Apple

Who Captures Value in a Global Innovation System? The case of Apple's iPod

Greg Linden, Kenneth L. Kraemer, Jason Dedrick Personal Computing Industry Center (PCIC) An Alfred P. Sloan Foundation Industry Center The Paul Merage School of Business University of California, Irvine

June 2007

The Personal Computing Industry Center is supported by grants from the Alfred P. Sloan Foundation, theU.S. National Science Foundation, industry sponsors, and University of California, Irvine (California Institute of Information Technology and Telecommunications, The Paul Merage School of Business, and the Vice Chancellor for Research). Online at http://pcic.merage.uci.edu.

Introduction Innovation is held to be the key to U.S. competitiveness, but there is little understanding of who capturesthe value from a successful innovation. This paper is a preliminary report on a study that will answer the question for specific examples of innovation. Here, we present a framework for analysis and use that framework to look at one member of Apple’s iPod family, part of a thriving ecosystem that has upended business models across the consumer electronics, computer, and entertainment industries.The iPod is a perfect example of a globally innovated product, combining technologies from the U.S., Japan and a number of Asian countries. In the past, large electronics companies designed and developed their own products, often using internally-produced components. Such highly integrated companies created and captured a large share of the value of innovation, mostly in their home countries.Since then, supply chains in the global electronics industry have steadily disaggregated across corporate and national boundaries (Sturgeon, 2002; Dedrick and Kraemer, 1998). Companies that formerly manufactured most products in-house, such as IBM and HP, as well as start-ups that never had manufacturing capabilities, have outsourced production and even product development to global networks ofcontract manufacturers (CMs) and original design manufacturers (ODMs). Even vertically integrated Japanese and Korean companies rely on outside suppliers for key parts, equipment and some final assembly. Today the creation of a successful product in the global electronics industry spreads wealth far beyond the lead firm, i.e. the company whose brand appears on the product, and who bears primaryresponsibility for conceiving, coordinating, and marketing new products. While the lead firm and its shareholders are the main intended beneficiaries of the firm’s strategic planning, other beneficiaries include partners in the firm’s supply chain and firms that offer complementary products or services may also benefit. The lead firms recognize how their products create potential value and they negotiateover its division with their partners. A successful firm understands that the creation of value through innovation is not a zero-sum game, and profits are needed all along the supply chain to sustain innovation by all participants. In this paper, we build a framework for measuring and mapping the value created along a supply chain and show preliminary results from an analysis of one model of theApple iPod line. Conceptual framework Within a supply chain, each producer purchases inputs and then adds value, which then becomes part of the cost of the next stage of production. The sum of the value added by everyone in the chain equals the final product price. The natural starting point for estimating these values is a map of a supply chain showing the activities involved in passing from rawmaterial to the consumer. A stylized supply chain for a generic electronic product is shown in Figure 1.

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Figure 1. Generic electronics supply chain
Core technologies A few highcost inputs CM/ODM Brand name vendor IP, design, marketing Distributors Retail sales Distribution, sales Online, phone sales Consumer

Materials, subcomponents

Manufacturing Many lowcost inputs

Each...