Date March 31, 2005

By Jeffrey Green,2014-11-28 01:27
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Date March 31, 2005Date,March,31,31,date,31,31,DATE,31,31

Date: March 31, 2005

    To: Stephen Jobs, CEO Apple Computer

    From: Kopka MNGT 481 Strategy Task Force

    Subj: Strategic Analysis for Apple Computer

    This strategic analysis for Apple Computer uses established tools and techniques to first present a hard-hitting environmental analysis of Apple’s external and internal conditions. The strategic issues facing Apple are then identified, followed by evaluation of potential alternative solutions and recommendations for future strategies.


    External Analysis

    There are two conditions that are most significant in Apple’s external environment and the personal computer industry:

    1. increasing price competition requires consistent efforts to control and

    reduce costs; and

    2. Wintel (integration of the Windows operating system and Intel processors)

    is the standard for PCs because of the wide availability of application

    software leading buyers to prefer, even require, Wintel-based PCs.

    The Key Success Factors and Stage of Industry conditions in APPENDIX 1 reveal the importance of cost competitiveness and selling computers capable of running Wintel-based applications. This interpretation is further supported in APPENDIX 2: Five Forces of Competition with the dominance of Wintel-based PCs as substitute threats to Apple, and buyers’ high price consciousness, low switching costs, and preference for Wintel-PCs. Competition is also intensifying due to slow market growth and product similarities among competing PCs. In addition, complementors, primarily software developers, have high power. They do not write Apple applications because the sales potential is small given the small base of Apple computers.


    There are other areas of concern. The fastest growth markets are in emerging economies, especially China, but Apple has lost its original advantage for accommodating Chinese characters and Wintel PCs are now preferred in China. PC makers’ drive to reduce costs is leading to greater standardization and cuts in R&D spending to only 1.5% to 2% of sales. Buyer price consciousness contributes to more direct sales, especially for knowledgeable PC users, through the Internet, telesales, and low cost providers such as Dell and Wal~Mart. And this cost competition exists even as more computers are “built-to-order” to meet buyers’ specifications; buyers no longer want to buy products off the shelves. These conditions are challenges for Apple as its computers do not meet the Wintel standard and industry cost-price requirements.

Internal Analysis

     Apple has always stood out for its innovation (See APPENDIX 4: Internal Analysis Competitive Advantage Building Blocks), developing and bringing to market “blockbuster” products such as the iMac and the iPod. Unfortunately, Apple’s products remain distinctive for only a short time until similar Wintel products enter and dominate the market. Apple’s sales then drop, leading to the company’s up and down financial performance (See APPENDIX 5: Internal Analysis Selected Apple Financial Results).

    Most significantly, Apple has always emphasized “user friendly” computers with its own proprietary operating system, creating highly brand loyal Apple users. But limited software applications prevent converting Wintel-PC users or new computer buyers to Apple. For example, Apple’s successful iMac sold 6,000,000 units from 1998 to 2001, but PC sales were 300 million during the same period. Apple’s innovation is


    insufficient to generate strong market share. APPENDIX 3: Internal Analysis Apple Value Chain presents the company’s strengths and weaknesses. It is an unfortunate

    contradiction that Apple’s innovation and distinctiveness also limits its acceptance in the market, a theme throughout APPENDIX 3. Apple also has higher costs than Wintel substitutes, spending more on both R&D, and Selling, Marketing, and Administration (See APPENDIX 5), leading to relatively higher prices and low, even negative profitability. Apple’s lost market share and higher costs forced reductions in employee benefits, but financial results have been inconsistent so that morale has declined and

    investors remain unhappy (APPENDIX 6: Internal Analysis Stakeholder Satisfaction).


     Apple is in a vicious circle. Its major issue is that its operating system is not widely used, so that application software is not developed for Apple’s computers, thereby limiting the demand for those computers, further reducing application software development, further reducing its computer sales, and so on. The decline in employee morale due to benefit cuts is unfortunate because Apple has always had committed employees, but the operating system issue is most significant because Apple cannot survive if it cannot sell its computers.


     The strategic alternatives are presented and evaluated in “APPENDIX 7: Pro-

    Con Alternative Analysis for Issue 1: Apple’s operating system not widely used, limiting market for Apple computers” and “APPENDIX 8: Pro-Con Alternative Analysis for Issue


    2: Poor Morale Among Apple Employees Reduces Productivity and Performance.” The three alternatives for Issue 1--adopt the Windows Operating System, get out of the computer business, or concentrate on electronic devices--involve consideration of how best to use Apple’s innovation capability and also how to accommodate to the

    requirement to be Windows-based in the industry. The three alternatives for reducing poor morale in order to raise employee productivity emphasize the incentives that will best elicit positive employee reactions and performance.


     Issue 1 is the most critical problem facing Apple because the survival of Apple is at stake. The recommended alternative is to concentrate on electronic devices and computer peripherals. These devices apply Apple’s strong innovation capabilities but do not limit sales because of limited software availability. The rapid growth of the iPod indicates the potential for such devices, and Apple’s innovation experience should enable the company to regularly turn out new devices. But the devices must be Wintel compatible in order to generate higher sales from the much larger base of Wintel PCs. It is undesirable to exit the computer business; Apple needs to be in computers in order to support the development of peripheral devices. To improve morale and increase productivity, Issue 2, Apple should implement a bonus program that directly connects the work and rewards of employees with achievement of Apple’s strategy. Such a bonus program better focuses employee efforts on what the company needs to do to be competitive. Apple needs to ensure that rewards are given for behavior and performance that advances the company’s strategy and makes Apple more competitive.


    APPENDIX 1: Selected External Analyses

     Key Success Factors for Industry Competition

    ; Must employ widely-used operating system for computersfollow the

    Wintel standard for personal computers

    ; Broad availability of application software

    ; Achieve low-cost production/assemblypersonal computers commodity

    product and must meet low market prices

    ; Collaborative production relations with large, vertically integrated systems

    contract manufacturers based mostly in China and Taiwan required to

    meet low-cost industry requirements; China and Taiwan manufacturers’

    labor rates 10% to 20% of U.S. rates

    ; Service and support compatibility

    ; Innovations in manufacturing, distribution, marketing more important for

    competitiveness than R&D breakthroughs

    ; Build-to-order production increasingly replacing traditional build-to-stock

    productioncan reduce costs by 10% due to cuts in inventory

Stage of Industry

    ; Mature stage in U.S.

    o evidenced by intense cost and price declines and competition for

    personal computers

    o advent of “PC-plus” era where PC’s are being replaced or

    supplemented by simpler electronic devices

    ; Growth stage in emerging markets, especially in Asia

General Environment

    ; Technologyrapid rise of online retailing


    APPENDIX 2: Five Forces of Competition External Analysis

Threat of New Entrants: High

    ; Components standard, anyone can assemble

    ; Reduced need for R&D

    ; Costly to build national-global brand name, but can be local

Supplier Power: Depends on supplier

    ; Medium power for contract assemblers/manufacturers of computers

    manufacturers can readily switch to different assembler

    ; High power for others like Intel, especially for Microsoft, one of few suppliers of

    application software for Apple computers

    ; Developers decline to develop iMac applications because market too small

Threat of Substitutes: VERY HIGH

    ; Wintel PCs dominate the market90% of all PCsand is industry technology


    ; Attractive because of wide availability of application software

    ; Arrival of “PC-plus era” where PCs replaced by other devices such as handheld

    PDAs,, smart phones, even video game boxes.

Competitive Rivalry: Low

    ; Apple computers have niche in which there are no other competitors

    ; But rivalry high in PCs

    o products offer similar capabilities at declining prices

    o large aggressive players with equal resourcesDell, HP-Compaq

    o Dell’s build-to-order, lower cost model being emulated by Compaq and

    others to reduce costs and to offer products that precisely meet customer

    needs and preferences

    o many small shops can assemble computers

    o slow growth in United States intensifying competition

Buyer Power: VERY High

    ; Low switching costs for Wintel PCs

    ; Little product differentiationPCs viewed as commodities

    ; Very price conscious

    ; Dominance of Wintel-standard PCs and heightened price competitiveness

    reduces attractiveness of Apple computers

Complementators: High Power

    ; Develop software for most widely used PCs and operating systemWindows.

    ; Application developers not inclined to develop applications for Apple computers,

    reducing attractiveness of Apple machines; Windows applications 88% of market

    in 2000, Mac software fell from 11% to 5% of market between 1996 and 2000


    APPENDIX 3: Internal Analysis Apple Value Chain

    Value Chain Strength Weakness

    Secondary Activities

    ; Regained profitability ; Multiple CEOs created leadership Firm Infrastructure

    uncertainties ; Strategy focused on education

    ; Frequent reorganizations ; Well known brand name

    disruptive ; Known for easy-to-use

    ; Lost 2/3 of market share technology and innovation,

    “user friendly” software ; Lost strength in core niche

    education market ; Cash conversion cycle

    reduced from 53 to 22 days ; Inconsistent, up-down financial improving financial and market performance

    performance ; High cost structure and inability to

     improve cost competitiveness

    ; Failed collaboration with IBM

    ; Lost international competitiveness

    ; High-price differentiation strategy

    no longer successful

    ; Need to reposition in PC industry

    ; Consistent failures to recognize

    intensity and rapidity of industry


    ; Small existing customer base and

    unlikely to attract Windows


    ; Cost savings from cuts in ; Declining morale due to Human Resource

    employee programs headcount reductions, elimination Management of sabbaticals and other ; Employees strongly identify

    employee perks with Apple’s distinctiveness

    ; iMac high performance, ; Proprietary design limits Technology

    versatile, extensive application development Development sophisticated capabilities, ; Limited software for computers

    serves as hub for peripheral ; Software developers see limited devices sales opportunities and do not ; Widely regarded for desktop develop software for Apple publishing computers

    ; Leadership in multimedia ; Technology outdated quickly and applications not preferred in marketcomputer

    ; Improved development cycles systems managers not buy Apples

    ; High innovation capabilities ; Failure of devices such as Newton

    and Pippin ; iPod successful in market

    along with iPhoto, iMovie, ; R&D spending of 4% to 6% much iTunes software higher than industry range of 1.5%

    to 2%

    ; Developed relationships with ; Unable to develop relationships Procurement

    foreign contract manufacturers, for more software application Foxconn in Taiwan best development


    ; Continued relationship with

    rival Microsoft for Office for the


    ; “Evangelists” for developers


    APPENDIX 3: Internal Analysis Apple Value Chain (cont.)

    Value Chain Strength Weakness

    Primary Activities

     Inbound Logistics

    ; State-of-the-art factories ; High cost operations Operations

    ; Recently outsourced some


    ; Successful in establishing ; Establishment of company retail Outbound Logistics

    online ordering stores problematic give failure of

    other such stores for PCs ; Reduced reliance on smaller

    outlets for products

    ; Inventory less than 2 days of


    ; Established own stores to sell ; Products overpriced compared to Marketing

    more effectively than in PCs

    warehouse electronics stores ; Products losing market share in

    growing Asian markets ; Expanded presence in national

    chains ; Macs not competitive with low

    ; Able to charge premium prices market shareonly 5%

    ; iMac attracted new users ; Premium branding undermined by

    low quality and support, and ; Preferred computer for desktop

    limited software availability publishing

    ; iMac developed limited attraction ; Consolidated, reduced product

    as replacement for computers lines from 15 to 3

    based on the Wintel standard


    APPENDIX 4: Competitive Advantage Building Blocks

; Strong capability for Apple Innovation

    ; Consistent innovator with periodic blockbuster products such as iMac and iPod

    that give Apple temporary advantage in the market

    ; Advantage tends to dissipate over time as competitors offer similar products at lower prices.

    ; Inconsistent performance Efficiency

    ; Historically higher cost operations than competitors

    ; Cost reductions in recent years, but R&D and advertising expenses relatively

    higher than other firms in the industry.

    ; Good with existing Apple owners who are brand loyal and love Apple products Customer

    ; Low for nearly all PC users other than existing Apple owners Responsiveness

    ; Most people buy and prefer Wintel products and are disinterested in Apple PCs

    because of lack of application software

    ; As long as Apple computers do not run Wintel application software, it will be

    difficult to attract new customers

    ; Questionable due to negative events such Apple notebooks that have caught fire Quality

    ; Innovative capabilities in Apple products not accompanied by market judgments that Apple products are high quality or reliable

     9 APPENDIX 5: Internal Analysis Selected Apple Financial Results

     2001 2000 1999 1998 Return on Negative 12 12 7 Investment (%)

    Total Asset .89 1.17 1.19 1.39 Turnover

    Net Profit Negative 10 10 05 Margin (%)

    Gross Profit 25 28 29 25 Margin (%)

    Selling, 29 19 21 15 General,


    as Percent of


     Dell 10 9 10 10

     IBM 20 24 25 29

     HP 21 21 21 24

APPENDIX 6: Stakeholder Satisfaction

Investors Poorinconsistent results

    Employees Poor at presentloss of benefits decreased morale Customers Good with existing Apple owners, have strong loyalty to Apple


    Poor for non-Apple owners who are not inclined to buy Apple Suppliers PoorApple computers do not offer opportunities for expanded

    hardware and software sales, except for iPod products Competitors Goodthey sense little threat from Apple computers


    APPENDIX 7: Pro-Con Alternative Analysis for Issue 1: Apple’s operating system

    not widely used, limiting market for Apple computers

Alternative 1: Adopt Windows operating system

    Pros Cons

    ; Widely used applications formerly limited to ; Lose ease-of-use associated with Apple

    Wintel PCs become useable on Apple computers

    computers ; Lose independence and come under Microsoft ; More application availability increases appeal dominance

    of Apple computers ; Same as every other PC on the market

     ; Ends distinctiveness of Apple computers

    ; Potential costly investments to adapt existing

    hardware and software on Apple computers to

    accommodate Windows operating system

Alternative 2: Get out of the computer business

    Pros Cons

    ; Ends noncompetitive product line ; Lose computer capabilities necessary to support

    development of peripheral devices ; Diverts resources to more promising

    opportunities ; Apple misses opportunity to turn its computers

     into preferred hubs for peripheral devices

    ; Eliminates Apple’s core business of computers;

    effectively ends Apple as a computer company

    ; Leaving computer business may undermine

    Apple’s imagine for cutting-edge innovation

    ; Lose support of small but loyal number of Apple


Alternative 3: Concentrate on electronic devices and computer peripherals like

    the iPod

    Pros Cons

    ; Applies Apple’s strong innovative capabilities ; Risky reliance on being able to regularly turn out

    new products ; Reduces reliance on Apple’s noncompetitive

    computers ; Puts Apple in competition with experienced

    electronic companies such as Sony, Panasonic, ; Gives Apple opportunity to establish and

    Phillips dominate new markets

    ; Must develop relationships with content ; Taps Apple’s spirit and pride of aggressive

    providershistorically, relationship development nonconventional approach to business

    not a strong capability for Apple ; Demand for peripherals may translate into

    ; Must be compatible with Wintel PCs increased demand for Apple computers

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