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Module 6 Apple In April 2017 Apple formally opened its second…
Module 6 Apple
In April 2017 Apple formally opened its second corporate campus, Apple has a ring-shaped 2.8-million-square-foot building with walls of curved glass surrounding an inner greenspace courtyard. Part of a 175-acre campus, the facility would ultimately house more than 12,000 employees and was said to be one of the most energy-efficient buildings in the world. It was also the most recent and possibly the last evidence of the direct vision and innovation of Apple co-founder Steve Jobs. Originally envisioned by Jobs in 2011 as a center for creativity and collaboration, the building honors his legacy, his memory, and enduring influence on Apple and the world: The 1,000-seat auditorium that overlooks meadows and the main building is named the Steve Jobs Theater. Jobs, who died in 2011, would have turned 62 in February 2017. As Apple’s current CEO Tim Cook said, “Steve’s vision for Apple stretched far beyond his time with us. He intended Apple Park to be the home of innovation for generations to come.”1 Yet the pace of innovation at Apple has slowed considerably. Since Steve Jobs’s death, the only new products launched have been the Apple Watch and Apple Pay in 2014, and the Apple Music streaming service in 2015. The iconic iPhone, in FY2016 representing 64 percent of total revenues, is over 10 years old, and even though upgrades keep customers coming back, competition has eroded Apple’s smartphone market share such that 2016 iPhone revenues declined in three consecutive quarters, year over year. Mac computer and iPad sales have declined as well, with iPad revenues falling continuously since 2013: Apple’s FY2016 revenues were down by about 8 percent overall, gross profit fell by 10 percent, and net income was off by 15 percent, making 2016 the first financial setback for Apple since 2008. In this environment, a new campus that was reported to cost over $5B was considered by many to be a “huge investment of time and energy” and perhaps a distraction, keeping “management from running the business and innovating.”2 In addition, there was some concern that although research and development spending was up in FY2016, research output had not produced any recent meaningful breakthroughs. Speculation was that perhaps this new campus, with its emphasis on amenities such as a fitness center and movie theater, might have been designed to attract.
Company Background Founder Steve Jobs Apple Computer was founded in Mountain View, California, on April 1, 1976, by Steve Jobs and Steve Wozniak. Jobs was the visionary and marketer, Wozniak was the technical genius, and A. C. “Mike” Markkula Jr., who had joined the team several months earlier, was the businessman. Jobs set the mission of empowering individuals, one person-one computer, and doing so with elegance of design and fierce attention to detail. In 1977 the first version of the Apple II became the first computer ordinary people could use right out of the box, and its instant success in the home market caused a computing revolution, essentially creating the personal computer industry. By 1980, Apple was the industry leader and went public in December of that year. In 1983, Wozniak left the firm and Jobs hired John Sculley away from PepsiCo to take the role of CEO at Apple, citing the need for someone to spearhead marketing and operations while Jobs worked on technology. The result of Jobs’s creative focus on personal computing was the Macintosh. Introduced in 1984, with the now-famous Super Bowl television ad based on George Orwell’s novel Nineteen Eighty-Four,10 the Macintosh was a breakthrough in terms of elegant design and ease of use. Its ability to handle large graphic files quickly made it a favorite with graphic designers, but it had slow performance and limited compatible software was available. That meant the product as designed at the time was unable to help significantly Apple’s failing bottom line. In addition, Jobs had given Bill Gates at Microsoft some Macintosh prototypes to use to develop software, and in 1985, Microsoft subsequently came out with the Windows operating system, a version of GUI for use on IBM PCs. Steve Jobs’s famous volatility led to his resignation from Apple in 1985. Jobs then founded NeXT Computer. The NeXT Cube computer proved too costly for the business to become commercially profitable, but its technological contributions could not be ignored. In 1997 then Apple CEO Gilbert Amelio bought out NeXT, hoping to use its Rhapsody, a version of the NeXTStep operating system, to jump-start the Mac OS development, and Jobs was brought back as a part-time adviser.
Under CEOs Sculley, Spindler, and Amelio John Sculley tried to take advantage of Apple’s unique capabilities. Because of this, Macintosh computers became easy to use, with seamless integration (the original plug-andplay) and reliable performance. This premium performance meant Apple could charge a premium price. However, with the price of IBM compatibles dropping, and Apple’s costs, especially R&D, way above industry averages, this was not a sustainable scenario. Sculley’s innovative efforts were not enough to substantially improve Apple’s bottom line, and he was replaced as CEO in 1993 by company president Michael Spindler. Spindler continued the focus on innovation, producing the PowerMac in 1994. Even though this combination produced a significant price-performance edge over both previous Macs and Intel-based machines, the IBM clones continued to undercut Apple’s prices. Spindler’s response was to allow other companies to manufacture Mac clones, a strategy that ultimately led to clones stealing 20 percent of Macintosh unit sales. Gilbert Amelio, an Apple director and former semiconductor turnaround expert, was asked to reverse the company’s financial direction. Amelio intended to reposition Apple as a premium brand, but his extensive reorganizations and cost-cutting strategies couldn’t prevent Apple’s stock price from slipping to a new low. However, Amelio’s decision to stop work on a brand-new operating system and jump-start development by using NeXTStep brought Steve Jobs back to Apple in 1997.
Steve Jobs’s Return One of Jobs’s first strategies on his return was to strengthen Apple’s relationships with third-party software developers, including Microsoft. In 1997 Jobs announced an alliance with Microsoft that would allow for the creation of a Mac version of the popular Microsoft Office software. He also made a concerted effort to woo other developers, such as Adobe, to continue to produce Mac-compatible programs. In late October 2001, Apple released its first major noncomputer product, the iPod. This device was an MP3 music player that packed up to 1,000 CD-quality songs into an ultraportable, 6.5-ounce design: “With iPod, Apple has invented a whole new category of digital music player that lets you put your entire music collection in your pocket and listen to it wherever you go,” said Steve Jobs. “With iPod, listening to music will never be the same again.”11 This prediction became even truer in 2002, when Apple introduced an iPod that would download from Windowsits first product that didn’t require a Macintosh computer and thus opened up the Apple “magic” to everyone. In 2003 all iPod products were sold with a Windows version of iTunes, making it even easier to use the device regardless of computer platform. In April 2003, Apple opened the online iTunes Music Store to everyone. This software, downloadable on any computer platform, sold individual songs through the iTunes application for 99 cents each. When announced, the iTunes Music Store already had the backing of five major record labels and a catalog of 200,000 songs. Later that year, the iTunes Music Store was selling roughly 500,000 songs a day. In 2003 the iPod was the only portable digital player that could play music purchased from iTunes, and this intended exclusivity helped both products become dominant. After 30 years of carving a niche for itself as the premier provider of technology solutions for graphic artists, Web designers, and educators, Apple was reinventing itself as a digital entertainment company, moving beyond the personal computer industry. The announcement in 2007 of the iPhone, a product incorporating a wireless phone, a music and video player, and a mobile Internet browsing device, meant Apple was also competing in the cell phone/smartphone industry.
Apple’s Operations Maintaining a competitive edge requires more than innovative product design. Operational execution is also important. For instance, while trying to market its increasingly diverse product line, Apple believes that its own retail stores can serve customers better than can third-party retailers. By the beginning of 2017, Apple had 494 stores open, including 224 international locations. Some of these stores worldwide are considered architectural wonders, including the iconic Fifth Avenue glass cube in New York City. Apple has even received trademark protection for its retail stores’ “distinctive design and layout.”19 Partly due to the appealing design of both the shopping experience and the products being sold within, Apple retail stores generate more sales per square foot than any other U.S. retailer, including its closest luxury rival Tiffany & Co.20 To solidify its supply chain, Apple has entered into multiyear agreements with suppliers of key components. Apple has had historically excellent margins, partly because of its simpler product line, leading to lower manufacturing costs.21 Apple has outsourced almost all manufacturing and final assembly to its Asian partners, paying close attention to scheduling and quality issues. Outsourcing to Asian manufacturers is not without its problems, however. In 2012, headlines worldwide exposed China’s Foxconn manufacturing facility for labor abuses that led to worker suicide threats. Apple, as well as most other technology companies, audit of working conditions that found violations in wages, overtime, and environmental standards. Apple stated that it remained “committed to the highest standards of social responsibility across our worldwide supply chain,”22 and Cook announced that Apple might be bringing some of the production of Mac computers back to the U.S., starting in 2013. They could do this without affecting the company’s profitability, because of automation cost savings.23 Apple has also historically paid attention to research and development, increasing its R&D investment year after year. In the first quarter of 2017, Apple spent $2.9 billion on R&D, an increase of 4 percent from the previous year. As one of Steve Jobs’s legacies, Apple has traditionally kept the specifics of its research and development a closely guarded secret and fiercely protected its innovative patents. A well-publicized series of lawsuits in 2012 highlighted rifts between Apple and Samsung, both a rival and supplier. Samsung smartphones had captured more market share than Apple’s iPhones in the beginning of 2012, and Apple argued that Samsung had succeeded with both its phones and tablets only by copying Apple’s designs. Samsung replied by claiming that Apple had infringed on Samsung’s patents.24 U.S. intellectual property courts found in favor of Apple, but Japanese courts found in favor of Samsung. The ongoing battle meant Apple needed to look for other suppliers of chips and displays. Supply chain watchers pointed out that Apple still had a major challenge finding reliable suppliers for increasingly scarce components, and that the continued reliance on Foxconn as the sole manufacturer of the iPhone meant that any disruption there could have major consequences for delivery.
Status of Apple’s Business Units in 2017 The Apple Computer Business In the computer market, Apple has always refused to compete on price, relying instead on its reliability, design elegance, ease of use, and integrated features to win customers. An opportunity for increased market share was realized when Apple began using Intel processors in the iMac desktop and the MacBook portables, which allowed them to run Microsoft Office and other business software. However, in FY2016 Apple’s worldwide Mac computer sales decreased 10 percent over the previous year, continuing to signal the decline of this category since the introduction of the iPad in 2010. Overall it appeared that sales of desktop computers, especially, were slowing worldwide as the tablet and smartphone markets grew, and this was evident in the worldwide PC market share data from 2016, where only HP and Dell saw any growth (see Exhibit 4). Apple saw the greatest decline amongst its rivals, a decline also evident in its own revenue profile, which had seen the Mac’s share of Apple overall revenue drop from more than 40 percent in 2007 to just 11 percent in 2016, and slipping further to 9 percent in the first quarter of 2017.26 In 2017, Apple was planning to refresh the iM.
Personal Digital Entertainment Devices: iPod Although many analysts at the time felt the MP3 player market was oversaturated, Apple introduced the iPod Touch in 2007, intending it to be an iPhone without the phone, a portable media player, and Wi-Fi Internet device without the AT&T phone bill. The iPod Touch borrowed most of its features from the iPhone, including the finger-touch interface, but it remained mainly an iPod, with a larger viewing area for videos. Apple released the fifth-generation iPod Touch in September 2012, and a new version debuted in 2015. It was possible a seventh-generation might still be released in 2017. The device was still a cheap way to get entertainment, and used for portable gaming, this device plus a cheap phone for calling and texting was still less expensive than an iPhone.
Mobile Communication Devices: iPhone In 2007 Apple’s iPhone combined an Internet-enabled smartphone and video iPod. The iPhone allowed users to access all iPod content and play music and video content purchased from iTunes. Subsequent smartphone models increased the quality of the photo and video components to make even the digital camera or camcorder appear obsolete. By the fourth quarter of 2015 Apple had achieved almost 19 percent market share, in a close tie with Samsung (see Exhibit 5), and in July 2016 it sold over one billion units, becoming “one of the most important, world-changing and successful products in history.”
However, the smartphone market was increasingly turning into a battle between mobile operating systems. Apple’s iPhone, running on iOS, had considerable competition from Samsung’s line of smartphones. This was partly due to Samsung’s use of Google’s Android operating system. Historical worldwide leader Nokia stumbled badly with its outdated Symbian operating system and had to partner with Microsoft, using the Windows Phone operating system. By 2017 the operating system map had Android devices capturing the majority of market share. In recent years it has appeared some of the “cool” factor has disappeared from the iPhone. In Asian markets, especially, Apple’s shares of mobile devices has fallen sharply, losing considerable ground to Samsung, HTC, and other smartphones produced by Asian manufacturers. Younger users, the 20-something college students and fresh graduates, look for the next new thing, and that is increasingly an Android-driven device. Going into 2017, overall iPhone first quarter sales were up 4.5 percent from the previous year, but this may have been due more to Samsung’s Galaxy Note 7 exploding battery problems than to anything Apple did. The overall smartphone market was slowing down as mature markets were increasingly dependent on replacement purchases, and emerging markets appeared more interested in low-cost devices. Other than the removal of the headphone port in the iPhone 7, Apple had been unable to innovate the iPhone design or features in any major way, so if Apple wanted to address its declining market share, it might have to lower prices, which, given the iPhone’s major contribution to Apple’s bottom line ($215B or 64 percent of total sales in 2016), would make it difficult for the company to grow net income going forward.
Tablet Computer: iPad In April 2010 Apple released the iPad, a tablet computer, as a platform for audio-visual media, including books, periodicals, movies, music, games, and web content. More than 300,000 iPads were scooped up by eager tech consumers during the device’s first day on store shelves. Weighing only 1.5 pounds, this lightweight, portable, and touch-screen device was seen as a gigantic iPod Touch.33 Features like the sleek design, touch screen, multiple apps, and fast and easy-to-navigate software made the iPad popular in business, education, and the entertainment industry. The iPad was selected by Time magazine as one of the 50 Best Inventions of the Year 2010.34 Up until September 2010, Apple iPads accounted for 95 percent of tablet computer sales,35 but by the end of 2012, that figure had fallen to 78.9 percent, and by the end of 2016 Apple held only 21.5 percent of the market. The loss of share was partly due to tablet devices, such as Samsung’s Galaxy, that were based on Google’s opensource Android system. Other platforms and devices had also appeared, including Google’s Nexus, Amazon’s Kindle Fire, and Microsoft Windows’ Surface tablet.36 Going into 2017 there were signs that the iPad models’ sales, as well as the entire tablet industry were “going downhill,” partly due to the “jumbo” phones coming from the likes of Samsung (and Apple), and low-cost Google-based Chromebook laptops.
The Software Market Although Apple has always created innovative hardware, software development also has been an important goal. Software has been Apple’s core strength, especially in its computers, due to its reliability and resistance to virus infections and resulting crashes. The premier piece of Apple software is the operating system. The iOS allows Apple to develop software applications such as Final Cut Pro, a video-editing program for professionals’ digital camcorders; GarageBand, for making and mixing personally created music; the iTunes digital music jukebox; and iWork, containing a PowerPoint-type program called Keynote and a word-processor/page-layout program called Pages.
iTunes Arguably, Apple’s most innovative software product is iTunes, a free downloadable software program for consumers running on either Mac or Windows operating systems. It is bundled with all Mac computers and iPods and connected with the iTunes Music Store for purchasing digital music and movie files that can be downloaded and played by iPods, iPads, and the iPhone, and by iTunes on PCs. Although the volume is there, iTunes has not necessarily been a profitable venture. Traditionally, out of the 99 cents Apple charges for a song, about 65 cents goes to the music label; 25 cents for distribution costs, including credit card charges, servers, and bandwidth; and the balance to marketing, promotion, and the amortized cost of developing the iTunes software. However, if not wildly profitable, iTunes is still considered a media giant, especially with its over 35 million songs, 2.2 million apps, 25,000 TV shows and 65,000 films available in its database as of 2017.
The App Store In March 2008, Apple announced that it was releasing the iPhone software development kit (SDK), allowing developers to start applications for the iPhone and iPod Touch and sell these third-party applications via the Apple App Store. The App Store was made available on iTunes, and it was directly available from the iPhone, iPad, and iPod Touch products. This opened the window for another group of Apple customers, the application developers, to collaborate with Apple. Developers could purchase the iPhone Developer Program from Apple for $99, create either free or commercial applications for the iPhone and iPod Touch, and then submit these applications to be sold in the App Store. Developers would be paid 70 percent of the download fee iPhone or iPod Touch customers paid to the App Store, and Apple would get 30 percent of the revenue. In September 2016, over 140 billion apps were downloaded from Apple’s App Store,48 but Google Play, the app store for Android users, was gaining ground, with 65 billion downloads in May 2016, indicating that Google might be attracting top-tier developers and quality titles to its marketplace.
Apple Pay Introduced in late 2014, Apple Pay allowed iPhone 6 and 6 Plus users in the U.S. to make secure payments for goods and services using their phones. With over 1 million credit and debit card activations within the first 72 hours of its release, Apple Pay was intended to replace the user’s wallet, and, according to CEO Tim Cook, would “forever change the way all of us buy things,” primarily because the process was more secure than a traditional card-based transaction. Major retailers such as Macy’s, Walgreens, McDonald’s, Whole Foods, and Disney had all agreed to accept Apple Pay. Apple reportedly received 0.15 percent of each purchase, making the service a potentially lucrative venture. Competition was coming from Google Wallet, especially given Google’s 2015 acquisition of technology from Softcard.50 Google Wallet had also seen an increase in usage as the Apple Pay system was launched, but usage of these payment forms appeared to have peaked in 2015, such that by 2017 nearly 49 percent of Apple Pay users reported that they didn’t use the service anymore because they were happy with existing payment methods; they believed plastic cards were just fine.
Other Products: Apple Watch, Apple TV and Apple Music Apple Watch was the first all-new product since the iPad, and therefore CEO Tim Cook’s most ambitious gamble. Once again, Apple was not the first company to enter the wearable tech space, following the lead of Samsung, Sony, and Motorola, and competing against fitness trackers produced by Nike, FitBit and others. However, Apple’s preorders for the launch in 2015 indicated demand would run to a combined five to six million units of the three watch models. This category was a bit of a departure for Apple as it had positioned the Watch as a personalized device, with the market segmented between mass market and luxury.54 In 2017, the Apple Watch was the number 1 smartwatch, and the third largest maker of wearable devices behind Fitbit and China’s Xiaomi
Product Extensions, Growth of Services, Mergers and Acquisitions Rumors in 2015 surfaced that Apple had acquired resources, primarily engineers and related technology, that would enable it to develop an automobile, ready for market by 2020. Speculation was that the Apple would not do the actual assembly, but as with its other products, would use its sophisticated supply chain expertise to outsource manufacturing, focusing its considerable innovation skills on the design and sales of a product that incorporates Apple technology in multiple configurations. By 2017, rumors had spread that Apple would not pursue the actual automobile, but instead was investigating the development of self-driving car software, using its “heavy investment in machine learning and autonomous systems.”58 With the existing hardware products all appearing to languish, analysts are looking to Apple’s services and “other products” for growth opportunities. This category, which includes Apple Pay, Apple Music, iCloud, iTunes, and the App Store, grew 24 percent as of FY2016 to a fourth quarter record of $6.3 billion, and in the first quarter of 2017 accounted for 9 percent of all revenues. In addition, making this sector more attractive, profit margin estimates average almost 39 percent, ranging from a low of 15 percent for Apple Music to a high of 85 percent for the App Store One final opportunity for Apple in coming years comes from the company’s positive cash flow. Accumulating cash over the years from 2012, Tim Cook has positioned the company to be able to bid for acquisitions in related industries or spend to develop vertically within the Apple ecosystem. Apple has not made any significant acquisitions since Beats in 2014, but speculation has been growing, with analysts supposing targets such as Tesla, Pandora, or even Disney. In addition, Apple has been internalizing supplier components, especially semiconductors, in search of performance and power consumption advantages. This means Apple might eventually ditch current highly integrated suppliers such as Intel and Qualcomm in favor of in-house solutions. This would increase Apple’s ability to move in new directions, and truly be innovative in hardware and component design.
The Future of Apple Under Cook, Apple has transitioned itself “from being a hypergrowth company to being a premium, branded consumer company.” Apple is a truly vertically integrated designer and marketer of products that increasingly inhabits a world “dominated by the Internet of Things.” Apple just loves “designing great stuff,” and can use its current products as “building blocks and core components of future, more important products.” Some of those future products might include enterprise software, augmented reality glasses, automobile on-board navigation systems, solar power systems, and anything else that takes advantage of the Apple ecosystem.66 Why not? However, going into 2017 there was no doubt in some analysts’ minds that Apple was no longer the growth engine of innovation it once was, instead becoming “a value company with lots of hungry competitors seeking to eat away at its market share.” Tim Cook was entering his seventh year as Apple’s CEO, and although acknowledged as “a significant leader in his own right,” he has yet to be identified as one to infuse new energy and emerge with a major breakthrough product. One analyst said, “the creative legacy and marketing savvy of Steve Jobs will be forever in the background of Apple, even as Cook and future company leaders seek to continue Apple’s innovations and industry disruptions.”
Follow Case Template
Case Study Template
Issues: Identify at least seven issues you see in the case
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What is the Key issue you see in the case: __________________________
What facts pertain to the case: Identify at least three important facts that pertain to the case
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What assumptions do you plan to make in your analysis: None is an acceptable answer
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What people and organizations may have an impact on the case: There should be at least five.
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You are writing the case from the perspective of which person or organization: ______________
What tools of Analysis would you use in this case: You only need to identify them and explain what information each will give you that you feel is important.
Based upon the above information – provide three alternatives.
Alternative 1 is the Status Quo or to do nothing different that the current situation.
Identify at least three arguments in favor and three against this approach.
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Alternative 2 ____________________________________________________
Identify at least three arguments in favor and three against this approach.
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Alternative 3 ______________________________________________
Identify at least three arguments in favor and three against this approach.
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Recommended Alternative
Given the information above select your recommended alternative and explain why you feel it is the best alternative: This should take five to seven paragraphs and be based upon the information presented in your case. The recommendation is made to the decision maker you identified. You need to justify why this is the best alternative. (I have no preselected alternative and what I am looking for is your ability to support a given recommendation.)
