Business Model Interrogation & Development: How Apple Inc Makes Money - Case Study Example

Business Model Interrogation & Development: How Apple Inc. Makes Money Introduction Apple Inc., a multinational company headquartered in Chicago has featured in the global media for its capacity to develop and apply strategies that earn real money for the company and its shareholders. Established in 1976 and then registered in 1977 as a personal computer producing company under the name of Apple Computers Inc. The company changed its name in 2007, to reflect is new strategy for the production of a range of other technology products such as consumer electronics, computer software and online consumer services (Zylla-Woellner, 2011:7). Ever since the company has ranked among the top most profitable publicly traded companies in the USA, while also ranking as the world’s largest mobile phone maker and also the second largest IT company globally when categorized in terms of revenue generation capacity (OGrady, 2009:47). According to the company’s 2014 financial report, the company generated a total of $182 billion in revenues globally, making the company rank as the third most profitable company in the USA, beating its traditional rival, Microsoft, which had annual revenue of $91 billion in 2014. Nevertheless, the story of Apple Inc. has not been so decorated in the past. The company had declined in its profitability and revenue earning capacity between 1990 and 1999, only to return to reasonable profitability after the year 2000, when the company gained a strategic focus on the development of few but quality products for its market niche (Lynch, 2014:n.p.). Consequently, the company started to rise in the hall of fame starting 2001, and has maintained its quality products and profitability reputation throughout the last decade, and has passed on the same legacy through to this decade. Therefore, the major question at this point is; how does Apple Inc. make money? Analysis Apple Inc.’s Product Portfolio and revenue generation capacity Apple Inc. makes most of its money from selling hardware gadgets (Lunch, 2006:21). Thus, the most popular product sold by the company is the iPhones, which accounted for 37% of the total revenues that the company generated in 2013, and amazingly accounted for over half the total revenue that the company earned in 2014, by accounting for 55% of the total revenues of the company (Bott, 2014:n.p.). The iPhones are followed by the iPads, as the next most profitable product for the company, with this product generating 13% of the total revenues of the company in the year 2013, which then increased to account for 18% of the total revenues generated by Apple Inc. in 2014 (Bott, 2014:n.p.). The most interesting aspect of the Apple Inc. money earning strategy is that it earned over 60% of its revenues for the year 2014 from the two most popular products; iPhones and iPads, which are products that did not exist in the company seven years ago (Frommer, 2011:n.p.). It is this unusual revenue generation occurrence; where the traditional products of a company are overtaken by the newly developed products in sales and revenue generation capacity by such a huge margin, which then tells that Apple Inc. has a very unique money-making strategy. Apple Inc.’s Money Making strategies The niche market strategy The application of the niche market strategy is one of the answers to the question; how does Apple Inc. make money. From its establishment in the late 1970s, the company manifested and cemented its intention and strategy as that one of offering products and services for premium-rated customers (Lunch, 2006:22). Therefore, Apple Inc. spoke to the world at its establishment, by simply spelling out that its objective was not to seek to acquire the largest market share, but just sought to completely and satisfactorily meet the needs of the premium and high-income class of customers, who required unique and differentiated products that were not available in the market back then. Consequently, Apple Inc. started with offering its Apple personal computers and the Mac Os system, which immediately earned the company its reputation of the company with the most favored brand, and a high customer loyalty rating (Linzmayer, 2004:44). It is this niche-market strategy that soon allowed Apple Inc. to perceive another new market amongst its premium-rate customers; that of music and software apps. Consequently, Apple Inc. would venture into the iTunes & Mobile application services (Lunch, 2006:21). However, the company was to soon realize that these products did not earn it as much revenues as it had targeted, but realized that they can be useful platforms for launching into a totally different area of business; the electronics. Thus, Apple Inc. started producing the iPhones and the iPads in 2007, and tailored their quality, software and hardware features to the requirements and interests of the premium-rated and high-income customers (Linzmayer, 2004:46). The effect of this strategic move is that the company has now been able to rely on these two major products for its revenue generation and profitability earning, more than any of its traditional products. Thus, currently, the iPhones and the iPads earn the company well over 60% of its total annual revenue, with the iPhones alone accounting for 55% of the company’s revenues for the year 2014, thereby earning the company a total of $101.99 billion in sales (Yarow & Gould, 2014:n.p.). On the other hand, the iPads earned the company $30.28 billion in the financial year 2014, which accounted for a total of 18% of the total revenues of the company (Bott, 2014:n.p.). Sustaining strategic accompaniment product portfolio The other product that generates substantial revenues for Apple Inc. is its Apple Mac, which accounted for a total of 13% of the company’s revenue in 2013, and maintained the same percentage for the year 2014. The iPods generated 7% of Apple Inc.’s total revenue for the year 2013, but decreased their percentage contribution to the company’s revenues for the year 2014, where the iPods earned the company only 2% of its total revenues (Thompson, 2013:n.p.). The other products that contributes to revenue streams of the Apple Inc. include its iTunes and mobile app service software, which accounted for a total of 7% of the revenues of the company in 2013, and then increased to account for 9% of the total revenues earned by the company in 2014 (Bott, 2014:n.p.). The company also produces accessories to its mobile phone, computers and other hand held devises, which also earns the company some revenues, with the accessories earning Apple Inc. a total of 3% of its total revenues, which was a drop from the initial 12% that the accessories earned the company in the year 2013 (Thompson, 2013:n.p.). The combination of the Apple Inc. iTunes, app services, accessories and software do not account for a high income for Apple Inc., with the combination of this product portfolio earning the company less than 40% of the total revenues that the company generated in 2013, and even decreasing, to account for only 27% of the company’s total revenues for the year 2014 (Kakabadse, 2002:56). However, the major question that one would ask at this point is; why does Apple Inc. fail to popularize these products to the level of its iPhones and iPads among its customers, so that the product can earn more revenues for the company? Alternatively, why does Apple Inc. fail to remove these products from its portfolio and continue to focus on the ones that are earning the company the high profit margin? The answer to these questions is; these products constitute a product portfolio for Apple Inc. referred to as the accompaniment product portfolio, which accompany the major products that the company sells to its customers, and thus helps the company to sell these products even more (Ireland, Hoskisson & Hitt, 2008:13). The logic behind this product portfolio is that they are manufactured and tailor-made to fit the features of the other hardware products for Apple Inc., such as the iPhones and iPads. The importance of this strategy is that the customers will already have ready and custom-made software, app services and music and video services by the time they purchase the Apple hardware products. This is instrumental in ensuring that the Apple Inc. hardware products are more useful and also desirable, owing to the fact that they have their own custom made software, music, apps and accessories, as opposed to other competitive brands which have hardware products and then depend on the accompaniment products from other suppliers (Jeffrey, 1988:16). Therefore, despite the fact that this product portfolio does no fetch Apple Inc. a lot of money, it is the most useful portfolio for the company’s ecosystem. This strategy is one that causes a distinction between Apple Inc. and other players both in the IT and the electronics industry, causing Apple to come out strongly as a dependable and reliable company for its premium-rated customers. The fact that the customers are able to purchase both the hardware and the software components from their valued company, in addition to the opportunity to purchase entertainment products and also accessories, serves to enable Apple Inc. to sell more iPhones and iPads, thus being able to generate high income and also earn good profits (Ireland, Hoskisson & Hitt, 2008:13). Therefore, the strategy to sell the hardware products and also avail their accompanying software, apps and entertainment services enabled Apple Inc. to earn a profit of $37 billion for the year 2014 (Apple Inc.,2014:n.p.). Industry co-operation strategy Apple Inc. has risen to the hall of fame both as the most valued company in the USA and also the company commanding a high customer loyalty, due to its co-operation strategy, as opposed to isolation, allowing the company to increase its sales by a great margin each year, since 2007 (Zylla-Woellner, 2011:12). The company has devised well meaningful cooperation strategies with the main players in different niche markets where the company serves, such that after the introduction of the iPhones in 2007, Apple Inc. entered into a co-operation contract with 02 Mobile telephony company of the UK and the AT&T telephone company in the USA, to have these companies sell its products alongside their own products (Zylla-Woellner, 2011:14). In addition, when Apple Inc. expanded to other parts of the world, it continued to enter into co-operation contracts with different mobile telephone players, for example, the co-operation contract Apple Inc. entered with China Mobile, the biggest mobile company in China, to sell its products (Lynch, 2014:n.p.). It is such cooperation that has enabled Apple Inc. to distribute both its hardware and software products widely. The effect is that the company has been able to sell high volumes of both hardware and software products, allowing the company to earn high revenues annually and consequently continue to grow its profitability year after year. Through the co-operation of Apple and other industrial players from different parts of the world, the company was able to grow its profitability from $25 billion in 2011 to $41 billion in 2012, most especially due to its expansion and increased sale in the Asian market (Apple Inc.,2014:n.p.). The co-operation strategy has seen Apple Inc. manage to remain relevant in the apps and music services segments of the of the IT industry, with numerous sales of its products being sold through its contracted companies, as opposed to its Apple Store. For example, in the year 2014 alone, the Apple’s iOS sold by the China mobile was able to earn more than 85% revenues of the Google Play, while statistics also indicate that China Mobile is responsible for more than 70% of the downloads that are made in Apple Inc.’s app store (Zylla-Woellner, 2011:17). These facts clearly indicate that the industry cooperation strategy that Apple Inc. has adapted is essential for generating more business for the company. The big advantage associated with industrial co-operation of Apple Inc. with other industrial players is that; the company is also able to fight competition in the regions where it could hardly be able to compete on its own, without the support of the contracted partners. For example, Apple has managed to venture into Asia and conquer most of the mobile and electronics markets, despite the fact that the global electronic giant, Samsung, is an Asian-based company (Apple Inc.,2014:n.p.). This can be exemplified by the fact that in 2014, Apple Inc. was able to increase its total sales in Japan by 11% compared to its 2013 sales, despite the fact that Samsung is based and headquartered there. This was possible through Apple Inc. increasing its sales revenue in Japan from $13.46 million to 14.98 million in 2014 (Apple Inc.,2014:n.p.). This simply indicates that the industrial co-operation strategy is an effective strategy through which Apple Inc. makes money. Apple Inc. High-price-high-quality strategy The high-price-high-quality strategy is another important of Apple Inc.’s money making strategy, which has allowed the company to make a higher profit margin that most companies, often ranging over 40% of the total annual sales (Kakabadse, 2002:45). The first fiscal quarter of 2013, which comprised of 13 weeks, indicated that the company had made total sales of $54.5 billion, which constituted a net profit of $13.1 billion, which also meant that the value per diluted share of the Apple Inc was valued at $13.81 (Apple Press, 2013:n.p.). The capacity to earn such a huge profit margin is created by the high-price-high-quality strategy, which allows Apple Inc. to sell its products at a high price, having ensured that they are high quality products. The effect is that Apple Inc. has been able to cultivate a high value of goodwill that is worth billions, since it has emerged as the most valued company in the USA, while at the same time remaining the company with the high percentage of loyal customers (Linzmayer, 2004:39). The high-quality high-price strategy has enabled Apple Inc. to continue growing its sales in different regions globally, since it has been able to tap into the premium market and remain the company with the most high-end products in the computer, electronics and mobile phone/hand held devices market. For example, Apple Inc. was able to increase its net sales in the Americas from $62.7 billion in 2013 to $ 65.2 billion in 2014, which is an annual increment of 4% (Apple Inc.,2014:n.p.). Similarly, the company managed to grow its sale in the European market by an annual margin of 8%, where it increased its sales from $37.8 billion in 2013 to $40.2 billion in 2014, while the growth in the greater China was even higher, with Apple Inc. increasing its sales in this region from 25.8 billion in 2013 to $29.4 billion in 2014, which accounts for a 17% annual growth in sales (Apple Inc.,2014:n.p.). Japan was not left behind either, with Apple Inc. growing its sale in this region from $13.4 billion in 2013 to $14.9 billion in 2014, which accounts for approximately 11% annual growth in sales (Apple Inc.,2014:n.p.0). This data indicates that Apple Inc. products have been accepted widely in different regions of the world, despite the fact that they still remain high-end products that retail at a relatively higher price compared to similar products offered by other companies. The high level of acceptability of the Apple Inc. products is as a result of the fact that the company has strategically placed its brand on the top tier of the electronics, mobile and computer categories. This has been attained through Apple Inc. retailing its products at a premium-rated price, which gives the impression that the products are worth much because they are of high quality (Lunch, 2006:72). Thus, the high-price-high-quality strategy is a vital strategy that explains how Apple Inc. makes money. 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Business Analysis of Apple Inc. GRIN Verlag. 2-18. Read More