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APPLE INC 2008

CASE STUDY#2

ABDUL MATEEN FATTANI


MUBASHIR AHMED
SHAHRUKH MUSHTAQ KHAN
SYEDA TOOBA HUSSAIN

OK
4/17/2011
PORTER’S FIVE FORCES MODEL
What basic type of industry environment does the company face (emerging, rapid growth,
mature, fragmented, decline) give reasons to justify your answers?

RAPID GROWTH

It is essential for us to first indentify the exact industry Apple belongs to due to its diversified products it
is not anymore an organization which dealt only in personal computers and software industry although it
started of from being a dealer of PC’S and operating systems and GUI interface but now it has a range of
MP3 players, online music services, and mobile products.
To answer which environment this industry is belong to we need to do Porter analysis for its core
business that is PC and operating systems.

We consider this market to be a rapid growth one due to following reasons

We have seen that this is an industry which revolutionize the world and converted this world into a global
village and that has only been able to happen due to rapid changes in technology which resulted due to
research and development in the environment when it comes to Apple it is in pretty competitive
enviornment due to continuous demand for the products as well.

Customer keeps on demanding and technological changes keep on delivering and creating a niche for
example we never thought there would be one day when we can sit at our own home and be able to see
and talk to someone who lives in the other part of the world but internet, webcam technology and with the
help of software this has happened.

Now a days PC is not just a PC it is your complete world either in the form of notebook or a home
desktop computer supported by operating systems and other software like Microsoft office, real player,
Google chrome, Skype etc all these technological changes are demand driven and identification of their
need has made this industry hyper competitive people are fighting for market share and entry barriers are
low.
PC

Low

Threat of - Economies of Scale: R&D is especially a big part of the cost of producing (R&D cost in computers
Entry hovers at 12% of sales by the U.S. industry) i.
- Product Differentiation: Apple’s PC has its own operating system and the unique design.
- Cost Advantage: High demand particularly in proprietary technology.

High

- There are relatively few competing firms compared to other industries, but Microsoft has most of the
Threat of market share.
Rivalry - Lower priced PC makers like Dell have been growing in the market.

Low

Threat of - Many types of products such as PDA, DVD player, and calculator can exist as a substitute for PC,
Substitutes but these can substitute only one or two functions of PC.

Moderate

- The major suppliers are of raw materials and the labor which is highly proprietary in technology and
has the power to impact price.
Threat of - Besides the threat of the labor which includes the technicians, there are relatively various suppliers
Suppliers for the raw materials.

Moderate

- The number of buyers is huge and growing as new technologies are introduced at a fast pace.
Threat of
- Apple differentiated by creating its own operating system and unique design, but other
buyers
companies like Dell or HP differentiate by lower price marketing.
MP3 player/online music services
Low

- Since iPod nano launched, some competitors such as Rio and Olympus had preferred to
Threat of stop.
Entry - Economies of Scale: iPod has 80% of market share and Apple contracted with Samsung to
buy 40% of its flash memory production which is two times more expensive than a hard
drive1.
- Product Differentiation: iPod has its own music store like iTunes which allows customers
download music conveniently. The complete set of iPod, iTunes and the accessories for iPod.
- Cost Advantage: High demand in proprietary technology. Apple has several patents for
iPod and favorable access to raw materials by the contract with Samsung.
Moderate

- There are various competing firms such as Samsung, Sony, i-River, etc., but iPod has
almost 80% of the market share.
Threat of - But if it does not keep the products innovative, the other company’s products which are
Rivalry lower in price than iPod can be a significant threat in anytime.
Moderate

- The substitutes for MP3 player can be a CD player, MD player, radio, etc.; but cheaper and
Threat of easier access to MP3 files has been making customers leave from the other music players.
Substitute
s
High

- The suppliers for raw materials and labor can be the threat, but the supplier who holds the
main profitability is the song writers, singers and players.
- Another big threat is the illegal free music download websites or P2P file- sharing sources.
Threat of Easy and cheap access to MP3 files can encourage the MP3 player market, but on the other
Suppliers hand, this can be the threat to iTunes.
Low
- The number of buyers is continually increasing and they keep demanding new and updated
Threat of products.
buyers - The internet speed and the music file providers are developing and these environments
encourage the MP3 buyers.
- iPod has relatively loyal customers

Mobile Products
Low

- Economies of Scale: High demand in R&D and marketing (today’s cell phones come with a
Threat of lot of add-ons like camera, voice recorder, speakerphone, MP3 player and FM receiver. They
Entry also have built in memories to record and retain voice and pictures and facility to download
them to a computer).
- Product Differentiation: iPhone has add-on functions with technology from their own PC
and MP3 player.
- Cost Advantage: High proprietary technology and favorable access to raw materials.
High

- There are relatively large numbers of competing firms such as Samsung, LG, Motorola,
etc., but Apple took 28% share of US smart phone market in 4th quarter of 2007.
Threat of
Rivalry
Low

- Mobile phones can be substituted by home phones, internet messengers, etc., but the main
Threat of convenience of mobile phones which is the portability cannot be easily substituted.
Substitute
s
Low

- Today’s phone has a lot of functions in addition to calling/receiving so there are many
kinds of suppliers for the camera, MP3 players, Video players, memories, etc.
- Apple which is already in the industry of PC and MP3 mostly deals with internal mediates
Threat of and suppliers.
Suppliers
Low

- The number of buyers is even huger than the PCs. Also the buyers keep increasing with the
new market of other developing countries.
Threat of
buyers

According to the above mentioned analysis we have come to the conclusion that threat of rivalry is
highest in all the PC and mobile phone industry product ranges and in the MP3 player and online music
service industry, the power of suppliers is the highest external force. We have also observed this market
trend are destroying all the boundaries now your phone is not just a call sending and receiving device it
has camera, mp3 player, voice recording device and many other features available. Same goes for MP3 its
not only an audio device anymore, but it is turning into a more enhanced tool for full-motion videos and
data storing which is the area of PCs therefore observing the trends we can say that Apple is operating in
a rapid growth environment.
COMPETITIVE PROFILE MATRIX

Apple

Critical Success Weight Rating Score


Factors
Innovation(Product 0.13 4 0.52
Design)
Market Share 0.12 1 0.12

Brand Loyalty 0.09 4 0.34

Customer 0.05 3 0.15


Service/Support
Diversification(Product 0.10 3 0.29
Range)
Business Structure 0.08 2 0.15
Efficiency
Pricing 0.08 2 0.15

History of Name 0.05 3 0.15

e-Store 0.05 4 0.20

Financial Position 0.09 3 0.27

Product Quality 0.13 3 0.39

Concern for 0.05 1 0.05


Environment
1 2.78
QUESTION # 01

What is the present strategy of the company? Does it match with the environment

PRESENT STRATEGY

Apple is market driven it produce what the customer demands with strong direction and market
understanding it is creating products which are portable ,stylish, affordable and powerful
To consistently push new ideas and products
To get rid of unprofitable segments and divisions
Capture market opportunities by redefining existing market concept
Apple brand must create a desire to own and reward the user with more than just the basic tangible
product functionality. Good customer and product support enhances the value perception and
experience for the user.
Apple's current strategy in the PC market revolves around a business of software manufacturing that
drives the hardware and retail categories. The official focus is on growth by concentric diversification
into portable / mobility and wireless communications, the digital lifestyle and music, iPod, iPod mini
and iTunes Music Store

QUESTION # 02

What are the threats/ opportunities faced by the company?

OPPORTUNITIES

Untapped market for PC’S like Asia


Projected halo effect of iPods and iPhone, which means that consumers were expected to switch to
apple computers after being exposed to Apple brand through iPods/iTunes/iPhones
Emphasis on products which are portable stylish easy to use and power
iTunes the biggest legitimate digital entertainment library which provide protection to music with
Apple’s Fair play Digital Rights Management system
Increase in worms and viruses on PCs where Apple PC MAC offer greater protection against virus
but Windows doesn’t.
Large population (Gen X&Y) which are extremely individualistic and name brand conscious.
Weak ties with Microsoft products.
Downloadable music and MP3 players are highly marketable along with online movie store
Expected Apple notebook unit total shipment by more than 40%
Expected Apple PC unit total shipment by more than 30%

THREATS

Companies not seeing Apple Mac at a discount and receive informational material about the
operating system.
Dell and HP are major competitors in PC and notebook
Increasing competition with music downloads and preference towards piracy.
Dell does not invent but provides computers at a more cost effective rate for customers.
Recession—price of Apple computers are higher.
Intel’s future Pentium release.
Steve Jobs health.
QUESTION # 03

EFE MATRIX

WEIGHTE
KEY EXTERNAL FACTORS WEIGHT RATING
D SCORE
Opportunities
Untapped market for PC’S like Asia 0.15 2 0.3

Projected halo effect of iPods and iPhone, which means that 0.1 4 0.4
consumers were expected to switch to apple computers after
being exposed to Apple brand through iPods/iTunes/IPhones

Emphasis on products which are portable stylish easy to use and 0.05 4 0.2
power

Increase in worms and viruses on PCs where Apple PC MAC 0.05 3 0.15
offer greater protection against virus but Windows doesn’t.

Downloadable music and MP3 players are highly marketable 0.05 3 0.15
along with online movie store
Expected Apple notebook unit total shipment by more than 40% 0.05 3 0.15

Expected Apple PC unit total shipment by more than 30% 0.05 3 0.15

Threats
Companies not seeing Apple as compatible with their software. 0.1 4 0.4

Dell and HP are major competitors in PC and notebook 0.15 4 0.6

Increasing competition with music downloads and preference 0.05 4 0.2


towards piracy.

Dell does not invent but provides computers at a more cost 0.02 3 0.06
effective rate for customers
Recession—price of Apple computers are higher. 0.03 3 0.09

Intel’s future Pentium release 0.05 2 0.1


Steve Jobs health. 0.1 2 0.2

TOTAL 1.00 3.25

As the weighted score of the EFE matrix is above 3 that suggest that the company is fully aware about the
opportunities and threats and taking necessary actions to keep them into this competitive industry.
QUESTION # 04

Analyze each value chain activity of the company and identify its strength and weakness of each
activity.

Value Chain Analysis

To determine where Apple developed distinctive capabilities, Porter’s generic value chain model provides
a systematic framework for identifying Apple’s utilization of resources. Primary activities for Apple
include Technology and Product Design, Production, Sales and Marketing, Customer Service, and Legal
Services.

Technology and Product Design

This feature is Apple strength apple is known for its unique deisgn and technologies it was apple who
introduced the first GUI PC it was MAC was the first computer to use 3.5 inch disk drive first one to
make power pc chip Apple’s history is rich with cutting-edge technology development. Apple drives to be
the best, no simply the first. The Apple operating system is universally regarded as more stable and
reliable than Windows, while the desktop publishing software bundles (iMovie, iPhoto, iTunes, etc.) are
the most comprehensive available to end users

Strength
Apple came up with new ideas and kept the other competitiors on toes they were being the best not
simply the first ones

Weaknesses
Mostly this thing for being the best require a lot financing and until unless you have a star product in
your portfolio you cant keep on draining money in research
Production

Because Apple had long refused to license its operating system to external entities, the bundled packages
of Apple-developed hardware and software became the cornerstone of Apple’s production process. While
every product introduction has not been a success (Lisa, Newton, etc.), Apple treats component
production as a natural extension of the design process.

Strength
They can keep their technological advancements a secret

Weakness
Limiting their market of PC as other software developers can’t get access to their hardware system and
can’t make their software Mac compatible.

Sales and Marketing

We could simply title this section ―Steve Jobs‖. Since his return as CEO in 1997, Jobs personally unveils
all new product introductions, reviews corresponding marketing campaigns, and approves new product
development guidelines. In a departure from their turbulent history, Jobs ―entered into patent cross-
licensing and technology agreements with Microsoft. After years of unimpressive market share growth
and cannibalization of a loyal consumer base, the door to the expansive PC market was now more
accessible to Apple than ever before. Apple continued to command a market premium for producing a
―better mousetrap‖ throughout its history.
Strength
Steve Jobs strategies were the strength in this area
Weakness
Everything relay on Steve Jobs pointing the way there are market reservations that would would happen if
he is not there to show the way

Customer Service

How has Apple retained substantial cash reserves during the explosive growth and dominance of PCs
worldwide? Apple created a virtual love affair with their customer base by delivering technically superior
products (iPods vs. other MP3 players, Macs vs. PCs, etc.), and
Aggressively pursuing hardware and software updates. Apple integrated their primary activities so well
that it is transparent to the consumer where one activity begins and the other ends

QUESTION # 05

1. Return on Equity
2007 2006 2005
Earning Before
Tax 5,008 2,818 1,808

Total Equity 14,532 9,984 7,428

Return on
Equity 34% 28% 24%

2. Return on Assets

2,007 2,006 2,005

Net Profit 3,496 1,989 1,328

Total Assets 25,347 17,205 11,516

Return on Assets 14% 12% 12%

3. Net Profit Margin


2007 2006 2005

Net Profit 3,496 1,989 1,328

Sales 24,006 19,315 13,931

Net Profit
Margin 15% 10% 10%

4. Current Ratio
2007 2006 2005
Current Assets 17,369 11,632 9,321
Current Liabilities 9,299 6,443 3,487

Current Ratio
1.87 1.81 2.67

5. Quick Ratio / Acid Test Ratio


2007 2006 2005
Current Assets 17,369 11,632 9,321
Current Liabilities 9,299 6,443 3,487
Inventories 346 270 165

Quick Ratio 1.83 1.76 2.63

6. Asset turnover
2007 2006 2005

Sales 24,006 19,315 13,931

Total Assets 25,347 17,205 11,516

Asset turnover 0.95 1.12 1.21

7. Debt to Equity
2007 2006 2005
Total Libilities 10,815 7,221 4,088

Total Equity 14,532 9,984 7,428

Debt to Equity 0.74 0.72 0.55

Apple’s financial performance continued to strengthen over the last several quarters. In
the most recent earnings announcement, Apple reported significant growth in net revenues driven by the
strong performance of its iPod and iPhone product line.

Profitability Measures

From the above ratios it is quite clear that Apple substantially improved in its key measures of
profitability in the last few fiscal years. In terms of return on assets, return on equity and profit margin,
Apple strengthened financially and now has similar ratios to that of its competitors and the overall
computer hardware industry

Liquidity and Leverage Measures

Apple historically held very little long-term debt. The above ratios confirmed that the Apple’s liquidity
position is on the strongest side and its current ratio, quick ratio and debt to equity ratio interpret that the
company have the ability to payoff its liability at any point of time and there is a nominal long term
liability which not hurt the position of the company. The financial position of the Apple strengthen their
position in the industry.
QUESTION # 06

IFE MATRIX

Strengths Weight Rate Score

User-friendly GUI 0.1 4 0.4


Highly Innovative products 0.07 4 0.28
Brand Loyal Customers 0.09 4 0.36
Financial Strength 0.05 3 0.15
Steve Jobs Return to APPLE 0.05 3 0.15

WEAKNESSES Weight Rate Score

Dependability on Jobs for strategic visions and


0.12 2 0.24
new ideas
Low e-trade 1 0.1
0.1
Market Share 0.12 2 0.24

Product sales performance 0.07 2 0.14

Limited global share 0.08 1 0.08


TOTAL - 3.04
ITunes and music store is a great source of 0.4
0.1 4
revenue
Diversifications in Products 0.05 3 0.5

As per IFE weighted average score we can say that the strengths of the company are greater than its
weakness and they can cope up with these weakness with utilizing their strengths properly.
QUESTION # 07

Financial Strength (FS)

Return on Investment =+6


Leverage =+5
Liquidity =+6
Working capital =+5
Cash Flow =+4
Ease of exit = +3
Risk Involved =+3

Average Score = 27/7 = 4.28

Environmental Stability ( ES)

Technological change =-4


Rate of Inflation =-2
Demand variability =-3
Price range of competitive products = -5
Barriers to entry =-5
Competitive pressure =-4
Price elasticity of demand = -2

Average Score = -25/7= - 3.57

Industry Strength ( IS)

Growth Potential =+3


Profit Potential = +3
Technological Knowhow =+4
Resource utilization = +3
Capital Requirement = +4
Ease of Entry = +1

Average IS Score = +3.00

Competitive Advantage (CA)

Market Share =-5


Product Quality =-3
Product life cycle = -5
Customer Loyalty = -2
Competition’s capacity utilization = -4
Technological Know how = -3
Average CA Score = - 3.67

SPACE MATRIX

The Space matrix shows that the company’s current position is on the conservative side they have the
competitive advantage over their rivals in the shape of iPod and iPhone as well as their financial position
is very strong but to sustain in the market they have to convert their strength into opportunities and create
a sustainable competitive edge through innovation in their product line
QUESTION # 08

TOWS MATRIX

“SO” Strategy

Their financial strength gives them the courage to move into Asian market where the potential customers
are waiting for their products. This move helps them to get the extra market share and capture this huge
market with their innovative products.

“ST” Strategy

Their R&D is very much capable to expand their product line and create some products for the low end
consumers and this strategy tackles the threat of low cost products of Dell which is available in the
market. If they targeted the low end consumers once with their innovative products the threat of Dell
goes down.

“WO” Strategy

Apple should emphasize on making new product and focus on creating awareness among the customers.

“WT” Strategy

Apple should have to focus on producing new compatible products and focus on marketing its products.
QUESTION#09

ISSUES FACED BY APPLE

Companies not seeing Apple as compatible with their software.


Dell and HP are major competitors in PC and notebook
Legal risks – In a market that literally changes at the speed of thought, patent and copyright
infringement risks remain high. As long as operating systems and support software packages continue
to converge and remain relatively easy to imitate, present and future lawsuits are inevitable. The Apple
records claim against iTunes remains unresolved.
Gross margins were not increasing due to the factor that Apple products are relative high priced secondly
due to recession in US economy which brings in the biggest profit chunk.
Cutbacks in education budget in the United States could impact Apple’s revenue
The continued problems with the iPhone 3G launch, including a worldwide crash of the iPhone activation
system
The fact that Steve Jobs potential health problems will not hamper the company impressive performance
and leadership in innovation into the future
QUESTION # 10

Develop minimum of three alternative strategies to resolve the issues. Give cost benefit of each\

Apple should consider better support system for it iPhone so that a particular star product should
not bring in law suits and customer complaint as it happened when 3G was launched for that
Apple can invest more in support system and should do a test run as well before launching it
They could revamp their value chain like Dell did and keep the designing of the product to itself
They can also go in providing peripherals such as printers, TVs and camera in an effort to supply
a broader array of customers needs for electronic products
They could also come up with an innovative marketing strategy
They can ease their restriction on the Apple Certified Developer Program so that it is easy for
software developers to obtain Macs at a discount and receive informational material about the
operating system
QUESTION # 11

STRATEGY RECOMMENDATION

License of MAC software to other PC

o By adopting this recommendation company can gain excess market share, more customer
will get access and can get user free application to MAC.
o Company has enough resources to adopt this change. Due to their Brand name other PC
will welcome their approach which will bring mutual benefit to both partners.
o Competitive advantage can be achieved by gaining excess market share and revenues.
o Long term contracts should be made between alliances to get rid of counter competitive
move.

Special concession to schools so that once workshops are conducted in schools, it can create
a lasting interest amongst the younger generation (future of tomorrow)

o Company has enough marketing capabilities by which they can attract new potential
customers.
o Students are future market of computer; once they get introduced by apple in their
beginning it would be easy for them to make a decision.
o Benefits and easy packages for students should be introduced to counter the competitive
move with the passage of time. For example using their wide product line i-e IPOD,
IPHONES, ITUNES.

Increase retail presence in developing economies

o Company can get enough market shares, and exposure in developing markets, numbers of
potential customers will increase easy access and availability to the customers who are
willing to use the product of the company.
o Company have enough recourses to adopt this recommendation and will strengthen there
position in global market.
o Vast range of products should be available of the company with in there retailing
facilities which will facilitate the buyer according to customer demand. One stop
shopping for Apple.

Apple should reintroduce its Apple TV to the market in a new marketing campaign. The
new Apple TV would include the ability to access iTunes on the television itself through an
internet connection and directly from there, download and watch movies and TV shows
rented or bought through an iTunes account. Also, the music library could be accessed so
consumers could take advantage of their television speakers to play their music purchased
on iTunes as well. This, combined with the standard cable features of any other TV, would
complete the “entertainment hub” concept you originally wanted.

o It will be competitive in terms of cost as they have previously developed a system of


ITUNES which will make their existing customer attract more towards the product.
o Company have resources in terms of finance and experience in working in innovation,
Apple is the name of innovation, by adopting this recommendation there brand name in
term of innovation and creativity will get more strengthen.
o Competition will be in new market and they can crab the attention of first mover who will
be doing expansion in their product line through utilizing their experiences and
technology of their existing products within a new product.

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