As a company Apple Inc. has developed from being a pioneering PC company specialised in creating high end PCs to a diversified design powerhouse focused on constantly innovating products that not only revolutionise and redefine industries but that also reshape customers’ perceptions of products and functionality simultaneously. This report attempts to put to Apple, its businesses, its products and strategies under the microscope in order to provide the reader a better view of the underlying reasons for Apple’s success with specific regard to strategy.
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The report begins with a detailed overview of Apple’s core strategy of differentiating itself by constant innovation of products that redefine the boundaries of the industries it operates in. From here, a link is made to show the corporate structure of the company and more importantly to highlight the culture of innovation within Apple that serves simultaneously as its driving force and competitive advantage.
Further the report examines Apple’s evolution in the PC industry, its positioning of Macintosh computers as ‘digital hubs’ that add value to a chain of digital devices and how its model integrated of hardware/software has served as the foundation for its other products.
Later, analysis of holistic view of Apple’s development and strategies in the consumer electronics industry and how innovation has allowed it to become a dominant brand in the industry by surpassing stalwarts such as Sony in delivering consumer friendly devices. Few recommendations are made to Apple executives who could take a note of in order to stay ahead of the pack in their various businesses.
The Strategies, Corporate structure and culture of the firm
Apple is considered as one of the most reputable companies in the PC and digital industry all over the world. It has received many awards and recognition in many different categories and is ranked as the world’s most admired company consecutively for last three years. There is great effort behind Apple’s success in the market. Also there are many factors involved in its ongoing success as the market innovator. Apple has brought a big change in our day to-day life, simplest being buying music to participating in the domain around us. (Christine Thompson)
As BMW CEO Norbert Reithofer puts it, “The whole world held its breath before the iPad was announced. That’s brand management at its very best.”(Fortune Magazine, March 4, 2010)
One of the important factors for Apple’s success is its solid corporate culture that promotes its values and belief’s among employees and partners and their keen commitment towards the company. These values and commitment bring together the award winning products and services every year. All this has not come overnight, it has been there from the beginning (1980’s) until today. This is a sign of consistency and lasting culture in the company. The employees at Apple think diversity and dress code are the best part of the company. (Christine Thompson)
We know that many of Apple’s customers sleep or wait outside the Apple stores just to be the first to buy the new products. This indicates that Apple enjoys its brand loyalty. This success is from great effort to deliver the best products. To achieve this Apple employs a few strategies such as; exclusive Apple stores with well-trained and well-informed employees who have good knowledge of their products and services. These give the customers an opportunity to explore the technology. One of the other strategies is the complete control over the hardware and software which enables them to deliver complete products. They also have a range of products from music players to computers which allows them to capture the new market and establish their presence. Another strategy used by Apple is to develop its presence in the schools and universities which let young people to use Apple products, once the kids get acquainted to these products they would want Apple products even at home. One of the important strategies that Apple employs is a result of enthusiastic research, its design of easy to use products which are simple and durable. These great products basically have the same fundamental architecture that encourages the existing customers to buy more Apple products in their future. With their constant innovation Apple brings out new products that let its customers to stay loyal to the brand.(Insider CRM editors)
Analysis of the Industry
The PC industry
Apple started off as “Apple Computer” in 1976. Thus the first major industry Apple was and still is operating in is the Personal Computer (PC) industry. Since the company started providing the first Macintosh PC’s, the industry has been developing rapidly. In 1978 Apple Computer released their first home computer and quickly became the market leader in the PC industry (Yoffie & Kim, 2010, p. 2). However, over the next 18 years, Apple lost its position as a market leader. Other vendors such as IBM and Compaq gained market share with better and cheaper products. A survey conducted by Dataquest and International Data Corporation (IDC) in 1996 revealed that the two vendors, IBM and Compaq, had a share of the market of 8.9% and 10% respectively (Heichler, 1997, para. 3). In comparison, Apple’s PC market share was only about 4% that year (Yoffie & Kim, 2010, exhibit 3). Just 10 years later in 2006 a survey conducted by Gartner Dataquest revealed that Hewlett-Packard (HP), that merged with Compaq in 2002, and Dell Inc. were the new market leaders in the PC industry with a market share of 17.4% and 13.9% respectively.(REFERENCE)
Today, in the 3rd quarter of 2010, the PC industry could be characterised as an oligopoly or a differentiated oligopoly, where the four big companies have a market share of 53.2% with HP as the clear market leader with a 17.5% share of the market, according to Gartner Dataquest (appendix table 2). Apple is still not in top 5 according to this survey. However, Apple has now for the first time since early 1990’s gained a market share in the U.S. above 10%, which makes it the 4th biggest PC vendor in the U.S. (Gartner, 2010, para. 8).
The history of the PC industry reveals some major changes in the structure. Acquisitions of companies have led to changes in the top five PC vendors, which indicate that constant innovation is the key to survival. However, the standardisation of components has led to lesser spending on R&D by some companies (Yoffie & Kim, 2010, p. 4). But innovation among other things has led to a lower Average Sales Price (ASP). In 2009 the ASP in the industry was $544, which is a 50% price cut compared to the level in 2007. This increases the bargaining power of the buyers, because of the lower switching costs, it will cost them to buy another product (Porter, 1980 p. 24). Apple has tried to increase the switching costs, thereby lowering the buyers’ bargaining power by creating an alignment between their electronic products.
The rapid innovative growth of electronic products such as smartphones, iPads, netbooks that adopt many of the PC’s features and functions has made it difficult for the PC vendors. It is crucial to be innovative to make the PC’s better; else the consumers will choose one of the other products as a substitute to the PC.
As it can be seen in the table above the growth in total global shipments of PC’s has declined by 12% over a two year period, from 2007 to 2009. The decrease in growth may be an effect of the surge in the sales of mobile devices. This indicates that the PC vendors have to be creative and innovative if they want a successful business in the future. One way of doing it, is as mentioned earlier; Apple does this by creating an alignment between the different devices and thereby giving the consumer an incentive to buy the laptop as well.
Consumer Electronics Industry:
Consumer Electronics (CE) Industry is a space where Apple is growing up as an emerging power and seems promising enough to reach the top sooner than later. CE include all the electronics equipment’s and gadgets which are basically used for everyday purpose. They are usually used in entertainment, communications and office productivity. The market space of CE Industry is close to US$ 2 Trillion and the sales of CE have hit US$ 724 Billion in 2009 which is a 4.3% from the US$ 694 Billion of 2008. However, it was a plunge from the 13.7% growth which was posted last year and the double digit growth of the previous years and this particular slowdown due to global economic downturn was already forecasted by the Consumer Electronics Association (CEA). On the other side they also stated that the industry will outperform or do much better than the other sectors. The slowdown of 2009 affected almost everything across the board, from computers to mobile phones to television. (Peters)
Nevertheless, the prospect for CE Industry has completely changed. The industry is witnessing a transformational growth after a series of tough economic conditions. The industry is focusing on the importance of revolutionary technological developments. They are looking forward to create a union of product, market or technologies. The factors behind to drive such a transformation includes miniaturization, digitalization and mobility. The industry has realised the fact that they either need to innovate in order to survive or search alternatively for new avenues of growth. The digital technological revolution had assisted the industry to make good profits from the growing interaction of digital applications such as DVD player, camcorder, digital camera etc. One of the research report states that if it moves in such a planned way then the Consumer Electronics Industry can grow at a Compound Annual Growth Rate of 5% during 2010-2013. Some of the factors for the growth of the industry are: (Electical and Electronics Industry Overview)
Continuous and rising investment in research and development which has led to increased productivity.
Accelerating growth in terms of electronic production and growth due to increased foreign investment.
Support that it extends to various other global industries such as telecommunication, medical, industrial and automotive industries.
Increase in the demand of consumer electronics due to rising income and living standards.
Rapid pace of innovation in electronic technology.
Companies such as Apple have already started using effective, new and disruptive innovations to transform the industry demand curve in positive direction, which has led Apple to make supernormal profits thus reinforcing the necessity of innovation. During economic global recession – technological innovation, cost competitiveness and emerging markets have turned out to be the key driver of industry’s such a transformational growth. Some of the emerging markets have been South Korean giants – Samsung & LG who have been commoditizing the industry.
We could also find geographic playing a major role in relation to CE Industry. We established that the American region specially the US to be the dynamic force in driving the industry closely followed by EU. However, the growth pattern will change in the future with the emergence of Asia Pacific as one of the important contributors for the industry due to the increasing demand from the developed countries. For instance – there is an expectance from India to grow at a CAGR of 19% in between 2010-2013. (bharatbook)
Below is a pie – graph of area manufacturing consumer electronics to give us a better understanding of the CE Industry. (Source: Digitivity)
These trends (Industry Trends) signifies the rapid evolution phase of the consumer electronics industry and it puts the manufacturers in tremendous pressure to to be the first one to come up with something new and unique and differentiated products. When a products becomes successful it automatically attracts copycats, automatically leading to rapid price erosion. Again to stay at the top in the competition manufacturers are forced to develop and enhance their products, but these are also the reasons behind a reduced consumer product life cycle. (conducting an industry analysis)
Computer Software:
Computer Software (CS) is a collection of computer programs and related data that provides information to the computer on what to do. CS Industry is an ever changing environment. One of the recent news from the world of CS is that SAP is manoeuvring its way with the biggest companies and that they have decided to purchase Business Objects as a part of their future growth plan. This would make them one of the hottest vendors in the U.S’s software industry. (REFERENCES)
The largest software companies of the world generated over US$220 Billion in 2009 in which almost 60% of the revenue were generated by the top 10 companies .Apple seems to stand at the 28th position which shows the level of competition in this particular industry. Microsoft and IBM have for a long time been the clear market leaders, where Microsoft in 2010 has a higher software revenue than IBM and Oracle (number 2 and 3) combined (reference). However, this is not an indication that the industry has come to a standstill. In 2009, 38 companies had over $1 billion, compared to 2002 where it was only 15 companies (reference).
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To remain a competitive vendor in the CS industry, you have to be prepared to innovate and develop your product. The technology changes all the time, which means that there will be tough competition among the providers in the industry. Recently Microsoft’s leadership has been challenged by other providers in the industry, such as Google with its Android and Apple with its iOS, which indicates that the future software market will still be highly competitive.
Some of the major trends coming up in the CS Industry are Merger Mania which means strategic alliance between different business software vendors and the other upcoming trend would be Functional Expansion i.e. the software vendors trying to add new functionality to their software’s.
Analysis of the firm and its strategies
The PC industry
In the ultra-competitive PC industry where stalwarts like Dell and Hewlett Packard have long been dominant, Apple re-entered with the intent of imposing its vision of what a PC should be. From figure -3 one can observe that Apple once again focusing on its customer based approach to innovation tops the PC industry in customer satisfaction.Description: ACSI
In the PC industry, Apple’s range of Macintosh computers have been positioned as an integral part of its ‘digital hub strategy’ whereby they serve as value adding ‘digital hubs’ for other products such as the iPod, iPhone and a host of other digital devices.
In fact, one could argue that Apple is first and foremost a computer company because that is where it established its roots and it is the foundation on which the successful business models for other Apple products have been built. For instance, Apple’s main strategy of owning and integrating both its software and hardware which is in sharp contrast to Microsoft’s strategy of licensing its software to other computer manufacturers; Apple still uses this model in the smartphone market and the tablet PC market today.
A major criticism of Apple’s strategy was that due to its integrated hardware and software platforms, it might have failed to gain a significantly larger market share compared to if it licensed its software like Microsoft. Though, a reasonable argument, one has to also observe the fact that the integrated software/hardware model does also from the basis of Apple’s competitive strategy and as a constantly innovative company with high profit margins (as a result of being able to charge premium prices), Apple might not need to focus on capturing a larger share of the market as its primary goal is to achieve customer satisfaction by offering high quality, innovative products that allow it to charge premium prices.
Consumer Electronics Industry
The main success of Apple moving into the future is its focus on its R&D. The products developed by Apple have unique features and command premium prices. With the introduction of the iPod, Apple was considered to be a digital company rather than just a computer manufacturer. With the invention of the iPod there has been a great change in the portable music technology. The competitive advantage through which it dominated the market was its sleek design, simple user interface and its large storage capacity. Each new iPod brings a new form, feature and function. Because of its design the iPod has dominated the lucrative emergent market which was targeted by the many big companies like Sony, Samsung, and LG. Many have said that the external shape and design layout of the iPod is unique and is the main feature for differentiation and brand identity. The look and feel of the iPod conveys powerful messages in the user experience. The iPod was also differentiated from the other multimedia devices because of its compatibility with iTunes. The main advantage of the iTunes desktop software was the ability to synchronize iPods and the computer. The iTunes music store was the first of its kind and was a great success. Though there was not much profit from the iTunes but the iPod sales increased drastically. The other advantage of the iTunes was that all the songs that were played via iTunes were protected against piracy by FairPlay. No other MP3 player had any security measures considered. The competition for iTunes increased from other online music stores, social networking sites and internet radio sites. Apple acquired the Lala.com site and later introduced the iPhone to beat the competition. (James Conley)
As a company that specializes in design, Apple has always sought to redefine the boundaries of its industry by innovating products that not only look different from what other competitors offer but that more importantly are intuitively easy to use and consumer friendly. With the launch of the first generation of the iPhone in 2007, Apple once again applied ‘differentiation’ as its main strategy as it made a bold entry into the smartphone industry which already had well-established players such as Nokia and Research In Motion(RIM) to name a few.
In order to differentiate itself, Apple’s iPhone set the new industry standard by incorporating a ‘touchscreen’ as opposed to the physical buttons that were commonplace on all other smartphones at the time. In addition, Apple’s iPhone further transcended traditional boundaries by being presented as a multimedia device with more functionality. In 2008 Apple revolutionized the smartphone industry with the launch of the Apple Applications Store (Apps Store); with the development of applications open to third party developers, the App Store has ballooned from about 500 applications in 2008 to over 300,000 applications as of October 2010 (Ankeny, 2010). It could be argued that the main drive behind Apple’s consistent innovation has more to do with satisfying customers’ needs than simply outpacing the competition. To get a feel for how well Apple is doing with its customer focused the figure below shows cell phone satisfaction ratings by customers.
Description: http://www.changewave.com/assets/alliance/reports/smart_phone_20100629/smart_phone_satisfaction.gif
As can be observed, Apple leads the pack once again; much of its success in the smartphone industry can be attributed to what one author terms ‘active curation’, which refers to Apple’s increasing control over the applications and content on its devices (Foremski, 2010) . By maintaining a tight reign over both its hardware and software, Apple is able to ensure higher customer satisfaction through the delivery of top quality products, service and applications across its iOS platform.
In terms of profitability, the figure below shows just how successful Apple’s current differentiation strategy has been in the mobile phone industry.
As can be observed, even though the market leaders such as Nokia, Samsung and LG combined are selling an average of 23 units to every unit of an iPhone sold; Apple is still drawing in an astounding 39% of the industry total profits compared to the 32% earned by Nokia, Samsung and LG combined ( Sigal, 2010).
A real world view of Apple’s competitive strategy in practice does raise an interesting issue; for instance, applying a structuralist approach such as Porter’s differentiation strategy to Apple fits appropriately because Apple does indeed differentiate its products and services to gain a competitive advantage. But could it simultaneously be a cost leader? A recent study by Steve Cheney of Business Insider shows that in the span of the last four years Apple spent a total of about $4.6 billion on research and development (R&D) while competitors in the spent significantly higher in the same timespan – Microsoft ($31 billion), Cisco ($19 billion) and Intel ($23 billion) (Cheney,2010).
Perhaps Apple’s ability defy conventional strategies may be a sign of how rapidly innovative products and business models are changing the traditional business landscape and so, while Porter’s differentiation strategy is still applicable, it may not be capable of providing a sufficient explanation of Apple’s competitive strategy in today’s business environment.
Recommendations
As a company, Apple has to continue to innovate in order to maintain a competitive advantage because its businesses are highly dependent on rapidly changing technologies and are also situated in dynamic industries where the average lifespan of products runs from about 7 to 8 months. These industries experience very high levels of competition due to the presence of many well-established players and so in order for Apple to survive it cannot afford to be complacent.
Though Apple consistently creates innovative products, it would be appropriate for it to aware of the risk of its products canibalizing on each other. For instance, the introduction of the iPad has garnered a large amount of praise for Apple and has increased it profit margins, recent studies show that the iPad phenomenom might be affecting the sales of traditional PCs or even Macs.
Apple is well known for developing products that are intuitively user friendly and a recommendation could be for them to continue to tailor their products in even simpler ways that make it easier for users of other platforms/software to build a comfort level that attracts them to Apple’s products.This could be especially true in the PC industry where traditional users of Microsoft usually have a difficult time adjusting/switching to the Mac, better steps could be taken to make the transition from PC to Macs easier.
Though Apple’s foray into the TV business has met with less success compared to its other initiatives and products, one could argue that the TV industry still holds a lot of potential especially in a continually integrative media environment where media can be easily shared across various platforms and devices. The recommendation here is for Apple to look at re-launching Apple TV but this time preferably building its own high resolution flat screen TVs embedded with the functionalities of the original Apple TV device.
Conclusion
So far, this report has attempted to lay out in detail Apple’s business model and its competitive strategies in the various markets it currently operates in, namely the PC, consumer electronics and computer software industries. To begin, from the research and analysis done up to this point, it is our unanimous opinion that as a company, Apple’s major strategy is ‘differentiation’ as classified by Porter (Porter, 1980).
Apple focuses on innovating products that redefine the traditional boundaries of industries it operates in as such it creates products that become the industry standard which all other competitors attempt to emulate. In addition, by being a first mover in terms of innovation, Apple is able to charge premium prices for its products and still remain competitive.
Another key note with regards to Apple’s strategy lies in its long established business model of owning and integrating both its hardware and software. This model has been in place since Apple introduced Mac and has been carried over to all its current businesses in the MP3, Tablet PC and Smartphone markets. By maintaining control over its hardware and software, it is able to ensure that all the content delivered across its iOS platform is easily accessible to customers and compatible with all its products.
Going into the future, it remains to be seen how Apple’s competitive strategy will evolve; however, one thing is for certain the key to whatever path they may choose to follow depends heavily on their ability to innovate consistently.
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