Apple Inc 2008 Report


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This is a report prepared as per MBA 660 requisite by the USM students

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Apple Inc 2008 Report

  2. 2. ISSUES STEVE JOBS: Steve Jobs founded Apple Computers in 1976 in California along with his colleague Steve Wozniak. Apple I was the first personal computer. Since then the computer business has been growing rapidly and so has been the company. During his position as a CEO Jobs has played a major role in the company’s success. The company performance has been a roller coaster ride associated with Jobs’ presence and absence. There is a pressure to keep Jobs at the CEO’s position due to the success stories he has written in the history of Apple. Once Jobs was forced to leave the company and the directors brought in other three CEOs one by one. They did apply different strategies to create the success that Jobs had. But it did not work out properly with some exceptions and company had to face certain difficulties. Then the directors decided to bring Jobs back at the position of CEO. However, there is too much dependence on the present CEO Steve Jobs. Although he is the founder of the company, he is not immortal. LOW MARKET SHARE: Apple is a very well known brand and it has quality products. Every now and then Apple brings out a new and unique product. But even after the innovative products and the popularity it enjoys, it has low share in the worldwide PC market (3% in 2007). Apple’s competitor Dell has competitive advantage through its manufacturing, distribution and marketing. It’s the industry leader in US (world market share is 14.9 %). Another of Apple’s competitor, HP, worked its way through aggressive consumer marketing and by giving importance on product designing. This gave HP the highest market shareholder in 2007
  3. 3. (18.8%). Due to the pricing strategy of Apple’s products and due to its low compatibility with products other than Apple’s, it suffered low market share constantly. EXTERNAL ENVIRONMENT The industry has a fast growth. Everyday new and innovative products flood the markets. From mobile phones to laptops there is a new product advertised almost every week. The major players of the industry are Dell, HP, Apple, Acer and Lenovo. There is a high entry barrier due to the standardization of the PC components. If any new players wish to come into this business, they need to have a differentiated strategy form the existing companies. Also, a high learning curve exists which means the customers take time to get accustomed with the new product. The existing brand names make the entry barriers high. Suppliers for this industry are powerful. There are only a handful of companies like Intel and Microsoft which manufactures microprocessor and operating systems (OS). These suppliers are hard to switch due to dominant production of such components. There is always a threat of forward integration by the suppliers since the products manufactured by these suppliers are highly sophisticated and the other components needed for the production of PCs are not so difficult to imitate. But there are many sources which do provide small PC components like memory chips, disk drives and keyboards. Substitutes for most of the products are easily available at a lower price. Although buyers do look for quality and brand name, some of the components they need are purchased from these substitute providers at a low cost. For example if a consumer cannot afford to buy an Apple iphone then he/she has the option to buy any alternative low cost smart phone from some other company. There is high competition due to high industry growth. Manufacturers of these products try every possible strategy to attract the attention of customers through promotion and advertising. Apple fights with its highly
  4. 4. innovative products whereas Dell and HP have better marketing and distribution strategies. According to the present conditions Apple does have a Gross margin of 35% which exceeds that of Dell’s 19% and HP’s 24%. In this extremely competitive environment, companies are highly responsive to any new product as they can imitate at low costs. It is almost reaching a status of mature market with intense competition but it is still growing. There are companies which are coming up with low cost strategies to compete with the existing manufacturers and this had led to intense rivalry. Companies like Acer and HP acquired Compaq are already competing with Apple and other companies with notebooks on the basis of cost. Also there are a wide range of MP3 players available in the market which ranges from $30 to $499 and from 1 GB to 160GB. Also there are several websites which give access to downloading and listening music which becomes a high threat for products like itunes. The type of consumers for this market can be categorized as home, small and medium sized business, corporate, education and government. Since buyers are mostly not concentrated they have less bargaining power for prices and models. Buyers do have a high switching cost which discourages them from buying a similar product from another supplier. But there are a number of substitutes available which makes buyers powerful to choose from the available options and also because they are very price sensitive. The customers always have an advantage of choosing the electronic good according to the need and taste. This industry has a vast customer base and companies have to be customer oriented and should innovate according to their demand. Apple targets customers who are “techno savvy”, who look for something unique. They have a wide range of products like computers (Mac book), ipods and iphones which are highly differentiated. Customers desire to buy its products as they are “icons of the digital industry”.
  5. 5. Exit barriers for this industry are high. There is a lot of capital requirement to establish a firm inside the electronics and PC industry. There is a chance of exit becoming almost impossible due to strategic interrelationships between these firms. Not all the products are made by the same firm. And so they have to depend on other firms in the industry for making a final product ready for the customers. So it is very difficult if one firm leaves, leaving the other dependent firms in dilemma. Technological changes in the industry are very fast. Everyday a new product or a new application or version for the existing product is available. Consumers are very demanding and it makes it necessary for the firms to compete with each other and become the first mover or the best as a second mover in bringing out a new innovation. The young generation in particular is very trendy and they love to show of the new things as a fashion statement. And so they expect companies to give them something which is different than what others have. It is both an opportunity and a threat when it comes to rapid technological changes. Companies have to move faster than the imagination of both their competitors and the consumers. If not, it is not long before they go down in history forever. INTERNAL ANALYSIS Strengths and Weaknesses: Apple Inc. makes a difference in the PC industry through its innovative product design and high standard applications. Macintosh has been the powerful tool to build the success story of the company. The “integrated system” of computer was its differentiated strategy which presented the Macintosh along with its own Operating System (OS). The new step in “Consumer Electronics Industry” has outshined Apple Inc’s performance as a smart company. The innovative products like iPod and iPhone have been very successful in potential music market. Customers have a great trust on company’s elegant products and they always look forward to be loyal to the brand. Apple keeps it Price strategy different from its competitors which give computers and other entertainment devices at low cost. The high prices (especially Computer) keep it access limited to only people with
  6. 6. high income level. The Apple computer had compatibility issues with Microsoft Office and IBM PCs, which motivated the research and development at the company. As the company has a wide product line, each new product makes the previous one dull against it; the issue of cannibalization may be a reason of bothering the expected revenue generation of the products. Core Competencies: Apple has been the leader of the Consumer Electronics industry and has maintained a distinct image in PC manufacturing and Music too. The Core competencies responsible behind the success are mainly the “Unique resources” and “Differentiation strategy”. It offers the best designed hardware and incomparable software in its products. The Apple has been giving “Plug and Play” solutions. The hard drive based player called iPod has a stunning design which has become the “icon of the digital age”. Apple has a “Think Different” motivation and it believes in “Value Creation”. The success of some products like iPod and iPhone cannot decide its sustainable competitive advantage because the industry has intense rivalry and imitation is also a threat. Hence, Innovation plays a key role to remain the leading company in the dynamics of fast-growing markets, and Apple definitely can withstand the changes with its innovative skills. Apple has been able to command a premium in market and gain above average returns owing to its innovation and differentiation of technologically superior products. VALUE CHAIN ANALYSIS Technology and Product Design: This Component is the true core of Apple’s Capability. The learning and innovation in technology in its products has led Apple to leverage its expertise in iPod, iPhone, iTunes and iWorks suite of products. Over due course of time, Apple has been able to perfect the chain of activities in innovation. New Products Ideation New Products Ideation Designing/ FundingDesigning/ Funding Product CreationProduct Creation Diffusing Products across company Diffusing Products across company
  7. 7. It is really the strongest advantage for a company to be independently manufacturing from scratch to finished product with application and peripherals. Apple starts from its new ideas of product design, designs it through its own resources and funding, then manufactures it and finally markets it wholeheartedly. Production: The bundled packages of Apple-developed hardware and software became the cornerstone for its own production process. Apple achieved unparalleled performance via 64-bit architecture, integrated distinctive styling with the multi-colored translucent iMac cases, and redefined intuitive operation with the iPod. The research and development oriented products give an extraordinary performance and products like Mac which soon became an identity of Apple Inc. While every product introduction has not been a success (Lisa, Newton), Apple treats component production as a natural extension of design process. Marketing and Advertising: Distinctive marketing campaigns have been a strategy of Apple to attract customers and to spread the information among them. Television commercials, Print Advertisements, Posters in Public areas and wrap advertisement campaigns have been successful ways of outshining the new product. Apple continues to command a market premium for producing a “better mousetrap” throughout its history. Steve Jobs personally unveils all new product introductions, reviews corresponding marketing campaigns and approves new product development guidelines. This adds to better targeting to the market and consequently, it is a special concern of company’s CEO.
  8. 8. Customer Service: Apple believes in keeping a place in customer’s heart, the customer loyalty is a great strength to the company. The credit for such a strong relationship between the company and its customers goes to company’s customer service and the nature of products which fulfills the need of today’s stylish people. Apple created a virtual love affair with their customer base by delivering technically superior products (iPods vs. other MP3 players, Macs vs. PCs, etc.), and aggressively pursuing hardware and software updates. Apple integrated their primary activities so well that it is transparent to the consumer where one activity begins and the other ends. A perfect example of this is Apple’s willingness to develop software to run Windows XP on its new Intel-based iMac and then post it online free to iMac users. In such an environment, customer service merely becomes the realization of receiving a little more than expected. STRATEGIC ALTERNATIVES Apple’s strengths can be attributed to many factors. First, Apple’s premium-price or product differentiation strategy as well as their retail strategy have proven to be essential to Apple’s past and will continue to play a vital role in Apple’s future. As a result of their past success as recognition as innovators, Apple has attracted the attention of many companies whom have recognized Apple’s potential for successful strategic alliances For example, Apple’s successful alliance with AT&T, provided Apple with the opportunity to improve their IPhone’s technology. Apple was able to the lower the IPhone’s price to consumers, as well as, up-grade the Iphone’s network coverage. In addition, Apple entered into partnerships with YouTube and Google in order to provide their IPhone users with cutting edge “search, mapping, and video features”. These partnerships allow Apple to further differentiate their products and add value to their users. Similarly, Apple’s reputation as an innovator and creator of easy-to-use cutting edge products continues to strengthen apple by keeping
  9. 9. Apple on the radar of the technologically savvy consumer, as well as providing support for Apple’s product differentiation strategy. Still, there have been some drawbacks or weakness as a result of Apple’s choosing to employ a product differentiation strategy. First, Apple’s selection of a premium price or product differentiation strategy also limits Apple’s market share. Some customers do not recognize the value that Apple’s attempts to create for their customers. Price sensitive consumers are reluctant to buy Apple’s products. Similarly, customers seeking highly customized computers may not choose Apple. For example, Dell, one of Apple’s biggest competitors and one of the top four P.C. producers, offers customers array of bundling options when purchasing a computer. This allows customers to choose hardware and software components as well as somewhat control the price of the computer. Instead, Apple offers their computer customers packages with very few customization options. Secondly, a problem for Apple exists in their reliance on Apple’s C.E.O., Steve Jobs. Jobs has been a guiding force at Apple, acting as Apple’s savior when the company saw their lowest financial numbers in 2002. Steve Jobs was responsible for Apple’s expansion and the introduction of one of Apple’s most profitable products, the IPod. There is a question as to if Apple could continue to operate as they do currently in the absence of Steve Jobs. Still, there are alternatives to Apple’s current problems. In regards to Apple’s low market issues, an alternative would be to add a product with a lower price point to Apple’s current product line. Similarly, an alternative to Apple’s reliance on Steve Jobs, would be to create another executive position for someone act as liaison between Apple’s top executives and Jobs. Thus, preparing Apple for the post Steve Jobs era.
  10. 10. In lieu of their drawbacks, Apple is still presented with opportunities to experience growth and success. Apple has established itself as a continuous innovator in the ever changing electronics industry. Apple’s commitment to employing the latest technology and providing their customers with cutting edge, stylish, sleek product designs have provided them with a sense customer loyalty. Apple’s customers are willing to pay Apple’s premium prices because they are satisfied with Apple’s products. Apple is continually working to produce products with improved compatibility, allowing their customer more flexibility and increasing the ease-of use of their products. By continuing with their premium price or price differentiation and retail strategies Apple can continue strive and uphold their reputation as an innovator in the electronics industry. RECOMMENDATION When Apple first entered the computer industry, they were first movers. They were able to revolutionize the way home computing was both viewed and accessed. This naturally have them a large market share, especially with the huge successes of the Apple II. However, IBM soon entered the market with a more user friendly and compatible computer and Apple saw their market share on the industry drop dramatically to 6.2%. Ever since then, Apple has trailed the computer industry leaders in market share. However, in more recent years, they have seen many successes from targeting a smaller market of trendy, higher quality customers that are devoted to their company. While maintaining a low market share of the computer industry, Apple has continued to produce a quality product. This quality has been seen throughout all of its many products and is not viewed as a lesser product compared to the competition. In addition to the quality, Apple has always been able to make more of a profit off of its computers than other distributors. Because of the reliance of companies like Dell and HP on Microsoft's Windows operating system, almost half of their revenues are cut by paying back Microsoft for using their product. This quickly turns Apple's small market share into an extremely profitable market share.
  11. 11. Apple’s low market share is turning far more profit per percentile than their competition because while Apple is making money, the other companies are usually only reaching their break-even point or slightly above. In addition to the competition that is seemingly strangling Apple's computer market share they must also battle against an economic downturn that has affected the whole industry. While all companies have seen a slow in sales and a loss of profits, Apple' has seen a greater loss in its computer revenues. Because of the nature of Apple's products, they are seen more as high-end items and more expensive luxuries rather than as necessities. Because of this many people are buying cheaper, lower quality computers from customized manufacturers in order to save money. Normally, this would lean Apple towards developing a lower priced computer that could compete with these personal computer models. However, this strategy has been tested before with the Mac Mini. What Apple found was that the sales of the Mac Mini were cannibalizing on the sales on other, more expensive models. This previous failure should be viewed as a warning and disclaimer against any further pushes into the low-cost market. One Apple product that will never be viewed as a failure is the iPod. Contrary to Apple's computers, the iPod has a giant lead over the competition when market share is concerned. Because of its success, it has introduced an entire generation to the Apple brand. By using the iPod as a gateway, Apple will continue to push its trendy image to new customers in order to gain more and more computer customers. Apple will look at further expanding on their small but efficient market share. However, with the current Microsoft user base, it is going to be increasingly difficult. The company will focus on its core competencies in order to stay successful. Apple's customers are incredibly dedicated. Many people that buy Mac computers continue to buy more Mac computers as well as other Apple branded products,
  12. 12. hardware, and software. Even though this is deemed as a niche market, Apple would be foolish to try to take the world of Microsoft and PC distributors head on. The difference in market shares is far too large. By focusing on their current customers and slowly expanding this base, Apple will try to better position itself for a future attempt to capture back the market share that it maintained many years ago. During the time that Jobs was absent from Apple, the company had a long period of ups and downs. New products were released to both success and failures. It was during this time, however, that their status as a niche market retailer began to form. Apple customers were extraordinarily loyal. Many people were buying IBM and other personal computers because they had a need for the devices. On the other hand, many people were buying Apple brand computers because they wanted an Apple machine. Due to this increasing amount of dedication to the company, Apple was able to charge a higher price for their high-end, high-quality computers. This allowed them to stabilize financially as well as discover a new identity as a company. After this new identity was established and Steve Jobs was reestablished as CEO of the company, Jobs was able to take this identity and expand on it. By targeting their now niche market, he was able to follow a product differentiation strategy to turn the company around. With the release of the iPod and iPhone, he was able to tap into markets and succeed in areas that were previously never explored or considered. Even though the deficit in computer industry market share remained relatively unchanged, Jobs’ foresight allowed Apple to reach new levels of profitability and success. Whether the Apple enthusiasts like it or not, Steve Jobs will not be around forever. While he has done great things for the company, he has left Apple in a precarious situation. What will Apple do when he leaves? Apple's last response to not having Steve Jobs as their CEO was eventually to rehire him as CEO. In order to survive once he is no longer leading the company, Apple needs to begin depending less
  13. 13. on Steve Jobs and balancing responsibilities throughout the company and among select individuals. In order to prepare for Jobs’ future absence from the company, Apple will look ahead and find a future replacement for Jobs. In order to sustain peace in the Apple world, such a replacement will preferably be chosen by Jobs himself. That way, the replacement will be able to learn and continue Jobs’ success as the company when Jobs’ role was reduced to that of a chief advisor or to that of no role at all. Continuing the Jobs mindset is the most important characteristic of a CEO at Apple. As long as the company has existed, the most success Apple has seen has come when Steve Jobs was at the helm. However, it is the manner in which Jobs runs the company that allows for such innovative success, not Jobs himself. The Apple board of directors will meet with Steve Jobs to discuss the future of the company within the next year. From the conclusion of that meeting, or series of meetings, Jobs will begin to look for a potential replacement—preferably from inside the company—in order to ensure that the Apple spirit stays alive within the company. Jobs will then serve a dual role as CEO and Chief Advisor as he mentors the future leader of the company. After two years of mentoring, Jobs will have the option of stepping down as CEO and further establishing himself as Chief Advisor. If he feels that the company is not ready for this he will have the option to retain his position as CEO as he sees fit. This option gives Apple the security it needs to ensure that it still lies in the best and most capable hands possible. The previous CEO's were able to do some great things in the name of Apple. Future CEO's have the potential to do just the same, if not better. Because of the company's past, Apple is in a great position to maintain its profitability. The continued success of its niche computers as well as the dominating iPod brand, Apple must rely less on Steve Jobs and rely a little more on the fact that they are a successful company with a dedicated customer base. This is something that losing Steve Jobs cannot change.
  14. 14. FIVE FORCES MODEL Low Threat of New Entrants Current Competitor s very Intense Very High Threat of Substitutes High High Low Low Bargaining power of Suppliers Bargaining Power of Customers
  15. 15. APPENDICES A QUICK VIEW ON MARKET SHARE AND FINANCIAL ASPECTS OF APPLE INC. The market share of PC manufacturers in 2007 The profitability ratios for Apple from 2004-2008 3rd Quarter
  16. 16. Debt Equity Ratio for Apple Inc. from 2004-2008 3rd Quarter Stock prices for Apple Inc. from 1981-2008 3rd Quarter
  17. 17. SALES FOR APPLE FROM 1984-2008
  18. 18. SWOT Analysis: Strengths: • Branding (Well established Brand) • Innovation • Differentiated product • Integrated Product (Computers + OS) • Ease of Use • Technically Elegant Products • Superior Quality • Colorful and Trendy • Marketing and Distinctive Advertising • Retail strategy • Customer loyalty • Online Sales (Informative website) • Financial Vitality Weaknesses: • High Priced Proprietary system • No Customization • Lack of Compatibility • Cannibalization Opportunities: • Fast growing Industry (Customer Electronics Industry) • Technological Innovations • Extend new products to loyal customers • High Potential music phone market • Strategic Alliances Threats: • Extensive Competition • Substitute Products • Low prices of Competitors • Technical Advancements • Economy downfall