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1. Apple did better in its iPod business than it did in its PC business. Explain why.

Justify
your answer through the application of industry analysis and other strategy concepts
discussed in this course.
In the early years, Apple focused on manufacturing low cost computers, working together with
IBM, cooperating with Novell and Intel to create a new operating system that run on Intel
platform. However, these projects had not achieved success until Steve Jobs became the CEO
and refocused the original strategy for Apple. Jobs was able to create a competitive advantage for
the company through restructuring and innovating software, hardware, marketing, digital asset
management, retail strategy, and product differentiation. With these advantages, Apple was
saved from bankruptcy and has gained a positive reputation, more customers, and large profit
margin.
The struggle of Apple incorporate in the PC industry was mostly due to the companys inability
to utilize Porters Five Forces. Porters Five Forces analysis is a powerful tool for understanding
a company competitive position in the industry. The first three CEOs of Apple (Scully, Spindler,
and Amelio) failed to address these forces and led the company to the edge of bankruptcy, which
largely contribute to the reason why Apples PC industry suffer more than its iPod business.
Intensity of Competition
The present of several large PC manufacturers such as IBM, Dell, Hp, Acer, etc. substantially
increases the intensity of competition. Additionally, when the Windows operating system
combined with an Intel processor, it created a new standard known as Wintel which dominated
the PC industry. This trend turned every personal computer into a commodity, and the
competition turned into a battle of lower prices, which greatly severe the profit of all companies.

Power of Buyer
There are five categories of buyers, include Home, Small and Medium-sized business, Corporate,
Education, and Government. The power of these customers increases as they become more
knowledgeable and price sensitive to the PC product. The appearance of netbooks also ignited
price sensitive customers interest in these lightweight devices.
Power of Supplier
The supplier power was significant, especially the supplier of Microprocessors and Operating
system. Products in these categories were supplied chiefly by two firms: Intel and Microsoft. As
the two largest companies in their market, Microsoft and Intel were able to dominate other new
entrants and freely control the product prices.
Threat of New Entrant
Large amount of customer shifted from full-service dealers with powerful brands, such as HP
and Apple, to the White box channel, which featured generic machines assembled by local
entrepreneurs. The emerging of white box channel greatly lowered the barrier to entry, allowed
more competitors to enter and compete in the market. Additionally, the recent success of the iPad
also draws consumers away from the PC industry.
Threat of Substitute
The popularity of consumer electronics products, such as game consoles, tablets and
smartphones, has started to replace the functionality of computers. When Apple released the
iPad, Steve Jobs described the new device as even more intuitive and easier to use than a PC,

and where the software and the hardware and the applications need to be intertwined in an even
more seamless way than they are on a PC.
Apple PC business was tightly restricted by the five forces in the industry, and only narrowly
escaped its demise when Steve Jobs became the CEO and repositioned the company where it
could gain its competitive advantage. Among the tailored value chain strategy of Jobs were the
new distribution system and the digital hub strategy, which substantially contribute to the
improved sale of Apple computer. Apples shift toward a digital hub strategy was initiated by the
first introduction of the iPod in 2001. With the iTunes software and the iPod device, Apple has
created more value to the Macintosh, allowing its PC consumers becoming more involved in a
digital lifestyle. While the chance of success for the Apple PC business had been recovered, it
was the iPod that set Apple on its explosive growth path. The new distribution strategy took
advantage of the popularity of media products such as the iPod to bring consumers into the
stores, and expose them to the Macintosh product line.
When iPod was launched, it immediately became an innovative product that appeal to
consumers. From the iPods sleek design, simple user interface, to battery technology and life,
storage, resolution quality, Apple has created a device that became an icon of the Digital Age.
Apple even invested in several memory producers to secure output at the best prices and became
one of the largest buyers of flash memory. However, the long term success of Apple in the
digital music industry was primarily due to iTunes music store. The iTunes music store
differentiated Apple from others competitors by creating a platform for digital music, for which
the iPod is the perfect companion. Apple clearly defined that the primary role of the iTunes was
not generating profit for the company, but served as a loss leader for a profit-driving durable
good, i.e. the iPod. While iTunes has become the worlds largest music store, featuring the

largest music catalog, its impact of Apples revenue was far less significant in contrast to the
explosive iPod sales.
The competition was intense in the music products and services as other companies promote
song download and digital content at discounted prices. However, iTunes has evolved
considerably that customers were tied to this music platform due to its convenience and ease of
use. As more people buy iPods, more media and content companies want to sell their content on
iTunes, which further increase the sale of iPods. Most songs offered by competitors can be
played on various devices, including the iPod.
The buyer powers were weak as most iPod purchases were for individual use. Additionally,
Apple could keep the iPods at premium price because the company was able to differentiate the
product and turned it into an icon of the Digital Age. iPod consumers were also willing to pay
more for an iPod add-on product.
As one of the largest purchasers of flash memory in the world, Apple gained significant
advantages over its suppliers and got the best prices for the components that had the biggest
costs.
The threat of new entrants was high in both the player and music service businesses. At the
hardware level, most players were approximately comparable to iPods models. Fortunately, the
digital music platform that iTunes has created became a major barrier and disadvantage to new
entrants.
The threat of substitutes was increasing. The appearance of internet radio sites such as Pandora,
and Spotify offered free streaming music, and gained more success than iTunes in some markets.

When the PC industry reached its maturity, where almost everyone already has their own
computer, Apple was in a tight spot until it could create differentiations in its PC to keep the
premium prices, and relied on the popularity of the iPods to increase sale. On the other hand,
Apple iPod business didnt suffer from initial loss of profit like its PC counterpart. Additionally,
the iPod industry faced less intensity from the Porters five forces compared to the PC industry.
This was mainly due to the differentiation advantage created by iTunes digital music platform,
the largest music store in the world. Furthermore, the iPod business also benefited from cost
advantage because Apple was a powerful buyer. As a result, the iPods were available in all price
segments, with iPod ASPs retailed for 50$ to 100$ more than the rivals mp3 player.
2. Perform an industry analysis of the smart-phone industry. Do you believe Apple was
effective in neutralizing the threats and capitalizing on the opportunities posed by the
forces in the smart-phone industry? If yes, explain how. If not, explain why not.
Intensity of Competition
Competitive rivalry was very high for mobile phones industry, the market was dominated by
major brand competitors such as Nokia. Motorola, Samsung, HTC, LG Electronics, Research in
Motion (RIM). Competing and gaining economies of scale and market share against major
competitors was challenging to new entrants with little experience. In distribution, powerful
cellular carriers such as T-Mobile, Vodafone, Verizon Wireless, and AT&T had control over the
networks and the phones used on those networks.
After the debut of Android, an open and free platform developed by Google, Apple faced even
more intense competition. Seeing the potential that may rival Apple, many mobile phone
supplier and manufacturer backed the Android platform. Samsung became Apples most direct
competitor after the release of Android-based Galaxy S2 handset.
Apples App Store also faced its rival from Google - the Play Store. As an open and free
platform, Android apps met fewer restrictions and received the attention from app developers
comparable to iPhone apps.
The smartphone intense competition even reached the court regarding lawsuit on design and
intellectual property. In this business, every competitors faced lawsuit and pursued sue. Apple
was the most aggressive in pursuing legal compensation and redress against Android platform
and Android devices.

Power of Buyer
The bargaining power of buyers could be described as medium. The iPhone was considered a
luxury, high-end device that differentiated itself from other mobile phones by its user interface
which was the industry-first multi-touch screen. Apples agreement with AT&T on an
unprecedented revenue-sharing on the first iPhone generation resulted in huge loss of serviceshare revenue because customers found a way to buy iPhones from unauthorized resellers and
used them on unapproved mobile network.
During the release of later iPhone model, Apple revamped its pricing model and gain more
power as a negotiator when the company added more carriers. Additionally, by lowering the
price of prior iPhone model, plus the big subsidies and larger distribution channel, buyers were
exposed and more willing to pay for the easy-to-use iPhone.
As the revolutionary Invention of the year, Apple gained powerful brand recognition for the
iPhone which contributed to the appeal of the device. Furthermore, App Store, the key driver
behind the iPhone sensation, was introduced as part of iTunes and became a attractive business
for Apple thanks to its user friendly interface that easily reach consumers and software
developers.
Power of Supplier
Apple was able to gain significant cost advantage by falling component costs and design
improvements. Thanks to this, the later iPhone model with twice as much storage capacity cost
less than the first iPhone generation. By becoming one of the largest customers of Foxconn in
China, the supplier power was weaken as Apple strived to keep its cost down.
Threat of New Entrant
The threat of new entrants into the smartphone market is relatively low with the exception of
companies that already operate in the electronics industry, such as Samsung. When Android and
Google Play Store made their first appearance, Apple faced intense competition from handset
manufactures and their Android-based devices. However, for companies interested in competing
as new entities, the cost of capital is extremely prohibitive as large amounts of capital would be
required to establish research, development and production facilities.
Threat of Substitute
The threat of substitutes could be considered low as companies have established high barriers of
entry. Since mobile devices included a multitude of services and technology products such as
digital camera in a single device, consumers were discouraged from switching to alternative
products.

Overall, the five forces in the smartphone industry were relatively high. However, Apple was
able to effectively neutralize the threats and take advantage of opportunities to sustain its
competitive edges.
Using its powerful brand recognition, Apple made its way through the intense competition
among major companies. Right from the first debut of the iPhone, this device was recognized as
a revolutionary product that reinvent the phone, receiving immediate attentions from all
stakeholders. To ensure the success of the iPhone, Steve Jobs even made preparation to protect
the companys intellectual property since the earliest days at Apple, and he relentlessly pursuit
legal proceedings to destroy Android. The patent wars have raised the barrier to entry for new
entrants and substitutes even higher.
After the loss of service-share revenue when consumers found a way to buys iPhones from grey
market, Apple immediately changed its relationship with carriers from single to multiple
carriers selling iPhones. As a result, the iPhones received big subsidies, expanded distribution
that cause revenue and unit volumes to explode.
Apple positioned itself as a powerful buyer by becoming one of the largest customers of
Foxconn. Hence, Apple gained substantial cost advantage while keeping the iPhones at premium
price, which consumers were willing to buy even without subsidies. As a result, Apple vied with
Samsung for the largest market share in smartphones, and generated over 50% of mobile phone
industrys profit with less than 4% unit market share.
3. What kind of competitive advantage and business strategy did Apple pursue for its
iPhone business? What value chain activities were used to achieve this competitive
advantage? Do you believe Apples iPhone business strategy was effective? Explain why
or why not.
The success of the iPhone business was primarily due to its differentiation advantage and cost
advantage. Apple was able to gain its competitive advantages through cost leadership,
differentiation, and focus strategies that neutralized potential threats from the smartphone
industry. Apple sought innovative design for the iPhone and strived to develop secured operating
systems, hardware, application software, and services to deliver superior new product which was
differentiated by its ease of use, break-through internet communication technology, and seamless
integration. Thanks to its investment in R&D, Apple has created a cultural icon in the
smartphone industry. While handset manufacturers attempted to imitate Apples success, Apple

was continuing to deliver ground-breaking new products to the market, ensuring its first mover
advantage .Apple also dropped the price of prior generations, expanding its brand loyalty while
increasing customers demand for the latest products. It was the differentiation that increased
powerful branding and reduced price sensitivity. The App store, one key driver behind the
iPhone sensation, made it easy to distribute, access, and download applications directly onto the
iPhones. With its friendly user interface and less restrictions, the App store attracted more
developers to create application software for the iPhones than Android.
Additionally, Apple was effective in keeping the cost of producing the iPhones substantially low.
Initially, Apple provided the iPhones to one single network operator in most markets, agreed to
an unprecedented revenue-sharing which allowed Apple to gain control over distribution,
pricing, and branding, while also lowering its inventory cost as more carriers were added. In the
process of expanding its economies of scale, Apples falling component costs and design
improvements helped to reduce the iPhones cost structure. Apple also outsourced production to
third party manufacturer partners to utilize their economies of scale while eliminating the cost of
production management from the firm.
Apples strategies were successful in the smartphone industry. The iPhone business accounted
for 44% of Apples total revenue within 4 years after its launch, and generated more than 50% of
the cellphone industrys profits with less than 4% unit market share. In many countries, the
demand for iPhone products was growing promptly, and consumers willingness to pay remained
high even without subsidies.

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