I’ve seen many sound analyses of the Apple Watch —or rather, of what little we know about its features and functions— already. But until its launch, what’s most fascinating about it isn’t how much RAM it has or whether its apps will really be displayed in a grape-bunch of moving icons, but rather what it tells us about Apple’s strategies, especially for creating, entering, and attempting to own new categories.

First, a refresher on what strategy really means for a company, from Michael E. Porter’s invaluable essay What is Strategy?:

Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value. [1]

The activities Apple chooses to undertake in order to deliver a unique mix of value are well-known:

  • Control of —but not ownership of— supply chain, based on capitalization of supplier operations and equipment in exchange for exclusivity of supplier output, as well as relentless supply-chain improvement for greater and greater operational efficiencies
  • “General consumer” UX-oriented software development, but with a heavy emphasis on perfecting and polishing details to provided a premium and delightful product that errs on the side of well-executed simplicity over decently-executed multiplicity
  • In-house chip design —they have over 1000 chip designers!— with chip development heavily tailored to the software and hardware uses specific to Apple products, leading to more efficient chips (which allows Apple to use less RAM, get more out of batteries, etc.).
  • Retail outlets where Apple can showcase its products as it sees fit and control the context in which they’re demonstrated, purchased, and serviced
  • Activities related to the aestheticization of technology; although this is decreasingly unique, recent hires and the soon-to-be-discussed development of the various Apple Watch bands is illustrative of the lengths to which they go

In general, these activities are often summed by saying that Apple integrates hardware, software, and services while retaining a concern for beauty in form. In the Android world, parties compete in hardware, and even in software and services to an extent, and a concern with form usually lags concerns with margins, modularity, cost.

Google’s bet: that commodification of hardware and software (for example: software design patterns that constitute solutions to user problems) will eventually make the benefits of Apple’s integration minimal or non-existent, and the market will reward what’s least expensive. Google’s choices tend to reflect their desire for a commodity ecosystem where gains come from operational effectiveness.

For Apple, then, a key strategy is to continually prevent the commodification of product categories [2]. Returning to Porter’s phrase, this means that Apple wants to be different, in that they choose “a different set of activities to a deliver a unique” —that is, non-commodity and hard-to-copy— “mix of value.”

iPhone and Android

With Android and Samsung, Apple had a minor scare: relatively early in iPhone’s life, it seemed to be nearly commodified, with many millions of buyers happily accepting Samsung’s Galaxy series phones as adequate for their needs (or in some cases preferring their different features or sizes). While this never threatened iOS existentially, I believe Apple took note. Subsequently, iPhone and iOS development has trended towards those things Apple knows Android cannot provide, those things that only their unique mix of activities as a company enables.

Specifically, Apple’s mix of activities permits things like

  • Touch ID + Apple Pay. Touch ID requires sapphire glass expertise, something only a supply-chain capitalizing company can attain; but Apple Pay also requires difficult corporate contracts with disparate vendors who will not see their margins eroded. Thus: only a company which doesn’t need to earn much money from their digital wallet but which also has the hardware expertise to make an easy, durable, reliable fingerprint scanner and the deal-making capabilities Apple has can achieve this feature.
  • Metal and other graphics technologies. Not only does Apple work closely with vendors as they spec their hardware, and not only do they make their own chips on occasion, but they also work hard to tailor their software to (1) take full, maximally efficient use of their silicon and (2) allow developers to do the same. iOS has graphical features that are simply too computationally costly for Android without lots of cores, lots of RAM, and lots of power and heat issues. Java has obliged Android device makers to move in that direction already, and Apple wants to make it worse for them.
  • Improvements to the camera. Apple’s cameras are unmatched —not in megapixels but in image quality in everyday use— because of their control over software and hardware, and because of their investments in manufacturing technologies. Again: commodity hardware is cheaper, and can compete on specs, but so long as Apple can drive new technology into this are —focus pixels, for example, or a better integrated processor— Android makers are at a competitive disadvantage because of their strategic choice to rely on vendors for technology advancement (assuming Apple can stay ahead of the vendors)[3].

There are many more examples. Even CEO Tim Cook’s reorganization —which replaced autocracy-led fiefdoms with cross-functional collaboration— seems to emphasize that Apple must provide unique value from its unique mix of integrative activities or those activities will become too costly to justify and may even overserve the market. As an example: the new iPhone is 6.9mm thick, thinner than the iPhone 5s but not as thin as the iPod touch (at 6.1mm). How much thinner do devices need to be? How much will people pay for a thinner device than this one? Will they upgrade to a new iPhone if it’s 5mm thick? And how long until HTC can make a 5mm phone?

What drives progress on this axis is a combination of miniaturization of technologies and manufacturing advancements. Both of those become, after some delay, generically available to other device-makers. So Apple has some lead on device thinness for some period of time, but others are always in pursuit, and there is a risk that at some point —possibly soon— Apple’s costly pursuit of thinner devices will overserve the market, which will accept a 6mm phone from Samsung for $100 less.

Only strategic differentiation can prevent this sort of commodification, and probably only for a time.

(How quickly, or whether, the mobile market will commodify to the point at which the cheapest solution wins every time is a question I can’t answer. In general: where creativity, ingenuity, and research are pushing the boundaries of what’s possible, commodification doesn’t occur; when solutions are duplicable and only efficiency matters, it does. In batteries, cameras, device durability, thickness, weight, and feel, and much more, the mobile device market remains one which rewards progress more than efficiency, which is good news for Apple).

Apple Watch

With the Apple Watch, we see a radically ex nihilo category play from a company with recent experience in redefining markets. As such, their choices tell us a bit about what they’ve learned from iPhone (and iPad) and how that knowledge is guiding their plans. The general conclusion: Apple is “doubling down” on strategic differentiation.

First, simply by choosing this category, Apple is strategically well-positioned. The Apple Watch will be harder to imitate than the iPhone because everything that keeps Apple ahead in smartphones —miniaturization, build quality, control over component development (for example: removing layers from screen composition), custom chip design, efficiencies from hardware and software control, services integration, materials sciences investments— is even more important in wearables, and seems likely to be so for some time.

But beyond that, nowhere is Apple’s willingness to be different more evident than with Apple Watch. Apple is aggressively shaping the category such that entrants will be required by customer expectations to provide a large, multi-SKU assortment of variations of their product made from high-end materials not normally sourced through Foxconn. Launching with three cases and many bands, several of which feature incredible design touches and luxury materials, was not an obvious decision. When Apple makes such choices they often seem inevitable in retrospect, but we should imagine what those meetings were like during development, the concerns that would have been raised about the necessity of redesigning exotic leather bands with magnets inside of them, the costs and delays all that entailed, and the image it might give the new product. Remember: Apple has always smarted from accusations that it makes expensive baubles.

Nevertheless, they chose to launch a model at $349 and then a range of models above it which, though functionally identical, will likely cost thousands more. Some pundits think this is a silly mistake, which is reason enough to pause and attempt to determine why Apple chose this unorthodox, unprecedented product strategy. They didn’t launch with three iPhone bodies made of luxury materials; they didn’t introduce the iPad alongside the iPad Edition. Primarily, one assumes, they wanted to make “the best watch in the world,” as they’ve said often about their product priorities, and to do so required deference to traditions.

But at the same time, the pressure this puts on Motorola, Samsung, and Android Wear in general is enormous, and a large reason why it was worth it for Apple to learn about, experiment with, and become adept at peripheral activities like leatherworking. One of Apple’s bands, for example, is described thus on their site:

A small French tannery established in 1803 produces the supple Granada leather for this elegant band. The smooth top-grain leather is lightly milled and tumbled to maintain its refined texture. What looks like a solid buckle is actually a two-piece magnetic closure that’s delightfully simple to secure. We also added an inner layer of Vectran weave for strength and stretch resistance. It’s the same material NASA used to create the parachute strings for the Mars Rover. This band is available in soft pink, brown, and midnight blue.

Does Samsung have the ability to source Granada (or Venezia) leather, scale its manufacture suitably, and stock it as an option without the costs eating into their margins? Do any technology companies today? Apple can charge a premium in order to do so, and with gold cases and Milenese bands, it will; for them, the cost will certainly be worth it. But Motorola and other Android Wear competitors compete very much on price: they often use the same chips from the same vendors; borrow the same design patterns from the same sources; lean on the same Google services, whose integration into Wear products is an afterthought for the search giant; and they buy their bands in bulk from the same sources. How many sizes will they be able to offer cost-affordably? How many case materials? How many bands, and of what caliber?

In the same way that Apple’s extremely efficient optimization of hardware and software forces Android to pack in more cores, more RAM, and more battery than they’d like just to keep up, Apple’s materials and fashion expertise will force Android Wear to pack in more models, bands, and sizes than they will likely execute well or manage efficiently. This isn’t how tech products tend to work, so commodity tech companies in particular will struggle.

Thus, Apple’s Watch model mix reflects their strategic activities mix, and yields the following:

  • Even if just 1% of Apple Watches sold are gold, in the public eye Apple is the company that makes beautiful watches. Because the unit functionality is the same, the luxury aura isn’t problematized by class concerns, but other smartwatches will definitely be “the cheap ones”; thus Apple owns the top of the market completely without losing the middle of it. Motorola won’t be the company that makes beautiful watches, nor will they benefit from being the “affordable” option, as they’re comparably priced.
  • Not only is the high-end of the market likely to be Apple’s —as with iPhone— but Apple will capture more money from that end of the market than they would have with a single model or a modest range. That is: Apple is giving people a way to pay as much as they want for this watch, from $349 up; many will pay much, much more, which is great for ASP and margins and development budgets but doesn’t threaten marketshare by putting the device out of reach [4]
  • A primary negative reaction to smartwatches in general is that they’re dorky or nerdy, and appeal mostly to computer jocks; that is: the critical posture adopted against smartwatches is one of disdain for geeky gadgetry and digital overconnection. This reaction is toxic for a product which hopes to achieve mass-market success among men and women and the young. But after the Apple Watch introduction —and after the prices are announced— Apple achieves a different primary negative reaction: “Too expensive. Too fancy. Too fashionable. Only rich people buy stuff like that. Too blingy. Who cares about luxury leather, you can side-load the Gear!” This reaction is practically an advertisement for the Apple Watch as far as regular humans are concerned. [5]
  • Last, Apple repeatedly notes that they don’t track you or sell data about you; Cook has recently emphasized this strongly, even writing “A few years ago, users of Internet services began to realize that when an online service is free, you’re not the customer. You’re the product. But at Apple, we believe a great customer experience shouldn’t come at the expense of your privacy. Our business model is very straightforward: We sell great products. We don’t build a profile based on your email content or web browsing habits to sell to advertisers.” This direct shot at Google is also a direct shot at the idea of using Android Wear or Android in general to track health issues, as users are notoriously anxious about such data leaking (and indeed, there are legal issues too). Apple Watch depends on Apple’s business model —selling products, not ads— to deliver services that many wouldn’t trust from Google.

In sum: the Apple Watch leverages Apple’s unique strengths like no product in their portfolio to date, and if they can achieve momentum with it, it will be very hard for other companies to catch up. They need to achieve parity or superiority in hardware —now meaning from chips to metallurgy to leather-sourcing to sensors— and software —now meaning integrated payments systems and health tracking and communications and so much more— and services like a music store, an app store, mapping, books and films, and so on. Worse, such companies will need to start hiring from fashion and fitness firms, as Apple’s been doing for several years. The skills and best practices involved in these areas are closer to Apple’s experience than Samsung’s, and Apple knows it. Last, they need to be companies whose business model doesn’t depend on user data, as this “most personal” device yet is personal enough that people don’t want it to be mined.

Conclusion

The Apple Watch gives the company a new space in which its strategic activities confer huge, possibly decisive advantage, and the decisions made in how to structure their offering —decisions which I emphasize again will define customer expectations and color how the category is perceived— reflect their determination to press that advantage wherever they can. It’s worth noting that this falls naturally out of their efforts to make superlative products, as a smart company leans on its strengths to deliver value that’s otherwise missing from markets. That is to say: Apple didn’t pursue the watch because it reflects their strategic mix of activities, but as they pursued it, that mix informed what they could do, and importantly what they could do better than anyone else.

Fast-followers and imitators are in for a tough slog in wearables, and even the deep pockets of Google and Samsung won’t confer commodity parity on other offerings immediately. Thanks to their smartly-chosen (and continually updated) set of activities, Apple is probably in pole position, defining the category before they sell their first unit. While that tells us little about the revenue implications —there’s no telling how large the market is for the first version of Apple Watch, which doesn’t have all the features later models will— it does tell us a little about how Apple enters categories and what drives some of their peripheral decisions about product, mix, and marketing.

Notes

  1. PDF of “What is Strategy?” As a side-note: the distinction between “differentiation on the basis of operational efficiency” and “differentiation based on strategically-chosen activities” is a clear lens through which to understand Apple vs. Samsung, and obviates the need for much of what’s written about Apple, iOS, Android, Google, Samsung, and others in the space. I cannot recommend the essay highly enough, and am indebted to David Cole for sharing it with me.
  2. There is an argument to be made that in doing so, Apple keeps the prices of certain goods higher than they might be; the counter-argument is that markets in which competitors are not strategically differentiated in this way are crummy markets with insufficient reward for innovation, and the products they produce tend to suck (as PCs did, for the same reasons). Porter says it thusly:

Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day. The most obvious reason for that is the rapid diffusion of best practices. Competitors can quickly imitate management techniques, new technologies, input improvements, and superior ways of meeting customers’ needs. The most generic solutions—those that can be used in multiple settings—diffuse the fastest.

Generic markets with outsourced activities do not produce much creative dynamism; if a commodity needs no improvement, they’re fine, but for technology-based products, they seem pretty suboptimal, achieving only local maxima of productivity but rarely innovating novel solutions to human problems.

  1. We should expect to see Apple stay ahead of the vendors because their margins afford them greater R&D budgets; OEMs compete on operational efficiencies and, as Porter describes, genericize themselves over time as a result.
  2. Apple has probably left a lot of money on the table with iPhone, since they originally pursued a single-model product strategy; there are many people who would have paid more than they have for various iPhones, were fancier options available. The introduction of the iPhone Plus is in part an effort to recapture some of that money, in addition to answering the competitive threat from larger Android phones.
  3. Setting the primary negative reaction to something is one of the more important acts of manipulation a person or company can undertake in framing a conversation; marketing which accomplishes this is particularly effective. As Kevin Simler noted in “Ads Don’t Work That Way”:

Cultural imprinting is the mechanism whereby an ad, rather than trying to change our minds individually, instead changes the landscape of cultural meanings — which in turn changes how we are perceived by others when we use a product.

Thanks to this marketing move, someone wearing an Apple Watch goes from being considered pejoratively as “a computer nerd or business jockey with a smartwatch” to “a rich person or a style-oriented person.” That’s a major revision of cultural imprinting for one day’s keynote!

Mills Baker