Yesterday, we were discussing the value of relationships with suppliers and I mentioned the cost leadership of Apple in the ipad as an example.
Remember that Apple as far as the ipod and the iphone product lines are concerned has always been known to be a price leader (meaning highest prices). The margins for the ipods and iphones are supposed to be in the region of 40% to 50%.
However, the ipad pricing strategy is reversed. Apple has priced the ipad much below prices of competitive tablets and no other manufacturer has so far been able to reach these prices. This means that Apple is following a penetration strategy for the ipad in contrast with the ipods and iphones.
The question is, how can Apple have a product that can be priced much lower than the competition. There are multiple reasons for the low price, but one of the most significant ones is Relationships with components suppliers.
Relationships, contracts and future deals with major component suppliers in the technology business matter a lot. Component suppliers of high quality are few, leading to a limited manufacturing capacity for the OEMs in the marketplace. Therefore, the OEM who books the manufacturing capacity of these suppliers in advance will create shortages and barriers for other OEMs. Furthermore, the target market for technology devices is characterized by innovation, excitement and dynamism, which means that any supply disruption creating shortage of products in the retail market will have extremely adverse effects. Customers are excited by the prospect of using and owning high tech products and unavailability at any point in time can put them off.
Apple as an OEM, has secured long-terms contracts with major suppliers of components, especially the touch screen display. Rumors are that they have booked the entire manufacturing capacity of a major supplier for the next two years. Now, imagine the kind of partnership Apple is doing with the supplier...