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Case Analysis: Apple Inc., 2008




                      Sairam Iyer
                      XLRI GMP 034
                      11/6/2008
1) Competitive Advantages:
       -Design and innovation oriented
       -Greater horizontal and vertical Integration
       -Designing from scratch to finish bundled with applications and peripherals.
       -‘’Plug and Play” solutions
       -R&D oriented
       -An everything ready device

                                                     Firm Infrastructure


                                                            HRM


                                                   Technology Development


                                                       PROCUREMENT


                  Inbound                                  Outbound
                                      Operations                               Marketing/Sales           Service
                  Logistics                                 Logistics




        Alliances with         Design &              Horizontal &          Plug and play            I-tunes gives a
        major suppliers        Innovation            vertical              solutions                major edge
                                                     Integration
        Linkages with          Technology                                  Complete bundle      Operating system
        independent            Driven                                      of applications      more secure, and
        software vendors                                                                        less prone to virus
                                                                                                attacks
                               Collaborating                              I-pod—I-tunes         Apple’s retail
                               with other                                 combo gives           experience, new
                               leaders.                                   brand awareness mac consumers
                                                                          a push.               bought more.
Apple has been able to command a premium in the market and gain above average returns owing to
its innovation and differentiation of technologically superior products. This learning and innovation
in its products has led apple to leverage its expertise in the i-pod,i-phone, i-tunes, i-works suite of
products. Over due course of time Apple has been able to perfect the chain of activities in
Innovation and design leading to a fit between the activities which is difficult to imitate and hence
offers them an edge over competitors.




                                                                                           Diffusing products
            New products: Ideation     Designing/funding         Product Creation
                                                                                            across company
2) Analysis of the PC Industry based on Porter’s 5 Forces.



                                                    Low


        5-Forces
                                                 Threat of
                                                   new
                                                 Entrants




                                                  Current
                                 Bargaining                      Bargaining
                 Low                            Competition:
                                 Power of                         Power of           High
                                                Very Intense
                                 Suppliers                       Customers




                                                 Threat of
                                                 Substitute
                                                 products




                                                 Very High.




   -Current Rivalry: Very intense and fierce and the PC industry also has very low switching
   costs. This makes current rivalry very high. Apple faces stiff competition from Dell, HP, IBM
   etc.

   -Threat of new Entrants: Since there are considerable investments to be made for setting up
   this industry, new entrants would be reluctant. Though there is scope for White-box PC’s
   having a share of 36% world -wide in 2006, but since the existing companies have created
   strong branding awareness, this threat would be low.

   -Bargaining power of Suppliers: Two types of suppliers- microprocessors and OS: very few
   suppliers but memory chips, keyboards, disk drives: many suppliers. Suppliers will adjust
   pricing and quality to make their products more attractive so competition is high leaving
   them in a low supplier power position.

   -Bargaining power of buyers: Switching costs are low. This situation places the buyer power
   in a strong position that can only be countered by companies with strong product
   differentiation that would increase the switching costs
-Threat of substitute products: The more differentiation of product the less likely the switch
    to a substitute will occur. If prices are higher then the company with the higher price has to
    provide justification for the increase. Apple's operating system differentiation can command
    higher pricing when it is presented to the creative designer community but not to the
    individual computer buyer unless they are specifically looking for such enhanced
    graphic capabilities.

    Overall the PC Industry is a very competition intense sector and with technology undergoing
    paradigm shifts, coping with these changes can make life difficult for the players in the
    sector.

    These dynamics do not look favourable for Apple, but at the same time Apple has been able
    to manage to retain its technologically savvy and designer approach to come out of this
    quagmire. Apple could convert some of these problematic features into opportunities by
    looking at its SWOT analysis which is discussed further.

3) Apple’s difficulty in the PC industry.

    -Strengths
             -Brand awareness/ Halo effect from the i-pod to the PC
             -Product differentiation- The system continues to be strength for the company since
    its closed operating system is not subject to the computer viruses and hacking that affects
    the Microsoft Windows operating system.
             -Complete package of hardware and software-enabling plug and play and
    aesthetics by designing unusual shapes for its computer chassis.

    -Weaknesses
             -Heavy Investment in Research- As compared to other players this forms a major
    cost for Apple.
             -Not a lean operations management- Unlike Dell, where the forecasting is accurate
    and inventory costs are minimal, Apple has to bear the cost of components and parts that it
    purchases before-hand.
             -Not completely independent- Apple is reliant on Motorola and IBM for processor
    chips so if these companies run short or increase the price on the chips Apple must either
    absorb the cost or pass it along to consumers. Either of the two scenarios is can make Apple
    vulnerable.

    -Opportunities
             -Taking Microsoft head-on with its image- Apple has always come up with
    innovative ways to ridicule and expose the shortcomings of the Microsoft OS- Reference:
    http://in.youtube.com/watch?v=FxOIebkmrqs. Apple should finally take the plunge and go
    all out with its brand image to attack Microsoft.
             -Taking advantage of the MAC OS-Since the Mac OS is seen as a safe, reliable and
    secure system, apple should leverage the differences over competing OS. The latest launch
of its Leopard-OS received rave reviews with sales totalling 4 million copies, and creating
20% of the Mac installed base.
         -The i-pod-i-tunes combo- The halo effect of the i-pod needs to be capitalised to the
maximum extent.

The difficulty
        Apple started off as a straight out of the box machine which was easy and simple to
use. When IBM-PC entered the market in 1981, Apple was confident of its position owing to
its proprietary designs and graphics. But this “closed” system was their undoing, as the IBM-
PC started to spawn clones, who started to collaborate.
        With windows 3.0 the ease of the apple products was questioned, and apple was
also burdened with maintaining high costs required for research for premium computers.
In 1991 alliances were being forged IBM, which did not materialise later. Shifting
manufacturing costs were also not enough to sustain profitability.
        The frequent changes in strategies were responsible for some of the problems that
Apple found itself in. What Apple needed to realise was that it was actually operating in a
Niche market of premium and high end PC’s and it was earning handsome profits per unit
sold, but its penetration was an issue.




                                                    Closed system of the Apple Mac,
  Frequent changes of strategies and
                                                     application software not easily
         leaders at the helm
                                                                available.


                                     Reasons for facing
                                        difficulties



       Niche market operator, less                     Premium segment, research
              penetration                                 oriented, hence costly
4) Apples Mac business:

        In his second stint with Apple as CEO Steve jobs had his task cut out. He had to turn around
                                          CEO, teve
        the Apple mac business and he undertook multiple steps to achieve it.

        -Agreement with Microsoft to invest $150 Million in Apple
         Agreement

        -Macintosh licensing program was abolished, thus restricting clones and cannibalizing
         Macintosh                                       restricting

        -Consolidated product range from 15 to 3
         Consolidated

        -Launched the iMac, plug and play with multiple colours
         Launched

        -outsourcing and restructuring, while expanding to national chains
         outsourcing

        -Direct selling through website and streamlining operations
         Direct

        -Pared down inventory and increased spending on R&D
            ed

        -Re-energized apples image as a hip brand
            energized

        Notebook Products Launched:


                          Macbook
                          • 1099
                            1099-1499 USD

                          Macbook Pro
                          • 1999
                            1999-2799 USD

                          Macbook Air
                          • 1799
                            1799-2598 USD

Technology and Innovation:

        -Integrated with the Intel platform
         Integrated

        -Mac users able to operate both windows and Mac based applications
         Mac

        -Leopard OS launched

        -Built independent applications (iLife suite)
         Built

        -Web browser Safari

        -MS-Office suite for MAc
            Office

Distribution and Sales:

        -Retail stores opened
-Collaboration with Best buy

        -i-Pod halo effect benefitted sales

        Owing to all these measures, the Mac sales grew thrice as fast as the overall PC market,
which increased by about 14% in 2007. Apple had become the third-largest PC maker within the US
market with a market share of 8.5%. But to continue the robust trend of the Mac growth saga, Apple
will need to look outward. Since the US market is not growing at a great pace, Apple will have to look
at the emerging asian markets and tap its potential.



    5) Sustainable competitive advantage:



                                               Exploitation




       Launch                                                                         Counterattack



       As Apple is operating in a Fast-cycle market in which the firms capabilities that contribute to
competitive advantage aren’t shielded from imitation and where imitation is often rapid and
inexpensive, its strategic decisions need to be undertaken quickly and in an effective manner.

The i-pod-itunes business has been a spectacular success for Apple. The Razor/Blade strategy in
Apple’s case is even more profitable unlike in the case of a printer-toner relation, as in Apples case
its a reverse Razor/Blade, and the returns will be even higher for Apple, as it is the devices like the i-
pod, i-phone which would require replacement.

Apple has always differentiated itself on its innovation and design, and the same is the case for the i-
phone i-tune combination. But this is not a competitive advantage which will last for long, and hence
Apple will have to adapt and offer new services to keep itself one-up from the competition. Steve
Jobs has perfected the art of coming up with a innovative product to keep this advantage from
falling over. It is difficult for firms competing in fast-cycle markets to maintain a competitive
advantage. However, Innovation plays a dominant role in the competitive dynamics in fast cycle
markets, and here is where Apple is able to leverage its skills.
Threats and Competitors:


                                           DRM free
                                            copies-
                                           Amazon




                                                               Creative,
                                      Threats/Competition
                      MS-Zune                                  Samsung,
                                                                 Sony




                                           Objection
                                          from music
                                             labels




   6) I-Phone: Initial Strategy
        Phone:

       Rationale to launch i-Phone: To integrate the i Pod with a mobile phone service and to
                             Phone:                  i-Pod
       reinvent the phone as a multifunction communication device.




                                  Version1
                                  •   8GB $399, 16GB $499
                                  •   AT&T plan $59.99
                                  •   Service revenue sharing model
                                  •   No third party distribution
                                  •   Edge network 2-2.5G
                                  •   Battery life affected by 3G
                                  •   19.5% share during first quarter
                                  •   Gray markets in China russia- a concern
                                                                  -
                                  •   Los of service-share revenue
Version 2
                            •   8GB $199 16GB $299
                            •   AT&T plan $69.99
                            •   Fixed premium model
                            •   Best buy retail channel
                            •   3G bandwidth
                            •   Google, youtube partnership
                            •   i-tunes integration
                            •   New application packages
                            •   Launched in 22 markets




The initial launch of the i-phone at a high price band and with exclusivity around it was a
good move by Apple. The aura of exclusivity built a tremendous hype and expectation over
the launch of the product. The early adopters (Fad) were ready to shell out the price which
was definitely on the higher side. Apple capitalised on this and was thus able to offer better
prices in its second version.

Reasons for changing its strategy:

-Availability of 3G bandwidth and battery life upgradation

-Revenue-sharing model was not generating profit

-Price band was on the higher side, and the early adopters were not interested

-Retail channels were a better option than single distribution channel

-Exclusivity to carriers was affecting the growth

-Design improvements

-By launching i-phone officially in 22 markets and making it available in 70 markets including
most of the countries which had a gray market presence, Apple is trying to safe-guard its
interests.
7) Strategies for India:

    The demographics of India can be a major factor for apple to succeed in India. The cost
    premium attached to apple products could play a hindrance, and hence Apple would have to
    devise a cost leadership strategy while maintaining the product differentiation. Apple would
    need to devise a Supply chain initiative to maintain its operation. The following segments
    could be targeted by Apple.

    -   There is a huge demand for better processing powers in Business analytics and Market
        research firms in India. Apple could target these companies, by demonstrating its
        technical expertise over Microsoft.
    -   By leveraging its expertise in the education segment K-12, Apple could enter into tie-ups
        with major educational institutes in India. This would lead to mass awareness of its
        products, other than the i-pod.
    -   Animation is another segment which is picking up in India, Apple along with its
        association with Pixar could become a huge hit in India, if it plans to launch its own
        animation centre of excellence, and thus promoting the brand Apple.

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Case Study Apple Inc. 2008

  • 1. Case Analysis: Apple Inc., 2008 Sairam Iyer XLRI GMP 034 11/6/2008
  • 2. 1) Competitive Advantages: -Design and innovation oriented -Greater horizontal and vertical Integration -Designing from scratch to finish bundled with applications and peripherals. -‘’Plug and Play” solutions -R&D oriented -An everything ready device Firm Infrastructure HRM Technology Development PROCUREMENT Inbound Outbound Operations Marketing/Sales Service Logistics Logistics Alliances with Design & Horizontal & Plug and play I-tunes gives a major suppliers Innovation vertical solutions major edge Integration Linkages with Technology Complete bundle Operating system independent Driven of applications more secure, and software vendors less prone to virus attacks Collaborating I-pod—I-tunes Apple’s retail with other combo gives experience, new leaders. brand awareness mac consumers a push. bought more. Apple has been able to command a premium in the market and gain above average returns owing to its innovation and differentiation of technologically superior products. This learning and innovation in its products has led apple to leverage its expertise in the i-pod,i-phone, i-tunes, i-works suite of products. Over due course of time Apple has been able to perfect the chain of activities in Innovation and design leading to a fit between the activities which is difficult to imitate and hence offers them an edge over competitors. Diffusing products New products: Ideation Designing/funding Product Creation across company
  • 3. 2) Analysis of the PC Industry based on Porter’s 5 Forces. Low 5-Forces Threat of new Entrants Current Bargaining Bargaining Low Competition: Power of Power of High Very Intense Suppliers Customers Threat of Substitute products Very High. -Current Rivalry: Very intense and fierce and the PC industry also has very low switching costs. This makes current rivalry very high. Apple faces stiff competition from Dell, HP, IBM etc. -Threat of new Entrants: Since there are considerable investments to be made for setting up this industry, new entrants would be reluctant. Though there is scope for White-box PC’s having a share of 36% world -wide in 2006, but since the existing companies have created strong branding awareness, this threat would be low. -Bargaining power of Suppliers: Two types of suppliers- microprocessors and OS: very few suppliers but memory chips, keyboards, disk drives: many suppliers. Suppliers will adjust pricing and quality to make their products more attractive so competition is high leaving them in a low supplier power position. -Bargaining power of buyers: Switching costs are low. This situation places the buyer power in a strong position that can only be countered by companies with strong product differentiation that would increase the switching costs
  • 4. -Threat of substitute products: The more differentiation of product the less likely the switch to a substitute will occur. If prices are higher then the company with the higher price has to provide justification for the increase. Apple's operating system differentiation can command higher pricing when it is presented to the creative designer community but not to the individual computer buyer unless they are specifically looking for such enhanced graphic capabilities. Overall the PC Industry is a very competition intense sector and with technology undergoing paradigm shifts, coping with these changes can make life difficult for the players in the sector. These dynamics do not look favourable for Apple, but at the same time Apple has been able to manage to retain its technologically savvy and designer approach to come out of this quagmire. Apple could convert some of these problematic features into opportunities by looking at its SWOT analysis which is discussed further. 3) Apple’s difficulty in the PC industry. -Strengths -Brand awareness/ Halo effect from the i-pod to the PC -Product differentiation- The system continues to be strength for the company since its closed operating system is not subject to the computer viruses and hacking that affects the Microsoft Windows operating system. -Complete package of hardware and software-enabling plug and play and aesthetics by designing unusual shapes for its computer chassis. -Weaknesses -Heavy Investment in Research- As compared to other players this forms a major cost for Apple. -Not a lean operations management- Unlike Dell, where the forecasting is accurate and inventory costs are minimal, Apple has to bear the cost of components and parts that it purchases before-hand. -Not completely independent- Apple is reliant on Motorola and IBM for processor chips so if these companies run short or increase the price on the chips Apple must either absorb the cost or pass it along to consumers. Either of the two scenarios is can make Apple vulnerable. -Opportunities -Taking Microsoft head-on with its image- Apple has always come up with innovative ways to ridicule and expose the shortcomings of the Microsoft OS- Reference: http://in.youtube.com/watch?v=FxOIebkmrqs. Apple should finally take the plunge and go all out with its brand image to attack Microsoft. -Taking advantage of the MAC OS-Since the Mac OS is seen as a safe, reliable and secure system, apple should leverage the differences over competing OS. The latest launch
  • 5. of its Leopard-OS received rave reviews with sales totalling 4 million copies, and creating 20% of the Mac installed base. -The i-pod-i-tunes combo- The halo effect of the i-pod needs to be capitalised to the maximum extent. The difficulty Apple started off as a straight out of the box machine which was easy and simple to use. When IBM-PC entered the market in 1981, Apple was confident of its position owing to its proprietary designs and graphics. But this “closed” system was their undoing, as the IBM- PC started to spawn clones, who started to collaborate. With windows 3.0 the ease of the apple products was questioned, and apple was also burdened with maintaining high costs required for research for premium computers. In 1991 alliances were being forged IBM, which did not materialise later. Shifting manufacturing costs were also not enough to sustain profitability. The frequent changes in strategies were responsible for some of the problems that Apple found itself in. What Apple needed to realise was that it was actually operating in a Niche market of premium and high end PC’s and it was earning handsome profits per unit sold, but its penetration was an issue. Closed system of the Apple Mac, Frequent changes of strategies and application software not easily leaders at the helm available. Reasons for facing difficulties Niche market operator, less Premium segment, research penetration oriented, hence costly
  • 6. 4) Apples Mac business: In his second stint with Apple as CEO Steve jobs had his task cut out. He had to turn around CEO, teve the Apple mac business and he undertook multiple steps to achieve it. -Agreement with Microsoft to invest $150 Million in Apple Agreement -Macintosh licensing program was abolished, thus restricting clones and cannibalizing Macintosh restricting -Consolidated product range from 15 to 3 Consolidated -Launched the iMac, plug and play with multiple colours Launched -outsourcing and restructuring, while expanding to national chains outsourcing -Direct selling through website and streamlining operations Direct -Pared down inventory and increased spending on R&D ed -Re-energized apples image as a hip brand energized Notebook Products Launched: Macbook • 1099 1099-1499 USD Macbook Pro • 1999 1999-2799 USD Macbook Air • 1799 1799-2598 USD Technology and Innovation: -Integrated with the Intel platform Integrated -Mac users able to operate both windows and Mac based applications Mac -Leopard OS launched -Built independent applications (iLife suite) Built -Web browser Safari -MS-Office suite for MAc Office Distribution and Sales: -Retail stores opened
  • 7. -Collaboration with Best buy -i-Pod halo effect benefitted sales Owing to all these measures, the Mac sales grew thrice as fast as the overall PC market, which increased by about 14% in 2007. Apple had become the third-largest PC maker within the US market with a market share of 8.5%. But to continue the robust trend of the Mac growth saga, Apple will need to look outward. Since the US market is not growing at a great pace, Apple will have to look at the emerging asian markets and tap its potential. 5) Sustainable competitive advantage: Exploitation Launch Counterattack As Apple is operating in a Fast-cycle market in which the firms capabilities that contribute to competitive advantage aren’t shielded from imitation and where imitation is often rapid and inexpensive, its strategic decisions need to be undertaken quickly and in an effective manner. The i-pod-itunes business has been a spectacular success for Apple. The Razor/Blade strategy in Apple’s case is even more profitable unlike in the case of a printer-toner relation, as in Apples case its a reverse Razor/Blade, and the returns will be even higher for Apple, as it is the devices like the i- pod, i-phone which would require replacement. Apple has always differentiated itself on its innovation and design, and the same is the case for the i- phone i-tune combination. But this is not a competitive advantage which will last for long, and hence Apple will have to adapt and offer new services to keep itself one-up from the competition. Steve Jobs has perfected the art of coming up with a innovative product to keep this advantage from falling over. It is difficult for firms competing in fast-cycle markets to maintain a competitive advantage. However, Innovation plays a dominant role in the competitive dynamics in fast cycle markets, and here is where Apple is able to leverage its skills.
  • 8. Threats and Competitors: DRM free copies- Amazon Creative, Threats/Competition MS-Zune Samsung, Sony Objection from music labels 6) I-Phone: Initial Strategy Phone: Rationale to launch i-Phone: To integrate the i Pod with a mobile phone service and to Phone: i-Pod reinvent the phone as a multifunction communication device. Version1 • 8GB $399, 16GB $499 • AT&T plan $59.99 • Service revenue sharing model • No third party distribution • Edge network 2-2.5G • Battery life affected by 3G • 19.5% share during first quarter • Gray markets in China russia- a concern - • Los of service-share revenue
  • 9. Version 2 • 8GB $199 16GB $299 • AT&T plan $69.99 • Fixed premium model • Best buy retail channel • 3G bandwidth • Google, youtube partnership • i-tunes integration • New application packages • Launched in 22 markets The initial launch of the i-phone at a high price band and with exclusivity around it was a good move by Apple. The aura of exclusivity built a tremendous hype and expectation over the launch of the product. The early adopters (Fad) were ready to shell out the price which was definitely on the higher side. Apple capitalised on this and was thus able to offer better prices in its second version. Reasons for changing its strategy: -Availability of 3G bandwidth and battery life upgradation -Revenue-sharing model was not generating profit -Price band was on the higher side, and the early adopters were not interested -Retail channels were a better option than single distribution channel -Exclusivity to carriers was affecting the growth -Design improvements -By launching i-phone officially in 22 markets and making it available in 70 markets including most of the countries which had a gray market presence, Apple is trying to safe-guard its interests.
  • 10. 7) Strategies for India: The demographics of India can be a major factor for apple to succeed in India. The cost premium attached to apple products could play a hindrance, and hence Apple would have to devise a cost leadership strategy while maintaining the product differentiation. Apple would need to devise a Supply chain initiative to maintain its operation. The following segments could be targeted by Apple. - There is a huge demand for better processing powers in Business analytics and Market research firms in India. Apple could target these companies, by demonstrating its technical expertise over Microsoft. - By leveraging its expertise in the education segment K-12, Apple could enter into tie-ups with major educational institutes in India. This would lead to mass awareness of its products, other than the i-pod. - Animation is another segment which is picking up in India, Apple along with its association with Pixar could become a huge hit in India, if it plans to launch its own animation centre of excellence, and thus promoting the brand Apple.