VOL. VIII, NOS.

XXI

THE COLUMBIA WORLD REVIEW

an undergraduate guide to international affairs

STRIVING FOR PEACE

a background guide for the APPLE INC. SENIOR MANAGEMENT
by Scott St. Marie
Columbia College
Class of 2010

Topic: Porter’s Five Forces

This edition of the Columbia World Review serves as a companion to the

Eighth Annual Columbia Model United Nations Conference and Exposition, CMUNCE 2009.
THE COLUMBIA WORLD REVIEW TABLE OF CONTENTS
VOLUME V, FALL 2008
~
EDITOR-IN-CHIEF COMMITTEE INTRODUCTION, PAGE 3
SEJAL PATEL
~ LETTER FROM THE CHAIR, PAGE 4
MANAGING EDITOR
MONA SOLIMAN FORMAT, PAGE 5
~
HISTORY, PAGE 6
COPY EDITORS
MONA SOLIMAN
TOPIC I, PAGE 16
HELEN ZHU
BOIN CHEONG
POSITIONS, PAGE 20
ANDREW SCHEINESON
MARIA INSALACO
RESEARCH, PAGE 24
NURIEL MOGHAVEM
~
CHIKARA ONDA
WILLIAM DAI
Cover photo: Columbia University with
~
Sundial, circa 1909
CONTRIBUTORS
EDWARD KIM ~
WILSON WONG
WILL LEONARD This is a publication of Columbia University
DENNIS MARTIN Model United Nations (CUMUN),
TIANYANG SUN copyright 2009.
VICENTE SANCHEZ
NIRAV CHHEDA No part of it may be reproduced or used
CHUCK ROBERTS without the written permission of the
ETHAN WONG executive board of CUMUN and the
ELEANNA VARANGIS secretariat of CMUNCE 2009. Please
STEPHANIE WILHELM address all inquires to CMUNCE 2009, 7487
AMY WANG Lerner Hall, New York, NY 10027.
KAREN WOODIN Thank You.
DORIS CARRION
RHONDA SHAFEI This edition of the Columbia World Review
OLIVIA GREENE serves as a companion to the
WINSTON KUNG Eighth Annual Columbia Model United
ANOUSHKA VASWANI Nations Conference and Exposition,
SARAH BROVMAN CMUNCE 2009.
ASEEL NAJIB
SCOTT ST. MARIE
CHIKARA ONDA
AHSLEY MOSS
BOCHIKA CHEONDA

2
COMMITTEE INTRODUCTION

Apple, Inc., formerly known as Apple Computer, Inc., is an American multinational

corporation with a focus on designing and manufacturing consumer electronic and software
products. It is an icon of the consumer electronics industry. Since its founding in 1976,
Apple has been on the cutting edge of technology with its hip and easy-to-use products.
Not only was Apple named the “most admired company in the United States” by Fortune
magazine, it is a giant in its own right, with more than $24 billion in revenue in 2007 and
28,000 employees. Today, however, Apple stands at a crossroads; the launch of the iPod
has put it back on the map, but its sale of computers—its core business—is falling apart
and it faces a variety of legal challenges. Apple’s Senior Management must face these
challenges and come up with strategies that will ensure that Apple, Inc. stays at the
forefront of digital life.

As a member of that senior management team, you’ve been called by CEO Steve Jobs to
the company’s headquarters in Cupertino, California to develop a bold strategic plan that
will save the company and propel it forward.

3
LETTER FROM THE CHAIR

Delegates,
Welcome to the one committee at CMUNCE where there won’t be famines, bombs,
rebels or invasions. That’s not to say that we won’t be fighting battles, however. Instead,
we’ll be competing in the intense world of high-tech business, which can be even more
dangerous than dealing with rebel juntas or weapons proliferation.
So why have a committee that focuses on business and not politics? Well, they’re a
lot more alike than you might think. Both are incredibly strategic and can have very high
stakes. The “purpose” of this committee, if there is one, is to introduce the world of
business strategy so that you start thinking like a businessperson and perhaps even using
some of the terminology that you might hear on CNBC or the business section of the
newspaper.
If you don’t have time to read the entire background guide or want to know where
to focus, I’d send you to the bottoms of all the pages: to the footnotes. While reading the
“story” behind Apple is important, getting an idea of how its business works is critical.
Further, I’d encourage you to take a couple of the “frameworks” presented in the Topics
section and try to apply them to other companies or products you know about. What are the
“Five Forces” in the video game industry? What might a “value chain” look like for the
cereal you ate this morning.
The point of presenting all of this general information is not to make CMUNCE
feel like a class or to get you ready for an MBA. It’s simply to get you to start thinking
strategically about business problems. While you and I may only interact with Apple when
we buy an iPod or download a song off of iTunes, the reality is that you and I as consumers
are just one part of what makes Apple’s business model tick.
As part of this letter I’m supposed to explain how this committee is important to
me. While I’ve never owned an iPhone and don’t know how to use a Mac, it is the
Economics major in me that finds Apple’s business model amazing. There is no other
company in the world that has tried what Apple has attempted—to build a completely
separate “ecosystem” of products, hardware and software that work together better than
what the rest of the world is able to produce. Have they succeeded? Have they failed?
Well, some of that is up for you to determine as one of Apple’s senior managers.

See you in New York.

Best regards,

Scott St. Marie

Chair, Apple, Inc.
Columbia College Class of 2010
sws2110@columbia.edu

4
FORMAT

The structure of this committee will work much like other small committees that you may
have been on. While parliamentary procedure is important, you can expect that the
committee will conduct a great deal of its work in moderated caucuses.

Further, as a small committee, the output will be different. This isn’t a committee that
focuses on producing multi-page resolutions. Rather, what is critical here is responding to
the crises and thinking on one’s feet. To that end, we’ll be looking at releasing two types of
documents: press releases, which represent the firm’s communications to the outside
world, and strategy memos which direct give orders to the divisions of the firm and outline
the firm’s reactions to business events.

The Chair will serve as Apple’s CEO, Steve Jobs. While Jobs has been known to be an
active (and perhaps domineering) force within the firm, you can expect that he’ll take a
backseat and agree to the strategies that the Senior Management develops.

5
HISTORY

The Early Years

Steve Jobs and Steve Wozniak, a pair of 20-something college dropouts, founded Apple
Computer on April Fool’s Day, 1976. Working out of the Jobs family’s garage in Los
Altos, California, they built a computer circuit board that they named the Apple I. Within
several months, they had made 200 sales and taken on a new partner—A.C. “Mike”
Markkula, Jr., a freshly minted millionaire who had retired from Intel at the age of 33.
Markkula, who was instrumental in attracting venture capital, was the experienced
businessman on the team; Wozniak was the technical genius and Jobs was the visionary
who sought to “change the world through technology.”

Jobs made it Apple’s mission to bring an easy-to-use computer to every man, woman, and
child. In April 1978, the company launched the Apple II, a relatively simple machine that
people could use straight out of the box. The Apple II set in motion a computing revolution
that drove the PC industry to $1 billion in annual sales in less than three years. Apple
quickly became the industry leader, selling more than 100,000 Apple IIs by the end of
1980. In December 1980, Apple launched a successful IPO.1

Apple’s competitive position changed in 1981, when IBM entered the PC market. The IBM
PC, which used the Microsoft Disk Operating System (MS-DOS) and a microprocessor
(also known as a Central Processing Unit or CPU, the “brains” of the computer) from Intel,
seemed bland and gray in comparison with the graphics and sound of the Apple II. But the
IBM PC was a relatively “open” system that other manufacturers could imitate. By
contrast, Apple relied on designs that only Apple could produce. As the number of IBM-
type machines on the market expanded, Apple’s revenue grew, but its market share2
dropped.

In 1984, Apple introduced the Macintosh, marking a breakthrough in ease of use, industrial
design, and technical elegance. Yet the Mac’s slow performance and a lack of compatible
software limited sales. Between 1983 and1984, Apple’s net income3 fell 17%, leaving the
company in crisis. In April 1985, Apple’s board removed Jobs from an operational role.

1
IPO: An “Initial Public Offering” is the first time a company sells stock to the public. They sell some
ownership in the firm in exchange for capital, or money to expand. IPOs are usually done by younger
companies looking to grow, and success can be seen as a critical step in the development of a company.
2
Market share: the percentage of the overall market that is served by a particular company. In this case, the
percent of computers sold each year that were made by Apple. It is interesting to note here that Apple is
making more money in revenue every year, but losing competitive ground. Imagine the computer market like
a pie—Apple is getting more and more pie each year, but that’s because there’s a bigger pie every year.
Apple might have started out getting a really wide slice, but its slice is getting narrower as the pie grows. The
result: more pie for Apple, but much more for its competitors.
3
Net income = revenues – expenses. Looking at that equation (I = R – E), shows that increasing revenue (by
selling more products, for example) isn’t helpful if expenses (like the cost of advertising those products) also
increase. It isn’t what you take in; it is what you take home.
6
Several months later, Jobs left Apple to found a new company named NeXT. Those moves
left John Sculley, the CEO whom Apple recruited from Pepsi in 1983, alone at the helm.

The Sculley Years, 1985 – 1993

Sculley tried to use Apple’s capabilities in graphics and design to make the company a
leader in desktop publishing as well as education. He also moved aggressively to bring
Apple into the corporate world. Apple’s combination of superior software and peripherals
(like color laser printers) gave the Macintosh unmatched capabilities in desktop publishing.
Sales exploded, turning Apple into a global brand. By 1990, sales reached $5.6 billion,
while Apple’s worldwide market share stabilized at about 8%. In the education market,
which contributed roughly half of Apple’s US sales, the company held a share of more than
50%. Apple had $1 billion of cash and was the most profitable PC company in the world.

By 1990, Apple controlled the only significant alternative, both in hardware and in
software, to the IBM-compatible standard. The company practiced horizontal4 and vertical5
integration to a greater extent than any other PC company, with the exception of IBM.
Apple typically designed its products from scratch, using unique chips, disk drives, and
monitors, as well as unusual shapes for its computers’ chassis.

Analysts generally considered Apple’s products to be more versatile than comparable IBM-
compatible machines. IBM-compatibles narrowed the gap in ease of use in 1990, when
Microsoft released Windows 3.0. But in many software technologies, Apple maintained a
big lead. In addition, since Apple controlled all aspects of its computer, it could offer
customers a complete desktop solution, including hardware, software, and peripherals that
allowed customers to “plug and play.” By contrast, users often struggled to add hardware
or software to IBM-compatible PCs. As a result, one analyst noted, “The majority of IBM
and compatible users ‘put up’ with their machines, but Apple’s customers ‘love’ their
Macs.”

This love affair with the Mac allowed Apple to sell its products at a premium price. Top-
of-the-line Macs went for as much as $10,000, and gross profit hovered around an enviable
50%.6 However, senior executives at Apple realized that trouble was brewing. As IBM-
compatible prices dropped, Macs appeared overpriced by comparison. As John Sculley
explained, “We were increasingly viewed as the ‘BMW’ of the computer industry. Our
portfolio of Macs were almost exclusively high-end, premium-priced computers …
Without lower prices, we would be stuck selling to our installed base.” Moreover, Apple’s
4
Horizontal integration means selling the same product in numerous markets. This means two things here.
First, Apple not only sells in the US market, but also abroad. Second, it sells in a variety of different types of
markets, like selling to schools and to corporations.
5
Vertical integration means controlling many different stages of the production process. Here Apple makes
the physical parts for the computer, designs the programs for them and assembles them. This was (and still is)
a very different way of doing business from the IBM model, where one firm would make the parts (like Intel),
one would write the programs (like Microsoft) and another would put them together (like Dell).
6
This is an example of what’s called a “profit margin.” Profit margin = (Net profit after tax) / (Net Sales).
This is one way to measure the profitability of a company. High profit margins are good because they mean
that a significant portion of the sale price of an item is retained as profit for the firm.
7
cost structure7 was high: Apple devoted 9% of sales to research and development,
compared to 5% at Compaq and only 1% at many other IBM-clone manufactures.

Beginning in 1990, Sculley aimed to move Apple into the mainstream by offering
“products and prices designed to regain market share.” That meant becoming a low-cost
producer of computers with mass-market appeal. He also sought to maintain Apple’s
technological lead by bringing out “hit products” every 6 to 12 months. In October 1990,
Apple shipped the Mac Classic, a $999 computer that was designed to compete head-to-
head with low-priced IBM clones. One year later, the company launched the PowerBook
notebook computer to rave reviews.

Despite these signs of strength, Sculley made a bold move to forge an alliance with its
foremost rival, IBM. Apple and IBM formed a joint venture8, named Taligent, with the
goal of creating a revolutionary new operating system. At the time, it cost around $500
million to develop a next-generation OS; subsequent marginal costs9 were close to zero. In
addition, Apple committed to switching from Motorola’s microprocessor line to IBM’s
new PowerPC chip, while IBM agreed to license its technology to Motorola to guarantee
Apple a second source. Sculley believed that PowerPC would help Apple leapfrog the
Intel-based platform.

Meanwhile, Apple undertook another cooperative project, this one involving Novelland
Intel. Codenamed Star Trek, it was a highly secretive effort to rework the Mac operating
system to run on Intel chips. Sculley authorized the project in early 1992, and a working
prototype was available by November.

Sculley argued that it was essential for Apple to drive down costs in order to remain
competitive. In 1991, as pricing pressure10 hit Apple, the company moved to reduce its
headcount11 by 10%. Apple also sought to move much of its manufacturing to contractors
and took a tougher line with its business partners. However, these actions were not enough
to sustain Apple’s profitability. Its gross margin by this point was heading toward 34%—
14 points below the company’s 10-year average. When Sculley decided to commute from
Connecticut to California, the board “promoted” him to Chairman and appointed Michael
Spindler to CEO. Five months later, Sculley left Apple for good.

7
Cost structure: the expenses that firm incurs when manufacturing a product or providing a service.
8
An arrangement between two or more companies to set up a business venture together. Here IBM and Apple
each provide some resources and funding for the new company with the expectation of being able to share the
profits and technology that come as a result. Do you think that Apple today would be likely to set up a joint
venture? If so, with which other companies?
9
Marginal costs: the cost of producing one additional unit of a product. Here the cost of the OS is all up-
front—there are research costs and programming costs, but one it has been produced, the cost of burning one
more disk is almost nothing.
10
That is to say, pressure from its opponents who were selling their computers and peripherals for lower
prices.
11
Total number of employees.
8
The Spindler Years, 1993 – 1995

Mike Spindler was a German-born engineer who, as head of Apple Europe, had tripled his
division’s revenue between 1988 and 1990. As head of Apple, Spindler tried to
reinvigorate its core markets: education (K-12) and desktop publishing, in which the
company held 60% and 80% market shares, respectively. Meanwhile, to increase market
share overall, Spindler killed the plan to put the Mac operating system on Intel-based PCs
and announced instead that Apple would license a handful of companies to make Mac
clones.

Yet despite Spindler’s efforts, Apple was losing momentum. A 1995 Computerworld
survey of 140 corporate computer system managers found that none of the Windows users
surveyed would consider buying a Mac, while more than half of Apple users expected to
buy an Intel-based PC. Like Sculley, moreover, Spindler had hoped that a revolutionary
new operating system would turn the company around, but prospects for a breakthrough
were fading fast. At the end of 1995, Apple and IBM parted ways on Taligent. After
spending more than $500 million, neither side wanted to switch to a new technology.

Under Spindler, international growth became a key objective for Apple. In 1992, 45% of its
sales came from outside the United States. Spindler targeted China in particular, setting the
goal of achieving a 15% or 16% market share in that country by 2000. Apple had just a 2%
share in China in 1992, but the growth potential of that market was immense. Spindler also
moved to slash costs, cutting 16% of Apple’s workforce and reducing R&D spending to
6% of sales, but serious problems remained. In its first fiscal quarter of 1996, Apple
reported a $69 million loss and announced further layoffs. Two weeks later, Gilbert
Amelio, an Apple director, replaced Spindler as CEO.

The Amelio Years, 1996 – 1997

Amelio, like Spindler, came from an engineering background; he had worked previously in
Rockwell International’s semiconductor business. Right away, Amelio set out to improve
Apple’s operations by streamlining its product line, slashing its payroll and rebuilding cash
reserves. He also planned to push Apple into higher-margin segments such as servers,
Internet access devices and PDAs. Four months after Amelio arrived, he proclaimed that
Apple would return to its premium-price differentiation strategy.

He, too, hoped that a new OS would restore the Mac platform to its position as a
technological leader. But these efforts were in disarray. Amelio decided to cut Apple’s
losses by canceling the repeatedly delayed next-generation Mac OS, which had cost more
than $500 million in R&D. Instead, in December 1996, he announced that Apple would
acquire NeXT Software—and that NeXT’s founder, Steve Jobs, would return to Apple as a
part-time adviser. NeXT’s operating system, NeXTStep, had a lead over Microsoft in a few
technical areas, but its market share was tiny and it could not run Mac software.

Amelio led the company through three reorganizations and several deep payroll cuts. Yet
despite these austere moves, Apple lost $1.6 billion on Amelio’s watch. In addition, its
9
share price sank to a 12-year low, and its worldwide market share dropped from 6% to 3%.
The Apple board forced Amelio out, and in September 1997 Steve Jobs became the
company’s interim CEO.

Steve Jobs and the “Apple Turnaround”

After returning as Apple’s leader, Steve Jobs moved quickly to shake things up. On August
6, 1997, he announced that Microsoft had agreed to invest $150 million in Apple and had
also reaffirmed its commitment to develop products, such as Microsoft Office, for the Mac
through August 2002. While the Apple faithful booed and hissed, the news sent Apple’s
stock to a 52-week high, and Apple’s board soon signaled its faith in Jobs by deferring its
search for a permanent CEO.

Job’s first real coup was the launch of the iMac—“the Internet-age computer for the rest of
us”—in August 1998.12 Priced at $1,299, the iMac lacked a floppy-disk drive but
incorporated low-end CPU, a CD-ROM drive, and a modem, all housed in a distinctive
translucent case that came in multiple colors. It also supported “plug-and-play13”
peripherals, such as printers, that were designed for Windows-based machines (previous
Apple computers needed special, more expensive Apple peripherals). Roughly three years
after the iMac launch, the iMac had sold about 6 million units, compared with sales of 300
million for PCs during the same timeframe.

In February 1998, Jobs shut down two divisions: one that produced the Newton PDA and
one that was developing a portable PC for education. Apple had spent roughly $500million
to develop those products over six years. In addition, Jobs slashed new project plans by
70%. Under Jobs, Apple continued its restructuring efforts by reducing headcount, closing
facilities and outsourcing manufacturing. In November 1997, Apple launched a website to
sell its products directly to consumers for the first time. By 2001, Apple’s online store—by
selling either directly to users or through dealers—accounted for 40% of the company’s
overall sales. Internally, meanwhile, Jobs worked to streamline operations and reinvigorate
innovation.

The chief priority for Jobs was to re-energize Apple’s image. Soon after taking the helm,
he hired TBWA\Chiat\Day, the agency that had designed ads for the original Mac. Starting
with the “Think Different” campaign, which featured iconic figures such as Albert Einstein
and John Lennon,14 Apple began promoting itself as a hip alternative to other computer
brands. For Jobs, Apple was not just a technology company; it was a cultural force. Not
coincidentally, perhaps, during this period Jobs retained his position as CEO of Pixar, an
animation studio that he had co-founded in1986. In collaboration with Disney, Pixar
produced such major films as Toy Story and Monsters, Inc.

12
Remember these? http://www.everymac.com/images/cpu_pictures/apple_imac_400.jpg
13
A computer term referring to devices like keyboards, printers, etc., which can be used with a computer as
soon as they are plugged in without installing additional software.
14
http://onionesquereality.files.wordpress.com/2008/03/apple_think_different.jpg
10
Jobs turned Apple around and then set it on a course of aggressive innovation. But he did
so largely through the force of his own strong leadership. In product development, in
strategy and in other key areas, he remained at the center of all decision-making. Whether
Apple would be able to sustain its innovative edge, if and when Jobs left the company,
remained an open question.

Mac Computers in the 21st Century

Just a few years into the 21st century, the buzz around Apple focused on a product that was
not a personal computer. Surging sales of the iPod drove much of the company’s growth
and captured the greater part of public attention. Nonetheless, Mac sales in 2005 still
accounted for 45% of Apple’s revenue, and Steve Jobs continued to treat Macintosh as
central to his plans.

The most innovative Macintosh offering, as of its introduction in January 2005, was the
Mac Mini, a computer that measured 2 inches high by 6.5 inches square with prices
ranging for $499 to $699. The twist, as Jobs explained, was that the Mini arrived in
BYODKM condition: “Bring you own display, keyboard and mouse.” The Mini was
Apple’s first bid in almost a decade to target price-sensitive customers. To make this
happen, Apple used strict, vertical control of hardware and operating systems and software.
On the operating system front, Apple launched OS X in 2001 and issued new versions on a
roughly annual basis. Jobs, speaking in 2005, called the move to OS X the second “major
transition” in Mac’s history (the first being the shift to PowerPC chips). The new operating
system offered a more stable environment than previous Mac platforms. With each version
of OS X, Apple aimed to generate not only extra revenue, but also new interest in the Mac
and greater loyalty to the platform among existing users. A version named Tiger, released
in2005, included improved interoperability with Windows and an advanced search function
called Spotlight. In addition, OS X had fewer reported security hazards, giving it another
advantage over Windows.

Apple also began to develop more software for its system. Many of these applications
served creative or entertainment purposes, thereby furthering Job’s goal to make Mac
central to an emerging digital lifestyle. As Jobs said, “Software is the user experience.”
Instead of relying on independent software vendors to develop programs for the operating
system like Windows, Apple built programs such as those in the iLife suite (iPhoto, iTunes
and so on).

While Jobs insisted on maintaining control in many areas, he relinquished some control to
others. Over the years, Apple has migrated toward standard interfaces (such as the USB
port), making the Mac a less closed system. Thus, users of a Mac Mini could use a non-
Mac keyboard. Conversely, the owner of a non-Mac PC could attach it to an Apple display.

Apple in Retail

On May 19, 2001, Apple opened its first retail store in McLean, Virginia. By the end of
2005, it had opened 135 stores, and in 2006 it planned to pen about 40 additional retail
11
outlets. Although most of these stores were in the United States, the chain also included
stores in Canada, Japan, and in the United Kingdom. The move into retail operations was a
major departure for Apple. Early on, skeptics likened this retail adventure to the Gateway
Country chain, which suffered steep losses and finally shut down in 2004. But by the 2005
fiscal year, Apple’s retail division accounted for 17% of its revenues.

Through its stores in malls and other shopping districts, Apple reached large numbers of
consumers who otherwise had little exposure to the Mac. The company estimated that in
the 2005 fiscal year, foot traffic in its stores totaled 50 million. It also estimated that of
retail customers who bought a Mac, 50% had switched from using a Windows machine. A
key factor in bringing people into the stores, most analysts believed, was the popularity of
the iPod. Having entered a store to buy one of Apple’s trendy portable music players,
consumers could admire the attractive “form factor” of Macintosh products, test-drive the
user-friendly OS X and give salespeople a chance to sell them a computer to go with their
iPod.

Putting Intel in a Mac

When Jobs contended that the launch of OS X was the second “major transition” in Apple
history, he did so in the context of announcing a third crucial shift: Apple, he said in June
2005, would abandon its longstanding use of PowerPC chips in favor of microprocessors
made by Intel Corp. In January 2006—half a year ahead of its originally announced
schedule—Apple began shipping two products built with Intel Core Duo chips. These
“Intel Mac” machines, an updated iMac and a replacement of the PowerBook called the
MacBook Pro, represented a startling move for a company that had long positioned itself
against the “Wintel” (Windows plus Intel) colossus. By the end of 2006, Jobs said, the
entire Macintosh line would be running on Intel chips.

With “Intel Inside,” some analysts speculated, Apple might be able to double its PC share
to 6%. Reinforcing that possibility was Apple’s move in April 2006 to enable users to run
Windows on Intel-based Macs. That move, involving a free application called Boot Camp,
provided a “safety net” to would-be Windows switchers. Nonetheless, even as Apple
moved closer to the Wintel mainstream, it remained an outlier. With its own OS X and its
relatively tight control of the Mac “ecosystem,” Apple continued to ply its own course. But
how long would that strategy remain viable, particularly at a time when the PC industry
continued to evolve rapidly?

The iPod Phenomenon

Apple launched the iPod, a portable digital music player based on the MP3 compression
standard, in November 2001. Five years later, it offered a full line of MP3 players—from
the iPod Shuffle, to the iPod Nano, the video iPod and the iPod Touch. The iPod had many
things going for it: high storage capacity (supported by sophisticated engineering that
placed a hard drive in its standard version), sleek design (exemplified by its trademark
white earphones), and appealing functionality embodied in its “click wheel” control). As a

12
result, it became “an icon of the Digital Age,” one journalist wrote. It also commanded a
premium of up to $50 over other MP3 players.

The economics of the iPod were stellar by consumer electronics standards, with gross profit
margins that ranged from 20% to 30%. In 2005, analysts estimated that Apple paid a bill of
materials (BOM)15 of $143.50 for the video iPod, which retailed for $299. Apple received
about $270 of that amount, after the retailer’s discount of 10%.16 Most important, the iPod
spawned as many as 1,000 accessories. An iPod leather case, for example, strengthened the
iPod “ecosystem,” even if Apple made no money from it. In the spring of 2006, the
company floated the idea of charging 10% of the wholesale price of any accessory that
carried its “Made for iPod” logo.

Initially, the iPod could only “sync” with Macs. But in August 2002, despite reported
reluctance on Job’s part, Apple introduced the iPod for Windows. In other ways, too, the
company’s approach to developing and marking the iPod was less closed than the
Macintosh. To make the iPod, for example, Apple depended on a company called
PortalPlayer, which manufactured the device’s core chip, and on companies such as
Toshiba to supply the hard disk drives.

As of September 2007, more than 150 million iPods had been sold worldwide, making it
the best-selling digital audio player series in history. For Steve Jobs, the success of the iPod
had profound significance for Apple: “We’re getting a chance to see what Apple
engineering and Apple design can really do once we get out from underneath the 5 percent
Macintosh operating system share,” he said in 2004. Although analysts predicted that the
iPod’s market share would dip as competition intensified, they also projected a steep rise in
the size of the market. Most iPod competitors had converged on the use of Microsoft’s
WMA standard.

On January 22nd, 2008, Apple reported the best quarter revenue and earnings in Apple’s
history so far. Apple posted record revenue of $9.6 billion and record net quarterly profit of
$1.58 billion. Forty-two percent of Apple’s revenue in the first fiscal quarter of 2008 came
from iPod sales, followed by 21% from notebook and 16% from desktop sales.

iPod + iTunes

One key element of the iPod system was the iTunes Music Store, an online service that
Apple launched in April 2003. For 99 cents per song, visitors could download music
offered by all five major record labels and by thousands of independent music labels. One
could play a downloaded song on their computer, burn it to their own CD or transfer it to
their iPod. Initially available only to Mac users, the iTunes store became Windows-
compatible in October 2003. Early in 2006, it held an 83% share of that market, and as of

15
That is to say, the total cost of everything physical that goes into making the product.
16
This demonstrates why the retail stores above were attractive—Apple didn’t lose this 10% when it sold
products in its own stores as opposed to selling them in Best Buy or elsewhere.
13
February of that year, it had sold more than 1 billion songs. According to one estimate,
iPod users downloaded an average of 26 iTunes songs per device each year.

The introduction of the iTunes store had a massive impact on iPod sales. Before the advent
of iTunes, Apple sold an average of 113,000 iPods per quarter; by the quarter that ended
December 2003, iPod sales had shot up to 733,000 units—and then continued to rise.
Central to the iTunes model was a set of standards that guaranteed both the music labs’
intellectual property and the proprietary technology inside the iPod. An Apple-exclusive
“digital rights management” (DRM) system called FairPlay protected iTunes songs by
limiting to five the number of computers on which they could be played. It allowed Jobs to
bring music executives onboard for the iTunes venture and fueled iPod sales, since no
competing MP3 player could play FairPlay-protected songs. Observers called iTunes a
“Trojan horse” that allowed iPod-specific standards to invade users’ music collections and,
in effect, lock out other MP3 players or music software.

While iPod + iTunes became a huge part of Apple’s total revenue, several challenges faced
Apple. First, music companies grew impatient with Apple’s non-variable pricing structure
and began pursuing other outlets off selling their content. Second, government watchdogs
showed signs of impatience with Apple as well. In March 2006, the French national
Assembly passed a measure that would require Apple to open up its FairPlay system to
users and rivals. One Apple spokeswoman called it “state-sponsored piracy.”

Enter the iPhone

The iPhone is an Internet-connected multimedia Smartphone designed and marketed by

Apple with a flush multi-touch screen and minimal hardware interface. The device lacks a
physical keyboard, so a virtual keyboard is rendered on the touch screen. Apple announced
the iPhone on January 9, 2007. The announcement was preceded by rumors and
speculation that circulated for several months. The iPhone was initially introduced in the
United States on June 29, 2007 and is in the process of being introduced worldwide. It was
named Time magazine’s Invention of the Year in 2007. On July 11th, 2008, the iPhone 3G
was released and supported faster data speed and Assisted GPS.

The iPhone OS is the operating system that runs on the iPhone and iPod Touch. It is based
on a variant of the same basic system that is found in Mac OS X. iPhone OS is less than
half of the device’s considerable 8 GB of 16 GB storage. It is capable of supporting
bundled and future applications from Apple, as well as applications written by third-party
developers and published through the iTunes store.

There are several applications that come with the iPhone and reflect the phone’s main
purposes—Phone, Mail, Safari and iPod. On June 11th, 2007, Apple announced that the
iPhone would support third-party “applications” via the Safari web browser that share the
look and feel of the iPhone interface. Further, Apple would be providing a “software
development kit” to jump-start potential software developers. The kit will allow developers
to develop applications for the iPhone and the iPod Touch, as well as test them in an
“iPhone simulator.” However, loading an application onto the devices is only possible after
14
paying a membership fee. Developers are free to set any price for their applications to be
distributed through the App Store, of which they will receive a 70% share. Developers can
also opt to release the application for free and will not pay any costs to release or distribute
the application beyond the membership fee.

While initially the iPhone was only sold on the AT&T network with a SIM lock in place,
various hackers have found methods to “unlock” the phone; more recently some carriers
have started to sell unlocked iPhones. More than a quarter of iPhones sold in the United
States were not registered with AT&T. Apple speculates that they were likely shipped
overseas and unlocked.

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TOPIC I: PORTER’S FIVE FORCES

Porter’s Five Forces is a framework for the analysis of an industry developed by Michael
Porter of Harvard Business School in 1979. It identifies five forces that determine how
competitive a market is and therefore how attractive it is. It is useful in determining
whether or not to enter a particular market. In this context, “attractiveness” is how likely it
is that one can be profitable in a given industry. A change in any of these five forces would
force a firm to re-assess the market.

It is also important to note that the five forces analysis doesn’t determine whether or not a
firm will be profitable:
rather, it determines the
likelihood of that
profitability. The airline
industry is an unattractive
one, but some firms like
Southwest have been able
to come up with business
models that work very
well.

Rivalry within the

industry: This section of
the model represents how
aggressive rivals are in
terms of pricing,
innovation, marketing, etc.
“Good” signs here would
be a lack of competitors,
fast industry growth,
economies of scale17 and
competitors who don’t
innovate. “Bad” signs would be the opposite: many competitors, slow growth, lack of
economies of scale and innovative and aggressive competitors.

Threat of new entrants: How hard is it for new firms to get involved in this industry? If it
is easy to enter a particular market, then that market is less desirable because this would
lead to many firms in the market. Some things that might raise barriers against new firms
entering the market would be patents, large start-up costs, government policies or the
complexity of the product. One example of an industry which is easy to enter is computer
manufacturing—anybody with a screwdriver and a workbench in their garage can assemble

17
Economics of scale: This rewards firms that produce more. As the number of units produced increases, the
cost of producing each good decrease. For example, it might cost me $2.00 to bake a single cookie, but if I’m
baking four dozen, then it only costs me $6.00 total (or $0.13/cookie) because I can make better use of my
oven, I can re-use the cookie sheet and it is cheaper to buy large quantities of cookie mix.
16
a computer with products they purchased online. The creation of those individual
components, like the complex LCD screen, for example, is much more difficult to begin
and is therefore much less attractive.

Bargaining power of suppliers: How difficult is it to get the things you need to make the
product? If it is difficult to get the components or if they are expensive, then the supplier is
said to have a great deal of “power.” The fact that only a few firms sell raw diamonds
hurts jewelry manufacturers, but restaurants benefit from the number of producer suppliers
available and their relative cheapness.

Threat of substitute products: The existence of products that consumers can use to fulfill
the same need increases the threat that consumers will switch as price increases. If I can’t
get Crest Total Whitening toothpaste, there are a greater number of other types of
toothpaste that I could use. However, should I have a quarrel with the electric power
company, it is unlikely that I’ll switch to candles or gas lamps to light my home.

Bargaining power of consumers: This is the ability of buyers of a product to put pressure
on the firm. When PCs first came out, consumers knew little about the product and were
willing to pay whatever price the firm wanted to charge so that they knew they were getting
a “good” product. Today, consumers are much savvier and are able to differentiate between
different types of computers and want to ensure that they’re getting what best suits them. In
short, consumers have gone from being not very “powerful” at all to being quite
powerful—a bad thing for firms in the computer business.

Value Chains within a Firm

The concept of “value chains” was also developed by Michael Porter of Harvard Business
School. The concept can be used to compare a company’s strengths and weaknesses against
another. The basic value chain is shown below. The figure is a way to look at the basic
activities of a company to try to understand how each contributes to the overall success of
the total firm. An important point made by the value chain is that differentiation can be
obtained through efforts of the whole corporation, not just through marketing.

One way to
differentiate is
through inbound
logistics, that is,
through the selection
of the highest-quality
raw materials and
other inputs
including
technology. A reason
that Steinway has
consistently built the
best pianos in the
17
world is through the use of the best wood that can be found. For years, the supercomputer
company Cray had a significant technological edge on other companies.

A second way to gain competitive advantages is through operations advantages. One of the
ways that McDonald’s has been the fast food market leader throughout the world is by
significant investments in training programs that produce consistency in service and
product quality.

Outbound logistics provides a third basis for differentiation. This can be through speedy
and on-time delivery such as the Federal Express promise and fulfillment of the promise
during its earlier days of being there “absolutely and positively overnight.” A company
called Premier Industrial Corporation distributes nuts and bolts, seemingly a commodity,
but differentiates itself from competition (and has higher margins) by agreeing to ship in
any quantity desired by the customer.

Marketing and sales also serve to differentiate. The IBM sales force has historically been a
major advantage to the company in terms of its ability to satisfy customer needs better than
competitors.

Finally, service can be an important differentiator, as the retailer Nordstrom has found. The
product manager can use the value chain concept to check at each step of the process if and
how a competitor is gaining competitive advantage in the category.

Value Chains in Industries

One of the most recent and interesting applications of the framework developed by Porter
and explained above for value chains has been the emergence of the concept of industry
value chains. Here the entire history of a product is tracked—from the raw materials to the
eventual purchase by the user. Below you can see an example of a very complex value
chain—the one that delivers music and video to your mobile phone. chain—the one that
delivers music and video to your mobile phone.

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It is interesting to note that firms in some parts of the value chain (like Nokia or Walt
Disney) are quite well-known while some of the others are not. While name-recognition is
a great asset, it doesn’t necessarily reflect profits. Firms at sections that you might not
regularly think of—like content aggregation—might be making the greatest margins on the
product. This explains why a firm like Walt Disney, which is a creative powerhouse, might
want to acquire a firm like Glu Mobile which writes the code for turning the creativity into
programming. While they’re not directly competing with one another, Disney wants to get
access to the profits currently being made by Glu.

Apple, Inc. is an interesting firm because it has positions throughout the value chain of
music distribution and computer sales. This means that you as a manger will have to
consider threats from a great number of industries—online music portals, other computer
sellers and even program writers. Can Apple continue to compete on all of these levels?
That’s a good question.

19
POSITIONS

A Note on Corporate Politics

Like any organization, a large corporation like Apple will face divisions in its leadership.
Conflicting strategies, goals and visions for the company will lead to conflicts among upper
management. Just like a governmental or political entity, the process through which
decisions are made is inherently political. While you, as a member of Apple’s highest level
of management, must always work for the best interest of the company, you must also look
out for the good of your own division, if only to ensure that you remain employed!

Further, it is important to note that the Board of Directors of Apple enjoys taking an active
role in the supervision of the firm’s management. If they suspect that a certain member of
management isn’t pulling his/her weight, then that manager might not be employed in the
Apple organization much longer. Similarly, they are also responsible for hiring the next
CEO of Apple Computer, so the rewards of success could be great.

Position List

Below is a list of all members of Apple’s Senior Management. You’ll notice that when you
received your positions, they referred to the department, which you would be heading
rather than the “real” person who is in that role. How any particular division relates to the
rest of the firm is what is important, not the biographical details of the person who
currently has that position.

Chief Operating Officer (COO, Timothy Cook): The Chief Operating Officer is
responsible for the day-to-day management of a firm and ensuring that all of its operations
run smoothly. While the CEO and some other executives might focus on the long-term and
strategic operations of a firm, the COO is primarily concerned with the short-term and the
tactical. The COO is responsible for organizing the firm’s activities, providing information
on the implementation of any strategic plan as well as reporting back to the rest of the
executives on the overall health of the firm’s processes and operations.

Chief Financial Officer (CFO, Peter Oppenheimer): The Chief Financial Officer is
responsible for the overall financial picture of the firm. While one particular division might
do well and another might slump in any given quarter, what really matters to Apple (and
investors) is the firm’s overall bottom line. While the CFO is also responsible record-
keeping and financial reporting at the end of every quarter, it isn’t expected that you have a
degree in accounting. Rather, the CFO here is primarily responsible for assessing the
financial risks and opportunity cost of any given strategic move.

SVP Marketing (Philip Schiller): One of the reasons that Apple has been able to remain
such a prominent cultural force despite its relatively low market share in computer systems
has been because of its innovative marketing campaigns. Ads such as the “Think Different”
or “1984” commercials demonstrate that Apple has always been able to leverage its

20
superior marketing capabilities and brand image to be more than an electronics firm—it is
also selling a lifestyle. Maintaining this level of creativity and balancing it with savvy
business choices about which products to promote, which market segments to go after and
the best way to reach consumers is the responsibility of the firm’s marketing division. As
Apple contemplates entering new markets or faces losses on its existing products, it is the
challenge of the marketing division to ensure that Apple maintains a unified brand image at
the top of consumers’ minds.

SVP iPod Division (Tony Fandell): While Apple may not have its roots in the music
industry; it has become increasingly identified with it due to the success of the iPod. While
some analysts suggest that Apple’s flagship product is now the iPod rather than their older
line of computer systems, the fact that the iPod is under attack by other firms cannot be
avoided. Despite its success and importance to the firm as a whole, the iPod division must
ensure that it continues to release new and innovative products in order to maintain its
currently high level of profitability. Any failure in the iPod line could have troubling
effects on the firm as a whole.

SVP Retail (Ron Johnson): One of the biggest ways in which Apple has changed over the
past decade has been the opening of Apple retail stores across the United States and in
selected international cities. Apple’s retail stores have been noted for their sleek
appearance, savvy sales force and remarkable ability to cross-sell.18 Further, having
physical locations across the United States has allowed Apple to become a real cultural
presence and further define its brand image—consumers know exactly what the ‘iLife”
would look like just by visiting an Apple store. That’s not to say that the retail picture has
been completely rosy, however. Having physical locations is a huge cost that competitors
like Dell avoid by selling only over the Internet.

SVP Applications (Sina Tamaddon): While the physical appearance of Apple products
might be stunning, Apple would find itself completely without customers if it didn’t
manage to produce products which are both functional and easy to use. Indeed, Apple’s
original acclaim came from the initial development of the graphical user interface. As
Apple begins to find itself under attack by firms such as Microsoft and Google, it is likely
that it will be fighting its battles in the arena of applications.

SVP Software Engineering (Bertrand Serlet): As is typical with the Apple business
strategy, the firm chooses to develop nearly all OS X-compatible software on its own,
ensuring not only that the products work together seamlessly, but that Apple makes retains
all the profits. While OS X and its suite of iLife programs have been lauded recently
(especially in contrast to Microsoft’s recent troubles with Vista), Apple must ensure that its
software continues to be top-of-the-line in order to support the rest of the Apple product
family.

18
Cross-selling: Selling an additional product to an existing customer. For example, I might go into the
Apple store looking to buy a new MacBook Pro, but before I walk out of the store I’ve also purchased an
iPhone and a carrying case.
21
SVP iPhone Software (Scott Forstall): The iPhone software team is responsible for the
development of the user experience with the iPhone. This means control over many aspects
of the product, including user interface, applications and the operating system. As the
iPhone becomes a more mature product, Apple’s competitors from not only the world of
personal computing but also in telephony have begun to put together counterattacks. In
2008 Google announced Android, a software suite that promises to challenge the iPhone
software. The team responsible for iPhone software needs to not only fend off this
challenge, but also manage the expanding number of third-party applications that have
begun to be developed for the iPhone and the iPod Touch.

SVP Mac Hardware Engineering (Bob Mansfield): Because of Apple’s desire to develop a
separate, closed system of both hardware and software, Apple’s hardware engineering is of
critical importance. While all other personal computer manufactures allow other firms to
make each individual part (processors by one firm, the display by another, etc.), Apple is
actually responsible for developing all parts by itself—with much less money and a much
smaller headcount than the combination of the other firms. As Mac continues to try to
compete against all of its Windows PC competitors, it is absolutely critical that the firm
continue to offer advanced technology or, despite Apple’s snazzy brand image, its
computer line will be left in the dust.

General Counsel (Daniel Cooperman): As with any large corporation, Apple is sure to run
into legal difficulties. Among the most recent of these have been lawsuits targeted at
Apple’s iTunes and iPhone products. The iTunes lawsuits from antitrust organizations in
the United States and France threaten to break open the closed Apple iTunes ecosystem and
could have deleterious effects on the rest of Apple’s core businesses. Further, despite the
fact that a great number of Apple’s products are actually manufactured in California
(making Apple one of the few consumer electronics firms to do so), there have also been
allegations that Apple has broken international labor law in its factories in Asia and
elsewhere. The General Counsel is responsible for not only ensuring that each new move
Apple makes is free of legal concerns, but also for fending off legal challenges from
governments and rivals.

SVP Sales and Client Development (N/A): Historically, Apple’s business model has
focused on developing deep market share in certain key industries and having a slim
market share in the general consumer market. Apple’s strong market segments are in
education, publishing and graphical design, as well as among those who own a legacy
Apple19 product. Globally, however, Apple products are a very small minority of total
computer and notebook purchases. The Sales division is responsible not only for
identifying and nurturing new potential customers and market segments but also for
developing the channels20 to reach them.

19
That is to say, are previous owners of a Macintosh product.
20
Channel: A way in which a product reaches a customer. Examples of these might be through Apple-
specific stores, through Apple’s website and through resellers (like Best Buy).
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SVP iLife Ecosystem Management (N/A): As mentioned above, one of the most
interesting concepts of Apple’s business model has been the effort to develop a
comprehensive “ecosystem” of products that are optimized to work with one another. In
Apple’s earliest days, this meant that all components of Apple’s information technology
products from the hardware that built them to the software that ran them was a closed-off
system—they were incapable of interacting with non-Apple products. Apple has slowly
opened up its “ecosystem” to be compatible with other computer products and software
programs, but the firm (and Apple’s most faithful consumers) still holds that Apple’s
products should be optimized to work with other Apple products. iLife System
Management is responsible for ensuring that Apple offers one smooth, synchronized
product suite across all of its divisions.

SVP Human Resources (N/A): One of the management mantras of the 1990s was “a
corporation is only as strong as its people,” leading to an increased focus on employee
welfare and development. Apple is a huge organization that employs thousands of workers
throughout the globe. Managing Apple requires more than business savvy, it requires
empathy for the needs of the thousands of Apple employees across the globe. Human
Resources is responsible for the recruitment, development, dispute resolution and
termination of Apple employees.

SVP Innovation Management (N/A): Key to Apple’s ability to remain profitable for
decades has been its ability to innovate and incorporate new ideas into it product offerings.
From the development of the graphical user interface (GUI), which arguably made
computers “user-friendly” for the first time, to their revolutionizing of the portable music
player with the iPod, Apple has always been at the bleeding edge of innovation. This
department is responsible for working with the others to research, develop and execute on
new product designs as well as for scouting for new types of products that could be offered
as part of the Apple product family.

SVP Public Affairs (N/A): Large corporations like Apple cannot help but be public
institutions. Their policies on everything from environmental protection, workers’ rights to
corporate social responsibility all come under great scrutiny. Whenever Apple is
questioned on one of these or any number of other issues (or faces a crisis of some sort), its
Public Affairs department swings into action and deals with the press. This job is one of the
most high-pressured in the Apple organization because one slip-up could mean that the
firm takes a beating in the press (and in the market).

23
RESEARCH

A great deal of the research that went into writing this background guide came from class
materials (like Harvard Business School case studies used across the world in business
school classes) or textbooks. Both of these are linked to the specific classes that I’m taking.

In order to learn more about Apple, there are a couple of really good sources. First off, their
website is a fantastic way to get to know more about the company, its products and how it
sees itself. Second, get an idea about what Apple has been doing recently by keeping an
eye out for it in the news or doing a search for Apple in the New York Times, Wall Street
Journal or on Google News.

To get a better handle on business and strategy as a whole, just read through the business
section of your local newspaper. Further, Investopedia (an online source) is a good and
accurate way to look up business terms that you might not know.

Carlton, Jim. Apple: The Inside Story of Intrigue, Egomania, and Business Blunders. New
York: Times Business/Random House, 1997.

Yoffie, David B. Apple Computer 1992. Harvard Business School Case 792-081. Boston:
Harvard Business School Publishing, 1992.

Yoffie, David B. and Wang,Yusi. Apple Computer 2002. Harvard Business School Case
702-469. Boston: Harvard Business School Publishing, 2002.

Yoffie, David B. and Slind, Michael. Apple Computer 2006. Harvard Business School Case
706-496. Boston: Harvard Business School Publishing, 2007.

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