A. Superb product design
B. Low-cost manufacturing
C. Direct sales channels
D. All of the above
D is correct according to a number of industry observers. We all have heard the stories about Steve Jobs being intimately involved in product design and extremely detailed oriented. In addition, Apple hired product designers with artistic training instead of industrial design training and pays its designers very well. It also elevated its chief industrial designer—the other one, Jonathan Ives—to SVP, a level not typical of most organizations. However, I noticed that Ives did not receive options grants this week which were announced to keep key Apple executives in place.
During most of my years in the technology industry, Apple products were easy-to-use and elegant with limited market share. They were too expensive to attract application developers that would have the products useful in mainstream operations.
But that has changed. In addition to sleek external looks and Apple’s traditional ease-of-use, the company recognized the value of standardizing its components for multiple products as much as possible. Apple has signed long term agreements with component manufacturers to guarantee supply for itself and limit supply for competitors who are often forced to buy the items on the spot market at significantly higher prices.
Some industry observers scoffed when Apple started opening retail outlets, saying that a single product store could not succeed. Now the stores are viewed a competitive strength; allowing people to try out and learn about Apple products. The 32GB NAND flash memory version of the iPad 2 equipped the with Global System for Mobile Communications/high-speed packet access (GSM/HSPA) air standard carries a BOM of $326.60, according to industry cost expert iSuppi, and sells for $729. This gives Apple a $392.40 or 54% gross margin. Of course, Apple has the expense of the Apple stores to cover, and corporate overhead even if the product is sold through the Apple web site. But 54% gross margin is significantly higher than the discount received by resellers, according to Jason Hiner, Editor in Chief of TechRepublic, who published on March 11, 2011, that he had spoken to industry insiders claiming Apple only gives retailers 3% off vs. 5-15% margin offered by manufacturers of competing products. So Apple’s direct sales channels now make a huge difference in its bottom line.
(Note: I went into an Apple store with my twin ten year olds and my iPod and asked the manager where the power cords for the product were. I needed to buy a replacement as my daughters had lost ours. He handed me a cord and said, “Here, just take it.” With that kind of customer service, I’ll be back. Exceptional service is another competitive advantage for Apple.)
At some point, Apple realized that its key competitive advantage, wonderful product design, was not enough. It needed and developed other barriers to entry supplementing its design advantage. So now, instead of being a niche player, it dominates certain market categories.
Does your company depend on a key, but basically single, competitive advantage? Do any of your competitors? If any of your competitors do, are any of them, like Apple, quietly developing additional strengths that will lead to market dominance? The bottom line is that you need to monitor competitors which focus on a primary competitive advantage to determine if they recognize the inherent weakness of their strategy and are attempting to address it.