Apple Inc. in 2018: Challenges and Opportunities

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Overview of Apple's Performance in 2018

Apple CEO Tim Cook had reason to celebrate Apple's accomplishments in early 2018. Apple had posted record sales and profits in the final quarter of 2017. Revenues for the quarter were up 13% year over year to 588.3 billion and quarterly net income was 520.1 billion.' In early February, Cook announced that there were 1.3 billion active Apple devices in use.2 Moreover, Apple's performance in the prior decade had been stellar by any measure. Revenue grew from 524 billion in 2007 to 5229 billion in 2017. The stock price had followed a similar course (see Exhibit la and Exhibit 2).

Although the company's momentum and stock performance were undeniable, there were also challenges in 2018. Net sales and net income for FY 2017 were still below their 2015 peaks. iPad sales had seen a steady decline since 2014, and even though Macintosh sales had grown faster than the PC industry in recent years, Apple's share of worldwide PCs remained in single digits.

As a result, Apple was increasingly dependent on the iPhone, which accounted for nearly 70% of Apple's revenue.3 The iPhone, of course, was certainly a powerful horse to ride. Apple had sold its one billionth iPhone in mid-2016. Yet the smartphone market was mature and intensely competitive. Samsung was the number one player, and low-cost competitors from China such as Huawei, OPPO, and Xiaomi were taking the market by storm, robbing both Samsung and Apple of market share. Apple's top line growth was being driven by the iPhone X's 51000 selling price, which had pushed the average selling price for the iPhone to 5796.4

Over the previous few years, Apple had sought new sources of revenue, mostly from products complementary to the iPhone. One bright spot was the growth in services, including digital content, Apple Care, and Apple Pay, which reached nearly 530 billion in 2017. Apple also launched the Apple Watch in 2015. Although Apple did not release Watch sales, its 'other products' category, which included the Apple Watch along with Apple TV and Beats Audio products, had grown by double digits over the last two years to reach nearly 513 billion} Tim Cook also hoped that the HomePod, its smart home speaker, which launched in February 2018, would drive new sales. But as Cook thought about the future, he noted, "I've been thinking about the Jetsons since I was a kid. But occasionally you want the Jetsons to come to reality.

Challenges Faced by Apple in 2018

Steve Jobs and Steve Wozniak, a pair of 20-something college dropouts, founded Apple Computer on April Fool's Day, 1976.7 Working out of the Jobs family garage in Los Altos, California, they built a computer circuit board that they named the Apple I. Within several months, they had made 200 units and had taken on a new partner — A.C. "Mike" Markkula Jr., who was instrumental in attracting venture capital as the experienced businessman on the team. Jobs's mission was to bring an easv-to-use computer to market, which led to the release of the Apple II in April 1978. It sparked a computing revolution that drove the PC industry to S1 billion in annual sales in less than three years.s Apple quickly became the industry leader, selling more than 100,000 Apple Us by the end of 1980. In December 1980, Apple launched a successful IPO. Apple's competitive position changed fundamentally in 1981 when IBM entered the PC market.

The IBM PC, which used Microsoft's DOS operating system (OS) and a microprocessor (also called a CPU) from Intel, was a relatively "open" system that other producers could done. Apple, on the other hand, practiced horizontal and vertical integration. It relied on its own proprietary designs and refused to license its software to third parties. IBM PCs not only gained more market share, but also emerged as the new standard for the industry. Apple responded by introducing the Macintosh in 1984.

The Mac marked a breakthrough in ease of use, industrial design, and technical elegance. However, the Mac's slow processor speed and lack of compatible software limited sales. Apple's net income fell 62% between 1981 and 1984, sending the company into a crisis. Jobs, who was often referred to as the "soul" of the company, was forced out in 1985.9 The boardroom coup left John Sculley, the executive whom Jobs had recruited from Pepsi-Cola, alone at the helm.

The Sculley Years, 1985-1993 Sculley pushed the Mac into new markets, most notably in desktop publishing and education. In education, Apple grabbed more than half the market. Apple's worldwide market share recovered and stabilized at around 8% (see Exhibit 3a). By 1990, Apple had S1 billion in cash and was the most profitable PC company in the world. Apple offered its customers a complete desktop solution, including hardware, software, and peripherals that allowed them to simply "plug-and-play." Apple also stood out for typically designing its products from scratch, using unique components. IBM compatibles narrowed the gap in ease of use in 1990 when Microsoft released Windows 3.0. Still, as one analyst noted, "Mhe majority of IBM and compatible users 'put up' with their machines, but Apple's customers 'love their Macs."1.

Opportunities for Apple in 2018

The Spindler and Amelio Years, 1993-1997 Spindler killed the plan to put the Mac OS on Intel chips and announced that Apple would license a handful of companies to make Mac clones. He tried to slash costs and pushed for international growth, but Apple lost momentum: a 1995 Computerworld survey found that none of the Windows users would consider buying a Mac, while more than half the Apple users expected to buy an Intel-based PC11 (see Exhibit d for shipments of PC microprocessors). Spindler, like his predecessor, had high hopes for a revolutionary OS that would turn around the company's fate. But at the end of 1995, Apple and IBM parted ways on their joint ventures.

After spending more than $500 million, neither side wanted to switch to a new technology.12 Following a 569 million loss in Apple's first fiscal quarter of 1996, the company appointed another new CEO, Gilbert Amelio, an Apple board member." Amelio proclaimed that Apple would return to its premium-price differentiation strategy, but Macintosh sales continued to fall. In December 1996, Amelio announced the acquisition of NeXT Software (founded by Jobs after he left Apple) and plans to develop a new OS based on NeXT. Jobs also returned to Apple as a part-time adviser. Despite more restructuring efforts, Apple lost 51.6 billion under Aurelio. At one point, insiders believed that Apple was within 90 days of bankruptcy. To save the company, Jobs became the company's interim CEO in September 1997.

Steve Jobs and the Apple Turnaround Jobs moved quickly to reshape Apple. In August 1997, Apple announced that Microsoft would invest 5150 million in Apple and make a five-year commitment to develop core products, such as Microsoft Office, for the Mac. Jobs abruptly halted the Macintosh licensing program. Almost 99% of customers who had bought clones were existing Mac users, cannibalizing Apple's profits." Apple's 15 product lines were slashed to just four categories — desktop and portable Macintoshes, for consumers and professionals.

Tim Cook, hired by Jobs in 1998 after a career in operations at Compaq and IBM, was credited with streamlining Apple's supply chain. In addition, Apple launched a website to set up direct sales for the first time. Internally, Jobs focused on reinvigorating innovation. Apple pared down its inventory and increased R&D (see Exhibit 5 for PC manufacturers' key operating measures).

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1. Title of case

2. Problem/Opportunity facing the company. If a problem/opportunity is stated in the case, use it to address this section.

3. Summarize the External environment of the company:

1.Sociocultural

2.Technological

3. Economic

4. Ecological

5. Political - Legal

4. Summarize the Internal environment of the Company:

1. Organization's resources

2. Capabilities