Successful Business Model of Apple - Essay Example

Finance & Accounting By + APPLE BUSINESS MODEL Introduction The huge success of Apple has been a reference of discussion on the secrets of business development. The success story of Apple is attributable to its innovative business model. This is similar to the case of other leading companies in different industries such as Walmart and Amazon. In fact, statistics for the period between 1998 and 2007 indicate that approximately 40% of new entering Fortune 500 firms attribute their success to innovative business models. These significant statistics just show how important a business model is to a company (Ciulla, Martin and Solomon 2007). This paper analyses the case of Apple, one of the world’s most successful companies. Components of a successful Business Model A good business model is a structure that creates and provides customer centred values that are built on four fundamental elements; profit pattern, critical process, key resource, and customer value (Adcock 2000). Profit pattern is the development of a benefit-generating system from the process of creating customer values. Critical process entails matching culture and standardizing operation to ensure customer value. Key resource entails integration of internal and external resources with aim of establishing a beneficial environment that promotes customer value (Afuah and Tucci 2001). Finally, customer value is the unique value that a company can deliver to customers and that other competitors cannot replicate. Concisely, customer value is the core aspect of any business model whilst profit pattern is the value of the company (Best 2000). On the other hand, critical process and key resource define the achievement of customer value and profit pattern. Apple’s Innovation Customer Value innovation Apple has had a massive path to the top echelon of world’s best electronics company. From iTunes to iPad, the company continues to establish a tradition for publishing, mobile, and music industry. Apple’s noteworthy transformation that stems from mastery of software, hardware, and additional service sets it as a major driver of consumer electronics worldwide. A good business model should be able to offer customers a new value that is non-existent in the market (Bettis 2004). Apple ensures they achieve this form of customer value by providing unparalleled advanced technology. The return of Steve Jobs was especially significant in establishing a unique customer value as the company started redefining customer needs, combining advanced techniques, outstanding marketing, and a reasonable cost. Apple’s technology is not dominant over it peers (Brown and Kātz 2009). However, the company incorporates its technology in production and marketing in the process delivering user-friendly products. For instance, by launching the iPod, Apple did not become the first company to launch a music player. However, Steve jobs and Apple’s staff were able to figure out customer needs leading to the production of star product that took the world by storm. Profit Pattern Innovation Defining a profit pattern is the other way of running a good business model (Burgelman and Sayles 1986). Apple can earn profits from three different avenues. First is the selling of hardware products including iPod, iPhone, iMac, and iPad. The second avenue is the selling of accessories of the products. This includes transmitters, earphones, adapters, and other accessories. Thirdly, Apple can generate profits from the sale of music and software through iTunes and Apple’s store (Cruikshank, 2006). It is evident that Apple’s three avenues of profit generation can positively influence each other’s sales. The excellent design coupled with thousands’ of applications and music online make Apple’s mobile devices more profitable than other similar products. Similarly, Apple’s applications have higher values than other applications mainly due to high sales and good hardware components. Furthermore, Apple has a competitive edge as it controls the most profitable components of the industry, which are research and design, sales, and channels. Additionally, Apple’s hardware, platform, and operating system only work in an Apple ecosystem locking out outside manufacturers (Cruikshank, 2006). Statistics just but indicate the extent of Apple’s control and competitive edge over its competitors. For instance, in the period between 2005 and 2009, Apple’s revenue from music downloads was dominant in the industry. Even the worst sale of iPod in 2009 could not hamper music download revenues, which rose by 21%, leading to 33.3% market share of music service from previous 16.4%. Challenge Analysis Challenge analysis involves an analysis of the challenges that a company faces and decision making on key issues and their relation to the business model (Cohen and Cohen, 1995). Apple’s Challenges Continuous technological advancements and the ever-changing people values mean that companies continue to face increasing global competition. The passing away of Steve Jobs has left Apple with some important issues (Dodgson, Gann and Salter, 2008). Firstly, the company has to find a way of maintaining competitive advantage over its competitors. Secondly, Apple has to maintain balance between growth in enterprise value and creating value for customers. One of the main challenges is the high consumer expectations and weakening brand recognition (Davila, Epstein and Shelton, 2006). BCG MATRIX Firms develop different business strategies when competing in different industries. The Boston Consulting Group matrix helps in enhancing strategy formulation for multi-divisional companies. Product Life Cycle Stage 1: Introduction There is need for awareness among adopters for a firm to introduce a new product like Apple’s iPod. Early adopters are customers that want greatest and latest products from an industry. Apple targets design savvy, educators, and small business owners when introducing its products in the market. Stage 2: Growth Apple sold 275 million devices a decade after iPod’s debut. Apple’s market approach entails appealing advertising and unique online retail consumer experience. This stage entails extending market share and may involve entering new market share using both outbound and inbound marketing strategies. Stage 3: Maturity Even though iPod became a huge success, Apple was facing stiff competition from other market players. The launching of iMac campaign highlighted Apple’s innovative products. Product differentiation set a new bar for Apple, differentiating its products from other products in the market. Stage 4: Decline In 2001, iPod was the market leading product in 2001. Fast forward to 2015 and iPhones and iPads are superior to iPod. However, Apple continues to produce iPod because it is key in user transition from PC to Mac. The decline of iPod led to Apple’s change in functionality, redesign, and innovation. Apple continues to use the decline phase to create new products and win new buyers. Porter’s Five Force Model Analysis Michael Porter’s model of five forces provides can help provide more insight into the industry context that Apple operates. This model analyses the attractiveness of an industry’s organization (Porter, 1980). Threat of new entrants The profitability of the iPhone and iPad markets continues to attract new firms. Some of the entrants into this market include Samsung who launched the Galaxy series and other manufacturers like HP, ASUS, and ACER. Even though there exists barriers of entry in the production of these consumer electronics in the form of technology, rights, and patents, technology communization lowers the barriers to entry. Apple continues to face competition from perennial and new competitors (Prahalad and Krishnan, 2008). Threat of substitute product or service At some point in his leadership, a Steve job was angry at the existence of Android that he swore to take legal action. Android is the substitute product as it is outside the realm of Apple’s boundaries and increases the inclination of customers to alternative electronic products (Rafinejad, 2007). Any brand that adopts an Android system can have their products operate Google’s operating system android. This broadens the range of substitute products that customers can choose. Furthermore, buyer-switching costs are low and consumers can gain in accessing cheaper products (Kumar and Phrommathed, 2005). Bargaining power of Customers Bargaining power of customers is also the market of output and refers to the capability of Customers to put pressure on the firm. This may entail customer’s sensitivity to changes in prices of the company’s products and services (Roberto, 2009). Apple does not face a strong customer bargaining power, which enables the company to set high standard pricing strategy. Even though increasing competition is driving down the prices of electronic products, Apple products are still going at a higher price in comparison to other products. This price battle with competitors is likely to affect customer value, which is the core business of the company (Katz, 1997). Bargaining power of Suppliers Bargaining power of suppliers is the market of inputs and entails supply of labour, raw materials, services, and other components to the company (Malik, 2013). Supplies that have few substitutes may lead to bargaining power of suppliers. In such cases, the suppliers may charge high prices or refuse to cooperate with the company especially when the resources in need by the company are scarce. Apple successfully controls its cost of production mainly due to good supply chain management. Apple’s suppliers have little bargaining power and they have no option but accept Apple’s stipulations. However, Apple should be cautious to avoid competition from other buyers, which might derail its source of inputs. Intensity of Competitive Rivalry The competitiveness of any industry depends on the intensity of rivalry among the industry’s players (Kagermann, Österle and Jordan, 2011). The main sources of competition for Apple are offline and online companies. Apple needs to emphasize on its competitive edge through innovation and continue implementing the competitive strategy (Manning and Reece, 2004). Innovation Matrix An innovation matrix is applicable on different levels of creativity, particularly on two-dimensional matrix. This matrix can help analyse Apple’s innovative strategy. Apple’s innovation falls into two categories: product design and innovation of application. Innovation of application entails product-side innovation and functional innovation. Product-side innovation deals with the supply side and technological thrust. On the other hand, functional innovation deals with the market pull and other demand side issues. Secondly, innovation of design entails creation based on the features of the product, like lighter weight and longer battery life (Sempels and Hoffmann, n.d.). According to the innovation matrix, Apple is advancing from the breakthrough innovation to sustenance stage. Apple’s main competitors like the new entrants as mentioned in the Porter’s five model are still at the initial stages of research and are yet to make a breakthrough similar to Apple. The main challenge for Apple is to meet the ever-increasing expectations of customers. Consistency in innovation is a major challenge, especially after the death of Steve Jobs (Strong, n.d.). Monetizing for Apple Apple can achieve more success by improving its business model. Apple has a good connection with buyers and sellers. Buyers are a core part of the business as they are the main source of revenue. For instance, Apple charges record companies commission fees when customers download content from iTunes. The company can broaden its source of revenue by engaging more users and partners other than direct customers. Software service is one of the projects that can start this strategy. Multiple income streams would help diversify Apple’s portfolio and manage risk especially with a lot of market uncertainties and economic instability. Even though multiple income streams may require more management, it serves as a base of a healthy business (Warren, 2002). Capital Market Conditions From the above diagram, Apple is financially healthier than its competitors are. The financial ratios reveal Apple’s dominance as they surpass the industry’s averages. Internal Organization Architecture Systems The internal and external relational contracts define an organisation’s architecture. Internal architecture relates to the relationships among human resources. On the other hand, external architecture refers to relationships with suppliers and customers. Apple also participates in collaborative engagements with its rivals such as Microsoft. Apple’s distinct architecture creates an organisational knowledge that reflects more than the inputs of employees. Architecture continues to be a source of advantage for Apple as the complex and implicit relationships both internally and externally limit any form of imitation and protects product development process. Apple’s success in architecture enables it to dominate the market with innovative products. Consumers use long-term experiences to gauge the quality of products in the technology industry. As such, reputation is important for any firm that intends to keep hold of its customers. Apple’s customers are loyal to the company’s brand and this remains a strategic advantage for the company to enter new markets. Most theorists agree that innovation is the main source of competitive advantage. Apple’s ability to innovate products that improve user experience continues to place the firm on a front foot in the industry. This competitive advantage originates from Apple’s internal architecture as innovation procedures are part of the firm’s routines. Patents and copyrights protect the innovative products of a firm and enable the company to earn returns from investments in research and design. However, in a highly competitive hyper-tech market, copyrights and patents may not be enough. A more beneficial action course would involve continuous product development, which would maintain the firm’s competitive advantage. This action plan defines Apple’s current strategy. Platform Innovation Production Apple’s partnership with Foxconn in the production line has been beneficial to Foxconn. This is because Foxconn engages in supplier quotation double decreasing antics in order to earn space of cost. For instance, if Apple places a unit price of $2, Foxconn would force the supplier to decrease its price to say $1.9 in the process earning $0.1 per unit. This behaviour may damage supplier’s good and Apple should create controls that monitor Foxconn’s actions or order from other manufacturers such as BYD (Minkes and Nuttall, 1985). Media, Accessories, and Online promotions Like iTunes and iPod, Apple can come up with an ecosystem for iPhone and iPad. The company can develop a digital media network or an entertainment system. One of the common accessories for iPad is dock. This accessory is an original design from ASUS’ transformer and not from Apple. However, Apple can design more accessories to meet consumer needs and broaden the functionality of its products (Funk, 2009). The famous and most valid promotion of Apple is press conferences (Gale and Wood, 1994). However, this method is slowly fading especially after the passing away of Steve Jobs. There is need for Apple to explore online promotion, which is an important avenue for promotion for many companies (Johnston and Bate, 2003). Action Plan Apple can build an action plan based on collective user value. This will enable the company to engage customers on a platform where users share Apple experience and raise concerns on the functionality of the operating system among other technical hitches. This would allow Apple to provide solutions and enhance user experience of its products (Mello, 2006). Additionally, the company can activate network effects, which would involve evaluation and measurement of the values of online and offline network effects. Apple’s reputation is important because the company employs a high pricing strategy. Reputation marketing is a significant aspect of Apple’s network. Another avenue that Apple can explore is the social network platform. Social networking not only works for internet firms but also hardware companies like Apple. This platform would provide an avenue for the company to highlight significant issues for its projects (Fey and Rivin, 2005). Sustainable Competitive Edge Research and Design Apple’s competitive advantage stems from its innovative products, which include iPhone, iPod, iPad, and iMac. Recent developments have seen Apple transform from a hardware design firm to a service provide (Forgang, 2004). At the centre of this transformation is the company’s innovation. Therefore, there is need for enough investments in research and design to enable Apple to maintain the competitive edge. The firm should focus on developing more innovative products and providing services that meet customer needs. This would enable the Apple to capture more market share by retaining its customers while attracting new customers at the same time. Customer Value Customers are key stakeholders in any business. Apple highly regards its customers that the business model centres on customer value. Most Apple customers purchase its products because they find the company’s staff nice and helpful (Morris, 2012). Another instance that reflects Apple’s commitment to customer value is the interesting case of a customer who returned an iPad after the wife did not take it. Apple’s response was unimaginable in the business world (Naumann, 1995). The company sent the Customer a free iPad immediately. Apple should maintain this trait by ensuring that customer needs are at the top of the company’s priorities (Nissing, 2013). Sustainable Profit Pattern Apple needs to develop a more sustainable pattern. The current profit pattern for the company is three-dimensional. Firstly, Apple relies on the sales of hardware products such as iPod, iPad, iPhone, and iMac. The second source of profits is the sale of accessories for its products (Osterwalder, Pigneur and Clark, 2010). Some of the accessories that Apple sells include transmitters, adapters, and earphones. Thirdly, Apple generates its profits from the sale of music and software on iTunes and Apple store and charging commission fees on the platform. The three avenues generate significant profit for Apple (West, 1992). This has led to increasingly more companies copying Apple’s business model and design. This poses a threat to Apple’s ability to generate significant profits from the three platforms. It is therefore important for Apple to beat the alarming replication of its business model by creating more and diversifying its business portfolio (Pearce, Robinson and Pearce, 1991). Conclusion Apple operates under one of the most successful business model globally. The company’s foundations lie on customer value, key resource, critical process, and profit pattern. This paper has discussed the main drivers of Apple’s success while providing a critical analysis of the company’s culture and performance. Innovation is the main strategic tool that gives Apple a competitive advantage in the industry. Apple has a strong bargaining power over its suppliers, which enables it to take charge of the key resources. Customer value is at the centre of the company’s service delivery, which enables the firm to retain its customers and attract new customers. The company’s profit pattern depends on three pillars of the company’s operations, that is: sale of hardware products, sale of accessories to its products, and sale of software and music. Innovative products give Apple a competitive edge allowing it successfully implement a high pricing strategy. 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