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NANYANG BUSINESS SCHOOL

AB311 STRATEGIC MANAGEMENT GROUP STRATEGIC REPORT ON APPLE INC.

SEMINAR GROUP 2 TEAM GENIE

Instructor:

A/P LAI SI TSUI-AUCH

Word Count: 5,999

Done by:

CHAN ZHE YING GOH CHUWEN

LEE KOK CHONG TEO KOK MIN JOHN

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Table of Contents I. EXECUTIVE SUMMARY ............................................................................................................... 3

II. MAIN REPORT ............................................................................................................................... 5

1. Introduction of Apple Inc. ........................................................................................................... 5

1.1 History ................................................................................................................................. 5

1.2 Current Business Strategy ................................................................................................... 5

2. SWOT Analysis ........................................................................................................................ 10

2.1 Promising Opportunities ....................................................................................................... 10

2.1.1 The Shift from the PC to Mobile Era ............................................................................ 10

2.1.2 Emerging Markets ......................................................................................................... 11

2.1.3 Consumer Digital Lifestyle ........................................................................................... 12

2.2 Significant Threats ................................................................................................................ 13

2.2.1 Intense Competition ...................................................................................................... 13

2.2.2 Risk of International Operations ................................................................................... 15

2.2.3 Risk of Imitations, Unauthorised Modifications and Piracy ......................................... 15

2.3 Strengths ............................................................................................................................... 17

2.3.1 Strong Marketing Efforts .............................................................................................. 17

2.3.2 Horizontal and Vertical Integration .............................................................................. 19

2.3.3 Research and Development ........................................................................................... 21

2.4 Major Weaknesses ................................................................................................................ 21

2.4.1 Business Strategy .......................................................................................................... 21

2.4.2 Reliance on Steve Jobs .................................................................................................. 22

2.4.3 Apple‟s Product and Expectations ................................................................................ 22

2.4.4 Corporate Social Responsibility .................................................................................... 24

3. Recommendations of Future Strategic Actions for Apple ........................................................ 25

3.1 Leverage on Innovation and Consumer Feedback ............................................................ 25

3.2 Leadership ......................................................................................................................... 26

3.3 Target Emerging Markets ................................................................................................. 27

III. ATTACHMENTS ......................................................................................................................... 29

IV. BIBLIOGRAPHY ......................................................................................................................... 33

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I. EXECUTIVE SUMMARY

Incorporated by Steve Jobs and Steve Wozniak in 1977, Apple Computer, Inc. was

incorporated with a net worth of US$250,000. It has since grown leaps and bounds to the

Apple Inc. of today, employing close to 50,000 employees worldwide, with a net worth of

US$209,379 million in 2010, placing it 56th

among the Fortune 500 companies. From the

iPod revolution in 2000, to the iPhone in 2007 and most recently, the iPad in 2010, Apple has

introduced, amidst much fanfare, ground-breaking products that revolutionized the markets

since the start of the 21st century.

This report serves to provide some insight of a firm that has been named Fortune magazine‟s

most admired company in the world for three consecutive years from 2008 to 2010. A

strategic analysis of the firm will examine the opportunities and threats in the general

environment and the firm‟s strengths and weaknesses.

Apple operates in many aspects of consumer electronics, such as personal computers (PCs),

mobile communication devices, digital music and video devices. The industry presents the

firm with ample growth opportunities such as the emerging economies, the shift towards the

mobile era and increasing consumer digital lifestyle. However, global markets for consumer

electronics are highly competitive as Apple‟s competitors are quick to respond to its major

product launches. As Apple operates across many geographical locations, the firm is also

exposed to international operation risks and risk of product imitation.

Apple‟s strengths put the firm in a prime position to take advantage of the opportunities and

minimize the impact of inherent risks. With its commitment to research and development,

Apple‟s Digital Hub strategy, coupled with strong brand marketing and retail efforts, has

resulted in the success of many Apple products. An integral ecosystem is also one of Apple‟s

competitive advantages. However, many industry observers believe that Apple may be too

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reliant on Jobs and wonder if the firm is able to continue with its momentum after Job‟s

eventual departure. The mass appeal of Apple‟s products has created great hype and

expectations that are becoming increasingly hard to meet. The firm has also received

widespread criticism for its contractors‟ labour and business practices.

The report will conclude by providing Apple with three recommendations. Firstly, Apple

should strive to improve with each new product launch by continuing to leverage on its

strong innovation and being receptive to feedback. Secondly, Apple should have its

succeeding leader to front the firm in the way Jobs has. This increased visibility of its leader

would increase stakeholders‟ confidence in Apple‟s business continuity without Jobs. Finally,

the emerging markets represent a huge opportunity which Apple can tap on by launching a

new product line exclusively for these markets to pursue growth and expanding on its

Corporate Social Responsibility program to further enhance its image.

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II. MAIN REPORT

1. Introduction of Apple Inc.

1.1 History

The firm started off as “Apple Computer”, best known for its Macintosh line of computers in

the 1980s and 1990s. Despite a strong brand, rapid growth and high profits in the late 1980s,

Apple nearly went bankrupt in 1996.

Steve Jobs took over as CEO again in 1997 after being forced out of the firm in 1985. “Apple

Computer” was renamed “Apple Inc.” to reflect the firm‟s expansion into consumer

electronics market with innovative non-PC products starting in the early 2000s.1 Various

revolutionary products such as the iPod, iPhone and iPad were introduced into the market,

gaining a cult-like following behind the brand, with exponential growth and share price rising

more than 15-fold since 2003.2 Today, Apple stands as a global technology powerhouse,

surpassing its major competitors, including Microsoft, to become one of the world‟s most

valuable companies.3

1.2 Current Business Strategy

Apple adopts a differentiation strategy with its distinctive marketing campaigns that position

itself as a hip alternative to other brands in the industry. Despite being a premium brand that

is capable of commanding high price margins, Apple is still able to undercut its competitors‟

pricing with the latest iPad 2 release by leveraging its balance sheet and its position as one of

the largest buyers to secure components at low prices.4

This further gives Apple a

competitive advantage.

1 Markoff, John, 2007.

2 Refer to Exhibit 1.

3 Helft, Miguel and Vance, Ashlee, 2010.

4 Bloomberg, 2011.

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1.2.1 Broad Target and Uniqueness

Apple‟s strategy serves a broad target market by positioning itself as a full-fledged digital

convergence firm that seeks to enhance consumers‟ digital life.

Apple never fails to build on its uniqueness to stand out from its competitors. Apart from

building on its strong brand and culture, it has delivered one innovative product design after

another, from the iPod scroll wheel to the multi-touch screen of the iPhone.

1.2.2 Porter’s Five Forces

Using the Porter‟s five forces, this section analyzes how Apple effectively positions itself

with its differentiation strategy.

Rivalry with Existing Competitors

Apple faces strong rivalry from its existing competitors due to the huge number of

competitors in the various industries in which it operates. In the Personal Computer (PC)

industry, its main competitors include large industry players such as Hewlett-Packard (HP)

and Dell, and in the Smartphone industry, Research In Motion (RIM) and Nokia.

However, Apple‟s products are highly differentiated in terms of design and functionalities as

compared to its competitors‟ products. As a result, Apple is insulated from intense rivalry due

to strong brand loyalty arising from its positive reputation for high-quality and unique

products.

Apple would be able to sustain this competitive advantage as long as it continues to innovate

and meet the expectations of its customers.

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Bargaining Power of Suppliers

Hardware Components

The bargaining power of suppliers for hardware products is low as the industry is highly

saturated, causing suppliers to be competitive in their pricing.

Apple adopts a differentiation strategy which requires the firm to ensure that suppliers

provide high-quality components, driving up its supplier costs. However, Apple is partially

insulated from the impact of higher supplier costs due to the premium that the firm charges

for its products.

Furthermore, Apple purchases a large amount of raw materials, increasing its bargaining

power as a significant customer. Hence, Apple is able to secure components at a lower price.

Microprocessors

Intel has been dominating the PC Computer Processing Unit market with 80% of the market

share.5 To provide higher performance desktops and laptops, the entire Macintosh line is now

running on Intel chips, increasing Apple‟s dependence on Intel. Therefore, Intel has a high

bargaining power as a supplier for its PCs.6

However, for non-PC devices7 that make up 60% of its revenue, Apple develops its own A4

and A5 chips which mitigates its over-dependence on Intel.

5 Yoffie, B. David and Kim, Renee, 2010, pp 5.

6 Includes desktops and laptops.

7 Includes iPod, iPhone and iPad.

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Operating Systems (OS)

Apple develops its own Mac OS X for its PCs and iOS for its non-PC devices. Due to

incompatibility of the Mac OS with many software programs, Mac users may prefer to run

the Windows OS. This creates a dependency on Microsoft to provide the Mac-compatible

Windows OS.

However, since Apple is the third largest PC seller in the U.S. market,8 Microsoft would also

be dependent on Apple to make the sales for the Windows OS. Hence, this interdependency

would result in a low bargaining power of Microsoft.

Bargaining Power of Buyers

Apple operates in markets for PCs, mobile telecommunication devices, consumer electronics

and related software which are highly competitively and saturated. With a large number of

firms operating in the industry, there are many competitor product substitutes. This increases

the bargaining power of consumers.

However, the uniqueness of Apple‟s products and a loyal customer base reduce the price

sensitivity of customers. A strong research and innovation base allows Apple to produce

ground-breaking products such as the iPad. Coupled with strong brand marketing and

successful implementation of its pricing strategy throughout its product range, customers are

willing to pay for the firm‟s products.

As long as Apple continues stay ahead of the curve by introducing innovative products and

builds on its brand marketing, it is likely that its customers will continue to be less price-

sensitive. Hence, the bargaining power of customers for Apple is medium.

8 Ogg, Erica, 2010

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Potential Entrants

The industry poses substantial barriers to potential entrants with Apple‟s established brand

presence in the market, providing it with a strong differentiating factor. Potential entrants will

not only find difficulty in winning the market share over, but also require a significant

investment of resources to compete with Apple‟s constant innovation of products.

Products Substitutes

With competitors eager to ride on Apple‟s waves of success, substitutes for its products in the

electronics industry are aplenty, posing a potential threat to its business. However, Apple has

positioned itself effectively against its competitors‟ substitute products with a strong brand

that has gained it a loyal base of Apple Fanatics. Therefore, the threat of product substitute is

medium.

Based on our analysis of the Porter‟s Five Forces, Apple‟s differentiation strategy has

enabled to firm to compete effectively in the competitive landscape while maintaining

reasonable bargaining power with its suppliers and buyers.9

9 Refer to Exhibit 2.

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2. SWOT Analysis

This section of the report will examine the opportunities and threats of the external

environment and the firm‟s strengths and weaknesses.

2.1 Promising Opportunities

2.1.1 The Shift from the PC to Mobile Era

Since the mid-1990s, demand for phones with increased functionalities and enhanced

aesthetics has increased tremendously, with smartphones rising to prominence in the

following decade.10

These high-end phones bring multiple functions together, serving as a

mobile phone, Internet browser, PDA device and media player.

Currently, there are more than 1.3 million mobile applications compared to 50,000-75,000 PC

applications in the market. 500 million smartphones and tablets, as compared to 380 million

PCs, are expected to be sold in 2011.11

In an IBM survey conducted with 2,000 enterprise IT

professionals, majority of the respondents thought that "within the next five years, more

developers will be working on mobile applications and cloud-based architecture than

traditional computing platforms for enterprise".12

These results further suggest the good

future prospects of the mobile industry.

With the successful launch of the iPhone and iPad, Apple is set in the right direction to

continue to leverage on its existing core competencies to tap on this growing opportunity.

10

Yoffie, B. David and Kim, Renee, 2010, pp 10. 11

Lai, Eric, 2011. 12

Finley, Klint, 2010.

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2.1.2 Emerging Markets

Despite the shift towards the mobile era, the PC industry is still considerably viable

especially in emerging markets, as it is propelled by growing internet demand.13

As of 2010,

more than one billion PCs were used worldwide and it is forecasted that this trend will

continue for the next 3 years, with exponential increases in the Asia Pacific and Middle

East/Africa regions.14

Research has shown that consumers in these emerging countries are buying and using more

consumer electronic products. In 2010, these consumers are more than 2.5 times as likely to

buy a smartphone in the following year and twice as likely to have bought a computer in the

past year as compared to consumers in mature markets.15

This is evident in India where the appetite for consumer technology is one of the strongest in

the emerging markets as consumer spending on mobile phones and computers remain

especially strong.16

Consumers in Africa are also becoming more connected and eager to

consume digital content as the price of bandwidth falls.17

Another study has shown that Chinese consumers are as keen on Apple's sleek gadgets

as international consumers and that Apple has a lot to gain from the Chinese market. For

instance, Lenovo currently holds approximately 30% of the Chinese market and Lenovo's

Chairman has observed that "if Apple were to spend the same effort on the Chinese consumer,

we (Lenovo) would be in trouble".18

China has also outperformed mature markets in the netbook and e-book market. A survey of

consumers across eight countries ranked Chinese consumers first in the use of leading age

13

Yoffie, B. David and Kim, Renee, 2010, pp 4. 14

Refer to Exhibit 3. 15

Hartley, Charles, 2010. 16

Refer to Exhibit 4. 17

Appfrica, 2010. 18

Elmer-DeWitt, Philip, 2011.

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consumer technologies. For example, 17% of Chinese respondents own an e-book, ahead of

U.S.‟s 5% and Germany‟s 2%.19

This presents an opportunity for Apple to build on the

worldwide success of the iPad as an e-book reader.

Apple currently has not spent the same amount of effort in China as compared its competitors

such as Lenovo. Despite it being increasingly difficult to obtain any official Apple products

within China, the firm's products are in high demand.20

The market potential of emerging economies should not be overlooked as it represents huge

opportunities that Apple can tap on. By penetrating and establishing a presence in these

markets, Apple would be able to increase its global market share, allowing it to build on its

momentum as one of the fastest growth firms in the world.

2.1.3 Consumer Digital Lifestyle

Consumers of the 21st century are increasingly more engaged in a wide variety of technology-

based activities.21

They are more entrenched in the digital lifestyle with the usage of

computing devices such as PCs and smartphones becoming part of their daily lives.22

Such

trends in the consumer lifestyle correlate to the growing consumer electronics market demand.

Apple‟s Digital Hub strategy to position itself as the center of its consumers‟ digital lifestyle

has an advantage to capture this target market segment. Apple focuses on connectivity among

its various products that would fit the needs of its tech-savvy consumers. This strategy will

enable Apple to continue to pursue the opportunities of the growing consumer electronics

market as a means of profitable and sustainable growth.

19

Hartley, Charles, 2010. 20

Griffiths, Sarah, 2010. 21

Refer to Exhibit 5. 22

Hogan, Kurt M., 2011.

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2.2 Significant Threats

2.2.1 Intense Competition

Global markets for consumer electronics are considered fast-cycle markets23

that are highly

competitive and subjected to rapid technological changes. Apple huge success in major

product lines attracts strong competitive responses, emphasising the need to innovate and

differentiate to out manoeuvre its competitors.

Consolidation in the PC market, such as the possible Lenovo and NEC merger24

, has resulted

in larger and potentially stronger competitors. Price competition has been particularly intense

as competitors, such as Dell,25

which sell Windows-based PCs, are aggressively cutting

prices and lowering product margins. If Apple is unable to compete effectively, it faces the

risk of losing its PC market share.

The success of the iPhone caused the competition in the mobile telecommunications industry

to intensify significantly as competitors such as Samsung, LG and Sony Ericsson attempt to

imitate some of the iPhone‟s functionality and designs within their own smartphones.26

Companies also collaborate to offer solutions that are more competitive than those they

currently offer. For instance, phones that run on Google-backed Android OS have grown in

popularity over the last 12 months due to its lower pricing and similarity to the iOS. Android-

powered phones currently match Apple‟s strong position in the U.S. with an OS market share

of 27%-28%.27

In February 2011, Nokia and Microsoft partnered to take on Apple and

Google in the growing smartphone industry.28

Give these circumstances, Apple will risk

23

Ireland, R. Duane, Hoskisson, Robert E. and Hitt, Michael A., 2011. pp 133. 24

Ausick, Paul, 2011. 25

Hanlon, Mike, n.d. 26

Gikas, Mike, 2008. 27

Kellogg, Don, 2011. 28

CBC News, 2011.

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losing its market share if it does not continue to innovate and develop future iOS releases and

iPhones that outperform those by its competitors.

The iPhone and iPod Touch allowed Apple to enter the portable gaming devices market.

Firms such as Nintendo and Sony that were not thought to be Apple‟s direct competitors are

now drawn into the fray with games being a big hit on the mobile devices. This enlarged

scope of competitors encompasses firms that have long dominated their markets in which

Apple may not have the experience or resources to compete. Furthermore, competitors such

as Sony have since added the music player functionality on its PlayStation Portable devices,

potentially decreasing the demand of the iPod Touch.

The launch of the iPad in April 2010 also produced an immediate competitive response, with

at least a dozen companies from Android, Samsung to HP scrambling to announce plans to

ship tablets in 2010.29

Though Apple currently commands over 82% of the tablet market

share30

, the nature of the industry suggests that it is only a matter of time before the

competitors narrow Apple‟s lead. Apple needs to be proactive and reactive by continuing to

keep itself ahead of the curve, as it has done with the launch of iPad 2 in March 2011.

The instantaneous success of the App Store has also sent competitors rushing to offer their

own application stores. Though there are over 350,000 applications available on the App

store, Google‟s Android Market is fast catching up with 250,000 applications to date, an

increase of 150% within the last 6 months. As the success of the App Store is heavily

dependent on third-party developers, the availability and quality of applications for Apple‟s

devices may suffer if developers focus their efforts in writing applications for competitor

platforms. This would ultimately decrease the demand for Apple‟s mobile devices.

29

Dybwad, Bard, 2010. 30

Yarow, Jay, 2011.

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2.2.2 Risk of International Operations

A large and growing portion of Apple‟s revenue is derived from international operations.

Over the last three years, international sales have been increasing and accounted for 56%, 47%

and 44% for FYs 2010, 2009 and 2008 respectively.31

Therefore Apple risks violating the

complex foreign laws and regulations, including foreign exchange controls, labour laws and

anti-competition regulations – the latest being that Apple is accused of creating a music-

download monopoly.32

Compliance with such regulations increases the costs of doing

business in foreign jurisdictions. Significant foreign operations also expose Apple to

movements in foreign currency exchange rates against the greenback. The weakening of U.S.

dollar since the recent global financial crisis has led to Apple to raise international pricing to

offset the foreign currency exposure, potentially reducing demand for its products.33

2.2.3 Risk of Imitations, Unauthorised Modifications and Piracy

Given the high success of Apple‟s product launches, Apple‟s products are highly prone and

susceptible to imitation. In the past, when Macintosh licensed their ROM and softwares,

almost 99% of customers who bought such clones were existing Mac users, cannibalizing

Apple‟s profits. Although the Macintosh licensing program has been halted, iPhone

imitations in countries such as China have been rampant34

while more established players of

the industry also copy the look and ergonomic design of Apple‟s iPhone as discussed in the

earlier section about intense competition. With firms like iFixit dismantling Apple‟s products

quickly after its releases to study its parts35

and even getting around Apple‟s tamper resistant

31

Refer to Exhibit 6. 32

Thomasch, Paul and Levine, Dan, 2011. 33

Apple Inc. Form 10-K 2010, pp 19. 34

Chang, Chris, 2010. 35

Takahashi, D. 2011.

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screws with its „liberation kit‟

36, it is likely that clones will continue to exist and possibly

take a cut out of Apple‟s market share.

Furthermore, studies estimated that Apple has lost around US$450 million due to users

running unauthorised applications on its mobile devices.37

The root cause is the emergence of

Jail-Breakers – users who illegally modify the iOS to install applications not approved by

Apple, and this includes pirate software applications.38

This may ultimately lead to decreased

sales from the App Store, negatively affecting Apple‟s financial bottom line.

36

iFixit Site News, 2011. 37

W. McIntyre, Garrett and MacDonald, Phil 2010. 38

Keller, Mike, 2009.

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2.3 Strengths

2.3.1 Strong Marketing Efforts

One of the greatest strength of Apple is its impactful marketing efforts which produced a

potent concoction of a strong global brand and celebrated products.

Brand Marketing

Apple is one of the most established and reputable IT brands globally. Its popular multi-

million dollar marketing campaigns included successful “Think Different” ads and catchy

slogans such as “It just works”, which positioned the firm as a chic alternative to its

competitors .39

Apple also promoted its computers as the “world‟s greenest lineup of notebooks” that are

recyclable and energy-efficient.40

In 2007, the U.S. Environmental Protection Agency ranked

Apple‟s notebooks as the “most environmentally-friendly portable computers”.41

In 2011,

Climate Counts placed Apple in its top category of corporate climate responsibility.42

As a result of its massive marketing efforts, Apple has built a very loyal customer base that

advocates the brand, enabling it to not only recruit customers, but also retain them. This

provides a platform for Apple to introduce new products, such as the iPod and iPhone.

Besides, Apple branding is so successful that it is able to license its “Made for iPod” logo,

which serves as a form of advertisement and a revenue source as it earns an estimated 5% of

the retail price of such products.43

39

Yoffie, B. David and Kim, Renee, 2010. pp 4. 40

Apple Environment Website, n.d. 41

Macnn news, 2007. 42

Climate Counts Org, 2011. 43

Yoffie, B. David and Kim, Renee, 2010. pp 8.

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Ecosystem of Products

Apple ingeniously created an ecosystem of products contributing to the firm‟s revenue and

enhancing its product marketing. An example would be the iPod accessory market. It was

estimated that for every $3 spent on an iPod, consumers spent another $1 on iPod add-on

products. These exclusive iPod add-ons of over 2,000 different items signal that Apple‟s

player is superior to many other MP3 players, which had fewer accessories.44

The emergence of iTunes also revolutionized the sales of iPod. The iTunes desktop software

and music store differentiate the iPod from its competitors‟ products and reinforce consumers‟

decision to purchase the iPod. With the launch of the iTunes store in 2003, iPod sales

flourished with Apple‟s market share of MP3 players increasing from 12% in 2003 to 70% by

2005.45

The App Store, an extension of the iPhone‟s ecosystem, was introduced as part of iTunes

which consumers were already very familiar with. Since its introduction, the App Store has

broken the 10 billion download mark in less than 3 years.46

With Apple taking a cut of 30%

of the developers‟ App sales, this contributes to its revenue stream.47

Furthermore, the

popularity of the Apps also helps to boost sales of the iPhone and other non-PC devices.

44

Darlin, Damon, 2006. 45

Zook, Chris, 2007. 46

The Telegraph, 2011. 47

Apple iOS Development Program Website, n.d.

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Retail Strategy

Apple launched its retail strategy in 2001 to increase customer exposure to its products. Its

stores carry its full range of products exclusively with well-trained sales personnel promoting

product advantages to potential buyers alongside in-store presentations. Apple specialists are

also present to provide technical support. The enhanced consumer experiences helped to

further differentiate Apple from its competitors.

With annual sales of about $4,500 per square foot as compared to Tiffany & Co‟s $2,750 and

Best Buy‟s $930 in 2007, Apple retail stores were a tremendous success.48

This retail division,

with an average of 288 stores, grew to account for 15% of Apple‟s total net sales in 2010.49

Besides, Apple explored other retail revenues such as entering into a partnership with Best

Buy, the world‟s largest electronics retailer. By having its own retail space within Best Buy‟s

stores, Apple was able to expand on its physical presence. 50

This worked well, with Mac

shipments increasing 34% during the last quarter of 2007.51

2.3.2 Horizontal and Vertical Integration

Another unique strength that Apple has over its competitors is that it is one of the few firms

in the PC industry that adopts both horizontal and vertical integration.

Horizontal Integration

Apple adopted a digital hub strategy, expanding its production line to include non-PC devices

such as iPod, iPhone and iPad products that deliver a cutting-edge tightly integrated user

experience. This horizontal integration by expanding the product range created synergies as

Apple was able to develop various products based on the knowledge of application software

48

Marsal, Katie, 2008. 49

Apple Inc. Form 10-K 2010, pp 38. 50

Krazit, Tom, 2008. 51

Krazit, Tom, 2007.

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and content from its Mac products. It also had the opportunity to launch these new product

lines to its existing base of loyal Mac users.

Horizontal integration expanded and strengthened Apple‟s business, with the iPhone and the

iPod currently representing about 51% of Apple‟s net sales.52

Vertical Integration

Apple demonstrates vertical integration with its PC and music market, where it is able to

integrate the content, hardware, software, online service and retail stores under its firm.

However, unlike vertical integration of the past, Apple engages in contract manufacturing,

where hardware is manufactured by third-parties such as Foxconn and Asus. These

companies manufacture Apple‟s products according to its precise design specifications.

Hence, Apple still retains full control of the manufacturing process.

Besides, Apple has taken a step further by manufacturing its own A4 and A5 processors to

power iPhones and iPads, and producing its proprietary iOS for the non-PC devices.53

It also

took over P.A. Semi, a chip company.54

With this platform control, Apple is able to optimize

the use of different components and create products with a performance advantage over its

competitors‟.

Vertical integration allows Apple to have control over design, innovation and production

throughout the vertical chain. Hence, it is able to enhance the quality of its customers‟

experiences and possess unparallel pricing strength to outperform its competitors.55

52

Apple Inc. Form 10-K 2010, pp 34. 53

Lyons, Daniel, 2010. 54

Martellaro, John, 2008. 55

Flynn, David, 2010.

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2.3.3 Research and Development

Apple‟s R&D encompasses the product development process where it relies on its proprietary

designs and keeps key design decisions in-housed. Jobs is also a vital part of this design

process with his hands-on involvement.56

As a result, Apple is able to produce best-sellers,

from the iPod scroll wheel design to the ultra-thin MacBook Air, which sets Apple apart from

its competitors.

Apple is also recognized for designing products using its unique components. An example

would be its own A4 chip, specifically designed for mobile devices that required efficiency

and speed. It came up with proprietary developed applications to support its Macintosh line

as well.57

This commitment to R&D allows Apple to produce sophisticated but easy-to-use products

and deliver well-integrated user experiences.

2.4 Major Weaknesses

2.4.1 Business Strategy

Apple‟s premium price differentiation strategy has its pitfalls given the intense rivalry of the

industry. Without constant innovation to set itself apart from its competitors, Apple‟s

products may appear overpriced in comparison to its rivals. An example was the Mac Mini

which failed to outdo the Windows desktop in terms of functionality. Consumers could get a

desktop with more functions and faster performance at a lower price,58

resulting in less than

ideal sales for the Mac Mini.

Given the broad range of products launched from its Digital Hub Strategy, Apple has to

divide its organizational resources and capability to manage the various product arms. This

56

Burrows, Peter, 2005. 57

Yoffie, B. David and Kim, Renee, 2010, pp 7. 58

Macworld, 2009.

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has incurred opportunity costs for Apple as it could have focused on the more profitable

target segments and utilise its resources more efficiently in generating higher returns. Certain

less receptive ventures such as the Mac Mini and Apple TV prove the case in point and could

also highlight the weaknesses of over diversifying its business.

2.4.2 Reliance on Steve Jobs

The success of Apple, since Jobs‟ return to the firm in 1997, has been immensely attributed to

his leadership. Apple‟s fortune has been linked to the iconic CEO and the stock market has

been reacting adversely to news of Jobs‟ series of medical leave following treatment for

pancreatic cancer in 2004 and a liver transplant in 2009.59

It is without a doubt that many see

Jobs as the sole reason for Apple‟s success especially when uncertainty of Jobs‟ health is able

to cause a stir among shareholders. The question remains as to whether the management team

and new products in Apple‟s pipelines are able to see Apple through continued success in the

absence of Jobs.

2.4.3 Apple’s Product and Expectations

With the successful mass appeal of Apple‟s products, it has become increasingly difficult to

fully incorporate the various desires and expectations of consumers into the various devices.

One of such product limitation is the lack of a physical QWERTY keyboard for the iPhone

which is especially useful for business consumers to type long emails. It is also useful in

regions of colder climates where consumers wearing gloves can choose not to use the touch

screen which only detects the naked finger. Other notable limitations pertain to Apple‟s

restrictive closed system that prevents certain applications and platforms, such as the popular

Adobe Flash, from running on products like the latest iPad which spots the iOS. The

criticisms are high with consumers considering open systems, like Android, that position

59

Channel Newsasia Business News, 2011.

23

themselves to give users more choices.60

These limitations could lead to performance below

expectations and a loss of certain customer segments.

With products being increasingly multi-functional, Apple also runs the risk of cannibalising

its own products. For example, the Apple‟s iPad have been said to be cannibalising notebook

and iPod sales to the extent that the iPod Touch product line was expected to be

discontinued.61

This has the implication that Apple may have to maintain higher price

margins for the latest releases so that there will still be a net positive business impact even

after considering the cannibalisation effect.

With short product life cycles of the consumer electronics industry, Apple may find it

increasingly difficult to keep up with the overly-hyped expectations with some product

launches being merely a rehash of the last. In an interview with an analyst Gene Munster, it

was commented that investor reaction prior to the unveiling of the iPad 2 was underwhelming.

The iPad 2 was also said to be „evolutionary, not revolutionary‟62

which had hardly any

impressive new features with consumers already turning their high hopes to iPad 3.63

The

competition may now not be with the „real‟ competitors but with the consumer expectation it

sets.

The difficulties in meeting or exceeding expectations are in addition to the problem of market

saturation,64

a problem that any high growth firm will inevitably face. Apple has to constantly

come up with new products to attract new customers and ensure its company growth or risk

losing its current firm valuation which is again, based on expectations.

60

Macstories, 2010. 61

V3.co.uk, 2010. 62

Bloomberg, 2010. 63

Osada, J., 2011. 64

AppleInsider, 2009.

24

2.4.4 Corporate Social Responsibility

As a large firm under the media spotlight and public scrutiny, it is imperative that Apple

extends its responsibilities to its stakeholders and demonstrates commitment to its triple

bottom line: people, planet, profit. However, Apple has been known to receive widespread

criticism for its labour and business practices.65

Although Apple has been reactive to such

allegations and standards have been said to be raised, the resulting negative perceptions may

prove to be difficult to reverse. Furthermore, allegations have continued to surface despite

Apple‟s measures.66

Having such negative media reports may adversely impact and tarnish

Apple‟s image. The growing negative sentiments of workers in China, an emerging economy

where Apple‟s production predominantly takes place, may possibly cause Apple to lose a

huge consumer market that could provide future growth opportunities.67

65

The Washington Post, 2006. 66

Wired, 2010. 67

The WSJ’s Digital Network, 2011.

25

3. Recommendations of Future Strategic Actions for Apple

In light of our SWOT analysis, we have identified a three-pronged approach which Apple

may adopt.

3.1 Leverage on Innovation and Consumer Feedback

Given the nature of the industry where technological advancement is rapid with high risk of

product obsolescence, we recommend that Apple continues to invest in R&D in order to keep

up in the fast-paced industry. By constantly innovating and coming up with cutting-edge

products, Apple would be able to maintain its position as one of the industry leaders.

As Apple is adopting a differentiation strategy, it is imperative for Apple to leverage on its

strength in R&D to generate products that will meet the expectations of its customers.

Understanding the tastes and preferences of its consumers is the crux. It is important for

Apple to be receptive to both positive and negative feedback from its consumers and to

appropriately incorporate them into winning solutions.

An example would be recent criticisms on how Apple‟s iPhone and iPad are incompatible

with the popular flash technology. Analysts have predicted that Apple‟s decision not to

support Flash would have a “limiting effect on the iPad‟s sales potential”.68

Such product

limitations, as identified under our weakness analysis, may lead to a loss of certain customer

segments.

Though it is not feasible for Apple to act on every criticism, Apple should strive to improve

and re-invent with each new product launch to minimise product limitations without

compromising on its core values and product uniqueness. This will help to ensure that Apple

is able to remain as one of the leading firms in the industry.

68

Maisto, Michelle, 2010.

26

3.2 Leadership

Jobs has become an icon that strongly represents the firm and its prospects. He has, after all,

played no small role in designing and developing Apple‟s core products and has grown to

define Apple‟s renegade culture. His skill at salesmanship has been dubbed the “reality

distortion field” and is evident during his keynote speeches (colloquially known as

“Stevenotes”) which have been known to move the stock price.69

In discussing Apple‟s weaknesses, however, there is a concern of how Jobs‟ health problems

and leave of absence would leave investors and shareholders alike unsettled. It has become

apparent that Jobs is indeed the „soul‟ of the firm and his absence will prove to be an

uncertain transition for the firm.

Therefore, it is our recommendation for Apple to prepare for eventualities and transition of

leadership. Despite Apple‟s efforts of having the next line of management team in the

pipelines with plans for future products, it is equally, if not more critical, for Apple to put a

new face on the leadership of the firm. The increased visibility of its leader would reassure

stakeholders of Apple‟s future prospects.

Apple should gear itself for the future and groom its successor to be of Jobs‟ calibre. The

internal managerial labour market should be used to select an insider as the new CEO. Due to

the internal successor‟s experience and understanding of the firm‟s culture, he/she will be

better positioned to carry on Apple‟s culture and differentiating strategy.70

From within the firm, Job‟s successor should be able to effect Apple‟s brand differentiation

and transcend orthodoxy by adopting a transformational leadership style. This will serve to

continue Apple‟s strong ability to innovate and to stay ahead of its competitors. At product

69

AppleInsider, 2007. 70

Ireland, R. Duane, Hoskisson, Robert E. and Hitt, Michael A., 2011, pp 314.

27

launches, Job‟s successor should be able to front the firm and its values and connect with the

audience by exuding passion, energy and enthusiasm. Fans will be rallied and the hype

created will continue to keep consumers excited and looking forward to the next

revolutionary Apple product. In essence, Apple will be fronted by a new face representing

everything Apple is thus far.

With a clear leader to succeed Jobs in taking charge of the firm while connecting with the

followers, stakeholders and shareholders can be reassured that the firm is in good hands and

will not be losing its vigour in the technology and entertainment industry.

3.3 Target Emerging Markets

As discussed in our opportunities analysis, the market potential of emerging economies

represents huge opportunities that Apple can tap on. We have two recommendations at which

the firm can implement to increase its presence in these markets.

3.3.1 Launching a New Product Line

Many emerging economies may not have the infrastructure to support some of Apple‟s

products. Mobile and Wi-Fi networks may not be in place. Other issues in such markets

include the premium pricing of Apple products which may exceed what consumers and

businesses are able to afford.

One of the ways Apple can increase market presence is to develop simple but adequate

products specifically for these markets. Apple can leverage on its expertise in research and

innovation, as well as its strong balance sheet to obtain bulk discounts from suppliers to drive

costs down. Given the limitations in certain emerging markets, product features which are not

supported by the infrastructure such as the 3G network will be dropped for the new product

line. This reduction of features will enable the products to be relatively more affordable to

consumers of these countries.

28

Brand dilution can be avoided by keeping the product line separate from the mainstream. The

products will not be marketed as a cheaper alternative as product quality standards will still

be maintained. The marketing and the launching of these products will also be done

exclusively within these targeted markets.

3.3.2 Expand on Its Current CSR Initiatives

Throughout its history, Apple has focused on the use of technology in education and has been

committed to delivering tools for the education sector. Some of the firm‟s initiatives in the

education sector include having an online education store, which allows students and

educators to purchase most of its available products at a discount, as well as support mobile

learning through the iTunes U (for University) programme where students and teachers can

share and distribute educational media through iTunes.71

However, such initiatives are not implemented in many education sectors in less developed

cities across emerging economies such as Brazil, Russia, India and China. Given the rapid

and unpredictable pace of product obsolesces, there is a likelihood that Apple will be faced

with excess inventory,72

due either to inaccurate forecasting or the unpredictable consumer

behaviour. Apple could donate, or sell at a discount, these excess stocks to schools and aid in

upgrading the school‟s infrastructure, as well as enhancing the learning experience of youths.

This initiative can be an expansion of Apple‟s CSR programme and will increase Apple‟s

visibility and brand awareness in these emerging economies. In the long run, when these

markets mature, Apple will be well poised ahead of its competitors to roll out its full product

range.

71

Apple Education Website, 2011. 72

Apple Inc. Form 10-K 2010, pp 12.

29

III. ATTACHMENTS

Exhibit 1: Apple Inc. Stock Performance

Source: Yahoo Finance

Exhibit 2: Porter’s Five Forces Summary

Hardware: LOW

Microprocessors (Intel): MEDIUM

OS: LOW

HIGH

LOW

MEDIUM

MEDIUM

30

Exhibit 3: Worldwide PCs in use

Source: Computer Industry Almanac, Inc. Worldwide PC Market Research Report 2010

Exhibit 4: India’s Consumer Electronics Survey

Source: Accenture, 2010. India: The 2010 Accenture Consumer Electronics Products and

Services Usage Report.

Worldwide PC In-use

31

Exhibit 5: Consumers’ Digital Lifestyle Survey

Which of the following activities do you do in a typical week? How much time do you

spend?

Source: Hogan, Kurt M., 2011. From digital lifestyle to digital lifeblood: The increasing

value of technology that works.

32

Exhibit 6: Apple’s Net Sales from 2008-2010

Source: Adapted from Apple Inc. Form 10-K, 25 September 2010. [Filed 27 October 2010]

$20,893 $22,325 $28,633

$16,598 $20,580

$36,592

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2008 2009 2010

International

U.S.

33

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