Apple Strategic Audit

Apple Computer Inc. Strategic Audit

Valentin Iliev D03103544

Andreas Lindinger D03103551

Guenther Poettler D03103523

Dublin Institute of Technology

FT351, Business & Management, Year 4 Strategic Management and Business Policy

February, 23rd 2004

Apple Computer Inc.

DIT | Strategic Management | Iliev, Lindinger, Poettler 1

Table of contents 1 Introduction ......................................................................................................................6

2 History...............................................................................................................................7

2.1 Introduction ...............................................................................................................7

2.2 Period before 1975 ..................................................................................................7

2.2.1 PC Market .........................................................................................................7

2.2.2 Apple ..................................................................................................................9

2.3 Period 1975 – 1981 .............................................................................................. 11

2.3.1 PC Market ...................................................................................................... 11

2.3.2 Apple ............................................................................................................... 12

2.4 Period 1981 – 1985 .............................................................................................. 14

2.4.1 PC Market ...................................................................................................... 14

2.4.2 Apple ............................................................................................................... 15

2.5 Period 1986 – 1992 .............................................................................................. 18

2.5.1 PC Market ...................................................................................................... 18

2.5.2 Apple ............................................................................................................... 19

2.6 Period 1993 – 1997 .............................................................................................. 21

2.6.1 PC Market ...................................................................................................... 21

2.6.2 Apple ............................................................................................................... 21

2.7 Period 1998 – 2000 .............................................................................................. 22

2.7.1 PC Market ...................................................................................................... 22

2.7.2 Apple ............................................................................................................... 23

2.8 Period 2001 – now................................................................................................ 23

2.8.1 PC Market ...................................................................................................... 23

2.8.2 Apple ............................................................................................................... 23

3 Current situation ........................................................................................................... 25

3.1 Current performance ............................................................................................ 25

3.2 Mission and current strategy............................................................................... 26

4 Internal environment.................................................................................................... 27

4.1 General information.............................................................................................. 27

4.1.1 General description....................................................................................... 27

4.1.2 Products.......................................................................................................... 27

4.1.3 Competencies................................................................................................ 31

4.2 Corporate governance.......................................................................................... 32

Apple Computer Inc.


4.2.1 Board of Directors ......................................................................................... 32

4.2.2 CEO................................................................................................................. 34

4.2.3 Top Management .......................................................................................... 36

4.2.4 Stockholdings of Board of Directors and Senior executives .................. 39

4.2.5 Governance mechanisms............................................................................ 40

4.2.6 Business ethics.............................................................................................. 43

4.2.7 Environmental issues ................................................................................... 46

4.3 Corporate structure ............................................................................................... 47

4.3.1 Organisational structure ............................................................................... 47

4.3.2 Operating structure ....................................................................................... 47

4.3.3 Performance .................................................................................................. 48

4.3.4 Strategic implications .................................................................................... 49

4.3.5 Integration and control.................................................................................. 50

4.4 Corporate culture .................................................................................................. 51

4.4.1 Culture and values ........................................................................................ 51

4.4.2 Strategic implications .................................................................................... 53

4.5 Corporate resources ............................................................................................. 54

4.6 Corporate resources: Marketing ......................................................................... 55

4.6.1 Marketing strategy ........................................................................................ 56

4.6.2 Brand positioning .......................................................................................... 57

4.6.3 Marketing mix ................................................................................................ 58

4.6.4 Advertising...................................................................................................... 60

4.6.5 Product life cycles of Apple’s core products ............................................. 60

4.6.6 Trends from this analysis ............................................................................. 62

4.6.7 Competitive advantage ................................................................................ 63

4.7 Corporate resources: Finance ............................................................................ 63

4.7.1 Apple’s financial status quo ......................................................................... 63

4.7.2 Apple’s competitors, their financial status quo, and the market ............ 73

4.7.3 Apple’s financial operations ......................................................................... 75

4.8 Corporate resources: Research & Development ............................................. 77

4.8.1 General information...................................................................................... 77

4.8.2 Structure and performance.......................................................................... 77

4.8.3 Strategic management ................................................................................. 79


Apple Computer Inc.


4.9 Corporate resources: Operations & Logistics................................................... 81

4.9.1 General information...................................................................................... 81

4.9.2 Operations capabilities................................................................................. 85

4.9.3 Structure and performance.......................................................................... 86

4.9.4 Strategic issues ............................................................................................. 87


4.10 Corporate resources: Human Resource Management ................................... 88

4.10.1 Human resource objectives and strategies............................................... 88

4.10.2 Human resource policies ............................................................................. 90

4.10.3 Human resource performance .................................................................... 91

4.10.4 Partnership program..................................................................................... 91

4.10.5 Training and Development .......................................................................... 92

4.10.6 Staff appraisals .............................................................................................. 93

4.10.7 Trends............................................................................................................. 96


4.11 Corporate resources: Information Systems ...................................................... 98

4.11.1 What type of software and hardware is used at Apple? ......................... 98

4.11.2 To what extent is the model of a virtual company achieved by Apple’s

Intranet and Extranet solutions? ...............................................................................100

4.11.3 How do Apple’s internet solutions assist in generating a competitive

advantage? ..................................................................................................................101

4.12 Summary of internal factors ..............................................................................105

4.12.1 Core competencies and distinctive competencies.................................105

4.12.2 Internal Factor Analysis Summary (IFAS)...............................................106

5 External environment.................................................................................................108

5.1 Overview – The uniqueness of the Macintosh ...............................................108

5.2 The PC market – an in-depth analysis ............................................................108

5.2.1 Status quo ....................................................................................................108

5.2.2 Defining the sector, industry and market segments ..............................109

5.2.3 Porter’s five forces Analysis ......................................................................110

5.2.4 Strategic Group Analysis ...........................................................................115

5.2.5 Industry Life Cycle Analysis ......................................................................116

5.2.6 The Macro-Environment ............................................................................118

5.3 External analysis of software and peripherals market ..................................119

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5.3.1 Software industry ........................................................................................120

5.3.2 Market and external environment analysis for the iPod........................128

5.4 Summary of external factors .............................................................................130

5.4.1 Overview.......................................................................................................130

5.4.2 External Factor Analysis Summary (EFAS)............................................131

6 Functional strategy.....................................................................................................133

6.1 General information............................................................................................133

6.2 Company resources and functional strategy..................................................133

6.3 Sources of competitive advantage ...................................................................135

7 Business-level strategy.............................................................................................136

7.1 Customer needs ..................................................................................................136

7.2 Customer groups.................................................................................................137

7.3 Distinctive competencies ...................................................................................138

7.4 Differentiation strategy .......................................................................................138

7.5 Advantages and disadvantages of the Differentiation strategy ...................139

7.6 Investment strategy ............................................................................................140

7.7 Competitive strategy...........................................................................................140

7.8 Strategies to deter entry.....................................................................................141

7.9 Strategy to manage rivalry.................................................................................142

8 Global strategy ...........................................................................................................145

8.1 Apple’s foreign operations .................................................................................145

8.2 Apple’s Transnational Strategy.........................................................................146

8.3 Apple’s methods of entering new markets ......................................................147

8.4 Pressures for cost reductions and local responsiveness..............................148

9 Corporate strategy.....................................................................................................150

9.1 General information............................................................................................150

9.2 Horizontal integration..........................................................................................150

9.3 Vertical integration..............................................................................................151

9.4 Strategic outsourcing ..........................................................................................152

9.5 Diversification ......................................................................................................152

10 Strategy implementation...........................................................................................154

10.1 Corporate structure, control, and culture.........................................................154

10.2 Implementation ....................................................................................................154

11 Analysis of strategic factors......................................................................................156

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11.1 Situational analysis .............................................................................................156

11.2 Strategic Factor Analysis Summary.................................................................157

11.3 Review of mission and objectives ....................................................................158

12 Strategic advice ..........................................................................................................160

12.1 Strategic alternatives ..........................................................................................160

12.1.1 Take advantage of technological forces by innovation (S-O) ..............160

12.1.2 Use creativity in a way to avoid substitute products (S-T)....................161

12.1.3 Take advantage of the MP3 player market by overcoming a

disimproving business execution (W-O)..................................................................161

12.1.4 Act to minimise high operating costs and avoid rivalry (W-T)..............162

12.1.5 Recommended strategy: Operation costs (weakness)/rivalry (threat)163

12.2 Recommended strategy.....................................................................................163

12.2.1 Functional level strategy............................................................................163

12.2.2 Business level strategy ..............................................................................164

12.2.3 Corporate strategy......................................................................................165

12.3 Implementation ....................................................................................................166

12.4 Evaluation and control........................................................................................167

13 Conclusion...................................................................................................................168

Bibliography .........................................................................................................................169

Appendix...............................................................................................................................178

Apple Computer Inc.


1 Introduction ! An inexpensive speedy disk drive with good storage capacity ! Enough memory to establish Multitasking ! The first graphic-based user interface available to the general consumer ! Development of a pointing device called "mouse" as an essential peripheral

part of a PC ! The first use of 3.5 inch disks and CD-ROM ! Production of “cool-looking” but also powerful computers

All these inventions and utilities are inseparably linked with one name, Apple

Computer Inc., which represents a fascinating compilation of engineering talent,

innovation, perseverance, and success in spite of dysfunctional behaviour. Apple

obtains the unique distinction of being the single surviving company from the early

days of the industry that is still successfully acting in the computer vending business,

as well as challenging Microsoft's dominance in operating systems. Apple also came

perilously close to irrelevancy. After the lifeblood of the company, co-founder Steve

Jobs was ousted in a boardroom coup in 1985, Apple had too many products, too

little focus and was paralysed by two inept chief executives. Apple's already small

market share was dwindling further. By 1996, it had racked up $1.5 billion in losses,

and there were weekly speculations over who would buy the company.

Then, in the summer of 1997 Apple stunned the world by announcing that Jobs

would return as interim CEO. Even more shocking, Apple said it was partnering with

its blood enemy Microsoft and scrapped dozens of its products to refocus the

company. Jobs also challenged our perceptions of computers, introducing several

new colourful computers. While Apple's market share has hovered at about 5%, the

company has re-established itself as an innovator in design and ease of use and has

managed to build up a loyal customer base.

This strategic audit of Apple Computer Inc. analyses the company’s internal and

external environment as well as its entire strategy. Based on this comprehensive

strategic foundation and an analysis of a profound set of strategic factors, it provides

Apple with specific strategic alternatives and concludes with a strategic advice.

Apple Computer Inc.


2 History 2.1 Introduction

“Man is a tool-using animal. Without tools he is nothing, with tools he is all!”

Without being able to guess human inventions and innovations in the forthcoming

centuries or their challenging importance on society, the Scottish essayist Thomas

Carlyle (Historian, Essayist & Critic 1795-1881) might have had some visionary ideas

when formulating this famous quote. He seems to have observed the history and

deployment of humanity where tools always played an important role to guarantee

the race’s survival.

Nevertheless, Carlyle would have never been able to imagine the unique significance

of one special gadget which is indispensable for “today’s world” – the Personal

Computer, which in historical concordance shouldn’t represent more than an aiding

tool. However, the great minds behind IT-companies such as IBM or Microsoft

created devices (by combining hard- and software) that not only changed global

business, people’s cohabitation and even the social behaviour, but also opened new,

undiscovered horizons. In particular, Apple Computer has pioneered the widespread

use of many aspects of computer technology that today we all take for granted.

So, for creating a thorough picture and increasing comprehension of the subsequent

strategic analysis of Apple Computer in 2004 it’s first of all crucial to take a profound

chronologic look on the historic development of the entire PC sector with an already

analysing focus on Apple.

2.2 Period before 1975 The creation of computers was primarily urged by the immanent human desire to

store data, to automate processes, and to solve complicated calculations.

2.2.1 PC Market

Although it’s necessary to admit that the development towards computers wasn’t

started at one specific date, but represented a long-dating progression, the sector’s

younger origins can be traced back at the close of the 19th century. At this time, more

Apple Computer Inc.


exactly in 1876, Alexander Graham Bell invented the

telephone and in 1888 1 , the first dial recorder was

accomplished by Dr. Alexander Dey who belonged to the

Computing-Tabulating-Recording Company (C-T-R

Company), the predecessor of IBM (International

Business Machines). Machinery manufactured and sold

ranged from commercial scales and industrial time recorders to meat and cheese

slicers, along with tabulators and punched cards. War times as well as the Great

Economic Depression caused the growing industry to expand their operations as the

customers’ needs broadened (e.g.: business accounting, information, and

communication facilities for better war-planning). Especially the demands of World

War II founded the basis for the latter work on computers like:

! John von Neumann’s outline on the architecture of a stored program

computer and following IAS computer,

! Moore School of Electrical Engineering 2 grounding efforts,

! Claude Shannon’s dossier “The Mathematical Theory of Communication”,

! MIT’s first general-purpose, programmable computer built with transistor in

1956.

With a market share of 81.2% IBM dominated this market in the

1960’s which was characterised by the implementation of the

ASCII code for the alphabet (American Standard Code for

Information Interchange – binary sequence) and the creation of

the computer programming language “BASIC” at the Dartmouth

College. In 1969, Xerox bought Scientific Data Systems for $1

billion which logged huge sales with their series of

minicomputers. AT&T Bell Labs developed the UNIX operating

system, IBM came up with the 8-inch floppy diskette and

Hewlett-Packard strengthened its position in the market by

announcing the HP-35 as "a fast, extremely accurate electronic

slide rule" with a solid-state memory. But still many computer systems represented

mainframes that required a user to present a stack of punched cards to the person

operating the machine and were far too large and expensive for anyone to actually

1 http://www-1.ibm.com/ibm/history/history/decade_1880.html, 18.01.04 2 http://www.computerhistory.org/timeline/timeline.php?timeline_year=1946, 18.01.04

Apple Computer Inc.


have in their homes as a "personal" computer. By 1972, the Intel 8008, a

microprocessor that approached the ability to function as an adequate central

processing unit (CPU) for a stand-alone computer, was launched. The first computer

that made use of the 8008 was the fully assembled French Micral that never had any

impact in the USA. A further breakthrough occurred with the release of the Intel 8080.

MITS (Micro Instrumentation Telemetry Systems), later designing the overwhelmingly

successful "Altair 8800 personal computer”, Texas Instruments and chip-maker

Motorola were other names, known in the market.

2.2.2 Apple

There's no doubt Apple Computer is a pioneer. It invented computers "for the rest of

us”.

Stephen Gary Wozniak (“Woz”) was born on the 11th of August 1950 in San Jose,

California. He was the first of two sons of three children of Jerry and Margaret

Wozniak. The father was an electrical engineer and the mother was active in local

politics. Wozniak had an early interest in electronics, also symbolised by obtaining

his amateur radio license in the sixth grade. He also designed and built electronic

projects for Homestead High School (e.g.: "A Parallel Digital Computer"). Through his

presidency of the Electronics Society and one of his teachers, he became a frequent

visitor to the GTE Sylvania computer facility and the Stanford Linear Accelerator

Center's (SLAC) computer facility that became a valued source for information on

computer technology. Wozniak enrolled at the University of Colorado in Boulder in 1968. He now had

access to the university computer and wrote programs in FORTRAN and ALGOL

which were two software/programming languages analogous to BASIC. However the

year was a failure academically, so the next year he continued studies at the local De

Anza Community College. In 1969 Wozniak decided to build his own computer,

cooperating with his neighbour Bill Fernandez. They called the machine the "Cream

Soda Computer" on account of the amount of the drink they consumed during its

construction.

Steven Paul Jobs was born on the 24th of February 1955 in San Francisco, California.

He was the first of two adopted children of Paul and Clara Jobs. The father had

several occupations such as machinist, finance company representative, and real

estate salesman. His mother had also worked at a number of jobs, including part-

Apple Computer Inc.


time in a payroll department. Jobs became interested in electronics during his

elementary school years. At the age of twelve, he got the opportunity to visit Hewlett-

Packard (HP) and dedicated himself thoroughly to its technology. Through all this,

Jobs obtained a summer job at HP by calling one of the founders, Bill Hewlett. He

also obtained a part-time job at a surplus electronic parts retailer called Haltek. His

familiarity with the parts enabled him to buy and sell parts to Haltek for a profit.

Despite his electronic interests Jobs expertise would tend to the commercial rather

than the technical aspects. Bill Fernandez introduced Jobs to Wozniak in 1969. This

was the beginning of the association and friendship between Jobs and Wozniak.

In 1971, Wozniak moved to the University of California, Berkeley campus and started

to develop a digital design to generate the audio tones required to hack phone

systems worldwide. Jobs convinced Wozniak to sell these so called “blue boxes”.

However, conviction of other phone hackers tempered their initial commercial

activities. In 1973, Wozniak joined HP as an associate engineer and was given the

task to refine the HP-35.

After the completion of high-school in 1972, Steve Jobs studied at the Reed College

in Portland with mixed academic success as his interests for mysticism adversely

affected his academic studies. Consequently, he started working for Atari

Engineering in early 1974. One year later Wozniak and Jobs became members of the

Homebrew Computer Club which offered them the forum to exchange information on

the latest microcomputer technology. Additionally, they formed “Computer Converser”,

a subsidiary of a friend’s (Alex Kamradt) Call Computer company to build video

terminals, but withdrew shortly afterwards due to Wozniak’s lack of interest.

Apple Computer Inc.


2.3 Period 1975 – 1981 In 1976, Apple Computer was born when

Steve Jobs and Steve Wozniak, along

with Ronald G. Wayne founded the Apple

Computer Company officially on the 1st of

April, headquartered in a parents’ garage.

Six months later, Jobs and Wozniak were

splitting a monthly salary of $250.

Nevertheless, their first formal business

plan set a goal for sales to grow to $500 million in ten years. As it turned out, they will

pass that mark in half the time. The first step into this direction was the completion of

a preassembled computer circuit Board, named the Apple I. This first prototype has

taken about six months to design and 40 hours to build. It was published first at the

Homebrew Computer Club in Palo Alto, California. Although not attracting much

attention, the “Byte Shop computer store” ordered 50 Apple I boards. To fund

production ($1,350), Jobs and Wozniak “put all their eggs into one basket” and sold a

VW van as well as a HP programmable calculator.

2.3.1 PC Market

Still in infant status, the microcomputer industry was characterised by the

manufacture and sale of small desktop computers with microprocessors as central

processing units in the mid 1970’s. Nevertheless, competition was increasing which

caused frontrunner IBM who was producing the “industry benchmark” to face a

number of rivals such as Commodore, Atari, HP or AT&T. Due to the fact that Apple

didn’t comply by determining and implementing their own standards (hard- and

software), dealers and consumers who had to decide which one to buy were

confused. Furthermore, software developers had to make programs for two

standards which was one of Apple’s biggest future difficulties. The MS-DOS, or

Microsoft Disk Operating System, the basic software for the future IBM PCs,

established a long partnership between IBM and Microsoft, which Bill Gates and Paul

Allen had founded only six years earlier. This alliance became Apple’s hardest

opponent in the market.

Soaring demand for higher storage capacity was met by Phillips’ first attempts to

optical storage opportunities that later resulted in the invention of the Compact Disc

Apple Computer Inc.


(CD). There were five major market segments in the industry: home (games and

educational programs for children, hobbyists, home-working professionals), business

(most profitable and predicted high-potential market), government, education, and

international sales. 2.3.2 Apple

After incorporation of the Apple Computers

Company, Jobs (taking over responsibilities

for marketing & engineering) and Wozniak

(engineering) equally owned 45% of the

company by leaving the latter 10% to soon

quitting Wayne (documentation and

mechanical engineering). Regarding their

first product, the Apple I, hobbyists did not

take it very seriously. Consequently, Jobs and Wozniak were in financial trouble and

intensively searched for potential investors. Luckily, they could raise venture capital

provided by Mike Markkula and moved to a new corporate HQ in Cupertino,

California.

Apple did not begin to take off until 1977, when the Apple II came out at a local

computer trade show. As the first PC to be sold in a plastic case and including colour

graphics, the Apple II was an impressive machine. Orders for the Apple II equipped

with a circuit motherboard, switching power supply, keyboard, case assembly,

manual, game paddles, and brilliant colour graphics as well as for the Apple Disk II,

the most inexpensive, easy to use floppy drive ever (at that time) rocketed. This

success established the company as a major player in the early days of the personal

computer revolution. In addition, the company maintained the Apple II while it

floundered with other product ideas (the Apple III, the Lisa, the early Macintosh). This

Apple flagship-device survived longer than any other computer platform from the

early days. Fabrication proceeded for sixteen years and seven months, from April

1977 to November 1993. The success of the Apple II was due entirely to the millions

of people who bought it, used it, and developed software and hardware for it, in spite

of the mistakes and restrictions of its parent company. With this computer, Apple

managed its transformation to the mass consumer market.

Apple Computer Inc.


The rise in sales, however, led to an

increase in company size, and by 1980,

Apple had several thousand employees,

a market share of 50% and was

beginning to sell computers abroad. A

number of more experienced mid-level

managers and, more importantly, several

new investors opting for their seats in the

Board of Directors caused difficulty in making design improvements that kept up with

the advances in computer technology. So these more conservative, new Directors

made sure that Apple became a "real company," much to the dismay of many of its

original employees.

As co-founder of Apple, Steve Jobs’ focus was more and more on creating new and

different products. He was the visionary responsible for Apple’s reputation for

innovation who stressed Apple’s mission to change the world by bringing computers

to the masses with the belief of “one person – one computer”. In their first years of

existence Apple focused its sales on the home and education markets and was the

leader in the education market. Apple had two product lines, Apple II and the

Macintosh. In its first six years of business, Apple’s earnings grew explosively from

$793,000 to $76,714,000. During 1980 the market for new stock issues had

improved. In August 1980 the Apple Computer Board of Directors decided to make a

public offering of shares in the company. It was a huge success and oversubscribed.

On the first day the offered share price of $22 increased to $29. At the end of 1980

Jobs' ownership in Apple was worth about $256 million. Furthermore, organisation

was changed from a functional one to a product-oriented one. The company created

divisions for the Apple II and Apple III, Lisa, accessories, manufacturing, sales, and

service.

Apple Computer Inc.


2.4 Period 1981 – 1985 2.4.1 PC Market

In 1981, things got a bit more difficult. A saturated market made it more difficult to sell

computers, and in February Apple was forced to lay off 40 employees. IBM released

its first PC using Microsoft products as software items. With the power of IBM, the PC

quickly began to dominate the playing field. By 1984, the IBM PC had 50%market

share. Several competitors such as Compaq, Dell, AST or Gateway2000 entered the

PC-market by trying to launch advanced IBM clones, similar to and compatible with

“Big-Blue’s” technology. This was the outcome of IBM’s “open-architecture” which

Apple struggled to prevent as the below excursus examines: As mentioned before, Apple Computer set their individual standards which led to a constant competition against the IBM-Microsoft-Intel model (Wintel standard). Hence, Apple tried to differentiate itself by following a strict non-licensing, patent-regulated policy (no information about Apple hard- and software was given out), by producing

Units 9.5 Million - 1984

55%

5%

3%

37% Home

Education

Other

Business

Units 16.7 Million - 1990

29%

9%

5%

57%

Home

Education

Other

Business

Dollars 17.9 Billion -1984

20%

3%

14%63%

Home

Education

Other

Business

Dollars 43.0 Billion - 1990

11%

4%

16%

69%

Home

Education

Other

Business

Apple Computer Inc.


higher quality, but by also charging an immense above industry average price for their goods which they considered as legitimate due to their product superiority. As Apple wanted to avoid being “cloned” such as IBM’s PCs and consequent diminishing returns, they didn’t provide free-lancing program writers with necessary information to develop different features for the Apple technology. This provided them with high short-term profit margins, but in the long run Apple had to encounter a vicious circle that even teetered Apple on the brink:

! Continuously increasing R&D costs as Apple had to develop all innovation on their own

! Subsequently, less features available for Apple technology (mainly PC and Operating System (OS)) in comparison to IBM-Microsoft-Intel standard

! Problems for Apple in making design and service improvements that kept up with the advances in computer technology.

! A narrower customer base as the demanded hard- and software either wasn’t offered or if delivered, took Apple to long to create

! Most computers were now IBMs or clones and as a result, most of the software applications were written for PCs only, therefore PCs were safer buys

In addition, the importance of computers for businesses reached new highs. In 1985,

the microcomputer industry suffered its worst slump in over a decade. Many new

computer products had been promised or rumoured but were not yet available,

causing consumers and businesses (due to recession fears) to delay purchases until

they could evaluate the new machines. Moreover, the home market was saturated

and the market for new customers difficult to penetrate. Consumer preferences also

changed. Service and how new products fit into an existing family of products had

become more important. There was a growing demand for personal computers that

could communicate and share information. It was estimated that this demand was

growing at 30% a year, or twice the rate of the overall industry.

2.4.2 Apple

Within this four year period Apple had to cope with a 70% decline in market share.

Wozniak was injured in a plane crash. He took a leave of absence and returned only

briefly. Jobs became chairman of Apple Computer in March. Apple III and the Lisa

project were put forward to redefine personal computing following the historic visit to

Apple Computer Inc.


Xerox PARC in 1979, but both failed to win acceptance. Jobs took over another idea

of Apple and began working with the Macintosh (Mac) which had started as a $500

personal computer competing with IBM’s releases. Despite his efforts Jobs began to

realise that Apple would have to become a "grown-up" company and accepted he

was not the man for the job. Also, Markkula resigned from his posts as CEO and

president.

John Sculley, president of Pepsi-Cola USA domestic operations, was recruited and

became president and CEO of Apple. Considering Apple’s new competitive

pressures, choosing Sculley with his corporate experience as the company’s new

president was considered by Jobs to be “one of the most important decisions in

Apple’s history.” Although he was hired for his executive and marketing expertise,

Sculley did not know much about the computer industry, unfortunately. He and Jobs

were at odds almost immediately. By 1983, Apple Computer had annual net sales of

almost $1 billion (as the first personal computer company ever) and 4,645

employees.

The year was 1984. Apple was the hip, young heart of Silicon Valley – the place

where America was showing the world how the combination of technology and

entrepreneurship could make a revolution. On January 22nd 1984, during the third

quarter of the Super Bowl, Apple aired its infamous 60 second commercial

introducing the Macintosh. The Orwellian scene depicted the IBM world being

shattered by a new machine. Initially, the Mac sold very well, but by Christmas of

1984, people were becoming fed up with its disadvantages.

To fulfil their social responsibility, Apple organised and financially supported music

festivals, held the “AppleFest” in San Francisco and gave their computers to

academic institutions and prisons. In 1984, Sculley reorganised the management

structure. His main change was to reduce the number of Apple’s product divisions to

three: a division for Apple II products, another for the Lisa product and the

development and production of the Macintosh, and an accessory products group.

Each division was responsible for its own functions and acted as “independent profit-

and-loss centres.”3

3 Fortune (1988)

Apple Computer Inc.


Sculley hoped that the new structure would eliminate most of the overlap without

causing massive layoffs. He wanted many people reporting to him, both line and staff

people, so he could “assess all the pieces.” Sculley also installed tighter control

policies and increased the market focus and level of discipline of Apple’s managers.

Now there was a distinct hierarchy, with two powerful product divisions responsible

for their own duties.

Apple focused its efforts on developing the Macintosh as an alternative business

computer. In January 1985, Apple introduced the “Macintosh Office” which consisted

of the computer, a laser printer, a local area network called Appletalk, and a file

server. The company’s focus on gaining acceptance in the business market led it to

finally acknowledge IBM’s pre-eminence, which, in turn, led to a change in its

competitive strategy. It now emphasised developing a comprehensive line of

compatible computers that worked well with those made by other producers. The

company targeted SMEs (small and medium-sized enterprises ), accounting for 80%

of personal computer sales. The Apple II line of products (as described in the

previuous chapter) still was the company’s cash cow.

Disappointing market performance was attributed to internal problems. Apple had no

sales force with direct access to corporations. Unlike IBM, which had 6,000 to 7,000

direct salespeople, Apple relied on 300 manufacturers representatives over whom

they had no direct control. There were also marketing problems. The company failed

to communicate a business image for the Macintosh to the market. A former

Macintosh employee stated that the “Mac wasn’t perceived as an office machine or

Apple Computer Inc.


as the technology leader that it is.”4 While Jobs believed that Apple should focus on

technology, Sculley preferred to go along customer needs determining the product.

Due to Jobs engagement in and support for the Macintosh division and their poor

results compared to other departments motivation among the entire staff plummeted.

Internationally, Apple was an early market leader in Europe. Before 1983, the

company expanded sales into Britain, Germany, and France. Especially in France,

Apple achieved a high profile and a critical mass of buyers. The company established

a European headquarters in Paris with a staff of 45 people and built a production

plant in Ireland, but managed its international operations from California.

At the beginning of 1985, the smouldering dispute between Jobs and Sculley

escalated. The common credo established by Jobs and Wozniak stated to “create

your own thing, defy the naysayers, and ignore the establishment – one person can

change the world”. The culture had incredibly powerful elements, but the other side of

that is unharnessed and uncontrolled. Inevitably, that led to clashes among “creators”

and the new management. In May 1985, Jobs decided to make a play for control of

the company and planned to stage a boardroom coup. Finally, the Board took a vote

and unanimously made Sculley to Apple’s new head, but further work force lay-offs,

the company’s first quarterly loss, a legal battle against Microsoft’s Windows OS, and

Jobs’ resignation served to erode confidence in Sculley's abilities as CEO of Apple.

In the mid of 1985, Sculley declared another reorganisation which consolidated the

three product divisions into one called “Product Operations”.5

2.5 Period 1986 – 1992 2.5.1 PC Market

The PC market, initiated and encouraged by the production of IBM-PC clones,

continued its global development and PCs themselves started towards being

available for everyone. Although Microsoft issued its first Windows OS and thereby

marked a revolutionary point in PC history, there was still a lack of useful software to

make it a market for the mass.

4 Fortune (1985) 5 see Appendix: Corporate memo

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2.5.2 Apple

After having ousted Jobs and sacked lots of employees, Sculley wasn’t popular at all

among the Apple staff. He also knew that the majority of the company would resent

the big-company systems he was putting in place. And most important, he

understood that he had to keep engineers and programmers on board if Apple was to

stay ahead of the technology curve. The solution was not to touch the culture.

By 1987, the Mac II was a solid hit, but Sculley paid the price. His consensus-style

for getting things done and achieving decisions made the company more and more

inflexible and slow-moving 6 . Key decisions have been postponed, reversed, or

avoided completely as various executives and factions tried to push their own

agendas. A decisive leadership might have helped Apple to fend off what has

ultimately proved to be its nemesis: Windows. The day Windows 3.0 was launched,

Apple's executive staff dismissed the OS’s chances to challenge MacOS with

complete arrogance. In 1989, it seemed that Windows 3.0 would be a flop, and the

Mac would be riding high for the next decade. It didn't. By 1990 the market was

saturated with PC clones of every conceivable configuration, and Apple was the only

company selling Macs. Therefore Apple was in trouble and decided to give up their

restrictive protection of corporate know-how. They licensed the MacOS although

opinions stated that “it was too late to license” (Michael Spindler, Apple’s COO and

later CEO). It was becoming clear that Apple could not provide both the hardware

and the software to drive an industry. In late 1991, Apple released its first generation

of PowerBooks, which were an instant success.

Product and marketing strategy were also adjusted. Product lines were filled out with

equipment the consumer desired. Efforts were made to provide third-party hardware

and software companies with access to the Mac. These companies were hesitant,

however, to invest time and money to develop software for the Mac since the

installed hardware base was such a small percentage of the market. Programs

designed for Apple would sell far fewer copies than those created for IBM compatible

machines, making it too costly to develop Macintosh software. Apple’s marketing

strategy focused more aggressively on the corporate market to win space in the

office at the expense of IBM. In pursuing the business segment, Apple also

transformed its hiring policy. The idea was that corporate managers would rather be

more responsive to salespeople who were similar to them as to hackers. 6 Joke that circulated at Apple: “A vote can be 15,000 to 1 and still be a tie.''

Apple Computer Inc.


Business market expansion resulted in a 30% increase in Apple’s sales in 1987. The

CEO doubled the size of Apple’s field force and the number of employees grew to

10,837 making Apple more and more unmanageable.7

Two new computers for the business market were introduced: the Macintosh SE and

the Macintosh II. These products attracted larger software houses that developed

sophisticated applications for large business users. Nearly half of Apple’s sales and

most of its profits came from selling PC’s and related products to big corporations.

International growth became a priority

at Apple. The European market for

PCs was expanding faster than the

US market. By trying to reduce their

dependence on the US consumer and

consequently covering up declining

US sales, Apple made efforts to

mainly penetrate the European

corporate business market. This was

done by adapting their overall network

model to each country’s individual

circumstances and local markets 8 .

Apple gained 6% of the overall

European market. Apple’s European

revenues grew by 55%, faster than

revenue growth for the entire company. Thus, the control of the European activities

was switched to Europe, for instance by raising the proportion of European-made

components used in Apple’s Irish production plant. Once more, the organisational

structure was altered. Each division was now headed by a president who reported

directly to Sculley. 7 Problem of managerial inefficiency if a company becomes too big to achieve economies of scale 8 Stay global, act local

Apple Computer Inc.


2.6 Period 1993 – 1997 2.6.1 PC Market

Microsoft seemed to start dominating the entire market by introducing Windows 95

and by consequently creating network and log-on effects for its OS and Office

packages.

2.6.2 Apple

In June 1993, Sculley was relieved of his position as CEO and Michael Spindler put

in the big chair. Essentially Spindler was the wrong man for the job as he was a fairly

impersonal man who oversaw several accomplishments during his two and a half

years term as CEO. Apple's technology edge eroded dangerously mainly due to his

mismanagement. The project that could have restored Apple’s position and given an

ambitious answer to Microsoft’s Windows 95 onslaught which seriously eroded the

Mac's justified technology leadership – a new Mac operating system called Copland

– has fallen two years behind schedule. Another fact was that the most talented

executives left the company. There have been massive management upheavals that

caused Apple to fumble critical decisions and “zigzag” between strategies and that

brought the company to a juncture, but Mike Markkula who was still in business

never removed Spindler by always pledging him support. In 1994, Apple announced

the PowerMac family, the first Macs to be based on the PowerPC chip and secretly

began talks to sell the company with Sun Microsystems, IBM, and Hewlett-Packard.

Apple took its worst plunge ever in the winter

of 1995/96. Misjudging the market, Apple

pushed low-cost PCs over mid-range

PowerMacs and failed to make a profit at all.

Apple posted a $68 million loss for one quarter.

In January 1996, Spindler was asked to resign

as CEO and was replaced by Gil Amelio, the

former president of National Semiconductor.

Despite making a strong effort to bring Apple

back to profitability, Amelio’s efforts proved to

be largely unsuccessful. In late 1996, Apple

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made an industry-shocking announcement that it would be acquiring NeXT9 and that

Steven Jobs would be returning.

He took over the position of an "iCEO or

interim CEO", began to make striking

changes in the structure of Apple, and

announced an alliance with Microsoft,

one of Apple’s greatest rivals.

In exchange for $150 million in Apple

stock, Microsoft and Apple would have a

5-year patent cross-license 10 and, more

importantly, a final settlement in the

ongoing MacGUI11 battle. In addition, as

clone production from companies such as Power Computing or UMAX had failed to

effectively expand the MacOS market, instead taking customers away from Apple in

the high end market, Jobs ended this licensing. Other changes in the corporate

strategy comprised direct-computer selling via the web and new products (Apple

Online-Store, PowerMac G3 Computer) such as the iMac were published with a

focus on innovative design. Finally, Apple reached profitability for the first time within

one year.

2.7 Period 1998 – 2000 2.7.1 PC Market

Tight competition through low barriers to entry, tough-sale as well as cost reduction

strategies applied by companies such as Dell and the first internet hype resulting in

thousands of dotcoms made the PC industry to one of the most efficient, interesting

and powerful ones. Microsoft preserved its “near-monopoly” position in software,

above all in OS, but had to face several lawsuits against this “predatory” situation as

critics argue. “One computer per person” didn’t appear to be utopian anymore.

9 Merger brought about acquisition of NeXTstep, the basis of Apple’s planned OS Rhapsody 10 including a Mircosoft Office version for the Mac 11 Apple OS and intellectual property that Mircosoft allegedly stole for its Windows software

Apple Computer Inc.


2.7.2 Apple

Soaring profits pushed Apple’s stock. The iMac

was one of the best-selling computers in the US

and drove Apple sales well beyond most

predictions. The "Apple Product Matrix" was

complemented by a consumer portable, the

stylish iBook. Jobs – now also formally named

CEO – formulated Apple’s internet strategy as “a

suite of Mac-only internet-based applications called iTools”.

The second half of 2000 was different from the trend of previous years. Slower sales

in the industry combined with a misunderstanding of the consumer market (failure of

G4 Cube – a Mac PC offered without a monitor) and the assembly of DVD drives

instead of user preferred CD-RW ones for burning their own CDs unveiled in poor

results.

2.8 Period 2001 – now 2.8.1 PC Market

Seeking more storage capacity as well as higher speed concerning CPUs and a

tendency to look for arising business potential (online music and video market, file

sharing through Peer-to-Peer) characterise the market. Linux, an open-source OS,

accompanied Apple in contesting Microsoft-Windows’ hegemony. 2.8.2 Apple

The 21st century started for Apple with Jobs’ plan to open a number of retail stores

across America, selling not only Apple hardware, but various third-party "digital

lifestyle" products. The “i” product group was added up by implementing iDVD, a

DVD-authoring program, iMovie that contained tremendous value to digital cameras,

iTunes, which allowed users to encode and listen to MP3 songs and then burn them

to CDs, and the iPod, a small hard-drive-based digital music player. This innovative

product line was a consistent part of Apple’s new “digital hub” strategy to secure and

guarantee Apple steadily high profits as well as to gain share of the promising digital

music and video market. In July 2002, Steve Jobs announced that the free iTools

service would be rolled into a new subscription-based "dotMac" service.

Apple Computer Inc.


Although Apple’s history is one of ups and downs, currently a stable profit has been

maintained with the latest $63 million profit in the first quarter of 200412.

12 Apple’s financial year ends on the last Saturday of September

Apple Computer Inc.


3 Current situation 3.1 Current performance Today Apple’s operations are as diversified as they were never before. With its

currently 13,599 employees worldwide it generated a revenue of $63 million in the

last quarter.13 It holds cash reserves of over $4.5 billion14 and has a ROIC of 3.05%15.

Apple’s operations are spread around the PC industry, computer peripherals and the

software and service industry. In the overall PC industry Apple’s market share has

diminished to a skinny 2.1%.16 Apple itself doesn’t look itself at the overall PC market,

as it has defined 4 specific markets on which it currently focuses on. The market

shares in these sectors are to some extent more significant.

Market segment Market share

Education (12.4%)

Creative (>65%)

Consumer (3.5%)

Business (<5%)

In the peripherals sector (besides the iSight digital video camera and displays), Apple

has been particularly successful through its innovative iPod (digital MP3 music player)

as the market share in terms of revenues was 54% and in terms of units was 29%.

This success is closely tied up to the launch of iTunes, Apple’s music online store

and jukebox, which is the current leader in the online downloadable music market.

iTunes accounts for 20%17 of the pay per download music market.18

A number of cutting edge software applications (e.g. iLife, Final Cut Pro) and its

operating system Mac OS X also contribute to the firms overall success, without one

being specifically important.

13 Apple Computer Inc. (2004) 14 Apple Computer Inc. (2003a) 15 http://yahoo.investor.reuters.com, 29.01.04 16 Apple Computer Inc. (2003a) 17 Baltimore Sun (2003) 18 Pay per download system vs. subscription services, allows the customer without monthly fees to download and pay for songs

individually

Apple Computer Inc.


3.2 Mission and current strategy Apple’s mission statement emphasises that the company made major innovations in

the personal computer industry in the past and links this strength to its present

strategy:

“Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings.”19

The digital hub, that is what Steve Jobs (CEO) identified as objective for Apple’s

strategy in the future. Herewith, all three sectors Apple is currently operating in will

get closer and closer together and showing a high interdependence, where seamless

integration of all components is vital to win customers. Apple is the only company

providing a bundle of solutions which are perfectly adjusted and fine tuned to

complement each other to, for other companies, unattainable degree. By designing

such high end products Apple is corresponding to external and internal environment,

which in the high technology sector are changing more rapidly than anywhere else.

Throughout its diversification efforts, Apple keeps its design and innovation focused

line by equally adapting performance and price positions to changes in the external

environment. The following analysis of internal and external environment will allow

the reader to gain a detailed picture of Apple itself, its industry and the strengths,

weaknesses, opportunities and threats associated with them.

19 http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-faq#corpinfo2, 14.02.04

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4 Internal environment 4.1 General information 4.1.1 General description

Apple designs, manufactures and markets personal computers, related software,

peripherals, and personal computing and communicating solutions. Therefore, it is

the only company in the personal computer industry that designs and manufactures

the entire personal computer – from the hardware and operating system to

sophisticated applications. It sells its products through its online store, direct sales

force, third-party wholesalers and resellers, and its own retail stores.

Apple is convinced that personal computing has entered a new era in which the

personal computer functions as the digital hub for advanced new digital devices and

other electronic devices, and as a consequence interconnecting with as well as

adding value to the internet and other devices becomes a PC’s main purpose. In

short, computers should now be designed to simplify the user’s (digital) life 20 by

combining computing with consumer electronics 21 and by pursuing this strategy

Apple is uniquely positioned in the PC industry. 22

The company currently has 10,912 fixed employees and its foreign operations

include the Americas, Europe, Japan, and Asia Pacific23. In identifying Apple’s main

customer groups, it becomes clear that those are computer users who don’t see

themselves as part of the mainstream: graphic designers, students, and anyone else

who like to think that they are different.24

4.1.2 Products25 Apple’s product range includes first and for most the Macintosh line of desktop and

notebook computers, the Mac OS operating system, and the iPod digital music player.

In addition, it contains a portfolio of further software solutions and peripherals,

networking and connectivity products, and various third-party hardware products for

education, creative, consumer, and business customers.

20 Quittner J. and Winters R. (2002) 21 Ganesan S. (2003) 22 Apple Computer Inc. (2003) 23 http://cbs.marketwatch.com/tools/quotes/profile.asp?sid=609&symb=AAPL&siteid=mktw, 19.02.04 24 The Economist (1998a) 25 Apple Computer Inc. (2003)

Apple Computer Inc.


This table should highlight the most important elements of Apple’s product portfolio:26 Product Comment iBook notebook Robust and successful notebook, aimed at the education market.

iMac PC Unexpected and ongoing success.

PowerBook notebook High-end notebook, probably the best-designed notebook available.

PowerMac PC Personal computer targeting graphics and layout professionals.

iPod music player Digital music player, unique product in combination with iTunes online

music store.

hardware accessories Wireless connectivity products, monitors, etc.

Mac OS X Superior and operating system with modular architecture.

Quicktime and other sub

process software

Widely used media player, successful by consolidating and gaining

exclusive rights for popular movie trailers in the internet.

application software Programs for digital editing of video, graphics, music, etc.

internet integration software Several unique web services.

The following paragraphs provide a deeper insight into the different parts of Apple’s

product portfolio:

26 Sudbury A. (2001)

Apple Computer Inc.


Hardware Apple offers a wide range of personal computing products including desktop and

notebook PCs. The PowerMac is a high-performance desktop PC which is targeted

at businesses and professional users and their demanding speed, expansion and

networking needs. The PowerBook is a portable computer that should satisfy the

high-performance mobile computing needs of professionals and advanced consumer

users. The iMac and eMac desktop computers with their innovative industrial design

are targeted to education and consumer markets whereas the iBook mobile computer

should satisfy the mobile computing needs of these customers.

Furthermore, the Xserve server solution is designed for simple setup and remote

management of intensive input/output applications.

Peripheral products Apple’s product portfolio includes a range of associated Apple-branded computer

hardware peripherals. These include the iPod digital music player which is a portable

music player whose functionality extends well beyond playing music and can be seen

as a seamless end-to-end music solution in combination with the iTunes software

and music store that enables customers to purchase songs over the internet.

Moreover, the iSight digital video camera (combined with the iChat software) enables

high-quality audio- and videoconferences and Apple several all-digital, active matrix

LCD flat panel displays.

Software products and computer technologies The company’s software portfolio includes its operating system Mac OS X, server

software, professional application software, and consumer, education, and business

oriented application software. In fact, Max OS X which has been continuously

upgraded during the last years offers advanced functionality built on an open-source

UNIX -based foundation. The Max OS X server software and several related solutions

deliver stable high-performance services for Internet and web serving, filing, printing,

and networking services.

In the field of professional application software, Apple offers products for video

editing (Final Cut Pro), compositing and visual effects (Shake), computer based

music production (Logic; from acquired firm Emagic), and DVD authoring (DVD

Studio Pro). Concerning consumer, education, and business oriented application

Apple Computer Inc.


software, Apple has introduced an integrated suite of digital lifestyle applications

called iLife which includes software for music management (iTunes), digital video

editing (iMovie), DVD authoring (iDVD), and digital photo organisation (iPhoto). In

addition, Apple offers several other applications such as iChat (audio-

/videoconferences), Keynote (presentations), or AppleWorks (word processing,

spreadsheets, etc.).

Finally, thousands of third-party software titles and solutions are available for the

Macintosh platform.

Internet software, integration, and services Apple's Internet strategy is focused on delivering seamless integration with and

access to the Internet throughout the product line. Therefore, the iTunes music store

for online music-purchases is fully integrated into the iTunes music management

software and the company offers an own web browser (Safari), multimedia software

(Quicktime), and internet services/tools suite (.Mac).

Wireless connectivity and networking This part of Apple’s product range includes its Wi-Fi wireless networking technology

(AirPort Extreme, Bluetooth), its networking technology (Rendevous) and a standard

high-speed serial I/O technology (FireWire) developed by Apple.

Product support and services AppleCare offers a range of support options for Apple customers such as general

software assistance, manuals, online support or technical assistance. AppleTraining

provides comprehensive system administration and development training whereas

Apple Professional Services offers a range of personalized technical services.

Moreover, Apple also has special loan programs and leasing solutions for its

customers.

Specialised education products and services Apple not only offers a separate online -store with special prices and financing

programs for higher education students, faculty, and stuff, but also specialised

education software such as the iBook Wireless Mobile Lab to share resources

Apple Computer Inc.


between classrooms or the PowerSchool software for efficient and cost-effective

school administration.

4.1.3 Competencies Apple is famous for possessing distinctive competencies in product design/innovation,

digital entertainment, and educational skills. The company acted as the computer

industry’s leader in the development of graphical user interfaces, mouse input,

networking, and several other areas, and is now leading the industry into a new era

where the PC and its related software/hardware should be regarded as the hub of a

digital lifestyle 27 and an entire, interconnected multimedia solution. By fostering this

development, Apple can use its strengths in the fields of creativity, innovation, and

technological obsession/development to differentiate itself and gain a competitive

advantage over other players in the industry which only offer single products with

lower value due to lower connectivity possibilities. Moreover, Apple has traditionally

been strong in the fields of education, desktop publishing, and digital

art/entertainment where its strengths interact with the desired attributes of its

customers.28

Quite interestingly, Apple’s main weakness also stems from the fact that it produces

the entire line of computers and related products: in fact, the incompatibility of its

products with the Wintel (Microsoft Windows operating system and Intel processor)

standard makes it difficult for Apple to penetrate the computer industry as a whole

and especially the traditional business sector29. As several other factors such as high

hardware costs or uncertainty in (future) software compatibility aggravate this

situation, Apple is likely to remain a marginal player in terms of overall market share

in the personal computer industry and will probably find it more difficult to maintain a

critical size for being profitable and successful.

27 Daily News (2003) 28 Sudbury A. (2001) 29 Sudbury A. (2001)

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4.2 Corporate governance 4.2.1 Board of Directors

General information and Directors30 The Board of Directors consists of seven members and has three committees (Audit

& Finance, Nominating & Corporate Governance, Compensation) which will be

discussed in the governance mechanisms section in detail. In addition, Apple’s Board

is fairly unique as it has no chairman.31 Name Position Age Director since Professional background William V. Campbell Director 63 1997 Chairman Intuit Inc.

Millard S. Drexler Director 59 1999 CEO J. Crew

Albert Gore Jr. Director 56 2003 Former Vice President of the United

States

Steve Jobs Director,

CEO

48 1997 CEO and Co-founder Apple Computer,

Chairman and CEO Pixar

James A. Lawrence Director 51 2004 Executive Vice President and CFO

General Mills Inc.

Arthur D. Levinson Director 53 2000 Chairman and CEO Genentech Inc.

Jerome B. York Director 65 1997 Chairman, President and CEO Micro

Warehouse Inc.

In fact, five out of seven Apple Directors are independent under SEC and NASDAQ

rules32 as only Steve Jobs (CEO) and Jerome York (member of an investment group

that purchased IT-reseller MicroWarehouse Inc. which accounted for 2.4% of Apple’s

net sales in 2003 33) can be regarded as dependent Directors. Nevertheless, the

Board seems to lack an optimally balanced mix of inside and outside Directors34 as

there’s only one inside Director (Steve Jobs, CEO).

Although Steve Jobs isn’t chairman of the Board, it can be criticised that the Board is

dominated by the company CEO. In fact, the Board members certainly never

criticised Jobs for Apple's lousy performance in 2002, a year that competitor Dell

managed to weather far better. In addition, the Board’s propensity to give him huge

stock-option awards regardless of his performance as well as the relatively low level

of scrutiny and constructive criticism has rankled many investors. 35 As a

30 Apple Computer Inc. (2003) 31 http://news.com.com/2100-1042-993332.html, 19.02.04 32 http://www.apple.com/pr/library/2003/mar/20governance.html, 14.02.04 33 Apple Computer Inc. (2003) 34 Hill C. W. and Jones G. R. (2004), p. 386 35 BusinessWeek (2004e)

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consequence of the criticism, no options were granted to or exercised by the

executive officers in 2003. In short, the outside Directors apparently don’t bring

enough objectivity to the monitoring and evaluation process which should actually be

their key objective.36

Tasks and skills/experience The tasks of the Board of Directors are to oversee the CEO and other senior

executives in the competent and ethical operation of the company on a day-to-day

basis and to assure that the long-term interests of the shareholders are being served.

The Directors should take a proactive, focused approach to their position, and set

standards to ensure that the company is committed to business success through

maintenance of the highest standards of responsibility and ethics.37

Directors bring to Apple a wide range of experience, knowledge and judgement, and

bring these skills to bear for the company. These varied skills mean that good

governance depends on principled actions, effective decision-making, and

appropriate monitoring of both compliance and performance.38

Indeed, Apple’s Directors don’t only contribute an excellent professional background

but also a wide range of skills, knowledge, international experience, and contacts to

the company. For instance, James Lawrence (Executive Vice President and CFO of

General Mills) was awarded the title “Top CFO” by the CFO-Magazine in 2001 or

former US Vice President Al Gore is widely regarded as a key person in the building

of the internet39 and possesses excellent links to the world of business and politics.

Compensation The form and amount of Director compensation is determined by the Board after a

review of recommendations made by the Nominating committee. The current practice

of the Board is that a substantial portion of a Director's annual retainer is equity-

based. Moreover there’s a Director Stock Option Plan which enables Apple’s non-

employee Directors to acquire shares in Apple and they also receive a $50,000

annual retainer paid in quarterly increments. Directors do not receive any additional

consideration for serving on committees or as committee chairperson.

36 Apple Computer Inc. (2003), p. 386 37 http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-govCommitteeComp, 19.02.04 38 http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-govCommitteeComp, 19.02.04 39 http://www.apple.com/pr/bios/gore.html, 19.02.04

Apple Computer Inc.


4.2.2 CEO Professional background Steve Jobs co-founded Apple in 1976. After he had left the company in 1985, Jobs

co-founded NeXT Software and served as the Chairman and CEO of NeXT from

1985 until 1997 when NeXT was acquired by Apple40. Moreover, he also co-founded

Pixar Animation Studios in 1986 and still serves as Chairman and CEO of the

company. In 1997, Jobs moved back into Apple’s executive suite as CEO and

Director41.

Performance and compensation The following table shows Steve Jobs’ compensation during the last three years: Name Year Salary ($) Bonus ($) Restricted

Stock Award ($)

Securities Underlying Options (#)

All Other Compen-sation ($)

Steve Jobs 2003 1 --- 74,750,000 --- ---

2002 1 2,268,698 --- 7,500,000 1,302,795

2001 1 43,511,534 --- --- 40,484,594

In fact, although Steve Jobs only gets $1 as salary, he made good money during the

last three years. Moreover, Steve Jobs cancelled all of his outstanding options in

March 2003 and was awarded five million restricted shares. His huge bonus and

other compensation figures result from a special executive bonus in form of an

aircraft. By taking a closer look at his compensation and linking it to the company’s

performance, it becomes clear that the development of his bonuses is totally contrary

to the company’s results and especially the huge bonus in 2001 when the company

had a net loss might mislead investors.

Abilities and characteristics In fact, Steve Jobs can be described as a charismatic leader who possesses strong

technical obsession, creative and innovative skills, enthusiasm, commitment and

entrepreneurship. As he says that “innovation distinguishes between a leader and a

follower”42, he can be regarded as a visionary in the world of personal computers.

Moreover, Jobs possesses a business sense for the marketability of his products and

therefore could streamline Apple’s product portfolio and introduce new and highly 40 Apple Computer Inc. (2003) 41 Yoffie D. B. and Wang Y. (2003) 42 http://askmen.com/men/apr00/21c_steve_jobs.html, 21.02.04

Apple Computer Inc.


successful products such as the iPod. In addition, his user-friendly business

approach doesn’t only lead to increased value for customers through user-friendly

products but also puts the customer in the centre of Apple’s business and constantly

praises him as the best customer in the world. Moreover, his favour for technology,

innovation, and creativity as well as his entrepreneurship could/can also be seen in

his jobs at NeXT and Pixar.

When Steve Jobs came back to Apple in 1997, he immediately recruited a new

Board of Directors and had to reposition Apple in the evolving personal computer

industry. 43 In fact, Jobs also proved his capabilities of being able to make harsh

decisions during the restructuring of Apple when he rescinded the licences of

competitors who have been cloning Macintosh computers and killed the Newton

hand-held device.44 In short, Steve Jobs not only successfully pursues his current

vision for Apple but could also implement necessary restructuring efforts in the past

which led to an increase in the company’s profits and therefore in shareholders’

wealth.

Evaluation of skills Actually, no one really doubts that Steve Jobs is the right man for Apple because

he’s not only admired by the Silicon Valley elite for the foundation of the company45

but also for his glamour, technological obsession, and the other characteristics and

abilities discussed above. Moreover, Businessweek titled him one of the best

managers 2003 as Jobs moved beyond computers to establish himself in two

businesses where newcomers rarely emerge unscathed: music and movies. In fact,

Jobs was the first to find a way to compel consumers to pay for online music and

Pixar Animation Studios continued a remarkable run of hits with “Finding Nemo”46,

the top-grossing film of 2003 and the top animated hit of all time47.

Nevertheless, critics of Steve Jobs claim that he seems strangely uninterested in the

“post-PC devices”48 and that he creates a “reality-distortion field” as his enthusiasm

for a favoured technology is so great and his selling of it so sure, that anyone who

meets him invariably feels converted.49 In addition, his absolute belief in Apple’s right

43 Yoffie D. B. and Wang Y. (2003) 44 The Economist (1998a) 45 The Economist (1999b) 46 BusinessWeek (2004d) 47 BusinessWeek (2004c) 48 The Economist (2000) 49 The Economist (1997)

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strategy and future success which he emphasises is many interviews might sound a

bit arrogant to other people but actually can also be seen as a sign of his strong

commitment and enthusiasm.

Strategic issues and future challenges Steve Jobs can be seen as the fathe r of Apple’s current “digital hub” strategy which

should transform the personal computer into a multimedia and entertainment hub that

connects many devices. In fact, this strategy can be regarded as quite visionary and

revolutionary as it is especially aimed at the future. Therefore, it can be concluded

that Steve Jobs apparently has developed a coherent strategy to deal with future

challenges and is convinced that his approach will lead the personal computer once

again into a new era and therefore guarantee Apple’s future success.

Nevertheless, it has to be stated that Apple’s future success and the future

performance of Steve Jobs will not only depend on this ambitious strategy but also

on various other factors especially concerning the business execution and

commercialisation of his ideas. Although this was sometimes a problem in the past,

the success of the iPod for example shows that Steve Jobs and Apple are probably

on the right way. In addition, it will be important for the company to continuously

focus on its strengths in the field of innovation and therefore Steve Jobs is definitely

the right man to manage this challenge due to his unlimited commitment and

enthusiasm for technological inventions.

4.2.3 Top Management

Executive management team50 Name Age Since Position

Steve Jobs 48 1997 Chief Executive Officer

Fred D. Anderson 59 1996 Executive Vice President and Chief Financial Officer

Timothy D. Cook 43 1998 Executive Vice President, Worldwide Operations

Executive Vice President, Worldwide Sales

Nancy R. Heinen 47 1997 Senior Vice President and General Counsel

Ronald B. Johnson 45 2000 Senior Vice President, Retail

Peter Oppenheimer 41 1996 Senior Vice President, Finance

Corporate Controller

Jonathan Rubinstein 47 1997 Senior Vice President, Hardware Engineering

50 Apple Computer Inc. (2003)

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Philip W. Schiller 43 1997 Senior Vice President, Worldwide Product Marketing

Bertrand Serlet 42 1997 Senior Vice President, Software Engineering

Sina Tamaddon 46 1997 Senior Vice President, Applications

Avadis Tevanian 42 1997 Chief Software Technology Officer

It should be stated that most executive managers joined Apple in 1997 – the year in

which Steve Jobs came back to the company. Moreover, most executive managers

were externally hired (Jobs, Serlet, Tamaddon, and Tevenian as part of the

acquisition of NeXT) and only a few held other positions within the company before.

In addition, Fred Anderson will retire as CFO on June 1, 2004 and Peter

Oppenheimer will succeed him as Chief Financial Officer51.

Professional background and experience52 Name Professional background

Steve Jobs Chairman and CEO of Pixar Animation Studios

Chairman and CEO of NeXT

Fred D. Anderson Director of eBay and E.piphany

Corporate Vice President and CFO of Automatic Data Processing

Timothy D. Cook Vice President, Corporate Materials of Compaq

Chief Operating Officer of Intelligent Electronics

Director of North American Fulfillment of IBM

Nancy R. Heinen Vice President, General Counsel and Secretary of the Board of NeXT

Ronald B. Johnson Senior Merchandising Executive of Target Stores

Peter Oppenheimer CFO of Automatic Data Processing

Information Technology Consulting Practice of Coopers and Lybrand

Jonathan Rubinstein Director of Immersion Corporation

Executive Vice President, Chief Operating Officer of FirePower Systems

Philip W. Schiller Vice President, Product Marketing of Macromedia

Director of Product Marketing of FirePower Systems

Bertrand Serlet Director of Web Engineering of NeXT

Research engineer of Xerox PARC

Sina Tamaddon Vice President, Europe of NeXT

Vice President, Professional Services of NeXT

Avadis Tevanian Vice President, Engineering of NeXT

Engineering and management positions of NeXT

In fact, Apple’s top management possesses a strong professional background as all

executive managers held positions that were related to their current positions in the

51 http://www.apple.com/pr/library/2004/feb/05anderson.html, 14.02.04 52 Apple Computer Inc. (2003)

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past. So, the company’s management contributes to its success by providing the

required skills, experience, and knowledge as well as the necessary industry

background.

Performance and compensation In fact, compensation information is only available for the last three years for the four

most highly compensated executive officers (other than the CEO). The following

table summarises their compensation: Name Year Salary ($) Bonus ($) Restricted

Stock Award ($)

Securities Underlying Options (#)

All Other Compen-sation ($)

Fred D. Anderson 2003 656,631 --- --- --- 11,450

2002 656,631 --- --- --- 11,000

2001 657,039 --- --- 1,000,000 7,312

Timothy D. Cook 2003 617,673 --- --- --- 9,929

2002 563,829 --- --- --- 8,025

2001 452,219 500,000 --- 1,000,000 7,875

Ronald B. Johnson 2003 452,404 1,500000 --- --- ---

2002 452,404 --- --- 300,000 ---

2001 452,429 --- --- 300,000 ---

Avadis Tevanian 2003 456,731 --- --- --- 11,962

2002 492,212 --- --- --- 10,700

2001 460,873 500 --- 1,000,000 10,200

It can be seen that there are some salary differences of Apple’s best compensated

chief executives and that CFO Fred Anderson earns the highest salary in the

company. Moreover, the company didn’t give many bonuses but made some smaller

contributions in accordance with the 401(k) plan that are listed as “other

compensation”. In addition, there were no options granted to the named executive

officers in 2003.

By linking Apple’s compensation scheme to the performance of the company there

isn’t any observable direct link because Apple had a net loss of $25 million in 2001,

followed by a net income of $65 million in 2002 and $69 million in 2003 whereas only

Timothy D. Cook’s salary moved according to this pattern. Moreover, in terms of

salary Timothy D. Cook was the only one who was granted a significant increase of

his salary during the last three years whereas there had been only modest changes

in the other executives’ salaries.

Apple Computer Inc.


Strategic issues and future challenges

Although Apple’s core strategy is always associated with Steve Jobs and his visions

for the company, Apple’s other senior executives show that they are sufficiently

skilled to contribute to the future success of the company due to their strong

professional background and the sharing of the company’s common values (as many

of them came from other innovative and upright companies). Moreover, several

statements and their overall public behaviour show that they have also adopted the

company’s norms and conduct their jobs in the ethical manner which is demanded

through the company’s code of business ethics.

In addition, as Apple doesn’t give any information concerning future strategies,

products, and plans to the public, it can be followed that the internal communication

and discussion among the company’s top management is not only fruitful but also

characterised by the loyalty to the company’s norms and rules. So, it is obvious that

Apple’s top management is highly involved in the internal strategic management

process and contributes to the future choice of strategies and success of the

company.

4.2.4 Stockholdings of Board of Directors and Senior executives The following table indicates security ownership of Directors and executive officers

as of October 31, 2003:53 Name Shares of Common

Stock Percent of Common Stock Outstanding

Steven P. Jobs 5,060,002 1,38%

Fred D. Anderson 1,152,672 0,31%

William V. Campbell 90,502 0,02%

Timothy D. Cook 804,334 0,22%

Millard S. Drexler 90,000 0,02%

Albert Gore Jr. --- 0,00%

Ronald B. Johnson 1,204,334 0,33%

Arthur D. Levinson 231,600 0,06%

Avadis Tevanian Jr. 1,601,252 0,44%

Jerome B. York 110,000 0,03%

Others 4,370,677 1,19%

All Executives and Directors (16 people) 14,715,373 4,00%


Apple Computer Inc.


4.2.5 Governance mechanisms

Generally, the governance mechanisms are aimed at aligning incentives between

principals and agents and to monitor and control agents in order to reduce the

possibility of agency problems. As the Board of Directors has already been described

earlier in this chapter, this section will now take a closer look at several other

governance mechanisms as well as at Apple’s general governance guidelines and

the three committees that should support those.

Stock-based compensation Stock-based compensation schemes, such as stock options, are aimed at aligning

management and stockholder interests by providing an incentive for executives to

implement strategies that increase the future value of the company and its shares

and therefore increase the value of their own shareholdings as well as the wealth of

the company’s shareholders in general.54

In fact, Apple has used stock options as a form of executive compensation in the past

but due to some criticism no options were granted to or exercised by the executive

officers in 2003 and the company has entered into an Option Cancellation and

Restricted Stock Award Agreement with CEO Steve Jobs in 2003 (which cancelled

stock option awards granted in 2000/2001 and gave Jobs a restricted stock award).

Moreover, as critics of these compensation systems suggest that companies should

at least treat options as an expense that must be charged against profits, Apple

includes the pro forma effects when accounting for stock compensation in its annual

SEC-filings.55

Financial statements and auditors Like every publicly traded company in the US, Apple has to file quarterly and annual

reports with the SEC that are prepared according to GAAP and that are audited by

an independent and accredited accounting firm. 56 Apple’s independent auditor is

KPMG57 which generally offers a complementary range of multi-disciplinary skills

including Assurance, FAS, Tax and Legal services to clients. Moreover, as a client of

54 Hill C. W. and Jones G. R. (2004), p. 388 55 Apple Computer Inc. (2003) 56 Hill C. W. and Jones G. R. (2004), p. 390 57 http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-faq#corpinfo1, 14.02.04

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KPMG, Apple can leverage KPMG's in-depth knowledge in various areas58 but has

also adopted an auditor independence policy that bans KPMG from performing non-

financial consulting services59. As a result, no conflict of interest that could stem from

an auditor performing auditing and consulting businesses simultaneously exists at

Apple.

In fact, a detailed look at the company’s annual 10-K filings with the SEC highlights

that Apple obviously can guarantee the accuracy of the information contained in the

audited financial statements. Moreover, the Board is able to objectively guarantee the

quality and accuracy of the auditor’s work due to the Board’s independence and the

dominance of outside members on the Board.

Employee incentives In fact, positive incentive systems are an effective way of motivating employees to

work towards goals that are important for maximizing company performance and

especially long-run ROIC. Possible incentives are employee stock ownership plans,

stock option grants, and bonuses or other financial rewards that are linked to the

achievement of goals related to the four building blocks of competitive advantage

(superior efficiency, quality, innovation, and responsiveness to customers).60

In order to take advantage of these positive effects, Apple has established several

employee benefits such as employee stock option grants, employee stock purchase

plans, and an employee savings plan. In spite of these financial incentives, Apple

also creates an incentive for employees to stay with the company by providing an

atmosphere of creativity, innovation, and technological fascination that allows them to

experiment, to be creative and to turn their technological ideas into reality.

Corporate governance guidelines61 According to Apple’s corporate governance guidelines, the Board of Directors has to

oversee the CEO and top management in their operation of the corporation and to

ensure that these act in the long-term interests of the shareholders which should

reduce the agency problem. In addition, there should be at least a majority of

independent Directors on the Board (which is actually the case at the moment) and

58 http://www.kpmg.com/about/, 19.02.04 59 Apple Computer Inc. (2003) 60 Hill C. W. and Jones G. R. (2004), p. 395 61 Apple Computer Inc. (2003d)

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the Board of Directors should effectively pursue its activities in the three committees

which are described in more detail below. Moreover, the Board has to monitor the

mix of skills and experience of its Directors in order to assure that the Board has the

necessary tools to perform its oversight function effectively. Finally, the Board should

consider shareholder proposals with respect to Director nominations and devote

enough time and attention to its tasks.

Concerning ethics and possible conflicts of interest, the Board expects its Directors,

as well as officers and employees, to act ethically and to acknowledge their

adherence to the corporation’s code of conduct.

In addition, the Directors are elected annually by shareholders to serve a one-year

term and there are no term limits. Moreover, it is possible for the Board to elect

Directors between annual shareholder meetings (as it was the case with James

Lawrence at the beginning of 2004) and the Board should consist of five to nine

members. Besides, it is the responsibility of Apple’s management to provide new

Directors with sufficient educational opportunities and information about the company

and the responsibility of Directors to inform the Board about changes in their job

responsibilities.

Additionally, Apple’s corporate governance guidelines contain detailed information

about further responsibilities/rights and the compensation of the Directors and

emphasize the independence and rules of the Board committees. Moreover, a self-

evaluation (at least once a year) of the Board should ensure its quality and the Board

should evaluate the performance of the corporation’s executive officers in order to

guarantee adequate compensation, effective leadership, and constant management

development. Finally, succession planning for senior management and the CEO is an

important responsibility of the Board to contribute to Apple’s successful future

performance and stability.

Audit and finance committee62 The Audit and finance committee is primarily responsible for overseeing the services

performed by the company's independent auditors and internal audit department,

evaluating the company's accounting policies and its system of internal controls and

reviewing significant financial transactions. Whereas the committee performs an

important internal and external control function, it is not the duty of the committee to 62 Apple Computer Inc. (2003b)

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prepare financial statements, to perform audits or to determine that the corporation's

financial statements and disclosures are complete and accurate as these are the

responsibilities of management and the independent auditors.

So, as the committee has to ensure the quality of its independent auditors, it is a vital

element in enhancing the governance mechanism of financial statements and

auditors.

Compensation committee63 The Compensation committee is primarily responsible for reviewing the

compensation arrangements for the company's executive officers, including the CEO,

and for administering the company's stock option plans. In addition, it should

establish and modify compensation and incentive plans and programs and therefore

supports the governance mechanism which deals with stock-based compensation.

Nominating and corporate governance committee64 The Nominating committee assists the Board in identifying qualified individuals to

become Directors, determines the composition of the Board and its committees,

monitors the process to assess Board effectiveness and helps develop and

implement the company's corporate governance guidelines.

As a result, this committee doesn’t only have an important function in determining

Apple’s direction in terms of corporate governance but also in guaranteeing the

quality and independence of the Board of Directors which serves as an important

governance mechanism.

4.2.6 Business ethics65

Fundamental principles Apple’s core fundamental principle is to “use good judgement” and the company is

especially aware of its responsibility to shareholders, communities, and customers in

conforming with legal/ethical boundaries and complying with applicable laws. In

addition, the corporation’s employees should be aware of job and ethical

responsibility.

63 Apple Computer Inc. (2003c) 64 Apple Computer Inc. (2003g) 65 Apple Computer Inc. (2003e)

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In fact, Apple’s business standards include highest standards of business conduct,

honesty and ethical awareness, avoidance of conflicts of interest, respect of

confidentiality of (internal) information, highest standards of corporate citizenship

(rules and laws), and the provision of benefits to communities through the company’s

presence. Apple expects its employees, business partners, and other parties to

comply with these standards and policies.

Responsibilities Apple recognises its responsibility to the company itself to encourage a creative,

culturally diverse, and supportive work environment and therefore doesn’t tolerate

any kind of discrimination, harassment or other threats. Moreover, as the company’s

success depends on its technologically innovative products, Apple has implemented

strict information protection policies in order to preserve the confidentiality of its

confidential, proprietary, and trade secret information. In addition, Apple has specific

policies for the communication to the press and financial analysts and only allows

limited personal use of Apple-owned equipment. In order to prevent conflicts of

interest, the company has identified several possible sources of such conflicts and

recommended avoidance strategies. Finally, a key ethical responsibility for the

corporation is to ensure the quality of its records by acting in accordance with

established procedures, policies, laws, rules, and regulations, by forbidding false or

misleading entries as well as undisclosed/unrecorded funds, payments or receipts,

and by specifying records or documents that must not be destroyed, altered or

modified.

Concerning Apple’s responsibility to other stakeholders, the company aims at

satisfying the costumer first by putting him first and it expects its employees to strive

for the highest quality possible. Moreover, Apple complies with all license or

purchase terms as well as with copyright agreements and expects the same from its

employees and contractors. Additionally, Apple has defined several responsibilities to

the public in which it prohibits insider trading, aims at meeting export and government

requirements, avoids political contributions, and supports trade practises that foster

competition.

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Compliance, consequences, and strategic implications In fact, Apple expects its employees to comply with its code of ethics and to be

sensitive to possible violations. Moreover, the company is committed to integrity in all

of its dealings with employees, customers, and the general public, especially through

the use of voluntary disclosures and the report of inappropriate behaviour. As

violations of these laws may result in civil and criminal penalties for Apple and its

employees, the corporation will take appropriate action (termination of employment or

other business relationship, or legal action, or referral to law enforcement authorities)

if this occurs.

From a strategic viewpoint, Apple’s code of business ethics aims at establishing

ethical behaviour which should lead to ethical decisions by its management and

employees – decisions that reasonable or typical stakeholders would find acceptable

because it aids stakeholders, the organisation or society 66 . In addition, these

business ethics provide a huge variety of tools for dealing with moral complexity and

therefore provide a general guideline combined with specific

actions/recommendations for certain situations where the moral implications of

strategic decisions or personal behaviour are of special importance.

Actually, Apple strongly aims at establishing a culture that emphasises the

importance of ethics. Although Apple has developed a consistent and exemplary

code of business ethics, it hasn’t been successful in implementing all the three

necessary steps for fostering an ethical organisational climate 67 . In fact, top

managers should stress ethical values more (at least in their external comments) and

ethical values should be incorporated into the mission statement as they should not

only be written down in a separate document.

Nevertheless, it has to be concluded that Apple definitely can be regarded as a role

model in terms of emphasising the importance of business ethics and due to its

coherent culture will probably be able to successfully implement an ethical climate in

its whole organisation.

66 Hill C. W. and Jones G. R. (2004), p. 395 67 Hill C. W. and Jones G. R. (2004), p. 296

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4.2.7 Environmental issues

In order to satisfy the claims of various stakeholders, Apple included environmental

and other related issues in its corporate governance efforts. By recognising the

responsibility to minimise the environmental impacts of its operations/products and

integrating sound environmental, health, and safety management practises, the

company can better satisfy employees, customers, local communities, and the

general public.

Environmental mission statement and guiding principles68 According to its environmental mission statement, by integrating sound

environmental, health, and safety management practices into all aspects of its

business, Apple offers technologically innovative products and services while

conserving and enhancing resources for future generations . This is based upon

several guiding principles which are founded on laws, regulations, standards, and

requirements as well as sound scientific principles and fiscally responsible public

policy. Moreover, the corporation aims at communicating the benefits of such a policy

of environmental consciousness, energy efficiency, safety maximisation, and health

protection to its various stakeholders.

Corporate initiatives and actions69 Apple’s Corporate Environmental Health and Safety (EHS) Department provides

several activities and services to ensure the implementation of Apple’s EHS policy by

refining, developing, implementing, and maintaining documented programs and

processes. These include on-line training programs, corporate EHS audits,

environmental due diligence, and OSHA statistics. Moreover, the company engages

in effective recycling as well as in product design, manufacturing, use, and end of life

which are targeted at the protection of the environment and maximising

environmental quality.

68 http://www.apple.com/about/environment/corporate/index.html#EHS_policy, 14.02.04 69 http://www.apple.com/about/environment/corporate/corp_ehs_programs/index.html, 14.02.04

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4.3 Corporate structure 4.3.1 Organisational structure In fact, the company’s management employs a functional structure as the company is

organised along functional lines. This can be shown in the following chart:

This structure groups people on the basis of their common expertise/experience and

resources. It enables the company’s functions to learn from another and to become

more specialised and productive. Moreover, this structure enables effective

monitoring and efficient activities which consequently reduces costs and increases

operational flexibility. As we can see in Apple’s case, where the executive

management team’s structure corresponds to this structure, a functional structure

gives managers greater control of organisational activities and enables the company

to avoid becoming too tall by creating several different hierarchies.70

By decentralising authority and responsibility as well as through a relatively flat

hierarchical structure, Apple encourages its lower-level managers and employees to

take the initiative and foster the company’s strengths (i.e. Apple’s innovation,

engineering excellence, and marketing skills 71). Moreover, decentralisation enhances

the company’s planning, decision making, and control processes due to better

information availability.72

4.3.2 Operating structure Apple primarily uses a geographic structure for managing its business. The

corporation’s reportable operating segments are the Americas, Europe, Japan, and

Retail. The Americas segment includes both North and South America, except for the

activities of the company’s Retail segment. The Europe segment includes European

countries as well as the Middle East and Africa. The Japan segment includes only

Japan, except for the activities of the company’s Retail segment. The Retail segment 70 Hill C. W. and Jones G. R. (2004), p. 422 71 BusinessWeek (2004c) 72 Morden T. (1993), p. 228

CEO

Finance Operat-

ions/Sales Retail Applicat-

ions Software Hardware Marketing

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currently operates Apple-owned retail stores in the United States and in the first

quarter of fiscal 2004, opened its first international store in Tokyo, Japan. Other

operating segments include Asia-Pacific, which includes Australia and Asia except

for Japan, and the company’s subsidiary FileMaker. Each reportable operating

segment provides similar hardware and software products and similar services.73

This structure can be shown in the following organisational chart:

This structure allows the company to be responsive to the needs of regional

customers and reduces transportation costs. As most central functions are

centralised, Apple can leverage its skills (e.g. in the fields of marketing or

hardware/software/applications development) across all the regions.74 Nevertheless,

it has to be stated that this doesn’t represent a pure geographical structure because

the Retail operating segment doesn’t constitute a geographical area. So, there might

arise coordination or communication problems between the two sub-segments United

States and Japan in the Retail operating segment and the North America and Japan

sub-segments in the Americas or Japan operating segment.

4.3.3 Performance Apple evaluates the performance of its operating segments based on net sales. The

Retail segment's performance is also evaluated based on operating income. Net

73 Apple Computer Inc. (2003) 74 Hill C. W. and Jones G. R. (2004), p. 434

CENTRAL OPERATIONS CEO, Management

Americas Europe Japan

Japan

Other Retail

North

America

South

America

Europe United

States Australia

Africa

Middle East Japan Asia

FileMaker

Apple Computer Inc.


sales for geographic segments are based on the location of the customers. The

following table provides an overview of the performance of Apple’s operating

segments (detailed information on the composition of the various positions can be

found in the company’s SEC-10K filings)75:

($, millions) 2003 2002 2001 Americas Net sales 3,181 3,131 3,037

Operating income 323 278 128

Segment assets 494 395 334

Europe Net sales 1,309 1,251 1,249



Japan Net sales 698 710 713



Retail Net sales 621 283 19

Operating loss (5) (22) (21)


Other segments Net sales 398 367 354



The table indicates that net sales have increased in all segments except Japan and

consequently the operating income position has improved in all segments from 2001

to 2003. In fact, only the Retail segment has an operating loss in 2003 despite a high

increase in net sales, resulting from the opening of new Apple retail stores.

4.3.4 Strategic implications Concerning the overall strategic implications of Apple’s corporate structure, it can be

stated that Apple’s organisational structure is consistent with its objectives/strategy

and its operating structure is consistent with its international strategy/operations. This


Apple Computer Inc.


is especially manifested in the huge importance of hardware, software, and

applications engineering (which contribute to the company’s objective to be the most

innovative company) and the importance of marketing and retail (which should

highlight Apple’s status as a creative, innovative, and cool company) as well as the

structure of the operating segments respectively (which are generally supporting the

company’s international objectives and presence).

4.3.5 Integration and control76

In order to avoid coordination problems between people, functions, and divisions,

Apple has to use integration mechanisms and control systems. Actually, integration

mechanisms aim at increasing intra-functional coordination and communication. As

Apple’s culture can be described as relatively open and casual, direct contact

constitutes an appropriate integration mechanism. In fact, direct contact among

Apple’s managers enables them to work closely together in terms of problem-solving

and other (strategic) issues.

In terms of control systems, these are targeted at efficient monitoring/evaluation and

enable the company to reach superior efficiency, quality, innovation, and

responsiveness to customers. For instance, concerning efficiency it can be stated

that on the one hand Apple apparently produces its goods and services efficiently

(which explains its profitability) but on the other hand the efficiency in several areas

(e.g. Apple’s network of huge retail stores across the United States) remains doubtful.

As Apple is famous for its quality and innovation, these areas can be seen as major

strengths of the company due to appropriate strategic control.

In fact, Apple uses personal control as the company expects their employees to

perform their work efficiently, avoid hiding any information, and share

competencies/experience. The firm therefore aims at shaping and influencing the

behaviour of its workforce through the promotion of the company’s goals and values

in everyday face-to-face interaction as well as through the huge enthusiasm and

motivation skills of its management which should influence the all of the company’s

employees.

76 Hill C. W. and Jones G. R. (2004), p. 410ff

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Moreover, Apple is also engaged in terms of behaviour control, as the firm aims at

generally directing the actions and behaviour of its employees through certain rules

like the code of business ethics. Nevertheless it should be stated that this type of

strategic control generally plays a minor role, because Apple generally prefers

creativity and innovation instead of standardised procedures.

As one would expect for a firm that engages in the computer industry, information

technology definitely plays a major role in supporting Apple’s organisational structure

and control systems. In fact, IT improves information and knowledge

distribution/availability, facilitates output/financial control, enables better and

problem-solving, and leads to several other positive aspects through a common

software platform, a company-wide intranet, and Apple’s general expertise in terms

of IT.

4.4 Corporate culture 4.4.1 Culture and values Corporate culture defines the specific set of values and norms shared by people and

groups within a company. Actually, values can be regarded as beliefs and ideas

about what kinds of goals should be pursued and the appropriate standards of

behaviour for achieving these goals. On the basis of these values, norms are

developed which constitute guidelines or expectations for appropriate behaviour in

particular situations and the control of the right behaviour. As a result, it is the task of

management to influence the values and norms of the organisation.77

By taking a look at the role of top management in creating the culture of the

enterprise, it becomes obvious that (in spite of a period of frequent changes of chief

executives) no CEO could successfully alter the rebellious, defiant, against formal

business routines type of culture that characterised Apple when it was founded in the

1970s.78 In fact, the company’s culture could be described as individualistic at the

beginning which means that it emphasised individual empowerment and creativity

and saw personal creativity and self-expression as the source of competitive

77 Hill C. W. and Jones G. R. (2004), p. 417f 78 Dupai I. and Pinter V. (1999)

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advantage79. As organisational culture is created by the strategic leadership provided

by an organisation’s founders and top-managers, it becomes clear that current CEO

Steve Jobs as a co-founder of Apple definitely is the optimal person to design and

develop the company’s culture with regard to the challenges of the 21st century.

In fact, the firm’s culture should be regarded as an emergent culture as it was never

well-defined but emerged from the way its founders lead the company. Therefore, the

initial bohemian, individualistic, riotous, and rebellious culture (which was definitely

advantageous when the company was a mere start-up)80 continually changed as the

company metamorphosed into a corporate giant and its values adapted to the new

situation although the core values stayed more or less the same. So, Apple’s culture

today can be described as a culture which focuses on innovation and creativity and

has definitely become an adaptive culture. Concerning the latter aspect, Apple has

developed a culture that encourages innovation and initiative and therefore can adapt

to its current environment which is absolutely necessary because of the huge amount

of rapid changes in the fast-moving computer industry. 81

In addition, it is important to take a closer look at the role of innova tion and creativity

as they are the two most important values in the company’s culture. In fact, it is

obvious that these values are constantly emphasised by Steve Jobs through

statements such as “Innovate, that’s what we do”82 or “Apple is the most creative

technology company out there” 83 . Moreover, the CEO always tries to link the

company’s reputation for successful innovation to the company as a whole and

therefore not only claims that this culture of innovation and creativity creates “the

world’s best computers” and other great products but also says that these attract the

“best 25 million customers any company ever had”.84 By constantly emphasising

these positive effects of Apple’s innovative culture, innovation is manifested as the

cornerstone in the company’s culture and therefore leaves no doubt that it represents

the most important source of the firm’s competitive advantage. In order to transform

innovation into a sustained competitive advantage, the firm has a strict policy that

79 Morden T. (1993), p. 243 80 The Economist (1998b) 81 Hill C. W. and Jones G. R. (2004), p. 418 82 Fastcompany (2004) 83 BusinessWeek (2004c) 84 BusinessWeek (2004c)

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none of its employees are allowed to talk about of refusing to comment on future

products or services85 and therefore preserves the value of its upcoming innovations.

Nevertheless, there are also certain drawbacks to this form of culture that is primarily

based on innovation. First of all, Steve Jobs’ apparent belief that Apple could

innovate its way through a downturn86 seems to be inconsistent with economic reality

as economically successful products don’t only need innovation but also appropriate

execution, consistency, and follow-through (supporting product innovation with things

such as a solid sales force, a strategy for collaborating with developers and makers

of complementary products, and a strategy for customer service). So, one apparent

criticism is that Apple has devoted itself single-mindedly, religiously to innovation.

Moreover, the source of innovation is another important criticism as Apple might

focus too much on technical innovation and not enough on the innovation of business

models which would rather increase profitability (e.g. as it is the case at Dell).87

In terms of organisational socialisation (which specifies how people learn

organisational culture and therefore become organisational members), the values

and norms of Apple’s corporate culture are not only manifested in written documents

like the code of business ethics but also transmitted through stories, myths, and

language. For instance, the various myths about Apple and its charismatic CEO as

well as the conviction, enthusiasm, commitment, and technological obsession which

are obvious in all of Steve Jobs’ statements highlight the company’s corporate culture

and directly influence all members of the organisation.

4.4.2 Strategic implications

Concerning the strategic implications of Apple’s corporate culture, it can be stated

that the company’s values and norms are definitely clearly communicated internally

(as well as externally) through documents and the role/behaviour of management

and therefore should be clearly understood by everyone in the organisation.

In addition, the firm’s culture can be seen as consistent with corporate strategy and

objectives as innovation is an integral part of Apple’s corporate strategy and staying 85 Baltimore Sun (2003) 86 BusinessWeek (2002a) 87 Fastcompany (2004)

Apple Computer Inc.


the most innovative company definitely acts as one of the firm’s core objectives.

Moreover, it is also consistent with the design of the organisation’s structure where

the various functions that primarily serve as sources of (technical) innovation

(hardware, software, and applications engineering) represent separate functions in

the overall organisation and therefore have enough power, capacity, and attention to

be innovative within this common cultural framework.

4.5 Corporate resources88 The following six subchapters take a closer look at six value creation functions,

namely Marketing, Finance, Research & Development, Operations & Logistics,

Human Resource Management, and Information Systems. The importance of these

functions can be illustrated through the value chain which regards a company as a

chain of activities for transforming inputs into outputs where primary activities are

concerned mainly with the actual design, creation, delivery, and marketing of the

product and support activities allow the primary activities to take place.

As Operations & Logistics contains materials management acti vities, the production

of the product, and customer service, we can illustrate the position of all single

functions in the following value chain where every function adds value to the product

(the overall company infrastructure isn’t explained explicitly in the following chapters

as it mainly deals with aspects that have already been described before like the

company’s management or organisational structure):

88 Hill C. W. and Jones G. R. (2004), p. 83-86

Research &

development

Production

Marketing

and Sales

Customer

service

Company infrastructure

Information systems

Materials manage ment

Human resources

Primary Activities

Support Activities

Apple Computer Inc.


4.6 Corporate resources: Marketing Apple designs, manufactures and markets personal computers and related software,

peripherals and personal computing and communicating solutions. How can

Marketing and Sales achieve a competitive advantage and add value in the value

chain?

For example, customers are attracted to Apple’s Macintosh computers for a variety of

reasons, including the reduced amount of training resulting from the Macintosh

computer's intuitive ease of use, advanced graphics capabilities, industrial design

features of the Company’s hardware products, and ability of Macintosh computers to

network and communicate with other computer systems and environments.89 These

attributes need to be addressed by the marketing department and communicated to

potential customers. The key success factor is to create value by igniting people's

imagination and create a favourable impression of the products by means of brand

positioning, advertising, and promotion.90

Apple’s marketing strategy is to put its customers first: “Apple creates, manufactures, and markets computing products so people can use them to make their lives better. Apple strives to understand our customers’ needs, to provide customers with the tools and skills to enhance their use of Apple products, and to be courteous and instructive.”91

At Apple creativity, innovation, and customer responsiveness are seen as highest

principles therefore clearly formulating them as biggest responsibilities in their

marketing policies. This view of conducting business goes hand in hand with their

mission statement that “Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings.”92 So as one

can obviously understand the marketing goals of the company are coherent with the

overall objectives of Apple.

89 Apple Computer Inc. (2003) 90 Hill C. W. and Jones G. R. (2004) 91 Apple Computer Inc. (2003) 92 Apple Computer Inc. (2003e)

Apple Computer Inc.


4.6.1 Marketing strategy

As Steve Jobs took over Apple 1997 as CEO, a lot of people doubted that he will

succeed to turnaround the company and return it to profitability. But once again he

proved the others wrong. His eager goal and objective for Apple was to transform the

niche PC maker into a high-end consumer-electronics and services company, being

less dependent on its sales of computers and laptops. Currently 80% of revenues are

generated in this area.93

So this radical change in corporate strategy meant that marketing strategies had also

to change and adapt to this new strategy. He reorganised the department by

centralising the responsibilities in company wide groups, so that communication and

effectiveness can be increased.

Along with its new focus on software and services as the introduction of iMovies in

1999 and the iTunes music online store in 2001 demonstrate impressively, the

invention of the iPod, an MP3 player, marked the first product that wasn't tethered to

the Mac. This paradigm shift in overall corporate strategy was naturally accompanied

by huge marketing expenses. In its third quarter of 2003, which ended June 30,

Apple earned $428 million in gross profit, a 27.7% margin on sales of $1.55 billion,

but it spent $419 million on operating expenses, leaving it with an operating margin of

just 0.6% (marketing accounted for $193 million).94 Apple's gross margins are the

envy of the industry. But below the line, they give it all back. Apple pours money into

R&D and selling, general, and administrative expenses. They have expensive retail

locations and high-end advertising. In other words it's a Cadillac operation. The

dedication to high-end marketing leaves the company with very little choice in

regards to increasing operating margins. Steve Jobs already assured that he won’t

cut costs through decrease in marketing expenses but will focus on increasing profits

and revenues. The huge marketing budget can be justified through its unique position

as hip brand – the cult of cool – it has spent billions building this image.

On one side Apple focused its recent marketing operations on one major business

area: The iPod and iTunes, recognising that the global music MP3 market will triple

until 2006 as forecasts show. So strategy adjusts in respect to changes in the

93 http://www.macminute.com/2003/08/05/appleshift, 16.12.03 94 Apple Computer Inc. (2003)

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external environment, which actually shows Apple’s marketing department’s

responsiveness to outside changes.

On the other side Apple slowed down the aggressive marketing in terms of PCs and

notebooks as their niche market, because especially one of their core businesses,

the advertising and media business, was in a steady decline during the last few years

and therefore demand for products was anyway not skyrocketing. Remarkable in this

area is that Apple adopted the direct selling model from one of its rivals “Dell” by

opening their own online store, which has been a huge success, now accounting for

40% of total PC sales in the US market.95 Through combination of online and retail

channels Apple has the opportunity to reach both first time buyers and Power users,

who are looking for sophisticated and customized products. This analysis shows that

Apple is adapting to changes in the external as well as internal environments to align

the marketing strategy with its corporate strategy and consequently Apple is ahead of

the curve. As software and services become more important, both to consumers and

to generate revenue, Apple's moves to capitalise on its brand and bring simple,

elegant software and services to the Windows world make sense.

Microsoft's mantra is “Where do you want to go today?” But it’s Apple that has

succeeded at figuring out where people really want to go.

4.6.2 Brand positioning

Like people, brands can be viewed as having personalities. A brand can be viewed

as being trustworthy, humorous, youthful, intellectual, etc. The personalities of

brands can affect the relationship that is developed with the brand's users. A brand's

personality can also serve to reinforce a product feature. The creati ve and innovative

"personality" of Apple computer products and the advertisements that promote them

do much to reinforce the distinctive capabilities of Apple and create brand loyalty,

which in turn leads to low customer deflection rates and a possible ride down of the

experience curve. The result of being on a lower point of the experience curve is

lower cost and therefore the margin between costs (C) and value (V) widens,

increasing company’s efficiency as well as its profits.96

95 Yoffie D. B. and Wang Y. (2002) 96 Evans D. and Gupta P. (2001)

Apple Computer Inc.


What Apple accomplished throughout its existence was the promotion of the brand

and its products simultaneously as the legendary spot “1984” (relaunched in 2004 for

the 20 year jubilee) in the half time break of the Superbowl, influenced by the

identically named bestseller of George Orwell, demonstrates in a spectacular way.

People associate the same qualities with the company AND its products. This

capability results therefore in a very strong brand loyalty.

4.6.3 Marketing mix Products Power Mac (PC) and iBook (laptop), iPod (MP3-player), iTunes (online music store)

and multimedia software are the core products of Apple.

Price Products are usually, as previously mentioned, highly differentiated and high-priced

in the premium segment of their respective market. This pricing option is seen as the

main obstacle for Apple to enter the mass market and gain sustainable market share,

but Apple puts itself as a supplier mainly to the education sector and the graphic

professionals community, which altogether is a high end niche market.

Promotion Promotion heavily utilises the TV as its advertising channel to promote the coolness

factor of Apple’s products. For example Apple recently produced a commercial

together with the famous soft drink producer Pepsi to market its iTunes music online

Accumulated output over time

Uni

t Cos

ts

The experience curve

Apple Computer Inc.


store. The ad marks also the intro of the current version of the “Apple homepage”.97

Another simultaneous campaign running in recent years is the “Switch” -campaign

which tries to encourage Wintel user (user that use Intel microprocessors with

Windows operating systems) to “switch” to Apple by emphasising the comparative

advantage in terms of reliability and user friendliness.

Placement Since the inception of the retail initiative in 2001, Apple has opened 65 retail stores in

the United States through 2003 and during the first quarter of 2004 opened 9

additional stores, including its first international store in the Ginza in Tokyo, Japan.98

Stores are installed at high traffic locations in quality shopping malls and urban

shopping districts. In addition to its own hardware, software, and peripheral products,

the company's stores carry a variety of third-party hardware and software products.

One of the main goals of the retail initiative is to bring new customers to Apple and

expand its installed base through sales to both first time personal computer buyers

and those switching to the Macintosh platform from competing operating system

platforms. By operating its own stores, Apple is able to better control the customer

retail experience. The stores are designed to simplify and enhance the presentation

and marketing of personal computing products. To that end, retail store

configurations have expanded to various sizes in order to accommodate market

demands. The stores employ experienced and knowledgeable personnel, provide

post-sale advice and support, offer a wide selection of third-party products selected

to complement the company's own products, and host training and marketing

presentations.

Certainly, Apple’s stores have been designed and built to serve as high profile

venues that function as vehicles for general corporate marketing, corporate events,

and brand awareness. As one can analyse there's far more to Apple than curvy

products and groovy ad campaigns nowadays. The results in comparison to the only

rival Gateway, which engages in a similar retail strategy, are fantastic (3,500 visitors

per week for Apple compared to 700 visitors per week for Gateway). Still Apple was

only able to convert 0.9% of non-Mac visitors into Mac customers. It would take only

97 http://www.apple.com, 21.01.04 98 Apple Computer Inc. (2003)

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a 2% conversion rate to boost Apple's market share in the home market by 50%.99

This initiative is supported by a simultaneous launch of a campaign to improve the

buying experience at consumer electronic chains through own personnel trying to

make the actual buying an unforgettable experience. The numbers prove Apple right:

Apple's business jumped from 15% to 35% of sales after Apple set up a special Mac

section and a cyber-cafe outfitted with iMacs at chains such as CompUSA.100

The second initiative called “direct Selling” involves the expansion and improvement

of Apple’s online store, not only increasing the product range but also reducing

handling time of customer orders.

By and large all these ideas can be seen as a commitment to quality. Apple’s focus

on its customer is expressed by superior responsiveness through knowledgeable

personnel, support and after-sale service, and quality products leaving Apple with an

added value and greater choice of pricing options (higher value).

4.6.4 Advertising

Apple Computer does an excellent job of creating congruency between its offline and

online operations. The Apple site is very colourful, easy to navigate, and promotes

movies, new media and QuickTime TV, reflecting Apple's strong emphasis on

multimedia.101 The aspects that characterise the Apple web site are also aspects that

characterise their brands. Therefore, Apple does a good job of utilising their web

presence to reinforce their brand identity and brand positioning. Apple further adds to

the congruency of its brand marketing by consistently using the same promotional

imagery across various media sources.

4.6.5 Product life cycles of Apple’s core products

iTunes

Apple’s music online store is in the growth stage – this stage is characterised by high

turnover and high promotional costs, offsetting each other. In other words, the net

profits are moderate. For example, Apple’s new Prime Time TV Ad highlights burning

custom music (from the iTunes online music store) CDs on Macs. The payoff here is

to create increased brand awareness in order to exploit future market opportunities

through networking effects. 99 BusinessWeek (2002a) 100 Apple Computer Inc. (2003) 101 Evans D. and Gupta P. (2001)

Apple Computer Inc.


The more people join iTunes the more popular it would get – as it was shown in

previous times by illegal download services such as Kazaa and Napster. According

to marketing strategists a t Apple, the new iTunes version for Microsoft Windows user

should additionally have the effect of convincing users to switch to the Mac OS X,

Apple’s operating system, by providing the superior graphic user interface that

earmarks all of Apple’s software products. The marketing division emphasises the

innovation, price, and coolness factor of the product to attract new customers.

iPod Apple’s iPod, the hard drive based MP3 music player currently positions itself in the

growth stage. MP3 player market is expected to triple over the next 3 years. The

product is also supported by expensive blockbuster ad campaigns to boost sales and

establish the iPod as the dominant player in the market. The premium price (29% of

units market share account for 54% of revenues in the market) lets Apple earn

decent profits despite the high promotional costs. The introduction of a Windows

compatible version additionally is expected to spur demand.

Apple also tied up with apparel maker Burton Snowboards to create the Burton Amp

Jacket that allows wearers to control iPod from the jacket sleeve. This feature had

the potential to lead to many more innovative applications for the iPod. Marketing

emphasises the capacity capabilities of the iPod being able to store more than the

equivalent of 1,000 CDs on the 40GB model.102 Therefore it targets customers who

care about capacity as well as style, which from Apple products is anyway expected

to be superior.

iMac and iBook The PC and laptop products are seen as being in their mature stage with high profits

and turnover. In this stage products are subjected to only slight changes and

improvements, on the one side using economies of scale and on the other side

learning effects to ride down the experience curve. Furthermore, marketing these

products means to concentrate on reliability and easiness of use which together with

superior design should appeal to Apple’s specified niche market. Marketing

accomplishes to change customer’s view about computers from a commodity to a

lifestyle product. The “switch” campaign and slogans like “Only Apple designed the 102 http://www.emergic.org/archives/2004/01/14/index.html#apples_intelligent_pricing, 16.01.04

Apple Computer Inc.


way to fit your work” are perfect examples of underpinning these product features.

Moreover infomercials should justify the relative high price and help educate

consumers about the Apple brand. Instead of increasing market share Apple chose

to engage in a strategy of maximising profits by serving the high price high end niche

market.

4.6.6 Trends from this analysis

Apple’s strong brand name is definitely an advantage and unique capability, which

Apple can capitalise on, as the recent example of the online music store

demonstrated. Through its reputation Apple was the only player in the market who

was able to convince all five major music labels to sign on to this legal download

service.103 Also this capability seems to have a high barrier to imitation as nobody

was able to create such brand loyalty in the industry until now. But marketing through

its incredible high budget hindered also in a way corporate performance in the past,

103 http://www.silliconvalley.com, 20.01.04

Growth

Embryonic

Shak

eout

Mature

Decline

Dem

and

iTunes 3-digit

growth rates expected

iMac and iBook sales

constant

iPod market

expected to triple 2006

Time

Apple Computer Inc.


as it was previously stated that nearly all of the gross margin is eaten away by R&D

and Marketing. Despite costs, Marketing is still far from being perfect. Apple has to

recognise that a “name” is not everything. Customer support is also viewed as an

important criteria considering to buy hard- and software because of the increasing

complexity in pulling together the various pieces of digital lifestyle and the lack of

responsiveness can mean the fall from grace. Specifically the online anti-advertising

campaign by disappointed buyers of the iPod could have been avoided through

better customer support. Apple refused to exchange empty batteries with the simple

excuse that the customers should just get a new iPod – not a very polite way of

dealing with the ones you are dependent on?!104 So for the future this means that

either Apple will have to increase value (e.g. through superior after sales service) or

decrease its costs in order to stay competitive and enhance performance.

4.6.7 Competitive advantage At the first look Apple seems to have a huge competitive advantage by being able to

differentiate itself from its competitors and communicating this successfully to

customers, and therefore it can charge a premium price. But as competitive

advantage is defined as being more profitable than its competitors – in other words

the gap between the cost for the company and perceived value for the customer is

greater than industry average – Apple doesn’t outperform its competitors

substantially.

4.7 Corporate resources: Finance By looking back in history, we notice that Apple was never caring much about the

long-run. Short-term high profit margins through charging elevated prices were the

determining fact without attributing much attention to their deteriorating market share.

But is Apple’s financial situation an altered one in 2004?

4.7.1 Apple’s financial status quo

When Apple published the first quarter results of 2004, the company beat analysts’

expectations by presenting a net income of $63 million, the highest profit on an

annualised basis since 2001 and far beyond any estimation. Net income also reflects

104 BusinessWeek (2003a)

Apple Computer Inc.


higher margins due to product mix. For the three months ended in December 2003,

revenues rose 36% to $2.01 billion. Revenues reflect an increase in sales of iPod

and computer accessories.

Financial results and ratios105 Apple’s financial results of 2002 and 2003 were already published under the rules of

the Sarbanes-Oxley Act106 of 2002. They showed Total Assets of $6.815 billion, Total

Liabilities of $2.592 billion, a net income of $69 million, but an Operating loss of $1

million. This number improved especially in the first quarter of 2004. Average Cash

Flow figures in comparison to the previous years marked the liquid position of Apple

Computer. This states that Apple’s product and business mix is diversified enough to

always serve the company with appropriate cash.

Net sales increased $465 million or eight percent during 2003 compared to 2002

while Macintosh unit sales declined three percent year-over-year to approximately

three million units in 2003. Several factors have contributed favourably to net sales

during 2003, including:

The Retail segment’s net sales grew to $621 million during 2003 from $283 million in

2002, an increase of 119%. Therefore we can infer that Apple’s customers may

prefer to purchase products from their local Apple Retail store rather than through

other pre-existing sales channels in the United States.

Net sales of peripherals and other hardware rose to $384 million or 57% during 2003

compared to 2002, which follows a $287 million or 74% increase in 2002 as

compared to 2001. The current year increase was primarily driven by the $202 million,

or 141%, year-over-year increase in iPod net sales to $345 million. All of the

company’s operating segments experienced substantial increases in iPod net sales

and unit sales during 2003. In addition to the iPod, the increase in net sales of

peripherals and other hardware during 2003 also reflects an overall increase in net

sales of other computer accessories including AirPort cards and base stations.

Although total Macintosh unit sales were down 3% in 2003, portables were relatively

strong primarily due to the 69% or 247,000 unit increase in PowerBook unit sales,

slightly offset by a 4% or 30,000 unit decrease in iBook unit sales.

105 Yahoo Finance, Reuters Investor Services 106 Strict corporate governance action plan that imposed strict corporate rules by trying to avoid a second Enron

Apple Computer Inc.


Annual Balance Sheet, 09-2003

Quarterly Balance Sheet, 12-2003

Apple Computer Inc.


Annual Income Statement, 09-2003 Quarterly Income Statement, 12-2003

Annual Cash Flows, 09-2003 Quarterly Cash Flows, 12-2003

This reflects an overall industry trend towards portable systems. Apple’s average net

sales per Macintosh unit sold increased two percent to $1,491 in 2003 due to an

increase in direct sales primarily from the company’s retail and online stores.

PowerBook and Power Macintosh systems accounted for 42% of total unit sales in

2003 versus 36% in 2002. Net sales of software increased $55 million or 18% during 2003 and result from

higher net sales of Apple-branded application, server software, and third-party

software. Additionally, higher sales figures may also infer from the recent acquisitions

of PowerSchool and Emagic. Service and other sales rose $69 million or 30% during

2003. Increased net sales associated with Internet services are due to net sales from

the iTunes Music Store.

Apple Computer Inc.


In contrast, total unit sales of desktop systems fell 15% during 2003 compared to

2002. iMac systems unit sales declined 16%. Unit sales of Power Macintosh systems

fell 13% during 2003 compared to 2002. Furthermore, some of Apple’s professional

and creative customers seem to have delayed system upgrades in anticipation of

new innovative products on the market. Apple has continued to experience ongoing

weakness in its US education channel during 2003. Net sales and unit sales in this

sector during 2003 were down four and six percent. Apple has also experienced

significant competition in 1:1 learning solutions and, accordingly, has achieved a

lower profit margin.

With respect to the economic and industry downturn, political instability and Apple’s

direct influence on the market sales of professional and consumer oriented

Macintosh systems remain far below levels experienced in 2000.

Apple Computer Inc.


Apple’s ratios - overview107

107 EPS – Earnings per share; ttm – time to market ; ROIC = ROI; EBITDA – Earnings before Interest and Taxes, Depreciation,

Amortisation; P/E – Price Earnings

Apple Computer Inc.


Research & Development, Sales, general and administrative expenses

Apple Computer Inc.


Working Capital, Inventory

Property, plant and equipment

Apple’s stock and dividends Primarily, Apple is listed at the

electronic NASDAQ (National

Association of Securities Dealers

Automated Quotations) stock

exchange in New York (AAPL – short

term for Apple Computer at the

NASDAQ), but represents member of

the S&P 500 and the NASDAQ 100 Composite Index. On the 20th of February 2004,

its price was $22.40 (High: $22.51, Low: $22.21) with a traded volume of 4,957,200

shares. The 52-week high is $25.01, the corresponding 52-week low $12.72, the

stock has an average three month volatility of 5.33.

Currently, a majority of analysts108 is “neutral” (in real terms, but this normally implies

a slight tendency to sell) on the Apple share which suggests neither buy nor sell the

stock. This is due to the general belief that Apple itself will prosper in several

108 J.P. Morgan Securities Inc. (2003)

Apple Computer Inc.


business areas, but will still have to face tough competition, especially from ultra-

efficient producing and selling Dell. For fiscal 2004 (EPS of $0.40 and revenues of

$7.10 billion, for fiscal 2005 an EPS of $0.51 on revenues of $7.34 billion are

estimated. Apple is trading at the high end of its historical range. Finally,

recommendations conclude that Apple’s current valuation already recognises in lofty

expectations for a turnaround, foresees few near-term catalysts that could drive

significant share price appreciation and therefore can’t see an outperformance of the

group average in the near future. Although providing a Common Stock dividend during Apple’s latest stock split in 2000,

the company’s policy normally is not to pay out any. This can be derived from the

attitude of many IT companies, above all Microsoft, that could persuade their

shareholders to reinvest their earnings in the company by promising them a far

higher yield through. The money was mainly used to fund business operations and

R&D.

Apple’s credit ratings and capitalisation structure At the moment, Apple’s corporate credit rating is at BB109 and consequently near sub

investment grade, but with a stable outlook. New product introductions and seasonal

holiday demand should provide near-term revenue and earnings improvement but

109 see Appendix: Standard & Poor’s Rating Agency

Apple Computer Inc.


are not expected to affect Apple's rating or outlook. Ample liquidity (more than $4

billion in cash) and modest debt levels support the current rating despite Apple's

limited global market share and earnings dependence upon a narrow product base.

This states that debt financing by issuing corporate bonds would become costly for

Apple due to their low rating. Nevertheless, this is a common scenario for

corporation, above all in the IT sector (33% have a B-rating, 25% a BB, 23% a BBB

and only 13% an A).

The company currently has debt outstanding in the form of $300 million of aggregate

principal amount 6.5% unsecured notes that were originally issued in 1994. The

notes, which pay interest semi-annually, were sold at 99.925% of par, for an effective

yield to maturity of 6.51%. The company currently anticipates utilising its existing

cash balances to settle these notes when due which fur ther visualises Apple’s strong

capital position and its liquidity. This leads to a very low financial leverage / Gearing

ratio110 (Total Debt to Equity equals 0.07) and therefore makes refinancing for Apple

rather cheap regarding their capital structure.

As far as Equity Capital is concerned, there exist common and preferred stock. The

latter ones became important in August 1997 when Microsoft purchased 150,000

shares of Apple Series A111 nonvoting convertible preferred stock for $150 million,

going along with a reciprocal “technological exchange”. These shares were

convertible by Microsoft after August 5, 2000, into shares of the Company’s common

stock at a conversion price of $8.25 per shares.

From the prospective of accuracy there can’t be found any valuation discrepancies in

asset values or market prices. Trends can be discovered in how Apple finances their

activities by keeping up a low dependence on outside debt capital and raising money

through cheaper equity where dividends were successfully avoided to be paid out.

Such a policy may be beneficial as the company’s ownership isn’t diluted, but in

times of low market bond yields, Apple isn’t able to take full advantage of “cheap”

corporate bonds’ issues.

Current financial objectives and policies Apple’s major financial goal is to outperform its competitors, above all in terms of

productivity (measured by net sales, operating income, stock price performance,

110 Shows the company’s relationship debt to equity 111 Different classes of shares containing specific rights

Apple Computer Inc.


Return on Invested Capital, Liquidity) and to become the industry’s most profitable

company. This policy is clearly stated (focus on equity) and implied from both,

performance and budgets.

Nevertheless, the financial acting is neither totally consistent with the overall

company strategy (as it doesn’t take into account possible lower returns due to the

innovation superiority) nor has it supported past development significantly as Apple’s

mixed results demonstrate.

4.7.2 Apple’s competitors, their financial status quo, and the market Amid continuing cautious commentary from

industry participants, the signs of growth in

the US computer hardware industry are

modest but accumulating. Consumer

spending on PCs and electronics has been

the primary bright spot to date, but a full

hardware spending recovery is dependent

upon growth in corporate spending and is

not expected to be material in 2003. In the

near term, highly competitive industry pricing

conditions continue to challenge profitability

levels for most original equipment

manufacturers (OEM). However, over the longer term, the need for continued

investment in wireless, e -commerce, and Web-based technologies remains clear.

Dell Inc. With a rating of A-, an expanding product line, a low-cost manufacturing model, and

an efficient asset management Dell should be enabled to preserve double -digit

revenue growth and consistent profitability levels, despite highly competitive industry

conditions. In addition, ratings are supported by ample liquidity (cash and

investments total $11 billion) and a strong financial profile.

Hewlett-Packard Co. With a boost from its seasonally strong fourth fiscal quarter, HP posted the highest

revenue growth since its merger with Compaq Computer and achieved profitability in

Apple Computer Inc.


each of its major business segments. Due to highly competitive market conditions,

HP's goal of attaining sustainable profitability in its PC segment will continue to be a

challenge. However, excellent liquidity and significant free cash flow generation

provide ratings stability despite continued earnings reliance on its printing and

imaging segment. A credit rating of A- proves that too.

International Business Machines Corp. Despite a challenging global economy and highly competitive industry conditions,

IBM's diverse product and customer base supported modest four percent revenue

growth in the September quarter and consistent profitability. Strong cash flow

generation is expected to support internal investments, an active acquisition profile,

and share repurchases. Debt protection metrics are expected to remain within

acceptable levels for the rating of A+.

Quanta Computer Inc. Quanta's operating performance and financial profile has been consistently

satisfactory. The company is expected to report record high revenues and profit in

2003. The rating (BBB-) could be raised over the next one to two years if the

company is able to continue reporting good operating performance and a solid

financial profile, while demonstrating sustained diversification of product lines.

Silicon Graphics Inc. A very low credit rating of CCC- could be further deteriorated if an exchange of

convertible notes to common stock failures in the near future. Stratus Technologies Inc. Despite ongoing declines in proprietary product sales, privately owned Stratus has

stabilised revenues and improved profitability through new product introduc tions and

cost reduction actions. Stratus is expected to maintain EBITDA margins in the high

tens as a percent of revenue, and modest free operating cash flow. Still, the potential

for ratings improvement (B) is limited by Stratus' niche position in a highly competitive

market.

Apple Computer Inc.


Sun Microsystems Inc. Sun's rating of BBB was placed with negative implications. This reflects the concerns

about Sun's cost structure and ability to improve profitability, as well as uncertainty

about the level and timing of a recovery in IT spending and increased market

acceptance of lower-cost Windows and Linux systems.

4.7.3 Apple’s financial operations Apple’s finance and treasury division has to provide the company with a sound

financial policy, managing general obligations (“paying the bills” by guaranteeing

liquidity, risk management duties, handling Apple’s international capital transactions)

as well as special programs. A few of them are to mention:

The company places its short-term investments in highly liquid securities issued by

high credit quality issuers and, by policy, limits the amount of credit exposure to any

one issuer. The firm’s general policy is to limit the risk of principal loss and ensure the

safety of invested funds by limiting market and credit risk. All highly liquid

investments with maturities of three months or less are classified as cash equivalents.

In 1999, a plan was authorised for the company to repurchase up to $500 million of

its common stock. During the fourth quarter of 2001, Apple entered into a number of

forward purchase agreements to acquire the shares. Apple uses this repurchased

shares finance employee remuneration through stock option plans.

The company has not entered into any transactions with unconsolidated entities

whereby it has financial guarantees, subordinated retained interests, derivative

instruments or other contingent arrangements that expose Apple to continuing risks

and contingent liabilities. Therefore, a vibrant risk management taking care of

hedging foreign exchange exposure, adjusting to local conditions and making use of

“financial engineering”112 to secure capital flows is indispensable. Furthermore, Apple

is actively involved in off-balance sheet transaction such as lease commitments

(mainly retail space and related facilities) which amount to approximately $600 million.

Measurement is accomplished by using common ratio analysis, Weighted Average

Costs of Capital approach113 to value Apple’s assets and derivative pricing Black-

Scholes model for options, futures, and swaps. Apple’s accounting relies on GAAP

(Generally Accepted Accounting Principles). According to Apple’s auditor KPMG,

112 Creating and using new financial products, above all derivatives, to minimise risk exposure 113 CAPM – Capital Asset Pricing Model

Apple Computer Inc.


Apple changed accounting for asset retirement, hedging activities, and financial

instruments in 2003.

Finally, Apple has investments in EarthLink Inc. (EarthLink), Akamai Technologies,

Inc. (Akamai), ARM Holdings plc (ARM), and certain investments in private

companies.

The role of the financial manager in the strategic management process is a crucial

one in Apple’s case. It’s his obligation to raise the capital tremendously needed to

finance Apple’s huge R&D expenses for maintaining their innovative position.

Although the company is applying accepted finance concepts and techniques, there’s

to argue that a competitive advantage isn’t obvious regarding financial policy.

Objectives in comparison to its competitors are set far too high up (see ROIC -ROI

figures), above all when Apple’s financial principles often prove inconsistent with the

company’s entire strategy. Innovation is expensive and in Apple’s mind this argument

counts more as the company had to “relaunch” itself only six years ago by taking on

immense R&D.

Apple Computer Inc.


4.8 Corporate resources: Research & Development 4.8.1 General information

As the personal computer industry is characterised by rapid technological advances,

Apple’s ability to compete successfully is heavily dependent upon its ability to ensure

a continuing and timely flow of competitive products and technology to the market. As

a consequence, the firm continues to develop new products and technologies and to

enhance existing products in the areas of hardware and peripherals, system software,

applications software, networking and communications software and solutions, and

the internet. Moreover, Apple’s management believes that maintaining or increasing

the pace of innovation and product development is the best way to respond to current

economic and market conditions and will continue to position the enterprise for future

growth as overall economic conditions improve.114

As innovation and new technology are key driving forces of mission and strategy115

and technology and especially technological progress/innovation is the main driver of

Apple’s corporate performance, the company’s research and development

department constitutes a central element of Apple’s value chain in terms of creating

value. In fact, the task of R&D is to enhance the development of new and existing

products and therefore increase the speed of innovation which is consistent with the

company’s overall strategy and goal to remain the most innovative personal

computer company.

4.8.2 Structure and performance By taking a closer look at Apple’s actual R&D budget, it becomes clear that

investment in research and development is continuously rising and in 2003 with $471

million is up 50% from 1999. At the moment, Apple’s R&D budget is used mainly for

hardware purposes (49%) whereas software and applications play a somewhat less

important role. Moreover, R&D headcount is now close to 2,500.116

114 Apple Computer Inc. (2003) 115 Morden T. (1993), p. 140 116 Apple Computer Inc. (2003a)

Apple Computer Inc.


$314

$380

$430 $446$471

$0

$100

$200

$300

$400

$500

1999 2000 2001 2002 2003

($=M

il)

Hardware49%

Software29%

Applications22%

R&D expense amounted to approximately 8% of total net sales during 2003, 2002

and 2001, up substantially from approximately 5% of total net sales in fiscal year

2000 and recent earlier periods. As a result, the company incurs higher research and

development costs as a percentage of revenue than many of its competitors who sell

personal computers based on other operating systems. Many of these competitors

seek to compete aggressively on price and maintain very low cost structures. So, if

the firm is unable to continue to develop and sell innovative new products (in order to

differentiate) with attractive gross margins, its results of operations may be materially

adversely affected by its operating cost structure. 117

Moreover, Apple also engaged in Purchased In-Process Research and Development

(IPR&D) when it acquired Emagic (2002) and PowerSchool (2001). Through these

acquisitions, Apple got new R&D capabilities and capacities in the fields of

professional software solutions for computer based music production and web-based

student information systems but also had to value and expense the necessary R&D

investments for the development of these products.

Although the company has continually increased its R&D budget during the last years,

compared to some of its competitors Apple probably still has a relatively skinny

research and development budget (in absolute terms) which has to work much

harder than those of competitors who benefit from the huge spending of Microsoft


Apple Computer Inc.


and Intel118. In fact, Apple has just 300,000 independent and in-house developers

writing programs and making products for its operating systems, including the latest,

Mac OS X. On the contrary, more than 7 million developers build applications for the

Windows platform worldwide.119

4.8.3 Strategic management

In terms of strategic management issues, it is the ultimate task of Apple’s R&D

resources to develop a distinctive competency in innovation and technology that

results in products that fit customers’ needs. In addition, this should lead to short

product-to-market cycles and innovative products or processes. 120

In fact, Apple promotes its R&D efforts by providing enough freedom and autonomy

which is supported by the company’s corporate culture that emphasises the

importance of personal creativity, innovation, and thoughtful but entrepreneurial

actions. Moreover, a flat and decentralised hierarchical structure is another positive

aspect through which Apple promotes efficient and successful R&D activities.

4.8.4 Competitive advantage In fact, the company’s R&D department is definitely one of the most important value

creation functions within Apple. Indeed, it creates value by enhancing the speed,

quantity, and quality of innovation and therefore enables the firm to achieve superior

innovation. This aspect can be shown with the example of the rate of innovations in

the development of Apple’s operating system Mac OS X compared to the rate of

innovation of Microsoft Windows:121

118 The Economist (2000) 119 Fastcompany (2004) 120 Hill C. W. and Jones G. R. (2004), p. 424 121 Apple Computer Inc. (2003a)

Apple Computer Inc.


Whereas Microsoft uses a policy of longer time frames between releases of new

operating systems, Apple constantly improves, innovates, and develops its operating

system and brings new and improved versions directly to the market. So, its

customers can more easily and continuously reap the benefits of Apple’s ongoing

innovation and product development.

In fact, ongoing innovation takes place in the design of the company’s products and

production processes, thereby also leading to improvements in (product) quality and

(operating) efficiency (although there’s still potential in the field of achieving higher

efficiency) . As a result, this can create value for the customer by increasing the

functionality of the products. Thus, by making new or enhanced products more

desirable for Apple’s customers through product innovation (as this also increases

the quality of its products through improving reliability, performance, and other

attributes such as design or ergonomics), innovation will also increase the firm’s

pricing options. So, as innovation is probably the most important building block of

competitive advantage in the long run, Apple’s R&D efforts create huge value for the

company and its customers.

In short, Apple’s R&D capabilities and activities help the company to achieve a

competitive advantage through superior innovation, thereby also leading to superior

quality.

Apple Computer Inc.


4.9 Corporate resources: Operations & Logistics 4.9.1 General information Operations management and logistics Operations management can be regarded as the process in which material, human

or financial inputs are transformed into outputs of goods, services or utilities.122 The

actual creation of a good or service is in the centre of this process and is referred to

as production, manufacturing, or operations. In addition, logistics or materials

management controls the transmission of physical materials through the value chain

(input - throughput - output). Distribution deals with the physical delivery of the

product to the customer whereas customer service provides after-sales service and

support.

Overview According to Porter’s description of the process of value-generation, the operations &

logistics resource focuses at the following value chain elements:123

• inbound logistics supply of raw materials, components, services, etc. as

input to the value generation process

• operations value generation by operational processes

(manufacturing)

• outbound logistics value generation by transportation, distribution, and

supply logistics

• service value generation by specification and offer of customer

service, by customer-orientation, and by customer care

Inbound logistics Although most components essential to Apple’s business are generally available

from multiple sources, certain key components are currently obtained from single or

limited sources. For instance, IBM is the firm’s sole supplier of the G5 processor used

122 Morden T. (1993), p. 174 123 Morden T. (1993), p. 193

Inbound

logistics

Operations

Outbound

logistics

Marketing

& Sales

Service

Apple Computer Inc.


in current PowerMac products and Motorola is the sole supplier of the G4 processors.

Therefore a possible inability in the future to obtain microprocessors in sufficient

quantities with competitive price/performance features could have an adverse impact

on Apple’s results in terms of operations and financial condition.

Some other key components, while currently available to the firm from multiple

sources, are generally subject to industry wide availability constraints and pricing

pressures. In addition, the company uses some components that are not common to

the rest of the personal computer industry and new products introduced by Apple

often initially use custom components obtained from only one source until the

company has evaluated whether there is a need for additional suppliers.

If the supply of a key or single-sourced component to the company is delayed or

curtailed or if a key manufacturing vendor delays shipments of completed products to

the company, Apple’s ability to ship related products in desired quantities and in a

timely manner could be adversely affected. The firm’s business and financial

performance could also be adversely affected depending on the time required to

obtain sufficient quantities from the original source or to identify and obtain sufficient

quantities from an alternative source. Continued availability of these components

may be affected if producers were to decide to concentrate on the production of

common components instead of components customized to meet the Apple’s

requirements. As a consequence, this highlights a possible threat of Apple’s

differentiation strategy as the company depends on the availability of certain custom

components from special suppliers.

Apple attempts to mitigate these potential risks by working closely with its key

suppliers on product introduction plans, strategic inventories, coordinated product

introductions, and internal and external manufacturing schedules and levels.

Consistent with industry practice, the company acquires components through a

combination of formal purchase orders, supplier contracts, and open orders based on

projected demand information. Such purchase commitments typically cover the

company's requirements for periods ranging from 30 to 130 days. Apple must order

components for its products and build inventory in advance of product shipments.

As Apple’s markets are volatile and subject to rapid changes, there is a risk the

company will forecast incorrectly and produce or order from third parties excess or

insufficient inventories of particular products. Consequently, it has to be stated that

although Apple tries to work closely with its key suppliers, the company’s policy of

Apple Computer Inc.


forecasting future demand creates a possible threat of inflexibility in coping with

sudden changes in customer demand and therefore could result in increased

inventory costs or lost profit opportunities.

Operations Final assembly of Apple’s products is conducted in the company’s manufacturing

facilities in Sacramento and Cork as well as by external vendors in Fremont, Fullerton,

Taiwan, Korea, the Netherlands, China, and the Czech Republic. Currently,

manufacture of many of the components used in the Apple’s products and final

assembly of substantially all of the portable products are performed by third-party

vendors in Japan, Taiwan, and China.

In short, Apple only assembles some of its products in the United States and Europe,

whereas most products are assembled and manufactured by third-party vendors

which are mainly situated in lower-cost countries.

Outbound logistics Concerning Apple’s distribution model, it is quite interesting to take a closer look at

the changes that the company made beginning in the year 2000. In fact, Apple relied

on a network of distributors and resellers in the past which led to higher prices for

Apple products and greater distance to customers. In fact, this initial situation as well

as the effects of the introduction of special retail stores, an expansion of Apple’s

presence in national chains, and other changes to the distribution system are

illustrated in the following diagrams124:

124 Sudbury A. (2001)

Apple Computer Inc.


In fact, these efforts seemed to be paying off as Apple could reduce its inventory to

less than two days worth of sales by early 2002.125

Generally, Apple distributes its products through wholesalers, resellers, national and

regional retailers and cataloguers. The company also sells many of its products and

resells certain third-party products in most of its major markets directly to education

customers, consumers, businesses, and certain resellers through its retail stores or

through one of its online stores around the world (which had total direct and indirect

online sales of approximately $2.9 billion in 2003).

Whereas Apple’s online store (as a direct business to consumer store which can also

serve as a communication medium between the company and its customers126) can

be regarded as a successful distribution channel as it accounts for a huge amount of

Apple’s total sales (43% in 2001127), Apple’s new retail stores recently earned much

criticism. In spite of the huge initial interest in the stores, now, with slower traffic

through the stores and flagging sales, Apple's outlets may be losing their impact and

could increase the company’s fixed-cost base128.

125 Yoffie D. B. and Wang Y. (2003), p. 14 126 Gupta P. and Ryan J. (2000) 127 Yoffie D. B. and Wang Y. (2003), p. 13 128 BusinessWeek (2002a)

component suppliers

contract manufacturers

consumers Apple manufacturing resellers

distributors

internal inventory channel inventory

pre-shipment post-shipment

component suppliers

contract manufacturers

consumers

Apple

manufacturing

resellers

distributors internal inventory channel inventory

pre-shipment post-shipment

Online-Store Retail Stores Direct BTO

Apple Computer Inc.


In terms of inventory holdings, Apple records a write-down for inventories of

components and products that have become obsolete or are in excess of anticipated

demand or net realisable value and accrues necessary reserves for cancellation fees

of orders for inventories that have been cancelled. Although the company believes its

inventory and related provisions are adequate, given the rapid and unpredictable

pace of product obsolescence in the computer industry, no assurance can be given

that it will not incur additional inventory and related charges. In addition, such

charges have had, and may have, a material effect on the company's financial

position and results of operations.

Service

Concerning product support and customer service, Apple’s special AppleCare

programme offers a range of support options for Apple customers like manuals,

online tutorials, and a special protection plan including phone support, hardware

repairs, web-based support resources, and user diagnostic tools. Moreover, Apple

engages in the fields of training programmes and professional technical

(consulting/installation/integration) services. Nevertheless, although Apple definitely

offers a comprehensive support package, there has also been criticism about the

quality of the customer service.

4.9.2 Operations capabilities Manufacturing facilities and capabilities In fact, the company largely depends on the manufacturing capabilities of its external

vendors in the United States, Taiwan, Korea, the Netherlands, China, and the Czech

Republic. As Apple uses its manufacturing facilities only for the final assembly of

several products and due to the fact that the company orders some of its

components from a few key suppliers by the use of future demand predictions, there

is a potential threat that its operational capabilities can’t cope with excess demand.

For instance, right after the introduction of the latest iMac, its sales soared so high

that Apple couldn't keep up – thanks in part to component shortages – and

consequently demand quickly cooled off.129

129 BusinessWeek (2002a)

Apple Computer Inc.


Outsourcing As already stated before, many of Apple’s products are manufactured in whole or in

part by third-party manufacturers. In addition, the company has outsourced much of

its transportation and logistics management. While outsourcing arrangements may

lower the fixed cost of operations, they also reduce the company's direct control over

production and distribution and therefore such diminished control might have

negative impacts on the quality or quantity of the products manufactured or the

flexibility to respond to changing market conditions.

Moreover, although arrangements with manufacturers may contain provisions for

warranty expense reimbursement, Apple may remain at least initially responsible to

the ultimate consumer for warranty service in the event of product defects. Therefore,

any unanticipated product defect or warranty liability could adversely affect the

Company's future operating results and financial condition. In addition, if for any

reason manufacturing or logistics in any of the manufacturers’ locations is disrupted

by regional economic, business, environmenta l, medical, political, or military

conditions or events, the company’s results of operations and financial condition

could also be adversely affected.

4.9.3 Structure and performance Budget and performance Apple’s consolidated statement of operations offers no detailed insight into the

separate positions that are related to operations and logistics. Nevertheless, it can be

stated that Apple’s cost of sales continuously increased in the last three years (from

$4,128 million in 2001 to $4,499 million in 2003) which lead together with a larger

increase in net sales (from $5,363 million in 2001 to $6,207 million in 2003) to an

improvement in Apple’s gross margin of almost $500 million. This indicates that,

although there was an increase in costs of sales (which are the costs of

manufacturing the products), this increase was only of minor size compared to the

increase in net sales and therefore led to an overall increase in profitability.

Consequently, Apple’s policy in terms of operations and logistics contributes to the

good financial performance of the company.

Apple Computer Inc.


Role of IT Concerning the role of IT as a driving factor of operational performance, information

technology is fundamental to the establishment of effective operations management

systems as the application of IT to systems of operations management and to

management information systems is a basic strategic requirement. IT can increase

the availability and quality of information and therefore improve the efficiency of

operations management, thereby leading to cost savings.130

4.9.4 Strategic issues In fact, there are several approaches to improve the quality and efficiency of a

company’s operations such as just-in-time (JIT) inventory systems, total quality

management (TQM), or flexible manufacturing. Although Apple could successfully

reduce its inventories in the past, it could probably even decrease its inventory stock

by moving away from buying inputs based on forecasts of future demand and

implementing JIT inventory systems instead. Nevertheless, this could also increase

the apparent threat that the company is facing in times of huge customer demand

and lead to further shortages of key component. As a result, Apple could only use JIT

inventory systems if it had the opportunity to select from a wider range of suppliers

and if it used long-term cooperative relationships to deepen the links with its key

suppliers.

In terms of the approaches that are aimed at manufacturing processes, Apple doesn’t

really have many possibilities because the situation is quite different: on the one

hand it is unclear whether Apple uses such approaches in its manufacturing facilities

and on the other hand a huge amount of Apple’s manufacturing processes are

outsourced to third-party companies.

4.9.5 Competitive advantage Concerning the four building blocks of competitive advantage, manufacturing can

improve efficiency, quality, and customer responsiveness. As a result, efficiency in

production helps a company to lower its cost structure. Similarly, the production

function can also perform its tasks in a way that is consistent with ensuring high

product quality, which leads to differentiation and lower costs.

130 Morden T. (1993), p. 184 and 186

Apple Computer Inc.


Moreover, superior efficiency can also be achieved in the field of logistics (for

example through lower inventories), resulting in significantly lower cost, thereby

creating more value. Finally, customer service can create a perception of superior

value in the minds of customers by solving customer problems and supporting

customers after they have purchased the product, thereby leading to superior

customer responsiveness.

By applying these possible sources of competitive advantage in the field of

operations and logistics to Apple, it becomes clear that the company apparently

doesn’t have a competitive advantage in terms of superior efficiency through better

manufacturing processes. Although the company has improved a lot in terms of

inventory and offers its customers the necessary support and service, these areas

are also unlikely to contribute to a competitive advantage as they apparently don’t

lead to superior value creation.

4.10 Corporate resources: Human Resource Management 4.10.1 Human resource objectives and strategies The strategy of human resource management should always recognise the critical

importance of the organisational structure and the people building it. The strategy

represents a practical response to creativity, competence, and the constraints that

employees as individuals and teams bring with them into the work situation. The

workforce is the source of all value enhancing activities in regards to quality,

efficiency, responsiveness, and innovation. Apple’s Human resource department has

formulated its objectives in the following way:

“Provide the company with the necessary personnel to assure superior performance. Employees should at all times strive for the highest quality in all they do. Ensure proactive internal career progression.”131

Apple wants to assure that by employing the best people, it will constantly be

inventing and manufacturing the best products. A recent survey carried out among

US technology professionals named their primary reason to work for Apple as being

the admiration of its products/services (45% compared to industry average of 13%).

131 Apple Computer Inc (2003)

Apple Computer Inc.


The result of this survey can be interpreted as that the human resource department

aligns its hiring policy with the overall corporate strategy and objectives, stressing the

need of retaining the position as industry leader concerning superior design and

innovation.132

Why do you want to work for Apple?

Apple All

Stability 6% 16%

Interesting/challenging work 15% 15%

Admire products/services 45% 13%

Their cutting-edge technology 15% 10%

Great benefits and perks 2% 8%

Location near my home 1% 6%

Great work environment 6% 6%

Good chance for promotion 2% 5%

Offer great training 2% 4%

Strong employee morale 3% 4%

Enjoyed previous employment there 2% 3%

Low employee turnover 1% 3%

Admire their leaders/employees 3% 2%

Friends work there 0% 2%

I'm not sure 1% 2%

Additionally as one can see in the next diagram, the growing importance of Apple’s

direct distribution channels (e.g. through online store) also affects the human

resource management, as it lays its focus stronger on hiring people for web and

interactive content (27%) compared to industry average of (10%). In this case Apple

adapted its HRM objectives in concordance with its business strategy because of a

change in external environmental forces such as consumer preferences (possibility of

customising the own PC).133

132 Techies.com (2002) 133 Techies.com (2002)

6%

15%

45%

15%

6%

13%

StabilityInteresting/challenging workAdmire products/servicesTheir cutting-edge technologyGreat work environmentOther

Apple Computer Inc.


0% 5% 10% 15% 20% 25% 30%

Other

Systemsadministration

Systemssupport/help

desk

Management

Softwaredevelopment

Web andinteractive

content

Apple All

With Apple’s statement that “The company’s success depends largely on its ability to attract and retain key personnel.” 134 Apple catapults the human resource

management function in terms of its importance from a support activity to the status

of a primary activity which is indispensable for Apple’s success. Much of the future

success of the company is linked to the continued service and availability of skilled

personnel. The ability to continue to employ experienced personnel, which especially

in the information technology industry is in high demand and competition for its

talents is intense, particularly in the Silicon Valley, where the majority of the high tech

company’s are located, is also key objective of the HRM department.

4.10.2 Human resource policies The policies should reflect the mission, values, and culture of a company. They have

a direct impact on the external perceptions about the company by the apparent

treatment of and attitude towards its staff and therefore shape the corporate image


Employer Preference by job category

Apple All

Data entry 2% 1%

Data management 1% 4%

Education 6% 2%

Engineer 1% 2%

HR 1% 0%

Management 12% 12%

Marketing/Product management 2% 1%

Networking/Telecommunications 4% 12%

Sales 1% 2%

Software development 26% 28%

Student 3% 4%

Systems administration 6% 9%

Systems support/help desk 9% 12%

Web and interactive content 27% 10%

Apple Computer Inc.


and identity. 135 A positive image then can reinforce a competitive advantage

increasing customer value, as people associate positive values with the company. 136

Apple meets this need of creating a favourable image of a company by implementing

equality of employment and promotion opportunities through partnership

arrangements around the world.

4.10.3 Human resource performance In pursuing the above mentioned objectives of getting the best employees to work for

Apple, the company has installed several measures to increase productivity as well

as effectiveness. A cornerstone in the employment relationship are the regional

partnership programs with different organisations like Skillnet in Ireland (a body

comprising both employer and employee organisations) aiming at facilitating the

mutual involvement of management and employees/unions in organisational

development.137

4.10.4 Partnership program

The first stage of this program involves the forming of a forum which has access to all

financial records of the organisation, so that on the basis of this information the forum

can formulate and initiate plans to improve and adapt to changes in the industry.

Employees have actively a say in design matters and are taking part in the resolution

of all challenges and opportunities facing Apple.

The next stage is the installation of so called change champions, who had the

responsibility to communicate and promote cooperation between both parties

(employees and manager) at Apple.

After that there follows the application of an attitude analysis. This analysis should

enable employees to express their opinions and concerns about all aspects in the

company with the aim of encouraging them to find ways to maximise their

contribution for the benefit of the company. The information collected through this

interactive approach is then used to identify aspirations for various kinds of training.

For example in Cork, Ireland this analysis found that employees have the desire to

have business awareness training and additionally highlighted the lack of effective

135 Bernardin H. J. and Russell J. E. A. (1998), p. 26f 136 Bernardin H. J. and Russell J. E. A. (1998), p. 31f 137 IBEC and ICTU (2000)

Apple Computer Inc.


communication within the plant – in other words soft skills were fairly

underdeveloped.

The result of this process is a lifelong learning, providing employees at Apple with

continued improvements of their professional as well as personal soft skills and an

added value for Apple through greater employee productivity and a reduction in all

aspects of confrontational industrial relations issues.

These partnerships are regarded as part of the internal fabric of Apple, also

successfully dealing with industry relations issues, which are jointly solved at the

shop floor level.

The function of HRM is to create an environment which fosters such partnership

agreements through:

! The establishment of trust and fairness

! Financially rewarding employees for their efforts in the partnership area

! Ensuring that employees are at all times equipped with business awareness

4.10.5 Training and Development

Apple always attempted to be exemplars of best practice in the area of Human

Resource Management and especially in the area of training and development this is

most apparent as the model of partnership agreement impressively shows. Apple

realises that their staff require skills and knowledge beyond those needed to do their

job in order to function effectively. In order to meet this self imposed requirement the

training is divided across the organisational structure into four broad categories:

Offer or efficiency programme This training aims directly at improving the efficiency of staff regardless of their

department base. Example of this type of training is the training in various Microsoft

packages.

Business driven needs training The module teaches skills and knowledge that Apple believes require in order to

progress business. An example here would be training in the e -commerce area.

Apple Computer Inc.


Personal development category The above mentioned soft skills are part of this category such as assertiveness

training.

General Awareness education This area is given top priority and therefore separated from the personal

development module. As the name already suggests, the employees should increase

their business awareness

What Apple distinguishes from other companies in this area is the additional

sophisticated evaluation process of the training , which is actually missing in a lot of

companies. The evaluation compares the objectives of the training with the learning

process that actually occurred.138 The bottom line of the training provision is a work

force that not only feels that it can effectively adapt to and adapt within an

environment that is in a constant change, but also increase their internal mobility,

giving Apple the possibility of redeploying employees.

All in all, Apple believes that through such practices employees are able to see the

big picture and make a greater contribution, having the ability to fully grasp the

business dynamics of the current business situation.

4.10.6 Staff appraisals

The objective of staff appraisals is to provide feedback to both appraiser and

appraised and to serve as formal opportunity for personal counselling and motivation.

It can also include salary reviews and allocation of merit payments. At this, staff

members are analysed in terms of objectives, tasks, and results achieved.

For the HRM department the appraisal can be seen as an opportunity to identify

individual and collective performance strengths and weaknesses, and if necessary

identifying needs to develop new skills and capabilities.

The illustration below explains how the staff appraisal system works at Apple. The

system is a key input to HRM and planning.139

138 IBEC and ICTU (2000) 139 Morden T. (1993), p. 268

Apple Computer Inc.


The benefit of having a functioning staff appraisal system in place is that it can

reliably indicate shortages of available skill and experience.140 To avoid such a skills

gap and successfully bridge this gap HRM can undertake additional recruitment.

Apple for example lacking operational efficiency was in a terrible need to hire an

expert on this particular topic, through a functioning HRM department Apple therefore

was able to win Timothy D. Cook, a highly skilled operational Manager (and Vice

president, Materials) from Compaq, one of its main competitors, 141 because of

attractive work conditions, which are embedded in the staff appraisal system. A

combination of life long learning, management development, and reward policy

convinced him to become a part of Apple’s culture.

140 Morden T. (1993), p. 269 141 http://www.apple.com/pr/bios/cook.html, 02.02.04

Staff appraisal process Comparison

THE INDIVIDUAL

The Organisation

Objectives, tasks, workflows, results actually achieved

Required results

Performance standards Appraisal criteria

Personnel policies Market position

Salary

Personnel specification

Feedback

Counselling and

motivation

Stretching

Salary progression

Training and development

Career management

Human resource planning

Job description

Apple Computer Inc.


Other advantages of the staff appraisal system include but are not limited to the

career management and recruitment and selection policy, which are part of the HRM

planning. Career Management at Apple offers promotion from within in preference to

outside recruitment, which on one side is highly acknowledged by employees and on

the other side this policy acts as signal of the company’s evident care and concern

for their staff and improves the corporate image, which eventually leads to value

creation.142

The recruitment policy is a primary example of how HRM activities adapt to changes

in the external environment. As Apple considered that it demands a higher number of

skilled staff in the area of web development and interactive content, they shifted their

application process to a large extent on the corporate website. Statistic shows that

the Web is the preferred medium for application among tech professionals.143

What is also recognisable is that Apple gives up or decreases traditional ways of job

advertising such as news paper ads in order to cut costs. Apple utilises the resources

saved on this side to create a balance between online and offline application formats.

142 Hill C. W. and Jones G. R. (2004), p. 83ff 143 Techies.com (2002)

Which jobsearch toole would you use to secure an interview with Apple?

0% 5% 10% 15% 20% 25%

Trade/career mags

Newspaper ads

Headhunters

Job fairs

Network contacts

Contact HR

Online job board

Corporate website

AllApple

Apple Computer Inc.


The corporate strategy again defines already the way Apple sets up its recruiting

events. For example Apple organises yearly events such as the Apple design awards

where the winner is automatically entitled to an internship/work position with the

company. This way Apple assures a continued flow of creative minds in their

company, who can generate a competitive advantage if the HRM activities support

them through their work life at Apple.

4.10.7 Trends

Apple heavily relies and is dependent upon the ability of hiring people committed to

excellence and the challenging aspect for the future is to keep well trained and skilled

personnel in the company, which becomes more and more difficult, as competition

increases in the industry. For example Sony’s notebooks, which have some

similarities in regards to design, were initially developed by people who Sony had

headhunted from Apple R&D department. The initiatives Apple created for its

employees must consequently be improved and it must remain a long term goal to

increase every aspect of the work experience at Apple. This indeed, requires

substantial investments and resources in order to sustain such benefits as the

partnership program.144 The existence of a positive work environment already proved

to be beneficial to Apple as they were able to stay the number one in creating

visionary products and this is only possible with the right people. For the future it will

be important to maintain and even increase the organisational competency through

HRM beyond life long learning and partnership programs – in other words, the staff

appraisal system has to be developed on a continuing basis, only then Apple will be

able to outperform its competitors with its HRM activities.

4.10.8 Competitive advantage

Analysis already showed the harmonic connection between corporate strategy and

HRM strategy, which in first place is the basis for a competitive advantage. HRM is

able to create incentives for key employees to maintain a fruitful and competitive

relationship and boost creativity, which is the key success factor for Apple, because

everything is built on this core competence. On the one hand they offer comparable

high remuneration as the following diagram shows – only 3% of possible employees

have the opinion of not being paid enough, compared to 7% industry average – and 144 IBEC and ICTU (2000)

Apple Computer Inc.


on the other hand they have an effective job recruitment system combining

recruitment events and online application services, which by far exceed content wise

the services offered by other players in the market.145

What would keep you from working for Apple?

Apple All

Too many candidates 30% 39%

No contacts there 17% 20%

I'm not qualified 17% 13%

Too far from home 23% 9%

Not enough money 3% 7%

Not a U.S. citizen 3% 4%

Don't know the business 5% 4%

Corporate culture clash 2% 3%

Non-compete agreement 0% 1%

Would have to work long

hours

1% 1%

What is also worth mentioning is that Steve Jobs as CEO has created the need of

HRM changes. Research indicates that technology oriented managers tend to place

less value on and pay little attention to HRM activities, but that’s not the case with

Apple. He was able to create a vision of the importance of HRM practices, by

emphasising that “to be the best is just good enough” and this can only be achieved

through internal activities such as life long learning and development. Apple wants to

stay the employer of choice. Also through his active involvement in staffing decisions

(he was the main initiator of Timothy D. Cook’s employment) he is able to create

support for the HRM department.146 The HRM department on its own also contributes

to an obvious competitive advantage through designing and delivering effective

programs such as the local partnership agreements and adapting itself to the

changing needs of a fast paced business. Employee productivity figures for Apple

support this view as the company is able to outperform its rivals in the industry.

145 Techies.com (2002) 146 Apple Computer Inc. (2003)

0% 10% 20% 30% 40%

Too manycandidates

No contactsthere

I'm notqualified

Too far fromhome

Not enoughmoney

Other

Apple

All

Apple Computer Inc.


Revenue per Employee (TTM) is $617,760 for Apple, 551,020 for the industry and

396,094 for the sector.147

In conclusion you can say that both the HRM department itself and the employees as

a great source of human capital contribute to the upswing Apple is currently

experiencing and therefore provide the company with a competitive advantage.

4.11 Corporate resources: Information Systems Information systems in an IT company such as Apple is definitely one of the most

interesting and important things to look at. At Apple, the information system is more

than just a business-assisting facility. What software, what applications do the

“experts” use to get their things done, to automate internal processes (supply chain)

and to provide customers with service and support by implicitly objecting to reduce

costs? Therefore an analysis of Apple Computer’s IS has to answer three main

questions:

4.11.1 What type of software and hardware is used at Apple? Due to the fact that Apple fabricates PC, Servers and the necessary, the company of

course relies on their products. Nevertheless, third-party applications gets included

where there’s no appropriate Apple software available. At the moment this means

that in general the following internal computing components exist at Apple:

Hardware

Name by Description Power Mac G5 Apple Desktop computer, equipped with a 2GHz

processor, fast 64 bit technology

Power Mac G4 Apple Desktop computer, 1.25 GHz processor

iMac (new and old) Apple Desktop computer, 1,25 GHz G4 processor

eMac Apple Desktop computer

iSight Apple Digital audio conferencing device

Xserve G5 Apple Server with single or dual 2GHz G5 processors,

huge storage, high bandwidth

Xserve RAID Apple Server with up to 3.5TB 148 storage capacity

iBook G4 Apple portable

147 http://yahoo.investor.reuters.com/MG.aspx?ticker=AAPL&target=%2fstocks%2ffinancialinfo%2fratios%2fefficiency, 14.02.04 148 Terabyte: 1 TB = 1,000 GB

Apple Computer Inc.


Power Book G4 Apple Portable with 1.33 GHz processor

23’’, 20’’, 17’’ display Apple Separate displays

AirPort Extreme Apple 54 Mbps WLAN component

Bluetooth Industry Stand. To connect periphery with main system wireless

FireWire Industry Stand. To connect periphery with main system at higher

bandwidth

USB Industry Stand. To connect periphery with main system

Software

Name by Description Power Mac G5 Apple Desktop computer, equipped with a 2GHz

processor, fast 64 bit technology

Power Mac G4 Apple Desktop computer, 1.25 GHz processor

iMac (new and old) Apple Desktop computer, 1,25 GHz G4 processor

eMac Apple Desktop computer

iSight Apple Digital audio conferencing device

Xserve G5 Apple Server with single or dual 2GHz G5 processors,

huge storage, high bandwidth

Xserve RAID Apple Server with up to 3.5TB storage capacity

iBook G4 Apple portable

Power Book G4 Apple Portable with 1.33 GHz processor

23’’, 20’’, 17’’ display Apple Separate displays

AirPort Extreme Apple 54 Mbps WLAN component

Bluetooth Industry Stand. To connect periphery with main system wireless

FireWire Industry Stand. To connect periphery with main system at higher

bandwidth

USB Industry Stand. To connect periphery with main system

Apple has begun using SAP's R/3 system as ERP system, which was aimed to

speed the filling of custom orders149. Due to high costs and the long establishment

period, SAP wasn’t a success although employing an accounting package,

manufacturing, order management, and order fulfillment.

Regarding supply-chain-planning software packages, Apple implemented i2

Technologies Inc.'s Rhythm150. The PC maker is using several Rhythm advanced

planning modules and plans to install more. Therefore, SAP is the basis, but i2 is a

key piece of what Apple does. Several other computer manufacturers apply i2, 149 Custom-order-to-delivery time could be reduced from ten to five days 150 http://www.industryweek.com/CurrentArticles/asp/articles.asp?ArticleID=497, 14.02.04

Apple Computer Inc.


including Compaq, Dell, Gateway, Acer, Hewlett-Packard, IBM, and Silicon

Graphics. Now, instead of constructing lots of computers and building up high

inventory in advance to meet estimated demand, Apple projects sales each week

and adjusts production schedules daily with Rhythm. This software also helps Apple

to integrate suppliers by asking them to maintain a certain stake of "industry

standard" parts to deliver assembled PCs quickly to the clients.

4.11.2 To what extent is the model of a virtual company achieved by Apple’s

Intranet and Extranet solutions? Intranet as well as Extranet151 play a crucial role for Apple and above all for its

business environment:

Apple Intranet and Network Apple’s main objective always was to be the innovation leader. That isn’t only valid

for its products, but also for its internal communication to demonstrate their

superiority. Therefore, Apple tries to make its business process as virtual as possible.

Virtual communities will be the lifelines of future success. As Apple knows, if a

company doesn't actively pursue involvement in a virtual community, it will not be

able to create or even maintain its competitive advantage.

The Apple-Intranet provides the cornerstone to do so. First, it increases efficiency

and reduces costs of the operations as far less employees are necessary. Data

storage, interconnected work on projects, exchange of information, and reciprocal

communication are the main obligations, but the potential is much higher. For

instance, the Intranet provides Apple employees with all necessary information right

at the desk, further, non-compulsory education opportunities, an internal and external

contact database, an overwhelming knowledge base, holiday planning-, lunch

ordering- and work-time overview tools as well as an internal recruitment process. A

company electronic notice Board to highlight key Apple news increases the corporate

identity. To put it into a nutshell, it is beneficial for company and people. The Intranet

simplified and improved training as well as skills, all in all at lower costs for Apple.

Raising the velocity and efficiency of the working progress by automating it

represents a big advantage of a functioning network policy and the Intranet as less

failures occur and less money and time is wasted. For example, when Apple plans a 151 Networks connecting Apple with outside developers or suppliers; different to Internet

Apple Computer Inc.


PC, how can communication between two involved parties be better arranged than

by transferring building-plans and component descriptions via a network.

Nevertheless, a too uncontrolled level of virtuality and interconnectiveness can result

in severe problems and huge bureaucratic impediments as anonymity is increased,

e.g. sending tons of unnecessary emails to colleagues (and thereby making costs)

becomes more likely.

By intensively re-enforcing this development and by permanently eliminating or

minimising disadvantages within the company, Apple already makes a big step

towards competitive advantage.

Apple Extranet For suppliers, special key account clients or developers of Mac-software Apple has

introduced a term called the Extranet. This means that these groups can work,

communicate, and exchange information/data with Apple on a customised basis.

Individualised content of special websites that neither permits these mentioned

stakeholders access to the Intranet nor are the same as basic Internet websites, the

Extranet lies in between the two well-known components. A major fact that Apple

wanted to get use of is the chance to treat special groups on a personalised basis by

preventing cost accruals. Notwithstanding, this idea has been pursued by Apple and

results in higher sales, increased productivity, and much more accurate (concerning

quality and time) outcomes in form of products.

4.11.3 How do Apple’s internet solutions assist in generating a competitive advantage?

Apple’s approach to the Internet is to work as and to be an active member of the

Internet community, supporting the existing open standards and working with Internet

standards organisations. Furthermore, Apple starts to follow a new clear concept

called Utility Computing 152, implied from performance. This model refers to the fact

that a “ubiquitous” IT infrastructure will deliver all our computing needs. We would

own far less computing assets than we do now but are instead willing to pay for

access to services used which will be offered by "utility computing." Computing

becomes a utility similar to electricity or fuel. In this context we can see Apple’s new

online product strategy comprising iTunes which will be mentioned below. The 152 http://www.utilitycomputing.com, 12.02.04

Apple Computer Inc.


ramifications for the IT sector are enormous. The ability to flexibly up- or downscale

to meet demand will have a revolutionary affect on companies and on their strategy

formulation, above all in the way they provide online contents. The concept will also

be applied to individual users of computing where they will be offered packages like

satellite television services today. At present, the infrastructure required to deliver

that reality is beginning to be put into place by leading Apple and IBM as the high

number of contract manufacturing and outsourcing not only in the IT world portrays.

Internet services Apple has been an active member of

the Internet community for years, with

an FTP site that provided Apple

software updates and versions of the

Macintosh system software (up to

version 7.0.1). More recently, Apple

has added numerous other FTP sites

that carry a full complement of Apple’s

freely distributable software and

updates. Of these, http://www.support.apple.com and http://www.info.apple.com have

become an important way of providing updates to the global Macintosh community,

serving hundreds of thousands of Macintosh systems.

Apple has a number of web-servers, all collected under the main server at

http://www.apple.com. These servers help to distribute information about Apple,

provide searchable access to the Apple Technical Information Library, and offer

detailed product information for current and future customers. Apple continues to

create new Internet resources, such as mailing lists that distribute Apple press

releases to interested parties, discussions about Internet client and server programs

for the Macintosh, and support for Apple products such as the Macintosh Application

Environment. In the future, Apple plans to create even more avenues of

communication between the company and customers to provide better on-line

support and to take advantage of the direct customer feedback that results from such

open lines of communication.

In detail, there’s to say that Apple provides a wide range of internet based services

for its customers and the public (Service & Support, Corporate/Investor information,

Apple Computer Inc.


Products, Learning/Training centres), has entirely increased its direct PC selling

activities via the web, especially via Apple Store (which make them a serious rival of

record-breaking Dell in this area), offers its online contents (i.e. iTunes) there and

uses the corporate internet platform for marketing and human resource management

efforts. Additionally, Apple attracts independent Macintosh developers outside the

company to bring the Mac technology forward, both giving the possibility to make

suggestions or write programs. These developers, hailing from such educational

institutions as Dartmouth College or Cornell University place simple graphical

interfaces on top of the standard protocols. Much of Apple’s strength in the internet

today results from these third-party developers who have combined forces to create

one of the most extensive internet toolsets available today. By seeding higher

education with inexpensive licenses for MacTCP, and continuing to provide

development assistance, Apple has cultivated these developers even though their

programs are often available only as freeware or shareware.

Homepage analysis At http://www.apple.com we can find Apple’s homepage containing these inputs

linking the visitor to the company’s other internet portals

(http://www.applestore.com; country websites). As expected, Apple presents itself

online with a clear structure, easy handling, thorough information and strong colours

which all goes along their self-required innovation leadership. Pillars of the website

are the following:

! General Apple information: Investor, Careers, PR, Contacts, FAQs

! Group of links

! News & Events

! Products: Hard- and software, periphery

! Apple Store: Direct selling platform

! Developers’ site

! Switch: Incentives to and problem solving for switching from a PC to a Mac

! Online contents: Music portal iTunes, combined with iPod

! Digital Production

! Quicktime product series: Multimedia applications

! Services & Support

! Apple learning & training interchange: Online learning platform

Apple Computer Inc.


Apple’s e-commerce in B2B and B2C relationships The onset of the e-commerce revolution can be dated back to the late 1970's, but the

real growth in this market can be mapped directly to the last five years due to the

increase in internet usage by 3,000% and the doubling of PC ownership. In order to

maintain or achieve a competitive edge within the IT market a company like Apple

must actively pursue e-commerce, especially via the Internet. Apple legitimately

argues that simply holding an internet website is far too less. As Apple has shown its

commitment to the implications of virtual institutions , the company stresses a

shopping site with its e-commerce strategy via Apple Store (fourth model of e-

commerce strategies; besides there are contextual selling, specialised malls, portals,

and virtual communities)153. This site dedicates itself to one brand (Apple). It focuses

on serving as a communication medium between the customer and the company. It

allows the company to control the shopping experience and build a brand. But the

site can be extremely expensive to set up, maintain, and manage. The company also

must make efforts to drive traffic to the site.

Overall we can observe that Apple has a competitive advantage compared to other

industry participants. This competitive advantage comes from the company’s

innovation leadership (new concepts and trends in both, products and processes)

which can help Apple to stay ahead of competitors and therefore maintain a higher

profitability than the market in the future. IS strengthens Apple’s strategies and is a

decisive part by not only staying a “supporting activity”, but also by actively exploring

new business areas. This is due to IS managers that implement the necessary

technology well, diminish restrictions in the data/information flow (also to outside

developers) and intensively use of the “New Media” such as the web to make profit.

Nevertheless, Apple constantly increases its “exposure” to the entertainment sector

(eg. iTunes, iPod), but doesn’t seem to be adequately prepared in bundling all these

efforts to create an overall platform for that.

153 Gupta P. and Ryan J. (2000)

Apple Computer Inc.


4.12 Summary of internal factors 4.12.1 Core competencies and distinctive competencies

A company’s core competencies describe something that a company does best

internally. In the case of Apple, this includes the following competencies:

! innovation and engineering excellence: technological development and inventions

! creativity and design: high-end marketing, product design

! HRM policy: HRM department and employees contribute effectively to company’s success

When core competencies constitute aspects that a company also does well

compared to its competitors, they become distinctive competencies – firm specific

strengths that allow a company to differentiate and/or lower costs. As we can see in

the above illustration, these stem from the company’s resources and capabilities and

shape its strategies, ultimately leading to a competitive advantage and resulting in

superior profitability. So, the following resources and capabilities can be regarded as

Apple’s distinctive competencies:

! human resources:

highly skilled workforce (soft skills, experience, knowledge, initiative, etc.)

! technological resources:

superior information technology (intranet, extranet)

Resources

Distinctive Competencies

Capabilites

Strategies Competitive Advantage

Superior Profitability

Build

Build

Shape

Apple Computer Inc.


! engineering and technical development capabilities:

short product-to-market cycles and innovation/functionality of products

! creativity capabilities:

design of hardware, software, etc.

In fact, Apple’s engineering and technical development capabilities as well as its

creativity capabilities are most the important factors at the present time as the whole

personal computer industry is in a period of change where innovative and creative

products that possess entertainment characteristics are attracting more and more

customers. Moreover, Apple’s engineering and technical development capabilities

will definitely be the most important distinctive competencies in the future as superior

innovation is the most important source of competitive advantage in the long run.

4.12.2 Internal Factor Analysis Summary (IFAS) The Internal Factor Analysis Summary (IFAS) combines Apple’s main strengths and

weaknesses, gives them a short comment (rational use), a weight (0-100 each,

overall sum of 100) and a rating (from 5 = very significant to 1 = not really significant)

and calculating the resulting weighted score. Internal factors Weight Rating Weighted

score Comments

Strenghts

Coherent strategy 3 4 12 Strategy clearly stated and understood,

coherent strategy, consistency with

corporate structure and culture

Creativity & design 13 15 65 Regarding PC not just as commodity but as

premium product (aesthetics, lifestyle)

Innovation 16 5 80 Famous for technical revolutions, inventions

and development, engineering excellence

Entertainment

capabilities

2 4 8 Pioneer through digital hub strategy, unique

products (iPod, iLife, iTunes, etc.)

User-friendly

business approach

and products

6 3 18 Aware of having “best customers”, intuitive

ease of use, advanced graphics capabilities

and special design features

Wide range of skills

and capabilities

1 2 2 Producing whole range of products

(hardware, software, peripherals, etc.)

Marketing skills 5 3 15 High-end marketing, combining online and

retail channels, strong brand name/loyalty

Apple Computer Inc.


Adaptive culture 3 3 9 Encouraging innovation, initiative, autonomy,

discussion, and entrepreneurship by

decentralising authority/responsibility

Workforce 9 4 36 Strong HRM-department, high employee

skills and productivity

Information

technology

4 4 16 Leader in terms of internal communication,

internet-based services for consumers etc.

Weaknesses

Business

execution,

commercialisation

5 4 20 Difficulties in turning inventions into real

money, not enough focus on innovation of

business models

Lack of critical size 4 3 12 Difficulties in maintaining profitability due to

low overall PC market share

Incompatibility 11 4 44 Incompatibility with Wintel-standard deters

customers and PC-producers

High hardware and

software costs

2 3 6 Higher prices for Apple products than for

comparable products

Lack of realism 3 1 3 Creation of “reality-distortion-field”,

inconsistency with economic reality

High operating

costs

8 4 32 High costs for marketing (retail stores), R&D,

and production (unique components)

Low number of

developers

2 2 4 300,000 independent or in-house developers

compared to 7 million Windows developers

Dependence on

key suppliers and

manufacturers

2 3 6 Key components from single or limited

sources, problems in coping with high

customer demand (contract manufacturers)

No high degree of

specialisation

1 2 2 High competition at many fronts, threatening

and competing with own developers/partners

Total 100

Apple Computer Inc.


5 External environment “Foolproof, invisible and everywhere”154 – this is how the chief executives of the PC

market’s big players are describing the promising future of computing. “Clearly,

something monumental must be going on in the world of computing for the

technology titans to discover something that is so profound and yet so hard to name”

argues The Economist. The future of the PC industry is predicted to be glamorous,

but what about its present situation and what are the implications for Apple as vibrant

part of this sector.

5.1 Overview – The uniqueness of the Macintosh If analysing Apple in its external environment we are confronted with one significant

difficulty – the definition of the market or the markets Apple is engaged in. It can be

observed that Apple is in an exclusive position. No other company in the computing

sector than Apple has survived producing both, hardware and software. Thus, Apple

can’t and shouldn’t be analysed only as a PC manufacturing enterprise, but also as

software programmer, server producer, peripherals fabricator, and online content

provider.

Nevertheless, there is to admit that PC market still remains Apple’s “cash cow“ and

consequently the company’s prime sector by contributing up to 70% of consolidated

revenues through the Macintosh product line. Additionally, several other Apple

products (software like the operating systems, servers, divers applications) are

ultimately linked to the Mac which makes more or less useless without the Apple PC.

Therefore, the company’s public entitlement as PC manufacturer is adequate and

lets us focus on the PC market. Moreover, an analysis of Apple’s second business

market, represented by its pillar of online content / digital music industry, will also be

carried out.

5.2 The PC market – an in-depth analysis155 5.2.1 Status quo Apple is confronted by aggressive competition in the market for the design,

manufacture, and sale of personal computers. This market continues to be

154 The Economist (2004) 155 see: Bibliography – Annual Reports of Dell Inc., International Business Machines, Hewlett Packard Compaq, Gateway

Apple Computer Inc.


characterised by rapid technological advances in both hardware and software

development which have substantially increased the capabilities and applications of

these products. Additionally, this progress has resulted in the frequent introduction of

new products and significant p rice features as well as performance competition. Over

the past several years, price competition in the market for personal computers has

been particularly intense. Apple’s competitors who sell personal computers based on

other OS, above all Microsoft’s Windows have aggressively cut prices and lowered

their product margins to gain or maintain market share. This intending “predatory”

pricing led to adverse affects on Apple’s performance ratios, but also put industry-

wide downward pressures on gross margins. This development (to the benefit of the

consumer) is forecasted to continue in the future.

Further, as the PC industry and its customers acknowledge the importance of the

internet, an increasing number of smaller, simpler, but less expensive online devices

may compete for market share with the Apple’s existing products (e.g. Apple’s iChat

against ICQ, Yahoo Messenger). Hence, Apple takes steps to oppose these

competitive pressures by innovating in competing platforms. Its forthcoming results

are substantially relying on its ability to continue to develop improvements to the

Macintosh itself in order to protect perceived advantages in function and design.

5.2.2 Defining the sector, industry and market segments

By serving the same customer base, their needs and demands (i.e. computing

devices for businesses and individuals) as its competitors such as Dell, HP Compaq

(merger between Hewlett Packard & Compaq in 2001), IBM or Gateway, Apple finds

itself in the sector of computing and in the industries of computer hardware which

consist of the mainframe, the handheld and the personal computer sub-industry and

which is supported by its neighbouring industries of computer software and computer

components. Market segments of Apple are therefore portable/notebook PC,

Desktop PC and Server. Notwithstanding these definitions business boundaries and

limits have to be considered flexible and transforming due to changes in client

preferences, time and technologies.

Apple Computer Inc.


5.2.3 Porter’s five forces Analysis The primary competitive factors in the market for personal computers include the

subsequent:

! Relative price to performance

! Product quality and reliability

! Design-innovation

! Availability of software and other applications

! Product features such as high speed microprocessor

! Marketing and distribution capability

! Service and support

! Availability of hardware peripherals

! Corporate reputation

Computer Sector

Computer Hardware industry

Computer software industry

Computer Component Industry

Disk drive industry

Semiconductor Industry

Modem Industry

Mainframe Industry

Personal Computer Industry

Handheld computer Industry

Notebook PC market segment

Industry Desktop PC

market segment Industry Server

market segment Industry

Supply Inputs

Provides complements

Apple Computer Inc.


Therefore, Michael Porter’s five forces model has to be applied to identify and

emphasise possible opportunities and impending threats:

Risk of entry by potential competitors From a macroeconomic viewpoint, potential competitors are willing to enter a market

if short term prices don’t equal marginal costs by taking away market share from the

established companies. Although high levels of competition among the existing

producers can be observed in the PC industry, gaining access to the market isn’t

easy and thus unlikely. This seems to make the PC market an outstanding one as

low market entry risk is – though contradicting theory – associated with vivid

competition and tough price wars. The detailed reasons for that show up in the

barriers to entry of an industry. The PC market doesn’t have a high level of brand

loyalty which implies that certain products aren’t more preferred by consumers due to

high standardisation, low patent protection, diminishing brand advertising efforts and

lower product quality. This argument isn’t valid for Apple where brand loyalty always

played an important role. Apple achieves this brand loyalty through profound R&D

and an emphasis on product innovation.

Regarding cost advantages Apple’s situation behaves in line with the PC market’s.

For possible competitors it’s hard to enter as cost to do so are high. Existing market

Threat of new entrants

Bargaining power of

Threat of substitute products or services

Bargaining power of suppliers

SUPPLIERS

SUBSTITUTES

BUYERS

POTENTIAL ENTRANTS

INDUSTRY COMPETITORS

Rivalry Among Existing Firms

Apple Computer Inc.


participants already manage their production operations and processes superior (e.g.

Dell’s supply chain management, capital intensive PC production market), control

particular necessary inputs (e.g. although qualified graduates are available on a

constant basis the outstanding engineers and product designer are already employed

by the existing companies) and are in a financially sound position (e.g. cheap fund

raising). These elevated cost advantages make it very hard and even unprofitable to

enter.

Economies of scale provide the small number of dominating PC companies with

another barrier to entry against the outside rivals. Dell and Co. are able to drive down

costs by mass production of standardised goods (i.e. computer components merely

are identical, even if customers are ordering different PC variations) and resource

cheaply through increased parts’ purchasing. Furthermore, spreading overheads,

marketing and advertising expenses as well as fixed costs over large fabrication

volumes enhances the advantageous constellation for existing PC manufacturers.

Entrants can therefore either explore the market on a small size by facing these

economies of scale or bear the financial risks if moving in largely.

As far as the issue of customer switching costs is concerned, the situation in terms of

barriers to entry proves to be a mixed one. As they are mainly associated with

software, PC hardware producers can’t sustain their superior position if new

competitors also use – for instance – the Wintel standard. If this doesn’t hold and –

as Apple’s position demonstrates – it’s prevented that PC hardware manufacturing

entrants use the same software items, existing market participants maintain their

competitive advantage. Switching costs are kept up and arising “lock-in and network

effects” make consumers less probable to purchase another PC offering different

software. In addition to this, preservation of business for the existing enterprises

occurs when their hardware has special features.

In a more political context, government’s regulations and restrictions can hinder or

force the existence of barriers to entry. In Apple’s and its industry’s example where

the majority of companies operates on a global basis governments’ interference

plays an important role but didn’t have much influence in the last years.

Rivalry among established companies As there was already stated, the PC industry is a highly competitive one. This means

that rivalry is established at an increased level which is expressed by aggressive

Apple Computer Inc.


pricing policies, profound product design and innovation ambitions (e.g. Apple’s

major efforts), intensive marketing, online direct selling (e.g. Dell and Apple), holistic

support and after-sale services. All this shows that profitability isn’t an easy goal to

reach in the PC market as all its participants are applying ambitious cost as well as

price structures.

Regarding the industry competitive structure the PC sector is a consolidated industry

being dominated by only a small number of large companies. Nevertheless, it can’t

be compared to an oligopoly due to the market’s soared competition. Interdependent

companies whose strategies and actions have direct effects on market share and

profitability of the other industry participants often end up in finding themselves in so

called “competitive spirals” 156. In the PC market, this proves to be valid as an –

especially for high-end manufacturers like Apple – dangerous downward spiral came

into existence. Although Apple never intended to follow the dominant industry

company in terms of price, this often occurs by establishing an oligopoly.

Moreover, the rivalry of the personal computer market is determined by the industry

demand which is currently positioned at a very high level. Favourably for all the

market participants it implies that from this point of view there’s less rivalry due to a

large number of spending buyers, visualised by the industry life cycle.

The PC industry’s exit barriers can be tremendous. An economic dependence on one

specific industry which imposes huge risk if the entire sector goes bust exists in a

considerable amount of companies. Emotional factors that prevent executives to

leave a falling market appear for instance in Apple’ case (i.e. CEO Steve Jobs

sentiments as being one of the co-founders). The fact was argued that computer

manufacturing is capital intensive which builds up impediments for exit strategies.

This shows up in the number of assembly plants and manufacturing utilities,

necessary for PC companies.

The bargaining power of buyers A moderate industry demand and lots of small buyers result in a rather low

bargaining power of purchaser in the current PC market. This means that buyers

aren’t in the position to force companies to charge lower prices on the goods sold

and therefore don’t make the impression of being a threat to them. Furthermore, in

an industry of high switching costs for consumers, above all if software and – to a 156 Hill C. W. and Jones G. R. (2004), p. 45

Apple Computer Inc.


narrower extent – if hardware is concerned157, consumer fluctuation is low. Client

play offs of industry participants become obsolete and barriers to entry prevent them

from producing their desired good themselves. This fact implies that buyers can’t

obtain bargaining power in the PC market once more. Interestingly, suppliers always

move in the opposite direction which would leave them with huge bargaining power,

as is discussed next.

The bargaining power of suppliers In the PC industry, Porter’s fourth force states that the bargaining power of suppliers

is a stringent one which imposes a threat (e.g. risk to Apple and the entire market.

Although it doesn’t seem that they are providing low quality items, companies such

as Intel, Motorola or IBM (when only looking at microprocessor producers) possess

the ability to “squeeze out every drop” from the PC industry at the industry’s current

stage. These enterprises fulfil all necessary criteria for obtaining the bargain power

by selling products without real substitutes, by having a diversified operations

portfolio that assures their non-reliance on a specific sector and by exercising real

dominance on the PC industry. Apple and its rivals would often face high switching

costs themselves when changing to another supplier. For instance, if Apple quits its

contract with Motorola and integrates new Intel microprocessors in its devices this will

adversely affect Apple’s position as a whole production process including customers’

preferences for the Mac will change. Nevertheless, there’s to admit that this powerful

position is only accessible for key component producers, not for all of them.

Substitute products A considerable amount of substitute products threatens Apple’s market situation as

consumers easily can switch from one device to another. In spite of this, Apple

persists to differentiate itself with their Mac computer series from the common PC

market and therefore the company isn’t as directly affected as Dell, HP Compaq or

IBM.

As theory taught us, Porter’s model is often amended with an additional sixth one

and even seventh force. The first one defines complementors as value-adding

institutions for specific products. In the PC industry these complementors can be

found in form of software companies. A personal computer being equipped with, for 157 see above: barriers to entry – customer switching costs

Apple Computer Inc.


instance Corel Graphics (Draw 11.0, PhotoPaint 11.0) and MS Project 03, will

definitely sell better than one, just containing MS Office XP. For Apple these

complementors are also represented by third-party software developers who are

mostly independent freelancers or students and amount much less than “Wintel

standard” program writers.

The latter force tries to measure the relative power of unions, governments and

special interest groups (i.e. stakeholders) who exert their individual interests on

Apple.

5.2.4 Strategic Group Analysis

As the above diagram shows Apple Computer is situated in its own strategic group

within the PC industry, implying high R&D expenses by at the same time charging a

premium price for its products. This isn’t anything new or surprising as there was

already defined that first, Apple obtains innovation leadership and therefore is part of

that top-right bubble and second, Apple is difficult to properly integrate in one of the

dominating three big computing industries. The company’s individual status within the

PC market therefore is derived from Apple’s intention to focus on the “exclusive”

R & D Spending

Pri

ces C

harg

ed

Premium Group (Innovation)

Apple

Commodity Group Dell, Gateway, HP/Compaq

High Low Low

High

Apple Computer Inc.


high-end premium PC market by “flooding” customers with their own products, but by

still monitoring accurately its profitability. As there is no other company pursuing a

similar positioning strategy or can be located in Apple’s strategic group, “real” 158

direct substitutes become obsolete. Furthermore, within its industry, Apple is

confronted with overall the same, but in detail totally different opportunities and

threats.

As a result, Apple doesn’t want to adjust their strategic position in the matrix as it

doesn’t desire to move into another strategic group. The company’s only objective is

to maintain R&D and thereby keep up innovation and the same prices charged.

5.2.5 Industry Life Cycle Analysis

As any other industry, personal computing also is dependent on evolutions and

dynamics in its industry over time. These may alter strategic groups, change the

impact of competitive forces and incite task managers as well as executives to

properly define and evaluate the industry they are in. Moreover, they may be able to 158 As stated above “Wintel standard” substitutes are a danger for Apple, although there can’t be identified real substitutes for Apple which entirely fit the Mac’s profile or satisfy identical customer needs/groups;

Growth

Embryonic

Shak

eout

Mature

Decline

Dem

and

PC

Industry

Time

Apple Computer Inc.


estimate implications for their company and products by applying tools as the

industry life cycle. The above chart illustrates that the PC industry can still be

attributed to the mature stage market at the moment. Therefore, observations

consider the market as saturated with moderate, but already stagnating demand

(mainly replacement). In addition, the PC industry shows high barriers to entry at this

stage with a low number of potential competitors being able to enter, respectively

penetrate it.

As high growth rates can’t be sustained, competition among Apple’s main rivals such

as Dell, IBM, Gateway and HP Compaq has become aggressive. Consequently,

price wars will stay ahead resulting in company’s cost reductions and the build -up of

brand loyalty. All these developments also are appropriate for Apple Computer within

this mature industry. The company could already build up its strong brand loyalty, but

is currently working on its high cost structure to become a vibrant candidate for

survival in declining times.159 Despite normal developments where a mature stage

infers oligopolies, the PC industry is different. Due to extreme price reductions by Dell

Inc. mergers such as the one between HP and Compaq as well as business

restructuring efforts among all market participants evolved.

Nevertheless, the industry’s development shouldn’t determine the company’s profiles

too much and innovation – as a major key success factor (KSF) – will become more

and more crucial in reaching profitability and optimising business operations as the

case of Apple Computer exemplifies thoroughly.

159 see: Strategic Advice – Chapter 12

Apple Computer Inc.


5.2.6 The Macro-Environment

In addition to the industry also the macroenvironment of a sector influences the

companies and their ways of doing business. The local key factors like customers,

competitors, suppliers, creditors, labour unions, governments, trade associations,

interest groups, local communities, and shareholders can be located within the

immediate environment of the company. In the PC industry, the factors influencing

the market participants aren’t the same globally although the geographic markets,

most of them are operating in, seem to be merely the same. Nevertheless, these

determinants vary from country to country. Therefore, the subsequent main

macroeconomic forces exist:

Economic Forces These forces affect the PC industry in determining the general overall global

economic circumstances such as global sales and demand that play an important

role in the daily PC industry.

Technological Forces Innovation, new trends in technology and computing form the basis for the PC

industry and above all for Apple to outperform competitors.

Potential competitors

Substitutes

Supplier power

Buyer Power Rivalry

Political and Legal Environment

Technological Environment

Social Environment

Demogrphic Environment

Macroeconomic Environment

Apple Computer Inc.


Demographic Forces and Social Forces The PC industry tends to shift its focus from business, professionals and home users

to also explore new customer groups such as retired persons as potential, wealthy

future clients.

Political and Legal Forces Governments provide the basic legal regulations and restrictions that influence the

PC in producing and selling personal computers.

Global Environment As globalisation is optimising the possibility to expand abroad to attract new

customer groups this environment gets used by an increasing number of market

participants.

National Environment The PC market is already acting on a very global level. In spite of this, a national

competitive advantage can still be encountered, especially in the US, as the national

context of IT leadership helps the industry and Apple in achieving a competitive

advantage in the global marketplace by for instance attracting highly skilled

professionals.

5.3 External analysis of software and peripherals market Apple has a much more difficult task to accomplish than the majority of its

competitors, who operate mainly in one single industry or industry segment. The

external analysis of the computer industry and the PC market in particular showed

already the immense difficulty to survive in such a fast paced and changing

environment. To add to the complexity of Steve Jobs’ job, Apple endeavours to

diversify its operations by entering into the digital music market, as part of its digital

hub strategy. The launch of its music store and the equally named music jukebox

iTunes marked an ambitious strategy to become the primary digital music provider in

the industry. To understand what environmental forces actually drive this industry we

first have to define what the industry itself is160.

160 Hill C. W. and Jones G. R. (2004), p. 39

Apple Computer Inc.


5.3.1 Software industry

From the illustration we can conclude that although related to its core business area

the PC industry, Apple operates with its online music store within a market segment

of a different industry, namely the computer software industry. Apple produces a

variety of software applications which are mainly targeted at the creative

professionals community and is also active in internet software and services, as it

recently has developed its own web browser “Safari”. Moreover, with the Mac OS X it

competes on the operating system market against Microsoft and Linux. Last but not

least there are several applications designed for consumers such as the iTunes

music store and the iLife package, which includes iTunes, iPhoto, iMovie, and

iDVD.161 The reasons for the analysis of the external environment of the digital music

market and therefore illumina te only one particular aspect of the software products,

are that at all the others, competition is not as intensive as in the digital music market.

Also the other software applications don’t contribute as much to the revenues as the

iTunes software does, which makes it a liable choice.


COMPUTER SECTOR

Computer Hardware industry

Computer software industry

Computer Component Industry

Disk drive industry

Semiconductor Industry

Modem Industry

Operating System Industry

application software Industry

web services/software

Industry

desktop publishing software Industry

digital art/entertainment software

business office software

Supply Inputs

Provides complements

Apple Computer Inc.


Competitive forces driving the digital music market First, it is vital to assess the market’s growth potential, because this potential

determines the nature of the game to be played. A double digit growth rate in the

digital music market present substantial opportunities for existing players, but also

attracts new competitors162.

Risk of entry by potential competitors The barriers to entry are very low as on the one side capital requirements are limited,

brand loyalty is low and economies of scale virtually don’t exist. 163 Especially the

disloyalty of young customers has to be managed effectively in order to create what

Apple has been able to do in the PC market164: Having the best (loyal) customers a

company can dream of. Nevertheless there are two significant aspect in terms of

barriers to entry.

One is the networking effect, which means that the more people use one platform the

more popular it gets and increased demand will drive up the amount of available

songs. Also, as the CEO of Apple points out that music artists themselves prefer to

work with Apple and why then not provide their songs and albums on an Apple

platform?

The second barrier is the cooperation with music labels, which provide the essential

song material for the online music stores. Nobody except Apple has succeeded to

win all five major music labels for its operations (Bertelsmann AG's BMG, EMI Group

Plc, AOL Time Warner Inc., Vivendi Universal, and Sony Corp.).165 Once again Mr

Jobs was smart enough to do something that was beneficial to the music industry in

creating a paid environment that protects their interests. “He's pretty much golden in

terms of getting deals with the labels,” said Tim Bajarin, CEO of consultancy Creative

Strategies. 166

Rivalry among established companies In general, the rule suggests that the more competitors the more rivalry and so it is in

this market. There has been a constant increase of small competitors on national

levels all trying to take market share away in this multibillion music online market. 162 http://www.siliconvalley.com/mld/siliconvalley/news/editorial/3856253.htm?template=contentModules/print story.jsp, 11.02.04 163 Morden T. (1993), p. 123ff 164 Lopez J. M. (2003) 165 http://www.siliconvalley.com/mld/siliconvalley/news/editorial/3856253.htm?template=contentModules/print story.jsp, 11.02.04 166 BusinessWeek (2004b)

Apple Computer Inc.


Jupiter Media forecasts a market worth $5.2 billion by 2007167 – who wouldn’t be

eager to get a slice of such a big pie? The industry is fragmented, still with a few

major players such as Apple , Napster II, and Rapsody dominating the market, but as

the product (song) is a commodity type of good and barriers to entry are not high,

competition will increase over the next years, as companies start to realise that there

is a high demand for legal online music downloads. The fact that demand is still

growing rapidly tends to moderate the competition as gaining market share doesn’t

automatically mean that this gain is at the expense of another player. Actually Apple

captures about 20% of the pay per download online music market.168 The last point

to consider are the barriers to exit, which would intensify rivalry if existing. As

previously stated as there are no significant investments and fixed costs can

consequently be kept at a minimum, quitting the business in the digital music market

is not exactly what one would define as difficult.

Bargaining power of Buyers The existence of huge illegal music download communities with file sharing networks

such as Shareman networks with their file sharing tool “Kazaa”, the branch leader in

terms of users (on average over 4 million users online)169, the legal digital music

market can be glad to exist in first place. This immediate threat can be seen as

bargaining power of the buyers and constraints competitors in their pricing options as

the switching costs to either other players or the illegal music download scene are

practically non existing. This situation is less advantageous for Apple and other

suppliers of online music content as they are forced to keep prices low resulting in

low profit margins. This competiti ve picture of the industry leads to the conclusion of

various analysts that in this industry there is no money to make at all, even if you are

a big fish like Apple.

Bargaining power of Suppliers This is the flip side of the assessment of the bargaining power of buyers. As the

buyers can influence prices and marketing costs, so do the suppliers influence the

production costs.170 In this industry production costs basically equal the costs of

167 http://www.pcworld.com/news/article/0,aid,102516,tk,dn070802X,00.asp, 04.02.02 168 Baltimore Sun (2003) 169 http://www.kazaa.com, 01.02.04 170 Morden T. (1993), p. 18f

Apple Computer Inc.


“buying” the songs from the music labels through contracts. Disadvantage for Apple

in this field is the presence of only a handful big and important music labels on the

world. Suppliers, aware of this situation, try to exploit that by maximising profits and

cut good deals for themselves.171 Fortunately the illegal music download business is

working against the supplier, therefore limiting their power to a certain extent. The

music labels can either choose to insist on high profit contracts with legal online

music stores, which inevitably would lead to an increase of prices, because Apple

and other competitors would be forced to pass on these increased costs and

subsequently risk that customers would turn to illegal services or music labels could

charge lower prices (lower profit contracts) and this way ensure that they at least will

counteract the trend to illegal music sharing and capture still decent profits.

Pressure from substitute products If products of different businesses or industries can basically satisfy the same

customer needs, then the pressure from substitute products is considered to be

high.172 Although the market for online music is predicted to rise in an exorbitant

manner, there is still the traditional music industry with its retail channels selling CDs,

music DVDs, and minidisks. In numbers this means that for a 4month period from

July to October 2003 7.7 million digital tracks were recorded as sold, compared to

only 4 million physical units of CD singles. 173 Consumer preferences can change

especially in high tech markets, as history has frequently shown. The music cassette

has been replaced by the CD and so can new products hit the online music industry

from its blind side and substituting them. Currently the threat of substitute products

can be rather neglected as technological innovation is not likely to produce big

changes in the near future, but Apple has to be aware that the external environment

can change rapidly to the disfavour of Apple.

Strategic group analysis The online downloadable music industry is a very homogenous industry, expected to

undergo further harmonisation, as music labels will learn to fulfil consumer demands

in the next few years, forecasting that by 2005 labels will endorse a standard

171 http://www.siliconvalley.com/mld/siliconvalley/news/editorial/3856253.htm?template=contentModules/print story.jsp, 11.02.04 172 Hill C. W. and Jones G. R. (2004), p. 48f 173 http://www.internetnews.com/ec-news/print.php/3286881, 04.04.02

Apple Computer Inc.


download contract on equal terms to all distributors such as Apple’s iTunes store.174

As a result there are no major differences between competitors, the only thing which

seems to distinguish them at the moment is the payment method. Apple as opposed

to other key competitors such as Rhapsody doesn’t rely on subscription services but

rather provides the customer with a pay as you download principle. Internet users,

especially the younger ones, are as previously mentioned extremely disloyal. They

are not prepared to acquire a monthly commitment nor to pay in advance for a

service that, most times, imposes more restrictions and offers less options than free

services. Reports show that surfers prefer to pay per download rather than to have a

monthly subscription and Apple’s experience corroborates that.175

iTunes Napster 2 (roxio) BuyMusic.com Rhapsody Audio Lunchbox

Song library size

400,000 +500,000 +315,000 +300,000 +40,000+ from

Indep. Artists

Pricing $0.99 per song

$9.99/album

$0.99 per song

$9.95/album

$9.95/month unlimited

access

$0.79 for limited

songs, $0.99/song

$9.95/month

subscription,

$0.79/song to burn

on CD

$0.99 per song

$9.99/album

Song formats

AAC, MP3 MP3 MP3 MP3 MP3, AAC, Oggs

Complem. Products

iPod, other portable

devices

All portable devices

Online Community

Limited portables,

Windows media 8

for DRM, no iPod

support

None None

System Limitations

none Downloads in Windows

Media File format will

not work with iPods

Downloaded tunes tied

to one computer

IE5.0 on Windows

only

Windows only

Cannot transfer to

portables directly

Mainstream record

label offerings not

available

Other services

*Allowance accounts

*Gift Certificates

*CD burning

*Smart playlists

*Sync iPods

*Exclusive tracks

*Videos*Audiobooks

*Share playlists

*Email songs

*Online magazine

*billboard charts *music

videos

*share playlists

*Unused credits do

not carry over

*Pricing scheme

may vary by

distributor

*complex pricing

*Free of DRM

*Plans for lyric

download

174 http://www.siliconvalley.com/mld/siliconvalley/news/editorial/3856253.htm?template=contentModules/print story.jsp, 11.02.04 175 Cheng L. and Devgan A. (2003)

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Industry life cycle

The economic downturn during 2001 has also afflicted the still-nascent digital music

industry. Growth projections had been revised and successful entrance or even

penetration of the digital music industry has been proved to be more difficult as

imagined. In 2001, industry backed subscription services Musicnet and Pressplay

discussed prelaunch plans and Napster with a new CEO hailed Napster as a brand

that “cannot be killed”. One and a half years later the situation looks completely

different. Napster is bankrupt (mainly because it was not paying royalties to the

troubled record industry) and Musicnet and Pressplay are struggling to draw

customers to their limited services.176

After sluggish sales in the past two years demand begins to take off, moving the

industry from embryonic to growth stage. Predictions say that the digital music

download service in Europe will be worth an impressive !1.3 billion by 2007. The

sector will generate just !24 million this year, but will account for 13 per cent of all

music sales by 2007.177 The US market will be worth $2 billion by 2007.178

This will mostly come from individual downloads, not subscription-based services.

Growth will be fuelled by the emergence of more legitimate services and higher

broadband penetration. After a slow start, major music and technology companies

including Apple are now taking the future of digital music seriously.

176 http://www.pcworld.com/news/article/0,aid,102516,tk,dn070802X,00.asp, 04.02.02 177 http://www.macworld.co.uk/news/main_news.cfm?NewsID=6342, 09.01.04 178 http://www.pcworld.com/news/article/0,aid,102516,tk,dn070802X,00.asp, 04.02.02

Apple Computer Inc.


The Macroenvironment Technological Forces

In recent times technological advancement has rapidly increased its speed and has

unshackle a process that has been called “perennial gale of creative destruction”179.

Changes in technology can affect the height of barriers to entry and therefore have a

huge impact on industry structure.180 In the case of the digital music industry music

labels are working on a common format to make their content available on equal

terms, so that Apple then will maybe lose the advantage of being the only player

having access to the five big music labels. This can further eliminate barriers to entry,

because opportunities in regards to content would be equal. Logical consequence

would then be a price war among existing competitors driving profit margins from an

already low to an even lower level.181

What can also play an important role are the different formats of the music files.

Apple has created an own format, the AAC, which is only compatible with its own

MP3 player compared to the industry standard format of MP3. The impact of limiting

the downloaded content to its own software (iTunes juke box to play music on the PC)

can have a detrimental impact on users acceptance of Apple’s product.

Demographic forces

Demographic forces underlie all market and economic trends. The external

environment within which the enterprise operates depends partially also on how

population is made up. The disproportionate decrease in the population aged

between 18 and 35 can adversely affect the online music industry, as this group is

believed to be the main users of online content including downloadable music.

Although Apple’s efforts to make the easiest software to use, the lack of

technological awareness of the older generation can inhibit sales in the iTunes music

store.

Social Forces

People’s attitudes as well as consumer behaviour together shape what is called

social forces. Trends and changes in attitudes towards work and leisure or changes

in expectations can all affect the day to day operations of an organisation. A major 179 Schumpeter J. (1950), p. 68 180 Dickel K. E. et al. (1994), p. 177 181 Hill C. W. and Jones G. R. (2004), p. 41ff

Apple Computer Inc.


issue and key determinant of the success of the digital music industry are people’s

conscience and ethic values.182 At the moment Apple has created the picture that

downloading music from the internet is cool and therefore was able to spur sales.183

But the line between music piracy and legal industry is thin and only the smallest

change in perception from customer’s point of view can change their consumer

pattern and the anyway increasingly disloyal consumer could turn to piracy again.184

Demand for Music Subscriptions and Downloads

Type of Consumer (number sampled)

Subscriptions Downloads Will Not Pay for Music

Music aficionados (357) 21% 25% 46%

Free-music fans (514) 13% 19% 60%

CD purists (280) 10% 16% 71%

Passive populace (746) 7% 10% 79%

Political and legal Forces

These forces are outcomes of changes in law and regulation. The environment Apple

operates in can be shaped by political judgments and legal decisions.185 Bodies such

as the Copyright Arbitration Royalty Panel (CARP) or the Recording Industry

Association of America (RIAA) can have a crucial impact through imposing new laws

limiting the digital music industry in its efforts to grow and expand.186

For example, in 2002 the CARP determined that webcasters (companies that

produce audio or radio for the world wide web) should pay a per song, per stream

royalty. The rate being 0.07 cent would force many companies out of business, which

would lead to anticompetitive structures. The RIAA justifies this high rate by claiming

that these rates don’t reflect music’s fair market value and that broadcasters who

couldn’t afford to pay the fees should in first place be not in the market. Such fees

imposed on downloadable music content could ruin the business as the narrow profit

margins of Apple and consorts could totally disappear. Also government was very

182 Lopez J. M. (2003) 183 BusinessWeek (2004g) 184 Lopez J. M. (2003) 185 Dickel K. E. et al. (1994), p. 112ff 186 http://www.pcworld.com/news/article/0,aid,102516,tk,dn070802X,00.asp, 04.02.04

Apple Computer Inc.


active on regulating the industry through means of the Music online Competition act

in order to tweak various aspects of the US Copyright Act with updates. 5.3.2 Market and external environment analysis for the iPod Apple utilises the iTunes music store in order to make a natural connection between

its iPods (MP3 player) and the service, a seamless connection between hardware

and content. The market for MP3 players started to develop in 1998 with such

companies as Diamond Multimedia with its RIO MP3 player.187 Since then, growth

has been tremendous and all major consumer electronics producers entered the

market, which is constantly heating up. The market grew by 70% to more than 3.5

million units only in the US during 2003 and is expected to grow further at a rate of

50% in the next three years. Jupiter predicts that by 2006 the install base of players

will hit 26 million – that would be one out every ten Americans.188 The clearly trend is

that music consumers behaviour shifts from a physical to a digital approach.

Today the MP3 player market is swamped to the gunne ls with me-too products, and

it has gotten pretty tough for new arrivals to distinguish themselves. Some have

gotten smaller (Apple’s iPod), some have added capacity, such as Creative's Nomad

Zen 60GB. Others have added video, the key example being the Archos AV320. With

so many available products, there's little room for innovation.189

The immediate rivals come from electronics makers (Samsung) and from fellow

computer makers (Dell, Gateway), as well as from veteran music-player makers (Rio,

Creative Labs, iRiver). Most have the familiar iPod ingredients. The other notable

feature of these competitors is a marketing message that's either “just like the iPod,

only cheaper” or “just like the iPod, only better.” Another fact to take into

consideration is that most of these rivals are cheaper - usually $100 less. 190But

“better” is another story. The iPod is still smaller, more attractive, and more

thoughtfully designed than any of the upstarts.

187http://news.com.com/2100-1040_3-252001.html, 05.02.04 188 http://www.macobserver.com/article/2003/12/30.1.shtml, 31.01.04 189 http://www.extremetech.com/article2/0,3973,1230545,00.asp, 23.01.04 190 New York Times (2004)

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Best selling MP3 player makers over US$150 (by units)191

1. Apple

2. Creative Technology

3. Rio

4. RCA

5. Arcos

Best selling MP3 players for November 2003

10GB Apple iPod

128MB Digitalway

20GB Apple iPod

128MB iRiver

40GB Apple iPod

But the margin is very slim and the other players, especially the Dell, are credible

alternatives. The iPod integrates much better with Apple's download service than Dell

and Samsung do with their companion services and that’s the key advantage of

Apple’s iPod. This indispensable connection between iTunes and iPods was also the

reason for the extensive analysis of the downloadable online music market in the

previous chapter.192

In terms of environmental forces, technological and political/legal forces are worth

mentioning. The MP3 player market can also be categorised as high tech market

were technological advancements often occur and reshape industry patterns. The

format war between the two existing memory formats, the flash based models and

the hard drive models (Apple’s iPod is hard drive based), is currently dominated by

the hard drive models, simply because their bigger storage capacity is more attractive

to customers. The advantage of Flash based models which are accounting for one

third of the MP3 player market, is the smaller size of the players, which are particular

suitable for use during sports.193

Political forces once again include the RIAA, which at the very beginning of the

industry in the late 1990’s filed lawsuits against first movers in the industry accusing 191 http://www.macobserver.com/article/2003/12/30.1.shtml, 31.01.04 192 Wall Street Journal (2003) 193 http://www.macobserver.com/article/2003/12/30.1.shtml, 31.01.04

Apple Computer Inc.


them of supporting online piracy through their products. Their view has changed, as

the RIAA has realised that the MP3 player market can be the device which opens up

the door to a legal online download music industry as Apple’s combination between

iTunes and iPods already shows.

In conclusion, both the digital online music industry and the MP3 music player market

are dynamic, marked by intense competition and a huge potential for companies to

make profits.

5.4 Summary of external factors 5.4.1 Overview Apple operating in the high tech industry, is, as the name already reveals, highly

influenced by technological changes. Apple has already made the brutal experience

of losing a format war against Microsoft and therefore is eager not to make the same

mistake again.

Opportunities arise through its digital hub strategy which aims at producing not only

Mac compatible software and hardware, but also targets the Wintel market with its

new innovations. Besides that the significant barriers to entry represent a safe haven

for Apple as it can serve its niche markets through innovative and highly capable

products and equally charge a premium price.

Among the most important threats are the high level of competition in the PC industry,

which constantly drives down prices and makes high end, high price innovative

products less attractive and the bargaining power of Apple’s key component

suppliers, which can lead to a higher cost structure and thinner profit margins.

For the future, as other industries where Apple is involved in will gain importance,

issues in the music player market and digital music market will have a higher impact

on the company. In this, social forces seem to evolve as key determinant of how

successful Apple will be in the future. If Apple is able to maintain the coolness factor

of both iPod and iTunes,it will be able to generate above industry profits for the future.

Apple Computer Inc.


5.4.2 External Factor Analysis Summary (EFAS) External factors Weight Rating Weighted

score Comments

Opportunities

High barriers to

entry in the PC

industry

11 4 44 High brand loyalty, high economies of scale,

high customer switching costs due to unique

hardware/software, cost advantages through

patents and secret processes

Complements and

complementors

6 2 12 Strong and loyal developer community !

superior quality and added value;

Cutting edge software ! more acceptance

in education/creative professionals segment

Mature stage of PC

industry

7 3 21 Strong brand loyalty ! protect market share,

superior products gain new market share !

increase profits ! Apple no fear of declining

industry

Technological

forces

12 5 60 Superior R&D and innovation leadership!

possible first mover advantage ! high

returns in embryonic/growth industries (mp3

player market and digital music segment)

National

environment

1 4 4 U.S. computing dominance attracts R&D and

network of services and developers.

Technological awareness in the U.S.

facilitates digital hub strategy

MP3 player market

in growth stage

9 4 36 iPod ! Superior design and quality of killer

application (storage capacity) can earn high

profits

Threats

Rivalry among

established

companies in PC

industry

16 4 64 Consolidate industry with price wars !

(downward price spiral)

saturation of PC market ! decrease in

demand ! fiercer competition ! profits?

Exit barriers: emotional attachments/pride

Apple’s high dependence on PC market

Bargaining power

of suppliers in the

PC industry

9 3 27 Key components exclusively manufactured

by few suppliers ! high reliance on them !

higher costs

Substitute products

in the PC industry

14 5 70 Commodity type good ! intense competition

through Wintel standard. PCs

Social forces 4 2 8 Rising disloyalty among young generation !

Apple Computer Inc.


price key determinant of buying decision !

may lead to decreasing demand for high end

products

Political and legal

forces

2 3 6 New regulations/restrictions governing digital

online content may inhibit industry in its

growth (RIAA and CARP)

Bargaining power

of buyers in online

music market

2 2 4 Switching costs extremely low ! price key

determinant of success ! threat also

through music piracy

Bargaining power

of Suppliers in the

online music

market

3 1 3 only five key music labels who produce

majority of songs !labels dictate price !

dependence on their cooperation

Technological

forces in the online

music market

4 4 16 Format war between MP3 and AAC ! user’s

acceptance defines future success

Total 100

Apple Computer Inc.


6 Functional strategy 6.1 General information194

Functional strategies are shaped by a company’s distinctive competencies and

enable a company to achieve superior efficiency, quality, innovation, and

responsiveness to customers, thereby leading to lower costs and/or differentiation

(competitive advantage) and ultimately resulting in superior profitability.

6.2 Company resources and functional strategy

194 Hill C. W. and Jones G. R. (2004), chapter 4

Superior quality

Superior innovation

Superior efficiency

Superior customer

responsiveness

Competitive advantage:

Low cost

Differentiation

Resources

Distinctive Competencies

Capabilites

Strategies Competitive Advantage

Superior Profitability

Build

Build

Shape

Apple Computer Inc.


Functional strategies are targeted at improving the functions of a company’s value

chain and therefore reaching a competitive advantage through superior efficiency,

quality, innovation, and responsiveness to customers.

As a consequence, there are different strategies, policies, and methods for all value

creation activities that were examined as company resources in the analysis of

Apple’s internal environment, namely Marketing, Finance, Research & Development

(R&D), Operations & Logistics (O&L), Human Resource Management, and

Information Systems.

The following matrix gives an overview containing several exemplary strategies and

methods a company can use to succeed in improving the four building blocks of

competitive advantage: Marketing Finance R&D O&L HRM IS superior efficiency

reducing customer

defection rates, building brand loyalty,

experience curve effects

invest in better manufacturing

machinery

product innovations,

process innovations

economies of scale, flexible

manufacturing, JIT, mass customisation,

supply chain management

increasing employee

productivity (hiring, training,

team, pay for performance)

improved interaction

between company and others,

automated processes

superior quality focus on

customer, feedback on quality

provide funds

for implementation of TQM

design

products with superior quality and

ease to manufacture

analyse

defects, optimise production,

implement TQM at

suppliers

TQM training

programs, quality teams

monitor

defect rates

superior innovation

providing market

information to R&D, developing

products with R&D

provide capital for R&D efforts

developing new products

and processes, coordination

with other functions

cooperation with R&D to

develop product and process

innovations

hiring of scientists and

engineers

coordination of product

development work

superior customer responsiveness

customer

knowledge and feedback

investment in

market research etc.

include

customers in product development

customisation

and rapid response through

flexible manufacturing

and JIT

training

programs for sales force and other

employees to think like

customers

web-based

information systems for customers

Apple Computer Inc.


6.3 Sources of competitive advantage As Apple only possesses a competitive advantage in some specific areas, the

following illustration should summarise Apple’s sources of competitive advantage

which result from its distinctive competencies that were examined in the analysis of

the internal environment:

Apple reaches superior quality through improved product design which creates value

through better product quality and functionality, thereby leading to differentiation and

more pricing options. Moreover, the HRM department enables Apple to reach

superior quality as a high-skilled workforce ultimately leads to better products,

thereby also leading to differentiation and more pricing options.

In addition, the R&D function is the most important source of superior innovation as

short product-to-market cycles and innovative products create value for the customer,

thereby constituting another factor that leads to differentiation and results in more

pricing options. Finally, the Information Systems function optimises internal

communication (intranet) and external coordination (extranet) which facilitates and

optimises business processes and therefore lowers costs due to superior efficiency.

In all, these four factors contribute to superior innovation, efficiency, and quality and

provide Apple with a competitive advantage.

Superior quality

! R&D, HRM

Superior innovation ! R&D

Superior efficiency ! IS

Competitive advantage:

Low cost

Differentiation

Apple Computer Inc.


7 Business-level strategy

The above illustration shows Apple’s overall strategy, 195 with the business strategy

being in the top right corner. Apple pursues a differentiation strategy with unique

products which until now are unmatched by its rivals. To explain how this strategy

works out in detail is the purpose of this chapter.

The business strategy proposes how a specific business model can gain a

competitive advantage over its competitors in the industry. There are three main

factors influencing the shape of Apple’s business strategy. They are customer needs,

customer groups, and distinctive competencies – in other words Apple has to find

answers to what and how customer needs are satisfied and who is going to be

satisfied.196

7.1 Customer needs Apple, throughout all industries it participates in, tries to implement its vision of being

the digital hub in an area where networking between hardware, software, and

services is getting more and more important, as consumers require sophisticated as 195 Crossan M. M., Fry J. N. and Killing J. P. (2002) 196 Hill C. W. and Jones G. R. (2004), p. 158ff

Product Market Focus

Goals

Core Activities

Value Proposition

• Differentiation on product and service through a user-friendly graphic interface and integrated products

• Complete desktop solution • 50% US; 50% foreign • Education (50%MS); home • Hardware, software, peripherals • High end

• “Change the world through technology”

R&D Manufacturing Distribution

• Fully integrated

Apple Computer Inc.


well as integrated digital devices who can smoothly communicate with each other.

Apple since ever tries to differentiate itself from competitors in order to justify the

premium price it charges. It is important to find the right balance between customer

satisfaction and pricing option as this mix is crucial to maximise value for the

customer and drive up profitability.197 Apple is known for its high cost structure, as

development of product design and innovation is a costly matter.

Nevertheless product differentiation is a strong competitive weapon because Apple

can increase the perceived value of its products and be as profitable as other

competitors despite the higher cost structure.

7.2 Customer groups For a company it is indispensable to know its customers. Know your customers

means to be able to carry out a proper market segmentation, because each set of

consumers needs to be properly differentiated. This procedure helps companies to

target individual customers in a better way with better and more appropriate products,

increasing customer responsiveness.198 There are three types of strategy available

for market segmentation. The first option would be that Apple could try to serve the

average customer without making any differences in serving their needs, second

Apple could still serve all customers, but recognise the different tastes and therefore

create separate products for each customer segment or third Apple could simply

position itself into a niche and serve just specific customer groups. Apple uses

consumer characteristics to segment the market as the following diagram shows and

employs a niche strategy.199

197 Morden T. (1993), p. 79ff 198 Dickel K. E. et al. (1994), p. 116f 199 Apple Computer Inc. (2003a)

Apple Computer Inc.


7.3 Distinctive competencies Apple’s business model must acknowledge its distinctive competencies and set a

business model which allows it to organise and enforce its competitive advantages.

With Apple as industry leader in design and product innovation the task of the

manager is to choose a strategy which is in compliance with the high cost structure

and the differentiation approach.

7.4 Differentiation strategy200 Among the different choices Apple has on the business level, it chose the so called

Differentiation strategy. Key element of this approach is that it lets Apple compete in

different niche market segments by means of differentiation. By doing this, Apple

focuses on superior quality and innovation. Apple’s PCs are the most beautiful

among all, therefore successfully getting rid of the image of being only a commodity

type good. Additionally, the strong performance in graphic and other media

applications has persuaded one of the target segments, namely the creative people

employed in the media and advertising industry, to mainly operate on Apple

computers. Competitors based on Wintel standards underperform Apple by far in this

particular category. 201 In the education segment Apple’s superior quality is

demonstrated by its ease of use, which is a key success factor in the education

market. In the consumer sector Apple is the innovation leader, as it was able to build 200 Hill C. W. and Jones G. R. (2004), p. 160f 201 Apple Computer Inc. (2003a)

Apple Computer Inc.


state of the art computers, software and digital devices such as the Power Mac, iLife

and the iPod. Apple products appeal to customer’s psychological desires and as a

result consumers are willing to pay more for its products. But this premium price

should not mean that Apple can neglect its cost control, which Apple has been doing

in the past, driving it into losses. In contrary, Apple tries now to copy cost savings

innovations from competitors such as Dell by substantially reducing inventory cost by

partially outsourcing manufacturing (inventory is down to less than two days worth of

sales) and boosting direct sales channels (43% of sales are already through its

online store). 202 Apple has realised that in order differentiation to provide a

competitive advantage it has to lead to superior profitability, which is also depends on

the cost structure of Apple.

7.5 Advantages and disadvantages of the Differentiation strategy The strategy was able to safeguard Apple against competitors as it was able to

create a strong brand loyalty. Steve Jobs pointed that out by saying that Apple has

the world’s greatest customers. Another advantage is that this loyalty creates a

substantial barrier to entry and especially in the case of Apple, where switching costs

are considerably high.

The main threat for Apple in pursuing such a strategy is the entrance of competitors

being able to imitate the products and at the same time have a lower cost structure.

Analysts rate the threat of imitation in the PC sector for Apple as relatively low

despite the tangible nature of competitive advantage, as Dell and Compaq a few

years ago designed PCs which were fancy coloured, as an answer to Apple’s iMacs

which was then sold in five shiny colours, but only six months after their introduction

they had to be discontinued as a result of slow sales.

In the past years technological factors have drawn players with different strategies

closer together intensifying competition. So former pursuer of cost leadership

strategies such as Dell and HP/Compaq are trying to gain market share on the

expense of Apple , differentiating their product portfolio to create products which can

compete with Apple’s iMacs and Power Macs.

202 Yoffie D. B. and Wang Y. (2003)

Apple Computer Inc.


7.6 Investment strategy203 The second determinant of where Apple is heading in the future on a business level

is its investment strategy. As the name already suggests, the investment strategy

defines and allocates resources needed to create distinctive competencies. The

choice is dependent on the strength of Apple’s position in the industry and the stage

of the industry life cycle. To analyse Apple’s position in the industry you need to

consider the market share in its key market segments. In the education sector Apple

has a 28% market share in portable devices (iBook) and an overall market share of

12.4%, in the creative professionals sector Apple’s market share exceeds 65%. In

the consumer and the small business segments it captures only insignificant market

shares.204 To sum it up, Apple has a relatively strong competitive position within the

industry.

Apple’s position has again implications for the investment strategy. As stated before,

the PC industry is in its shake out stage reaching maturity, meaning that demand is

only increasing slowly with 2001 being the second year of a decline in worldwide PC

sales after 1985. As a strong competitor and a differentiation specialist Apple

investments are oriented towards the development of a sophisticated customer

service, marketing , and broader differentiation. Apple therefore entered as part of the

digital hub industry the consumer electronics market, more specifically the MP3

player market with its iPod and developed iTunes, an online music platform and

media content player. Naturally the PC business remains Apple’s core business

(70% of Apple revenues come from PC sales), but as profits start to dry up, broader

diversification is the only liable way for Apple to ensure profitability in the long run.

All in all the investment strategy tends to be coherent with the generic business level

differentiation strategy, as new products are marked by the same qualities and

features Apple has established and is proud of in the PC industry. iPod and iTunes

perfectly fit in the corporate image as they seamlessly join the existing products in

terms of design, reliability and pricing.

7.7 Competitive strategy After choosing the appropriate generic business level strategy and investment

strategy, Apple faces another critical decision. To chose a competitive strategy which 203 Hill C. W. and Jones G. R. (2004), p. 173f 204 Apple Computer Inc. (2003a)

Apple Computer Inc.


best fits generic business level strategy, given the maturity stage of the PC industry

in the industry life cycle. As this stage is characterized by a small amount of dominant

players such as Dell, HP/Compaq, Gateway and Apple, these companies have the

power to influence the five competitive forces. Apple therefore is constantly watching

the other players, trying to predict their next step in order to be ahead of the rivals.

This so called competitive game can be analysed using game theory. As Apple

2000/2001 tried to enter the low priced market to better serve its education segment,

it launched its eMac and priced it competitively at $999.205 Just weeks after this

launch, Dell, its main competitor in the education market, announced deep price cuts

for its Dell Dimension 4100 Desktop to as low as $799 per unit. This obvious high

interdependence in the PC industry requires Apple and its managers to look forward

and reason back, before launching any initiatives.206 This interdependence doesn’t

only pose a threat to Apple, as Apple can use this already existing invisible hand to

protect company’s and industry’s profitability. There are two major starting points how

Apple can achieve sustainable profitability. Either deter entry into the industry or

reduce rivalry among existing competitors.

7.8 Strategies to deter entry207

From the three options to deter entry (product proliferation, pricing games and

maintaining excess capacity) Apple could choose from, the only beneficial choice 205 Ganesan S. (2003) 206 Hill C. W. and Jones G. R. (2004), p. 194ff 207 Dickel K. E. et al. (1994), p. 125ff

Strategies for deterring entry of rivals

Product

proliferation

Pricing

games

Maintaining

excess

capacity

Apple Computer Inc.


would be product proliferation. As competition is immense among existing players,

pricing games which would have to be supported by the majority of the industry are

very difficult to introduce. Also, apart from Apple only one player is currently making

profits, namely Dell. This circumstance makes it difficult for the other players to lower

prices, as they might incur very high losses. Also Apple with a traditionally high cost

structure will see this opportunity for entry-deterring signals as the least attractive.

Although financially feasible limit pricing, meaning the lowering of prices below the

average cost curve of potential new entrants, who wouldn’t enjoy the same

economies of scale in the beginning as existing players, Apple has never used this

option, as the fear of price wars within the industry poses a far greater threat than the

benefit from increasing the barrier to entry. Maintaining excess capacity would be in

contrast to the manufacturing process at most PC companies, as they have

introduced lean manufacturing systems as well as Just-in-time production. Also the

rapid decrease in value and price of old technology prevents maintaining excess

capacity. 208

Product proliferation means that the current competitors try to cover all market niches,

which in turn would lead to higher barriers to entry, because new companies willing

to enter the market, won’t be able to find any unsaturated niches. The current product

range of Apple and competitors are a strong signal to potential entrants, that there is

no space for them in the highly competitive PC market. Apple has constantly tried to

fill more and more niches in the consumer PC market, as they made a wide range of

their products affordable for consumers. It introduced PCs priced below the magic

$1,000 limit and expanded to consumer electronic markets, reinforcing the maturity of

the PC industry having no space left for new competitors.

7.9 Strategy to manage rivalry Apple of course has to consider the more direct threats from within the industry and

also put measures into force to actively manage this rivalry. A high degree of

competition can quickly lead to intense price wars and decreasing profitability. Apple

in this case has a variety of possibilities, three basic options to handle competition

within the industry being further analysed: Price signalling, price leadership, non-

price competition, and capacity control. For the same reasons as before, any kind of

208 Hill C. W. and Jones G. R. (2004), p. 204ff

Apple Computer Inc.


price signalling is useless to pursue, as the famous tit-for-tat strategy wouldn’t work.

Price leadership would mean that the weakest player in the PC market would set a

price, which would then serve as orientation to price its own products. The reason

why Apple can’t rely upon such a system, is that its products are far to differentiated,

so that any kind of price settings from its competitors could not really act as an

indicator for Apple’s pricing options. The competitive nature of the PC industry and

the clash of the various corporate cultures do the rest to make price leadership

strategies impossible. Apple’s only chance to impact the intensity of existing rivalry in

the industry is through non-price competition. To break non-price competition down

into its four main components the following chart is used to exemplify Apple’s

strategic alternatives.

All four tactics are achieved by means of product differentiation. Apple’s approach

here is a mixture between product development and product proliferation.

Product proliferation tactic is identical to the one used to create barriers to entry. If

new niches develop, the leader gets a first mover advantage as it was the case with

Apple in the digital music market where it was the first company to offer online music

via iTunes and the suitable device, the iPod, thereto. When other companies start to

move into to the niche, competition is stabilised and hence decreases rivalry.

Product proliferationMarket developmentNEW

Product developmentMarket penetrationEXISTING

MAR

KETI

NG

S

EG

ME

NTS

NEWEXISTING

PRODUCTS

Four Types of non-price competitive strategies

Product proliferationMarket developmentNEW

Product developmentMarket penetrationEXISTING

MAR

KETI

NG

S

EG

ME

NTS

NEWEXISTING

PRODUCTS

Four Types of non-price competitive strategies

Apple Computer Inc.


Product development signifies the innovation of new or better products in order to

replace the old ones. Apple’s lead in innovation and design is more than suited to

exploit opportunities to gain market share through product development. As the iPod

and iTunes were made available as a Windows version in 2002 and 2003

respectively209, the demand skyrocketed and helped to propel sales to record highs.

More than half of all iPods sold are to Windows users and the expected estimates of

being able to capture 20 percent of the pay-per-download market, were beaten in an

spectacular way - iTunes today accounting for 70% of the market for the digital-

music downloads.210

Apple is adapting to its environment effectively through generic and competitive

business level strategy and according it with the investment strategy adds to the

overall picture that Apple is doing quite well pursuing its strategies on the business

level. However one has to remember that competitive advantages in the high tech

industry are hard to sustain, but Apple has until now safeguarded its distinctive

competencies and utilised the business strategies to exploit the advantage which

arises through these competencies. But competitors don’t sleep – the major PC

makers have already started to differentiate themselves to offer products which

compete with Apple’s ones for the same customer groups. The perceived value,

generated through superior design and innovation proves to be an inimitable

competency and therefore as long as such an advantage exists for Apple, Apple will

continue to outperform rivals.

209 Baltimore Sun (2003) 210 BusinessWeek (2004b)

Apple Computer Inc.


8 Global strategy Apple’s unique history made the company known as the typical example for the

“American Dream” stereotype. Nowadays, Apple is more than a domestically

operating enterprise. Over the years it has become a pure multinational, resourcing

raw materials and selling products globally.

8.1 Apple’s foreign operations As Apple manages its business primarily on a geographic basis, its segments are the

Americas, Europe (including Middle East and Africa), Japan, the Retail segment and

Others (comprising Asia-Pacific). This organisation already indicates Apple’s

widespread global operations and activities although the United States still represent

Apple's largest geographic marketplace with 58% of net sales. Nevertheless, a large

portion of the company's net sales is derived from its international operations. Also, a

majority of the raw materials used in Apple’s products is obtained from foreign

sources.

Final assembly of products outside the US is conducted in Apple’s manufacturing

facility in Cork (Ireland)211 and by external vendors in Taiwan, Korea, the Netherlands,

the People’s Republic of China and the Czech Republic. Currently, manufacture of

many of the Apple PC’s components and final assembly of all portable products are

performed by third-party vendors in Japan, Taiwan and China. Sale and marketing

subsidiaries were founded in several countries all around the world to serve a global

customer base whereby Japan and France became the most prosperous markets for

Apple. In contrast, to penetrate countries like Germany or the United Kingdom was

difficult due to restrictions and cost- as well as responsiveness pressures.

Additionally, the company expanded its retail programm, the Apple Store, to Japan

by launching the first international shop in the Ginza in Tokyo.

As margins on sales of Apple products in foreign countries and on sales of devices

that include parts obtained from foreign suppliers can be adversely affected by

foreign currency exchange rate fluctuations, by international trade regulations,

including tariffs and antidumping penalties or by pressure on cost reduction and local

responsiveness and therefore can impose huge risks to the company, it’s necessary

to evaluate why Apple moved abroad.

211 Earlier, also one facility in Singapore

Apple Computer Inc.


As with any internationalisation Apple tried to increase profitability through lowering

costs and to explore new customer groups through selling more. When Apple started

this expansion in the late 1980s and intensified it in the early 1990s the company

already benefited from lower costs over the life-cycle of their products as learning

effects and economies of scale occurred212.

These abilities enabled Apple to differentiate its product offerings (new products and

services). Furthermore, Apple transferred these distinctive competencies (but still

domestic) which generally lead them to achieve superior efficiency, quality,

innovation or customers responsiveness to foreign countries for exploiting a probable

value creation potential. However, going abroad created the chance to not only use,

but also improve and “leverage” Apple’s skills.

A perfect example for this development at Apple is the PC company’s production

plant in Cork (Ireland). The Americans shipped over their know-how and knowledge

to the “Celtic Tiger” which is characterised by low taxes and by a well-educated work

force. In the end, Apple achieved to lower costs as transportation efforts to Europe

and consequently expenses decreased. Additionally, value arised from being able to

provide faster delivery of accurately fabricate products, better service, reach a higher

customer satisfaction and in the end have increased sales/profits.

It is indispensable for Apple to maintain and even strengthen their way towards

internationalisation by taking advantage of the positive aspects of globalisation. For

instance, the African market isn’t covered at all in practice despite being in the

position to provide Apple with a small, but soaring number of wealthy clients.

Although having experienced difficulties in Germany and the UK years ago, even

there Apple succeeded as their products became more and more “stylish”.

8.2 Apple’s Transnational Strategy From the four strategies possible Apple finds itself in the fourth quadrant facing both,

high pressure for local responsiveness as well as for cost reduction. It’s by far the

most difficult one to realise, but if accomplished a company can obtain a low cost

structure as well as a considerable level of customer acceptance. Apple applies this

strategy, but hasn’t reached the optimal point yet. This is due to the fact that Apple

could get to an appropriately low cost situation, it still has to persuade PC users in

212 see: experience curve

Apple Computer Inc.


each country from the very entry of their technological and innovative superiority.

Despite of living in a world more and more knitted together a huge amount of

computer owners doesn’t know much about Apple’s technology. Moreover, Apple is

heading towards Transnational Strategy from a point in between Global and

Transnational Strategy.

8.3 Apple’s methods of entering new markets When deciding to move abroad Apple executives were asking themselves the

questions which markets to enter, when to enter and on what size. This meant finding

out the size of the market, possible local consumers, their wealth and purchasing

power and the situation in Apple’s market there (i.e. competition). Would Apple have

to adapt products to meet the local preferences? Apple’s assessment of benefits,

risks (also politically) and costs concluded in first of all expanding to Europe which

was and is only slightly different to the US. Later on, politically risky and highly

competitive Japan was taken on, followed by a number of other countries. Timing the

entry wasn’t hard to work out as the US market at the beginning of the 1990s was in

a bad shape (i.e. recession) concerning the business cycle and not many other PC

companies went overseas.

So Apple – despite taking on some risk as nobody knew what it would be like – was

in a position to build up demand and pre-empt future rivals as first-mover advantages.

Apple Computer Inc.


Furthermore, Apple tried to start their foreign ambitions with “babysteps” which

means not being exposed to too much risk if the decision failed. As soon as the

company encountered that business performed, Apple imposed a strategic

commitment to enhance their activities overseas by all means and forces.

The method Apple used was to simply export at the very start which also could infer

huge costs (e.g. exchange rate fluctuations, shipping costs, cheaper producing

competitors located in the objected market) by using economies of scale at their US

plants, but altered the strategy and implemented fully owned subsidiaries in some

specific countries (e.g. Cork plant in Ireland). Additionally, Apple started licensing

their PC production, but that emerged only within the US. Franchising or joint venture

never played an important role for Apple as the PC producer never wanted to provide

partners with access to their know-how. So at the moment, Apple operates with a

good strategy by combining strategically allocated subsidiaries worldwide with

exporting activities from the company’s assembly plants.

With putting aside domestic US mergers and acquisitions and the Microsoft deal,

Apple never proceeded any forms of major strategic alliances with foreign companies.

8.4 Pressures for cost reductions and local responsiveness Although the PC market is one of high technology and high quality goods, Apple as

well as the whole PC industry has to have an immense focus on the cost side.

Increased domestic and abroad competition makes use of prices as the main source

of competitive advantage. This wasn’t the case at the start of Apple’s business, but

brought the company already on the edge in the 1990s. This was one of the reasons

for Apple to look for business opportunities overseas, but even there pressures for

cost reduction were sustained. Therefore, price policy which means drawing the line

between the quality and the price of a product was and is an essential one for Apple

as the management often was reluctant to lower short term profit margins. Even

today, not charging too high or low represents a crucial criteria when selling

fashionable PC ware213.

213 Failure of the “Cube” PC

Apple Computer Inc.


Concerning the global strategy, consumer awareness and acceptance of Apple’s

products is important. Not for the “Wintel-standard” base industry, but especially for

Apple “log-on” and “network” effects are extremely dangerous as they influence

people not to abandon the OS or PC-standard they were trained on or are constantly

using at home as in office. This makes it much harder for Apple to gain market share

abroad (e.g. Europe) as there’s a much higher percentage of people that choose

“Wintel” than in the US.

Therefore internationally, adapting to local tastes and preferences, being able to deal

with the different infrastructure and altered traditional practices becomes much more

decisive abroad to acquire customers. In addition, demands of local politics arise (e.g.

Japan’s wired political and economical situation) and require Apple to act to avoid

running the risks of protectionism, local legal barriers or economic restrictions.

Although Apple doesn’t vary its product and marketing message from country to

country, the company has early developed strategies to respond to pressures in local

acceptance by adapting. Building up an intercultural communications skill when doing

business helped them to prevent, minimise or get rid off problems arising from

internationalisation. Globalisation moves on, but doesn’t destroy local differences,

local uniqueness. Nevertheless, the fear can emerge that Apple reinforces their

global ambitions too little although having been one of the front-runners for an

international strategy in the PC sector.

Apple Computer Inc.


9 Corporate strategy214 9.1 General information Corporate-level strategy deals with identifying the businesses in which a company

should invest its resources215 and possible opportunities for expanding or contracting.

As Apple is engaged in horizontal integration, vertical integration, strategic

outsourcing, and diversification, this chapter will take a closer look at the company’s

specific activities and goals in these areas.

In general, it is a special characteristic of the network era that firms create value

networks of cooperative specialists through vertical integration/partnerships and

strategic outsourcing. This development results from the differences between the

traditional cost structure and the coordination cost structure of the networked

economy. Whereas the traditional structure included a trade-off between production

costs and coordination costs when using “markets” (buy external ! outsourcing) or

“hierarchies” (make internal ! vertical integration, long term relationships) as

organising mechanisms, the network structure led to overall cost reductions and

favours markets over hierarchies. This can be shown in the following illustration:216

traditional structure network structure production

costs coordination

costs markets LOW HIGH

hierarchies HIGH LOW

production costs

coordination costs

markets LOW LOW hierarchies MEDIUM LOW

9.2 Horizontal integration Horizontal integration is the process of acquiring or merging with industry competitors

in order to maximise long-run profitability. Although there are two possible ways of

pursuing horizontal integration, Apple only engages in acquisitions and obviously

doesn’t consider a merger at the moment.

In fact, Apple has acquired and may continue to acquire companies that have

products, services, personnel, and technologies that complement the company’s

strategic direction and product portfolio. In fact, Apple is aware that these

acquisitions may involve significant risks and uncertainties, for instance concerning 214 Hill C. W. and Jones G. R. (2004), chapters 9 & 10 215 Alexander M., Campbell A. and Goold M. (1994), p. 5 216 Kraemer K. L. (2003)

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the integration of the acquired companies, expenses related to the acquisition, legal

obstacles, or product quality issues. Apple generally pays cash for its acquisitions as

current shareholders’ percentage ownership and earnings per share may become

diluted if the company issued its common stock or other equity related purchase

rights as in an acquisition.217

Recent acquisitions such as the acquisitions of Emagic and PowerSchool highlight

that Apple’s acquisition policy is aimed at improving the company’s value by adding

valuable skills, knowledge, and products of the acquired companies. In fact, these

acquisitions of relatively small companies didn’t give Apple a huge possibility to

enhance the competitive advantages that stem from economies of scale or scope but

added significant value to the firm’s product portfolio. As Apple is generally engaged

in the area of product bundling, these new products also give the company new

possibilities in offering new and differentiated product bundles and can foster cross-

selling.

9.3 Vertical integration Through the use of vertical integration, a company expands its operations either

backward into an industry that produces inputs for the company’s products or forward

into an industry that uses or distributes the company’s products.

In the case of Apple which can be regarded as a vertically integrated firm, the

company is primarily engaged in the field of forward vertical integration in order to

gain control over its distribution channels. For instance, Apple entered the retail

industry through the introduction of its retail stores in 2001. Moreover, Apple’s online

store can be seen as another aspect o f vertical integration in the distribution area.

Concerning the positive and negative aspects of Apple’s strategy, it can be said that

vertical integration enables the company to gain flexibility in terms of pricing options

due to improved scheduling and more control over the distribution of its products. On

the contrary, possible cost disadvantages and problems because of demand

unpredictability may also arise. In addition, Apple’s vertical integration efforts can be

seen as an example for taper integration as there are in-house as well as

independent distributors and therefore should bear less risk for high bureaucratic

costs (than in the case of full integration).


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9.4 Strategic outsourcing Strategic outsourcing involves separating out some of a company’s value creation

activities within a business and letting them be performed by an independent entity.

Indeed, Apple has outsourced various functions in terms of operations and logistics

as its contract manufacturers and outsourcing companies can perform several value-

creation functions at a lower cost due to low-cost location and other competitive

advantages.

As Apple’s focus lies in the design of its products and its strengths can be seen in the

fields of innovation, creativity, and marketing, it makes sense that the company

focuses on these value creation functions and outsources its manufacturing activity

to contract manufacturers that specialise in this function. Therefore, Apple can reap

benefits in terms of a lower cost structure, opportunities to differentiate its products,

and increased focus on its distinctive competencies. Nevertheless, it has to be stated

that the company bears risks with regard to holdup due to the dependence on its

outsourcing partners as well as loss of control and information.

9.5 Diversification Diversification is the process of adding new businesses to a company that are

distinct from its established operations. As Apple has recently engaged in the digital

music player business which can be seen as distinct from its traditional personal

computer business, this can be regarded as a diversification activity.

By taking a closer look at Apple’s step into the music player market with its iPod

digital music player, various elements of Apple’s diversification strategy become

obvious. For instance, Apple could transfer its distinctive competencies in the

computer industry (technological innovation, quality, and creativity) to the music

player industry and create an innovative, high-performance device which

consequently attracted many customers due to its design, capabilities, and quality.

Moreover, this is definitely an example for related diversification as there are obvious

links to Apple’s core business which are highlighted by the iTunes music software

that connects the iPod with the iMac and therefore creates the ultimate link between

these two industries. In addition, the launch of the iPod shows that Apple uses

internal new venturing as its preferred entry strategy because it possesses a valuable

set of distinctive competencies that can be leveraged to the new business and

because internal new venturing is generally seen as the typical entry strategy for

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related diversification activities. Furthermore, Apple’s new product didn’t fail because

there were no problems in terms of scale of entry, commercialisation, and

implementation and the company’s R&D activities provided a strong basis for a

successful internal new venture.

Apple Computer Inc.


10 Strategy implementation 10.1 Corporate structure, control, and culture As Apple’s corporate structure, control, and culture have been examined in detail in

previous chapters, the following paragraphs should sum up the key points with

regards to strategy implementation. In fact, these main elements of strategy

implementation are an important factor contributing to achieving superior efficiency,

quality, innovation, and customer responsiveness and need to be designed so that

they are consistent with the company’s functional-level, business-level, corporate-

level, and global-level strategy.

In fact, Apple’s organisational structure is a functional structure which promotes

specialisation, control, and decentralisation of authority and responsibility which

should allow the various functions to set appropriate actions in order to implement

the company’s strategy. Moreover, Apple organises its operating business through

an (impure) geographic structure which increases responsiveness to regional

customers and reduces costs as well and therefore goes hand in hand with Apple’s

international strategy. In terms of control systems, the use of personal and behaviour

control systems enables efficient strategy implementation. Finally, the values and

norms incorporated in Apple’s corporate culture support the firm’s organisational

structure as well as its strategy by promoting innovation, initiati ve, motivation, and

creativity throughout the company which can be regarded as central elements of

Apple’s strategy.

Generally, organisational structure, control, and culture shape the way people

behave, their values and attitudes, and determine how they will implement an

organisation’s business model and strategies218. So, it can be concluded that through

the consistent interaction of Apple’s structure, control, and culture as well as through

the resulting coordination and motivation of its employees the company is enabled to

effectively implement its policies at the various levels of strategy.

10.2 Implementation219 It is now important to examine the specific policies that Apple uses in order to

implement its strategy.

218 Hill C. W. and Jones G. R. (2004), p. 405 219 Hill C. W. and Jones G. R. (2004), chapter 12 and 13

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First of all, at the functional level a company’s competitive advantage depends on its

ability to use and develop distinctive competencies and therefore it is important to

build organisational structures and capabilities that will allow a company to

outperform its competitors. In the case of Apple, the company’s functional structure is

definitely the optimal solution to group its employees and tasks in order to build

competencies. In fact, the functional structure as well as the strategic control systems

which should foster monitoring, constant improvement, and organisational learning

and the company’s cohesive culture which emphasises central values (innovation,

quality, creativity, initiative) across all functions promote Apple’s functional-level

strategy.

Second, in terms of business-level strategy, strategic management has to link and

combine the competencies in a company’s value chain functions in a way that

enhances the ability to differentiate products and economise on bureaucratic costs.

So, at Apple effective strategy implementation at the business level links the

company’s sources of competitive advantage (like superior innovation) in order to

improve the firm’s ability to add value and to differentiate its products. As a result of

integration problems, there’s a need for the development of more sophisticated

control systems, more complex kinds of organisational structure, and a culture based

on professionalism or collegiality which can be observed in the ongoing development

of Apple’s culture, structure, and control in the past.

Third, by taking a closer look at the implementation of corporate -level strategy, it

becomes obvious that in terms of Apple’s vertical integration and related

diversification efforts, effective strategy implementation depends upon the company’s

skills in terms of integration and the appropriate use of strategic control, especially

behaviour control in both cases as well as financial control in the case of vertical

integration and organisational culture in the case of related diversification.

Finally, in order to successfully implement its global-level strategy, it would be optimal

for Apple to use a global matrix structure combining its product groups and

geographic divisions. In spite of this, the creation of an information network that lets

Apple capitalise globally on the skills and capabilities of its employees as well as the

use of strategic outsourcing and a network structure which promote deep

relationships with its global suppliers, manufacturers, and distributors foster the

company’s efforts with regard to its global strategy.

Apple Computer Inc.


11 Analysis of strategic factors The analysis of strategic factors will look at the strategic fit between internal and

external analysis through the combination of the Internal Factor Analysis Summary

(IFAS) and the External Factor Analysis Summary (EFAS) that have been examined

and analysed in detail before. Thereby, it will evaluate the importance of the key

strategic factors and finally end with a review of the company’s mission and (strategic)

objectives with regard to these factors.

11.1 Situational analysis The situational analysis combines the most important strategic factors from the IFAS

and EFAS. In Apple’s case, the 9 most important factors for the company’s current

and future performance are: Strategic factors Comment Strenghts

Innovation Superior innovation constitutes the most important competitive

advantage for Apple because the company is famous for its technical

revolutions, inventions, and development as well as its engineering

excellence. As this source of competitive advantage is widely regarded

as the most important one in terms of future profitability, innovation is

especially vital for Apple’s future performance.

Creativity & design By regarding the PC not just as a commodity but as a premium product,

Apple’s puts special emphasis and its huge creativity skills into the

design of its products. Therefore, Apple’s customers get a higher value

for Apple’s products due to aesthetics, lifestyle, or similar reasons. As

this leads to higher sales and profits, this is an important cornerstone of

Apple’s intermediate-term performance.

Weaknesses

Incompatibility As Apple’s hardware, software, and other products aren’t compatible

with the Wintel standard, this incompatibility deters possible customers

and PC-producers. This leads to lower sales and profits, thereby

weakening especially Apple’s long-term performance.

High operating costs High operating costs are caused by high Marketing and R&D costs and

reduce overall profitability. This also immediately weakens Apple’s

short-term performance.

Opportunities

Technological forces Apple can take advantage of the importance of technological forces

which enable possible first mover advantages through superior R&D

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and innovation leadership in the future. This can lead to high returns,

thereby improving Apple’s long-term performance.

High barriers to entry in

the PC industry

High barriers to entry due to high brand loyalty, high economies of

scale, and other factors offer the opportunity to maintain market share

as the potential new entrants are unlikely to enter the industry. This

ensures Apple’s profits and constitutes an opportunity in terms of

intermediate-term performance.

MP3 player market in

growth stage

Apple can use the iPod and its superior design/quality to earn high

profits in this growth market, thereby improving its current performance.

Threats

Substitute products in the

PC industry

As many customers regard the PC as a commodity, these are often

attracted through the lower price of the Wintel-standard products. This

threat can lead to lower profits in the intermediate-term.

Rivalry among established

companies in PC industry

Intense rivalry in the consolidated PC industry can cause price wars

which are an important threat to Apple’s profitability as they would

reduce profits immediately and therefore leading to inferior performance

in the short-term.

11.2 Strategic Factor Analysis Summary The Strategic Factor Analysis Summary (SFAS) combines the 9 strategic factors,

gives them a weight (0-100 each, overall sum of 100) and a rating (from 5 = very

significant to 1 = not really significant), calculating the resulting weighted score and

evaluating the factor’s duration (short-term = 1 year and below, intermediate = 1 to 3

years, or long-term 3 years and above).

Strategic factors Weight Rating Weighted

score Short-term

Inter-mediate

Long-term

Strenghts

Innovation 18 5 90 x

Creativity & design 9 5 45 x

Weaknesses

Incompatibility 12 4 48 x

High operating costs 9 4 36 x

Opportunities

Technological forces 13 5 65 x

High barriers to entry in

the PC industry

6 4 24 x

MP3 player market in 8 4 32 x

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growth stage

Threats

Substitute products in the

PC industry

15 5 75 x

Rivalry among established

companies in PC industry

10 4 40 x

Total 100

In short, Apple’s key strategic factors are innovation (strength), incompatibility

(weakness), technological forces (opportunity), and substitute products in the PC

industry (threat).

11.3 Review of mission and objectives The importance in analysing these factors lies in the interdependence with the

company’s mission and objectives. One would expect that these strategic issues

need to be addressed in the mission statement, as their effective management is

crucial for the success of the company. To start with the analysis, the mission

statement has to be recalled:

“Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings.”220

Although short, the first sentence already creates the link between Apple’s obvious

and most powerful strength in innovation and the results from the SFAS-table. In

other words, Apple gives its strongest distinctive competence a top priority by

pointing out the computer revolution, initiated by Apple during the late 1970’s, in the

first sentence of the mission statement. Furthermore Apple also addresses key

technological issues as its commitment to excellence in all major business areas it

operates in. Superior quality and innovation through the extensive use of R&D is the

main driving force behind Apple’s recent success. To build on that and further

220 http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-faq#c orpinfo2, 14.02.04

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increase its customer base, is clearly one of the main objectives of the company. It

doubtlessly highlights its strengths and opportunities in every situation.

Nevertheless neither mission statement nor objectives are dealing with Apple’s

threats – and here lies another major problem within Apple. Apple and especially its

current CEO lack realism, meaning that they have a difficulty to accept economic

reality and live in their own innovative digital world. Apple, still condemned to be a

niche player because of incompatibility and high pricing options, doesn’t comment at

any time on any possible threats such as competitors eaten in Apple’s market share,

such as Dell in the education market or Sony in its notebook segment.

Therefore attempts should be made to adapt its objectives and the mission statement

not only to one half of the SFAS, but to incorporate every strategic factor. Any

change in the mission statement and objectives would have huge and direct impacts

on any strategy, beginning with functional over business to corporate strategy. In

order to change all of them, the organisation as a whole has to change. For this

purpose you need to first unfreeze the organisation in order to be able to move it.

The change has to be lived within the people, because it is only people who can

change the organisation.

Apple Computer Inc.


12 Strategic advice As Apple’s current strategy isn’t appropriate for the revised mission and objectives,

this chapter will evaluate possible strategic alternatives for Apple based on the

previous analyses. Based on these alternatives, we will ultimately choose a

recommended strategy and examine its implications, implementation, evaluation, and

control.

12.1 Strategic alternatives

We have included eight exemplary strategies in the four quadrants of the above

diagram indicating possible combinations of strengths and weaknesses with

opportunities and threats. Now, we will take a closer look at four of these specific

strategic alternatives and choose the recommended strategy.

12.1.1 Take advantage of technological forces by innovation (S-O) Innovation has been identified as one of Apple’s core strengths, technological forces

as one of Apple’s core opportunities. Both innovation and technological forces

combined form a possible alternative strategy in terms of strengths and opportunities.

Apple’s innovation made the company famous for technical revolutions, for

outstanding inventions and development as well as engineering excellence.

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Technological forces helped Apple to reach innovation leadership, a “first-mover”

advantage and higher returns in embryonic/growth industries through superior

Research & Development.

The strategy is to apply increased innovation to fully exploit technological forces

which in turn will help to push innovation once more. As a kind of “perpetuum mobile”

this process circle improves Apple’s innovation further and accomplishes to take

advantage of the technological forces. This will guarantee Apple’s demand for

innovation leadership in the long run as well as differentiation, growth and stability

without raising risk connected innovation efforts (i.e. uncertainty if customer will

respond to an invention). Negatively, there is to say that this strategic alternative has

to be well funded at the very beginning and also in the short run to be sustainable.

12.1.2 Use creativity in a way to avoid substitute products (S-T) Creativity has been identified as one of Apple’s core strengths, substitute products as

one of Apple’s core threats. Both creativity and substitute products combined form a

possible alternative strategy in terms of strengths and threats. Apple’s creativity tried

to attract customers by establishing an attitude of regarding personal computers not

just as a commodity but as a premium product. Aesthetics should originate lifestyle.

Substitute products in the PC industry demonstrate the “Wintel standard based”

commodity type goods which are competing with Apple’s products on the market

place.

Substitute products of Apple’s competitors make it hard for the company to

differentiate on the market for attracting new customer groups. Strengthening Apple’s

creativity efforts is the only way this can come about. This alternative strategy is

intensively connected to models requesting a further rise in innovation. Therefore, as

design and creativity forms one of its vivid pillars these actions improve Apple’s

products, make them more stylish, more unique and are determined to create higher

sales and profits in the end. Costs and funding are observed to be the biggest

advantage of this strategic alternative.

12.1.3 Take advantage of the MP3 player market by overcoming a disimproving business execution (W-O)

Business execution has been identified as one of Apple’s core weaknesses, the MP3

player market as one of Apple’s core opportunities. Both business execution and the

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MP3 player market combined form a possible alternative strategy in terms of

weaknesses and opportunities. Business execution became a problem area through

severe difficulties in turning Apple’s inventions into real money and by not focussing

enough on innovative business models/processes. By implementing the iPod, the

MP3 player market moved into the centre of Apple’s digital online content/music

strategy. Its outstanding design as well as the quality of its “killer applications” such

as an enormous storage capacity provides Apple with considerable profit potential.

For years, Apple experienced severe difficulties with their business execution. Too

much money was improperly spent and therefore wasted which would – regarding

the strategic alternative – result in the obligation to displace it. Only if done so, the

grounding for bringing new product ideas (e.g. Apple’s successful MP3 player iPod)

ahead can be elaborated. This change has to be initiated by executives who wouldn’t

be very likely to either concede their own malpractice and mismanagement or even

to alter them. 12.1.4 Act to minimise high operating costs and avoid rivalry (W-T)

Operating costs have been identified as one of Apple’s core weaknesses, rivalry as

one of Apple’s core threats. Both operating costs and the rivalry combined form a

possible alternative strategy in terms of weaknesses and threats. Apple’s extremely

high operating costs mainly result from huge Marketing expenses (e.g. Apple retail

stores), essential R&D as well as production liabilities. Rivalry or market competition

represents possible future “price wars” due to the elevated level of competition and

may result in a forthcoming downward price spiral. Therefore a saturated PC market

will decrease industry demand and make the sector fiercer. Due to Apple’s reliance

on the PC market and the existence of market exit impediments for Apple such a

development would adversely affect the company’s profits, would force them to

plunge sharply and if ongoing over a longer period would endanger Apple itself.

The aim of this strategic alternative is to lower Apple’s high-up operating costs to be

able to succeed on a market, characterised by enormous competition. This will

immunise Apple against tough pricing policies implemented by its rivals and will suit

the company to maintain the value (the ”V”) of its products by still providing R&D with

indispensable funds. Furthermore, costs (the “C”) can be reduced by cutting utopian

product ideas and non-effective Marketing spending and consequently profitability

secured.

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12.1.5 Recommended strategy: Operation costs (weakness)/rivalry (threat) A peculiar significance for Apple’s corporate development and even survival is mainly

imposed by the current situation where Apple’s high operation costs meet the intense

market rivalry, identified by Apple’s strategic analysis. To solve this main problem

Apple faces at the moment, the fourth alternative strategy has been chosen as the

recommended one.

12.2 Recommended strategy The recommended Weakness-Threats (WT) strategy focuses as above mentioned on

Apple’s weakness, the high operation cost structure and Apple’s threat of intense

rivalry amongst competitors within the industry, as the PC industry, Apple’s core

business, approaches saturation levels signalling that the PC market has reached its

maturity stage. The WT-strategy is basically defensive and primarily tries to avoid

and minimise weaknesses, which in our case would be the existing rivalry. Given this

scenario, the following chapter deals with the implications for the strategies on each

level of business. To fully grasp the benefits of this strategy one has to carefully

analyse the changes this new strategy would bring to Apple.

12.2.1 Functional level strategy The functional level strategy, aiming at improving the efficiency of Apple’s day to day

operations, will need to adapt to the WT-strategy. To be in coherence with its

functional level strategies the actions undertaken have to aim at cost reduction

effects. We suggest that efficiency should be improved through a reduction in

marketing expenses, because the $193 million spent 2003 on building brand loyalty

are far too much. Apple’s high cost structure must be reduced for two obvious

reasons. On the one hand Apple could be better prepared to face competition within

the industry, as it could actively play a role in price wars, because of the lower cost

structure and on the other hand high revenues could serve as a war-chest against

potential entrants into the market. Especially the retail store initiative proved to be a

very costly one. Also after the initial hype about Apple’s brand new retail stores,

much of the coolness factor has worn off and managers at Apple face increasingly

tougher reality. The visitor rate per week dropped from 5,000 to 3,500 and the

conversion rate of Wintel customers has been a skinny 0.9%, therefore not adding

significant value to the company’s value chain. By cutting marketing, we want to

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emphasise that market research however will remain at the same levels in order to

assure that the R&D department makes the right decisions in terms of product

innovations. We believe that the brand name “Apple” is already strong enough

developed to remain alive as hip brand even with decreased marketing expenses.

Also expensive prime time advertising campaigns should be only utilised if necessary,

because we believe that Apple’s products are themselves means and channels of

marketing. The stylish forms, paired with superior engineering quality are a delight for

the eye and therefore successfully create a positive corporate image of the company.

Another area where costs are high above industry average is operations and logistics.

Apple has continuously experienced bottlenecks in its supply chain management,

which consequently led to increased costs due to time lags in the production process.

To ride down the experience curve and enjoy economies of scale, Apple has to

continue to outsource production processes and find a broader group of key

suppliers in order to be in a better bargaining position, which would lower the cost of

inputs therefore lowering overall production costs, widening the spread between

costs and value for the customer. As a result Apple could price its products also more

competitively on the market and subsequently, facing the threat of immense rivalry,

win market share from its rivals

12.2.2 Business level strategy

At the business level, strategy should aim at further improving the weakness and

therefore getting rid of the potential threat. As we defined to focus on Apple’s cost

structure, ways to reduce it have to be found which would then result in the desired

value creation effect. Right now Apple as analysed is pursuing a broad differentiation

strategy with particular strong emphasis on the software and peripherals markets as

its current performance in the digital music market shows. To obtain cost advantages,

Apple has to shift its strategy from being a pure differentiator to combine the

advantages of cost leadership and differentiation strategies simultaneously. As the

competitive nature of the high tech industry is anyway removing barriers between

both strategies, Apple could utilise this trend for its own benefit. The key success

factor here is to achieve significant economies of scale and to decrease production

costs further by shifting more of the production process to low labour costs countries.

Apple’s task is to effectively coordinate the unique components needed for its

technology to adhere to the existing high standards. Apple in the past tried not for

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nothing to control the whole supply chain management on its own, but within an

industry where critical mass has to be reached in order to be profitable, Mr Jobs has

to realise that beautiful doesn’t always mean profitable.

Competitive strategy has equally to match the generic business level strategy as we

target a lower cost structure. The savings occurred from the implementation of

functional strategies, hopefully leaves us with more powerful tools to survive in the

competitive structure of the industry. In addition to the previously available non-price

tools to create barriers to entry and to reduce rivalry inside the industry, Apple now

can use limit pricing to deter potential entry as it now, with a lower cost structure, can

survive lasting price battles and effectively signalling the environment that it won’t let

any firm take market share away, especially if it would target the same customer

needs and groups. If Apple manages to implement the necessary measure to shift

from a pure differentiator to a cost leadership oriented differentiator it can combine

low cost structure by meanwhile still offering unique and superior products, which

would further decrease the threat of rivalry.

12.2.3 Corporate strategy Apple, as previously examined, today is a company which is vertically forward

integrated by operating its own distribution channels such as the criticised expensive

retail stores. If Apple wants to stay vertically integrated it has to start controlling costs

and for instance enter into lease agreements for its stores, which are less expensive.

To experience cost reduction effects, Apple has to continue its policy of outsourcing

major parts of the products and getting more suppliers to provide them with key

components in order to be independent of a particular supplier. The outsourcing

efforts should include more value chain activities and as suppliers with their superior

efficiency in producing components at lower costs can pass on these savings to the

company, Apple can benefit greatly through outsourcing and likewise concentrate on

its core competencies design and innovation. The last choice would be the horizontal

integration, expected to yield cost savings through M&A, but reality shows us that

often these actions fail to realise these anticipated gains.

To sum it up the key to a better performance for Apple is to reduce its cost structure

through a reduction in marketing expenses, a multifaceted supply chain, and a

combination of differentiation and cost leadership strategies bringing together the

important elements from both, resulting in a lower C (cost) and a higher V (value) for

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the customer due to the now made possible price reduction as you can see in the

following diagram.

12.3 Implementation In order to implement a strategy that focuses on lowering operating costs, Apple’s

CEO and the company’s other senior executives have to continuously stress this goal

and motivate as well as coordinate the workforce through incentives, leadership, and

commitment. Moreover, they have to shape/adapt the company’s culture and

structure so that it fits to the new objectives but still provides a basis for maintaining

the firm’s distinctive competencies and leading to a competitive advantage.

Concerning the corporate culture, cost awareness (where appropriate and useful)

has to become incorporated into Apple’s set of values and norms. Although this

might be one of the most difficult parts of a successful strategy implementation as

several CEOs in the past failed in their attempts to change Apple’s culture, Steve

Jobs is definitely able to manage this challenging task. By taking Apple’s

organisational structure into account, it becomes obvious that an important step

towards the realisation of the ambitious goal will be to coordinate and integrate the

efforts of all employees so that they are consistent with the company’s strategic

objective. In fact, by allocating even more responsibility to single employees, these

V-P

V-P

V-P V-P

V-P

V-P

Initial Status

Lower prices to generate

demand

P2

C2

P1

C1 V

V*

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will take advantage of their authority, creativity, and flexibility and therefore search for

new ways to contribute to the firm’s goals.

12.4 Evaluation and control Actually, Apple’s current information system is highly capable and advanced and

therefore should be able to provide sufficient feedback about the company’s

performance and the status of its cost reduction objectives in an accurate and timely

manner. Moreover, through the use of the firm’s intranet the whole workforce as well

as the management team should be informed about the current status quo and IT

can also facilitate to implement appropriate strategic control measures which should

provide instantaneous and continuous feedback on the performance and

effectiveness of the firm’s strategy-specific activities.

In fact, these strategic control systems should contain incentives to motivate the

workforce in order to improve efficiency, quality, innovation, and customer

responsiveness. Moreover, in order to be effective, they should use IT for

measuring/monitoring purposes, comparison of actual/desired results, and the final

evaluation which could lead to enhanced or corrective action. In our case, Apple – as

it currently concentrates on personal and behaviour control – should also implement

output control in terms of performance goals for separate divisions or even specific

employees. These performance goals should support the cost reduction strategy and

therefore lead to a successful implementation as an accompanying reward system

would provide a motivating incentive for the employees. Nevertheless, management

should be aware that possible corrective measures need to be taken into account if

the company’s new strategic direction doesn’t enhance its performance and therefore

the responsible managers should be willing to take even harsh corrective moves if

necessary.

Finally, as already mentioned before, evaluation procedures play an important role in

a successful strategy implementation and therefore should act as a monitoring

activity that controls the company’s deve lopment due to the new strategic objectives

and provides top management useful support in making the right and necessary

decisions. In conclusion, all these efforts should lead to higher profitability and a

prosperous future for the company.

Apple Computer Inc.


13 Conclusion As our strategic analysis and the resulting strategic alternatives as well as our

strategic recommendation actually summarise the main facts of this strategic audit

and provide a ventured but definitely interesting (and on a broad strategic foundation

based) suggestion for the company, we would like to conclude this paper with some

personal thoughts:

In fact, it was certainly a challenging, interesting, and beneficial task for us to pursue

this strategic audit that was not only a personal milestone in our academic history but

above all improved our overall knowledge concerning the company and the strategic

management tools, processes, and methods. Moreover, this paper can be regarded

as a beneficial work as it gave us the unique opportunity to visit the company’s office

in Vienna (Austria) or engage in written communication with its branch in Cork

(Ireland).

In addition, this all meant a great chance for us to put our theoretical knowledge in

terms of strategic management and other areas into practise and to get a deeper

insight into a company which fascinates us due to its exceptional history, its amazing

capabilities, and the unique strategy it is pursuing in dealing with present and future

challenges in a rapid-moving industry environment.

Finally, we hope that we’ve been able to provide the reader with a comprehensive

and consistent strategic picture of Apple Computer Inc. and that our creativity and

design can contribute to superior innovation as well as the content does to superior

quality. Of course, we are thankful for any comments, advice, and recommendations

and will value your thoughts as a useful input to reach superior customer

responsiveness.

Valentin Iliev, Andreas Lindinger, Guenther Poettler

Apple Computer Inc.


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Apple Computer Inc.


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Apple Computer Inc.


Appendix Corporate memo

Apple Computer Inc.


Apple Computer Inc.


Standard and Poor’s Rating Agency

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Standard & Poor’s Moody’s Fitch

Documents

Apple Strategic Audit