Apple: Strategic Challenges And Changes

Q1) Evaluate Apple’s strategies and how they have managed their strategic challenges and strategic changes within this. In your evaluation you will need to consider the key factors of success in relation to the different strategic groups within the industry. Support your evaluation with relevant theory and academic models.

Apple is a vertically integrated company, manufacturing and supplying all hardware and software as well as its own operating systems. Apple chose this strategy so they could retain profit and ensure profit is not lost by financing other company’s profit margins. The practice behind this theory is to heavily finance research and development and have had the necessary means of production to cover all areas of the business. Marketing and advertising are also a key component in Apple strategy to have a better market position.

Founded in 1976, Apple built its early reputation on innovative personal computers that were particularly easy for customers to use and as a result were priced higher than those of competitors. The inspiration for this strategy came from a visit by the founders of the company- Steven Jobs and Steven Wozniack- to the Palo Alto research laboratories of the Xerox company in 1979. They observed that Xerox had developed an early version of a computer interface screen with the drop-down menus that are widely used today on all personal computers. Jobs and Wozniack took the concept back to apple and developed their own computer- the Apple Macintosh (Mac) that used this consumer friendly interface. The Macintosh was launched in 1984 but Apple did not sell or share the software to rival companies. Over the next few years, this non-co-operation strategy turned out to be a major weakness for Apple.

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Although the Mac had initial success, its software was threatened by the introduction of windows 1.0 from the rival company Microsoft, whose chief executive was the well-known Bill Gates. Microsoft’s strategy was to make this software widely available to other computer manufacturers for a license fee- quite unlike Apple. A legal dispute arose between Apple and Microsoft because windows had many on-screen similarities to the Apple product. Eventually, Microsoft signed an agreement with Apple saying that it would not use Mac technology in windows 1.0

Unlike Microsoft with its focus on software strategy, Apple remained a full-line computer manufacturer from that time, supplying both the hardware and software. Apple continued to develop various innovative computers and related products. Early successes included the Mac2 and PowerBooks along with the world’s first desktop publishing programme- PageMaker. This latter remains today the leading programme of its kind. It is widely used around the world in publishing and fashion houses. It remains exclusive to Apple and means that the company has a specialist market where it has real competitive advantage and can charge higher prices. Not all Apple’s new products were successful- the Newton personal digital assistant did not sell well. Apple’s high price policy for its products and difficulties in manufacturing also meant that innovative products like the iBook had trouble competing in the personal computer market place.

In the year 2000, Apple identified a new corporate strategy to exploit the growing worldwide market in personal electronic devices- CD players, MP3 players, digital cameras etc. It would launch its own Apple version of these products to add high-value, user friendly software. Resulting products included iMovie for digital cameras and iDVD for DVD players.

The iPod was launched in 2001 and was followed by the iTunes Music store in 2003 in USA and 2004 in Europe. The product has proven unbelievably successful; over 100 million units have been sold in the six years since its introduction. In 2003, Apple’s iTunes Store was introduced, offering online music downloads in integration with the iPod. The service quickly became the market leader in online music services, with over 3 billion downloads by August 2007. Steve Jobs announced that iTunes had reached 4 billion downloads during his keynote address at the 2008 Macworld Conference & Expo.

The iTunes was essentially an agreement with the world’s 5 leading record companies to allow legal downloaded of music tracks using the internet for 99 cents each. This was a major success for Apple- it had persuaded the record companies to adopt a different approach to the problem of music piracy. At the time, this revolutionary agreement was unique to Apple and was due to the negotiating skills of Steve Jobs, the Apple chief executive, and his network of contacts in the industry.

By 2005, Apple’s music player- the iPod- was the premium priced, stylish market leader with around 60% of the world sales. Its iTunes download software had been redeveloped to allow it to work with all windows compatible computers (about 90% of all PC’s) and it had around 70% of the world music download market, the market being worth around US$330 million per annum. However, by 2005, all the major companies like Sony, Philips and Panasonic were catching up fast with new launches that were just as stylish, cheaper and with more capacity. Apple’s competitors were even reaching agreements with the record companies to provide legal downloading of music from websites.

Another Example of the likely competition came from the mobile telephone market leader, Nokia, and the dominant software company Microsoft. In February 2005, they jointly announced that all new Nokia mobile phones would come with Microsoft’s Windows media 10, allowing downloading of music from PC’s onto mobile phones- yet another threat to apple. However Apple was the market leader and was able to demonstrate major increases in sales and profits from the development of iPod and iTunes by early 2005.

One thing that has been established is that Apple releases a few versions of one great computer and then offers new software that easily integrates with the other software. Well, Apple has a lot of software that only within the last 4 or so years began to integrate with PC things as well as hardware. For this reason Apple has only been able to gain supplies from a limited set of suppliers, leaving Apple in a vulnerable position. However, one of Apples competencies is a great designing department. They come up with fun looking machines and professional looking machines. The other important thing is the size and the colour of the machine.

Distribution

Apple has many forms of distribution from their own retail outlet, to business to business selling, to their online store. First there are the Apple retail stores; most of these will be found in major cities across the US and the UK. From these or the website anything can be offered to customers and the products can be even more personalized than they already are.

Their most important deals are probably with education. For years they have been offering their computers to schools for years and have grown a large following just from the children that are familiar with Apple and comfortable with Apple interface. This also allows Apple to watch market trends since their market is also people between 20 and 30 years old. The young children will be the future so Apple simply watches what they are interested in.

Their final bit of distribution comes from other warehouse companies or help desk companies that need the Apple parts and products to fix peoples’ computers. There are also third party stores that might display the product amongst several other laptop options.

Their main manufacturing, development, designing stuff can be found in California and in Ireland. These two points must serve as umbrellas under which warehouses and retail shops would order or receive from them.

Marketing stratergy

I think Apples main stratergy is there appeal to their customers. What you find in general with many of their products more btter looking than the competitions. One thing we can see is Apple building on the popularity of the iPod. It appeals to the Mass market. Now appeal less as a computer company and more of a electronics company and seem more user-friendly.

Apple have a differentiation stratergy. Apple products are known to have a unique appeal, with its sleek designs a userbility. Due to this it gets a lot of attention from consumers and the media. Without much advertising or marketing on their part. They give something new and unique to talk about which everybody gets pulled in to.

With the iPod there not only selling a mp3 player, there selling a social chic. Everybody has one and everybody wants one.

Target Market

• Apple Ipod focused particularly at those between the age of 12-25, consistent with their advertising. Bright colours and a man dancing.
• It will appeal to both males and females
• People who have a passion or interest in music and/or literature
• Technology enthusiasts

The iPod appeals to the mass market, everyone is a potential customer. Young or old. They have music, literature and podcasts all avaiable for the iPod owners. The simplicity and sleek design is what attracts people. Although the latest ones (the touch) are expensive, and may be aimed at higher and older earners.

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Appropriate models, such as environmental analysis, industry analysis, lifecycle, analysis, resource analysis, swot and pest analysis, Porters 5 forces etc (these do NOT form part of the word count).

PESTEL-Analysis:

Economical aspects:

• Inflation currently has increased in UK and the US and may affect current sales of ipods which have already slowed.
• Global economy in a down turn
• The exchange rate will also affect Apple as they are importing or exporting goods within the international market.
• Socio-cultural aspects:
• Again Anti-American agenda may cause potential customers to but from another company.
• A generally aging British population, so many may be put off by the technology
• As much as it is a iPod culture, it can go away as quickly as it came. People may find something else which is better and more value for money.

Technical aspects:

The wide range of fast changing high-tech/high-quality download possibilities, encourages consumers to download but it also puts more pressure on competing firms, as they have to stay up-to-date with the newest technologies. Considerable developments in the mobile phone market (3G handsets becoming reality and expanded features available to the customer) will push the multimedia download market into new spheres and will open up great opportunities for Apple.

Many substitutes available from iRiver, Samsung and Sony. Competition moving away from copy protection on songs, Such as Amazon.

Peer-to-peer file sharing applications like Lime wire and Kazaa are still extremely popular. Although this is a problem with the music industry on a whole. This still however affects iTunes.

Legal aspects:

Issues of copyrights and illegal downloads greatly affect the music download industry and are a major problem for active legal providers. A former lack of legislation in this area has encouraged consumers away from commercial downloading services and as a response to this, new technologies have been introduced that protect the copyright of owners and prevent customers to download and share files illegaly. Digital Rights Managment (DRM) was created to control the number of copies that can be made from a download and although for the music industry there are many positive aspects to DRM, there are surely as many negative for the consumer. Therefore, some companies have already planned to open big portals on DRM-Free tracks that will legally enable the consumer to download files without being limited to a certain number of computers, portable digital devices and CD burns for a reasonable price.

Source: Corporate Stratergy finntrack.com

Porter’s 5 Forces:

Substitute products:

A substitute product is not a direct alternative to the product a company is selling. For example, the new Sony Walkman media player is not a substitute for the iPod Touch, it is a competitor. However, a personal CD player or MP3 player could be if certain aspects of the market were to change, e.g. price and there was a high elasticity of demand. In the case of iTunes, with music there is a wide range of options for buying music and therefore are many substitutes within the music industry, for example tapes, CDs, vinyl and DVDs. All of these are easily accessible and just as convenient as downloading from the internet. The benefit which iTunes has is that you do not have to buy whole albums; you can download songs individually and at a fraction of the cost of a single song on another format. Also you are able to buy movies, TV shows, audio books and Podcasts, all available 24 hours a day, 7 days a week. Reports by Mintel have shown that sale price and the volume of sales is falling for non digital media, consequently as a result of internet downloading.

The Threat of new Entrants:

Already, there are hundreds of media downloading sites available to use on the internet. Some are legal and some are not. It is more difficult to block and put barriers up for illegal entrants into the market because they are not abiding by the law and therefore do not have patents, licences or the rights to distribute media, but still do. With legitimate start up companies, there are capital requirements, possible patents & licences to obtain and ultimately the prospect of competing with already well established and reputable companies such as iTunes. Mintel predicts that there will be an influx of new companies willing to invest in the online downloading industry. A big threat for Apple constitutes the entrance of Amazon into the market. The company announced the launch of a new music download portal that offers a wide range of DRM-Free tracks to a reasonable price. Since there are many advantages to DRM-Free tracks, like the fact that users can legaly copy the files without being restricted to a certain number of copies, consumers are expected to highly welcome the new download store. Apple has to be aware of the fact, that it could lose both new and old customers by restricting them to Digital Rights Management tracks that can only be played on Apple’s iPod and not on any MP3 capable device, as it is the case with Amazon.

Bargaining Power Of Customers:

Due to the vast range of direct alternatives and substitutes, iTunes needs to price competitively as well as maintaining reputation and range & availability. Consumers are easily swayed to alternative products, especially the ease and free use of illegal downloading sites and therefore need to be drawn in to using legal downloading sites like iTunes. Consumers have great power due to their ability to buy from any one competitor in the music industry and can therefore potentially dictate prices by constantly buying from the cheapest company, thus forcing competitors to reduce prices. Obviously one customer would not make a difference, but collectively customers are strong. As for the Apple iPhone, it has to be considered that network providers have great power over the company, as they could decide not to sell the iPhone or put pressure on the company that forces them to pay a certain amount of their revenues to the provider. At the moment, Apple has restricted itself to one provider, O2, and therefore greatly depends on them selling the iPhone but this will surely change over time.

Bargaining Power of Suppliers:

Similarly to bargaining power of customers, there is the bargaining power of suppliers. iTunes have to submit to the requirements of the consumer market to be competitive, but on the other hand have the ability to bargain with their suppliers due to the size and reputation of the company, thus they are a supplier and a customer. Due to the volume of sales that iTunes have, it would be foolish for companies such as SonyBMG, Universal, Warner and EMI to not compromise on the costs and rights to distribute their music, as their success in the music download market highly depends on the successful distribution of their music, mainly through Apple. This fact clearly limits the bargaining power of suppliers to a certain degree, although Apple has to consider that without their music iTunes could not function as efficiently as the market demands. Therefore a compromise must arise that suits both companies, a possible agreement could be initial fees plus percentage of sales.

Intensity of Rivalry:

Although the amount of companies operating in the music download market is pretty high, Apple is the clear market leader. Still the multimedia download market is a market in its growth phase with fast changing technologies and many new companies entering the market. At the moment, it seems very unlikely that a company could seriously threaten Apple’s market position but the company has to be aware of the fact that there are other big multinational companies trying to enter the market with new technologies and ways of offering their services.

SWOT-Analyses:

Strengths:

Apple is the clear market leader in the music downloadand steady financial performance. Revenues have grown from $5,742 million in 2002 to $19,315 million in 2006 and the company’s net profit has increased from $65 million in 2002 to $1,989 million in 2006 (Datamonitor, 2007). Steady financial growth shows the good financial state of the company and builds the base for future growth and expansion. Also, the company has a very strong branding and enjoys a high level of brand recognition and brand awareness that allows the company to differentiate its offers and stimulate sales. Strengths of the company is defined by its successful distribution of the iPod and its software iTunes. With every iPod sold, the consumer automatically installs iTunes on his pc, as it is only possible to download music from Apple’s original software to an iPod. Moreover, Apple products’ are being considered as “hip”, “stylish” and “fashionable” which is increasingly becoming important for consumers. Furthermore, Apple devices and software attract customers for their convenience, their ease of use and for always being up-to-date with the newest technology. Apple has also collaborated with large brand companies like Nike, Starbucks, Coca Cola and Google, which has had beneficial impacts on both Apple and their partners and has created a new profile, e.g. linking sports and music culture.

Weaknesses:

First off all there is to say that although the interconnection between the iPod/iPhone and iTunes has been a key factor to Apple’s success this restriction could become a problem in the future, as more and more customers are looking for devices and online portals that allow them to download MP3s to any MP3 capable device. Moreover, Apple has only a very limited offer of DRM-Free tracks on iTunes, which can be defined as a strong weakness since an increasing number of customers fancy DRM-Free downloads. Another weakness for Apple lies in its pricing, especially for its iPhone. A Mintel research about the mobile phone market in the UK defined “pricing and costs to be the most important factor when it comes to purchasing a phone (Mintel, 2007). Also, the iPhone currently doesn’t allow the costumer to directly download files to the mobile, which, compared to the new Nokia N-Series, is a enormous weakness, since it could prevent customers to buy the Apple device and go for the Nokia handset instead. This could lead to a loss of Apple’s market share to its competitor Nokia. Also, technically, the iPhone isn’t quiet as good as its competitor the Nokia N95, as it runs on a slower mobile data service and comes only with a 2 Megapixel camera. Another weakness for Apple is, that they’ve only chosen one operator in each country where the iPhone is available and thus has restricted the consumer’s choice of network operators.

Threats:

The comany’s biggest threat probably constitutes the entrance of Nokia into the digital download market. By providing the opportunity to directly download files to a handset device, Nokia could gain some of Apple’s a market share in the digital download market, since customers are increasingly fancying mobile downloads that don’t restrict them to a bulky pc or laptop. The mobile download market is “one of the most opportunity-rich markets the world has ever seen”, as Nokia’s Chief Executive Olli-Pekka Kallasvuo states (Halper,2007), and if Apple doesn’t catch up fast on this opportunity it is running risk to loose its superiour market position to Nokia. Another threat for Apple constitutes the launch of online portals that are specialized in marketing DRM-Free tracks. More and more customers are looking for music that doesn’t restrict them to a certain number of copies or to a special device as it is the case with iTunes and the iPod. Although Apple is currently trying to improve its choice of DRM-Free tracks, it still lacks the greater choice and lower price of companies such as Amazon which could lead to custmers switching over from Apple to those in terms of DRM more convinincing sites. Also the threat of illegal download sites would have an negative impact, due to the availability of free digital content that could sway customers away from Apple’s iTunes.

Opportunities:

Although currently especially the youth customer segment is seen as the major target group for downloading, as these customers seem to be less restrictive towards new technologies, providing more substantial and sophisticated products and services for older and wealthier people could proof very profitable for Apple. With the launch of its iPhone Apple has already done an important move into the mobile phone market that might allow the company to challenge its biggest threat Nokia on their home market. As more and more customers are increasingly becoming aware of innovative techologies and of the benefits arising out of Internet downloading Apple should now take advantage of the great opportunities arising from the fast growing mobile phone download market by making its services directly downloadable to its iPhone as its rival Nokia has already done. Also, the upcoming change in the digital download industry towards ad-supported content could be an opportunity for Apple, if the company manages to strike advertising deals with companies that allow Apple to offer services for free to customers who agree to watching ads. This could bring a whole new bunch of customers to the company. Although these customers won’t have to pay for the add-supported services, they will probably buy an iPod or an iPhone or another Apple hardware device.

Resource Analysis:-

The resources of an organisation include its human resource skills, the investment and the capital in every part of the organisation. Apple has advantages in the production and marketing of its new iPod music player and associated software that set the standards for the industry. It had also invested heavily in branding its products and the Apple retail stores that sold its products. All these were part of its resources.

Apple takes supplies it buys in- such as components, energy, skills and capital equipment and then uses its own resources and expertise to create a product from these supplies- such as a computer or an iPod- that has a value which is higher than the combined value of all the supplies which have been used to make the product.

Environmental Analysis:-

Organisations need to develop corporate strategies that are best suited to their strengths and weaknesses in relation to the environment in which they operate. For example, Apple faces a highly competitive environment for its competitors in relation to the American companies such as Dell, Hewlett Packard. In addition, the company had to cope with changing levels of economic growth in many markets around the world, which influenced the decisions of its customers to purchase new computers.