In the final of our series, The 4 As, we look at Apple ... - KPMG Boxwood

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The iPhone 6 had sold 10 million units by the first weekend after its release. But with the loss of design guru Steve Jo
In the final of our series, The 4 As, we look at Apple, one of the world’s most iconic and innovative brands. As we discussed in our opening article on Aldi, today’s consumers expect convenience, transparency and value for money. The best performing brands in this climate are those who have a rigorous focus on understanding their customer and apply that understanding through a differentiation on price, product or convenience. Apple shipped 39m smartphones in its fourth quarter, compared with 33m in the same period last year, smashing analysts’ forecasts and setting a new record for the company. Tim Cook, Apple’s CEO, said the year was “one for the record books”, which would pave the way for a strong Christmas shopping season. Apple’s strength is in its products: they have created design icons, often with ground-breaking functionality. Not only that, they have also created a retail environment which perfectly matches their products and enhances the Apple experience for their customers. Apple customers are buying an experience, and they are buying it in their millions. The iPhone 6 had sold 10 million units by the first weekend after its release. But with the loss of design guru Steve Jobs, the rise of cheaper products with equal or even superior functionality, and the need to conquer emerging markets, can Apple continue to wow its consumers and remain one of the world’s most successful brands?

Apple’s recent release of the iPhone 6 was awaited excitedly by millions around the globe. Customers’ initial delight was followed by the scandal of a poorly designed casing for the iPhone 6+, which bends out of shape. Not a great image for a company passionate about its products. Apple has recently been cited as the world’s most valuable brand, worth $124bn. With annualised revenue growth of around 30% per annum over the last five years and operating margins of over 20%, it is one of the world’s most profitable businesses. Many people today are touched by Apple in some way. Whether it is our iPhone, iPad, iPod, or iTunes, we are surrounded by the Apple nexus of devices, systems and services. It can be argued that Apple does not truly invent new products – rather it takes existing concepts and gives them a new twist. For example, the Personal Computer becomes the Mac, and the mp3 player gives way to the iPod. However, this ability to put a new twist on an old idea is precisely what makes Apple so innovative. With each new twist, it tells us what we want, rather than responding to what we ask for. Synonymous with Apple is Steve Jobs – the famous leader, who alongside Steve Wozniak, founded Apple in the 1970s, left in the 80s and returned in the 90s as CEO, bringing Apple from near bankruptcy back to profitability by 1998. He took Apple from an idea, to a quirky alternative to a desktop PC, to an ecosystem of devices, systems and services which have literally changed the world. His death in 2011 was mourned by employees, shareholders and loyal consumers alike. His legacy has continued, despite fears that Apple would struggle to continue to innovate. Recent product launches include the iPhone 5s and 5c which sold 9 million units on their first weekend of sale, and more recently the iPhone 6. Apple products and stores are cool, stylish and sexy and they draw you into an Apple lifestyle that integrates itself into your daily life. However, that unique style may no longer be enough to sustain Apple’s growth, particularly in emerging markets. The ‘bendy’ iPhone 6+ is not the only issue Apple faces. In this article, we discuss a range of challenges that could threaten Apple’s continued success: competitors in Western and emerging markets; its ‘closed’ approach to innovation; growing its brand without a network of physical stores in emerging markets; and its existing outsourcing model for operations. What does the future hold for Apple? How will it survive in a world changing so rapidly we may not recognise it in 5 years’ time?

Apple’s business model delivers stylish, seductive products, with a stickiness that few brands could boast of. The Apple ecosystem of products, apps, platforms and stores ensures that Apple products are incorporated into consumers’ daily lives, enticing them to embrace the full Apple experience and buy into a cool, attractive and highly functional brand.

Apple has always been something different – something for the rebel, for the consumer who wants to make a statement that they are different and don’t follow the masses. Even Apple’s stores make a statement – the clean and stylish furniture, and the somehow intellectual dress-code of their staff all reinforce the feeling that you are entering an experience which is better, different, and in some ways luxurious. Apple operates over 400 retail stores, the majority in the USA, which employ over 40,000 people and play host to more than a million visitors every day. It is estimated that Apple’s Fifth Avenue store generates somewhere in the region of $35,000 per square foot, making it the retailer with highest sales density in New York - ever. By comparison, most retail stores in the USA are typically at less than $1,000 per square foot. Apple Stores are now the highest performing stores in retail history.

Fig. 1

Steve Jobs’ passion for design and innovation is reflected in the uniquely stylish products which Apple creates. Jobs knew what good design looks like, and inspired others to deliver it, for example Sir Jony Ive, who takes a leading role in product experience from physical to software. Apple products have always been different, offering a certain look which distinguishes them from other products. When all PCs looked the same, Apple introduced the iMac in a different shape and a variety of colours. The iPhone, with its lozenge-shaped curves, brushed metal casing, and stylised Apple logo was the epitome of cool when it was released. The iPod’s interface was different – a circular wheel for easy scrolling. The glossy, well-presented, and easy-tonavigate menus and its infamous application format were a revelation: style could be backed by substance. This style is further enhanced by Apple’s association of its brand with contemporary culture. Consider the famous silhouetted figures dancing with an iPod against different brightly coloured backgrounds. This person was cool, having fun, and had made a choice.

Notice how difficult it is to talk about the user-experience of Apple products without talking about its brand. The brand is associated with the image of the physical product, the operating system and applications it supports.

Fig. 2

With a stylish and usable platform, and a seductive image and brand to draw us in, the stage was set to launch a plethora of new applications. Apple products are incorporated into most aspects of our daily lives. That’s the key strength of Apple’s business model: the Apple ecosystem creates a stickiness that prevents us from leaving. Why clutter your shelves when you can keep music, downloaded from iTunes, on your iPod, iMac, or iPhone? And do you really need the unsightly bulk of a keyboard when all you want to do is swipe and browse the internet? Your iPhone and your iPad neatly connect with whichever wireless network you are closest to. Need a bigger screen to view a movie? Connect your iPad or iPhone wirelessly to Apple TV. Want to know how many calories you’re burning? Track it on your Apple Watch. Not sure which device you need to take with you? Never mind, they all talk to each other via the iCloud. Each part of the ecosystem supports the whole. Take iTunes as an example: its profitability is lower than other elements of the system, but it has been key to Apple’s domination, and continues to act as the glue which keeps the system hanging together. As a recent article in Wired magazine stated, “Apple has turned our world into one ubiquitous computer”. The Apple ecosystem is like a swamp. The more we interact with it, the deeper we are drawn into it. Fortunately it is a very lovely swamp.”

Apple’s business model has, for many years, successfully provided the business with a powerful articulation of Steve Jobs’ vision and passion for products, but the world is changing. Apple’s business model is increasingly under threat from emerging markets and stronger competition.

Apple may be left with a premium, or even a luxury, product. But will emerging market consumers be willing to pay that premium, en-masse, for Apple’s luxury image, product and service? When the functionality and usability is matched by cheaper alternatives, precisely what premium is Apple offering? Style is not enough.

Most of the global economic growth predicted between now and 2020 is expected to come from emerging markets. China and India will deliver most of this, and their economies include the manufacturing of high-tech products on an enormous scale. While the iPad blazed the trail for tablets and hand-held devices, Asian competitors are offering affordable alternatives. Just as Toyota and Honda in the 80s and 90s studied Western cars and produced equivalent products more cheaply, Apple could be under a similar threat from their Asian counterparts. Such a threat would push their products firmly into the niche/luxury market, in a world which is becoming increasingly commoditised.

Western households are already showing they are unsurprisingly not deterred by cheaper alternatives, simply because they may not have the Apple image or lustre which we describe above. And, of course, these rival devices are perfectly capable of using Apple’s ecosystem e.g. iTunes, and they come with their own app stores which offer access to the multitude of apps available from around the world.

Emerging markets are, of course, also a key territory for Apple’s competitors. Samsung and Google currently offer smartphones and operating systems which are functionally equivalent, if not superior, to iPhones and iPads, and are becoming notably cheaper.

Fig. 3 Source: Apple and Boxwood analysis

It’s not just about the devices themselves. As competing devices increasingly offer apps of a similar quality, or a wider range than appStore, how long until Apple’s dominant market position in Western advanced economies becomes eroded and its ecosystem has to open its doors to competitive interlopers? Shrewd consumers could opt for cheaper alternatives with equivalent functionality, and a perfectly attractive and presentable physical casing, operating in a mixed ecosystem of devices and apps.

Apple’s products run on iOS, an operating system which is available only to Apple products, whereas Android, developed by Google, is available, in principle, to any developer or manufacturer who wants to use it.

VHS, on the other hand, made its technology available to many brands and manufacturers, such as Fergusson, Mitsubishi, Sharp, Hitachi, and Panasonic. The result: the death of Betamax.

Android’s open approach is a significant driver behind its market share: in the third quarter of 2013, Android's share of the global smartphone shipment market was 81.3%.

There are wider implications of Apple continuing to operate as a closed loop. Less sharing of access to technology means fewer partnerships and business relationships, which means less sharing of new ideas, technologies and trends. This could make it harder to stay in touch with consumer demands in a fastchanging and diverse global economy, where much of the income growth is in Asia.

In India and other countries, Android is the most popular operating system. Mobile usage has already overtaken desktop in several countries including India, South Africa and Saudi Arabia, as well as in several African nations, including Ethiopia and Kenya (where mobile is 72.23%). This market share is despite the fact that in emerging markets, unlike in the West, Android phones rarely include Google’s proprietary add-ons (such as Google Play). Consider the famous war of attrition between Betamax and VHS in the 1980s: Betamax limited the licensed use of its arguably superior VCR technology to certain manufacturers it considered to be higher quality, such as Sony.

Fig. 4 Source: Statista and Boxwood analysis

Does the past hold a future lesson for Apple here? Or should Apple retain its closed system and entrench its position as a provider of premium products for wealthy Western consumers? With these consumers living in an age of price consciousness and with economic growth expected to be driven by emerging economies with home-grown technology providers, Apple’s business model appears to be under threat.

Apple has long been associated with an amazing ability to take existing ideas and put a new twist on them, delivering something that is different and better than the competition. That ability may now be under threat, but it is worth looking at how Apple’s operating model has helped it to be so successful for so long. We believe that Apple’s operating model has three defining characteristics: 1. 2.


Design: responsible for making Apple products unique; Destination: the Apple stores, with their famed approach to customer service, and the physical and virtual elements of its ecosystem; Delegation: the outsourcing of non-core competencies

Design has always been at the heart of Apple. Flip over your iPhone to see: ‘Designed by Apple in California.’ Steve Jobs was at the heart of design at Apple. It was arguably his singular vision which drove the uniqueness of Apple products. Famed for testing relentlessly before presenting a new product to the market place, his expositions of new Apple ideas became events in themselves.

Fig. 5

The Apple brand is synonymous with innovation. As noted briefly earlier, it can be argued that Apple does not invent anything. But invention and innovation are not the same thing. Innovation is doing the same things in a different way – often aided by new resources, such as technology. That philosophy of doing things differently also applies to Apple stores, as we shall see later on. Apple currently has 12,000 staff at the Apple Campus in Cupertino, California. Just as their operating system is closed, their working practices are relatively closed too, and subject to very careful security. Apple employees know something big is afoot when new office walls are quickly erected, doors are added and new security protocols are introduced in their workplace. Windows that were once transparent are now frosted. Other rooms have no windows at all. These are called ‘lockdown rooms’: no information goes in or out without a reason. By contrast, Google’s centre is open to visitors, with volleyball courts for employees, and a famed overall culture of informality. Will Apple’s setting and its closed system continue to provide a level of design-uniqueness which supports a luxury or premium brand?

By destination we mean Apple’s ecosystem – exemplified by its store experience – and the location of its brand in the mainly virtual market place. Apple famously studied the failings of other retailers and hired two retail heavyweights to help fulfil its retail vision: to be unique, stylish, and a cut above the rest, just like its products. Millard Drexler (previously of GAP) was hired to help with retail operations, and Ron Johnson to assist with positioning Apple’s image at the top in terms of price and quality. Before opening, Steve Jobs ensured the layout of stores were mocked-up and carefully considered, ensuring that stores were laid out by solution, in a way that customers would relate to. They were also conscious that people will pay more for products if they are given great service. The ‘Genius Bar’ and product set-up cells for customers were used to ensure their image was cool, but not unapproachable, turning what could have been niche products into something many could relate to. This included the ability to set up appointments online to be seen in stores, with a real focus on personal selling. Through these stores, Apple made contact with customers and invited them to experience a lifestyle. The key to achieving this, of course, is people. Apple is famously selective in its hiring, with incredibly low acceptance rates. Store staff are selected by Apple because they buy the image, they buy the experience, they buy the tech, and above all they buy the lifestyle and are passionate about the product. To work at the Genius Bar, you need to pass tough technical and communication skills tests. The result is personal selling, without the hard sell. This experience stays with customers after the product is out of date, and so they await the next big release, and they come back. This lifestyle is difficult to leave, and it works in the US and Europe, where Apple has most of its stores. In emerging markets, however, Apple only has a small presence and that presence is further diluted with limitations on their famous in-store functionality such as EasyPay. This dent in Apple’s ecosystem in emerging markets could prove to be a major barrier to growth.

Fig. 6

Even more so if, as we have discussed, consumers in these markets struggle to see the benefits of a premium Apple product over cheaper, functionally equivalent alternatives. With no in-store experience to deliver the coveted lifestyle, there is a danger that the Apple product remains just a product in the consumers’ eyes. An expensive product.

Flip the iPhone over again, and you can also read ‘Assembled in China’. Whereas design is situated in California, broadly speaking, Apple’s manufacturing is outsourced to China. Research and development, and software development, take place globally, in the UK, California, and China. Clearly, Apple sees design as its core competence, and manufacturing as something they can delegate. But the recent issues with the bending iPhone 6+ casing indicate that the interface between design and manufacture is at least as important as design alone. Stylish, sticky products are the cornerstone of Apple’s business model, a model which is still driven by the legacy of Steve Jobs’ passion for product innovation. It’s unsurprising then that design and marketing remain firmly in-house in California. It’s perhaps more surprising that technology is outsourced as a non-core competency. However, key to Steve Wozniak’s technical leadership was his open preference for engineering over management, something well-known in environments such as Silicon Valley to bring deep authenticity and credibility. If the best coding experts are located elsewhere in the world, then it makes sense to outsource. This approach has worked so far: Wozniak was the technical guru behind the unseen coding, application and operating system development that was the fundamental platform of seamless functionality that enabled the Apple image to stand out in the market place. Outsourcing, however, does have a major disadvantage: lack of control. Outsourcing non-core capabilities also creates the need for vendor management and quality control as core competencies to ensure external relationships and value are wellmanaged. Returning again to the bending issue, it could be argued that in-house manufacturing would never have allowed such a major release to contain such a flaw. In a commoditising marketplace with intense global competition, failing quality standards are the last thing Apple needs if it does wish to maintain a premium position.

Whether Apple can maintain its position, continuing to employ the same business and operating models in a rapidly changing world, is open to question. Apple faces some critical decisions about how it will compete in the future.

Will Apple continue as a premium brand or will they be either forced upwards into the luxury segment, or down into the mass-market commodity segment as their premium features fail to stand out? Apple has recently appointed Angela Ahrendts, exBurberry CEO, to head up retail and online sales, and Paul Deneve, formerly CEO of Yves St Laurent, as its VP of ‘Special Projects’. The iWatch, due to be launched soon, will need to be credible in terms of fashion as well as tech. With Ahrendt’s and Deneve’s experience in luxury brands, this seems a strong move to preserve and even increase Apple’s premium position. But if a luxury or premium position is taken, how will Apple achieve credibility with discerning consumers in emerging markets such as China and India? With competitors offering cheaper alternatives, equal in functionality, they could easily erode a luxury position. It’s also hard to see how a niche, luxury position fits with Apple’s existing operations. A luxury product will have limited units, manufactured to the highest standards and distributed to a select network of customers. That doesn’t translate to Apple’s hundreds of stores, and outsourced manufacture of products on a large scale. Apple’s premium position could be enhanced through the creation of a greater number of products, delivered via a new digital model. Digital seems more able than ever to provide personal interactions. Take, for example, Amazon’s Kindle Fire, which provides personal video chat with service assistants. Perhaps Apple can try and replicate its store experience online: could Apple’s customers and resellers form part of this experience? Apple could learn from ASOS’s successes and the challenges it faces, as experts at building a customer community (featured in the third of our 4 As series).

Leadership will be key to market position, and Steve Jobs’ unique vision requires successors. In the absence of his vision and influence over design, and amidst commoditisation, will Apple be able to maintain the credibility of its brand, or will it need to focus more on functionality and cost? New leadership is a good platform for change, and this is an opportunity for Apple to change direction as global markets develop.

As noted earlier, Google’s Android is the key competitor for Apple in terms of software – and its open-system approach threatens to leverage this critical mass in the marketplace, particularly for commoditised emerging markets. For hardware, Samsung has recently been applauded for the user-friendliness of its devices, from TVs through to its competitor to the iPhone: the Galaxy. That said, whilst Apple is a closed system, it can choose its partners and make alliances. Apple and IBM recently announced an exclusive partnership that hopes to unite the market-leading strengths of each company to transform enterprise mobility through a new class of business apps – bringing IBM’s big data and analytics capabilities to the iPhone and iPad. Apple’s appointment of Angela Ahrendts and Paul Deneve seems a logical move to help preserve brand uniqueness, and assist the launch of the iWatch. However, it remains a bet in the global market place which may not be amenable to luxury Western brands. If Apple chooses luxury, then a closed system is logical (though it carries the risk of losing touch with technologies and trends). If, however, Apple goes down the premium product route, or into commodity products, then its closed operating system is likely to become a barrier to future innovation and growth.

Just as the iPod, smartphone and tablet have changed the world, so too could products such as Google Glass, 3D printing, and smart watches. Wider technologies in robotics automation, and even 3D printing could transform manufacturing in directions which are difficult to predict with accuracy. These new technologies could also work their way into people’s lives and disrupt Apple’s ecosystem completely.

All of the above have implications for Apple’s business model, and in turn its operating model. It is currently set up to provide what is arguably a ‘mass-premium’ product mainly to relatively high-income Western consumers. If Apple chooses to focus on upmarket luxury products for a niche audience, or push into the commoditised emerging Eastern markets, or both, this has implications. The scale and complexity of its operating model, in terms of outsourced manufacture, and design at home in California, could need to change.

All is not doom and gloom. Apple has powerful strengths it can draw upon to reconfigure and reposition for the future if needed: a strong brand, a cash-rich balance sheet, well-established products, and a strong distribution network and stores. Clearly, there is much to be learned from Apple. They have developed an incredible ability to innovate, to create unique, stylish design, and encourage consumers to invest in the Apple ecosystem, rather than more open systems such as Google and Android. Apple delivers a retail environment which gives the customer the freedom to browse, discover, explore and purchase at their leisure, serviced by passionate product and lifestyle ambassadors selling an experience. These strengths, combined with its strong financial position, leave it with good strategic options, such as acquisition of disruptive competitors and their technologies, and development of its own disruptive products such as the iWatch. However, Apple does face several key strategic questions which will influence its future: 

At the volume at which it now operates, can Apple maintain its position as a brand which is different, for the independent thinker?

Will simply giving existing products a new twist, or taking a luxury position, be sufficient for survival in a global consumer marketplace which is becoming crowded with new competing, disruptive technologies, products and eco-systems?

What is the right balance between development of Apple’s own new products, and the acquisition of disruptive competitors and their products?

What are the implications for its operating model, for example in terms of design and manufacture?

Above all, does Apple need an even better capability to develop its vision and imagine its future direction?

Apple may be struggling to answer the question of whether their brand and style is enough to eclipse equivalent and cheaper functionality for its retail consumers, but there is another consumer segment to consider. Perhaps through a focus on business executives and luxury consumers, the support is possible for a volume luxury brand, although the issue of scale and customer contact remains. Apple’s passion for its product has helped it to become one of the world’s most iconic brands and one of the world’s most profitable businesses. It’s that passion and vision for the product that seeps out into every area of Apple’s operation and sets it apart. Think Apple: think design, think user experience, not product. If you want to differentiate your business through your product, would the same mantra apply?

Matt Clark | Director T +44 (0)20 3170 6025 | E [email protected] Paul Martin | Managing Director, Boxwood Insights T +44 (0)20 3170 7240 | E [email protected] Richard Rickards | Manager T +44 (0)20 3170 7240 | E [email protected]

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