Case 12 Apple Computer, Inc. (2000): Here We Go Again I. CASE ABSTRACT July 9,2000: It was ten days before the July 19, 2000 Macworld trade show in New York, when Apple Computer, Inc. Chief Executive Steven P. Jobs once again wowed the masses with his P. T. Barnum–style product introductions. First came the small stuff: a see-through plastic keyboard and a sleek mouse. Then, off came the covers from new versions of Apple’s popular iMac computer, now in four rich new colors, including ruby and indigo.
Finally the climax: an 8-inch cube-shaped Mac that packed Apple’s most powerful technology into a clear plastic case about the size of a toaster. The reporter from Business Week sent to the trade show gushed, “Since returning three years ago to the company he founded, Jobs, 44, has worked the most unlikely comeback since the 1969 Amazin’ Mets. ” Close to death in 1997 with mounting losses and shriveling market share, Apple was back to making the most stylish products. Revenues were up 17 percent to $1. 8 billion, in the quarter reported on July 18.
The stock was up eight-fold since Jobs returned. Stock analysts expected 25 percent plus revenue growth in the year that ends September 30, 2001. Thanks to the coolness factor of Apple’s products, the company was charging up to 25 percent more than its competitors for a machine with similar capabilities. That helped Apple gain a gross profit margin of 29. 8 percent in the quarter ending June 30. More amazing is that in a company known for its free-spirited, free-spending ways, Apple had become a master of operating efficiencies.
Jobs slashed expenses from $8. 1 billion in 1997 to $5. 7 billion in 1999. This was accomplished by outsourcing manufacturing and trimming inventories, shifting 25 percent of sales to an online store, and slicing the number of distributors from double digits to two. October 20,2000: Under the headline “Apple Computer Plunges 52 percent, Drags Down Rest of Market” the Wall Street Journal noted that on Friday, September 30, 2000 the value of a share of Apple Computer, Inc. ropped from $53. 00 to $27. 75 a share in heavy trading on the NASDAQ Stock Market. The loss came after the Cupertino, California, personal-computer maker issued a warning late Thursday that its fiscal fourth quarter profits were expected to be far less that expected. Apple Computer’s fiscal year 2000 ended September 30. By contrast, when embattled, Apple released a far direr news release prompting one analyst at the time to question “the viability of the whole turnaround plan. Apple’s shares fell just 18 percent that day. What is it about Apple that now had the market spooked? Decision Date: October 2000 2000 Sales: $7,983,000,000 2000 Net Loss: _______________________________
Copyright 2001 and 2003 by Thomas L. Wheelen and J. David Hunger. Reprinted by our permission for the Eighth and Ninth Editions of Strategic Management and Business Policy and Cases in Strategic Management. II. CASE ISSUES AND SUBJECTS Personal Computer Industry |Steve Jobs serves as | |Loyal Customer Base | CEO/BOD-Apple Chairman CEO-Pixar | |Strategy Formulation |Growth Strategies | |Concentration Strategy via |Search for CEO | |Horizontal growth |Executive Leadership | |Stages of Corporate Development |Executive Succession | |Corporate Governance |Turnaround Strategy | |Corporate Culture |R&D Strategy |Strategic Alliance |Differentiation Strategy | | Competitive Strategy |Technology and Innovation | | New Board of Directors |Marketing Strategy | | Education Market |Multinational Corporation | | Organizational Life Cycle |Distinctive Competency | | Strong Competition |Core Competency | | Evaluation and Control | | III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS (See Figure 1. 5 on pages 20 and 21) [pic] O = Emphasized in CaseX = Covered in Case IV. CASE OBJECTIVES 1. To illustrate the successful turnaround of Apple 2. To discuss the impact of Steve Jobs’ leadership style on the company 3. To discuss the impact of the turnover of top management and Board of Directors on Apple’s strategic management process 4.
To discuss what Apple’s management can do to keep its loyal customer base, in light of all the articles in media concerning its future viability as a company 5. To discuss the new Board and the roles of Steve Jobs and Larry Ellison (Oracle) 6. To discuss the impact and role of third-party software developers 7. To discuss the volatility of Apple’s stock 8. To discuss the role of proprietary versus open system architecture • Wang’s decision to keep its products proprietary almost caused its bankruptcy. 9. To illustrate the dynamics of the PC industry • Don’t forget PC, software, and chip manufacturers dominate the high-tech segment of the stock markets. 10. To discuss education market on Apple’s performance 11.
To discuss the fragmentation of the U. S. PC market and impact of clone PC companies on the PC industry 12. To discuss the role of foreign sales on the U. S. PC manufacturers 13. To discuss how much debt is available to Apple in the capital markets • Students can look up the debt/equity ratios of Apple’s chief competitors and use this to determine the long-term debt that Apple could support. 14. To discuss the impact of the semiconduct or industry on PC sales 15. To illustrate the opportunities and threats to a company in the personal computer industry 16. To discuss the role of strategic alliance and joint ventures in high-tech industries 17.
To discuss the role of software in the acceptance of new computer technology • To discuss what drives sales—new hardware or new software that accompanies the new hardware. 18. To show the effective use of differentiation strategies and to evaluate their effectiveness 19. To discuss the role and impact of new technology on this industry and, specifically, on Apple 20. To discuss the impact of the Internet on Apple 21. To discuss Apple’s dependency on sole suppliers 22. To discuss Apple’s core competencies, if any. 23. To discuss Apple’s distinctive competency and if it still exists V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1.
This case can be used alone or as part of Industry One, Internet/and Software or Industry Three, Computer Software Industry section comprising: Case 9 Oracle Case 10 Palm Computing Case 11 Handspring Case 12Apple Computer 2. This is a very high interest case for the students. They are surprised by the company’s poor performance and executive leadership turmoil. 3. The Apple case is an excellent case for individual case analysis or individual strategic audit. Students quickly get involved in the case due to their familiarity with the product. 4. This is an excellent case for a team presentation and team strategic audit. 5. Students can develop an industry analysis with this case. SUGGESTION FOR DAILY CLASS PARTICIPATION
We have found it is difficult to get quality daily participation from our students. We suggest the following: 1. Have the class members prepare—individually or as a team—(a) EFAS, IFAS, and SFAS or (b) just a SFAS for the assigned case. • We have one or two individual students of a team bring their EFAS, IFAS, and SFAS or just their SFAS on a transparency. We have found in this 75-minute class that SFAS alone as a transparency works more effectively. 2. We compare the student’s work with the team or individual students making the presentation to the class. • We also discuss how the Weights and Ratings were developed and Weighted Score for the case under discussion and pass it in. 3.
We ask each student at the beginning of the class to write down his or her Total Weighted Score for the case under discussion and pass it in. • You can use the results to call on students, whose scores seem to be out of line with the case. • It allows for a discussion of the Total Weighted Score as his or her overall evaluation of how the management of the company is managing the company’s internal and external environment. • We ask the students if they would buy stock in this company. Then the Total Weighted Score seems to have real meaning. VI. DISCUSSION QUESTIONS 1. What are the strengths and weaknesses of Apple Computer? 2. What are the opportunities and threats facing Apple Computer? 3. What are the strategic factors facing Apple Computer? 4.
Does Apple have any core competencies? If yes, what are they? 5. Does Apple have a distinctive competency? If yes, what is it? 6. What effect does the constant turnover of top management executives have upon the strategic planning process? On the company’s employees and the company’s culture? 7. How would you evaluate Steve Jobs performance since returning to Apple? 8. Can Apple Computer survive as a stand-alone company? 9. What impact did Apple’s management decision in the early 1980s, to keep its software proprietary, have on the present situation? 10. How important is software to computer manufacturers? 1. What drives sales—software or hardware? 11.
What impact do price wars have on the company’s sales and profits? Who wins a price war? 12. Why have the no-name PC manufacturers gained market share? What is their strategy and competitive advantage? 13. What role do strategic alliances play in making Apple a viable player in the PC market? 14. How well did Apple perform in a fiscal year? 15. Would you buy stock in Apple computer? 16. What is your prediction for Apple’s future? Be specific! VII. CASE AUTHOR’S TEACHING NOTE Not provided. VIII. STUDENT STRATEGIC AUDIT/STUDENT PAPER CURRENT SITUATION A. Recent Performance 1. Through quarter ended June 30, 2000, with a solid 29. 8 percent profit margin and revenues up 17 percent to $1. 8 billion.
The stock price had been up eightfold in the 3 years since the return of Steve Jobs. Three months later, the stock dropped 52 percent on warning of substantial decrease in profits. 2. Apple’s share of the education market is falling very rapidly: 1994=47 percent, 1999=16. 5 percent, 2000=12. 5 percent. 3. Good balance sheet; low debt levels B. Strategic Posture 1. Mission • (Implied) Keep up the “coolness” factor. Be producer of the most stylish products. • Represent “the intersection of art and technology. ” • Produce powerful, yet easy to use machines. • Generate “killer applications”—software that users can’t live without. 2. Objectives (Some of these are less quantifiable “goals. ”) (Implied) Improve operating efficiency (expenses down from $8. 1B to$5. 7B in 1999) • To hold on to the education niche (assume “stop the decline” and not “grow”) • To attract new software developers to the Mac platform • To increase online sales—now 25 percent of total sales (implied from past actions) • To attract more first-time computer buyers; improve “shopping environment” • To increase sales growth (not quantified)—new distributors, new retail chains, global push 3. Strategies (Most were implied. ) • Continue focus on efficiency; outsource where appropriate (e. g. anufacturing) • Enhance differentiation (real or perceived) from non-Macintosh platforms • Leverage recent acquisition of NeXT by integrating software technology • Extend alliances (e. g. Microsoft—key software packages for the Mac platform) • Reestablish a retail presence (through former retail networks or company stores) 4. Policies • (Implied) Promotion from within (based on the key positions for NeXT employees) • (Implied) Be innovation-driven, but stay operationally efficient NOTE: Innovation &operating efficiency seem mutually exclusive. The marketplace is demanding technological innovation. Too much focus on ops might conflict with the external environment. II. CORPORATE GOVERNANCE A. Board of Directors 1.
Eighty-six percent of the Board is external (the lone internal Board member is Steve Jobs) 2. The composition of the seven-member Board has not changed since the return of Steve Jobs in 1997. (Total tenure of the members is not mentioned. ) 3. Excluding Steve Jobs, four of the other six members are from information technology fields and yet another is from the biotechnology industry. 4. Most members hold very powerful positions at top-tier companies such as Oracle, Intuit, and Gap. 5. The activity of the Board is not explicitly mentioned, but the recent top-management shake-ups imply at least semi-active roles. (Top management seldom “kicks itself out,” but the Board might. ) 6.
Observation: It seems that this Board was very well selected. There are four IT experts, the head of a consumer-marketing firm (Gap, Inc. ), and an R&D expert (Genetech)—all fit in very well. B. Top Management 1. Six men, one women; average age—a surprisingly young 45 years old. 2. Four members came via the acquisition of NeXT in 1997. Note: It is unclear whether this was a case of Jobs taking the “cream of the crop” or simply granting open positions for coworkers. 3. Only one member had extensive sales experience; the majority was in operations roles. (Observation: This may explain some recent disruption of sales relationships and loss of market share. ) 4.
Two members had significant international exposure, but oddly the Senior VP of Worldwide Operations appears not to have prior to taking the position. 5. It is probably safe to say that this management team (along with Mr. Jobs) is largely responsible for the mostly successful turnaround since 1997 but also partly to blame for recent faltering. Note: It generally appears that this team is adequately poised to handle future challenges, but it is troubling that they would allow Apple to fall far enough (in market share) to start discouraging third-party software developers from developing much-needed new Macintosh-based applications. Also, the bungling of the education sales process indicates that marketing might not be as strong as thought. III.
EXTERNAL ENVIRONMENT (EFAS see Exhibit 1) A. Societal Environment 1. Economic Opportunities • Entering (or already in) a recession? Slowing economy = lower disposable income • Currency exchange rates—46 percent of sales are outside the United States • Lower interest rates = good cost of capital for new projects • Market crash = depressed prices for rival firms or complementary firms (acquisition targets) • Globalization; much larger potential market, in varying stages of development • Trend towards alliances; perhaps software developers could be brought in closer 2.
Technological • Greater information flows allows for more skilled workers in other countries • Constant innovation required in order to stay up with ever-shortening product life cycles • Risk of radical, revolutionary change (potential obsolescence) • Bandwidth improvements may change role of computers in the future • Adoption of industry standards can dramatically alter the landscape 3. Sociocultural • Demographic changes. Baby boomers might like “cool” products even if at a higher price. • Trend toward a more “wired” society continues. Continued demand for computer products. More telecommuting; separate office and home computers in the home (additional sales). • As wired youth grow, computers will be seen like TV’s—one in each room (additional sales). • Environmental issues remain important to consumers. 4. Political/Legal • Governments of developing nations may spend more on education market, stimulating demand of consumers, and providing future workforce. • International governments may spend on tech infrastructure, further developing new markets. • Local governments may have budgetary changes that could increase or decrease spending on updated computer equipment (a very important issue to Apple). • Patents on Apple technology may expire or be challenged in court battles. Movements toward free trade with other nations may lead to greater influx of competitors. B. Task (Industry) Environment 1. Rivalry is very high. Dell has lead in education market, is adding salespeople and forming alliances. Other firms have gained and are targeting other Apple markets. Apple’s education share is dropping. Recent softness of demand = high inventories in industry. This led to price-cutting, hurting margins. Large number of competitors and short product life cycles. 2. Threat of new entrants is low to medium. Entry barriers are high. Price competition requires economies of scale. Extremely short product life cycles require heavy R&D. Heavy marketing also needed.
Soft demand, declining margins, entry barriers, and fierce competition likely to limit large-scale entrants. Niche players or generics may emerge, however. 3. Threat of substitutes is high. Windows-based PCs of many kinds; computing devices other devices other than standard desktops such as: TV Web devices, hand-helds (PDAs, etc. ). 4. Bargaining power of suppliers is high. Key components such as microprocessors are available for limited number of firms, some of which may also be direct competitors. 5. Bargaining power of distributors/buyers is medium. Slightly more power than expected due to Apple’s fairly critical need for expanded sales. End users are price sensitive, but Apple users are brand loyal (57% of sales through third quarter 2000).
Distributors had been cut to two, but on increase—probably slightly diminished power. 6. Impact of other stakeholders (government, unions, etc. ) is low. No much mention of union. Government not too involved in regulation. Perhaps there are some environmental issues if byproduct of manufacturing process. 7. Impact of complementary producers (third party software developers) is high. Without them, Apple’s market will dry up unless sufficient in-house apps are developed. Microsoft can exert considerable pressure in return for the popular Office programs written for Mac. Note: This section was added due to the degree of importance to Apple’s existence. IV.
INTERNAL ENVIRONMENT (IFAS see Exhibit 2) A. Corporate Structure 1. (Implied) Apple’s history implies a rather “free floating” reporting structure, but the recent efficiency efforts may have caused it to be less so than in the past. 2. Apple manages business on a geographic basis (four segments: the Americas, Europe, Japan, and Asia-Pacific). Each segment provides similar services. B. Corporate Culture 1. (Implied) Implied loyalty. Jobs brought NeXT employees; only one executive departure since 1997. 2. Focus on innovation and distinctive products throughout organization 3. (Implied) Cofounder Steve Jobs is a very impassioned leader C. Corporate Resources 1. Marketing Amazingly, a former strength had turned weakness—education sales process bungled • Retailer relations became poor • Difficulty gaining share from former PC users • Key point: Appears to have learned from mistakes—relationships now improving; new distributors added: Sears and Wiz 2. Finance • Low degree of leverage (debt) can help fuel expansion • Fiscal Year 2001 is off to a very poor start. Cutting prices will hurt margins; company gave earnings warning for first quarter 2001 3. Research and Development • While sizable, R&D has not been growing as a percentage of revenue (5. % in 1998 versus 4. 76% in 2000). • The market demands innovation. • R&D experts on Board of Directors. • Some R&D like see-through, vivid colors; doesn’t add to function, but adds to “style and image” 4. Operations and Logistics • Almost half of sales overseas, but only two executives with much international experience. • Outsourcing manufacturing helped costs. Misjudgment of expected sales led to excess inventory and obsolescence in 2000. 5. Human Resources Management • Assumes good: loyalty implied, no union issues mentioned. 6. Information Technology • Not stated • Given industry they are in, assume very strong V. STRATEGIC FACTORS (SFAS see Exhibit 3) A.
Strategic Factors B. Review of Mission and Objectives 1. Overall mission appears appropriate, but sense of urgency in objectives seems lacking. 2. Many objectives are unstated, and others are merely goals—need quantification. VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY A. Strategic Alternatives 1. Current strategy implemented more effectively. Perhaps euphoria over Jobs return coupled with unsustainable rate of efficiency improvements caused the recent positive spin around Apple. But, the deterioration in education market is serve. Declining third party development of software is poised to significantly harm usefulness of Mac computers.
More aggressive moves are needed. 2. Other possible strategies: • Undertake a traditional competitive business strategy: Re-establish education dominance by intense, sincere commitment to marketing as well as price cutting. Regain the one market that really seemed to value Apple’s differentiated products. (Personal note: My family purchased an Apple in early 1980s because we knew they were used at my school. ) A more cooperative strategy may be needed given the severity of the (still continuing) market share decline. • Use debt capacity to aggressively buy up software producers and cutting-edge multimedia firms at market-crash depressed prices.
Full-blown assault with software applications. Speed up the new applications pipeline. Heavy R&D. Establish competitive advantage through leadership of captivating future multimedia uses of computers. Bring more PC users to Mac. • License out Mac o/s technology to clones in United States and abroad. Attempt to roll back time to mid-1980s when the Mac and the PC began the battle that left Apple a defeated niche player. But, differentiation requirements now are much higher to accomplish major shifts in operating system preference. Some developing markets may have potential for this strategy, however. B. Recommended Strategy Focus on software and multimedia.
Essentially this is concentric diversification, but into complementary products. Pouring retained earnings and new debt financing into software and multimedia will allow the Mac to be much more marketable to much more than just the large, but finite, education market. More rapid penetration of international markets could be possible. New, vastly superior videoconferencing technology may even open up the huge business market-where Apple is currently an “also-ran. ” The ability to capture share from PC users is critical. VII. IMPLEMENTATION Invest more heavily into consumer research. Survival dictates that Apple must target the right products instead of a shotgun approach.