How the iPhone Got Tail Fins—Part 2 of 2


Read part 1 of this post for background.

By the early 1920s General Motors realized that Ford, which was now selling the Model T for $290, had an unbeatable monopoly on low-cost automobile manufacturing. Other manufacturers had experimented with selling cars based on an image and brand. (The most notable was an ad by the Jordan Car company.) But General Motors was about to take consumer marketing of cars to an entirely new level.


Market Segmentation

General Motors had turned the independent car companies acquired by its founder Billy Durant into product divisions. But in a stroke of genius GM transformed these divisions into a weapon that Ford couldn’t match. With the rallying cry “a car for every purse and purpose,” GM positioned its car divisions (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac) so they would cover five price segments – from low-price to luxury. It targeted each of its brands (and models inside those brands) to a distinct economic segment of the population. Chevy was directly aimed at Ford – the volume car for the working masses. Pontiac came next, then Oldsmobile, then Buick. The top-of- the-line Cadillac offered luxury and prestige announcing you had finally arrived at the top of the conspicuous consumption heap. Consumers could announce their status and lives had improved by upgrading their brands.

GM had one more trick to make this happen. Within each brand, the top of the line was just a bit less expensive than the lowest priced model of the next expensive brand. The goal was to convince the consumer to spend a little more to trade up to a more prestigious brand.

Market segmentation by price was something no other automotive manufacturer had ever done. While other car companies could compete with one of GM’s divisions, few had GM’s capital and resources to compete simultaneously with the onslaught of car models from all five divisions.

Planned Obsolescence

While market segmentation allowed GM to use its divisions to reach a wider market than Ford or Chrysler, this didn’t solve the problem of market saturation. By the late 1920’s, most everyone in the U.S. had a car. And cars lasted 6 to 8 years. Even worse, the market was now filled with used cars that provided even lower cost basic transportation. Sloan, the General Motors CEO, faced two seemingly unsolvable challenges:

  • How do you get consumers to abandon their perfectly fine cars and buy a new one?
  • How do you turn a product that competed on price and features into a need?

In another stroke of genius, GM invented the annual model change. Sloan borrowed this idea from fashion where styles changed every year and applied it to automobiles starting in the 1920s. General Motors would change the external appearance of cars every year. Sloan preferred to call it “dynamic obsolescence.”

Styling and design became an integral part of GM’s strategy. Sloan hired Harley Earl to set up GM’s in-house styling staff. Earl would run it from 1927 to 1958.

Before Earl, cars were designed by in-house body-engineers who focused on practical issues like function, costs, features, etc. Each exterior component was designed separately to be functional – radiator, bumpers, hood, passenger compartment, etc. Some companies used third-party bodymakers to set the style , but GM was the first to take car design away from the engineers and give it to the stylists.

The concept of yearly “improvements”, whether styling or incremental technology improvements, every model year gave GM an unbeatable edge in the market. (Henry Ford hated the idea. He had built Ford on economies of scale – the Ford Model T lasted for 19 years.) Smaller car makers could not afford the constant engineering and styling changes they had to make to … Next Page »

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Steve Blank is the co-author of The Startup Owner's Manual and author of the Four Steps to the Epiphany, which details his Customer Development process for minimizing risk and optimizing chances for startup success. A retired serial entrepreneur, Steve teaches at Stanford University Engineering School and at U.C. Berkeley's Haas Business School. He blogs at Follow @sgblank

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6 responses to “How the iPhone Got Tail Fins—Part 2 of 2”

  1. Jered Floyd says:

    Great retrospective of the change in cars from transport to fashion. I just purchased your book on a recommendation and look forward to reading it.

    I agree that Apple does this sort of thing frequently. They’re very interesting in the mobile phone industry. They’re the only vendor that has consistently updated the software on older phones (with Android it’s hit-or-miss by vendor, but getting better), but on both mobile and the desktop they’ve done feature segmentation that is entirely separate from capability. Nothing in the iPhone 4S, for example, enables Siri… it all runs server-side. Yet, it’s not available on the older phone models.

    There’s one aspect of the iPhone model that differs greatly from the car upgrade model, and recent policy changes will show if the iPhone Next (I’m betting on a shift away from numbering, perhaps it will be the iPhone LTE) will have quite as massive a launch. I’m talking, of course, about the US model of the business distorting handset subsidy.

    An iPhone really costs around $750, but you only pay $200 for it because of a tradition in the US of getting a subsidized phone in exchange for being locked into a contract with the provider. Until April, AT&T would allow a fully-subsidized upgrade (for high-value, i.e. iPhone users) every 12 months in exchange for a renewed 2-year contract. This is a big part of what drove early adopters like myself to upgrade every year.

    In April, this changed. AT&T will now only fully subsidize upgrades every 20 months. That means that those of us who just upgraded to the 4S will not be eligible for the inevitable next iPhone shipping in a year. I bet you most of us aren’t going to pay an extra $300 for a semi-subsidized upgrade, and instead will start skipping a cycle.

    The every year upgrade model was unsustainable anyway, but it will be very interesting to see how this change affects the next launch.

  2. Billy Bob says:

    @ Jared

    Have you not seen any of the documents showing the cost of a shipped iphone to be around $180 USD?

  3. Jered Floyd says:

    @Billy Bob: I’m referring to the purchase price, not the manufacturing cost.

  4. Chris Noble says:

    Fascinating story. Detroit is now an industrial wasteland, a testament to how the US auto industry almost destroyed itself at a huge cost to the US economy and blue-collar communities in its focus on wasteful consumption rather than value creation. I think Steve Jobs’ legacy will be more positive! But Jered’s comment above about Apple’s “planned obsolescence” strategy should be a cautionary tale… Wall Street is expecting continuously-growing earnings from Apple… I feel a bit sorry for Tom Cook.

  5. Shashi P says:

    There is a fundamental fatal flaw in this analogy, and that is an automobile is something that takes you from point A to point B. Even over the years you could as a driver at most listen to the radio as an added task, nothing more. No new tasks can be integrated into the driving of the automobile – you can’t cook your lunch or shave your face.

    On the other hand, a phone is no longer just a phone it is continually integrating new tasks that were previously external to it- web search, navigation, assistance and in the future payment ewallet. This is a fundamental difference. Integration of tasks is creating obsoleteness of a previous more limited set of tasks.

    What you seem to have confused are the “features” of the car vs “features” of the phone (as you try to set it up in Part 1). It is not features that should be compared between next generation of phones but tasks.

    The two paths of evolution are completely different. As Siri might say ‘Are there other tail fins out there?’

  6. Shashi P says:

    @Chris Noble
    You seem to have no grasp of the lines of thinking or vision in the whole information technology space. Detroit died trying to churn out commodity cars at high cost of living while globalization was occurring with no innovation at its base.

    If you are able to see anywhere into the future you will understand that we are traveling at high speed toward a Star-Trek tricorder future. Just think of how much innovation can be squeezed out between todays phone and the tricorder! For example your phone in the future can scan you and tell you that you have a specific type of bacterial infection. That is where we are headed.

    Steve Jobs changed the road of innovation in some profound ways looking into the future. He set the path to making reality what only the futurists dreamed possible one day.

    I think those who are unable to imagine the future will look at the wasteland of the past to find a reason to stop moving and sit by the wayside and fret about the state of things.