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MiniCase 1

Apple: What’s Next?

Frank T. Rothaermel prepared this MiniCase from public sources. This MiniCase is developed for the purpose of class
discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient
management. All opinions expressed, all errors and omissions are entirely the author’s. Revised and updated: June 18, 2019. ©
Frank T. Rothaermel.

APPLE IS THE first company whose stock market valuation crossed the $1 trillion threshold
(in 2018). Some 20 years earlier, however, Apple would likely have gone bankrupt if archrival
Microsoft (which enjoyed a valuation of $615 billion in December 1999)1 had not invested $150
million in Apple. Under investigation by the Department of Justice at the time for alleged abuse
of monopoly power, Microsoft was eager to not have another competitor go out of business.

The Apple Ecosystem

Apple achieved its success over two decades by implementing a potent competitive strategy.
That strategy, conceptualized by co-founder Steve Jobs, combined innovation in products,
services, and business models. In 1997, Apple was near bankruptcy. But in 2001, its
revitalization took off with the introduction of the iPod, a portable digital music player; this was
the same year Apple opened its first retail stores (see Exhibit MC1.1). Today, Apple’s stores earn
some of the highest sales per square foot of any retail outlets, including Tiffany & Co., a luxury
jeweler, and LVMH, a purveyor of fine handbags and other high-end goods.
In 2003, Apple soared even higher when it launched its digital store iTunes. And it didn’t
stop there. In 2007, the California tech company revolutionized the smartphone market with the
introduction of the iPhone. Just three years later, Apple re-created the tablet segment by
introducing the iPad. For each of its iPod, iPhone, and iPad lines of businesses, Apple followed
up with incremental product innovations that extended each product category. In 2017, Apple
launched the 10th anniversary edition of the iPhone 10 and in 2018 it introduced the iPhone XS
Max. Globally, Apple has also sold more than 1 billion iPhones. (The classic iPod was
discontinued in 2014; the intent was always that the iPhone would subsume the MP3 capability.
In 2019, Apple phased out iTunes and replaced it with three apps: Apple Music, Podcasts, and
Apple TV.) Also, in 2019, Apple introduced the iPhone 11 and Apple TV+, its new streaming
service.
 Apple’s category-defining products (iPhone, iPad, iMac, and Apple Watch)
are critical building blocks for its ecosystem anchored around its
proprietary iOS operating system.
Studio Monkey/Shutterstock

By combining tremendous brainpower, intellectual property, and iconic brand value, Apple
has enjoyed dramatic increases in revenues, profits, and stock market valuation. By 2019, it was
one of the most profitable companies ever, with $225 billion in cash holdings alone.

A Good Strategy
Why was Apple so successful? Why did Apple’s competitors, such as Sony, Dell, Hewlett-
Packard (HP), Nokia, and BlackBerry, struggle or go out of business? The short answer is: Apple
had a better strategy. But this raises the question: What is a good strategy? A good strategy is
more than a mere goal or a company slogan. A good strategy defines the competitive challenges
facing an organization through a critical and honest assessment of the status quo. A Page 472
good strategy also provides an overarching approach (policy) on how to deal with the Page 473
competitive challenges identified. Last, a good strategy requires effective
implementation through a coherent set of actions. A good strategy, therefore, consists of three
elements:2

1. A diagnosis of the competitive challenge.

2. A guiding policy to address the competitive challenge.
3. A set of coherent actions to implement the firm’s guiding policy.

THE COMPETITIVE CHALLENGE. First, consider the diagnosis of the competitive

challenge. Above, we briefly traced Apple’s renewal from the year 2001, when it hit upon the
product and business-model innovations of the iPod/iTunes combination. Before that, Apple was
merely a niche player in the desktop-computing industry and struggling financially. Steve Jobs
turned the sinking company around by focusing on only two computer models (one laptop and
one desktop) in each of two market segments (the professional market and the consumer market)
as opposed to dozens of non-differentiated products within each segment. This streamlining of its
product lineup enhanced Apple’s strategic focus. Even so, the outlook for Apple was grim. Jobs
believed that Apple, with less than 5 percent market share, could not win in the personal
computer industry where desktops and laptops had become commoditized gray boxes. In that
world, Microsoft, Intel, and Dell were the star performers. Jobs knew that he needed to create the
“next big thing.”3

A GUIDING POLICY. Second, Apple shifted its competitive focus away from personal
computers to mobile devices. In doing so, Apple disrupted several industries through its product
and business-model innovations. Combining hardware (i.e., the iPod) with a complementary
service product (i.e., the iTunes Store) enabled Apple to devise a new business model. Users
could download individual songs legally (at 99 cents) rather than buying an entire CD or
downloading the songs illegally using Napster and other file-sharing services. The availability of
the iTunes Store drove sales of iPods. Along with rising sales for the new iPod and iTunes
products, demand rose for iMacs. The new products helped disrupt the existing personal
computer market because people wanted to manage their music and photos on a computer that
worked seamlessly with their mobile device. Apple then leveraged the success of the iPod/iTunes
business-model innovation, following up with product-category-defining innovations when
launching the iPhone (in 2007) and the iPad (in 2010).

COHERENT ACTIONS. Third, Apple implemented its guiding policy with a set of
coherent actions. Apple’s coherent actions took a two-pronged approach: It drastically
streamlined its product lineup through a simple rule—“we will make only one laptop and one
desktop model for each of the two markets we serve, professional and consumer.”4 It also
disrupted the industry status quo through a potent combination of product and business-model
innovations, executed at planned intervals. These actions allowed Apple to create a string of
temporary competitive advantages (see Exhibit MC1.1). Taken together, this enabled Apple to
sustain its superior performance for over a decade.

EXHIBIT MC1.1 Apple’s Stock Market Valuation ($ bn) and Key

Events, 1976–2019

Source: Author’s depiction of publicly available data.

Peak iPhone: What’s Next?
Past performance, however, is no guarantee of future performance. Although Microsoft struggled
to keep up with Apple, by spring 2019 it surpassed Apple to become the world’s most valuable
company once again with its renewed focus on cloud and mobile computing. In the same
fashion, Amazon has also surpassed Apple in stock market valuation, while Alphabet is closing
in. At the same time, Apple continues to face stiff competition from such non-U.S. rivals as
Samsung (a South Korean firm) and Huawei, Xiaomi, and Oppo (all Chinese firms).
The trillion-dollar question today is whether Apple can continue to maintain a competitive
advantage in the face of increasingly strong competition and rapidly changing industry
environments. One big issue that Apple faces is “what’s next?” after the iPhone. The situation in
2019 is akin to that of 2005 when Apple faced peak sales with the iPod, and competitors were
starting to offer flip phones with MP3 player capabilities. As a response Apple launched the
iPhone in 2007. The iPhone was a complete game changer. Although it made the iPod as a
product category obsolete, Apple dominated the smartphone market for the decade to come.
The problem is that the global smartphone market has peaked. After reaching double-digit
growth rates in 2013 and 2014, in 2017 and 2018 growth in sales of new phones Page 474
contracted. This implies that most purchases are replacements of existing phones, while
consumers hold on to their phones for longer as the cost of the phones has increased. Moreover,
subsequent models offer mere incremental improvements over current models, often not worth
the price differential. For instance, the introductory price of Apple’s iPhone XS Max was $1,349
in the United States and nearly $1,800 in China! The “peak iPhone” situation is a huge problem
for Apple because two-thirds of Apple’s revenues in 2015 came directly from iPhone sales. By
2018, iPhone sales made up 50 percent of total revenues ($265 billion). With declining sales of
iPhone units, Apple’s revenues fell in 2016 and 2017, but rebounded in 2018, in part due to
higher-priced iPhones. In other words, fewer units were sold, but the price increase made up for
the unit fall in sales. In early 2019, Apple’s market cap dropped again by 40 percent from its
peak of $1.1 trillion in the fall of 2018 to $672 billion, but recovered to stand at $900 billion in
summer 2019.
In recent years, sales in China made up 20 percent of Apple’s revenues. However, Apple’s
popularity in China is declining rapidly in the face of local competition and trade tensions. The
Chinese smartphone makers Huawei, Xiaomi, and Oppo offer phones of similar capabilities and
user-friendliness for one-half the price or less. Moreover, given the trade tensions between the
United States and China, Apple can expect more headwinds in China. For example, a consumer
boycott could be instigated, or a stiff tax could be levied on Apple products by the Chinese
authorities. In 2019, Huawei was facing several U.S. charges, among them misleading the U.S.
government about its business dealings with Iran (while it was under U.S. economic sanctions)
and allegations of bank fraud and technology theft (Huawei has denied both claims).
Will Apple introduce another game changer like the iPhone? In 2015, it introduced the Apple
Watch, the first new product category launched since the iPad in 2010. Despite the unfulfilled
potential of AirPower, which would have disrupted the charging industry and redefined the way
consumers charge their Apple products, the Apple Watch is gaining more traction and has
become the most popular smartwatch. In mobile payment systems (Apple Pay launched in 2014),
music streaming (Apple Music launched in 2015), smart speaker systems (Apple’s HomePod
launched in 2018), and streaming services (Apple TV+ launched in 2019), Apple was a late
mover.
 Going forward, Apple CEO Tim Cook has explained that Apple will focus on services to
make up for losses resulting from declining iPhone sales. In 2019, Apple had more than 1 billion
users in its ecosystem, which comprises mobile devices (iPhone, iPad, iMac, or Apple Watch)
combined with services such as iTunes, iCloud, and ApplePay. The Apple ecosystem is centered
around its proprietary iOS operating system, which anchors a family of Apple products with its
accompanying, co-dependent services. This allows the firm to benefit from customer lock-in and
network effects. In other words, if a user is embedded in the Apple ecosystem, that makes it
much harder for that user to switch to a mobile phone that relies on Google’s Android operating
system.

DISCUSSION QUESTIONS

1. How did Apple’s introduction of the iPhone in 2007 lead to its success over its main
competitors? Think about which industries it has disrupted and how.
2. What are some of the challenges facing Apple today? What should Apple do to address
them? Be specific.
3. Apply the three-step process for developing a good strategy (diagnose the competitive
challenge, derive a guiding policy, and implement a set of coherent actions) to Apple’s
current situation. What recommendations would you offer Apple to outperform its
competitors in the future? Be specific.

Endnotes
1. Inflation adjusted, Microsoft’s 1999 stock market valuation of $615 billion is about $940
billion in today’s dollars.
2. This discussion is based on Rumelt, R. (2011), Good Strategy, Bad Strategy (New York:
Crown Business).
3. Rumelt, R. (2011), Good Strategy, Bad Strategy (New York: Crown Business).
4. Ibid.

Sources: Apple Inc. annual reports (various years); Sull, D., and K.E. Eisenhardt (2015), Simple Rules: How to Thrive in a
Complex World (New York: Houghton Mifflin Harcourt); Sull, D., and K.E. Eisenhardt (2012, September), “Simple rules for a
complex world,” Harvard Business Review; Isaacson, W. (2011), Steve Jobs (New York: Simon & Schuster); and Rumelt, R.
(2011), Good Strategy, Bad Strategy (New York: Crown Business).