Discussion questions: 1. Is Apple a successful company? Justify your answer (compare Apple’s financial performance with its main competitors). 2. What are the main sources of its success? (Value chain, resources? valuable/rare/difficult to imitate/difficult to substitute?) You need to answer all the questions thoroughly (min. 300 words)
Strategic ManagementBUSINESS MANAGEMENT
CASE 32
APPLE INC.: WHERE’S THE NEXT INNOVATION?*
In April 2019, Apple CEO Tim Cook held the second quar- ter earnings presentation at the Apple Park corporate cam- pus in the
1,000-seat auditorium named the Steve Jobs Theater. Part of a 175-acre campus developed in 2017, the ring-shaped 2.8-million-
square-foot facility with walls of curved glass surrounding an inner greenspace courtyard was possibly the last evidence of the
direct vision and inno- vation of Apple co-founder Steve Jobs. Originally envi- sioned by Jobs in 2011 as a center for creativity
and collaboration, the building honored his legacy, memory, and enduring influence. Jobs, who died in 2011, would have turned
64 in February 2019. As Apple’s current CEO Tim Cook said, “Steve’s vision for Apple stretched far beyond his time with us. He
intended Apple Park to be the home of innovation for generations to come.”1
Yet the pace of innovation at Apple had slowed consid- erably. Since Steve Jobs’s death, the only new physical prod- uct
launched had been the Apple Watch in 2014. The iconic iPhone, in FY2018 representing 63 percent of total reve- nues, was over
10 years old, and even though upgrades kept customers coming back, competition had eroded Apple’s smartphone market share
such that second quarter 2019 iPhone revenues had declined by over 17 percent year over year. Mac computer and iPad sales had
declined as well. Although Apple’s FY2018 revenues were up by about 16 percent overall, the bulk of that increase came from
ser- vices and other products such as the Apple Watch. In this environment, there was some concern that although re- search and
development spending was up in FY2018, re- search output had not produced any recent meaningful breakthroughs. This posed
yet again the unavoidable ques- tion that still seemed to haunt the 42-year-old Apple: What happens to a modern company whose
innovations and in- spirations are so closely tied to the vision of one leader when that leader’s influence is no longer present?2
Tim Cook was considered a highly effective leader, yet had been criticized for “lack of ambition and vigor,” for be- ing perhaps
too cautious about entering new product cate- gories, pursuing acquisitions, or driving employees to achieve almost impossible
stretch goals.3 On the other hand, investors had been mostly very pleased with the stock performance under Cook. Since he was
named CEO in August 2011, Apple share price had risen from an averag
e
* This case was prepared by Professor Alan B. Eisner of Pace University and Professor Pauline Assenza, Western Connecticut
State University. This case is based solely on library research and was developed for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation. Copyright © 2019 Alan B. Eisner.
of over $45 to a high of $230 in August 2018, and when the company reached a market capitalization of over $1 trillion in 2018,
that made it the most valuable company in the world. In addition, Cook had instituted Apple’s first dividend since 1995 in 2012,
and bought back more than $200 billion of shares, producing strong free cash flows and an “impressive” balance sheet.4 This had
made investors happy.
Cook had done what CEOs of public companies are sup- posed to do—drive up value. But revenue from the flagship products—
iMac, iPad and iPhone—was falling or stagnant, and only the services and other products sectors were see- ing growth. In
addition, operating margins were declining in products, indicating that high iPhone prices may have been the only thing keeping
margins stable at around 30 percent. If iPhone sales were increasingly challenged by lower price competitors such as China’s
Xiaomi, and Huawei, something would have to change. Was Apple’s recent shift into services and other products going to be the
answer? (See Exhibits 1 to 3.) “Other products” included wearables such as the iWatch and the AirPod wireless ear- phones, and
home products such as the HomePod voice- controlled smart speaker system. These were new, but perhaps not as innovative as
Apple’s other products. Were expectations of major breakthroughs unrealistic? As one analyst said, it is hard to find “ways to
make the world’s most valuable company even more valuable when it’s al- ready so big that conventional growth strategies—
extending product lines, moving into new territories—would barely move the needle.”5
Apple, Fortune Magazine’s “world’s most admired com- pany” since 2008,6 had distinguished itself by excelling over the years
not only in product innovation but also in revenue and margins (since 2006 Apple had consistently reported gross margins of over
30 percent). By 2019, Apple Inc. was known for having top-selling products not only in desktop (iMac) and notebook (MacBook)
personal computers but also in online music and “app” services (iTunes and App Store), mobile communication devices (iPhone),
digital consumer entertainment (Apple TV), tablet computers (iPad), operating systems (macOS and iOS), software (Sa- fari web
browser) and online services (iCloud), as well as wearable technology (Apple Watch, AirPods) and home ac- cessories
(HomePod, Beats products), mobile payment sys- tems (Apple Pay), and a subscription-based music streaming service (Apple
Music). Additional services roll- ing out in 2019 included Apple TV+ original content, sub- scription services Apple Channels,
Apple News+ and
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EXHIBIT 1 Apple Sales, 2015–2018 (dollars in millions and units in thousands)
2018 Change 2017 Change 2016 2015
Net Sales by Reportable Segment:
Americas $112,093 16 % $ 96,600 12 % $ 86,613 $ 93,864
Europe 62,420 14 % 54,938 10 % 49,952 50,337
Greater China 51,942 16 % 44,764 (8 )% 48,492 58,715
Japan 21,733 23 % 17,733 5 % 16,928 15,706
Rest of Asia Pacific 17,407 15 % 15,199 11 % 13,654 15,093
Total net sales $265,595 16 % $ 229,234 6 % $215,639 $233,715
Net Sales by Product:
iPhone (1) $166,699 18 % $ 141,319 3 % $136,700 $155,041
iPad (1) 18,805 (2 )% 19,222 (7 )% 20,628 23,227
Mac (1) 25,484 (1 )% 25,850 13 % 22,831 25,471
Services (2) 37,190 24 % 29,980 23 % 24,348 19,909
Other Products (1)(3) 17,417 35 % 12,863 16 % 11,132 10,067
Total net sales $265,595 16 % $ 229,234 6 % $215,639 $233,715
Unit Sales by Product:
iPhone 217,722 — % 216,756 2 % 211,884 231,218
iPad 43,535 — % 43,753 (4 )% 45,590 54,856
Mac 18,209 (5 )% 19,251 4 % 18,484 20,587
1. (1) Includes deferrals and amortization of related software upgrade rights and non-software services.
2. (2) Includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing, and other services. Services
net sales in 2018 included a favorable one-time item of $236 million in connection with the final resolution of various
lawsuits. Services net sales in 2017 included a favorable one-time adjustment of $640 million due to a change in
estimate based on the availability of additional supporting information.
3. (3) Includes sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and other Apple-branded
and third-party accessories.
Sources: Annual Report. Apple Inc. 2017.; Annual Report. Apple Inc. 2018.
EXHIBIT 2 Apple Product Performance—Percentage of Total Sales
iPad 7% 8% 10% Services 14% 13% 11%
Product 2018 2017 2016
iPhone 63% 62% 63%
Ma
c
10% 11% 10%
Source: Annual Report. Apple Inc. 2018.
Apple Arcade for games, and Apple Card, a credit card stored in Apple Wallet. (see Exhibit 4).
As the time line shows, most of the product innovations occurred after 1998, when Apple was under Steve Jobs’s lead- ership.
However, there was also a 12-year period in which Jobs was not in charge. The company’s ongoing stated strategy was
to leverage “its unique ability to design and develop its own operations systems, hardware, application software and ser- vices to
provide its customers products and solutions with in- novative design, superior ease-of-use and seamless integration.”7 This
strategy required not only product design and marketing expertise but also scrupulous attention to
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EXHIBIT 3 Apple Products and Services Revenue and Gross Margins
Second Quarter Comparison 2018 to 2019
Three Months Ended Six Months Ended
March 30, 2019 March 31, 2018 Chang March 30, 2019 March 31, 2018 Change
e
Net sales by category:
iPhone (1) $31,051 $37,559 (17)% $ 83,033 $ 98,663 (16)%
Mac (1) 5,513 5,776 (5)% 12,929 12,600 3%
iPad (1) 4,872 4,008 22% 11,601 9,763 19%
Wearables, Home and Accessories (1)(2) 5,129 3,944 30% 12,437 9,425 32%
Services (3) 11,450 9,850 16% 22,325 18,979 18%
Total net sales $58,015 $61,137 (5)% $142,325 $149,430 (5)%
1. (1) Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are
bundled in the sales price of the respective product.
2. (2) Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products,
HomePod, iPod touch, and Apple-branded and third-party accessories.
3. (3) Services net sales include sales from the company’s digital content stores and streaming services, AppleCare, Apple
Pay, licensing, and other services. Services net sales also include amortization of the deferred value of Maps, Siri, and
free iCloud services, which are bundled in the sales price of certain products.
Three Months Ended Six Months Ended
March 30, 2019 March 31, 2018 March 30, 2019 March 31, 2018
Gross margin:
Products $14,518 $17,351 $39,715 $45,940
Services 7,303 6,071 14,137 11,394
Total gross margin $21,821 $23,422 $53,852 $57,334
Gross margin percentage:
Products 31.2% 33.8% 33.1% 35.2%
Services 63.8% 61.6% 63.3% 60.0%
Total gross margin percentage 37.6% 38.3% 37.8% 38.4%
Source: Quarterly Report Form 10-Q. Apple, March 30, 2019.
operational details. Given Apple’s global growth in multiple product categories, and the associated complexity in strategic
execution, CEO Tim Cook would be challenged to sustain the level of innovation for which the company was known.
Company Background
Founder Steve Jobs
Apple Computer was founded in Mountain View, California, on April 1, 1976, by Steve Jobs and Steve Wozniak. Jobs was the
visionary and marketer, Wozniak
was the technical genius, and A. C. “Mike” Markkula Jr., who had joined the team several months earlier, was the businessman.
Jobs set the mission of empowering individu- als, one person–one computer, and doing so with elegance of design and fierce
attention to detail. In 1977, the first version of the Apple II became the first computer ordinary people could use right out of the
box, and its instant suc- cess in the home market caused a computing revolution, essentially creating the personal computer
industry. By 1980, Apple was the industry leader and went public in December of that year.
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EXHIBIT 4 Apple Innovation Time Line
Date Product Events
1976 Apple I Steve Jobs, Steve Wozniak, and Ronald Wayne found Apple Computer.
1977 Apple II Apple logo first used.
1979 Apple II1 Apple employs 250 people; the first personal computer spreadsheet software, VisiCalc, is written by Dan Bricklin
on an Apple II.
1980 Apple III Apple goes public with 4.6 million shares; IBM personal computer announced.
1983 Lisa John Sculley becomes CEO.
1984 Mac 128K, Apple IIc Super Bowl ad introduces the Mac desktop computer.
1985 Jobs resigns and forms NeXT Software; Windows 1.01 released.
1986 Mac Plus Jobs establishes Pixar.
1987 Mac II, Mac SE Apple sues Microsoft over GUI.
1989 Mac Portable Apple sued by Xerox over GUI.
1990 Mac LC Apple listed on Tokyo Stock Exchange.
1991 PowerBook 100, System 7 System 7 operating-system upgrade released, the first Mac OS to support PowerPC-based
computers.
1993 Newton Message Pad (one of the first Sculley resigns; Spindler becomes CEO; PowerBook sales reach 1 million units.
PDAs)
1996 Spindler is out; Amelio becomes CEO; Apple acquires NeXT Software, with Jobs as adviser.
1997 Amelio is out; Jobs returns as interim CEO; online retail Apple Store opened.
1998 iMac iMac colorful design introduced, including USB interface; Newton scrapped.
1999 iMovie, Final Cut Pro (video editing iBook (part of PowerBook line) becomes best-selling retail notebook in October;
software) Apple has 11% share of notebook market.
2000 G4Cube Jobs becomes permanent CEO.
2001 iPod, OS X, iTunes software, Apple iTunes software is a mobile device management application. First physical retail Store
store opens, in Virginia.
2002 iMac G4, iLife Apple releases iLife software suite.
2003 iTunes Store Apple reaches 25 million iTunes downloads.
2004 iMac G5 Jobs undergoes successful surgery for pancreatic cancer.
2005 iPod Nano, iPod Shuffle, Mac Mini First video iPod released; video downloads available from iTunes.
2006 MacBook Pro Apple computers use Intel’s Core Duo CPU and can run Windows software; iWork software competes with
Microsoft Office.
2007 iPhone, Apple TV, iPod Touch Apple Computer changes name to Apple Inc.; Microsoft Vista released.
2008 iPhone 3G, MacBook Air, App Store App Store launched for third-party applications for iPhone and iPod Touch and brings
in $1 million in one day.
2009 17-inch MacBook Pro, iLife, iWork ’09 iTunes Plus provides DRM-free music, with variable pricing; Jobs takes medical
leave.
2010 iPad, iPhone 4, Mac App Store iPhone 4 provides FaceTime feature; iTunes reaches 10 billion songs sold.
2011 iPad2, iPhone 4S, iCloud iPhone available on Verizon Wireless; Jobs resigns as CEO, dies on October 5th. Tim Cook
becomes CEO.
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Continued
EXHIBIT 4 Continued
Date Product Events
2012
iBook Author, iPhone5, iPad
Mini, Apple Wallet
iBook supports textbook creation on iPad. Retina displays, skinny Macs. Apple Wallet
stores coupons, tickets. Apple becomes world’s most valuable company by market
capitalization.
2013 Mega Mac, iPad Air Workstation in a small aluminum cylinder.
2014
iPhone 6 Plus, Apple Watch,
Apple Pay
Biggest iPhone yet, Apple Watch = computer on your wrist introduced in 2014, actual
delivery in 2015, Apple Pay mobile payment service, acquisition of Beats Electronic for
headphones, streaming digital content.
2015 Apple Music
Streaming music subscription service, including Internet radio station Beats 1, blog
platform Connect.
2016
iPhone 7, iPhone 7 Plus, iPad
Pro, Apple AirPods, Apple
Watch Series
Seventh generation iPhone, AirPods wireless earphones, Apple Watch multiple series
included Nike and Hermes; over 1 billion Apple devices are in use worldwide.
2017
iPhone 8, iPhone 8 Plus, iPhone
X
Fall 2017 release.
2018
HomePad, iPhone XS & XR,
iPadPro with Face ID, iPad Air
with Apple Pencil support
HomePad smart speaker with voice control; Apple reaches $1 trillion market value,
becomes the largest publically traded corporation in the world by market capitalization.
2019
Apple TV+, Apple Channels,
Apple News+, Apple Arcade,
Apple Card
Apple TV+ will produce original content, Channels subscription gives access to premium
network TV, News+ subscription gives access to digital magazines & newspapers, Apple
Arcade gives access to games via the App Store, Apple Card is a credit card stored in
Apple Wallet.
Sources: Timeline of Apple Inc. products. Wikipedia; author estimates.
In 1983, Wozniak left the firm and Jobs hired John Sculley away from PepsiCo to take the role of CEO at Apple, citing the need
for someone to spearhead marketing and operations while Jobs worked on technology. The result of Jobs’s creative focus on
personal computing was the Macintosh. Introduced in 1984, with the now-famous Super Bowl television ad based on George
Orwell’s novel Nineteen Eighty-Four,8 the Macintosh was a breakthrough in terms of elegant design and ease of use. Its ability to
handle large graphic files quickly made it a favorite with graphic designers, but it had slow performance and limited compatible
software was available. That meant the product as designed at that time was unable to help significantly Apple’s failing bottom
line. In addition, Jobs had given Bill Gates at Microsoft some Macin- tosh prototypes to use to develop software and, in 1985,
Mi- crosoft subsequently came out with the Windows operating system—a version of GUI for use on IBM PCs.
Steve Jobs’s famous volatility led to his resignation from Apple in 1985. Jobs then founded NeXT Computer. The NeXT Cube
computer proved too costly for the business to become commercially profitable, but its technological con- tributions could not be
ignored. In 1997, then Apple CEO Gilbert Amelio bought out NeXT, hoping to use its Rhapsody—a version of the NeXTStep
operating system—to jump-start the Mac OS development, and Jobs was brought back as a part-time adviser.
Under CEOs Sculley, Spindler, and Amelio
John Sculley had tried to take advantage of Apple’s unique capabilities. Because of this, Macintosh computers became easy to
use, with seamless integration (the original plug-and- play) and reliable performance. This premium performance meant Apple
could charge a premium price. However, with the price of IBM compatibles dropping, and Apple’s costs, especially research and
development (R&D), way above industry averages, this was not a sustainable scenario.
Sculley’s innovative efforts were not enough to substan- tially improve Apple’s bottom line, and he was replaced as CEO in 1993
by company president Michael Spindler. Spindler continued the focus on innovation, producing the PowerMac in 1994. Even
though this combination pro- duced a significant price-performance edge over both previ- ous Macs and Intel-based machines,
the IBM clones continued to undercut Apple’s prices. Spindler’s response was to allow other companies to manufacture Mac
clones, a strategy that ultimately led to clones stealing 20 percent of Macintosh unit sales.
Gilbert Amelio, an Apple director and former semicon- ductor turnaround expert, was asked to reverse the compa- ny’s financial
direction. Amelio intended to reposition Apple as a premium brand, but his extensive reorganiza- tions and cost-cutting strategies
could not prevent Apple’s stock price from slipping to a new low. However, Amelio’s
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decision to stop work on a brand-new operating system and jump-start development by using NeXTStep brought Steve Jobs back
to Apple in 1997.
Steve Jobs’s Return
One of Jobs’s first strategies upon his return was to strengthen Apple’s relationships with third-party software developers,
including Microsoft. In 1997, Jobs announced an alliance with Microsoft that would allow for the creation of a Mac ver- sion of
the popular Microsoft Office software. He also made a concerted effort to woo other developers, such as Adobe, to continue to
produce Mac-compatible programs.
In late October 2001, Apple released its first major non- computer product—the iPod. This device was an MP3 music player that
packed up to 1,000 CD-quality songs into an ultra- portable, 6.5-ounce design: “With iPod, Apple has invented a whole new
category of digital music player that lets you put your entire music collection in your pocket and listen to it wherever you go,”
said Steve Jobs. “With iPod, listening to music will never be the same again.”9 This prediction became even truer in 2002, when
Apple introduced an iPod that would download from Windows—its first product that did not require a Macintosh computer and
thus opened up the Apple “magic” to everyone. In 2003, all iPod products were sold with a Windows version of iTunes, making it
even easier to use the device regardless of computer platform.
In April 2003, Apple opened the online iTunes Music Store to everyone. This software, downloadable on any com- puter
platform, sold individual songs through the iTunes application for 99 cents each. When announced, the iTunes Music Store
already had the backing of five major record labels and a catalog of 200,000 songs. Later that year, the iTunes Music Store was
selling roughly 500,000 songs a day. In 2003, the iPod was the only portable digital player that could play music purchased from
iTunes, and this intended exclusivity helped both products become dominant.
After 30 years of carving a niche for itself as the premier provider of technology solutions for graphic artists, Web de- signers,
and educators, Apple had reinvented itself as a digital entertainment company, moving beyond the personal com- puter industry.
The announcement in 2007 of the iPhone, a product incorporating a wireless phone, a music and video player, and a mobile
Internet browsing device, meant Apple was also competing in the cell phone/smartphone industry. That year, Apple changed its
name from Apple Computer to Apple Inc.
Also introduced in 2007, the iPod Touch incorporated Wi-Fi connectivity, allowing users to purchase and down- load music
directly from iTunes without a computer. Then, in 2008 Apple opened the App Store. Users could now pur- chase applications
written by third-party developers specifi- cally for the iPhone and iPod Touch.
In 2010, Apple launched the large-screen touch-based tablet called the iPad and sold over 2 million of these devices in the first
two months.10 That same year, Apple’s stock value increased to the extent that the company’s
market cap exceeded Microsoft’s, making it the biggest tech company in the world.11 In 2011, Steve Jobs made his last product
launch appearance to introduce iCloud, an online storage and syncing service. On October 4, 2011, Apple announced the iPhone
4S, which included “Siri,” the “intelligent software assistant.” The next day, on October 5, came the announcement that Steve
Jobs had died.
Apple continued to innovate, however, and on September 21, 2012, Apple had its biggest iPhone launch ever with the iPhone
5.12 On September 19, 2012, Apple stock reached $702.10, its highest level to date, which made Apple the most valuable
company in the world. 2013 saw the iPhone5C and the high-range iPhone5S, which intro- duced the Touch ID fingerprint
recognition system. The iPhone 6 and 6 Plus, with larger displays, faster processors, and support for mobile payments, were
released in Septem- ber 2014.13 The prototype of the Apple Watch was unveiled in 2014. Also introduced in 2014 was Apple
Pay, a mobile payment system meant to augment all Apple mobile prod- ucts. February 2015 saw Apple reach the highest market
cap of any U.S.-traded company. During 2016 Apple intro- duced Apple Music, a streaming music service meant to take
advantage of its already strong relationship with artists and music publishers, and therefore positioned to success- fully compete
with Pandora and Spotify. In addition, iPhone 7 and 7 Plus and the Apple Watch Series 2 all had a positive response from
customers. Apple products had more than 1 billion users worldwide by the end of 2017.
Apple had become a diversified digital entertainment corporation. Back in 2005 analysts believed Apple had “changed the rules
of the game for three industries—PCs, consumer electronics, and music and appears to have noth- ing to fear from major
rivals.”14 On top of steady sales of its computers, of the iPod, and of iTunes, the added categories of iPhone and iPad had shown
substantial growth; but by 2013, Samsung had outperformed Apple in worldwide smartphone sales,15 and Google’s Android had
captured the largest market share of cell phone operating systems. At the same time, both the Amazon Kindle Fire HD and
Microsoft’s Surface tablet had emerged to challenge the iPad. 2015 was marked by competition in the wearable tech space, and
2017 saw the Windows 10 operating system become four times more popular than the macOS, the Microsoft Surface defeating
iPad in user satisfaction, and customers frustrated that the MacPro had not yet been redesigned to recover from its 2013 design
misstep. Could Apple continue to grow, and, if so, in what categories?
Apple’s Operations
Maintaining a competitive edge required more than innova- tive product design. Operational execution was also impor- tant. For
instance, while trying to market its increasingly diverse product line, Apple believed that its own retail stores could serve
customers better than any third-party retailers. By the beginning of 2019, Apple had 506 stores open, including 234 international
locations.16 Some of
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these stores worldwide were considered architectural wonders, including the iconic Fifth Avenue glass cube in New York City.
Apple had even received trademark protec- tion for its retail stores’ “distinctive design and layout.”17 Partly due to the appealing
design of both the shopping ex- perience and the products being sold within, Apple retail stores had traditionally generated more
sales per square foot than any other U.S. retailer, including its closest luxury rival Tiffany & Co.18
To solidify its supply chain, Apple had entered into mul- tiyear agreements with suppliers of key components. Apple had had
historically excellent margins, partly because of its simpler product line, leading to lower manufacturing costs.19 Apple had
outsourced almost all manufacturing and final assembly to its Asian partners, paying close attention to scheduling and quality
issues. Outsourcing to Asian manu- facturers was not without its problems, however. In 2012, headlines worldwide exposed
China’s Foxconn manufactur- ing facility for labor abuses that led to worker suicide threats. Apple, as well as most other
technology companies, used Foxconn facilities to assemble products, including the iPad and iPhone. After the story broke, Apple
CEO Tim Cook visited the Foxconn plant and reviewed an audit of working conditions that found violations in wages, overtime,
and environmental standards. Apple stated that it remained “committed to the highest standards of social responsibility across our
worldwide supply chain,”20 and Cook announced that Apple would be bringing some of the production of Mac computers back
to the United States, starting in 2013. They could do this without affecting the company’s profit- ability, because of automation
cost savings.21
Apple had also historically paid attention to research and development, increasing its R&D investment year after year. In the
second quarter of 2019, Apple spent $3.9 billion on R&D, an increase of 1 percent from the previous year. As one of Steve Jobs’s
legacies, Apple had traditionally kept the specifics of its research and development a closely
guarded secret and fiercely protected its innovative patents. For example, a well-publicized series of lawsuits in 2012 highlighted
rifts between Apple and Samsung, who was both a rival and supplier. Samsung smartphones had cap- tured more market share
than Apple’s iPhones in the begin- ning of 2012, and Apple argued that Samsung had succeeded with both its phones and tablets
only by copying Apple’s designs. Samsung replied by claiming that Apple had infringed on Samsung’s patents.22 U.S.
intellectual property courts found in favor of Apple, but Japanese courts found in favor of Samsung. The threat of ongoing battle
meant Apple needed to look for other suppliers of chips and displays. Supply chain watchers pointed out that Apple still had a
major challenge finding reliable suppliers for increasingly scarce components, and that the continued reliance on Foxconn as the
sole manufacturer of the iPhone meant that any disruption there could have major conse- quences for delivery.23
Status of Apple’s Business Units in 2019
The Apple Computer Business
In the computer market, Apple had always refused to com- pete on price, relying instead on its reliability, design ele- gance, ease
of use, and integrated features to win customers. An opportunity for increased market share was realized when Apple began using
Intel processors in the iMac desk- top and the MacBook portables, which allowed them to run Microsoft Office and other
business software.
However, in FY2018 Apple’s worldwide Mac computer sales decreased 5 percent over the previous year, continuing to signal the
decline of this category since the introduction of the iPad in 2010. Overall it appeared that sales of desk- top computers,
especially, were slowing worldwide as the tablet and smartphone markets grew, and this was evident in the worldwide PC market
share data from 2018, where only Dell saw any significant growth (see Exhibit 5). Apple
EXHIBIT 5 Worldwide PC Market Share, Calendar Year 2018 (units in thousands)
Company 2018 Shipments 2018 Market Share 2017 Shipments 2017 Market Share 2018/2017 Growth
1. HP 59,986 23.2% 58,809 22.6% 2.0%
2. Lenovo* 59,857 23.2% 58,049 22.4% 3.1%
3. Dell Inc 44,170 17.1% 41,822 16.1% 5.6%
4. Apple 18,021 7.0% 19,010 7.3% −5.2%
5. Acer Group 17,841 6.9% 18,033 6.9% −1.1%
Others 58,621 22.7% 63,925 24.6% −8.3%
Total 258,497 100.0% 259,647 100.0% −0.4%
Source: Inventory and Processor Supply Issues Weigh Against Holiday PC Shipments, According to IDC. IDC, January 10, 2019.
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EXHIBIT 6 Worldwide SmartPhone Shipments, First Quarter 2019
Vendor
Q1 2019 shipments
(million)
Q1 2019 Market
share
Q1 2018 shipments
(million)
Q1 2018 Market
share
Annual
growth
Samsung 71.5
Apple 40.2
Oppo 27.3
Total 313.9
22.8% 79.5
12.8% 52.2
8.7% 25.7
100.0% 336.8
23.6% 15.5% 7.6%
100.0%
−10.0% −23.2% +6.4% −6.8%
Huawei 59.1 18.8% 39.3 11.7% +50.2%
Xiaom
i
27.8 8.9% 28.2 8.4%
−1.3
%
Others 88.0 28.0% 111.9 33.2% −21.3%
Source: Canalys: Apple iPhone shipments fall 23% as global smartphone market remains in freefall. Canalys, May 1, 2019.
saw the greatest decline amongst its rivals, a decline also evident in its own revenue profile, which had seen the Mac’s share of
Apple overall revenue drop from more than 40 percent in 2007 to about 11 percent in 2016, and slip- ping further to 9.5 percent
in the first quarter of 2019.24
There had been rumors Apple was planning to refresh the iMac, and completely revamp the Mac Pro. Targeting professional
users, and very expensive at around $3,000, the Mac Pro product had never had a large market share, but the creative
professionals—the videographers, designers, and photographers—who embraced the original product were still waiting for a
delayed redesign.25 The iMac did see new processors and graphics in 2019, but the basic design remained the same.
Personal Digital Entertainment Devices: iPod
Although many analysts at the time felt the MP3 player mar- ket was oversaturated, Apple had introduced the iPod Touch in
2007, intending it to be an iPhone without the phone, a portable media player, and Wi-Fi Internet device without the AT&T phone
bill. The iPod Touch borrowed most of its fea- tures from the iPhone, including the finger-touch interface, but it remained mainly
an iPod, with a larger viewing area for videos. Apple released the fifth-generation iPod Touch in September 2012, and the sixth-
generation version debuted in 2015. A seventh-generation was released in May, 2019.26 The iPod Touch had sold well over 100
million units since its debut in 2007, and although it was no longer promoted on the Apple website, it was still for sale. The
device was still a cheap way to get entertainment, and used for portable gam- ing, this device augmented with a cheap phone for
calling and texting was still less expensive than an iPhone.
Mobile Communication Devices: iPhone
In 2007, Apple’s iPhone combined an Internet-enabled smart- phone and video iPod. The iPhone allowed users to access all iPod
content and play music and video content purchased from iTunes. Subsequent smartphone models increased the quality of the
photo and video components to make even the
digital camera or camcorder appear obsolete. By the fourth quarter of 2015 Apple had achieved almost 19 percent market share,
in a close tie with Samsung, and by July 2016 it had sold over 1 billion units, becoming “one of the most impor- tant, world-
changing and successful products in history.”27 However, competition was fierce and by 2019 Apple’s smart- phone market share
had dropped by over 23 percent. The main challenge was coming from Huawei (see Exhibit 6).
In addition, the smartphone market was increasingly turning into a battle between mobile operating systems. Ap- ple’s iPhone,
running on iOS, had considerable competition from Samsung’s line of smartphones. This was partly due to Samsung’s use of
Google’s Android operating system. By 2018, the operating system map had Android devices captur- ing the majority of market
share (see Exhibit 7).28
Over the years, in Asian markets especially, Apple’s shares of mobile devices had lost considerable ground to Samsung, Huawei,
and other smartphones produced by Asian manufacturers. Younger Asian users, the 20-something college students and fresh
graduates, were looking for the next new thing, and that was increasingly an Android-driven device.29
In 2019, overall iPhone second quarter sales were down 17 percent from the previous year. The overall smartphone market was
slowing down as mature markets were increas- ingly dependent on replacement purchases, and emerging markets appeared more
interested in low-cost devices. Other than the removal of the headphone port, Apple had not made any significant technological
changes to the iPhone lineup, so if Apple wanted to address its declining market share, it might have to lower prices, which, given
the iPhone’s major contribution to Apple’s bottom line ($167B or 63 percent of total sales in 2018), would make it difficult for
the company to maintain its profit margins or grow net income going forward. Even so, the iPhone was Apple’s most important
and potentially lucrative product.
Tablet Computer: iPad
In April 2010, Apple released the iPad, a tablet computer, as a platform for audio-visual media, including books, periodicals,
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EXHIBIT 7 Smartphone Operating System Market Share, Fourth Quarter 2018 100
Android iOS
88.0% 87.6%
84.3%
87.8%
86.8%
81.8%
85.0%
14.7%
11.8%
12.4%
80.3%
19.6%
15.7%
18.2%
12.1%
13.2%
90
80
70
60
50
40
30
20
10
0
2017Q1 2017Q2 2017Q3
2017Q4 2018Q1 2018Q2 2018Q3
Quarter
2018Q4
Source: Smartphone Market Share: OS Data Overview. IDC. https://www.idc.com/promo/smartphone-market-share/os
movies, music, games, and web content. More than 300,000 iPads were purchased by eager tech consumers during the de- vice’s
first day on store shelves. Weighing only 1.5 pounds, this lightweight, portable, and touch-screen device was seen as a gigantic
iPod Touch.30 Features like the sleek design, touch screen, multiple apps, and fast and easy-to-navigate software made the iPad
popular in business, education, and the enter- tainment industry. The iPad was selected by Time magazine as one of the 50 Best
Inventions of the Year 2010.31
Up until September 2010, Apple iPads had accounted for 95 percent of tablet computer sales,32 but by the end of 2012, that
figure had fallen to 78.9 percent; and by the end of 2018 Apple held only about 26 percent of the market. The loss of share was
partly due to tablet devices, such as Samsung’s Galaxy, that were based on Google’s open- source Android system. Other
platforms and devices had
also appeared, including Google’s Chromebook, Amazon’s Kindle Fire, and Microsoft Windows’ Surface tablet.33 Going into
2019 there were signs that the iPad models’ sales—as well as the entire tablet industry—were in decline, perhaps due to the
“jumbo” phones coming from the likes of Samsung (and Apple), and low-cost Google-based Chromebook laptops (see Exhibit
8).34
Apple finally redesigned the iPad lineup in 2019, provid- ing a major upgrade in power with Apple’s new A12 Bionic chip, and
introducing a new iPad Mini and iPad Air, both ultra-portable with Apple Pencil support. The iPad Pro, although expensive, was
redesigned to incorporate a full- screen Liquid Retina display, Face ID, as well as the powerful A12X Bionic chip with Neural
Engine and sup- port for the new Apple Pencil and Smart Keyboard. Even though the category had seen reduced activity as a
whole,
EXHIBIT 8 Worldwide Quarterly Tablet Market Share, Third Quarter 2018
Company
3Q18 Unit
Shipments
3Q18 Market
Share
3Q17 Unit
Shipments
3Q17 Market
Share
Year-Over-Year Growth
1. Apple
3. Amazon.com 5. Lenovo Total
9.7 26.6% 10.3 4.4 12.0% 4.4 2.3 6.3% 3.1
36.4 100.0% 39.9
25.9% 11.0% 7.7% 100.0%
−6.1%
−0.4% −24.5% −8.6%
2. Samsung 5.3 14.6% 6.0 15.0% −11.4%
4.
Huawei
3.2 8.9% 3.0 7.6% 7.1%
Others 11.5 31.6% 13.1 32.9% −12.1%
Lenovo (excluding Fujitsu volume in
3Q17)
2.3 6.3% 3.0 7.4% −22.1%
Source: Tablet Market Sees Modest Decline of 8.6% as Slate and Detachable Categories Continue to Struggle, According to IDC.
IDC, November 2, 2018.
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the iPad continued to perform for Apple, with 2018 seeing the strongest growth in years. Part of this growth was due to customer
response to the iPad Pro and the adoption of the iPad in operational scenarios such as in airline pilots’ flight bags and
maintenance ground crews’ service bays as an easy portable source for key information.
The Software Market
Although Apple had always created innovative hardware, software development also had been an important goal. Software had
been Apple’s core strength, especially in its computers, due to its reliability and resistance to virus infections and resulting
crashes.35 The premier piece of Apple software was the operating system. The iOS allowed Apple to develop software
applications such as Final Cut Pro, a video-editing program for professionals’ digital cam- corders; GarageBand, for making and
mixing personally created music; the iTunes digital music jukebox; and iWork, containing a PowerPoint-type program called
Keynote and a word-processor/page-layout program called Pages.
Apple’s Web browser, Safari, was upgraded in 2009 to compete with Windows Internet Explorer, Mozilla Firefox, and the new
entrant, Chrome from Google. Apple announced, “Safari 4 is the world’s fastest and most innova- tive browser,”36 but analysts
were quick to point out that Google’s Chrome, which debuted six months earlier, was perhaps the first to take the browser
interface in a new direction. One commentator called Chrome “a wake-up call for the Safari UI guys.”37 Browser market share
data in 2019 showed Chrome in the top spot, with its various versions grabbing over 65 percent of global market share. Recent
versions of Microsoft Internet Explorer and Edge held second place with 14 percent, and Firefox had 9.6 percent. Safari had 3.7
percent share.38
iCloud was introduced in 2011 during one of Steve Jobs’s last public appearances. The web-based storage ser- vice initially
struggled to get traction, but in 2014 was upgraded to iCloud Drive, allowing users to interoperate with Windows and connect all
iOS devices. As an alterna- tive to Google Drive and Dropbox, this gave Apple an intro into the enterprise/corporate user space, a
market CEO Tim Cook had begun to successfully target.39
In other software development areas, Apple had not been that successful. In 2012, Apple stumbled badly with its Maps software.
Released in iOS6, Apple Maps was meant to replace Google Maps on the iPhone, but instead produced distorted images and gave
really bad directions. CEO Tim Cook had to apologize that Apple had fallen short of its commitment to making “world-class
products,” and suggested customers go back to using its competitor’s mapping software.40
iTunes/Apple Music
Arguably, Apple’s most innovative software product was iTunes, a free downloadable software program for con- sumers running
on either Mac or Windows operating systems. It came bundled with all Mac computers and
iPods and connected with the iTunes Music Store for pur- chasing digital music and movie files that could be downloaded and
played by iPods, iPads, and the iPhone, and by iTunes on PCs.
Although the volume was there, iTunes had not neces- sarily been a profitable venture. Traditionally, out of the 99 cents Apple
charged for a song, about 65 cents went to the music label; 25 cents for distribution costs, including credit card charges, servers,
and bandwidth; and the bal- ance to marketing, promotion, and the amortized cost of developing the iTunes software.41
However, if not wildly profitable, iTunes was still considered a media giant— especially with its over 50 million songs, and
100,000 TV shows and movies available in its database as of 2019.42
Growth, however, was occurring in the streaming service market, especially with the rising popularity of online radio and Internet
streaming providers Pandora and Spotify, and by 2015 music sales on iTunes had fallen by over 14 percent worldwide. This trend
helped explain why Apple acquired the monthly subscription streaming service Beats Music in 2014. The $3 billion acquisition
included headphone maker Beats Electronics,43 and ultimately led to the development of Apple Music in 2015. By April 2019,
Apple Music had over 28 million U.S. subscribers, beating out Spotify.44 Worldwide, Spotify still had a lead, especially when
factor- ing in non-paying users, but Apple was working to draw from its base of 900 million iPhone users to increase this.
The App Store – Apple Arcade, Apple News+
In March 2008, Apple announced that it was releasing the iPhone software development kit (SDK), allowing develop- ers to
create applications for the iPhone and iPod Touch and sell these third-party applications via the Apple App Store. The App Store
was made available on iTunes, and it was directly available from the iPhone, iPad, and iPod Touch products. This opened the
window for another group of Apple customers, the application developers, to collabo- rate with Apple. Developers could
purchase the iPhone Developer Program from Apple for $99, create either free or commercial applications for the iPhone and
iPod Touch, and then submit these applications to be sold in the App Store. Developers would be paid 70 percent of the down-
load fee customers paid to the App Store, and Apple would get 30 percent of the revenue.
By 2019, over 180 billion apps had been downloaded from Apple’s App Store,45 but Google Play, the app store for Android
users, had grabbed more of the download business. In the third quarter of 2018 the App Store saw 7.6 billion downloads, while
Google Play had 19.5 billion. The most popular App Store downloads were games.46 It was worth noting that the mobile app
industry was large—in 2019 there were an estimated 2.7 billion smartphone users and 1.35 billion tablet users worldwide, and
this number was expected to continue to grow. Data showed that 90 per- cent of mobile time was spent on apps, and this was a
po- tentially lucrative business for both the app developer and
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the platform host. Apple was intending to capitalize on this by offering its new Apple Arcade, an ad-free subscription service,
providing access to over 100 exclusive or new games. Apple was attracting game developers who appreci- ated the superior
iPhone animation technology and, unlike on the Google Play platform, Apple had the ability to pro- vide security and protection
against malware, counterfeit- ing, and piracy. This meant high quality games would be available for Apple products
exclusively.47
Also available in 2019 in the App Store was Apple News+, a $9.99 per month subscription to 300 magazines including Time,
Vogue, Popular Science, Sports Illustrated, and Fortune. Premium digital content from The Wall Street Journal, Los Angeles
Times, and TechCrunch made this an attractive offering.
Apple Pay/Apple Card
Introduced in late 2014, Apple Pay allowed iPhone users in the United States to make secure payments for goods and services
using their phones. With over 1 million credit and debit card activations within the first 72 hours of its release, Apple Pay was
intended to replace the user’s wallet and, according to CEO Tim Cook, would “forever change the way all of us buy things,”
primarily because the process was more secure than a traditional card-based transaction. Major retailers such as Macy’s,
Walgreens, McDonald’s, Whole Foods, and Disney had all agreed to accept Apple Pay. Apple reportedly received 0.15 percent of
each pur- chase, making the service a potentially lucrative venture, but adoption had been poor, with only one-third of iPhone
users trying it once or more. In 2019, Apple debuted the Apple Card in partnership with Mastercard and Goldman Sachs. This
was both a digital and physical credit card option that provided better security in its physical form, since nothing was printed on
the card. The digital card could be used anywhere Apple Pay was accepted, while the physical version could be used in other
places. Apple was hoping this option would increase the use of Apple Pay.
Other Products: Apple Watch, AirPods,
HomePod, Apple TV
Apple Watch was the first all-new product since the iPad, and therefore CEO Tim Cook’s most ambitious gamble. Once again,
Apple was not the first company to enter the wearable tech space, following the lead of Samsung, Sony, and Motorola, and
competing against fitness trackers produced by Nike, FitBit, and others. However, Apple’s pre- orders for the launch in 2015
indicated demand would run to a combined five to six million units of the three watch models.48 This category was a bit of a
departure for Apple as it had positioned the Watch as a personalized device, with the market segmented between mass market and
luxury.49 Although initial sales appeared disappointing, Apple continued to innovate the product, and by 2019 had sold over 46
million, making the Apple Watch the number one smartwatch in the world. Software improvements using
HealthKit and ResearchKit had helped wearers monitor and improve their health and fitness, showing that this device was more
than just an iPhone extension on the wrist.
Apple’s AirPods, first released in 2016, were Apple’s most popular accessory product, with over 35 million units sold in 2018.
These wireless Bluetooth earphones not only played audio but could handle phone calls and receive assistance from Siri, Apple’s
digital assistant. AirPods had full functionality with all Apple products, including Apple Watch and Apple TV.
The Apple HomePod was another way to interact with Apple devices. This smart speaker introduced in early 2018 was intended
to compete with Amazon’s Echo and Google’s Home device, and by 2019 the Apple device had captured a 6 percent share.
Reviews had been mixed, however, especially since the HomePod version of Siri was not as helpful as Ama- zon’s Alexa or
Google’s Assistant, so the initial price had been lowered, presumably to attract more Apple users.50 Once again, the intention
was to use the device for its high quality speaker capability, pairing it with AppleTV, Apple Music, and the iPhone, extending the
reach of the Apple ecosystem.
Apple TV, around since 2007, had undergone four upgrades, and had partnered with NBC Universal to offer users access to seven
of its networks’ most popular series. Similar to rivals Roku, Amazon Fire, and Chromecast, Apple TV was a digital media player
that could stream con- tent to a compatible television. Unlike its rivals, Apple TV could play all the content from iTunes, apps,
and games from the iPhone, and use Siri voice recognition software to search and recognize viewer choices. However, it was
more expensive and did not provide easy access to Amazon Prime content, a popular destination for many viewers. 2019 saw the
addition of new services Apple TV+ streaming service, designed to cement loyalty among Apple users.51 Original content
designed for Apple TV+ and access to streaming content from other providers may be a new and developing revenue source for
Apple.52
Product Extensions, Growth of Services
Rumors surfaced in 2015 that Apple had acquired resources, primarily engineers and related technology, that would enable it to
develop an automobile ready for market by 2020. Speculation was that the Apple would not do the actual assembly but, as with
its other products, would use its sophisticated supply chain expertise to outsource manu- facturing, focusing its considerable
innovation skills on the design and sales of a product that incorporates Apple tech- nology in multiple configurations.53 By 2019,
restructuring had led to the dismissal of over 200 employees from Apple’s Project Titan autonomous driving unit. Rumors had
spread that Apple would not pursue the actual automo- bile, but instead was investigating the development of self- driving car
software, or the application of artificial intelligence in multiple products, using its available cash to acquire both businesses and
people, making a “heavy invest- ment in machine learning and autonomous systems.”54
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With the existing hardware products all appearing to stagnate, analysts were looking to Apple’s services and “other products” for
growth opportunities. While the “other” products such as Apple Watch, Apple TV, AirPods, and HomePod grew 35 percent in
FY2018, the services category—which included Apple Pay, Apple Music, iCloud, iTunes, and the App Store—grew 24 percent to
a record $37.2 billion and accounted for 14 percent of all revenues, beating every category except the iPhone. In addition, mak-
ing this sector more attractive, profit margin estimates aver- aged almost 64 percent. In particular, the App Store, having tripled
revenue between 2013 and 2016, was projected to produce about two-thirds of Apple’s growth target for 2020.55 In 2019, Apple
reported over 390 million paid subscriptions across its services portfolio, an increase of 120 million since the previous year.
Many analysts were wondering whether Apple could create “the world’s greatest subscription model, where users can opt to have
the latest iPhone and many services for a fixed fee. This would lock many into its ecosystem and create a constant stream of
56
recurring revenues.” Others cautioned that Apple’s strength
is “using the services division to boost the sales of the iPhone and keep people locked into an ever-growing cycle of updated
hardware.”57 This may be Apple’s exact intention.
The Future of Apple
Under Cook, Apple had transitioned itself “from being a hypergrowth company to being a premium, branded con- sumer
company.”58 Apple was a truly vertically integrated designer and marketer of products and services. If long-time Apple fans
were not satisfied with the state of Apple’s innovation today, they might have to realize, as former Ap- ple marketing guru Guy
Kawasaki did, that
[It is] difficult for Apple to top itself. …. It would be foolish to bet against Apple based on my experience…. If nothing else, Apple
will once again force everyone to improve their game.59
As CEO Tim Cook said during the second quarter earnings call of 2019:
One of Apple’s great strengths is our culture of flexibility, adaptability, and creativity. This quarter featured some important
announcements that speak to the power of our commitment to innovation and long- term thinking… we previewed a game-
changing array of new services, each of them rooted in principles that are fundamentally Apple…. These features aren’t just nice
to have. They actually help to eliminate the boundary between hardware, software, and service, creating a singularly exceptional
experience for our users.60
It is entirely possible Apple is not done innovating.
ENDNOTES
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http://blogs. wsj.com/digits/2015/02/17/apple-orders-more-than-5-million-watches- for-initial-run/?mod=rss_Technology.
49 Cybart, N. 2015. Don’t focus on Apple Watch edition pricing. SeekingAlpha, February 25,
http://seekingalpha.com/article/2950516- dont-focus-on-apple-watch-edition-pricing.
50 Sun, L. 2018. Apple gains a foothold in the smart speaker market: A foolish tale. USAToday, August 18,
https://www.usatoday.com/story/ tech/news/2018/08/18/apple-market-share-smart-speaker-google- amazon/37458353/.
51 https://www.macrumors.com/2019/11/01/hands-on-with-apple-tv-plus/ 52 Dilger, D.E. 2019. Editorial: Apple’s super obvious
secret–Services is
software. Apple Insider, May 1, https://appleinsider.com/ articles/19/05/01/editorial-apples-super-obvious-secret—services-is-
software.
53 DoctoRx. 2015. The real importance of the Apple car project. SeekingAlpha, February 20,
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036a6dfaf470ca644123bac661ffb276&uprof=14.
54 Painter, L. 2017. iCar release date rumours, features and images– Apple Car rumours. MacWorld, March 3,
http://www.macworld.co.uk/ news/apple/icar-apple-car-release-date-rumours-news-caros-evidence- patents-march-2017-
3425394/; Betz, B. 2019. Apple increased autonomous testing in 2018 (update). SeekingAlpha, February 13,
https://seekingalpha.com/news/3432866-apple-increased-autonomous- testing-2018-update.
55 D.M. Martins Research. 2017. App store: Key to apple’s growth target. Seeking Alpha, March 29,
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0:243d936e23ab6d685e106ccb80db6615&uprof=14.
56 The Growth Guy. 2019. What is the next big phase in Apple’s growth? Subscriptions. SeekingAlpha, March 28,
https://seekingalpha.com/ article/4251532-next-big-phase-apples-growth-subscriptions.
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failure/#27e8c28b2315.
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Assessing the Internal Environment of the Firm
chapter 3
Learning Objectives
After reading this chapter, you should have a good understanding of:
LO3.1 The benefits and limitations of SWOT analysis in conducting an internal analysis of the firm.
LO3.2 The primary and support activities of a firm’s value chain.
LO3.3 How value-chain analysis can help managers create value by investigating relationships among activities within the firm and between the firm and its customers and suppliers.
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Learning Objectives
LO3.4 The resource-based view of the firm and the different types of tangible and intangible resources, as well as organizational capabilities.
LO3.5 The four criteria that a firm’s resources must possess to maintain a sustainable advantage and how value created can be appropriated by employees and managers.
LO3.6 The usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms.
LO3.7 The value of the “balanced scorecard” in recognizing how the interests of a variety of stakeholders can be interrelated.
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The Importance of the Internal Environment
Consider…
Which activities must a firm effectively manage and integrate in order to attain competitive advantages in the marketplace?
Which resources and capabilities must a firm create and nurture in order to sustain a competitive advantage?
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What if two firms compete in the same industry and both have many strengths in a variety of functional areas: marketing, operations, logistics, etc. However, one of these firms outperforms the other by a wide margin over a long period of time. How can this be? The value-creating activities that the firm manages well, and the bundles of resources and capabilities that the firm has created and nurtured over time are crucial to answering this question.
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The Limitations of SWOT Analysis
Strengths may not lead to an advantage
SWOT’s focus on the external environment is too narrow
SWOT gives a one-shot view of a moving target
SWOT overemphasizes a single dimension of strategy
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SWOT is a good starting point, but it doesn’t give enough guidance regarding the specific action steps needed to enact strategic change. For instance, a firm may have a capability that is a strength, but that, by itself, cannot create or sustain competitive advantage. It’s too easy to become preoccupied with a single dimension or element of what is, essentially, a moving target…MORE analysis is necessary, which is where the value chain comes in. See Strategy Spotlight 3.1
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Value-Chain Analysis
Value-chain analysis looks at the sequential process of value-creating activities
Value is the amount buyers are willing to pay for what a firm provides
How is value created within the organization?
How is value created for other organizations in the overall supply chain or distribution channel?
The value received must exceed the costs of production
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Value-chain analysis = a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm’s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm’s competitive position.
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Example: Streamlining the Value Chain
IBM & SAP have teamed up to help firms reduce value chain inefficiencies & improve operational effectiveness
Benefits of value chain streamlining:
Commonality between parts & suppliers
Integration of sales forecasting & inventory management
Lowered transaction, infrastructure & operating costs
Deliver products to market faster
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When Philips Consumer Electronics needed to quickly improve customer satisfaction and business profitability, they looked to IBM to create a future-focused supply chain strategy. IBM launched a multifaceted initiative to address all process and infrastructure elements of the supply chain from procurement through manufacturing and order fulfillment. Best-in-class warehouse and transportation management were integrated in to Philip’s SAP system: Production schedules now meet inventory specs—improving customer satisfaction while avoiding penalties for missed delivery dates. Savings in transportation and warehouse management is expected to exceed US$8M. Overall benefits include reducing operating costs by automating buy and supply processes. Increasing efficiency by integrating business processes such as sales forecasting and inventory management. Decreasing production cycle by building a responsive and flexible supply chain. See http://www.ibm.com/solutions/sap/us/en/solution/U370542E61180I63.html
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Value-Chain Analysis
Primary activities contribute to the physical creation of the product or service; the sale & transfer to the buyer; and service after the sale:
Inbound logistics
Operations
Outbound logistics
Marketing & sales
Service
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Primary activities = sequential activities of the value chain that refer to the physical creation of the product or service, its sale and transfer to the buyer, and its service after sale, including inbound logistics, operations, outbound logistics, marketing and sales, and service.
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Value-Chain Analysis
Support activities either add value by themselves or add value through important relationships with both primary activities & other support activities:
Procurement
Technology development
Human resource management
General administration
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Support activities = activities of the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities; including procurement, technology development, human resource management, and general administration.
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The Value Chain
Exhibit 3.1 The Value Chain: Primary and Support Activities
Source: Reprinted with permission of The Free Press, a division of Simon & Schuster Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by The Free Press. All rights reserved.
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To get the most out of value-chain analysis, view the concept in its broadest context, without regard to the boundaries of your own organization – place your organization within a more encompassing value chain that includes your firm’s suppliers, customers, and alliance partners. This helps identify how value is created for other organizations in the overall supply chain or distribution channel. For an interesting example, see Case 16: The Movie Exhibition Industry, or look at Case 31: General Motors (remember the strategic groups discussion from Chapter 2? What does GM have to do to compete with other groups in its industry? How important might the value chain be in this industry?)
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Question?
In assessing its primary activities, an airline would examine:
Employee training programs
Baggage handling
Criteria for lease versus purchase decisions
The effectiveness of its lobbying activities
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Answer: B – baggage handling involves transfer of service to buyer, and is part of airline operations
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Primary Activity: Inbound Logistics
Inbound logistics is primarily associated with receiving, storing & distributing inputs to the product:
Material handling
Warehousing
Inventory control
Vehicle scheduling
Returns to suppliers
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Inbound logistics = receiving, storing, and distributing inputs of a product. Example = Toyota’s just-in-time (JIT) inventory systems where parts deliveries arrive at the assembly plants only hours before they are needed. This allows Toyota to fill a buyer’s new car order in just 5 days. Inbound logistics includes location of distribution facilities, design of material and inventory control systems, warehouse layout and design, and efficient systems to return products to suppliers.
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Primary Activity: Operations
Operations include all activities associated with transforming inputs in to the final product form:
Machining
Packaging
Assembly
Testing or quality control
Printing
Facility operations
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Operations = all activities associated with transforming inputs into the final product form. Example = Shaw Industries’ ability to reduce expenses associated with the disposal of dangerous chemicals used in the manufacture of floor coverings. Operations includes assessment of efficiency of plant operations, incorporation of appropriate process technology, efficient plant layout and workflow design, degree of automation, extent of appropriate quality control systems.
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Primary Activity: Outbound Logistics
Outbound logistics includes collecting, storing, & distributing the product or service to buyers:
Finished goods
Warehousing
Material handling
Delivery vehicle operation
Order processing
Scheduling & distribution
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Outbound logistics = collecting, storing, and distributing the product or service to buyers. Example = Campbell Soup uses an electronic network so retailers can inform Campbell of product needs and inventory levels. This allows Campbell to forecast future demand and determine which products to replenish, delivering inventory the same day. The retailer gains efficiency, and therefore has an incentive to carry a broader line of Campbell products. Outbound logistics includes effective shipping processes to provide quick delivery and minimize damages, efficient finished goods warehousing processes, the ability to ship goods in large lot sizes to minimize transportation costs, and the use of quality material handling equipment. (See also Case 33: Campbell Soup)
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Primary Activity: Marketing & Sales
Marketing & sales activities involve purchases of products & services by end users and includes how to induce buyers to make those purchases:
Advertising
Promotion
Sales force management
Pricing & price quoting
Channel selection
Channel relations
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Marketing and sales = activities associated with purchases of products and services by end users and the inducements used to get them to make purchases. Example = the BMW supercar used in the Mission Impossible: Ghost Protocol movie got premiere “product placement” as Tom Cruise drove it in a race through Mumbai traffic. Marketing and sales includes the development of a highly motivated and competent sales force, innovative approaches to promotion and advertising, selection of the most appropriate distribution channels, proper identification of customer sergments and needs, and effective pricing strategies.
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Primary Activity: Service
Service includes all actions associated with providing service to enhance or maintain the value of the product:
Installation
Repair
Training
Parts supply
Product adjustment
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Service = actions associated with providing service to enhance or maintain the value of the product. Example = Nordstrom service reps can take control of the customer’s Web browser and lead her to the specific product she wants. Service includes effective use of procedures to solicit customer feedback and to act on information, quick response to customer needs and emergencies, ability to furnish replacement parts, effective management of parts and equipment inventory, quality of service personnel and ongoing training, and warranty and guarantee policies.
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Support Activity: Procurement
Procurement involves how the firm purchases inputs used in its value chain:
Procurement of raw material inputs
Optimizing quality & speed
Minimizing associated costs
Development of collaborative win-win relationships with suppliers
Analysis & selection of alternative sources of inputs to minimize dependence on one supplier
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SUPPORT ACTIVITIES are those functions that support the value chain – each industry might have distinct value activities that are unique to that industry, but here are some common ones. Procurement = the function of purchasing inputs used in the firm’s value chain, including raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings. Example = Microsoft does formal reviews of its outside suppliers, including a feedback system that helps clarify expectations. LG electronics centralized purchasing decisions for all divisions, and gained substantial cost savings over competitors. See Strategy Spotlight 3.3. In addition to the above activities, procurement includes effective procedures to purchase advertising and media services, and the ability to make proper lease versus buy decisions.
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Support Activity: Technology Development
Technology development is related to a wide range of activities:
Effective R&D activities for process & product initiatives
Collaborative relationships between R&D and other departments
State-of-the-art facilities & equipment
Excellent professional qualifications of personnel
Organizational culture to enhance creativity & innovation
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Technology development = activities associated with the development of new knowledge that is applied to the firm’s operations. The array of technologies employed in most firms is very broad, ranging from technologies used to prepare documents and transport goods, to those embodied in processes and equipment or the product itself. Technology development related to the product and its features supports the entire value chain, while other technology development is associated with particular primary or support activities. Example = Honeywell merger with Allied Signal brought together 13,000 scientists and an $870 million R&D budget to create innovative performance materials and control systems. Technology development includes activities related to the process as well as the product, such as enhancing the ability to meet critical deadlines.
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Support Activity: Human Resource Management
Human resource management consists of activities involved in recruitment, hiring, training & development, & compensation of all types of personnel:
Effective employee retention mechanisms
Quality relations with trade unions
Reward & incentive programs to motivate all employees
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Human resource management = activities involved in the recruiting, hiring, training, development and compensation of all types of personnel. It supports both individual primary and support activities such as the hiring of engineers and scientists, as well as supporting the entire value chain through activities such as negotiations with labor unions. Example = JetBlue recruited flight attendants with a one-year contract so they could travel, meet lots of people, then decide what else they might like to do. Human resource management includes creating a quality work environment to maximize overall employee performance and minimize absenteeism.
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Support Activity: General Administration
General administration involves
Effective planning systems to attain overall goals & objectives
Excellent relations with diverse stakeholder groups
Effective information technology to coordinate & integrate value-creating activities across the value chain
Ability of top management to anticipate & act on key environmental trends & events, create strong values, culture & reputation
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General administration = general management, planning, finance, accounting, legal and government affairs, quality management, and information systems; activities that support the entire value chain and not individual activities. These activities can be among the most important activities for competitive advantage. Example = how a telephone operating company effectively negotiates and maintains ongoing relations with regulatory bodies. General administration also includes, for instance, the ability to obtain low-cost funds for capital expenditures and working capital.
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Interrelationships Among Value-Chain Activities
Interrelationships among activities within the firm
Relationships among activities within the firm and with other stakeholders such as customers & suppliers
Managers must not ignore the importance of interrelationships among value-chain activities
Expand the value chain by exchanging resources
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Interrelationships = collaborative and strategic exchange relationships between value-chain activities either (a) within firms or (b) between firms. Strategic exchange relationships involve exchange of resources such as information, people, technology, or money that contribute to the success of the firm. Example = within the firm, how CarMax’s proprietary information system tracks car inventory with every car test drive and purchase. See Strategy Spotlight 3.4. Example = between the firm and stakeholders, how Proctor & Gamble involved customers and suppliers in growing its fragrance business through a “prosumer” or crowdsourcing relationship.
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Example: The Value Chain in Service Organizations
Exhibit 3.4 Some Examples of Value Chains in Service Industries
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The value chain might be configured differently depending on the type of business a firm is engaged in. For instance a travel agent adds value by creating an itinerary that includes transportation, accommodations, and activities customized to the client’s budget and travel dates, while a law firm provides services specific to the client’s circumstances. Both involve work “operations” dependent on the application of specialized knowledge based on the specifics, the “inputs” of the situation, and the outcome, the “output” the client desires. In retail, a firm adds value by developing expertise in the procurement of finished goods and by displaying these goods in stores in a way that enhances sales. Therefore procurement is a primary activity rather than a support activity. In an engineering services firm, research and development are primary activities, providing inputs to the engineering process, while innovative designs are the outputs. How the primary and support activities of a given firm are configured and deployed will often depend on industry conditions and whether the company is service and/or manufacturing oriented. (For more discussion in a service context, see Case 34: United Way)
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Resource-Based View of the Firm
The resource-based view of the firm (RBV)
Combines an internal analysis of phenomena within a company
With an external analysis of the industry & its competitive environment
Resources can lead to a competitive advantage
If they are valuable, rare, hard to duplicate
When tangible resources, intangible resources, & organizational capabilities are combined
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A firm’s strengths and capabilities – no matter how unique or impressive – do NOT necessarily lead to a competitive advantage. Resource-based view of the firm = perspective that firms’ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities.
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Types of Firm Resources
Tangible resources are assets that are relatively easy to identify:
Physical assets: plant & facilities, location, machinery & equipment
Financial assets: cash & cash equivalents, borrowing capacity, capacity to raise equity
Technological resources: trade secrets, patents, copyrights, trademarks, innovative production processes
Organizational resources: effective planning processes & control systems
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Firm resources are all assets, capabilities, organizational processes, information, knowledge, etc. controlled by a firm – resources that enable it to develop and implement value-creating strategies.Tangible resources = organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources. These include assets that the firm uses to create value for its customers: physical resources such as the plant’s proximity to customers and suppliers; financial resources such as accounts receivables; organizational resources such as employee development, evaluation and reward systems; technological resources such as trade secrets and patents.
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Types of Firm Resources
Intangible resources are difficult for competitors to account for or imitate – are embedded in unique routines & practices:
Human resources: trust, experience & capabilities of employees; managerial skills & effectiveness of work teams
Innovation resources: technical & scientific expertise & ideas; innovation capabilities
Reputation resources: brand names, reputation for fairness with suppliers; reliability & product quality with customers
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Intangible resources = organizational assets that are difficult to identify and account for, and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources. Example = Harley-Davidson’s strong brand image. A firm’s specific practices and procedures, and the firm’s culture, may also be resources that provide competitive advantage.
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Types of Firm Resources
Organizational capabilities are competencies or skills that a firm employs to transform inputs into outputs; the capacity to combine tangible & intangible resources to attain desired ends
Outstanding customer service
Excellent product development capabilities
Superb innovation processes & flexibility in manufacturing processes
Ability to hire, motivate, & retain human capital
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Organizational capabilities = the competencies and skills that a firm employs to transform inputs into outputs. Capabilities involve an organization’s capacity to deploy tangible and intangible resources over time and generally in combination, and to leverage those capabilities to bring about a desired end. Example = Apple’s ability to combine and package technological components in new and innovative ways while also seeking to integrate the value chain. See Case 6: Apple.
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Question?
Gillette combines several technologies to attain unparalleled success in the wet shaving industry. This is an example of their
tangible resources.
intangible resources.
organizational capabilities.
strong primary activities.
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Answer: C, organizational capabilities in combining technologies in innovative ways
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Firm Resources and Sustainable Competitive Advantages
Strategic resources have four attributes:
Valuable in formulating & implementing strategies to improve efficiency or effectiveness
Rare or uncommon; difficult to exploit
Difficult to imitate or copy due to physical uniqueness, path dependency, causal ambiguity, or social complexity
Difficult to substitute with strategically equivalent resources or capabilities
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Strategic resources (also firm resources or organizational resources) = firms’ capabilities that are valuable, rare, costly to imitate, and costly to substitute. Firm attributes must be valuable in order to be considered resources and potential sources of competitive advantage. These valuable resources enable a firm to formulate and implement strategies that improve its efficiency or effectiveness. If competitors or potential competitors also possessed the same valuable resource, it is not a source of competitive advantage unless it is uncommon or rare. Inimitability or being difficult to imitate is the key to value creation because it constrains competition. Having a resource that competitors can easily copy generates only temporary value. Non-substitutability means there is no strategically equivalent valuable resources that are themselves not rare or inimitable.
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Sources of Inimitability
Physical uniqueness: resources that are physically unique
Path dependency: scarce because of all that has happened along the path followed in a resource’s development and/or accumulation
Causal ambiguity: impossible to explain what caused it to exist or how to re-create it
Social complexity: a result of social engineering such as interpersonal relations
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Physical uniqueness = a beautiful resort location, mineral rights, or patents. Path dependency = a characteristic of resources that is developed and or accumulated through a unique series of events. Causal ambiguity = a characteristic of the firm’s resources that is costly to imitate because a competitor cannot determine what the resource is and/or how it can be re-created. Social complexity = a characteristic of a firm’s resources that is costly to imitate because the social engineering required is beyond the capability of competitors, including interpersonal relations among managers, organizational culture, and reputation with suppliers and customers.
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Criteria for Sustainable Competitive Advantage
Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications
Source: Adapted from Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17:99 – 120.
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Resources and capabilities must be rare and valuable as well as difficult to imitate or substitute in order for a firm to attain competitive advantages that are sustainable over time. If resources and capabilities do not meet any of the four criteria it would be difficult to develop any type of competitive advantage in the short or long run. If resources and capabilities are not difficult for competitors to imitate or substitute firms could attain some level of competitive parity. Only when all four criteria are satisfied will competitive advantages be sustained over time.
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The Generation and Distribution of the Firm’s Profits
Four factors help explain the extent to which employees and managers will be able to obtain a proportionately high level of the profits that they generate:
Employee bargaining power
Employee replacement cost
Employee exit costs
Manager bargaining power
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The resource based view of the firm is useful in determining when firms will create competitive advantages and enjoy high levels of profitability. These profits can be retained or appropriated by employees or managers (and not owners or shareholders) by various methods: employee bargaining power allows employees to earn disproportionately high wages; if employee skills are rare it will be costly to replace them; if an employee’s expertise is firm-specific or of limited value it would be difficult for the employee to explain his or her specific contribution to the firm, therefore would be costly for that employee to exit; if managers have sources of information that may not be readily available to others they will have bargaining power. See chapter 9 for a discussion of how corporate governance can be a critical control mechanism here.
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Evaluating Firm Performance
Balance sheet
Income statement
Market valuation
Historical comparison
Comparison with industry norms
Comparison with key competitors
Employees
Owners
Customer satisfaction
Internal processes
Innovation, learning & improvement activities
Financial perspectives
Financial Ratio Analysis
Balanced Scorecard Stakeholder Perspective
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Financial ratio analysis = a technique for measuring the performance of a firm according to its balance sheet, income statement, and market valuation. When performing a financial ratio analysis, you must take into account the firm’s performance from a historical perspective (not just at one point in time) as well as how it compares with both industry norms and key competitors. Balanced scorecard = a method of evaluating a firm’s performance using performance measures from the customers’, internal, innovation and learning, and financial perspectives.
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Financial Ratio Analysis
Five types of financial ratios
Short-term solvency or liquidity
Long-term solvency measures
Asset management or turnover
Profitability
Market value
Meaningful ratio analysis must include:
Analysis of how ratios change over time
How ratios are interrelated
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Financial ratio analysis = a technique for measuring the performance of the firm according to its balance sheet, income statement, and market valuation. A meaningful ratio analysis must go beyond the calculation and interpretation of financial ratios. It must include how ratios change over time as well as how they are interrelated. A firm’s financial position should not be analyzed in isolation: historical comparisons, comparisons with industry norms, and comparisons with key competitors make financial analysis more meaningful.
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Five Types of Financial Ratios
Exhibit 3.9 A Summary of Five Types of Financial Ratios
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Appendix 1 to chapter 13 (the case analysis chapter) provides detailed definitions for and discussions of each of these types of ratios as well as examples of how each is calculated.
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The Balanced Scorecard
A meaningful integration of many issues that come into evaluating performance
Four key perspectives:
How do customers see us? (customer perspective)
What must we excel at? (internal perspective)
Can we continue to improve and create value? (innovation & learning perspective)
How do we look to shareholders? (financial perspective)
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Balanced scorecard = a method of evaluating a firm’s performance using performance measures from the customers’, internal, innovation and learning, and financial perspectives. It includes financial measures that reflect the results of actions already taken, but it complements these indicators with measures of customer satisfaction, internal processes, and the organization’s innovation and improvement activities – operational measures that drive future financial performance. The balanced scorecard approach recognizes how the interests of a variety of stakeholders can be interrelated.
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Customer Perspective
Managers must articulate goals for four key categories of customer concerns:
Time
Quality
Performance and service
Cost
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Customer perspective = measures of firm performance that indicate how well firms are satisfying customers’ expectations. Managers must translate their general mission statements on customer service into specific measures that reflect the factors that really matter to customers.
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Internal Business Perspective
Managers must focus on those critical internal operations that enable them to satisfy customer needs:
Business processes
Cycle time, quality, employee skills, productivity
Decisions
Coordinated actions
Key resources and capabilities
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Internal business perspective = measures of firm performance that indicate how well a firm’s internal processes, decisions, and actions are contributing to customer satisfaction. Customer-based measures are important, however they must be translated into indicators of what the firm must do internally to meet customer’s expectations. The internal measures should reflect business processes that have the greatest impact on customer satisfaction.
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Innovation and Learning Perspective
Managers must make frequent changes to existing products & services as well as introduce entirely new products with extended capabilities. This requires:
Human capital (skills, talent, knowledge)
Information capital (information systems, networks)
Organization capital (culture, leadership)
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Innovation and learning perspective = measures of firm performance that indicate how well firms are changing their product and service offerings to adapt to changes in the internal and external environments. A firm’s ability to improve, innovate, and learn is tied directly to its value. Simply put, only by developing new products and services, creating greater value for customers, and increasing operational efficiencies can a company penetrate new markets, increase revenues and margins, and enhance shareholder value. A firm’s ability to do well from an innovation and learning perspective is more dependent on its intangible than tangible assets.
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Financial Perspective
Managers must measure how the firm’s strategy, implementation, and execution are indeed contributing to bottom line improvement. Financial goals include:
Profitability, growth, shareholder value
Improved sales
Increased market share
Reduced operating expenses
Higher asset turnover
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Financial perspective = measures of firms financial performance that indicate how well strategy, implementation and execution are contributing bottom-line improvement. Periodic financial statements remind managers that improve quality, response time, productivity, and innovative products benefit the firm only when they result in improved sales, increased market share, reduced operating expenses, or higher asset turnover.
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Limitations of the Balanced Scorecard
Not a “quick fix” – needs proper execution
Needs a commitment to learning
Needs employee involvement in continuous process improvement
Needs cultural change
Needs a focus on nonfinancial rather than financial measures
Needs data on actual performance
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There is general agreement that there is nothing inherently wrong with the concept of the balanced scorecard. The key limitation is that some executives may view it as a “quick fix” that can be easily installed. Implementing a balanced metrics system is an evolutionary process. It is not a one-time task that can be quickly checked off as completed. If managers do not recognize this from the beginning and fail to commit to it long-term, the organization will be disappointed. Poor execution becomes the cause of such performance outcomes. And organizational scorecards must be aligned with individuals’ scorecards to turn the balanced scorecards into a powerful tool for sustained performance. (For a variation on the balanced scorecard concept, see the Malcolm Baldrige National Quality Award at http://www.nist.gov/baldrige/publications/criteria.cfm. This award encourages organizations to focus on critical aspects of managing and performing as an organization, using an integrated performance management framework that addresses innovation management, intelligent risk, and strategic priorities; social media; operational effectiveness; and work systems and core competencies. Through a self-study process, organizations can submit their findings for the award in business/non profit, education, and healthcare categories.)
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