Apple Inc.

in 2010
There is no company in the world which does not desire to copy Apple’s success in the electronics
business.
Apple’s success history is very interesting and not easy to imitate. Started from a garage in a backyard
by Steven Jobs and Steve Wozniak in 1976 and growing into a company with a market cap over a $1
trillion dollar in 2018. Apple has one of the highest profit margins among virtually all industries and
enjoys highest sales revenues. Apple proved to be recession proof and even showed higher sales in
2008 during Financial Crisis. 1
Analyzing Apple is very attractive, because they have proved that Steve Jobs’ visionary strategy
attained a competitive advantage over rivals.
Strong brand name and marketing strategy is indisputably Apple’s most valuable resource and
capability to build on and capture core competency.
An excellent reputation combined with high quality products leads to a high brand loyalty on the
customer side. Furthermore, Apple products are being a status symbol among young adults, so that
their products appear to be worth the extra money. Rather than advertising the iPhone as a powerful
device full of latest technology, Apple claims that the product can make the consumer’s life easier and
better. This ability is definitely valuable, rare and nearly impossible to imitate by other firms. Apple
also applies this notion to its entire organization. Hence, the brand, the customer loyalty and the
network effect coming with it alongside with its commercialization strategy can be viewed as
sustained competitive advantage.
Another exceptional resource is the product selection that integrates whole Apple ecosystem into one.
Apple abandoned a lot of product line in late 1990s and with Steve Jobs as a new CEO in 1997 set a
focus for the Apple employees to concentrate on very few products. A huge success with the iPad,
Apple appealed to many first-time buyers. Once the customer has bought one product, he will most
likely buy other Apple products afterwards since the company has strongly focused on integrating
software and hardware to create the very best product. Moreover, Apple gains advantage through
economies of scope by using similar hardware and software on their different devices. This
phenomenon is unique in this industry and inimitable. Altogether, this leads to another competitive
advantage as the product portfolio is in line with Apple’s overall strategy and organization.

Apple’s Hardware and Software duet

One of the most significant points to capture consumer’s loyalty, and after coming network effect is to
make consumer fall into the company’s ecosystem. Consumers who already bought Apple iMac
would definitely at least consider buying an iPhone and iPad as complementary devices creating
network effect. However, the customer loyalty comes not only from the network effect but from the
software ecosystem, because buying an iPhone means using iTunes and App Store, and a person using
iOS would likely buy an MacOS device along with an iPad, iPod and compatible accessories. It may
not be obvious to some, but it is incredibly significant for Apple. Having strong position among other
players on the markets with their models, buy hardware and then install all drivers and Windows and
it excludes buying periphery devices like mouse, sound system and display, Apple let you to just buy
and plug it to the socket and enjoy it with pre-installed OS and other needed standard applications.
While the rest of the PC industry was struggling with differentiation, Apple has had it since day one.
Many may disagree, but Apple can be seen as a more software company rather than hardware
company. Of course, Apple stepped into making hardware market to secure inventory for itself and
Apple makes extremely good hardware, but that is simply because they believe they are the only ones
who can make hardware worthy to run their software. Therefore, the reason Apple makes hardware is
to be sure it runs smoothly and as predicted to maximize the value of their software.

1
Based on analysis of Exhibit 1c and 2 from the case study (Apple had a huge spike in share price and sales volume
overall in 2008)
Not only do they make a great OS which sets them apart by itself, but Apple also creates extremely
good “core” software, a MacOS for MacBook and iMac, and later an iOS for iPhone and iPad
showing off to the world their ability to create a totally new perspective to use a touchscreen.

Even at the time of the launch of the first iPhone back in the 2007 there were already existing and
sophisticated technologies to create something similar to the iPhone, however only Apple’s vision
took off. Of course, at the time there were PDAs with their limited touch input with pen and sluggish
performance because of the Windows Mobile platform and also feature phone with resistive touch
screens. But the appearance of the iPhone put an end to the PDA segment, Apple had some extremely
good ideas with integrating a touch sensitive screen into a software only created for that particular
device. A revolutionary iOS was something never appeared before and the iOS is still the core
competence of the iPhone over the competitors offering unique, well designed and sophisticated
software complementing brilliantly designed iPhone.
However, the vast majority of electronics companies are either hardware or software companies, not
both like Apple. Any hardware company looking to do more software and vice-versa is no easy task if
possible at all.
And there is one piece of software that requires an explanation all its own…

iTunes & App Store

iTunes and later App Store became one of the most strategic elements of the Apple software core
giving it solid competitive advantage over competitors with their poorly designed software solutions.
Apple has fundamentally understood that it is not the one who owns the content who wins in the
future, but he who holds the keys to the content and applications. After the launch of the App Store in
2008, the iPhone got its second breath having a platform where users can download and use software
which was only available on PCs and being unique and innovative for that time in 2008 at the start.
With the App Store, Apple iPhone even now is more popular than Google’s Play Store because of the
quality and variety of applications in it.
The App Store gave the edge to Apple over competitors, because every application published in the
App Store was strictly controlled and was free of bloatware and viruses. Also, Apple always
emphasized on spreading the latest iOS to all devices without regarding carrier, making customers
satisfied with the latest update and therefore keeping up the buzz around iPhone and iPad. Being a
company launching one or two devices at a time meant no problems with applications’ compatibility
throughout product line compared the closest competitor Android with hundreds of different devices
launched and with a lot of software problems because of the archaic software installed and poor
device performance. We can clearly see the superiority of the App Store over its competitors from the
case study data.2

Apple’s Retail Strategy

When Apple was creating its line of retail shops it got a lot of negative comments, citing how many
companies have tried and failed miserably at owning their own storefront. However, in retrospect, this
has been one of the most brilliant moves they have made. There are a number of reasons why some
other companies have tried owning their own storefronts and failed. Usually it boiled down to location
or a lack of priority, however Apple got both of those right.
Historically Apple has been very careful about how people buy their products. Apple authorized
retailers were small shops that carried all of Apple’s products and accessories and provided an outlet
for support and repair. By learning the importance of controlling the retail experience and providing
valuable customer services and interaction, Apple invested heavily in controlling their own retail
experience.

2
Exhibit 9 shows the number of apps available for users and App store has the highest number of 185,000 and the
closest competitor Android with mere 30,000 applications ready for users.
This is significant because every other PC company currently loathes the cut-throat retail battles there
are in and not a single one of them I speak with is happy with it. Yet to those PC companies it is a
necessary relationship because it is the primary way consumers experience and buy their products.
This is not the case for Apple. Even though they do sell at big box retailers, it is still the Apple stores
that consumers prefer according to our research.
Location plays a significant role in this as well. The fact that they are in malls helps because
consumers are already in shopping mode. As a part of our behavioral research week, we have noticed
that consumer mentality prior to walking into any retail experience plays a significant role in the
shopping experience. Costco is a great example of this that I will explore in a later article. Most
consumers walk into Best Buy or other outlets with an idea in mind of what they are going to buy,
mainly because they know employees are not that helpful or knowledgeable so they do a good deal of
research online. There is a difference between shopping and buying in consumer behavior and
generally speaking when they go somewhere like Best Buy they are buying, not shopping. This is not
true of the mall where consumers generally go to shop and then to buy.
This location also plays well into Apple’s support strategy. The fact that consumers can go in and get
support or repairs for their products and then get some other shopping done while they wait is a
bonus. But primarily it is the priority that Apple places on their retail strategy which has set them
apart from those who have tried retail, kiosk, and other outlets in the past. Apple spends top dollar on
the look and feel and the in-store experience and it shows. While there is always room for
improvement in Apple stores, they have assembled a strong team, experiment heavily, and listen to
customers.
Lastly, because Apple owns the retail experience they also have direct conversations with their
customers and potential customers. This data is invaluable for Apple as they think about future needs
of their customers and how their products can help solve current and future problems for consumers.

Summary

Though in modern days Apple is not the leader by market share, it still gathers the most of the profit3
from the market and as a company is an example of a perfect understanding of the market and even
setting the taste and trends for the consumers therefore showing that they keep a strong sustainable
competitive advantage. Apple is set apart from its competition by its combination of hardware and
software, by the content gate-keeper strategy embodied in iTunes and then in App Store and by their
successful retail strategy. While there are many other reasons in the company’s history for their
success in recent years, these are the dominant themes of their astounding success. Companies
looking to compete with Apple need to know that it is not impossible, however they will need to pick
their battles wisely, innovate on their differentiation, focus heavily on being the best solution in the
market for the problems they are trying to solve.

Endnotes

Exhibit 1c Apple’s Unit Sales by Product Category, 2004-2009 (in thousands of units)

2004 2005 2006 2007 2008 2009

Desktopsa 1,625 2,520 2,434 2,714 3,712 5,182
Portablesb 1,665 2,014 2,869 4,337 6,003 7,214
Total Macintosh Unit Sales 3,290 4,534 5,303 7,051 9,715 12,396
Net Sales per Unit Sold $ 1,496 $ 1,384 $ 1,391 $ 1,466 $ 1,478 $ 1,333

iPods 4,416 22,497 39,409 51,630 54,828 54,132

3
According to Exhibit 5, Apple has a gross margin of around 40% in 2009
 Net Sales per Unit Sold $296 $202 $195 $161 $167 149
iPhone unit sold NA NA NA 1,389 11,627 20,731
Source
: Apple’s financial statements; casewriter calculations.

Exhibit 2 Apple’s Share Price vs. S&P 500 Index (December 31, 1980 = 100)

Source: Created by casewriter using data from Thomson-Reuters ONE Banker, accessed March 2010.

Exhibit 9 Overview of Smartphone Operating Systems and App Stores (as of March 2010)

Operating Owner Major Handset Licensing App Store Approximate Number

System Vendors Fee of Available Apps
Symbian Nokia Nokia, Sony No Ovi Store NA
Ericsson, and
Samsung
Mac OS X Apple Apple Proprietary App Store 185,000
Blackberry RIM RIM Proprietary BlackBerry App World 6,000
Windows Microsoft HTC, Samsung, LG. Yes Windows Marketplace 700
Mobile Sony Ericsson for Mobile
Android Open HTC, Motorola, No Android Marketplace 30,000
Handset Samsung
Alliance
Palm Web OS Palm Palm Proprietary Palm 2,100
MeeGo Nokia, Intel Nokia No Ovi Store NA

Source: Created by case writer based on various public sources.

Note: NA = Not Available or Not Applicable.

Exhibit 5 PC Manufacturers’ Key Operating Measures, 1997-2009

 1997 2000 2003 2006 2008 2009
Gross margins (%)
Apple 21% 28% 29% 30% 35% 40%
Dell 23% 21% 19% 18% 18% 18%
Hewlett-Packard 38% 31% 29% 26% 24% 24%

R&D/Sales (%)
Apple 12% 5% 8% 4% 3% 3%
Dell 1% 2% 1% 1% 1% 1%
Hewlett-Packard 7% 5% 5% 4% 3% 2%

Source: Compiled from Capital IQ, accessed March 2010.

All information is on a fiscal-year basis. Apple’s fiscal year ends in September, HP in October, and Dell in
Note: January.