to the lack of support for Hi-Speed USB
  3. An arbitrary song limit of 100, regardless of how much memory is available
  4. Aesthetics that made it look like it was “designed by a committee”

Motorola ROKR E1

Walter Isaacson’s biography explains well what happened next:

As a hedge against future embarrassments, Jobs’ new plan (Plan B) was to build the entire phone themselves and shop the device around to any wireless service provider that’s interested, such as AT&T (then Cingular), Verizon and T-Mobile. But even if a carrier decided to turn him down, he was prepared to purchase wireless minutes wholesale and create his own wireless company (Plan C), similar to what Virgin Mobile was doing at the time.

After meetings with several carriers including Verizon, who flatly turned him down, and AT&T, Jobs finally secured AT&T as his wireless carrier partner in the deal. After launch, sales of the iPhone grew AT&T’s subscribers and revenues substantially. Verizon would later live to regret their mistake to the tune of roughly $3B.

iPhone Lesson Four: Have A ‘Bet the Company’ Moment

In late 2004/early 2005 Apple began assembling a team to execute plan B – make their own phone and partner with AT&T to do it. Given the hardware experience Apple had at the time with iPods and Macs, to make the iPhone Jobs figured that he had two choices: 1) Enlarge the capabilities of an iPod into an iPhone or 2) Shrink the capabilities of a Mac into an iPhone. To make the decision, an internal competition was setup that pitted the iPod team led by Tony Fadell against the Mac team led by Scott Forestall.

Development of the “Trackwheel P1”

For six months Tony Fadell’s team worked on turning an iPod into an iPhone prototype. The software would be Linux-based and the controls were similar to the iPod. An Apple patent filing shows drawings of these early prototypes which in hindsight look primitive compared to the  touchscreen version that was finally released.

As shown in these images, the major challenge Fadell’s team had in going this route was how to dial using the iPod’s trackwheel. Despite what look to be some clever attempts, ultimately this approach would fall out of favor with Jobs as he saw more potential in using the mulit-touch screen that Scott Forestall was working on.

Development of the Multi-Touch P2

Scott Forestall’s main concern with creating the Multi-Touch P2 was to figure out how the Mac software, OSX, would work (navigation, phone calls, etc.) on a lower-power ARM-based CPU with a  mulit-touch screen. To solve this problem, he recruited a small team of engineers and created a development platform that mimicked these conditions complete with an old PowerMac G3 computer that had close to the same computing specs as the iPhone would. The picture below was obtained by the Wall Street Journal which wrote an article on the development of the iPhone during Apple and Samsung’s patent litigation proceedings.

Picture of the room Scott Forestall’s team used to develop software for the first iPhone.

Note the similarities in specifications between the setup above and the eventual specs of the first generation iPhone:

PowerMac G3Gen 1 iPhone
Processor (CPU) Speed333 Mhz412 Mhz
RAM Memory128 Mb128 Mb
Hard Drive Capacity4, 6 or 8 GB4 or 8 GB

According to the Journal article, Forestall recruited Greg Christie to join his team and create the iPhone software.

The major downside to Forestall’s approach was that even though the software and touchscreen showed a lot of promise, the hardware to make it all work would need to shrink down to the size of something that could fit in your pocket. Think of it as needing to take all the equipment in that room and stuffing it into an iPod.

With Fadell’s approach, on the other hand, the hardware and software was very similar to the current iPod hardware and software of the time which gave them confidence that they could build and ship something fairly quickly without too much risk. Only trouble was that the trackwheel was an awkward thing to dial with.

After several iterations and demos of how the Mac approach with a touchscreen would work, Jobs was smitten with excitement over the possibilities and gave Forestall and Fadell direction to move forward with the touchscreen with OSX approach.

It’s important to realize that most risk averse companies would have gone the safe route of modifying the iPod and turning it into a phone. That would have been the easy path. Why take the risk of devoting so many engineering resources to something that might never work? That’s why it was a bet-the-company moment, one that eventually paid off in droves.

In product management and product marketing there are times when its tempting to go the safe route, get to market quicker and “make a few bucks.” The trouble is that approach won’t wow the customer and won’t truly drive growth for your business. Thank goodness Apple took the risk they did.

iPhone Lesson Five: Continue Connecting The Dots

With the touchscreen approach Apple would need to devise a new hardware design concept. Up until this point the demos given by Forestall’s team on the Multi-Touch P2 were basically touchscreens attached to an old Mac computer. A hardware concept still needed to be fleshed out and it was Fadell and Ive’s job to come up with ideas.

During the Samsung vs Apple patent litigation trial in 2012, Samsung submitted documents pointing out that the eventual iPhone design was actually inspired by an article Tony Fadell read in BusinessWeek where Sony designers described a design concept they had for a consumer device, the excerpt is below:

These drawings clearly resemble the iPhone 4, even though that wasn’t the first design that was actually built. Samsung’s claim that Apple’s design was derived from a Sony design is a bit outlandish given that the Apple designer created the above design based solely off the verbal descriptions Sony gave of a design concept, not an actual design itself. Turns out that the actual design Sony ended up creating with this concept was the Sony-Ericsson Walkman phone below:

 

Not quite as striking of a resemblance to the iPhone after all.

But the point of this is that when Fadell came across that article he started connecting the dots between what he read and what he was trying to build. After this “Sony style” (what Apple started calling it internally) design was drawn, it changed the course of the project and laid the foundation for the eventual embodiment of the iPhone.

iPhone Lesson Six: Don’t Ship It Until You ‘Love’ It

Somewhere along the way during development, Apple executives including Steve Jobs had approved moving forward with a design where, according to Walter Isaacson’s Steve Jobs, “had the glass screen set into an aluminum case.”

Thanks again to information revealed from the patent litigation, several prototype images emerged and it’s likely that even though the “Sony style” design had set the foundation, Apple initially planned to launch a design that was pictured below that matches Isaacson’s description:

Despite having made the decision to move forward with one of the designs above, not long before the planned launch, Jobs decided to hit the reset button. Isaacson’s book tells the story well…

This story illustrates one of the most valuable traits of Steve Jobs: demanding excellence without compromise. For benefit leader companies like Apple, having someone in charge of product decisions with these characteristics is essential. Cost leaders can get away with not having the absolute best in quality and design (think WalMart) but benefit leaders will not be able to get away with it for very long. In this regard, Steve Jobs seemed to be exceptionally rare.

In a commencement speech at Stanford, Jobs explained how loving what you do will help you do great work…

Steve Jobs loved what he did and that passion fueled his demand for excellence.

On a related topic, it’s important to note that this philosophy flies in the face of the popular Lean Startup movement created by Eric Ries. According to the lean startup methodology, you should ship a product as soon as it reaches “MVP” (which stands for “minimum viable product”) status and get valuable feedback from customers on what should be improved and then go and improve those things. The reason this method is not recommended for a company like Apple is because Apple’s strategy is benefit leadership and the Lean Startup methodology is more applicable for cost leaders. The whole crux cost leadership strategy is to provide benefits that are “good enough” at a much lower cost than the competition. Benefit leaders, such as Apple, on the other hand must provide benefits that are far superior to other alternatives and as such can’t be shipping things that are minimally viable. Eric Ries’ method is great for startups that want to become cost leaders but if a startup is trying to make something with far superior benefits, it would be better for them to follow Steve Jobs philosophy rather than Eric Ries.

iPhone Lesson Seven: Breakthrough Products Integrate Functionality In A Simple and Easy To Use Way

When Jobs announced the iPhone in January 2007, he started the meeting by saying that he was going to announce 3 exciting new products: an iPod, a phone and an internet communicator. That video is below.

This introduction is important because it clearly conveys the value of the iPhone in terms of two things:

  1. The combined functionality of an iPod, phone and internet communicator
  2. Ease of use

Below is a picture from the iPhone announcement…

To illustrate ease of use, Jobs used a perceptual map to show how most phones, even phones that were called “smartphones” at the time, stacked up:

By combining the power of a small computer with a user interface that was easy enough for a child to use, Apple was able to create a game-changing device.

iPhone Lesson Eight: Sometimes To Create A Breakthrough, You Must Do Everything (e.g. Be Vertically Integrated)

Another important thing Steve Jobs mentioned when he announced the iPhone was the idea that only a company like Apple could have created the iPhone. To drive home the point, Jobs showed a quote by Alan Kay about software…

Creating both the software and hardware has always been a cornerstone of Apple’s product design philosophy but never was this strategy better executed than with the introduction of the iPhone. Previous “smartphones” such as the Motorola Q, Palm Treo and Samsung Blackjack were all the product of a horizontal value chain. In the case of the Treo, Intel made the CPU, Microsoft created the software (the dreadful Windows Mobile) while Palm did the design and assembly and Verizon provided sales and distribution. When Apple introduced the iPhone, Jobs demanded virtually full control of the value chain by controlling the intricacies of the hardware, software, design, marketing and distribution of the device. Apple even went so far as to control the way iPhones were sold and displayed within AT&T stores. In general, these efforts represented a massive shift in the smartphone industry to vertical and because of the complexities involved with the iPhone (integrating an iPod with a cellular radio, etc.), it’s likely that only a vertical company such as Apple could have created such a breakthrough.

This pattern of industries shifting from horizontal to vertical and back again was described well by Clayton Christensen in his theory of “Value Chain Evolution.”

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Table of Contents

Apple in 2000
Apple in 2001
Apple Fast Forward
Apple Today

How did Apple do it?
Apple’s Innovation Strategy
Innovation in Products
Innovation in Business Model
Innovation in Production Model
Innovation in Customer Experience
Apple’s Innovative Leadership

Apple iPod
iPod made Apple #1
Disruptive Innovation
iPod and Apple Revenue
iPod Growth Challenges
iPod Falling Price / Unit
iPod touch
iPod Opportunity
Can Apple create iPod turnaround?

Apple iTunes
iTunes Challenges
iTunes Opportunities

Apple Strategic Innovation Shifts

Apple iPhone
Apple iPhone Juggernaut
Apple iPhone Apps
Apple iPhone Innovation

Apple Innovation Leadership
How does Apple innovate?
Another Apple innovation... the new iPad
How Apple Innovates?

Apple Innovation Takeaways
Where’s Apple headed?

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