Apple’s Business Model and Sources of Competitive Advantage

Apple (NASDAQ: AAPL) apart from being a leading technology brand is also the first company in the world to have touched the market cap of $1.5 trillion. Despite the spread of Covid-19, the market cap of Apple has kept growing and this is just an indication that its competitive advantage is a lot stronger than the rival brands. Founded by visionary Steve Jobs and Steve Wozniak, Apple has grown into the world’s most popular brand of smartphones and wearable devices. The credit of its popularity goes mainly to the company’s consistent focus on product quality and the pace at which innovation is carried out inside Apple. The business empire of Apple is spread throughout the world and it is a familiar name in most corners of the world. However, the largest market of Apple products is the United States. Apple has its headquarters at Cupertino, California in the United States and is currently led by CEO Tim Cook.

 The fast-paced and aggressive culture of Apple has also undergone a major change under his leadership and since the sad demise of visionary leader Steve Jobs, the company has been growing very fast. In fact, Jobs would have felt very proud to see his company in its current shape. In this regard, Apple has been performing better than analysts’ predictions and apart from faster growth in its market cap, the company’s financial performance has also remained strong over the last several years. The release of the iPhone 11 also drove impressive growth in sales and revenue. Moreover, Apple has become the leading and most reliable brand of wearable devices. 

The business of Apple has several sustainable sources of competitive advantage. Its competitive advantage has also kept growing stronger over the years primarily due to its focus on technological innovation and customer experience. The business model of Apple is also hailed among one of the world’s strongest. It is something that does not just enable faster innovation but also has fewer bottlenecks and offers the company a stronger edge against the rivals. Here we will discuss the business model of Apple, its core strengths, and how it has helped the company achieve solid business growth and faster international expansion. Apple’s business success apart from its focus on innovation also depends on some other pillars like its sales and distribution, marketing strategy as well as supply chain management.

Business/Product Segments of Apple

Apple has brought a large product range to the market that includes computing products, smartphones as well as wearable devices, and a large range of services. Overall based on product segments, Apple has divided its business into five segments that include iPhone, Mac, iPad, wearables, home, and accessories as well as services.

The above graph shows the net sales of Apple Inc by product segment in billions of US dollars for 2018 and 2019.

iPhone:

Based on revenue, the iPhone constitutes the largest product segment of Apple Inc. It is Apple’s line of smartphones that operate on Apple’s iOS operating system. During September 2019, Apple introduced three new iPhone models including iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max. The iPhone is also the largest source of revenue for the company. Apple makes most of its money from the sales of iPhones globally. In 2019 while Apple’s sales of iPhones reduced overall, picking only in the last quarter with the introduction of the iPhone 11 model, it also experienced revenue growth across other product segments. In 2019, when Apple experienced a net decline of around 14% in iPhone sales, the net share of iPhone in Apple’s revenue was around 54%. Apple generated $142.4 billion from iPhone sales in 2019 compared to $164.9 billion in 2018.

Apple Business Model
Net Sales of iPhone 2017-2019 in billions of US Dollars.

Mac: 

Mac is the company’s line of personal computers based on the macOS operating system from the house of Apple. The company released some new models of Mac during 2019. It released a new version of Macbook Air as well as a new Mac Mini and also introduced a new and updated Mac Pro. Based on the net sales in 2019, Mac is the third-largest source of revenue for Apple. In 2019, the net share of Mac in the net revenue of Apple was close to 10%. Apple’s net revenue from the sales of Mac in 2019 was $25.7 billion compared to $25.2 billion in 2018 or a net drop of 2%.

iPad:

 iPad is a line of multipurpose tablets introduced by Apple that operate on the iPadOS operating system that the company introduced during 2019. In 2019, the sales of iPad picked up because the company introduced some new versions of iPad including two new versions of iPad pro as well as iPad Air, an iPad mini, and a new 10.2 inch iPad.  Based on the amount of net revenue that it generates, the iPad is the smallest product segment of Apple. However, the net revenue of Apple from iPad sales experienced sharp growth during 2019 as compared to 2018. In 2019, the net sales of iPad experienced a rise of 16% compared to the previous year. The net revenue of Apple generated from the sales of iPad in 2019 reached $21.3 billion compared to $18.4 billion in 2018. In this way, even if the iPad is not a leading driver of sales and revenue for Apple, still its impact on the overall earnings of the company is significant.

Wearables, home and accessories:

This segment includes a large range of products including products from the house of Apple and third parties. It includes AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and other Apple-branded and third-party accessories. Airpods are wireless headphones developed by Apple that interact with Siri. Apple introduced AirPods Pro in October 2019. Another major attraction in this segment is the Apple Watch. It runs on the Watch OS that Apple developed specifically for small devices. Apart from that, it also includes several other innovative technologies developed by Apple. The company introduced its Apple Watch Series 5 in September 2019.

This segment has experienced rapid growth during the last two years. In 2019, this segment experienced a growth of around 41% compared to the previous year. Net revenue of Apple Inc from the sales of wearables, home and accessories grew to $24.5 billion in 2019 from $17.4 billion in 2018. In this way, this segment became the fourth largest product segment of Apple based on revenue.

Services:

The services segment of Apple has grown fast to become a leading source of revenue for the company. Of the total net revenue of Apple in 2019, this segment accounted for around 18%. This segment is also expected to grow faster compared to others in the near future. This segment is a large segment that includes several services. Apple operates several platforms that allow people to access and download digital content including music, podcast, games, videos, and books. These digital platforms operated by Apple include the App Store, the Mac Apple Store, the TV App store, and the Watch App store. The App Store is available for iPhones and iPads. Apart from that, the company also offers subscription-based services including Apple Music and Apple TV+.  After a free seven days trial, Apple TV+ costs just $4.99 per month. Other services that are a part of this segment include Apple Care, iCloud, licensing, and other services. 

Apple Revenue from services 2017-2019.
Apple Revenue from Services 2017-2019.

Based on the net revenue it generated in the year 2019, the services segment is the second-largest contributor to the total net revenue of the company. The services revenue of Apple experienced a growth of around 16% in 2019. The company generated a net $46.3 billion in 2019 from the sales of services compared to $39.75 billion in 2018.

Geographical Segments of Apple Inc.

Apple manages its business mainly on a geographic basis. The reportable segments of the company include the Americas, Europe, Greater China, and Rest of Asia Pacific. While the products and services sold by Apple in all the geographical segments are nearly the same, the company manages its geographical segments separately. This is done in order to align the company strategy and operations better with the local industry environment and laws as well as to cater to the needs of the customers and the distribution partners more effectively. Moreover, the market dynamics vary from country to country and region to region and so operating the business on a geographical basis offers some distinct advantages.

Americas: 

Based on the net revenue it generated in the year 2019, this segment is the largest geographical segment of Apple Inc. The Americas include both North and South America. Net Sales of Apple in 2019 from the Americas reached $116.9 billion from $112 billion in 2018. The main factors that drove the growth in net sales from the Americas include growth in net sales of services as well as wearable, home, and accessories. However, the growth in net revenue from the Americas segment in 2019 was also offset partially by the drop in sales of iPhones. Apart from that, there was a negative impact of a stronger US dollar compared to the foreign currencies on the net sales of Apple from the Americas segment during 2019. 

Europe:

The Europe geographical segment of Apple Inc includes the European countries as well as India, the Middle East and Africa. In all the geographical regions excluding the Americas and the rest of Asia Pacific, the net sales of Apple took a hit and declined in 2019 compared to the previous year. Total net sales of Apple in Europe declined by around 3% in 2019 compared to the previous year. The decline in net sales in Europe was primarily due to lower net sales of iPhones compared to the previous year. However, to some extent the higher sales of services as well as wearables, home and accessories offset the decline due to drop in net sales of iPhones. Europe generated $60.3 billion in net sales in 2019 compared to $62.4 billion in 2018. A stronger US dollar also had a significant negative impact on the net sales of Apple in Europe. 

Greater China:

The Greater China geographical segment of Apple includes China as well as Hong Kong and Taiwan. During 2019, the Greater China segment also experienced a significant decline in net sales compared to the previous year. The decline in Greater China was more severe than the other regions. The total net sales of Apple in Greater China declined by 16% in 2019 compared to 2018. Net sales of the iPhone were weaker in Greater China during 2019 as compared to the previous year. However, the higher sales of services as well as wearables, home, and accessories offset the decline in net sales partially. Apart from that, a stronger dollar worldwide also had a negative impact on the net sales of Apple in Greater China. 

Rest of Asia Pacific:

The rest of the Asia Pacific geographical segment includes Australia and those geographical areas in the Asia Pacific region that are not included in the other geographical segments of Apple Inc.  Apple enjoyed a small growth in net sales in this region during 2019 mainly due to higher sales of services as well as wearables, home, and accessories. However, the growth in net sales was partially offset by the lower sales of the iPhone in the region. There was a growth of 2% in the net sales of Apple Inc in the region in 2019 compared to the previous year. Apple’s net sales in the rest of Asia pacific rose to $17.8 billion in 2019 compared to $17.4 billion in 2018.  A stronger dollar worldwide also had an unfavorable impact on the net sales of Apple in the rest of Asia Pacific.

Competitive Advantage in the Business Model of Apple

Apple’s winning business model is supported by several sources of competitive advantage. Since its foundation, the company is known for its fast-paced innovation and focus on product quality as well as customer experience. However, Apple’s moat has continued to grow stronger with time as its financial position has continued to strengthen and the company has continued to expand its presence worldwide in all the leading markets. Here are some of the leading sources of competitive advantage of Apple that are also the main drivers of performance for the company.

Technological Innovation:

Research and development is not just a source of competitive advantage for the company but also one of the primary drivers of performance that have helped it find better growth and develop its market position compared to the rival brands.

Apple invests a large sum each year in research and development. It continues to update its existing product models including hardware and software as well as services. The range of services offered by Apple has grown a lot in recent years and so has its revenue from services as well as wearables and accessories. Apple is known for its fast-paced innovation right since its early days. Steve Jobs apart from his tight control of affairs inside Apple was also known for his focus and penchant for innovation. As a result, the company continued to gain growth momentum and also strengthen its customer base worldwide.

In 2019, the research and development expenditure of Apple grew to $16.22 billion compared to $14.24 billion in 2018; a net growth of around 14% in the R&D expenses. The technology industry is marked by intense competition and apart from being the driver of performance, it is also the leading differentiator that has helped the company achieve a significant edge over the competitors. As the web of services provided by Apple has continued to grow, the company is also investing more in research and development.

Marketing:

Apple is also known as one of the leading marketers in the world. Steve Jobs, the founder of the company was known for his distinctive approach to marketing. He did not just position his brand uniquely but also worked to help Apple build an identity that was distinct and differentiated from all other brands in the world of technology. While Apple does not reveal its marketing and advertising related expenditure in its annual report, the company announced in its 2019 form 10K that its SG&A expenses, mainly driven by growth in its marketing and advertising expenses. Apple focuses heavily on product quality and word of mouth as well as publicity are among the leading marketing channels for the company.

Each product and event at Apple receives heavy media coverage owing to the company’s market-leading position and the hype around Apple products as well as the personality of its founder Steve Jobs. However, the company also spends on marketing and advertising for demand creation. Apple also does a lot of marketing through its stores worldwide. The use of digital channels by the company including its own e-commerce site has grown a lot in recent years. Other promotional channels utilized by Apple include Twitter and YouTube mainly. However, due to the string hype surrounding Apple and Steve Jobs, the company always remains in the eyes of the media.

Customer Experience:

Customer experience has remained a central focus of Apple right since it was founded. Steve Jobs focused heavily on both the quality and design of products made by Apple. Apart from that, his focus on customer experience in other aspects including sales and marketing was equally intense. It was due to his obsession with a highly differentiated and unique customer experience that Apple is known as a highly customer-focused company right since its early days.

Despite so much growth and its market-leading position, the focus of the company on customer experience has not dwindled. It is also a reason that the popularity of the brand continues to grow stronger and stronger with time. Apart from innovative products, the quality of marketing and advertising as well as sales and customer-staff interaction, Apple places a heavy focus on customer experience in all these areas. In the tech industry where competition is intensely high, companies are placing an aggressive focus on customer experience to sway them away from their rivals. However, Apple’s strong competitive edge is also because of the matchless customer experience that it offers.

Customer loyalty:

Apple enjoys very strong customer loyalty as a leading computing and smartphone brand. The company’s focus on product quality and customer experience led to higher popularity and its customers are highly loyal to the brand. Most Apple customers buy several products from the company. It is not just the iPhone that enjoys strong popularity and customer loyalty but Apple has created a large range of interrelated products and services that include Mac, iPad, Apple Watch, Apple Music, and Apple TV+. Moreover, Apple products are not compatible with other products and it is also a reason that the company enjoys strong loyalty from its customers. The company has also introduced a large number of services and extraordinary privileges for its customers to grow the brand loyalty the company has been enjoying. In the current intensely competitive industry environment, gaining and retaining customer loyalty is difficult. However, in the case of Apple, its strong popularity and customer loyalty offer it an edge over its competitors. 

Premium product quality:

Product quality has remained a primary driver of popularity, demand, and sales for Apple. Worldwide the company is known mainly for its outstanding product quality. Whether the iPhone, Ipad, Mac, or other products, Apple offers outstanding quality in each of them, typically not matched by any of its rivals. Despite the premium prices of Apple products, the company has a large customer base worldwide which is mainly because the quality of its products and services is just so outstanding that the customers cannot find a substitute for them easily. With time, the company has grown its focus on innovation even stronger to offer its customers matchless products and experience. While on the one hand, product quality is a source of competitive advantage for the brand, on the other it is also one of the main differentiating factors that differentiate Apple from all its rivals in the market.

International sales and distribution network:

Apple has established a large and global sales and distribution network that enables the international sales and distribution of its products and services. The sales and distribution network of the company includes both physical and digital channels. Apart from its own e-commerce website, its products are also available on other e-commerce websites like Amazon and Flipkart.

 In this intensely competitive business environment, brands are offering their customers an omnichannel experience. Customers can purchase Apple products and services from Apple stores as well as online channels and from several authorized resellers worldwide. This has also led to increased availability of Apple products in various corners of the world.

Supply chain management:

Supply chain management is also an important source of competitive advantage for smartphone and computing brands. During the pandemic especially, the resilience of global supply chains has been put to test. However, Apple’s production network is supported by a strong supply chain and it was proved during the pandemic. The market cap of the company has continued to grow fast even when several leading markets are affected by Covid-19. The string supplier network of the company plays a leading role in helping the company grow its empire and strengthen its overall competitive position in the market.

The supply chains of smartphone and computing brands are like the backbones of their business and the resilience of their supply chains determines the competitive position of the business during a crisis. Apple has its supply chain located globally in various corners. A large part of its supply chain is located in the Asian region and particularly in countries including  China and Vietnam. However, despite its suppliers being globally scattered the company has managed its supplier relationships very well which has led to strong supply chain performance and overall faster market growth.

Human Resources:

The human capital of a technology company is among its leading sources of competitive advantage. The company has been known for its electric work culture and environment since the days of Steve Jobs. Things are known to move very fast at Apple whether it is regarding technological innovation or product development. In the days of Tim Cook also while the work culture at Apple is marked by less pressure and aggression, its focus on employee productivity and innovation has not diluted. All the leading technology companies including Apple and Microsoft or even Google and Amazon are known for hiring only the best. However, these companies also provide the most outstanding benefits to their employees including financial and non-financial incentives.

It is why there is heavy competition among candidates to earn a position at Apple. The leading technology brands including Apple and its rivals also compete with each other to attract and retain only the best talent. In the 21st century when innovation has become the leading driver of growth and the industry is characterized by too heavy competition, brands are in a race to hire the most talented candidates. Research has shown that the human capital of a company is an asset and the primary source of competitive advantage in which the foundation of most of their core competencies is led. As such most leading companies are focusing on managing their human capital strategically. 

Diversified product portfolio:

Apple has continued to grow its product portfolio strategically to increase its sources of revenue over time. While the iPhone continues to remain the main source of revenue for the company, the new sources of revenue whose weightage has grown in the last two years include services and wearables, home, and accessories. The company is strategically diversifying its product and services portfolio without deviating from its core focus. Last year, it released three new iPhone models apart from Apple TV+ and new Apple Watch models. While it has become the most trusted brand of wearables, the contribution of Apple services to the net revenue of the brand has also grown over the past two years. Services are now the second-largest source of revenue for Apple and that has helped it reduce its dependence on the core source iPhone. 

Financial Performance of Apple in last two years:

The graph above shows the total net revenue of Apple Inc. in billions of US dollars for the period between 2015 and 2019.

After experiencing strong growth in fiscal 2018 compared to 2017, Apple’s financial performance experienced a small decline in 2019. The total net revenue of the company declined by around 2% in 2019 compared to the previous year falling down to $260.2 billion from $265.6 billion in 2018. Of all the geographical regions, the decline was strongest in Greater China where the company experienced a decline of around 16% in net revenue during 2019 compared to the previous year. However, the contribution of Greater China to the net revenue of Apple was still significant at around 17%.

While net sales of iPhone in 2019 declined significantly, having a significant negative impact on the overall net revenue of the company, the net sales of services as well as wearables, home and accessories grew and partially offset the impact from lower iPhone sales.  The net decline in the total net revenue of Apple was around 2% of $5.4 billion. Apart from the other things, there was an unfavorable impact of a stronger dollar on the net revenue of Apple. Apart from the iPhone, the rest product segments of Apple enjoyed improved performance during 2019 compared to the previous year. The net sales of the iPhone experienced a 14% decline and came down to $142.4 billion in 2019 compared to $164.9 billion in 2018. The wearables, home, and accessories segment enjoyed the highest growth in net sales, rising by 41% compared to the previous year. During 2018, Apple generated $17.4 billion from the sales of wearables, home, and accessories and in 2019, its net sales from this segment grew to $24.5 billion. 

The total gross margin of Apple declined a little in 2019 falling to $98.4 billion from $101.8 billion in 2018. While Apple’s gross margin from products declined, its services gross margin grew. Gross margin from products came down to $68.9 billion in 2019 compared to $77.7 billion in 2018 mainly due to weaker iPhone sales and a stronger dollar relative to foreign currencies. The services gross margin, on the other hand, showed healthy growth rising to $29.5 billion in 2019 from $24.16 billion in 2018 driven mainly by growth in net sales of services and a more varied services mix. The product gross margin percentage of Apple was 32.2% in 2019 compared to 34.4% in 2018. The services gross margin percentage of Apple on the other hand rose to 63.7% in 2019 from 60.8% in 2018.

Main Drivers of Growth for Apple Inc.

Despite its declining iPhone sales during 2019, Apple managed to retain sales and revenue in its latest fiscal. Among the leading drivers of revenue for the company were services and wearables, home and accessories.

Apple has earned a major advantage in this area and while its services have continued to find more popularity and started making a significant contribution to the net sales of the company, it is also now a highly trusted brand of wearables and accessories. Earlier while the iPhone remained the major driver of sales and revenue for Apple, in 2019 iPhone sales slumped. However, Apple had done a very good job at shifting the pressure from one product segment to several. In this way, while the company reduced its dependence on the iPhone it also built new channels of growth.

During 2019, the company continued to diversify its services range adding Apple TV+ which also benefited product sales during the last quarter of fiscal 2019. The services mix of Apple during 2019 was very different from that during 2018. In 2019, the company also leveraged its services fixed cost structure apart from increased net sales which reflected in the form of increased services gross margin and gross margin percentage.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.