Apply Porter 5 forces to IBM Essay
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With Porter five forces framework, we identify the sources of competition facing IBM:-1.Threat of new entrantsHigh capital requirement needed to fund R&D and assets make the threat of new entrants relatively low. IBM spends large amount of funds annually for R&D, in order to constantly introduce new high-technology and innovative products and solutions to market to maintain its’ competitiveness,Tougher for new entrants to achieve economies of scale due to experience curve effect. In addition, Consumers’ preference over established brands, long-term relationship and broad product portfolio make IBM the preferred brand.
2.Threat of SubstitutesPropensity to substitute is low for buyers. Threat varies from low to medium with high switching cost and product differentiation such as technology, performance, functionality etc.
3. Bargaining power of buyersBargaining power is high during sourcing stage. However, buyers’ bargaining power decrease after the purchase stage as switching cost is high with compatibility concerns, migration issues and cost of hardware/software.
4.Bargaining power of suppliersSuppliers’ bargaining power is low for the industry, IBM maintains a diversity of suppliers.
5.Intensity of rivalry among established firmsAfter several years of contraction, the global IT industry returns to growth. The competition in the industry is intense with big boys like Microsoft, Dell, Hewlett-Packard and Sun Microsystems with diversified capabilities.
Gerry Johnson, Kevin Scholes and Richard Whittington (2005), Exploring Corporate Strategy – Text and Cases, 7th edition, Harlow : FT/Prentice Hall.
IBM Corporation, available online from http://www.ibm.comIBM Annual report 2004, An IBM Prospectus, Understanding Our Company, available online fromhttp://www.ibm.com/annualreport/2004/prospectus/IBM Public Affairs, available online from http://www.ibm.com/ibmIBM corporation, Government and Public Policy, available online : www.ibm.comOverview of Telecommunication industry in Malaysia: Industry Analysis with Michael Porter’s 5 ForcesOverview of Telecommunication IndustryThe market for mobile services in Malaysia is highly competitive. Prior to the liberalisation of the telecommunications industry in Malaysia, Telekom Malaysia had a virtual monopoly on telecommunications services in Malaysia.
In recent years, the Government has taken steps to introduce managed competition in the industry by awarding various telecommunications licences. To date, the Government has awarded eight mobile licences to operators in Malaysia. Maxis’ competitors in this segment are Celcom, Telekom Malaysia (through its TMTOUCH, Mobifon 018 and ATUR011 brands), DiGi and TIME. Maxis believes that the main competitive factors in the mobile services market are network coverage, service quality, pricing and brand. The two largest participants in Malaysia’s mobile market, Maxis and Celcom, are considered by many customers to their more extensive network coverage and higher service quality. In addition, the introduction of equal access and the licensing of by-pass operators have further increased competition in the Malaysian telecommunications industry.
Michael Porter five forces are used to analyze the attractiveness of the telecommunication industry.
Michael Porter Five ForcesEntry Barriera) Base stationGiven the rapid deployment of base station sites required to support network growth, Maxis has a significant number of base stations which have been installed. Meanwhile they are also some pending submission to wait approval from the local authorities. This is the common practice among mobile operators in Malaysia given the long lead time generally required for the approvals. The lack of approvals and the long waiting time had resulted a high entry barrier for new company.
b) TechnologyThe types of technologies employed by Maxis include the GSM standard for its mobile network, operating in the 900MHz frequency band. Maxis’ mobile and fixed networks use a mix of Synchronous Digital Hierarchy and Plesiochronous Digital Hierarchy microwave links for most of its transmission systems. For its core data network, Maxis deploys Internet Protocol based technology use of DSL technology. The advanced technology which required in the telecommunication industry incurred high capital investment and also needed professional knowledge in relevant sector to success in the industry. It was not easy copy or imitate by competitor.
c) Regulatory PoliciesTelecommunication operating landscape is largely shaped by the country’s regulatory environment. Often, the regulatory policies, the number and type of licences awarded by the Government are view as the entry barrier for the development of the industry. The existences of various regulatory such as interconnection fees between operators, call tariffs and the degree of foreign participation. Meanwhile, it is not so easy for a company to apply for a new licence to operate legally in this industry. The process is complex and high cost.
Bargaining Power of SupplierGenerally, the telecommunications industry in Malaysia is dependent on imports for the majority of its network components as most of the network equipment cannot be sourced locally. Maxis’ networks utilise standard equipment which is available from a limited number of suppliers. Most of the GSM equipment for Maxis’ mobile network operations is purchased from Motorola, Siemens and Trisilco Folec, and Maxis maintains close working relationships with its key network equipment suppliers.
Maxis has been purchasing from these suppliers for approximately six years. Maxis also purchases certain network components from various other key suppliers, including Nortel and Cisco. Maxis has been dealing with substantially the same group of suppliers since commencement of operations in 1995. Bad news was, Siemens is now a sub-contractor to Motorola for network switching systems. Maxis left only one main supplier- Trilsilco Folec. The bargaining power of their supplier becomes strong. Moreover, their supplier is from overseas. In future, Maxis believes that comparable equipment and support is available from other established suppliers.
Bargaining Power of BuyerInformation technology increase the bargaining power of buyer, high available of information make it easier for buyer to evaluate sources of materials about telecommunication. There are many alternatives product such as fax, email, and internet which enhance the bargaining power of buyer to the mobile service provider. Meanwhile, high level of competition between the major telecommunication companies that exists in current market leads to low switching cos for the buyer to change their mobile service provider. Customers are high price sensitivity, easy to switch brand.
Threat of SubstitutesThere are many substitutes for mobile services such as a very traditional way- letter, fixed home line telephone, fax, and email. From the year of 2000 onwards, broadband Internet services, which enable faster and always-on connection to the worldwide web, offer more promising growth potential.In addition, the pressure on the very low cost to use the phone calling through internet or communicate through online messenger had threated the mobile service industry,The attractiveness of internet services making it more affordable to the masses.
Rivalry among CompetitorsTelecommunication industry in Malaysia is oligopoly structure nowadays. Maxis have two main competitors, they are Celcom, Digi. Maxis lead this telecommunication industry. They are largely compete on differentiate their product and services on how to improve their features and implementing innovation. Moreover, company in this industry will certainly compete on the call rates, package price and so on. They try to gain competitive advantage through low call rate and proce. Each of them invests a lot on advertising to promote their product. There is high exit barriers in this industry due to the high investment budget and responsible to customer will make campanies strive to survive in the industry. Technology advanced leads fast industry growth and opporturnities, increase the competition among companies.
Rapidly changing industry dynamics dictated Apple’s competitive strategy. In essence, the intended strategy did not develop into the “realized” strategy. In fact, empirical evidence shows us that realized strategy tends to be about 10-30 percent of intended strategy. What really determines strategy is the “patterns of decisions that emerge from individual managers adapting to changing external circumstances and the ways in which the intended strategy was interpreted.” . What is Apple’s mission and strategy today? Apple’s mission is to deliver a highly innovative and superior solution to a customer’s personal computing needs. Apple’s present day competitive strategy is a return to differentiation. Key elements to this strategy are an emphasis on design, service, branding through advertising, and quality. Drivers needed to attain these objectives are through the firm’s unique marketing abilities, engineering skills, creativity, and R&D.
Apple’s long range objectives are to obviously regain market share leadership and return the company to profitability and maximize shareholder return. Can Apple do so by continuing a differentiating strategy? Yes. To do so, every aspect of the way Apple conducts business and relates to its customers must be involved and driven by strategy. Apple’s distinctive core competencies lie within their ability to provide quality products through their vertically integrated inbound activities. Not only are Apple’s finished goods differentiated by quality, they are innovative and cutting edge. Innovation is driven by consistent investment in R&D.
Although the company has excelled in delivery and order processing, it still has yet to prove its operational efficiency. Therein lies Apple’s principal weakness. In the past, Apple has failed to reconcile the added cost of differentiation with operational efficiencies in production and distribution. Apple has also shown competencies in building brand reputation and generating buzz for its products. Their marketing campaigns have been successful and remain a value added activity. Financially, the company remains liquid with substantial cash reserves and is not highly leveraged in debt.
Apple’s differentiation strategy is uniquely aligned with the changing dynamics of the industry. Firstly, Apple owns the only viable alternative to a “Wintel” machine. All other major computer manufacturers are only slightly differentiated because they are forced to conform to the “Wintel” standards of an Intel chip and Microsoft operating system. They are limited to differentiating themselves based on accessibility, service, and marketing.
Apple has successfully differentiated itself as the only viable alternative to the PC standard. The two major forces that have affected market share loss are the misconception that Apple computers are incompatible with available software for Wintel machines and buying one will result in losses in functionality. This can be overcome with aggressive marketing campaigns in which Apple has demonstrated value added competencies. The second major factor contributing to Apple loss in market share is the unmatched price erosion from the PC market. Apple has failed to narrow the gap because of its operational inefficiencies. If Apple can narrow this price gap and overcome the negative software perception, it will undoubtedly regain market share.
Internal AnalysisMission, Long-Range Objectives, Current Strategy, and PerformanceBetween the years of 1980 and 2001, Apple slid along a turbulent slope of declining market share and profit erosion where it lost its leadership position and now lags as a market follower with a mere 3% total market share. (See Exhibit 1.) Apple’s inability to defend its market share and leadership status can be directly attributed to one general, yet prevailing driver. Throughout this fleeting tenure, Apple lacked a clear mission and competitive strategy that drove the value creating activities of the firm.
Between these years, Apple morphed itself between alternating cost leadership and premium priced differentiation strategies. Four CEO’s took the helm between this time and each brought with them a compelling strategy for the company. Strategy links people and cross functional departments to an overall goal, or vision. However, without a consistent vision and an accompanying roadmap, a company looses sight on how it is creating value. When a company fails to understand its competencies and value creating processes, it looses the continual ability to innovate, improve, and learn.
Apple began with the mission to “change the world through technology.” More specifically, the company sought out to make the personal computer an accessible and affordable device to the mass market. The proliferation of new software and hardware technology drastically changed the landscape of the industry and Apple evolved into a leader in desktop publishing. The crucial point not to be overlooked is that the company’s mission did not guide Apple into this differentiating strategy. Rapidly changing industry dynamics dictated Apple’s competitive strategy. In essence, the intended strategy did not develop into the “realized” strategy.
In fact, empirical evidence shows us that realized strategy tends to be about 10-30 percent of intended strategy. What really determines strategy is the “patterns of decisions that emerge from individual managers adapting to changing external circumstances and the ways in which the intended strategy was interpreted.” If Apple had decided to be consistent with its vision, it wouldn’t have introduced “Lisa,” an incredibly expensive machine that limited its mass market appeal. Instead, strategy would have focused on cost leadership and the processes that optimized operational efficiencies in order to compete with the new entrants, such as IBM, who had cost advantages.
The adopted differentiation strategy explains Apple’s future decisions to vertically and horizontally integrate. Software and hardware integration allowed Apple products to be more “versatile,” reliable, and superior in performance. However, superior and integrated products meant higher manufacturing costs. Products were priced at a premium to their PC counterparts. It is no surprise that when the company, in response to higher costs decided to change its strategy by attempting to become a cost leader overnight, failed in this endeavor. The executive team overlooked the firm’s value creating activities and picked a strategy that was inherently incompatible with the company core competencies.
I argue that during this time, management should have realized that the company’s true value was bringing to the market a highly differentiated product based on form, features, design, and quality. Although this has taken some time, I believe Apple has finally arrived at this conclusion and its strategy today incorporates the company’s core competencies and value added benefits.
What is Apple’s mission and strategy today? Rather than focusing on delivering a mass market product, which inevitably translates into a low cost commodity-like product, Apple’s mission is to deliver a highly innovative and superior solution to a customer’s personal computing needs. Is this product designed for everyone? No. Because the mission statement focuses on superiority and innovativeness, it inherently segments the broad market into consumers whose computing needs demand a solution that is powerful, cutting edge, reliable AND who are willing to pay a slight premium for such value added features and functionality.
With such a mission in mind, it logically follows that in order to provide a superior computing solution, Apple’s corporate strategy must not limit itself in terms of scope. A complete computing solution expands industry and market boundaries. We are not just talking about a personal computer anymore. Apple’s corporate strategy is to compete in the markets that encompass all the devices, peripherals, and software to make a computing solution or “experience” complete. This corporate strategy implies vertical integration. As one Microsoft executive so eloquently put “this isn’t the post-PC era; it’s the PC-plus era.”Apple’s present day competitive strategy is a return to differentiation. Key elements to this strategy are an emphasis on design, service, branding through advertising, and quality. Drivers needed to attain these objectives are through the firm’s unique marketing abilities, engineering skills, creativity, and R&D.
For Apple, differentiation encompasses tangible and intangible dimensions. Tangible differentiation is concerned with the physical characteristics and performance of a product, in this case, a personal computer. Physical characteristics include form, features, performance quality, durability, reliability, and style. Products that are enhancements or complements to the personal computer are also vital in pursuing this differentiation strategy. The scope, functionality, and ease of integration of these complements affect the “utility” consumers will gain from an Apple PC. Apple adopted a competitive strategy that vertically integrates these complementary products that include the iPod, digital cameras, PDA’s, and wireless devices.
In an effort to gain market share, Apple is pursuing several growth strategies. Obvious to this pursuit is international market expansion into the explosive Asian and European markets. Domestically, Apple is focusing on three variables concerning its growth strategy. Firstly, it must convert nonusers before they choose a competitor. Secondly, they need to enter new markets such as server based and mainframe computers. Thirdly, they are trying to win their competitors’ customer base through aggressive advertising and promotion. Apple can also attain domestic growth though convincing users to use their products on more occasions as in entertainment, research, and communication.
Apple can likewise convince customers to use more of each product on each occasion and use their products in new ways. Who would have thought that a computer can be used to watch movies, play songs, talk over the internet using voice over IP technology, and much more?Apple’s long range objectives are to obviously regain market share leadership and return the company to profitability and maximize shareholder return. Can Apple do so by continuing a differentiating strategy? Yes. To do so, every aspect of the way Apple conducts business and relates to its customers must be involved and driven by strategy. These goals are indeed attainable and the company actually made significant headway once it committed and aligned the entire organization to the differentiation strategy.
I would argue that the introduction of the iMac, with its sleek design, innovative features such as “Fire Wire” ports, “Blue Tooth” technology for peripherals, and its Herculean advertising budget, wasn’t Jobs at his best, but differentiation at its best. During this time, PCs were standardized, lacked unique form and features, and their open and interoperable system allowed for performance deviations.
It is also important to note that adopting a differentiation strategy by no means insinuates that a company is not concerned with cost. Although differentiation adds costs by way of higher quality inputs, skilled labor, higher advertising, and increased vertical integration, these costs need to be continually assessed an evaluated so that they can be improved. Apple made significant progress in this arena. They streamlined operations to the point where they now have the highest inventory turnover in the industry. This feat has significant implications.
Dell’s core competency is in their direct model that leverages JIT inventory. They pioneered this method and had a first mover advantage for quite some time, yet Apple has been able to surpass their arch rival in terms of inventory turnover. In 1999 and 2000, Apple’s operating and profit margins exceeded industry averages. (See Exhibit 2.) Although 2001 was a dismal year, this was more due to industry wide demand contraction as industry sales declined by over 5%. (See Exhibit 3.) If Apple had maintained its 3 year growth rate, their operating and profit margins would have been competitive with Dell, Compaq, and HP.
Functional AnalysisUsing Porter’s value chain analysis, we are able to identify differentiation potential for Apple. Porter’s method divides a firm’s endeavors into 5 primary activities encompassing inbound logistics, operations, outbound logistics, marketing and sales, and service. (See Exhibit 4.) Inbound logistics involve relationships with suppliers and include all the activities required to receive, store, and disseminate inputs. Inputs for an Apple personal computer include an operating system, chassis, memory, CPU, etc. Apple practices horizontal and vertical integration of computer components to a greater extend than any other PC manufacturer. As a result, the firm’s ability to influence quality control of inputs and intermediate processes such as logistics is greater. Apple can specifically define its specifications for product form and features and can logistically control where and when they are manufactured. A higher degree of quality of components and materials is therefore perceived by the end user as a differentiating factor and to the company, a key value added activity.
Supporting activities such as technology development also plays a major role in developing value added activities in the inbound logistic environment. Apple allocates the most amount of capital to R&D when benchmarked against competitors. This allows Apple to produce highly innovate products and technologies. With an R&D rate of 8% in 2001 (See Exhibit 10), Apple has introduced several successful products such as the iBook and iPod, technologies like Fire Wire and Blue Tooth, and a superior operating system.
Historically, Apple hasn’t been on the forefront of integrating efficiencies into the manufacturing process. Operation activities refer to all the activities required to transform inputs into outputs. In general, operation activities refer to production or assembly. It is here where assembly line innovations, inventory management, and supply chain management drive down costs and act as value added activities. However, as mentioned, Apple has made significant improvements to its operations, streamlining them to a great extent. Restructuring efforts such as closing facilities, outsourcing specific manufacturing tasks, and centralizing core functions improved Apple’s operating efficiency.
From 1997 to 1998, operating margins improved by 20% and continued to approve in 1999 and 2000. (See Exhibit 2.)Human resource management plays a significant supporting role in operations. By downsizing, more is expected from workers and productivity has to increase per employee. Training and hiring skilled employees that can immediately contribute their skills to the production process is in itself a value added activity. Jobs also recruited an executive team that instituted and managed these drastic operational improvements.
Outbound logistics refer to the activities required to collect, store, and distribute the output. Apple specifically excels in these activities. Their efficient web site order processing allows them to have the highest inventory turnover rate in the industry. The firm infrastructure supports these fast response capabilities through investments in MIS and knowledge sharing systems. Apple also eliminated thousands of resource draining distribution outlets and complemented their direct selling efforts with wholly owned retail boutiques. Additionally, Apple expanded their presence in national chains. These value added outbound activities translated into reduced distribution time and increased delivery reliability to the end user.
Marketing and sales activities act to build brand reputation and stimulate sales. In 1998, Apple demonstrated its competencies in marketing with the unveiling of the iMac. Backed by a $100 million campaign, clever strategic advertising helped sell 278,000 iMacs in just six weeks and 6 million in 3.5 years. This massive advertising campaign generated positive buzz for Apple and helped reinvigorate its image.
This campaigned strategically targeted young and contemporary market segments and helped position Apple as a differentiated product with plug and play multimedia peripherals that seamlessly complemented the PC. This advertised differentiation was by no means an accident. The iMac sold 6 million units at premium prices compared to its PC counterparts because the marketing campaign succeeded in communicating the differentiation advantages of the iMac over the cheaper PCs.
Service represents the last primary company activity in Porter’s value chain analysis. Service activities include all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered. Here, Apple demonstrated value by creating nation wide support groups. Leveraging the ubiquitous attributes inherent to the Internet, Apple was able to establish regional and local software and technical support groups for its installed customer base. Strategically, Apple forged alliances with over 400 software developers to provide more than 1200 new software applications for Apple. The company’s ability to continually add functionality to its PC line via new software availability is a key value driving activity. What good is it from the customer’s perspective to have a quality product that is limited to a few functions?To summarize, Apple’s distinctive core competencies lie within their ability to provide quality products through their vertically integrated inbound activities.
Not only are Apple’s finished goods differentiated by quality, they are innovative and cutting edge. Innovation is driven by consistent investment in R&D. Although the company has excelled in delivery and order processing, it still has yet to prove its operational efficiency. Therein lies Apple’s principal weakness. In the past, Apple has failed to reconcile the added cost of differentiation with operational efficiencies in production and distribution. Apple has also shown competencies in building brand reputation and generating buzz for its products. Their marketing campaigns have been successful and remain a value added activity. Financially, the company remains liquid with substantial cash reserves and is not highly leveraged in debt. (See Exhibit 10)Opportunities exist for Apple to emerge as a leader in providing a complete system that seamlessly integrates peripherals as these complements become more prevalent and adopted. By horizontally integrating, Apple can maintain stringent conformity standards and ensure all its peripheral offerings are compatible with its PC offering. Please see Exhibit 5 for a more a complete SWOT analysis.
Competitive Environment AnalysisProduct Life CycleDomestically, the PC market seems to be in its maturity stage characterized by a slowdown in sales growth as a result of mass acceptance. (See Exhibit 6) Following its worst year ever in 2001, unit growth is expected to exceed revenue growth, indicative of falling prices and profit erosion, both characteristics of a mature market. The industry consists of well entrenched competitors whose basic drive is to gain or maintain market share.
A commonly used statistic to measure market structure is the Herfindahl index. The Herfindahl index equals the sum of the squared market shares of all the firms in the market. If perfect or monopolistic competition exists, then index should be below .2. Anything above .2 reflects either an oligopoly any anything above .6 usually points to a monopoly. The Herfindahl index for the PC industry in 2001 is ..05 or 5%. The top 9 market share leaders dominate 60% of the world wide industry. (See Exhibit 7) Firms with a market share of .01 or lower are too small to significantly affect the final calculation.
Porter Five Forces AnalysisUnfortunately, the PC industry is presently experiencing a contraction period after achieving impressive expansion during the last two decades. Demand has been stagnating with a 5% drop in sales for 2001. Accordingly, each individual firm has been experiencing larger than average excess capacity. These two factors have elicited intensified competition among current incumbents.
Factors such as the ability for consumers to switch from one competitor to the other with relative ease, the absence of any cooperative pricing, and the ability of incumbents to adjust prices quickly all attribute to intense internal rivalry within this industry. And as a result, these factors have exerted a downward pressure on prices. In fact, prices are expected decline by 6% going forward to 2005. This is consistent with the internal rival theory, where increases in rivalry will result in further price competition and erosion. Aside from Apple, there is little differentiation among sellers and cost differences among sellers are relatively low. (See Exhibit 8)Threat of entry into this industry is relatively low for this industry. With an industry consisting of over 100 incumbents ranging from powerful brand names such as Dell and Compaq to no name cloners, it is reasonable to conclude that the industry has reached a certain saturation point.
This accompanied by several structural barriers to entry make it highly unfeasible for new companies to enter the market unless significant consolidation or exit occurs within the incumbent group. Economies of scale, learning curve advantages, access to distribution channels, and relationship specific investments into direct sales channels all make the threat of entry highly unlikely. (See Exhibit 8)Currently, substitutes are becoming more of a realized threat to the industry as they become closer in functionality to the PC. With the ability of PDAs, WebTV, and SmartPhones to handle email, word processing, communication, and other ancillary functions, the demand for a bulky home desktop or laptop computer is being flanked. One could argue that these some of these devices are complements to the PC an one should pursue a differentiation strategy that incorporates these devices into a product offering such as Apple’s strategy.
Nevertheless, as computer technology continues to evolve and bandwidth increases, a PDA may soon be able to duplicate most of the functions inherent to the PC. (See Exhibit 8)Supplier power is relatively high in this industry. Two major components are a computer’s operating system and CPU. These two components are supplied by their respective industries that are more consolidated than the PC industry. Intel and AMD own over 80% of the CPU market and Microsoft owns 90% of the operating system market. There are few substitutes for these input devices. Firms make relationship specific investments that creating extensive switching costs if a change were to be made in the choice of operating system or CPU chip.
Although these firms pose little to no threat of forward integration, they can charge PC manufacturers premiums due to their market dominance. (See Exhibit 8)Buyer power is relatively low to medium in the PC industry. Because firms make relationship specific investments by choosing to adopt a OS and CPU chip, they are forced to maintain long lasting relationships with their suppliers. The PC industry is more fragmented than the OS and CPU industries and PC manufacturers pose little threat in their ability to backward integrate. Apple has already accomplished this feat with its own proprietary OS. Because price elasticity is high for the PC industry, and increase in price will adversely affect sales and profit for PC manufacturers. This exerts downward pressure on component prices.
The key success factors associated with this industry can be generalized into rapid technological innovation. Technological innovation has consistently stimulated the demand for more powerful products in the areas of performance (computing speed), reliability, and data storage. The proliferation of the Internet has also been a major factor affecting PC adoption rates. Likewise, a steady and continual flow of complementary products that enhance the “computing experience” also has positively affected the industry’s success. PC companies must keep up with the pace of technological innovation to remain competitively viable. Systems must be able to comply with new and innovative complementary products and performance must match what component suppliers such as Intel are providing.
With that said, is Apple’s competitive strategy aligned with the industry’s dynamics? I would argue that Apple’s differentiation strategy is uniquely aligned with the changing dynamics of the industry. The following industry characteristics serve as supporting premises to this argument. Firstly, Apple owns the only viable alternative to a “Wintel” machine. All other major computer manufacturers are only slightly differentiated because they are forced to conform to the “Wintel” standards of an Intel chip and Microsoft operating system. They are limited to differentiating themselves based on accessibility, service, and marketing. Differentiation has been realized by the way the industry evolved and Apple is positioned as the only alternative to the PC.
If differentiation results in a highly inferior yet differentiated product, then this strategy is doomed to fail. However, Apple has developed a superior product because it controls a large degree of input components, peripherals, and the operating system. The result is a differentiated product that outperforms PC competitors on speed, design, style, ease of use, and peripheral integration. Additionally, Apple is not subjected to the same degree of supplier power as PCs. It has the advantage of picking and choosing which technological innovations to pursue based on what will perform best on their system whereas PC’s are forced to deal with Windows and the associated software incompatibilities that may arise with new releases.
Long term, PCs are subjected to increased competition from small brands that use alternate, yet inferior components, allowing these manufacturers to offer comparable products at discounted prices. Companies like eMachines and other small brands are undercutting costs by adopting alternative components from lesser well know brands such as AMD versus Intel. You can’t clone an Apple. Therefore Apple is not directly subjected to the same threats as PC manufacturers are.
A major weakness in Apple’s differentiation strategy is in its operating costs. As PC prices fall, Apple must remain somewhat competitive by narrowing the gap in production costs. This provides a continuous challenge for Apple. How high of a premium can Apple justify for their differentiation strategy? In times of economic contraction, large discrepancies between the selling prices of a PC and an Apple can result in a loss of market share for the company.
An additional weakness to Apple’s differentiation strategy is that by adopting its own operating system, the company limits itself to the availability of software. With a significantly dwarfed customer base, software developers are more inclined to save costs by not developing Mac compatible versions. This remains a critical competitive issue that needs to be addressed.
Critical Issues & Recommendations For ActionThe major issue facing Apple executives is how to return the company to profitability and regain market share. Although the entire industry contracted in 2001, sales for Apple declined by 32% while Dell’s sales increased and Compaq, HP, and IBM revenues were reduced by 21%, 7%, and 3% respectively. Apple lost strength in every market segment including its core niche markets and the company still lacked mainstream consumer awareness and adoption. Consumers weren’t buying into the premium price tag associated with Apple’s differentiation strategy and a major hurdle existed in overcoming the widely accepted perception that Apple computers were incompatible with major software vendors. Supplementing these issues are Apple’s operating costs. Apple failed to initiate cost containment counter measures during the industry wide contraction period. In fact operating cost increased during 2001 even though sales decreased by 30%.
Going forward, should Apple appeal to the mass market or entrench during economic uncertainty and focus on their niche market strongholds? Can Apple compete on cost with its PC counterparts or will they always be regarded as the “BMW” of personal computing?My recommendations for action will be based on an analysis utilizing the Balanced Scorecard approach developed by Robert Kaplan and David Norton. Central to this approach is vision and strategy. This approach will attempt to complement financial measures with operational measures on customer satisfaction, internal processes, and the company’s innovation and improvement activities. These measures are the drivers of future financial performance.