Apple Case Study

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Professional Management Under John Sculley (1985 – 1993) and

Under Michael Spindler and Gilbert Amelio (1993 – 1997)

Although Sculley was Apple’s CEO, his expertise was in marketing. He implemented strategies to make Apple a leader in desktop publishing as well as education. The firm combined its superior software and peripherals, such as laser printers to give Macintosh unmatched capabilities in desktop publishing. In a 1998 introduction of the iMac computer, Jobs included in his presentation what he believed the “i” represented in the marketplace; internet, individual, instruct, inform, and inspire. These themes have been carried forward to all of the firm’s product categories in the ensuing years. Sales expanded significantly over the next four years and, by 1990, Apple had become a global brand, with a worldwide market share of 8 percent. The education market for Macs contributed roughly 50 percent of Apple’s U.S. sales, with a market share of more than 50 percent. With just over $1 billion in cash on its balance sheet, the firm was the most profitable PC company in the world.

In both hardware and software, Apple controlled the only significant alternative to the IBM - compatible PC standard. The company also implemented both horizontal and vertical integration strategies to a greater extent than any other PC manufacturer, except for IBM. They designed their products from inception, used unique chips, disk drives and monitors, as well as innovative and unique shapes for its computer products. In addition, they developed their own proprietary OS, which was bundled with the Mac, along with its own application software and many peripherals, including printers.

Most industry experts, both analysts as well as consumers (individual and business) considered Apples’ products to be more versatile than comparable IBM – compatible machines. With the release of Microsoft’s Windows 3.0 in 1990, the gap in ease of use narrowed significantly. But the firm retained its lead in many core software technologies such as multimedia. Since they controlled all aspects of their computers, Apple could offer customers complete desktop solutions; hardware, software and peripherals that allowed customers to “plug and play.” These capabilities contributed to Apple’s customer’s “love” for their Macs 5.

The strong attraction that had been developed between Apple products and Apple consumers (brand loyalty) allowed the firm to sell its products at premium price levels. The most powerful Macs were sold for up to $10,000 while the firm’s gross profit margin approximated a very favorable 50 percent. At the same time, IBM – compatible PC prices were declining Intel ramped up the speed and capabilities of its processor chips. The price gap between Macs and most other PC’s continued to widen as a growing number of customers viewed the MACs as the “BMW” of the computer industry; high end, premium – priced PC’s that appealed to a shrinking market segment. Sculley opined, “without lower prices, we would be stuck selling to our installed base, rather than to a growing market segment 6.”

At this same time, Apple’s cost structure was relatively high. They were spending 9 percent of sales on research and development compared with a 4 to 5 percent ratio for Compaq and Dell. Many other IBM – clone manufacturers were spending only one percent. Dan Eilers, vice president of strategic planning concluded, “the company was on a glide path to history 7.”

In March of 1990, CEO Sculley took on the added position of chief technology officer (CTO) and strove to position Apple towards the mainstream of the PC marketplace by offering “products and prices designed to regain market share 8.” This strategy required the firm to become a low-cost producer of computers with mass - market appeal. At the same time, he sought to maintain Apple’s technological lead by bringing to market “hit products” every 6 to 12 months. The first of the mass – market offerings was the Mac Classic, a $999 computer designed to compete directly with low-priced IBM clones. One year later, the Power Book lap top was introduced, to rave reviews. In 1993, Apple introduced the Newton, a high-profile “personal digital assistant” (PDA). This product failed to find a market niche and was discontinued within two years.

During Mr. Sculley’s years at Apple, management worked diligently to drive down costs. One way of achieving this goal was to shift a growing proportion of its manufacturing to subcontractors. Although this strategy proved successful, it was not enough to sustain the firm’s profitability. Gross margins declined by 14 percentage points by 1992, to a level of 34 percent, even though sales continued to rise for most of the firm’s products. In June of 1993, the board of directors “promoted” Mr. Sculley to chairman and appointed Michael Spindler, then company president, as the new CEO. Mr. Sculley left Apple five months later.

With Mr. Spindler as CEO, the firm focused on reinvigorating its core markets, education (K-12) and desktop publishing. With 60 percent and 80 percent market shares respectively this seemed to be a logical strategy. A plan to put Mac OS on Intel chips was reversed while the firm announced that it would license a small number of companies to make Mac clones, charging roughly $50 per copy for a Mac OS license.

In 1992, 45 percent of company revenues were generated outside the U.S. and a key Spindler strategy was to expand these international sales. Cost control was also a critical component of company focus, as the workforce as well as R & D spending were downsized. In spite of these initiatives, Apple lost its growth focus. In a 1995 Computerworld survey of 140 corporate buyers it was found that none of the current Windows users would consider buying a Mac, while more than half of the Apple users expected to purchase an Intel-based PC 9. Both Spindler and Sculley before him had hoped that a revolutionary new OS would turn around the company’s fortunes. Unfortunately, prospects for such a break through continued to fade. With a first quarter 1996 loss of $69 million and announcements of further layoffs, Gilbert Amelio, an Apple director, replaced Mr. Spindler as CEO.

Under Mr. Amelio, Apple returned to its premium – price differentiation strategy. He redirected marketing efforts towards high – margin segments such as services, Internet access devices and PDAs. While he saw a critical need for a new OS, he cancelled development of a much-delayed next – generation Mac OS. In December of 1996, Amelio announced that Apple would acquire NeXT Software and develop a new OS based on