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Apple Inc.

: A Case Evaluation by Mary ORourke; 12/02/15

Value Creation

Like many other companies, in Apples origin, it served a niche market. Originally, the
people who purchased Apple computers were technology enthusiasts who were simply excited
about the new technology, as well as those in accounting fields who made use of its processing
technology, VisiCalc. As time progressed, Apple improved its products and moved into the mass
market. That is truly where they lie today in Americas market for consumer technology.
Businesses, school systems, students, and the average consumer alike, all use Apple products.
Their consumer can be as young as two years old fumbling around on an Ipad, up to the later
stages of adulthood, but usually lies in the middle. Apple is in the high-tech/ computer industry.
Apple computers, tablets, and phones fulfill a variety of consumer needs. They fulfill the
need to communicate through various forms: telephone call, text message, video conference,
email, internet forum etc. They fulfill the need to find information through web search. They fulfill
practical needs such as calculation and writing tools with their applications. They fulfill their
consumers desire for gaming through gaming apps. They fulfill digital storage needs with the
iCloud and their hard drive system, among other needs.
Buyers
Buyers have always had choice in the PC industry, even when Apple was is Steve Jobss
garage, because there was always more than a few guys making PCs in their garages, even
though those who sought out PCs at that time were not necessarily price sensitive. There are
now many developed industry competitors: Apple, Dell, HP, etc. and so pricing power of buyers
is high.
When one considers the quantity that buyers buy in and its effect on pricing power, one
must take into consideration who the buyer is, and how that can differ. Since Apple has forward
integrated, and offers its own retail stores, one of its buyers is the end consumer. The other, as
is common for the rest of the industry, is large retailers such as Best Buy. The only other
company to forwards integrate following Apples retail opening in 2001, is Microsoft, which didnt
open up its stores for some years after Apple. If one considers the retail store to be the buyer,
then the buyer would buy in large quantities, and can therefore negotiate a lower per unit price
(meaning they would have high pricing power), but if the end consumer is considered to be the
buyer than purchasing power is low because the quantity is low.
Originally, switching costs were high because consumers had to travel far and wide in
order to get PCs. Now switching costs are high for a new reason, PCs are expensive and
infrequent purchases, and with Apples and competitors system of integration between phone,
tablet, and computer, there is the added cost of adapting to a new system. Taking this into
consideration, pricing power of buyers is low.
When PCs were first invented, it was more likely that consumers would enter the market
because those who purchased the computers were very interested in their development, now
however it is unlikely that retailers like Bestbuy or end consumers will enter into the PC market.
This makes pricing power low.
Overall, pricing power of buyers is moderately low.

Suppliers

PCs have always been made with commodities such as metal and plastic, which have
many substitutes, making pricing power of suppliers low. However, suppliers can sell metal and
plastic to a variety of other customers, making the pricing power of suppliers high. Pricing power
is especially high for the makers of Apples differentiated gorilla high-quality glass, because the
glass is not manufactured anywhere else. The tech industry is important to suppliers, but
suppliers would still have many other customers without the tech industry, making pricing power
moderate. In Apples case, switching costs would be high for their gorilla glass, but in the
industry in general, switching costs are low and therefore pricing power of suppliers would be
low. It is unlikely that suppliers will enter the PC market (making pricing power low), but it is
moderately likely that Apple and other companies could enter the supply market (keeping pricing
power low). Overall, pricing power for Suppliers is moderate.
Threat of Entry
Economies of Scale. The PC market originated in the late 70s, when Apple was
created. At this time threat of entry was high as economies of scale had not been
reached. As time went along companies did enter the market. Now Economies of scale
have been reached, and so entering the market would be cost disadvantageous, making
threat of entry low.
Brand Loyalty. It is clear that companies within the market have established
Brand Loyalty, Apple in particular; with each new product release, Apple can count on
millions of preorders and lines out the door. It wasnt always this way. In the early days of
the PC market, brand loyalty was low, and therefore so was threat of entry. As the
brands have developed, brand loyalty has also developed. As it stands, threat of entry
would be low due to high brand loyalty.

Substitutes
Though initially, typewriters and modeling by hand might have been seen as substitutes
to a PC in the minds of consumers, today that is not true. The closest thing that PCs currently
have as substitutes are tablets and/ or smartphones. Though tablets and smartphones are
different than PCs, they serve many of the same functions. However this is not particularly a
threat to Apple, because they also sell tablets and smartphones (as do many of their
competitors), but would be a threat to the PC market itself.
Competitive Rivalry
Industry Competitive Structure. Because of the size of the companies within the PC
market, it would be considered a consolidated industry. There are relatively few companies in
the PC market. When PCs first hit the market however, they could be considered fragmented,
the companies were small and there were many of them. Over time many of the small
companies failed and the ones that survived developed and grew to be quite large. Because the
PC market is consolidated, companies within the market are interdependent. If Apple lowers the
price on their new notebook computer, Dell is likely to do the same. This can be dangerous to
company profits if price competition is too fierce.

Industry Demand. When the PC market was first developing, demand was in a period
of growth, and so competition was relatively low. Now the PC market is in the mature stage and
so demand has stabilized, increasing competition.
Cost Conditions. The PC market has a high cost structure, they have high research
and development costs, materials costs, and labor costs. This has been true of the PC market
since the origin of established companies (once companies grew out of the garage stage).
Profitability is highly leveraged to sales volume, and so rivalry is high. Overall, the PC market
experiences a high level of competitive rivalry which means that Apple has to fight for market
share (which it is currently succeeding at), and keep its value competitive.
Compliments
Compliments in the PC market are accessories such as cases and cables, but more
importantly, software that adds value and functionality to PCs. A computer without software
would be practically useless to the consumer. Sometimes the company itself makes the
software (for example Apple has Garageband, iPhoto, and iMessage), and sometimes a
different company makes the software (Microsoft Office Suite). Apple has had a complicated
relationship with software as a compliment. In 2012 when Apple introduced OS X they had to
offer applications. They received a deal with Microsoft to include their Office Program. Jobs
believed that third party developers would be compelled to write programs for OS X because an
established company like Microsoft had done so, but that wasnt the case. One famous
occurrence of rejection was when Adobe refused to offer their video editing program for the
Mac, which was already in use on the PC. For Apple though, this ended up being something of
a gift. As they were rejected they began to develop their own applications which became a
source of product differentiation and added value for the Mac. Especially in regards to its iTunes
software, which revolutionized the music industry and created a market for its compliment
product, the iPod. Compliments are so important to the consumer, that they impact purchasing
decisions. Apple has benefitted from this in the past, but competitiors development in this area
poses a threat to Apples advantage.
Key Success Factors and Trends
Industry.
Apple is in the technology industry but much of this analysis is focused on the PC market
within the technology industry. Apple is also a global company, but much of this analysis is U.S.centric. Within the U.S. Apple operates within the mass market.
Price.
PCs are seen as expensive to purchase, they are considered to be infrequent, large
purchases. Though their expense has actually lessened over time as efficiencies have
developed and economies of scale have been reached. Apple is priced slightly above market
with their PCs, but they are considered to be high-quality and high-value machines and so this
is permissible.
Product Design.
Product design was never very important in the PC market, however when Ive started
creating beautiful industrial designs, with high-quality materials as prompted by Jobs, product

design became increasingly important in the industry, and is now a key success factor within the
industry.
Advertising and Promotional Spending.
Unlike other consumer products, PCs are not usually marketed year round, rather only
when a company has recently released a new and impressive product. This is the same for
Apple, who releases and advertises once per year in the fall moving into the holidays. Apple
does not offer many promotions for their products, but does offer a small student discount, and
likely offers a quantity discount to large companies looking to outfit an office with Apple. This is
not unlike other companies, though companies like Microsoft and Dell do have more frequent/
significant promotions than Apple does.
Direct-Selling Efforts.
It is common in the industry to sell PCs to third party retailers, however Apple and
Microsoft also offer their own stores where they sell directly to the consumer. This change to
consumer selling occurred in 2001 when Apple opened its first store. When companies sell to
retailers, the contribution margin is lower because they have to give up profit to the retailer.
When Apple and Microsoft sell directly to the consumer, they absorb more of the profit.
Production.
Production for personal computer companies has evolved greatly in the past few
decades. Production that was once great manual labor, now is highly automated. For most
companies on the market, they produce the hardware of the computer, but not the software. The
interesting thing about Apples production, is that they do both which allows their software to be
holistically in tune with the hardware, adding value to the product.
After Sales Service and Support.
Other than increased profit, another notable difference in having a physical retail store, is
that when consumers have issues with their product, they are able to take it to the physical store
to receive help or get repairs, which adds value to the consumer when they purchase and Apple
or a Microsoft PC (something Apple made famous with the Genius Bar).
Financing.
Many tech companies start out with personal investors, Apple is no different. Mark
Markkula financed Apple initially with a $250,000 investment. Others were offering other
technologies and then evolved into the Personal Computer market, using past successes to
fund their new venture. As any company matures, provided they go public, they finance through
shareholders equity and debt instruments, and move away from financing through contributed
capital. Apple originally did not want to take out any loans, likely part of their Think Different
company culture, but they soon realized that without financing through debt, they could not
enjoy significant growth or satisfy investors, and so they took on debt in 2013.
Apples Initial Missteps

In 1976 Jobs and Wozniak made Apples first misstep of not having a business strategy,
as evidenced by their random selling price for the Apple I: $666. In 1980 Apples second misstep
was rushing to the market with their Apple II computer, ultimately leading to the computers
failure. Apple would fall prey to the pitfalls of rushing to the market again in 1982 with the
Macintosh and Steve Jobs reality distortion field, the Mac was missing key features: a hard
disk drive, insufficient number of floppy drives, a lack in computer memory, and sufficient
applications. Jobss inability to see his products disadvantages led to outsized sales
projections, and ultimately, Apples first loss in 1985.
Strengths
1976-1990
In the time span of 1976 to 1990, Apple had many strengths. They manufactured
their products in the U.S., which was appreciated by their American consumers
(even though it came at a higher cost to the company). Apple did have triumphs
in research and development that led to product innovations such as their stylish
design and GUI interface, this gave them differentiation advantage (see Appendix
A for more details).
1990-2013
After 1990 Jobs and the rest of Apple streamlined their product lines while
maintaining enough lines to satisfy consumer needs. Apple has considerable
market share in the PC market, as well as their other markets (smartphones,
tablets, etc). Their cover of the market is broad. Apple had maintained their
commitment to research and development from 1990 to 2013. This has led to
continued product innovations in design and functionality. Apple human
resources seemed to have improved because currently, Apple positions are
widely sought after. Apple has a definite advantage in brand loyalty due to their
differentiation advantage. Their storefront allows them to interact directly with the
consumer, and gives them incredible customer responsiveness in regards to
issues and repairs. Apple has also made improvements in financial management
(Appendix A).
Weaknesses
1976-1990
Like any company does, Apple has its weaknesses. When Apple first originated it
did not have developed product lines, but in between 1976 and 1990 they began
to expand and actually develop too many product lines that were not profitable.
Eventually these lines were terminated. During this time period, Apple was seen
as a niche player and did not enjoy the vast market share that they currently do.
In the early days, Apples human resources were not a source of strength for the
company. Steve Jobs had been described as a bully, and executives were
butting heads. The company also took a hit to morale when Sculley had to cut
salaries by 15%. Apples biggest weakness, however, was their financial

situation. Their high cost structure and often overstated demand led to low
margins and they were facing financial collapse.
1990-2013
Apple has improved on many of their prior points of weakness. In 1990- 2013
they still have a higher cost structure than their competitors, and have
inaccurately forecasted demand many times. Also, it is yet to be seen if Tim
Cooks leadership will bring adequate corporate direction for the company.
Efficiency Since 1990
Apples relationship with efficiency is complex. They are efficient enough to be able to maintain
a rigorous product release schedule: a new product release every 6 to 12 months. This reflects
that Apple is highly efficient in production. However there are indicators that Apple has room to
improve in efficiency. With almost every product release Apple experiences widespread
stockouts. If Apple were to improve their efficiency and have fewer stockouts, they would
capture more revenue.
Quality Since 1990
Apple has been recognized for decades for its attention to quality considerations. They use
metal and glass where other companies use plastic. They also provide quality software that is
less susceptible to virus than their competition. However, as a result of Apples deeply ingrained
rushed to market mentality, some quality pitfalls have not been addressed until after product
release. Most new software that they release has small bugs that reduce functionality that often
take a few updates to mend. One of their more recent failures (after 2013 and derived from my
own knowledge), was when Apple released the iPhone 6. Its thin, long, frame was prone to
bending when consumers put their phones in their pocket.
Innovation Since 1990
Apples brand loyalty stems from their innovation. Apples app store, iPod, iCloud, and iTunes
have been just a few of Apples many innovations that changed the industry. With each of these
innovations, the market had to catch up just to compete with Apple. The app store added value
and functionality to Apples computers, phones, tablets, and music players; it expanded what
their products were able to do. The iCloud system revolutionized storage, which led to
competitors imitations. The iPod stepped up the game for storage and functionality for music
players. Perhaps the most revolutionary for its impact on both the PC industry and the music
industry was iTunes. ITunes provides users with a legal forum to download most music and it
has garnered incredible profit.

Customer Responsiveness Since 1990


With Apples launch of their retail stores in 2001, came impressive customer responsiveness.
Instead of having to ship their computers away for repairs, or consult a user manual for
questions, Apple customers have the assurance of being able to go to the Apple Store to talk

with employees that are knowledgeable on the products and are able to repair the products and
answer questions. Customer responsiveness adds value to the product.
Resources
Tangible
Here, I will talk about just a few of Apples Tangible Resources, and whether or not they
are Valuable, Rare, Inimitable, and Organized for Success. Apples inventory is a
tangible resource. It is valuable because thats how they raise revenue. It is rare
because it is their unique products. It is inimitable because it is trademarked and it is
organized for success. The Apple Store is valuable, because it gives Apple a physical
space to sell and service their products. It is rare, only one other company has
storefronts (Microsoft). It is not inimitable, others have and can do it. It is organized for
success (see Appendix B).
Intangible
Some of Apples Intangible resources are as follows. Employee expertise: Steve Jobs
and Jonathan Ive each bring expertise and innovation to Apple. Their expertise is
valuable, rare, and organized for success. It is unclear whether or not it is inimitable
however, it is possible someone could come along with the same caliber of contributions
to Apple or its competitors, however that is yet to be seen (Appendix B). Apples software
and applications are both valuable. While their software is rare most of their applications
are not, because their competitors often possess the exact same applications on their
machines. Software and applications are not inimitable, but are organized for success
(Appendix B).
Capabilities
Apple has many capabilities, I will touch on a few. Apples ability to integrate its products:
iPhone, PC, and iPad is valuable to consumer needs. rare, and organized for success. It is a
place of competitive advantage for Apple, however it is not inimitable, and so their competitors
pose a threat in this situation. Because Apple makes both its hardware and its software, its
integration adds value to ease of use and quality design, it is rare (no one else is doing it), it is
organized for success, but again this is an area where Apple needs to watch competitors.
Apples design capabilities are valuable, rare, and organized for success. They are inimitable to
a point: no one can design exactly what Apple does, but they can design to a point that is
equally appealing to the consumer. Apples capability in innovation has been invaluable to the
company, and extremely rare, it is difficult to imitate but not impossible, and remains organized
for success (Appendix C).

Sculleys Strategy for Apple


Sculley decided to streamline production efforts and shut down the Lisa line of
computers. This decision was a profitability decision, the Lisa was just not profitable. Sculley

practiced capabilities in customer responsiveness, when he saw customer-identified


shortcomings of the Mac, and initiative when he exerted efforts to fix them, ultimately leading to
the success of the Mac Plus. Sculley wanted to license the Mac operating system to other
computer manufacturers. In the short run, this would have increased profits, but since it never
came to fruition, Apple has enjoyed the long-term fruits of the differentiated value that their
operating system possesses.
In 1990 Sculley felt that Apple was in trouble, it had been pigeonholed into a niche
market and had a high cost structure. In order to combat these problems he appointed himself
chief technology officer, and committed the company to release a low cost version of the Mac in
order to compete with IBM clones. He also cut prices by 30% on the Macs Apple II which
increased sales by 60%, but lowered margins. He cut staff by 10% and salaries by 15% and
shifted much of its manufacturing to subcontractors. He also introduced a policy to release a
new product every 6 to 12 months. And finally, to catch up to its competitors, Sculley had Apple
enter into an alliance with IBM. His efforts were not enough however, gross margins were too
low, and costs were still too high. This led to Sculleys exit of the company.
Jobs Strategy for Apple
When Jobs returned in 1998, his main focus was to address the areas of concern at
Apple. He immediately struck a deal with Bill Gates (Microsoft) to increase Apples capital, and
to add value to its product. He did this by convincing Microsoft to invest $150 million into Apple
and to continue producing Office Suite until at least 2002. Jobs chose quality over quantity, and
cut the product line down from 60 products, to just 4. He implemented online distribution, which
was only the beginning of Apples direct selling efforts to consumers. Jobss actions did stabilize
the company, but it did not provide them growth. More needed to be done.
Jobs and Ive differentiated Apples new PC, the iMac with its interesting and sleek
design. This changed the industry, stimulated sales, and was the beginning of Apples products
being seen as a fashion/ design statement. With the iMac boosting sales, Jobs was able to
develop an improved operating system, the OS X, which was critically acclaimed. Not everyone
was willing to make applications for the Mac system, and so where Jobs couldnt strike a deal,
he made applications himself. This ultimately led to a differentiated product and also supports
Apples advantage of hardware/ software coordination.
Apples Business Level Strategy
If we consider Apple as a PC company, their business level strategy has changed over
time. When Apple was in the embryonic stage, they served a niche market, and so their strategy
can be described as focused differentiation. As Apple has moved into the mature stage, they
have grown to serve the mass market. Because they are now in the mass market, they are
considered to use a broad differentiation strategy.
Apples Functional Level Strategy and its Integration with Business Level Strategy
Apples functional level strategy aligns with its business level strategy for differentiation. Its
advanced investment in Research and Development has led to differentiation through
innovation and therefore a better product. Apple pays more for its materials than any other

company, it differentiates itself by using only high-quality materials. And its storefronts
differentiate its customer responsiveness.
Corporate Level Strategy
Beyond the PC market, Apples business level strategy for each of the markets it operates in is
similar. Many of the things that differentiate the PC also differentiate the iPhone. Often, the
differentiation of the two are inextricably linked. However, since 1990 Apple has looked for areas
company-wide to lower their cost structure and increase profit margins, while maintaining
differentiation. They have streamlined their line of products in order to get rid of deadweight.
They always strive to be the first the market with new technology, in order to set the standard
for the industry. The competition tries to keep up with Apple, Apple does not try and keep up with
the competition.
Apples Products and their Effect on the Industry
Apples products have had a variety of effects on the industry.Thanks to Ives design,
and Jobss insistence on high quality materials, Apples products have led the industry to
incorporate design into their PCs. Apples development of iTunes and the iPod have
revolutionized the music industry, as well as the PC industry. But it is not only the products
themselves that revolutionized the industry, but Jobss strategy and ability to get all of the major
music producers to cooperate. He convinced them all that this was the way of the future, and
the only way they would continue to experience profit, and he was right. Apple enjoyed first
mover advantage and ate up 64% of the market share for music downloading software. The rest
of the industry, including RealNetworks, Walmart, Yahoo, Napster, Microsoft, Google, and
Amazon tried to compete, and released their own alternatives to iTunes. Two other revolutionary
services from Apple that changed the industry are its App Store and iCloud system, both of
which are implemented in Apples iPhone and iPad. Apples iPhone started the trend of elegant
glass touchscreens to overtake clumsy plastic keyboards as the norm.

Appendices
Appendix A

Criteria
Product Lines

1976-1990
Strength

Weakness
When Apple initially opened,
it of course took time to
develop many product lines.

However, as the company


moved towards 1990, they
actually had too many
product lines, which Jobs
eventually streamlined.
Market Coverage

In the early days, Apple was


seen as a niche player and
had poor market coverage

Manufacturing

Apples manufacturing was


originally done in the U.S.
which American consumers
appreciate

R&D

From a product perspective,


Apple is moderately strong in
R&D, though there were
some missteps, Apple also
had innovation and design
triumphs

From a cost perspective,


Apples R&D is a weakness
because they spend more
than their competitors

Human Resources

Human resources were poor


in Apples early days. Steve
Jobs was described as a
bully. Woznik and other
executives butt heads. And in
1990 Sculley cut pay by 15%,
which is bad for company
morale.

Brand

Apple did not have the brand


loyalty/ identity in this time
period that they have today.

Cost of Differentiation
advantage

Apple differentiated their


products with superior
materials used, and superior
R&D

Financial Management

Apple was in financial trouble


by 1990

Criteria

Their use of superior


materials and more
extensive R&D led to higher
costs for Apple and lower
margins

1990-2011
Strength

Weakness

10

Product Lines

Apple streamlined their


product lines, while
maintaining a small variety of
offerings

Market Coverage

Apple has broad market


coverage and considerable
market share

R&D

Superior Product Innovations

Human Resources

Apple is seen as a very good


company to work for

Brand

Brand loyalty is very extreme.


Apple received millions of
pre-orders for products
consumers know nothing
about, and stores have lines
out the doors on product
launch day.

Cost of Differentiation
advantage

This cost is outweighed by


differentiation profits because
of the sheer volume that
Apple is able to sell

Financial Management

Financial management has


improved.

Higher cost structure

Apple still incurs higher costs


for its differentiation

Appendix B
Resources

Tangible/
Intangible

Valuable?

Rare?

Inimitable?

Organized for
success?

Steve Jobs:
innovation

Intangible

Yes

Yes

Yes

Jonathan Ive:
design

Intangible

Yes

Yes

Yes

Software

Intangible

Yes

Yes

No

Yes

Applications

Intangible

Yes

No

No

Yes

Inventory

Tangible

Yes

Yes

Yes

Yes

Apple Stores

Tangible

Yes

Yes

No

Yes

Appendix C

11

Capabilities

Valuable?

Rare?

Inimitable

Organized for
Success

Integration
Between
Products
(iPhone syncs
with computer,
sinks with iPad/

Yes

Yes

No

Yes

Hardware and
Software
Integration

Yes

Yes

Yes

Design
Capabilities

Yes

Yes

No

Yes

Innovative
Capabilities

Yes

Yes

Yes

Writing
Record

Center Appointment

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