4 Compelling Lessons Learned from Apple’s Strategy

Photo of an iPhone
 

By Tricia McKinnon

“Excellence is never an accident. It is always the result of high intention, sincere effort, and intelligent execution; it represents the wise choice of many alternatives - choice, not chance, determines your destiny” — Aristotle. If Aristotle was alive today he might have been thinking about Apple when he made that statemet.  

Recently Apple’s stock market valuation surpassed the $2 trillion mark. Just as impressive is the fact that Apple doubled in market value from $1 trillion to $2 trillion in just two years. Even the pandemic can’t bring Apple down. Apple’s third quarter 2020 revenue was $59.7 billion up 11% from last year. Some may call that luck but when you look underneath the hood what you see is a company that has reinvented itself in ways most can’t. Apple has also figured out how to build stickiness into its products and services, making even the most critical customer reluctant to leave Apple’s ecosystem. Although often criticized for not having as many breakthrough innovations as in the past Apple has never stopped innovating.

If you are curious about how Apple has created such enormous value for its shareholders and maybe how you can too consider these four lessons that can be learned from Apple’s strategy.

1. Reinvent yourself or fall behind 

If this was June of 2007 we would be talking about the launch of a new and exciting product, the iPhone. It’s hard to believe that the iPhone has been around for more than a decade. The iPhone for Apple is a breakthrough product, one that changes the entire trajectory of a company.

With the outsized success of the iPhone Apple could have sat back and gotten comfortable, after all the iPhone generates billions in sales every year. But in 2016 something happened that frightened investors, the iPhone experienced its first ever decline in sales. If Apple reacted like many companies the rest of this story would be different. Take Sears. In 1969 it was the largest company in the world. By 1990 Walmart narrowly passed Sears in revenue. Sears never fully realized the market was fundamentally changing, moving towards discount retailers like Walmart. Even if it saw the change it did not know how to respond to it. Now Sears is a fallen icon, one for the history books.

Apple has a very different story. In early 2017 after the decline in iPhone sales, Apple’s CEO Tim Cook made a goal to double Apple’s Service’s revenues within four years. “We feel great about this momentum, and our goal is to double the size of the services business in the next four years,” said Cook after Apple’ Services revenue grew by 18% in the first quarter of 2017 (which ended in December of 2016). 

In 2010 Services represented 7% of Apple’s revenues by 2019 it represented 18%. Continuing along this trajectory, by the third quarter of 2020 Services generated $13.2 billion for Apple. That’s more money generated in the quarter by Mac sales ($7.1 billion), iPad sales ($6.6 billion) or Apple Watch & AirPods sales ($6.5 billion). Only one category performed better in the third quarter and that’s the iPhone which brought in $26.4 billion. "This was our biggest June quarter ever -- driven by an all-time record revenue from Services," said Cook on Apple’s third quarter 2020 earnings call. His strategy from 2017 now sounds like a prophesy. 

When you look at annual sales Apple’s Services business looks even more impressive. In 2019 Apple’s Services business generated a whopping $46.3 billion. That’s enough revenue to land it on the Fortune 500. Analysts believe that business can generate significantly more, more than $100 billion by 2024. 

So what are Services anyways? They include revenue from the App Store, Apple Music, iCloud storage, Apple TV+, AppleCare and Apple Pay.

While all of these businesses seem like natural extensions of Apple’s core hardware business Apple made a strategic decision to redefine the type of business it’s in. Is Apple just a device manufacturer or does it provide services that make its devices more valuable? An iPhone without easy photo storage is a problem. So it was a choice taken by Apple to expand the definition of what it does and how it satisfies customers’ wants and needs. 

Too many companies stick to what used to make them successful, making little tweaks along the way. Look at department stores like Sears and JCPenney and you will see this is the case. Apple instead had a real vision for what it could do and pursued it relentlessly. Another company that has made it into the trillion dollar club that also does this is Amazon. Imagine if Amazon decided to only become the world’s largest bookstore. You would barely know it existed. Instead it has a relentless focus on what it can be and how it can use its knowledge and infrastructure to help others, that’s how Amazon Web Services was born. If only more businesses and even people had a bigger vision it would be amazing to see what they could achieve. 

2. Continually find new ways to monetize your customer base

Monetizing your customer base is just a fancy way of saying sell more stuff to your existing customers. If you want to know how to do this take a look at Apple as it has done this better than any company in the world. 

Photo of Apple’s timeline of product launches

If we look back at Apple’s history for a few decades Apple was really about the desktop computer. But in the early 2000s that started to change with the launch of the iPod in 2001. If you already had a Mac then of course you wanted a compatible music player so you could listen to your music on the go. Even if you didn’t own a Mac you still wanted an iPod. That was the beginning of Apple hooking customers into multiple products. 

Then towards the end of the decade in 2007 Apple launched the iPhone, then the iPad in 2010. Both of these products were and are hits with consumers. Apple makes this looks easy but it’s not. Understanding your customers so well that you can define what they want before they want or need it is no easy task. Then you have to invest resources before you have had any commercial success. 

“I’m from the halo generation, where my first iPod caused me to buy my first MacBook, which led to an iPhone and then an iMac and then more iPhones, iPads, and finally, an Apple TV. And all this Apple hardware begat dozens of compatible accessories including speaker docks, cradles, cables, and Kickstarter doodads, not to mention hundreds of apps and other content purchased in Apple’s stores,” said Thomas Ricker Deputy Editor at The Verge. “So maybe what I’m describing is akin to Stockholm syndrome. But I don’t think so, not yet, anyway. Nevertheless, I’m at the point where I judge the best device to be the device that works best in the ecosystem where I live.” 

Steve Jobs somehow knew when the iPod launched in 2001 that consumers would want to have “1,000 songs in… [their] pocket”. Remember when people were laughing at the Apple Watch? Or thought AirPods were goofy looking? It takes a lot of vision and confidence to come out with products before the consumer is ready for them.

Most companies are not good at extracting more value from their existing base of customers. They come out with one hit product and then they struggle to figure out what’s next. They are one hit wonders. Remember Blockbuster? Maybe you have forgotten but you certainly know who Netflix is. But companies like Apple figure out how to get a greater share of your wallet over time, they are constantly expanding the pie. One of the reasons Walmart rose to dominance is because it figured out how to get a consumer to shop at Walmart more frequently. The secret? Groceries. Although Walmart launched in 1962 its first full service grocery store didn’t open until 1988. If you sell someone groceries customers will shop at your store on a regular basis and while they are there they will buy other things. 

One of the ways Apple has gotten customers to spend more is through paid subscriptions. At the end of Apple’s 2020 third quarter it had over 550 million paid subscribers up a staggering 130 million from last year. Apple is targeting to have 600 million by the end of 2020. Apple gets paid subscribers from a growing library of services which are just another way for Apple to generate revenue on an ongoing bases. Again, Apple has thought about its devices, how people use them and has created a long list of additional ways to use them.

Speaking about Apple+, Dan Rayburn, principal analyst at research firm Frost and Sullivan said: “Apple's endgame is to provide more content services to consumers and to package more content across their entire platform. They own an ecosystem: the hardware, the device, the operating system, the browser, Safari, the Store, the Card. So, adding more content, whether it's music, whether it's news, whether it's video, brings more people to Apple's platform.”

At the end of the day Apple has a deep understanding of its customer’s wants and needs often before they even exist. If you give Apple a dollar today in ten years (or less) it will figure out how you can give them $100 back.

The New York Times writes that: “under its chief executive, Tim Cook, Apple’s most important innovation in recent years has arguably been its nearly unrivaled ability to generate profits. Mr. Cook has built a sophisticated global supply chain to produce billions of devices…and leaned into a product line designed to lock customers into its ecosystem so they buy new gadgets every few years and pay monthly fees to use Apple’s suite of digital services.”

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3. Embed switching costs into your products and services making it hard to leave

Every company wants to create products that are sticky. The ones where once you buy one product and then you are inclined to stay with that company for a while longer. Embedding switching costs into its products is a long-held philosophy at Apple. 

If you are an iPhone owner have you ever thought about switching over to Android? If you have let me guess what the first thought was that came to mind? Your group chat with your college friends is on iMessage, isn’t it? Who would have thought that a messaging app would cause so many customers to stick with Apple for the long haul? Apple did. Much is written about Apple’s ecosystem. It’s the hardware, apps and services that all work seamlessly together that stop you from leaving. 

If you have an iPhone most likely you backup your photos on iCloud. Transferring those photos to an Android device is a pain so you choose not to. Then there’s the App Store. Often times when a company is launching a new app they launch it first on the App Store. So there’s a chance you could be missing out if you switch over to another operating system. Or try moving away from FaceTime. There are entire blogs devoted to how hard it is to leave Apple’s ecosystem once you are in it. 

Even those pesky little AirPods are sticky. "Wearables are a source of competitive advantage and differentiation because they're making themselves more valuable to customers and ultimately making it less attractive to switch to another option," says Forrester Research Analyst Frank Gillett.

4. Never stop innovating

You can’t be successful without innovation. Over Apple’s 44 year history it has continually introduced many innovative products that quickly became the standard for others to emulate. Apple may not always be first to market but a lot of great products are great not because they were first but because they are better than what else exists. That is what Apple did with the iPhone. Blackberry maker RIM had a competing product at the time that featured a physical keyboard. Instead Apple decided to move forward with a touch screen. It turned out to be a hit. 

In 2008 Apple launched the App Store. This little known store which most people did not know existed or what it was for at the time had less than 500 apps in the early days. Fast forward nearly a decade later and the App Store has 2 nearly million apps, half a billion weekly visitors and the App Store facilitated over a half a trillion dollars in transactions in 2019. 

Many criticize Apple by saying it hasn’t had many innovations in recent years. But that’s untrue. Take Apple’s AirPods. When they first launched they were mocked (as many new inventions are). Consumers thought they were funny looking and impractical believing they would easily fall out of your ears. By 2018 those AirPods led Apple to a 60% share of the global wireless airbud market and by 2019 it is estimated that Apple had sold 65 million AirPods. Since the launch of AirPods there have been countless knockoffs. Once again Apple redefined a category. Time magazine called the AirPods Pro one of the best innovations of 2019.

With Apple you have a company that continues to experiment even when it doesn’t have to. Experiments payoff over time. You may not get the first one or the second one right or even the third but eventually you will hit a home run. Apple’s culture of constantly trying new things to improve the customer experience is paying off.

Tricia McKinnonStrategy & Growth2 Comments