After an unprecedented decade of growth, analysts wrote off 2013 as a year to forget for Apple. Most pundits agreed onhbr_130x130 what was wrong — a lack of breakthrough innovation since the passing of founder Steve Jobs. But in our view, Apple faces a deeper problem: the industries most susceptible to its unique disruptive formula are just too small to meet its growth needs.

Apple has seemingly served as an anomaly to the theory of disruptive innovation. After all, it grew from $7 billion in 2003 to $171 billion in 2013 by entering established (albeit still-emerging) markets with superior products — something the model suggests is a losing strategy.

Back in 2008, we suggested that the key to Apple’s success was that it had perfected a particular disruptive strategy we dubbed “value chain disruption.” That is, rather than employ a new technology to disrupt a company’s business model, an upstart disrupts the entire breadth of an entrenched value chain by wresting control of a critical asset. Thus Apple’s integration of its iPod device, iTunes software, and iTunes music store disrupted the existing music industry value chain from the record labels to the CD retailers to the MP3 device makers. The key to Apple’s success was that Steve Jobs was able to convince the major record labels to sell its critical asset — individual songs — for 99 cents.

Achieving such a wholesale disruption of an industry is exceeding rare because the key players in the existing value chain typically have controlling rights to the scare resource, which prevents a new value chain from forming. And they are understandably loathe to give it up. But at the time, the music labels were under attack by upstarts giving their offerings away for free and were embroiled in a fairly hopeless effort to sue Napster and other music-sharing services into oblivion. In relation to nothing, 99 cents looked pretty good.

The deal Jobs struck allowed Apple to form a new digital value chain for the legal distribution of music content with itself at its center, reaping high margins on its iPod hardware. Apple quickly became the largest music retailer in the U.S. The record labels grumbled that Apple sucked the lion’s share of the profits out of the industry, but it was too late.

Jobs and Apple were able to run this play again with the introduction of the iPhone. About a decade ago, wireless carriers like AT&T, Verizon, and Sprint tightly controlled the wireless telecom value chain through the critical asset – so-called “walled gardens” they had placed around their service that prevented users from putting any nonauthorized content on their phones.

Read the rest at Harvard Business Review

Scott Anthony is the managing partner of Innosight.

Michael Putz is a strategy and business development executive with two decades of experience working for Cisco Systems, Telcordia, and major service providers.

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