Apple 10K project

Apple Inc. is engaged in designing, manufacturing and marketing mobile communication and
media devices, personal computers, and portable digital music players. Collectively known as
Apple or the Company, they also sell a variety of related software, services, peripherals,
networking solutions, and third-party digital content and applications. The companys portfolio
of offerings include iPhone, iPad, iPod, Apple TV, a variety of consumer and professional
software applications, iOS and Mac OS X operating systems, iCloud, and a range of accessories,
services, and support offerings.
The federal securities laws require publicly traded companies to disclose information on a
continuing basis. Part the data that must be disclosed is encompassed in the annual reports on
Form 10-K. This form provides a comprehensive overview of the companys business and
financial condition. It includes audited financial statements to support the data disclosed. The
following are excerpts from Apples 10-K that were submitted to the United States Securities and
Exchange Commission for fiscal year 2011. These excerpts contain forward-looking statements
that involve risks and uncertainties to Apple that were used to conduct a strategic analysis and
derive Apples competitive strategy. The external analysis includes an examination of the
political, economic, socio-cultural, technological, legal, and environmental (PESTLE) macroforces that affect the industry in which the Company contends in. Michael Porters Five Forces
constitute the remaining portion of the external analysis to determine whether or not Apples
industry is attractive. The internal examination of Apple consists of a SWOT analysis, or the

examination of the strengths, weaknesses, opportunities, and threats of the Company. The
following discussing the findings of this strategic analysis.
Analysis of the PESTLE Forces
1. Political
a. War, terrorism, geopolitical uncertainties, public health issues, and other business
interruptions have caused and could cause damage or disruption to international
commerce and the global economy, and thus could have a strong negative effect on the
Company, its suppliers, logistics providers, manufacturing vendors and customers,
including channel partners. The Companys business operations are subject to
interruption by natural disasters, fire, power shortages, nuclear power plant
accidents, terrorist attacks, and other hostile acts, labor disputes, public health issues,
and other events beyond its control. Such events could decrease demand for the
Companys products, make it difficult or impossible for the Company to make and
deliver products to its customers, including channel partners, or to receive
components from its suppliers, and create delays and inefficiencies in the Companys
supply chain. (Page 16)
However, the statement aforementioned is indicative that political forces have and can
indirectly affect international commerce and the global economics which does strongly impact
the Companys industry (this will be discussed in the following section). The excerpt highlights
several political factors that are beyond the Companys control, yet can potentially adversely
affect its financial conditions and operating results. These include terrorists attacks, hostile acts,
and labor disputes. Such political factors could have adverse consequences which include
decrease demand for the Companys products, make it difficult or impossible for the Company

to make and deliver products to its customers, including channel partners, or to receive
components from its suppliers, and create delays and inefficiencies in the Companys supply
chain.
2. Economic
a. The Companys operations and performance depend significantly on worldwide
economic conditions. Uncertainty about global economic conditions poses a risk as
consumers and businesses postpone spending in response to tighter credit,
unemployment, negative financial news and/or declines in income or asset values,
which could have a material negative effect on demand for the Companys products
and services. Demand also could differ materially from the Companys expectations
because the Company generally raises prices on goods and services sold outside the
U.S. to offset the effect of a strengthening of the U.S. dollar. Other factors that could
influence demand include increases in fuel and other energy costs, conditions in the
real estate and mortgage markets, unemployment, labor and healthcare costs, access
to credit, consumer confidence, and other macroeconomic factors affecting consumer
spending behavior. These and other economic factors could materially adversely
affect demand for the Companys products and services and the Companys financial
condition and operating results. (Page 9)
The overall level of economic forces that impact the industry in which Apple competes in is
strong. The Company indicates through its annual report that its operating and financial
conditions depend significantly on the global economic conditions. Major economic drivers
that suspend consumer spending (which adversely affect demand for Apples products and
services) are tighter credit, unemployment, negative financial news and/or declines in incomes

or asset values. The aforementioned statement discusses other factors that materially impact the
demand from consumers and businesses through fiscal means as well.
3. Soio-cultural
a. 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 new products and solutions with superior ease-of-use, seamless integration,
and innovative design. (Page 25)
This statement is reflective of the notion that Apple acknowledges factors that depict what the
buyers want. The fact that their products encompass superior ease-of-use, seamless integration,
and innovative design signifies that the Company accepts these as socio-cultural trends that
must be fulfilled. Furthermore, it can also be assumed from this excerpt that these product
specifications must be integrated into Apples offering or else they will not sell. Therefore,
socio-cultural trends impact the Company strongly.
4. Technological
a. Global markets for the Companys products and services are highly competitive and
subject to rapid technological change. If the Company is unable to compete effectively
in these markets, its financial condition and operating results could be materially
adversely affected. (Page 10)
b. 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. The Company continues to develop new
technologies to enhance existing products and to expand the range of its product

offerings through research and development, licensing of intellectual property and

acquisition of third-party businesses and technology. (Page 7)
There were several statements from Apples 10-K that are indicative that technological forces
are strong and play a significant role in the Companys industry. Manufacturers in this industry
are faced with an extremely rapid pace of technological change. The statements above assert
that in order to sustain a competitive advantage amongst its competitors and stimulate future
demand, Apple must continuously manage frequent product introductions and transitions. It
has done so successfully thus far through its heavy investment in research and development,
licensing of intellectual property, and acquisition of third-party businesses and technology.
5. Legal
a. The Company currently holds rights to patents and copyrights relating to certain
aspects of its iPhone, iPad, Mac and iPod devices, peripherals, software and services.
The Company has registered or has applied for trademarks and service marks in the
U.S. and a number of foreign countries. (Page 7)
b. Many of the Companys products are designed to include intellectual property
obtained from third parties. While it may be necessary in the future to seek or renew
licenses relating to various aspects of its products and business methods, based upon
past experience and industry practice, the Company believes such licenses generally
could be obtained on commercially reasonable terms; however, there is no guarantee
that such licenses could be obtained at all. Because of technological changes in the
industries in which the Company competes, current extensive patent coverage, and
the rapid rate of issuance of new patents, it is possible that certain components of the
Companys products and business methods may unknowingly infringe existing

patents or intellectual property rights of others. From time to time, the Company has
been notified that it may be infringing certain patents or other intellectual property
rights of third parties. (Page 8)
Legal forces in the industry Apple competes in have a steady trend. Currently, Apple and its
competitors face minimal regulatory intervention. There are key legal forces that cannot be
completely disregarded though. As the former statement above discusses, the ownership of
patents, copyrights, trademarks, and services are an important factor in the Companys
operations. Successful financial and operational results are therefore partly attributed to the
rightful ownership of these legal requirements. As discussed in the latter statement, legal issues
regarding intellectual property require careful, continuous scrutiny. This is to avoid accidental
infringement caused by the rapid technological changes, extensive patent coverage, or the rapid
rate of issuance of new patents.
6. Environmental
a. On March 11, 2011, the northeast coast of Japan experienced a severe earthquake
followed by a tsunami, with continuing aftershocks. These geological events have
caused significant damage in the region, including severe damage to nuclear power
plants, and have impacted Japans power and other infrastructure as well as its
economy. Certain of the Companys suppliers are located in Japan, and certain of its
other suppliers integrate components or use materials manufactured in Japan in the
production of its products. To the extent that component production has been
affected, the Company has generally obtained alternative sources of supply or
implemented other measures. The Company does not currently believe these events
will have a material impact on its operations in the first quarter of 2012 unless

conditions worsen, including, but not limited to, power outages and expansion of
evacuation zones around the nuclear power plants. (Page 26)
Overall, environmental forces do not have a material impact on the industry Apple contends in.
However, the statement aforementioned is indicative that there exist potential environmental
drivers that may affect Apples financial condition and operating results. The earthquake and
tsunami that occurred early 2011 in Japan heavily impacted the country and its component
production. Luckily, the Company was able to attain alternative sources for the supplies. This is
a prime example of how an environmental force could potential devastate Apples supply chain
had they not been able to obtain other solutions. Furthermore, if the sole-source suppliers the
Apple uses were in Japan, the outcome could have easily been devastating. Furthermore, the
report indicates that risk still exist from this geological event if conditions are to worsen.
Analysis of Porters Five Forces:
7. Intensity of Competitive Rivalry
a. The markets for the Companys products and services are highly competitive and the
Company is confronted by aggressive competition in all areas of its business. These
markets are characterized by frequent product introductions and rapid technological
advances that have substantially increased the capabilities and use of mobile
communication and media devices, personal computers, and other digital electronic
devices. The Companys competitors who sell mobile devices and personal computers
based on other operating systems have aggressively cut prices and lowered their
product margins to gain or maintain market share. The Companys financial
condition and operating results can be adversely affected by these and other industrywide downward pressures on gross margins. Principal competitive factors important

to the Company include price, product features, relative price/performance, product

quality and reliability, design innovation, a strong third-party software and
peripherals ecosystem, marketing and distribution capability, service and support,
and corporate reputation. (Page 6)
The intensity of competitive rivalry in the computer manufacturing industry is strong. Apples
competitors that carry comparable products attempt to gain or sustain market share through
strategies involving dramatic price cuts and reduced product margins. These strategies from
competitors create an industry-wide downward pressure on gross margins which can
substantially affect Apples standing. Nonetheless, Apple has identified several elements that it
can integrate into its strategic planning to create a competitive advantage. This includes price,
product features, relative price/performance, product quality and reliability, design innovation, a
strong third-party software and peripherals ecosystem, marketing and distribution capability,
service and support, and corporate reputation.
8. Threat of New Entrants
a. The Companys competitors who sell mobile devices and personal computers based
on other operating systems have aggressively cut prices and lowered their product
margins to gain or maintain market share.
b. R&D expense increased $647 million or 36% to $2.4 billion in 2011 compared to 2010.
c. The Company currently holds rights to patents and copyrights relating to certain
aspects of its iPhone, iPad, Mac and iPod devices, peripherals, software and services.
The statements above demonstrate determinants that Michael Porter uses to assess whether an
industry has a strong threat of new entrants. These determinants indicate that there are high
barriers to entry thus reducing the threat of new entrants. For instance, the fact that aggressive

competition has created a downward pressure on product margins indicates that there is a high
level of expected retaliation. Capital requirements are high as well since heavy R&D investments
are required to remain competitive. Furthermore, the current market players, including Apple,
hold several patents and copyrights to withhold their proprietary product differences from other
competitors. Overall, there is a weak likelihood of new entrants to the industry the Company
competes in.
9. Bargaining Power of Suppliers
a. 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, which subjects the Company to significant supply and
pricing risks. Many components are at times subject to industry-wide shortages and
significant commodity pricing fluctuations. In addition, the Company has entered into
various agreements for the supply of components; however there can be no guarantee
that the Company will be able to extend or renew these agreements on similar terms,
or at all. Therefore, the Company remains subject to significant risks of supply
shortages and price increases that can materially adversely affect its financial
condition and operating results. (Page 7)
The bargaining power of suppliers of the industry in which Apple competes in is assessed as
strong. It can be derived from this excerpt that there are two key types of suppliers to the
Company. There exists the suppliers that offer the basic components that are commodity in
nature and then there are the suppliers that offer the more sophisticated electrical components.
The majority of Apples suppliers are those that provide components that are readily available
from multiple sources since supplier concentration is low. Some of the key components,

however, are procured from a single or limited source. This increases the supply and pricing
volatility for these items. The statement above also depicts that even though various supply and
price agreements have been contracted, there is no guarantee that these statements of work can
be extended or renewed on similar terms. Therefore, supplier power is recognized to be strong.
10. Bargaining Power of Buyers
a. The Company believes providing direct contact with its customers is an effective way
to demonstrate the advantages of its products over those of its competitors. (Page 2)
b. 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. (Page 6)
c. Principal competitive factors important to the Company include price, product
features, relative price/performance, product quality and reliability, design
innovation, a strong third-party software and peripherals ecosystem, marketing and
distribution capability, service and support, and corporate reputation. (Page 6)
The bargaining power of buyers the industry in which Apple competes in is assessed as
moderate. The key buyers for the Company are consumers, small and mid-sized businesses
(SMB), and education, enterprise and government customers which is indicative of a robust
buyer volume. Larger entities may be able to negotiate on the terms of the contracts with the
Company. The smaller organizations and regular consumers do not have this same bargaining
leverage over the Company. The quote above from Apples 10-K denotes several determinants
the Company uses to reduce overall buyers bargaining power. Apples attempts to highlight
product differences by advocating direct contact with consumers to depict the advantages of its

products over those of its competitors. It also strengthens buyer information by providing
knowledgeable salespersons to convey the products value-added. The Company has identified
several elements that it can integrate into its strategic planning to address the price sensitivity
and bargaining leverage of their customers. These elements include price, product features,
relative price/performance, product quality and reliability, design innovation, a strong third-party
software and peripherals ecosystem, marketing and distribution capability, service and support,
and corporate reputation.
11. Threat of Substitute Products or Services
a. The Companys digital content services have faced significant competition from other
companies promoting their own digital music and content products and services,
including those offering free peer-to-peer music and video services. The Company
believes it offers superior innovation and integration of the entire solution including
the hardware (iPhone, iPad, Mac, and iPod), software (iTunes), and distribution of
digital content and applications (iTunes Store, App Store, iBookstore and Mac App
Store). 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. (Page 6)
This statement acknowledges that substitute products from competitors do exist in regards to
providing digital music and content products and services. Competitors offers include free peerto-peer music and video services. Even though there is the existence of substitute products,
Apple asserts that its products and services remain superior to that of the competitors.
Unfortunately, that superiority they offer may be offset by the fact that competitors may offer

such products and services at little or no profit, or even at loss, in order to contend with Apples
offering. Therefore, the threat of substitute products is assessed as moderate.
Analysis of SWOT:
12. Strengths
a. The gross margin percentage in 2011 was 40.5%, compared to 39.4% in 2010. This
year-over-year increase in gross margin was largely driven by lower commodity and
other product costs. (Page 35)
b. R&D expense increased $647 million or 36% to $2.4 billion in 2011 compared to 2010.
(Page 35)
c. The Company continues to believe that focused investments in R&D are critical to its
future growth and competitive position in the marketplace and are directly related to
timely development of new and enhanced products that are central to the Companys
core business strategy. As such, the Company expects to make further investments in
R&D to remain competitive. (Page 36)
These statements are indicative of Apples strengths. The positive gross margin percentage for
2011 of 40.5% in combination with the 66% year-over year growth of the Companys net sales
during 2011 depict a healthy financial performance. This strengthens investors confidence and
results in increased capital inflow for future growth avenues. Apples 10-K is also reflective of
the Companys notion that its research and development (R&D) is directly correlated with its
success. Its R&D results in the timely development of new and enhanced products that are
crucial to sustaining the competitive advantage it currently holds.
13. Weaknesses

a. Global markets for the Companys products and services are highly competitive and
subject to rapid technological change. If the Company is unable to compete effectively
in these markets, its financial condition and operating results could be materially
adversely affected. (Page 10)
b. The Companys future results could be materially adversely affected if it is found to
have infringed on intellectual property rights. (Page 13)
c. The Companys products and services experience quality problems from time to time
that can result in decreased sales and operating margin. (Page 15)
The statements aforementioned illustrate risk factors Apple has identified. These are arguably
internal to the Company; therefore, for purposes of the SWOT analysis, they will be discussed as
weaknesses. A major weakness Apple has acknowledged is the incessant need to development of
new and enhanced products. If at any point they are unable keep up with the rapid technological
change caused by the highly competitive industry, the Company will not be able to compete
effectively in its market. Currently, Apple has entered into litigations based on allegations of
patent infringement and other violations of intellectual property rights. These patent infringement
lawsuits may affect the financial condition, operating results, and even the Companys reputation
if the fallout from these legal proceedings are unfavorable. Furthermore, the Company has faced
several quality problems on its deliverables. There is no assurance that Apple will be able to
detect and resolve 100% of these quality issues. Failure to do so could result in loss of revenue
through diminished sales, harm to reputation, and significant increase to warranty and other
expenses. All of these weaknesses discussed could have a material adverse impact on the
Companys financial condition and operating results.
14. Opportunities

a. The Company is focused on expanding its market opportunities related to mobile

communication and media devices. (Page 6)
b. Additionally, the Company has invested in programs to enhance reseller sales by
placing high quality Apple fixtures, merchandising materials and other resources
within selected third-party reseller locations. Through the Apple Premium Reseller
Program, certain third-party resellers focus on the Apple platform by providing a
high level of integration and support services, and product expertise. (Page 6)
The statements aforesaid is reflective of opportunities since they pertain to the external
environment. The fact that Apple is still pursuing a growth strategy into mobile communications
and media devices indicates a positive outlook of that market. This depicts a potential growth
opportunity of the Companys market share. Furthermore, Apples operating performance is
heavily dependent on the performance of external entities that sell the Companys offerings.
With the additional investments from Apple, these resellers are able to increase revenue, which
will trickle back to the Company.
15. Threats
a. Global markets for the Companys products and services are highly competitive and
subject to rapid technological change. (Page 10)
b. The Companys competitors who sell mobile devices and personal computers based
on other operating systems have aggressively cut prices and lowered their product
margins to gain or maintain market share. The Companys financial condition and
operating results can be adversely affected by these and other industry-wide
downward pressures on gross margins. (Page 6)
c. Global economic conditions could materially adversely affect the Company. (Page 9)

d. Future operating results depend upon the Companys ability to obtain components in
sufficient quantities. (Page 11)
The statements above illustrate risk factors the Company has identified. These are arguably
external to the Company; therefore, for purposes of the SWOT analysis, they will be discussed as
threats. As mentioned within the section Intensity of Competitive Rivalry, Apple is in a market
that is highly competitive. Competitors uncompromisingly reduce price and product margins to
gain or sustain market share. This strong competitive intensity may affect the Companys
market, and ultimately the profit pool that is shared amongst its industry. Global economic
conditions, which are out of the Companys control, also display a critical threat. Apples
operations and performance depend significantly on worldwide economic conditions.
Uncertainty about the economy could have a material negative impact on demand for the
Companys offerings. For instance, consumers may postpone spending in response to tighter
credit, unemployment, negative financial news and/ or declines in income or asset values.
Additionally, as discussed within the section Bargaining Power of Suppliers, some of the key
components are procured from a single or limited source. This dependence on specific suppliers
may affect negatively the Companys operations since the Company is subject to significant
supply shortages and price risks. All of these threats mentioned could materially adversely affect
Apples financial condition and operating results.
Companys Competitive Strategy
a. The Company is committed to bringing the best user experience to its customers
through its innovative hardware, software, peripherals, 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 new

products and solutions with superior ease-of-use, seamless integration, and innovative
design. The Company believes continual investment in research and development and
marketing and advertising is critical to the development and sale of innovative
products and technologies. (Page 1)
The statement aforementioned depicts that Apple Inc. has created value for their customers by
its relentless pursuit of a differentiation competitive strategy. They create and sustain a superior
performance by seeking to be unique within its industry along some dimensions that are
extensively valued by its customers. Apple recognizes what is most appreciated by consumers
are products and solutions that involve superior ease-of-use, seamless integration, and
innovative design. By integrating this into the Companys offerings, they are able to create the
best user experience possible for their customers.
By identifying the important factors that represent what the customer wants are, Apple is then
able to differentiate itself from its competitors. The Company exercises its differentiation
strategy through its unique ability to design and develop its own operating systems, hardware,
application software, and services. This unique ability has not been able to be truly matched by
its competitors thus far. As a result, Apple Inc. is the differentiation leader in its industry.
Furthermore, their ability to sustain this position has granted the Company an above-average
performance from its contenders.
As discussed within the Strengths section, Apple has been able to sustain this position
through its focused investments in its R&D. It recognized that this must be an unremitting
investment that is critical to its future growth and competitive position in the marketplace.
Within its annual 10-K report, Apple states it expect to make further investments in R&D in
order to remain competitive, thus continuing its differentiation leadership.