Strategy Apple Case

Business Strategy Group Case Analysis – Apple Computers

Group 1  SP Jain Institute of Management & Research  6/13/2009

By Kalpesh Agarwal Sivaram Gunavel Chetan Mahindra Jaspal Singh

- PGPM508_01 - PGPM508_12 - PGPM508_23 - PGPM508_47

 Business Strategy

P C I ND U ST RY O VE RV I E W The global computer industry is extremely competitive and it has experienced consistent explosive growth. In 2002, personal computers were a $220 billion global industry. Personal computing was pioneered by Apple, but IBM due to its brand name and strong product quality brought PCs into the mainstream. The annual PC unit growth averaged roughly 15% since 1980’s. From 1998 to 2000, the CAGR of worldwide PC market was 20.8%. Further, the CAGR of price of each unit has been decreasing at 5% from 2000 to 2005. By 2002, there were 400 million PCs installed around the world. Components became increasingly standardized due to introduction of Wintel (a combination of the Windows operating system and Intel microprocessor) in early 1990’s which further brought in new big players like Compaq and Dell. Some of the major players existing today in market are Dell, Compaq, HP, IBM and Apple. The different forms of personal computing devices available in the market primarily include desktops, laptops, notebooks, sub-notebooks,

Worldwide PC Market (2002)

PC Buyers (2001)

10%

24% United States 40%

25%

Western Europe

8%

Asia Pacific Rest of World

25%

Figure - Worldwide PC Market Distribution

Channel Distribution in US (2001) 25%

10%

40% 25%

Direct channels

Commercial channels

Retail channels

Internet

Figure - Channel Distribution in US

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60%

8% Business

Government

Education

SOHO

Figure - PC Buyers

workstations, servers, etc. These devices break the industry into various segments. The industry can also be broken down into segments on the basis of PC buyers (as shown in the figure) as business, government, education and small-office & home-office users.

When it comes to suppliers, the PC industry has two categories them: those supplying products that have many sources, such as memory chips, disk drivers and keyboards, and those supplying products that come from a small number of sources, notably microprocessors and operating systems. Intel

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has been the major player in the microprocessor space followed by AMD, IBM and Texas Instruments. On the operating system (OS) front, Microsoft has dominated with roughly 90% of new PCs (in 2001) shipped worldwide with its Windows OS. Microsoft started with its Disk Operating System (DOS), followed by its Windows 3.0, Windows 3.1, Windows 95, Windows 98, Windows NT, Windows 2000 and Windows XP. Some of the different alternatives to personal computers that exist today are hand-held PDAs, smart-phones, set-top boxes and even the X-box offered by Microsoft.

P C I ND U ST RY A NA L Y S I S Major manufacturers in the PC industry are constantly competing to produce least expensive yet most efficient machines on the market. As technology changes rapidly, competition in the personal computer industry is on the rise. With the advent of internet technologies, the time spent from order placement to delivery has drastically reduced. PC demand is found to be accelerating, and a big growth in the sale of notebooks is an indicator that the market will continue to grow. PC prices have been falling continuously and the major reason, along with intense competition, has been the significant reduction of microprocessor prices by Intel which ranges to about 50% per year. Outsourcing to contract manufacturers to produce both components and complete PCs has been on the rise which has led to the reduction of cost to the manufacturers apart from improving turnaround time. Also, companies are moving from a build-to-stock to build-toorder or configure-to-order strategy so that they can potentially reduce its cost by 10%. Developing economies like India and China are seen as potential market for buyers and manufacturers due to the fact that it is an attractive growing economy and provides the advantage of cheap labour. Hence, huge expansion plans are seen in the pipeline.

FI V E F O R CE S A NAL YSI S O F TH E P C I N D U ST RY Threat of New Entrants While there is always a potential for new competitors to emerge, the personal computer industry is dominated by five main competitors: Dell, HP, Compaq, IBM, and Apple. The presence of dominant players deters the entry of new players to immediately enter this market and establish their brand. A greater threat to the computer industry is the existence of a great number of amongst industry leaders. In such a competitive environment, these companies often pool costs together on the research and development field. This creates an increased competition between companies who are competing to build superior products based on the same information, and the larger companies often engage in buying out the smaller companies, increasing their competitive edge. Established mobile phone manufacturers can also be considered as a threat to the PC industry because they can easily shift to PC manufacturing given their technical expertise and channel establishment apart from brand image.

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The advent of modern software capabilities like online office, online operating system, cloud computing and online resources might push PC manufacturers where they need to just provide only the basic hardware and connectivity. The relative technology and know-how needed to make PCs is low. Due to increased standardization in operating system (by Microsoft) and Microprocessors (by Intel), it is easy for any new entrant to clone and manufacture PCs (called “white boxes”) with no established brand name. Players like Dell today have shifted to negative working capital because of their strategy of build-to-order. This is an attractive option for new entrants. The presence of patents and copyrights in the microprocessor space actually deter new entrants as they need to invest in huge R&D. Selling PCs directly to customers using Internet is also possible. However, existing large companies have established strong supply chains, distribution channels, R&D, marketing, and customer support services to create moderate entry barriers. As the PC industry in most nations is close to the maturity stage, the number of entrants has slowed down and industry concentration increased. The results are lessened entry, which has led to a more concentrated industry. Hence the threat from new entrants to the PC industry is weak to moderate. The Threat of Substitute Products and Services Anything that may replace personal computer is a substitute, which creates a threat to the PC industry. A cell phone with an Internet web browser and emailing function is a substitute for the PC for people who use a computer only to use those functions. Word-processor/typewriters and calculators are also substitutes. Xbox by Microsoft, has a DVD player, high-performance games, and a standard Ethernet network card for high-speed Internet connections without PC hardware, which is a substitute of PC especially for home users. However, the PC is still a necessity today as it has actually taken many functions away from other products to become a substitute for products such as the TV, newspaper, magazine, book, videogame, CD player, DVD player, photo album, calculator, wordprocessor, telephone, fax machine, and so on. However substitutes for computers do not have as many functions as a PC and are not close in performance. Hence threat from substitutes is weak to moderate in the PC industry.

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Figure - Porter's Five Force Model for PC Industry

Bargaining Power of Suppliers Components for manufacturing personal computers are the microprocessor, motherboard, memory storage, and peripherals such as monitor, keyboard, or mouse, along with bundled software. Most of the components are highly standardized and widely available from a large number of suppliers. Thus, suppliers of those similar components do not have much market power vis-a-vis the PC industry. However, software makers hold significant power compared to PC makers that want to sell their computers with preinstalled software. For instance, Microsoft, which does not have a competitor for its Windows software, dominates the industry and thus has a strong power to influence the PC industry. While the PC industry changes regularly, it can be observed that only the central processing unit (CPU) is a key input. All other items are commodity in nature and so don’t command a bargaining power. Intel has a significant market power as it is a single major supplier of microprocessor and has an 80% market share.

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Thus, the computer manufacturers hold a power over the suppliers as opposed to the suppliers holding a power over the manufactures. It is the suppliers that are in direct competition with each other to obtain exclusive contacts with the manufactures to have them use their products. The suppliers, therefore, are often forced to slash prices or merge with larger companies in order to survive. Hence the bargaining power of suppliers is moderate. Bargaining Power of Buyers Large businesses, governments, and schools, which buy computers in large volumes, have the power to bargain on price, quality and service. Personal computer buyers are price-sensitive. However, buyers have less power when the switching costs and brand-loyalties are high. Thus, PC manufacturers can reduce a threat of buyer power by differentiating their products. For example: Apple’s unique operation system and its computers specifically targeted to publishing and designing industry prevent their buyers from switching to competitors’ products. Its sleek product design represented by iMac and iBook also acquired many fans and increased brand-loyalty. But, despite several ways in which manufacturers have differentiated their products and found ways to increase switching costs, customers still see units as very similar and thus choose primarily on price. Hence the bargaining power of buyers can be concluded to be strong. Industry Rivalry The five main manufacturers namely IBM, Dell, HP, Apple, Compaq are in competition to produce the least-expensive and most efficient machine. Japanese companies such as Fujitsu, Toshiba, NEC, and Sony also have large market shares. Some companies such as IBM and Apple focus more on innovation while others such as Dell focus on distribution channel and service, which creates differentiation to some extent. The technology paradox holds in the PC industry. High-tech companies such as PC makers thrive when they provide ever greater amount of advanced technology, while the price sharply falls. Since the quality of a PC is largely determined by the microprocessor and application system installed, the profitability and prosperity of the PC industry’s is dependent of the profitability and prosperity of these suppliers. As the PC has become a more commodity-like product, price-competition has become severe in the industry. The price of PCs has declined since 1990’s. Cost-cutting is now critical for PC producers to cover the decreasing profit margin.

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Low-cost production at Dell contributes its positive growth rate, while all other major firms are experiencing negative growth rates. Another important aspect of competitive advantage is globalization. Many PC makers in the US now earn around 40% of their revenues in international markets. Although PC markets in the US, Europe, and Japan have matured and the demand has slowed down, demand in Asia-Pacific (except for Japan) is expected to grow. The effects of intense competition are beginning to be felt as companies exit via selling to other companies or simply exiting the industry altogether. Regardless of the number of companies present, the computer industry will continue to expand and remain competitive for a number of years to come. Hence the threat to industry rivalry can be concluded to be strong.

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Part II RE CO MM E N D AT I O NS TO A PPL E The following are the recommendations on how Apple can turn its existing product advantage to a competitive advantage: Licensing of MAC software to other PC makers Increase entertainment diet so that acceptance of Apple products increases among customers Special concession to schools so that once workshops are conducted in schools, it can create a lasting interest amongst the younger generation (future of tomorrow) Have long term contracts with corporate to increase market share by selling them bulk PCs at discounted prices Increase retail presence in developing economies Increase customer service capabilities Online upgrades even for hardware Apple could come up with a separate product line with luxury brand PC that can be thought of making a lasting fashion statement amongst certain customers by constantly bringing innovatively designed highly fashionable PCs for the urban chic People are using hard-to-administer Windows PCs or expensive Macs to just send email and access intra-office databases. It doesn't make any sense that all that hardware be wasted. It would be advisable to have a generic low end model for basic computational purposes targeting low cost buyers. Tie up with wireless service providers and provide bundled packages to users as this might be the trend tomorrow where a PC would become useless without a network connectivity Provide customization & personalization capabilities where the customer can design even the look and feel of her/his PC before placing an order. Such personalization does not exist today and can also make Apple demand higher margin for the product design flexibility, service and innovation. Device a mechanism which will charge batteries whenever a key is pressed or a mouse is moved. The more a PC is used, the better it charges the batteries (a concept similar to the olden day mechanical auto winding watches which winds every time your hand moves). This should be a revolution in the PC industry to move towards a completely wire free computing.

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CO N CL U SI O N It can be concluded that the PC industry is fairly attractive for entrenched, global, leading companies but not for new firms. Although cost of assembling a PC is low, the barrier to entry is fairly high because of the economics of scale and brand-loyalty. Adversely, however, the high barrier to entry provides strong competitive advantages to existing large companies. PC manufacturers should especially focus on buyers and industry competitors, whose power reduces profits in the industry.

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