Apple Computer, Inc.
Case Study
Terry Gray
Bus 680
Historical Perspective of Apple Computer
Apple computer has experienced both good and bad times as a major player in the computer industry. It has been a leader in computer technology in the past but has struggled lately in keeping pace in the rapidly developing computer industry. Developing technology and evolving computer applications have contributed to a business environment that is extremely competitive. Survival in this industry requires the ability to anticipate changes and to effectively respond to market demands. This industry has experienced tremendous growth over the last two decades with the popularity of personal computers. Many households now have personal computers, making them a household item. This market is no longer confined to the business and educational environment; computers are a consumer good world-wide. Every day, new uses for personal computers are developed including information dissemination, world-wide communications and entertainment. Apple Computer, Inc. must respond to this business environment if it is to survive in the future.
Apple Computer, Inc. developed as a major player in the computer industry in the early years. This company started as a garage operation in 1976 and grew to a publicly traded company by 1980. In 1980, the decision to go public was made and an IPO of 4.6 million shares was sold within minutes, making Apple the largest public offering since Ford Motor Company went public in 1956. Apple continued to experience early success in the industry being the first computer company to reach $1 billion in annual sales in 1982. One year later, it entered the Fortune 500 at number 441. Apple continued its strong market position by introducing a graphic user interface that became known as a "window" that later became the industry standard. They were far ahead of their competition in providing a user friendly computer interface system. Apple computers were also beating the competition in data processing capability and speed. These factors contributed greatly to Apple’s early success.
However, Apple’s performance began to sliding, leaving the company perilously close to extinction. An internal struggle for power between the founder, Steve Jobs, and the company president and CEO, John Scully, adversely affected Apple’s ability to compete. When Scully was able to foil this takeover attempt, Steven Jobs left Apple and formed his own company. This struggle resulted in a decline in Apple’s ability to anticipate changes in the industry and affected its ability to appropriately respond to new external threats in the industry. At the same time, Microsoft based computers began gaining popularity with PC users with their introduction of a "windows" based operating system. Apple tried, unsuccessfully, to stop Microsoft from using a similar "windows" operational system, claiming copyright infringement. They eventually lost this fight and Microsoft was able to gain market share from this user friendly interface system. Microsoft was now becoming a stronger player in the computer industry.
Problems continued for Apple with a series of failures, changes in their distribution policies and another change in the CEO. In spite of the many attempts to improve the company through product development, production, distribution and marketing, they continued to lose market share to Microsoft based companies. In January 1996, Apple posted a first quarter loss of $69 million. This lead to a major company restructuring of the organization by laying-off 1,300 employees. The losses continued to mount and Apple experienced an astounding $740 loss in the March quarter of that same year. Apple Computer, Inc. was bleeding badly and something needed to be done. Steven Jobs returned to the company in December of that year, but Apple continued to experience staggering losses, $816 million for 1996 and nearily$1.5 billion for 1997. Things were getting desperate at Apple and major changes were needed to provide any hope for future survival.
Apple’s Strategic Decisions
What lead to the demise at Apple? Several strategic decisions were made that put Apple at a disadvantage in competing in the industry. They had made several mistakes in their analysis of the external and internal environment that resulted in their losing their competitive advantage in this industry. A look at their strategic decisions will help explain the companies decline.
Early in the industry’s life cycle, Apple Computer, Inc. decided to pursue an Intensive Strategy to competitively position their product. They decided to focus on a specific market segment and used a Market Penetration strategy to promote their product with the educational community. Apple specifically focused their marketing strategy on the educational market and heavily promoted their product to this segment. Their assumption was, if students learned computer applications and techniques on Apple computers in school, they would demand Apple products in the business environment, therefore, they could migrate their products through assimilation into the business environment. Although Apple was successful in penetrating the educational environment, the residual demand for their products in the business environment did not materialize. The development of Microsoft’s "windows" interface made the conversion from Apple products to Microsoft based products relatively easy. With PC computers firmly established in the business market segment, Apple was unable to effectively penetrate this market.
Apple also decided to apply an Integration Strategy to position their product. The decision was made to use Forward Integration to closely control where Apple products would be sold. Apple products are sold by third party reseller to their customers. Unlike many PC companies, Apple does not sell directly to their customers. The level of distribution points was far below the PC segment. This has significantly reduced the availability of their products to the general public. It is far easier to purchase and get service for PCs than an Apple computer.
Apple also underestimated the growth potential of the computer industry. In an effort to exercise control their products, Apple decided not to allow "cloning" of their product. They felt they could effectively protect their technological competitive advantage by keeping tight control over manufacturing of their systems. When Microsoft successfully introduced their version of "windows," Apple now had a new competitive threat. IBM chose to allow the cloning of their computer systems and this spawned a tremendous boom in PC based computer companies. Apple has paid a large price for this decision by losing larger and larger portions of the market share. This trend needs to be reversed if Apple is to survive as a major player in the computer industry.
The result of these ineffective strategies required Apple to begin a series of Defensive Strategies. Apple Computer, Inc. began to initiate a Retrenchment Strategy to protect the company from large losses by laying off 1,500 employees in 1993 and another 4,100 employees in 1997. These layoffs were needed to reduce their operating costs as the company experienced larger than expected losses in those years. This was an attempt to reverse a trend of operating losses and to try to reorganize the company to improve its financial performance. Apple needed to take these cost-cutting measures to appease their investors, financiers and other shareholders.
Apple’s Strategic Issues
To effectively respond to threats from the industry, Apple must develop and implement new strategies. The return of Steven Jobs to Apple has generated some much needed enthusiasm, but much more is needed for the survival of Apple. Steven Jobs is only temporarily controlling the company and has refused the CEO position. This must be resolved and a permanent CEO installed quickly. There are many strategic decisions to be made and it is important to resolve the internal corporate structure. The vision for the company needs to be established and effectively communicated throughout the company. The culture of this company is of paramount importance to their survival. Once these issues are resolved Apple can begin the process of determining their next course action.
Many more issues still remain. How should Apple improve its competitive position? Should Apple increase their R&D budget to develop new and improved products? Should they continue their current strategy regarding the distribution of their products? Should Apple continue to concentrate on niche markets like education, publishing and graphics? Should they try to penetrate the business and PC markets? Can Apple penetrate the computer industry through marketing efforts, placement, product, price and promotion? The answers to these questions are extremely important in determining Apple’s future strategy.
Porter’s Five Forces
To effectively develop an appropriate strategy, it is helpful to analyze the intensity of competition between firms. Porter’s five forces analysis can provide important insight into the level of competition in a particular industry. "Rivalry among competing firms is usually the most powerful of the five forces."1 The computer industry has many players, each attempting to gain competitive advantage over the other.
They compete on price and features and when one firms makes a change in their price or packagefeatures, the others are quick to respond. This response makes it difficult to maintain any competitive advantage based on price or product features.
The computer industry also has new competition entering the market. Although their are a few highly recognized companies that have the majority of the market share, new smaller firms are still able
1. Fred R. David, "Strategic Management, Concepts and Cases," 3rd ed.(Prentice-Hall, Inc. 1999),p.127.
to enter this industry. The potential for substitute products is also beginning to become a factor. AT&T recently announced plans to provide products that will adapt the television into an internet monitor. This device will provide an alternative to using a computer to access the Internet.
Competition in the computer industry is also affected by the bargaining power of suppliers. Because there are many suppliers of component parts in this industry, manufacturers are able to make favorable purchasing agreements allowing their manufacturing cost to be reduced. This puts competitive pressure on manufactures to pass on this cost savings to consumers. Computer prices are always declining in this very competitive market. The bargaining power of consumers is also high due to the large number of computer manufacturers. This requires each computer firm to constantly offer new features and services to gain customer loyalty. Consumers have many choices and can often bargain with sellers to get the most competitive price.
The effectiveness of Apple Computer, Inc. in responding to these forces will determine their future survival. Apple must be extremely aware of these forces and be prepared to respond appropriately if it is to regain being a major player in this industry.
External Factor Evaluation Analysis
Opportunities: Weight Rating Score
Threats:
TOTALS: 1.00 2.16
This assessment of the External Factors reveals that Apple Computer is below the industry average in responding to the external environment They should begin to prepare a strategy to better defend the firm against external threats present in the business environment and try to identify ways to take advantage of opportunities. However, EFE is basically a tool for strategists to use to help develop an appropriate course of action. This assessment does not provide an absolute answer or course of action, and good judgment is essential in using this evaluation.
Internal Factor Evaluation
Strengths: Weight Rating Score
Weaknesses:
TOTALS: 1.00 2.50
This assessment of Internal Factors indicates that Apple Computer, Inc. is about average in using its internal strengths to off set their weaknesses. Apple is having some success in controlling their internal operations relative to responding to their weaknesses. However, they should not be satisfied with being average in this highly competitive business environment. The goal is to establish a competitive advantage over other firms, and they have plenty of room for improvement. Apple needs to identify ways to improve their operations to gain this competitive advantage. Again, the IFE assessment is not an exact science and the exercising of good judgment is essential.
It appears from the EFE and IFE analysis that Apple should try to improve their ability to respond to the external environment. However, Apple should strive to be effective in both the external and internal environments. These tools are only one of many analysis to be conducted to identify an appropriate course of action. This analysis is a starting place rather the an end. This is to be the fact finding stage, the Input stage, that will lead to the development of alternative strategies, the Matching stage. To make this EFE and IFE a more valuable assessment, it needs to be brought to the next stage, the TOWS analysis.
TOWS Analysis for Apple
Now that a list of internal strengths, weaknesses and external opportunities and threats has been developed a further evaluation using a matching method using a technique known as TOWS can be applied. In the phase, Apple should match internal strengths to take advantage of external opportunities. They also need to analyze their internal weakness to defend against threats. This matching phase will begin the formulation of possible alternative strategic decisions.
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TOWS ANALYSIS |
Strengths |
Weaknesses |
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Opportunities |
(O2, O3,S1,S2,S3) |
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Threats |
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1. Settle CEO position to establish firm’s direction. (T2,T6,W1,W7)
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The various alternative strategic decisions identify a beginning point for formulating possible courses of action. This technique is not a final evaluation, but it does provide a framework for discussion and evaluation. The correct course of action must include exhaustive evaluation of the possibilities and include intuitive judgment. It is important to keep in mind that a TOWS analysis is only one of many tools available when evaluating various strategic options.
SPACE Matrix Evaluation
GRAPH
The SPACE matrix indicates that Apple Computer, Inc. should consider a defensive strategy. Because of its relatively weak financial position and the highly evolving industry, Apple should consider allocating its resources to a more focused product line and attempt to gain a distinctive competence in these markets. The rapid changes in technology makes the computer industry very unstable and highly competitive. Apple should concentrate their remaining assets and resources towards developing a niche market. They should also develop a contingency plan to seek protection from creditors if further decline is experienced in the future.
Apple’s Financial Ratio Trend
1995 1996 1997 1998*
Debt/ Equity 10.4% 45.9% 79.25% 58%
Return on Equity(loss) 14.6% (39.65%) (87.08%) 39.9%
Profit Margin 3.83% (8.30%) (14.76%) 6.82%
Earnings per Share 3.45 (6.59) (8.29) 2.66
Growth in Sales --- - 12.5% -38.86% -16.1%
* From CNN Financial Stock Report
http://cnnfn.com/stock/05680.htm
An analysis of Apple’s financial performance shows a declining trend. In 1995, Apple Computer was turning a profit for their shareholders even though overall sales were declining. However, declining sales resulted in poor performance in 1996 and 1997. Sales declined by 12.5% and 38.86% over this two year period, resulting in net losses. To keep Apple operating, their long term debt load increased by a staggering 213% ($303 to $951). This new debt load adversely affected their Debt/Equity ratio by increasing it from 10.4% to 79.25% over the two year period. This problem was further compounded by losses in retained earnings. This would make further financing for Apple very difficult in the future.
Profitability also suffered due to increased interest expenses in 1996 and 1997 as a result of the heavy debt load. Further compounding their poor financial performance in profitability was an increase in operating expenses coupled with declining sales in 1996. This was partially corrected by Apple’s retrenchment action in 1997, however, operating expenses still exceeded net sales for the period. It would not be until 1998 that this retrenchment would begin to have a positive impact. The problems at Apple also showed with poor performance on Earnings per Share. In 1995, EPS returned $3.45, but subsequent losses in 1996 and 1997 mirrored poor performance in sales and profitability. This further complicated Apple’s financial demise, making Apple unattractive to investors, and making them more reliant on debt for financing. With an already large debt load (79.5%), raising new capital would be extremely difficult.
The sales trend for Apple did not offer much relief over this period. Sales continued to decline from 1996 to 1998 by 12.5%, 38.86% and 16.1% respectively. In spite of the declining sales, Apple was able to return to profitability in 1998 due to a major restructuring and cost cutting from retrenchment. Apple must attempt to improve their sales performance to return to fiscal stability.
Recommendations For Apple
Apple Computer, Inc. has experienced both the best of times and the worst of times. The survival of this company will depend on what strategic course they decide to persue. The following are a few recommendations that I propose.
Although there are many different strategies to consider, Apple’s future success will depend on their future strategic decisions.
Apple Today
Apple has experienced some recent success from the introduction of the iMac, the G3 processor, OS 8.5 and recent cost cutting. The iMac was a major player in increased revenues. This new product was highly advertised by Apple and produced in bright primary colors as an effort to differentiate form other systems. It is a self contained system that emphasizes ease of use and appeal to consumers that want a simple computer. Apple had also decided to counter declining sales by concentrating on customers in the graphics, advertising and publishing industries. "In summation of Apple’s performance, acting CEO Steven Jobs made it clear that the company was now a niche player focused on the creative segment of the computer market."3
3. Harrison M. Rose, "Apple: Now a niche company" Electronic News, Jan. 12,1998.
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Apple has also made a change in their international distribution. "Apple Computer, Inc. has announced that the company’s on line store, The Apple Store, has opened its e-doors for business in Japan at www.apple.co.jp/japanstore."4
The return to profitability in 1998 and the strong sales experienced in the beginning of 1999 may be the beginning of a turn around for Apple. However, it remains to be seen if this recent trend can continue and even be improved upon. The survival of Apple will depend on their ability to sustain profitability and their effectiveness in making important strategic decisions.
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