From Pepsi to Apple
From Pepsi to Apple
This essay analyses the strategies that enabled Apple Inc. to develop from a small company operating in Steve Jobs’ garage to one of the world’s most successful and most recognizable companies. The essay briefly introduces and defines the concepts of strategy and strategic management. It then delves the history of Apple. An attempt is made to analyze the key strategies that propelled Apple to such success while critiquing limitations of such strategies where applicable.
Johnson and Scholes in their book Exploring Corporate Strategy define Strategy as “the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations”. In other words, strategy is about:
• Where is the business trying to get to in the long-term (direction)
• The markets a business should compete in and the kinds of activities are involved in such markets (markets; scope)
• How can the business+s perform better than the competition in those markets? (advantage)
• What resources (skills, assets, finance, relationships, technical competence, and facilities) are required in order to be able to compete? (resources)
• What external, environmental factors affect the businesses’ ability to compete? (environment)
• What are the values and expectations of those who have power in and around the business? (stakeholders)
Strategic management in the broadest sense is about taking “strategic decisions” to answer the questions raised above. In practice a thorough strategic management process has three main components; strategic analysis, strategic choice and strategy implementation:
HISTORY OF APPLE
Steve Jobs and Stephen Wozniak founded Apple Inc. (Apple) on April 1, 1976, in Jobs’ garage. The two partners had been introduced to each other in 1971 by a common friend, Bill Fernandez. As a hobby, Wozniak manufactured microcomputers that were cheaper than other existing microcomputers. Wozniak had built his own computer board — simply because he wanted a personal computer for himself. Steve Jobs took interest, and he quickly understood that his friend’s brilliant invention could be sold to software hobbyists, who wanted to write software without the hassle of assembling a computer kit. Jobs convinced Wozniak to start a company for that purpose: Apple Computer was born on April 1, 1976.
Apple took off in Jobs’ garage. However, Wozniak had started work on a much better computer, the Apple II. — an expandable, much more powerful system that supported color graphics. Because they knew it would be successful, Jobs convinced former Intel executive turned business angel Michael Markkula to invest $250,000 in Apple, in January 1977. Markkula was a big believer in the personal computing revolution, and he said to the young founders that, thanks to the Apple II, their company could be one of the Fortune 500 in less than two years.
Apple’s soon became an American success story which made Apple founders millionaires. The biggest surge in sales came after the introduction of VisiCalc, the first commercially successful spreadsheet program: hundreds of thousands of Americans, whether they be accountants, small business owners, or just obsessed with money, bought Apple IIs to make calculations at home.
In the wake of Apple’s success, its investors decided it was time to go public. The IPO took place in December 1980, only four years after the company was started. Steve Jobs’s net worth increased to over $200 million, at age 25.
Apple’s success attracted the attention of the computer giant IBM, which until then was still only selling mainframe computers to large companies. A crash project was started and in August 1981, the IBM PC entered the personal computer market. It was the biggest threat yet to Apple, whose reputation was being put into question after the flop of the Apple III in 1980. Most hopes rested on a business computer project, called the Lisa and Macintosh.
From Pepsi to Apple
Mike Markkula, Apple CEO and cofounder who was itching to go back to retirement had decided that Apple was actually a consumer company that needed a CEO with experience in marketing rather than technology.
Among several other candidates approached by Apple head hunters was John Sculley, who had quickly climbed the corporate ladder at Pepsi and become the youngest president of the beverage division. It was in this position that he shined. He launched two major advertising campaigns; “The Pepsi Challenge” and “The Pepsi Generation”. These two would characterize Pepsi’s marketing strategy for three decades.It was such marketing success that lured Apple head hunters into contacting Sculley to become its next CEO.
Sculley was floored by the a demonstration of the Macintosh interface that the Macintosh engineers had put together that showed Pepsi bottle caps bouncing across the screen. Impressed and intrigued, Sculley agreed to meet with Jobs in New York City and it is on one such occasion that Jobs asked Sculley, “Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?” Sculley, by now infatuated with Jobs, accepted and got approval to leave Pepsi for Apple.
Exit of Jobs
Having been thrown out of the Lisa project because of his hot temper and his relative inexperience in technology or management, Steve Jobs had taken over the Macintosh Project. However, the board was not happy with Jobs because he had expended so much of the company’s resources on Macs. Worse still, instead of the 2 million predictions of Mac sales by 1985, only 250,000 were sold which was largely due to flawed marketing and its price. The business users for whom the Macintosh was intended had little use for it without a hard drive or a high quality printer. Jobs equally led the Mac team on the ill-fated Macintosh Office and the Macintosh successor, BigMac. The internet server, file server and AppleShare never took off and after spending millions of dollars on a worthless Unix license from AT&T in a bid to replace existing Macintosh software the project was cancelled.
Apple’s board of directors insisted that Sculley “contain” Jobs to avoid other dud products and protect Apple from its growing competition in the form of Microsoft and IBM with their OS/2 and Windows efforts.
Sensing danger Jobs had decided, to regain control of the company away from Sculley, he scheduled a business meeting in China for Sculley and planned for a corporate take-over, when Sculley would be absent. Information about Jobs’ true motives, reached Sculley before the China trip, he confronted Jobs and asked Apple’s Board of Directors to vote on the issue. The board was unanimous in favor of Sculley; Jobs was forced out of Apple.
STRATEGIES USED BY APPLE
Recruitment of specialists
Apple knew that it lacked marketing experience yet its CEO and cofounder Mike Markkula, decided that Apple was actually a consumer company that needed a CEO with experience in marketing rather than technology. It was against that background that in 1983, the then youngest president of the beverages division at Pepsi, John Sculley was recruited as Apple CEO. He had launched two major advertising campaigns; “The Pepsi Challenge” and “The Pepsi Generation”. These two would characterize Pepsi’s marketing strategy for three decades.
In January 2000, Ron Johnson, the former vice-president of merchandising at Target, the second most successful discount retailer after Wal-Mart was hired to increase Apple’s sales and market share. He was charged with building a fully-owned retail channel, the famous Apple retail stores, developing a sales strategy and making the stores profitable with an investment of US$700 million.
Apple attempted to use this strategy by bringing John Sculley from Pepsi as a way of grooming Steve Jobs as CEO. When John Sculley reorganized Apple after Steve Job’s exit, the same strategy was used in promoting Jean Louis Gassée from Apple Europe to head product development, Michael Spindler rose through the ranks of Apple’s European subsidiary and was promoted to head Apple Europe (Europe, Africa, and Middle East) while “Coach” Bill Campbell head Apple Americas (Apple’s US sales subsidiary) was moved to head the newly created Claris.
As his health deteriorated, Steve Jobs made sure that Apple was ready to operate without him: in late 2008, he hired the dean of the Yale School of Management to create ‘Apple University’, a sort of internal business track to groom future Apple executives by exposing them to the Apple ways of doing business, through actual case studies in the history of the company. He also consolidated his executive team and agreed with the board that his natural successor would be his second in command, COO Tim Cook.
However, this was at times marred by internal fights for supremacy that often cost Apple key executives in the form of Steve Jobs, and Yocam, the COO during John Sculley’s reign.
With every new CEO came reorganizations especially in company structure, product/project priorities. For example before John Sculley kicked Steve Jobs out, Apple had been organized by product. Each division had its own marketing team and design team operating independently from the other divisions. The divisions such as Macintosh, Lisa, Apple II and Apple III were at war with each other. The engineers would not communicate with each other and as a result there were lots of superfluous projects. Marketers didn’t talk to each other, causing different projects to target the same audience and actually compete with each other.
To solve this, Sculley implemented a more conventional structure based on function. All product development would take place in one division. The engineers would collaborate with marketers, who were in their own division. Then the product would be manufactured and sold in two more divisions. The heads of the divisions all reported directly to Sculley. This organization would yield Apple its biggest growth, percentage wise, in its history prior to the return of Steve Jobs in 1997. Sculley also created his own team of cooperative executives to propel Apple.
Equally when Steve Jobs returned to Apple in 1997, he reviewed every team at Apple and asked them to justify why they were important to the future of the company. If they couldn’t, their product would get canceled, and there was a high probability they’d have to leave, too. Jobs also brought with him his executive team from NeXT, and installed them in key positions.
Recruitment of developers
Just like Jobs, Sculley aggressively recruited developers. Jobs had created a corps of evangelists to promote the Macintosh to third party developers. The head of the program, Guy Kawasaki, was given permission to spend hundreds of thousands of dollars to bring new programs to the Macintosh. For example beta programs were bought to run on demonstration Macs at retailers. Other times Kawasaki simply bought software or sometimes even brand new Macs for developers. Evangelist efforts were enormously successful, and products like FrameMaker, Mathematica, and Quark Xpress made their way to the market. Such developers included Adobe and Intel. The move to Intel made Macs more efficient, and paved the way for the super slim MacBook Air notebooks, but it also opened up a whole new set of customers of Apple.
However, in an attempt to produce its own software as a way of cutting costs, Apple developed a reputation for abusing developers as was the case with Adobe when Gassée opted to cut off Adobe’s well respected and very expensive PostScript software from all its low end computers. Such actions cost Adobe’s stock price to drop by almost 50% costing Adobe and its investors millions of dollars (including Apple).
High end computers and gadgets
To keep attracting high end buyers who would be willing to buy products with a huge profit margin, Apple’s head of product development Gassée created a bevy of expensive, powerful Macs, reasoning that users would be willing to pay to avoid DOS. As a result, with nine models available in 1989, there were no Macs that cost less than $3,000. This strategy proved to be very effective in growing the installed base rapidly. Apple had sold over 3 million Macs by 1989 scompared to fewer than 300,000 Macs in1984. This strategy was successfully applied to iPods and iPhones.
However, Gassée’s insistence on irrationally protecting of high profit margins (sometimes over 60%, double what other PC manufacturers commanded) cost Apple its stellar reputation among customers especially in 1989 when there was need to reduce prices which cost him his job. As a result, he was dead set against any low-end Macintosh.
Apple’s Online Store
Traditionally, Apple products were sold through authorized Apple resellers, such as retail chains like Sears and large electronic resellers like MacMall, MacZone and Best Buy. Even Apple’s corporate accounts were managed by channel members. In mid-1997, Apple severed relationships with Sears and Best Buy because of poor sales support. On November 10, 1997, Apple opened an online store, called the Apple store (www.apple.com/store), in order to increase market share and sales. The store manufactured computers according to customer specifications. Apple also allowed big electronic resellers such as MacMall and MacZone to sell online. Overall, the online store was very successful, producing revenue of US$12 million in the first month alone.
Apple’s Physical Stores
In order to increase Apple’s sales and market share Ron Johnson, the former vice-president of merchandising at Target, the second most successful discount retailer after Wal-Mart was hired by Apple. He was charged with building a fully-owned retail channel, the famous Apple retail stores, developing a sales strategy and making the stores profitable with an investment of US$700 million.
Steve Jobs explained that only in an environment fully controlled by Apple, with Apple-trained staff and only Apple-compatible products, could the superiority of Macs be fully appreciated by consumers. The stores could be used to offer customers solutions using salespeople. The salespeople could show customers how to use the over 500 different items, along with third-party peripherals and software titles. The stores opened in high traffic locations such as on 5th Avenue in New York City. With profit of US$39 million for the fiscal year that ended September 30, 2004, Apple had 103 retail stores, including three outside of the United States, in London, Tokyo and Osaka. Apple planned to and opened more retail stores across the world.
However, the emergency of Apple retail stores created friction with its network of authorized resellers. Resellers such as Santos, MacTech Systems of Bend, Oregon, and Los Angeles-based Computers International filed separate multimillion-dollar lawsuits against Apple, accusing the company of breach of contract, fraud, negligent misrepresentation, false advertising, trade libel, unfair competition defamation charges under the Federal Racketeer Influenced and Corrupt Organizations Act and other counts. By December 2004, there were five lawsuits filed against Apple, and all were waiting for trial dates to be allotted. However, by 2006, Apple had reached out-of-court settlements with all plaintiffs.
Apple’s Retail Approach
Apple held a competitive advantage with respect to retail because of how the company handled its people. Apple generally tended to hire employees who were already big fans of the brand and were passionate about what they were selling.
Apple carefully trained its employees by new employees watching and listening to podcasts about selling techniques. They watched more experienced salespeople while they executed the company’s three-step sales process: position, permission, and probe. When salespeople met a customer, they explained to the customer that they have some questions to ask in order to understand their needs, then obtained permission to ask those questions, and then kept digging in order to determine which products were the best fit for a given customer’s needs. Overall, Apple employees focused on dispensing information. This approach was effective as stores averaged approximately $4,000 in gross sales per square foot of retail space per month.
Apple also treated its employees like adults – they were taught to work together, as customers can easily tell when employees don not get along with each other. Retail zones had adequate staff to avoid loss of sales and profits arising from keeping customers waiting. Apple employees handed out business cards, a habit that was not typical in a retail environment.
Diversification – The Digital Hub strategy
Once Apple had been resurrected by the iMac, Steve Jobs started focusing on ways to make the company’s shrinking market share (around 5% of PCs) grow. Using the idea of the “desktop video”, the ability to shoot and edit personal movies on a Mac, the iMac DV and a digita movie editing software, iMovie were released.
The success of the iMac DV led to using the idea of desktop video to expand to other consumer devices that were becoming main stream at the time. Apple wrote software for the Mac to edit and store all the new digital content that consumers created. It was hoped this would entice PC users to switch to the Mac. The Digital Hub strategy was born. The result was the iApps: iDVD, to shares iMovies with family and friends on DVDs; and iTunes, digital jukebox software.
The iPod changed the music industry and the way everybody listen to music, the most important change it carried was probably that of Apple. The wild success of iPod proved to all the company’s employees, starting with Jobs himself, that they were right to strive for perfection and ease of use — unlike the Mac, which still didn’t make it past the 5% market share, iPod garnered Microsoft-like numbers of 80% of sales of MP3 players. It was iPod that revealed the future of Apple, not only as a PC manufacturer, but as a consumer electronics powerhouse. It was also the iPod that broadened the company’s expertise in the manufacturing, logistics and distribution of a mainstream digital device in gigantic proportions. Finally, it was iPod which, through the crowds it attracted to the company’s retail stores, finally helped the Mac business of Apple, whose growth rate outpaced that of Windows PCs starting in 2005.
Given enormous success, it became evident that iPod benefited from music piracy, and that its sales could go even higher if there was a legal way to download music. Steve Jobs initiated landmark negotiation deals with music labels that would lead to the introduction of the iTunes Music Store in April 2003. This alternative to illegal music file-sharing was an instant success, selling one million songs in its first week. It not only helped the sales of iPods, but it eventually reshaped the whole music industry. It was introduced to Windows as well six months later, in October 2003.
iPod made Steve Jobs realize that Apple could become the greatest consumer electronics company on the planet. In a bid to develop a tablet, Steve realized that the revolutionary touch-screen technology could be used in a phone rather than a tablet. Hence the birth of the iPhone (“an iPod, a phone, and an internet communicator” all in one). The iPhone was bound to become a force of disruption to traditional phone business and just like for the iTunes Steve had negotiated landmark deals with wireless carrier AT&T before he introduced iPhone — without ever showing it to them! In exchange for exclusivity, the carrier would pay Apple a share of all their iPhone subscription revenues. And of course, AT&T could not put any software on the iPhone, and no logo either. This was an inversion of the traditional master-slave relationship that carriers entertained with phone manufacturers
With the assured success of iPhone and its likely impact on not only Apple but to several industries, Steve Jobs announced that its name would change from Apple Computer Inc. to Apple Inc. Macs still mattered, but accounted for a minority of Apple’s revenues already, and this decline would not stop any time soon. Apple had become the most prominent digital device company.
This was seen as the ultimate post-PC device, an eventual replacement of PCs for the average user. Steve jobs compared PCs to trucks, which still existed after cars were invented but were only for professional, niche use. This perspective on iPad was reiterated in a series of TV commercials where the narrator, the ‘Apple voice’, explained how revolutionary iPad was and how the revolution had ‘only just begun’.
Building his legacy
With continued recurrence of cancer, Steve Jobs made sure that Apple was ready to operate without him: in late 2008, he hired the dean of the Yale School of Management to create ‘Apple University’, a sort of internal business track to groom future Apple executives by exposing them to the Apple ways of doing business, through actual case studies in the history of the company. He also consolidated his executive team and agreed with the board that his natural successor would be his second in command, COO Tim Cook. Finally, at his last public appearance in June 2011, he unveiled his plans for the future Apple campus in Cupertino, a huge spaceship-sized building in the shape of a perfect circle. All of this was in place when, because of his increasingly deteriorating health, he resigned as Apple CEO on August 24, 2011.
Jobs also prepared his personal legacy. In 2009, he finally started giving interviews to journalist Walter Isaacson to prepare for his first and only authorized biography, giving him his perspective on his life and career. He also spent his last days designing a boat for his family on which he hoped to travel the world. Unfortunately, death took him too soon, and he died peacefully at home on October 5, 2011, surrounded by his family — the day following the introduction of the iPhone 4S, an Apple event that he watched from his deathbed.
Apple’s traditional focus on personal computers had certainly helped the company to make its name, yet Jobs felt that a more recent focus on products such as the iPod, iPhone and Apple TV had made a significant contribution to his company’s phenomenal growth. Jobs also felt that the company’s unique retail approach was the key to Apple’s phenomenal success. Jobs wondered how the company should allocate resources between its more traditional products (i.e. computers) and its newer products (i.e. iPods, iPhones, Apple TV) in order to maintain and improve its market position. Also, Jobs wondered how Apple’s unique retail strategy could be used to support the company’s product decisions and further contribute to its success.
Subject: Apple Inc.,
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 14 October 2016
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