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Contents
Contents...........................................................................................................2 Company History and Growth...........................................................................5 Strengths and Weaknesses within the Company...............................................6 Strength........................................................................................................6 Weaknesses...................................................................................................7 Opportunities and Threats within the External Environment..............................8 Opportunities.................................................................................................8 Threats..........................................................................................................8 Is Apple in a Strong Competitive Position?........................................................9 Corporate and Business Level Strategies........................................................11 Apples Vision..............................................................................................11 Apples Mission............................................................................................11 Strategies....................................................................................................11 Recommendations..........................................................................................15 References......................................................................................................17

Apple's Secret? It Tells Us What We Should Love

by Roberto Verganti

http://blogs.hbr.org/cs/2010/01/how_apple_innovates_by_telling.html

At the beginning of Steve Jobs' presentation of the iPad, a slide showed an image of God delivering its commandments, paired by a quote from The Wall Street Journal: "Last time there was this much excitement about a tablet, it had some commandments written on it." Although a touch arrogant, this quote powerfully captures the essence of the event. While tech experts were busy commenting on the qualities of the iPad, what struck me was the level of excitement that the event created. On Tuesday, the day before the product was unveiled; a Web search for "Apple tablet" produced more than 17 million links! On Wednesday, hordes of people attended the news conference remotely. Everyone was anxiously waiting for Apple's interpretation of what a tablet is. This was validation of Apple's peculiar innovation process: Insights do not move from users to Apple but the other way around. More than Apple listening to us, it's us who listen to Apple. This contradicts the conventional management wisdom about innovation. In fact, one of the mantras of the past decade has been user-centered innovation: Companies should start their innovation process by getting close to users and observe them using existing products to understand their needs. I disagree with this approach for these kinds of efforts. User-centered innovation is perfect to drive incremental innovation, but hardly generates breakthroughs. In fact, it does not question existing needs, but rather reinforces them, thanks to its powerful methods. With the iPad Apple has not provided an answer to market needs. It has made a proposal about what could fit us and what we could love. It's now up to us to answer whether we agree. The iPad, of course, is not the first time Apple has taken this approach. If it had scrutinized users of early MP3 players downloading music from Napster, it would have not came out with a breakthrough system (the iPod + iTunes application + iTunes Store) based on a business model that asks people to pay for music. Consumers don't always swallow Apple's notion of what they should love. In 2008, when Jobs unveiled the MacBook Air, he said "No matter how hard you look, one thing you are not gonna find in a MacBook Air is an optical drive. If you really want one, we have built 3

one. [He showed an external CD-DVD drive] . . . But you know what? We do not think most users will miss the optical drive. We do not think they will need an optical drive." Apple is not alone in thumbing its nose at the notion of user-centered innovation. If Nintendo had closely observed teenagers in their basements using existing game consoles, it would have provided them with what they apparently needed: a powerful console with sophisticated 3D processing that could enable them to better immerse in a virtual world. Instead, Nintendo did not get close to users when developing the Wii. According to Shigeru Miyamoto, Nintendo's senior marketing director, "We don't use consumer focus groups. We got a lot of feedback from developers in the industry." This allowed Nintendo to completely redefine the experience of game consoles. The iPod and the Wii were outside the spectrum of possibilities of what people knew and did. But they were not outside what they could dream of and love, if only someone could propose it to them. Firms that create radical innovations make proposals. They put forward a vision. In doing that, of course, they take greater risks. And it may even be that the iPad will not succeed. (My feeling is that its success strongly depends on developers. If they create applications specifically tailored for this device, instead of simply adapting existing applications running on notebooks, then the iPad could mark a new era in mobile computing. The potential is there, given that Apple is using the same collaborative innovation strategy devised for the iPhone.) My 10 years of research on breakthrough innovations by companies such as Apple, Nintendo, and Alessi, which are summarized in my book Design-Driven Innovation, shows, however, that these radical proposals are not created by chance. And they do not simply come from intuition of a visionary guru. They come from a very precise process and capabilities. Thanks to this process these companies are serial radical innovators. Their non-usercentered proposals are not dreams without a foundation. Sometimes they fail. But when they work, people love them even more than products that have been developed by scrutinizing their needs.

Roberto Verganti is professor of the management of innovation at Politecnico di Milano and a member of the board of the European Institute for Advanced Studies in Management. He has served as an executive advisor, coach, and educator at a variety of firms, including Ferrari, Ducati, Whirlpool, Xerox, Samsung, Hewlett-Packard, Barilla, Nestl, STMicroelectronics, and Intuit.

Company History and Growth

In April 1976, Steve Jobs (21 years old) and Steve Wozniak (26 years old) founded Apple Computer after dropping out from school. Wozniak had an engineer mind and began building boxes that allowed people to make long distance phone calls for free. The selling of few hundred of the boxes led to a persistence that resulted in the manufacturing of Apple I computer box. Their initial investment as start-up money was $1,300. The team began the work in Jobs garage and sold over 200 PCs to computer hobbyists in the area of San Francisco. By this time, Wozniak began producing Apple II and Jobs hired high school computer fanatics to build circuit boards and design computer software. Both were focusing to offer consumers with a smaller user friendly computer, nonexistent at that time. One year later, an advertizing strategy was implemented and the Apple logo was born leading to a $1,000,000 in sales. Growth continued at an exponential rate that in 1980 the company went public and sales reached $117 million. In 1983, the company experienced some failures after the resignation of Wozniak. Jobs hired Pepsi Companys John Scully as president to fill the gap. But their difference of opinion led to Jobs leaving in 1985. At that time, Microsoft of Bill Gates were pushing Apple to license its product and make the Microsoft platform an industry standard. Apple had established itself as a player in the corporate world with the Mac Plus and Laser Writer printers. At that time, Jobs established another computer software company, NEXT, that was technologically advanced. In 1997, CEO Gilbet Amelio purchased Jobs company NEXT software with the hope of creating Apple next generation operating system. The move did not work and in 1998 Amelio was thrown out and Jobs was placed back as Apple CEO. During this time, Apple successfully launched the iBook and the iMac product lines and continues to push them in the consumers and education markets till now; it also has G4 portable and desktop versions that are marketed with high focus on design. Year 2004, however, was a turning point for Apple. The company began experimenting with new parts from new suppliers. This helped Apple to produce new designs so quickly for a short amount of time. With the release of the iPod video, the iPod classic and ultimately the iPod touch, the iPad and iPhone, each apple product has been under equally high demand. On January 2006, the iMac and MacBook Pro, which are the first Intel based machines, were introduced. They were based on the Intel Core Duo platform. In January 2007, Apple Computer, Inc. changed its name to simply Apple Inc. Jobs explained that due to their current product mix consisting of the iPod and Apple TV as well as their Macintosh brand.

Apple wasnt just a computer company anymore. It dealt also with a revolutionized product in which Apple had never previously competed: the Apple iPhone (3G, 3GS, 4G). The iPhone combined Apple first widescreen iPod with the worlds first mobile possessing visual voicemail and an internet communicator capable of running a fully functional version of Apples web browser Safari on the iPhone operating system.

Strengths and Weaknesses within the Company

Strength
Product differentiation: From the early 1980s, Apple launched a product that differentiated it from all other computer products. Its closed operating system is not subject to the computer viruses and hacking that affects the Microsoft Windows operating system, its major competitor. Apples graphic and architectural production and design is far superior to any Windows application

Brand name: Whenever a company established a popular brand name or image, where branding of products help in keeping customers abreast of the company products, it can gather some benefits, such as reducing advertising costs from the recognition perspective. Besides, the innovations in the music industry have been linked with Apples brand name.

Weaknesses
High research and development costs: The market requires that participants continually provide innovations and competitive products and technologies. Apple has been working extremely hard to accomplish this and in doing so is spending more money for research and development than its competitors. This huge spending, negatively affects its profit margin and with competitors cutting prices on their products, it makes it difficult to compete on the same playing field. High selling and administrative costs: Marketing fees for advertising its unique operating system and new equipment again affects the bottom line, even though they are necessary expenditures. Competitors are able to enjoy the luxury of utilizing operating systems, in Windows users case, that controls a considerable amount of market share so they do not have to spend anywhere near as much to promote their operating system. Apple has to focus on creating more awareness not only of its products but also of its operating system. It must continue to develop innovative products that balance the expenditures of these group costs. Order placement puts company at risk: Components and products are ordered before the computers are manufactured. Thus if something occurs that limits a sale, the company would be vulnerable because of the high priced inventory that it retains. Cancellations of orders usually result in cancellation fees that still affect the companies' financial position. The process of production requires that a company forecast possible sales so that they can order the products and components necessary for being able to manufacture a desired output. If they are not ordered, then the competitor will have the upper hand in getting product to the consumer first. The risk is in making incorrect forecasts. Apple components may not be as abundant from vendors since their market share is smaller and the operating systems are different. This puts the companies with the Windows operating systems at an advantage since Apple could run into a problem procuring a sufficient supply of components.

Opportunities and Threats within the External Environment

Opportunities
Apple pursuit of Music industry: Apple's pursuit of the music industry through its iTunes also provides a good opportunity to increase Apple's bottom line and also increase brand awareness. The launching of the iTunes Music Store resulted in over 2 million downloads in only 16 days. All of the downloads were all done on Mac computers. Apple's opening of its music store worldwide was such a great opportunity

Microsoft upgrade cost versus benefit: Microsoft users are finding it less feasible to continually upgrade software packages unless they can truly see a benefit for the money being spent. The last few Microsoft upgrades have been plagued with glitches that provide another grand opportunity that Apple can use to its advantage as long as it doesn't make the same mistake with its issues of upgrades. The customers will continue to look for value whenever they spend money.

Threats
Competitive industry: The market for design, manufacturing, and sales are all extremely competitively aggressive in Apple's business. The rapid technological advances made by competitors in the hardware and software segments have increased the number of products offered in shorter time spans. Price competition has been very intense as the battles for increased market share rise. All of these affect gross margin, especially when combined with increased reliance on the Internet and the miniaturization of components that decrease prices since they are smaller and simpler.

Microsoft Dominance: Microsoft Windows continues to dominate the market. More than 90% of the world's computers use the Microsoft operating system. Apple needs to work on convincing the world that its system is better than Microsoft. This dominance and need to overcome the world's mental state of thought about Windows operating systems is a major threat to Apple.

Software Piracy: Software piracy has been a trouble for software and operating systems companies. As the technology advances, the more susceptible the companies become to additional piracy. The piracy issue has grown to global proportions and stopping unlawful copying and distribution of copyrighted software does not seem to have a remedy for prevention in the near future.

Substitute Products: Substitute products are readily available so this threat is very high. Competitors work to convince their customers that their product is superior to its competitors. The more differentiation of product, the less likely the switch to a substitute will occur. If prices are high, than the company has to provide justification for the increase. Apple's operating system differentiation can command higher pricing when it is presented to the creative designer community but not to the individual computer buyer unless they are specifically looking for such enhanced graphic capabilities. The market is favorable for the companies that have locked a business or educational facility since substitution will require a change of each computer within the facility and in some cases more than one location.

Is Apple in a Strong Competitive Position?

High devotion to research and development keeps the Apple innovation system working at full capacity, ensuring Apple access to the latest technology. In the marketing environment, Apple has managed to create a very strong brand image for them, one that adopts quality and reliability. In the management realm, Steve Jobs is their most valuable asset. His commitment and drive has created a strong and vibrant firm that would not be where it is now without him. Also, the use of a multi divisional structure 9

keeps the various portions of the company working at what they do best rather than stretching top management too thin. Another managerial strength is Apples commitment to secrecy when it comes to their products, software, and new gadgets in development. Tight lips keep Apples innovations from being pirated by rival firms. Innovation is the strongest trait in Apples technological environment. They are on the forefront of the computer technology, actually creating what would be considered state-of-the-art. Despite all the strengths of the firm, Apple does have weaknesses that need addressing. The company spends a great deal of money on research and development. This could be perceived as a risky company because of the fact that so much is devoted to R&D instead of some other aspect of the infrastructure. Nonetheless, Apple would not be able to innovate without using this strategy; therefore it is an acceptable risk. As well as being one of their greatest strengths, Steve Jobs is a weakness for Apple too. Apple relies too much on Steve Jobs, which is a risky policy. In an industry of brutal competition and price wars, Apple relies heavily upon their competitive advantages to survive. The greatest competitive advantage Apple acquires is the differentiation of their products. Apple computers and digital accessories set the standard for quality and innovation. The price tag on these products is high but the consumer knows that he is purchasing high quality, reliable, and fashionable products. Being the industry innovator is another great advantage for the firm. Though the position carries with it a measure of risk, Apple always gives to customers, state-of-the-art, and cutting edge products that are not available anywhere else. Additionally, Apple has managed to create legions of sternly brand loyal consumers. These consumers who subscribe to the Apple culture stand by their purchases with pride and commitment. Whether their motivation is quality or simply buying a computer that is not Windows based, these Apple enthusiasts present the company with a unique competitive advantage as they have significant influence on what the world views as trendy.

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Corporate and Business Level Strategies

Apple has a moderate to high level of diversification with related constrains. Apple offers home computers, personal computers, phones, music devices, software, and applications. All of the products use very similar design techniques and the majority of the applications can be used on multiple devices without changing the format. Apple is also one of the few computer base companies that own retail stores. Their customers can either order online through apple.com or go to an Apple retail store and buy the same products. All of its businesses are linked and continue to move forward at the same time.

Apples Vision
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980 with the Macintosh. Apple is committed to bringing the best personal computing experience to students, educators, creative professionals, and consumers around the world through its innovative hardware, software, and Internet offerings.

Apples Mission
Apple computer is committed to protecting the environment, health and safety of our employees, customers and the global communities where we operate. We recognize that by integrating sound environmental, health and safety management practices into all aspects of our business, we can offer technologically innovative products and services while conserving and enhancing resources for future generations. Apple strives for continuous improvement in our environmental, health and safety management systems and in the environmental quality of our products, processes and services.

Strategies

Despite the recent recession, Apple Inc. has turned a substantial profit for the past five years and is consistently one of the top performing firms worldwide. In order to maintain its success strip, Apple must maintain its strategic practices with nominal changes. 11

The vision statement of Apple in the upper level management is to continue innovation. Currently Apple is one of the most dominant companies in innovation, and every product they create is a hit with the younger generation. Their strategic plan is not very strong if they are solely relying on innovation, but so far it has not failed them. Apple has not really broken through the international barrier. Apples products are mainly seen in Europe and Japan, but have not really gone international. Some of Apples future plans would be to go international and market to their younger generations like they have in the United States. Many countrys youth like to replicate American youth, so if Apple penetrated their markets like they have done in the United States, they could probably increase their market share. Currently Apple is successful because of its CEO Steve Jobs. For the time being, that strategy is alright, but with the recent events and Steve Jobs health issues, such as cancer, Apple needs to have a new plan set in place. They need to make sure that they have more people on their management team with the same passion and drive for the company as Steve Jobs. Apple has been successful thus far because they have had Steve Jobs who has built Apple up to what it is today. Apple needs a stronger management strategy and figure out the right way to implement the plan to keep Apple on the road to success.

In Corporate Strategy, there are two kinds of diversification: linked and constrained. Companies using linked diversification enter new businesses when it relates in some way to another business they are already in (linked to it), but does not necessarily have any connection to their other businesses. If they are using constrained diversification, however, they only enter a new business if it is based on their core resources or competencies. Companies based on linked diversification have little coherence to their overall corporate strategy, while companies using constrained diversification tend to be more focused. Constrained diversification allows companies to maximize the effect of their resources because they are shared. Apple uses constrained diversification. Apple is, inherently, a personal computer company (hardware and software), and their businesses utilize their competencies in developing hardware and software. The Mac, iPod, iPhone, and iPad are all computers, which allow Apple to share resources between businesses. This creates economies of scale, which create cost savings for the company because their resources are shared across multiple businesses. Rather than just have related businesses, though, each business is a focused platform with no unrelated products or product types. The Macintosh, for example, consists of two kindsdesktop and notebook. These two separate product lines each share resources and complement each other. Each platform, too, complements the other. Apples Macintosh computers synchronize their media and personal data (calendar, contacts, email) perfectly with the other 12

platforms. Because they work so well together, owning products from each platform can benefits users by creating an experience where their devices work appropriately. The platform advantage does not apply just to Apples devices. Through iTunes, users can purchase music, movies and television shows that matches across all of their devices. The App Store allows users to download applications for their iPhones and iPads wherever they are. Because Apple has chosen what businesses to enter carefully, these platforms reinforce the others and make them more powerful. The sum is greater than the parts and this is what we call synergy. This creates a complete package for consumers to choose, and it is difficult for competitors to match. Their platform strategy makes each individual business more valuable than it would be as a separate entity.

Apples goal for their mobile business should not be to take a Microsoft like monopoly of the industry, but rather to take a sizable portion. Since Apple is deeply about innovation, differentiation, they can seek high profit margins, and thus do not need overwhelming market share. Strong profit margins allow them to have a high percentage of the industrys profit share without a corresponding market share. Gaining market share, however, should not be Apples primary goal. Market share today does not guarantee market share tomorrow. Rather, Apples goal should be to define what these devices are, so the competition responds to Apple. By constantly defining what these devices are and what they do, Apple can secure for itself the role of industry innovator, and thus a position of strength. If they are constantly redefining the industry, they do not need overwhelming market share. The iPhones release in 2007 is a perfect example. Before the iPhone, no smart phones used touch as a primary means of input. After its release, however, most smart phones use large touch screens and even resemble the iPhone. The similarities extend to the software, too. They try to match the iPhones features; specifically, its excellent web browser and the App Store, (for example OVI store by Nokia). The iPhone defined what smart phone devices are and what they do. Competitors have tried to make incremental improvements, such as a higher resolution screen or a physical keyboard, but none have made serious changes to the basic definition laid out by Apple in 2007. There is an interesting matching between the emerging mobile market and the personal computer market of the mid 1980s. Apple dominated the early personal computer market with integrated hardware and software, but Microsoft licensed its operating system to any computer manufacture who wanted it. Microsoft ended up dominating the market.

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In the mobile market, Apple is following a similar path as it did with the Mac; hardware and software are integrated. With Android OS, however, Google is using Microsofts strategy. In an attempt to grab market share, Google allows any device manufactures to use Android on their smart phones. By giving away the operating system and taking a majority of the market, Google can ensure a place for the company in the mobile market, attract developers to their platform and commoditize their competitors main advantage, which is the operating system. They are grabbing significant market share in the smart phone market. In first quarter 2010, Androids market share grew to twenty eight percent, up from twenty percent in fourth quarter 2009. Apples market share in the same period stood at twenty one percent. The question, then, is whether Apple should follow Googles strategy and license the iPhone OS to other companies in an attempt to counteract Androids advantage. This is not the proper strategy. Apples basic business model is to sell hardware. Everything else, the operating system, iTunes, the App Store, are used to make their products more valuable and thus to increase hardware sales. Apple enjoys high profit margins on their products not because the hardware is better than what others offer, but primarily because their software is better. If Apple were to license the iPhone OS to other manufactures, this would give away their hardwares main advantage and thus significantly cut into their sales. Apple would have to find a different business model. Their integration strategy provides other advantages as well. By controlling the hardware and software, Apple can guarantee a level of quality their competitors cannot. Moreover, they can build hardware and software features their competitors cannot access, and thus make their products more valuable. For example, the iPads battery lasts for ten hours of use. For its weight, thickness and price, this is an incredible advantage over competing devices, and it is due to Apples own battery and processor technology. Controlling the hardware and software together is the best way for Apple to differentiate their products, because they can guarantee the quality of their devices and create innovations and features exclusive to the platform.

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Recommendations
Recommendation 1
Apple should continue to support the educational and creative professional markets:

Apple is the company with the best systems in place for each of these markets so they should focus on continued support for each in a restrictive manner. Cost of supporting such programs in a niche market sense should be reviewed financially so that R&D costs do not pull the company into an impossible position of making a profit.

Recommendation 2
Apple should consider all work related to its operations in the iPod, iTunes, iPhone and iPad sectors: Apple must continue to spend R&D dollars in finding new innovative ideas that will continue to lead the competitors. It can focus on advertising to the different age groups. Advertisement to the younger crowds can utilize pop stars whereas business people can hear advertising messages from influential people. Apple should get the iPod and iTunes systems into the schools systems. It should work with teachers and other academic driven management to have these systems made available for students. Promote sales of these products while returning specific sums back to the school for support of other academic programs could benefit word of mouth advertising.

Recommendation 3
Apple should continue opening its retail outlets as long as it remains financially successful:

Apple has been successful with the opening of many retail stores. It should continue to 15

open these stores as long as the profits continue. Real estate purchases for these stores should be in prime locations only should the need for selling occur in the future. The opening of these stores has brought the product to the people so that they can easily see, touch, and play with the systems with personnel available to provide assistance and information. Franchising of stores should also be considered so that costs to Apple would be reduced. They could still control sales and system operation without the excessive cost outlay. The three recommendations above can help provide direction for Apple but they must reevaluate continuously since the market is moving quicker each day.

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References
1-http://www.innovationmain.com/Apple-eBook.html 2-http://gigaom.com/2009/02/22/is-being-%e2%80%9copen%e2%80%9d-an-absolutein-mobile/ 3-http://www.bnet.com/article/how-to-innovate-like-apple/330240 4-http://www.brainmass.com/homework-help/business/accounting-business-analysisfinancial-reporting/153466 5-http://en.wikipedia.org/wiki/Apple_Inc

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