Apple's strategy and five forces analysis.

2. Strategy Evaluation

        As Apple’s mission statement emphasizes, it is true that this company has kept itself innovative to be a leader in the industry by introducing differentiated products in terms of the functions, the design, and the brand image. Its innovative mindset has built up a very strong power of its brand name, and particularly in the MP3 market.  The so-called ‘iPod Generation’ came into being as Apple’s MP3 player became a very popular icon for the young generation. Apple’s innovative strategies to differentiate gave it the competitive advantage in an environment in which trends and technology change rapidly, and the tendency that people value uniqueness is also co-worked with the environment.

2.1 Michael Porter’s Five Forces Industry Analysis

For more effective strategy evaluation, we will examine the industry analysis through Porter’s five forces analysis.  It is necessary to define the industry that Apple Inc. belongs to.  It used to be just in the personal computer and software industry but now Apple expanded its business to the entertainment industry, which includes MP3 players, online music service, and mobile phones as well as PCs.  Although Apple is now referred to as a company which is providing digital entertainment products and services, the industry itself is not consistently comparable with the other companies because Apple is not specialized in just one scope of product, such as the PC, but the scope of products and services provided is more complicated.  Thus, we will look into the major segments of Apple’s products and services in terms of PC, MP3 players, online music services, and mobile products in the table below.

Table 1

Porter’s Five Forces for PC, MP3/Music Entertainment Services and Mobile Products

According to the five forces analysis, the threat of rivalry is the highest external force in the PC and mobile phone industry and in the MP3 player and online music service industry, the power of suppliers is the highest external force. However, the marketplace trend seems to be destroying all the boundaries of each industry.  A MP3 player is not only an audio device anymore, but it is getting to be a more enhanced tool for full-motion videos and data storing which is the area of PCs.  Furthermore, a mobile phone is also not only the tool for the calling and receiving, but rather, it is taking the role as a digital camera, a carry-on PC for memory storing and internet, and an audio device as a radio or MP3 player as well. In terms of these trends, Apple has been very smart in analyzing market profitability and adopting innovative strategies by catching the changes of the market trends. Also, the most recent step to the mobile phone industry seems that it was the best way to utilize and maximize their competitive advantages by integrating PC, MP3 player, and online music service.

2.2 The VRIO Assessment

        To examine Apple Inc.’s internal strengths, weaknesses, resources, and competencies, we need to ask four questions about this company’s competitive potential using the VRIO framework.

The Question of Value:  Do the resources enable Apple Inc. to exploit an environmental opportunity or neutralize an environmental threat? Apple already had many experiences in designing, manufacturing, and selling PC and MP3 player and online music services. Apple has used these experiences and skills to exploit opportunities for stepping into the mobile industry.

The Question of Rarity:  How many competing firms already possess particular valuable resources and capabilities?  Apple has patents not only in their operating system and software, but also in the technology that allows monitors to record video of their viewers at the same time as displaying visual output in their computer products. They also have an integrated system with iPod and iTunes to allow the users to easily utilize both products. These resources are definitely rare as Apple hold patents, preventing other companies from using such technologies.

The Question of Imitability:  Do others companies without the resources or capabilities face a cost disadvantage in obtaining or developing Apple’s resources?  Apple is already holding the patents and copyrights in their technologies and designs.  Since the patent extends to Apple the right to legally pursue any company that violates its intellectual property, companies are unlikely to engage in using this technology without permission for fear of significant amounts of money that could be paid out in damages.

The Question of Organization:  Is Apple Inc. organized enough to exploit the full competitive potential of its resources and capabilities?  Apple has a reputation for being a creative company and has the required procedures and practices in place to support the proper use of technology as a strategic resource.  Apple Inc. has especially defined innovation and design activities as being of higher importance than the commercial aspect. Innovation and design have been at the core of Apple and its organization since its start, which increases the chance of the competitive advantages.

Table 2

Assessment of the Apple Inc.’s Internal Capabilities

Taken together, the analysis of Apple Inc.’s internal capabilities suggests that it is valuable, rare, costly to imitate, and organized to exploit opportunities. According to the result of this assessment, Apple Inc. is sustainable as long as it preserves and develops these competitive advantages in the industry, which requires being continuously innovative.

3. Strategic Option:  Streaming Music

Our first strategic option is to develop a streaming music system similar to Pandora. The Pandora music system allows users to listen to streaming music that plays based on their favorite artists. All of the songs have gone through an in depth analysis to make sure customers hear music they like. This would be ideal for the iPhone because of its internet capabilities.  It would also come into play if Apple comes out with an iPod that has Wi-Fi or satellite capabilities. Customers could buy a monthly package that contained unlimited streaming music and a set number of downloads. Currently iTunes offers streaming music but it is not available at a personalized level. Using the currently existing streaming music program, customers can choose stations from different music categories.  For example while going jogging, consumers may choose to listen to the station that plays upbeat music ideal for working out.  With a more personalized system they could also choose stations that play music that is similar to an artist they know they already like.   While the streaming music is playing customers would have the option to buy the song if it is something they like.  This would be a great way to increase sales of downloaded songs.  If it is a song they never want to hear again, they could choose to have that song removed from all of their stations.  Customers would still be able to buy music from the iTunes store.  A certain number of downloads could be included in a monthly fee for the streaming music. If customers go over their limit of songs, then they can buy additional ones at the .99-cent cost.

3.1 Evaluation of the Streaming Music Strategy

Strategic option one is very feasible. Technically, the main component of this option is an extremely large music database, which Apple already has.  This option continues the use of the iTunes store with just a few minor changes, such as making it possible to have a set number of free downloads.  The iTunes store would also have to be linked to the streaming music program.  The streaming music player itself would be the most difficult part of this option. If Apple decides to mimic Pandora it would take a lot of man hours and money.  Pandora has a staff that listens to each individual song in its library and does an in depth analysis of each song.  Each of these analyses take from 20 to 30 minutes. Songs are then grouped by over 400 characteristics such as key, harmony, lyrics, etc.  This could be something that is out of Apple’s scope.  However, Apple does have its music organized to some extent.  Music sold on iTunes is already listed under a certain genre along with the year it came out.  These could be the factors that Apple decides to use when deciding what songs to play on each station.

The economic benefits of this strategy are that Apple can reel in consumers that are hesitant to pay for music when they have a wide variety of tastes and do not want to pay for every song they listen to. Another economic advantage is that it gives listeners a chance to become exposed to new music and gives them an easy way to make this new music a part of their personal collection.  An economic disadvantage is that Apple will be giving customers a chance to listen to an unlimited amount of music without having to pay for each song.  Also, there is the cost of setting up the new system. Apple is already familiar with the Pandora music program.  Currently when Pandora users listen to songs they have the option to buy them on iTunes.  The existing relationship could either hurt or help this strategic option.  Apple’s familiarity with the program could save the company money when it is time to set up a similar system. On the other hand Apple may be under a contract with Pandora that could prohibit Apple using a similar system. This option is economically feasible because there are ways to pay for the cost of up keeping the new system. Apple could charge a monthly fee to listen to this personalized streaming music. They could also include advertising to the streaming music station, which could be very profitable because advertisers would be able to target certain listeners. In order to avoid the high cost of creating its own music analysis, Apple could simply buy out Pandora. Not only would this reduce the startup costs, it would also eliminate competition and give Apple access to Pandora’s 6 million subscribers.

The organization of Apple’s iTunes is set up in a way that would make it easy to add this new streaming system. The main organizational difficulty would either be setting up a monthly fee system or setting up advertising.

4. Strategic Option:  Closed Community

        Apple stands to benefit significantly in the future from building a closed community with artists and consumers which will enable the company to compete more aggressively with record companies while also building a closed network which minimizes hacker risk. Creating a closed network allows Apple to maximize security, value, and freedom to compete more aggressively with competitors in the overall digital entertainment industry.

The option of licensing music through Apple’s music store online as a portal creates a strategically lucrative impact on revenue for online music sales. Using this approach with the online store allows Apple to publish songs in return for artists overall sales. Pairing artist’s skill with the iTunes online music portal is a strategically lucrative step for allowing Apple, the artist, and the consumers to maximize value in the market place through versatility. Ultimately Apple can mold and develop this branded market since music will forever be so much more than just a fad.

4.1 Evaluation of the Closed Community Strategy

Apple is technically fit to take on competition since it boasts immense branding ability, and a store front that enables functionality for e-consumers music shopping needs. Currently it offers consumers variety with music, movies and podcasts. However by building artists through this immensely effective store front gives Apple the ability to build artists. The consumer technology barriers to entry are low enough now to appeal to a sizeable number of professional and amateur artists and consumers. The company has been highly profitable from the iPod line of products, and the development of their on-line music portal is an essential next step in growing the company’s revenue sources.  The greatest challenge here will be building a strong network with artists and consumers, which could take significant capital to secure resources. However advertisements could subsidize overall costs to implementing these new options to the iTunes store. Continuing to build this music pairing by licensing smaller artists; building advertising revenue and implementing new pricing strategies will maximize Apples use of resources and boost overall competitiveness.

Apple could position itself competitively to take on the recording industry by eroding at their talent pool and directly marketing talent to specific niche groups. The market is suffering from music losses due to illegal downloading which could play to Apple’s strategic advantage. Utilizing the ability of their immense branding potential, and security enabled communities will fortify Apple against theft. Record executives agree that theft of music “was in large due to on-line piracy”. This competitive move could create a show down with the record industry ultimately stressing Apple’s resources in the long run since the recording industries has billion dollar buying power. Offering an all encompassing pricing package at the Apple iTunes Music store will better fortify and cater to user’s interests. Opening up pricing options for consumer creates greater sustainable advantage in the online music market place.

Using the best talent to map out the music industry is a must for building a strategic advantage against competitors. The environment with the iTunes Store allows for the company to build significantly on its web music portal, while really focusing resources into more branding options with this product regarding micro niche markets. Apple’s overall move to change its name to Apple Inc shows potential for further online expansion and growth by focusing more on the overall product/service pairing with its “community of 25 million users”.  Apple needs to promote that it is a friend of the artist who also stands behind the ethical decision to purchase music from the artist. We feel this mentality fits into the framework of the art centric environment that Apple embodies.

5. Strategy Selection and Implementation

The strategy that should be implemented is the Closed Community.  The Closed Community solves the main issues faced by Apple; specifically the loss of customers to competitors and dealing with illegal downloads from consumers.  One of the main tradeoffs by not choosing the Streaming Music option is that although it has experienced difficulties, the firm Pandora has experienced a lot of popularity with its streaming music stations.  Its personalized touch is also a tradeoff because it goes through so many criterions to bring each consumer exactly what he or she is looking for.  While the Closed Community offers unlimited downloads and many options, it isn’t targeted as much towards each specific iTunes user.  Another disadvantage with the Closed Community is that now Apple is becoming more competitive with the large recording companies and giving up good relations with those firms.  The Streaming Music solution would have been able to further a quality relationship with recording studios.

This option proves to be the most advantageous when using the VRIO analysis.  This strategy creates value in many ways.  First, the Closed Community adds value to the Apple brand name.  Also, value is created from the information that is collected from an increased customer base.  A sense of belonging to the Apple community adds additional value.  This strategy is innovative and few competitors have been able to create a community that encompasses such a broad customer base.  The ability of competitors to imitate a closed community is difficult because they do not have the brand recognition that is necessary.  Obviously Apple already has the organization that is required to expand its community to include new independent artists and new customers.  The iPod and online music store are well established and well known by millions of consumers worldwide.  It also has the resources that are necessary for this, especially if Apple decides to include advertisements on their iTunes store.  Another advantage of the iTunes software is that Apple is constantly updating the encryptions to deal with illegal downloads and hackers.  This is a problem that will continue to be around, but Apple already has the necessary tools to deal with the dilemma.  The Closed Community is sustainable in the long run because it is going to become the standard in the music industry.

5.1 Sequence of Implementation

• Research to set the ideal price for the monthly fee.
• Finish major licensing negotiations with industry leaders and independent artists.
• Decide if advertising is needed to fund cost of supporting independent artists.
• Update iTunes online music store and encryptions to allow unlimited access to music that is limited to Apple Inc. software.

6. Apple’s Competitive Advantage

        Apple will receive a sustained competitive advantage by implanting the Closed Community.  Apple will have a long term advantage over its competitors because its new system will bring in new customers and then encourage them to use Apple exclusively. Another competitive advantage in the long run is that Apple will be building relationships directly with artists that will be hard for competitors to copy.

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