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Overall about Apple
Apple Computer's 30-year history is full of highs and lows, which is what we would expect in a highly innovative company. They evolved throughout the years into an organization that is very much a representation of its leader, Steven Jobs. Apple made several hugely successful product introductions over the years. They have also completely fallen on their face on several occasions. They struggled mightily while Jobs was not a part of the organization. Apple reached a point where many thought they would not survive. When asked in late 1997 what Jobs should do as head of Apple, Dell Inc.'s (DELL) then-CEO Michael S. Dell said at an investor conference: "I'd shut it down and give the money back to the shareholders." (Burrows, Grover, and Green)
Well, times changed. Less than 10 years later, BusinessWeek ranked Apple as the top performer in its 2006 BusinessWeek 50. Apple attributes their recent success to robust sales of iPod music players (32 million in 2005). They are optimistic about the economies of scope with media giants, such as Disney and Pixar. (BusinessWeek)
Apple rarely introduces a new type of product. Thus, instead of being the pioneer, they are an expert "second mover" by refining existing products. Portable music players and notebook computers are examples. Apple increases the appeal of these products by making them stylish and more functional. They now appear poised to make significant strides in the home computer market and to creating a total digital lifestyle whereby the home is a multimedia hub.
Apple consumer values
It's official and even we discuss Apple is the most valuable computer maker in the world. In the wake of the company's better than expected earnings in the quarter ended Sept. 30, Apple's shares rose by nearly 7 percent, making the company's total market value $162 billion.
That edges out I.B.M., which is worth $155 billion. Apple also surged past Intel, worth $156 billion, and Nokia, the most valuable cellphone maker, which is worth $150 billion.
Indeed, Apple is now the fourth most valuable technology company, after Cisco ($189 billion), Google ($208 billion), and Microsoft ($290 billion).
Apple, interestingly, has something in common with these other companies. They all draw their power from software. Microsoft sells software in a box. Google delivers software online. Cisco, like Apple, delivers software embedded in devices, which it largely contracts to others to make.
But there is a key difference, too. The other three have established dominant positions in their markets, which fends off rivals and keeps margins high.
Apple is a distant No. 3 in PCs. It dominates personal music players, but it has a much more modest share if you define the consumer electronics market more broadly.
Still, Apple maintains margins through a combination of innovation and marketing that leads consumers to prefer its brand. That's a great achievement, but it is harder to maintain that edge than an operating-system monopoly. For an investor, one question is whether Apple can capitalize on its momentum to catapult itself to a business that doesn't depend so much on each successive product introduction.
To do so, Apple will increasingly find itself battling with the three other companies at the top of the tech totem pole. Microsoft, of course, thought that it had defeated Apple in the operating system a decade ago, only to find its rival has revived, stronger than ever.
If the battle of the future is server-based applications delivered on browsers, the battle pits Microsoft, Apple, Google and the collective forces of open-source software against one another.
In that world, Apple has some choices to make: Will its iLife and iWork applications move onto the Web? More importantly, will it compete in the mass business PC market, where the C.I.O. of an insurance company buys desktops by the truckload?
Price is more important than styling there. Steve Jobs hasn't liked commodity businesses. He said he didn't want to do a deal with a cellphone carrier either, but he found a way to hold his nose and cut a rather advantageous deal with AT&T. So who knows if he will go after Microsoft's corporate market? A safer bet is that the real rivalry will be between Windows and some form of Linux, with Hewlett-Packard and Dell, the No. 1 and No. 2 PC makers, building machines of both flavors and Cisco making the routers.
The other, perhaps bigger, battle is over who will control the world of connected entertainment and communications. The iPod begat the iPhone and Apple TV, of course. But Microsoft has been working on media and cellphone software for a decade. And Google is shaping up to be a key player in cellphone software, video distribution, and any other service or device on which it can display advertising.
That brings us to Cisco, which wants to get out more and have some fun. It bought several social networks, as well as Linksys, the home network company, and Scientific Atlanta, the cable set-top-box company. Now it has declared that it will develop an "entertainment operating system."
No one knows what an entertainment operating system is. But I suspect that if Apple can become the dominant player in that market, it has the best chance to keep its position as one of the most valuable technology companies in the world.
Existing value proposition
Apple has positioned itself to a certain type of customer, wealthy people, innovators, people with good jobs, good lifestyle, etc. If Apple targets the poor, the trendy guys will stop buying Apple. This would hurt the brand more than the increasing sales because of lower prices, and in good times, where everybody has more money. Apple would have the problem that they cannot raise prices, because everybody expects a cheap Apple.
On the other hand, there are no really substitution products, there are no similar machines than we can buy to have the same user experience, PCs are the same competition to Apple as Ford is to Mercedes. PCs are the everyday workhorse for the masses; Apple is the elegance for the minority.
Apple managed its business primarily on a geographic basis. The company reportable operating segments comprises of the America, Europe, Japan and Retail. The Retail segment currently operates Apple-owned retailed stores in the U.S., Canada, Japan and the U.K. The other operating segments include Asia-Pacific (Australia & Asia). Each reportable geographic operating segment provided similar Hardware and Software products and similar services.
The largest geographic marketplace for Apple is the United States as it accounted for 60% of the company's net sales in 2005.
One way in which a business will analyse the possible market for its product to consider the market segments at which the product may be targeted. Markets are segmented because of the variety in certain markets. Market segmentation is used to target a certain segment of the public and make them want to buy their product (Doyle and Stern 2006). Apple use carefully segmented markets to differentiate the different types of marketing to attract each segment to purchase their product. This is evident in the way they target their younger segment by selling cut-price apple machines to schools in the USA.
Apple has focused on the use of technology in education for the past 25 years. They are committed to delivering tools to help educators teach and student learns. The effective integration of technology into classroom instruction can result in higher levels of student achievement, especially when used to support collaboration, information access, and the expression and representation of student thought and ideas.
Apple created solutions that enable new modes of curriculum delivery, better ways of conducting research, and opportunities for professional development of faculty, students and staff. They had designed a range of products and services to help schools maximize their investments in the needs for education customers. (iBook & eMac)
Creative Professional Market
This market constitutes one of Apple's most important markets for both Hardware and Software products. This market was also important to many third-party developers who provide Macintosh-compatible Hardware and Software solutions. Creative customers utilized the company's products for a variety of creative activities including digital video and film production and editing (Digital Video, Film Special Effects & Graphic Design).
Apple also offers various Software solutions to meet the needs of its creative customers. Apple's Operating System, Mac OS X, incorporated powerful graphics and audio technologies and features developer tools to optimize system and application performance when running powerful creative solutions provided by Apple or third-party developers.
Apple uses a differentiation strategy that tells the company development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. Because of the product's unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute products easily.
Apple's Competitive Strategy:
Apple has continually been at odds determining its strategic focus. When they began in 1976, they were market makers. They employed a Differentiation Strategy. They filled a need that was overlooked. They developed a computer for personal use and sold it at a premium price. They were successful because they were first to market and because onsumers had limited knowledge about computers of that time. The Buyers of computers in 1984 were
consumers and business managers who were most often unsophisticated first time buyers. Purchases were limited to a few computers at a time and placed great emphasis on service, support and compatibility. Price was secondary.
When Sculley held the CEO title, 1985-1993 the company's maintained a Focused Differentiation Strategy focusing on desktop publishing and education while charging a premium price. As competitions prices crept down Apple's premium became too high. Apple could either keep selling to their installed base or in win new costomers. They chose new customers and pursued a Cost Leadership Strategy by becoming a low cost producer of computers with mass market appeal. This focus was continued through the Spindler term at the helm, 1993-1995. When Amelio became CEO, 1996-1997, Apple's competitive strategy became a Differentiation Strategy where they would demand a premium price, because it was an Apple. Amelio tried to position Apple as a premium brand with little success. In 1997 Jobs once again retained his seat as CEO and changed the competitive strategy to a cost leadership strategy once again appealing to the mass market.
Prior to 1990 Apple did have some advantages. Its design and operating system was easier to use and had plug and play ability, though as time passed the customers changed. Customers did not require simplicity as before, because purchasers had become more experienced with computers. Buyers in 2002 were largely business, IT managers, who were very knowledgeable about computers. They would often buy computers in bulk to drive the price down and in order to meet strict budget constraints.
In 2001 the market was becoming saturated, slowing growth was intensifying competition on price. The market no longer could support the premium price Apple demanded.
IBM PC was a relatively open system that other manufacturers could clone. With many clones becoming available its operating system (Microsoft MS DOS) became the standard. Multiple companies producing similar compatible computers resulted in an increase in software programs for the MS DOS operating system. At one point IBM tried to build a more proprietary machine and not only lost a significant amount of market share, but its claim of the standard bearer of the industry. This opened the flood gates for the non-IBM Wintel computers. Apple's software offerings were limited. In 2000 88% of the total software was for Windows, versus 5% for Mac. The Mac remained more user friendly with the Mac's Graphical User Interface (GUI). In 1990 Microsoft offered windows 3.0 which incorporated GUI. The Mac no longer had the upper hand. This was Mac's only advantage over the Wintel machines. With its proprietary design, lack of programs and same easy to use operating system Mac could no longer demand a premium price or appeal to the mass market. It had lost its last competitie advantage.
Apple computers relied on proprietary designs that only Apple could produce. As a result Apple had a higher cost structure, R&D costs were as high as 8% of sales versus 1.5% to 2% for their competitors. The competition cut R&D spending as components became more standardized. With reduced R&D costs the competition could then focus on improving manufacturing processes, distribution and marketing to give them more of a competitive edge.
Mac should choose a focused differentiation strategy or as Michael Dell said "...shut it down and give the money back to the shareholders." They should narrow their focus to two market segments. Since they already have a foothold and a loyal following in desktop publishing they should concentrate their efforts in that market. Their share of the educational market has continued to dwindle from 26% in 1995 to 13.4% in 2001, but it provides the largest contribution to revenue, 35.4% in 2001. Since the Education and desktop publishing markets have been bundled together througout Apple's history, I believe they should focus on those markets and appeal to this niche rather than the mass market.
Jobs (First term) and Amelio both persued a differentiation strategy. It was successful for Jobs, as mentioned above, mainly because he market was new and there was not yet a standard for the industry.
By the time Amelio took control the standard of the industry was set, and Apple computer did not do anything better than the competition. This strategy was not effective.
Both Sculley and Jobs (In his second term) chose a cost leadership strategy. This strategy would be right for Apple if they were competing with the exact machine. Because their machine is not the "Standard" it takes more than price reductions to woo a customer and lead the market.
Though Apple has outsourced Mac manufacturing and reduced inventory to two days worth of sales. Unless it can differentiate itself and actually do something better, customers will not purchase Apple because it is not the standard in the mass market. If compared to home video players, the market has switched to VHS, its going to be hard to push a Betamax player even if they were offered in pretty colors.
The buyers have changed dramatically. The primary driver of industry change is growing customer sophistication (a product of greater product maturity) and a fundamental change in functionality, which leads to a need for corporations to change their approach to purchasing. This has resulted in strong buyer power.
The industry is highly concentrated.
Open standards: PCs are commodities: manufacturers compete on price pushing down margins
Industry fragmentation: There are no market leaders to provide price stability
Very rapid technology obsolescence
Strong buyers, with greater sophistication
Technology: You can assemble PCs with a screwdriver or just snap the parts together. Not really high tech.
Components: Standardized components are widely available
Plant/location: Distribution can very cheap, over the Web or through a classified ad.
Customers: Who would buy these PC? Price-sensitive customers; knowledgeable customers who realize that PC's are a commodity product; customers looking for access to local service. Remember PC's without national brands make up almost a quarter of the market in North America and 50% in Europe and Asia.
Personal digital assistants, smart phones (primarily for calendar applications, address books and e-mail)
TV set-top boxes
Video games consoles (e.g., Sony Play Station)
Summary: Existence of substitutes could push PC prices down further and reduce growth of demand. Average price of most of these substitute is roughly $300
Applications: PC software prices have come down while software functionality and the number of titles have increased; all of these developments have increased customers' willingness to pay for PCs
Commodity suppliers: Suppliers of components such as disk drives have no real power over PC manufacturers. Intel/Microsoft: together, Intel and Microsoft earned almost $20 billion in 2007, and about $9 billion in 2008. This is because there are high barriers to entry. Established standards, start-up costs and established brands names. (Intel, Windows)
New value proposition
The industry has a fast growth. Everyday new and innovative products flood the markets. From mobile phones to laptops there is a new product advertised almost every week. The major players of the industry are Dell, HP, Apple, Acer and Lenovo. There is a high entry barrier due to the standardization of the PC components. If any new players wish to come into this business, they need to have a differentiated strategy form the existing companies. Also, a high learning curve exists which means the customers take time to get accustomed with the new product. The existing brand names make the entry barriers high. Suppliers for this industry are powerful. There are only a handful of companies like Intel and Microsoft which manufactures microprocessor and operating systems (OS). These suppliers are hard to switch due to dominant production of such components. There is always a threat of forward integration by the suppliers since the products manufactured by these suppliers are highly sophisticated and the other components needed for the production of PCs are not so difficult to imitate.
The type of consumers for this market can be categorized as home, small and medium sized business, corporate, education and government. Since buyers are mostly not concentrated they have less bargaining power for prices and models. Buyers do have a high switching cost which discourages them from buying a similar product from another supplier. But there are a number of substitutes available which makes buyers powerful to choose from the available options and also because they are very price sensitive. The customers always have an advantage of choosing the electronic good according to the need and taste. This industry has a vast customer base and companies have to be customer oriented and should innovate according to their demand. Apple targets customers who are "techno savvy", who look for something unique. They have a wide range of products like computers (Mac book), ipods and iphones which are highly differentiated. Customers desire to buy its products as they are "icons of the digital industry". Exit barriers for this industry are high. There is a lot of capital requirement to establish a firm inside the electronics and PC industry. There is a chance of exit becoming almost impossible due to strategic interrelationships between these firms. Not all the products are made by the same firm.
And so they have to depend on other firms in the industry for making a final product ready for the customers. So it is very difficult if one firm leaves, leaving the other dependent firms in dilemma. Technological changes in the industry are very fast. Everyday a new product or a new application or version for the existing product is available. Consumers are very demanding and it makes it necessary for the firms to compete with each other and become the first mover or the best as a second mover in bringing out a new innovation. The young generation in particular is very trendy and they love to show of the new things as a fashion statement. And so they expect companies to give them something which is different than what others have. It is both an opportunity and a threat when it comes to rapid technological changes. Companies have to move faster than the imagination of both their competitors and the consumers. If not, it is not long before they go down in history forever.
Strengths and Weaknesses: Apple Inc. makes a difference in the PC industry through its innovative product design and high standard applications. Macintosh has been the powerful tool to build the success story of the company. The "integrated system" of computer was its differentiated strategy which presented the Macintosh along with its own Operating System (OS). The new step in "Consumer Electronics Industry" has outshined Apple Inc's performance as a smart company. The innovative products like iPod and iPhone have been very successful in potential music market. Customers have a great trust on company's elegant products and they always look forward to be loyal to the brand. Apple keeps it Price strategy different from its competitors which give computers and other entertainment devices at low cost. The high prices (especially Computer) keep it access limited to only people with high income level. The Apple computer had compatibility issues with Microsoft Office and IBM PCs, which motivated the research and development at the company. As the company has a wide product line, each new product makes the previous one dull against it; the issue of cannibalization may be a reason of bothering the expected revenue generation of the products.
Apple has been the leader of the Consumer Electronics industry and has maintained a distinct image in PC manufacturing and Music too. The Core competencies responsible behind the success are mainly the "Unique resources" and "Differentiation strategy". It offers the best designed hardware and incomparable software in its products. The Apple has been giving "Plug and Play" solutions. The hard drive based player called iPod has a stunning design which has become the "icon of the digital age". Apple has a "Think Different" motivation and it believes in "Value Creation". The success of some products like iPod and iPhone cannot decide its sustainable competitive advantage because the industry has intense rivalry and imitation is also a threat. Hence, Innovation plays a key role to remain the leading company in the dynamics of fast-growing markets, and Apple definitely can withstand the changes with its innovative skills. Apple has been able to command a premium in market and gain above average returns owing to its innovation and differentiation of technologically superior products.
Strategically Alternation / Conclusion
Apple's strengths can be attributed to many factors. First, Apple's premium-price or product differentiation strategy as well as their retail strategy have proven to be essential to Apple's past and will continue to play a vital role in Apple's future. As a result of their past success as recognition as innovators, Apple has attracted the attention of many companies whom have recognized Apple's potential for successful strategic alliances For example, Apple's successful alliance with AT&T, provided Apple with the opportunity to improve their IPhone's technology. Apple was able to the lower the IPhone's price to consumers, as well as, up-grade the Iphone's network coverage. In addition, Apple entered into partnerships with YouTube and Google in order to provide their IPhone users with cutting edge "search, mapping, and video features". These partnerships allow Apple to further differentiate their products and add value to their users. Similarly, Apple's reputation as an innovator and creator of easy-to-use cutting edge products continues to strengthen apple by keeping Apple on the radar of the technologically savvy consumer, as well as providing support for Apple's product differentiation strategy. Still, there have been some drawbacks or weakness as a result of Apple's choosing to employ a product differentiation strategy. First, Apple's selection of a premium price or product differentiation strategy also limits Apple's market share. Some customers do not recognize the value that Apple's attempts to create for their customers. Price sensitive consumers are reluctant to buy Apple's products. Similarly, customers seeking highly customized computers may not choose Apple. For example, Dell, one of Apple's biggest competitors and one of the top four P.C. producers, offers customers array of bundling options when purchasing a computer. This allows customers to choose hardware and software components as well as somewhat control the price of the computer. Instead, Apple offers their computer customers packages with very few customization options. Secondly, a problem for Apple exists in their reliance on Apple's C.E.O., Steve Jobs. Jobs has been a guiding force at Apple, acting as Apple's savior when the company saw their lowest financial numbers in 2002. Steve Jobs was responsible for Apple's expansion and the introduction of one of Apple's most profitable products, the IPod. There is a question as to if Apple could continue to operate as they do currently in the absence of Steve Jobs. Still, there are alternatives to Apple's current problems.
Apple is continually working to produce products with improved compatibility, allowing their customer more flexibility and increasing the ease-of use of their products. By continuing with their premium price or price differentiation and retail strategies Apple can continue strive and uphold their reputation as an innovator in the electronics industry.