Tuesday, September 4, 2012

How is Apple winning the price war?

Apple is little known for its price strategy among consumers than its brand.
I summarized below some examples of Apple’s competitive pricing:
1) Apple accepted handset subsidies from carrier partners, therefore reducing the cost of iPhone to a couple of hundred dollars.
2) Apple priced its iPad @$499 plus. As per John Gallaugher, an associate professor of information systems at Boston College, “ It was a very competitively priced device”.  Its biggest competitors could not undercut the prices for a long time.[1]
3) Apple has been aggressively pricing its Macbook Air and Notebook to increase its market share.
It uses the following ways to defend its pricing:
1) Price Decoys: Apple uses some of its products as decoys or reference to encourage customers to buy its other more expensive products. For example $499 iPad looks much better when compared to its cheaper cousin, which is priced at $399, because of enhanced capability.
2) Establish a high reference point: Apple has creatively used the concept of “SALE”. It introduces its products at sky high prices and then rapidly cuts prices, letting the consumer believe that the purchase is a steal!
3) Bundling: Apple is a perfect example of bundling. It bundles the hardware and software components. It sells hardware at a cheaper price only to realize profit by software/application sales [3].
But, as per Bloomberg, New York times and Forbes research the most significant tactic to consider is Apple's supply chain management:
We have known Apple for its cutting edge technology, for its stylish products, for its brand and community. Few of us know Apple for its ingenuity in supply chain management . 
As per Matthew Davis, a supply-chain analyst with Gartner, “They have a very unified strategy, and every part of their business is aligned around that strategy”. He has consistently ranked Apple as the world’s best supply chain for 4 years since 2008 [3].
Apple’s supply chain management tactics began in 1997 when Steve Jobs bought all the available holiday air freight space to ensure timely delivery of iMacs during Christmas. This locked capacity resulted in denied air transport for rival  Compaq. Apple also used air transport to ship music players from China to consumers in US. It covered the overhead of air transport by volume of sales. [2]
Off late Apple has been spending millions of dollars in locking manufacturing capacity. It is using the scale of manufacturing to cut down costs for critical parts.  We discussed in class about how companies were traditionally vertically integrated example Ford and then came the era of decentralization of supply chain and now companies are again moving towards vertical integration, example Apple.
 “According to Katy Huberty, an analyst at Morgan Stanley ( MS - news - people ), that’s exactly what CEO Tim Cook, an operations expert who has been the master of Apple’s supply chain since Steve Jobs hired him in 1998, is doing. And she calls the move “frankly ingenious.” Says Huberty: “Apple is cornering the market in [its] supply chain … giving them an edge beyond volume and scale. If Apple owns its equipment, it means its suppliers can’t build an HP PC or HTC smartphone on it.” [4]
Refer the diagram below to understand the scale of Apple’s investment.

Apple is pumping money in Asian markets to secure production capacity and ability to drive out its competition. It is doing this by buying production equipment  for its suppliers, hiring labor and running day to day operations. As per the article in Forbes magazine[4], for the suppliers of NOKIA, Motorola , HP and Dell, Apple takes out the volatility in their business by soaking the equipment risk and bearing the depreciation costs by owning it. It’s a win-win situation.
“By Huberty estimates, Apple’s investment in supply chain can lead to a 15 to 20% cost decline in per year.” It will also allow Apple to venture into new low margin, high volume markets like Television.  It also gives Apple an opportunity to cut down costs for its existing products like iPad and iPhone and maintain its dominant market share. [4]
Some questions to consider:
Will apple's strategy limit the disruption in technology by denying access to resources to competitors? Will it lead to a monopoly which Will impact the choices available to consumers?
[1] Apple’s Lower Prices Are All Part of the Plan, By NICK WINGFIELD Published: October 23, 2011
[2] Apple's Supply-Chain Secret? Hoard Lasers, By Adam Satariano and Peter Burrows on November 03, 2011
[3] Little Known Secrets of Apple’s Pricing Strategy, By Dave Bui / April 3, 2012
[4] Apple's Secret Plan For Its Cash Stash, By Connie Guglielmo, 04.20.12, 10:00 AM EDT Forbes Magazine dated May 07, 2012

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