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Gwen Johnson SJ Lee Michelle Middleton Nigel Ngai Greg Palmeri
Business Capstone Professor Lee March 5, 2008
Apple Inc. Executive Summary
Apple Inc. is a company that designs, manufactures, and then sells desktop and notebook computers, portable digital music players, and cell phones. It also creates software like the OS X operating system, iLife, iTunes, or QuickTime; and peripherals such as printers or storage devices that go with these products. The biggest challenge Apple is facing is that consumers are reluctant to pay for songs and thus, Apple is losing customers to its competitors who are offering music at a lower price. This can be seen in increased piracy and code hackers. We came up with two possible solutions to address Apple’s challenges. The first is to create a streaming music system. Using the currently existing streaming music program, customers can choose stations from different music categories. With a more personalized system they could choose stations that play music similar to an artist they already like. While the streaming music is playing customers would have the option to buy the song as well. The second option is to open up their music file sharing program with an all encompassing price. Apple stands to benefit significantly in the future from building a closed community with artists and consumers which will enable the company to compete more aggressively with record companies while also building a closed network which minimizes hacker risk. The second option of the closed community solves the main issues faced by Apple, like the loss of customers to competitors and dealing with illegal downloads from consumers, which is why we found this to be the best option for Apple to pursue. Its overall purpose is to deliver a competitive music package with top security, which adds value and significant competitive advantage to Apple’s current processes.
Apple Inc. Table of Contents 1. The Strategy of Apple Inc. ………………………………………4 2. Strategy Evaluation …………………………………………… 5 2.1 Michael Porter’s Five Forces Industry Analysis ……………….5 Table 1: Porter’s Five Forces ……………………………………..6 2.2 The VRIO Assessment …………………………………………8 Table 2: Assessment of the Apple, Inc.’s Internal Capabilities …... 9 3. Strategic Option: Streaming Music……………………………...10 3.1 Evaluation of the Streaming Music Strategy ………………….. 10 4. Strategic Option: Closed Community……………………………12 4.1 Evaluation of the Closed Community Strategy ………………... 12 5. Strategy Selection and Implementation ………………………… 14 5.1 Sequence of Implementation …………………………………...15 6. Apple’s Competitive Advantage ………………………………...15
Apple Inc. 1. The Strategy of Apple Inc.
Apple Inc. is a company that designs, manufactures, and then sells desktop and notebook computers (Mac), portable digital music players (iPod), and cell phones (iPhone). It also creates software like the OS X operating system, iLife, iTunes, or QuickTime; and peripherals such as printers or storage devices that go with these products. Apple is in the technology sector, and has expanded from the computer industry into peripherals and the digital entertainment industry because of the wide scope of its products and servicesi. Apple’s mission statement is as follows: Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market with its revolutionary iPhoneii. Our group struggled to find out what Apple’s objectives are. It turns out that it does not really have any well-defined short-term goals. Steve Jobs said in a conference, “Our goal is to provide our customers with the best personal computers in the world.”iii We had a hard time finding other specific objectives of Apple, Inc. Apple incorporates most of its product lines, such as the Mac, iPod, iTunes online store, and iPhone into its mission statement. It shows that Apple has fully evolved into a digital entertainment company from a former computer-oriented company. Also, Apple is right about its position of being a leader in the digital entertainment industry and it shows in its sales figures: its revenue in 2007 was $9.6 billioniv. By March 2005, Apple had sold more than 300 million songs and the number is still increasing tremendouslyv. But the music industry loses around US$4 billion to piracy a yearvi. This number addresses the biggest challenge Apple is facing: consumers are reluctant to pay for
Apple Inc. songs and thus, Apple is losing customers to its competitors who are offering music at a lower price. This can be seen in increased piracy and code hackers. Other problems, such as lack of
focused consumer groups, not taking full advantage from its existing loyal customers, and failure to integrate its products with readily available existing technology, are also obstacles to Apple’s success as an organization but they are not as critical as the problem we mentioned above. In this article, we will carry out an industry analysis of Apple, generate two possible solutions, analyze the feasibility of the two options, recommend the best solution, and implement and evaluate the strategic solution. 2. Strategy Evaluation As Apple’s mission statement emphasizes, it is true that this company has kept itself innovative to be a leader in the industry by introducing differentiated products in terms of the functions, the design, and the brand image. Its innovative mindset has built up a very strong power of its brand name, and particularly in the MP3 market. The so-called ‘iPod Generation’ came into being as Apple’s MP3 player became a very popular icon for the young generation. Apple’s innovative strategies to differentiate gave it the competitive advantage in an environment in which trends and technology change rapidly, and the tendency that people value uniqueness is also co-worked with the environment. 2.1 Michael Porter’s Five Forces Industry Analysis For more effective strategy evaluation, we will examine the industry analysis through Porter’s five forces analysis. It is necessary to define the industry that Apple Inc. belongs to. It used to be just in the personal computer and software industry but now Apple expanded its business to the entertainment industry, which includes MP3 players, online music service, and mobile phones as well as PCs. Although Apple is now referred to as a company which is
Apple Inc. providing digital entertainment products and services, the industry itself is not consistently comparable with the other companies because Apple is not specialized in just one scope of product, such as the PC, but the scope of products and services provided is more complicated. Thus, we will look into the major segments of Apple’s products and services in terms of PC, MP3 players, online music services, and mobile products in the table below. Table 1 Porter’s Five Forces for PC, MP3/Music Entertainment Services and Mobile Products
PC Low - Economies of Scale: R&D is especially a big part of the cost of producing (R&D cost in computers hovers at 12% of sales by the U.S. industry)vii. - Product Differentiation: Apple’s PC has its own operating system and the unique design. - Cost Advantage: High demand particularly in proprietary technology. MP3 player/online music services Low - Since iPod nano launched, some competitors such as Rio and Olympus had preferred to stop. - Economies of Scale: iPod has 80% of market share and Apple contracted with Samsung to buy 40% of its flash memory production which is two times more expensive than a hard driveviii. - Product Differentiation: iPod has its own music store like iTunes which allows customers download music conveniently. The complete set of iPod, iTunes and the accessories for iPod. - Cost Advantage: High demand in proprietary technology. Apple has several patents for iPod and favorable access to raw materials by the contract with Samsung. Mobile Products Low - Economies of Scale: High demand in R&D and marketing (today’s cell phones come with a lot of add-ons like camera, voice recorder, speakerphone, MP3 player and FM receiver. They also have built in memories to record and retain voice and pictures and facility to download them to a computer). - Product Differentiation: iPhone has add-on functions with technology from their own PC and MP3 player. - Cost Advantage: High proprietary technology and favorable access to raw materials. High - There are relatively large number of competing firms such as Samsung, LG, Motorola, etc., but the latest market data from analyst firm Canalys estimates that Apple took 28% share of US smart phone market in 4th quarter of 2007ix.
Threat of Entry
High Threat of Rivalry - There are relatively few competing firms compared to other industries, but Microsoft has most of the market share. - Lower priced PC makers like Dell have been growing in the market.
Moderate - There are various competing firms such as Samsung, Sony, i-River, etc., but iPod has almost 80% of the market share. - But if it does not keep the products innovative, the other company’s products which are lower in price than iPod can be a significant threat in anytime.
Low Threat of Substitutes - Many types of products such as PDA, DVD player, and calculator can exist as a substitute for PC, but these can substitute only one or two functions of PC. Moderate - The major suppliers are of raw materials and the labor which is highly proprietary in technology and has the power to impact price. - Besides the threat of the labor which includes the technicians, there are relatively various suppliers for the raw materials. Moderate Threat of buyers - The number of buyers is huge and growing as new technologies are introduced at a fast pace. - Apple differentiated by creating its own operating system and unique design, but other companies like Dell
Moderate - The substitutes for MP3 player can be a CD player, MD player, radio, etc.; but cheaper and easier access to MP3 files has been making customers leave from the other music players.
Low - Mobile phones can be substituted by home phones, internet messengers, etc., but the main convenience of mobile phones which is the portability cannot be easily substituted. Low - Today’s phone has a lot of functions in addition to calling/receiving so there are many kinds of suppliers for the camera, MP3 players, Video players, memories, etc. - Apple which is already in the industry of PC and MP3 mostly deals with internal mediates and suppliers. Low - The number of buyers
High - The suppliers for raw materials and labor can be the threat, but the supplier who holds the main profitability is the song writers, singers and players. - Another big threat is the illegal free music download websites or P2P file- sharing sources. Easy and cheap access to MP3 files can encourage the MP3 player market, but on the other hand, this can be the threat to iTunes. Low - The number of buyers is continually increasing and they keep demanding new and updated products. - The internet speed and the music file providers are developing and these environments encourage the MP3 buyers. - iPod has relatively loyal customers.
Threat of Suppliers
is even huger than the PCs. Also the buyers
keep increasing with the new market of other developing countries.
or HP differentiate
by lower price marketing.
According to the five forces analysis, the threat of rivalry is the highest external force in the PC and mobile phone industry and in the MP3 player and online music service industry, the power of suppliers is the highest external force. However, the marketplace trend seems to be
Apple Inc. destroying all the boundaries of each industry. A MP3 player is not only an audio device anymore, but it is getting to be a more enhanced tool for full-motion videos and data storing which is the area of PCs. Furthermore, a mobile phone is also not only the tool for the calling and receiving, but rather, it is taking the role as a digital camera, a carry-on PC for memory storing and internet, and an audio device as a radio or MP3 player as well. In terms of these trends, Apple has been very smart in analyzing market profitability and adopting innovative strategies by catching the changes of the market trends. Also, the most recent step to the mobile phone industry seems that it was the best way to utilize and maximize their competitive advantages by integrating PC, MP3 player, and online music service. 2.2 The VRIO Assessment
To examine Apple Inc.’s internal strengths, weaknesses, resources, and competencies, we need to ask four questions about this company’s competitive potential using the VRIO framework. The Question of Value: Do the resources enable Apple Inc. to exploit an environmental opportunity or neutralize an environmental threat? Apple already had many experiences in designing, manufacturing, and selling PC and MP3 player and online music services. Apple has used these experiences and skills to exploit opportunities for stepping into the mobile industry. The Question of Rarity: How many competing firms already possess particular valuable resources and capabilities? Apple has patents not only in their operating system and software, but also in the technology that allows monitors to record video of their viewers at the same time as displaying visual output in their computer products. They also have an integrated system with iPod and iTunes to allow the users to easily utilize both products. These resources are definitely rare as Apple hold patents, preventing other companies from using such technologiesx.
Apple Inc. The Question of Imitability: Do others companies without the resources or capabilities
face a cost disadvantage in obtaining or developing Apple’s resources? Apple is already holding the patents and copyrights in their technologies and designs. Since the patent extends to Apple the right to legally pursue any company that violates its intellectual property, companies are unlikely to engage in using this technology without permission for fear of significant amounts of money that could be paid out in damagesxi. The Question of Organization: Is Apple Inc. organized enough to exploit the full competitive potential of its resources and capabilities? Apple has a reputation for being a creative company and has the required procedures and practices in place to support the proper use of technology as a strategic resource. Apple Inc. has especially defined innovation and design activities as being of higher importance than the commercial aspect. Innovation and design have been at the core of Apple and its organization since its start, which increases the chance of the competitive advantagesxii.
Table 2 Assessment of the Apple Inc.’s Internal Capabilities Are the Resources or Capabilities: Costly to Exploited by Rare? Imitate? Organization? Yes Yes Yes
Competitive Advantages Sustainable
Taken together, the analysis of Apple Inc.’s internal capabilities suggests that it is valuable, rare, costly to imitate, and organized to exploit opportunities. According to the result of this assessment, Apple Inc. is sustainable as long as it preserves and develops these competitive advantages in the industry, which requires being continuously innovative.
Apple Inc. 3. Strategic Option: Streaming Music
Our first strategic option is to develop a streaming music system similar to Pandora. The Pandora music system allows users to listen to streaming music that plays based on their favorite artists. All of the songs have gone through an in depth analysis to make sure customers hear music they like. This would be ideal for the iPhone because of its internet capabilities. It would also come into play if Apple comes out with an iPod that has Wi-Fi or satellite capabilities. Customers could buy a monthly package that contained unlimited streaming music and a set number of downloads. Currently iTunes offers streaming music but it is not available at a personalized level. Using the currently existing streaming music program, customers can choose stations from different music categories. For example while going jogging, consumers may choose to listen to the station that plays upbeat music ideal for working out. With a more personalized system they could also choose stations that play music that is similar to an artist they know they already like. While the streaming music is playing customers would have the option to buy the song if it is something they like. This would be a great way to increase sales of downloaded songs. If it is a song they never want to hear again, they could choose to have that song removed from all of their stations. Customers would still be able to buy music from the iTunes store. A certain number of downloads could be included in a monthly fee for the streaming music. If customers go over their limit of songs, then they can buy additional ones at the .99-cent cost. 3.1 Evaluation of the Streaming Music Strategy Strategic option one is very feasible. Technically, the main component of this option is an extremely large music database, which Apple already has. This option continues the use of the iTunes store with just a few minor changes, such as making it possible to have a set number of
free downloads. The iTunes store would also have to be linked to the streaming music program. The streaming music player itself would be the most difficult part of this option. If Apple decides to mimic Pandora it would take a lot of man hours and money. Pandora has a staff that listens to each individual song in its library and does an in depth analysis of each song. Each of these analyses take from 20 to 30 minutesxiii. Songs are then grouped by over 400 characteristics such as key, harmony, lyrics, etc. This could be something that is out of Apple’s scope. However, Apple does have its music organized to some extent. Music sold on iTunes is already listed under a certain genre along with the year it came out. These could be the factors that Apple decides to use when deciding what songs to play on each station. The economic benefits of this strategy are that Apple can reel in consumers that are hesitant to pay for music when they have a wide variety of tastes and do not want to pay for every song they listen to. Another economic advantage is that it gives listeners a chance to become exposed to new music and gives them an easy way to make this new music a part of their personal collection. An economic disadvantage is that Apple will be giving customers a chance to listen to an unlimited amount of music without having to pay for each song. Also, there is the cost of setting up the new system. Apple is already familiar with the Pandora music program. Currently when Pandora users listen to songs they have the option to buy them on iTunes. The existing relationship could either hurt or help this strategic option. Apple’s familiarity with the program could save the company money when it is time to set up a similar system. On the other hand Apple may be under a contract with Pandora that could prohibit Apple using a similar system. This option is economically feasible because there are ways to pay for the cost of up keeping the new system. Apple could charge a monthly fee to listen to this personalized streaming music. They could also include advertising to the streaming music
Apple Inc. station, which could be very profitable because advertisers would be able to target certain
listeners. In order to avoid the high cost of creating its own music analysis, Apple could simply buy out Pandora. Not only would this reduce the startup costs, it would also eliminate competition and give Apple access to Pandora’s 6 million subscribersxiv. The organization of Apple’s iTunes is set up in a way that would make it easy to add this new streaming system. The main organizational difficulty would either be setting up a monthly fee system or setting up advertising. 4. Strategic Option: Closed Community Apple stands to benefit significantly in the future from building a closed community with artists and consumers which will enable the company to compete more aggressively with record companies while also building a closed network which minimizes hacker risk. Creating a closed network allows Apple to maximize security, value, and freedom to compete more aggressively with competitors in the overall digital entertainment industry. The option of licensing music through Apple’s music store online as a portal creates a strategically lucrative impact on revenue for online music sales. Using this approach with the online store allows Apple to publish songs in return for artists overall sales. Pairing artist’s skill with the iTunes online music portal is a strategically lucrative step for allowing Apple, the artist, and the consumers to maximize value in the market place through versatility. Ultimately Apple can mold and develop this branded market since music will forever be so much more than just a fad. 4.1 Evaluation of the Closed Community Strategy Apple is technically fit to take on competition since it boasts immense branding ability, and a store front that enables functionality for e-consumers music shopping needs. Currently it
offers consumers variety with music, movies and podcasts. However by building artists through this immensely effective store front gives Apple the ability to build artists. The consumer technology barriers to entry are low enough now to appeal to a sizeable number of professional and amateur artists and consumers. The company has been highly profitable from the iPod line of products, and the development of their on-line music portal is an essential next step in growing the company’s revenue sources. The greatest challenge here will be building a strong network with artists and consumers, which could take significant capital to secure resources. However advertisements could subsidize overall costs to implementing these new options to the iTunes store. Continuing to build this music pairing by licensing smaller artists; building advertising revenue and implementing new pricing strategies will maximize Apples use of resources and boost overall competitiveness. Apple could position itself competitively to take on the recording industry by eroding at their talent pool and directly marketing talent to specific niche groups. The market is suffering from music losses due to illegal downloading which could play to Apple’s strategic advantage. Utilizing the ability of their immense branding potential, and security enabled communities will fortify Apple against theft. Record executives agree that theft of music “was in large due to online piracy”xv. This competitive move could create a show down with the record industry ultimately stressing Apple’s resources in the long run since the recording industries has billion dollar buying power. Offering an all encompassing pricing package at the Apple iTunes Music store will better fortify and cater to user’s interests. Opening up pricing options for consumer creates greater sustainable advantage in the online music market place. Using the best talent to map out the music industry is a must for building a strategic advantage against competitors. The environment with the iTunes Store allows for the company to
Apple Inc. build significantly on its web music portal, while really focusing resources into more branding options with this product regarding micro niche markets. Apple’s overall move to change its
name to Apple Inc shows potential for further online expansion and growth by focusing more on the overall product/service pairing with its “community of 25 million users”xvi. Apple needs to promote that it is a friend of the artist who also stands behind the ethical decision to purchase music from the artist. We feel this mentality fits into the framework of the art centric environment that Apple embodies. 5. Strategy Selection and Implementation The strategy that should be implemented is the Closed Community. The Closed Community solves the main issues faced by Apple; specifically the loss of customers to competitors and dealing with illegal downloads from consumers. One of the main tradeoffs by not choosing the Streaming Music option is that although it has experienced difficulties, the firm Pandora has experienced a lot of popularity with its streaming music stations. Its personalized touch is also a tradeoff because it goes through so many criterions to bring each consumer exactly what he or she is looking for. While the Closed Community offers unlimited downloads and many options, it isn’t targeted as much towards each specific iTunes user. Another disadvantage with the Closed Community is that now Apple is becoming more competitive with the large recording companies and giving up good relations with those firms. The Streaming Music solution would have been able to further a quality relationship with recording studios. This option proves to be the most advantageous when using the VRIO analysis. This strategy creates value in many ways. First, the Closed Community adds value to the Apple brand name. Also, value is created from the information that is collected from an increased customer base. A sense of belonging to the Apple community adds additional value. This strategy is
Apple Inc. innovative and few competitors have been able to create a community that encompasses such a broad customer base. The ability of competitors to imitate a closed community is difficult
because they do not have the brand recognition that is necessary. Obviously Apple already has the organization that is required to expand its community to include new independent artists and new customers. The iPod and online music store are well established and well known by millions of consumers worldwide. It also has the resources that are necessary for this, especially if Apple decides to include advertisements on their iTunes store. Another advantage of the iTunes software is that Apple is constantly updating the encryptions to deal with illegal downloads and hackers. This is a problem that will continue to be around, but Apple already has the necessary tools to deal with the dilemma. The Closed Community is sustainable in the long run because it is going to become the standard in the music industry. 5.1 Sequence of Implementation • • • • Research to set the ideal price for the monthly fee. Finish major licensing negotiations with industry leaders and independent artists. Decide if advertising is needed to fund cost of supporting independent artists. Update iTunes online music store and encryptions to allow unlimited access to music that is limited to Apple Inc. software. 6. Apple’s Competitive Advantage Apple will receive a sustained competitive advantage by implanting the Closed Community. Apple will have a long term advantage over its competitors because its new system will bring in new customers and then encourage them to use Apple exclusively. Another competitive advantage in the long run is that Apple will be building relationships directly with artists that will be hard for competitors to copy.
Apple Inc. (March 5, 2008). Business Week Online. Retrieved Feb 27, 2008 from http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=AAPL ii Apple Investor Relations. Retrieved Feb 27, 2008 from http://www.apple.com/investor/ iii Apple, Inc. (2005). Apple to Use Intel Microprocessors Beginning in 2006. Retrieved 4 March 2008, from Apple, Inc. Web site: http://www.apple.com/pr/library/2005/jun/06intel.html iv United States Securities and Exchange Commission (2008), Apple, Inc. Form 10-Q. Retrieved 2 March 2008, from SEC Web site: http://sec.gov/Archives/edgar/data/320193/000119312508017426/d10q.htm v Barney, J. & Hesterly, W. (2008). Strategic Management and Competitive Advantage. (2nd ed.). New Jersey: Pearson Prentice Hall, PC 1-11. vi Barney, J. & Hesterly, W. (2008). Strategic Management and Competitive Advantage. (2nd ed.). New Jersey: Pearson Prentice Hall, PC 1-6. vii Flamm, Kenneth. “Creating the Computer: Government, Industry, and High Technology”. Brookings Institution Press. 1988. pg. 210-211. viii Sangan, Harold. “Apple and MP3 Player Market” Extracted from http://www.happle.org/etudes/happle-anglais_ipod.pdf in Mar 3, 2008. ix Apple Took 28% Share of US Smart Phone Market and is 3rd in Worldwide Market Share. Extracted from http://www.techztalk.com/techwebsite/node/393 in Mar 3, 2008. x Tomas, Owen. “New Apple Monitors to Double as Cameras” Business 2.0 Online Magazine. April 27, 2006: 2:36 PM EDT xi MBA 618. “Apple’s ‘Screen Cam’” Extracted from http://sahli1.blogspot.com/ in Mar 4, 2008. xii Holmberg, Tove., Lindqvist, Fredrik., Logander, Marcus. “Living On the Edge: A Case Study of Important Factors for the Survival of Apple Computers, Inc.” School of Economics and Management, Lund University. Jan, 2005. xiii http://www.Pandora.com, accessed March 1, 2008 xiv A.B., Red Herring. “Pandora Media”. Business Source Premier,October 7, 2007. xv et al. Barney & Hesterly 1-11 xvi et al. Barney & Hesterly