There is not a single mobile phone handset that has stayed atop of the market for over three years. Initially it was Nokia, Motorola and Alcatel which dominated the market. But that Era ended by the entry of Apple Inc. and the Chinese brands and lately Samsung that has taken the market so fast.
Samsung took the lead in 2012 from Apple Inc. which sold 25.000 units in the first weekend after lunch.
Samsung is fighting Apple Inc. by its heavy weapon which is the “low cost”. While Apple Inc. is still stuck with its high differentiated expensive products.
The latest report by market research firm IDC shows that Samsung shipped about 56 million smartphone units in the third quarter of 2011 — double its delivery in 2012 in the same quarter.
Currently, Samsung Electronics is leading the market by selling the most and gaining the most, providing excellent quality with low cost, but Apple Inc. still has the weapon of Research and Development…
Apple Inc. History
Many of us know Apple Inc. but we think that most of Apple users don’t know its history. So we will give a brief summary about Apple Inc. history. Apple Inc. is a multinational corporation which produces consumer electronics, software and commercial servers such as personal computers, Smartphones and Entertainment electronics.
Apple Inc. was established on April 1, 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne. Steve Jobs and Steve Wozniak were friends and both were interested in electronics. Wozniak designed his first hand-built computer to use it for chatting. This computer was built by Wozniak in 1976. This hand-built Computer was called the Apple 1. Steve Jobs who kept an eye on future, insisted that with Wozniak and Wayne should try to sell the machines. Apple was established to sell the Apple 1 personal computer. Apple 1 was shown to the public at the Homebrew Computer Club and was sold as a System board with CPU, RAM, and basic textual-video chips. It went on sale in July 1976 and was market-priced at $666.66 that is equivalent to $2723 in 2012 dollars.
At the beginning, Steve Jobs was said to own 45% of the company as well as Steve Wozniak, and Wayne with 10%. Apple was incorporated in January 3, 1977 in Cupertino California without Wayne who sold his share of the company for Jobs and Wozniak for a reported $800. On April 16, 1977 Apple II or Apple 2 was introduced and it was differentiated from Apple I in its parts. In 1980 Apple went public with $22 per share, generating more capital than any IPO (Initial public offering) since Ford Motor Company in 1956. In 1984, Apple launched the “Macintosh” by a television ad.
After the success of the Macintosh LC, Apple was doing incredibly well by introducing fresh new products and increasing its profit. Apple realized that producing Apple II series was very expensive, so in 1993 it stopped producing the Apple II series. At that time Microsoft was gaining market share with windows focusing on delivering software to cheap personal computers while Apple was delivering a richly engineered but expensive experience. In 1994, Apple allied with IBM and Motorola in the aim of alliance. The goal was to make a new computing platform which would use IBM and Motorola hardware coupled with Apple’s software. In 1985 Steve Jobs left Apple and this was a major problem in the decline of the company. He came back in 1996 and he had a big role in returning the company to profitability. In 1997 Macworld Expo, Steve Jobs announced that Apple would join Microsoft to release new versions of Microsoft office for the Macintosh and that Microsoft made $150 million investment in non-voting Apple stock.
Return to Profitability
In August 15, 1998 Apple introduced a new all-in-one computer reminiscent of the Macintosh 128K and iMac. The iMac featured modern and unique design, and sold almost 800,000 units in its first five months. Between 1998 and 2005, Apple purchased several companies to create a portfolio of professional and consumer-oriented-digital production software. In 1998 Apple announced Macromedia’s Final Cut software, signing its expansion into the digital video editing market.
Apple achieved widespread success with its iPhone, iPod Touch and iPad products, which introduced innovations in mobile phones, portable music players and personal computers respectively. In addition, the implementation of a store for the purchase of software applications represented a new business model. Touch screens had been invented and seen in mobile devices before. But Apple was the first to achieve mass market adoption of such a user interface that included particular pre-programmed touch gestures.
Since 2007 till these days Apple Company is producing more products of different types and different uses. And the company is being one of the biggest multinational corporations that have a huge market share all over the world, and many companies are coping its products like Samsung, the first and biggest competitor to Apple in the Smartphones Industry.
Samsung Electronics History
Samsung is a South Korean multinational corporation, headquartered in Samsung Town, Seoul. It comprises numerous subsidiaries and affiliated businesses. Most of them are united under the Samsung brand, and is the largest South Korean Center. Notable Samsung industrial subsidiaries include Samsung Electronics (the world’s second largest information technology company measured by 2011 revenues).
Founding Samsung Company
In 1938, Lee Byung-chull of a large land-owning family in the Uiryeong country came to the nearby Daegu city and founded Samsung Sang hoe, a small trading company with forty employees located in Su-dong (now “lngyo-dong”). It dealt in groceries produced in and around the city and produced its own noodles. The company prospered and Lee moved its head office to Seoul in 1947. However, when Korean War broke out he was forced to leave Seoul and started a sugar refinery in Busan named Cheil Jedang. After the war in 1954, Lee founded Cheil Mojik and built the plant in Chimsan-dong, Daegu. It was the largest woolen mill ever in the country and the company took on the aspect of a major company. In the late 1960s, Samsung Group entered into the electronics industry. It formed several electronics-related divisions, such as Samsung Electronic Devices Co. Samsung Electro-Mechanics Co. Samsung Corning Co. and Samsung Semiconductor & Telecommunications Co. and made the facility in Suwon. Its first product was a black-and-white television set.
After the death of Lee in 1987, Samsung group was separated into four business groups: Samsung Groups, Shinsegae Group, CJ Group and Hansol Group. Today these groups are independent and they are not part of or connected to the Samsung Group. In the 1980s Samsung Electronics began to invest heavily in research and development.
Samsung Going International 1990 to 2000
Samsung started to rise as an international corporation in the 1990s. Samsung’s construction branch was awarded a contract to build one of the two Petronas Towers in Malaysia, Taipei 101 in Taiwan and Burj Khalifa in the United Arab Emirates. Samsung became the largest producer of memory chips in the world in 1992, and is the world’s second-largest chipmaker after Intel. In 1995, it created its first liquid-crystal display screen, Ten years later Samsung grew to be world’s larger manufacturer of liquid-crystal display panels. In 1997 Asian financial crisis occurred, at that time Samsung survived compared to other major Korean companies. However Samsung Motor was sold to Renault at a significant loss. As of 2010 Renault Samsung is 80.1% owned by Renault and 19.9% owned by Samsung.
Samsung, 2000 to Present
In 2010, Samsung announced a 10-year growth strategy centered around five businesses. One of these businesses was to be focused on biopharmaceuticals, to which the Company has committed 2.1 trillion. In December 2011, Samsung Electronics sold its hard disk drive (HDD) business to Seagrate. In the first quarter of 2012, Samsung Electronics became the largest mobile maker by unit sales, overtaking Nokia, which had been the market leader since 1998. In the August 21st edition of the Austin American-Statesman, Samsung confirmed plans to spend 3 to 4 billion dollars converting half of its Austin chip manufacturing plant to a more profitable chip. The conversion should start in early 2013 with production on line by the end of 2013.
On August 24, 2012 a U.S jury ruled that Samsung had to pay Apple Incorporated US$1.05 billion dollars in damages for violating its parents on smartphone technology. Samsung decried the decision saying that the move could harm innovation in the sector. In the first trading after the ruling, Samsung shares on the Kospi index fell 7.7% and that was the largest fall since October 24, 2008 to 1,177,000 Korean won. Apple then sought to bar the sales of eight Samsung phones (Galaxy S 4G AT&T, Galaxy S2 Rocket, Galaxy S2 T-Mobile Galaxy S2 Epic 4G, Galaxy S Showcase, Droid Charge and Galaxy Prevail) in the United States which has been denied by Judge Koh. On September 4, 2012 Samsung announced it plans to examine all of its Chinese supplier’s labor policies.
Smartphones – Development Stages
Smartphones are mobile phones that require advanced mobile operating systems with high computing capability and connectivity. The first advanced mobile phone or smartphone merged the functions of PDA (Personal Digital Assistant) and mobile phone, and that was in 1973 but they were offered for sale in 1994, and the term “Smartphone” did not appear until 1997, when Ericson introduced its first Smartphone “GS 88 Penelope”. Later on, functions and add-on like media players, digital cameras, GPS navigation, web browsers and High-resolution touchscreen
were also added to many modern Smartphones.
The first prototype that incorporates PDA functions and a mobile phone was developed and demonstrated by IBM (International Business Machines Corporation) in 1992 at the COMDEX computer industry trade show. And then, it was offered in 16 August 1994 by the American telecommunications holding company “BellSouth”, under the name “Simon Personal Communicator”, it was a handheld, touchscreen cellular phone and PDA. It was distributed in the United State of America between August 1994 and February 1995 selling 50,000 units. “Simon Personal Communicator” had the ability to send and receive emails that contains smiley faces through its touch screen display, and it had many other applications like calendar, address book, touch screen keyboard, worldwide clock, games and electronic notepad.
In 1996, Nokia reached its bestselling phone and it was the Nokia 9000 “Communicator”, part of the Nokia Communicator line. It was a handheld PC which is smaller than any laptop, and it is also called “Palmtop”, combined with a PDA (Personal Digital Assistant) from HP (Hewlett-Packard). Nokia and HP installed the GEOS V3.0 operating system to Nokia 9000 to provide E-mail and Web services.
Before talking about operating systems, we want to mention that the majority of old mobile phones had only basic phone features, so many people carried PDAs beside their mobile phones, running old OS (operating system) like BlackBerry operation system, Palm operating system and Windows Pocket PC operating system. Later on, these operating systems evolved into mobile operating systems and support many of new Smartphones.
Mobile Operating Systems
Symbian OS – Nokia
Now, let’s talk briefly about new Operating Systems that support the newest Smartphones, especially Android and iOS. But first, we’re going to talk about the successor to Symbian OS and Nokia Series 60, the Symbian Platform which was first released by Ericson in 2000 when they introduced their touch screen Ericson R380 Smartphone, and this was the first device to be marketed as a “Smartphone”. Later in the same year, Nokia released its Nokia 9210 communicator, also with Symbian platform. After that, Nokia rose to power and released the first camera phone and first Wi-Fi phone “Nokia 9500”, and the Nokia E90 included GPS.
BlackBerry – RIM
RIM (Research In Motion Limited) went further and made the first BlackBerry device with data, voice, messaging and organizer applications in 2002 marked the first “True Smartphone”.
Android – Google
Android is the open source platform founded by Google and 83 major hardware and software developers such as (HTC, Sony, Dell, Intel, Motorola, Qualcomm, Texas Instruments, Samsung Electronics, LG Electronics, T-Mobile, Sprint Nextel, NVidia, Wind River Systems…) who made the OHA (Open Handset Alliance) to develop open standards for mobile devices. HTC Dream was the first Smartphone to use Android, branded for distribution by T-Mobile as the G1, its software included Google applications such as Maps, Calendar, Gmail, and a full HTML web browser. “Google Play” Or ”Android Market” is a digital application distribution platform for Android. It is developed and maintained by Google, it was launched in 2008. It allows members to download applications, movies, magazines, books, music that were published through Google.
iOS – Apple Inc.
The first iPhone was introduced in 2007 by Apple Inc. (an American multinational corporation headquartered in Cupertino, California that designs, develops, and sells consumer electronics, computer software, and personal computers). IPhone was the first Smartphone to use multi-touch interface which refers to a touch surface’s ability to recognize the presence of two points of contact with the surface. Apple Inc. was the first Corporation who introduced a Smart phone with large touchscreen for direct finger input instead of a stylus.
The second version of iPhones was introduced in July 2008 with lower price and 3G support. At the same time Apple lunched the App store which allowed any iPhone holder to install free and paid applications. The App Store was very popular, it marked over 1.000.000.000 downloads in its first year, and 15.000.000.000 by 2011.
iOS 4, was the first operating system that include APIs to allow third party application to multitask, it was introduced by Apple Inc. in June 2010. iOS 4 was used in iPhone 4 with an improved display and front facing camera for video conferencing and other improvements. iOS 5 is the fifth version of iOS mobile operating system from Apple Inc. is was preceded by iOS4 and succeeded by the last version of iOS mobile operating system, the iOS 6, which was released on September 19,2012.
Windows Phone – Microsoft
And the last operating system we are going to talk about is the “Windows Phone” that was introduced by Microsoft on February 2010. It included a completely new over hauled User Interface (UI) developed by Microsoft’s “Metro Design Language”. It included full integration of Microsoft services such as Microsoft Office, Xbox Music, Xbox Video, Xbox Live games, but also integrates with many other non-Microsoft services such as Twitter, Linkedin, Facebook and Google accounts.
The introduction of Apple’s Application Store (App Store) for the iPhone and iPod-touch in July 2008 popularized manufacturer-hosted online distribution for third-party applications focused on a single platform.
Following the success of Apple’s App Store other smartphone producers quickly launched application stores of their own. Google launched the Google-Play that also called Android Market, RIM launched BlackBerry App World, and Nokia launched Ovi Store. The relatively high revenue of U.S. $5782 million in 2012 for Apple’s App Store compared to rival’s stores can be endorsed to a mixture of factors. In big part this can be credited to having the biggest number of applications available and the highest download volume of any mobile application store in 2010, but besides that only 28% of the applications in Apple’s App Store were free applications, compared to over 57% in the Android Market. Similarly, Nokia’s Ovi Store and the BlackBerry App World both had only 26% of their applications available for free, but both generated higher revenues than the Android Market (Google Play) despite having much lower download volumes.
For several years, the demand for Smartphones has beaten the rest of the mobile phone market. According to a 2012 survey, around 50% of the U.S. mobile holders own Smartphones and could account around 70% of all U.S. mobile devices by 2013. In the 25–34 age range Smartphone ownership is reported to be at 62%.
The European mobile market, according to an Olswang report in early 2011, the amount of smartphone adoption is accelerating as of March 2011 22% of United Kingdom consumers had a Smartphone, with this percentage rising to 31% amongst 24 to 35 year olds.
In China, smartphones represented more than 51% of handset shipments in the second quarter of 2012. But we also notice that Apple Inc. is failing in China to other competitors like Samsung and Lenovo.
Worldwide smartphones beats the share of non-smartphones in profit share. According to a study note from Canaccord Genuity, Apple Inc. holds 52% of the total mobile industry’s operating profits, while only holding 4.2% of the global handset market. HTC and RIM similarly only make smartphones and their worldwide profit shares are at 9% and 7%, respectively. Samsung, in second place after Apple at 29%, makes both smartphones and feature phones but doesn’t report a breakdown separating their profits between the two kinds of devices.
Since Communicators in 1996 until 2011 Nokia was dominant in the smartphone market. However Nokia has more recently been joined by other rivals in the market. According to the report of Strategy Analytics, Samsung passed Nokia in smartphone shipments with an estimated 27.8 million units shipped in the third quarter of 2011.
Apple exceeded Nokia worldwide by revenue and profit in the second quarter of 2011, and Apple’s profit share increased to 66.3% while Nokia reported a loss.
Between the second quarter of 2010 and the second quarter of 2011 Nokia’s worldwide Symbian smartphone sales fell from 38.1% to 15.2%, while Samsung smartphone sales increased worldwide from 5% to 17.5%. As of the first quarter of 2011, Nokia had already announced plans to switch to Windows Phone (operating system by Microsoft).
In the first quarter of 2012, and after 14 years in the market, Samsung exceeded Nokia in units sold. Samsung also taking pole position in smartphones with 44.5 million smartphones sold or 30.6% market share, while 35.1 million iPhones sold or 24.1% market share.
Currently the vast majority of smartphones are produced in China, Taiwan and Mexico, for corporations based in the U.S. (Apple, HP, Motorola), South Korea (LG, Samsung), Canada (RIM), Finland (Nokia), Taiwan (HTC) and the U.K. (Sony Ericsson).
Michael Porter’s Forces | Industry Structure
Mobile phone technology is driven primarily by two things the wireless network and the mobile handset. The mobile phone use cases have changed exponentially from a “telephone” on the run model to personal “mini” computer on the run. With the accelerated growth of internet the web is no longer limited to the personal computer and laptops but much more beyond that, ubiquitous internet comes into the picture. The point to be noted is that users are expecting a similar user experience from their handheld devices. This has triggered the need of mobile phones with a stronger operating system which makes the mobile phone smarter creating not only a richer web experience with always on data connection but also allowing users to do other personal day to day tasks and communication activities.
The above graph clearly depicts the growth of smartphone category and its contribution to the total mobile phone sales. In 2006, smartphone contributed to almost 8% of the total handset sales and now in 2009 it almost contributed to 15.3% with an average year on year growth of 30% for the last four years. Whereas considering the overall handset sales in mobile industry, it was almost flat in 2009 due to recession and with an average of 6% year on year growth. This shows smartphone is going to be the category which will fuel the mobile industry and supporting wireless network industry growth. The wireless network operators have already started deploying faster and fatter piped 3G networks to support this huge surge of data flowing in and out of the hungrier and smarter devices.
If we deep dive into this mobile industry and more into the smartphone industry, we can see the game is changing. The mobile wireless industry forces were dominated only by the powerful network operator’s network and mobile device manufacturer’s hardware design. But now the success of a mobile device manufacturer is no longer limited to the hardware design of their mobile devices but instead is powered by multiple functionalities, more features, and the demand for near web- user experience on mobile devices. So what is the differentiator? It’s the Mobile Operating System and software platform which is and will be the key differentiator in carving out a richer user experience and the bucket of features satisfying these new generation data hungry “always on” users. I.e. Always on the web and always on the move (ubiquity).
The dynamics between network operators, mobile OEM is being acted upon by different industry forces. Let’s apply Porter’s five force analysis to smartphone industry and analyze the threat levels to the incumbents.
These forces have great effect on the OEMs and there has been a relative shift in power from the manufacturers to the OEM smartphone OS developers in terms of accountability for sales and services. The primary example being Google Android System with Droid (Motorola), Android (HTC), Symbian (Nokia(all), Samsung i8910 Omnia, Sony Ericsson Satio, LG KT615). The success of the phone is tied directly with the OS’s performance, brand, sales and the support expected. We have already seen with T-Mobile Sidekick (Windows Mobile OS), Nexus by Google (Android) service issues with users seeing the OS as the main force behind their smartphones.
Symbian OS is the world leader in Mobile Operating Systems with a substantial market share followed by RIM’s Blackberry OS and Apple MAC OSX. Though Symbian has lost its market share over two years due to phenomenal success of Apple iPhone in consumer world and Blackberries in enterprise world but the latest move by opening the Symbian OS platform to the development community will definitely result in a better user interface design, lots of apps and hence a better user interface to combat with likes of iPhones and Blackberries. But, all eyes are on Google Android Operating System gaining traction in the smartphone market, cashing in on its brand equity and reputation. The recent Google Nexus’s launch was a clear example of the world’s leading search engine and online advertiser employing its marketing muscle, indicating a start to an intense battle between the smartphone operating systems in claiming its supremacy.
But what is the outcome of this intense rivalry?? In first case why is this rivalry? The answer is the mobile user’s pyramid of needs which a smartphone tries to satisfy with the ultimate goal of taking the user to the tip of the pyramid.
The above pyramid highlights the priorities and needs of the users which integrate with their mobile phones. The most important basic needs are at the bottom of the pyramid, whereas the richer experience creating needs are top of the pyramid. The smartphone which fulfills all the needs right from the bottom to the top of pyramid will stand out to be the most successful smartphone. And, the Smartphone OS is the key element for the user reaching at the top of the pyramid. From smartphone manufacturer point of view the top of the pyramid is the key differentiator in gaining a competitive advantage. Apple iPhone has succeeded in taking the user experience to the topmost level with its huge and wide variety of apps from its app store.
In the next part we will conduct a comparative study in this battle of operating systems. We will chalk out what differentiates these OS and makes the mobile phone smarter. We will also analyze the apps (app stores comparative business model), which brings the ultimate satisfaction to the smartphone user and hence prove to be the biggest differentiating factor in the smartphone market.
Apple competitive environment
For any firm that wants to understand the nature of the competition they are facing, they have to define their market perfectly, by identifying all their real competitors.
For Apple it was very hard to identify their real competitors in the Smartphones Industry. After they were engaged in a war with Motorola Mobility, apple made a huge advancing step on Motorola by Smartphones innovation, after inventing iPhone 3, Motorola couldn`t follow up with apple`s huge improvement in Smartphones technology, but in 2011 a new Era of competition started when Samsung Android Smartphones rose, releasing Nexus S, Epic 4G, Galaxy S 4G, and the Samsung Galaxy Tab in 2011 and 2012.
In April 15, 2011 Apple and Samsung went to the District Court for the Northern District of California. It was easy for both companies and customers to find the clear similarities between iPhone 3GS and Galaxy i9000 S, so the competition was in more than one field concerning mobiles industry. The two parties were competing in terms of style and operating systems and each one of them was trying to show his strength for consumer in their products. The low price of Samsung mobiles was a very heavy weapon in the competition and it is still being used in Samsung strategies. However Apple Inc. still charging high prices on their high quality of mobile phones and other products in invading the markets, we`ll explain these two aspects in details through.
Major strategic groups
Since its start in 1976, apple purses a differentiation advantage, this strategy was always followed by a huge marketing campaign, as they always tried to differentiate their Macintosh from any other product in the PC industry. We should always mention that Steve Job`s strategic decisions is considered a major differentiator and a main competitive advantage for Apple. Job`s was continuously trying to capitalize Apple`s competitive advantage, he never competed on price.
Two types of strategies are available for managers to use in their decision making, the In-Out and the Out-In strategies. Apple was able to use the In-out strategy in through the production of its revolutionary smart phones. The idea of creating a Smartphone was from inside the company, planned, implemented, and manufactured by the company`s engineers and employees. The need of a Smartphone and the technology that was already in their hands, helped Apple to create these Smartphones and designing it typically from scratch as its used to do in its older invention, using the unique chips, disk drives and monitors.
Key success factors
Key success factors for Apple can be illustrated by Innovation and Quality.
Apple has always been very innovative in the computer industry manufacturing. Through their extraordinary R&D, Apple always managed to launch PC innovations on the market. Beside the capital expenditures on equipment, real estate, leasehold improvements and data centers, apple used a very smart form of investing (spending now, reaping benefits later) is the spending on research and development (R&D).
Apple`s current CEO Tim Cook stated about innovation: One of Apple co-founder Steve Jobs’ key lessons was to skate to where the puck will be, a figure of speech borrowed from hockey that boils down to anticipating the key action, and avoiding the late hit. Instead of relying on what the customer says they want — on a market research survey, for example — Jobs insisted on defining needs that consumers didn’t know they had.
By the innovation strategy that apple has been using since the last decade apple are considered the first movers in the mobile and PC industry, and Samsung are followers, since apple recognized before any other competitor the need of the customers and how to use its assets to create a new idea to meet expectations.
Beside the great effort that apple`s managers put on R&D to reach innovation, apple insists on releasing a new product every few years that seizes the public’s attention worldwide preserving the high quality of its products, this aspect had always differentiated apple`s products,
Apple’s senior vice president of industrial design Jonathan Ive declared: “Our goal and what makes us excited is to make great products”
It’s quite clear that iPhone and the iPad filled a void in the market in the way they function, not the products themselves. Apple has developed their mentality and focused on their quality by narrowing there production “simplified product line” For example there’s only one version of the iPhone. If you want an Android phone, there are literally dozens of manufacturers out there. All feature phones with different specs, screen sizes and variations of the operating system running them.
It’s not a accident that make apple the leader in producing and selling Smartphones and Tablet computers, the quality of their products from the Macs, iPhones and iPads make it easy for Apple to take the lead in the internal and global market, besides their marketing strategy they were relying on 4 major aspects: “success by design, pricing, distribution and hype”. Apple`s design was always unique, the style and volume of the iPhone and the iPad, same as its operating system, makes it reliable and easy to use, so customers will directly buy a product that offer simplicity.
Apple never thought about low pricing as a marketing weapon, but in some markets apple was obliged to lower its selling prices to be able to compete ensuring the same high quality. Apple spends considerable resources to expand its stores so that it can get its prospects’ undivided attention. Apple’s promotion strategy is centered on making hype. You always know about Apple`s products months before its released, not by huge marketing campaigns, but by making a hype and big fuss about the new products.
PLC (product life cycle)
Apple relies on the first buyers (Skimming) to make its profits, lodgers and second buyers are not the ones who pay high amounts to the company. Observing the product life cycle study of apple, you can find that apple always releases a new product or a development directly when the maturity zone ends, the growth of apple`s products sales increases dramatically from the release of a specific product.
Value chain analysis
Value chain is the added value that firms contribute from raw materials until finished product.
There is an important inter-firm value chain that all departments are involved in reducing costs as follows:
Firm infrastructure, HRM, Technology and Procurement.
Apple uses its very developed technology, its HR, available skills and the ability to pay huge budgets on R&D and manufacturing etc. the added value on apple`s product during the value chain process is what makes it special, though sometimes apple was obliged to use outsourcing as in Google earth and maps case, or in buying microchips from other companies, even manufacturing in china is considered outsourcing of labor and low taxes manufacturing locations. But the quality never changed, followed by a very smart marketing strategy, which makes the sales of the manufactured products easy. Moreover, using the six beta strategy added more value on the production of apple`s products, it reduced the margin of mistakes in production.
Apple lost PC market because of ignoring industrial changes
The PC industry has evolved in the past decades. There are 3 phases. Let’s take a look at these phases and Apple’s position in each phase.
How Apple survives in competition
The structure of computer industry is a monopolistic competition which characterized by a lot of competitors due to unsecure entry. That what made the market saturated and fragmented and make only small market share can be gained by every improvement.
This industry is also characterized by strong supplier and consumer bargaining position, due to the few number of the first and the low searching cost and switching cost to competitors. All these circumstances create pressure for Apple that purchases component with higher prices. Thus, Apple couldn’t reach the margin that it wants.
Those following factors: a lot of competitors, fragmented market, low margin, and low market share create very tough condition for Apple. The history and facts show that once Apple dominated the market, but due to inability to adapt with competition in market Apple lost to only 3% market share in 2001.
How Apple responds to the dynamic of innovation
Apple and all computer producer firms depend on components and software from suppliers. Among of them, without neglecting the importance of other components, processor is the core component of computer because the general performance of computer is usually associated with processor speed.
The rapid innovation of processor, approximately every quarter by Intel Company, put no choice for computer producers including Apple except to adopt the new technology. The ignorance of adopting such new processor will create competitive disadvantage for Apple especially when competitors acquire before it.
Besides, computer also requires core software which is called operating system to provide environment for applications. Microsoft which shares with more than 80% PCs using Microsoft Windows is the main operating system competitor of Apple. In addition, the high and expensive switching cost from Windows to MacOS, make it harder for Apple MacOS to get back market share.
This situation is hardened since Microsoft releases new version of operating system approximately every two years. To keep in pace, Apple has also to respond by innovating at least the same frequency with Microsoft’s Windows.
The pressure coming from processor innovation and rapid release of competitor operating system represents the dynamic of innovation which requires apple respond good. While responding fast of those dynamics will result a short product life cycle, failing responds to these dynamics will create competitive disadvantage for Apple.
How Apple responds to the continuous changing market needs
Market demands and market needs are continuously changing. There is trend of migrating PC demand from developed countries to developing countries such as China, Malaysia and Korea. This moving of demand has to be responded by Apple in order to better manage its resources and manage its marketing strategy.
Macro environment is a far environment which comprise of several forces that raise strategic issue to Apple. These forces are politic force, economic force, social force, and technology force which well known as PEST.
The first force that influences computer industry structure is rapid and sustained technical progress. Each year, integrated circuits and other electronic components become better, faster, and cheaper, providing opportunities for improving existing computers as well as designing a new kind.
As computer comprises of hardware and software, Apple is really affected by technology innovation forces around it. Rapid innovation on hardware by component producers (Intel, AMD) and software by competitors (Microsoft) as well as complementary products from partner gives no choice for Apple except responsively catching the new hardware technology and also continuously innovating to sustain differentiation.
Starting from 1976, Apple created personal computer. Apple created the hardware by assembling components, create operating system (MacOS) and develop applications. That time, as Apple controls both hardware and software, Apple can make personal computer that deliver great personal experience compare to its competitors.
That time, IBM was the main competitor for Apple. In 1981, IBM changed into open structure. This move brought new competitors such as Intel and Microsoft.
All these rapid innovations put Apple in a big circumstance of strong technological forces. As Intel released a faster processor every quarter Apple failed to respond with comparable or faster processor which create a competitive disadvantage for Apple.
Moreover, Microsoft which dominates operating system producer for Intel based personal computer made the situation harder and harder for Apple, as it release a new version of windows every two years. This creates a pressure for Apple to upgrade MacOS since this costs a lot. Due to the lack sharing market of MacOS it is difficult for Apple to cover its R&D cost from the revenue.
In addition, the open system adopted by Microsoft and Intel and the network size of Windows attracts many Independent Software Vendors (ISV) breed in order to create application for Wintel platform. The rapid innovation of Windows operating system and the increasing number of applications for Wintel platform make Windows Intel platform more valuable and thus create additional pressure for Apple especially high switching cost for consumer to switch to Apple.
Monopolistic competition characterizes computer industry. A lot of existing competitors in the industry (IBM, Dell, HP, Compaq, Ben Q, Asus, Gate Way, Lenovo, and Acer) and low entry barrier allow new entrant to enter the industry easily and thus increasing more competition. Supplier bargaining position is strong due to small number of processor suppliers (Intel, AMD, and Cyrix). Customer bargaining position is also strong due to low searching cost and low switching cost. Both of these characteristics constrain companies in the industry to get only low operating margin. Apple is also affected by this economic force where Apple has to choose between low prices to boost market share or premium price but lower market share.
Comparison of operating margin
Comparison of market share in US
While setting up strategies, competitors must take into consideration the level of development in each country which affects the purchasing power.
Dynamic change of life-style
Different and dynamic change of needs and lifestyle push Apple to continuously innovate to adapt with it. Lifestyle and need of customers are continuously changing. The motives of customers on buying computer can be segmented into the following:
- Entertainment. Costumers in this segment need better graphics and better sound thus this segment needs computer to have faster processing power, graphical purchasing power and good sound system device.
- Travel/mobility. Customer in this segment need smaller, lighter computer as well as longer time of battery life.
- Everyday computer. Customer in this segment need computer for day to day activities such as office system. This segment need more reliable computer to accomplish its task.
- Interconnectivity. This segment needs computer with faster and reliable communication device.
- Server. This segment needs computer with high processing power, available and reliable for running continuously non-stop.
- Status. This segment needs computer with great brand and brand new design.
Dynamic change of demands
Market demand is continuously changing. Data from 1995 to 2003 shows that there is trend of decreasing PC demand on developing countries such as US, Japan, Singapore whereas the trend of increasing demand moves to emerging countries such as China, Malaysia and Korea. This moving of demand has to be responded by Apple in order to better manage its resources and manage its marketing strategy. Denying this dynamics will produce resource inefficiency, cost competitive disadvantage and infectivity of marketing strategy.
Hardware production and share of total global production
Environmental issues force Apple to be friendlier with nature.
Nowadays societies become more concerned about the environment which increase the pressure on Apple and oblige it to reconstruct its issues toward nature. For example removing the toxic chemicals from its new products and recycle its old ones.
How environmental changes could influence the strategy
Our past and current life shows us our future and how our environment will change. The rapid increasing of technological innovation is affecting customer needs, the saturation and fragmentation of market. This will make it more complicated and disturbing for Apple. Thus, Apple strategy must be flexible so it can be reshaped based on internal and external environmental analysis and have to be adapted continuously as a response of the dynamics of environment. As environmental changes go strategy must be.
Since the return of Steve Jobs as Apple CEO, Apple response to the environmental change shows improvement to the company revenue. Apple selling on MacBook shows increasing trend which represent the successfulness of Apple strategy.
Mac unit sales
Apple response to the environmental change
Apple shows a great improvement by responding to the environmental changing. Struggling to survive and searching for a new source of income, Apple tried to create a new business model since it kept losing in personal computer industry. Deciding to enter digital media sector Apple comes up with iPod and iTunes which achieve success due to its innovative design, easy to use and large to storage.
Apples business model for the iPod generates money in many different levels, hardware, software and on the accessories. When Apple introduced the iPod it was not a new product. The mp3 players had existed for some time without being a big success, but customer preferences were changing rapidly. Apple quickly saw a new market and created an inferior music player with a great design. Apples most decisive move was to create a web shop with hundreds of thousands of licensed songs. Soon Apple was making big money both on the iPod and the music – a dream scenario for most companies. Songs bought at the Apple music store can only be played on iPods but this has not affected the sales so far. Apples margins on the iPod Mini is on average about 35% and $0.25 on each sold song. At the end of 2004 Apple has sold 10 million iPods and 250 million songs.
With this innovative approach, as he did previously with home computers, Jobs has developed a new market: that of legal digital music, which in 2005 reported $1.1 billion in sales to the record companies, as compared to 400 million from the previous year.
Apple improves design to create differentiation and offer with premium price. To gather back its market share in personal computer and mobile computer, Apple conducts differentiation strategy. Apple creates very distinctive and innovative design that simplifies the size of computer, increase the artistic look of its products.
Apple perception map
Apple also reduces product category to ease consumers. Currently Apple no longer creates too many product variations in order to ease consumer choosing products.
Apple also transforms its marketing channel by using exclusive delivery channel. In order to manage its brand as high class and high quality product, Apple chose to transform its retail channel into exclusive store. The openings of Apple Stores are in order to extend the reach of the external distribution channel.
To respond with dynamic of innovation and create competitive advantage, Apple leaves IBM and does alliance with Intel as a response of rapid innovation of processor. After IBM cannot afford Apple to provide processor that is faster to Intel, Apple has no other source that capable providing high-speed processor. Apple moves and does alliance with Intel, as both of the company can create mutual benefit to compete AMD for Intel and MS Windows for Apple. Apple currently uses Intel processor for its new computer and laptops for the next five years. This strategy gives benefit to Apple as it is allowing Microsoft Windows to run above it in turn it reduces the risk, cost and barrier for customer to switch from Microsoft to Apple platform. The Mac Mini is expected to be the first Apple computer to use Intel chips, with the entire product line switching by the end of 2007.
Apple’s move to Intel is thought to have come about because of IBM’s reluctance to expand the number and range of PowerPC chips it makes. Furthermore IBM has yet to produce a version of the G5 chip that would be suitable for use in Apple laptops. IBM has the contract to make PowerPC chips for Microsoft’s imminent Xbox 360 console, Sony’s forthcoming PlayStation 3 and Nintendo’s future game-playing machine. As a result the cash it gets from making chips for Apple has become a very small slice of its revenue.
In responding social pressure on environmental issues, Apple recycled 13 million pounds of e-waste in 2006, which is equal to 9.5% of the weight of all products Apple sold seven years earlier. We expect this percentage to grow to 13% in 2007 and to 20% in 2008. By 2010, we forecast recycling 19 million pounds of e-waste per year — nearly 30% of the product weight we sold seven years earlier.