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Apple Computer 2002

Id shut it down and give the money back to the shareholders, Michael Dell on Apple, in 1997 with our new products and our new store and our new build-to-order, we're coming after you, buddy., Steve Jobs to Michael Dell, in 1997

Group 4
Balakrishnan V (010) Basant Kumar (011) Harini Ravishankar (020) Janani Ganesh (023) R Anirudh Raghavendra (039)

Early Years
Steve Jobs and Steve Wozniak College dropouts
Founded Apple Computer on April Fools day 1976 Apple I built in Jobs familys garage 200 sold within months

New partner A.C Mike Markkula Jr.

Retired from Intel at age 33 Instrumental in attracting venture capital

Jobs Visionary; Wozniak Genius; Markkula - Businessman

Mission to bring an easy to use computer to everyone [1978] Apple II Simple machine; use straight out of the box
Computing revolution - $1B in annual sales in less than 3 years More than 100,000 Apple II machines sold by end of 1980

Early Years
IBM PC Microsofts DOS and Intel microprocessor
Stolid and gray vs. Graphics and sound enhanced Apple II Open system vs. Proprietary designs Apples revenues grew; Market share fell sharply 6.2% in 1982

[1983] Lisa Stunning next-gen machine priced at $10,000

Graphical User Interface (GUI) and Point-and-Click mouse Dropped and instead focused on a cheaper machine with features

[1984] Macintosh
Breakthrough in ease-of-use, industrial design and tech. elegance Slow performance and lack of Mac-compatible S/W limited sales 1983-84 Net income fell 17%; Company in crisis

[1985] Jobs removed from operational role; Jobs leaves

Sculley [1985-93] Up to 1990

To exploit Apples capabilities in graphics and design and to become the leader in desktop publishing and education
Combination of superior software and peripherals gave Mac unmatched capabilities in desktop publishing; Apple Global Brand Revenues = $5.6B; Market share = 8%; $1B in cash; Most profitable

Position in 1990
Only significant H/w and S/w alternative to the IBM standard Typically designed products from scratch Unique components No backward integration; Proprietary OS bundled along with Mac IBM narrowed the gap in ease-of-use with Win3.0 IBM users put up with their machines; Apple users love their Macs As IBM dropped prices, Macs looked increasingly overpriced High costs 9% to R&D vs. 5% at Compaq Glide path to history

Sculley [1985-93] - 1990 onwards

Reposition Apple into the mainstream with products and prices aimed at regaining market share
[1990] Mac Classic, $999 - compete with low priced IBM clones [1991] PowerBook notebook Rave reviews

1991 Close relationship with IBM (Federation of alliances)

Taligent Revolutionary OS Development cost ~ $500M Switch from Motorola to IBMs PowerPC chip; IBM agreed to license its technology to Motorola to guarantee a second source Kaleida Common language for multimedia applications

1992 Less public co-operation between Intel and Novell Project Star Trek to rework Mac OS

Sculley [1985-93] Other changes

As CTO, belief that Apple had to change rules of the game

Newton First Personal Digital Assistant

Internal Changes
Argued that it was essential to drive down costs [1991] 10% headcount reduction due to pricing pressures Moved much of its manufacturing to subcontractors and adopted a tougher line with distribution and development partners

Not enough to sustain profitability !

Gross margin ~ 34% - 14% below Apples 10 year average [1993] Sculley was promoted to Chairman; Resigned 5 months later

Michael Spindler, the company president, was appointed as CEO

Spindler [1993-95]
[1988-90] Head of Apple Europe
Tripled revenues, accounting for 25% of Apples sales worldwide Strong Operating Manager, No-nonsense style Sharp contrast to Sculleys focus on technology and marketing

[1984-94] Apple had sold 25M Macs worldwide

Had considered many plans to broaden the platforms reach

Mac on top of DOS; Mac on Intel (Star Trek); Mac Clones

Spindler killed the plan to put Mac OS on PCs; Would license a handful of companies to make Mac Clones ($50 per copy)

[1994] PowerMac, based on PowerPC

2x 8x performance improvement $1000 premium over comparable Intel-based machines

Spindler [1993-95]
[1995] Apple cut prices by 25% and unit sales surged
Briefly regained posn. as leading PC seller; clearly losing momentum 0% of Windows users would consider buying a Mac >50% of Mac users would consider buying an Intel-based PC

[1995] IBM and Apple parted ways on Taligent and Kaleida

After $550-$600M, neither wanted to switch to the new technology

International Expansion
[1992] 45% of sales from outside US; Significant success in Japan Targetted 15-16% market share in China, by 2000

Internal Changes
16% (2,500 employee) layoff; R&D cut to 6% of sales [1996] $69M loss; 1300 layoffs Gilbert Amelio appointed CEO

Amelio [1996-97]
Stock price at its lowest, in more than a decade

[1995] Market share dropped from 6% to 3%; Education market share fell from 41% to 27%
Decided to cut Apples losses by cancelling next-gen OS
Had already cost $500M in R&D

Acquired NeXT Software; Jobs as technical advisor

Fell to 6% of the handheld market; Pippin - $500 device

Internal Changes
[1996-97] Cut 2,800 workers; Lost $1.6B from Jan 96 to June 97

[1997] Announced another 4100 worker cuts

Steve Jobs was named CEO

The PC Industry
[2002] PCs were a $220B global industry

IBMs dominance eroded in the late 80s Commoditization

Early 1990s Wintel was the dominant standard

By 2002, 400M PCs around the world

US 40% of total; Western Europe -25%; Asia-Pacific 25% Growth ~15% since mid 80s; 2001- Flat, expected to recover by 05 US 50% of households had a PC; Sub-600$ PCs ~ 20% of sales

PC Manufacturing Relatively simple device

Microprocessor, Motherboard, Memory and Peripherals

Cost around $730 to make a desktop that would retail for $860
Microprocessor Costliest - $50 to $500

The PC Industry
PC Manufacturing (contd.)
Other components of the box cost $250-$350; Peripheral devices $90-$140; Monitor - $100; Windows 98 - $45; Labor - $35 $499 Cut down on Processor, Memory; $2499 Latest devices Early 1980s 5% of sales on R&D; 2001 Around 1.5%-2% Innovations in manufacturing, distribution and marketing Contract manufacturing; Flexible,high-volume plant in low-cost locn Late 1990s Large contract manufacturers of vertically integrated systems; Build everything; Based in China, Taiwan (Low labor rates) PC makers moved from build-to-stock to build-to-order JIT Reduced costs by ~10% - Inventory carrying costs & Product returns and decline in price protection costs (guarantees to distributors) [2002] components costs decline by close to 6% per quarter; Prices declining at around 4-9% per year

The PC Industry Buyers &

n Dist .

Buyers Business (60%), Government (8%), Education (8%) and Home (24%)
Purchase Drivers Home (Price); Business (Service); Education (S/w)

1980s No more than a few PCs at a time; Established brands through service computer dealers 1990s Knowledgeable customers; Alternative channels
Superstores for bulk purchases; Mail-Order outlets-30-50% discount Value Added Resellers Fulfill growing demand for networked PCs

Late 1990s Marketing over the WWW 2001 40% of sales through direct channels (power users); 25% through commercial channels; 25% through retail channels (1st time buyers); Remainder - Internet telesales

The PC Industry PC Manufacturers

Dell Started by Michael Dell in 1984
By 2002, full line of desktops, notebooks, workstations and servers, and also S/W, service & support; $31.9B sales, >50% through its site Build-to-Order Only 36hrs to ship a computer; 6 days inventory vs. Compaqs 26 -> Undercut competition by 10-15%

Compaq Started in 1982; Lost share and sold to HP in 2002

[1983] More than $100M in revenues; US Record for 1st year sales [2000] $42B revenues Second largest computer company Sell PCs that offered more power/features at prices close to IBM Early 90s Rivals moved in with cheaper PCs and direct service Responded by cutting costs and brought a new line of low-price PCs and high-end servers; Also started build/configure-to-order [2001] Claimed that 59% of sales by phone/online

The PC Industry PC Manufacturers

Hewlett Packard Founded in 1939
1980s Added computers and printers to its portfolio [2001] 43% of sales from printing; Only 20% from PC (Compaq-44%) Online Sales 5% of customers; $2B in revenue Late 90s Moved away from proprietary software towards Wintel [2001] Sales of $86B; H/W 43%, Services 38%, S/W 14% Historical trademark has been its horiz. and vertical integration Failed in PC; Allowed Microsoft and Intel to seize control Mid 80s Earned 25-30% of revenues by the PC business globally [1994] PC business lost $1B; Started farming out assembly Early 2002 Agreed to outsource desktop manufacturing Market share remained at ~ 7%

IBM Largest computer company in the world in 2001

The PC Industry Suppliers and Compliments

Microprocessors Brains of the PC
[2002] Intels chip market ~$22B vs. <$1B for PowerPC chips for Mac AMD was the key challenger; Intel cut prices by ~50% every year AMD and other competitors usually lost money on process sales

Operating Systems S/W that managed PC resources

1980s Microsoft sold DOS at ~ $15/PC; DOS was crude and harder to use than Mac OS, but gained a wide audience

Windows 3.0 and 3.1 GUI to challenge Mac OS

Windows 95 50M copies at ~ $40/copy; Windows 98 - $50/copy [2001] Windows XP 17M copies in first 8 weeks; Developed at cost of $1B, sold at $55-60/copy; 90% of new PCs in 2001 with XP [2000] Apples OS accounted for ~ 3.6% of new license revenue

The PC Industry Suppliers and Compliments

Application Software
Value of a system directly depends on the quantity and quality of application software available on the platform Apple II supported VisiCalc the first electronic spreadsheet Important Segments Word processing, Presentation Graphics, Databases, Desktop Publishing, Education, Entertainment, Internet Microsoft - #1 applications seller for both Mac and Wintel [2000] Software for Windows accounted for 88% of total S/W; Up from 81% in 1996; Macs fell from 11% to 5% in the same period

Alternative Technologies
By late 1990s, talk of PCs demise, Post-PC / PC-Plus era Simpler computing devices to complement/replace PC (Networked) PDAs, Smartphones, Set Top Boxes, Video Game boxes (Xbox)

Apple Turnaround ?
[1997] Microsoft invested $150M and confirmed commitment to developing core products like Office
Stock touched a 52 week high; Board deferred search for CEO

Macintosh license program termination

Clones accounted for around 20% of unit sales; Value of Mac market had fallen 11% Spent $110M to acquire the assets of the leading cloner Reduced number of product lines from 15 to 3

[1997] G3 PowerMac Based on new PowerPC chip

Targeted at business users; Could also be used as network servers

[1998] G3 PowerBooks Well received

[2000] PowerMac G4 Cube Too costly; Suspended

Apple Turnaround ?
[1998] iMac Internet-age computer for the rest of us
Priced at $1299; First entry into low-priced consumer market Low-end CPU, Distinctive translucent case, Plug-n-Play Initiated project shortly after taking over; Completed in 10 months Deliver things that the user most cared about Internet, Simplicity $100M advertising campaign to promote the iMac Sold 278,000 in the first 6 weeks; 800,000 by the year (discounting) 32% of iMac buyers were new buyers; 13% replacing Wintel Within 3.5 years, 6M iMacs sold (vs. 300M PCs sold)

[2002] New iMac Futuristic design, Flat display; $1300

Digital Hub for cameras, camcorders, MP3 players

Think Different campaign

Apple Turnaround ?
Jobs hoped that Apples reinvigorated image would bring back large number of S/W developers
Planned to launch new OS in early 2001 that would be incompatible with most existing Mac programs To lessen migration problems, Jobs decided to ship each new computer with two OS Mac OS 9 and Mac OS X Mac OS X UNIX bases, technically advanced, stable environment Evangelists to woo and support important developers Lined up 400 ISVs to deliver 1200 applications for OS X [2001]No. of participants in the developer program went up by 75%

Other Products
[1998] Shut down Newton and a portable computer for education (Had spent $500M over the last 6 years) Expanded into peripherals market with iPod and software

Apple Turnaround ?
Internal Changes
Top priority to improve Apples operating efficiency Popular paid sabbatical plan Pruned Apples organization Eliminating units and Centralizing responsibility; Continued to reduce headcount, facilities and outsource manufacturing tasks Close relationship with Foxconn (contract manufacturer) Revamped Apples distribution system, eliminating smaller outlets [1997] Website to sell directly to consumers for the first time [2001] First retail store in McLean, Virginia; By end of 2001, Apple had 27 company owned boutiques in mjor cities

Lost $8M on $48M in the last quarter of 2001

Attracted 800,000 customers in December 2001 (40% new)

Apple Turnaround ?
Internal Changes (contd.)
By early 2002, $4.3B in cash and short term investments Inventory down to less than 2 days of sales; Cash conversion cycle reduced from 53 to 22 days Increased R&D expenditures to 8% of net sales (from 5%) [2001] Sales of $5.4B, down 32% from previous year Net loss of $25M included an operating loss of $344M Market share fell from 46% to 23% in the education market

Apples Competitive Advantage
Know the needs of the user and deliver a superior and rich user experience through great products that their customers love In the early years, GUI and application software was a major adv.

This enabled them to charge a huge price premium for their products

Apples Strategies after 1990

Sculley Years Marketing and Technology focus
Tried to reposition Apple as a mainstream and affordable brand
Diversify Apple from the PC business into PalmPilot and other devices Federation of Alliances with partners to lead the PC industry in innovation Laid off 10% headcount and Outsourced manufacturing

Spindler Years Operating focus

Allowed sale of Mac OS licenses to third party PC manufacturers Cut Apple product prices; Also terminated ventures with IBM (huge losses) International expansion; Cut R&D expenditure and also laid off employees

Apples Strategies after 1990 (contd.)
Amelio Years Filling the gap
Cancelled development of next-gen OS (Sunk cost = $500M)
Acquired NeXT software to compete with Windows; Jobs as advisor

Jobs Years Turnaround

Partnership with Microsoft; Investment + Commitment to produce Office
Terminated licensing program and released Powermacs iMac personal computer for the rest of us Foray into home PCs Reinvigorating and Reinventing Apples image Think Different

Developing relationship with ISVs and application developers

Shut down unprofitable and non-core businesses Expanded into peripherals market with iPod and software for that Streamlined the organization Eliminated units and centralizing resp.

Close relationship with Foxconn (contract manufacturer)

Opened first Apple retail store in Virginia; 27 boutiques in major cities in 2001

Analysis Apple in 2002

Brand awareness & the halo-effect of the iPod to the PC Complete package from the hardware to the software Product differentiation: Closed OS not subject to hacking and virus attacks unlike Windows OS

Heavy investment in research; Not a lean operations management unlike Dell Not completely independent as it is dependent on Motorola and IBM for processor chips

Taking advantage of Mac OS as a safe, reliable and secure system Leveraging the popularity with iPod, iTunes, iMovie and iPhoto

Closed system: application software not easily available Less penetration in the market; Premium segment, research oriented -> Hence costly

Frequent changes of strategies and leaders at the helm

Has Steve Jobs solved the problem

Termination of Mac licenses was a good thing to do
Dilution of brand image through cheaper clones

Foray into untapped iPod (music) segment

No clear market leader; Not good enough products Even Sonys products have not penetrated to a great extent

Close relationship with suppliers

Manufacturing is not their forte and hence Apple must rely on cheaper contract manufacturing

Attracting developers and ISVs

The platform is only as good as the application software on it

Strategic and Operating Focus

Cut unprofitable and non-core units Jobs gives the firm a vision/mission to work towards

Apples share price over the years

Apple in 2012
Apple Computer Inc., renamed Apple Inc.
iPod Huge success; Up to 7 generations of products
Variety of products Classic, Nano, Touch, Shuffle iTunes Major revolution Encouraged users to buy songs, rather than download them Market leader in online music services

[2006] Jobs announced transition to Intel processors

2003-05 Stock increased tenfold; MarketCap surpassed Dell

2007-11 Widespread Success

Portable device revolution iPhone, iPod Touch and iPad

Patent wars with Samsung [2011] Tim Cook took over as CEO