Case
Why Apple’s product magic continues to
amaze – skills of the world’s #1 value
chain integrator
Will Mitchell
Will Mitchell, a Professor
of Strategy at the Rotman
School of Management
(William.Mitchell@Rotman.
utoronto.ca), is co-author of
Build, Borrow, or Buy:
Solving the Growth
Dilemma, with Professor
Laurence Capron of
INSEAD (Harvard Business
Review Press, 2012). He is
a co-editor of the Strategic
Management Journal and a
board member of Neuland
Laboratories, Hyderabad,
India.
© 2014 RRandallPublish@cs.com
DOI 10.1108/SL-10-2014-0074
pple’s amazing run of blockbusters – iPhone, iPad, iPod, iTunes, multiple iterations
A
of the Mac computer, and going all the way back to the Apple II – has created a fan
base of consumers willing to pay premium prices and produced enormous
corporate value. Apple’s success is often attributed to its superior design skills. Yet
thousands of companies around the world have stellar designers. What underlies Apple’s
ability to bring its designs to commercial stardom and propel shareholder value?
Two related skills that the company has developed since the late 1990s are critical
complements to Apple’s design talents: its ability to combine “build, borrow and buy”
strategies and its world-leading abilities as a value chain integrator.
The three “Build, Borrow and Buy (BBB)” skills
Apple has uniquely sophisticated “build, borrow and buy” (BBB) expertise throughout its
management, going all the way up to its CEO Tim Cook. The company’s lengthy success
record proves it knows when and how to develop products and components internally,
when to ally with other firms and when and how to acquire and integrate other
companies.[1]
1. Build
Apple has deep internal skills, particularly in software design
and early stage hardware. The company is able to attract the
world’s most highly skilled scientific, technical and managerial
talent. Teams of employees work on new iterations of existing
products. Other teams experiment in deep secrecy with
potential major new products, some of which will emerge in the
market as Apple’s next thrusts in creating new value – such as
the recent Apple smart watch and Apple Pay service.
Apple complements its initial internal design activity with the
internal consulting of a diagnostic unit, MediMac, which comes
into play during prototyping. Once an idea has been
conceptualized and given to hardware to make components,
MediMac plays a key role in providing internal support for
people developing software and hardware for the prototypes
VOL. 42 NO. 6 2014, pp. 17-28, © Emerald Group Publishing Limited, ISSN 1087-8572 STRATEGY & LEADERSHIP PAGE 17
 device. Indeed, executives who create prototypes cannot test them without first signing
up with MediMac.
More generally, Apple emphasizes extensive training internally, for technical skills,
management expertise, and in the Apple philosophy. Indeed, without fanfare the company
founded Apple University in 2008, to reinforce the company’s expertise, values and culture.
In addition, Apple reaches actively for external partnerships and acquisition targets that
have leading-edge global expertise.

2. Borrow
The components in Apple products, plus the design activity that created the components
and the assembly activity that puts them together, come from firms around the world. In
2014, for instance, Apple had relationships with about 200 different companies.
Developing, producing and selling the iPhone alone involved more than 30 partnerships,
with firms as disparate as Sanyo and Sharp in Japan for screens, TSMC and UMC in Taiwan
for chips, National Semiconductor and Novatek in the USA and Taiwan for display drivers,
BYD and Tianjin Lishen in China for batteries and Quanta, Flextronics and Foxconn in
Taiwan, China, Brazil and Vietnam for assembly.

These firms are among the world’s most sophisticated companies in their areas, and some are
also active competitors – Samsung is both Apple’s strongest competitor in the smartphone
market and a frequent target of patent litigation, as well as a key supplier of video processor
chips. Indeed, in 2014, Apple had 21 major supply relationships with three different companies
within the Samsung Group. Despite their fierce competition, the companies recognize that they
also need each other if they are to remain at the leading edge of the industry.

Apple zealously guards its secrecy even as it works with the external partners in developing
new products and prototypes. Apple is an important enough partner that its assemblers
and even competitors are willing to create firewalls to protect intellectual resources
developed during the project.

Despite working with such a large and powerful set of partners, Apple harvests much of the
value in the relationships. One study of the iPod, for instance, found that Apple captured about
50 percent of the value of the product, with suppliers holding 18 percent, assemblers 15
percent, distributors 15 percent and retailers 11 percent to 18 percent.[2]

3. Buy
Sometimes, though, a partnership is not enough. When more
complicated interactions are needed to develop and sell new
goods, acquisitions often provide stronger control and better
ongoing exchange of ideas. Apple also excels in the M&A part of
the BBB strategy.

The Thomson/SDC data on acquisition history chronicles more

than 60 deals since 1988 (more than 50 during the 2000s) – with
purchase prices ranging from a few million dollars to the recent
acquisition of Beats Electronics in 2014 for $3 billion. And the
market expects Apple to create value via the acquisitions; when
the Beats deal was announced in May 2014, Apple’s price jumped
about 5 percent.

Apple’s M&A targets have included software, search engines,

maps, electronic devices and a host of other components that are
central to the design and evolution of Apple’s products, but
beyond the firm’s existing expertise. The acquisitions add key
components to Apple’s products, while also helping the company
© 2014 RRandallPublish@cs.com update its skills.

PAGE 18 STRATEGY & LEADERSHIP VOL. 42 NO. 6 2014

‘‘Two related skills that the company has developed since the
late 1990s are critical complements to Apple’s design
talents: its ability to combine ‘build, borrow and buy’
strategies and its world-leading abilities as a value chain
integrator.’’

Apple has an active post-acquisition integration process, with a dedicated corporate

development group. The company has recently added a team of acquisition integration
analysts who examine acquired companies and then assist in integrating the targets’
resources into existing teams within Apple. The integration activity involved broad-based
multidisciplinary integration with HR, legal, information systems, technology, real estate,
operations, finance, tax and other teams.
Nonetheless, it is not enough just to build, borrow and buy – Apple also needs to coordinate
the global value chain that encompasses its BBB activities.

From BBB to value chain integration

A critical component of Apple’s management capability involves its role as a value chain
integrator in coordinating the activities of actors throughout its value chains. Value chains
encompass the ecosystems of activities and actors that design, develop, produce and deliver
goods and services to customers. In turn, value chain integrators (VCIs) are the firms that
coordinate the direct and indirect relationships of firms and other actors that make up a
commercial ecosystem, overseeing the upstream, downstream and complementary activities
that need to be accomplished for products to reach markets efficiently.
Some VCIs are appointed by industry associations or established by formal agreements
among partnerships. More often, VCIs emerge as part of the competitive process in an
industry.
Increasingly, leading firms are competing not only to develop and deliver goods and
services, but also to set the terms of trade and market evolution by coordinating the
activities of actors throughout the value chain. In the competitive dynamics of the consumer
electronics sector, Apple has emerged as one of the world’s leading VCIs.
Indeed, Apple has held first place among Fortune 500 firms in the annual Gartner Supply
Chain rankings since 2008, typically with a score about 1.5 times that of the #2 firm –
McDonald’s, Amazon, Dell, P&G and Nokia have placed #2 in various years. Over the
years, Apple has scored as much as four times higher than the #25 firm – including strong
firms such as Nestlé, J&J, Kimberly-Clark, Kraft, Schlumberger, Intel and Publix.
Value chain integration requires mastering three major skills: Value chain identification,
BBB skill and value chain coordination:
 Value chain identification is the ability to recognize each of the links that makes up the
value chain that delivers value to customers and will deliver future value – from design
through delivery and service.
 BBB skill is the ability to choose effective BBB strategies for each of the links – which
ones will be created internally (Build), which will be out-sourced through simple market
relationships and basic contracts or via more complicated partnerships (Borrow) and
which will be acquired (Buy)?
 Value chain coordination is the ability to coordinate key sequences of links along the
value chain so that projects maintain agility.

VOL. 42 NO. 6 2014 STRATEGY & LEADERSHIP PAGE 19

 In Apple’s case, the value chain expertise means ensuring that the design and production
cycles at dozens of key suppliers such as Samsung, Intel, TSMC and Cheng Uei Precision
are synchronized with each other as well as with activities in the Apple’s internal staff. In
turn, Apple needs to work closely with assemblers such as Foxconn and Quanta to ensure
that their supply chains work smoothly, in sequence with other key steps along the design,
production and marketing chain.
This set of value chain integration skills, particularly the ability to apply them dynamically as Apple
adapts to and leads the creation of new market value, underlies the company’s ongoing success.

What makes apple the VCI leader?

Apple’s three pre-eminent skills as a value chain integrator are:

1. Identifying and integrating the product development and product life cycle value chain.
2. Balancing differentiation and complexity.
3. Facing challenges and adapting capabilities.

1. Identifying and integrating the product development and product life cycle value
chain
In this value chain, Apple speeds up and enhances the success of new product
development by integrating R&D, marketing and other functions within and across the
value chain, including acquiring and licensing from third-party businesses (Exhibit 1).[3]
Some of these activities are carried out by Apple staff, others by personnel at partners. In
either case, Apple takes the lead in identifying what components and processes the new
product will require and ensures that the relevant actors – whether internal or external –
carry out their tasks in appropriate sequence.
Product life cycle: Once products enter the market, Apple actively manages the production,
delivery and recycling chain. Apple tightly specifies expectations for suppliers and, in
some cases, offers exclusivity agreements for particular components in exchange for
volume guarantees. Working with its supply chain partners, Apple personnel have helped
develop new manufacturing processes, some of which have been the subject of patents
filed by the company. Such relationships have helped Apple quickly scale operations to
meet customer demand for existing and new products (Exhibit 2).

Exhibit 1 Value chain: new product development and product launch

PAGE 20 STRATEGY & LEADERSHIP VOL. 42 NO. 6 2014

 Exhibit 2 Value chain: sourcing, delivery, return

Apple and its key assembly partners, such as Foxconn, purchase raw materials and
components from multiple sources for assembly facilities, most in China. In some cases,
vendors need to set up facilities next to the assembly campuses to simplify logistics.
Post-production delivery is made as simple as possible. Assemblers ship products directly
to on-line customers. For other distribution channels such as retail stores, direct sales and
other distributors, Apple warehouses products in one California location.

2. Balancing differentiation and complexity

The strength of the product development chain allows Apple to regularly introduce new
products, while eliminating older ones. This both helps the company remain differentiated
in the market – commanding a price premium – and simplifies its supply chain.
A comparison of Apple’s supply chain to competitors such as Nokia and Dell contrasts their
different strategic choices and capabilities.
Number of items: Apple and Nokia have strikingly different model strategies. Nokia has about
220 different models of cell phones in circulation–with eight major models in India alone, in
2007)–while Apple has only the variants on the iPhone. Apple’s more parsimonious choices of
models still offers enough variety to address key market segments, while limiting the complexity
of making demand forecasts and coordinating its value chain. Indeed, Steve Jobs once said
that he was proud not only of the products Apple has introduced, but also the products Apple
decided not to ship.
Product life cycle: Apple typically manages its products on a one- to two-year life cycle,
long enough to manage flow, while short enough to lead the market as it evolves. Nokia,
despite its broader product line, tended to have longer life cycles for its core handsets,
such as the 2,110 and 3,110.
Inventory turnover: In 2010, Apple had inventory turnover of about 61 times; in 2013,
Apple’s turnover rate reached 69. In comparison, before selling its handset division to
Microsoft, Nokia had inventory turnover of only 13 times in 2010, while Dell had turnover of
47 times (Exhibit 3).
Apple’s higher turnover rate reflects an element of its value chain strategy. Apple is now a
design, marketing and coordination company, outsourcing manufacturing to electronic
manufacturing firms such as Foxconn. By contrast, Nokia manufactured its handsets in its
own facilities in about nine countries, including Finland, India and China.
Nonetheless, Apple still holds investment in inventory at its assemblers’ facilities, so that the
more direct reason for the higher turnover rate lies in using inventory more effectively in
partnership with its assemblers. Apple’s effectiveness in managing the supplier
relationships provides it with a higher inventory turnover rate than Dell, for instance, which
also out-sources production.
Cost of goods sold (COGS): From 2008 through 2010, before selling its handset division,
Nokia’s COGS averaged 67 percent of sales revenue, while Dell’s COGS averaged 82 percent

VOL. 42 NO. 6 2014 STRATEGY & LEADERSHIP PAGE 21

 Exhibit 3 Inventory turnover: Apple, Dell, Nokia, 2007-2013

100

Turnover (COGS / mean

80

inventory)
60

40

20

0
2007 2008 2009 2010 2011 2012 2013

Apple Dell Nokia

Sources: Company annual reports

during the period. In the same three year span, Apple’s COGS averaged 62 percent,
substantially lower than its competitors.
Number of suppliers: Apple focuses on relationships with a moderate number of key
vendors, reporting that fewer than 200 suppliers represent 97 percent of sourcing spend in
2014. Dell, meanwhile, reports that it has about 130 key supply chain partners that it directly
or indirectly manages in 2014. Nokia, by comparison, states that it has “thousands of
suppliers around the world.”
The challenge for a value chain integrator such as Apple is to identify world-class suppliers
for each component, ideally two or more suppliers for as many components as possible to
reduce the chance of hold up in the supply chain, while keeping numbers of partners small
enough to coordinate the direct and indirect relationships in the supply chain.
Number of warehouse facilities: By having a single warehouse in California, Apple can
easily synchronize data between the facility and its retail network of about 250 stores in the
USA shipments to Apple’s 160 retail stores elsewhere in the world typically move either
from that warehouse or from the assembler.

3. Facing challenges and adapting capabilities

Despite its strength, Apple faces critical challenges that it needs to address in managing
its value chain:

The risks of too much value chain integration complexity

Overall, for Apple, the combination of coordinating a global team of internal and external actors to
produce rapid product development of a focused set of products, together with active
management of a moderately complex supply chain has created substantial competitive
advantages.

The contrast with Nokia is striking. Nokia long had a well-deserved reputation as an effective value
chain integrator. The company had a system of inter-linked suppliers, manufacturing plants,
contract manufacturers, distributors, sales vendors and logistics service providers that worked
together under Nokia’s coordinating lead to deliver an ongoing stream of new handsets to
consumers around the world. Nokia had long-term relationships with many of its suppliers and
supported them in improving their development and production processes, while also working with
its distributors and vendors to position their pricing and promotion strategies. Indeed, Nokia topped
the Gartner ranking of global supply chain firms in 2007.

However, the complexity of its global value chain slowed Nokia down when it attempted to respond
to the smartphone revolution sparked by RIM, Apple and Android-based providers such as
Samsung and HTC. Nokia’s value chain integration skills were not up to the task of shifting focus
from basic handsets to smartphones and it ended up selling the business to Microsoft in 2013.

PAGE 22 STRATEGY & LEADERSHIP VOL. 42 NO. 6 2014

‘‘Apple complements its initial internal design activity with
the internal consulting of a diagnostic unit, MediMac, which
comes into play during prototyping.’’

 Market risks: Inventories can become obsolete due to unexpected changes in

demand, global economic fluctuations and natural disasters.
 Upstream risks: Some components have single sources, some components are highly
specialized, and as a result suppliers may be unable to design or deliver on time.
 Knowledge loss risks: Many re-sellers and vendors also interact with competitors.
 Reputation risks: Partners may violate the letter or spirit of codes of conduct.
 Competitive risks. Strong established global competitors such as Samsung, Microsoft
and Google as well as many newcomers such as Huawei, Lenovo and ZTE, are
constantly seeking innovations and advantages in Apple’s evolving markets.
Managing these challenges requires five major types of value chain integration
competencies:
 Customer-driven: The supply-side skills of value chain integration start with a
comprehensive understanding of current customer needs and wants, together with
thoughtful assessment of what products and services will create differentiated
value in the future in the face of fierce competition. This requires constant
engagement of staff members in all VCI activity. Personnel need to understand
customer demand cycles within ongoing products, as well as product life cycles as
demand shifts.
 Visible interaction: On the supply-side, key suppliers need to be connected with
internal personnel early in the new product development cycle and throughout the
product life cycle. In doing so, staff members in a VCI leader need to undertake
hard-nosed evaluation of both internal and partner performance: for technical
expertise, for commitment to the partnership and for maintaining secrecy about
Apple’s products and goals. Apple needs to be highly visible – and demanding –
as a coordinator of the ecosystem.
 Systemic view: Corporate leaders and personnel throughout the company require
a systematic view of customer value, the value chain that delivers that value and the
competitive and social contexts that shape value demands, so that they can
communicate and coordinate activities of multiple vendors throughout the
ecosystem rather than simply manage a series of one-to-one relationships.
 Flexibility: Staff members in a VCI leader require the ability to change the system as
demand, supply and competitive conditions vary. This means being able to switch
suppliers, shift from internal to external sourcing – and the reverse – and use
inventory and asset management tools effectively, even for inventory and assets
that are located in partner facilities. VCI leadership also requires the ability to
identify opportunities to avoid fixed cost investments that may become obsolete as
markets change.
 Risk assessment: VCI personnel need to undertake ongoing risk assessments of
partners and potential partners, competitors, markets, regulatory and political
conditions, social norms and technological opportunities.

VOL. 42 NO. 6 2014 STRATEGY & LEADERSHIP PAGE 23

 Stumbles sometimes occur
Yet even great VCIs sometimes falter. In 2012, Apple’s launch of the iPhone 5 faced
controversy when its new mapping application – combining internal mapping software
and geographic data that it licensed from the Dutch firm TomTom – was much poorer
than the Google Maps application that it replaced. In 2014, the launch of the iPhone 6
Plus received negative publicity following reports of bent phones, which some analysts
attributed to problems in communication in the supply chain. Even temporary setbacks
such as these can create big problems. Most often, however, Apple succeeds in
carrying out its customer-driven, visible interaction, systemic view, flexibility and risk
assessment tasks, all critical to managing its complexity advantage (Exhibits 4 to 13).

Exhibit 4 Apple v. the Dow Jones Industrial Average (DJIA), 2002-2014

Exhibit 5 Apple market capitalization ($ billion), 1990-2014

PAGE 24 STRATEGY & LEADERSHIP VOL. 42 NO. 6 2014

Exhibit 6 Apple sales trends, 1988-2014 ($ billion)

$200

$150

Sales revenue ($ bln)

$100

$50

$0

2000

2013
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

2014
Sources: Apple annual reports

Exhibit 7 Apple cost and profitability trends (percent of sales), 1988-2014

100%

80%

60%
COGS %
% of sales

SGA %
40%
R&D %
ROS %
20%

0%
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

−20%
Sources: Apple annual reports

Exhibit 8 Apple revenue, expense and net income comparisons ($ millions)

1988 1990 2000 2010 2011 2012 2013 2014
($) ($) ($) ($) ($) ($) ($) ($)

Sales revenue 4,071 5,558 7,983 65,225 108,249 156,508 170,910 178,144
Selling, general,
and admin expense 1,188 1,729 1,256 5,517 7,599 10,040 10,830 11,508
R&D expense 273 478 380 1,782 2,429 3,381 4,475 5,523
Net Income 400 475 786 14,013 25,922 41,733 37,037 38,555
Sources: Apple annual reports (February 28 year end)

VOL. 42 NO. 6 2014 STRATEGY & LEADERSHIP PAGE 25

 Exhibit 9 Apple employment and sales/employee trends, 1994-2013

90,000 $2.5

Sales $ / employee ($ milloin)

$2.0
60,000

Employees
$1.5

$1.0
30,000
$0.5

0 $0.0

1988
1989
1990
1991
1992
1993
1994

1997
1998

2004
2005
1995
1996

1999
2000
2001
2002
2003

2006
2007
2008
2009
2010
2011
2012
2013
Sales $ / employee ($ million) Apple employees

Notes: From 1994 to 2013, Apple’s employment grew by 7.1 times, while sales grew by 19.4
times. For comparison, in 2010, before selling its handset division, Nokia had sales revenue of
$57 billion, 132,000 employees and sales/employee of $430,000. Dell meanwhile, had
revenue/employee of about $500 to $600 thousand from 2010 through 2013 (on revenue of
$50 to $60 billion and about 100,000 employees)
Sources: Apple annual reports

Exhibit 10 iPhone value chain

Layer Firm Nationality

Software and design Apple USA

Assembly Foxconn, Quanta, Others Taiwan
TFT-LCD screen Sanyo Epson, Sharp, TMD Japan
Video processor chip Samsung Korea
Touch screen overlay Balda Germany
Bluetooth chip Cambridge Silicon Radio UK
Chip manufacture TSMC, UMC Taiwan
Baseband IC Infineon Technology Germany
WIFI chip Marvell USA
Touch screen control chip Broadcom USA
CMOS chip Micron USA
NOR flash ICs Intel, SST USA
Display driver chip National Semi, Novatek USA, Taiwan
Case, mechanical parts Catcher, Foxconn Tech Taiwan
Camera lens Largan Precision Taiwan
Camera module Altus-Tech, Primax, Lite On Taiwan
Battery charger Delta Electronics Taiwan
Timing crystal TXC Taiwan
Passive components Cyntec Taiwan
Connector and cables Cheng Uei, Entery Taiwan
Sources: Apple annual reports

PAGE 26 STRATEGY & LEADERSHIP VOL. 42 NO. 6 2014

Exhibit 11 Gartner supply chain global top 25 (2014)
Rank Company Composite score

1 Apple 8.9
2 McDonald’s 6.3
3 Amazon 6.1
4 Unilever 5.3
5 P&G 5.2
6 Samsung Electronics 5.1
7 Cisco Systems 4.6
8 Intel 4.5
9 Colgate-Palmolive 4.2
10 The Coca Cola Co. 4.0
11 Inditex 4.0
12 Nike 3.9
13 H&M 3.8
14 Walmart 3.5
15 PepsiCo 3.4
16 Lenovo Group 3.1
17 Starbucks 3.1
18 3M 3.1
19 Qualcomm 3.0
20 Seagate Technology 2.8
21 Kimberly-Clark 2.7
22 Johnson & Johnson 2.7
23 Caterpillar 2.4
24 Cummins 2.3
25 Nestlé 2.3
Note: The composite score incorporates industry and Gartner analyst surveys (50 percent weight),
3-year ROA and revenue growth averages (35 percent) and inventory turns (15 percent).
Source: www.gartner.com/doc/2746917?srcId⫽1-3132930191&pcp⫽gi_sr_sc25

Exhibit 12 Apple geographic distribution of sales and long-lived assets

2013 2009 2001
Revenue ($) ($) ($)

Americas 62,739 18,981 3,037

Europe 37,883 11,810 1,249
Greater China 25,417 – –
Japan 13,462 2,279 713
Rest of Asia Pacific 11,181 3,179 345
Retail 20,228 6,656 19
Total revenue 170,910 42,905 5,363
Long-lived assets
United States 7,399 2,348 498
China 7,403 365 –
Other countries 2,786 480 80
Total long-lived assets 17,588 3,193 578
Notes: Long-lived assets include property, plant and equipment, including capital assets held at its
suppliers’ facilities and inventory pre-payments; long-lived assets located in China consist primarily
of product tooling and manufacturing process equipment at suppliers’ facilities and assets related
to retail stores and related infrastructure
Source: Apple annual report (February 2014)

VOL. 42 NO. 6 2014 STRATEGY & LEADERSHIP PAGE 27

 Exhibit 13 Apple product segments: 2013
Product sales 2013 $ million Units (000)

iPhone 91,279 150,257

iPad 31,980 71,033
Mac 21,483 16,341
iPod 4,411 26,379
iTunes 16,051
Accessories 5,706
Total 170,910
Source: Apple annual report (February 2014)

Notes
1. For more background on BBB strategies, see Laurence Capron and Will Mitchell, Build, Borrow, or
Buy: Solving the Growth Dilemma, (Harvard Business Review Press, 2012).

2. “Who captures value in a global innovation network? The case of Apple’s iPod” Greg Linden,
Kenneth L. Kraemer, Jason Dedrick), Communications of the ACM, 52 (3), March 2009, pp.
140-144.

3. This section includes ideas adapted from SupplyChainOpz, www.supplychainopz.com/2013/01/

is-apple-supply-chain-really-no-1-case.html

Corresponding author
Will Mitchell can be contacted at: William.Mitchell@Rotman.utoronto.ca

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PAGE 28 STRATEGY & LEADERSHIP VOL. 42 NO. 6 2014