© David O’Sullivan and Lawrence Dooley

International Case Study

Apple
One organization that epitomizes the power of creativity and innovation is the Apple
Corporation. From its initial inception in 1976, the company has developed products that
have been hugely successful and have left an indelible mark on the computer world.

Background
Apple was founded in 1976 when Steve Jobs and Steve Wozniak began producing personal
computers. Although their first product (the Apple I) only sold 200 units, it was the
foundation upon which they established the organization and went on to develop the
commercially successful Apple II. This product was revolutionary for its time and set the
standard for many of the design features that we expect to find when purchasing a
personal computer.
These innovative features included VDU, color display, protective casing around
the CPU and a high level of reliability. Later versions would also include the addition of a
‘floppy’ disk drive for data storage. The Apple II attracted a much broader market that
just the electronics enthusiast and contributed to the beginnings of the personal computer
market as we now know it.
With commercial success, Apple was exporting computers to foreign markets by
the early eighties and had introduced a number of new products including the Macintosh
range with its revolutionary graphical user interface. The nineties brought with them a
significant threat to Apple in the form of the IBM-Microsoft partnership. Over the decade,
the partnered system replaced Apple as industry market leader. Apple responded with the
introduction of products such as the PowerBook and iMac range, but never managed to
regain their dominance of the eighties. Towards the end of the nineties, Apple was facing
a future of ever-increasing competitor dominance of the Microsoft PC and the risk of
becoming a niche player in the industry. Consequently, the future of the company was at
stake and Apple began to seek new opportunities in order to sustain the organization.

Opportunity
Faced with an uncertain future, the company asked their iconic founder (Steve Jobs) to re-
take the helm at Apple in order to help restore the creative and innovative capability of
the organization. With the return of Jobs, Apple began exploring opportunities so as to use
its competencies and skills in developing innovations.
There was a digital revolution in the late nineties as products such as cameras,
camcorders and music players made the transition over to a digital format. Apple began
exploring this area by investing in R&D in order to adequately determine their relative
area of expertise. It identified the area of digital music players as one where they could
make a contribution. With the boom in music downloads from the internet and weak
competition, Apple identified the potential of bringing a quality designed digital player
with an easy-to-use interface to the market. This was how the organization began to
develop a new product that was eventually called the iPod.
In 2001 Apple launched its innovation to the marketplace. The iPod did for Apple
what the Walkman had done for Sony two decades earlier. The product initially became a
‘must-have’ for the 15-25-year-old market, establishing Apple as the market-leader and
diffusing over time into other market segments. In developing the iPod, Apple showed
many of the characteristics that are known to facilitate the innovative process;

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 1. They had a long-term growth orientation. This amortized expenses over a
larger market. i.e. growing their market-share to successfully position itself in
the home electronics business, while still maintaining its reputation in building
the worlds best desktop computers.
2. They showed vigilance by being alert and identifying the opportunity in the
digital devices market.
3. They were receptive and adaptable in being open to new ideas, in that they
introduced the iPod to the mass market instead of concentrating on a niche
market.
4. The team organized to develop the product had a diverse range of skills (as
there were many different organizations involved). This enabled them to cover
the full innovative cycle.

Developing the idea

The opportunity for Apple to develop a digital music player appeared attractive given the
growing market and poorly designed competitor products. However, the process of
developing the eventual product from its initial concept was a complex one.
Firstly, a number of key individuals were involved in the development process and
without their input and experience it is unlikely that the iPod would have been successful.
Individuals such as Tony Fadell, who joined Apple as an independent contractor had a
major impact on the development of the iPod. He had established his own company to
develop digital players but was not successful in the venture. Jon Rubinstein (Apple’s
hardware engineering chief) was also another influential contributor. Responsible for
putting the development team together, he identified the Toshiba 1.8 inch disk as the
storage medium for the developing product. He had been on a routine visit to Toshiba
where he was shown the newly developed miniature hard-disk (for which Toshiba had not
yet found a use). The other important individual was Steve Jobs, as mentioned previously,
who championed the project and inputted on the overall product design.
Secondly, Apple was departing from its core business of computer design and was
facing the challenge of a completely different industry. Thus, uncharacteristically for
Apple, they adopted a distributed approach to the innovation through collaborating other
companies rather than delay the development while they acquired the necessary
knowledge and capabilities internally.
Rubinstein was charged with the development of the iPod and began putting
together a team of hardware and software engineers. To aid the design of the iPod, Apple
approached PortalPlayer, a company renowned for their expertise in providing the highest
quality sound in MP3 players. This partnership proved to be very successful and allowed a
worldwide network of third-party organizations with key capabilities to be assembled. This
network included the following companies that contributed components to the eventual
product:

• Sony- Battery
• Wolfson- Stereo digital-to-analog converter
• Pixo- Operating system
• Toshiba- Hard Disk Drive
• Texas Instruments- Fire wire

With the combination of expertise from all the different companies involved, Apple were
guaranteed of high product quality. By adopting this distributed approach to innovation,
Apple succeeded in bringing the iPod to market within just eight months. It was unveiled
to the public in December 2001.
When the iPod prototype was developed initially, Jobs was unhappy with the
design. Thus, he took an active role overseeing its development from very eary on in the
process. He was influential in the design of the scroll wheel (although indirectly). He
continuously complained that he couldn’t get to his song in less than three clicks;
eventually the development team came up with a suitable interface where the menu
moved faster the quicker the click-wheel was turned. This interface distinguished iPods
from their competitors and made it easier for potential customers to use the product.

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The Virtual Music Shop
As the iPod was being developed, Napster (which was the dominant site for file sharing of
music) was encountering significant legal challenges from the music industry regarding
alleged copyright infringement. The availability of internet sites to access digital music
was crucial to the success of digital music players, thus Apple began development of the
iTunes site as a legal means of purchasing digital music.
The iTunes software was designed to work seamlessly with the iPod in order to
allow users fast and simple download of music to their iPods. The software also allowed
users to customize their playlists and alter them as often as they wished. Thus Apple had
not only brought together an integrated package of hardware and software to allow users
control over their digital music collection, but also established themselves as one of the
main internet sites where users can access digital music.

Product Realization
Eight months after assembling the team, the iPod (Generation 1) was launched to an
expectant market. The product worked on the basis that music could be stored on a hard
disk as very small computer files called Moving Picture Experts Group Layer 3 (MP3’s). The
original iPod could store up to 1000 songs on a small, lightweight handheld database. This
handheld device is attractive looking and very easy to use. The individual songs are stored
on the iPod in folders categorized under headings such as ‘Album’, ‘Artist’ and ‘Song’,
which are navigated extremely easily through the use of the click-wheel interface.
With the success of their initial offering of a 5-gigabyte iPod capable of storing
approximately 1000 songs, Apple returned to the development laboratory and since 2001
has delivered a range of enhanced products including the iPod (Generation 4), the iPod
Mini and the iPod Shuffle. These developments have not only addressed performance
issues relating to earlier iPod generations but also provided customers with increased
choice in relation to storage capacity, functionality and price point.
Apple continues to develop new and innovative offerings for the market and future
products include the 100-gigabyte iPod and even the iPhone that will bring the company
into direct competition with new competitors such as Nokia.

Results
The launch of the iPod has been a huge financial success for Apple as well as being a
cultural phenomenon that has swept the globe and reinvigorated the Apple brand. This
success has been reflected in the share value of the organization which rose from $8 in
2001 to $85 in 2007.
During the last quarter of 2006, Apple shipped an estimated 21.06 million iPod
units. Currently, it is estimated that the iPod accounts for 70% of the digital music player
market and 48% of Apple’s 2006 turnover. Thus, the development of the iPod has
significantly improved the fortunes of Apple Corporation and reduced its reliance on the
computer industry for sustainability.
While the last five years have been good for Apple, the future is more challenging.
The success of Apple has attracted new entrants into the market (Microsoft’s Zunes
product for example) that will raise the competition and standards even further.
Additionally, the iPod product design has had its flaws over the past five years with issues
such as poor battery life and defective screens leading to significant complaints from
customers. The world waits to see Apple’s next move and wonders whether they can come
up with such an innovative product as the iPod again.

Review Questions

1 How does this case study demonstrate the synergy between new venture
creation and product innovation?
2 What were the driving forces that encouraged Apple to move into the MP3
player market?
3 What was the rationale behind Apple adopting a distributive approach to the
development of the iPod?
4 How important was the return of the founder (Steve Jobs) to the success of
the iPod?

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 5 How important was the development of the iTunes platform to the success of
the iPod?

Sources

• Apple Confidential, ‘The Real Story of Apple Computer Inc’, By O.W. Linzmayer.
No Starch Press, USA.
• http://en.wikipedia.org/wiki/IPod.
• ‘Strategies for Optimizing your Design Chain.’
www.designchain.com/coverstory.asp?issue=summer02.
• ‘Straight Dope on the iPod's Birth’, Leander Kahney,
http://www.wired.com/news/culture/0,71956-0.html.
• ‘Apple's Remarkable Comeback Story.’
http://money.cnn.com/2006/03/29/technology/apple_anniversary/?cnn=yes.
• ‘Insider Look at the Birth of the IPod’, Leander Kahney.
http://www.wired.com/news/culture/0,64286-0.html.
• ‘Apple's iPod Continues to Gain Market Share.’
http://www.ibtimes.com/articles/20061004/apple-iPod-market-share.html