Apple – AppStore, Industrial Design, Innovation, and Supplier Leverage
Background:
1997 marked the year Steve Jobs returned to Apple after being forced to leave the company in 1985 due to disappointing Macintosh sales. [1] With his return, along with the promotion of Jonathan Ive as senior vice president of industrial design, came a new era of innovation and design. Over the next several years, Apple would release the iMac, iPod, iPhone, and iPad, creating an ecosystem of products for its customers. [2]
Evolution of the industrial design of the iMac [3]
Business Model:
With its unique ability to develop both hardware and software, Apple is committed to “bringing the best user experience to its customers” by focusing on innovative design, ease-of-use, and seamless integration across products [4]. Features such as AirDrop [5], AirPlay[6], and Continuity [7] allow users to wirelessly share photos and videos, mirror displays, and edit emails and documents across Macs, iPads, iPhones, iPods, and Apple TVs. As a result, users can benefit from the added value of owning multiple Apple products, literally buying into the Apple ecosystem. In addition, native apps on the iPhone and Mac like iMessage and FaceTime allow for free text messaging, phone calls, and video calls with other Apple users. With each additional friend that buys an iPhone or Mac, the value of those free communication tools increases as the user pool increases. Apple’s constant focus on the user experience leads Apple to have a competitive advantages through adding value for its customer.
Apple Ecosystem [8]
Operations Model – The App Store; Bridging 3rd Party Developers and Customers:
After the successful introduction of the iPhone in 2007, Apple saw a need to differentiate itself from other phones on the market and to continue adding value for its customers. The solution came in the form of the App Store, introduced on July 10, 2008. By creating a platform for 3rd party apps, developers can submit apps to the App Store and sell directly to customers. Once an app is submitted, Apple reviews the app and can control the quality of the apps that are being published. Contingent on approval, developers can chose to provide the apps for free and earn money through ads or in-app purchases or they can chose to sell their apps at a price point that is a multiple of $1. Revenues are split 70% going to developers and 30% to Apple. [9] The introduction of the App Store had two benefits: adding to the user experience through a rapid increase in apps developed for the iPhone and a steady cash flow beyond the initial sale of hardware.
App Store – Two Sided Market
Hardware Operations Model – Industrial Design, Innovation, and Supplier Leverage:
While in the past industrial design often seemed like an after thought in product development, at Apple the industrial design group takes lead on new-product development “dictating the look and feel of a new product.” [10] Because Steve Jobs and Jonathan Ive were so attentive to the look and feel of their products, Apple continues to maintain that focus on design, acting as a catalyst for innovating within thinner and lighter products. The introduction of new technologies comes at a high risk though for product launch. Apple’s unique approach to product development and supply chain management continues to allow them to succeed in developing and releasing innovative products.
New product development begins with R&D. Apple can research new technologies in house, acquire licensing of intellectual property, or acquire third party businesses. Once the technology becomes mature, a product is selected to debut this new technology. [11] Next, during prototyping and development builds, Apple does not merely work with one supplier to manufacture a new component technology, it works with several suppliers, closely monitoring their manufacturing processes and yield rates throughout several development builds until production ramps up for product launch. As a result, when a product finally does launch, Apple can diversify their risk among several suppliers. In the case of the Apple Watch, one of the two qualified taptics engine suppliers ran into a reliability issue during ramp. Because of the dual supplier approach, Apple was able to shift incoming parts from one supplier to the other in order to keep up with the manufacturing of Apple Watches. [12]
Apple Watch with Taptics Engine [13]
Conclusion:
Apple’s business model and operating model continue to parallel one another in a cycle of customer focused innovations. With the introduction of the App Store, Apple enjoyed a first mover advantage as developers quickly moved to develop apps for the iPhone. This led to higher iPhone sales, which in turn attracted even more developers. Soon after, the competition also adopted the model of an app store and Apple continues to differentiate itself with even more focus on hardware innovation and adding value for customers through hardware product synergies. In addition to the integrating software features such as AirDrop, AirPlay, and Continuity, Apple cross pollinates its hardware technologies across products. Aluminum housings were first developed for the Macbook Air, but later found its way to Macbook Pro and iPods. High resolution displays developed for iPhones found its way into Macbooks, iPads, iPods, and Apple monitors. 3D Touch, developed for Apple Watch has now been added to the iPhone 6s. As a result of these hardware and software synergies, Apple will continue to have a competitive edge in producing customer focused products that are user friendly.
[1] http://www.edn.com/electronics-blogs/edn-moments/4421114/Steve-Jobs-leaves-Apple-Computer–September-16–1985
[2] http://www.huffingtonpost.com/2011/08/29/jonathan-ive-apple-designer_n_940115.html
[3] http://www.highsnobiety.com/2012/10/24/the-evolution-of-the-imac-from-1998-to-today/
[4]Apple 10-K http://investor.apple.com/secfiling.cfm?filingid=1193125-14-383437&cik=
[5] https://support.apple.com/en-us/HT204144
[6] https://support.apple.com/en-us/HT204289
[7] https://support.apple.com/en-us/HT204681
[8] http://inotes4you.com/2013/11/30/apples-ecosystem/
[9] https://en.wikipedia.org/wiki/App_Store_(iOS)
[10] Strategic Management: Theory: An Integrated Approach / Edition 11 by Charles W. L. Hill, Gareth R. Jones Page 396
[11] http://www.supplychain247.com/article/is_apples_supply_chain_really_the_no._1_a_case_study
[12] http://www.sdcexec.com/article/12080764/apple-a-supply-chain-model-of-excellence
[13] http://www.apple.com/watch/
Nice post Allen! I’m a huge fan of iPhone products and noticed that during earlier iPhone launches Apple was unable to keep up with initial demand. With subsequent iPhones they seem to have done a better job. How do you think they’ve been able to set up manufacturing to better anticipate and fulfill demand?
Also, Jobs was a “visionary” who created products such as the iPod without any prior consumer research. How do you think Apple was able to figure out the right levels of products to produce during initial launches since they had little consumer insights / demand data? How did they balance fulfilling demand with mitigating overproduction risk?
Those were questions I’ve always wondered about Apple!
Great post Allen. I agree that Apple’s business and operating model is focused in the development of innovative products. Apple developed the iPad after similar products from their competitors failed in the past. There was great concern if Apple’s iPad was going to be successful, but they created a product of higher quality and integrated it with the app store.
In recent years they launched the watch and many analyst aren’t sure if it’s are going to be successful. Can Apple replicate their past success launching new hardware products? How much do they miss the vision of Steve Jobs?
HI Chun,
Great questions!
– How do you think they’ve been able to set up manufacturing to better anticipate and fulfill demand?
Apple has a couple has a couple levers they can pull in terms of fulfilling demand and increasing production.
Once production has been fully ramped up, Apple can produce around 150,000 units of iPhones per day:
http://www.cultofmac.com/112783/its-coming-apple-ramps-up-iphone-5-production-to-150000-units-a-day/
If they predict that the next generation iPhone will sell 4 million more units then their previous year, then they can decide to ramp their production about a month earlier. The other lever they have is to increase the number of suppliers and manufacturers so their units produced per day increases.
How do you think Apple was able to figure out the right levels of products to produce during initial launches since they had little consumer insights / demand data? How did they balance fulfilling demand with mitigating overproduction risk?
For products that are releasing a new generation, Apple can rely on historical sales to predict future sales. What do they do for new products like the Apple Watch? It’s actually pretty challenging and honestly its not exactly a science. Many companies will undershoot or overshoot production by multiples. With the Apple Watch they made an announcement over half a year in advance to gauge customer interest. Then about 2 weeks before shipment they took pre-orders online to get a baseline number of units they need to produce. Within those two weeks, assuming they’ve already built up a good amount of product already, they have the choice to continue building an additional 2 million units up until shipping day or throttle back depending on how pre-orders go. For the most part it is much riskier for them to be understocked than overstocked because the selling window for consumer electronics is very narrow. Consumers know that about every year or so a new generation of a product comes out. Sales are usually highest within the first 2-3 months after the first shipment begins and if they cant meet demand within that window, the sales decline rapidly.
HI Alonso,
Can Apple replicate their past success launching new hardware products? How much do they miss the vision of Steve Jobs?
Only time can tell. HAh. It’s only been about 4 years since Steve Jobs passed away and many people questioned whether Apple could still continue to innovate. In the past 4 years Apple has released a new Mac Pro (completely different from previous models), created Apple Pay, released the Apple Watch, iPad Mini, and Apple Pencil. Apple still continues to create innovative products and I don’t doubt their ability to create great hardware, but the thing I miss the most about Steve Jobs is the way he was able to create excitement and anticipation for Apple products. He was a great public speaker and was able to capture the audiences attention whenever he was launching a new products. When you get a chance, I encourage you to listen to his commencement speech at Stanford here: https://www.youtube.com/watch?v=D1R-jKKp3NA