Case 2: Apple Inc.

, 2008

Date: 23-09-2009

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Table of Contents
Table of Contents .................................................................................................................................... 2

Introduction............................................................................................................................................. 3

Theory and Analysis................................................................................................................................. 4

Research question 1: The structure of the PC industry....................................................................... 4

Research Question 2: The difficulty of Apple in the PC industry over time ........................................ 7

Research Question 3: Sustainability of competitive advantage for Apple in the PC business .......... 10

Strategic advice ..................................................................................................................................... 12

Conclusion and Reflection ..................................................................................................................... 12

References ............................................................................................................................................. 13

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Introduction
In 1976 Steve Jobs and Steve Wozniak founded Apple Computer Inc. together with a group of 20
other people and started out in Steve Jobs garage. Apple started making computer circuit boards and
followed that with an easy to use computer in 1978, through the years it focused on the PC business
and developed applications for their own Macintosh computers. They created laptops called the
Macbook in 1994 and even entered the MP3 player industry with the iPod brand in 2001 and more
recently the mobile phone industry with the iPhone in 2008.
Through the years Apple has changed from being the world’s largest producer of PC’s controlling
almost the entire market at the beginning of the 1980’s, to only controlling a small share of the
industry after several circumstances which left the company in crisis. Its market share had declined
significantly to a current 3% market share, still Apple is a successful business due to its other
products and its Macintosh computers are still profitable. Currently Apple’s PC Business is on the rise
again, but is this only temporal or can Apple reclaim its original market leader position in the PC
industry.

Goal and structure of this report

In this report we review the current state of PC industry and that of Apple’s PC Business and we
review the future of Apple’s PC business.
We started this report by giving a small introduction of the company in which showed some of its
history and some of the products that are developed by Apple.
We continue our report with our analysis which we conduct by answering the following research
questions:

1. Analyze the structure of the PC industry. Are the dynamics in this industry favourable or
problematic for Apple?

2. Given that Apple has always had superior products, why has the company had so much difficulty
in the PC industry over time?

3. Does Apple possess any resources that provide it with a sustainable competitive advantage in the
PC business?

We answer these research questions through the application of the theories we have found in the
articles we used to solve these research questions.
We continue the report by giving our strategic advice to aid the company in attaining sustainable
competitive advantage within the PC industry.
We end this report with our reflections and our conclusion on the subject and the limitations of the
theories we have used in this report.

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Theory and Analysis
The structure of the PC industry
We start our analysis by examining the structure of the PC industry. Are the dynamics in this industry
favourable or problematic for Apple?

Our first research question was to research the structure of the PC industry. To answer this question
we use Porter’s Five Forces Model as it is and effective method to create a clear picture of a business
environment.

Five Forces Model

The Five Forces Model by Porter (Wit & Meyer, 2004, pp. 258-262) determines the attractiveness of
an industry. There are five different forces that determine whether the profits in any given industry
will be high or whether competition drives profits down. The profits are essentially determined by
these forces because they influence prices, costs, and required investment of firms (Wit & Meyer,
2004, p. 259). The five different Forces by Porter that “embody the rules of competition” (Wit &
Meyer, 2004, pp. 258-262) are:

Suppliers force
The bargaining power of suppliers determine this force. Cases of supplier power include presence of
substitute inputs, differentiation of inputs and supplier concentration (Wit & Meyer, 2004, p. 260).
The effect of this power is changeable by the number of buyer and importance of materials which
companies require.

Buyers force
The bargaining leverage of buyers determine this force. Substitute products, buyer volume and buyer
information are examples (out of many) from this force (Wit & Meyer, 2004, p. 260).

New entrants force

The threat of new entrance determines this force. Entry barriers can make the threat of new entrants
either easier or more difficult. There is an extensive list of entry barriers, but examples are switching
costs, access to distribution or government policy (Wit & Meyer, 2004, p. 260). Economies for scale
also make the barriers higher.

Substitutes force
There are several determinants of the threat of substitutes. Examples are relative price performance
of substitutes, switching costs and buyer propensity to substitute (Wit & Meyer, 2004, p. 260)

Industry competitors force

the final force is determined by the rivalry among existing competitors inside the industry.
Determinants can be the industry growth, brand identity, Product differences and switching costs.
(Wit & Meyer, 2004, p. 260).

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The structure of the PC industry
Now that we have discussed the theory we can apply it to the case as to determine the structure of
the PC industry.

Five Force Analysis

Suppliers force
” The Company has entered into certain agreements for the supply of key components including, but
not limited to, microprocessors, NAND flash memory, DRAM and LCDs at favourable pricing, but
there is no guarantee that the Company will be able to extend or renew these agreements on similar
favourable terms, or at all, upon expiration or otherwise be able to obtain favourable pricing in the
future.”(10-K, 2008, P, 17). Sometimes quality components can become a struggle within the PC
industry as competitors try to obtain these components and make sure that others cannot use these
technologies. Considering this, a supplier’s power could be changed because of this situation. These
days, “declining average selling prices”(X-bit, 2009) are problematic for the suppliers, which in turn
could lead to a decrease in new technologies as these suppliers will have lower incomes and thus less
revenues to spend on R&D.

Buyers force
There are a number of different entities to which Personal Computer industry caters: large
companies, normal households, governments and so on.
However, Apple’s target includes people who have special demands for a computer. For example, in
the publishing industry; Apple’s computer was the only effective machine as it allowed companies to
edit things digitally. Apple still remains in that industry, because of the fonts, the system, and options
it brings. Many companies continue to use Apple’s computers as it is expensive to change the entire
system, thus companies are afraid to switch to other systems. However, average sales continue to
decline. “Combined, HP, Dell, Lenovo and Apple’s unit sales decreased only 5% year-over-year,
however, their collective ASP dropped 13%, causing an 18% decline in PC revenues.”(X-bit,
2009).Needless to say, Apple’s competitors have control over Apple’s former market share.

New entrants force

More than 60% of the market share is occupied by Hewlett-Packard, Dell, Acer, Lenovo, Toshiba (“PC
Market Still Strong in Q4 With Solid Growth Across Regions, According to IDC”, 2008). Brand identity
is a large enough barrier to make it difficult for new companies to enter this market. Producers
continue to lower their prices to try and attract new customers. This is a large barrier that makes
sure that new entrants cannot easily start a business. Hence, Entry Barriers are so high that threat of
new entrants entering the market is low.

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Substitutes force
Other PC’s from other companies are treated as substitutes for Apple’s computers, the same is true
the other way around. Thus in this market there are a number of substitutes which have an influence
on the sales of each producer.

Industry competitors force

“Combined, HP, Dell, Lenovo and Apple’s unit sales decreased only 5% year-over-year, however, their
collective ASP dropped 13%, causing an 18% decline in PC revenues.”(X-bit, 2009) Competition has
always been fierce within the personal computer industry and this is only increasing. Cutting costs is
required to survive in this a situation.
Moreover, Apple is facing three aspects of conflict in the Personal Computer industry.
a) PC hardware
Needless to say, there are many companies which provide PC hardware. In 2007, Apple had
only 2.6% share in global personal computer market (“PC Market Still Strong in Q4 With Solid
Growth Across Regions, According to IDC”, 2008).
b) Operating System
Mac OSX has minor share comparing to Windows OS. Some important applications do not
support Mac OSX.
c) Software
Apple provides software for Mac OS, but most of Apple’s software and the software
developed by third-parties for Apple could only be used on an Apple Computer in the past.
Apple’s computer used to play a role as digital creative tool, but now, other software
producers have reached same level and these software programs can be used on multiple
operation systems and competition has occurred. For example, Final Cut Studio 2 – Adobe
Creative Suite 4 Production Premium, iWork 08 – Microsoft office, iLife 08 – Blog, Adobe
Dreamweaver, flicker, and picasa, and Logic Studio – DTM software.

Considering this output of five force analysis, two strong forces could be found: a strong decrease is
price and severe competitive environment in PC industry. Especially, a conflict of software is
important because existence of similar software as all competitive software can be used with the
Windows OS, means that there is nothing we can only do with Apple’s computer.

Are the dynamics in this industry favourable or problematic for Apple?

They are problematic as Apple focuses on keeping its computers unique. Its strong points have been
threatened by its competitors and its environment. If Apple could not find a way to create
differentiation that attracts customers in this highly competitive market, their computers lose their
attractiveness and Apple would lose even more of its market share.

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The difficulty of Apple in the PC industry over time
We continue with our second research question; why has Apple had so much difficulty within the PC
industry.
When analyzing this problem, we first determine that these ‘difficulties’ are declining sales, or a
declining market share as happened in the case of Apple Computers Inc. (Yoffie & Slind, 2008, p. 19).
In the case of Apple Inc. (2008) it is clear that there is declining market share from 1980 until
(approximately) 1997 where the market share stabilizes. It is harder to find information about the
net Macintosh sales before 2003. On the website of Apple (Apple.com - Press Release Library, 2009)
and in the case about Apple (Yoffie & Slind, 2008) no numerical information about sales before 2003
can be found. A decline in sales can therefore not be shown.
Consequently the theory about why Apple had so much difficulty in the PC industry must be
translated to “Why did the market share of Macintoshes decline from 1980 and never rose back to a
worldwide 3% market share?” The first step is to determine the market structure. Michael Porter, as
explained by De Wit & Meyer (2004, p. 258) described forces that determine industry competition.
This Five Forces Model, as it is called, is useful for two different reasons. De Wit & Meyer (2004, p.
258) describe that the first reason is that it can determine the attractiveness of industries for long-
term profitability and the factors that determine it.

Because this case tries only to grasp the Apple Inc. situation we are not interested in the whole
industry. A second reason however why the Five Forces Model is useful is because it determines the
relative competitive position within an industry (Wit & Meyer, 2004, p. 258).

Another way of looking at why the market share of Apple Inc. declined over the years, despite its
superior products, can be done by looking at consumers’ determinants in the purchasing process of a
PC. This can show, or even prove, why consumers prefer (and then buy) one computer (brand) over
the other. The second part of the theory describes this part.

Consumers’ determinants in the purchasing a personal computer

Stahura, deVaney & Yen Win (2005, p. 254) developed a conceptual model of computer expenditure
that included economic resources and consumer tastes and preferences. We use this model because
it could help to determine whether there was a match between the consumer’s economic resources
and tastes and preferences and the products of Apple Computers.

The determinants can be split up in two categories. The first category consists of the economic
resources that a consumer has to buy a PC. The second category is the consumers’ tastes and
preferences. The second category will be difficult to research for many practical reasons. First of all
there will be too many variables in PC’s that will have to be researched. This is almost impossible as
every person has its own desires when looking for a PC. Secondly the many developments in the IT
industry make it very hard to find ‘comparable information’.

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We must therefore conclude that when there is no mismatch between consumers’ economic
resources and Apple’s computers the problem must be a mismatch between Apple’s computers and
the consumers’ tastes and preferences.

The difficulty of Apple in the PC industry over time – Analysis

Five Forces Model

Suppliers force
The case text by Yoffie & Slind (2008, p. 9) describes two different categories of suppliers. The first
category is microprocessors and the second category is operating systems.

 Microprocessors are said to be widely available at highly competitive prices. It is

questionable to what extent that can be true in a market where the market leader (Intel)
provides more than 80% of new computer with an Intel CPU (Yoffie & Slind, 2008, p. 9).
Other components are real commodities and do not have market leaders with such high
market shares.
 The category of operating systems is not competitive at all according to the case text (Yoffie
& Slind, 2008, p. 9) with only two main suppliers. In the case of Apple this doesn’t necessarily
have to be a problem since Apple provides their own computers with their own operating
system.

Because of these two findings it can be concluded that the supplier force within the PC industry were
not really the problems that caused the decline in market share of Apple over time.

Buyers’ force
The buyer’s force has changed over time. In the beginning of the PC industry (1980) consumers were
not very well informed about functionality etc. The Internet has made information about PC’s widely
available (Yoffie & Slind, 2008, p. 8). With information being more widely available people could
compare functionality and prices more. This change over time could (partially) explain why Apple lost
market share. Perhaps people found out that comparable products were cheaper and/or better.

New entrants force

The threat of new entrants is partly determined by the entry barriers. In the computer industry it
became more difficult to enter the industry over time. This has been the result of multiple reasons
the most important being that Personal Computer components became more standardized over time
(Yoffie & Slind, 2008, p. 7). This resulted in easier access to the products and a decline in price of
components (Yoffie & Slind, 2008, p. 7). The computers of Apple didn’t use very much standardized
products and were in the beginning only compatible with other Apple products. With products being
standardized there costs of components were driven down through economies of scale. Thus
lowering the prices of computers, this made it difficult for new companies to enter the market.

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Substitutes force
Within the computer industry there are many substitutes. One of the main substitutes is probably
newer products (PC’s) with a higher functionality, better specifications for an equal (or lower) price.
This is an example of a higher relative price performance. What also could be counted as a substitute
product are Personal Digital Assistants (PDA’s) and Smartphone’s that came to the market in the last
years (Yoffie & Slind, 2008, p. 10). Other examples that are described by Yoffie & Slind in the case
text are “TV set-top boxes” and game consoles that could start to replace (substitute) PC’s. It is
however mentioned that these examples could just as easily supplement PC’s. Therefore it is not sure
whether this is a negative or a positive development.

Industry competitors force

The industry has grown tremendously. Data that supports this trend before 2002 could not be found.
Data from 2002 – 2007 (Yoffie & Slind, 2008, p. 17) shows that total computer net sales have grown
from $4.534.000.000 in 2002 to $10.656.000.000 in 2008. This shows that there must be a huge
internal rivalry. The switching costs must probably have declined over the years. Reasons for this are
off course the standardizing of PC components (Yoffie & Slind, 2008, p. 7). With lower switching costs,
it must have become easier for Macintosh users to switch to alternatives; something that resulted in
a decline in market share.

Consumers’ determinants in the purchasing a personal computer

The second part of the analysis of this research question takes the consumers’ determinants into
account. There can be a mismatch between the economic resources of the consumer and the prices
of a product and there can be a mismatch between the consumers’ tastes and preferences and the
product. In the case of Apple Inc. it is clear that competitor’s products became cheaper over time
while Apple didn’t have the benefits of growing economies of scale. Cheaper prices for competing
products could be a reason why consumers chose other PC’s over Apple’s Macintosh.

A second aspect is that with the development of Windows in the 1990’s (Yoffie & Slind, 2008, p. 6),
the main advantage of Apple’s software vanished. It is said in the case that “the Windows OS
combined with an Intel processor) had replaced “IBM-compatible” as the industry standard” (Yoffie
& Slind, 2008, p. 6). This development implies that consumers no longer prefer Apple’s software, and
perhaps hardware, over other PC’s. This could then have lead to a decline in market share.

It can be concluded that despite Apple’s superior products, the new IBM-standard, with its
standardized components that made components cheaper through economies of scale, higher
industry competitor’s forces, easier distribution of computers, better information about computers
and their prices etc. are reasons for Apple’s declining market share over time.

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Sustainability of competitive advantage in the PC industry
This brings us to our final question. Does Apple possess any resources that provide it with a
sustainable competitive advantage in the PC business?

Resources
To answer this question it is imperative to first define the meaning of resources. According to Barney
(1991) resources are ‘assets, attributes and knowledge controlled by a firm that help improve
efficiency and effectiveness.’ Bingham and Eisenberg(2008, P.3) add to this by stating that resources
include tangible and intangible assets and that managers can use these assets to develop value-
creating strategies.

The deployment of these resources is also important as a correct deployment can create a
competitive advantage. This can be done through the combinations of resources that are ‘valuable,
rare, inimitable, and non-substitutable.’ (Bingham&Eisenhardt, 2008, P.3)
Valuable resources are resources that for example have the ability to lower costs. Rare resources are
resources that are unique or relatively scarce among companies within a business sector.
Resources that are inimitable cannot easily be copied and non-substitutable resources are resources
that do not have possible substitutes.
According to Bingham and Eisenhardt, a combination of all four resources is necessary to create true
lasting competitive advantage. When there is only a combination between only two or three
resources, which do not include inimitable resources, there will only be a temporary advantage or
will only allow the company to temporarily compete with its competitors. Inimitable resources are
the most important of the four resources as they allow a company to be different from its
competitors. Imitable resources can be created in three ways; property rights, causal ambiguity and
recognition.
Property rights are for example patents and copyrights, these rights make sure that it is illegal for
competitors to copy certain resources, products and processes.
Causal ambiguity exists when competitors are unable to view certain processes and resources thus
rendering these processes partially invisible, which in turn creates causal ambiguity.
Recognition of a brand and the building of resources are done over a large span of time, if it is hard
for competitors to imitate a company because of brand recognition, then the company has imitable
resource through recognition and resource accumulation.

Apple’s key resources

Now that we now the underlying theory behind resources and their impact on competitive
advantage, we can look at what kind of resources Apple has.

According to Apple’s marketing department it is important that Apple computers differentiate from
other computers because of the ‘attractive Apple design factors’ (Yoffie&Slind, 2008, P.5), but that

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they also function with other non Apple computer products, like keyboards. This can be viewed as a
valuable resource and imitable resources as some of these design factors are protected by property
rights and thus competitors cannot copy these factors.
Another Key resource are the apple stores, these stores are valuable resources as they create quite
some revenues, ‘19% of total revenues in 2008’ (Yoffie&Slind,2008,P.6).
Brand recognition and the building of resources is another imitable resource that is a key resource
for Apple. As Apple was created during the 1980’s it has had a long time to develop its brand and
accumulate resources. Because Apple is now so well known for its quality products and distinctive
style it is difficult for competitors to copy these products with the same success.
As the PC industry and the components within them have been largely standardized it is difficult to
obtain rare resources.

Sustainability
Now that we know what Apple’s resources are we can answer the question. Do these resources
provide Apple with a sustainable competitive advantage in the PC business?

The problem with Apple and every other PC producer is that none have rare resources as the parts
used in building PC’s are largely standardized. Another problem is that there is always a substitute for
a certain PC. Non-substitutable resources are also limited as the products mainly need to have the
same functions. Thus companies need to largely rely on brand name and quality, but quality
increases price. This is a problem for Apple as its high quality products are more expensive than
computers from other companies. Currently Apple’s share in the PC business is relatively small, thus
it can be concluded that they do not currently posses as sustainable competitive advantage and the
current resources are not enough to create a sustainable competitive advantage. However it does
seem that Apple’s PC Business does currently have sustainable growth. Part of this growth can be
attributed to the Halo effect of the i Brand, which has been extremely successful due to products like
iPod and iTunes and thus increase the interest in Apple products including the Macintosh computers.
The other part of the growth can be attributed to the changes Steve Jobs implemented in recent
years including restructuring of Apple and improving the image of Apple. So currently Apple has
sustainable growth and if this growth continues it can change into competitive advantage.

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Strategic advice
Apple could build up its market share by using its resources more effectively. However Apple does
not possess a lot of resources that could provide a sustainable competitive advantage. The resources
are the creativity to differentiate itself, brand recognition and the Apple Stores. These differentiated
products can be patented and protected. Brand recognition must be used to rebuild market share
that is partly based on this brand recognition. This recognition has been enhanced by the i-Brand that
has emerged in the last decade. Apple Stores can also be used to further enhance the brand
recognition and offer Apple PC’s. Another option to regain market share would be to lower the prices
of the PC’s and at the same time try and retain the quality of the products as this is currently one of
the larger problems Apple faces as its competitors all have cheaper products.

Conclusion and Reflection

From our analysis and research we can derive the following: despite superior products, Apple has lost
a significant part of its market share over time. This can be explained by a changing standard from
Apple’s OS (Operating System) standard towards the standard of an Intel CPU with Windows’ OS.
Furthermore, the high competition has been a problem. This was supported by the standardization of
PC components. Furthermore distribution of PC’s became easy and information about PC’s was more
widespread than it was before. This made it easier for consumers to compare functionality and prices
of PC’s. Apple could not benefit from these declining costs because of its special PC structure, with
special components.

The Theories we used to develop our conclusions had their uses, but all theories, concepts and
models were developed to explain and describe certain phenomenon. However, in the process of
trying to explain these phenomenons to others, facts will be simplified and will lose their detail. For
example in Porter’s five forces model, the model has split reality into five rough pieces; when in
reality this is not so simple and there would be more forces at work in shaping a business and the
surrounding market. But without simplifying these theories and models it would become difficult to
implement these theories.

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References
Articles:
Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management (17),
99–120.

Bingham, C. B., & Eisenhardt, K. M. (2008). Position, Leverage and Opportunity: A Typology of
Strategic Logics Linking Resources with Competitive Advantage. Managerial and Decision Economics
(29), 241-256.

Collis D.J., Montgomery C.A., (2005). Corporate Strategy: A Resource-Based Approach. McGraw-Hill:
Boston.

Stahura, J., DeVaney, A., & Win, Y. (2005). Determinants of Household Expenditure on Computer
Hardware and Software. The Journal of Consumer Affairs (39:2), 254-275.

Wit, d. B., & Meyer, R. (2004). Strategy Process, Content, Context An International Perspective (3rd
edition ed.). London: South Western Learning.

Yoffie, D. B., & Slind, M. (2008). Apple Inc., 2008. Boston, MA: Harvard Business School.

Websites:
Apple.com - Press Release Library. (2009). Retrieved September 21, 2009, from Apple.com:
http://www.apple.com/pr/library/

Apple.com - Investor Relations - 10-K Annual Report. (2008):

http://library.corporate-ir.net/library/10/107/107357/items/315133/AAPL_10K_FY08.pdf. Accessed
21. Sep. 2009.

X-bit laboratories - Average Selling Prices of Personal Computers Collapse. (2009).

http://www.xbitlabs.com/news/other/display/20090306064622_Average_Selling_Prices_of_Persona
l_Computers_Collapse__Market_Research.html .Accessed 21. Sep. 2009.

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