Apple Inc. 2008: An Innovative Strategic Position
Apple Inc. was founded in the late 1970's by Steve Wozniak and Steve Jobs and has obtained its market share with extensive investment in research and development of innovative new products in personal computers, smart phones, and digital music players industries, experiencing both successes and failures. Though the Apple has had a bumpy road with the exit of many top executives and some failed products through the 1980's and 1990's, it has always been a leader in innovation. At the end of 2007, the company's net profit was $3.496 million and Apple had successfully broken into both the emerging industries of smart phones and digital music players through a closely monitored company strategy.
Apple still primarily sees itself as a computer company but with the recent success with smart phones and MP3's and the increasing market trends towards portable devices, the company's primary focus has to be reevaluated to continue to compete.
In the second quarter of 2008, the global PC market grew by 16% compared to the second quarter of 2007 to 71.9 million units mostly due to notebook PC's. The United States market grew by 4.2% with Apple having the highest growth rate (38.1). Seventy-nine percent of the U.S. market was composed of five competitors, which accounted for 55.2% of the international market, for which Apple only represented 3%. The personal media player industry also continued to grow with Apple's market share at 40 and 70 percent for flash memory and hard drive MP3 players respectively. Lastly, the smart phone industry has emerged with Apple leading with the release of the iPhone.
No. Of Rivals:
In the second quarter of 2008 the market shares of the computer industry consisted of Dell, Inc. (31.9), Hewlett-Packard (25.3), Apple (8.5), Acer (8.5), and Toshiba (5.5). The iPod faces rivalry from Creative, iRiver, SanDisk, and Microsoft and the iPhone was other emerging smart phone and mobile phone competitors such as Motorola and Nokia.
Scope of competitive rivalry:
The scope of rivalry is global for all three industries. Personal mobile technology is booming with innovations in laptops, smart phones and MP3's being produced around the world.
Degree of product differentiation:
The degree of product differentiation is high with design, style, and capabilities of a product all highly variable as well and quality and pricing.
All three markets have high product innovation as competitors are trying to increase market share by developing new products. This is particularly the case in the digital media players and smart phone industries as they are still relatively new and competitors are still emerging.
Pace of technological change:
In all three industries technological change is very pertinent and happening relatively fast to keep up with the rapid innovation and development of new products for each industry.
Apple has strong vertical integration in relation to the designing, building, and retailing all apple products and the exclusive accessories and support software needed allowing for synergy between products in the different industries. At the same time this also allows for horizontal integration of Apple products to be used for their different purposes with ease of transition.
Economies of scale:
Economies of scale is relevant with larger companies having a cost advantage and the industries being characterized in the manufacturing and distribution of their products.
Learning/experience curve effects:
Learning/experience curve effects are hard to consider because of how rapidly the industries change to accommodate new technology and innovations but companies can benefit from longer experience in emerging markets by understanding the market trends and gaining market share.
1. How well has Steve Jobs done as Apple's CEO? Has he done a good job of performing the five tasks of strategic management discussed in Chapter 2? Why or why not? What grade would you give him?
Regardless of a rocky history between co-founder Steve Jobs and Apple, Inc., Jobs was able to return to Apple in 1997 after a string of CEO's were run through and replaced and the company was losing money. Since his return, Jobs has taken Apple from reporting quarterly losses to introducing new and innovative product lines, such as the iPod music player which has become a pillar of Apple's current success and has helped increased earnings per share from $1.5 million in 2005 to $3.93 million in 2007. Job's has continued to pursue the introduction of new, stylized, and user-friendly products helping the brand to increase its market share and new industries and markets.
When considering Jobs success as CEO of Apple, it is important to consider his execution of the five tasks of strategic management. Jobs was asked to leave Apple in the 1980's due poor management, he was brought back in over ideas for new development. Jobs clearly saw the market trending towards the synchronization between mobiles phones and computers as well as the market of digital music players and focused the strategic vision towards these changes. Objectives were set around financial success and measuring the performance by units sold. Jobs crafted a strategy of entering these markets by selling highly differentiated, stylized and easy-to-use products, implementing this by pushing research and development of new products and evaluating the market trends and reacting with new innovations. The company's sales have increased between 2001-2007 and Apple has consistently responded to the market changes by introducing new products and appealing to an ever-widening market and increasing its market share. When assessing Jobs role as CEO of Apple in terms of changes in both the company's financial status and strategy, it is clear Jobs has been an integral part of this accomplishment and therefore successful in terms of his job description.
2. What are the chief elements of Apple's strategy? How well do the pieces fit together? Is the strategy evolving?
Apple's strategy centers around the design and development of its operating system, hardware, software, and new products with "superior ease-of-use, seamless integration, and innovative design" (c-150) with the underlying company philosophy of having innovation in all that they do. The company's product lines are separated into Macintosh products (desktops and portables), iPods, iPhones, iTunes, hardware, software, service, and other sales. Apple manages business in geographic segments and operates a retail stores in larger market segments including the United States, Italy, Japan, Canada and the United Kingdom as well as an online store. Financially, Apple sales can be broken down by product line and specific product to display the success of each and draw conclusions about where the company's focus should be. In 2004, the company paid off the all of its outstanding debt to no longer carry long-term liabilities therefore freeing up more funds to reinvest in research and development, highlighting the company's overall focus on innovation.
Strategy for Apple's computer operations in 2008 still remained the company's primary focus and maintained handling every aspect of the computer within Apple, which stands apart from the top PC competitors. Apple's computer products consist of a small variety of different models, each intended to appeal to different types users with different functionality and price points.
Though Apple was not the first the enter the personal media player industry, the iPod was the first player to gain widespread popularity and by 2005 Apple dominated 70% of the hard drive MP3 player market and 40% of the flash player market. By 2008, Apple had released 4 different iPod styles each with different functions and price points, just as with its computer's segment, with the strategy of appealing to a wider market segment. Many analysts also have commented the bridge into the personal media player industry was strategic for Apple to attract more customers to their computers with the introduction to their sleek and innovative product designs through the smaller and trendy iPod.
Apple's development of iTunes fell hand-in-hand with its entrance in the personal media player industry as it synchronized with iPods and allowed easy-to-use access to music in MP3 format. By establishing itself as the largest legal downloading library early on, it gained the largest market share and thus became the leader while promoting the Apple brand as a whole.
Apple's iPhone strategy centers on it being a key product for the company in the future. Its development reflects the innovation of the company and its ability to recognize a market trending towards the synergy between computer and mobile phone. It was released to be compatible with many of Apple developments such as iTunes, Safari software, many other Apple applications. This again exposing the Apple brand to more consumers and increasing company awareness as well as adapting to changing market demands.
Overall, as Apple has managed to maintain a strategy focused around innovation that quickly responds to market demands and continues to gain market share by offering a variety of developments and improvements in its product lines and striving to provide sleek, easy-to-use, superior quality products. Below is the SWOT analysis on the company, outlining the current strengths, weaknesses, opportunities, and threats associated with Apple's strategy.
SWOT Analysis of Apple, Inc.
• Financial Stability and low debt in recent years.
• Highly technologically savvy personnel.
• Highly innovative designs provide market niche.
• Early entry into growing smart phone and digital music players industries.
• Brand loyalty
• Unique operating system with strict use guidelines not compatible with most PC's.
• Low presence in education and business markets.
• Low market share in computer industry.
• Premium pricing and limited variety limit market base.
• Low global recognition.
• Sales of laptops, smart phones, and MP3's on the rise.
• Entrance intro smart phone and digital music players industries exposes consumers to Apple brand.
• Consumers more conscious of stylized design of products.
• Online sales of laptops increasing.
• Economic recession
• Lower priced PC's in computer industry
• Strong competitors in digital music players industry
• Technology for smart phones progressing very fast with new emerging rivals.
3. Does it make good strategic sense for Apple to be a competitor in the computer, digital music player, and mobile phone industries? Are the value chain activities that Apple performs in computers, digital music players, and mobile phones very similar and "compatible" or are there very important differences from product to product? Which of the three products lines¬¬—computers, digital music players, or mobile phones¬¬—do you think is most important to Apple's future growth and profitability? Why?
Apple was able to recognize the market's focus shift towards the synchronization of mobile phones and computer technology as well as the appeal of the development of the MP3 players as new music-listening technology. Strategically it made sense for Apple, a company focused on innovation, to enter these markets as way of expanding the breadth of the its horizontal integration, something that many of its competitors already had extensive amounts of. Apple was careful to avoid the threat of cannibalization of its products by clearly differentiating them via capabilities, price points, and phases of market introduction. The value chains for Apple computers, digital music players, and mobile phones are extremely similar given Apple's adherence to its strategic plan. The main value chain for apple products is depicted below
Table 1. Value Chain for Apple Products
Research and Development of New Technologies and Products → Product Design → Product Manufacturing → Sales and Marketing of Product → Customer Support and Service
Supporting activities include the management of human resources as well as evaluation of product performance, purchasing supplies and general administrative affairs.
Unlike competitors, Apple develops all its products in-house and then sells them online; in their retail stores, or with strict contracts to Apple product certified retailers as well as provides customer service for its products in its retail stores. Out of its three product lines following this value chain, it is most important for Apple's future growth and profitability to expand both the presence of its computer and iPhone products with the reasoning that while iPod products are providing a substantial amount of profitability for the company they also already have the most of their market share with the threats of entry and competitors low. Apple stills sees itself primarily as a computer company though lacks the market share its rivals have as well as the brand recognition. Therefore if Apple wishes to still position itself as a computer company it must increase it development of computer products to appeal to a larger market to increase profitability. At the same time it is also important for Apple as a company to develop its technology with the iPhone, as it is part of a new and growing industry which the company currently has control in. If Apple wishes to increase its profitability and stay relevant as an innovative company it must respond to the market demand for smart phones.
4. How intense is the competition in the digital music players industry? Prepare a five-forces analysis of this industry to support your position.
When considering the competition Apple faces in the digital music player industry it is important to analyze Porter's five forces of the industry. As Table 2 shows below, the threats are very similar for Apple across all three product lines, going along with the very similar value-chains for the products. To look specifically at Apple's position in the digital music industry, the fives forces for the iPod show the intensity of competition for Apple. The threat of entry into the industry is low when considering the high costs associated with the technology, the large market share already controlled by Apple, as well as the well established supporting software (iTunes) integrated with the iPod. The threat of rivals is moderate since others are established through strong companies such as Microsoft yet lack the highly differentiated design and support Apple provides with the iPod though can be provided at a lower price. The threat of substitutes is also moderate since while there are other options for listening to music, such as on the radio or CD's, substitutes cannot access the large music download libraries. Threat of suppliers is high even though the raw materials are low, the music providers hold the right to distribute their music and therefore can control the access for it be downloaded. Threat of buyers is low since though there are many, they are mostly on an individual basis and Apple provides a variety of iPods to appeal to many different market segments as well as being highly differentiated as a product.
Porter's Five Forces Analysis for Apple Products: Computers, iPods, and iPhones
Apple Computers IPod IPhone
Threat of Entry Low
-Large initial investment needed
- High Cost of entry due to Proprietary technology
-Unique operating system
- Apple has largest market share, iPod has 70% of hard drive market share and 40% flash memory market share.
- iPod highly differentiated from other MP3 in style and capabilities
-iPod synced to be used with has iTunes, the largest and most convenient music download software.
- Apple vertically integrated iPod development therefore production is highly specific and difficult to imitate. Low
- iPhone combines all smart phone technology features as well as links them with popular Apple software
-High cost of entry due to proprietary technology
Threat of Rivals High
- Other PC firms such as Dell and Microsoft have larger market shares
- Apple prices computers at premium prices while other competitors have a wider range of price points Moderate
- There are other competing firms but Apple has the largest market share
- Many products are lower in price than iPods
-Development of products is constant therefore Apple must continue to innovate new products. High
- There are multiple firms competing in the smart phone industry
Technology still developing and Apple must keep up.
Threat of Substitutes Moderate
- Some substitutes exist for the functions of a computer
-Unique software and operating system create differentiation. Moderate
- Multiple music playing substitutes exist (CD's, music videos, radio) but do not provide convenience of MP3 player.
-Substitutes cannot access music downloading stores large libraries. Low
- Mobile phones can be substituted with landlines.
-Smart phones can be substitutes with internet and instant messaging devices
-transportability of mobile smart phones hard to substitute
Threat of Suppliers Moderate
-Raw materials suppliers have low threat due to low differentiation of materials between suppliers.
- Labor to produce product is high due to highly technical work.
- Raw materials suppliers have low threat due to low differentiation of materials between suppliers.
-The suppliers of the music is high, holding rights to the distribution of the songs for download in MP3 format.
- Raw materials suppliers have low threat due to low differentiation of materials between suppliers.
- Labor to produce product is high due to highly technical work.
Threat of Buyers Moderate
- Large number of buyers but mostly on individual level
- Buyers have option of purchasing lower priced PC from rival
-Product highly differentiated with unique operating system and design.
-High customer loyalty Low
- Large number of buyers but mostly buying on individual level.
- Technology developing to promote use of MP3 players as the most convenient music device
-iPod has many different products appealing to wide variety of different customers.
iPod has large market share. Low
- Large number of buyers but mostly buying on an individual basis
-iPhone design unique to other smartphones
-High customer loyalty to Apple
5. Identify the key success factors in the digital music industry. What does a competitive strength assessment reveal about Apple, as compared to the four main players in the digital music industry? Use the unweighted methodology in Table 4.4 to support your answer. Among these digital music player competitors, which company enjoys the strongest competitive position? Who is in the weakest overall competitive position? Has Apple's strategy resulted in a substantial competitive advantage over its rivals in the digital music player industry? What is the basis for whatever competitive advantage Apple has?
Table 3. Key Success Factors to the Digital Music Industry
• Highly Innovative Product Design
• Large Capital Investment in Research and Development
• Brand Recognition
• Music Management Software Synchronization Capabilities
• Large customer base
• Variety of Product Types
• Customer Support
As Table 4 shows below, Apple clearly had the competitive advantage based on comparing the seven key success factors listed in Table 3. Creative ranked with the lowest overall competitive position most due to its poor financial state, variety of products, and music management software capabilities. Apple's strategy of providing highly differentiated and innovative products through investing heavily in research and development has given them a clear advantage as industry leaders as well as increasing brand recognition through product design and increasing customer base.
Table 4. Un weighted Methodology Apple Creative iRiver SanDisk Microsoft
Highly Innovative Product Design 10 8 7 8 7
Large Capital Investment in Research and Development 10
Brand Recognition 9 6 5 6 10
Music Management Software Synchronization Capabilities 10 5 4 6 10
Large customer base 9 7 6 7 10
Variety of Product Types 9 4 5 10 4
Customer Support 10 6 7 7 8
Total: 86 42 46 58 69
6. What is your assessment of Apple Computer's financial performance the past three years? (Use the financial ratios I distributed and that we used in class, as a guide in doing your financial analysis.)
Appendix 1 displays the key financial ratios associated with Apple, Inc. from 2005-2007. To summarize, revenue has steadily increased in the past three years ending in 2007 at approximately 24 million dollars. The growth rate of the company has been notable extending from 68.4% in 2005 to 24.3% in 2007. Though the growth rate is declining it is still extremely well above the industry average and the decline most likely represents the growing competiveness of the industries. Apple's net income has continued to increase from year to year resulting in a growing profitability indicating the company's increasing strength. At the same time, the cost of goods sold has decreased over the past three years, indicating the company has found more efficient ways of either producing their products which also helps increase profitability. Apple showed stable selling, general, and administrative costs over the past three years implying the company has not gone through any major structural changes and considers costs within a reasonable range. Total assets have increased slightly year to year as the company continues to increase income and profitability and at the same time equity has increased as more money is invested to fund the strategic innovation. The return on assets has increased implying there is increasing returns on investment, which is good sign for the company. The return on equity is above average and shows the amount stockholder's are getting off of their investment, another sign of financial health. Lastly, the earnings per stock also increased over the past three years implying the financial stability of the company is being reflected in the stock marker and earnings per stock are increasing.
7. What accounts for Apple's noteworthy success in the markets for mobile smart phones and digital music players, but its overall weak showing in the computer industry?
Apple has a successful history breaking into emerging markets early on with superior innovative products that obtain a large market share early on that Apple is able to sustain with consistent developments and new product innovations. In both the smart phone and digital music player industries, Apple anticipated the growing trend and developed a highly differentiated product with unique and recognizable design and continued to improve on it. In terms of Apple in the computer industry, Apple faces much more competition from rivals who have wider varieties of computers, more compatible software, and larger customer bases. Apple emerged onto the PC scene early though has gone through periods where innovation has lagged thus allowing competitors to grow and gain market share. For Apple to gain the recognition it has in both the smart phone and digital music players industry, it must increase the variety of computer options as well as develop further innovations to further differentiate the brand and rationalize the premium price point.
8. Does Apple's strategy for its iPod business seem capable of allowing the company to remain on top of the digital music player industry over the next 5 years?
If Apple continues to stick to the company strategy of the innovation and development of new products in the industry as well as continue to be viewed as a premium brand for quality and differentiation then it will be capable of holding onto its market share as the industry changes and expands. If however the company allows for other companies to gain market share by missing key market demands and trends, it could rapidly lose its position on top.
9. What steps should Apple take to improve its corporate performance and to strengthen its position in its most important markets?
To ensure the future profitability and increased growth for Apple, Inc. the company must:
• Continue to closely adhere to strategy surrounding innovation and product development in current industries. All three industries are continuing to develop and competition lies within the ability of a corporation to respond the market trends and demands.
• Look for new and emerging market demands and trends and develop products to obtain a large market share at the beginning. Apple's history has shown being one of the initial companies to enter a new market, it places the company in a better position on obtaining a large market share as well as allowing them the research and develop the products with more experience of use.
• Increase variety of computers to appeal to a larger market. Currently Apple's computer segment is the leased recognized of the three segments. They have created smooth synchronization between the three product lines but the computer segment contains less of a variety compared not only to competitors but also compared to iPod offerings. By offering more computers at different price point and with different functions creates appeal to a larger market and thereby increasing brand awareness and market share.
• Monitor competitor developments in both the smart phone and digital music players industries. With both markets developing and changing so quickly, Apple must maintain its market share but staying relevant with their products' technology.
• Continue to foster iTunes partnerships (with Sony and other music industry companies) to ensure reasonable contracts for downloading permission as well as to continue to expand library
• Explore other partnership options with companies in overlapping industry to expand the use of Apple products as well as increase access to more resources for further innovation of products (i.e. partnering with large television corporations for rights to download TV shows through iTunes or partnering with Microsoft for use of software on Apple computers to help motivate consumers to try Apple computers).
• Continue to monitor financial stability and monitor cash flow, allocating more money towards investments as appropriate while keep debt low.
Since Steve Jobs return to Apple, Inc. the company has made a substantial turnaround in both financial stability and innovation of product lines. Over the past three years leading into 2008 Apple has continued to grow with increased presence in the digital music players and smart phone industries. Though Apple's brand awareness has increased greatly over recent years, the company needs to focus on expanding its computer segment to capitalize on the company's exposure through their other markets. Looking forward, Apple should continue to focus on their strategy of developing sleek, innovative products with constant evaluation of market trends. If Apple is able to keep its products relevant to the industry trends and focus on expanding awareness of company as well as appeal to a wider market base, the company will be able to continue to grow and increasing its profitability, competitive advantage, and place it is a more stable position to weather the ever-changing market fluctuations. The key to Apple's future success is inherent to its strategy: constant innovation.
Appendix 1: Key Financial Ratios
Apple Financial Analysis
Key Financial Ratios 2007 2006 2005
Revenue $millions 24,006 19,315 13,931
Growth Rate 24.3% 38.6% 68.4%
Net income $millions 3,496 1,989 1,328
Profitability 14.6% 10.3% 9.5%
Cost of Goods Sold $m 15,852 13,717 9,889
% of revenue 66% 71% 71%
Selling, General & Administrative Costs $millions 2,963 2,433 1,864
% of revenue 12% 13% 13%
Total Assets 25,347 17,205 11,516
ROA 13.8% 11.6% 11.5%
Long Term Debt and Liabilities 1,516 778 601
Equity $millions 14532 9984 7428
LT Debt Over Equity 0.10 0.08 0.08
ROE 24.1% 19.9% 17.9%
Yearly EPS 3.93 2.27 1.55
1) Thompson Jr., Strickland III and Gamble. Crafting and Executing Strategy. Fifteenth Edition, 2008.