When small and focused is smart

I recently attended MacWorld Expo in San Francisco, my eleventh time at this show. I've found a lesson in the history of Apple Computer Inc. that's relevant to any company that holds a small portion of its market.

Continuous innovation is essential to Apple's continued success

Any company in Apple's position must choose between remaining a niche player or competing directly with the companies that dominate the segment.

Apple has tried both strategies. Apple dominated the PC industry in the days of the Apple II, but only by default; Apple was simply the first well-financed company devoted entirely to personal computers. As serious competition emerged, Apple's proprietary solutions lost market share to more open alternatives such as the IBM PC. Apple didn't move out of the mainstream, but the mainstream moved away from Apple.

The Macintosh was the perfect expression of Apple's niche strategy-a closed box that sacrificed almost everything PC buyers found valuable on the altar of user friendliness. It surely was an "insanely great" system from certain viewpoints, but as a commercial product, it was simply insane. It took eight years of technology improvements following Moore's Law to make the Mac what it needed to be from day one.

Apple's management then began to seek a much larger role in the PC market. Macintosh industrial designs became more like the PCs of the day, the better to fit into corporate environments, and Apple's marketing efforts focused on the practical value of the Macintosh. The result was disaster; the Macintosh simply couldn't compete with the PC on price/performance, system variety or software availability. The Mac's few advantages, such as its superior user interface and integrated networking, weren't enough to attract new PC buyers-and besides Microsoft was rapidly integrating these features into Windows. Apple's second fling with the PC mainstream ended with the near-death of the company.

With Steve Jobs' return to Apple in 1997, the company once again began to focus on what it does well-defining and dominating specific niches within the PC market. This strategy-and Apple's success in pursuing it-points to a valuable lesson for other companies in the same position: Market share is not necessarily a primary factor in business success.

Business success is defined primarily by return on investment, not by the magnitude of the return. A large business can be more profitable than a small business due to economies of scale, but that effect pales in comparison to the increased gross margins possible with distinctive products. Apple's current products, with their special finishes and quirky feature sets, are nothing if not distinctive. Continuous innovation, however, is essential to Apple's continued success; thus whenever the company leaves the same set of products on the market for very long, sales flag.

Innovation may also be the key to your company's success. If you can predict where your market is going and get there first-or pick a direction and get the market to follow you-you'll find strong demand and earn a higher return on your investment. Apple has taken the latter course, but "following from in front" can work just as well.

Next month, I'll describe how Advanced Micro Devices Inc. has overtaken Intel Corp. in the CPU speed race by delivering value to the whole PC market, not just a small portion of it. The contrast to Apple's niche focus couldn't be more stark, but innovation also is at the heart of the AMD story.

Peter N. Glaskowsky is a senior editor of the Microprocessor Report. For more information on topics covered in this column, visit http://www.chipinsider.com. Send Peter e-mail at chipinsider@ideaphile.com.