1. What, historically, have been Apples competitive advantages? Apple Inc.

was founded by Steve Jobs and Steve Wozniak in 1976 with the mission to make products that were cutting edge, designed beautifully, and easy to use. They have been able to keep this competitive advantage not only by relying on its own proprietary designs but by refusing to license their hardware to third parties. They tend to be a leader in new technologies such as the first desktop solution, mp3 player, and touch screen cell phone. 2. Analyze the personal computer industry. Use the tools you learned in your strategy course. Consider the following factors: competition in the PC industry, barriers to entry, power of PC buyers, power of suppliers (Intel & Microsoft), threat of substitutes. Is the competitive environment favorable or problematic for Apple? (In other words, is this a hard industry to compete in?) The competitive environment was favorable at the inception of Apple. The only barrier at the time was the actual knowledge capable of developing the technology never seen before. They quickly became the industry leader when they came out with Apple II and were able to launch a successful IPO which would allow them to raise needed capital to develop more products. At the time the PC industry gained momentum quickly and Apple was responsible for sparking a computing revolution with annual sales reaching $1 billion in less than three years. Once IBM entered the PC market in the early 80s the competitive environment changed drastically. Quickly their PCs became the industry standard and they were able to spread their product by selling the rights to the system so other producers could easily replicate the product. At this point it was easy for producers to enter the market as long as they had the capital to purchase the rights to the system. This had a very negative impact on Apple and caused net income to fall 62% in just four years, after being industry leader just years before. The new structure of the PC Industry lead to what is called buyer power. Since there were so many sellers, prices of the PC became more accessible and this eventually lead to a crisis for Apple. Jobs was forced out and the company began to go in a new direction. By the 90s Apple was on the rise and was able to catch a part of the market untouched by the other PC competitors. They began to develop new products like laser printers and also grabbed more than half of the education market. Over time things began to change for the other PC Manufactures and the number of manufactures decreased to a point where about four or five PC vendors existed instead of thousands. This allowed the vendors to sell their products to customers through superstores instead of dealers. As far as the suppliers are concerned, there are definitely major players in the microprocessor and operating systems market with Intel and Microsoft holding approximately 80 and 90% of the market share respectively. This market is difficult to enter and be competitive since both firms dominate the market. It would require high development costs in order to make a system or processor that could compete with their technology. In recent years Apple has found their niche and has really gotten back to their competitive advantage of high quality, new technology, and style in every product. The market is still competitive and other companies are coming up with substitutes for their innovative products, but it seems that Apple will always be the original innovator of the next great piece of technology due to their philosophy of controlling their software and hardware.

3. In your opinion, how sustainable is Apples competitive position in PCs? Looking back on how the PC industry developed, Apple was the original innovator, but they became overshadowed by IBM and Microsoft who would sell their rights to manufactures who could make a cheaper and almost comparable device to Apple. As we have seen in the past few years, Apple has been able to cash in on developing new technologies before anyone else has. Jobs idea of creating a digital hub allows him to monopolize the consumers experience because all devices such as the iPod and iPad, which are highly sought after, can only be used if you purchase add on through Apples store. Apple also has made their PCs more compatible with other PCs by working with Microsoft and providing the capability to use applications such as Microsoft Office, which is the most widely used creation software. They also cooperated with Intel which allowed them to make their computers faster and more energy efficient. I believe that Apples competitive position is sustainable as long as they continue to come up with products that are cutting edge and customers are forced to buy them first from Apple if they want to get their hands on the latest and greatest technologies. 4. In your opinion, how sustainable is Apples competitive position in MP3 players? When apple came out with the iPod in 2001 they secured a position in the MP3 market that no other competitor could match. The quality and capability of the iPod surpassed that of its competitors and Apple soon came out with new generations that out performed its previous model. By 2010 Apple held more than 70% of the MP3 market. Apple also introduced iTunes which allows users to purchase and save their music in any computer they choose and download to any Apple product. This is the largest music catalog available and is the catalyst to get customers to buy Apple products. They make hardly any money on the music, but people will purchase the Apple products to have the whole experience. Considering these facts and the reality that Apple has developed other products such as the iPhone and iPad which allow you to use the same music interface and store, they will continue to be the leader in MP3 players. 5. How do you assess Apples competitive position in Smart phones? With the problems that were created for Apple with the availability of free listening on sites like Pandora and Spotify, Apple had to figure out how to get customers to still use iTunes. With the invention of the iPhone in 2007, there were able to not only partly address that issue, but also introduce a product into the industry that was completely different and could offer capabilities that no other phone could. Even with all this to offer there were some draw backs. The first iPhone model was limited to a single network that did not always have the best service, bad battery life, and did not support flash technology. They were able to capture over 14% of the smart phone market and introduced the Apple App Store which would bring in even more revenue and benefits to customers which would convince them to buy the iPhone. Overall people still continue to purchase the iPhone and there seems to be a sort of following for Apple created products, so I do not think that Apple will have a problem with maintaining a position in the smart phone market.

6. In your opinion, what are the prospects for the iPad? The iPad was designed to be a middle ground between the smart phone and laptop. Some thought that the iPad would be a replacement for the Kindle eReader but that was never Jobs intention. Eventually Jobs thought that the iPad would kill the laptop market but my personal opinion is that it never will. The capabilities and design of the iPad does not always provide the same experience that a laptop does, so only time will tell where the iPad goes. Page 2 of 4

7. Examine Apples Select Financial Information in Exhibit 1a. Of the years provided in the exhibit, what, in your opinion, was Apples worst year financially? Provide the rationale you used to arrive at your choice. According to Exhibit 1a Apples worst financial year was 1996. That year Apple had a net loss of $816 Million. A few years before this time Apple had appointed a new CEO, Michael Spindler, whose objectives were to simply expand sales internationally. He was not focused on new product development except for developing a revolutionary OS for Mac which eventually never came to fruition. This left Apple with high costs and average sales for the year. After the first quarter of 1996, apple appointed a new CEO who only lasted a year, and eventually Steve Jobs came back in late 1997 and quickly moved to reshape Apple for the better.

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8. Using information from Exhibit 1a, prepare common-size income statement amounts for the first six line items (i.e., Net sales through Net income (loss)) for years 2004 through 2009. Also prepare common-size statement amounts for the asset section of the balance sheet (i.e., for line items seven through eleven, Total cash and ST Investments through Total assets) for the same time period. Is there anything in this analysis which you find interesting or cause for optimism or concern? Common Size Income Statement 2004 % 2006 % 8,279 100.0% 19,315 100.0% 6,022 72.7% 13,717 71.0% 491 5.9% 712 3.7% 1,430 17.3% 2,433 12.6% 336 4.1% 2,453 12.7% 266 3.2% 1,989 10.3%

Net Sales Cost of Sales Research and Development Selling, general, and administrative Operating income (loss) Net Income (loss)

2008 37,491 24,294 1,109 3,761 8,327 6,119

% 100.0% 64.8% 3.0% 10.0% 22.2% 16.3%

2009 42,905 25,683 1,333 4,149 11,740 8,235

% 100.0% 59.8% 3.1% 9.7% 27.4% 19.2%

For the Common Size Income Statement the Cost of Sales decreased steadily from 2004 to 2009. Historically Cost of Sales was about 72% of Net Sales and in 2009 it was about 59%. This could be due to outsourcing production and streamlining the process of producing products. Research and Development and Selling, general, and administrative costs also decreased by about half over the 5 year period. All of these lead to dramatic increases in the bottom line of Operating and Net Income. Overall after the introduction of the iPod, Apple has been able to build on the technology and in many of their products are able to use the same technologies which will cut costs and in turn increase Net Income.

Total cash and ST investments Accounts Receivable, net Inventories Net property, plant, and equipment Total Assets

Common Size Balance Sheet 2004 % 2006 % 5,464 67.9% 10,110 58.8% 1,050 13.0% 2,845 16.5% 101 1.3% 270 1.6% 707 8.8% 1,281 7.4% 8,050 100.0% 17,205 100.0%

2008 22,111 4,704 509 2,455 36,171

% 61.1% 13.0% 1.4% 6.8% 100.0%

2009 23,464 5,057 455 2,954 47,501

% 49.4% 10.6% 1.0% 6.2% 100.0%

For the Common Size Balance Sheet the major fluctuation from year to year is the amount of cash and ST investments Apple has on hand. From 2004 to 2009 cash and ST investments decreased by almost 19%. They are shifting their capital to another place. You might think that it is for Research and Development, but according to the Common Size Income Statement R&D has decreased over this time span. By looking at their liabilities they have increased significantly over this time period, so they could be using their cash to pay off these liabilities.

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