Introduction

Apple Computers 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 organi ation that is very much a representation of its leader, !teven "o#s. 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 "o#s was not a part of the organi ation. Apple reached a point where many thought they would not survive. $hen as%ed in late &''( what "o#s should do as head of Apple, )ell *nc.+s ,)-../ then-C-0 1ichael !. )ell said at an investor conference2 3*+d shut it down and give the money #ac% to the shareholders.4 ,5urrows, 6rover, and 6reen/. $ell, times changed. .ess than &0 years later, 5usiness $ee% ran%ed Apple as the top performer in its 7008 5usiness $ee% 90. Apple attri#utes their recent success to ro#ust sales of i:od music players ,;7 million in 7008/. They are optimistic a#out the economies of scope with media giants, such as )isney and :ixar. Apple rarely introduces a new type of product. Thus, instead of #eing the pioneer, they are an expert <second mover4 #y refining existing products. :orta#le music players and note#oo% computers are examples. Apple increases the appeal of these products #y ma%ing them stylish and more functional. They now appear poised to ma%e significant strides in the home computer mar%et and to creating a total digital lifestyle where#y the home is a multimedia hu#.

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Review of Literature

!teve "o#s and !teve $o nia% founded Apple on April &, &'(;. The two !teves, "o#s and $o ,as he is commonly referred to = see wo .org/, have personalities that persist throughout Apples products, even today. "o#s was the consummate salesperson and visionary while $o was the in>uisitive technical genius. $o developed his own homemade computer and "o#s saw its commercial potential. After selling 90 Apple * computer %its to :aul Terrells 5yte !hop in 1ountain ?iew, CA, "o#s and $o sought financing to sell their improved version, the Apple **. They found their financier in 1i%e 1ar%%ula, who in turn hired 1ichael !cott to #e C-0. The company introduced the Apple ** on April &(, &'((, at the same time Commodore released their :-T computer. 0nce the Apple ** came with ?isicalc, the progenitor of the modern spreadsheet program, sales increased dramatically. *n &'(', Apple initiated three pro@ects in order to stay ahead of the competition2 &/ the Apple *** = their #usiness oriented machine, 7/ the .isa = the planned successor to the Apple ***, and 3/ 1acintosh. *n &'80, the company released the Apple *** to the pu#lic and was a commercial flop. *t was too expensive and had several design flaws that made for less-thanstellar >uality. 0ne design flaw was a lac% of cooling fans, which allowed chips to overheat. *n late &'80, Apple went pu#lic, ma%ing the two !teves and 1ar%%ula wealthy = to the tune of nine figures. 5y &'8&, the Apple *** was not selling well and !cott infamously fired A0 people on Be# 79 ,<5lac% $ednesday4/. !cotts direct management style conflicted with the culture "o#s and 1ar%%ula preferred, and !cott resigned in "uly. 1ar%%ula stepped into his position as C-0. *n August &'8&, *51 released their :C. Cnimpressed and unafraid, Apple welcomed *51 to
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the :C mar%et with a slightly smug full-page ad in the $all !treet "ournal. *t would not #e long #efore *51s :C dominated the mar%et. The Derox Alto was the inspiration for Apples .isa. Apple employees were a#le to examine the Alto in exchange for allowing Derox to invest in Apple #efore Apples initial pu#lic offering ,*:0/. Apple released the .isa in "anuary &'83 and was nota#le for #eing the first computer sold to the pu#lic that utili ed a 6raphic Cser *nterface ,6C*/. Cnfortunately, the .isa was not compati#le with existing computers, and therefore came #undled <with everything and a list price to match.4 At E',''9 ,over E7&,000 in 7009 dollars/, the .isa missed its target mar%et #y a wide margin. "o#s attempted to control the .isa pro@ect. !cott, unimpressed with the performance of "o#s on the Apple *** pro@ect, had "o#s head up the dog-and-pony show for the pending *:0. "o#s, loo%ing for a pro@ect to lead, inserted himself into the 1acintosh development team. Csing his considera#le influence, "o#s was a#le to procure the resources to produce a computer that was faster than .isa, used a 6C*, had a mouse, and sold for Fth of .isas price. Apple introduced the 1acintosh with great fanfare during the &'8A !uper 5owl. The 0rwellian-themed commercial ,directed #y Gidley !cott, of HAlien fame/ portrayed *51 as 5ig 5rother and em#odied 1acintosh and Apple as freedom-see%ing individuals #rea%ing away from this oppressive regime.The commercial was largely successful and sales for the 1ac started strong. Iowever, 1ac sales later faded. "ohn !culley left :epsiCo to @oin Apple in April &'83. Ie was famous for engineering the <:epsi Challenge4, in which #linded testers tasted #oth Co%e and :epsi to unveil the Htruth of the taste of :epsi. *n response to lagging 1ac sales, !culley contrived the HTest )rive a 1acintosh campaign. *n this promotion, prospective users could ta%e home a 1acintosh with only a refunda#le deposit on their credit card. $hile lauded #y the pu#lic and the advertising industry, this campaign was a
3

#urden on dealers and significantly impeded the availa#ility of 1acs to serious #uyers. *n &'89, Apple tried to have lightening stri%e twice with their H.emmings commercial during the !uper 5owl. *n what was #ecoming Apples typical patroni ing fashion, this commercial insulted current :C users #y portraying them as witless lemmings, unthin%ingly doing harm to themselves. Although "o#s attempted to overthrow !culley, the #oard #ac%ed !culley. "o#s left Apple to form JeDT computer. After "o#s left in &'89, sales of the 1ac <exploded when Apples .aser$riter met Aldus :age1a%er.4 Apple dominated the des%top pu#lishing mar%et for years to come. Cnder !culley, Apple grew from E;00 million in annual sales to E8 #illion in annual sales #y &''3. Apple introduced 1ac :orta#les in &'8' and the first :ower5oo%s in &''&. 5y &''7, :C competition ate into Apples margins and earnings were falling. !culley was under pressure to have Apple produce another #rea%out product. Ie focused his energy on the Jewton = Apples introduction of the :ersonal )igital Assistant ,:)A/. )espite !culley generating su#stantial demand for Jewton, it did not live up to the hype due to it #eing severely underdeveloped. !culley resigned in &''3 and 1ichael !pindler replaced him. !pindler spent most of his time and energies on regaining profita#ility, with the end goal of finding a #uyer for Apple. 0ver the next several years, !pindler shopped Apple to !un 1icrosystems, -astman Koda%, ATLT, and *51. 1eanwhile, Apple was una#le to meet the growing demand for its products due to supplier pro#lems and faulty demand predictions. To add insult to in@ury, 1icrosoft released $indows '9 with great fanfare in &''9. After significant >uarterly losses in &'';, the #oard replaced !pindler with )r. 6il Amelio, C-0 of Jational !emiconductor. )r. Amelio tried to #ring Apple #ac% to #asics, simplifying the product lines and restructuring the company. 0ne of Apples most pressing issues at the time was releasing their next generation operating system ,code named <Copland4/ to
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compete with $indows '9.

Amelio and his technology officers found that

Copland was so #ehind schedule that they loo%ed outside the company to purchase a new 0!. Cltimately, and somewhat ironically, they decided to purchase JeDT computer from "o#s. Jaturally, Apple welcomed "o#s #ac% into the fold. The #oard #ecame increasingly impatient with Amelio due to sales not re#ounding >uic%ly enough. Apple #ought out Amelios contract after @ust & M years on the @o#. "o#s eventually claimed the C-0 position. Then, he cleaned house #y revamping the #oard of directors and even replacing 1i%e 1ar%%ula ,who had #een with the company since the #eginning/. "o#s simultaneously put an end to the fledgling clone licensing agreements ,which created a few 1ac clones/ and entered into cross-licensing agreements with 1icrosoft. 0n 1ay ;, &''8, Apple introduced the new i1ac, a product so secret that most Apple employees had never heard of it. The new i1ac was a runaway success with its translucent case, all-inone architecture, and ease of use. *t #rought Apple to a new mar%et of users = those who had never owned a computer #efore. "o#s further simplified the product lines into four >uadrants along two axes2 )es%top and :orta#le on one, :rofessional and Consumer on the other. Apple completed the matrix with the introduction of the consumer-#ased i5oo% in &'''. The year 700& was an important year for consumers of Apple products. Apple opened their first 79 retail stores ,totaling &;3 stores in A countries as of 1ay 700;/. *n !eptem#er 700&, Apple introduced the new i1ac featuring a screen on a swivel.The new i:ods ,porta#le music players/ were a tremendous success. Apple sold so many that Apples dependence on 1ac sales was significantly less. This was no small feat considering that the 700& i1ac #ecame Apples #est-selling product <#y a long shot4. Apple offered iTunes ,a free application/ to help their consumers organi e music on i:ods and 1acs.

*n 7003, Apple expanded iTunes #y &/ opening the iTunes music store to allow 1ac users to purchase music online and 7/ expanding iTunes to $indows users. !ales of i:ods s%yroc%eted and currently provide the #ul% of product sales to Apple. *n 7009, Apple announced that it would start using *ntel-#ased chips to run 1acintosh computers. *n April 700;, Apple announced 5oot Camp, which allows users of *ntel-#ased 1acs to #oot either 1ac or $indows 0!. This functionality allows users who may need #oth 0!s to own @ust one machine to run #oth, al#eit not simultaneously.

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Vision Statement

31an is the creator of change in this world. As such he should #e a#ove systems and structures, and not su#ordinate to them.3 Explanation of vision Apple lives this vision through the technologies it develops for consumers and corporations. *t strives to ma%e its customers masters of the products they have #ought. Apple doesn+t simply ma%e a statement. *t lives it #y ensuring that its employees understand the vision and strive to reach it. *t has put systems in place to ena#le smooth customer interaction. *t has put o#@ectives in place to continuously move forwardN implemented strategies to fulfil these o#@ectivesN and ensured that the right mar%eting, financial and operational structures are in place to apply the strategies. Mission Statement <Apple is committed to #ringing the #est personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and internet offerings4

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The PC Industry
$e can glean *nsight into the history and composition of the :C *ndustry from its eponymous title. *n the late &'(0s, as $o nia% and "o#s were starting Apple computer, personal computers were an emerging product. The following chart ,Geimer/ gives an overall view of the ma@or mar%et players since the mid-&'(0s.
PC Share of Market
100% 90% 80% Share of Market 70% 60% 50% 40% 30% 20% 10% 0%
ar 76 80 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 78 Ye 19 19 19 19 19 82

IBM SOM Apple II SOM Mac SOM Amiga SOM C64 SOM TRS 80 SOM

5y &'83, the mar%et share of the Apple ** fell to 8O while the :C had 7;O. 1ar%et share of 1acintosh pea%ed at slightly more than &0O in the early &''0s and has since tapered to #etween 7-3O. The *51 :C and its clones #ecame the standard due to the success of the open nature of the :C. This allows product developers to offer vastly more products for the platform. !ome argue that not licensing the 1ac 0! was a mista%e. 5ill 6ates and 1icrosoft were encouraging Apple to license their 0! in the early &'80s, #ecause they were developing software for Apple and had much riding on the success of the company.

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$hen Apple did not license, 1icrosoft #egan developing their operating system, $indows. The nline Music Industry

$hile Apple clearly dominates the online music industry, the #attle for domination is not over. Although digital music sales are growing rapidly, the Gecording *ndustry Association of America ,G*AA/ states that digital sales account for only AO of all music sales. ,5orland/ Analysts at Borrester ,5artiromo/ and 6artner ,5runo/ validate this. Apples sales are #etween ;;O and (9O of downloads and 80O of music players. ,5runo/ Apple is part to a suit alleging monopolistic practices concerning their mar%et share dominance of players and downloads. The other players in the download mar%et are ,the revised/ Japster, Pahoo 1usic, Ghapsody, and illegitimate file-sharing services. :orta#le music players competing with the i:od include those made #y Creative, !amsung, iGiver, and !ony. A ma@or point of contention #etween these services and player manufacturers is the control of a variety of incompati#le )igital Gights 1anagement ,)G1/ schemes. The !uture of "pple :ersonal Computers = A !hift in !trategy Apple has historically ta%en a far different path than the traditional $indows and *ntel com#ination. 1icrosoft provides the $indows operating system to separate downstream hardware producers such as )ell. Apple vertically integrated #oth the operating system software and hardware completely under Apple. A consumer running 1icrosoft $indows can choose from a myriad of systems #ased on the *ntel processor, while a consumer running Apples 0! D must purchase Apple hardware.

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Apple is ad@usting this strategy #y migrating their microprocessors from *51 and 1otorola :ower:C to *ntel. Analysts #elieve that the *ntel-#ased 1acintosh may #e a#le to run 1icrosoft $indows applications #y the end of 700;. ,5urrows/ *n addition to switching processors, Apple positioned their computers as an immediate option for the traditional 1icrosoft $indows user. $ith Apple 5oot Camp, users may now use 1ac 0! D or $indows on an Apple computer. ,!utherland/.5y allowing users to run $indows on an *ntel 1ac, Apple reduced the switching costs for traditional :C users. Apple may steal away customers that are willing to pay a premium for a system that runs #oth $indows and 1ac 0! D. Apple continues to retain a strategic option to license its technology to clone ma%ers such as )ell. :ast attempts at licensing Apple technology ,to *51, 6ateway, and others/ failed on accord of Apples rigid demands. 1any technology leaders ,such as a &'89 letter #y 5ill 6ates to Apple C-0 "ohn !culley/ critici ed Apple for %eeping a closed architecture. Apple cofounder !teve $o nia% critici es this strategy, <$e had the most #eautiful operating system, #ut to get it you had to #uy our hardware at twice the price. That was a mista%e.4$hether Apple would #e willing to pursue this reversal of vertical integration is unclear. Although such a move would canni#ali e a portion of Apples own hardware sales, it would also provide royalty-#ased revenue that could approach E& #illion annually. ,5urrows/ "o#s traditionally sided against licensing Apple technology. Ie referred to 1ac clone producers as <leeches4 and he personally %illed :ower Computing ,a 1ac clone producer/ #y terminating their license in &''(.

"pple in the Livin# Room

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Apples i:od and iTunes are a powerful com#ination that fosters a networ% style of increasing returns. ,5arney, &7A/ 5y selling i:ods, Apple increases the consumer demand for music from iTunes. 5y placing more musical choices on iTunes ,including less popular songs that appeal to niche audiences/, there is more demand for i:ods. Apple had (0O of the legal music download mar%et in early 7009. ,Poffie/ Apple is shooting for the digital living room of the future. Bor example, Apple @ust released a <#oom #ox4 porta#le version of the i:od. This i:od ,the i:od Ii-Bi/ comes with a remote control. *nstead of forming a strategic alliance, Apple engineered the i:od Ii-Bi and designed it with high-fidelity features. ,5urrows/ Apple is clearly trying to develop a stronger core competency in the entertainment area.

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Strate#ic "lliances and Entertainment

"o#s had the early strategic vision to complement computing with movie entertainment. After founding JeDT, he personally ac>uired a ma@ority interest in the young movie company :ixar in Be#ruary &'8;. "o#s went on to invest F of his personal wealth into :ixar. *n &''9, :ixar solidified its position within animated movies with the de#ut of Toy !tory. 6rossing E398 million worldwide, it #ecame the 3rd-largest grossing animated movie in history. After this success, "o#s too% :ixar pu#lic and negotiated far #etter terms with )isney. .ater successes included Toy Story 2, 1onsters *nc., and Binding Jemo. The alliance #etween :ixar and )isney has tremendous potential for economies of scope. As C-0 of Apple and )isneys largest shareholder, "o#s is the strategic lin% #etween )isney, Apple, and :ixar. 0pportunities include com#ining the animated movie expertise of )isney and :ixar, as well as sharing the content of )isneys A5C or -!:J networ%s over Apples digital offerings. ,5urrows, 6rover, and 6reen/ A current example of the fusion #etween )isney, "o#s, Apple, and technology is video on the i:od. )isneys )esperate Iousewives was one of the first television programs availa#le for purchase and download to the newer video-ena#led i:od. There are concerns a#out whether these synergies will come to fruition. There are fears that the personality and style of "o#s may conflict with )isney, and that )isney C-0 *ger could #e <Amelioed4 -- driven out of office #y "o#s in a manner similar to how "o#s drove Amelio out of the C-0 post at Apple. ,5urrows, 6rover, and 6reen/.

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External "analysis
Technolo#ical Environment 5rand Awareness = !tyle at a :remium Apples products are trendy and stylish. After "o#s returned in &''(, Apple retained designer "onathan *ve to differentiate their computers from the typical #eige #ox. *ves design of the i1ac included clear colorful cases that distinguished Apple computers. Apples i:od ,with the trademar% white ear #uds and simple trac% wheel/ commands a &9O-70O premium over other 1:3 players. Apple and :ixar limit the num#er of computer products and movies that they sell. :roduct differentiation with focused >uality and style also extend to the "o#s :ixar = <:ixar+s executives focus on ma%ing sure there are no H5 teams, that every movie gets the #est efforts of :ixar+s #rainy staff of animators, storytellers, and technologists.4 ,5urrows, 6rover, and 6reen/ Apple positions its 1acintosh computers as higher >uality and higher price. I:, )ell, and other :C manufacturers are pricing many systems under the E&,000 threshold. <Apple is struggling to meet demand for its new 1ac5oo% :ro laptop despite a E&,'00 price tag that is nearly twice that of garden-variety rivals.4 Apple has only recently entered the low-end ,#elow E900/ consumer mar%et with the 1ac 1ini. Although the 1ac 1ini is a #ase model with few features, it comes encased in a very small and distinctive pac%age. Apple portrays this computer as <!mall is 5eautiful4. ,Apple/ .i%ewise, the i:od !huffle was Apples first entry into the lower-end ,E&00 range/ of flash-memory-#ased porta#le music players.

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Interopera$ility Although Apple competes directly with 1icrosoft for operating systems, the release of iTunes for $indows in 7007 was a %ey strategic move. This decision expanded the potential customer #ase to nearly all personal computer owners, even though Apple only has 7O-3O of all personal computer sales. Conversely, Apple depends on 1icrosoft for a version of 1icrosoft 0ffice. As the most widely used office suite of applications, 1acintosh users rely on 0ffice to correspond with companies that standardi ed on $indows. This is from a strategic alliance Apples iTunes #etween Apple and 1icrosoft after "o#s returned in &''(.

service has a technological hoo% ,asset specificity/ to Apples i:od. Although versions of iTunes exist for #oth Apple and 1icrosoft operating systems, the iTunes AAC file format prevents other porta#le music players ,such as iGiver or !amsung/ from playing purchased songs. Technolo#y and the %i#ital Lifestyle Apple not only dominates the music player mar%et, its i.ife suite provides consumers with easy-to-use software for music and video composition. $ith <podcast4 a household word, Apples 6arage 5and application ma%es the recording of podcasts and music very easy. Re#ulatory Environment $hile introducing new technologies, there is a persistent threat of legal action #y competitors. Bor example, Apple sued 1icrosoft in &'88 ,settled in &''( for an undisclosed amount/ for perceived similarities #etween 1icrosoft $indows and 1acintosh audiovisual wor%s.1icrosoft has generally #een the focus for government antitrust charges ,such as C.!. v. 1icrosoft/ ,C! )0", 700;/. 5oth federal and state governments assert that 1icrosofts dominance #loc%ed fair
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competition within the software industry. This is an advantage for Apple, #ecause its operating systems are a via#le su#stitute for $indows. of mar%et monopoly and a#use. Burthermore, 1icrosofts continued support for 0ffice for 1acintosh reduces the perceived level 1anufacturers will continue to trespass on Apples intellectual property. Bor example, the company tex' released an open source music program called xtunes that was very similar to iTunes. *n 7007, Apple too% legal action against tex', who then altered the programme and renamed it sumi. .egal threats can surface from somewhat unusual sources. Apple Corps .td. is the .ondon-#ased company that owns the rights to the music of the 5eatles. :aul 1cCartney and Gingo !tarr recently sued Apple over the use of the Apple logo in iTunes, claiming that it violated Apples agreement not to produce music under an apple-#ased logo. Gesearch and development is a %ey component to Apples sustained competitive advantage. Apple is currently ta%ing legal action against several popular technical we# sites for releasing proprietary product research. !ites such as Gelease of appleinsider.com have allegedly posted ver#atim content from documents protected #y employee non-disclosure agreements. ,1cCullagh/ rival products. critical insider information could give Apples competitors a @ump in producing

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Industry "nalysis &sin# Porter's !ive !orces Model

Apple operates in two primary industries2 Computing - Iardware and !oftware )elivery of -ntertainment and 1edia Apple has always #een under intense competition within the computer, software, and entertainment industries. <.oo%ing to 7009...-very time that Apple had @umped into the lead in a product category during the past two decades, it had had difficulty in sustaining its leadership position.4 $e use :orters Bive Borces 1odel to understand why Apples industries are so competitive. Bigure 2 :orters Bive Borces 1odel

Threat of Jew -ntrants 5argaini ng power of !upplier Level of Threat in an Industry 5argaining power of 5uyers

Threat of !u#stitutes

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Bigure 2 !ummary of *ndustry Threats ,Computer ->uipment and -ntertainment )istri#ution/ Type and r#ani(ation Examples Severity of Threat Entry ) ?eri on !treaming audio and video with ? CA!T. *i#h Threat Ama on 0n demand online services to purchase music ,similar to iTunes/. 6oogle They ma%e everything. The <Jext Jew entrants with disruptive technology. 6oogle4 Rivalry ) 1icrosoft $indows 0perating !ystem, $indows 1edia *i#h :layer for playing music and video. Threat .inux Competition to 1ac 0! D 0perating !ystem. Japster, 0nline music sources = alternatives to iTunes Ghapsody 1usic !tore. )ell, I:, Alternate sources for computer hardware. .enovo iGiver, !mall, stylish 1:3 :layers. !amsung, Creative )ream$or%s Animated movies. PouTu#e.com 0nline video. Su$stitutes D1, !irius !atellite Gadio for music. ) Moderate Threat D5ox, :!7 -ntertainment 1edia, 1edia and 1usic. ?arious *nternet !treaming Gadio and :odcasts. 1usic C)s, Alternative means to ac>uire music. )?)-Audio and !uperAudio C) 5roadcast, Alternative sources for video. Ca#le,

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!atellite, JetBlix, Ti?o, Theatres Suppliers 1otorola, ) *i#h *51, *ntel, Threat !amsung 1icrosoft The 5ig Bive 516, -1*, !ony, Cniversal, and $arner )isney, A5C, J5C, C5!, Box, :ixar, !ony +uyers ) Consumers and Moderate *llegal peer-toThreat peer file sharing )istri#utors

!uppliers of :rocessors and computer memory. !trategic Alliance Q !upplier of 0ffice for 1ac. !ources of music. $ill they raise prices and #rea% the dollar per song modelR !ome in the record industry resent Apples distri#ution model. <Apple reaps #illions from selling its hit music player, #ut there are sparse profits from the songs #eing sold over the Jet.4 ,5urrows, 6rover, and 6reen/ !uppliers of Television and 1ovies. $ill they sign exclusive contracts with other online servicesR Jote that this threat is reduced for )isney Q :ixar. Consumers share music using networ%s without paying for music. peer-to-peer

Apple retailers may pressure for lower prices or #etter terms. Bor example, the release of the Apple !tore in 700& <infuriated longtime independent Apple retailers that didnt appreciate Cupertino canni#ali ing their sales.4 ,.in mayer, 300/ Consumer Consumers or #usinesses may reduce spending on Attitudes and personal computers or non-essential ,potentially 5ehaviors high elasticity of demand/ music players if they fear economic downturns. Consumer Consumers and #usinesses may continue to use Gefresh Cycles previous-model i:ods and 1acs rather than upgrade to current i:ods, i1acs, or 0!

7&

The total industry threat for the industry space that Apple occupies ,computer e>uipment and distri#ution of entertainment/ is a high threat industry. Apple must continue to pursue product differentiation ,i.e. the style and ease-of-use of an i:od/ and economies of scope ,i.e. offering A5C television shows on iTunes/ to maintain their sustained competitive advantage in this industry. ,hich External Threats are Most Si#nificant Computer Iardware and !oftware2 0pen !ource software such as the .inux 0perating !ystem and 0pen 0ffice applications threaten #oth Apple and 1icrosoft. China. 1usic :roducts2 1a@or online retailers such as Ama on are considering entry into the online music mar%et. $ith a wide internet presence and a household name, Ama on could present a formida#le challenge to Apple. *f the ma@or record la#els ,Cniversal, !ony 516, -1*, and $arner/ negotiate #etter terms with new competitors to iTunes, Apple may #e una#le to provide some of the music content that they currently offer. The ma@or music la#els disli%e Apples dollar per song pricing. They would prefer to earn higher profits with <varia#le pricing4. ,$ingfield/ $ith varia#le pricing, the most popular songs would #e greater than E&, and less popular songs would #e less than E&. Although the la#els recently renewed their contracts with Apple, there may #e provisions that allow future changes in the pricing model. ,$ingfield and !mith/ !uppliers2 The recent shift to *ntel processors could present a significant threat to Apple. $ith only two companies ,*ntel and A1)/ producing *ntelThe low ,often, free/ cost of the software may allow it to overta%e Apple and 1icrosoft, especially in developing mar%ets such as

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compati#le processors, there is a strong potential for tacit collusion and oligopoly power #etween these suppliers. Apple purchasing must now directly compete with I:, .enovo, and )ell. *f shortages or exclusive agreements materiali e, Apple could face pro#lems with o#taining raw materials. Apple should consider additional sources such as Advanced 1icro )evices ,A1)/. Bigure2 C:C 1ar%et !hare

"dditional External Threats !ecurity Apple software, li%e all large software products, has security vulnera#ilities that hac%ers may exploit. A significant exploitation in the future could damage many #usinesses and households using Apple computers. This would affect future

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customer purchasing decisions. Apple en@oys a competitive advantage, #ecause their 0! D is mature and sta#le due to its #asis on 5!) Cnix. *n fact, <computer security fol%s #ac% at B5* IS use 1acs running 0! D4. Iowever, the increased use of Apple computers is prompting hac%ers to target the platform. *n Be#ruary 700;, there was documentation of the first %nown Apple 0! D worm. 5y using iChat instant messaging, it spreads to other users and deletes files from their 1ac computers. *f 1ac 0! D #ecomes as wide of a target as $indows, Apples perceived differentiation as the more secure platform may disappear.

Vertical Inte#ration of Competitors !ony is an example of a competitor with a uni>ue position against Apple. !ony 1usic supplies Apple with many of the songs for iTunes. !ony also creates a version of the $al%man porta#le music player that is a direct competitor to the i:od. !ony is attempting to vertically integrate forward directly to the music #uyer. !ony integrated their music system ,1ora/ into the !ony $al%man. !ony is exclusively distri#uting certain songs on 1ora. ,Iall/ 1ora currently targets "apanese consumers. *f !ony can gain additional momentum ,such as colla#orating with other record la#els/, their service could present a formida#le challenge to iTunes in additional mar%ets.

7A

Value Chain "nalysis

To determine where Apple developed distinctive capa#ilities, :orters generic value chain model provides a systematic framewor% for identifying Apples utili ation of resources. !ervices. Technolo#y and Product %esi#n This component represents the true core ,no pun intended/ of Apples capa#ility. Brom #eing the first platform to run an electronic spreadsheet ,?isiCalc on the Apple ** :lus/ to the first to esta#lish a <digital lifestyle4 hu# ,the 1acintosh product lines/, Apples history is rich with cutting-edge technology development. Apple drives to #e the #est, no simply the first. The Apple operating system is universally regarded as more sta#le and relia#le than $indows, while the des%top pu#lishing software #undles ,i1ovie, i:hoto, iTunes, etc./ are the most comprehensive availa#le to end users. *ves #est summari es the entrepreneurial culture within Apple #y saying that <its very easy to #e different, #ut very difficult to #e #etter.4 Production 5ecause Apple had long refused to license its operating system to external entities, the #undled pac%ages of Apple-developed hardware and software #ecame the cornerstone of Apples production process. Apple achieved unparalleled performance via ;A-#it architecture, integrated distinctive styling with the multicolored translucent i1ac cases, and redefined intuitive operation with the i:od. :rimary activities for Apple include Technology and :roduct )esign, :roduction, !ales and 1ar%eting, Customer !ervice, and .egal

79

$hile every product introduction has not #een a success ,.isa, Jewton, etc./, Apple treats component production as a natural extension of the design process. Sales and Mar-etin# $e could simply title this section <!teve "o#s4. !ince his return as C-0 in &''(, "o#s personally unveils all new product introductions, reviews corresponding mar%eting campaigns, and approves new product development guidelines. *n a departure from their tur#ulent history, "o#s <entered into patent cross-licensing and technology agreements with 1icrosoft.4 ,.in mayer, 7'0/ After years of unimpressive mar%et share growth and canni#ali ation of a loyal consumer #ase, the door to the expansive :C mar%et was now more accessi#le to Apple than ever #efore. Apple continued to command a mar%et premium for producing a <#etter mousetrap4 throughout its history. Customer Service Iow has Apple retained su#stantial cash reserves during the explosive growth and dominance of :Cs worldwideR Apple created a virtual love affair with their customer #ase #y delivering technically superior products ,i:ods vs. other 1:3 players, 1acs vs. :Cs, 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 #egins and the other ends. A perfect example of this is Apples willingness to develop software to run $indows D: on its new *ntel-#ased i1ac and then post it online free to i1ac users. ,$ingfield/ *n such an environment, customer service merely #ecomes the reali ation of receiving a little more than expected.Although Apple employs many resources and capa#ilities to support their primary activities ,human resources, supply procurement, etc./, the most strategically relevant would #e .egal !ervices.

7;

Le#al Services *n a mar%et climate of constant change and innovation, it is inevita#le that the drive to expand product and service offerings will su#@ect Apple to patent and copyright infringement claims. The dispute over the Apple logo on its iTunes 1usic !tore, for example, continues despite a previously reached settlement with 5eatles Apple Corps .td. in &''&. ,)ow "ones Jewswires/ $hile such litigation as 1icrosofts $indows infringement on 1ac 0! patents has #een highly pu#lici ed, use of legal guidance to drive ac>uisition versus internal development strategies for such products as 6arage5and and i1usic have proven highly valua#le. *ntellectual property is sacred to Apple. There was a recent attempt to uncover the identities of internal <sources who lea%ed confidential information a#out an unreleased product to online media outlets in 7008.

7(

S, T "nalysis
Although participation in such activities may add value, they may not #e a source of competitive advantage. Cltimately, the value, rarity, inimita#ility, andQor organi ation ,?G*0/ of an activity or resource determine its sustaina#ility as a source of competitive advantage. $ithin this context, we can identify a firms strengths, wea%nesses, opportunities, and threats ,!$0T/. Stren#ths Technical savvy = :roduct lines are easy to use and sta#le. Gecent

integration with 1icrosoft products lines and *ntel processors demonstrate a#ility and willingness to adapt to a diverse customer #ase. ,1oss#erg/ !uch innovation, however, would not #e sustaina#le without a learning environment tolerant of mista%es. $hile the pure technical expertise alone is not a valua#le or rare resource, it #ecomes very costly to imitate when it exists within the socially complex, entrepreneurial culture of Apple. Binancial vitality = Cash reserves remained ro#ust and sta#le despite stagnant mar%et share growth in the computer hardware and software arenas. Apple exploited this #y resisting mar%et pressures to reduce costs, tightly integrating product pac%ages, and forming strategic alliances ,i.e. securing the #ac%ing of all ma@or music distri#utors in the support of iTunes/. 5rand loyalty = The only way that Apple could maintain the financial vitality descri#ed a#ove is via a fanatical, almost cult-li%e, affair with its customer #ase. !uch #rand loyalty is extremely costly and time-consuming to imitate. !teve "o#s = As discussed earlier, "o#s proved to #e a vital component to Apples success. )uring his a#sence ,&'89-&'';/, Apple experienced the
78

most tur#ulent ,financial and innovative/ timeline in its history. *mmediately upon his return, he replaced most of the 5oard of )irectors, pruned and focused the new product ideas, and delivered seven consecutive >uarters of positive earnings to shareholders. As such, "o#s is certainly a valua#le, rare, and hard to imitate resource that Apple fully exploits. ,ea-nesses 1ar%et share = Apple has historically #een strongest in the C! geographical and educational vertical mar%ets. $ith the educational mar%et facing tightening #udget constraints and the C! approaching a :C saturation point, Apple may need to #urn cash more >uic%ly and succum# to mar%et cost pressures on its products without a strategic innovation, integration, or divesture. !teve "o#s = Bor virtually the same reasons "o#s is a strength, he is simultaneously a wea%ness. The aggressive drive to #ring innovative visions to life was noticea#ly a#sent and painfully felt ,especially #y shareholders/ during his departure. The apparent a#sence of succession planning coupled with a lust for the limelight positioned "o#s as Apples single consciousness in the eyes of consumers and shareholders. pportunities Consumer electronics = $ith the startling success of the i:od and iTunes, Apple entered the consumer electronics mar%et. 5y expanding the iTunes concept to downloada#le mo#ile phone features and movies ,podcasts/, the door is now open to develop new and potentially profita#le strategic alliances with peripheral component manufacturers ,spea%er, home stereo, etc./ and media transmission giants ,)isney, T5!, ?eri on, etc./.

7'

 :C hardware and software mar%et growth = $ith cross-licensing of operating system platforms in place, Apple entered the high-volume #usiness environment traditionally dominated #y $indows-#ased :Cs. The introduction of *ntel-#ased processors prompted #usinesses to replace :Cs with i1acs. They did this to gain a level of sta#ility and relia#ility in their #usiness applications that :Cs failed to provide. An example is "apans Ao ora 5an% .td., who is replacing 7,300 :Cs with i1acs. ,$ingfield/ Apple must esta#lish themselves as a credi#le player in #usiness des%top applications to overcome the <des%top pu#lishing4 stereotype. Threats .egal ris%s = *n a mar%et that literally changes at the speed of thought, patent and copyright infringement ris%s remain high. As long as operating systems and support software pac%ages continue to converge and remain relatively easy to imitate, present and future lawsuits are inevita#le. The Apple records claim against iTunes remains unresolved.

Competition = This threat occurs primarily on two fronts2 hardwareQsoftware and consumer electronics.

:C

Bor the same reasons

discussed in the opportunities section, the threat of imita#ility ,cloning, pirating, etc./ increases. As relative newcomers to the consumer electronics arena, will Apple retain a competitive advantage as they diversify their offerings ,spea%ers, home entertainment systems, etc./.

30

Influx of "pple's Mac Challen#es Mis to Cope

*n the heart of large companies, data center managers are wearingly warding off a second #and of corporate renegades. The renegades are trying to #rea% down mainframe walls and #uild new applications replete with icons and pretty pictures. After finally coming to terms with the *51 microcomputer revolution, 1*! departments are now #eing as%ed to assimilate a second microcomputer standard, the 1acintosh from Apple Computer *nc. of Cupertino, Calif.$hen the machine was introduced in the mid-&'80s, most managers viewed it as a small #usiness system or a home computer.)espite the tag, 1acintoshes have wormed their way into many large corporations. Conglomerates, such as -.*. du :ont de Jemours L Co., Jorthern Telecom *nc., 6eneral -lectric Co., 1artin 1arietta Corp. and -lectronic )ata !ystems Corp., have all #lessed the 1acintosh. "ohn $ardley, a senior analyst at *nternational )ata Corp., a mar%et research firm in Bramingham, 1ass., said, 31acintoshes were initially purchased to address a specific niche. Bor example, a corporate advertising department may have used the microcomputer to produce graphic presentations.30nce other department saw the machine+s output, interest spread. Gight now, 1acintosh usage is rapidly growing in many large corporations,3 he said. Cse of the computer has progressed well #eyond the test phase and a few corporations have installed thousands of 1acintoshes. 3Gight now, our users are purchasing more 1acintoshes than *51 microcomputers,3 said 1ichael :earson, the director of technical operations at the Jew Por% )aily Jews in Jew Por%.

3&

,hat is drivin# Macintosh acceptance. !upporters agree that it is the product+s easy to use graphic interface. 30nce a user sits down and wor%s with a 1acintosh, they never go #ac% to an *51 :ersonal Computer,3 proclaimed :rice Collins, a programming manager at 6eneral -lectric Co. in 5ridgeport, Conn.The ease of use features translate into su#stantial savings for many corporations. 3$e spend much less time training 1acintosh users than we do training *51 microcomputer users,3 noted :earson at the Jew Por% )aily Jews. !tudies comparing 1acintosh and *51 microcomputer training costs found that it ta%es twice as long for an *51 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 #y Apple found the average cost of training an *51 user was E(;9 compared to E7'A for a 1acintosh user.The 1acintosh+s graphics capa#ilities also offer many middle managers their own strategic weapons in the #attle for upper management+s attention. 3An employee will use a 1acintosh to generate slides and charts for an important presentation,3 6-+s Collins explained. 3The output is far superior to anything generated on an *51 microcomputer, so other managers immediately want to produce the same >uality output. Suic%ly, use of 1acintoshes spreads through the company.3 Removin# +arriers for &sers Analysts reported that another reason for acceptance was aggressive Apple actions. 3Apple removed #arriers that corporations erected to %eep 1acintoshes out of

37

users+ hands,3 said Gichard Kollmeyer, the director of mar%eting and technical services at The !upport 6roup *nc., a $ellesley, 1ass., microcomputer reseller. 30ne of the initial concerns was the ina#ility to run 1!-)0! software on a 1acintosh. Suic%ly, Apple delivered hardware so users could run those applications.3 To date, 1acintoshes have #een relegated to personal productivity tools in most companies. 31ost users purchase a 1acintosh to more efficiently do their own wor%,3 noted 1ichael 1asterson, a microcomputer systems specialist at Arthur Poung L Co. in !an "ose, Calif. Csers are primarily wor%ing with traditional microcomputer applications, such as spreadsheet and word processing. Iowever, there are nuances in the types of applications employed #y *51 :C and 1acintosh users. "pplication Preferences *n a survey of &,7&; large companies ,each having more than 900 employees/, )ata>uest Corp., a mar%et research firm in !an "ose, Calif., reported that word processing was the 1acintosh+s most widely used application--named #y 9AO of respondents. 6raphics applications followed with A;O, and spreadsheets placed third with 38O.0n the *51 :ersonal Computer, the response was as follows2 ;9O used spreadsheetsN 9(O, word processingN and 39O, data#ase management systems. Bew of the companies that dominate the *51 microcomputer software mar%et have had much success plying 1acintosh wares. Bor example, .otus )evelopment Corp. of Cam#ridge, 1ass., and Ashton-Tate of Torrance, CAlif., have had little success in the mar%et. The most nota#le exception, 1icrosoft Corp., Gedmond, $ash., offers the three #estselling applications2 -xcel, a spreadsheetN
33

$ord, a word processing pac%ageN and $or%s, an integrated spreadsheet, word processing and data#ase application.

Apple*nsider reports on a research note from 510 analyst Keith 5achman that could have #een written for Cra y Apple GumorsTif they hadn+t gone ghost-site on us. *t turns out the success of the 1ac in recent years isn+t #ecause of 1ac 0! D, or *ntel C:Cs, or the i:od Ialo -ffectN rather, it+s #ecause 1icrosoft suc%s. 3Thus far, user satisfaction ratings for ?ista have #een wea%, and startup times for ?ista have #een %nown to #e much slower than the 1ac 0! D,3 5achman says. 3Thus, more than 90O of recent customers #uying 1acs in Apple retail stores are first-time #uyers.3

3A

$hile it+s great that the six-figure analyst pro@ects 7.A to 7.9 million 1acs sold for the >uarter @ust ended, his rationale is, well, cra y. !etting aside the image of some grandma dropping E7,;00 for a 1ac5oo% Air with !!), there+s nothing 3recent3 a#out half of 1ac #uyers in Apple !tores #eing new to the platform. *t+s #een that way since #efore ?ista was released. Burther, as the chart #y the four-figure analyst clearly shows, the surge in 1ac sales started around the time Apple transitioned to *ntel C:Cs. *ronically, one could argue that 1ac sales are rising #ecause of ?ista, #ut not in the way 5achman suggests. :rior to the release of .eopard and the discontinuation of 5oot Camp as a separate product, Apple reported huge downloads of the program that let 1ac users launch $indows ?ista very, very slowly. 5achman further expects 1ac sales to @ump around 79 percent in 700', or a#out twice the expected growth of :Cs. Apple could end up with as much as four percent worldwide mar%et share if that happens. *n the near term, 5achman, li%e @ust a#out every other analyst and Apple nerd on a message #oard, is expecting the company to get a #oost from the i:hone. *f so, it hasn+t happened yet. !ince the unveiling of the i:hone 36 at $$)C, AA:. is actually down a#out 9 percent, which is pretty good compared to some competitors in the smartphone mar%et. !ure, om#ie :A.1 is stum#ling along, down 70 percent, #ut G*11 is down nearly &0 percent. This is after the company reported record profits during the last >uarter and a couple of million new su#scri#ers. $hile the pro#lems of Apple+s competitors can #e partially #lamed on fear of the i:hone 36, the real issue is the trou#led economy. 5achman, and others, are rating AA:. as 3outperform3 with a value in excess of E700. 1ay#e, #ut you can only go so high in a down mar%et, no matter how #ad ?ista #oot times are.

39

"pple profit ma-es hu#e rise due to iPod success *n the first >uarter of 700(, more than five million i:od music players were sold. Apple+s >uarterly income has increased six-fold largely due to the success of the device. The firm+s net income raised #y a massive 930O to E7'0m compared to UA; over the same period in 7008. Gevenues rose (0O to E3.7A#n after good growth in all product categories. A num#er of approximately 9.3 million i:ods were sold over the period, which is an increase of 990O in the same period in 7008. !ales of :Cs also rose to over a million ,A3O rise/ following the success of the new 1ac mini and new :ower5oo% note#oo% computers. !teve "o#s was delighted with the figures for the first >uarter. 3Apple is firing on all cylinders and we have some incredi#le new products in the pipeline for the coming year,3 he said. A0O of the sales made were over seas, which showed the popularity of the i:od in -urope and Asia. Iowever, Apple said it expected earnings per share to #e lower in the third >uarter, at E78 per share as against E3A per share over the latest period and also expects revenues to remain largely flat at E3.79#n. "pple +eats Competitors at Inventory Turn ver

)espite a wea%ening economy and a need to meet customer demand, Apple has #een a#le to maintain a fast inventory turnover rate. The 1ac and i:hone ma%er is sitting at five days worth of inventory on any given day, #eating )ell+s seven days worth of inventory, according to data from C5!. 0ther :C ma%ers are having even more trou#le matching Apple+s inventory efficiency. .enovo, for example, is averaging &9 days of inventory, and I: is sitting at 37 days. *ntel, however, is showing a much slower inventory turnover rate at 8' days, and )-.in% is sitting on a staggering &3& days worth of inventory.
3;

Apple+s >uic% turnover rate may have #een due in part to preparing for its @ust announced i1ac, 1ac mini and 1ac :ro updates. The company released new des%top computer models on 1arch 3, and %eeping inventory low helped assure that there would #e fewer of the previous model machines sitting on store shelves. $hile maintaining a higher inventory level can help a company cope with sudden increases in demand, it can also show a company+s ina#ility to ade>uately gauge mar%et interest in their products. Bor now, it loo%s li%e Apple is managing inventory #etter than its competition. IPod/ The Mar-etin# of an Idea Pro0ect Apples i:od has ta%en the world #y storm. Jearly u#i>uitous, it has changed not only the way people listen to music, #ut it has transformed its parent company Apple into an entertainment giant. *n order to understand how this change came a#out, well ta%e a loo% at Apples ongoing efforts to ma%e i:od synonymous with hip. $ell also discuss exactly what customers are #uying when they #uy an i:od, and we will ta%e a deep loo% at several aspects of Apples mar%eting of this exciting new product, from the i:od itself, Apples strategic planning, possi#le research findings that supported their approach, segmentation strategies that may have #een employed and why, as well as pricing strategy across these segments. .ast well discuss communications, promotion and advertising, as well as an interesting shift in retailing that the i:od has ena#led. Throughout, well tie #ac% to the Apple #rand to dig deep into the notion that i:ods stunning success stems from it #eing specifically not an 1:3 player. .i%e 1agrittes surrealist painting of a pipe with the caption Ceci nest pas une pipe ,This is not a pipe/, the i:od is not merely an 1:3 player. *t is a sym#ol which encompasses many grand ideasN ideas that involve world change, and how cool we all can #e if we are part of that change.
3(

Apples careful and deli#erate exploitation of this concept, comprising an entire mar%eting ecosystem which nurtures that idea will #e the su#@ect of this paper. 0n "anuary 'th, 700(, !teve "o#s, renowned C-0 of Apple, announced that the company which he founded would no longer #e %nown as Apple Computer, *nc. *ts new name would @ust #e Apple, *nc.& 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 yearsN transitioning itself from a computer company slugging it out for a meager share of an increasingly competitive hardware and software mar%et, to a #usiness that promoted an entirely new concept2 the digital lifestyle. 5efore we dig down into what this radical shift entailed, #oth for the company and the world, lets ta%e a >uic% loo% at the history of Apple, a company already firmly rooted in several notions that allowed this transition to ma%e sense. Apple made a name for itself #y #eing instrumental in ushering in the home :C revolution. Bor millions of its aficionados, Apple was single-handedly responsi#le for this revolution #y 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 :C revolution is a history of war #etween Apple, a num#er of losers that no one remem#ers any more, and archrival 1icrosoft with its du#ious counterclaims of having pioneered the concept of $indows. Brustrating to anyone who owned a 1ac #ac% in the &'80s is the %nowledge that Apple did indeed pioneer the windows metaphor as a distinct feature of its operating system. This was at a time when 1icrosoft users were still struggling with text-#ased )0! commands, and yet the commercial success of 1icrosoft has served to rewrite history to some degree. 5attles ensued over the years, #ut no matter whose side you were on, #y the late '0s it was clear that Apple was not gaining any ground whatsoever as a

38

computer and software manufacturer. *n fact due to many external events, Apples position was in clear threat. Birst, huge num#ers of consumers, particularly the #usiness community, clearly preferred 1icrosoft. Apples mar%et share was tiny compared to the Gedmond #ehemoth7 however Apple users were an ardent group of graphic designers, college students, and mem#ers of the ur#an hip %nown as The )igerati. This was a group of consumers who saw themselves as different from the mainstreamN definitely cooler, and part of a community of li%e-minded people. They %new they paid more for to #reathe this rarified air, #ut they didnt seem to mind. *n these segments, Apples mar%et share was relatively solid, even if it was comparatively small. -ven so, #y the end of 7000, with a downturn in the worldwide demand for :Cs, Apple posted a E700 million loss3, and analysts were not optimistic a#out Apples future. Cndeterred, in "anuary 700&, "o#s opened the annual 1acworld conference in Jew Por% City with his usual #rand of enthusiastic vision. Ie announced that personal computing, far from tailing off into irrelevance, was a#out to leap ahead into a new 6olden Age. To support his vision he introduced several new Apple products that were intended to align the 1ac with this new <digital lifestyle4A. Though the conference attendees may have nodded %nowingly, few understood what he was tal%ing a#out, for at this point ha#its which would later #e hallmar%s of the digital lifestyleTlistening to music online, creating digital movies and sharing photos through networ%s of computersTwere not widely practiced, except perhaps #y the most innovative of consumers. Any such ha#its were still in their domain, as 1:3 technology, and 1:3 players specifically, were still >uite new, and no one yet %new exactly what to do with them. .aunched in &''8, 1:3 players were initially seen as an alternative to porta#le C) players. They only held a couple hours worth of music, and there were still technical glitches such as
3'

transfer times and clumsy user interfaces that cast these new gadgets firmly into the realm of the gee%. *nterestingly this is not too different from the situation that existed when Apple first entered the :C mar%etN the concepts and technology existed, #ut they werent popular. Apples stro%e of strategic genius was to create a way to simplify and populari e them through cool and innovative design. This approach #ecame foundational to their #usiness strategy as well as their corporate culture, and it can still #e seen today, irrespective of the fact that so much has changed. *n this regard, this companys guiding principles have remained remar%a#ly consistent. *n &''8 as today, Apples strategy has #een to release cool new products fre>uently9, accepting and capitali ing on the fact that computer products en@oy a short product life cycle. Apple populari es difficult technology #y ma%ing it fun and intuitive, and characteristically they wrap it all up in a super-hip pac%age that ma%es consumers of their products feel as if they #elong to an exclusive community. The companys commitment in 700; differs from their commitment in 7000 only insofar as the addition of the words <porta#le digital music42 The Company is committed to #ringing the #est personal computing and porta#le digital music experience to students, educators, creative professionals, #usinesses, government agencies, and consumers through its innovative hardware, software, peripherals, services, and *nternet offerings.; 1any have critici ed this approach, particularly the more conservative elements within the #usiness community whose view is summed up #y 5usiness $ee% who wrote when i:od was first introduced that <a few might pay a premium for good design, #ut it isnt a good #usiness strategy.4( Those same people may today wish they had at least #ought a few shares of stoc% as a hedge against possi#le shortsightedness, #ut more to the point, this type of thin%ing seems to miss exactly what it is that Apple has always sold.

A0

Consider that last year, Jorway, )enmar% and !weden challenged Apple in court over this limitation of their product, a case which Apples competitors are following with great interest&A. $hole industries want a piece of Apples pie, most nota#ly mo#ile phone manufacturers. Jo%ia has announced that it is setting up a rival to iTunes in its purchase of the American digital music service .oudeye. !ongs downloaded from the new Jo%ia su#scription service will play on any digital music player, including i:od. Jot coincidentally, handsets are one of the explosive new growth areas for porta#le digital music. Apple continues to mitigate these ris%s #y %eeping it hard to su#stitute, and this gets to the heart of the matter, that i:od sym#oli es more than @ust another 1:3 player. *f Apple wins all the chips, then i:ods halo effect will help Apple outmaneuver such threats, and future product offerings such as i:hone, which are #eing developed now in response to the competitive onslaught, will gain a critical head start. As it stands there is simply no su#stitute for an i:od. This is reinforced consistently across the technology, advertising, promotion, and accessory ecosystem. *n this sense, #uyers have strengthened Apples competitive position #ecause at sales of over &00 million units, and (0O of the mar%et&9, i:od is the industry standard for 1:3 players. *n a mesmeri ing feat of mental acuity, Apple helps consumers @udge the efforts of its competition against a standard they themselves invented. *n order to #e part of the phenomena, #uyers have shown that they will pay a premium, and that for the most part, there are no ready su#stitutes. This causes a significant pro#lem for competitors when the glo#al conversation a#out 1:3 players invaria#ly leads to all things i:od. Any competing product will certainly #e @udged against the gold standard of i:od, and #ecause of Apples early entry and su#se>uent early lead, 1:3 players from today through forever wont #e strictly @udged #y their technical merits, #ut rather on their value as a style accessory.
A&

Than%s to i:od, any potential entrant has to now offer an augmented product that delivers an entire pac%age of #enefits far and a#ove the simple core attri#utes most tech companies speciali e in. $e can reasona#ly infer that Apple did plenty of primary and secondary research a#out the types of people who would #e interested in i:od, and crafted their message accordingly. Cndou#tedly they owned mountains of data from their over twenty years #eing at the epicenter of the :C revolution as well as their relevance #irthing its child, the $e# revolution. Csing laddering in interviews perhaps revealed that this new #reed of high tech consumer had desires far and a#ove the technical. Accordingly, they positioned the products physical attri#utes in a way that was secondary to its contri#ution toward #ettering the consumers world. A tool for #uilding high self-esteem, impressing your friends, and #eing part of a semi-exclusive clu#, that #y the way happens to #e #eautifully designed and technically superior to the competition. $hats not to loveR 0f course, they charge for this love, #ut they %new from the #eginning where they were going, and they didnt get there #y accident. .oo%ing at the Christmas retail season of 700&, three months after i:od+s release, we see a story that practically draws for us a perceptual map whose axes are price and technical capa#ility. Brom that we can #ac%wards-engineer possi#le research findings, conclusions, and recommendations. The leading device at the time was !onic#lue Gio?olt 1:3 C) :layer, which retailed for less than E&00. Creative+s Jomad "u%e#ox was selling its recently introduced ;65 hard drive for a#out E790, and e.)igital Corp. was touting its walloping &065 palm-si e Treo &0 for E 7A' Treo. Against these contenders, i:ods E3'' price tag for a mere 9 65 of storage doesnt seem to ma%e sense&;. Also, at this time, i:od was only compati#le with 1acs, which amused 5ill 6ates, and continued to do so even as late as 7009 when C!A today >uoted him as saying2 * thin% you can draw parallels here with the computer T here, too, Apple was once
A7

extremely strong with its 1acintosh and graphic user interface, li%e with the i:od today, and then lost its position.&( *t is our contention that the initial release of iTunes &.0, which as noted was practically laughed at, was a Tro@an Iorse that delivered >uite a #it of #usiness intelligence to Apple. $e %now that they released it a#out one year #efore i:od was released, so theres no dou#t that the entire i:od strategy and product development were well into their final phases. To go #ac% to that time is to recall that Apple faced numerous legal issues relating to copyright infringement. Geleasing iTunes #efore there was a correlating 1:3 player gave Apple a window to negotiate )igital rights 1anagement agreements without the success of i:od hanging over their head. *n other words, the lac% of a product didnt cause the alarm #ells to go off among %ey sta%eholders in the distri#ution chain, whose future position was in grave threat, and who would have certainly put the #ra%es on if they had seen what was coming down the trac%s. Binally, iTunes usage in that first year may have served as the final chec%point, validating Apples contention that a successful 1:3 playerTone that would truly leverage the potential of the technologyTwould need to find a way around the clun%y process of #uying and ripping C)s. 5uilding these findings into a psychographic profile and consistently spea%ing to that profile as an individual would comprise the remainder of the mar%eting effort, in all its facets, #ut how many psychographics were thereR $hat factors did Apple ta%e into account when deciding whether there were via#le segments out thereR *t is clear today that Apple is mar%eting different products to different groups of people2 the flagship i:od video which is expensive, the Jano which is midrange and a shuffle which is inexpensive and small. This segmentation strategy appears to ma%e sense, since the mar%et is heterogeneous, the segments are identifia#le and they are divisi#le. 5ut, did releasing different products ris% dividing the total mar%et, or did it create new opportunities for salesR 6reg
A3

"oswia%, Apples ?: of hardware mar%eting in 7009 noted in reference to the Jano that 3This is a different product and it will ta%e the i:od to a different mar%et, one which couldn+t afford the price of the normal i:od &8.3 That it was a good move was lauded #y 1errill .ynchs analysts at the time when they concluded, <The i:od shuffle is li%ely to outsell all Apple+s other i:od models com#ined, and may #e in short supply until next >uarter4 &'. -xtreme i:od pu#lished a report at a#out the same time that suggested that the strongest demand for the i:od shuffle was li%ely to come from new users. 3-xisting i:od owners may prefer the larger capacity and display of existing i:ods, which ma%es for good mar%et segmentation on Apple+s part. Jew-to-i:od users tell us the price points and ease of use are attractive.370 5y the following year, i:od had moved into its sixth generation, with a line that featured the i:od video player, an i:od Jano with a color screen, and the i:od shuffle. Also #eing upgraded right alongside the product was its life-giving infrastructure iTunes, now a#le to offer and organi e different types of media. $e #elieve that in the #eginning Apples segmentation strategy focused on narrow mar%ets and a uni>ue niche #ecause in 700& it was early adopters who might #e interested in 1:3 players. Iowever i:od also created a whole industry, which must now #e characteri ed as having a #road scope, simply #ecause of its u#i>uitous presence. *t may #e a uni>ue nicheTit certainly was at the timeT #ecause they intentionally did not go for cost leadership.

"n "pple for your enterprise. 1acs have made their way out of the art department and into the offices of accountants, salespeople, manufacturing planners and top executives. <$ere seeing more re>uests outside of creative services to switch to 1acs from :Cs,4 notes )avid :lavin, operations manager for 1ac systems engineering at the C.!. it
AA

division of :u#lic 6roup !A, a glo#al advertising conglomerate. Bor it managers across all industries T even those with a well esta#lished and stalwart $indows user #ase T the >uestion is no longer whether youll need to design and support a 1ac computing strategy. the only >uestion is how >uic%ly. Pou may already #e a little late to the game. According to Borrester, #usiness adoption of 1acs tripled last year. $hats more, this will surely accelerate as companies hire more 6en P wor%ers. Coming through the door in those #ac%pac%s are a slew of consumer technologies and wireless personal productivity tools T thin% i:hone. !ome users are finding that switching to 1acs can even save money T lots of it. Auto $arehousing Co. ,A$C/ in tacoma, $ash., is pulling the plug on all $indows-#ased :Cs and powering up 1acs to execute virtually all of its revenuegenerating operations. *n septem#er, 7008, Apple *nc.s 1ac 0s D mar%et share passed the 8O mar% for the first time, according to data collected #y net Applications. Apples operating system ran on 8.7O of the computers that accessed the A0,000 sites monitored for clients #y Jet Applications. The 1acs share of the operating system mar%et was up over Augusts #y nearly four-tenths of a percentage point, the #iggest one-month gain since 1ay. *n the last two years, 1ac 0! Ds share has increased #y 3 percentage points, a gain of 98O. 1icrosoft Corp.s $indows, meanwhile, continued to slip in mar%et share last month. 0verall, $indows accounted for '0.3O of the operating systems powering the machines that accessed Jet Applications metric networ%, a drop of 0.A percentage points from August, when the operating system fell #y nearly the same amount from "uly. That month was the last time that $indows maintained or grew its

A9

share. !ince the #eginning of this year, $indows has lost &.9 percentage points in mar%et share. As the largest full-service auto processing company in Jorth America, A$C has 73 sites across the C.!. and Canada and handles 9.9 million cars a year. !witching to 1acs will save the company E&.87 million over three years, according to Cio )ale Brant . thats what it would have cost to upgrade software licenses if the company had stayed on :Cs. in contrast, the total cost of switching to 1acs was E339,000. <this is more of a strategic choice for the future,4 says Brant . <5y investing in the Apple platform, we pic% up additional functionality that we dont have today,4 he says. Brant also says 1acs are ready for #usiness prime time. <on the whole,4 he adds, <what were finding is this stuff @ust wor%s. $ere at a point where we can deploy it companywide.4 Bor all the details, see A$C !witches to 1ac and The 1ac !witch Gevisited. other %ey factors driving 1ac adoption include the rise of $e# #ased computing via software-as-eservice applications, which for the most part are platform-agnostic. the rise of virtuali ation, as well as Apple incs shift toward standardi ed :C components, has also cleared the way for greater corporate 1ac use. *ndeed, experts say the 1ac fits much #etter than it ever has #efore in the enterprise, and the trend toward cloud computing is reducing the importance of the client platform to access #oth internal and external resources.

A;

!inancial "nalysis

1nd 2uarter 1334 Apples financial performance continued to strengthen over the last several >uarters. *n the most recent earnings announcement, Apple reported significant growth in net revenues driven #y the strong performance of its i:od product line. Jet sales for the 7nd >uarter grew to EA.3; #illion, which is a 3AO increase over 7 nd >uarter 700( results. Jet income increased #y A&O to EA&0 million. The i:od product line continues to drive the financial performance of the company. *n the 7nd >uarter alone, Apple sold 8.9 million i:ods, representing a ;&O increase over the 9.3 million units sold in the 7nd >uarter of the prior year. 1ac sales showed slight growth of only AO. Apples year-to-date revenues total @ust over E&0 #illion and earnings total @ust under E& #illion. Bor the 3rd >uarter, CB0 :eter 0ppenheimer stated, <Vwe expect revenue of a#out EA.7 to EA.A #illion4 which will push total sales a#ove last terms annual num#ers. *istorical Performance Although sales remained stagnant during &''8-7007, sales more than dou#led since ,see graph #elow/. This dramatic shift in performance is primarily due to the increase in sales from the i:od product line.

A(

Apple Revenue Growth

16000 14000

Net Sales

12000 10000 8000 6000 4000 2000 0 1998 1999 2000 2001 2002 2003 2004 2005

Stoc- Price Performance

Another interesting way to consider the financial performance is to evaluate how Apples stoc% price performed against the mar%et and against its main competitors. As we see from the chart a#ove, Apples performance has #een inconsistent over the last 70 years compared to the !L: 900. *t also has not performed at the same level as its main competitors, )ell and 1icrosoft. improved since 7003. Iowever, performance

A8

Profita$ility Measures Apple su#stantially improved in its %ey measures of profita#ility in the last few fiscal years. *n terms of return on assets, return on e>uity and profit margin, Apple strengthened financially and now has similar ratios to that of its competitors and the overall computer hardware industry .

1335 1336 1334 Return on "ssets Return on E:uity Profit Mar#in P;E Ratio &.0& O &.;3 O &.&& O 3.A3 O 9.AA O 3.33 O

&&.9; O &(.88 78.9;O O '.98 3&.9(O O 33.8' 77.;3

Microso ft 734 &'.(9O

%ell 734 &9.A7 O ;(.3& O ;.3' O &8.9&

Indust S8P ry 734 933 &&.'8O 8.&3O 3;.;&O &'.;&O ;.3;O 7;.37 &3.(9O 77.0'

*n reviewing Apples &st and 7nd >uarter 7008 earnings releases, gross margins dropped slightly. Apple attri#utes this decline primarily to price pressures, especially in the i:od product line. ,&st Suarter &0S/ This will continue to affect performance over time. Iowever, Apples a#ility to maintain the momentum it #uilt in the mar%etplace will control the speed with which erosion will occur. Li:uidity and Levera#e Measures Apple historically held very little long-term de#t. The ta#le #elow compares Apples li>uidity measures to their competitors, their industry, and the general mar%et. )uring the period of strong financial performance, Apple accumulated cash. This strengthens Apples position should they choose to access the capital mar%ets.

A'

Current Ratio 2uic7.A( 7.9' Ratio Product &nit Sales

1 335 7.9

1 336 7.;

1 334 3 7.'

Microsoft %ell 734 734 7.88 &.&& 7.89 &.08

Industry 734 &.8& &.A9

S8P 933 &.87 &.3&

*n the last several years, there have #een dramatic changes to Apples product sales #y category. Apple #rea%s its unit sales into four primary categories2 des%tops, note#oo%s, i:ods, and peripherals. The graph #elow shows the product mix for Apple in 7007. Jote the domination #y des%tops and note#oo%s and the small contri#ution #y i:ods.

2002 Product Sales

e!"#$p! %$#e&$$"! i'$( 'erip)eral!

2005 Product Sales

e!"#$p! %$#e&$$"! i'$( 'erip)eral!

$hen you compare the same graph for 7009, you see dramatic differences in the product mix for Apple. The i:od sales now account for 37.9O compared to 7.9O for 7007. The com#ined sales of computers ,des%topQnote#oo%/ lost share, dropping from ('O to A9O of sales. This drop merely represents a shift in Apples product mix, not their glo#al computer mar%et share ,which remains sta#le in the 7-3O range/. 1eanwhile, sales of peripherals ,including wireless connectivity and networ%ing solutions/, remained sta#le. ,Ioovers/

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peratin# Se#ments Apple #rea%s its sales into five <operating segments4. The chart #elow shows the sales #y segment for each year 7007-7009. 0n a percentage #asis, only the retail segment appears to #e outperforming the others.

Sales by Re !on Se "ent

16000

$otal Sales

14000 12000 10000 8000 6000 4000 2000 0 2002 2003 2004 2005

O#)er Re#ail *apa+ ,-r$pe America.!

#ear

Jet sales in the retail segment grew to E7.39 #illion in 7009. *n the & st >uarter 700;, sales growth continued in the retail segment to E&.& #illion ,a '&O increase over the same period last year/. This increase was due to growth in the num#er of stores ,from &0& to &39/ and to a A&O same-store sales growth. ,&st Suarter &0S/ Although the retail segment was the only segment to reali e growth as a percentage of total sales, all of the segments had solid growth. *n the Americas, sales increased ;9O and continued to represent approximately A(O of total worldwide sales. !ales in "apan and -urope grew #y '7O and A(O, respectively. ,& st Suarter &0S/ Mar-et Value "nalysis $e used )iscounted Cash Blow ,)CB/ analysis to assess the appropriate e>uity value of Apple. To complete this analysis, we developed a pro-forma income statement and extracted free cash flow. $e then discounted these cash flows using
9&

a calculated $eighted Average Cost of Capital ,$ACC/. Apples $ACC e>ualed their cost of e>uity since they carry no long-term de#t. $e used the Capital Asset :ricing 1odel ,CA:1/ to calculate the cost of e>uity. CA:1 consists of a ris%-free rate, a mar%et ris% premium, and a company 5eta. The yield on the &0-year Treasury is the standard for a ris%-free rate. To determine the mar%et ris% premium, we used the average return that an investor would re>uire for an investment with average ris%. $e used data availa#le online to determine Apples 5eta, pro@ected to #e &.A;. The #elow chart summari es Apples cost of e>uity.

Cost of E:uity;,"CC Ris- !ree Rate Mar-et Ris- Premium +eta "d0usted "pple RisPremium Cost of E:uity;,"CC

<ote &0 Pr Treasury ,Analysis/ Brom 6oogle

Value 9.&7 A &.A; 9.8A &0.';

Pro=!orma Income Statement $e made several %ey assumptions in compiling a pro-forma income statement. Birst, to complete the estimate for the 700; data, we merely annuali ed the earnings for the first two >uarters. $e then pro@ected a declining rate of growth in sales for the next four fiscal terms of 30O, 70O, &9O, and &0O, respectively. $e do not #elieve that the growth in i:ods is sustaina#le for the long-term. $e also used the percent-of-sales method to calculate cost of goods sold, research L

97

development, !6LA, and interest. $e applied the 7009 tax rate for all future periods. As the ta#le #elow shows, the mid-term earnings growth is positive.

<et Sales Cost f Sales R8% S@A@" peratin# Income Interest Income Taxes <et Income EPS Shares ut B3337sC

1339 &3'3& '888 93A &89' &;90 &;9 A80 &339 &.9( 8A8,;& 7

1335 707&; &A393 80' 7;78 7A7; 73' (09 &';0 7.3& 8A8,;& 7

1336 7;780. 8 &8;9' &09& 3A&( 3&9A 3&& '&; 79A8 3.00 8A8,;& 7

1334 3&93;.' ; 773'& &7;& A&00 3(8A 3(A &&00 3098 3.;0 8A8,;&7

133>P 3;7;(.9 0 79(90 &A9& A(&9 A397 A30 &7;9 39&( A.&A 8A8,;&7

13?3P 3'8'A.79 78379 &9'; 9&8; A(8( A(3 &3'& 38;' A.9; 8A8,;&7

Pro0ected !ree Cash !low and E:uity Valuation $e assume that Apple will continue without long-term de#t. $e also assume that there will #e no significant changes in capital expenditures and net wor%ing capital. Thus, free cash flow will e>ual net income plus depreciation. 6iven $ACC, we are a#le to discount cash flows #ac% using half-year :? factors ,we are through the first half of 700'/. $e calculated our terminal value using a perpetual annual growth rate of (O, which is slightly a#ove the industry growth rate of 9.;O.

93

!ree Cash !lows <et Income %epreciation !ree Cash !lows ,"CC PV !actor Terminal Value PV !C! Sum of PV of C! PV of Terminal Value

1335 &';0.00 73'.00 7&''.00 &0.'; 0.'909 &8;7.'8

1336 79A8.0 0 3&0.(0 7898.( 0 &0.'; 0.89;9 7&87.3 ;

1334 3098.0 0 3(7.8' 3A30.8 ' &0.'; 0.((&9 739'.7 9

133>P 39&(.0 0 A78.8; 3'A9.8 ; &0.'; 0.;'9 7AAA.3 7

13?3P 38;'.0 0 A(&.(8 A3A0.( 8 &0.'; 0.;7; 7A7&.' '

Terminal

0.;7; &0';&9.; ;8;&'.A7

&&7(0.'0 ;8;&'.A 7 !MV of Invested Capital ('8'0.3 7 Less Existin# Cash 87;& +alance Intrinsic Value of E:uity (&;7'.3 7

6iven intrinsic e>uity value, we estimate the per share stoc% price. 6iven their particular mar%et condition, Apple appears undervalued. E:uity Value Total Shares B3337sC Value B3337sC Value;Share Current Price B9;9;35C Strate#y $e can descri#e Apples strategy in terms of product differentiation and strategic alliances. *n each of these strategies, we examine what Apple did historically and then discuss alternatives for Apples future.

8A8;&7 (&;7'000 E8A E(&.8'

9A

Product %ifferentiation Apple prides itself on its innovation. $hen reviewing the history of Apple, it is evident that this attitude permeated the company during its pea%s of success. Bor instance, Apple pioneered the :)A mar%et #y introducing the Jewton in &''3. .ater, Apple introduced the easy-to-use i1ac in &''8, and updates following &''8. *t released a highly sta#le operating system in &''', and updates following &'''. Apple had one of its critical points in history in &''' when it introduced the i5oo%. This completed their <product matrix4, a simplified product mix strategy formulated #y "o#s. This move allowed Apple to have a des%top and a porta#le computer in #oth the professional and the consumer segments. The matrix is as follows2 Professional Se#ment )es%top 63 :orta#le :ower5oo% Consumer Se#ment i1ac i5oo%

*n 700&, Apple hit another important historical point #y launching iTunes. This mar%ed the #eginning of Apples new strategy of ma%ing the 1ac the hu# for the <digital lifestyle4. Apple then opened its own stores, in spite of protests #y independent Apple retailers voicing canni#ali ation concerns. Then Apple introduced the i:od, central to the <digital lifestyle4 strategy. :hilip $. !chiller, ?: of $orldwide :roduct 1ar%eting for Apple, stated, <i:od is going to change the way people listen to music.4 Ie was right. Apple continued their innovative strea% with advancements in flat-panel .C)s for des%tops in 7007 and improved note#oo%s in 7003. *n 7003, Apple released the i.ife pac%age, containing improved versions of i)?), i1ovie, i:hoto, and iTunes. *n reference to Apples recent advancements, "o#s said, <$e are going to do for

99

digital creation what 1icrosoft did for the office suite productivity.4 That is indeed a #old statement. Time will tell whether that happens. Apple continued its digital lifestyle strategy #y launching iTunes 1usic !tore online in 7003, o#taining cooperation from <The 5ig 94 1usic companiesT516, -1*, !ony -ntertainment, Cniversal, $arner. This allowed iTunes 1usic !tore online to offer over 700,000 songs at introduction. *n 7003, Apple released the worlds fastest :C ,1ac 69/, which had dual 7.06I :ower:C 69 processors. :roduct differentiation is a via#le strategy, especially if the company exploits the conceptual distinctions for product differentiation. Those that are relevant to Apple are product features, product mix, lin%s with other firms, and reputation. Apple esta#lished a reputation as an innovator #y offering an array of easy-to-use products that cover a #road range of segments. Iowever, its lin%s with other firms have #een 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 #arrier to entry, thus reducing the threat of new entrants. Jot only does a company have to #ear the cost of standard #usiness, it also must #ear the costs associated with overcoming the differentiation inherent in the incum#ent. !ince companies pursue niche mar%ets, there is a reduced threat of rivalry among industry competitors. A companys differentiated product will appear more attractive relative to su#stitutes, thus reducing the threat of su#stitutes. thus reducing the threat of suppliers. *f suppliers increase their prices, a company with a differentiated product can pass that cost to its customers, !ince a company with a differentiated product competes as a >uasi-monopoly in its mar%et segment, there is a reduced

9;

threat of #uyers. $ith all of :orters Bive Borces lower, a company may see economic value from a product differentiation strategy. A company attempts to ma%e its strategy a sustained competitive advantage. Bor this to occur, a product differentiation strategy that is economically valua#le must also #e rare, difficult to imitate, and the company must have the organi ation to exploit this. *f there are fewer firms differentiating than the num#er re>uired for perfect competition dynamics, the strategy is rare. *f there is no direct, easy duplication and there are no easy su#stitutes, the strategy is difficult to imitate. There are four primary organi ing dilemmas when considering product differentiation as a strategy. They are as depicted #elow. 0rgani ing )ilemmas
Too Little (No Collaboration) %$ lear+i+g ma"e! impleme+#a#i$+ (i11ic-l# Too Little (No History) 2ac" $1 irec#i$+ i+ I++$0a#i$+ Too Little (No Sight) 3ail #$ ,4pl$i# 5i!#$rical A(0a+#age Too Little (Chaos) 2ac" $1 irec#i$+ i+ I++$0a#i$+

%nter&'unct!onal Collaborat!on Too Much (Lockstep) Sl$/! I++$0a#i$+ Connect!on to the Past Too Much (History as Constraint) S#i1le! I++$0a#i$+

Co""!t"ent to Market (!s!on Too Much (Foresight) %$ I++$0a#i$+ Ca+ Ta"e 'lace %nst!tut!onal Control Too Much (Bureaucracy) 2ac" $1 3le4i&ili#6 i+ 7+cer#ai+ Mar"e#

To resolve these dilemmas, there must #e an appropriate organi ation structure. A C-Borm organi ation resolves the inter-functional colla#oration dilemma if there are product development and product management teams. Com#ining the old with the new resolves the connection to the past dilemma. Iaving a policy of experimentation and a tolerance for failure resolves the commitment to mar%et vision dilemma. 1anagerial freedom within #road decision-ma%ing guidelines will resolve the institutional control dilemma.

9(

Bive leadership roles will facilitate the innovation process2 *nstitutional .eader, Critic, -ntrepreneur, !ponsor, and 1entor. The institutional leader creates the organi ational infrastructure necessary for innovation. This role also resolves disputes, particularly among the other leaders. The critic challenges investments, goals, and progress. advises. Apple had issues within its organi ation. *n &''(, when Apple was see%ing a C-0 accepta#le to "o#s, "ean-.ouis 6assWe ,then-C-0 of 5e, ex-:roducts :resident at Apple/ commented, <Gight now the @o# is so difficult, it would re>uire a #isexual, #lond "apanese who is 79 years old and has &9 years experienceX4 Charles Iaggerty, then-C-0 of $estern )igital, said, <Apple is a company that still has opportunity written all over it. 5ut youd need to recruit 6od to get it done.4 1ichael 1urphy, then-editor of California Technology !toc% .etter, stated, <Apple desperately needs a great day-to-day manager, visionary, leader and politician. The only person whos >ualified to run this company was crucified 7,000 years ago.4 !ince "o#s too% over as C-0 in &''(, Apple seems to have resolved the innovation dilemmas, evidenced #y 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. Strate#ic "lliances Apple has a history of shunning strategic alliances. 0n "une 79, &'89, 5ill 6ates sent a memo to "ohn !culley ,then-C-0 of Apple/ and "ean-.ouis 6assWe ,then:roducts :resident/. 6ates recommended that Apple license 1acintosh technology to 3-9 significant manufacturers, listing companies and contacts such as ATLT,
98

The entrepreneur manages the innovative unit,s/.

The

sponsor procures, advocates, and champions. The mentor coaches, counsels, and

)-C, Texas *nstruments, Iewlett-:ac%ard, Derox, and 1otorola. ,.in mayer, 7A98/ After not receiving a response, 6ates wrote another memo on "uly 7', naming three other companies and stating, <* want to help in any way * can with the licensing. :lease give me a call.4 contracts with Apollo Computer. *n &'8(, !culley refused to sign licensing Ie felt that up-and-coming rival !un

1icrosystems would overta%e Apollo Computer, which did happen. Then, !culley and 1ichael !pindler ,C00/ partnered Apple with *51 and 1otorola on the :ower:C chip. !culley and !pindler were hoping *51 would #uy Apple and put them in charge of the :C #usiness. That never came to fruition, #ecause Apple ,with !pindler as the C-0/ seemed contradictory and was extraordinarily difficult in #usiness dealings.Apple turned the corner in &''3. !pindler #egrudgingly licensed the 1ac to :ower Computing in &''3 and to Gadius ,who made 1ac monitors/ in &''9. Iowever, !pindler nixed 6ateway in &''9 due to canni#ali ation fears. 6il Amelio, an avid supporter of licensing, too% over as C-0 in &'';. Cnder Amelio, Apple licensed to 1otorola and *51. *n &'';, Apple announced the EA7( million purchase of JeDT !oftware, mar%ing the return of !teve "o#s. Amelio suddenly resigned in &''(, and the stage was set for "o#s to resume power. "o#s despised licensing, calling cloners <leeches4. Ie pulled the plug, essentially %illing its largest licensee ,:ower Computing/. Apple su#se>uently ac>uired :ower Computings customer data#ase, 1ac 0! license, and %ey employees for E&00 million of Apple stoc% and E&0 million to cover de#t and closing costs. The #usiness was worth EA00 million. A massive reversal occurred in &''( and &''8. *n &''(, "o#s overhauled the #oard of directors and then entered Apple into patent cross-licensing and technology agreements with 1icrosoft. *n &''8, "o#s stated that Apples strategy is to <focus all of our software development resources on extending the 1acintosh operating
9'

system. To reali e our am#itious plans we must focus all of our efforts in one direction.4 This statement was in the wa%e of Apple divesting significant software holdings ,ClarisQBile1a%er and Jewton/. There is economic value in strategic alliances. *n the case of Apple, there was the opportunity to manage ris% and share costs facilitate tacit collusion , and manage uncertainty. *t would have #een applica#le to the industries in which Apple operated. Tacit collusion is a valid source of economic value in networ% industries, which the computer industry is. 1anaging uncertainty, managing ris%, and sharing costs are sources of economic value in any industry. Although Apple eventually reali ed the economic value of strategic alliances, it should have occurred earlier. The following are some comments a#out Apples no-licensing policy. <*f Apple had licensed the 1ac 0! when it first came out, $indow wouldnt exist today.4T"on van 5ron%horst, <The computer was never the pro#lem. The companys strategy was. Apple saw itself as a hardware companyN in order to protect our hardware profits, we didnt license our operating system. $e had the most #eautiful operating system, #ut to get it you had to #uy our hardware at twice the price. That was a mista%e. $hat we should have done was calculate an appropriate price to license the operating system. $e were also naYve to thin% that the #est technology would prevail. *t often doesnt.4T!teve $o nia%, Apple cofounder <*f we had licensed earlier, we would #e the 1icrosoft of today.4T*an $. )iery, Apple -xecutive ?:, * am aware that * am %nown as the 6reat !atan on licensingV * was never for or against licensing. * @ust did not see how it would ma%e sense. 5ut my approach was stupid. $e were @ust fat cats living off a #usiness that had no competition.4T"ean-.ouis 6assWe, 5e C-0 and ex-C-0 of Apple, admitting he made a strategic mista%e

;0

A strategic alliance can #e a sustained competitive advantage if it is rare, difficult to imitate, and the company has an organi ation to exploit it. *f the num#er of competing firms implementing a similar strategic alliance is relatively few, the strategy is rare. *f there are socially complex relations among partners and there is no direct duplication, the strategy is difficult to imitate.$hen organi ing for strategic alliances, a firm must consider whether the alliance is non-e>uity or e>uity. A non-e>uity alliance should have explicit contracts and legal sanctions. An e>uity alliance should have contracts descri#ing the e>uity investment. There are some su#stitutes for an e>uity alliance, such as internal development and ac>uisitions. Iowever, the difficulties with these drive the formation of strategic alliances. *t is vital to remem#er, <Commitment, coordination, and trust are all important determinants of alliance success.4

;&

Recommendations
!or Company .owering the cost of products and maintaining the same >uality standards. Can form @oint = ventures. Knowledge 1anagement. 1ore num#er of retail stores for easy access. Continuous innovation to expand. !or thers

)o not compromise on price for >uality. Choose the products #ased on individual needs. 5e uni>ue and different.

;7

Conclusion

$e feel that Apple must focus on several %ey aspects to continue to grow and succeed. They must continue a sta#le commitment to licensing, push for economies of scope #etween media and computers, and #ecome a learning organi ation. Apple apparently made a commitment to licensing. Although it should continue, Apple may want to consider other forms of strategic alliances. An e>uity strategic alliance may offer Apple the opportunity to o#tain additional competencies. An effective way for a company li%e Apple to accomplish this would #e in the form of a @oint venture.Apple should continue pushing the new line of media-centric products. 1eanwhile, Apple should not lose focus on its computers. 1acintosh computers were 3'O of Apples sales in 7009. ,5urrows/ This very innovative company exploits its second-mover position. *n the future, they will need to continue innovating to expand the #oundaries of #oth media and computers.0ne persistent element of #oth competitive advantage and ris% is !teve "o#s. Ie is #oth synonymous with Apples success and has a large e>uity interest in Apple and )isney. *f he were to divest his leadership position, the reaction of #oth the mar%et and consumers would #e uncertain. 6iven his position within the organi ation as well as the history of the company when he was gone, Apple must find a way to learn as an organi ation. This will allow the company to withstand a departure #y "o#s. 5ased on the actions of the organi ation, we feel that the mid-term performance of Apple will #e strong. This period allows Apple time to overcome their challenges if they move swiftly. Bor this reason, we feel that they will continue to succeed and will continue to outperform their peers.

;3

"pple avoids competition *f you loo% 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 #undling clout, to erase it. $hen challenged #y a larger mar%et force, as with the *51 :C and its clones in the early 80s, and with $indows 3.0, '9 and then JT A.0 in the '0s, they miss o#vious mar%eting opportunities, ways to ma%e their products stronger #y participating in mar%ets that others develop. This is an art that 1icrosoft has mastered, there+s no reason Apple couldn+t have learned the same lessons, #ut they didn+t. And when dealing with smaller competitors, Apple routinely and often unconsciously forced them out of #usiness #y #undling, or declaring that they will #undle a competitive offering. $hen the *nternet happened, Apple struggled against it instead of em#racing it, preferring to invest in technologies that eventually ended up on the scrap heap. A wasted lead in content development, developers going to $indows, a poor "ava implementation on the 1ac. The #ottom line, the strategy of avoiding competition has #een disastrous for Apple. 5ut they want to do it again. The same old strate#y The cloners, 1otorola, :ower Computing, C1AD, *51 and others, are poised to ship products that would ta%e Apple out of the hardware #usiness, #ecause they+re cheaper, faster, #igger, more powerful machines than Apple+s new products. These are the computers that 1ac users want and are, in my opinion, entitled to.
;A

-ven though we haven+t seen the license agreements with the cloners, it appears that Apple has the contractual right to for#id them to ship the computers, for any reason at all. Apple wants to %eep their hardware #usiness, so they exercise that right. * despise companies that use hard#all tactics to put their competitors out of #usiness. * admire companies that rise to competition. * happily #uy new products when * have a choice. * don+t li%e to #uy products that *+m forced to #uy. Is it a nice $usiness. *f you don+t have anyone to compare with, if you aren+t su#@ect to customer choice, your product loses direction, you focus inward, and eventually ,as now for Apple/ your interests #ecome out of synch with the interests of your customers. Bocus on that for a moment. A company whose interests are against their customers. *s that a nice #usinessR )oes it have much of a futureR Is it le#al. The customer+s interest here is clearly served #y competition. The usual #enefits apply -- lower prices, more realistic configurations, more diversity. Apple+s complaint that the cloners weren+t growing the mar%et can #e explained #y Apple+s licensing policy that %ept them from ma%ing fundamentally different products than Apple. $here+s the cheap su#-note#oo% 1acR $here+s the handheld 1acR The 1ac #uilt into the dash#oard of my carR Apple wouldn+t let the cloners ma%e these products. Apple is an economic disaster area. They want 1ac users to put all their eggs in Apple+s crum#ling #as%et.

;9

" STR"TEAIC "<"LDSIS

! "PPLE C PR R"TI <

" Ma0or Pro0ect Report

!u#mitted in partial fulfillment of the re>uirements for 55A,6eneral/ !emester ?* :rogramme of 6.6.!. *ndraprastha Cniversity, )elhi.

!u#mitted #y Anurag !inha 55A ,6en/ - !emester-?* -nroll. Jo. 2 0(A&77&(0;

%elhi Colle#e of "dvanced Studies Shan-ar Aarden@ Vi-aspuri <ew %elhi=??33?4

;;

%eclaration
* here#y declare that the ma@or pro@ect report, entitled <A !trategic Analysis of Apple Corporation4, is #ased on my original study and has not #een su#mitted earlier for any degree or diploma of any institutionQ university. The wor% of other author,s/, wherever used, has #een ac%nowledged at appropriate place,s/.

:lace

Candidates !ignature

)ate

Jame2 Anurag !inha -nroll. Jo.2 0(A&77&(0;

Countersigned

Jame !upervisor2 !hi%ha 1a%%ar )elhi College of Advanced !tudies

;(