What were Apple’s competitive advantages

During the end 70’s and beginning of the 80’s, Apple’s competitive advantages assured high profitability to the firm. Apple II and Macintosh were premium (priced) products that were very easy-to-use computers with appealing design and technical elegance. Despite the slow processor speed and the lack of compatible software, the combination of superior software and peripherals, giving “unmatched capabilities in desktop publishing”, allowed Apple to reach 8% of the world market and more than 50% of the education market in the US by the mid 80’s.

Also one other factor important for the high success of Apple in its early days is the fact that the operating system (OS) was a closed system, being therefore very difficult to clone. After some ups and downs during the 90’s decade, the strategy of Apple continued to base on differentiation. They offer high-quality, an exceptional design, the ease of use of their products, security, high-quality bundled software and in-store personalized service. At the same time, the incorporation of some standard interfaces (like USB ports) made Apple computers less closed systems, allowing the Mac customer to use non Mac peripherals with his OS.

In terms of technical features, the total Mac sales increased about 40% from 2006 to 2007 thanks to Intel’s dual-core technology for Apple’s laptops. This specification allowed Apple to build laptops that were faster and less-power consuming, and at the same time could also easily run Windows and other third-party OS. One of the main problems of Apple, the lack of Macintosh software, was now solved. As it was mentioned above, one of Apple’s recent competitive advantages is the in-store personalized service.

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This, of course, is directly related to the introduction of stores, important not only because those stores are sales locations, but also because it allows Apple to control the image of the brand and provide an excellent customer service. The success of Apple stores is also due to the “halo effect” of iPod and iPhone that attracted many people to the stores. The iTunes Music and App online store, together with the iPod and iPhone products, are also one of the main reasons for the increasing of sales of Mac computers. Analyze the dynamics of the PC industry. Are these dynamics favorable or problematic for Apple?

In our days computers are in most people everyday life and business and therefore computers are becoming even more a commoditized product. It is estimated that 1 billion of PCs are in use around the world! The PC industry has its origins in the mid-70s and it was dominated by IBM during its first decade of existence. By the early 90’s Wintels (Windows OS with Intel processors) replaced IBM computers as the industry standard. The market in those years already suffered some (fast) changes, as there were thousands of manufacturers (HP, Dell, Acer, Apple, and clone makers) building computers.

In terms of buyers, also some several changes were observed: the US was no longer the main customer of this industry. The main share of the average 15% growth of PCs goes to the emerging markets, to countries like India and China. At the same time, revenue growth didn’t grow, mainly due to the decreasing of prices of these products. The main suppliers in this industry are the component manufacturers, the OS software programmers and the Application software developers. In what component manufacturers is concerned, the industry is dominated by two players, Intel and AMD, to produce microprocessors.

These microprocessors are totally different in terms requirements and motherboard design, so if a PC manufacturer would think on changing the microprocessors of its products, it would also have to support high switching costs. The OS software programmers are resumed to one player, Microsoft Windows (about 90% of world computers run through Window platform). The Application software developers are mainly ISV’s, or Independent Software Vendors. In what buyers are concerned, we can divide them into 5 categories: home, small and medium business, corporate, education and government.

In the past years we have been assisting to several changes: the home segment is nowadays the most important of the segments (42% of computers were acquired by this segment in 2007), followed by the business customers. In order to respond to the many needs of these customers, PC manufacturers react offering broad products. At the same time, it also must be taken into consideration that these segments meet different requirements when acquiring a PC: the home segment is very price sensitive and has recently started to value the product design, the mobility and wireless capability.

The business customer makes his decision based on a combination of price an service. In terms of barriers of new entries, brands like Dell, Apple or HP are brand recognized and in a general way their clients are loyal to them, creating therefore difficulties for a potential new player in this market. Also the fact that most of these companies have good relationships with OEM allows them to benefit from economies of scale. The threat of substitution is high. Taking in consideration that the home buyer is the “best client”, there are several products that might be an alternative to computers, in particular laptops.

PDA’s, smartphones, or game consoles allow the consumer to run video, watch DVD’s, play games, or even surf the web. In terms of competitive rivalry, the market is dominated by 4 players, Dell, HP, Acer and Lenovo. Together, these companies are responsible for more than 50% PC shipments (2007 data). In a general way, these companies are adopting a strategy of improving design, R&D spending, and aggressive consumer marketing. According to this industry analysis, Apple’s position in the market might be of some concern.

One of the good and positive aspects of Apple’s strategy is the launching of complementary products to the Macs, like the Apple TV or home data centers. The strategy of differentiation and innovation has to continue to be adopted, as well as to build exclusive agreements and partnerships and OEM. Has Steve Jobs finally solved Apple’s long-standing problems with respect to the Macintosh business? In 1997, when Steve Jobs became the CEO of Apple, the firm was going through some problems with the Mac business.

These problems weren’t solved with Spindler and Amelio strategies, which were mainly the cost reduction (cutting of 16% Apple workforce and reducing R&D spending), and several deep payroll cuts. Apple was already incurring in several losses and something had to be done! Steve Jobs started to restructure the company: partnerships with Microsoft, development of core products such as Microsoft Office, end of licensing agreements (to avoid cannibalization of Apple’s computers), consolidation of the product range, outsourcing, changing of distribution system, and promoting the brand as “a hip alternative” to other brands.

But one of the most important changes was during 2006, four years after the launch of Mac OS X, when Apple’s computers also started to be equipped with Intel technology, allowing not only to reduce the technical specifications gaps between Macs and Wintel computers (Mac were slower in speed and more energy consuming) but also to use third-party applications (until then, Apple had to produce their own software because of its small market share). These measures, together with the synergies of iPod, iTunes and iPhone are responsible for the 33% increasing of Total Macintosh sales from 2006 to 2007.

However, Apple still remains in the 2-3% range worldwide PC market. As its products are premium priced, I think that some measures might have to be taken in consideration, such as to continue developing and improving the brand image in order to continue practicing premium prices in its products, to improve relationship with 3rd parties (for example, with music labels for iTunes, with NBC for the Apple TV or with 3rd party software developers) or to continue producing complementary products to Macs. The iPod-iTunes business has been a spectacular success. Has Jobs found a new formula to create a sustainable competitive advantage for Apple?

In fact, the iPod and iTunes and their synergies with Apple’s computers are one of the key drivers for the success of Apple. The launch of the iPod in 2001 and specially the introduction of iPod for Windows in 2002 simply boosted Apple’s sales. In 2003 the sales of iPods more than doubled in respect to the previous year. Its design, the easy to use system, its high margins (thanks to the use of flash memories instead of hard disks) and its reasonable selling price are some of the factors responsible for being such a hit. But it is in this very same year that the iTunes system is born.

This online service is the main factor for iPod’s success (in 2004, after the first year of iTunes launch, iPods sales almost increased 300% as of 2003; in 2007 the iPod accounts for 35% of Apple’s total revenue). This reveals the synergy between iPod and iTunes (and also iPhone). This competitive advantage is not difficult to maintain as Apple has in fact the best product in the market, in terms of hardware and an efficient easy to use online store. The only problem that might exist is in terms of relationships with the music companies. In order to maintain the market size, Apple has to improve on this subject.

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