Case Apple What should Apple do to sustain

Case Apple What should Apple do to sustain its position? Klaus Castrén, Somayyeh Jaferi, Saara Sulonen

Agenda • Issues and Background • Current initiatives and available choices • Our recommendation for way forward • Reasoning

Despite growing sales, Apple has some issues to address Net sales by product category Symptoms: • Declining sales in Mac and i. Pad product categories • Gross margins declining 44% 39% during last two years • RONA decline 24% 18% during last two years 120000 100000 M$ 80000 60000 40000 20000 0 Mac 2002 2004 2006 2008 2010 2012 2013 2014 i. Pod i. Phone & related products i. Pad Gross Margin % 50 40 30 20 10 0 1997 2000 2003 2006 2008 Gross Margin % 2010 2014 Reasons: • Overly reliant on i. Phone • Assets in form of retained profits increased significantly • Blockbuster products launched long ago, are in a more mature phase of lifecycle • Margin erosion can be expected to continue • Competition in new products and markets

Product portfolio Service ecosystem layer Apple’s strength is the ability to design compelling total offerings – simplicity and convenience through ecosystem i. Cloud App. Store Apple Pay Apple X? i. Tunes Apple TV Mac Computer i. Pad i. Phone Apple Watch The ecosystems leverages Apple’s design capabilities and complementarities to build superior offering for target segment New Markets?

Apple has a strong position in the premium segment with highest margins • Some remarks, for instance apple generates most of the personal computer industry’s profits with only a small market share Price Lenovo Thinkpad i. Macbook Toshiba Fujitsu Acer Travel Mate Lenovo Idea Pad Price i. Phone Samsung S 7 Mac. Book Pro LG Sony Dell HP Samsung Windows Huawei Illustrative Motorola Benefit Illustrative Benefit

Agenda • Issues and Background • Current initiatives and available choices • Our recommendation for way forward • Reasoning

Apple’s current action points are insufficient • New market segment of enterprise apps through partnership with IBM • Apple Watch and Apple Pay introduced • Licensing Apple brand for 3 rd party accessories manufacturers These actions help in increasing sales, but • sustained impact on profitability is questionable • the actions are not sufficient to maintain Apple’s position as a premium brand driving the market with innovative products and services

Apple’s future actions must consider value comprehensively: what, to whom and how to deliver? The Three V’s* Main strategic implications for Apple • What is the Value Proposition Apple wants to deliver? To which Valued Customer does Apple want to deliver this? What is the ideal Value Network for delivering? • • • Should Apple continue emphasizing superior convenience, design and performance in the future? What kind of portfolio maximizes the value – how should the products and services interact? Does Apple want to continue targeting the premium segment in the markets it is active in? Are there new markets and segments Apple should aggressively explore? Does Apple need more control in the value chain for ensuring its value is delivered? Could partnerships yield access to capabilities that can improve the competitive position? *From Kumar, Nirmalya. 2004: Marketing as Strategy: Understanding the CEO’s Agenda for Driving Growth and Innovation. Harvard Business Press.

Agenda • Issues and Background • Current initiatives and available choices • Our recommendation for way forward • Reasoning

Our recommendation • Don’t go downmarket! • Develop smartwatch in two phases: 1. make compatible to properly leverage Apple ecosystem, 2. invest in technology to see if it can become a true replacement for smartphones • Continue building convenience through ecosystems around the products observe developments in the market and react with rapid development/acquisition of future ”app stores” • Expand Apple Stores’ network for ensuring perfect customer experience and control of brand communication • React to Intel’s superiority in microprocessors – explore partnership opportunities for developing Mac technology to the next level

Agenda • Issues and Background • Current initiatives and available choices • Our recommendation for way forward • Reasoning

The current premium segment is where Apple should be • Going downmarket can be shown irrational by just looking where the fiercest competition and tightest margins are • It would also potentially dilute Apple’s brand Industry gross margins 33. 5% 21. 8% Apple Computing industry average

Smartwatch leverages all of Apple’s strengths and may resolve the dent in profitability As a replacement for i. Phone $$$$ Smart Watch Apple needs to be a market driving company High volume, high margin product? As expensive replacement for watches $$ • Smartwatch may transform mobile communication forward from the phone • Opportunity for starting a new product lifecycle and associated large profits • Possible cannibalization of i. Phones • Introduction that is strategically a smart move • Wearable technology • potential Io. T control point

Appel Pay is a good move towards more integrated digital Apple hub • Apple’s historical huge success has been from innovative products and software that complements it, no reason to belive future will be otherwise • Apple has ability to draw developers to doing cool things that others lack Apple products over time Macintosh Portable Mac Powerbook Macintosh 1984 Power Macintosh 1989 1991 i. Tunes i. Mac 1994 Macbook Pro New i. Mac i. Pod 1998 2001 2003 i. Pad i. Phone App. Store 2006 2007 2010 Apple Pay Apple Watch 2014

Build the brand by bringing Apple to cool places • Apple’s huge following is perhaps its most significant asset : users actually love the products • Identify what drives this – potentially Apple’s new and hip image Expand Apple Stores’ network: • Apple has 450 Apple stores in only 14 countries, but these stores generate 12% of Apple’s revenue • Apple can control and build the brand image through Apple stores • Control over customer experience remains with Apple and they receive instant feedback through customer interaction

Apple should explore partnership opportunities with Intel to improve power position and build technological differentiation • In 2008 and 2010 Apple acquired microprocessor companies for higher control of mobile phone supply – this move was apparently successful • Intel, the leading-edge microprocessor company, is one of the most powerful companies in the industry with a 88% market share and a 20, 9% return on sales (2014) • A minority equity stake in Intel should be financially feasible with Apple’s current cash reserves of $ 155 bn • Possibility for developing semi-proprietary ”Intel for Apple” microprocessor Apple would benefit from differentiating the Mac also by its core technology – for this an equity partnership with Intel could yield an advantage

Steps forward 1. 2. 3. 4. 5. Stay in the premium market Develop Apple Watch and Apple Pay further Secure Apple’s brand image Open more Apple stores Investigate possible joint ventures

Appendix

Apple’s sales improvement spectacular despite lowering margins and return on assets Apple Sales, Net income and profit margin RONA and Cash & Cash equivalents 200000 30. 0 % 180000 30% 160000 25. 0 % 160000 25% 140000 20. 0 % 120000 20% 100000 15. 0 % 15% 80000 10. 0 % 60000 10% 40000 5. 0 % 5% 20000 0 180000 1 2 Net Sales 3 Net Income 4 Profit margin 5 0. 0 % 0 1 2 3 Cash & Cash equivalents 4 Return on assets 5 0%