Contents

1.

Introduction............................................................................................................. 2

2.

How Apple iPhone has been differentiated........................................................................2

3.

Existing barriers to entry and exit in the smart phone market.................................................3

4.

Degree of control over price of iPhone that Apple enjoys.....................................................4

5.

References............................................................................................................... 6

1. Introduction
Apple Inc. is based in Cupertino, California. The company designs, manufactures, and
markets a variety of consumer electronic products and for the purpose of this assignment, we will
focus on Apple iPhones which generate 55% of Apples revenue (Papke & Williams). Even
though the iPhone has a smaller market share of 14% worldwide (Kovach, 2015), Apple reigns
the smartphone world with its loyal customer base believing it to be superior and in the rest of
this report we will examine and explore why.

2. How Apple iPhone has been differentiated

Apple attempts to increase market demand for its products through differentiation, which
entails making its products unique and attractive to consumers. The companys products have
always been designed to be ahead of the curve compared to its peers. Despite high competition,
Apple has succeeded in creating demand for its products, giving the company power over prices
through product differentiation, innovative advertising, ensured brand loyalty, and hype around
the launch of new products.
On the other hand, its also hard to come across an inferior Apple iPhone. Generous profit
margins and a tight control over its distribution channels have enabled the consumer electronics
giant to produce superior quality goods at prices that only modestly exceed those of rival
products. Thus, arguably, consumers enjoy a better overall experience in the long term.
Apples business strategy leverages its unique ability to design and develop its own operating
systems, hardware, application software, and services to provide its customers new products and
solutions with superior ease-of-use, seamless integration, and innovative design. Known for its
innovation, Apple has established a unique reputation in the consumer electronics industry and
has a loyal customer base for reasons as diverse as its philosophy of aesthetic design to its
unusual advertising campaigns. The company believes a high quality buying experience greatly
enhances its ability to attract and retain customers. So Apples strategy also includes enhancing
and expanding its own retail and online stores and its third-party distribution network to
effectively reach more customers and provide them with a high quality sales and post-sales
support experience.

Apples founder, Steve Jobs vision for Apple was always to create a premier product and
charge a premium price. Apples cheapest products are usually priced in the mid-range, but they
ensure a high-quality user experience with their features. The hardware and user interface are
designed to provide a lot of value for the price, which keeps profits high. However, a company
can charge a premium price as long as it has a competitive advantage, and analysts believe the
brand is on the way to losing its aspirational status. (Casteleyn, 2013)

3. Existing barriers to entry and exit in the smart phone market

Some of the top competitors in the technology industry Apple competes with include, Google
Inc., Microsoft Inc., Hewlett-Packard Company and Blackberry Ltd. And their respective market
share is shown in figure 1 (Papke & Williams).

Figure 1: Worldwide Smartphone Market Share (2013-2014)

The barriers for the new entrants as well as barriers to exit for the existing players can be
discussed in terms of multiple aspects.

Economies of Scale

Apples economies of scale, both internal and external, give it a clear advantage over its
competitors in the same industry. Apples internal economies of scale were established through
its learning curve and volume of production. It has been in the industry for a while to have a leg
up on competitors like Samsung by figuring out how to lower their production costs and
analyzing their market better. Apples external economies of scale give them an advantage thanks
to its location. California is the Mecca for the computer industry in the U.S. As such, suppliers
naturally flock there and computer workers can easily share their ideas and build off of another.

Therefore, Apple gains a significant advantage of lower supply costs and a more intelligent labor
pool.

Product Differentiation

The technology sector is a tough market to enter regarding product differentiation

because of the innovative powerhouses currently there, such as: Apple, Google and Microsoft.
When you have companies currently present that have already matured and gone through the
learning curve it is hard to match their prices, and all their expenses are much lower compared to
yours. These high barriers give the companies like Apple an advantage and form of protection
against new up and coming companies who try to compete. Trying to beat the innovative nature
of these companies is unarguably a tough task.

Capital Requirements

Most capital requirements needed to start a new business or compete in a particular sector
are normally high, but it is remarkably high in the technology sector since technological products
are not cheap, highly skilled human capital is additionally needed and high R&D costs to
innovate.

Access to Distribution Channels

Another high barrier to entry is bigger companies already locking down the major
suppliers in the region. This occurs due to existing players forming contracts with major
suppliers, new entrants failing to match what other companies currently pay and higher costs
associated with premium suppliers.

Expected Retaliation

In addition to the above, a potential new entrant to the market may experience reactions
from the existing players in the form of, large companies with excess cash flow can hinder new
companies, distribution channel leverage of present companies and if truly threatened, attempt
for buy-outs.

4. Degree of control over price of iPhone that Apple enjoys

The strategy for Apple has four pillars:

Offer a small number of products.

Focus on the high end market

4

Give priority to profits over market share

Create a halo effect that makes people starve for new Apple products (Nielson, 2014)

Apple sells its products and resells third-party products in most of its major markets directly
to consumers and SMEs through its retail and online stores and its direct sales force. The
company also employs a variety of indirect distribution channels, such as third-party cellular
network carriers, wholesalers, retailers, and value-added resellers. (Arvidson, n.d.)
We never had an objective to sell a low-cost phone. Our primary objective is to sell a great
phone and provide a great experience, and we figured out a way to do it at a lower cost. Tim
Cook, CEO Apple uses a retail strategy called minimum advertised price (or MAP). Minimum
advertised pricing policies prohibit resellers or dealers from advertising a manufacturers
products below a certain minimum price. MAP is usually enforced through marketing subsidies
offered by a manufacturer to its resellers. (Tabini, 2013) This fairly straightforward strategy takes
advantage of the popularity of its products and exploits a quirk in the way retailers are allowed to
advertise their merchandise.
Apple maintains the popularity of its high-priced products by only offering retailers such as
Wal-Mart or Best Buy a marginal wholesale discount. This small percentage in savings is not
enough of a profit margin for retailers to offer big discounts on Apples products, which means
customers end up paying a price close to the manufacturer suggested retail price. However, a
retailer could give up this small profit margin and offer products at a discount to attract more
customers. Apple prevents this scenario by offering monetary incentives to retailers to sell goods
at the MAPs fixed by the company. (Tabini, 2013)
This price strategy is effective insofar as it prevents retailers from competing directly with
Apples own stores, and it also ensures that no one reseller has an advantage over another. So
Apple is able to keep its distribution channels clean as well as make more money on its direct
sales. However, iPhones were not under a strict pricing model, as they sold at a lower price with
wireless contract deals, as retailers gain a commission from carriers.

This strategy benefits Apple in a number of ways. First, the company makes more money on
direct sales and doesnt have to compete against marked-down prices offered by its own
resellers. Since Apples own retail operations are among the most profitable in the world,
undercutting their prices for the sake of a wider distribution network would be
counterproductive.

5. References
Apple. (n.d.). Apple-history. Retrieved from Apple: http://apple-history.com/iphone
Arvidson, E. (n.d.). The Product Strategies for the iPhone. Retrieved from Small Business:
http://smallbusiness.chron.com/product-strategies-iphone-32460.html
Casteleyn, J. (2013, Apr 16). Apples iOS and Googles Android lead the land grab for new
enterprise shelf space. Retrieved from Market Realist:
http://marketrealist.com/2013/04/apples-ios-and-samsungs-android-lead-the-land-grabfor-new-enterprise-shelf-space/
Kovach, S. (2015, Feb 02). 9 reasons why iPhones are better than Android phones. Retrieved
from Business Insider: http://www.businessinsider.com/iphone-versus-android-2015-2?
op=1
Nielson, S. (2014, Feb 07). Apples premium pricing strategy and product differentiation.
Retrieved from Yahoo Tech: https://www.yahoo.com/tech/s/apple-premium-pricingstrategy-product-191247308.html
Papke, D., & Williams, A. (n.d.). Apple Inc. Retrieved from Academia:
https://www.academia.edu/10330763/Business_Analysis_of_Apple_Inc
Tabini, M. (2013, Jan 14). How Apple sets its prices. Retrieved from Macworld:
http://www.macworld.com/article/2024257/how-apple-sets-its-prices.html