Apple Case Analysis

Rebecca Brown Professor Maurice Gervais March 1, 2011

Throughout its operations, Apple has continuously set and accomplished new goals. In less than 10 years Apple transformed from a struggling corporation to a vital and innovative company. Apple credits much of its recent success to the development of the iPod, a portable and user-friendly music player. Through the iPod Apple has revolutionized the music industry. It become a fashion statement, and many any other MP3 player is considered Brand X for many consumers. Each product is technology driven and is easily linked from product to the independent software vendor. For example, Apple computers, iPods and iPhones are programed to use iTunes as its primary music player. The brand name beginning with I encourages brand recognition. Apple competes in three separate industries: computers, mobile phones and MP3 players. The Apple product line began with its introduction of its first computer, the Apple I in 1976. For the fifteen years Apple focused solely on the computer market. The firm began to see improvements when expanding their computer lines to appeal to the consumer industry. However, it was not until the iPod, first released in 2001 that they began to see enormous improvements in cash flows. Apple did not follow in the path of the traditional computer hardware and operating methods used by their competitors. Unlike Windows, in order for a consumer to use Apples OS X operating system they must purchase Apple hardware. Their computer also offered customers the option of paying a premium to operate both Windows and MAC OS X. Apple is presently trying to position itself as the chief option for home and business technology systems. Mac computers have proven to be reliable, stylish and innovative technology features. Following the release of the iPod, MP3 players began to take on multiple roles. It was considered not only a music listening device but also, room for data storage with the ability to watch videos. The introduction of the Apple iPod was what drove most of Apples growth from the past 10 years. However, Apple was under threats from other mobile phone manufacturers that began offering included MP3 players. In 2007, Apple introduced the iPhone, an Internet and multimedia- enabled smartphone with a multitouch screen display and access to Wi-Fi and 3G connectivity. The iPhone not only acted as a mobile phone but also as a digital camera, MP3 player, and portable PC. An assessment of Apples strengths, weaknesses, opportunities and threats help us distinguish what future recommendations should be made in order for Apple to continue sustainable growth. SWOT of Apple: Strengths Apple is a strongly recognized and appreciated company Skilled management team who Opportunities Success of iPhone will encourage consumers to buy more Apple products

ensures all business operations run smoothly Innovative CEO who provides a clear and concise vision for the company No financial problems Manages its business on a geographic basis Several options of products for consumers to choose from Strong consumer loyalty Ability to reinvest cash flows in R&D to maintain cutting edge technologies Unique designs Simple and user-friendly products Highest stock price in the computer industry Stores allow consumers to have an immediate face-to-face experience with a direct employee of Apple Weaknesses Priced at a premium compared to others Any economic downturns will significantly affect Apple since their products are luxuries High R&D expenses Dependency on Steve Jobs

Enter new emerging markets Allow for easier upgrades in hardware and software Extend warranty plans Increasing demand for iTunes not only in music, but also in movies and applications downloads Halo effect of iPhones and iPods

Threats Lower priced goods, with similar quality Increasing competition: Apples success will attract more competitors to the industry Product substitution Have been involved in numerous legal battles, these have large costs associated and may lead to critical recognition An increase in illegal music downloads will reduce revenues of iTunes Uncertain global economic circumstances

1.

How well has Steve Jobs done as Apples CEO? Has he done a good job of performing the five tasks of strategic management discussed in Chapter 2? Why or why not? What grade would you give him?

Steve Jobs has excelled in his position as Apples CEO. Soon after his interim CEO induction in 1997 he announced that Apple would begin selling software directly to consumers. This led to transform Apple into the third largest e-commerce site on the Internet. Immediately once Jobs became CEO he made began to restructure the company

through hiring a new board of executives, an aggressive marketing campaign and the first-ever alliance with Microsoft. Prior to Jobs Apple seemed to be going in a downward spiral, with little hope for longterm sustainability. Steve Jobs has done an excellent job in setting a clear and concise vision for the company. He has implemented the most optimal strategy possible for his goals to be reached and has had strong communication with his stakeholders throughout. Since 1997, Steve Jobs has transformed the organization into the extremely successful business we know of today. The five tasks of strategic management are developing a strategic image, setting performance objectives, defining the strategy, implementing the strategy and evaluating the performance. In order for Apple to become the successful company it is today, they first needed to ensure their strategic management process was on the right track. 1. Develop a strategic image: Steve Jobs was determined to make products that will appeal to consumers.

2. Setting performance objectives: Jobs was determined to turn the companys performance around.

3. Defining the strategy: In order to turn performance around Jobs must sell products and minimize expenses to generate revenue and result in maximizing shareholders profits.

4. Implementing the strategy: Jobs pushed for new products, made structural changes, enforced business discipline and hired a brand new skilled management team.

5. Evaluating the performance: Using the financial ratio analysis we can evaluate that their cash flows have resulted in a sustainable future for Apple.

Since Steve Jobs has done so well in developing and implementing a strategic vision for the company I would give him an A for his CEO performance. Jobs does an excellent job in communicating his visions to Apples stakeholders and making sure the actions he takes are in congruence with the goals of the corporation. His strategies will produce long-term benefits for all of Apples stakeholders.
2. What are the chief elements of Apples strategy? How well do the pieces fit together? Is the strategy evolving?

Apple uses numerous strategies to maintain a wide customer base. Using the value chain analysis we will determine which activities are most important to Apple and why.

1. Research and development i. Apple is consistently making sure that their products will appeal to large quantities. They have made numerous changes and updates to their product lines over the years. For example, the first iPhone was announced in January 2007 and just 4 years later the iPhone is on its 4th generation.

2. Supply chain management i. ii. Apple has created strategic alliances with companies in order to promote their products. (Including AT&T and iTunes) ITunes example: After the launch of the iPod, Apple began working with iTunes digital music store to allow for easy access between the music software and their new MP3 player. For iPod users, iTunes was the simplest method for a legitimate online music service and by 2008 it became the number one music retailer in the United States. ITunes gives iPod users a wide product line including movies, music and television series available almost immediately. The collaboration between Apple and iTunes creates a strong push for both of the businesses.

3. Manufacturing i. Apple uses previously developed technology to produce new products. For example using the iPod software, Apple has produced numerous different sizes of iPods with various memory and pricing. The design and technological features of the product is important to any electronic industry. Apple is known as a more secure and dependable operating system than its competitors.

ii.

4. Marketing i. Apple markets their products on an international basis, leading to worldwide brand recognition. Since sales and marketing are extremely important to Apple, especially Steve Jobs, Jobs reviews all product development lines, new marketing campaigns and personally announces all new projects. In all of its products, Apple promotes its improved features in order to outcompete competitors.

ii.

5. Human Resources i. Jobs leadership style and business discipline guided the corporation in changing their performance around. Under Jobs was an extremely knowledgeable management team who ensured all of the business operations ran smoothly and in relation to Jobs vision for the corporation.

6. Financial i. Apple takes pride in its financial strategies. In February 2004, they retired $300 million of liabilities and reported a long-term debt of $0 without depriving any needed funding for research and development. Without liabilities the company was able to price itself more competitively and convince consumers that they had an advantage over competitors.

Based on Apples trend in sales revenue and other financial ratios shown below we can determine that its strategy is beneficial in ensuring sustainability and a competitive advantage.
3. Does it make good strategic sense for Apple to be a competitor in the computer, digital music player, and mobile phone industries? Are the value chain activities that Apple performs in computers, digital music players, and mobile phones very similar and compatible or are there very important differences from product to product? Which of the three products lines computers, digital music players, or mobile phonesdo you think is most important to Apples future growth and profitability? Why?

In order to support the activities and costs associated with Apple, they have followed the following 6-step value chain. 1. Purchased supplies/ inbound logistics: Apple purchases its raw materials from third parties, which allows for them to put more effort into testing and developing their own software. 2. Operations: Apple continues to promote R & D in order to find innovative ideas to outcompete rivals. Apple manufacturers products to appeal to the large quantities of consumers. 3. Distributions/ outbound logistics: Apple is a leader in its distribution techniques due to its shown by its success in globalization. The ease of iTunes software also proves Apples effective distribution techniques. 4. Sales/ marketing: Since the computer industry is commoditizing, Apples attempt at product differentiation in the computer industry has shown negligible outcomes. Its marketing techniques in its other product lines have proven to be much more successful. (see Appendix I) 5. Service: Apple takes pride in its customer service, offering technological support over the phone, Internet and in Apple stores 6. Profit Margin: Apples financial documents reveals growing profitability from 2005-2007. Apple value chain activities do not differentiate much between its products. All of the products work well together and the consumers experience is enhanced as each additional Apple product is purchased.

4.

How intense is the competition in the digital music players industry? Prepare a five-forces analysis of this industry to support your position.

Porters Five Forces Model: Digital Music Player Industry Rivalry among competitors: moderately high: Apples existing rivalries in the digital music player industry include the Creative ZEN, the iRiver Clix, the Microsoft Zune and the SanDisk Sansa. All of MP3 players are essentially very similar and used for the same functions. Apple has a great variety in its products compared to its competitors. Apple features four iPods in its stores currently, the iPod touch, iPod classic, iPod nano and the iPod shuffle, each having different options in memory size and price. Apple has the vast majority of the MP3 sales, however, someone who is willing to sacrifice the brand name of Apple for a lesser cost, will get the majority of the benefits iPod has in the competitor MP3 players. Consumers have access to testing a wide selection of MP3 players before purchasing. Threat of new entrants: low: It is relatively easy for a company to obtain the necessary resources to produce a new MP3 player since they already exist in the market. However, the market is already extremely developed and dominated by a few corporations, so being very profitable would be difficult. The commoditized market makes it challenging to make a product that will be differentiated from its competitors. Competition from substitutes: moderate: Consumers can easily purchase CDs from stores such as Newbury Comics and FYE. They also have access to streaming music over the Internet and listening to the radio at no cost. However, it is difficult for competitors to match the unique software and design of Apple. Bargaining power from suppliers: Since the digital music player industry has grown so quickly, suppliers must make their products in high volumes resulting in low supplier bargaining power. Since MP3 players are not highly differentiated, MP3 manufacturers have numerous options in their choice of supplier. When it comes to music download suppliers, the bargaining is high because there are few options Apple users can use to buy songs over the Internet. Bargaining power of consumers: moderately high. Since MP3 players primarily have identical functions the consumer is given many options to choose from. They can then base their option off of other variabilitys such as price.
5. Identify the key success factors in the digital music industry. What does a competitive strength assessment reveal about Apple, as compared to the four main players in the digital music industry? Use the unweighted methodology in Table 4.4 to support your answer. Among these digital music player competitors, which company enjoys the strongest competitive position? Who is in the weakest overall competitive position? Has Apples strategy resulted in a substantial competitive advantage over its rivals in the digital music player industry? What is the basis for whatever competitive advantage Apple has?

The digital music industry is primarily dominated by five competitors; Apple, iRiver, Microsoft, SanDisk and Creative. The most important success factor in manufacturing

and selling MP3 players is to maintain and attract customers. Using a competitive strength analysis we can determine which of the competitors are strongest. (Rating scale: 1= Very weak, 10= Very Strong) Competitive Measure Quality Performance Customer Service Financial Resources Apple 10 9 9 10 iRiver 7 9 6 7 9 6 44 Microsoft 8 9 8 10 10 10 55 SanDisk 9 9 6 8 10 8 50 Creative 8 8 6 4 9 6 41

Technological 10 Skills Brand Recognition Total 10 58

Apple shows strength in the quality of their products, their financial skills, customer service, technological skills and brand recognition. The weakest overall competitor is Creative. A major cause in their weakness is their unstable financial resources. The competitive strength assessment shows that while Apple is the top performer they should be wary of competitors in the digital music industry, especially Microsoft and SanDisk.
6. What is your assessment of Apple Computers financial performance the past three years? (Use the financial ratios I distributed and that we used in class, as a guide in doing your financial analysis.)

Appendix II displays the key financial ratios used to determine whether Apple was in good financial health. Although Apple is showing declining growth rate, it is still well above other the industry average and its competitors. The growth rate has reached very high double digits from 68.3% in 2005 to 24.3% in 2007. Profitability is consistently growing into the double digits. This is due to maximizing their net income from year to year and indicates financial strength. The cost of goods sold and selling, general and administrative expenses has decreased slightly from 2005 to 2007, which is a result from a decreasing cost of manufacturing and selling the products. This may be as a result of additional research and development to make more cost efficient business strategies.

Apples increasing Return on Assets proves that there is more capital available to pay for their assets. Long-term debt over equity has slightly increased from 2005 to 2007. This reveals that Apple is using additional long-term liabilities to finance its operations. Apples Return on Equity is increasing at a steady rate. This reveals that they are consistently profiting more off of their investments. Given their financial ratios, Apple is performing well. Their growth rate has been extremely high due to new projects and has shown a slight decrease. However, their profitability is increasing and expenses to revenue ratios are decreasing. This proves that they are a sustainable corporation in stable financial health.
7. What accounts for Apples noteworthy success in the markets for mobile smart phones and digital music players, but its overall weak showing in the computer industry?

Even though computers were the first product Apple introduced, there is much difficulty matching their profits from computer operations to their smartphone and digital music player products. The factors that this can be attributed is pricing, market timing and compatibility issues. Along with the rest of Apples products, the price of an Apple computer is placed at a premium. Price-conscious consumers will be inclined to purchase a cheaper, but still reliable, Windows operating system. Apple must further differentiate and improve upon their product in order to rationalize the price premium. Since the majority of the computer industry sales are Windows, it is difficult for consumers to switch over to Apple. Compatibility issues may be faced because it is an entirely new operating system. Even though Apple was one of the first competitors in the computer industry, the periods of delay in producing reliable products allowed for competitors to develop their product and gain market share. In order to strengthen their computer sales, Apple must promote innovation and further develop their product line.
8. Does Apples strategy for its iPod business seem capable of allowing the company to remain on top of the digital music player industry over the next 5 years?

Even though Apple was not the first company to introduce MP3 players, the sales and technological advances have exploded since their introduction of the iPod in 2001. Since Apple is constantly using R&D to find what consumers are looking for in a new products Apple will remain as a leader in the digital music industry over the next 5 years. Apples innovative strategies have resulted in new products and product updates year after year. Technological changes and findings are constantly occurring. Apple will make immediate use of the technological advances through updating and announcing new products in the future. However, if Apple misses key market demands they risk losing their position at the top of the industry.

9.

What steps should Apple take to improve its corporate performance and to strengthen its position in its most important markets?

Recommendations/ Strategic Opportunities: 1. Make their computers more compatible with other operating systems. 2. Put more effort in promoting their products in emerging markets. 3. Customer loyalty programs: Apple could offer the purchase of two of their products in a packaged deal for a discounted price. 4. Increase the variety of their product line. For example: make a more affordable computer, priced for low-income citizens and/or students who cannot afford the premium priced computers. This will address the decline in their computer sales. 5. Establish a succession plan for Steve Jobs. With a stable succession plan Apple stocks are less likely to fall if anything were to happen to Jobs. 6. Focus on R & D to keep up with emerging trends and technological advances.

Appendix I:

Unit Sales by Product (2007)

2% 12% Macintosh iPod iPhone 86%

Appendix II.

Apple Financial Analysis 2007 Revenue $millions Growth Rate Net income $m Profitability Cost of Goods sold $m % of revenue SG&A $m % of revenue Total Assets ROA Long term debt and liabilities Equity $m LT debt over equity ROE Yearly EPS 24,006 24.3% 3,496 14.6% 15,852 66% 2,963 12% 25,347 13.8% 1,516 14532 0.10 24.1% 3.93 2006 19,315 38.6% 1,989 10.3% 13,717 71% 2,433 13% 17,205 11.6% 778 9984 0.08 19.9% 2.27 2005 13,931 68.3% 1,328 9.5% 9,889 71% 1,864 13% 11,516 11.5% 601 7428 0.08 17.9% 1.55 2004 8,279

Bibliography: 1) Thompson Jr., Strickland III and Gamble. Crafting and Executing strategy. Fifteenth Edition. (Text and Apple case). 2) Prof. Maurice Gervais class notes and handouts.