Apple has fallen from the tree - Heet Shah Logo cited from Svetlik, 2011
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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.
(Medium, 2019)
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
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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
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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
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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
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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,
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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
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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
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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
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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.
Page 18 of 69AIBM thesis 2019 Heet Shah B6042389/S3904911
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 69AIBM 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 69AIBM 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
Page 21 of 69AIBM thesis 2019 Heet Shah B6042389/S3904911
Net sales EBIT
300,000 80,000
225,000 60,000
Amount in $m
Amount in $m
150,000 40,000
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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