APPLE INC.

IN 2010

Apple Inc. in 2010

Did Jobs solve the problem?

Contents
Question 1 ...................................................................................................... 2 Question 2 ...................................................................................................... 3 Question 3 ...................................................................................................... 5 Question 4 ...................................................................................................... 6 Question 5 ...................................................................................................... 7 Question 6 .................................................................................................... 10 Question 7 .................................................................................................... 10 Our advice ..................................................................................................... 11

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Apple Inc. in 2010

Question 1
What, historically, have been the sources of Apples competitive advantages? Have these been relatively stable or changeable over time?
The case has been analyzed based on the following business strategy concept, to determine the sources of Apples competitive advantages:

External & internal means: How do experience customers Apple? The competitive advantage has been divided in external and internal means to define the advantages: The external means are the value proposition for the customers. Most important reasons why customers by Apple products are Easy-to-use, Plug

and play solutions, Design, revolutionary technology and its strong brand name.
The Internal means are the unique activities to deliver the value proposition. Apple combines activities into an innovative and integrated development and

design of their hardware and software, which gives them a unique position in the
market. Apple launched a multimillion marketing campaign the ultimate all-inone design, think different and it just works to create a strong brand name and the value proposition. Apple selected a premium pricing strategy to reinforce the halo effect of Apple. Following from the external and internal means Apple has a clear strategic position: It offers Total Customer Solutions Sources Apples customer value proposition and its unique activities are mainly based on three categories of sources: Positions

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Apple Inc. in 2010

Apple has a strong brand name. Their customers are very loyal. Its brand is associated with a way of living. It is a digital lifestyle. Capabilities Apple knows how to design, develop and control the horizontal and vertical

integration of hardware and software. It has always been an innovative firm, designing elegant products to create ease of use.
Values Steve Jobs created a hip, alternative computer brand that Thinks different It has the greenest line-up of notebooks and low-energy devices The Industrial proprietary design has grown into a Cultural force Through the years, Apples customer value proposition, activities and sources have been stable. All products are linked to their so-called digital hub and all products were designed to create plug and play and were easy to use. Customers can recognize Apples strong positioning which has not changed over the years. At some point in time Apple struggled with their strategy which resulted in a different competitive position (Sculley years). Apple decided to compete on operational excellence which was completely not in line with their values, capabilities and their sources. It was an unsuccessful period. Since Jobs came back, Apple returned to its original strategy, with success. New products and services do strengthen this unique customer value proposition: Apples distribution channel (retail stores) is much more than a way of selling products; it is a real brand experience. Apples latest product launch (iPad) has all its original sources: The combination of hardware and software, innovation, design and ease of use.

Question 2
Analyze the structure and profitability of the personal computer industry. Are the dynamics favorable or problematic for Apple? [Apple competes in three industries today: computers, music players, and cell phones. This question focuses on computers. In addition to a traditional industry analysis, also consider the complements (applications, peripherals, the Internet).]

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Apple Inc. in 2010

Rivalry among existing Competitors: HIGH The competition is extreme intense as main firms as Acer, Lenevo, Dell and HP are all huge to each other in size, scope, and scale. The highly competitive computer sector has a strong protection of intellectual property and patents. Competing computer manufacturers Acer and Lenovo introduce rival products pushed for international expansion (very active in emerging markets, and aimed at the same local market segments). The industry is based on low costs and low price strategies with high volumes.

New entrants threats: LOW There are a few very strong barriers to entry for new firms in the consumer personal computer technology which are: Costs with regard to entering in retail distribution and to marketing (to compete against well-established global brands) may be high. Contract manufacturing market entry is easy, but due to required higher sales volumes this will lead to lower pricing and cost advantages will be key. Due to fierce competition average margin profile fell below 5% (in 2007) which makes the market unattractive for new players. Substitutes threats: MEDIUM

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Apple Inc. in 2010

Personal computers can partly be substituted by consumer electronics like game consoles, PDAs and tablets.

Bargaining power of buyers: HIGH The PC market is defined by many consumers who can switch from product to product fairly easily with little cost implications.

Bargaining power of suppliers: MEDIUM PC manufacturers are depending on its suppliers as substantially all of its main products are manufactured by outsourcing partners. There are many producers for these main products which leads to low bargaining power. Intel and Windows have a high supplier power, because they dominate the standard in the PC industry. Complements: Since the nineties the number of applications for PCs exploded wich made the usablility of the PC much better. The value of computer use increased with the availibility of internet browsing. A wide selection of complementary hardware enhanced the ecosystem of PCs.

Dynamics for Apple Customer swings can be significant, and in fact Apple has gone from industry leader in1980 to near bankruptcy in 1997 back to market dominance again over its 33 year history. Given the PC industrys intense competition, high volumes, low prices and low cost structure the PC industry should not have the main focus of Apple. Question 3

How sustainable is Apples competitive position in PCs?

[Apple suffered badly in this industry between 1988 and 2001, with its gross margins hitting rock bottom in 1996, when it almost went bankrupt. What have been Apples problems? Why was Apple so weak in the 1990s? How did Apple try to solve the problem? What is your evaluation of Sculleys strategy? Did Jobs make his move from Motorola and IBM to Intel at the right time?]

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Apple Inc. in 2010

In 1978 Apple entered the PC market. Apple released easy-to-use computers, practiced horizontal and vertical integration and had own proprietary design. These are external means and value propositions for the customers which characterize Apple, as described in question 1. In 1984 complementary competitive advantages were added to Apple PCs, they offered a complete desktop solution and plug and play. With the result that customers loves their premium prized Macs. At that time Apple dominated the PC Market, a result of first mover advantage. The problems for Apple started when IBM entered the market. The IBM PC, with MS DOS, a fast microprocessor from Intel and low prices were competitive to Apple PCs. Apple lost market share. It became clear that Apple PCs had slow processor speed and lack of compatible software applications. Beside that IBM-compatibles narrowed the gap in ease of use. Apple tried to solve the problem by competing head to head with low priced competitors and became a low cost producer with mass market appeal. They started alliances to create new operating systems and to write multimedia applications. Another cooperative product was started with Novell and Intel to faster processing speed. But still, the gross margin dropped enormous to 34% and Apple moved during the Sculley years far away from their original strategy. Jobs returned to Apple, stopped all cooperations and alliances, and brought Apple back to their original strategic positions and sources. In 1998 Apple launched the iMac, an all in one computer, featured colorful translucent cases with a distinct eggshell design, supporting plug and play peripherals designed for windows. To strengthen Apples strategy Jobs introduced the digital hub, a new digital lifestyle. The control of both hardware and software were, according to Jobs, a unique strength. Jobs saw the Macintosh at the heart of his business strategy for (the bigger picture of) Apple. By doing so he moved from the PC market low cost, low prices to a niche market with a total solution (digital hub). In this niche market Apple has proven its sustainability.

Question 4
How sustainable is Apples competitive position in MP3 players?
With the introduction of the digital hub in 2001, the first Ipod was released and set Apple on its explosive growth path. The Ipod is sustainable in the MP3 market, although the

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Apple Inc. in 2010

MP3 market itself is not so sustainable anymore. New products are released on the market in which MP3 players are integrated. Apple used the same strategy with the introduction of the Ipod as by introducing the first PC. Sleek design, simple user interfaces and premium prices are typical features for Apple. The large storage distinguished the Ipod from other MP3 players. The Ipod Touch was the first MP3 player that had build in Wifi, a 3,5 inch screen and multi touch graphical interface. With the Touch, Apple entered a new market and became a competitor on the handheld game players market. In April 2003 Apple completed its vision of an entertainment hub. The combination of the iTunes desktop software and the iTunes Music Store dramatically differentiated Apples Ipods and formed new unique competitive advantages. Itunes songs were protected by DRM/FairPlay, no other MP3 player could play Itunes songs. Although the earnings for Apple of Itunes were far from impressive, it served as a loss leader for the Ipod. The launch of Itunes had a big effect on the Ipod sales. In 2009 DRM was given up, pricing for songs became more flexible and the market became more and more competitive. Music streaming services from social networks, free streaming music and online music jukeboxes are becoming a fact and Apple has to consider other challenges to response to these threats.

Question 5
How do you assess Apples competitive position in smartphones? Can Apple sustain its iPhone success?

With the introduction of the iPhone, Apple combined the iPod (music), iTouch (Apps) and mobile phone into one device. At the introduction in 2007 it changed the rules in the industry. Apple again created a Total Customer Solution (see figure below) with the iPhone: it provides multiple functions in one device, such as email, apps, music library and the internet.

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Apple Inc. in 2010

iPhone

The first mover advantage was important for the success. In two years, the sales of the iPhone went from zero to 14% market share, with one of the key factors the launch of the App store in 2008. Apple and RIM (Blackberry) accounted for 60% of total operating profits in cell phone industry in 2009. Within two years, the iPhone went from zero to 30% of Apples total revenue which grew by approximately 13 billion (Exh. 1b). In 2010 Apple viewed itself as a mobile device company. Apples competitive position in smartphones To get insight the competitive position of the iPhone the Five forces of Porter are used (Porter, 2008, HBR Vol. 78). Added to the figure and description of the five forces are the Complements, the forces that are complementary to the iPhone, such as the network companies.

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Apple Inc. in 2010

Risk of new entrants = LOW - easy to get in the market with open OS Android - difficult to get big market share - already many competitors

Power of suppliers = LOW - many producers of hardware - open source OS Android available - Apple has vertical and horizontal integration - many iPhone apps were build for developer's share Threat of substitutes = LOW - no real alternatives for the smartphones - simple mobile phones - SKYPE on laptop/PC - corded/cordless phones (not mobile) Rivalry = HIGH - fierce competition - fast moving market - short product life cycles

Power of Buyers = HIGH - buyers can choose from a lot of competitors - different 'total solutions' available: Apple, Palm, RIM, Nokia, Android, Windows

Complements - 'locked' networks needed for lower pricing (by subsidies) - often these networks have 'walled gardens'

Apple's entrance into the mobile phone industry with its iPhone has placed Apple in another highly competitive industry, where several experienced competitors operate. Rivalry is fierce in this market, with competitors as Nokia, RIM and Samsung. Consumers have a very strong price sensitivity and switch easily after a 2-year contract. To gain market share, competitor behavior is characterized by aggressive pricing practices, evolving designs and technologies, fast introduction of new models and rapid adoption of technological and product developments by competitors. Apples value proposition of easy to use, design, strong brandname and their innovation capacity gives a strong competitive position. Can Apple sustain its iPhone success? Due to the success of the iPhone, other producers will undoubtedly attempt to imitate the Total Customer Solution with its appealing features and functional applications. Already there is some competition of the Android platform in 2009 which grew in two years to a market share from zero to 3.9%. Also the Android Marketplace was gaining momentum, which introduced more competition for Apple and decreased their competitive advantage. However, this competition is scattered over several brands of smartphones. As contrast, Apple has only one (!) model of smartphone and a closed system for hardware and software. Only Apps can be made freely by developers, for which Apple gets a share.

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Apple Inc. in 2010

Apple can only sustain the iPhone success if it keeps creating and adding customer value and enhance the Total Customer Solution. This will be a difficult task among the fierce competition in the market, especially from the open OS Android. Looking at other competitors like Symbian (Nokia) which loses market share, Apple still has a small market share in the growing business of smartphones. This gives a positive drive to Apples iPhone. Question 6

What are the prospects for the iPad?

With the introduction of the iPad in 2010, Apple again redefined the industry. The iPad was placed between a smartphone and a laptop computer, which also gave input to the debate about the usage model. The sales figures spoke differently: within one week 450,000 units were sold. Also there were already over 1,000 apps available at the launch of the iPad and all iPod Apps of customers were available for iPad. The first mover advantage of the iPad with the Total Customer Solution was very strong. Because the iPad is produced with an own branded chip, the A4, it gives Apple more control over the components. It closes their system even more. On one hand an advantage, because of the control of costs and revenues for Apple. On the other hand a disadvantage, because with open OS, much more competitors can and will get into competition with Apples iPad. Already there was an immediate competitive response. The prospects for the iPad for the short term are positive. Apple again sets the standard and creates a hype in the tablet market. A growing market will arise. For example, the paper-free offices and the application of e-books for educational purposes can give a push in the market. For the long term it is uncertain. Again, as with the iPhone, the competition will be strong and based on different processors and OS. Open source platforms, like Android, are a possible threat for the market share of the closed Apple system. Question 7

Did Jobs solve the chronic Apple problem and does Apple have a sustainable advantage today? How should the new CEO, Tim Cook, change Apples strategy? [Try to construct some alternative strategic options and scenarios for the future of Apple]
Fundamental problems:

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Apple Inc. in 2010

Vertical and horizontal integration is a value but also a problem o o The value ensures Apples first mover advantage when introducing new products. The problem comes from the fast follow up from competitors with open standards which are copied by the industry and threaten Apples market share.

The combined effort of all competitors speeds up the market and technological developments. Apple strongly depends on its own innovation power (biggest competative advantage). Every time a single innovative product is launched by Apple it results in high revenues. It is a challenge to stay ahead of competitors after the first hype. This makes them vulnerable to create a sustainable business.

Suggestions for Tim Cook (CEO Apple) Alternative 1: Strengthen the vertical and horizontal integration Keep others out of your OS and products: ensure a private and closed system, because Apple is very dependend on innovation. Loose the link with Microsoft Office and make your own applications compatible to everyone and everything. Android is a serious competitor with their OS and Apps, so be prepared. Alternative 2: Open the system and set the industry standard. Apple is able to strongly innovate the industry and should focus on new ideas and create a bigger market share by licencing their products and ideas to a larger market, including their competitors. Alternative 3: Introduce the Apple experience more widely Hold on to strong market reputation from loyal customers and the world strongest brand. Aim for more interaction with customers and create a bigger total Apple solution. Use the strong brand name, easy to use approach, proprietary design and innovation power to step into the much broader consumer electronics industry.

Our advice
Go for alternative 1 and enhance Apples original strategy. Based on the analysis on the markets in which Apple is active, their unique sources as mentioned are best used. Be the best, be different!

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