Case Study on Apple’s Business Strategies

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We can describe Apple’s strategy in terms of product differentiation and strategic alliances.

Product Differentiation

Apple prides itself on its innovation.  When reviewing the history of Apple, it is evident that this
attitude permeated the company during its peaks of success.  For instance, Apple pioneered the
PDA market by introducing the Newton in 1993. Later, Apple introduced the easy-to-use iMac in
1998, and updates following 1998. It released a highly stable operating system in 1999, and
updates following 1999. Apple had one of its critical points in history in 1999 when it introduced
the iBook.  This completed their “product matrix”, a simplified product mix strategy formulated
by Jobs.  This move allowed Apple to have a desktop and a portable computer in both the
professional and the consumer segments.  The matrix is as follows:

Professional Segment Consumer Segment

Desktop G3 iMac
Portable PowerBook iBook

In 2001, Apple hit another important historical point by launching iTunes.  This marked the
beginning of Apple’s new strategy of making the Mac the hub for the “digital lifestyle”. Apple
then opened its own stores, in spite of protests by independent Apple retailers voicing
cannibalization concerns. Then Apple introduced the iPod, central to the “digital lifestyle”
strategy.  Philip W. Schiller, VP of Worldwide Product Marketing for Apple, stated, “iPod is
going to change the way people listen to music.” He was right.

Apple continued their innovative streak with advancements in flat-panel LCDs for desktops in
2002 and improved notebooks in 2003. In 2003, Apple released the iLife package, containing
improved versions of iDVD, iMovie, iPhoto, and iTunes. In reference to Apple’s recent
advancements, Jobs said, “We are going to do for digital creation what Microsoft did for the
office suite productivity.” That is indeed a bold statement.  Time will tell whether that happens.

Apple continued its digital lifestyle strategy by launching iTunes Music Store online in 2003,
obtaining cooperation from “The Big 5” Music companies—BMG, EMI, Sony Entertainment,
Universal, Warner.  This allowed iTunes Music Store online to offer over 200,000 songs at
introduction. In 2003, Apple released the world’s fastest PC (Mac G5), which had dual 2.0GHz
PowerPC G5 processors.

Product differentiation is a viable strategy, especially if the company exploits the conceptual
distinctions for product differentiation.  Those that are relevant to Apple are product features,
product mix, links with other firms, and reputation. Apple established a reputation as an
innovator by offering an array of easy-to-use products that cover a broad range of segments.
However, its links with other firms have been limited, as we will discuss in the next section on
strategic alliances.

There is economic value in product differentiation, especially in the case of monopolistic

competition.  The primary economic value of product differentiation comes from reducing
environmental threats.  The cost of product differentiation acts as a barrier to entry, thus reducing
the threat of new entrants.  Not only does a company have to bear the cost of standard business,
it also must bear the costs associated with overcoming the differentiation inherent in the
incumbent.  Since companies pursue niche markets, there is a reduced threat of rivalry among
industry competitors.

A company’s differentiated product will appear more attractive relative to substitutes, thus
reducing the threat of substitutes.  If suppliers increase their prices, a company with a
differentiated product can pass that cost to its customers, thus reducing the threat of suppliers. 
Since a company with a differentiated product competes as a quasi-monopoly in its market
segment, there is a reduced threat of buyers.  With all of Porter’s Five Forces lower, a company
may see economic value from a product differentiation strategy.

A company attempts to make its strategy a sustained competitive advantage.  For this to occur, a
product differentiation strategy that is economically valuable must also be rare, difficult to
imitate, and the company must have the organization to exploit this.  If there are fewer firms
differentiating than the number required for perfect competition dynamics, the strategy is rare.  If
there is no direct, easy duplication and there are no easy substitutes, the strategy is difficult to
imitate.

There are four primary organizing dilemmas when considering product differentiation as a
strategy.  They are as depicted below.
 To
resolve these dilemmas, there must be an appropriate organization structure.  A U-Form
organization resolves the inter-functional collaboration dilemma if there are product
development and product management teams.  Combining the old with the new resolves the
connection to the past dilemma.  Having a policy of experimentation and a tolerance for failure
resolves the commitment to market vision dilemma.  Managerial freedom within broad decision-
making guidelines will resolve the institutional control dilemma.

Five leadership roles will facilitate the innovation process:  Institutional Leader, Critic,
Entrepreneur, Sponsor, and Mentor.  The institutional leader creates the organizational
infrastructure necessary for innovation.  This role also resolves disputes, particularly among the
other leaders.  The critic challenges investments, goals, and progress.  The entrepreneur manages
the innovative unit(s).  The sponsor procures, advocates, and champions.  The mentor coaches,
counsels, and advises.

Apple had issues within its organization.  In 1997, when Apple was seeking a CEO acceptable to
Jobs, Jean-Louis Gassée (then-CEO of Be, ex-Products President at Apple) commented, “Right
now the job is so difficult, it would require a bisexual, blond Japanese who is 25 years old and
has 15 years’ experience!”  Charles Haggerty, then-CEO of Western Digital, said, “Apple is a
company that still has opportunity written all over it.  But you’d need to recruit God to get it
done.”  Michael Murphy, then-editor of California Technology Stock Letter, stated, “Apple
desperately needs a great day-to-day manager, visionary, leader and politician.  The only person
who’s qualified to run this company was crucified 2,000 years ago.”

Since Jobs took over as CEO in 1997, Apple seems to have resolved the innovation dilemmas,
evidenced by their numerous innovations.  To continue a product differentiation strategy, Apple
must continue its appropriate management of innovation dilemmas and maintain the five
leadership roles that facilitate the innovation process.

Strategic Alliances

Apple has a history of shunning strategic alliances.  On June 25, 1985, Bill Gates sent a memo to
John Sculley (then-CEO of Apple) and Jean-Louis Gassée (then-Products President).  Gates
recommended that Apple license Macintosh technology to 3-5 significant manufacturers, listing
companies and contacts such as AT&T, DEC, Texas Instruments, Hewlett-Packard, Xerox, and
Motorola. (Linzmayer, 245-8)  After not receiving a response, Gates wrote another memo on
July 29, naming three other companies and stating, “I want to help in any way I can with the
licensing.  Please give me a call.”  In 1987, Sculley refused to sign licensing contracts with
Apollo Computer.  He felt that up-and-coming rival Sun Microsystems would overtake Apollo
Computer, which did happen.

Then, Sculley and Michael Spindler (COO) partnered Apple with IBM and Motorola on the
PowerPC chip.  Sculley and Spindler were hoping IBM would buy Apple and put them in charge
of the PC business.  That never came to fruition, because Apple (with Spindler as the CEO)
seemed contradictory and was extraordinarily difficult in business dealings.      Apple turned the
corner in 1993.  Spindler begrudgingly licensed the Mac to Power Computing in 1993 and to
Radius (who made Mac monitors) in 1995.  However, Spindler nixed Gateway in 1995 due to
cannibalization fears. Gil Amelio, an avid supporter of licensing, took over as CEO in 1996. 
Under Amelio, Apple licensed to Motorola and IBM. In 1996, Apple announced the $427
million purchase of NeXT Software, marking the return of Steve Jobs. Amelio suddenly resigned
in 1997, and the stage was set for Jobs to resume power.

Jobs despised licensing, calling cloners “leeches”.  He pulled the plug, essentially killing its
largest licensee (Power Computing).  Apple subsequently acquired Power Computing’s customer
database, Mac OS license, and key employees for $100 million of Apple stock and $10 million to
cover debt and closing costs.  The business was worth $400 million.

A massive reversal occurred in 1997 and 1998.  In 1997, Jobs overhauled the board of directors
and then entered Apple into patent cross-licensing and technology agreements with Microsoft. In
1998, Jobs stated that Apple’s strategy is to “focus all of our software development resources on
extending the Macintosh operating system.  To realize our ambitious plans we must focus all of
our efforts in one direction.” This statement was in the wake of Apple divesting significant
software holdings (Claris/FileMaker and Newton).

There is economic value in strategic alliances.   In the case of Apple, there was the opportunity to
manage risk and share costs  facilitate tacit collusion , and manage uncertainty.  It would have
been applicable to the industries in which Apple operated.  Tacit collusion is a valid source of
economic value in network industries, which the computer industry is.  Managing uncertainty,
managing risk, and sharing costs are sources of economic value in any industry.  Although Apple
eventually realized the economic value of strategic alliances, it should have occurred earlier.

The following are some comments about Apple’s no-licensing policy.

“If Apple had licensed the Mac OS when it first came out, Window  wouldn’t exist today.” – Jon
van Bronkhorst, “The computer was never the problem.  The company’s strategy was.  Apple
saw itself as a hardware company; in order to protect our hardware profits, we didn’t license our
operating system.  We had the most beautiful operating system, but to get it you had to buy our
hardware at twice the price.  That was a mistake.  What we should have done was calculate an
appropriate price to license the operating system.  We were also naïve to think that the best
technology would prevail.  It often doesn’t.” – Steve Wozniak, Apple cofounder

“If we had licensed earlier, we would be the Microsoft of today.” – Ian W. Diery, Apple
Executive VP, I am aware that I am known as the Great Satan on licensing…I was never for or
against licensing.  I just did not see how it would make sense.  But my approach was stupid.  We
were just fat cats living off a business that had no competition.” -  Jean-Louis Gassée, Be CEO
and ex-CEO of Apple, admitting he made a strategic mistake.

A strategic alliance can be a sustained competitive advantage if it is rare, difficult to imitate, and
the company has an organization to exploit it.  If the number of competing firms implementing a
similar strategic alliance is relatively few, the strategy is rare.  If there are socially complex
relations among partners and there is no direct duplication, the strategy is difficult to imitate.
When organizing for strategic alliances, a firm must consider whether the alliance is non-equity
or equity.  A non-equity alliance should have explicit contracts and legal sanctions. An equity
alliance should have contracts describing the equity investment.  There are some substitutes for
an equity alliance, such as internal development and acquisitions.  However, the difficulties with
these drive the formation of strategic alliances.  It is vital to remember, “Commitment,
coordination, and trust are all important determinants of alliance success.”

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