Apple Inc.

Apple Inc.

Gwen Johnson SJ Lee Michelle Middleton Nigel Ngai Greg Palmeri

Business Capstone Professor Lee March 5, 2008

Apple Inc. 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 Apples 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 Apples current processes.

Apple Inc. Table of Contents 1. The Strategy of Apple Inc. 4 2. Strategy Evaluation 5 2.1 Michael Porters Five Forces Industry Analysis .5 Table 1: Porters 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 Community12 4.1 Evaluation of the Closed Community Strategy ... 12 5. Strategy Selection and Implementation 14 5.1 Sequence of Implementation ...15 6. Apples Competitive Advantage ...15

Apple Inc. 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. Apples 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 Apples 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. 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 Apples 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 Apples 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 Apples MP3 player became a very popular icon for the young generation. Apples 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 Porters Five Forces Industry Analysis For more effective strategy evaluation, we will examine the industry analysis through Porters 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. 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 Apples products and services in terms of PC, MP3 players, online music services, and mobile products in the table below. Table 1 Porters Five Forces for PC, MP3/Music Entertainment Services and Mobile Products
PC Low - Economies of Scale: R&D is especially a big part of the cost of producing (R&D cost in computers hovers at 12% of sales by the U.S. industry)vii. - Product Differentiation: Apples PC has its own operating system and the unique design. - Cost Advantage: High demand particularly in proprietary technology. MP3 player/online music services Low - Since iPod nano launched, some competitors such as Rio and Olympus had preferred to stop. - Economies of Scale: iPod has 80% of market share and Apple contracted with Samsung to buy 40% of its flash memory production which is two times more expensive than a hard driveviii. - Product Differentiation: iPod has its own music store like iTunes which allows customers download music conveniently. The complete set of iPod, iTunes and the accessories for 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. Mobile Products Low - Economies of Scale: High demand in R&D and marketing (todays 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 - There are relatively large number of competing firms such as Samsung, LG, Motorola, etc., but the latest market data from analyst firm Canalys estimates that Apple took 28% share of US smart phone market in 4th quarter of 2007ix.

Threat of Entry

High Threat of Rivalry - There are relatively few competing firms compared to other industries, but Microsoft has most of the market share. - Lower priced PC makers like Dell have been growing in the market.

Moderate - There are various competing firms such as Samsung, Sony, i-River, etc., but iPod has almost 80% of the market share. - But if it does not keep the products innovative, the other companys products which are lower in price than iPod can be a significant threat in anytime.

Apple Inc.

Low Threat of Substitutes - Many types of products such as PDA, DVD player, and calculator can exist as a substitute for PC, but these can substitute only one or two functions of PC. Moderate - The major suppliers are of raw materials and the labor which is highly proprietary in technology and has the power to impact price. - Besides the threat of the labor which includes the technicians, there are relatively various suppliers for the raw materials. Moderate Threat of buyers - The number of buyers is huge and growing as new technologies are introduced at a fast pace. - Apple differentiated by creating its own operating system and unique design, but other companies like Dell

Moderate - The substitutes for MP3 player can be a CD player, MD player, radio, etc.; but cheaper and easier access to MP3 files has been making customers leave from the other music players.

Low - Mobile phones can be substituted by home phones, internet messengers, etc., but the main convenience of mobile phones which is the portability cannot be easily substituted. Low - Todays phone has a lot of functions in addition to calling/receiving so there are many kinds of suppliers for the camera, MP3 players, Video players, memories, etc. - Apple which is already in the industry of PC and MP3 mostly deals with internal mediates and suppliers. Low - The number of buyers

High - The suppliers for raw materials and labor can be the threat, but the supplier who holds the main profitability is the song writers, singers and players. - Another big threat is the illegal free music download websites or P2P file- sharing sources. Easy and cheap access to MP3 files can encourage the MP3 player market, but on the other hand, this can be the threat to iTunes. Low - The number of buyers is continually increasing and they keep demanding new and updated products. - The internet speed and the music file providers are developing and these environments encourage the MP3 buyers. - iPod has relatively loyal customers.

Threat of Suppliers

is even huger than the PCs. Also the buyers

keep increasing with the new market of other developing countries.

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

face a cost disadvantage in obtaining or developing Apples 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

Apple Inc. (March 5, 2008). Business Week Online. Retrieved Feb 27, 2008 from http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=AAPL ii Apple Investor Relations. Retrieved Feb 27, 2008 from http://www.apple.com/investor/ iii Apple, Inc. (2005). Apple to Use Intel Microprocessors Beginning in 2006. Retrieved 4 March 2008, from Apple, Inc. Web site: http://www.apple.com/pr/library/2005/jun/06intel.html iv United States Securities and Exchange Commission (2008), Apple, Inc. Form 10-Q. Retrieved 2 March 2008, from SEC Web site: http://sec.gov/Archives/edgar/data/320193/000119312508017426/d10q.htm v Barney, J. & Hesterly, W. (2008). Strategic Management and Competitive Advantage. (2nd ed.). New Jersey: Pearson Prentice Hall, PC 1-11. vi Barney, J. & Hesterly, W. (2008). Strategic Management and Competitive Advantage. (2nd ed.). New Jersey: Pearson Prentice Hall, PC 1-6. vii Flamm, Kenneth. Creating the Computer: Government, Industry, and High Technology. Brookings Institution Press. 1988. pg. 210-211. viii Sangan, Harold. Apple and MP3 Player Market Extracted from http://www.happle.org/etudes/happle-anglais_ipod.pdf in Mar 3, 2008. ix Apple Took 28% Share of US Smart Phone Market and is 3rd in Worldwide Market Share. Extracted from http://www.techztalk.com/techwebsite/node/393 in Mar 3, 2008. x Tomas, Owen. New Apple Monitors to Double as Cameras Business 2.0 Online Magazine. April 27, 2006: 2:36 PM EDT xi MBA 618. Apples Screen Cam Extracted from http://sahli1.blogspot.com/ in Mar 4, 2008. xii Holmberg, Tove., Lindqvist, Fredrik., Logander, Marcus. Living On the Edge: A Case Study of Important Factors for the Survival of Apple Computers, Inc. School of Economics and Management, Lund University. Jan, 2005.