Apple management project

GREAT LAKES INSTITUTE OF ENERGY MANAGEMENT & RESEARCH, GURGAON

STRATEGIC MANAGEMENT PROJECT REPORT

STRATEGY MANAGEMENT AT

APPLE, INC.

1. 2. 3. 4. 5.

PRESENTED BY: Group 11 Kapil Bhati (19) Kumar Rathnam (21) N Praveen Kumar (29) Nikhil Yadav (30) Sharath Babu (46)

Date: April 3, 2012

Contents 1.

INTRODUCTION .................................................................................................................. 3

2.

APPLE: BRIEF HISTORY ........................................................................................................ 4 2.1

Early Products .............................................................................................................. 4

2.2

Exit of Steve Jobs and Decline of Apple....................................................................... 5

2.3

The Sculley Years, 1985–1993 ..................................................................................... 5

2.4

The Spindler and Amelio Years, 1993– 1997 ............................................................... 6

2.5

Steve Jobs and the Apple Turnaround ........................................................................ 7

2.6

Apple iPods and iTunes................................................................................................ 7

2.7

Name Change and Recent Products ............................................................................ 8

2.8

The iPhone ................................................................................................................... 9

2.9

App Store ................................................................................................................... 10

2.10 3.

The iPad.................................................................................................................. 11

STRATEGY ANALYSIS TOOLPACK ...................................................................................... 13 3.1

Porter’s Five Forces Model ........................................................................................ 13

3.1.1

Rivalry Among Competitors ............................................................................... 13

3.1.2

Emergence Of Substitutes .................................................................................. 13

3.1.3

Power Of Suppliers ............................................................................................. 13

3.1.4

Power Of Buyers ................................................................................................. 14

3.1.5

Barriers To Entry ................................................................................................. 14

3.2

Swot Analysis For Apple ............................................................................................ 15

3.2.1

Strengths ............................................................................................................ 15

3.2.2

Weaknesses ........................................................................................................ 15

3.2.3

Opportunities ..................................................................................................... 15

3.2.4

Threats................................................................................................................ 15

3.3

Timing – Another Dimension Of Impeccable Strategy .............................................. 16

4.

APPLE’S STRATEGY GAMEPLAN ........................................................................................ 17

5.

REFERENCES ..................................................................................................................... 18

Strategic Management Project Report: Apple’s Strategy

2012

1. INTRODUCTION Apple Inc. needs no introduction as it is one of the world’s most successful, popular and iconic companies with around three decades of ground-breaking innovations and redefining the way humans consume digital content such as music and movies. Named the world;s most admired company for consecutive three years by Fortune, the late CEO Steve Jobs, who turned around the company from near bankruptcy in 1996, couldn’t have asked for more. Originally Apple Computer, the company was renamed Apple Inc. in 2007 to signify its enlarging its pie from merely selling high-end computers to include iPod, iPhone and now iPad. As its revenue and net income have shot up in recent years, Apple’s share price outperformed S&P 500 index by nearly ten times. Apple Inc. is by far the largest company in the world by market capitalization. At $565 billion (INR 28.25 trillion!) it pips Exxon Mobil, the largest upstream oil company in the world, worth $408 billion! The subject of study in this report is how sustainable is Apple’s position in its various product markets – PCs, digital music, smart-phones and tablets. We shall briefly touch upon the structure of the PC business and the role of the iPod, iPhone and iPad in Apple’s overall strategy, primarily to discuss the industry analysis, competitive positioning, and sustainability analysis. Four central issues in strategy formulation have been discussed here – 1. Evolution of the computer industry over time and its implications for strategic positioning 2. Nature of sustainable competitive advantage 3. Timing of strategic moves 4. Challenge of invigorating competitive through innovation

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2. APPLE: BRIEF HISTORY Founders Steve Jobs and Steve Wozniak effectively created Apple Computer on April 1, 1976, with the release of the Apple I, and incorporated the company on January 3, 1977, in Cupertino, California. For more than two decades, Apple Computer was predominantly a manufacturer of personal computers, including the Apple II, Macintosh, and Power Mac lines, but it faced rocky sales and low market share during the 1990s. Jobs, who had been ousted from the company in 1985, returned to become Apple's CEO in 1996 after his company NeXT was bought by Apple Inc., and he brought with him a new corporate philosophy of recognizable products and simple design. With the introduction of the successful iPod music player in 2001, Apple established itself as a leader in the consumer electronics industry, dropping "Computer" from its name. The latest era of phenomenal success for the company has been in the iOS range of products that began with the iPhone, iPod Touch and now iPad. As of 2011, Apple is the largest technology firm in the world, with annual revenues of more than $60 billion.

2.1

Early Products

Apple’s first computer was manufactured in Jobs’ garage and was called Apple I. The Apple I differed significantly from other computers offered at the time: it used a MOStek 6502 processor (instead of the Intel 8080 processor), it had fewer parts (a TV was used as a display unit), and its price of US$666.66 was less than its competitors’ prices. In May 1976, Jobs and Wozniak displayed the Apple I to the other members of the Homebrew Club. A local dealer present at the demonstration ordered 25 units, a deal that represented Apple’s first sales revenue. At this point, Wozniak quit HP to join Apple. Over the ensuing 10 months, 200 Apple I computers were sold. The Apple I targeted individuals who were interested in computers and electronics. Overall, 1977 sales for the Apple I totalled US$774,000. Apple was incorporated on January 3, 1977. Later that year, at the West Coast Computer Fair in San Francisco, the two entrepreneurs introduced the Apple II as a general purpose computer. The Apple II was also built on a 6502 processor. It interfaced directly with a color video monitor and had color graphics, as well as an audio cassette drive with a storage capacity of 4 KB RAM. The Apple II was priced at US$1,298. In 1978, the audio cassette drive was replaced with a floppy disk drive, and the RAM storage was increased to 48 KB. The Apple II was also successful, yielding US$139 million in sales within the first three years of its launch. In 1980, the company introduced its third computer, the Apple III. This PC had eight applications, with its price ranging from US$4,340 to US$7,800, depending on the configuration. The initial Apple III had technical problems so it was withdrawn from the market and eventually re-launched in 1981. 4

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Despite the fact that the newer model had 128 KB RAM, an updated software system and a lower price (US$3,495) than the previous version, it still was not successful. After launching Apple III, the company focused on developing a new computer with innovative features, such as a hand-held mouse and graphic user interface (GUI). This new product was codenamed “Lisa,” and it was supposed to take the industry by storm. However, its high price (US$9,995) prevented high sales. A significant problem with Apple’s first three models was that they all ran on different operating systems, thus limiting the company’s market share. Jobs recognized this and tried to create a new computer, as well as an operating system for it. To that end, Apple combined the talents of hardware and software designers and created an atmosphere where their creativity could flourish. The result was the Macintosh (Mac). Priced at US$2,495, this PC had 128 KB of memory, as well as a 32-bit microprocessor. The Mac was released in 1984, along with its operating system, Mac OS, which could run on all Apple computers. Overall, the Mac was quite different from previous Apple computers: it was smaller, less expensive, more user-friendly, adaptable and flexible. Furthermore, it could do more creative work such as graphics – most PCs at the time were used for calculations. Despite its advantages, the Mac suffered from several problems, in particular, its lack of compatibility with IBM PCs, which made it difficult to sell Mac computers to large corporations that were already using IBMs.

2.2

Exit of Steve Jobs and Decline of Apple

Job’s management style drew significant criticism from the Apple board. In particular, board members were not happy that Jobs had expended so much of the company’s resources on Macs. Overall, Mac sales were quite low. In 1984, only 20,000 Macs were sold, which was well short of the 80,000-unit projection. In 1985, Mac sales were averaging only 2,500 units a month. Jobs left Apple in 1985. He then went on to start NeXT, a venture designed to create computers for students. After eight unsuccessful years, the company finally entered a growth stage in 1993. However, while NeXT was growing, Apple was declining. Increased competition, a lack of innovative products, as well as falling hardware and software prices all combined to reduce Apple’s worldwide market share from 11 per cent in the mid-1980s to 5.3 per cent in the mid-1990s.

2.3

The Sculley Years, 1985–1993

John Sculley, actively recruited from Pepsi-Cola for his marketing skills by Jobs himself, pushed the Mac into new markets, most notably in desktop publishing and education. Apple’s desktop market was driven by its superior software, such as Aldus (later Adobe) PageMaker, and peripherals, such as laser printers. In education, Apple grabbed more than half the market. Apple’s worldwide market share recovered and stabilized at around 8%. By 1990, Apple had $1 billion in cash and was the most profitable PC company in the world. Apple offered its customers a complete desktop solution, including hardware, software, and peripherals that allowed them to simply “plug and play.” Apple also stood out for 5

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typically designing its products from scratch, using unique chips, disk drives, and monitors. IBM-compatibles narrowed the gap in ease of use in 1990 when Microsoft released Windows 3.0. Still, as one analyst noted, “The majority of IBM and compatible users ‘put up’ with their machines, but Apple’s customers ‘love’ their Macs.” Macintosh’s loyal customers allowed Apple to sell its products at a premium price. Topof-the-line Macs went for as much as $10,000 and gross profit hovered around an enviable 50%. However, as IBM-compatible prices dropped, Macs appeared overpriced by comparison. As the volume leader, IBM compatibles were also attracting the vast majority of new applications. Moreover, Apple’s cost structure was high: Apple devoted 9% of sales to research and development (R&D), compared with 5% at Compaq, and only 1% at many other IBM-clone manufacturers. After adding on the Chief Technology Officer title in 1990, Sculley tried to move Apple into the mainstream by becoming a lowcost producer of computers with mass-market appeal. For instance, the Mac Classic, a $999 computer, was designed to compete head-to-head with low-priced IBM clones. Sculley also chose to forge an alliance with Apple’s foremost rival, IBM. They worked on two joint ventures; Taligent was set up to create a new OS and Kaleida aimed to write multimedia applications. Apple undertook another cooperative project involving Novell and Intel to rework the Mac OS to run on Intel chips that boasted faster processing speed. These projects, coupled with an ambition to bring out new “hit” products every 6 to 12 months, led to a full-scale assault on the PC industry. Yet Apple’s gross margin dropped to 34%, 14 points below the company’s 10-year average. In June 1993, Sculley was replaced by Michael Spindler, the company’s president.

2.4

The Spindler and Amelio Years, 1993– 1997

Spindler killed the plan to put the Mac OS on Intel chips and announced that Apple would license a handful of companies to make Mac clones. He tried to slash costs, which included cutting 16% of Apple’s workforce, and pushed for international growth. In 1992, 45% of Apple’s sales came from outside the United States. Yet despite these efforts, Apple lost momentum: A 1995 Computerworld survey found that none of the Windows users would consider buying a Mac, while more than half the Apple users expected to buy an Intel-based PC. Spindler, like his predecessor, had high hopes for a revolutionary OS that would turn around the company’s fate. But at the end of 1995, Apple and IBM parted ways on Taligent and Kaleida. After spending more than $500 million, neither side wanted to switch to a new technology. Following a $69 million loss in Apple’s first fiscal quarter of 1996, the company appointed another new CEO, Gilbert Amelio, an Apple director. Amelio proclaimed that Apple would return to its premium-price differentiation strategy. Yet Macintosh sales fell amid Apple’s failure to produce a new OS that would keep it ahead of Microsoft’s Windows 95. Amelio ended up turning to Steve Jobs. In December 1996, Amelio announced the acquisition of NeXT Software (founded by Jobs after he left Apple) and plans to develop a new OS based on work done by NeXT. Jobs also returned to Apple as a part-time adviser. Despite more job cuts and restructuring efforts, Apple lost $1.6 billion under Amelio and its worldwide market share tumbled to around 3%. In September 1997, Steve Jobs became the company’s interim CEO. 6

Strategic Management Project Report: Apple’s Strategy

2.5

2012

Steve Jobs and the Apple Turnaround

Steve Jobs moved quickly to reshape Apple. In August 1997, Apple announced that Microsoft would invest $150 million in Apple and make a five-year commitment to develop core products, such as Microsoft Office, for the Mac. Jobs abruptly halted the Macintosh licensing program. Almost 99% of customers who had bought clones were existing Mac users, cannibalizing Apple’s profits. Jobs also refused to license the latest Mac OS. Apple’s 15 product lines were slashed to just four categories—desktop and portable Macintoshes, for consumers and professionals. Other restructuring efforts involved hiring Taiwanese contract assemblers to manufacture Mac products and revamping Apple’s distribution system from smaller outlets to national chains. In addition, in 1997, Apple launched a website to set up direct sales for the first time. Internally, Jobs focused on reinvigorating innovation. Apple pared down its inventory significantly and increased its spending on R&D. Jobs’s first real coup came with the iMac in August 1998. The $1,299 all-in-one computer featured colorful translucent cases with a distinct eggshell design. The iMac also supported “plug-and-play” peripherals, such as printers, that were designed for Windows-based machines for the first time. Thanks to the iMac, Apple’s sales outpaced the industry’s average for the first time in years. Following Jobs’s return, Apple posted a $309 million profit in its 1998 fiscal year, reversing the previous year’s $1 billion loss. Another priority for Jobs was to break away from Apple’s tired, tarnished image. Jobs wanted Apple to be a cultural force. Not coincidentally, perhaps, Jobs retained his position as CEO of Pixar, an animation studio that he had bought in 1986. (Jobs later sold Pixar to Walt Disney for $7.4 billion in 2006.) Through multi-million dollar marketing campaigns such as the successful “Think Different” ads and catchy slogans (“The ultimate all-in-one design”, “It just works”), Apple promoted itself as a hip alternative to other computer brands. Apple ads were placed in popular and fashion magazines as well, venturing out from general computer publications. Later on, Apple highlighted its computers as the world’s “greenest lineup of notebooks” that were energy efficient and used recyclable materials. The goal was to differentiate the Macintosh amid intense competition in the PC industry.

2.6

Apple iPods and iTunes

On January 9, 2001, at MacWorld Expo, Apple introduced the first edition of iTunes. This first edition was Mac-OS 9 compatible, and it had the ability to burn CDs. Along with iTunes, Apple launched iTunes Music Store (iTMS) on April 28, 2003. This service allowed customers to pay and download music through Macs and was later modified to allow Windows users to access it. Over the years, iTunes grew substantially, and as new editions were created, its capabilities increased. The current version, iTunes 8, allowed users to manage the contents on Apple’s popular iPod digital media players as well as on the iPhone.

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Furthermore, it was possible to connect to the iTunes store through the Internet to purchase and download music, music videos, television shows, applications, iPod games, audiobooks, various podcasts, feature-length films, movie rentals and ringtones. It could also be used to download applications for the iPhone and iPod touch iTunes and was available as a free download for Mac OS X, Windows Vista and Windows XP. Also, iTunes could be bundled with all Macs and some HP and Dell computers. In October 2001, Apple entered the digital music market by launching the iPod, a harddrive-based music player. The iPod was comparable in size to most portable CD players and used a 1.8” hard drive. Also, it had five GB of storage space and could hold about 1,000 songs. The iPod was superior to all contemporary flash memory-based players, which could store only about 30 songs. Upon its release, Jobs proclaimed that “with iPod, listening to music will never be the same again.” However, most industry analysts felt that the iPod’s price of US$339.95 was too expensive and that it would limit sales. Contrary to analysts’ predictions, the iPod was a great success. Overall, it had high sales numbers – in the fourth quarter of 2001 alone, Apple sold around 125,000 iPods. Apple’s resellers were key to the success of the iPod, as they aggressively promoted the product. In March 2002, Apple introduced a new model of the iPod. The storage capacity was doubled to 10 GB and its price was raised to US$499. During the same year, the company made some technical changes to the product, increased the storage capacity to 20 GB and decreased the prices of the five and 10 GB models. On January 11, 2005, Apple introduced the iPod Shuffle, which used flash memory. By May 2005, Apple had captured 58 per cent of the flash player market, and by May 2005, Apple held 90 per cent of the hard-disk player market share in the United States.

2.7

Name Change and Recent Products

On June 6, 2005, at the Worldwide Developers’ Conference (WWDC), Jobs announced that Apple would begin producing Intel-based Macs starting in 2006. As promised, in early 2006, Apple shifted the entire Mac product line towards Intel chips. The PowerMac was eliminated and replaced with the MacBook Pro (15.4-inch widescreen), which was targeted towards a professional audience. In addition, Apple introduced the iMac, which was two or three times faster than its predecessor. The company also introduced new software called Bootcamp. The purpose of this software was to help users install Windows XP on their Intel Mac alongside Mac OS X. Apple’s success during this time period was evidenced through its rapidly increasing stock price. Between 2003 and 2006, the price of Apple’s stock skyrocketed, increasing from US$6 per share (split adjusted) to more than US$80 per share. On January 13, 2006, Apple’s market cap surpassed that of Dell. Ten years before, in 1997, Dell’s CEO, Michael Dell, indicated that if he ran Apple, he would “shut it down and give money back to shareholders.” 8

Strategic Management Project Report: Apple’s Strategy

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On January 9, 2007, at MacWorld 2007, Jobs announced a name change: Apple Computer Inc. would become known as Apple Inc. On the same day, the company announced the launch of the iPhone and Apple TV, a move that gave Apple the ability to compete in the on-demand digital media market (i.e. HD-TV, music, video). The next day, Apple’s share price increased to US$97.80, and in May 2007, its share price went over US$100. On February 7, 2007, Apple indicated that it would sell music on iTunes without digital rights management protection if major record labels agreed to drop anti-piracy technology. On April 2, 2007, Apple and EMI reached an agreement regarding the removal of antipiracy technology, effective in May 2007.

2.8

The iPhone

Hailed as Time magazine’s “Invention of the Year,” the iPhone represented Apple’s bid to “reinvent the phone.” Two and a half years of development efforts had been devoted to the phone, guarded under intense secrecy, even within the company’s own employees. The estimated development cost was around $150 million. Entry into mobile phones might have been a risky move for Apple. The industry was dominated by Nokia, Motorola, and Samsung, with roughly 60% market share. In addition, products were characterized by short product life cycles (averaging six to nine months) and sophisticated technology, including radio technology, where Apple had little experience. In distribution, Apple faced powerful cellular carriers such as NTT DoCoMo and Vodafone, which controlled the networks and often the phones used on those networks. In the U.S., the top two carriers—Verizon Wireless and AT&T—collectively controlled more than 60% of the market and their networks were ‘locked’: An AT&T phone would only work on AT&T’s network. Especially in the U.S., a handset manufacturer was usually dependent on the operator to provide a subsidy, which could lower the consumer’s purchase price of a popular new handset by as much as $150 or more. In return, most consumers signed a two-year service contract with the carrier. Operators also maintained “walled gardens,” which required consumers to access content only from their own networks. Price competition was especially intense in emerging markets like China and India, where, like the PC market, manufacturers had to compete with “white-box” phones. In the early days when a mobile phone’s foremost purpose was to make calls, consumers selected a handset based on its appearance and service provider. Starting in the mid1990’s, the industry’s preference shifted towards feature phones that offered more attractive hardware designs and userfriendly interfaces, which was pioneered by Nokia, the world’s largest mobile phone manufacturer. Multimedia functions, such as a camera, were added as well. Then smartphones rose to prominence in the next decade. These high-end phones brought multiple functions together in the palm of one’s hand, serving as a mobile phone, Internet browser, PDA device (such as managing schedules and address book), and media player. 9

Strategic Management Project Report: Apple’s Strategy

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The iPhone, however, changed the rules in the industry. A revolutionary 3.5 inch touchscreen interface placed commands at the touch of users’ fingertips without a physical keyboard. The iPhone’s entire system ran on a specially adapted version of Apple’s OS X platform. Above all, users found it intuitive to use. The first model was priced at $499 for an 8GB model. At that time, handsets that cost more than $300 accounted for only 5% of worldwide mobile phone sales. AT&T, the exclusive U.S. operator for the iPhone, did not provide a subsidy. Instead, AT&T agreed to an unprecedented revenue sharing agreement with Apple, which gave Apple control over distribution, pricing, and branding. The first generation iPhone sold about six million units over five quarters. However, more than a million had been sold in the “grey market,” in which consumers bought iPhones from unauthorized resellers and used them on unsanctioned mobile networks. Apple’s demand for a share of service revenue had led to only a few markets in the world with legal iPhone distribution. One estimate suggested that Apple could lose $1 billion over three years from the loss of service-share revenue. The second iPhone model was released in 2008. This version ran on a faster 3G network. More importantly, Apple had revamped the pricing model under a new agreement with AT&T. The carrier provided a subsidy on the phone in exchange for dropping the revenue sharing agreement. Consumers could buy an 8GB iPhone with a two-year contract for $199. An unsubsidized iPhone could cost $599 for the same version. With the 3G model, iPhone revenues exploded to $13 billion by the end of the 2009 fiscal year. A third version, the iPhone 3GS, went on sale in June 2009. With its release, the subsidized price of the 8GB iPhone dropped down to $99. Analysts estimated that Apple generated an ASP of $562 from its iPhones, while competitors’ ASP on similar handsets ranged between $300 and $400. Falling component costs and design improvements helped to reduce the iPhone’s cost structure. According to one analysis, the bill of materials for the latest 16GB model was just under $180. The first iPhone with half of that storage capacity cost around $220 to build. Lower prices and wider international distribution (94 countries) fueled sales. AT&T also benefitted from being the exclusive carrier for the iPhone in the U.S. The carrier generated an average revenue per user (ARPU) of $95 with the iPhone. The top three U.S. carrier’s ARPU, in contrast, was around $50. Within two years, the iPhone went from zero to 30% of Apple’s total revenue. In terms of global smartphones sales, the iPhone was the biggest growth story, capturing more than 14% of the market. Like the iTunes store, a key factor behind the iPhone sensation was the extension of the iPhone’s ecosystem with the launch of the Apple App Store in 2008.

2.9

App Store

Software applications for PDAs and smartphones had been around for years. Palm Inc., the PDA market leader in the 1990’s, was known for its wealth of third party-developed applications. Microsoft similarly had more than 20,000 apps written for its mobile OS. 10

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These applications could be downloaded through multiple outlets with an average price of $10 or more. But Apple’s App Store was the first outlet that made it easy to distribute, access, and download applications directly onto the mobile phone. Customers could downloaded apps onto their iPhones over the network or download them to their PC. Many apps were free; even paid apps usually started at 99 cents. The App Store was introduced as part of iTunes, which consumers were already familiar with through the iPod. Third party developers also welcomed the App Store because Apple made it easier to reach consumers. Apple reserved the right to approve all applications before they went on sale, and kept a 30% cut of the developer’s app sales. The popularity of the App Store was stunning. In about 18 months, four billion applications had been downloaded by iPhone and iPod Touch users worldwide. More than 185,000 applications were offered in some 20 categories, ranging from games to health to business productivity programs. Walt Mossberg, the well-known technology columnist for the Wall Street Journal, even claimed that, “The App Store is what makes your device worth the price.” Mobile apps had turned into a nice side business for Apple as well. Around $4 billion was spent on mobile phone applications in 2009, the bulk of which was spent on iPhone apps. Excluding developers’ share, that still left Apple with about $1 billion dollars in app sales. Apple’s blockbuster hit sent competitors rushing to offer their own application stores and touch-screen devices as well.

2.10 The iPad The launch of the iPad in 2010 was yet another bold move by Jobs to redefine an industry. Positioned between a smartphone and a laptop computer, the iPad was priced from $499 to $829. The computer tablet featured a 9.7 inch LED screen for reading books, watching movies, and some business productivity applications. In fact, several reviews referred to the iPad as a “giant iPod Touch” with almost identical hardware and interface. The iPad could either connect to the Internet via WiFi, or consumers could buy a premium iPad and then spend another $30 per month for AT&T’s unlimited 3G service. The device could run, with some limitations, almost all iPhone apps. To offset those limitations, software developers had already released over 1,000 applications specifically developed for the iPad at the time of its launch. Apple took a somewhat different approach to the iPad compared to the iPod and the iPhone. Going back to his roots, Jobs decided to take more control over the components. Between 2008 and 2010, Jobs bought two microprocessor design companies for about $400 million. The iPad became the first Apple product to run on its own branded chip, the A4. Like Intel’s Atom or Qualcomm’s Snapdragon CPUs, the A4 was specifically designed for next generation mobile devices that required low-power and fast processing speed. Apple claimed that the A4 enabled the iPad to deliver 10 hours of battery life. More than 450,000 iPads were sold during its first week on the market. Jobs commented that, “It feels great to have the iPad launched into the world—it’s going to be a game changer.” 11

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Yet the jury was out for the device. Computer tablets, prior to the iPad’s launch, accounted for less than one percent of the PC market. The iPad still lacked a physical QWERTY keyboard to the frustration of many business consumers. It could not take advantage of Flash video or animation on the Web. A top complaint was the lack of multi-tasking to run different apps in the background. In April 2010, Jobs announced that the new iPhone OS 4 would enable multi-tasking, and analysts expected the new OS to be available for iPads later in the year.

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3. STRATEGY ANALYSIS TOOLPACK 3.1

Porter’s Five Forces Model Porter’s five forces model for Apple can be understood as follows: 1. Rivalry among existing competitors, such as Samsung, in terms of - innovation - being first to hit the market 2. Substitute products in terms of - Competitors, such as Samsung, with similar products 3. Powerful suppliers who have achieved forward integration 4. Powerful buyers who have achieved backward integration 5. High threat of easy entry owing to - advanced knowledge - low capital requirement

3.1.1 Rivalry Among Competitors 1. open standards: As PCs became commodities, manufacturers had to compete on price thereby pushing down margins; ASPs declined 8% per year between 1999 and 2005. 2. industry fragmentation: No market leader existed who was strong enough to provide price stability. 3. rapid technology obsolescence, that exacerbated price cutting Summary: This industry was characterized by very tough rivalry among competitors, of the kind that would always keep new and weak-hearted players out of the market. 3.1.2 Emergence Of Substitutes The existence and emergence of substitutes such as PDAs, smart-phones, TV settop boxes, video game consoles, in addition to their extreme price competitiveness, would push PC prices down further and reduce the future growth of demand. 3.1.3 Power Of Suppliers 1. Intel’s and Microsoft’s power comes primarily from high entry barriers (huge scale economies to build CPUs and develop modern operating systems), brand (Intel Inside®, Windows), and customer lock-in (need for software compatibility, network effect) 2. Suppliers of components such as disk drives have no real power over PC manufacturers. 13

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Summary: Intel and Microsoft hold substantial bargaining power over manufacturers because of their tremendous brand equity and dominance in the computer chips and software market. 3.1.4 Power Of Buyers The bulk of the PC market lies in large corporations, especially IT companies and banks. Mostly PCs are recycles every 3 to 4 years, and a single order from a large corporation can go up to 50,000 to 60,000 PCs in a year. Moreover, buyers today are very knowledgeable about the product and technology, and demand more than ever in terms of service and support. With price determining the purchase decision today rather than anything else, the power that the buyers exert on PC manufacturers cannot be ignored. 3.1.5 Barriers To Entry 1. Nowadays, components have been standardized and widely available from a host of manufacturers. 2. PCs can be assembled in a garage very easy by simply putting smaller, prebuilt, independent units together. 3. Distribution can be done cheaply — over Internet or through a classified newspaper advertisement. 4. Customers are demanding, price-sensitive and knowledgeable; they know that a PC is a commodity product. White-boxes have 30% of the market share with most of the demand coming from SOHO (small office, home office users). 5. Availability of customized products at very low prices, with the promise of local, low cost service. Summary: Barriers to entry are lower than most of the industries, and therefore threat from new competitors is very high.

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3.2

2012

Swot Analysis For Apple

3.2.1 Strengths 1. Intuitive and innovative, easy to use, graphical interface and plug-and-play peripheral support 2. Proprietary environments, especially the operating system 3. Aesthetic, or rather artistic, design with sleek form-factors and appealing chassis design and packaging 4. Buyer loyalty 5. Strong cash base 6. Innovation, being the first to enter the market 7. Cost-leadership in flash memory market 3.2.2 Weaknesses 1. 2. 3. 4. 5. 6. 7.

Lower profit margins Dividends rarely paid Lack of succession planning Presence in business arena Underdeveloped customer relationships Apple’s PC market share is low as prices for wintel machines fall Apple has limited number of suppliers to obtain components for its products, and is increasingly becoming dependent on competitors like Samsung for essential components 8. Some key components are subject to industry-wide availability constraints and pricing pressures. 9. Saturation in sales of Apple products 3.2.3 Opportunities 1. Digital business strategies such as apps development and digital music through iTunes 2. Expand strategic alliances 3. Global expansion 3.2.4 Threats 1. 2. 3. 4.

New technology – especially free streaming music and movies on Internet Volatile customers Forward integration Possibility of becoming a low-end commodity if product differentiation is not carried out and sustained 5. Increasingly powerful competitors, such as Samsung

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3.3

2012

Timing – Another Dimension Of Impeccable Strategy

One of the biggest successful strategic moves by Steve Jobs in the Macintosh business was to switch from Motorola and IBM chips to Intel processors. Post facto, we know that this strategy worked, but it was a very risky move. Did Jobs make this move at the right time? Obviously, yes. The strategy to move to Intel had obvious pros and cons: Cons: Shifting the CPU to a new, different processor was a risky, expensive move. It cost Apple around $1 billion to re-write all their software and redesign their hardware to accommodate the new Intel processor platform. This could have easily disrupted Macintosh sales during the transition. Pros: However, as time clearly showed, this switch was critical to the long-run health of the Macintosh product line. If Apple kept its existing suppliers, it risked its computers becoming clearly inferior to Wintel PCs. More importantly, the timing was brilliant—the booming iPod business provided cover for any hiccups that could have occurred with the Macintosh business. Two years earlier, any hiccup could have killed the company. Two years later, the Mac may have lost too much market share to make the shift viable. It would be too late. Apple today dominates the premium price category; 91% of all PCs priced $1,000 and above in the U.S. market are sold by Apple. This suggests that Jobs may have changed the basic economics of the Macintosh business, at least in the short-run. At the same time, we should also recognize that fundamental issues for the Macintosh remain unchanged. Apple’s worldwide market share continues to linger below 5%, where it has languished for the last decade.

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Strategic Management Project Report: Apple’s Strategy

2012

4. APPLE’S STRATEGY GAMEPLAN Apple’s five-pronged strategy game plan is simple, one of the reasons why it is so powerful too. 1. 2. 3. 4. 5.

Believe in the simple Design and give the customer a full experience Lock customer in to the maximum extent possible Sell at high premium Cross-sell your product line

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Strategic Management Project Report: Apple’s Strategy

2012

5. REFERENCES 1. http://en.wikipedia.org/wiki/History_of_Apple_Inc. 2. Fabrizio Di Muro, Strategic Planning at Apple Inc., Ivey Management Services, Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada 3. Prof. David B Yoffie, Apple Inc. in 2010, HBS No. 710-467, June 21, 2010, Harvard Business School Publishing, Boston 4. Prof. David B Yoffie & Renee Kim, Apple Inc. in 2010, HBS No. 9-710-467, March 21, 2011, Harvard Business School Publishing, Boston

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