Apple's Developments in AI Technology

Executive Summary

 Apple was a company established in 1976. The company’s purpose was to revolutionize the tech industry, specifically focusing on consumer electronics, online services, and computer software. In its consumer electronics department, Apple manufactures phones, tablets, laptops, desktops, among other smaller electronics like Airpods. According to a 2018 unaudited summary data Apple made most of its revenue ($61,576 million) on iPhones. Therefore, the primary industry they are competing in is the smartphone industry.

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Apple has set in motion a couple of sustainability initiatives in order to reduce their carbon footprint. They also plan on using safer materials in their production and conserving resources. In September 2018 Apple had its highest revenue to date and expects revenue of $84 billion for the next quarter. One of Apple’s strongest factors is their brand image; however, they are experiencing issues in sales decline due to poor market penetration, a damaged brand image, and premium pricing. Apple will need to greatly improve on their AI technology in order to advance above their competitors.

Situation Analysis

Apple was founded in 1976 by two college dropouts who had the vision of changing consumers perspectives on computers. Steve Jobs, one of its founders, built the first Apple computer, Apple I, in his garage. The Apple I didn’t include a monitor, keyboard, or casing. Once they did include all three add-ons in the Apple II they revolutionized the tech industry by being the first to introduce color graphics. In 1983 Wozniak left Apple due to a lack of interest in the company, and not even two years later Jobs left as well to pursue bigger projects. Jobs then founded NeXT software and became the owner of Pixar. Apple then experienced a slow decline in its market share. Due to experiencing a pitfall and potentially facing the end of the company Apple decided to enlist aid from one of its founders, Steve Jobs. Steve Jobs then became the interim CEO of the company and made drastic changes. Jobs introduced the iBook, as well as he branched out to mp3 players and later the company introduced the iPhone and the Apple TV. (Apple Inc, 2019)

Apple strives to bring “the best user experience to its customers through its innovative hardware, software, and services.” (Apple Inc, 2019) Apple is one of the world’s leading electronics companies; however, there is still a lot of opportunities for Apple to gain market share in emerging markets. Apple has a consumer-oriented marketing philosophy, focusing on consumers’ wants and needs and requires a little assistance in analyzing their consumers. Their primary stakeholders who motivate CSR initiatives are: Customers or Consumers, Apple’s Employees, Investors, and Employees of Suppliers and Distributors.

In order to satisfy consumer perceptions Apple has set in motion a couple of sustainability initiatives. According to their Environmental Responsibility Report they have set initiatives to reduce the company’s impact on climate change through renewable energy, conserve resources, and to also use safer materials in their products and processes. Currently all of Apple’s facilities are powered by renewable energy. This includes all of Apple’s offices, stores and data centers that are worldwide. As of 2018 Apple has had 23 manufacturers commit to power their operations with 100% renewable energy. (EPR, 2018) By reducing the suppliers carbon footprint Apple is able to avoid generating over 1.5 million metric tons of CO2. (EPR, 2018) In order to implement this program Apples used “data from our comprehensive carbon footprint to identify and prioritize the most energy-intensive commodities.” (EPR,2018) Apple then communicated directly to manufacturers in order to discuss the best options in transitioning to completely clean energy.

Reduction of energy consumption in products

Apple not only focuses on reducing the use of non-renewable energy in its facilities, but Apple has focused on reducing the amount of energy their products use and strive to use less packaging materials in their products. As of 2008 Apple has decreased the amount of energy its products consume by 16%. (EPR, 2018)

SWOT Analysis:

In 2018 Apple had its highest revenue to date at 265.6 billion. (Statista, 2018) Most of the revenue was achieved through iPhone sales, iPhones made up about 82% of the global revenue. In 2017 sold about 218 million units. Apple also increased their iPad sales by distributing more than 13 million units. (Statista, 2018) One of Apple’s strengths is its high-profit margins in the smartphone market. As of September 2018, Apple had gross profit margins of 38.3% (finbox, 2018). Although this was their all-time low, their margins are still higher compared to their competitors. Huawei’s, for example, is at 7.1% (CNB, 2017). Their high-profit margin is mainly a result of their 4P marketing plan. The main focus of their 4-point plan is on product branding, which allows for them to demand a higher price relative to competing products

As of January 2019, Apple expects the following for the next quarter:

-          Revenue of approximately $84 billion

-          Gross margin of approximately 38 percent

-          Operating expenses of approximately $8.7 billion

-          Other income/(expense) of approximately $550 million

-          Tax rate of approximately 16.5 percent before discrete items

They also expect the number of shares used in computing diluted EPS to be approximately 4.77 billion. According to these estimates, they expect their revenue for their next quarter to be lower than what they originally expected. According to Apple this drop-in revenue was to be expected due to macroeconomic and Apple-specific factors. Some of those factors include the early release of the next line of iPhones, foreign exchange rates, supply and demand, and economic weakness in emerging markets. Due to these factors, Apple states they were unable to provide sufficient upgrades.

The following chart demonstrates Apple’s Revenue from 2012-2018 divided by region

According to the graph above Apple has consistently had their largest portion of revenue from North America. Apple’s second largest market is in Europe and their third largest market is in China.

Probably one of Apple’s strongest factors is their brand image. They have a strong image in the U.S and various European countries with consumer loyalty at 87%. (marketingtutor, 2019) In the U.S market Apple is amongst one of the most valuable brands. It takes second place behind Amazon. According to Statista, it is valued at 153,634 million dollars. By having a strong brand value Apple is able to shape consumer perceptions and influence purchasing behavior. It also holds the seconds spot in most valuable technological brands. IT is values at 300.6 billion. (Statista, 2018)

In Apple’s quarterly reports they also address their biggest weakness in their ability to capture market share in China and other emerging markets. Apple expected a challenge in attaining market share and had a revenue shortfall among 100% of their year-over-year worldwide revenue decline. Apart from their drastic decline in their iPhone sales, their accessories lines are doing very well. Last year they received a 19% increase in revenue from Services, Wearables, and Mac. (Apple Inc, 2018) Additionally, Apple’s products have a high appeal because of their sleek designs and easy to use interface. MacOS is not only known as an efficient software but is also very user-friendly. To improve, Apple’s plans to facilitate the process of trading in an iPhone in their stores, giving customers the ability to finance, and ease of transferring data from one phone to another.

Like Apple acknowledged in their quarterly report, their main problems are the sales declines in China and the U.S. Although Apple holds a strong brand image in the U.S and European countries, they are struggling to establish and maintain said image in China. For the size of the market Apple has only about 40 stores in China. According to a MarketLine Industry Profile on mobile phones in China, Apple’s image is greatly affected by the presence of fake Apple stores across the country. Because of this, their sales are declining, and they are losing market share fast. Chinese consumers don’t see an appeal for Apple and prefer to purchase another phone that better suits their needs; whether it’d be a more economically friendly option or a more popular brand with a better reputation in that marketplace. Due to China’s place as Apple’s manufacturing capital, they are not seen as a “premium” brand which means they cannot successfully offer premium pricing. However, the MarketLine industry article states that “as real Apple stores continue to open, increased brand awareness is reducing demand for fake Apple products.” Therefore, in order to combat this issue, they are facing in China they need to focus on brand awareness and bettering consumer perceptions of the brand.

Problem Analysis & Description

Problem Statement: Apple’s sales are declining due to problems in premium pricing strategies, lack of brand recognition and market penetration.

Their premium pricing strategy is not only presenting a weakness in countries where their image isn’t strong, but it is also starting to affect their sales in the United States. Buying an iPhone wasn’t just a piece of technology, but Apple was successfully able to implement expressive brand associations. Which meant consumers bought not only a piece of technology but a status symbol. Therefore, not long-ago consumers would’ve jumped at the latest release of an iPhone, but now as Apple’s prices have risen it’s gotten to the point where consumers are starting to ask themselves whether the technology is significantly improved from the previous generation and if it is worth the high price point.

The reason why premium pricing is a problem in North America is because Apple is amongst one of the main competitors in a sector dominated by a small number of companies including Samsung, LG electronics, and Blackberry. As a lead in the industry “Rivalry is increased due to the limited number of competitors and the high penetration of mobile phone devices, which intensifies R&D expenses and price competition.” (MarketLine, 2019) This means that consumers that are a little more price sensitive will choose a competing brand rather than Apple.  Or may choose a company that better fits their personal values.

According to trendforce Apple has about 80% brand awareness unaided and 49% that is top of mind. Compared to its competitors Apple’s brand recognition takes second place behind Samsung. The problem Apple has been having in China, is brand associations with fake Apple products. Although there was not a set number of fake iPhone stores in China, there have been many reports on these stores. The stores do an impeccable job at imitating an actual Apple store by providing the same layout, similar but duplicate technology, and identical employee uniforms. These stores have not only affected Apple’s brand image, but they have discouraged customers from purchasing Apple products. The fake products are not up to Apple’s standards. In a comparison between a real iPhone XS and a duplicate iPhone XS there are multiple connectivity issues. Among, cosmetic issues which includes a fake dual lens camera and a thick bezel on the screen of the fake iPhone. (EverythingApplePro, 2018) There are also issues of non-functioning programs and a slow processor. Due to these factors, Apple is having a hard time gaining loyal customers with a brand that is being used for counterfeits.

Lastly, Apple is having a hard time penetrating the market in China due to the previous factors of premium pricing, and duplicate stores. Apple is having a difficult time penetrating the market with how prevalent competition is in China. Their image is being greatly affected due to iPhone duplicates that are being sold. Counterfeit marketers are producing iPhone knockoffs which aren’t up to Apple’s standards and give some consumers the perception of Apple as a cheap company. While the knockoffs may be difficult to adequately regulate, Apple needs to be more innovative in the way they appeal to emerging markets. Failure to do so will result in a huge missed opportunity, and lead shareholders to invest in businesses that can successfully capitalize on it.

Solutions, Evaluation & Recommendation

In order to combat these issues Apple is facing, Apple could change an aspect of their company in pricing, design, or improving AI technology. One fear Apple has is if they decide to adopt cheaper prices their brand equity would decrease due to being perceived as a sub-premium brand. Instead, they could create a partner brand that is operated by Apple but isn’t quite associated with the brand. This allows Apple to capture market share with affordable pricing without affecting its brand image. They could also consider a change of design. When Apple was first established leading phone brands would try to mimic their styles; however, now the roles have changed, and Apple is not becoming an industry follower rather than setter. Each year the new models of iPhones offer similar benefits as the past year model and are almost if not identical. The rise of other virtual assistants threatens to deem Siri obsolete if Apple does not innovate at the rate of their competitors. Therefore, Apple needs to make large improvements to match the response of competitors’ AI’s.

Customers are no longer dazzled by the new iPhones that come out. Therefore, if Apple wants to offer the same technology generation after generation, they’ll need to lower their price point. This could be through implementing a new line of more economical phones or creating a multi-brand as a subsidiary to Apple. However, if they want to continue offering premium pricing on their phones, major updates need to take place. Updates in design and functionality, including updates to Siri are critical to maintaining its image of quality when juxtaposed to close competitors like Samsung and Huawei. If Apple wants to keep succeeding they’ll need to return to their place as trendsetters of new technology like when they were first established rather than following industry trends.

Decision Matrix

According to the decision matrix focusing on Technology would be most beneficial because it has a higher advantageous outcome in the long run. With benefits of improving profitability and overall brand image. However, improving AI technology does not aid Apple with market penetration. The least advantageous options are improving design and reducing price. If the price is reduced perceptions of the company will greatly suffer which also provides low profitability. The only positive factor to reducing the price is being able to penetrate the market. Lastly, pursuing improvements in design seems to be an option that will neither hurt nor greatly benefit Apple.

Cost benefit Analysis

In order to get to the numbers in the cost benefit analysis, the average salary of the positions was taken and multiplied by 5. According to Glassdoor the average salary for an Apple User Experience Designer is $122,707. While the average salary for an Apple Software engineer salary is $668,750. (Glassdoor, 2019) Both these figures were then multiplied by 5.

Implementation & Success Metrics –

 The best option for Apple is to implement the alternative that focuses on improving AI technology. Although Apple was the first to implement AI technology, Siri is still lagging behind Google Assistant. According to CNBC in a test of 800 questions, Siri scored 74.6% which was slightly ahead of Amazon Alexa 72.5% but not nearly as accurate as Google Assistant at 87.9%. Therefore, there is room for improvement in Apple’s AI technology. The first step in this process is to assign talent acquisition specialists to find five top candidates for improving artificial intelligence capabilities.

Primary requirements would include ensuring that they are adequately trained in iOS software and well versed in Apple’s philosophy and values. To provide guidance for this team of software engineers, a base objective of improving Siri recall by 6% for the next year would be set, with additional incentives for improvement beyond that figure. This team would work alongside other developmental teams to conduct extensive testing during the final month before rolling out any software packages for improvement.

In Q1 of each year of development, focus groups would be conducted to determine customer priorities with regards to AI and overall satisfaction with current AI (namely Siri). The data gained from research can be used to both determine the success of current efforts as well as to develop new objectives for AI improvement. The overall effectiveness of these improvements will be determined by consumer responses through these focus groups and voice-recognition stress tests. Once Siri recall reaches a more competitive percentage of 88%, the team would be encouraged to take on the secondary responsibility of developing an offline mode for mobile voice-recognition software. After additional years of development, Siri will be capable of responding to tasks when experiencing connectivity issues.

The software engineering team will also focus having Siri have more functions in control over sound radius and being able to rename Siri. Both functions would allow multiple Apple products in one room without one device taking over the Siri command. Overall Siri has a lot of improvements to do under. Without these improvements, Apple will be unable to continuously offer premium pricing on their devices and may deter loyal customers to companies with more advanced and innovative technologies.

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