This was based on the Harvard business Case apple in 2002, might be outdated but it is where I think apple is moving. Keep in mind this is before itunes. My teacher liked it...
EXECUTIVE SUMMARY
The computer industry has become very competitive and specialized with consumers reaching to products far below Apple’s price points. In order to maintain a position in the industry, Apple must diversify into new markets and seek sources of revenue outside its core computer market.
It is recommended that Apple leverage its core competencies of R&D and design to generate increased revenue and a larger market through software and technology licensing. Additionally Apple should use R&D to pioneer and create products for home networking solutions while lowering the prices of its products.
EXTERNAL ANALYSIS
The computer industry in 2002 has evolved rapidly in the past 30 years. Currently there are two main options for computer users: an Apple computer running a Mac OS only available from Apple or a PC running Windows from a wide range of sellers including IBM, Dell, and HP. Windows based PC’s dominate the market with 90% of new PC’s worldwide shipping with Windows and only 3.6% shipping with Apple’s OS.
Computer buyers are segmented into four categories business, government, education, and home (see exhibit 1). All segments consider price to be critical in making computer purchases. The majority of computer shipments are made to the United States, but international growth is projected to be much higher with China being the fastest-growing market (see exhibit 2).
The computer industry consists of hardware manufacturers and software developers who are responsible for developing operating systems as well as applications. Currently the trend is for companies to specialize in either hardware or software (see exhibit 3).
In addition to this trend, the industry has also reached two inflections points regarding customer perceptions. First, consumers see PC’s as a commodity and have become very price sensitive, dramatically increasing competition. Also, PC’s, operating systems, and software has become much easier to use, limiting the further development of more user friendly machines. As a result of these inflection points most large players in the industry are not increasing research and development.
The major segments of the computer industry: hardware, software, and peripherals have different competitive forces (see exhibit 4). The main forces shaping the industry are:
Threat of New Entry: is high in hardware due to increased competition, but low in software because of high development costs. In peripherals the threat is medium because it is a newer market than hardware and software.
Rivalry: is high in both hardware and software because these segments are competitive and require a large amount of investment, while growth is stagnating. Peripherals have a low to medium rivalry in which growth can be fueled by new innovations.
The value chain of the computer industry and specialized nature of most companies exhibits the trend of specialization (see exhibit 5). Companies are creating value where they have competitive advantages and moving away from activities where superior value is not created.
INTERNAL ANALYSIS
Apple is one of the few computer companies that develops its own hardware and software. It has survived in a very competitive and changing environment despite remaining unspecialized in both hardware and software.
The company pioneered the PC industry and continues to innovate by leveraging its experience curve and core competencies (see exhibit 6). Apple’s main core competencies are:
Innovation through R&D: Although Apple spends more than most companies on R&D this is only a temporary competitive advantage because Apple innovations can be replicated on non Apple PC’s.
Operating System: Apple’s proprietary OS is a temporary competitive advantage. The software is substitutable with Windows and does not have enough market share to maintain a sustained advantage over Microsoft.
Positioned as Easy to Use: Apple’s ease of use represents a sustained competitive advantage, but is in jeopardy of being lost due to PC’s becoming easier to use in general.
Hardware and Software Expertise: Apple’s expertise in both hardware and software is a sustained competitive advantage that allows it to ensure seamless integration of its products.
Apple’s market in the United States is very competitive and growing slowly. Apple products are priced above comparably configured PC’s and it has not been able to cut into Windows markets share. Additionally Apple’s largest customer segments, home and education, are the most price sensitive. The company has been able to draw in new customers with innovative designs such as the iMac computer and iLife software. Additionally the sales effort of Apple stores shows promising results of developing new customers and capturing Windows users.
BUSINESS MODEL
Apple’s current business model revolves around its core competencies of developing hardware and software that are completely integrated and easy to use. This model is clear when looking at the company’s value chain for both hardware and software (see exhibit 7).
Apple has trimmed some activities, production and assembly, of the computer industry from its value chain in order to create a more effective business strategy of competing with both hardware and software companies to provide a computer, operating system, and software.
The 5 activities in Apple’s current value chain are not completely aligned with its core competencies. Marketing is not adding value to its targeted customers because Apple’s prices are not competitive. Additionally, the lack of support activities is not strengthening the ease of use competency.
Apple’s current management has closed down all past efforts at licensing the Apple OS on clone computers while as keeping well received software such as iLife off of Windows machines. This decision allows the company to maintain full control of its products, while severely limiting its potential customer base.
RECOMMENDATION
License R&D and Software - Apple needs to open its proprietary R&D, technologies, and software to other companies through licensing. In doing so, the company can leverage its core competencies of innovation and positioning to enter new markets. Licensing hardware and design developments will create a new revenue stream as well as opening up Apple products to a much larger customer base. If software such as iLife were licensed to Windows machines it could produce large returns on apples development investments with little additional cost.
Develop Products for a Home Networking Solution - Apple should also create a new market by developing products for home networking solutions. This would allow apple to sell additional products to its largest customer base, home users, while attracting new customers through diversified product offerings. Apple can again leverage its R&D to develop hardware for TV’s, radios, phones, and networking needs in homes. The hardware and software developed should be open and compatible with both Windows and Apple OS, making either a PC or Apple computer the digital hub for the home. Developing a new market in such peripherals will allow Apple to charge premiums through innovation rather than only competing in the price sensitive and saturated hardware market.
Lower Prices: Apple needs to lower prices in order to adjust for increased competition in the industry as well as a change in consumer preferences that views computers as a commodity. Without making such changes in pricing, Apple continues to overprice its key customers in the education and the home segments. Apple must adjust to the industry inflection point of all computer purchasers being much more price sensitive. Lowering price will allow customers to compare Apple systems with comparable computers from Dell and HP.
Apple’s new value chain based on the previous three recommendations outlines its new business model (see exhibit 8). Support activities should be outsourced to a third party because it provides less value than licensing.
Apple’s new strategy will allow the company to adjust to industry inflection points while leveraging core competencies for growth in its current market of hardware and software as well as the new markets of licensing and home network solution products.
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