APPLE’S
INNOVATION STRATEGY
Background
Apple Inc. (AAPL) is
based in Cupertino, California. The company designs, manufactures, and markets
mobile communication and media devices, personal computers, and portable
digital music players. Apple sells a variety of related software, services,
peripherals, networking solutions, and third-party digital content and
applications. Established on April 1, 1976, by Steve Jobs, Steve Wozniak, and
Ronald Wayne, and incorporated January 3, 1977, the company was called “Apple
Computer, Inc”. for the first 30 years, but dropped the word “Computer” on
January 9, 2007, to reflect the company’s ongoing expansion into the consumer
electronics market in addition to its traditional focus on personal computers.
On September 30, 2013, Apple surpassed Coca-Cola to become the world’s most
valuable brand in the Omnicom Group’s “Best Global Brands” report.
Think
different?
Apple’s business
strategy leverages its unique ability to design and develop its own operating
systems, hardware, application software, and services to provide its customers
new products and solutions with superior ease-of-use, seamless integration, and
innovative design. Known for its innovation, Apple has established a unique
reputation in the consumer electronics industry and has a loyal customer base
for reasons as diverse as its philosophy of aesthetic design to its unusual
advertising campaigns. The company believes a high-quality buying experience
greatly enhances its ability to attract and retain customers. Thus, Apple’s
strategy includes enhancing and expanding its own retail and online stores and
its third-party distribution network to effectively reach more customers and
provide them with a highquality sales and post-sales support experience.
Before returning to
Apple, Steve Jobs said in a 1996 interview for Wall Street Week with Louis
Rukeyser:
“Apple
was a company that was based on innovation. When I left Apple ten years ago, we
were ten years ahead of everybody else. The problem was that Apple stood still.
Even though it invested cumulatively billions in R&D, the output has not
been there and people have not caught up with it and the differentiation has
eroded in particular with respect to Microsoft. And so the way out for Apple,
and I still think Apple has a future, there’s some awfully good people there
and tremendous brand loyalty to that company. I think the way out is not to
slash and burn, it’s to innovate. That’s how Apple got to its glory, and I
think that’s how Apple could return to it.”
Apple’s stock price was
flat for 2013, although the shares rose 33% in the second half of the year,
reversing steep losses in the first six months as the company saw concerns
regarding slowing revenue growth and losing market share to Android. The
company saw stock price decline after it reported its first quarter 2014
earnings due to disappointing iPhone sales and outlook. Apple chief executive
officer (CEO), Tim Cook, is facing pressure over a lack of innovation, as Apple
has yet to introduce any groundbreaking products, although there have been
speculations around an iWatch or iTV that could offer a new revenue
opportunity.
Apple’s
strategy
On low-end devices,
Apple CEO, Tim Cook, told Bloomberg Business Week in an interview in 2013, “We
never had an objective to sell a low-cost phone. Our primary objective is to
sell a great phone and provide a great experience, and we figured out a way to
do it at a lower cost.” Cook’s thoughts echoed those of his predecessor, Steve
Jobs, whose strategy for Apple had four pillars:
1. Offer a
small number of products.
2. Focus on
the high end.
3. Give
priority to profits over market share.
4. Create a
halo effect that makes people starve for new Apple products.
Differentiation
Apple attempts to
increase market demand for its products through differentiation, which entails
making its products unique and attractive to consumers. The company’s products
have always been designed to be ahead of the curve compared to its peers.
Despite severe competition, Apple has succeeded in creating demand for its
products, giving the company power over prices through product differentiation,
innovative advertising, ensured brand loyalty, and hype around the launch of
new products. By focusing on customers willing to pay more and maintaining a
premium price at the cost of unit volume, Apple also set up an artificial entry
barrier to competitors.
Apple sells its products
and resells third-party products in most of its major markets directly to
consumers through its retail and online stores and its direct sales force. The
company also employs a variety of indirect distribution channels, such as
third-party cellular network carriers, wholesalers, retailers, and value-added
resellers. Apple uses a retail strategy called “minimum advertised price” (or
MAP). Minimum advertised pricing policies prohibit resellers or dealers from
advertising a manufacturer’s products below a certain minimum price. MAP is
usually enforced through marketing subsidies offered by a manufacturer to its
resellers.
According to Macworld,
Apple maintains the popularity of its high-priced products by only offering
retailers such as Wal-Mart or Best Buy a marginal wholesale discount. This
small percentage in savings isn’t enough of a profit margin for retailers to
offer big discounts on Apple’s products, which means customers end up paying a
price close to the manufacturer suggested retail price (MSRP). However, a
retailer could give up this small profit margin and offer products at a
discount to attract more customers. Apple prevents this scenario by offering
monetary incentives to retailers to sell goods at the MAPs fixed by the
company.
This price strategy is
effective insofar as it prevents retailers from competing directly with Apple’s
own stores, and it also ensures that no one reseller has an advantage over
another. So Apple is able to keep its distribution channels clean as well as
make more money on its direct sales. The Macworld article further noted that
iPhones were not under a strict pricing model, as they are sold at a lower
price with wireless contract deals, as retailers gain a commission from
carriers.
Premium
prices
Jobs’ vision for Apple
was always to create a premier product and charge a premium price. Apple’s
cheapest products are usually priced in the mid-range, but they ensure a
high-quality user experience with their features. The hardware and user
interface are designed to provide a lot of value for the price, which keeps
profits high. However, a company can charge a premium price as long as it has a
competitive advantage, and analysts believe the brand is on the way to losing
its “aspirational” status. With increasing competition from Android and
low-cost smartphones, as well as saturation in the developed markets, analysts
feel that the company could risk becoming a high-end niche name.
According to IDC’s
mobile phone forecast in the third quarter of 2013, a number of trends co-exist
in the global smartphone market − but none have more of an effect on driving
market growth than the steady decline in average selling prices (ASPs). Android
has enabled a number of new manufacturers to enter the smartphone market,
supported by a variety of turnkey processing solutions. Many of these handset
vendors have focused on low-cost devices as a way to build brand awareness. In
2013, IDC expects smartphone ASPs to hit $337, down 12.8% from the $387
recorded in 2012. This trend will continue in the years to come, and IDC
expects smartphone ASPs to gradually drop to $265 by 2017.
Strategic
change
When it comes to
smartphone innovation, Apple just changed its strategy in a fundamental way.
Instead of releasing one new premium product each year, Apple has now adopted
the approach favoured by the world’s most successful consumer brands: creating
a high-end premium line for the most affluent customers and a scaled-down
product line at a lower price point for everyone else. In the case of Apple, it
means offering the high-end Apple iPhone 5S in gold, silver and platinum to its
most affluent customers, and a cheaper iPhone 5C in fun plastic colours for
everyone else. In other words, people with the gold cards get the gold phones,
and the creative types get the colourful phones. Apple’s new approach has
consequences for innovation in the smartphone market. The innovative new
technologies that are included as part of the iPhone 5S – like the fingerprint
sensor Touch ID, the upgraded camera functionality and the new motion sensor
chip for fitness apps – were unveiled for the 5S, but not the 5C. This means
that consumer innovation is a top-down, rather than a bottom-up, process.
Just as some economists
believe that the economic benefits from cutting taxes for the wealthiest
citizens of a nation will eventually “trickle down” to the broader population,
Apple now believes that technological innovation will eventually “trickle down”
to the broader population of smartphone users. The elite athletes and the elite
photographers may gravitate to the new iPhone 5S to check out the motion sensor
and the new camera features. And those innovations, once they’ve been picked up
by a company like Nike (a partner mentioned by Apple in its presentation), may
find their way into the broader consumer marketplace. Not that there is
anything wrong with that.
That is the way it works
with the world’s top consumer brands. Consider, for example, the world’s top
automakers – they introduce innovations like parking assist and satellite
navigation into the high-end models first, before rolling them out to every car
and every model. A company like Toyota segments its product lines so that there
is a Lexus for the most affluent customers, but also a high-quality Toyota for
everyone else. Contrast this approach, though, to the way that Apple has
traditionally thought about innovation in the smartphone market. The strategy
was always to introduce one premium phone at a time, and to ensure that the
newest smartphone was always the best possible phone in the world. According to
Apple, the iPhone 5S is “the most forward-thinking smartphone in the world”,
but where does that leave the 5C? As the world’s second-most forward-thinking
phone?
Part of what always made
Apple so special and magical − at least, to the Apple fanboys and fangirls− was
that the one premium product per year strategy meant that a minimum-wage worker
could have access to the same technology as a Wall Street hedge fund manager.
There was never a sense that Apple users were viewed as “gold” and “silver” and
“platinum” users – it was a sense that all Apple users were somehow superior to
all the Android users out there. In an Apple retail store, there was never a
very important person (VIP) room or a special roped-off area for the top Apple
users. Everyone was a genius. Innovation did not so much trickle down, as it
seemed to swell up and emanate from everyday people in the crowd.
Now, Apple is back in
the position of selling phones the way automakers sell cars, the way financial
services companies market credit cards, and the way fashion brands launch new
product lines for their customers. Maybe, as many people have already
suggested, that is just a reality of a mature smartphone market in which it is
harder than ever before to find new buyers.
The good news is that
Apple seems to have deflected earlier criticism that it had somehow settled for
“incremental innovation”. And, by pricing the iPhone 5C at a high enough price
point, there is no sense that the iPhone 5C will become a cheap, throwaway
phone for the world’s lowest-income users. The bad news, though, is that Apple
must now hope that all the high-end affluent users out there will use their
smartphones in creative ways, and that this creativity and innovation will be
passed down to other Apple users in the form of new functionality and new
features. Just as we have seen people argue the various merits of trickle-down
economics, we may soon be arguing the benefits of trickle-down innovation.
Why
Apple’s ecosystem is its biggest competitive advantage − Apple’s vertical
integration
Vertical integration has
given Apple a competitive advantage, as it owns chip manufacturers, controls
manufacturing, follows extremely strict software standards, and operates in a
nearly closed ecosystem of proprietary retail stores. With these advantages,
the company has more control over its value chain and, more importantly, its
component costs. Google’s (GOOG) acquisition of Motorola and Microsoft’s (MSFT)
acquisition of Nokia were made with the objective of pursuing this end-to-end
strategy that has until now only worked for Apple.
Apple is known to have
the most popular, addictive, and tightly integrated ecosystem of all technology
companies. The devices and software Apple makes are designed to work well with
each other and sync easily so that preferences and media can be copied or
shared with multiple devices without much effort. Applications work on multiple
devices at the same time − even with a single purchase − and user interfaces
are very similar across devices. According to a Harvard Business Review blog
posted by Ron Adner, when Apple broadened its product portfolio from iPods to
iPhones, it carried over not only the technology and software that powered the
iPod but also users’ entire music collections and iTunes’ entire supplier base.
The move was not about just switching costs, but also about leveraging existing
relationships to create an enhanced offering.
Currently, Google
(GOOG), Microsoft (MSFT), and Amazon (AMZN) have entered the fray by setting up
their own ecosystems, including devices, books, games, music, media, and
storage services. Each of these companies has its own distinct strengths and
has been trying to grab market share from Apple. Amazon leads in e-commerce,
while Google dominates online search and advertising. However, Apple had a head
start with the success of its iPods, iTunes software, and iTunes Store, and
Apple was also one of the pioneers of touchscreen technology in phones. Apple’s
App Store recorded more than $10 billion in sales in 2013, as the company
announced this month. In December alone, customers spent $1 billion on nearly 3
billion App Store downloads, making December 2013 the most successful month in
App Store history.
At the 2013 Worldwide
Developer Conference (the WWDC), Cook said the Apple developer ecosystem
includes 6 million developers and that there have been 1.5 million new
developers added since WWDC in 2012. Apple said on its recent earnings call
that as of January 2014, 80% of Internet work operating system (iOS) devices
are running iOS 7. That dwarfs the single-digit adoption percentage measured
for the latest version of the Android operating system, and it makes iOS 7 the
most popular operating system in the world.
A
leading supply chain ranked first in the world for the third time
IT research firm Gartner ranked Apple’s supply
chain last year as the best supply chain in the world for the third time in a
row. Apple’s products and components are manufactured by a number of suppliers
around the world. The final assembly of most products happens mainly in China.
Apple has built a closed
ecosystem, with the company having control over nearly every activity in the
supply chain – from design to retail. It has outsourced its assembly for
economic reasons but has also partnered with manufacturing companies that
understand that Apple’s products require different techniques and approaches,
which often must be accommodated by very little lead time.
The company faces a
number of expectations from suppliers and draws up exclusivity agreements for
key components. Accordingly all planning is carried out in secrecy to avoid
information leaks. Apple said in its annual filing that although most
components essential to the company’s business are available from multiple
sources, a number of components are currently obtained from single or limited
sources. Plus, the company competes for various components with other market
participants for mobile communication and media devices and personal computers.
Apple uses some custom components that are not commonly used by its
competitors, and Apple’s new products often use custom components available
from only one source.
Current CEO Tim Cook was
originally brought in by Steve Jobs to make Apple’s supply chain more
efficient. Cook reduced the number of component suppliers and shut down
warehouses to limit overstocking. Inventory was reduced from a month to only
six days. A recent Bloomberg report said Apple is investing a record $10.5 billion
in new technology − from assembly robots to milling machines − in its supply
chain to improve sales that have been slowing due to competition.
A recent study by the
U.S. Congress on U.S.-China trade stated that Apple’s innovation in developing
and engineering the iPod and its ability to source most of its production to
low-cost countries, such as China, have helped the company become a highly
competitive and profitable firm as well as a source for high-paying jobs in the
U.S. The study looked at the production of an Apple iPod, which was made in
China by Foxconn, a Taiwanese company. A report last November by Digitimes
cited Taiwan-based original equipment manufacturers (OEMs) and said that Apple
has shaken up its supply chain and that OEMs were responsible for both
component procurement and production.
Sources
Adapted
from:http://www.washingtonpost.com/blogs/innovations/wp/2013/09/11/apples-new-strategytrickle-down-innovation/
[Accessed: 10 September 2014]
Adapted
from: Nielsen, S. 2014.Why innovation could be the key to Apple’s growth.
Market Realist, 29 January. http://marketrealist.com/2014/01/apple/ [Accessed:
10 September 2014].
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