Apple Computer’s Business Model
Introduction
“A business model is a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.Therefore we must consider which concepts and relationships allow a simplified description and representation of what value is provided to customers, how this is done and with which financial consequences.” (2005)
(2004) describes a business model as consisting of nine related business model building blocks. These building blocks describe the company’s business model which includes:
Apple Computer’s Traditional Business Model
Innovation is, and always has been, at the core of Apple Computer. Innovation remains a potent force but has limits, can be misused, and carries risks. Apple has followed the integrator approach, the “model with the highest costs and highest risks”. The integrator model is a traditional model in which a company assumes responsibility for the entire innovation process from start to finish, including the design, manufacture, and sale of a new technology. The company chooses to be an integrator in the ambition of the founders of Apple to build perfect machines. In addition, the pursuit of perfection also has lead the founder’s to opt for a closed operating environment.
Apple’s obsession with controlling the entire process of innovation has also demonstrated the truth of Voltaire’s dictum that the perfect is the enemy of the good. Today, the company has just 300,000 independent and in-house developers writing programs and making products for its operating systems, including the latest, OS X. More than 7 million developers build applications for the Windows platform worldwide.
Fewer developers mean fewer new products to run on Apple machines. That means fewer options for end users, which influences purchasing decisions, and therefore sales and profits.
Apple has consistently rejected opportunities to adjust its innovation strategy to another model. Licensing its operating system to hardware manufacturers would have been an obvious choice. Yet when Jobs returned to Apple in 1997, he terminated the first and last licensing program. The licensing issue was claimed by many to be the central explanation for Apple’s financial and market share decline. However, others have argued that Apple’s problems can be attributed to other strategic and operational errors (1997a; 1999; 2000).
Advantages and Disadvantages
Apple’s integrator approach and closed operating environment for computing brought advantages in terms of elegance, ease of use, and reliability (within the Apple environment). It was the least appropriate choice for a startup with scant financial resources and a nonexistent customer base. However, on the other hand, it came at the heavy cost of less choice and higher prices for customers, and far fewer developers.
A closed source strategy exposes the company to serious business risk. The company’s supplier might suddenly decide to be a competitor. No company can survive with a critical component totally controlled by a competitor.
Apple’s Direct Business Model
Recently, Apple Computer Inc. is selling its bulk of equipment through distributors and resellers. Just like Dell which has gained market share by cutting out its cost and selling its computers prices lower than its competitors selling through indirect route, Apple Computer also has offer direct sales as a way of delivering custom-configured systems not available from other retailers.
Apple has launched its e-commerce which is called Apple Club which is accessible to fee-paying members, offers discounts on refurbished hardware and some new systems as well as software upgrades. The website can quickly ran into problems when users report complaints about registration delays and trouble entering the site and other privacy concerns. The site is an online reseller with its product on fronts and with the posting current prices and configurations for the systems.
With the history of Apple’s decline in the 1990s, the company has finally shifted from its traditional business model to a direct business model. With its recorded decline, the company changed the company’s business strategy and focused on improvements in operational efficiency.
In the mid 1998, Apple has shifted its target market to primarily three groups of customers. This includes graphics/designs, education, and home users. Apple’s strength in this comparatively high end professional market was complemented by its remaining customers in education and consumer segments. According to (2000), existing consumer market remained because of high switching costs. Early in the year 1998, Apple has successfully targeted new computer users by offering an easy-to-set-up internet computer. In addition, Apple had increased its distribution channels from traditional computer retailers to consumer electronics dealers and office supply dealers.
Amongst the major changes in Apple Computer is on its operations and manufacturing. Apple Computer has shifted from integrator strategy to outsourcing manufacturing for all orders except custom build-to-order. Since Apple Computer has shifted its assembling to outsource plants, the company needed no forms of build up in their inventory. The company reduces its costs on inventory management.
In addition, Apple Computer has also give emphasis on the simplification of their products. Having their products simplified, this is reducing the number of products and also subassemblies, Apple’s desktop computer are reduced from four motherboards to one. Thus, this change has improved the use of common components across the product line. In addition, the volume of the company’s production has increases and also its bargaining power (1998). Use of standard industry components such as CD-ROM and disk drives also allowed Apple to leave inventory in supplier warehouses until it was needed (1999)
The product line simplification “allowed the Company to more accurately forecast demand, reduce inventory carrying levels and related costs, lessen the financial exposure resulting from inventory obsolescence and excess inventory levels, and reduce the component cost of obtaining certain standardized parts” (1998). Apple reduced its reported supply in inventory from 31 days in 1997 to 6 in 1998 and finally to 2 in 1999. (1998)
One of the areas in which Apple Computer has maintained inventory and assembly was on its build-to-order systems. According to (2000), “while this potentially raised inventory costs, it also improved the accuracy of Apple’s forecasts and thus the supply chain management by providing an up-to-date window on the latest consumer demand trends. Managing both the customized and standard product production and distribution required entirely new supply chain process.”
“In late 1998, Apple adopted the Rhythm sales forecasting system from i2 Technologies. In December 1998, Apple adopted a new enterprise-resource-planning system (ERP) based on SAP AG’s R/3. These new systems allowed Apple to tie daily product production to weekly sales forecasts. Apple’s supply chain management systems also extended to resellers such as CompUSA, allowing Apple to fine-tune its distribution channel to avoid both excess inventory and out-of-stock dealers.” (1999; 2000).
“In 1997, Apple tightened distribution polices even further. In anticipation of the launch of its direct retail web site, in September 1997 Apple had announced new dealer policies which was made effective December 1997 that allowed smaller retailers to buy product directly from Apple eliminating distributor mark-up and also adding a four-week price protection policy. At the same time, it restricted product returns and reduced its co-marketing allowance to 0.5% of product purchases” ( 1997a). Apple’s direct retail web site helped address its lack of shelf space and mindshare in the traditional retail channel.
“In May 2001, Apple finally confirmed its long-rumored plans to open its own stores, with its first stores in affluent D.C. and Los Angeles suburbs. However, Apple planned a more limited presence in upscale shopping malls” (2001; 2001).
Beginning in 1995, the major catalog vendors opened online stores for personal computers, software and accessories. According to Apple management, the catalog vendors played both a competing and complementary role to Apple’s own direct strategy (2000). With their customer databases and centralized inventory they were ideally suited to serve a niche market like the Macintosh, capturing the most knowledgeable and profitable customers from the limited product lines available in retail stores. The Internet brought efficiency improvements by reducing the demand for printing and postage and simplifying ordering and fulfillment.
Apple’s Internet commerce efforts are designed to address customer demand to buy directly from Apple and to be able to order specific configurations. It is not a way to compete with our current distribution channels, but a means to complement them. The Apple Store will be a neutral proposition as far as pricing and product allocation is concerned 1997b). Through ease of use and other aspects of the online shopping experience, Apple also sought to use the store as a role model to improve the standard for its other dealers ( 2000). Apple’s e-commerce sites were used to reach existing market segments and offer them a wider array of configuration options.
Apple, through its direct business model, designs, manufactures and customizes computer hardware, including desktops, servers, and laptops. Having this direct relationship will improve order accuracy, reduce delivery time, and provide better pricing for institutional orders.
Apple’s direct model remains a powerful differentiator in the global business, providing a unique relationship with their customers and a clear cost advantage over competitors. Apple’s direct model enables the company to excel at demand management. The process of selling directly to customers and building product to order creates opportunities for true real-time collaboration and synchronization between manufacturing and sales.
By being in direct contact with the market, Apple can quickly see changes in customer demand. Synchronization then allows the company to respond more quickly to customer demand than its competitors can. Additionally, this true internal collaboration allows for highly accurate forecasts.
The direct model has proven to be compelling for customers. The direct model has enabled the company to pass on the reduction in operating expenditure and declining component costs to customers by reducing the PC prices.
Credit:ivythesis.typepad.com
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