Case study 2: The death of the iPod

Module 2 - External environment

Identify the industry, product segment and value chain

Apple is a company based in the United States. Apple designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software.

mobile communication and media devices

What is the current life cycle of the industry?

Currently in the decline or renewal stage if its life cycle.

What have been the key issues affecting historical industry growth? What was their impact?

Key issues influencing historical industry growth using TEMPLES model

|Factor |Issue |Nature of impact (+/=/-) |
|Technology |Internet has enabled downloading and files sharing of music across the world. |+ |
| | | |
| | | |
|Economy |Dotcom bubble |- |
| | | |
| |Recession – reduced disposal incomes available to purchase discretionary items | |
|Markets | | |
|Politics | | |
|Law | | |
|Environment | | |
|Society | | |

What are the key issues that will affect future industry growth? What is their likely impact and the overall assessment of the industry’s future growth?

|Factor |Issue |Nature of impact (+/=/-) |
|Technology |Introduction of new technologies that make copying of files difficult and stem the |- |
| |increase of illegal downloading | |
|Economy | | |
|Markets |Change in purchasing patterns from buying physical CD’s to purchasing them online (iTunes | |
| |store) | |
| | | |
| |Competition to intensify significantly as competitors attempt to imitate some of the | |
| |features of the Company’s products and applications within their own products or, | |
| |alternatively, collaborate with each other to offer solutions that are more competitive | |
| |than those they currently offer. | |
| | | |
| |Consumer may be more price sensitive due to the range of products from different | |
| |competitors | |
|Politics | | |
|Law |Consumer protection laws | |
|Environment |Corporate social responsibility |+ |
|Society |The need to have the newest and trendiest technology | |

What are the key issues that will affect future industry profitability? What is their likely impact and the overall assessment of the industry’s future profitability?

The Porter’s five forces model, the extended eight forces model and the value chain are used to assess the future profitability of the industry. It is concluded that the future profitability of the industry will be high and increasing. The diagram below summaries the industry’s value chain:

Market research and innovation – protocol – product testing – manufacturing – distribution – retails – consumers

Apple’s future profitability will depend on the company’s ability to continue to develop and offer new innovative products and services in each of the markets it competes in. The markets for Apple’s products and services are highly competitive and the company is confronted by aggressive competition in all areas of its business. These markets are characterised by frequent product introductions and rapid technological advances that have substantially increase the capabilities and use of mobile communication and media devices, personal computers and other digital electronic devices.

The key factors influencing the future profitability of the industry can be summarised as follows:
Positive factors include: - First movers - Product development and innovation

Negative factors include: - Competitors aggressively cutting prices to gain market share - Competition to increase as competitors attempt to imitate some of the features of the Company’s products and applications within their own products. - Competitors promoting their own digital music and content products and services including offering free peer-to-peer music and videos

These factors discussed above are summarised in the following industry analysis, which uses porters model and the extended eight forces model as its framework.

|Threats of new entrants |Several large, well-funded and experienced participants. |
|Impact: High | |
|Government influence | |
|Suppliers |Strong brand name |
|Impact: High |Products are in high demand |
|Industry rivalry |Apple are market leaders, they are the first movers |
|Impact: Medium |Competitors aggressively cutting prices to gain market share |
| |Competitors promoting their own digital music and content products and services including offering free|
| |peer-to-peer music and videos. |
|Buyers |Regardless of price consumers want the newest and trendiest technology |
|Impact: Low |Buyers market is large |
|Substitutes |Low switching costs as competitors aggressive cut prices to remain competitive |
|Impact: High |Competition to increase as competitors attempt to imitate some of the features of the Company’s |
| |products and applications within their own products. |
| |Threats of copyright (from China) cheaper versions |
|Supplier’s supplier |Five major labels signed up with Apple to supply music for iTunes to join in on the increase popularity|
|Impact: Medium |of digital music |
| |75% of recorded music are still on CD |
|Buyer’s buyer |Consumers have a lot of choices of where to buy, at what price and experience |
|Impact: High | |

Who are the industry’s key competitors? What are their strengths and weaknesses?

Not enough info

Module 3 – Internal Environment

Who are Apple’s key stakeholders, what are their objectives and are their objectives aligned with Apple’s strategic goals?

|Who are the stakeholders? |What do they seek to receive from the |Is Apple delivering against their |
| |organisation? |expectation? |
|Shareholders |Innovation | |
| |Revenue and market share growth | |
| |Total shareholder return | |
|Steve Jobs (CEO) | | |
|Jonathan Ive (Senior vice president) | | |
| | | |
|Consumers |Great customer service | |

What business strategy is Apple suppose to have been pursuing and has tis in fact been the case?

The five questions (5Q) approach is used here to understand Apples stated business strategy.

|Business strategy using 5Q approach |Examples of how Apple has been pursuing this stated business strategy |
|Does Apple plan to grow (profitably)? |Yes Apple plans to continually grow. The Company continues to develop new |
| |technologies to enhance existing products and to expand the range of its product |
| |offerings through research and development, licensing of intellectual property and |
| |acquisition of third-party businesses and technology. |
|What products/services will Apple provide? |The Company offers a range of mobile communication and media devices, personal |
| |computing products, and portable digital music players, as well as a variety of |
| |related software, services, peripherals, networking solutions and third-party |
| |hardware and software products. In addition, the Company offers its own software |
| |products. |
|In what markets will Apple operate? |Apple currently services both the domestic and international markets. |
|What generic strategy will Apple adopt? |Differentiation? |
| | |
| |Strategy hub |
|What position in the industry does Apple plan to |To revolutionise the business, based on the digital hub strategy. The Mac would be |
|hold? |the centre of a new digital ecosystem, a place where we would soon come to plug in |
| |all manner of wonderful new devices. |

Has Apple been pursuing this stated strategy?

How has Apple performed to date? Balance score card

What are the strategic capabilities of Apple, and do these meet the strategic goal of the company? Are the strategic capabilities consistent with the industry’s key success factors?

Financial perspective
Customer perspective
Internal business perspective
Learning and growth perspective

Summary

What are the strategic capabilities of Apple. And do these meet the strategic goals of the company? Are the strategic capabilities consistent with the industry’s key success factors?

Summary of Apple;s current strategic position

Key strategic issues for Apple what module?

Module 4 – Product and market development

Identifying strategic options for Apple

SWOT analysis

|Strength |Weaknesses |
|First movers: releasing products in a timely manner to ensure that | |
|Apple gains a competitive advantage | |
|Brand is so strong that their must effective marketing technique is | |
|word of mouth | |
|Opportunities |Threats |

Ansoff product-market matrix

Using the Ansoff product-market matrix, the following diagram summarise the suggested approach for identifying strategic options and making recommendations for Apple and the order of preference for each option. Products Existing products New products
|Market penetration |Product development |
|Preference 1 |Preference 2 |
|Market development |Diversification |
|Preference 3 |Preference 4 |

Existing markets
Markets
New Markets

Short to medium-term recommendations

Market penetration – existing products into existing markets (preference 1)

Product development – new products into existing markets (preference 2)

Market development – existing products into new markets (preference 3)

Long-term recommendation

Diversification – new products into new markets (preference 4)

Risks

|Possible risks |Description |Possible mitigation strategies |
|Project risks | | |
|Customer risks | | |
|Transition risks | | |
|Competitor risks |To remain competitive and stimulate customer | |
| |demand, the Company must successfully manage | |
| |frequent product introductions and | |
| |transitions. | |
|Brand risks |Intellectual property rights | |
|Industry risks |Global markets for the Company’s products and| |
| |services are highly competitive and subject | |
| |to rapid technological change. | |
|Stagnation risks | | |

Evaluation of Apples strategic options

Apples strategic options can be evaluated using Remelt’s criteria for evaluating strategic options.

Internal consistency

External consistency

Feasibility

Competitive advantage

Increasing Returns Business - Apple has evolved into a money-making machine because it has been successful in creating a business model that results in increasing returns that has created economies of scale in production, sales and distribution. This has also contributed to Apple's high gross profit margins. Here are a few examples:

• Lower Production Costs - Apple outsources all product production to Asia, eliminating the need to invest in plant and equipment and hiring production personnel. • Locking Up Scarce Components - Apple's deals with its manufacturing partners allows it to lockin prices and regular supplies of vital components, while competitors have to pay higher costs for the same components and wait longer to get them. • Distribution Chain Economies - Apple does not use distributors or dealers thereby eliminating middle-man costs, instead it sells its products through: o Apple Stores - Apple sells the bulk of its products through its network of 325 state-of-the-art worldwide Apple Stores. Apple Store's innovative store interiors, Genius Bar and personalized selling approach is what sets it appart from other retailers. Apple stores attract over 75 million visitors per year and are the highest grossing stores per square foot of any retail chain in the world. o Major Cellular Phone Providers - Apple distributes the iPhone through AT&T (no longer exclusive distributor) and Verizon Wireless (beginning with the iPhone 4). It is rumored that Apple negotiated sweet deals with both companies. o Itunes Store - Apple's online iTunes Store is the secret sauce that has made the iPod, iPhone and iPad a resounding success. The iTunes Store's sweet deals with the major music labels and "99 cent per song model" has allowed Apple to control nearly 85% of all music downloads and reaching over 1 billion downloads in 2010. o Apple App Store - Apple now has the world's largest collectiion of apps for the iPhone and iPad with a combined total of 350,000 apps. At the end of 2010, Apple reported that over 10 billion apps had been downloaded. Apps are a huge revenue contributor for Apple. Wwhile 80% of Android apps are free, only 33% of Apple apps are free. • Software Developers - With the exception of the Mac and iOS operating systems, Safari browser, Quick Time Player, and iWorks, Apple leaves nearly all software development up to its network of software developers and partners. Again, Apple has a very sweet deal. Apple's revenue sharing deal with developer's allows it to keep 30% of the revenues. Most of this is pure profit.