The computer industry

Apple computer has experienced both good and bad times as a major player in the computer industry. It has been a leader in computer technology in the past but has struggled lately in keeping pace in the rapidly developing computer industry. Developing technology and evolving computer applications have contributed to a business environment that is extremely competitive. Survival in this industry requires the ability to anticipate changes and to effectively respond to market demands. This industry has experienced tremendous growth over the last two decades with the popularity of personal computers. Many households now have personal computers, making them a household item. This market is no longer confined to the business and educational environment; computers are a consumer good world-wide. Every day, new uses for personal computers are developed including information dissemination, world-wide communications and entertainment. Apple Computer, Inc. must respond to this business environment if it is to survive in the future.

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Apple Computer, Inc. developed as a major player in the computer industry in the early years. This company started as a garage operation in 1976 and grew to a publicly traded company by 1980. In 1980, the decision to go public was made and an IPO of 4.6 million shares was sold within minutes, making Apple the largest public offering since Ford Motor Company went public in 1956. Apple continued to experience early success in the industry being the first computer company to reach $1 billion in annual sales in 1982. One year later, it entered the Fortune 500 at number 441. Apple continued its strong market position by introducing a graphic user interface that became known as a “window” that later became the industry standard. They were far ahead of their competition in providing a user friendly computer interface system. Apple computers were also beating the competition in data processing capability and speed. These factors contributed greatly to Apple’s early success.

However, Apple’s performance began to sliding, leaving the company perilously close to extinction. An internal struggle for power between the founder, Steve Jobs, and the company president and CEO, John Scully, adversely affected Apple’s ability to compete. When Scully was able to foil this takeover attempt, Steven Jobs left Apple and formed his own company. This struggle resulted in a decline in Apple’s ability to anticipate changes in the industry and affected its ability to appropriately respond to new external threats in the industry. At the same time, Microsoft based computers began gaining popularity with PC users with their introduction of a “windows” based operating system. Apple tried, unsuccessfully, to stop Microsoft from using a similar “windows” operational system, claiming copyright infringement. They eventually lost this fight and Microsoft was able to gain market share from this user friendly interface system. Microsoft was now becoming a stronger player in the computer industry.

Problems continued for Apple with a series of failures, changes in their distribution policies and another change in the CEO. In spite of the many attempts to improve the company through product development, production, distribution and marketing, they continued to lose market share to Microsoft based companies. In January 1996, Apple posted a first quarter loss of $69 million. These losses lead to a major company restructuring of the organization by laying-off 1,300 employees. The losses continued to mount and Apple experienced an astounding $740 million loss in the March quarter of that same year. Apple Computer, Inc. was bleeding badly and something needed to be done. Steven Jobs returned to the company in December of that year, but Apple continued to experience staggering losses, $816 million for 1996 and nearily$1.5 billion for 1997. Things were getting desperate at Apple and major changes were needed to provide any hope for future survival.

What lead to the demise at Apple? Several strategic decisions were made that put Apple at a disadvantage in competing in the industry. They had made several mistakes in their analysis of the external and internal environment that resulted in their losing their competitive advantage in this industry. A look at their strategic decisions will help explain the companies decline.

Early in the industry’s life cycle, Apple Computer, Inc. decided to pursue an Intensive Strategy to competitively position their product. They decided to focus on a specific market segment and used a Market Penetration strategy to promote their product with the educational community. Apple specifically focused their marketing strategy on the educational market and heavily promoted their product to this segment. Their assumption was, if students learned computer applications and techniques on Apple computers in school, they would demand Apple products in the business environment, therefore, they could migrate their products through assimilation into the business environment. Although Apple was successful in penetrating the educational environment, the residual demand for their products in the business environment did not materialize. The development of Microsoft’s “windows” interface made the conversion from Apple products to Microsoft based products relatively easy. With PC computers firmly established in the business market segment, Apple was unable to effectively penetrate this market.

Apple also decided to apply an Integration Strategy to position their product. The decision was made to use Forward Integration to closely control where Apple products would be sold. Apple products are sold by third party reseller to their customers. Unlike many PC companies, Apple does not sell directly to their customers. The level of distribution points was far below the PC segment. This has significantly reduced the availability of their products to the general public. It is far easier to purchase and get service for PCs than an Apple computer.

Apple also underestimated the growth potential of the computer industry. In an effort to exercise control their products, Apple decided not to allow “cloning” of their product. They felt they could effectively protect their technological competitive advantage by keeping tight control over manufacturing of their systems. When Microsoft successfully introduced their version of “windows,” Apple now had a new competitive threat. IBM chose to allow the cloning of their computer systems and this spawned a tremendous boom in PC based computer companies. Apple has paid a large price for this decision by losing larger and larger portions of the market share. This trend needs to be reversed if Apple is to survive as a major player in the computer industry.

The result of these ineffective strategies required Apple to begin a series of Defensive Strategies. Apple Computer, Inc. began to initiate a Retrenchment Strategy to protect the company from large losses by laying off 1,500 employees in 1993 and another 4,100 employees in 1997. These layoffs were needed to reduce their operating costs as the company experienced larger than expected losses in those years. This was an attempt to reverse a trend of operating losses and to try to reorganize the company to improve its financial performance. Apple needed to take these cost-cutting measures to appease their investors, financiers and other shareholders.

To effectively respond to threats from the industry, Apple must develop and implement new strategies. The return of Steven Jobs to Apple has generated some much needed enthusiasm, but much more is needed for the survival of Apple. Steven Jobs is only temporarily controlling the company and has refused the CEO position. This must be resolved and a permanent CEO installed quickly. There are many strategic decisions to be made and it is important to resolve the internal corporate structure. The vision for the company needs to be established and effectively communicated throughout the company. The culture of this company is of paramount importance to their survival. Once these issues are resolved Apple can begin the process of determining their next course action.

Many more issues still remain. How should Apple improve its competitive position? Should Apple increase their R&D budget to develop new and improved products? Should they continue their current strategy regarding the distribution of their products? Should Apple continue to concentrate on niche markets like education, publishing and graphics? Should they try to penetrate the business and PC markets? Can Apple penetrate the computer industry through marketing efforts, placement, product, price and promotion? The answers to these questions are extremely important in determining Apple’s future strategy

An analysis of Apple’s financial performance shows a declining trend. In 1995, Apple Computer was turning a profit for their shareholders even though overall sales were declining. However, declining sales resulted in poor performance in 1996 and 1997. Sales declined by 12.5% and 38.86% over this two year period, resulting in net losses. To keep Apple operating, their long term debt load increased by a staggering 213% ($303 to $951). This new debt load adversely affected their Debt/Equity ratio by increasing it from 10.4% to 79.25% over the two year period. This problem was further compounded by losses in retained earnings. This would make further financing for Apple very difficult in the future.

Profitability also suffered due to increased interest expenses as a result of the heavy debt load. Further compounding their poor financial performance in profitability was an increase in operating expenses coupled with declining sales since 1996. This was partially corrected by Apple’s retrenchment action in 1997, however, operating expenses still exceeded net sales for the period. It would not be until 1998 that this retrenchment would begin to have a positive impact. The problems at Apple also showed with poor performance on Earnings per Share. In 1995, EPS returned $3.45, but subsequent losses in 1996 and 1997 mirrored poor performance in sales and profitability. This further complicated Apple’s financial demise, making Apple unattractive to investors, and making them more reliant on debt for financing. With an already large debt load (79.5%), raising new capital would be extremely difficult.

The sales trend for Apple did not offer much relief over this period. Sales continued to decline from 1996 to 1998 by 12.5%, 38.86% and 16.1% respectively. In spite of the declining sales, Apple was able to return to profitability in 1998 due to a major restructuring and cost cutting from retrenchment. Apple must attempt to improve their sales performance to return to fiscal stability.

Apple Computer, Inc. has experienced both the best of times and the worst of times. The survival of this company will depend on what strategic course they decide to pursue. The following are a few recommendations that I propose.

* Expand their R&D efforts. Survival in this industry depends on the development of new products and technology. Products are subject to quick obsolescence and being a leader in new products is essential. In the past, the R&D budget was cut as a cost saving measure. This is ill advised due to the importance of developing new technology.

* Consider the licensing of clones. “Apple is the only company in the PC market that makes both computers and the operating systems to run them, whereas the market is dominated by computers that combine Intel processors with Microsoft operating systems.” Because of their financial situation, they need to better position themselves to quickly produce and distribute any newly developed products. For example, if they developed a revolutionary new product, cloning companies could assist in the production and distribution of this technology. Revenues would be generated from the licensing agreements. This could result in quickly establishing this new technology in the industry and re-establish Apple as a leader in technology development.

* Develop better marketing and distribution of their products. Apple products are not as available as PCs to the retail market. For example, I cannot purchase an Apple product in Greenfield, Mass. where there are several retailer of PCs. I must travel to approximately 20 miles to the nearest Apple retailer.

* Develop an integrated and easy-to-use computer system. This system could be targeted to young children and older individuals that would be interested in using a computer but do not want the hassle of setting up equipment.

Although there are many different strategies to consider, Apple’s future success will depend on their future strategic decisions

Apple has experienced some recent success from the introduction of the iMac, the G3 processor, OS 8.5 and recent cost cutting. The iMac was a major player in increased revenues. This new product was highly advertised by Apple and produced in bright primary colors as an effort to differentiate form other systems. It is a self contained system that emphasizes ease of use and appeal to consumers that want a simple computer. Apple had also decided to counter declining sales by concentrating on customers in the graphics, advertising and publishing industries.

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