What makes Apple Apple

The following is an excerpt from Gary Hamel's forthcoming book, What Matters Now, to be published in December 2011 by Jossey-Bass Business.

In 1997 I bought an e-tablet from A.T. Cross, the pen company. Codeveloped with IBM, the CrossPad was hailed as a breakthrough product that would open up a whole new category--portable digital notepads. I'm a copious notetaker, so the idea of turning my scribblings into digital files was too good to ignore.

This article was originally posted on the Management Innovation eXchange (MIX), an open innovation project aimed at reinventing management for the 21st century.

Truth is, I'm not so much an early adopter as an easy mark. Who was I to argue with "Ozzie" Osborne, head of IBM's Pen and Speech Business Systems business unit, when he declared that the CrossPad would "redefine how users perceive pen and paper?" Yet within a month, the CrossPad was sharing shelf space with all the other "revolutionary" products that had promised to change my life but somehow hadn't.

Over the years I've become a tad less susceptible to the utopian visions of technology's self-proclaimed prophets. Recently, for example, I walked out of a Sony store without a 3-D television. I've learned to my sorrow that a lot of geeky gadgeteers are hucksters not oracles.

Given that, you might have expected me to be at least a teensy bit skeptical of the hype that accompanied the announcement of Apple's first generation iPad in January 2010--but I wasn't. Not that there weren't doubters. Some questioned the need for an iPhone on steroids, others bemoaned the lack of a stylus, while still others panned the device as an wildly overpriced e-reader. I, though, find it difficult to bet against the pride of Cupertino. Not because I'm a hopeless fanboy, which I am, but because Apple has innovation embedded more deeply in its DNA than any other company I know.

With hindsight, the skepticism over the iPad appears downright silly. In its first nine months, the shiny tablet generated nearly $10 billion in revenue--that's 10 with a "b." If the iPad were a company, it would have gone from incubator to the middle of the Fortune 500 in less than a year! A feat that is, I think, unprecedented in the annals of business history.

Over the past decade, Apple has produced a mind-boggling parade of accomplishments.

• Having once been dismissed as a footnote in the personal computer industry, it is now the market leader in computers costing $1,000 or more. Apple's share of the industry's most profitable segment is estimated to be a whopping 90%.
• Apple is today the world's largest music retailer, a milestone reached just six years after the launch of its online music store in 2003. The 10 billionth song sold on iTunes was downloaded on February 24, 2010.
• Though it was a late entrant into the mobile phone business, Apple currently makes more money from its roughly 5% of the global handset market than Nokia makes with its 30-plus share. To appreciate the magnitude of this accomplishment, consider the following. According to the website Asymco.com, at the time of the iPhone's launch, in June 2007, Nokia accounted for 63% of industry profits. Thirty-six months later, Nokia's global profit share had tumbled to 22% while the iPhone's had rocketed to 48%.
• Apple opened its first retail store in 2001. At the time, many retail analysts panned the strategy. Today, though, Apple's sparse, elegant shops generate four times the revenue per square foot of its big box competitors, and its Fifth Avenue store in New York is rumored to be the most profitable retail outlet in the world.
• Since the launch of the company's App Store in 2008, Apple has become the world's largest software distributor. Thus far, developers have created more than 425,000 applications for the company's iOS operating system, and consumers have downloaded more than 10 billion apps.
• As I'm writing this, Apple's market value is $361 billion, making it the most valuable company in the world. To put that in contrast, Hewlett-Packard, a company with twice the revenues of Apple, is valued at only $54 billion.

All this is more than extraordinary--it's nearly unimaginable. It is the business equivalent of an athlete setting world records in half a dozen different sports. Apple may one day fall victim to its own success (most companies do), but if that happens, Apple will stand as one of history's most remarkable companies. Indeed, if I were compiling a list of the most important companies of all time, Apple would be in the top three--alongside Ford, which invented large-scale manufacturing, and General Electric, a company that has been a management bellwether for more than a century.

How in the world could one company accomplish all this? How in the heck do you build an organization that is capable of reinventing not just one industry, but five or six--including computing, music, retailing, mobile phones, software, and (just maybe) media and publishing as well? Most companies never reinvent one industry; no other company in history has reinvented a handful.

Some would argue you have to start with Steve Jobs, the inspired and uncompromising visionary who led Apple from 1976 to 1985, and then again from 1997 to 2011. In that latter fourteen-year period, Apple's share price increased 110-fold. When Jobs stepped down from his CEO post in August 2011, only two months before he would pass away, he left behind a legacy that is nearly unparalleled in business history. As a business icon, he's in the same pantheon as Henry Ford, Thomas Edison and, well, I can't think of another. Apple would never have existed without Steve Jobs--that's obvious. Equally obvious is the fact that the company's unparalleled accomplishments are the product of more than one fertile mind. Even if Jobs had never slept, he couldn't have spawned all the ingenious ideas that have made Apple the world's most innovative company.

Other observers might credit Apple's unique business model. Ask an analyst or MBA to deconstruct the company's gravity-defying performance and they would probably point to these distinctive elements of Apple's strategy:

• Redefine the basis for competition. For years, Apple has differentiated itself through design and ease-of-use. Its competitors, by contrast, have seemed determined to create products that are as homely and nonintuitive as possible.
• Fuse hardware and software. While most of Apple's competitors have specialized in either hardware or software, Apple has pursued excellence in both. By tightly integrating hardware and software design, the company has been able to optimize system performance to the benefit, and relief, of its customers.
• Master a broad array of complementary technologies. With the possible exception of Samsung, Apple encompasses a broader array of technological competencies than any of its competitors. Though it does little of its own manufacturing, Apple's mastery of semiconductor design, advanced materials, batteries, power management, component packaging, application development, and industrial design gives the company a distinct advantage in launching groundbreaking products--and in controlling its own destiny.
• Lock up customers with velvet hand-cuffs. Apple has found ways of locking customers in and competitors out--all with the goal of delivering a delicious end-to-end experience (and making boatloads of money). That's why the only place you can buy music for your iPod or apps for your iPad is in Apple's online store.
• Build a giant network of third-party developers. The success of the iPhone and iPad has been vastly multiplied by Apple's success in activating a global community of passionate developers. Apple understands that competition isn't device versus device, it's ecosystem versus ecosystem.
• Extend the company's core competencies into new markets. Apple's self-definition isn't centered on a particular product or market, but on a portfolio of deep competences. It is telling that Jobs once described Apple as the world's large "mobile devices company" (ahead of Nokia, Samsung, and Sony), and not a computer company.9 A decade ago, no one would have lumped Apple in with these companies--the comparisons would have been with Microsoft and Dell.

As logical as this analysis seems, it is unsatisfying. It reveals something of the "how," but nothing of the "why." Why has Apple been able to rewrite industry rules again and again? Why does it seem to take such pride in defying conventional wisdom? Why is it able to routinely deliver the exceptional?

I don't think it's a particular strategy or person that makes Apple Apple; rather, it's the company's unstinting devotion to a particular set of ideals. Within the universe of inventors, designers, and artists, these ideals aren't all that unremarkable, but within the universe of Fortune 500 companies, they're as rare as water in the Gobi.

Before going further, I should make it clear that my take on Apple's signature values isn't the product of any in-company research I've conducted. Nevertheless, when you ask yourself, "What sort of values would a company have to venerate if it wanted to duplicate Apple's success?" the answers seem almost intuitive.

First, Be Passionate

Great success is the product of a great passion; it arises from the tireless and inventive pursuit of a noble ideal. And for Apple, that virtue is beauty. During his unveiling speech for the iPad, Jobs remarked again and again, "It's just so amazing to hold." Can you imagine Leo Apotheker, HP's chairman, enthusing over a product in that sort of way--taking joyous pride in a technological coup d'art. To deliver years of exceptional performance, a company must first dedicate itself to the pursuit of an exceptional ideal.

Lead, Don't Follow

I'm guessing that most of the folks at Apple hate being derivative. Sure, they'll sometimes borrow an idea from Microsoft or Amazon, but what gets them up in the morning is the chance to break new ground. I'm guessing no one at Apple has ever defended the proposition that it's best to be a fast follower. While Apple doesn't always pioneer a new product category--there were MP3 players before the iPod and smartphones before the iPhone--it always sets itself the challenge of radically redefining the status quo.

Aim to Surprise

As a company, Apple seems committed to exceeding expectations--to wringing little gasps of delight from even its most jaded customers. That's why I think the company's penchant for prelaunch secrecy is more than competitive paranoia; it's simply the way you produce the same sort of gee-whiz delight that a parent aims for on Christmas morning. Apple wants to bewitch us. On this point, listen to Jonathan Ives, the company's head of design: "When something exceeds your ability to understand how it works, it sort of becomes magical." That's the bar Apple has set for itself. By the way, when's the last time your bank did something magical for you, rather than something diabolical?

Be Unreasonable

Greatness doesn't come from compromise, from resigning oneself to the trade-offs others so blithely accept. It comes when trade-offs get transcended, when either/or gives way to both/and. Apple gets this, and frequently challenges itself to do the impossible--like producing products that are both gorgeous and functional. Apple proves that a company doesn't have to choose between high value and low cost. Not only is it one of the world's most innovative companies, its also one of the most efficient--when it comes to lean, Apple gives nothing away to Toyota, Wal-Mart, or Dell. There's an important lesson here: You can't outperform your competitors if you live by their trade-offs. Reasonable people don't produce breakthroughs.

Innovate Incessantly and Pervasively

At Apple, innovation isn't a strategy or a department; instead it's the basic material that goes into everything the company does. From the wafer-thin MacBook Air to the App Store to the Genius Bar, innovation infuses everything Apple does. Apparently there are a lot of people at Apple who realize that innovation--in products, services, and business models--is the only strategy for creating long-term value. If so, they must be relieved that innovation is still a sideshow in so many of their competitors.

Sweat the Details

Apple is justifiably celebrated for its sense of aesthetics--but great design isn't just about bold strokes, it's about getting all of the tiny things right that conspire together to make a product truly exceptional. In Apple's case, it's the magnetically-attached power cord on every laptop, it's the gorgeous packaging that surrounds every iPod, it's the single billet of aluminum that gives structural integrity to every MacBook--plus a lot more stuff you can't see. "It just works"--that's another thing you often hear from Apple's top executives. The company aims to produce products that work intuitively, seamlessly, and reliably--and this can only happen when hundreds of people take the trouble to sweat the details.

Think Like an Engineer, Feel Like an Artist

A company can't produce beautiful products if bean counters win every argument. That thought occurred to me a few years back when I first visited Apple's Fifth Avenue Store in New York. This is now one of the most photographed landmarks in the city--a giant glass cube with the Apple logo floating in the middle. If you haven't seen it, Google it. Now ask yourself, is this the cheapest way to build a store entrance? Obviously not. Can you imagine getting something so extravagant past the CFO in your company? No way. So why does it happen at Apple? Because there are lots of people there whose cranial cavity contains both left and right hemispheres--and they understand their customers are similarly equipped. Apple's executives know that something lovely and sleek and unexpected can provoke a visceral reaction in customers--a reaction that may not be easily quantified but can nevertheless be monetized.

To be clear, I don't think Apple has it all figured out. There are plenty of people who will tell you that Apple has all the monopolistic tendencies of its competitors, or that its success owes more to hype than to truly outstanding products. And no one would accuse anyone on the top team of being humble. The thing that can't be argued is this: Apple is one of the most successful companies ever.

So let's do a bit of compare and contrast. If the values in the left-hand column distinguish Apple (or my airbrushed rendering of it), what are the values that characterize your company? I'm guessing it's something closer to what appears on the right.

Unlike Apple, most companies are long on accountants and short on artists. They are run by executives who know everything about cost and next to nothing about value. Does that sound like an overstatement? If so, here's a recent case in point: a few weeks ago I once again found myself forced to fly on a United Airlines flight. (Sorry, another airline rant.) I had paid well over $1,000 for my one-way, first-class ticket, so when I was served a cup of the world's worst decaffeinated coffee, I couldn't help but enquire politely as to its provenance. "It comes from a 'tea bag,'" the flight attendant explained apologetically. "We stopped serving fresh-brewed decaf a few months back." I don't know how much money United will save by this move, but the airline's penny-wise, pound-foolish approach to customer service has already cost it tens of thousands of dollars in lost revenue from at least one business traveler.

Like many other cost-obsessed managers, United's bean counters seem to have forgotten that productivity is determined by two factors: the efficiency with which the organization uses its inputs, and the value customers place on its outputs. Executives often wrongly equate "good value" with "low price," when what "good value" should mean is amazing value for the price. Historically, many of Apple's products carried a premium price tag, but customers anted up because they also delivered superior fun and functionality. Put simply, hyper-rational executives produce ultra-boring products.

The bottom line: Apple's unique success is a product of its unique values--which are uniquely innovation-friendly and customer-centric. That's why I don't think any other company will soon duplicate the kind of run Apple has had over the past decade--whether or not Apple climbs higher still in the post-Jobs era. I hope I'm wrong, and maybe I will be. Imagine if Apple's passions were the norm rather than the exception. What if the world's leading insurance company or publisher or bank or airline or hotel chain was driven by these ideals? What if you encountered them every time you talked to someone at the Internal Revenue Service or had to apply for a building permit? OK, now I'm hallucinating. But I still can't help but dream of a world in which Apple has become a lot less exceptional because its core values have become a lot less exceptional. Apple may have patented a lot of things, but it hasn't patented the values that made it, for a time at least, the world's most successful company. Apple is proof positive that innovation matters now!