Case Study of Apple: Competitive Advantage Through Innovation
Apple Inc. is an American consumer electronic company which designs, develops manufactures and supports the well-known hardware products such as Macintosh computers, the iPod, the iPhone and the iPad. Most of Apple’s products seem to be a trigger of revolution in electronic market and this reason contribute Apple as a market leader. The main strategy to run its business is not only creating new innovation product but also incremental improvement. The strength of Apple is “think different”. With innovative ideas and aesthetic designs, Apple has changed how people listen to music and communicate. One of the success products of Apple is iPhone which is a revolutionary device. It combined the feature of music device (iPod) and mobile phone technology with the key feature on this product that is “multi-touch” and “multi-tasking” on the graphic user interface. The phone supports a camera, a multimedia player, a blue tooth, web browsing and internet connectivity. However, the price of iPhone is higher than other mobiles in the market and the aim is targeting a niche market. From this reason, iPhone faced with various challenge to get market share and compete with existing player in the mobile market. With innovation and unique features that is the selling point, iPhone sustains this competitive advantage by continue development and create the new innovation with its best.
Apple is one of the success innovation companies by the evidence with the first rank of ‘the 50 Most Innovative Companies’ in 2009. From the success innovation product with $9.87 billion profit for 2009, it seems to be motivator for other companies to aware of innovation factor. Moreover, Apple emphasizes its successful innovation device with “iPad” which is touch-screen device to use the Internet for research applications, listen to music, movies and games. A lot of buzz occurred and attract attention from consumer immediately when product launch in the first quarter 2010. This is another evident that shows the success innovative product of Apple. The question of how Apple success in innovation product be concerned from others.
Key Drivers for Innovation for Apple
The first key Apple’s innovation driver is consumers’ needs. It is not only to put new technology into its products, but also the great new design that focuses on needs of user. Introduce high technology within the products that easy to use is what Apple always successfully done. The Macintosh computer, one of the core products of Apple, comes with “mouse’ that is easy to navigate around the whole screen for user. The iPod introduces itself as a music player with the way to transfer and organize music is simple enough for anyone to use which is how the perfect product should be. Its click wheel simple the way user can make a quick scan through thousands of songs. As well as for the iPhone, even though it is not the first smartphone which integrated by music player, camera, web browser and email. It removes the tiny buttoned keyboards with the button-less touch screen and put almost everything in fingertips. Significantly, it ensures that the customer needs not to be smart to use a smartphone. The concepts of innovative user interface with easy to use is what Apple put as one of the most important features for its user. It is a key driver for innovation within electronic consumer. Moreover, Apple has own retail stores that is easier to access customer and get direct feedback. That is the Apple strategy to understand actual consumers’ needs and apply them for the new innovation product.
The next innovation driver that makes iPhone getting more attractive from user than others is the competitive environment. From the intense competitive environment in mobile market, it drives Apple to develop the better product continuously. Moreover, the high expectation of customer motivates Apple to create the next best thing in order to keep the customers’ loyalty that get from previous products and attract to the new customers. When iPhone launch to the market, it received the great response from customers with the average number of selling 20,000 units per days in the first 200 days. Furthermore, Apple got 19.5% of market share in the first quarter, RIM got the most.
Finally, economic is the key innovation driver. The performance of people in corporations is higher and productivities of products are quite similar. Economy factor pushes companies to have more innovation. For example, fast growth economy likes United State, there is the country where a half of companies in ‘the 50 most innovation companies ranking’, have the headquarters in. Companies try to hire employee who has more creativity and imagination that seem to be the core competency to generate high growth revenue. Business week said “Apple CEO Steve Jobs has turned Apple into the paragon of the creative corporation, and with the evolution of the economy toward creativity underway, companies throughout the world are de-constructing Apple’s success in design and innovation”. Moreover, capability of consumers’ purchasing in economy nowadays is higher. Consumers be able to accept on expensive innovative product that it is easier for company to invest money on R&D and apply higher technology for the innovation product with less concerned on cost.
Strategic Enablers within Apple
The first enabler is the leader, Steve Jobs who is CEO of Apple and co-founded in 1976. He said “Innovation distinguishes between a leader and a follower”. From this idea, he thought that the innovation is the key to get competitive advantage. Jobs said that the best work always come from the best people working. He realized that the only way to do great work is to love what you do. This human resources strategy forms the basis for innovation idea. Finding and fostering people who is the talent in innovation is one of the four principles that drives innovation. The CEO is the key involvement in determining direction and goal of company. In 1997, Jobs became CEO of Apple and bring technologies from NeXT that was purchased by Apple into Apple products especially NeXTSTEP technology that was evolved in Mac OS X. He was the first to see the potential of Graphical User Interface and apply graphic into computer interface. Since then, appealing designs and powerful branding have worked. After that, Apple has been operated by Jobs as CEO.
Jobs started his responsibility in CEO position by reorganizing company. He focused on small group of products such as desktop and portable Macintoshes and eliminated 15 from 19 company’s products (such as printer, scanner and portable digital assistants). Then, he laid off a thousand of worker, closed plant and receiving cash $150 million by exchange stock. He focused on creating popular computer that retailed with the price less than $2,000 and then iMac was created. iMac is unique style desktop computer. This became the first success of Jobs after moving back to the company. Jobs noted “during first 139 days, an iMac was sold every 15 seconds of every minute of every hour of every day and every week”. From this result, it effect to company to get a profit once again with number of selling 800,000 units in the first five months.
The organisation culture was changed within Apple, it geared towards more creativity. Apple’s success cannot be measured by revenue or award but that is company’s culture of innovation which exists as an incubator for a long term impact. Jobs said that his job is pull thing together from different part of company and get the great resource for the key project. Although Jobs configure the company direction, employee team in Apple is also important equally. They play in a role of delivering innovation successful and human resource department must ensure that workers are active and understand the company direction. Spurring employees to think different and motivating their idea by atmosphere can encourage more creativity. Technology Business Research (TBR) supported that culture innovation allows Apple to outstanding perform then lead to increase market share and stay profitable.
The second enabler is intangible resource base including process and structure in organization. That is one of the root causes why Apple’s products are differentiated from others competitors. The tangible resources of Apple are quite similar with general IT companies but apply it to new innovation such as raw material of product, office layout and company location. Apple does not build the first computer or the first phone but Apple try to create the best at all of those. It is seen to be copying but if spending more time to research and apply it with new innovation in design or combining technology, it can come out with strong products. It can be able to convince consumers that this is the best thing out there like what Apple did. The tangible resource of Apple is intellectual of development team who is the smartest people and the best talent. The main success of it is unlocking innovation and dreaming ability of R&D team. iSuppli disclosed that from analysis, the bill of material (BOM) cost of 3GS iPhone is estimated $178.96 for 16 GB. The price of this model in the market is more than twice ( £450 in UK.). The selling price need to be included the cost of intellectual and innovation from development team that is the reason why consumer are acceptable in this price. Another evidence, that reflect the Apple’s capability translating great idea to product, is return of equity (ROE) by 20.9%. However, capability of workforce in Apple is not specific only creating innovation computer but also break into entertainment product as iPod in 2001 and then communication product as iPhone in 2007.
Apple enables intangible and tangible resource to the products and services through an innovation process in order to develop capability.
Strategic Blockages within Apple
Obstacles to sustain innovation of Apple have been avoided except LISA project. Apple developed Local Integrated Software Architecture or “LISA” to be a personal computer in 1983. It was a more advanced and far more expensive system ($9,995 in 1983). It was created too complex that its inclusion of protected memory, sophisticated hard disk, cooperative multitasking and so on. From this reason, LISA turned to be a commercial failure. LISA is a mistake of Apple that LISA was complex product with unnecessary extras and without understanding actual consumers’ needs. However, Apple develops other products by avoiding this pitfall and avoids developing products which out of the line with core value. Its core products are iPod, iPhone, Mac laptop and Mac desktop and get its best-ever performance in last quarter with net quarterly profit of $3.38 billion. From enormous success of these core products, it may be the maturity phase in product life cycle (the highest selling period) especially iPhone because it launched the first model since 2007 and it was developed in many versions. From this reason, it seems to be obstacle if Apple will develop a new innovation model that better than iPhone and create by keeping the key concept of ‘easy to use’ and ‘customer needs’. If the new product is not success, it may impact on its financial because iPhone created big revenue with selling 8.7M units in the last year quarter. The next obstacle is core competency of resource. The intellectual of development teams do not focus and develop on high performance product. Therefore, target consumer is limited in niche market that satisfies in this kind of product. Another obstacle is product limitation. For instance, Mac laptop/desktop is less flexibility than other products in the market (with the same kind). Consumer cannot change hardware which is more suitable with their work. Moreover, consumers may have some problem with software that need compatible with Macintosh operation system.
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Case Study on Apple’s Business Strategies
Apple was founded by Steve Jobs and Stephen Wozniak in 1976; Apple Computers revolutionized the personal computer industry. Apple Computers Inc is considered to be one of the innovators in the computer industry. It brought about different changes to the industry; these changes are still visible in the present. The company’s products were used as a basis by other computer company’s in designing the specifications and physical characteristics of their product. It also serves as a meter of how products are designed. The company offers various products for the different market it targets. The products made by the company offer something different.
We can describe Apple’s business strategy in terms of product differentiation and strategic alliances.
Product Differentiation
Apple prides itself on its innovation. When reviewing the history of Apple, it is evident that this attitude permeated the company during its peaks of success. For instance, Apple pioneered the PDA market by introducing the Newton in 1993. Later, Apple introduced the easy-to-use iMac in 1998, and updates following 1998. It released a highly stable operating system in 1999, and updates following 1999. Apple had one of its critical points in history in 1999 when it introduced the iBook. This completed their “product matrix”, a simplified product mix strategy formulated by Jobs. This move allowed Apple to have a desktop and a portable computer in both the professional and the consumer segments. The matrix is as follows:
| Professional Segment | Consumer Segment | |
| Desktop | G3 | iMac |
| Portable | PowerBook | iBook |
In 2001, Apple hit another important historical point by launching iTunes. This marked the beginning of Apple’s new strategy of making the Mac the hub for the “digital lifestyle”. Apple then opened its own stores, in spite of protests by independent Apple retailers voicing cannibalization concerns. Then Apple introduced the iPod, central to the “digital lifestyle” strategy. Philip W. Schiller, VP of Worldwide Product Marketing for Apple, stated, “iPod is going to change the way people listen to music.” He was right.
Apple continued their innovative streak with advancements in flat-panel LCDs for desktops in 2002 and improved notebooks in 2003. In 2003, Apple released the iLife package, containing improved versions of iDVD, iMovie, iPhoto, and iTunes. In reference to Apple’s recent advancements, Jobs said, “We are going to do for digital creation what Microsoft did for the office suite productivity.” That is indeed a bold statement. Time will tell whether that happens.
Apple continued its digital lifestyle strategy by launching iTunes Music Store online in 2003, obtaining cooperation from “The Big 5” Music companies–BMG, EMI, Sony Entertainment, Universal, Warner. This allowed iTunes Music Store online to offer over 200,000 songs at introduction. In 2003, Apple released the world’s fastest PC (Mac G5), which had dual 2.0GHz PowerPC G5 processors.
Product differentiation is a viable strategy, especially if the company exploits the conceptual distinctions for product differentiation. Those that are relevant to Apple are product features, product mix, links with other firms, and reputation. Apple established a reputation as an innovator by offering an array of easy-to-use products that cover a broad range of segments. However, its links with other firms have been limited, as we will discuss in the next section on strategic alliances.
There is economic value in product differentiation, especially in the case of monopolistic competition. The primary economic value of product differentiation comes from reducing environmental threats. The cost of product differentiation acts as a barrier to entry, thus reducing the threat of new entrants. Not only does a company have to bear the cost of standard business, it also must bear the costs associated with overcoming the differentiation inherent in the incumbent. Since companies pursue niche markets, there is a reduced threat of rivalry among industry competitors.
A company’s differentiated product will appear more attractive relative to substitutes, thus reducing the threat of substitutes. If suppliers increase their prices, a company with a differentiated product can pass that cost to its customers, thus reducing the threat of suppliers. Since a company with a differentiated product competes as a quasi-monopoly in its market segment, there is a reduced threat of buyers. With all of Porter’s Five Forces lower, a company may see economic value from a product differentiation strategy.
A company attempts to make its strategy a sustained competitive advantage. For this to occur, a product differentiation strategy that is economically valuable must also be rare, difficult to imitate, and the company must have the organization to exploit this. If there are fewer firms differentiating than the number required for perfect competition dynamics, the strategy is rare. If there is no direct, easy duplication and there are no easy substitutes, the strategy is difficult to imitate.
There are four primary organizing dilemmas when considering product differentiation as a strategy. They are as depicted below.
To resolve these dilemmas, there must be an appropriate organization structure. A U-Form organization resolves the inter-functional collaboration dilemma if there are product development and product management teams. Combining the old with the new resolves the connection to the past dilemma. Having a policy of experimentation and a tolerance for failure resolves the commitment to market vision dilemma. Managerial freedom within broad decision-making guidelines will resolve the institutional control dilemma.
Five leadership roles will facilitate the innovation process: Institutional Leader, Critic, Entrepreneur, Sponsor, and Mentor. The institutional leader creates the organizational infrastructure necessary for innovation. This role also resolves disputes, particularly among the other leaders. The critic challenges investments, goals, and progress. The entrepreneur manages the innovative unit(s). The sponsor procures, advocates, and champions. The mentor coaches, counsels, and advises.
Apple had issues within its organization. In 1997, when Apple was seeking a CEO acceptable to Steve Jobs, Jean-Louis Gassee (then-CEO of Be, ex-Products President at Apple) commented, “Right now the job is so difficult, it would require a bisexual, blond Japanese who is 25 years old and has 15 years’ experience!” Charles Haggerty, then-CEO of Western Digital, said, “Apple is a company that still has opportunity written all over it. But you’d need to recruit God to get it done.” Michael Murphy, then-editor of California Technology Stock Letter, stated, “Apple desperately needs a great day-to-day manager, visionary, leader and politician. The only person who’s qualified to run this company was crucified 2,000 years ago.”
Since Jobs took over as CEO in 1997, Apple seems to have resolved the innovation dilemmas, evidenced by their numerous innovations. To continue a product differentiation strategy, Apple must continue its appropriate management of innovation dilemmas and maintain the five leadership roles that facilitate the innovation process.
Strategic Alliances
Apple has a history of shunning strategic alliances. On June 25, 1985, Bill Gates sent a memo to John Sculley (then-CEO of Apple) and Jean-Louis Gassee (then-Products President). Gates recommended that Apple license Macintosh technology to 3-5 significant manufacturers, listing companies and contacts such as AT&T, DEC, Texas Instruments, Hewlett-Packard, Xerox, and Motorola. (Linzmayer, 245-8) After not receiving a response, Gates wrote another memo on July 29, naming three other companies and stating, “I want to help in any way I can with the licensing. Please give me a call.” In 1987, Sculley refused to sign licensing contracts with Apollo Computer. He felt that up-and-coming rival Sun Microsystems would overtake Apollo Computer, which did happen.
Then, Sculley and Michael Spindler (COO) partnered Apple with IBM and Motorola on the PowerPC chip. Sculley and Spindler were hoping IBM would buy Apple and put them in charge of the PC business. That never came to fruition, because Apple (with Spindler as the CEO) seemed contradictory and was extraordinarily difficult in business dealings. Apple turned the corner in 1993. Spindler begrudgingly licensed the Mac to Power Computing in 1993 and to Radius (who made Mac monitors) in 1995. However, Spindler nixed Gateway in 1995 due to cannibalization fears. Gil Amelio, an avid supporter of licensing, took over as CEO in 1996. Under Amelio, Apple licensed to Motorola and IBM. In 1996, Apple announced the $427 million purchase of NeXT Software, marking the return of Steve Jobs. Amelio suddenly resigned in 1997, and the stage was set for Jobs to resume power.
Jobs despised licensing, calling cloners “leeches”. He pulled the plug, essentially killing its largest licensee (Power Computing). Apple subsequently acquired Power Computing’s customer database, Mac OS license, and key employees for $100 million of Apple stock and $10 million to cover debt and closing costs. The business was worth $400 million.
A massive reversal occurred in 1997 and 1998. In 1997, Jobs overhauled the board of directors and then entered Apple into patent cross-licensing and technology agreements with Microsoft. In 1998, Jobs stated that Apple’s strategy is to “focus all of our software development resources on extending the Macintosh operating system. To realize our ambitious plans we must focus all of our efforts in one direction.” This statement was in the wake of Apple divesting significant software holdings (Claris/FileMaker and Newton).
There is economic value in strategic alliances. In the case of Apple, there was the opportunity to manage risk and share costs facilitate tacit collusion , and manage uncertainty. It would have been applicable to the industries in which Apple operated. Tacit collusion is a valid source of economic value in network industries, which the computer industry is. Managing uncertainty, managing risk, and sharing costs are sources of economic value in any industry. Although Apple eventually realized the economic value of strategic alliances, it should have occurred earlier.
The following are some comments about Apple’s no-licensing policy.
“If Apple had licensed the Mac OS when it first came out, Window wouldn’t exist today.” – Jon van Bronkhorst, “The computer was never the problem. The company’s strategy was. Apple saw itself as a hardware company; in order to protect our hardware profits, we didn’t license our operating system. We had the most beautiful operating system, but to get it you had to buy our hardware at twice the price. That was a mistake. What we should have done was calculate an appropriate price to license the operating system. We were also naïve to think that the best technology would prevail. It often doesn’t.” – Steve Wozniak, Apple cofounder
“If we had licensed earlier, we would be the Microsoft of today.” – Ian W. Diery, Apple Executive VP, I am aware that I am known as the Great Satan on licensing…I was never for or against licensing. I just did not see how it would make sense. But my approach was stupid. We were just fat cats living off a business that had no competition.” – Jean-Louis Gassee, Be CEO and ex-CEO of Apple, admitting he made a strategic mistake.
A strategic alliance can be a sustained competitive advantage if it is rare, difficult to imitate, and the company has an organization to exploit it. If the number of competing firms implementing a similar strategic alliance is relatively few, the strategy is rare. If there are socially complex relations among partners and there is no direct duplication, the strategy is difficult to imitate. When organizing for strategic alliances, a firm must consider whether the alliance is non-equity or equity. A non-equity alliance should have explicit contracts and legal sanctions. An equity alliance should have contracts describing the equity investment. There are some substitutes for an equity alliance, such as internal development and acquisitions. However, the difficulties with these drive the formation of strategic alliances. It is vital to remember, “Commitment, coordination, and trust are all important determinants of alliance success.”
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