Strategies for Service Innovation Fall 2011 MOB9526-01 Jayaprakash Valar Sarabjeet Chhatwal

Assignment Question:

Innovation happens in all industries by taking advantage of the windows of opportunities that existing players in the industry have left open. Looking at the histories of how some industries have evolved, one can see how firms have innovated and gained competitive advantage. This will also reveal the opportunities that still exist in these industries. So, for the assignment, you can pick one industry and see how innovation has progressed in the industry and identify what opportunities exist.

When most consumers and corporations think of innovation, sleek, user-friendly products such as Apple's iPod come to mind. In current era, discussions around innovation often end with Apple products. Apple has been termed an Innovation factory; it promotes bold and innovating ideas and has excelled in harnessing creativity from its employees. Apple leverages its diverse ecosystem of employees, customers, suppliers, partners & global networks, proven innovation process, and a winning culture 1 to seize the new opportunities in the marketplace and grow its business. Apple is identified as one of the Most Admired (Exhibit 1) and Most Innovative companies (Exhibit 2) It is interesting to analyze Apples innovation success and the approach company used in their path to success. This paper analyzes the principles and generally accepted concepts of innovation and how Apple used these to gain competitive advantage. Product innovation - Apple has created great innovations beginning with the first Apple computer in 1976, the Graphical User Interface along with the popular Macintosh introduced in 1984, to the iPod that essentially changed music. iPod, introduced in 2001 and masterminded by Apple's CEO Steve Jobs, combined outstanding design, easy-to-use interface, superb performance, and an unmatched experience. Then, even as iPod sales were growing exponentially (Exhibit 3), Apple introduced iPhone, which was dubbed the innovation of the year in 2007. In 2010, Apples released its most recent innovation iPad, which essentially created a new market itself. Apples prosperity has been largely due to its ability to design intuitive, reliable interfaces for its products. All Apple products complement and complete each other at the same time. With an iPod, one can download content via iTunes and access them
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www.InnovationMain.com, The Pyramid of Innovation

through iCloud and use that to move content to iPad or other devices. This control over the entire user experience or process, from hardware to software, has strengthened customer loyalty and provided lock-in. The result has been that it has been extremely difficult for users to leave Apple and find substitute products. Disruptive Innovation - There is a theory that a company, in order to succeed on the long-term, needs to practice drastic innovation. Apples iPod and iPad are great examples of disruptive innovations. iPods design concept, spin wheel and ability for users to have so many songs in pocket was revolutionary. The iPod also gave customers the option of picking their favorite songs on the internet in iTunes and putting it in there iPod with the click of a button. The iPad created an entirely new product category and a new need and market. But these innovations came from a lot of small steps. The first step was touch-technology. Apple realized that touch interaction was very different compared to mouse-pointer interaction. They analyzed the opportunities and implications of software/interface development using this new technology. They thought about how computers would look like and work deployed with this new technology. Apples strength was in its ability to integrate software development and hardware design. The iPad was game changer for the netbooks and eReaders market and in integrating web access through applications market. Business Model innovation - Business model innovation means more than a brilliant insight coming at the right place and time and is more than a product, service or technological innovation. Apple demonstrated how business model innovation can help companies break out of intense competition, and create opportunities, even in the time of instability and downturns. By the late 1990s, Apples growth was losing momentum

as its proprietary approach to designing both hardware and software limited its ability to compete on price. As described before, in 2001, Apple began offering a series of successful new products and services the iPod, the iTunes online music service, and the subsequently the iPhone that propelled the company to the top of the market. This shift resulted not just from product innovation, but also through its ability to define a workable business model for downloading music. The combination of product innovation and business model innovation gave Apple a huge market share and competitive advantage. It also helped expand the companys share of the traditional computer market. Experience Innovation - Apple has been held up as the poster child of ease of use and high value customer experience. Apples philosophy of simple yet elegant design that makes its products extremely easy-to-use while providing an amazing experience has been the cornerstone of its success. The flexibility provided by the iTunes software and service that allows users to try and download any music and video, and accessories ranging from wireless headsets to connectors, with the click of a button from any computer or the Internet to their iPod is an example of Apples goal of providing a great customer experience. Value Disciplines In 1993 Michael Treacy and Fred Wiersema published an article on marketing in The Harvard Business Review, Customer Intimacy and Other Value Disciplines. This article laid out a framework and argued that the best-run, and most successful businesses tended to follow one of three strategic approaches: Customer Intimacy, Operational Excellence, or Product Leadership.

Apple is a great example of an organization that has reaped success from explicitly narrowing down a customer market segment and further choosing a value discipline (Product Leadership) to master in. In choosing Product Leadership as the main value discipline, companies must have the ability to bring new products to market quickly and to identify and solve their customers problems through their new offerings. Apple displayed product leadership in audio device, the iPod and the tablet market, the iPad. Apple continuously renovates and introduces new versions that offer a new feature to its customers. It can be argued that Apple is its own biggest competitor, and its continued focus on improving its own groundbreaking products (and its ability to market these) is its greatest strength. However, even though Apples primary value discipline is Product Leadership, Apple excels in other value disciplines of Customer Intimacy and Operational Excellence. Customer Satisfaction - Apple is one of the few companies in world, which expands both vertically and horizontally and manages to satisfy customers in most of its products. For sixth consecutive year, Apple ranks top in customer satisfaction in Smartphone2. As categorized in Exhibit 4, Apple Smartphone outranks its competitors in all the rating factors except Battery Function. Smartphone consumers look for performance, ease of operation, features and physical design. Apple understands their needs and satisfies only those needs. Apples competitors, Nokia and Blackberry received five stars ranking for their battery life. These surveys provide input to Apple to enhance its Smartphone battery life and bandwidth. If they fail to address this, chances for their competitors to capture their market is very high. Apples customer satisfaction
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http://www.jdpower.com/news/pressRelease.aspx?ID=2011146

survey score is 838, which is high compared to the industry average of 788 (Exhibit 5). American Customer Satisfaction Index for Mac is 87, which is nine points higher than its immediate competitor HP for almost six years. Customer Experience - Unique experience for customers in Apple stores is incomparable to any electronic retail store. Apples retail sale per square foot is $5626, which is double its competitor Tiffany (Exhibit 7). Amazing customer service in purchase, returns, and exchanges invite repeated customers to the Apple retail stores 3. Apple engages by inventing new customer experience rather than what they already do4. Steve Jobs value proposition to Apple is to Think Different and he aligned it by converting new technology into new positive customer experience. Observational studies, is what has been implemented in understanding customer experience and their issues. Steve also knew how to control the customer experience by providing limited upgrades. There is no USB slot in iPad, iPhone doesnt support storage etc., Apple keeps the buzz and excitement in the consumers by offering new versions gradually with small improvements. However, this also allows competitors to fulfill missed customer experience by Apple and capture its market share. Customer Relationship - Apple made strategic moves to maintain the customer brand loyalty. Exclusive retail store for Apple products eliminated distraction and brought in loyal customers. Apples products complement each other, and also provide complete solution to their product range. As an iPod user, customer will be interested in buying iPhone, by which he/she is introduced to user-friendly interface and eventually will be

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http://www.customerthink.com/article/state_of_customer_experience_spending_more_doesnt_drive_success http://www.workingwider.com/strategic_innovation/the_apple_experience_fortress/

motivated to buy a Mac. These product introductions from low priced gadgets to high priced Mac books maintain loyalty in customers. Mac users will never go back to Windows, thats how Apple maintains its customer relationship (Exhibit 6). According to Gartners article5 on iCloud, Apple's iCloud is targeted at the Consumer Cloud:

Apple's iCloud is a different take on the cloud one that is more appropriate for the consumer market.

iCloud is part of a more complete set of consumer services. Those services revolve around a synchronization service and a future streaming service.

Summary - Apple is the innovative company of the century both in product line and service innovation. Steve Jobs maintained Apples ranking in the top, which provided adequate cushion for him to never Exceed expectation when you are No.1 in the industry6. Apple is one of those Great Firms which excel in all three disciplines Product Leadership, Operational Excellence and Customer Intimacy 7. It is also the leading company in the TIME (Telecom, Information Technology, Media and Entertainment)8 landscape.

http://my.gartner.com/portal/server.pt?open=512&objID=260&mode=2&PageID=3460702&resId=1793815&ref= QuickSearch&sthkw=apple 6 Prof. Jay Raos class notes 7 Treacy and Wiersema, The Discipline of Market Leaders 1997
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Jay Raos class slides

Exhibits:

Exhibit 1: Fortune Magazines List of Most Admired Companies - 2011

Exhibit 2: Bloombergs Businessweek list of Most Innovative Companies

Exhibit 3: Apple iPod Sales9

Exhibit 4: J.D. Power Customer Satisfaction score for Smartphone

Innovation Index Group, http://www.innovationindexGroup.com.

Exhibit 5: Apples Customer Satisfaction score for Smartphone

Exhibit 6: Apple Macs Customer Satisfaction score for Personal Computers10

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http://www.theacsi.org/index.php?option=com_content&view=article&id=210:acsi-scoresseptember&catid=14&Itemid=265

Exhibit 7: Apple Retail Stores per Square Foot Sales