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Global Business Environment Analysis of Apple

1 The volatility and evolution of computer industry

Starting from 1976, Apple computer created the personal computer (PC). After IBM transformed the PC from proprietary systems into open structure, PC has been dominated by Wintel (Windows + Intel) structure. Apple insists in adopting proprietary and niche market strategies made them keep losing market share till less than 3% in 2001. However, its strategy with ignoring the market trends makes it lose the market after years.

1.1 Industrial changes: Apple lost PC market because of ignoring industrial changes

The PC industry has evolved in the past decades. There are 3 phases. Let’s take a look at these phases and Apple’s position in each phase.

Figure 1 Computer industrial change

Before 1981: Proprietary Systems.

Every PC producer had to develop self own hardware and software. It was proprietary. Most buyers were technical people. There were 2 main streams in the market: Apple style machine and IBM style machine. During this period, Apple was the leader. Its strong developing ability made the Apple II became a family commodity. However, Apple didn’t use patent or trade secret to protect its products. Many computer companies re-engineered Apple II and made cheaper similar products to compete in the market. For example, Acer copied Apple II and developed the Little Professor Series.

1981- 1997: Open structure.

IBM turned the PC into open structure. Compaq, HP and many other producers started to show in the market to produce IBM compatible PC. During this period, hardware can be separated into CPU, mother board, power, disk drive, and other peripheral businesses. Software can be separated into basic input output system (BIOS), operation system (DOS, Unix, Windows), tool systems (Norton doctor, Anti-virus), computer language (C, Basic, Clipper, FoxPro), office applications (spreadsheet, word process), graphic applications (Adobe, Corel), game, and other applications. Each area had many providers competing with each other. But CPU, OS and some special application areas had few providers. PC producers became the hub of the hardware business. They had to buy all the components and assemble into a whole piece. Consumers are not only cared about hardware performance, but they also cared about the software applications. IBM style machine with Intel CPU and Windows OS became the mainstream. During this period, Apple kept losing its market share. It is because of 4 reasons. (a) Apple insisted in selling their products as a high price proprietary system. Its hardware and software were different and not compatible with IBM machine. (b) As more people using IBM machine, software developers turned to create software that can be run on IBM machine. (c) Apple adopted Motorola CPU. However, Intel’s developing ability is better than Motorola after late 80’s. As Intel kept leading the market, Apple’s CPU ability could not pass IBM’s. (d) Apple focused on education and printing industries. Compared to the total industrial growth, these 2 markets may only take small portions. The total PC market growth came from increasing businesses customers, they use IBM style machine. It makes Apple’s market share relatively decreasing.

1997- : Internet PC.

After internet booming, the PC industry has changed. PCs connect together. Before that, most PCs are work independently, especially in the household market. But it has changed. Internet connects every computer around the world. Network has become a necessary part in PC industry.

Apple already lost their PC market. It tried to develop new iMac to win the market back. However, Apple kept using the same strategy with fancy styles and user- friendly interface. They still don’t focus on Powerful CPU and compatible software. As most PC users in the market are makes IBM keeps dominating this shrinking market. Apple’s niche strategy success with unique selling points in “ease of use”, “industrial design”, “tech elegance”, and “powerful application in graphic processing”. However, Apple kept losing market share because they focused in relatively low growth industries with many substitute competitors. People can buy an IBM style PC with similar functions and cheaper price from Compaq, HP, Dell, and many other providers. Apple focused on the wrong market with many substitute competitors. Its unique selling points are not hard to copy. Its loosing market is destined.

2 Identification of the strategic issue at the level of the firm

As a computer producer company, there are several strategic issues are faced by Apple. They are:

1. How Apple survives in competition.
2. How Apple responds to the dynamic of technology innovation.
3. How Apple responds to the continuous changing market needs.

Figure 2. Strategic Issue of the firms.

2.1 Issues 1: How Apple survives in competition

The structure of computer industry can be considered as monopolistic competition. This structure is characterized by a lot of competitors, easy to enter the industry due to low entry barrier and certain differentiation created by the firms in the industry. As a result, the market becomes saturated and fragmented which make only small market share can be gained by every firm.

This industry is also characterized by strong supplier bargaining position due to few numbers of suppliers and strong consumer bargaining position due to low searching cost and low switching cost to competitors. Even though Apple does certain differentiations, these circumstances create pressure for Apple since it purchases component with higher price but should to limit the price due to the strong of competitions. Thus, Apple not too flexible to gain as big margin as it wants.

Those following factors: a lot of competitors, fragmented market, low margin, and low market share create very tough condition for Apple. The history and facts show that once Apple dominated the market but due to inability to adapt with competition in market Apple lost to only 3% market share in 2001.

2.2 Issues 2: How Apple responds to the dynamic of innovation

Apple and all computer producer firms depend on components and software from suppliers. Among of them, without neglecting the importance of other components, processor is the core component of computer because the general performance of computer is usually associated with processor speed.

The rapid innovation of processor, approximately every quarter by Intel Company, put no choice for computer producers including Apple except to adopt the new technology. The ignorance of adopting such new processor will create competitive disadvantage for Apple especially when competitors acquire before it.

Besides, computer also requires core software which is called operating system to provide environment for applications. Microsoft is the main operating system competitor of Apple. It dominates operating system market share with more than 80% PCs using Microsoft Windows. These great numbers of users in turn produce network effects for Microsoft Windows which increase the value of the operating system. Furthermore, it is really a hard for Apple MacOS to get back market share because it creates high and expensive switching cost from Windows to MacOS.

This situation is hardened since Microsoft releases new version of operating system approximately every two years. To keep in pace, Apple has also to respond by innovating at least the same frequency with Microsoft’s Windows.

The pressure coming from processor innovation and rapid release of competitor operating system represents the dynamic of innovation which requires apple respond good. While responding fast of those dynamics will result a short product life cycle, failing responds to these dynamics will create competitive disadvantage for Apple.

2.3 Issue 3: How Apple responds to the continuous changing market needs

Market demands and market needs are continuously changing. There is trend of migrating PC demand from developed countries to developing countries such as China, Malaysia and Korea. This moving of demand has to be responded by Apple in order to better manage its resources and manage its marketing strategy.

3 Identifying the components of the environment in the strategic issue and its main characteristics

There are several environment component s that involves in the strategic issues. Those components can be classified into: Macro or far environment and Micro environment.

3.1 Macro environment

Macro environment is a far environment which comprise of several forces that raise strategic issue to Apple. These forces are social force, economic force, politic force, and technology force which well known as PEST (figure 3).

Figure 3 Macro Environment

3.1.1 Technology forces

The first force that influences computer industry structure is rapid and sustained technical progress. Each year, integrated circuits and other electronic components become better, faster, and cheaper, providing opportunities for improving existing computers as well as designing a new kind.

As computer comprises of hardware and software, Apple is really affected by technology innovation forces around it. Rapid innovation on hardware by component producers (e.g. Intel, AMD) and software by competitors (e.g. Microsoft) as well as complementary products from partner gives no choice for Apple except responsively catching the new hardware technology and also continuously innovating to sustain differentiation.

Starting from 1976, Apple created personal computer as a proprietary system. Apple created the hardware by assembling components, create operating system (e.g. MacOS) and develop applications. That time, as Apple controls both hardware and software, Apple can create personal computer that deliver great personal experience compare to its competitors.

That time, Apple computer main competitor is IBM personal computer. Previously IBM followed proprietary system as well. In 1981, IBM changed into open structure. This move changed the environment of competition. This move brought many new entrants such as Compaq and HP to produce IBM PC Compatible. This also brought in Intel as new entrant as producer of processor and Microsoft as producer of operating system.

Rapid innovation both from Intel created strong technological forces for Apple. As Intel released faster processor every quarter (figure 4), Apple, which that time sourced its processor from Motorola, had to respond with comparable or faster processor. Failing to respond this in time would create competitive disadvantage for Apple since competitors would adopt it and gain better technology.

Microsoft which dominates operating system producer for Intel based personal computer is also the main competitor for Apple. The rapid innovation by Microsoft which releases new version of Windows every 2 years (figure 5) creates pressure for Apple to upgrade MacOS as well. This is not easy task for Apple since Microsoft Windows selling is very high so it can cover its R&D cost meanwhile Apple MacOS market share is a little.

Figure 4. Intel desktop CPU Roadmap

Figure 5 Microsoft Windows roadmap

In addition, the open system adopted by Microsoft and Intel and the network size of Windows attracts many Independent Software Vendors (ISV) breed in order to create application for Wintel platform. The rapid innovation of Windows operating system and the increasing number of applications for Wintel platform make Windows Intel platform more valuable and thus create additional pressure for Apple especially high switching cost for consumer to switch to Apple.

3.1.2 Economic forces

Monopolistic competition characterizes computer industry. A lot of existing competitors in the industry (e.g. IBM, Dell, HP, Compaq, Ben Q, Asus, Gate Way, Lenovo, and Acer) and low entry barrier allow new entrant to enter the industry easily and thus increasing more competition. Supplier bargaining position is strong due to small number of processor suppliers (e.g. Intel, AMD, and Cyrix). Customer bargaining position is also strong due to low searching cost and low switching cost. Both of these characteristics constrain companies in the industry to get only low operating margin (figure 6). Apple is also affected by this economic force where Apple has to choose between low prices to boost market share or premium price but lower market share.

Figure 6 Comparison of operating margin

Figure 7 Comparison of market share in US

Developed countries are characterized by high purchasing power consumer meanwhile some developing countries and undeveloped countries are characterized by low purchasing power. This difference in purchasing power need to be considered for adapting entry marketing strategy on different countries

3.1.3 Politic forces

Joining China to WTO creates opportunity as well as threat for Apple. Lower investment barrier and market barrier gives opportunities for Apple to take advantage of low cost labor as well as getting potential market. On the other side, similar opportunities are also available to competitors. When competitors move its plant into China and become more efficient, Apple has to respond or will get cost inefficiency disadvantage over competitors.

3.1.4 Social forces

Dynamic change of life-style

Different and dynamic change of needs and lifestyle push Apple to continuously innovate to adapt with it. Lifestyle and need of consumers are continuously changing. The motives of consumers on purchasing computer can be segmented into the following:

• Entertainment. Costumers in this segment need better graphics and better sound thus this segment needs computer to have faster processing power, graphical purchasing power and good sound system device.
• Travel/mobility. Customer in this segment need smaller, lighter computer as well as longer time of battery life.
• Everyday computer. Customer in this segment need computer for day to day activities such as office system. This segment need more reliable computer to accomplish its task.
• Interconnectivity. This segment needs computer with faster and reliable communication device.
• Server. This segment needs computer with high processing power, available and reliable for running continuously non-stop.
• Status. This segment needs computer with great brand and brand new design.

Dynamic change of demands

Market demand is continuously changing. Data from 1995 to 2003 (figure 8) shows that there is trend of decreasing PC demand on developing countries such as US, Japan, Singapore whereas the trend of increasing demand moves to emerging countries such as China, Malaysia and Korea. This moving of demand has to be responded by Apple in order to better manage its resources and manage its marketing strategy. Denying this dynamics will produce resource inefficiency, cost competitive disadvantage and infectivity of marketing strategy.

Figure 8 Hardware production and share of total global production

Environmental issues force Apple to be friendlier with nature.

Apple has been criticized by some environmental organizations for not being a leader in removing toxic chemicals from its new products, and for not aggressively or properly recycling its old products. Due to social pressure in environmental issues Apple has to adapt its process to be friendlier with nature.

3.2 Micro Environment

Micro environment is near environment. This environment is actually the direct surrounding of the firm that determines firm position in competition. This environment can be explained using Porter five forces (figure 9). Based on Porter, firm position is characterized by rivalry, threat from product substitution, threat from new entrant, bargaining power of supplier and bargaining power of consumers.

A large number of competitors especially from Wintel (Windows Intel) family create a ‘red ocean’ for Apple. Wintel platform is not produced by single firm rather than combination of firms. These competitors offer similar product to apple with only little different in features, brand and design. Several Apple competitors are IBM, HP, Compaq, Dell, Lenovo, Gateway, Acer, Fujitsu, Sony, ECS, Toshiba, etc.

Strong bargaining power of suppliers creates high cost of computer components. As there is only small number of processor suppliers (e.g. Intel, AMD, Cyrix, and IBM) and only small of them has capability and willingness to provide the best for Apple, the bargaining power of supplier is high to the Apple. This condition made the price of processor component is high.

At the other side, the great number of competitors with similar product specification and the birth of Internet are also strengthening the bargaining power of final consumers. This limits the ability for Apple set price too high.

Low threats of substitute product also characterize the industry. Besides Wintel personal computer, there are no pure substitutions for Apple personal PC. Since Wintel personal computer is the same kind of product with Apple, it is considered as rivalry instead of product substitution.

Figure 9. Porter five forces

4 Analysis of the interaction of environment components

4.1 Interaction of macro elements

The interaction of Politic, Economic, Social and Technology forces create a turbulent and complex environment (figure 11). Rapid change of technology, dynamic of social lifestyle and needs, and the monopolistic economic environment influence Apple has to keep in pace with new technology, innovate to be different with competitors, and adapt its product to customer need and demand. This rapid adaptation of products made the product life-cycle obsolete faster and it increase the number of obsolete inventory. In addition, the joining China into WTO also influences Apple to be efficient since many of its competitors relocate its plant to China and benefit cost and labor efficiency.

Figure 10 Interaction of macro elements

4.2 Interaction of micro elements

The interaction between 5 competitive forces, create environment for Apple very competitive and hard to survive. Low entry barrier, rapid innovation of supplier and changing demand of consumer create the product life-cycle shorten. A lot of competitors with very similar product specification let product easy to imitate and alter PC become near to commodity product. Thus this leads to low market share industry. In addition, strong power of suppliers, a lot of competitors and strong power of consumers create the industry as low margin industry.

Figure 11. Interaction of micro elements

5 Analysis of how environmental change (future) will influence the strategy

The environmental change trend in current and past can depict the future. The rapid increasing of technological innovation, changing customer need, competition due to low entry barrier lead to the more and saturated and fragmentation of market. Thus, it made environment situation in the future more turbulent and complex for Apple.

Thus, this made Apple strategy have to be adapted continuously as a response of the dynamics of environment. Strategy has to be reshaped based on internal and external environmental analysis. As environment change, so do strategy.

Since the return of Steve Jobs as Apple CEO, Apple response to the environmental change shows improvement to the company revenue. Apple selling on MacBook shows increasing trend which represent the successfulness of Apple strategy (Figure 13).

Figure 12. Mac unit sales

6 Apple response to the environmental change

As environmental change dynamically, Apple responded by adapting its business model and strategy in order to struggle for survive. Since Apple was keep losing market share in personal computer industry, Apple has been tried to create new business model to create new source of income. Through its research and development, Apple decided to enter digital media sector, by creating innovative design iPod and iTunes. As a result, iPod and iTunes are successful due to its innovative design, easy to use and large storage.

Apples business model for the iPod generates money in many different levels. Money is being made both on the hardware, software and on the accessories. When Apple introduced the iPod it was not a new product. The mp3 players had existed for some time without being a big success, but customer preferences were changing rapidly. Apple quickly saw a new market and created an inferior music player with a great design. Apples most decisive move was to create a web shop with hundreds of thousands of licensed songs. Soon Apple was making big money both on the iPod and the music – a dream scenario for most companies. Songs bought at the Apple music store can only be played on iPods but this has not affected the sales so far. Apples margins on the iPod Mini is on average about 35% and $0.25 on each sold song. At the end of 2004 Apple has sold 10 million iPods and 250 million songs.

With this innovative approach, as he did previously with home computers, Jobs has developed a new market: that of legal digital music, which in 2005 reported $1.1 billion in sales to the record companies, as compared to 400 million from the previous year.

Apple improves design to create differentiation and offer with premium price (figure 13). To gather back its market share in personal computer and mobile computer, Apple conducts differentiation strategy. Apple creates very distinctive and innovative design that simplifies the size of computer, increase the artistic look of its products.

Figure 13 Apple perception map

Apple also reduces product category to ease consumers. Currently Apple no longer creates too many product variations in order to ease consumer choosing products.

Apple also transforms its marketing channel by using exclusive delivery channel. In order to manage its brand as high class and high quality product, Apple chose to transform its retail channel into exclusive store. The openings of Apple Stores are in order to extend the reach of the external distribution channel.

To respond with dynamic of innovation and create competitive advantage, Apple leaves IBM and does alliance with Intel as a response of rapid innovation of processor. After IBM cannot afford Apple to provide processor that is faster to Intel, Apple has no other source that capable providing high-speed processor. Apple moves and does alliance with Intel, as both of the company can create mutual benefit to compete AMD for Intel and MS Windows for Apple. Apple currently uses Intel processor for its new computer and laptops for the next five years. This strategy gives benefit to Apple as it is allowing Microsoft Windows to run above it in turn it reduces the risk, cost and barrier for customer to switch from Microsoft to Apple platform. The Mac Mini is expected to be the first Apple computer to use Intel chips, with the entire product line switching by the end of 2007.

Apple’s move to Intel is thought to have come about because of IBM’s reluctance to expand the number and range of PowerPC chips it makes. Furthermore IBM has yet to produce a version of the G5 chip that would be suitable for use in Apple laptops. IBM has the contract to make PowerPC chips for Microsoft’s imminent Xbox 360 console, Sony’s forthcoming PlayStation 3 and Nintendo’s future game-playing machine. As a result the cash it gets from making chips for Apple has become a very small slice of its revenue.

In responding social pressure on environmental issues, Apple recycled 13 million pounds of e-waste in 2006, which is equal to 9.5% of the weight of all products Apple sold seven years earlier. We expect this percentage to grow to 13% in 2007, and to 20% in 2008. By 2010, we forecast recycling 19 million pounds of e-waste per year — nearly 30% of the product weight we sold seven years earlier.

7 Conclusion

The PC industry has evolved in the past decades. They are proprietary, open structure and internet PC. The interaction of Politic, Economic, Social and Technology forces create a turbulent and complex environment. In addition, the interaction between 5 competitive forces, create environment for Apple very competitive and hard to survive. Apple past ignorance of environmental change made Apple losing market share. Now, as environmental change dynamically, Apple responded by adapting its business model and strategy in order to struggle for survive.

Bibliography

AMI Partners. (n.d.). Apple: An Alternative Approach to Business. AMI Partners .

Benavent, C. (2007). Chapitre VI : Stratégies Primaires. Power point presentation .

Benavent, C. (2007). GEBE_1_-_the_globalisation_phenomena. Power point presentation .

Chen, Y.-c. (2002,2005). Corporate Strategy Analyses.

Intel.com. (2007). Apple to Use Intel Microprocessors Beginning in 2006. Retrieved 8 2007, from Intel Leap Ahead: http://www.intel.com

Jobs, S. (1995, April 20). STEVE JOBS Oral History. (D. S. (DSM), Interviewer)

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