Clayton Christensen's seminal work The Innovator's Dilemma1 describes how incumbent vendors typically compete by continually adding performance (typically in the form of new features) eventually overshooting the requirements of their target market and providing an opportunity for upstart competitors to provide a lower-cost "good enough" solution.
But John Gruber at Daring Fireball writes:
No one’s going to beat Apple by being "good enough". The only way to beat the iPhone is by creating something better.Intuitively I agree with John that Apple doesn't face this problem with the iPhone. But why don't they? I think the answer lies in the reason people buy Apple products in the first place.
Apple doesn't sell products based on laundry lists of features. In fact, their products often lack features considered standard by competitors. For instance, the iPhone has a substandard 2 megapixel camera with no flash, no video recording capabilities, no voice dial, etc. Many of the features of the iPhone are in fact only "good enough".
Instead, Apple differentiates itself on design. Their products feel right. And to their customers, "good enough" design will never be compelling, regardless of how high Apple sets the bar.
By choosing to compete on design instead of technology alone, Apple seems to have found a loophole in the Innovator's Dilemma.
Update: Thanks for the many excellent comments to this post.
1 If you haven't used Google Book Search, click the link to be freaked out.