Towson University Shekhar Mistry MNGT 481: Business Strategy and Policy Alina Chernyshova Dr. Mariana Lebron Tobore Sefia March 17, 2014 Jennifer Ojiyi Diana Ly Kyle Paul Analysis of the Personal Computing Industry ANALYSIS OF PERSONAL COMPUTING INDUSTRY 2 Personal Computing Industry Analysis The personal computing industry is one driven by innovation and increasing global necessity. Competition for business, new technology, and resources has created a marketplace that seems to have the ability to make or break an entire organization almost overnight. In the year 2010, electronic computer manufacturing, NAICS code 334111, supported nearly 2,150 domestic businesses, provided jobs to approximately 63,300 American workers and generated US sales revenues of $215.8 billion (Highbeam, 2010). The first “computers” were mechanical calculating devices developed in 17th century Europe. Two centuries later, mathematician Charles Babbage would conceptualize the idea of what would eventually prompt the creation of the first digital computer with his design of the Analytical Engine (Highbeam, 2010). The development of the microprocessor in 1971 (Highbeam, 2010) completely changed the computing industry and allowed not only for more computing power to be applied in a single device, but also created an avenue to take the processing power of these formerly bulky machines, previously reserved for university and government use, and make it available to the general public in the form of relatively small personal computers. On April Fool’s Day, 1976 Apple, Inc was founded by Steve Jobs and Steve Wozniak. Two years after the successful introduction of their computer circuit board dubbed Apple I, they released the Apple II and, “an easy-to-use computer… sparked a computing revolution that drove the PC industry to $1 billion in annual sales in less than three years,” (Yoffie, Kim, 2010). They sold approximately 100,000 units by year end 1980. In 2010, Apple’s market capitalization was valued at nearly $220 billion (Yoffie, Kim, 2010). ANALYSIS OF PERSONAL COMPUTING INDUSTRY 3 Early success and proven innovation were crucial to Apple, Inc’s front-runner status. However, in 1981 IBM introduced their own PC using an “open” system that allowed other producers to easily clone their workflow. The launch of a viable open system for hardware lead IBM to own a greater share of the market as their version of the PC became the new standard in the industry. Even with the introduction of the Macintosh in 1984, Apple’s net income fell 62% from 1981 to 1984 (Yoffie, Kim, 2010). Today’s versions of IBM and Apple, Inc are vastly larger and more well equipped, with distinct distribution channels, suppliers, and manufacturing processes that allow them to retain a strong competitive edge in an industry that is defined by the leaps it takes forward in propelling knowledge and technological advancements. Apple and IBM, along with Hewlett Packard and Dell Computers round out the list of the top four PC manufacturers in the nation. However, over the last decade the definition of personal computing has had to grow in order to accommodate the new trends in mobile computing. Increasingly, consumers, businesses, and even government agencies have begun swinging their attention to the growing arena of smartphone and tablet computing alternatives. In response, manufacturers have made strides to incorporate more and more functions into a single device, which has allowed room for companies like Nokia and RIM to gain market share in certain analyses that account for revenues from these products. Perspective is very important in this industry and with so many ways to enter, it is no wonder that so many companies seek to carve out a place for themselves in the market. However, a competitive environment, large price tags on success, and other major market hurdles render the likelihood of victory for new entrants questionable. ANALYSIS OF PERSONAL COMPUTING INDUSTRY 4 Barriers to entry Capital: significant The potential entrants in the electronic computer manufacturing industry will generally be at a disadvantage when it comes to the capital requirement; therefore, this particular barrier is significant. The need to invest large financial resources in order to compete creates a capital barrier to enter the market. Large capital requirements in electronic computer manufacturing industry limit the pool of likely entrants. Capital is required for equipment, production facilities, inventory (storage, supply-chain management, and accounting), labor, R&D costs, and customer credit. The manufacturing process itself requires a substantial investment. According to IHS report, “Apple spends at least $191 on components to build a 16 gigabyte iPhone. The cost rises to $210 for a 64GB unit. The cost of assembly adds another $8 per unit, bringing the range to between $199 and $218” (Worstall, 2013). Economies of scale: significant Since the potential of a new entrant to sustain growth and compete with established companies in terms of economies of scale is low, the barrier is significant. A potential entrant in the electronic computer manufacturing industry will face a barrier created by economies of scale. Economies of scale is characterized by decline in unit costs of a product with the increase in the absolute production volume (Porter, 1980). Thus, economies of scale are the cost advantages exploited by expanding the scale of production in the long run. Every activity of a business can be viewed in terms of economies of scale. This applies to product development, marketing, distribution, production, R&D and many other activities. In ANALYSIS OF PERSONAL COMPUTING INDUSTRY 5 electronic computer manufacturing industry production, research, marketing and service economies of scale are especially important for the new entrants. The quantities in which most components are produced allow the companies to keep the final price of a product far below the collective price of the individual components of a gadget. Besides, most industry incumbents manufacture the components under their brand name, or have established long-term relationships with suppliers which allow them to control the final price of their products. Additionally, vertical integration of the industry leaders establishes their economies of scale in marketing and distribution. Switching cost: medium to high Based on the redundant relationship-specific investments, disruption risks, and contractual penalties risk we identify the switching cost barrier in electronic computer manufacturing industry as medium to high. Switching costs are incremental expenditures, inconveniences, and risks incurred when a customer changes from one supplier to another. Switching costs fall into three broad categories. Redundant Relationship-Specific Investments Due to distinct technical requirements of a new supplier, customers who change manufacturers sometimes have to purchase additional products, such as a comparable software and hardware. For example, if a customer decides to switch from a Windows PC to Apple’s Mac computer, he will have to invest in Mac-compatible application software and devote time for getting familiar with a new interface. ANALYSIS OF PERSONAL COMPUTING INDUSTRY 6 Data loss Changing suppliers may involve considerable risk of data loss. For example, switching from one cloud service to another creates a significant risk for a customer’s records to be lost or corrupted during the transfer. Contractual Penalties Contractual penalties or obligations might prevent a customer from completing purchases through a new company because of an existing obligation to the current or previous supplier. For example, cell phone providers usually impose an early termination fee on customers who want to get out of a multi-year contract associated with a specific mobile device .(Eisenmann, 2011). Distribution Channels: high The barrier for new entrants is high based on distribution channel in this industry, because of the cost disadvantage and the switching cost distributors have to incur when switching from one industry to the other. In the personal computing industry, direct and indirect distribution channels are used to make computers available to consumers. The direct distribution channels used are the company’s online stores and the company’s retail stores. As of December 2010, apple had 221 Apple stores in the United States (Appleappraisal, 2010). In addition to physical store locations, personal computing industries also maintain their online sites, as we see with top computer companies like HP, Apple, Acer and Dell that each has their online stores. Personal computing companies are beginning to realize that the larger the distribution channel, the more likely they are to reach different customers. Personal computing companies have expanded their distribution channels by going through retail suppliers such as Amazon, Best Buy, Wal-Mart and eBay. Wal-Mart and Best Buy have both online and physical stores, while eBay and Amazon have just online stores. EBay offers consumer to consumer ANALYSIS OF PERSONAL COMPUTING INDUSTRY 7 services, whereby a consumer offers a product for sale and the purchasing consumer could either bid or buy the product. Retail distributors such as Amazon, Best Buy and Wal-Mart would be reluctant to take on these new products with no assurance of profit rewards. It would be difficult to keep up with the competition of making these products available in different locations. Companies like Dell, Apple, HP and IBM have the first mover advantage, which gives them substantial advantage over new entrants in the personal computing industry. Product Differentiation: high The barrier threat for new entrants is high because of customer loyalty established overtime as a result of product differentiation. In the personal computing industry, Dell, Apple, HP and IBM are the main manufacturers of computers. These manufacturing companies have established unique ways that they differentiate their products. Apple’s product differentiation strategy is innovation while Dell focuses on distribution channels and product customization. Apple’s innovation is focused on offering a large array of easy to use products, that don’t need any additional learning. In 2010, Apple introduced the iPad and new apps such as iWork. Apple’s iPad immediately dominated the market for tablets (ApplePressInfo, 2010). Apple iPad innovated in 2010 was recognized as the first successful tablets, because the other tablets that were attempted failed (talklets). The reason for this failure was because they could not be made small enough to be used. Apple used this idea to formulate a successful strategy of making tablets. Apple realized that the best way to make a tablet is by making a Smartphone bigger and capable, rather than make a computer smaller (talklets). Apple also has past innovation of the Macintosh, OS X ANALYSIS OF PERSONAL COMPUTING INDUSTRY 8 operating system, iLife, iTunes store, different versions of the iPhone and iPod. Apple has used its innovations to differentiate itself from other competitors in the market such as Dell and HP. Dell has used product customization, whereby it allows customers to tailor their laptops to differentiate them and add personal value. Dell also has a direct selling business model, whereby they sell directly to customers and enterprises. This direct distribution enables them to eliminate middlemen and deal directly with customers, which in turn results to dealing with customer problems efficiently and quickly. These differentiation strategies that the personal computing industry has adopted make the threat of new entrants low. This is because it is hard and expensive to copy these differentiation strategies. In addition to that, the current companies have gained a mass market share of customers that are loyal to these brands, because of the value they create for customers. Government Policies: high The barrier for new entrants is high in this industry based on government policy. The personal computing industries have been outsourcing manufacturing to other countries because of the minimum wage law that was set in the United States. An example would be Apple outsourcing its manufacturing operations to Foxconn Zhengzhou in China because of cheaper labor. As a result of this the personal computing industry would be unattractive to new firms wanting to enter the industry in the United States. Substitute Products: medium to high Substitute products for PC’s are widely available but none have been able to fully match product capability and functionality so the threat is listed as medium to high. While products listed in this category are quickly gaining ground, there is not a significant item that can currently fully replace personal computers. Along with smartphones and tablets, users have the ANALYSIS OF PERSONAL COMPUTING INDUSTRY 9 option to accomplish computing tasks via gaming consoles, MP3 players, and notebooks. Nevertheless, smartphones and tablets are chief among the possible avenues for future substitute products, especially as Moore’s Law plays a more significant role in placing added computing power into the palms of consumers. We are a mobile society. As such, the term all-in-one device has taken on an almost entirely new definition since Apple introduced its first all-in-one PC, the iMac in 1998 (Yoffie, Kim, 2010). Today, people have the ability to make calls, surf the internet, connect to social media, and listen to music all at the same time using their smartphone’s. This advancement in technology falls directly in line with Steve Jobs’ “Digital Hub” strategy which was introduced in 2001 to the world as a way for Apple consumers to control the reigns of their digital life from one central device or “hub” (Yoffie, Kim, 2010). The idea that the enormously popular iPhone might one day grow in capability to replace the everyday PC must have crossed Steve jobs’ mind as he was envisioning his plan for the future and paring down Apple’s formerly 15 product lines into just 4 categories designed to satisfy the desktop and portable Mac needs for consumers and professionals. The natural evolution of the processor is to allow more processing power in less space. The idea that smartphones might evolve over time into a product that could actually replace the PC as the primary computing device for average consumers is actually not surprising. Bargaining Power of Suppliers: 1) low to medium & 2) Significant The suppliers of the personal computing industry can be broken down into 2 categories: 1) products with many sources (memory chips, disk drive, keyboards, etc), and 2) products with few sources (microprocessors, operating systems, etc). The power of suppliers for the former was low to medium. This is because there were so many sources for these items. The companies ANALYSIS OF PERSONAL COMPUTING INDUSTRY 10 that were supplying these products include Intel, who held about 80% of the market share, and a couple of others, including Advanced Micro Device, and VIA Technologies. These suppliers lacked any true power; while it was clear that Intel had the majority of the market share, strong competition among these companies actually led to continuous decreases in pricing. Therefore, if a company within in the personal computing industry felt that they were being overcharged, they were easily able to leave their supplier for one of the others. The second type of suppliers, those who supplied products with few sources were in a better position as far as having power over those within the industry to which they supplied. Because there are just a few suppliers in this category, bargaining power is relatively high as only a few companies can afford to provide or have the capability to provide the necessary product requirements. Companies that fell into this category, particularly Microsoft who held about 90% of the market share (Yoffie, Kim, 2010), had minimal competition-- meaning that companies could either take their software or leave it. This led Steve Jobs and Apple to create their own operating system, so they would not be held hostage by Microsoft. In 2001, Apple introduced their first fully overhauled OS--OS X--which cost roughly $1 billion to develop with an 81% “very satisfied” rating from consumers (Yoffie, Kim, 2010). In 2006, Apple introduced the first Mac to run on Intel processor, and by January 2010, their newest operating system at the time, Leopard, ran on more than half of all Mac computers (Yoffie, Kim, 2010). Bargaining Power of Buyers: low to medium There was moderate power of buyers in the computer manufacturing industry. Buyers had more and more option to the personal computers, smartphones, tablet computers, and other handheld devices like ipods, bluetooth, and etc (Porter’s five forces). ANALYSIS OF PERSONAL COMPUTING INDUSTRY 11 The power of buyer in the computer manufacturing industry would be low to medium due to following reasons: First, the retailers have a wide range of consumers to whom they can sell their products which also diminishes the bargaining power of buyers, so in this case the power would be low. Second, computer manufacturers sell their products directly through the retailers and their websites. Customers include different types of entities such as large enterprises and small businesses, government agencies, educational institutions, exporter, and consumers (Thormahlen, 2010). The major part of revenues comes from the large and small businesses and also from the government agencies and schools (see Exhibit 1). Buyers that generated revenue for computer manufacturing industry are big enterprises, small business and government who occupied more than 50% sales of computers. The industry is mainly dependent on those buyers who purchase computers in bulk quantity which generate a significant portion of sales revenue, so in this case the buyer power would be medium to high (Thormahlen, 2010). Consumers are always looking for lower price and high quality products with their supplier. If they don’t get it with then they will go with another. There are many major players are in the market of computer manufacture industry such as Apple, Dell, Samsung, HP, Nokia, Acer, and many more. So, buyers have a many choices here for buying computers, laptops, tablets, cell phones and etc. Rivalry within the personal computing industry: high The rivalry in the electronic manufacturing industry can be characterized as high. Companies are under pressure to increase their budgets for on R&D, public relations, marketing and sales promotions in order to stay competitive in the industry. ANALYSIS OF PERSONAL COMPUTING INDUSTRY 12 Rivalry between existing competitors in the electronic manufacturing industry involves price competition, advertising battles, product introductions and increased customer service or warranties. The competition among electronic manufacturing industry companies is very high. Due to rapid technological change companies are under the pressure to constantly release new products. This is especially true considering Moore’s Law. Gordon Moore, the co-founder of Intel, made an observation in 1965 that still controls the dynamics of the electronic manufacturing industry. Moore stated that “the number of transistors per square inch on integrated circuits had doubled every year since the integrated circuit was invented” (Webopedia, 2014). Later Moore adjusted his law for data density to double every 18 months. This is the current definition of Moore's Law, which, according to the experts, will remain valid for at least another two decades. For that reason, the innovation and investment in R&D are the primary competitive strategies in the current market. A company that cannot keep up with the innovation is in disadvantage. Apple’s success can be attributed to the company’s effective use of innovations (see Exhibit 2). During the economic global recession of 2010 the technological innovation created cost competitiveness which led to the higher profits of the industry leaders. Other competitive strategies include: Advertising Companies spend large amount of money on their marketing campaigns. For example, according to Apple's 2010 10-K annual report, the company's sales, general and administrative expenses reached $5.5 billion. As Apple explained in the report: “SG&A expense increased $1.4 billion or 33% to $5.5 billion in 2010 compared to 2009. This increase was due primarily to the ANALYSIS OF PERSONAL COMPUTING INDUSTRY 13 Company's continued expansion of its Retail segment, and higher spending on marketing and advertising programs” (CBC news). Public relations In 2010 Nokia challenged its customers to raise money for single homeless people for Christmas and in return, Nokia awarded the top fundraisers with a pair of tickets to see Coldplay in their only live performance of 2010 (Arnold, 2010). Sales promotion Sales promotion is marketing communication activities, other than personal selling, and public relations, in which a short-term incentive motivates consumers or members of the distribution channel to purchase a good or service immediately, either by lowering the price or by adding value. For example, Hewlett- Packard offers many coupons like online coupons, free shipping and discounts. It’s a good way to stimulate trial, to add value and bring customer loyalty. Strategic Leadership Steve Jobs is widely known for his creativity, innovation and ability to work with others. Managing people as well as working in teams has been one of the most successful factors to Steve Jobs and Apple. After his passing, there were concerns with how well the new CEO, Tim Cook would lead the company. Steve Jobs’ leadership strategy positively impacted the company during his time with Apple. The new CEO of Apple, Tim Cook, has been able live up to Steve Jobs’ standards and take responsibility to leading and managing the company successfully. In several interviews available on YouTube, Steve Jobs explains his strategy of keeping to Apple’s core values which is the belief that people with a passion can change the world for the better. He explains, “The theme is to think different, it’s honoring the people that think different ANALYSIS OF PERSONAL COMPUTING INDUSTRY 14 and who move this world forward.” When Steve Jobs began at Apple, his main concern was to understand who Apple was and what they stood for. According to Steve Jobs, changing the world for the better and moving forward is what Apple stands for. (Jobs) Managing people is the greatest leadership skill that has helped Steve Jobs as an effective strategic leader. In his interview he speaks about organization, teamwork, and collaboration. Everyone plays a major role in the company; they have meetings every week to talk about what they’ve done, what they can improve on and how improvement can be accomplished. He states that there is, “tremendous teamwork on the top of the company which filters downward to tremendous teamwork throughout the company.” He believes that working in teams brings ideas and problems together and he is open to criticism. He explains that he allows his employees to make decisions and let their ideas win otherwise his greatest employees will leave. (Jobs) Steve Jobs has transformed Apple which could only have been done through outstanding leadership. Walter Isaacson, the writer of “The Real Leadership Lessons of Steve Jobs,” writes, “Along the way he helped to transform seven industries: personal computing, animated movies, music, phones, tablet computing, retail stores, and digital publishing. He thus belongs in the pantheon of America’s great innovators, along with Thomas Edison, Henry Ford, and Walt Disney (Isaacson, 2012).” Sarah McInerney, writes in the article, “Steve Jobs: An Unconventional Leader”, “it was his sheer genius combined with his ability to articulate his vision and bring staff, investors, and customers along on the journey (McInerney, 2011).” During his time at Apple, Steve Jobs transformed the company through his incredible strategic leadership. There is some skepticism on the current leadership of Apple but others are more optimistic. Tim Cook, the new CEO of Apple has been described by Sydney Finkelstein, the writer of ANALYSIS OF PERSONAL COMPUTING INDUSTRY 15 “Steve Jobs and Tim Cook: Does Apple Still Have the Leadership It Needs?,” as a great leader for Apple. He writes, “Tim Cook is focused on building incredible products that customers love...He shoots for superior customer experience...He understands how important the Apple management team, and rank and file, are to the continued success of Apple and is spending lots of time motivating them (Finkelstein, 2013).” The new CEO of Apple seems to be continuing to motivate the company as Steve Jobs did. Finkelstein also states, “In his short tenure as CEO, he has presided over some of the most successful results any technology company, make that any company, has ever reported (Finkelstein, 2013)!” Carolina Milanesi, The research vice president of consumer technologies and markets also spoke of Tim Cook’s outstanding leadership throughout the company. She states, “Tim has done well during Steve's leaves of absence… Tim has the support of the board and the trust of the employees (Cox, 2011)." Despite the skepticism coming from others, the new CEO continues to work on Apple’s management system and remains optimistic. Conclusion The computing industry has grown by gigantic leaps and bounds since the advent of the first general-purpose electronic computer, ENAIC, in 1946 (Highbeam, 2010). Over the decades, manufacturers have migrated from big to small devices, from analog to digital processes, and with each new iteration, the level of innovation is that much greater. Currently, the world’s fastest computer has nearly four times the processing power of the human brain (Fischetti, 2011). One can only imagine what new advancements will take place during the next 18 months of Moore’s Law. Employing leading knowledge providers, solidifying capitalization, and securing reliable suppliers will be crucial in realizing the innovation that is so fundamental to commercial ANALYSIS OF PERSONAL COMPUTING INDUSTRY 16 viability. At the same time, retaining an existing customer base, increasing product visibility, and finding ways to differentiate products to consumers will be important to developing brand awareness and customer loyalty, both of which are needed for long-term achievement. Companies that are unable to adapt will quickly fall victim to their rivals in this highly competitive market. Keeping costs relatively low while providing a comparably desirable product will also go a long way to ensuring success. Should companies within the personal computing industry continue along current trend lines, then mobile technology will soon become a major substitute for the typical PC. The “Digital Hub” strategy that Steve Jobs instituted at Apple over a decade ago has paid dividends already. The long-term sustainability of Apple was greatly enhanced mainly due to this idea of providing a one-stop, central location for a consumer’s daily needs. The plan made sense in 2001 and makes even more sense today as the genius and vision behind that philosophy has become apparent in our daily life. The continued success of Apple has a lot to do with the organization’s ability to continue to apply the vision and wisdom behind Steve Jobs’ innovation towards future products and projects. If the employees at Apple can find ways to keep “thinking different” and find new ways to apply their strategy of offering highly innovative products at a premium price, then there is no reason that Apple should lose either its fan base or market share. However, it can be easy for the current and future leaders of Apple to go the way of some of their predecessors by attempting to stray from this most successful approach to business. Apple customers are fiercely loyal and as such must be consistently rewarded for their loyalty with superior product offerings and clear differentiation. It is in this manner that Apple will remain a leader in the manufacturing industry for decades to come. ANALYSIS OF PERSONAL COMPUTING INDUSTRY 17 Bibliography (2010, January 27). Apple launches iPad. Apple Press Info, Retrieved from https://www.apple.com/pr/library/2010/01/27Apple-Launches-iPad.html Ahonen, T. (2011, February 24). Top 10 world's biggest computer makers revealed. 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Apple computer Inc, Retrieved from https://docs.google.com/a/students.towson.edu/document/preview?hgd=1&id=17QYNzjP uyHA2223UfaCkYLaF8Y4v69BbOFEKaSkzkdY Thormahlen, C. (2010). Computer Manufacturing in the US. IBIS World.2010. Webopedia (2014). Moore’s Law. Retrieved from http://www.webopedia.com/TERM/M/Moores_Law.html Worstall, T. (2013, September 25). If apple brought iphone manufacturing to the US it would cost them $4.2 billion. Forbes, Retrieved from http://www.forbes.com/sites/timworstall/2013/09/25/if-apple-brought-iphonemanufacturing-to-the-us-it-would-cost-them-4-2-billion/ Yoffie, D., & Kim, R. (2011, March 21). Apple Inc. in 2010. Harvard Business School, 9710-467. Retrieved from https://cb.hbsp.harvard.edu/cbmp/content/25969861 ANALYSIS OF PERSONAL COMPUTING INDUSTRY Exhibit 1- Buyer’s revenue generating figures (www.ISBIWORLD.com, 2010) 20 ANALYSIS OF PERSONAL COMPUTING INDUSTRY Exhibit 2: the largest computer makers in the world according to 2010 data (Ahonen, 2011). 21