Introduction

Apple Computer’s 30-year history is full of highs and lows, which is what we

would expect in a highly innovative company. They evolved throughout the years

into an organization that is very much a representation of its leader, Steven Jobs.

Apple made several hugely successful product introductions over the years. They

have also completely fallen on their face on several occasions. They struggled

mightily while Jobs was not a part of the organization. Apple reached a point

where many thought they would not survive. When asked in late 1997 what Jobs

should do as head of Apple, Dell Inc.'s (DELL) then-CEO Michael S. Dell said at

an investor conference: "I'd shut it down and give the money back to the

shareholders.” (Burrows, Grover, and Green).

Well, times changed. Less than 10 years later, Business Week ranked Apple as the

top performer in its 2008 Business Week 50. Apple attributes their recent success

to robust sales of iPod music players (62 million in 2008). They are optimistic

about the economies of scope with media giants, such as Disney and Pixar.

Apple rarely introduces a new type of product. Thus, instead of being the pioneer,

they are an expert “second mover” by refining existing products. Portable music

players and notebook computers are examples. Apple increases the appeal of these

products by making them stylish and more functional. They now appear poised to

make significant strides in the home computer market and to creating a total digital

lifestyle whereby the home is a multimedia hub.

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Review of Literature

Steve Jobs and Steve Wozniak founded Apple on April 1, 1976. The two Steves,

Jobs and Woz (as he is commonly referred to – see woz.org), have personalities

that persist throughout Apple’s products, even today. Jobs was the consummate

salesperson and visionary while Woz was the inquisitive technical genius. Woz

developed his own homemade computer and Jobs saw its commercial potential.

After selling 50 Apple I computer kits to Paul Terrell’s Byte Shop in Mountain

View, CA, Jobs and Woz sought financing to sell their improved version, the

Apple II.

They found their financier in Mike Markkula, who in turn hired Michael Scott to

be CEO. The company introduced the Apple II on April 17, 1977, at the same time

Commodore released their PET computer. Once the Apple II came with Visicalc,

the progenitor of the modern spreadsheet program, sales increased dramatically. In

1979, Apple initiated three projects in order to stay ahead of the competition: 1) the

Apple III – their business oriented machine, 2) the Lisa – the planned successor to

the Apple III, and 3) Macintosh.

In 1980, the company released the Apple III to the public and was a commercial

flop. It was too expensive and had several design flaws that made for less-than-

stellar quality. One design flaw was a lack of cooling fans, which allowed chips to

overheat. In late 1980, Apple went public, making the two Steves and Markkula

wealthy – to the tune of nine figures. By 1981, the Apple III was not selling well

and Scott infamously fired 40 people on Feb 25 (“Black Wednesday”). Scott’s

direct management style conflicted with the culture Jobs and Markkula preferred,

and Scott resigned in July. Markkula stepped into his position as CEO. In August

1981, IBM released their PC. Unimpressed and unafraid, Apple welcomed IBM to

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the PC market with a slightly smug full-page ad in the Wall Street Journal. It

would not be long before IBM’s PC dominated the market.

The Xerox Alto was the inspiration for Apple’s Lisa. Apple employees were able

to examine the Alto in exchange for allowing Xerox to invest in Apple before

Apple’s initial public offering (IPO). Apple released the Lisa in January 1983 and

was notable for being the first computer sold to the public that utilized a Graphic

User Interface (GUI). Unfortunately, the Lisa was not compatible with existing

computers, and therefore came bundled “with everything and a list price to match.”

At $9,995 (over $21,000 in 2005 dollars), the Lisa missed its target market by a

wide margin.

Jobs attempted to control the Lisa project. Scott, unimpressed with the

performance of Jobs on the Apple III project, had Jobs head up the dog-and-pony

show for the pending IPO. Jobs, looking for a project to lead, inserted himself into

the Macintosh development team. Using his considerable influence, Jobs was able

to procure the resources to produce a computer that was faster than Lisa, used a

GUI, had a mouse, and sold for ¼th of Lisa’s price. Apple introduced the

Macintosh with great fanfare during the 1984 Super Bowl. The Orwellian-themed

commercial (directed by Ridley Scott, of ‘Alien’ fame) portrayed IBM as Big

Brother and embodied Macintosh and Apple as freedom-seeking individuals

breaking away from this oppressive regime.The commercial was largely successful

and sales for the Mac started strong. However, Mac sales later faded. John Sculley

left PepsiCo to join Apple in April 1983. He was famous for engineering the

“Pepsi Challenge”, in which blinded testers tasted both Coke and Pepsi to unveil

the ‘truth’ of the taste of Pepsi. In response to lagging Mac sales, Sculley

contrived the ‘Test Drive a Macintosh’ campaign. In this promotion, prospective

users could take home a Macintosh with only a refundable deposit on their credit

card. While lauded by the public and the advertising industry, this campaign was a

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burden on dealers and significantly impeded the availability of Macs to serious

buyers. In 1985, Apple tried to have lightening strike twice with their ‘Lemmings’

commercial during the Super Bowl. In what was becoming Apple’s typical

patronizing fashion, this commercial insulted current PC users by portraying them

as witless lemmings, unthinkingly doing harm to themselves. Although Jobs

attempted to overthrow Sculley, the board backed Sculley. Jobs left Apple to form

NeXT computer. After Jobs left in 1985, sales of the Mac “exploded when Apple’s

LaserWriter met Aldus PageMaker.” Apple dominated the desktop publishing

market for years to come. Under Sculley, Apple grew from $600 million in annual

sales to $8 billion in annual sales by 1993. Apple introduced Mac Portables in

1989 and the first PowerBooks in 1991. By 1992, PC competition ate into Apple’s

margins and earnings were falling. Sculley was under pressure to have Apple

produce another breakout product. He focused his energy on the Newton –

Apple’s introduction of the Personal Digital Assistant (PDA). Despite Sculley

generating substantial demand for Newton, it did not live up to the hype due to it

being severely underdeveloped. Sculley resigned in 1993 and Michael Spindler

replaced him.

Spindler spent most of his time and energies on regaining profitability, with the

end goal of finding a buyer for Apple. Over the next several years, Spindler

shopped Apple to Sun Microsystems, Eastman Kodak, AT&T, and IBM.

Meanwhile, Apple was unable to meet the growing demand for its products due to

supplier problems and faulty demand predictions. To add insult to injury,

Microsoft released Windows 95 with great fanfare in 1995. After significant

quarterly losses in 1996, the board replaced Spindler with Dr. Gil Amelio, CEO of

National Semiconductor. Dr. Amelio tried to bring Apple back to basics,

simplifying the product lines and restructuring the company. One of Apple’s most

pressing issues at the time was releasing their next generation operating system

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(code named “Copland”) to compete with Windows 95. Amelio and his

technology officers found that Copland was so behind schedule that they looked

outside the company to purchase a new OS. Ultimately, and somewhat ironically,

they decided to purchase NeXT computer from Jobs. Naturally, Apple welcomed

Jobs back into the fold. The board became increasingly impatient with Amelio due

to sales not rebounding quickly enough. Apple bought out Amelio’s contract after

just 1 ½ years on the job. Jobs eventually claimed the CEO position. Then, he

cleaned house by revamping the board of directors and even replacing Mike

Markkula (who had been with the company since the beginning). Jobs

simultaneously put an end to the fledgling clone licensing agreements (which

created a few Mac clones) and entered into cross-licensing agreements with

Microsoft. On May 6, 1998, Apple introduced the new iMac, a product so secret

that most Apple employees had never heard of it. The new iMac was a runaway

success with its translucent case, all-in-one architecture, and ease of use. It

brought Apple to a new market of users – those who had never owned a computer

before. Jobs further simplified the product lines into four quadrants along two

axes: Desktop and Portable on one, Professional and Consumer on the other.

Apple completed the matrix with the introduction of the consumer-based iBook in

1999.

The year 2001 was an important year for consumers of Apple products. Apple

opened their first 25 retail stores (totaling 163 stores in 4 countries as of May

2006). In September 2001, Apple introduced the new iMac featuring a screen on a

swivel.The new iPods (portable music players) were a tremendous success. Apple

sold so many that Apple’s dependence on Mac sales was significantly less. This

was no small feat considering that the 2001 iMac became Apple’s best-selling

product “by a long shot”. Apple offered iTunes (a free application) to help their

consumers organize music on iPods and Macs.

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In 2003, Apple expanded iTunes by 1) opening the iTunes music store to allow

Mac users to purchase music online and 2) expanding iTunes to Windows users.

Sales of iPods skyrocketed and currently provide the bulk of product sales to

Apple. In 2005, Apple announced that it would start using Intel-based chips to run

Macintosh computers. In April 2006, Apple announced Boot Camp, which allows

users of Intel-based Macs to boot either Mac or Windows OS. This functionality

allows users who may need both OSs to own just one machine to run both, albeit

not simultaneously.

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Vision Statement

"Man is the creator of change in this world. As such he should be above systems

and structures, and not subordinate to them."

Explanation of vision

Apple lives this vision through the technologies it develops for consumers and

corporations. It strives to make its customers masters of the products they have

bought. Apple doesn't simply make a statement. It lives it by ensuring that its

employees understand the vision and strive to reach it. It has put systems in place

to enable smooth customer interaction. It has put objectives in place to

continuously move forward; implemented strategies to fulfil these objectives; and

ensured that the right marketing, financial and operational structures are in place to

apply the strategies.

Mission Statement

“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”

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The PC Industry

We can glean Insight into the history and composition of the PC Industry from its

eponymous title. In the late 1970s, as Wozniak and Jobs were starting Apple

computer, personal computers were an emerging product. The following chart

(Reimer) gives an overall view of the major market players since the mid-1970s.

PC Share of Market

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sh

are

of

Ma

rke

t

IBM SOM

Apple II SOM

Mac SOM

Amiga SOM

C64 SOM

TRS 80 SOM

By 1983, the market share of the Apple II fell to 8% while the PC had 26%.

Market share of Macintosh peaked at slightly more than 10% in the early 1990s

and has since tapered to between 2-3%. The IBM PC and its clones became the

standard due to the success of the open nature of the PC. This allows product

developers to offer vastly more products for the platform.

Some argue that not licensing the Mac OS was a mistake. Bill Gates and

Microsoft were encouraging Apple to license their OS in the early 1980s, because

they were developing software for Apple and had much riding on the success of

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the company. When Apple did not license, Microsoft began developing their

operating system, Windows.

The Online Music Industry

While Apple clearly dominates the online music industry, the battle for domination

is not over. Although digital music sales are growing rapidly, the Recording

Industry Association of America (RIAA) states that digital sales account for only

4% of all music sales. (Borland) Analysts at Forrester (Bartiromo) and Gartner

(Bruno) validate this. Apple’s sales are between 66% and 75% of downloads and

80% of music players. (Bruno) Apple is part to a suit alleging monopolistic

practices concerning their market share dominance of players and downloads. The

other players in the download market are (the revised) Napster, Yahoo Music,

Rhapsody, and illegitimate file-sharing services. Portable music players competing

with the iPod include those made by Creative, Samsung, iRiver, and Sony. A

major point of contention between these services and player manufacturers is the

control of a variety of incompatible Digital Rights Management (DRM) schemes.

The Future of Apple

Personal Computers – A Shift in Strategy

Apple has historically taken a far different path than the traditional Windows and

Intel combination. Microsoft provides the Windows operating system to separate

downstream hardware producers such as Dell. Apple vertically integrated both the

operating system software and hardware completely under Apple. A consumer

running Microsoft Windows can choose from a myriad of systems based on the

Intel processor, while a consumer running Apple’s OS X must purchase Apple

hardware.

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Apple is adjusting this strategy by migrating their microprocessors from IBM and

Motorola PowerPC to Intel. Analysts believe that the Intel-based Macintosh may

be able to run Microsoft Windows applications by the end of 2006. (Burrows)

In addition to switching processors, Apple positioned their computers as an

immediate option for the traditional Microsoft Windows user. With Apple Boot

Camp, users may now use Mac OS X or Windows on an Apple computer.

(Sutherland).By allowing users to run Windows on an Intel Mac, Apple reduced

the switching costs for traditional PC users. Apple may steal away customers that

are willing to pay a premium for a system that runs both Windows and Mac OS X.

Apple continues to retain a strategic option to license its technology to clone

makers such as Dell. Past attempts at licensing Apple technology (to IBM,

Gateway, and others) failed on accord of Apple’s rigid demands. Many

technology leaders (such as a 1985 letter by Bill Gates to Apple CEO John

Sculley) criticized Apple for keeping a closed architecture. Apple cofounder Steve

Wozniak criticizes this strategy, “We had the most beautiful operating system, but

to get it you had to buy our hardware at twice the price. That was a

mistake.”Whether Apple would be willing to pursue this reversal of vertical

integration is unclear. Although such a move would cannibalize a portion of

Apple’s own hardware sales, it would also provide royalty-based revenue that

could approach $1 billion annually. (Burrows) Jobs traditionally sided against

licensing Apple technology. He referred to Mac clone producers as “leeches” and

he personally killed Power Computing (a Mac clone producer) by terminating their

license in 1997.

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Apple in the Living Room

Apple’s iPod and iTunes are a powerful combination that fosters a network style of

increasing returns. (Barney, 124) By selling iPods, Apple increases the consumer

demand for music from iTunes. By placing more musical choices on iTunes

(including less popular songs that appeal to niche audiences), there is more demand

for iPods. Apple had 70% of the legal music download market in early 2005.

(Yoffie)

Apple is shooting for the digital living room of the future. For example, Apple just

released a “boom box” portable version of the iPod. This iPod (the iPod Hi-Fi)

comes with a remote control. Instead of forming a strategic alliance, Apple

engineered the iPod Hi-Fi and designed it with high-fidelity features. (Burrows)

Apple is clearly trying to develop a stronger core competency in the entertainment

area.

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Strategic Alliances and Entertainment

Jobs had the early strategic vision to complement computing with movie

entertainment. After founding NeXT, he personally acquired a majority interest in

the young movie company Pixar in February 1986. Jobs went on to invest ¼ of his

personal wealth into Pixar.

In 1995, Pixar solidified its position within animated movies with the debut of Toy

Story. Grossing $358 million worldwide, it became the 3 rd-largest grossing

animated movie in history. After this success, Jobs took Pixar public and

negotiated far better terms with Disney. Later successes included Toy Story 2,

Monsters Inc., and Finding Nemo. The alliance between Pixar and Disney has

tremendous potential for economies of scope. As CEO of Apple and Disney’s

largest shareholder, Jobs is the strategic link between Disney, Apple, and Pixar.

Opportunities include combining the animated movie expertise of Disney and

Pixar, as well as sharing the content of Disney’s ABC or ESPN networks over

Apple’s digital offerings. (Burrows, Grover, and Green)

A current example of the fusion between Disney, Jobs, Apple, and technology is

video on the iPod. Disney’s Desperate Housewives was one of the first television

programs available for purchase and download to the newer video-enabled iPod.

There are concerns about whether these synergies will come to fruition. There are

fears that the personality and style of Jobs may conflict with Disney, and that

Disney CEO Iger could be “Amelioed” -- driven out of office by Jobs in a manner

similar to how Jobs drove Amelio out of the CEO post at Apple. (Burrows, Grover,

and Green).

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External Aanalysis

Technological Environment

Brand Awareness – Style at a Premium

Apple’s products are trendy and stylish. After Jobs returned in 1997, Apple

retained designer Jonathan Ive to differentiate their computers from the typical

beige box. Ive’s design of the iMac included clear colorful cases that distinguished

Apple computers. Apple’s iPod (with the trademark white ear buds and simple

track wheel) commands a 15%-20% premium over other MP3 players.

Apple and Pixar limit the number of computer products and movies that they sell.

Product differentiation with focused quality and style also extend to the Jobs Pixar

– “Pixar's executives focus on making sure there are no ‘B teams,’ that every

movie gets the best efforts of Pixar's brainy staff of animators, storytellers, and

technologists.” (Burrows, Grover, and Green)

Apple positions its Macintosh computers as higher quality and higher price. HP,

Dell, and other PC manufacturers are pricing many systems under the $1,000

threshold. “Apple is struggling to meet demand for its new MacBook Pro laptop

despite a $1,900 price tag that is nearly twice that of garden-variety rivals.” Apple

has only recently entered the low-end (below $500) consumer market with the Mac

Mini. Although the Mac Mini is a base model with few features, it comes encased

in a very small and distinctive package. Apple portrays this computer as “Small is

Beautiful”. (Apple) Likewise, the iPod Shuffle was Apple’s first entry into the

lower-end ($100 range) of flash-memory-based portable music players.

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Interoperability

Although Apple competes directly with Microsoft for operating systems, the

release of iTunes for Windows in 2002 was a key strategic move. This decision

expanded the potential customer base to nearly all personal computer owners, even

though Apple only has 2%-3% of all personal computer sales. Conversely, Apple

depends on Microsoft for a version of Microsoft Office. As the most widely used

office suite of applications, Macintosh users rely on Office to correspond with

companies that standardized on Windows. This is from a strategic alliance

between Apple and Microsoft after Jobs returned in 1997. Apple’s iTunes

service has a technological hook (asset specificity) to Apple’s iPod. Although

versions of iTunes exist for both Apple and Microsoft operating systems, the

iTune’s AAC file format prevents other portable music players (such as iRiver or

Samsung) from playing purchased songs.

Technology and the Digital Lifestyle

Apple not only dominates the music player market, its iLife suite provides

consumers with easy-to-use software for music and video composition. With

“podcast” a household word, Apple’s Garage Band application makes the

recording of podcasts and music very easy.

Regulatory Environment

While introducing new technologies, there is a persistent threat of legal action by

competitors. For example, Apple sued Microsoft in 1988 (settled in 1997 for an

undisclosed amount) for perceived similarities between Microsoft Windows and

Macintosh audiovisual works.Microsoft has generally been the focus for

government antitrust charges (such as U.S. v. Microsoft) (US DOJ, 2006). Both

federal and state governments assert that Microsoft’s dominance blocked fair

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competition within the software industry. This is an advantage for Apple, because

its operating systems are a viable substitute for Windows. Furthermore,

Microsoft’s continued support for Office for Macintosh reduces the perceived level

of market monopoly and abuse. Manufacturers will continue to trespass on

Apple’s intellectual property. For example, the company tex9 released an open

source music program called xtunes that was very similar to iTunes. In 2002,

Apple took legal action against tex9, who then altered the programme and renamed

it sumi. Legal threats can surface from somewhat unusual sources. Apple Corps

Ltd. is the London-based company that owns the rights to the music of the Beatles.

Paul McCartney and Ringo Starr recently sued Apple over the use of the Apple

logo in iTunes, claiming that it violated Apple’s agreement not to produce music

under an apple-based logo.

Research and development is a key component to Apple’s sustained competitive

advantage. Apple is currently taking legal action against several popular technical

web sites for releasing proprietary product research. Sites such as

appleinsider.com have allegedly posted verbatim content from documents

protected by employee non-disclosure agreements. (McCullagh) Release of

critical insider information could give Apple’s competitors a jump in producing

rival products.

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Industry Analysis Using Porter’s Five Forces Model

Apple operates in two primary industries:

Computing - Hardware and Software

Delivery of Entertainment and Media

Apple has always been under intense competition within the computer,

software, and entertainment industries. “Looking to 2005...Every time that Apple

had jumped into the lead in a product category during the past two decades, it had

had difficulty in sustaining its leadership position.” We use Porter’s Five Forces

Model to understand why Apple’s industries are so competitive.

Figure : Porter’s Five Forces Model

Threat of New Entrants

Bargaining power of Suppliers

Threat of Substitutes

Bargaining power of Buyers

Level of Threat in an Industry

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Figure : Summary of Industry Threats (Computer Equipment and Entertainment Distribution)

Type and Severity of Threat

Organization Examples

Entry – High Threat

Verizon Streaming audio and video with V CAST.

Amazon On demand online services to purchase music (similar to iTunes).

Google They make everything.The “Next Google”

New entrants with disruptive technology.

Rivalry – High Threat

Microsoft Windows Operating System, Windows Media Player for playing music and video.

Linux Competition to Mac OS X Operating System.Napster, Rhapsody

Online music sources – alternatives to iTunes Music Store.

Dell, HP, Lenovo

Alternate sources for computer hardware.

iRiver, Samsung, Creative

Small, stylish MP3 Players.

DreamWorks Animated movies.YouTube.com Online video.

Substitutes – Moderate Threat

XM, Sirius Satellite Radio for music.

XBox, PS2 Entertainment Media, Media and Music.Various Internet Streaming Radio and Podcasts.Music CDs, DVD-Audio and SuperAudio CD

Alternative means to acquire music.

Broadcast, Cable, Satellite,

Alternative sources for video.

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NetFlix, TiVo, Theatres

Suppliers – High Threat

Motorola, IBM, Intel, Samsung

Suppliers of Processors and computer memory.

Microsoft Strategic Alliance / Supplier of Office for Mac.The Big Five - BMG, EMI, Sony, Universal, and Warner

Sources of music. Will they raise prices and break the dollar per song model? Some in the record industry resent Apple’s distribution model. “Apple reaps billions from selling its hit music player, but there are sparse profits from the songs being sold over the Net.” (Burrows, Grover, and Green)

Disney, ABC, NBC, CBS, Fox, Pixar, Sony

Suppliers of Television and Movies. Will they sign exclusive contracts with other online services? Note that this threat is reduced for Disney / Pixar.

Buyers – Moderate Threat

Consumers and Illegal peer-to-peer file sharing

Consumers share music using peer-to-peer networks without paying for music.

Distributors Apple retailers may pressure for lower prices or better terms. For example, the release of the Apple Store in 2001 “infuriated longtime independent Apple retailers that didn’t appreciate Cupertino cannibalizing their sales.” (Linzmayer, 300)

Consumer Attitudes and Behaviors

Consumers or businesses may reduce spending on personal computers or non-essential (potentially high elasticity of demand) music players if they fear economic downturns.

Consumer Refresh Cycles

Consumers and businesses may continue to use previous-model iPods and Macs rather than upgrade to current iPods, iMacs, or OS

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The total industry threat for the industry space that Apple occupies (computer

equipment and distribution of entertainment) is a high threat industry. Apple must

continue to pursue product differentiation (i.e. the style and ease-of-use of an iPod)

and economies of scope (i.e. offering ABC television shows on iTunes) to maintain

their sustained competitive advantage in this industry.

Which External Threats are Most Significant

Computer Hardware and Software: Open Source software such as the Linux

Operating System and Open Office applications threaten both Apple and

Microsoft. The low (often, free) cost of the software may allow it to

overtake Apple and Microsoft, especially in developing markets such as

China.

Music Products: Major online retailers such as Amazon are considering

entry into the online music market. With a wide internet presence and a

household name, Amazon could present a formidable challenge to Apple. If

the major record labels (Universal, Sony BMG, EMI, and Warner) negotiate

better terms with new competitors to iTunes, Apple may be unable to

provide some of the music content that they currently offer. The major

music labels dislike Apple’s dollar per song pricing. They would prefer to

earn higher profits with “variable pricing”. (Wingfield) With variable

pricing, the most popular songs would be greater than $1, and less popular

songs would be less than $1. Although the labels recently renewed their

contracts with Apple, there may be provisions that allow future changes in

the pricing model. (Wingfield and Smith)

Suppliers: The recent shift to Intel processors could present a significant

threat to Apple. With only two companies (Intel and AMD) producing Intel-

compatible processors, there is a strong potential for tacit collusion and

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oligopoly power between these suppliers. Apple purchasing must now

directly compete with HP, Lenovo, and Dell. If shortages or exclusive

agreements materialize, Apple could face problems with obtaining raw

materials. Apple should consider additional sources such as Advanced

Micro Devices (AMD).

Figure: CPU Market Share

Additional External Threats

Security

Apple software, like all large software products, has security vulnerabilities that

hackers may exploit. A significant exploitation in the future could damage many

businesses and households using Apple computers. This would affect future

customer purchasing decisions. Apple enjoys a competitive advantage, because

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their OS X is mature and stable due to its basis on BSD Unix. In fact, “computer

security folks back at FBI HQ use Macs running OS X”. However, the increased

use of Apple computers is prompting hackers to target the platform. In February

2006, there was documentation of the first known Apple OS X worm. By using

iChat instant messaging, it spreads to other users and deletes files from their Mac

computers. If Mac OS X becomes as wide of a target as Windows, Apple’s

perceived differentiation as the more secure platform may disappear.

Vertical Integration of Competitors

Sony is an example of a competitor with a unique position against Apple. Sony

Music supplies Apple with many of the songs for iTunes. Sony also creates a

version of the Walkman portable music player that is a direct competitor to the

iPod.

Sony is attempting to vertically integrate forward directly to the music buyer.

Sony integrated their music system (Mora) into the Sony Walkman. Sony is

exclusively distributing certain songs on Mora. (Hall) Mora currently targets

Japanese consumers. If Sony can gain additional momentum (such as collaborating

with other record labels), their service could present a formidable challenge to

iTunes in additional markets.

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Value Chain Analysis

To determine where Apple developed distinctive capabilities, Porter’s generic

value chain model provides a systematic framework for identifying Apple’s

utilization of resources. Primary activities for Apple include Technology and

Product Design, Production, Sales and Marketing, Customer Service, and Legal

Services.

Technology and Product Design

This component represents the true core (no pun intended) of Apple’s capability.

From being the first platform to run an electronic spreadsheet (VisiCalc on the

Apple II Plus) to the first to establish a “digital lifestyle” hub (the Macintosh

product lines), Apple’s history is rich with cutting-edge technology development.

Apple drives to be the best, no simply the first. The Apple operating system is

universally regarded as more stable and reliable than Windows, while the desktop

publishing software bundles (iMovie, iPhoto, iTunes, etc.) are the most

comprehensive available to end users. Ives best summarizes the entrepreneurial

culture within Apple by saying that “it’s very easy to be different, but very difficult

to be better.”

Production

Because Apple had long refused to license its operating system to external entities,

the bundled packages of Apple-developed hardware and software became the

cornerstone of Apple’s production process. Apple achieved unparalleled

performance via 64-bit architecture, integrated distinctive styling with the multi-

colored translucent iMac cases, and redefined intuitive operation with the iPod.

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While every product introduction has not been a success (Lisa, Newton, etc.),

Apple treats component production as a natural extension of the design process.

Sales and Marketing

We could simply title this section “Steve Jobs”. Since his return as CEO in 1997,

Jobs personally unveils all new product introductions, reviews corresponding

marketing campaigns, and approves new product development guidelines. In a

departure from their turbulent history, Jobs “entered into patent cross-licensing and

technology agreements with Microsoft.” (Linzmayer, 290) After years of

unimpressive market share growth and cannibalization of a loyal consumer base,

the door to the expansive PC market was now more accessible to Apple than ever

before. Apple continued to command a market premium for producing a “better

mousetrap” throughout its history.

Customer Service

How has Apple retained substantial cash reserves during the explosive growth and

dominance of PCs worldwide? Apple created a virtual love affair with their

customer base by delivering technically superior products (iPods vs. other MP3

players, Macs vs. PCs, etc.), and aggressively pursuing hardware and software

updates. Apple integrated their primary activities so well that it is transparent to

the consumer where one activity begins and the other ends. A perfect example of

this is Apple’s willingness to develop software to run Windows XP on its new

Intel-based iMac and then post it online free to iMac users. (Wingfield) In such an

environment, customer service merely becomes the realization of receiving a little

more than expected.Although Apple employs many resources and capabilities to

support their primary activities (human resources, supply procurement, etc.), the

most strategically relevant would be Legal Services.

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Legal Services

In a market climate of constant change and innovation, it is inevitable that the drive

to expand product and service offerings will subject Apple to patent and copyright

infringement claims. The dispute over the Apple logo on its iTunes Music Store,

for example, continues despite a previously reached settlement with Beatles’ Apple

Corps Ltd. in 1991. (Dow Jones Newswires) While such litigation as Microsoft’s

Windows infringement on Mac OS patents has been highly publicized, use of legal

guidance to drive acquisition versus internal development strategies for such

products as GarageBand and iMusic have proven highly valuable. Intellectual

property is sacred to Apple. There was a recent attempt to uncover the identities of

internal “sources who leaked confidential information about an unreleased product

to online media outlets in 2008.’’

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SWOT Analysis

Although participation in such activities may add value, they may not be a source

of competitive advantage. Ultimately, the value, rarity, inimitability, and/or

organization (VRIO) of an activity or resource determine its sustainability as a

source of competitive advantage. Within this context, we can identify a firm’s

strengths, weaknesses, opportunities, and threats (SWOT).

Strengths

Technical savvy – Product lines are easy to use and stable. Recent

integration with Microsoft products lines and Intel processors demonstrate

ability and willingness to adapt to a diverse customer base. (Mossberg)

Such innovation, however, would not be sustainable without a learning

environment tolerant of mistakes. While the pure technical expertise alone

is not a valuable or rare resource, it becomes very costly to imitate when it

exists within the socially complex, entrepreneurial culture of Apple.

Financial vitality – Cash reserves remained robust and stable despite

stagnant market share growth in the computer hardware and software arenas.

Apple exploited this by resisting market pressures to reduce costs, tightly

integrating product packages, and forming strategic alliances (i.e. securing

the backing of all major music distributors in the support of iTunes).

Brand loyalty – The only way that Apple could maintain the financial

vitality described above is via a fanatical, almost cult-like, affair with its

customer base. Such brand loyalty is extremely costly and time-consuming

to imitate.

Steve Jobs – As discussed earlier, Jobs proved to be a vital component to

Apple’s success. During his absence (1985-1996), Apple experienced the

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most turbulent (financial and innovative) timeline in its history.

Immediately upon his return, he replaced most of the Board of Directors,

pruned and focused the new product ideas, and delivered seven consecutive

quarters of positive earnings to shareholders. As such, Jobs is certainly a

valuable, rare, and hard to imitate resource that Apple fully exploits.

Weaknesses

Market share – Apple has historically been strongest in the US geographical

and educational vertical markets. With the educational market facing

tightening budget constraints and the US approaching a PC saturation point,

Apple may need to burn cash more quickly and succumb to market cost

pressures on its products without a strategic innovation, integration, or

divesture.

Steve Jobs – For virtually the same reasons Jobs is a strength, he is

simultaneously a weakness. The aggressive drive to bring innovative

visions to life was noticeably absent and painfully felt (especially by

shareholders) during his departure. The apparent absence of succession

planning coupled with a lust for the limelight positioned Jobs as Apple’s

single consciousness in the eyes of consumers and shareholders.

Opportunities

Consumer electronics – With the startling success of the iPod and iTunes,

Apple entered the consumer electronics market. By expanding the iTunes

concept to downloadable mobile phone features and movies (podcasts), the

door is now open to develop new and potentially profitable strategic

alliances with peripheral component manufacturers (speaker, home stereo,

etc.) and media transmission giants (Disney, TBS, Verizon, etc.).

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PC hardware and software market growth – With cross-licensing of

operating system platforms in place, Apple entered the high-volume

business environment traditionally dominated by Windows-based PCs. The

introduction of Intel-based processors prompted businesses to replace PCs

with iMacs. They did this to gain a level of stability and reliability in their

business applications that PCs failed to provide. An example is Japan’s

Aozora Bank Ltd., who is replacing 2,300 PCs with iMacs. (Wingfield)

Apple must establish themselves as a credible player in business desktop

applications to overcome the “desktop publishing” stereotype.

Threats

Legal risks – In a market that literally changes at the speed of thought, patent

and copyright infringement risks remain high. As long as operating systems

and support software packages continue to converge and remain relatively

easy to imitate, present and future lawsuits are inevitable. The Apple

records claim against iTunes remains unresolved.

Competition – This threat occurs primarily on two fronts: PC

hardware/software and consumer electronics. For the same reasons

discussed in the opportunities section, the threat of imitability (cloning,

pirating, etc.) increases. As relative newcomers to the consumer electronics

arena, will Apple retain a competitive advantage as they diversify their

offerings (speakers, home entertainment systems, etc.).

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Influx of Apple’s Mac Challenges Mis to Cope

In the heart of large companies, data center managers are wearingly warding off a

second band of corporate renegades. The renegades are trying to break down

mainframe walls and build new applications replete with icons and pretty pictures.

After finally coming to terms with the IBM microcomputer revolution, MIS

departments are now being asked to assimilate a second microcomputer standard,

the Macintosh from Apple Computer Inc. of Cupertino, Calif.When the machine

was introduced in the mid-1980s, most managers viewed it as a small business

system or a home computer.Despite the tag, Macintoshes have wormed their way

into many large corporations. Conglomerates, such as E.I. du Pont de Nemours &

Co., Northern Telecom Inc., General Electric Co., Martin Marietta Corp. and

Electronic Data Systems Corp., have all blessed the Macintosh.

John Wardley, a senior analyst at International Data Corp., a market research firm

in Framingham, Mass., said, "Macintoshes were initially purchased to address a

specific niche. For example, a corporate advertising department may have used the

microcomputer to produce graphic presentations."Once other department saw the

machine's output, interest spread. Right now, Macintosh usage is rapidly growing

in many large corporations," he said.

Use of the computer has progressed well beyond the test phase and a few

corporations have installed thousands of Macintoshes. "Right now, our users are

purchasing more Macintoshes than IBM microcomputers," said Michael Pearson,

the director of technical operations at the New York Daily News in New York.

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What is driving Macintosh acceptance?

Supporters agree that it is the product's easy to use graphic interface. "Once a user

sits down and works with a Macintosh, they never go back to an IBM Personal

Computer," proclaimed Price Collins, a programming manager at General Electric

Co. in Bridgeport, Conn.The ease of use features translate into substantial savings

for many corporations. "We spend much less time training Macintosh users than

we do training IBM microcomputer users," noted Pearson at the New York Daily

News.

Studies comparing Macintosh and IBM microcomputer training costs found that it

takes twice as long for an IBM user to learn how to operate his machine and three

times longer for the user to understand how to opeate a second application. A

survey commissioned by Apple found the average cost of training an IBM user was

$765 compared to $294 for a Macintosh user.The Macintosh's graphics capabilities

also offer many middle managers their own strategic weapons in the battle for

upper management's attention.

"An employee will use a Macintosh to generate slides and charts for an important

presentation," GE's Collins explained. "The output is far superior to anything

generated on an IBM microcomputer, so other managers immediately want to

produce the same quality output. Quickly, use of Macintoshes spreads through the

company."

Removing Barriers for Users

Analysts reported that another reason for acceptance was aggressive Apple actions.

"Apple removed barriers that corporations erected to keep Macintoshes out of

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users' hands," said Richard Kollmeyer, the director of marketing and technical

services at The Support Group Inc., a Wellesley, Mass., microcomputer reseller.

"One of the initial concerns was the inability to run MS-DOS software on a

Macintosh. Quickly, Apple delivered hardware so users could run those

applications."

To date, Macintoshes have been relegated to personal productivity tools in most

companies. "Most users purchase a Macintosh to more efficiently do their own

work," noted Michael Masterson, a microcomputer systems specialist at Arthur

Young & Co. in San Jose, Calif.

Users are primarily working with traditional microcomputer applications, such as

spreadsheet and word processing. However, there are nuances in the types of

applications employed by IBM PC and Macintosh users.

Application Preferences

In a survey of 1,216 large companies (each having more than 500 employees),

Dataquest Corp., a market research firm in San Jose, Calif., reported that word

processing was the Macintosh's most widely used application--named by 54% of

respondents. Graphics applications followed with 46%, and spreadsheets placed

third with 38%.On the IBM Personal Computer, the response was as follows: 65%

used spreadsheets; 57%, word processing; and 35%, database management

systems. Few of the companies that dominate the IBM microcomputer software

market have had much success plying Macintosh wares. For example, Lotus

Development Corp. of Cambridge, Mass., and Ashton-Tate of Torrance, CAlif.,

have had little success in the market. The most notable exception, Microsoft Corp.,

Redmond, Wash., offers the three bestselling applications: Excel, a spreadsheet;

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Word, a word processing package; and Works, an integrated spreadsheet, word

processing and database application.

AppleInsider reports on a research note from BMO analyst Keith Bachman that

could have been written for Crazy Apple Rumors—if they hadn't gone ghost-site

on us. It turns out the success of the Mac in recent years isn't because of Mac OS

X, or Intel CPUs, or the iPod Halo Effect; rather, it's because Microsoft sucks.

"Thus far, user satisfaction ratings for Vista have been weak, and startup times for

Vista have been known to be much slower than the Mac OS X," Bachman says.

"Thus, more than 50% of recent customers buying Macs in Apple retail stores are

first-time buyers."

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While it's great that the six-figure analyst projects 2.4 to 2.5 million Macs sold for

the quarter just ended, his rationale is, well, crazy. Setting aside the image of some

grandma dropping $2,600 for a MacBook Air with SSD, there's nothing "recent"

about half of Mac buyers in Apple Stores being new to the platform. It's been that

way since before Vista was released.

Further, as the chart by the four-figure analyst clearly shows, the surge in Mac

sales started around the time Apple transitioned to Intel CPUs. Ironically, one

could argue that Mac sales are rising because of Vista, but not in the way Bachman

suggests. Prior to the release of Leopard and the discontinuation of Boot Camp as a

separate product, Apple reported huge downloads of the program that let Mac users

launch Windows Vista very, very slowly.

Bachman further expects Mac sales to jump around 25 percent in 2009, or about

twice the expected growth of PCs. Apple could end up with as much as four

percent worldwide market share if that happens. In the near term, Bachman, like

just about every other analyst and Apple nerd on a message board, is expecting the

company to get a boost from the iPhone. If so, it hasn't happened yet.

Since the unveiling of the iPhone 3G at WWDC, AAPL is actually down about 5

percent, which is pretty good compared to some competitors in the smartphone

market. Sure, zombie PALM is stumbling along, down 20 percent, but RIMM is

down nearly 10 percent. This is after the company reported record profits during

the last quarter and a couple of million new subscribers. While the problems of

Apple's competitors can be partially blamed on fear of the iPhone 3G, the real issue

is the troubled economy. Bachman, and others, are rating AAPL as "outperform"

with a value in excess of $200. Maybe, but you can only go so high in a down

market, no matter how bad Vista boot times are.

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Apple profit makes huge rise due to iPod success

In the first quarter of 2007, more than five million iPod music players were sold.

Apple's quarterly income has increased six-fold largely due to the success of the

device. The firm's net income raised by a massive 530% to $290m compared to

€46 over the same period in 2008. Revenues rose 70% to $3.24bn after good

growth in all product categories. A number of approximately 5.3 million iPods

were sold over the period, which is an increase of 550% in the same period in

2008.

Sales of PCs also rose to over a million (43% rise) following the success of the

new Mac mini and new PowerBook notebook computers. Steve Jobs was delighted

with the figures for the first quarter. "Apple is firing on all cylinders and we have

some incredible new products in the pipeline for the coming year," he said. 40% of

the sales made were over seas, which showed the popularity of the iPod in Europe

and Asia. However, Apple said it expected earnings per share to be lower in the

third quarter, at $28 per share as against $34 per share over the latest period and

also expects revenues to remain largely flat at $3.25bn.

Apple Beats Competitors at Inventory Turn Over

Despite a weakening economy and a need to meet customer demand, Apple has

been able to maintain a fast inventory turnover rate. The Mac and iPhone maker is

sitting at five days worth of inventory on any given day, beating Dell's seven days

worth of inventory, according to data from UBS.

Other PC makers are having even more trouble matching Apple's inventory

efficiency. Lenovo, for example, is averaging 15 days of inventory, and HP is

sitting at 32 days. Intel, however, is showing a much slower inventory turnover

rate at 89 days, and D-Link is sitting on a staggering 131 days worth of inventory.

36

Apple's quick turnover rate may have been due in part to preparing for its just

announced iMac, Mac mini and Mac Pro updates. The company released new

desktop computer models on March 3, and keeping inventory low helped assure

that there would be fewer of the previous model machines sitting on store shelves.

While maintaining a higher inventory level can help a company cope with sudden

increases in demand, it can also show a company's inability to adequately gauge

market interest in their products. For now, it looks like Apple is managing

inventory better than its competition.

IPod: The Marketing of an Idea Project

Apple’s iPod has taken the world by storm. Nearly ubiquitous, it has changed not

only the way people listen to music, but it has transformed its parent company

Apple into an entertainment giant. In order to understand how this change came

about, we’ll take a look at Apple’s ongoing efforts to make iPod synonymous with

hip. We’ll also discuss exactly what customers are buying when they buy an iPod,

and we will take a deep look at several aspects of Apple’s marketing of this

exciting new product, from the iPod itself, Apple’s strategic planning, possible

research findings that supported their approach, segmentation strategies that may

have been employed and why, as well as pricing strategy across these segments.

Last we’ll discuss communications, promotion and advertising, as well as an

interesting shift in retailing that the iPod has enabled. Throughout, we’ll tie back to

the Apple brand to dig deep into the notion that iPod’s stunning success stems

from it being specifically not an MP3 player. Like Magritte’s surrealist painting of

a pipe with the caption Ceci n’est pas une pipe (This is not a pipe), the iPod is not

merely an MP3 player. It is a symbol which encompasses many grand ideas; ideas

that involve world change, and how cool we all can be if we are part of that

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change. Apple’s careful and deliberate exploitation of this concept, comprising an

entire marketing ecosystem which nurtures that idea will be the subject of this

paper. On January 9th, 2007, Steve Jobs, renowned CEO of Apple, announced that

the company which he founded would no longer be known as Apple Computer,

Inc. Its new name would just be Apple, Inc.1 This seemingly trivial change

represents a fundamental shift with deep implications that were the result of many

changes Apple had engineered over the past six or seven years; transitioning itself

from a computer company slugging it out for a meager share of an increasingly

competitive hardware and software market, to a business that promoted an entirely

new concept: the digital lifestyle. Before we dig down into what this radical shift

entailed, both for the company and the world, let’s take a quick look at the history

of Apple, a company already firmly rooted in several notions that allowed this

transition to make sense. Apple made a name for itself by being instrumental in

ushering in the home PC revolution. For millions of its aficionados, Apple was

single-handedly responsible for this revolution by virtue of the fact that it created

radical new features such as windows-type graphical user interfaces, pull-down

menus and simplified computer control via the mouse. The history of the PC

revolution is a history of war between Apple, a number of losers that no one

remembers any more, and archrival Microsoft with its dubious counterclaims of

having pioneered the concept of Windows. Frustrating to anyone who owned a

Mac back in the 1980’s is the knowledge that Apple did indeed pioneer the

windows metaphor as a distinct feature of its operating system. This was at a time

when Microsoft users were still struggling with text-based DOS commands, and

yet the commercial success of Microsoft has served to rewrite history to some

degree. Battles ensued over the years, but no matter whose side you were on, by

the late 90’s it was clear that Apple was not gaining any ground whatsoever as a

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computer and software manufacturer. In fact due to many external events, Apple’s

position was in clear threat.

First, huge numbers of consumers, particularly the business community, clearly

preferred Microsoft. Apple’s market share was tiny compared to the Redmond

behemoth2 however Apple users were an ardent group of graphic designers,

college students, and members of the urban hip known as The Digerati. This was a

group of consumers who saw themselves as different from the mainstream;

definitely cooler, and part of a community of like-minded people. They knew they

paid more for to breathe this rarified air, but they didn’t seem to mind. In these

segments, Apple’s market share was relatively solid, even if it was comparatively

small. Even so, by the end of 2000, with a downturn in the worldwide demand for

PCs, Apple posted a $200 million loss3, and analysts were not optimistic about

Apple’s future. Undeterred, in January 2001, Jobs opened the annual Macworld

conference in New York City with his usual brand of enthusiastic vision. He

announced that personal computing, far from tailing off into irrelevance, was about

to leap ahead into a new Golden Age. To support his vision he introduced several

new Apple products that were intended to align the Mac with this new “digital

lifestyle”4.

Though the conference attendees may have nodded knowingly, few understood

what he was talking about, for at this point habits which would later be hallmarks

of the digital lifestyle—listening to music online, creating digital movies and

sharing photos through networks of computers—were not widely practiced, except

perhaps by the most innovative of consumers. Any such habits were still in their

domain, as MP3 technology, and MP3 players specifically, were still quite new,

and no one yet knew exactly what to do with them. Launched in 1998, MP3

players were initially seen as an alternative to portable CD players. They only held

a couple hours worth of music, and there were still technical glitches such as

39

transfer times and clumsy user interfaces that cast these new gadgets firmly into

the realm of the geek.

Interestingly this is not too different from the situation that existed when Apple

first entered the PC market; the concepts and technology existed, but they weren’t

popular. Apple’s stroke of strategic genius was to create a way to simplify and

popularize them through cool and innovative design. This approach became

foundational to their business strategy as well as their corporate culture, and it can

still be seen today, irrespective of the fact that so much has changed. In this regard,

this company’s guiding principles have remained remarkably consistent. In 1998 as

today, Apple’s strategy has been to release cool new products frequently5,

accepting and capitalizing on the fact that computer products enjoy a short product

life cycle. Apple popularizes difficult technology by making it fun and intuitive,

and characteristically they wrap it all up in a super-hip package that makes

consumers of their products feel as if they belong to an exclusive community. The

company’s commitment in 2006 differs from their commitment in 2000 only

insofar as the addition of the words “portable digital music”:

The Company is committed to bringing the best personal computing and portable

digital music experience to students, educators, creative professionals, businesses,

government agencies, and consumers through its innovative hardware, software,

peripherals, services, and Internet offerings.6 Many have criticized this approach,

particularly the more conservative elements within the business community whose

view is summed up by Business Week who wrote when iPod was first introduced

that “a few might pay a premium for good design, but it isn’t a good business

strategy.”7 Those same people may today wish they had at least bought a few

shares of stock as a hedge against possible shortsightedness, but more to the point,

this type of thinking seems to miss exactly what it is that Apple has always sold.

40

Consider that last year, Norway, Denmark and Sweden challenged Apple in court

over this limitation of their product, a case which Apple’s competitors are

following with great interest14. Whole industries want a piece of Apple’s pie, most

notably mobile phone manufacturers. Nokia has announced that it is setting up a

rival to iTunes in its purchase of the American digital music service Loudeye.

Songs downloaded from the new Nokia subscription service will play on any

digital music player, including iPod. Not coincidentally, handsets are one of the

explosive new growth areas for portable digital music.

Apple continues to mitigate these risks by keeping it hard to substitute, and this

gets to the heart of the matter, that iPod symbolizes more than just another MP3

player. If Apple wins all the chips, then iPod’s halo effect will help Apple

outmaneuver such threats, and future product offerings such as iPhone, which are

being developed now in response to the competitive onslaught, will gain a critical

head start. As it stands there is simply no substitute for an iPod. This is reinforced

consistently across the technology, advertising, promotion, and accessory

ecosystem. In this sense, buyers have strengthened Apple’s competitive position

because at sales of over 100 million units, and 70% of the market15, iPod is the

industry standard for MP3 players. In a mesmerizing feat of mental acuity, Apple

helps consumers judge the efforts of its competition against a standard they

themselves invented. In order to be part of the phenomena, buyers have shown that

they will pay a premium, and that for the most part, there are no ready substitutes.

This causes a significant problem for competitors when the global conversation

about MP3 players invariably leads to all things iPod. Any competing product will

certainly be judged against the gold standard of iPod, and because of Apple’s early

entry and subsequent early lead, MP3 players from today through forever won’t be

strictly judged by their technical merits, but rather on their value as a style

accessory.

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Thanks to iPod, any potential entrant has to now offer an augmented product that

delivers an entire package of benefits far and above the simple core attributes most

tech companies specialize in. We can reasonably infer that Apple did plenty of

primary and secondary research about the types of people who would be interested

in iPod, and crafted their message accordingly. Undoubtedly they owned

mountains of data from their over twenty years being at the epicenter of the PC

revolution as well as their relevance birthing its child, the Web revolution. Using

laddering in interviews perhaps revealed that this new breed of high tech consumer

had desires far and above the technical. Accordingly, they positioned the product’s

physical attributes in a way that was secondary to its contribution toward bettering

the consumer’s world. A tool for building high self-esteem, impressing your

friends, and being part of a semi-exclusive club, that by the way happens to be

beautifully designed and technically superior to the competition. What’s not to

love? Of course, they charge for this love, but they knew from the beginning where

they were going, and they didn’t get there by accident. Looking at the Christmas

retail season of 2001, three months after iPod's release, we see a story that

practically draws for us a perceptual map whose axes are price and technical

capability. From that we can backwards-engineer possible research findings,

conclusions, and recommendations.

The leading device at the time was Sonicblue RioVolt MP3 CD Player, which

retailed for less than $100. Creative's Nomad Jukebox was selling its recently

introduced 6GB hard drive for about $250, and e.Digital Corp. was touting its

walloping 10GB palm-size Treo 10 for $ 249 Treo. Against these contenders,

iPod’s $399 price tag for a mere 5 GB of storage doesn’t seem to make sense16.

Also, at this time, iPod was only compatible with Macs, which amused Bill Gates,

and continued to do so even as late as 2005 when USA today quoted him as

saying: I think you can draw parallels here with the computer — here, too, Apple

42

was once extremely strong with its Macintosh and graphic user interface, like with

the iPod today, and then lost its position.17 It is our contention that the initial

release of iTunes 1.0, which as noted was practically laughed at, was a Trojan

Horse that delivered quite a bit of business intelligence to Apple.

We know that they released it about one year before iPod was released, so there’s

no doubt that the entire iPod strategy and product development were well into their

final phases. To go back to that time is to recall that Apple faced numerous legal

issues relating to copyright infringement. Releasing iTunes before there was a

correlating MP3 player gave Apple a window to negotiate Digital rights

Management agreements without the success of iPod hanging over their head. In

other words, the lack of a product didn’t cause the alarm bells to go off among key

stakeholders in the distribution chain, whose future position was in grave threat,

and who would have certainly put the brakes on if they had seen what was coming

down the tracks. Finally, iTunes usage in that first year may have served as the

final checkpoint, validating Apple’s contention that a successful MP3 player—one

that would truly leverage the potential of the technology—would need to find a

way around the clunky process of buying and ripping CDs. Building these findings

into a psychographic profile and consistently speaking to that profile as an

individual would comprise the remainder of the marketing effort, in all its facets,

but how many psychographics were there?

What factors did Apple take into account when deciding whether there were viable

segments out there? It is clear today that Apple is marketing different products to

different groups of people: the flagship iPod video which is expensive, the Nano

which is midrange and a shuffle which is inexpensive and small. This segmentation

strategy appears to make sense, since the market is heterogeneous, the segments

are identifiable and they are divisible. But, did releasing different products risk

dividing the total market, or did it create new opportunities for sales? Greg

43

Joswiak, Apple’s VP of hardware marketing in 2005 noted in reference to the

Nano that "This is a different product and it will take the iPod to a different

market, one which couldn't afford the price of the normal iPod 18." That it was a

good move was lauded by Merrill Lynch’s analysts at the time when they

concluded, “The iPod shuffle is likely to outsell all Apple's other iPod models

combined, and may be in short supply until next quarter” 19. Extreme iPod

published a report at about the same time that suggested that the strongest demand

for the iPod shuffle was likely to come from new users. "Existing iPod owners may

prefer the larger capacity and display of existing iPods, which makes for good

market segmentation on Apple's part. New-to-iPod users tell us the price points and

ease of use are attractive."20 By the following year, iPod had moved into its sixth

generation, with a line that featured the iPod video player, an iPod Nano with a

color screen, and the iPod shuffle. Also being upgraded right alongside the product

was its life-giving infrastructure iTunes, now able to offer and organize different

types of media. We believe that in the beginning Apple’s segmentation strategy

focused on narrow markets and a unique niche because in 2001 it was early

adopters who might be interested in MP3 players. However iPod also created a

whole industry, which must now be characterized as having a broad scope, simply

because of its ubiquitous presence. It may be a unique niche—it certainly was at

the time—because they intentionally did not go for cost leadership.

An Apple for your enterprise?

Macs have made their way out of the art department and into the offices of

accountants, salespeople, manufacturing planners and top executives. “We’re

seeing more requests outside of creative services to switch to Macs from PCs,”

notes David Plavin, operations manager for Mac systems engineering at the U.S. it

44

division of Public Group SA, a global advertising conglomerate. For it managers

across all industries — even those with a well established and stalwart Windows

user base — the question is no longer whether you’ll need to de-

sign and support a Mac computing strategy. the only question is how quickly. You

may already be a little late to the game. According to Forrester, business adoption

of Macs tripled last year. What’s more, this will surely accelerate as companies

hire more Gen Y workers. Coming through the door in those backpacks are a slew

of consumer technologies and wireless personal productivity tools — think iPhone.

Some users are finding that switching to Macs can even save money — lots of it.

Auto Warehousing Co. (AWC) in tacoma, Wash., is pulling the plug on all

Windows-based PCs and powering up Macs to execute virtually all of its revenue-

generating operations.

In september, 2008, Apple Inc.’s Mac Os X market share passed the 8% mark for

the first time, according to data collected by net Applications.

Apple’s operating system ran on 8.2% of the computers that accessed the 40,000

sites monitored for clients by Net Applications. The Mac’s share of the operating

system market was up over August’s by nearly four-tenths of a percentage point,

the biggest one-month gain since May. In the last two years, Mac OS X’s share has

increased by 3 percentage points, a gain of 58%. Microsoft Corp.’s Windows,

meanwhile, continued to slip in market share last month.

Overall, Windows accounted for 90.3% of the operating systems powering the

machines that accessed Net Applications’ metric network, a drop of 0.4 percentage

points from August, when the operating system fell by nearly the same amount

from July. That month was the last time that Windows maintained or grew its

45

share. Since the beginning of this year, Windows has lost 1.5 percentage points in

market share.

As the largest full-service auto processing company in North America, AWC has

23 sites across the U.S. and Canada and handles 5.5 million cars a year. Switching

to Macs will save the company $1.82 million over three years, according to Cio

Dale Frantz. that’s what it would have cost to upgrade software licenses if the

company had stayed on PCs. in contrast, the total cost of switching to Macs was

$335,000. “this is more of a strategic choice for the future,” says Frantz. “By

investing in the Apple platform, we pick up additional functionality that we don’t

have today,” he says. Frantz also says Macs are ready for business prime time. “on

the whole,” he adds, “what we’re finding is this stuff just works. We’re at a point

where we can deploy it companywide.” For all the details, see AWC Switches to

Mac and The Mac Switch Revisited. other key factors driving Mac adoption

include the rise of Web based computing via software-as-eservice applications,

which for the most part are platform-agnostic. the rise of virtualization, as well as

Apple inc’s shift toward standardized PC components, has also cleared the way for

greater corporate Mac use. Indeed, experts say the Mac fits much better than it ever

has before in the enterprise, and the trend toward cloud computing is reducing the

importance of the client platform to access both internal and external resources.

46

Financial Analysis

2nd Quarter 2008

Apple’s financial performance continued to strengthen over the last several

quarters. In the most recent earnings announcement, Apple reported significant

growth in net revenues driven by the strong performance of its iPod product line.

Net sales for the 2nd quarter grew to $4.36 billion, which is a 34% increase over 2nd

quarter 2007 results. Net income increased by 41% to $410 million.

The iPod product line continues to drive the financial performance of the company.

In the 2nd quarter alone, Apple sold 8.5 million iPods, representing a 61% increase

over the 5.3 million units sold in the 2nd quarter of the prior year. Mac sales

showed slight growth of only 4%.

Apple’s year-to-date revenues total just over $10 billion and earnings total just

under $1 billion. For the 3rd quarter, CFO Peter Oppenheimer stated, “…we expect

revenue of about $4.2 to $4.4 billion” which will push total sales above last term’s

annual numbers.

Historical Performance

Although sales remained stagnant during 1998-2002, sales more than

doubled since (see graph below). This dramatic shift in performance is primarily

due to the increase in sales from the iPod product line.

47

Stock Price Performance

Another interesting way to consider the financial performance is to evaluate how

Apple’s stock price performed against the market and against its main competitors.

As we see from the chart above, Apple’s performance has been inconsistent over

the last 20 years compared to the S&P 500. It also has not performed at the same

level as its main competitors, Dell and Microsoft. However, performance

improved since 2003.

48

Apple Revenue Growth

0

2000

4000

6000

8000

10000

12000

14000

16000

1998 1999 2000 2001 2002 2003 2004 2005

Ne

t S

ale

s

Profitability Measures

Apple substantially improved in its key measures of profitability in the last few

fiscal years. In terms of return on assets, return on equity and profit margin, Apple

strengthened financially and now has similar ratios to that of its competitors and

the overall computer hardware industry .

  2006 2007 2008 Microsoft '08

Dell '08

Industry '08

S&P 500

Return on Assets

1.01%

3.43%

11.56%

19.75% 15.42%

11.98% 8.13%

Return on Equity

1.63%

5.44%

17.88%

28.56% 67.31%

36.61% 19.61%

Profit Margin

1.11%

3.33%

9.58%

31.57% 6.39%

6.36% 13.75%

P/E Ratio     33.89 22.63 18.51 26.32 22.09

In reviewing Apple’s 1st and 2nd quarter 2008 earnings releases, gross margins

dropped slightly. Apple attributes this decline primarily to price pressures,

especially in the iPod product line. (1st Quarter 10Q) This will continue to affect

performance over time. However, Apple’s ability to maintain the momentum it

built in the marketplace will control the speed with which erosion will occur.

Liquidity and Leverage Measures

Apple historically held very little long-term debt. The table below compares

Apple’s liquidity measures to their competitors, their industry, and the general

market. During the period of strong financial performance, Apple accumulated

cash. This strengthens Apple’s position should they choose to access the capital

markets.

49

  2006 2007 2008 Microsoft '08

Dell '08

Industry '08

S&P 500

Current Ratio

2.5 2.6 3 2.88 1.11 1.81 1.82

Quick Ratio

2.47 2.59 2.9 2.85 1.08 1.45 1.31

Product Unit Sales

In the last several years, there have been dramatic changes to Apple’s product sales

by category. Apple breaks its unit sales into four primary categories: desktops,

notebooks, iPods, and peripherals. The graph below shows the product mix for

Apple in 2002. Note the domination by desktops and notebooks and the small

contribution by iPods.

When you compare the same graph for 2005, you see dramatic differences in the

product mix for Apple. The iPod sales now account for 32.5% compared to 2.5%

for 2002. The combined sales of computers (desktop/notebook) lost share,

dropping from 79% to 45% of sales. This drop merely represents a shift in Apple’s

product mix, not their global computer market share (which remains stable in the

2-3% range). Meanwhile, sales of peripherals (including wireless connectivity and

networking solutions), remained stable. (Hoover’s)

50

2002 Product Sales

Desktops

Notebooks

iPod

Peripherals

2005 Product Sales

Desktops

Notebooks

iPod

Peripherals

Operating Segments

Apple breaks its sales into five “operating segments”. The chart below shows the

sales by segment for each year 2002-2005. On a percentage basis, only the retail

segment appears to be outperforming the others.

Net sales in the retail segment grew to $2.35 billion in 2005. In the 1 st quarter

2006, sales growth continued in the retail segment to $1.1 billion (a 91% increase

over the same period last year). This increase was due to growth in the number of

stores (from 101 to 135) and to a 41% same-store sales growth. (1st Quarter 10Q)

Although the retail segment was the only segment to realize growth as a percentage

of total sales, all of the segments had solid growth. In the Americas, sales

increased 65% and continued to represent approximately 47% of total worldwide

sales. Sales in Japan and Europe grew by 92% and 47%, respectively. (1st Quarter

10Q)

Market Value Analysis

We used Discounted Cash Flow (DCF) analysis to assess the appropriate equity

value of Apple. To complete this analysis, we developed a pro-forma income

51

Sales by Region Segment

0

2000

4000

6000

8000

10000

12000

14000

16000

2002 2003 2004 2005

Year

To

tal S

ale

s

Other

Retail

Japan

Europe

America's

statement and extracted free cash flow. We then discounted these cash flows using

a calculated Weighted Average Cost of Capital (WACC). Apple’s WACC equaled

their cost of equity since they carry no long-term debt. We used the Capital Asset

Pricing Model (CAPM) to calculate the cost of equity.

CAPM consists of a risk-free rate, a market risk premium, and a company Beta.

The yield on the 10-year Treasury is the standard for a risk-free rate. To determine

the market risk premium, we used the average return that an investor would require

for an investment with average risk. We used data available online to determine

Apple’s Beta, projected to be 1.46. The below chart summarizes Apple’s cost of

equity.

Cost of Equity/WACC Note ValueRisk Free Rate 10 Yr Treasury 5.12Market Risk Premium (Analysis) 4Beta From Google 1.46Adjusted Apple Risk Premium

  5.84

Cost of Equity/WACC   10.96

Pro-Forma Income Statement

We made several key assumptions in compiling a pro-forma income statement.

First, to complete the estimate for the 2006 data, we merely annualized the

earnings for the first two quarters. We then projected a declining rate of growth in

sales for the next four fiscal terms of 30%, 20%, 15%, and 10%, respectively. We

do not believe that the growth in iPods is sustainable for the long-term. We also

used the percent-of-sales method to calculate cost of goods sold, research &

52

development, SG&A, and interest. We applied the 2005 tax rate for all future

periods. As the table below shows, the mid-term earnings growth is positive.

  2005 2006 2007 2008 2009P 2010PNet Sales 13931 20216 26280.8 31536.96 36267.50 39894.25Cost Of Sales 9888 14353 18659 22391 25750 28325R&D 534 809 1051 1261 1451 1596S,G,A 1859 2628 3417 4100 4715 5186Operating Income 1650 2426 3154 3784 4352 4787Interest Income 165 239 311 374 430 473Taxes 480 705 916 1100 1265 1391Net Income 1335 1960 2548 3058 3517 3869EPS 1.57 2.31 3.00 3.60 4.14 4.56Shares Out (000's) 848,612 848,612 848,612 848,612 848,612 848,612

Projected Free Cash Flow and Equity Valuation

We assume that Apple will continue without long-term debt. We also assume that

there will be no significant changes in capital expenditures and net working capital.

Thus, free cash flow will equal net income plus depreciation. Given WACC, we

are able to discount cash flows back using half-year PV factors (we are through the

first half of 2009). We calculated our terminal value using a perpetual annual

growth rate of 7%, which is slightly above the industry growth rate of 5.6%.

53

Free Cash Flows 2006 2007 2008 2009P 2010P Terminal

Net Income 1960.00

2548.00

3058.00

3517.00

3869.00

 

Depreciation 239.00 310.70

372.89

428.86

471.78

 

Free Cash Flows 2199.00

2858.70

3430.89

3945.86

4340.78

 

WACC 10.96 10.96 10.96 10.96 10.96  PV Factor 0.9505 0.856

50.7715

0.695 0.626 0.626

Terminal Value           109615.6

PV FCF 1862.98

2182.36

2359.25

2444.32

2421.99

68619.42

Sum of PV of CF 11270.90

         

PV of Terminal Value 68619.42

         

FMV of Invested Capital

79890.32

         

Less Existing Cash Balance

8261          

Intrinsic Value of Equity

71629.32

         

Given intrinsic equity value, we estimate the per share stock price. Given their

particular market condition, Apple appears undervalued.

Equity ValueTotal Shares (000's) 848612Value (000's) 71629000Value/Share $84Current Price (5/5/06) $71.89

Strategy

54

We can describe Apple’s strategy in terms of product differentiation and strategic

alliances. In each of these strategies, we examine what Apple did historically and

then discuss alternatives for Apple’s future.

Product Differentiation

Apple prides itself on its innovation. When reviewing the history of Apple, it is

evident that this attitude permeated the company during its peaks of success. For

instance, Apple pioneered the PDA market by introducing the Newton in 1993.

Later, Apple introduced the easy-to-use iMac in 1998, and updates following 1998.

It released a highly stable operating system in 1999, and updates following 1999.

Apple had one of its critical points in history in 1999 when it introduced the iBook.

This completed their “product matrix”, a simplified product mix strategy

formulated by Jobs. This move allowed Apple to have a desktop and a portable

computer in both the professional and the consumer segments. The matrix is as

follows:

Professional Segment

Consumer Segment

Desktop G3 iMacPortable PowerBook iBook

In 2001, Apple hit another important historical point by launching iTunes. This

marked the beginning of Apple’s new strategy of making the Mac the hub for the

“digital lifestyle”. Apple then opened its own stores, in spite of protests by

independent Apple retailers voicing cannibalization concerns. Then Apple

introduced the iPod, central to the “digital lifestyle” strategy. Philip W. Schiller,

VP of Worldwide Product Marketing for Apple, stated, “iPod is going to change

the way people listen to music.” He was right.

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Apple continued their innovative streak with advancements in flat-panel LCDs for

desktops in 2002 and improved notebooks in 2003. In 2003, Apple released the

iLife package, containing improved versions of iDVD, iMovie, iPhoto, and iTunes.

In reference to Apple’s recent advancements, Jobs said, “We are going to do for

digital creation what Microsoft did for the office suite productivity.” That is indeed

a bold statement. Time will tell whether that happens.

Apple continued its digital lifestyle strategy by launching iTunes Music Store

online in 2003, obtaining cooperation from “The Big 5” Music companies—BMG,

EMI, Sony Entertainment, Universal, Warner. This allowed iTunes Music Store

online to offer over 200,000 songs at introduction. In 2003, Apple released the

world’s fastest PC (Mac G5), which had dual 2.0GHz PowerPC G5 processors.

Product differentiation is a viable strategy, especially if the company exploits the

conceptual distinctions for product differentiation. Those that are relevant to

Apple are product features, product mix, links with other firms, and reputation.

Apple established a reputation as an innovator by offering an array of easy-to-use

products that cover a broad range of segments. However, its links with other firms

have been limited, as we will discuss in the next section on strategic alliances.

There is economic value in product differentiation, especially in the case of

monopolistic competition. The primary economic value of product differentiation

comes from reducing environmental threats. The cost of product differentiation

acts as a barrier to entry, thus reducing the threat of new entrants. Not only does a

company have to bear the cost of standard business, it also must bear the costs

associated with overcoming the differentiation inherent in the incumbent. Since

companies pursue niche markets, there is a reduced threat of rivalry among

industry competitors.

A company’s differentiated product will appear more attractive relative to

substitutes, thus reducing the threat of substitutes. If suppliers increase their

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prices, a company with a differentiated product can pass that cost to its customers,

thus reducing the threat of suppliers. Since a company with a differentiated

product competes as a quasi-monopoly in its market segment, there is a reduced

threat of buyers. With all of Porter’s Five Forces lower, a company may see

economic value from a product differentiation strategy.

A company attempts to make its strategy a sustained competitive advantage. For

this to occur, a product differentiation strategy that is economically valuable must

also be rare, difficult to imitate, and the company must have the organization to

exploit this. If there are fewer firms differentiating than the number required for

perfect competition dynamics, the strategy is rare. If there is no direct, easy

duplication and there are no easy substitutes, the strategy is difficult to imitate.

There are four primary organizing dilemmas when considering product

differentiation as a strategy. They are as depicted below.

To resolve these dilemmas, there must be an appropriate organization structure. A

U-Form organization resolves the inter-functional collaboration dilemma if there

are product development and product management teams. Combining the old with

the new resolves the connection to the past dilemma. Having a policy of

Inter-Functional Collaboration

Too Much (Lockstep) Too Little (No Collaboration)

Institutional Control

Too Much (Bureaucracy)

Connection to the Past

Commitment to Market Vision

Too Much (History as Constraint)

Too Much (Foresight)

Too Little (Chaos)

Too Little (No Sight)

Too Little (No History)

Slows Innovation No learning makes implementation difficult

Stifles Innovation Lack of Direction in Innovation

No Innovation Can Take Place Fail to Exploit Historical Advantage

Lack of Flexibility in Uncertain Market Lack of Direction in Innovation

Organizing Dilemmas

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experimentation and a tolerance for failure resolves the commitment to market

vision dilemma. Managerial freedom within broad decision-making guidelines

will resolve the institutional control dilemma.

Five leadership roles will facilitate the innovation process: Institutional Leader,

Critic, Entrepreneur, Sponsor, and Mentor. The institutional leader creates the

organizational infrastructure necessary for innovation. This role also resolves

disputes, particularly among the other leaders. The critic challenges investments,

goals, and progress. The entrepreneur manages the innovative unit(s). The

sponsor procures, advocates, and champions. The mentor coaches, counsels, and

advises.

Apple had issues within its organization. In 1997, when Apple was seeking a CEO

acceptable to Jobs, Jean-Louis Gassée (then-CEO of Be, ex-Products President at

Apple) commented, “Right now the job is so difficult, it would require a bisexual,

blond Japanese who is 25 years old and has 15 years’ experience!” Charles

Haggerty, then-CEO of Western Digital, said, “Apple is a company that still has

opportunity written all over it. But you’d need to recruit God to get it done.”

Michael Murphy, then-editor of California Technology Stock Letter, stated,

“Apple desperately needs a great day-to-day manager, visionary, leader and

politician. The only person who’s qualified to run this company was crucified

2,000 years ago.”

Since Jobs took over as CEO in 1997, Apple seems to have resolved the innovation

dilemmas, evidenced by their numerous innovations. To continue a product

differentiation strategy, Apple must continue its appropriate management of

innovation dilemmas and maintain the five leadership roles that facilitate the

innovation process.

Strategic Alliances

58

Apple has a history of shunning strategic alliances. On June 25, 1985, Bill Gates

sent a memo to John Sculley (then-CEO of Apple) and Jean-Louis Gassée (then-

Products President). Gates recommended that Apple license Macintosh technology

to 3-5 significant manufacturers, listing companies and contacts such as AT&T,

DEC, Texas Instruments, Hewlett-Packard, Xerox, and Motorola. (Linzmayer,

245-8) After not receiving a response, Gates wrote another memo on July 29,

naming three other companies and stating, “I want to help in any way I can with

the licensing. Please give me a call.” In 1987, Sculley refused to sign licensing

contracts with Apollo Computer. He felt that up-and-coming rival Sun

Microsystems would overtake Apollo Computer, which did happen.

Then, Sculley and Michael Spindler (COO) partnered Apple with IBM and

Motorola on the PowerPC chip. Sculley and Spindler were hoping IBM would buy

Apple and put them in charge of the PC business. That never came to fruition,

because Apple (with Spindler as the CEO) seemed contradictory and was

extraordinarily difficult in business dealings.Apple turned the corner in 1993.

Spindler begrudgingly licensed the Mac to Power Computing in 1993 and to

Radius (who made Mac monitors) in 1995. However, Spindler nixed Gateway in

1995 due to cannibalization fears. Gil Amelio, an avid supporter of licensing, took

over as CEO in 1996. Under Amelio, Apple licensed to Motorola and IBM. In

1996, Apple announced the $427 million purchase of NeXT Software, marking the

return of Steve Jobs. Amelio suddenly resigned in 1997, and the stage was set for

Jobs to resume power.

Jobs despised licensing, calling cloners “leeches”. He pulled the plug, essentially

killing its largest licensee (Power Computing). Apple subsequently acquired

Power Computing’s customer database, Mac OS license, and key employees for

$100 million of Apple stock and $10 million to cover debt and closing costs. The

business was worth $400 million.

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A massive reversal occurred in 1997 and 1998. In 1997, Jobs overhauled the board

of directors and then entered Apple into patent cross-licensing and technology

agreements with Microsoft. In 1998, Jobs stated that Apple’s strategy is to “focus

all of our software development resources on extending the Macintosh operating

system. To realize our ambitious plans we must focus all of our efforts in one

direction.” This statement was in the wake of Apple divesting significant software

holdings (Claris/FileMaker and Newton).

There is economic value in strategic alliances. In the case of Apple, there was the

opportunity to manage risk and share costs facilitate tacit collusion , and manage

uncertainty. It would have been applicable to the industries in which Apple

operated. Tacit collusion is a valid source of economic value in network

industries, which the computer industry is. Managing uncertainty, managing risk,

and sharing costs are sources of economic value in any industry. Although Apple

eventually realized the economic value of strategic alliances, it should have

occurred earlier.

The following are some comments about Apple’s no-licensing policy.

“If Apple had licensed the Mac OS when it first came out, Window wouldn’t exist

today.”—Jon van Bronkhorst, “The computer was never the problem. The

company’s strategy was. Apple saw itself as a hardware company; in order to

protect our hardware profits, we didn’t license our operating system. We had the

most beautiful operating system, but to get it you had to buy our hardware at twice

the price. That was a mistake. What we should have done was calculate an

appropriate price to license the operating system. We were also naïve to think that

the best technology would prevail. It often doesn’t.”—Steve Wozniak, Apple

cofounder

“If we had licensed earlier, we would be the Microsoft of today.”—Ian W. Diery,

Apple Executive VP, I am aware that I am known as the Great Satan on

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licensing…I was never for or against licensing. I just did not see how it would

make sense. But my approach was stupid. We were just fat cats living off a

business that had no competition.”—Jean-Louis Gassée, Be CEO and ex-CEO of

Apple, admitting he made a strategic mistake

A strategic alliance can be a sustained competitive advantage if it is rare, difficult

to imitate, and the company has an organization to exploit it. If the number of

competing firms implementing a similar strategic alliance is relatively few, the

strategy is rare. If there are socially complex relations among partners and there is

no direct duplication, the strategy is difficult to imitate.When organizing for

strategic alliances, a firm must consider whether the alliance is non-equity or

equity. A non-equity alliance should have explicit contracts and legal sanctions.

An equity alliance should have contracts describing the equity investment. There

are some substitutes for an equity alliance, such as internal development and

acquisitions. However, the difficulties with these drive the formation of strategic

alliances. It is vital to remember, “Commitment, coordination, and trust are all

important determinants of alliance success.”

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Recommendations

For Company

Lowering the cost of products and maintaining the same quality standards.

Can form joint – ventures.

Knowledge Management.

More number of retail stores for easy access.

Continuous innovation to expand.

For Others

Do not compromise on price for quality.

Choose the products based on individual needs.

Be unique and different.

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Conclusion

We feel that Apple must focus on several key aspects to continue to grow and

succeed. They must continue a stable commitment to licensing, push for

economies of scope between media and computers, and become a learning

organization.

Apple apparently made a commitment to licensing. Although it should continue,

Apple may want to consider other forms of strategic alliances. An equity strategic

alliance may offer Apple the opportunity to obtain additional competencies. An

effective way for a company like Apple to accomplish this would be in the form of

a joint venture.Apple should continue pushing the new line of media-centric

products. Meanwhile, Apple should not lose focus on its computers. Macintosh

computers were 39% of Apple’s sales in 2005. (Burrows) This very innovative

company exploits its second-mover position. In the future, they will need to

continue innovating to expand the boundaries of both media and computers.One

persistent element of both competitive advantage and risk is Steve Jobs. He is both

synonymous with Apple’s success and has a large equity interest in Apple and

Disney. If he were to divest his leadership position, the reaction of both the market

and consumers would be uncertain. Given his position within the organization as

well as the history of the company when he was gone, Apple must find a way to

learn as an organization. This will allow the company to withstand a departure by

Jobs. Based on the actions of the organization, we feel that the mid-term

performance of Apple will be strong. This period allows Apple time to overcome

their challenges if they move swiftly. For this reason, we feel that they will

continue to succeed and will continue to outperform their peers.

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Apple avoids competition 

If you look at the history of Apple, you'll see that instead of rising to competition,

they often ignore it, or try to use legal means, or bundling clout, to erase it.

When challenged by a larger market force, as with the IBM PC and its clones in

the early 80s, and with Windows 3.0, 95 and then NT 4.0 in the 90s, they miss

obvious marketing opportunities, ways to make their products stronger by

participating in markets that others develop. This is an art that Microsoft has

mastered, there's no reason Apple couldn't have learned the same lessons, but they

didn't.

And when dealing with smaller competitors, Apple routinely and often

unconsciously forced them out of business by bundling, or declaring that they will

bundle a competitive offering.

When the Internet happened, Apple struggled against it instead of embracing it,

preferring to invest in technologies that eventually ended up on the scrap heap. A

wasted lead in content development, developers going to Windows, a poor Java

implementation on the Mac.

The bottom line, the strategy of avoiding competition has been disastrous for

Apple. But they want to do it again.

The same old strategy 

The cloners, Motorola, Power Computing, UMAX, IBM and others, are poised to

ship products that would take Apple out of the hardware business, because they're

cheaper, faster, bigger, more powerful machines than Apple's new products. These

are the computers that Mac users want and are, in my opinion, entitled to.

64

Even though we haven't seen the license agreements with the cloners, it appears

that Apple has the contractual right to forbid them to ship the computers, for any

reason at all. Apple wants to keep their hardware business, so they exercise that

right.

I despise companies that use hardball tactics to put their competitors out of

business. I admire companies that rise to competition. I happily buy new products

when I have a choice. I don't like to buy products that I'm forced to buy.

Is it a nice business? 

If you don't have anyone to compare with, if you aren't subject to customer choice,

your product loses direction, you focus inward, and eventually (as now for Apple)

your interests become out of synch with the interests of your customers.

Focus on that for a moment. A company whose interests are against their

customers. Is that a nice business? Does it have much of a future?

Is it legal? 

The customer's interest here is clearly served by competition. The usual benefits

apply -- lower prices, more realistic configurations, more diversity.

Apple's complaint that the cloners weren't growing the market can be explained by

Apple's licensing policy that kept them from making fundamentally different

products than Apple. Where's the cheap sub-notebook Mac? Where's the handheld

Mac? The Mac built into the dashboard of my car? Apple wouldn't let the cloners

make these products. Apple is an economic disaster area. They want Mac users to

put all their eggs in Apple's crumbling basket.

65

A STRATEGIC ANALYSIS OF APPLE COPRORATION

A Major Project Report

Submitted in partial fulfillment of the requirements for BBA(General) Semester VI Programme of G.G.S. Indraprastha University, Delhi.

Submitted by Anurag Sinha

BBA (Gen) - Semester-VIEnroll. No. : 0741221706

Delhi College of Advanced StudiesShankar Garden, Vikaspuri

New Delhi-110018

66

Declaration

I hereby declare that the major project report, entitled “A Strategic Analysis of Apple Corporation”, is based on my original study and has not been submitted earlier for any degree or diploma of any institution/ university.

The work of other author(s), wherever used, has been acknowledged at appropriate place(s).

Place Candidate’s Signature

Date Name: Anurag Sinha Enroll. No.: 0741221706

Countersigned

NameSupervisor: Shikha Makkar Delhi College of Advanced Studies

67