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Apple Inc: Different Dynamics Essay

Apple’s initial competitive advantages and the emergence of the Personal Computer With sales of $108 billion in 2011 and shares that have consistently outperformed the market since December 2004, Apple is today one of the largest and most valuable companies in the world. Apple is well known for its high quality, design, functionality and innovation. Since the company was founded in 1976 these unique qualities, particularly innovation, contributed to its success. The Apple I and II were the first easy to use computers in the market; these products were unique and therefore quickly made their way into the market. However, this success faded in 1981, when IBM entered the PC market with a computer that quickly became the standard for the industry. Apple’s ease of use, industrial design and technical elegance no longer justified higher prices and as a result Apple’s net income dropped 62% between 1981 and 1984, which led to Steve Jobs’ dismissal.

When Sculley took over as CEO in 1985, Apple started positioning itself as offering a complete desktop solution to “plug and play”, which, in their mind, justified the premium price compared to their competitors. This attempt to differentiate Apple was not successful and after IBM’s drop in prices Apple started competing in price and volume. This was followed by a series of events between 1993 and 1997, which reduced differentiation even more (licenses to make Mac clones, leave the JV with IBM to create a new OS). In 1996, its profit fell to a negative $ 1.6 billion and its gross margin to 10%. Apple’s strategy at that time was not successful in competing with the PC: IBM’s system was relatively “open” (other producers could clone it) and the higher unit volumes attracted software producers. The lack of Apple’s compatible software further limited its sales.

Computer manufacturers in the 90’s were involved in a technological war in which every year computers had more storage capacity and faster processors, while at the same time sold at a lower price. This led to a mutually destructive game in which no competitor was able to capture significant value. Instead, both the customers and suppliers of OS and microprocessors benefited the most from the situation, “stealing” previous PC manufacturer’s profitability. Customers demanded lower and lower prices every year, got more knowledgeable about the product and started buying in superstores that have a higher bargaining power towards PC manufacturers. Industry growth was driven essentially by lower prices and expanding capabilities. Whereas Microsoft and Intel had profit margins between 25% and 30%, the main PC manufacturers did not exceed 6%.

The following figure illustrates the different dynamics influencing the highly competitive PC industry:

Steve Jobs’ return has shaped Apple’s successful strategy Steve Jobs returned to Apple in 1997, and in an attempt to save it from bankruptcy he strategically repositioned the company. His new vision was positioning Apple not as another PC manufacturer but as what he called a “digital hub”. Costumers would now be able to have integrated, cutting edge devices that would suit their digital lifestyle although for a higher price. The measures that followed this decision helped to build Apple’s new strategic position in a market with barely no competitors: Jobs rose barriers of entry (halted licensing program) and followed a strict secrecy policy that strengthened Apple’s first mover advantage, modernized the supply chain, and narrowed the business to four categories, which allowed Apple to save costs and invest heavily in R&D and innovation.

As a result, many of the new products launched in recent years were successful. While Apple’s market share in computers stayed at a low level (4.7% in 2011), the expansion into light-weight notebooks worked out well. Other mobile devices such as iPod, iPhone, iPad revolutionized the mp3 player, cellphone and tablet industries significantly. Samsung managed to be one of the fastest followers with similar products, however, cannot match Apple’s brand image and its strongly vertical integrated solutions (e.g. recently further completed with the introduction of iCloud). The following figure illustrates Apple’s superior position as an industry leader:

Strategic considerations: reinvent Apple to secure its future success Innovative products – In such a fast moving industry, Tim Cook should counter strong competition by innovating industry disruptive products. Instead of providing incrementally changed products (such as iPad mini), the aim should be to sell high-end products and create new markets. For example, Apple could counter Samsung’s plan for launching web-connected TVs with a new Apple-TV solution that goes beyond the expected features. Apple should further consolidate systems to make the use of technology as easy as possible at times when the number of features and capabilities is growing exponentially. To achieve this, Apple needs to look at the whole vertical infrastructure rather than at single hard- or software. Top-notch Quality – One of the core foundations of Apple’s brand has been the quality experience of using its products.

Tim Cook must not lose focus on this aspect when launching products, as this will surely hurt Apple’s differentiation. Strict controls should be placed to avoid launching flawed products such as Apple Maps or Siri. On the hardware side, some users notice a deteriorating product quality of every new iPhone generation (e.g. buttons falling off) which is a big threat. Talent Retention – A number of key persons have left Apple recently; most notably retail chief Ron Johnson. While it may not be a big brain drain at Apple, there is the possibility that more executives might leave. Cook needs to make sure that this does not happen. Overall, with Apple now being one of the largest companies in the world, management skills need to reflect the change to ensure that such a big company stays as flexible and “entrepreneurial” as possible to continuously innovate.

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