Apple's strategies for competitive advantage in the smartphone industry

Economic Analysis

The first Apple iPhone was launched in June, 2007, and the product became an instant hit. The smartphone industry had evolved out of the PDA industry, and the current trend in cell phones to add different features such as cameras and mp3 players to enhance the phone experience. The iPhone represented something of a quantum leap in technology. To that point, only Blackberry and Palm were in the industry and their technology was substantially inferior to that of Apple. Apple quickly began to make inroads into Blackberry's market share as Palm fell by the wayside. In the fall of 2008, however, the first smartphones were launched using Google's Android system. This operation system was open source, which meant that OEM smartphone manufacturers could enter the industry freely using this platform, for which Google would receive little payment if any. This changed the industry dynamics for Apple. Over time, even the once-mighty Blackberry would struggle in the industry. One key industry dynamic is the number of applications -- or apps -- that are available for a given operating system. Consumers have demonstrated significant preference for the number of apps, and this presents a significant barrier to entry. The smartphone operation system industry has moved from oligopoly to monopolistic competition but is now headed back to an oligopoly state. This case study will examine the smartphone industry from the perspective of Apple, with particular reference to the strategies that Apple has used to win profits in the industry.

The Problem

The basic problem in the smartphone industry is how align the phones along the key dimensions of consumer preference. These are believed to be price and features. There is a high level of correlation to the amount of features a phone has and its cost, because of the fixed real estate of a smartphone and the fact that smaller components, or higher-quality components, cost more. Thus, consumers almost always face the trade-off between the utility of a feature-rich phone and price. Complicating the matter is that the price of the phone is sometimes obscured -- the phone is basically "paid for" by the telecommunications service provider, whose data rates just happen to be dependent on the quality of the phone it is selling, among other factors (Thierer, 2011). Assume, however, that in general consumers pay less for a lower-quality phone overall.

Apple has always positioned itself as a differentiated provider. It bases this on a few different dimensions. The company long ago realized that the money in technology was with the software, whereas the hardware for any product would eventually become commoditized. Therefore, Apple focuses on software development, design and marketing -- three creative tasks -- in order to generate its profits. The company has high margins, however, which gives it some flexibility in setting prices. The rapid maturation of the smartphone industry, however, has shifted from rapid growth and market share building to an approach built on leveraging an installed base as something of a cash cow -- selling apps, music and other services to existing customers, and having them update their phones periodically.

The problem for Apple is, having forged a dominant position in an oligopoly that allowed it to earn near-monopoly rents, how it should adjust its strategy and especially its pricing strategy in response to the new entrant in Android.

Analysis and Evaluation

Apple's response was to remain in the high end of the market. It sought to create monopoly by maintaining monopoly on its operating system but also on its software and on its designs. The name itself carried cachet due to exceptional marketing efforts. The company recognized that the market was growing so rapidly that even the high end of the market would deliver a high volume of sales. Apple also knew from its experience in personal computers that the company had high brand loyalty, something that would erode price sensitivity in a given percentage of consumers, anywhere from 5-20%. The company also realized that margins on lower-end models would continue to shrink, especially once the pace of innovation slowed. Apple's response, therefore, was to continue the rapid pace of innovation but also to maintain its pricing.

The market responded by punishing Apple in market share -- Android has now stolen most of it. However, Apple still has exceptional sales and profits because it was able to maintain sufficient innovation to keep its product differentiated. The company also has utilized its marketing goodwill, though there is some question as to how much brand loyalty the company has among mobile-only users. However, by utilizing these tactics Apple has been able to build sales and revenue even in the face of rapidly-declining market share. The demand curve for Apple and Android are as follows. Note demand is still high for the iPhone in terms of number of customers, but it is losing ground to Android as the latter brings its average price down.

The future of the iPhone is a little bit less certain. The product has a much higher market share in wealthy markets than it does in emerging markets, because the company has focused more marketing and there is better capacity to purchase. However, the pace of innovation has slowed and as the industry matures Apple is also facing a situation where it must make a pricing decision again. The market is moving to oligopoly again, despite the persistent presence of Blackberry and Microsoft as bit players in the market. In an oligopoly, companies are more responsive to the moves of one another, including pricing moves. Apple will compete more directly against the low priced-OEM Android products, but also against multiple providers of high-end devices, who in combination can out-innovate Apple. At least Samsung has also been able to build its brand reputation as well, but more importantly Android has a strong brand reputation. Going forward, Apple is going to come under increasing price pressure as the pace of innovation in the industry continues to slow. What should the company's response be? Should it continue with high prices even though it can afford to cut them? Should it lower prices in response to the changing industry conditions? What will the increased supply of low-end smartphones ultimately mean for high-end players like Apple?

Works Cited:

Beggs, J. (2013). Absolute and comparative advantage. About.com. Retrieved April 23, 2013 from http://economics.about.com/od/Gains-From-Trade/ss/Absolute-and-Comparative-Advantage.htm

Investopedia. (2013). Monopolistic competition. Investopedia. Retrieved April 23, 2013 from http://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/monopolistic-competition.asp

Thierer, a. (2011). How iPhones and Android ushered in a smartphone pricing revolution. Forbes. Retrieved April 23, 2013 from http://www.forbes.com/sites/adamthierer/2011/07/10/how-iphones-and-androids-ushered-in-a-smartphone-pricing-revolution-2/