...continued from Part 1
4 Strategy Analysis (2007 – present)
Apple has utilized its unique resources and core competences to obtain tremendous success over the last five years .Today it has annual revenue in excess of $125 billion compared to $20 billion in end of 2006 and in the span of 5 years between 2007 to 2012 Apple's stock value increased more than 500% from $85 to $542 per share (wikiinvest-APPL, 2012).
4.1 Strategic choice
Apple products follow a Focussed differentiation strategy. According to Johnson et al (2008), a focussed differentiating strategy seeks to provide high perceived product value to customers, justifying a price premium and aimed at a niche segment of the market. Apple has been very successful in creating innovative products targeted at higher income customers who are willing to pay premium price for superior user experience.
On the surface, it could appear that Apple's competitive advantage is solely due to product differentiation. But on a closer look, Apple's success is not entirely because of its ability to consistently create innovative products. Creating innovative products gives Apple only a temporary advantage as its competitors have imitated and launched their own versions of product in a matter of months. Apple's success lies in its ability to create a platform around their products that drives and sustains growth. A platform strategy is one in which third party developers and media companies can sell their contents that runs on Apple's products.
Apple is unique in that it enters a red ocean, i.e., a highly competitive market and succeeds by changing the market paradigm. Apple combines its 'Product strategy' with a 'Platform strategy' that is free of threats and sustain long term growth. Apple's “Product+Platform” strategy can be summarized as a two phase strategy;
- Product differentiation focussing on innovation and consumer experience to enter a new market; i.e., Product Strategy.
- Platform development to build, adopt and then consolidate the platform that is centric to its products to achieve long term growth; i.e. , Platform Strategy.
In the last 5 years the most important products from Apple was the launch of iPhone in 2007 and launch of iPad in 2010. Both of these products were diversification to new industries and today constitutes about 70% of Apple's revenue (Apple, Inc. FY12 10-Q Form Apple). To understand Apple's iPhone success and subsequent iPad success, its important to understand what Apple did with iPod+iTunes business.
When iPod was launched it was a very innovative product that made technology easy to use. It was hugely successful among the early adopters but its long term success was primarily due to iTunes music store. The iTunes music store created a platform for online music downloads and iPod was the perfect companion for this platform. This digital music platform is the reason why the iPod dominats the portable digital player market even today, in spite of its competitors coming up with digital music players that were technologically superior to iPods. For example, Microsoft's 'Zune' music player had color screen and video capabilities even before Apple introduced them in their iterations of iPods. However Microsoft's Zune was not successful because it did not have that convenient music platform like iTunes. By 2007, iTunes had evolved considerably enough that customers were locked-in to this platform due to its convenience and ease of use. As more people buy iPods, more media houses want to sell their content in iTunes and as more entertainment are available on iTunes, consumers are more likely to buy iPods. This self-reinforcing cycle can sustain and reinforce growth by raising barriers to competitors (Lohr, 2011). Apple repeated this same “Product+Platform” strategy with their iPhone and iPad products.
4.2 iPhone in 2007
In 2007, Apple entered the highly competitive mobile phone market with iPhone. iPhone was a product extension of iPod. The iPhone primarily differentiated itself from other mobile phones by its user interface which was the industry-first multi-touch screen. From Ansoff’s Product/Market Matrix (A12), iPhone targeted both existing Apple customers and also new customers by diversification to mobile phone market.
Apple's first movers advantage was short-lived as their competitors like Nokia and Samsung introduced their own version of iPhone-look-feel phones within few months. In 2008, Apple launched “App Store”. The word “apps”, short for applications that run on iPhones was introduced by Apple during the launch of App Store. The App Store allowed third party developers to create application to run on iOS which consumers can download onto their iPhones. This was the beginning of Apple's mobile platform. While competitors were busy making feature-level comparisons to their products, Apple consolidated its iPhone platform and laid the foundations of a new growth engine that revolutionized mobile phone industry.
Apple makes 30% commission on all apps revenue. On March 4th 2012, Apple announced that 25 billion Apps were downloaded from its App store (Brian, 2012). As more 'apps' are available for people to download, Apple's mobile platform gets dominant which in turn sells more iPhones. From Ansoff’s Product/Market Matrix (A8), success of App stores along with iTunes consolidated the existing iPhone market and also developed new market as iPhone customers were introduced to other Apple products like iPods and Mac computers.
4.3 iPad in 2010
After iPhone, the next major product launch from Apple was the iPad, a tablet computer. Apple introduced iPad in 2010, positioning it between the laptops and smart phones as a companion product in Apple's product lineup. Apple leveraged the iPhone and iPod designs, and integrated iTunes store and the App store in iPad. iPad was a diversification towards the e-reader market as iPad presented opportunities to the publication and content industry. During the iPad launch Apple also announced “ibook store” which is an extension of its Apps store targeting media publishers. The ibook store launch was accompanied by Apple's partnership announcement with five large book publishers: Penguin Group, Harper Collins, Hachette Book Group, Simon & Schuster and McGraw-Hill. This laid the foundation of a e-reader platform with iPad.
In January, 2012 Apple consolidated the iPad+iBook platform further by releasing the iBook2, and iBooks author which lets anyone author and create digital books on iPad. The ipad+ibook platform has potential to revolutionize educational sector by giving teachers and any other authors the ability to create their own interactive books.
4.4 Product Iterations & Market Expansion (2007-present)
Apple operates a very short product life cycle. Throughout the last five years Apple has continuously updates product line with innovative features that has kept it one step ahead of its competitors and at the same time consolidating its platform adoption. Popularity of iPod, iPhone and now with iPad has strengthened Apple's brand which in turn is drawing more customers to Apple's Mac computer products. Apple reports that half of all computer sales through its retail channel are to people new to Mac computers, Mac products saw an increase of 21% in 2011 (Apple, Inc., FY12 10-Q Form).
The popularity of iPhone and iPad has penetrated the corporate business market segment which Apple had no presence before the introduction of iPhone. Adoption of iPhone among the corporate users has increased Mac computer sales among the corporate users. Apple introduced Macbook Air in 2008 targeting the corporate uses. Even though Macbook Air sales is relatively small compared to overall Apple products sales, it has seen year over year increase (Apple, Inc., FY12 10-Q Form).
5 Conclusion
Apple has built a culture of transforming industries by introducing innovative products. iPad is likely to become another big platform for Apple. With iPad, Apple has created a completely new market, just like they did first with the iPod and then with iPhone. Success of the iPhone, and iPad does not appear to be slowing and should continue into 2012 and beyond. Besides these products, Apple’s biggest competitive advantage is its digital content service business based on iTunes and Apps Store, which no other competitor can replicate in the short-term. Apple remains promising because of is strong brand combined with the halo effect of iPod, iPhone and iPad products have on its other businesses.
6 References
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