There are broadly two ways of putting a product together – Modular and Integrated. Modular players like Compaq / HP / Dell in PC industry or Samsung / Huawei / One Plus in Mobile phone industry put various parts from various manufacturers together and create a product. Integrated players like Apple / Google / Microsoft – while still relying on 3rd party manufacturers for some components – control the core experience of the product like Operating System / Processors.
For every new category of product that gets launched in a market, there are various steps that involve bringing a product from conception to distribution, and everything in between—such as procuring raw materials, manufacturing functions, and marketing activities.
New Product Categories – Integrated Players
Given the novelty of the product / technical challenges involved in putting various pieces together, integrated players succeed in debuting the product categories. Let us take Personal Computer as an example. Apple and IBM probably are the first ones that envisioned a PC on every desk. Making a PC involved putting various pieces together like RAM, Processor, Operating System to start with. Display, Networking, Tooling for the cabinet holding these parts together and Marketing/Retail that come at a later stage.
But… All great product managers work backwards from customer experience. They painstakingly put all the pieces together in an integrated way the technicalities of which are hidden from the end user. All a user should care is about the user-experience and all successful first gen products nail this piece of the puzzle.
Let us take example of iPhone and appreciate how integration works. The processor of first gen iPhone was so under powered it took 2 seconds for the iPhone to register a shutter button click on the camera app. To counter this, Apple smartly started capturing photos in the background the moment camera app is opened. On receiving a capture command, the iPhone just showed the image it captured 2 seconds ago. There are numerous such tricks that made the iPhone possible and flummoxed the competition.
Now, this is impossible to conceive and execute unless you control all the pieces of the puzzle. As Apple controlled all the core technologies like Operating System, memory, bandwidth and through puts to the processors, they were able to make the iPhone happen. Modular players can never achieve this. Its only 2 years later that we found solid alternatives to iPhones in Android world.
Enter the Modular Players
After integrated players pave way for new product categories, it won’t take long for the competition to come up with cheaper/modular alternatives. It took roughly couple of years for IBM to introduce a competing product for Apple II. Similarly HTC was able to put together a response to the iPhone in 18 months.
When integrated players develop products, what they also do is to define standards for various technologies in the pipeline. A product is a combination of various trade off decisions:
Its about deciding between having many processor cores with meagre performance or having lesser cores with greater single core performance. (Though you have 8 cores, if there is a process with only 2 threads, other 6 cores are useless!)
Its about deciding between screen having more pixels per inch or having just enough number of pixels with true color representation and wider viewing angles.
Its about deciding between having an open source operating system and dealing with all sorts of viruses and inconsistencies or to go with a curated Appstore approach.
Its about deciding to have a higher processor clock speed or a lower clock speed with optimized performance and sustained throughput. (Phones with higher clock speeds slows down once the phone gets heated to compensate for the temperature)
A successful product gets market approval and democratizes such knowledge. Any uncertainty on drawing board is now conventional wisdom. This allows modular players to quickly break the integrated product down into modular pieces and conquer them.
Various Parts that make an iPhone
Instead of one integrated player chasing suppliers for Processors, Batteries, Screens, etc.. we will now have multiple companies building processors, batteries, screens, etc. This allows competition in each step of the value chain that allows superior performance across the board. Samsung produces better screens than Apple, (Apple now sources screens from Samsung) Qualcomm produces better processors than Samsung, Corning produces better screen glass than everyone else, etc.
This allows a manufacturers like Oneplus to source parts from different manufacturers and put together a superior phone over everyone else at a cheaper price (Oh yes, the competition drives prices down as well, in addition to pushing performance)
This approach has its own associated risks. A manufacturer putting together a complete device by stitching various parts together transfers the negotiating power to the monopolistic suppliers. While components like Battery, Screen and Screen glass are fairly replaceable, vendors that provide Operating System and Processor like Google and Qualcomm (by virtue of their irreplaceable nature) squeeze all the profits from the value chain leaving the brands like One plus high and dry. (This is a 2 part series and I’ll touch upon the dynamics and profit accumulation in modular value chains in part 2)
Hedging against Modular Playbook
The society at large appreciates these kind of products and show their adulation with their wallets in the absence of competition. Once cheaper alternatives show up, situation for integrated player starts to looks grim.
Apple understood this very early and entered into all the places which are core areas of controlling user experience like Processors, News, Maps, Health, etc. that allowed them to keep competition at bay.
In addition to controlling primary technologies of the product, another strategy that integrated players (given that they have a head start at the product category) deploy is to lock users in the ecosystem. Tech pundits call these walled gardens. Apple does that with iCloud, Apple Music, App Store, etc. Users who start using these services find it hard to switch to other platforms and keep upgrading their iPhones for better iPhones.
Users are starting to realize this, and are wary about locking themselves down. Majority now wait out to see how a new product category pans out allowing big organizations to make an entry. Hence, today, a new product category from a start up looks highly improbable. They either get acquired or go out of relevance after tech giants enter the market.
Let us circle back the entire premise to the theory of disruptive innovation:
We can clearly see Customer Expectation, Performance of Integrated Players and Performance of Modular players in 3 distinct lines.
Till point P1, as modular players figure out various integration issues and come up with a product that matches customer expectations, Integrated players are safe. Starting P1, Modular players start performing to customer expectations at a lower price. The integrated player still has better performance.
At point P2, as efficiencies across the board improve, (because of competition at various levels that we looked at earlier) modular players start outperforming the integrated players.
So integrated players have time T1 to lock price sensitive customers into their ecosystem. After T2, it becomes very difficult to retain even price insensitive customers as integrated players start loosing to competition on performance.
Therefore, creating a successful product is one thing and staying on top for several years is a completely different undertaking!