Phase – 1: Product Analysis

Apple Watch Series 2

Willingness to Cannibalize

Megan Brogan, Behzad Nematzadeh, Brian Ricks, James Wedewer

NEW PRODUCT INNOVATION (MKTG 3572), FALL 2016

DEPARTMENT OF BUSINESS ADMINISTRATION

SANTA CLARA UNIVERSITY

History & Category

Apple Inc. is a technology company based in Cupertino, California. The company was

founded in the 1970s and has developed a wide array of products since its inception, most of

which are related to personal computer or computer-like devices, such as the smartphone. In late

2014, the company released its first product in the smartwatch category, the Apple Watch. An

upgraded version of the devices, called Apple Watch Series 2, was released in September 2016.

This analysis will focus primarily on the most recent release, the Apple Watch Series 2.

Smartwatches are digital interface wearable devices that serve a number of functions. The Apple

Watch Series 2 functionality includes:

● GPS Tracking of movement

● Exercise and Heart Rate Monitoring

● Enhancing the user’s smartphone experience

● Running Apple Watch-specific software applications

● Playing music through bluetooth enabled devices

In order to use an Apple Watch, a user needs to also have an Apple branded smartphone. This

product line, the iPhone, is targeted at the premium smartphone market, and is offered at a higher

price point than the majority of its smartphone competitors. Similarly, the Apple Watch is meant

to serve the higher end of the smartwatch market, and is also priced at one of the highest points

among smartwatches.

Category Lifecycle & Product Life Cycle

Another way to look at the product is to examine the total product circle, as represented

in Exhibit 1.

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Development

The smartwatch category emerged as an offshoot of the “wearable” technology product

line, which includes a wide array of products from fitness trackers, like Fitbit, to augmented

reality devices, like Google Glass. One of the first successful pioneers in this market was Pebble.

That company used crowdfunding to launch what many consider the first successful smartwatch.

After this Google developed an operating system, Android Wear, that was utilized by product

developers at Samsung and elsewhere to produce third party smartwatches. This was followed by

Apple’s introduction of the first Apple Watch. 1

With the emergence of the market, the major product producers like Apple, Samsung,

Pebble, Garmin, and Fitbit have collectively began to offer a wider array of products to meet the

needs of a multitude of market segments. These range from exercise and outdoor activity

tracking to running software applications and acting as standalone devices without the need of

smartphones. This is the stage in which the market currently exists.

Product Lifecycle

Similarly, the Apple Watch is in the Growth stage of its product lifecycle. Apple took

more time to enter the market, and as with its smartphones it is not an innovative leader. Instead,

it often lags in presenting the most recent technology and prefers to attempt to achieve optimal

performance, easability of use and reliability. This is the approach that the company followed

with the Apple Watch, and it led their product’s lifecycle position to trail that of the category.

With the release of it’s second edition of the Apple Watch nearly two years after the

announcement of their first edition, Apple looks to grow sales through increased functionality of

1 http://smartwatches.org/timeline/

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its product and hardware improvements. Understanding how sales are tracking to the product

lifecycle is difficult, as Apple is not forthcoming with product-specific sales figures.

Another important issue is the slope of the product lifecycle. While this can only be seen

in retrospect, determining whether the Apple Watch is a high-learning, low-learning, fashion or

fad product is difficult. The slope of this will be determined by both the breadth and height of the

sales gains during the growth stage, where it currently resides, as well as the sales during the

maturity and decline stages.

Why is it Preferred?

The power that the Apple brand exudes is hard to overstate. When the company releases a

product there are a number of loyal customers that can be counted on to purchase the Apple

product without much consideration to similar competitive offerings. This was not always the

case, and just because there are loyal fans of the brand does not guarantee success for its

products. The influence of the brand, however, does give a kickstart to their offerings. In

addition, through marketing and successful product launches, Apple’s brand has been associated

with reliability and high-functionality, and is largely considered a premium brand. This particular

product utilizes the brand, as well as leveraging the success of the iPhone smartphone. First

billed as an accessory to the phone, and now with enhanced capabilities as a more standalone

device, the watch is being marketed and purchased as both a functional and fashion device.

Therefore, the product is preferred largely because of the success of other Apple products.

How is the Product Differentiated?

While the functionality of the Apple Watch can be matched by other products, the main

differentiator from other smartwatches is the integrated functionality that exists with the

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company’s iPhone. Competing products have much of the same functionality as the Apple

Watch, but Apple Watch is the only product that provides complementary functionality to the

iPhone in the manner that it does. More specifically, when someone purchases an Apple Watch,

it is quickly integrated with Apple’s calendar, messaging and email, voice recognition, maps and

alert functions; there is little set up required for a consumer who already owns an iPhone. With

an iPhone required for the operation of the Apple Watch, the out-of-the-box setup is nearly

instant compared to the integration necessary to utilize a competitor’s product.

Competitive Product Analysis

A number of companies have entered the smartwatch market, with industry

representation from fashion, traditional watch, and technology spaces. Gartner’s Magic Quadrant

model (Exhibit 2) shows us that there is a separation between the technology companies and the

other players in their ability to execute. The completeness of vision disparities between the

companies are largely determined by the companies’ experience in the smartwatch market.

However, as evidenced by Apple’s position at the forefront of this category, experience is not the

only determinate. Apple is a leader in this dimension because of its strategy to not be an

innovator in terms of utilizing new technology, but instead offering complete products.

Although several companies are attempting to gain a foothold in the smartwatch market,

Apple’s primary competitors exist in its quadrant (Exhibit 2), including Samsung, Fitbit and

Pebble. These competitors’ products offer features in certain areas that are better than those of

the Apple Watch, and the differences can be more thoroughly examined in Exhibit 2. Fitbit and

Pebble approach the smartwatch from a fitness-focused angle, so the products are generally more

durable, less focused on enhancing the smartphone experience, and have significantly greater

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battery life. Samsung, on the other hand, takes the opposite tact and tries to offer a product more

focused on variety of functionality. Their watch even offers a cellular data connection without

requiring a connected smartphone. Further, while trying to compete with Apple on features,

Samsung has also priced its product lower than the Apple Watch. (Exhibit 9)

Sustainable Competitive Advantage

It is hard to evaluate the success of the Apple Watch without acknowledging that its

adoption is partly attributable to it being an accessory to the successful iPhone. Therefore, it is

hard to evaluate the device as a standalone product, much like the Fitbit or Pebble smartwatches.

Because of the popularity of the iPhone and the perception of Apple as a market leader in that

category, it is very likely that the Apple Watch will maintain a sustained competitive advantage

over other smartwatches for those consumers who use Apple smartphones. According to Kantar,

Apple had an over 30% market share in smartphones in 2013, and relatively similar numbers

before and after. However, unless the device can exist without being tethered to an iPhone, the 2

potential growth of the Apple Watch will be limited to the iPhone user-base.

Innovation Analysis

How New is this Product?

The Apple Watch is a fairly new innovation although the smartwatch category was

created in 2001 with the IBM WatchPad. Although the category was in its infancy when IBM

released its watch, Pebble launched the current generation of smartwatches 2012. The Pebble is

considered the first in its category to integrate modern smartphone technology that users

demanded. Using Booz Allen and Hamilton’s framework (Exhibit 3) to develop the Apple Watch

2 http://www.us.kantar.com/tech/mobile/2016/september-us-smartphone-share-data/ See Exhibit

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Series 2, we can go through the seven stages of product creation with risk minimization (New

product strategy, Idea Generation, Screening and evaluation, Business Analysis, Design and

Development, Testing, Commercialization).

First, Apple identifies potential ideas that consumers have shown an interest in. In the

second stage, there are numerous new ideas being considered but there is major interest in two

product concepts. The Apple TV Set[1] and the Apple Watch are two ideas consumer-surveys

have uncovered interest in. At this point in time smartwatches are considered a growing market.

In comparison, the TV market began facing declining profits and stiff competition[2] resulting in

declines in both profits and revenues. Apple’s market surveys soon showed that 19% of

consumers are likely interested in an Apple Watch[3]. The capabilities and miniaturization of

technology are available for the product so it is a realistic innovation. Other competitors have

crowdfunded their companies and have met their desired sales goals proving there is a viable

market. Apple’s branding also allows for a price premium which would boost profit margins.

Although this is generally the fifth stage, it seems as if the design of the product started

almost 10 years before actual development of the watch. This may not fall into order with the

framework but it makes sense considering how much of an emphasis Apple puts into product

design. Research shows that although actual development of the watch started in 2011 the design

process may have started as early as 2002[4]. Next Apple tested the production runs and used a

small group of internal employees to beta test the product. In the final stage, Apple launched the

Apple Watch with varying bands and metals. This was done in late 2014 and announced at a

highly promoted press conference.

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Platform or a Derivative Product?

This line of products is a blend between a platform and a derivative product. About 70%

of the watch is considered platform while 30% of it is derivative. The derivative aspect of the

product comes from the firm’s scale of learning and hardware experience. The platform aspect of

the product deals with its OS coding, apps, design, phone integration, etc. Still, the derivative

aspect of the product is enough to allow apple to predict and forecast most of the costs associated

with the Apple Watch. Apple is constantly upgrading features of the watch but these are also

considered derivatives since they are minor changes, not new to the market, and easily

forecasted.

Innovation Strategy

The Apple Watch line is in the category of Product Development because we are

introducing a new product in an existing market (See Exhibit 4). The majority of its

functionality is tied to the existing apple iPhone product line. The major risk involved in the

product is competitor products, obsolete technology. Some medium risks are product safety, and

product adoption. These risks can be seen in the Impact/Probability Chart (See Exhibit 5). We

minimize risks by introducing a product that our existing customer base may be interested in. We

also already know what our secondary market share is and that 20% of those users are likely to

buy the watch based off the survey data with no marketing efforts involved[5].

Using the Decision Matrix Analysis (Exhibit 6) we see that, at the time, the Apple Watch

was a decent product to develop. However, there should be a large focus on the market

(consumer trends, primary market size, secondary market size) when introducing a new product.

If we focus our marketing efforts on the Apple Watch and release it with state of the art features

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and capabilities there may be a large demand for the product (additional to the 20% fanatically

loyal customer base).

[1] http://appleinsider.com/articles/12/12/11/47-of-consumers-interested-in-apple-television-willing-to-pay-20-premium [2] http://www.nytimes.com/2011/12/27/business/tv-prices-fall-squeezing-most-makers-and-sellers.html?_r=0 [3]http://appleinsider.com/articles/13/04/19/survey-finds-19-of-consumers-interested-in-buying-apple-iwatch [4] http://www.businessinsider.com/a-timeline-of-how-the-apple-watch-was-created-2015-3 [5] http://appleinsider.com/articles/13/04/19/survey-finds-19-of-consumers-interested-in-buying-apple-iwatch

Utility Analysis

Using K&M’s Utility Map (Exhibit 7), the Apple Watch 2 has utility and buyer

advantage over its competitors, specifically Fitbit, in the areas of convenient purchasing

processes at the Apple store; simple, convenient, and environmentally friendly maintenance

procedures; and a fun image associated with its relationship with supplements (the iPhone).

While these are advantages, the necessity in iPhone connectivity is a limiting factor to the

product’s success. It is often desirable to have a standalone device, such as the Fitbit, where

individuals don’t have to feel attached to their smartphone. Per Exhibit 7, both products are

negatively impacted by the lack of environmental friendliness and risk associated with the

disposal of electronics and lithium-ion batteries; however, this is the case for many electronic

devices. Fitbit’s lack of supplements allows for enhanced customer productivity because the user

does not have to rely on another device. Additionally, both products have a fun and admirable

image when it comes to user-experience.

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Critical Issues

Market research shows that the top three issues facing the smartwatch category directly

are price (40%), disinterest in wearing a watch (32%), and functionality (29%), with a close

fourth issue that consumers “don’t understand the need” (27%). (Exhibit 10)

Price

At a range of $369 to $1249 for the four versions of the Apple Watch Series 2, it sets the

top of the price range in the smartwatch category. While Apple has never been a company

focused on competing on price, for a growing category this has been a difficult point to

overcome for the Apple Watch 1, even at its lower price point.

Product Lifecycle

A watch is not something people plan to replace every 12-24 months like is done in the

smartphone market. And at the Apple Watch Series 2 price point, there may be an expectation

that this product will last through at least two or three phone upgrade cycles before consumers

expect to replace it. Even then, the typical watch consumer expects simple things like the ability

to replace a battery to be a possibility. At present, when the Apple Watch Series 2’s battery no

longer charges, there is no current maintenance path.

Wearing a Watch

Along with the second highest barrier to smartwatch purchasing, “phone does everything

I need,” it’s clear that consumers are not wearing watches to tell time, instead relying on their

phones. The smartwatch gives consumers a new reason to wear a watch, but education is

necessary, which brings us to the next issue.

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Functionality and Don’t Understand the Need

Up until the Apple Watch Series 2, functionality has been limited to what is built into the

product initially, with incremental enhancements possible at best. The Apple Watch Series 2 has

the capability to accept new apps, and has the variety of sensors and capabilities to operate

independently from a phone, which opens up a range of possibilities that have not even been

thought of yet. Expanded functionality in the Apple Watch Series 3 may be a tough sell if the

existing product has all the software and hardware capabilities required.

Extending the Product Line

With four current versions at three price points, there are additional opportunities for

accessories and co-branding beyond what has already been done with the Nike and Hermes

editions.

Unaddressed Needs

Consumers have noted an interest in smartwatches that can make phone calls. There are

technical and service hurdles for this capability, and we will need to determine if this is truly a

necessary feature to expand the category or a nice to have. [6] Additionally, needing to have an

iPhone to operate the Apple Watch is an aspect of the product with which some are not satisfied.

Reviewers have also cited the desire for more or better apps, a long lasting battery, and a simpler

interface. (7)

(7) https://www.cnet.com/products/apple-watch/

[6] https://www.wired.com/2015/09/lg-watch-urbane-cellular-connected/

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Appendix

Exhibit 1:

Exhibit 2: Gartner Magic Quadrant

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Exhibit 3: Booz Allen and Hamilton’s framework

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Exhibit 4: Product/Market Expansion Grid

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Exhibit 5: Risk Impact/Probability Chart

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Exhibit 6: Decision Matrix

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Exhibit 7: K&M Utility Analysis

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Exhibit 8: Competitors

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Exhibit 9: Purchase Drivers [8]

(8) http://us.kantar.com/tech/mobile/2016/wrist-wearable-market-share-data/

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Exhibit 10: Barriers to Purchasing [9]

(9) http://www.us.kantar.com/tech/mobile/2015/kantar-worldpanel-comtech-smartwatch-adoption-data/

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