Apple Inc Case Analysis

Apple Inc., 2008
Case Analysis

1. What were Apple’s competitive advantages?

The PC (personal computer) industry is fairly competitive, making it important for a company like Apple Inc. to stand out among its rivals. Although all computers are not created equally and each model can have vast differences, it is sometimes difficult for the end user to differentiate between brands. One competitive advantage for Apple is that Macs are known to be different than all other brands of PCs. To a consumer it sometimes seems like there are two types of computers: Macs, and all other brands. Adding on to this advantage, there are usually positive differences that separate Macs from all other brands. Macs are known to be more “user-friendly” and are advertised to be used right out of the box. They are also known to be more secure than other PCs, since most viruses cannot attach Apple computers. In the Apple Inc., 2008 case study, an analyst is quotes as saying, “The majority of IBM and compatible users ‘put up’ with their machines, but Apple’s customers ‘love’ their Macs” (Yoffie & Slind, 2008). This sort of affection toward a product leads to another competitive advantage that Apple has capitalized on: brand loyalty. When Apple turned its direction more towards up and coming technology, such as the iPod, iTunes and now the iPhone, consumers already trusted the Apple name and thus were more apt to buy the products. Apple created the iPod in 2001 when MP3 technology was relatively new to consumers. There are portable music players made by other brands, but Apple’s iPod quickly became the industry leader and has remained in that position. A wise choice by the company was to make iPods compatible with Windows operating systems. Initially they could only be used on a Mac, but by opening the technology to other PC users, Apple quickly gained customers. Apple spends a higher percent of their budget on research and development than other competing companies which has been a strong advantage for the company. Technology is ever-changing at this point in time and consumers demand that products are the “newest” and the “fastest.” In recent years Apple has been the first company to launch popular new technology, including the iPod, iTunes, the music store, and the iPhone, with its large range of applications. While there are now many different versions of smartphones, the iPhone was the first of its kind to revolutionize how a phone is used. Essentially Apple combined a computer, a portable music player, and a phone into one handheld device. Apple’s focus to create new technologies that combine various functions has been incredibly successful in the technological age. The company also launches new versions of their devices each year. This helps the company because even people who already own an iPod, for example, are interested in upgrading to a new version in the following year or two. One last advantage for Apple has been its ability to create products that work together. For example, Apple created the music store iTunes to work with the iPod. Consumers buy the iPod for a set price, but then end up spending much more money through Apple on purchasing music. Creating complementary products like these boost the success of the company. If Apple can continue to differentiate their products from others, be the first to create new technologies that are changing the way consumers live day-to-day, and launch complementary products, they will continue to have advantages over their competitors.

2. Analyze the dynamics of the PC industry. Are these dynamics favorable or problematic for Apple?

Overall the PC industry has become more and more advanced through the years and this could be a result of Apple. In our case study, we saw the history of Apple Inc. unfold from its humble start in 1976 to the introduction of the iPod, as well as the iPhone. The analysis did indicate that although Apple developed “personal” computing devices, it was IBM that brought the PC into mainstream market (Yoffie & Slind, 2008, p. 6). This analysis went on to mention that IBM’s explosive start into the market fizzled out by the early 1980’s. Other companies such as Compaq and Dell developed their versions of the PC throughout the 1990’s. By 2008, PC’s in use topped one billion worldwide and in 2007 PC shipments totaled 269 million units (Yoffie & Slind, 2008, p. 7). The analysis also emphasized how competitive the PC industry is, as one company could be on top for years and yet another could take over the market years later. From a consumer’s perspective, it seems that popular trends have a lot to do with which PC company is doing better. Years ago, Dell captured a large market share due to its ability to customize a PC by building to the actual specifics an individual wanted. Recently, the shift has come back toward Apple and their technological advances in the PC industry as well as other products they offer. Apple has been able to learn from the volatile PC industry by accepting trends in consumer behavior and creating knew innovative products. As the PC industry rises and falls each year, Apple seems to always sustain growth with their many products that are introduced to the market. We must also look at who the buyers are for both PC’s and Apple based computers (iMac and MacBook). Consumers who buy PC’s are usually homebuyers and possibly large businesses who very price conscious. When an individual is looking for a personal computer, they are looking for ease of use at a price that will fit their budget. Businesses, both large and small, are looking for the same aspects in that the more they spend on a PC system, the less money they will see as a company. In retrospect, Apple has created quite a name for its company, so there will be consumers, both homebuyers and businesses, who will buy Apple products regardless of the price. We must realize brand loyalty runs strong amongst the computer industry and Apple has had great respect in maintaining a customer base.

3. Has Steve Jobs finally solved Apple’s long-standing problems with respect to the Macintosh business?

Apple has had its ups and downs with their Macintosh technology. When Jobs first brought the Macintosh into market in 1978 it was a simple machine that made a huge impact in the PC industry by boasting $1 billion in annual sales in less than three years. But, after the introduction of the Mac, Apple seemed to face long-standing problems. In 1981 the IBM PC competition dropped Apple’s market share, and by 1984 the sales were limited because of “Mac’s slow processor speed and lack of compatible software” (Yoffie & Slind, 2008). Throughout the years Mac’s sales declined because of their high cost structure, and the fact that the Mac’s operating system was not compatible with the available software, such as Microsoft Office, which was widely used in the business world. An example of this is that Mac was maintained on a proprietary platform (Mac OS) which was in a small market. Apple tried many different options to help solve their problem; they even had a joint venture with IBM and tried shifting its manufacturing to subcontractors, but they still faced a drop in their gross margin. The pricing strategy of Apple kept the Mac at a premium price, which also put the sales at a disadvantage in a market where the consumers were very price conscious. It had appeared that the competition was producing faster and more efficient machines at a lower price, which meant that Apple was in a need of a drastic change. Steve Jobs returned to Apple in 1997 and seemed to be the perfect man to help with the turnaround of the Mac. In order to improve the sales more Jobs expanded Apple’s partnership with Microsoft that created a product, a Mac version of Microsoft Office, which has mass appeal. In 1998 the iMac was released, but Jobs didn’t stop there. He “outsourced the manufacturing of Mac products…and revamped its distribution system, eliminating relationships with thousands of smaller outlets and expanding its presence in national chains” (Yoffie & Slind, 2008). Jobs also focused on cost cuts by decreasing inventory, but increased R&D to ensure every possible technological advance. Apple became a cultural force due to Jobs’ effort to revamp the image of the company. “Apple highlighted features that differentiated them from other PCs while also emphasizing their interoperability with other machines.” With the new image, their fix of the compatibility problem, and speed of the Intel microprocessors it seems that Jobs had found the perfect mix for success. This success showed in the numbers. Mac revenues increased 40% from 2006 to 2007, with the unit sale increase of 5.3 million, which was three times as fast as the overall PC market. “Apple had become the third-largest PC maker within the U.S. market, with a market share of 8.5%;” a true success from the previous 3%. Jobs has appeared to fix Apple’s long-standing problems with the Mac.

4. The iPod-iTunes business has been a spectacular success. Has Jobs found a new formula to create a sustainable competitive advantage for Apple?

Indeed the iPod-iTunes business has been a spectacular success for Apple, Inc. When the iPod MP3 was first introduced in November 2001, it was reported to have become “an icon of the Digital Age” (Yoffie & Slind, 2008, p. 10). The iPod allows consumers to play anywhere from 240 to 40,000 of there favorite songs, therefore eliminating the hassle and bulkiness of portable cassette and CD players. Between the years of 2004 and 2008 unit sales for the iPod had grown exponentially, surpassing other major competitors such as Sony, Creative, Samsung, and Zune. In the wake of Apple’s success in the PC industry, under the leadership of Steve Jobs, the company has managed to create and sustain the competitive advantage in the vast majority of Apple, Inc. ventures. But, has Jobs found a new formula to create a sustainable competitive advantage for Apple? We believe there is no mystery to how Jobs successfully introduced his brilliance and innovation to the PC industry. It is also believed that Jobs started with the basic foundation to operating a good business, which is to seek growth. This translates into maximizing value for the customer and let profits flow to us from there (Edward Jones). As the PC industry began to cultivate new competition, Jobs knew that Apple must diversify its strategy in order to maintain market share and sustain the competitive advantage. As aforementioned, the advent of iPod in November 2001 (avg. iPods sold 113,000 per quarter) and the introduction of iTunes Music Store in April 2003 (avg. iPods sold 733,000 by the end of the quarter) had once again sparked sales of the two-year old idea (iPod) and had proven to be “an icon of the Digital Age” (Yoffie & Slind, 2008, p. 10). The iPod, along with iTunes, allows consumers to then download their own CD or transfer it to their iPod or purchase music for less than one dollar. In order for these changes to occur within this firm, Jobs and the Apple Corporation had to analyze the industry in such as the buyers, suppliers, competitors, substitutes, and potential entrants in an effort to cultivate a winning strategy that would allow them to sustain their competitive advantage.

5. How would you assess Apple’s initial strategy for the iPhone? Why did Apple change so quickly to a different strategy?

Riding on the momentum created by iPod and iTunes, Apple premiered the iPhone on June 29, 2007. In keeping with Apple’s mission of offering technologically innovative products, the iPhone was a blend of the iPod and a mobile phone and was Apple’s attempt to reinvent the phone as a multifunction communication device. During the first year of its availability, buyers of the iPhone paid quite a premium for the much heralded device, which retailed for $399 for the 8GB model and $499 for the 16GB model. Despite its high cost, approximately 1.4 million units were sold in the U.S. in 2007, which jumped to a staggering 11.6 million in 2008. Although the sales numbers were impressive, they fell below sales forecasts and Apple’s share of the worldwide mobile handset market was disappointingly less than 1% (Yoffie & Slind, 2008). An analysis of Apple’s iPhone strategy using Porter’s Five Forces model reveals some of the issues with the initial strategy and why Apple was forced to make changes.

Threat of Entry According to Olli-Pekka Kallasvuo, CEO of Nokia, the world 's largest manufacturer of mobile phones, the mobile device market has become more volatile and competitive. Mr. Kalasvuo notes that the "mightiest companies in the world," including Microsoft, Google and Apple, Inc., are now competitors.” He further noted that the industry is under a transformation and that there are many new entrants into the cellular marketplace, including some of the world 's largest technology companies, like Google and Microsoft. With Apple’s push to gain market share, new entrants into the mobile device marketplace puts a cap on the profit potential of the iPhone. Therefore, in order to remain competitive, Apple had to reduce the price of the iPhone to deter its competitors.

The Power of Suppliers Like other Apple products, the iPhone operates on a proprietary platform and utilizes specialized components. Suppliers of raw materials may impact strategy through pricing and quality. As a large and highly respected company, Apple must maintain partnerships with key suppliers to ensure that there is no impact to the production of the iPhone or its other products. There is no indication that suppliers had a direct impact on the company’s decision to change strategies for the iPhone.

The Power of Buyers The iPhone was initially only available only in the United States and five European countries. In the U.S., phones were available only through AT&T and Apple’s online and retail stores. International mobile phone operators balked at Apple’s revenue sharing model, which effectively shut the iPhone out of some of the world’s largest mobile device markets. Due to the limited distribution of the iPhone, Apple lost significant revenue in international sales as service revenue fell into the worldwide “gray market.” Additionally, 80% of cell phones sold in the U.S. were priced under $100 and only 5% of handsets sold worldwide were priced at $300 or more. The iPhone was therefore highly priced and did not appeal to the majority of consumers. In an attempt to stem the loss of revenue, Apple was forced to change its distribution and pricing policy to conform to buyer’s demands. The restructuring of the pricing and revenue sharing models was more appealing to buyers and Apple was able to quickly launch the iPhone in numerous overseas markets, thereby reducing the loss of revenue in “gray markets.” New channels of distribution also opened when Apple contracted with Best Buy to allow sales via its 1,000 stores. This new strategy opened new revenue streams for the iPhone and offered an opportunity for Apple to increase revenues and market share.

Threat of Substitutes Since the launch of the iPhone in 2007, a number of companies have released phones with similar functions and features. The iPhone has changed the game for mobile device manufactures and Apple must constantly strive to be at the forefront of technology and innovation. The threat of substitutes is very high and Apple must remain innovative in order to be competitive. There were numerous complaints about the iPhone 2G, including the high cost of the device, high cost of service plans, short battery life and slow network. Coupled with a limited distribution network and Apple’s revenue sharing model, sales were beginning to slow and competitor’s devices were making inroads on iPhone sales. Apple was therefore forced to look at its technology and pricing models and make changes in response to its competitors.

Rivalry Among Existing Competitors Although Apple is known for the superiority of its products, it must compete in an industry where there are rapid technological changes. Mobile device companies are constantly striving for dominance in a market that has seen significant growth over several years. With less than one percent of the global market share, Apple must position itself to compete against the other giants of the industry. Failure to remain competitive will result in an erosion of its market share and the loss of revenue. Apple’s new strategy better positions the company to compete in the global marketplace and ward off potential rivals.

References

Lane, F., (2008). Nokia CEO says new entrants transform mobile market. Enterprise Security Today. Retrieved from http://www.enterprise-securitytoday.com/news/ Nokia-CEO-Sees-Market-Changing/story.xhtml?story_id=1130009GKN57

Porter, M. E., The five competitive forces that shape strategy. (2008). Harvard Business Review.

Wilcox, J. (2008). Apple fiscal 2008 by the numbers. eWeek Apple Watch. Retrieved from http://blogs.eweek.com/applewatch/content/corporate/apple_fiscal_2008_by _the_numbers.html

Yoffie, D. B., & Slind, M., (2008) Apple Inc., 2008. Harvard Business School.

References: Lane, F., (2008). Nokia CEO says new entrants transform mobile market. Enterprise Security Today. Retrieved from http://www.enterprise-securitytoday.com/news/ Nokia-CEO-Sees-Market-Changing/story.xhtml?story_id=1130009GKN57 Porter, M. E., The five competitive forces that shape strategy. (2008). Harvard Business Review. Wilcox, J. (2008). Apple fiscal 2008 by the numbers. eWeek Apple Watch. Retrieved from http://blogs.eweek.com/applewatch/content/corporate/apple_fiscal_2008_by _the_numbers.html Yoffie, D. B., & Slind, M., (2008) Apple Inc., 2008. Harvard Business School.