Like so much that emanates from the complex science, the economic idea of “competition” is something of an abstract concept. It can be difficult to envision how the desire of individual firms to outperform one another, in the market, can translate to better products and lower prices in the long-run. But understanding this process is important, not only because of its impact on consumers, but also because of how it affects companies and their investors.
Apple (AAPL), a tech industry and market darling, has been repeatedly lauded (including on this site) as one of the most innovative companies in history. But despite the legendary renown of the company and its founder, Steve Jobs did not entirely create Apple’s impressive array of products; innovation rarely occurs in a vacuum. Rather, the genius of Jobs and Apple — indeed, that of any innovator — is the ability to see potential and to build on what already exists. Jobs reportedly received the inspiration for the Macintosh, which brought the graphical user interface (GUI) into widespread use, after visiting Xerox (XRX). In fact, nearly every Apple product builds on the work of a competitor, from the Mac (IBM) to the iPhone (Palm and Blackberry).
This is not to say that Apple has made its reputation by simply copying others. For one, U.S. patent law, as flawed as it may be, makes such wholesale copying virtually impossible. For another, it is often not enough to simply replicate another company’s work to succeed in the market. An effort must be made to build on that work, to advance it in some way.
Because of their yearly release cycle, smartphones are one of the most prominent examples of this phenomenon. Since the iPhone first brought the internet-capable phone to the average consumer, each year seems to arrive with new phones that feature the latest and greatest in everything, whether produced by Apple, Samsung, Amazon (AMZN), HTC, or Google (GOOG). There is no better market in which to observe Moore’s Law; the massive growth in phone processing power is driven by the need to outperform competitors' products in an effort to win customers. And this goes beyond just clock speed and the number of cores — every feature, from screen resolution, to UI, to camera quality, is better than previous models, all in an effort to compete for market share.
The result is a better phone for the end user. It does not matter whether one prefers the Apple iPhone or the Samsung Galaxy—both are vastly superior products because of the other. And while this constant cycle of competition and innovation is most apparent in smartphones, it is universal: computers, cars, financial services, entertainment options, and so much more are improved by the need to be superior, in order to win customers.
While this concept is important from a consumer standpoint, it is also worth understanding as an investor. Competition-driven innovation, especially in fast-moving fields, such as technology, is what makes many companies thrive. Understanding how well a company can or cannot respond to a competitor’s uprising is important in understanding its long-term potential. In a manner reminiscent of Darwin’s Origin of the Species, the company that will outlast and outperform its competitors is not necessarily the one with the best product or first to market, but the one best able to adapt and innovate. While there is no easily measurable metric of a company’s ability to innovate for the future, it is nevertheless a vital aspect to consider when investing.