Case 2: Apple Inc.

, 2008

Date: 23-09-2009

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

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

Theory and Analysis

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

The structure of the PC industry

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

Substitutes force Other PCs from other companies are treated as substitutes for Apples computers, the same is true the other way around. Thus in this market there are a number of substitutes which have an influence on the sales of each producer. Industry competitors force Combined, HP, Dell, Lenovo and Apples unit sales decreased only 5% year-over-year, however, their collective ASP dropped 13%, causing an 18% decline in PC revenues.(X-bit, 2009) Competition has always been fierce within the personal computer industry and this is only increasing. Cutting costs is required to survive in this a situation. Moreover, Apple is facing three aspects of conflict in the Personal Computer industry. a) PC hardware Needless to say, there are many companies which provide PC hardware. In 2007, Apple had only 2.6% share in global personal computer market (PC Market Still Strong in Q4 With Solid Growth Across Regions, According to IDC, 2008). b) Operating System Mac OSX has minor share comparing to Windows OS. Some important applications do not support Mac OSX. c) Software Apple provides software for Mac OS, but most of Apples software and the software developed by third-parties for Apple could only be used on an Apple Computer in the past. Apples computer used to play a role as digital creative tool, but now, other software producers have reached same level and these software programs can be used on multiple operation systems and competition has occurred. For example, Final Cut Studio 2 Adobe Creative Suite 4 Production Premium, iWork 08 Microsoft office, iLife 08 Blog, Adobe Dreamweaver, flicker, and picasa, and Logic Studio DTM software. Considering this output of five force analysis, two strong forces could be found: a strong decrease is price and severe competitive environment in PC industry. Especially, a conflict of software is important because existence of similar software as all competitive software can be used with the Windows OS, means that there is nothing we can only do with Apples computer. Are the dynamics in this industry favourable or problematic for Apple? They are problematic as Apple focuses on keeping its computers unique. Its strong points have been threatened by its competitors and its environment. If Apple could not find a way to create differentiation that attracts customers in this highly competitive market, their computers lose their attractiveness and Apple would lose even more of its market share.

The difficulty of Apple in the PC industry over time

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

We must therefore conclude that when there is no mismatch between consumers economic resources and Apples computers the problem must be a mismatch between Apples computers and the consumers tastes and preferences.

The difficulty of Apple in the PC industry over time Analysis

Five Forces Model Suppliers force The case text by Yoffie & Slind (2008, p. 9) describes two different categories of suppliers. The first category is microprocessors and the second category is operating systems. Microprocessors are said to be widely available at highly competitive prices. It is questionable to what extent that can be true in a market where the market leader (Intel) provides more than 80% of new computer with an Intel CPU (Yoffie & Slind, 2008, p. 9). Other components are real commodities and do not have market leaders with such high market shares. The category of operating systems is not competitive at all according to the case text (Yoffie & Slind, 2008, p. 9) with only two main suppliers. In the case of Apple this doesnt necessarily have to be a problem since Apple provides their own computers with their own operating system.

Because of these two findings it can be concluded that the supplier force within the PC industry were not really the problems that caused the decline in market share of Apple over time. Buyers force The buyers force has changed over time. In the beginning of the PC industry (1980) consumers were not very well informed about functionality etc. The Internet has made information about PCs widely available (Yoffie & Slind, 2008, p. 8). With information being more widely available people could compare functionality and prices more. This change over time could (partially) explain why Apple lost market share. Perhaps people found out that comparable products were cheaper and/or better. New entrants force The threat of new entrants is partly determined by the entry barriers. In the computer industry it became more difficult to enter the industry over time. This has been the result of multiple reasons the most important being that Personal Computer components became more standardized over time (Yoffie & Slind, 2008, p. 7). This resulted in easier access to the products and a decline in price of components (Yoffie & Slind, 2008, p. 7). The computers of Apple didnt use very much standardized products and were in the beginning only compatible with other Apple products. With products being standardized there costs of components were driven down through economies of scale. Thus lowering the prices of computers, this made it difficult for new companies to enter the market.

Substitutes force Within the computer industry there are many substitutes. One of the main substitutes is probably newer products (PCs) with a higher functionality, better specifications for an equal (or lower) price. This is an example of a higher relative price performance. What also could be counted as a substitute product are Personal Digital Assistants (PDAs) and Smartphones that came to the market in the last years (Yoffie & Slind, 2008, p. 10). Other examples that are described by Yoffie & Slind in the case text are TV set-top boxes and game consoles that could start to replace (substitute) PCs. It is however mentioned that these examples could just as easily supplement PCs. Therefore it is not sure whether this is a negative or a positive development. Industry competitors force The industry has grown tremendously. Data that supports this trend before 2002 could not be found. Data from 2002 2007 (Yoffie & Slind, 2008, p. 17) shows that total computer net sales have grown from $4.534.000.000 in 2002 to $10.656.000.000 in 2008. This shows that there must be a huge internal rivalry. The switching costs must probably have declined over the years. Reasons for this are off course the standardizing of PC components (Yoffie & Slind, 2008, p. 7). With lower switching costs, it must have become easier for Macintosh users to switch to alternatives; something that resulted in a decline in market share. Consumers determinants in the purchasing a personal computer The second part of the analysis of this research question takes the consumers determinants into account. There can be a mismatch between the economic resources of the consumer and the prices of a product and there can be a mismatch between the consumers tastes and preferences and the product. In the case of Apple Inc. it is clear that competitors products became cheaper over time while Apple didnt have the benefits of growing economies of scale. Cheaper prices for competing products could be a reason why consumers chose other PCs over Apples Macintosh. A second aspect is that with the development of Windows in the 1990s (Yoffie & Slind, 2008, p. 6), the main advantage of Apples software vanished. It is said in the case that the Windows OS combined with an Intel processor) had replaced IBM-compatible as the industry standard (Yoffie & Slind, 2008, p. 6). This development implies that consumers no longer prefer Apples software, and perhaps hardware, over other PCs. This could then have lead to a decline in market share. It can be concluded that despite Apples superior products, the new IBM-standard, with its standardized components that made components cheaper through economies of scale, higher industry competitors forces, easier distribution of computers, better information about computers and their prices etc. are reasons for Apples declining market share over time.

Sustainability of competitive advantage in the PC industry

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

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they also function with other non Apple computer products, like keyboards. This can be viewed as a valuable resource and imitable resources as some of these design factors are protected by property rights and thus competitors cannot copy these factors. Another Key resource are the apple stores, these stores are valuable resources as they create quite some revenues, 19% of total revenues in 2008 (Yoffie&Slind,2008,P.6). Brand recognition and the building of resources is another imitable resource that is a key resource for Apple. As Apple was created during the 1980s it has had a long time to develop its brand and accumulate resources. Because Apple is now so well known for its quality products and distinctive style it is difficult for competitors to copy these products with the same success. As the PC industry and the components within them have been largely standardized it is difficult to obtain rare resources. Sustainability Now that we know what Apples resources are we can answer the question. Do these resources provide Apple with a sustainable competitive advantage in the PC business? The problem with Apple and every other PC producer is that none have rare resources as the parts used in building PCs are largely standardized. Another problem is that there is always a substitute for a certain PC. Non-substitutable resources are also limited as the products mainly need to have the same functions. Thus companies need to largely rely on brand name and quality, but quality increases price. This is a problem for Apple as its high quality products are more expensive than computers from other companies. Currently Apples share in the PC business is relatively small, thus it can be concluded that they do not currently posses as sustainable competitive advantage and the current resources are not enough to create a sustainable competitive advantage. However it does seem that Apples PC Business does currently have sustainable growth. Part of this growth can be attributed to the Halo effect of the i Brand, which has been extremely successful due to products like iPod and iTunes and thus increase the interest in Apple products including the Macintosh computers. The other part of the growth can be attributed to the changes Steve Jobs implemented in recent years including restructuring of Apple and improving the image of Apple. So currently Apple has sustainable growth and if this growth continues it can change into competitive advantage.

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Strategic advice
Apple could build up its market share by using its resources more effectively. However Apple does not possess a lot of resources that could provide a sustainable competitive advantage. The resources are the creativity to differentiate itself, brand recognition and the Apple Stores. These differentiated products can be patented and protected. Brand recognition must be used to rebuild market share that is partly based on this brand recognition. This recognition has been enhanced by the i-Brand that has emerged in the last decade. Apple Stores can also be used to further enhance the brand recognition and offer Apple PCs. Another option to regain market share would be to lower the prices of the PCs and at the same time try and retain the quality of the products as this is currently one of the larger problems Apple faces as its competitors all have cheaper products.

Conclusion and Reflection

From our analysis and research we can derive the following: despite superior products, Apple has lost a significant part of its market share over time. This can be explained by a changing standard from Apples OS (Operating System) standard towards the standard of an Intel CPU with Windows OS. Furthermore, the high competition has been a problem. This was supported by the standardization of PC components. Furthermore distribution of PCs became easy and information about PCs was more widespread than it was before. This made it easier for consumers to compare functionality and prices of PCs. Apple could not benefit from these declining costs because of its special PC structure, with special components. The Theories we used to develop our conclusions had their uses, but all theories, concepts and models were developed to explain and describe certain phenomenon. However, in the process of trying to explain these phenomenons to others, facts will be simplified and will lose their detail. For example in Porters five forces model, the model has split reality into five rough pieces; when in reality this is not so simple and there would be more forces at work in shaping a business and the surrounding market. But without simplifying these theories and models it would become difficult to implement these theories.

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References
Articles: Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management (17), 99120. Bingham, C. B., & Eisenhardt, K. M. (2008). Position, Leverage and Opportunity: A Typology of Strategic Logics Linking Resources with Competitive Advantage. Managerial and Decision Economics (29), 241-256. Collis D.J., Montgomery C.A., (2005). Corporate Strategy: A Resource-Based Approach. McGraw-Hill: Boston. Stahura, J., DeVaney, A., & Win, Y. (2005). Determinants of Household Expenditure on Computer Hardware and Software. The Journal of Consumer Affairs (39:2), 254-275. Wit, d. B., & Meyer, R. (2004). Strategy Process, Content, Context An International Perspective (3rd edition ed.). London: South Western Learning. Yoffie, D. B., & Slind, M. (2008). Apple Inc., 2008. Boston, MA: Harvard Business School. Websites: Apple.com - Press Release Library. (2009). Retrieved September 21, 2009, from Apple.com: http://www.apple.com/pr/library/ Apple.com - Investor Relations - 10-K Annual Report. (2008): http://library.corporate-ir.net/library/10/107/107357/items/315133/AAPL_10K_FY08.pdf. Accessed 21. Sep. 2009. X-bit laboratories - Average Selling Prices of Personal Computers Collapse. (2009). http://www.xbitlabs.com/news/other/display/20090306064622_Average_Selling_Prices_of_Persona l_Computers_Collapse__Market_Research.html .Accessed 21. Sep. 2009.

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