Southern NH University

Apple Inc in 2010

Case analysis

Thirichy, Sridhar 5/7/2012

Even though there was a poor economy in the country of United States, there were a record quarterly revenues and unit sales by Apple Inc. in the third quarter of 2010. The sales of iPad tablet computer was 3.3 million units in between April 3, 2010, launch and the June 26, 2010 quarter end and the sales of iPhones was 8.4 million during the quarter. Company Background Apple is a multinational company that deals with computer software, hardware and electronic goods (Apple, 2011). It is an American company with its headquarters based in Cupertino, California. It has a worldwide location and had 317 retail stores by 2010. It produces a number of products including computers hard wares, computer software, mobile computing devices and electronic among other consumer applications. Much of its success is attributed to its strong brand and its innovativeness when it comes to the release of its products. History of the Company Apple Inc. was established in 1976 by Ronald Wayne, Steve Wozniak and Steve Jobs as Apple Computer Inc. (Apple, 2011). At this time the company sold the Apple 1 computer kit which was made up of a motherboard, RAM, CPU and basic textual video chips. It was incorporate in 1977 where Mike Mark Kula provided the essential funds and expertise. However, Wayne was left out during the incorporation as he had sold his shares to Steve Jobs. The company released its second brand, Apple II, in 1977 which contained an additional feature of colored graphics and compatibility with the office. This gave the new brand more appeal in the market.

Overview of personal computer industry: The personal computer industry was relatively consolidated with five sellers accounting for 78.5% of the U.S. shipments in 2009. Its excepted growth rate was 5-6 % to reach 354 billion by 2012. But the recession caused a dramatic decline in the industry revenues in 2008 and 2009. Both business and consumers were tending to replace desktop PCs with portable PCs such as laptops and netbooks. The consumer purchasing grew by 38% during 2008 and 2009.The sales of desktop computers was excepted emerging markets in Asia, which would allow portable PCs to make up 70% of industry shipments by 2012. Apples competitive position in the personal computer industry: Apples proprietary operating system and strong graphics-handling capabilities differentiated Macs from PCs. The companys market share in the United States had improved from 4% in 2005 to 8% in 2009 primarily because of the success of the iPod and iPhone. These products created a halo effect whereby some consumers switched to apple computers after purchasing an iPhone or iPod. Apples computer product line consisted of several models in various configurations. All apple computers were priced at a steep premium compared to PCs and laptops offered by Dell, HP, and other rivals. The company lowered the prices of all its computer models by 10 percent or more in June 2009, with the price of MacBook Pro falling to $ 1,199 and the MacBook Air getting a $300 price cut, to $1,499.

Competitive analysis of Apple Inc.:

Rivalry between Competitors: As a result of the penetration of computers into everyday life and business the PC is becoming more and more a commodity product. The result has led many manufacturers to pursue low-cost and best-cost provider strategies. Those at the lowest end compete on rock-bottom prices foregoing all but the most basic features. Those in the middle range including Dell, HP, and Lenovo compete for customers offering a range of options for varying prices. The similarity of their products due to industry standard setting also leads to price competition that drives down prices and squeeze margins. The desire of companies to buy large numbers of PCs for the lowest bid available also exercises considerable downward pressure on prices offered by these firms. The nature of technological development also imposes increased competition on the members of the industry. The technology behind many key components of PCs continues to become more efficient with increased processing power and less energy consumption. Buyers power: The factor that significantly impact on Apples success is the way in which the company manages the critical forces within its industry .Apple buys its components in such large quantities, that it can exercise significant leverage over suppliers. This leverage enables Apple to negotiate favorable terms and pricing. Apple has a lower cost structure for its products relative to competing products and all else equal, this lower cost structure results in higher margins for Apple versus competitors. When Apple commands such a large portion of the global market for a key component it creates enormous barriers to entry for potential competitors. Competitors can obtain the component in limited quantities but at a higher price, therefore placing them at a cost disadvantage. Next, competitors can launch different products

Threat of Potential Entrants: There are many avenues by which a new entrant may enter the portable personal computer market; however there are several hindrances that may prevent successful entrance. Currently in the market there are several large, well-entrenched players that have substantial brand recognition and loyalty, including Dell, HP, Lenovo, and Apple among others. Developing a successful brand among many others is difficult. These players also dominate and keep costs down with economies of scale, which cannot easily be achieved by a new entrant without substantial capital investment. Threat of Substitutes: The consumer technology sector has grown substantial over the past decade with the advent of alternatives to personal computers growing from PDAs and now feature-rich smartphones The increase in technology in the average American living room may cause a dislike of PCs. However, despite the spread it is unlikely that smart phones, like the iPhone or Blackberry, will significantly diminish the importance of PCs in the near future.

Recommendations based on competitive analysis: Create a differentiation strategy:

The commodity PC market presents a perpetual downward pressure on prices, which erodes firm profitability. Developing and brand image that separates the firm from the competitive race will reduce the effect of destructive competition and pad margins. Develop close relationships with suppliers: Because there are few suppliers of key components required in PC manufacturing developing close relationships with suppliers is of utmost importance. Rather than searching for the supplier of lowest cost, maintaining a collaborative and exclusive business relationship will help mitigate the power of suppliers and help to lock in attractive component prices. Consumer electronics diversification: While the PC market has grown increasingly crowded with competitors and customers saturated other areas of consumer electronics continue to grow. Developing complementary products in other categories provides broader sources of revenue by accessing more customers in markets with less intense competition.

Financial analysis of Apple Inc.: Current ratio: This measures the short term debt paying ability of Apple, Inc. At 2.7, this is lower than the personal computing industry average. This has been relatively stable is a good sign. A

declining ratio could be a sign of deteriorating financial condition. An improving ratio might be the result of stock piling inventory or it might indicate an improving financial situation.

Quick Ratio: This helps determine how well a company can meet its obligations without having to liquidate or depend too heavily on its inventory. Apples quick ratio is 2.2. Again this is lower than the industry standard but having $2.2 to back every $1 of liabilities is still strong.

Accounts receivable turnover: This indicates how quickly credit sales are converted into cash. Apples average is 19 days, Values less than a month is positive. Collection periods ranging from 10 to 180 days are common depending upon the industry.

Dividend payout: Apple used to pay dividends to the owners of its stock but it discontinued that policy in December 1995. Since, Apple is a fast growing company and the industry it competes in requires constant innovation and rolling out of new products, iPhone for example, if Apple started paying its shareholders dividends there would be a lot less money to research and develop new products which in turn would harm the company's future prospects. Apple can use that dividend money rather to invest in new products which in turn (hopefully) become a success like IPod and raise Apple stocks to new heights which would in turn help investors.

Return on equity/Return on assets: When compared to the return on total assets, return on equity measures the extent to which financial leverage is working for or against common stockholders. Apples ROE and ROA are both similar to the industry standard.

Debt to equity ratio: A high debt/equity ratio generally means that a company has been Aggressive in financing its growth with debt. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5. Apples debt/equity ratio average over 5years is 0.01. Cash flows: In 2007, Apple Inc. increased its cash reserves by 46.31%, or $3.0B. As a percent of revenues, this was among the biggest increases by any company in the Computers and Peripherals industry. By looking at the Cash Flow Statement (Appendix), analysts can easily see the sources and use of cash generated throughout the year. In 2007, management spent only 0.03% of its revenues in attempting to spur growth in its operating business lines. Recommendations based on financial analysis: Apples stock has more than doubled in price in 2009. Great products, great management, and great financial performance, lend to good stock outcomes. Success of the iPhone, iPod, and Mac don't appear to be slowing and should continue into 2010. As long as Apple keeps beating estimates and continuing to put money into research and development, they should continue to do well. As competition rises, Apple will have to be careful to maintain their pace of growth and pace of market share.

SWOT analysis of Apple Inc.: Strengths:

IPod - largest market share (70%) of the digital music market (nearest competitor only 8%) due to first mover advantages in portable digital music industry

Control over supplier and distributors Product sales Strategic alliances - marketing partnerships Marketing competence - reputation for brand development which gains customers through well-planned and carefully executed marketing strategies

Extensive content access based on valuable partnerships in the recording industry Innovation skills and creativity - stream of new product releases Product design and features - ease of use, high quality format - clear product differentiation

Suite of products for range of applications - iPhoto, iMovie, iTunes, iMac Internal software and hardware development - R&D Devoted base of customers - niche audience Customer relationships - responsiveness to customer feedback

Weaknesses:

Historically incompatible software - computer and digital music format - users want compatibility

Profit per song is low Less than 5% of the computer market Unpopular Apple TV features Need to build management team and conduct succession planning External to the company, Apple's most pressing challenges emanate from the industry and competitor environments. A multitude of existing and new competitors is poised to battle for market share and requires continuous attention from the company's leaders.

Opportunities: Retail stores - brand exposure International growth and expansion Upgrades for installed music base Improve compatibility Licensing brand name with accessory manufacturers Web technology and marketing

New ways to integrate electronic devices and change the way they are used in customers' daily lives

Product line extensions and new content distribution systems Consumer demand for "custom" features More customer programs Consumer image consciousness Strategic partnerships - cooperative marketing Growth in new user segments Consumer/corporate needs merging - tools and features to appeal to alternate markets

Threats: Very large competitors with good reputations and extensive resources Pricing pressures as products mature and competition increases Inability to please more diverse customer base Inability to continue marketing success for broader range of products for mainstream customers Technology and entertainment industries are constantly and rapidly changing

Collaborations between competitors and content providers Got Voice (Web-based free subscription service records voicemail messages in MP3 format and sends to e-mail accounts for discretionary review) rivals iPhone's Visual Voicemail and is not limited to cell phone devices, giving it an advantage

New entrants from backward, forward, and cross-industry integration

SOME RECOMMENDATIONS BASED ON THE CASE: The Apple brand, the company's innovative capabilities, the quality of its marketing strategy, and continued success in building strategic partnerships are likely to determine the outcome of the company's forays into the music, mobile phone, and video-on-demand businesses. Apple's commitments and actions should be integrated and coordinated to exploit the company's core competencies, strengthen its competitive advantage, and maximize value. The analysis reveals that, to secure strategic success, it will remain important for Apple Computer to be fanatically protective of the Apple brand image and adequately invest in the company's competitive advantages in innovation and marketing. Some suggestions for achieving this include: Only cautiously engage in the low-end of the market which can tarnish Apple's reputation as a technology leader. Carefully manage brand exposure. Continually invest in research and development to stay ahead of and lead radical product and technology discoveries.

 Maintain and upgrade design appeal to reduce the prospect of new entrants. Because the personal computer, consumer electronics, and mobile communication industries are characterized by rapid technological advances, the company's ability to compete successfully is heavily dependent upon a continual and timely flow of competitive products, services, and technologies to the marketplace. In terms of the global sector, Apple has begun to establish itself as a worldwide player. As the company expands its reach into different parts of the world beyond its current locations, major efforts should be made to study the preferences of customers in those regions to make sure that service offerings and marketing efforts are attuned to and targeted to address specific needs in those areas.