Strategies

1. Functional Strategy

Functional strategies are targeted at improving the functions of a companys value chain and therefore reaching a competitive advantage through superior efficiency, quality, innovation, and responsiveness to customers. As a consequence, there are different strategies, policies, and methods for all value creation activities that were examined as company resources in the analysis of Apples internal environment, namely Marketing, Finance, Research & Development (R&D), Operations & Logistics (O&L) , Human Resource Management, and Information Systems.

2. Business-level strategy

The above illustration shows Apples overall strategy, with the business strategy being in the top right corner. Apple pursues a differentiation strategy with unique products which until now are unmatched by its rivals. To explain how this strategy works out in detail is the purpose of this chapter. The business strategy proposes how a specific business model can gain a competitive advantage over its competitors in the industry. There are three main factors influencing the shape of Apples business strategy. They are customer needs, customer groups, and distinctive competencies in other words Apple has to find answers to what and how customer needs are satisfied and who is going to be satisfied.

3. Global strategy Apples unique history made the company known as the typical example for the American Dream stereotype. Nowadays, Apple is more than a domestically operating enterprise. Over the years it has become a pure multinational, resourcing raw materials and selling products globally. Apples strategy of entering new markets

3.1.

When deciding to move abroad Apple executives were asking themselves the questions which markets to enter, when to enter and on what size. This meant finding out the size of the market, possible local consumers, their wealth and purchasing power and the situation in Apples market there (i .e. competition). Would Apple have to adapt products to meet the local preferences? Apples assessment of benefits, risks (also politically) and costs concluded in first of all expanding to Europe which was and is only slightly different to the US. Later on, politically risky and highly competitive Japan was taken on, followed by a number of other countries. Timing the entry wasnt hard to work out as the US market at the beginning of the 1990s was in a bad shape (i.e. recession) concerning the business cycle and not many other PC companies went overseas. So Apple despite taking on some risk as nobody knew what it would be like was in a position to build up demand and pre-empt future rivals as first-mover advantages.

4. Competitive strategy After choosing the appropriate generic business level strategy and investment strategy, Apple faces another critical decision. To choose a competitive strategy which best fits generic business level strategy, given the maturity stage of the PC industry in the industry life cycle. As this stage is characterized by a small amount of dominant players such as Dell, HP/Compaq, Gateway and Apple, these companies have the power to influence the five competitive forces. Apple therefore is constantly watching the other players, trying to predict their next step in order to be ahead of the rivals. This so called competitive game can be analyzed using game theory. As Apple 2000/2001 tried to enter the low priced market to better serve its education segment, it launched its eMac and priced it competitively at $999. Just weeks after this launch, Dell, its main competitor in the education market, announced deep price cuts for its Dell Dimension 4100 Desktop to as low as $799 per unit. This obvious high interdependence in the PC industry requires Apple and its managers to look forward and reason back, before launching any initiatives. This interdependence doesnt only pose a threat to Apple, as Apple can use this already existing invisible hand to protect companys and industrys profitability. There are two major starting points how Apple can achieve sustainable profitability. Either deter entry into the industry or reduce rivalry among existing competitors.

5. Corporate strategy 5.1. Horizontal integration

Horizontal integration is the process of acquiring or merging with industry competitors in order to maximize long- run profitability. Although there are two possible ways of pursuing horizontal integration, Apple only engages in acquisitions and obviously doesnt consider a merger at the moment. In fact, Apple has acquired and may continue to acquire companies that have products, services, personnel, and technologies that complement the companys strategic direction and product portfolio. In fact, Apple is aware that these acquisitions may involve significant risks and uncertainties, for instance concerning the integration of the acquired companies, expenses related to the acquisition, legal obstacles, or product quality issues. Apple generally pays cash for its acquisitions as current shareholders percentage ownership and earnings per share may become diluted if the company issued its common stock or other equity related purchase rights as in an acquisition. Recent acquisitions such as the acquisitions of Emagic and PowerSchool highlight that Apples acquisition policy is aimed at improving the companys value by adding valuable skills, knowledge, and products of the acquired companies. In fact, these acquisitions of relatively small companies didnt give Apple a huge possibility to enhance the competitive advantages that stem from economies of scale or scope but added significant value to the firms product portfolio. As Apple is generally engaged in the area of product bundling, these new products also give the company new possibilities in offering new and differentiated product bundles and can foster cross-selling.

5.2.

Vertical integration

Through the use of vertical integration, a company expands its operations either backward into a n industry that produces inputs for the companys products or forward into an industry that uses or distributes the companys products. In the case of Apple which can be regarded as a vertically integrated firm, the company is primarily engaged in the field of forward vertical integration in order to gain control over its distribution channels. For instance, Apple entered the retail industry through the introduction of its retail stores in 2001. Moreover, Apples online store can be seen as another aspect of vertical integration in the distribution area. Concerning the positive and negative aspects of Apples strategy, it can be said that vertical integration enables the company to gain flexibility in terms of pricing options due to improved scheduling and

more control over the distribution of its products. On the contrary, possible cost disadvantages and problems because of demand unpredictability may also arise. In addition, Apples vertical integration efforts can be seen as an example for taper integration as there are in-house as well as independent distributors and therefore should bear less risk for high bureaucratic costs (than in the case of full integration).

5.3.

Diversification

Diversification is the process of adding new businesses to a company that are distinct from its established operations. As Apple has recently engaged in the digital music player business which can be seen as distinct from its traditional persona l computer business, this can be regarded as a diversification activity. By taking a closer look at Apples step into the music player market with its iPod digital music player, various elements of Apples diversification strategy become obvious. For insta nce, Apple could transfer its distinctive competencies in the computer industry (technological innovation, quality, and creativity) to the music player industry and create an innovative, highperformance device which consequently attracted many customers d ue to its design, capabilities, and quality. Moreover, this is definitely an example for related diversification as there are obvious links to Apples core business which are highlighted by the iTunes music software that connects the iPod with the iMac and therefore creates the ultimate link between these two industries. In addition, the launch of the iPod shows that Apple uses internal new venturing as its preferred entry strategy because it possesses a valuable set of distinctive competencies that can be leveraged to the new business and because internal new venturing is generally seen as the typical entry strategy for related diversification activities. Furthermore, Apples new product didnt fail because there were no problems in terms of scale of entry, commercialization, and implementation and the companys R&D activities provided a strong basis for a successful internal new venture.

Strategy Follows Structure, Structure Supports Strategy

Strategy and structure are married to each other. If you change one you have to change the other. For too long, structure has been viewed as something separate from strategy. Revising structures are often seen as ways to improve efficiency, promote teamwork, create synergy or reduce cost. Yes, restructuring can do all that and more. What has been less obvious is that structure and strategy are dependent on each other. You can create the most efficient, team oriented, synergistic structure possible and still end up in the same place you are or worse. The Connection between Strategy and Structure Structure is not simply an organization chart. Structure is all the people, positions, procedures, processes, culture, technology and related elements that comprise the organization. It defines how all the pieces, parts and processes work together (or dont in some cases). This structure must be totally integrated with strategy for the organization to achieve its mission and goals. Structure supports strategy. If an organization changes its strategy, it must change its structure to support the new strategy. When it doesnt, the structure acts like a bungee cord and pulls the organization back to its old strategy. Strategy follows structure. What the organization does defines the strategy. Changing strategy means changing what everyone in the organization does.

When an organization changes its structure and not its strategy, the strategy will change to fit the new structure. Strategy follows structure. Suddenly management realizes the organizations strategy has shifted in an undesirable way. It appears to have done it on its own. In reality, an organizations structure is a powerful force. You cant direct it to do something for any length of time unless the structure is capable of supporting that strategy.

Porters five forces Analysis The primary competitive factors in the market for personal computers include the subsequent: Relative price to performance Product quality and reliability Design-innovation Availability of software and other applications Product features such as high speed microprocessor Marketing and distribution capability Service and support Availability of hardware peripherals Corporate reputation

Therefore, Michael Porters five forces model has to be applied to identify and emphasize possible opportunities and impending threats:

Risk of entry by potential competitors From a macroeconomic viewpoint, potential competitors are willing to enter a market if short term prices dont equal marginal costs by taking away market share from the established companies. Although high levels of competition among the existing producers can be observed in the PC industry, gaining access to the market isnt easy and thus unlikely. This seems to make the PC market an outstanding one a low market entry risk is though contradicting theory associated with vivid competition and tough price wars. The detailed reasons for that show up in the barriers to entry of an industry. The PC market doesnt have a high level of brand loyalty which implies that certain products arent more preferred by consumers due to high standardization, low patent protection, diminishing brand advertising efforts and lower product quality. This argument isnt valid for Apple where brand loyalty always played an important role. Apple achieves this brand loyalty through profound R&D and an emphasis on product innovation. Regarding cost advantages Apples situation behaves in line with the PC markets. For possible competitors its hard to enter as cost to do so are high. Existing market participants already manage their production operations and processes superior (e.g. Dells supply chain management, capital intensive PC production market), control particular necessary inputs (e.g. although qualified graduates are available on a constant basis the outstanding engineers and product designer are already employed by the existing companies) and are in a financially sound position (e.g. cheap fund raising). These elevated cost advantages make it very hard and even unprofitable to enter. Economies of scale provide the small number of dominating PC companies with another barrier to entry against the outside rivals. Dell and Co. are able to drive down costs by mass production of standardized goods (i.e. computer components merely are identical, even if customers are ordering different PC variations) and resource cheaply through increased parts purchasing. Furthermore, spreading overheads, marketing and advertising expenses as well as fixed costs over large fabrication volumes enhances the advantageous constellation for existing PC manufacturers. Entrants can therefore either explore the market on a small size by facing these economies of scale or bear the financial risks if moving in largely. As far as the issue of customer switching costs is concerned, the situation in terms of barriers to entry proves to be a mixed one. As they are mainly associated with software, PC hardware producers cant sustain their superior position if new competitors also use for instance the Wintel standard. If this doesnt hold and as Apples position demonstrates its prevented that PC hardware manufacturing entrants use the same software items, existing market participants maintain their

competitive advantage. Switching costs are kept up and arising lock-in and network effects make consumers less probable to purchase another PC offering different software. In addition to this, preservation of business for the existing enterprises occurs when their hardware has special features. In a more political context, go vernments regulations and restrictions can hinder or force the existence of barriers to entry. In Apples and its industrys example where the majority of companies operates on a global basis governments interference plays an important role but didnt ha ve much influence in the last years.

Rivalry among established companies As there was already stated, the PC industry is a highly competitive one. This means that rivalry is established at an increased level which is expressed by aggressive pricing policies, profound product design and innovation ambitions (e.g. Apples major efforts), intensive marketing, online direct selling (e.g. Dell and Apple), holistic support and after -sale services. All this shows that profitability isnt an easy goal to reach in the PC market as all its participants are applying ambitious cost as well as price structures. Regarding the industry competitive structure the PC sector is a consolidated industry being dominated by only a small number of large companies. Nevertheless, it cant be compared to an oligopoly due to the markets soared competition. Interdependent companies whose strategies and actions have direct effects on market share and profitability of the other industry participants often end up in finding themselves in so called competitive spirals. In the PC market, this proves to be valid as an especially for high-end manufacturers like Apple dangerous downward spiral came into existence. Although Apple never intended to follow the dominant industry company in terms of price, this often occurs by establishing an oligopoly. Moreover, the rivalry of the personal computer market is determined by the industry demand which is currently positioned at a very high level. Favourably for all the market participants it implies that from this point of view theres less rivalry due to a large number of spending buyers, visualised by the industry life cycle. The PC industrys exit barriers can be tremendous. An economic dependence on one specific industry which imposes huge risk if the entire sector goes bust exists in a considerable amount

of companies. Emotional factors that prevent executives to leave a falling market appear for instance in Apple case (i.e. CEO Steve Jobs sentiments as being one of the co-founders). The fact was argued that computer manufacturing is capital intensive which builds up impediments for exit strategies. This shows up in the number of assembly plants and manufacturing utilities, necessary for PC companies. The bargaining power of buyers A moderate industry demand and lots of small buyers result in a rather low bargaining power of purchaser in the current PC market. This means that buyers arent in the position to force companies to charge lower prices on the goods sold and therefore do nt make the impression of being a threat to them. Furthermore, in an industry of high switching costs for consumers, above all if software and to a narrower extent if hardware is concerned, consumer fluctuation is low. Client play offs of industry participants become obsolete and barriers to entry prevent them from producing their desired good themselves. This fact implies that buyers cant obtain bargaining power in the PC market once more. Interestingly, suppliers always move in the opposite direction which would leave them with huge bargaining power, as is discussed next. The bargaining power of suppliers In the PC industry, Porters fourth force states that the bargaining power of suppliers is a stringent one which imposes a threat (e.g. risk to Apple and the entire market. Although it doesnt seem that they are providing low quality items, companies such as Intel, Motorola or IBM (when only looking at microprocessor producers) possess the ability to squeeze out every drop from the PC industry a t the industrys current stage. These enterprises fulfil all necessary criteria for obtaining the bargain power by selling products without real substitutes, by having a diversified operations portfolio that assures their non-reliance on a specific sector and by exercising real dominance on the PC industry. Apple and its rivals would often face high switching costs themselves when changing to another supplier. For instance, if Apple quits its contract with Motorola and integrates new Intel microprocessors i n its devices this will adversely affect Apples position as a whole production process including customers preferences for the Mac will change. Nevertheless, theres to admit that this powerful position is only accessible for key component producers, not for all of them.

Substitute products A considerable amount of substitute products threatens Apples market situation as consumers easily can switch from one device to another. In spite of this, Apple persists to differentiate itself with their Mac computer series from the common PC market and therefore the company isnt as directly affected as Dell, HP Compaq or IBM. As theory taught us, Porters model is often amended with an additional sixth one and even seventh force. The first one defines complementors as value-adding institutions for specific products. In the PC industry these complementors can be found in form of software companies. A personal computer being equipped with, for instance Corel Graphics (Draw 11.0, PhotoPaint 11.0) and MS Project 03, will definitely sell better than one, just containing MS Office XP. For Apple these complementors are also represented by third-party software developers who are mostly independent freelancers or students and amount much less than Wintel standard program writers. The latter force tries to measure the relative power of unions, governments and special interest groups (i.e. stakeholders) who exert their individual interests on Apple.

Apples competitors, and their market/financial status In the middle of continuing cautious commentary from industry participants, the signs of growth in the US computer hardware industry are modest but accumulating. Consumer spending on PCs and electronics has been the primary bright spot to date, but a full hardware spending recovery is dependent upon growth in corporate spending and is not expected to be material in 2003. In the near term, highly competitive industry pricing conditions continue to challenge profitability levels for most original equipment manufacturers (OEM). However, over the longer term, the need for continued investment in wireless, e -commerce, and Web-based technologies remains clear.

Dell Inc. With a rating of A- , an expanding product line, a low-cost manufacturing model, and an efficient asset management Dell should be enabled to preserve double digit revenue growth and consistent profitability levels, despite highly competitive industry conditions. In addition, ratings are supported by ample liquidity (cash and investments total $11 billion) and a strong financial profile. Hewlett-Packard Co. With a boost from its seasonally strong fourth fiscal quarter, HP posted the highest revenue growth since its merger with Compaq Computer and achieved profitability in each of its major business segments. Due to highly competitive market conditions, HP's goal of attaining sustainable profitability in its PC segment will continue to be a challenge. However, excellent liquidity and significant free cash flow generation provide ratings stability despite continued earnings reliance on its printing and imaging segment. A credit rating of A- proves that too. International Business Machines Corp. Despite a challenging global economy and highly competitive industry conditions, IBM's diverse product and customer base supported modest four percent revenue growth in the September quarter and consistent profitability. Strong cash flow generation is expected to support internal investments, an active acquisition profile, and share repurchases. Debt protection metrics are expected to remain within acceptable levels for the rating of A+. Quanta Computer Inc. Quanta's operating performance and financial profile has been consistently satisfactory. The company is expected to report record high revenues and profit in 2003. The rating (BBB-) could be raised over the next one to two years if the company is able to continue reporting good operating performance and a solid financial profile, while demonstrating sustained diversification of product lines. Silicon Graphics Inc. A very low credit rating of CCC- could be further deteriorated if an exchange of convertible notes to common stock failures in the near future.

Stratus Technologies Inc. Despite ongoing declines in proprietary product sales, privately owned Stratus has stabilized revenues and improved profitability through new product introductions and cost reduction actions. Stratus is expected to maintain in EBITDA margins in the high tens as a percent of revenue, and modest free operating cash flow. Still, the potential for ratings improvement (B) is limited by Stratus' niche position in a highly competitive market. Sun Microsystems Inc. Sun's rating of BBB was placed with negative implications. This reflects the concerns about Sun's cost structure and ability to improve profitability, as well as uncertainty about the level and timing of a recovery in IT spending and increased market acceptance of lower-cost Windows and Linux systems.