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Apple, Are You Interested in the World's Largest Market?

Apple

A corporate strategy article by Thunderbird students.

With $100 billion in cash and closing in on the richest market cap in history, many feel that Apple is at the top of its game.[i] Nevertheless, at some point, Apple’s products will reach saturation levels at the high-end of the market in developed countries.  To keep the top spot, Apple will need to direct its growth efforts to emerging markets and find ways to make its products both relevant and widely available to customers outside of its traditional target markets.

In spite of its strong worldwide sales, Apple has long ignored an underserved market segment that, if tapped, could enrich its coffers even more.  Far away from high end markets in developed countries, lay the “poor” representing 65% the world’s population.[ii] On average, individuals in this “bottom of the pyramid” (BOP) group earn $2,000 per year or less; however, because of the large number of consumers in this group, their aggregate purchasing power is immense.[iii] This BOP segment represents a tremendous opportunity for Apple to serve a market that currently relies on second-tier technology for mobile devices and media platforms, yet is eager for lower-priced, high-quality goods and services.  In spite of their low incomes, those in the BOP segment often spend 10% to 500% more than those in higher-end segments on similar goods.[iv] By offering a high end brand at a price competitive with second-tier products, Apple could drive tremendous sales volumes and acquire a large share of the BOP market.

Apple

A corporate strategy article by Thunderbird students.

With $100 billion in cash and closing in on the richest market cap in history, many feel that Apple is at the top of its game.[i] Nevertheless, at some point, Apple’s products will reach saturation levels at the high-end of the market in developed countries. To keep the top spot, Apple will need to direct its growth efforts to emerging markets and find ways to make its products both relevant and widely available to customers outside of its traditional target markets.

In spite of its strong worldwide sales, Apple has long ignored an underserved market segment that, if tapped, could enrich its coffers even more. Far away from high end markets in developed countries, lay the “poor” representing 65% the world’s population.[ii] On average, individuals in this “bottom of the pyramid” (BOP) group earn $2,000 per year or less; however, because of the large number of consumers in this group, their aggregate purchasing power is immense.[iii] This BOP segment represents a tremendous opportunity for Apple to serve a market that currently relies on second-tier technology for mobile devices and media platforms, yet is eager for lower-priced, high-quality goods and services. In spite of their low incomes, those in the BOP segment often spend 10% to 500% more than those in higher-end segments on similar goods.[iv] By offering a high end brand at a price competitive with second-tier products, Apple could drive tremendous sales volumes and acquire a large share of the BOP market.

According to recent figures, the 10 countries with the lowest mobile device penetration per 100 inhabitants are Nepal, Bangladesh, Lebanon, Nigeria, Pakistan, Canada, China, India, Azerbaijan and Vietnam.  As evidenced by this list of countries, there are fertile opportunities for growth in the Asian market in countries such as China, India and Vietnam.  Although countries such as India and China have both reached mobile device penetration levels of 75%, they still have a much lower penetration rate than more mature markets such as the United States which has 103.9 mobile devices for every 100 people.[v] At the end of 2011, only 12% of Chinese mobile device owners had broadband capability on their devices;[vi] consequently, the growth potential is huge for mobile broadband internet connected devices that can deliver valuable real-time content to the consumer.  This is obviously a niche that Apple is well positioned to fill if it can build the right product at the right price.

Steve Jobs’ passion was to build “insanely great” products, and as a result Apple has churned out one amazing product after another. Until his recent passing, all of the product development took place under Jobs’ watchful eyes at the company’s headquarters in Palo Alto, CA. The company’s focus on high-end, high-performance products has paid off in strong sales in the United States and other developed markets.  Since its inception, Apple has benefited from local market conditions in the United States which favored its products due to: (1) a strong domestic demand for innovative gadgets, (2) a strong preference for higher quality goods, and (3) strong competitors in the Silicon Valley (and around the world) that have fueled Apple’s creativity.

Historically, what has separated Apple from its competitors is its “blue ocean strategy”.  Apple has been able to sense demand for new products and develop products for market segments which did not previously exist.  iTunes, iPhone, and iPad are just some of the examples of successfully executing this strategy. When the iPad was announced, many others had already tried and failed at selling tablets. Experts questioned whether there was any space in the market to fit a tablet between an iPhone and a laptop. But with its iPad, Apple succeeded in defining the market and creating new demand that did not exist before. Two years after the release of the iPad, competitors are still trying to catch up.

Another philosophy that Apple has religiously stuck to is its “one size fits all” strategy.[vii] Products are sold world-wide with few changes made to adapt products to foreign markets. Apple’s high-end pricing combined with its “one size fits all” strategy has made most of Apple’s products more suitable for mature markets and middle-to-upper-level income consumers than for developing countries and BOP markets.

The first quarter 2012 results for Apple were the best in the company’s history.  Compared to the first quarter in 2011, unit sales for the first quarter in 2012 increased by 128% for the iPhone, 111% for the iPad, and 26% for Macs.[viii] In the first quarter of 2012, 58% percent of Apple’s sales came from outside of the U.S.[ix] Just as high-end international markets are the current frontier for Apple’s existing product line, future adaptations to serve the world’s BOP market can be the next quintessential development in Apple’s roadmap to future profits.

Apple has ample cash to make a push into the BOP market.  To date, it has accumulated $60 billion in cash outside of the U.S., which can’t be repatriated to the U.S. without paying a significant amount in taxes[x]; consequently, using this cash to enter new markets presents an opportunity to greatly increase the return on this investment.

Today, while Apple fights to enter regional markets with its existing product lines, it is passing over the BOP segment in established regions where supply chains already exist.  The bill of materials for an iPhone 4 is currently $187.51.[xi] This could be cut in half by removing some high-end functionality, making the phone more affordable for low-income consumers while still targeting the high-end of the BOP market segment and keeping it positioned as an “aspirational” product.  Apple has dipped its toes into low-end markets in the U.S. by selling older versions of its products at a reduced cost, but up until now, Apple has not diversified into lower-priced products on a grand scale, and for good reason – the Apple brand image is that of world-class products, unparalleled in design, technology, and style.  The typical Apple customer is tech-savvy and middle-upper income, but with a growing risk of market saturation and hyper-competition Apple must explore ways to profitably serve lower income markets in order to maximize revenues on its product development investments, even at the risk of cheapening its brand image.

By making a commitment to serve BOP markets, Apple can revamp itself from a US-centric organization with manufacturing outsourced to Asia, into a truly global company.  By increasing its investment in Asia and developing new products targeted specifically at the BOP markets, Apple could not only innovate and create new low-priced phones, but have more control over its image in the region.  This could even help Apple rebound from the blemish on its reputation caused by human rights investigations into its outsourced manufacturing facilities in China.

Apple has prided itself on its “Designed in California” packaging since its inception, but its current high-end products do not fit the mold for the poor consumers of India, Indonesia, Russia, and Brazil.  Apple will need to challenge its own status quo and conduct R&D efforts in major BOP markets like China and India.  A major reason the iPhone has had a difficult time penetrating Asia, Africa, and South America has been Apple’s lack of local market knowledge and lack of relationships with local cellular networks and carriers.  iTunes is gaining Bollywood films and Indian music, but market penetration in India for iPhones and iPods does not reach far beyond the upper class, much like its sales in the US and Western Europe.  Up to this point, Apple has not successfully developed products in India which best suit the needs of the country’s poor population.

By setting up regional R&D centers Apple would gain significant local knowledge of how to best adapt its existing product lines to be sold at reduced prices in poorer markets.  Apple will also need to develop new apps which fit in with the local language(s) and culture.  With Apple’s ingenuity, there is no doubt that local R&D departments would be able to develop new products to fit local niches.  It is also likely that features and apps developed for BOP markets could one day find their way back into the U.S. market, either further enriching Apple in its traditional market segments or potentially opening up new opportunities to sell to customers at the lower end of the U.S. market.

Apple will also need to invest time and money into developing its distribution networks in BOP markets.  This can be especially difficult in developing countries where the distribution infrastructure may be underdeveloped.  Apple may need to partner with local companies to tap into their distribution networks or work with them to develop the local infrastructure needed to support their sales and distribution.  If Apple cannot properly distribute its products via a well-developed local distribution network, it will have a difficult time meeting its sales goals and turning a profit in the BOP market.

As Apple’s focus transitions from its U.S. domestic market to a global market, it needs to retain its high-end reputation while simultaneously creating products low enough in price to serve the BOP community.  While Apple can continue to be successful as a U.S. focused domestic company, it has a once in a lifetime opportunity to successfully develop into a world-wide transnational company by expanding its market share and reaching out to a new market segment with new customers.  In the past, Apple has found ways to make its competition irrelevant by utilizing “blue ocean” strategies to create new markets.  It should continue doing this, but it must also find ways to maximize its existing investments by tapping into the vast emerging markets of the BOP community.  If it fails to enter the BOP market, regional companies will dominate the local and “glocal” tiers where customers are yearning for higher-end products at a price within their budget.[xii]

If Apple is to maintain its global superiority, it must adjust its strategy so that it focuses on BOP markets while maintaining its high end customer base.  Apple needs to enter local BOP markets, gain knowledge of these markets, and adapt its products to fit.  Apple has the opportunity to enter and dominate the global BOP market, not just because it has the cash flow to do so, but also because creating the next “insanely great” product that thrills expectant customers is what it continues to do best.

Endnotes:


[i] http://news.cnet.com/8301-13579_3-57411868-37/apples-market-cap-tops-$600-billion/

[ii] Prahalad, C.K. and Hammond, Allen. “Serving the World’s Poor, Profitably.” Harvard Business Review, September 2002, pg. 208.

[iii] Ibid.

[iv] Ibid, pg. 211.

[v] http://en.wikipedia.org/wiki/List_of_countries_by_number_of_mobile_phone...

[vi] http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats#smart...

[vii] http://www.guardian.co.uk/technology/2012/apr/10/apple-ipad?newsfeed=true

[viii] Apple, http://www.apple.com/pr/library/2012/01/24Apple-Reports-First-Quarter-Re...

[ix] Wall Street Journal, http://professional.wsj.com/article/BT-CO-20120124-717653.html?mg=reno64...

[x] The Huffington Post, http://www.huffingtonpost.com/2012/03/19/apple-announces-plans-for-cash_...

[xi] http://www.isuppli.com/Teardowns/News/Pages/iPhone-4-Carries-Bill-of-Mat...

[xii] Khanna, Tarun and Palepu, Krishna G., “Emerging Giants”. Harvard Business Review, October 2006, pg. 4.