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Apple, The Innovator's Exception?

This article is more than 10 years old.

Can Apple continue to disrupt the technology industry without its visionary leader at the helm?

FRANKFURT AM MAIN, GERMANY - OCTOBER 06: (Image credit: Getty Images via @daylife)

The question came up again this week, after Apple missed quarterly earnings for the second time in the last 12 months. Apple CEO Tim Cookand CFO Peter Oppenheimer attributed the miss to slowing iPhone sales—the same reason that the company missed earnings for the quarter that ended September 2011.

Clayton Christensen, the Harvard Business School professor who is America's guru of business disruption, once famously predicted that the iPhone would flop because it merely represented a better version of an existing product. "Apple is leaping ahead on the sustaining curve," Christensen told Business Week. "But the prediction of the theory would be that Apple won't succeed with the iPhone. They've launched an innovation that the existing players in the industry are heavily motivated to beat."

Could Christensen's prediction finally be coming true? That fear helped drive the sell-off that followed Apple's earnings report on Tuesday.

Of course, there are still plenty of reasons to believe in Apple and view the stock's sharp drop in value as a buying opportunity. Forbes.com contributor Darcy Travlos makes this argument in her post "Within the Apple Earnings Report, Seven Positive Trends to Consider."

But it's also worthwhile taking a closer look at how well Apple continues to track the theory of disruption. When Christensen first laid out his theory in his ground-breaking book, "The Innovator's Dilemma," published in 1997, Apple was one of his case studies. The book, in turn, "deeply infuenced," Steve Jobs, according to his biographer, Walter Isaacson.

Is Apple still the industry disruptor? Or, as the industry leader, is Apple more at risk of being disrupted itself? Or could Apple represent the "Innovator's Exception," the company that thinks different, acts different and succeeds by different rules?

To answer, we need to revisit the "The Innovator's Dilemma" which sought to answer the question of why success in business is so difficult to sustain.

What Christensen discovered, and what was so surprising to so many people, is that time and time again, industry leaders are displaced not by rivals that make better products, but by upstarts whose products are in many ways inferior—cheaper, less powerful, less durable, etc. The leaders know about these products, and they deliberately ignore them until it was too late. While the big companies are focusing on higher margin activities, the upstarts not only improve their disruptive product, they achieve market dominance.

In Apple's case the upstart takes the form of Android devices. What started as a lower-end smart phone has steadily improved. For hundreds of millions of people, an Android device is a viable altenative to an iPhone. Perhaps nothing illustrates the threat to Apple more than the recent headlines about the new Nexus 7. (See Rob Hof's post on Forbes.com, "Why Google's Nexus 7 Tablet is Hotter Than Apple's iPad.")

Three months ago, Clayton Christensen spoke with Horace Dediu, founder of the Asymco analysis site, about his fears for Apple's future. He compared Apple to Sony during the era when the electronics maker was launching one blockbuster product after the next. Christiensen noted that products like the Sony Walkman were disruptive to the market but not to Sony itself. Then downloadable music came along, first in the form of Napster and then more conventional businesses. "[Sony] really stumbled," Christensen said. "They basically lost it and gave the opportunity to Apple and the iPod.

"I really worry that Apple is in the same situation [now], in that the sequence of extraordinary products has in fact been disruptive relative to traditional competitors in the marketplace…but these have not been disruptive to Apple. So they have not seen this problem before."

Dediu, who has been leading the debate around Apple and disruption, responded to Christensen by pointing out that the iPhone has been disruptive of the iPod, and that the iPad has already shown its ability to cannabilize sales of both Macs and PCs. "I would say this is a mixed story," Dediu said. "Apple does have a self-disruptive instinct."

In Christensen's world self-disruptive—as opposed to self-destructive—is a good thing. It's how a company survives serious technological threats. In his 1997 book, Christensen contrasts IBM's success during the first five years of the personal computing industry with the failure of other mainframe and minicomputer makers to come to terms with the new PC era.

In the same way that IBM embraced the PC, Apple has embraced the tablet. Dediu noted Apple is the first computer manufacturer to successfully build a tablet device, and that they appear to be managing the transition to tablets better than their peers.

But the success of the iPad isn't necessarily proof that Apple can survive the Innovator's Dilemma. "If the iPad is in fact disruptive relative to the Mac, what is happening to the margins?" Christensen asked. "If the margin is attractive to both, than you manage it as a sustaining innovation."

In fact, margins are higher on the iPad, and therein lies the risk to Apple.

There will come a point, and perhaps it has already arrived, that Apple won't be able to continue to improve the iPhone and iPad and will have to find some other way to compete. As Dediu noted, you can't improve the screen beyond the retina display, because human eyes can't detect the difference. The size of the device will be limited to what we can comfortable use and fit in our pocket.

Some people believe that when that inflection point is reached, Apple will have to compete on price, which will drive down the company's famous world-famous margins.

Dediu believe the company could potentially compete on software, by leveraging cloud computing, or by taking products like Siri, Apple's virtual assistant to the next level.

Christensen agrees. There is just one way that Apple will be able to maintain its supremacy: It can stake out new ground and discover new unconquered territories. "I am hopeful that Apple will do the Jobsian thing," he said.