Strategic Planning: The Case Study of Apple Computer Company in 1992
Gary Cao
PROBLEM STATEMENT
The single most important problem for Apple Computer is the absence of a new vision and a
comprehensive strategic plan. Apple is losing its advantage in personal computer (PC)
technology. Rather than focusing on customer's needs, Apple has been complacent and "out of
touch".
PROBLEM DEFINITION
Apple does not understand its corporate strengths and weaknesses. Net income in 1991 was $310
million, compared with a range from $400 million to $474 million in the previous three years.
Return on Equity (ROE) in 1991 was 19%, compared with a range from 32% to 44% in the
previous three years. Apple's market share has been stagnant (8% to 10%) compared with the
market size growth (worldwide hardware revenue increased more than 400% from 1983 to 1991)
and other fast growing competitors (IBM's market share increased from 6.04% in 1981 to
16.05% in 1991). Without a clearly defined new vision, strategies and action plans closely
linked with its mission, Apple Computer will be "on the glide path to history" and become a victim of the
competitive marketplace and its own complacency.
PROBLEMS AND SITUATION ANALYSIS
1. Industry Environment
An extremely dynamic industry environment and a highly competitive marketplace have
contributed to Apple's problem.
Direct competition -- By 1991, the market size was $50 billion for hardware, $30 billion for
software, and an installed base of 100 million PC units. The top 17 PC manufacturers
increased their market share to 62% by revenue (45% by units) in 1991 from 39% (20%) in
1981. The combination of Microsoft OS with Intel microprocessor has a market share close
to 90%. Two major platforms exit in the market: IBM-compatible PCs (90% of the installed base),
and Apple Macintosh (Mac) PCs (less than 10% of the market share).
New Entrants -- For the five layers in the PC industry, two of them (microprocessors and
operating systems) have relatively higher barriers of entry. The other three layers (platforms,
applications software, and distribution) have low barriers of entry with relatively low capital
requirements. Commoditization is the industry trend, especially for hardware.
Buyers -- Three categories of buyers exist: Business and government (units 60%, revenue
79%), educational institutions (9%, 7%), and individual/home (31%, 23%).
Suppliers -- Intel supplies 87% of the microprocessor; Microsoft OS enjoys 88% of the
installed base; Independent Software Vendors (ISVs) write application software for the
operating systems; hardware (memory chips, disk drives), peripherals (printers, modems) and
service suppliers also participate in the game.
Substitution -- Substitutes of PC are workstations of networks, laptop/notebook PCs, and Personal Digital
Assistants (PDAs).
Industry Trends
This industry has several trends that deserve attention. To survive, PC manufacturers must
combine lower cost with higher quality. Large spending on R&D forced companies to form
alliances to share risks and make resource-allocation more efficient. Continuous technological
innovation is vital to a company's success, and open systems tend to set industry standards. The
IBM-compatible PC is an open system compared with Apple's highly proprietary, closed Mac PC.
The Intel/Microsoft alliance set the industry standard for IBM-compatible PCs.
Customer Needs
The market mechanism works in favor of the customer and for open competition. If Apple
continues to separate itself from the market transition, it will lose its popularity, shrink to a small
market niche, and possibly go out of business. The customers, as end-users, have the ultimate
power in choosing the best product in each different niche (segment) with the highest performance and lowest price. Apple has not paid attention to the most important customer need.
Customers want all of the following attributes in a PC: user-friendly OS, high performance, low
price, suitability to their specific needs. Before 1990 (when MS Windows came to the market),
customers had to make a hard decision between two alternatives: a lower priced
open system with a less user-friendly OS (IBM-clone PC with Intel/MS DOS), or a higher priced
close system with a more user-friendly OS (Apple's Mac), for roughly the same performance
(speed or capacity). An open system PC with user-friendly OS would be the ideal product for
customers without compromising each of the two items. Apple once had the most loved, user-
friendly GUI OS, but Microsoft DOS had the advantage of the open system. Furthermore, in
1990, Microsoft Windows went to the market, narrowing the gap between Mac and DOS, and
making the trend to Intel/Microsoft IBM-clone PC even more popular. Customers would
see a PC as a commodity, not a luxury toy. Market mechanisms worked as an equalizer:
the ordinary people think and act rationally and choose the product/service with the
best combination of features.
Open Systems
From the facts that IBM-compatible PC has 90% of market, Microsoft has 88% of the OS
market, and Intel has 87% of the microprocessor market, Apple should have learned the
importance of an open system. IBM's entry in 1981 changed the PC industry by offering an open
system. The specifications of IBM's PC were easily obtainable, allowing independent hardware
companies to make compatible machines and independent software vendors (ISVs) to write
applications that would run on different brands. Open systems gave customers a big benefit
because they were no longer locked into a particular vendor's product, and they could mix and
match hardware and software from different competitors to get the lowest system price. PC
consumers' preferences in the major brands (IBM, Compaq, Apple, etc.) show that product
compatibility is the most important factor (44%). An open system meets this need,
whereas Apple's Mac does not.
Hardware and Software Profitability
From the table below, we can see that the operating margin is much higher in software companies
than in hardware companies.
Hardware Companies Software Companies
COGS 66% 19%
SG&A 21% 40%
R&D 5% 13%
Operating Profit 5% 28%
2. Internal Analysis: Apple's Strengths and Weaknesses
Since 1976, Apple Computer has adopted the mission -- "to change the world through
technology". To achieve its mission, Apple needs a clear vision on the market trend, a balanced
set of objectives, a comprehensive strategic plan, an action plan, and an effective implementation
of the plan. It also must carefully evaluate its strengths and weaknesses using the following four
criteria.
Value -- Apple's performance/price ratio is lower than some of the major competitors. It did
not have major technology breakthroughs for its OS since 1984, even though it had a niche
from 1986 to 1990 as the easiest PC to use in the industry with unmatched capabilities at
desktop publishing.
Rareness -- Apple's GUI OS was once unique and innovative but has been losing this
advantage.
Imitation/Substitution -- IBM-compatible PCs with Intel chips and Microsoft Windows came
to the market in 1990 with the intention defeating Apple's product.
Organization -- Apple is not well organized for the competition. It invents, designs, and
produce most products it sells. In this closed system, R&D is not efficient. Five large dealers
sell 80% of Apple's products.
In summary, the industry structure is very unfavorable for Apple to survive. Apple restructured
somewhat in 1990 and 1991 to adapt to the market. These actions included developing a cost-
cutting strategy and "hit product strategy", creating Claris as its software subsidiary, setting up
two joint ventures (Taligent and Kaleida) with IBM. However, the fundamental philosophy
remains the same: Apple believes that by innovation, it can charge a premium price and resist
industrial trends toward commoditization. It has not paid adequate attention to what most PC
users really want. This philosophy has hurt Apple's market share and profit growth. Before
Apple can revitalize itself in the dynamic and competitive PC industry, it must address consumers
needs. Apple Computer can change the structure of the industry by making the following
recommended changes.
RECOMMENDATIONS
1. New Vision and New Strategy
Based on its mission ("change the world through technology"), Apple had a vision in 1976 to
make the PC easy to use for non-technical people. In 1992, the new vision should be to make the
PC cheaper and easier to use with higher performance for ordinary people. The strategy is to
create an open system and to disrupt the market by innovation and audacious moves.
2. Objectives
Apple's objectives are higher operating profit margins and higher market share.
3. Action Plan
-- Make Apple's Operating System an Open System: License the Macintosh OS and encourage
ISVs to write application software applications for Mac OS; Work with IBM and other
companies to develop an open standard for OS called "Pink" that can run on Apple's installed
based of Motorola chips, IBM's new chip, and Intel chips.
-- Form an alliance with Intel, and use Intel microprocessors in Apple products.
-- Focus on software innovation and subcontract hardware production. Expand notebook
PC and multimedia products.
-- Focus on educating customers, with enterprise customers as the next
target within five
years.
The first two actions relates to an open system and will directly increase Apple's market share.
Action (3) and (4) relates to the structure of business operations and will increase Apple's
profitability. Apple's expertise and mission is on innovation (particularly
software), whereas hardware is becoming commodity. The operating profit margin is
much higher in software companies. Because Apple cannot fight the commoditization of the
PC hardware industry, Apple can focus on its core competency and make it a sustainable
advantage. In summary, the action plan will solve Apple's problems and help it
achieve its objectives.
4. Implementation
(1) Technology
The IBM-Apple joint venture, Taligent, will develop the new generation OS called "Pink". Apple
and IBM believe Pink will be major breakthrough in software technology because Pink will be
able to run on Apple's installed base of Motorola chips, the new IBM chip (RS6000), and the
Intel chip. By creating joint ventures, Apple and IBM show their commitment to achieving inter-
operability (seamless connections between the IBM and Apple computers). Apple believes IBM's
RS6000 RISC microprocessor is the best technology in the industry, and IBM-Apple-Motorola
has formed an alliance to launch "PowerPC" as the new generation of computer. However, since
Intel already has close to 90% market share, Apple should be able to work with Intel and try to
use Intel chips in Apple's PC.
(2) Financial and other Resources
By making Apple's PC an open system, Apple may lose some control on its products, but it will
gain a much broader market. The Apple-IBM-Motorola alliance will have the technological
expertise to make major changes in the market, and the Apple-Intel alliance will greatly threaten
Microsoft's dominant position in the OS market. Developing a new OS requires $500 million
R&D investment, plus substantial ongoing development cost. Combining their market shares as
26% in revenue (20% in units), Apple and IBM will be financially able to raise capital in the
financial market. The combined marketing expertise will also lead to major changes in the
industry structure.
(3) Customer Reactions
Customers will welcome the changes that Apple tries to make because they will obtain the ideal
products with the best microprocessor chip (chosen from Motorola, Intel, and IBM) and the best
OS (chosen from Mac-IBM's Pink and Microsoft's Windows). While loyal Mac users will still
"love" Mac, Apple may attract more potential new users for Mac. ISVs will write more
application software for Mac, and VARs will be more willing to sell Mac than before.
5. Risks and Contingency of Implementing the Plan
(1) Apple may face some risks in financing the R&D and making the technological breakthrough
before Microsoft. Apple must act quickly and forcefully to implement the plan.
(2) By taking the recommended actions, Apple selects Microsoft as the major competitor/rival.
Since Apple wants to work with Intel, it must break the strong alliance between Microsoft and
Intel. Apple may alienate Motorola by using Intel's chip in Apple PC. In addition, IBM may
leave the Apple-IBM-Motorola alliance. Intel may refuse to work with Apple because its cost-
benefit analysis may reach an unfavorable conclusion for Apple. Microsoft will react vigorously
to defend its OS market position. The complicated relationship among the major market players
make the implementation even more challenging for Apple. However, in order to survive in this
extremely competitive environment, Apple has no other choice but to take risks and adeptly
deal with the complexity.
CONCLUSION
Apple should focus on customer needs, create an open system for its products, and shift more
attention to software innovation and development (OS, PowerPC chips, Multimedia technology,
Notebook PC, and PDAs). By doing so, Apple will be able to change the unfavorable structure of
PC industry and remain as a major player in the game. Otherwise, Apple will stay as a niche
player, or go out of business.