In the final article 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 39 million smartphones in its fourth quarter, compared with 33 million 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 groundbreaking 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 ten million units by the first weekend after its release.

Apple has recently been cited as the world's most valuable brand, worth $124 billion. 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.

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.

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 create a new product from an old idea is precisely what makes Apple so innovative. With each new innovation, it tells us what we want, rather than responding to what we ask for.

The Apple operating model

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:

  • 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 eco-system; 

  • Delegation: the outsourcing of non-core competencies 


Design

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.

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.

Destination

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. This 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.

Delegation

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 it 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.

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 well-managed. 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.

Conclusion

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? 


Paul Martin is managing director of Boxwood Insights at management consulting firm Boxwood. Find out about Amazon and the other two As which are significantly impacting the retail industry, in his regular Essential Retail column.

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