Apple Micro-Macro Environment

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1 The volatility and evolution of computer industry

Starting from 1976, Apple computer created the personal computer (PC). After IBMtransformed the PC from proprietary systems into open structure, PC has been dominated by

Wintel (Windows + Intel) structure. Apple insists in adopting proprietary and niche marketstrategies made them keep losing market share till less than 3% in 2001. However, its strategy

with ignoring the market trends makes it lose the market after years.

1.1 Industrial changes: Apple lost PC market because

of ignoring industrial changes

The PC industry has evolved in the past decades. There are 3 phases. Let¶s take a look at these phases and Apple¶s position in each phase.

Figure 1 Computer industrial change

Before 1981: Proprietary Systems.

Every PC producer had to develop self own hardware and software. It was proprietary. Most

buyers were technical people. There were 2 main streams in the market: Apple style machineand IBM style machine. During this period, Apple was the leader. Its strong developing

ability made the Apple II became a family commodity. However, Apple didn¶t use patent or trade secret to protect its products. Many computer companies re-engineered Apple II and

made cheaper similar products to compete in the market. For example, Acer copied Apple IIand developed the Little Professor Series.

1981- 1997: Open structure.

IBM turned the PC into open structure. Compaq, HP and many other producers started toshow in the market to produce IBM compatible PC. During this period, hardware can beseparated into CPU, mother board, power, disk drive, and other peripheral businesses.Software can be separated into basic input output system (BIOS), operation system (DOS,Unix, Windows), tool systems (Norton doctor, Anti-virus), computer language (C, Basic,

Clipper, FoxPro), office applications (spreadsheet, word process), graphic applications(Adobe, Corel), game, and other applications. Each area had many providers competing witheach other. But CPU, OS and some special application areas had few providers. PC producers

became the hub of the hardware business. They had to buy all the components and assembleinto a whole piece. Consumers are not only cared about hardware performance, but they alsocared about the software applications. IBM style machine with Intel CPU and Windows OS

became the mainstream. During this period, Apple kept losing its market share. It is becauseof 4 reasons. (a) Apple insisted in selling their products as a high price proprietary system. Itshardware and software were different and not compatible with IBM machine. (b) As more

people using IBM machine, software developers turned to create software that can be run onIBM machine. (c) Apple adopted Motorola CPU. However, Intel¶s developing ability is better



than Motorola after late 80¶s. As Intel kept leading the market, Apple¶s CPU ability could not

pass IBM¶s. (d) Apple focused on education and printing industries. Compared to the totalindustrial growth, these 2 markets may only take small portions. The total PC market growth

came from increasing businesses customers, they use IBM style machine. It makes Apple¶smarket share relatively decreasing.

1997- : Internet PC.

After internet booming, the PC industry has changed. PCs connect together. Before that, mostPCs are work independently, especially in the household market. But it has changed. Internetconnects every computer around the world. Network has become a necessary part in PC

industry.

Apple already lost their PC market. It tried to develop new iMac to win the market back.However, Apple kept using the same strategy with fancy styles and user- friendly interface.They still don¶t focus on Powerful CPU and compatible software. As most PC users in themarket are makes IBM keeps dominating this shrinking market. Apple¶s niche strategysuccess with unique selling points in ³ease of use´, ³industrial design´, ³tech elegance´, and³powerful application in graphic processing´. However, Apple kept losing market share

because they focused in relatively low growth industries with many substitute competitors.

People can buy an IBM style PC with similar functions and cheaper price from Compaq, HP,Dell, and many other providers. Apple focused on the wrong market with many substitute

competitors. Its unique selling points are not hard to copy. Its loosing market is destined.

2 Identification of the strategic issue at the

level of the firm

As a computer producer company, there are several strategic issues are faced by Apple. Theyare:

1. How Apple survives in competition.

2. How Apple responds to the dynamic of technology innovation.3. How Apple responds to the continuous changing market needs.



Figure 2. Strategic Issue of the firms.

2.1 Issues 1: How Apple survives in competition

The structure of computer industry can be considered as monopolistic competition. Thisstructure is characterized by a lot of competitors, easy to enter the industry due to low entry

barrier and certain differentiation created by the firms in the industry. As a result, the market becomes saturated and fragmented which make only small market share can be gained byevery firm.

This industry is also characterized by strong supplier bargaining position due to few numbersof suppliers and strong consumer bargaining position due to low searching cost and lowswitching cost to competitors. Even though Apple does certain differentiations, thesecircumstances create pressure for Apple since it purchases component with higher price butshould to limit the price due to the strong of competitions. Thus, Apple not too flexible to gainas big margin as it wants.

Those following factors: a lot of competitors, fragmented market, low margin, and lowmarket share create very tough condition for Apple. The history and facts show that onceApple dominated the market but due to inability to adapt with competition in market Applelost to only 3% market share in 2001.

2.2 Issues 2: How Apple responds to the dynamic of innovation

Apple and all computer producer firms depend on components and software from suppliers.Among of them, without neglecting the importance of other components, processor is the corecomponent of computer because the general performance of computer is usually associatedwith processor speed.

The rapid innovation of processor, approximately every quarter by Intel Company, put nochoice for computer producers including Apple except to adopt the new technology. The



ignorance of adopting such new processor will create competitive disadvantage for Apple

especially when competitors acquire before it.

Besides, computer also requires core software which is called operating system to provideenvironment for applications. Microsoft is the main operating system competitor of Apple. Itdominates operating system market share with more than 80% PCs using Microsoft Windows.These great numbers of users in turn produce network effects for Microsoft Windows whichincrease the value of the operating system. Furthermore, it is really a hard for Apple MacOS

to get back market share because it creates high and expensive switching cost from Windowsto MacOS.

This situation is hardened since Microsoft releases new version of operating system

approximately every two years. To keep in pace, Apple has also to respond by innovating atleast the same frequency with Microsoft¶s Windows.

The pressure coming from processor innovation and rapid release of competitor operatingsystem represents the dynamic of innovation which requires apple respond good. Whileresponding fast of those dynamics will result a short product life cycle, failing responds tothese dynamics will create competitive disadvantage for Apple.

3 Identifying the components of the environment in the

strategic issue and its main characteristics

There are several environment component s that involves in the strategic issues. Those

components can be classified into: Macro or far environment and Micro environment.

3.1 Macro environment

Macro environment is a far environment which comprise of several forces that raise strategicissue to Apple. These forces are social force, economic force, politic force, and technology

force which well known as PEST (figure 3).

Figure 3 Macro Environment

3.1.1 Technology forces

The first force that influences computer industry structure is rapid and sustained technical progress. Each year, integrated circuits and other electronic components become better, faster,and cheaper, providing opportunities for improving existing computers as well as designing anew kind.



As computer comprises of hardware and software, Apple is really affected by technology

innovation forces around it. Rapid innovation on hardware by component producers (e.g.Intel, AMD) and software by competitors (e.g. Microsoft) as well as complementary products

from partner gives no choice for Apple except responsively catching the new hardwaretechnology and also continuously innovating to sustain differentiation.

Starting from 1976, Apple created personal computer as a proprietary system. Apple createdthe hardware by assembling components, create operating system (e.g. MacOS) and develop

applications. That time, as Apple controls both hardware and software, Apple can create personal computer that deliver great personal experience compare to its competitors.

That time, Apple computer main competitor is IBM personal computer. Previously IBM

followed proprietary system as well. In 1981, IBM changed into open structure. This movechanged the environment of competition. This move brought many new entrants such as

Compaq and HP to produce IBM PC Compatible. This also brought in Intel as new entrant as producer of processor and Microsoft as producer of operating system.

Rapid innovation both from Intel created strong technological forces for Apple. As Intelreleased faster processor every quarter (figure 4), Apple, which that time sourced its processor from Motorola, had to respond with comparable or faster processor. Failing to respond this in

time would create competitive disadvantage for Apple since competitors would adopt it andgain better technology.

Microsoft which dominates operating system producer for Intel based personal computer isalso the main competitor for Apple. The rapid innovation by Microsoft which releases newversion of Windows every 2 years (figure 5) creates pressure for Apple to upgrade MacOS aswell. This is not easy task for Apple since Microsoft Windows selling is very high so it cancover its R&D cost meanwhile Apple MacOS market share is a little.

In addition, the open system adopted by Microsoft and Intel and the network size of Windows attracts many Independent Software Vendors (ISV) breed in order to create

application for Wintel platform. The rapid innovation of Windows operating system and theincreasing number of applications for Wintel platform make Windows Intel platform more

valuable and thus create additional pressure for Apple especially high switching cost for consumer to switch to Apple.

3.1.2 Economic forces

Monopolistic competition characterizes computer industry. A lot of existing competitors in

the industry (e.g. IBM, Dell, HP, Compaq, Ben Q, Asus, Gate Way, Lenovo, and Acer) andlow entry barrier allow new entrant to enter the industry easily and thus increasing more

competition. Supplier bargaining position is strong due to small number of processor suppliers (e.g. Intel, AMD, and Cyrix). Customer bargaining position is also strong due to low

searching cost and low switching cost. Both of these characteristics constrain companies inthe industry to get only low operating margin (figure 6). Apple is also affected by thiseconomic force where Apple has to choose between low prices to boost market share or

premium price but lower market share.



Figure 6 Comparison of operating margin

Figure 7 Comparison of market share in US

Developed countries are characterized by high purchasing power consumer meanwhile somedeveloping countries and undeveloped countries are characterized by low purchasing power.

This difference in purchasing power need to be considered for adapting entry marketingstrategy on different countries

3.1.3 Politic forces

Joining China to WTO creates opportunity as well as threat for Apple. Lower investment barrier and market barrier gives opportunities for Apple to take advantage of low cost labor aswell as getting potential market. On the other side, similar opportunities are also available tocompetitors. When competitors move its plant into China and become more efficient, Applehas to respond or will get cost inefficiency disadvantage over competitors.

3.1.4 Social forces

Dynamic change of life-style



Different and dynamic change of needs and lifestyle push Apple to continuously innovate to

adapt with it. Lifestyle and need of consumers are continuously changing. The motives of consumers on purchasing computer can be segmented into the following:

y Entertainment. Costumers in this segment need better graphics and better sound thusthis segment needs computer to have faster processing power, graphical purchasing

power and good sound system device.

y Travel/mobility. Customer in this segment need smaller, lighter computer as well as

longer time of battery life.y Everyday computer. Customer in this segment need computer for day to day activities

such as office system. This segment need more reliable computer to accomplish itstask.

y Interconnectivity. This segment needs computer with faster and reliablecommunication device.

y Server. This segment needs computer with high processing power, available andreliable for running continuously non-stop.

y Status. This segment needs computer with great brand and brand new design.

Dynamic change of demands

Market demand is continuously changing. Data from 1995 to 2003 (figure 8) shows that thereis trend of decreasing PC demand on developing countries such as US, Japan, Singaporewhereas the trend of increasing demand moves to emerging countries such as China, Malaysiaand Korea. This moving of demand has to be responded by Apple in order to better manageits resources and manage its marketing strategy. Denying this dynamics will produce resourceinefficiency, cost competitive disadvantage and infectivity of marketing strategy.

Figure 8 Hardware production and share of total global production

E nvironmental issues force Apple to be friendlier with nature.

Apple has been criticized by some environmental organizations for not being a leader inremoving toxic chemicals from its new products, and for not aggressively or properlyrecycling its old products. Due to social pressure in environmental issues Apple has to adaptits process to be friendlier with nature.

3.2 Micro Environment

Micro environment is near environment. This environment is actually the direct surroundingof the firm that determines firm position in competition. This environment can be explained



using Porter five forces (figure 9). Based on Porter, firm position is characterized by rivalry,

threat from product substitution, threat from new entrant, bargaining power of supplier and bargaining power of consumers.

A large number of competitors especially from Wintel (Windows Intel) family create a µredocean¶ for Apple. Wintel platform is not produced by single firm rather than combination of firms. These competitors offer similar product to apple with only little different in features,

brand and design. Several Apple competitors are IBM, HP, Compaq, Dell, Lenovo, Gateway,

Acer, Fujitsu, Sony, ECS, Toshiba, etc.

Strong bargaining power of suppliers creates high cost of computer components. As there isonly small number of processor suppliers (e.g. Intel, AMD, Cyrix, and IBM) and only small

of them has capability and willingness to provide the best for Apple, the bargaining power of supplier is high to the Apple. This condition made the price of processor component is high.

At the other side, the great number of competitors with similar product specification and the birth of Internet are also strengthening the bargaining power of final consumers. This limitsthe ability for Apple set price too high.

Low threats of substitute product also characterize the industry. Besides Wintel personal

computer, there are no pure substitutions for Apple personal PC. Since Wintel personalcomputer is the same kind of product with Apple, it is considered as rivalry instead of productsubstitution.

Figure 9. Porter five forces

4 Analysis of the interaction of environment components

4.1 Interaction of macro elements

The interaction of Politic, Economic, Social and Technology forces create a turbulent andcomplex environment (figure 11). Rapid change of technology, dynamic of social lifestyleand needs, and the monopolistic economic environment influence Apple has to keep in pacewith new technology, innovate to be different with competitors, and adapt its product tocustomer need and demand. This rapid adaptation of products made the product life-cycle



obsolete faster and it increase the number of obsolete inventory. In addition, the joining China

into WTO also influences Apple to be efficient since many of its competitors relocate its plantto China and benefit cost and labor efficiency.

Figure 10 Interaction of macro elements

4.2 Interaction of micro elements

The interaction between 5 competitive forces, create environment for Apple very competitiveand hard to survive. Low entry barrier, rapid innovation of supplier and changing demand of consumer create the product life-cycle shorten. A lot of competitors with very similar productspecification let product easy to imitate and alter PC become near to commodity product.Thus this leads to low market share industry. In addition, strong power of suppliers, a lot of competitors and strong power of consumers create the industry as low margin industry.



Figure 11. Interaction of micro elements

5 Analysis of how environmental change (future) will

influence the strategyThe environmental change trend in current and past can depict the future. The rapid increasingof technological innovation, changing customer need, competition due to low entry barrier

lead to the more and saturated and fragmentation of market. Thus, it made environmentsituation in the future more turbulent and complex for Apple.

Thus, this made Apple strategy have to be adapted continuously as a response of thedynamics of environment. Strategy has to be reshaped based on internal and externalenvironmental analysis. As environment change, so do strategy.

Since the return of Steve Jobs as Apple CEO, Apple response to the environmental change

shows improvement to the company revenue. Apple selling on MacBook shows increasingtrend which represent the successfulness of Apple strategy (Figure 13).

Figure 12. Mac unit sales

6 Apple response to the environmental change



As environmental change dynamically, Apple responded by adapting its business model and

strategy in order to struggle for survive. Since Apple was keep losing market share in personalcomputer industry, Apple has been tried to create new business model to create new source of

income. Through its research and development, Apple decided to enter digital media sector, by creating innovative design iPod and iTunes. As a result, iPod and iTunes are successful

due to its innovative design, easy to use and large storage.

Apples business model for the iPod generates money in many different levels. Money is

being made both on the hardware, software and on the accessories. When Apple introducedthe iPod it was not a new product. The mp3 players had existed for some time without being a

big success, but customer preferences were changing rapidly. Apple quickly saw a newmarket and created an inferior music player with a great design. Apples most decisive movewas to create a web shop with hundreds of thousands of licensed songs. Soon Apple wasmaking big money both on the iPod and the music ± a dream scenario for most companies.Songs bought at the Apple music store can only be played on iPods but this has not affectedthe sales so far. Apples margins on the iPod Mini is on average about 35% and $0.25 on eachsold song. At the end of 2004 Apple has sold 10 million iPods and 250 million songs.

With this innovative approach, as he did previously with home computers, Jobs hasdeveloped a new market: that of legal digital music, which in 2005 reported $1.1 billion in

sales to the record companies, as compared to 400 million from the previous year.

Apple improves design to create differentiation and offer with premium price (figure 13). Togather back its market share in personal computer and mobile computer, Apple conductsdifferentiation strategy. Apple creates very distinctive and innovative design that simplifiesthe size of computer, increase the artistic look of its products.

Figure 13 Apple perception map

Apple also reduces product category to ease consumers. Currently Apple no longer creates toomany product variations in order to ease consumer choosing products.

Apple also transforms its marketing channel by using exclusive delivery channel. In order tomanage its brand as high class and high quality product, Apple chose to transform its retailchannel into exclusive store. The openings of Apple Stores are in order to extend the reach of the external distribution channel.

To respond with dynamic of innovation and create competitive advantage, Apple leaves IBM

and does alliance with Intel as a response of rapid innovation of processor. After IBM cannotafford Apple to provide processor that is faster to Intel, Apple has no other source that capable



providing high-speed processor. Apple moves and does alliance with Intel, as both of the

company can create mutual benefit to compete AMD for Intel and MS Windows for Apple.Apple currently uses Intel processor for its new computer and laptops for the next five years.

This strategy gives benefit to Apple as it is allowing Microsoft Windows to run above it inturn it reduces the risk, cost and barrier for customer to switch from Microsoft to Apple

platform. The Mac Mini is expected to be the first Apple computer to use Intel chips, with theentire product line switching by the end of 2007.

Apple¶s move to Intel is thought to have come about because of IBM¶s reluctance to expandthe number and range of PowerPC chips it makes. Furthermore IBM has yet to produce aversion of the G5 chip that would be suitable for use in Apple laptops. IBM has the contractto make PowerPC chips for Microsoft¶s imminent Xbox 360 console, Sony¶s forthcomingPlayStation 3 and Nintendo¶s future game-playing machine. As a result the cash it gets frommaking chips for Apple has become a very small slice of its revenue.

In responding social pressure on environmental issues, Apple recycled 13 million pounds of

e-waste in 2006, which is equal to 9.5% of the weight of all products Apple sold seven yearsearlier. We expect this percentage to grow to 13% in 2007, and to 20% in 2008. By 2010, we

forecast recycling 19 million pounds of e-waste per year ² nearly 30% of the product weightwe sold seven years earlier.

7 Conclusion

The PC industry has evolved in the past decades. They are proprietary, open structure andinternet PC. The interaction of Politic, Economic, Social and Technology forces create aturbulent and complex environment. In addition, the interaction between 5 competitive forces,create environment for Apple very competitive and hard to survive. Apple past ignorance of environmental change made Apple losing market share. Now, as environmental changedynamically, Apple responded by adapting its business model and strategy in order to struggle

for survive.

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