Ted Goranson - Personal Blog

The blog of Ted Goranson. This is both a personal blog and an ongoing update on his projects.

Apple as an Advanced Virtual Enterprise

Published: 11 Mar 2012

Apple is a useful example of one sort of advanced enterprise. They are phenomenally successful; the public is aware that they ‘do things different;’ and we can describe some of those different things as illustrative examples:

  • They are a virtual enterprise of a rather advanced breed so far as the design and manufacture of the physical devices which constitute their core business;
  • They are a virtual enterprise as well in several kinds of platform support for those devices: software and entertainment as one kind of shared infrastructure, and the press and enthusiasts as another.
  • At the same time, they are vertically integrated in other areas: they have their own relatively exclusive sales channels, and deep brand management.
  • So far as the core operation, they are centrally collected. Apple does from time to time make acquisitions but they always are for talent (rather than existing operations) or for production capability.

This short note reviews the business model, which is a hybrid of virtual enterprises and vertically integrated ones.

The Virtual Enterprise Bits

Apple is a virtual enterprise of several different types of virtual enterprise.

The manufacturing dimension of Apple is well known: all of their manufacturing, and most of the logistics and support activities are subcontracted. They clearly believe that so far as the devices (primarily iPads, iPhones and MacBooks) their core competence is in designing them and managing the integrated platforms and communities. What differentiates Apple from a conventional ‘manufacturing supply chain’ is:

  • Apple mixes autonomy with engagement, for example it would not be unusual for Apple to buy ‘capability’ (equipment, materials, processes, intellectual property) that their partners not only use but which they might build a plant — or even a division — around.
  • On the other hand, Apple is ruthlessly frangible in the partners they acquire. The competitive dynamic is not based on the traditional subcontractor model where specifications exist beforehand and price/quality/timeliness are the determining factors. Instead, additional factors of agility, secrecy and autonomy come into play. This last is counter to the prevailing subcontractor model, where prime contractors intrusively audit processes and practices. (This practice contributes to the recent publicrelations issue.)

Apple’s partners are not chosen because they can supply products cheaply, as is still the case among all their competitors. The virtual enterprise is constructed primarily around the need for agility. The practical notion of an agile virtual enterprise was first defined by DARPA research that had some proximity to the research into next generation Unix kernels. That operating system research resulted in MACH, then NeXT which underpins Mac OS X, while the research into the agile virtual enterprise has moved into practice, underpinning Apple, the most competitive manufacturing system on the planet.

(Most Apple managers are not aware of this dual influence from the DARPA/NSA investment.)

Agility is not speed per se, rather more a notion of responsiveness, not only in direct reaction to a need but at the deeper level of organizational adaptation. Information infrastructure plays a role, but it is not as significant as many believe; rather than any all-encompassing information system and ERP-type 'soviet-style' models, it is a matter of federating special purpose lightweight systems on the fly. Sometimes international standards matter, but they are not the great enabler.

In the kerfuffle over worker empowerment, what is overlooked is that the Apple ecosystem is producing the world’s largest cadre of middle managers, ones capable of supporting the next generation of manufacturing systems.

Incidentally, Foxconn is losing money; that is because of their incredible investment in robots and robotic research. The idea is not to save money: robots will be far more expensive than peasants imported from the country to the workcities. The idea is to further advance the idea of agility, and for that matter, portability or manufacturing. In the future, there will be no labor-related structural reason for being based in China. An experiment is currently starting in Brazil.

Apple can also be considered the organizing agent for numerous communities which live in a symbiotic relationship that fit various definitions of our virtual enterprise family tree:

  • The iOS App store has created well over a hundred thousand new independent developers. As I write this, 25 billion apps have been downloaded and two billion dollars dispensed to the developers. The Mac App store, with a smaller user base, appears to be on a similar path but with more per-seat profitability to the development community. Nothing like this has happened in the software business to lower the threshold to entering the market.
  • iTunes is the world’s largest retailer of music. To say that Apple has revolutionized the music business would be an understatement. Music is not created specifically for the platform as are apps, but many independent artists have been given a voice that did not previously exist. The Apple influence in the TeeVee/movie, book and textbook domains is not so remarkable, but the current model in each area (as a specific kind of virtual enterprise) was established by Apple.
  • Often overlooked is the accessory market. Apple makes very few devices and even fewer accessories. A market as large as the one for applications has grown up around this opportunity. There is even less direct contact between Apple and this community, but they are clearly part of the ecosphere that enhances the attractiveness of the platform and enhances the brand.

So it could be said that Apple is a virtual enterprise, consisting of component virtual enterprises of different types in the areas of manufacturing, software development, content and accessories.

As I write this, several stories have circulated about the conditions in Chinese Foxconn plants. Foxconn assembles a percentage of some of Apple’s best selling products, but Apple is only one of Foxconn’s clients; they assemble products for competitors of Apple as well. As one would expect, conditions in any third world factory trigger concern among the comfortable. Probably because more is expected of Apple than other firms — because of the narrative — they are hit with bad press more than others where conditions are much worse.

The irony is that the assembly cost of Apple’s devices is trivial; they aren’t with Foxconn to lower those costs. They are with Foxconn for the agility alone, the ability to turn on a dime so far as product design, and to scale quickly if needed. The damage to the brand is compounded because the public judges the situation as if Foxconn were a traditional subcontractor, with the intrusive controls that such a normal relationship carries.

In contrast, what makes the Apple ecosphere special is the unusual autonomy the partners have; it is not deniability-of-the-guilty that one saw in the initial response of Apple to bad press, but a genuine and deliberate distance from the process.

Apple is Also a Novel Vertical

Some parts of Apple innovate in the other direction: vertical consolidation.

What makes Apple such an interesting case it that they balance this virtual enterprise strategy of loose, agile federations with some business areas where the business model is tightly controlled vertically. The potential for success of the virtual enterprise model was studied in some depth in the DARPA work, and all the expected successful cases involved some extreme verticalcomponent, so Apple’s combination of federation and control is not surprising. What is surprising is how successful it has become.

Apple is an advanced vertically integrated enterprise in these ways:

  • The design of the products, the look and feel of the hardware, software and services is so tightly controlled that even today there is a robust press that tries to guess what is coming next.
  • The management of the brand is as carefully manicured as possible. Though Apple does have a conventional business relationship with an ad agency, the creative relationship is reported to be unconventional. (Perhaps this facet will be the one that changes the most with the death of Steve Jobs.)
  • Apple was considered bold and a bit reckless is setting up its own network of retail stores. The majority of the high end physical goods are sold either through their unique physical stores or their popularwebsite. Major chains are allowed to sell some Apple goods, but only under strict controls. There is no other major retail good whose retail presentation is so strictly controlled.
  • An artifact of the centralized designs is that extreme secrecy can be maintained up until the moment of announcing a new product. In this way, Apple even controls the big reveal, and it can be said that mystery associated with each product announcement is an invention of Apple. Controlling the press to this extent is yet another way of building the vertical.
  • Though Apple is host to a broad community of developers, it reserves key software roles for itself. Apple provides an integrated ‘stack’ of essential software: mail/calendar/addressbook, cloud services, audio/video/photo management, (personal) office software, speech interpretation and browser. That’s a lot, and many users can do well using 100% Apple-supplied software.
  • Over the last decade, Apple has made it increasingly less attractive to build applications with languages, programming environments and frameworks other than the ones it supports (objective-C, Xcode and Cocoa respectively). Also, it has — in the name of security — started to impose some comparatively intrusive restrictions on the architecture of applications.
  • We’ve mentioned that Apple often supplies its partners with key resources and capability, but the vertical side of this goes well beyond that. Apple can and does buy the lion’s share of certain key components, for example: flash memory, displays, Gorilla Glass, even all the the available milling machines needed to make the aluminum unibody MacBook chassis. They have invested heavily in controlling their own chip technology and of course they are deep in key intellectual property.

These are all characteristics that individually and combined are the most centrally controlled and vertically integrated in the technology business. That they coexist with the similarly extreme federated virtual enterprises is remarkable. But the balanced model has indeed produced never-before-seen results: profound reductions in cost, amazing insertion of innovation into mass products and simple delight in a user base.

(In another note, I speculate on what market Apple should next reinvent. A separate remembrance of Steve Jobs is in the personal section.)

The DARPA work was funded because of a crisis in the acquisition of military systems. As a result, most of the detailed studies involved a core, vertically integrated facilitator, a central mission-centric agent.

Their web store is the most visited on the web afterAmazon.com (and vastly more profitable). Their brick and mortar stores produce the highest total profit of any chain. The Apple Store on Fifth Ave in New York City is that city’s number one tourist attraction!

Amazon itself is an interesting case of a double virtual enterprise. You can only do so much to increase your web presence, so Amazon introduced an affiliate program. Affiliates can engage as simply as using a referral link for a product, and get a reward if that results in a sale on the Amazon site. But an affiliate can also set up their own curated web store and sell through that portal. At one point, Amazon reported that more than half of its new sales were from this program, which turns large numbers of entrepreneurs into virtual front ends.

But they have a virtual enterprise on the back end as well, because there is a limit to how fast they can grow their stock and fulfillment infrastructure. So — after an experiment called ‘Z-Shops’ where customers were referred to affiliate retailers — they introduced Amazon Marketplace. This decomposes the products from all the back end partners and presents them on Amazon’s product pages. Amazon handles the money, and the products are delivered in Amazon-branded boxes with a standard Amazon shipping slip.

© copyright Ted Goranson, 2012