Case Scenario:
A quick glance at Apple’s stock history in Figure 4-15 will tell you that Apple is an incredibly successful and dramatic company, having peaks around the turn of the century, in 2007–2008, and again in 2012. At its high, it had the highest market value of any public company worldwide. Apple has been so successful that the NASDAQ stock exchange concluded Apple’s price was skewing the price of the NASDAQ 100 Index and reduced Apple’s weight in that index from 20 to 12 percent. But today? As of this writing, Apple stock is trading at $440, down from its high over $700. Since Steve Jobs’ death, there haven’t been any groundbreaking products like the iPod, iPhone, or iPad. What does the future look like for Apple and its shareholders? Bleak, especially if you consider its past history without Jobs.
In 1996, Apple bought Jobs’ NeXT Computing and gained technology that became the foundation of Mac OS X, today’s Macintosh operating system. The true asset it acquired, however, was Steve Jobs. Even he, however, couldn’t create an overnight miracle. It is exceedingly difficult to regain lost market share and even more difficult to regain the respect of the retail channel that had come to view Apple’s products with disdain. Even by 2011, Apple’s PC market share was in the range of 10 to 12 percent, down from a high of 20 percent in the 1980s. In response to these problems, Apple broke away from the PC and created new markets with its iPod, iPhone, and iPad. It also countered retailer problems by opening its own stores. In the process, it pioneered the sale of music and applications over the Internet. iPod, iPhone, and iPad devices are a marvel of creativity and engineering. They exude not only ease of use, but also now/wow/fun coolness. By selling hot music for the iPod, Apple established a connection with a dynamic segment of the market that was willing to spend lots of money on bright, shiny objects. The ability to turn the iPhone on its side to rotate images probably sold more iPhones than anything else. With the iPad, portable devices became readable, and the market responded by awarding Apple a 44 percent (and growing) share of the mobile market.9 All of this success propelled Apple’s stores not only beyond vanilla retailers like Best Buy, but also beyond the lofty heights of Tiffany & Co. In 2011, Apple stores were grossing more than $4,000 per square foot, compared to $3,000 for Tiffany and a mere $880 for Best Buy. As of 2012, Apple operates more than 350 such retail outlets and has welcomed more than 1 billion customer visits.10 Apple encourages customer visits and loyalty with its open and inviting sales floor, its Genius Bar help desk, and its incredibly well-trained and disciplined sales force. Salespeople, who are not commissioned, are taught to be consultants who help customers solve problems. Even some vocabulary is standardized. When an employee cannot solve a customer’s problem, the word unfortunately is to be avoided; employees are taught to use the phrase as it turns out, instead.11 Try that on your next exam! By mid-2011, Apple had sold 15 billion songs through its iTunes online store, 130 million books through its iBookstore, innovative interfaces with its Apple II PC for the home and its Macintosh computer for students and knowledge workers. At one point, Apple owned more than 20 percent of the PC market, competing against many other PC vendors, most of which are no longer relevant (or in business). However, Apple lost its way. In 1985, Steve Jobs, Apple’s chief innovator, lost a fight with the Apple board and was forced out. He founded another PC company, NeXT, which developed and sold a groundbreaking PC product that was too groundbreaking to sell well in that era. Meanwhile, Apple employed a succession of CEOs, starting with John Sculley, who was hired away from Pepsi-Cola where he’d enjoyed considerable success. Sculley’s knowledge and experience did not transfer well to the PC business, however, and the company went downhill so fast that CNBC named him the 14th worst American CEO of all time.8 Two other CEOs followed in Sculley’s footsteps. During this period, Apple made numerous mistakes, among them not rewarding innovative engineering, creating too many products for too many market segments, and losing the respect of the retail computer stores. Apple’s market PC share plummeted. and a mere 14 billion applications through its App Store, the latter in less than 3 years. Apple is now the number one PC software channel and the only place a customer can buy the Mac OS X Lion, which sells for $30 instead of the $130 for the earlier OS X that sold through the software channel.12 To encourage the development of iPhone and iPad apps, Apple shares its revenue with application developers. That would be $2.5 billion paid to developers in less than 3 years! Developers responded by creating 445,000 iOS applications, and an army of developers are at work building thousands more while you read this. By the way, if you want to build an iOS application, what’s the first thing you need to do? Buy a Macintosh. Apple closed its development to any other development method. Adobe Flash? No way. Apple claims that Flash has too many bugs, and perhaps so. Thus, Flash developers are excluded. Microsoft Silverlight? Nope. Microsoft developers are out in the cold, too. The non-Apple development community was furious, and Apple’s response was, in essence, “Fine, we’ll pay our $2.5 billion to someone else.” The bottom line? Until Jobs’ death, every sales success fed every other sales success. Hot music fed the iPod. The iPod fed iTunes and created a growing customer base that was ripe for the iPhone. Sales of the iPhone fed the stores, the success of which fed the developer community, which fed more applications, which fed the iPhone and set the stage for the iPad, which fed the App Store, which enabled the $30 price on the OS X Lion, which led to more loyal customers, and, of course, to more developers. No wonder Steve Ballmer decided to resign as CEO over at Microsoft!
Q1. Which of Porter’s four competitive strategies does Apple engage in? Explain.
Q2. What do you think are the three most important factors in Apple’s past success? Justify your answer.
Q3. Steve Jobs passed away in October 2011. Until his death, he had been the heart and soul of Apple’s innovation. Today, 35,000 Apple employees continue onward in his absence. A huge question for many investors is whether the company can be successful without him. What role did he play? How can Apple respond to his loss? Would you be willing to invest in Apple without his leadership? Why or why not?
Q4. Microsoft took an early lead in the development of tablet devices (like the iPad), and it had the world’s leading operating system and applications for more than 20 years. Provide five reasons why Microsoft was not able to achieve the same success that Apple has. Most industry analysts would agree that the skills and abilities of Microsoft’s 88,000 employees are as good, on average, as Apple’s.
Q5. Considering your answers to the four questions above, as well as the current stock price, if you had a spare $5,000 in your portfolio and wanted to buy an equity stock with it, would you buy AAPL (Apple)? Why or why not?
Your answer must be typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format.