Wednesday, February 23, 2011

Apple and Farmville

We typically think of Apple as using a classic differentiation strategy. They make elegant products that appeal to customers with a taste for high quality user experiences and charge a premium price for this. While that strategy has been very effective for Apple, it suffers from the imitability problem. As rivals produce products that are cheaper than Apple and reasonable substitutes in quality, Apple tends to lose share. The classic example of this was the development of the Window OS, which massively undercut Apple's advantage in UI quality.

Apple now seems to use game theory to anticipate this. When it rolled out the iPad, it adopted a Farmville type strategy. A key component to imitate the iPad is the capacitive glass used in the screens of these devices. This input is difficult to produce with only limited fabs currently manufacturing it. Apple prepaid for about 60% of world output of this glass. Obviously, this helps Apple to avoid shortages and production delays but, more importantly, it ensures that imitators will face high prices for this input as they come to the market. The result is that Apple now also enjoys a cost advantage as well as a differentiation advantage. This will obviously slow market share gains from rivals and allow Apple to sell in quantity thereby further lowering input costs.

The combination of offering a vertically differentiated product while at the same time having lower costs makes Apple a fearsome competitor.

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