Apple Computer had clearly established itself as the product leader in its industry by being the first company to market a complete personal computer in 1976. But by 1992, the industry had evolved in ways that threatened this position of leadership. Among strategy case studies, the Apple 1992 case is unique in the complexity of multiple challenges that it presents, including: How does the global industry evolve when it makes the transition to maturity? How does a "standards war" between competing technical standards affect that evolution? How does this evolution affect the viability of a product leader's competitive advantage both at a domestic and international scale? Can a product leader still win in the market competition even if it loses the "standards war"? "What should Apple do next and why?" In order to answer this question, you are required to assess the external environment and the internal environment of Apple

Apple Computer 1992 John Sculley, Apple Computer's charismatic CEO, sat in his small, interior glass ofce in Cupertino. California, reading the yearend results for 1991. The computer industry had just experienced its worst year in history. Average return on sales plummeted to under 4% and the return on equity (ROE) was under 11%. For the rst time, worldwide PC revenues actually dropped by almost 10%, despite rising unit volume. Although Apple continued to outperform the industry, the intensity of competition was putting acute pressure on Apple's margins. \"Our challenge,\" noted Sculley, \"is not only to stay ahead of our competition, but we have to nd some way to change the rules of the game. If computer manufacturers continue to make and sell commodities, everyone in our business will suffer. " Changing a $50 billion global industry, however, was no easy task. Yet Sculley believed that Apple was one of the only companies that could do it. For Apple's next strategy session, he asked his staff to address two key questions: (1) could Apple change the structure of the industry, and if so how? and (2) what other alternatives are available? A Brief History of Apple Apple's legendary story began when Steve Wozniak (Woz) and Steve Jobs joined forces to produce the Apple I computer in the Jobs family garage in Cupertino. College dropouts in their early 205, they formed Apple Computer Inc. on April Fool's Day 1976. After selling 200 Apple I computers, mainly to hobbyists. they managed to obtain venture capital. Jobs sold his vision of making the personal computer easy to use for non-technical people. His stated mission, which permeated the firm through 1992, was "to change the world through technology.\" The concept was one computer for every man, woman, and child. When Jobs and Woz announced the Apple II in March 1977, they began a revolution in computing, which changed the company and the world. Apple sold over 100,000 Apple 115 by the end of 1980, generating revenues over $100 million. Primarily selling into homes and schools, Apple was recognized as the industry leader. The company went public in December 1980, making the founders multi-millionaires. Apple's competitive position changed fundamentally when IBM entered the personal computer market in 1981. While Apple's revenues continued to grow rapidly, market share and margins fell precipitously. Apple responded to IBM with two new products, the Lisa and Macintosh (Mac). These innovative computers featured a graphical interface and a windowing operating system that allowed the user to view and switch between several applications at once. They also used a mouse to move and point to positions on the screen, making applications easier to use. However, both computers were incompatible with the IBM standard and even with the Apple II. The technologically sophisticated, but expensive ($10,000) Lisa Computer was soon dropped. The Macintosh fared better, but suffered because of limited software and low performance. By 1984, the company was in crisis. A year before the introduction of the Lisa and Macintosh, Apple hired John Sculley to be its president and CEO. Sculley, 44, an MBA from Wharton and previously president of Pepsi's beverage operations, had spent most of his career in marketing and advertising. Sculley was to provide the operational expertise, and Steve Jobs the technical direction and vision. But Jobs resigned from Apple in September 1985 after a well publicized dispute with Sculley and Apple's board of directors. After its slow start, Apple's new Mac computer picked up steam. Between 1986 and 1990, Apple's sales exploded (see Exhibit 1). It introduced new, more powerful Macs that roughly matched the newest IBM personal computers in speed. Even more important, the Mac offered superior software and a variety of peripherals (e.g., laser printers) that gave Apple a unique market nichethe easiest computer to use in the industry with unmatched capabilities at desktop publishing. Apple's strategy of being the only manufacturer of its hardware and software made Apple's protability the envy of the industry. By 1990, Apple had 31 billion in cash and more than $5.5 billion in sales. Return on equity, at 32%, was one of the best in the industry. Market share had stabilized at around 10%. But the industry environment was changing rapidly. Rather than basking in success, Apple's management became convinced in the spring of 1990 that their position was unsustainable. According to Dan Eilers. vice president of strategic planning at the time, \"the company was on a glide path to history.\" The Evolving Personal Computer Industry' The personal computer was a revolution in information technology that spawned a $50 billion hardware business, with another $30 billion in software and peripherals by 1991. During its short 15 years, the industry evolved through three successive periods. During its rst 5 to 6 years, it was characterized by explosive growth and multiple, small competitors vying for a piece of the market. IBM's introduction of the IBM PC in 1981 launched a second stage in desktop computing. Over the next five years, the industry became a battle for standards and retail shelf space. Three firms emerged as the clear leaders during this period: IBM, Compaq, and Apple. The third era was one of increasing fragmentation. From 1986 through 19911992, new manufacturers of IBM clones from around the world grabbed share from the industry leaders as new channels of distribution emerged and product innovation as well as revenue growth slowed. In some ways, the personal computer was a very simple device. Most PCs were composed of ve, widely available components: memory storage, a microprocessor (the brains of the PC), a main circuit board called a mother board, a disk dn've and peripherals (e.g., display, keyboard, mouse, printer, etc). Most manufacturers also bundled their PC hardware The late 19805 saw revolution turn into evolution in both hardware and software. On one front, the IBM PC standard became the MSDOS/ Intel compatible standard. IBM tried to make PCs more proprietary in 1987 with the introduction of its PS/ 2 line of computers. Old IBM PC boards could not be plugged into the PS/Z. Many customers, however, did not want to give up any compatibility with their prior purchases. As a result, IBM faltered, losing almost half its market share. Since Intel and Microsoft provided all manufacturers with identical parts, it was IBM's clones that offered compatibility with the installed base. A new generation of PC clone manufacturers such as Dell and Gateway also found that most customers could no longer distinguish between low priced and premium brands. Finally, the greatest differentiation in the industry had been between standardsIBM versus Apple. However, when Microsoft introduced its \"Windows\" 3.0 graphical user interface in 1990, the differences in user- friendliness between MSDOS/ Intel machines and Macs narrowed signicantly. By 1992, the PC business had changed from a high growth industry to an industry with a few high growth segments. The installed base of PCs approached 100 million units. New products, like notebook computers, and traditional products sold through new channels, like direct mail, continued to sell at double-digit growth rates. But the economics of PC manufacturing, sales, R&D, and software, were fundamentally different compared to the early- and mid19803. Manufacturing and R&D A company could manufacture a personal computer box (with the most current, state of the art microprocessor, but without a keyboard and screen) for as little as $540 in 1992. That box would typically carry a wholesale price of 3600. PC boxes with a last generation microprocessor (i.e., an 80386} wholesaled for about $500. Firms, however, had different cost structures, which varied with their manufacturing strategy. Some rms were pure assembly operations, buying all of their components from independent vendors, while others designed and made their own computer boards. For under $1 million, an assembler could buy the equipment and lease enough space to make 200,000 to 300.000 PCs per year. It would cost that assembler about $480 for the boards, chassis, disk drives, and power supplies, and another $60 in direct labor. If a rm designed and manufactured its own boards. the entry costs were somewhat higher. While you only needed one manufacturing line to be efficient, the initial capital costs for assembling computer boards was $5 million. One line would produce about 1000 boards per day. If the PC manufacturer produced its own boards, it could reduce the cost of the computer box by as much as $50. The price of the keyboard and monitor could add from $100 to more than $500 to the system's total costs, depending on the options. The costs of specialty PCs, like notebooks, were considerably higher. There were fewer standard components, the products required more special engineering, and there were only two major suppliers of LCD screens in the world, Apple Computer 1992 792-081 R&D expenditures closely tracked a firm's manufacturing strategy. While the average R&D spending in computers was ~5%, PC manufacturers spent from 1% for a pure assembler to 8%10% for companies like Apple, which designed their boards, chips, and even the ergonomics of the keyboards and boxes. Since R&D costs on many key technologies were rising, there was a growing trend in the industry in the early 19905 to license technology from third parties, work collectively in consortiums, and whenever possible, buy off-the-shelf components and software. rather than develop from scratch. Distribution and Buyers Buyers of PCs could be roughly divided into three broad categories: business/ government; education; and individual/ home. Each customer had somewhat different criteria and different means for purchasing computers. The largest segment was business, with roughly 60% of the units and 70% of the total revenue. During the 1980s, personal computers were most often bought by individuals or small departments in corporations, without much input from a corporation's MIS staff. Individual business PC buyers were usually unsophisticated about the technology, and worried most about service, support, and compatibility. Brand name was especially important and full service computer dealers, such as Businessiand and ComputerLand, built billion dollar businesses servicing these customers. By the early 19905, individual business consumers had become more knowledgeable about the PC; in addition, more computers were purchased by technically trained MIS staff, who were operating under tight budgets. (See Exhibit 2.) Full-service dealers suddenly became an expensive channel. Demand exploded at \"superstores\" like CompuAdd and Staples as well as at mail order outlets, which offered computers and peripherals at 30% to 50% off list price. Even K Mart, Costco, and other mass merchandisers started to sell large volumes of PCs. (See Exhibit 3.) Since business organizations were increasingly demanding that their PCs be networked, another channel evolved, called valueadded resellers or VARs. Most VARs were low-overhead operations that could buy computers in volume, package them with software or peripherals, and then congure the PCs into networks. Finally, some computer manufacturers bypassed thirdparty distribution entirely, selling directly through the mail with phone support for customer service. The education and individual/ home markets were driven by different channels and somewhat different criteria. In the early 19905, education accounted for roughly 9% of units and 7% of revenues. While most schools had limited budgets for computers, the primary concern for most educators was the availability of appropriate software. The individual/ home market comprised about 31% of units and 23% of revenues; however, the market was a complicated mixture of neonle who bought commuters for business work at home. and those who bought the almost 40%. Within a week, other competitors were cutting prices. Clones of the \"386\" retailed for as little as $999.00 and \"486\" clones were selling for $1,600.00. Analysts repeatedly talked about a shakeout in the computer industry, yet there were no indications when and if a shake out would occur. A few large mergers had taken place in the early 19905, such as Groupe Bull's purchase of Zenith, and AT8zT's purchase of NCR. But the worldwide PC business was more fragmented in 1992 than in 1985. Despite the variety of competition, Apple's rivalry in the PC industry could be typified by three players: IBMthe worldwide leader; Compaqthe premium priced leader in the MS-DOS/ Intel segment; and Del], a low-priced clone. IBM IBM's position in PCs was characteristic of many broad line computer companies in the world, ranging from Digital Equipment to Siemens. Like its competitors in mainframes and minicomputers, IBM had a large installed base of customers that were tied to the company's highly protable, proprietary technology. However, like most mini and mainframe companies, IBM was also a relatively high cost producer of PCs that was struggling to create a unique position for itself in the 19903. Despite suffering its first loss in history in 1991, IBM was still the world leader in computers, with $64 billion in revenue and the number one market share in PCs, minicomputers. and mainframes (see Exhibit 5). IBM's trademark was its sweeping horizontal and vertical integration. One of the largest manufacturers of semiconductors, IBM had the largest direct sales forces in the computer industry, and sold more types of computers, software, and peripherals than any company in the world. IBM's R&D budget of $6.6 billion exceeded the revenues of all but a few competitors. Nonetheless, IBM's market share had steadily declined in the PC business since 1984. IBM's products lost much of their differentiation, as clones successfully attacked IBM with cheaper (and in a few cases, technically superior) products; and after a dispute with Microsoft, IBM appeared to lose control over the operating system software (discussed below). To regain the initiative, IBM launched a blizzard of alliances in the 19905, ranging from jointly developing the next generation memory chips with Siemens and at panel displays with Toshiba, to working with Apple on a next generation operating system and with Motorola on microprocessors. Compaq Compaq got its start by selling the first successful IBM clone portable. In its very first year, Compaq generated $100 million in sales, making it the fastest growing company in history. Compaq's subsequent growth and profitability was based on offering more power or features than comparable IBMs, usually at slightly higher prices. When Compaq launched the first PC with an Intel 80386 microprocessor, it became a trendsetter rather than just another clone. Compaq generally engineered its products from scratch, developing and manufacturing many custom components. However, Compaq did not make semiconductors, like IBM, nor did it develop software or manufacture peripherals, like Apple. Compaq was a pure PC hardware company that sold its products through fullservice dealers. In 1991, however, Compaq's position weakened considerably. Clones were quickly copying Compaq's PCs and even beating Compaq to market with some new products. The most damage was done by Dell Computer, which ran full page ads in newspapers around the world, suggesting that Dell offered comparable value at 50% off Compaq's list price. Although Compaq rarely sold its computers at list, the campaign had a devastating impact. Compaq was put on the defensive with its customers, causing it to cut prices and streamline costs. Compaq's board fired the CEO and embarked on a new strategy of reducing costs and offering lowpriced products through lower cost channels. Dell Computer Michael Dell, a dropout from the University of Texas, started Dell Computer in Austin in 1984. The company's rst product was an IBM PC/XT clone that it sold through computer magazines at one-half IBM's prices. From 1985 to 1990 Dell became the fastest growing computer company in the world. By 1991, it was a half-billion-dollar company, offering a full line of PCs through direct mail. What made Dell distinctive was its unconditional money back guarantee within 30 days, its toll-free customer service number, and a one-year contract with Xerox to provide next day, onsite service within 100 miles of nearly 200 locations. Dell could bypass dealers because utilizing computer technology (i.e., running PCs with software tools that could tell the customer quickly how to fix a PC) could offer customers comparable or better service at much lower prices than a local dealer. Moreover, Dell generally copied Compaq or IBM's basic design while assembling the products with standard components. Yet even Dell was feeling pressure from lower priced clones in 1992. Companies such as ALR, Packard Bell, and Gateway were doing to Dell what Dell had done to Compaq: copying the strategy with an even lower expense structure and lower prices. Packard Bell, for instance, grew larger than Dell in 1990 by selling cheap clones exclusively through mass merchandisers; in the meantime, ALR started offering Dell clones with similar service at lower prices. Since ALR's overhead was only 14% of sales, with R&D of only 1.5%, Dell was forced to look for new ways to differentiate its products. By 1992, Dell was introducing new PCs every three weeks; its oldest product was 11 months old. Dell also planned to offer onsite service within four hours. Suppliers There were two categories of suppliers to the personal computer industry in the early 1990s: those supplying products that had multiple sources, like disk drives, CRT screens, keyboards, computer boards, and memory chips; and those supplying products that came from only one or two sources, particularly microprocessors and operating system software. The rst category of suppliers were all producing products that had become commodities by 1992. Anyone in the world could buy memory chips or disk drives at highly competitive prices from a large number of companies, often from a wide variety of countries. Microprocessors and operating system software, on the other hand, were dominated by a small number of companies. Every PC needed a microprocessor, which served as the brains of the computer. While several companies offered microprocessors, two companies dominated the industry: Intel, which was a sole source for the latest generation (386, 486, Pentiums) of chips for the MS-DOS standard; and Motorola, which supplied 100% of Apple's needs.3 (See Exhibits 5 and 6.) Microprocessors were critical to the personal computer because in 1992, the leading software operating systems (OSs) could only run on specific chips. Most new 085 conceived since the late 19805 were developed for multiple microprocessors. But Apple's OS was originally written could not support multitude OS standards. In the early 1990s, analysts estimated that more than 340 billion in software was installed on the Intel/ Microsoft standard and $4.5 billion to $5.0 billion on the Motorola/ Apple standard. For computer users to switch standards, they had to buy new hardware and software as well as incur substantial retraining costs. The economics of operating systems also made it difficult for multiple players to survive. While the marginal costs of producing software were negligible, it cost an estimated $500 million to develop a new generation operating system, plus substantial ongoing development cost. Microsoft's dominance in this arena was based on its ability to sell to the huge installed base of Intel's X86 microprocessors, even though MSDOS (and Windows) were widely acknowledged to be inferior to Apple's System 7. Microsoft typically received about $15 from a manufacturer for every PC sold with MS-DOS, and approximately another $15 if the PC was sold with Windows. Finally, OSs were of little value without application programs written by independent software vendors (ISVs). The market share of an OS was critical in inuencing an ISV's decision. A program written for MSDOS, for instance, had a potential market of more than 80 million PCs; a program written for Apple's OS had roughly one-tenth the potential; and programs written for some of the other OSs, discussed below, had only onetenth of Apple's possible market. Events in the early 19905 suggested that the conguration of players in both microprocessors and operating systems might be changing. First, several new players entered the microprocessor arena, including imitators of Intel's chips as well as new competitors, such as IBM (with its RS6000 chip), Sun Microsystems, MIPS, and DEC. Most of these chips were designed in special ways, called RISC, which gave them some initial performance advantages over Intel and Motorola's existing products.4 These RISC chips, however, could not run software directly compatible with Intel or Motorola in 1992. Second, there was an emerging battle over new operating systems. Microsoft's graphical user interface (GUI), Windows 3.0, worked on top of MS-DOS. Windows sold 10 million copies from its introduction in June of 1990 through March 1992, and was selling one million copies per month. Since Windows mimicked Apple's operating system, the differences between the Apple environment and the Microsoft/ Intel world were less obvious.5 Windows was also attracting the greatest ISV attention in the early 19905. In the meantime, several companies were trying to compete directly with Microsoft by rewriting their operating systems to work on Intel's X86 chips. These rms included Sun and Steve Job's new company, NeXT. In addition, after IBM broke with Microsoft, it spent $1 billion to offer its own OS in 1992, called 05/ 2 2.0. While other vendors were not offering OSs compatible with the installed base, IBM hoped to stall Microsoft's momentum with a superior OS that would maintain compatibility with MSDOS and Windows. Finally, both Microsoft and Apple were developing new 035. Microsoft promised that its next product, Windows NT, would be available in late 1992. Microsoft claimed that Windows NT would match or exceed competitive products, be backward compatible with MS-DOS and Windows, and run on Intel, MIPS, and DEC microprocessors.\" Apple's new OS, discussed below, was scheduled for release in 1994. Alternative Technologies Like many high-technology businesses, there was a variety of substitutes either available or on the horizon. The most direct substitutes for PCs were technical workstations, powerful standalone computers that were used primarily by engineers for scientific applications, graphicintensive applications, like designing airplane wings, and number intensive applications, like nancial transactions on Wall Street. Workstations comprised a highly competitive business, dominated by four companies: Sun, DEC, HewlettPackard, and IBM. Each of these companies used their own RISC chip and incompatible OS. Historically, workstations were not only more powerful than PCs, but they were also much more expensive. By the early 19905, all of the major workstation vendors had proclaimed that they, too, wanted to sell cheap versions of their computers for the mass market. In 1992, prices of low-end workstations dropped to less than $5000, making them competitive with high-end PCs and Macs. Many analysts thought that much faster growth would come from other alternative technologies, like penbased computers, palmtop computers, and mobile computing. All of these technologies were in their nascent stages in 1992. Penbased computers allowed the user to point a stylus on a screen rather than use a keyboard. Both hardware and software innovations were required to make penbased systems cost-effective. Microsoft had already announced a version of Windows for pen-based machines that was expected to compete with alternative 053 from a variety of start-up companies and Apple. Hewlett-Packard and Japan's Sharp were the early entrants in the palm-top market. Their products were relatively primitive computers that could run very simple operations, like spreadsheets and word processing, as well as keep calendars and address books. Their advantage was size and price: these computers sold for a few hundred dollars and could be carried in a shirt pocket. Sony also announced that it would offer for under $1000 portable \" computer players \" in 1992: book size devices with CD audio capability that displayed text and video, and ran Microsoft's MS-DOS software. Finally, several observers expected that all forms of computers would be networked in the 19905, many with cellular phone connections. While analysts had talked about the merging of computer, telecommunications, and consumer electronics technologies for more than a decade, many industry executives believed that the integration of computers, phones, and videos would be a reality by the mid to late19905. Many consumer electronic products, like televisions, were beginning to use digital technologies, while computers were becoming sufficiently powerful to encode and manipulate video, sound, and data. Apple's Position in October 1990 Apple held a peculiar position in the computer industry as it entered the 19905. It was the only existing alternative hardware and software standard for PCs other than the \"5-1105 :1 | l | l I II 1 . I 'l I' 1] l] . Ill Analysts generally considered Apple's products to be easier to use, easier to network, and more versatile than comparable IBM machines. In many core software technologies like multimedia (integrating video, sound, and data), Apple had a two year lead on vendors such as Microsoft. Since Apple controlled all aspects of the computer, from board design to software, it could offer a better computer \"system," where all the partssoftware, hardware, and peripheralsinteracted in a coherent way. If someone bought an IBM and a clone, they could never be sure if one computer could be easily connected to another or whether two software programs from different vendors would lead the system to crash. Apple, on the other hand, gave customers a complete desktop solution. Hardware and operating system software were sold as a package, bundled together. This made Apple's customers the most loyal in the industry. As one analyst commented, \"the majority of IBM and compatible users 'put up' with their machines, but Apple's customers 'love' their Macs. " Trouble started brewing, however, in the late 19805. Apple had not aggressively lowered prices during the price war among competitors in the Microsoft/ Intel standard. In addition, Apple's image as a performance leader was damaged in 1990 when Motorola, its sole source for microprocessors, was delayed in shipping its newest products. Suddenly Apple's computers looked overpriced and underpowered. And those were not the only problems, according to John Sculley: We were increasingly viewed as the \"BMW\" of the computer industry. Our portfolio of Macintoshes were almost exclusively high-end, premiumpriced computers that our market research suggested would continue to have limited success in penetrating the corporate marketplace. Without lower prices, we would be stuck selling to our installed base. We were also so insular that we could not manufacture a product to sell for under $3000. We constantly fell into the trap of \"creeping elegance\" with our NIHnot invented herementality. We spent more than two years, for instance, designing a portable computer that had to be \"perfect.\" But in the end, it was a disasterit was 18 months late and 10 pounds too heavy. Our distribution was also an issue. Five large dealers were selling 80% of our products. Given the evolution of the computer industry, we concluded that drastic action was necessary; there could be no sacred cows. The result was a dramatic shift in Apple's strategy and culture. We still want to change the world, but we have to transform the company and industry for it to work. We cannot permit the commoditization of this industry to continue. The New Apple In October of 1990, Apple began a process of repositioning its entire business. This repositioning included new nancial and manufacturing policies, a new marketing mix (new products, pricing, and distribution), and new relationships with other companies, including its own subsidiaries, IBM, and a variety of Japanese rms. New Marketing Mix The key to Apple's ongoing business, noted John Sculley, was that w But Sculley did not believe that volume was enough. In 1990, he also appointed himself the chief technology ofcer, and made it a priority to get products out faster and extend the hardware and software product lines. \"To build on our core differentiation,\" commented Sculley, \"we will bring out a series of 'hit products' through the rst half of the 19905." \"Hit products\" were dened as new products and derivations of older products that could be produced with very rapid cycle times. Sculley believed that product turns would have to be every 6 to 12 months. By the end of 1991 he noted with pride that 80% of Apple volume was coming from products introduced in October of 1990. In the previous year, only 35% of revenue came from new products. Two more hit products were introduced in late 1991 and early 1992. The first were aggressively priced notebook computers, called Powerbooks. Notebook computers were the fastest growing segment of the computer market since 1989, but it was a segment where Apple had previously failed. When the Powerbook shipped in October 1991, it got rave reviews. Analysts predicted the Powerbook might generate a billion dollars in revenue in its first year. Sculley's second effort was unveiled shortly thereafter. In January 1992, Apple introduced a new software product, called Quicktime, which put Apple at the forefront of multimedia technology. One month later, Apple announced software that would allow Macs to respond to commands from the human voice, without special hardware or training. In both areas, Apple was probably 12 to 18 months ahead of the competition. To complement the hit products strategy, Sculley also proclaimed that Apple would restructure its distribution strategy. Apple maintained a direct sales force of approximately 300, one-third covered large corporate accounts, twothirds focused on education and other markets. Most products, however, were still sold through computer stores. Bob Puette, president of Apple USA, described the problem succinctly, \"How do we move to the Dell model, without killing our existing business?\" In late 1991, Apple decided that it would sell its products through superstores and started to offer limited direct end-user telephone support. Finance and Manufacturing Apple's historical nancial model was based on one simple principle, Sculley's \"50-50-50\" rule: If Apple could sell 50,000 Macs a month. with a gross margin of 50%, Apple will have a stock price of $50. In 1987, Sculley wrote in his autobiography, \"it was critical to have high gross margins to pay for the huge research and development expenses to support a proprietary technology." And until 1990, Apple followed these policies religiously, achieving all of Sculley's objectives. New, lowend products designed to gain market share as well as \"hit products\" with short product life cycles could not operate on the same principle. Joe Graziano. Apple's CFO remarked, \"we have no choice. We must bring down our expense structure, raise our productivity, and fundamentally alter the way we do business.\" If Apple wanted to match the computer hardware industry's average (see Exhibit 7), it would have to cut costs drastically. Yet Apple was also a software company. which meant that Apple had less exibility than other PC companies in cutting certain expenditures, especially R&D. Sculley nonetheless decided to trim Apple's entire cost structure before a crisis emerged. In May of 1991, Apple reduced its W addition. we cut some projects and activities that some people felt were important to us. especially in sales and marketing. We let people go who were very talented and doing great work, but we chose not to do that work any more. We also stated that we were going to be moving jobs out of California. . . . The Campus was no longer the Center of the Universe. . . . Finally, we changed many of our relationships with the channel. large accounts. and developers. We got much tougher on selecting who they were and what kind of service or response they would get from us. We were building a new Apple that had to be leaner and swifter. Finally, we had to do layoffs, and layoffs are layoffs. any way you cut it. Part of Apple's greatest challenge was in manufacturing, which historically was a centerpiece of Apple's sole source strategy. In the past. virtually eveiything was done in-house. But now manufacturing had new instructions: anything that could be bought on the outside should be subcontracted rather than developed. NIH was no longer acceptable. At the same time, manufacturing facilities were expanded to build a greater variety of products that could be ramped faster to global volumes. Relationships with Other Companies To get a better understanding of the competitive environment, Sculley and his COO, Michael Spindler, spent nine months in 1990 visiting with the senior executives of major computer companies, including Sun, Hewlett-Packard, IBM, DEC, as well as the large Japanese and European companies. Sculley said, \"we discovered that we were out of touch. We did not really understand open systems, how to penetrate big corporations, and we did not realize that rms like IBM had big leads in semiconductor technology.\" Sculley's conclusion was that Apple should build a \"federation\" of alliances with partners that could help leverage Apple's strengths in software, especially userfriendliness, multimedia, and networking. He said, \"we have to have partners; we have to become more open; we have to penetrate a broader market or our application developers will abandon us; we have to license technologies in and be willing to license technologies out.\" A key to the federation concept was that the core Macintosh business would be largely separate from the new ventures and product groups. Spindler would run the Mac business, while Sculley could operate the alliances and federation like Silicon Valley start-ups. (See Exhibit 8.) However, Apple shocked the world when it chose its rst signicant alliance partnerits long-time nemesis, IBM. The Apple-IBM Joint Ventures During the summer of 1991, IBM and Apple formed two joint venturesTaligent and Kaleida. Sculley listed four major objectives in working with IBM: First, we had to overcome the resistance of M15 managers in large corporations to buying Apple computers. We called this our Enterprise Systems effort. The alliance attacked this problem in three ways: (1) we got IBM's stamp of approval; (2) IBM's sales force would offer Mac communication products; and (3) we both committed to achieve "interoperability\" (seamless connections L'L. _______'___ I'I'III ___ _I A____I_ __._\\ ('1. _ called Pink. Pink will be a major breakthrough in software technology.7 However, to pay for Pink, we needed money and a broader market. IBM and Apple together would have the resources and large installed base. In addition, Pink would be written to run on Apple's installed base of Motorola chips, the new IBM chip, as well as the Intel X86 chips. Lastly, we formed Kaleida to create standards in multimedia technologies, like putting full motion video on the personal computer.8 The underlying concept of the IBM-Apple relationship was that both companies could share the costs and risks of developing new technologies, but ultimately, the parents would compete in the market place for computers. The IVs would operate independently, shipping their software products to both parents at agreed upon transfer prices. IBM would provide the semiconductor technology while Apple would provide most of the software technology and personnel. Six months after the JV was formed, the parents appointed a CEO from IBM and COO from Apple. Claris To help create a supply of applications for the Mac in the mid-1980s, Apple created a software subsidiary called Claris. Claris was responsible for many of the important programs for the Mac, like MacDraw and MacWrite. However, in an effort to reduce potential conicts of interest with Apple's ISVs, Sculley decided to spinoff a portion of Claris to the public. Although Apple ultimately decided to keep 100% of Claris in 1990, it kept Claris operationally independent (see Exhibit 8). By 1992, Claris was the second leading supplier of applications to the Mac with 15% of the market (compared to Microsoft's 30% share of Mac applications) and was in the top 15 application software companies in the world. Analysts estimated that Claris had broken even on roughly $100 million in sales in 1991. As part of Sculley's strategy to be a more open computer company, Claris would not have to dedicate itself in the future to Mac applications. It could write applications for DOS, Windows, 08/2, as well as the Mac. Although Claris was behind other companies, like WordPerfect, Lotus, and Microsoft, its goal was to be in the top 5 software companies by the mid-1990s. Alliances with Japanese Firms Beyond reinvigorating its core business with the IBM alliance and expanding its application software sales, Sculley believed that Apple had to break out of the mold set by other computer companies and look for major innovations that would change the way people used computers. In the near future, Sculley argued, computers would be pervasively networked. His vision of the year 2001 saw computers, telecommunications, consumer electronics, publishing, and a variety of other technologies merging together (see Exhibit 9). Apple, he believed, had unique software technology that could exploit these linkages. Rather than everyone using general purpose PCs in the future, computing would be increasingly specialized. Sculley announced to the world at the Consumer Electronics Show in January of 1992 Apple's intention of creating a new era of \"personal electronics\" with \"personal digital assistants (PDAs).\" In describing the product concept, Sculley recalled the words of Dr. Edwin Land of Polaroid, who said, "we really don't invent new products, but the best ones are there already, only invisible, just waiting to be discovered.\" In this vein, Apple would introduce an executive organizer that would t in the palm of your hand and keep track of telephone numbers, calendars, etc. It would have builtin wireless communications, and have the capability of displaying best selling book titles. Other products would include portable MultiMedia Players that used computer and CD technology, and a portable pen-based computing product. Sculley even suggested at the public gathering that Apple would license its GUI and operating systems for other companies' consumer electronic products, possibly including digital television. These types of computing and consumer electronics products, however, required expertise that exceeded Apple's core skills and competencies. While Apple could pioneer the computing hardware and software technologies, it lacked distribution and marketing expertise for consumer electronics, LCD display technology needed for handheld computers, and very low-cost manufacturing for miniaturized products. For these new technologies to be successful, analysts speculated that they would have to be priced under 8500. Given the ambitious nature of these projects, Sculley also believed that no one company could pursue all of these avenues by itself. Sony had already manufactured one of Apple's new portable computers, and a number of other Japanese companies might be candidate partners to work with Apple in this new realm. Going Forward in 1992 Sculley told his sales force in late 1991, "the industry must once again become innovation driven, move away from commodity status, and provide value-added products and services. I believe Apple has a chance to make the difference. In fact, Apple may be one of the few great hopes for turning things around." The questions Sculley posed in March 1992 was: Can our actions to date achieve the objective of changing the industry structure? Would other steps be necessary? Was it even required that Apple change the industry structure to be successful in the future? And were there other alternatives that Apple might consider