In business there are many inherent forces that can sway results one way or another. When several of them act at the same time to drive toward a particular outcome, you have a Lollapalooza effect.
The Lollapalooza effect can create large-scale drivers of business success and studying them can help you design a better business.
It’s like taking all the different advantages you can have in your business, and stacking them all together. Who wouldn’t want that?
There is one company that stands head-and-shoulders above the rest when it comes to designing their business and stacking advantages to create a Lollapalooza effect. That company is Apple.
Let’s study how they did it and explore some lessons for small business owners.
Explaining Apple’s vast profitability
Apple designs, markets and distributes electronic devices. It’s a simple description for a company that earned $367 billion in 2021 and was valued at over $2.5 trillion by investors.
While the company’s products are widely popular, the company’s success is also down to an efficiently designed business model that generates unmatched returns on capital and value creation to match.
It starts with a big market
The full explanation of Apple’s vast profitability starts with its products.
Specifically, Apple sells mobile communication and media devices, personal computers, wearables and portable digital music players along with related software, services, and peripherals, networking solutions and third-party digital content and applications. At their core, these devices create and store data, enable telecoms and then retrieve and deliver this data and information to users, predominantly via a screen.
When assessed across the world, this is a very big market.
Apple capturing any meaningful market share amounts to a lot of revenue. And there are no huge profits without first a large market opportunity and significant revenues.
The point being that Apple plays in a huge market and is starting from a large revenue base as a result. But it doesn’t quite tell the story of how they turn so much of this revenue into pure profit.
An optimised value chain
The devil can be found in the detail by breaking down and analysing Apple’s value chain. How they chose to structure their value chain (where Apple invests, and where they don’t invest) tells the story.
Apple captures additional value in non-core segments of the value chain (manufacturing), all while maintaining investment where it matters (product design and development and marketing).
Specifically, Apple’s unique value chain covers design and development, marketing, sales, some distribution and all the post purchase support functions. The company then overlooks but does not directly own sourcing (of materials and components), manufacturing and the remainder of the distribution network that supplement their internal distribution efforts.
It’s core segments have a high return on capital, it’s non-core segments have a lower return on capital (especially at the smaller scale Apple would operate if it fully owned it).
Apple invests in design and development
Products and services are developed in house, including designing the hardware and developing operating systems for their devices, as well as development of third party content applications. This is reflected in a $19 billion annual research and development expense.
Apple relies heavily on their people to innovate, and they must continually do so given that this technology changes rapidly.
A key element of Apple’s strategy is to internally develop both the hardware and operating systems for their devices. Most competitors focus on one or the other. For example, Samsung hardware uses a third party operating system.
Apple believes the seamless and integrated system made possible by completing both the hardware and software functions enhances user experience through greater functionality and usability. While increasing development costs and the complexity of operations, it also means Apple is not reliant on an external partner for the development of their products.
This investment subtracts from profitability, but it is a key differentiator for the company that helps generate that massive revenue through sales volume and pricing power.
A standardised product in high demand
One major benefit of the products developed by Apple is their standardisation.
Once a product is developed, they sell the same version of it over and over again and there is absolutely no customization. This reduces the complexity of their operations and the repeatable processes minimise costs. The use of a platform on which to build new releases (that is, Apple iterates on older versions of their products by adding new technology) means initial development costs for a new product are spread over a period of time.
There are big benefits to getting this right and small businesses should standardise or customise their products and services thoughtfully.
Apple avoids capital-intensive plants and equipment
Manufacturing is largely outsourced to partners in Asia. In this way Apple avoids the need to invest in capital-intensive plants and equipment, which must be frequently retooled to adapt to new product specifications.
Instead, their manufacturing partners make these investments. This is reflected in a higher cost of goods sold than otherwise possible, as they pass some margin on to these manufacturing partners.
While the decision to use external manufacturers gives Apple a partner dependency, for example if their partners experience problems then Apple may have inventory shortages. In addition, the components Apple sources and that partners assemble often come from one or few suppliers, and there can be significant competition for these parts. As such, while Apple’s supply chain is managed well and they go to pains to ensure secure supply, it relies on continued favourable conditions in these component markets and arrangements.
But it is well worth it.
While they give away margin to manufacturers, it saves on capital required. It allows Apple to focus on where its unique capabilities really add value.
Marketing is central to their success
In the highly competitive market for electronic devices that Apple participates in, marketing is central to success.
They dedicate significant resources to communicating their value proposition to potential customers by investing in internal sales forces, training their staff and educating their third party distributors.
Apple’s marketing genius also adds to their brand competitive advantage.
Distribution is vital, Apple reaches their customers everywhere
Distribution of products around the world is multi-channel, both direct and indirect. Apple distributes directly through company owned retail stores, online stores, and a direct sales force, and indirectly through third-party cellular network carriers, wholesalers, retailers, and value-added resellers.
Using company owned (direct) distribution channels and third party (indirect) channels allows Apple to get-the-best-of-both-worlds, a wider distribution network while retaining higher margin sales in the online and prime retail space sweet spot.
They really cover all the angles.
The business is all designed towards repeat sales
Central to Apple’s process is post-purchase support and ensuring that current customers turn into long-term customers by buying new devices and replacing old devices with new models.
To achieve this Apple invest in support tools and training at their retail stores, online, through a warranty and an extended warranty program. Apple automates as much of this process as possible to reduce cost.
In addition (and this is vital) they do not design their products to last more than 1-2 generations (2-4 years). For example, designing a phone that could maintain performance for 10 years is not in their engineer’s briefs. This means phones last as long as contracts, and can be replaced every 2 years or so (even if only for design purposes).
This repeat revenue is another factor that underlies their huge sales numbers.
Apple harness the force of nature that is pricing power
Price increases go straight to the bottom line. If you sell 100 widgets for $1.00 and they each cost $90 to make, you’ve made $10. Changing the price to $1.10 effectively costs nothing (it requires replacing a 0 with a 1), and if customers still demand the same number of widgets at the new price, profits have doubled to $20.
Apple can, and do, charge a premium.
How? They create desire for their products through marketing that intelligently highlights its features. In addition, the development of a closed-system platform to deliver third party digital content and applications creates a powerful ecosystem around the Apple hardware. The ability to innovate, create desirable products and services and to a lesser degree, the switching costs associated with moving data from their proprietary platform, is vital to ensuring Apple can charge a premium price for their widgets.
This has a similar effect on Apple’s profits as increasing the price of your widgets by 10% would for you.
The resulting formula
A big market plus a desirable product plus repeat sales plus pricing power plus an efficient scalable business model equals vast profits almost never before seen in the world of business.
This is why Apple is one of the most valuable companies on earth.
If you, as a small business owner, can harness multiple advantages you too can experience greater success.
Like Apple you also need to design your business to stack advantages and create your own Lollapalooza effect. That means working on your business and not just in it.
- Understand your customers
- Understand your key value drivers
- Understand your operating environment
- Understand your points of leverage
- Creating a value proposition that maximises your value proposition to customers, and the value you capture
- Building systems and processes to support your business
Simple right? I hope this post has convinced you to work more on your business, as well as in it, and that some ideas have popped up in your mind while you read it that you might like to try.
The takeaway for small business owners
So how can a small business owner use this all?
See how thoughtful Apple is about how they design their business? You should do it too! In fact, you must design your business by stacking advantages. Carefully consider and make each design choice that increases customer delight, provides differentiation, adds to pricing power, reduces costs, increases margins and extends the sustainability of your business. The beauty is, they often reinforce each other to create compounding returns and value creation.
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