978-1259913747 Appendix E Case Part 1

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Structure of the Case

The case is set in the spring of 2015 and begins with a vignette of CEO Tim Cook contemplating the

source of longer-term growth at Apple. Tim Cook has successfully led Apple following Steve Jobs’

death and made Apple the first company to be worth more than $700 billion, but no major new product

has been introduced since 2010.

The next section of the case provides a history of Apple Inc. (AAPL). The origins of Apple begin with

Steve Jobs and Steve Wozniak founding Apple Computer Inc., after Steve Jobs sold his Volkswagen

to build computers in his garage. By 1980, Apple had released three improved versions of personal

computers and launched a successful IPO that made Steve Jobs and Wozniak millionaires. In 1981,

IBM entered the personal-computer industry, and by 1982 its open architecture and partnership

with Microsoft (software) and Intel (processor) were becoming the industry standard. In 1984, Apple

responded with the Macintosh computer, whose introduction to the world came as part of a memorable

Super Bowl commercial (see additional resources). The graphic design of the Macintosh shaped later

computer interfaces with Microsoft’s imitation in Windows 3.0 in 1990.

As part of its growth, Apple brought in professional managers, and in 1983 John Sculley, a market-

ing guru, was hired. John Sculley and Steve Jobs initially worked well together, but the two began to

diverge; a power struggle erupted over the future of Apple, resulting in Steve Jobs’ public firing by

Apple’s board of directors in favor of making John Sculley CEO. The leadership of John Sculley at

Apple represented a time of decline at the company as competition increased and Apple lost focus. This

set the stage for Steve Jobs’ return.

By 1996, Apple revenues had fallen, and the company announced layoffs of 30 percent of its work

force. A new CEO (Gilbert Amelio) bought NeXT software that Steve Jobs founded after leaving Apple,

and brought in Steve Jobs as a part-time advisor. (Note: While away from Apple, Steve Jobs also

became involved with Pixar animation in what has to be among the best investments ever, as Disney

bought Pixar for $7.4 billion in 2006.) In 1997, Apple experienced its worst performance ever; Steve Jobs

returned as CEO and orchestrated one of the greatest corporate turnarounds in history.

Steve Jobs began by focusing the company and discontinuing several products, ending relationships

with smaller stores, and outsourcing production. He also switched the platform of Apple’s operating

system to UNIX, which enabled Apple to adopt Intel processors and run both the Apple and Microsoft

Apple Inc.

TEACHING NOTE

MHE-FTR-031

1259420477

REV: FEBRUARy 21, 2015

Teaching Note —Apple Inc.

operating systems. This coincided with an alliance with Microsoft that involved a $150 million invest-

ment and development of Microsoft Office for the Macintosh.

Another change Steve Jobs instituted was a renewed focus on design and the appointment of

Jonathan Ive as Apple’s chief designer. This coincided with a renewed focus on Apple’s brand iden-

tity and the launch of Apple’s “Think Different” advertising campaign (see additional resources). The

campaign did not feature any Apple products, and the case includes an interview that suggests Steve

Jobs was waiting “for the next big thing.” Additionally, the focus on outsourcing coincided with Tim

Cook being hired in 1998 as senior vice president of worldwide operations. By 2007, Tim Cook’s role at

Apple increased, and he became Chief Operating Officer. The transition from Steve Jobs to Tim Cook

and some of the changes made are then discussed.

From this background, the case transitions to a discussion of Apple’s culture under Steve Jobs that

emphasized attracting employees who wanted to “change the world.” Apple developed a rebel cul-

ture, which was symbolized by flying over its Macintosh building a pirate flag with a rainbow-colored

Apple eye patch. This culture also helped to differentiate Apple in the marketplace, and it developed

an almost cult-like following among customers who bought Apple products. Under Steve Jobs’ leader-

ship, Apple began to deliver innovative products to serve these customers.

A key theme of Apple’s history under Steve Jobs was innovation, and this was reestablished with the

iPod in 2001, which coincided with Apple starting its own retail stores. However, the MP3 player did

not really take off until the introduction of iTunes, which complemented the iPod and enabled consum-

ers to download individual songs legally. By 2010, millions of iPods had been sold and over 10 billion

songs downloaded.

The iPod was followed by the iPhone in 2007 in a partnership with AT&T to “bring the Internet to

your pocket.” In 2008, the updated iPhone 3G was introduced and sold in record numbers. The bril-

liance of the iPhone was that it combined a phone, watch, digital camera, and GPS into a single device

that sold at a premium, but still less than the price of separate products.

In 2010, the iPad was the next innovation, and it created a market for a product that crossed a phone

with a laptop computer. The iPad also presented increased competition for Amazon’s Kindle electronic

book, and iTunes was expanded from music to enable downloading movies and books. Apple reached

agreements with all the major book publishers (with the exception of Random House) that allowed

publishers to set prices, with Apple retaining 30 percent of the sale price. This differed from Amazon’s

pricing model and resulted in a Justice Department investigation on price fixing.

Steve Jobs died in October 2011, and Tim Cook became CEO. Tim Cook’s personality is starkly dif-

ferent from that of Steve Jobs. His selection as an inside, relay succession signaled that no large changes

would be expected. This is reflected in Apple largely releasing derivatives of existing products (e.g.,

iPhone 5S and 5C, the iPad mini). As of the end of 2014, Apple had not introduced another innovative

product line. This has increased Apple’s reliance on the iPhone (2/3 revenues), and Apple appears to

be following a path to sell complementary products to the iPhone (Beats, Apple Pay, Apple Watch) at

the same time that it is pursuing product development (Apple TV, Apple Car).

The case then shifts from Apple to a discussion of its primary competitors. For the sake of brevity,

the review of competitors is provided in the following bullets. (Note: More detail on Apple’s primary

competitors can be found in the suggested questions.)

Teaching Note —Apple Inc.

• Amazon.com:DirectlycompeteswithApple’siTunesandtabletcomputers.

• Google:Initiallyawebsearchfirm,Googlehasrapidlyexpandedintomultipleareas.Seeingthe

trend to mobile computing as a threat to its primary revenue stream of advertising, Google provides

its Android operating system to phone developers for free. Google also purchased Motorola in 2011

and planned to release products with hardware designed for its software. Google is also developing

inexpensive Chromebook laptops, as well as Chromecast, a device similar to the current Apple TV

box.

• Microsoft:Perhapsthefirmmostaffectedbytheshifttomobilecomputing,Microsoftappearstobe

playing catch-up. It has acquired Nokia to increase adoption of its operating systems on phones and

released its Surface tablet computer. Microsoft has also opened its own retail stores.

• Samsung:In2012,Samsungbecametheglobalsmartphoneleaderbyemployingadifferentstrategy

than Apple. Relying on Google’s Android software, Samsung has introduced multiple products,

including more than 26 phones and tablets with screen sizes varying from 3 to 10 inches. This has

enabled Samsung to saturate the market with lower-cost products to meet different needs, resulting

in intense competition and legal battles.

The case concludes with a discussion of Apple’s challenges, including a reliance on the iPhone and

China, sources of continued growth, acceptance of Apple Watch, activist investors, and so on. Tim

Cook knows he needs to chart a path to continued growth, but it is unclear from where that growth

will come. The case suggests this could come from introducing less-expensive products, developing

another revolutionary product, or expanding Apple’s presence in emerging markets. This highlights

that the short-term competitive pressures are compounded by the need for Apple to decide how it will

compete in the long term.

Suggested Answers

ANALYSIS: FOCUS ON EXTERNAL AND/OR INTERNAL ENVIRONMENTS

1. Perform a SWOT analysis for Apple.

2. Perform a SWOT analysis for Amazon.

3. Perform a SWOT analysis for Google.

4. Perform a SWOT analysis for Microsoft.

FORMULATION: FOCUS ON BUSINESS, CORPORATE,

AND/OR GLOBAL STRATEGY

5. Summarize Apple’s product segments and suggest where it can pursue continued growth.

Teaching Note —Apple Inc.

Based on information in the case, Apple’s product ecosystem includes the following:

• Macintosh(1984):desktopandportablecomputersandrelatedperipherals

• iPod(2001):alineofportabledigitalmusicandmediaplayers

The Macintosh consistently achieves 10–20 percent market share and provides a foundation for

Apple sales. Apple’s recent growth coincided with the introduction of the iPod in 2001. And with the

Later introductions of the iPhone and iPad increased the reliance of Apple on iPhone sales (see

1. Develop a new product that will create as much revenue as the iPhone.

The potential contenders are an Apple television set or an Apple car. An Apple television could be a

product priced at several hundred dollars, but Apple has run into problems reaching agreements with

2. Increase sales from the iPhone with complementary products and repeat sales of upgraded

products.

A smartwatch that includes exercise monitoring and the ability to read texts but that still requires a

IMPLEMENTATION: FOCUS ON RECOMMENDATIONS

AND HOW TO EXECUTE THEM

6. Identify the top challenges that Tim Cook faces and how he should address them.

The challenges that Tim Cook faces fall into several categories, including:

Teaching Note —Apple Inc.

• MaintainApple’sabilitytoinnovate.

Most analysts agree that Apple will continue to perform well in the short term. Incremental improve-

ments in the current product lineup will provide strong revenue streams for many years, even with-

out another technological breakthrough. However, there is a legitimate concern that the Apple of the

future will not be the maverick it is today.

How to address? Cook must learn to trust his own leadership instincts and take calculated risks to

keep Apple moving forward. Jobs did his best to ensure a lasting legacy of innovation by working with

• RetainApple’stopexecutivesandgrowothertalentedemployees.

Without a clear vision, there is a risk that more of Apple’s senior executives might cash in their stock

options and depart for leadership positions at other companies. As mentioned earlier, Ron Johnson,

How to address? Tim Cook must avoid abusing the power of his position and appear as if he is trying

NOTE: See the text of Question 7 for additional discussion about Apple.

7. Considering the internal and external environment for your assigned firm (e.g., Apple, Amazon,

Google, and Microsoft), develop alternatives for how it can adapt to increased competition.

The direction of the discussion in class can go multiple ways. Still, as each of these firms continues to

seek revenue growth, the competition among them will only intensify as they seek to increase revenue.

This relates to multimarket competition and the formation and dissolution of alliances. The case men-

tions that Apple and Microsoft cooperated, and the increased competition between Apple and Google

can explain iOS recently dropping Google Maps. Similarly, Amazon has partnered with Google to use

its Android operating system on its Kindle tablets. At the same time, the points of competition between

the profiled firms should be clear:

• Apple’siAdsencroachonGoogle’sprimaryrevenuestreamfromadvertising.

• Apple’siPadisadirectthreattoMicrosoft’soperatingsystemsales.

Teaching Note —Apple Inc.

of McGraw-Hill Education.

• Apple’siTunesandiPadareadirectthreattoAmazon.comdigitalsalesandKindle.

• Amazon.comanditsKindleareadirectthreattoApple’siTunesandiPad.

• Google’sAndroidisadirectthreattoApple’siOSanditsmobiledevices,andthisiscompounded

with its partnership with Samsung and its acquisition of Motorola.

• Google’sChrome,GoogleDocs,andGmailareadirectthreattoMicrosoft’sOfficeSuite.

• Microsoft’sSurfacetabletandWindows8anditsacquisitionofNokiaplaceitonacollisioncourse

with Apple.

• Microsoft’sBingsearchengineisadirectthreattoGoogle’srevenuestreamfromadvertising.

In addition to these points, some likely alternatives exist for the profiled firms, which are discussed

Apple

• Leveragebrandloyalty—Apple currently has one of the most loyal customer groups in the technology

market. People wait in lines for days in order to purchase the newest Apple product. Apple needs

to leverage this from just iPhones and iPads into their Macs and Apple TV. The average Apple user

business to serving a broader range of markets and market segments. Apple can focus on those rap-

idly growing smartphone/tablet markets, such as China and India that have a large and expanding

base of affluent customers.

• Vertical integration—Apple could focus on controlling or diversifying their supply chain using

their strong financial position and large cash reserves. This would allow Apple to vertically inte-

Amazon

• Services—Leverage its strengths in IT and server infrastructure by expanding into business consult-

ing and services. For example, Amazon recently beat IBM and overcame a protest to win a CIA

Teaching Note —Apple Inc.

Google

• Increase Android adoption—Mobile computing and therefore advertising will only grow, and as

Android devices continue to outsell Apple, the adoption of Google+ and other products will increase.

Additionally, this will help attract application developers to Android, and the products from this

Microsoft

• Change culture—Microsoft needs to overhaul the firm’s culture so it is more innovative and able

to respond to changing consumer preferences. Future opportunities lie in more powerful personal

computing on smaller and smaller devices, or in areas outside Microsoft’s traditional strengths.

Recent Updates

• ActivistInvestors: The large cash stockpile that Apple has amassed has attracted activist investors,

including Carl Icahn, who want the cash returned to investors in the form of dividends or expanded

stock buyback programs.

• SupplierAccountability:ArecurringthemerelatedtoAppleinvolvestheworkconditionsofitssuppliers.

ApplehasinstitutedaSupplierCodeofConductandaudits(seehttp://www.apple.com/supplierrespon-

sibility/accountability.html). However, problems remain. In December 2013, a 15-year-old worker

• AppleCulture:ThecultureofApplehasbeeninfluxSteveJobs’death.Consistentlynameda“bestplacetowork”

underJobs’leadership,therearenowincreasingemployeecomplaints(seehttp://www.businessinsider.com/

Teaching Note —Apple Inc.

Additional Resources

1. https://www.youtube.com/watch?v=R706isyDrqI (1:00). Apple’s 1984 Super Bowl commercial

introducing the Macintosh computer.

2. https://www.youtube.com/watch?v=SswMzUWOiJg (1:10). Apple’s “Think Different”

commercial released following Steve Job’s return to Apple in 1997.

3. For background on how difficult Steve Jobs was to deal with, here is a description of the

story behind how Apple’s “Think Different” commercial was developed in a December

2011 Forbes article (see http://www.forbes.com/sites/onmarketing/2011/12/14/

the-real-story-behind-apples-think-different-campaign/).

4. SteveJobsthroughtheYears.http://online.wsj.com/video/steve-jobs-through-the-years/779F0E04-

56B8-44BB-B1F5-3B95FF22C4B3.html (9:39). August 24, 2011.This is a review from The WallStreet

Journal of Steve Jobs’ career on the day he announced his resignation as CEO.

5. http://rockcenter.nbcnews.com/_news/2012/12/06/15708290-apple-ceo-tim-cook-announces-

plans-to-manufacture-mac-computers-in-usa (11:08). Tim Cook’s first interview (December 2012)

following his becoming CEO on RockCenter with Tim Williams that also introduces Apple’s

retail stores and discusses the challenge of Apple continuing to be successful without Steve

Jobs. In addition, the interview covers potential missteps, including Apple Maps, and increasing

competition from Samsung among others.

6. A description of Samsung’s product strategy (June 2013) (see http://www.wired.com/

gadgetlab/2013/06/samsungs-product-strategy/).

7. Prediction of how well Apple Watch and wearables in general will do, TheEconomist,March14,

2015http://econ.st/1xfUtE1

MOVIE

JOBS. http://jobsthefilm.com/

BOOKS

Isaacson, W. (2011). SteveJobs. New york: Simon & Schuster.

Kane Iwatani, y. (2014). HauntedEmpire:AppleAfterSteveJobs. New york: HarperCollins.