What should Apple do to sustain its position? Case Apple What should Apple do to sustain its position? Klaus Castrén, Somayyeh Jaferi, Saara Sulonen

Agenda Issues and Background Current initiatives and available choices Our recommendation for way forward Reasoning

Despite growing sales, Apple has some issues to address Symptoms: Declining sales in Mac and iPad product categories Gross margins declining 44%  39% during last two years RONA decline 24%  18% during last two years Reasons: Overly reliant on iPhone Assets in form of retained profits increased significantly Blockbuster products launched long ago, are in a more mature phase of lifecycle Margin erosion can be expected to continue Competition in new products and markets

Apple’s strength is the ability to design compelling total offerings – simplicity and convenience through ecosystem AppStore iCloud Apple Pay Service ecosystem layer Apple X? iTunes New Markets? Mac Computer iPad iPhone Apple TV Apple Watch Product portfolio The ecosystems leverages Apple’s design capabilities and complementarities to build superior offering for target segment

Apple has a strong position in the premium segment with highest margins Some remarks, for instance apple generates most of the personal computer industry’s profits with only a small market share Price Lenovo Thinkpad Price iPhone Samsung S7 Samsung MacBook Pro iMac Macbook Dell HP LG Windows Sony Toshiba Fujitsu Huawei Acer Travel Mate Lenovo Idea Pad Illustrative Motorola Illustrative Benefit Benefit

Agenda Issues and Background Current initiatives and available choices Our recommendation for way forward Reasoning

Apple’s current action points are insufficient New market segment of enterprise apps through partnership with IBM Apple Watch and Apple Pay introduced Licensing Apple brand for 3rd party accessories manufacturers These actions help in increasing sales, but sustained impact on profitability is questionable the actions are not sufficient to maintain Apple’s position as a premium brand driving the market with innovative products and services

Apple’s future actions must consider value comprehensively: what, to whom and how to deliver? The Three V’s* Main strategic implications for Apple Should Apple continue emphasizing superior convenience, design and performance in the future? What kind of portfolio maximizes the value – how should the products and services interact? What is the Value Proposition Apple wants to deliver? To which Valued Customer does Apple want to deliver this? Does Apple want to continue targeting the premium segment in the markets it is active in? Are there new markets and segments Apple should aggressively explore? What is the ideal Value Network for delivering? Does Apple need more control in the value chain for ensuring its value is delivered? Could partnerships yield access to capabilities that can improve the competitive position? *From Kumar, Nirmalya. 2004: Marketing as Strategy: Understanding the CEO’s Agenda for Driving Growth and Innovation. Harvard Business Press.

Agenda Issues and Background Current initiatives and available choices Our recommendation for way forward Reasoning

Our recommendation Don’t go downmarket! Develop smartwatch in two phases: make compatible to properly leverage Apple ecosystem, invest in technology to see if it can become a true replacement for smartphones Continue building convenience through ecosystems around the products - observe developments in the market and react with rapid development/acquisition of future ”app stores” Expand Apple Stores’ network for ensuring perfect customer experience and control of brand communication React to Intel’s superiority in microprocessors – explore partnership opportunities for developing Mac technology to the next level

Agenda Issues and Background Current initiatives and available choices Our recommendation for way forward Reasoning

The current premium segment is where Apple should be Industry gross margins Going downmarket can be shown irrational by just looking where the fiercest competition and tightest margins are It would also potentially dilute Apple’s brand 33.5% 21.8% Apple Computing industry average

Smartwatch leverages all of Apple’s strengths and may resolve the dent in profitability Apple needs to be a market driving company Smartwatch may transform mobile communication forward from the phone Opportunity for starting a new product lifecycle and associated large profits Possible cannibalization of iPhones Introduction that is strategically a smart move Wearable technology potential IoT control point As a replacement for iPhone $$$$ Smart Watch High volume, high margin product? As expensive replacement for watches $$

Appel Pay is a good move towards more integrated digital Apple hub Apple’s historical huge success has been from innovative products and software that complements it, no reason to belive future will be otherwise Apple has ability to draw developers to doing cool things that others lack Apple products over time Macintosh Portable Power Macintosh Macbook Pro New iMac iPod iPad Mac Powerbook iMac iTunes iPhone Apple Pay Apple Watch Macintosh AppStore 1984 1989 1991 1994 1998 2001 2003 2006 2007 2010 2014

Build the brand by bringing Apple to cool places Apple’s huge following is perhaps its most significant asset : users actually love the products Identify what drives this – potentially Apple’s new and hip image Expand Apple Stores’ network: Apple has 450 Apple stores in only 14 countries, but these stores generate 12% of Apple’s revenue Apple can control and build the brand image through Apple stores Control over customer experience remains with Apple and they receive instant feedback through customer interaction

Apple should explore partnership opportunities with Intel to improve power position and build technological differentiation In 2008 and 2010 Apple acquired microprocessor companies for higher control of mobile phone supply – this move was apparently successful Intel, the leading-edge microprocessor company, is one of the most powerful companies in the industry with a 88% market share and a 20,9% return on sales (2014) A minority equity stake in Intel should be financially feasible with Apple’s current cash reserves of $ 155 bn Possibility for developing semi-proprietary ”Intel for Apple” microprocessor Apple would benefit from differentiating the Mac also by its core technology – for this an equity partnership with Intel could yield an advantage

Steps forward Stay in the premium market Develop Apple Watch and Apple Pay further Secure Apple’s brand image Open more Apple stores Investigate possible joint ventures

Appendix

Apple’s sales improvement spectacular despite lowering margins and return on assets