Business Strategy

Group Case Analysis – Apple Computers

Group 1  SP Jain Institute of Management & Research  6/13/2009

By
Kalpesh Agarwal - PGPM508_01
Sivaram Gunavel - PGPM508_12
Chetan Mahindra - PGPM508_23
Jaspal Singh - PGPM508_47
  Business Strategy

P C I ND U ST RY O VE RV I E W
The global computer industry is extremely competitive and it has experienced consistent
explosive growth. In 2002, personal computers were a $220 billion global industry. Personal
computing was pioneered by Apple, but IBM due to its brand name and strong product quality
brought PCs into the mainstream.

The annual PC unit growth averaged roughly 15% since 1980’s. From 1998 to 2000, the CAGR
of worldwide PC market was 20.8%. Further, the CAGR of price of each unit has been
decreasing at 5% from 2000 to 2005. By 2002, there were 400 million PCs installed around the
world.

Components became increasingly standardized due to introduction of Wintel (a combination of

the Windows operating system and Intel microprocessor) in early 1990’s which further brought
in new big players like Compaq and Dell. Some of the major players existing today in market
are Dell, Compaq, HP, IBM and Apple. The different forms of personal computing devices
available in the market primarily include desktops, laptops, notebooks, sub-notebooks,

Worldwide PC Market (2002) PC Buyers (2001)

10%
24%
United States
40% Western Europe 8%
25% 60%
8%
Asia Pacific

25% Rest of World Business Government

Education SOHO

Figure - Worldwide PC Market Distribution Figure - PC Buyers

workstations, servers, etc. These devices
break the industry into various segments. The
Channel Distribution in US industry can also be broken down into
(2001) segments on the basis of PC buyers (as shown
in the figure) as business, government,
10% 40%
25% education and small-office & home-office
25% users.

When it comes to suppliers, the PC industry

has two categories them: those supplying
Direct channels Commercial channels products that have many sources, such as
memory chips, disk drivers and keyboards,
Retail channels Internet
and those supplying products that come from
a small number of sources, notably
Figure - Channel Distribution in US
microprocessors and operating systems. Intel

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has been the major player in the microprocessor space followed by AMD, IBM and Texas
Instruments. On the operating system (OS) front, Microsoft has dominated with roughly 90% of
new PCs (in 2001) shipped worldwide with its Windows OS. Microsoft started with its Disk
Operating System (DOS), followed by its Windows 3.0, Windows 3.1, Windows 95, Windows
98, Windows NT, Windows 2000 and Windows XP. Some of the different alternatives to
personal computers that exist today are hand-held PDAs, smart-phones, set-top boxes and
even the X-box offered by Microsoft.

P C I ND U ST RY A NA L Y S I S
Major manufacturers in the PC industry are constantly competing to produce least expensive
yet most efficient machines on the market. As technology changes rapidly, competition in the
personal computer industry is on the rise. With the advent of internet technologies, the time
spent from order placement to delivery has drastically reduced. PC demand is found to be
accelerating, and a big growth in the sale of notebooks is an indicator that the market will
continue to grow.

PC prices have been falling continuously and the major reason, along with intense competition,
has been the significant reduction of microprocessor prices by Intel which ranges to about 50%
per year. Outsourcing to contract manufacturers to produce both components and complete
PCs has been on the rise which has led to the reduction of cost to the manufacturers apart
from improving turnaround time. Also, companies are moving from a build-to-stock to build-to-
order or configure-to-order strategy so that they can potentially reduce its cost by 10%.
Developing economies like India and China are seen as potential market for buyers and
manufacturers due to the fact that it is an attractive growing economy and provides the
advantage of cheap labour. Hence, huge expansion plans are seen in the pipeline.

FI V E F O R CE S A NAL YSI S O F TH E P C I N D U ST RY
Threat of New Entrants
While there is always a potential for new competitors to emerge, the personal
computer industry is dominated by five main competitors: Dell, HP, Compaq, IBM, and
Apple. The presence of dominant players deters the entry of new players to
immediately enter this market and establish their brand.
A greater threat to the computer industry is the existence of a great number of
amongst industry leaders. In such a competitive environment, these companies often
pool costs together on the research and development field. This creates an increased
competition between companies who are competing to build superior products based
on the same information, and the larger companies often engage in buying out the
smaller companies, increasing their competitive edge.
Established mobile phone manufacturers can also be considered as a threat to the PC
industry because they can easily shift to PC manufacturing given their technical expertise
and channel establishment apart from brand image.

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The advent of modern software capabilities like online office, online operating system,
cloud computing and online resources might push PC manufacturers where they need
to just provide only the basic hardware and connectivity.
The relative technology and know-how needed to make PCs is low. Due to increased
standardization in operating system (by Microsoft) and Microprocessors (by Intel), it is
easy for any new entrant to clone and manufacture PCs (called “white boxes”) with no
established brand name.
Players like Dell today have shifted to negative working capital because of their strategy
of build-to-order. This is an attractive option for new entrants.
The presence of patents and copyrights in the microprocessor space actually deter new
entrants as they need to invest in huge R&D.
Selling PCs directly to customers using Internet is also possible. However, existing large
companies have established strong supply chains, distribution channels, R&D, marketing,
and customer support services to create moderate entry barriers.
As the PC industry in most nations is close to the maturity stage, the number of
entrants has slowed down and industry concentration increased. The results are
lessened entry, which has led to a more concentrated industry.

Hence the threat from new entrants to the PC industry is weak to moderate.

The Threat of Substitute Products and Services

Anything that may replace personal computer is a substitute, which creates a threat to the PC
industry.
A cell phone with an Internet web browser and emailing function is a substitute for the
PC for people who use a computer only to use those functions.
Word-processor/typewriters and calculators are also substitutes.
Xbox by Microsoft, has a DVD player, high-performance games, and a standard Ethernet
network card for high-speed Internet connections without PC hardware, which is a
substitute of PC especially for home users.
However, the PC is still a necessity today as it has actually taken many functions away
from other products to become a substitute for products such as the TV, newspaper,
magazine, book, videogame, CD player, DVD player, photo album, calculator, word-
processor, telephone, fax machine, and so on. However substitutes for computers do
not have as many functions as a PC and are not close in performance.

Hence threat from substitutes is weak to moderate in the PC industry.

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Figure - Porter's Five Force Model for PC Industry

Bargaining Power of Suppliers

Components for manufacturing personal computers are the microprocessor,
motherboard, memory storage, and peripherals such as monitor, keyboard, or mouse,
along with bundled software. Most of the components are highly standardized and
widely available from a large number of suppliers. Thus, suppliers of those similar
components do not have much market power vis-a-vis the PC industry.
However, software makers hold significant power compared to PC makers that want to
sell their computers with preinstalled software. For instance, Microsoft, which does not
have a competitor for its Windows software, dominates the industry and thus has a
strong power to influence the PC industry.
While the PC industry changes regularly, it can be observed that only the central
processing unit (CPU) is a key input. All other items are commodity in nature and so
don’t command a bargaining power. Intel has a significant market power as it is a single
major supplier of microprocessor and has an 80% market share.

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Thus, the computer manufacturers hold a power over the suppliers as opposed to the
suppliers holding a power over the manufactures. It is the suppliers that are in direct
competition with each other to obtain exclusive contacts with the manufactures to have
them use their products. The suppliers, therefore, are often forced to slash prices or merge
with larger companies in order to survive.

Hence the bargaining power of suppliers is moderate.

Bargaining Power of Buyers

Large businesses, governments, and schools, which buy computers in large volumes,
have the power to bargain on price, quality and service. Personal computer buyers are
price-sensitive.
However, buyers have less power when the switching costs and brand-loyalties are high.
Thus, PC manufacturers can reduce a threat of buyer power by differentiating their
products.
For example: Apple’s unique operation system and its computers specifically targeted to
publishing and designing industry prevent their buyers from switching to competitors’
products. Its sleek product design represented by iMac and iBook also acquired many
fans and increased brand-loyalty.
But, despite several ways in which manufacturers have differentiated their products and
found ways to increase switching costs, customers still see units as very similar and thus
choose primarily on price.

Hence the bargaining power of buyers can be concluded to be strong.

Industry Rivalry
The five main manufacturers namely IBM, Dell, HP, Apple, Compaq are in competition
to produce the least-expensive and most efficient machine. Japanese companies such as
Fujitsu, Toshiba, NEC, and Sony also have large market shares.
Some companies such as IBM and Apple focus more on innovation while others such as
Dell focus on distribution channel and service, which creates differentiation to some
extent.
The technology paradox holds in the PC industry. High-tech companies such as PC
makers thrive when they provide ever greater amount of advanced technology, while
the price sharply falls.
Since the quality of a PC is largely determined by the microprocessor and application
system installed, the profitability and prosperity of the PC industry’s is dependent of the
profitability and prosperity of these suppliers.
As the PC has become a more commodity-like product, price-competition has become
severe in the industry. The price of PCs has declined since 1990’s. Cost-cutting is now
critical for PC producers to cover the decreasing profit margin.

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Low-cost production at Dell contributes its positive growth rate, while all other major
firms are experiencing negative growth rates.
Another important aspect of competitive advantage is globalization. Many PC makers in
the US now earn around 40% of their revenues in international markets. Although PC
markets in the US, Europe, and Japan have matured and the demand has slowed down,
demand in Asia-Pacific (except for Japan) is expected to grow.
The effects of intense competition are beginning to be felt as companies exit via selling
to other companies or simply exiting the industry altogether.

Regardless of the number of companies present, the computer industry will continue to expand
and remain competitive for a number of years to come. Hence the threat to industry rivalry can
be concluded to be strong.

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Part II
RE CO MM E N D AT I O NS TO A PPL E
The following are the recommendations on how Apple can turn its existing product advantage
to a competitive advantage:
Licensing of MAC software to other PC makers
Increase entertainment diet so that acceptance of Apple products increases among
customers
Special concession to schools so that once workshops are conducted in schools, it can
create a lasting interest amongst the younger generation (future of tomorrow)
Have long term contracts with corporate to increase market share by selling them bulk
PCs at discounted prices
Increase retail presence in developing economies
Increase customer service capabilities
Online upgrades even for hardware
Apple could come up with a separate product line with luxury brand PC that can be
thought of making a lasting fashion statement amongst certain customers by constantly
bringing innovatively designed highly fashionable PCs for the urban chic
People are using hard-to-administer Windows PCs or expensive Macs to just send email
and access intra-office databases. It doesn't make any sense that all that hardware be
wasted. It would be advisable to have a generic low end model for basic computational
purposes targeting low cost buyers.
Tie up with wireless service providers and provide bundled packages to users as this
might be the trend tomorrow where a PC would become useless without a network
connectivity
Provide customization & personalization capabilities where the customer can design
even the look and feel of her/his PC before placing an order. Such personalization does
not exist today and can also make Apple demand higher margin for the product design
flexibility, service and innovation.
Device a mechanism which will charge batteries whenever a key is pressed or a mouse
is moved. The more a PC is used, the better it charges the batteries (a concept similar
to the olden day mechanical auto winding watches which winds every time your hand
moves). This should be a revolution in the PC industry to move towards a completely
wire free computing.

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CO N CL U SI O N
It can be concluded that the PC industry is fairly attractive for entrenched, global, leading
companies but not for new firms. Although cost of assembling a PC is low, the barrier to entry
is fairly high because of the economics of scale and brand-loyalty. Adversely, however, the high
barrier to entry provides strong competitive advantages to existing large companies. PC
manufacturers should especially focus on buyers and industry competitors, whose power
reduces profits in the industry.

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