Apple has fallen from the tree

Heet Shah

Logo cited from Svetlik, 2011 An exploratory study into organisation and innovation decline in successful companies: the case of Apple Inc Abstract

Apple is one of the biggest tech giant that enjoys being the icon of the technology industry, heavily dominating that industry through its product. Recent events shed light of the continued weakness in ever changing global economy that is likely to raise concerns and challenges for businesses. In doing so, this research aims to review and synthesise current research on the antecedents and consequences of organisational failure whilst providing with new insights to existing literature.

Keywords: organisational decline and failure; innovation performance; business strategy Acknowledgement

I would like to thank my supervisors for their support throughout the dissertation process. Then I would also like to thank other academic staff at university who have indirectly assisted me while writing this through their teaching and guidance.

Second, I would also like to extend my gratitude to all my friends, for troubling them a lot in order to keep me motivated during the dissertation.

Finally also late Steve Jobs (1955 - 2011) for inspiring me into the world Apple. Table of contents

Chapters Page I Introduction 1 II Literature review 3 2.1 Defining organisational decline 3 2.2 Perspectives on organisational failure 4 2.3 Environmental explanations 5 2.4 Resource based view 7 2.5 Organisational studies 9 2.6 Innovation performance 12 2.7 Performance measurement 13 2.8 Other perspectives III Research methodology 15 IV Findings 19 4.1 Early history 20 4.2 Jobs return (1994 onwards) 21 4.3 Decline 28 4.4 iPhone 32 4.5 Mac 33 4.6 Apple Watch and services 35 4.7 iPad Chapters Page V Discussion 37 5.1 External 38 5.2 Internal 40 5.3 Innovation performance 41 5.4 Performance measurement VI Conclusion, Limitations and managerial implications 42 VII Appendices 45 VIII References 51 AIBM thesis 2019 Heet Shah B6042389/S3904911

CHAPTER I

INTRODUCTION

Apple is the first company in the world to reach 1 Trillion in valuation in 2018 eventually declining to $853 billion (Yahoo, 2019). During this year, Apple’s market share price has taken a nose dive from $234 to $186 in June 2019, with a historic low of $142 in January 2019 (Yahoo, 2019). Although it eventually reached an all time high of $260 at the time of this article, becoming one of the largest company in the world. This Cupertino based company established in 1977 that designs, manufacturers and markets media devices such as iPhones and iPads, personal computers such Macs and services such as iTunes and iCloud (Apple, 2017). Moreover, they have been subject to severe criticisms regarding sustainability and lack of innovation alarming their very existence. The company has also seen its sales decline, profitability questioned and loss of market share, indicating some form of organisational decline.

It is not the first time that a highly successful company faces such a crisis (Anheier, 1999; Lawler and Galbraith, 1994). Over 600,000 American firms disappear each year, accounting for 10% of all economically active firms Ormerod (2005). In spite of the commercial importance of organisational decline in real world, this topic has not been a central topic of research by many academics (Cameron et al, 1998; Sheppard, 1994; Whetten, 1988). The study of competitive strategy to help ensure long term profitability has received considerable attention for example Porter’s five forces, value chain, blue ocean, etc. Yet, little is discussed about what happens when these competitive advantage become a source of disadvantage over time. To hasten the theoretical knowledge of organisational decline and failure, this paper aims to understand the symptoms of organisational decline in case of Apple Inc.

The study of organisational failure has predominately been on either small or public sector organisations (Hambrick & D’Aveni, 1988). These research had theoretical limitations being, liability of newness for small organisations (Stinchcombe, 1965; Hannan and Freeman, 1977; Carroll, 1984; Aldrich and Auster, 1986) or restricted strategic options in case of public sector organisations (Whetten, 1980; Zammuto and Cameron, 1985). Hence calling for a need for research for decline and failure of large organisations (Hambrick & D’Aveni, 1988). Moreover, prior research has considerable limitations owing to studies being solely qualitative (Daughen and Binzen, 1971; Richards, 1973; Starbuck, Greve, and Hedberg, 1978), anecdotal (Ross and Kami, 1973; Argenti, 1976) or financial ratios (Altman, 1968, 1982). The aim of this study is to combine qualitative and financial ratios approach to provide a holistic view of organisational decline, whilst primary focus being

Page 1 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 decline instead of failure. Along with using innovation performance as a supplementary factor in deterring decline in multinational companies such as Apple Inc.

The rest of the paper is organised as follows. First, I outline the definition of organisational decline and define the scope of this research. This is then followed by a catalogued and revised theories surrounding the topic of organisational decline and failure. Specifically, integrating innovation performance as a dimension contributing to organisational decline. Second, the research mythology is discussed that is used for this research. Third, these assertions are investigated using various findings to provide an empirical based discussion for future research. On the basis of the analysis, the final section draws lessons learnt from this analysis, outlines directions for future research, limitations and highlight implications for managers.

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CHAPTER II

LITERATURE REVIEW

2.1 Defining organisational decline

In this section I will briefly define the term organisational decline and failure since there are variations to be found in the literature.

Some scholars have viewed organisational failure as either discontinuance of business (Hamilton, 2006; Walsh & Bartunek, 2011) or discontinuance of ownership through sale of the firms assets by its owners (Everett & Watson, 1998). Another, more widely adopted definition is the state wherein the firm ceases its operations and loses its identity because of failure to adapt and respond to changes in the industry (Cameron, Sutton, & Whetten, 1988; Hager, Galaskiewicz, Bielefeld, & Pins, 1996). Arguably these definitions perceive failure only as an exit in comparison with decline in performance.

It would make sense to include organisations suffering temporary performance problems. Hence, it would be important to distinguish organisational failure with decline, as the later would indicate the circumstances when a firm’s resources base or performance deteriorates over prolonged period of time (Bruton, Oviatt & White, 1994; Weitzel & Jonsson, 1989). This prolonged period usually lasts for a period of at least two years (McKinley et al, 2013).

Only one study (Latham and Braun, 2009) is identified that specifically investigates an industry sector in connection with an industry-wide downturn, a situation where “... all ships are sinking at the same time, but not at the same rate” (Bozeman, 2010).

2.2 Perspectives on organisational failure & decline

The concept of decline or failure in research has been primarily split between two perspectives i.e an outcome of either firm specific internal or external causes, also known as environmental changes (Trahms et al., 2013). Another review by Amankwah-Amoah (2016) on past theoretical and empirical research found that the antecedents of organisational failure has been polarised between the deterministic and voluntarist perspectives. Although, there are subsets of the two perspectives which are further classified into Resource based view, upper-echelon, ecological and liabilities of ageing (Amankwah-Amoah, 2016). He also mentioned that literature on the combined or interactive effect of the above perspectives

Page 3 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 lack sufficient explanation (Amankwah-Amoah, 2016). This has inspired my research to understand the complimentary effect of both factors when determining organisational failure. Each of the above mentioned perspectives will be discussed in the following sub- sections.

2.3 Environmental explanations (External)

The mainstream literature emerges from Schumpeter’s conceptualisation of creative destruction (Schumpeter, 1942). In which are ephemeral perturbations whose materialisation are difficult to foresee and whose impacts on organisations are disruptive and potentially destructive (Meyer, 1982). These environmental occurrences have been classified into two categories that are either beneficial or hostile (Meyer, 1982). Beneficial shocks such as an increase in the customer population because of demographic changes, reduction in taxes, technological advancements and upswings in the business cycle have the potential to forestall the demise of firms (Venkataraman & Van de Ven, 1998; Carter & Van Auken, 2006).

Conversely, hostile conditions such as competitive intensity, declining prices, price competition, elimination of government subsidies and others are likely reasons for business failure (Baum & Mezias, 1992; Covin, Slevin, & Heeley, 2000; Jones & Bouamane, 2012; Platzer, 2015; El Hennawy & Morris, 1983; Platt, 1989). Research indicates that the reduction of government subsidies in United States and Germany further aggravated the demise of companies such as Solyndra in the US, and Solar Millennium and Odersun in Germany (Jones & Bouamane, 2012). Moreover, intense competition from international companies have also contributed to organisational failure (Platzer, 2015). In adverse hostile conditions coupled with uncertainty, firms are more likely to close (Anderson & Tushman, 2001; Swaminathan, 1996). An important factor specific to the researched companies would be technological uncertainty from product and process innovations (Slater and Narver, 1994). Hence, this perspective contends that firms are victims of environmental shocks in the system that are beyond their control.

Not only does external environment create contingencies threatening the competitiveness of the organisation but also provide resources (Thompson, 1967; Pfeffer and Salancik, 1978; Tushman and Anderson, 1986) that could play a crucial role in deterring the fate of the firm (Andrews, 1971). In such scenarios, the research is polarised between two views of either sudden or gradual decline (Zammuto and Cameron, 1985). The former explained by Staw’s concept of threat-rigidity effect that critically impairs the organisations ability to respond to changes (Staw et al, 1981). On the contrary, gradual or slow decline is more common

Page 4 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 phenomenon as argued by Tichy and Devanna (1986). They explained this situation through “boiled frog phenomenon”, wherein a frog that is put in boiling water reacts instantly by jumping out of the pan whereas the frog put in cold water, which is then eventually heated to boiling point is likely to cook to death. The idea being that the rate of change in second frogs environment is a slow process of ‘just noticeable differences’, making the frog unable to respond to the change. Thus, the two concepts of the pace at which environment changes and its impact on the organisation will be examined in this study.

Another construct explained in literature on decline is organisational slack, which refers to surplus or resources (Cyery and March, 1963), such as financial slack, human resources and technology. Singh (1986) construed that unabsorbed slack or excess liquid resources needs to be eliminated from the organisation. As excess slack does not provide buffer from environmental jolts (Meyer, 1982). It is well agreed upon the slack can lead to decline or failure (Hambrick & D’Aveni, 1988). The crucial view being, high-slack firms are likely to become complacent and undertake minimal initiatives i.e the notion of success leads to failure (Starbuck, Greve and Hedberg, 1978 & Whetten, 1980). In contrast, Staw et al (1981) argues that lack of slack can foster rigidity and can aggravate the organisations failure. Therefore, are large organisations typified into decline by excess of slack resources?

Another interesting point of view argues that organisational failure is rather a natural and objective phenomenon (Balderston, 1972). A research in line of retail firms is ‘Wheel of Retailing’, which describes the gradual ‘trade up’ of small cost efficient organisations into large firms leads to added services and expensive attributes making it vulnerable to new lean entrants (Hollander, 1960). Inherently the management becomes separated from consumer realities, making the firm unable to respond to threats. Also, explaining the threat from new entrants in such competitive industry (Baum and Singh, 1994; Frank, 1988). Although, this research is in line to retail firms, it could potentially shed light on to technology firms which offer products and services to consumers through retail outlets.

Timing was another crucial element identified in research wherein firms that failed to adapt and respond to changes in environment in a timely manner eventually went bankrupt (Hollow, 2014).

2.4 Resource-based view (RBV)

Another line of research argues that internal organisational factors are likely factors contributing to organisational failure (Mahoney & Pandian, 1992). This perspective recognises the utilisation of firm specific resources and capabilities that are rare and cannot be easily imitated, to gain sustainable advantage (Barney, 1991). It has also been found that

Page 5 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 effective utilisation of firms resources and capabilities can determine the fate of firm’s ability to survive and avert environmental shocks as mentioned before (Hambrick & D'Aveni, 1992; Headd, 2003).

Barney’s concept of resource based view has been challenged by Teece’s dynamic capabilities. The latter argues that the concept of realising the organisation’s assets in order to meet the four key criteria as defined for resources and capabilities that can support sustained competitive advantage - valuable, rare, imperfectly imitable, and non-substitutable (Barney, 1991) - is only a part of a process (Teece, 2018). He argues that despite the strong lack of imitability, successful business models will eventually be imitated by competitors to a certain extent.

In contrast to the firms internal capabilities i.e Barney’s RBV, dynamic capabilities is one of the most active research topic in management literature as it analyses the firms response to technological and environmental changes (Eisenhardt and Martin, 2000; Di Stefano et al., 2014; Helfat et al., 2007; Teece, 2007; Teece et al., 1997). The concept of dynamic capabilities dictates the speed and degree of marshalling the firm's resources with customer needs and aspirations (Teece, 2018). This is achieve through continuous process of sensing and seizing opportunities, and periodically transforming aspects of the organisation and culture to be able to proactively reposition to address environmental jolts as explained before (Teece, 2018). The significance being that organisations failing to modify its internal resources will result in loss of sustained competitive advantage, eventually leading to decline. Hence, through understanding of these relationships, and their implications for performance answers Teece’s call for further research in this field (Teece, 2018).

RBV also supports the presumption that executives continually upgrade tacit knowledge within the firm in order to mitigate decline; the concept being similar to dynamic capabilities in case of managerial competences have developed into the sub-field of dynamic managerial capabilities (Helfat and Martin, 2015). Firms in possession of abundant financial resources and human capital are less likely to fail (Headd, 2003).

However, recent research supports the position that shrinking resources and expertise base of the firm (D'Aveni, 1990). Hence, firms will declining resources are likely to fail as compared to firm with abundant resources. With respect to declining human capital, mismanagement and loss of key personnel have been proven as contributory factors to failure (Burger & Owens, 2013; Hager et al., 2004). Eventually it could also lead to bankruptcy if firm level expertise is not sustained due to managerial deficiencies (Thornhill and Amit, 2003). This has been explained by upper-echelon perspective (Hambrick & Mason, 1984) that failure is often a cause of information processing inefficiencies by top management teams (TMTs) (D'Aveni, 1990; Hambrick & D'Aveni, 1992; Platt & Platt, 2012).

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Consequently strategic errors, inability to identify opportunities and delay in responding to environmental threats can be attributed to managerial deficiencies (Hambrick & D'Aveni, 1992; Argenti, 1976; Nutt, 2002). It is also notable that TMTs tend to credit themselves for positive performance whereas assign blame negative performance on the external environment (Tsang, 2002).

One line of research, acknowledged demography as an perspective, which found that quality and differences in human capital can contribute to organisational failure (Carroll & Harrison, 1998; Pfeffer, 1983). Surprisingly, it was found that long tenure of top executives leads to strategic persistence, which causes organisation to fail (Amankwah-Amoah, 2014b). In contrast, departure of such executives (TMTs) from the firm can compromise the firm’s legitimacy and its ability to entice key stakeholders (Sutton & Callahan, 1987). Other factors such as poor management controls, frequent changes in TMTs (Amankwah-Amoah & Debrah, 2010), misallocation of resources and over widening ambitions all factor for organisational failure. In case of large firms TMTs lethargic attitudes could foster inertia, resulting in reduced flexibility that can make the firm difficult to adapt to environmental factors (Cyert & March, 1963). Hence, TMTs can make significant impact on the performance of the firm through resource capacity.

Research on TMTs ability and conduct during growth is well researched as compared to TMTs cognitive capabilities during decline (Trahms et al, 2013). Therefore, for the purpose of this research the strengths of managerial cognition has been tied to firms internal capabilities. Although, this has been separately analysed and explained in research on upper- echelon perspective, which is in line with organisational studies as explained in the next section.

2.5 Organisational studies

The research body on organisational studies emphasises internal factors as the main cause of failure (Cameron et al, 1988). Researchers often criticise the external view, stating that decline or failure is caused by management’s lack of vision and ability to respond effectively to the changes in the market. Past research has revealed several factors contributing to organisational decline and failure such as strategic paralysis (D’Aveni, 1989), threat rigidity effects (Staw et al 1981), structural inertia (Hannan and Freeman, 1984), management malfunctioning (Argenti, 1976), managerial complacent to customer demand and competition (Zajac and Bazerman, 1991), continued use of pre-exisitng structures and routines (Bateman and Zeithaml, 1988 and Staw et al 1981) and many others.

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A notable reason to failure is Miller’s (1990) notion of ‘success can breed over- confidence and arrogance’, which is also agreed upon by ONeill (2001). Wherein successful companies tend to become conservative and arrogant in fact of competition. Hardcopf et al (2017), found that managers operate in decision making environments that are usually characterised by high degree of complexity and necessity to act. They have to deal with their cognitive capability of information processing limitations as well as embedded biases. As a result TMTs are likely to select cost-cutting measures to realise their performance objectives, which undermine the firms long term profitability and performance. In face of such crisis, myopic managers tend to express narcissistic views to threats and criticisms (Macoby, 2000). Even the most visionary leaders can fall a victim of such behaviour and increase the risk of failure (Macoby, 2000).

Larson and Clute (1979) found that personal decision-based characteristics of TMTs correlated to failed firms. Similarly, Barmash (1973), states ‘corporations are managed by men; and men, never forget, manage organisations to suit themselves’. Power dynamics also play a role in organisations demise, where either powerful or poorly-informed executives tend to undertake impulsive actions (Argenti, 1976). Such managers perceive external crisis to be temporary in nature, thereby failing to adapt their strategy to mitigate threats, often overstating their confidence in decisions so made (Argenti, 1976; Holsti, 1978).

Having a large group of stakeholders with conflicting interests can also contribute to the organisations decline (Amankwah-Amoah and Debrah, 2014). This would largely be due to the fact that firms in decline stage can face resource constraints to fulfil the needs of its stakeholders. This concept is further described in a situation wherein team deficiencies can lead to strategic errors, whereby certain group of stakeholders may not be satisfied (Hambrick and D’Aveni, 1992). It is also noteworthy that failing firms tend to decline failure, avoid long term view of the organisation, ending up in threat-rigidity state (D’Aveni and MacMillan, 1990).

The role of managers in the dynamic capabilities of the firm has received special attention under the designation of dynamic managerial capabilities, introduced by Adner and Helfat (2003). A still-expanding theoretical and empirical literature has deepened understanding of the underpinnings and economic implications of managerial abilities (Castanias and Helfat, 2001; Helfat and Martin, 2015). Research on this topic places emphasis on three key elements. First, managerial cognition i.e the mental process that guide TMTs decision making such as which information is reverent in the given context (Kaplan, 2008). Second, social capital, which include the network of interpersonal ties that the TMTs possess which are vital to the organisations’ accessibility to human capital (Blyler and Coff, 2003). Finally the experience, knowledge and skills of the TMTs (Carpenter et al, 2001).

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This is important in the process of sensing changes and threats within the environment, at the same time seizing opportunities so arising. However, it is not surpassing to not the poor processing capabilities of the TMTs, even when fed with valuable information (Teece, 2016). As a result the TMTs poor performance is likely to result in organisational decline as stated by Hambrick (1994). Henderson (1994), analyses case studies of General. Motors, Digital equipment and IBM, which suffered from major crisis mainly due to TMTs complacent assumptions and problem solving strategies. Thus, TMTs are evidently lack the ability to look beyond a narrow perspective of already established routines.

Large organisations often struggle when compared to smaller and new firms, which employ the ‘lean startup’ model (Ries, 2011). Owing to their size and newness, the smaller firms are likely to be quick with updating their business models and ideas. Such agility is extremely difficult to achieve in large organisations. Partly because they lack TMT integration due to rapid turnover within the board, making it difficult for new members to truly work together on strategic issues and pursue new concepts (Lubatkin et al, 2006). Evidence supports this view that TMT integration is positively correlated with active strategy formulation in rapidly changing environment scenarios (Chen et al, 2010).

Entrepreneurial capabilities among the TMTs also play a key role during a period when organisation undergoes business and technological turbulence (Teece, 2015). As discussed in this section, TMTs bear a crucial and ultimate role for strategic decision and orchestrating the firms resources according to the changes in external environment (Linden and Teece, 2014).

2.6 Innovation performance

The construct of innovation in modern organisations has gained considerable attention in both literature and in practice (Damanpour, 1991; Nohria & Gulati, 1996; Van de Ven, 1986). This research defines innovation as novelty in a product or service as a result of significant changes in the product, process or service (McKinley, Latham & Braun, 2014). The focus being on novelty and significant rather than mere administrative changes such as downsizing or organisational restructuring (Freeman & Cameron, 1993; McKinley, Zhao, & Rust, 2000).

In contrast, rigidity is the opposite of any innovation, wherein the organisation is manifested in perpetuation of existing routines (Staw et al, 1981). McKinley (1993), posit two opposing views on influence of decline on innovation performance that are ‘necessity is the mother of rigidity’ and ‘necessity is the mother of invention’. First view is explained by Staw et al (1981) who argue that threats can trigger three distinct responses: loss of control,

Page 9 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 resource conservatism and reduction in information processing capacity of managers. These make it difficult for organisation to adapt to changes in environment, thereby the lack of innovation enhances its rigidity. As such established products and processes are preserved to reduce the risk of an already troubled organisation.

Notwithstanding the discussion surrounding rigidity above, there has also been considerable body of research to explain the opposite effect. This literature indicates that loss of performance provides stimulus to declining firms to innovate (McKinley, 2014). Cyert and March (1963) observed that in the event of aspired-performance gap, decision maker tends to deviate from already established routine. Such routines are divergent from conservative approach, which can foster innovation by adaptation of new products and processes. Furthermore, Bowman (1980, 1982, 1984) also found evidence of risk seeking in firms facing decline. Additional research by Wehrung (1989) and Miller and Bromiley (1990) also confirms to the above findings. Hence, this theory argues that risk seeking managers would adopt innovation when experiencing organisational decline.

The above research explains the impact of organisational decline on the perception of innovation. On the contrary, this research contributes by analysing it from an alternate perspective wherein rigidity or lack of innovation being a supplementary factor in organisational decline. On the other hand another environmental jolts as classified by Trahms et al (2013) is Christensen’s concept disruptive innovation radically change the industry landscape as well as their value chain (Tushman & Anderson, 1986).

Consistent with ‘necessity is the mother of innovation’ is the concept of downward spiral as explained by McKinley et al (2014). Wherein, organisations in decline tend to amplify the situation through successive innovation efforts. Not only does it disrupt existing routines but also exacerbate decline through a feedback loop. If such loop isn’t stopped at any given point, the organisation’s resource base will continue to erode. While this concept is contradictory to innovation’s turnaround capabilities, there is considerable empirical evidence in favour of this argument. For example, Weitzel and Jonsson (1991), found that W.T Grant persisted in store expansion strategies (as a mean of strategic innovation), even in light of the evidence suggesting otherwise that the sales per square foot were declining. Another research mentioned that decline firms tend to undertake bad risks, that eventually compound to its decline (Wiseman and Bromiley, 1996).

Another popular work in academia is the Christensen’s (1997) concept of disruptive technologies, which was eventually redefined as disruptive innovation (Christensen and Raynor, 2003). According to Christensen (2015), disruption is a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent

Page 10 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 businesses. He mentioned that new market disruptions could be achieved in two ways, fringe market (low-end) and new market.

Such technologies initially underperform in comparison to their established counterparts, they eventually succeed conventional technologies. Another conception of disruption is through the resource competency of the firm, wherein such disruptive technologies have the potential to render the existing research and development investments by incumbents obsolete (Charitou and Markides, 2003).

The scope and definition of disruptive technology has triggered an intense debate among both critics and supporters of his theory (eg: Adner 2002; Benner and Tushman, 2003; Chesbrough, 2001; Danneels 2004; Gilbert, 2003; Henderson, 2006; Husig et al, 2005). Adner (2002) metnions that a consumer is motivated by decreasing marginal utility from the performance improvements in major dimensions, in addition to the new value propositions and affordable prices.

On the other hand Barney (1997) argued ‘it may simply be the case that some firms are lucky in their technology choices’. As such it can be inferred that disruptive innovation does not implicate that new firms will replace incumbents nor does all disruptive innovation originate from start-ups. Incumbents could disrupt the market themselves by focusing their efforts on least price sensitive customers, i.e operating in a niche.

Organisational culture plays a crucial role as a mean of controlling and co-ordinating innovation efforts within the firm (Tushman and O’Reilly, 2002). It is often referred to as a ‘double-edged sword’ that could result in failure of innovation within a firm (Yu and Hand, 2010). This its because organisational culture could breed cultural inertia, which is a key reason why management is unable to introduce change within the firm, even when they know that the change is needed (Christensen and Raynor, 2003; Henderson, 2006; Tushman and O’Reilly, 2002). For example cultural elements such as risk taking, entrepreneurship, creativity should be well embedded within the incumbent organisation in order to continue developing disruptive innovation (Govindarajan and Kopalle, 2006; Murase, 2003).

Finally, poor resource allocation can also lead to failure of innovative efforts within a firm. Structured routines such as financial returns as the key evaluation criteria constrain the actions of incumbent firms (Christensen, 2006). As such firms are locked into businesses in which they have already gathered substantial expertise and continue to invest in such businesses. Firms with such resources are likely to invest in incremental innovation of their existing technologies (Christensen and Bower, 1996). Thereby ignore the opportunities from new product innovations, i.e disruptive innovation.

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2.7 Performance measurement

Prior research have proved that audit reports provide essential information to investors about upcoming failures (Dopuch, Holthausen, & Leftwich, 1987; Piñerio-Sánchez et al, 2013), thereby suggesting that quality audit reports can provide crucial financial information (Gaynor, Kelton, Mercer & Yohn, 2016). Identifying the causes of organisational decline and failure appears to be a complex and hard to detect phenomenon (Lukason, 2016). These factors were consistently detected by the research conducted on the use of audit reports in explaining the endogenous and exogenous factors that offer a comprehensive viewpoint of the causes of failure (N. Muñoz-Izquierdo et al, 2019). There is also evidence suggesting a correlation between audit quality, business failure and qualified reports (Arneedo_Ajona, Lizarrage-Dallo, & Sánchez-Alegría, 2012; Blay, 2005).

In the research body of organisational failure, the most widely used variables to explain organisational failure are accounting ratios (Altman, Iwanicz-Drozdowska, Laitinen & Suvas, 2017). However, these ratios cannot be solely relied upon, as they do not capture other variables that epitomise firms’s management (Du Jadrin, 2017) and industry effect (Altman et al., 2010; Back, 2005; Cultrera & Brédart, 2016; Hopwood, McKeown, & Mutchler, 1989; Laitinen, 1999; Lensberg, Eilifsen, & McKee, 2006). Severe market-share erosion (Starbuck, Greve and Hedberg, 1978), sharp decline in demand and sales (D’Aveni, 1989) and many other indicators could also be used along with financial ratios to determine decline.

On the other hand, innovation performance literature explains the importance of innovation strategy, idea creation, customer satisfaction and market, organizational learning and knowledge management tools, and organizational culture and leadership (Adams et al., 2006; Crossan and Apaydin, 2010; Saunila and Ukko, 2012). However, Bititci et al (2012) mention that the measurement of innovation remains a challenge in the field of research. Prior research has approached this problem from two perspectives: the measurement of R&D (Alegre et al., 2006; Chiesa and Frattini, 2009; Chiesa et al., 2009; Lazzarotti et al., 2011) and technological innovation capability (Capaldo et al, 2003). First, R&D has been a traditional method to measure performance where high performance is associated with new product launches and number of patents generated (Godener and Söderquist, 2004). The second focuses on the internal resources such as human capital, management tools and organisational culture as mentioned before. Moreover, Capaldo et al’s (2003) research was primarily conducted on SMEs, which wouldn’t be suitable for the purpose of this research. Ideally innovation performance is based on output measurement as compared to internal or technological capability (Adams et al, 2006).

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2.8 Other perspectives

A stream of research based in ecological perspective has provided insights into failure of firms due to liability of size, age and density. (Burger & Owens, 2013; Carroll & Delacroix, 1982). The most agreed upon finding being that younger firms are likely to fail owing to liability of newness as compared to older firms (Hager et al, 1996). Statistically 40% of new firms fail within their first year of operation (Taylor, 1999) and more than 60% fail pithing the next five years of operation (Kirchhiff, 1994). This is mainly due to their limited expertise and scare resources, they fail to gain legitimacy from their stakeholders (Carroll, 1983; Henderson, 1999). It is also observed that such new firms tend to undertake unproven and high risk strategies and innovations, which explain their high failure rate (Henderson, 1999). However, as mentioned earlier that large organisations in face of decline or failure are forced to adopt such high risk strategies, highlights a contradicting point that needs further clarification.

Alternatively Fichman & Levinthal (1991), provide a converse view that large successful firms suffer from liability of adolescence instead of liability of newness. Firms rich in resources are likely to survive initial environmental shocks with little risk of immediate failure (Bruderl & Schussler, 1990). Further supporting the view that organisational decline is a gradual process as compared to sudden decline as mentioned previously. These initial resources or slack provide cushion against environmental jolts, thereby creating an ‘initial honeymoon period’ (Fichman & Levinthal, 1991; Henderson, 1999). Over the years as the organisations resources reduce coupled with other factors such as complacent mangers, the risk of failure increases exponentially. As supported by research on liability of obsolescence, that states the failure rates increase as the firms age (Barron, West & hannan, 1994). Established incumbents’s bureaucratic and complex routines breed into organisational inertia, which often precipitate into failure (Henderson, 1999).

Although the two perspectives are well researched in literate both theoretically and empirically, they offer a limited picture due to isolation of perspectives. This calls for the need of a more integrated view of organisational decline and failure that provides highly robust and holistic picture (Carter & Van Auken, 2006; Mellahi & Wiklinson, 2004; Pal, Medway & Byrom, 2006). Not surprisingly, there have been notable complementaries been observed in the literature that is split between two perspectives. For example, the notion of dynamic capabilities is dependant on managerial understanding and perception of environmental jolts proposition about changes in the industry. This suggests a combined effect of both internal and external factors playing a complementary role in decline. As mentioned previously, the integration of internal and external orientations in the study of organisational failure needs further research (Witteloostuijn, 1998). Prior attempts have

Page 13 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 been made to amalgamate the two approaches as they are linked in management practice but separated for research (Mellahi et al, 2002).

To summarise, a number of themes have been identified within the vast body of literature on organisational decline and failure as well as in innovation performance. First, the changes in external environment, classified as environmental jolts is discussed wherein the rapid or uncertain conditions make it difficult for even the most resourceful organisation to entice. Second, attention is given to the resource based view and dynamic capabilities of the organisation, which argues that the strength of the organisation is derived from its internal competencies. Such capabilities offer organisation sustained advantage that can allow it to face even the harshest environment. This perspective on decline has been followed with the managerial role in organisational failure that suggests often lack of cognition, inertia and arrogance breeds failure. Finally, the importance of innovation performance is also mentioned that acts as an supplementary or catalyst in organisational decline. All these these concepts have been illustrated using the conceptual framework as shown in Figure 1. It should also be noted that most of the work above has not been undertaken in the technology sector, which raises the issue of applicability of the factors as discussed above.

Internal (RBV + Innovation OS) performance

Organisational decline

External (IO, Environmental)

Figure 1: Conceptual framework

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CHAPTER III

RESEARCH METHODOLOGY

Introduction

This research seeks to map out the causes of organisational decline at Apple. As such the research philosophy applied for this dissertation is interpretivism with a mix of deductive and inductive approach. On the other hand positivism would involve the study of variable in an controlled environment for predicting outcomes which would be more suitable for scientific research. Although causality is involved as strategy will have an outcome, but the purpose of the research is to understand the reason for organisational failure due to various reasons as mentioned in the literature. Using a particular strategy would result in an outcome that would either give the chosen companies a competitive advantage or disadvantage. Thus implying a scientific approach to management. Furthermore this study is unlikely to be repeated in the same or controlled environment. Thus interpretivism would be the philosophy underpinning this research for answering as to why the company shows sign of organisational decline.

Research design/approach

Whereas explanatory research will answer the ‘why’ that is the reasons which would explain for decline in organisational performance based on theories drawn from literature. On the other hand, exploratory research will identify new themes from data collected to expand the scope of current literature.

This research uses single case study as the purpose is to understand organisational decline at Apple, wherein an in-depth research can be conducted that will act as a distinctive experiment that stands on its own as an analytic unit (Eisenhardt, 2007). Moreover, it also supports the notion by Yin (1994), which would allow for replications, contrasts, and extensions to the emerging theory. The rationale for choosing Apple Inc for this case study research is because it is the largest company in the world in terms of market capitalisation that operates in a highly competitive environment. Hence, its decline would be relevant in competitive environment that are often characterised by innovation capabilities, which is often ignored in literature.

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Also, there is a mass of information available in the form of annual reports, other statements, press and social media. Secondary data is thus abundant and has been used to analyse the various themes and explanations for the causes of decline. For example, annual report and press interviews provides explanation to the extent to which the company was aware of this decline as well as the underlying internal causes for it.

Case study and archival research strategies will be combined for this research for the following two reasons. Firstly, case study will help understand the reasons for decline based on the analysis of strategic options from archival data. Secondly, the research will involve use of company accounts, press releases and other relevant corporate data for the past years, archival research will help answer with the analysis of strategic decisions so made. Action research is unsuitable because it follows an insider approach (Saunders et. all, 2009). Since the research is not undertaken for the organisation nor is the researcher employed by the organisation. Grounded theory is unsuitable because this research will employ a deductive approach as compared to inductive approach. Ethnography on the other hand is highly time consuming and requires a first hand field study (Saunders et. all, 2009). Hence, it would not be relevant for this research proposal.

Yin (2003) mentions that case study involves risks such as unsystematic execution of procedures, equivocal evidence and biased opinions which can affect the findings and conclusion. The data for this case study will be collected from documentation, archival records, interviews as stated above; amongst the six sources of evidences as identified by Yin (2003). Although he also highlights the risks associated with them such as biased selectivity, accessibility and inaccuracies. These would have an impact on the research, however can be avoided using triangulation technique. Triangulation involves using various mix of sources to validate a finding, to reduce the above mentioned risks to minimum acceptable standard (Bryman and Bell, 2015).

Research data

From the outset, the research design focuses on a range of sources to capture a variety of data. The data techniques used is mixed, i.e quantitative and qualitative data.

This research has studied the company over a period of time, i.e longitudinal study (Saunders et. all, 2009) to analyse the of decline sales and profitability. This suits the aim of the study which is to understand the reasons of organisational decline, which is a result of events or factors that occur over a period of time. The primary time period chosen for this research is from 2006 onwards as the values prior to that year would be unsubstantial for

Page 16 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 comparisons while plotting them in the graph. Also, the focus is organisational decline which occurred in 2016 and 2019.

The media and stock market coverage of Apple is extensive because it is the largest company in the world based on its market capitalisation of 1.2 Trillion (NASDAQ, 2019). This not only applies to Apple but also its competitors, whose data is available on their corporate website. As such secondary data is abundant and has been used to analyse the various themes in order to deterring the underlying factors of decline. Moreover, reliable data is relatively convenient to obtain through company’s legal documents and press coverage from reputable sources for example, financial times and YouTube channels with millions subscribers. Such coverage also include interviews conducted with Apple’s CEO Tim Cook. In addition, these published sources usually do not have any vested interest in the company, and therefore can report more accurately and without any bias about their understanding of the situation. Another reason is that Apple deletes public comments on Facebook (see Appendix 9) and has disabled its comment section on YouTube channel. Due to the lack of data and bias, data was collected from a range of sources. Hence, the use of a wide range of sources would eliminate risks with sampling error, biased information, credibility and reliability of information (Bryman and Bell, 2015). Primary data has not been used due to impossibility of interviewing Tim Cook or any other CEO of other tech companies.

Data analysis

First, for triangulation, the findings are confirmed with an academic (she has chosen to remain anonymous), who specialises in organisational decline. Second, I use the quantitive data from annual report to ascertain decline using primary measures of revenue and net profit. Also, share price data is also used as another way of identifying decline (Morris, 1997). This is then followed by an in-depth quantitative analysis through ratio analysis such as Return on assets (Deakin, 1972), segment information and executive remuneration of data from balance sheet, income statement and cash flow to identify the financial performance of the company. Since, quantitative data do not capture non-financial elements for example, externalities, qualitative analysis is used to draw conclusions supporting the ratios.

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Ethics

Ethics are the moral framework by which we ensure integrity and set normative standards of behaviour. They may not be absolute and my require balance when they compete. Every research should obey the ethical principles for a good quality research (Bryman and Bell, 2015). Ethical considerations involve harm to participants, informed consent, privacy, deception and conflict of interest (Bryman and Bell, 2015). Harm to participants is unlikely due to lack of any primary research conducted which would have human element being involved. Although, Bryman and Bell (2015) highlights that harm to participants could also include the researcher, as the work can be criticised by more scholarly researchers. However the risk would only exist if this proposal would be published in a Journal. No presence of company or any large institution which has funded this research, thus eradicating the element of conflict of interest where the research could be biased in favour of anyone. Furthermore this research will be carried in accordance with the relevant regulations such as University of Newcastle, Groningen code of ethics and the European GDPR 2018.

Limitations

Finally, this research since it is conducted with the help of qualitative data analysis, which raises concerns over its reliability and validity as the subjective position of the research can affect it (Bryman and Bell, 2015). As such the interpretation provided by would vary according to the researchers understanding and skills (Bradley, 1992). However, clear description of the data used and the steps followed have been provide, should this research be carried by another researcher for replicability and validity. Since, the research focuses on organisational decline and innovation, as such any other themes such as corporate social responsibility, corporate governance, marketing, etc would not be incorporated in this research which may have otherwise altered the analysis. Further limitation would include the data collection, since it is based on secondary historic data, it lacks the credibility of primary data. The data collected would also be subject to time restrictions as it will be limited to the time period of this research, and any further advancements would not be incorporated.

The variety of data collection methods and their subsequent analysis, including triangulation has been used to deepen the understanding of Apple’s organisational decline. This research provides a holistic view of the entire organisation in the following section.

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CHAPTER IV

FINDINGS

This section will analyse the findings beginning with an overview of the company’s history. This will then be followed by an overall evaluation of the company’s current position based on financial and non financial indicators. Finally, each product division will be analysed for more detailed view on the factors leading to decline at Apple.

4.1 Early history of Apple

Apple Inc is known for its CEO Steve Jobs, who along with Steve Wozniak and Ronald Wayne, co-founded Apple Inc in 1976 in his parents’ garage in Los Altos, California, the heart of Silicon Valley (Lazonicka et al, 2013). The company originally specialised in manufacturing of personal computers such as Apple I. Within a year of operation an angel investor, Mike Markkula, invested $250,000 in equity and loan for 26% stake in the company (Lazonicka et al, 2013). As the company grew, Jobs and Markkula recruited John Sculley, President of Pepsico, who had expertise in marketing to take over as CEO. Whilst Jobs retained the Chairman position in the company. Although this decision eventually led to power struggle within Apple due to their divergent point of views as Sculley believed that personal computer like a commodity, wherein the competitive advantage lies in marketing. Whereas, Jobs viewed innovation as the core advantage through continuous innovation based on internal capabilities and technological opportunities in the environment. This conflicting views escalated in 1985, when Sculley undermined Jobs’ control over his Macintosh division. Having Jobs’ attempt, as the Chairman to regain control over his company failed, he sold his interest in the company for $12 million to start NeXT (Pollack, 1993).

Following the departure of Jobs, Sculley retained the title the CEO, when the downfall began. With increasing competition from IBM and its (Macintosh) clones, the company decided to pursue premium pricing strategy for Macintosh products to ensure increasing revenue (Lazonicka et al, 2013). In 1991, Apple formed a strategic alliance with IBM and Motorola - named AIM - to develop processor for its PowerPC. This alliance subsequently failed once IBM’s new CEO announced its plans to become a software company as opposed to hardware. Whilst Apple’s other project - Newton PDA - with over $100 million in sunk development expenditures is one of its greatest failures (Shah, 2007). In an even more

Page 19 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 desperate attempt to boost the computer systems revenue, Apple announced plans to participate with open system vendors. In contrast to these struggles, the revenue reported strong growth figures, with over $8.0 billion, a 13 percent increase from the last year (see Appendix 3). The business plan in 1993 was focused towards maximising shareholder value, with executive bonuses based on stock-price performance, see Appendix 1&3 (Yoffie, 1994). Moreover, R&D expenditure was also witnessed an increased following the period of Jobs exit (see Appendix 1)

This shift in focus evidently instilled short-termism as well as corporate conservatism among management, undermining long term profitability and performance as mentioned earlier (Macoby, 2000, Hardcopf et al, 2017). As such Apple’s revenues rose to $11.1 billion in 1995, an amount that didn’t surpass until 2005. Employment also rose during that period as shown in Appendix 2. All of which resulted in Apple’s stock price doubling over time in September 1993. However, Apple’s market share fell from 9.5% in 1993 to 7.8% in 1995 (Lazonicka et al, 2013). While, companies such as Compaq became the market leader with 10% share followed by IBM wit an 8% share (Reuters News, 1996). Following a period of rapid growth, it eventually incurred a loss of $69 million in first quarter of 1996 (Lazonicka et al, 2013).

Gilbert Amelio, head of national semiconductor became the new CEO as well as Chairman of the company (Lazonicka et al, 2013). Even under his leadership, the decline continued until 1997, when its revenue fell from $11.1 billion in 1995 to $7.1 billion in 1997, accumulating a total loss of $1.9 billion over those periods (Lazonicka et al, 2013). One of the cause being the Macintosh’s technological superiors became unsustainable following the launch of Windows 95 in 1995 (Lazonicka et al, 2013). Previously, Apple had maintained a niche market with premium pricing. The launch of Windows 95 forced apple to cut prices in order to maintain its market share.

From the early history of Apple, it can be inferred that the company has experienced decline during the period when Jobs left Apple. The main causes as highlighted above have already been mentioned in various literature such as: short-termism, hubris, loss of market share. These would be significant when evaluating Apple’s current decline with historic data i.e exploring the possible repetition of previous factors to strengthen the argument for organisation decline.

4.2 Jobs return (1994 onwards)

Jobs returned to Apple in 1994 after his company NeXT was acquired by Apple. Under his leadership, Apple went through internal reorganisation to make more efficient use of its

Page 20 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 resources (Cameron, 1995). During his reign, Jobs introduced a few ground breaking products, which are iPod, iPhone and iPad that set Apple on a trail of growth for the coming years, with iPhone becoming the dominant product.

Today, Apple Inc stands out with an incredible market capitalisation exceeding $1.1 Trillion (NASDAQ, 2019) as well as with the most valuable brand in the world (Forbes, 2019). In its recent annual report, the company reported its highest ever net revenue of over $265 billion with net profit of approximately $60 billion (Apple 10-K, 2018). This extraordinary success stems from a series of innovative products, mainly the iPhone that have re-shaped the smartphone industry. Along with its other product offering such as iPad, Apple Watch and Mac lineup; software applications such as MacOS, iOS, tvOS, WatchOS; and services such as Apple Music, Apple TV, iCloud, etc. (Apple 10-K, 2018).

Figure 2: Market share price (FT, 2019)

4.3 Decline

Despite its enviable success, the company could be facing a formidable crisis based on its financial and strategic positioning. Overall, the company’s revenue has grown exponentially over the years but slowed in 2016 and 2017 as shown in figure 3 on next page. Moreover, its

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Net sales EBIT

300,000 80,000

225,000 60,000

150,000 40,000 Amount in $m in Amount $m in Amount

75,000 20,000

0 0 2006 2008 2010 2012 2014 2016 2018 2006 2008 2010 2012 2014 2016 2018 Financial year Financial year

Figure 3&4: Net sales and Earnings before interest and tax (EBIT) over time (Apple Form 10-K, 2006-2019)

Earnings before interest and tax is also consistent with decline in revenue as shown in figure 4 on the following page. In 2019, the graph shows another sign of decline with revenue and EBIT (Earnings before. Interest and tax) to $260 billion and $65 billion respectively. To gain a better understanding about this recent decline, the analysis would be conducted through individual product segments, which will be done in the next sections. At the same time, the company’s gross profit and operating profit margins have increased until 2012 as shown in figure 5, but have decreased in 2013, remaining stable ever since. Based on traditional measures such as profitability and revenue alone, the above evidence do not indicate strong decline. In the given case, it could be because the executives’ remuneration is tied to these measures. Hence, they have increased the price of products, primarily iPhones significantly which have manipulated the revenue and gross profit figures to sustain managerial returns at the cost of sustainability. Analyse managerial remuneration.

The main cause of this is the remuneration design of the executives which appears to be controversial in nature. As shown in Appendix 8, the managerial remuneration has witnessed a sharp increase. When Tim Cook took over control of the company as the CEO in 2011, he took the company on an aggressive expansion route. First, he received an extraordinarily extreme ‘joining award’ of $376 million in equity (Apple DEF14-A, 2011). This value has been reduced from his total compensation for the purpose of avoiding outliers, as it heavily skews the values. The crucial element being that half the amount will

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Gross profit Operating profit Dividend payout Re-purchase of stock 50% 80000

38% 60000

25% 40000 Percentage Amount $’000 Amount 13% 20000

0% 0 2006 2008 2010 2012 2014 2016 2018 2010 2012 2014 2016 2018 Financial year Financial year

Figure 5&6: Gross and operating profit ratio, dividend payout and stock repurchases (Apple Form 10-K, 2006-2019) vest five years from the grant date and the other half will vest ten years after the grant. He is also expected to own shares of Company common stock that have a value equal to ten times his base salary. Such requirement is one of the highest among the Fortune 100 CEOs.

Followed with an overhaul of current incentive plan for the executives in 2012, when the board increased their current performance related bonus from 100% to 400% of base salary over the coming years (Apple DEF14-A, 2010 & 2019). Moreover, this compensation was solely designed based on two metrics; revenue and net profit. One would imagine that this business was poised for future growth, however as shown in figure 3 this growth was short- lived due to the drop in sales form 2016. In additional to the bonus, the base salary also increased from approximately $900,000 to $3 million for the CEO and from $700,000 to $1 million for other executives (Apple DEF14-A, 2012 & 2019).

One of the the shareholder addressed the following issue:

“The Corporate Library/GMI, an independent investment research firm, expressed ongoing concern regarding our Company’s executive pay policies. For 2011, Mr. Timothy Cook’s pay greatly increased; on the day that he formally replaced Mr. Jobs as the new CEO, Mr. Cook received a mega-grant of one million restricted stock units with a grant date value of over $376 million….Equity awards of this magnitude are extreme, and the lack of performance requirements for vesting is an additional concern.” (Apple DEF14-A, 2011)

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Gearing ratio Revenue growth YoY

120% 70% R² = 0.3857 53% 90%

35% 60% 18%

30% 0%

0% -18% 2006 2008 2010 2012 2014 2016 2018 2007 2009 2011 2013 2015 2017 2019 Financial year Financial year

Figure 9 & 10: Gearing ratio and revenue growth YoY (Apple Form10-K, 2006-2019)

To which, the board responded that such new design would give the executives “an ever- growing incentive to focus on long-term stock price performance.” (Apple DEF14-A, 2011). In contrast to suitable corporate governance practice, non-executive directors (5 0f 10) were appointed from current executives who have served the company for more than 12 years. They were also expected to own shares in the company which compromised their independence even further (Apple DEF14-A, 2011).

Another measure to identify decline is return on assets, which has been declining over the years as shown in figure 8. The R-square value is 0.73, which demonstrates a strong negative correlation for the values over the years, suggesting that this value is highly likely to decline over time. This measure explains the company’s efficiency at utilising its assets to generate earnings (Investopedia, 2019). A negative value would indicate that the firms resources and capabilities no longer provide competitive advantage to the firm, that the assets are probably ageing. Another interpretation would be that the company’s capabilities are shrinking and/or unable to adapt to the customers needs and aspirations i.e Apple is slow at responding to technological and environmental changes.

Moving on to the corporate culture at Apple, which was quite unique under Jobs leadership, people were recruited with the concept and motivation to change the world (Pfeffer & Veiga, 1999). In order to fulfil that strategic goal of innovation, the company required highly creative, talented and innovative work force. Past struggles, especially outing

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Quick ratio Return on asset Return on capital employed 2.8 1 R² = 0.6637 R² = 0.7342 2.1 0.75 R² = 0.3348

1.4 0.5

0.7 0.25

0 0 2007 2009 2011 2013 2015 2017 2019 2007 2009 2011 2013 2015 2017 2019 Financial year Financial year

Figure 7&8: Quick ratio; ROA and ROCE (Apple 2007-2019) of Jobs from the company resulted in loss of that workforce that critically affected its performance as discussed before (Pfeffer & Veiga, 1999). A similar situation can be observed at Apple today as the company’s values have shifted fundamentally from focus on product innovation to inclusion and diversity, environment and other social issues such as privacy (Apple 2019). This is further evidenced by the number new recruits of minorities and women that have gone up significantly at Apple (Apple, 2019). Moreover, it can also be noted that CEO’s personal bias towards LGBT+ community, has routinised commitment to social causes within Apple’s values.

Not surprisingly the number of key employees that have been at Apple for a long time are leaving, namely Jony Ive, who resigned as the Chief design officer in 2019 (FT, 2019). He left to start his new design company at which Apple will continue to remain as one of his many client. Although his reason for departure is not fully revealed. One of the reason for Apple’s success was embedded in its distinctive and applying design. As such this would significantly impair the company’s legitimacy (Sutton & Callahan, 1987) in terms of the design of its new products. This has been witnessed in the product designs remaining unchanged recently, which will be discussed in each product’s separate section later in this research paper. Among other executives that left the company are Ronald B Johnson (SVP Retail), Scott Forstall (SVP iOS), Robert Mansfield (SVP Technologies) and others (see Appendix 8).

Next, excess financial slack appears to be absent in the given case as the company’s liquidity ratio has been declining over the years as illustrated by figure 7. However, instead

Page 25 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 of pursuing additional strategies, the company has focused on financial returns to shareholders, mainly through stock repurchase and dividend as shown in figure 9. The stock purchase reached an all time high of $80 billion in 2018. At the same time, the company’s gearing ratio indicates high levels of debts increasing rapidly from 2011 as shown in figure. The issue being that the excess slack would be used for its debenture interest commitment, further hammering its liquidity. Therefore, it can be argued that Apple has turned its attention towards maximising shareholder value. Something that was witnessed during its previous decline in 1985 - 1995.

Recently, Apple announced a $2.5 billion fund to support housing crisis in California, which is a social issue (Apple, 2019). Upon analysing the liquidity of the company, it wouldn’t be a suitable strategy to invest in social causes at the cost of long term financial performance. This could be evidence of a strategic error as suggested by Hambrick and D’Aveni (1992), that firms can face resource constraints to fulfil the needs of the stakeholders (Amankwah-Amoah and Debrah, 2014), i.e the company is sacrificing the customer’s needs of innovative products for social causes. Since innovation is Apple’s key competency, the loss of which could be detrimental to the company. As evidently it has been unable to attract and retain this capability in the company. Moreover, the product launches over time has fallen as well due to various reasons, which will be addressed later in this research.

The Company has international operations with sales outside the U.S. representing a majority of the Company’s total net sales. Show sales segment by country. In addition, a majority of the Company’s supply chain, and its manufacturing and assembly activities, are located outside the U.S. As a result, the Company’s operations and performance are dependent significantly on global and regional economic conditions. For example, Apple has relied heavily on outsourcing with most of its supply chain activities conducted in China, making it susceptible to macro-economic conditions (Apple 10-K, 2018). Following the election of Donald Trump, U.S has begun to impose tariffs on Chinese imports as a part of trade war. The imposed tariff is currently 15% on products made in China like smartwatches on September 1, 2019, whilst tariffs on iPhones will take effect from December 15, 2019 (Reuters, 2019). Eventually all of its products including the Mac, AirPods, and iPads will be subject to levy.

Yet Apple’s dependence on China hasn’t decreased significantly over the years with little expansion into other markets such as India (Reuters, 2019). These actions have forced Apple to re-shore its production facilities in Texas, where it plans to to manufacture its new lineup of Mac Pros (Apple Newsroom, 2019).

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In the same news Tim Cook said “We believe deeply in the power of American innovation. That’s why every Apple product is designed and engineered in the US, and made up of parts from 36 states, supporting 450,000 jobs with US suppliers, and we’re going to continue growing here.” - Apple Newsroom, 2019

The company plans to invest $350 billion in the US economy by 2023 through its Advanced manufacturing fund of $5 billion into its Texas facility (Apple Newsroom, 2019). Such external pressures along with declining liquidity could pose a threat to the business as it is likely that costs of manufacturing in a developed country would be higher as compared to developing country such as China. Thereby, adversely affecting its competitiveness in an already competitive industry where cost is an important determinant (Apple, 2018). Notwithstanding, the fact that wages in China have galloped over the years from 2073 yuan in 1999 to 44991 yuan in 2017 (National Bureau of Statistics of China, 1999 & 2018). Apple Inc has acknowledged that such rising costs can materially impact the company’s performance, reflected by increasing price for its products (Apple 10-K, 2018). Hence, the company faces hostile conditions not only in US but also in China.

In order to offset the tariffs, which currently only applies to physical commodities, Apple plans to expand its Services division that are not subject to tariffs. It is also one of the only division at Apple showing sustained growth over the years of approximately. 20%. With the launch of Apple TV+, Arcade, News and Music, which are priced at around $4.99 respectively (Apple, 2019). This move should help Apple sustain profit margins to meet the target performance goals. As Dan Ives, a financial analyst told BBC:

“If Apple executes with minimal speed bumps and aggressively acquires content given the company’s massive installed base and unmatched brand loyalty we believe reaching the 100 million subscriber number in the medium term (three to five years) is a realistic goal that could translate into a $7 billion to $10 billion annual revenue stream over time for Apple.” - BBC, 2019

However, the aggressive marketing has its drawbacks too because it has attracted EU and US investigators for alleged anti-competitive behaviour (BBC, 2019). Specifically, Apple is accused of pushing its own apps and services over its competition, for example, Apple’s Music is ranked higher than Spotify on the Apple store. Such changes would in fact make the environment more hostile by provoking the regulators. In addition, expanding into service segment such as News and TV, especially by providing exclusive shows and movies would require firm specific resources and competencies. Something that Apple does not possess in the field of media and movie production.

On the contrary the external environment could also provide benefits for example, reduction in corporate tax in US from 35% to 21% in order to encourage on-shoring to US

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iPhone YoY %growth iPod YoY %growth

100 80 R² = 0.8041 R² = 0.8043 60 75

40 50 20 25 0

0 -20

-25 -40 2009 2011 2013 2015 2017 2006 2007 2008 2009 2010 2011 2012 Financial year Financial year

Figure 11 & 12: iPhone and iPad YoY growth (Apple Form 10-K, 2006-2019)

more attractive (Koenig, 2018; Ellram, 2013). However, it may not be significant in case of Apple, which has been known to avoid taxes in US (ITEP, 2017) or this reduction in tax payment would not provide sufficient sustainable benefits. Having outlines the factors concerning Apple Inc as a whole, the following section will analyse each of its product division in depth.

4.4 iPhone

iPhones are the company’s primary product offering comprising of 55% of total revenue generated in 2018 (see figure 13). First launched in 2007, the iPhones have cannibalised its iPod division as well as become pivotal in determining the fate of the company. Especially with increasing competition and their technological superiority in smartphones posing a challenge to iPhones.

Firstly, iPhone prices have gone up sharply over the years following 2011 as shown in table 1. More specifically the iPhone 11 pro starts at $1000, which is twice the price of previous iPhones and nearly the cost of a laptop, mainly the MacBook Pro starting at $1299 (Apple, 2019)! Also as shown in Appendix 6, the customers complain about the iPhone’s insane pricing for a product that includes little to no improvements over the previous generation. Notwithstanding Apple’s ridiculous naming strategy of the iPhones, iPhone X ‘R’, 11-Pro-Max, etc, wherein the ‘R’ has no significance or meaning. Also, the unusual dropping

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Samsung Apple Huawei Xiaomi Others LG Global smart phone unit sales Lenovo OPPO vivo

100 3.3 4.5 2.6 3.6 4.6 3 5.3 2 4.8 4.6 7.6 8.1 5.2 6.8

75 32.9 1.5 40.1 39.3 39.1 41.5 38.5 39.1

4 8.7 50 4.9 4.4 4.9 3.6 6.3 1 5.7 Percentage 7.4 10.5 14.7 18.7 15.3 9.5

14.8 16.1 billions in Units 14.6 14.7 14.9 25 0.5

30.3 31.3 24.4 22.3 21.1 21.7 20.8 0 2013 2014 2015 2016 2017 2018 2019* 2009 2012 2015 2018 2021* Year end Year end

Figure 14 & 15: Market share (IDC, 2019) and global smart phone unit sales (IDC, CCS Insight. (2019) of iPhone 9 for iPhone X. Moving back to the issue of iPhone pricing making the product over-priced for most customers. Mainly due to product offerings from Chinese competitors such as Huwaei and Samsung, that offer similar products at much lower prices (see Appendix 4).

Charging such high prices have enabled Apple to report higher revenue figures and profits at the cost of long-term profitability. Since the unit sales have been declining with the rise in cost of their products as shown in figure. Yet, other data such as segment information on net sales and historic figures support the view that iPhones have experienced decline since 2012, when its YoY (herein after referred to as year-on year) growth fell from 75% to 20% in 2013 (see figure 11). In 2016 the YoY growth experienced its first decline of -12%, which eventually offset by. with the introduction of the $1000 iPhone X in 2017, when the growth rose to 2% (see figure 11). In 2019, revenue fell again by a remarkable 14%, which is the company’s historic low. Although unit sales figure isn’t provided, this is due to lower than expected iPhone unit sales (Apple form 10-K, 2019).

The time series regression analysis suggests a strong negative correlation with R2 value of -0.804 (see figure 11), implying that this trend is likely to continue in the upcoming years unless Apple manages to innovate with the next generation of iPhone. Especially, upon comparison with its other product, iPod, one can argue that declining growth may lead to the products demise as shown in figure 12. Moreover, Apple had stopped providing iPod sales figures once it went into a complete decline stage since 2017. In a clever attempt to mask this decline, Apple has refused to provide annual sales figures for iPhones in its annual

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iPad Wearables, home and othwe Services 8% 6% 7% iPod 14% iPhone iPad 55% 8%

iPhone iPod 42% 2006 2010 2019 Mac 44% 10%

Mac 42% Mac 29% Services Wearables, home and other Wearables, home and other 18% 3% 9% Services 4%

Figure 13: Segment information (Apple Form 10-K, 2006; 2010 & 2019)

report since 2018. Suggesting similar symptoms affecting the iPhone product segment. Therefore it wouldn’t be irrational to assume that iPhone price will continue to increase over the coming years, especially with the development of 5G technology in smartphones. This was recently reported in an article by Forbes that states:

“Kuo believes that the main logic-board on the 2020 iPhone 5G will have to grow by about 10% in area to accommodate the new technologies,” explains AppleInsider. “That increase in area will come with a cost - the [mother]board fabrication and some new antenna technology will force a 35% increase in cost to build that component.” (Forbes, 2019)

Secondly, Apple’s market share in the smartphone industry experienced decline over the years as well, falling from 18.7% in 2012 to 14.9% in 2018 as demonstrated in figure 14. The loss of share can be ascertained to international competition from Chinese manufacturers such as Huawei, Xiaomi and OPPO. For example, Huawei’s growth in market share from 4.9% in 2013 to 14.7% in 2018 is noteworthy. Hence, not surprisingly its revenue has also grown from CNY 288 million in 2014 to CNY 721 million in 2018 (Huawei, 2018) whereas Apple’s revenue has declined. Inspire of the industrywide problem of slowing smartphone sales as shown in figure 15. This will result in the competition among existing rivals continue to get more fierce, especially in terms of price and product features. Therefore, Apple’s strategy to increase price would prove counter productive. However, in order to maintain their financial profitability and performance, Apple will be locked in a path trajectory to increase prices.

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The smartphone industry’s landscape already appears to be hostile because it is characterised by intense competition from international firms such as Huawei and Xiaomi, which compete strongly on price. Recently, with the announcement of Samsung’s galaxy Fold, customers preference has shifted to conventional touch screen devices to a foldable display (Samsung, 2019). Other companies such as Huawei and Motorola have followed suit in relation to this technology. Hence, supporting the argument of disruptive innovation by incumbents as well as new entrants in the market, competing primarily on price. All of which indicate strong presence of environmental jolts as explained by external perspective on organisational decline.

Having discussed the market landscape, this section will now address the innovative performance of Apple by benchmarking the iPhones against competitors’ smartphones as shown in Appendix 4. With the introduction of iPhone X, which became the first Apple phone to transition from LCD display to OLED display (Apple, 2019), which has been used by its competitors for a very long time. Moreover Samsung has been using AMOLED technology in its display that is superior to AMOLED, indicating Apple still lacks behind in terms of display technology. Secondly, in terms of performance, Apple still utilises 3 GB of RAM whereas its competitors have significantly higher RAM in their products (see Appendix 4). Moreover, other features such as triple camera and brightness have been present in competitors offerings for a long time. Notably, Sony, Morotola and HTC were among the first to develop a water-resistant smartphone since 2009 (Techcrunch, 2014), which became the industry standard. Only to be later adopted by Apple in 2016 with the launch of iPhone 7, its main feature being water-resistant. These features were recently incorporated with the Launch of iPhone 11 Pro in 2019. This provides sufficient evidence to support the argument that Apple is copying ideas from competitors, suggesting lack of innovation, despite increasing expenditure in R&D from 2012. Reinforcing the argument of inefficient utilisation of resources and/or excess resources in the R&D department, also explaining the decline in Assets to Turnover ratio. Importantly, Huawei is far ahead of Apple with the launch of 5G feature in its latest smartphone (Huawei, 2019), something that set apart iPhones in the past with the launch of iPhone 3G. Finally, with the launch of its recent flagship product, iPhone 11 Pro, the new iPhones have also dropped one of the most popular feature, 3D touch for larger battery (Apple, 2019). In order to stand in line with competitors offerings to support longer battery life.

Therefore it can be agreed that iPhones, which once transformed the industry with the launch of iPhone 4, have become very slow in embracing new technologies. It is also noteworthy that Apple’s products, which are inferior to their counterparts maybe overpriced for the features they offer. Unlike many of its competitors, iPhones have now become a

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Mac unit YoY %growth

40 R² = 0.508 30

20

10

0

-10 2006 2008 2010 2012 2014 2016 2018 Financial year

Figure 16 & 17: Pro Display XDR stand (Business insider, 2019) and Mac YoY growth (Apple Form 10-K, 2006-2018) status symbol - relying heavily on its brand name as compared to real performance. This suggests hubris by the executives in the brand name Apple.

There has also been a shift in performance metrics from conventional to new ones such as triple camera, higher battery life, foldable displays, etc, all of which are introduced by competitors. Apple, once disrupted the conventional phone industry with the launch of touchscreen enabled smartphone, now risks being disrupted.

4.5 Mac

Mac, which was Apple’s pioneering product, does not look favourable either as shown in figure 17. Since, 2012 the annual growth has fallen below 10%, which has now turned negative indicating strong decline. The R-squared value of 0.508 indicates that such trend is likely to continue in the future. In terms of new product launches, there has been a significant delay between new product updates: for example, iMac lineup (see Appendix 5). Among other products are MacBooks and MacPro which have faced considerable delay in update. This may be probably due to the fact the Macs only comprise 10% of the entire revenue since the launch of iPhone as shown in the figure 13. Furthermore, iPhones have a regular and consistent product launches at September each years. On the other hand Macs, which previously had a consistent product launch every October, has now become history. The idea of consistent update suggests that the product is continually being developed. Apple announced the new Mac Pro in June 2019, its first update in six years has yet to begin

Page 32 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 shipment. This could be due to production issue that the company faces, i.e reshoring and Trump’s tariffs as mentioned earlier. On the other hand Apple has recently launched its 16” MacBook Pro to replace the 15” MacBook Pro, first update since 2016 (Apple, 2019). Although it is only an incremental update addressing the issues raised by customers over the past three years, mainly keyboard issue as mentioned by Phil Schiller in an interview (Jonathan Morrison, 2019).

Customers have also complained about its keyboard issues for years (cite), which wasn’t fixed until recently. One a final note, another issue pertaining to its MacBook Pro line up, is thermal throttling, wherein the computer overheats and as a result underperforms. The loss of performance due to a software bug in the system in 2018, when the company had to issue a software update to fix it (Verge, 2018). Despite the new update, the computer barely achieves its advertised performance.

Apple also announced its new monitor called Pro Display XDR, which the company claims to be a breakthrough. However, upon comparing its core technology, one might argue otherwise. The backlit technology has been replicated from TV companies such as Sharp, Sony and Samsung, who first introduced this technology around 2009 (Carnoy, 2010). With a price tag of $4,999, it’s surprising to note that the stand is sold separately with a ludicrous price of $1000 for a monitor stand. This was event put on display at its WWDC event in June 2019 (see figure 16). Arguably, such high price for a monitor stand wouldn’t be justified under any circumstances except adding additional revenue for the company.

The iMacs still use 5400RPM hard drives, which are by far out of date within the industry, especially with the move towards SSD based drives. This technology has been in existence since 2000, which is now outdated. Also, customers have raised concern regarding this, which has been ignored by Apple for a long time (see Appendix 6).

The main cause of this is organisational inertia, i.e the assumption that Macs have competitive advantage due to font rendering, desktop publishing tools, and a strong integration of hardware and software (Forbes, 2019). Moreover Phil Schiller continues to mention the strong integration of hardware and software in an interview (Jonathan Morrison, 2019).

4.6 Apple Watch and services

Apple Watch and service are among the two segments that show strong signs of growth (see figure 18). With regards to the former, the company reported a 41% growth in 2019, which was mainly attribute to Apple watch (Apple Form 10-K, 2019). The watch was

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Other brands Services YoY %growth Apple Watch devices

40 120 66.1

30 90 57 46.5

20 60 34.7

46.9 21.6 40.7 10 millions in Units 30 34 11.9 27.9 7.2 22.3 11.5 16.7 0 2008 2010 2012 2014 2016 2018 2016 2018 2020* 2022* Financial year Calendar year (*Forecast)

Figure 18 & 19: Services YoY growth (Apple Form 10-K, 2008 - 2019) and Global smartwatch unit sales (Strategy Analytics. (February 27, 2019) introduced in 2015 with its main feature that enables users rack their health and fitness (Apple Form 10-K, 2015). Over the years, this smartwatch has revolutionised the health and fitness industry with the introduction of its advanced heart rate scanners capable of conducting an ECG (Apple 10-K, 2018). Such advancement has enriched lives of many people in the past for example, one user reported:

“I’m a former sportsman and keep myself in good nick so I was surprised one day when I got a tap on the wrist saying I displayed symptoms of atrial fibrillation. I had no visible symptoms, but I took an ECG on the Watch and it confirmed it.… He said the big advantage of coming in straight away is that intervention is much more likely to succeed. Normally, the only time someone presents with AFib is when they’re unconscious, they've had a stroke.” - Independent, 2019

The user was eventually put on medication that cured his ‘Afib’. The smartwatch industry is growing rapidly as shown in figure 19, with Apple as the market leader with 27.9% in 2019. This industry’s is expected to continue its growth trajectory over the coming years. Moreover, Fitbit, which is a rival smartwatch company was recently acquired by Google (Google, 2019). This has attracted regulators, who have called for this deal to be blocked as Fitbit’s health data is not covered by US health privacy regulations, hence raised ‘serious concerns’ over its privacy (FT, 2019). This may create an opportunity for Apple to exploit in the healthcare sector over the coming years.

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Apple Samsung Microsoft iPad YoY %growth

6,000 400 R² = 0.5885 300 4,500 200

3,000 100

0

Number of patents of Number 1,500 -100

0 -200 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018 Year Financial year

Figure 20 & 21: Patents filed by each company

In relation to services, its growth has been consistently high over the past years, exceeding 10% as shown in figure 18. This is expected to grow from $24 billion in 2016 (Apple Form-10K) to over $50 billion in 2019 as mentioned by Cook in an interview (CNBC, 2018). In addition to Apple music, the company announced its new line of services, which are Apple TV+, Apple News and Apple Arcade earlier this year (Apple, 2019). However, not only does apple needs to develop capabilities within these areas but also the industry is highly competitive with well experienced rivals such as Disney+, Amazon Prime, Netflix and Hulu. Hence, Apple’s move to enter these industries may not be a suitable strategic decision.

4.7 iPad

Finally, iPad is another one of Apple’s neglected division with negative growth as shown in figure 21. Its current line up seems a bit puzzling as well with five models, each mainly distinguished by screen size and processor (see Appendix 7). Another idiosyncrasy is the notion behind its display size, 10.2”, 10.5” and 11”, which seems eccentric. This indicates a marketing gimmick to distinguish their products from older ones. Indicating the lack of innovation within this devision. Other symptoms of decline such as price rise, stable industry, etc are in line with iPhone.

Moving back to the comprehensive analysis of Apple, it appears that its products do not possess sustained competitive advantage as suggested by Barney (1991). For example, its competencies in developing technology has now become complacent that can be easily

Page 35 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 imitable and substituted by competitors. In fact, Apple’s response to technological changes in the industry appears to be on adopting competitors features as compared to marshalling its internal competencies. Supporting the view by Teece (2018), that successful business models will eventually be imitated by competitors over time. Additionally, in relation to seizing opportunities in mobile or service industry, there is no evidence to support that Apple is modifying its internal resources to take lead over its competitors.

Examining innovation performance by benchmarking against its competitors does reveal the fact that Apple still lacks behind despite increasing its investment in R&D. As illustrated by figure 20, the number of patents filed by Apple has relatively plateaued since 2013, two years following departure of Jobs. Hence, investing into more workforce for diversity and inclusion may not provide competitive advantage.

Finally, there are a lot of similarities observed among the product divisions, each facing similar issues, both internally and externally. Each facing rigidity as compared to innovation, wherein the the company’s lack of innovation is fuelling rigidity. As a result established products and processes will continue to be preserved, increasing the risk of decline at Apple.

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CHAPTER V

ANALYSIS AND DISCUSSION

As anticipated, the data has revealed probable causes indicating decline at Apple, the interconnectedness or complementaries observed between the internal and external perspectives and the supplementary effect of innovation performance. While some elements of the decline can be correlated to the external environment, internal factors had a more crucial upholding on the decline. I layout this analysis under the extensive headings of external, internal and innovation factors as identified in the literature review before as shown in the figure 22 below.

Managerial complacency, Disruptive innovation+ myopia and hubris loss of innovation capability

Organisational decline

U.S China trade war, international competition, changing customer needs

Figure 22: Conceptual framework applied

5.1 External factors

The findings support the plethora of hostile factors as explained by the environmental jolts explanation (Meyer, 1982). The competitive landscape has changed over time with a host of revitalised and new international rivals such as Huawei and Xiaomi, which have captured a significant proportion of the smartphone market. Moreover, the existing competitors such as IBM and Compaq in 1990s and, Samsung and Microsoft currently, has intensified the competition within the industry. Especially when the industries i.e

Page 37 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 smartphone, PC and Tablet have plateaued or declined recently, indicating a change in the business cycle (Venkataram & Vam de Ven, 1998; Carter & Van Auken, 2006). Thereby significantly limiting the profitability within this stagnant or declining industry as rivalry goes up.

There is also evidence supporting the change in customer’s attitude towards price. As a result, most of the competitors are catering to these price conscious customers, thereby driving the prices down. On the contrary at Apple, the prices it charges to the customers have increased and become less competitive as well as the price-quality differentials with competitors has been eroded or reversed. Not only will this limit Apple’s ability to raise smartphone prices but also its ability to sustain gross profit margins by lowering price. The smartphone industry also faces technology technological uncertainty (Slater and Narver, 1994) from product innovations from rival companies such as foldable display.

Aspects of the US-China trade war and rising cost of production in China have also been discussed that highlight the adverse economic environment. Despite the trade war, Apple continues to increase its presence in China. Only until recently when it announced plans to re-shore its production facility in Texas. However, Mac Pro, which will be the primary output only comprises of less than 30% of the company’s revenue, which will materialise in 2023. The significant time-scale in response will only bring more difficulties to its existing crisis. Yet, the management appears to be optimistic about the externalities. Hence, it suggests that the company is been late in responding to the crisis prevailing American environment.

Interestingly, there is clear indication for the applicability of ‘Wheel of Retailing’ by Hollander (1960), wherein TMT at Apple has become complacent to customer realities, mainly price consciousness and vulnerable to new entrants, such as international competition as discussed before. Finally, the arguments do support the view that Apple has failed to adapt to these changes in the environment in a timely manner as discussed above (Hollow, 2014).

The findings support the notion of gradual decline (Zammuto and Cameron, 1985), as all of the above mentioned factors have occurred over a significant period of time that spans over the course of last five years. Therefore, the findings indicate that this crisis was triggered by a range of external factors, especially international competition.

5.2 Internal factors

Regardless of the externalities, the findings provide stronger evidence to support the importance of internal factors as compared to external factors. Preliminary analysis using

Page 38 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 financial indicators suggest that performance has deteriorating significantly over the years, signalling strong decline.

Having established the grounds for decline, this poor financial situation was mainly stimulated by the change in the company’s culture from innovation to financial returns. Especially, with the new remuneration system geared towards maximising shareholder returns. No other performance measurement tool apart from revenue and net profit was used to evaluate executives. To the extent that the management increased its product prices as a tool to manipulate profitability in order to sustain their bonuses. This I believe is the critical factor, that deterred the fate of the company, not once but twice. It can also be construed that such remuneration would foster corporate conservatism among the directors (Hardcopf et al, 2017) as executives will be motivated to pursue strategies that will realise their short term objectives of revenue and profit Barmash (1973). As such the practices that worked well for Apple in the past, were now replaced with hubris and myopia (Miller, 1990; ONeill, 2001; Macoby, 2000), which would contribute to threat-ridigity state as explained by D’Aveni and MacMillan (1990). Furthermore, Cook’s justification about not providing iPhone shipment number seems like an attempt to cloak the decline to investors as Mac lineup also sells in a wide price range yet Apple provides its sales figures. This may serve in the short- term, however the company has risked itself into path-dependancy over the course of the long term.

Moreover, the managerial perception of the large portfolio of products introduced by Jobs as well as a well-recognised brand name would provide it competitive advantage over a long period of time. However, this didn’t shield the company from international competition as the company developed arrogance about its brand reputation in addition to structural inertia. For example, when questioned about the company’s profitability and innovation capabilities, CEO Tim Cook mentioned that Apple has a strong culture of innovation several times, ‘long term health of the company has never been better’, ‘revenue is at the bottom of the list’, etc. Apparently these don’t seem to be true as the company’s health has clearly been deteriorating and the fact that his bonus is dependent on revenue.

The top management team also lacked strong entrepreneurial capabilities that would have enabled them to respond to rapid technological changes in the external environment (Teece, 2015). Despite increase in R&D investment, the company has failed to meet customer aspirations, more importantly unable to seize opportunity within the healthcare industry. This indicates a lack of dynamic capabilities at Apple coupled with routinised activities and embedded structural inertia.

The decline was exacerbated when the board distanced itself from the design team, that lead to departure of one of its key employee, Jony Ive. In combination with departure of

Page 39 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 other key executives, who were expert in technology has affected the legitimacy of the board to continue nurturing innovation.

Nevertheless, notable differences have also been observed such as in case of Staw’s threat-rigidity effect. Additionally, the shift from iPhones and Macs to Apple Watch and Services as means to diversify suggests some degree of dynamic capabilities in order to seize opportunities (Teece, 2018). Also, the company appears to support D’Aveni’s and MacMillan’s (1990) view that firms tend to avoid long term view of the organisation end up in a threat-rigidity state. The above mentioned internal factors have contributed to poor innovative capabilities, which will be discussed in the next section.

5.3 Innovation performance

The company made efforts to improve its technical innovation capabilities through investment in R&D over time (Alegre. Et al, 2006; Chiesa and Frattini, 2009; Chiesa t al, 2009; Lazzarotti et al, 2011) has covertly been hindered. From an internal point of view, Apple Inc lacks a clear innovation strategy following change in strategic direction; short of idea generation; out of touch with customer needs (price consciousness and new technology and poor organisational culture and leadership to foster innovation as discussed in internal view. Apple’s efforts to control its innovation efforts have primarily failed due to its change in organisational culture as discussed previously (Tushman and O’Reilly, 2002; You and Hand, 2010). Structural inertia was quite evident throughout the organisation, wherein the cultural elements that fostered innovation such as risk taking and entrepreneurship were replaced by corporate conservatism.

The findings strongly support that competitors are much more in tune with the customers needs, primarily through regular innovation and product redesigns. Also, recent product innovation efforts at Apple are primarily focused on getting at par with competitors’ product offerings. Indicating a strong shift from market leader to market follower, in other words the company that once disrupted the industry with iPod, iPhone and other products, is now disrupted (Christensen, 1997). Notably, international competition from smaller companies such as Xiaomi and Huawei has disrupted the incumbents such as Apple Inc through fringe market disruption. Eventually these competitions made their way into the main stream market by remodelling and redefining traditional product offerings of incumbents. For example, the introduction of triple lens camera in Huawei obviated Apple’s advantage of superior cameras. As a result these disruptions have rendered Apple’s investments into new technologies obsolete (Charitou and Markides, 2003). However, the data also supports that new product innovations can arise in incumbents in the case of Apple’s new monitor, whose

Page 40 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 technology was borrowed from an established firm, i.e Sony. Hence, Apple is now follower in the industry.

As predicted, this loss of innovation performance has failed to provide stimulus to Apple that would foster innovation. Moreover, the lack of shift from established routines and inertia is in contrast with the literature (McKinley, 2014; Cyert and March, 1963). Owing to the fact that the new TMTs have become complacent and relatively risk averse as compared to risk seeking (Wehrung, 1989; Miller and Bromiley, 1990).

5.4 Performance measurement

The traditional performance measurement technique such as market share price and revenue for decline and, R&D expenditure and number of patents published for innovation performance, alone do not provide sufficient information regarding decline. Also, use of such measures are prone to manipulation or game owing to their simplistic nature, for example managers can raise prices to cloak declining unit sales as observed in case of iPhones to show higher revenue. Hence, through this research I contribute some new ratios and performance indicators such as revenue growth year-on-year, gearing and other ratios that provide a more holistic as well as in-depth view about symptoms of organisational decline. Finally, cross product examination or benchmarking company’s product offerings to that of competitors may be another way of comparing a firms innovative performance.

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CHAPTER VI

CONCLUSION

This research provided with a synthesis of prior work in organisational decline and innovation performance. Using these as a lens, I was able to examine the organisational decline at Apple using data from corporate reports and other press releases. My main theoretical contributions and findings regarding organisational decline can be summarised as follows:

1. Organisational decline at Apple appears to be substantial. The research shows a change in the direction of the company following the change of leadership in 2011 from innovation to financial returns. Strikingly similar to the decline that was observed during the period of 1985 to 1995. Therefore, it indicates that large companies operating in technological industry are often characterised by strong competition along with heavy reliance on innovation capabilities. Due to which, the decline to a greater extent, results from internal factors as compared to external environment.

2. This decline illustrates that using the case study of Apple can create added value for the two previously fragmented perspectives i.e internal and external, especially if these theories are complementary in their strengths. Both factors have played a significant role that contributed to this decline, although the findings suggest internal factor as the main cause. I argue that internal factors are critical to understanding organisational decline, which has high degree of managerial prepotence in order to prevent decline.

3. This has also been supplemented by the fall in innovation performance of the company. A number of new themes have also been found such as an increase in R&D expenditure does not necessarily mean higher innovativeness of a firm and, innovation and shareholder returns do not always coincide.

4. Traditional performance indicators may not work in extremely competitive industry that suffers from strong internal factors which affect its decline. Also, innovative capabilities can be determined using product benchmarking tools.

Unfortunately, as demonstrated in this research, the $1.1 Trillion market capitalisation milestone of Tim Cook and Apple’s board is deeply in bed with the shareholder’s value extraction notion. Historically, Apple didn’t have to solve the society’s problems such as diversity and environment. It prospered during the 1970s and with Jobs return in 1995, through constant efforts to innovate within the industry through some radical innovations

Page 42 of 69 AIBM thesis 2019 Heet Shah B6042389/S3904911 such as Macintosh, iPod and iPhone. My research shows that Apple’s focus to financial returns comes at the expense of the goose (organisational culture) that laid the golden egg (brand name). In agreement with Lazonick et al (2013), Cook’s set of norms have resulted in value extraction instead of value creation at Apple. The evidence supports to what Sculley and other CEOs tried and failed in the late 1980s, through increasing managerial remuneration, revenue and profitability. More importantly, destroyed the unique culture that Apple was originally built upon by turning it into an ordinary corporation for financial returns with strong attention to CSR. Based on my analysis I strongly believe in the opinion that Apple died with Steve Jobs. In other words the company will run into serious struggle over the coming years that were previously experienced after his departure in 1985.

LIMITATIONS

Provided the time and word constraint of this research, the products from last three years have been chosen, alternatively a more in-depth analysis could also be conducted for all the products over the years.

Another research comparing the stated competitors’ such as Microsoft, Samsung and Huawei could be undertaken in depth with other factors taken into consideration. Also future research could address what characteristics prevent decline in case of established incumbents as well such as Microsoft and Samsung, as called upon by Danneels (2004).

More importantly, I lack the networks or resources to gain an insider view of the company. A follow up research with sufficient insider information, such as interview of managers, more facts and internal reports could provide more facts to further the arguments made by my research. Alternatively, a more in-depth review of the product specification across the entire portfolio and throughout the duration of the company could also be undertaken provided additional resources, mainly time and word count. Finally, in order to improve the validity and reliability of this research, a multi case study analysis could be conducted by comparing metrics across organisations in the industry to gain a better understanding of decline. Also, it would help explain whether decline is an independent phenomenon or pertains to the whole industry.

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MANAGERIAL IMPLICATION

Research has not only address the gap in literature on TMTs but also identify issues that needs to be addressed in order for early detection and prevention of decline; role of founder CEOs and entrepreneurship in relation to decline and further research on innovation as a factor determine decline.

Moreover, long-term oriented and subjective incentive plans should be adopted instead of short-term plans based on revenue and profitability for the key executives (Govindarajan and Kopalle, 2006). As such managers would not be restricted to organisational inertia and recognise the risks of disruptive innovation in the market. It can also be noted that founding members, would be advantageous to the firm in this case Steve Jobs, who in their entrepreneurial capacity would over-ride existing routines in the business in pursuit of innovation (Christensen and Raynor, 2003).

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CHAPTER VII

APPENDICES

Appendix 1: Apple R&D as percent of sales and Payouts ratio (Lazonicka et al, 2013)

Appendix 2: Apple sales and employees from 1980 to 2012 (Lazonicka et al, 2013)

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Appendix 3: Apple revenue and net income 1980 - 2004 (Lazonicka et al, 2013)

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Appendix 4: Smartphones comparison (Apple, 2019; Huawei, 2019 and Samsung, 2019)

Huawei P20 Models iPhone X iPhone XS iPhone 11 Pro Samsung S9 Pro

Year launched Sept 2017 Sept 2018 Sept 2019 October 2018 March 2018

Storage 64 GB 64 GB 64 GB 128 GB 64 GB

RAM 3 GB 3 GB 3 GB 6 GB 4 GB

2436x1125 2436x1125 2436x1125 2240x1080 2960 x 1440 Display OLED OLED OLED OLED AMOLED

Brightness 625 nits 625 nits 1200 nits 660 nits 1130 nits

Dual 12MP Dual 12MP Triple 12MP Rear: Leica Rear: 12MP Wide and Wide and Ultra Wide, Triple Camera, Front: 8MP Telephoto Telephoto Wide and 40MP RGB f1.8, cameras; cameras; Telephoto 20MP BW f1.6, Wide: ƒ/1.8 Wide: ƒ/1.8 cameras; 8MP RGB f2.4, aperture aperture Ultra Wide: ƒ/ 5x Hybrid Telephoto: ƒ/ Telephoto: ƒ/ 2.4 aperture Zoom, AIS, Camera 2.4 aperture 2.4 aperture Wide: ƒ/1.8 dual-tone LED aperture Front: 24MP, Front: 7MP, ƒ/ Front: 7MP, ƒ/ Telephoto: ƒ/ f2.0 2.2 2.2 2.0 aperture

Front: 12MP, ƒ/ 2.2

Battery life Up to 13 hours Up to 14 hours Up to 18 hours Up to 25 hours Up to 16 hours

Price £999 £999 £1049 £799 £739

Appendix 5: iMac design history (Steeber, 2018)

Models Year launched

Orignial iMac 1998

G5 2002

First-aluminium iMac 2005

Wide-screen iMac 2009

Slim iMac 2012

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Appendix 6: Youtube comments

Video Comments Theme

Zam: “we have run out of ideas, but the price will be higher than ever….Crowd: woooo” (2,300 likes)

Daily Dose Of Memes: ”We ripped you off last year...this year it's no different….Audience: Woooooo!” (1,900 likes) Out of ideas, high price, kitchen Verge (2019): Apple iPhone 11 stove camera design, modest and 11 Pro event in 11 minutes Hurricane: “Apple: We made the improvements camera look like a kitchen stove… Crowd: WoooOoOhh” (718 likes)

Nicholas Nelson: “Summary….It’s like 5% better…..WOOOOOOOOOOOO” ( 1,900 likes)

BowlerHatStudios: ”Okay sooo, what's different?…First of all, it's got a different name now.” (3,500 likes)

Marques Brownlee (2019): iPhone pat herboub: ”So what is new?… Modest improvements, expensive 11 Review: Too Easy! The name” (964 likes)

Traveling The World: “As they say now…An Apple a year makes the money disappear” (1,600 likes)

Jose Santana: “A 5400 RPM hard Jonathan Morrison (2019): drive should be banned for life. Old technology Apple’s Best Mac Right Now That's unacceptable in today's standards.” (475 likes)

Jesse Lioce: "How can you expect an apple product with decent cooling. The guy's name is literally Cook smh” (8,300 likes)

Linustechtips (2019): Macs are Thermal issues, CPU throttle SLOWER than PCs. Here’s why. MA16v3: ”9:16…A slower CPU that doesn't throttle is not slower than a faster one that does…Well put!!!” (1,600 likes)

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Appendix 7: iPad models (Apple, 2019)

Appendix 8: Executive remuneration table (Apple DEF14-A, 2011-2018)

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Appendix 9: Apple Facebook page screenshot (AppleFB, 2019)

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CHAPTER VIII

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