Issues in Competitive Advantage: The Computer Industry - Case Study Example

Part Executive Summary The Computer Industry has evolved from firms providing basic computing machines to encompass organizations that sell sophisticated computer hardware (including portable and desktop computers) and software (operating systems as well as specific applications), as well as those selling server. With the advent of latest technology, traditional computer manufacturers like Apple Inc. are also turning towards integrating their core products with tech-enabled entertainment accessories like iPod, and developing innovative software applications for educational, corporate, and scientific communities. With the advent of the Information Technology, the computers have become all pervasive. The computers are becoming like a commodity, with households aspiring for more than just computers. Business processes are being converted to computerization, and the developing nations are rapidly embracing IT. All these factors, coupled by the trend of upgrading that affluent consumers are adopting, makes the Industry highly attractive. The industry is not severely influenced by either customers or suppliers, and also the barriers to entry too are rather high. However, the presence of several heavyweight competitors, makes it important for organizations to streamline their processes towards product innovation and to back their selling efforts with creative marketing strategies. Apple is one of the leading players in the Computer and Entertainment Media Industry, though its market share has been usurped by competitors like Dell. Apple has been following a generic strategy of differentiation, though a Value chain analysis reveals that its product differentiation is accompanied by propriety legalities. Its sales and distribution channels too are lagging in market responsiveness. The major challenges that Apple faces include competition from free software, its sales and distribution channels, and customer service. Table of Contents Industry: Computer and Entertainment Media - Definition and Overview Computer Industry Analysis Using Porter’s 5 forces Company Overview: Apple Computers Apple Computers: Generic Strategy Value Chain Analysis: Apple Computers Three Challenges For Apple Computers and Recommendations Part 2: The Industry 1. Definition: The Computer Technology Industry that is extending to cover entertainment and media. 2. Overview of the Industry The Computer Industry is a highly competitive industry with several players vying for market share with each other. The industry includes hardware developers, software vendors, and vendors of technologies that deliver digital entertainment and media. The Computer Industry had grown at a rate of 10. 5% in 2006. (Business Wire, 2005) The major players in the industry are Dell Inc., Apple Inc., IBM, Sun Micro Systems Inc., Gateway Inc., Palm Inc., Hewlett-Packard-Compaq. (Reuters, 2007). The industry is highly price sensitive and organizations operate in an environment of low margins. (The PC Guide, 2001). The industry has slowly expanded from equipment and software suppliers to include video-gaming and digitized music providers. As such companies that were traditionally into hardware or software development are now facing competition from organizations that were earlier restricted to the entertainment and music industry. 3. Porters’ Five Forces Model To Evaluate The Attractiveness of the Industry According to Porter, an organization that wants to exist and profit in an industry, must come up with specific a competitive advantage. (Kotlar, 2000). Porter has given a framework (the five forces model) for analyzing the Industry of any given organization, by doing which, an organization can arrive at indications and hard facts that it can develop into competitive advantage for itself. The Five Forces Model is based on the assumption that an industry faces, and is affected by five different kind of influences. These include, The Barriers To Entry Industry, The Threats of Substitute Products, The Suppliers’ Power, The Buyers’ Power, and the Threat of Competitors. An Industry Analysis for the Computer and Entertainment Technology will therefore include gauging the above threats for that industry. The Barriers To Industry - High The Computer and Entertainment Technology Industry provides a substantial barrier to entry for the new entrants. This is because, the industry has several heavy-weight existing players that have already captured the market. These players are able to compete with each other on price and innovativeness and brand identity – which could be a tangible threat to a new entrant, especially in the hardware section. However, as the industry has expanded to include music and entertainment products and services – which already had big players like Sony – the threat from these companies (that already have experience and market share in their industry) could is noteworthy. Threat From Substitutes - Medium There are over 1000 million internet users at present (Ghosh, 2007), and will expand manifold in the near future - but most of them will be consumers of handheld devices like mobiles and wireless devices (Kotz and Gray, ). This is already a threat for the existing manufacturers of hardware products. Other substitutes include music and entertainment from the Radio, the TV, videos entertainment providers like YouTube, and gaming consoles and content providers. The threat from the substitutes is therefore very much existent and the organizations need to be continuously innovate and expand their scope to remain competitive. The Suppliers’ Power - Low The industry is dependent upon the suppliers of the components and processors. Thus the computer hardware providers find it profitable to have strategic alliances or have vertical integration with their suppliers. Though the industry thrives on outsourcing component manufacturing and assembly, the suppliers have little bargaining power owing to the customers’ preference and recognition of the seller’s brand names. On the other hand, the suppliers of music like Sony, Warner, BMG etc., to exercise substantial power on the entertainment industry. These suppliers have an upper-hand as they have several options including the internet to sell their content. This is a substantial threat to the industry players – and it may affect their capacity to deliver their wares on time and within price. The Buyers’ Power – Medium The Buyers are guided by their economic status, and their technological savvyness in their buying computer and entertainment technology related products. The industry is not really very differentiated in terms of prices or products, and the consumers are mainly attracted by brand-names. With increase in awareness of the variety of brand names available in the market, easy availability of the different products, and intense competition among the rival companies that leads to lucrative offers for the buyers, both the corporate as well as the individual customers have gained in bargaining power. The customer can chose the cheapest and the best package that is now possible as his reach is not limited to the locally available brands. As such, the buyers indeed have an advantage over the sellers in this industry. The Rivalry of Competitors - High The competition in the above industry is intense. Not only the rivals are playing each other out on pricing, but they are continuously trying to outdo each other in innovativeness. But, since, the products and the technology is highly imitable, the advantage of innovation is soon lost. The competitors are trying out vertical integration, outsourcing and strategic alliances to remain competitive. Market Positioning Strategies Of the Competitors. The Computer and Entertainment Industry is exhibiting a promising rate of growth over the last few years. Though there are several players in the industry, and most of them are selling the same products and contents, the industry becomes highly competitive and existence becomes difficult. As such, the organizations have to follow different Positioning Strategies, or present their offerings and image in a distinctive way in the mind of the target market. (Kotler, 2000). The existing players therefore follow certain positioning strategies - Dell, which is the Market Leader in the Computer industry, follows a price-cutting and customization strategy that allows it provide flexible solutions to the customers. Apple Inc. is at present acting as a Market Challenger, and comes a close second to Dell. IBM and HP-Compaq follow a niche strategy where they are continuously providing innovative products. Sun Micro Systems, Gateway are market followers. In relation to the Entertainment and Media Industry, Apple is the Market Leader, but facing increasing competition from Sony, and other online music content providers like Napster and Rhapsody. Part 3: Apple Computers Apple Computer is a leading vendor of home and educational computers with products ranging from the Macintosh desktops, Mac OS, notebook computers, and iPod digital music player. (Enderle, 2007) With expected Net Sales growing to $4.3 billion in 2006 (CNNMoney.com, 2006), Apple’s market extend to the American continent, Europe and Japan. Apple uses a variety of sales channels including online stores, direct sales force, own retail stores, and third party retailers and wholesalers. Since Apple operates in an industry that is highly competitive, it relies on a generic strategy of differentiation. This strategy helps an organization to produce and sell highly differentiated products and services – and in return they can charge a premium from the customers or/and become market leaders. (Porter, 1998). Apple has been successful in its strategy to a large extent, though recent changes in the market have placed in a second position next to Dell. A Value Chain Analysis can be used to explore if Apple has been able to implement its strategy of differentiation to its benefit. A Value Chain is created through specific activities that are involved in the delivering of a particular offering (Kotler, 2000). These may include activities related to the Inbound logistics, Operations, Outbound Logistics, Marketing and Sales, and Service. (Kotler, 2000). Value Chain Analysis For Apple The Inbound Logistics Apple has been facing problems in both its supply and distributor chains. With, at times, funds tied up in inventories, and at other times, product shortages, Apple had to face backlash in the form of lost sales and customer discontentment. Apple has responded by outsourcing most of its logistics and transportation planning. With the introduction of SAP R/3, outsourcing of components, and co-ordination of the suppliers to ensure sensitivity to market demand, Apple has managed to maintain a leaner inventory. The order to delivery time has been minimized, standardization of parts undertaken to facilitate ease of assembly, and efforts made to better alignment of supplies with demand forecast. This strategy is getting Apple the benefits of the economies of scale and lowered costs of goods Product and Operations Apple has been largely relying upon its own technological excellence in producing cutting-edge products like Mac, iPod, iTunes etc. Apple has produced its own software and hardware, and as a result it has been able to sell both as a combined package. While this has created differentiation for the company, it has also placed restrictions on it’s hardware sale – due to its incompatibility with Windows OS. Apple has been introducing new and differentiated market offerings since its inception. It pioneered the PDA market with Newton, and then introduced iBook. It also came up with simplified Mac range of products. It was ableistics to reach out to both the personal, and the professional market for both desktops and portable computing systems. Perhaps the most lucrative innovation for Apple has been it’s iTunes and iPod, and then the introduction of flat LCD screens, and iLife rang of products. It is also credited with more reliable OS than Microsoft’s Windows. Apple has been able to do all this due to its focused drive towards differentiating itself in the Computer Industry. Apple is continuously involved in upgrading its existing products and introducing new products and software. It is able to do this by tapping into its core skills in Research and Development that it has acquired over the years. As such, Apple’s product are reasonably priced and affordable by a large section of the society. Marketing and Sales Apple can be said to have forwarded its differentiation strategy with the use of effective and concerted sales and marketing efforts. Almost all of Apple’s marketing communications are targeted towards generating an excitement and passion among the customers. On the distribution front, Apple is following the policy of using only reliable and sturdy distributors. In addition, it has allied with CompUSA for store-in-store program (while at the same time doing away with traditional partners like Best Buy and Circuit City). This has helped Apple in cutting the advertising costs, as “Apple users are drawn into these areas”. Its online store is doing excellent business, and it provides added advantage of having to keep zero-inventory, and sales to even remote and previously inaccessible places. Apple uses its retail stores to sell not only its own products but also select third party hardware and software – thus further reducing the overall cost of store management. Services However, there are certain aspects of the value chain on which the competitors are having a relative advantage. For example, Dell is using the direct selling channel to steadily increase its market base, Gateway is adding value through customer support and after sales service, HP-Compaq and IBM are focusing their operations on intense research to carry forward the computing technology, and Microsoft is depending upon its aggressive marketing to maintain its leadership. Part 4: Three Challenges and Recommendations. The key success factors in the Computers and Entertainment Industry can be narrowed down to the ability to produce innovative and dependable products, the ability to establish a strong and market responsive supply-distribution channel, and the ability to provide excellent after sales and customer support services. 1. Apple is faced with several strategic issues in order to regain its market position and also to add identifiable competitive advantage. Its products are innovative, but the propriety clause attached with them acts as a barrier to growth. Apple needs to re-evaluate its product strategies and move away from propriety software. It needs to formulate strategies to encourage more innovative products, and to establish the brand as a provider of both quality and utility. It can start licensing its software, and make hardware compatible with software of other companies. 2. A second issue is to set up systems for efficient monitoring of individual product performance. This needs decisions on re-structuring the organization into profitability centers and assigning responsibilities. While the top management should be in control, it makes more strategic sense to involve a wider pool of talent in the decision making process. Apple invest in strong Management Information Systems to gauge the real time market demand and to regulate its supply and distribution channels. This will result in lowering of lost sales due to shortages, and in low inventory carrying costs. Further, Apple can position itself as a sensitive and approachable market player in the eyes of the customers. This strategy will make Apple’s operations flexible and release it resources (time, money, store space etc) so that they can be used optimally. 3. Thirdly, Apple is faced with tough competition in computer selling channels. The organization needs to evaluate its present marketing and distribution strategies so as to gain greater market reach and penetration. There is an immediate need to consolidate the supply and distribution of the company. While Apple has already implemented SAP R/3, and is closely monitoring its suppliers, there is still further scope to improve the supply chain. As Apple products are available world wide, it would be better if it can groom local suppliers to meet the regional demands. Such a strategy could result in lowering of the production and the transportation cost. It will also generate goodwill for the company, as local content or labor will be employed. Apple can also outsource its components to regions where it can capitalize on cheaper wages and where exports are in favor. References 1. Business Wire, Dec 20, 2005, ‘IDC Forecasts Continued Double-Digit PC Market Growth in 2006’, available online at: http://findarticles.com/p/articles/mi_m0EIN/is_2005_Dec_20/ai_n15954096 accessed on 1 March 2007 2. Reuters, Wed 28 Feb 2007, ‘Apple Inc and Competitors’, available online at: http://72.14.253.104/search?q=cache:o_W8XogIGFQJ:www.investor.reuters.com/GoTo.aspx%3Fnss%3Dwww%26ticker%3DAAPL.O%26symbol%3DAAPL.O%26.t%3D/business/buscompany/buscompcpfake/buscompc_p+apple+and+competitors+overview&hl=en&ct=clnk&cd=2&gl=in&client=firefox-a accessed on 26 Feb 2007 3. The PC Guide, 2007, ‘The PC Industry’ available online at: http://www.pcguide.com/buy/ven/indIndustry-c.html accessed on 1 March 2007 4. Gautham Ghosh, 2007, ‘Vint Cerf on the Internet’, Desicritics.org, available online at http://desicritics.org/2007/02/25/093516.php accessed on 2 March 2007 5. Kotz, D. and R. S. Gray. 1999 . ‘Mobile Agents and the Future of the Internet’, ACM Operating Systems Review, 33(3), August 1999, pages 7-13 Available online at http://72.14.253.104/search?q=cache:cQ3xvOUhVIMJ:www.cs.dartmouth.edu/~dfk/papers/kotz:future2/+Most+internet+users+will+use+wireless+and+mobile&hl=en&ct=clnk&cd=10&gl=in&client=firefox-a accessed on 1 March 2007 6. Enderle, R., 2007, Apple’s Competitive Advantage, Technewsworld.com, http://www.technewsworld.com/story/33061.html accessed on 2 March 2007. 7. CNNMoney.com, 2006, ‘Apple Profit Zooms on iPod Sales’, available online at: http://72.14.253.104/search?q=cache:YYy5yF5UfQ0J:money.cnn.com/2006/01/18/technology/apple_analysis/index.htm+Net+Sales+growing+to+%244.3+billion+in+2006+for+apple+computers&hl=en&ct=clnk&cd=2&gl=in&client=firefox-a accessed on 1 March 2007 8. Porter, M. E., 1998, Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press: USA. 9. Kotler, P., 2000, Marketing Management, Tata McGraw Hill, India. Read More