Internal, Macro-Environmental and Industrial Analyses of Apple - Case Study Example

1. INTRODUCTION Dynamism is trademark of business. An organisation is continuously subjected to various internal and external factors which compel it to keep adjusting in order to sustain. Similarly the journey of Apple Inc. is also full of various strategic changes. Apple Inc., which was formerly know as Apple Computer, Inc., is involved in designing, manufacturing and marketing of personal computers, allied software, services, peripherals and other application based solutions.  Products and services include the Macintosh line of desktop and notebook computers; the iPhone, Smartphone; the iPod line of portable digital music players a portfolio of consumer and professional software applications; the Mac OS X operating system and the iTunes Store. Being a truly global company, Apple operates in various geographical locations which include European, Asian, Japanese markets and of course the domestic market of United States. It is headquartered in Cupertino, California, USA. This assignment endeavours to highlight the various factors like internal, macro environmental and industrial one in context of Apple Inc. On the basis of this analysis this assignment will judge the existing strategic standpoint of the company. Moreover it will also recommend the few of the strategies, the company need to consider for its future sustainability. 2. INTERNAL ANALYSIS An interesting point to start with the internal analysis (Appendix 1A &1B) is to first have a look at the financial results of. From the evidences given in the case study, it is clear that Apple Inc. has a very remarkable gross margin of 31 %. Though this is the characteristic of the industry itself, still it proves the strategic viewpoint of the company. Moreover it should also be taken into consideration that such a return is achieved in times when the global economy is subjected to slowdown. Another remarkable fact that can be gathered from the data given in the case is that with its remarkable financial recovery, the company has become a zero debt company. This will certainly help the company to increase the shareholders equity and will also bring down the cost of financing any further project. A closer look at the shareholders equity will reveal its integrity over the period of time. This suggests that the company has used mostly internal resources at its disposal to meet the financial requirement for projects and development. If the financial results give us an idea of the success of Apple Inc., maybe the most relevant proof of that success is its reputation. The brand name appears as key factor of success for Apple Inc., which sells not a product but an experience. The emotional attachment to the brand built the firm’s reputation with values of individuality (i-phone, i-pod and i-Tune) and innovation (first PDA). The tradition and institution linked to this brand are transformed in a real sense of community where style and image are predominant and enabled to build customer’s loyalty. One of the other big strengths of Apple that enables the company to be successful is its visionary leadership in form of Steve Jobs. The Apple Inc. has a philosophy of continuous improvement and innovation. This is evident from the fact that company has always come out will new and enhanced version o its products and services. Management structures and working methods with non hierarchical and teamed based structures is designed to promote employee commitment and involvement. But at the same time if one takes a look at the frequent change in leadership in search of performance, then it casts a shadow on the sustenance of the company. Moreover it can also be argued that the company is overly dependent on one man for its remarkable performance which seems very risky. It becomes more risky with absence of any proper succession planning. Moreover, beyond the Human Resources aspect, the management in Apple Inc. is in general pragmatic since they were able to react and change their strategy in order to cut costs and improve quality when they were faced with a crisis in product portfolio. They also know when to make alliances (Like with AT&T and various retail chains) with the goal of enlarging the product range and of broadening the marketing channel. Figure 1: Internal Value Chain Analysis of Apple Inc. Apple Inc. has always been very quick in trying to improve itself when confronted to the gaps between its strategy and the environment. The company invested a lot in physical resources in order to respond the increasing demand and to improve quality and capacity. Apple Inc. is now equipped with firm R&D base that enables it owning an effective capacity to introduce advanced process technologies and to expand capacity. Strength of Apple Inc. is its product and design quality compared with competitors. The company prides itself on offering innovative products and services that really fit the needs of its wide customer base. Then, to be consistent with its philosophy of individualisation and quality, Apple Inc. adopted a particular strategy of giving the same distribution experience everywhere in the world with higher standards of pre and after-sales service. 3. MACRO ANALYSIS On viewing the Macro analysis (Appendix 2) a number of conclusions can be made with regard to the current and future state of the industry. The analysis will also highlight the major trends affecting the industry, and how those trends are likely to affect future industry growth. Current economic conditions including the variability of currency exchange rates, rising interest rates and subsequent tightening of economies give reason for this industry, like most others, to be slightly concerned about maintaining and building on current growth levels. Add to this the fact raw materials are rising exponentially in price and it can be argued with some certainty economic conditions do not currently favour industry growth. Thus the companies in this industry need to look towards outsourcing and off shoring business to cost effective places like Asia. Moreover the reducing trade barrier will help in this endeavour. The rising level of disposable income holds some weight in regards to helping industry growth, but the general economic tightening that is currently occurring largely negates this. These reasons lead one to believe industry growth will not be helped by a somewhat average economic climate. Despite this, political and legal trends appear to be more promising in regards to cultivating industry growth. The positive aspects of globalisation such as reducing trade barriers and harnessing free trade agreements between nations is positive for increased industry growth, largely through the reduction in tariffs as well as exposure to new and previously untapped market segments. This trend appears likely to promote growth within the industry in years to come. Intellectual property rights are a major concern of this industry. This is the issue which is more prominent in third world countries and to an extent to rapidly developing economies like that of India and China. When taking into account technological trends of the general macro environment positive growth looks likely. The innovations in field of IT and IT enable services along with telecommunications and transportations will aid the growth in this industry. As a matter of fact the trend towards eco-friendly products and processes has not proved to be cost effective. This puts the sustainability aspect on the negative side. The trend towards utilising new technologies to improve quality features and general attributes of products is on rise. Socio-cultural trends show somewhat balanced inclination towards this industry. The increasing awareness and education level is pointing towards better adaptability for this industry. But the multiculturalism needs a lot of technological improvement to be made for products to get acceptable. At the same time the reduction in physical movement especially in case of youth is also a matter of concern. To conclude the macro analysis of the industry in question it is a fair assumption to say there are a number of factors at each company’s disposal to push forward growth. Having said this there are also some negatives in place that must be overcome to maintain any growth. Numerous challenges lie ahead for industry players and the way in which they react to these will largely determine what kind of effect each trend has on growth, and if in fact this industry does outperform others in the long run. 4. INDUSTRY ANALYSIS The Industry Analysis (Appendix 3) focuses on Porters Five Forces Model, which “includes the threat of new entrants, the relative power of suppliers to the industry, the relative power of buyers (customers) from the industry, and the existence of substitutes.” (Hubbard, et. al. 2008) These forces are summarised in relation to Apple Inc. and the market within which it operates. The threat of new entrants integrating into the industry is low. The analysis revealed certain barriers do currently protect industry players to a certain extent. The advantage of current firms utilising economies of scale as well as their respective brand identities does dissuade new entrants, thus protecting current market share. However the product differentiation is no longer sustainable and capital requirements are manageable, meaning a new business could potentially enter the market and attempt to erode current profit margins. When discussing the bargaining power of suppliers it must be understood this is a variable and relative measure. A supplier’s bargaining power is usually determined by its market position, its relationship and worth to the relevant manufacturer, and how important the part is to the production process. Therefore it is a variable factor determined by individual circumstances. Although a uniform conclusion cannot be determined suppliers are in fact universally strong in regards to their bargaining power. The compatibility issue makes a supplier very specific to a firm. This increases the dependence of the firm on its supplier. But at the same time since the industry is knowledge specific, the chances of vertical integration by the supplier is very feeble. Bargaining power of buyers is quite high. If the product is sufficiently differentiated to be a unique item, buyers have little ability to affect the profitability of such a product, assuming it has something they want and are willing to pay for. If however a similar product can be attained elsewhere then bargaining power of buyer’s increases exponentially. This is becoming evident in the light of the fact that differentiations are no more sustainable. As a matter of fact, the possibility of backward integration is negligible as the industry is knowledge intensive. The growing power of substitutes is the most defined threat when it comes to current firms’ long-term survival. Because there is a vast array of readily available, cheap, convenient, and in many cases superior substitute products and services, the industry in question must continue to differentiate their service from that of such substitutes. It should be noted the power of substitutes depends on how one defines the industry. The substitutes are abundant for products and services of general use but are very restricted for specific one. The final of Porters five forces that must be considered is the intensity of industry rivalry. Rivalry is high and this environment can be attributed to continued industry growth, but the fact that companies compete within same market segments meaning the individual share is diminishing. The low exit barrier also aids to this. From the Industry Analysis undertaken for this industry, one can conclude that the continued survival and profitability of an industry are conducive but challenging for sustained industry growth. 5. PRESENT STRATEGY The present set of strategy stands vindicated by the performance of the company. The present strategy will be evaluated rationally through SWOT analysis. This analysis will reveal the standpoint of the strategy adopted with respect to internal features as strengths and weaknesses. Similarly with respect to external features as opportunities and threats. 5.1. STRENGTHS The company has been able to establish its brand awareness in the market. There has been a Halo effect from i-pod to PC. The company has been able to carve out an image of innovative firm. The negation of threat from virus and hacking has made the operation system of this company to put forward a differentiated product vis-a-vis Microsoft. Moreover the complete package of software and hardware has made it possible to put forward plug and play products. The company strategy to pay attention to appearance as well as features has helped it to extend its traditional as well as youth customer base. Being pioneer with the help of continuous investment in R&D has also proved to be a beneficial strategy for the company. 5.2. WEAKNESSES The company has not adopted lean operations management strategy. Unlike Dell, where the forecasting is accurate and inventory costs are minimal, Apple has to bear the cost of components and parts that it purchases before hand. This reduces the margin unnecessarily. Also the company is overly dependent on suppliers. Its reliance on IBM and Motorola for processor chip is high and risky. Though the company has got capable and visionary leadership but absence of any concrete succession planning makes it very vulnerable. Moreover the frequent change in leadership has also raised questions on the board’s ability to provide sustainable growth. 5.3. OPPORTUNITIES Apple has always come up with innovative ways to ridicule and expose the shortcomings of the Microsoft OS. Apple has been going all out with its brand image to attack Microsoft. Since the Mac OS is seen as a safe, reliable and secure system, Apple has leveraged the differences over competing OS. The latest launch of Leopard OS received reviews with sales totalling 4 million copies, and creating 20 % of the Mac installed base. The halo effect of i-pod has been judiciously used in i-phone and this strategy has effected PC market also. 5.4. THREATS The frequent changes in strategies were responsible for some of the problems that Apple found itself into. What Apple realised that it was actually operating in a niche market of premium and high end PCs and it was earning handsome profits per unit sold, but its penetration is an issue. Apple is also burdened with maintaining high cost required for research. But its startegy to recognise benefits in making research alliances has started paying off. Figure 2: Threats and difficulties of Apple Inc. 6. RECOMMENDATIONS Owing to all the strategic measures, the Mac sales grew thrice as fast as the overall PC market, which increased by about 14% in 2007. Apple had become the third largest PC maker within the US market with market share of 8.5%. But to continue the robust trend of the Mac growth saga, Apple will need to look outward. Since the US market is not growing at a great pace, Apple will have to look at the emerging Asian markets and tap its potential As Apple is operating in a fast cycle market in which the firm’s capabilities that contribute to competitive advantages are not shielded from limitation and where limitation is often rapid and inexpensive, its strategic decisions need to be undertaken quickly and in an effective manner. The i-pod and i-Tune business has been a spectacular success for apple. The Razor/Blade strategy in Apple case would bring a lot of profitability. The returns will be higher as it is the devises which would require replacement. Since the competitive advantage is no more sustainable, Apple will have to adapt and offer new services to keep itself one-up from the competition. Thus apart from products it has to stress on services more. On the organisational end, Apple need to look for new leader and should adopt a proper succession planning for that. This will lower the risk of vacuum of leadership as Apple has faced quite often. Figure 3: Representation of Sustainable Competitive Advantage Moreover the company should concentrate on its supply chain integration and should optimize it in order to compete in the market. It is generally accepted that successful manufacturing firms no longer compete head-to-head with other firms, but instead, they compete supply chain-to- supply chain. This means that firms rely on the complementation between their own internal competencies and those of their supply chain partners to achieve competitive advantage. To achieve complementary competencies among independently owned firms, a relatively new form of organizational governance, called Supply Chain Integration (SCI), is preferred over more traditional forms such as hierarchies or markets. Figure 4: Representation of proposed supply chain integration for Apple Inc. 7. REFERENCES a) Paulus, P.B. & Nijstad, B.A. (2003). Group creativity: Innovation through collaboration. USA: Oxford University Press. b) Gil Amelia, William L. Simon (1999), On the Firing Line: My 500 Days at Apple c) Alan Deutschman (2000), The Second Coming of Steve Jobs, Broadway d) Apple Inc. (October 21, 2008). Apple Reports Fourth Quarter Results. Press release. http://www.apple.com/pr/library/2008/10/21results.html. Retrieved on 2009-05-25. e) Linzmayer, Ronald W. (1999). Apple Confidential: The Real Story of Apple Computer, Inc.. No Starch Press. http://extras.denverpost.com/books/chap0411h.htm. Retrieved on 2009-05-25 8. APPENDICES APPENDIX 1A – INTERNAL ANALYSIS AREA RESOURCES Financial resources Very good gross Margin 31% Zero Liability (Debt free company) Integrated equity base over the years Organizational resources Philosophy and methodology for continuous innovation Management structures and working methods designed to promote employee commitment and involvement: non hierarchical, teamed based structures Physical resources Continuous investment in R&D through development centres Increasing the marketing channels i.e. company owned stores, online stores, other retail stores Technological resources Achieving continuous technological breakthrough Access to microprocessor and other allied technology through alliance. Human resources Dedicated and capable CEO like Steve Jobs But at the same time overdependence on one man is risky too. Frequent leadership change Absence of any proper succession planning Reputation resources Established market reputation as innovative firm Market reputation for quality and performance Value for money products and services APPENDIX 1B – INTERNAL ANALYSIS FUNCTIONAL AREAS CAPABILITIES Distribution Increasing the marketing channels i.e. company owned stores, online stores, other retail stores Almost equal share of domestic and international sales. Human resources Capable and visionary leadership Importance of employee commitment and job satisfaction favouring motivation, innovation and learning Marketing Effective brand-name products: values of individuality (i-phone, i-pod and i-Tune) Build customers’ loyalty through various application based services like i-Tune and Apple stores. Product strategy: Range of products to suit wider choices Wide price range with added and core features Importance of style and image with innovation Management Dedicated to innovation an performance Open to changes Manufacturing Effective capacity to introduce advanced process technologies and to expand capacity Product innovation and design quality Effective balance between product differentiation and economies of scale and scope R&D Innovative design features Continuous investment in R&D APPENDIX 2 – MACRO ANALYSIS FACTOR ISSUE ANALYSIS EFFECT ON INDUSTRY International World economy changing rapidly, becoming highly competitive and unstable. Reduction in trade barriers, through establishing trade agreements. The Globalisation movement - improvements in IT, and telecommunication Emergence of new economies & country development – causing new markets for opportunity. Increased competition (Negative) Acquisition of cost-effective labour & material(Positive) Reduction in trade barrier (Positive) New market avenue (Positive) Ruling: Positive Economic Increasing individual income. Ongoing global slowdown Increasing Unemployment levels. Interest & taxation rates. Increased affordability (Positive) Reduction in overall demand (Negative) Reduction in affordability (Negative) Falling Margins (Negative) Ruling: Negative Political Impact of international trading barriers. Government & attitude towards IT industry Creating international trading agreements (Free trading agreements) with countries Regulations & agency – uncertainty with international trading, (Negative) Encourage industry expanding (Positive) International trading agreements ease entry into country (Positive) Ruling: Positive Technological Improvements & development of technology. IT revolutions & innovation in telecommunication & transportation. Technology integration into the industry Telecommunication / Internet capability. Improved communication & innovation at global level (Positive) More efficient manufacturing operations/procedures (positive) Achievement of economy of scale and scope (Positive) International marketing, fast product delivery to Markets (Positive) Ruling: Positive Legal Industry regulations, patent protection and copyright laws. Class action lawsuits (Like that against Microsoft Inc.) Corporate social responsibility. Patent & Copyright – supports innovation & growth (Positive) Prevents monopoly & dominant control (Positive) but at the same time damage industry reputation (Negative) Brings corporate ownership (Positive) Ruling: Positive Social / Cultural The change in social attitude & behaviour towards product quality of computers and phones Influence of education / literacy Social issues – concern for obesity Recent movements of multiculturalism immigration into the Western world. Quality innovative products bring satisfaction and enjoyment (Positive) Increase product acceptability. through more rational to buy product (Positive) Reduces physical movement to great extent. Also attracts youngsters to remain in door. (Negative) Multiculturalism – change in religious beliefs & country custom, must change marketing & software and application platform (Negative) Ruling: Balanced Demographic Changes in work – knowledge workers have become the focus, thus people have become highly mobile. Need faster, mobile aids (Positive) Ruling: Positive Sustainability Continuously rapid changing environment, due to globalisation. The increasing issue of ‘global warming’ & ‘climate change’ – encouraging companies to become ‘green’: recycling, waste management, environmentally friendly. Change is continuous, uncertain, unstable (Negative) Establishment of renewable energy source which is not cost effective (Negative) Ruling: Negative APPENDIX 3 – INDUSTRY ANALYSIS Items ISSUE ANALYSIS New Entrants Economies of Scale: Reluctance of new players supports it. Product Differences: Product differentiation is no longer sustainable. Brand Identity: Brand identity becomes more important and sustainable. Expected Realisation: More prominent. Impact Ranking: Low Industry Rivalry (Competitors) Industry Growth Rate: Rapid because in increasing market size. But Individual share is diminishing. Brand Identity: Frequent Attempts to tarnish rival’s brand identity. Switching Costs: Switching cost is low for consumers. Exit Barriers: Exit barrier is low for firms due to less capital and more intellectual intensive nature of industry. Impact Ranking: High Suppliers Differentiation of Inputs: High as supplier is specific to firms. Switching Costs of Suppliers: High as compatibility issue is concerned.. Presence of Substitute Inputs: Immense because of ongoing technological breakthrough. Threat of Forward Integration: Very less as it is highly knowledge intensive. Impact Ranking: Moderately High Buyers Switching Costs of Buyers: Low as abundant availability of options. Buyer Concentration (relative to industry): company wise it is very fragmented. But is overall high relative to industry per se. Buyer Profitability: Greatest among all stakeholders as market is majorly price sensitive. Threat of Backward Integration: Almost difficult being highly knowledge and capital intensive. Impact Ranking: High Substitutes Relative Substitutes: Abundant for general purpose but scares for specific applications. Switching Costs: Very low as because of abundant options available. Buyer Propensity to Substitute: Very high as buyer is the real gainer of the improved situation. Impact Ranking: High Read More