David Baier

Apple 10K Analysis

PESTEL Forces

1. Political Forces
Due to economic and political conditions, tax rates in various jurisdictions may be
subject to significant change. The Companys effective tax rates could be affected by
changes in the mix of earnings in countries with differing statutory tax rates, changes in
the valuation of deferred tax assets and liabilities, or changes in tax laws or their
interpretation, including in the U.S. and Ireland. (Apple 10-K, 2015, Pg. 17)
Apple has taken a lot of heat over their tax practices despite being the largest
income tax payer in America. The company is said to have avoided billions in taxes in the
United States and all around the world. The surrounding controversy has led to a
Congressional investigation which found that some of Apples subsidiaries had no
employees and were largely run by top officials from the companys headquarters. By
locating them in places like Ireland, Apple was able to make them exempt from taxes,
record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in
the world (DUHIGG, 2013). Apple is hardly the only multinational to face scrutiny for
sidestepping taxes, but considering the enormous amount of money involved there are a
lot of things that need to be reconsidered. If nothing else, Apple has exposed an amount
of loopholes in the American corporate tax code. In 2013, while on Capitol Hill, Apple
CEO Tim Cook explained, Unfortunately the tax code has not kept up with the digital
age. The tax system handicaps American Corporations in relation to our foreign
competitors who dont have such constraints on the free movement on capitol (CNBC,
2013). Cook even went on to recommend a dramatic simplification of the tax code.

In an interview on 60 minutes that aired in 2015, Cook told Charlie Rose of CBS
"Apple pays every tax dollar we owe. We pay more taxes in this country than anyone,"
Rose went on to state, Congress concluded was that Apple is engaged in a sophisticated
scheme to pay little or no corporate taxes on $74 billion in revenues held overseas. Cook
simply responded, That is total political crap (Sahadi, 2015). Cook argued that this was
a tax code made for the industrial age and not the digital age. Only time will tell whether
or not changes in tax rates and tax laws will ultimately happen, and if so it would
undoubtedly affect the way Apple conducts its business and where it holds its profits.
2. Economic Forces
The Companys operations and performance depend significantly on global and
regional economic conditions. Uncertainty about global and regional economic
conditions poses a risk as consumers and businesses may postpone spending in response
to tighter credit, higher unemployment, financial market volatility, government austerity
programs, negative financial news, declines in income or asset values and/or other
factors. (Apple 10-K, 2015, Pg. 8)
Adverse global and regional economic conditions pose as legitimate threats even
to a company as large as Apple. Negative ramifications could ensue in tough economic
times. The risk of consumers and businesses limiting spending in uncertain economic
times could have an adverse effect on demand for Apples products and services.
Stagnating middle-class income in certain countries including the United States could
shrink the prospective market for higher-end consumer goods including those marketed
by Apple. This and other adverse economic factors could cause the company to cut back
on costs, affecting how it operates (Apple 10-K, 2015, Pg. 8).

3. Sociocultural Forces
In 2015, the Company changed its reportable operating segments as management
began reporting business performance and making decisions primarily on a geographic
basis, including the results of its retail stores in each respective geographic segment.
(Apple 10-K, 2015, Pg. 2)

Apple has broken up its reportable operating segments into four geographic
regions which consist of the Americas, Europe, Greater China, Japan and Rest of Asia
Pacific (Apple 10-K, 2015, Pg. 2). The benefits that exist with this strategy include a
better understanding of each segment which will better equip the company to take
advantage of consumer demographics, psychographics, tastes, preferences, and behavior.
Taking advantage of differences in market dynamics of each region, and managing each
segment in a way that best fits the consumers and distribution partners allows Apple to
further create a stronger brand image and satisfy its customers. Although Apples
products, software, and services are similar across all segments, better distribution
efficiency and segment awareness can be reached.

4. Technological Forces
Because the industries in which the Company competes are characterized by rapid
technological advances, the Companys ability to compete successfully depends heavily
upon its ability to ensure a continual and timely flow of competitive products, services
and technologies to the marketplace. (Apple 10-K, 2015, Pg. 6)

For Apple to remain a leader in the technology industry, it will have to continually
invest in R&D to develop new technology, enhance current products, and expand the

variety of its product offerings. Apples future financial condition and operating structure
hinge on on the ability to continually develop and offer new innovative products and
services. With this in mind, new product introductions, evolving design, prompt
implementation of technological and product advancement is crucial to remaining a
leader in the industry (Apple 10-K, 2015, Pg. 5). If Apple is unable to come up with
innovative new products or enhance their current offerings, their ability to maintain a
competitive advantage could be harmed significantly. In regards to Mac products and iOS
devices, the development of software applications is crucial to sustaining success. If
developers are unable to create new software or keep pace with competitors, customers
may become displeased and turn to competitors, which may damage Apples image.

5. Environmental Forces
Manufacturing or logistics in these locations or transit to final destinations may be
disrupted for a variety of reasons including, but not limited to, natural and man-made
disasters, information technology system failures, commercial disputes, military actions
or economic, business, labor, environmental, public health, or political issues. (Apple
10-K, 2015, Pg. 11)

Natural or man-made disasters as well as any other unforeseen environmental

occurrence could harmfully affect Apples manufacturing or logistics. Outsourcing
partners perform most of the companys manufacturing, transportation, logistics
management, and final assembly of hardware (Apple 10-K, 2015, Pg. 11). In the event of
a natural disaster prohibiting any of these partners from effectively managing their
operations, negative impacts on Apples cost or supply of components or finished goods
could ensue. Also, climate change could disrupt transoceanic shipping giving Apples
supply chain more challenges to overcome. What was not mentioned in the 10-K but may

be the biggest environmental issue Apple faces is the disposal of used or nonworking
electronic devices. The high expense of disposing these devices, particularly those
containing lithium batteries could raise some real concerns about such devices in landfills
for Apple who could be forced to assume that expense. Also not mentioned was pollution
or other environmental side effects from manufacturing facilities in China which could
lead to increased regulation and higher manufacturing costs in the future (Makos, 2015).

6. Legal Forces
As the Company has grown, the intellectual property rights claims against it have
increased and may continue to increase. In particular, the Companys cellular enabled
products compete with products from mobile communication and media device
companies that hold significant patent portfolios, and the number of patent claims
against the Company has significantly increased. (Apple 10-K, 2015, Pg. 12)

Allegations of patent infringement for companies in the technology industry are

common place and legal battles between companies can often lead to protracted
litigation. Additionally, litigation can be expensive, time-consuming, disruptive to
operations, and distracting to management. Settlements may often be negotiated to
minimize the effect of these issues. If Apple was found to have infringed on patents or
other intellectual property rights, it may require payment of considerable damages or
royalties, or it may be subject to temporary or permanent injunctions which could
prohibit marketing or selling of certain products (Apple 10-K, 2015, Pg. 12).

Porters Five Forces

7. Current competitors (Intensity of Rivalry)

The Companys products and services compete in highly competitive global markets
characterized by aggressive price cutting and resulting downward pressure on gross
margins, frequent introduction of new products, short product life cycles, evolving
industry standards, continual improvement in product price/performance characteristics,
rapid adoption of technological and product advancements by competitors and price
sensitivity on the part of consumers. (Apple 10-K, 2015, Pg. 8)

The aggressive, fast paced nature that firms operate within the technology sector,
coupled with low switching costs give evidence to an intense rivalry amongst
competitors. Apples product line and service offerings are so widespread that they are
competing with several other big name companies that have established resources,
hardware, software, digital content supplier relationships, technical, marketing, and
distribution channels. As companies try to distinguish themselves, many look to pricing
as a focal point. Apples competitors that sell mobile devices and personal computers
have aggressively cut prices and lowered their product margins to gain or maintain
market share (Apple 10-K, 2015, Pg.5). As many consumers are always going to shop
around for the best price, the financial state and operating results of the company can be
adversely affected by these and other industry-wide downward pressures on gross
margins. Some competitors even have greater experience and product breadth; however,
Apple has dealt with the threat of competition primarily through innovation while
continually developing new and unique products to increase and strengthen its market
share position (Apple 10-K, 2015, Pg. 9). Due to the highly volatile and competitive

nature of the industry, continuing and timely introduction of innovative new products,
services, technologies, designs, along with enhancing existing products and services are
all necessary in order to effectively keep existing customers happy and stimulate new
customer demand.

8.

Threat of New Entrants

Some of the Companys current and potential competitors have substantial resources
and may be able to provide such products and services at little or no profit or even at a
loss to compete with the Companys offerings. (Apple 10-K, 2015, Pg. 5)

For Apple, the threat of new entrants primarily comes from existing companies
which may decide to grow by entering new markets. New companies looking to enter the
industry pose a very small threat to Apple due to the presence of substantial entry barriers
such high capital requirements, high cost of brand development, and obligations to
possess intangible assets such as creativity and know-how. Any new entrant to the
marketplace needs to have substantial amounts of capital just to spend on R&D and
manufacturing in order to develop and produce its own products and services prior to
ever bringing its products to market. Furthermore, economies of scale characterize a
significant entry barrier to the industry due to the fact that new players will find it
difficult to compete with established global brands that are able to gain cost advantages
through economies of scale. Conversely, there are large companies with significant
capital that have the potential to impact Apple such as when Google or Samsung were
once new entrants to the smart phone industry. Competition can intensify as competitors
may attempt to imitate Apples approach, product features, and applications, or instead
work collaboratively to offer integrated solutions. In addition, third-party content

providers and distributions could decide to enter the market by offering competing
products and services which could make it impossible for Apple to license or distribute
their content (Apple 10-K, 2015, Pg.11). This could ultimately leave a gap in Apples
product offerings, leaving the company in a real bind.

9.

Power of Suppliers
Although most components essential to the Companys business are generally available
from multiple sources, a number of components are currently obtained from single or
limited sources. (Apple 10-K, 2015, Pg. 5)

The bargaining power of suppliers for Apple is weakened by the large amount of
potential suppliers of component parts for its products and the ample quantity of supply.
Apples switching costs of suppliers is relatively low and considering it is a major
customer for its suppliers and the volume of purchases Apple makes, limits the power of
the suppliers. However, sometimes components are subject to industry-wide shortages
and significant commodity pricing fluctuations, even those available from multiple
sources (Apple 10-K, 2015, Pg.10). Consequently, Apple remains subject to significant
risks of supply shortages and price increases. Failure of the companies supply partners to
perform may have a negative impact on Apples cost, supply of components, and finished
goods (Apple 10-K, 2015, Pg.11).
Apple also uses some custom components that are not commonly used by its
competitors, often available from only one source. When a component or product uses
new technologies, initial capacity constraints may exist. If supply of components were
delayed or constrained, the Companys financial condition and operating results could be

adversely affected depending on the time required to obtain sufficient quantities from the
original source, or to identify and obtain sufficient quantities from an alternative source
(Apple 10-K, 2015, Pg. 6).Continued availability of these components at adequate prices,
or at all, may be affected if those suppliers concentrated on the production of common
components instead of components customized to meet Apples requirements (Apple 10K, 2015, Pg. 6).
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10.

Power of Buyers
Some resellers have perceived the expansion of the Companys direct sales as
conflicting with their business interests as distributors and resellers of the Companys
products." Such a perception could discourage resellers from investing resources in the
distribution and sale of the Companys products or lead them to limit or cease
distribution of those products. (Apple 10-K, 2015, Pg. 10)

Strong competition amongst rivals as well as narrow operating margins illustrate

why resellers should be concerned with Apples direct sales strategy. One could argue
that switching costs for buyers (resellers) are relatively low and validate the bargaining
power of the buyer; however, in the case of mobile devices, loyal customers of Apples
products and services may become disgruntled if a provider such as Verizon or Spirit
ceased to carry Apples products and could in turn switch to a provider that did. The
company has, on the other hand, invested in programs to enhance reseller sales, including
staffing selected resellers stores with company employees and contractors (Apple 10-K,
2015, Pg. 10). Furthermore, uncertainty regarding demand for some or all of the Apples
products could cause resellers to reduce their ordering and marketing of its products.
Apple also believes decisions by customers to purchase its hardware products depend in
part on the availability of software applications and services (Apple 10-K, 2015, Pg. 12).

If software applications and services cease to be developed and maintained, customers

may choose not to buy the companys products. The element of low switching cost
strengthens the bargaining power of buyers.

11.

Threat of Substitutes
The Company faces substantial competition in these markets from companies that have
significant technical, marketing, distribution and other resources, as well as established
hardware, software and digital content supplier relationships; and the Company has a
minority market share in the global smartphone market. (Apple 10-K, 2015, Pg. 9)

There are plenty of substitute models in comparison to Apples products and

services throughout the industry. If a consumer wanted to switch from an iPhone to an
Android, or iPad to an Amazon Kindle, or a Mac to Widows it would not require a
substantial investment. Apple has usually been known as the company introducing new
technology resulting in a higher price point. Thereafter, competitors attempt to emulate
Apples success and make a comparable substitute and offer it at a lower price point. For
example, it took Google and Samsung less than a year to make a payment application
with the same capabilities as Apple Pay (Makos, 2015). Apples competitive advantage
could be adversely affected if it is unable to continually develop innovative new products
or if competitors are able to infringe on the companys intellectual property. Other
examples of substitute products to be examined include a landline telephones, satellite
radio, or digital cameras. The threat of these substitutes on the other hand is relatively
low due to the limited capabilities in comparison to Apples products.

SWOT Analysis

12.

Strengths
The Company believes that sales of its innovative and differentiated products are
enhanced by knowledgeable salespersons who can convey the value of the hardware and
software integration and demonstrate the unique solutions that are available on its
products. (Apple 10-K, 2015, Pg. 4)
Apples strengths are easily identified from the number of innovative and
distinguishing products and operating systems, to their ease of use, to its strong brand
name, high margins, effective business processes, and its knowledgeable staff. The
company is expanding the number of its retail stores to ensure a high-quality and
educational buying experience (Apple 10-K, 2015, Pg.4). Apples retail stores stress
presentation of company products and are located in high-traffic areas. With experienced
and knowledgeable personnel who provide product, hardware, software, and accessory
advice, Apple is able to effectively complement its innovative products and services with
customer service excellence to further satisfy its customers and strengthen its brand
image.

13.

Weaknesses
The Company has also outsourced much of its transportation and logistics management.
While these arrangements may lower operating costs, they also reduce the Companys
direct control over production and distribution. (Apple 10-K, 2015, Pg. 11)
Reduced control can adversely affect quality or quantity of products or services,
and flexibility of the company to respond to changing conditions. Apple may also remain

responsible to the consumer for warranty service in the event of product defects even
though arrangements with these partners may contain provisions for warranty expense
reimbursement (Apple 10-K, 2015, Pg.11). In addition, violations of the supplier code of
conduct could occur as well as quality problems of the companys product which can
harm Apples reputation and result in decreased sales and operating margins. Failure of
these partners to perform can have a negative impact on the Apples cost and supply.

14. Opportunities
The Company is focused on expanding its market opportunities related to personal
computers and mobile communication and media devices. (Apple 10-K, 2015, Pg. 5)

There is still room for Apple to extend its share in the traditional computing and
smart phone spaces. With more and more dependency on digitization for a younger
generation, there are plenty of opportunities for Apple to target potential consumers who
may not have the same emotional attachment to Apples products as a previous
generation. Through further innovation, Apple can continue to introduce new product
lines and services to support the companys growth, such as they did recently with the
Apple Watch and Apple TV.

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15. Threats
Although malicious attacks to gain access to PII affect many companies across various
industries, the Company is at a relatively greater risk of being targeted because of its
high profile and the amount of PII it manages. (Apple 10-K, 2015, Pg. 14)

PII refers to Personally Identifiable Information. This includes massive amounts

of storage of customer, employee, and business partners information that may include
names, addresses, phone numbers, email addresses, contact preference, tax identification
numbers and payment account information. The growing capabilities of cyber criminals
make the threat of a breach more prevalent. If such an incident were to occur, business
partners and customer relationships would suffer considerable damage, as well as adverse
impacts to online stores and services, company reputation, financial, legal and operational
consequences. Although Apple devotes significant resources to network security, data
encryption and other security measures to protect its systems and data, these security
measures cannot provide absolute security (Apple 10-K, 2015, Pg. 15).

Overall Strategy
16.

Strategy Identification
The Company is committed to bringing the best user experience to its customers
through its innovative hardware, software and services. The Companys business strategy
leverages its unique ability to design and develop its own operating systems, hardware,
application software and services to provide its customers products and solutions with
innovative design, superior ease-of-use and seamless integration. (Apple 10-K, 2015,
Pg. 1)
Apple uses a differentiation strategy where the company provides sufficiently
differentiated value striving to be the leader in the technology industry which has
allowed the company to generate superior economic returns through higher pricing and
attractive offerings. Despite the high competition, Apple has maintained their positon
and has been successful in giving the company power over pricing through product
differentiation, innovative advertising and branding, ensured brand loyalty, and

excitement around the launch of new products (Nielson, 2014). Anticipation of a

product introduction along with seasonal demand has historically given the company
higher net sales in its first quarter evidencing a mastery of skillful branding (Apple
10-K, 2015, Pg. 7).
Apple believes that sales of its innovative and differentiated products are
enhanced by knowledgeable salespersons that can convey the value of the hardware and
software integration and demonstrate the unique solutions of its products (Apple 10-K,
2015, Pg. 4). This strategy is followed through from its innovative products to creating a
network of services that work together including its retail locations that are positioned to
ensure a high quality buying experience where presentation is emphasized. A major
aspect of Apples product differentiation strategy comes from an attractive product
design; for example when Apple introduced the iPod, iPhone, and iPad, no similar
consumer electronics products existed in the market that included so many features in
one package (Hanks).
By focusing on customers willing to pay a premium price, Apple has set up an
artificial entry barrier to competitors. Hardware and user interface create a topnotch
product with a price equivalent to its level of quality, designed to provide substantial
value for the price and keeping profits high (Nielson, 2014). Apples customers are
traditionally willing to pay the high price for the high quality of the user experience.
Customers for Apples products and services are primarily in the consumer, small
and mid-sized business, education, enterprise and government markets. Apple sells its
products and resells third-party products in most of its major markets directly to

consumers, small, and mid-sized businesses through its retail and online stores and its
direct sales force. A variety of indirect distribution channels are also employed such as
third-party cellular network carriers, wholesalers, retailers and value-added resellers
(Apple 10-K, 2015, Pg. 4).
Ongoing investment into research and development to continually produce
innovative new products and services to market and sell is a strategy that Apple has been
able to sustain in order to become a leader in the industry. Because of rapid
technological advances within the industry, continual development of new technologies,
competitive products and services, an expanded range of product offerings, and
enhancement of existing products are essential (Apple 10-K, 2015, Pg. 6).
Apple has also been able to capitalize on the brand itself, which has been
integrated into our culture and lives with the ease of use of multiple company products
to share media, applications, and specific user content across multiple devices. Apple has
been among the most successful in developing loyalty to a brand which has allowed the
company to differentiate itself from competitors (Hanks).

Works Cited
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STATES SECURITIES AND EXCHANGE COMMISSION:
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62d10k.htm
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Cook: We Pay 'Every Single Dollar' in Taxes Owed:
http://www.cnbc.com/id/100754556
DUHIGG, N. D. (2013, May 20). Business Day. Retrieved January 30, 2016, from New
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62d10k.htm
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differentiation. Retrieved January 3, 2016, from Yahoo Tech:
https://www.yahoo.com/tech/apple-premium-pricing-strategy-product191247308.html
Sahadi, J. (2015, December 18). Apple scheming to avoid taxes? 'Total political
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http://money.cnn.com/2015/12/18/pf/taxes/apple-taxes/