Lecture 6: Apple

Question 1

Why was Apple so successful in ‘PCs’ in the late 1970s and 1980s? How can we explain their high profitability?

Answer 1

1.  User friendliness
2.  Reliability
3.  Focus on education and desk top publishing segments 
4. Plug and play peripherals

Question 2

Why did Apple management to believe that they were on a ‘glide path to history’ by 1991? What were the key factors that had led to this state of affairs?

Answer 2

A. Customer value problem
– Narrowing of performance gap with Wintel PCs
– Wrong side of network effects (i.e. low volume)
– Wrong side of switching costs (i.e. low installed base)

B. Unit cost problem
– Vertical integration
– Low scale
– US manufacturing

C. Development problem
– Development of new chip or OS requires very high largely fixed cost investment
– But Apple has low volume over which to amortise investment

Question 3

What is definition of network effects?

Answer 3

Network effects arise when each customer’s ‘willingness to pay’ for a product increases with the number of other people who have a compatible product

Question 4

What are the types of network effects?

Answer 4

1. Direct: everyone uses Facebook because everyone else uses Facebook
2. Indirect: customer buys Windows cos most developers write for Windows; most developers write for Windows cos most customers buy Windows

Question 5

Why are network effects important?

Answer 5

Network effects can tip a market toward winner-take-all

Question 6

What are complements?

Answer 6

Complements are products that make your product more valuable to customers.
CV (A+B) > CV (A alone) + CV (B alone)

Good news: they expand the pie
– Bad news: complementors want their slice (a bargaining issue)

Question 7

What are pros of complements?

Answer 7

they expand the pie

Question 8

What are the cons of complements?

Answer 8

complementors want their slice (a bargaining issue)

Question 9

Why WINTEL PC assembly businesses had low economies of scale?

Answer 9

1. No differentiation
2. Same unit cost
3. same technology

Question 10

Why did Sculley’s initiatives fail?

Answer 10

In 2 years he pursued 6 different strategies…
IBM partnership, lower price mass market, PDA, Japanese firms…
New operating system

Question 11

Apple’s 3 general takeaways

Answer 11

1. Having a product advantage does not guarantee sustained competitive success
2. Network effects can be very important in some businesses
3. The issue of ‘closed-proprietary’ versus ‘open-standardized’ is important in many technology system business

Question 12

Why do tech businesses like to make proprietary technologies?

Answer 12

1. facilitates innovation (close linkage between components)

2. captures value at the system level

Question 13

Open vs closed in tech

Answer 13

1. System innovators (seeking enhanced performance) tend to be vertically integrated to develop proprietary systems
2. Once broad system design is established, performance enhancement may slow and attention shifts to cost: COMMODITISATION

implications

If you pursue a proprietary system, you better be sure you can compete against not only
another proprietary system competitor but the sum of all open system competitors!

Question 14

What are the 7 sources of Value Creation Advantage?

Answer 14

1. Distinctive Design of choices
2. Proprietary technology/ knowhow
3. Superior inputs
4. Superior brand or reputation
5. Superior execution
6. Superior volume
   a) Economics of scale
   b) Experience, learning effects
   c) Network effects
   d) Switching costs
7. Broader scope

Question 15

What are the three types of source of alue Creation Advantage

Answer 15

1. Set of choices
2. Superior Resource
3. Scale & Scope