Case 2: Apple Inc.

, 2008

Date: 23-09-2009

1

......................................................................................... 7 Research Question 3: Sustainability of competitive advantage for Apple in the PC business ..................................................................................................................................................................................................................................................Table of Contents Table of Contents .................. 12 Conclusion and Reflection .............................................................................................. 4 Research Question 2: The difficulty of Apple in the PC industry over time ............................................................................ 13 2 ................... 3 Theory and Analysis...................................................................................................................................................................................................................................................................................................... 12 References .......................................... 2 Introduction........................ 4 Research question 1: The structure of the PC industry...... 10 Strategic advice ...........

They created laptops called the Macbook in 1994 and even entered the MP3 player industry with the iPod brand in 2001 and more recently the mobile phone industry with the iPhone in 2008. Currently Apple’s PC Business is on the rise again. We continue the report by giving our strategic advice to aid the company in attaining sustainable competitive advantage within the PC industry. Analyze the structure of the PC industry. We continue our report with our analysis which we conduct by answering the following research questions: 1.Introduction In 1976 Steve Jobs and Steve Wozniak founded Apple Computer Inc. 3 . We started this report by giving a small introduction of the company in which showed some of its history and some of the products that are developed by Apple. Given that Apple has always had superior products. We end this report with our reflections and our conclusion on the subject and the limitations of the theories we have used in this report. Does Apple possess any resources that provide it with a sustainable competitive advantage in the PC business? We answer these research questions through the application of the theories we have found in the articles we used to solve these research questions. Apple started making computer circuit boards and followed that with an easy to use computer in 1978. why has the company had so much difficulty in the PC industry over time? 3. to only controlling a small share of the industry after several circumstances which left the company in crisis. Are the dynamics in this industry favourable or problematic for Apple? 2. Its market share had declined significantly to a current 3% market share. Goal and structure of this report In this report we review the current state of PC industry and that of Apple’s PC Business and we review the future of Apple’s PC business. Through the years Apple has changed from being the world’s largest producer of PC’s controlling almost the entire market at the beginning of the 1980’s. through the years it focused on the PC business and developed applications for their own Macintosh computers. together with a group of 20 other people and started out in Steve Jobs garage. still Apple is a successful business due to its other products and its Macintosh computers are still profitable. but is this only temporal or can Apple reclaim its original market leader position in the PC industry.

Five Forces Model The Five Forces Model by Porter (Wit & Meyer. p. Substitutes force There are several determinants of the threat of substitutes. brand identity. Entry barriers can make the threat of new entrants either easier or more difficult. Economies for scale also make the barriers higher. 2004. p. 260). Examples are relative price performance of substitutes. (Wit & Meyer. but examples are switching costs. 259). 2004. There are five different forces that determine whether the profits in any given industry will be high or whether competition drives profits down. 2004. Substitute products. Cases of supplier power include presence of substitute inputs. and required investment of firms (Wit & Meyer. Product differences and switching costs. pp. 258-262) are: Suppliers force The bargaining power of suppliers determine this force. There is an extensive list of entry barriers. 258-262) determines the attractiveness of an industry. costs. 2004. The five different Forces by Porter that “embody the rules of competition” (Wit & Meyer.Theory and Analysis The structure of the PC industry We start our analysis by examining the structure of the PC industry. New entrants force The threat of new entrance determines this force. 260). pp. 2004. p. 2004. 2004. To answer this question we use Porter’s Five Forces Model as it is and effective method to create a clear picture of a business environment. Determinants can be the industry growth. The effect of this power is changeable by the number of buyer and importance of materials which companies require. 260) Industry competitors force the final force is determined by the rivalry among existing competitors inside the industry. p. 260). p. Are the dynamics in this industry favourable or problematic for Apple? Our first research question was to research the structure of the PC industry. Buyers force The bargaining leverage of buyers determine this force. The profits are essentially determined by these forces because they influence prices. switching costs and buyer propensity to substitute (Wit & Meyer. p. access to distribution or government policy (Wit & Meyer. buyer volume and buyer information are examples (out of many) from this force (Wit & Meyer. 260). differentiation of inputs and supplier concentration (Wit & Meyer. 2004. 4 .

Lenovo. Buyers force There are a number of different entities to which Personal Computer industry caters: large companies. New entrants force More than 60% of the market share is occupied by Hewlett-Packard. or at all. because of the fonts. causing an 18% decline in PC revenues. the system. governments and so on. microprocessors. upon expiration or otherwise be able to obtain favourable pricing in the future. Many companies continue to use Apple’s computers as it is expensive to change the entire system. Apple’s computer was the only effective machine as it allowed companies to edit things digitally. Dell. Sometimes quality components can become a struggle within the PC industry as competitors try to obtain these components and make sure that others cannot use these technologies.”(10-K. 2008. 2008). However. which in turn could lead to a decrease in new technologies as these suppliers will have lower incomes and thus less revenues to spend on R&D. Brand identity is a large enough barrier to make it difficult for new companies to enter this market. Apple’s competitors have control over Apple’s former market share. Hence. Dell. 2009) are problematic for the suppliers. thus companies are afraid to switch to other systems. and options it brings. For example. a supplier’s power could be changed because of this situation. average sales continue to decline. Toshiba (“PC Market Still Strong in Q4 With Solid Growth Across Regions.”(X-bit. “declining average selling prices”(X-bit. 17). However. According to IDC”. but there is no guarantee that the Company will be able to extend or renew these agreements on similar favourable terms. Apple still remains in that industry. DRAM and LCDs at favourable pricing. Considering this. HP. however. 2009). NAND flash memory. Entry Barriers are so high that threat of new entrants entering the market is low. Acer. 5 . Lenovo and Apple’s unit sales decreased only 5% year-over-year.The structure of the PC industry Now that we have discussed the theory we can apply it to the case as to determine the structure of the PC industry. Producers continue to lower their prices to try and attract new customers.Needless to say. This is a large barrier that makes sure that new entrants cannot easily start a business. P. their collective ASP dropped 13%. These days. “Combined. Apple’s target includes people who have special demands for a computer. normal households. Five Force Analysis Suppliers force ” The Company has entered into certain agreements for the supply of key components including. in the publishing industry. but not limited to.

2008). For example. Apple is facing three aspects of conflict in the Personal Computer industry. 6 . c) Software Apple provides software for Mac OS. Final Cut Studio 2 – Adobe Creative Suite 4 Production Premium.6% share in global personal computer market (“PC Market Still Strong in Q4 With Solid Growth Across Regions. Industry competitors force “Combined. Moreover.”(X-bit. Apple’s computer used to play a role as digital creative tool. According to IDC”. Adobe Dreamweaver. their computers lose their attractiveness and Apple would lose even more of its market share. other software producers have reached same level and these software programs can be used on multiple operation systems and competition has occurred. Lenovo and Apple’s unit sales decreased only 5% year-over-year. b) Operating System Mac OSX has minor share comparing to Windows OS. In 2007. the same is true the other way around. HP. Some important applications do not support Mac OSX. If Apple could not find a way to create differentiation that attracts customers in this highly competitive market. Dell. their collective ASP dropped 13%. two strong forces could be found: a strong decrease is price and severe competitive environment in PC industry. flicker. iWork 08 – Microsoft office. Apple had only 2. and Logic Studio – DTM software. Thus in this market there are a number of substitutes which have an influence on the sales of each producer. Considering this output of five force analysis. iLife 08 – Blog. a) PC hardware Needless to say. and picasa. however. Are the dynamics in this industry favourable or problematic for Apple? They are problematic as Apple focuses on keeping its computers unique. means that there is nothing we can only do with Apple’s computer. causing an 18% decline in PC revenues. Especially. there are many companies which provide PC hardware. a conflict of software is important because existence of similar software as all competitive software can be used with the Windows OS. Cutting costs is required to survive in this a situation. 2009) Competition has always been fierce within the personal computer industry and this is only increasing. but now. Its strong points have been threatened by its competitors and its environment. but most of Apple’s software and the software developed by third-parties for Apple could only be used on an Apple Computer in the past.Substitutes force Other PC’s from other companies are treated as substitutes for Apple’s computers.

254) developed a conceptual model of computer expenditure that included economic resources and consumer tastes and preferences. or even prove. This is almost impossible as every person has its own desires when looking for a PC. situation we are not interested in the whole industry. 2008) no numerical information about sales before 2003 can be found. 258) describe that the first reason is that it can determine the attractiveness of industries for longterm profitability and the factors that determine it. 2009) and in the case about Apple (Yoffie & Slind. The determinants can be split up in two categories. 7 . Michael Porter. p. p. We use this model because it could help to determine whether there was a match between the consumer’s economic resources and tastes and preferences and the products of Apple Computers. In the case of Apple Inc. deVaney & Yen Win (2005. can be done by looking at consumers’ determinants in the purchasing process of a PC. p. 258). The second category will be difficult to research for many practical reasons. as explained by De Wit & Meyer (2004.com . is useful for two different reasons.Press Release Library. When analyzing this problem. 2004. 2008. (Yoffie & Slind. we first determine that these ‘difficulties’ are declining sales. (2008) it is clear that there is declining market share from 1980 until (approximately) 1997 where the market share stabilizes.The difficulty of Apple in the PC industry over time We continue with our second research question. 19). Because this case tries only to grasp the Apple Inc. 258) described forces that determine industry competition. Secondly the many developments in the IT industry make it very hard to find ‘comparable information’. p. A decline in sales can therefore not be shown. First of all there will be too many variables in PC’s that will have to be researched. Consumers’ determinants in the purchasing a personal computer Stahura. De Wit & Meyer (2004. why consumers prefer (and then buy) one computer (brand) over the other. or a declining market share as happened in the case of Apple Computers Inc. Consequently the theory about why Apple had so much difficulty in the PC industry must be translated to “Why did the market share of Macintoshes decline from 1980 and never rose back to a worldwide 3% market share?” The first step is to determine the market structure. On the website of Apple (Apple. The second part of the theory describes this part. why has Apple had so much difficulty within the PC industry. as it is called. This Five Forces Model. A second reason however why the Five Forces Model is useful is because it determines the relative competitive position within an industry (Wit & Meyer. despite its superior products. Another way of looking at why the market share of Apple Inc. p. The first category consists of the economic resources that a consumer has to buy a PC. declined over the years. It is harder to find information about the net Macintosh sales before 2003. The second category is the consumers’ tastes and preferences. This can show.

2008. 7). Because of these two findings it can be concluded that the supplier force within the PC industry were not really the problems that caused the decline in market share of Apple over time. In the case of Apple this doesn’t necessarily have to be a problem since Apple provides their own computers with their own operating system. p. p. This change over time could (partially) explain why Apple lost market share.  The category of operating systems is not competitive at all according to the case text (Yoffie & Slind. The Internet has made information about PC’s widely available (Yoffie & Slind. New entrants force The threat of new entrants is partly determined by the entry barriers. 2008. In the computer industry it became more difficult to enter the industry over time.We must therefore conclude that when there is no mismatch between consumers’ economic resources and Apple’s computers the problem must be a mismatch between Apple’s computers and the consumers’ tastes and preferences. The computers of Apple didn’t use very much standardized products and were in the beginning only compatible with other Apple products. It is questionable to what extent that can be true in a market where the market leader (Intel) provides more than 80% of new computer with an Intel CPU (Yoffie & Slind. In the beginning of the PC industry (1980) consumers were not very well informed about functionality etc. Perhaps people found out that comparable products were cheaper and/or better. This has been the result of multiple reasons the most important being that Personal Computer components became more standardized over time (Yoffie & Slind. 2008. Thus lowering the prices of computers. This resulted in easier access to the products and a decline in price of components (Yoffie & Slind. 9). this made it difficult for new companies to enter the market. With products being standardized there costs of components were driven down through economies of scale.  Microprocessors are said to be widely available at highly competitive prices. 2008. Buyers’ force The buyer’s force has changed over time. The difficulty of Apple in the PC industry over time – Analysis Five Forces Model Suppliers force The case text by Yoffie & Slind (2008. 2008. p. 7). 9) describes two different categories of suppliers. p. 8 . p. With information being more widely available people could compare functionality and prices more. 8). The first category is microprocessors and the second category is operating systems. p. 9) with only two main suppliers. Other components are real commodities and do not have market leaders with such high market shares.

something that resulted in a decline in market share. This could then have lead to a decline in market share. A second aspect is that with the development of Windows in the 1990’s (Yoffie & Slind. 10). Data that supports this trend before 2002 could not be found. 2008.656. This is an example of a higher relative price performance. 2008. are reasons for Apple’s declining market share over time. It is however mentioned that these examples could just as easily supplement PC’s. Data from 2002 – 2007 (Yoffie & Slind. over other PC’s. with its standardized components that made components cheaper through economies of scale. the main advantage of Apple’s software vanished.000 in 2002 to $10. 7). In the case of Apple Inc. Reasons for this are off course the standardizing of PC components (Yoffie & Slind. it is clear that competitor’s products became cheaper over time while Apple didn’t have the benefits of growing economies of scale. Consumers’ determinants in the purchasing a personal computer The second part of the analysis of this research question takes the consumers’ determinants into account. Cheaper prices for competing products could be a reason why consumers chose other PC’s over Apple’s Macintosh. easier distribution of computers. p.000. 6). Therefore it is not sure whether this is a negative or a positive development. What also could be counted as a substitute product are Personal Digital Assistants (PDA’s) and Smartphone’s that came to the market in the last years (Yoffie & Slind. It is said in the case that “the Windows OS combined with an Intel processor) had replaced “IBM-compatible” as the industry standard” (Yoffie & Slind. p.000. better information about computers and their prices etc. 9 . 2008. It can be concluded that despite Apple’s superior products. it must have become easier for Macintosh users to switch to alternatives.Substitutes force Within the computer industry there are many substitutes. There can be a mismatch between the economic resources of the consumer and the prices of a product and there can be a mismatch between the consumers’ tastes and preferences and the product.534. higher industry competitor’s forces. This development implies that consumers no longer prefer Apple’s software. p.000 in 2008. and perhaps hardware. the new IBM-standard. p. With lower switching costs. better specifications for an equal (or lower) price. The switching costs must probably have declined over the years. This shows that there must be a huge internal rivalry. 2008. 2008. Industry competitors force The industry has grown tremendously. p. Other examples that are described by Yoffie & Slind in the case text are “TV set-top boxes” and game consoles that could start to replace (substitute) PC’s. 17) shows that total computer net sales have grown from $4. 6). One of the main substitutes is probably newer products (PC’s) with a higher functionality.

rare. P. products and processes. 2008.’ (Bingham&Eisenhardt. According to Barney (1991) resources are ‘assets. According to Bingham and Eisenhardt. a combination of all four resources is necessary to create true lasting competitive advantage. which in turn creates causal ambiguity. we can look at what kind of resources Apple has. attributes and knowledge controlled by a firm that help improve efficiency and effectiveness. Causal ambiguity exists when competitors are unable to view certain processes and resources thus rendering these processes partially invisible. 2008. P. causal ambiguity and recognition. inimitable.3) Valuable resources are resources that for example have the ability to lower costs. and non-substitutable. Apple’s key resources Now that we now the underlying theory behind resources and their impact on competitive advantage. these rights make sure that it is illegal for competitors to copy certain resources. Property rights are for example patents and copyrights. Resources that are inimitable cannot easily be copied and non-substitutable resources are resources that do not have possible substitutes. if it is hard for competitors to imitate a company because of brand recognition. there will only be a temporary advantage or will only allow the company to temporarily compete with its competitors.’ Bingham and Eisenberg(2008. P.3) add to this by stating that resources include tangible and intangible assets and that managers can use these assets to develop valuecreating strategies. which do not include inimitable resources.5). then the company has imitable resource through recognition and resource accumulation. When there is only a combination between only two or three resources. Recognition of a brand and the building of resources are done over a large span of time. The deployment of these resources is also important as a correct deployment can create a competitive advantage. Inimitable resources are the most important of the four resources as they allow a company to be different from its competitors. Does Apple possess any resources that provide it with a sustainable competitive advantage in the PC business? Resources To answer this question it is imperative to first define the meaning of resources. This can be done through the combinations of resources that are ‘valuable.Sustainability of competitive advantage in the PC industry This brings us to our final question. Rare resources are resources that are unique or relatively scarce among companies within a business sector. but that 10 . property rights. Imitable resources can be created in three ways. According to Apple’s marketing department it is important that Apple computers differentiate from other computers because of the ‘attractive Apple design factors’ (Yoffie&Slind.

This can be viewed as a valuable resource and imitable resources as some of these design factors are protected by property rights and thus competitors cannot copy these factors. but quality increases price. like keyboards. Because Apple is now so well known for its quality products and distinctive style it is difficult for competitors to copy these products with the same success. Another Key resource are the apple stores. However it does seem that Apple’s PC Business does currently have sustainable growth. This is a problem for Apple as its high quality products are more expensive than computers from other companies. ‘19% of total revenues in 2008’ (Yoffie&Slind. The other part of the growth can be attributed to the changes Steve Jobs implemented in recent years including restructuring of Apple and improving the image of Apple. As Apple was created during the 1980’s it has had a long time to develop its brand and accumulate resources. Currently Apple’s share in the PC business is relatively small. As the PC industry and the components within them have been largely standardized it is difficult to obtain rare resources. Do these resources provide Apple with a sustainable competitive advantage in the PC business? The problem with Apple and every other PC producer is that none have rare resources as the parts used in building PC’s are largely standardized. Another problem is that there is always a substitute for a certain PC.P. which has been extremely successful due to products like iPod and iTunes and thus increase the interest in Apple products including the Macintosh computers. Non-substitutable resources are also limited as the products mainly need to have the same functions. thus it can be concluded that they do not currently posses as sustainable competitive advantage and the current resources are not enough to create a sustainable competitive advantage. Part of this growth can be attributed to the Halo effect of the i Brand. Thus companies need to largely rely on brand name and quality. these stores are valuable resources as they create quite some revenues.2008.6). Sustainability Now that we know what Apple’s resources are we can answer the question.they also function with other non Apple computer products. So currently Apple has sustainable growth and if this growth continues it can change into competitive advantage. 11 . Brand recognition and the building of resources is another imitable resource that is a key resource for Apple.

facts will be simplified and will lose their detail. brand recognition and the Apple Stores. Apple Stores can also be used to further enhance the brand recognition and offer Apple PC’s. This can be explained by a changing standard from Apple’s OS (Operating System) standard towards the standard of an Intel CPU with Windows’ OS. Apple could not benefit from these declining costs because of its special PC structure. with special components. Brand recognition must be used to rebuild market share that is partly based on this brand recognition. These differentiated products can be patented and protected. For example in Porter’s five forces model.Strategic advice Apple could build up its market share by using its resources more effectively. Furthermore distribution of PC’s became easy and information about PC’s was more widespread than it was before. Apple has lost a significant part of its market share over time. This made it easier for consumers to compare functionality and prices of PC’s. The resources are the creativity to differentiate itself. Conclusion and Reflection From our analysis and research we can derive the following: despite superior products. However Apple does not possess a lot of resources that could provide a sustainable competitive advantage. Furthermore. the model has split reality into five rough pieces. However. This recognition has been enhanced by the i-Brand that has emerged in the last decade. Another option to regain market share would be to lower the prices of the PC’s and at the same time try and retain the quality of the products as this is currently one of the larger problems Apple faces as its competitors all have cheaper products. This was supported by the standardization of PC components. but all theories. 12 . in the process of trying to explain these phenomenons to others. when in reality this is not so simple and there would be more forces at work in shaping a business and the surrounding market. the high competition has been a problem. But without simplifying these theories and models it would become difficult to implement these theories. concepts and models were developed to explain and describe certain phenomenon. The Theories we used to develop our conclusions had their uses.

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