Introduction

Apple Computer’s 30-year history is full of highs and lows, which is what we
would expect in a highly innovative company. They evolved throughout the years
into an organization that is very much a representation of its leader, Steven Jobs.
Apple made several hugely successful product introductions over the years. They
have also completely fallen on their face on several occasions. They struggled
mightily while Jobs was not a part of the organization. Apple reached a point
where many thought they would not survive. When asked in late 1997 what Jobs
should do as head of Apple, Dell Inc.'s (DELL) then-CEO Michael S. Dell said at
an investor conference: "I'd shut it down and give the money back to the
shareholders.” (Burrows, Grover, and Green).
Well, times changed. Less than 10 years later, Business Week ranked Apple as the
top performer in its 2008 Business Week 50. Apple attributes their recent success
to robust sales of iPod music players (62 million in 2008). They are optimistic
about the economies of scope with media giants, such as Disney and Pixar.
Apple rarely introduces a new type of product. Thus, instead of being the pioneer,
they are an expert “second mover” by refining existing products. Portable music
players and notebook computers are examples. Apple increases the appeal of these
products by making them stylish and more functional. They now appear poised to
make significant strides in the home computer market and to creating a total digital
lifestyle whereby the home is a multimedia hub.

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 Review of Literature

Steve Jobs and Steve Wozniak founded Apple on April 1, 1976. The two Steves,
Jobs and Woz (as he is commonly referred to – see woz.org), have personalities
that persist throughout Apple’s products, even today. Jobs was the consummate
salesperson and visionary while Woz was the inquisitive technical genius. Woz
developed his own homemade computer and Jobs saw its commercial potential.
After selling 50 Apple I computer kits to Paul Terrell’s Byte Shop in Mountain
View, CA, Jobs and Woz sought financing to sell their improved version, the Apple
II.
They found their financier in Mike Markkula, who in turn hired Michael Scott to
be CEO. The company introduced the Apple II on April 17, 1977, at the same time
Commodore released their PET computer. Once the Apple II came with Visicalc,
the progenitor of the modern spreadsheet program, sales increased dramatically. In
1979, Apple initiated three projects in order to stay ahead of the competition: 1) the
Apple III – their business oriented machine, 2) the Lisa – the planned successor to
the Apple III, and 3) Macintosh.
In 1980, the company released the Apple III to the public and was a commercial
flop. It was too expensive and had several design flaws that made for less-than-
stellar quality. One design flaw was a lack of cooling fans, which allowed chips to
overheat. In late 1980, Apple went public, making the two Steves and Markkula
wealthy – to the tune of nine figures. By 1981, the Apple III was not selling well
and Scott infamously fired 40 people on Feb 25 (“Black Wednesday”). Scott’s
direct management style conflicted with the culture Jobs and Markkula preferred,
and Scott resigned in July. Markkula stepped into his position as CEO. In August
1981, IBM released their PC. Unimpressed and unafraid, Apple welcomed IBM to

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the PC market with a slightly smug full-page ad in the Wall Street Journal. It would
not be long before IBM’s PC dominated the market.
The Xerox Alto was the inspiration for Apple’s Lisa. Apple employees were able
to examine the Alto in exchange for allowing Xerox to invest in Apple before
Apple’s initial public offering (IPO). Apple released the Lisa in January 1983 and
was notable for being the first computer sold to the public that utilized a Graphic
User Interface (GUI). Unfortunately, the Lisa was not compatible with existing
computers, and therefore came bundled “with everything and a list price to match.”
At $9,995 (over $21,000 in 2005 dollars), the Lisa missed its target market by a
wide margin.
Jobs attempted to control the Lisa project. Scott, unimpressed with the
performance of Jobs on the Apple III project, had Jobs head up the dog-and-pony
show for the pending IPO. Jobs, looking for a project to lead, inserted himself into
the Macintosh development team. Using his considerable influence, Jobs was able
to procure the resources to produce a computer that was faster than Lisa, used a
GUI, had a mouse, and sold for ¼th of Lisa’s price. Apple introduced the
Macintosh with great fanfare during the 1984 Super Bowl. The Orwellian-themed
commercial (directed by Ridley Scott, of ‘Alien’ fame) portrayed IBM as Big
Brother and embodied Macintosh and Apple as freedom-seeking individuals
breaking away from this oppressive regime.The commercial was largely successful
and sales for the Mac started strong. However, Mac sales later faded. John Sculley
left PepsiCo to join Apple in April 1983. He was famous for engineering the
“Pepsi Challenge”, in which blinded testers tasted both Coke and Pepsi to unveil
the ‘truth’ of the taste of Pepsi. In response to lagging Mac sales, Sculley
contrived the ‘Test Drive a Macintosh’ campaign. In this promotion, prospective
users could take home a Macintosh with only a refundable deposit on their credit
card. While lauded by the public and the advertising industry, this campaign was a

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burden on dealers and significantly impeded the availability of Macs to serious
buyers. In 1985, Apple tried to have lightening strike twice with their ‘Lemmings’
commercial during the Super Bowl. In what was becoming Apple’s typical
patronizing fashion, this commercial insulted current PC users by portraying them
as witless lemmings, unthinkingly doing harm to themselves. Although Jobs
attempted to overthrow Sculley, the board backed Sculley. Jobs left Apple to form
NeXT computer. After Jobs left in 1985, sales of the Mac “exploded when Apple’s
LaserWriter met Aldus PageMaker.” Apple dominated the desktop publishing
market for years to come. Under Sculley, Apple grew from $600 million in annual
sales to $8 billion in annual sales by 1993. Apple introduced Mac Portables in
1989 and the first PowerBooks in 1991. By 1992, PC competition ate into Apple’s
margins and earnings were falling. Sculley was under pressure to have Apple
produce another breakout product. He focused his energy on the Newton – Apple’s
introduction of the Personal Digital Assistant (PDA). Despite Sculley generating
substantial demand for Newton, it did not live up to the hype due to it being
severely underdeveloped. Sculley resigned in 1993 and Michael Spindler replaced
him.
Spindler spent most of his time and energies on regaining profitability, with the end
goal of finding a buyer for Apple. Over the next several years, Spindler shopped
Apple to Sun Microsystems, Eastman Kodak, AT&T, and IBM. Meanwhile, Apple
was unable to meet the growing demand for its products due to supplier problems
and faulty demand predictions. To add insult to injury, Microsoft released
Windows 95 with great fanfare in 1995. After significant quarterly losses in 1996,
the board replaced Spindler with Dr. Gil Amelio, CEO of National Semiconductor.
Dr. Amelio tried to bring Apple back to basics, simplifying the product lines and
restructuring the company. One of Apple’s most pressing issues at the time was
releasing their next generation operating system (code named “Copland”) to

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compete with Windows 95. Amelio and his technology officers found that
Copland was so behind schedule that they looked outside the company to purchase
a new OS. Ultimately, and somewhat ironically, they decided to purchase NeXT
computer from Jobs. Naturally, Apple welcomed Jobs back into the fold. The
board became increasingly impatient with Amelio due to sales not rebounding
quickly enough. Apple bought out Amelio’s contract after just 1 ½ years on the
job. Jobs eventually claimed the CEO position. Then, he cleaned house by
revamping the board of directors and even replacing Mike Markkula (who had
been with the company since the beginning). Jobs simultaneously put an end to the
fledgling clone licensing agreements (which created a few Mac clones) and entered
into cross-licensing agreements with Microsoft. On May 6, 1998, Apple
introduced the new iMac, a product so secret that most Apple employees had never
heard of it. The new iMac was a runaway success with its translucent case, all-in-
one architecture, and ease of use. It brought Apple to a new market of users –
those who had never owned a computer before. Jobs further simplified the product
lines into four quadrants along two axes: Desktop and Portable on one,
Professional and Consumer on the other. Apple completed the matrix with the
introduction of the consumer-based iBook in 1999.
The year 2001 was an important year for consumers of Apple products. Apple
opened their first 25 retail stores (totaling 163 stores in 4 countries as of May
2006). In September 2001, Apple introduced the new iMac featuring a screen on a
swivel.The new iPods (portable music players) were a tremendous success. Apple
sold so many that Apple’s dependence on Mac sales was significantly less. This
was no small feat considering that the 2001 iMac became Apple’s best-selling
product “by a long shot”. Apple offered iTunes (a free application) to help their
consumers organize music on iPods and Macs.

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In 2003, Apple expanded iTunes by 1) opening the iTunes music store to allow
Mac users to purchase music online and 2) expanding iTunes to Windows users.
Sales of iPods skyrocketed and currently provide the bulk of product sales to
Apple. In 2005, Apple announced that it would start using Intel-based chips to run
Macintosh computers. In April 2006, Apple announced Boot Camp, which allows
users of Intel-based Macs to boot either Mac or Windows OS. This functionality
allows users who may need both OSs to own just one machine to run both, albeit
not simultaneously.

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9
 Vision Statement

"Man is the creator of change in this world. As such he should be above systems
and structures, and not subordinate to them."
Explanation of vision
Apple lives this vision through the technologies it develops for consumers and
corporations. It strives to make its customers masters of the products they have
bought. Apple doesn't simply make a statement. It lives it by ensuring that its
employees understand the vision and strive to reach it. It has put systems in place
to enable smooth customer interaction. It has put objectives in place to
continuously move forward; implemented strategies to fulfil these objectives; and
ensured that the right marketing, financial and operational structures are in place to
apply the strategies.

Mission Statement

“Apple is committed to bringing the best personal computing experience to

students, educators, creative professionals and consumers around the world
through its innovative hardware, software and internet offerings”

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 The PC Industry

We can glean Insight into the history and composition of the PC Industry from its
eponymous title. In the late 1970s, as Wozniak and Jobs were starting Apple
computer, personal computers were an emerging product. The following chart
(Reimer) gives an overall view of the major market players since the mid-1970s.

PC Share of Market

100%

90%

80%
IBM SOM
70% Apple II SOM
Share of Market

60% Mac SOM

Amiga SOM
50%
C64 SOM
40% TRS 80 SOM

30%

20%

10%

0%
ar
76

78

80

82

84

88

94

96

00
86

92

98
90

02
Ye
19

19

19

19

19

19

19

19

19

19

19

20
19

20

By 1983, the market share of the Apple II fell to 8% while the PC had 26%.
Market share of Macintosh peaked at slightly more than 10% in the early 1990s
and has since tapered to between 2-3%. The IBM PC and its clones became the
standard due to the success of the open nature of the PC. This allows product
developers to offer vastly more products for the platform.
Some argue that not licensing the Mac OS was a mistake. Bill Gates and Microsoft
were encouraging Apple to license their OS in the early 1980s, because they were
developing software for Apple and had much riding on the success of the company.

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When Apple did not license, Microsoft began developing their operating system,
Windows.

The Online Music Industry

While Apple clearly dominates the online music industry, the battle for domination
is not over. Although digital music sales are growing rapidly, the Recording
Industry Association of America (RIAA) states that digital sales account for only
4% of all music sales. (Borland) Analysts at Forrester (Bartiromo) and Gartner
(Bruno) validate this. Apple’s sales are between 66% and 75% of downloads and
80% of music players. (Bruno) Apple is part to a suit alleging monopolistic
practices concerning their market share dominance of players and downloads. The
other players in the download market are (the revised) Napster, Yahoo Music,
Rhapsody, and illegitimate file-sharing services. Portable music players competing
with the iPod include those made by Creative, Samsung, iRiver, and Sony. A
major point of contention between these services and player manufacturers is the
control of a variety of incompatible Digital Rights Management (DRM) schemes.

The Future of Apple

Personal Computers – A Shift in Strategy

Apple has historically taken a far different path than the traditional Windows and
Intel combination. Microsoft provides the Windows operating system to separate
downstream hardware producers such as Dell. Apple vertically integrated both the
operating system software and hardware completely under Apple. A consumer
running Microsoft Windows can choose from a myriad of systems based on the
Intel processor, while a consumer running Apple’s OS X must purchase Apple
hardware.

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Apple is adjusting this strategy by migrating their microprocessors from IBM and
Motorola PowerPC to Intel. Analysts believe that the Intel-based Macintosh may
be able to run Microsoft Windows applications by the end of 2006. (Burrows)
In addition to switching processors, Apple positioned their computers as an
immediate option for the traditional Microsoft Windows user. With Apple Boot
Camp, users may now use Mac OS X or Windows on an Apple computer.
(Sutherland).By allowing users to run Windows on an Intel Mac, Apple reduced
the switching costs for traditional PC users. Apple may steal away customers that
are willing to pay a premium for a system that runs both Windows and Mac OS X.
Apple continues to retain a strategic option to license its technology to clone
makers such as Dell. Past attempts at licensing Apple technology (to IBM,
Gateway, and others) failed on accord of Apple’s rigid demands. Many technology
leaders (such as a 1985 letter by Bill Gates to Apple CEO John Sculley) criticized
Apple for keeping a closed architecture. Apple cofounder Steve Wozniak criticizes
this strategy, “We had the most beautiful operating system, but to get it you had to
buy our hardware at twice the price. That was a mistake.”Whether Apple would be
willing to pursue this reversal of vertical integration is unclear. Although such a
move would cannibalize a portion of Apple’s own hardware sales, it would also
provide royalty-based revenue that could approach $1 billion annually. (Burrows)
Jobs traditionally sided against licensing Apple technology. He referred to Mac
clone producers as “leeches” and he personally killed Power Computing (a Mac
clone producer) by terminating their license in 1997.

Apple in the Living Room

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Apple’s iPod and iTunes are a powerful combination that fosters a network style of
increasing returns. (Barney, 124) By selling iPods, Apple increases the consumer
demand for music from iTunes. By placing more musical choices on iTunes
(including less popular songs that appeal to niche audiences), there is more demand
for iPods. Apple had 70% of the legal music download market in early 2005.
(Yoffie)
Apple is shooting for the digital living room of the future. For example, Apple just
released a “boom box” portable version of the iPod. This iPod (the iPod Hi-Fi)
comes with a remote control. Instead of forming a strategic alliance, Apple
engineered the iPod Hi-Fi and designed it with high-fidelity features. (Burrows)
Apple is clearly trying to develop a stronger core competency in the entertainment
area.

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 Strategic Alliances and Entertainment

Jobs had the early strategic vision to complement computing with movie
entertainment. After founding NeXT, he personally acquired a majority interest in
the young movie company Pixar in February 1986. Jobs went on to invest ¼ of his
personal wealth into Pixar.
In 1995, Pixar solidified its position within animated movies with the debut of Toy
Story. Grossing $358 million worldwide, it became the 3rd-largest grossing
animated movie in history. After this success, Jobs took Pixar public and
negotiated far better terms with Disney. Later successes included Toy Story 2,
Monsters Inc., and Finding Nemo. The alliance between Pixar and Disney has
tremendous potential for economies of scope. As CEO of Apple and Disney’s
largest shareholder, Jobs is the strategic link between Disney, Apple, and Pixar.
Opportunities include combining the animated movie expertise of Disney and
Pixar, as well as sharing the content of Disney’s ABC or ESPN networks over
Apple’s digital offerings. (Burrows, Grover, and Green)
A current example of the fusion between Disney, Jobs, Apple, and technology is
video on the iPod. Disney’s Desperate Housewives was one of the first television
programs available for purchase and download to the newer video-enabled iPod.
There are concerns about whether these synergies will come to fruition. There are
fears that the personality and style of Jobs may conflict with Disney, and that
Disney CEO Iger could be “Amelioed” -- driven out of office by Jobs in a manner
similar to how Jobs drove Amelio out of the CEO post at Apple. (Burrows, Grover,
and Green).

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 External Aanalysis

Technological Environment

Brand Awareness – Style at a Premium

Apple’s products are trendy and stylish. After Jobs returned in 1997, Apple
retained designer Jonathan Ive to differentiate their computers from the typical
beige box. Ive’s design of the iMac included clear colorful cases that distinguished
Apple computers. Apple’s iPod (with the trademark white ear buds and simple
track wheel) commands a 15%-20% premium over other MP3 players.
Apple and Pixar limit the number of computer products and movies that they sell.
Product differentiation with focused quality and style also extend to the Jobs Pixar
– “Pixar's executives focus on making sure there are no ‘B teams,’ that every
movie gets the best efforts of Pixar's brainy staff of animators, storytellers, and
technologists.” (Burrows, Grover, and Green)
Apple positions its Macintosh computers as higher quality and higher price. HP,
Dell, and other PC manufacturers are pricing many systems under the $1,000
threshold. “Apple is struggling to meet demand for its new MacBook Pro laptop
despite a $1,900 price tag that is nearly twice that of garden-variety rivals.” Apple
has only recently entered the low-end (below $500) consumer market with the Mac
Mini. Although the Mac Mini is a base model with few features, it comes encased
in a very small and distinctive package. Apple portrays this computer as “Small is
Beautiful”. (Apple) Likewise, the iPod Shuffle was Apple’s first entry into the
lower-end ($100 range) of flash-memory-based portable music players.

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Interoperability
Although Apple competes directly with Microsoft for operating systems, the
release of iTunes for Windows in 2002 was a key strategic move. This decision
expanded the potential customer base to nearly all personal computer owners, even
though Apple only has 2%-3% of all personal computer sales. Conversely, Apple
depends on Microsoft for a version of Microsoft Office. As the most widely used
office suite of applications, Macintosh users rely on Office to correspond with
companies that standardized on Windows. This is from a strategic alliance
between Apple and Microsoft after Jobs returned in 1997. Apple’s iTunes
service has a technological hook (asset specificity) to Apple’s iPod. Although
versions of iTunes exist for both Apple and Microsoft operating systems, the
iTune’s AAC file format prevents other portable music players (such as iRiver or
Samsung) from playing purchased songs.

Technology and the Digital Lifestyle

Apple not only dominates the music player market, its iLife suite provides
consumers with easy-to-use software for music and video composition. With
“podcast” a household word, Apple’s Garage Band application makes the recording
of podcasts and music very easy.

Regulatory Environment
While introducing new technologies, there is a persistent threat of legal action by
competitors. For example, Apple sued Microsoft in 1988 (settled in 1997 for an
undisclosed amount) for perceived similarities between Microsoft Windows and
Macintosh audiovisual works.Microsoft has generally been the focus for
government antitrust charges (such as U.S. v. Microsoft) (US DOJ, 2006). Both
federal and state governments assert that Microsoft’s dominance blocked fair

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competition within the software industry. This is an advantage for Apple, because
its operating systems are a viable substitute for Windows. Furthermore,
Microsoft’s continued support for Office for Macintosh reduces the perceived level
of market monopoly and abuse. Manufacturers will continue to trespass on
Apple’s intellectual property. For example, the company tex9 released an open
source music program called xtunes that was very similar to iTunes. In 2002,
Apple took legal action against tex9, who then altered the programme and renamed
it sumi. Legal threats can surface from somewhat unusual sources. Apple Corps
Ltd. is the London-based company that owns the rights to the music of the Beatles.
Paul McCartney and Ringo Starr recently sued Apple over the use of the Apple
logo in iTunes, claiming that it violated Apple’s agreement not to produce music
under an apple-based logo.
Research and development is a key component to Apple’s sustained competitive
advantage. Apple is currently taking legal action against several popular technical
web sites for releasing proprietary product research. Sites such as
appleinsider.com have allegedly posted verbatim content from documents
protected by employee non-disclosure agreements. (McCullagh) Release of
critical insider information could give Apple’s competitors a jump in producing
rival products.

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 Industry Analysis Using Porter’s Five Forces Model

Apple operates in two primary industries:

• Computing - Hardware and Software
• Delivery of Entertainment and Media
Apple has always been under intense competition within the computer,
software, and entertainment industries. “Looking to 2005...Every time that Apple
had jumped into the lead in a product category during the past two decades, it had
had difficulty in sustaining its leadership position.” We use Porter’s Five Forces
Model to understand why Apple’s industries are so competitive.
Figure : Porter’s Five Forces Model

Threat of
New
Entrants

Bargaini Level of Bargaining

ng Threat in an power of
power Industry Buyers
of
Supplier

Threat of
Substitutes

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Figure : Summary of Industry Threats (Computer Equipment and Entertainment
Distribution)
Type and Organization Examples
Severity of
Threat
Entry – Verizon Streaming audio and video with V CAST.
High
Threat
Amazon On demand online services to purchase music
(similar to iTunes).
Google They make everything.
The “Next New entrants with disruptive technology.
Google”
Rivalry – Microsoft Windows Operating System, Windows Media
High Player for playing music and video.
Threat
Linux Competition to Mac OS X Operating System.
Napster, Online music sources – alternatives to iTunes
Rhapsody Music Store.
Dell, HP, Alternate sources for computer hardware.
Lenovo
iRiver, Small, stylish MP3 Players.
Samsung,
Creative
DreamWorks Animated movies.
YouTube.com Online video.
Substitutes XM, Sirius Satellite Radio for music.
–
Moderate
Threat
XBox, PS2 Entertainment Media, Media and Music.
Various Internet Streaming Radio and Podcasts.
Music CDs, Alternative means to acquire music.
DVD-Audio
and
SuperAudio
CD
Broadcast, Alternative sources for video.
Cable,

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 Satellite,
NetFlix, TiVo,
Theatres
Suppliers Motorola, Suppliers of Processors and computer memory.
– High IBM, Intel,
Threat Samsung
Microsoft Strategic Alliance / Supplier of Office for Mac.
The Big Five - Sources of music. Will they raise prices and break
BMG, EMI, the dollar per song model? Some in the record
Sony, industry resent Apple’s distribution model. “Apple
Universal, and reaps billions from selling its hit music player, but
Warner there are sparse profits from the songs being sold
over the Net.” (Burrows, Grover, and Green)

Disney, ABC, Suppliers of Television and Movies. Will they sign

NBC, CBS, exclusive contracts with other online services?
Fox, Pixar, Note that this threat is reduced for Disney / Pixar.
Sony
Buyers – Consumers and Consumers share music using peer-to-peer
Moderate Illegal peer-to- networks without paying for music.
Threat peer file
sharing
Distributors Apple retailers may pressure for lower prices or
better terms. For example, the release of the Apple
Store in 2001 “infuriated longtime independent
Apple retailers that didn’t appreciate Cupertino
cannibalizing their sales.” (Linzmayer, 300)
Consumer Consumers or businesses may reduce spending on
Attitudes and personal computers or non-essential (potentially
Behaviors high elasticity of demand) music players if they
fear economic downturns.
Consumer Consumers and businesses may continue to use
Refresh Cycles previous-model iPods and Macs rather than
upgrade to current iPods, iMacs, or OS

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The total industry threat for the industry space that Apple occupies (computer
equipment and distribution of entertainment) is a high threat industry. Apple must
continue to pursue product differentiation (i.e. the style and ease-of-use of an iPod)
and economies of scope (i.e. offering ABC television shows on iTunes) to maintain
their sustained competitive advantage in this industry.

Which External Threats are Most Significant

• Computer Hardware and Software: Open Source software such as the Linux
Operating System and Open Office applications threaten both Apple and
Microsoft. The low (often, free) cost of the software may allow it to
overtake Apple and Microsoft, especially in developing markets such as
China.
• Music Products: Major online retailers such as Amazon are considering
entry into the online music market. With a wide internet presence and a
household name, Amazon could present a formidable challenge to Apple. If
the major record labels (Universal, Sony BMG, EMI, and Warner) negotiate
better terms with new competitors to iTunes, Apple may be unable to
provide some of the music content that they currently offer. The major
music labels dislike Apple’s dollar per song pricing. They would prefer to
earn higher profits with “variable pricing”. (Wingfield) With variable
pricing, the most popular songs would be greater than $1, and less popular
songs would be less than $1. Although the labels recently renewed their
contracts with Apple, there may be provisions that allow future changes in
the pricing model. (Wingfield and Smith)
• Suppliers: The recent shift to Intel processors could present a significant
threat to Apple. With only two companies (Intel and AMD) producing Intel-

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 compatible processors, there is a strong potential for tacit collusion and
oligopoly power between these suppliers. Apple purchasing must now
directly compete with HP, Lenovo, and Dell. If shortages or exclusive
agreements materialize, Apple could face problems with obtaining raw
materials. Apple should consider additional sources such as Advanced
Micro Devices (AMD).

Figure: CPU Market Share

Additional External Threats

Security
Apple software, like all large software products, has security vulnerabilities that
hackers may exploit. A significant exploitation in the future could damage many
businesses and households using Apple computers. This would affect future

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customer purchasing decisions. Apple enjoys a competitive advantage, because
their OS X is mature and stable due to its basis on BSD Unix. In fact, “computer
security folks back at FBI HQ use Macs running OS X”. However, the increased
use of Apple computers is prompting hackers to target the platform. In February
2006, there was documentation of the first known Apple OS X worm. By using
iChat instant messaging, it spreads to other users and deletes files from their Mac
computers. If Mac OS X becomes as wide of a target as Windows, Apple’s
perceived differentiation as the more secure platform may disappear.

Vertical Integration of Competitors

Sony is an example of a competitor with a unique position against Apple. Sony

Music supplies Apple with many of the songs for iTunes. Sony also creates a
version of the Walkman portable music player that is a direct competitor to the
iPod.
Sony is attempting to vertically integrate forward directly to the music buyer.
Sony integrated their music system (Mora) into the Sony Walkman. Sony is
exclusively distributing certain songs on Mora. (Hall) Mora currently targets
Japanese consumers. If Sony can gain additional momentum (such as collaborating
with other record labels), their service could present a formidable challenge to
iTunes in additional markets.

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 Value Chain Analysis

To determine where Apple developed distinctive capabilities, Porter’s generic

value chain model provides a systematic framework for identifying Apple’s
utilization of resources. Primary activities for Apple include Technology and
Product Design, Production, Sales and Marketing, Customer Service, and Legal
Services.

Technology and Product Design

This component represents the true core (no pun intended) of Apple’s capability.
From being the first platform to run an electronic spreadsheet (VisiCalc on the
Apple II Plus) to the first to establish a “digital lifestyle” hub (the Macintosh
product lines), Apple’s history is rich with cutting-edge technology development.
Apple drives to be the best, no simply the first. The Apple operating system is
universally regarded as more stable and reliable than Windows, while the desktop
publishing software bundles (iMovie, iPhoto, iTunes, etc.) are the most
comprehensive available to end users. Ives best summarizes the entrepreneurial
culture within Apple by saying that “it’s very easy to be different, but very difficult
to be better.”

Production
Because Apple had long refused to license its operating system to external entities,
the bundled packages of Apple-developed hardware and software became the
cornerstone of Apple’s 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.

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While every product introduction has not been a success (Lisa, Newton, etc.),
Apple treats component production as a natural extension of the design process.

Sales and Marketing

We could simply title this section “Steve Jobs”. Since his return as CEO in 1997,
Jobs personally unveils all new product introductions, reviews corresponding
marketing campaigns, and approves new product development guidelines. In a
departure from their turbulent history, Jobs “entered into patent cross-licensing and
technology agreements with Microsoft.” (Linzmayer, 290) After years of
unimpressive market share growth and cannibalization of a loyal consumer base,
the door to the expansive PC market was now more accessible to Apple than ever
before. Apple continued to command a market premium for producing a “better
mousetrap” throughout its history.

Customer Service
How has Apple retained substantial cash reserves during the explosive growth and
dominance of PCs worldwide? 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. (Wingfield) In such an
environment, customer service merely becomes the realization of receiving a little
more than expected.Although Apple employs many resources and capabilities to
support their primary activities (human resources, supply procurement, etc.), the
most strategically relevant would be Legal Services.

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Legal Services
In a market climate of constant change and innovation, it is inevitable that the drive
to expand product and service offerings will subject Apple to patent and copyright
infringement claims. The dispute over the Apple logo on its iTunes Music Store,
for example, continues despite a previously reached settlement with Beatles’ Apple
Corps Ltd. in 1991. (Dow Jones Newswires) While such litigation as Microsoft’s
Windows infringement on Mac OS patents has been highly publicized, use of legal
guidance to drive acquisition versus internal development strategies for such
products as GarageBand and iMusic have proven highly valuable. Intellectual
property is sacred to Apple. There was a recent attempt to uncover the identities of
internal “sources who leaked confidential information about an unreleased product
to online media outlets in 2008.’’

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 SWOT Analysis

Although participation in such activities may add value, they may not be a source
of competitive advantage. Ultimately, the value, rarity, inimitability, and/or
organization (VRIO) of an activity or resource determine its sustainability as a
source of competitive advantage. Within this context, we can identify a firm’s
strengths, weaknesses, opportunities, and threats (SWOT).

Strengths

 Technical savvy – Product lines are easy to use and stable. Recent
integration with Microsoft products lines and Intel processors demonstrate
ability and willingness to adapt to a diverse customer base. (Mossberg)
Such innovation, however, would not be sustainable without a learning
environment tolerant of mistakes. While the pure technical expertise alone
is not a valuable or rare resource, it becomes very costly to imitate when it
exists within the socially complex, entrepreneurial culture of Apple.
 Financial vitality – Cash reserves remained robust and stable despite
stagnant market share growth in the computer hardware and software arenas.
Apple exploited this by resisting market pressures to reduce costs, tightly
integrating product packages, and forming strategic alliances (i.e. securing
the backing of all major music distributors in the support of iTunes).
 Brand loyalty – The only way that Apple could maintain the financial
vitality described above is via a fanatical, almost cult-like, affair with its
customer base. Such brand loyalty is extremely costly and time-consuming
to imitate.
 Steve Jobs – As discussed earlier, Jobs proved to be a vital component to
Apple’s success. During his absence (1985-1996), Apple experienced the

28
 most turbulent (financial and innovative) timeline in its history.
Immediately upon his return, he replaced most of the Board of Directors,
pruned and focused the new product ideas, and delivered seven consecutive
quarters of positive earnings to shareholders. As such, Jobs is certainly a
valuable, rare, and hard to imitate resource that Apple fully exploits.

Weaknesses

 Market share – Apple has historically been strongest in the US geographical

and educational vertical markets. With the educational market facing
tightening budget constraints and the US approaching a PC saturation point,
Apple may need to burn cash more quickly and succumb to market cost
pressures on its products without a strategic innovation, integration, or
divesture.
 Steve Jobs – For virtually the same reasons Jobs is a strength, he is
simultaneously a weakness. The aggressive drive to bring innovative visions
to life was noticeably absent and painfully felt (especially by shareholders)
during his departure. The apparent absence of succession planning coupled
with a lust for the limelight positioned Jobs as Apple’s single consciousness
in the eyes of consumers and shareholders.

Opportunities

 Consumer electronics – With the startling success of the iPod and iTunes,
Apple entered the consumer electronics market. By expanding the iTunes
concept to downloadable mobile phone features and movies (podcasts), the
door is now open to develop new and potentially profitable strategic
alliances with peripheral component manufacturers (speaker, home stereo,
etc.) and media transmission giants (Disney, TBS, Verizon, etc.).

29
  PC hardware and software market growth – With cross-licensing of
operating system platforms in place, Apple entered the high-volume business
environment traditionally dominated by Windows-based PCs. The
introduction of Intel-based processors prompted businesses to replace PCs
with iMacs. They did this to gain a level of stability and reliability in their
business applications that PCs failed to provide. An example is Japan’s
Aozora Bank Ltd., who is replacing 2,300 PCs with iMacs. (Wingfield)
Apple must establish themselves as a credible player in business desktop
applications to overcome the “desktop publishing” stereotype.

Threats

 Legal risks – In a market that literally changes at the speed of thought,

patent and copyright infringement risks remain high. As long as operating
systems and support software packages continue to converge and remain
relatively easy to imitate, present and future lawsuits are inevitable. The
Apple records claim against iTunes remains unresolved.
 Competition – This threat occurs primarily on two fronts: PC
hardware/software and consumer electronics. For the same reasons
discussed in the opportunities section, the threat of imitability (cloning,
pirating, etc.) increases. As relative newcomers to the consumer electronics
arena, will Apple retain a competitive advantage as they diversify their
offerings (speakers, home entertainment systems, etc.).

30
 Influx of Apple’s Mac Challenges Mis to Cope

In the heart of large companies, data center managers are wearingly warding off a
second band of corporate renegades. The renegades are trying to break down
mainframe walls and build new applications replete with icons and pretty pictures.

After finally coming to terms with the IBM microcomputer revolution, MIS
departments are now being asked to assimilate a second microcomputer standard,
the Macintosh from Apple Computer Inc. of Cupertino, Calif.When the machine
was introduced in the mid-1980s, most managers viewed it as a small business
system or a home computer.Despite the tag, Macintoshes have wormed their way
into many large corporations. Conglomerates, such as E.I. du Pont de Nemours &
Co., Northern Telecom Inc., General Electric Co., Martin Marietta Corp. and
Electronic Data Systems Corp., have all blessed the Macintosh.

John Wardley, a senior analyst at International Data Corp., a market research firm
in Framingham, Mass., said, "Macintoshes were initially purchased to address a
specific niche. For example, a corporate advertising department may have used the
microcomputer to produce graphic presentations."Once other department saw the
machine's output, interest spread. Right now, Macintosh usage is rapidly growing
in many large corporations," he said.

Use of the computer has progressed well beyond the test phase and a few
corporations have installed thousands of Macintoshes. "Right now, our users are
purchasing more Macintoshes than IBM microcomputers," said Michael Pearson,
the director of technical operations at the New York Daily News in New York.

31
What is driving Macintosh acceptance?

Supporters agree that it is the product's easy to use graphic interface. "Once a user
sits down and works with a Macintosh, they never go back to an IBM Personal
Computer," proclaimed Price Collins, a programming manager at General Electric
Co. in Bridgeport, Conn.The ease of use features translate into substantial savings
for many corporations. "We spend much less time training Macintosh users than
we do training IBM microcomputer users," noted Pearson at the New York Daily
News.

Studies comparing Macintosh and IBM microcomputer training costs found that it
takes twice as long for an IBM user to learn how to operate his machine and three
times longer for the user to understand how to opeate a second application. A
survey commissioned by Apple found the average cost of training an IBM user was
$765 compared to $294 for a Macintosh user.The Macintosh's graphics capabilities
also offer many middle managers their own strategic weapons in the battle for
upper management's attention.

"An employee will use a Macintosh to generate slides and charts for an important
presentation," GE's Collins explained. "The output is far superior to anything
generated on an IBM microcomputer, so other managers immediately want to
produce the same quality output. Quickly, use of Macintoshes spreads through the
company."

Removing Barriers for Users

Analysts reported that another reason for acceptance was aggressive Apple actions.
"Apple removed barriers that corporations erected to keep Macintoshes out of

32
users' hands," said Richard Kollmeyer, the director of marketing and technical
services at The Support Group Inc., a Wellesley, Mass., microcomputer reseller.

"One of the initial concerns was the inability to run MS-DOS software on a
Macintosh. Quickly, Apple delivered hardware so users could run those
applications."

To date, Macintoshes have been relegated to personal productivity tools in most

companies. "Most users purchase a Macintosh to more efficiently do their own
work," noted Michael Masterson, a microcomputer systems specialist at Arthur
Young & Co. in San Jose, Calif.

Users are primarily working with traditional microcomputer applications, such as

spreadsheet and word processing. However, there are nuances in the types of
applications employed by IBM PC and Macintosh users.

Application Preferences

In a survey of 1,216 large companies (each having more than 500 employees),
Dataquest Corp., a market research firm in San Jose, Calif., reported that word
processing was the Macintosh's most widely used application--named by 54% of
respondents. Graphics applications followed with 46%, and spreadsheets placed
third with 38%.On the IBM Personal Computer, the response was as follows: 65%
used spreadsheets; 57%, word processing; and 35%, database management
systems. Few of the companies that dominate the IBM microcomputer software
market have had much success plying Macintosh wares. For example, Lotus
Development Corp. of Cambridge, Mass., and Ashton-Tate of Torrance, CAlif.,
have had little success in the market. The most notable exception, Microsoft Corp.,
Redmond, Wash., offers the three bestselling applications: Excel, a spreadsheet;

33
Word, a word processing package; and Works, an integrated spreadsheet, word
processing and database application.

AppleInsider reports on a research note from BMO analyst Keith Bachman that
could have been written for Crazy Apple Rumors—if they hadn't gone ghost-site
on us. It turns out the success of the Mac in recent years isn't because of Mac OS
X, or Intel CPUs, or the iPod Halo Effect; rather, it's because Microsoft sucks.

"Thus far, user satisfaction ratings for Vista have been weak, and startup times for
Vista have been known to be much slower than the Mac OS X," Bachman says.
"Thus, more than 50% of recent customers buying Macs in Apple retail stores are
first-time buyers."

34
While it's great that the six-figure analyst projects 2.4 to 2.5 million Macs sold for
the quarter just ended, his rationale is, well, crazy. Setting aside the image of some
grandma dropping $2,600 for a MacBook Air with SSD, there's nothing "recent"
about half of Mac buyers in Apple Stores being new to the platform. It's been that
way since before Vista was released.

Further, as the chart by the four-figure analyst clearly shows, the surge in Mac
sales started around the time Apple transitioned to Intel CPUs. Ironically, one
could argue that Mac sales are rising because of Vista, but not in the way Bachman
suggests. Prior to the release of Leopard and the discontinuation of Boot Camp as a
separate product, Apple reported huge downloads of the program that let Mac users
launch Windows Vista very, very slowly.

Bachman further expects Mac sales to jump around 25 percent in 2009, or about
twice the expected growth of PCs. Apple could end up with as much as four
percent worldwide market share if that happens. In the near term, Bachman, like
just about every other analyst and Apple nerd on a message board, is expecting the
company to get a boost from the iPhone. If so, it hasn't happened yet.

Since the unveiling of the iPhone 3G at WWDC, AAPL is actually down about 5
percent, which is pretty good compared to some competitors in the smartphone
market. Sure, zombie PALM is stumbling along, down 20 percent, but RIMM is
down nearly 10 percent. This is after the company reported record profits during
the last quarter and a couple of million new subscribers. While the problems of
Apple's competitors can be partially blamed on fear of the iPhone 3G, the real issue
is the troubled economy. Bachman, and others, are rating AAPL as "outperform"
with a value in excess of $200. Maybe, but you can only go so high in a down
market, no matter how bad Vista boot times are.

35
Apple profit makes huge rise due to iPod success

In the first quarter of 2007, more than five million iPod music players were sold.
Apple's quarterly income has increased six-fold largely due to the success of the
device. The firm's net income raised by a massive 530% to $290m compared to
€46 over the same period in 2008. Revenues rose 70% to $3.24bn after good
growth in all product categories. A number of approximately 5.3 million iPods
were sold over the period, which is an increase of 550% in the same period in
2008.
Sales of PCs also rose to over a million (43% rise) following the success of the
new Mac mini and new PowerBook notebook computers. Steve Jobs was delighted
with the figures for the first quarter. "Apple is firing on all cylinders and we have
some incredible new products in the pipeline for the coming year," he said. 40% of
the sales made were over seas, which showed the popularity of the iPod in Europe
and Asia. However, Apple said it expected earnings per share to be lower in the
third quarter, at $28 per share as against $34 per share over the latest period and
also expects revenues to remain largely flat at $3.25bn.

Apple Beats Competitors at Inventory Turn Over

Despite a weakening economy and a need to meet customer demand, Apple has
been able to maintain a fast inventory turnover rate. The Mac and iPhone maker is
sitting at five days worth of inventory on any given day, beating Dell's seven days
worth of inventory, according to data from UBS.

Other PC makers are having even more trouble matching Apple's inventory
efficiency. Lenovo, for example, is averaging 15 days of inventory, and HP is
sitting at 32 days. Intel, however, is showing a much slower inventory turnover rate
at 89 days, and D-Link is sitting on a staggering 131 days worth of inventory.

36
Apple's quick turnover rate may have been due in part to preparing for its just
announced iMac, Mac mini and Mac Pro updates. The company released new
desktop computer models on March 3, and keeping inventory low helped assure
that there would be fewer of the previous model machines sitting on store shelves.

While maintaining a higher inventory level can help a company cope with sudden
increases in demand, it can also show a company's inability to adequately gauge
market interest in their products. For now, it looks like Apple is managing
inventory better than its competition.

IPod: The Marketing of an Idea Project

Apple’s iPod has taken the world by storm. Nearly ubiquitous, it has changed not
only the way people listen to music, but it has transformed its parent company
Apple into an entertainment giant. In order to understand how this change came
about, we’ll take a look at Apple’s ongoing efforts to make iPod synonymous with
hip. We’ll also discuss exactly what customers are buying when they buy an iPod,
and we will take a deep look at several aspects of Apple’s marketing of this
exciting new product, from the iPod itself, Apple’s strategic planning, possible
research findings that supported their approach, segmentation strategies that may
have been employed and why, as well as pricing strategy across these segments.
Last we’ll discuss communications, promotion and advertising, as well as an
interesting shift in retailing that the iPod has enabled. Throughout, we’ll tie back to
the Apple brand to dig deep into the notion that iPod’s stunning success stems from
it being specifically not an MP3 player. Like Magritte’s surrealist painting of a pipe
with the caption Ceci n’est pas une pipe (This is not a pipe), the iPod is not merely
an MP3 player. It is a symbol which encompasses many grand ideas; ideas that
involve world change, and how cool we all can be if we are part of that change.

37
Apple’s careful and deliberate exploitation of this concept, comprising an entire
marketing ecosystem which nurtures that idea will be the subject of this paper. On
January 9th, 2007, Steve Jobs, renowned CEO of Apple, announced that the
company which he founded would no longer be known as Apple Computer, Inc. Its
new name would just be Apple, Inc.1 This seemingly trivial change represents a
fundamental shift with deep implications that were the result of many changes
Apple had engineered over the past six or seven years; transitioning itself from a
computer company slugging it out for a meager share of an increasingly
competitive hardware and software market, to a business that promoted an entirely
new concept: the digital lifestyle. Before we dig down into what this radical shift
entailed, both for the company and the world, let’s take a quick look at the history
of Apple, a company already firmly rooted in several notions that allowed this
transition to make sense. Apple made a name for itself by being instrumental in
ushering in the home PC revolution. For millions of its aficionados, Apple was
single-handedly responsible for this revolution by virtue of the fact that it created
radical new features such as windows-type graphical user interfaces, pull-down
menus and simplified computer control via the mouse. The history of the PC
revolution is a history of war between Apple, a number of losers that no one
remembers any more, and archrival Microsoft with its dubious counterclaims of
having pioneered the concept of Windows. Frustrating to anyone who owned a
Mac back in the 1980’s is the knowledge that Apple did indeed pioneer the
windows metaphor as a distinct feature of its operating system. This was at a time
when Microsoft users were still struggling with text-based DOS commands, and
yet the commercial success of Microsoft has served to rewrite history to some
degree. Battles ensued over the years, but no matter whose side you were on, by
the late 90’s it was clear that Apple was not gaining any ground whatsoever as a

38
computer and software manufacturer. In fact due to many external events, Apple’s
position was in clear threat.
First, huge numbers of consumers, particularly the business community, clearly
preferred Microsoft. Apple’s market share was tiny compared to the Redmond
behemoth2 however Apple users were an ardent group of graphic designers,
college students, and members of the urban hip known as The Digerati. This was a
group of consumers who saw themselves as different from the mainstream;
definitely cooler, and part of a community of like-minded people. They knew they
paid more for to breathe this rarified air, but they didn’t seem to mind. In these
segments, Apple’s market share was relatively solid, even if it was comparatively
small. Even so, by the end of 2000, with a downturn in the worldwide demand for
PCs, Apple posted a $200 million loss3, and analysts were not optimistic about
Apple’s future. Undeterred, in January 2001, Jobs opened the annual Macworld
conference in New York City with his usual brand of enthusiastic vision. He
announced that personal computing, far from tailing off into irrelevance, was about
to leap ahead into a new Golden Age. To support his vision he introduced several
new Apple products that were intended to align the Mac with this new “digital
lifestyle”4.
Though the conference attendees may have nodded knowingly, few understood
what he was talking about, for at this point habits which would later be hallmarks
of the digital lifestyle—listening to music online, creating digital movies and
sharing photos through networks of computers—were not widely practiced, except
perhaps by the most innovative of consumers. Any such habits were still in their
domain, as MP3 technology, and MP3 players specifically, were still quite new,
and no one yet knew exactly what to do with them. Launched in 1998, MP3
players were initially seen as an alternative to portable CD players. They only held
a couple hours worth of music, and there were still technical glitches such as

39
transfer times and clumsy user interfaces that cast these new gadgets firmly into
the realm of the geek.
Interestingly this is not too different from the situation that existed when Apple
first entered the PC market; the concepts and technology existed, but they weren’t
popular. Apple’s stroke of strategic genius was to create a way to simplify and
popularize them through cool and innovative design. This approach became
foundational to their business strategy as well as their corporate culture, and it can
still be seen today, irrespective of the fact that so much has changed. In this regard,
this company’s guiding principles have remained remarkably consistent. In 1998 as
today, Apple’s strategy has been to release cool new products frequently5,
accepting and capitalizing on the fact that computer products enjoy a short product
life cycle. Apple popularizes difficult technology by making it fun and intuitive,
and characteristically they wrap it all up in a super-hip package that makes
consumers of their products feel as if they belong to an exclusive community. The
company’s commitment in 2006 differs from their commitment in 2000 only
insofar as the addition of the words “portable digital music”:
The Company is committed to bringing the best personal computing and portable
digital music experience to students, educators, creative professionals, businesses,
government agencies, and consumers through its innovative hardware, software,
peripherals, services, and Internet offerings.6 Many have criticized this approach,
particularly the more conservative elements within the business community whose
view is summed up by Business Week who wrote when iPod was first introduced
that “a few might pay a premium for good design, but it isn’t a good business
strategy.”7 Those same people may today wish they had at least bought a few
shares of stock as a hedge against possible shortsightedness, but more to the point,
this type of thinking seems to miss exactly what it is that Apple has always sold.

40
Consider that last year, Norway, Denmark and Sweden challenged Apple in court
over this limitation of their product, a case which Apple’s competitors are
following with great interest14. Whole industries want a piece of Apple’s pie, most
notably mobile phone manufacturers. Nokia has announced that it is setting up a
rival to iTunes in its purchase of the American digital music service Loudeye.
Songs downloaded from the new Nokia subscription service will play on any
digital music player, including iPod. Not coincidentally, handsets are one of the
explosive new growth areas for portable digital music.
Apple continues to mitigate these risks by keeping it hard to substitute, and this
gets to the heart of the matter, that iPod symbolizes more than just another MP3
player. If Apple wins all the chips, then iPod’s halo effect will help Apple
outmaneuver such threats, and future product offerings such as iPhone, which are
being developed now in response to the competitive onslaught, will gain a critical
head start. As it stands there is simply no substitute for an iPod. This is reinforced
consistently across the technology, advertising, promotion, and accessory
ecosystem. In this sense, buyers have strengthened Apple’s competitive position
because at sales of over 100 million units, and 70% of the market15, iPod is the
industry standard for MP3 players. In a mesmerizing feat of mental acuity, Apple
helps consumers judge the efforts of its competition against a standard they
themselves invented. In order to be part of the phenomena, buyers have shown that
they will pay a premium, and that for the most part, there are no ready substitutes.
This causes a significant problem for competitors when the global conversation
about MP3 players invariably leads to all things iPod. Any competing product will
certainly be judged against the gold standard of iPod, and because of Apple’s early
entry and subsequent early lead, MP3 players from today through forever won’t be
strictly judged by their technical merits, but rather on their value as a style
accessory.

41
Thanks to iPod, any potential entrant has to now offer an augmented product that
delivers an entire package of benefits far and above the simple core attributes most
tech companies specialize in. We can reasonably infer that Apple did plenty of
primary and secondary research about the types of people who would be interested
in iPod, and crafted their message accordingly. Undoubtedly they owned
mountains of data from their over twenty years being at the epicenter of the PC
revolution as well as their relevance birthing its child, the Web revolution. Using
laddering in interviews perhaps revealed that this new breed of high tech consumer
had desires far and above the technical. Accordingly, they positioned the product’s
physical attributes in a way that was secondary to its contribution toward bettering
the consumer’s world. A tool for building high self-esteem, impressing your
friends, and being part of a semi-exclusive club, that by the way happens to be
beautifully designed and technically superior to the competition. What’s not to
love? Of course, they charge for this love, but they knew from the beginning where
they were going, and they didn’t get there by accident. Looking at the Christmas
retail season of 2001, three months after iPod's release, we see a story that
practically draws for us a perceptual map whose axes are price and technical
capability. From that we can backwards-engineer possible research findings,
conclusions, and recommendations.
The leading device at the time was Sonicblue RioVolt MP3 CD Player, which
retailed for less than $100. Creative's Nomad Jukebox was selling its recently
introduced 6GB hard drive for about $250, and e.Digital Corp. was touting its
walloping 10GB palm-size Treo 10 for $ 249 Treo. Against these contenders,
iPod’s $399 price tag for a mere 5 GB of storage doesn’t seem to make sense16.
Also, at this time, iPod was only compatible with Macs, which amused Bill Gates,
and continued to do so even as late as 2005 when USA today quoted him as saying:
I think you can draw parallels here with the computer — here, too, Apple was once

42
extremely strong with its Macintosh and graphic user interface, like with the iPod
today, and then lost its position.17 It is our contention that the initial release of
iTunes 1.0, which as noted was practically laughed at, was a Trojan Horse that
delivered quite a bit of business intelligence to Apple.
We know that they released it about one year before iPod was released, so there’s
no doubt that the entire iPod strategy and product development were well into their
final phases. To go back to that time is to recall that Apple faced numerous legal
issues relating to copyright infringement. Releasing iTunes before there was a
correlating MP3 player gave Apple a window to negotiate Digital rights
Management agreements without the success of iPod hanging over their head. In
other words, the lack of a product didn’t cause the alarm bells to go off among key
stakeholders in the distribution chain, whose future position was in grave threat,
and who would have certainly put the brakes on if they had seen what was coming
down the tracks. Finally, iTunes usage in that first year may have served as the
final checkpoint, validating Apple’s contention that a successful MP3 player—one
that would truly leverage the potential of the technology—would need to find a
way around the clunky process of buying and ripping CDs. Building these findings
into a psychographic profile and consistently speaking to that profile as an
individual would comprise the remainder of the marketing effort, in all its facets,
but how many psychographics were there?
What factors did Apple take into account when deciding whether there were viable
segments out there? It is clear today that Apple is marketing different products to
different groups of people: the flagship iPod video which is expensive, the Nano
which is midrange and a shuffle which is inexpensive and small. This segmentation
strategy appears to make sense, since the market is heterogeneous, the segments
are identifiable and they are divisible. But, did releasing different products risk
dividing the total market, or did it create new opportunities for sales? Greg

43
Joswiak, Apple’s VP of hardware marketing in 2005 noted in reference to the Nano
that "This is a different product and it will take the iPod to a different market, one
which couldn't afford the price of the normal iPod 18." That it was a good move
was lauded by Merrill Lynch’s analysts at the time when they concluded, “The
iPod shuffle is likely to outsell all Apple's other iPod models combined, and may
be in short supply until next quarter” 19. Extreme iPod published a report at about
the same time that suggested that the strongest demand for the iPod shuffle was
likely to come from new users. "Existing iPod owners may prefer the larger
capacity and display of existing iPods, which makes for good market segmentation
on Apple's part. New-to-iPod users tell us the price points and ease of use are
attractive."20 By the following year, iPod had moved into its sixth generation, with
a line that featured the iPod video player, an iPod Nano with a color screen, and the
iPod shuffle. Also being upgraded right alongside the product was its life-giving
infrastructure iTunes, now able to offer and organize different types of media. We
believe that in the beginning Apple’s segmentation strategy focused on narrow
markets and a unique niche because in 2001 it was early adopters who might be
interested in MP3 players. However iPod also created a whole industry, which
must now be characterized as having a broad scope, simply because of its
ubiquitous presence. It may be a unique niche—it certainly was at the time—
because they intentionally did not go for cost leadership.

An Apple for your enterprise?

Macs have made their way out of the art department and into the offices of
accountants, salespeople, manufacturing planners and top executives. “We’re
seeing more requests outside of creative services to switch to Macs from PCs,”
notes David Plavin, operations manager for Mac systems engineering at the U.S. it

44
division of Public Group SA, a global advertising conglomerate. For it managers
across all industries — even those with a well established and stalwart Windows
user base — the question is no longer whether you’ll need to de-

sign and support a Mac computing strategy. the only question is how quickly. You
may already be a little late to the game. According to Forrester, business adoption
of Macs tripled last year. What’s more, this will surely accelerate as companies hire
more Gen Y workers. Coming through the door in those backpacks are a slew of
consumer technologies and wireless personal productivity tools — think iPhone.
Some users are finding that switching to Macs can even save money — lots of it.
Auto Warehousing Co. (AWC) in tacoma, Wash., is pulling the plug on all
Windows-based PCs and powering up Macs to execute virtually all of its revenue-
generating operations.

In september, 2008, Apple Inc.’s Mac Os X market share passed the 8% mark for
the first time, according to data collected by net Applications.
Apple’s operating system ran on 8.2% of the computers that accessed the 40,000
sites monitored for clients by Net Applications. The Mac’s share of the operating
system market was up over August’s by nearly four-tenths of a percentage point,
the biggest one-month gain since May. In the last two years, Mac OS X’s share has
increased by 3 percentage points, a gain of 58%. Microsoft Corp.’s Windows,
meanwhile, continued to slip in market share last month.
Overall, Windows accounted for 90.3% of the operating systems powering the
machines that accessed Net Applications’ metric network, a drop of 0.4 percentage
points from August, when the operating system fell by nearly the same amount
from July. That month was the last time that Windows maintained or grew its

45
share. Since the beginning of this year, Windows has lost 1.5 percentage points in
market share.

As the largest full-service auto processing company in North America, AWC has
23 sites across the U.S. and Canada and handles 5.5 million cars a year. Switching
to Macs will save the company $1.82 million over three years, according to Cio
Dale Frantz. that’s what it would have cost to upgrade software licenses if the
company had stayed on PCs. in contrast, the total cost of switching to Macs was
$335,000. “this is more of a strategic choice for the future,” says Frantz. “By
investing in the Apple platform, we pick up additional functionality that we don’t
have today,” he says. Frantz also says Macs are ready for business prime time. “on
the whole,” he adds, “what we’re finding is this stuff just works. We’re at a point
where we can deploy it companywide.” For all the details, see AWC Switches to
Mac and The Mac Switch Revisited. other key factors driving Mac adoption
include the rise of Web based computing via software-as-eservice applications,
which for the most part are platform-agnostic. the rise of virtualization, as well as
Apple inc’s shift toward standardized PC components, has also cleared the way for
greater corporate Mac use. Indeed, experts say the Mac fits much better than it ever
has before in the enterprise, and the trend toward cloud computing is reducing the
importance of the client platform to access both internal and external resources.

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 Financial Analysis

2nd Quarter 2008

Apple’s financial performance continued to strengthen over the last several
quarters. In the most recent earnings announcement, Apple reported significant
growth in net revenues driven by the strong performance of its iPod product line.
Net sales for the 2nd quarter grew to $4.36 billion, which is a 34% increase over 2 nd
quarter 2007 results. Net income increased by 41% to $410 million.
The iPod product line continues to drive the financial performance of the company.
In the 2nd quarter alone, Apple sold 8.5 million iPods, representing a 61% increase
over the 5.3 million units sold in the 2nd quarter of the prior year. Mac sales
showed slight growth of only 4%.
Apple’s year-to-date revenues total just over $10 billion and earnings total just
under $1 billion. For the 3rd quarter, CFO Peter Oppenheimer stated, “…we expect
revenue of about $4.2 to $4.4 billion” which will push total sales above last term’s
annual numbers.

Historical Performance
Although sales remained stagnant during 1998-2002, sales more than
doubled since (see graph below). This dramatic shift in performance is primarily
due to the increase in sales from the iPod product line.

47
 Apple Revenue Growth
16000

14000

Net Sales 12000

10000

8000

6000

4000

2000

0
1998 1999 2000 2001 2002 2003 2004 2005

Stock Price Performance

Another interesting way to consider the financial performance is to evaluate how

Apple’s stock price performed against the market and against its main competitors.
As we see from the chart above, Apple’s performance has been inconsistent over
the last 20 years compared to the S&P 500. It also has not performed at the same
level as its main competitors, Dell and Microsoft. However, performance
improved since 2003.

48
Profitability Measures
Apple substantially improved in its key measures of profitability in the last few
fiscal years. In terms of return on assets, return on equity and profit margin, Apple
strengthened financially and now has similar ratios to that of its competitors and
the overall computer hardware industry .

2006 2007 2008 Microso Dell Indust S&P

ft '08 '08 ry '08 500
Return on 1.01 3.43 11.56 19.75% 15.42 11.98% 8.13%
Assets % % % %
Return on 1.63 5.44 17.88 28.56% 67.31 36.61% 19.61%
Equity % % % %
Profit 1.11 3.33 9.58 31.57% 6.39 6.36% 13.75%
Margin % % % %
P/E Ratio 33.89 22.63 18.51 26.32 22.09

In reviewing Apple’s 1st and 2nd quarter 2008 earnings releases, gross margins
dropped slightly. Apple attributes this decline primarily to price pressures,
especially in the iPod product line. (1st Quarter 10Q) This will continue to affect
performance over time. However, Apple’s ability to maintain the momentum it
built in the marketplace will control the speed with which erosion will occur.

Liquidity and Leverage Measures

Apple historically held very little long-term debt. The table below compares
Apple’s liquidity measures to their competitors, their industry, and the general
market. During the period of strong financial performance, Apple accumulated
cash. This strengthens Apple’s position should they choose to access the capital
markets.

49
 2 2 2 Microsoft Dell Industry S&P
006 007 008 '08 '08 '08 500
Current 2.5 2.6 3 2.88 1.11 1.81 1.82
Ratio
Quick 2.47 2.59 2.9 2.85 1.08 1.45 1.31
Ratio
Product Unit Sales

In the last several years, there have been dramatic changes to Apple’s product sales
by category. Apple breaks its unit sales into four primary categories: desktops,
notebooks, iPods, and peripherals. The graph below shows the product mix for
Apple in 2002. Note the domination by desktops and notebooks and the small
contribution by iPods.
2002 Product Sales 2005 Product Sales

Desktops Desktops

Notebooks Notebooks

iPod iPod

Peripherals Peripherals

When you compare the same graph for 2005, you see dramatic differences in the
product mix for Apple. The iPod sales now account for 32.5% compared to 2.5%
for 2002. The combined sales of computers (desktop/notebook) lost share,
dropping from 79% to 45% of sales. This drop merely represents a shift in Apple’s
product mix, not their global computer market share (which remains stable in the
2-3% range). Meanwhile, sales of peripherals (including wireless connectivity and
networking solutions), remained stable. (Hoover’s)

50
Operating Segments
Apple breaks its sales into five “operating segments”. The chart below shows the
sales by segment for each year 2002-2005. On a percentage basis, only the retail
segment appears to be outperforming the others.

Sales by Region Segment

16000

14000
Total Sales

12000
Other
10000
Retail
8000 Japan
6000 Europe
4000 America's
2000

0
2002 2003 2004 2005

Year

Net sales in the retail segment grew to $2.35 billion in 2005. In the 1 st quarter
2006, sales growth continued in the retail segment to $1.1 billion (a 91% increase
over the same period last year). This increase was due to growth in the number of
stores (from 101 to 135) and to a 41% same-store sales growth. (1st Quarter 10Q)
Although the retail segment was the only segment to realize growth as a percentage
of total sales, all of the segments had solid growth. In the Americas, sales
increased 65% and continued to represent approximately 47% of total worldwide
sales. Sales in Japan and Europe grew by 92% and 47%, respectively. (1 st Quarter
10Q)
Market Value Analysis
We used Discounted Cash Flow (DCF) analysis to assess the appropriate equity
value of Apple. To complete this analysis, we developed a pro-forma income
statement and extracted free cash flow. We then discounted these cash flows using

51
a calculated Weighted Average Cost of Capital (WACC). Apple’s WACC equaled
their cost of equity since they carry no long-term debt. We used the Capital Asset
Pricing Model (CAPM) to calculate the cost of equity.
CAPM consists of a risk-free rate, a market risk premium, and a company Beta.
The yield on the 10-year Treasury is the standard for a risk-free rate. To determine
the market risk premium, we used the average return that an investor would require
for an investment with average risk. We used data available online to determine
Apple’s Beta, projected to be 1.46. The below chart summarizes Apple’s cost of
equity.

Cost of Equity/WACC Note Value

Risk Free Rate 10 Yr Treasury 5.12
Market Risk Premium (Analysis) 4
Beta From Google 1.46
Adjusted Apple Risk 5.84
Premium
Cost of Equity/WACC 10.96

Pro-Forma Income Statement

We made several key assumptions in compiling a pro-forma income statement.

First, to complete the estimate for the 2006 data, we merely annualized the

earnings for the first two quarters. We then projected a declining rate of growth in

sales for the next four fiscal terms of 30%, 20%, 15%, and 10%, respectively. We

do not believe that the growth in iPods is sustainable for the long-term. We also

used the percent-of-sales method to calculate cost of goods sold, research &

52
development, SG&A, and interest. We applied the 2005 tax rate for all future

periods. As the table below shows, the mid-term earnings growth is positive.

2005 2006 2007 2008 2009P 2010P

Net Sales 13931 20216 26280. 31536.9 36267.5 39894.25
8 6 0
Cost Of Sales 9888 14353 18659 22391 25750 28325
R&D 534 809 1051 1261 1451 1596
S,G,A 1859 2628 3417 4100 4715 5186
Operating Income 1650 2426 3154 3784 4352 4787
Interest Income 165 239 311 374 430 473
Taxes 480 705 916 1100 1265 1391
Net Income 1335 1960 2548 3058 3517 3869
EPS 1.57 2.31 3.00 3.60 4.14 4.56
Shares Out (000's) 848,61 848,61 848,61 848,612 848,612 848,612
2 2 2

Projected Free Cash Flow and Equity Valuation

We assume that Apple will continue without long-term debt. We also assume that
there will be no significant changes in capital expenditures and net working capital.
Thus, free cash flow will equal net income plus depreciation. Given WACC, we
are able to discount cash flows back using half-year PV factors (we are through the
first half of 2009). We calculated our terminal value using a perpetual annual
growth rate of 7%, which is slightly above the industry growth rate of 5.6%.

53
Free Cash Flows 2006 2007 2008 2009P 2010P Terminal
Net Income 1960.00 2548.0 3058.0 3517.0 3869.0
0 0 0 0
Depreciation 239.00 310.70 372.89 428.86 471.78
Free Cash Flows 2199.00 2858.7 3430.8 3945.8 4340.7
0 9 6 8
WACC 10.96 10.96 10.96 10.96 10.96
PV Factor 0.9505 0.8565 0.7715 0.695 0.626 0.626
Terminal Value 109615.6
PV FCF 1862.98 2182.3 2359.2 2444.3 2421.9 68619.42
6 5 2 9
Sum of PV of CF 11270.90
PV of Terminal Value 68619.4
2
FMV of Invested Capital 79890.3
2
Less Existing Cash 8261
Balance
Intrinsic Value of Equity 71629.3
2

Given intrinsic equity value, we estimate the per share stock price. Given their
particular market condition, Apple appears undervalued.

Equity Value
Total Shares (000's) 848612
Value (000's) 71629000
Value/Share $84
Current Price (5/5/06) $71.89

Strategy
We can describe Apple’s strategy in terms of product differentiation and strategic
alliances. In each of these strategies, we examine what Apple did historically and
then discuss alternatives for Apple’s future.

54
Product Differentiation
Apple prides itself on its innovation. When reviewing the history of Apple, it is
evident that this attitude permeated the company during its peaks of success. For
instance, Apple pioneered the PDA market by introducing the Newton in 1993.
Later, Apple introduced the easy-to-use iMac in 1998, and updates following 1998.
It released a highly stable operating system in 1999, and updates following 1999.
Apple had one of its critical points in history in 1999 when it introduced the iBook.
This completed their “product matrix”, a simplified product mix strategy
formulated by Jobs. This move allowed Apple to have a desktop and a portable
computer in both the professional and the consumer segments. The matrix is as
follows:
Professional Consumer
Segment Segment
Desktop G3 iMac
Portable PowerBook iBook

In 2001, Apple hit another important historical point by launching iTunes. This
marked the beginning of Apple’s new strategy of making the Mac the hub for the
“digital lifestyle”. Apple then opened its own stores, in spite of protests by
independent Apple retailers voicing cannibalization concerns. Then Apple
introduced the iPod, central to the “digital lifestyle” strategy. Philip W. Schiller,
VP of Worldwide Product Marketing for Apple, stated, “iPod is going to change
the way people listen to music.” He was right.
Apple continued their innovative streak with advancements in flat-panel LCDs for
desktops in 2002 and improved notebooks in 2003. In 2003, Apple released the
iLife package, containing improved versions of iDVD, iMovie, iPhoto, and iTunes.
In reference to Apple’s recent advancements, Jobs said, “We are going to do for

55
digital creation what Microsoft did for the office suite productivity.” That is indeed
a bold statement. Time will tell whether that happens.
Apple continued its digital lifestyle strategy by launching iTunes Music Store
online in 2003, obtaining cooperation from “The Big 5” Music companies—BMG,
EMI, Sony Entertainment, Universal, Warner. This allowed iTunes Music Store
online to offer over 200,000 songs at introduction. In 2003, Apple released the
world’s fastest PC (Mac G5), which had dual 2.0GHz PowerPC G5 processors.
Product differentiation is a viable strategy, especially if the company exploits the
conceptual distinctions for product differentiation. Those that are relevant to Apple
are product features, product mix, links with other firms, and reputation. Apple
established a reputation as an innovator by offering an array of easy-to-use
products that cover a broad range of segments. However, its links with other firms
have been limited, as we will discuss in the next section on strategic alliances.
There is economic value in product differentiation, especially in the case of
monopolistic competition. The primary economic value of product differentiation
comes from reducing environmental threats. The cost of product differentiation
acts as a barrier to entry, thus reducing the threat of new entrants. Not only does a
company have to bear the cost of standard business, it also must bear the costs
associated with overcoming the differentiation inherent in the incumbent. Since
companies pursue niche markets, there is a reduced threat of rivalry among
industry competitors.
A company’s differentiated product will appear more attractive relative to
substitutes, thus reducing the threat of substitutes. If suppliers increase their
prices, a company with a differentiated product can pass that cost to its customers,
thus reducing the threat of suppliers. Since a company with a differentiated
product competes as a quasi-monopoly in its market segment, there is a reduced

56
threat of buyers. With all of Porter’s Five Forces lower, a company may see
economic value from a product differentiation strategy.
A company attempts to make its strategy a sustained competitive advantage. For
this to occur, a product differentiation strategy that is economically valuable must
also be rare, difficult to imitate, and the company must have the organization to
exploit this. If there are fewer firms differentiating than the number required for
perfect competition dynamics, the strategy is rare. If there is no direct, easy
duplication and there are no easy substitutes, the strategy is difficult to imitate.
There are four primary organizing dilemmas when considering product
differentiation as a strategy. They are as depicted below.
Organizing
Inter-Functional Collaboration Dilemmas
Too Much (Lockstep) Too Little (No Collaboration)
Slows Innovation No learning makes implementation difficult
Connection to the Past
Too Much (History as Constraint) Too Little (No History)
Stifles Innovation Lack of Direction in Innovation
Commitment to Market Vision
Too Much (Foresight) Too Little (No Sight)
No Innovation Can Take Place Fail to Exploit Historical Advantage
Institutional Control
Too Little (Chaos)
Too Much (Bureaucracy)
Lack of Flexibility in Uncertain Market Lack of Direction in Innovation

To resolve these dilemmas, there must be an appropriate organization structure. A

U-Form organization resolves the inter-functional collaboration dilemma if there
are product development and product management teams. Combining the old with
the new resolves the connection to the past dilemma. Having a policy of
experimentation and a tolerance for failure resolves the commitment to market
vision dilemma. Managerial freedom within broad decision-making guidelines
will resolve the institutional control dilemma.

57
Five leadership roles will facilitate the innovation process: Institutional Leader,
Critic, Entrepreneur, Sponsor, and Mentor. The institutional leader creates the
organizational infrastructure necessary for innovation. This role also resolves
disputes, particularly among the other leaders. The critic challenges investments,
goals, and progress. The entrepreneur manages the innovative unit(s). The
sponsor procures, advocates, and champions. The mentor coaches, counsels, and
advises.
Apple had issues within its organization. In 1997, when Apple was seeking a CEO
acceptable to Jobs, Jean-Louis Gassée (then-CEO of Be, ex-Products President at
Apple) commented, “Right now the job is so difficult, it would require a bisexual,
blond Japanese who is 25 years old and has 15 years’ experience!” Charles
Haggerty, then-CEO of Western Digital, said, “Apple is a company that still has
opportunity written all over it. But you’d need to recruit God to get it done.”
Michael Murphy, then-editor of California Technology Stock Letter, stated, “Apple
desperately needs a great day-to-day manager, visionary, leader and politician. The
only person who’s qualified to run this company was crucified 2,000 years ago.”
Since Jobs took over as CEO in 1997, Apple seems to have resolved the innovation
dilemmas, evidenced by their numerous innovations. To continue a product
differentiation strategy, Apple must continue its appropriate management of
innovation dilemmas and maintain the five leadership roles that facilitate the
innovation process.

Strategic Alliances
Apple has a history of shunning strategic alliances. On June 25, 1985, Bill Gates
sent a memo to John Sculley (then-CEO of Apple) and Jean-Louis Gassée (then-
Products President). Gates recommended that Apple license Macintosh technology
to 3-5 significant manufacturers, listing companies and contacts such as AT&T,

58
DEC, Texas Instruments, Hewlett-Packard, Xerox, and Motorola. (Linzmayer, 245-
8) After not receiving a response, Gates wrote another memo on July 29, naming
three other companies and stating, “I want to help in any way I can with the
licensing. Please give me a call.” In 1987, Sculley refused to sign licensing
contracts with Apollo Computer. He felt that up-and-coming rival Sun
Microsystems would overtake Apollo Computer, which did happen.
Then, Sculley and Michael Spindler (COO) partnered Apple with IBM and
Motorola on the PowerPC chip. Sculley and Spindler were hoping IBM would buy
Apple and put them in charge of the PC business. That never came to fruition,
because Apple (with Spindler as the CEO) seemed contradictory and was
extraordinarily difficult in business dealings.Apple turned the corner in 1993.
Spindler begrudgingly licensed the Mac to Power Computing in 1993 and to
Radius (who made Mac monitors) in 1995. However, Spindler nixed Gateway in
1995 due to cannibalization fears. Gil Amelio, an avid supporter of licensing, took
over as CEO in 1996. Under Amelio, Apple licensed to Motorola and IBM. In
1996, Apple announced the $427 million purchase of NeXT Software, marking the
return of Steve Jobs. Amelio suddenly resigned in 1997, and the stage was set for
Jobs to resume power.
Jobs despised licensing, calling cloners “leeches”. He pulled the plug, essentially
killing its largest licensee (Power Computing). Apple subsequently acquired
Power Computing’s customer database, Mac OS license, and key employees for
$100 million of Apple stock and $10 million to cover debt and closing costs. The
business was worth $400 million.
A massive reversal occurred in 1997 and 1998. In 1997, Jobs overhauled the board
of directors and then entered Apple into patent cross-licensing and technology
agreements with Microsoft. In 1998, Jobs stated that Apple’s strategy is to “focus
all of our software development resources on extending the Macintosh operating

59
system. To realize our ambitious plans we must focus all of our efforts in one
direction.” This statement was in the wake of Apple divesting significant software
holdings (Claris/FileMaker and Newton).
There is economic value in strategic alliances. In the case of Apple, there was the
opportunity to manage risk and share costs facilitate tacit collusion , and manage
uncertainty. It would have been applicable to the industries in which Apple
operated. Tacit collusion is a valid source of economic value in network industries,
which the computer industry is. Managing uncertainty, managing risk, and sharing
costs are sources of economic value in any industry. Although Apple eventually
realized the economic value of strategic alliances, it should have occurred earlier.
The following are some comments about Apple’s no-licensing policy.
“If Apple had licensed the Mac OS when it first came out, Window wouldn’t exist
today.”—Jon van Bronkhorst, “The computer was never the problem. The
company’s strategy was. Apple saw itself as a hardware company; in order to
protect our hardware profits, we didn’t license our operating system. We had the
most beautiful operating system, but to get it you had to buy our hardware at twice
the price. That was a mistake. What we should have done was calculate an
appropriate price to license the operating system. We were also naïve to think that
the best technology would prevail. It often doesn’t.”—Steve Wozniak, Apple
cofounder
“If we had licensed earlier, we would be the Microsoft of today.”—Ian W. Diery,
Apple Executive VP, I am aware that I am known as the Great Satan on licensing…
I was never for or against licensing. I just did not see how it would make sense.
But my approach was stupid. We were just fat cats living off a business that had
no competition.”—Jean-Louis Gassée, Be CEO and ex-CEO of Apple, admitting
he made a strategic mistake

60
A strategic alliance can be a sustained competitive advantage if it is rare, difficult
to imitate, and the company has an organization to exploit it. If the number of
competing firms implementing a similar strategic alliance is relatively few, the
strategy is rare. If there are socially complex relations among partners and there is
no direct duplication, the strategy is difficult to imitate.When organizing for
strategic alliances, a firm must consider whether the alliance is non-equity or
equity. A non-equity alliance should have explicit contracts and legal sanctions.
An equity alliance should have contracts describing the equity investment. There
are some substitutes for an equity alliance, such as internal development and
acquisitions. However, the difficulties with these drive the formation of strategic
alliances. It is vital to remember, “Commitment, coordination, and trust are all
important determinants of alliance success.”

61
 Recommendations

For Company
Lowering the cost of products and maintaining the same quality standards.
Can form joint – ventures.
Knowledge Management.
More number of retail stores for easy access.
Continuous innovation to expand.

For Others
Do not compromise on price for quality.
Choose the products based on individual needs.
Be unique and different.

62
 Conclusion

We feel that Apple must focus on several key aspects to continue to grow and
succeed. They must continue a stable commitment to licensing, push for
economies of scope between media and computers, and become a learning
organization.
Apple apparently made a commitment to licensing. Although it should continue,
Apple may want to consider other forms of strategic alliances. An equity strategic
alliance may offer Apple the opportunity to obtain additional competencies. An
effective way for a company like Apple to accomplish this would be in the form of
a joint venture.Apple should continue pushing the new line of media-centric
products. Meanwhile, Apple should not lose focus on its computers. Macintosh
computers were 39% of Apple’s sales in 2005. (Burrows) This very innovative
company exploits its second-mover position. In the future, they will need to
continue innovating to expand the boundaries of both media and computers.One
persistent element of both competitive advantage and risk is Steve Jobs. He is both
synonymous with Apple’s success and has a large equity interest in Apple and
Disney. If he were to divest his leadership position, the reaction of both the market
and consumers would be uncertain. Given his position within the organization as
well as the history of the company when he was gone, Apple must find a way to
learn as an organization. This will allow the company to withstand a departure by
Jobs. Based on the actions of the organization, we feel that the mid-term
performance of Apple will be strong. This period allows Apple time to overcome
their challenges if they move swiftly. For this reason, we feel that they will
continue to succeed and will continue to outperform their peers.

63
Apple avoids competition

If you look at the history of Apple, you'll see that instead of rising to competition,
they often ignore it, or try to use legal means, or bundling clout, to erase it.

When challenged by a larger market force, as with the IBM PC and its clones in
the early 80s, and with Windows 3.0, 95 and then NT 4.0 in the 90s, they miss
obvious marketing opportunities, ways to make their products stronger by
participating in markets that others develop. This is an art that Microsoft has
mastered, there's no reason Apple couldn't have learned the same lessons, but they
didn't.

And when dealing with smaller competitors, Apple routinely and often
unconsciously forced them out of business by bundling, or declaring that they will
bundle a competitive offering.

When the Internet happened, Apple struggled against it instead of embracing it,
preferring to invest in technologies that eventually ended up on the scrap heap. A
wasted lead in content development, developers going to Windows, a poor Java
implementation on the Mac.

The bottom line, the strategy of avoiding competition has been disastrous for
Apple. But they want to do it again.

The same old strategy

The cloners, Motorola, Power Computing, UMAX, IBM and others, are poised to
ship products that would take Apple out of the hardware business, because they're
cheaper, faster, bigger, more powerful machines than Apple's new products. These
are the computers that Mac users want and are, in my opinion, entitled to.

64
Even though we haven't seen the license agreements with the cloners, it appears
that Apple has the contractual right to forbid them to ship the computers, for any
reason at all. Apple wants to keep their hardware business, so they exercise that
right.

I despise companies that use hardball tactics to put their competitors out of
business. I admire companies that rise to competition. I happily buy new products
when I have a choice. I don't like to buy products that I'm forced to buy.

Is it a nice business?

If you don't have anyone to compare with, if you aren't subject to customer choice,
your product loses direction, you focus inward, and eventually (as now for Apple)
your interests become out of synch with the interests of your customers.

Focus on that for a moment. A company whose interests are against their
customers. Is that a nice business? Does it have much of a future?

Is it legal?

The customer's interest here is clearly served by competition. The usual benefits
apply -- lower prices, more realistic configurations, more diversity.

Apple's complaint that the cloners weren't growing the market can be explained by
Apple's licensing policy that kept them from making fundamentally different
products than Apple. Where's the cheap sub-notebook Mac? Where's the handheld
Mac? The Mac built into the dashboard of my car? Apple wouldn't let the cloners
make these products. Apple is an economic disaster area. They want Mac users to
put all their eggs in Apple's crumbling basket.

65
 A STRATEGIC ANALYSIS OF APPLE COPRORATION

A Major Project Report

Submitted in partial fulfillment of the requirements for BBA(General) Semester VI

Programme of G.G.S. Indraprastha University, Delhi.

Submitted by
Anurag Sinha
BBA (Gen) - Semester-VI
Enroll. No. : 0741221706

Delhi College of Advanced Studies

Shankar Garden, Vikaspuri
New Delhi-110018

66
 Declaration

I hereby declare that the major project report, entitled “A Strategic Analysis of
Apple Corporation”, is based on my original study and has not been submitted
earlier for any degree or diploma of any institution/ university.

The work of other author(s), wherever used, has been acknowledged at appropriate
place(s).

Place Candidate’s Signature

Date Name: Anurag Sinha

Enroll. No.: 0741221706

Countersigned

Name
Supervisor: Shikha Makkar
Delhi College of Advanced Studies

67