Strategic Management: Apple Inc.
Executive Summary
Apple Inc. is a famous and renowned American corporation which is known for a variety of consumer and electronic products. iTunes is software which was introduced by Apple Inc in 2001. It is considered a revolutionary product in the online music downloading business for its ability to download and categorize music and video files. iTunes faces threat from Nokia which has launched several new mobile phones and online music store to counter the threat of Apple. This paper studies the micro environmental and macro environmental factors of Apple iTunes. It makes recommendations to meet the strategic threat by Nokia.
Table of Contents
Introduction……………………………………………………………4
Apple iTunes Market.………………………………………………….4
Macro-Environmental factors………………………………………….5
Micro environmental factors…………………………………………..7
Success Factors for the Multimedia Download Industry…………….10
SWOT Analysis………………………………………………………11
Nokia’s threat to Apple………………………………………………12
Evaluating relative strengths and weaknesses……………………….13
Conclusion of the Analysis………………………………………….13
Strategic recommendation…………………………………………..13
References……………………………………………………………15
Strategic Management
Introduction
Apple Inc. is a famous and renowned American corporation which is known for a variety of consumer and electronic products. Some of its well known products have been the Macintosh computers, iPod, iPhone, iTunes media browser and other multimedia software. Apple has enjoyed a large market in the online music downloading business. However with reports of Nokia entering this industry, the company has been concerned about the strategic threat posed Nokia. This paper identifies the important macro and micro environmental factors in the music downloading industry. It examines the threats posed by Nokia and finally makes recommendations for Apple iTunes to retain its strategic edge in the market.
Apple iTunes Market
iTunes is software which was introduced by Apple Inc in 2001. It is considered a revolutionary product in the online music downloading business for its ability to download and categorize music and video files. It can also be used as an interface between the iPod and iPhone. The software can be connected with the iTunes Store to download music, audio, video, and sound files using the internet. The software is also compatible with Windows and Linux based operating systems. Since June 2008 it is reported that an estimated five billion songs have been downloaded from iTunes store (Wall Street Journal, 2008). The software enjoys the distinction of dominating the digital music market in the United States. It has the largest music directory in the United States with an estimated eight million songs. It also has fifty million customers who regularly download music from the iTunes Store. iTunes faces threat from Nokia which has launched several new mobile phones and online music store to counter the threat of Apple. The Nokia Music Store is accessible using the internet portal called Ovi. This makes it a direct competitor to Apple in the online music industry.
Macro-Environmental factors
This section of the paper studies the political, economic, social, technological, and legal factors which impact iTunes in the online music downloading market.
Political
The online music downloading industry has become complex and controversial in the past decade. Digital rights management and DRM hacking are the current issues which are affecting companies like Apple. The ruling against Napster in 2001 stressed the importance of copyrights while making the process of licensing a difficult one (Brian, 2008). Apple has been successful in its agreements with the entertainment and media organizations in order to enhance the market share of iTunes.
Economical
The iTunes market can enjoy success in the European and American market because of positive economic growth trends, spending levels, and import/export ratios. The increase in the economic growth and spending levels in Europe show that the development and living standards of the region continue to increase (Barrile, 2008). iTunes targets the medium and upper class people. Business is affected by national and global economic factors. The serious economic difficulties of the company in the late 1990s have been replaced by a booming market. iTunes has also provided a great financial backbone to the company. This has been witnessed in the form of increased sales volume as revenue from iTunes has outstripped computer hardware and software.
Social
The demographic trends, lifestyle, leisure activities, and earning capacity of people are some of the social factors which affect the sales of iTunes. Social forces influence the behavior and purchasing style of people (Block, 2007). Apple has offered a unique product, iTunes which has been able to complement and benefit the lifestyle and behavior of people. There is no age bar for the product as it has become an integral part of people for all walks of life.
Technological
These are the factors which are concerned with the development and competitiveness of technology. The rapid changes in technology have revolutionized the way business operates. iTunes has become a profound innovation. The company’s strategy has been to offer development tools as well as to form relationships with third parties that offer capabilities. Apple relies on Sony for battery, Texas instruments for Firewire, and Toshiba for the DiskDrive (Burrows, 2007). The digital lifestyle has been made possible by the integration and enhancement of digital devices and software. As the company controls the design and development of the entire personal computer, this offers the company a unique advantage in offering innovative digital lifestyle solutions. It aims to bring the portable digital music and communication experience for students, educators, creative professionals, private organizations, government agencies and consumers. The company believes in investment in research and development as important for the development and enhancement of innovative products and technologies. It also aims to expand its distribution network to effectively reach its targeted customers and provide them with high quality sales and post sales support experience.
Legal aspects
The online multimedia industry has been facing threats from piracy which occurs if a consumer has obtained copyrighted content illegally by using peer to peer file sharing services like LimeWire, Morpheus, etc. It can also occur in the form of illegitimate CDs or DVDs from street vendors (Walter, 2006). Legislation has been implemented to regulate the online music industry in the form of preventing piracy. The concept of digital rights management has been introduced which means the right to use digital technology to exploit and manage rights inherent in a work (Yukari, 2006). The objective of a DRM system is to ensure that licenses between content providers and consumers are protected on the basis of authorized use of managed content. Apple Inc has faced threats on its products with company tex9 that released an open source music program called xtunes. This was similar to the iTunes (Carlisle, 2007). A legal action undertaken by Apple resulted in the renaming of the product to sumi. Other legal threats have emerged from different sources. The surviving Beatles members sued the company over the use of the Apple logo in iTunes by claiming that it violated Apple’s agreement not to product music under an apple based logo. Some technical websites have been sued that released product research documents of Apple (The Economic Times, 2006). The release of this critical information could provide the company’s rivals an edge in producing rival products.
Industrial Life Cycle
The online music industry has come a long way from the early twenty first century when Sony began to sell music on the internet. This venture was not successful because of the expensive service. Most of the files also expired after a certain time. They had to be played again by repurchasing from Sony. The industry has been witnessing a boom as music stores have sprung up which include masterbeat.com, Beatport, Bleep.com, Mindawn. Technology has radically altered the way people acquire music. CD sales have been down while the use of online stores has been increasing. It is estimated that the sales from digital downloads was one billion dollars in 2007 (Cantrell, 2007). Online music sales have emerged from subscription services has registered an increase from fifty six million in 2001 to two billion in 2007 (Cohen, 2007). The popularity of the online music industry can be judged from the fact that everyone is downloading their favorite songs into the MP3 player. This technology has played an important role in radically changing the music industry. Research has found that global music sales in the United States are thirty seven billion dollars. Online music has emerged to be more popular as compared with physical music sales. Innovations in technology have assisted the music to be within reach of people with computers (TechWhackNews, 2007). MP3 technology allows the transfer of CD quality sound music files over the internet. These advances are also very popular as they allow consumers the potential delivery of music to multiple points like car, different rooms in a home, or a mobile phone.
Micro environmental factors
The micro environmental factors have been analyzed using Porter’s Five Forces.
Porter’s Five Forces
Competition
Apple clearly dominates the digital music market because of its combination of iTunes and iPod. The iPods control the digital player market while iTunes dominates the download market. According to research by the first half of 2008, iTunes was the leading music retail outlet in the United States of America. Apple has consolidates its hold on the market because of the decline in CD sales. Since 2003, iTunes store has sold an estimated four billion songs and accounts (TechWhackNews, 2007). The company dominates seventy percent of the digital music market. Research says that it could capture one quarter of the world music market by 2012 (Christopher, 2007). iTunes is also a widely popular application which is installed in forty percent of worldwide computers. Financial statements of Apple in 2007 reveal that the company had revenue of nine billion dollars and quarterly profit of one billion by Dec, 2007 (Howard, 2007). International sales contributed to forty five percent of the revenue. An estimated twenty two million iPods were sold in 2007 which was a growth of five percent and seventeen percent revenue growth. However despite these achievements, the company faces threats from companies like Nokia for the control of the digital music market. Nokia has signed deals with three of the largest record label companies in the world like Warner Music. This would allow Nokia consumers to download music from companies like Warner and Sony. Nokia might find it difficult to penetrate the online digital music market but with domination of the world cellular market, it can be a threat to Apple. The company churns out four hundred million sets annually which pose a significant threat to Apple Inc.
Substitutes
Despite the popularity of digital music, Apple Inc faces the threat of MP3 substitutes like CD players and cell phones with MP3 player capabilities. This represents a moderate threat because they do not offer the identical experience of iTunes (TechWhackNews, 2007). Another significant threat is that of illegal peer-to-peer music download. iTunes will retain its edge over other substitutes because it offers legal and easy to use song downloads. It also allows buyer to freely browse two hundred thousand songs and download an individual song for ninety nine cents. Compared with illegal and free downloading services, iTunes offers sound quality as well as creative searching and browsing functions (New Media Age, 2007). iTunes can successfully compete against peer to peer file sharing software because the latter is under constant attack by industry players. P2P also faces network congestion and downloading problems which creates hurdles for users. Another threat is that of Nokia starting its own internet services which are being branded as Ovi. This portal will provide music, games, and maps.
Threat of new Entrants
Apple Inc lead over the digital music market is because of the diversity of its users. It offers a range of hardware which aggressively targets different features and price points. Users might even buy more than one player. It has targeted broad interests which have added support for audio books, short films, movies, and games. It has also worked with major companies like Nike for its Nike + sensor product. iTunes represents a huge market which appeals to a large range of interests and usage patterns (TechWhackNews, 2007). Its digital download strategy creates several advantages for the company in the marketplace. Another feature is that iTunes offers catalogs of albums, user reviews, Internet radio, and pod cast listings for free (Ethan, 2007). Consumers can benefit from this service without making any digital purchase. Rival companies like Nokia and Google which seek to access the digital market will have to invest in creating their brands and advertising in order to reduce the domination of Apple. The threat of new entrants is high because of their financial and branding resources.
The bargaining power of suppliers
The domination of Apple Inc in the online digital music business means that suppliers have limited bargaining power. The company renewed its contracts with the four largest record companies in 2006 after a conflict over the price of songs being sold. The record companies had been pressurizing Apple to increase the prices of new material from top selling artists (John, 2007). Universal, Warner Music, EMI, and Sony BMG were forced to accept the company’s price of selling one song for ninety nine cents because iTunes controls eighty percent of the market. The four major companies have been trying to reduce their dependence on iTunes by trying to allow download of music from their own websites (Lawrence, 2006). However because of the limited integration, limited customer awareness, and increased features of iTunes has led to the bargaining power of suppliers being limited.
The bargaining power of buyers
Apple Inc has created a brand name because of its master branding and advertising policies. The iPod accounts for half of the brands value because it is more than an MP3 player or phone (Kahney, 2006). It also expresses individual creativity as people are prepared to pay at least twenty percent price premium. Even with rivals like Amazon, Yahoo, and other online retail stores selling digital music, the company has maintained its edge. This has been because of the combination of iTunes and iPod. An estimated one hundred million iPods have been sold by 2007 (Kirk, 2007). iTunes is popular software which allows users to connect to the iPod and iTunes music store. However the entry of Nokia, a company possessing immense financial and branding muscle, the consumers and buyers might have a different attitude towards the sale of digital music. The bargaining power of buyers in this scenario represents a significant threat for Apple Inc.
Four Links Model
This model further analyzes the micro environmental factors along with Porter’s five forces.
Informal Cooperative Links and networks
Apple Inc has several links with other countries as it seeks to increase its global music market share. It has a service called iTunes Latino, which specifically offers Latin music, videos, audio books, and pod casts. In 2006 the company signed an agreement with an Indian digital media company, hungama.com which expected to release an estimated thirty thousand tracks (LaPedus, 2007). iTunes also allows users to directly link from their websites to any song or music video on its website. Users can also request iTunes logos for web advertising. Another feature is the iTunes Link Maker which creates direct web links to any artist, song, album, or music video.
Formal cooperative Links
Apple Inc has been using its links with the leading multinational corporations in order to enhance and promote its iTunes products. In 2007 the company launched a partnership with Starbucks where an estimated fifty million iTunes songs would be played for free at Starbucks locations in the United States of America (Lewis, 2007). There have been links with other corporations like Nike where the combination of iTunes and high tech sports equipment was an important brand strategy.
Complementors
Apple Inc has a successful network of companies using iTunes to promote and advertise their products. The successful combination of iPod and iTunes has assisted the company in creating a strong brand image (Mac.com, 2007). Several major corporations belonging to automobile, entertainment, airlines, electronics, and computers industries have made deals with Apple to promote their products using iTunes.
Success Factors for the Multimedia Download Industry
The analysis above has identified several success factors of the multimedia music download industry. Brand image is very important for the success of enlarging market segments and diversifying products. Another success factor is the strength of diversity which targets and caters for the various groups. Technology has to assist the customer by offering ease, high download speed, and lack of network congestion problems. The prices must also be kept at reasonable rates in order to deter consumers from accessing illegal downloading P2P software. A network of informal and formal cooperative partners also assists the company in securing domination in the multimedia download industry.
SWOT Analysis
This sector analyzes the strengths, weaknesses, opportunities and threats faced by Apple iTunes.
Strengths
Apple is a highly successful company with an increase in its iPod music player and iTunes software sales in 2008. iTunes has a favorable brand perception which has led to increased sales volume. It has allowed the company access to a whole series of segments that buy into other parts of the Apple brand (Macnn.com, 2007). It represents a huge contribution to income for Apple. The company has a committed, loyal, and fanatical base of customers because of its commitment to satisfy loyal customers. It retains its market edge because of stylish designs and state of the art products. Apple is also dedicated to the improvement of its products by investing in research and development. This has assisted in the penetration of local markets by coming up with new and innovative products.
Weaknesses
One of the inherent weaknesses of iTunes is that it cannot be played in other portable devices. The company has also faced the problem of supply and integration. The launching of iPod Nano resulted in shortages for consumers (Marsal, 2006). The product was also priced at a higher level as compared with other competitors. The lack of integration with non Apple products is also a potential weakness for the company. Some of its models of iPod reported faulty batteries and faulty screens (Nancy, 2006). While the domination of the online downloading music industry ensures that Apple Inc can keep control of prices, in the future there could be pressure from the music industry to increase the price of downloaded music files.
Opportunities
Apple Inc enjoys penetrating the mobile market with the launch of the iPhone. This would enable the company to fight Nokia on its main market. The purchase of an iPhone automatically creates another iTunes user. The company can also diversify and broaden its list of products by penetrating into the multimedia industry (Steven, 2006). Motorola’s Rokr mobile phone system uses a version of Apple’s iTunes music store. New technologies and strategic alliances can create new opportunities for Apple Inc.
Threats
The high level of competition in the technology market poses a significant threat for Apple. Being successful requires competition as the company has been working hard on research and development in order to maintain its competitive edge (Sherman, 2002).The popularity of iPod and iTunes is subject to the demand and health of local economies (Stern, 2005). The entry of giants like Nokia, Microsoft, and Google could create potential threats for the iPod and iTunes.
Nokia’s threat to Apple
Nokia corporations are one of the largest communication manufacturers in the world with a worldwide market share of twenty seven percent in 2008. The company generates two thirds of its sales by the Nokia Mobile Phones business group. Nokia networks are responsible for thirty percent of net sales. Nokia networks are a leading supplier of mobile, IP, broadband and fixed network infrastructure. The company has a sales network in one hundred and thirty nations. The company has moved into the digital music market by the launching of its own digital music service in 2007. The Nokia Music Store allows users to download songs from the internet to their computers or directly to mobile phones over wireless networks. This feature is not available in Apple’s iPhone. It also has plans to launch an online portal, Ovi as a direct response to Apple’s iTunes (Fildes, 2007). The company is also planning to launch nGage which is an online game store. This would allow Nokia users to play games for free on their Nokia mobiles. Ovi is a the buzzword for the online portal which will offer a variety of mobile services like games, music, maps, photo sharing, and much more. Several new devices like N95, N81, 5310, and 5610 are being launched which will allow users access to nGage and music store (Halper, 2007). The aim of the company has been to be in the mobile Internet services business and a development of content and services. Nokia represents a significant threat to Apple because of the vast financial resources at its disposal. Further being one of the greatest logistics companies on the planet, it produces millions of phones with different models. It also has the technical expertise in maintaining cellular phone networks. Nokia also can take advantage of the fact that music companies will be trying to reduce the monopoly of Apple. Nokia can also fight on more fronts because of the diversity of services it offers.
Evaluating relative strengths and weaknesses
iTunes has a strong and loyal customer following because of aggressive brand imaging by the company. The integration of iTunes and iPod is one of its greatest strengths. However it is hampered by the lack of integration with non Apple products. Also users cannot directly download the music into their cell phones. Apple Inc also has the relative strength of system designing because of its design of hardware and software which creates an integrated system (TechWhackNews, 2007). The user interface is also friendly which creates a dedicated customer base. Further strengths come in the form of industrial design and clever management skills.
Conclusion of the Analysis
iTunes has a loyal, dedicated, and fanatic customer base. It dominates eighty percent of the American online music download industry. A strong brand image and integration with iPod has created a strong market for the company. However competitors like Nokia, Google, and Microsoft have the financial and advertising muscle to penetrate this market. Nokia has the potential to reduce the market of iTunes (Thomas, 2007).
Strategic recommendation
This portion of the paper makes recommendations for Apple to reduce its weaknesses and threats. It concludes that the company must utilize its opportunities in order to retain its competitive market edge in the online music downloading industry. iTunes powerful customer base and brand image allow it to market new products. Apple must utilize these resources for diversifying and enhancing their downloading content in order to attract more customers. The partnerships with organizations like Nike, Starbucks, Ford Motors, etc give the company a powerful network of corporations through which it can promote and advertise its products. iTunes can minimize its weakness by increasing the quality of content. It must also address the possibility of allowing downloads directly into the mobile to challenge Nokia’s Ovi portal. Apple’s must also increase the compatibility of the iTunes with non Apple multimedia devices. Further the faults of its iPods must be addressed. It can reduce the threat posed by Nokia by utilizing the benefit of integration between iPod and iTunes. Other strengths like the brilliant integration of software and hardware can be used to create more options for consumers. iTunes and iPod also have user friendly interfaces as compared with Nokia products. Finally the company should utilize its strong brand image, loyal customers, and network of cooperation with major companies to aggressively prevent competitors from entering the market. iTunes should retain its loyal customer following by allowing direct downloads into mobile phones. An aggressive marketing campaign should be launched by focusing on the strengths of the company to increase the users of iTunes and iPod. Another recommendation is to offer new products that can be downloaded using iTunes and iPod. Finally an aggressive strategy is required for the expansion of the cellular phone market as the company still occupies a small portion of that sector.
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