Apple Offers Lesson in Building Loyalty


Apple (Stock Quote: AAPL), once again, has the gear heads all a-twitter.

The debut this week of the video-equipped iPhone 3GS raised the smart-phone ante by offering competition for
Research in Motion's BlackBerry Storm and the Pre from Palm. To lure customers on a budget, the company also cut in half the price of its original iPhone.

But look behind the headlines, and you'll discover that Apple's success rests on more than just a new cell-phone launch. Just as the iPhone itself encourages multitasking, Apple has multitasked as a company, moving quickly and efficiently within target markets.

Such nimbleness can pay off for any small business. Developing a breakthrough product or service is great. But if you're also able to expand your reach, improve customer service and reinvent the shopping experience so customers keep coming back, you'll be on solid footing for years to come.

It seems to be paying off for Apple. The company's most recent earnings announcement showed an 8% growth in earnings, despite dismal times for tech sales.

Bill Nygren, manager of the Oakmark and Oakmart Select funds at Harris Associates, says Apple's key to success has been its excellence in separate, yet interconnected, areas.

Apple's earliest competitive advantage was its focus on clean, user-friendly devices. "You talk to people in the tech industry, they're all envious of Apple's design expertise," Nygren says.

But great design can only take you so far. Sure, it might persuade graphic designers and filmmakers to buy your computers. It brings waves of early adopters who like to be seen toting the latest cool gadget. But design awards alone won't bring the millions of buyers you need to build a profitable company.

"In the packaged-food business, having a brand gives you the ability to earn a premium," Nygren says. "But across the consumer-electronics sector, price is such a driver. You may have a brand, but you're one of a dozen competitors, and innovations can be copied so quickly."

He mentions TiVo as a cautionary tale. "They put in all the R&D, but by the time it became a mainstream product, they couldn't capitalize on it," he says. Cheaper digital-video recorders flooded the market, and TiVo's dominance vanished.

The iPod could have met the same fate: a game-changing product that quickly became just another entry in a crowded field. But Apple changed the rules of the game with its iTunes store, focusing on software just as much as hardware. The plus for users was that it had almost every kind of music a person could want. The upside for Apple was that those songs were formatted in such a way that they would only play on an iPod.

Apple did the same thing when it launched the iPhone. By setting up the App Store, it created a place for users to customize their phones with thousands of extras, from games to business-accounting software. In less than a year, there have been more than 1 billion downloads, which will run only on an iPhone.

"If you try to save a few bucks by buying a knockoff of an iPod or iPhone, you won't get the same experience," Nygren says. "You won't get access to the same applications. Apple is perfecting the confluence of hardware and software."

Clearly, Apple is doing well selling online. But what's often overlooked is how well the company handles traditional, bricks-and-mortar sales as well. In these days of deserted shopping malls, Apple stores throughout the country still manage to draw customers.

Although Apple laid off about 10% of its store employees in its most recent quarter, retail sales overall were up 1% for the quarter compared with the same period last year. Any rise in sales, especially for big-ticket, tech items, is impressive in the current economic climate.

So Apple has developed innovative new products and reinvented the way people use and customize them. The company has streamlined online and in-store shopping. And what underlies all those initiatives is a focus on customer service. A study released by Forrester Research this spring rated Apple double-digits higher than rivals such as Dell (Stock Quote: DELL) and Hewlett-Packard (Stock Quote: HPQ) in qualities such as usability and quality of customer interaction.

Apple may never topple giants such as Hewlett-Packard or Microsoft (Stock Quote: MSFT). But a relentless focus on customer service has given the company a core of unusually loyal fans. Build a network of people loyal to your brand, and they may be enough to get you through hard times.

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