Behavioral SciencesApple Inc.Group 1 Project

Gaurav Chandwani 131/48Happy Saini 137/48Harshit Krishna 143/48Karan Sareen 168/48Kaushal Bhandaria 172/48Komal Agarwal 177/48Vani Gopalan 4037/48

TABLE OF CONTENTS

Introduction 3

External Environment 3

Customers 3

Suppliers 4

Competitors 7

Regulatory Environment 8

New Entrants 8

Substitutes 10

Conclusion 10

INTRODUCTIONApple Inc. is an American multinational corporation that designs and markets consumer electronics,computer software, and personal computers. The company's best-known hardware products includethe Macintosh line of computers, the iPod, the iPhone and the iPad. Apple software includes the Mac OSX operating system; the iTunes media browser; the iLife suite of multimedia and creativity software; theiWork suite of productivity software; Aperture, a professional photography package; Final Cut Studio, asuite of professional audio and film-industry software products; Logic Studio, a suite of musicproduction tools; the Safari web browser; and iOS, a mobile operating system. As of October 2010, thecompany operates 317 retail stores in ten countries, and an online store where hardware and softwareproducts are sold. As of September 2011, Apple is the largest publicly traded company in the world bymarket capitalization and the largest technology company in the world by revenue and profit.Since 1976, when the first Apple I came to the market, Apple has been widely successful at buildingbrand loyalty in Apple products. Apple’s products are meant to compliment each other, whichencourages consumers to purchase another product in the brand. Apple has also been smart in sellingtheir products through the educational network. This helps not only to hook students on to Appleproducts early on, but also to build a “cool” and “hip” image. Apple is consistently coming out with newinnovations to keep their products interesting, while also keeping up with the demands of moderntechnology. The bottom line: Apple delivers outstanding products consistently that receive highconsumer ratings, causing consumers to keep coming back for more.Apple’s innovative products, incredible brand image and success story make it truly admirable. Hence,we have chosen Apple for this project.EXTERNAL ENVIRONMENT

Customers

Apple Inc. as a name is known to have attained a cult status, especially among the tech savvy 21stcentury youth.Apple sells in almost all the developed and developing countries of the world, with rapid emergence inthe third world as well. All of these countries and cultures have different demand patterns andsensitivities. To this end, buying behavior and buying capacities also vary across nations. To this diversecustomer base, Apple provides a whole range of hi-tech personal devices, which are sold on thephilosophy of “Buy Different, Think Different”. Thus as it permeates different cultures of the world,Apple as a brand has established a culture of its own. Some other important features, which shapeApple’s strategies, are: Customers are empowered due to availability of low priced products giving similar features. The Internet and new media avenues allowing easier information exchange have enhancedinformation availability. Hence the companies need to be more careful regarding their valueproposition

Rapid inter-temporal variation in consumer tastes has influenced companies to race to meetthese demands. Also, companies like Apple with sheer innovation have influenced consumertastes. Now they need to maintain their lead on the S-curve of consumer demand withconstant innovationThere is in fact noticed an unusually high amount of brand loyalty for Apple products which hasresulted in an emotional bond between its customers and the brand. The reason more and more oftencited for this is the company’s constant innovativeness.Dynamism: UnstableBecause of favorable brand image, high brand loyalty and repeat purchases across different customerclassesRichness: Moderately RichIncreasing purchasing power and number of potential consumers in the young segment of populationComplexity: ComplexConsumer behavior contingent on psychological, socio-cultural and economic variables and henceApple needs to constantly monitor these.Suppliers

APPLE doesn't make the any of its products itself. It neither manufactures the components norassembles them into a finished product. The components come from a variety of suppliers and theassembly is done by Foxconn, a Taiwanese firm, at its plant in Shenzhen, China. The “teardown” graphicbelow, based on data from iSuppli, a market-research firm, shows who makes what inside the iPhone,and how much the various bits cost. Samsung turns out to be a particularly important supplier. Itprovides some of the phone's most important components: the flash memory that holds the phone'sapps, music and operating software; the working memory, or DRAM; and the applications processorthat makes the whole thing work. Together these account for 26% of the component cost of an iPhone.This puts Samsung in the somewhat unusual position of supplying a significant proportion of one of itsmain rival's products, since Samsung also makes smartphones and tablet computers of its own. Apple isone of Samsung's largest customers, and Samsung is one of Apple's biggest suppliers.This is actually part of Samsung's business model: acting as a supplier of components for others gives itthe scale to produce its own products more cheaply. For its part, Apple is happy to let other firmshandle component production and assembly, because that leaves it free to concentrate on its strengths:designing elegant, easy-to-use combinations of hardware, software and services.

Another aspect of Apple supplier strategy is its control over the worldwide market for key componentshas reduced Apple’s cost structure and has created significant barriers to entry for competitors. Thisyields significantly higher margins and market share for Apple, among other benefits.It turns out that Apple has secured about 60% of global touch panel capacity, with a focus on 10-inchdisplays. Some have speculated that this has forced some competitors to initially focus on deviceswith 7-inch screens, such as Samsung with its Galaxy Tab.Because Apple is buying these components in such large quantities it can exercise significant leverageover suppliers. This leverage enables Apple to negotiate favorable terms and pricing. Forinstance, South Korean Fair Trade officials alleged that Apple struck a special deal with Samsung toobtain flash chips at below market rates. This favorable pricing means that Apple has a lower coststructure for its products relative to competing products. And all else equal, this lower cost structureresults in higher margins for Apple versus competitors.Second, when Apple commands such a large portion of the global market for a key component itcreates enormous barriers to entry for potential competitors. Competitors can obtain the component inlimited quantities but at a higher price, therefore placing them at a cost disadvantage. Next, competitorscan launch different products — e.g., a hard drive based portable media device or a 7-inch touch screentablet – that may not match the preferences of consumers. Alternatively, competitors can just sit andwait until more supply of the component is made available, which in some cases takes years.Complexity: ComplexHigh number of suppliers, where some of them might be industry rivals makes managing supplierrelationship criticalDynamism: StableIn a High Tech environment where new technologies are surfacing on a continuous basis, Apple has tomake sure that technologies are fast evaluated and production secured for strategic security.Richness: PoorThe dependence on contract manufacturers and external suppliers for all manufacturing needs putsApple in a precarious position.

Competitors

Apple mainly competes in the personal computer, mobile and music industries.Personal Computers & Software:The personal computer market is fairly well developed with a very high concentration of matureplayers such as Dell, HP, Lenovo, Acer, Sony, Gateway, Samsung, Asus, Fujitsu, and Toshiba etc. As aresult, this market has become extremely commoditized with most of these players producingpractically identical products running Microsoft’s Windows operating system. This makes MicrosoftApple’s biggest competitor in the Operating System and Software market.Apple continues to differentiate its Macbooks through their unique design and operating system.Switching costs for the customer have been the main deterrent in Apple’s quest to attain a moresizeable market share, due to their higher prices and perceived incompatibility with other software.Music:Apple is also a big player in the music industry. Apple’s iPod is the market leader in the music playermarket and competitors (like Sony, Creative, Philips and others) are struggling to offer up a productthat can match iPod’s technology and innovation. Apple’s iTunes is also the leader in the online musicand entertainment industry. With iPod and iTunes, Apple is in no danger of losing market share in theshort term and has continued to pour money into its R&D to support its long-term strategy.Smartphones and Tablets:Apple revolutionized the smartphone and tablet industries by introducing the iPhone in 2008 and iPadin 2010 respectively. In this industry, Apple’s iOS faces intense competition from other mobileoperating systems like Microsoft’s Windows Mobile and Google’s Android that have formed strategicalliances with hardware manufacturers like Motorola, HTC, Samsung and Nokia. RIM is also acompetitor in this industry with its Blackberry Smartphones and Playbook tablet. Both Apple andGoogle have significant market share in the smartphone industry, while Apple’s iPad continues to be theleader in the tablet industry.Complexity: ComplexApple’s competitive environment is very complex. Their diverse and intricate products put themdirectly in competition with almost every technology company – be it hardware manufacturers,software firms or online portals and retailers - in many complicated ways.Dynamism: UnstableDue to the presence of so many players and the pace of technological advancement, Apple faces a verydynamic environment that requires them to be innovative and nimble.

Richness: RichThe size, dynamism and concentration of all the markets Apple is in also make its environment veryrich in resources. The large number of possible suppliers of different products can give Apple greatmarket power, but their need for specialized components restricts their resourcefulness to a largeextent.Regulatory Environment

Apple vs. CompetitorsResearch and Development is the most fundamental reason for Apple’s continuous competitiveadvantage. However, while researching upon and introducing new technologies, there is either apersistent threat of legal action by competitors or a necessity by Apple to do the same against them.This is because release of insider information about Apple’s new products could give its competitors aheads-up to introduce rival products.For instance – Apple sued Microsoft in 1988 for perceived similarities between Microsoft Windows and Macintoshaudio-visual-works. Apple is currently taking legal action against many popular technical web sites for releasingproprietary product research from confidential documents protected by employee non-disclosureagreements.Apple vs. GovernmentApple has been fortunate so far to have not been involved in any major issues where Governmentregulations are concerned. On the contrary, the Government has charged its prime competitor Microsofton many antitrust regulations, which has worked to Apple’s advantage, allowing it have a betterfoothold in the industry.Complexity: MediumWith increasing competition between Apple and other market players, the regulatory environment isquite fragile. There are a large range of laws and regulations that Apple needs to be aware of, in order torightly penalize those who deserve it, and at the same time, defend itself from any charges. This makesthe regulatory environment somewhat complex to be in.Dynamism: StableWith new regulations being introduced and limits being set on a company’s carbon footprint, Appleneeds to be extremely careful and keep improvising to not be entangled in any legal issues with theGovernment. This makes the environment quite unstable and prone to misfortunes unless proper careis taken.

New EntrantsIn personal computer market there are a few well-established companies like Dell, HP, Sony andCompaq. The threat from new entrant is limited as there are large economies of scale in the PC market.Due to large economies of scales, new companies would require huge capital to compete with Apple andother well-established companies.In Operating system, Microsoft and Apple’s iOS are the main leaders. New entrants have to make OS,which is one step ahead of them. Google with its Google OS and Android is currently a big threat toApple consuming its market share.Another barrier that new entrants would have to face is legal barrier; mainly in the form of patents.The main market leaders have numerous patents on computer designs as well as technology, whichmake it extremely difficult for new entrants to enter the market.In portable music market, there are a fairly large amount of competitors the entry barrier is quite low.As the market is relatively new, there is more of a threat of new entrants in the MP3/Portable Musicmarket than there is in the personal computer market. The portable music websites like Amazon andNapster have relatively small startup costs and are stealing away portion of iTunes market shareApple is enjoying the first mover advantage in the hardware side of the market with their iPod. It hashuge following and brand image which creates an obstacle for new entrants. Due to the potentially highgrowth rate of this market, it is still profitable for companies to invest the capital involved in breakinginto the market. Even though the main market leaders already have many patents protecting theirtechnologies, new entrants have developed pioneering technologies due to the relatively young natureof the market.Complexity – ComplexPortable music market being relatively new poses a bigger threat of new entrants, which makes thisenvironment highly complex.Dynamism – UnstableAs new technology is coming up everyday especially in countries like Japan, many new entrants(although small) join the industry, and many leave as well. Thus, the environment is changing veryquickly with time.

SubstitutesWith increase in technological innovations, first mover advantages are short-lived and substitutesemerge to compete in any new product category within no time. Apple sports a wide product line, at thesame time faces continuous threat from three distinct types of substitutes:Direct Substitutes:

Music [iTunes: Napster, Rhapsody, Satellite Radio, p2p], [iPod: Walkman, CDs, audio streaming] Video [iPad, iPod: Broadband connections, Satellite / Cable TV, video streaming, Netflix] Computing [iMac, MacBook: PCs] Communication Devices [iPhone: smartphones, touchscreen devices] E-books [iPad: Amazon Kindle, Samsung Papyrus, Sony Reader]Service based Indirect Substitutes:Increasingly the popularity of Apple has opened up other channels where apple products are sold, newand used. An example is E-bay that can buy Apple products and put it up on sale with specialpromotions. Special offers by Mobile service providers where Apple products are sold in bundles areanother example.Due to availability of a variety of substitutes, there is constant need of product differentiation, whichcreates economic value for the customers. It can reduce environmental threats as the cost of productdifferentiation acts as a barrier to entry.CONCLUSION

Still growing at 52% y-o-y and expanding income annually by almost 70%, Apple Inc. has carved out abase of followers-cum-customers who are very much driven by its innovativeness and brand name intheir purchasing behavior. It leads a high technology race against very powerful players in many of theseveral product markets that it covers. It deals with suppliers spread the world over to streamline itsproduction. It controls for competition from substitutes as distant as new service offering by anInternet based firm and as close as an imitator. This leadership has come about by efforts of themanagement and the innovators I the company.At the same time, a very important mediation is carried out by the uncertainties posed by concerns ofstability / dynamism, richness of resources and complexities in the external environment. In thiscontext, there are certain variables that become more important given the higher degree of uncertaintyinvolved and so on. As Apple Inc. tries to navigate through these rough waters, an enduring success willdepend upon how it accounts for these uncertainties and pre-emptively acts to retain its position as aproduction innovator.