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Analysis of How MICROSOFT Should Spend its Cash

Uploaded by resol1 on Jun 22, 2006

Analysis of How Microsoft Should Spend its Cash

Microsoft has a nasty problem: figuring out what to do with $31.6 billion in cash. We can picture a sleep-
deprived Bill Gates and a red-eyed Steve Ballmer toiling away night after night, trying to get Microsoft
out of this predicament. It must be tough. So we decided to help them out by making a few suggestions
on how Microsoft should spend its cash hoard.

We're going to propose a variety of acquisitions. While the company hasn't historically had an
acquisitive culture, that seems to be changing. Last November, Microsoft hired Richard Emerson--a
former managing director at the investment bank Lazard Frères--to head its mergers and acquisitions
division. A month later, the company announced the purchase of the software developer Great Plains
Software for $1.1 billion.

The only possible hitch could be its ongoing legal battle with the U.S. Department of Justice and 18 state
governments regarding antitrust violations. Sources interviewed for this article, however, say that a
settlement is the most likely outcome for the legal dispute, and that such a resolution would cost
Microsoft between $1 billion and $2 billion. But that's chump change. Here's what it should do with the
rest of the dough.

First, we think Microsoft should buy the security software developer Symantec. Microsoft software has
often been plagued by security concerns, and acquiring Symantec would improve its product line with
powerful antivirus and firewall capabilities. Since Symantec has a better mix of desktop and enterprise
products than other companies in the sector, acquiring Symantec would buy more bang for Microsoft's
buck than, say, springing for Network Associates. The deal, however, wouldn't be cheap. We put the
cost of such a purchase at $4.2 billion, based on a 20 percent premium to Symantec's market value as of
August 14.

Microsoft should also buy the ISP EarthLink. The acquisition would strengthen Microsoft's own MSN
franchise by adding 4.8 million users, bringing the subscriber base to 11 million. It would also bring
Microsoft a step closer to arch rival America Online, the leading ISP, which boasts almost 30 million
users. "I'd like to see Microsoft do this deal," says Henry Blodget, an analyst at Merrill Lynch. So would
we. The cost? A mere $2.1 billion.
While they're at it, it would be wise for Microsoft to acquire companies that can help expand its .Net
platform for selling services and software on a subscription basis. One way to do so would be to spruce
up its thriving bCentral Web site and Great Plains Business Solutions initiatives--which cater to small and
mid-size businesses--with improved service options like robust customer relationship management
capabilities. Epiphany, which makes software that helps firms analyze client data and increase customer
service interactions, would be a good fit. The price tag? About $625 million.

Microsoft might also want to consider privately held Groove Networks, the software maker run by Ray
Ozzie, who created Lotus Notes. Groove's collaboration software is based on distributed-computing
technology, and promises to integrate workers through secure peer-to-peer connections over the
Internet. Albeit still a relative startup, Groove has won some heavyweight clients, like GlaxoSmithKline,
and its technology could help Microsoft further push .Net into large corporations. Our private market
sources tell us Groove could be had for about $300 million.

On the wireless front, Microsoft could make a bold statement by snatching up the software developer
Openwave Systems. The purchase would give Microsoft a solid software platform to extend its .Net
initiative into the wireless space, with opportunities like distributing Word and game titles to handheld
devices. "Wireless is an area where Microsoft could be more aggressive," says Paul Cook, senior
portfolio manager with Munder Capital Management. Our estimate: $3.7 billion.

What about fun and games? We think Microsoft should gobble up Activision for its ample portfolio of
video games, which includes blockbusters Quake, Star Trek, and Tony Hawk's Pro Skater. Such a
purchase would guarantee a pipeline of software for Microsoft's upcoming Xbox game console. Likely
price tag: $1.3 billion.

We also see a couple of key sectors where Microsoft could make strategic investments: storage,
telecom, and IT services. We're allocating $1.5 billion for these investments. In storage, we'd like
Microsoft to invest in Veritas Software. As storage networks multiply in size and number, storage
management software will be king, and Veritas dominates the space. "Veritas can bring a lot of value to
the table," says Michael Stanek, an analyst at Lehman Brothers.

In telecom, we expect Microsoft to clinch some money-for-software deals with regional carriers like
Verizon and SBC Communications. Those should be similar to Microsoft's 1998 deal with Qwest
Communications, in which the carrier committed to use Microsoft software, and, in exchange, Microsoft
agreed to invest $200 million in Qwest.

Finally, Microsoft should continue to set up alliances with IT services firms, similar to its $1 billion joint
venture with Accenture, which focuses on delivering Internet and other enterprise services based on the
Windows platform. KPMG Consulting and Electronic Data Systems are potential partners in this sector.

We don't expect Microsoft to run out and complete all of our suggested acquisitions pell-mell. But
there's no reason it can't loosen up those purse strings soon. We've even taken into consideration Mr.
Gates's known financial conservatism. "I have developed a rule," he writes in his 1995 book The Road
Ahead (Viking Press). "We always have enough cash on hand to be able to run the company for at least a
year if no one pays us." Based on Microsoft's operating expenses in the 12 months ended in June, Mr.
Gates's lock box needs about $13 billion.

Our plan calls for Microsoft to spend only $13.7 billion, leaving the company with $17.9 billion to spare.
That's more than enough to spend on legal settlements as well as routine corporate expenditures like
share buyback programs and research and development--especially when you consider the $1 billion in
free cash flow the company generates every month. So what are you waiting for, Bill? Start shopping.

2. Analysis of Strategic Structure of Southwest

Airlines
Uploaded by so cerious on Jun 26, 2006
Analysis of Strategic Structure of Southwest Airlines

Twenty-nine years ago, Rollin King and Herb Kelleher got together and decided to start a different kind
of airline. They began with one simple notion: If you get your passengers to their destinations when they
want to get there, on time, at the lowest possible fares, and make darn sure they have a good time
doing it, people will fly your airline.

Within 28 years, Southwest Airlines became the fifth largest major airline in America. With the addition
of service to Buffalo-Niagara International Airport on October 8, 2000, fly more than 57 million
passengers a year to 57 great cities (58 airports) all over the Southwest and beyond. And she does it
over 2,600 times a day.

Company also got more than 330 of the newest jets in the nation, with an average age of 8.4 years. In
her fleet are included three flying killer whales, Shamu One, Two and Three. Lone Star One, painted like
the Texas flag, to celebrate Southwest Airlines' 20th Anniversary in a style and manner second to none.
Arizona One, a symbol of the importance of the state of Arizona to Southwest Airlines; California One, a
high-flying tribute to the state of California; Silver One, our 25th Anniversary plane; Triple Crown One,
dedicated to the Employees of Southwest Airlines for their marvellous achievement of five consecutive
annual Triple Crown awards and the newest member of the family - Nevada One, a high-flying tribute to
the state of Nevada.

In May 1988, were the first airline to win the coveted Triple Crown for a month - Best On-time Record,
Best Baggage Handling, and Fewest Customer Complaints. Since then we've won it more than thirty
times, as well as five annual Triple Crowns for 1992, 1993, 1994, 1995, and 1996.

And no other airline has contributed more to the advancement of the commercial airline industry.
Southwest were the first airline with a frequent flyer program to give credit for the number of trips
taken and not the number of miles flown.

Also pioneered senior discounts, Fun Fares, Fun Packs, a same-day airfreight delivery service, ticket less
travel, and many other unique programs.

In 1966, Herb Kelleher was practicing law in San Antonio when a client named Rollin King proposed
starting a short-haul airline similar to California-based Pacific Southwest Airlines. The airline would fly
the “Golden Triangle” of Houston, Dallas, and San Antonio, and by staying within Texas, avoid federal
regulations .

Because of the fact that, U.S government was imposing very strict regulations regarding commercial
airlines by regulating airline route entry and exit, passenger fares, mergers and acquisitions, and airline
rates of return, the primary idea was to focus on a single state area (avoiding governments interfering)
and to a substitute market (local) where major operators weren’t giving the proper attention.

Typically, by that time only a few carriers provided service in the market, although there were routes
covered by only one carrier. Cost increases were passed along to customers and price competition was
almost non-existent. The airlines operated as if there were only two market segments: “those who could
afford to fly and those who couldn’t.”

Kelleher and King incorporated a company, raised initial capital, and filed for regulatory approval from
the Texas Aeronautics Commission. Unfortunately, the other Texas-based airlines, namely Braniff,
Continental, and Trans Texas (later called Texas International), opposed the idea and waged a battle to
prohibit Southwest from flying. Kelleher argued the company’s case before the Texas Supreme Court,
which ruled in Southwest’s favor. The U.S. Supreme Court refused to hear an appeal filed by the other
airlines. In late 1970, it looked as if the company could begin flying. Southwest began building a
management team and the purchase of three surplus Boeing 737s was negotiated.

Meanwhile, Braniff and Texas International continued their efforts to prevent Southwest from flying.
The underwriters of Southwest’s initial public stock offering withdrew and a restraining order against
the company was obtained two days before its scheduled inaugural flight. Kelleher again argued his
company’s case before the Texas Supreme Court, which ruled in Southwest’s favor a second time, lifting
the restraining order. Southwest Airlines began flying the next day, June 18, 1971

In October 1978 when Deregulation accomplished, airline fares tumbling and allowed many new firms to
enter the market. The financial impact on both established and new airlines was enormous. The fuel
crisis of 1979 and the air traffic controllers’ strike in 1981 contributed to the industry’s difficulties, as did
the severe recession that hit the U.S. during the early 1980s. During the first decade of deregulation,
more than 150 carriers,

Many of them new start-up airlines, collapsed into bankruptcy. Eight of the major 11 airlines dominating
the industry in 1978 ended up filing for bankruptcy, merging with other carriers, or simply disappearing
from the radar screen. Collectively, the industry made enough money during this period to buy two
Boeing 747s3 . The three major carriers that survived intact—Delta, United, and American—ended up
with 80% of all domestic U.S. air traffic and 67% of trans-Atlantic business.

Competition and lower fares led to greatly expanded demand for airline travel. By the mid-1990s, the
airlines were having trouble meeting this demand. Travel increased from 200 million travelers in 1974 to
500 million in 1995, yet only five new runways were built during this time period.
During the 1980s, many airlines acquired significant new debt in efforts to service the increased travel
demand. Long-term debt-to-capitalization ratios rose dramatically: Eastern’s went from 62% to 473%,
TWA’s went from 62% to 115%, and Continental’s went from 62% to 96%. In contrast, United and Delta
maintained their debt ratios at less than 60%, and American Airline’s ratio dropped to 34%.

Despite the financial problems experienced by many airlines started after deregulation, new firms
continued to enter the market. Between 1992 and 1995, the FAA certified 69 new airlines. Most of these
airlines competed with limited route structures and lower fares than the major airlines. The new low-
fare airlines created a second tier of service providers that saved consumers billions of dollars annually
and provided service in markets abandoned or ignored by major carriers.

One such start-up was Kiwi Airlines, founded by former employees of the defunct Eastern and Pan Am
airlines. Largely employees funded kiwi: pilots paid $50,000 apiece to get jobs and other employees paid
$5,000.
Although deregulation fostered competition and the growth of new airlines, it also created a regional
disparity in ticket prices and adversely affected service to small and remote communities.

Airline workers generally suffered, with inflation-adjusted average employee wages falling from $42,928
in 1978 to $37,985 in 1988. About 20,000 airline industry employees were laid off in the early 1980s,
while productivity of the remaining employees rose 43% during the same period. In a variety of cases,
bankruptcy filings were used to diminish the role of unions and reduce unionized wages.

When Southwest began flying to three Texas cities, the firm had three aircraft and 25 employees. Initial
flights were out of Dallas’ older Love Field airport and Houston’s Hobby Airport, both of which were
closer to downtown than the major international airports. Flight attendants in hot pants staffed
flamboyant from the beginning, original flights. By 1996, the flight attendant uniform had evolved to
khakis and polo shirts. The “Luv” (“love”) theme was a staple of the airline from the outsetbecame the
company’s advertisement campaign along with ticker symbol on Wall Street. Mission Statement.

Dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness,
individual pride, and Company Spirit

Vision Statement.

“ Open up the skies for ordinary people”

Goals

§ To make profit
§ Achieve job security for every employee
§ Make flying affordable for more people.

Core Competencies

§ Short hall
§ High frequency
§ Low fare
§ No-frills
§ Point- to -point

Strategies.
§ Conservative growth pattern
§ Cost-containment policy
§ Commitment of its employees
§ Expansion Strategy (not less than 12 flights/day)
§ Flying large numbers of passengers on high frequency.
§ Short hops (usually one hour or less) barging fares.
§ Avoid hub-and-spoke.
§ Avoid most congested major airports.
§ Creates market segments peculiarly (for adapting changes that are most efficient and economical)
§ Longer non-stop trips (to save changes to “ticket tax 1997”)
§ Faster turnarounds, Plastic Cards, No assigned seating, Low Cost
§ Only (737) jets.
§ Operating cots/available seats 15-25% lower than rivals.
§ Flexible work rules.
§ Employee retention policy.
§ Maximizing profitability.
§ Full fare ticket along with “Chivas Regal”. …………And more fatherly discussed.

Assessing the nature of the environment.

Since one of our major problems on strategic management is coping with uncertainty, it is useful to
begin by considering how uncertain the environment is and why.

Regarding the fact that, uncertainty increases the less the environment is stable or the more it is
dynamic, and also by extend to which it is simple or complex. Wanted to evaluate into which
environment Southwest operates, we can easily understand the company operates in a complex
environment also with dynamic conditions.

This conclusion generates, by the fact that Airline Companies that operate into a constantly changing
environment with many rabid classifications ex. (11th of September), the different parts of an
organization must be responsible for different aspects diversity; and also to have the authority to handle
their own part of the environment.

Chair President and CEO

Herbert D. Kelleher.

Corporate ServicesJohn G. DenisonExec. Vice-President CustomersCollen C. Barrett.Exec. Vice-President

OperationsGarry A Barron.Exec. Vice-President and COO Internal Audit and Special Projects.Al DavisVice-
President Schedule Planning.Pete McGladeVice-President

Therefore, Southwest operates into a multi-divisional structure, as it subdivided into units (divisions) on
the basis of products, services, geographical area or the processes of the enterprise. This is an attempt
to overcome problems that functional structures have in dealing with the diversity of the environment.
The products and markets that Southwest operates are so diverse that it could be impractical to bring
the tasks together in a single body. So divisions can be created which related closely to the SBU’s,
allowing tailoring of the product/market strategy to the requirement of that SBU and improving the
ownership of the strategy by divisional staff. The main advantage is the fact that Southwest was able to
concentrate on the particular business (SBU) and opportunities of the environment. Ex.

§ Purchase 3 brand new 737’s at bargain-basement prises because Boeing had over produce in periods
of slump.

Environmental Influences (P.E.S.T Analysis)

Environmental forces, which are especially important for one organization, may not be the same for
another; and over time, their importance may change. Southwest might be especially interesting in
understanding policies and legal governmental matters, since it operates in different states, with
different operating plants or subsidiaries with different political systems. It is also likely to be concerned
about labor costs and exchange rates, which will affect the ability to compete with multinational
competitors entering the environment
For that carrying out a PEST analysis we will find the key influences of change and providing the basis of
examining the extent to which these influence has major or no impact to Southwest.

A PEST Analysis of Environmental Influences

Political/Legal§ Federal Ticket Tax 1997§ Block Approval with temporary restraining order§ Deregulation
of flights.§ Wright Amendment for “Love Field”§ Labor Unions Economic Factors§ Operating costs were
fixed or semi-variable.§ Federal Ticket Tax 1997§ Price sensitive customers.

Socio-cultural § Price sensitive customers§ Time oriented customers Technological § Internet § 737’s

Wanted to better evaluate the PEST diagram, we consider vital in this point to identify a key number of
environmental drivers of change, by identifying the:
Key drivers of change and the differentiate impacts of environmental influences.
Furthermore, the impacts of Socio-cultural environment is consider crucial as South west must satisfy 2
different types of opposite cultures: Price sensitive, Time oriented. To achieve that must focus, to a low-
cost time oriented strategy, as this two target groups are the most important.
Also, technological factors (Internet) are considered vital, as must focus on look-to-look ratio. And, 737
are considering crucial as to provide efficient response (ER) to customer’s need, wands, demands.
(turnaround, knowledge,…)
And finally flight deregulation must be a key point in “competitive arena”, to operate in more flexible
ways.

Controlling Scenarios (What if……?)

Scenario planning is essentially useful in circumstances where it is important to take a long-term view of
strategy, probably a minimum of 5 years, where there is limited key factors influencing the success of a
strategy, but there is higher level of uncertainty among relevant factors. For that a scenario analysis is
considered vital.

Step 1: High Impact, High Uncertainty factors in the Environment.

High

Potential
Impact

Low
Low Uncertainty High
(Source: Developed by the author, Exploring Corporate Strategy”, Gerry Johnson-Kevan Scholes, 5th
Edition, Prentice Hall, 1999)

A. Oil Crisis.
B. Government regulation about not using the “Love Field”
C. Increase Airport fees.
D. Cost of maintenance and spare parts increase.
Step 2: Identify different possible features by factor

A: rapid change C: High

Measurable change Increasing
B: Favourable D: High and increasing
Unfavourable Favourable

Step 3: Build scenarios of plausible configurations of factors.

Scenario 1: A rapid change in Oil (a) along with a favourable government regulation (b) and a high and
increasing Airport Fees (c) with a favourable increase in maintenance costs (d).

Scenario 2: A high and increase cost of maintenance (d) with a measurable change in oil (a) along with a
unfavourable regulation (b).

Scenario 3: An high Airport fee (c) along with a high and increasing cost of maintenance (d) and a
Measurable change in Oil (a).
According to that scenarios Southwest must be ready to restructure Efficient and affectively her strategy
in order to prevent changes, and to able to maintain her low-cost, low frequent, low fares strategy.
With the 5 forces analysis we will try to identify the forces which affect the level of competition in an
industry, and thus that it will help us to identify bases of competitive strategy.

The Threat of Entry

This factor is closely related to weather there are barriers to entry or not.
Southwest operates in a differentiation strategy that makes competitors very difficult to enter. By
offering, low fare (25% lower than every other company that tries to imitate), point-to-point delivery (no
hub-and-spoke), plastic boarding cards (to recycle back), and no designated seats is considered a
powerful advantage to burry competitors.
Also the offer of “Chivas Regal” in a double fee ticket., and also the short hub routes along with the
philosophy It not now, then when? If not us, then who?" are having the basis for a strong differentiate
strategy.

The Power of Buyers and Suppliers.

Moreover, the relationship of buyers and sellers are can have similar effects in constraining the strategic
freedom of an organization and in influencing the margins of this organization.
Regarding this, there are some major factors that affect the organizational strategy. It is well known,
that in market that there is big concentration of buyers the flexibility reduces.
Southwest has to deal with big groups of people, meaning that their barging power is consider strong.
Although, the company by offering the lowest prices along with satisfaction, reduces or either eliminate
the barging power or the “switching of suppliers”.
Moreover, the company by doing a forward integration makes her self a supplier, which connected with
the customers.
The Threat of Substitutes.

Southwest understood that for short-haul destinations, surface transport (car) was a substitute of flying.
By concentrating on the factors that lead people to choose one of these forms of transport over the
other, and eliminating or reducing anything else, the southwest concept created.

The key was to consider, why people are flying over driving for short destinations; because they want,
luxury, multiple seating, meals, drinks, etc… The answer is, no.
There is only one reason that makes people to fly over driving: speed. People fly to save time.

Competitive Rivalry.

Even though this considers a philosophical term, southwest manage to eliminate competitors by using
flexible strategy.
Expansion strategy (not least than 12 flights), ideally commitment of employees, concentrate on flying
“big number of passengers” (big market share), and with point-to-point, manage to be “the worlds only
short haul, high frequent, low fare carrier.

Competition and Collaboration.

Southwest followed some major steps concerning the direction and the method of developing the
organizations strategy.
1. Market penetration (in substitute industry) where the attention was small
2. Product development on existing and with new competencies (“Love field”, new737, low fare, point-
to-point, short hub delivery)
3. Market Development into new markets, territories (Texas, then interstate, smaller market niches in
time oriented and price sensitive customers)
4. And then Diversification (no hub, point to point, 10 minutes turnaround , same airplanes, multi-
operational employees)

Marketing.

Southwest operates in small market niches, focus on people that want to fly in small routes (time
oriented) and to those that there where price sensitive, knowing that this target market was consisting
the biggest market share.
Also by marketing research, offers the opportunity for mass marketing to those niches. Moreover, by
negotiating for a full-fare ticket along with “liqueur” push to the market the full fare ticket, knowing that
the full fare will give more “processing customers”

Management.
Southwest was the only large airline to operate without major hubs, although cities such as Phoenix,
Houston, and Dallas were increasingly becoming important transit points for Southwest trips. For
example, daily departures from Phoenix, Southwest’s busiest airport, had increased to 170 in 1999 .
Point-to-point service provided maximum convenience for passengers who wanted to fly between two
cities, but insufficient demand could make such nonstop flights economically unfeasible. For that reason,
the hub-and-spoke approach was generally assumed to generate cost savings for airlines through
operational efficiencies. However, hub-and-spoke arrangements resulted in planes spending more time
on the ground waiting for customers to arrive from connecting points.

Turnaround time —the time it takes to unload a waiting plane and load it for the next flight—was15
minutes for Southwest, compared with the industry average of 45 minutes. This time savings was
accomplished with a gate crew 50% smaller than other airlines. Pilots sometimes helped unload bags
when schedules were tight. Flight attendants regularly assisted in the cleanup of airplanes between
flights.

Relative to the other major airlines, Southwest had a “no frills” approach to services: reserved
seating was not offered and meals were not served. Customers were handed numbered or color-coded
boarding passes based upon their check-in order. Seating was first come, first served. As a cost-saving
measure, the color-coded passes were reusable. As to why the airline did not have assigned seating,
Kelleher explained: “It used to be we only had about four people on the whole plane, so the idea of
assigned seats just made people laugh. Now the reason is you can turn the airplanes quicker at the
gate”.
And if you can turn an airplane quicker, you can have it fly more routes each day. That generates more
revenue, so you can offer lower fares.”

Financial Analysis
Southwest Airlines is a commercial airline that provides passenger and freight transportation to 56
airports in 55 cities in the Midwestern, Southwestern, and Western United States. The airline specializes
in short-haul routes and targets business commuters. The company's most-traveled routes are intrastate
flights in California and Texas. Its fleet consists of about 310 Boeing 737s. Passenger transportation
generates almost all revenue, accounting for more than 96% of the total. In fiscal 1999, Southwest's
average aircraft trip was 465 Southwest has managed to steer clear of nearly all the woes that afflict its
competitors. Over the past few years, the Dallas-based carrier has done a much better job of protecting
itself against high fuel costs and labor disputes than industry rivals. It has avoided being associated with
airport gridlock in the minds of travelers because, in many regions, it flies in and out of smaller, less
congested airports, such as Love Field.
Instead, it appears to be ignoring the consolidation wave while staying on course by serving smaller
regional airports where congestion has not reached epidemic proportions.
Corporate Culture

The culture of this company is what helps make it a wonderful place to work for. The leaders of this
company have tried their best to develop a place where everyone loves to come to work and wants to
work. Managers who do not follow this theory are stuck with employees who just come to get as little
done and still get paid.

It's a company that not only nurtures nuttiness but also makes its pleasure a requirement for
employment. And it's a company unique culture, which includes a order that people have fun at work
which are part of Southwest, which set itself on low fares and low frills, serving peanuts instead of
meals. Employees also are constantly reminded that they are No. 1 in the company's eyes. The
reminders include cards, notes, gifts, celebrations - and profit sharing to motivate them that there are
“our children”
In fact they believe: “Yes, Southwest it’s a good home”

EDI
Although, southwest where a new company in the it manages to turnover from browsers to buyers. The
company gave grate attention to the construction of the site presenting the major advantages of
electronic booking (no seat, payment in the plane, competitive prices, receive the ticket on board,) , the
site was giving real time examples for price sensitivity and time orientation strategy.

SWOT~EFE, IFE
Internal Strengths WEIGHT RATING WEIGHTED SCORE
§ 10 minutes turnaround 0.15 4 0.60
§ Only 737 0.10 3 0.30
§ Point-to-point 0.20 4 0.80
§ Loyal Employees 0.20 4 0.80
§ Not congested airports 0.20 4 0.80
§ Low operating Costs 0.15 4 0.60
TOTAL 1.00 3.90
Internal Weakness WEIGHT RATING WEIGHTED SCORE
§ Try to convince customers that what the airline offers it a real value to them. 1.00 2 2
TOTAL 1.00 2

External Opportunities WEIGHT RATING WEIGHTED SCORE

§ Purchasing three 737’s at basement barging price 0.30 2 0.60
§ Internet 0.30 3 0.90
§ Deregulation of flights 0.30 3 0.90
§ Med Link 0.10 2 0.20
TOTAL 1.00 2.6
External Threats
§ United Air 0.20 2 0.40
§ Delta 0.20 2 0.40
§ American Airlines 0.20 2 0.40
§ “Ticket tax in 1997 0.40 3 1.20
TOTAL 1.00 2.4

The major airlines had also taken steps to compete directly with Southwest. The Shuttle by United, a so-
called “airline within an airline,” was started in October 1994. United’s objective was to create a new
airline owned by United with many of the same operational elements as Southwest: a fleet of 737s, low
fares, short-haul flights, and less-restrictive union rules. Although offering basically a no-frills service, the
Shuttle provided assigned seating and offered access to airline computer reservation systems. United
predicted that the Shuttle could eventually account for as much as 20% of total United U.S. operations.

Cost was the major problem for United in competing with Southwest. For two main reasons, the
Shuttle’s cost-per-seat mile remained higher than Southwest’s. First, many passengers booked their tick-
ets through travel agents, which resulted in commission fees. Second, many of the Shuttle’s flights were
in the San Francisco and Los Angeles markets, both of which were heavily congested and subject to
costly delays. As well, the Shuttle was unable to achieve the same level of productivity as Southwest.
Nevertheless, by launching the Shuttle, United was able to gain market share in the San Francisco and
Los Angeles markets, largely at the expense of American, US Airways, and Delta. The Shuttle also offered
first-class and reserved seating.
Concluding, we must state that weather the other companies try to imitate Southwest, the result where
very disappointed because the southwest has realized that there is only for that market, and she is well
aware with that.

Concluding we must state that the reasons for Southwest success are well documented: It focuses on
short-haul industries with an average distance of 425 miles. Thorough away meals, in flight films,
designated seats, membership, central airports and a hub and spoke system-all the above assume that
are closely relevant.
Also, with plastic cards, small or smaller airports and a 10 minute turnaround (30-35 usually for other
companies) succeed the inevitable.
Southwest understood that for short-haul destinations instead of surface transport (car) was a
substitute of flying. By concentrating on the factors that lead people to choose one of these forms of
transport over the other, and eliminating or reducing anything else, the southwest era created.

The key was to consider, why people are flying over driving for short destinations; because they want,
luxury, multiple seating, meals, drinks, etc… The answer is, no. There is only one reason that makes
people to fly over driving: speed. People fly to save time.
There is also and the opposite direction, on why the people are choosing the south west instead of the
car; because they can take it and leave whenever they want.

That’s why southwest delivers high frequent flights; to give this opportunity to her customers.
Moreover, despite the competition Southwest gain the biggest market share; although other market
offered grate opportunities on substitute markets; The fact is that southwest concentrate in price-
sensitive and time-oriented customers that there were consisting the biggest percentage of the
environment.

Bibliography

§ “Exploring Corporate Strategy”, Gerry Johnson-Kevan Scholes, 5th Edition, Prentice Hall, 1999)

§ “Economics”, John Sloman, 3rd Edition, Prenctice Hall, 1994

§ “Strategic Management”, Fred R David, 8th Edition, Prenctice Hall, 1999

§ “The management of business logistics”, Coyle, 6th edition, WEST

§ K. Freiberg & J. Freiberg, Nuts: Southwest Airlines’ Crazy Recipe for Business and Personal Success
(Austin, TX: Bard Press, 1996), p. 61.

§ K.S. Krause, “Tougher Profit Story, Traffic World”, June 7, 1999, p. 29-30.

§ “Bank Management”, Koch McDonald, 4th Edition, Dryden Publishing.

 3. Apple Computer Comprehensive Case Analysis
Uploaded by spootyhead (9244) on Mar 19, 2007
Apple Computer Comprehensive Case Analysis

Industry Summary

Apple Computer’s standard industrial classification (SIC) is 3571. SIC 3571 is used for companies that
manufacture computer hardware. The top computer hardware manufacturers by sales are IBM,
Hewlett-Packard, Compaq, Dell Computer, Cisco Systems, Sun Microsystems, Xerox, EMC, Seagate, and
Gateway. Growth in the computer hardware industry in the United States is predicted to be slow
because of the recession and market saturation. Consumers are holding on to their computers because
they are adequate for now. According to International Data Corp, the industry was supposed to grow
16.6% in 2001. 16.6% growth is good for some industries, but not computer hardware manufacturers.
The computer hardware industry will not see a lot of growth in the United States until the current
recession ends

Hewlett-Packard and Compaq are attempting to merge to make the world’s largest computer hardware
manufacturer. Hewlett-Packard and Compaq together would have 87 billion dollars in earnings a year,
operations in more than 160 countries, and over 145,000 employees. Although Hewlett Packard and
Compaq claim the merger will benefit customers, some critics believe a monopoly will be created and
consumers will pay higher prices.

Company Summary

Steve Jobs and Stephen Wozniak founded Apple Computer in 1976. Their first computer was called the
Apple I. Apple was incorporated in 1977. After incorporating, Jobs and Wozniak introduced the Apple II
computer.

Apple went public in 1980. Investors were eager to buy stock in a company on the cutting edge of
technology. All of Apple’s shares were sold in a few minutes.

In 1983 Apple introduced the Lisa computer, which was the underpinning for the Macintosh computer.
The Lisa and the Macintosh had graphical user interfaces that were easy to use.

Jobs tried to take over Apple in 1985, but President and CEO, Sculley, stopped him with the support of
the board. Jobs resigned and Wozniak left to start his own company soon after.

Apple faced some hard times over the years competing with Microsoft, IBM compatible computers, and
PC clone manufacturers. Apple takes pride in being different, but its downfall seems to be that it is too
different. Apple computers are not IBM compatible and over 90% of computers on the market are IBM
compatible. Apple has manage to find a niche in the education and creative markets.

Specific Information
• A distinct competency of Apple is the ability to design innovative computers
• Apple found its niche in the education (27.7% desktop and 34.7% portable), technical, and business
sectors
• Apple has an overall market share of 4.5%
• Apple’s culture promotes creativity. Casual dress is allowed, workers are given considerable vacation
time, and generous benefits
• Apple employs approximately 8,568 people in the United States
• Apple is headquartered in Cupertino, California.

Mission Statement Analysis and Revised Mission Statement

Apple’s Mission Statement

Apple Computer is committed to protecting the environment, health, and safety of our employees,
customers and the global communities where we work and live. We recognize that by integrating sound
environmental, health, and safety management practices into all aspects of our business, we can offer
technologically innovative products and services while conserving and enhancing resources for future
generations. Apple strives for continual improvement in our environmental, health and safety
management systems and in the environmental quality of our products, processes and services.

Mission Statement Analysis

Apple’s mission statement is pretty good. It expresses concern for the environment, employees, safety,
and customers. It tells us that Apple’s customers are worldwide but it does not tell us exactly who they
are. Apple’s mission statement expresses concern for being technologically current. It does not say
precisely what its products and services consist of. It does not address concern for survival, profits, and
growth. It does address philosophy, concern for public image, and self-concept be expressing a sincere
concern for preserving the environment. Apple’s mission statement expresses its concern for employees
by stating a concern for safety.

Mission Rewrite-

Apple Computer’s mission is to make the most technologically current personal computer and related
products on the market for customers worldwide. Apple strives to give shareholders the best return on
their investment in the industry while maintaining respect for communities, employees, and the
environment.

External Analysis Summary

Apple is below average in taking advantage of opportunities. 40-50% of homes in the United States do
not have PCs. These consumers need to be targeted and convinced that they cannot live without a
computer. Internet use has grown worldwide. If Apple can get consumers to use an Internet service it is
affiliated with, it may be able to persuade consumers to buy its computers. 40% of worldwide spending
on IT is on computer hardware. Apple computers are not attractive to a lot of consumers because it is
not IBM compatible like the majority of PC users. There is an increasing demand for faster/advanced
technology. Although Apple is very good at creating faster/advanced technology, IBM compatibility is a
bigger issue with customers than advanced technology. Apple has done a superb job capturing the
education market (See EFE matrix).

Apple’s is below average in avoiding threats (See EFE matrix). HP and Compaq are talking of merging and
Apple stands alone. The economic downturn has hurt all companies in the computer hardware industry.
Apple is being hurt by the recession like other computer hardware companies.

Apple’s EFE score was 1.48 (See EFE matrix). 2.5 is an average score. Apple’s 1.48 score is well below
average and tells us that Apple is below average in capitalizing on opportunities and avoiding threats.
The EFE matrix was constructed by listing opportunities and threats, assigning a weight to each
opportunity and threat, assigning a rating to each opportunity and threat, and multiplying weights by
ratings. Finally, the weights are added and compared to the 2.5 average.

Internal Analysis Summary

Apple is below average in utilizing internal strengths to overcome internal weaknesses. Many of Apple’s
customers are loyal and would never consider purchasing anything else. This loyalty is great but Apple
needs to increase the amount of loyal customers that buy its products. Apple manufacturers and designs
computers and operating systems. Apple is the only company that manufactures operating systems and
computers. Apple’s online sales are a perfect compliment to its 27 new stores. Apple is targeting
customers that will buy on line and those that like to see what they are buying in person. Apple’s new
stores will most likely increase sales and improve customer service. The IFE matrix was created by listing
Apple’s strengths and weaknesses, assigning weights to each one, and ratings to each one, and
multiplying the weights by the ratings. Finally, the weighted scores are added and compared to the 2.5
average.

Apple is competitively lagging behind the competition with a CPM score of 2.20 versus Compaq (3.52),
and Dell (3.82). Apple needs to improve its marketing, management, market share, and global expansion
to be more competitive in its industry. IBM compatibility would be a good start for Apple to improve
competitiveness.

Financial Analysis Summary

According to our textbook, a current ratio is the extent to which a firm can meet its short-term
obligations. Apple’s 2001 current ratio is 3.39 (See 3 year financial trend paper). Apple’s current ratio is
better than the industries and is an improvement from 2000.

According to our textbook, a quick ratio is the extent to which a firm can meet its short-term obligations
without relying upon the sales of its inventories. Apple’s quick ratio is 3.08 for 2001, which is an
improvement from 2000, and it better than the industry (See 3 year financial trend paper).

According to our textbook the debt to equity ratio is the percentage of total funds provided by creditors
versus owners. Apple’s debt to equity ratio is .35 for 2001, which is an improvement from 2000, and is
better than the industry (See 3 year financial trend paper).

According to our textbook the long-term debt to equity ratio is the balance between and equity in a
firms long-term capital structure. Apple’s long-term debt to equity ratio for 2001 is .081, which is an
improvement from 2000, and is better than the industry (See 3 year financial trend paper).

The Inventory turnover ratio determines helps determine if a company is holds excessive stocks of
inventory. Apple’s inventory turnover for 2001 is 488 compared to 26.02 for the industry. It is an
improvement from 2000.

Our textbook says, “Total assets turnover is whether a firm holds excessive stocks of inventories and
whether a firm is selling inventories slowly compared to the industry average”. Apple’s total asset
turnover for 2001 is .0891. It was 1.17 in 2000 and is lower than the industry average.

Our textbook says, “Gross profit margin is the total margin available to cover operating expenses and
yield a profit. Apple’s gross profit margin for 2001 was 23 (In millions) compared to 27 for 2000, and
30.83 for the industry in 2001.
Our textbook says, “Operating profit margin is profitability without concern for taxes and interest.
Apple’s operating profit margin for 2001 was .9 down from 13.7 in 2001 and compared to 5.61 for the
industry in 2001.

Our textbook says, “Net profit margin is after tax profit per dollar of sales”. Apple’s net profit margin
was .098 in 2000, .005 in 2001, and 4.77 in the industry in 2001. Apple is got worse from 2000 to 2001
and is not doing as good as the industry.

Our textbook says, “Return on total assets is after-tax profits per dollar of assets”. Apples return on total
assets was .116 in 2000, .004 in 2001, and 5.75 for the industry. Apple is getting worse and not doing as
well as the industry.

Return on stockholders equity is profits after taxes for every dollar of shareholder investment. Apple’s
return on stockholder equity was .191 for 2000, .006 for 2001 and 21.93 for the industry. Apple is
getting worse and not doing as well as the industry.

Earnings per share is earnings that shareholders get to keep. Apples earnings per share was 2.18 for
2000, -.07 for 2001 and 2.36 for the industry. Apple is getting worse and not doing as well as the
industry.

Price earnings ratio is how much investors are willing to pay for a firms earnings. Apples PE ratio was
37.2 in 2000, 42.8 in 2001, and 35.6 for the industry. Apple is getting better and doing better than the
industry.

Apple’s sales have increased 18.1 in 2000, and decreased 13.78 in 2001. The industries sales growth
ratio decreased 6.78 in 2001. Apple is doing worse than it did in 2000 and not as well as the industry in
2001.

Apple’s earnings per share growth ratio increased 26.15 in 2000, decreased 44.2 in 2001, and is worse
than the 2001 industry average of a negative 22.78. Earnings per share have decreased for Apples and
the industry.

Alternative strategies Summary

My first SO strategy in the TOWS matrix was offer free computer classes for seniors in the new Apple
computer stores. This would introduce apple computers to new customers and be good for the
community. My second SO strategy in the TOWS matrix was to offer interest free financing to parents
that have children in school that use Apple computers. The children are already familiar with Apple
computers and the parents would be enticed by the interest free financing. My third strategy in the
TOWS matrix is to market computers to consumers globally. There is a large untapped market that
Apple could pursue more aggressively.

My first ST strategy is to advertise on popular web sites. This would increase Internet sales. My second
ST strategy is to offer free computer classes to displaced workers. The workers may purchase Apple
computers when the get back to work and they will be more employable after completing the computer
classes. My third ST strategy is to make computers that are harder to illegally clone. This would protect
Apple from losing profits.

My first WO strategy is to offer discounts to past customers that recommend new customers. They say
word of mouth is the best advertising and who would know better than someone who already owns an
Apple product. My second WO strategy is to offer discounts to AARP members. Older people usually
have more disposable income to purchase discretionary items. My Third WO strategy is to develop a
computer that is IBM compatible. IBM compatibility would make it more competitive because
customers would be compatible with the majority of pc users.

My first WT strategy is to implement a just in time system. A just in time system would cut down on
excess inventory and help the bottom line. My second WT strategy would be to merge with IBM and
produce computers that are IBM compatible. Apple could produce IBM compatible computers or just
work in its education and technical niche if it merged with IBM.

The Grand matrix shows us that Apple is in a slow growth industry and has a weak competitive position.
Apple should consider retrenchment, cocentric diversification, horizontal diversification, conglomerate
diversification, divestiture, and liquidation as strategies. The space matrix confirms that Apple is has a
weak competitive position and is in an industry that is technologically stable but decreasing in sales.

Strategy Recommendation

The two strategies I evaluate in the QSPM are to develop an IBM compatible PC and develop and Apple
that is more competitive with the IBM compatible PCs. After completing the QSPM, developing an IBM
compatible computer was the obvious choice. Developing an IBM compatible PC scored 5.60 on the
QSPM and Improving the Apple PCs scored 4.46 on the QSPM. Apple is alienating itself from a large part
of the market by not being IBM compatible. Apple would sell a lot more computers if it got rid of its
operating system and used Microsoft’s operating system. I recommend developing an Apple computer
that keeps the Apple operating system and it compatible.

Implementation

I recommend that Apple approach IBM, Microsoft, Compaq, or another company in

the hardware or software industry and propose a merger. A company like IBM could
supply Apple with the investment dollars, expertise, and licensing rights to make an
IBM compatible computer. Although some die hard Apple fans may not like the idea of
a merger, Apple would be more competitive in the end.
 Case study: IBM’s reputation for innovation
By Vijay Govindarajan and Chris Trimble
Published: September 29 2010 23:17 | Last updated: September 29 2010 23:17

The business is defined by innovation and cuting-edge technology

The story: In the 1990s, IBM was struggling. The rise of Silicon Valley as a hotbed of innovation had
created a perception that everything innovative in the technology sector was created in small, high-growth
companies. IBM, by contrast, was seen as oversized and decrepit.
The challenge: The company was finding it hard to attract talented computer scientists and salespeople,
who were instead going to Silicon Valley. Reversing the perception that IBM was not an innovative
company became a priority for senior management.
The solution: IBM decided to build BlueGene, a supercomputer. High-performance computers were used
by meteorologists, security and intelligence analysts, particle physicists and geneticists. But in their efforts
to push the boundaries of their respective fields, they were constrained by the speed of the world’s fastest
computers. IBM believed that if it could meet this demand, it would be in a position to make a strong,
symbolic statement about its prowess at innovation.
Impetus from the top: Lou Gerstner, chief executive, understood the power of symbols. In 1997, for
example, the company generated a lot of attention by creating Deep Blue, a machine that defeated Garry
Kasparov, the reigning world chess champion.
In 1999, when the company was more stable but still struggling to attract talent, the most exciting field
of scientific inquiry was biotechnology. Scientists were close to completing a map of the whole human
genome.
Rethink the model: Ambuj Goyal, head of computer science at IBM Research, led the project to create the
first “petaflop” computer. Computer speeds are measured in “flops”, floating point operations per second.
At the time, the world’s fastest computers operated at speeds of about 1,000bn flops. A petaflop was
1,000 times faster than a teraflop.
To create a new machine, however, IBM had to abandon the existing paradigm for how to design
supercomputers. Traditionally, advances in computational power came through increases in processor
speed and sophistication. But faster processors consumed more power. So, the company decided it
needed to build a supercomputer while at the same time reducing the speed and complexity of the
microprocessors. This had never been done before.
Tell the world: Whether the company’s theory could be turned into reality was uncertain but Mr Gerstner
and his PR team seized on the opportunity to make their ambition public. IBM held a press conference in
November 1999 to announce it would invest $100m over five years in a new machine, to be dubbed
BlueGene.
There was a shift in press coverage of the industry: a New York Times article, for example, declared that
only an organisation of IBM’s scale could assemble the expertise in computers, mathematics, biology,
chemistry and physics to build such a machine.
By September 2004, the company had surpassed its original ambition of creating the world’s fastest
computer: BlueGene was running with more than 8,000 chips and just over 36 teraflops.
BlueGene did not break the petaflop barrier until 2007, but IBM was still able to get attention in 2004 by
publicising its ambition.
IBM expected the investment to signal a redoubled commitment to research that would in turn help
recruit the world’s greatest minds – and it did. When asked about the project’s return on investment, Mr
Goyal responded: “BlueGene has attracted a number of the world’s most talented graduate students to
IBM. What’s the return on investment of that?”
Key lessons: First, IBM is defined by innovation and cutting edge technology. Attracting top talent requires
understanding the purpose of your company and fulfilling it better than anyone else.
Second, IBM used disciplined experimentation, meaning it innovated in incremental steps and tested
the progress at each stage. In so doing, it was able to learn quickly, make good decisions and get better
results at the least expense possible.
The writers are professors at the Tuck School of Business at Dartmouth College, and co-authors of ‘The
Other Side of Innovation’
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