Successful Market Strategy of Apple - Case Study Example

? Case Study – Apple, Inc. Case Study – Apple, Inc. Case Background The case, written by Yoffie and Slind (2008) focused on the evolution of Apple, Inc. as an organization that revolutionized the technological industry. Through its pioneering work in developing personal computers that are easy to use, the owners, Steve Jobs and Steve Wozniak, and later partner, A.C. “Mike” Markkula, Jr. have experienced the ups and downs of the organization due to competitive pressures and changes in the external environment. With the latest generated success from non-PC products, Jobs, currently the CEO is faced with the dilemma of evaluating Apple’s current performance in view of future prospects. The question that is to be responded to is: Was Apple’s recent success just another temporary “up” in its up- and-down history, or had he finally established a sustainable strategy for the company? The case is hereby assessed by addressing the questions enumerated below. I. Current Situation A. Current Performance In the 1980’s Apple’s competitive advantages focused on the following: (1) possessed strong corporate position and image as a pioneer manufacturer and marketing of easy-to-use computer for a wide range of clientele; (2) begun to exhibit excellence in product design; and (4) launched a successful Initial Public Offering of their shares. However, during this period, Apple was reported to “rely on proprietary designs that only Apply could produce” (Yoffie & Slind, 2008, p. 2) in contrast to IBM’s “open” system which enabled other computer producers to clone. The result of this on Apple’s financial performance during the 1980s was a drop in their market share by 6.2% in 1982; decreased net income from 1982 to 1984 by a significant 17%. The condition necessitated removal of Jobs as in charge of operations and eventually made him to decide leaving the position to Sculley, a previous CEO from Pepsi-Cola in 1983. The financial performance of Apple reflected an up-and-down history of financial success. The selected financial highlights presented in Exhibit 1 indicate increasing trends from 1981 to 1996 with a sharp decline in 1998. The upward trend likewise continued to be exemplified from 1998 onwards. The latest financial figures from the time Apple focused on non-PC products in 2001 attest to the increasing pattern, ending with net sales of $24 billion in 2007 to $24.6 billion for the first to third quarters of 2008. Likewise, net income improved considerably from only $65 million in 2002 to almost double to $3.7 billion for the first three quarters of 2008 (Yoffie & Slind, 2008, p. 16). The composition of net revenues for Apple come from Macintosh products and non-PC products with majority of revenues accounted for by the non-PC products (70%). From Exhibit 1b, it can be deduced that financial success was mostly attributable to the iPod, seconded by portables. Other fast moving products were desktops and other music products. Data from Exhibit 1c provides information that supports that more than 61% of net sales in the first three quarters of 2008 came from the U.S., followed by Europe (33%) and the remaining sales coming from Japan. Exhibit 2 indicated that the share prices for Apple rose sharply, starting in 2002 and more abruptly after 2006, consistent with the introduction of the iPhone in the market. On a global scale, however, the financial figures indicate that worldwide PC share had actually been steady at an average of 2.5% since 1997 (Exhibit 3). Apple’s gross margin has bested other competitors, particularly Hewlett-Packard and Dell (35% in 2007) (Exhibit 5). Comparing their net income to those of its competitors, Apple’s net income of $3.5 billion in 2007 was only almost similar in amount to Dell ($2.9 billion). All other competitors topped the net income according to the following positions: Microsoft ($14 billion), Hewlett-Packard ($7.3billion), and Intel ($7 billion). B. Strategic Posture During the governance of Sculley and just before Jobs came back in 1997, Apple manifested strengths in the following: (1) invested considerably and strategically in research and development paving the way for the discovery of new product designs deemed to be more versatile than competitors and creation of innovative applications. For example, Sculley focused on making Apple the leader in desktop publishing and education and targeted the corporate world. In addition, Apple offered a complete desktop solution, where customers enjoyed the “plug and play” capabilities; (2) exhibited exemplary competence in both hardware and software applications practicing both horizontal and vertical integration (Yoffie & Slind, 2008, p. 2); and (3) ability to employ strong leaders with vast professional experiences (Sculley-marketing; Spindler – cost cutting; Amelio- price differentiation strategy); C. Porter’s 5 Forces The dynamics of the PC industry could be analyzed by tracing its evolution and profile and using Porter’s 5 forces. Its origins have been traced in the mid-1970s where the PC industry marked robust growth. Apple was identified as the pioneer in usable ‘personal’ computing devices but reported IBM as the instigator of the PC in the sector (Yoffie & Slind, 2008, p. 6). Price remained a crucial factor for purchase of PC although its simple manufacturing and assembly had been applied by various manufacturers to offer ready-to-use units for a minimum cost of $400. a. Buyer Power PC buyers were identified to be categorized into five: (1) home; (2) small- and medium- sized businesses (SMB); (3) corporate; (4) education; and (5) government. Purchase behavior was noted to be influenced by diversity in preferences ranging from a combination of service and price strategies (businesses); cost and software availability (education); cost, features and network capabilities (home) (Yoffie & Slind, 2008, p. 8). With these trends and dynamics, these patterns have been validated to create both favorable and problematic situations for Apple. With price being considered the crucial determining factor for purchase, their initial strategy of focusing on the high-end market required a revision of their stance to capture the lower-end market where most manufacturers and clones produced products with significantly lower prices. b. Supplier Power PC’s were reported to be distributed through various outlets such as superstores, electronic retailers, and SMB markets. Finally, the top 4 PC vendors were identified as Hewlett-Packard, Dell, Acer and Lenovo; while suppliers were categorized according to those that make products with many versus few sources (Yoffie & Slind, 2008, p. 8). c. Threat of New Entrants With technological improvements that resulted in the convergence in PCs and CE products, noted as “digital convergence” (Yoffie & Slind, 2008, p. 10), the strong competence of Apple in product design and creation of innovative products paved the way for their entrenched leadership in the non-PC products market. Although other PC manufacturers could opt to clone other computer products and parts, Apple has already been known for its high quality product and therefore responds to competitive risks from new entrants appropriately. d. Threat of Substitutes Apple had faced significant threats of substitutes from its fiercest competitor, IBM and its application of an open system strategy. In response, Apple designed its products to directly compete with a wide range of products offered by its competitors from the lowest possible price to the top of the line. As indicated, Apply “highlighted features that differentiated them from other PCs while also emphasizing their interoperability with other machines” (Yoffie & Slind, 2008, p. 5). e. Rivalry Exhibit 5 detailed the top competitors of Apple as Dell and Hewlett-Packard where Apple still generated the highest gross margin of 35% in 2007, compared to 24% for Hewlett-Packard and 19% for Dell for the same year. On the other hand, the same exhibit showed highest percentage of R&D to sales for Hewlett-Packard at 3.5% versus 3.3% for Apple in 2007. The intensity and level of past competition with IBM was eminent and manifested in IBM’s ability to erode the market share previously established by Apple. The competitive pressures imposed by IBM and the rest of its rivals required Apple to shift strategies and focus on its strengths and competitive advantages to regain leadership in this field of endeavor. D. New Apple Strategies The success of the iPod was attributable to the focus on more advanced technology specifically in terms of its ability to store an enormous amount of songs, enhancing the iPod functionality. Subsequently, the by offering other innovative products through iTunes and iPhone, Apple was able to create a sustainable competitive advantage in the digital technology market patronized by the younger generation. Job’s creative and entrepreneurial skills were put the test through forging alliances with flash drive manufacturers to sustain its strategy for the iPod device. The interoperability for the device plus the availability of add-ons make the new products more popular. This generation’s interest to access and download music from a variety of sources and in magnanimous quantity paved the way for iTune’s instrumental success. As noted, “the introduction of iTunes had a galvanic impact on iPod sales” (Yoffie & Slind, 2008, p. 11). The vision of linking one product’s success to another exhibited Job’s innate and genuine talent in product design and in strategy development. Likewise, the innovative strategy of designing iPhone was another instrumental investment that paid off for Apple. Having capitalized on the increasing proliferation of mobile phones, the technology of uniting the features offered in iPod to mobile technology attained the object to “reinvent the phone” (Yoffie & Slind, 2008, pp. 12-13). The iPhone excelled in the mobile market due to its advanced features: email capability, Web access, text messaging and options for PDA functions (calendar, address book), and camera; 3.5inch multi-touch widescreen display; accelerometer technology; ability for customized search, mapping and video features; access for immediate purchase of music; and the ability to tap third party applications through App Store (games, business programs) (Yoffie & Slind, 2008, p. 14). The initial strategy for the iPhone was focused on service plans that were exclusively earmarked from AT&T, requiring a two-year contract at a fixed price of $59.99 per month. The terms included: five year exclusivity period in the U.S. market; almost full control accorded to Apple for product development and branding; restrictions of distribution through third parties (Best Buy, Radio Shack); and sharing of service revenues (Yoffie & Slind, 2008, p. 13). Likewise, the data service was reported to rely on2G or 2.5G services using the Edge network, which according to Job, was chosen to be preferred over the 3G service network due to its known capacity to tax the unit’s battery charge (Yoffie & Slind, 2008, p. 13). However, there were discoveries that more than one million units were sold in the underground markets of China and Russia and used unauthorized network service, resulting in “loss of service-share revenue…(costing) Apple $1billion over a three-year period” (Yoffie & Slind, 2008, p. 13). In this regard, Apple opted to reinvent its strategy by implementing the following measures: faster network service (3G); new pricing model and new third party applications. Job addressed the problem of battery life, offered the new model at a relatively cheaper price, gave up the service revenue sharing scheme by agreeing on a fixed premium for every unit sold, and opened up Best Buy as a new retail outlet (Yoffie & Slind, 2008, p. 14). The change in strategy enabled iPhone to reflect increased revenues from falling costs of components and design improvements, as well as the expansion on markets coupled with cheaper price that potentially made Apple attain its 10 million target units to be sold before 2009. II. Corporate Governance As indicated, Job’s success as CEO and the person tasked for corporate governance is due to his application of entrepreneurial and innovative skills by changing the rules of the game. His ability to tap opportunities from the external environment, partly due to the investment in research and development enabled him to tap new markets and design products that consumers acknowledge as revolutionary. In this regard, his ability to change the rules of the game depending on what the external environment offers, concurrent with the organization’s strengths give Apple the competitive advantage in their field of endeavor. Conclusion Only in the meantime, the remarkable sales figures reflected in Apple’s financial statements validated Job’s effective implementation of strategies partially solved long standing problems with respect to the Macintosh business. The performance of Macintosh computers in 2008 showed significant contribution to Apple’s financial success. The sale of Mac products was reported to contribute to 43% in total revenues (Yoffie & Slind, 2008, p. 5). Apple’s ability to offer Macintosh in product designs that cater to different clients assisted in steering the organization back to positive financial status. Further, Job’s ability to use Intel processor finally enabled Apple to tap other applications increasing its products’ interoperability with other OS. Likewise, through marketing the product in strategic distribution outlets, new breeds of consumers were able to explore and experience the high quality, yet affordable price of Mac products. However, the success of the Macintosh immediately lost luster through the introduction and proliferation of non-PC products that set the stage for Apple’s repositioning its image as a “full-fledged digital convergence company” (Yoffie & Slind, 2008, p. 10). In this regard, Jobs need to continually reassess its strategy regarding the Macintosh line to sustain is leadership in the Macintosh business areas. The case study revealed the rollercoaster financial performance recorded by Apple, Inc. with regards to implementing diverse strategies that focus on product innovation and responding to demands and opportunities in the external market. By identifying Apple’s competitive advantage, it could be deduced that their initial corporate position entrenched them as a PC manufacturer with extensive competence in product design, research and development and in providing high quality and high priced products. The need to reevaluate their strategies was deemed necessary in response to dwindling market shares and increasing competitive pressures. The change in leadership, likewise influenced the transformations in directions and visions depending on the preferences and expertise of the chief executive officers at the helm. With the remarkable improvement in financial condition attributed largely to non-PC products, the future of Apple needs to be further evaluated in terms of responding to demands and changes of the external environment, due predominantly to technological developments. As the financial performance of Apple reveals, although there was considerable growth in sales and net income since the marketing on the iPod, the fact still remains that when compared to other competitors in the PC industry, Apple only fairs marginally. To respond to the question: Was Apple’s recent success just another temporary “up” in its up- and-down history, or had Job finally established a sustainable strategy for the company? The past performance and experience could support that the phenomenal success of iPod and iPhone could just be considered a temporary ‘up’. Job needs to develop a sustainable strategy on its core competence, the Macintosh to directly compete with leaders in the PC industry. The PC industry is characterized by volatility and fast technological breakthroughs that could make or break the leadership position of participating organizations. Depending on the creative innovative response of other players, the respective market shares to either increase or decrease and thereby affect the overall profitability and long term perspectives of organizations in the PC industry. Apple should therefore be vigilant and use its competitive advantage to tap opportunities globally, as needed. Reference Yoffie, D. B., & Slind, M. (2008). Apple, Inc., 2008. Harvard Business School , 1-32. Read More