BES’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

STRATEGIC MANAGEMENT

Submitted by

Abhishek Krishnakumar Rane.

SYMMS

Apple Inc.

Apple Inc. is a company that designs, manufactures, and then sells desktop and notebook computers (Mac), portable digital music players (iPod), and cell phones (iPhone). It also creates software like the OS X operating system, iLife, iTunes, or QuickTime; and peripherals such as printers or storage devices that go with these products. Apple is in the technology sector, and has expanded from the computer industry into peripherals and the digital entertainment industry because of the wide scope of its products and services. Apple’s mission statement is as follows:

Our group struggled to find out what Apple’s objectives are. It turns out that it does not really have any well-defined short-term goals. Steve Jobs said in a conference, “Our goal is to provide our customers with the best personal computers in the world.” We had a hard time finding other specific objectives of Apple, Inc.

Apple incorporates most of its product lines, such as the Mac, iPod, iTunes online store, and iphone into its mission statement. It shows that Apple has fully evolved into a digital entertainment company from a former computer-oriented company. Also, Apple is right about its position of being a leader in the digital entertainment industry and it shows in its sales figures: its revenue in 2007 was $9.6 billion.

By March 2005, Apple had sold more than 300 million songs and the number is still increasing tremendously. But the music industry loses around US$4 billion to piracy a year. This number addresses the biggest challenge Apple is facing: consumers are reluctant to pay for songs and thus, Apple is losing customers to its competitors who are offering music at a lower price. This can be seen in increased piracy and code hackers. Other problems, such as lack of focused consumer groups, not taking full advantage from its existing loyal customers, and failure to integrate its products with readily available existing technology, are also obstacles to Apple’s success as an organization but they are not as critical as the problem we mentioned above. In this article, we will carry out an industry analysis of Apple, generate two possible solutions, analyze the feasibility of the two options, recommend the best solution, and implement and evaluate the strategic solution.

Michael Porter’s Five Forces Industry Analysis

For more effective strategy evaluation, we will examine the industry analysis through Porter’s five forces analysis. It is necessary to define the industry that Apple Inc. belongs to. It used to be just in the personal computer and software industry but now Apple expanded its business to the entertainment industry, which includes MP3 players, online music service, and mobile phones as well as PCs. Although Apple is now referred to as a company which is providing digital entertainment products and services, the industry itself is not consistently comparable with the other companies because Apple is not specialized in just one scope of product, such as the PC, but the scope of products and services provided is more complicated. Thus, we will look into the major segments of Apple’s products and services in terms of PC, MP3 players, online music services, and mobile products in the table below.Table 1Porter’s Five Forces for PC, MP3/Music Entertainment Services and Mobile Products

PC MP3 player/online music services

Mobile Products

Threat of Entry

Low

- Economies of Scale: R&D is especially a big part of the cost of producing (R&D cost in computers hovers at 12% of sales by the U.S. industry).- Product Differentiation: Apple’s PC has its own operating system and the unique design.- Cost Advantage: High demand particularly in

Low

- Since iPod nano launched, some competitors such as Rio and Olympus had preferred to stop. - Economies of Scale: iPod has 80% of market share and Apple contracted with Samsung to buy 40% of its flash memory production which is two times more expensive than a hard drive.- Product Differentiation: iPod has its own music

Low

- Economies of Scale: High demand in R&D and marketing (today’s cell phones come with a lot of add-ons like camera, voice recorder, speakerphone, MP3 player and FM receiver. They also have built in memories to record and retain voice and pictures and facility to download them to a computer).- Product Differentiation:

proprietary technology.

store like iTunes which allows customers download music conveniently. The complete set of iPod, iTunes and the accessories for iPod. - Cost Advantage: High demand in proprietary technology. Apple has several patents for iPod and favorable access to raw materials by the contract with Samsung.

iPhone has add-on functions with technology from their own PC and MP3 player.- Cost Advantage: High proprietary technology and favorable access to raw materials.

Threat of Rivalry

High

- There are relatively few competing firms compared to other industries, but Microsoft has most of the market share.- Lower priced PC makers like Dell have been growing in the market.

Moderate

- There are various competing firms such as Samsung, Sony, i-River, etc., but iPod has almost 80% of the market share.- But if it does not keep the products innovative, the other company’s products which are lower in price than iPod can be a significant threat in anytime.

High

- There are relatively large number of competing firms such as Samsung, LG, Motorola, etc., but the latest market data from analyst firm Canalys estimates that Apple took 28% share of US smart phone market in 4th quarter of 2007.

Threat of Substitutes

Low

- Many types of products such as PDA, DVD player,

Moderate

- The substitutes for MP3 player can be a CD player, MD

Low

- Mobile phones can be substituted by home phones,

and calculator can exist as a substitute for PC, but these can substitute only one or two functions of PC.

player, radio, etc.; but cheaper and easier access to MP3 files has been making customers leave from the other music players.

internet messengers, etc., but the main convenience of mobile phones which is the portability cannot be easily substituted.

Threat of Suppliers

Moderate

- The major suppliers are of raw materials and the labor which is highly proprietary in technology and has the power to impact price.- Besides the threat of the labor which includes the technicians, there are relatively various suppliers for the raw materials.

High

- The suppliers for raw materials and labor can be the threat, but the supplier who holds the main profitability is the song writers, singers and players. - Another big threat is the illegal free music download websites or P2P file- sharing sources. Easy and cheap access to MP3 files can encourage the MP3 player market, but on the other hand, this can be the threat to iTunes.

Low

- Today’s phone has a lot of functions in addition to calling/receiving so there are many kinds of suppliers for the camera, MP3 players, Video players, memories, etc.- Apple which is already in the industry of PC and MP3 mostly deals with internal mediates and suppliers.

Threat of buyers

Moderate

- The number of buyers is huge and growing as new technologies are introduced at a fast pace.- Apple differentiated by

Low

- The number of buyers is continually increasing and they keep demanding new and updated products.- The internet speed and the music file providers are

Low

- The number of buyers is even huger than the PCs. Also the buyers keep increasing with the new market of other developing countries.

creating its own operating system and unique design, but other companies like Dell or HP differentiate by lower price marketing.

developing and these environments encourage the MP3 buyers.- IPod has relatively loyal customers.

According to the five forces analysis, the threat of rivalry is the highest external force in the PC and mobile phone industry and in the MP3 player and online music service industry, the power of suppliers is the highest external force. However, the marketplace trend seems to be destroying all the boundaries of each industry. A MP3 player is not only an audio device anymore, but it is getting to be a more enhanced tool for full-motion videos and data storing which is the area of PCs. Furthermore, a mobile phone is also not only the tool for the calling and receiving, but rather, it is taking the role as a digital camera, a carry-on PC for memory storing and internet, and an audio device as a radio or MP3 player as well. In terms of these trends, Apple has been very smart in analyzing market profitability and adopting innovative strategies by catching the changes of the market trends. Also, the most recent step to the mobile phone industry seems that it was the best way to utilize and maximize their competitive advantages by integrating PC, MP3 player, and online music service.