Case Study 7 (4) Apple Inc. in 2008
Question 1 What is the key of competitive advantage of Apple Inc.? At the start, Apple Inc had many competitive advantages that allowed it to become a profitable business. Apple’s PCs rely on proprietary designs that only Apple could produce. When Apple developed the Macintosh, it was very easy to used, had an industrial design and technical elegance. Consumer desired these qualities in a PC, but the Mac was very slow and there were very few compatible programs due to the proprietary design. To fight this, Apple was able to blow into the corporate sector, as the mac became the best PC with respect to desktop publishing. It was also able to hold more than 50% of the education sector. In addition, Apple was able to control the Mac completely in both hardware and software. It was also able to develop its own peripherals that took advantage of a “plug and play” system. Consumers today’s world still value the consumer experience just like when the Mac was initially introduced. Thus, the current incarnations of Macs offer attractive design, case of use, good security and bundled software that all contributes to an “Everything ready” system that is very easy to use. Apple has introduced Apple stores, which offers its own unique retail experience, as people looked forwards to a good shopping experience when buying computers. The synergy along with iTunes definitely helped to boost sales of traditional PC systems from Apple. It also fashionable to have Apple computers, as a recent Microsoft Ad proclaims that some people are just “not cool enough to be a Mac person”. Apple is set apart from its competition by its combination of hardware and software, by the content gate-keeper strategy embodied in iTunes, and by their successful retail strategy. While there are many other reasons in the company's history for their success in recent years, these are the dominant themes of their astounding success. Companies looking to compete with Apple need to know that it is not impossible, however they will need to pick their battles wisely, innovate on their differentiation, and focus heavily on being the best solution in the market for the problems they are trying to solve.
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Question 2 What can you show about the degree in Porter’s 5 forces for Apple Inc. Company in competitive force? How strong its competitive advantage compare to other PC industry? Entrants (Moderate)
FIVE FORCES MODEL
Low manufacturing cost (+) Direct sale (+) High economics of scale (-) Brand loyalty (-) Market maturity (-) Industry concentration (-)
Suppliers (Moderate) Low components cost (-) Large number of components suppliers (-) Small number of OS/Application suppliers (+)
Rivalry (Strong) Large number of manufacturers (+) Price sensitivity (+) Falling growth (+) Globalisation (+)
Entrants (Moderate) Potential substitutes for home users (+) Not close in performance (-)
Figure 1: Porter’s Five Force Model for Apple Inc Industry
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Buyers (Strong) Large volume buyers (+) Price sensitivity (+) Brand loyalty (-)
Question 3 What are Apple Inc.’s resource strengths and weaknesses and its external opportunities and threats (SWOT) in facing another PC industry? SWOT Analysis:
Strengths: • • • • • • • • • • • • •
Weaknesses: • • • •
Branding (Well established Brand) Innovation Differentiated product Integrated Product (Computers + OS) Ease of Use Technically Elegant Products Superior Quality Colorful and Trendy Marketing and Distinctive Advertising Retail strategy Customer loyalty Online Sales (Informative website) Financial Vitality
Opportunities: • • • • •
High Priced Proprietary system No Customization Lack of Compatibility Cannibalization
Threats: • • • • •
Fast growing Industry (Customer Electronics Industry) Technological Innovations Extend new products to loyal customers High Potential music phone market Strategic Alliances
Extensive Competition Substitute Products Low prices of Competitors Technical Advancements Economy downfall
Strengths: Apple Inc. makes a difference in the PC industry through its innovative product design and high standard applications. Macintosh has been the powerful tool to build the success story of the company. The “integrated system” of computer was its differentiated strategy which presented the Macintosh along with its own Operating System (OS). The new step in “Consumer Electronics Industry” has outshined Apple Inc’s performance as a smart company. The innovative products like iPod and iPhone have been very successful in potential 3
music market. Customers have a great trust on company’s elegant products and they always look forward to be loyal to the brand. Apple keeps it price strategy different from its competitors which give computers and other entertainment devices at low cost. Weaknesses: The high prices (especially Computer) keep it access limited to only people with high income level. The Apple computer had compatibility issues with Microsoft Office and IBM PCs, which motivated the research and development at the company. As the company has a wide product line, each new product makes the previous one dull against it; the issue of cannibalization may be a reason of bothering the expected revenue generation of the products. Opportunities: In the second quarter of 2008, the worldwide PC market raised by 16 percent over the second quarter of 2007, to 71.9 million units, with growth led by mobile PCs. US market, total shipments grew by only 4.2 percent. Apple Inc having the highest growth rate with 38.1 percent from the second quarter of 2007. At that time, the PC industry was relatively consolidated. The technology innovation shown in Y2K years while Apple Inc releases iPod in 2001, the first non-computer product, iTunes in 2003, the online retail stores where consumers could purchase individual songs legally. By July 2004, 100 million songs had been sold and iTunes had a 70 percent market share among all legal online music download service. The first iPhone was released on June 29, 2007. The iPhone began with Apple CEO Steve Job’s direction that Apple engineers investigate touch screen. Apple manage to extend their new product with managed it business largely on a geographic basis. Its primary geographic segments included the Americas (North and South), Europe, Africa, the Middle East and Japan. Threats: Substitutes for most of the products are easily available at a lower price. Although buyers do look for quality and brand name, some of the components they need are purchased from these substitute providers at a low cost. If the consumer cannot afford to buy an Apple iPhone then he/she has the option to buy any alternative low cost smart phone from some other company. There is high competition due to high industry growth. Manufacturers of these products try every possible strategy to attract the attention of customers through promotion and advertising. Apple fights with its highly innovative products whereas Dell and HP have better marketing and distribution strategies. According to the present conditions Apple does have a Gross margin of 35% which exceeds that of Dell’s 19% and HP’s 24%. In this extremely competitive environment, companies are highly responsive to any new product as they can imitate at low costs.
Question 4
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What are the key elements of Apple Inc.’s value chain? Represent value chain for an Apple Inc. The value chain activities are not much differences from product to product. Instead, Apple has been able to command a premium in the market and gain above average returns from utilizing the similar and compatible of its value chain activities across the products. Technology and development component is the true core of Apple’s Capability. The learning and innovation in technology in its products has led Apple to leverage its expertise in iPod, iPhone, iTunes and iWorks suite of products. Over due course of time, Apple has been able to perfect the chain of activities in innovation. It is really the strongest advantage for a company to be independently manufacturing from scratch to finished product with application and peripherals. Apple starts from its new ideas of product design, designs it through its own resources and funding, then manufactures it and finally markets it wholeheartedly. Distinctive marketing campaigns and sales have been a strategy of Apple to attract customers and to spread the information among them. Television commercials, Print Advertisements, Posters in Public areas and wrap advertisement campaigns have been successful ways of outshining the new product. Apple continues to command a market premium for producing a “better mousetrap” throughout its history. Steve Jobs personally unveils all new product introductions, reviews corresponding marketing campaigns and approves new product development guidelines. This adds to better targeting to the market and consequently, it is a special concern of company’s CEO. Apple’s service believes in keeping a place in customer’s heart, the customer loyalty is a great strength to the company. The credit for such a strong relationship between the company and its customers goes to company’s customer service and the nature of products which fulfills the need of today’s stylish people. 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. In such an environment, customer service merely becomes the realization of receiving a little more than expected.
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Figure 2: Value Chain of Apple Inc
Another example of value chain analysis, Apple podcasting value chain, commonly known as Digital supply chain, is comprised of nine steps that essentially move from raw content to the listener. All the steps of the value chain include content, advertising, production, publishing, hosting/bandwidth, promotion, searching, catching, and listening. It is important to note that each step in the value chain adds value to the podcast in distinctive ways, and has its own sets of challenges and opportunities.
The main processes of a digital supply chain are as follows: •
True on-demand product availability
•
Ease of use and speed for content search and activation
•
Pricing and subscriptions
•
Quality management built on licensing and refunds
Given the enormous growth of the electronic market, a highly fragmented market expertise, and the asset costs to build and maintain a digital supply chain, it’s clear that this model is transforming traditional practices.
Some of the key issues in Digital Supply Chain management are: •
Innovation—this goes for product and supply chain delivery methods. 6
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Time to market—Since digital products can be made once and sold many times, speed of collaboration between design and delivery will be a major measure of success
•
Customer service—this includes quality of the transaction activations, and ease of refunds.
and product, speed of
So far, these issues have been efficiently dealt with by Apple.
Question 5 Which one of the five generic competitive strategies best characterizes Apple Inc.’s strategies approach to competing successfully? Generic Competitive Strategy Apple is pursuing a broad differentiation strategy. Apple differentiates by offering high-quality, exceptional design, and personalized service. The scope of their strategy is broad targeting customers ranging from unsophisticated beginner users to specials needs power-users. Value Creation Apple outsources the basics of production to third-party original equipment manufacturers (OEMs) that can achieve cost savings through vast economies of scale while in-housing elements of design to attract and retain users. Apple excels in the areas of industrial design and user interface and focuses on these areas to deliver a product that is both highly stylish and at once ergonomically natural and useable. Apple’s people-friendly devices and highly personalized one-on-one customer service create a one-of-a-kind value proposition that commands a higher-than-average price.
Question 6 Does Apple Inc. enjoy a competitive advantage over its rivals in the MP3 player industry? Does the company have a winning strategy? Does Apple iPhone considered as a key product for the Apple Inc.’s product portfolio? Explain it. Apple enjoys a competitive advantage over its rivals in the MP3 industry. Even though it was Eigerlabs who introduced the first MP3 portable player, Apple Ipod is the one who brought the revolution in the portable MP3 industry. In order to cater the various market segments. Apple has offered many type of models that can fulfilled the demand from various age. Basically, Apple has classified the Ipod based on the design (Ipod Nano), multi-function (Ipod Touch), basic (Ipod Shuffle) and heavy user (Ipod Classic). All these models would help the customers to make decision on which model they need. This is something that Apple competitors lack in 7
designing their MP3 player. Most of the competitors basically have almost similar products that could cause customers feel bored and tired of their products. Apple’s continuous innovation in designing their products is their main strength and this easily attracts the end users or customers. The introducing of iTunes was significant as it compliment the Ipod products very well. The success of Apple lies on their CEO Steve Jobs. After resigned in 1985 because of board feud, he made a comeback at 1996 and came as new and mature personnel. His ideas of designing new products that meet all the generation demand is the winning strategy of the company. Since appointed as permanent CEO since 2000, he has kept surprising everyone every year. Every year, millions of Apple fan would wait nervously on his keynote speech, announcing the latest Apple products. Such phenomena could only be seen when the latest game console is launch and there is no other IT company can bring such phenomena, and not even Microsoft. Another winning strategy implement by Apple is that its improvement or facelift products are always cheaper from the previous version. For example, Iphone 3G was priced $200 lower than the previous version. This has courage the customers to upgrade their products even though they have just own the previous version in the short period.
Since Nokia has brought mobile phone industry to a new level, many people especially Apple fan waited what Steve Jobs could offer in the mobile phone industry. This can easily understood given the reputation he has in designing and marketing the Apple PC products and Ipod. Because mobile phone is one of large industry, the Iphone is very important to the Apple portfolio. Indeed, Apple intend to make Iphone as an introductory products to the customers those never experience Apple products. This would open the door to Apple to sell its other products to its mobile phone customers.
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Question 7 How do the financial performance results of the Apple Inc based on Exhibit 1 and Exhibit 2? Explain both Exhibits. Exhibit 1
Domestic International Total Net Sales
Domestic ratio International ratio Total Net Sales ratio -
2006 11,468. 00 7,829. 00 19,297. 00
07/06 1.2319 1.2617
06/05 1.3760 1.3988
1.2440
1.3852
2005 8,334. 00 5,597. 00 13,931. 00
By looking at the performance from 2005 until 1007, total net sales both from international and domestic increased from 13 931, 19 315 and 24 006 respectively. The table above, the ratio shows total net sales come from International Sales. However, ratio between 2007/2006 dropped from 1.3852 in 2006/2005 to 1.2440. Even though the sales increased, the ratio shows the momentum of it dropped.
Total Assets Total Liabilities
Total Assets ratio Total Liabilities ratio -
2007 14,128. 00 9,878. 00 24,006. 00
2007 2007 25,347. 00 10,815. 00
2006 2006 17,205. 00 7,221. 00
07/06 1.4732
06/05 1.4940
1.4977
1.7664
2005 2005 11,516. 00 4,088. 00
From the table above, liabilities ratio increase a bit compared to Total Assets ratio. Liabilities ratio always ahead of Total Assets ratio between 2005 and 2007.
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Net Income -
2006 1,989. 00
2005 1,328. 00
Net income for Apple Inc increased from 1 328 to 3 496 in 2005 and 2007 respectively.
Total Operating Expense -
2007 3,496. 00
2007 2006 2005 3,745. 3,145. 2,399. 00 00 00
Total Operating Expense has increased between 2005 and 2007 as the Total Net Sales increased as show in the above before.
Exhibit 2 Net Sales by Operating Segment Total Macintosh iPod Other music-related products and services Peripherals and other software Software, service, other sales
2007/2006 2006/2005 2005/2004 2004/2003 1.3985 1.1753 1.2746 1.0962 1.1261 1.6244 3.4763 3.7855 1.3241 1.1455 1.1790
2.0968 0.9769 1.1723
3.2338 1.1840 1.3289
7.7222 1.3763 1.2748
Net Sales table shows that sale from Americas, Europe, Retail, and Other segments (Asia Pacific and FileMaker) increased except from Japan. In overall, Net Sales increased from 2003 to 2007. By looking at Net Sales by Product, iPod and other music-related products and services sales dropped drastically between 2006 and 2007. On the other hand, Total Macintosh (Desktops and Portables) and also Peripherals and other software registered a drastic increase between 2007 and 2006. Between 2006/2005, the number of sales of iPod drastically decreased compared to 2005/2004 which registered a drastic increase. By looking at the table above, ratio between 2006/2005 and 2005/2004 dropped drastically by registered 1.6244 and 3.463 respectively.
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Net Sales by Product 2006
iPod
2007 7, 051 1, 463 1, 630
303
534
1, 391 39, 409
1, 384 22, 497
2004 3, 290 1, 496 4, 416
Net Sales/iPod unit sold
161
195
202
296
367
iPhone
389
2006
2005
2003 3, 012 1, 491
iPod
2007 7, 051 1, 463 51,6 30
Net Sales/iPod unit sold
161
367
iPhone
389
Total Macintosh Net Sales/Macintosh unit sold
2005 5,
4,
2003 3, 012 1, 491 939
1,
Unit Sales by Product
Total Macintosh Net Sales/Macintosh unit sold
303
534
1, 391 39, 409
1, 384 22, 497
2004 3, 290 1, 496 4, 416
195
202
296
5,
4,
939
1,
Total Macintosh Net Sales/Macintosh unit sold iPod Net Sales/iPod unit sold iPhone
2007/2006 2006/2005 2005/2004 2004/2003 1.3296 1.1696 1.3781 1.0923 1.0518 1.3101 0.8256 -
1.0051 1.7517 0.9653
0.9251 5.0944 0.6824
1.0034 4.7029 0.8065
Total Macintosh sales increased drastically between 2005/2004 and then drop between 2006/2005 and increased again between 2007 and 2006. The most increase that can be seen from the table above is the sales of iPod between 2005 and 2004 which registered a ratio of 5.0944. However, Net Sales per iPod unit sold dropped and the ratio is 0.6824. No ratio for iPhone because it only started for sale in 2007. Overall, Total Macintosh and iPod has increased between 2007 and 2006. 11
Question 8 What does the strategic of the Apple Inc. in compete their sales with other PC industries? Apple Inc. makes a difference in the PC industry through its innovative product design and high standard applications. For example, Macintosh was the breakthrough and one of the success stories of the company. The “integrated system” of computer was its differentiated strategy which presented the Macintosh along with its own Operating System (OS). The new step in “Consumer Electronics Industry” has outshined Apple Inc.’s performance as a smart company. The innovative products like iPod and iPhone have been very successful in potential music market. The iTunes is compliment product of iPod that significantly contribute to the higher profit. Those products, digital electronic devices and computers are produced to be more synchronized and harmonized to each other’s. It is one of its strategies to demand customers to have both types of products. At the same times, customers have a great trust on company’s elegant products and they always look forward to be loyal to the brand. Apple keeps it price strategy different from its competitors which give computers and other entertainment devices at low cost. The high prices (especially Computer) keep it access limited to only people with high income level. It can be seen as Apple adapted differentiation strategy based on products and targeted customers. Apple has been able to command a premium in market and gain above average returns owing to its innovation and differentiation of technologically superior products.
Question 9 What recommendations would you make to Apple Inc. to improve the company’s competitive position in the industry and its financial and market performance? Apple was among the pioneer in the computer industry. Therefore, they have more competitive advantages, especially with the huge successes of the Apple II as compared to other newcomers. However, IBM when entered the market with a more user friendly and compatible computer and Apple saw their market share on the industry drop dramatically to 6.2%. The company needs to adapt very fast and review their strategic plan and marketing as newcomers into the industry can easily provide alternative to the customers. It have been seen that in recent years, they have seen many successes from targeting a smaller market of trendy, higher quality customers that are devoted to their company. While maintaining a low market share of the computer industry, Apple has continued to produce a quality product. This quality has been seen throughout all of its many products and is not viewed as a lesser product compared to the competition. Apple developed its own operating system that and result more revenue. Since Dell and HP use Microsoft's Windows operating system, almost half of their revenues are cut by paying back Microsoft for using their product. Apple can be seen having better position as compared 12
to Dell and HP. However, Jobs already has settled this OP battle. But Apple must not forget that their strategy is to differentiate their products with others available. Jobs need to review consumer’s preference of its OP and the compatibility of its OP with the current most used software. The company should now consider entering into new type of customer while maintaining its current target group. The natures of Apple’s products are seen more as high-end items and more expensive luxuries rather than as necessities. Because of this many people are buying cheaper, lower quality computers from customized manufacturers in order to save money. Their main customers are from high-end and rich people. So Apple needs to provide product for other type of customers. It can help customers to adapt with its OP and possibilities of the customer to upgrade their computer to better specification. It can help to reduce volatility of its sales as target market group is diversified. The company is too dependent on Jobs as its CEO. It has been seen that when Jobs come back to the company, he has did very well. Apple has become more stable and profitable. However, the company should start to prepare to recruit new CEO as Jobs is battling with his health issue. In order to survive once he is no longer leading the company, Apple needs to begin depending less on Steve Jobs and balancing responsibilities throughout the company and among select individuals. In order to prepare for Jobs’ future absence from the company, Apple will look ahead and find a future replacement for Jobs. In order to sustain peace in the Apple world, such a replacement will preferably be chosen by Jobs himself. That way, the replacement will be able to learn and continue Jobs’ success as the company when Jobs’ role was reduced to that of a chief advisor or to that of no role at all. Continuing the Jobs mind set is the most important characteristic of a CEO at Apple. The previous CEO's were able to do some great things in the name of Apple. Future CEO's have the potential to do just the same, if not better. Because of the company's past, Apple is in a great position to maintain its profitability. The continued success of its niche computers as well as the dominating iPod brand, Apple must rely less on Steve Jobs and rely a little more on the fact that they are a successful company with a dedicated customer base. This is something that losing Steve Jobs cannot change.
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