Apple Company: Strategy Analysis

Introduction

Apple, Inc. formerly known as Apple Computers is an electronics and software giant based in California, USA. It is amongst the pioneers of personal computers that the world uses today. The restructured company, now called simply Apple, designs, manufactures and markets not only personal computers but also consumer electronics in the form of portable digital music players and mobile communication devices. Apple also sells intangible goods in the form of software, music, and video.

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The products are sold globally through online and retail stores, wholesalers, resellers and value-added resellers. Apple also sells a variety of third-party compatible, peripheral products as accessories to its core line to a diverse customer base, which includes the government, consumers, and small and medium sized businesses (Apple, 2009).

Although Apple has a global outreach in terms of sales, the U.S. represents its largest market, with approximately 57% of its sales coming from this area (Apple, 2009). Coincidentally, its headquarters is situated in the same country in Cupertino, California. The sales of the company are usually highest in the company’s first and last quarter, which fall in the holiday seasons and the beginning of the school year. While in terms of success, Apple has seen its share prices rise steadily over a 3 year period from FY 2006 to FY 2008, following a surge in the sales and net income of the firm (Apple, 2009).

This essay will review the strategic development of Apple, and then analyze the strategy using PEST, SWOT, and a financial review of the strategy, before conclusions are made.

Background to apple strategy development

Like most computer related companies the origin of Apple can be traced to a garage where a group of individuals got together to make a revolutionary machine that would change the world as we know it; in this case it was Steve Jobs and Steve Wozniak who invented the Apple I in 1976, on April Fool’s Day (Kerin, 2003). The business was established as a small group of people, which later changed into an organization that grew on the basis of successfully aligning its strategy with its people, structure, and culture. But as the organization grew its need for a more diversified market-focus caused it to change, with the resulting impact of the ouster of Steve Jobs by the company’s BOD.

The global focus of the company required the introduction of more processes and systems so that chaos would be replaced by efficiency; something that Jobs tried desperately to resist. John Sculley was the man who was considered as having the skills required to carry Apple in the new era of the company. But Microsoft’s Windows succeeded in pushing Apple off its perch and established itself as the predominant Operating System. This forced a further change in the structure and strategy of the company, which now faced a market that favoured low cost, high quality, and high efficiency. Thus Sculley was replaced by Spindler, who was replaced by Gil Amelio to implement the turn-around of the company; a task that only Jobs reinstatement could adequately meet (Tushman, 2002).

These changes in teams and leaders show the company’s use of incremental changes to its strategy. While such marginal changes were necessary to meet the short-run needs of the company, in the long-run they were largely ineffective. The different stages that the market goes through require different strategies, so an emerging market would require a focus on innovation and flexibility while a mature market would require a focus on cost and quality, focuses that necessitated a discontinuous change in the company’s strategy, people, culture, and structure (Tushman, 2002).

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Since then, Apple has regained its market share by switching to a differentiated strategy that relies on tapping lucrative market niches (McDonald, 2007). The ease-of-use, and they ‘hip’ design has positioned Apple as a unique and happening brand, which has subsequently raised the customer loyalty of the company, which has allowed Apple to maintain its premium pricing on its products (Graham, 2008). The iPod and iTunes are products that have captured significant market value for Apple, and this is largely because of the strategy of the company to establish itself as a brand that has a high level of involvement and a high level of simplicity at the same time. So consumers that previously downloaded songs illegally off the internet can now download using a legal and cheap product (Larréché, 2008).

Apple has always played to its strength as a company, but the fact that its strengths were not always cognizant with the prevalent market structure is another point altogether. So looking at the development of Apple so far the successful strategy has been to differentiate itself as a brand that provides its consumers with simple, sleek, high quality products that are targeted towards a specific segment of the market. This strategy will now be reviewed using the PEST and SWOT analyses.

PEST analysis

Political Factors

The company uses several external suppliers for producing key components in the U.S., China, Japan, Korea, Malaysia, and Singapore, among other countries (Apple, 2009). The production and final assembly of Apple’s products thus rely on continued production by the various vendors situated in the world. So if the production were to be halted by any of the countries due to political or other reasons the company’s financial and operating conditions would be adversely affected to a significant degree (Andersen, 2008).

Apple, along with other companies such as Dell and Cisco have benefitted in the past through several grant programs for educational institutes, as these institutes form some of the customer base of these companies. For Apple, these grants allow schools and universities to buy from them; therefore Apple is more than willing to lobby for and educate these institutes on the best way to be eligible for a stimulus package (Worthen, 2009).

Economic Factors

Apple has fared well in the last few years against its competitors in the computer despite lower sales of desktops which were down 20%, with the downturn affecting both Macs (38% decrease) and Windows-based PCs (15% decrease). On the other hand, laptop sales rose by 16.6%, and Apple notebooks saw a 22% gain due largely to the introduction of the new MacBook and MacBook Pro models, as opposed to Windows-based laptop sales, which increased by 15% (Hoovers, 2009).

Social Factors

One reason for the remarkable turnaround of the firm was due to the success of the iPod; it transformed the company into a profit making organization that has seen steady growth in all aspects of business due to the resulting halo effect on the Apple brand. The iPod’s success itself can be attributed to an amalgamation of several trends such as the greater increase in disposable income of young adults and teenagers, the increase in the population of mobile users, and the rapid acceptance and demand for miniaturization of electronics (Barringer, 2008).

Technological Factors

It has largely been accepted that companies follow a technology adoption life cycle, where mass distribution is the stage when prices fall, resulting in lower margins, but by this time the production costs have decreased enough to allow a certain level of profitability. This belief was shattered by the manufacture and sale of the iPod, which was marketed so successfully that despite the mass distribution stage being reached the company was able to maintain a high level of prices through its ‘hipness’ factor (Evans, 2006). Therefore, while the technology industry is largely characterized as a fast-moving, volatile market where prices eventually fall, Apple does not seem to follow the trends and rules that have been established over time – it chooses to make its own rules. So despite the presence of a large number of low price and/or more variety competitors, Apple has been able to discount the effect of the fast pace of technological innovation through its superior marketing (Lemberg, 2007).

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So while it seems that the company is engaged in a very risky business that it has almost succumbed to bankruptcy in the past, the new strategy of the company has managed to avert that situation to the extent that it has now recorded significantly improved profitability figures.

SWOT analysis

Strengths

According to the Interbrand rankings Apple’s global brand value has improved from 39 in 2006, to 35 in 2007, and witnessed a phenomenal rise of 11 ranks to reach number 24 in 2008 (Chaffin, 2008). This brand image has been successfully leveraged by the company to differentiate its product offerings and increase its sales by charging a premium for its products, such as the iMac, iPhone, and iPod (Grant, 2005). The company was also the pioneer of the retail format of hobby stores in the 1970s, which further allowed it to secure higher margins than its competitors (Rangan, 2006). In addition, the growth of the media content products such as iPod and iTunes has been phenomenal, with the iTunes Music Store allowing legal online purchase and download of music and videos so as to install itself in the online media market (Jackson, 2006). Apple also recently announced that its iTunes Movie Rentals will offer movies from all the major movie studios in Hollywood (Burrows, 2007).

Weaknesses

Apple’s R&D investment has decreased steadily as a percentage of total revenue from 7.6% in 2003 to 3% in 2008, despite an increase in absolute terms from $471 million in 2003 to $1.1 billion in 2008. In comparison, Microsoft and Hewlett-Packard have invested in R&D, as a percentage of total revenue, around 16.1% and 4.6% in 2007. Therefore, this declining trend in contrast to its competitors in investing in R&D might adversely affect the company’s position in the market in the future, especially considering the pace of the market in which it is competing (Datamonitor, 2008).

As mentioned earlier, Apple has been able to use its differentiation strategy on its iPod to resist the attack of several low price competitors; something it was not able to do with the Mac when there was no Steve Job (Katsioloudes, 2002). The company’s reliance on Steve Job’s for improved performance is a highly limiting factor to the continuing success of Apple, which fact was witnessed twice in the company’s history: the first when Jobs left Apple in 1985, and the second when he announced his leave for medical reasons in the recent year (Harvey, 2009). Both times the stocks of the company saw their values decreasing significantly; Jobs was able to come back to save the company in 1997, but whether he can come back again remains to be seen, and investors are a bit iffy about whether the company can survive another Job-less era.

Opportunities

The demand for smartphones is expected to rise swiftly over the next few years, with 65% of all the mobile phones in the world being forecasted to be smartphones by 2010 from the current share of 35%, as derived from the rising demand for computer-type functions as well as voice in mobile phones: the market Apple caters to through its iPhone. The success of this product can be judged by the fact that Apple sold its one millionth iPhone in June 2007 – just 74 days after its launch in the US, providing the company with an increasing potential revenue source. The global music player market is also expected to grow for the next few years – the US market alone is expected to touch 310 million units of portable music players by 2010, a market which Apple has captured successfully with its trendy iPod. The iPod accounts for nearly 60% of the US digital music players market, and the company has also managed to integrate its product with the entertainment systems of major automotive and airline brands (Datamonitor, 2008).

Yet another growing market is the global PC market with shipments growing by 13% in 2007 to reach 271.2 million units, largely due to declining prices and growing demand in the mobile segment in Asia-Pacific and the emerging markets. The sales of laptops are expected to follow this trend, which is why Apple launched the MacBook Air, the world’s thinnest notebook. However, while the company enjoys a large share of the market through its MacBooks in the U.S. and in Europe, the Asia-Pacific region still remains to be penetrated (Hoovers, 2009).

Threats

Apple operates in the highly volatile market of the technology industry and has to face intense competition due to the speed at which technological innovations take place in the world. The resultant introduction of new, competitive, and cheaper products means that the company has to be constantly on its toes with regards to its own frequency of innovation. In addition, Apple relies on third parties to supply various materials for its products, as well as customized parts from single sources who are not used as suppliers by other companies for these components. The continued availability of the materials are thus suspect, for the producers could decide to concentrate on production of components other than those customized to meet the Apple’s needs.

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Apple was sued by Honeywell International for alleged infringement of the US Patent 5,280,371 entitled “Directional Diffuser for a Liquid Crystal Display” in 2004, which Apple denied in the same year (Datamonitor, 2008). The case was stayed by the court but Honeywell filed a revised suit with a greater range of accused products. The resulting legal costs on the intellectual property would cause the company to face financial obligations which would unfavourably affect Apple’s reputation, and thus profitability (Datamonitor, 2008).

The SWOT analysis shows how the company has managed to use its strengths to overcome the problems it faces from its competition, while simultaneously minimizing the effect of the weaknesses of the business.

Performance analysis

From a financial viewpoint Apple is performing well, with a robust financial performance being reported in the past few years. Apple’s total sales revenue increased from $6,207 million in FY 2003 to $32,479 million in FY 2008, and its operating income recovered from a loss in FY 2003 of $1 million to a profit of $6,275 million in FY 2008 (Datamonitor, 2008). Similarly, the company’s net income increased from $69 million in FY 2003 to $4,834 million in FY 2008, in addition to its returns: the ROA and ROE increased from 3.7% and 5.9% in FY 2004 to 16.4% and 28.5% in FY 2007. By contrast, its competitor, Hewlett-Packard recorded ROA and ROE of 8.5% and 19.9%, respectively in FY 2007 (Datamonitor, 2008). These figures reflect the successful leveraging of the brand to secure higher revenues, despite the weaknesses inherent in the business and its strategy.

Conclusion

So in conclusion, Apple’s strategy is well suited to the environment that the company is in as shown in the PEST analysis as the company enjoys mass production while being able to charge a premium price for its products. In addition, we have also seen that the recent trends that are prevalent in the global market are congruent with the strategy that Apple is employing, which explains the company’s surge in profitability and revenue over the past three years.

The SWOT analysis revealed that the strengths of the company are being adequately leveraged to decrease the costs of being in business, while the company’s weaknesses seem to explain the company’s financial performance. The opportunities and threats that it faces, on the other hand, reflect the trends in the market with regards to consumer demographics and attitudes, as well as the problems the company would face if the political environment of any country changed in a manner which would disallow the future production capability of its very specialized suppliers.

It is important to note here that is it has always been innovation which has proved to be the trump card for Apple’s success, with iPod and iPhone being two recent examples and it is this innovation that has allowed the company to secure the higher margins that it now enjoys, not to forget the great loyalty and super brand image that Apple products enjoy.

Ending thought: While the company seems to benefit greatly every time it is under the leadership of the controversial Steve Jobs, it remains to be seen how it will fare with Jobs eminent retirement from the business.

References

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