1 The volatility and evolution of computer industry

Starting from 1976, Apple computer created the personal computer (PC). After IBM
transformed the PC from proprietary systems into open structure, PC has been dominated by
Wintel (Windows + Intel) structure. Apple insists in adopting proprietary and niche market
strategies made them keep losing market share till less than 3% in 2001. However, its strategy
with ignoring the market trends makes it lose the market after years.

1.1
Industrial changes: Apple lost PC market because
of ignoring industrial changes
The PC industry has evolved in the past decades. There are 3 phases. Lets take a look at these
phases and Apples position in each phase.

Figure 1 Computer industrial change

Before 1981: Proprietary Systems.

Every PC producer had to develop self own hardware and software. It was proprietary. Most
buyers were technical people. There were 2 main streams in the market: Apple style machine
and IBM style machine. During this period, Apple was the leader. Its strong developing
ability made the Apple II became a family commodity. However, Apple didnt use patent or
trade secret to protect its products. Many computer companies re-engineered Apple II and
made cheaper similar products to compete in the market. For example, Acer copied Apple II
and developed the Little Professor Series.

1981- 1997: Open structure.

IBM turned the PC into open structure. Compaq, HP and many other producers started to
show in the market to produce IBM compatible PC. During this period, hardware can be
separated into CPU, mother board, power, disk drive, and other peripheral businesses.
Software can be separated into basic input output system (BIOS), operation system (DOS,
Unix, Windows), tool systems (Norton doctor, Anti-virus), computer language (C, Basic,
Clipper, FoxPro), office applications (spreadsheet, word process), graphic applications
(Adobe, Corel), game, and other applications. Each area had many providers competing with
each other. But CPU, OS and some special application areas had few providers. PC producers
became the hub of the hardware business. They had to buy all the components and assemble
into a whole piece. Consumers are not only cared about hardware performance, but they also
cared about the software applications. IBM style machine with Intel CPU and Windows OS
became the mainstream. During this period, Apple kept losing its market share. It is because
of 4 reasons. (a) Apple insisted in selling their products as a high price proprietary system. Its
hardware and software were different and not compatible with IBM machine. (b) As more
people using IBM machine, software developers turned to create software that can be run on

IBM machine. (c) Apple adopted Motorola CPU. However, Intels developing ability is better
than Motorola after late 80s. As Intel kept leading the market, Apples CPU ability could not
pass IBMs. (d) Apple focused on education and printing industries. Compared to the total
industrial growth, these 2 markets may only take small portions. The total PC market growth
came from increasing businesses customers, they use IBM style machine. It makes Apples
market share relatively decreasing.

1997- : Internet PC.

After internet booming, the PC industry has changed. PCs connect together. Before that, most
PCs are work independently, especially in the household market. But it has changed. Internet
connects every computer around the world. Network has become a necessary part in PC
industry.

Apple already lost their PC market. It tried to develop new iMac to win the market back.
However, Apple kept using the same strategy with fancy styles and user- friendly interface.
They still dont focus on Powerful CPU and compatible software. As most PC users in the
market are makes IBM keeps dominating this shrinking market. Apples niche strategy
success with unique selling points in ease of use, industrial design, tech elegance, and
powerful application in graphic processing. However, Apple kept losing market share
because they focused in relatively low growth industries with many substitute competitors.
People can buy an IBM style PC with similar functions and cheaper price from Compaq, HP,
Dell, and many other providers. Apple focused on the wrong market with many substitute
competitors. Its unique selling points are not hard to copy. Its loosing market is destined.

2 Identification of the strategic issue at the

level of the firm
As a computer producer company, there are several strategic issues are faced by Apple. They
are:
1. How Apple survives in competition.
2. How Apple responds to the dynamic of technology innovation.
3. How Apple responds to the continuous changing market needs.

Figure 2. Strategic Issue of the firms.

2.1

Issues 1: How Apple survives in competition

The structure of computer industry can be considered as monopolistic competition. This

structure is characterized by a lot of competitors, easy to enter the industry due to low entry
barrier and certain differentiation created by the firms in the industry. As a result, the market
becomes saturated and fragmented which make only small market share can be gained by
every firm.
This industry is also characterized by strong supplier bargaining position due to few numbers
of suppliers and strong consumer bargaining position due to low searching cost and low
switching cost to competitors. Even though Apple does certain differentiations, these
circumstances create pressure for Apple since it purchases component with higher price but
should to limit the price due to the strong of competitions. Thus, Apple not too flexible to gain
as big margin as 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.

2.2
Issues 2: 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 is the main operating system competitor of Apple. It
dominates operating system market share with more than 80% PCs using Microsoft Windows.
These great numbers of users in turn produce network effects for Microsoft Windows which
increase the value of the operating system. Furthermore, it is really a hard for Apple MacOS
to get back market share because it creates high and expensive switching cost from Windows
to MacOS.
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 Microsofts 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.

3 Identifying the components of the environment in the

strategic issue and its main characteristics
There are several environment component s that involves in the strategic issues. Those
components can be classified into: Macro or far environment and Micro environment.

3.1

Macro environment

Macro environment is a far environment which comprise of several forces that raise strategic
issue to Apple. These forces are social force, economic force, politic force, and technology
force which well known as PEST (figure 3).

Figure 3 Macro Environment

3.1.1

Technology forces

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 (e.g.
Intel, AMD) and software by competitors (e.g. 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 as a proprietary system. Apple created
the hardware by assembling components, create operating system (e.g. MacOS) and develop
applications. That time, as Apple controls both hardware and software, Apple can create
personal computer that deliver great personal experience compare to its competitors.
That time, Apple computer main competitor is IBM personal computer. Previously IBM
followed proprietary system as well. In 1981, IBM changed into open structure. This move
changed the environment of competition. This move brought many new entrants such as
Compaq and HP to produce IBM PC Compatible. This also brought in Intel as new entrant as
producer of processor and Microsoft as producer of operating system.
Rapid innovation both from Intel created strong technological forces for Apple. As Intel
released faster processor every quarter (figure 4), Apple, which that time sourced its processor
from Motorola, had to respond with comparable or faster processor. Failing to respond this in
time would create competitive disadvantage for Apple since competitors would adopt it and
gain better technology.
Microsoft which dominates operating system producer for Intel based personal computer is
also the main competitor for Apple. The rapid innovation by Microsoft which releases new
version of Windows every 2 years (figure 5) creates pressure for Apple to upgrade MacOS as
well. This is not easy task for Apple since Microsoft Windows selling is very high so it can
cover its R&D cost meanwhile Apple MacOS market share is a little.
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.

3.1.2

Economic forces

Monopolistic competition characterizes computer industry. A lot of existing competitors in the

industry (e.g. 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
(e.g. 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 (figure 6). 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.

Figure 6 Comparison of operating margin

Figure 7 Comparison of market share in US

Developed countries are characterized by high purchasing power consumer meanwhile some
developing countries and undeveloped countries are characterized by low purchasing power.
This difference in purchasing power need to be considered for adapting entry marketing
strategy on different countries

3.1.3

Politic forces

Joining China to WTO creates opportunity as well as threat for Apple. Lower investment
barrier and market barrier gives opportunities for Apple to take advantage of low cost labor as
well as getting potential market. On the other side, similar opportunities are also available to
competitors. When competitors move its plant into China and become more efficient, Apple
has to respond or will get cost inefficiency disadvantage over competitors.

3.1.4

Social forces

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 consumers are continuously changing. The motives of
consumers on purchasing 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 (figure 8) 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.

Figure 8 Hardware production and share of total global production

Environmental issues force Apple to be friendlier with nature.
Apple has been criticized by some environmental organizations for not being a leader in
removing toxic chemicals from its new products, and for not aggressively or properly
recycling its old products. Due to social pressure in environmental issues Apple has to adapt
its process to be friendlier with nature.

3.2

Micro Environment

Micro environment is near environment. This environment is actually the direct surrounding
of the firm that determines firm position in competition. This environment can be explained
using Porter five forces (figure 9). Based on Porter, firm position is characterized by rivalry,
threat from product substitution, threat from new entrant, bargaining power of supplier and
bargaining power of consumers.
A large number of competitors especially from Wintel (Windows Intel) family create a red
ocean for Apple. Wintel platform is not produced by single firm rather than combination of
firms. These competitors offer similar product to apple with only little different in features,
brand and design. Several Apple competitors are IBM, HP, Compaq, Dell, Lenovo, Gateway,
Acer, Fujitsu, Sony, ECS, Toshiba, etc.
Strong bargaining power of suppliers creates high cost of computer components. As there is
only small number of processor suppliers (e.g. Intel, AMD, Cyrix, and IBM) and only small
of them has capability and willingness to provide the best for Apple, the bargaining power of
supplier is high to the Apple. This condition made the price of processor component is high.
At the other side, the great number of competitors with similar product specification and the
birth of Internet are also strengthening the bargaining power of final consumers. This limits
the ability for Apple set price too high.
Low threats of substitute product also characterize the industry. Besides Wintel personal
computer, there are no pure substitutions for Apple personal PC. Since Wintel personal
computer is the same kind of product with Apple, it is considered as rivalry instead of product
substitution.

Figure 9. Porter five forces

4 Analysis of the interaction of environment components

4.1

Interaction of macro elements

The interaction of Politic, Economic, Social and Technology forces create a turbulent and
complex environment (figure 11). Rapid change of technology, dynamic of social lifestyle and
needs, and the monopolistic economic environment influence Apple has to keep in pace with
new technology, innovate to be different with competitors, and adapt its product to customer
need and demand. This rapid adaptation of products made the product life-cycle obsolete
faster and it increase the number of obsolete inventory. In addition, the joining China into
WTO also influences Apple to be efficient since many of its competitors relocate its plant to
China and benefit cost and labor efficiency.

Figure 10 Interaction of macro elements

4.2

Interaction of micro elements

The interaction between 5 competitive forces, create environment for Apple very competitive
and hard to survive. Low entry barrier, rapid innovation of supplier and changing demand of
consumer create the product life-cycle shorten. A lot of competitors with very similar product

specification let product easy to imitate and alter PC become near to commodity product.
Thus this leads to low market share industry. In addition, strong power of suppliers, a lot of
competitors and strong power of consumers create the industry as low margin industry.

Figure 11. Interaction of micro elements

5 Analysis of how environmental change (future) will

influence the strategy
The environmental change trend in current and past can depict the future. The rapid increasing
of technological innovation, changing customer need, competition due to low entry barrier
lead to the more and saturated and fragmentation of market. Thus, it made environment
situation in the future more turbulent and complex for Apple.
Thus, this made Apple strategy have to be adapted continuously as a response of the
dynamics of environment. Strategy has to be reshaped based on internal and external
environmental analysis. As environment change, so do strategy.
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 (Figure 13).

Figure 12. Mac unit sales

6 Apple response to the environmental change

As environmental change dynamically, Apple responded by adapting its business model and
strategy in order to struggle for survive. Since Apple was keep losing market share in personal
computer industry, Apple has been tried to create new business model to create new source of
income. Through its research and development, Apple decided to enter digital media sector,
by creating innovative design iPod and iTunes. As a result, iPod and iTunes are successful
due to its innovative design, easy to use and large storage.
Apples business model for the iPod generates money in many different levels. Money is
being made both on the 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 (figure 13). 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.

Figure 13 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.
Apples move to Intel is thought to have come about because of IBMs 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 Microsofts imminent Xbox 360 console, Sonys forthcoming
PlayStation 3 and Nintendos 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.

7 Conclusion
The PC industry has evolved in the past decades. They are proprietary, open structure and
internet PC. The interaction of Politic, Economic, Social and Technology forces create a
turbulent and complex environment. In addition, the interaction between 5 competitive forces,
create environment for Apple very competitive and hard to survive. Apple past ignorance of
environmental change made Apple losing market share. Now, as environmental change
dynamically, Apple responded by adapting its business model and strategy in order to struggle
for survive.
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Publicatia e din 2009