Pressed by social inequalities and saved by Technology; or is it?

Written by Nkululeko Goqo

19 September 2013

A short original case related study (phantom story-line) created for Information Technology Auditing deliberations.

Damn!!! Yelled Sbongiseni Mbambo, as he heard the sirens shrieks from afar after he was tipped that the ‘now’ disbanded scorpions were on his trail, gasping, pacing up and down is his dilapidated condominium. He swung himself across the room, like a pendulum, grabbing his latest MacBook Pro that boasts a Retina display built entirely around flash architecture, dumping it in boiling water to save his skin.

Earlier that day, Zakhele Madida had written a song with Unleash Records, aimed at addressing the issues surrounding social exclusion and social inequalities. He had hoped that folks would heed his call and put a screeching end to their technological crimes, a sound that would echo so loud catching all of them in a slipstream and would be plucked to better living.

Zakhele understood that social inequality is linked to racial inequality, gender inequality, and wealth inequality. It refers to the processes in society that have the effect of limiting or harming a group’s social class, social statuses, that even extend to prohibiting access to basic needs, like education and others.

“We are tired of our brothers becoming embroiled in crimes, becoming the hood-rats that have mastered the sewerage pipes of Westville Prison. Inequalities have created crime monsters, a world that indicates the survival of the fittest, every man for himself”, proclaimed an unnamed poet from Durban, South Africa.

Sbongiseni’s love for old portable Frequency Modulation radios taught him a lot about microchips, semiconductors, broadly electronics. He later puts his itchy hands on computers and telephony systems. He was adorned by Kevin Mitnick, the “America’s most wanted computer outlaw”. Mr. Mbambo was fascinated by Kevin’s exploits as a cyber-desperado and fugitive forming one of the most exhaustive FBI manhunts in history and spawned dozens of books, articles and computer security case studies.

A hard knock banged on the door repeatedly as Sbongiseni froze with bated breath. He drifted off into oblivion, only to wake up in a cold cell. What has actually transpired before the activities leading to Sbongiseni’s arrest; was the release of a broadcast citing the following:  

Cyber criminals targeted SA Post Office and stolen more than 42 million user details financial institution Postbank. The theft occurred between 1 and 3 January, and was allegedly committed by a syndicate with knowledge of the post office's information technology (IT) system, confirmed by Department of state security spokesman Brian Dube.

The National Intelligence Agency (NIA) has launched a high-level probe after this data breach. According to NIA spokesman "When a government institution is compromised, the NIA will be involved and will offer its assistance" Postbank currently holds over 4-billion in deposits, and processes millions of rands in social grants throughout the year. The bank told that none of its customers were affected by the hacking, but declined to comment further.

Over the next three days, automated teller machines (ATMs) in Gauteng, Free State and KwaZulu-Natal were used to withdraw cash from the accounts. The incident comes three years after Postbank spent over $15-million to upgrade its fraud-detection service. But that investment seems zero valuation. An unnamed security expert told that "The Postbank network and security systems are shocking and desperate need of an overhaul. This was always going to be a real possibility".

Sbongiseni and his clique better known as the McGezas have been hard at work experimenting with different technologies and techniques including war-dialing. War-dialing is a technique of using a modem to automatically scan a list of telephone numbers, usually dialing every number in a local area code to search for computers, bulletin board systems and fax machines. 

Hackers use the resulting lists for various purposes, hobbyists for exploration, and crackers - malicious hackers who specialize in computer security: for guessing user accounts (by capturing voicemail greetings); or locating modems that might provide an entry-point into computer or other electronic systems. It may also be used by security personnel: for example, to detect unauthorized devices, such as modems or faxes, on a company's telephone network.

It has also emerged that one member of the McGezas clique, Zukiswa Manciya, works for the Posbank and it is alleged that she is privy to very confidential information, system intricacies, operations and the entire organization’s workflow. The following confusing (as the link was not vividly seen) articles that had nothing to do with what Zukiswa is deployed at her post for were seized from her posh upmarket apartment in Sandton. It appeared to be a research that reads as follows:

Exhibit 1.1

Technological convergence is the tendency for different technological systems to evolve toward performing similar tasks. Convergence can refer to previously separate technologies such as voice (and telephony features), data (and productivity applications), and video that now share resources and interact with each other synergistically. Telecommunications convergence, network convergence or simply convergence are broad terms used to describe emerging telecommunications technologies, and network architecture used to migrate multiple communications services into a single network. Specifically this involves the converging of previously distinct media such as telephony and data communications into common interfaces on single devices.

The rise of digital communication in the late 20th century has made it possible for media organizations (or individuals) to deliver text, audio, and video material over the same wired, wireless, or fiber-optic connections. At the same time, it inspired some media organizations to explore multimedia delivery of information. This digital convergence of news media, in particular, was called "Mediamorphosis" by researcher Roger Fidler, in his 1997 book by that name. Today, we are surrounded by a multi-level convergent media world where all modes of communication and information are continually reforming to adapt to the enduring demands of technologies, "changing the way we create, consume, learn and interact with each other".

Convergence in this instance is defined as the interlinking of computing and other information technologies, media content, and communication networks that has arisen as the result of the evolution and popularization of the Internet as well as the activities, products and services that have emerged in the digital media space. Many experts view this as simply being the tip of the iceberg, as all facets of institutional activity and social life such as business, government, art, journalism, health, and education are increasingly being carried out in these digital media spaces across a growing network of information and communication technology devices. Also included in this topic is the basis of computer networks, wherein many different operating systems are able to communicate via different protocols. This could be a prelude to artificial intelligence networks on the Internet eventually leading to a powerful super-intelligence via a technological singularity.

Exhibit 1.2

Privacy and Electronic Shopping – Securing Company Information

Traditionally, the term “privacy” has meant at least two different (but related) things: The right to close the door behind us and thus be left alone and The freedom to determine with whom we share personal details of our lives or personal information.

The question of privacy is as old as mankind, but with the increasing operation of computers and computer networks it has become an urgent issue. As electronic commerce evolves, information about a person’s shopping behavior becomes more and more valuable and, at the same time, easier to acquire. Large databases facilitate access to information and it is becoming easier to trace activities in electronic media. Formerly, it was feasible to track the activities of one or two people (accessing paper files usually meant phoning and traveling a lot), but it would have been impossible to track thousands of people on a routine basis.

The possibility of automation--of mighty electronic “robots” which comb the Internet for consumer habits or credit card information--really makes privacy an issue. One possibility of protecting ourselves against loss of privacy is not to participate in the Electronic World. This approach corresponds to closing the door behind ourselves. But what if there are big opportunities--special bargains, exiting new products--on the Web which we do not want to miss? What is the information that we believe is too private to be handed over to a merchant?

When it comes to a business transaction it is usually not possible for the customer to stay anonymous. Some personal information must be revealed. In the case of a physical product that would eventually require to be couriered, for example.

There are so many lose ends that still need to be tied-up and fresh reports are hitting our screens day by day as we wait to see what will happen next. The community is divided between two plots; are the McGezas guilty or are they saved by technology?

Written by Nkululeko Goqo

19 September 2013

REFERENCES:

1.        POSBANK R42 Million news

2.        Kevin Mitnick Articles

3.        Computer Related articles

#AI

Artificial Intelligence 4 (EC)

CLICK -  AI Textbook (previous ed)

CLICK - Assessment Letter

In its simplest sense, artificial intelligence refers to computer programs or robots that mimic human intelligence, not only by performing the same functions that humans do (like recognizing speech), but by being able to either reason or learn from examples.

When people talk about artificial intelligence, or AI, and homeland security or terrorism in the same breath, they are referring to one of a number of techniques designed to process, organize and analyze data relating to terrorism events or presumed terrorist behaviors.

One of the challenges to AI systems is simply figuring out what information to collect in order to feed it into an analytic system. It is very difficult to know when patterns are meaningful predictors of the future, and when they aren't atterns are often presumed to be predictive, although they may not be. (That is, just because one terrorist attack involved Saudi nationals who went to flight school does not mean another attack will; collecting all of the information possible about Saudi nationals going to flight school in the United States is not necessarily predictive.)

Such techniques include neural networks, genetic algorithms, data mining techniques and rule-bases systems.(Amy Zalman)

#ITA

Information Technology Auditing 4

CLICK -  ITA Material
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An information technology audit, or information systems audit, is an examination of the management controls within an Information technology (IT) infrastructure. The evaluation of obtained evidence determines if the information systems are safeguarding assets, maintaining data integrity, and operating effectively to achieve the organization's goals or objectives. These reviews may be performed in conjunction with a financial statement audit, internal audit, or other form of attestation engagement.

An IT audit is different from a financial statement audit. While a financial audit's purpose is to evaluate whether an organization is adhering to standard accounting practices, the purposes of an IT audit are to evaluate the system's internal control design and effectiveness. This includes, but is not limited to, efficiency and security protocols, development processes, and IT governance or oversight. Installing controls are necessary but not sufficient to provide adequate security. People responsible for security must consider if the controls are installed as intended, if they are effective if any breach in security has occurred and if so, what actions can be done to prevent future breaches. These inquiries must be answered by independent and unbiased observers. These observers are performing the task of information systems auditing. In an Information Systems (IS) environment, an audit is an examination of information systems, their inputs, outputs, and processing.

The primary functions of an IT audit are to evaluate the systems that are in place to guard an organization's information. Specifically, information technology audits are used to evaluate the organization's ability to protect its information assets and to properly dispense information to authorized parties. The IT audit aims to evaluate the following:

Will the organization's computer systems be available for the business at all times when required? (known as availability) Will the information in the systems be disclosed only to authorized users? (known as security and confidentiality) Will the information provided by the system always be accurate, reliable, and timely? (measures the integrity) In this way, the audit hopes to assess the risk to the company's valuable asset (its information) and establish methods of minimizing those risks. (wikipedia)

#SIS

Strategic Information System 4  (EC)

CLICK -  SIS Material
CLICK - Assessment Letter
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Strategic information systems are the information systems that companies use to help achieve their goals and become more efficient.

Businesses use these systems to achieve a competitive advantage on their competitors as they seek to provide a good or service in a way that is better than that of their competition. For example, a strategic information system can be used to provide a product at a lower cost than competing organizations. 

This business tool may also be used to help the business appeal to a certain market segment. Businesses can increase their profits by appealing to a portion of the market that is not being adequately served or is particularly profitable. (Ask)

TESLA'S Case Study

THE SECRET TESLA MOTORS’ MASTER PLAN

Background

Electric cars have been manufactured for as long as the internal combustion cars, but the dominant method of propulsion has been the internal combustion engine. Moreover, for the past 100 years the electric car has not been reimaged. Consequently the electric car has been designed, manufactured and retailed in the same way as the internal combustion engine car. However, in 2006 Elon Musk’s ideation (master plan) for the electric car was put forward. Musk, the founder of Tesla Motors, reimagined almost all aspects of how an electric car was designed, manufactured and retailed. The “secret master plan” of Tesla was to enter the high end of the electric car market, where customers would be willing to pay a premium price. The aim was to produce higher unit volumes and reduce the unit price of each successive model. Elon Musk explained the master plan of Tesla briefly as follows:

1. Build a sports car.

2. Use the money earned to build an affordable car.

3. Use that money to build an even more affordable car.

4. While doing the above, also to provide zero emission electric power generation options.

However, in 2006, Tesla was a start-up company that did not possess the bundles of resources and capabilities to create a mass market electric car at the first attempt. The goal was simply impossible to reach, because the company had never built an electric car, had one technology iteration and no economies of scale. Elon Musk realised that its first product was “R going to be expensive no matter what it looked like”, so they decided to build a sports car, because it would probably have the best chance of competing successfully with its gasoline alternatives.

Executing the master plan

To bring the first compelling electric sports car to market required that a long list of initiatives be deployed. These initiatives included: engineering a custom car and manufacturing process; setting up a factory to assemble the car; designing a new battery system; performing several iterations of safety tests and subsequently making changes to the battery system; developing software algorithms for the transmission; developing a new chassis and a new body, and ensuring that every single part would meet legal safety requirements; performing safety testing; creating infrastructure (service centres) for customers; sourcing spares for every replaceable part; obtaining licenses to transport, manufacture and sell cars and subassemblies; staffing an entire company; and creating the necessary infrastructure to do all of the above. While implementing the above master plan, planning had to be done for the second model.

The second model was priced at half the price point of the Tesla roadster and the third model was even more affordable. Most of the cash generated was reinvested in research and development to drive down costs and to bring the following models to market as fast as possible. Therefore, when a customer buys a Tesla car, it helps to pay for the development of the low-cost family car.

Yet, for all of Tesla’s successes in introducing new models, with the number of cars that Tesla produced it was unlikely to make a dent in the consumption of oil and the number of internal combustion cars that were produced by mainstream car manufacturers. Less than 1% of all cars manufactured were electric. To move closer to achieving Tesla’s overarching strategic goal of sustainable transport called for every aspect of electric car manufacturing and retailing to be re-imagined. Tesla’s strategy was thus not the “business as usual” of mainstream carmakers. Tesla’s strategic initiatives focused on moving beyond the past 100 years of entrenched ways of car manufacturing and retailing. These initiatives included: reimaging what the electric car could be; designing an electric car from the ground up; reimagining the retail experience of buying an electric car; reimagining customer service; creating a network of “electric highways”; venturing into battery manufacturing; and accelerating the manufacturing of electric cars by sharing patents and creating partnerships.

Design process

In 2006, Elon Musk reimagined what the electric car could be. Moreover, Elon Musk envisioned that the future of the car would be electric. This vision and belief in what the electric car could be was very different from main stream car manufacturers’ beliefs. This belief in the future of the electric car also strongly influenced the design process at Tesla. Elon Musk wrote in the Tesla blog:

Not too long from now, most cars will be electric. Why? Two reasons: because electric cars are far more efficient than any other kind of car, and because they are the ultimate multifuel cars. Sound bold, maybe crazy?

Therefore to truly benefit from electric efficiency, Tesla started the design process of an electric car from the ground up. By following the ground-up design approach the restrictions imposed by traditional combustion car design were not experienced. As a result, the Model S design showed superior aerodynamics and remarkable torsion rigidity. Safety tests showed it had the lowest probability of injury of any car ever tested by the US government.

In 2011, Tesla chief designer Franz von Holzhausen made the following comments during an interview on the design philosophy and approach to designing the Model S:

Model S is a revolutionary vehicle not only due to its electric propulsion, but also in that its engineering and design go hand in hand. We have designed Model S from the ground up as an EV. The unique powertrain integration allows for an unprecedented package that is both rigid and incredibly safe. We set out to redefine the electric car, but with room for seven passengers and more functional storage space than any sedan on the market, Model S will set a new bar for the premium sedan as well.

Retail experience

In reimagining the experience of buying an electric car, Tesla started to recruit talented individuals who wanted to be more innovative, create something different and leave the world a better place. John Walker, recruited for his retail track record at Audi, made the following comment:

It is really because of Tesla that the automotive industry has turned so quickly to embrace development of electric vehicles, and I feel confident that Tesla will continue to be at the forefront of innovation. Joining the company now is a once-in-a-lifetime opportunity to help create something different, change the world for the better and have fun in the process.

The recruitment of employees with specific talents ensured that customers’ retail experience at Tesla would be unlike their retail experience at other typical car dealerships. Tesla Motors opened stores in shopping malls where customers could examine a floor model, learn about the design and engineering processes involved, and schedule a test drive. Purchasing happens online, directly from Tesla, which means that there are no intermediaries that add costs. Furthermore, by cutting them out of the value chain, intermediaries lose the leverage they had for decades over car manufacturers and customers.

Enhancing the customer experience

In reimaging the customer experience, Tesla first set the goal to deliver the highest possible level of ownership satisfaction in every way. Tesla measured customer satisfaction using a survey that customers were asked to complete after each service. Almost 90% of customers’ rated Tesla’s service at 9 or better on a 10-point scale, where 10 is best and 1 is worst. Tesla also made several improvements to the Model S through software updates and added small but important features, such as power folding mirrors and parking sensors. These efforts were validated by an owner satisfaction survey, which gave Model S a score of 99 out of 100, the highest satisfaction score achieved for any car in the world. The next highest score was 95.

Electric highways

In April 2014, Tesla announced it had opened 100 charging stations (86 Supercharger stations in North America, 14 in Europe and 1 in China) as part of its initiative to create “electric highways” that would make long distance driving possible. The “electric highways” initiative made it convenient to travel long distances in an electric car and addressed the practicality of growing the number electric cars on roads. Charging stations were also an important component in creating a carbon-free lifestyle for customers, enabling customers to combine other renewable energy options with all electric cars. The network of charging stations was part of a partnership with SolarCity and Rabobank aimed at creating a corridor of fast charging stations between San Francisco and Los Angeles.

Battery manufacturing

In 2014, Tesla announced it would build the world’s largest and most advanced battery factory in Nevada. This initiative would allow Tesla to achieve a major reduction in the cost of battery packs and to accelerate the pace of battery innovation. Working in partnership with suppliers, Tesla planned to integrate precursor material, cell, module and pack production into one facility. With this facility, Tesla would possess another capability, namely to create a compelling and affordable electric car in a shorter timeframe. This capability would make it possible for Tesla to address the solar power industry’s need for a massive volume of stationary battery packs.

Patents and open structures

In 2014, Elon Musk decided to join the open source movement by making the patents of Tesla available to anyone who wanted to use them in good faith. Initially Tesla felt that competitors would copy Tesla technology and therefore they felt compelled to create patents. Elon Musk admitted that this assumption was wrong. Tesla rather found that competitors were not copying Tesla’s technology, nor were they using their resources and capabilities to overtake Tesla. The true state affairs was that less than 1% of cars sold by major car companies were electric cars and trying to protect patents in reality slowed down the advent of sustainable transport. Tesla’s new logic assumed that patents were of more value if shared across a large number of stakeholders interested in manufacturing electric cars. Elon Musk wrote the following on Tesla’s open patent initiative to accelerate the advent of sustainable transport:

At Tesla, however, we felt compelled to create patents out of concern that the big car companies would copy our technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla. We couldn’t have been more wrong. The unfortunate reality is the opposite: electric car programs (or programs for any vehicle that doesn’t burn hydrocarbons) at the major manufacturers are small to non-existent, constituting an average of far less than 1% of their total vehicle sales.

At best, the large automakers are producing electric cars with limited range in limited volume. Some produce no zero emission cars at all.

Given that annual new vehicle production is approaching 100 million per year and the global fleet is approximately 2 billion cars, it is impossible for Tesla to build electric cars fast enough to address the carbon crisis. By the same token, it means the market is enormous. Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day.

We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform.

Technology leadership is not defined by patents, which history has repeatedly shown to be small protection indeed against a determined competitor, but rather by the ability of a company to attract and motivate the world’s most talented engineers. We believe that applying the open source philosophy to our patents will strengthen rather than diminish Tesla’s position in this regard.

Conclusion

The strategic initiatives undertaken by Tesla look beyond the present and 100 years of entrenched ways of car manufacturing and retailing. Tesla’s strategic goal to accelerate the advent of sustainable transport by bringing electric cars into the market as soon as possible is big, bold and risky. Yet, Tesla’s ability to execute strategy reveals that strategic change is not about trying to predict change. It is rather about creating change.

Sources:

Adapted from http://www.teslamotors.com/blog-and-press-releases, accessed September 2014.

Adapted from http://www.wired.com/2014/03/tesla-banned-ensure-process-buying-car-keeps-sucking/, accessed September 2014.

APPLE'S Case Study

APPLE’S INNOVATION STRATEGY

Background

Apple Inc. (AAPL) is based in Cupertino, California. The company designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players. Apple sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. Established on April 1, 1976, by Steve Jobs, Steve Wozniak, and Ronald Wayne, and incorporated January 3, 1977, the company was called “Apple Computer, Inc”. for the first 30 years, but dropped the word “Computer” on January 9, 2007, to reflect the company’s ongoing expansion into the consumer electronics market in addition to its traditional focus on personal computers. On September 30, 2013, Apple surpassed Coca-Cola to become the world’s most valuable brand in the Omnicom Group’s “Best Global Brands” report.

Think different?

Apple’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative design. Known for its innovation, Apple has established a unique reputation in the consumer electronics industry and has a loyal customer base for reasons as diverse as its philosophy of aesthetic design to its unusual advertising campaigns. The company believes a high-quality buying experience greatly enhances its ability to attract and retain customers. Thus, Apple’s strategy includes enhancing and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a highquality sales and post-sales support experience.

Before returning to Apple, Steve Jobs said in a 1996 interview for Wall Street Week with Louis Rukeyser:

“Apple was a company that was based on innovation. When I left Apple ten years ago, we were ten years ahead of everybody else. The problem was that Apple stood still. Even though it invested cumulatively billions in R&D, the output has not been there and people have not caught up with it and the differentiation has eroded in particular with respect to Microsoft. And so the way out for Apple, and I still think Apple has a future, there’s some awfully good people there and tremendous brand loyalty to that company. I think the way out is not to slash and burn, it’s to innovate. That’s how Apple got to its glory, and I think that’s how Apple could return to it.”

Apple’s stock price was flat for 2013, although the shares rose 33% in the second half of the year, reversing steep losses in the first six months as the company saw concerns regarding slowing revenue growth and losing market share to Android. The company saw stock price decline after it reported its first quarter 2014 earnings due to disappointing iPhone sales and outlook. Apple chief executive officer (CEO), Tim Cook, is facing pressure over a lack of innovation, as Apple has yet to introduce any groundbreaking products, although there have been speculations around an iWatch or iTV that could offer a new revenue opportunity.

Apple’s strategy

On low-end devices, Apple CEO, Tim Cook, told Bloomberg Business Week in an interview in 2013, “We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience, and we figured out a way to do it at a lower cost.” Cook’s thoughts echoed those of his predecessor, Steve Jobs, whose strategy for Apple had four pillars:

1. Offer a small number of products.

2. Focus on the high end.

3. Give priority to profits over market share.

4. Create a halo effect that makes people starve for new Apple products.

Differentiation

Apple attempts to increase market demand for its products through differentiation, which entails making its products unique and attractive to consumers. The company’s products have always been designed to be ahead of the curve compared to its peers. Despite severe competition, Apple has succeeded in creating demand for its products, giving the company power over prices through product differentiation, innovative advertising, ensured brand loyalty, and hype around the launch of new products. By focusing on customers willing to pay more and maintaining a premium price at the cost of unit volume, Apple also set up an artificial entry barrier to competitors.

Apple sells its products and resells third-party products in most of its major markets directly to consumers through its retail and online stores and its direct sales force. The company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers, and value-added resellers. Apple uses a retail strategy called “minimum advertised price” (or MAP). Minimum advertised pricing policies prohibit resellers or dealers from advertising a manufacturer’s products below a certain minimum price. MAP is usually enforced through marketing subsidies offered by a manufacturer to its resellers.

According to Macworld, Apple maintains the popularity of its high-priced products by only offering retailers such as Wal-Mart or Best Buy a marginal wholesale discount. This small percentage in savings isn’t enough of a profit margin for retailers to offer big discounts on Apple’s products, which means customers end up paying a price close to the manufacturer suggested retail price (MSRP). However, a retailer could give up this small profit margin and offer products at a discount to attract more customers. Apple prevents this scenario by offering monetary incentives to retailers to sell goods at the MAPs fixed by the company.

This price strategy is effective insofar as it prevents retailers from competing directly with Apple’s own stores, and it also ensures that no one reseller has an advantage over another. So Apple is able to keep its distribution channels clean as well as make more money on its direct sales. The Macworld article further noted that iPhones were not under a strict pricing model, as they are sold at a lower price with wireless contract deals, as retailers gain a commission from carriers.

Premium prices

Jobs’ vision for Apple was always to create a premier product and charge a premium price. Apple’s cheapest products are usually priced in the mid-range, but they ensure a high-quality user experience with their features. The hardware and user interface are designed to provide a lot of value for the price, which keeps profits high. However, a company can charge a premium price as long as it has a competitive advantage, and analysts believe the brand is on the way to losing its “aspirational” status. With increasing competition from Android and low-cost smartphones, as well as saturation in the developed markets, analysts feel that the company could risk becoming a high-end niche name.

According to IDC’s mobile phone forecast in the third quarter of 2013, a number of trends co-exist in the global smartphone market − but none have more of an effect on driving market growth than the steady decline in average selling prices (ASPs). Android has enabled a number of new manufacturers to enter the smartphone market, supported by a variety of turnkey processing solutions. Many of these handset vendors have focused on low-cost devices as a way to build brand awareness. In 2013, IDC expects smartphone ASPs to hit $337, down 12.8% from the $387 recorded in 2012. This trend will continue in the years to come, and IDC expects smartphone ASPs to gradually drop to $265 by 2017.

Strategic change

When it comes to smartphone innovation, Apple just changed its strategy in a fundamental way. Instead of releasing one new premium product each year, Apple has now adopted the approach favoured by the world’s most successful consumer brands: creating a high-end premium line for the most affluent customers and a scaled-down product line at a lower price point for everyone else. In the case of Apple, it means offering the high-end Apple iPhone 5S in gold, silver and platinum to its most affluent customers, and a cheaper iPhone 5C in fun plastic colours for everyone else. In other words, people with the gold cards get the gold phones, and the creative types get the colourful phones. Apple’s new approach has consequences for innovation in the smartphone market. The innovative new technologies that are included as part of the iPhone 5S – like the fingerprint sensor Touch ID, the upgraded camera functionality and the new motion sensor chip for fitness apps – were unveiled for the 5S, but not the 5C. This means that consumer innovation is a top-down, rather than a bottom-up, process.

Just as some economists believe that the economic benefits from cutting taxes for the wealthiest citizens of a nation will eventually “trickle down” to the broader population, Apple now believes that technological innovation will eventually “trickle down” to the broader population of smartphone users. The elite athletes and the elite photographers may gravitate to the new iPhone 5S to check out the motion sensor and the new camera features. And those innovations, once they’ve been picked up by a company like Nike (a partner mentioned by Apple in its presentation), may find their way into the broader consumer marketplace. Not that there is anything wrong with that.

That is the way it works with the world’s top consumer brands. Consider, for example, the world’s top automakers – they introduce innovations like parking assist and satellite navigation into the high-end models first, before rolling them out to every car and every model. A company like Toyota segments its product lines so that there is a Lexus for the most affluent customers, but also a high-quality Toyota for everyone else. Contrast this approach, though, to the way that Apple has traditionally thought about innovation in the smartphone market. The strategy was always to introduce one premium phone at a time, and to ensure that the newest smartphone was always the best possible phone in the world. According to Apple, the iPhone 5S is “the most forward-thinking smartphone in the world”, but where does that leave the 5C? As the world’s second-most forward-thinking phone?

Part of what always made Apple so special and magical − at least, to the Apple fanboys and fangirls− was that the one premium product per year strategy meant that a minimum-wage worker could have access to the same technology as a Wall Street hedge fund manager. There was never a sense that Apple users were viewed as “gold” and “silver” and “platinum” users – it was a sense that all Apple users were somehow superior to all the Android users out there. In an Apple retail store, there was never a very important person (VIP) room or a special roped-off area for the top Apple users. Everyone was a genius. Innovation did not so much trickle down, as it seemed to swell up and emanate from everyday people in the crowd.

Now, Apple is back in the position of selling phones the way automakers sell cars, the way financial services companies market credit cards, and the way fashion brands launch new product lines for their customers. Maybe, as many people have already suggested, that is just a reality of a mature smartphone market in which it is harder than ever before to find new buyers.

The good news is that Apple seems to have deflected earlier criticism that it had somehow settled for “incremental innovation”. And, by pricing the iPhone 5C at a high enough price point, there is no sense that the iPhone 5C will become a cheap, throwaway phone for the world’s lowest-income users. The bad news, though, is that Apple must now hope that all the high-end affluent users out there will use their smartphones in creative ways, and that this creativity and innovation will be passed down to other Apple users in the form of new functionality and new features. Just as we have seen people argue the various merits of trickle-down economics, we may soon be arguing the benefits of trickle-down innovation.

Why Apple’s ecosystem is its biggest competitive advantage − Apple’s vertical integration

Vertical integration has given Apple a competitive advantage, as it owns chip manufacturers, controls manufacturing, follows extremely strict software standards, and operates in a nearly closed ecosystem of proprietary retail stores. With these advantages, the company has more control over its value chain and, more importantly, its component costs. Google’s (GOOG) acquisition of Motorola and Microsoft’s (MSFT) acquisition of Nokia were made with the objective of pursuing this end-to-end strategy that has until now only worked for Apple.

Apple is known to have the most popular, addictive, and tightly integrated ecosystem of all technology companies. The devices and software Apple makes are designed to work well with each other and sync easily so that preferences and media can be copied or shared with multiple devices without much effort. Applications work on multiple devices at the same time − even with a single purchase − and user interfaces are very similar across devices. According to a Harvard Business Review blog posted by Ron Adner, when Apple broadened its product portfolio from iPods to iPhones, it carried over not only the technology and software that powered the iPod but also users’ entire music collections and iTunes’ entire supplier base. The move was not about just switching costs, but also about leveraging existing relationships to create an enhanced offering.

Currently, Google (GOOG), Microsoft (MSFT), and Amazon (AMZN) have entered the fray by setting up their own ecosystems, including devices, books, games, music, media, and storage services. Each of these companies has its own distinct strengths and has been trying to grab market share from Apple. Amazon leads in e-commerce, while Google dominates online search and advertising. However, Apple had a head start with the success of its iPods, iTunes software, and iTunes Store, and Apple was also one of the pioneers of touchscreen technology in phones. Apple’s App Store recorded more than $10 billion in sales in 2013, as the company announced this month. In December alone, customers spent $1 billion on nearly 3 billion App Store downloads, making December 2013 the most successful month in App Store history.

At the 2013 Worldwide Developer Conference (the WWDC), Cook said the Apple developer ecosystem includes 6 million developers and that there have been 1.5 million new developers added since WWDC in 2012. Apple said on its recent earnings call that as of January 2014, 80% of Internet work operating system (iOS) devices are running iOS 7. That dwarfs the single-digit adoption percentage measured for the latest version of the Android operating system, and it makes iOS 7 the most popular operating system in the world.

A leading supply chain ranked first in the world for the third time

 IT research firm Gartner ranked Apple’s supply chain last year as the best supply chain in the world for the third time in a row. Apple’s products and components are manufactured by a number of suppliers around the world. The final assembly of most products happens mainly in China.

Apple has built a closed ecosystem, with the company having control over nearly every activity in the supply chain – from design to retail. It has outsourced its assembly for economic reasons but has also partnered with manufacturing companies that understand that Apple’s products require different techniques and approaches, which often must be accommodated by very little lead time.

The company faces a number of expectations from suppliers and draws up exclusivity agreements for key components. Accordingly all planning is carried out in secrecy to avoid information leaks. Apple said in its annual filing that although most components essential to the company’s business are available from multiple sources, a number of components are currently obtained from single or limited sources. Plus, the company competes for various components with other market participants for mobile communication and media devices and personal computers. Apple uses some custom components that are not commonly used by its competitors, and Apple’s new products often use custom components available from only one source.

Current CEO Tim Cook was originally brought in by Steve Jobs to make Apple’s supply chain more efficient. Cook reduced the number of component suppliers and shut down warehouses to limit overstocking. Inventory was reduced from a month to only six days. A recent Bloomberg report said Apple is investing a record $10.5 billion in new technology − from assembly robots to milling machines − in its supply chain to improve sales that have been slowing due to competition.

A recent study by the U.S. Congress on U.S.-China trade stated that Apple’s innovation in developing and engineering the iPod and its ability to source most of its production to low-cost countries, such as China, have helped the company become a highly competitive and profitable firm as well as a source for high-paying jobs in the U.S. The study looked at the production of an Apple iPod, which was made in China by Foxconn, a Taiwanese company. A report last November by Digitimes cited Taiwan-based original equipment manufacturers (OEMs) and said that Apple has shaken up its supply chain and that OEMs were responsible for both component procurement and production.

Sources

Adapted from:http://www.washingtonpost.com/blogs/innovations/wp/2013/09/11/apples-new-strategytrickle-down-innovation/ [Accessed: 10 September 2014]

Adapted from: Nielsen, S. 2014.Why innovation could be the key to Apple’s growth. Market Realist, 29 January. http://marketrealist.com/2014/01/apple/ [Accessed: 10 September 2014].