1 PC Industry Analysis

Over the last two decades, the demand for personal computer has grown exponentially due to explosion in the availability and use of digital content; and the rapidly growing need of technology in the emerging markets of the world. Starting with the IBM terminals in the early 1970s, the global PC industry today is a $182 billion industry comprising of desktops, laptops, net-books, PDAs and smart-phones. Worldwide PC shipments totaled 302.2 million units in 2008, up 10.9 percent from 2007. However, the economic slowdown coupled with the increased commoditization and market segmentation is causing the PC industry to falter, with a projected 9.2% dip in revenue in 2009i. The personal computer industry landscape The flagging growth combined with increased commoditization has made the PC industry unattractive within US as international players like Toshiba and Acer look to flood the market with low-cost products and Apple continues to invest heavily in R&D to maintain its competitive advantage. Historically, the two events that dramatically altered the PC industry landscape - the introduction of the Intel chipset in 1972ii and the advent of internet in the mainstream in late 1980s heralded a new age of smaller, faster and more powerful computers for the increasingly mobile and global workforce. Ever since, the PC industry has progressively moved away from desktops to laptops as consumers look for increased mobility and integration of technologies. The gap between the desktop and the laptop market has been widening steadily since 2003 but PC manufacturers continue to build desktops to cater to two main consumer segments entrylevel consumers who consider laptops discretionary and are primarily home or office-based users; consumers who require high-end processing capabilities for gaming or video development purposes. The changing customer preferences continue to drive growth and competition thus enhancing the attractiveness of the PC industry.

2 PC Industry Analysis

Industry structure Focus on innovation and brand image creates high barriers to entry in the PC industry. Dell, HP and Apple together control almost 60% of the US marketiii share but constant innovations and the international players are keeping the industry competitive. In the US market, the top firms have built a strong brand name and large scale operations thus making entry for new players more capital intensive. Globally, the market is far more segmented with firms targeting different segments of the customer base. This means that though Dell had built a cost advantage position in US, it found it difficult to replicate the same success in the global markets. Apple, meanwhile, continued to concentrate on providing differentiated products and was successful in mitigating the threat of new entrants. While most components and raw materials going into a PC are commodity items, the bargaining power of suppliers with unique resources is high. Suppliers like Intel and Microsoft yield considerable power in this industry as breaking away from the industry standard on chipsets or operating systems could lead to a major disadvantage. The key suppliers are thus able to operate as near monopolies and earn enormous profit margins. Intels market cap is 6.5 times that of its nearest competitor, AMDiv while Microsoft has been subject to multiple anti-trust lawsuits because of its monopolistic market practices.v However, Apple made the conscious decision to move away by using proprietary in-house operating system and has been successful in segmenting the market. Dells low-cost strategy was however severely impacted as the prices of commodity raw materials continued to reduce significantly, squeezing Dells operating margins. On the other hand, the bargaining power has increasingly shifted towards the buyers as PC manufacturers try to attract buyers, who are highly price sensitive and well-informed, to lift deteriorating sales. The intense competition between the manufacturers, to gain market share has

3 PC Industry Analysis

led to price wars and the proliferation of internet has made comparisons between similar products easier. The growing household income coupled with changing consumer preferences has promoted the manufacturers to invest in innovative technologies while cutting down on product lifecycle. In this dynamic landscape, Dells low-cost position has come under threat from other international and low-cost manufacturers who are targeting the same market segment. The availability of cheaper substitutes has increased the propensity of customers to switch to alternatives, increasing the threat of substitutes. The focus on providing increased mobility to end-users led to the development of smaller and faster processors in smaller packaging. Increasingly, consumers are shifting to smart-phones and other handheld devices for their communication needs. The proliferation of technology in day-to-day activities and increased competition in the PC segment also led manufacturers to invest into production and manufacture of complements that included printers, scanners and mp3 players. Apple has a strong position with respect to complements where sales of Ipod and Iphone devices not only subsidized the flagging PC sales in the beginning but were also instrumental in attracting existing Apple customers to the Mac line of PCs. By maintaining a differentiated position, Apple was better equipped to deal with the threat of cheap alternatives. On the other hand, Dell has decided to make a shift into IT-enabled services industry in search of new markets to grow invi. Internal rivalry is high in the PC industry due to increased commoditization, changing consumer preferences, increasing number of competitors and the high level of advertising costs involved. The manufacturers tried to cushion the effect by diversifying into different geographies and product lines. However, US-based strategies had to be tailored to fit the global markets and not all entry strategies produced the desired results. Diversifying into different product lines segmented the market and further drove down revenues of major players as newer, smaller, more

4 PC Industry Analysis

focused competitors entered the market. As PCs became increasingly commoditized, the manufacturers resorted to higher advertising spending to grab market share. Though the demand for PCs has been going up, Dell has continued to lose market share to its closest competitor, HP, as it is struggles to differentiate from other low-cost competitors. Positioning With increasing competition, it has become imperative for manufacturers to re-evaluate their market positioning and strive for a position that maximizes profit and lowers operational costs. While some major players like Dell and HP chose to compete on price and thus turned into highvolume, low-margin players; some others like Apple moved up the value chain and focused on providing benefit advantage to users through innovative and proprietary technologies. The remainder of this report focuses on these different positioning strategies and its impact on Apples and Dells performance. Financial Analysis A preliminary inspection of each companys financials reveals that Apples ROA has increased from 3.58% to 14.98% between year ending Sept-2004 and Sept-2008. In contrast Dells ROA has dropped from 14.19% to 9.17% between Jan-2005 and Jan-2009. And although Dells annual revenue of $61.1B is approximately twice that of Apples, when comparing net income, Dells net earnings was only half of Apples $4.8B in that period. From 2004 to 2008, Apple generated stronger growth with revenue CAGR of 40.7% versus 10.2%. During this period, Apple has and increased in profitability as its EBITDA CAGR was 93.9% versus 2.6% for Dell. In 2008, Apple had an EBITDA margin of 20.7% versus 6.9% for Dell (Exhibit 1). Based on analysis of Dell and Apples financial statements the above analysis, we have selected Apple has been selected as
Comment [s1]: Can we get the same year for both?

5 PC Industry Analysis

the high performer and Dell as the low performer. The rest of this report analyzes the strategic decisions and trade-offs that Apple and Dell made and attempts to determine the factors that contribute most to each companys divergent fortunes. APPLE Strategic positioning Apple has always differentiated itself from the clone PC market, and did not make notable attempts to enter into a price war with the other low cost PC players manufactures. Instead, it offered its customers higher benefit through its unique software and creative design, and charged a premium for that. There are certain several reasons why Apple chose to become a differentiated, focused player. First, rather than combining components from a number of suppliers and installing the popular Microsoft operating system, Apple developed its own proprietary operating system and hardware. The unique features set their products apart from their competition, but also incurred the tradeoff of increasing their costs. Secondly, by providing those unique features, Apple had cultivated a group of loyal customers who are were willing to pay a premium for the premium experience that Apple products offer Apple experience. For example, a notebook PC sold for $499 by Dell would have comparable computing power and storage capacity as a $999 MacBook (Exhibit 2). As such, while HP, Acer and Dell are were fighting to offer customers lower prices; Apple chose not to fight on the competitions battlefield but to create their own market segments. They set their target customer towards mMiddle/uUpper income class who arewere technologically savvy, who were are Mmusic enthusiasts, or who arewere professionals in media and design. It
Comment [SM2]: Elaborate on what costs?

6 PC Industry Analysis

has This enabled Apple to expand their industry its product line from computer hardware and computer software to consumer electronics and digital distribution. They supported their high benefit, high price strategy from with a focus on the following aspects: branding, R&D, and complimentary products. Branding

Apple generated strong brand loyalty that led to a higher percentage of repeat customers. According to surveys by J. D. Power, Apple enjoys the highest brand and repurchases loyalty of any computer manufacturer.vii The reason for this strong brand loyalty is not only attributive can be attributed to not only to its software and products innovation, but also to its branding and marketing strategy. Apple creates a consistent brand image for all their products. First, they all products follow the same apple style, using the same color themes, new materials and sleek line exterior design. Secondly, they are all named after the i-pattern: i-tune, i-movie, i-pod, i-phone Thirdly, all the products can be connected and synchronized together through with the same software, such as sharing music through i-tune. Thus, either you see the design of a new product, or hear its name, or even just know about its application, you will have a very high chance to tell immediately if the new product is part of the apple family. Apple also attracts new and retains existing customers by providing a high-quality sales and after-sales support experience. They enable customer to experience all the products in their apple stores. The knowledgeable sales people educate customers about the innovative techniques and peripheral integration. The more the customers know about apple products and how they are differentiated from other counterparts, the more likely they will be willing to pay a premium for

7 PC Industry Analysis

the products and keep their brand loyalty. As of June 2008, it operated 215 stores and its retail division accounted for 19% of total revenues. However, the tradeoff for high brand loyalty is high expenses on marketing and high operating costs on the retail stores. They spent a much higher percentage of their revenue (almost twice) on advertising (exhibit #) than Dell in 2003 and 2004. Also, although Apple stores generated an average of nearly $4,500 in sales per square foot, their operating expenses is very high. It is estimated that the retail segment's operating margin was 16.9 percent for the year, compared with 18.4 percent for Apple overallviii. Research and Development To create truly differentiated products with high benefits and high barriers to imitate Apples strategy, the company has continuously maintained high investment into R&D. Apples R&D spending is focused on further development of new and existing product lines, and strengthening the connectivity between their devices and solutions. The company has consistently spent a larger percentage of its revenues and more in absolute dollars on R&D compared to Dell. Apples R&D spending in the year ending Sept-2004 was 5.93% of annual sales, compared to 0.94% for Dells year ending Jan-2005. Apple invested 3-4 times in R&D as a percentage of their revenue in subsequent years, with the latest year ending at 3.41% (or $1.11B) for Apple against 1.09% (or $0.67B) for Dell. (Exhibit R&D Expenditure and Ratios) The higher R&D enables the company to differentiate themselves by having highly customized complementary products, with the tradeoff of higher R&D expenses. So what are these R&D expenses being allotted to? Product design Apple figures out what kind of designs consumers will most want from the devices, and engineers those devices to

8 PC Industry Analysis

deliver such requirements immediately. The First thing is the stylish exterior. Apple adopted bold design features such as the aluminum unibody and the sleek lines that attracted thousands of fashion fans. Besides that, equally important are the hidden designs, such as compatibility of the software and hardware, which provide trouble free experiences to the customers. Apple has successfully capitalized on the convergence of the PC, digital music player and mobile communications products by creating and refining innovations, such as the iPod, iPhone, and software applications such as iTunes that bring such devices together. Apple product leadership begins with its great look, ease of use, and is further enhanced by the seamless integration between product categories. Complements To create an exclusive experience and lifestyle to loyal customers, Apple has developed a series of complementary products, linked together with their proprietary software. Apple participates in several highly competitive markets, including PCs with its Mac line of personal computers, consumer electronics with its iPod product families, mobile communications with its iPhone, and distribution of third-party digital content through its online iTunes Store. While the company is widely recognized as a leading innovator in the PC and consumer electronics markets as well as a leader in the emerging market for distribution of digital content, these markets are highly competitive. However, Apple is able to operate competitively in each segment due to its strong brand, its simple design of its products, and integration across product categories. Apples well-known strategy is its walled-garden approach to devices, software, and content. The walled-garden phrase refers to Apples proprietary features that limit interactivity with nonApple products.ix For example, the Mac operating system is not available on non-Apple PCs, and

9 PC Industry Analysis

while the company also actively markets their iPods/iPhones products to non-Mac users by ensuring compatibility with Windows based PCs, the only software option to control these devices is Apples proprietary iTunes software. The iPod/iPhone combination with iTunes on a Windows PC represents an extension of the walled garden beyond Mac computers, as the software and the iPod/iPhone devices are interdependent. The iPod/iPhone in-turn become drivers for their other services such as iTunes and the App Store, a service created by Apple that allows users to download software applications for the iPod/iPhone developed by Apple and other third-party developers. As of June 2009, Apple has sold over 120 million iPods. Through the iTunes Store, it has the largest library of content available in the world for sale to customers, more than 5 million songs, over 500 movies, and hundreds of TV shows. x As of September 2009, there are over 85,000 third-party applications officially available on the App Store, with over 2 billion total downloads.xi Apple effectively ties together their complementary products and services to enhance the entire Apple experience, as well as to lock in its customers across their various interfaces. Apples Mac sales were lagging at only 3.0% growth in 2002 and -0.9% growth in 2003. However, in subsequent years after the iPod had gained momentum in its sales, growth of Mac sales had also picked up to achieve 38.4% year-on-year growth in 2008, or a CAGR of 21.2% between 2002 and 2008 (Exhibit 3). Developing complementary products also allows Apple to achieve economies of scope in R&D expenses. The operating systems for Apples iPod/iPhone are derived from the Mac OS, and the iPod Touch and iPhone devices are extremely similar in design and capability aside from the difference that iPhones have cellular phone capability. This adapting of existing knowledge and technology saves Apple in R&D expenditure.

10 PC Industry Analysis

DELL Positioning Dell achieved significant success from 1998 until 2006 as it positioned itself as a focused, low-cost company with a narrow scope. The success of the company was evident through its revenue CAGR of 20.8% versus 11.1% for HP, Dells most formidable competitor at the time. The personal computers that Dell was able to provide at a low-price created a significant competitive advantage for Dell and led to average operating margins of 8.8% from 1998 to 2006 for Dell versus 5.3% for HP (See Exhibit X). Competitors were not able to provide the same quality product as Dell for such a low price from 1998 to 2006. In 2006, Dells position remained the same; however, its competitive advantage had diminished significantly. Previously, Dell had attributed part of its competitive advantage by allowing consumers the opportunity to customize their personal computers. Customization decreased in importance for consumersxii and customized computers were not an option when consumers began purchasing Dell computers in retail stores in 2007. Companies such as HP, Acer and Lenovo were able to provide products of similar quality at a price at least equal to that of Dell. The competitive marketplace created a price war, which caused Dell to decrease prices to match that of its competition, in turn significantly decreasing Dells margins. Dells cost structure had remained the same; however, prices reductions by competitors forced Dell to decrease prices, which reduced margins. In 2009, Dells average selling price (revenue per unit sold) decreased 7% compared to 2008. Dell has become a low performer with 2006 to 2008 revenue CAGR of 4.7% versus 13.6% for HP. Dells operating margins averaged 6.3% versus

11 PC Industry Analysis

8.1% for HP from 2006 to 2008, which was further evidence of Dells reduced competitive advantage. Decreased advantage in the direct distribution model (Throughout the years, Dells strength has been selling commoditized IT products through its direct distribution model, and given that most proprietary technology goes through a commoditization phase1), Dell was well-positioned to be a sustained leader in PC sales as long as its competitors could not imitate this model. As the market place for PCs grew, competitors began improving operations and supply chains, and soon enough, Dell began losing this competitive advantage and in turn started losing market share. (The direct distribution model allowed Dell to create a more efficient and cost effective supply chain that, according to Dell, gave them a 15-point cost advantage over its competitors which could be passed on to customers in the form of lower prices2.) Historically, competitors could not match this model if they expected to earn a profit. Dells direct distribution model also allowed for faster turnover of inventory, a faster cash conversion cycle, as well as customizations to fit customer preferences. Dells direct distribution model helped it become the dominant player in the PC market until competitors began imitating this process to create computers with a similar cost structure and efficiency. For example, in 2008 Apples inventory turnover ratio was equal to that of Dells at 42 days (Exhibit X). In addition Apples cash conversion cycle was -33 days vs. -30 days for Dell (Exhibit X). Another key advantage of the direct distribution model was the ability to take advantage of steeply declining component prices, which have decelerated and caused Dells margins to decrease. Component prices have historically declined 50 to 100 basis points per week;
Comment [PD3]: Do we want to talk about Dell versus HP instead here? We ve been comparing Dell to HP the whole time in this section until now.

12 PC Industry Analysis

however, these price declines have decelerated to approximately 30 to 50 basis points per week (Cowen 2006 p. 5). Declining prices had been to the benefit of Dell as it could quickly transfer cost savings to consumer and increase its own profit margins due to the companys low inventory turn of just over 7 days (Dell, 2009 10-K). Decelerating prices have caused Dell to not experience the significant margin increases it previously experienced simply from large declines in component prices. The deceleration of component prices coupled with prices wars have been factors in Dells margins decreasing from 8.6% in 2005 to 5.2% in 2009. Value chain activities Dells low R&D spending along with a lack of emphasis on changing consumer preferences towards laptops, unique designs and higher customer service, led to a loss of market share to more innovative competitors. Dell chose to focus on operations activities within the value chain to support their strategic position of being a low-cost player. This strategy worked as long as consumer preferences were homogeneous; however, Dells choice of activities to support their position as a low-cost provider impeded their pursuit of differentiating consumer demands for innovation. Dell experienced strong revenue growth and solid profit margins from 1998 to 2006 primarily due to the success of its desktop computer, but the change in consumer preferences from desktops to laptops has resulted in decreased revenue growth and margins. Dells operation activities were primarily focused on the manufacturing of desktops versus laptops. As a result, the companys supply chain for desktops was far more efficient than its supply chain for notebooks, which means higher profit margins on desktops than notebooks3. In the past four quarters, the personal computer market has experienced a decline in demand for desktops, while

13 PC Industry Analysis

notebooks have experienced growth4. In 2009, it is predicted that the global personal computer industry will experience a unit decline of 5%, while in 2010 the industry is expected to grow 5.4% with strong growth by notebooks3. As the personal computer market has changed and sales of notebooks have increased, Dell does not have the same advantages it had from desktop sales so margins its margins have decreased. In addition, Dell was not able to meet consumer preferences for unique designs and higher end proprietary technology due to its lower investment in R&D compared to its competitors (Exhibit X). Dells focus on logistics and standardization and low spending on R&D gave it a cost advantage in comparison to its competitors initially, but the trade-off was Dell could not differentiate without increasing costs. This meant that Dell had left the market open for competitors to take market share (Exhibit X), which was evident through Dells decline in revenue growth versus that of its peers (Exhibit X). (From 2005 to 2007, HPs unit share of the global notebook market increased from 16.0% to 21.4%, while Dells share declined from 17.6% to 14.0%2. In the consumer market, HPs share went from 14.4% to 19.4%, while Dells share declined from 12.7% to 8.3%2). (Coupled with the low R&D investments, Dell had also become complacent with its market share, and believed its direct distribution model could not be matched). (As a result, Dells service rankings began to drop and its designs began to look bland in comparison to its competitors such as Apple and HP). (In April of 2009, Dell had low PC customer service rankings of 58x compared to Apple which received a score of 80x). Complements Dell diversified into complements that fit into their low-cost strategy; however, these complements do not provide opportunities to differentiate. It is not possible for a firm to be a

14 PC Industry Analysis

low-cost provider and differentiate unless the costs of differentiation are low. In this case, differentiation requires high R&D spending, but this was mutually exclusive to Dells decision to be a low-cost provider. The competitive nature of the market necessitated high R&D spending in order to differentiate commodity products meaningfully. Dell diversified by using its supply chain and distribution network expertise to partner with companies such as Sony, Canon, Western Digital, Nokia, Microsoft, Logitech, etc. to sell complimentary products. These complimentary products are sold both under the Dell name, as well as vendor names, and include printers, monitors, televisions, projectors, servers, handheld devices, etc. (Dells strategy for its complementary products was similar to its production operation strategy of selling PCs, where in they focused on standardization and logistics while leveraging its partners R&D and investments in market development to sell commoditized products2.) While this strategy of selling commodity products allows Dell to focus on their expertise in standardization and logistics, the trade-off is that Dell will always remain in a highly competitive market place susceptible to price wars, similar to PCs, where there are many rivals that are catching up in supply chain efficiency and pricing. Approach to Complements The approach each company took to diversification and choice of Ccomplements largely explains the variance between Dell and Apples performance in recent years. Dell had achieved remarkable success in the PC market through its ability to assemble and distribute computers at a lower cost than any of its competitors. As such, when seeking to continue rapid growth, it was natural that Dell would seek economies of scope by applying its this low-cost approach to a wide range of other consumer electronic devices. Natural extensions

15 PC Industry Analysis

of Dells strategy included offering printers and televisions to consumers and commercial items such as servers and storage to business users. For a period of time, this approach was successful. Between 199X and 200X, Dell held significant market share in a range of electronic devices. As their ability to assemble and distribute at low costs was so much greater than that of its competitors, for a time Dell was able to secure relatively high margins even at comparatively low prices. Over time, however, the PC industry structure changed. International competitors entered the market with significantly lower labor costs and a willingness to sacrifice profit margins for market share in the short-run. International competition among suppliers and advances in technology drove down the cost of raw materials, also contributing to a reduction in price. Dells found the efficiency of its much-vaunted supply chain a key element of their competitive advantage - being replicated by rivals. By 2008, even Apple, a higher-priced competitor, matched Dell on the key efficiency metric of inventory turns. These factors led Dell CEO Michael Dell acknowledge in 2008 that it is fair to say that as we got to the end of that 10-year period, our strategy wasnt working as well as it had previously. Moreover, as we evolved we lost focus and allowed our cost structure to become non-competitive.xiii When combined with a downturn in the global economy and the resulting reduction in discretionary spending by consumers or IT investments by companies, the extent of Dells vulnerability became very apparent. Ironically, ever since being named as Most Admired Company in 2005, its stock price has been steadily falling. xiv

16 PC Industry Analysis

While Dell incorrectly believing its cost structure would give an unassailable competitive advantage - chose to participate in product categories with high competition, low degrees of differentiation and that did little to not drive their collective sales performance, Apple chose a very different strategy for its choice of product mix. Apple pursued the creation of an overall experience for the user by developing complements that were differentiated, interdependent and interoperable. This strategy drove sales and created significant barriers to entry for their competitors. It is important to consider the context in which Apples strategy emerged. To a large extent, Apples strategy was developed as a result of external conditions at the time, and continued to evolve incrementally over time. 2000-2001 saw the phenomenal growth of a range of free, peerto-peer, music file-sharing platforms, such as Napster and Kazaa. From aits launch in early 2000, Napster had there were approximately 14 million unique users of Napster in the US alone by March 2001 and a further 13 million around the world. xv This development constituted a severe threat to the viability of the music industry as its companies the record labels and artists were dependent on royalties from sales of CDs. As a result, A&M Records and several other recording companies sued Napster for contributory and vicarious copyright infringement. A&M won the case, eventually forcing Napster to shut down service and declare bankruptcy in 2002. Apple seized upon the clear demand for digital media that could be accessed in a convenient, affordable way by consumers. In January 2001, Apple released iTunes, a free software interface for managing digital media. Over time, iTunes would prove to be the common platform that bound Apples complementary products together smoothly, resulting in increased sales and high
Comment [SM6]: And legal? Comment [SM5]: Too much detail on Napster maybe?? Comment [SM4]: How?

17 PC Industry Analysis

margins across multiple products. By June 2008, iTunes had been downloaded more than 5 Billion times.xvi In 2001, considering existing digital music players to be big and clunky or small and useless, with user interfaces that were unbelievably uselessxvii, Apple released the first version of the iPod. Users used iTunes as a central system to manage their digital music; with the release of ITunes v2, users could synchronize their iPods with the music on their PCs. Parallel with the release of the iPod, Apple invested in its differentiation strategy by opening the first Apple retail stores. The retail stores were staffed by hipsters who were passionate and knowledgeable about Apple products. The stores were designed to provide a high-tech, aesthetically pleasing experience for consumers while allowing them to test out Apples products. Although Apple continued to sell its products through shared retail outlets (such as Best Buy), many consumers chose to go to the Apple retail stores. In 2008, 19% of Apples sales were conducted through their proprietary retail stores.xviii In 2003, in response to the unmet consumer demand left by the collapse of the free file-sharing services, Apple launched the iTunes iStore. Customers could buy songs (and later other media) for less than a dollar per unit through the iStore and synchronize their personal music collections onto their iPods. Although the iPod was considered to be a success initially, few could have predicted the growth that would come after the launch of the iStore in 2003. Total iPod sales went from approximately 2 million in Q1 2004 to over 140 million by Q1 2008 and more than 220 million by Q3 2009.xix In 2007, Apple responded to the increasing convergence of technology by launching the iPhone. Apples success in combining phone, internet, email, digital media and enabling a high degree of

Comment [SM7]: This seems like a big leap of faith!

18 PC Industry Analysis

user-customization on a single attractive device led to another incredibly successful product. As well as being able to directly download media onto the iPhone, users could now also download their choice of millions of applications. As with media files, for each application sold, Apples earns money, regardless of whether they developed the application or whether it was invented by a third party. The iPhone is synchronized with the data on a users PC using an interface on iTunes. Sales of iPods, digital media, iPhones and iPhone applicationsxx have grown rapidly since their introduction to the market. Having developed superior and differentiated products, Apple invested more heavily than its competitors in marketing, both in absolute dollar terms and as a percentage of net income. (Insert statistics) The result was a dominant market share in the digital music and mobile music marketsxxi and a rapidly growing market share in the mobile phone/smart phone market. xxii The shared platform of iTunes for both the iPod and iPhone, and investments in cross-marketing through the Apple Retail Store experience, meant that when the time came to buy a new PC a much higher priced and more competitive market than digital music devices or smart phones. Furthermore, due to the differentiated customer experience and compatibility it could offer, Apples brand was gaining value much faster than any of its rivals. (Apples brand gained 12% in the Interbrand report between 2008 and 2009; Dells brand lost 12% of its valuexxiii) In the mature and competitive market for PCs, while adopting a high price point in a poor economy, Apple has gained market share steadily in the past four years. In terms of year-on-year percentage growth of sales volume, Dells volume grew by 26% between 2004 and 2007, while Apples volume increased by 116%.xxiv Furthermore, Apple has managed to grow while maintaining high profit margins: although the total volume of sales for Apples PCs is only 16%

19 PC Industry Analysis

of the volume of sales of the lower priced and more highly differentiated iPods, for example, PC sales represented 43% of Apples Net Income in 2008.xxv Such is the sales volume for iPods that if only 3% of those people who purchased an iPod appreciated their overall experience with Apple enough to make Apple their preferred brand for their next PC purchase, this would explain the entire growth rate of Apples PC business. In summary, Dell chose complements products that were poorly differentiated and subject to significant price competition. As prices were driven down, Dells margins were squeezed in turn making it more difficult to increase investment in R&D and marketing to increase differentiation: a downward spiral. In contrast, betting on a future of integrated and interoperable devices, Apple created a common software platform. Industry-leading investments in R&D and marketing were rewarded with breakthrough, differentiated products that were mutually reinforcing from a compatibility, brand and, ultimately, cross-sales perspective. <It would be great to insert a series of charts here, showing various industries with Apple and Dells profits against the industry as a whole. I think the contrast of choice of products and performance relative to the market would be very interesting. >

20 PC Industry Analysis

Exhibit 1
High Performer Apple 40.7% 49.1% 93.9% 20.7% 34.3% 2.8% 12.1% Low Performer Dell 10.2% 11.5% 2.6% 6.9% 19.1% 12.7% 8.5%

2004 - 2008 Revenue CAGR 2004 - 2008 Gross Profit CAGR 2004 - 2008 EBITDA CAGR 2008 EBITDA Margin 2008 Gross Margin 2004 Return on Assets 2008 Return on Assets

Difference 30.5% 37.6% 91.3% 13.8% 15.2% -9.9% 3.6%

Exhibit 2

21 PC Industry Analysis

Price Comparison, Source: William Blair & Company Equity Report, September 2, 2009 Exhibit 3

Source: Factset

Exhibit 4

22 PC Industry Analysis

Computer & Peripheral Manufacturing in the US: 33411- IBISWorld report http://www.intel.com/museum/corporatetimeline/ iii http://blogs.zdnet.com/gadgetreviews/?p=3347 iv http://0-www.mergentonline.com.lib.bus.umich.edu/compdetail.asp?company=4396&type=competitors v http://www.uri.edu/personal/mdee4037/MainPage.html vi http://online.wsj.com/article/SB125353092801427455.html vii http://www.experiencefestival.com/a/Apple_Computer_-_User_culture/id/4800043. viii http://brainstormtech.blogs.fortune.cnn.com/2008/01/07/report-apple-stores-outperform-best-buy-saks-andtiffany/ ix William Blair & Company Equity Report, September 2, 2009 x Apple Inc. - Financial and Strategic Analysis Review, Global Markets Review, Reference Code: GMDTC27353FSA, Oct 2009 xi www.apple.com/pr/library/2009/09/28appstore.html xii Credit Suisse, 2008, p. 5 xiii Dell, Inc in 2009 , Ivey Case Study, p.12 xiv Dell, inc, in 2009 , HBS Article, p. 13, Exhibit 1 xv Jupiter Media Metrix (July 20, 2001). Global Napster Usage Plummets, But New File-Sharing Alternatives Gaining Ground. Press Release. xvi iTunes Store Tops Five Billion Songs, Apple Inc., 2008-06-19. Retrieved on 2008-09-03. xvii Kahney, Leander.Straight Dope on the iPod's Birth, Wired News, 2006-10-17. Retrieved on 2006-10-30. xviii Apple, Inc, in 2008 , HBS Article, p.17, Exhibit 1b xix "Liveblog: "Rock and Roll" Apple iPod Event". Ars Technica. September 9, 2009. http://arstechnica.com/apple/news/2009/09/liveblog-rock-and-roll-apple-ipod-event.ars. Retrieved 2009-09-09. xx More than a billion applications have been downloaded already. http://features.csmonitor.com/innovation/2009/04/23/one-billion-iphone-apps-but-how-many-are-worthdownloading/ xxi iPod held 73.8% of market share in September 2009, for all portable media players. http://www.afterdawn.com/news/archive/19294.cfm xxii iPhone s market share went from 5.3% in Q1 2008 to 10.8% in Q1 2009. http://news.cnet.com/8301-13579_310245339-37.html xxiii http://www.interbrand.com/best_global_brands.aspx xxiv Apple, Inc, in 2008 , HBS Article, p. 21, Exhibit 6 xxv Ibid, pp. 16 and 21, Exhibits 1 and 6
ii