Phase – 2: Product Analysis

Apple Watch Series 3

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

Problem Statement

The Apple Watch portfolio is in its growth stage where it must establish a strategy to

‘cross the chasm’ and reach new market segments and more product champions. The Apple

Watch Series 2, Apple’s most recent derivative product of this portfolio, is situated in an

evolving market where customer demands are still in flux and yet to be accurately defined. Could

Apple continue to use quality and unique applications as differentiators to justify a higher price?

What new product attributes would keep the Apple Watch competitive AND expand the target

market?

Concept Ideation, Generation, and Next Steps

Through Voice of the Customer (VoC) survey analysis (Exhibit 1a-c) and Ethnography

(Exhibit 2), customer needs were identified. Ethnography revealed how and how often the Apple

Watch is used. The Apple Watch allows users to stay connected without looking solely at their

Apple iPhone. Similar to the watch industry, it also acts as a piece of jewelry and a method of

telling the time. VoC revealed that consumers are more price sensitive and demand is elastic up

until the $150K salary threshold, where users are less sensitive to price and are willing to

purchase a wearable. Of the sample we surveyed, each income group was almost exactly 50%

split, whereas those above $150K showed only 28% without a wearable. The VoC also

demonstrated that wearables are used primarily for fitness/step tracking, especially while

walking and running. The data undoubtedly showed that customers need the product to be

aesthetically pleasing and have a reliable battery life and charging features. With the Conjoint

Analysis (Exhibit 3), it is confirmed that the preferred features are improved battery life and

redesigned visual look and feel and that Apple has failed to meet these names. One can also see

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that the customer’s Willingness to Pay (WTP) is greatest for these features as well as more

accurate data from the heart rate monitor and enhanced water resistance.

The concept generation process resulted in the following three recommendations to create

a solution for the battery/charging need and desire for improved design: 1) Mechanical

Movement Charging, where wrist movement provides power to the device; 2) Solar-Powered

Charging, where all kinds of light can charge the battery and fuel the device; 3) Battery Band,

where the Apple Watch bands hold additional batteries for longer-life. With each of these

options there is a proposed redesign, which gives customers the opportunity to purchase different

faces for their Apple Watch. Improved battery life and more variability in design addresses both

primary needs identified in the concept ideation and generation processes.

According to the RWW Model (Exhibit 4), option 2 (solar-powered charging) has the

greatest opportunity to succeed while reducing risk. There are technical challenges with each of

these models; however, the Solar-Powered option provides more benefits than cost. Apple has

the resources and capabilities to tackle the battery challenge if managed properly. The battery

band is not an acceptable solution at this time because it would require too many vendor

partners, already designing brands, to find the means and technological capacity to input

batteries into their own product lines. Mechanical Movement, on the other hand, would be a

more innovative, risky approach that has not been researched enough to support real-world

implementation. The experience in the solar-powered watch industry has been introduced to the

market, but is still in its infancy and should be capitalized on. Exhibit 5 shows the new design of

the watch that not only addresses the needs of the customer, but is attainable.

Concept Testing

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With concept generation completed using the aforementioned ethnography and VoC, we

identified which attributes and features the Apple Watch 2 lacked. The most common attributes

focused on the Battery Life and the Visual Look of the watch. The conjoint Analysis, referred to

above, uncovered that these two attributes provided monetary value for the company while

providing the customer with benefits they desired. These attributes seem technologically feasible

and makes monetary sense by providing a hardware platform for derivative software upgrades.

Our first round of Concept Testing revolves around a Secondary Survey (Exhibit 6) collecting

information regarding the Solar Face and the Removable Watch Face features. Secondary survey

data focused on the following users: Exercise Tracking, Watch users, Apple Watch owners,

iPhone Owners, and Others. From this data, we concluded the Solar Face and Changeable Watch

Face are features that provide customers with the benefits they desire. Next, a TOP box analysis

(Exhibit 7) showed a 16% increase in likelihood to buy this Apple Watch with compared to

competitor products. Further Concept Testing for the solar face will take place with prototype

users, manufacturing partners, and watch face designers, as well as engineers as we move from

concept testing to concept screening.

Screening

Internally, we started our concept screening process using the Utility Map (Exhibit 8) to

show that the Apple Watch can gain utility during the buyer experience by matching the “image”

utility to “use” setting the market standard for “productivity” during “use” . These features

provide utility during the buyer experience and position the product away from current

competitors. Furthermore, the utility of simplicity during use cycle has been a staple of Apple’s

brand which further helps differentiate its market position. Using the Augmented Product

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Concept Map (Exhibit 9) we see that the pricing and quality perceived for the Apple Watch 3 is

unique to the competition. Engineers have assured us that we have the capability in-house to

modify these existing technologies and can purchase additional (intellectual or physical)

properties if needed. Our partial Screen Scoring Model (Exhibit 10) shows that we have a

difficult technical task to accomplish, however, it will secure our superiority assurance.

Additionally, these technical accomplishments are shown to have a probable increase on market

share and fill the unmet need of the current market. The interchangeable face and solar charging

capabilities satisfies our customer needs while separating us from our competitors.

The Apple Watch Series 3 will allow us to create a hardware platform using the base of

the watch. Using the same production and hardware methods we can create watches with

additional capabilities in the future. This will reduce our costs in the long run and provide a base

for additional derivative products. At the same time, our product sales forecast predicts a 50%

likelihood that 13.8 million units will sell in the first 12 months (Exhibit 15). The

interchangeable face and solar charging capabilities satisfies our customer needs and expands the

TAM. Again, looking at the Augmented Product Concept Map the Apple Watch 3 satisfies

consumers as a core smartwatch, as an actual Apple Watch 3 Product, and fits into the Apple

Ecosystem with style as an augmented product. Existing departments and processes will be used

to develop the new watch because most of the watch will be a variation of the current version.

Additional design partnerships (both internal and external) will need to be created in able to

satisfy customer demands for stylistic variances.

Product Protocol

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Our product protocol outline (Exhibit 11a) takes current Apple users (our target market)

and creates an end-user “I want list” (Exhibit 11b) from the customer perspective. The final

product protocol (Exhibit 12) is an internal, multi-disciplinary guide we developed to focus the

company on the attributes we are trying to provide. Product Protocol includes weekly meetings

focusing on engineering, product development, and purchasing managers associated with the

product. Once a month all the above mentioned management will also meet with marketing,

sales, and finance to coordinate their efforts for a successful development and launch.

Target Market

All versions of the Apple Watch have four core market segments: Tech Peacocks (early

adopters), Active/Sports, Core Functional, and Fashionistas. Each segment consists of current

Apple users and has key values (Exhibit 13) that sets it apart from the others.

Tech Peacocks (early adopters) - In the Bass model, this market segment consists of the

Innovators along with some early adopters. When it comes to cell phones, tablets, computers and

tech gadgets, they always have the latest products, and they want to show them off. When the

latest phone is released, or a new version of the Apple Watch, they will have it on day one. This

segment’s primary purchase driver is simply that they own the latest version and the newest

technology at all times. They value functionality such as apps, battery life and core features, but

those are not key decision criteria. Product strength in those features is beneficial, however, as

these buyers are product evangelists. This segment has inelastic demand, which fits with their

buying pattern as an innovator or early adopter. These buyers will buy the Series 3 at a high

adoption rate.

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Active/Sports Users - Buyers in this segment have already owned a wearable product

such as a Fitbit, Garmin, or other activity tracking device for years. That product category has

already moved into the Early Majority phase in the Bass model, where many mainstream buyers

now have the product. To these buyers, the Apple Watch should replace those products. Even if

they do not play water sports, they sweat, so the original Apple Watch was an early failure as its

splash resistance was not sweat resistance. They need enough battery life to last all-day sessions

on the mountain skiing, hiking in the woods, or out on the bike. Core functionality needs to

include GPS because they may not be doing an activity where they can take their phone. And

they need the core functionality and Apps to support all that they do or might do in the future.

Active/Sports users are a focus of the Apple Watch Series 3. Just like the Series 2 targeted this

market with water proofing, the Series 3 addresses their next highest pain point - battery life.

Core Functional Users - This segment is the straight-forward Apple Watch buyer. They

generally take the product as-is, are often multi-product users of the Apple ecosystem, and have

certain expectations of every Apple product. They will buy Apple products again and again, but

might only buy a new iPhone every other generation unless their cell phone carrier gives them a

new one every 2 years for little to no cost. The product must meet their core functionality

expectations out of the box, which includes battery life, and they value expandability through

applications. They might buy simple accessories such as watch straps to accessorize the Watch to

their clothing, but they don’t necessarily wear the latest fashion trends and don’t need their

Watch co-branded with designer labels. Core Functional Users are happy with their Series 1 or

2 watch. If they have a Series 1, they will likely upgrade to the Series 3 to gain two product

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generations of benefits. Series 2 owners might hold off on buying a Series 3 if battery life is not a

high need or problem given their usage habits and current design satisfaction.

Fashionistas - The fashionista prefers designer products, and similar to the Tech Peacock

they will wear an Apple Watch if they think it makes a statement. Exclusivity drives this

segment’s purchase decision-making. If the watch itself isn’t enough, they will happily purchase

special editions and/or accessories to individualize the product and make it more one of a kind.

They are not as focused on functionality beyond core features, and something like the special

Coach edition Series 2 watch is a perfect fit for them. As a new buyer to the Apple Watch, they

will always buy the latest model. The Series 3 can be accessorized or personalized in ways that

are not possible with a Series 1 or 2, so it’s likely they would feel the need to upgrade for this

flexibility and improved battery life.

Product Forecast

Using third party market research and Assumption-Based Modeling, we have established

product forecasting for Apple Watch sales in general as well as the Apple Watch Series 3

(Exhibit 14 & 15). IDC and Technavio have recently completed estimates on the growth of the

Wearables Devices and Smartwatch markets. Earlier market forecasts as wearables were just

coming into the market were significantly higher, and forecasts now reflect more conservative

unit sales forecasts that better reflect actual usage. IDC predicts a market 5-year CAGR of

23.0%, with Apple only seeing 15.5% during the same time period. Technavio is slightly more

aggressive in their market forecast, predicting a market 5-year CAGR of 25.2%, and if we apply

that forecast proportionately to Apple using IDC’s 2016 estimate as the base, Apple’s 5-year

CAGR would be 19.4%.

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Looking toward a release of the Apple Watch Series 3 in September 2017, in-line with

recent phone and watch releases, we applied the following assumptions to predict unit sales:

● 50% of the 1st year product sales to Sept-Dec 2017, and 50% to Jan-Aug 2018 to close out 12 months of sales expectations

● Average of IDC and Technavio’s market forecasts based on Apple’s 2016 estimated watch sales

● Weighted sales results at 75% of forecast (lower demand), 100% of forecast (medium demand) and 125% of forecast (higher demand), and applied a probability to each

● Series 1 and Series 2 watches will continue to be sold and will make up 25% of all Apple Watch sales

Given these assumptions, we forecast Apple will sell 14.1M watches in the Sep 2017 - Aug 2018

time period, of which 75%, or 10.6M units, will be the new Apple Watch Series 3 product. Sales

will be driven primarily by new Apple Watch buyers, next by late switchers moving from Series

1 to Series 3, and third by buyers moving from Series 2 to Series 3. We predict these purchasing

trends because, according to our market segment analysis, fashionistas and early adapter will be

attracted to the new design and active/sports users will be excited about the new, extended

battery life.

Product and Technology Development

In order to achieve these stated goals, Apple needs to develop both the new product and

the technology needed to achieve the new products aims. We will continue to develop the new

version of the Apple Watch as a derivative of the old version. The product roadmap, Exhibit 16,

demonstrates the flow from concept generation, testing and screening, model selection, and

implementation.

The development of the solar face technology is outlined in Exhibit 17. After concept

testing the various methods of utilizing solar technology, we will focus on prototyping and

testing. Our goal is to achieve a 95% satisfaction as a consequence of the prototyping process.

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Similarly, we will develop the changeable watch face, focusing our development on the manner

in which the face connects with the device. This process is outlined in Exhibit 18. Apple will

offer a number of different watch faces upon purchase. While commitments from specific third

party designers have not been solidified, those portrayed in Exhibit 19 provide examples of

potential partnerships.

Portfolio Strategy

Increasing the capacity of the battery in the device, while making the watch more

fashionable, is the goal of the Apple Watch Series 3. This fits into Apple’s larger smartwatch

portfolio strategy of continuing to develop new and demanded technologies into its derivative

smartwatch products. Each derivative is a technological improvement upon the former, and aims

to fill the needs of those at the higher end of the smartwatch market. The previous version can

then be lowered in price and marketed toward a larger, more price conscious segment of the

market. The overall strategic objective is to continually improve the fashionability and

functionality of the Apple Watch, while primarily increasing battery capacity. Only two versions

will remain marketed so we do not confuse the customer as to which product can best meet their

needs. Further, this will help differentiate Apple smartwatches from Android smartwatches, for

which there are a multitude of variations. This strategy is one that will enable the Apple Watch

line to remain in a high relative position in terms of market share, while having a low to medium

growth rate because of the need to pair the watch with an Apple iPhone product. This puts the

product in the Cash Cow category in the BCG Matrix (Exhibit 20).

Platform Strategy

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This iteration will continue to expand the Apple Watch Platform and we have used a

need-based approach for the development of different products within this platform. We will

continue to focus on customer needs first rather than attempting to progress via a

technology-based approach that might develop innovative products, but might do so for a set of

customers that does not exist in the market. The Apple Watch is so uniquely integrated into the

Apple ecosystem that imitation from competitors is not likely. While competitors can match the

Apple Watch on specifications, it will continue to hold an advantage because of its integration

with the Apple ecosystem. This only remains true if the Apple Watch is a leader in the industry,

producing devices that function amongst (or beyond) the best in the industry. The Apple Watch

Series 3 will work with current bands, chargers, and will have the same OS, while continuing to

support familiar software applications. Beyond the Apple Watch Series 3, Apple will continue to

develop a number of additional derivatives, to be released on a yearly basis. Each derivative will

continue to progress in both functionality, design, and battery capacity. The Merwyn Translation

Journal explains why and how the Apple Watch Series 3 is a promising business opportunity and

the Feature Function Benefit Matrix details the primary value of the product. (Exhibit 21 & 22).

Value Proposition

For all individuals interested in staying connected, fashionable, and fit, Apple offers the

customizable, solar-powered Apple Watch Series 3, which unlike its competitors, offers a

premium smartwatch with full and seamless integration in the Apple ecosystem, exceptional

battery life, and the ability to make it your own. Users can express themselves through the design

of their watch and will be able to wear the device for multiple days and reduce smartphone

dependence.

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Exhibits

Exhibit 1: Voice of the Customer

Voice of the Customer (31 Questions, 56 responses)

What cell phone do you own? Do you exercise? If so, how often? What type of exercise? Do you wear a watch? If so, what kind? Brand? Why do you wear a watch? Do you own a wearable? If so, what kind? Did you buy it for yourself or get it as a gift? What time of day do you find yourself using the wearable the most? What’s your favorite application? What’s your favorite feature? What are you trying to accomplish with the product? Do you wear your wearable while you exercise? What prevents you from using/wearing your wearable? What do you like about the wearable? What do you dislike? What has been your worst experience with your wearable? Why did you choose to this wearable over its competitors? If you could change one or two things about your wearable, what would it be? Would you be willing to pay for this change? How much? If not, why not? Have you ever thought purchasing a wearable? If so, what for? What would be the most attractive feature if you had a wearable? What is the best experience you’ve had with a wearable? If you could change one or two things about wearables, what would it be? What industry do you work in? What is your income range? What is your age range?

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Exhibit 1a: Voice of the Customer Data Analysis - Q: Do you exercise / how often / what kind?

Exhibit 1b: Voice of the Customer Data Analysis - Q: What do you dislike?

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Exhibit 1c: Voice of the Customer Data Analysis - Q: What prevents you from wearing your wearable?

Exhibit 2: Ethnography

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Exhibit 3: Conjoint Analysis

Attributes Ranking/Priority

(by frequency mentioned)

WTP Ranking (perceived by Apple for Apple Watch Series 2)

Value Gap

Battery Life 1 $100.00 5 -4

Visual Look & Feel / Thickness 2 $200.00 7 -5

Step Count 3 $- 6 -3

GPS 4 $- 2 2

Calorie Tracking 5 $- 4 1

Water Resistance 6 $30.00 1 5

Heart Rate Monitor 7 $50.00 3 4

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Exhibit 4: RWW Analysis

RWW Model

1) Mechanical Movement Charging, where wrist movement provides power to the device 2) Solar-Powered Charging, where all kinds of light can charge the battery and fuel the device 3) Battery Band, where the Apple Watch bands hold additional batteries for longer-life

Is it Real?

Is the Market Real? 1 2 3 Is the Product Real? 1 2 3

Is there a need or desire for the product?

Yes Yes Yes Is there a clear concept? No Yes Yes

Can the customer buy it? No No Yes Can the product be made? Yes Yes Yes

Is the size of the potential market adequate? Yes

Will the final product satisfy the market? No Yes No

Will the customer buy the product? No Yes Yes

Can We Win?

Can the Product be Competitive? 1 2 3

Can our Company be Competitive? 1 2 3

Does it have a competitive advantage? Yes Yes Yes

Do we have superior resources? Yes Yes Yes

Can the advantage be sustained? No Yes No

Do we have appropriate management? Yes Yes Yes

How will competitors respond? Slow Fast Medium

Can we understand and respond to the market? Yes Yes Yes

Is It Worth Doing?

Will the Product be Profitable at an Acceptable Risk? 1 2 3

Can our Company be Competitive? 1 2 3

Are forecasted returns greater than costs? No Yes No

Does the product fit our overall growth strategy? Yes Yes Yes

Are the risks acceptable? No Yes Yes Will top management support it? No Yes Yes

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Exhibit 5: New Product Design/Diagram

Exhibit 6: Concept Testing - Secondary Survey Questions & Analysis

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Exhibit 7: Top Box Analysis

Exhibit 8: Utility Map (New vs. Old)

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Exhibit 9: Augmented Product Concept Map

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Exhibit 10: Screen Scoring Model

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Exhibit 11a: Product Protocol Outline

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Exhibit 11b: Product Protocol - I Want List & Design List

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Exhibit 12: Final Product Protocol

Exhibit 13: Apple Watch Market Segmentation

Importance Criteria Tech Early Adopters /

Peacocks Active / Sports

Users Core

Functionalists Fashionistas

Estimated Market Contribution (to 100%) 20% 25% 45% 10%

Apps Medium High Medium Low

Battery Life Medium High High Low

Water / Sweat Protection Low High High Low

Core Functionality Medium Medium High Medium

Simple Accessories Medium Medium Low High

Branded Accessories Medium Low Low High

Latest Technology

Extreme - they must have the latest tech and

they show it off Medium Low

High if they are like “Tech Peacocks”

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Exhibit 14: SmartWatch Market and Apple Watch Market Share Forecast IDC Forecast* Sep. 15, 2016 Watch OS

2016 Est (units, M)

2016 Mkt Share

2020 Forecast (units, M)

2020 Mkt Share

5-year CAGR

Apple watchOS 10.5 52.3% 23.9 43.8% 15.5%

Android / Android Wear 4.6 22.9% 22.8 41.8% 44.4%

Tizen 2.6 12.7% 3.8 6.9% 9.4%

RTOS 2.1 10.2% 3.4 6.2% 35.7%

Others 0.4 1.8% 0.7 1.2% -7.1%

Total Smartwatch Market 20.1 100.0% 54.6 100.0% 23.0%

https://www.idc.com/getdoc.jsp?containerId=prUS41736916

Technavio* Forecast using IDC 2016 Units:

2016 Est (units, M)

2016 Mkt Share

2020 Forecast (units, M)

2020 Mkt Share

5-year CAGR

Apple watchOS 10.5 52.3% 27.1 43.8% 20.9%

Total Smartwatch Market 20.1 100.0% 61.9 100.0% 25.2%

http://www.businesswire.com/news/home/20160823005095/en/

Forecast Average: Apple watchOS

10.5 52.3% 25.5 43.8% 19.4%

Exhibit 15: Product Sales Forecast

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Exhibit 16: Product Development Roadmap

Exhibit 17: Technology Development Roadmap: Solar

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Exhibit 18: Technology Development Roadmap: Changeable Face

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Exhibit 19: Changeable Face Styles Apple Offerings Third Party Options

Traditional Rolex

Circle Tag Heuer

XL Burberry

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Exhibit 20: BCG Matrix

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Exhibit 21: Merwyn Translation Journal

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Exhibit 22: Feature Benefit Chart FEATURE FUNCTION BENEFIT

A smartwatch face infused with solar power technology

Allows users to charge their smartwatch while it is not being used on their wrist

Reduces the time an Apple watch needs to spend on a charger, off the wrist. Increases usable time of product by customer. Addresses the biggest concern of current smartwatch users.

A removeable smartwatch face

Allows users to change their smartwatch face

Increases the fashionability of the watch. Enables users to further customize their watch beyond the band.

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