Apple Inc. Innovation Development Analysis

The central objective of the essay was to undertaken an innovation development analysis of Apple Inc. The article reviewed the creativity and innovation strategies, organisational structure and culture, operational challenges, threats, and the drivers for change. Apple was selected based on the 2017 global rankings by Boston Consulting Group; Apple was ranked as the most innovative corporation in the world – ahead of IBM, Tesla and Microsoft (Boston Consulting Group 2018). Innovation was considered in the context of processes which contributed to the development of novel products (Nonaka and Kenney 1991, p. 67; Wonglimpiyarat 2012, p. 90).

Apple Corporation was established by Steve Wozniak and Steve Jobs in 1976 in Los Altos, California (Nonaka and Kenney 1991, p. 75). The demand to miniaturise personal computers defined initial innovations because the bulkiness of early computers diminished their utility. Product innovation enabled the company to safeguard its competitive advantage and long-term sustainability (Dedrick, Kraemer and Linden 2008, p. 890). The Apple I computer was the first product to be developed by Apple in 1978. In the same year, the company released Apple II – a refined version of the earlier computer (Montgomerie and Roscoe 2013, p. 291). In the subsequent years, the company had developed different products including MacBook Air, iPods, iPad, and iPhones (Apple Inc. 2018).

Literature Review

Organisational Structure

The company was led by the CEO (presently Tim Cook) who had the management prerogative to define the innovation strategy within the company. The CEO was tasked with official product launches, and he delegated tasks to senior vice presidents (SVPs) in charge of retail, internet software, marketing, software engineering, design, finances, hardware engineering, and marketing (Apple 2018). In turn, the SVP’s work was facilitated by five vice presidents who managed communication, people, marketing, social initiatives, environment and China.

The head of the board was Arthur Levinson – the current chairman (Apple 2018). Other members of the board included the CEO and industry leaders drawn from leading corporations such as Boeing, Blackrock, Northrop, Grameen and Walt Disney (Apple 2018). Besides, Al Gore was on the company’s board. The structure of the board of management and executives had a significant implication on Apple’s creativity and innovation. For example, it was postulated that Al Gore’s membership would enable the company to pursue sustainable and green innovation given that he was a global advocate for climate change and sustainability in manufacturing. Additionally, Boeing’s former CEO would augment the company’s push for innovation because radical innovations had characterised Boeing’s market dominance.

Organisational Culture

A survey of organisational culture at Apple indicated that secretiveness was the norm. The company’s offices had lockdown rooms with restricted access where highly classified innovations were developed without the insights or input of the majority of the employees (Burns 2013, p. 157). Additionally, the employees were prohibited from disclosing information concerning new innovations to outsiders. Employees that failed to adhere to such regulations were threatened with prosecution. Secrecy also extended to the human resources. Recent reports affirmed that newly recruited employees were accorded dummy titles and responsibilities that were undefined until their loyalty to the company was established (Burns 2013, p. 157). The secretiveness of the company was evident in its software products. For instance, its iOS platform was not compatible with other operating systems. The aim was to limit the company’s exposure to external competition.

In a nutshell, the organisational culture at Apple was primarily defined by Steve Job’s persona; his relentless quest to innovate was assimilated into the company’s business model (Burns 2013, p. 156). Other factors that defined the culture included perfection, mistrust, competitiveness and discipline which augmented product excellence. The organisational culture also featured strict adherence to plans, precision to detail, innovation, and intolerance to failure. Another unique aspect was simplicity in product development – the company had a narrow product offering.

Despite the positive aspects of the organisational culture at Apple, mistrust, secrecy and bullying were detrimental to its sustainability. Bullying was a risk factor for high employee turnover. Furthermore, there was no defined approach to employee remuneration and promotion. Product designers and engineers were not accorded management responsibilities despite their experience in the company. Besides, managerial duties were reserved for a small group of trusted senior vice presidents and company insiders (Burns 2013, p. 156).

According to a recent report by Forbes, Apple had a generous bonus scheme for its top management. In 2011, the company offered Tim Cook stock grants worth over $500 million (Denning 2012). However, the generous reward scheme did not extend to the junior employees who earned about $25,000 annually (Denning 2012). There were also reports of poor working conditions and the contracts for the junior employees were often terminated on short notice. Nonetheless, the low pay was augmented by other indirect benefits such as the 100 percent coverage of healthcare insurance, private pension plan, life assurance and concierge services (Apple 2013). Additionally, the company employees were allowed to purchase Apple’s shares at discounted prices (Apple 2013). After reviewing the company’s organisational culture and reward scheme, it was evident that the additional perks were provided to the employees. Besides, such benefits contributed to the retention of talented employees – a factor that was critical to the long-term success of the corporation (Jain 2016, p. 210).

Concepts of Creativity and Innovation

Apple’s initial years were defined by several setbacks including competition from Microsoft (Richardson and Terrell 2008) and the temporary departure of Steve Jobs. Microsoft’s innovative and affordable Windows OS that outperformed Apple’s in the market. However, following the return of the company’s founder, the company recorded remarkable growth. For example, despite its belated debut in the mobile phone industry in 2007 (Mudambi and Venzin 2010, p. 1519), the iPhone had become the world’s most acclaimed phone. Presently, the company has diversified its operations to iPads and the iTunes music store. The development of new products over the years was a confirmation that “change was the only constant” at Apple. The changes were mediated by both internal and external forces such as the consumers’ demand for advanced computing devices.

As noted in the previous section, Apple’s early innovations and competitive edge were compromised by Microsoft due to lower in-house innovation in the 1990s. However, since 2003 the company adopted an innovation-centric business model (Montgomerie and Roscoe 2013, p. 290). In fact, 2003, was the last year that Apple recorded a loss and stagnated growth (Cusumano 2010, p. 22). In addition to higher investments in innovation, the return of Jobs had an impact on the investment strategy. The innovation spearheaded by the founder had safeguarded the company’s niche market through accurate forecasting of technological trends and perfection of cutting-edge innovations (Wonglimpiyarat 2012, p. 98). Through Steve Jobs, the company was able to exhibit all the five qualities of innovation namely the ability to overcome invisible orthodoxies such as the wrong belief that change was capital intensive (Webber 1999). Moreover, the company capitalised on new trends, leveraged on assets, innovation, core competencies, and addressed unarticulated consumer needs (Hamel and Tennant 2015, p. 4). Thus, Steve Jobs was ”a champion of innovation” (Jain 2016, p. 204).

Recent statistics indicated that the company’s smartphone market share was about 20 percent – a significant improvement from the 3.7 percent market share it commanded in 2007 (Statista 2018b). In an attempt to safeguard its market niche, Apple had adopted the non-integrative approach – its devices were not compatible with other operating systems. In contrast, Microsoft’s programs were compatible with other devices – a phenomenon that exposed the company to software piracy and open access programs such as Linux and Java (Wonglimpiyarat 2012, p. 98).

Apple had subcontracted different manufacturers (such as Quanta, Solectron, Balda AG, and Flextronics) to supply components for the personal computers and smartphones (Dedrick, Kraemer and Linden 2008, p. 7; Mudambi and Venzin 2010, p. 1519). Outsourcing was an indication that the company had not pursued vertical integration. Instead, it had adopted a specialisation strategy. After considering the approach taken by Apple, it was evident that its business model was in line with open innovation. The component suppliers were primarily responsible for research and development (the core of innovation in product development) as illustrated in Figure 1 (Dedrick, Kraemer and Linden 2008, p. 8).

Figure 1 Innovation and supply chains at Apple (Dedrick, Kraemer and Linden 2008, p. 8)

The essential elements of the open innovation model were depicted in Figure 2. Based on the illustration, it was evident that the company was not only reliant on internal R&D processes but also innovations made outside the company. Under the open model, innovation was a collaborative effort between internal and external stakeholders. The open innovation approach adopted by Apple also extended to app development. According to Eaton et al. (2011, p. 3), the company was also reliant on independent developers to create innovative applications customised for Apple. However, Apple still retained control over R&D in the upstream product development, contact points with the end users, marketing and brand management (Mudambi and Venzin 2010, p. 1519).

Figure 2 Open innovation model (Karamitsios 2013, p. 10)

The outsourcing approach adopted by Apple was in line with the innovation life-cycle presented in Figure 3 (Wonglimpiyarat 2012, p. 91). The model illustrated that innovative companies first invested in product innovation before transitioning to process innovation. However, it was evident that the two processes were mutually exclusive. Schumpeter first postulated the innovation life cycle in an attempt to delineate the underlying factors that defined organisational performance (Duobiene 2013, p. 584). According to the lifecycle theory, corporations experienced cyclical growth. The first phase was the startup – a period that was defined by innovation. The growth phase followed the startup stage; in the case of Apple, the growth phase began in 2003. Based on current developments within the company such as product outsourcing (manufacturing delegation and disengagement from non-core activities), it was postulated that the company was in the third phase (maturity). After the maturity phase, the company would transition to the renewal and decline phases, respectively (Duobiene 2013, p. 585).

Figure 3 innovation lifecycle at Apple (Wonglimpiyarat 2012, p. 91)

Drivers for Change: Research and Development

Based on recent industry reports, Apple’s R&D budget was among the top ten in the world. In 2016, the company spent approximately $10 billion in research and development (Upbin 2018); this was a significant improvement from the $780 million recorded in 2007. In the most recent budgetary spending, the company allocated $11.58 billion for R&D (Statista 2018a). Lo (2011, p. 163) observed that Apple allocated more resources for R&D because it had outsourced the product development and manufacturing of secondary products such as iPod. Outsourcing enabled the company to reduce its operating expenses significantly. Haslam, Tsitsianis and Ping (2013, p. 6) reported that a majority of Apple’s production facilities were non-operational as the company limited its operations to product design and perfection of technical services. The approach had contributed to the minimisation of the internal employment costs and operational expenses. The decision to outsource product manufacturing was in line with the innovative enterprise theory. According to the theory, innovative enterprises achieved a competitive edge in the market through the deployment of finances, the organisation of internal processes and strategy (Lazonick, Mazzucato and Tulum 2013, p. 250). Moreover, the innovative process was augmented by management incentives. The empirical observations at Apple validated the theory; Steve Job’s creative persona and self-drive were instrumental to the success of the company in the early phase of growth.

The cost savings were evident in the company’s financial performance. In 2012, Apple’s shares were trading at $636 – the inflation of the share price transformed Apple into the largest tech company in the US based on market capitalisation (Montgomerie and Roscoe 2013, p. 290). In 2013, Apple was ranked as the world’s most productive public listed company because it had approximately $121 billion in cash (Lazonick, Mazzucato and Tulum 2013, p. 249). The trend was sustained in the following years. In 2014, KPMG reported that Apple had posted a 500 percent increase in revenue compared to 2009 (KPMG 2015). During the period under review, the company recorded a 1,551 percent surge in the sales of iPhones and 174 percent growth in MacBook sales. The spectacular market performance observed at Apple had its origins in 2004 when the company launched the iTunes platform – the system provided the company with the opportunity to integrate both hardware and content (Montgomerie and Roscoe 2013, p. 291). Investment in R&D had enabled the company to remain profitable despite the death of its founder Steve Jobs (Lazonick, Mazzucato and Tulum 2013, p. 249) – a confirmation of the fact that the organisational culture adopted by the company was independent of the changes in management.

The offshoring and outsourcing had facilitated the transfer of financial risks in product development to the component manufacturers. The offshoring and outsourcing approach had also enabled the company to wield more power over its suppliers (Haslam, Tsitsianis and Ping 2013, p 7) while minimising the tax payable to the government. However, one of the limitations of the approach was that it had diminished the company’s revenue from the sale of apps compared to other manufacturers (Haslam, Tsitsianis and Ping 2013, p. 6). Despite the decline in sales, Apple was among the leading developers of smartphone software and applications. In 2014, the company’s App Store boasted of 1.2 million applications (KPMG 2015). The company had initiated partnerships with industry leaders as a complementary measure for the declining revenue from app sales.

Market Entry and Dominance

Apple had employed innovation to gain market entry and subsequently maintain its dominance in the market. For instance, the iPhones were first released in 2007 at a time when Nokia was a dominant global player in handset manufacturing (Shaughnessy 2013). Apple was able to outperform Nokia through the development of featured phones and the App Store that provided users with diverse content among other capabilities that were absent from Nokia phones (Shaughnessy 2013). Market dominance at Apple was also augmented by the adoption of the dual channel marketing approach. The company’s products were sold in both physical locations such as Apple stores and online platforms such as Amazon.

Upon gaining market entry, Apple was able to sustain its market dominance through creative destruction (KPMG 2015) and radical innovation coupled with the adoption of diversification strategies (Basu 2014, p. 29). The company maintained a continuously innovative culture that rendered earlier innovations obsolete after a specified duration of time. In addition to the creative destruction approach, it was noted that investment in its iOS platform had enabled the company to save significant costs that it would have otherwise incurred in acquiring licenses from other software developers (Montgomerie and Roscoe 2013, p. 292). The in-house platform also provided the company with higher leverage in digital rights management.

The creative destruction at Apple was depicted in the innovation S curve in Figure 4. The development of the iPhone in 2007 eliminated the need for the iPod given that the smartphone could conduct multiple tasks in addition to storage of music. Besides, the release of the iPad was regarded as an encroachment on the MacBook market because the device had similar capabilities as the PC. In fact, following the release of the iPad, Jobs forecasted the death of the MacBook and other PCs (KPMG 2015). Recently, the company developed the Apple Watch as a complementary device to the iPhone.

Figure 4 Innovation S-curve for Apple

Models and Theory

The acceptance of new technologies by Apple’s consumers was in line with the technology acceptance model. The model posited that product features and capabilities acted as a stimulus that motivated the users to either adopt the product or seek a replacement. If the products were in line with the consumer needs, a purchase was recorded (Chuttur 2009, p. 1). Therefore, Apple had strived to ensure that all its product features enhanced perceived usefulness and utility of the product to the consumer. The adoption of Apple’s products was also elucidated by the theory of reasoned action which hypothesised that in addition to the consumer needs, the use of new products was mediated by beliefs, attitudes and subjective norms (Chuttur 2009, p. 2). The transaction cost economics, relational and core competency theories guided the outsourcing operations in Apple (Vaxevanou and Konstantopoulos 2015, p. 573). The two models posited that companies preferred to outsource non-core functions as part of the austerity measures to reduce transactional costs and safeguard their niche market while at the same time leveraging on the relationships with contracted manufacturers and app developers.

Challenges

The sustainability of Apple’s innovations was currently exposed to multiple threats including new entrants and enhanced development of substitute products (Wonglimpiyarat 2012, p. 92). For instance, following the release of iPad other device manufacturers such as Samsung and Huawei had released similar products into the market. Besides, iTunes was a costly platform to the users because the music was available for free on YouTube or pirated sites. Other threats included competitors with global distribution channels that were more advanced compared to Apple’s mainly in the smartphone segment (Wonglimpiyarat 2012, p. 98). Therefore, to safeguard its competitive edge, it was recommended that the company should also invest in supply chains and diversify its product offering.

Conclusion

Presently, Apple was America’s most successful and profitable technological company – a position that it had safeguarded through continuous and radical innovation. The article affirmed that the market dominance and capitalisation enjoyed by Apple were a product of the innovative strategies adopted by the company post-2003. Besides, it was observed that managerial acumen and perfectionist persona exhibited by Steve Jobs mediated innovation within the company because the aspirations were assimilated into the organisational culture. The company was able to outperform previously dominant companies such as Nokia through radical innovation and outsourcing. However, the long-term profitability was threatened by substitute products and the absence of robust supply chain networks.

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