Strategic positioning of Apple in the post-PC markets


Introduction

1.1 Background

The post-PC market is witnessing rapid development in technologies and market growth. Apple Inc (Apple) has managed to take advantage of these changes better than any other competitor. This report will examine the strategies that underlie the rapid rise of a small, struggling PC competitor to the world’s most valuable tech company.

1.2 Scope:

The report examines Apple’s global functional and business strategies and their fit, the state of the competition and, using Porter’s framework, the various forces affecting Apple’s profitability. The report is based on Apple’s annual report, industry specific academic studies, the latest expert technology commentary and strategic theory as it applies to high-tech industries.

 

1.3 Plan:

After a quick historical background, the discussion outlines Apple’s currently very favourable competitive position. After this, Apple’s business strategies are listed, followed by the functional strategies that underlie it. The congruence between those two levels, in light of Apple’s market positioning, is noted. The report discusses how forces that shape the market affect Apple using Porter’s Five Forces framework. Finally, turning to the future, we examine the sustainability of Apple’s competitive advantages and the future threats to profitability. The report concludes with recommendations to improve the strategic positioning of the company, ordered from the short term to long term strategy.

Discussion

 

2.1 Apple’s run to the top

In the fifteen years between 1996 and 2011, Apple has gone from a quirky, small PC competitor near bankruptcy to the world’s most valuable company (Menn & Crooks, 2011). This remarkable change of fortunes required daring strategies, intuitive innovation and well-executed commercialisation but also for the established players to miss new market opportunities and the changes in demand in their markets. Apple’s competition is not alone in these mistakes: the Australian car industry missing the shift of demand towards small cars, Australian retail ignoring online shopping, Prodigy ignoring AOL and Blockbuster ignoring Netflix at the dawn of the internet era, or Kodak missing the digital photography revolution completely (The Age b, 2012) are just some examples where the combination of inattentiveness to the customer and the desire to keep playing on the old strengths can bring the demise of once powerful competitors. Microsoft, in direct competition with Apple and the dominant IT player in the 90s, was regularly a laggard in game-changing technologies such as the internet. In addition Microsoft, concentrating on its large corporate clients, missed the change in demand as the consumer market moved to the mass market phase and the early majority began to demand easy access to digital content and more user-friendly consumer devices “that just work”. At the same time the music industry was wary of new, purely digital distribution channels, and Sony was reluctant to develop a competent digital version of its Walkman, leaving a perfect opening for the iPod (The Age b, 2012).

Apple, with less invested in existing markets and paying more attention to the unmet customers needs, was able to leverage its business assets (such as supply chain in digital goods and software capabilities) to develop the iPod and iTunes. The physical product would have been imitable, but the brilliance of the strategy was that the plethora of third-party application providers and media content owners connected through a single marketplace (iTunes) was not (Kenney & Pon, 2011). Apple has  repeated the successful formula of filling unoccupied differentiated product spaces by innovating, the results being the iPhone and its killer app, mobile internet (West & Mace, 2010), iTab, and now the latest rumoured venture, the iTV (Blackden, 2012). Each innovation was able to uncover a large market whose needs have not been previously met, and through the combination of being an early mover and skilful marketing/commercialisation, realise high prices and above-average profitability. Ironically Microsoft, by not protecting the consumer markets, has allowed Apple to grow strong and now, through young employees exerting pressure on IT departments, Apple is able to make inroads into Microsoft’s heartland, the corporate market as well (Martin, 2012).

 

2.2 Competitive position

In mid-90s Apple had a relatively low market share in the maturing personal computer and laptop (PC) markets. This meant there was a small chance of growing the market share due to the weak competitive position, and even if advances were made, the “upside” was small as the market growth was slowing. Apple’s meteoric rise could only be achieved by innovation. This allowed Apple to grab a large market share in the new, growing markets of music players, smartphones and tablet computing. The large market share, combined with distinctive competencies in design and user experience, has put Apple in a strong competitive position in each market it competes in. In addition, it is able to dictate conditions and technical specifications to the wireless carriers, instead of the other way around, even extracting ongoing subscriber revenues (Kenney & Pon, 2011), and single-handedly creating a new wireless landscape where the new lucrative mobile data business the iPhone created has offset the breaking the carrier’s “walled garden” strategy (West & Mace, 2010).

This position is looking even more secure as this post-PC industry, even though still in a growth phase, is already consolidating and is now able to support only a few platforms. At the heart of the competing platforms lie the operating systems (OS), the standards with which other components (hardware devices, apps, services) have to be designed to work with. When viewed this way, it becomes clear that this is another standards war, aimed at securing sustainable competitive advantage the ownership of the standard can bring. The ability to differentiate through the OS means that Apple is able to achieve 40% gross margin on its hardware (Apple, 2011), while other generic handset makers like Samsung can only achieve around 30% (Samsung, 2010). Also, while value creation might well move from hardware to a higher level in the technological stack (to apps like iTunes, for example), it is the OS again that locks in the user and makes that value-creation possible (Kenney & Pon, 2011). Many weaker competitors have already given up this critical asset (Nokia’s Symbian, Palm’s and HP’s WebOS, Intel and Nokia’s MeeGo, RIM’s Playbook and BlackBerry are all gone or going), leaving only Microsoft’s Windows Mobile and Google’s Android as viable global competitors to Apple’s iOS. Until disruptive new technologies are missed by the incumbent players again, the chances of new competitors entering this arena is reducing as existing competitors are moving down the experience curve and  gather large economies of scale.

Apple has in-house competencies across the whole value chain, from experience in co-ordinating the global manufacture of the devices by Asian outsourcing partners to end-retail and after-sales support. This structure, after the retreat of RIM, Palm and Nokia, makes Apple the only vertically integrated company able to provide an integrated user experience. The OS competition (Microsoft and Google) are also keen to establish their standards so that they could take advantage of network effects, and grow profits easily given the negligible marginal costs.  However, these companies, lacking the complementary assets, are only able to licence their OSes and rely on third-party entities to provide complementors in the many arenas that make up the more diverse and interdependent range of actors than the PC industry has ever known (Kenney & Pon, 2011). Each actor is motivated by its own aims, and co-ordinating the complex interlinking offering that includes various layers of the technological stack, ranging from devices (from wearable devices and smartphones to tablet PCs), OS, software (applications and mobile apps), online content (video, music, games, books and pictures), and online services (email, mapping, search, cloud computing, support) is not easy. This places Apple in a strong position, as it is able to differentiate its product as reliably high quality and consistent, attributes the more disjointed competition is finding harder to match.

Numbers of running OSes aside, the synergies each OS maker is able to extract will largely define their strength as competitors. Microsoft might able to leverage the cloud-based Office suite, and perhaps the Bing search engine if that takes off, but in terms of these profitable complementors will still be far behind Google, who has multitudes of services Android can “play nice” with, such as search, Gmail and maps. To bring the maximum out of the platform and compete in profits, Apple needs to maximise the value extracted from the hardware devices, App store and iTunes, the traditional points of value capture in the Apple ecosystem (Kenney & Pon, 2011).

 

2.3 Business-level strategies

Apple’s innovative DNA means that unlike the usual low-end entrant, it wants to start as a differentiator in each market it enters. The reputation for innovation-driven strategy notwithstanding, Apple typically brings the market alive only after some (compared to Apple’s standards) half-baked first mover effort by someone else. In other words, Apple tends to be an early, rather than first-mover (there were smartphones, digital music players and tablet-PCs before the Apple equivalents made their impact), by “tipping across markets” and cleverly leveraging the extant ecosystem, cachet, and market momentum of previously successful Apple platforms as well as other extant infrastructure. This strategy, apart from the obvious benefits of leveraging existing assets and avoiding first-mover disadvantages also lessens the danger of falling into the chasm as Apple is able to design the product for the mass market from the outset.

At first, reflecting the high cost of physical product development, only one device is released to launch the new market. Apple, being a strong competitor in each post-PC market (which are typically in growth or shakeout phase), is able to increase its market share by emphasis on marketing and with time is able to pursue a less focused strategy by “filling in” its product range to better meet customer needs in various market segments. Various screen sizes, memory options, and niche-products such as the cameraless iPhone for security conscious companies (The Age a, 2012) illustrate this trend. With time, as the markets mature Apple is likely to move into a broad differentiator role in each market, with efficiency becoming more critical as competitors imitate its most attractive features and some of the premium pricing is competed away (Hill & Jones, 2010).

The dominant market position of Apple allows it (for now) to run a “walled garden” strategy that includes a closed OS system. This strategy, apart from increasing profitability for Apple, results in two other product attributes that competition is finding hard to match: security and good user experience (consistent across all existing as well as new form factors like TVs and onboard vehicle displays). Technically, “closed system” means that only signed (Apple-approved) code can run on the iOS devices, and only approved apps are available in the App store. This makes it harder to develop for the iOS platform, but because of the size of the market, developers will jump through these hoops, and users will enjoy a secure, high quality software eco-system. On the other hand, Google (and to a lesser degree, Microsoft), starting with a much smaller market share, is seeking app-developers more desperately, and running a more open setup. Their OSes can run unsigned code, and the app-stores do not vet applications which allows for ease of development, but also for potential of malware, and more varied quality of apps. Despite the drawbacks, the open system strategy is working for Android, and the number of apps in Android store is now close to matching Apple’s. The harnessing of the vigour and competence of Android developers adds vitality to the Android platform and is helping both to erode Apple’s market share as well as to set off powerful network effects for Android. When the desired size of the Android Market is reached, Google will no doubt tighten the checks to raise the standard in security and quality, by which time Apple needs to have innovated further to stay in the current highly profitable position.

2.4 Functional strategies

For a differentiator (or broad differentiator) such as Apple, the main distinctive competencies are innovation, quality in terms of attributes and customer responsiveness. Innovation in particular is highly pursued and by 2010, Apple has been voted the most innovative company by senior business leaders for 6 years in a row (Businessweek, 2010). Currently, over 72% of its revenue comes from two products (iPhone and the iPad) that were not even available for sale 5 years ago (Wingfield, 2012). Apple embodies Prahalad and Hamel’s prescription which states that the most critical task of management is to create an organisation capable of creating products which customers need but have not yet even imagined (Prahalad & Hamel, 1990). The most recognisable heavyweight project manager in IT (Steve Jobs) has helped to create an internal architecture that made sure that R&D is closely involved with marketing, keeping the customer’s needs first and foremost, and thereby ensuring a string of successful product launches. It is important to note how the three competencies naturally reinforce each other: customer responsiveness means identifying and satisfying customers’ needs, resulting in optimal product attributes mapped out, and innovation making that product a commercial reality. In addition Apple, having mastered the responsiveness, has managed to achieve that next step Prahalad and Hamel identified: finding solutions to needs the customers did not even know they had (Lohr, 2012).

The emphasis on competencies listed above does not mean that the other two competencies (that of efficiency and quality as reliability) are neglected. Li Mingqi, until recently in management at (Apple manufacturing partner) Foxconn Technology describes the relentless pursuit of Apple’s goals as presented to the manufacturer: “Apple never cared about anything other than increasing product quality and decreasing production cost” (Duhigg & Barboza, 2012, p13). This is done to the exclusion of almost everything else, often shirking (or ignoring) even clear legal obligations such as working conditions, worker’s safety, minimum wages, etc. It is clear that Apple cannot be accused of frittering away profitability through lack of cost-control. Efficiency is further helped by the sizeable economies of scale, learning effect and experience curve available, and the ability to spread fixed costs of R&D and marketing over large production runs.

2.5 Apple’s position in light of Porter’s five forces

Differentiators like Apple tend to enjoy a number of advantages when analysed using Porter’s five forces model. Buyers have low power as there are few platforms to choose from and many (individual) buyers who already purchased software and other devices in the Apple ecosystem are faced with high switching costs as well as a considerable learning curve. In addition, since Apple has invested heavily in the differentiating factors, there are no competitors that can satisfy the user’s psychological needs (user experience, prestige) quite the same way, thus lowering both the number of substitute products and the buyers bargaining power. Suppliers are also large in number and in a weak bargaining position. Apple is even able to purchase the capability if it benefits from the resulting security of supply or technological insight, as it has in the flash-memory manufacturing area (The Age c, 2012). New entries are unlikely to enter if shifts in technology are covered quickly, and the main threat, new focused competitors are bought up or imitated.

Two forces that are less optimal for Apple are the strong rivalry with established competitors and weakness (relative to Android) in complementors. The rivalry happens for good reasons (potential of high profits) and will merely place an upper limit on profitability. The weakness in complementors (due to the closed system and vertical integration model) is more insidious, and represents the greatest danger to the profitability of the Apple platform in the long term. For Apple it is the appended sixth force in Porter’s five-forces theory that is likely to prove the most important to watch.

2.6 Sustainable competitive advantage

Apple has invested in the growth phase in the brand name. It has acquired a very high satisfaction rate, ensuring loyal and returning customers. It has carefully developed hard-to-copy resources and capabilities that will drive the innovation for the foreseeable future. These are all sources of sustainable distinctive competencies that can ensure long-term prospects (Hill & Jones, 2010), especially as some aspects of its platform are going to be hard to imitate by the disjointed competition. There are two areas Apple should watch out for, however.

Firstly, in a dynamic industry new technologies can upset the carefully designed strategic positioning. For example, Apple’s new mobile search engines Siri is moving the competition from simply generating the old style search engine results to returning single answers (Yared, 2012), undermining search, the main competitor Google’s main cash-cow. The threat of Siri is taken very seriously, and at last year’s All Things Digital conference, Google chairman Eric Schmidt presaged the shift from links to answers, stating that “we’re trying to move from answers that are link-based to answers that are algorithmically based, where we can actually compute the right answer” (Benton, 2011). In December 2011 Google acquired predictive search company Clever Sense to accelerate this transition (Dickinson, 2011). If this dynamic happens the other way around, and competition can take advantage of a new technology to undermine Apple’s main strengths, that move will need to be similarly keenly “covered” by Apple as this was by Google. Also, another player (such as Facebook) could revive an also-ran OS such as WebOS, or make allegiance with a search engine such as Bing or Google, upsetting the relative power balance and necessitating radically different strategies.

Secondly, the IP protection must stay a side-tactic. Patents do prevent the competition from imitating technological achievements (such as the code to the iOS, Apple’s operating system) too closely but this is a possibly dangerous diversion for Apple. On the one hand, Apple might feel it needs to aggressively protect its large bank of patents and is frequently engaged in litigation that is based on alleged patent infringement by competitors; Steve Jobs has reportedly said he is willing to go “thermonuclear” on the main competing standard, Android, for imitating iOS features. On the other hand, it is only a matter of time before competitors will “invent around the patents”, and in Apple’s case, reliance on patents does not suit hypercompetitive markets, only continuous new product development will keep a company ahead of its competitors (D’Aveni, 1999). Litigation may delay the competition by a few months, or result in limited royalty payments to the patent holder, but the main activity must remain innovation. The annual report has put it correctly: “The Company’s future financial condition and operating results depend on the Company’s ability to continue to develop and offer new innovative products and services in each of the markets it competes in”. (Apple, 2011, p6, par 6).

Conclusion

The report identifies Apple entering markets as a differentiator, focused at first and moving towards the broad differentiator position with time. Apple’s growth is dependent on innovation, an activity towards which its functional and business level strategies are congruently oriented. It locks in users and differentiates its offering through the iOS operating system, a standard that is under siege by Android, Google’s open OS that is given to device makers for free. While Apple has invested in assets that ensure sustainable competitive advantages, the walled garden business model, the reliance on Jobs-styled intuitive innovation without Steve Jobs, appearance of new technologies and overreliance on existing IP are some potential threats to the current strong competitive position.

Recommendations

 

Based on the report, a list of recommendations is offered. Ordered from short-term to long-term timeframe they apply to, they are as follows:

 

  1. When great leaders go, they can leave a void behind. Apple’s unique top-down, intuitive innovation might not continue with the same surety after the departure of Steve Jobs. The company might have to invest in the more scientific, bottom-up, experimental innovation, until another leader or group of leaders, able to detect opportunities like Jobs did, emerges.
  2. Apple’s “walled garden” strategy has worked well in markets without strong open competition, but with Google’s open platform attracting more complementors and rapidly growing numbers, this model is under great danger. Steps need to be made to attract more complementors, reduce rent from app developers and reduce other technological barriers to users.
  3. Apple’s integrated business model is a source of competitive advantage. This makes sense only until the benefits thus derived (cohesive, easy user experience and security) remain a differentiating factor. When that’s no longer the case, re-organisation and rationalisation will be necessary.

Lastly, two more recommendations that are not time-horizon specific:

  1. Litigation is not to be relied on to fend off competition for a meaningful period of time. Only continual innovation will do that.
  2. Focused competitors (such as voice-recognition engine Siri) should be bought up or imitated before they can become successful alliance-partners in the wider industry.

 

 

 

Glossary of abbreviations

 

OS                  Operating System

IP                    Intellectual property

PC                  Personal computing (desktop and laptop computers)

Post-PC         Portable digital devices (smartphones, tablets, appliances)

 

 

References

 

Apple (2011 October 26). Apple Inc Form 10-K (Annual Report). Retrieved from http://files.shareholder.com/downloads/AAPL/1664597104x0xS1193125-11-282113/320193/filing.pdf

Businessweek (2010 April 15). The 25 Most Innovative Companies 2010. Retrieved from http://images.businessweek.com/ss/10/04/0415_most_innovative_ companies/1.htm

Benton, J. (2011 June 1). Eric Schmidt: Google wants to get so smart it can answer your question without having to link you elsewhere. Niemenlab. Retrieved from http://www.niemanlab.org/2011/06/eric-schmidt-google-wants-to-get-so-smart-it-can-answer-your-questions-without-having-to-link-you-elsewhere/

Blackden, R. (2012 January 23). Living room plan is Apples to the core. The Age. Retrieved from http://www.theage.com.au/business/world-business/living-room-plan-is-apples-to-the-core-20120122-1qc4f.html

D’Aveni, R.A. (1999). Strategic supremacy through disruption and dominance. Sloan Management Review 40(3), 117-135.

Dickinson, B. (2011 December 13). Google Snaps Up Clever Sense To Help Predict What You Want To Search For. Business Insider. Retrieved from http://www.businessinsider.com/boonsri-dickinson-google-acquires-recommendation-app-clever-sense-2011-12#ixzz1jZLxALi4

Duhigg, C. & Barboza, D. (2012 January 28). The human cost of Apple’s success. The Age. Retrieved from www.theage.com.au/technology/technology-news/the-human-cost-of-apples-success-20120126-1qjyy.html#ixzz1kpRRxPs2

Hill, W.L.C., Jones, R.G. (2010). Strategic Management: An integrated approach (9th ed.). Mason, Ohio: South-Western Cengage Learning

Kenney, M., Pon, B. (2011) Structuring the Smartphone Industry: Is the Mobile Internet OS Platform the Key? Journal of Industry, Competition and Trade 11(3), 239-61

Lohr, S. (2012 January 30). The yin and yang of corporate innovation. The Age. Retrieved from  http://www.theage.com.au/it-pro/business-it/the-yin-and-yang-of-corporate-innovation-20120130-1qp1f.html#ixzz1l4syf8To

Menn, J., Crooks, E. (2011 August 10). Apple touches top spot by capitalisation. Financial Times. Retrieved from http://www.ft.com/cms/s/0/516e690e-c2d8-11e0-8cc7-00144feabdc0.html#axzz1kFiUiW72

Martin, S. (2012 January 30). Cracks appear in Windows’ corporate dominance. The Age. Retrieved from http://www.theage.com.au/it-pro/business-it/cracks-appear-in-windows-corporate-dominance-20120130-1qp7w.html

Yared, P. (2012 January 13). Why Google is ditching search. Cnet. Retrieved from http://news.cnet.com/8301-1023_3-57358850-93/why-google-is-ditching-search/?tag=rtcol;dis

Samsung (2010). 2010 Samsung electronics Annual Report. Retrieved from http://www.samsung.com/us/aboutsamsung/ir/financialinformation/annualreport/downloads/2010/SECAR2010_Eng_Final.pdf

The Age a (2012 January 22). Cameraless iPhones go on sale. The Age. Retrieved from  http://www.theage.com.au/digital-life/mobiles/cameraless-iphones-go-on-sale-20120121-1qb33.html

The Age b (2012 January 23). How Kodak squandered every single digital opportunity it had. The Age. Retrieved from http://www.theage.com.au/digital-life/cameras/how-kodak-squandered-every-single-digital-opportunity-it-had-20120123-1qcui.html

The Age c (2012 January 12). Apple buys Israeli flash-memory company for $390m. The Age. Retrieved from http://www.theage.com.au/it-pro/business-it/apple-buys-israeli-flashmemory-company-for-390m-20120112-1pwjx.html

West, J., Mace, M. (2010). Browsing as the Killer App: Explaining the Rapid Success of Apple’s iPhone. Telecommunications Policy, 34(5-6), 270-86

 Wingfield, N (2012 January 26). Holiday over, Apple still rejoicing. The Age. Retrieved from http://www.theage.com.au/business/holiday-over-apple-still-rejoicing-20120125-1qhnq.html

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