Strategy

Week 3

Competitive Advantage

Prof. Elie Sung

© Co py rig ht 20 25, E LI E S UNG Al l rig ht s res e rve d
 Agenda
- Competitive advantage

- Apple case:
- Overview of strategic decisions as they have appeared over time.
- Identify enduring and evolving sources of Apple’s competitive advantage
Competitive Advantage:
Willingness to Pay, Cost & Price

Customer
WTP - Cost
Price Value

Firm → Competitive Advantage

When greater than competition
Profit

Willingness Cost
To Pay
Generic strategies to achieve competitive advantage
Price Premium for a Unique Product Similar product at similar (or lower) price

WTP

WTP

WTP
WTP WTP Cost
Cost
Cost
Cost
Cost

Industry Differentiation Cost leadership Stuck-in-the- Dual advantage

average middle
W3: Apple
 Apple’s History

1976 • Steve Jobs and Steve Wozniak founded Apple Computer

• 200 units of Apple I made

1978 • Apple II released

• More than 100,000 Apple IIs sold

• Successful IPO
1980

Why was Apple II so successful?

What was the source of Apple’s competitive advantage?

 Competitive advantage through differentiation

• Strategy to add unique features to a product or a services that

increases the perceived value of those goods to customers so they are
willing to pay a higher price.

• Compete with rivals not on the basis of price but on perceived

value
Why did Apple’s fortunes change?
 The Economics of Operating Systems
(p5, Exhibit 3)
Assuming “price” for Mac OS = MS OS

Cost of developing a new OS $1 billion $1 billion

Unit price $45 - $60 $50
Breakeven volume 16-22 million units 20 million units
(17 million units sold in 8 weeks!)

Market share (2002) 98% 2%

Units sold (2002) ~130 million units ~3 million units
Time to breakeven About 8 weeks About 6 years !
Estimated profit over 6 years 130 x 6 x 50 – 1,000= $38 billion $0
Sculley’s strategy Splinder’s strategy Amelio’s strategy
- Premium market: - Both alliances - Premium price
$10,000 PC killed/died differentiation

- Mass market: new - Apple licensing plan to - Buys NexT Software

$999 PC make Mac clones (focus (Jobs)
on international growth)

- Hit products - Plan to develop new OS

(R&D 9%) - Cuts 16% workforce
- Alliance with Intel for
microprocessor
- Alliance with IBM for a
new (closed) OS
Differentiation? Cost Leadership
(inconsistent with traditional Back to
Cost-Leadership? customer base.
(lacked internal consistency) Deteriorates WTP too much.) Differentiation
(without tackling cost problem)
 Learning Curve
Unit cost

Origin
Cn V
log = k. log n Empirical research on the cost of
C0 Co Vo
manufacturing airplanes
log (1-k) conducted in the 1930s
Cn with k =
log 2
Reference
Boston Consulting Group, 1975
V0 Vn Cumulated
volume
The message
Log (Unit cost)
As the cumulative production of a
C0 product doubles, the cost of producing
it decreases by a constant percentage
Cn
(15% < k < 30%)

V0 Vn Log (Cumulated
volume)
 The Economics of Microprocessors

(Exhibit 4, Exhibit 6)
Learning curve: As the cumulative
production of a product doubles, the
cost of producing it decreases by a
constant percentage (15% < k < 30%)

Cumulative production 2004 1,433 million 36.2 million

Intel produces 39 times larger volume (~ × 25 ) than PowerPC

Unit cost $14 billion / 170 units = $ 80 𝐶𝑝𝑝𝑐

(assumption: k=25% )
𝐶𝑝𝑝𝑐 × 0.75 5 = 0.237 𝐶𝑝𝑝𝑐 = $ 80 𝐶𝑝𝑝𝑐 = $ 338

Unit price 34 billion / $170 units = $ 200 Should be higher than $ 338
 Steve Job’s strategy
- Buy microprocessor from Intel (solves quality and cost issues)

- New Operating system ($1B, risky but it is the source of competitive advantage)

- Proprietary set of applications (also compatible with Windows applications)

- Stops licensing for clones (enables differentiation)

- Opens Apple retail stores (enables differentiation)

Differentiation
(and tackling cost issue without deteriorating WTP)
Results of the Job’s strategy
Yet, the timing of strategic moves can be
just as important as the content

2005: Apple announce switch from

Motorola and IBM CPU to Intel

iPod / iTunes business was booming =

Buffer that did not exist 2 years before
In summary

• Having a better product ≠ having a competitive advantage

• Product advantage alone is difficult to sustain over time

• Two “generic strategies”: Differentiation and Cost-Leadership

• Cost and WTP must always be considered jointly
• E.g. Economics of Operating Systems
• Apple ≠ Hermes. They have fixed costs! So needs volume.

• Understand industry dynamics

• Identify pressure points in the industry & changes over time
• Understand their strategic implications
Where does Apple’s revenue come from?

Proportion

52.3%
7.7%
7.4%
10.4%
22.2%
100.0%
Apple developing its own processor for Mac (2020)
Group project – now available on Blackboard:

• Final groups

• Tentative schedule for Week 8 presentations

• Guidelines

• Week 12 – 2 options:
• In-person presentation: link to sign up for a slot
• Submit a video & script: video posted on BB and asynchronous Q&A
 Firm choice due February 23

• Discuss with your teammates and email firm choice

• A firm that (a) you find interesting and (b) you can gather enough information
about
• No firms studied in this course
• Exclude: Zara, McDonald’s

• Your analysis should be grounded in real-world data of the firm,

competitors, and the industry

• Don’t wait for the last minute to ask for advice

 See you in W4
for the Telmore case