Case Study: Apple, Inc. Strategy Analysis - Part 2

 

...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;

1. Product differentiation focussing on innovation and consumer experience to enter a new market; i.e., Product Strategy.
2. 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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Case Study: Apple, Inc. Strategy Analysis - Part 1

 1  Introduction

Apple, Inc. is a US multinational corporation that needs no introduction.  Apple Inc. with its “Think Differently" motto has been Fortune magazine's  “World's most admired company in the World” for the last 4 consecutive years (Fortune, 2012). On February 28th, 2012, Apple, Inc.'s market value toped $500 billion (Blodget, H, 2012).

'Apple Computers' as it was called prior to 2007 had primarily focused on its core computer business. In 2001, it shifted its strategy by entering the portable digital music player business with the introduction of iPod, and in 2003 entered the music business with the introduction of iTunes music store. According to Apple's FY'07 10-Q, by end of 2006, the iPod & iTunes business contributed to more than half of its revenue. In 2007, “Apple Computer” changed its name to “Apple, Inc.” This paper focuses on Apple, Inc.'s  business strategy in the last five years starting from 2007 to present and throughout this paper 'Apple, Inc.' will be simply referred as 'Apple'.

 2   External Analysis

 Apple competes in the following four industries ;

• Computer Hardware and Software – with 'Mac' line of computers, Mac OS X & iOS
• Portable media devices – iPod, iPad & appleTV
• Smart Phone – iPhone 
• Music, Media and Content Service – iTunes, iBook, App Store and Mac Store

A firm's business strategies are influenced by the forces in its external environment. PESTEL and Porter's five forces framework can be used to analyze the factors influencing the firm's macro-environmental and industry sectors respectively (Johnson et al, 2008, p.55). From Apple's PESTEL Analysis (A1) and Porter's Five Forces Analysis (A2), the key external drivers of change affecting Apple are ;

Political Threat

Apple manufactures and assembles all of its products in Asia (Apple, Inc. FY12 10-Q Form , p36). Hence it is dependent on political stability in these countries. Any political conflict between these countries and the US can have a negative effect on Apple's operations.

Legal Threat

Apple is a successful company and with success comes persistent threat of litigation from any number of sources, e.g., Apple had legal disputes with Beatles on Apple trademark which was settled in late 2006. Currently Apple is fighting Antitrust lawsuit filed against its iTunes download business (Apple, Inc. FY12 10-Q, p33)

Economic Threat

Apple is subject to global economic cycles, like inflation, GDP, interest rates and levels of disposable income. Apple products are considered premium products and puts Apple in disadvantage during economic downturns as consumers are weary of big-ticket purchases like computers, iPhones or iPads. 

Apple is a multinational company maintaining huge cash reserves which is not fully repatriated. Global interest rate fluctuation will have impact on Apple's income as the company earns interest on its cash reserves. Fluctuation in US dollar exchange rate will have significant effect on its profits as more than half of its revenue coming from outside US (Apple, Inc. FY12 10-Q Form, p18). 

Threats from Competitors 

  Apple's competitors are established companies with substantial resources. Any advantage that Apple gains by product differentiation is short lived as competitors have copied them immediately, e.g., mobile phone companies like Samsung, Nokia, Motorola released their version of touch screen smart phones and tablet computers within months after the introduction of iPhone & iPad.   

Threat of  New Entrants

Even though cost can be a significant barrier to entry, some of potential competitors with substantial resources have diversified into Apple's music and smartphone businesses. New entrants to music industry like Amazon, started their own online music business. Microsoft launched the 'Zune' music player to compete against iPod. Google entered smartphone business with Android based phones to compete  against  iPhone & iOS.

 3  Internal Analysis 

In spite of all four of these industries being highly competitive, we can see from Apple's SWOT analysis (A3), that they are all fast growing industries with huge potential. Apple has been able to successfully exploit these opportunities by entering and then creating a sustainable market for its products.

 3.1  Competitive Advantage

A firm achieves competitive advantage when it has one or more core competencies which is a combination of unique resources and capabilities (Johnson et al, 2011, p.97). From Porter’s value chain analysis (A4) and SWOT analysis (A3)  Apple's success factors can be attributed to its unique Resources and capabilities of ;

Leadership and Talented Employees

Even after Steve Job's death, who was the iconic leader of the company, Apple’s executive  management team, that was hand picked and groomed by Steve Jobs are embedded with  “Think Different” philosophy (Lee, 2011).   Tim Cook, the current CEO, took over day-to-day CEO duties from Steve Jobs since his first medical leave of absence back in 2006. Apple under the leadership of Tim Cook, has done extremely well. Apple recruits the best talents available and Apple has one of the best design team headed by Chief designer Jonathan Ive.

Cash

As of December 31, 2011 Apple has about $92 billion in cash (Apple, Inc. FY12 10-Q Form). This gives the company strategic advantage as Apple can pay in cash upfront to its suppliers and lock out crucial supply parts from the suppliers years in advance (Wingfield, 2011). Having huge cash resources protects Apple in fighting legal battles against it and also aggressively pursue legal actions on any firm that steals Apple's intellectual property. 

Brand

Apple is the world's valuable brand valued at $153 billion (Culpam, 2011). Apple brand stands for innovation and design and has a cult like following. 

Culture of Innovation

From Apple's culture web analysis (A7), an innovation culture has permeated throughout Apple's history by Steve Job's “Think Different” philosophy. This has become a self enforcing and self sustaining culture. Apple's culture of innovation is not just limited to products development, but also to its business model, innovative marketing and captivating communications. It not only boosts sales, but enhances the brand value too. This culture of innovation gives Apple a strategic advantage.

Technology with Integrated Value Chain

Apple puts consumer experience more than the technical prowess of the product. Apple is the only vertically integrated company and thus can manage all aspects of the consumer experience. Vertical integration refers to owning all parts of the product value chain. Apple designs and develops its own Hardware and Software platforms for its products, content service via iTunes and App stores, uses its own sales and service via Apple Retail store and online store. By controlling the whole value chain, Apple is in position to extract all the value from it, and also provide an outstanding value in all aspects of consumer experience. This gives Apple a strategic advantage. 

 3.2  Sustainable Competitive Advantage

An organization can attain sustainable competitive advantage if its unique resources and core competencies are rare, inimitable, valued by customers and embedded within its organization (Johnson et al, 2008, p107). Analyzing Apple's Unique Resources and Core Competencies (A5) using VRIO framework (A6) we can conclude that the above mentioned Unique resources and core competencies give Apple a sustained competitive advantage.

   ... continued in Part 2

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