Question

Case Study1: APPLE’S PROFITABLE BUT RISKY STRATEGY

When Apple’s Chief Executive – Steven Jobs – launched the Apple iPod in 2001 and the iPhone in 2007, he made a significant shift in the company’s strategy from the relatively safe market of innovative, premium-priced computers into the highly competitive markets of consumer electronics. This case explores this profitable but risky strategy. Note that this case explores in 2008 before Nokia had major problems with smartphones situation. Now things have changed considerably. (Currently, 2020 has arrived and expect a different kind of strategy altogether. Take note of those changes.) (Hint: Students need to be well prepared of the trend and changes that is happen now in Apple).

Early beginnings

To understand any company’s strategy, it is helpful to begin by looking back at its roots. 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. Most computers in the late 1970s still used complicated technical interfaces for even simple tasks like typing – still called ‘word-processing’ at the time.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. However, Apple did not sell to, or share the software with, rival companies. Over the next few years, this non-co-operation strategy turned out to be a major weakness for Apple.

Battle with Microsoft

Although the Mac had some 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 licence 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. Microsoft retained the right to develop its own interface software similar to the original Xerox concept. Coupled with Microsoft’s willingness to distribute Windows freely to computer manufacturers, the legal agreement allowed Microsoft to develop alternative technology that had the same on-screen result. The result is history. By 1990, Microsoft had developed and distributed a version of Windows that would run on virtually all IBM-compatible personal computers – see Case 1.2. Apple’s strategy of keeping its software exclusive was a major strategic mistake. The company was determined to avoid the same error when it came to the launch of the iPod and, in a more subtle way, with the later introduction of the iPhone.Unlike Microsoft with its focus on a software-only strategy, Apple remained a full-line computer manufacturer from that time, supplying both the hardware and the 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.

Apple’s move into consumer electronics

Around the year 2000, Apple identified a new strategic management opportunity to exploit the growing worldwide market in personal electronic devices – CD players, MP3 music players, digital cameras, etc. It would launch its own Apple versions of these products to add high-value, user-friendly software. Resulting products included iMovie for digital cameras and iDVD for DVD-players. But the product that really took off was the iPod – the personal music player that stored hundreds of CDs. And unlike the launch of its first personal computer, Apple sought industry co-operation rather than keeping the product to itself.

Launched in late 2001, the iPod was followed by the iTunes Music Store in 2003 in the USA and 2004 in Europe – the Music Store being a most important and innovatory development. iTunes was essentially an agreement with the world’s five leading record companies to allow legal downloading of music tracks using the internet for 99 cents each. This was a major coup 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. Figure 1.9 shows that Apple’s new strategy was beginning to pay off. The iPod was the biggest single sales contributor in the Apple portfolio of products.

In 2007, Apple followed up the launch of the iPod with the iPhone, a mobile telephone that had the same user-friendly design characteristics as its music machine. To make the iPhone widely available and, at the same time, to keep control, Apple entered into an exclusive contract with only one national mobile telephone carrier in each major country – for example, AT&T in the USA and O₂ in the UK. Its mobile phone was premium priced – for example, US$599 in North America. However, in order to hit its volume targets, Apple later reduced its phone prices, though they still remained at the high end of the market. This was consistent with Apple’s long-term, high-price, high-quality strategy. But the company was moving into the massive and still-expanding global mobile telephone market where competition had been fierce for many years. (Note that with regard to Figure 1.9, the new iPhone was too new to have made any impact on sales or profitability in 2007.) And the leader in mobile telephones – Finland’s Nokia – was about to hit back at Apple, though with mixed results. But other companies, notably the Korean company Samsung and the Taiwanese company, HTC, were to have more success later.

By 2007, Apple’s music player – the iPod – was the premium-priced, stylish market leader with around 60 per cent of world sales and the largest single contributor to Apple’s turnover –Its iTunes download software had been re-developed to allow it to work with all Windows-compatible computers (about 90 per cent of all PCs) and it had around 75 per cent of the world music download market, the market being worth around US$1000 million per annum. Although this was only some 6 per cent of the total recorded music market, it was growing fast. The rest of the market consisted of sales of CDs and DVDs direct from the leading recording companies.

In 2007, Apple’s mobile telephone – the iPhone – had only just been launched. The sales objective was to sell 10 million phones in the first year: this needed to be compared with the annual mobile sales of the global market leader, Nokia, of around 350 million handsets. However, Apple had achieved what some commentators regarded as a significant technical breakthrough: the touch screen. This made the iPhone different in that its screen was no longer limited by the fixed buttons and small screens that applied to competitive handsets. As readers will be aware, the iPhone went on to beat these earlier sales estimates and was followed by a new design, the iPhone 4, in 2010.

The world market leader responded by launching its own phones with touch screens. In addition, Nokia also launched a complete download music service. Referring to the new download service, Rob Wells, senior Vice President for digital music at Universal commented: ‘This is a giant leap towards where we believe the industry will end up in three or four years’ time, where the consumer will have access to the celestial jukebox through any number of devices.’ Equally, an industry commentator explained: ‘[For Nokia] it could be short-term pain for long-term gain. It will steal some of the thunder from the iPhone and tie users into the Nokia service.’

‘Nokia is going to be an internet company. It is definitely a mobile company and it is making good progress to becoming an internet company as well,’ explained Olli Pekka Kollasvuo, Chief Executive of Nokia. There also were hints from commentators that Nokia was likely to make a loss on its new download music service. But the company was determined to ensure that Apple was given real competition in this new and unpredictable market.Here lay the strategic risk for Apple. Apart from the classy, iconic styles of the iPod and the iPhone, there is nothing that rivals cannot match over time. By 2007, all the major consumer electronics companies – like Sony, Philips and Panasonic – and the mobile phone manufacturers – like Nokia, Samsung and Motorola – were catching up fast with new launches that were just as stylish, cheaper and with more capacity. In addition, Apple’s competitors were reaching agreements with the record companies to provide legal downloads of music from website.

As a short term measure, Apple hit back by negotiating supply contracts for flash memory for its iPod that were cheaper than its rivals. Moreover, it launched a new model, the iPhone 4 that made further technology advances. Apple was still the market leader and was able to demonstrate major increases in sales and profits from the development of the iPod and iTunes. To follow up this development, Apple launched the Apple Tablet in 2010 – again an element of risk because no one really new how well such a product would be received or what its function really was. The second generation Apple tablet was then launched in 2011 after the success of the initial model. But there was no denying that the first Apple tablet carried some initial risks for the company.

All during this period, Apple’s strategic difficulty was that other powerful companies had also recognised the importance of innovation and flexibility in the response to the new markets that Apple itself had developed. For example, Nokia itself was arguing that the markets for mobile telephones and recorded music would converge over the next five years. Nokia’s Chief Executive explained that much greater strategic flexibility was needed as a result: ‘Five or ten years ago, you would set your strategy and then start following it. That does not work anymore. Now you have to be alert every day, week and month to renew your strategy. ‘If the Nokia view was correct, then the problem for Apple was that it could find its market-leading position in recorded music being overtaken by a more flexible rival – perhaps leading to a repeat of the Apple failure 20 years earlier to win against Microsoft. But at the time of updating this case, that looked unlikely. Apple had at last found the best, if risky, strategy.

Question 1

Based on the above case study answer the following questions:

1. Analyse the mission and vision statements for Apple.Provide comments based on good characteristics of both statements that you have learned.   
2. Identify THREE (3) strengths and THREE (3) weaknesses of Apple and Nokia in the above case study.                                                                            
3. Identify THREE (3) opportunities and THREE (3) threats in the telecommunication industry for Apple and Nokia.

Threats for apple:

4. Analyse and explain the short and long run performances of Apple and Nokia. Which has the best competitive advantage? Why?                                                                                           

5. Based on your answers in 1d) Identify and develop THREE (3) competitive advantages in this case.

Answer 1

a.Apple Inc.’s corporate mission and corporate vision are linked in terms of how they push for the company’s continuous growth despite challenges in the competitive landscape. Considering the variety of industries where the technology business operates, the corporate mission and corporate vision embody the diversity of strategic approaches for these industries. A Porter’s Five Forces analysis of Apple Inc. shows that the business deals with strong competition. The technology company must ensure that its mission statement hints on the strategies to keep the business competitive. In relation, Apple’s vision statement must direct business efforts toward a future of leadership in the global market.

APPLE MISSION AND VISION STATEMENT ANALYSIS

Apple mission statement is “ to bringing the best user experience to its customers through its innovative hardware, software, and services. ” Tim Cook, Apple’s current CEO, stated this as the company’s mission statement and included it in the 2018 annual report. Through their mission statement, Apple highlights that it exists to offer its clients the best service that it can. The statement also describes how the company intends to achieve this.

In this current mission statement, the company highlights the scope of its operations and how it exploits these to satisfy the needs of its client base. While focusing on the dynamic technological changes over time, Apple stays clear that impacting positive change through innovation is its central objective. The following components arise from this mission statement.

b.strengths and weakness of apple.inc

Strengths:

1. Strong brand image

2.High profit margins

3.Effective rapid innovation processes

Weakness:

1.Limited distribution network

2.High selling prices

3.Dependence of sales on high-end market segments

Strengths and weakness of Nokia:

Strengths:

1.Strong customer relations

2.wide range of products

3.Durability

4. High resale value

Weakness:

1.Market skimming prices of high sets

2.low voice quality

3.heavy sets

4.less stylish in low prices.

c.oppurtunities and Threats of Nokia

Opportunities:

1.New growth markets

2.Other hand held devices

3.Well designed and styled sets

4.Increase their presence in 3G & edge market

5.Improvise on quality of camera

6.Mini notebooks

Threats:

1.Changing consumer buying behavior

2.The demand of the highly profitable products

3.New technologies developed by the competitor

4.Liability laws in different countries

Opportunities and threats for apple.inc

Opportunities

1.Consistent Consumer Growth

2. Qualified Personals

3.lack of green technology

4.utilize artificial intelligence

Threats :

1.supply chain disruption

2.increasing Competition

3.market penetration

4.Backdoor Mechanism.