PGDM IB 2011-13

Apple Inc. in 2010

Submitted by: Vinayak Naik (56)

1. Update the case to date. Apple in 2010: Apples success story continued in 2010 even after the launch of iPad. In May 2010, market capitalization of Apple surpassed that of Microsoft for the first time since 1989. Apple, valued at $227 billion had become the largest technology company in the world. The only American company valued higher was Exxon Mobil, with a market cap of $282 billion. Apple continued to launch innovative and cutting edge products throughout 2010. It released the iPhone 4 in June 2010 and refreshed its iPod line of MP3 players by introducing a multitouch iPod Nano, iPod Touch with FaceTime, and iPod Shuffle. The year 2010 also saw the launch of the iLife suite of applications, Mac OS X Lion operating system, and Mac App Store, a digital software distribution platform, similar to the existing iOS App Store. Performance in post - Steve Jobs era: In January 2011 jobs announced that he would be taking an indefinite leave of absence to allow him to focus on his health. Jobs surprisingly took stage to launch the iCloud in June 2011 which is an online storage and syncing service for music, photos, files, and software. However this would be the last product launch attended by Steve Jobs. On August 24, 2011 Jobs stepped down as the CEO of Apple Inc. and Tim Cook took over. Steve Jobs passed away on October 5, 2011, marking an end of an era at Apple Inc. Many skeptics doubted whether Apple would be able to survive this huge loss. After all Steve Jobs, often referred to as soul of the company, was the man responsible for bringing Apple back from dead and making it one of the most successful companies in the world. Apple, under the leadership of Tim cook has continued to post robust performance figures and also launched a host of new products. The iPhone 4S was officially released on October 14, 2011. A notable feature of the iPhone 4S was Siri voice assistant technology, which Apple had acquired in 2010. Other features of the phone included an updated 8 megapixel camera with new optics, a dual core A5 chip, and cloud-sourced data with iCloud. Apple sold 4 million iPhone 4S phones in the first three days after its release, which made it not only the best iPhone launch in Apple's history, but also the most-successful launch of any mobile phone ever. On March 2, 2011, Apple introduced iPad 2 which had a faster processor and two cameras on the front and back respectively. The iPad 2 also added support for optional 3G service provided by Verizon in addition to the existing offering by AT&T. Backed by record Mac and iPad sales, Apple posted annual revenue of $108 billion and profit of $26 billion in the year 2011. Apple has began the year 2012 on a high note and posted a record quarterly revenue of $46.33 billion and record quarterly net profit of $13.06 billion. As of March 1, 2012, Apples market cap stood at $500 billion making it the largest company in the world. However whether Apple can sustain this superior performance in face of growing competition and without a visionary like Steve Jobs remains to be seen.

2. Analyse the P.C. industry for its attractiveness based on value net. Consider key dominant features and industry driving forces.

Compleme ntors

Industry Analysis: a. Degree of rivalry: The PC industry is consolidated. 50% of the market is captured by the top four players of the industry. However, the rest of the industry is fragmented by clone manufacturers and smaller players. These smaller players sell white box PCs at lower prices, thus cannibalizing the profits of the larger players. The industry is growing as by volume of PCs sold, however the margins of PC manufacturers are getting eroded because of downward pressure on PC prices. The product sold by most of the PC manufacturers is highly standardized and hence the competition amongst the firms is price based resulting in very high degree of rivalry. b. Bargaining power of buyers: The buyers for the PC manufactures are categorized into five categories: Home, small and medium sized businesses, corporate, education, and government. Home consumers form the largest part of buyers. The switching cost for the buyers is very low due to falling prices of PCs and large number of options available. Also the buyers are highly price sensitive. Hence the bargaining power of buyers is significantly high. c. Bargaining power of suppliers: The suppliers to the PC industry fall in two categories: 1.Those that made products such as memory chips, disk drives, and keyboards and 2. Those that made products like operating system and microprocessors. The first set of products had many sources were available at competitive prices. Hence these suppliers had a very low bargaining power. The second category of products was supplied mainly by two firms namely: Intel and Microsoft. Thus these suppliers were highly consolidated and had a very high bargaining power. Hence the overall bargaining power of suppliers was moderate.

d. Threat of new entrants: The PC industry is highly capital intensive. The large players have lowered their costs due to economies of scale, organizational learning and innovation. It is difficult for new entrants to achieve such large scales or to innovate. Lack of access to necessary inputs and distribution network deters new entrants from entering this industry. Thus the barriers to entry are high and hence the threat of new entrants is low. e. Threat of substitutes: The number of substitutes available for PCs is growing rapidly with advent of innovative products like smartphones and tablets. However these new devices cannot completely replace the PCs. Also these substitutes are very costly resulting in high switching costs for buyers. Thus the threat of substitutes is moderate. f. Complementors: Application software, content and peripherals form the complementors for this industry. The relative concentration of the complementors is high and hence they have a higher bargaining power.

Key dominant features: a. Market size: $294.2 million as of 2009 (exhibit 6) b. Market growth rate: The market growth rate is increasing but it is not in proportion with the volume growth rate of PCs sold. c. Stage in life cycle: Mature d. Degree of vertical integration: There is a scope for vertical integration but only a few players like Apple have actually indulged in it. e. Entry/Exit Barriers: High entry barriers due to reasons like high capital requirement, intense rivalry and diminishing margins. f. Technology/Innovation: Very little scope for innovation as the products are highly standardized. However players like Apple who can innovate can benefit immensely. g. Product Characteristics: Highly standardized products. h. Scale economies: Large players have lower costs due to scale economies. i. Learning and Experience effects: These are extremely important as they play a major role in reducing the costs. Industry driving forces: a. Internet and e-commerce: Customers are becoming more informed due to the internet and ecommerce provides them a choice in how they buy PCs. b. Increasing Globalization: Saturating US markets forced industry players to exploit international markets (Especially emerging countries like India & China). c. Technological changes: Technological changes have resulted in product improvement and lowered costs. d. Changing societal concerns, attitudes and lifestyles: People are becoming highly oriented towards digital lifestyle and are looking for products which keep them in touch with the digital world.

3. How did Apple position itself initially in 1976, 1981 and thereafter? Did apple have KSF for the P.C. industry when it started? Does apple have it now? What is Apples competitive position today? Trace changes in competitive positioning in previous years (Major Changes) Apple was founded in 1976 by Steve Jobs and Steve Wozniak. Their mission was to bring an easy to use computer to market, which led to release of Apple II in April 1978. It sparked a revolution in the PC industry and Apple became the industry leader, selling more than 100,000 Apple IIs by the end of 1980s. Apples competitive positioning changed fundamentally in 1981 when IBM entered the PC market. The IBM PC used Microsofts DOS operating system and a microprocessor from Intel and was an open system that other producers could clone. Apple however relied on its own proprietary design and refused to license its hardware to third parties. As a result of IBM PCs superior performance, IBM became the new market leader. Apple retaliated by launching Macintosh in 1984. However because of its slow processor speed its sales were limited. Apples net income fell by 62% between 1982 and 1984 sending the company into a crisis. In 1985 Steve Jobs was forced out of the company by the board of directors. The boardroom coup left John Sculley alone at the helm. Sculley pushed Mac into new markets, most notably in desktop publishing and education. Apple also designed its products from scratch, using unique chips, disk drives, and monitors. Apple positioned itself as a highly differentiated premium player. However the Macs started looking overpriced when the prices of the IBM PCs dropped drastically. Apples cost structure was high as compared to other players in the industry. In 1990, Sculley tried to reposition Apple as a low cost producer of computers with mass market appeal. Apple returned to the premium priced differentiation strategy when Gilbert Amelio became the Apple CEO in 1996. When Steve Jobs became the interim CEO of Apple in 1997, he started collaborated with Microsoft in order to develop core applications like MS Office for the Mac. He killed the licensing program started by Spindler and started outsourcing the assembly of Apple products to Taiwanese manufacturers. Apple slashed the Apples 15 product line to 4 categories. Jobs also revamped the distribution operations of the company. Apple drew down its inventory and started focusing on R&D. Thus Jobs positioned Apple as an R&D oriented and innovative organization. His goal was to differentiate the Mac and other Apple products from the competitors offerings. Jobs unveiled his digital hub strategy for the Mac in 2001. Apples shift towards digital hub strategy was initiated by debut of I-pod in 2001, followed by the iPhone in 2007 and finally iPad in 2010. These products set Apple on a path to become a digital convergence company. In 2007, Apple Computers was renamed Apple Inc. to marking the official repositioning of the company. Today, Apple is well known for its differentiated and innovative products, and loyal customer base. Thus, Apple positions itself as a highly differentiated, knowledge based technology company producing innovative and revolutionary digital products.

Key success factors: The KSFs of Apple at the time of inception are given below: a. Scientific research expertise b. Design expertise in making its products (hardware and software) right from scratch c. Technical capability to make product innovations and improvement d. Clever Advertising e. Superior workforce talent All the above KSFs exist even today. The additional KSFs of the company today are given below: a. Reputed Brand name b. Superior information systems c. Convenient locations d. Overall low cost e. Managerial experience f. Low distribution costs (iTunes, App Sores, iCloud etc.)

4. Explain Apples resources and core competencies & how they were developed? Which of the above are Apples competitive resources & critical capabilities & why? Resources and Core Competencies: Resources are assets, attributes and knowledge controlled by a firm that helps improve efficiency and effectiveness. Resources are of two types: tangible and intangible. Resources which are valuable, rare, inimitable and non- substitutable are a source of sustainable competitive advantage. In case of Apple Inc. the following resources can be identified: a. Steve Jobs Apple founder and CEO Steve Jobs was an incredibly valuable resource to the firm. His unique vision and approach to business established Apple as an industry leader in the beginning and he saved the firm from a crisis when he returned in the mid-1990s. Under his guidance the firm has rebounded and created many products that revolutionized the entire consumer electronics industry. To Apple Steve Jobs is a valuable, rare, inimitable, and non-substitutable resource. b. Product Lifecycle Management (PLM) process: Apple timed the launch of its new products perfectly. It introduced new product with innovative features into the market when the older product had reached a maturity stage. Apple sold the new product at a high price whereas it slashed the prices of the older product to boost its sales. Thus then new product did not cannibalize the sales of the older product. An example of this is the PLM of iPhone. The introductory 8 GB iPhone was priced at $499. The same model was priced at $99 when the third generation iPhone 3GS was launched. Apple adopted a similar strategy even for the iPods. c. Tailored Hardware/Software Systems Apple is one of the few companies that control both hardware and software for its products. Apple has gained this capability through its proprietary business model and by deciding against licensing its technologies. Apple has gained a strong control over the 6

components and hardware it requires by carrying out extensive backward integration. For example, Apple acquired two microprocessor design companies so that it could develop its own branded chips for the iPad. No other firm in the industry has a system like Apples and it would cost millions or billions of dollars to imitate, not regarding success. d. Innovative design and technology: Apples incredible industrial design capability is a function of their innovative design teams. All the Apple products, right from the Mac to the iPad, create value for their customers because of their elegant and user friendly design. Such innovative designs cannot be easily imitated by the competitors. e. Customer experience: Apple doesn't just want you to think differently about their products. It wants you to redefine the buying experience. Apples retail stores are designed to provide an out of the world buying experience. f. Apple Retail Stores: The introduction of Apple stores has provided the company with an important physical presence to act as both a sales location and an advertisement. The stores allow Apple to tightly control the image of the brand and provide excellent customer service. Matching success and impact like the Apple store model is difficult for other firms to achieve.

g. Relationship with OEMs Apple has outsourced all of its manufacturing processes to OEM partners in China, while focusing on design internally. The relationships between Apple and their suppliers are very close to provide Apple with excellent service and high quality products. Mutually beneficial business relationships are time-consuming and difficult to develop. An example of this is seen from the contracts that Apple signed with flash drive manufacturers like Intel, Micron, Toshiba etc. in order to ensure it got the best quality supply at lower prices for its iPods.

Capabilities: While Apples designers, programmers, and engineers each represent key resources the ability of the firm to exploit their abilities to create their entire software/hardware ecosystem is the firms key capability. Taken each individually, the resources only represent competitive parities and temporary advantages. The combination is their key capability that has established a sustainable and ongoing competitive advantage and above average performance within the industry.

5. Comment on Apples diversification so far (from P.C. to ipod, istore, iphone and ipad) with respect to Ansoffs matrix 7 comment on common thread, if any?

Ansoffs Matrix

Apple has already implemented a successful strategy of diversification, both related and unrelated. Beginning as a company which produced full-sized desktop computers Apple now offers a line of desktops, notebook computers, mobile digital media players, and a mobile phone, among many other devices. Apple has also entered the content distribution business, selling music and applications for its devices as well as renting digital video, playable across many of its most popular devices. Thus broadly speaking Apple has diversified into the following categories: a. Mp3 Players - iPod: When the company launched iPod it went for unrelated diversification as it had no prior experience of producing MP3 players or any knowledge about the music industry. Thus this kind of diversification falls in the 4th quadrant. Once iPod became a success Apple launched many versions of the product. This kind of diversification falls in the 2nd quadrant where Apple catered to the same market with a new product. b. Mobile Phones iPhone: With the launch of iPhone 2007, Apple entered the Mobile phone market. This time however iTunes was the common thread for the company as well as the consumers. Also the iOS was the common thread between iPod touch and iPhone. Thus this diversification falls in the 3rd quadrant. c. Tablet PCs iPad: Apple entered the tablet PC market with the launch of iPad. This time the common thread was the App Store, iTunes and the iOS used in the iPhone. Thus this diversification also falls in the 3rd quadrant. From the above diversification strategy it can be seen that Apple has successfully transformed itself from a computer company to a digital convergence company.

6. Analyze how is Apple`s competitive advantage sustainable in P.C., MP3, iTunes, smartphone and ipad? PC: a. Right from the launch of the Mac, Apple projected it as highly differentiated premium product. This gave Mac its own set of loyal followers which give it a competitive advantage over the competitors products. b. Steve Jobs vision of the digital hub for the Macintosh helped Apple grow in the PC segment. The Mac added value to the consumers who were becoming entrenched in a digital lifestyle. c. Apples control of both hardware and software gave it a unique capability of designing and developing its products right from scratch. Competitors found this particular capability of Apple very hard to imitate as they relied heavily on third party vendors for hardware and software. d. Proprietary applications like iTunes, iPhoto, Mac App Store added value to the overall consumer experience. e. Apple started using Intel chips for the Mac which dramatically improved its performance and helped in Macs resurgence. f. Apples innovative design capability was very hard for competitors to imitate. MP3 Players: a. The iTunes software and the iTunes Music store were the two features that differentiated iPod from other mp3 players in the market. b. Also iPods unique design, ease of use and superior performance were difficult for the competitors to imitate. c. Apple was also able to source the flash drives at a competitive prices because of the agreements it had signed with the suppliers. This coupled with iTunes gave the iPod dual competitive advantage. Smartphones: a. The iPhone ran on a specially adapted version of Apples OS X platform. This combined with Apples innovative design differentiated the iPhone from the other smartphones. b. Also falling component costs coupled and design improvements helped Apple reduce iPhones cost structure. Thus Apples iPhone had a dual competitive advantage. c. The App store launched by Apple in 2008 further enhanced the user experience by making it possible to distribute, access, and download mobile applications directly onto the mobile phone. d. The popularity of the App store with the users as well as the app developers further strengthened iPhones competitive advantage. e. Under Apples pricing model agreement, AT&T provided subsidy on the iPhone which brought the prices of the subsidized phone to $199. This in turn boosted the iPhone sales. iPad: a. Apple has uniquely positioned the iPad between a smartphone and a laptop computer. This is a source of differentiation for the iPad.

b. Here again Apple resorted to backward integration in order to gain more control over the components. Apple acquired 2 microprocessor design companies in order to develop chips for the iPad. c. Here again iTunes and the App store enhanced the user experience. 7. Analyze performance from 1981 (decade wise). What are the current and emerging challenges? a. 1981-1985: Apple had become a leader in the PC industry by 1981 with the success of its Apple II computer. However the competitive position of Apple changed fundamentally in 1981 because of IBMs entry into the PC market. The IBM PC used Microsofts DOS operating system and a microprocessor from Intel and was an open system that other producers could clone. Apple however relied on its own proprietary design and refused to license its hardware to third parties. As a result of IBM PCs superior performance, IBM became the new market leader. Apple retaliated by launching Macintosh in 1984. However because of its slow processor speed its sales were limited. Apples net income fell by 62% between 1982 and 1984 sending the company into a crisis. b. 1985-1993: In 1985 Steve Jobs was forced out of the company by the board of directors. The boardroom coup left John Sculley alone at the helm. Sculley pushed Mac into new markets, most notably in desktop publishing and education. By 1990, Apple had $1 billion in cash and was the most profitable PC company in the world. Apple offered its customers complete desktop solutions, including hardware, software and peripherals. Apple also designed its products from scratch, using unique chips, disk drives, and monitors. In the process Apple built a great brand image for itself and gained customer loyalty. This loyal customer base allowed Apple to charge a premium on its products and it gross profit hovered around 50%. However the Macs started looking overpriced when the prices of the IBM PCs dropped drastically. Apples cost structure was high as compared to other players in the industry. In 1990, Sculley tried to reposition Apple as a low cost producer of computers with mass market appeal. Sculley also forged an alliance with rival IBM to work on developing new OS and create new multimedia applications. Apple also came out with a plan to run the Mac OS on Intel chips. Despite these efforts Apples gross margin dropped to 34%, 14 points below the companys 10-year average. In June 1993, Sculley was replaces by Michael Spindler. c. 1993-1997: Spindler killed the plan to run the Mac OS on Intel chips and announced that Apple would license a few companies to produce Mac clones. He also tried to cut costs by slashing the work force and reducing the R&D spending. Spindler also pushed for international growth. Despite these efforts Apple lost momentum and Wintel (Windows OS + Intel processors) based PCs continued to gain ground. Apple recorded a loss of $69 million in Apples first quarter of 1996. The company appointed Gilbert Amelio as the new CEO.

10

Amelio proclaimed that Apple would return to its premium price differentiation strategy. Macintosh sales however continued to dwindle and Amelio eventually turned to Steve Jobs to revive Apple. In 1996 Apple acquired Next software which was stated by Jobs after he left Apple. Jobs returned to Apple as a part time adviser. Apple lost $1.6 billion under Amelio and its worldwide market share tumbled to 3%. In September 1997 Steve Jobs became the companys interim CEO. d. 1998-2007: Steve Jobs moved quickly to reshape Apple. In August 1997, Apple announced that Microsoft would invest $150 million in Apple and develop core products like Microsoft Office for the Mac for 5 years. Jobs abruptly halted the Mac licensing program as this arrangement was cannibalizing Apples profits. Apple slashed its product lines to just four categories. Apple pared down its inventory and increased its R&D spending. Jobs introduced the iMac in 1998. The iMac had a unique design and it supported peripherals which were designed for Windows based machines. Thanks to iMac Apples sales outpaced the industry sales for the first time in years. In 1998 Apple posted a $309 million profit reversing its losing trend. Apple broke away from its tired and tarnished image by coming up with creative marketing campaigns. In 2001, Jobs presented his vision for the Macintosh in what he called the digital hub. Apple wanted Macintosh to become the centre of consumers digital lifestyle. Apple subsequently revamped its product line to offer machines that could tightly integrated user experience. In 2006 Apple introduced the first Mac computer to run on Intel chip. This enabled Apple to build faster and less power consuming computers. Apple became the fourth largest PC vendor in the US with 8% market share in 2009. Apples shift towards digital hub strategy was initiated by the debut of iPod in 2001, followed by iPhone in 2007 and iPad in 2010. With the launch of iPhone in 2007, Apple computers became Apple inc. In April 2003 Apple launched the iTunes desktop software and iTunes Music Store. The two in combination completed Apples vision of and entertainment hub. The iTunes was the first legal site that allowed music downloads on a pay per song basis. The launch of iTunes dramatically increased the sales of iPod. In 2007 iPod sales amounted to $8.3 billion which accounted for about 33% of total net sales. (Exhibit 1b) In 2007 Apple launched the iPhone which revolutionized the mobile phone industry. Within two years iPhone went from zero to 30% of Apples total revenue. iPhone revenues exploded to $13 billion by 2009. The iPhone went on to capture 14% of the smartphone market. A key factor behind the success of the iPhone was the launch of Apple App Store in 2008. From 1997 to 2007 Apples profits increased almost six times and its market value rose to $72.9 billion. (Exhibit 1a) e. 2008- Present: Apple released the second model of iPhone in 2008. This version ran on a faster 3G network. With the 3G model the iPhone revenues exploded to $13 billion by the end of 2009 fiscal year. A third version of iPhone 3GS went on sale in June 2009. Falling component costs and design improvements helped to reduce iPhones cost structure. Wider international distribution also fueled iPhone sales. The App Store which was launched by Apple in 2008 further boosted the sales of the iPhone. The App store made it easy to distribute, access, and download applications

11

directly onto the mobile phone. Third party developers welcomed App store as it made it easier for them to reach the customers. Apple generated $1 billion in app sales. The launch of iPad in 2010 was another bold move to redefine the industry. It was positioned between a smartphone and a laptop computer. Jobs claimed that iPad would be the netbook killer and drive new consumer behavior. More than 450,000 iPads were sold during the first week on the market. In May 2010 Apples market cap surpassed that of competitor Microsoft for the first time since 1989. In October 2010 Apple shares hit an all time high eclipsing $300. In January 2011 jobs announced that he would be taking an indefinite leave of absence to allow him to focus on his health. Jobs surprisingly took stage to launch the iCloud in June 2011 which is an online storage and syncing service for music, photos, files, and software. On August 24, 2011 Jobs stepped down as the CEO of Apple Inc. and Tim Cook took over. Steve Jobs passed away on October 5, 2011, marking an end of an era at Apple Inc. iPhone 4S was officially released on October 14, 2011. Apple has continued to grow at a rapid pace even after Jobs demise on the back of new product launches and strong sales of its existing products, mainly the iPhone and the iPad. As on fourth quarter ended September 24, 2011 Apple posted quarterly revenue of $28.27 billion and quarterly net profit of $6.62 billion. Current and Future Challenges: Apple is facing four immediate challenges that may slow-down its buzz and momentum: a. Technology challenge: Judging from the features of iPhone 4S, Apples radical innovation machine seems to be running out of steam. The new phone is a marginal rather than a radical improvement over its predecessor, both in terms of its physical attributes and technological capabilities. b. Leadership challenge: The company is in the middle of a leadership transition that casts a cloud of uncertainty over its future. It will be difficult for Apple to thrive without Steve Jobs, as he was a leader with a strong vision, a man who knew the technology, the market, and the art, and he could combine altogether in blockbuster products; and he had the charisma to develop and spread the message to Apple followers, creating efficient and effective word of mouth and buzz campaigns. c. Competition challenge: So far, Apples barriers to competitors and innovation magic have been formidable, and any company from Nokia to Research in Motion to Hewlett-Packard that has tried to challenge Apple has not succeeded. In recent months, however, Apple has faced a serious challenge to two of its blockbuster products, the iPad and the iPhone. On the tablet market, Apple contends with an unlikely challenger: online seller Amazon.com Last week, the company is expected to announce the release of its new version of the Kindle reader, which some analysts expect to be a serious challenge to Apples iPad. On the iPhone side, Apple faces a new challenge from Googles Android phones, especially if Google manages to integrate Motorola Mobility successfully to its organization. Other phone manufacturers like HTC, Samsung, LG etc. using Android OS are posing a serious challenge to the iPhone. In fact, according to a Nielsen Survey, Android phones command a 43 percent market share, compared to 28 percent for iPhones.

12

d. Economy challenge: Though Apple enjoys a strong brand among consumers that makes demand for its products inelastic, its sales are sensitive to an impending down turn, especially in Europe.

8. What are your recommendations regarding these challenges and why? a. Create a differentiation strategy: The commodity PC market presents a perpetual downward pressure on prices, which erodes firm profitability. Developing and brand image that separates the firm from the competitive rat race will reduce the effect of destructive competition and pad margins. Apple has successfully developed a differentiated lifestyle brand and must continue to build on this foundation while resisting pressure to move to the middle to directly compete with Dell and HP. b. Develop close relationships with suppliers: Because there are few suppliers of key components required in consumer electronics industry, developing close relationships with suppliers is of utmost importance. Rather than searching for the supplier of lowest cost, maintaining a collaborative and exclusive business relationship will help mitigate the power of suppliers and help to lock in attractive component prices. Supplier relationship based on trust and cooperation will enable Apple to come out with innovative products at a faster rate as compared to its competitors and also at lower prices. c. Expand Apple store locations: Providing more points of direct contact with buyers will enable Apple to provide better service to customers and bring the Apple experience to more people. d. Diversification: Apple must look at emerging markets to drive the growth of its current and new products. This will help Apple to mitigate the risk of slowdown due to economic downturn in US and European markets. e. Design innovation: Put additional emphasis on design development with internal resource allocation to continue to lead the industry in design. f. Continue the expansion of Apple stores: The stores represent an important source of revenue for Apple and serve as an interactive advertisement for the Apple brand. Their success has been unmatched by any other industry player. g. Emphasize the integrated system in advertisements: Apples integrated system holds a significant advantage over other industry systems relying on Microsoft Windows, yet some customers have not experienced the seamless interoperability of all Apple products. This marketing angle will result in cross selling of more products to new and existing customers. h. Seek exclusivity arrangements with OEM partners: Continue to build relationships with the closed Asian OEM partners and enter into exclusivity arrangements to lock out competitors and gain favorable business deals.

13