RELEVANCE

OF DYNAMIC CAPABILITIES TO BUSINESS MODEL

Apple Case Study

Author: BIBIANA KYSUCKA
University: AALBORG UNIVERSITY

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 TITLE PAGE

Aalborg University
Top-up Economics and Business Administration
1st Semester
Bibiana Kysucka


DELIVERY: January 16th, 2014
NUMBER OF CHARACTERS (WITH SPACES): 131.957
NUMBER OF PAGES: 66
FORMER GROUP NUMBER: Group 8


TITLE: Relevance of Dynamic Capabilities Framework to Business Model
Apple Case Study




Signature: .

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Table of Contents

1. Introduction ................................................... 4
1.1 Problem Statement .......................................................................................................................... 4
1.2 Data Limitations ................................................................................................................................ 4

2. Methodology .................................................... 5
2.1 Research Purpose ............................................................................................................................. 5
2.1.1 Exploratory Study ...................................................................................................................... 5
2.1.2 Descriptive Study ....................................................................................................................... 6
2.1.3 Explanatory Study ..................................................................................................................... 6
2.2 Paradigm ........................................................................................................................................... 6
2.3 Methodological Approach ................................................................................................................ 8
2.4 Research Strategy ........................................................................................................................... 10
2.5 Research Design ............................................................................................................................. 11
2.6 Methodics ....................................................................................................................................... 11

3. Literature Review ............................................. 12

3.1 Resource Based View ...................................................................................................................... 12
3.1.1 Division of Resources ............................................................................................................... 13
3.1.2 Core Competence and Distinctive Capability ........................................................................... 14
3.1.3 Identifying Sustainable Competitive Advantage ..................................................................... 16
Executing Sources of Sustainable Competitive Advantage ................................................................... 18
3.2 Dynamic Capabilities Framework ................................................................................................... 19
3.2.1 Foundation of Dynamic Capabilities ........................................................................................ 19
3.2.2 Processes of Dynamic Capabilities ........................................................................................... 19
3.2.3 Steps in Dynamic Capabilities Framework ............................................................................... 20
3.3 Synthesis of RBV and Dynamic Capabilities .................................................................................... 21
3.4 Business Model ............................................................................................................................... 22

4. Apple Company Overview ........................................ 24

4.1 Apples History ............................................................................................................................... 25
4.2 Apples Values ................................................................................................................................ 26
4.3 Apples Story of Success ................................................................................................................. 26
4.4 Apples Failures ............................................................................................................................... 28

5. Dynamic Capabilities Analysis ................................. 28

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5.1 Sensing ............................................................................................................................................ 28
5.1.1 Overview of Sensing in Dynamic Capabilities .......................................................................... 28
5.1.2 Elements of an Ecosystem Framework for Sensing .............................................................. 29
5.2 Seizing ............................................................................................................................................. 32
5.2.1 Overview of Seizing in Dynamic Capabilities ........................................................................... 32
5.2.2 Enterprise Structures, Procedures, Designs and Incentives for Seizing Opportunities ............. 35
5.2.3 Summary of Seizing ................................................................................................................. 41
5.3 Managing Threats & Transforming ................................................................................................. 42
5.3.1 Decentralization and Near Decomposability ........................................................................... 43
5.3.2 Knowledge Management ........................................................................................................ 44
5.3.3 Cospecialization ....................................................................................................................... 46
5.3.4 Governance ............................................................................................................................. 48

6. The Business Model Analysis .................................... 52

6.1 Past Reconfiguration of the Business Model .................................................................................. 53
6.2 The Business Model Canvas ............................................................................................................ 53
6.2.1 KEY PARTNERS ......................................................................................................................... 53
6.2.2 KEY ACTIVITIES ......................................................................................................................... 55
6.2.3 KEY RESOURCES ....................................................................................................................... 56
6.2.4 COST STRUCTURE .................................................................................................................... 57
6.2.5 VALUE PROPOSITIONS ............................................................................................................. 57
6.2.6 CUSTOMER RELATIONSHIPS .................................................................................................... 58
6.2.7 CHANNELS ............................................................................................................................... 58
6.2.8 CUSTOMER SEGMENTS ........................................................................................................... 59
6.2.9 REVENUE STREAMS ................................................................................................................. 59

7. Conclusion .................................................... 61

8. References .................................................... 62

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1. Introduction
Apple is a global company in field of innovation and electronics. Researches have chosen this
company as a case study since it can be used as a general example for other companies within
this particular industry. By using theoretical frameworks such as Resource Based View,
Dynamic Capabilities and Business Model, there will be an analysis of the company provided.
By applying these theories researchers opt to visualize the current state of the company and
answer the questions mentioned in the following sub-chapter.

1.1 Problem Statement

How does Apple reconfigure its Business Model in order to exploit opportunities
and mitigate threats found in its external environment?
What opportunities and threats can we identify using Dynamic Capabilities
framework?
Is it possible to investigate what Business Model is Apple using currently?
If necessary, how can it be optimized?

1.2 Data Limitations

Through data gathering, some limitations have arisen. The secondary sources used in the
project are: Apples report, various business journals and scientific articles. The models and
frameworks found in the scientific articles, the facts about Apple found in different business
journals and in the Apples report give the paper a multi-angles perspective. It is believed that
the sources are trustworthy.

However, when only using secondary data, some problems could arise (Flick, 2011). One of
the issues could be the compatibility of the sources with the report itself (Arbnor & Bjerke,
2009). The analyzed data is elaborated and processed already and it could be hard to
understand. Moreover, Apples report is a subjective statement and as a result, the knowledge
about Apple might be biased. In addition DC model can be criticized for giving an ideal
world, which may not always match the reality and firms ability to apply the model.

According Decker (2013): The dynamic capability framework offers interesting perspectives
for further research (including dissertations at the M.Sc. and B.Sc. level) because there is not
a complete understanding on why intangible assets are so critical for sustained performance of
firms. These questions are not or only partly answered by previously existing frameworks.

Therefore it makes additional limitations to DC model application in real business world.

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2. Methodology
The purpose of this chapter is to give an insight into the process of project formation,
including data collection methods, research design, paradigms and assumptions underlying
this project report.

The theory of the methodology is mostly based on Arbnor and Bjerke (1997 & 2009) and is
divided into the following parts:

Research Purpose
Paradigm
Methodological Approach
Research Strategy
Research Design
Methodics

2.1 Research Purpose

In this part, the purposes of the research together with the desired objectives to be achieved
are going to be described. In this way, the reader will understand how the research is going to
be conducted and how the research question is going to be answered. The purpose of any
study can be classified in three categories: exploratory, descriptive and explanatory.

The research starts with the choice of paradigm that underlines how the reality is understood.
The methodological approach chosen is the system approach. The research strategy and the
research design are the master plans for connecting the research question and the problem
statement with the empirical analysis. The research reveals what data is needed, what methods
are used for data collection and how these are going to answer the research question.

2.1.1 Exploratory Study

An exploratory study handles situations that not much is known about, like a new topic that
there is no research or a little research about (Yin, 2003). It needs a lot of background
research about the subject in order to gain knowledge and understanding (Sekaran, 1992).

The most important part of this type of study is that a better understanding of the subject shall
be the end result of this study. From this kind of study a better understanding will be
generated upon the subject and it will also generate hypotheses and suggest direction and
feasibility for further research. Usually, exploratory studies are vital in obtaining knowledge

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about the subject of interest through a solid theory building (Sekaran, 1992). The exploratory
study focuses on what the subject is about and not why the subject exists.

2.1.2 Descriptive Study

Unlike the exploratory study, a descriptive study already has a certain amount of data from
previous research. These studies are done to get a better view on the subject and it is done in a
certain group, part of an organization. The aim of the study is to underline certain specific
aspects of the subject (Sekaran, 1992). The descriptive study highlights how the subject is
seen in real life.

2.1.3 Explanatory Study

The explanatory study is used when observing the patterns of a discussed subject in order to
answer the research question (Yin, 2003).

Formulating hypotheses is a common approach in order to explain how relations between

factors regarding the subject are made. This study focus is on the way that the subject exists,
but it is in more depth than the previous types of studies. Regarding the research for Apple,
the explanatory studies were used due to the complexity of data being available, but also
because the focus was on the research question.

2.2 Paradigm
The concept of paradigm is used to describe basic philosophical assumptions that influence
research. According to Arbnor and Bjerke (1997) paradigms should be understood as a
concept consisting of 4 components:

Conception of Reality
Conception of Science
Scientific Ideals
Ethics / Aesthetics

Various take on these aspects leads to different paradigms.

Conception of reality, or, What does Business reality looks like? gives an inside into
philosophical ideas on the construction of the reality, whether it exists independently from
human existence or not and what kind of relation between them can we distinguish. In this
project the both cases are perceived as equal, as it is assumed that the reality consists of both
subjective and objective facts.

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Conception of science, or, How do we look at the Business as a science? stands for all the
knowledge that allows us to investigate the subject of study that can be represented in models
or interpretations. The framework consists of many components that are widely determined by
the user and adds value to decisiveness system or its parts.

Scientific ideals, or, What do we want from Business as a science? the purpose of the
Business is to give a better insight of systems into business reality. As new models and
understandings are approached the better various types of systems can be described, while
influenced by different internal and external factors.

Ethical and aesthetical aspects, or, What can and should Business creators do and what
attitude should they take towards what is done? implications of these aspects are crucial in
the enterprise and its environment relations, as everything is deeply connected with each
other. In this paper the holistic view is provided, with intention of creating an illustrative and
knowledgeable model that can aspire other as an analogy.

Arbnor and Bjerke present 6 different paradigms that on the continuum from being extremely
objective to being extremely subjective. An objective reality is believed to be filled with facts
independent from what the actors in the reality are doing. On the other hand, a subjective
reality is built on the actors and their assurance of creating reality themselves. Researchers
conducting a project have to agree on how do they see the world and place themselves within
this continuum. This project is based on the systems approach, what delimits the choice of
paradigms:

Figure 1: Ontological Considerations in the Systems Approach, Arbnor and Bjerke (1997)

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We can emplace paradigms shown in the table above in the objective - subjective continuum
as follows: paradigm SO1 is on the second position of continuum, SO2 the third and SO3 the
fourth one and at the same time represents the middle position of continuum indicating the
combination of subjective and objective dimensions.

Each of the paradigms considers some research issues, therefore the choice of paradigm
determines research issues and with the order reversed. The paradigm followed in this project
is:

Reality as a world of symbolic discourse

In this view, the researchers put a greater emphasis on language, labels, routines and culture,
which are the elements that reality consists of. Research must be led relatively and with
specification to the examined context, which results in this project in creating a highly
individualized business model. Nevertheless, the particular cases may resemble one another
that allow constructing generalized frameworks and models, for example, dynamic
capabilities model that can be applied for the analysis of different firms.

2.3 Methodological Approach

According to Arbnor and Bjerke (2009) there are three methodological approaches that the
knowledge creators/researchers can use as a foundation for their study: Analytical Approach,
Systems Approach and Actors Approach.
Analytical Approach is the most formal among the other approaches. In this approach it is
assumed that the reality is factive - it means that this approach includes objective and
subjective facts that are seen as being true. The analytical view is faced with the task of
discovering the elements that are invariant despite the changes in the environment and
perceptions among different individuals. In other words, researchers believe that the reality of
events of all parts is summative. Thus, they identify each part separately and then add them
together in order to create the explanation of the reality. The most common form of research
is quantitative research, which can be used for statistical explanations, mathematical terms,
calculations and measurements, resulting in conclusions (Arbnor & Bjerke, 2009).
In this work the Systems Approach has been applied in order to identify, and afterwards, to
try to find an explanation along with an understanding of the Apple's organizational problem
so to come up with solution of overcoming threats and exploiting opportunities within
Apples Business Model (Arbnor & Bjerke, 2009).

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The systems view is seen as reality that consists of units which consist of systems structures
in the objective reality and subjective viewpoints of structures, which have been seen as facts
(Arbnor & Bjerke, 2009). In contrary, analytical view sees the reality of entrepreneurship as
separated parts and admits that these structures cannot be seen as added and combined parts
without influencing each other (Arbnor & Bjerke, 2009).
Therefore systems view has a certain presumptions of reality:

The reality consists of units and each unit has its own components, which create their
own system. These units are seen as open systems, because each unit has its
connections. What is more, in reality they have relations to one another and since they
make open system there are no boundaries in between them (Arbnor & Bjerke, 2009).
It is seen in business context and activities, for instance, as network systems and
relationships between facilities within a firm (Arbnor & Bjerke, 2009).
Moreover, in practice, systems creators knowledge, interests and goals will influence
how the companys problem is formulated and how it will progress. Under these
circumstances knowledge creator is encouraged to be resourceful, adaptable and
creative. According to Arbnor & Bjerke (2009:274): The operative paradigm for
systems creator of knowledge is relatively fixed in forms, but has a highly varied
content.
All in all, researchers look at the reality as not fully objective but subjectively accessible to
the observer. Researchers believe that the sum of the parts does not equal the whole reality,
because when these parts get combined, they create synergistic effects. In addition, these
effects can be positive or negative. It means that the knowledge creation is dependent on the
specific systems structure (Arbnor & Bjerke, 2009).
In the Actors View Approach, knowledge creators assume that the reality is a social
construction, which consists of chaos and uniqueness. In other words, it is a world where the
knowledge creator takes part itself and creates those social constructions. These researchers
believe that the actors design the reality with the purpose and results differ from each study in
the way that they cannot be generalized. The most often-used research strategy is qualitative
research, which can clarify passion and feelings towards a certain subject by doing
experimentations and informal interviews. Namely, the actors want to come up with the most
artistic descriptions and explanations (Arbnor & Bjerke, 2009).

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Researchers of this project believe that the most suitable methodology approach is system
approach, because it is explaining how are different parts working together and if they can
create a synergy effect while analysing Apple Inc. by using Dynamic Capability Framework.

2.4 Research Strategy

When analysing research strategy, three terms need to be discussed - Deductive, Inductive,
and Iterative Research. Inductive Research is the research that composes of surveys or
observations and develops theory based on the results. Iterative Research is a mixture of both
deductive and inductive research where the researcher shifts between theory and practice. The
deductive research is theory based research and, meanwhile, the researcher is proving it in
practice. It is a specific way of creating knowledge based on a logical analysis of what general
theory says about a specific event in the future (Arbnor & Bjerke, 2009). The research done
for the project is in a deductive way, being focused on finding knowledge about Apple
through different channels.

The researcher goes through a learning process, without involving the company or the
companys actors in any way in the learning process (Kuada slides). The research strategy of
the project is secondary research, focused on secondary sources. A sum of various theories
gathered in the same source is a secondary sources. It can also give insight on research of a
certain field (Flick, 2011). A secondary source is made out of summarized primary sources
that have been put together, elaborated, rechecked and reworked by other authors (Flick,
2011).

The advantage of collecting secondary data over primary data is that is requires less time to be
found and it fits answering the research question better (Arbnor & Bjerke, 2009). Official
documents, like Apples report, allow conclusion about what their authors intend in future
(Flick, 2011). In this way, the knowledge gathered about Apple comes from a secure source.
Other secondary data collected are from journals, articles, books, official online websites,
economical newspapers and databases. Using these sources, Apple knowledge was achieved
from different angled perspectives. The articles, journals and books gave the theoretical
knowledge to theoretically place Apple on the market and in the consumers mind. Moreover,
the official websites, economical newspapers and databases provided the markets knowledge
about Apple and a more realistic consumers needs regarding Apple products. After the data
collection, it was filtered and imitated to answering the problem formulation. Moreover, it is
highlighted in words and relevant tables.

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2.5 Research Design
The research design could comprise of one of the five alternatives (Arbnor and Bjerke, 1997):

Experimental, characterized by intensive primary data collection

Cross sectional, characterized by qualitative and quantitative data collection
Longitudinal, characterized by data from several studies which is collected repeatedly
in set time intervals over a specific time period to detect differences between single
points in time
Case study, characterized by concentrated analysis of a single unit
Comparative, characterized by comparison of two or more cases with focus on various
key factors

The Research Design of this project is a case study, focused on only one single unit of study
Apple. The project is though as a three-step project. The first step comprises of analysing the
relevant literature, also known as literature discussion or a literature review. The second step
is scanning the company, Apple, with the Dynamic Capabilities framework and concluding
upon it. The third step is focused on the conclusions of the second step, putting them in a
Business Model with further adaptation to Apple.

2.6 Methodics
In this chapter information about collected data for the project, the methods used to access it
and its form of application will be provided.

The goal for this project is to scan the Apple Company using the Dynamic Capabilities
framework and using the captured data reconfigure the Business Model in accordance to
findings.

Collected data is classified as secondary. This type of data is chosen because the project needs
accurate theoretical foundations and considering the difficulties with providing data
concerning innovations and technology of Apple. In that sense, researchers use literature
widely accepted in the economics profession and Apple report from 2013, form 10-K. It
consists of initial ideas and vision, risks that the company may face and its general condition.
At the same time, as being the official released document, it imposes on Apple to serve
truthful data within the document. Especially while describing the threats of the company, the
additional sources to Apples annual report were used due to many general statements

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regarding possible risks. Furthermore, the annual report contains a lot of threats, which are
affecting every company and are not threats for Apple in particular.

The data is analyzed by what researches found to be relevant in terms of analysis and
Business Model creation. These finding are about to help to find the omission in existing
Business Model and suggest an applicable solution.

3. Literature Review
This particular chapter constructs of literature discussion on previous work of academic on
topics as follows: Resource Based View, Dynamic Capabilities and Business Models.
Furthermore, there is the alignment of RBV along DC shown, and visualisation of the essence
of Business Models that is used in Chapter 6.

3.1 Resource Based View

Resource Based View (RBV) identifies the internal capabilities of an organization in
formulating strategy to attain a sustainable competitive advantage in an industry (Henry,
2008).

An organization is built from resources and capabilities, which can be managed and
reconstructed to provide the firm with competitive advantage. Furthermore its internal
capabilities determine the strategic choices, through these strategic choices the organization is
able to compete successfully in the markets. In some cases the organization's ability to
perform allow some companies to create new markets and add value for customers. In
addition, if an organization's capabilities are seen to be of primary importance in the
development of competitive advantage it will reshape its value chain activities (Henry, 2008).

According Barney (1991) firms attain sustained competitive advantage by employing

strategies that exploit their internal strengths, trough responding to environmental
opportunities, while neutralizing external threats and avoiding internal weakness. This
approach suggests understanding sources of sustained competitive advantage, which can be
found by analysing firms opportunities and threats in its competitive environment.

Porter (1990) attributes by environmental models, like SWOT and Porter's 5 Forces, which
help to identify companys competitive advantage, assumes that firms have identical terms of
the strategically relevant resources they control and the strategies they follow. In addition
these models assume that resource heterogeneity is highly mobile (Barney, 1896a; Hirshleifer,
1980).

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Therefore RBV is built on the resources>conduct>performance paradigm, meaning that the
organization's success depends on the organization's own set of resources and capabilities as
determinant to the competitive advantage. That is RBV of competitive advantage examines
the link between a firms internal characteristics and performance. The Resource Based View
model assumes that firms within an industry may be heterogeneous with respect to the
strategic resources they control. Moreover RBV model assumes that resources are not
perfectly mobile across firms, therefore heterogeneity can be lasting for a longer time
(Decker, 2013).

Henry (2008:130) indicates this example Toyotas value chain activities and its linkages
across them, and its linkages with the value chain of its suppliers are configured in a such a
way that they provide Japanese competitor with the core competence or distinctive capability.
This is the capability which provides it with competitive advantage and which its competitors
have found difficult to match.

3.1.1 Division of Resources

Resources are all assets, firm attributes, information, know-how controlled by a firm that
enable to implement strategies that improve its effectiveness and efficiency (Daft, 1983). In
addition traditional strategies would define resources as strengths that firms can use to
conceive the strategies (Learned et al., 1981).

All in all, resources are organized as tangible and intangible. Tangible resources refer to the
physical assets, which include manufacturing plants, geographical location, technology, and
access to its raw materials. To add value to these physical resources the firm must be capable
of responding with flexibility to changes in the market place. For instance, the organizations
with the most up-to-date technology and processes will be in the better position, compared to
competitors using old technology (Henry, 2008).

Intangible resources comprise intellectual and technological resources and reputation. Where
technological resources include the organization's ability to innovate, intellectual resources
include patents and copyrights. Moreover human capital resources include training, judgment,
intelligence, experience and relationships (Henry, 2008).

Competencies can be defined as tools that firm requires in order ti being able to compete in
the market place. In other words, long for the efficient resource configuration. That is
organizational capital resources include reporting structure, planning, controlling,
coordinating. However, only the organization capital resources do not offer any competitive

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advantage to the organization. Because of the reason that competencies are the bundle of
specific resources and capabilities that an organization possess ( Barney, 1991).

From this perspective resources are unequally distributed which leads to heterogeneity of
firms. RBV emphasizes the unique combination or mix of resources and capabilities, that each
organization possess (Decker, 2013). But not all firms resources are strategically relevant
sources for reaching firms performance, because some of them might prevent a firm from
conceiving of and implementing new strategies ( Barney, 1986).

3.1.2 Core Competence and Distinctive Capability

It is recognized that core competence or distinctive capability is important in contributing an
organization with competitive advantage. These elements resolve from three areas of an
organization: architecture, reputation and level of innovation. Core competences derive from
collective learning of employees within the organization and their ability to work across
organizational boundaries (Henry, 2008).

Defining Core Competence:

A core competence ensures assets to a wide variety of markets and of an

industry (Henry, 2008).

A core competence should make a significant input into the recognized added
value and customer benefits of the end product (Henry, 2008).

A core competence should be difficult to copy for the competitors. In addition,

a core competence must be sustainable. Moreover a core competence is
enhanced as it is applied and shared across the organization (Henry, 2008).

Core competencies, for instance, can be reached through first mover advantage. It is when one
firm, as first in an industry implements a strategy and so obtains a sustainable competitive
advantage over another firms. First mover advantage can be in these fields access to the
distribution channels, reputation, goodwill etc. But to be a first mover by implementing
strategy before others, a single firm must recognize the opportunities by implementing a
strategy that is not obtained by any other firm (Lieberman & Montgomery, 1988).

In other words, this information about the opportunity is firms resource. In order to become a
first mover, firms in an industry must be heterogeneous in terms of the resource they control.
Moreover first mover advantage can create entry barriers, but it is only possible when rival

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firms are heterogeneous in their resources they control and these resources should be
immobile (Barney et al., 1989).

All in all, entry barriers can become a source of sustainable competitive advantage when firm
resources are not perfectly mobile and homogeneously distributed across the rivalry firms.
The Resource Based View of the firm simply emphasizes the logic of value chain, by
executing the attributes that resources isolated by value chain analysis (Porter, 1990).

Defining Distinctive Capabilities

Distinctive capabilities derive from three areas: architecture, reputation and innovation.
However, organization's capabilities are distinctive when they rise from a characteristic,
which other firms do not have. In addition, distinctive capabilities are linked with relationship
between an organization and its employees. This relationship provides an organizations
resources with its distinctive capabilities through the management of its architecture,
reputation and innovation (Henry, 2008).

Organization's Architecture
That a distinctive architecture can be sustainable the relational contracts must be difficult for
its competitors to identify and copy. Then architecture refers to the ability of the organization
to create organizational knowledge. With the meaning to react quickly and effectively to
changes taking place in its external environment, information exchange within the
organization and as well outside it (Henry, 2008).

Organization's Reputation
Reputation is important especially in markets where the quality of a product is essential, such
as an architecture firm. An organization's reputation is built through its reliable relationships,
which ensures the trust in the organization and through that distinctive capability might be
reached. When an organization has a good quality on providing their product and service, this
can ensure the organization with a competitive advantage (Henry, 2008).

Organization's Ability to Innovate

It is the organization's competence to innovate new products and optimize or develop
processes, which are routed within the routines of the organization and therefore hard to copy
or imitate for the competitor. Thus, can lead an organization to obtain competitive advantage.
In this characteristic distinctive capabilities are patents, copyrights, strong brand image,
patters of supplier or customer relationships, skills. These distinctive capabilities are basis of
sustainable competitive advantage (Henry, 2008).
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All in all, as it is showed in the picture resources are inputs into the production process. Thus
resources can be capital equipment, the skills of employees, patents, brands and financial
capital. But as itself these resources are rarely productive, therefore cooperation and
coordination of bundles of resources are required. These resources are the source of an
organization's capabilities to manage them. As well the main source of competitive advantage,
which lead in new product creation (Henry, 2008).

Figure 2: Organizations Resources and Capabilities Co-existence, Own development

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Moreover competitive advantage will barely last forever and may be lost within a short time
span when competitors accomplish to copy the resource (e.g. machine capacity), which gives
the company a unique value proposition. If a resource of a company becomes elastic in supply
it loses its competitive advantage as this enables all firms access to the resource. However a
company that profits from a first mover advantage is likely to have a long lasting competitive
advantage. As the pioneer it has the opportunity to install certain rules and barriers, which are
hard to overcome for its competitors. Thus competitive advantage can rapidly be lost but also
persist for long-time spans (Decker, 2013).

3.1.3 Identifying Sustainable Competitive Advantage

Of course not all resources can sustain sustainable competitive advantages. To have this
potential, a firm resource must contain 4 attributes such as be valuable, rare, non-imitable and
it cannot have substitute. These attributes explain how heterogeneous and immobile firm
resources are and how with these resources firms can achieve sustainable competitive
advantage. These attributes become resources when these attributes exploit environmental
opportunities or neutralize threats. In this section RBV model suggest what additional
characteristics these resources must possess for sustainable competitive advantage.

n Valuable resources are those who can set up and implement strategies that enchase
firms performance and capability (Barney, 1991). An organization based in a unique
location will be able to add value to its products, which allows generating superior
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 returns. It is very hard to imitate this resource because it involves the climate, soil and
geographic section. For instance Spanish wines are known as one of the best in the
world by handing over knowledge from one generation to the other one (Henry, 2008).

n Rare resources can create sustainable competitive advantage when firm applies
bundles of rare and valuable resources. In other words, some firms require a particular
combination of resource attributes (Barney, 1991).

n However, sources of sustainable competitive advantage can be only valuable and rare
if, competing firms cannot copy them. In general, firm resources can be imperfectly
copyable, firstly when the firm resource has unique historical condition, secondly
when the link between firm resource and sustained competitive advantage is causally
ambiguous and development of firm resources is socially complex (Barney, 1991).

Therefore each of these sources of the imperfect imitability are listed below:

n Path dependency is a unique experience a firm has acquired to date as a result of doing
business right. Therefore it is very hard for the competitors to acquire this knowledge
on the market and imitate the organizations value-creating strategy (Henry, 2008).

n Relationship between causal ambiguity and imperfectly imitable resources occur when
the relationship between the resources controlled by the firm and sustained
competitive advantage is not understood. For example, it is challenging for competing
firms to attempt to replicate resources of successful firm. Because of this reason it is
not clear that resources of successful firm are the same and exactly these resources
generate sustainable competitive advantage. In case the firm with sustainable
competitive advantage understands the relationship between resources it manages and
between its competitive advantages, it means that competing firms can learn about this
relationship and therefore compete it away. In this case firms competitive advantage is
not sustained and can be competed away (Barney, 1991).

n Social complexity is one of the reasons that firms resources are not imitable, because
they are very complex and interdependent. For instance, interpersonal relationships
between management members in the firm, customer relationships and supplier
relationships (Barney, 1991). It includes as well organizations culture, and a
companys reputation with its suppliers and customers. Therefore organizations

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 resources may be difficult to imitate because they are based on these complex
interactions (Henry, 2008).

n Substitutability is the last requirement for a firm resource in oder to be sustainable

competitive advantage. In other words, there must be no other equivalent valuable,
rare or imitable resource. Otherwise firms with similar resources will be able to
implement the same strategies, but with different resources, thus these strategies will
not lead to sustainable competitive advantage (Barney, 1991).

RBV indicate that firms are essentially historical and social entities, but their capability to
acquire and explore some resources depends from the time and space where they are. And
when this unique time and space passes, the firms who are dependent on these resources
cannot have sustainable competitive advantage, thus these resources are not imitable. In
addition these firms will be able to implement value-creating strategies that cannot be
replicated by rivalry firms (Barney, 1991).

Executing Sources of Sustainable Competitive Advantage

Particularly, this RBV model shows relationships between all attributes, namely resource
heterogeneity and immobility, value, rareness, imitability, substitutability and sustained
competitive advantage (Barney, 1991).

Figure 3: The relationship between attributes (Barney, 1991)

Value
.
Firm resource Rareness
Sustained
Heterogeneity Imperfect Imitability:
Competitive
Firm resource -History Dependent
Advantage
Immobility -Causal Ambiguity

-Social Complexity

Substitutability

Basically this framework helps firms to identify their resources, which could be the main
source of sustained competitive advantage. This framework suggests as well that the formal
and informal strategic planning might be helpful for some firms to identify and exposure their
resources in order to create sustainable competitive advantage. Application in Figure 2
18
indicates that information process systems in close link with top management can be socially
complex, rare and valuable resource, which could lead the firm to achieve competitive
advantage. Thus be imperfectly imitable. Moreover positive reputation of the firm can be
sustainable competitive advantage, which depends on specific historical settings. Therefore it
is rare resource (Barney, 1991).

3.2 Dynamic Capabilities Framework

3.2.1 Foundation of Dynamic Capabilities
Dynamic Capabilities (DC) explains how firms can stay alive and how they develop
uniqueness and competitive advantage in environments where competition is vigorous in both
input and component markets (Teece, 2008). To do that firms are building and creating a set
of microfoundations, which serve as the base for building intangible assets. These
microfoundations are skills of employees, architecture of the organization's structure,
decisions rules and disciplines as a cross boundary fields. In addition these microfoundations
help to build enterprise level capabilities (Decker, 2013). In this way sustainable competitive
advantage might be reached where firms can create and protect intangible assets over time
(Teece, 2008). Moreover, these microfoundations are requirements for the firms in order to
complete to achieve Dynamic Capabilities: sensing, seizing and ability to maintain
competitiveness from the managerial position by being proactive in fast changing
environment (Decker, 2013). So essence of Dynamic Capabilities is sensing new
opportunities before others do, and executing where the situation allows and requires. Then
capturing sufficient value to deliver superior long- term financial performance (Teece, 2008).

A firms needs to be able to successfully orchestrates its tangible and intangible resources and
adapt them to the external environment. Nevertheless Porter argues that firms select their
industry where to compete according to secure higher profit margin. Therefore Porters 5
Forces model takes industry structure as given. Basically it means that firms do not have
influence on their external environment. In contrast, Dynamic Capability framework assumes
that firms can influence their external environment by conducting and reconfiguring their
external environment when the conditions are given. This allows firms to stay competitive
over time (Decker, 2013).

3.2.2 Processes of Dynamic Capabilities

Dynamic Capability framework classifies between managerial processes, procedures, systems,

and structures. Teece (2008) describes in his article that Dynamic Capabilities are difficult to
19
recognize, because it is hard to identify microfoundations. The second purpose of DC is to
explain the sources of enterprise - level competitive advantage over time and provide
guidance to managers for avoiding zero profit condition that results when homogeneous firms
compete in perfectly competitive markets ( Teece, 2008).

According to Teece (2008) the success of firms is the ability to identify and take advantage of
opportunities, creative combination of internal and external resources, which include
technology transfer and protection of intellectual property (Decker, 2013). Its all about
reinventing business processes and building entirely new markets that meet unmet customer
demand (Teece, 2008).

Essentially, successful firms, know how to create successful new business models as tool to
align resources which allows them to capture the value of their business processes. This lets
the firms to react and act in proactive way, too. Proactive means that a company is able to
introduce its own product or service innovations to the market. Clearly, the firm who has the
ability to manage its Dynamic Capabilities is able to create its own system with a structure of
the external environment of the other firms, its suppliers, buyers, stakeholders. This means
that it can take influence on the conditions of its environment. The positioning of Dynamic
Capabilities is significant to its international environment, because of open economies,
sources of invention and innovation and manufacturing (Decker, 2013).

3.2.3 Steps in Dynamic Capabilities Framework

Description of the steps in Dynamic Capabilities is sensing opportunities: this means that
firms managers have to be able to identify scan and interpret signals from the environment
(Decker, 2013). Foundations of enterprise success is being productive at R&D, achieving new
product introductions, adopting best practice. It must also generate and implement the
complementary organizational and managerial innovations needed to achieve and sustain
competitiveness (Teece, 2008).

When the opportunities are identified in the local and international markets, enterprises must
understand customer needs, technological opportunities through R&D. The second step in
Dynamic Capability framework is opportunity seizing. That is taking advantage of identified
opportunity. This sensed opportunity must be addressed through new products, services or
processes. For instance, firm makes specific investments into the technology or in markets.
Addressing opportunities involves maintaining and improving technological competence and
complementary assets, when the opportunity is matured invest heavily in the particular

20
technologies and designs most likely to achieve market place acceptance (Teece, 2008). In
addition the firm to be able to make the right decision need to have as well the right business
model. Therefore DC helps a firm to decide on the right moment to phase out existing
products and services in order to take advantage of newer innovative products. In case the
firm is not being able to do so exposes the firm to the risk of being left behind with outmoded
products or services once they have gone through their life-cycle (Decker, 2013).

Thirdly the firm need to develop the skills on the managerial level, like to develop skills that
help the firms managers to discover new technology combinations in robust markets and
come up with new solutions (Decker, 2013). In addition committee decision-making
structures almost always tent toward balancing and compromise. Many enterprises makes
single decisions viewing each opportunity as unique. Very much risk averse, therefore it leads
to investment in low or negative return projects. Therefore risk aversion leads to biased
decisions making and limits the probability that binding firms will explore risky radical
innovations. The new opportunity capturing is likely dependent on importantly on the quality
of enterprise routines, decision rules, strategies and leadership around evaluating new
investment opportunities. That is critical for enterprise performance (Teece, 2008).

Selecting the right entrepreneurial architecture for a business requires not only understanding
the choices available, it also require assembling the evidence about costs, customers,
competitors, complementary, distributors and suppliers. To reduce biased decision making
strategies such as increase in divisional authority is used (Teece, 2008).

In marketing strategy, cannibalization refers to a reduction in sales volume, sales revenue, or

market share of one product as a result of the introduction of a new product by the same
producer. While this may seem naturally negative, in the context of a carefully planned
strategy, it can be effective, by ultimately growing the market, or better meeting consumer
demands. Cannibalization is a key consideration in product portfolio analysis. For example,
when Apple introduced iPad, this took sales away from the original Macintosh, but ultimately
led to an expanded market for consumer computing hardware (Teece, 2008).

3.3 Synthesis of RBV and Dynamic Capabilities

Both the Resource Based View and the Dynamic Capabilities Framework are part of the
strategy management research field and disclose how firms differ due to their performance
and why some competitors are more profitable than others (Decker, 2013).

21
For instance in fast changing markets Dynamic Capabilities are affected by competitive
advantage and at the same time are unstable processes themselves which are challenging to
maintain. Thus time is becoming a fundamental aspect of strategy; therewith RBVs focus on
long-term competitive advantage becomes unrealistic in those dynamic markets.

Where Dynamic Capabilities represent the source of sustained competitive advantage, to

address rapidly changing environments. The assumption that an organization is a bundle of
heterogeneous resources cannot be perceived to be true in the fast changing markets, where
resources are added, recombined and dropped (Einsenhardt & Martin, 2000).

This is where the Dynamic Capabilities framework can be applied as an addition to the
Resource Based View. By illustrating how the development of the competitive advantage of a
firm changes over time and how firms can attain high performance in the long run by
deploying their intangible assets (Decker, 2013).
\

3.4 Business Model

The particular theme of business models has caused vast discrepancies and dissonances
between academics, which are also reflected in literature we dealt with. The research has been
mainly inclined to journals and research papers found on Business Model Community, the
Internet webpage (Business model community, 2013). Incorporating Zott, Amit and Massa
(2011) who provided us with the valuable literature review, complementary insight of
different approaches in journals ensured bridging of the gaps between various approaches of
the so-called less cumulative literature.

In respect to the differences between the vast amounts of academic literature on the subject,
there is no one stable definition of what business model is. On the other hand its been clarified
that the model seeks to explain how an organization creates, delivers and captures value from
the customer. In alignment, the highlight is upon systemic and holistic understanding of how a
firm orchestrates its system of activities for value creation (Teece, 2010). Dealing with
strategic issues such as value creation, competitive advantage and firms performance, the
topic is centered mostly on innovation, knowledge and technology management. Zott, Amit &
Massa (2011) have divided their literature review into three phenomena: e-business along the
use of information technology; strategic issues; innovation and technology management.

The concept emerged due to a drive for change in doing business during the 1990s or the so-
called dot-com era. The Internet and technical advancements dispersed the rapid
modification of information search, distribution channels and communication flow. An
22
extensive amount of opportunities opened up new ways of doing business (Arnim, 2013).
However, Teece (2010) suggests that business models have been included in economic
behavior since pre-classical times but have changed ever since. Because of more clients
choices, firms were to make their businesses more customers oriented. In accordance to
Chesbrough (2010) business model is used as a mechanism for value creation, identification
of market segment and specification of revenue generation, definition of value chain and
distribution, articulation of cost structure and profit potential, description of position of the
focal firm within value network (suppliers, partners, distribution channels, and coalitions) and
formulation of competitive strategy for further gain in competitive advantage. Moreover, in
the essence of a business model there lies a reality that business model innovation might bring
more significance to the firm than R&D and innovation in the very core of products. A
mediocre technology pursued within a great business model may be more valuable than a
great technology exploited via a mediocre business model (Chesbrough, 2010).

In order for an organization to acquire status of competitive advantage it deploys orchestration

of difficult-to-replicate dynamic capabilities where one of them is design and implementation
of viable business models (Teece, 2009). In other words, the adoption of successful business
model is crucial for an organizations further growth. Business models cause challenges to top
managers and entrepreneurs. In our case the focus is on business model reconfiguration in
incumbent corporations as this is the sense of our case study. Realizing that not only
innovation of products, but also design innovation of business model itself and constant
reorganization are highly important as a pathway to competitive advantage (Teece, 2010).
Chesbrough (2010) suggests that, organizational processes should be altered through openness
to business model experimentation of emerging and disruptive technologies. Therefore
learning and customer focus is the key of business model adoption. However, concerning
incumbent corporations where top managers tend to accept less risky situations than
entrepreneurs in start-ups this philosophy is not so easily put to practice. Business model
should be forever ongoing, ever changing and never static. Overcoming obstacles through
constant testing of business models and realignment of strategic choices for accomplishment
in marketplace (Shafer, Smith & Linder, 2005).

The adoption of a well-developed business model is crucial in order to succeed. A hard to

copy - differentiated, effective and efficient business model assures for competitive advantage
(Teece, 2010).

23
Figure 4: The Business Model Canvas (Osterwalder and Pigneur, 2010)

The Osterwalders and Pigneurs mapping approach with the nine-point decomposition of
business model which provides for more holistic, tangible and visual way has been selected
for further implementation to and clear visualization of Apple Inc. As illustrated in Figure 4,
by The Business Model Canvas used for systematic reflection on the way of doing business
there is the capture of key partners, activities and resources, cost structure, value propositions,
channels, customer relationships and segments, and revenue streams (Business model
alchemist, 2013). All these points are discussed in deeper detail in our analysis chapter of
business model, Chapter 6.

4. Apple Company Overview

In 2011 Barack Obama described Apple, which had a market value of $600 billion in 2012
(Lashinsky, 2012), as one of the most successful enterprises of the planet that made the
revolution of information not only more accessible but also more fun. Furthermore he
characterized Steve Jobs, one of the founders of Apple, as one of the greatest American
innovator and as an exemplary demonstration for the American inventive talent (Knop, 2011).

24
4.1 Apples History
Figure 5: Events In the Year 2012 and 2013: (Dernbach, 2013)

1976 Foundation of Apple by Steve Jobs, Roland Wayne and Steve Wozniak, who sold his
shares of the company shortly afterwards. Together they produced the first fully
functional PC board the Apple I, which was sold by the computer chain Byte Shop.
1977 Market launch of Apple II, which was considered as one of the most successful
personal computers of its time.
1981 Beginning of the production for the European market with the opening of the
manufacturing plant in Cork, Ireland.
1983 Presentation of LISA - the first PC with a mouse guide, which was not accepted by
the market due to its high price.
1984 Presentation of the first Macintosh, which was designed for broad sections of the
population.
1985 Steve Jobs has to leave the company.
1989 The Macintosh Portable, the first portable PC was introduced on the market.
1993 The Newton Message Pad being the first personal digital assistant device, was
introduced to the market and still showing problems with the recognition of
handwriting after six years of development.
1994 Introduction of the Power PC a new generation of computers.
1997 Collaboration between Apple and Microsoft under a cooperation agreement.
Steve Jobs returned to the company.
1998 The Apple iMac with a futuristic design has been sold over one million times after
its launch.
2000 The Power Mac G4 Cube is not accepted by the market.
2001 Opening of the first Apple Store.
With the iPod Apple introduced a product of the consumer electronic goods for the
first time.
2002 The iMac received a new design through a flat screen.
2003 Introduction of the first Apple App Store at the market.
2006 Beginning of the use of Intel processors for the iMac.
2007 Presentation of Apple TV and the iPhone => Apple changed its name from Apple
Comupter Inc. to Apple Inc.
2010 Presentation of the tablet iPad.

25
2011 Presentation of the iCloud and the iPad II.
Steve Jobs died and T. Cook became the CEO of Apple.
2012 Introduction of the 7th iMac generation.
2013 More than half of Apples revenue is made with the iPhone.

4.2 Apples Values

The so-called Apple Values of the book Apples handbook for employees from 1993
clearly show the philosophy and the foundation for all projects of the company. In the
following the main points of these values based on the Apples handbook for employees are
summarized (Lashinsky, 2012):

The risks of the aggressive targets of Apple should be accepted and it should be striven for
superior and innovative products, that are new, satisfy real needs and are changing the world
in that way that they enable a better life.

Work should be seen as an adventure, with the interest to solve the customers problems
within the desired profit frame.

Team spirit is equalized with success, where the consideration of each single individual
constitutes the strength of Apple.

Quality and effectiveness of the products are emphasized, which secures the respect and the
loyalty of the customers.

In addition to personal rewards in both a psychological and financial manner, management

should secure a productive work environment for employees.

4.3 Apples Story of Success

The way to the successful products, Apple is characterized by interplay of the original idea,
the innovation, the development and cost planning.

Apple demonstrated that low costs of development and the attraction of a broad target group
could make a crucial contribution to achieve a commercially strong product. Hence the
Apple II, which was introduced in 1977, addressed a broad target group and the production
costs were comparatively low due to the application of the same architecture plate as used for
the Apple I.

26
The Apple II was a fully-fledged computer that could be connected to the TV and represent
colour, which was exceptional for this time. What made the computer additionally attractive
was the acquisition of the license for Basic leading to Applesoft Basic that enabled the users
to establish and conduct programmes at Apple II. The introduction of the Disk II in 1978,
the cheapest disk driver at that time, made the computer even more successful. The Apple II
enabled the average consumer to buy ones own computer for the first time as it was really
user-friendly compared to the computers of other providers. In May 1983 the Apple II had
been sold over a million times. All in all the Apple II can be called as the first real
computer, with which Apple laid a foundation stone for the revolution in the computer
industry.

The lucrative success of the PowerMacs, firstly being introduced in 1994, mainly results
from low production costs as well and from the improvement in performance of the
Macintosh product range. Apple is also characterized by its unique design with which it
differentiates itself from its competitors. As an example the iMac didnt imply many new
technical alterations in 1998 but it could especially convince through its exceptional design.

With the opening of the first Apple Store in 2001 Apple represented a brilliant retail sales
concept, which solely sales Apple products. Each Apple store is characterized by exclusive
design and contains a Genius Bar where the personnel helps and advises customers.
Enabling the customers the interaction and testing of nearly all products mainly contributes to
the success of the Apple stores. Creating unique experience for its customers these stores
belong to the key components of Apples marketing strategy (Moritz, 2011).

In 2003 Apple introduced its first App Store, a distribution platform for the additional
software of the iPhone. Through this virtual market third party providers are able to offer self-
programmed applications to an individual price for a download. Where a large attendance of
providers leads to a greater variety of offered applications resulting in an increased benefit for
the customer. Users can reach the App Store directly on the pre-installed application of their
iPhone or with a PC through the Apple iTunes software. Within the App stores Apple
aggregates the deals, takes over the provision, conducts the marketing and is in charge of the
payment process. Thus Apple holds a dual role by being not only the manufacturer of
hardware but also the platform operator (Knop, 2011).

27
In 2007 Apple changed its name from Apple Comupter Inc. in Apple Inc. to reflect that
Apple launched two new products (Apple TV and iPhone) in addition to the iPod, that do not
belong to the traditional computer sector (Vogelstein, 2013).

4.4 Apples Failures

The failures of Apple primarily resulted from the digression of the two significant factors of
Apples success being the low costs of development and addressing a broad target group.
These factors seemed to be almost forgotten by Apples innovators, who couldnt release from
their incipiently idea of certain products (i.e. Mactintosh Portable, Newton) through their
enthusiasm for technology and innovation.

Exemplarily the idea to make the Mactintosh portable was very innovative but the
implementation took too long so that the development costs of the Macintosh Portable
could not be covered after some time. In order to keep the losses as low as possible Apple
stopped the production of almost all commercially poor products after a short time
(Lashinsky, 2012).

5. Dynamic Capabilities Analysis

5.1 Sensing

5.1.1 Overview of Sensing in Dynamic Capabilities

Sensing dynamic capabilities are the strategic activities, which an organizations key decision
makers must apply, often simultaneously, to sense new opportunities (Barreto, 2010; Teece,
2007). Sensing means an inherently entrepreneurial set of capabilities that involves exploring
technological opportunities, probing markets, and listening to customers, along with scanning
the other elements of the business ecosystem (Teece, 2011). That stands for performing
entrepreneurial search and sense-making activities (Pandza and Thorpe, 2009) in a mindful
way (Dew, 2009; Gartner, 2011) in order to recognize new opportunities. In fast changing and
globally competitive environments, consumer needs, technological opportunities and
competitor activity are constantly modifying (Teece, 2009). As a matter of fact, sensing
valuable opportunities is indeed often a matter of serendipity (Denrell, Fang, and Winter,
2003: 978), a combination of prior learning and experience, in-depth research and fortuity
(Dew, 2009; Pandza and Thorpe, 2009).

28
Entrepreneurial firms need to be creative (Schumpeter, 1934). Creative search is an
enterprising decision that requires intuition and imagination and must precede any decision to
go ahead with the exploration of an opportunity (Pandza and Thorpe, 2009: S122; Penrose;
1959). Alertness refers to a sense of what might be around the corner, i.e., the sense to
notice that which has hitherto not been suspected of existing at all (Kirzner, 2009: 151).
Sensing new opportunities is mostly a scanning, creation, learning, and interpretive activity.
This process not only involves investment in research and investigating consumer needs and
technological possibilities; into account must be taken also understanding latent demand,
likely supplier and competitor responses (Teece, 2009).

5.1.2 Elements of an Ecosystem Framework for Sensing

Figure 6: Ecosystem Framework for Sensing Market and Technological Opportunities (Teece,
2009)

Figure 6 summarizes individual and enterprise traits that undergird sensing capabilities. Many
of these aspects apply by reason to top managements main tasks - foreseeing and leading the
organisation into the future. On the following pages we would like to give a short description
of each of them and by choosing the two out of them, one giving the internal and the other
one external perspective, make a deep inside overview of the Apple Company.

Processes to Direct Internal R&D and Select New Technologies

Nowadays, in fast-paced environments enterprises must constantly scan, search and explore
across technologies and markets, both local and distant in order to identify and shape
opportunities (March and Simon, 1958; Nelson and Winter, 1982). Discovery can be
grounded in the cognitive and creative capacities of individuals as well as in organizational
processes, like R&D. This require both access to information and the ability to recognize,
sense and shape developments (Teece, 2009). Instinctively we conceive processes to direct

29
internal R&D and select new technologies as of an on-going repetitive nature, linked to daily
activities. In fact, empirical studies demonstrate that awareness of process and interaction
comes from entrepreneurial characteristics, such as proactiveness, integrative skill, and
motivation (Lee and Kelley, 2008), and by supporting organisation routines (Katzy and
Crowston, 2008).
Unfortunately, it is impossible for companies to invest in every R&D project or new
technology. Top management should collect data, facts and anecdotes. After making the
decision, middle management should update the information through business processes.
However, to make the right choice, companies should get access to and filter the information.
This can be done by organising meetings, trainings, hiring policies and platforms. In addition,
companies can select a broad range of scientific specialists while ensuring that theses
scientists maintain close ties with the scientific community. These activities will positively
influence the input of information (Cardinal, 2011). To make the process even more
productive mechanisms to control the distribution of information should be applied. These
mechanisms include centralization, formalization, and frequent performance evaluations,
which involves the relationship between control and innovation. However, noted by Teece et
al. (1997), decentralization in organizations has a positive effect on sensing and seizing
market and technological development. Enterprises need to find the perfect control situation
on their own. Last but not the least important part is controlling the output. The R&D
department should be supervised regarding future R&D expenditures.
We can talk about dynamic capabilities when managers apply these control processes and
mechanisms as simple rules and routines, which are focused on situation-specific information.
To gain the satisfactory outcome these processes should result in parallel considerations and
partial implementation of multiple options, what includes development of multidisciplinary
teams, development of information supporting systems (websites, intranet, etc.), collaboration
platforms, selecting specialities, non-routineness, and controlling output.

Processes to Tap Supplier and Complementor Innovation

The search activities that are relevant to sensing include information about what is going on
in the business ecosystem in its core as well as in the periphery. Within the search potential
collaborators must be enclosed customers, suppliers, complementors, who are active in
innovative activity (Teece, 2009).

The activity of sensing and shaping suppliers can be organized within an alliance. It can act in
the form of a separate organizational unit or team of managers that are responsible for
30
managing and coordinating a firms alliance activity. As a result that provides several benefits
to firms (Kale et al., 2002). What is interesting, recent paper works show that firms differ in
alliance success. Some of them are more successful at managing alliances or creating value
from them (Anand & Khanna, 2000; Kale et al., 2002). Alliance success is explained as the
function to oversee and coordinate a firms overall alliance activity (Kale et al., 2002).
Successful alliance consists of articulation, codification, sharing, and internalization of
alliance management know-how. Because of the focus on learning and continue innovation,
these activities are resulting in dynamic capabilities for the organisation. Network
intermediaries help enterprises sense new opportunities, by broadening the scope of their
external innovation search and reducing their search cost (Zhang and Li, 2010: 89).
Schumpeter (1934) underlined in his work that to be a successful company it need to be
threatened by multiple imitators, all wanting to create substitutes. Especially industries in
which innovation is essential, complementary innovation is of a great significance, for
example new technologies enable personal computers and phones batteries to run longer
between charging. Cospecialization gives an opportunity for a greater value to be captured
when an asset owner is not aware of the possible value of its assets to another party, whose
assets value might be enlarged through combination. This situation can be found within
Apple company. Using the known technology of digital music players and combining it with
iTunes music store along with digital rights management software, both introduced by Apple,
company created a great selling product - iPod. These crucial elements put into a well design
coverage managed to take over the leading position from Sony in the personal stereo market.
Nonetheless, what is even more remarkable Apple maintained an approximated 40% gross
profits from the value chain on its hard drive-based iPods, although it did not manufacture any
part of the product itself (Linden et al., 2009). These numbers do not include the interest from
licensing to makers of iPod accessories neither sale from the iTunes Music Store.

Processes to Tap Developments in Exogenous Science and Technology

Nowadays, in many industries, the internal orientation and centralized approach of R&D is
becoming obsolete. Practical knowledge has become widespread. This attitude contributes to
a creation of a new common logic of open innovation, the one that embrace exogenous ideas
and knowledge combined with internal R&D. Now that companies are more active with
Open Innovation, external search becomes a necessity for enterprise success (Chesbrough,
2003). The practice of open innovation underline the importance of broad-based external

31
search that will positively influence the sensing and shaping of new opportunities in the
future.

Processes to Identify Target Market Segments, Changing Customer

Needs, and Customer Innovation
Aside from the supplier integration, companies need to integrate customers. Identify target
market segments changing customer needs and customer innovation will influence the ability
to sense and shape market opportunities. Commercial success is highly correlated with the
developers understanding of the user/customer (Freedman, 1974). Customers are potential
for applying new technology; therefore, companies should work with visionary members of
customer organizations. This can be done on the same way as with suppliers.

Apple is an exemplary expert in adapting dynamic capabilities as it has created and

transformed a series of markets. The company takes in to consideration the socioeconomic
status, lifestyle and personality variables of its consumers. It senses customer changing needs
perfectly. Before introducing iPod the ascendant trend among people was the attitude towards
existing mp3 players were too nerdy. In smart phones market the common objections were
impractical interfaces and recalling the existing phones design. As an answer to this Apple
introduced an iPhone, creating a multimedia phone with a large screen and an intuitive
interface.

These examples are showing that customers can be the first ones to notice the potential for
applying new technology. What is more, suppliers of the new technology must understand
potential user needs and expectations, otherwise the developed product might not be
successful. In electronic computing user-led innovations play a fundamental role. The
cautious enterprises are able to advantage these efforts into new products and services , as in
most cases consumers themselves carry the prototypes further forward (Teece, 2009).

5.2 Seizing
5.2.1 Overview of Seizing in Dynamic Capabilities
Seizing opportunities is the second step in the Dynamic Capabilities framework. It is also the
mobilization of resources to address an opportunity and to capture value from doing so
(Teece, 2007). Seen from another perspective, it refers to the organizational strategy and
infrastructure in order to make the best decisions and absorbing and integrating resources to
create and capture value from addressing opportunities (Ridder, 2011). It is focused on how a
32
company can build enterprise structures, incentives and address the designs (Decker, 2013).
When an opportunity has been sensed, the company needs to take advantage of it. Investing in
it at the right time is one of the different ways of seizing opportunities (Decker, 2013). When
partnerships/ alliances/ networks are involved, the company needs to be quick and precise to
choose the right moment, otherwise competitors can step up and take advantage of it.
Together with deciding for or against investing, the company needs to have a viable business
model that would suit the investment (Decker, 2013). The business models are also created to
satisfy the customers in order to capture value, including access to capital and human
resources. However, the human element, the employee motivation is vital being the only way
to achieve superior performance. This pattern needs to be continued externally with the
suppliers, complementors and customers (Teece, 2007).
Seizing opportunities can be also done through transferring the know-how and technological
resources outside the firm and adapting them to their new use (Ridder, 2011). The market
conditions can be changed in order to achieve competitive advantage. Here, two concepts can
be distinguished inward and outward seizing. The inward seizing acknowledges that the
members in the organization need to analyze and understand the external knowledge.
Moreover, the external knowledge needs to be translated into a common firm-language that is
understood by organizational members. Once this is done, it is likely to get effectively
implemented. The transforming processes facilitate the implementation of external knowledge
and technology which enables a firms inward seizing capability (Ridder, 2011).

Regarding outward seizing, firms need to be flexible and open-minded in choosing new
applications for internal knowledge and technology. The information needs to be effective and
efficient when made available to an external recipient. Firms need to fit the transfer
mechanisms and make a plan for the technology transfer at an operational level because if the
capability can be communicated and understood in a short time, imitation is likely to happen.
Implementing the support processes needs to change the mindsets of the firms employees in
order to motivate them to teaching the external recipient. But employees might not be opened
regarding transferring technology because they might fear the company will lose the
competitive position on the market. Inward and outward seizing capabilities are used in order
to transfer and adapt the knowledge resources (Ridder, 2011).

Figure 7: Inward and Outward Seizing (Ridder, 2011)

33
Inward Seizing Outward Seizing
Underlying Underlying
Processes: Processes:
- Transforming - Multiplying
- Complementing - Transferring
- Integrating - Supporting
- Retaining

Seizing capabilities, re-shaping the opportunities and taking advantage of it includes the
ability of managing assets, structures, processes, routines with new asset orchestration,
innovation, and governance structures (Dixit & Bhowmick, 2010). Addressing opportunities
requires determining a business model, foreseeing the resource needs, and deciding to invest
in technology and other resources. Moreover, the other needs to understand the need for
change and start implementing it. The focus on management is mandatory because multiple
functional areas are involved (Harris, Kaefer & Salchenberger, 2009).

Ongoing reconfiguration of resources is necessary in order to realign the resources to increase

the firms value. The manager gets the ability, through reconfiguration, to try different
circumstances and to experience something new. The faster adapting to change firms are the
innovative ones that embrace new technologies earlier than most firms that adopt innovations
(Harris, Kaefer & Salchenberger, 2009).

Changing organizational structures, managing strategic fit and achieving incentive alignment
leads to reconfiguration. The assets realignment to increase the value of the firm is the
strategic fit. Together with it, special attention needs to be put on incentives and on their
design because they need support the performance improvement efforts of the firm (Harris,
Kaefer & Salchenberger, 2009).

By looking into the organizational knowledge, a manager can better understand what have
been done in the past, helping him to define the business model in order to capture value. The
non-economic factors, values and cultures are seen through organizational learning. The
transfer of the knowledge is a strong help in selecting the technology and the customers. But
knowledge integration is vital in foreseeing the opportunities that would lead to
cannibalization (Harris, Kaefer & Salchenberger, 2009). Knowledge management is important
in decentralized structures and it is easy to be achieved due to easily moving the knowledge
boundaries to realign assets.
34
Managers are very important in seizing opportunities. Selecting the technology, targeting
customers, and determining suppliers are their choice. Managers also need to be careful in
Allocating assets and resources. They need to be allocated in a way that will best utilize and
recognize when assets are complementary. Usually the CEO is allocating the resources and
the CIO is looking for the technology assets to be complementary. The CEO and the CIO
need to build loyalty and commitment through communication in the company (Harris, Kaefer
& Salchenberger, 2009).

5.2.2 Enterprise Structures, Procedures, Designs and Incentives for

Seizing Opportunities

Seizing can be obtained through launching innovation in order to design new products,
processes or services (Teece, 2007). The strategic decision skills/ execution of the dynamic
capabilities framework is formed of four micro-foundations - Delineating the Customer
Solution and the Business Model, Selecting Decision-Making Protocols, Selecting
Enterprise Boundaries to Manage Complements and Control platforms and Building loyalty
and Commitment (Decker, 2013).

New product development can be used and new business models must be built in order to
capture value. It is a good idea to associate key stakeholders impacting or being impacted by
the environmental performance (Castiaux, 2012). Innovations are complex architectures, to
which multiple actors contribute, either as providers, as consumers or as regulators.
Calibrating the asset specificity and recognizing, managing and capturing cospecialization
economies define the enterprises boundaries (Castiaux, 2012). The decision-making
protocols are characterized by tools to help decision-making when building innovations exist.
They help managers to orient their choices and to manage the trade-offs between different
criteria (economic, social, environmental). The issue here is to find ways to manage collective
decision- making, as many stakeholders can be involved in the building of the system.
Moreover, avoiding decision errors and anti-cannizalization proclivities is also part of the
decision-making protocols (Castiaux, 2012). Engagement in seizing opportunities requires the
motivation of all stakeholders, internally as externally. People in the company must
understand what their contribution to a broader strategic perspective is. The ones higher in
hierarchy need to demonstrate leadership and there should be effective communication in the
organization. The non-economic factors, values and culture need to be recognized (Castiaux,
2012).

35
Figure 8: Strategic decision skills/execution (Teece, 2009)

There are four micro-foundations that define seizing Selecting product architectures and
business models, selecting enterprise boundaries to manage complements and control
platforms, selecting decision-making protocols and building loyalty and commitment.

Delineating the Customer Solution and the Business Model

The first micro-foundation comprises of the technology and the product architecture, selecting
the target market and the designing mechanisms to capture value (Teece, 2009). In Apples
case, they are delivering solution to help educators teach and students to learn (Apple INC.).
Apple designs and develops 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. The Company continuously invests in research
and development. Moreover, marketing and advertising is critical to the development and sale
of innovative products and technologies (Apple INC.). The company believes that by
integrating their solutions, the students will learn faster and easier, achieving higher marks.
Through iTunes the company is supporting mobile learning and real time distribution with
online access to education. Apple continuously develops new technologies to enhance
existing products and to expand the range of its product offerings through research and
development, licensing of intellectual property and acquisition of third-party businesses and
technology (Apple INC.). Some third-party digital content providers require the Company to
provide digital rights management and other security solutions. The company has to develop
or license new technology because certain countries have passed or may propose and adopt

36
legislation that would force the company to license its digital rights management (Apple
INC.).
The company thinks that its products are unique, supports the design, the software and the
hardware. The portfolio also comprises of diverse product architectures like iPhone, iPad,
Mac, iPod, Apple TV, a portfolio of consumer and professional software applications,
the iOS and OS X operating systems, iCloud, and different accessories, services and
support offerings. Moreover, the iTunes Store, App Store, iBooks Store, and Mac App
Store are also offered by Apple (Apple INC.).
A viable business model, design and product specification needs to be in place so Apple can
deliver value. It is possible for the managers to understand how much the customers are
willing to pay for the products and they can transform it into profit (Teece, 2009). In order to
estimate the cost structure and the potential profit, target potential market segments, choose
the technologies in order to be used and create a value proposition, a business model has been
used (Teece, 2009). The plan is making assumptions regarding revenues customer,
competitors behavior and costs and once it will be implemented, it will define the enterprise
and the way that it reacts on the market (Teece, 2009). Everything spins around how to seize
the opportunity. Apple wants to capture value and this is interconnected with their design of
business. For creating a business model, the enterprise needs available information about the
competitors, customers and suppliers (Teece, 2009). Apple took in consideration different
designs of products, knows the needs of the users and analyzed they value chain in the way
that they know what to deliver when and how.

In order to select the target customers, Apple seized opportunity in small and mid-sized
businesses and education, enterprise and government sectors. They also work with a variety of
indirect distribution channels, like as third-party cellular network carriers, wholesalers,
retailers, and value-added resellers.

All this is done in order to create a buying experience for the customers and to underline that
at Apple, service and education is valuable.

Another seized opportunity is the retail stores. They continuously expand and improve the
distribution capabilities by expanding the number of Apple stores worldwide. Typically for
Apple stores is that they are located at high-traffic locations in quality shopping malls and
urban shopping districts (Apple INC.).

37
At Apple, capturing value is not a problem. Apple retrained around 40% of the gross profits
from the entirety of the value chain on its hard drive-based IPods, even though they do not
manufacture any part of it (Linden et al., 2009). It seems that seizing opportunities is
something that Apples does best since they created and transformed many markets. The case
of the iPhone tells us that Apple is a good example of creating a market. Apple created a
multimedia phone, with a large screen, something that was very new at that time. Moreover,
the company created an intuitive interface for the phone. Besides that, together with the
iPhone, Apple also promotes complementary asset creation with the App Store
infrastructure (Linden, Kraemer & Dedrick, 2009).

The iPod was among their first seized opportunities. With this product, Apple created an
aesthetically appealing portable device with a simple interface. Later on, they introduced the
iTunes Music Store, getting more and more market share. (Linden, Kraemer & Dedrick, 2009)

The iPads case, their newest product, is similar to the iPhones, seizing opportunity wise.
Apple scaled up the iPhones interface to provide a wider multimedia platform with or
without phone functionality. It turned out to be a hit (Linden, Kraemer & Dedrick, 2009).

Selecting Enterprise Boundaries to Manage Complements and Control

Platforms
The second micro-foundation, selecting enterprise boundaries to manage complements and
control platforms focuses on asset specificity, assessing appropriability and recognizing,
managing and capturing co-specialization economies (Teece, 2009). Apples products, the
iPhone, the iPad, the Mac and the iPod are asset specific. The company calibrated the
products in a way that the user gets the Apple experience together with four devices that can
easily be connected to each other, without errors.

Selecting Decision-Making Protocols

At Apple, selecting decision-making protocols comprises of avoiding decision errors. Risk
needs to be taken into consideration. The Apples operations and performance depend on
global and regional economic conditions.

The global and regional economic conditions pose a risk as consumers and businesses limit
investment in response to tighter credit, higher unemployment, financial market volatility,
government austerity programs, negative financial news, declines in income or asset values
and/or other factors (Apple INC.). The economic conditions can influence the company in a

38
negative way because it is a risk that the demand for Apple products will drop. A decision
error could be not to adapt the production to the market needs these days. Another decision
error would be not to align the product prices to fuel and other energy costs, conditions in the
real estate and mortgage markets, unemployment, labor and healthcare costs, access to credit,
consumer confidence, and other macroeconomic factors affecting consumer spending
behavior. All these risk factors need to be taken into consideration when avoiding decision
errors (Apple INC.).

The markets where Apples products compete are highly competitive due to aggressive price
cutting and resulting downward pressure on gross margins, frequent introduction of new
products, short product life cycles, evolving industry standards, continual improvement in
product price/performance characteristics, rapid adoption of technological and product
advancements by competitors, and price sensitivity on the part of consumers. It means that the
company needs to compete at a high level. A possible decision error could be not to introduce
the innovative new products and technologies to the market. In order to avoid risks and error
decisions, the company must make significant investments in research and development to
keep up with the market and the competitors (Apple INC.).
Selecting the decision-making protocols is very important at Apple due to the importance of
addressing risks through avoiding errors and recognizing the inflexion points in the business
(Teece, 2009).

It is very important to avoid not being innovative at Apple. It means both creating innovative
products and selling them in the same way. The products also need to have attractive margins,
otherwise the competitors will take over. Another risk is having all the Chinese manufacturers
as competitors because they tend to get inspired from Apples designs. Apple needs to decide
to straighten companys intellectual property, which is also the Companys ability to maintain
a competitive advantage. This could also be an inflection point due to the gravity of copying
the design (Apple INC.).

Another inflexion point for Apple can be now, when consumers and businesses postpone
spending in response to tighter credit, higher unemployment, financial market volatility,
government austerity programs, negative financial news, declines in income or asset values
and/or other factors (Apple INC.). When the budgets are tight, Apple needs to reconfigure the
business model so it can be adapted to the markets needs.

39
Apples products and services are competing on very competitive global markets, where there
is a lot of pressure on gross margins, frequent introduction of new innovative products, short
product life cycles, evolving industry standards, continual improvement in product
price/performance characteristics, rapid adoption of technological and product advancements
by competitors, and price sensitivity on the part of consumers (Apple INC.). An inflexion
point here would be if the company would not be able anymore to compete in an aggressive
way. It is not enough to believe in your own products and in your unique design. That is the
reason why one of the most important decisions in order to avoid errors is to be focus on
continuously innovation.

Another inflexion point for Apple is that they are only allowed to use OS X for making the
hardware, which has a minor market share in the personal computer market. The market is
dominated by Windows, which offers lower prices, a friendly interface and accessibility
(Apple INC.). In order to avoid decision errors, Apple is focused on continually improving the
Mac platform to maintain its functional and design advantages. Moreover, they even work on
making the OS X free to download, just like Windows. This is going to be a very good seized
opportunity in the hope of getting more market share.

The computer and software industry is a very volatile one, so Apple constantly needs to
develop new products and enhance the existing ones to effectively stimulate customer demand
for new and upgraded product (Apple INC.). An inflexion point here could be if they
introduce a new product that is not sustained by Apps. In other word, the customers would
reject the product because it would not be customers friendly. That is why, the decision
should be taken around developing both the product and the Apps for it, so they can release
both in the same time.

Building Loyalty and Commitment

Building loyalty and commitment comprises of demonstrating leadership, effective
communication and recognizing the values, culture and the non-economic factors (Teece,
2009). Third-party software applications and services dictate the market trends. That is why
Apple needs to keep the good relationship with the third-party developers, so they will
continue to develop and maintain software applications and services for the Companys
products (Apple INC.). Here the communication in between companies and relationship
values are very important.

40
Regarding the Mac products, the availability of third-party software applications and services
depends on the developers perception and analysis of the relative benefits of developing,
maintaining, and upgrading such software for the companys products compared to Windows-
based products. In this situation, Apple needs to have a good share of the global personal
computer market so the developers will not question Apples products (Apple INC.).
Moreover, Apple needs to demonstrate leadership and underline the companys values in
order to attract the best developers. iOs devices rely on the continued availability and
development of compelling and innovative software applications, which are distributed
through a single distribution channel, the App Store (Apple INC.).

The devices are also subject to rapid technological change, and, if third-party developers are
unable to or choose not to keep up with this pace of change, third-party applications might not
successfully operate and may result in dissatisfied customers (Apple INC.). Here, Apple relies
and depends on the developers and on their perception, so they will not move to another
platform.

Apple depends on its key personnel because the success of the company is achieved due to
them. The key personnel is represented by the Chief Executive Officer, executive team and
other highly skilled employees (Apple INC.). In Silicon Valley there is competition on getting
the best experienced personnel in the technology industry. Apple also needs them, but the
company knows how to keep and reward them, so they stay with the company. The personnel
is also attracted by the companys values and their own values are respected in the company.

5.2.3 Summary of Seizing

In order to seize the opportunities arisen, Apple needs to constantly be focused on product
development and innovation. Moreover, the business plan will define the architecture of the
business, putting an accent on sales. Because the company creates a selling experience to the
customer, sales needs to be innovative as well. The cases of the iPhone, iPad and iPod
show how opportunities can be seized in a profitable way in order to achieve success. When
being focused on seizing opportunities, seeing the risks and the inflexion points plays a vital
role. When Apple knows itself where the company is on a risk scale, they can avoid them in
order to avoid decision errors.

41
5.3 Managing Threats & Transforming
Enterprise growth and profitability can be reached through both the determination and
calibration of technological and market prospects and the figuration of business models.
Profitable growth will then be followed by enhancement of enterprise-level resources and
assets. To accomplish sustained profitable growth and to adapt to market and technological
change a company should be able to recombine and to reconfigure assets and organizational
structures while the enterprise grows. Through reconfiguration evolutionary fitness can be
preserved and inappropriate path dependencies might be avoided. However operational
efficiency and success requires some level of routine, which facilitates continuity until there is
a diversification of the environment. The modification of routines is critical as it is costly and
primary leads to anxiety within an enterprise if the organizational culture is not going to
approve high levels of internal change. The degree of change depends on the nature of
innovation. When innovation is incremental routines and structures are very likely to be
assimilated gradually or in steps when it is radical the organization should be entirely
reorganized with a completely structure containing an absolute different set of procedures.

All established enterprises will be confronted with several complications over time such as
shirking, free riding, the strategic manipulation of information and internal complacency.
These problems and the protection against malfeasance and mismanagement in general can be
managed through assets that the enterprise acquires while growing. Furthermore, the
accruement of hierarchies, rules and procedures can also turn out to be problematical for
enterprises when they restrict certain interactions and behaviours that are necessary for the
positive development of an organization. It is with the exception of very solid environments
where such rules and procedures often require rearrangements.

Traditional management advocates strong hierarchies with the minimum of three levels of
management: top, middle and lower. Where control is executed from the top until the bottom.
Though within centralised structures strategic decisions exerted from the top get isolated from
marketplace realities. As the employees further down in the hierarchical structure of an
organization are the once who have direct contact to the customers and not the top managers.
Thus systems and rules established to conduct many layers of organization tend to constitute
structural rigidities, which lead to a lower performance in customer and technological
responsiveness. This can be prevented through decentralization as it enables the top a better
insight of technologies, the companys customers and the market in general. Decentralization

42
with the combination of top management leadership skills will sustain dynamic capabilities
(Teece, 2009).

5.3.1 Decentralization and Near Decomposability

Decentralization ensures flexibility, which is especially necessary in expanding enterprises as
it enables fast decision making processes. Due to the diversification of the power of decision
among different mangers, who observe different information and control various decisions. In
companies with a single central decision maker every issue needs to be communicated to one
person, which decelerates organizational processes and will lead to the eroding of
responsiveness in the long run (Teece, 2009).

With Steve Jobs as the CEO of Apple the company was incredible centralized around him as
the final decision maker. Thus all visions and innovations came from the top and were going
down through the organization, which is organized functionally. When John Scully became
CEO of Apple in 1984, the company was organized in the following products: Apple II,
Apple III, Lisa, and Macintosh - being entirely incompatible with one another. This facilitated
faster decision processes and strong cross-functional coordination within each product group.
However due to little integration across the single product groups the structure failed to
exploit scale economies within functions. Therefore, Apple was reorganized by functional
lines for achievement of control, reduction of costs and accomplishment of a more coherent
product strategy (Grant, 2010). Further information about Apples organizational structure
will be given in the part Governance.

The enforcement of the multidivisional form instead of the functional structure enables
greater accountability of managerial decisions. The multidivisional form facilitates to
recognize opportunities and threats rapidly as it involves the decomposition and the
devolution to decision rights to quasi-independent profit centres. While functional internal
structures prevent managers from long-run strategic issues because they also have to deal with
day-to-day problems, which would be diluted by the multidivisional form.

With a collaborative non-hierarchical management style firm-specific economies of scale and

scope are easier to be captured, which is further assured by the establishment of councils and
other integration forums. These forums enable middle management to conduct and undertake
tight financial controls and performance based reward systems. Performance can further be
improved through modern human resource management techniques including delayering,

43
decentralization of decision rights, teamwork, flexible task responsibilities and performance-
based rewards.

Furthermore, according to the open innovation model of Chesbrough it is beneficial for an

enterprise to count on a distributed model of innovation involving the access and the
integration of technology developed by others. Research productivity can be enhanced by the
involvement of knowledge from external sources, this was measured by Henderson and
Cockburn (1994) trough patent counts. The significance of knowledge integration skills can
further be demonstrated by the investigation of Iansiti and Clark (1994). They found a
connection between positive enterprise performance and the integration of capabilities (Teece,
2009) such as the investment of Apple in Microsofts capabilities in 1997 described in
Cospecialization.

All in all organizational units should have extensive autonomy especially in rapidly changing
environments to enable fast decision processes but at the same time they should persist to
activities that must be coordinated. Accomplishing this balance is denoted by near
decomposability (Simon; 2002) and its conduction is a substantial microfoundation of
dynamic capabilities (Teece, 2009).

5.3.2 Knowledge Management

Intangible assets are very important for an enterprise as they enable learning and the
attainment of new knowledge, which are relevant for a companys success. Learning can be
shown through different types such as experiential, vicarious, individual and organizational.
The integration and combination of assets, focusing especially on the combination of know-
how within the enterprise and between different enterprises, is significant for the systems
and networks of a company. Thus creating learning, sharing and integrating knowledge can
be seen as a key micro foundation of dynamic capabilities. Enterprise have to pay a special
attention to maintain their competitive advantage of tacit know-how, which often leaks out
even though having a certain amount of natural protection and being difficult to imitate.
Hence companies have to make sure not to lose their intellectual property rights (Teece,
2009).

In 2012 Apple sued against Samsung because of a design patent, which was disregarded by
the Korean manufacturer with the product Galaxy Tab 10.1. This product was seen as one
of the main rivals to Apples iPad, which controlled 63 percent of the tabled market in 2012
with 13.6 million units being sold between January and March. The US court found that

44
although Samsung has a right to compete, it does not have a right to compete unfairly, by
flooding the market with infringing products. Therewith the sale of the Samsung Galaxy
Tab 10.1 was blocked in America. According to this Samsung said in a statement: Should
Apple continue to make legal claims based on such a generic design patent, design innovation
and progress in the industry could be restricted. Nevertheless Apple won this complaint and
had to pay $2.6m for the patent (International Business Times, 2012).

Apple especially has to fight against rampant piracy in China, where their products are
imitated and sold for low prices. With the opening of a completely faked Apple store in 2011
by an enterprising entrepreneur in the southern Chinese city of Kunming, China has taken its
imitativeness to a new level. The store was designed as the original one with the classic
winding staircase and the upstairs sitting area, but it was poorly made and the walls werent
painted properly. Due to a member of staff the store is selling the real Apple products even
tough Apple has only 13 authorized resellers in Kunming but no official store. He further
stated that there is no Chinese law that says that they cant decorate their shops the way they
want to decorate it. It is unsure how the shops receive the original Apple products one
possibility is that they bought them from retail outlets in China and elsewhere. This could
cause damage for Apple as the faked store is not offering the high standards like the original
Apple stores do and so could lead to an image decrease for people who take the fake store for
a real one (BUSINESS, CANADA, 2011).

Surprisingly, Apple has not done anything about this revelation yet, supposedly because the
company has realized that it could also benefit from such faked stores. Given that they help to
sell Apples products and increase the popularity of its brand in China for free. Thus the best
strategy to build up market share in China quickly seems to be to sell as much products as
quickly as possible before counterfeiters can enter the field. This objective can be
accomplished by more retailers, where even the unauthorized ones can play a critical role.
Maybe Apple is able to learn a lesson from Microsoft, which tried to enter the complex
Chinese market with traditional strategies. But instead of earning money, it merely
encouraged rampant copying leading to an estimation of 90 percent of Chinese Microsoft
software as being bootlegged. Apple seems to have lost the control of its business in China
once it entered the Chinese market. Thus one of the main challenges besides trying to keep as
much control as possible is to make the process of not being fully in charge of its business in
China work for the shareholders (Chang, 2011). However Apple has to protect the iconic
Apple logo and other intellectual property. Hence in 2011 Apple managed to obtain 40 new

45
patents in China, which mostly cover aspects of Apples mobile phones. These patents may
further have a positive effect on Apples very positive growth in the Chinese market,
especially concerning its iPhone business (Etherington, 2011).

However Apple also has to struggle with intellectual property right claims against itself or
litigation based on allegations of patent infringement, which are time-consuming, disruptive
to the companys operations, distracting to management and have even increased as the
company has grown. This is especially critical concerning Apples cellular enabled products,
which are facing a hard competition with mobile communication and media device companies
that are possessing essential patent portfolios. Apple not only has to defend infringement
actions within the U.S. and before the U.S. International Trade Commission but also
internationally in Europe and Asia. These processes can be very costly and cause substantial
damages. Apple points out that the harm could even be so broad that the company is
temporarily or permanently prohibited from marketing or selling certain products through
injunctions. In the long run a high degree of litigations can affect the financial condition and
operating results of Apple by disgorgement of revenue or profits. This development could
push the company in future to enter licensing agreements, although they might not be
obtainable on acceptable terms and cant ensure that litigation will not occur. Additionally,
licensing agreements would increase the companys expenses (Apple INC., 2013).

For example in 2011 the Smartphone maker HTC field a new patent infringement complaint
against Apple with the United States International Trade Commission (ITC). The HTC
Corporation general counsel Grace Lei stated that HTC is taking this action against Apple to
protect their intellectual property, their industry partners, and most importantly their
customers that use HTC phones". With its complaint HTC aimed at the patent for a range of
functionality being embodied in Apples Mac computers and mobile devices that are essential
to user experience in the eyes of HTC. However this complaint against Apple was lost
(International Business Times, 2011).

5.3.3 Cospecialization

Cospecialization is highlighted as the key dimension of fit in the dynamic capabilities

model recognizing that strategic fit needs to be attained constantly and is especially
important for seizing and reconfiguration. Rapidly changing environments require for
continuous realignment, which can be achieved through new innovations. Many sources stress
that innovations are rather substitutes than complements that may be cospecialized to each
46
other. As an example Schumpeter (1934) disregarded complementarities completely by
emphasizing that imitators who are willing to produce substitutes harm successful
innovations. However complementary innovation and complementary assets are particularly
meaningful to industries in which innovation is described as cumulative. Complementarities
that are related to cospecialization between technologies and other parts of the value chain are
not rare but until now barely analysed in economic analysis (Teece, 2009).

Apple differentiates itself through the integrity of user-experience, which it is famous for.
Thus Apple strives to offer the integration of the entire solution inclosing the hardware
(iPhone, iPad, Mac, and iPod), software (iOS, OS X and iTunes), online services, and
distribution of digital content and applications (iTunes Store, App Store, iBooks Store and
Mac App Store). Trying to offer most of the complementarities for its products by itself and
therewith offering the entire solution is Apples business strategy. The expansion of
platforms to discover and deliver third-party digital content and applications through the
iTunes Stores is part of this strategy. The iTunes Store being composed of the App and the
iBooks Store enables customers to get access to applications and books through both a Mac
and a Windows-based computer or through iOS dvices (iPhone, iPad and iPod touch).
While with the Mac App Store customers can download and install Mac applications (Apple
INC., 2013).

Apple is not sharing any part of the user experience, like co-branding or app placement, with
carriers. Android on the contrary allows carriers to sell apps through their own app stores and
is therewith gaining a portion of app revenue. Furthermore it is willing to let carriers pre-load
apps and is amongst others open to co-branding on handsets (Bernstein Research, 2010).
However Apples offerings are complemented through the development of third-party software
and hardware products. Furthermore to attract and retain customers the company not only
enhances and expands its own retail and online stores but also its third-party distribution
network (Apple INC., 2013).

Cospecialization approves the offerings of differentiated products or unique cost savings and
results in thin markets, as the assets are not easily bought and sold. Due to the thin market
environment, which is surrounded by specific assets, competitors are not able to acquire the
same assets expeditiously. The combination of assets can create special value especially when
an asset owner is not aware of the value of its assets to another party that possesses assets
whose value will increase through combination. Recognition of the needs and opportunities
for the investment in cospecialized assets is essential to dynamic capabilities and depends on
47
many factors such as transaction costs. An enterprise cannot only create special value by
obtaining cospecialized assets externally but also internally by combining cospecialized assets
of its own (Teece, 2009). In 1997 Apple invested in Microsoft Office, being a copecialized
asset for Apples Macs, with a $150 million investment deal that resulted in a psychological
boost to companies and customers about Apple (Nair/Leng, 2012).

Furthermore the coordination and timing of R&D investment and alliance activity are crucial
for a business success (Teece, 2009). In 1993 the Business Systems Division of Apples
Computers, Inc. has formed a coalition with 11 technology vendors to develop product design
and to enhance the capabilities of Apple Search a search and retrieval server software. The
development alliance was made with software houses as well as online news services and CD-
ROM publishers. With this coalition Apple increased the value of Apple Search, which was
designed to provide both access to unstructured information in a client/server environment
and a way to present that information that is personalized for individuals (Rogers, 1993).

However to work with other manufactures also creates a certain dependency that could have a
negative impact on Apple. Thus the company is depending on component and product
manufacturing and logistical services provided by outsourcing partners, who are mostly
located outside of the U.S. Outsourcing the production and services to some degree lowers the
operating cost but at the same time reduces the companys direct control over production and
distribution. This diminishes the control over the quality or quantity of products or services
and restricts the companys flexibility to respond to changing conditions. In the event of
product defects Apple remains responsible to the consumer for warranty service and has to
absorb the faults of its distributors. Failures of Apples partners in performance may further
have a negative impact on the companys cost or supply of components or finished goods
(Apple INC., 2013).

5.3.4 Governance
The governance and incentive structures within enterprises are designed to afford learning and
the generation of new knowledge, where intangible assets are significantly important.
Governance procedures are influenced by outsourcing of production and diffusion of joint
development processes, which are required for the monitoring of the transfer of technology
and intellectual property. The transfer of technology increasingly not only take place inside
the enterprise but also across enterprise boundaries. The flow of technology and the protection
of intellectual property rights from misappropriation is enabled through government

48
mechanisms and essential to dynamic capabilities. To achieve asset combination and
reconfiguration is a governance ability, which is relevant to dynamic capabilities as well.
Where reconfiguration is likely to be achieved through decentralised structures that forward
near decomposability (See part Decentralization and Near Decomposability).

A part of governance issues are related to incentive alignments, which are comprised of
incentive design issues and a comprehension of agency. Agency theory has long stressed that
the division of ownership from control leads to interest alignment problems especially around
management compensation.

An enterprise always has to be aware whether its top management team is sufficiently
dynamic, if this is not the case and if they show weak sensing, seizing and reconfiguration
capabilities, the CEO and other members of the top management team have to be replaced.
Managerial capacities are characterized amongst others by the ability to craft work
specifications, attract and retain more committed talent, design reward systems, develop
corporate cultures, and blunt the formation of coalitions (Teece, 2009).

First of all it has to be mentioned that even employees at Apple have little idea of how the
company is actually organized as Apples organization is one of the most closely guarded
secrets.

Apples functional structure consists of all levels of management from upper to lower
including line managers whose work directly accounts for the production of goods and
services. Line workers from the different departments such as marketing, accounting, human
resources and legal services are supported by the special technical expertise of staff mangers.
The company has both functional managers being in charge for one area of activity and
general managers whose responsibility pertains complex areas (Kirkpatrick, 1998).

Even though the specialization being emphasized by functional structures leads to operational
efficiencies and improves productivity levels, there are a lot of disadvantages of functional
structures such as (Ford/Randolph, 1992):

High degrees of formalization and standardized ways of operation may lead to rigidity
Inflexibility and slowness of decision making processes
Poor horizontal coordination within departments
Increased level of autonomy complicating the efficient coordination of all units
Comparison of functional units might lead to infightings

49
With its organizational design Apple is creating a geographical structure, which allows their
expertise to focus on different cultures and requirements. Apple can also be seen as a learning
organization as it continuously changes and improves and values issues such as information
sharing, teamwork, participation and learning (Kirkpatrick, 1998).

Apples greatest strategic advantage is that they make their own hardware and software.
Having the control of the end products as well of the component parts makes them to a
vertical integration company. This integration has enabled Apple to be in power of the pace
for mobile computing. However, conglomerates are hard to manage especially when an
enterprise tries to integrate more than one line of business, as it is likely to become unfocused
and lose its ability to coordinate (Wharton, 2012).

Apple was losing focus when it tried to support 15 product lines, which lead to Jobs decision
to stop producing printers and Newtons. He refocused the company on just four product
categories: desktop and portable Macintoshes, for professionals and consumers (Kirkpatrick,
1998).

The design of Apples governance structure is to be a working structure for principled actions,
effective decision making and appropriate monitoring of both compliance and performance.
The Chief Executive Officer (CEO) is overseen by the Board and other senior management in
the competent and ethical operation of the Corporation and secures the implementation of the
long-term interests of the shareholders (Apple INC., 2012)

An array of CEOs influenced Apples identity over the years. They all led the company with
varied strategic approaches. However Steve Jobs is the CEO being combined with Apple the
most. He was one of the founders of Apple and was the CEO from 1976 until 1985 when he
left the company and then came back again in 1997 and maintained the position of the CEO
briefly before his dead in 2011. Steve Jobs instituted a command and control structure which
can be classified as aggressive and it was especially him who has steered Apples narrow
niche market. Jobs didnt like teams of more than 100 members as too large teams can
become unfocused and unmanageable. Jobs is the one who is responsible for Apples
transformation from a PC firm to a promising diversified organization, that has great strategic
flexibility to innovate in the market (Nair/Leng, 2012).

In 2011 Tim Cook, who already worked for Apple for 14 years, took over as the CEO. Cook
is maintaining most of Apples unique corporate culture but with Cook Apple has become
slightly more open and substantially more corporate. It was rumoured that Apple, which was

50
very much centralized around Jobs would be rudderless without him. However the company
does pretty well without him as well with a market value of $140 billion since Cook took
over. Cook brings a completely different tone and attitude to the company being far away
from Jobs obstinacy and partially aggressive manner. With Jobs as the CEO the companys
M&A was basically run by him, which led to too much concentration of this department
around only one person. Today the department has a completely new structure with Adrian
Perica as a head of the department being assisted by three corporate-development
professionals, who are supported by staff. In that way Apple can work on three deals
simultaneously. With Cook Apple is becoming more traditional leading to more MBAs, more
processes and more structure. However as Cook was asked at the Goldman investor forum in
what way his leadership could change Apple and what of Jobs culture he wanted to maintain,
Cook elided the first part of the question and concentrated on the second half: "Steve grilled
in all of us over many years that the company should revolve around great products and that
we should stay extremely focused on few things rather than try to do so many that we did
nothing well." He called Apple a "magical place" where employees could do "their life's best
work (Lashinsky, 2012)."

In the following some of the threats that the governance of Apple might have to deal with are
listed up, as an extract from Apples annual report (Apple INC., 2013):

Negative effect of bad global and regional economic conditions

Exposure to credit risk on the trade account receivable, vendor non-trade receivables
and prepayments related to long-term supply agreements
Confrontation with substantial inventory and other asset risk
Risk of international operations
Quality problems of products and services
Information technology systems that materially damage business partner and customer
relationship (i.e. adversely impact access to online stores and services)
Change of laws and regulations worldwide leading to an increase of Apples costs
Information technology system failures or network disruptions
Expectation of fluctuation of Apples quarterly revenue and operating results
Credit risk and fluctuations in the market values of its investment portfolio
Losing its position as the trailblazer in the highly competitive markets Apple is dealing
with being subject to rapid technological change => Apple must further manage
frequent product introductions and transitions
51
 Marinating the balance between the investment in new business strategies and
acquisitions and the concentration on the ongoing business

Figure 9: Organization Structure of the Company (Apple Inc., 2012)

6. The Business Model Analysis

The essence of business model is in defining the manner by which the enterprise delivers
value to customers, entices customers to pay for the value, and converts those payments to
profit (Teece, 2009). In other words, it resembles managements hypothesis and organization
of these activities in incumbent corporations such as, in our case, Apple Inc. The company
employs several divisions of business models, respectively. There are slight differences

between various product lines: iPhone, iPad, Mac, iPod, Apple TV, and consumer

and professional software applications: iOS and OS X operating systems, iCloud, and a

variety of accessories, services and support offerings such as: iTunes Store, App StoreTM,
iBooks StoreTM, and Mac App Store (Apple Inc, 2012).

52
6.1 Past Reconfiguration of the Business Model
Give away the razor handles, make money on the razor blades (Taylor, 2013). Numerous
companies have been build upon the above mentioned business wisdom for much of the 20th
century. By providing the core product for low-cost or discount price and subsequently
overcharging its loyal customers for add-ons.

But concerning Apple, their business model has been done the other way since the adoption of
iPod in 2001. The device was far more expensive than those days MP3 players but
immediately caught the market in great volume with its value added features such as design,
performance and usability. After two years, Steve Jobs introduced the iTunes Store, charging
very little for a single song. Ever since this visible modification in the companys business
model occurred, many more of them have been added. Never discounting its luxury items:
Macs, iPads or iPhones but instead providing the customers with supplements such as
applications, software (Mac OS X Mavericks, iOS), iWork and iLife for free (Taylor, 2013).

The appliance and therefore reconfiguration of BM should be a constant procedure

incorporating trial, fail, experimentation and learning process. Redesign of BM often desires
leadership, consumer-centric design approach, compelling vision and willingness to
investigate. When Steve Jobs conceived the idea of Apple specialty store, there was only one
trial built, which then explored possibilities such design and sense of this configuration and
lastly, spread throughout the world (Taylor, 2013).

6.2 The Business Model Canvas

Apples focus is upon the products uniqueness, which is shown in its business strategy and
furthermore reflected in their business model. In the following parts a map of Apples current
Business Model is pictured.

6.2.1 KEY PARTNERS

The drive for maintenance of key partners is the optimization and economy of scale (resulted
in outsourcing) and acquisition of particular resources and activities where Apple acquires
know-how, access to customers and further resources such as manufacturing plans, licensing
(of some package developed by others, in Apples case for instance Microsoft office) and
others.

53
Manufacturers
The manufacturers in Apples supply chain network are dedicated to the company, as the
products manufactured are very unique and some of the components left with high degree of
asset specificity. Therefore the company relies on few suppliers in order for them to
concentrate its skills. Simultaneously this relationship opts for the fact that manufacturers of
spare parts and accessories are not changed frequently, if at all. For example Broadcom
receives multi-touch screen controllers from Apple, which then reconstructs into the ordered
specifications. Another contract manufacturer, Intel or the one vastly spelled by media for the
controversial working conditions of its employees is Foxconn. These suppliers of components
and manufacturers of Companys hardware products are subjected to outsourcing, mainly
located in Asia.

App Store Developers

Simply anyone is allowed to build an application for Apple platform, the App store. Every
week, 95% of submitted apps are confirmed and after this event appear on the App store. The
rest is rejected due to some kind of incompatibility with Apples rules. By January 2013,
there were over 700,000 apps available in the App Store. Being provided by companys iOS
and Mac Developer Programs support for app development, developers keep 70% of the retail
price of each app sold by Apple (Burrows, 2010). Apple sees the apps as a supplement to its
products and therefore the healthy relationship with app developers is crucial for further
sustainable advantage.

Cellular Service Providers

Carriers in this case are incorporated into B2B retail where they offer the product witch has
the highest revenues iPhone for free or on discount prices in return for long-term contracts
with their clients. This was the end consumer is provided by a chance of a comfortable deal
with its carrier and in addition gaining its popular device. An example of this kind of cellular
service provider could be At&t.

Publishers
Book publishers, and online news services such as BBC, The Guardian, New York Times,
Wall Street Journal create a group of partners allowing the Company to offer the papers and
books in a digital format for buying into the iTunes library. The cost structure is designed as
follows: charging an individual consumer very little but going for volume instead.

54
Music, TV & Movie Industries
The same or similar cost structure is implemented for music and movie industry. Apple has
completely reorganized the music business model after the introduction of iPod in 2001 via
development of iTunes platform. If the Company wishes to continue providing its consumers
with these attributes it should thrive and nurture its partnerships with these industries (Apple
Inc., 2012).

6.2.2 KEY ACTIVITIES

These are the actions, which create and deliver value propositions, nurture customer
relationships and are subsequently derived from key resources of a company.

Design
Apple is significant for its truly remarkable design of the products. The company has literally
pioneered the graphical user interface design and furthermore disrupted the computer
industry. After Steve Jobs return to the company, the resources have been used and resulted
into introduction of the popular iMac. Design is considered as one of the companys key
activities even nowadays as this ability is continuous in development and has been present at
the emergence of each so-far created product. Design also accounts for highly perceived
customer value proposition.

Software development
By integrating the companys hardware and software, innovation and development results into
a high quality product with progressive usability. The Company continues to develop new
technologies to enhance existing products and to expand the range of its product offerings
through research and development, licensing of intellectual property and acquisition of third-
party businesses and technology. Total research and development expense was $4.5 billion,
$3.4 billion and $2.4 billion in 2013, 2012 and 2011, respectively (Apple Inc. 2012).

Manufacturing
Apple designs, manufactures or produces its products in superior quality. Therefore
manufacturing is one of their key activities and is also closely tied to quality control. However
the corporate headquarters are in Cupertino, CA the most manufacturing still happens in
China.

55
Quality control
Apple pursues differentiated strategy involving the great quality of its products therefore
quality control is highly relevant before the goods reach distribution channels and get further
to the end consumers.

Platform
Apple as a platform operator the App Store aggregates the deals, takes over the provision,
conducts the marketing and is in charge of the payment processes. Also by retailing the apps,
curating creation and implementation of rules, incorporation of adverts which must be used
by developers in the applications the Company brings into existence the most vital community
in the world (Apple Inc., 2012).

6.2.3 KEY RESOURCES

Human
The Apples employees act and live in accordance to its core values of existence and
corporate culture. Therefore they are encouraged to see daily work as an adventure and
themselves as gurus solving customers problems. The Company highly relies upon the
employees innovative skills, technical competence and marketing abilities. Pursuing training
and retaining on a large scale, Apple is more capable of exploiting its human resources in and
unobtrusive way. The workforce is organized in teams where the individual strengths are
nurtured in order to bring benefit to the company.

Leadership packed in vision, purpose and motivation has been one of the most influential
motivators since Steve Jobs returned back to the Company.

Intellectual
The Company is a frontrunner in the PC and media devices revolution, a technology leader.
They have acquired a large portfolio of patents and copyrights all over the world for its logo,
software and hardware, services products, mostly protecting innovations deriving from
Apples research, development and design.

Furthermore, the strong brand of Apple that has been built and sustained on basis of its value
propositions and marketing activities is a crucial resource in further competitive advantage.

56
Physical
Physical resources of Apple are the manufacturing facilities and machinery (acquired through
its partners), buildings, vehicles, systems and distribution networks (Apple Inc., 2012).

6.2.4 COST STRUCTURE

The Company sets the price for its products, therefore is classified as a price maker dictating
the price on the market. Simultaneously, as a result of shortage upon most components and
high degree of competition in the markets for mobile communication and media devices there
is the occurrence of significant pricing fluctuations, which might directly impact Companys
cost structure.

The cost structure implemented for Apple Inc., varies in accordance to product portfolio. The
company bots, prices aggressively dependent on the premium value propositions it attains for
its core products iPhone, Mac, iPad, etc. But also pursues economies of scale with cost-
driven approach and therefore charging reasonable price but going for volume as it pictures in
the iTunes store for instance (Apple Inc., 2012).

6.2.5 VALUE PROPOSITIONS

Value propositions are questioning which one of our customers problems we are solving,
what value do we deliver or which customer needs do we satisfy. The Apples features
classify as qualitative. The Apple products are differentiated on product uniqueness with their
design, performance, brand and usability. The above-mentioned attributes lead to more
dedicated and loyal customer base, higher profit margins and new sources of sustainable
competitive advantage.

Design
The unique design of Apples products adds significant value to the customers. Moreover, it
allows successful differentiating from other rivals/competitors.

Performance
The user experience changes the world and enables better life.

Brand/status
As a supplement, Apple also fully communicates the quality and effectiveness of its products
straightforward to the consumers. The company differentiates upon the high brand equity,
brand image.

57
Convenience/Usability
As the products are user friendly, easy to use for regular purposes this encompasses
consumers in buying their handy device made for life simplification (Apple Inc., 2012).

6.2.6 CUSTOMER RELATIONSHIPS

The Company believes in the essence of demonstration of advantages found in its products
(hardware and software integration and unique features) and presented to the end customer
through direct contact. The aim is to attract new and retain existing customers via high-quality
sales, after-sales support experience embedded in customer relationship. The customer
relationships are provided by personal assistance and that is via online support: e-mail opting
for technical assistance. Next to which stands self-service where the customers are provided
with information about procedure, are guided but solve the problem on their own. Through
AppleCare product support and service, the consumers are provided by assistance built in
software products, product manuals and an application Protection Plan (Apple Inc., 2012).

6.2.7 CHANNELS
The company offers products through the traditional retail channel, playing the role of
wholesaler along being the cost plus retailer. While also selling direct to consumers through
stand-alone retail stores and an online store. Moreover, some of the products are displayed via
third-party cellular network carriers.

Apple Retail Stores, iStores

The branded stand-alone Apple retail stores iStores offer solely their products, service and
Apple product supplements (adapters, headphones, converters, etc.). This particular channel is
very popular among clients enabling them not only buy but also to interact and test the newest
products. Gaining the valuable service of advices by the Apple personnel and a real touch of
the products results in a unique consumer experience and a direct reach to the end customer.
This particular channel appeared to gain popularity. Moreover, through this particular channel
the company is capable of controlling the entire compelling customer experience shelf
placement, sales support and customer service. The company-owned retail stores are
positioned in crowded locations, leaving room for marketing and knowledge spreading
awareness.

58
Apple.com
Ordering directly from the Companys website is another great attribute to the user experience
of Apple.

Other retailers
The Company also employs a variety of indirect distribution channels, such as third-party
cellular network carriers, wholesalers, retailers, and value-added resellers.

App Store
The App Store is a virtual market, a virtual platform designed by Apple or an additional
software providing updates for the products. Moreover, it is a place where the company
allows self-programmed applications to be sold (downloaded) for an individual price. Third
party developers this way contribute into a more variety of capabilities of Apple products
resulting into greater benefits for customers (Apple Inc., 2012).

6.2.8 CUSTOMER SEGMENTS

Customer divisions are created so the company identifies segments/fractures of the people
they would like to target. However when it comes to Apple, as a company selling consumer
electronics the main focus is on mass market, focusing on vast group of customers with same
needs and desires. As a consequence, Value Proposition, Distribution Channels and
Relationships are not fragmented. Furthermore, Apple exceptionally uses multi-sided
platforms serving interdependent customer segments.

While being the cost plus retailer Apple focuses on segmented mass market, offering quality,
service and selection to the end customer. The company accounts for all kinds of customers
while selling to consumers (B2C), small and mid-sized businesses (SMB), and education,
government (B2G) and enterprises. Furthermore, the company uses B2B in order to extend
brand merchandise using affiliate products - merchandize (applications, iTunes), product
accessories (spare parts) and enlarge distribution channels (operators, online stores and device
resellers) (Apple Inc., 2012).

6.2.9 REVENUE STREAMS

While opting for significant value delivery for customer, the company maintains comfortable
margins. The way Apple generates financial capital from the customer segment is through
recurring revenues which means that customers pay several times over the course of a time

59
period. The main revenue streams are sale of products, media sales/licensing, and rental and
subscription fees. (Apple Inc., 2012)

60
7. Conclusion
Apple uses a very interestingly designed Business Model. Its main idea revolves around the
highest value delivery possible for its consumers and it works very well. The main concept is
that the Company offers high end products as luxury technological advancement items for
which the customer is willing to pay relatively high margin. This happens due to Value
Propositions listed in previous subchapter, the value that Apple delivers to the customer along
the product offering itself. Moreover, the company by either its Key Partners or Key
Activities and Resources arranged a whole range of supplementary/additional products which
come along the luxury items in a package, at discount price or completely for free. The
approach might be also listed as reverse razor handles approach to business modelling. As
mentioned in previous parts, Apple maintains close Relationships with its mass-market
customer segment also through the stand-alone retail stores which themselves provide for
value added.

On the other hand Apple as well, as other companies face various threats found in the external
environment. These are listed in Dynamic Capabilities 3rd box. As a consequence, there is the
need for constant Business Model adaptation and reconfiguration. The design itself will
always mean to exploit opportunities and mitigate threats. Apple however is not only a
reactive but also a proactive enterprise willing not only to search for opportunities but also
create the environment, exploring and implementing novice markets with new solutions
through constant continuous and aligned innovation. Apple Inc. has created and transformed a
series of markets in the past naming, cell phone industry into smart phone industry or
computer industry into personal computer industry. The reconfiguration of Apples business
model happens within the leaders and/or senior management of any corporation.

Apple Inc. combines some elements of sustaining innovation with creation of a new market
space. The new-market disruption however appears on a larger scale. The secret for Apples
sustained competitive advantage is continuous sensing, seizing and management of
opportunities via both product and business model innovation. The customer is always on first
place also through responsible business practice. Apple as a visionary organization with its
highly motivated human capital, decentralization and top management leadership skills will
sustain dynamic capabilities. Leaving a balance between organizational units and autonomy
has proven valuable to the corporation.

Apple exploits all its resources and is driven with vast amounts of creativity in its prospects
and fight of threats found in external environment.
61
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