Apple: to live or to die – will the history repeat itself?

1. In 2005, the PC industry was at the cross roads. Although the PC market was growing, there was intense competition in the industry. The entry barriers to the PC industry were low due to the relative ease of putting together a PC. The PC technology had standardized and capital requirements were low. Basically, any person could make a PC with assembling four main parts together i.e. the microprocessor, motherboard, memory storage and peripherals.

There were two main suppliers for the critical components. Microsoft produced the operating system and Intel produced the microprocessors. These two suppliers produced compatible products (historically starting as the IBM compatible platform) which set the standards for the whole industry.

As a result there was a “lock-in” to these two suppliers. They exercised very high power. As an example, a potential competitor to Microsoft or Intel would need to design a new platform to compete. This meant that they would have to come up with a new operating system, the microprocessor that accommodates it and have enough scale so that the software producers would write code that worked on this new platform.

The buyers had significant power as switching costs were low. A wide range of choices were available. Companies in emerging markets such as Asus and Acer were starting to offer consumers a wide range of products at lower cost due to cheaper labour costs.

The threat of substitutes to the PC was relatively low with no real alternatives. Consumer Electronics (“CE”) were beginning to emerge; however these devices did not pose a real threat to the PC at the time.

In conclusion, in 2005, although the threat of substitution was low, due to the ease of entry, strength of suppliers for critical components, strength of buyers, there was intense competition among the players in the industry. The result was commoditization of the PC. The graph below summarizes the competitive situation in the PC industry described above based on Porters Five Forces[1] framework.

In 2008, the competitive forces in the PC industry had changed. The CE started to emerge as a real substitute to the PC. The alternative devices to the PC at the time were PDAs (e.g. Palm), Smartphone (e.g. Blackberry, IPhone), gaming consoles (e.g. Sony), music devices (e.g. IPod) and streaming content devices (e.g. Apple TV). For the first time, viable alternatives to the PC were becoming available to the consumers.

Perhaps the biggest threat of substitute to the PC was the IPhone launched in 2007. Although the concept looked like turning the phone into an IPod, the real use went much further, turning it to a device with PC like capabilities. IPhone was able to run a scaled down version of any application that could be run by the PC. This created new alternatives to the PC.

In summary, the main change in 2008 was that the threat of substitutes to the PC became real. In addition, the processor market became somewhat less concentrated on Intel with other players entering such as AMD.

2. Apple started in 1976 pioneering the first usable personal computer. Since that date, Apple’s core competencies in the PC business has been superior software and superior quality in hardware. Apple greatly excels in design versus its competitors. Vertical integration (i.e. manufacturing all components of the PC including the peripherals and software) enables Apple to produce aesthetic products at a higher quality versus competitors. Apple’s products are also highly compatible with “plug and play” capability.

Apples vertical integration which allows it to produce higher quality products is also its biggest disadvantage. Being vertically integrated means high costs which other manufacturers do not face.

Apple matches these manufacturing competencies with quality service in the stores that it operates. High quality service is offered during purchase and also through in store trainings. This also results in higher sales costs versus those competitors which primarily rely on direct sales.

The below value chain analyses summarizes Apple’s competitive advantages and disadvantages vs. competitors:

|Activities |Sources |Competitive Advantages |Competitive Disadvantages | |Marketing & Sales |Sales through own stores and website|Individual customer service |Higher sales costs than direct sales| | |Focus on high value client segments |High average selling prices |only | |Operations |High vertical integration |Superior quality |Higher manufacturing and design | | |Focus on aesthetics and design |Aesthetic products |costs | | | |High compatibility | | |Logistics |Inventory in Apple shops |High availability |Relatively higher costs due to | | |

Third party shipment partners |Efficiency in distribution |inventory in shops | |Service |In-store service, in store education|High Service Quality |Cost disadvantage vs. low cost | | |and demonstrations | |companies | |Procurement |Close integration with suppliers |Optimized highly specific products |Can be expensive to produce new | | |(partnered with Samsung on IPAD | |products | | |chips) | | | |Infrastructure / |Innovation driven organization focus|Highly innovative organization |Personnel costs | |Organization |on design

Due to these competencies Apple is able to position itself in the premium segment, offering differentiated product at a premium price.

The below shows Apple’s relative positioning vis-à-vis major competitors in 2008 which is still relevant today: [pic] It is interesting to see that with the exception of Sony Vaio offering aesthetic design at a relatively higher price, all other players more or less try to differentiate either by cost or by service. Although Apple’s competitors shift their positioning between cost leadership and competing offers shown in the graph above, Apple is able to keep its unique premium position by concentrating on differentiated products. This of course comes with higher costs which Apple may be able to bring down with its decision to outsource microprocessor production for the PC.

3. Apple’s expansion into the segments outside of the PC business proved to be successful beyond any imagination. For example, IPod sales reached 8.3 Billion US Dollars in 2007 from zero. Through trial and error, Apple changed its business model from a “produce and sell” to a “multi-sided platform” acting as an intermediary between consumers and content providers. Through innovations with IPod, IPhone and IPad, Apple has developed the most viable alternatives to PC which operated on the Intel – Microsoft set platform.

As for the future, Apple seems to be well positioned to innovate further in consumer electronic segments. Ideas for future innovation could come in the form of partnership with TV manufacturers to integrate to TVs PC like qualities. Furthermore, as people get used to operating on Apple devices, Apple could deploy the characteristics i.e. “gestures” to any device.

For example GPS devices may run with Apple like gestures allowing the screen to be “pinched” and “dragged”. Apple could turn the know-how it has garnered basically to turn any CE into an intelligent device. Desktop computers could transform into big IPad screens changing completely the way the classical PC looks and feels.

Apple faces many challenges. I do not think that the major challenge will come from device manufacturers; however the threat to Apple will come from alternative platforms. As an example, it is a fact that certain MP3 players are of better quality and cheaper than Apple’s IPod. Nevertheless, consumers still prefer an iPod because of the platform i.e. ITunes which simplifies downloading music in a legal way. The same holds for the IPad and IPhone as the value in availability and convenience of reaching digital content overrides product quality.

On the flip side, Apple’s current strategy of vertical integration does not allow any other company to participate in its success. This is forcing all others to collide in a new platform. One such platform is forming rapidly around the Android operating system which was initially supported by Google and is now being developed as an open system by everyone, including Microsoft. Android operating system works with the Android Market which is an online software store developed by Google.

Major manufacturers such as Motorola and Samsung are already selling devices supporting the Android platform as IPad alternatives. In addition, NVIDIA, a graphics processor manufacturer, has started to produce microprocessors, named Tegra, which can be used by many other manufacturers to design devices running on the Android platform. On the content side, there are significant signs of growth in the Android Market. The below graph shows the evolving number of applications offered through the Android Market:

|Date |Applications available | |Mar-09 |2,300 | |Dec-09 |20,000 | |Aug-10 |80,000 | |May-11 |200,000 | |Jul-11 |250,000 | |Oct-11 |319,000 | |Dec-11 |380,297 |

Source: Wikipedia A relatively open platform such as the Android generates opportunities to  reach critical mass on each part through division of labour. All of these parts, when brought together, may result in a superior and cheaper product than Apple with more digital content. If the Android platform continues to grow in numbers, the history could repeat itself such that although Apple invented the PC, the open IBM compatible platform still dominates it.

In summary, if Apple does not want history to repeat it should consider a strategy which allows for open innovation. Apple can still keep control of the critical high value added aspects such as the operating system and ITunes while allowing other companies to collaborate on other aspects such as the hardware. Time will tell if Apple’s desire for ultimate control on all components, which today is a great advantage, will again turn against it like a double edged sword.

----------------------- [1] Michael E. Porter. "The Five Competitive Forces that Shape Strategy", Harvard Business Review, January, 2008, p.86-104.

----------------------- New Entrants - EASY

• Low entry barriers (except Intel and Microsoft as described above) • Capital intensity low. • Technology is standard.

Buyer Power - HIGH

• High number of choices. • Switching costs low. • Product/service importance medium.

Threat of Substitutes - LOW BUT INCREASING

• Small number of alternatives to PC although increasing with the introduction of CEs.

Supplier Power - HIGH to VERY HIGH • Critical component suppliers (Intel, Microsoft) very powerful due to entry barriers. • Peripheral components manufacturers are weak. These components are highly commoditized.

Competitive Rivalry - VERY HIGH

• Number and size of competitors very high. • Intense price competition. • Overcapacity and market saturation. • Technology outdated quickly.

Porter’s Five Forces of Competitive Position for the PC Market in 2005