Apple And Microsoft's Competitive Advantages

Information technology changes every day. Companies must find a balance between careful planning with regards to product development planning while adapting to the dynamic environment around them. In an effort to gain larger market shares, companies seek out competitive advantages over one another. From their beginnings, both Apple and Microsoft have sought after competitive advantages through information technology as they fight for their consumer markets.

Microsoft began humbly in 1975 when Bill Gates and Paul Allen decided to write the BASIC programming language for the Altair 8800. The idea soon took flight, and their year-end sales in 1978 exceeded $1M. In 1980, a company known as International Business Machines Corporation (IBM) approached the Microsoft team to build an operating system (OS) for what would be the first Personal Computer (PC). Microsoft agreed, and purchased nonexclusive rights to a program known as Quick and Dirty Operating System (QDOS). Microsoft and IBM worked together to develop QDOS into 86-DOS. Just one month before the PC’s release, Microsoft purchased all of the rights to 86-DOS for $50K.

Microsoft developed 86-DOS into what would be called MS-DOS, and released a graphical user interface (GUI) on top of the OS known as Windows in 1983. Windows revolutionized the PC because users no longer needed to know how to operate on a command line. Along with the graphical OS, Microsoft released a personal publication software suite. Microsoft Office gave every owner of a computer the opportunity to create typed documents and datasheets with simple key strokes. The 90s ushered in the inception of the World Wide Web and Microsoft released Internet Explorer (IE) 1.0 in 1995. As the world entered the digital age, media followed suit. Consumers were able to digitize music, pictures and videos. Microsoft offered programs to sample each of them, the most popular of which was Windows Media Player. Soon users wanted to take the media with them, so Microsoft developed a portable media player, the Zune. In 2010, Microsoft entered a new realm of consumer electronics with the release of the first Windows Phone.

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Apple Computer began even humbler than did Microsoft when Steve Jobs sold his Volkswagen Bus and Steve Wozniak sold his programmable Hewlett Packard (HP) calculator. The two invited a former colleague, Ron Wayne, and with $1250 they began to produce the Apple I main boards in April 1976. The local computer store ordered 50 Apple I’s, but there wasn’t enough money to purchase the parts for the order. Jobs convinced a part supplier to give them a 30 day credit on the supplies. The team worked at night and delivered the full order of 50 computers in just 10 days. The Apple I sold for $666.66. Ron Wayne then resigned with a one-time payment of $800, feeling there was too much financial risk involved with the company. Jobs and Wozniak developed the Apple II prototype in the fall of 1976, but lacked the funds to produce large quantities. The pair decided to go incorporated in 1977 and hired an ad agency. The first large investor, Mike Markkula, put $92,000 into the company. Apple released the Apple II for $1295.

Apple went public in 1980, and the stock value increased 1700% in the first year. Apple released the first version of the Macintosh computer in 1984. The company grew so fast in the first half of the decade that tensions began to rise between the leadership. Steve Jobs, the Chairman of Apple, and John Sculley, the Chief Executive Officer (CEO), grew increasingly hostile towards each other. Jobs tried to force Sculley out by forming a coup, and planned to take over the company while the CEO was on a trip in China. Sculley learned of the plan at the last minute and cancelled the trip. When asked to pick sides, the board backed Sculley who stripped Jobs of all operational responsibilities. Jobs left Apple and formed a new company, NeXT, to which Apple responded by suing Steve Jobs on September 23, 1985. NeXT lasted 12 years before being purchased by Apple in 1997. That year, the president and CEO of Apple resigned after posting a $740M loss in the second quarter. Steve Jobs became the “de facto” head of Apple, and announced an alliance between Microsoft and Apple. Microsoft invested $150M in Apple stock and Apple included Internet Explorer on every copy of Apple’s Operating System, MacOS. The agreement lasted until 2003, when Apple introduced its own internet browser, Safari. Apple cut all non-profitable divisions and focused on the iMac and the PowerBook, the company also opened the first Apple Store, an instant success.

In January 2001, Apple introduced a media player, iTunes. In October of the same year they released the first version of the iPod. The iPod allowed users to take their music with them, and synchronized seamlessly with iTunes. The company also continued development of video and photo editing programs, iVideo and iPhoto, and a messaging program, iChat. In June 2007, Apple entered the cell phone industry with the introduction of the first iPhone.

Throughout the history of both companies, the most dynamic element from Porter’s Competitive Forces Model is the threat of substitute products or services. The threat is high when there are many alternatives to a product or service, and low when there are few alternatives from which to choose. Both companies produce numerous software products. One could argue that Microsoft is most well known for its line of operating systems. The primary reason for the major success of Windows is not because it revolutionized the industry back in 1983. If that were true then Microsoft would have been gone by the next decade. Instead, the primary reason for the success of the operating systems is the fact that Microsoft allows third parties to write programs for it. Windows is able to stay ahead of the other operating systems not only with new revisions, but because there are so many more programs to use on Windows than on MacOS distributions. More programmers work with Windows than with the variety of Linux distributions. For now, the threat of substitute operating systems is relatively low.

Internet browsers are a much greater threat to Microsoft. According to data pulled by Net Market Share, both Google Chrome and Mozilla Firefox are quickly stealing the internet browser market from IE. At the end of 2008, over 70% of surfers used IE, 21% used Firefox, and only 1.4% used Chrome. At the end of 2010 the statistics have changed. IE still claims 58% of the market, Firefox is up to 23% and Chrome is growing fast at almost 10%. It is also of note that in that same time period, Safari increased from 3½% to 5½%. Unless Microsoft is able to give a major face lift to IE, it appears that the threat of alternative products will remain high in this field.

Apple may not have the greatest market share in internet browsers, but they make up for it in the multimedia products. In April 2010, according to Business Insider, Apple’s iPod cornered 76% of the market share, while Microsoft’s Zune had less than 1%. Just as integration sparked success for Microsoft Windows, the iPod has reaped the rewards of offering everything in one little package. From the seamless integration with iTunes, to the sharp video display in the newer models, to the revolutionary technology of the iPod Touch, Apple dominates this industry.

The newest competition between these two companies may possibly heat up. The current smart phone market is dominated by Symbian, RIM, Apple, and Google based operating systems. Microsoft has produced a mobile OS for over a decade, but the newest version, Windows Phone 7 launched in November 2010. Although Microsoft doesn’t control a large portion of the current market share, Computer Weekly reports only 4.9% as of July 2010, the new OS could change that number dramatically. Microsoft stands as a possible threat of substituting a product in the smart phone industry.

When describing the competition between Apple and Microsoft, there is a direct correlation between the threat of substitute products or services and the threat of new entrants. Any new entrant in this market offers a substitute product or service. The threat of new entrants is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market. An entry barrier is a product or service feature that customers have come to expect from organizations. The largest entry barrier from the products above is the standard of integration between mp3 players and multimedia software. Apple has such a choke-hold on the mp3 player market that new companies are finding it very difficult to get in. Microsoft tried with the Zune, but with very little success.

Microsoft has worked hard at integrating the Office suite and Internet Explorer into all of their operating systems since 1995, but Google is on the path to overcoming the integration barrier. Google started chipping away at it when they released Google Docs, the online personal publication suite. Docs allowed users to create and share documents, datasheets and presentations over the web. Google hosted the server where all the files were saved so users didn’t need to worry about emailing copies back and forth. Next Google released a new internet browser, Google Chrome. The selling point was a lightweight design and user-friendly interface. The release came at a time when Microsoft was frustrating users with the bulky overhead programmed into Internet Explorer. Today Internet Explorer usage is falling and Google is on the dawn of releasing an online OS that may allow Google to challenge Microsoft’s dominance in the Operating System market.

Just like the threat of substitute products or services is directly related to the threat of new entrants, buyer power and supplier power share a strong correlation. Buyer power is high when there are plenty of products from which to choose. Supplier power is high when there are very few options for the buyer. Each of the industries described above contains very high buyer power. For every product available, there is at least one competitor, if not more. The suppliers have responded to the imbalance of power by incorporating specific features and integrating services in the products to gain a competitive advantage. Along with the integration between the mp3 player and computer, Apple has incorporated other specific features to retain the mobile music market share. Users can purchase gift cards to spend on media in the iTunes library, and also license multiple computers to play purchased media. Apple has given an incredible amount of supplier power to another company, AT&T by signing an exclusivity contract with the company. Microsoft entices users to by offering the ability to integrate home entertainment and personal computing, to the point of accessing recorded TV episodes from any internet access point.

The final element in the Competitive Forces Model cannot be overlooked in this discussion. Ten years ago Microsoft’s market capitalization peaked at almost $400B. At the same time, Apple’s market capitalization was just over $5B. Today Microsoft sits at $238.27B while Apple has leap-frogged to $293.87B. To say there is rivalry among these two competitors is an understatement. The two giants of the technology industry have a long history of both cooperation and competition. From the agreement from 1985 involving the GUI technology and Office for Mac, to the ensuing law suits over copyright infringement, to licensing Microsoft Exchange on the iPhone, these companies have found ways to co-exist in a wide variety of markets.

Each of the elements from Porter’s Competitive Forces Model is ordered from the most to the least relevant to this particular discussion. Because the technology industries are incredibly dynamic, the threat of substitute products or services can change overnight. The threat of new entrants is not as volatile, but it can also change very quickly. The new entrants threat typically is high in the early stages of technological development, when the current companies are not well established. There were plenty of mp3 player varieties to choose from when Steve Jobs introduced the iPod in 2001. New entrants were entering the market regularly. As Apple has taken over the market through the various iterations of the iPod, the threat of new entrants has decreased dramatically. Buyer power and supplier power are equally important to the discussion because they are so closely connected in these particular industries. Finally, rivalry among competitors brought up the rear not because it is unimportant, but because these companies are so large that the competition between them is not as hot as it once was. Microsoft has expanded to the gaming console industry with the XBOX and Apple makes an incredible amount of revenue through the sale of the PowerBooks and iMacs. The rivalry still exists, but the companies have also found that the success of one company fuels the success of the other, hence the investment deal back in 1997.

The co-existence of these to industry giants speaks volumes of their business strategies. Both companies focus on two generic ideas. The first is product development philosophy and the second is a marketable image. Each company approaches the strategies from completely different angles. Fortune Magazine sums up Apple’s approach to product development very succinctly, “Apple’s approach is to put every resource it has behind just a few products and make them exceedingly well” (Morris, 2003). The prime example of this practice took place when, after that staggering $740M quarter in the red zone, Apple cut all non-profitable programs and focused only on the PowerBook and iMac in 1997. Another example is when the company dropped its most popular iPod, the mini, on the same day it introduced the Nano. Apple’s approach to the marketable image is all about user capabilities. The “Get a Mac” campaign that debuted in 2006 showed, time after time, that Macs can do everything a PC can do, but they can do it faster, more easily, and with more versatility. The iTunes and iPod campaigns with the black dancing silhouette on a bright background holding a white iPod entices users to get in the groove, so to speak. Overall, Apple puts forth a young, hip image that targets the next generation of technology consumers.

Microsoft also follows a specific product development philosophy and has recently adopted a new marketing image. While Apple develops just a few products exceedingly well, Microsoft focuses on full package deals. The Office Suite comes with a wide variety of products that the average user never opens. Microsoft SharePoint is an incredibly powerful device, but the learning curve is so steep that it ends up frustrating more employees than it helps. The greatest success of the philosophy is Windows 7, and the integration of home entertainment and personal computing. The success stems, in part, from the recent marketing campaign switch. First there was, “I’m a PC, and Windows 7 was my idea,” which countered the “Get a Mac” campaign show the power to the user that Microsoft can give. “To the Cloud!” directly followed the campaign to show the versatility and integration that accompanies Windows 7. Microsoft is trying to catch up to Apple with regards to image, and the product philosophy seems rather convoluted. It will be interesting to see if the integration that it has promised with Windows 7 entices users enough to stay with Microsoft.

The internet grants competitive advantages to both companies. Apple utilizes the internet to power the iTunes Library. Without the internet, the library would not exist. Both companies offer extensive online shopping and support for their products. Both also utilize the internet for automatic updates and patches. Microsoft claims their competitive advantage with the integration that has been beaten to death.

Both companies seek out competitive advantages wherever and whenever possible. Apple and Microsoft are well established, and are not going anywhere anytime soon. That being said, only by walking that tight rope between careful product development and adaptable market image will they be able to avoid falling out of the market shares that they currently enjoy.