Defensive Strategy – Apple's Overlooked Key to Success

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Defensive Strategy – Apple’s Overlooked Key To Success

Sharam Sadeghi

Published by: epubli GmbH, Berlin,

Copyright: © 2012 Sharam Sadeghi, All rights reserved.

ISBN 978-3-8442-3143-4


Copyright: © 2012 Sharam Sadeghi, All rights reserved.

Cover picture copyright: © O2creationz/

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copy right owner.

Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners.


Sharam Sadeghi, the author of this eBook, is a sales and marketing professional with proven success in driving marketing strategies and execution at Fortune Global 500 companies: His career started at The Coca-Cola Company, before he moved to Sony, LG Electronics and Vodafone in Germany. His marketing expertise spans the full marketing mix spectrum with key responsibilities in product marketing, brand management and direct marketing.

Defensive Strategy – Apple’s Overlooked Key to Success is the topic of his Master Thesis to complete the two-year’s Executive MBA program in August 2012, held at Northwestern University’s Kellogg School of Management in partnership with WHU-Otto Beisheim School of Management.

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Tim Calkins, the supervisor of this publication, is clinical professor of marketing at Northwestern University’s Kellogg School of Management. Tim teaches marketing strategy, biomedical marketing and strategic marketing decisions in Kellogg’s full-time, part-time and executive MBA programs. He is co-academic director of Kellogg’s branding program.

He is the author of Defending Your Brand: How Smart Companies Use Defensive Strategy to Deal with Competitive Attacks (Palgrave Macmillan, 2012) and Breakthrough Marketing Plans (Palgrave Macmillan, 2008). He is co-editor of Kellogg on Branding (John Wiley & Sons, 2005). Tim has published more than a dozen Kellogg case studies including Crestor, MedImmune: FluMist Introduction and Genzyme: the Synvisc-One Investment Decision.

“Stay hungry! Stay foolish!”

Table of Contents

1. Defensive Strategy – Introduction...

2. Defensive Strategy – The Apple Way of (i)Defense..

2.1 A Company in Transformation: From Apple Computer, Inc. to Apple Inc.

2.2 Let The Music Play – Apple’s “Digital Hub Strategy”.

2.3 iDefend – How Apple Succeeds to Defend its Position Successfully.

2.3.1 Create a vertical product line that meets different customer needs!

2.3.2 Play a price orchestra along the product line to lock out competition!

2.3.3 Welcome to Troy: Create an ecosystem that works seamlessly!

2.3.4 Know what is best for your customer, make them want it and keep them!

2.3.5 Eat up resources your competitor might need and weaken their ability to maneuver!

2.3.6 Revolutionize your Supply Chain Management to increase efficiency & flexibility!

2.3.7 Create direct access to your customers via own retail stores!

2.3.8 Build up a patent wall & use your intellectual property as defensive assets!

2.3.9 Strengthen your financials to strengthen your fortress!

2.3.10 Create a fluid, agile organization and be mystical about it!

2.4 (i)Defend – The Apple Conclusion.

3. Defensive Strategy – The Theories Behind the Concept..

3.1 What Is Defensive Strategy & Why Does It Matter?.

3.2 Why Companies Fail to Defend?.

3.3 Which Defensive Strategy Should a Company Consider?.

3.4 How to Defend Effectively?.

4. Defensive Strategy – Summary..

5. Acknowledgements.

6. References.

Table of Figures

Figure 1: Apple’s Revenue Split Traditional Sales vs. post-PC Device Sales (2002-2011)

Figure 2: Worldwide Revenue Development of the Music Industry (2001-2011)

Figure 3: Worldwide Shipment of Portable Media Players (2005-2012)

Figure 4: Apple’s Advertising-to-Net Sales Ratio (2002-2011)

Figure 5: Apple’s Unit Sales by Category (2002-2011)

Figure 6: DRAMeXchange: Supply/Demand Sufficiency Ratio.

Figure 7: Quarterly Profit Margin Development Apple vs. Foxconn.

Figure 8: Apple Retail’s Net Sales Development (2003-2011)

Figure 9: Choosing the Right Defensive Strategy (by John H. Roberts)

Figure 10: Value and Vulnerability (by John H. Roberts)

1. Defensive Strategy – Introduction

In times, in which economic growth slows down, resources become scarce, costs of energy explode, technological resources proliferate, consumers’ behavior changes, and desire for mobility in all aspects increases, companies become increasingly challenged to protect their growth expectations and profitability in an intensely competitive environment. As a result, organizations aim to maintain their profitability at the expense of competing rivals in the same market place, offering similar products and services. This attempt requires the organizations to shift their focus towards market share gains rather than approaching market growth gains[1] – a step, which often includes sacrificing profitability at the end. In this gameplay, usually the market leader is the one to expect direct attacks from either existing competitors in the same category, or new entrants that improved their distinctiveness and relative competitive advantage to the incumbent. Responding to such threats is called defensive strategy, helping the incumbent to protect and maintain its market position.

As the Walkman generation, we have been witness to how an iconic and innovative brand, as Sony originally was perceived, has dramatically lost its leading position in almost all business areas it dominated from the 1980s, until mid-1990s. One could have assumed that Sony, with its unique structure as a conglomerate, holding an entertainment business (music, movies, games), a consumer electronics business, including mobile phones, and other services (financial services etc.) under one roof, has the invincible position to concentrate the synergies and offer integrated and innovative products and services from a single source, leaving other competitors far behind. The reality at hand is, that the company that once defined Japan’s technological prowess is now in fight; it is in fight to remain alive: Mr Kazu Hirai, the new CEO as of April 2012, and successor to Howard Stringer, has a truly tough starting position to strive for substantial change, while respecting the company’s heritage. For its closing fiscal year of 2011/12, Sony has (again) announced a record net loss of $5.7 billion. Since the beginning of the year 2012, the company’s share price has dropped by 12 percent in May of the same year, which is equivalent to a market value of $15 billion, or just three percent of Apple’s value.[2]


What happened to the rising star?

It appears that Sony failed to respond effectively, or even missed to foresee the changing environment, while strong competitors entered the same field, armed with disruptive technologies, innovative products, well thought-through value chains, and lastly marketing strategies letting the erstwhile desired brand of the “It’s a Sony!” generation appear old-fashioned, less innovative and not worth paying the premium price for, today. One by one, Sony lost its leading position in almost every category it competed in, be it hardware, software or content: The company had to see Samsung taking the lead in the TV business, while Apple took over the pole position with its digital content fortress and undefeated ecosystem in the music and mobile devices category. In the segment of game consoles, the company has surprisingly lost ground to Nintendo and Microsoft, but, could meanwhile recover through price cuts of its Playstation3 by sacrificing profit at the same time.[3] In the mobile and smartphone business, the company decided, in October 2011, to try a re-start and to leave the joint venture with Ericsson, and focus on the smartphone business only.[4]

The objective of this work is to examine, why having a defense system in place, for immediate and appropriate response, is crucial for successful companies to sustain their profitability and position in the market at the same time. We will further analyze why leading incumbents fail to respond to offensive threats and lose their right to exist. Moreover, we will discuss the defensive strategies and tactics a company might utilize, when under attack. To visualize the need for and the effectiveness of successful defensive strategies, we will start with Apple as the best practice example.

Why Apple?

The company from Cupertino gets a lot of credit for being an innovative and cool brand. The purity in design, seamless interaction between hardware and software, as well as, the unique user-experience are usually its top-three key success factors highlighted. But, while that might be true, it is not the real secret behind its success: The underestimated and often overlooked truth lies in the way of how Apple protects its innovations. Along the example, we will focus on its iPod and iTunes business and discuss how Apple obtained the lead in both, the digital music market, and digital media player segment at the same time. Furthermore, we will analyze the tactics of how the Cupertino-based company has succeeded in retaining its leading position in both segments, which helped Apple on its way to become the business world’s most valuable brand of today.

2. Defensive Strategy – The Apple Way of (i)Defense

In 2011, Apple sold 147 million post-PC devices (iPod, iPhone, and iPad), accounting for 75% of the company’s annual revenue (including sales from related products and services). With $6.3 billion, the iTunes store contributes 6% of Apple’s total net sales,[5] where we can already assume a prospective growth potential in correlation with the increased sales of the post-PC device category on one, and penetration of the iTunes software installment base on the other side. By the end of 2011, the company counted 357 own retail stores, generating $14.13 billion revenue, that is 13% of its total sales revenue.[6] The reported net income in the fiscal year 2011 was $25.9 billion, equivalent to an increase of +85% vs. fiscal year 2010.[7] Finally, with a market cap of about $500 billion, Apple is more valuable than Exxon Mobil by $100 billion, as reported by Fortune magazine in its June 2012 issue.[8]

The success story of Apple is a story of a company that has revolutionized a variety of industries, from personal computers, music, mobile phones, tablet computing, digital publishing, and mono-brand retail business. It has achieved this position by attacking the core of an existing segment (e.g. portable music devices and legal digital music distribution), or by creating a new, redefined segment (e.g. smartphones, tablets). At the same time, the success in existing and new categories increases the company’s vulnerability through a number of different flanks that will and already have become targets of competition from a variety of industries. Thus, the company is only able to sustain its leading position by having the right defense strategies and tactics implemented to protect its diverse flanks.

In the further course of this work, we will focus on the era from 2001 until today, and examine the defensive moves Apple has taken to protect its business. Here, we will focus mainly on its iPod category (including the business generated by the iTunes Store) that represented nearly 50% of Apple’s sales revenue in 2006, before iPhone was launched in 2007. As we will see, most of the key strategic moves and tactical patterns that helped Apple to strengthen its iPod business are now protecting its post-PC fortress, including the iPhone and iPad category. To understand why the company is there, where it is today, it is essential to know where it came from.

2.1 A Company in Transformation: From Apple Computer, Inc. to Apple Inc.

“Victory in our industry is spelled survival. The way we’re going to survive is to innovate our way out of this.” Steve Jobs, Interview with TIME in 2001

Apple Computer, Inc. was officially founded by Steven Paul Jobs, a 21-year-old college dropout working at Atari, and Steve “Woz” Wozniak, a 26-year-old employee of Hewlett-Packard, on April 1, 1976. Ronald Wayne, a third founder, left the company, after less than two weeks. He sold his share of the newly created company for just $800, three months after its inception.[9] Both, “Woz” as the technical genius, and Jobs as the creative and visionary mind, created the foundation of what is known today as the most desirable and successful brand in business history.

The first product of the newly formed company was Apple I, a computer that was hand-built by co-founder Steve Wozniak in Steve Jobs’ parents’ garage and first introduced in 1976. More than 200 units of Apple I were sold as a kit for $666.[10] In the following year, in April 1977, Apple II, a further improved version of the first Apple Computer, was introduced as a more elaborate and cosmetically polished machine looking more like a conventional PC.[11] Inspired by what Jobs had seen during his visit of Xerox’s PARC research lab in Palo Alto, California in 1979, Apple introduced Lisa in January 1983, a computer with features and, for the first time, a user-friendly graphical user interface (GUI) that later became standard. However, being launched at a premium price of $10,000 Lisa failed to penetrate the market and thus lacked commercial success. In January 1984, the first Apple computer was introduced under the name Macintosh, at a price of $2,495. It was the first affordable personal computer, equipped with a GUI and innovative operating system, the Mac OS. The launch of the “insanely great” product, a terminology often used by Jobs to characterize the uniqueness of Apple products, was accompanied by a prominent Superbowl ad, directed by Ridley Scott, who is known as the director of the Hollywood blockbuster movie Alien.[12]

The Macintosh became a real success. With its simplicity and plug-and-play approach, it offered a complete desktop solution to its customers. The growing PC market, at the time, was driven by IBM and compatible products. At the same time, prices for hardware started to drop constantly, making Apple appear as overpriced to customers. As a reaction to this development, John Scully, Apple’s new CEO who had been brought in by Jobs himself in 1985, attempted to move the company into the mainstream market, by becoming a low-cost producer, attracting the mass market. The disagreement regarding the “new” strategy driven by Scully, led to Steve Jobs being forced to leave the company in 1985. As a result of turbulent business performance, Michael Spindler was announced to replace Scully as CEO in 1993. Spindler changed Scully’s direction, started licensing to various companies to produce Mac clones (away from the original DNA), focused on cost-cutting, and fell behind against Microsoft’s Windows OS.[13] In 1996, Michael Spindler, the “vision-free” successor of Scully, was replaced by the third, “post-Jobs” CEO, Gilbert Amelio. Without Jobs, Apple was dramatically failing, especially enforced by the inconsistency and missing commitment to a clear (long-term) strategy. Scully, Spindler and Amelio were not able to turn around the company, which resulted in over $1.6 billion losses for Apple, in fiscal year 1996-’97. Gil Amelio, the CEO at the time, was not even able to sell the company, as deals with potential buyers, IBM and Sun Microsystems, fell through. Apple was about to run out of cash and into bankruptcy. Amelio, however, made a great move, as he paid $400 million to acquire NeXT, Steve Job’s next company, after he had left Apple in 1985. The software and patent properties, attached to the acquisition, set the foundation for the upcoming and successful operating system of the new Macs of today. But, more importantly, he could convince Jobs to join Apple again as interim CEO and advisor in 1997, to become the official CEO three years later, in 2000.

Steve Jobs was straight forward to set the milestones in order to turn around the company and find the right answers to the tough competition – at this stage in an offensive way: He dumped board members, reduced Apple’s product line by killing unprofitable and irrelevant product lines and focused on only few categories, mainly desktop and portable Macs for consumer and professional markets; furthermore, he changed the distribution scheme away from smaller outlets to national chains, introduced the new Apple website, offering direct sales to customers via Apple Store (online) and increased focus and investment on R&D and innovation. Another bold step was the announcement during Macworld Expo in 1997 that rival Microsoft would invest $150 million in Apple and commit to develop Microsoft core products for Mac that included Microsoft Office. The story went on with the roll out of the high awareness creating massive campaign “Think Different”.[14]

In 1998, the first commercial success after Job’s return came with the launch of the all-in-one computer iMac, coming in different translucent candy colored cases.[15] A week after the new iMacs became available Apple announced its most recent quarterly earnings were three times, what they had been the year before.[16] In 2001, Apple made the move into retail and opened the first Apple retail store in McLean, Virginia. The purpose was clear: to give (new) customers the chance to experience Apple’s products and to convince them, why choosing a Mac over a more affordable Windows PC would be a better option. The traditional electronic retail business had continuously failed to deliver this accomplishment in favor of Apple. [17]


One more thing… happened in October 2001, when Apple entered the digital music player business with the iPod in response to the development in the market. Soon, it became the best-selling Apple product in volume, providing the brand with respectable leverage, and awareness among a new consumer group, which discovered Apple for the first time. The success further took off, when, in 2003, the iTunes music store was launched with the easy-to-use pricing concept of $0.99 per song; a million songs were sold after just one week, at a time, when the music industry was desperately looking for solutions to respond against the increasing number of illegal downloads, driven by platforms such as Napster (in its early stage). Already in 2008, iTunes surpassed Wal-Mart and was announced to become the number one music retailer in the US.[18] Another critical milestone of success for Apple was the shift to Intel CPUs from 2006 onwards: Not only was Apple able to produce iMacs and MacBooks to run faster with less power consumption, it additionally provided the opportunity to run both operating systems – Windows and MacOS – on the same device. This was a critical step to convince potential customers to switch from Windows-based PCs to Apple by lowering the consumers’ barrier to entry and switching costs (e.g. all acquired PC compatible software).

On January 9, 2007, Apple Computer, Inc. changed its name to Apple, Inc. “We are dropping the ‘computer’ from our name today… to reflect the product mix we have today,”[19] said Steve Jobs, during his first iPhone presentation at Macworld Expo, San Francisco. It was a short message at the end of his presentation that delivered a clear signal towards competitors. The name change reflected the company’s move from its previous core businesses – software and computer – to other industry segments in near future, where the competition would not remain Microsoft, or other PC manufacturers only. With this announcement, Apple decided to enter new categories, facing competition from established players. With the introduction of iPhone in the same year and launch of the iPad in 2010, Apple redefined existing categories in the telecommunication and mobile computing devices[20] and further stressed its move to a “post-PC device era”, as highlighted by Steve Jobs in his key note in March 2011 during the announcement of iPad2. With iOS as the innovative operating system of both devices, the App Store, iBook, Newsstand and the iCloud, the company expanded the digital user experience in the typical simplistic Apple manner.

By the end of fiscal year 2011/2012, the company’s revenue mix has been clearly shifted towards post-PC-devices: While 97% of company’s revenue was generated from Mac sales in 2002, it was only 25% of Apple’s total net sales by the end of fiscal year 2011, leaving 75% revenue contribution to the post-PC-device category (See Figure 1: Apple’s Revenue Split Traditional Sales vs. post-PC Device Sales).

Figure 1: Apple’s Revenue Split Traditional Sales vs. post-PC Device Sales (2002-2011)

Steve Jobs’ leadership qualities, and his influence on where Apple is now, are being discussed in dozens of publications. Following the topic of this paper, we will focus on some examples of how a company that had been attacked, and had seen the edge of bankruptcy in the 1990s, managed to come back, not only successfully, but, has defined new and highly profitable categories to the company that did not exist before.

As we will see in Chapter 3, offensive and defensive strategies come along together. Once a company attacks and achieves a leading position in the market, it attracts either new entrants, or direct competitors to join the same category, targeting the profit and market potential expected in this segment. This is, where strategies and the right tools need to be implemented in the organization to defend the obtained leading position that required high investment of resources. Although Apple delivered good examples of how it struggled to find the right defense options in its early years until 1997, we will highlight the defense success stories, focusing on its iPod business that has started in 2001 and has defined Apple’s explosive growth path. We will see that most of the strategies and tactics apply to the iPhone and iPad business as well, since the iPod was just the starting point of building up a strong ecosystem fortress, as part of a strategy and vision that Steve Jobs called “The Digital Hub Strategy”.

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