Apple: The X Strategy

In Apple’s most recent keynote on September 19th, the company announced the launch of a new generation of iPhone (the iPhone X) at the same time as upgrading their existing iPhone range with the iPhone 8. Underlying this move is an interesting strategy that I will investigate in this post focusing on how the iPhone X has (yet again for Apple) created segmentation in the market for an iPhone, the brand strategy underlying the X and how the launch of the X is a sign of the maturity of the mass production of smartphones and Apple’s response.

Segmenting the iPhone market

This is not the first time Apple has offered different types of iPhones in parallel with an upgrade to the existing model but it is the first time Apple has announced a more expensive, new design and a ‘full number’ upgrade at the same time. In 2013, the introduction of the 5C at the same time as the 5S or the introduction of the iPhone SE are examples of previous attempts to segment the market. In these instances the iPhone 5C, with an iPhone 5 design and plastic casing but iPhone 6 components, was a way for Apple to sell ‘no frills’ iPhones to more price-sensitive customers – thus segmenting the market at the ‘lower end’. In a similar vein, the iPhone SE allows people who want a decent iPhone to get one without paying top dollar (an upgrade on the 5C). This is particularly relevant to markets like China and India where the Apple brand has prestige but the price tag can be a barrier.

The iPhone X represents a segmentation at the top end. It sells to two markets:

  • Those who want the most ‘prestigious’ phone on the market
  • Those who want the ‘newest’ and the ‘best’ phone

The announcement of the iPhone 8 at the same time as the X is a new strategy which will test the strength and size of these markets for Apple. Some who would typically fit in these cohorts may opt for the iPhone 8 for a ‘good enough upgrade’ at $300 less, making the buyers of iPhone X relatively small. Apple’s first quarter results will show the outcome of this segmentation approach.

iPhone X as a luxury brand

The iPhone X will be the first smartphone to retail at USD$1000 – a premium pricing strategy. This is interesting strategically for two reasons. Firstly, over the past 10 years Samsung and Chinese device manufacturers like Huawei/LG have caught up to Apple in terms of design and technology. Their current smartphones have ~90% the same components/features (e.g. facial recognition) but for 30% less. Granted, Apple’s software/hardware integration may be worth a premium but this is an example of a strategy pushing for ‘good enough’ innovation at a premium price.

Secondly, luxury goods are a comparatively faster growing market globally. In a recent Deloitte report Global Powers of Luxury Goods 2017, Deloitte highlights that luxury goods growth year on year is 6.8% with a CAGR of 5.2% (2013-2015), compared to a global rate of all goods of 1%. Entering the ‘luxury’ market for Apple and differentiating from its previous iPhone models is following the growth in this segment. In executing on a luxury strategy we may see Apple place more emphasis on marketing versus its core of product design.

The iPhone and mass production

A famous HBR case is that of Ford vs GM and the competing approaches to mass production (cost optimisation vs. flexibility). In short, Ford’s Model-T earned them the status of the dominant car manufacturer of the first three decades of the twentieth century. However, Ford’s focus on cost minimisation also led to inflexibility, allowing other manufacturers like General Motors to compete with newer designs and incorporate changing technology. The parallel here is that like Ford’s Model-T, iPhone design hasn’t changed greatly in the last 10 years. This has likely meant greater cost optimisation in Apple’s supply chain. The iPhone X represents a break away from cost optimisation with a new design (e.g. OLED Screens, edge to edge, new configuration of chips and cameras, ‘the notch’) meaning that Apple will likely oversee multiple supply chains for smartphone devices. This could be seen as a strategy to counter strong competition (i.e. the General Motors) from other manufacturers (e.g. Huawei and Samsung) which have multiple device designs in the market and could more easily adjust to changes in technology.

At the macro-level, another ~1.7bn smartphone shipments are forecast by 2020. Some of these will be first time buyers of a smartphone whilst many will be replacements. Through its iPhone X strategy, Apple will hope to make millions of customers luxury device owners while also enticing those who might have settled for an SE or equivalent, the proud owners of an iPhone 8. A good test of this strategy will be to see whether next year, come September/October, Apple launches an X2, an 11 and/or a 9.

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