Extended Essay

To what extent has Apple been successful in generating high revenue from its product- the iPhone?
Extended Essay IB Business and Management 2012

Name: Varsha Raghav Candidate Number: 001123 - 013 Session: May 2012 Beijing BISS International School Supervisor: Mr. Vithayathil Word Count: 4000 words

Table of contents:
Abstract ..................................................................... 3

Introduction ..................................................................... 4 - 5 Methodology ...................................................................... 6 - 7 Findings and Analysis ........................................................... Apple SWOT ................................................................ 8 - 9 Internal and external growth......................................... 10 Porters Generic Strategies ............................................ 11 Brand Development and Brand Loyalty.......................... 12 Market Led Pricing ...................................................... 13 The Relationship between Price Elasticity of Demand and Revenue................................................. 14 Promotion and Business Strategy ................................... 15 Evaluation Conclusion ........................................................................ .........................................................................

Bibliography .........................................................................

Abstract
To what extent has the company been able to generate high revenue from its product the iPhone this research question relates to me because I am an Apple user and seeing all the hype in the public about the Apple products caught my interest. I had once lost my iPhone but I still waned to purchase a new one because this was in fashion and then it struck me as a feasible topic for the extended essay. I intend to go about this research by using the IB Business and Management book and looking at the different aspects of business and apply that knowledge in terms of Apple.

I used various websites to conduct this research and found some facts about the Apple Company. The main area that was looked upon was the Marketing Strategies and the use of the SWOT framework as well as Porters Generic Strategies. It was interesting to find out about the Price Elasticity and its relationship to the demand of the products.

What I found in my research and prior knowledge is that Apple has a high reputation of its products and is reliable of high quality. Steve Jobs is a visionary and he strives to come up with innovations and use the branding in favor to promote its products. Promotion is a major factor for the sales revenue as the general public is already aware of the products and the Apple Company itself. As a business student, this research question can give an insight to the success of the sales revenue of a big Multinational Company such as Apple itself.

Introduction

Think Different. The Computer for The Rest of Us.1 Apple Inc. has been highly
successful with their i-gadgets. It has proven to be a remarkable upbringing of the computer software and the music world. It is said that Jobs had the eye for the future and thus the Apple Company came into existence.2 The first sales of the Apple Company had been in 1976 by Steven Wozniak and Steve Jobs of Apple I. In 1977, Wozniak made modification to the pre-existing Apple I and the sales increased because of the inexpensive product. Apple had been now functioning abroad and needed several employees. It wasnt until the 1980 that the company became larger in size due to the increase in the sales of the Apple III. Surpassing Microsoft, in May 2010 Apple became the company to be most valued in the world of technological companies.3

Apples mission statement; Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings.4 The target market has been identified in the mission statement, ranging from young students to professionals and also aiming at the regular consumer, along with their service in the field of computer softwares. Their vision statement is To make a contribution to the world by making tools for the mind that advance humankind.5 Clearly, the alluring Jobs has taken it upon himself to see to it that the world sets in the path of his belief of having the vision for the future.

1 2

http://www.trueknowledge.com/q/what's_apple's_slogan http://apple-history.com/?page=history&section=h1 3 http://topics.nytimes.com/top/news/business/companies/apple_computer_inc/index.html 4 http://www.soopertutorials.com/business/strategic-management/1952-apple-missionstatement.html 5 http://www.au.af.mil/au/awc/awcgate/ndu/strat-ldr-dm/pt4ch18.html

Due to heavy promotion of its products, for example iPhone posters stuck on the wall or the moving images at the metro that the general public is exposed to the product on a regular basis. In China, a large number of people take the subway and the place of promotion is effective because a large proportion of the population pass by the place of promotion. While the exposed population is high, they might belong to a low as well as the middle class family. 2.8% note: 21.5 million rural population live below the official
"absolute poverty line (approximately $90 per year); an additional 35.5 million rural population live above that level but below the official "low income" line (approximately $125 per year) (2007) 6 There are banners even at the bus stop; since

China is encouraging the public transport to keep the traffic and pollution in control a lot more people are aware of the Apple products. Apple stores are almost everywhere in the world now and with the ever growing technology the transfer of one item from one country to another is much more convenient. So, How has Apple been able to generate high revenue from its product- the iPhone?

Living in this tech-savvy generation with the advancement in technology making it easier for people to live, I consider iPhones to be a topic of great interest to conduct my research on with the help of secondary research. I am an iPhone user myself and this gadget drew my attention because everyone was beginning to use this product. I needed something that was pocketsize, portable and convenient. Calling system, music, cameras are the basic elements of a phone, easy Internet and fun games and the iPhone looks good too. I have a few Apple products and I was very satisfied with it hence I decided to pick Apple over any other business. I personally feel that the people, regarding Apple, buy the brand if not so much the product. There are many different types of phones available in the market that are iPhones look-alike and with similar features yet people opt for the expensive iPhones. It is also the preference of an individual and Apple products are reliable. The after-sales service provided by the business also attracts customers, as they feel freer to go to the store with any problem. If the product is great but the promotion strategies are not so effective then that will definitely have a huge impact on the business sales and profit. Heavy promotion is the key success to any business that has helped Apple generate high revenue for the iPhone.

https://www.cia.gov/library/publications/the-world-factbook/fields/2046.html

Methodology
How has Apple been able to generate high revenue from its product- the iPhone? In assessing this question the topic syllabus covered from Business and Management HL Paul Hoang with the help of

Topic 1: Business Organization And Environment. 1.6: Organizational Planning Tools will guide to a SWOT analysis of the Apple Company to evaluate the companys stand even before talking about the product. 1.7: Growth and Evaluation will help comment on the expanding business as both, internal (organic) and external growth and look at Porters generic strategies.

Topic 4: Marketing 4.3 Product, Product life cycle of the iPhones leading to the success of the iPhone 4 and the importance of Brand development and brand loyalty to the company. 4.4 Price, Market-led pricing where Apple decides price only based on its cost of production as they make their own software and hardware. The Relationship between price elasticity of demand and total revenue affecting the sales will be done through primary research. 4.5 Promotion, based on the thesis, this is the most important marketing mix aspect. Types of promotion will analyze the most effective way to help increase the sales. Promotion and business strategy for the Apple for the iPhone 4.

With the primary research I would view the elasticity of the price, see to it if the increase in price would have any effect on the number of potential buyers. While there are many different ways of promotion, which ones were the most effective to Apple? With the growing technology, there are many different means by which a message can be spread across. I made a statement earlier that the people buy the brand if not the product; I would investigate what services the Apple provides that many customers are attracted. For my primary research, I will talk to the current iPhone users face to face. I realize there might be limitation in the data collected because of the sample size and it might also be a slow process. Qualitative information would give me a depth of data but I would be interviewing the people who go to an international school and to them it might be fairly affordable than those of a normal income band. The demand of iPhone varies because of the change in consumer taste and trends for phones.

Secondary research is a quick way to collect information and it is out of date which would help me compare the old articles and figures to the recent articles. The background information regarding the iPhone and number of users will be required. Apple has many branches spread out in various parts of the world hence the number of sales would be an increase. The use of Internet would be an effective method but the source of information might not be correct so I would have to look at the url to comment on the credibility of the information. Facts and figures from the Apple website itself and the remarks made from the general public from the different parts of the world would broaden the knowledge regarding the elasticity of the product too as it was a limitation for my primary research.

The objectives of my report are To find the reasons for the high level of sales for the iPhone, mainly iPhone 4. To analyze the success of the Apple Inc. and to comment on the effectiveness of the way of marketing strategies used.

Apple SWOT

SWOT is a strategic planning tool that businesses and organizations use assess the current and future situation of a product, brand, company, proposal or decision. There are internal factors, namely Strengths and weaknesses that a company can focus on and try to make better their position in the market. There are also external factors, namely Opportunities and Threats that a company cannot control and just have to find a way to get around a particular hurdle. The Apple store in China is situated in Salnitun at Beijing. In assessing the external factors the location of the store is an important factor to evaluate on a narrower base. The four basic points to ponder are how to use each strength, how to stop each weakness how to exploit each opportunity, and how to defend against or eliminate each threat.7

Strengths
Brand name* Brand loyalty* Apple computers are expert in Developing own software and hardware8 Product development Different Operating Systems available for MacBooks New and amazing features for the apple iPhone 4 CEO Steve Jobs. Visionary and charismatic9 After sales customer Service Apple accessories for the products Wide product range/line

Weaknesses
Price is too high * More Research And Development costs Faulty aspects of the product can damage the name of the company that would ultimately lead to less brand loyalty and a decrease in the costumers. Not open to discussion about the release of a product

7 8 9

http://www.wisegeek.com/what-is-swot-analysis.htm http://www.mba-tutorials.com/marketing/273-apple-swot-analysis.html

http://www.fool.com/investing/general/2010/06/07/apple-strengths-weaknesses-opportunitiesthreats.aspx

Opportunities
Situated at a tourist area where foreigners visit IPhones would penetrate the mobile market even further Target market Adults (ages 20-30)
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Threats
Uncertain global economic
conditions11

High level of competition in the

Information Technology World

Microsoft launched Microsoft Vista,

Windows 7 which is gaining market share12

who make up majority of the world

Change in consumer taste

Opportunity:

In conclusion, the Apple Company has more strength compared to its weaknesses, opportunities and threats. To excel, Apple should focus on their strengths. The internal aspect such as providing services to customer and having a product that is suitable for all the age groups of the world. To overcome the threats, Apple can look for undervalued technology investments during economic recessions when stock prices are low and sell technology investments during the late stages of a bull markets when stock prices are high.13 Microsoft is indeed coming up with new software but Apple has always been innovative and in making new products to serve the consumer tastes.

* data based on a survey conducted.

10 11

http://www.howardforums.com/showthread.php/1203551-iPhone-users-What-is-your-age-group http://answers.yahoo.com/question/index?qid=20090624072545AACffI2 12 http://www.mba-tutorials.com/marketing/273-apple-swot-analysis.html 13 http://www.wikiwealth.com/research:aapl

Internal And External Growth

One of the objectives of any company is growth and there are two types of growth for a company. Internal Growth is also known as Organic Growth that occurs when a business grows internally, using its own resources to increase the scales of its operations and scales revenue. 14 There are various reasons for which growth is useful for the company.

Brand recognition will boost up the sales for a company and allows its products to be able to view for a wider audience. This will also create a good image and the general public would be more confident in going to that particular company.

Customer loyalty will come to the company when the company when be able to provide customers a discount that would be possible because of being a large company, it will undergo through Economies of scale.

The company will offer More Choices to its customers that would ultimately increase the sales of the product because of choices offered.

Apple has followed an organic growth strategy by focusing on the development and launch of new products like the iPad and iPhone.15 External Growth refers to business growth through mergers and acquisitions.16 New Products for New Customers- Sometimes, market conditions dictate that new products for new customers must be created. Apple pulled off this strategy when it introduced the iPod. What made the iPod such a breakthrough product was that it could be sold alone, independent of an Apple computer, but, at the same time, it also helped expose more new customers to the computers Apple offered. McFarland says the iPhone has had a similar impact; once customers began to enjoy the look and feel of the product's interface, they opened themselves up to buying other Apple products.

14

Hoang, Paul. "Growth and Evolution ." Business & management . Melton, Vic.: IBID Press, 2007. 119. Print. 15 http://tutor2u.net/blog/index.php/business-studies/comments/qa-explain-organic-or-internalgrowth/ 16 Hoang, Paul. "Growth and Evolution ." Business & management . Melton, Vic.: IBID Press, 2007. 119. Print.

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Porters Generic Strategies

Porters generic strategies are ways of outlining the ways a business can gain a competitive advantage over its rivals. When a new and innovative idea is being released into the market the rivals offer an improved product along with a competitive price in order to score more customers and look at a higher profit. Porter argued that every successful business must have a competitive advantage to prevent profits being eroded by rivals entering the market.

Cost Leadership means to become lower cost supplier of a product within a market. Increasing profits by reducing costs, while charging industry-average prices. Increasing market share through charging lower prices, while still making a reasonable profit on each sale because you've reduced costs.17

Differentiation is the focus here in on the quality rather than the cost of a product. Among them are a larger 4-inch display that may stretch further to the edges of the device, thus allowing the overall size to remain unchanged, and a metal chassis in place of Apples current glass case.18

Focus on a particular group of people in the general popular in an attempt to separate the people who can afford the product. Its drawback is that the market size is limited. In order to many a company work better, focus as a strategy is not enough, it has to follow up on wither cost leadership or differentiation.

In conclusion, it is ideal to focus on one of the strategies in order to maximize the profits because it is next to possible to expect a high profit and to have an image of outstanding quality by at charging low prices. Apple Company too for each generic strategy, carry out a SWOT Analysis of your strengths and weaknesses, and the opportunities and threats you would face, if you adopted that strategy.19 Apple has its the tag of always coming up with new and improved technology which does a great deal of an impression to its image. Differentiation along with focusing on the middle class people of the population is a better combination for success.

17 18

http://www.mindtools.com/pages/article/newSTR_82.htm http://www.bgr.com/2011/03/22/iphone-5-with-4-inch-display-metal-chassis-may-launch-in-q3/ 19 http://www.mindtools.com/pages/article/newSTR_82.htm

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Brand Development and Brand Loyalty

Brand Development is included in a companys long-term strategy plan. Its main objective is it to create a better image and boost its sales. The iPhone and iPad makers brand is now worth $153bn (R1trillion), almost half Apples market capitalization.20 A business firm might offer the customers special schemes in the form of promotion and to attract and keep the new and current customers.

Brand loyalty is always an ideal situation for a business, with brand loyalty and brand preference it will help the firm to improve the market share. Loyalty can be ensured if the company is developing its products to better suite the taste of its customers. Once a company has the largest market share then it becomes the market leader or the brand leader and Apple has overtaken Google as the worlds most valuable brand.21 This creates confidence in the customers regarding their choice of the company.

There are various advantages of a business that has brand loyalty: High market share Higher barrier to entry Demand becomes more price elastic Ability to charge premium prices

Apples products are meant to compliment each other, which encourages consumers to purchase another product in the brand. A consumer purchases an iPod, but then downloads music from iTunes. Having the user use the same brand for both hardware and software needs tends to increase consumer brand loyalty.22

20 21

http://www.thenewage.co.za/Detail.aspx?news_id=17640&cat_id=1026 http://www.thenewage.co.za/Detail.aspx?news_id=17640&cat_id=1026 22 http://www.newmaconline.com/how-apple-products-evoke-brand-loyalty_2011-03-17/

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Market-Led Pricing

Apple has played this game with itself by launching products such as the iPhone at artificially high reference prices - the iPhone cost $599 when it first hit the streets - and then rapidly lowering that price.23 The main strategies that Apple Company uses in order to attract customers is that is had adopted the methods of skimming pricing in which technological advancements and innovation of products plays an important role. Since the product is new in the market with technological improvements, is it likely to have any competitor for it in the market. Hence, to gain the cost of research and development put in the innovation, the Apple company sets a very high price to begin with, also to secure the image of its brand. From there the strategy changed to prestige pricing. Prestige pricing involves a firm permanently setting a high price because of its image, reputation or status associated with the product.24 And the example of this is Apple has played this game with itself by launching products such as the iPhone at artificially high reference prices - the iPhone cost $599 when it first hit the streets - and then rapidly lowering that price. Today, a $199 iPhone seems like a steal; Apple in essence is using its first-iteration pricing as a reference to make its current products feel affordable. It is basic human nature to opt for products that have been marked down from a high price to a lower price. Thus making is easier to attract customer so that they still buy the product. In conclusion, Steve Jobs sells is pricing.25 Regardless of the price, the customer will still buy the iPhone because it has a lot to do with the innovation and technological improvements. The customers feel that their money is well spent. For me, the price did not pay an important role in the decision of buying this phone because this was the new thing in and I didnt want to be left behind with a Nokia whereas all my friends were using iPhones.

23

http://www.msnbc.msn.com/id/38980367/ns/business-us_business/t/how-apple-plays-pricinggame/#.TzqfI4qon6Q 24 Hoang, Paul. "Growth and Evolution ." Business & management . Melton, Vic.: IBID Press, 2007. 119. Print. 25 http://www.insidecrm.com/features/strategies-apple-loyal-customers/

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Relationship between price elasticity of demand and revenue

An iPhone user depends on which income band, rather, social status that particular person belongs to. If one belongs to a high status then getting a new iPhone would not be much of a problem because it is only a small amount of income share for a new one. They would still be able to survive and still be able to afford three meals a day, clothing, shelter and basically all the necessities. On the contrary, if one belongs to the middle class then that person would have to have second thoughts about getting the same phone because comparatively, a large proportion of income is spent on the pricy iPhone. Some of these most people genuinely like the product because of all the new improved and advanced features such as facetime, multitasking, and retina display Beautifully designed hardware and software, excellent still and video camera.26 While the others actually buy the brand and not necessarily the product itself. Buying a brand gives a sense of being loyal to that particular business. Apple has been known to produce good quality products with an increasing number of Apple users. The number of MacBook users has increased due to the One-to-one policy at my school where every student has to buy a MacBook for their IB years. MetaFacts also found that Apple households are different: they are younger, more highly-educated, and have higher incomes.27 Never mind the fact that it is a requisite policy, just know the numbers have increased due to just one small school. If this policy were to be imposed on most of the IB schools around then that would raise the number of users sky high.

26 27

http://www.pcworld.com/product/545029/apple_16gb_iphone_4_gsm_atandt.html http://www.itwire.com/opinion-and-analysis/core-dump/20603-apple-tops-for-brand-loyaltyreport?start=2

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Promotion and business strategy

Promotion is a very essential part of any business and if the promotion is done in the right way, it can generate high revenue for the business.

The promotional activities are categorized into two types: Above the line refers to the use of mass media is essential to promote a long-term healthy image of the business, products or brands. Few examples of these are television, radio, new papers etc.

Below the line promotion refers to the use of non mass-media promotional activities. Few examples are, discount vouchers, buy one get one free etc.

Guerrilla marketing is a promotional strategy used to raise maximum exposure of a brand, product or business by using minimum input and highly unconventional methods.28 The Apple Company does extensive promotion where they use above the line promotional strategies. Turning pages in a magazine, or seeing the iPhone ad on the internet does not seem to be a shocker anymore. The billboards are costly but it attracts the larger public who travel a lot who are associated with the high society.

28

Hoang, Paul. "Growth and Evolution ." Business & management . Melton, Vic.: IBID Press, 2007. 119. Print.

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Evaluation:
The Apple Company has a large market for its products and is known for its innovative ideas and the charismatic Steve Jobs. Branding has made it easier to attract people and their trust in the quality remains. The ability and willingness to spend a considerable amount of income on the iPhones is a positive aspect to the company in respect to its customer. Since the people are already aware of the brand iPhones does not need to invest a lot in the branding.

Conclusion:
In conclusion, the Apple Company is widely known to general public throughout the world. Apple has a very strong reputation for its high price and high quality of technological applications. Apple been able to generate high revenue from its product the iPhone by its branding and extensively promotion of any new product that might be new and upcoming. Their main target is the upper band income household and using the price elasticity concept it has been able to be a price leader and set a price in the market for the products. Although there is competition for the iPhone in the market such as Nokia or the Android yet most people opt for the iPhone including me because of the trend. The Apple Company is worldwide and is offering new innovative ideas as well as new features to its existing products. One way to achieve the objective to remain in the market is by differentiating by shinning new light on the product.

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http://www.trueknowledge.com/q/what's_apple's_slogan http://topics.nytimes.com/top/news/business/companies/apple_computer_inc/index .html http://apple-history.com/?page=history&section=h1 http://www.samples-help.org.uk/mission-statements/apple-computer-missionstatement.htm http://www.soopertutorials.com/business/strategic-management/1952-applemission-statement.html https://www.cia.gov/library/publications/the-world-factbook/fields/2046.html http://www.au.af.mil/au/awc/awcgate/ndu/strat-ldr-dm/pt4ch18.html http://www.wisegeek.com/what-is-swot-analysis.htm http://www.ehow.com/about_5439348_advantages-disadvantages-applecomputers.html http://www.fool.com/investing/general/2010/06/07/apple-strengths-weaknessesopportunities-threats.aspx http://answers.yahoo.com/question/index?qid=20090624072545AACffI2 http://www.mba-tutorials.com/marketing/273-apple-swot-analysis.html http://www.howardforums.com/showthread.php/1203551-iPhone-users-What-isyour-age-group http://tutor2u.net/blog/index.php/business-studies/comments/qa-explain-organicor-internal-growth/ http://www.wikiwealth.com/research:aapl Hoang, Paul. "Growth and Evolution ." Business & management . Melton, Vic.: IBID Press, 2007. 119. Print. http://tutor2u.net/blog/index.php/business-studies/comments/qa-explain-organicor-internal-growth/ Hoang, Paul. "Growth and Evolution ." Business & management . Melton, Vic.: IBID Press, 2007. 119. Print. http://www.mindtools.com/pages/article/newSTR_82.htm http://www.bgr.com/2011/03/22/iphone-5-with-4-inch-display-metal-chassis-maylaunch-in-q3/

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http://www.insidecrm.com/features/strategies-apple-loyal-customers/

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