Apple Strategic Audit

Apple Computer Inc.
Strategic Audit
Valentin Iliev Andreas Lindinger Guenther Poettler
D03103544 D03103551 D03103523
Dublin Institute of Technology FT351, Business & Management, Year 4 Strategic Management and Business Policy February, 23rd 2004
Apple Computer Inc.
Table of contents
1 2 Introduction ......................................................................................................................6 History...............................................................................................................................7 2.1 2.2 Introduction ...............................................................................................................7 Period before 1975 ..................................................................................................7 PC Market .........................................................................................................7 Apple ..................................................................................................................9 PC Market ...................................................................................................... 11 Apple ............................................................................................................... 12 PC Market ...................................................................................................... 14 Apple ............................................................................................................... 15 PC Market ...................................................................................................... 18 Apple ............................................................................................................... 19 PC Market ...................................................................................................... 21 Apple ............................................................................................................... 21 PC Market ...................................................................................................... 22 Apple ............................................................................................................... 23 PC Market ...................................................................................................... 23 Apple ............................................................................................................... 23
2.2.1 2.2.2 2.3 2.3.1 2.3.2 2.4 2.4.1 2.4.2 2.5 2.5.1 2.5.2 2.6 2.6.1 2.6.2 2.7 2.7.1 2.7.2 2.8 2.8.1 2.8.2 3 3.1 3.2 4 4.1
Period 1975 1981 .............................................................................................. 11
Period 1981 1985 .............................................................................................. 14
Period 1986 1992 .............................................................................................. 18
Period 1993 1997 .............................................................................................. 21
Period 1998 2000 .............................................................................................. 22
Period 2001 now ................................................................................................ 23
Current situation ........................................................................................................... 25 Current performance ............................................................................................ 25 Mission and current strategy............................................................................... 26 General information.............................................................................................. 27 General description....................................................................................... 27 Products.......................................................................................................... 27 Competencies................................................................................................ 31
Internal environment.................................................................................................... 27 4.1.1 4.1.2 4.1.3 4.2
Corporate governance.......................................................................................... 32
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DIT | Strategic Management | Iliev, Lindinger, Poettler
Apple Computer Inc.

4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 4.2.6 4.2.7 4.3 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.4 4.4.1 4.4.2 4.5 4.6 Board of Directors ......................................................................................... 32 CEO................................................................................................................. 34 Top Management .......................................................................................... 36 Stockholdings of Board of Directors and Senior executives .................. 39 Governance mechanisms ............................................................................ 40 Business ethics.............................................................................................. 43 Environmental issues ................................................................................... 46 Organisational structure ............................................................................... 47 Operating structure ....................................................................................... 47 Performance .................................................................................................. 48 Strategic implications .................................................................................... 49 Integration and control.................................................................................. 50 Culture and values ........................................................................................ 51 Strategic implications .................................................................................... 53
Corporate structure ............................................................................................... 47
Corporate culture .................................................................................................. 51
Corporate resources ............................................................................................. 54 Corporate resources: Marketing ......................................................................... 55 Marketing strategy ........................................................................................ 56 Brand positioning .......................................................................................... 57 Marketing mix ................................................................................................ 58 Advertising ...................................................................................................... 60 Product life cycles of Apples core products ............................................. 60 Trends from this analysis ............................................................................. 62 Competitive advantage ................................................................................ 63 Apples financial status quo ......................................................................... 63 Apples competitors, their financial status quo, and the market ............ 73 Apples financial operations ......................................................................... 75 General information...................................................................................... 77 Structure and performance.......................................................................... 77 Strategic management ................................................................................. 79 Competitive advantage ................................................................................ 79
4.6.1 4.6.2 4.6.3 4.6.4 4.6.5 4.6.6 4.6.7 4.7 4.7.1 4.7.2 4.7.3 4.8 4.8.1 4.8.2 4.8.3 4.8.4
Corporate resources: Finance ............................................................................ 63
Corporate resources: Research & Development ............................................. 77
Apple Computer Inc.

4.9 Corporate resources: Operations & Logistics................................................... 81 General information...................................................................................... 81 Operations capabilities................................................................................. 85 Structure and performance.......................................................................... 86 Strategic issues ............................................................................................. 87 Competitive advantage ................................................................................ 87 Human resource objectives and strategies............................................... 88 Human resource policies ............................................................................. 90 Human resource performance .................................................................... 91 Partnership program ..................................................................................... 91 Traini ng and Development .......................................................................... 92 Staff appraisals .............................................................................................. 93 Trends ............................................................................................................. 96 Competitive advantage ................................................................................ 96 What type of software and hardware is used at Apple? ......................... 98 To what extent is the model of a virtual company achieved by Apples How do Apples internet solutions assist in generating a competitive
4.9.1 4.9.2 4.9.3 4.9.4 4.9.5 4.10 4.10.1 4.10.2 4.10.3 4.10.4 4.10.5 4.10.6 4.10.7 4.10.8 4.11 4.11.1 4.11.2 4.11.3 4.12
Corporate resources: Human Resource Management ................................... 88
Corporate resources: Information Systems ...................................................... 98
Intranet and Extranet solutions? ...............................................................................100 advantage? ..................................................................................................................101 Summary of internal factors ..............................................................................105 Core competencies and distinctive competencies.................................105 Internal Factor Analysis Summary (IFAS)...............................................106 4.12.1 4.12.2 5 5.1 5.2
External environment.................................................................................................108 Overview The uniqueness of the Macintosh ...............................................108 The PC market an in-depth analysis ............................................................108 Status quo ....................................................................................................108 Defining the sector, industry and market segments ..............................109 Porters five forces Analysis ......................................................................110 Strategic Group Analysis ...........................................................................115 Industry Life Cycle Analysis ......................................................................116 The Macro-Environment ............................................................................118
5.2.1 5.2.2 5.2.3 5.2.4 5.2.5 5.2.6 5.3
External analysis of software and peripherals market ..................................119
Apple Computer Inc.

5.3.1 5.3.2 5.4 5.4.1 5.4.2 6 6.1 6.2 6.3 7 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8 8.1 8.2 8.3 8.4 9 9.1 9.2 9.3 9.4 9.5 10 10.1 10.2 11 Software industry ........................................................................................120 Market and external environment analysis for the iPod........................128 Overview.......................................................................................................130 External Factor Analysis Summary (EFAS)............................................131
Summary of external factors .............................................................................130
Functional strategy.....................................................................................................133 General information............................................................................................133 Company resources and functional strategy..................................................133 Sources of competitive advantage ...................................................................135 Customer needs ..................................................................................................136 Customer groups.................................................................................................137 Distinctive competencies ...................................................................................138 Differentiation strategy .......................................................................................138 Advantages and disadvantages of the Differentiation strategy ...................139 Investment strategy ............................................................................................140 Competitive strategy...........................................................................................140 Strategies to deter entry.....................................................................................141 Strategy to manage rivalry.................................................................................142 Apples foreign operations .................................................................................145 Apples Transnational Strategy.........................................................................146 Apples methods of entering new markets ......................................................147 Pressures for cost reductions and local responsiveness..............................148 General information............................................................................................150 Horizontal integration..........................................................................................150 Vertical integration..............................................................................................151 Strategic outsourcing ..........................................................................................152 Diversification ......................................................................................................152 Corporate structure, control, and culture.........................................................154 Implementation ....................................................................................................154
Business-level strategy.............................................................................................136
Global strategy ...........................................................................................................145
Corporate strategy.....................................................................................................150
Strategy implementation...........................................................................................154
Analysis of strategic factors......................................................................................156
Apple Computer Inc.

11.1 11.2 11.3 12 12.1 Situational analysis .............................................................................................156 Strategic Factor Analysis Summary.................................................................157 Review of mission and objectives ....................................................................158 Strategic alternatives ..........................................................................................160 Take advantage of technological forces by innovation (S-O) ..............160 Use creativity in a way to avoid substitute products (S-T)....................161 Take advantage of the MP3 player market by overcoming a Act to minimise high operating costs and avoid rivalry (W-T)..............162 Recommended strategy: Operation costs (weakness)/rivalry (threat) 163 Functional level strategy............................................................................163 Business level strategy ..............................................................................164 Corporate strategy......................................................................................165
Strategic advice ..........................................................................................................160 12.1.1 12.1.2 12.1.3 12.1.4 12.1.5
disimproving b usiness execution (W-O) ..................................................................161
12.2
Recommended strategy.....................................................................................163
12.2.1 12.2.2 12.2.3 12.3 12.4 13
Implementation ....................................................................................................166 Evaluation and control........................................................................................167
Conclusion...................................................................................................................168
Bibliography .........................................................................................................................169 Appendix...............................................................................................................................178
Apple Computer Inc.
1 Introduction
! ! ! ! ! ! An inexpensive speedy disk drive with good storage capacity Enough memory to establish Multitasking The first graphic-based user interface available to the general consumer Development of a pointing device called "mouse" as an essential peripheral part of a PC The first use of 3.5 inch disks and CD-ROM Production of cool-looking but also powerful computers
All these inventions and utilities are inseparably linked with one name, Apple Computer Inc., which represents a fascinating compilation of engineering talent, innovation, perseverance, and success in spite of dysfunctional behaviour. Apple obtains the unique distinction of being the single surviving company from the early days of the industry that is still successfully acting in the computer vending business, as well as challenging Microsoft's dominance in operating systems. Apple also came perilously close to irrelevancy. After the lifeblood of the company, co-founder Steve Jobs was ousted in a boardroom coup in 1985, Apple had too many products, too little focus and was paralysed by two inept chief executives. Apple's already small market share was dwindling further. By 1996, it had racked up $1.5 billion in losses, and there were weekly speculations over who would buy the company. Then, in the summer of 1997 Apple stunned the world by announcing that Jobs would return as interim CEO. Even more shocking, Apple said it was partnering with its blood enemy Microsoft and scrapped dozens of its products to refocus the company. Jobs also challenged our perceptions of computers, introducing several new colourful computers. While Apple's market share has hovered at about 5%, the company has re-established itself as an innovator in design and ease of use and has managed to build up a loyal customer base. This strategic audit of Apple Computer Inc. analyses the companys internal and external environment as well as its entire strategy. Based on this comprehensive strategic foundation and an analysis of a profound set of strategic factors, it provides Apple with specific strategic alternatives and concludes with a strategic advice.
Apple Computer Inc.
2 History
2.1 Introduction
Man is a tool-using animal. Without tools he is nothing, with tools he is all! Without being able to guess human inventions and innovations in the forthcoming centuries or their challenging importance on society, the Scottish essayist Thomas Carlyle (Historian, Essayist & Critic 1795-1881) might have had some visionary ideas when formulating this famous quote. He seems to have observed the history and deployment of humanity where tools always played an important role to guarantee the races survival. Nevertheless, Carlyle would have never been able to imagine the unique significance of one special gadget which is indispensable for todays world the Personal Computer, which in historical concordance shouldnt represent more than an aiding tool. However, the great minds behind IT-companies such as IBM or Microsoft created devices (by combining hard- and software) that not only changed global business, peoples cohabitation and even the social behaviour, but also opened new, undiscovered horizons. In particular, Apple Computer has pioneered the widespread use of many aspects of computer technology that today we all take for granted. So, for creating a thorough picture and increasing comprehension of the subsequent strategic analysis of Apple Computer in 2004 its first of all crucial to take a profo und chronologic look on the historic development of the entire PC sector with an already analysing focus on Apple.
2.2 Period before 1975

The creation of computers was primarily urged by the immanent human desire to store data, to automate processes, and to solve complicated calculations. 2.2.1 PC Market Although its necessary to admit that the development towards computers wasnt started at one specific date, but represented a long-dating progression, the sectors younger origins can be traced back at the close of the 19th century. At this time, more
Apple Computer Inc.

exactly in 1876, Alexander Graham Bell invented the telephone and in 1888 1 , the first dial recorder was accomplished by Dr. Alexander Dey who belonged to the Computing-Tabulating-Recording Company), the predecessor of Company IBM (C-T-R (International
Business Machines). Machinery manufactured and sold ranged from commercial scales and industrial time recorders to meat and cheese slicers, along with tabulators and punched cards. War times as well as the Great Economic Depression caused the growing industry to expand their operations as the customers needs broadened (e.g.: business accounting, information, and communication facilities for better war-planning). Especially the demands of World War II founded the basis for the latter work on computers like: ! ! ! ! John von Neumanns outline on the architecture of a stored program computer and following IAS computer, Moore School of Electrical Engineering 2 grounding efforts, Claude Shannons dossier The Mathematical Theory of Communication, MITs first general-purpose, programmable computer built with transistor in 1956. With a market share of 81.2% IBM dominated this market in the 1960s which was characterised by the implementation of the ASCII code for the alphabet (American Standard Code for Information Interchange binary sequence) and the creation of the computer programming language BASIC at the Dartmouth College. In 1969, Xerox bought Scientific Data Systems for $1 billion which logged huge sales with their series of minicomputers. AT&T Bell Labs developed the UNIX operating system, IBM came up with the 8-inch floppy diskette and Hewlett-Packard strengthened its position in the market by announcing the HP-35 as "a fast, extremely accurate electronic slide rule" with a solid-state memory. But still many computer systems represented mainframes that required a user to present a stack of punched cards to the person operating the machine and were far too large and expensive for anyone to actually
1 2
http://www-1.ibm.com/ibm/history/history/decade_1880.html, 18.01.04 http://www.computerhistory.org/timeline/timeline.php?timeline_year=1946, 18.01.04
Apple Computer Inc.

have in their homes as a "personal" computer. By 1972, the Intel 8008, a microprocessor that approached the ability to function as an adequate central processing unit (CPU) for a stand -alone computer, was launched. The first computer that made use of the 8008 was the fully assembled French Micral that never had any impact in the USA. A further breakthrough occurred with the release of the Intel 8080. MITS (Micro Instrumentation Telemetry Systems), later designing the overwhelmingly successful "Altair 8800 personal computer, Texas Instruments and chip-maker Motorola were other names, known in the market. 2.2.2 Apple There's no doubt Apple Computer is a pioneer. It invented computers "for the rest of us. Stephen Gary Wozniak (Woz) was born on the 11th of August 1950 in San Jose, California. He was the first of two sons of three children of Jerry and Margaret Wozniak. The father was an electrical engineer and the mother was active in local politics. Wozniak had an early interest in electronics, also symbolised by obtaining his amateur radio license in the sixth grade. He also designed and built electronic projects for Homestead High School (e.g.: "A Parallel Digital Computer"). Through his presidency of the Electronics Society and one of his teachers, he became a frequent visitor to the GTE Sylvania computer facility and the Stanford Linear Accelerator Center's (SLAC) computer facility that became a valued source for information on computer technology. Wozniak enrolled at the University of Colorado in Boulder in 1968. He now had access to the university computer and wrote programs in FORTRAN and ALGOL which were two software/programming languages analogous to BASIC . However the year was a failure academically, so the next year he continued studies at the local De Anza Community College. In 1969 Wozniak decided to build his own computer, cooperating with his neighbour Bill Fernandez. They called the machine the "Cream Soda Computer" on account of the amount of the drink they consumed during its construction. Steven Paul Jobs was born on the 24th of February 1955 in San Francisco, California. He was the first of two adopted children of Paul and Clara Jobs. The father had several occupations such as machinist, finance company representative, and real estate salesman. His mother had also worked at a number of jobs, including part-
Apple Computer Inc.

time in a payroll department. Jobs became interested in electronics during his elementary school years. At the age of twelve, he got the opportunity to visit HewlettPackard (HP) and dedicated himself thoroughly to its technology. Through all this, Jobs obtained a summer job at HP by calling one of the founders, Bill Hewlett. He also obtained a part-time job at a surplus electronic parts retailer called Haltek. His familiarity with the parts enabled him to buy and sell parts to Haltek for a profit. Despite his electronic interests Jobs expertise would tend to the commercial rather than the technical aspects. Bill Fernandez introduced Jobs to Wozniak in 1969. This was the beginning of the association and friendship between Jobs and Wozniak. In 1971, Wozniak moved to the University of California, Berkeley campus and started to develop a digital design to generate the audio tones required to hack phone systems worldwide. Jobs convinced Wozniak to sell these so called blue boxes. However, conviction of other phone hackers tempered their initial commercial activities. In 1973, Wozniak joined HP as an associate engineer and was given the task to refine the HP-35. After the completion of high-school in 1972, Steve Jobs studied at the Reed College in Portland with mixed academic success as his interests for mysticism adversely affected his academic studies. Consequently, he started working for Atari Engineering in early 1974. One year later Wozniak and Jobs became members of the Homebrew Computer Club which offered them the forum to exchange information on the latest microcomputer technology. Additionally, they formed Computer Converser, a subsidiary of a friends (Alex Kamradt) Call Computer company to build video terminals, but withdrew shortly afterwards due to Wozniaks lack of interest.
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Apple Computer Inc. 2.3 Period 1975 1981

In 1976, Apple Computer was born when Steve Jobs and Steve Wozniak, along with Ronald G. Wayne founded the Apple Computer Company officially on the 1st of April, headquartered in a parents garage. Six months later, Jobs and Wozniak were splitting a monthly salary of $250. Nevertheless, their first formal business plan set a goal for sales to grow to $500 million in ten years. As it turned out, the y will pass that mark in half the time. The first step into this direction was the completion of a preassembled computer circuit Board, named the Apple I. This first prototype has taken about six months to design and 40 hours to build. It was published first at the Homebrew Computer Club in Palo Alto, California. Although not attracting much attention, the Byte Shop computer store ordered 50 Apple I boards. To fund production ($1,350), Jobs and Wozniak put all their eggs into one basket and sold a VW van as well as a HP programmable calculator. 2.3.1 PC Market Still in infant status, the microcomputer industry was characterised by the manufacture and sale of small desktop computers with microprocessors as central processing units in the mid 1970s. Nevertheless, competition was increasing which caused frontrunner IBM who was producing the industry benchmark to face a number of rivals such as Commodore, Atari, HP or AT&T. Due to the fact that Apple didnt comply by determining and implementing their own standards (hard- and software), dealers and consumers who had to decide which one to buy were confused. Furthermore, software developers had to make programs for two standards which was one of Apples biggest future difficulties. The MS-DOS, or Microsoft Disk Operating System, the basic software for the future IBM PCs, established a long partnership between IBM and Microsoft, which Bill Gates and Paul Allen had founded only six years earlier. This alliance became Apples hardest opponent in the market. Soaring demand for higher storage capacity was met by Phillips first attempts to optical storage opportunities that later resulted in the invention of the Compact Disc
DIT | Strategic Management | Iliev, Lindinger, Poettler 11
Apple Computer Inc.

(CD). There were five major market segments in the industry: home (games and educational programs for children, hobbyists, home-working professionals), business (most profitable and predicted high-potential market), government, education, and international sales. 2.3.2 Apple After incorporation of the Apple Computers Company, Jobs (taking over responsibilities for marketing & engineering) and Wozniak (engineering) equally owned 45% of the company by leaving the latter 10% to soon quitting Wayne (documentation and mechanical engineering). Regarding their first product, the Apple I, hobbyists did not take it very seriously. Consequently, Jobs and Wozniak were in financial trouble and intensively searched for potential investors. Luckily, they could raise venture capital provided by Mike Markkula and moved to a new corporate HQ in Cupertino, California. Apple did not begin to t ke off until 1977, when the Apple II came out at a local a computer trade show. As the first PC to be sold in a plastic case and including colour graphics, the Apple II was an impressive machine. Orders for the Apple II equipped with a circuit motherboard, switching power supply, keyboard, case assembly, manual, game paddles, and brilliant colour graphics as well as for the Apple Disk II, the most inexpensive, easy to use floppy drive ever (at that time) rocketed. This success established the company as a major player in the early days of the personal computer revolution. In addition, the company maintained the Apple II while it floundered with other product ideas (the Apple III, the Lisa, the early Macintosh). This Apple flagship-device survived longer than any other computer platform from the early days. Fabrication proceeded for sixteen years and seven months, from April 1977 to November 1993. The success of the Apple II was due entirely to the millions of people who bought it, used it, and developed software and hardware for it, in spite of the mistakes and restrictions of its parent company. With this computer, Apple managed its transformation to the mass consumer market.
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Apple Computer Inc.

The rise in sales, however, led to an increase in company size, and by 1980, Apple had several thousand employees, a market share of 50% and was beginning to sell computers abroad. A number of more experienced mid-level managers and, more importantly, several new investors opting for their seats in the Board of Directors caused difficulty in making design improvements that kept up with the advances in computer technology. So these more conservative, new Directors made sure that Apple became a "real company," much to the dismay of many of its original employees. As co-founder of Apple, Steve Jobs focus was more and more on creating new and different products. He was the visionary responsible for Apples reputation for innovation who stressed Apples mission to change the world by bringing computers to the masses with the belief of one person one computer. In their first years of existence Apple focused its sales on the home and education markets and was the leader in the education market. Apple had two product lines, Apple II and the Macintosh. In its first six years of business, Apples earnings grew explosively from $793,000 to $76,714,000. During 1980 the market for new stock issues had improved. In August 1980 the Apple Computer Board of Directors decided to make a public offering of shares in the company. It was a huge success and oversubscribed. On the first day the offered share price of $22 increased to $29. At the end of 1980 Jobs' ownership in Apple was worth about $256 million. Furthermore, organisation was changed from a functional one to a product-oriented one. The company created divisions for the Apple II and Apple III, Lisa, accessories, manufacturing, sales, and service.
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2.4.1 PC Market
Units 9.5 Million - 1984 Dollars 17.9 Billion -1984
20% 37% 55% 3% 5% Home Education Other Business 63% 14% Home Education Other Business
3%
Units 16.7 Million - 1990
Dollars 43.0 Billion - 1990
11% 29% Home Education 57% 9% 5% Other Business 69% 16% 4% Home Education Other Business
In 1981, things got a bit more difficult. A saturated market made it more difficult to sell computers, and in February Apple was forced to lay off 40 employees. IBM released its first PC using Microsoft products as software items. With the power of IBM, the PC quickly began to dominate the playing field. By 1984, the IBM PC had 50%market share. Several competitors such as Compaq, Dell, AST or Gateway2000 entered the PC-market by trying to launch advanced IBM clones, similar to and compatible with Big-Blues technology. This was the outcome of IBMs open-architecture which Apple struggled to prevent as the below excursus examines: As mentioned before, Apple Computer set their individual standards which led to a constant competition against the IBM-Microsoft-Intel model (Wintel standard). Hence, Apple tried to differentiate itself by following a strict non-licensing, patent-regulated policy (no information about Apple hard- and software was given out), by producing
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Apple Computer Inc.

higher quality, but by also charging an immense above industry average price for their goods which they considered as legitimate due to their product superiority. As Apple wanted to avoid being cloned such as IBMs PCs and consequent diminishing returns, they didnt provide free-lancing program writers with necessary information to develop different features for the Apple technology. This provided them with high short-term profit margins, but in the long run Apple had to encounter a vicious circle that even teetered Apple on the brink: ! Continuously increasing R&D costs as Apple had to develop all innovation on their own ! Subsequently, less features available for Apple technology (mainly PC and Operating System (OS)) in comparison to IBM-Microsoft-Intel standard ! Problems for Apple in making design and service improvements that kept up with the advances in computer technology. ! A narrower customer base as the demanded hard- and software either wasnt offered or if delivered, took Apple to long to create ! Most computers were now IBMs or clones and as a result, most of the software applications were written for PCs only, therefore PCs were safer buys In addition, the importance of computers for businesses reached new highs. In 1985, the microcomputer industry suffered its worst slump in over a decade. Many new computer products had been promised or rumoured but were not yet available, causing consumers and businesses (due to recession fears) to delay purchases until they could evaluate the new machines. Moreover, the home market was saturated and the market for new customers difficult to penetrate. Consumer preferences also changed. Service and how new products fit into an existing family of products had become more important. There was a growing demand for personal computers that could communicate and share information. It was estimated that this demand was growing at 30% a year, or twice the rate of the overall industry. 2.4.2 Apple Within this four year period Apple had to cope with a 70% decline in market share. Wozniak was injured in a plane crash. He took a leave of absence and returned only briefly. Jobs became chairman of Apple Computer in March. Apple III and the Lisa project were put forward to redefine personal computing following the historic visit to
15
Apple Computer Inc.

Xerox PARC in 1979, but both failed to win acceptance. Jobs took over another idea of Apple and began working with the Macintosh (Mac) which had started as a $500 personal computer competing with IBMs releases. Despite his efforts Jobs began to realise that Apple would have to become a "grown-up" company and accepted he was not the man for the job. Also, Markkula resigned from his posts as CEO and president. John Sculley, president of Pepsi-Cola USA domestic operations, was recruited and became president and CEO of Apple. Considering Apples new competitive pressures, choosing Sculley with his corporate experience as the companys new president was considered by Jobs to be one of the most important decisions in Apples history. Although he was hired for his executive and marketing expertise, Sculley did not know much about the computer industry, unfortunately. He and Jobs were at odds almost immediately. By 1983, Apple Computer had annual net sales of almost $1 billion (as the first personal computer company ever) and 4,645 employees. The year was 1984. Apple was the hip, young heart of Silicon Valley the place where America was showing the world how the combination of technology and entrepreneurship could make a revolution. On January 22nd 1984, during the third quarter of the Super Bowl, Apple aired its infamous 60 second commercial introducing the Macintosh. The Orwellian scene depicted the IBM world being shattered by a new machine. Initially, the Mac sold very well, but by Christmas of 1984, people were becoming fed up with its disadvantages. To fulfil their social responsibility, Apple organised and financially supported music festivals, held the AppleFest in San Francisco and gave their computers to academic institutions and prisons. In 1984, Sculley reorganised the management structure. His main change was to reduce the number of Apples product divisions to three: a division for Apple II products, another for the Lisa product and the development and production of the Macintosh, and an accessory products group. Each division was responsible for its own functions and acted as independent profitand-loss centres. 3
Fortune (1988)
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Apple Computer Inc.
Sculley hoped that the new structure would eliminate most of the overlap without causing massive layoffs. He wanted many people reporting to him, both line and staff people, so he could assess all the pieces. Sculley also installed tighter control policies and increased the market focus and level of discipline of Apples managers. Now there was a distinct hierarchy, with two powerful product divisions responsible for their own duties. Apple focused its efforts on developing the Macintosh as an alternative business computer. In January 1985, Apple introduced the Macintosh Office which consisted of the computer, a laser printer, a local area network called Appletalk, and a file server. The companys focus on gaining acceptance in the business market led it to finally acknowledge IBMs pre-eminence, which, in turn, led to a change in its competitive strategy. It now emphasised developing a comprehensive line of compatible computers that worked well with those made by other producers. The company targeted SMEs (small and medium-sized enterprises ), accounting for 80% of personal computer sales. The Apple II line of products (as described in the previuous chapter) still was the companys cash cow. Disappointing market performance was attributed to internal problems. Apple had no sales force with direct access to corporations. Unlike IBM, which had 6,000 to 7,000 direct salespeople, Apple relied on 300 manufacturers representatives over whom they had no direct control. There were also marketing problems. The company failed to communicate a business image for the Macintosh to the market. A former Macintosh employee stated that the Mac wasnt perceived as an office machine or
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Apple Computer Inc.

as the technology leader that it is. 4 While Jobs believed that Apple should focus on technology, Sculley preferred to go along customer needs determining the product. Due to Jobs engagement in and support for the Macintosh division and their poor results compared to other departments motivation among the entire staff plummeted. Internationally, Apple was an early market leader in Europe. Before 1983, the company expanded sales into Britain, Germany, and France. Especially in France, Apple achieved a high profile and a critical mass of buyers. The company established a European headquarters in Paris with a staff of 45 people and built a production plant in Ireland, but managed its international operations from California. At the beginning of 1985, the smouldering dispute between Jobs and Sculley escalated. The common credo established by Jobs and Wozniak stated to create your own thing, defy the naysayers, and ignore the establishment one person can change the world. The culture had incredibly powerful elements, but the other side of that is unharnessed and uncontrolled. Inevitably, that led to clashes among creators and the new management. In May 1985, Jobs decided to make a play for control of the company and planned to stage a boardroom coup. Finally, the Board took a vote and unanimously made Sculley to Apples new head, but further work force lay-offs, the companys first quarterly loss, a legal battle against Microsofts Windows OS, and Jobs resignation served to erode confidence in Sculley's abilities as CEO of Apple. In the mid of 1985, Sculley declared another reorganisation which consolidated the three product divisions into one called Product Operations. 5
2.5 Period 1986 1992

2.5.1 PC Market The PC market, initiated and encouraged by the production of IBM-PC clones, continued its global development and PCs themselves started towards being available for everyone. Although Microsoft issued its first Windows OS and thereby marked a revolutionary point in PC history, there was still a lack of useful software to make it a market for the mass.
4 5
Fortune (1985) see Appendix: Corporate memo
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Apple Computer Inc.

2.5.2 Apple After having ousted Jobs and sacked lots of employees, Sculley wasnt popular at all among the Apple staff. He also knew that the majority of the company would resent the big-company systems he was putting in place. And most important, he understood that he had to keep engineers and programmers on board if Apple was to stay ahead of the technology curve. The solution was not to touch the culture. By 1987, the Mac II was a solid hit, but Sculley paid the price. His consensus-style for getting things done and achieving decisions made the company more and more inflexible and slow-moving 6 . Key decisions have been postponed, reversed, or avoided completely as various executives and factions tried to push their own agendas. A decisive leadership might have helped Apple to fend off what has ultimately proved to be its nemesis: Windows. The day Windows 3.0 was launched, Apple's executive staff dismissed the OSs chances to challenge MacOS with complete arrogance. In 1989, it seemed that Windows 3.0 would be a flop, and the Mac would be riding high for the next decade. It didn't. By 1990 the market was saturated with PC clones of every conceivable configuration, and Apple was the only company selling Macs. Therefore Apple was in trouble and decided to give up their restrictive protection of corporate know-how. They licensed the MacOS although opinions stated that it was too late to license (Michael Spindler, Apples COO and later CEO). It was becoming clear that Apple could not provide both the hardware and the software to drive an industry. In late 1991, Apple released its first generation of PowerBooks, which were an instant success. Product and marketing strategy were also adjusted. Product lines were filled out with equipment the consumer desired. Efforts were made to provide third-party hardware and software companies with access to the Mac. These companies were hesitant, however, to invest time and money to develop software for the Mac since the installed hardware base was such a small percentage of the market. Programs designed for Apple would sell far fewer copies than those created for IBM compatible machines, making it too costly to develop Macintosh software. Apples marketing strategy focused more aggressively on the corporate market to win space in the office at the expense of IBM. In pursuing the business segment, Apple also transformed its hiring policy. The idea was that corporate managers would rather be more responsive to salespeople who were similar to them as to hackers.
6
Joke that circulated at Apple: A vote can be 15,000 to 1 and still be a tie.''
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Apple Computer Inc.

Business market expansion resulted in a 30% increase in Apples sales in 1987. The CEO doubled the size of Apples field force and the number of employees grew to 10,837 making Apple more and more unmanageable.7
Two new computers for the business market were introduced: the Macintosh SE and the Macintosh II. These products attracted larger software houses that developed sophisticated applications for large business users. Nearly half of Apples sales and most of its profits came from selling PCs and related products to big corporations. International growth became a priority at Apple. The European market for PCs was expanding faster than the US market. By trying to reduce their dependence on the US consumer and consequently covering up declining US sales, Apple made efforts to mainly penetrate the European corporate business market. This was done by adapting their overall network model to each countrys individual circumstances and local markets
8
Apple gained 6% of the overall European market. Apples European revenues grew by 55%, faster than revenue growth for the entire company. Thus, the control of the European activities was switched to Europe, for instance by raising the proportion of European-made components used in Apples Irish production plant. Once more, the organisational structure was altered. Each division was now headed by a president who reported directly to Sculley.
7 8
Problem of managerial inefficiency if a company becomes too big to achieve economies of scale Stay global, act local
20

2.6.1 PC Market Microsoft seemed to start dominating the entire market by introducing Windows 95 and by consequently creating network and log-on effects for its OS and Office packages. 2.6.2 Apple In June 1993, Sculley was relieved of his position as CEO and Michael Spindler put in the big chair. Essentially Spindler was the wrong man for the job as he was a fairly impersonal man who oversaw several accomplishments during his two and a half years term as CEO. Apple's technology edge eroded dangerously mainly due to his mismanagement. The project that could have restored Apples position and given an ambitious answer to Microsofts Windows 95 onslaught which seriously eroded the Mac's justified technology leadership a new Mac operating system called Copland has fallen two years behind schedule. Another fact was that the most talented executives left the company. There have been massive management upheavals that caused Apple to fumble critical decisions and zigzag between strategies and that brought the company to a juncture, but Mike Markkula who was still in business never removed Spindler by always pledging him support. In 1994, Apple announced the PowerMac family, the first Macs to be based on the PowerPC chip and secretly began talks to sell the company with Sun Microsystems, IBM, and Hewlett-Packard. Apple took its worst plunge ever in the winter of 1995/96. Misjudging the market, Apple pushed low-cost PCs over mid-range PowerMacs and failed to make a profit at all. Apple posted a $68 million loss for one quarter. In January 1996, Spindler was asked to resign as CEO and was replaced by Gil Amelio, the former president of National Semiconductor. Despite making a strong effort to bring Apple back to profitability, Amelios efforts proved to be largely unsuccessful. In late 1996, Apple
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Apple Computer Inc.

made an industry-shocking announcement that it would be acquiring NeXT9 and that Steven Jobs would be returning. He took over the position of an "iCEO or interim CEO", began to make striking changes in the structure of Apple, and announced an alliance with Microsoft, one of Apples greatest rivals. In exchange for $150 million in Apple stock, Microsoft and Apple would have a 5-year patent cross-license 10 and, more importantly, a final settlement in the ongoing MacGUI11 battle. In addition, as clone production from companies such as Power Computing or UMAX had failed to effectively expand the MacOS market, instead taking customers away from Apple in the high end market, Jobs ended this licensing. Other changes in the corporate strategy comprised direct-computer selling via the web and new products (Apple Online -Store, PowerMac G3 Computer) such as the iMac were published with a focus on innovative design. Finally, Apple reached profitability for the first time within one year.
2.7 Period 1998 2000

2.7.1 PC Market Tight competition through low barriers to entry, tough-sale as well as cost reduction strategies applied by companies such as Dell and the first internet hype resulting in thousands of dotcoms made the PC industry to one of the most efficient, interesting and powerful ones. Microsoft preserved its near-monopoly position in software, above all in OS, but had to face several lawsuits against this predatory situation as critics argue. One computer per person didnt appear to be utopian anymore.
10 11
Merger brought about acquisition of NeXTstep, the basis of Apples planned OS Rhapsody including a Mircosoft Office version for the Mac Apple OS and intellectual property that Mircosoft allegedly stole for its Windows software
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Apple Computer Inc.

2.7.2 Apple Soaring profits pushed Apples stock. The iMac was one of the best-selling computers in the US and drove Apple sales well beyond most predictions. The "Apple Product Matrix" was complemented by a consumer portable, the stylish iBook. Jobs now also formally named CEO formulated Apples internet strategy as a suite of Mac-only internet-based applications called iTools. The second half of 2000 was different from the trend of previous years. Slower sales in the industry combined with a misunderstanding of the consumer market (failure of G4 Cube a Mac PC offered without a monitor) and the assembly of DVD drives instead of user preferred CD-RW ones for burning their own CDs unveiled in poor results.
2.8 Period 2001 now

2.8.1 PC Market Seeking more storage capacity as well as higher speed concerning CPUs and a tendency to look for arising business potential (online music and video market, file sharing through Peer-to-Peer) characterise the market. Linux, an open-source OS, accompanied Apple in contesting Microsoft-Windows hegemony. 2.8.2 Apple The 21st century started for Apple with Jobs plan to open a number of retail stores across America, selling not only Apple hardware, but various third-party "digital lifestyle" products. The i product group was added up by implementing iDVD, a DVD-authoring program, iMovie that contained tremendous value to digital cameras, iTunes, which allowed users to encode and listen to MP3 songs and then burn them to CDs, and the iPod, a small hard-drive -based digital music player. This innovative product line was a consistent part of Apples new digital hub strategy to secure and guarantee Apple steadily high profits as well as to gain share of the promising digital music and video market. In July 2002, Steve Jobs announced that the free iTools service would be rolled into a new subscription-based "dotMac" service.
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Apple Computer Inc.

Although Apples history is one of ups and downs, currently a stable profit has been maintained with the latest $63 million profit in the first quarter of 2004 12.
12
Apples financial year ends on the last Saturday of September
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Apple Computer Inc.
3 Current situation
3.1 Current performance
Today Apples operations are as diversified as the y were never before. With its currently 13,599 employees worldwide it generated a revenue of $63 million in the last quarter.13 It holds cash reserves of over $4.5 billion14 and has a ROIC of 3.05% 15. Apples operations are spread around the PC industry, computer peripherals and the software and service industry. In the overall PC industry Apples market share has diminished to a skinny 2.1%. 16 Apple itself doesnt look itself at the overall PC market, as it has defined 4 specific markets on which it currently focuses on. The market shares in these sectors are to some extent more significant. Market segment Education Creative Consumer Business Market share (12.4%) (>65%) (3.5%) (<5%)
In the peripherals sector (besides the iSight digital video camera and displays), Apple has been particularly successful through its innovative iPod (digital MP3 music player) as the market share in terms of revenues was 54% and in terms of units was 29%. This success is closely tied up to the launch of iTunes, Apples music online store and jukebox, which is the current leader in the online downloadable music market. iTunes accounts for 20% 17 of the pay per download music market.18 A number of cutting edge software applications (e.g. iLife, Final Cut Pro) and its operating system Mac OS X also contribute to the firms overall success, without one being specifically important.
13 14
Apple Computer Inc. (2004) Apple Computer Inc. (2003a) 15 http://yahoo.investor.reuters.com, 29.01.04 16 Apple Computer Inc. (2003a) 17 Baltimore Sun (2003) 18 Pay per download system vs. subscription services, allows the customer without monthly fees to download and pay for songs individually
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Apple Computer Inc. 3.2 Mission and current strategy

Apples mission statement emphasises that the company made major innovations in the personal computer industry in the past and links this strength to its present strategy:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. 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. 19 The digital hub, that is what Steve Jobs (CEO) identified as objective for Apples strategy in the future. Herewith, all three sectors Apple is currently operating in will get closer and closer together and showing a high interdependence, where seamless integration of all components is vital to win customers. Apple is the only company providing a bundle of solutions which are perfectly adjusted and fine tuned to complement each other to, for other companies, unattainable degree. By designing such high end products Apple is corresponding to external and internal environment, which in the high technology sector are changing more rapidly than anywhere else. Throughout its diversification efforts, Apple keeps its design and innovation focused line by equally adapting performance and price positions to changes in the external environment. The following analysis of internal and external environment will allow the reader to gain a detailed picture of Apple itself, its industry and the strengths, weaknesses, opportunities and threats associated with them.
19
http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-faq#corpinfo2, 14.02.04
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Apple Computer Inc.
4 Internal environment
4.1 General information
4.1.1 General description Apple designs, manufactures and markets personal computers, related software, peripherals, and personal computing and communicating solutions. Therefore, it is the only company in the personal computer industry that designs and manufactures the entire personal computer from the hardware and operating system to sophisticated applications. It sells its products through its online store, direct sales force, third-party wholesalers and resellers, and its own retail stores. Apple is convinced that personal computing has entered a new era in which the personal computer functions as the digital hub for advanced new digital devices and other electronic devices, and as a consequence interconnecting with as well as adding value to the internet and other devices becomes a PCs main purpose. In short, computers should now be designed to simplify the users (digital) life 20 by combining computing with consumer electronics 21 and by pursuing this strategy Apple is uniquely positioned in the PC industry. 22 The company currently has 10,912 fixed employees and its foreign operations include the Americas, Europe, Japan, and Asia Pacific23. In identifying Apples main customer groups, it becomes clear that those are computer users who dont see themselves as part of the mainstream: graphic designers, students, and anyone else who like to think that they are different. 24 4.1.2 Products25 Apples product range includes first and for most the Macintosh line of desktop and notebook computers, the Mac OS operating system, and the iPod digital music player. In addition, it contains a portfolio of further software solutions and peripherals, networking and connectivity products, and various third-party hardware products for education, creative, consumer, and business customers.
20 21 22
Quittner J. and Winters R. (2002) Ganesan S. (2003) Apple Computer Inc. (2003) 23 http://cbs.marketwatch.com/tools/quotes/profile.asp?sid=609&symb=AAPL&siteid=mktw, 19.02.04 24 The Economist (1998a) 25 Apple Computer Inc. (2003)
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Apple Computer Inc.

This table should highlight the most important elements of Apples product portfolio:26
Product iBook notebook iMac PC PowerBook notebook PowerMac PC iPod music player hardware accessories Mac OS X Quicktime and other sub process software application software internet integration software Comment Robust and successful notebook, aimed at the education market. Unexpected and ongoing success. High-end notebook, probably the best-designed notebook available. Personal computer targeting graphics and layout professionals. Digital music player, unique product in combination with iTunes online music store. Wireless connectivity products, monitors, etc. Superior and operating system with modular architecture. Widely used media player, successful by consolidating and gaining exclusive rights for popular movie trailers in the internet. Programs for digital editing of video, graphics, music, etc. Several unique web services.
The following paragraphs provide a deeper insight into the different parts of Apples product portfolio:
26
Sudbury A. (2001)
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Apple Computer Inc.

Hardware Apple offers a wide range of personal computing products including desktop and notebook PCs. The PowerMac is a high-performance desktop PC which is targeted at businesses and professional users and their demanding speed, expansion and networking needs. The PowerBook is a portable computer that should satisfy the high-performance mobile computing needs of professionals and advanced consumer users. The iMac and eMac desktop computers with their innovative industrial design are targeted to education and consumer markets whereas the iBook mobile computer should satisfy the mobile computing needs of these customers. Furthermore, the Xserve server solution is designed for simple setup and remote management of intensive input/output applications. Peripheral products Apples product portfolio includes a range of associated Apple-branded computer hardware peripherals. These include the iPod digital music player which is a portable music player whose functionality extends well beyond playing music and can be seen as a seamless end-to-end music solution in combination with the iTunes software and music store that enables customers to purchase songs over the internet. Moreover, the iSight digital video camera (combined with the iChat software) enables high-quality audio- and videoconferences and Apple several all-digital, active matrix LCD flat panel displays. Software products and computer technologies The companys software portfolio includes its operating system Mac OS X, server software, professional application software, and consumer, education, and business oriented application software. In fact, Max OS X which has been continuously upgraded during the last years offers advanced functionality built on an open-source UNIX -based foundation. The Max OS X server software and several related solutions deliver stable high-performance services for Interne t and web serving, filing, printing, and networking services. In the field of professional application software, Apple offers products for video editing (Final Cut Pro), compositing and visual effects (Shake), computer based music production (Logic; from acquired firm Emagic), and DVD authoring (DVD Studio Pro). Concerning consumer, education, and business oriented application
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Apple Computer Inc.

software, Apple has introduced an integrated suite of digital lifestyle applications called iLife which includes software for music management (iTunes), digital video editing (iMovie), DVD authoring (iDVD), and digital photo organisation (iPhoto). In addition, Apple offers several other applications such as iChat (audio/videoconferences), Keynote (presentations), or AppleWorks (word processing, spreadsheets, etc.). Finally, thousands of third-party software titles and solutions are available for the Macintosh platform. Internet software, integration, and services Apple's Internet strategy is focused on delivering seamless integration with and access to the Internet throughout the product line. Therefore, the iTunes music store for online music-purchases is fully integrated into the iTunes music management software and the company offers an own web browser (Safari), multimedia software (Quicktime), and internet services/tools suite (.Mac).
Wireless connectivity and networking This part of Apples product range includes its Wi-Fi wireless networking technology (AirPort Extreme, Bluetooth), its networking technology (Rendevous) and a standard high-speed serial I/O technology (FireWire) developed by Apple.
Product support and services AppleCare offers a range of support options for Apple customers such as general software assistance, manuals, online support or technical assistance. AppleTraining provides comprehensive system administration and development training whereas Apple Professional Services offers a range of personalized technical services. Moreover, Apple also has special loan programs and leasing solutions for its customers. Specialised education products and services Apple not only offers a separate online -store with special prices and financing programs for higher education students, faculty, and stuff, but also specialised education software such as the iBook Wireless Mobile Lab to share resources
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Apple Computer Inc.

between classrooms or the PowerSchool software for efficient and cost-effective school administration. 4.1.3 Competencies Apple is famous for possessing distinctive competencies in product design/innovation, digital entertainment, and educational skills. The company acted as the computer industrys leader in the development of graphical user interfaces, mouse input, networking, and several other areas, and is now leading the industry into a new era where the PC and its related software/hardware should be regarded as the hub of a digital lifestyle 27 and an entire, interconnected multimedia solution. By fostering this development, Apple can use its strengths in the fields of creativity, innovation, and technological obsession/development to differentiate itself and gain a competitive advantage over other players in the industry which only offer single products with lower value due to lower connectivity possibilities. Moreover, Apple has traditionally been strong in the fields of education, desktop publishing, and digital art/entertainment where its strengths interact with the desired attributes of its customers. 28 Quite interestingly, Apples main weakness also stems from the fact that it produces the entire line of computers and related products: in fact, the incompatibility of its products with the Wintel (Microsoft Windows operating system and Intel processor) standard makes it difficult for Apple to penetrate the computer industry as a whole and especially the traditional business sector 29. As several other factors such as high hardware costs or uncertainty in (future) software compatibility aggravate this situation, Apple is likely to remain a marginal player in terms of overall market share in the personal computer industry and will probably find it more difficult to maintain a critical size for being profitable and successful.
27 28 29
Daily News (2003) Sudbury A. (2001) Sudbury A. (2001)
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Apple Computer Inc. 4.2 Corporate governance

4.2.1 Board of Directors General information and Directors30 The Board of Directors consists of seven members and has three committees (Audit & Finance, Nominating & Corporate Governance, Compensation) which will be discussed in the governance mechanisms section in detail. In addition, Apples Board is fairly unique as it has no chairman. 31
Name William V. Campbell Millard S. Drexler Albert Gore Jr. Steve Jobs James A. Lawrence Arthur D. Levinson Jerome B. York Position Director Director Director Director, CEO Director Director Director 51 53 65 2004 2000 1997 Age 63 59 56 48 Director since 1997 1999 2003 1997 Professional background Chairman Intuit Inc. CEO J. Crew Former Vice President of the United States CEO and Co-founder Apple Computer, Chairman and CEO Pixar Executive Vice President and CFO General Mills Inc. Chairman and CEO Genentech Inc. Chairman, President and CEO Micro Warehouse Inc.
In fact, five out of seven Apple Directors are independent under SEC and NASDAQ rules 32 as only Steve Jobs (CEO) and Jerome York (member of an investment group that purchased IT-reseller MicroWarehouse Inc. which accounted for 2.4% of Apples net sales in 2003 33 ) can be regarded as dependent Directors. Nevertheless, the Board seems to lack an optimally balanced mix of inside and outside Directors 34 as theres only one inside Director (Steve Jobs, CEO). Although Steve Jobs isnt chairman of the Board, it can be criticised that the Board is dominated by the company CEO. In fact, the Board members certainly never criticised Jobs for Apple's lousy performance in 2002, a year that competitor Dell managed to weather far better. In addition, the Boards propensity to give him huge stock-option awards regardless of his performance as well as the relatively low level of scrutiny and constructive criticism has rankled many investors.
30 31 32
35
As a
Apple Computer Inc. (2003) http://news.com.com/2100-1042-993332.html, 19.02.04 http://www.apple.com/pr/library/2003/mar/20governance.html, 14.02.04 33 Apple Computer Inc. (2003) 34 Hill C. W. and Jones G. R. (2004), p. 386 35 BusinessWeek (2004e)
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consequence of the criticism, no options were granted to or exercised by the executive officers in 2003. In short, the outside Directors apparently dont bring enough objectivity to the monitoring and evaluation process which should actually be their key objective.36 Tasks and skills/experience The tasks of the Board of Directors are to oversee the CEO and other senior executives in the competent and ethical operation of the company on a day-to-day basis and to assure that the long -term interests of the shareholders are being served. The Directors should take a proactive, focused approach to their position, and set standards to ensure that the company is committed to business success through maintenance of the highest standards of responsibility and ethics. 37 Directors bring to Apple a wide range of experience, knowledge and judgement, and bring these skills to bear for the company. These varied skills mean that good governance depends on principled actions, effective decision-making, and appropriate monitoring of both compliance and performance.38 Indeed, Apples Directors dont only contribute an excellent professional background but also a wide range of skills, knowledge, international experience, and contacts to the company. For instance, James Lawrence (Executive Vice President and CFO of General Mills) was awarded the title Top CFO by the CFO-Magazine in 2001 or former US Vice President Al Gore is widely regarded as a key person in the building of the internet39 and possesses excellent links to the world of business and politics. Compensation The form and amount of Director compensation is determined by the Board after a review of recommendations made by the Nominating committee. The current practice of the Board is that a substantial portion of a Director's annual retainer is equitybased. Moreover theres a Director Stock Option Plan which enables Apples nonemployee Directors to acquire shares in Apple and they also receive a $50,000 annual retainer paid in quarterly increments. Directors do not receive any additional consideration for serving on committees or as committee chairperson.
36 37 38
Apple Computer Inc. (2003), p. 386 http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-govCommitteeComp, 19.02.04 http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-govCommitteeComp, 19.02.04 39 http://www.apple.com/pr/bios/gore.html, 19.02.04
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4.2.2 CEO Professional background Steve Jobs co-founded Apple in 1976. After he had left the company in 1985, Jobs co-founded NeXT Software and served as the Chairman and CEO of NeXT from 1985 until 1997 when NeXT was acquired by Apple 40. Moreover, he also co-founded Pixar Animation Studios in 1986 and still serves as Chairman and CEO of the company. In 1997, Jobs moved back into Apples executive suite as CEO and Director41. Performance and compensation The following table shows Steve Jobs compensation during the last three years:
Name Year Salary ($) Bonus ($) Restricted Stock Award ($) Steve Jobs 2003 2002 2001 1 1 1 --2,268,698 43,511,534 74,750,000 ----Securities Underlying Options (#) --7,500,000 --All Other Compensation ($) --1,302,795 40,484,594
In fact, although Steve Jobs only gets $1 as salary, he made good money during the last three years. Moreover, Steve Jobs cancelled all of his outstanding options in March 2003 and was awarded five million restricted shares. His huge bonus and other compensation figures result from a special executive bonus in form of an aircraft. By taking a closer look at his compensation and linking it to the companys performance, it becomes clear that the development of his bonuses is totally contrary to the companys results and especially the huge bonus in 2001 when the company had a net loss might mislead investors. Abilities and characteristics In fact, Steve Jobs can be described as a charismatic leader who possesses strong technical obsession, creative and innovative skills, enthusiasm, commitment and entrepreneurship. As he says that innovation distinguishes between a leader and a follower 42, he can be regarded as a visionary in the world of personal computers. Moreover, Jobs possesses a business sense for the marketability of his products and therefore could streamline Apples product portfolio and introduce new and highly
40 41 42
Apple Computer Inc. (2003) Yoffie D. B. and Wang Y. (2003) http://askmen.com/men/apr00/21c_steve_jobs.html, 21.02.04
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successful products such as the iPod. In addition, his user-friendly business approach doesnt only lead to increased value for customers through user-friendly products but also puts the customer in the centre of Apples business and constantly praises him as the best customer in the world. Moreover, his favour for technology, innovation, and creativity as well as his entrepreneurship could/can also be seen in his jobs at NeXT and Pixar. When Steve Jobs came back to Apple in 1997, he immediately recruited a new Board of Directors and had to reposition Apple in the evolving personal computer industry. 43 In fact, Jobs also proved his capabilities of being able to make harsh decisions during the restructuring of Apple when he rescinded the licences of competitors who have been cloning Macintosh computers and killed the Newton hand-held device.44 In short, Steve Jobs not only successfully pursues his current vision for Apple but could also implement necessary restructuring efforts in the past which led to an increase in the companys profits and therefore in shareholders wealth.
Evaluation of skills Actually, no one really doubts that Steve Jobs is the right man for Apple because hes not only admired by the Silicon Valley elite for the foundation of the company45 but also for his glamour, technological obsession, and the other characteristics and abilities discussed above. Moreover, Businessweek titled him one of the best managers 2003 as Jobs moved beyond computers to establish himself in two businesses where newcomers rarely emerge unscathed: music and movies. In fact, Jobs was the first to find a way to compel consumers to pay for online music and Pixar Animation Studios continued a remarkable run of hits with Finding Nemo46, the top-grossing film of 2003 and the top animated hit of all time 47. Nevertheless, critics of Steve Jobs claim that he seems strangely uninterested in the post-PC devices 48 and that he creates a reality-distortion field as his enthusiasm for a favoured technology is so great and his selling of it so sure, that anyone who meets him invariably feels converted.49 In addition, his absolute belief in Apples right
43 44
Yoffie D. B. and Wang Y. (2003) The Economist (1998a) 45 The Economist (1999b) 46 BusinessWeek (2004d) 47 BusinessWeek (2004c) 48 The Economist (2000) 49 The Economist (1997)
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Apple Computer Inc.

strategy and future success which he emphasises is many interviews might sound a bit arrogant to other people but actually can also be seen as a sign of his strong commitment and enthusiasm. Strategic issues and future challenges Steve Jobs can be seen as the fathe r of Apples current digital hub strategy which should transform the personal computer into a multimedia and entertainment hub that connects many devices. In fact, this strategy can be regarded as quite visionary and revolutionary as it is especially aimed at the future. Therefore, it can be concluded that Steve Jobs apparently has developed a coherent strategy to deal with future challenges and is convinced that his approach will lead the personal computer once again into a new era and therefore guarantee Apples future success. Nevertheless, it has to be stated that Apples future success and the future performance of Steve Jobs will not only depend on this ambitious strategy but also on various other factors especially concerning the business execution and commercialisation of his ideas. Although this was sometimes a problem in the past, the success of the iPod for example shows that Steve Jobs and Apple are probably on the right way. In addition, it will be important for the company to continuously focus on its strengths in the field of innovation and therefore Steve Jobs is definitely the right man to manage this challenge due to his unlimited commitment and enthusiasm for technological inventions. 4.2.3 Top Management Executive management team50
Name Steve Jobs Fred D. Anderson Timothy D. Cook Nancy R. Heinen Ronald B. Johnson Peter Oppenheimer Jonathan Rubinstein Age 48 59 43 47 45 41 47 Since 1997 1996 1998 1997 2000 1996 1997 Position Chief Executive Officer Executive Vice President and Chief Financial Officer Executive Vice President, Worldwide Operations Executive Vice President, Worldwide Sales Senior Vice President and General Counsel Senior Vice President, Retail Senior Vice President, Finance Corporate Controller Senior Vice President, Hardware Engineering
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Apple Computer Inc. (2003)
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Philip W. Schiller Bertrand Serlet Sina Tamaddon Avadis Tevanian 43 42 46 42 1997 1997 1997 1997 Senior Vice President, Worldwide Product Marketing Senior Vice President, Software Engineering Senior Vice President, Applications Chief Software Technology Officer
It should be stated that most executive managers joined Apple in 1997 the year in which Steve Jobs came back to the company. Moreover, most executive managers were externally hired (Jobs, Serlet, Tamaddon, and Tevenian as part of the acquisition of NeXT) and only a few held other positions within the company before. In addition, Fred Anderson will retire as CFO on June 1, 2004 and Peter Oppenheimer will succeed him as Chief Financial Officer 51. Professional background and experience52
Name Steve Jobs Fred D. Anderson Timothy D. Cook Professional background Chairman and CEO of Pixar Animation Studios Chairman and CEO of NeXT Director of eBay and E.piphany Corporate Vice President and CFO of Automatic Data Processing Vice President, Corporate Materials of Compaq Chief Operating Officer of Intelligent Electronics Director of North American Fulfillment of IBM Nancy R. Heinen Ronald B. Johnson Peter Oppenheimer Jonathan Rubinstein Philip W. Schiller Bertrand Serlet Sina Tamaddon Avadis Tevanian Vice President, General Counsel and Secretary of the Board of NeXT Senior Merchandising Executive of Target Stores CFO of Automatic Data Processing Information Technology Consulting Practice of Coopers and Lybrand Director of Immersion Corporation Executive Vice President, Chief Operating Officer of FirePower Systems Vice President, Product Marketing of Macromedia Director of Product Marketing of FirePower Systems Director of Web Engineering of NeXT Research engineer of Xerox PARC Vice President, Europe of NeXT Vice President, Professional Services of NeXT Vice President, Engineering of NeXT Engineering and management positions of NeXT
In fact, Apples top management possesses a strong professional background as all executive managers held positions that were related to their current positions in the
51 52
http://www.apple.com/pr/library/2004/feb/05anderson.html, 14.02.04 Apple Computer Inc. (2003)
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past. So, the companys management contributes to its success by providing the required skills, experience, and knowledge as well as the necessary industry background. Performance and compensation In fact, compensation information is only available for the last three years for the four most highly compensated executive officers (other than the CEO). The following table summarises their compensation:
Name Year Salary ($) Bonus ($) Restricted Stock Award ($) Fred D. Anderson 2003 2002 2001 Timothy D. Cook 2003 2002 2001 Ronald B. Johnson 2003 2002 2001 Avadis Tevanian 2003 2002 2001 656,631 656,631 657,039 617,673 563,829 452,219 452,404 452,404 452,429 456,731 492,212 460,873 ----------500,000 1,500000 --------500 ------------------------Securities Underlying Options (#) ----1,000,000 ----1,000,000 --300,000 300,000 ----1,000,000 All Other Compensation ($) 11,450 11,000 7,312 9,929 8,025 7,875 ------11,962 10,700 10,200
It can be seen that there are some salary differences of Apples best compensated chief executives and that CFO Fred Anderson earns the highest salary in the company. Moreover, the company didnt give many bonuses but made some smaller contributions in accordance with the 401(k) plan that are listed as other compensation. In addition, there were no options granted to the named executive officers in 2003. By linking Apples compensation scheme to the performance of the company there isnt any observable direct link because Apple had a net loss of $25 million in 2001, followed by a net income of $65 million in 2002 and $69 million in 2003 whereas only Timothy D. Cooks salary moved according to this pattern. Moreover, in terms of salary Timothy D. Cook was the only one who was granted a significant increase of his salary during the last three years whereas there had been only modest changes in the other executives salaries.
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Apple Computer Inc.

Strategic issues and future challenges Although Apples core strategy is always associated with Steve Jobs and his visions for the company, Apples other senior executives show that they are sufficiently skilled to contribute to the future success of the company due to their strong professional background and the sharing of the companys common values (as many of them came from other innovative and upright companies). Moreover, several statements and their overall public behaviour show that they have also adopted the companys norms and conduct their jobs in the ethical manner which is demanded through the companys code of business ethics. In addition, as Apple doesnt give any information concerning future strategies, products, and plans to the public, it can be followed that the internal communication and discussion among the companys top management is not only fruitful but also characterised by the loyalty to the companys norms and rules. So, it is obvious that Apples top management is highly involved in the internal strategic management process and contributes to the future choice of strategies and success of the company. 4.2.4 Stockholdings of Board of Directors and Senior executives The following table indicates security ownership of Directors and executive officers as of October 31, 2003:53
Name Steven P. Jobs Fred D. Anderson William V. Campbell Timothy D. Cook Millard S. Drexler Albert Gore Jr. Ronald B. Johnson Arthur D. Levinson Avadis Tevanian Jr. Jerome B. York Others All Executives and Directors (16 people) Shares Stock 5,060,002 1,152,672 90,502 804,334 90,000 --1,204,334 231,600 1,601,252 110,000 4,370, 677 14,715,373 of Common Percent of Common Stock Outstanding 1,38% 0,31% 0,02% 0,22% 0,02% 0,00% 0,33% 0,06% 0,44% 0,03% 1,19% 4,00%
53
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Apple Computer Inc.

4.2.5 Governance mechanisms Generally, the governance mechanisms are aimed at aligning incentives between principals and agents and to monitor and control agents in order to reduce the possibility of agency problems. As the Board of Directors has already been described earlier in this chapter, this section will now take a closer look at several other governance mechanisms as well as at Apples general governance guidelines and the three committees that should support those. Stock-based compensation Stock-based compensation schemes, such as stock options, are aimed at aligning management and stockholder interests by providing an incentive for executives to implement strategies that increase the future value of the company and its shares and therefore increase the value of their own shareholdings as well as the wealth of the companys shareholders in general. 54 In fact, Apple has used stock options as a form of executive compensation in the past but due to some criticism no options were granted to or exercised by the executive officers in 2003 and the company has entered into an Option Cancellation and Restricted Stock Award Agreement with CEO Steve Jobs in 2003 (which cancelled stock option awards granted in 2000/2001 and gave Jobs a restricted stock award). Moreover, as critics of these compensation systems suggest that companies should at least treat options as an expense that must be charged against profits, Apple includes the pro forma effects when accounting for stock compensation in its annual SEC-filings. 55 Financial statements and auditors Like every publicly traded company in the US, Apple has to file quarterly and annual reports with the SEC that are prepared according to GAAP and that are audited by an independent and accredited accounting firm. 56 Apples independent auditor is KPMG 57 which generally offers a complementary range of multi-disciplinary skills including Assurance, FAS, Tax and Legal services to clients. Moreover, as a client of
54 55 56
Hill C. W. and Jones G. R. (2004), p. 388 Apple Computer Inc. (2003) Hill C. W. and Jones G. R. (2004), p. 390 57 http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-faq#corpinfo1, 14.02.04
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KPMG, Apple can leverage KPMG's in-depth knowledge in various areas 58 but has also adopted an auditor independence policy that bans KPMG from performing nonfinancial consulting services59. As a result, no conflict of interest that could stem from an auditor performing auditing and consulting businesses simultaneously exists at Apple. In fact, a detailed look at the companys annual 10-K filings with the SEC highlights that Apple obviously can guarantee the accuracy of the information contained in the audited financial statements. Moreover, the Board is able to objectively guarantee the quality and accuracy of the auditors work due to the Boards independence and the dominance of outside members on the Board.
Employee incentives In fact, positive incentive systems are an effective way of motivating employees to work towards goals that are important for maximizing company performance and especially long-run ROIC. Possible incentives are employee stock ownership plans, stock option grants, and bonuses or other financial rewards that are linked to the achievement of goals related to the four building blocks of competitive advantage (superior efficiency, quality, innovation, and responsiveness to customers).60 In order to take advantage of these positive effects, Apple has established several employee benefits such as employee stock option grants, employee stock purchase plans, and an employee savings plan. In spite of these financial incentives, Apple also creates an incentive for employees to stay with the company by providing an atmosphere of creativity, innovation, and technological fascination that allows them to experiment, to be creative and to turn their technological ideas into reality. Corporate governance guidelines61 According to Apples corporate governance guidelines, the Board of Directors has to oversee the CEO and top management in their operation of the corporation and to ensure that these act in the long-term interests of the shareholders which should reduce the agency problem. In addition, there should be at least a majority of independent Directors on the Board (which is actually the case at the moment) and
58 59 60
http://www.kpmg.com/about/, 19.02.04 Apple Computer Inc. (2003) Hill C. W. and Jones G. R. (2004), p. 395 61 Apple Computer Inc. (2003d)
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the Board of Directors should effectively pursue its activities in the three committees which are described in more detail below. Moreover, the Board has to monitor the mix of skills and experience of its Directors in order to assure that the Board has the necessary tools to perform its oversight function effectively. Finally, the Board should consider shareholder proposals with respect to Director nominations and devote enough time and attention to its tasks. Concerning ethics and possible conflicts of interest, the Board expects its Directors, as well as officers and employees, to act ethically and to acknowledge their adherence to the corporations code of conduct. In addition, the Directors are elected annually by shareholders to serve a one-year term and there are no term limits. Moreover, it is possible for the Board to elect Directors between annual shareholder meetings (as it was the case with James Lawrence at the beginning of 2004) and the Board should consist of five to nine members. Besides, it is the responsibility of Apples management to provide new Directors with sufficient educational opportunities and information about the company and the responsibility of Directors to inform the Board about changes in their job responsibilities. Additionally, Apples corporate governance guidelines contain detailed information about further responsibilities/rights and the compensation of the Directors and emphasize the independence and rules of the Board committees. Moreover, a selfevaluation (at least once a year) of the Board should ensure its quality and the Board should evaluate the performance of the corporations executive officers in order to guarantee adequate compensation, effective leadership, and constant management development. Finally, succession planning for senior management and the CEO is an important responsibility of the Board to contribute to Apples successful future performance and stability. Audit and finance committee62 The Audit and finance committee is primarily responsible for overseeing the services performed by the company's independent auditors and internal audit department, evaluating the company's accounting policies and its system of internal controls and reviewing significant financial transactions. Whereas the committee performs an important internal and external control function, it is not the duty of the committee to
62
Apple Computer Inc. (2003b)
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Apple Computer Inc.

prepare financial statements, to perform audits or to determine that the corporation's financial statements and disclosures are complete and accurate as these are the responsibilities of management and the independent auditors. So, as the committee has to ensure the quality of its independent auditors, it is a vital element in enhancing the governance mechanism of financial statements and auditors. Compensation committee63 The Compensation committee is primarily responsible for reviewing the compensation arrangements for the company's executive officers, including the CEO, and for administering the company's stock option plans. In addition, it should establish and modify compensation and incentive plans and programs and therefore supports the governance mechanism which deals with stock-based compensation. Nominating and corporate governance committee64 The Nominating committee assists the Board in identifying qualified individuals to become Directors, determines the composition of the Board and its committees, monitors the process to assess Board effectiveness and helps develop and implement the company's corporate governance guidelines. As a result, this committee doesnt only have an important function in determining Apples direction in terms of corporate governance but also in guaranteeing the quality and independence of the Board of Directors which serves as an important governance mechanism. 4.2.6 Business ethics65 Fundamental principles Apples core fundamental principle is to use good judgement and the company is especially aware of its responsibility to shareholders, communities, and customers in conforming with legal/ethical boundaries and complying with applicable laws. In addition, the corporations employees should be aware of job and ethical responsibility.
63 64 65
Apple Computer Inc. (2003c) Apple Computer Inc. (2003g) Apple Computer Inc. (2003e)
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Apple Computer Inc.

In fact, Apples business standards include highest standards of business conduct, honesty and ethical awareness, avoidance of conflicts of interest, respect of confidentiality of (internal) information, highest standards of corporate citizenship (rules and laws), and the provision of benefits to communities through the companys presence. Apple expects its employees, business partners, and other parties to comply with these standards and policies. Responsibilities Apple recognises its responsibility to the company itself to encourage a creative, culturally diverse, and supportive work environment and therefore doesnt tolerate any kind of discrimination, harassment or other threats. Moreover, as the companys success depends on its technologically innovative products, Apple has implemented strict information protection policies in order to preserve the confidentiality of its confidential, proprietary, and trade secret information. In addition, Apple has specific policies for the communication to the press and financial analysts and only allows limited personal use of Apple-owned equipment. In order to prevent conflicts of interest, the company has identified several possible sources of such conflicts and recommended avoidance strategies. Finally, a key ethical responsibility for the corporation is to ensure the quality of its records by acting in accordance with established procedures, policies, laws, rules, and regulations, by forbidding false or misleading entries as well as undisclosed/unrecorded funds, payments or receipts, and by specifying records or documents that must not be destroyed, altered or modified. Concerning Apples responsibility to other stakeholders, the company aims at satisfying the costumer first by putting him first and it expects its employees to strive for the highest quality possible. Moreover, Apple complies with all license or purchase terms as well as with copyright agreements and expects the same from its employees and contractors. Additionally, Apple has defined several responsibilities to the public in which it prohibits insider trading, aims at meeting export and government requirements, avoids political contributions, and supports trade practises that foster competition.
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Apple Computer Inc.

Compliance, consequences, and strategic implications In fact, Apple expects its employees to comply with its code of ethics and to be sensitive to possible violations. Moreover, the company is committed to integrity in all of its dealings with employees, customers, and the general public, especially through the use of voluntary disclosures and the report of inappropriate behaviour. As violations of these laws may result in civil and criminal penalties for Apple and its employees, the corporation will take appropriate action (termination of employment or other business relationship, or legal action, or referral to law enforcement authorities) if this occurs. From a strategic viewpoint, Apples code of business ethics aims at establishing ethical behaviour which should lead to ethical decisions by its management and employees decisions that reasonable or typical stakeholders would find acceptable because it aids stakeholders, the organisation or society 66 . In addition, these business ethics provide a huge variety of tools for dealing with moral complexity and therefore provide a general guideline combined with specific actions/recommendations for certain situations where the moral implications of strategic decisions or personal behaviour are of special importance. Actually, Apple strongly aims at establishing a culture that emphasises the importance of ethics. Although Apple has developed a consistent and exemplary code of business ethics, it hasnt been successful in implementing all the three necessary steps for fostering an ethical organisational climate
67
. In fact, top
managers should stress ethical values more (at least in their external comments) and ethical values should be incorporated into the mission statement as they should not only be written down in a separate document. Nevertheless, it has to be concluded that Apple definitely can be regarded as a role model in terms of emphasising the importance of business ethics and due to its coherent culture will probably be able to successfully implement an ethical climate in its whole organisation.
66 67
Hill C. W. and Jones G. R. (2004), p. 395 Hill C. W. and Jones G. R. (2004), p. 296
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Apple Computer Inc.

4.2.7 Environmental issues In order to satisfy the claims of various stakeholders, Apple included environmental and other related issues in its corporate governance efforts. By recognising the responsibility to minimise the environmental impacts of its operations/products and integrating sound environmental, health, and safety management practises, the company can better satisfy employees, customers, local communities, and the general public. Environmental mission statement and guiding principles68 According to its environmental mission statement, by integrating sound environmental, health, and safety management practices into all aspects of its business, Apple offers technologically innovative products and services while conserving and enhancing resources for future generations . This is based upon several guiding principles which are founded on laws, regulations, standards, and requirements as well as sound scientific principles and fiscally responsible public policy. Moreover, the corporation aims at communicating the benefits of such a policy of environmental consciousness, energy efficiency, safety maximisation, and health protection to its various stakeholders. Corporate initiatives and actions69 Apples Corporate Environmental Health and Safety (EHS) Department provides several activities and services to ensure the implementation of Apples EHS policy by refining, developing, implementing, and maintaining documented programs and processes. These include on-line training programs, corporate EHS audits, environmental due diligence, and OSHA statistics. Moreover, the company engages in effective recycling as well as in product design, manufacturing, use, and end of life which are targeted at the protection of the environment and maximising environmental quality.
68 69
http://www.apple.com/about/environment/corporate/index.html#EHS_policy, 14.02.04 http://www.apple.com/about/environment/corporate/corp_ehs_programs/index.html, 14.02.04
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Apple Computer Inc. 4.3 Corporate structure

4.3.1 Organisational structure In fact, the companys management employs a functional structure as the company is organised along functional lines. This can be shown in the following chart:
CEO
Finance
Operations/Sales
Retail
Marketing
Hardware
Software
Applications
This structure groups people on the basis of their common expertise/experience and resources. It enables the companys functions to learn from another and to become more specialised and productive. Moreover, this structure enables effective monitoring and efficient activities which consequently reduces costs and increases operational flexibility. As we can see in Apples case, where the executive management teams structure corresponds to this structure, a functional structure gives managers greater control of organisational activities and enables the company to avoid becoming too tall by creating several different hierarchies. 70 By decentralising authority and responsibility as well as through a relatively flat hierarchical structure, Apple encourages its lower-level managers and employees to take the initiative and foster the companys strengths (i.e. Apples innovation, engineering excellence, and marketing skills 71). Moreover, decentralisation enhances the companys planning, decision making, and control processes due to better information availability. 72 4.3.2 Operating structure Apple primarily uses a geographic structure for managing its business. The corporations reportable operating segments are the Americas, Europe, Japan, and Retail. The Americas segment includes both North and South America, except for the activities of the companys Retail segment. The Europe segment includes European countries as well as the Middle East and Africa. The Japan segment includes only Japan, except for the activities of the companys Retail segment. The Retail segment
70 71 72
Hill C. W. and Jones G. R. (2004), p. 422 BusinessWeek (2004c) Morden T. (1993), p. 228
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currently operates Apple-owned retail stores in the United States and in the first quarter of fiscal 2004, opened its first international store in Tokyo, Japan. Other operating segments include Asia-Pacific, which includes Australia and Asia except for Japan, and the companys subsidiary FileMaker. Each reportable operating segment provides similar hardware and software products and similar services. 73 This structure can be shown in the following organisational chart:
CENTRAL OPERATIONS CEO, Management
Americas
Europe
Japan
Retail
Other
North America South America
Europe
Japan
United States
Australia
Middle East
Japan
Asia
Africa
FileMaker
This structure allows the company to be responsive to the needs of regional customers and reduces transportation costs. As most central functions are centralised, Apple can leverage its skills (e.g. in the fields of marketing or hardware/software/applications development) across all the regions.74 Nevertheless, it has to be stated that this doesnt represent a pure geographical structure because the Retail operating segment doesnt constitute a geographical area. So, there might arise coordination or communication problems between the two sub-segments United States and Japan in the Retail operating segment and the North America and Japan sub-segments in the Americas or Japan operating segment. 4.3.3 Performance Apple evaluates the performance of its operating segments based on net sales. The Retail segment's performance is also evaluated based on operating income. Net
73 74
Apple Computer Inc. (2003) Hill C. W. and Jones G. R. (2004), p. 434
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Apple Computer Inc.

sales for geographic segments are based on the location of the customers. The following table provides an overview of the performance of Apples operating segments (detailed information on the composition of the various positions can be found in the companys SEC-10K filings)75: ($, millions)
Americas Net sales Operating income Segment assets Europe Net sales Operating income Segment assets Japan Net sales Operating income Segment assets Retail Net sales Operating loss Segment assets Other segments Net sales Operating income Segment assets 398 51 78 367 44 67 354 24 70 621 (5) 243 283 (22) 141 19 (21) 46 698 121 130 710 140 50 713 98 44 1,309 130 252 1,251 122 165 1,249 68 137 3,181 323 494 3,131 278 395 3,037 128 334
2003
2002
2001
The table indicates that net sales have increased in all segments except Japan and consequently the operating income position has improved in all segments from 2001 to 2003. In fact, only the Retail segment has an operating loss in 2003 despite a high increase in net sales, resulting from the opening of new Apple retail stores. 4.3.4 Strategic implications Concerning the overall strategic implications of Apples corporate structure, it can be stated that Apples organisational structure is consistent with its objectives/strategy and its operating structure is consistent with its international strategy/operations. This
75
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Apple Computer Inc.

is especially manifested in the huge importance of hardware, software, and applications engineering (which contribute to the companys objective to be the most innovative company) and the importance of marketing and retail (which should highlight Apples status as a creative, innovative, and cool company) as well as the structure of the operating segments respectively (which are generally supporting the companys international objectives and presence). 4.3.5 Integration and control76 In order to avoid coordination problems between people, functions, and divisions, Apple has to use integration mechanisms and control systems. Actually, integration mechanisms aim at increasing intra-functional coordination and communication. As Apples culture can be described as relatively open and casual, direct contact constitutes an appropriate integration mechanism. In fact, direct contact among Apples managers enables them to work closely together in terms of problem-solving and other (strategic) issues. In terms of control systems, these are targeted at efficient monitoring/evaluation and enable the company to reach superior efficiency, quality, innovation, and responsiveness to customers. For instance, concerning efficiency it can be stated that on the one hand Apple apparently produces its goods and services efficiently (which explains its profitability) but on the other hand the efficiency in several areas (e.g. Apples network of huge retail stores across the United States) remains doubtful. As Apple is famous for its quality and innovation, these areas can be seen as major strengths of the company due to appropriate strategic control. In fact, Apple uses personal control as the company expects their employees to perform their work efficiently, avoid hiding any information, and share competencies/experience. The firm therefore aims at shaping and influencing the behaviour of its workforce through the promotion of the companys goals and values in everyday face-to-face interaction as well as through the huge enthusiasm and motivation skills of its management which should influence the all of the companys employees.
76
Hill C. W. and Jones G. R. (2004), p. 410ff
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Apple Computer Inc.

Moreover, Apple is also engaged in terms of behaviour control, as the firm aims at generally directing the actions and behaviour of its employees through certain rules like the code of business ethics. Nevertheless it should be stated that this type of strategic control generally plays a minor role, because Apple generally prefers creativity and innovation instead of standardised procedures. As one would expect for a firm that engages in the computer industry, information technology definitely plays a major role in supporting Apples organisational structure and control systems. In fact, IT improves information and knowledge distribution/availability, facilitates output/financial control, enables better and problem-solving, and leads to several other positive aspects through a common software platform, a company-wide intranet, and Apples general expertise in terms of IT.
4.4 Corporate culture

4.4.1 Culture and values Corporate culture defines the specific set of values and norms shared by people and groups within a company. Actually, values can be regarded as beliefs and ideas about what kinds of goals should be pursued and the appropriate standards of behaviour for achieving these goals. On the basis of these values, norms are developed which constitute guidelines or expectations for appropriate behaviour in particular situations and the control of the right behaviour. As a result, it is the task of management to influence the values and norms of the organisation.77 By taking a look at the role of top management in creating the culture of the enterprise, it becomes obvious that (in spite of a period of frequent changes of chief executives) no CEO could successfully alter the rebellious, defiant, against formal business routines type of culture that characterised Apple when it was founded in the 1970s.78 In fact, the companys culture could be described as individualistic at the beginning which means that it emphasised individual empowerment and creativity and saw personal creativity and self-expression as the source of competitive
77 78
Hill C. W. and Jones G. R. (2004), p. 417f Dupai I. and Pinter V. (1999)
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advantage 79. As organisational culture is created by the strategic leadership provided by an organisations founders and top-managers, it becomes clear that current CEO Steve Jobs as a co-founder of Apple definitely is the optimal person to design and develop the companys culture with regard to the challenges of the 21st century. In fact, the firms culture should be regarded as an emergent culture as it was never well-defined but emerged from the way its founders lead the company. Therefore, the initial bohemian, individualistic, riotous, and rebellious culture (which was definitely advantageous when the company was a mere start-up)80 continually changed as the company metamorphosed into a corporate giant and its values adapted to the new situation although the core values sta yed more or less the same. So, Apples culture today can be described as a culture which focuses on innovation and creativity and has definitely become an adaptive culture. Concerning the latter aspect, Apple has developed a culture that encourages innovation and initiative and therefore can adapt to its current environment which is absolutely necessary because of the huge amount of rapid changes in the fast-moving computer industry. 81 In addition, it is important to take a closer look at the role of innova tion and creativity as they are the two most important values in the companys culture. In fact, it is obvious that these values are constantly emphasised by Steve Jobs through statements such as Innovate, thats what we do 82 or Apple is the most creative technology company out there 83 . Moreover, the CEO always tries to link the companys reputation for successful innovation to the company as a whole and therefore not only claims that this culture of innovation and creativity creates the worlds best computers and other great products but also says that these attract the best 25 million customers any company ever had. 84 By constantly emphasising these positive effects of Apples innovative culture, innovation is manifested as the cornerstone in the companys culture and therefore leaves no doubt that it represents the most important source of the firms competitive advantage. In order to transform innovation into a sustained competitive advantage, the firm has a strict policy that
79 80 81
Morden T. (1993), p. 243 The Economist (1998b) Hill C. W. and Jones G. R. (2004), p. 418 82 Fastcompany (2004) 83 BusinessWeek (2004c) 84 BusinessWeek (2004c)
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none of its employees are allowed to talk about of refusing to comment on future products or services85 and therefore preserves the value of its upcoming innovations. Nevertheless, there are also certain drawbacks to this form of culture that is primarily based on innovation. First of all, Steve Jobs apparent belief that Apple could innovate its way through a downturn86 seems to be inconsistent with economic reality as economically successful products dont only need innovation but also appropriate execution, consistency, and follow-through (supporting product innovation with things such as a solid sales force, a strategy for collaborating with developers and makers of complementary products, and a strategy for customer service). So, one apparent criticism is that Apple has devoted itself single-mindedly, religiously to innovation. Moreover, the source of innovation is another important criticism as Apple might focus too much on technical innovation and not enough on the innovation of business models which would rather increase profitability (e.g. as it is the case at Dell). 87 In terms of organisational socialisation (which specifies how people learn organisational culture and therefore become organisational members), the values and norms of Apples corporate culture are not only manifested in written documents like the code of business ethics but also transmitted through stories, myths, and language. For instance, the various myths about Apple and its charismatic CEO as well as the conviction, enthusiasm, commitment, and technological obsession which are obvious in all of Steve Jobs statements highlight the companys corporate culture and directly influence all members of the organisation. 4.4.2 Strategic implications Concerning the strategic implications of Apples corporate culture, it can be stated that the companys values and norms are definitely clearly communicated internally (as well as externally) through documents and the role/behaviour of management and therefore should be clearly understood by everyone in the organisation. In addition, the firms culture can be seen as consistent with corporate strategy and objectives as innovation is an integral part of Apples corporate strategy and staying
85 86 87
Baltimore Sun (2003) BusinessWeek (2002a) Fastcompany (2004)
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the most innovative company definitely acts as one of the firms core objectives. Moreover, it is also consistent with the design of the organisations structure where the various functions that primarily serve as sources of (technical) innovation (hardware, software, and applications engineering) represent separate functions in the overall organisation and therefore have enough power, capacity, and attention to be innovative within this common cultural framework.
4.5 Corporate resources88

The following six subchapters take a closer look at six value creation functions, namely Marketing, Finance, Research & Development, Operations & Logistics, Human Resource Management, and Information Systems. The importance of these functions can be illustrated through the value chain which regards a company as a chain of activities for transforming inputs into outputs where primary activities are concerned mainly with the actual design, creation, delivery, and marketing of the product and support activities allow the primary activities to take place. As Operations & Logistics contains materials management acti vities, the production of the product, and customer service, we can illustrate the position of all single functions in the following value chain where every function adds value to the product (the overall company infrastructure isnt explained explicitly in the following chapters as it mainly deals with aspects that have already been described before like the companys management or organisational structure): Primary Activities
Research & development Marketing and Sales Customer service
Production
Company infrastructure
Information systems
Materials manage ment
Human resources
Support Activities
88
Hill C. W. and Jones G. R. (2004), p. 83-86
54
Apple Computer Inc. 4.6 Corporate resources: Marketing

Apple designs, manufactures and markets personal computers and related software, peripherals and personal computing and communicating solutions. How can Marketing and Sales achieve a competitive advantage and add value in the value chain? For example, customers are attracted to Apples Macintosh computers for a variety of reasons, including the reduced amount of training resulting from the Macintosh computer's intuitive ease of use, advanced graphics capabilities, industrial design features of the Companys hardware products, and ability of Macintosh computers to network and communicate with other computer systems and environments. 89 These attributes need to be addressed by the marketing department and communicated to potential customers. The key success factor is to create value by igniting people's imagination and create a favourable impression of the products by means of brand positioning, advertising, and promotion.90 Apples marketing strategy is to put its customers first: Apple creates, manufactures, and markets computing products so people can use them to make their lives better. Apple strives to understand our customers needs, to provide customers with the tools and skills to enhance their use of Apple products, and to be courteous and instructive. 91 At Apple creativity, innovation, and customer responsiveness are seen as highest principles therefore clearly formulating them as biggest responsibilities in their marketing policies. This view of conducting business goes hand in hand with their mission statement that 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. 92 So as one can obviously understand the marketing goals of the company are coherent with the overall objectives of Apple.
89 90 91
Apple Computer Inc. (2003) Hill C. W. and Jones G. R. (2004) Apple Computer Inc. (2003) 92 Apple Computer Inc. (2003e)
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Apple Computer Inc.

4.6.1 Marketing strategy As Steve Jobs took over Apple 1997 as CEO, a lot of people doubted that he will succeed to turnaround the company and return it to profitability. But once again he proved the others wrong. His eager goal and objective for Apple was to transform the niche PC maker into a high-end consumer-electronics and services company, being less dependent on its sales of computers and laptops. Currently 80% of revenues are generated in this area.93 So this radical change in corporate strategy meant that marketing strategies had also to change and adapt to this new strategy. He reorganised the department by centralising the responsibilities in company wide groups, so that communication and effectiveness can be increased. Along with its new focus on software and services as the introduction of iMovies in 1999 and the iTunes music online store in 2001 demonstrate impressively, the invention of the iPod, an MP3 player, marked the first product that wasn't tethered to the Mac. This paradigm shift in overall corporate strategy was naturally accompanied by huge marketing expenses. In its third quarter of 2003, which ended June 30, Apple earned $428 million in gross profit, a 27.7% margin on sales of $1.55 billion, but it spent $419 million on operating expenses, leaving it with an operating margin of just 0.6% (marketing accounted for $193 million).94 Apple's gross margins are the envy of the industry. But below the line, they give it all back. Apple pours money into R&D and selling, general, and administrative expenses. They have expensive retail locations and high-end advertising. In other words it's a Cadillac operation. The dedication to high-end marketing leaves the company with very little choice in regards to increasing operating margins. Steve Jobs already assured that he wont cut costs through decrease in marketing expenses but will focus on increasing profits and revenues. The huge marketing budget can be justified through its unique position as hip brand the cult of cool it has spent billions building this image. On one side Apple focused its recent marketing operations on one major business area: The iPod and iTunes, recognising that the global music MP3 market will triple until 2006 as forecasts show. So strategy adjusts in respect to changes in the
93 94
http://www.macminute.com/2003/08/05/appleshift, 16.12.03 Apple Computer Inc. (2003)
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Apple Computer Inc.

external environment, which actually shows Apples marketing departments responsiveness to outside changes. On the other side Apple slowed down the aggressive marketing in terms of PCs and notebooks as their niche market, because especially one of their core businesses, the advertising and media business, was in a steady decline during the last few years and therefore demand for products was anyway not skyrocketing. Remarkable in this area is that Apple adopted the direct selling model from one of its rivals Dell by opening their own online store, which has been a huge success, now accounting for 40% of total PC sales in the US market.95 Through combination of online and retail channels Apple has the opportunity to reach both first time buyers and Power users, who are looking for sophisticated and customized products. This analysis shows that Apple is adapting to changes in the external as well as internal environments to align the marketing strategy with its corporate strategy and consequently Apple is ahead of the curve. As software and services become more important, both to consumers and to generate revenue, Apple's moves to capitalise on its brand and bring simple, elegant software and services to the Windows world make sense. Microsoft's mantra is Where do you want to go today? But its Apple that has succeeded at figuring out where people really want to go. 4.6.2 Brand positioning Like people, brands can be viewed as having personalities. A brand can be viewed as being trustworthy, humorous, youthful, intellectual, etc. The personalities of brands can affect the relationship that is developed with the brand's users. A brand's personality can also serve to reinforce a product feature. The creati ve and innovative "personality" of Apple computer products and the advertisements that promote them do much to reinforce the distinctive capabilities of Apple and create brand loyalty, which in turn leads to low customer deflection rates and a possible ride down of the experience curve. The result of being on a lower point of the experience curve is lower cost and therefore the margin between costs (C) and value (V) widens, increasing companys efficiency as well as its profits.96
95 96
Yoffie D. B. and Wang Y. (2002) Evans D. and Gupta P. (2001)
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Apple Computer Inc.

What Apple accomplished throughout its existence was the promotion of the brand and its products simultaneously as the legendary spot 1984 (relaunched in 2004 for the 20 year jubilee) in the half time break of the Superbowl, influenced by the identically named bestseller of George Orwell, demonstrates in a spectacular way. People associate the same qualities with the company AND its products. This capability results therefore in a very strong brand loyalty.
The experience curve
Unit Costs
Accumulated output over time
4.6.3 Marketing mix Products Power Mac (PC) and iBook (laptop), iPod (MP3-player), iTunes (online music store) and multimedia software are the core products of Apple.
Price Products are usually, as previously mentioned, highly differentiated and high-priced in the premium segment of their respective market. This pricing option is seen as the main obstacle for Apple to enter the mass market and gain sustainable market share, but Apple puts itself as a supplier mainly to the education sector and the graphic professionals community, which altogether is a high end niche market. Promotion Promotion heavily utilises the TV as its advertising channel to promote the coolness factor of Apples products. For example Apple recently produced a commercial together with the famous soft drink producer Pepsi to market its iTunes music online
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Apple Computer Inc.

store. The ad marks also the intro of the current version of the Apple homepage. 97 Another simultaneous campaign running in recent years is the Switch -campaign which tries to encourage Wintel user (user that use Intel microprocessors with Windows operating systems) to switch to Apple by emphasising the comparative advantage in terms of reliability and user friendliness.
Placement Since the inception of the retail initiative in 2001, Apple has opened 65 retail stores in the United States through 2003 and during the first quarter of 2004 opened 9 additional stores, including its first international store in the Ginza in Tokyo, Japan. 98 Stores are installed at high traffic locations in quality shopping malls and urban shopping districts. In addition to its own hardware, software, and peripheral products, the company's stores carry a variety of third-party hardware and software products. One of the main goals of the retail initiative is to bring new customers to Apple and expand its installed base through sales to both first time personal computer buyers and those switching to the Macintosh platform from competing operating system platforms. By operating its own stores, Apple is able to better control the customer retail experience. The stores are designed to simplify and enhance the presentation and marketing of personal computing products. To that end, retail store configurations have expanded to various sizes in order to accommodate market demands. The stores employ experienced and knowledgeable personnel, provide post-sale advice and support, offer a wide selection of third-party products selected to complement the company's own products, and host training and marketing presentations. Certainly, Apples stores have been designed and built to serve as high profile venues that function as vehicles for general corporate marketing, corporate events, and brand awareness. As one can analyse there's far more to Apple than curvy products and groovy ad campaigns nowadays. The results in comparison to the only rival Gate way, which engages in a similar retail strategy, are fantastic (3,500 visitors per week for Apple compared to 700 visitors per week for Gateway). Still Apple was only able to convert 0.9% of non-Mac visitors into Mac customers. It would take only
97 98
http://www.apple.com, 21.01.04 Apple Computer Inc. (2003)
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a 2% conversion rate to boost Apple's market share in the home market by 50%. 99 This initiative is supported by a simultaneous launch of a campaign to improve the buying experience at consumer electronic chains through own personnel trying to make the actual buying an unforgettable experience. The numbers prove Apple right: Apple's business jumped from 15% to 35% of sales after Apple set up a special Mac section and a cyber-cafe outfitted with iMacs at chains such as CompUSA.100 The second initiative called direct Selling involves the expansion and improvement of Apples online store, not only increasing the product range but also reducing handling time of customer orders. By and large all these ideas can be seen as a commitment to quality. Apples focus on its custo mer is expressed by superior responsiveness through knowledgeable personnel, support and after-sale service, and quality products leaving Apple with an added value and greater choice of pricing options (higher value). 4.6.4 Advertising Apple Computer does an excellent job of creating congruency between its offline and online operations. The Apple site is very colourful, easy to navigate, and promotes movies, new media and QuickTime TV, reflecting Apple's strong emphasis on multimedia.101 The aspects that characterise the Apple web site are also aspects that characterise their brands. Therefore, Apple does a good job of utilising their web presence to reinforce their brand identity and brand positioning. Apple further adds to the congruency of its brand marketing by consistently using the same promotional imagery across various media sources. 4.6.5 Product life cycles of Apples core products iTunes Apples music online store is in the growth stage this stage is characterised by high turnover and high promotional costs, offsetting each other. In other words, the net profits are moderate. For example, Apples new Prime Time TV Ad highlights burning custom music (from the iTunes online music store) CDs on Macs. The payoff here is to create increased brand awareness in order to exploit future market opportunities through networking effects.
99
100 101
BusinessWeek (2002a) Apple Computer Inc. (2003) Evans D. and Gupta P. (2001)
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Apple Computer Inc.

The more people join iTunes the more popular it would get as it was shown in previous times by illegal download services such as Kazaa and Napster. According to marketing strategists a t Apple, the new iTunes version for Microsoft Windows user should additionally have the effect of convincing users to switch to the Mac OS X, Apples operating system, by providing the superior graphic user interface that earmarks all of Apples software products. The marketing division emphasises the innovation, price, and coolness factor of the product to attract new customers. iPod Apples iPod, the hard drive based MP3 music player currently positions itself in the growth stage. MP3 player market is expected to triple over the next 3 years. The product is also supported by expensive blockbuster ad campaigns to boost sales and establish the iPod as the dominant player in the market. The premium price (29% of units market share account for 54% of revenues in the market) lets Apple earn decent profits despite the high promotional costs. The introduction of a Windows compatible version additionally is expected to spur demand. Apple also tied up with apparel maker Burton Snowboards to create the Burton Amp Jacket that allows wearers to control iPod from the jacket sleeve. This feature had the potential to lead to many more innovative applications for the iPod. Marketing emphasises the capacity capabilities of the iPod being able to store more than the equivalent of 1,000 CDs on the 40GB model. 102 Therefore it targets customers who care about capacity as well as style, which from Apple products is anyway expected to be superior. iMac and iBook The PC and laptop products are seen as being in their mature stage with high profits and turnover. In this stage products are subjected to only slight changes and improvements, on the one side using economies of scale and on the other side learning effects to ride down the experience curve. Furthermore, marketing these products means to concentrate on reliability and easiness of use which together with superior design should appeal to Apples specified niche market. Marketing accomplishes to change customers view about computers from a commodity to a lifestyle product. The switch campaign and slogans like Only Apple designed the
102
http://www.emergic.org/archives/2004/01/14/index.html#apples_intelligent_pricing, 16.01.04
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Apple Computer Inc.

way to fit your work are perfect examples of underpinning these product features. Moreover infomercials should justify the relative high price and help educate consumers about the Apple brand. Instead of increasing market share Apple chose to engage in a strategy of maximising profits by serving the high price high end niche market.
iMac and iBook sales constant
Demand
iPod market expected to triple 2006
Embryonic
Growth
Shakeout
iTunes 3-digit growth rates expected
Mature
Decline
Time
4.6.6 Trends from this analysis Apples strong brand name is definitely an advantage and unique capability, which Apple can capitalise on, as the recent example of the online music store demonstrated. Through its reputation Apple was the only player in the market who was able to convince all five major music labels to sign on to this legal download service.103 Also this capability seems to have a high barrier to imitation as nobody was able to create such brand loyalty in the industry until now. But marketing through its incredible high budget hindered also in a way corporate performance in the past,
103
http://www.silliconvalley.com, 20.01.04
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as it was previously stated that nearly all of the gross margin is eaten away by R&D and Marketing. Despite costs, Marketing is still far from being perfect. Apple has to recognise that a name is not everything. Customer support is also viewed as an important criteria considering to buy hard- and software because of the increasing complexity in pulling together the various pieces of digital lifestyle and the lack of responsiveness can mean the fall from grace. Specifically the online anti-advertising campaign by disappointed buyers of the iPod could have been avoided through better customer support. Apple refused to exchange empty batteries with the simple excuse that the customers should just get a new iPod not a very polite way of dealing with the ones you are dependent on?! 104 So for the future this means that either Apple will have to increase value (e.g. through superior after sales service) or decrease its costs in order to stay competitive and enhance performance. 4.6.7 Competitive advantage At the first look Apple seems to have a huge competitive advantage by being able to differentiate itself from its competitors and communicating this successfully to customers, and therefore it can charge a premium price. But as competitive advantage is defined as being more profitable than its competitors in other words the gap between the cost for the company and perceived value for the customer is greater than industry average Apple doesnt outperform its competitors substantially.
4.7 Corporate resources: Finance

By looking back in history, we notice that Apple was never caring much about the long-run. Short-term high profit margins through charging elevated prices were the determining fact without attributing much attention to their deteriorating market share. But is Apples financial situation an altered one in 2004? 4.7.1 Apples financial status quo When Apple published the first quarter results of 2004, the company beat analysts expectations by presenting a net income of $63 million, the highest profit on an annualised basis since 2001 and far beyond any estimation. Net income also reflects
104
BusinessWeek (2003a)
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higher margins due to product mix. For the three months ended in December 2003, revenues rose 36% to $2.01 billion. Revenues reflect an increase in sales of iPod and computer accessories. Financial results and ratios105 Apples financial results of 2002 and 2003 were already published under the rules of the Sarbanes-Oxley Act106 of 2002. They showed Total Assets of $6.815 billion, Total Liabilities of $2.592 billion, a net income of $69 million, but an Operating loss of $1 million. This number improved especially in the first quarter of 2004. Average Cash Flow figures in comparison to the previous years marked the liquid position of Apple Computer. This states that Apples product and business mix is diversified enough to always serve the company with appropriate cash. Net sales increased $465 million or eight percent during 2003 compared to 2002 while Macintosh unit sales declined three percent year-over-year to approximately three million units in 2003. Several factors have contributed favourably to net sales during 2003, including: The Retail segments net sales grew to $621 million during 2003 from $283 million in 2002, an increase of 119%. Therefore we can infer that Apples customers may prefer to purchase products from their local Apple Retail store rather than through other pre-existing sales channels in the United States. Net sales of peripherals and other hardware rose to $384 million or 57% during 2003 compared to 2002, which follows a $287 million or 74% increase in 2002 as compared to 2001. The current year increase was primarily driven by the $202 million, or 141%, year-over-year increase in iPod net sales to $345 million. All of the companys operating segments experienced substantial increases in iPod net sales and unit sales during 2003. In addition to the iPod, the increase in net sales of peripherals and other hardware during 2003 also reflects an overall increase in net sales of other computer accessories including AirPort cards and base stations. Although total Macintosh unit sales were down 3% in 2003, portables were relatively strong primarily due to the 69% or 247,000 unit increase in PowerBook unit sales, slightly offset by a 4% or 30,000 unit decrease in iBook unit sales.
105 106
Yahoo Finance, Reuters Investor Services Strict corporate governance action plan that imposed strict corporate rules by trying to avoid a second Enron
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Annual Balance Sheet, 09-2003
Quarterly Balance Sheet, 12-2003
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Apple Computer Inc.

Annual Income Statement, 09-2003 Quarterly Income Statement, 12-2003
Annual Cash Flows, 09-2003
Quarterly Cash Flows, 12-2003
This reflects an overall industry trend towards portable systems. Apples average net sales per Macintosh unit sold increased two percent to $1,491 in 2003 due to an increase in direct sales primarily from the companys retail and online stores. PowerBook and Power Macintosh systems accounted for 42% of total unit sales in 2003 versus 36% in 2002. Net sales of software increased $55 million or 18% during 2003 and result from higher net sales of Apple-branded application, server software, and third-party software. Additionally, higher sales figures may also infer from the recent acquisitions of PowerSchool and Emagic. Service and other sales rose $69 million or 30% during 2003. Increased net sales associated with Internet services are due to net sales from the iTunes Music Store.
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In contrast, total unit sales of desktop systems fell 15% during 2003 compared to 2002. iMac systems unit sales declined 16%. Unit sales of Power Macintosh systems fell 13% during 2003 compared to 2002. Furthermore, some of Apples professional and creative customers seem to have delayed system upgrades in anticipation of new innovative products on the market. Apple has continued to experience ongoing weakness in its US education channel during 2003. Net sales and unit sales in this sector during 2003 were down four and six percent. Apple has also experienced significant competition in 1:1 learning solutions and, accordingly, has achieved a lower profit margin. With respect to the economic and industry downturn, political instability and Apples direct influence on the market sales of professional and consumer oriented Macintosh systems remain far below levels experienced in 2000.
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Apples ratios - overview107
107
EPS Earnings per share; ttm time to market ; ROIC = ROI; EBITDA Earnings before Interest and Taxes, Depreciation, Amortisation; P/E Price Earnings
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Apple Computer Inc.
Research & Development, Sales, general and administrative expenses
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Working Capital, Inventory
Property, plant and equipment
Apples stock and dividends Primarily, Apple is listed at the electronic Association Automated NASDAQ of Securities Quotations) (National Dealers stock
exchange in New York (AAPL short term for Apple Computer at the NASDAQ), but represents member of the S&P 500 and the NASDAQ 100 Composite Index. On the 20th of February 2004, its price was $22.40 (High: $22.51, Low: $22.21) with a traded volume of 4,957,200 shares. The 52-week high is $25.01, the corresponding 52-week low $12.72, the stock has an average three month volatility of 5.33. Currently, a majority of analysts 108 is neutral (in real terms, but this normally implies a slight tendency to sell) on the Apple share which suggests neither buy nor sell the stock. This is due to the general belief that Apple itself will prosper in several
108
J.P. Morgan Securities Inc. (2003)
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Apple Computer Inc.

business areas, but will still have to face tough competition, especially from ultraefficient producing and selling Dell. For fiscal 2004 (EPS of $0.40 and revenues of $7.10 billion, for fiscal 2005 an EPS of $0.51 on revenues of $7.34 billion are estimated. Apple is trading at the high end of its historical range. Finally, recommendations conclude that Apples current valuation already recognises in lofty expectations for a turnaround, foresees few near-term catalysts that could drive significant share price appreciation and therefore cant see an outperformance of the group average in the near future. Although providing a Common Stock dividend during Apples latest stock split in 2000, the companys policy normally is not to pay out any. This can be derived from the attitude of many IT companies, above all Microsoft, that could persuade their shareholders to reinvest their earnings in the company by promising them a far higher yield through. The money was mainly used to fund business operations and R&D.
Apples credit ratings and capitalisation structure At the moment, Apples corporate credit rating is at BB109 and consequently near sub investment grade, but with a stable outlook. New product introductions and seasonal holiday demand should provide near-term revenue and earnings improvement but
109
see Appendix: Standard & Poors Rating Agency
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Apple Computer Inc.

are not expected to affect Apple's rating or outlook. Ample liquidity (more than $4 billion in cash) and modest debt levels support the current rating despite Apple's limited global market share and earnings dependence upon a narrow product base. This states that debt financing by issuing corporate bonds would become costly for Apple due to their low rating. Nevertheless, this is a common scenario for corporation, above all in the IT sector (33% have a B-rating, 25% a BB, 23% a BBB and only 13% an A). The company currently has debt outstanding in the form of $300 million of aggregate principal amount 6.5% unsecured notes that were originally issued in 1994. The notes, which pay interest semi-annually, were sold at 99.925% of par, for an effective yield to maturity of 6.51%. The company currently anticipates utilising its existing cash balances to settle these notes when due which fur ther visualises Apples strong capital position and its liquidity. This leads to a very low financial leverage / Gearing ratio110 (Total Debt to Equity equals 0.07) and therefore makes refinancing for Apple rather cheap regarding their capital structure. As far as Equity Capital is concerned, there exist common and preferred stock. The latter ones became important in August 1997 when Microsoft purchased 150,000 shares of Apple Series A111 nonvoting convertible preferred stock for $150 million, going along with a reciprocal technological exchange. These shares were convertible by Microsoft after August 5, 2000, into shares of the Companys common stock at a conversion price of $8.25 per shares. From the prospective of accuracy there cant be found any valuation discrepancies in asset values or market prices. Trends can be discovered in how Apple finances their activities by keeping up a low dependence on outside debt capital and raising money through cheaper equity where dividends were successfully avoided to be paid out. Such a policy may be beneficial as the companys ownership isnt diluted, but in times of low market bond yields, Apple isnt able to take full advantage of cheap corporate bonds issues. Current financial objectives and policies Apples major financial goal is to outperform its competitors, above all in terms of productivity ( measured by net sales, operating income, stock price performance,
110 111
Shows the companys relationship debt to equity Different classes of shares containing specific rights
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Apple Computer Inc.

Return on Invested Capital, Liquidity) and to become the industrys most profitable company. This policy is clearly stated (focus on equity) and implied from both, performance and budgets. Nevertheless, the financial acting is neither totally consistent with the overall company strategy (as it doesnt take into account possible lower returns due to the innovation superiority) nor has it supported past development significantly as Apples mixed results demonstrate. 4.7.2 Apples competitors, their financial status quo, and the market Amid continuing cautious commentary from industry participants, the signs of growth in the US computer hardware industry are modest but accumulating. Consumer spending on PCs and electronics has been the primary bright spot to date, but a full hardware spending recovery is dependent upon growth in corporate spending and is not expected to be material in 2003. In the near term, highly competitive industry pricing conditions continue to challenge profitability levels for most original equipment manufacturers (OEM). However, over the longer term, the need for continued investment in wireless, e -commerce, and Web-based technologies remains clear. Dell Inc. With a rating of A-, an expanding product line, a low-cost manufacturing model, and an efficient asset management Dell should be enabled to preserve double -digit revenue growth and consistent profitability levels, despite highly competitive industry conditions. In addition, ratings are supported by ample liquidity (cash and investments total $11 billion) and a strong financial profile.
Hewlett-Packard Co. With a boost from its seasonally strong fourth fiscal quarter, HP posted the highest revenue growth since its merger with Compaq Computer and achieved profitability in
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Apple Computer Inc.

each of its major business segments. Due to highly competitive market conditions, HP's goal of attaining sustainable profitability in its PC segment will continue to be a challenge. However, excellent liquidity and significant free cash flow generation provide ratings stability despite continued earnings reliance on its printing and imaging segment. A credit rating of A- proves that too.
International Business Machines Corp. Despite a challenging global economy and highly competitive industry conditions, IBM's diverse product and customer base supported modest four percent revenue growth in the September quarter and consistent profitability. Strong cash flow generation is expected to support internal investments, an active acquisition profile, and share repurchases. Debt protection metrics are expected to remain within acceptable levels for the rating of A+. Quanta Computer Inc. Quanta's operating performance and financial profile has been consistently satisfactory. The company is expected to report record high revenues and profit in 2003. The rating (BBB-) could be raised over the next one to two years if the company is able to continue reporting good operating performance and a solid financial profile, while demonstrating sustained diversification of product lines.
Silicon Graphics Inc. A very low credit rating of CCC- could be further deteriorated if an exchange of convertible notes to common stock failures in the near future. Stratus Technologies Inc. Despite ongoing declines in proprietary product sales, privately owned Stratus has stabilised revenues and improved profitability through new product introduc tions and cost reduction actions. Stratus is expected to maintain EBITDA margins in the high tens as a percent of revenue, and modest free operating cash flow. Still, the potential for ratings improvement (B) is limited by Stratus' niche position in a highly competitive market.
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Sun Microsystems Inc. Sun's rating of BBB was placed with negative implications. This reflects the concerns about Sun's cost structure and ability to improve profitability, as well as uncertainty about the level and timing of a recovery in IT spending and increased market acceptance of lower-cost Windows and Linux systems. 4.7.3 Apples financial operations Apples finance and treasury division has to provide the company with a sound financial policy, managing general obligations (paying the bills by guaranteeing liquidity, risk management duties, handling Apples international capital transactions) as well as special programs. A few of them are to mention: The company places its short-term investments in highly liquid securities issued by high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The firms general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with maturities of three months or less are classified as cash equivalents. In 1999, a plan was authorised for the company to repurchase up to $500 million of its common stock. During the fourth quarter of 2001, Apple entered into a number of forward purchase agreements to acquire the shares. Apple uses this repurchased shares finance employee remuneration through stock option plans. The company has not entered into any transactions with unconsolidated entities whereby it has financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose Apple to continuing risks and contingent liabilities. Therefore, a vibrant risk management taking care of hedging foreign exchange exposure, adjusting to local conditions and making use of financial engineering 112 to secure capital flows is indispensable. Furthermore, Apple is actively involved in off-balance sheet transaction such as ease commitments l (mainly retail space and related facilities) which amount to approximately $600 million. Measurement is accomplished by using common ratio analysis, Weighted Average Costs of Capital approach113 to value Apples assets and derivative pricing BlackScholes model for options, futures, and swaps. Apples accounting relies on GAAP (Generally Accepted Accounting Principles). According to Apples auditor KPMG,
112 113
Creating and using new financial products, above all derivatives, to minimise risk exposure CAPM Capital Asset Pricing Model
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Apple changed accounting for asset retirement, hedging activities, and financial instruments in 2003. Finally, Apple has investments in EarthLink Inc. (EarthLink), Akamai Technologies, Inc. (Akamai), ARM Holdings plc (ARM), and certain investments in private companies. The role of the financial manager in the strategic management process is a crucial one in Apples case. Its his obligation to raise the capital tremendously needed to finance Apples huge R&D expenses for maintaining their innovative position. Although the company is applying accepted finance concepts and techniques, theres to argue that a competitive advantage isnt obvious regarding financial policy. Objectives in comparison to its competitors are set far too high up (see ROIC -ROI figures), above all when Apples financial principles often prove inconsistent with the companys entire strategy. Innovation is expensive and in Apples mind this argument counts more as the company had to relaunch itself only six years ago by taking on immense R&D.
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Apple Computer Inc. 4.8 Corporate resources: Research & Development

4.8.1 General information As the personal computer industry is characterised by rapid technological advances, Apples ability to compete successfully is heavily dependent upon its ability to ensure a continuing and timely flow of competitive products and technology to the market. As a consequence, the firm continues to develop new products and technologies and to enhance existing products in the areas of hardware and peripherals, system software, applications software, networking and communications software and solutions, and the internet. Moreover, Apples management believes that maintaining or increasing the pace of innovation and product development is the best way to respond to current economic and market conditions and will continue to position the enterprise for future growth as overall economic conditions improve.114 As innovation and new technology are key driving forces of mission and strategy115 and technology and especially technological progress/innovation is the main driver of Apples corporate performance, the companys research and development department constitutes a central element of Apples value chain in terms of creating value. In fact, the task of R&D is to enhance the development of new and existing products and therefore increase the speed of innovation which is consistent with the companys overall strategy and goal to remain the most innovative personal computer company. 4.8.2 Structure and performance By taking a closer look at Apples actual R&D budget, it becomes clear that investment in research and development is continuously rising and in 2003 with $471 million is up 50% from 1999. At the moment, Apples R&D budget is used mainly for hardware purposes (49%) whereas software and applications play a somewhat less important role. Moreover, R&D headcount is now close to 2,500.116
114 115 116
Apple Computer Inc. (2003) Morden T. (1993), p. 140 Apple Computer Inc. (2003a)
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$500 $430 $400 $314 ($=Mil) $300
Hardware 49%
$446
$471
$380
Applications 22%
$200
$100
Software 29%
$0 1999 2000 2001 2002 2003
R&D expense amounted to approximately 8% of total net sales during 2003, 2002 and 2001, up substantially from approximately 5% of total net sales in fiscal year 2000 and recent earlier periods. As a result, the company incurs higher research and development costs as a percentage of revenue than many of its competitors who sell personal computers based on other operating systems. Many of these competitors seek to compete aggressively on price and maintain very low cost structures. So, if the firm is unable to continue to develop and sell innovative new products (in order to differentiate) with attractive gross margins, its results of operations may be materially adversely affected by its operating cost structure. 117 Moreover, Apple also engaged in Purchased In-Process Research and Development (IPR&D) when it acquired Emagic (2002) and PowerSchool (2001). Through these acquisitions, Apple got new R&D capabilities and capacities in the fields of professional software solutions for computer based music production and web-based student information systems but also had to value and expense the necessary R&D investments for the development of these products. Although the company has continually increased its R&D budget during the last years, compared to some of its competitors Apple probably still has a relatively skinny research and development budget (in absolute terms) which has to work much harder than those of competitors who benefit from the huge spending of Microsoft
117
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and Intel118. In fact, Apple has just 300,000 independent and in-house developers writing programs and making products for its operating systems, including the latest, Mac OS X. On the contrary, more than 7 million developers build applications for the Windows platform worldwide.119 4.8.3 Strategic management In terms of strategic management issues, it is the ultimate task of Apples R&D resources to develop a distinctive competency in innovation and technology that results in products that fit customers needs. In addition, this should lead to short product-to-market cycles and innovative products or processes. 120 In fact, Apple promotes its R&D efforts by providing enough freedom and autonomy which is supported by the companys corporate culture that emphasises the importance of personal creativity, innovation, and thoughtful but entrepreneurial actions. Moreover, a flat and decentralised hierarchical structure is another positive aspect through which Apple promotes efficient and successful R&D activities. 4.8.4 Competitive advantage In fact, the companys R&D department is definitely one of the most important value creation functions within Apple. Indeed, it creates value by enhancing the speed, quantity, and quality of innovation and therefore enables the firm to achieve superior innovation. This aspect can be shown with the example of the rate of innovations in the development of Apples operating system Mac OS X compared to the rate of innovation of Microsoft Windows: 121
118 119 120
The Economist (2000) Fastcompany (2004) Hill C. W. and Jones G. R. (2004), p. 424 121 Apple Computer Inc. (2003a)
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Whereas Microsoft uses a policy of longer time frames between releases of new operating systems, Apple constantly improves, innovates, and develops its operating system and brings new and improved versions directly to the market. So, its customers can more easily and continuously reap the benefits of Apples ongoing innovation and product development. In fact, ongoing innovation takes place in the design of the companys products and production processes, thereby also leading to improvements in (product) quality and (operating) efficiency (although theres still potential in the field of achieving higher efficiency) . As a result, this can create value for the customer by increasing the functionality of the products. Thus, by making new or enhanced products more desirable for Apples customers through product innovation (as this also increases the quality of its products through improving reliability, performance, and other attributes such as design or ergonomics), innovation will also increase the firms pricing options. So, as innovation is probably the most important building block of competitive advantage in the long run, Apples R&D efforts create huge value for the company and its customers. In short, Apples R&D capabilities and activities help the company to achieve a competitive advantage through superior innovation, thereby also leading to superior quality.
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Apple Computer Inc. 4.9 Corporate resources: Operations & Logistics

4.9.1 General information Operations management and logistics Operations management can be regarded as the process in which material, human or financial inputs are transformed into outputs of goods, services or utilities. 122 The actual creation of a good or service is in the centre of this process and is referred to as production, manufacturing, or operations. In addition, logistics or materials management controls the transmission of physical materials through the value chain (input - throughput - output). Distribution deals with the physical delivery of the product to the customer whereas customer service provides after-sales service and support. Overview According to Porters description of the process of value-generation, the operations & logistics resource focuses at the following value chain elements:123 inbound logistics operations outbound logistics service supply of raw materials, components, services, etc. as input to the value generation process value generation by operational processes (manufacturing) value generation by transportation, distribution, and supply logistics value generation by specification and offer of customer service, by customer-orientation, and by customer care
Inbound logistics
Operations
Outbound logistics
Marketing & Sales
Service
Inbound logistics Although most components essential to Apples business are generally available from multiple sources, certain key components are currently obtained from single or limited sources. For instance, IBM is the firms sole supplier of the G5 processor used
122 123
Morden T. (1993), p. 174 Morden T. (1993), p. 193
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in current PowerMac products and Motorola is the sole supplier of the G4 processors. Therefore a possible inability in the future to obtain microprocessors in sufficient quantities with competitive price/performance features could have an adverse impact on Apples results in terms of operations and financial condition. Some other key components, while currently available to the firm from multiple sources, are generally subject to industry wide availability constraints and pricing pressures. In addition, the company uses some components that are not common to the rest of the personal computer industry and new products introduced by Apple often initially use custom components obtained from only one source until the company has evaluated whether there is a need for additional suppliers. If the supply of a key or single-sourced component to the company is delayed or curtailed or if a key manufacturing vendor delays shipments of completed products to the company, Apples ability to ship related products in desired quantities and in a timely manner could be adversely affected. The firms business and financial performance could also be adversely affected depending on the time required to obtain sufficient quantities from the original source or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components may be affected if producers were to decide to concentrate on the production of common components instead of components customized to meet the Apples requirements. As a consequence, this highlights a possible threat of Apples differentiation strategy as the company depends on the availability of certain custom components from special suppliers. Apple attempts to mitigate these potential risks by working closely with its key suppliers on product introduction pla ns, strategic inventories, coordinated product introductions, and internal and external manufacturing schedules and levels. Consistent with industry practice, the company acquires components through a combination of formal purchase orders, supplier contracts, and open orders based on projected demand information. Such purchase commitments typically cover the company's requirements for periods ranging from 30 to 130 days. Apple must order components for its products and build inventory in advance of product shipments. As Apples markets are volatile and subject to rapid changes, there is a risk the company will forecast incorrectly and produce or order from third parties excess or insufficient inventories of particular products. Consequently, it has to be stated that although Apple tries to work closely with its key suppliers, the companys policy of
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forecasting future demand creates a possible threat of inflexibility in coping with sudden changes in customer demand and therefore could result in increased inventory costs or lost profit opportunities. Operations Final assembly of Apples products is conducted in the companys manufacturing facilities in Sacramento and Cork as well as by external vendors in Fremont, Fullerton, Taiwan, Korea, the Netherlands, China, and the Czech Republic. Currently, manufacture of many of the components used in the Apples products and final assembly of substantially all of the portable products are performed by third-party vendors in Japan, Taiwan, and China. In short, Apple only assembles some of its products in the United States and Europe, whereas most products are assembled and manufactured by third-party vendors which are mainly situated in lower-cost countries. Outbound logistics Concerning Apples distribution model, it is quite interesting to take a closer look at the changes that the company made beginning in the year 2000. In fact, Apple relied on a network of distributors and resellers in the past which led to higher prices for Apple products and greater distance to customers. In fact, this initial situation as well as the effects of the introduction of special retail stores, an expansion of Apples presence in national chains, and other changes to the distribution system are illustrated in the following diagrams 124:
124
Sudbury A. (2001)
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pre-shipment
post-shipment consumers
Apple manufacturing component suppliers contract manufacturers
resellers
distributors
internal inventory
channel inventory
pre-shipment Apple manufacturing component suppliers Online-Store Retail Stores Direct BTO
post-shipment
consumers
resellers contract manufacturers distributors internal inventory channel inventory
In fact, these efforts seemed to be paying off as Apple could reduce its inventory to less than two days worth of sales by early 2002.125 Generally, Apple distributes its products through wholesalers, resellers, national and regional retailers and cataloguers. The company also sells many of its products and resells certain third-party products in most of its major markets directly to education customers, consumers, businesses, and certain resellers through its retail stores or through one of its online stores around the world (which had total direct and indirect online sales of approximately $2.9 billion in 2003). Whereas Apples online store (as a direct business to consumer store which can also serve as a communication medium between the company and its customers 126) can be regarded as a successful distribution channel as it accounts for a huge amount of Apples total sales (43% in 2001127), Apples new retail stores recently earned much criticism. In spite of the huge initial interest in the stores, now, with slower traffic through the stores and flagging sales, Apple's outlets may be losing their impact and could increase the companys fixed-cost base 128.
125 126 127
Yoffie D. B. and Wang Y. (2003), p. 14 Gupta P. and Ryan J. (2000) Yoffie D. B. and Wang Y. (2003), p. 13 128 BusinessWeek (2002a)
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Apple Computer Inc.

In terms of inventory holdings, Apple records a write-down for inventories of components and products that have become obsolete or are in excess of anticipated demand or net realisable value and accrues necessary reserves for cancellation fees of orders for inventories that have been cancelled. Although the company believes its inventory and related provisions are adequate, given the rapid and unpredictable pace of product obsolescence in the computer industry, no assurance can be given that it will not incur additional inventory and related charges. In addition, such charges have had, and may have, a material effect on the company's financial position and results of operations. Service Concerning product support and customer service, Apples special AppleCare programme offers a range of support options for Apple customers like manuals, online tutorials, and a special protection plan including phone support, hardware repairs, web-based support resources, and user diagnostic tools. Moreover, Apple engages in the fields of training programmes and professional technical (consulting/installation/integration) services. Nevertheless, although Apple definitely offers a comprehensive support package, there has also been criticism about the quality of the customer service. 4.9.2 Operations capabilities Manufacturing facilities and capabilities In fact, the company largely depends on the manufacturing capabilities of its external vendors in the United States, Taiwan, Korea, the Netherlands, China, and the Czech Republic. As Apple uses its manufacturing facilities only for the final assembly of several products and due to the fact that the company orders some of its components from a few key suppliers by the use of future demand predictions, there is a potential threat that its operational capabilities cant cope with excess demand. For instance, right after the introduction of the latest iMac, its sales soared so high that Apple couldn't keep up thanks in part to component shortages and consequently demand quickly cooled off. 129
129
BusinessWeek (2002a)
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Apple Computer Inc.

Outsourcing As already stated before, many of Apples products are manufactured in whole or in part by third-party manufacturers. In addition, the company has outsourced much of its transportation and logistics management. While outsourcing arrangements may lower the fixed cost of operations, they also reduce the company's direct control over production and distribution and therefore such diminished control might have negative impacts on the quality or quantity of the products manufactured or the flexibility to respond to changing market conditions. Moreover, although arrangements with manufacturers may contain provisions for warranty expense reimbursement, Apple may remain at least initially responsible to the ultimate consumer for warranty service in the event of product defects. Therefore, any unanticipated product defect or warranty liability could adversely affect the Company's future operating results and financial condition. In addition, if for any reason manufacturing or logistics in any of the manufacturers locations is disrupted by regional economic, business, environmenta l, medical, political, or military conditions or events, the companys results of operations and financial condition could also be adversely affected. 4.9.3 Structure and performance Budget and performance Apples consolidated statement of operations offers no detailed insight into the separate positions that are related to operations and logistics. Nevertheless, it can be stated that Apples cost of sales continuously increased in the last three years (from $4,128 million in 2001 to $4,499 million in 2003) which lead together with a larger increase in net sales (from $5,363 million in 2001 to $6,207 million in 2003) to an improvement in Apples gross margin of almost $500 million. This indicates that, although there was an increase in costs of sales (which are the costs of manufacturing the products), this increase was only of minor size compared to the increase in net sales and therefore led to an overall increase in profitability. Consequently, Apples policy in terms of operations and logistics contributes to the good financial performance of the company.
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Apple Computer Inc.

Role of IT Concerning the role of IT as a driving factor of operational performance, information technology is fundamental to the establishment of effective operations management systems as the application of IT to systems of operations management and to management information systems is a basic strategic requirement. IT can increase the availability and quality of information and therefore improve the efficiency of operations management, thereby leading to cost savings.130 4.9.4 Strategic issues In fact, there are several approaches to improve the quality and efficiency of a companys operations such as just-in-time (JIT) inventory systems, total quality management (TQM), or flexible manufacturing. Although Apple could successfully reduce its inventories in the past, it could probably even decrease its inventory stock by moving away from buying inputs based on forecasts of future demand and implementing JIT inventory systems instead. Nevertheless, this could also increase the apparent threat that the company is facing in times of huge customer demand and lead to further shortages of key component. As a result, Apple could only use JIT inventory systems if it had the opportunity to select from a wider range of suppliers and if it used long-term cooperative relationships to deepen the links with its key suppliers. In terms of the approaches that are aimed at manufacturing processes, Apple doesnt really have many possibilities because the situation is quite different: on the one hand it is unclear whether Apple uses such approaches in its manufacturing facilities and on the other hand a huge amount of Apples manufacturing processes are outsourced to third-party companies. 4.9.5 Competitive advantage Concerning the four building blocks of competitive advantage, manufacturing can improve efficiency, quality, and customer responsiveness. As a result, efficiency in production helps a company to lower its cost structure. Similarly, the production function can also perform its tasks in a way that is consistent with ensuring high product quality, which leads to differentiation and lower costs.
130
Morden T. (1993), p. 184 and 186
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Apple Computer Inc.

Moreover, superior efficiency can also be achieved in the field of logistics (for example through lower inventories), resulting in significantly lower cost, thereby creating more value. Finally, customer service can create a perception of superior value in the minds of customers by solving customer problems and supporting customers after they have purchased the product, thereby leading to superior customer responsiveness. By applying these possible sources of competitive advantage in the field of operations and logistics to Apple, it becomes clear that the company apparently doesnt have a competitive advantage in terms of superior efficiency through better manufacturing processes. Although the company has improved a lot in terms of inventory and offers its customers the necessary support and service, these areas are also unlikely to contribute to a competitive advantage as they apparently dont lead to superior value creation.
4.10 Corporate resources: Human Resource Management

4.10.1 Human resource objectives and strategies The strategy of human resource management should always recognise the critical importance of the organisational structure and the people building it. The strategy represents a practical response to creativity, competence, and the constraints that employees as individuals and teams bring with them into the work situation. The workforce is the source of all value enhancing activities in regards to quality, efficiency, responsiveness, and innovation. Apples Human resource department has formulated its objectives in the following way: Provide the company with the necessary personnel to assure superior performance. Employees should at all times strive for the highest quality in all they do. Ensure proactive internal career progression.131 Apple wants to assure that by employing the best people, it will constantly be inventing and manufacturing the best products. A recent survey carried out among US technology professionals named their primary reason to work for Apple as being the admiration of its products/services (45% compared to industry average of 13%).
131
Apple Computer Inc (2003)
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Apple Computer Inc.

The result of this survey can be interpreted as that the human resource department aligns its hiring policy with the overall corporate strategy and objectives, stressing the need of retaining the position as industry leader concerning superior design and innovation. 132 Why do you want to work for Apple?
Stability Interesting/challenging work Admire products/services Their cutting-edge technology Great benefits and perks Location near my home Great work environment Good chance for promotion Offer great training Strong employee morale Enjoyed previous employment there Low employee turnover Admire their leaders/employees Friends work there I'm not sure 6% 15% 45% 15% 2% 1% 6% 2% 2% 3% 2% 1% 3% 0% 1% 16% 15% 13% 10% 8% 6% 6% 5% 4% 4% 3% 3% 2% 2% 2%
Stability Interesting/challenging work Admire products/services Their cutting-edge technology Great work environment Other 45% 15% 6%
Apple
All
13% 6% 15%
Additionally as one can see in the next diagram, the growing importance of Apples direct distribution channels (e.g. through online store) also affects the human resource management, as it lays its focus stronger on hiring people for web and interactive content (27%) compared to industry average of (10%). In this case Apple adapted its HRM objectives in concordance with its business strategy because of a change in external environmental forces such as consumer preferences (possibility of customising the own PC). 133
132 133
Techies.com (2002) Techies.com (2002)
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Apple Computer Inc.
Employer Preference by job category

Data entry Data management Education Engineer HR Management Marketing/Product management Networking/Telecommunications Sales Software development Student Systems administration Systems support/help desk Web and interactive content
Apple
2% 1% 6% 1% 1% 12% 2% 4% 1% 26% 3% 6% 9% 27%
All
1% 4% 2% 2% 0% 12% 1% 12% 2% 28% 4% 9% 12% 10%
Web and interactive content Software development
Management
Systems support/help desk Systems administration
Other
0% Apple All
5%
10% 15% 20% 25% 30%
With Apples statement that The companys success depends largely on its ability to attract and retain key personnel.
134
Apple catapults the human resource
management function in terms of its importance from a support activity to the status of a primary activity which is indispensable for Apples success. Much of the future success of the company is linked to the continued service and availability of skilled personnel. The ability to continue to employ experienced personnel, which especially in the information technology industry is in high demand and competition for its talents is intense, particularly in the Silicon Valley, where the majority of the high tech companys are located, is also key objective of the HRM department. 4.10.2 Human resource policies
The policies should reflect the mission, values, and culture of a company. They have a direct impact on the external perceptions about the company by the apparent treatment of and attitude towards its staff and therefore shape the corporate image
134
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Apple Computer Inc.

and identity.
135
A positive image then can reinforce a competitive advantage
increasing customer value, as people associate positive values with the company. 136 Apple meets this need of creating a favourable image of a company by implementing equality of employment and promotion opportunities through partnership arrangements around the world. 4.10.3 Human resource performance
In pursuing the above mentioned objectives of getting the best employees to work for Apple, the company has installed several measures to increase productivity as well as effectiveness. A cornerstone in the employment relationship are the regional partnership programs with different organisations like Skillnet in Ireland (a body comprising both employer and employee organisations) aiming at facilitating the mutual involvement of management and employees/unions in organisational development. 137 4.10.4 Partnership program
The first stage of this program involves the forming of a forum which has access to all financial records of the organisation, so that on the basis of this information the forum can formulate and initiate plans to improve and adapt to changes in the industry. Employees have actively a say in design matters and are taking part in the resolution of all challenges and opportunities facing Apple. The next stage is the installation of so called change champions, who had the responsibility to communicate and promote cooperation between both parties (employees and manager) at Apple. After that there follows the application of an attitude analysis. This analysis should enable employees to express their opinions and concerns about all aspects in the company with the aim of encouraging them to find ways to maximise their contribution for the benefit of the company. The information collected through this interactive approach is then used to identify aspirations for various kinds of training. For example in Cork, Ireland this analysis found that employees have the desire to have business awareness training and additionally highlighted the lack of effective
135 136 137
Bernardin H. J. and Russell J. E. A. (1998), p. 26f Bernardin H. J. and Russell J. E. A. (1998), p. 31f IBEC and ICTU (2000)
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Apple Computer Inc.

communication within the plant underdeveloped. The result of this process is a lifelong learning, providing employees at Apple with continued improvements of their professional as well as personal soft skills and an added value for Apple through greater employee productivity and a reduction in all aspects of confrontational industrial relations issues. These partnerships are regarded as part of the internal fabric of Apple, also successfully dealing with industry relations issues, which are jointly solved at the shop floor level. The function of HRM is to create an environment which fosters such partnership agreements through: ! ! ! 4.10.5 The establishment of trust and fairness Financially rewarding employees for their efforts in the partnership area Ensuring that employees are at all times equipped with business awareness Training and Development in other words soft skills were fairly
Apple always attempted to be exemplars of best practice in the area of Human Resource Management and especially in the area of training and development this is most apparent as the model of partnership agreement impressively shows . Apple realises that their staff require skills and knowledge beyond those needed to do their job in order to function effectively. In order to meet this self imposed requirement the training is divided across the organisational structure into four broad categories: Offer or efficiency programme This training aims directly at improving the efficiency of staff regardless of their department base. Example of this type of training is the training in various Microsoft packages. Business driven needs training The module teaches skills and knowledge that Apple believes require in order to progress business. An example here would be training in the e -commerce area.
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Apple Computer Inc.

Personal development category The above mentioned soft skills are part of this category such as assertiveness training. General Awareness education This area is given top priority and therefore separated from the personal development module. As the name already suggests, the employees should increase their business awareness What Apple distinguishes from other companies in this area is the additional sophisticated evaluation process of the training , which is actually missing in a lot of companies. The evaluation compares the objectives of the training with the learning process that actually occurred.138 The bottom line of the training provision is a work force that not only feels that it can effectively adapt to and adapt within an environment that is in a constant change, but also increase their internal mobility, giving Apple the possibility of redeploying employees. All in all, Apple believes that through such practices employees are able to see the big picture and make a greater contribution, having the ability to fully grasp the business dynamics of the current business situation. 4.10.6 Staff appraisals
The objective of staff appraisals is to provide feedback to both appraiser and appraised and to serve as formal opportunity for personal counselling and motivation. It can also include salary reviews and allocation of merit payments. At this, staff members are analysed in terms of objectives, tasks, and results achieved. For the HRM department the appraisal can be seen as an opportunity to identify individual and collective performance strengths and weaknesses, and if necessary identifying needs to develop new skills and capabilities. The illustration below explains how the staff appraisal system works at Apple. The system is a key input to HRM and planning.139
138 139
IBEC and ICTU (2000) Morden T. (1993), p. 268
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Apple Computer Inc.

Required results Performance standards
Appraisal criteria
Staff appraisal process

Comparison Feedback
Job description
Objectives, tasks, workflows, results actually achieved
Counselling and motivation Stretching Salary progression Training and development
THE INDIVIDUAL
Salary
Career management Human resource planning
Personnel specification
The Organisation
Market position Personnel policies
The benefit of having a functioning staff appraisal system in place is that it can reliably indicate shortages of available skill and experience.140 To avoid such a skills gap and successfully bridge this gap HRM can undertake additional recruitment. Apple for example lacking operational efficiency was in a terrible need to hire an expert on this particular topic, through a functioning HRM department Apple therefore was able to win Timothy D. Cook, a highly skilled operational Manager (and Vice president, Materials) from Compaq, one of its main competitors, 141 because of attractive work conditions, which are embedded in the staff appraisal system. A combination of life long learning, management development, and reward policy convinced him to become a part of Apples culture.
140 141
Morden T. (1993), p. 269 http://www.apple.com/pr/bios/cook.html, 02.02.04
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Apple Computer Inc.

Other advantages of the staff appraisal system include but are not limited to the career management and recruitment and selection policy, which are part of the HRM planning. Career Management at Apple offers promotion from within in preference to outside recruitment, which on one side is highly acknowledged by employees and on the other side this policy acts as signal of the companys evident care and concern for their staff and improves the corporate image, which eventually leads to value creation. 142 The recruitment policy is a primary example of how HRM activities adapt to changes in the external environment. As Apple considered that it demands a higher number of skilled staff in the area of web development and interactive content, they shifted their application process to a large extent on the corporate website. Statistic shows that the Web is the preferred medium for application among tech professionals.143
Which jobsearch toole would you use to secure an interview with Apple?
0% Trade/career mags Newspaper ads Headhunters Job fairs Network contacts Contact HR Online job board Corporate website 5% 10% 15% 20% 25%
All Apple
What is also recognisable is that Apple gives up or decreases traditional ways of job advertising such as news paper ads in order to cut costs. Apple utilises the resources saved on this side to create a balance between online and offline application formats.
142 143
Hill C. W. and Jones G. R. (2004), p. 83ff Techies.com (2002)
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Apple Computer Inc.

The corporate strategy again defines already the way Apple sets up its recruiting events. For example Apple organises yearly events such as the Apple design awards where the winner is automatically entitled to an internship/work position with the company. This way Apple assures a continued flow of creative minds in their company, who can generate a competitive advantage if the HRM activities support them through their work life at Apple. 4.10.7 Trends
Apple heavily relies and is dependent upon the ability of hiring people committed to excellence and the challenging aspect for the future is to keep well trained and skilled personnel in the company, which becomes more and more difficult, as competition increases in the industry. For example Sonys notebooks, which have some similarities in regards to design, were initially developed by people who Sony had headhunted from Apple R&D department. The initiatives Apple created for its employees must consequently be improved and it must remain a long term goal to increase every aspect of the work experience at Apple. This indeed, requires substantial investments and resources in order to sustain such benefits as the partnership program. 144 The existence of a positive work environment already proved to be beneficial to Apple as they were able to stay the number one in creating visionary products and this is only possible with the right people. For the future it will be important to maintain and even increase the organisational competency through HRM beyond life long learning and partnership programs in other words, the staff appraisal system has to be developed on a continuing basis, only then Apple will be able to outperform its competitors with its HRM activities. 4.10.8 Competitive advantage
Analysis already showed the harmonic connection between corporate strategy and HRM strategy, which in first place is the basis for a competitive advantage. HRM is able to create incentives for key employees to maintain a fruitful and competitive relationship and boost creativity, which is the key success factor for Apple, because everything is built on this core competence. On the one hand they offer comparable high remuneration as the following diagram shows only 3% of possible employees have the opinion of not being paid enough, compared to 7% industry average and
144
IBEC and ICTU (2000)
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Apple Computer Inc.

on the other hand they have an effective job recruitment system combining recruitment events and online application services, which by far exceed content wise the services offered by other players in the market. 145 What would keep you from working for Apple?
Too many candidates No contacts there I'm not qualified Too far from home Not enough money Not a U.S. citizen Don't know the business Corporate culture clash Non-compete agreement Would have to work long hours 30% 17% 17% 23% 3% 3% 5% 2% 0% 1% 39% 20% 13% 9% 7% 4% 4% 3% 1% 1%
Other 0% 10% 20% 30% I'm not qualified Too far from home Not enough money Apple All No contacts there
Apple
All
Too many candidates
40%
What is also worth mentioning is that Steve Jobs as CEO has created the need of HRM changes. Research indicates that technology oriented managers tend to place less value on and pay little attention to HRM activities, but thats not the case with Apple. He was able to create a vision of the importance of HRM practices, by emphasising that to be the best is just good enough and this can only be achieved through internal activities such as life long learning and development. Apple wants to stay the employer of choice. Also through his active involvement in staffing decisions (he was the main initiator of Timothy D. Cooks employment) he is able to create support for the HRM department.146 The HRM department on its own also contributes to an obvious competitive advantage through designing and delivering effective programs such as the local partnership agreements and adapting itself to the changing needs of a fast paced business. Employee productivity figures f r Apple o support this view as the company is able to outperform its rivals in the industry.
145 146
Techies.com (2002) Apple Computer Inc. (2003)
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Apple Computer Inc.

Revenue per Employee (TTM) is $617,760 for Apple, 551,020 for the industry and 396,094 for the sector. 147 In conclusion you can say that both the HRM department itself and the employees as a great source of human capital contribute to the upswing Apple is currently experiencing and therefore provide the company with a competitive advantage.
4.11 Corporate resources: Information Systems

Information systems in an IT company such as Apple is definitely one of the most interesting and important things to look at. At Apple, the information system is more than just a business-assisting facility. What software, what applications do the experts use to get their things done, to automate internal processes (supply chain) and to provide customers with service and support by implicitly objecting to reduce costs? Therefore an analysis of Apple Computers IS has to answer three main questions: 4.11.1 What type of software and hardware is used at Apple?
Due to the fact that Apple fabricates PC, Servers and the necessary, the company of course relies on their products. Nevertheless, third-party applications gets included where theres no appropriate Apple software available. At the moment this means that in general the following internal computing components exist at Apple: Hardware Name
Power Mac G5 Power Mac G4 iMac (new and old) eMac iSight Xserve G5 Xserve RAID iBook G4
by
Apple Apple Apple Apple Apple Apple Apple Apple
Description
Desktop computer, equipped with a 2GHz processor, fast 64 bit technology Desktop computer, 1.25 GHz processor Desktop computer, 1,25 GHz G4 processor Desktop computer Digital audio conferencing device Server with single or dual 2GHz G5 processors, huge storage, high bandwidth Server with up to 3.5TB portable
148
storage capacity
147 148
http://yahoo.investor.reuters.com/MG.aspx?ticker=AAPL&target=%2fstocks%2ffinancialinfo%2fratios%2fefficiency, 14.02.04 Terabyte: 1 TB = 1,000 GB
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Apple Computer Inc.

Power Book G4 23, 20, 17 display AirPort Extreme Bluetooth FireWire USB Apple Apple Apple Industry Stand. Industry Stand. Industry Stand. Portable with 1.33 GHz processor Separate displays 54 Mbps WLAN component To connect periphery with main system wireless To connect periphery with main system at higher bandwidth To connect periphery with main system
Software Name
Power Mac G5 Power Mac G4 iMac (new and old) eMac iSight Xserve G5 Xserve RAID iBook G4 Power Book G4 23, 20, 17 display AirPort Extreme Bluetooth FireWire USB
by
Apple Apple Apple Apple Apple Apple Apple Apple Apple Apple Apple Industry Stand. Industry Stand. Industry Stand.
Description
Desktop computer, equipped with a 2GHz processor, fast 64 bit technology Desktop computer, 1.25 GHz processor Desktop computer, 1,25 GHz G4 processor Desktop computer Digital audio conferencing device Server with single or dual 2GHz G5 processors, huge storage, high bandwidth Server with up to 3.5TB storage capacity portable Portable with 1.33 GHz processor Separate displays 54 Mbps WLAN component To connect periphery with main system wireless To connect periphery with main system at higher bandwidth To connect periphery with main system
Apple has begun using SAP's R/3 system as ERP system, which was aimed to speed the filling of custom orders 149. Due to high costs and the long establishment period, SAP wasnt a success although employing an accounting package, manufacturing, order management, and order fulfillment. Regarding supply-chain-planning Technologies Inc.'s Rhythm
150
software
packages,
Apple
implemented
i2
. The PC maker is using several Rhythm advanced
planning modules and plans to install more. Therefore, SAP is the basis, but i2 is a key piece of what Apple does. Several other computer manufacturers apply i2,
149 150
Custom-order-to-delivery time could be reduced from ten to five days http://www.industryweek.com/CurrentArticles/asp/articles.asp?ArticleID=497, 14.02.04
99
Apple Computer Inc.

including Compaq, Dell, Gateway, Acer, Hewlett-Packard, IBM, and Silicon Graphics. Now, instead of constructing lots of computers and building up high inventory in advance to meet estimated demand, Apple projects sales each week and adjusts production schedules daily with Rhythm. This software also helps Apple to integrate suppliers by asking them to maintain a certain stake of "industry standard" parts to deliver assembled PCs quickly to the clients. 4.11.2 To what extent is the model of a virtual company achieved by Apples Intranet and Extranet solutions? Intranet as well as Extranet151 play a crucial role for Apple and above all for its business environment: Apple Intranet and Network Apples main objective always was to be the innovation leader. That isnt only valid for its products, but also for its internal communication to demonstrate their superiority. Therefore, Apple tries to make its business process as virtual as possible. Virtual communities will be the lifelines of future success. As Apple knows, if a company doesn't actively pursue involvement in a virtual community, it will not be able to create or even maintain its competitive advantage. The Apple-Intranet provides the cornerstone to do so. First, it increases efficiency and reduces costs of the operations as far less employees are necessary. Data storage, interconnected work on projects, exchange of information, and reciprocal communication are the main obligations, but the potential is much higher. For instance, the Intranet provides Apple employees with all necessary information right at the desk, further, non-compulsory education opportunities, an internal and external contact database, an overwhelming knowledge base, holiday planning-, lunch ordering- and work-time overview tools as well as an internal recruitment process. A company electronic notice Board to highlight key Apple news increases the corporate identity. To put it into a nutshell, it is beneficial for company and people. The Intranet simplified and improved training as well as skills, all in all at lower costs for Apple. Raising the velocity and efficiency of the working progress by automating it represents a big advantage of a functioning network policy and the Intranet as less failures occur and less money and time is wasted. For example, when Apple plans a
151
Networks connecting Apple with outside developers or suppliers; different to Internet
100
Apple Computer Inc.

PC, how can communication between two involved parties be better arranged than by transferring building-plans and component descriptions via a network. Nevertheless, a too uncontrolled level of virtuality and interconnectiveness can result in severe problems and huge bureaucratic impediments as anonymity is increased, e.g. sending tons of unnecessary emails to colleagues (and thereby making costs) becomes more likely. By intensively re-enforcing this development and by permanently eliminating or minimising disadvantages within the company, Apple already makes a big step towards competitive advantage. Apple Extranet For suppliers, special key account clients or developers of Mac-software Apple has introduced a term called the Extranet. This means that these groups can work, communicate , and exchange information/data with Apple on a customised basis. Individualised content of special websites that neither permits these mentioned stakeholders access to the Intranet nor are the same as basic Internet websites, the Extranet lies in between the two well-known components. A major fact that Apple wanted to get use of is the chance to treat special groups on a personalised basis by preventing cost accruals. Notwithstanding , this idea has been pursued by Apple and results in higher sales, increased productivity, and much more accurate (concerning quality and time) outcomes in form of products. 4.11.3 How do Apples internet solutions assist in generating a competitive advantage? Apples approach to the Internet is to work as and to be an active member of the Internet community, supporting the existing open standards and working with Internet standards organisations. Furthermore, Apple starts to follow a new clear concept called Utility Computing 152, implied from performance. This model refers to the fact that a ubiquitous IT infrastructure will deliver all our computing needs. We would own far less computing assets than we do now but are instead willing to pay for access to services used which will be offered by "utility computing." Computing becomes a utility similar to electricity or fuel. In this context we can see Apples new online product strategy comprising iTunes which will be mentioned below. The
152
http://www.utilitycomputing.com, 12.02.04
101
Apple Computer Inc.

ramifications for the IT sector are enormous. The ability to flexibly up- or downscale to meet demand will have a revolutionary affect on companies and on their strategy formulation, above all in the way they provide online contents. The concept will also be applied to individual users of computing where they will be offered packages like satellite television services today. At present, the infrastructure required to deliver that reality is beginning to be put into place by leading Apple and IBM as the high number of contract manufacturing and outsourcing not only in the IT world portrays. Internet services Apple has been an active member of the Internet community for years, with an FTP site that provided Apple software updates and versions of the Macintosh system software (up to version 7.0.1). More recently, Apple has added numerous other FTP sites that carry a full complement of Apples freely distributable software and updates. Of these, http://www.support.apple.com and http://www.info.apple.com have become an important way of providing updates to the global Macintosh community, serving hundreds of thousands of Macintosh systems. Apple has a number of web-servers, all collected under the main server at http://www.apple.com. These servers help to distribute information about Apple, provide searchable access to the Apple Technical Information Library, and offer detailed product information for current and future customers. Apple continues to create new Internet resources, such as mailing lists that distribute Apple press releases to interested parties, discussions about Internet client and server programs for the Macintosh, and support for Apple products such as the Macintosh Application Environment. In the future, Apple plans to create even more avenues of communication between the company and customers to provide better on-line support and to take advantage of the direct customer feedback that results from such open lines of communication. In detail, theres to say that Apple provides a wide range of internet based services for its customers and the public (Service & Support, Corporate/Investor information,
102
Apple Computer Inc.

Products, Learning/Training centres), has entirely increased its direct PC selling activities via the web, especially via Apple Store (which make them a serious rival of record-breaking Dell in this area), offers its online contents (i.e. iTunes) there and uses the corporate internet platform for marketing and human resource management efforts. Additionally, Apple attracts independent Macintosh developers outside the company to bring the Mac technology forward, both giving the possibility to make suggestions or write programs. These developers, hailing from such educational institutions as Dartmouth College or Cornell University place simple graphical interfaces on top of the standard protocols. Much of Apples strength in the internet today results from these third-party developers who have combined forces to create one of the most extensive internet toolsets available today. By seeding higher education with inexpensive licenses for MacTCP, and continuing to provide development assistance, Apple has cultivated these developers even though their programs are often available only as freeware or shareware. Homepage analysis At http://www.apple.com we can find Apples homepage containing these inputs linking the visitor to the companys other internet portals (http://www.applestore.com; country websites). As expected, Apple presents itself online with a clear structure, easy handling, thorough information and strong colours which all goes along their self-required innovation leadership. Pillars of the website are the following: ! ! ! ! ! ! ! ! ! ! ! ! General Apple information: Investor, Careers, PR, Contacts, FAQs Group of links News & Events Products: Hard- and software, periphery Apple Store: Direct selling platform Developers site Switch: Incentives to and problem solving for switching from a PC to a Mac Online contents: Music portal iTunes, combined with iPod Digital Production Quicktime product series: Multimedia applications Services & Support Apple learning & training interchange: Online learning platform
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Apples e-commerce in B2B and B2C relationships The onset of the e-commerce revolution can be dated back to the late 1970's, but the real growth in this market can be mapped directly to the last five years due to the increase in internet usage by 3,000% and the doubling of PC ownership. In order to maintain or achieve a competitive edge within the IT market a company like Apple must actively pursue e-commerce, especially via the Internet. Apple legitimately argues that simply holding an internet website is far too less. As Apple has shown its commitment to the implications of virtual institutions , the company stresses a shopping site with its e-commerce strategy via Apple Store (fourth model of ecommerce strategies; besides there are contextual selling, specialised malls, portals, and virtual communities) 153. This site dedicates itself to one brand (Apple). It focuses on serving as a communication medium between the customer and the company. It allows the company to control the shopping experience and build a brand. But the site can be extremely expensive to set up, maintain, and manage. The company also must make efforts to drive traffic to the site. Overall we can observe that Apple has a competitive advantage compared to other industry participants. This competitive advantage comes from the companys innovation leadership (new concepts and trends in both, products and processes) which can help Apple to stay ahead of competitors and therefore maintain a higher profitability than the market in the future. IS strengthens Apples strategies and is a decisive part by not only staying a supporting activity, but also by actively exploring new business areas. This is due to IS managers that implement the necessary technology well, diminish restrictions in the data/information flow (also to outside developers) and intensively use of the New Media such as the web to make profit. Nevertheless, Apple constantly increases its exposure to the entertainment sector (eg. iTunes, iPod), but doesnt seem to be adequately prepared in bundling all these efforts to create an overall platform for that.
153
Gupta P. and Ryan J. (2000)
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Apple Computer Inc. 4.12 Summary of internal factors

4.12.1 Core competencies and distinctive competencies Build
Resources
Shape Distinctive Competencies
Strategies
Competitive Advantage
Superior Profitability
Capabilites
Build
A companys core competencies describe something that a company does best internally. In the case of Apple, this includes the following competencies: ! ! ! innovation and engineering excellence: technological development and inventions creativity and design: high-end marketing, product design HRM policy: HRM department and employees contribute effectively to companys success When core competencies constitute aspects that a company also does well compared to its competitors, they become distinctive competencies firm specific strengths that allow a company to differentiate and/or lower costs. As we can see in the above illustration, these stem from the companys resources and capabilities and shape its strategies, ultimately leading to a competitive advantage and resulting in superior profitability. So, the following resources and capabilities can be regarded as Apples distinctive competencies: ! ! human resources: highly skilled workforce (soft skills, experience, knowledge, initiative, etc.) technological resources: superior information technology (intranet, extranet)
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! ! engineering and technical development capabilities: short product-to-market cycles and innovation/functionality of products creativity capabilities: design of hardware, software, etc. In fact, Apples engineering and technical development capabilities as well as its creativity capabilities are most the important factors at the present time as the whole personal computer industry is in a period of change where innovative and creative products that possess entertainment characteristics are attracting more and more customers. Moreover, Apples engineering and technical development capabilities will definitely be the most important distinctive competencies in the future as superior innovation is the most important source of competitive advantage in the long run. 4.12.2 Internal Factor Analysis Summary (IFAS)
The Internal Factor Analysis Summary (IFAS) combines Apples main strengths and weaknesses, gives them a short comment (rational use), a weight (0-100 each, overall sum of 100) and a rating (from 5 = very significant to 1 = not really significant) and calculating the resulting weighted score.
Internal factors Weight Rating Weighted score Strenghts Coherent strategy 3 4 12 Strategy clearly stated and understood, coherent strategy, consistency with corporate structure and culture Creativity & design Innovation Entertainment capabilities User-friendly business approach and products Wide range of skills and capabilities Marketing skills 5 3 15 1 2 2 6 3 18 13 16 2 15 5 4 65 80 8 Regarding PC not just as commodity but as premium product (aesthetics, lifestyle) Famous for technical revolutions, inventions and development, engineering excellence Pioneer through digital hub strategy, unique products (iPod, iLife, iTunes, etc.) Aware of having best customers, intuitive ease of use, advanced graphics capabilities and special design features Producing whole range of products (hardware, software, peripherals, etc.) High-end marketing, combining online and retail channels, strong brand name/loyalty Comments
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Adaptive culture 3 3 9 Encouraging innovation, initiative, autonomy, discussion, and entrepreneurship by decentralising authority/responsibility Workforce Information technology Weaknesses Business execution, commercialisation Lack of critical size Incompatibility High hardware and software costs Lack of realism High operating costs Low number of developers Dependence on key suppliers and manufacturers No high degree of specialisation Total 100 1 2 2 2 3 6 2 2 4 3 8 1 4 3 32 4 11 2 3 4 3 12 44 6 5 4 20 Difficulties in turning inventions into real money, not enough focus on innovation of business models Difficulties in maintaining profitability due to low overall PC market share Incompatibility with Wintel-standard deters customers and PC-producers Higher prices for Apple products than for comparable products Creation of reality-distortion-field, inconsistency with economic reality High costs for marketing (retail stores), R&D, and production (unique components) 300,000 independent or in-house developers compared to 7 million Windows developers Key components from single or limited sources, problems in coping with high customer demand (contract manufacturers) High competition at many fronts, threatening and competing with own developers/partners 9 4 4 4 36 16 Strong HRM -department, high employee skills and productivity Leader in terms of internal communication, internet-based services for consumers etc.
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5 External environment
Foolproof, invisible and everywhere 154 this is how the chief executives of the PC markets big players are describing the promising future of computing. Clearly, something monumental must be going on in the world of computing for the technology titans to discover something that is so profound and yet so hard to name argues The Economist. The future of the PC industry is predicted to be glamorous, but what about its present situation and what are the implications for Apple as vibrant part of this sector.
5.1 Overview The uniqueness of the Macintosh

If analysing Apple in its external environment we are confronted with one significant difficulty the definition of the market or the markets Apple is engaged in. It can be observed that Apple is in an exclusive position. No other company in the computing sector than Apple has survived producing both, hardware and software. Thus, Apple cant and shouldnt be analysed only as a PC manufacturing enterprise, but also as software programmer, server producer, peripherals fabricator, and online content provider. Nevertheless, there is to admit that PC market still remains Apples cash cow and consequently the companys prime sector by contributing up to 70% of consolidated revenues through the Macintosh product line. Additionally, several other Apple products (software like the operating systems, servers, divers applications) are ultimately linked to the Mac which makes more or less useless without the Apple PC. Therefore, the companys public entitlement as PC manufacturer is adequate and lets us focus on the PC market. Moreover, an analysis of Apples second business market, represented by its pillar of online content / digital music industry, will also be carried out.
5.2 The PC market an in-depth analysis 155

5.2.1 Status quo Apple is confronted by aggressive competition in the market for the design, manufacture, and sale of personal computers. This market continues to be
154 155
The Economist (2004) see: Bibliography Annual Reports of Dell Inc., International Business Machines, Hewlett Packard Compaq, Gateway
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characterised by rapid technological advances in both hardware and software development which have substantially increased the capabilities and applications of these products. Additionally, this progress has resulted in the frequent introduction of new products and significant p rice features as well as performance competition. Over the past several years, price competition in the market for personal computers has been particularly intense. Apples competitors who sell personal computers based on other OS, above all Microsofts Windows have aggressively cut prices and lowered their product margins to gain or maintain market share. This intending predatory pricing led to adverse affects on Apples performance ratios, but also put industrywide downward pressures on gross margins. This development (to the benefit of the consumer) is forecasted to continue in the future. Further, as the PC industry and its customers acknowledge the importance of the internet, an increasing number of smaller, simpler, but less expensive online devices may compete for market share with the Apples existing products (e.g. Apples iChat against ICQ, Yahoo Messenger). Hence, Apple takes steps to oppose these competitive pressures by innovating in competing platforms. Its forthcoming results are substantially relying on its ability to continue to develop improvements to the Macintosh itself in order to protect perceived advantages in function and design. 5.2.2 Defining the sector, industry and market segments By serving the same customer base, their needs and demands (i.e. computing devices for businesses and individuals) as its competitors such as Dell, HP Compaq (merger between Hewlett Packard & Compaq in 2001), IBM or Gateway, Apple finds itself in the sector of computing and in the industries of computer hardware which consist of the mainframe, the handheld and the personal computer sub-industry and which is supported by its neighbouring industries of computer software and computer components. Market segments of Apple are therefore portable/notebook PC, Desktop PC and Server. Notwithstanding these definitions business boundaries and limits have to be considered flexible and transforming due to changes in client preferences, time and technologies.
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Computer Sector
Computer Component Industry

Supply Inputs
Computer Hardware industry

Provides complements
Computer software industry
Disk drive industry Semiconductor Industry Modem Industry
Mainframe Industry Personal Computer Industry Handheld computer Industry
Notebook PC market segment Industry Desktop PC market segment Industry Server market segment Industry
5.2.3 Porters five forces Analysis The primary competitive factors in the market for personal computers include the subsequent: ! ! ! ! ! ! ! ! ! Relative price to performance Product quality and reliability Design-innovation Availability of software and other applications Product features such as high speed microprocessor Marketing and distribution capability Service and support Availability of hardware peripherals Corporate reputation
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Therefore, Michael Porters five forces model has to be applied to identify and emphasise possible opportunities and impending threats:
Threat of new entrants
POTENTIAL ENTRANTS
Bargaining power of suppliers
INDUSTRY COMPETITORS
Bargaining power of
SUPPLIERS Rivalry Among Existing Firms
BUYERS
SUBSTITUTES
Threat of substitute products or services
Risk of entry by potential competitors From a macroeconomic viewpoint, potential competitors are willing to enter a market if short term prices dont equal marginal costs by taking away market share from the established companies. Although high levels of competition among the existing producers can be observed in the PC industry, gaining access to the market isnt easy and thus unlikely. This seems to make the PC market an outstanding one as low market entry risk is though contradicting theory associated with vivid competition and tough price wars. The detailed reasons for that show up in the barriers to entry of an industry. The PC market doesnt have a high level of brand loyalty which implies that certain products arent more preferred by consumers due to high standardisation, low patent protection, diminishing brand advertising efforts and lower product quality. This argument isnt valid for Apple where brand loyalty always played an important role. Apple achieves this brand loyalty through profound R&D and an emphasis on product innovation. Regarding cost advantages Apples situation behaves in line with the PC markets. For possible competitors its hard to enter as cost to do so are high. Existing market
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participants already manage their production operations and processes superior (e.g. Dells supply chain management, capital intensive PC production market), control particular necessary inputs (e.g. although qualified graduates are available on a constant basis the outstanding engineers and product designer are already employed by the existing companies) and are in a financially sound position (e.g. cheap fund raising). These elevated cost advantages make it very hard and even unprofitable to enter. Economies of scale provide the small number of dominating PC companies with another barrier to entry against the outside rivals. Dell and Co. are able to drive down costs by mass production of standardised goods (i.e. computer components merely are identical, even if customers are ordering different PC variations) and resource cheaply through increased parts purchasing. Furthermore, spreading overheads, marketing and advertising expenses as well as fixed costs over large fabrication volumes enhances the advantageous constellation for existing PC manufacturers. Entrants can therefore either explore the market on a small size by facing these economies of scale or bear the financial risks if moving in largely. As far as the issue of customer switching costs is concerned, the situation in terms of barriers to entry proves to be a mixed one. As they are mainly associated with software, PC hardware producers cant sustain their superior position if new competitors also use for instance the Wintel standard. If this doesnt hold and as Apples position demonstrates its prevented that PC hardware manufacturing entrants use the same software items, existing market participants maintain their competitive advantage. Switching costs are kept up and arising lock-in and network effects make consumers less probable to purchase another PC offering different software. In addition to this, preservation of business for the existing enterprises occurs when their hardware has special features. In a more political context, governments regulations and restrictions can hinder or force the existence of barriers to entry. In Apples and its industrys example where the majority of companies operates on a global basis governments interference plays an important role but didnt ha ve much influence in the last years.
Rivalry among established companies As there was already stated, the PC industry is a highly competitive one. This means that rivalry is established at an increased level which is expressed by aggressive
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pricing policies, profound product design and innovation ambitions (e.g. Apples major efforts), intensive marketing, online direct selling (e.g. Dell and Apple), holistic support and after-sale services. All this shows that profitability isnt an easy goal to reach in the PC market as all its participants are applying ambitious cost as well as price structures. Regarding the industry competitive structure the PC sector is a consolidated industry being dominated by only a small number of large companies. Nevertheless, it cant be compared to an oligopoly due to the markets soared competition. Interdependent companies whose strategies and actions have direct effects on market share and profitability of the other industry participants often end up in finding themselves in so called competitive spirals 156 . In the PC market, this proves to be valid as an especially for high-end manufacturers like Apple dangerous downward spiral came into existence. Although Apple never intended to follow the dominant industry company in terms of price, this often occurs by establishing an oligopoly. Moreover, the rivalry of the personal computer market is determined by the industry demand which is currently positioned at a very high level. Favourably for all the market participants it implies that from this point of view theres less rivalry due to a large number of spending buyers, visualised by the industry life cycle. The PC industrys exit barriers can be tremendous. An economic dependence on one specific industry which imposes huge risk if the entire sector goes bust exists in a considerable amount of companies. Emotional factors that prevent executives to leave a falling market appear for instance in Apple case (i.e. CEO Steve Jobs sentiments as being one of the co-founders). The fact was argued that computer manufacturing is capital intensive which builds up impediments for exit strategies. This shows up in the number of assembly plants and manufacturing utilities, necessary for PC companies. The bargaining power of buyers A moderate industry demand and lots of small buyers result in a rather low bargaining power of purchaser in the current PC market. This means that buyers arent in the position to force companies to charge lower prices on the goods sold and therefore dont make the impression of being a threat to them. Furthermore, in an industry of high switching costs for consumers, above all if software and to a
156
Hill C. W. and Jones G. R. (2004), p. 45
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narrower extent if hardware is concerned 157, consumer fluctuation is low. Client play offs of industry participants become obsolete and barriers to entry prevent them from producing their desired good themselves. This fact implies that buyers cant obtain bargaining power in the PC market once more. Interestingly, suppliers always move in the opposite direction which would leave them with huge bargaining power, as is discussed next. The bargaining power of suppliers In the PC industry, Porters fourth force states that the bargaining power of suppliers is a stringent one which imposes a threat (e.g. risk to Apple and the entire market. Although it doesnt seem that they are providing low quality items, companies such as Intel, Motorola or IBM (when only looking at microprocessor producers) possess the ability to squeeze out every drop from the PC industry at the industrys current stage. These enterprises fulfil all necessary criteria for obtaining the bargain power by selling products without real substitutes, by having a diversified operations portfolio that assures their non-reliance on a specific sector and by exercising real dominance on the PC industry. Apple and its rivals would often face high switching costs themselves when changing to another supplier. For instance, if Apple quits its contract with Motorola and integrates new Intel microprocessors in its devices this will adversely affect Apples position as a whole production process including customers preferences for the Mac will change. Nevertheless, theres to admit that this powerful position is only accessible for key component producers, not for all of them. Substitute products A considerable amount of substitute products threatens Apples market situation as consumers easily can switch from one device to another. In spite of this, Apple persists to differentiate itself with their Mac computer series from the common PC market and therefore the company isnt as directly affected as Dell, HP Compaq or IBM. As theory taught us, Porters model is often amended with an additional sixth one and even seventh force. The first one defines complementors as value-adding institutions for specific products. In the PC industry these complementors can be found in form of software companies. A personal computer being equipped with, for
157
see above: barriers to entry customer switching costs
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instance Corel Graphics (Draw 11.0, PhotoPaint 11.0) and MS Project 03, will
definitely sell better than one, just containing MS Office XP. For Apple these complementors are also represented by third-party software developers who are mostly independent freelancers or students and amount much less than Wintel standard program writers. The latter force tries to measure the relative power of unions, governments and special interest groups (i.e. stakeholders) who exert their individual interests on Apple. 5.2.4 Strategic Group Analysis High
Prices Charged
Premium Group (Innovation) Apple
Commodity Group Dell, Gateway, HP/Compaq
Low Low R & D Spending
High
As the above diagram shows Apple Compute r is situated in its own strategic group within the PC industry, implying high R&D expenses by at the same time charging a premium price for its products. This isnt anything new or surprising as there was already defined that first, Apple obtains innovation leadership and therefore is part of that top-right bubble and second, Apple is difficult to properly integrate in one of the dominating three big computing industries. The companys individual status within the PC market therefore is derived from Apples intention to focus on the exclusive
Apple Computer Inc.

high-end premium PC market by flooding customers with their own products, but by still monitoring accurately its profitability. As there is no other company pursuing a similar positioning strategy or can be located in Apples strategic group, real 158 direct substitutes become obsolete. Furthermore, within its industry, Apple is confronted with overall the same, but in detail totally different opportunities and threats. As a result, Apple doesnt want to adjust their strategic position in the matrix as it doesnt desire to move into another strategic group. The companys only objective is to maintain R&D and thereby keep up innovation and the same prices charged. 5.2.5 Industry Life Cycle Analysis
PC Industry
Demand
Embryonic
Growth
Shakeout
Mature
Decline
Time As any other industry, personal computing also is dependent on evolutions and dynamics in its industry over time. These may alter strategic groups, change the impact of competitive forces and incite task managers as well as executives to properly define and evaluate the industry they are in. Moreover, they may be able to
158
As stated above Wintel standard substitutes are a danger for Apple, although there cant be identified real substitutes for Apple which entirely fit the Macs profile or satisfy identical customer needs/groups;
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estimate implications for their company and products by applying tools as the industry life cycle. The above chart illustrates that the PC industry can still be attributed to the mature stage market at the moment. Therefore, observations consider the market as saturated with moderate, but already stagnating demand (mainly replacement). In addition, the PC industry shows high barriers to entry at this stage with a low number of potential competitors being able to enter, respectively penetrate it. As high growth rates cant be sustained, competition among Apples main rivals such as Dell, IBM, Gateway and HP Compaq has become aggressive. Consequently, price wars will stay ahead resulting in companys cost reductions and the build -up of brand loyalty. All these developments also are appropriate for Apple Computer within this mature industry. The company could already build up its strong brand loyalty, but is currently working on its high cost structure to become a vibrant candidate for survival in declining times.159 Despite normal developments where a mature stage infers oligopolies, the PC industry is different. Due to extreme price reductions by Dell Inc. mergers such as the one between HP and Compaq as well as business restructuring efforts among all market participants evolved. Nevertheless, the industrys development shouldnt determine the companys profiles too much and innovation as a major key success factor (KSF) will become more and more crucial in reaching profitability and optimising business operations as the case of Apple Computer exemplifies thoroughly.
159
see: Strategic Advice Chapter 12
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5.2.6 The Macro-Environment
Political and Legal Environment Technological Environment
Potential competitors
Social Environment
Supplier power
Rivalry
Buyer Power
Demogrphic Environment
Substitutes
Macroeconomic Environment
In addition to the industry also the macroenvironment of a sector influences the companies and their ways of doing business. The local key factors like customers, competitors, suppliers, creditors, labour unions, governments, trade associations, interest groups, local communities, and shareholders can be located within the immediate environment of the company. In the PC industry, the factors influencing the market participants arent the same globally although the geographic markets, most of them are operating in, seem to be merely the same. Nevertheless, these determinants vary from country to country. Therefore, the subsequent main macroeconomic forces exist:
Economic Forces These forces affect the PC industry in determining the general overall global economic circumstances such as global sales and demand that play an important role in the daily PC industry.
Technological Forces Innovation, new trends in technology and computing form the basis for the PC industry and above all for Apple to outperform competitors.
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Demographic Forces and Social Forces The PC industry tends to shift its focus from business, professionals and home users to also explore new customer groups such as retired persons as potential, wealthy future clients. Political and Legal Forces Governments provide the basic legal regulations and restrictions that influence the PC in producing and selling personal computers. Global Environment As globalisation is optimising the possibility to expand abroad to attract new customer groups this environment gets used by an increasing number of market participants. National Environment The PC market is already acting on a very global level. In spite of this, a national competitive advantage can still be encountered, especially in the US, as the national context of IT leadership helps the industry and Apple in achieving a competitive advantage in the global marketplace by for instance attracting highly skilled professionals.
5.3 External analysis of software and peripherals market

Apple has a much more difficult task to accomplish than the majority of its competitors, who operate mainly in one single industry or industry segment. The external analysis of the computer industry and the PC market in particular showed already the immense difficulty to survive in such a fast paced and changing environment. To add to the complexity of Steve Jobs job, Apple endeavours to diversify its operations by entering into the digital music market, as part of its digital hub strategy. The launch of its music store and the equally named music jukebox iTunes marked an ambitious strategy to become the primary digital music provider in the industry. To understand what environmental forces actually drive this industry we first have to define what the industry itself is 160.
160
Hill C. W. and Jones G. R. (2004), p. 39
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5.3.1 Software industry
COMPUTER SECTOR
Computer Component Industry

Supply Inputs
Computer Hardware industry

Provides complements
Computer software industry
Disk drive industry Semiconductor Industry Modem Industry
Operating System Industry application software Industry web services/software Industry
desktop publishing software Industry digital art/entertainment software business office software
From the illustration we can conclude that although related to its core business area the PC industry, Apple operates with its online music store within a market segment of a different industry, namely the computer software industry. Apple produces a variety of software applications which are mainly targeted at the creative professionals community and is also active in internet software and services, as it recently has developed its own web browser Safari. Moreover, with the Mac OS X it competes on the operating system market against Microsoft and Linux. Last but not least there are several applications designed for consumers such as the iTunes music store and the iLife package, which includes iTunes, iPhoto , iMovie, and iDVD.161 The reasons for the analysis of the external environment of the digital music market and therefore illumina te only one particular aspect of the software products, are that at all the others, competition is not as intensive as in the digital music market. Also the other software applications dont contribute as much to the revenues as the iTunes software does, which makes it a liable choice.
161
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Competitive forces driving the digital music market First, it is vital to assess the markets growth potential, because this potential determines the nature of the game to be played. A double digit growth rate in the digital music market present substantial opportunities for existing players, but also attracts new competitors 162.
Risk of entry by potential competitors The barriers to entry are very low as on the one side capital requirements are limited, brand loyalty is low and economies of scale virtually dont exist. 163 Especially the disloyalty of young customers has to be managed effectively in order to create what Apple has been able to do in the PC market164: Having the best (loyal) customers a company can dream of. Nevertheless there are two significant aspect in terms of barriers to entry. One is the networking effect, which means that the more people use one platform the more popular it gets and increased demand will drive up the amount of available songs. Also, as the CEO of Apple points out that music artists themselves prefer to work with Apple and why then not provide their songs and albums on an Apple platform? The second barrier is the cooperation with music labels, which provide the essential song material for the online music stores. Nobody except Apple has succeeded to win all five major music labels for its operations (Bertelsmann AG's BMG, EMI Group Plc, AOL Time Warner Inc., Vivendi Universal, and Sony Corp.). 165 Once again Mr Jobs was smart enough to do something that was beneficial to the music industry in creating a paid environment that protects their interests. He's pretty much golden in terms of getting deals with the labels, said Tim Bajarin, CEO of consultancy Creative Strategies.
166
Rivalry among established companies In general, the rule suggests that the more competitors the more rivalry and so it is in this market. There has been a constant increase of small competitors on national levels all trying to take market share away in this multibillion music online market.
162 163 164
http://www.siliconvalley.com/mld/siliconvalley/news/editorial/3856253.htm?template=contentModules/print story.jsp, 11.02.04 Morden T. (1993), p. 123ff Lopez J. M. (2003) 165 http://www.siliconvalley.com/mld/siliconvalley/news/editorial/3856253.htm?template=contentModules/print story.jsp, 11.02.04 166 BusinessWeek (2004b)
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Jupiter Media forecasts a market worth $5.2 billion by 2007 167 who wouldnt be eager to get a slice of such a big pie? The industry is fragmented, still with a few major players such as Apple , Napster II, and Rapsody dominating the market, but as the product (song) is a commodity type of good and barriers to entry are not high, competition will increase over the next years, as companies start to realise that there is a high demand for legal online music downloads. The fact that demand is still growing rapidly tends to moderate the competition as gaining market share doesnt automatically mean that this gain is at the expense of another player. Actually Apple captures about 20% of the pay per download online music market.168 The last point to consider are the barriers to exit, which would intensify rivalry if existing. As previously stated as there are no significant investments and fixed costs can consequently be kept at a minimum, quitting the business in the digital music market is not exactly what one would define as difficult. Bargaining power of Buyers The existence of huge illegal music download communities with file sharing networks such as Shareman networks with their file sharing tool Kazaa, the branch leader in terms of users (on average over 4 million users online) 169, the legal digital music market can be glad to exist in first place. This immediate threat can be seen as bargaining power of the buyers and constraints competitors in their pricing options as the switching costs to either other players or the illegal music download scene are practically non existing. This situation is less advantageous for Apple and other suppliers of online music content as they are forced to keep prices low resulting in low profit margins. This competiti ve picture of the industry leads to the conclusion of various analysts that in this industry there is no money to make at all, even if you are a big fish like Apple. Bargaining power of Suppliers This is the flip side of the assessment of the bargaining power of buyers. As the buyers can influence prices and marketing costs, so do the suppliers influence the production costs. 170 In this industry production costs basically equal the costs of
167 168 169
http://www.pcworld.com/news/article/0,aid,102516,tk,dn070802X,00.asp, 04.02.02 Baltimore Sun (2003) http://www.kazaa.com, 01.02.04 170 Morden T. (1993), p. 18f
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buying the songs from the music labels through contracts. Disadva ntage for Apple in this field is the presence of only a handful big and important music labels on the world. Suppliers, aware of this situation, try to exploit that by maximising profits and cut good deals for themselves. 171 Fortunately the illegal music download business is working against the supplier, therefore limiting their power to a certain extent. The music labels can either choose to insist on high profit contracts with legal online music stores, which inevitably would lead to an increase of prices, because Apple and other competitors would be forced to pass on these increased costs and subsequently risk that customers would turn to illegal services or music labels could charge lower prices (lower profit contracts) and this way ensure that they at least will counteract the trend to illegal music sharing and capture still decent profits. Pressure from substitute products If products of different businesses or industries can basically satisfy the same customer needs, then the pressure from substitute products is considered to be high. 172 Although the market for online music is predicted to rise in an exorbitant manner, there is still the traditional music industry with its retail channels selling CDs, music DVDs, and minidisks. In numbers this means that for a 4month period from July to October 2003 7.7 million digital tracks were recorded as sold, compared to only 4 million physical units of CD singles. 173 Consumer preferences can change especially in high tech markets, as history has frequently shown. The music cassette has been replaced by the CD and so can new products hit the online music industry from its blind side and substituting them. Currently the threat of substitute products can be rather neglected as technological innovation is not likely to produce big changes in the near future, but Apple has to be aware that the external environment can change rapidly to the disfavour of Apple. Strategic group analysis The online downloadable music industry is a very homogenous industry, expected to undergo further harmonisation, as music labels will learn to fulfil consumer demands in the next few years, forecasting that by 2005 labels will endorse a standard
171 172 173
http://www.siliconvalley.com/mld/siliconvalley/news/editorial/3856253.htm?template=contentModules/print story.jsp, 11.02.04 Hill C. W. and Jones G. R. (2004), p. 48f http://www.internetnews.com/ec-news/print.php/3286881, 04.04.02
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download contract on equal terms to all distributors such as Apples iTunes store.174 As a result there are no major differences between competitors, the only thing which seems to distinguish them at the moment is the payment method. Apple as opposed to other key competitors such as Rhapsody doesnt rely on subscription services but rather provides the customer with a pay as you download principle. Internet users, especially the younger ones, are as previously mentioned extremely disloyal. They are not prepared to acquire a monthly commitment nor to pay in advance for a service that, most times, imposes more restrictions and offers less options than free services. Reports show that surfers prefer to pay per download rather than to have a monthly subscription and Apples experience corroborates that.175
iTunes Song library400,000 size Pricing $0.99 per song $9.99/album
Napster 2 (roxio) +500,000 $0.99 per song $9.95/album $9.95/month unlimited access
BuyMusic.com +315,000 $0.79 for limited
Rhapsody +300,000 $9.95/month $0.79/song to burn on CD
Audio Lunchbox +40,000+ from Indep. Artists $0.99 per song $9.99/album
songs, $0.99/song subscription,
Song formats Complem. Products
AAC, MP3
MP3
MP3
MP3
MP3, AAC, Oggs
iPod, other portable All portable devices devices Online Community
Limited portables, None Windows media 8 for DRM, no iPod support
None
System Lim itations
none
Downloads in Windows IE5.0 on Windows Windows only Media File format will not work with iPods Downloaded tunes tied to one computer only portables directly
Mainstream record available
Cannot transfer to label offerings not
Other services
*Allowance accounts *Email songs *Gift Certificates *CD burning *Smart playlists *Sync iPods *Exclusive tracks *Videos*Audiobooks *Share playlists *Online magazine *billboard charts *music videos *share playlists
*Unused credits do *Free of DRM not carry over *Pricing scheme may vary by distributor *complex pricing *Plans for lyric download
174 175
http://www.siliconvalley.com/mld/siliconvalley/news/editorial/3856253.htm?template=contentModules/print story.jsp, 11.02.04 Cheng L. and Devgan A. (2003)
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Industry life cycle The economic downturn during 2001 has also afflicted the still-nascent digital music industry. Growth projections had been revised and successful entrance or even penetration of the digital music industry has been proved to be more difficult as imagined. In 2001, industry backed subscription services Musicnet and Pressplay discussed prelaunch plans and Napster with a new CEO hailed Napster as a brand that cannot be killed. One and a half years later the situation looks completely different. Napster is bankrupt (mainly because it was not paying royalties to the troubled record industry) and Musicnet and Pressplay are struggling to draw customers to their limited services. 176 After sluggish sales in the past two years demand begins to take off, moving the industry from embryonic to growth stage. Predictions say that the digital music download service in Europe will be worth an impressive !1.3 billion by 2007. The sector will generate just !24 million this year, but will account for 13 per cent of all music sales by 2007.177 The US market will be worth $2 billion by 2007.178 This will mostly come from individual downloads, not subscription-based services. Growth will be fuelled by the emergence of more legitimate services and higher broadband penetration. After a slow start, major music and technology companies including Apple are now taking the future of digital music seriously.
176 177 178
http://www.pcworld.com/news/article/0,aid,102516,tk,dn070802X,00.asp, 04.02.02 http://www.macworld.co.uk/news/main_news.cfm?NewsID=6342, 09.01.04 http://www.pcworld.com/news/article/0,aid,102516,tk,dn070802X,00.asp, 04.02.02
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The Macroenvironment Technological Forces In recent times technological advancement has rapidly increased its speed and has unshackle a process that has been called perennial gale of creative destruction 179. Changes in technology can affect the height of barriers to entry and therefore have a huge impact on industry structure.180 In the case of the digital music industry music labels are working on a common format to make their content available on equal terms, so that Apple then will maybe lose the advantage of being the only player having access to the five big music labels. This can further eliminate barriers to entry, because opportunities in regards to content would be equal. Logical consequence would then be a price war among existing competitors driving profit margins from an already low to an even lower level.181 What can also play an important role are the different formats of the music files. Apple has created an own format, the AAC, which is only compatible with its own MP3 player compared to the industry standard format of MP3. The impact of limiting the downloaded content to its own software (iTunes juke box to play music on the PC) can have a detrimental impact on users acceptance of Apples product. Demographic forces Demographic forces underlie all market and economic trends. The external environment within which the enterprise operates depends partially also on how population is made up. The disproportionate decrease in the population aged between 18 and 35 can adversely affect the online music industry, as this group is believed to be the main users of online content including downloadable music. Although Apples efforts to make the easiest software to use, the lack of technological awareness of the older generation can inhibit sales in the iTunes music store. Social Forces Peoples attitudes as well as consumer behaviour together shape what is called social forces. Trends and changes in attitudes towards work and leisure or changes in expectations can all affect the day to day operations of an organisation. A major
179 180 181
Schumpeter J. (1950), p. 68 Dickel K. E. et al. (1994), p. 177 Hill C. W. and Jones G. R. (2004), p. 41ff
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issue and key determinant of the success of the digital music industry are peoples conscience and ethic values.182 At the moment Apple has created the picture that downloading music from the internet is cool and therefore was able to spur sales. 183 But the line between music piracy and legal industry is thin and only the smallest change in perception from customers point of view can change their consumer pattern and the anyway increasingly disloyal consumer could turn to piracy again.184
Demand for Music Subscriptions and Downloads Type of Consumer (number sampled) Music aficionados (357) Free-music fans (514) CD purists (280) Passive populace (746) 21% 13% 10% 7% 25% 19% 16% 10% Subscriptions Downloads Will Not Pay for Music 46% 60% 71% 79%
Political and legal Forces These forces are outcomes of changes in law and regulation. The environment Apple operates in can be shaped by political judgments and legal decisions. 185 Bodies such as the Copyright Arbitration Royalty Panel (CARP) or the Recording Industry Association of America (RIAA) can have a crucial impact through imposing new laws limiting the digital music industry in its efforts to grow and expand.186 For example, in 2002 the CARP determined that webcasters (companies that produce audio or radio for the world wide web) should pay a per song, per stream royalty. The rate being 0.07 cent would force many companies out of business, which would lead to anticompetitive structures. The RIAA justifies this high rate by claiming that these rates dont reflect musics fair market value and that broadcasters who couldnt afford to pay the fees should in first place be not in the market. Such fees imposed on downloadable music content could ruin the business as the narrow profit margins of Apple and consorts could totally disappear. Also government was very
182 183 184
Lopez J. M. (2003) BusinessWeek (2004g) Lopez J. M. (2003) 185 Dickel K. E. et al. (1994), p. 112ff 186 http://www.pcworld.com/news/article/0,aid,102516,tk,dn070802X,00.asp, 04.02.04
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active on regulating the industry through means of the Music online Competition act in order to tweak various aspects of the US Copyright Act with updates. 5.3.2 Market and external environment analysis for the iPod Apple utilises the iTunes music store in order to make a natural connection between its iPods (MP3 player) and the service, a seamless connection between hardware and content. The market for MP3 players started to develop in 1998 with such companies as Diamond Multimedia with its RIO MP3 player. 187 Since then, growth has been tremendous and all major consumer electronics producers entered the market, which is constantly heating up. The market grew by 70% to more than 3.5 million units only in the US during 2003 and is expected to grow further at a rate of 50% in the next three years. Jupiter predicts that by 2006 the install base of players will hit 26 million that would be one out every ten Americans. 188 The clearly trend is that music consumers behaviour shifts from a physical to a digital approach. Today the MP3 player market is swamped to the gunne ls with me-too products, and it has gotten pretty tough for new arrivals to distinguish themselves. Some have gotten smaller (Apples iPod), some have added capacity, such as Creative's Nomad Zen 60GB. Others have added video, the key example being the Archos AV320. With so many available products, there's little room for innovation. 189 The immediate rivals come from electronics makers (Samsung) and from fellow computer makers (Dell, Gateway), as well as from veteran music-player makers (Rio, Creative Labs, iRiver). Most have the familiar iPod ingredients. The other notable feature of these competitors is a marketing message that's either just like the iPod, only cheaper or just like the iPod, only better. Another fact to take into consideration is that most of these rivals are cheaper - usually $100 less. thoughtfully designed than any of the upstarts.
190
But
better is another story. The iPod is still smaller, more attractive, and more
187 188 189
http://news.com.com/2100-1040_3-252001.html, 05.02.04 http://www.macobserver.com/article/2003/12/30.1.shtml, 31.01.04 http://www.extremetech.com/article2/0,3973,1230545,00.asp, 23.01.04 190 New York Times (2004)
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Best selling MP3 player makers over US$150 (by units) 191 1. Apple 2. Creative Technology 3. Rio 4. RCA 5. Arcos Best selling MP3 players for November 2003 10GB Apple iPod 128MB Digitalway 20GB Apple iPod 128MB iRiver 40GB Apple iPod But the margin is very slim and the other players, especially the Dell, are credible alternatives. The iPod integrates much better with Apple's download service than Dell and Samsung do with their companion services and thats the key advantage of Apples iPod. This indispensable connection between iTunes and iPods was also the reason for the extensive analysis of the downloadable online music market in the previous chapter.192 In terms of environmental forces, technological and political/legal forces are worth mentioning. The MP3 player market can also be categorised as high tech market were technological advancements often occur and reshape industry patterns. The format war between the two existing memory formats, the flash based models and the hard drive models (Apples iPod is hard drive based), is currently dominated by the hard drive models, simply because their bigger storage capacity is more attractive to customers. The advantage of Flash based models which are accounting for one third of the MP3 player market, is the smaller size of the players, which are particular suitable for use during sports. 193 Political forces once again include the RIAA, which at the very beginning of the industry in the late 1990s filed lawsuits against first movers in the industry accusing
191 192 193
http://www.macobserver.com/article/2003/12/30.1.shtml, 31.01.04 Wall Street Journal (2003) http://www.macobserver.com/article/2003/12/30.1.shtml, 31.01.04
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them of supporting online piracy through their products. Their view has changed, as the RIAA has realised that the MP3 player market can be the device which opens up the door to a legal online download music industry as Apples combination between iTunes and iPods already shows. In conclusion, both the digital online music industry and the MP3 music player market are dynamic, marked by intense competition and a huge potential for companies to make profits.
5.4 Summary of external factors

5.4.1 Overview Apple operating in the high tech industry, is, as the name already reveals, highly influenced by technological changes. Apple has already made the brutal experience of losing a format war against Microsoft and therefore is eager not to make the same mistake again. Opportunities arise through its digital hub strategy which aims at producing not only Mac compatible software and hardware, but also targets the Wintel market with its new innovations. Besides that the significant barriers to entry represent a safe haven for Apple as it can serve its niche markets through innovative and highly capable products and equally charge a premium price. Among the most important threats are the high level of competition in the PC industry, which constantly drives down prices and makes high end, high price innovative products less attractive and the bargaining power of Apples key component suppliers, which can lead to a higher cost structure and thinner profit margins. For the future, as other industries where Apple is involved in will gain importance, issues in the music player market and digital music market will have a higher impact on the company. In this, social forces seem to evolve as key determinant of how successful Apple will be in the future. If Apple is able to maintain the coolness factor of both iPod and iTunes,it will be able to generate above industry profits for the future.
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5.4.2 External Factor Analysis Summary (EFAS)
External factors Weight Rating Weighted score Opportunities High barriers to entry in the PC industry Complements and complementors 6 2 12 11 4 44 High brand loyalty, high economies of scale, high customer switching costs due to unique hardware/software, cost advantages through patents and secret processes Strong and loyal developer community ! superior quality and added value; Cutting edge software ! more acceptance in education/creative professionals segment Mature stage of PC industry 7 3 21 Strong brand loyalty ! protect market share, superior products gain new market share ! increase profits ! Apple no fear of declining industry Technological forces 12 5 60 Superior R&D and innovation leadership! possible first mover advantage ! high returns in embryonic/growth industries (mp3 player market and digital music segment) National environment 1 4 4 U.S. computing dominance attracts R&D and network of services and developers. Technological awareness in the U.S. facilitates digital hub strategy MP3 player market in growth stage 9 4 36 iPod ! Superior design and quality of killer application (storage capacity) can earn high profits Threats Rivalry among established companies in PC industry 16 4 64 Consolidate industry with price wars ! (downward price spiral) saturation of PC market ! decrease in demand ! fiercer competition ! profits? Exit barriers: emotional attachments/pride Apples high dependence on PC market Bargaining power of suppliers in the PC industry Substitute products in the PC industry Social forces 4 2 8 14 5 70 9 3 27 Key components exclusively manufactured by few suppliers ! high reliance on them ! higher costs Commodity type good ! intense competition through Wintel standard. PCs Rising disloyalty among young generation ! Comments
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price key determinant of buying decision ! may lead to decreasing demand for high end products Political and legal forces Bargaining power of buyers in online music market Bargaining power of Suppliers in the online music market Technological forces in the online music market Total 100 4 4 16 Format war between MP3 and AAC ! users acceptance defines future success 3 1 3 2 2 4 2 3 6 New regulations/restrictions governing digital online content may inhibit industry in its growth (RIAA and CARP) Switching costs extremely low ! price key determinant of success ! threat also through music piracy only five key music labels who produce majority of songs !labels dictate price ! dependence on their cooperation
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6 Functional strategy
6.1 General information194
Build
Resources
Shape Distinctive Competencies
Strategies
Competitive Advantage
Superior Profitability
Capabilites
Build
Functional strategies are shaped by a companys distinctive competencies and enable a company to achieve superior efficiency, quality, innovation, and responsiveness to customers, thereby leading to lower costs and/or differentiation (competitive advantage) and ultimately resulting in superior profitability.
6.2 Company resources and functional strategy

Superior quality
Superior efficiency
Competitive advantage: Low cost Differentiation
Superior customer responsiveness
Superior innovation
194
Hill C. W. and Jones G. R. (2004), chapter 4
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Functional strategies are targeted at improving the functions of a companys value chain and therefore reaching a competitive advantage through superior efficiency, quality, innovation, and responsiveness to customers. As a consequence, there are different strategies, policies, and methods for all value creation activities that were examined as company resources in the analysis of Apples internal environment, namely Marketing, Finance, Research & Development (R&D), Operations & Logistics (O&L), Human Resource Management, and Information Systems. The following matrix gives an overview containing several exemplary strategies and methods a company can use to succeed in improving the four building blocks of competitive advantage:
Marketing superior efficiency
reducing customer defection rates, building brand loyalty, experience curve effects
Finance
invest in better manufacturing machinery
R&D
product innovations, process innovations
O&L
economies of scale, flexible manufacturing, JIT, mass customisation, supply chain management
HRM
increasing employee productivity (hiring, training, team, pay for performance) TQM training programs, quality teams
IS
improved interaction between company and others, automated processes monitor defect rates
superior quality
focus on customer, feedback on quality
provide funds for implementation of TQM
design products with superior quality and ease to manufacture
analyse defects, optimise production, implement TQM at suppliers cooperation with R&D to develop product and process innovations customisation and rapid response through flexible manufacturing and JIT
superior innovation
providing market information to R&D, developing products with R&D
provide capital for R&D efforts
developing new products and processes, coordination with other functions
hiring of scientists and engineers
coordination of product development work
superior customer responsiveness
customer knowledge and feedback
investment in market research etc.
include customers in product development
training programs for sales force and other employees to think like customers
web-based information systems for customers
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Apple Computer Inc. 6.3 Sources of competitive advantage

As Apple only possesses a competitive advantage in some specific areas, the following illustration should summarise Apples sources of competitive advantage which result from its distinctive competencies that were examined in the analysis of the internal environment: Superior quality ! R&D, HRM
Superior efficiency ! IS
Competitive advantage: Low cost Differentiation
Superior innovation ! R&D
Apple reaches superior quality through improved product design which creates value through better product quality and functionality, thereby leading to differentiation and more pricing options. Moreover, the HRM department enables Apple to reach superior quality as a high-skilled workforce ultimately leads to better products, thereby also leading to differentiation and more pricing options. In addition, the R&D function is the most important source of superior innovation as short product-to-market cycles and innovative products create value for the customer, thereby constituting another factor that leads to differentiation and results in more pricing options. Finally, the Information Systems function optimises internal communication (intranet) and external coordination (extranet) which facilitates and optimises business processes and therefore lowers costs due to superior efficiency. In all, these four factors contribute to superior innovation, efficiency, and quality and provide Apple with a competitive advantage.
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7 Business-level strategy
Differentiation on
product and service through a user-friendly graphic interface and integrated products
Change the
world through technology
Goals
Value Proposition Product Market Focus Core Activities
Complete desktop solution 50% US; 50% foreign Education (50%MS); home Hardware, software, peripherals High end
R&D
Manufacturing
Distribution
Fully integrated
The above illustration shows Apples overall strategy, 195 with the business strategy being in the top right corner. Apple pursues a differentiation strategy with unique products which until now are unmatched by its rivals. To explain how this strategy works out in detail is the purpose of this chapter. The business strategy proposes how a specific business model can gain a competitive advantage over its competitors in the industry. There are three main factors influencing the shape of Apples business strategy. They are customer needs, customer groups, and distinctive competencies in other words Apple has to find answers to what and how customer needs are satisfied and who is going to be satisfied.196
7.1 Customer needs

Apple, throughout all industries it participates in, tries to implement its vision of being the digital hub in an area where networking between hardware, software, and services is getting more and more important, as consumers require sophisticated as
195 196
Crossan M. M., Fry J. N. and Killing J. P. (2002) Hill C. W. and Jones G. R. (2004), p. 158ff
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well as integrated digital devices who can smoothly communicate with each other. Apple since ever tries to differentiate itself from competitors in order to justify the premium price it charges. It is important to find the right balance between customer satisfaction and pricing option as this mix is crucial to maximise value for the customer and drive up profitability. 197 Apple is known for its high cost structure, as development of product design and innovation is a costly matter. Nevertheless product differentiation is a strong competitive weapon because Apple can increase the perceived value of its products and be as profitable as other competitors despite the higher cost structure.
7.2 Customer groups

For a company it is indispensable to know its customers. Know yo ur customers means to be able to carry out a proper market segmentation, because each set of consumers needs to be properly differentiated. This procedure helps companies to target individual customers in a better way with better and more appropriate products, increasing customer responsiveness. 198 There are three types of strategy available for market segmentation. The first option would be that Apple could try to serve the average customer without making any differences in serving their needs, second Apple could still serve all customers, but recognise the different tastes and therefore create separate products for each customer segment or third Apple could simply position itself into a niche and serve just specific customer groups. Apple uses consumer characteristics to segment the market as the following diagram shows and employs a niche strategy. 199
197 198 199
Morden T. (1993), p. 79ff Dickel K. E. et al. (1994), p. 116f Apple Computer Inc. (2003a)
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7.3 Distinctive competencies

Apples business model must acknowledge its distinctive competencies and set a business model which allows it to organise and enforce its competitive advantages. With Apple as industry leader in design and product innovation the task of the manager is to choose a strategy which is in compliance with the high cost structure and the differentiation approach.
7.4 Differentiation strategy200

Among the different choices Apple has on the business level, it chose the so called Differentiation strategy. Key element of this approach is that it lets Apple compete in different niche market segments by means of differentiation. By doing this, Apple focuses on superior quality and innovation. Apples PCs are the most beautiful among all, therefore successfully getting rid of the image of being only a commodity type good. Additionally, the strong performance in graphic and other media applications has persuaded one of the target segments, namely the creative people employed in the media and advertising industry, to mainly operate on Apple computers. Competitors based on Wintel standards underperform Apple by far in this particular category.
201
In the education segment Apples superior quality is
demonstrated by its ease of use, which is a key success factor in the education market. In the consumer sector Apple is the innovation leader, as it was able to build
200 201
Hill C. W. and Jones G. R. (2004), p. 160f Apple Computer Inc. (2003a)
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state of the art computers, software and digital devices such as the Power Mac, iLife and the iPod. Apple products appeal to customers psychological desires and as a result consumers are willing to pay more for its products. But this premium price should not mean that Apple can neglect its cost control, which Apple has been doing in the past, driving it into losses. In contrary, Apple tries now to copy cost savings innovations from competitors such as Dell by substantially reducing inventory cost by partially outsourcing manufacturing (inventory is down to less than two days worth of sales) and boosting direct sales channels (43% of sales are already through its online store). 202 Apple has realised that in order differentiation to provide a competitive advantage it has to lead to superior profitability, which is also depends on the cost structure of Apple.
7.5 Advantages and disadvantages of the Differentiation strategy

The strategy was able to safeguard Apple against competitors as it was able to create a strong brand loyalty. Steve Jobs pointed that out by saying that Apple has the worlds greatest customers. Another advantage is that this loyalty creates a substantial barrier to entry and especially in the case of Apple, where switching costs are considerably high. The main threat for Apple in pursuing such a strategy is the entrance of competitors being able to imitate the products and at the same time have a lower cost structure. Analysts rate the threat of imitation in the PC sector for Apple as relatively low despite the tangible nature of competitive adva ntage, as Dell and Compaq a few years ago designed PCs which were fancy coloured, as an answer to Apples iMacs which was then sold in five shiny colours, but only six months after their introduction they had to be discontinued as a result of slow sales. In the past years technological factors have drawn players with different strategies closer together intensifying competition. So former pursuer of cost leadership strategies such as Dell and HP/Compaq are trying to gain market share on the expense of Apple , differentiating their product portfolio to create products which can compete with Apples iMacs and Power Macs.
202
Yoffie D. B. and Wang Y. (2003)
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Apple Computer Inc. 7.6 Investment strategy203

The second determinant of where Apple is heading in the future on a business level is its investment strategy. As the name already suggests, the investment strategy defines and allocates resources needed to create distinctive competencies. The choice is dependent on the strength of Apples position in the industry and the stage of the industry life cycle. To analyse Apples position in the industry you need to consider the market share in its key market segments. In the education sector Apple has a 28% market share in portable devices (iBook) and an overall market share of 12.4%, in the creative professionals sector Apples market share exceeds 65%. In the consumer and the small business segments it captures only insignificant market shares. 204 To sum it up, Apple has a relatively strong competitive position within the industry. Apples position has again implications for the investment strategy. As stated before, the PC industry is in its shake out stage reaching maturity, meaning that demand is only increasing slowly with 2001 being the second year of a decline in worldwide PC sales after 1985. As a strong competitor and a differentiation specialist Apple investments are oriented towards the development of a sophisticated customer service, marketing , and broader differentiation. Apple therefore entered as part of the digital hub industry the consumer electronics market, more specifically the MP3 player market with its iPod and developed iTunes, an online music platform and media content player. Naturally the PC business remains Apples core business (70% of Apple revenues come from PC sales), but as profits start to dry up, broader diversification is the only liable way for Apple to ensure profitability in the long run. All in all the investment strategy tends to be coherent with the generic business level differentiation strategy, as new products are marked by the same qualities and features Apple has established and is proud of in the PC industry. iPod and iTunes perfectly fit in the corporate image as they seamlessly join the existing products in terms of design, reliability and pricing.
7.7 Competitive strategy

After choosing the appropriate generic business level strategy and investment strategy, Apple faces another critical decision. To chose a competitive strategy which
203 204
Hill C. W. and Jones G. R. (2004), p. 173f Apple Computer Inc. (2003a)
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best fits generic business level strategy, given the maturity stage of the PC industry in the industry life cycle. As this stage is characterized by a small amount of dominant players such as Dell, HP/Compaq, Gateway and Apple, these companies have the power to influence the five competitive forces. Apple therefore is constantly watching the other players, trying to predict their next step in order to be ahead of the rivals. This so called competitive game can be analysed using game theory. As Apple 2000/2001 tried to enter the low priced market to better serve its education segment, it launched its eMac and priced it competitively at $999. 205 Just weeks after this launch, Dell, its main competitor in the education market, announced deep price cuts for its Dell Dimension 4100 Desktop to as low as $799 per unit. This obvious high interdependence in the PC industry requires Apple and its managers to look forward and reason back, before launching any initiatives. 206 This interdependence doesnt only pose a threat to Apple, as Apple can use this already existing invisible hand to protect companys and industrys profitability. There are two major starting points how Apple can achieve sustainable profitability. Either deter entry into the industry or reduce rivalry among existing competitors.
7.8 Strategies to deter entry207 Strategies for deterring entry of rivals
Product proliferation
Pricing games
Maintaining excess capacity
From the three options to deter entry (product proliferation, pricing games and maintaining excess capacity) Apple could choose from, the only beneficial choice
205 206 207
Ganesan S. (2003) Hill C. W. and Jones G. R. (2004), p. 194ff Dickel K. E. et al. (1994), p. 125ff
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would be product proliferation. As competition is immense among existing players, pricing games which would have to be supported by the majority of the industry are very difficult to introduce. Also, apart from Apple only one player is currently making profits, namely Dell. This circumstance makes it difficult for the other players to lower prices, as they might incur very high losses. Also Apple with a traditionally high cost structure will see this opportunity for entry-deterring signals as the least attractive. Although financially feasible limit pricing, meaning the lowering of prices below the average cost curve of potential new entrants, who wouldnt enjoy the same economies of scale in the beginning as existing players, Apple has never used this option, as the fear of price wars within the industry poses a far greater threat than the benefit from increasing the barrier to entry. Maintaining excess capacity would be in contrast to the manufacturing process at most PC companies, as they have introduced lean manufacturing systems as well as Just-in-time production. Also the rapid decrease in value and price of old technology prevents maintaining excess capacity. 208 Product proliferation means that the current competitors try to cover all market niches, which in turn would lead to higher barriers to entry, because new companies willing to enter the market, wont be able to find any unsaturated niches. The current product range of Apple and competitors are a strong signal to potential entrants, that there is no space for them in the highly competitive PC market. Apple has constantly tried to fill more and more niches in the consumer PC market, as they made a wide range of their products affordable for consumers. It introduced PCs priced below the magic $1,000 limit and expanded to consumer electronic markets, reinforcing the maturity of the PC industry having no space left for new competitors.
7.9 Strategy to manage rivalry

Apple of course has to consider the more direct threats from within the industry and also put measures into force to actively manage this rivalry. A high degree of competition can quickly lead to intense price wars and decreasing profitability. Apple in this case has a variety of possibilities, three basic options to handle competition within the industry being further analysed: Price signalling, price leadership, nonprice competition, and capacity control. For the same reasons as before, any kind of
208
Hill C. W. and Jones G. R. (2004), p. 204ff
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price signalling is useless to pursue, as the famous tit-for-tat strategy wouldnt work. Price leadership would mean that the weakest player in the PC market would set a price, which would then serve as orientation to price its own products. The reason why Apple cant rely upon such a system, is that its products are far to differentiated, so that any kind of price settings from its competitors could not really act as an indicator for Apples pricing options. The competitive nature of the PC industry and the clash of the various corporate cultures do the rest to make price leadership strategies impossible. Apples only chance to impact the intensity of existing rivalry in the industry is through non-price competition. To break non-price competition down into its four main components the following chart is used to exemplify Apples strategic alternatives.
Four Types of non-price competitive strategies PRODUCTS

EXISTING NEW
MARKETING SEGMENTS
EXISTING
Market penetration
Product development
NEW
Market development
Product proliferation
All four tactics are achieved by means of product differentiation. Apples approach here is a mixture between product development and product proliferation. Product proliferation tactic is identical to the one used to create barriers to entry. If new niches develop, the leader gets a first mover advantage as it was the case with Apple in the digital music market where it was the first company to offer online music via iTunes and the suitable device, the iPod, thereto. When other companies start to move into to the niche, competition is stabilised and hence decreases rivalry.
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Product development signifies the innovation of new or better products in order to replace the old ones. Apples lead in innovation and design is more than suited to exploit opportunities to gain market share through product development. As the iPod and iTunes were made available as a Windows version in 2002 and 2003 respectively209, the demand skyrocketed and helped to propel sales to record highs. More than half of all iPods sold are to Windows users and the expected estimates of being able to capture 20 percent of the pay-per-download market, were beaten in an spectacular way - iTunes today accounting for 70% of the market for the digitalmusic downloads. 210 Apple is adapting to its environment effectively through generic and competitive business level strategy and according it with the investment strategy adds to the overall picture that Apple is doing quite well pursuing its strategies on the business level. However one has to remember that competitive advantages in the high tech industry are hard to sustain, but Apple has until now safeguarded its distinctive competencies and utilised the business strategies to exploit the advantage which arises through these competencies. But competitors dont sleep the major PC makers have already started to differentiate themselves to offer products which compete with Apples ones for the same customer groups. The perceived value, generated through superior design and innovation proves to be an inimitable competency and therefore as long as such an advantage exists for Apple, Apple will continue to outperform rivals.
209 210
Baltimore Sun (2003) BusinessWeek (2004b)
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8 Global strategy
Apples unique history made the company known as the typical example for the American Dream stereotype. Nowadays, Apple is more than a domestically operating enterprise. Over the years it has become a pure multinational, resourcing raw materials and selling products globally.
8.1 Apples foreign operations

As Apple manages its business primarily on a geographic basis, its segments are the Americas, Europe (including Middle East and Africa), Japan, the Retail segment and Others (comprising Asia-Pacific). This organisation already indicates Apples widespread global operations and activities although the United States still represent Apple's largest geographic marketplace with 58% of net sales. Nevertheless, a large portion of the company's net sales is derived from its international operations. Also, a majority of the raw materials used in Apples products is obtained from foreign sources. Final assembly of products outside the US is conducted in Apples manufacturing facility in Cork (Ireland)211 and by external vendors in Taiwan, Korea, the Netherlands, the Peoples Republic of China and the Czech Republic. Currently, manufacture of many of the Apple PCs components and final assembly of all portable products are performed by third-party vendors in Japan, Taiwan and China. Sale and marketing subsidiaries were founded in several countries all around the world to serve a global customer base whereby Japan and France became the most prosperous markets for Apple. In contrast, to penetrate countries like Germany or the United Kingdom was difficult due to restrictions and cost- as well as responsiveness pressures. Additionally, the company expanded its retail programm, the Apple Store, to Japan by launching the first international shop in the Ginza in Tokyo. As margins on sales of Apple products in foreign countries and on sales of devices that include parts obtained from foreign suppliers can be adversely affected by foreign currency exchange rate fluctuations, by international trade regulations, including tariffs and antidumping penalties or by pressure on cost reduction and local responsiveness and therefore can impose huge risks to the company, its necessary to evaluate why Apple moved abroad.
211
Earlier, also one facility in Singapore
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As with any internationalisation Apple tried to increase profitability through lowering costs and to explore new customer groups through selling more. When Apple started this expansion in the late 1980s and intensified it in the early 1990s the company already benefited from lower costs over the life-cycle of their products as learning effects and economies of scale occurred 212. These abilities enabled Apple to differentiate its product offerings (new products and services). Furthermore, Apple transferred these distinctive competencies (but still domestic) which generally lead them to achieve superior efficiency, quality, innovation or customers responsiveness to foreign countries for exploiting a probable value creation potential. However, going abroad created the chance to not only use, but also improve and leverage Apples skills. A perfect example for this development at Apple is the PC companys production plant in Cork (Ireland). The Americans shipped over their know-how and knowledge to the Celtic Tiger which is characterised by low taxes and by a well-educated work force. In the end, Apple achieved to lower costs as transportation efforts to Europe and consequently expenses decreased. Additionally, value arised from being able to provide faster delivery of accurately fabricate products, better service, reach a higher customer satisfaction and in the end have increased sales/profits. It is indispensable for Apple to maintain and even strengthen their way towards internationalisation by taking advantage of the positive aspects of globalisation. For instance, the African market isnt covered at all in practice despite being in the position to provide Apple with a small, but soaring number of wealthy clients. Although having experienced difficulties in Germany and the UK years ago, even there Apple succeeded as their products became more and more stylish.
8.2 Apples Transnational Strategy

From the four strategies possible Apple finds itself in the fourth quadrant facing both, high pressure for local responsiveness as well as for cost reduction. Its by far the most difficult one to realise, but if accomplished a company can obtain a low cost structure as well as a considerable level of customer acceptance. Apple applies this strategy, but hasnt reached the optimal point yet. This is due to the fact that Apple could get to an appropriately low cost situation, it still has to persuade PC users in
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see: experience curve
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each country from the very entry of their technological and innovative superiority. Despite of living in a world more and more knitted together a huge amount of computer owners doesnt know much about Apples technology. Moreover, Apple is heading towards Transnational Strategy from a point in between Global and Transnational Strategy.
8.3 Apples methods of entering new markets

When deciding to move abroad Apple executives were asking themselves the questions which markets to enter, when to enter and on what size. This meant finding out the size of the market, possible local consumers, their wealth and purchasing power and the situation in Apples market there (i.e. competition). Would Apple have to adapt products to meet the local preferences? Apples assessment of benefits, risks (also politically) and costs concluded in first of all expanding to Europe which was and is only slightly different to the US. Later on, politically risky and highly competitive Japan was taken on, followed by a number of other countries. Timing the entry wasnt hard to work out as the US market at the beginning of the 1990s was in a bad shape (i.e. recession) concerning the business cycle and not many other PC companies went overseas. So Apple despite taking on some risk as nobody knew what it would be like was in a position to build up demand and pre-empt future rivals as first-mover advantages.
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Furthermore, Apple tried to start their foreign ambitions with babysteps which means not being exposed to too much risk if the decision failed. As soon as the company encountered that business performed, Apple imposed a strategic commitment to enhance their activities overseas by all means and forces. The method Apple used was to simply export at the very start which also could infer huge costs (e.g. exchange rate fluctuations, shipping costs, cheaper producing competitors located in the objected market) by using economies of scale at their US plants, but altered the strategy and implemented fully owned subsidiaries in some specific countries (e.g. Cork plant in Ireland). Additionally, Apple started licensing their PC production, but that emerged only within the US. Franchising or joint venture never played an important role for Apple as the PC producer never wanted to provide partners with access to their know-how. So at the moment, Apple operates with a good strategy by combining strategically allocated subsidiaries worldwide with exporting activities from the companys assembly plants. With putting aside domestic US mergers and acquisitions and the Microsoft deal, Apple never proceeded any forms of major strategic alliances with foreign companies.
8.4 Pressures for cost reductions and local responsiveness

Although the PC market is one of high technology and high quality goods, Apple as well as the whole PC industry has to have an immense focus on the cost side. Increased domestic and abroad competition makes use of prices as the main source of competitive advantage. This wasnt the case at the start of Apples business, but brought the company already on the edge in the 1990s. This was one of the reasons for Apple to look for business opportunities overseas, but even there pressures for cost reduction were sustained. Therefore, price policy which means drawing the line between the quality and the price of a product was and is an essential one for Apple as the management often was reluctant to lower short term profit margins. Even today, not charging too high or low represents a crucial criteria when selling fashionable PC ware 213.
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Failure of the Cube PC
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Concerning the global strategy, consumer awareness and acceptance of Apples products is important. Not for the Wintel-standard base industry, but especially for Apple log-on and network effects are extremely dangerous as they influence people not to abandon the OS or PC-standard they were trained on or are constantly using at home as in office. This makes it much harder for Apple to gain market share abroad (e.g. Europe) as theres a much higher percentage of people that choose Wintel than in the US. Therefore internationally, adapting to local tastes and preferences, being able to deal with the different infrastructure and altered traditional practices becomes much more decisive abroad to acquire customers. In addition, demands of local politics arise (e.g. Japans wired political and economical situation) and require Apple to act to avoid running the risks of protectionism, local legal barriers or economic restrictions. Although Apple doesnt vary its product and marketing message from country to country, the company has early developed strategies to respond to pressures in local acceptance by adapting. Building up an intercultural communications skill when doing business helped them to prevent, minimise or get rid off problems arising from internationalisation. Globalisation moves on, but doesnt destroy local differences, local uniqueness. Nevertheless, the fear can emerge that Apple reinforces their global ambitions too little although having been one of the front-runners for an international strategy in the PC sector.
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9 Corporate strategy214
9.1 General information
Corporate-level strategy deals with identifying the businesses in which a company should invest its resources 215 and possible opportunities for expanding or contracting. As Apple is engaged in horizontal integration, vertical integration, strategic outsourcing, and diversification, this chapter will take a closer look at the companys specific activities and goals in these areas. In general, it is a special characteristic of the network era that firms create value networks of cooperative specialists through vertical integration/partnerships and strategic outsourcing. This development results from the differences between the traditional cost structure and the coordination cost structure of the networked economy. Whereas the traditional structure included a trade-off between production costs and coordination costs when using markets (buy external ! outsourcing) or hierarchies (make internal ! vertical integration, long term relationships) as organising mechanisms, the network structure led to overall cost reductions and favours markets over hierarchies. This can be shown in the following illustration:216 traditional structure
production costs markets hierarchies LOW HIGH coordination costs HIGH LOW markets hierarchies
network structure
production costs LOW MEDIUM coordination costs LOW LOW
9.2 Horizontal integration

Horizontal integration is the process of acquiring or merging with industry competitors in order to maximise long-run profitability. Although there are two possible ways of pursuing horizontal integration, Apple only engages in acquisitions and obviously doesnt consider a merger at the moment. In fact, Apple has acquired and may continue to acquire companies that have products, services, personnel, and technologies that complement the companys strategic direction and product portfolio. In fact, Apple is aware that these acquisitions may involve significant risks and uncertainties, for instance concerning
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Hill C. W. and Jones G. R. (2004), chapters 9 & 10 Alexander M., Campbell A. and Goold M. (1994), p. 5 Kraemer K. L. (2003)
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the integration of the acquired companies, expenses related to the acquisition, legal obstacles, or product quality issues. Apple generally pays cash for its acquisitions as current shareholders percentage ownership and earnings per share may become diluted if the company issued its common stock or other equity related purchase rights as in an acquisition. 217 Recent acquisitions suc h as the acquisitions of Emagic and PowerSchool highlight that Apples acquisition policy is aimed at improving the companys value by adding valuable skills, knowledge, and products of the acquired companies. In fact, these acquisitions of relatively small companies didnt give Apple a huge possibility to enhance the competitive advantages that stem from economies of scale or scope but added significant value to the firms product portfolio. As Apple is generally engaged in the area of product bundling, these new products also give the company new possibilities in offering new and differentiated product bundles and can foster crossselling.
9.3 Vertical integration

Through the use of vertical integration, a company expands its operations either backward into an industry that produces inputs for the companys products or forward into an industry that uses or distributes the companys products. In the case of Apple which can be regarded as a vertically integrated firm, the company is primarily engaged in the field of forward vertical integration in order to gain control over its distribution channels. For instance, Apple entered the retail industry through the introduction of its retail stores in 2001. Moreover, Apples online store can be seen as another aspect o f vertical integration in the distribution area. Concerning the positive and negative aspects of Apples strategy, it can be said that vertical integration enables the company to gain flexibility in terms of pricing options due to improved scheduling and more control over the distribution of its products. On the contrary, possible cost disadvantages and problems because of demand unpredictability may also arise. In addition, Apples vertical integration efforts can be seen as an example for taper integration as there are in-house as well as independent distributors and therefore should bear less risk for high bureaucratic costs (than in the case of full integration).
217
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Strategic outsourcing involves separating out some of a companys value creation activities within a business and letting them be performed by an independent entity. Indeed, Apple has outsourced various functions in terms of operations and logistics as its contract manufacturers and outsourcing companies can perform several valuecreation functions at a lower cost due to low-cost location and other competitive advantages. As Apples focus lies in the design of its products and its strengths can be seen in the fields of innovation, creativity, and marketing, it makes sense that the company focuses on these value creation functions and outsources its manufacturing activity to contract manufacturers that specialise in this function. Therefore, Apple can reap benefits in terms of a lower cost structure, opportunities to differentiate its products, and increased focus on its distinctive competencies. Nevertheless, it has to be stated that the company bears risks with regard to holdup due to the dependence on its outsourcing partners as well as loss of control and information.
9.5 Diversification
Diversification is the process of adding new businesses to a company that are distinct from its established operations. As Apple has recently engaged in the digital music player business which can be seen as distinct from its traditional personal computer business, this can be regarded as a diversification activity. By taking a closer look at Apples step into the music player market with its iPod digital music player, various elements of Apples diversification strategy become obvious. For insta nce, Apple could transfer its distinctive competencies in the computer industry (technological innovation, quality, and creativity) to the music player industry and create an innovative, high-performance device which consequently attracted many customers d ue to its design, capabilities, and quality. Moreover, this is definitely an example for related diversification as there are obvious links to Apples core business which are highlighted by the iTunes music software that connects the iPod with the iMac and therefore creates the ultimate link between these two industries. In addition, the launch of the iPod shows that Apple uses internal new venturing as its preferred entry strategy because it possesses a valuable set of distinctive competencies that can be leveraged to the new business and because internal new venturing is generally seen as the typical entry strategy for
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related diversification activities. Furthermore, Apples new product didnt fail because there were no problems in terms of scale of entry, commercialisation, and implementation and the companys R&D activities provided a strong basis for a successful internal new venture.
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10 Strategy implementation
10.1 Corporate structure, control, and culture
As Apples corporate structure, control, and culture have been examined in detail in previous chapters, the following paragraphs should sum up the key points with regards to strategy implementation. In fact, these main elements of strategy implementation are an important factor contributing to achieving superior efficiency, quality, innovation, and customer responsiveness and need to be designed so that they are consistent with the companys functional- level, business-level, corporatelevel, and global-level strategy. In fact, Apples organisational structure is a functional structure which promotes specialisation, control, and decentralisation of authority and responsibility which should allow the various functions to set appropriate actions in order to implement the companys strategy. Moreover, Apple organises its operating business through an (impure) geographic structure which increases responsiveness to regional customers and reduces costs as well and therefore goes hand in hand with Apples international strategy. In terms of control systems, the use of personal and behaviour control systems enables efficient strategy implementation. Finally, the values and norms incorporated in Apples corporate culture support the firms organisational structure as well as its strategy by promoting innovation, initiati ve, motivation, and creativity throughout the company which can be regarded as central elements of Apples strategy. Generally, organisational structure, control, and culture shape the way people behave, their values and attitudes, and determine how they will implement an organisations business model and strategies218. So, it can be concluded that through the consistent interaction of Apples structure, control, and culture as well as through the resulting coordination and motivation of its employees the company is enabled to effectively implement its policies at the various levels of strategy.
10.2 Implementation219
It is now important to examine the specific policies that Apple uses in order to implement its strategy.
218 219
Hill C. W. and Jones G. R. (2004), p. 405 Hill C. W. and Jones G. R. (2004), chapter 12 and 13
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First of all, at the functional level a companys competitive advantage depends on its ability to use and develop distinctive competencies and therefore it is important to build organisational structures and capabilities that will allow a company to outperform its competitors. In the case of Apple, the companys functional structure is definitely the optimal solution to group its employees and tasks in order to build competencies. In fact, the functional structure as well as the strategic control systems which should foster monitoring, constant improvement, and organisational learning and the companys cohesive culture which emphasises central values (innovation, quality, creativity, initiative) across all functions promote Apples functional-level strategy. Second, in terms of business-level strategy, strategic management has to link and combine the competencies in a companys value chain functions in a way that enhances the ability to differentiate products and economise on bureaucratic costs. So, at Apple effective strategy implementation at the business level links the companys sources of competitive advantage (like superior innovation) in order to improve the firms ability to add value and to differentiate its products. As a result of integration problems, theres a need for the development of more sophisticated control systems, more complex kinds of organisational structure, and a culture based on professionalism or collegiality which can be observed in the ongoing development of Apples culture, structure, and control in the past. Third, by taking a closer look at the implementation of corporate -level strategy, it becomes obvious that in terms of Apples vertical integration and related diversification efforts, effective strategy implementation depends upon the companys skills in terms of integration and the appropriate use of strategic control, especially behaviour control in both cases as well as financial control in the case of vertical integration and organisational culture in the case of related diversification. Finally, in order to successfully implement its global-level strategy, it would be optimal for Apple to use a global matrix structure combining its product groups and geographic divisions. In spite of this, the creation of an information network that lets Apple capitalise globally on the skills and capabilities of its employees as well as the use of strategic outsourcing and a network structure which promote deep relationships with its global suppliers, manufacturers, and distributors foster the companys efforts with regard to its global strategy.
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11 Analysis of strategic factors

The analysis of strategic factors will look at the strategic fit between internal and external analysis through the combination of the Internal Factor Analysis Summary (IFAS) and the External Factor Analysis Summary (EFAS) that have been examined and analysed in detail before. Thereby, it will evaluate the importance of the key strategic factors and finally end with a review of the companys mission and (strategic) objectives with regard to these factors.
11.1 Situational analysis

The situational analysis combines the most important strategic factors from the IFAS and EFAS. In Apples case, the 9 most important factors for the companys current and future performance are:
Strategic factors Strenghts Innovation Superior innovation constitutes the most important competitive advantage for Apple because the company is famous for its technical revolutions, inventions, and development as well as its engineering excellence. As this source of competitive advantage is widely regarded as the most important one in terms of future profitability, innovation is especially vital for Apples future performance. Creativity & design By regarding the PC not just as a commodity but as a premium product, Apples puts special emphasis and its huge creativity skills into the design of its products. Therefore, Apples customers get a higher value for Apples products due to aesthetics, lifestyle, or similar reasons. As this leads to higher sales and profits, this is an important cornerstone of Apples intermediate-term performance. Weaknesses Incompatibility As Apples hardware, software, and other products arent compatible with the Wintel standard, this incompatibility deters possible customers and PC-producers. This leads to lower sales and profits, thereby weakening especially Apples long-term performance. High operating costs High operating costs are caused by high Marketing and R&D costs and reduce overall profitability. This also immediately weakens Apples short-term performance. Opportunities Technological forces Apple can take advantage of the importance of technological forces which enable possible first mover advantages through superior R&D Comment
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and innovation leadership in the future. This can lead to high returns, thereby improving Apples long-term performance. High barriers to entry in the PC industry High barriers to entry due to high brand loyalty, high economies of scale, and other factors offer the opportunity to maintain market share as the potential new entrants are unlikely to enter the industry. This ensures Apples profits and constitutes an opportunity in terms of intermediate-term performance. MP3 player market in growth stage Threats Substitute products in the PC industry Rivalry among established companies in PC industry As many customers regard the PC as a commodity, these are often attracted through the lower price of the Wintel-standard products. This threat can lead to lower profits in the intermediate-term. Intense rivalry in the consolidated PC industry can cause price wars which are an important threat to Apples profitability as they would reduce profits immediately and therefore leading to inferior performance in the short-term. Apple can use the iPod and its superior design/quality to earn high profits in this growth market, thereby improving its current performance.
11.2 Strategic Factor Analysis Summary

The Strategic Factor Analysis Summary (SFAS) combines the 9 strategic factors, gives them a weight (0-100 each, overall sum of 100) and a rating (from 5 = very significant to 1 = not really significant), calculating the resulting weighted score and evaluating the factors duration (short-term = 1 year and below, intermediate = 1 to 3 years, or long-term 3 years and above).
Strategic factors Weight Rating Weighted score Strenghts Innovation Creativity & design Weaknesses Incompatibility High operating costs Opportunities Technological forces High barriers to entry in the PC industry MP3 player market in 8 4 32 x 13 6 5 4 65 24 x x 12 9 4 4 48 36 x x 18 9 5 5 90 45 x x Shortterm Intermediate Longterm
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growth stage Threats Substitute products in the PC industry Rivalry among established companies in PC industry Total 100 10 4 40 x 15 5 75 x
In short, Apples key strategic factors are innovation (strength), incompatibility (weakness), technological forces (opportunity), and substitute products in the PC industry (threat).
11.3 Review of mission and objectives

The importance in analysing these factors lies in the interdependence with the companys mission and objectives. One would expect that these strategic issues need to be addressed in the mission statement, as their effective management is crucial for the success of the company. To start with the analysis, the mission statement has to be recalled: Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. 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.220 Although short, the first sentence already creates the link between Apples obvious and most powerful strength in innovation and the results from the SFAS-table. In other words, Apple gives its strongest distinctive competence a top priority by pointing out the computer revolution, initiated by Apple during the late 1970s, in the first sentence of the mission statement. Furthermore Apple also addresses key technological issues as its commitment to excellence in all major business areas it operates in. Superior quality and innovation through the extensive use of R&D is the main driving force behind Apples recent success. To build on that and further
220
http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-faq#c orpinfo2, 14.02.04
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increase its customer base, is clearly one of the main objectives of the company. It doubtlessly highlights its strengths and opportunities in every situation. Nevertheless neither mission statement nor objectives are dealing with Apples threats and here lies another major problem within Apple. Apple and especially its current CEO lack realism, meaning that they have a difficulty to accept economic reality and live in their own innovative digital world. Apple, still condemned to be a niche player because of incompatibility and high pricing options, doesnt comment at any time on any possible threats such as competitors eaten in Apples market share, such as Dell in the education market or Sony in its notebook segment. Therefore attempts should be made to adapt its objectives and the mission statement not only to one half of the SFAS, but to incorporate every strategic factor. Any change in the mission statement and objectives would have huge and direct impacts on any strategy, beginning with functional over business to corporate strategy. In order to change all of them, the organisation as a whole has to change. For this purpose you need to first unfreeze the organisation in order to be able to move it. The change has to be lived within the people, because it is only people who can change the organisation.
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12 Strategic advice
As Apples current strategy isnt appropriate for the revised mission and objectives, this chapter will evaluate possible strategic alternatives for Apple based on the previous analyses. Based on these alternatives, we will ultimately choose a recommended strategy and examine its implications, implementation, evaluation, and control.
12.1 Strategic alternatives
We have included eight exemplary strategies in the four quadrants of the above diagram indicating possible combinations of strengths and weaknesses with opportunities and threats. Now, we will take a closer look at four of these specific strategic alternatives and choose the recommended strategy. 12.1.1 Take advantage of technological forces by innovation (S-O)
Innovation has been identified as one of Apples core strengths, technological forces as one of Apples core opportunities. Both innovation a nd technological forces combined form a possible alternative strategy in terms of strengths and opportunities. Apples innovation made the company famous for technical revolutions, for outstanding inventions and development as well as engineering excellence.
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Technological forces helped Apple to reach innovation leadership, a first-mover advantage and higher returns in embryonic/growth industries through superior Research & Development. The strategy is to apply increased innovation to fully exploit technological forces which in turn will help to push innovation once more. As a kind of perpetuum mobile this process circle improves Apples innovation further and accomplishes to take advantage of the technological forces. This will guarantee Apples demand for innovation leadership in the long run as well as differentiation, growth and stability without raising risk connected innovation efforts (i.e. uncertainty if customer will respond to an invention). Negatively, there is to say that this strategic alterna tive has to be well funded at the very beginning and also in the short run to be sustainable. 12.1.2 Use creativity in a way to avoid substitute products (S-T)
Creativity has been identified as one of Apples core strengths, substitute products as one of Apples core threats. Both creativity and substitute products combined form a possible alternative strategy in terms of strengths and threats. Apples creativity tried to attract customers by establishing an attitude of regarding personal computers not just as a commodity but as a premium product. Aesthetics should originate lifestyle. Substitute products in the PC industry demonstrate the Wintel standard based commodity type goods which are competing with Apples products on the market place. Substitute products of Apples competitors make it hard for the company to differentiate on the market for attracting new customer groups. Strengthening Apples creativity efforts is the only way this can come about. This alternative strategy is intensively connected to models requesting a further rise in innovation. Therefore, as design and creativity forms one of its vivid pillars these actions improve Apples products, make them more stylish, more unique and are determined to create higher sales and profits in the end. Costs and funding are observed to be the biggest advantage of this strategic alternative. 12.1.3 Take advantage of the MP3 player market by overcoming a disimproving business execution (W-O) Business execution has been identified as one of Apples core weaknesses, the MP3 player market as one of Apples core opportunities. Both business execution and the
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MP3 player market combined form a possible alternative strategy in terms of weaknesses and opportunities. Business execution became a problem area through severe difficulties in turning Apples inventions into real money and by not focussing enough on innovative business models/processes. By implementing the iPod, the MP3 player market moved into the centre of Apples digital online content/music strategy. Its outstanding design as well as the quality of its killer applications such as an enormous storage capacity provides Apple with considerable profit potential. For years, Apple experienced severe difficulties with their business execution. Too much money was improperly spent and therefore wasted which would regarding the strategic alternative result in the obligation to displace it. Only if done so, the grounding for bringing new product ideas (e.g. Apples successful MP3 player iPod) ahead can be elaborated. This change has to be initiated by executives who wouldnt be very likely to either concede their own malpractice and mismanagement or even to alter them. 12.1.4 Act to minimise high operating costs and avoid rivalry (W-T)
Operating costs have been identified as one of Apples core weaknesses, rivalry as one of Apples core threats. Both operating costs and the rivalry combined form a possible alternative strategy in terms of weaknesses and threats. Apples extremely high operating costs mainly result from huge Marketing expenses (e.g. Apple retail stores), essential R&D as well as production liabilities. Rivalry or market competition represents possible future price wars due to the elevated level of competition and may result in a forthcoming downward price spiral. Therefore a saturated PC market will decrease industry demand and make the sector fiercer. Due to Apples reliance on the PC market and the existence of market exit impediments for Apple such a development would adversely affect the companys profits, would force them to plunge sharply and if ongoing over a longer period would endanger Apple itself. The aim of this strategic alternative is to lower Apples high-up operating costs to be able to succeed on a market, characterised by enormous competition. This will immunise Apple against tough pricing policies implemented by its rivals and will suit the company to maintain the value (the V) of its products by still providing R&D with indispensable funds. Furthermore, costs (the C) can be reduced by cutting utopian product ideas and non-effective Marketing spending and consequently profitability secured.
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12.1.5 Recommended strategy: Operation costs (weakness)/rivalry (threat)
A peculiar significance for Apples corporate development and even survival is mainly imposed by the current situation where Apples high operation costs meet the intense market rivalry, identified by Apples strategic analysis. To solve this main problem Apple faces at the moment, the fourth alternative strategy has been chosen as the recommended one.
12.2 Recommended strategy

The recommended Weakness-Threats (WT) strategy focuses as above mentioned on Apples weakness, the high operation cost structure and Apples threat of intense rivalry amongst competitors within the industry, as the PC industry, Apples core business, approaches saturation levels signalling that the PC market has reached its maturity stage. The WT-strategy is basically defensive and primarily tries to avoid and minimise weaknesses, which in our case would be the existing rivalry. Given this scenario, the following chapter deals with the implications for the strategies on each level of business. To fully grasp the benefits of this strategy one has to carefully analyse the changes this new strategy would bring to Apple. 12.2.1 Functional level strategy
The functional level strategy, aiming at improving the efficiency of Apples day to day operations, will need to adapt to the WT-strategy. To be in coherence with its functional level strategies the actions undertaken ha ve to aim at cost reduction effects. We suggest that efficiency should be improved through a reduction in marketing expenses, because the $193 million spent 2003 on building brand loyalty are far too much. Apples high cost structure must be reduced for two obvious reasons. On the one hand Apple could be better prepared to face competition within the industry, as it could actively play a role in price wars, because of the lower cost structure and on the other hand high revenues could serve as a war-chest against potential entrants into the market. Especially the retail store initiative proved to be a very costly one. Also after the initial hype about Apples brand new retail stores, much of the coolness factor has worn off and managers at Apple face increasingly tougher reality. The visitor rate per week dropped from 5,000 to 3,500 and the conversion rate of Wintel customers has been a skinny 0.9%, therefore not adding significant value to the companys value chain. By cutting marketing, we want to
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emphasise that market research however will remain at the same levels in order to assure that the R&D department makes the right decisions in terms of product innovations. We believe that the brand name Apple is already strong enough developed to remain alive as hip brand even with decreased marketing expenses. Also expensive prime time advertising campaigns should be only utilised if necessary, because we believe that Apples products are themselves means and channels of marketing. The stylish forms, paired with superior engineering quality are a delight for the eye and therefore successfully create a positive corporate image of the company. Another area where costs are high above industry average is operations and logistics. Apple has continuously experienced bottlenecks in its supply chain management, which consequently led to increased costs due to time lags in the production process. To ride down the experience curve and enjoy economies of scale, Apple has to continue to outsource production processes and find a broader group of key suppliers in order to be in a better bargaining position, which would lower the cost of inputs therefore lowering overall production costs, widening the spread between costs and value for the customer. As a result Apple could price its products also more competitively on the market and subsequently, facing the threat of immense rivalry, win market share from its rivals 12.2.2 Business level strategy
At the business level, strategy should aim at further improving the weakness and therefore getting rid of the potential threat. As we defined to focus on Apples cost structure, ways to reduce it have to be found which would then result in the desired value creation effect. Right now Apple as analysed is pursuing a broad differentiation strategy with particular strong emphasis on the software and peripherals markets as its current performance in the digital music market shows. To obtain cost advantages, Apple has to shift its strategy from being a pure differentiator to combine the advantages of cost leadership and differentiation strategies simultaneously. As the competitive nature of the high tech industry is anyway removing barriers between both strategies, Apple could utilise this trend for its own benefit. The key success factor here is to achieve significant economies of scale and to decrease production costs further by shifting more of the production process to low labour costs countries. Apples task is to effectively coordinate the unique components needed for its technology to adhere to the existing high standards. Apple in the past tried not for
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nothing to control the whole supply chain management on its own, but within an industry where critical mass has to be reached in order to be profitable, Mr Jobs has to realise that beautiful doesnt always mean profitable. Competitive strategy has equally to match the generic business level strategy as we target a lower cost structure. The savings occurred from the implementation of functional strategies, hopefully leaves us with more powerful tools to survive in the competitive structure of the industry. In addition to the previously available non-price tools to create barriers to entry and to reduce rivalry inside the industry, Apple now can use limit pricing to deter potential entry as it now, with a lower cost structure, can survive lasting price battles and effectively signalling the environment that it wont let any firm take market share away, especially if it would target the same customer needs and groups. If Apple manages to implement the necessary measure to shift from a pure differentiator to a cost leadership oriented differentiator it can combine low cost structure by meanwhile still offering unique and superior products, which would further decrease the threat of rivalry. 12.2.3 Corporate strategy
Apple, as previously examined, today is a company which is vertically forward integrated by operating its own distribution channels such as the criticised expensive retail stores. If Apple wants to stay vertically integrated it has to start controlling costs and for instance enter into lease agreements for its stores, which are less expensive. To experience cost reduction effects, Apple has to continue its policy of outsourcing major parts of the products and getting more suppliers to provide them with key components in order to be independent of a particular supplier. The outsourcing efforts should include more value chain activities and as suppliers with their superior efficiency in producing components at lower costs can pass on these savings to the company, Apple can benefit greatly through outsourcing and likewise concentrate on its core competencies design and innovation. The last choice would be the horizontal integration, expected to yield cost savings through M&A, but reality shows us that often these actions fail to realise these anticipated gains. To sum it up the key to a better performance for Apple is to reduce its cost structure through a reduction in marketing expenses, a multifaceted supply chain, and a combination of differentiation and cost leadership strategies bringing together the important elements from both, resulting in a lower C (cost) and a higher V (value) for
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the customer due to the now made possible price reduction as you can see in the following diagram.
Lower prices to generate demand Initial Status V-P V-P P1 P2 V* V-P C2 V-P V V-P C1 V-P
12.3 Implementation
In order to implement a strategy that focuses on lowering operating costs, Apples CEO and the companys other senior executives have to continuously stress this goal and motivate as well as coordinate the workforce through incentives, leadership, and commitment. Moreover, they have to shape/adapt the companys culture and structure so that it fits to the new objectives but still provides a basis for maintaining the firms distinctive competencies and leading to a competitive advantage. Concerning the corporate culture, cost awareness (where appropriate and useful) has to become incorporated into Apples set of values and norms. Although this might be one of the most difficult parts of a successful strategy implementation as several CEOs in the past failed in their attempts to change Apples culture, Steve Jobs is definitely able to manage this challenging task. By taking Apples organisational structure into account, it becomes obvious that an important step towards the realisation of the ambitious goal will be to coordinate and integrate the efforts of all employees so that they are consistent with the companys strategic objective. In fact, by allocating even more responsibility to single employees, these
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will take advantage of their authority, creativity, and flexibility and therefore search for new ways to contribute to the firms goals.
12.4 Evaluation and control

Actually, Apples current information system is highly capable and advanced and therefore should be able to provide sufficient feedback about the companys performance and the status of its cost reduction objectives in an accurate and timely manner. Moreover, through the use of the firms intranet the whole workforce as well as the management team should be informed about the current status quo and IT can also facilitate to implement appropriate strategic control measures which should provide instantaneous and continuous feedback on the performance and effectiveness of the firms strategy-specific activities. In fact, these strategic control systems should contain incentives to motivate the workforce in order to improve efficiency, quality, innovation, and customer responsiveness. Moreover, in order to be effective, they should use IT for measuring/monitoring purposes, comparison of actual/desired results, and the final evaluation which could lead to enhanced or corrective action. In our case, Apple as it currently concentrates on personal and behaviour control should also implement output control in terms of performance goals for separate divisions or even specific employees. These performance goals should support the cost reduction strategy and therefore lead to a successful implementation as an accompanying reward system would provide a motivating incentive for the employees. Nevertheless, management should be aware that possible corrective measures need to be taken into account if the companys new strategic direction doesnt enhance its performance and therefore the responsible managers should be willing to take even harsh corrective moves if necessary. Finally, as already mentioned before, evaluation procedures play an important role in a successful strategy implementation and therefore should act as a monitoring activity that controls the companys deve lopment due to the new strategic objectives and provides top management useful support in making the right and necessary decisions. In conclusion, all these efforts should lead to higher profitability and a prosperous future for the company.
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13 Conclusion
As our strategic analysis and the resulting strategic alternatives as well as our strategic recommendation actually summarise the main facts of this strategic audit and provide a ventured but definitely interesting (and on a broad strategic foundation based) suggestion for the company, we would like to conclude this paper with some personal thoughts: In fact, it was certainly a challenging, interesting, and beneficial task for us to pursue this strategic audit that was not only a personal milestone in our academic history but above all improved our overall knowledge concerning the company and the strategic management tools, processes, and methods. Moreover, this paper can be regarded as a beneficial work as it gave us the unique opportunity to visit the companys office in Vienna (Austria) or engage in written communication with its branch in Cork (Ireland). In addition, this all meant a great chance for us to put our theoretical knowledge in terms of strategic management and other areas into practise and to get a deeper insight into a company which fascinates us due to its exceptional history, its amazing capabilities, and the unique strategy it is pursuing in dealing with present and future challenges in a rapid-moving industry environment. Finally, we hope that weve been able to provide the reader with a comprehensive and consistent strategic picture of Apple Computer Inc. and that our creativity and design can contribute to superior innovation as well as the content does to superior quality. Of course, we are thankful for any comments, advice, and recommendations and will value your thoughts as a useful input to reach superior customer responsiveness.
Valentin Iliev, Andreas Lindinger, Guenther Poettler
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! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! The Economist (1997d). How to love long and prosper. The Economist, 8 May 1997 The Economist (1997e). Of mice and men. The Economist, 27 March 1997 The Economist (1997f). Powerless. The Economist, 4 September 1997 The Economist (1998). Electronic anthills. The Economist, 19 November 1998 The Economist (1998a). Revival of the fittest. The Economist, 14 May 1998 The Economist (1998b). The rotten core. The Economist, 9 July 1998 The Economist (1999). A better beta. The Economist, 25 March 1999 The Economist (1999a). Firing the boss. The Economist, 28 October 1999 The Economist (1999b). iMaculate. The Economist, 7 January 1999 The Economist (2000). Cracks in the cube. The Economist, 5 October 2000 The Economist (2000a). The PC is dead - long live the PC. The Economist, 14 December 2000 The Economist (2001). Digital baroque. The Economist, 22 March 2001 The Economist (2002). Digital hubbub. The Economist, 10 January 2002 The Economist (2004). The next big thing. The Economist, 17 January 2004 Wall M. (2002). Apple Computer Inc (AAPL). Henry Fund Research, Tippie School of Management, University of Iowa, 22 April 2002 Wall Street Journal (2003). Attack of the iPod Clones. Wall Street Journal, 29 October 2003 Yoffie D. B. and Wang Y. (2003). Apple Computer 2002. Harvard Business School Case Study, 31 January 2003 Internet ! ! ! ! ! ! ! http://apple2history.org/ http://apple.computerhistory.org http://askmen.com/men/apr00/21c_steve_jobs.html http://bsnotes.bs.uce.ac.uk/lecturers/Brian Houghton/Apple Channels BSc.ppt http://bsnotes.bs.uce.ac.uk/lecturers/Brian Houghton/DMS 2 -2003/SBM 2001/Apple Env App Part 2.ppt http://cbs.marketwatch.com/tools/quotes/profile.asp?sid=609&symb=AAPL&sit eid=mktw http://collection.nlcbnc.ca/100/200/300/allan_publishing/history_personal_computer/eBook05.pdf
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! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! http://collection.nlcbnc.ca/100/200/300/allan_publishing/history_personal_computer/eBook10.pdf http://futurezone.orf.at/futurezone.orf?read=detail&id=210698 http://futurezone.orf.at/futurezone.orf?read=detail&id=210699 http://maccentral.macworld.com/news/2003/07/24/strategy/ http://news.com.com/2100-1040_3-252001.html http://news.com.com/2100-1042-993332.html http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irolgovCommitteeComp http://reviews -zdnet.com.com/AnchorDesk/4520-7298_16-5120446.html http://web.njit.edu/~jlw4/Mgt_480/Apple.htm http://yahoo.investor.reuters.com/MG.aspx?ticker=AAPL&target=%2fstocks%2 ffinancialinfo%2fratios%2fefficiency http://www-1.ibm.com/ibm/history/history/decade_1880.html http://www.apple.com http://www.apple.com/about/environment/corporate/corp_ehs_programs/index. html http://www.apple.com/about/environment/ http://www.apple.com/about/environment/corporate/index.html#EHS_policy http://www.apple.com/pr/bios/cook.html http://www.apple.com/pr/bios/gore.html http://www.apple.com/pr/bios/jobs.html http://www.apple.com/pr/library/2003/mar/20governance.html http://www.apple.com/pr/library/2004/feb/05anderson.html http://www.apple -history.com/ http://www.businessweek.com/@@aPgPnIUQ3BI6CRUA/1996/06/b34611.ht m http://www.businessweek.com/@@aPgPnIUQ3BI6CRUA/2000/00_31/b36920 01.htm http://www.computerhistory.org/timeline/timeline.php?timeline_year=1946 http://www.connectedhomemag.com/HomeControls/Articles/Index.cfm?ArticleI D=41683 http://www.duke.edu/~tlove/mac.htm http://www.extremetech.com/article2/0,3973,1230545,00.asp
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! ! ! ! ! ! ! ! ! ! ! http://www.industryweek.com/CurrentArticles/asp/articles.asp?ArticleID=497 http://www.internetnews.com/ec-news/print.php/3286881 http://www.kpmg.com/about/ http://www.macminute.com/2003/08/05/appleshift http://www.macnn.com/news/21787 WSJ http://www.macnn.com/news/23407 NYT http://www.macobserver.com/article/2003/12/30.1.shtml http://www.macworld.co.uk/news/main_news.cfm?NewsID=6342 http://www.siliconvalley.com/mld/siliconvalley/news/editorial/3856253.htm?tem plate=contentModules/printstory.jsp http://www.techstuff.ca/archives/554.html http://www.utilitycomputing.com
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! ! ! ! The McKinsey Quarterly (2003). The promise of purchasing software. The McKinsey Quarterly, 2003 Number 4 The McKinsey Quarterly (2004). Not by M&A alone. The McKinsey Quarterly, 2004 Number 1 The McKinsey Quarterly (2004a). The answer to video piracy. The McKinsey Quarterly, 2004 Number 1 The McKinsey Quarterly (2004b). The outlook for enterprise software. The McKinsey Quarterly, 2004 Number 1
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Appendix
Corporate memo
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Standard and Poors Rating Agency
Standrad & Poor`s Standard & Poors

short-term rating long-term rating
Moody`s Moodys
shortterm rating longterm rating shortterm rating
Fitch Fitch
longterm rating
A-1+
AAA AA+ AA AAA+ A ABBB+
P-1
A-1 A-2
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1
F1+
AAA AA+ AA AAA+ A ABBB+
F1 F2
P-2
A-3
BBB BBB-
P-3
Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1
F3
BBB BBBBB+ BB BBB+ B B-
BB+ BB BBB+
Not Prime
180

Apple Strategic Audit

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Apple Computer Inc.

Valentin Iliev Andreas Lindinger Guenther Poettler

D03103544 D03103551 D03103523

Apple Computer Inc.

Period 1975 1981 .............................................................................................. 11

Period 1981 1985 .............................................................................................. 14

Period 1986 1992 .............................................................................................. 18

Period 1993 1997 .............................................................................................. 21

Period 1998 2000 .............................................................................................. 22

Period 2001 now ................................................................................................ 23

Internal environment.................................................................................................... 27 4.1.1 4.1.2 4.1.3 4.2

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

Corporate structure ............................................................................................... 47

Corporate culture .................................................................................................. 51

Corporate resources: Finance ............................................................................ 63

Corporate resources: Research & Development ............................................. 77

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

Corporate resources: Human Resource Management ................................... 88

Corporate resources: Information Systems ...................................................... 98

5.2.1 5.2.2 5.2.3 5.2.4 5.2.5 5.2.6 5.3

External analysis of software and peripherals market ..................................119

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

Summary of external factors .............................................................................130

Global strategy ...........................................................................................................145

Analysis of strategic factors......................................................................................156

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

Strategic advice ..........................................................................................................160 12.1.1 12.1.2 12.1.3 12.1.4 12.1.5

disimproving b usiness execution (W-O) ..................................................................161

12.2.1 12.2.2 12.2.3 12.3 12.4 13

Implementation ....................................................................................................166 Evaluation and control........................................................................................167

Bibliography .........................................................................................................................169 Appendix...............................................................................................................................178

DIT | Strategic Management | Iliev, Lindinger, Poettler

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DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

2.2 Period before 1975

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

http://www-1.ibm.com/ibm/history/history/decade_1880.html, 18.01.04 http://www.computerhistory.org/timeline/timeline.php?timeline_year=1946, 18.01.04

DIT | Strategic Management | Iliev, Lindinger, Poettler

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DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc. 2.3 Period 1975 1981

Apple Computer Inc.

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc. 2.4 Period 1981 1985

Units 16.7 Million - 1990

Dollars 43.0 Billion - 1990

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.

DIT | Strategic Management | Iliev, Lindinger, Poettler

Apple Computer Inc.