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 multi-
touch 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 Opportunities
Apple is a strongly recognized and Success of iPhone will encourage
appreciated company consumers to buy more Apple
Skilled management team who 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 long-
term 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. Apple has created strategic alliances with companies in order to promote
their products. (Including AT&T and iTunes)
ii. 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.
ii. 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.
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.
ii. In all of its products, Apple promotes its improved features in order to
outcompete competitors.
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 Apple iRiver Microsoft SanDisk Creative

Measure

Quality 10 7 8 9 8
Performance 9 9 9 9 8
Customer 9 6 8 6 6
Service
Financial 10 7 10 8 4
Resources
Technological 10 9 10 10 9
Skills
Brand 10 6 10 8 6
Recognition

Total 58 44 55 50 41

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 2006 2005 2004

Revenue $millions 24,006 19,315 13,931 8,279

Growth Rate 24.3% 38.6% 68.3%

Net income $m 3,496 1,989 1,328

Profitability 14.6% 10.3% 9.5%

Cost of Goods sold $m 15,852 13,717 9,889

% of revenue 66% 71% 71%

SG&A $m 2,963 2,433 1,864

% of revenue 12% 13% 13%

Total Assets 25,347 17,205 11,516

ROA 13.8% 11.6% 11.5%

Long term debt and liabilities 1,516 778 601

Equity $m 14532 9984 7428
LT debt over equity 0.10 0.08 0.08

ROE 24.1% 19.9% 17.9%

Yearly EPS 3.93 2.27 1.55

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.