Apple Inc.

Apple Inc.

Gwen Johnson
SJ Lee
Michelle Middleton
Nigel Ngai
Greg Palmeri

Business Capstone

Professor Lee

March 5, 2008
 Apple Inc. 2

Executive Summary

Apple Inc. is a company that designs, manufactures, and then sells desktop and notebook

computers, portable digital music players, and cell phones. It also creates software like the OS X

operating system, iLife, iTunes, or QuickTime; and peripherals such as printers or storage

devices that go with these products. The biggest challenge Apple is facing is that consumers are

reluctant to pay for songs and thus, Apple is losing customers to its competitors who are offering

music at a lower price. This can be seen in increased piracy and code hackers.

We came up with two possible solutions to address Apple’s challenges. The first is to

create a streaming music system. Using the currently existing streaming music program,

customers can choose stations from different music categories. With a more personalized system

they could choose stations that play music similar to an artist they already like. While the

streaming music is playing customers would have the option to buy the song as well. The second

option is to open up their music file sharing program with an all encompassing price. Apple

stands to benefit significantly in the future from building a closed community with artists and

consumers which will enable the company to compete more aggressively with record companies

while also building a closed network which minimizes hacker risk.

The second option of the closed community solves the main issues faced by Apple, like

the loss of customers to competitors and dealing with illegal downloads from consumers, which

is why we found this to be the best option for Apple to pursue. Its overall purpose is to deliver a

competitive music package with top security, which adds value and significant competitive

advantage to Apple’s current processes.

 Apple Inc. 3

Table of Contents

1. The Strategy of Apple Inc. ………………………………………4

2. Strategy Evaluation …………………………………………… 5

2.1 Michael Porter’s Five Forces Industry Analysis ……………….5

Table 1: Porter’s Five Forces ……………………………………..6

2.2 The VRIO Assessment …………………………………………8

Table 2: Assessment of the Apple, Inc.’s Internal Capabilities …... 9

3. Strategic Option: Streaming Music……………………………...10

3.1 Evaluation of the Streaming Music Strategy ………………….. 10

4. Strategic Option: Closed Community……………………………12

4.1 Evaluation of the Closed Community Strategy ………………... 12

5. Strategy Selection and Implementation ………………………… 14

5.1 Sequence of Implementation …………………………………...15

6. Apple’s Competitive Advantage ………………………………...15

 Apple Inc. 4

1. The Strategy of Apple Inc.

Apple Inc. is a company that designs, manufactures, and then sells desktop and notebook

computers (Mac), portable digital music players (iPod), and cell phones (iPhone). It also creates

software like the OS X operating system, iLife, iTunes, or QuickTime; and peripherals such as

printers or storage devices that go with these products. Apple is in the technology sector, and

has expanded from the computer industry into peripherals and the digital entertainment industry

because of the wide scope of its products and servicesi. Apple’s mission statement is as follows:

Apple ignited the personal computer revolution in the 1970s with the Apple II and
reinvented the personal computer in the 1980s with the Macintosh. Today, Apple
continues to lead the industry in innovation with its award-winning computers,
OS X operating system and iLife and professional applications. Apple is also
spearheading the digital media revolution with its iPod portable music and video
players and iTunes online store, and has entered the mobile phone market with its
revolutionary iPhoneii.

Our group struggled to find out what Apple’s objectives are. It turns out that it does not

really have any well-defined short-term goals. Steve Jobs said in a conference, “Our goal is to

provide our customers with the best personal computers in the world.”iii We had a hard time

finding other specific objectives of Apple, Inc.

Apple incorporates most of its product lines, such as the Mac, iPod, iTunes online store,

and iPhone into its mission statement. It shows that Apple has fully evolved into a digital

entertainment company from a former computer-oriented company. Also, Apple is right about its

position of being a leader in the digital entertainment industry and it shows in its sales figures: its

revenue in 2007 was $9.6 billioniv.

By March 2005, Apple had sold more than 300 million songs and the number is still

increasing tremendouslyv. But the music industry loses around US$4 billion to piracy a yearvi.

This number addresses the biggest challenge Apple is facing: consumers are reluctant to pay for
 Apple Inc. 5

songs and thus, Apple is losing customers to its competitors who are offering music at a lower

price. This can be seen in increased piracy and code hackers. Other problems, such as lack of

focused consumer groups, not taking full advantage from its existing loyal customers, and failure

to integrate its products with readily available existing technology, are also obstacles to Apple’s

success as an organization but they are not as critical as the problem we mentioned above. In this

article, we will carry out an industry analysis of Apple, generate two possible solutions, analyze

the feasibility of the two options, recommend the best solution, and implement and evaluate the

strategic solution.

2. Strategy Evaluation

As Apple’s mission statement emphasizes, it is true that this company has kept itself

innovative to be a leader in the industry by introducing differentiated products in terms of the

functions, the design, and the brand image. Its innovative mindset has built up a very strong

power of its brand name, and particularly in the MP3 market. The so-called ‘iPod Generation’

came into being as Apple’s MP3 player became a very popular icon for the young generation.

Apple’s innovative strategies to differentiate gave it the competitive advantage in an

environment in which trends and technology change rapidly, and the tendency that people value

uniqueness is also co-worked with the environment.

2.1 Michael Porter’s Five Forces Industry Analysis

For more effective strategy evaluation, we will examine the industry analysis through

Porter’s five forces analysis. It is necessary to define the industry that Apple Inc. belongs to. It

used to be just in the personal computer and software industry but now Apple expanded its

business to the entertainment industry, which includes MP3 players, online music service, and

mobile phones as well as PCs. Although Apple is now referred to as a company which is
 Apple Inc. 6

providing digital entertainment products and services, the industry itself is not consistently

comparable with the other companies because Apple is not specialized in just one scope of

product, such as the PC, but the scope of products and services provided is more complicated.

Thus, we will look into the major segments of Apple’s products and services in terms of PC,

MP3 players, online music services, and mobile products in the table below.

Table 1

Porter’s Five Forces for PC, MP3/Music Entertainment Services and Mobile Products

PC MP3 player/online music services Mobile Products

Low Low Low

- Economies of Scale: - Since iPod nano launched, some - Economies of Scale:

R&D is especially a big competitors such as Rio and
part of the cost of Olympus had preferred to stop.
producing (R&D cost in - Economies of Scale: iPod has 80%
computers hovers at of market share and Apple contracted
12% of sales by the with Samsung to buy 40% of its flash
Threat of U.S. industry)vii. memory production which is two
Entry - Product times more expensive than a hard
Differentiation: Apple’s driveviii.
PC has its own - Product Differentiation: iPod has its
operating system and own music store like iTunes which
the unique design. allows customers download music
- Cost Advantage: High conveniently. The complete set of
demand particularly in iPod, iTunes and the accessories for
proprietary technology. iPod.
- Cost Advantage: High demand in
proprietary technology. Apple has
several patents for iPod and
favorable access to raw materials by
the contract with Samsung.
High demand in R&D and
marketing (today’s cell
phones come with a lot of
add-ons like camera,
voice recorder,
speakerphone, MP3
player and FM receiver.
They also have built in
memories to record and
retain voice and pictures
and facility to download
them to a computer).
- Product Differentiation:
iPhone has add-on
functions with technology
from their own PC and
MP3 player.
- Cost Advantage: High
proprietary technology
and favorable access to
raw materials.

High Moderate High

- There are relatively - There are various competing firms - There are relatively large
Threat of few competing firms such as Samsung, Sony, i-River, etc., number of competing
Rivalry compared to other but iPod has almost 80% of the firms such as Samsung,
industries, but market share. LG, Motorola, etc., but
Microsoft has most of - But if it does not keep the products the latest market data
the market share. innovative, the other company’s from analyst firm Canalys
- Lower priced PC products which are lower in price estimates that Apple took
makers like Dell have than iPod can be a significant threat 28% share of US smart
been growing in the in anytime. phone market in 4th
market. quarter of 2007ix.
 Apple Inc. 7

Low Moderate Low

Threat of - Many types of - The substitutes for MP3 player can - Mobile phones can be
Substitutes products such as PDA, be a CD player, MD player, radio, substituted by home
DVD player, and etc.; but cheaper and easier access to phones, internet
calculator can exist as a MP3 files has been making messengers, etc., but the
substitute for PC, but customers leave from the other music main convenience of
these can substitute players. mobile phones which is
only one or two the portability cannot be
functions of PC. easily substituted.

Moderate High Low

- The major suppliers - The suppliers for raw materials and - Today’s phone has a lot
are of raw materials and labor can be the threat, but the of functions in addition to
Threat of the labor which is supplier who holds the main calling/receiving so there
Suppliers highly proprietary in profitability is the song writers, are many kinds of
technology and has the singers and players. suppliers for the camera,
power to impact price. - Another big threat is the illegal free MP3 players, Video
- Besides the threat of music download websites or P2P players, memories, etc.
the labor which file- sharing sources. Easy and cheap - Apple which is already
includes the access to MP3 files can encourage in the industry of PC and
technicians, there are the MP3 player market, but on the MP3 mostly deals with
relatively various other hand, this can be the threat to internal mediates and
suppliers for the raw iTunes. suppliers.
materials.

Moderate Low Low

- The number of buyers - The number of buyers is continually - The number of buyers
Threat of is huge and growing as increasing and they keep demanding is even huger than the
buyers new technologies are new and updated products. PCs. Also the buyers
introduced at a fast - The internet speed and the music keep increasing with the
pace. file providers are developing and new market of other
- Apple differentiated these environments encourage the developing countries.
MP3 buyers.
by creating its own - iPod has relatively loyal customers.
operating system and
unique design, but other
companies like Dell
or HP differentiate
by lower price
marketing.

According to the five forces analysis, the threat of rivalry is the highest external force in

the PC and mobile phone industry and in the MP3 player and online music service industry, the

power of suppliers is the highest external force. However, the marketplace trend seems to be
 Apple Inc. 8

destroying all the boundaries of each industry. A MP3 player is not only an audio device

anymore, but it is getting to be a more enhanced tool for full-motion videos and data storing

which is the area of PCs. Furthermore, a mobile phone is also not only the tool for the calling

and receiving, but rather, it is taking the role as a digital camera, a carry-on PC for memory

storing and internet, and an audio device as a radio or MP3 player as well. In terms of these

trends, Apple has been very smart in analyzing market profitability and adopting innovative

strategies by catching the changes of the market trends. Also, the most recent step to the mobile

phone industry seems that it was the best way to utilize and maximize their competitive

advantages by integrating PC, MP3 player, and online music service.

2.2 The VRIO Assessment

To examine Apple Inc.’s internal strengths, weaknesses, resources, and competencies, we

need to ask four questions about this company’s competitive potential using the VRIO

framework.

The Question of Value: Do the resources enable Apple Inc. to exploit an environmental

opportunity or neutralize an environmental threat? Apple already had many experiences in

designing, manufacturing, and selling PC and MP3 player and online music services. Apple has

used these experiences and skills to exploit opportunities for stepping into the mobile industry.

The Question of Rarity: How many competing firms already possess particular valuable

resources and capabilities? Apple has patents not only in their operating system and software,

but also in the technology that allows monitors to record video of their viewers at the same time

as displaying visual output in their computer products. They also have an integrated system with

iPod and iTunes to allow the users to easily utilize both products. These resources are definitely

rare as Apple hold patents, preventing other companies from using such technologiesx.
 Apple Inc. 9

The Question of Imitability: Do others companies without the resources or capabilities

face a cost disadvantage in obtaining or developing Apple’s resources? Apple is already holding

the patents and copyrights in their technologies and designs. Since the patent extends to Apple

the right to legally pursue any company that violates its intellectual property, companies are

unlikely to engage in using this technology without permission for fear of significant amounts of

money that could be paid out in damagesxi.

The Question of Organization: Is Apple Inc. organized enough to exploit the full

competitive potential of its resources and capabilities? Apple has a reputation for being a

creative company and has the required procedures and practices in place to support the proper

use of technology as a strategic resource. Apple Inc. has especially defined innovation and

design activities as being of higher importance than the commercial aspect. Innovation and

design have been at the core of Apple and its organization since its start, which increases the

chance of the competitive advantagesxii.

Table 2

Assessment of the Apple Inc.’s Internal Capabilities

Are the Resources or Capabilities:

Costly to Exploited by Competitive
Valuable? Rare? Imitate? Organization? Advantages
Yes Yes Yes Yes Sustainable

Taken together, the analysis of Apple Inc.’s internal capabilities suggests that it is

valuable, rare, costly to imitate, and organized to exploit opportunities. According to the result of

this assessment, Apple Inc. is sustainable as long as it preserves and develops these competitive

advantages in the industry, which requires being continuously innovative.

 Apple Inc. 10

3. Strategic Option: Streaming Music

Our first strategic option is to develop a streaming music system similar to Pandora. The

Pandora music system allows users to listen to streaming music that plays based on their favorite

artists. All of the songs have gone through an in depth analysis to make sure customers hear

music they like. This would be ideal for the iPhone because of its internet capabilities. It would

also come into play if Apple comes out with an iPod that has Wi-Fi or satellite capabilities.

Customers could buy a monthly package that contained unlimited streaming music and a set

number of downloads. Currently iTunes offers streaming music but it is not available at a

personalized level. Using the currently existing streaming music program, customers can choose

stations from different music categories. For example while going jogging, consumers may

choose to listen to the station that plays upbeat music ideal for working out. With a more

personalized system they could also choose stations that play music that is similar to an artist

they know they already like. While the streaming music is playing customers would have the

option to buy the song if it is something they like. This would be a great way to increase sales of

downloaded songs. If it is a song they never want to hear again, they could choose to have that

song removed from all of their stations. Customers would still be able to buy music from the

iTunes store. A certain number of downloads could be included in a monthly fee for the

streaming music. If customers go over their limit of songs, then they can buy additional ones at

the .99-cent cost.

3.1 Evaluation of the Streaming Music Strategy

Strategic option one is very feasible. Technically, the main component of this option is an

extremely large music database, which Apple already has. This option continues the use of the

iTunes store with just a few minor changes, such as making it possible to have a set number of
 Apple Inc. 11

free downloads. The iTunes store would also have to be linked to the streaming music program.

The streaming music player itself would be the most difficult part of this option. If Apple decides

to mimic Pandora it would take a lot of man hours and money. Pandora has a staff that listens to

each individual song in its library and does an in depth analysis of each song. Each of these

analyses take from 20 to 30 minutesxiii. Songs are then grouped by over 400 characteristics such

as key, harmony, lyrics, etc. This could be something that is out of Apple’s scope. However,

Apple does have its music organized to some extent. Music sold on iTunes is already listed

under a certain genre along with the year it came out. These could be the factors that Apple

decides to use when deciding what songs to play on each station.

The economic benefits of this strategy are that Apple can reel in consumers that are

hesitant to pay for music when they have a wide variety of tastes and do not want to pay for

every song they listen to. Another economic advantage is that it gives listeners a chance to

become exposed to new music and gives them an easy way to make this new music a part of

their personal collection. An economic disadvantage is that Apple will be giving customers a

chance to listen to an unlimited amount of music without having to pay for each song. Also,

there is the cost of setting up the new system. Apple is already familiar with the Pandora music

program. Currently when Pandora users listen to songs they have the option to buy them on

iTunes. The existing relationship could either hurt or help this strategic option. Apple’s

familiarity with the program could save the company money when it is time to set up a similar

system. On the other hand Apple may be under a contract with Pandora that could prohibit Apple

using a similar system. This option is economically feasible because there are ways to pay for the

cost of up keeping the new system. Apple could charge a monthly fee to listen to this

personalized streaming music. They could also include advertising to the streaming music
 Apple Inc. 12

station, which could be very profitable because advertisers would be able to target certain

listeners. In order to avoid the high cost of creating its own music analysis, Apple could simply

buy out Pandora. Not only would this reduce the startup costs, it would also eliminate

competition and give Apple access to Pandora’s 6 million subscribersxiv.

The organization of Apple’s iTunes is set up in a way that would make it easy to add this

new streaming system. The main organizational difficulty would either be setting up a monthly

fee system or setting up advertising.

4. Strategic Option: Closed Community

Apple stands to benefit significantly in the future from building a closed community with

artists and consumers which will enable the company to compete more aggressively with record

companies while also building a closed network which minimizes hacker risk. Creating a closed

network allows Apple to maximize security, value, and freedom to compete more aggressively

with competitors in the overall digital entertainment industry.

The option of licensing music through Apple’s music store online as a portal creates a

strategically lucrative impact on revenue for online music sales. Using this approach with the

online store allows Apple to publish songs in return for artists overall sales. Pairing artist’s skill

with the iTunes online music portal is a strategically lucrative step for allowing Apple, the artist,

and the consumers to maximize value in the market place through versatility. Ultimately Apple

can mold and develop this branded market since music will forever be so much more than just a

fad.

4.1 Evaluation of the Closed Community Strategy

Apple is technically fit to take on competition since it boasts immense branding ability,

and a store front that enables functionality for e-consumers music shopping needs. Currently it
 Apple Inc. 13

offers consumers variety with music, movies and podcasts. However by building artists through

this immensely effective store front gives Apple the ability to build artists. The consumer

technology barriers to entry are low enough now to appeal to a sizeable number of professional

and amateur artists and consumers. The company has been highly profitable from the iPod line of

products, and the development of their on-line music portal is an essential next step in growing

the company’s revenue sources. The greatest challenge here will be building a strong network

with artists and consumers, which could take significant capital to secure resources. However

advertisements could subsidize overall costs to implementing these new options to the iTunes

store. Continuing to build this music pairing by licensing smaller artists; building advertising

revenue and implementing new pricing strategies will maximize Apples use of resources and

boost overall competitiveness.

Apple could position itself competitively to take on the recording industry by eroding at

their talent pool and directly marketing talent to specific niche groups. The market is suffering

from music losses due to illegal downloading which could play to Apple’s strategic advantage.

Utilizing the ability of their immense branding potential, and security enabled communities will

fortify Apple against theft. Record executives agree that theft of music “was in large due to on-

line piracy”xv. This competitive move could create a show down with the record industry

ultimately stressing Apple’s resources in the long run since the recording industries has billion

dollar buying power. Offering an all encompassing pricing package at the Apple iTunes Music

store will better fortify and cater to user’s interests. Opening up pricing options for consumer

creates greater sustainable advantage in the online music market place.

Using the best talent to map out the music industry is a must for building a strategic

advantage against competitors. The environment with the iTunes Store allows for the company to
 Apple Inc. 14

build significantly on its web music portal, while really focusing resources into more branding

options with this product regarding micro niche markets. Apple’s overall move to change its

name to Apple Inc shows potential for further online expansion and growth by focusing more on

the overall product/service pairing with its “community of 25 million users”xvi. Apple needs to

promote that it is a friend of the artist who also stands behind the ethical decision to purchase

music from the artist. We feel this mentality fits into the framework of the art centric

environment that Apple embodies.

5. Strategy Selection and Implementation

The strategy that should be implemented is the Closed Community. The Closed

Community solves the main issues faced by Apple; specifically the loss of customers to

competitors and dealing with illegal downloads from consumers. One of the main tradeoffs by

not choosing the Streaming Music option is that although it has experienced difficulties, the firm

Pandora has experienced a lot of popularity with its streaming music stations. Its personalized

touch is also a tradeoff because it goes through so many criterions to bring each consumer

exactly what he or she is looking for. While the Closed Community offers unlimited downloads

and many options, it isn’t targeted as much towards each specific iTunes user. Another

disadvantage with the Closed Community is that now Apple is becoming more competitive with

the large recording companies and giving up good relations with those firms. The Streaming

Music solution would have been able to further a quality relationship with recording studios.

This option proves to be the most advantageous when using the VRIO analysis. This

strategy creates value in many ways. First, the Closed Community adds value to the Apple brand

name. Also, value is created from the information that is collected from an increased customer

base. A sense of belonging to the Apple community adds additional value. This strategy is
 Apple Inc. 15

innovative and few competitors have been able to create a community that encompasses such a

broad customer base. The ability of competitors to imitate a closed community is difficult

because they do not have the brand recognition that is necessary. Obviously Apple already has

the organization that is required to expand its community to include new independent artists and

new customers. The iPod and online music store are well established and well known by

millions of consumers worldwide. It also has the resources that are necessary for this, especially

if Apple decides to include advertisements on their iTunes store. Another advantage of the

iTunes software is that Apple is constantly updating the encryptions to deal with illegal

downloads and hackers. This is a problem that will continue to be around, but Apple already has

the necessary tools to deal with the dilemma. The Closed Community is sustainable in the long

run because it is going to become the standard in the music industry.

5.1 Sequence of Implementation

• Research to set the ideal price for the monthly fee.

• Finish major licensing negotiations with industry leaders and independent artists.

• Decide if advertising is needed to fund cost of supporting independent artists.

• Update iTunes online music store and encryptions to allow unlimited access to music that

is limited to Apple Inc. software.

6. Apple’s Competitive Advantage

Apple will receive a sustained competitive advantage by implanting the Closed

Community. Apple will have a long term advantage over its competitors because its new system

will bring in new customers and then encourage them to use Apple exclusively. Another

competitive advantage in the long run is that Apple will be building relationships directly with

artists that will be hard for competitors to copy.

i
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et al. Barney & Hesterly 1-11
xvi
et al. Barney & Hesterly