Apple business model

1. Introduction
Apple’s huge success set off a global widely discussion on its secret. According to this essay, it is not difficult to find its success story was attributed to its unprecedentedly innovative business model, which was  not rare in the typical case analysis of Walmart, BestBuy, and Amazon who are the leader of corresponding industry due to the innovation of business model. Status shows 11 out of 27 new entering Fortune 500 companies from the year 1998 to 2007 considered their success was owing to the innovation of business models. The percentage approach 50% which is a huge evidence to prove the significance of business model, especially for Apple, whom I want to deliver an analysis followed, and gave a suggestion on its future development.

2. Apple’s Business Model
2.1. Elements of successful business model
A successful business model is a system that creates and delivers values to customer, consisting of four crucial elements: customer value, profit pattern, key resource and critical process. Customer value refers to the irreplaceable value only you can provide to the clients, not the other competitors. Profit pattern means that how you will develop a benefit-earning system from the procedure of creating customer values. Key resource is fundamental for the company to integrate all they have internally and externally to establish a more beneficial environment where breeds customer value. Critical process can ensure customer value via standard operation and matching culture. It is can be seen that customer value is the core of the whole business model and profit pattern represent company’s value, while key resource and critical process describe how to achieve the formers.

2.2. Apple’s innovation on its business model
It is Apple run such a brand new system from customer value, profit pattern, key source and critical process that made it change the fading traditional PC industry and lead it, as well as the Mobile product industry.

2.2.1. Customer Value Innovation
We can drop from the article that from iPod iTunes，iPhone App Store，iPad product launched, Apple has set up a rule for the traditional music, mobile and publishing industry, into which inserted a significant transformation by mastering the key part of hardware, software, and additional service. This made Apple be the King of the new consumer electronics’ world. As above discussed, a successful business model is judged mostly whether it offers consumers a new value that they have never seen. As for Apple, this kind of customer value means that they provide the advanced technology beyond the competitors, especially when Steve Jobs came back. Apple started to redefine the customers’ need, break out feudalistic thinking, combining the advanced techniques, reasonable cost and outstanding marketing.

2.2.2. Profit Pattern Innovation
The second step for running a successful business model is defining profit patter. It can be seen from the article that there are three main ways for Apple to earn profit. a)

Three ways
First one is selling price for the hardware product (iPod，iMac, iPhone，iPad) for one time. Second

one is selling price for the accessories of corresponding products, like transmitter, adapter, mouse, earphone, etc. Last but the least, selling software and music via Apple’s store and ITunes and the gaining commission fee by running the platform is a consistent source for earning profit. b) Driving reasons

The article has made a clear analysis on these three profit ways which can be positively impact each other by its own sales. On one hand, due to the excellent industrial design in appearance, and over hundred thousands’ music as well as applications on line, no matter iPod, iPhone or iPad, these three mobile devices are profitable far beyond the similar products. On the other hand, thanks to the amazing hardware components and high sales number, those applications are more valuable and accelerate more and more new software developing and embrace more and better content into Apple’s supply chain. c)

The most profitable part and examples According to the article, what irritated Microsoft, Intel and other industry’s leader, Apple is no longer

the idol for minority, but also for the community. Apple is controlling the most profitable part which is R&D, channels and sales, what’s more importantly, Apple’s hardware, OS, and platform like iTunes, APP Store is only suitable to Apple ecosystem, and not open to outside manufacturers.

Take iTunes for instance, from year 2005 to 2009, revenue from downloading music was dominating a high place, even in 2009 when appeared the worst sale of iPod, the music downloading revenue still rose by 21%, increasing the
market share of musical service from 16.4% up to 33.3%, total revenue was 4.036 billion USD. It was the worst status.

Take another eye on APP Store. Status up to June 2010 shown, more than 4 billion’s times free download happened in APP Store. The percentage of charging download is 19% with an average price 1.49 USD, in which Apple can share 29 cent per each download. Since 2008, APP Store has created revenue for the third party of APP developer (over 1 billion USD), as well as Apple itself with 4.28 commission fees.

Challenges Analysis
This section analyzes challenges faced and arguments on the key decisions that need to be made and how they are related to the business model and each other.

3.1. Apple’s challenges
The rapid development of science and technology and the change of people’s value result in an increasingly competitive global economy. How to find and maintain competitive advantage, and how to create value for customers while achieving growth in enterprise value, has become the most important issue faced by Apple, especially after Steve Job’s passing away. At my point of view, now Apple is facing some challenges from its fierce competitors, the disappointment from consumers’ high expectation, and weaker brand recognition. I will conduct an analysis with Porter’s Five Force model and Innovation Matrix.

3.2. Porter’s Five Force Model analysis
Michael Porter’s model of Five Forces can be used to better understand the industry context in which the firm operates. Porter’s Five Forces model is a strategy tool that is used to analyze attractiveness of an industry structure.

Fig 1. Michael Porter’s Model of Five Forces

3.2.1. Threat of new entrants
What profitable markets IPhone and IPad brought that yield high returns has attracted new firms. This resulted in many new entrants like Samsung who created Galaxy series for its Android phone and Android tablet, Google, Microsoft, and traditional PC manufacturers like ASUS, HP and ACER, which eventually will decrease profitability for all firms in the industry. The entry barrier for this consumer’s electronics is high before, for example, technology, patents, rights, etc. However, with the technology communization, the entry barriers is lower and lower, especially many small electronic companies in Mainland China have fight into this battle. Apple now is followed by numerous of competitors.

3.2.2. Threat of substitute products or services
From the article we knew that Steve Jobs was quite angry that the existence of Android, and he swore he would put every penny to sue Android whom he thought a baby from a thief. That’s the substitute product, which is outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives.

The substitute product of IPhone appeared so early that it is not surprised for us to think about the replacement for IPad, IPod, Mac. Google’s OS Android is no wondering the biggest competitors towards  Apple, which is open source that can be operated in any other Brand’s product only if they adopt Android system. This strongly enlarges the substitute products’ range for the customers. Buyer switching costs is so low for this, and even they can gain more advantages, like cheaper products,
and not bad user experience.

3.2.3. Bargaining power of customers (buyers)
The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer’s sensitivity to price changes. Very luckily the bargaining power of customer is not so strong for Apple that Apple can always set a high standard for its pricing strategy.

It seems the good days have gone. With the fierce competition from the varieties of manufacturers, the selling price for smart phone and tablet is going down sharply. Take a similar 4-core CPU smart phone for instance, IPhone 4 is sold around RMB 5200 when it firstly came out, while Samsung Galaxy S3 is sold a little bit lower, around RMB 4800, and the other phone brands sold three quarter price of that, like LG, Lenovo, even you can see just around RMB 2000 by China local brand MI. In this price battle, some customers not stable Apple’s fans will have a try, and doubt that whether Apple’s product is over-priced. This is significantly affected what we mention in the first part, customer value, what really matters to Apple, not in a good way.

3.2.4. Bargaining power of suppliers
We all know Apple is good at supply chain management which is made it so successful to control the cost of production. Suppliers in Apple’s supply chain are given little negotiation right but just to accept in the past.

In this five force model, the bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the company, when there are few substitutes. Suppliers may refuse to work with the company, or, for example, charge excessively high prices for unique resources.

At present, this is still rare for Apple’s vendors unless they are bleeding to give up Apple’s big order. However, according to some interviews to their vendors, many of them are complaining Apple’s over strict contract terms, and limit benefit space for them.

Therefore, although Apple is still controlling very small angle in the cooperation with the suppliers, it should be cautious of supplier competition – ability to forward vertically integrate and cut out the buyer. 3.2.5. Intensity of competitive rivalry

The intensity of competitive rivalry is the major determinant of the competitiveness of the industry. Apple should spare an eye on competition between online and offline companies, and focus on its sustainable competitive advantage through innovation, and stick to the powerful competitive strategy.

Suggestion and action plan

4.1. Apple’s Fishbone Diagram
I drew a Fishbone Diagram for my recommendation to achieve Web 2.0 strategy for Apple, see below graph.

Fig 3. Apple’s Fishbone Diagram

I will put some highlights on below analysis.

4.2. Monetizing for Apple with Web 2.0 strategy
Apple’s renewable profit pattern has been discussed in the business model section at the very beginning. I want to recommend two ways for improving.
4.2.1. N-sided platform
Apple has already connected two groups: buyers and sellers. Buyers are the main source of revenue; while it charges commission fee from record company while customers download music from ITunes. I suggest Apple can involve more groups into this platform, involving more partners or users but not direct consumers, to be cited as an n-sided market. I assume this is can be started from software service. 4.2.2. Multiple revenue stream

Multiple income streams are an idea in unstable economies that manage the risk. Adding additional revenue streams can keep Apple from totally panicking if one area slows down. Having multiple revenue streams means more to manage. But it also serves as the foundation of a healthy business.

4.3. Platform Innovation
4.3.1. Production
Apple drove Foxconn’s benefit up due to it put most of the production line into it. Foxconn is famous for double decreasing the suppliers’ quotation so that it can earn the space of cost. For example, a company quoted $1 to Apple, so Apple will place $1 as unit price to Foxconn plus the manufacturing fees, but Foxconn will force a company decrease its price like $0.09, so that it can earn $0.1 per pcs. I think this will damage the supplier’s good, Apple can create a more controlled way to monitor the factories’ action, or share more order to other qualified manufacturers, like BYD, etc.

4.3.2. Creative and Media
Like IPod and ITunes, Apple can create an ecosystem for IPad and IPhone, not only Apps Store, but an entertainment ecosystem. Dock is a common accessory for IPad since this is not original design from Apple but from ASUS’ Transformer. Unlike dock, Apple can develop more and more funny accessories for consumers to enlarge the function of their devices.

4.4. Online Promotion
The most valid and famous promotion of Apple is its Press Conference, but this way is fading Job’s death. So I think Apple can have a try on online promotion which is popular. 4.4.1. Action Plan:
Build on Collective User Value— build up a bbs for user to share Apple’s user experience and OS problem, allow them to provide solutions on it.
Activate Network Effects—the first step is to figure out what offline and online network effects are and measure their value. Apple sells a high pricy product, so the reputation is very important. Reputation marketing mouth by mouth is important in the network.

Work through Social Network—this is not only for Internet companies, but also work for Apple which is a hardware company. Social networking software can certainly highlight key issues for the projects. Last but the least, selling software and music via Apple’s store and ITunes and the gaining commission fee by running the platform is a consistent source for earning profit. But more and more followers not only copy Apple’s design but its business model. Therefore Apple has to beat its alarm and brings more creation on it.