Management 495 - Strategy Showcase

Strategy: Vertical Integration

Apple has had much success with consumer products over the last several years. Apple has now
become the most highly valued technology company in the word. This comes after Apple nearly
vanished almost 15 years ago. There are a number of attributing factors to the success of Apple:
company leadership in the form of Steve Jobs, the capability of leveraging their unique understanding
the Apple consumer, and pursuing risky opportunities which have lead to tremendous success of
Apple's products. Apple computer announced the introduction of the iPad tablet computer on February
12, 2010 and the next generation, the iPad2 tablet computer, on March 2, 2011. The introduction of a
new computer operating platform clearly demonstrates Apple's prowess in innovation. The introduction
of the iPad and the iPad 2 tablet computers also provides an excellent example of how a company can
build competencies using both backward and forward integrations. Strategy is instrumental when
deciding on the business model to implement and Apple has found their future is bright based on
ownership of the entire Apple experience.

Value of Forward and Backward Integration

Integrations are implemented for a number of reasons; extend our capabilities by controlling inventory
quality, timing, and availability; improving distribution channels; utilizing enhancements in technology
and innovation to extend our competitive advantage. Apple has pursued both backward and forward
integration for a number of reasons. By controlling the manufacturing of its hardware, both computer
chips and devices, it can control the innovation supply chain and by knowing its customers best can
apply its knowledge of customer experience and maintain its control. Quality is a key characteristic for
innovative companies as instilling pride of their products becomes paramount when customers have the
ability to buy successive generations of the product.

Backward Integration

A backward integration aims to improve our inputs and thereby gain more control over our supply
chain. A company pursuing this strategy may have encountered an unreliable quality of input, inputs
which were not reliably delivered on a time schedule matching our production capabilities, or finding
that suppliers are not increasing technology or innovation to allow their product to be differentiated in
the marketplace. Apple is a innovation leader and by bringing products to market before their time is
able to extend its competitive advantage. Apple leverages this early to market approach through both
backward and forward integrations. By controlling its hardware development Apple can invent entire
new classes of devices as well as pursue an incremental hardware develop approach tied to its own
innovation schedule. Apple also controls its distribution and also aligns product introductions to its
very successful marketing efforts.

Forward Integration

Forward vertical integration is performed to extend market share by changing the manner in which you
pursue distribution. Apple's retail store strategy serves as a good example. Apple decided to open retail
stores as a way to increase customer interest and further develop the Apple culture. Unlike companies
before them (Gateway) Apple pursued this strategy for reasons beyond sales. Apple pursued the store
concept to integrate the experience between customer and product. By placing Apple stores in hip
locations they have also increased utility of their product. Apple clearly demonstrates that additional
competitive advantages can be born through forward integration in distribution.

Integration Extends Core Competencies

Although Apple pursues vertical integration as an overall strategy Apple has also succeeded with the
development of content by 3rd party developers. Apple has increased the demand for its iPad by
allowing outside developers to leverage the Apple platform. The development of applets allows to
drive increased value from their products and allows Apple to focus on their core competencies.
Another example of Apple extending content development is their iTunes marketplace. The
marketplace has also incremented product demand by reinventing how their core product is delivered. I
believe the app marketplace and iTunes has in large part enhanced value along Apple's supply chain
and in the end provides utility for their product portfolio.

Apple is also a good example of creating new capabilities through innovation and leveraging the new
product to increase their market. By using their own operating system iPad developers have been able
to effectively concentrate on one platform. By keeping their operating system proprietary they have
prevented the issues which are now being encountered by Google. Google's competing operating
system, Android, has been developed through an open source model. By allowing outside parties to be
fully involved in the OS development they have relinquished some of the benefits mainly full product
direction and limiting the OS to one version. Google's tablet market has now been fractioned into
multiple manufacturers own versions of the Android OS.

Issues with Full Integrations

While vertical integration can result in a number of competitive advantages it can also create its own
problems. not able to spread costs of development among multiple vendors. A detriment to owning the
entire chain is the inflexibility to balances capacity. If a product is a great success they may have a
difficult time responding to demand as their manufacturing capabilities are less dynamic and the
specialization in manufacturing prevents other supplies from ramping up to meet this demand. There
may also be another problem related to internalizing a supply chain. Overtime their may be a tendency
for a division to become less nimble and lose efficiencies related to outside competition as they have a
guaranteed internal customer. A company must create some vehicle which adheres the internal
operation to a competitive model which would be found in an external supplier relationship.

Apple: Integration and Continued Success

Apple will continue with the backward and forward integration model as it has served them well. Apple
also understands that it derives unique competencies that provide strategic points of market
differentiation. The challenges that Apple has going forward is the development of competition of the
same device platform and content generation. Apple can continue its market presence as it has a proven
track record to continually introduce new generations of their product and does so by leveraging their
unique ability in product innovation. Additional competencies that integration provides are the the
reuse of their software components among its portfolio of products.