History of Apple Computer 2002 and the PC Industry

1. Analyze the structure of the personal computer industry over the last ten years. How have the dynamics of the PC industry changed?

2. Has Steve Jobs solved the “problem”? What should Steve Jobs do today?

The majority of the general population may think that the PC industry arrived along with Bill Gate’s “Windows” package and “Apple’s” “I think, therefore iMac” statement, but in reality the modern computer age began in 1971, when Intel built the first microprocessor chip in an attempt to provide more technologically adept “Calculators”.

No-one could have foreseen the way the PC would influence and become an integral part of our lives. Technology has advanced at unforeseen rate and this couple with the fact that competition has never been higher means that the structure is constantly changing. However I will attempt to outline the Structural changes that have occurred over the past decade making full use of Porter’s Five-Forces Framework for Industry analysis.

Five-Force Framework for Industry analysis.

Michael Porter developed an industry framework model that showed what he supposed the five forces that influenced the “normal” competitor in the Industry. It was originally designed to show the “attractiveness” of an Industry for individual firms in terms of profits, but I feel that it would be ideal to illustrate how the dynamics of the Personal Computer Industry have changed over the last ten years. The general model is shown overleaf.

Diagram of Porter’s 5 Forces

SUPPLIER POWER

Supplier concentration

Importance of volume to supplier

Differentiation of inputs

Impact of inputs on cost or differentiation

Switching costs of firms in the industry

Presence of substitute inputs

Threat of forward integration

Cost relative to total purchases in industry

BARRIERS

TO ENTRY

Absolute cost advantages

Proprietary learning curve

Access to inputs

Government policy

Economies of scale

Capital requirements

Brand identity

Switching costs

Access to distribution

Expected retaliation

Proprietary products

THREAT OF

SUBSTITUTES

-Switching costs

-Buyer inclination to

substitute

-Price-performance

trade-off of substitutes

BUYER POWER

Bargaining leverage

Buyer volume

Buyer information

Brand identity

Price sensitivity

Threat of backward integration

Product differentiation

Buyer concentration vs. industry

Substitutes available

Buyers’ incentives DEGREE OF RIVALRY

-Exit barriers

-Industry concentration

-Fixed costs/Value added

-Industry growth

-Intermittent overcapacity

-Product differences

-Switching costs

-Brand identity

-Diversity of rivals

-Corporate stakes

Five-Force Framework for PC Industry.

Suppliers.

It must be noted that the majority of profits are to be made through the production and development of software while the actual assembly of the computer is less profitable.

Switching Costs; Intel and Microsoft have combined their power forming a business agreement where most PCs are now Wintel. Their establishment in these dominating positions is based on their technological advancement. To rival this the normal manufacturer would have to spend many billions of dollars over a number of years. The cost for most PC manufacturers of switching away from the Wintel combination would be absolutely huge and so Wintel have massive power. In their infancy these firms obviously had less power and this is reflected in their market value. Intel has almost doubled in value since 1996 while Microsoft has trebled. This has changed the dynamics of the computer industry immeasurably.

Differentiation of Inputs; All these companies have limited power as the Operating Systems and the Microprocessor are almost solely controlled by Microsoft and Intel respectively. Other more basic parts which make up the motherboard have many sources and consequently those suppliers have significantly less power. Ten Years ago the OS was not monopolised by Microsoft. It only really came about with the arrival of Windows 3 and so Apple, which had been the forerunner, was forced to take a back seat.

Presence of substitute inputs; This is almost negligible at the quality that is required.

Impact of inputs on cost or differentiation; It used to be the case that around 7% or 8% of the Computer Industry’s profits were spent on Research and Development but as this has now fallen to 4% as there is wide spread acceptance of the lack of differentiation that is possible. This results in the suppliers of the OS and microprocessor have almost unfettered power and without them it would be practically impossible to exist in any competitive capacity.

Substitutes

Relative Price Performance of Substitutes; A number of substitutes for some of the functions that the PC performs have appeared. These include the Playstation 2 (PS2), Palm Pilots, WAP mobile phones, Interactive Televisions. The PS2 is both an entertainment system and a “fully functional desktop computer”. It can play DVDs and CD-ROMs and also can connect to the broadband network. Priced at $300 it has a high performance relative to price on some of its functions. Palm Pilots cost about $99 and serve a number of business functions and there are also “snap on peripherals such as a modem, keyboard and digital camera.” WAP phones can cost as little as $100 and provide internet access. Ten years ago none of the above products were even a twinkle in their inventor’s eye. There was no real substitute available partly because the technology was in such infancy that alternative uses had not been imagined.

Buyer propensity to substitute; Most consumers who won one of the above products also own a PC and so as full blown substitutes they have not yet materialised. However over the next couple of years this could all change. However in a survey “more than 70% surveyed by “Nngroup” thought they were unlikely to switch to the WAP technology in the next year.”

Switching Costs; Depending on the substitute used the prices of alternative technology products range from $99 to $300.

New Entrants

Brand Identity; Dell makes built to order products and effectively uses others materials and only is involved in assembling while Compaq began by selling IBM compatible clones “White Boxes” are PCs without national brands and there predominance is illustrated by the fact that they “accounted for 23% of the market in North America, 50% in Europe and Asia and over two thirds in China”. In this sense Brand Identity as a major entry barrier is falling and perhaps will not be relevant in 3 years time. Brand identity used to be more important as consumers were less informed about the specifications available so bought a brand rather than a desktop.

Capital Requirements; Michael Dell began by assembling computers for order in university in 1984. The reason he could do this at the beginning with minimum capital was because he only began to build once he was paid. This philosophy has stayed with his company today and one can place an order online and receive your fully assembled computer in 36 hours. Thus capital requirements should not impinge on a budding entrepreneur starting shipping PCs to order. On a small scale this has not changed dramatically in the past ten years.

Access to necessary inputs; It remains possible to buy a motherboard, a microprocessor, memory storage and peripherals (monitor, key, and mouse). As mentioned in the article it is possible to produce a desktop computer for $730. This is what Michael Dell did 15 years ago.

Access to Distribution; Dell and Compaq distribute from central offices in response to orders placed. In late 2001, 59% of Compaq’s US sales were made online or by phone. From May 2001 Apple till the end of that year Apple had set up 27 company owned stores selling just Apple products.

Expected Retaliation; New Entrants would be largely ignored initially by the big 4 dominant firms because of the negligible market share that these infant firms would hold. If a new entrant became established then it may be bought up and integrated into a larger company as Apple did to Steve Jobs later project “NEXT”.

Buyers

Brand Identity; This is low, and getting lower, therefore giving buyers more power as there conscious or otherwise draw towards some products is removed. Ten years ago only the very few computer literate bought PCs and so they were perhaps as unconscious as today’s consumers of brand identity but for different reasons.

Switching Costs; these are very small for individuals due to the frequency with which new products are purchased due to technology advancing. For Businesses this cost can be higher due to the network which many have set up. Ten years ago the prices were relatively so much higher that in absolute terms the cost of switching was also greater.

Ability to backward Integrate; this is out of the question due to the market value of the firms involved. The market value of all the firms involved was significantly less in the past so the possibility of this occurring was marginally higher, but still unlikely.

Substitute Products; there are few exact substitutes to the desktop but some of its functions are provided by items such as the WAP phone and Palm Pilots. These were unavailable in the past

Buyer Information; Paradoxically buyer information is higher due to the Internet, thus increasing their power.

Fragmented Buyers; No buyer, bar perhaps the government in some states, could be said to buy significant amounts of computers to give them significant power.

Producers supply critical portions of buyers’ input – distribution of purchases as is the case with Intel’s relationship with PC manufacturers.

Rivalry

Industry Growth; from 1996 to 2001 the four major computer vendors have seen a monetary growth of $176,456 from $159,213 billion to $335,669 which is a percentage growth of 47.4%. The number of firms beside these big four like NEC, Gateway and Toshiba, has also increased thus further heightening rivalry. This growth merely reflects that which had begun many years earlier.

Market Growth; The overall market growth means that firms will fight for market share. Dell and IBM have been successful here while Compaq has been more disappointing.

Switching Costs; there are very low switching costs again intensifying rivalry.

Brand Identity; this is decreasing as shown by the number of “white boxes” that are beginning to dominate the market on many continents, especially prevalent in China. Ten years ago was perhaps more important for reasons given earlier.

Diversity of Competitors; the similarity between producers is becoming more apparent but ten years ago companies had different philosophies as reflected by Apples relatively high budget expenditure on Research and Development in an attempt to provide innovative technology.

Storage Costs; These are quite low, depending on the vendor as the majority of computers are now made to order which was pioneered by Dell.

The dynamics of the computer industry have changed enormously. This is partly due to the huge leaps in technology which have presented us with the opportunity to fully exploit this new technology but also due to the economic ingenuity of people like Bill Gates and Michael Dell.

Apple History

In five years during the 1990s Apple had four CEOs each bringing with him a new idea of the direction the company should take. However the Apple story had begun many years before that in a garage in Los Altos, California. By 1980 Apple had become the market leader in what was by then a billion dollar industry. Due to the obvious possibilities for abnormal profits to be made IBM entered the PC industry and by 1982 Apple’s market share had fallen to 6.2%. Between 1983 and 1984 Apple’s net income fell 17% and consequently Jobs was effectively sacked.

John Sculley took over and with his aggressive management style he managed to stabilize Apple’s worldwide market share at 8%, or $5.6 billion, while Apple were the most profitable PC Company in the world. During this period “Apple controlled the only significant hardware and software alternative to the IBM standard” while also being able to sell its products at premium price. In an attempt to capture market share Sculley believed that they needed to enter the lower end of the market and he formed an alliance with IBM to form a revolutionary new OS. In 1993 as pricing pressure hit Apple Sculley was replaced by Spindler. There was a brief resurgence in Apple’s fortunes over this period but by 1996, and showing severe quarterly losses Amelio replaced Spindler as CEO. His philosophy was to return Apple to its historical premium-priced differentiation strategy. It did not work. During Amelio’s time Market share fell to an all time low of 3% and in mid-1997 was forced out and replaced by Steve Jobs.

The Problem

It would be fair to say that Steve Jobs had a “problem”. The market value of Apple had slumped to 1,671 million, which was comparable to its 1982 value even though it now employed double the number of full-time employees. Apple’s share of the PC market worldwide had fallen from a 17% high to a 3% low with the share price lower than at any time since 1985.

“The Solution”

Jobs immediately signed a $150 million deal of investment by Microsoft; Apple’s stock immediately shot up to a yearly high. He then removed what he viewed as the “Canniblaisation” of the Mac by refusing to license their OS. The iMac was launched in August 1998 and was a massive success. It was low enough priced to enter the lower end of the market and so bring Apple to a wider audience and therefore increase market share. Jobs successfully changed Apple’s image with the help of the advertising agency TBWA Chiat/Day and a massive marketing push. “I think, therefore iMac” became the slogan to encapsulate Apple’s new direction. Under Jobs Apple was streamlined from producing 15 products to 3 and abandoning costly lines such as the Newton and a portable computer aimed at the education market. Apple once again brought it back to the edge of entertainment technology by entering into peripherals such as the MP3 player iPOD.

Jobs also had ideas about distribution to solve “the problem” and he followed in Dell’s lead and began to offer products to the consumer directly over Apple’s website. He also stopped supplying to small retailers and by the end of 2001 had opened 27 company owned stores.

“The Solution?”

To rate Jobs degree of success one need only look at the financial change since his arrival. From 1997 till 2001 Apple’s market value had risen by 517%, stock price high had risen from $28.75 to $75.19. Its share of the market has remained stable at about 3% but this apparent failure may just be due to the streamlining of the products. The percentage of Apple’s revenue from its traditional stronghold Education has also increased from 17.8% to 35.4%.

From this viewpoint Jobs seems to have been an unbridled success but Apple’s 2001 sales were down 32% on the previous year. This may be due to the global downturn in the economy or could it be that it is time for yet another CEO!

Steve Jobs’ Next Move.

This is the $3.5 million, plus bonuses, question. I think that Steve Jobs was right to attempt to streamline the company’s products by reducing production from 15 to 3 models. In my opinion in Apple’s search to be at the forefront of the computer revolution they had bitten off a bit more than they could chew. This is shown historically by the technologically next generational, but economically unviable “Lisa” and more recently by the IBM collaboration on Taligent and Kaleida which was a $600 million dollar waste as neither side would switch to this new technology.

I believe that they should continue their resurgence into the Education sector and attempt to make that their central base which they can rely on in times of economic downturn. The Education sector is less likely to be as volatile as the external market and Apple’s whole “I think, therefore iMac” strategy should be ideal for this.

Apple’s sideline in peripheral technological uses has been both a critical and economic success with products such as the iPOD becoming a hit. I think that Apple has the right profile to enter the entertainment industry with confidence as its current marketing strategy portrays it is as youthful, exciting and innovative. It perhaps could attempt to produce a “hit” entertainment product every 6 to 12 months as it did in the past.

Apple still has the only real alternative to Microsoft in terms of Operating Systems and so I don’t think that Steve Jobs should allow this position to be lost. He seems to be conscious of this as he told “Fortune” Magazine “We own one of two high-volume OS in the world”.

If Steve Jobs can once again show the visionary brilliance that took him to becoming a billionaire by the age of 25 then there is no reason why Apple can’t “print money”.

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Harvard Business School. “Apple Computer 2002.” Yoffie and Wang. March 2001.

www.apple.com