Final Examination

2016

Exam: CIMMO1074U:

International Management

Date: 2 December 2016

Time allowed: 4 Hours

Type of exam: Open book E-Exam

 Case Apple
Apple recently reported its fourth quarter earnings. For the first time since 2001, the company
had lower sales than the year before. Apple’s revenue declined from $234 billion to $216 billion,
mainly due to a decline in iPhone sales. The company has posted double-digit revenue declines
across all major product categories, indicating that Apple might have lost its innovative edge
and needs new products to continue growing in the mid- to long-term.

In a subsequent conference call, CEO Tim Cook was repeatedly pressed on the question of
new products, but kept his answers vague and ambiguous. Furthermore, the president elect of
the USA, about to take office January 20 this year, has requested Apple to consider moving
manufacturing back to the US from countries such as China to help strengthen the US
economy.

This leaves the company - more particularly the board of directors - in a serious predicament
about how to avoid further decline in revenues and remain competitive through successful
commercialization of their innovations worldwide. While they are currently enjoying an immense
success with several products attaining a near cult-like status and solid earnings there are
several signs that the future might well be rather bleak unless action is taken immediately. The
landscape of contemporary technology corporations, software as well as hardware, is fraught
with stories of companies who once ruled supreme, seemingly able to do no wrong, with
products and services deemed to be superior only to lose everything. Some companies like
Kodak have simply vanished, while other companies such as Nokia are a mere shadow of their
former selves. Indeed, Apple has previously in the company’s history encountered severe
difficulties.

Apple is a highly complex organization with a relatively long history. The current success is thus
built on so many factors and elements that it can be difficult to see what exactly has created this
success - even for the board of directors.

Inaction is not an option, nor is acting prematurely or ill-informed. Therefore the board of
directors has summoned you to help them get the full overview and decide on a course of
action. They have decided to get advice from the elite consultants at IMM Unlimited.

More precisely they ask you to provide answers to the following questions:
1. What are the main events in the history of Apple that have lead to their current position?
2. What are the main factors that drive Apple forward as a commercially successful
company?
3. What are the main challenges for Apple in their current situation?
4. How should Apple address their current challenges in order to remain competitive?

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You are required to produce a brief to the board of directors answering the above questions.
The format of the brief is a 2 page executive summary using the standard 2275 characters per
page followed by a short powerpoint presentation of maximum 8 power point slides explaining
or elaborating on the main conclusions of the executive summary. Both documents have to be
self-supporting as you will not be present at the meeting where your findings will be discussed.
It is important that there is a clear logic in your executive summary and that you back your
findings and conclusions up with clear argumentation. There should also be a clear link between
the executive summary and the power point presentation.

The board of Apple has prepared the following brief for you to be used for your analysis. You
are strongly encouraged to use it as you see fit. The board further stresses that they do not
have any preconceived solutions in mind but are open to any good solution as long as it is
based on a solid analysis and well argued for.

History
Apple was founded in 1976, and has headquarters in Cupertino, California, USA. The company
was founded by Steve Jobs, Steve Wozniak, and Ronald Wayne. Ronald Wayne, however, left
the company shortly after its inception.

With the launch of the Apple and Apple II computers, Apple has been a frontrunner in the
personal computer (PC) revolution in the 1970s and early 1980s. The launch of the Mac in 1984
further changed the way the PC was perceived and put Apple on the map as a global computer
maker. After the ousting of co-founder Steve Jobs in 1985, the company soon faced declining
sales as they pursued as high-price policy. From 1989 to 1997 the company experimented with
a number of new product lines such as personal assistants, digital cameras, and TV appliances.
The company also made strategic collaborations with IBM and Motorola, and launched a
number of lower cost computers to reach lower-priced segments of the market. However, due to
cheap PC clones flooding the market all running on Microsoft’s successful Windows operating
system, Apple faced declining market share. Apple managed to sue Microsoft for copying the
user interface of its own operating system, but the case was later dismissed.

After a crisis in 1997 which almost left the company bankrupt, Steve Jobs was rehired as CEO
of Apple, and started an expansion into consumer electronics with a USD100M investment from
arch-rival Microsoft. Launches of new Apple computers; the iMacs, and a host of cutting edge
software, including Microsoft’s popular workplace productivity suite Microsoft Office soon
reached the market and brought Apple back with growing sales.

In 2001 Apple launched the iPod - a modern version of the walkman. Alongside the device
came an online store called iTunes where music could be downloaded for a fee. Apple had
made agreements with most of the music industry prior to launch, to provide an online catalogue

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of tunes creating a legal alternative to the extremely popular music pirating services such as
Napster. In this move Apple started transforming the music industry, as the online streaming
radically changed the business models for record labels, which saw their power dwindle as
revenues had to be shared with Apple and - in time - other music distribution services.

In 2007 Apple launched the iPhone, the company’s first mobile phone. The phone featured no
keyboard, but instead has a large touch sensitive screen that enabled more complex
applications - often called “apps” - to run on the phone, making it into a wearable mini-computer.
The launch was supported with an online store - the App Store - for applications that allowed
any developer around the world to develop new software for the iPhone and sell it through a
revenue share model with Apple. The iPhone quickly became extremely popular, and ended up
threatening the position of Nokia - the at that time largest mobile phone maker in the world. The
success of the iPhone underlined the success of the concept of the smartphone - a mobile
phone with advanced software - and prompted competitors such as Google - another tech giant
- to start developing a competing mobile operating system called Android.

In 2010, Apple launched the iPad, the company’s first tablet computer, a device the size of a
book with large touch sensitive screen. The iPad was supported by software from the AppStore
we well and became extremely popular. Similar to the iPhone, the success of the iPad saw a
new market for tablet computers emerge, with competitors such as Samsung and Amazon
launching their own versions. Today, the number of tablets shipped worldwide is approaching
the number of PCs shipped worldwide.

In October 2011, Steve Jobs passed away, and COO Tim Cook subsequently took over as
CEO. Apple kept shipping new version of the iPhone and iPad, and purchased a number of
companies within strategic area such as digital maps and digital memory.

During this period, a number of competitors started shipping similar devices to Apples and
Apple was involved in a number of patent law suits with companies such as Samsung and HTC.
Samsung won the suit in South Korea, but lost in the US where Apple after an appeal was
awarded USD450M in damages. HTC and Apple settled out-of-court, and made an agreement
to share certain patents. A deal estimated to bring Apple upwards of USD300M annually in
licensing revenues from their patents.

In November 2014, Apple was the largest publicly traded corporation in the world by market
capitalization. Apple continued with acquisitions in areas such as augmented reality and
machine learning, and rumors started to emerge of a secret project to launch a self-driving car,
the so-called project Titan.

In 2015, Apple launched the Apple Watch. A smartwatch that should integrate with the users
iPhone, and in addition enable the user to measure vital statistics. The Apple Watch was a
further extension of the family of portable products augmenting the iPhone as the basis of
applications running on the watch.

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Business Model
Apple is fundamentally a hardware company, making stylish and user-friendly computers,
mobile phones, and tablets. Recently, Apple has begun acquiring companies in other industries,
and there are thus speculations that Apple might branch out into other product areas.

The profits are mainly made from hardware, with software and content seen as a way to drive
hardware sales. Consequently, great attention is made to design of the hardware as well as the
user interface and usability. Apple’s products thus provide an integrated experience of
stylishness and ease-of-use. The products are backed by an ecosystem of applications and
supporting services a wide degree of interoperability. Customers are generally loyal to the Apple
brand and products, but are often locked into the Apple ecosystems through the investment in
applications and content that runs on multiple devices, but not on devices using other operating
systems than Apple’s proprietary operating system entitled “iOS”.

Apple combines innovation in design with innovation in technology, integrating cutting-edge

innovations with complex products that often provide simple user interfaces to customers. Apple
is an avid user of the latest technologies such as artificial intelligence (e.g. voice recognition in
Siri), and was one of the first companies to use solid state drives in mass produced hardware (in
e.g. the iPod) to achieve new levels of convenience, user friendliness and features.

Apple is not always a first mover. Nokia was before Apple in mass producing smartphones and
integrating them them a proprietary operating systems and application store. However, Apple
found a more appealing approach and managed to more or less squeezed Nokia out of the
market for mobile phones. As a consequence, Nokia’s mobile phone division suffered significant
decline in sales and was purchased by Microsoft in 2014, in an attempt by Microsoft to enter the
market for mobile phones.

Apple maintains its profitability in hardware by sourcing components from across the world and
assembling the products in low destinations, primarily China. One of the reasons Apple has
chosen China as the primary destination for assembly of the iPads and iPhones is the
combination of flexibility, competences and cost advantages. The minimum wage in China is
1/10 of the minimum wage in the US. Furthermore, environmental regulations are minimal which
reduces costs of manufacturing products with hazardous components in them. Manufacturing in
China also ensures access to rare minerals, a market of which China controls 95% and has
consistently cut export quotas to prioritizing domestic manufacturing. Foreign companies can
only be exempt from the rare minerals export quotas if they manufacture in China. Compared to
e.g. Samsung, Apple manages to achieve higher profits from its products through a combination
of premium prices and lower production costs per unit. This leads to a significant advantage to
Apple in gross profit per unit sold.

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Organization & Culture
Apple is known for its informal, non-hierarchical culture. The company is organized into teams
and divisions that work around specialized projects. Team with diverse backgrounds and skills
often collaborate to make complex products. The company has a history of hiring only top talent,
from engineering to marketing, operations and sales. The focus is on developing great products
of simple design. Part of the design philosophy of Steve Jobs was perfectionism. As a result,
Apple’s products have praised for their user-friendliness and simplicity.

Contrary to many other technology companies, Apple is also known to be extremely secretive
about projects, sometimes not allowing different teams to interact to avoid information about
certain projects leaking. Consequently, the company is often vague about future products, and
often choose to postpone products until they have reached the level of excellence the company
is striving for. However, Apple has also had products launching that where imperfect or
immature such as the first version of their map and wayfinding application, which subsequently
let to the manager of that division being released of his duties.

Location
Main R&D takes place in Cupertino, California, US. R&D across silicon valley, including
Cupertino, San Jose, Santa Clara and Sunnyvale. Outside of the US, Apple has R&D centres in
Shenzhen, Shanghai, and Beijing (China), Yokohama, (Japan), Herzliya and Haifa, (Israel),
Cambridge (UK), Grenoble (France), Lund (Sweden), Hyderabad (India).

Apple stores are located worldwide in major cities. The majority in the US and Europe.
Local resellers. Furthermore, Apple has an online store both for hardware, software and
content.

With more than 200 suppliers, around the world, Apple is operating a global supply chain.
Supplying countries include USA, China, Taiwan, Japan, Malaysia, Ireland, Philippines, Austria,
Vietnam, Indonesia, Singapore, france, Germany, UK, Netherlands, South Korea, Brazil, India,
Thailand, Mexico, Italy, and Czech Republic.

Even though China is main assembly and manufacturing location, Apple has manufacturing in
many other countries. The Apple MacPro - the professional line of computers - is made in the
US. Displays are mainly made in Japan by Japan Display and Sharp, and some in South Korea
by LG. Touch ID sensors are made in Taiwan by Taiwan Semiconductor Manufacturing
Company and Xintec. Many specialised components are made in other countries around the
world and then shipped to the assembly destination. The iPhone and iPad are mainly
assembled in China, but can as well be assembled in e.g. Taiwan.

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Even though the market in India is growing, India does not necessarily represent an alternative
to China as manufacturing destination. Tim Cook recently stated that Apple is viewing India as a
less desirable market, as the Indian government requires any company selling in the country to
source at least 30% of components from local suppliers in India.

R&D
Apple’s spending on R&D is expected to reach 6.8% of revenue in 2017, equal to USD12Bn,
which put Apple in the top-20 of companies worldwide spending the most on R&D. One reason
for the increase in R&D spending is that Apple now invests across four hardware segments:
iPhone, Mac, iPad and Apple Watch. However, the recent drastic increase in R&D spending
could also indicate that Apple plans to invest in new and potentially even larger projects such as
self-driving cars, virtual or augmented reality products.

Apple has recently hired new engineers to develop enhanced chip processors. Apple has also
managed to hire Tesla’s former chief engineer Chris Porritt, and hired leading Virtual Reality
expert Doug Bowman. This could indicate Apple is looking at launching new products in these
markets.

Apple also invests an increasing amount on R&D outside of the US, especially in China.
However, recently Apple has started to experience regulatory pressure in China, including being
forced to shut down services such as iTunes and iBook, and losing a patent case to a little-
known Chinese competitor for the iPhone 6. Some of Apple’s main competitors in China - and
increasingly worldwide - are Huawei and ZTE, both located in Shenzhen, China.

Competition
Despite the almost iconic position of Apple and its products the company is facing different
competitors across its products lines.

In the Mac area, most other personal and mobile computers run on Microsoft operating
systems. In the area of hardware, major competitors are Dell, Hewlett-Packard, Asus, Acer and
Lenovo.

In the tablet area, Apple is still dominating the market for tablets, but the company is losing
market share to competitors with tablets running Google’s Android operating system. Apple’s
market share fell from 55% in 2011 down to 26% in 2016. Amazon and Huawei are currently
growing their market share at close to 100% annually.

In the area of smart phones, Google’s Android operating system is dominating the market, and
used on most non-Apple phones produced by Huawei, Samsung, Sony, HTC, Lenovo and

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others. Google also runs the Google Play Store for purchase of applications and context for
Android-based phones.

In the Smartwatch area, Apple dominates the market with 50% market share. Google android-
based watches have a 25% market share, with Samsung (14%) and Garmin (21%) as the
largest producers. Other competitors include Lenovo (3%) and Pebble (3%).

Apple’s closest competitors in the hardware market, Samsung, recently suffered a major
setback as the company had to recall its Galaxy 7 flagship model due to battery hazards. Profits
for Samsung mobile division consequently fell by 96% in Q3 of 2016.

The picture emerging from the above overview of the competitive situation is that Apple, while
successful, is in no position to rest on their laurels and need to stay focussed to remain
competitive.

Market
Smartphones is the biggest revenue generator for Apple. However, there is an increasing
number of competitors entering the market. Apple and Samsung together has 32.5% of the
market share, but are both facing declining sales. For low-cost phones, Chinese companies
such as Huawei are increasingly gaining market share. Furthermore, the market for
smartphones is expected to slow in the coming years, with most growth coming outside of the
current main markets of US, Europe and China, and the number of first-time buyers are
shrinking in these markets. Especially India and Indonesia are seen as markets where there is
expected to be significant growth. Chinese brands have been exceptionally good at capturing
market shares in major markets such as India, which is forecast to grow to 700M smartphone
users in 2020.

The worldwide market for tablets is currently declining by almost 10% annually, with both Apple
facing declines of 9% and Samsung of 25%. Less customer are upgrading to new tablets, and
a new generation of computers that works both as tablets and laptop reduce the need for
customers to buy both a computer and a tablet. The Smartwatch market is likewise in decline,
with a decrease of over 50% in Q3 2016. Apple is facing the stiffest decline in units shipped,
whereas both Garmin and Samsung are growing.

On the personal computer market, Apple is facing a double-digit decline in units shipped, in a
market that is also in general decline. However, competitors such as Hewlett-Packard, Dell and
Asus are seeing small increases in shipments.

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Appendix
Fig. 1 Apple historic share price

Fig. 2 Apple Product launches of selected products

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Fig. 3 Apple annual sales

Fig. 4 Samsung Sales

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Fig. 5 Mac and PC sales development

Fig. 6 Smartphone Market Share

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Fig 7 Smart Phone sales

Fig. 8 Global Smart Phone Sales Forecasts

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Fig. 9 Market share by company

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Fig. 10 Most Innovative Companies

Fig. 11 Diversity in Apple Workforce

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Fig. 12 Apple R&D Expenses Growth

Fig. 13 Annual R&D Expenses

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Fig. 14 iOS versus Android

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Fig. 15 Q3 2016 Summary Data

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Fig. 16 Tablets market

Fig. 17 Personal Computer Market

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Fig. 18 Smart Watch Market

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Fig. 19 Overview of Apples revenue by operating segment

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Fig. 20 Share of Apple’s revenue by product category

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