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MBA Project On Apple Inc …

MBA Project On Apple Inc
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  • 1. The CTL EURO COLLEGE Title: Research project on Apple Inc Student name: Yogesh Karande Registration no. 12-2012 Course: MBA Supervisor: Dr.Andreas Constantinou Date: August 20, 2013 1
  • 2. Table of Contents Title Page Introduction 04 History Apple Inc: 05 Vision Statement of Apple: 05 Explanation of Vision Statement: 05 Mission Statement of Apple: 06 Review of Literature 06 The PC Industry 11 The Online Music Industry 12 The Future of Apple 12 Strategic Alliances and Entertainment 14 External Aanalysis 15 Industry Analysis Using Porter’s Five Forces Model 18 Which External Threats are Most Significant 23 Additional External Threats 24 Vertical Integration of Competitors 25 Value Chain Analysis 26 SWOT Analysis of Apple Inc: 28 BCG Model: 31 What is driving Macintosh acceptance? 33 Removing Barriers for Users 33 Application Preferences 34 Apple profit makes huge rise due to iPod success 34 Apple Beats Competitors at Inventory Turn Over 37 IPod: The Marketing of an Idea Project 38 Financial Analysis 41 Historical Performance 42 Profitability Measures 43 Liquidity and Leverage Measures 44 Product Unit Sales 45 Operating Segments 46 Market Value Analysis 46 Apple 2012 1Q financial analysis 47 Share value 50 Pro-Forma Income Statement 57 Projected Free Cash Flow and Equity Valuation 58 2
  • 3. Strategy 59 Product Differentiation 59 Strategic Alliances 63 Recommendations 66 Conclusion 67 3
  • 4. Introduction Apple Computer’s 30-year history is full of highs and lows, which is what we would expect in a highly innovative company. They evolved throughout the years into an organization that is very much a representation of its leader, Steven Jobs. Apple made several hugely successful product introductions over the years. They have also completely fallen on their face on several occasions. They struggled mightily while Jobs was not a part of the organization. Apple reached a point where many thought they would not survive. When asked in late 1997 what Jobs should do as head of Apple, Dell Inc.'s (DELL) then-CEO Michael S. Dell said at an investor conference: "I'd shut it down and give the money back to the shareholders.” (Burrows, Grover, and Green). Well, times changed. Less than 10 years later, Business Week ranked Apple as the top performer in its 2012 Business Week 50. Apple attributes their recent success to robust sales of iPod music players (79 million in 2011). They are optimistic about the economies of scope with media giants, such as Disney and Pixar. Apple rarely introduces a new type of product. Thus, instead of being the pioneer, they are an expert “second mover” by refining existing products. Portable music players and notebook computers are examples. Apple increases the appeal of these products by making them stylish and more functional. They now appear poised to make significant strides in the home computer market and to creating a total digital lifestyle whereby the home is a multimedia hub. 4
  • 5. History of Apple Inc: Apple Inc formerly known as Apple Computer Inc which provides corporate Server, MAC OS Systems and Operating System. Apples core product lines are the iPhone, iPod and Macintosh System. Steve Jobs and Steve Wozniak, The founder of Apple has created the Apple Computer on 1st April 1976 and integrated in the company on 3rd January 1977, in Cupertino California. It has driven the Computer manufacturing market for more than two decades. Mr. Steve Jobs who was expelled in 1985 was return as CEO of the APPLE Inc in 1996 with new Ideas and corporate philosophy. With introduction of successful IPod Player in to 2001 Apple has again proved itself as a Market leader in consumer electronics. Latest era of extraordinary success of the company is in iOS based Apple products like I Phone, IPod slim, I Pad and now I Pad 2. Now a day’s Apple is a biggest technology corporation in the planet with the profits of more than $65 billion. It has about 49,400 employs all over the world. Fortune Magazine most Admired company in United State in 2012 and in the world in 2012, 2009 and 2009. Apple has over 240 Store all over the world and the bifurcation of these store in different countries are as below. Vision Statement of Apple: “Man is the creator of change in this world. As such he should be above systems and structures, and not subordinate to them.” Explanation of Vision Statement: Apple lives this vision through the technologies it develops for consumers and corporations. It strives to make its customers masters of the products they have bought. Apple doesn’t simply make a statement. It lives it by ensuring that its employees understand the vision and strive to reach it. It has put systems in place to enable smooth customer interaction. It has put objectives in place to continuously move forward; implemented strategies to fulfil these objectives; and ensured that the right marketing, financial and operational structures are in place to apply the strategies. 5
  • 6. Mission Statement of Apple: “Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings.” Review of Literature Steve Jobs and Steve Wozniak founded Apple on April 1, 1976. The two Steves, Jobs and Woz (as he is commonly referred to – see woz.org), have personalities that persist throughout Apple’s products. Jobs was the consummate salesperson and visionary while Woz was the inquisitive technical genius. Woz developed his own homemade computer and Jobs saw its commercial potential. After selling 50 Apple I computer kits to Paul Terrell’s Byte Shop in Mountain View, CA, Jobs and Woz sought financing to sell their improved version, the Apple II. They found their financier in Mike Markkula, who in turn hired Michael Scott to be CEO. The company introduced the Apple II on April 17, 1977, at the same time Commodore released their PET computer. Once the Apple II came with Visicalc, the progenitor of the modern spreadsheet program, sales increased dramatically. In 1979, Apple initiated three projects in order to stay ahead of the competition: 1) the Apple III – their business oriented machine, 2) the Lisa – the planned successor to the Apple III, and 3) Macintosh. In 1980, the company released the Apple III to the public and was a commercial flop. It was too expensive and had several design flaws that made for less-than- stellar quality. One design flaw was a lack of cooling fans, which allowed chips to overheat. In late 1980, Apple went public, making the two Steves and 6
  • 7. Markkula wealthy – to the tune of nine figures. By 1981, the Apple III was not selling well and Scott infamously fired 40 people on Feb 25 (“Black Wednesday”). Scott’s direct management style conflicted with the culture Jobs and Markkula preferred, and Scott resigned in July. Markkula stepped into his position as CEO. In August 1981, IBM released their PC. Unimpressed and unafraid, Apple welcomed IBM to the PC market with a slightly smug full-page ad in the Wall Street Journal. It would not be long before IBM’s PC dominated the market. The Xerox Alto was the inspiration for Apple’s Lisa. Apple employees were able to examine the Alto in exchange for allowing Xerox to invest in Apple before Apple’s initial public offering (IPO). Apple released the Lisa in January 1983 and was notable for being the first computer sold to the public that utilized a Graphic User Interface (GUI). Unfortunately, the Lisa was not compatible with existing computers, and therefore came bundled “with everything and a list price to match.” At $9,995 (over $21,000 in 2012 dollars), the Lisa missed its target market by a wide margin. Apple introduced the Macintosh with great fanfare during the 1984 Super Bowl. The Orwellian-themed commercial (directed by Ridley Scott, of ‘Alien’ fame) portrayed IBM as Big Brother and embodied Macintosh and Apple as freedom- seeking individuals breaking away from this oppressive regime.The commercial was largely successful and sales for the Mac started strong. However, Mac sales later faded. John Sculley left PepsiCo to join Apple in April 1983. He was famous for engineering the “Pepsi Challenge”, in which blinded testers tasted both Coke and Pepsi to unveil the ‘truth’ of the taste of Pepsi. In response to lagging Mac sales, Sculley contrived the ‘Test Drive a Macintosh’ campaign. In this promotion, prospective users could take home a Macintosh with only a refundable 7
  • 8. deposit on their credit card. While lauded by the public and the advertising industry, this campaign was a burden on dealers and significantly impeded the availability of Macs to serious buyers. In 1985, Apple tried to have lightening strike twice with their ‘Lemmings’ commercial during the Super Bowl. In what was becoming Apple’s typical patronizing fashion, this commercial insulted current PC users by portraying them as witless lemmings, unthinkingly doing harm to themselves. Although Jobs attempted to overthrow Sculley, the board backed Sculley. Jobs left Apple to form NeXT computer. After Jobs left in 1985, sales of the Mac “exploded when Apple’s LaserWriter met Aldus PageMaker.” Apple dominated the desktop publishing market for years to come. Under Sculley, Apple grew from $600 million in annual sales to $8 billion in annual sales by 1993. Apple introduced Mac Portables in 1989 and the first PowerBooks in 1991. By 1992, PC competition ate into Apple’s margins and earnings were falling. Sculley was under pressure to have Apple produce another breakout product. He focused his energy on the Newton – Apple’s introduction of the Personal Digital Assistant (PDA). Despite Sculley generating substantial demand for Newton, it did not live up to the hype due to it being severely underdeveloped. Sculley resigned in 1993 and Michael Spindler replaced him. Spindler spent most of his time and energies on regaining profitability, with the end goal of finding a buyer for Apple. Over the next several years, Spindler shopped Apple to Sun Microsystems, Eastman Kodak, AT&T, and IBM. Meanwhile, Apple was unable to meet the growing demand for its products due to supplier problems and faulty demand predictions. To add insult to injury, Microsoft released Windows 95 with great fanfare in 1995. After significant quarterly losses in 1996, the board replaced Spindler with Dr. Gil Amelio, CEO of National Semiconductor. Dr. Amelio tried to bring Apple back to basics, 8
  • 9. simplifying the product lines and restructuring the company. One of Apple’s most pressing issues at the time was releasing their next generation operating system (code named “Copland”) to compete with Windows 95. Amelio and his technology officers found that Copland was so behind schedule that they looked outside the company to purchase a new OS. Ultimately, and somewhat ironically, they decided to purchase NeXT computer from Jobs. Naturally, Apple welcomed Jobs back into the fold. The board became increasingly impatient with Amelio due to sales not rebounding quickly enough. Apple bought out Amelio’s contract after just 1 ½ years on the job. Jobs eventually claimed the CEO position. Then, he cleaned house by revamping the board of directors and even replacing Mike Markkula.Jobs simultaneously put an end to the fledgling clone licensing agreements (which created a few Mac clones) and entered into cross-licensing agreements with Microsoft. On May 6, 1998, Apple introduced the new iMac, a product so secret that most Apple employees had never heard of it. The new iMac was a runaway success with its translucent case, all-in-one architecture, and ease of use. It brought Apple to a new market of users – those who had never owned a computer before. Jobs further simplified the product lines into four quadrants along two axes: Desktop and Portable on one, Professional and Consumer on the other. Apple completed the matrix with the introduction of the consumer-based iBook in 1999. The year 2001 was an important year for consumers of Apple products. Apple opened their first 25 retail stores (totaling 163 stores in 4 countries as of May 2001). In September 2001, Apple introduced the new iMac featuring a screen on a swivel.The new iPods (portable music players) were a tremendous success. Apple sold so many that Apple’s dependence on Mac sales was significantly less. This was no small feat considering that the 2001 iMac became Apple’s best- 9
  • 10. selling product “by a long shot”. Apple offered iTunes (a free application) to help their consumers organize music on iPods and Macs. In 2003, Apple expanded iTunes by 1) opening the iTunes music store to allow Mac users to purchase music online and 2) expanding iTunes to Windows users. Sales of iPods skyrocketed and currently provide the bulk of product sales to Apple. In 2012, Apple announced that it would start using Intel-based chips to run Macintosh computers. In April 2005, Apple announced Boot Camp, which allows users of Intel-based Macs to boot either Mac or Windows OS. This functionality allows users who may need both OSs to own just one machine to run both, albeit not simultaneously. 10
  • 11. The PC Industry We can glean Insight into the history and composition of the PC Industry from its eponymous title. In the late 1970s, as Wozniak and Jobs were starting Apple computer, personal computers were an emerging product. The following chart (Reimer) gives an overall view of the major market players since the mid-1970s. PC Share of Market 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Year 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 ShareofMarket IBM SOM Apple II SOM Mac SOM Amiga SOM C64 SOM TRS 80 SOM By 1983, the market share of the Apple II fell to 8% while the PC had 26%. Market share of Macintosh peaked at slightly more than 10% in the early 1990s and has since tapered to between 2-3%. The IBM PC and its clones became the standard due to the success of the open nature of the PC. This allows product developers to offer vastly more products for the platform. 11
  • 12. Some argue that not licensing the Mac OS was a mistake. Bill Gates and Microsoft were encouraging Apple to license their OS in the early 1980s, because they were developing software for Apple and had much riding on the success of the company. When Apple did not license, Microsoft began developing their operating system, Windows. The Online Music Industry While Apple clearly dominates the online music industry, the battle for domination is not over. Although digital music sales are growing rapidly, the Recording Industry Association of America (RIAA) states that digital sales account for only 4% of all music sales. (Borland) Analysts at Forrester (Bartiromo) and Gartner (Bruno) validate this. Apple’s sales are between 66% and 75% of downloads and 80% of music players. (Bruno) Apple is part to a suit alleging monopolistic practices concerning their market share dominance of players and downloads. The other players in the download market are (the revised) Napster, Yahoo Music, Rhapsody, and illegitimate file-sharing services. Portable music players competing with the iPod include those made by Creative, Samsung, iRiver, and Sony. A major point of contention between these services and player manufacturers is the control of a variety of incompatible Digital Rights Management (DRM) schemes. The Future of Apple Personal Computers – A Shift in Strategy Apple has historically taken a far different path than the traditional Windows and Intel combination. Microsoft provides the Windows operating system to separate 12
  • 13. downstream hardware producers such as Dell. Apple vertically integrated both the operating system software and hardware completely under Apple. A consumer running Microsoft Windows can choose from a myriad of systems based on the Intel processor, while a consumer running Apple’s OS X must purchase Apple hardware. Apple is adjusting this strategy by migrating their microprocessors from IBM and Motorola PowerPC to Intel. Analysts believe that the Intel-based Macintosh may be able to run Microsoft Windows applications by the end of 2009. (Burrows) In addition to switching processors, Apple positioned their computers as an immediate option for the traditional Microsoft Windows user. With Apple Boot Camp, users may now use Mac OS X or Windows on an Apple computer. (Sutherland).By allowing users to run Windows on an Intel Mac, Apple reduced the switching costs for traditional PC users. Apple may steal away customers that are willing to pay a premium for a system that runs both Windows and Mac OS X. Apple continues to retain a strategic option to license its technology to clone makers such as Dell. Past attempts at licensing Apple technology (to IBM, Gateway, and others) failed on accord of Apple’s rigid demands. Many technology leaders (such as a 1985 letter by Bill Gates to Apple CEO John Sculley) criticized Apple for keeping a closed architecture. Apple cofounder Steve Wozniak criticizes this strategy, “We had the most beautiful operating system, but to get it you had to buy our hardware at twice the price. That was a mistake.”Whether Apple would be willing to pursue this reversal of vertical integration is unclear. Although such a move would cannibalize a portion of Apple’s own hardware sales, it would also provide royalty-based revenue that could approach $1 billion annually. 13
  • 14. Strategic Alliances and Entertainment Jobs had the early strategic vision to complement computing with movie entertainment. After founding NeXT, he personally acquired a majority interest in the young movie company Pixar in February 1986. Jobs went on to invest ¼ of his personal wealth into Pixar. In 1995, Pixar solidified its position within animated movies with the debut of Toy Story. Grossing $358 million worldwide, it became the 3rd -largest grossing animated movie in history. After this success, Jobs took Pixar public and negotiated far better terms with Disney. Later successes included Toy Story 2, Monsters Inc., and Finding Nemo. The alliance between Pixar and Disney has tremendous potential for economies of scope. As CEO of Apple and Disney’s largest shareholder, Jobs is the strategic link between Disney, Apple, and Pixar. Opportunities include combining the animated movie expertise of Disney and Pixar, as well as sharing the content of Disney’s ABC or ESPN networks over Apple’s digital offerings. (Burrows, Grover, and Green) A current example of the fusion between Disney, Jobs, Apple, and technology is video on the iPod. Disney’s Desperate Housewives was one of the first television programs available for purchase and download to the newer video-enabled iPod. There are concerns about whether these synergies will come to fruition. There are fears that the personality and style of Jobs may conflict with Disney, and that Disney CEO Iger could be “Amelioed” -- driven out of office by Jobs in a manner 14
  • 15. similar to how Jobs drove Amelio out of the CEO post at Apple. (Burrows, Grover, and Green). External Aanalysis Technological Environment Brand Awareness – Style at a Premium Apple’s products are trendy and stylish. After Jobs returned in 1997, Apple retained designer Jonathan Ive to differentiate their computers from the typical beige box. Ive’s design of the iMac included clear colorful cases that distinguished Apple computers. Apple’s iPod (with the trademark white ear buds and simple track wheel) commands a 15%-20% premium over other MP3 players. Apple and Pixar limit the number of computer products and movies that they sell. Product differentiation with focused quality and style also extend to the Jobs Pixar – “Pixar's executives focus on making sure there are no ‘B teams,’ that every movie gets the best efforts of Pixar's brainy staff of animators, storytellers, and technologists.” (Burrows, Grover, and Green) Apple positions its Macintosh computers as higher quality and higher price. HP, Dell, and other PC manufacturers are pricing many systems under the $1,000 threshold. “Apple is struggling to meet demand for its new MacBook Pro laptop despite a $1,900 price tag that is nearly twice that of garden-variety rivals.” Apple has only recently entered the low-end (below $500) consumer market with the Mac Mini. Although the Mac Mini is a base model with few features, it comes 15
  • 16. encased in a very small and distinctive package. Apple portrays this computer as “Small is Beautiful”. (Apple) Likewise, the iPod Shuffle was Apple’s first entry into the lower-end ($100 range) of flash-memory-based portable music players. Interoperability Although Apple competes directly with Microsoft for operating systems, the release of iTunes for Windows in 2002 was a key strategic move. This decision expanded the potential customer base to nearly all personal computer owners, even though Apple only has 2%-3% of all personal computer sales. Conversely, Apple depends on Microsoft for a version of Microsoft Office. As the most widely used office suite of applications, Macintosh users rely on Office to correspond with companies that standardized on Windows. This is from a strategic alliance between Apple and Microsoft after Jobs returned in 1997. Apple’s iTunes service has a technological hook (asset specificity) to Apple’s iPod. Although versions of iTunes exist for both Apple and Microsoft operating systems, the iTune’s AAC file format prevents other portable music players (such as iRiver or Samsung) from playing purchased songs. Technology and the Digital Lifestyle Apple not only dominates the music player market, its iLife suite provides consumers with easy-to-use software for music and video composition. With “podcast” a household word, Apple’s Garage Band application makes the recording of podcasts and music very easy. 16
  • 17. Regulatory Environment While introducing new technologies, there is a persistent threat of legal action by competitors. For example, Apple sued Microsoft in 1988 (settled in 1997 for an undisclosed amount) for perceived similarities between Microsoft Windows and Macintosh audiovisual works.Microsoft has generally been the focus for government antitrust charges (such as U.S. v. Microsoft) (US DOJ, 2009). Both federal and state governments assert that Microsoft’s dominance blocked fair competition within the software industry. This is an advantage for Apple, because its operating systems are a viable substitute for Windows. Furthermore, Microsoft’s continued support for Office for Macintosh reduces the perceived level of market monopoly and abuse. Manufacturers will continue to trespass on Apple’s intellectual property. In 2002, Apple took legal action against tex9, who then altered the programme and renamed it sumi. Legal threats can surface from somewhat unusual sources. Apple Corps Ltd. is the London-based company that owns the rights to the music of the Beatles. Paul McCartney and Ringo Starr recently sued Apple over the use of the Apple logo in iTunes, claiming that it violated Apple’s agreement not to produce music under an apple-based logo. Research and development is a key component to Apple’s sustained competitive advantage. Apple is currently taking legal action against several popular technical web sites for releasing proprietary product research. Sites such as appleinsider.com have allegedly posted verbatim content from documents 17
  • 18. protected by employee non-disclosure agreements. (McCullagh) Release of critical insider information could give Apple’s competitors a jump in producing rival products. Industry Analysis Using Porter’s Five Forces Model Apple operates in two primary industries: • Computing - Hardware and Software • Delivery of Entertainment and Media Apple has always been under intense competition within the computer, software, and entertainment industries. “Looking to 2012...Every time that Apple had jumped into the lead in a product category during the past two decades, it had had difficulty in sustaining its leadership position.” We use Porter’s Five Forces Model to understand why Apple’s industries are so competitive. Figure: Porter’s Five Forces Model 18
  • 19. Figure: Summary of Industry Threats (Computer Equipment and Entertainment Distribution) Type and Severity of Threat Organization Entry – High Threat Verizon Streaming audio and video with V CAST. Amazon On demand online services to purchase music (similar to iTunes). Google They make everything. The “Next Google” New entrants with disruptive technology. Rivalry – Microsoft Windows Operating System, Windows Media Threat of New Entrants Bargaining power of Suppliers Threat of Substitutes Bargaining power of Buyers Level of Threat in an Industry 19
  • 20. High Threat Player for playing music and video. Linux Competition to Mac OS X Operating System. Napster, Rhapsody Online music sources – alternatives to iTunes Music Store. Dell, HP, Lenovo Alternate sources for computer hardware. iRiver, Samsung, Creative Small, stylish MP3 Players. DreamWorks Animated movies. YouTube.com Online video. Substitutes – Moderate Threat XM, Sirius Satellite Radio for music. XBox, PS2 Entertainment Media, Media and Music. Various Internet Streaming Radio and Podcasts. Music CDs, DVD-Audio and SuperAudio CD Alternative means to acquire music. Broadcast, Cable, Satellite, NetFlix, TiVo, Theatres Alternative sources for video. Suppliers Motorola, Suppliers of Processors and computer memory. 20
  • 21. – High Threat IBM, Intel, Samsung Microsoft Strategic Alliance / Supplier of Office for Mac. The Big Five - BMG, EMI, Sony, Universal, and Warner Sources of music. Will they raise prices and break the dollar per song model? Some in the record industry resent Apple’s distribution model. “Apple reaps billions from selling its hit music player, but there are sparse profits from the songs being sold over the Net.” (Burrows, Grover, and Green) Disney, ABC, NBC, CBS, Fox, Pixar, Sony Suppliers of Television and Movies. Will they sign exclusive contracts with other online services? Note that this threat is reduced for Disney / Pixar. Buyers – Moderate Threat Consumers and Illegal peer-to- peer file sharing Consumers share music using peer-to-peer networks without paying for music. Distributors Apple retailers may pressure for lower prices or better terms. For example, the release of the Apple Store in 2001 “infuriated longtime independent Apple retailers that didn’t appreciate Cupertino cannibalizing their sales.” (Linzmayer, 300) Consumer Attitudes and Behaviors Consumers or businesses may reduce spending on personal computers or non-essential (potentially high elasticity of demand) music players if they fear economic downturns. Consumer Refresh Cycles Consumers and businesses may continue to use previous-model iPods and Macs rather than upgrade to current iPods, iMacs, or OS 21
  • 22. The total industry threat for the industry space that Apple occupies is a high threat industry.Apple must continue to pursue product differentiation (i.e. the style and ease-of-use of an iPod) and economies of scope (i.e. offering ABC television shows on iTunes) to maintain their sustained competitive advantage in this industry. Which External Threats are Most Significant • Computer Hardware and Software: Open Source software such as the Linux Operating System and Open Office applications threaten both Apple and Microsoft. The low (often, free) cost of the software may allow it to overtake Apple and Microsoft, especially in developing markets such as China. • Music Products: Major online retailers such as Amazon are considering entry into the online music market. With a wide internet presence and a household name, Amazon could present a formidable challenge to Apple. If the major record labels (Universal, Sony BMG, EMI, and Warner) negotiate better terms with new competitors to iTunes, Apple may be unable to provide some of the music content that they currently offer. The major music labels dislike Apple’s dollar per song pricing. They would prefer to earn higher profits with “variable pricing”. 22
  • 23. • Suppliers: The recent shift to Intel processors could present a significant threat to Apple. With only two companies (Intel and AMD) producing Intel-compatible processors, there is a strong potential for tacit collusion and oligopoly power between these suppliers. Apple purchasing must now directly compete with HP, Lenovo, and Dell. If shortages or exclusive agreements materialize, Apple could face problems with obtaining raw materials. Apple should consider additional sources such as Advanced Micro Devices (AMD). • Figure: CPU Market Share 23
  • 24. Additional External Threats Security Apple software, like all large software products, has security vulnerabilities that hackers may exploit. A significant exploitation in the future could damage many businesses and households using Apple computers. This would affect future customer purchasing decisions. Apple enjoys a competitive advantage, because their OS X is mature and stable due to its basis on BSD Unix. In fact, “computer security folks back at FBI HQ use Macs running OS X”. However, the increased use of Apple computers is prompting hackers to target the platform. In February 2009, there was documentation of the first known Apple OS X worm. By using iChat instant messaging, it spreads to other users and deletes files from their Mac computers. If Mac OS X becomes as wide of a target as Windows, Apple’s perceived differentiation as the more secure platform may disappear. Vertical Integration of Competitors Sony is an example of a competitor with a unique position against Apple. Sony Music supplies Apple with many of the songs for iTunes. Sony also creates a version of the Walkman portable music player that is a direct competitor to the iPod. Sony is attempting to vertically integrate forward directly to the music buyer. Sony integrated their music system (Mora) into the Sony Walkman. Sony is exclusively distributing certain songs on Mora. (Hall) Mora currently targets Japanese consumers. If Sony can gain additional momentum (such as 24
  • 25. collaborating with other record labels), their service could present a formidable challenge to iTunes in additional markets. Value Chain Analysis To determine where Apple developed distinctive capabilities, Porter’s generic value chain model provides a systematic framework for identifying Apple’s utilization of resources. Primary activities for Apple include Technology and Product Design, Production, Sales and Marketing, Customer Service, and Legal Services. Technology and Product Design 25
  • 26. This component represents the true core (no pun intended) of Apple’s capability. From being the first platform to run an electronic spreadsheet (VisiCalc on the Apple II Plus) to the first to establish a “digital lifestyle” hub (the Macintosh product lines), Apple’s history is rich with cutting-edge technology development. Apple drives to be the best, no simply the first. The Apple operating system is universally regarded as more stable and reliable than Windows, while the desktop publishing software bundles (iMovie, iPhoto, iTunes, etc.) are the most comprehensive available to end users. Ives best summarizes the entrepreneurial culture within Apple by saying that “it’s very easy to be different, but very difficult to be better.” Production Because Apple had long refused to license its operating system to external entities, the bundled packages of Apple-developed hardware and software became the cornerstone of Apple’s production process. Apple achieved unparalleled performance via 64-bit architecture, integrated distinctive styling with the multi- colored translucent iMac cases, and redefined intuitive operation with the iPod. While every product introduction has not been a success (Lisa, Newton, etc.), Apple treats component production as a natural extension of the design process. Sales and Marketing We could simply title this section “Steve Jobs”. Since his return as CEO in 1997, Jobs personally unveils all new product introductions, reviews corresponding marketing campaigns, and approves new product development guidelines. In a departure from their turbulent history, Jobs “entered into patent cross-licensing and technology agreements with Microsoft.” (Linzmayer Pg. no. 290) After years of unimpressive market share growth and cannibalization of a loyal consumer base, the door to the expansive PC market was now more accessible to Apple than 26
  • 27. ever before. Apple continued to command a market premium for producing a “better mousetrap” throughout its history. Customer Service How has Apple retained substantial cash reserves during the explosive growth and dominance of PCs worldwide? Apple created a virtual love affair with their customer base by delivering technically superior products (iPods vs. other MP3 players, Macs vs. PCs, etc.), and aggressively pursuing hardware and software updates. Apple integrated their primary activities so well that it is transparent to the consumer where one activity begins and the other ends. A perfect example of this is Apple’s willingness to develop software to run Windows XP on its new Intel-based iMac and then post it online free to iMac users. (Wingfield) In such an environment, customer service merely becomes the realization of receiving a little more than expected. Although Apple employs many resources and capabilities to support their primary activities (human resources, supply procurement, etc.), the most strategically relevant would be Legal Services. Legal Services In a market climate of constant change and innovation, it is inevitable that the drive to expand product and service offerings will subject Apple to patent and copyright infringement claims. The dispute over the Apple logo on its iTunes Music Store, for example, continues despite a previously reached settlement with Beatles’ Apple Corps Ltd. in 1991. (Dow Jones Newswires) While such litigation as Microsoft’s Windows infringement on Mac OS patents has been highly 27
  • 28. publicized, use of legal guidance to drive acquisition versus internal development strategies for such products as GarageBand and iMusic have proven highly valuable. SWOT Analysis of Apple Inc: Although participation in such activities may add value, they may not be a source of competitive advantage. Ultimately, the value, rarity, inimitability, and/or organization (VRIO) of an activity or resource determine its sustainability as a source of competitive advantage. Within this context, we can identify a firm’s strengths, weaknesses, opportunities, and threats (SWOT). In SWOT analysis Strength and Weaknesses are depends on Internal factors and Opportunities and Threats Depends on External Factors of and Organization. SWOT analysis is useful in decision making about the organization going for any new or existing project. Apple SWOT Analysis Strength: • iTunes Music Store is a excellent source of revenue, especially with the iPod and the accessibility on Windows platform. • Apple Computer are expert in Developing own software and hardware. • Apple’s niche audience provides the company with some lagging from the direct price competition. 28
  • 29. • Giving a face-lift to desktop and notebook lines. • technology can be used to improve product awareness and sales. • Low debt—more maneuverable. • Apple Computers have good brand loyalty. • Strong Research & Development Department. Weaknesses: • Weak relationship with Intel and Microsoft. • Weak presence in business arena. • The product life cycle of Apple products are very small for that reasons revenues are more depend on launch of new products and services. • Weak presence in markets other than education and publishing. • Slow turn around on high demand products. • Apples market share is far behind from major competitor Microsoft. • In past the relationship between Steve jobs and employee were not good which result in reputation loss. Opportunities: • Increase in worms and viruses on PCs so the antivirus solution can be developed by Apple • Large population (Gen X&Y) which are extremely individualistic and name brand conscious. 29
  • 30. • The ties of apple other companies are weak, Apple can develop good relationship for joint ventures • Downloadable music and MP3 players are highly marketable. • The online sales of computer are increasing with rapid speed. • The laptop market growth is high; Apple Computers should focus to develop new models to cater the need of customers. Threats: • Companies not seeing Apple as compatible with their software. • Apple facing strong competition from Dell, HP, Sony and Toshiba in laptop segment. • Downloading free music from other online source without paying cost is common it may impact the iTunes sales. • Apple software, Cell phone and hardware are expensive as compared to other competitors such as Dell. • The long lasting recession may impact the sales of the company due to higher prices of the products and services • Microsoft launched Microsoft Vista, Windows 7 which is gaining market share. • The switching in technology is very fast 30
  • 31. BCG Model of Apple Inc. 31
  • 32. Boston Consulting Group (BCG) model is a technique developed by BRUCE HENDERSON of the Boston Consulting Group in early 1970’s. According to this technique businesses or products are classified as low or high performers depending upon their market growth rate and relative market share. It is very useful tool to identify the product line of an organization. BCG model classified in four main categories are 1.) Star 2.) Cash Cow 3.) Question Mark 4.) Dog 32
  • 33. What is driving Macintosh acceptance? Supporters agree that it is the product's easy to use graphic interface. "Once a user sits down and works with a Macintosh, they never go back to an IBM Personal Computer," proclaimed Price Collins, a programming manager at General Electric Co. in Bridgeport, Conn.The ease of use features translate into substantial savings for many corporations. "We spend much less time training Macintosh users than we do training IBM microcomputer users," noted Pearson at the New York Daily News. Studies comparing Macintosh and IBM microcomputer training costs found that it takes twice as long for an IBM user to learn how to operate his machine and three times longer for the user to understand how to opeate a second application. A survey commissioned by Apple found the average cost of training an IBM user was $765 compared to $294 for a Macintosh user.The Macintosh's graphics capabilities also offer many middle managers their own strategic weapons in the battle for upper management's attention. "An employee will use a Macintosh to generate slides and charts for an important presentation," GE's Collins explained. "The output is far superior to anything generated on an IBM microcomputer, so other managers immediately want to produce the same quality output. Quickly, use of Macintoshes spreads through the company." 33
  • 34. Removing Barriers for Users Analysts reported that another reason for acceptance was aggressive Apple actions. "Apple removed barriers that corporations erected to keep Macintoshes out of users' hands," said Richard Kollmeyer, the director of marketing and technical services at The Support Group Inc., a Wellesley, Mass., microcomputer reseller. "One of the initial concerns was the inability to run MS-DOS software on a Macintosh. Quickly, Apple delivered hardware so users could run those applications." To date, Macintoshes have been relegated to personal productivity tools in most companies. "Most users purchase a Macintosh to more efficiently do their own work," noted Michael Masterson, a microcomputer systems specialist at Arthur Young & Co. in San Jose, Calif. Users are primarily working with traditional microcomputer applications, such as spreadsheet and word processing. However, there are nuances in the types of applications employed by IBM PC and Macintosh users. Application Preferences In a survey of 1,216 large companies (each having more than 500 employees), Dataquest Corp., a market research firm in San Jose, Calif., reported that word processing was the Macintosh's most widely used application--named by 54% of respondents. Graphics applications followed with 46%, and spreadsheets placed third with 38%.On the IBM Personal Computer, the response was as follows: 65% used spreadsheets; 57%, word processing; and 35%, database management 34
  • 35. systems. Few of the companies that dominate the IBM microcomputer software market have had much success plying Macintosh wares. For example, Lotus Development Corp. of Cambridge, Mass., and Ashton-Tate of Torrance, CAlif., have had little success in the market. The most notable exception, Microsoft Corp., Redmond, Wash., offers the three bestselling applications: Excel, a spreadsheet; Word, a word processing package; and Works, an integrated spreadsheet, word processing and database application. 35
  • 36. AppleInsider reports on a research note from BMO analyst Keith Bachman that could have been written for Crazy Apple Rumors—if they hadn't gone ghost-site on us. It turns out the success of the Mac in recent years isn't because of Mac OS X, or Intel CPUs, or the iPod Halo Effect; rather, it's because Microsoft sucks. "Thus far, user satisfaction ratings for Vista have been weak, and startup times for Vista have been known to be much slower than the Mac OS X," Bachman says. "Thus, more than 50% of recent customers buying Macs in Apple retail stores are first-time buyers." While it's great that the six-figure analyst projects 2.4 to 2.5 million Macs sold for the quarter just ended, his rationale is, well, crazy. Setting aside the image of some grandma dropping $2,600 for a MacBook Air with SSD, there's nothing "recent" about half of Mac buyers in Apple Stores being new to the platform. It's been that way since before Vista was released. Further, as the chart by the four-figure analyst clearly shows, the surge in Mac sales started around the time Apple transitioned to Intel CPUs. Ironically, one could argue that Mac sales are rising because of Vista, but not in the way Bachman suggests. Prior to the release of Leopard and the discontinuation of Boot Camp as a separate product, Apple reported huge downloads of the program that let Mac users launch Windows Vista very, very slowly. 36
  • 37. Apple Beats Competitors at Inventory Turn Over Despite a weakening economy and a need to meet customer demand, Apple has been able to maintain a fast inventory turnover rate. The Mac and iPhone maker is sitting at five days worth of inventory on any given day, beating Dell's seven days worth of inventory, according to data from UBS. Other PC makers are having even more trouble matching Apple's inventory efficiency. Lenovo, for example, is averaging 15 days of inventory, and HP is sitting at 32 days. Intel, however, is showing a much slower inventory turnover rate at 89 days, and D-Link is sitting on a staggering 131 days worth of inventory. Apple's quick turnover rate may have been due in part to preparing for its just announced iMac, Mac mini and Mac Pro updates. The company released new desktop computer models on March 3, and keeping inventory low helped assure that there would be fewer of the previous model machines sitting on store shelves. While maintaining a higher inventory level can help a company cope with sudden increases in demand, it can also show a company's inability to adequately gauge market interest in their products. For now, it looks like Apple is managing inventory better than its competition. IPod: The Marketing of an Idea Project Apple’s iPod has taken the world by storm. Nearly ubiquitous, it has changed not only the way people listen to music, but it has transformed its parent company Apple into an entertainment giant. In order to understand how this change came about, we’ll take a look at Apple’s ongoing efforts to make iPod synonymous with 37
  • 38. hip. We’ll also discuss exactly what customers are buying when they buy an iPod, and we will take a deep look at several aspects of Apple’s marketing of this exciting new product, from the iPod itself, Apple’s strategic planning, possible research findings that supported their approach, segmentation strategies that may have been employed and why, as well as pricing strategy across these segments. Like Magritte’s surrealist painting of a pipe with the caption Ceci n’est pas une pipe (This is not a pipe), the iPod is not merely an MP3 player. It is a symbol which encompasses many grand ideas; ideas that involve world change, and how cool we all can be if we are part of that change. Apple’s careful and deliberate exploitation of this concept, comprising an entire marketing ecosystem which nurtures that idea will be the subject of this paper. On January 9th, 2010, Steve Jobs, renowned CEO of Apple, announced that the company which he founded would no longer be known as Apple Computer, Inc. Its new name would just be Apple, Inc.1 This seemingly trivial change represents a fundamental shift with deep implications that were the result of many changes Apple had engineered over the past six or seven years; transitioning itself from a computer company slugging it out for a meager share of an increasingly competitive hardware and software market, to a business that promoted an entirely new concept: the digital lifestyle. Before we dig down into what this radical shift entailed, both for the company and the world, a company already firmly rooted in several notions that allowed this transition to make sense. Apple made a name for itself by being instrumental in ushering in the home PC revolution. For millions, Apple was single-handedly responsible for this revolution by virtue of the fact that it created radical new features such as windows-type graphical user interfaces, pull-down menus and simplified computer control via the mouse. The history of the PC revolution is a history of war between Apple, a number of losers that no one remembers any 38
  • 39. more, and archrival Microsoft with its dubious counterclaims of having pioneered the concept of Windows. Frustrating to anyone who owned a Mac back in the 1980’s is the knowledge that Apple did indeed pioneer the windows metaphor as a distinct feature of its operating system. This was at a time when Microsoft users were still struggling with text-based DOS commands, and yet the commercial success of Microsoft has served to rewrite history to some degree. Battles ensued over the years, but no matter whose side you were on, by the late 90’s it was clear that Apple was not gaining any ground whatsoever as a computer and software manufacturer. In fact due to many external events, Apple’s position was in clear threat. The leading device at the time was Sonicblue RioVolt MP3 CD Player, which retailed for less than $100. Creative's Nomad Jukebox was selling its recently introduced 6GB hard drive for about $250, and e.Digital Corp. was touting its walloping 10GB palm-size Treo 10 for $ 249 Treo. Against these contenders, iPod’s $399 price tag for a mere 5 GB of storage doesn’t seem to make sense16. Also, at this time, iPod was only compatible with Macs, which amused Bill Gates, and continued to do so even as late as 2012 when USA today quoted him as saying: I think you can draw parallels here with the computer — here, too, Apple was once extremely strong with its Macintosh and graphic user interface, like with the iPod today, and then lost its position.17 It is our contention that the initial release of iTunes 1.0, which as noted was practically laughed at, was a Trojan Horse that delivered quite a bit of business intelligence to Apple. 39
  • 40. Historical Performance Although sales remained stagnant during 1998-2002, sales more than doubled since (see graph below). This dramatic shift in performance is primarily due to the increase in sales from the iPod product line. Stock Price Performance 40
  • 41. Another interesting way to consider the financial performance is to evaluate how Apple’s stock price performed against the market and against its main competitors. Apple’s performance has been inconsistent over the last 20 years compared to the S&P 500. It also has not performed at the same level as its main competitors, Dell and Microsoft. However, performance improved since then. Profitability Measures Apple substantially improved in its key measures of profitability in the last few fiscal years. In terms of return on assets, return on equity and profit margin, Apple strengthened financially and now has similar ratios to that of its competitors and the overall computer hardware industry . 2009 2010 2012 Microso ft '10 Dell '10 Indust ry '10 S&P 500 Return on Assets 1.01 % 3.43 % 11.56 % 19.75% 15.42 % 11.98% 8.13% 41
  • 42. Return on Equity 1.63 % 5.44 % 17.88 % 28.56% 67.31 % 36.61% 19.61% Profit Margin 1.11 % 3.33 % 9.58 % 31.57% 6.39 % 6.36% 13.75% P/E Ratio 33.89 22.63 18.51 26.32 22.09 In reviewing Apple’s 1st and 2nd quarter 2012 earnings releases, gross margins dropped slightly.Apple attributes this decline primarily to price pressures, especially in the iPod product line. (1st Quarter 10Q) This will continue to affect performance over time. However, Apple’s ability to maintain the momentum it built in the marketplace will control the speed with which erosion will occur. Liquidity and Leverage Measures Apple historically held very little long-term debt. The table below compares Apple’s liquidity measures to their competitors, their industry, and the general market. During the period of strong financial performance, Apple accumulated cash. This strengthens Apple’s position should they choose to access the capital markets. 2009 2010 2012 Microsoft '10 Dell '10 Industry '10 S&P 500 Current Ratio 2.5 2.6 3 2.88 1.11 1.81 1.82 Quick Ratio 2.47 2.59 2.9 2.85 1.08 1.45 1.31 42
  • 43. Product Unit Sales In the last several years, there have been dramatic changes to Apple’s product sales by category. Apple breaks its unit sales into four primary categories: desktops, notebooks, iPods, and peripherals. The graph below shows the product mix for Apple in 2002. Note the domination by desktops and notebooks and the small contribution by iPods. Comparing the same graph, you see dramatic differences in the product mix for Apple. The iPod sales now account for 32.5% compared to 2.5% for 2002. The 43
  • 44. combined sales of computers (desktop/notebook) lost share, dropping from 79% to 45% of sales. This drop merely represents a shift in Apple’s product mix, not their global computer market share (which remains stable in the 2-3% range). Meanwhile, sales of peripherals (including wireless connectivity and networking solutions), remained stable. (Hoover’s) Operating Segments Apple breaks its sales into five “operating segments”. The chart below shows the sales by segment for each year 2002-2012. On a percentage basis, only the retail segment appears to be outperforming the others. Net sales in the retail segment grew to $15.35 billion in 2009. In the 1st quarter 2009, sales growth continued in the retail segment to $1.1 billion (a 91% increase over the same period last year). This increase was due to growth in the number of stores (from 101 to 135) and to a 41% same-store sales growth. (1st Quarter 10Q) Although the retail segment was the only segment to realize growth as a percentage of total sales, all of the segments had solid growth. In the Americas, sales increased 65% and continued to represent approximately 47% of total worldwide sales. Sales in Japan and Europe grew by 92% and 47%, respectively. (1st Quarter 10Q) 44
  • 45. Market Value Analysis We used Discounted Cash Flow (DCF) analysis to assess the appropriate equity value of Apple. To complete this analysis, we developed a pro-forma income statement and extracted free cash flow. We then discounted these cash flows using a calculated Weighted Average Cost of Capital (WACC). Apple’s WACC equaled their cost of equity since they carry no long-term debt. We used the Capital Asset Pricing Model (CAPM) to calculate the cost of equity. CAPM consists of a risk-free rate, a market risk premium, and a company Beta. The yield on the 10-year Treasury is the standard for a risk-free rate. To determine the market risk premium, we used the average return that an investor would require for an investment with average risk. We used data available online to determine Apple’s Beta, projected to be 1.46. The below chart summarizes Apple’s cost of equity. 45
  • 46. Cost of Equity/WACC Note Value Risk Free Rate 10 Yr Treasury 5.12 Market Risk Premium (Analysis) 4 Beta From Google 1.46 Adjusted Apple Risk Premium 5.84 Cost of Equity/WACC 10.96 Financial Analysis Apple’s financial performance continued to strengthen over the last several quarters. In the most recent earnings announcement, Apple reported significant growth in net revenues driven by the strong performance of its iPod product line. Net sales for the 2nd quarter grew to $4.36 billion, which is a 34% increase over 2nd quarter 2012 results. Net income increased by 41% to $410 million. The iPod product line continues to drive the financial performance of the company. In the 2nd quarter alone, Apple sold 8.5 million iPods, representing a 61% increase over the 5.3 million units sold in the 2nd quarter of the prior year. Mac sales showed slight growth of only 4%. Apple’s year-to-date revenues total just over $10 billion and earnings total just under $1 billion. For the 3rd quarter, CFO Peter Oppenheimer stated, “…we 46
  • 47. expect revenue of about $4.2 to $4.4 billion” which will push total sales above last term’s annual numbers. Apple 2012 1Q financial analysis 2012 April 25 Posted by admin under 2012 1Q, Apple, Technology, USA Apple 2012 1Q results continues to impress. Revenue has jumped from 24,7 bn.$ to 39,2 bn.$ or by 59% compared to 2011 Q1. High revenue increase lead to even more rapid Net Income before depreciation increase. Which has risen from 6,4 bn. $ to 12,4 bn.$ or almost dubbed. This was lead by slower revenue cost (+43%) and operating cost increase (+36%) then revenue. 47
  • 48. Companies sales by geography is good. 1/3 of sales are from US and 1/3 is from Asia which are the regions with highest estimated growth. Europe takes 22% of sales. Asia sales has dubbed compared to last year so this market has grown the most. Most of companies revenue is generated by iPhone 58% which sales has increased by +85%. Most rise was in iPad where revenue has increased by +132% and now contains 17% of companies income, this is a defiantly income growth segment while Mac and special y iPod (-25%) are the products of the past. According to http://www.netmarketshare.com Apple share in mobile and tabled marked has increased from 48% to 60% and is better than its main competitors Google Android, which share has increased from 15% to 19%. But never the less big battle is projected in the future at this marked between Google and Apple 48
  • 49. In general companies results are positive. Balance sheet continue to be very strong. Equity level has increased to 68%. That did not effect high return on Equity level which is 45% at Q1. Since company announced dividend payments and share repurchases companies Equity should not increase in the future. Liquidity ratio is 1,6 which is good. Company has cash surplus of 110 bn.$ which has increased from 97 bn.$ from Q4. Companies inventory and Account receivables are minimal so as liabilities. No other major changes at the balance sheet. In general companies balance structure is strong. Share value: 49
  • 50. Common Stocks 14,9 bn.$ 0,935 bn.15,9 $ + Retained earnings 87,1 bn.$+ 93,2 $ 109,1 $ + 1 year Net income before Depreciation 41,1 bn.$ (52 bn.$) + 44,0 $ (+55,6 $) 153,1 $ Companies share basic value is ~109$ (Δ+13,5%/96$ compared with Q4). Current market price is ~610$ (Δ+12,1%/544$). which shows that market is paying ~500$ more or 11,4 years of Net income before Depreciation earnings, which shows that companies shares are a bit over evaluated. If calculating Net income before Depreciation according to last quarter yearly earnings should be around 52 bn.$/year (13 bn./quarter) or 55,6$/share which makes it ~9 year, never the less indicator is quit high. Share profitability (Share market price/Net income before Depreciation) if calculating projected income (52 bn.$/year) is 9,1% which is a bit over average. Annual Income statement(value in 000’s) Get Quarterly Data Period Ending: Trend 9/29/2012 9/24/2011 9/25/2009 9/26/2009 Total Revenue $156,508,000 $108,249,000 $65,225,000 $42,905,000 Cost of Revenue $87,846,000 $64,431,000 $39,541,000 $25,683,000 Gross Profit $68,662,000 $43,818,000 $25,684,000 $17,222,000 50
  • 51. Operating Expenses Research and Development $3,381,000 $2,429,000 $1,782,000 $1,333,000 Sales, General and Admin. $10,040,000 $7,599,000 $5,517,000 $4,149,000 Non-Recurring Items $0 $0 $0 $0 Other Operating Items $0 $0 $0 $0 Operating Income $55,241,000 $33,790,000 $18,385,000 $11,740,000 Add'l income/expense items $522,000 $415,000 $155,000 $326,000 Earnings Before Interest and Tax $55,763,000 $34,205,000 $18,540,000 $12,066,000 Interest Expense $0 $0 $0 $0 51
  • 52. Earnings Before Tax $55,763,000 $34,205,000 $18,540,000 $12,066,000 Income Tax $14,030,000 $8,283,000 $4,527,000 $3,831,000 Minority Interest $0 $0 $0 $0 Equity Earnings/Loss Unconsolidated Subsidiary $0 $0 $0 $0 Net Income-Cont. Operations $41,733,000 $25,922,000 $14,013,000 $8,235,000 Net Income $41,733,000 $25,922,000 $14,013,000 $8,235,000 Net Income Applicable to Common Shareholders $41,733,000 $25,922,000 $14,013,000 $8,235,000 Statement 52
  • 53. Bt (values in 00 Period Ending: Trend 9/29/2012 9/24/2011 9/25/2009 9/26/2009 Current Assets Cash and Cash Equivalents $10,746,000 $9,815,000 $11,261,000 $5,263,000 Short-Term Investments $18,383,000 $16,137,000 $14,359,000 $18,201,000 Net Receivables $21,275,000 $13,731,000 $11,560,000 $6,192,000 Inventory $791,000 $776,000 $1,051,000 $455,000 Other Current Assets $6,458,000 $4,529,000 $3,447,000 $1,444,000 Total Current Assets $57,653,000 $44,988,000 $41,678,000 $31,555,000 Long-Term Assets 53
  • 54. Long-Term Investments $92,122,000 $55,618,000 $25,391,000 $10,528,000 Fixed Assets $15,452,000 $7,777,000 $4,768,000 $2,954,000 Goodwill $1,135,000 $896,000 $741,000 $206,000 Intangible Assets $4,224,000 $3,536,000 $342,000 $247,000 Other Assets $5,478,000 $3,556,000 $2,263,000 $2,011,000 Deferred Asset Charges $0 $0 $0 $1,727,000 Total Assets $176,064,000 $116,371,000 $75,183,000 $47,501,000 Current Liabilities Accounts Payable $32,589,000 $23,879,000 $17,738,000 $9,453,000 54
  • 55. Short-Term Debt / Current Portion of Long-Term Debt $0 $0 $0 $0 Other Current Liabilities $5,953,000 $4,091,000 $2,984,000 $2,053,000 Total Current Liabilities $38,542,000 $27,970,000 $20,722,000 $11,506,000 Long-Term Debt $0 $0 $0 $0 Other Liabilities $16,664,000 $10,100,000 $5,531,000 $3,502,000 Deferred Liability Charges $2,648,000 $1,686,000 $1,139,000 $853,000 Misc. Stocks $0 $0 $0 $0 Minority Interest $0 $0 $0 $0 55
  • 56. Total Liabilities $57,854,000 $39,756,000 $27,392,000 $15,861,000 Stock Holders Equity Common Stocks $16,422,000 $13,331,000 $10,668,000 $8,210,000 Capital Surplus $0 $0 $0 $0 Retained Earnings $101,289,000 $62,841,000 $37,169,000 $23,353,000 Treasury Stock $0 $0 $0 $0 Other Equity $499,000 $443,000 ($46,000) $77,000 Total Equity $118,210,000 $76,615,000 $47,791,000 $31,640,000 56
  • 57. Total Liabilities & Equity $176,064,000 $116,371,000 $75,183,000 $47,501,000 http://www.nasdaq.com/symbol/aapl/financials?query=ratios#ixzz2Vv2kKj Period Ending: Trend 9/29/2012 9/24/2011 9/25/2009 9/26/2009 Net Income $41,733,000 $25,922,000 $14,013,000 $8,235,000 Cash Flows- Operating Activities Depreciation $3,277,000 $1,814,000 $1,027,000 $734,000 Net Income Adjustments $6,145,000 $4,036,000 $2,319,000 $1,750,000 57
  • 58. Changes in Operating Activities Accounts Receivable ($6,965,000) ($1,791,000) ($4,860,000) ($353,000) Changes in Inventories ($15,000) $275,000 ($596,000) $54,000 Other Operating Activities ($3,162,000) ($1,391,000) ($1,610,000) ($713,000) Liabilities $9,843,000 $8,664,000 $8,302,000 $452,000 Net Cash Flow- Operating $50,856,000 $37,529,000 $18,595,000 $10,159,000 Cash Flows- Investing 58
  • 59. Activities Capital Expenditures ($8,295,000) ($4,260,000) ($2,005,000) ($1,144,000) Investments ($38,427,000) ($32,464,000) ($11,075,000) ($16,046,000) Other Investing Activities ($1,505,000) ($3,695,000) ($774,000) ($244,000) Net Cash Flows- Investing ($48,227,000) ($40,419,000) ($13,854,000) ($17,434,000) Cash Flows- Financing Activities Sale and Purchase of Stock $665,000 $831,000 $912,000 $475,000 Net Borrowings $0 $0 $0 $0 Other Financing Activities ($1,226,000) ($520,000) ($406,000) ($82,000) Net Cash Flows- Financing ($1,698,000) $1,444,000 $1,257,000 $663,000 59
  • 60. Effect of Exchange Rate $0 $0 $0 $0 Net Cash Flow $931,000 ($1,446,000) $5,998,000 ($6,612,000) 60
  • 61. Period Ending: Trend 9/29/2012 9/24/2011 9/25/2009 9/26/2009 Liquidity Ratios Current Ratio 150% 161% 201% 274% Quick Ratio 148% 158% 196% 270% Cash Ratio 76% 93% 124% 204% Profitability Ratios Gross Margin 44% 40% 39% 40% Operating Margin 35% 31% 28% 27% Pre-Tax Margin 36% 32% 28% 28% Profit Margin 27% 24% 21% 19% Pre-Tax ROE 47% 45% 39% 38% After Tax ROE 35% 34% 29% 26% 61
  • 62. An Income Statement (values i 000'shttp://www.nasdaq.com/symbol/aapl/financials? query=income-statement#ixzz2Vv1MZyY4 Pro-Forma Income Statement Firm made several key assumptions in compiling a pro-forma income statement. First, to complete the estimate for the 2009 data,Company merely annualized the earnings for the first two quarters. They then projected a declining rate of growth in sales for the next four fiscal terms of 30%, 20%, 15%, and 10%, respectively. We do not believe that the growth in iPods is sustainable for the long-term. They also used the percent-of-sales method to calculate cost of goods sold, research & development, SG&A, and interest.As applied the 2012 tax rate for all future periods. As the table below shows, the mid-term earnings growth is positive. Projected Free Cash Flow and Equity Valuation Apple will continue without long-term debt. There will be no significant changes in capital expenditures and net working capital. Thus, free cash flow will equal 62
  • 63. net income plus depreciation. Given WACC, we are able to discount cash flows back using half-year PV factors (we are through the first half of 2009).Calculated terminal value using a perpetual annual growth rate of 7%, which is slightly above the industry growth rate of 5.6%. Given intrinsic equity value, we estimate the per share stock price. Given their particular market condition, Apple appears undervalued. Equity Value Total Shares (000's) 848612 Value (000's) 71629000 Value/Share $84 Current Price $71.89 Strategy Firm can describe Apple’s strategy in terms of product differentiation and strategic alliances. In each of these strategies, we examine what Apple did historically and then discuss alternatives for Apple’s future. Product Differentiation Apple prides itself on its innovation. When reviewing the history of Apple, it is evident that this attitude permeated the company during its peaks of success. For 63
  • 64. instance, Apple pioneered the PDA market by introducing the Newton in 1993. Later, Apple introduced the easy-to-use iMac in 1998, and updates following 1998. It released a highly stable operating system in 1999, and updates following 1999. Apple had one of its critical points in history in 1999 when it introduced the iBook. This completed their “product matrix”, a simplified product mix strategy formulated by Jobs. This move allowed Apple to have a desktop and a portable computer in both the professional and the consumer segments. The matrix is as follows: In 2001, Apple hit another important historical point by launching iTunes. This marked the beginning of Apple’s new strategy of making the Mac the hub for the “digital lifestyle”. Apple then opened its own stores, in spite of protests by independent Apple retailers voicing cannibalization concerns. Then Apple introduced the iPod, central to the “digital lifestyle” strategy. Philip W. Schiller, VP of Worldwide Product Marketing for Apple, stated, “iPod is going to change the way people listen to music.” He was right. Apple continued their innovative streak with advancements in flat-panel LCDs for desktops in 2002 and improved notebooks in 2003. In 2003, Apple released the iLife package, containing improved versions of iDVD, iMovie, iPhoto, and iTunes. In reference to Apple’s recent advancements, Jobs said, “We are going to do for digital creation what Microsoft did for the office suite productivity.” That is indeed a bold statement. Time will tell whether that happens. Apple continued its digital lifestyle strategy by launching iTunes Music Store online in 2003, obtaining cooperation from “The Big 5” Music companies—BMG, EMI, Sony Entertainment, Universal, Warner. This allowed iTunes Music Store 64
  • 65. online to offer over 200,000 songs at introduction. In 2003, Apple released the world’s fastest PC (Mac G5), which had dual 2.0GHz PowerPC G5 processors. Product differentiation is a viable strategy, especially if the company exploits the conceptual distinctions for product differentiation. Those that are relevant to Apple are product features, product mix, links with other firms, and reputation. Apple established a reputation as an innovator by offering an array of easy-to-use products that cover a broad range of segments. However, its links with other firms have been limited, as we will discuss in the next section on strategic alliances. There is economic value in product differentiation, especially in the case of monopolistic competition. The primary economic value of product differentiation comes from reducing environmental threats. The cost of product differentiation acts as a barrier to entry, thus reducing the threat of new entrants. Not only does a company have to bear the cost of standard business, it also must bear the costs associated with overcoming the differentiation inherent in the incumbent. Since companies pursue niche markets, there is a reduced threat of rivalry among industry competitors. A company’s differentiated product will appear more attractive relative to substitutes, thus reducing the threat of substitutes. If suppliers increase their prices, a company with a differentiated product can pass that cost to its customers, thus reducing the threat of suppliers. Since a company with a differentiated product competes as a quasi-monopoly in its market segment, there is a reduced threat of buyers. With all of Porter’s Five Forces lower, a company may see economic value from a product differentiation strategy. A company attempts to make its strategy a sustained competitive advantage. For this to occur, a product differentiation strategy that is economically valuable must 65
  • 66. also be rare, difficult to imitate, and the company must have the organization to exploit this. If there are fewer firms differentiating than the number required for perfect competition dynamics, the strategy is rare. If there is no direct, easy duplication and there are no easy substitutes, the strategy is difficult to imitate. There are four primary organizing dilemmas when considering product differentiation as a strategy. To resolve these dilemmas, there must be an appropriate organization structure. A U-Form organization resolves the inter-functional collaboration dilemma if there are product development and product management teams. Combining the old with the new resolves the connection to the past dilemma. Having a policy of experimentation and a tolerance for failure resolves the commitment to market vision dilemma. Managerial freedom within broad decision-making guidelines will resolve the institutional control dilemma. Five leadership roles will facilitate the innovation process: Institutional Leader, Critic, Entrepreneur, Sponsor, and Mentor. The institutional leader creates the organizational infrastructure necessary for innovation. This role also resolves disputes, particularly among the other leaders. The critic challenges investments, goals, and progress. The entrepreneur manages the innovative unit(s). The sponsor procures, advocates, and champions. The mentor coaches, counsels, and advises. Apple had issues within its organization. In 1997, when Apple was seeking a CEO acceptable to Jobs, Jean-Louis Gassée (then-CEO of Be, ex-Products President at Apple) commented, “Right now the job is so difficult, it would require a bisexual, blond Japanese who is 25 years old and has 15 years’ experience!” Charles Haggerty, then-CEO of Western Digital, said, “Apple is a 66
  • 67. company that still has opportunity written all over it. But you’d need to recruit God to get it done.” Michael Murphy, then-editor of California Technology Stock Letter, stated, “Apple desperately needs a great day-to-day manager, visionary, leader and politician. The only person who’s qualified to run this company was crucified 2,000 years ago.”To continue a product differentiation strategy, Apple must continue its appropriate management of innovation dilemmas and maintain the five leadership roles that facilitate the innovation process. Strategic Alliances Apple has a history of shunning strategic alliances. On June 25, 1985, Bill Gates sent a memo to John Sculley (then-CEO of Apple) and Jean-Louis Gassée (then- Products President). Gates recommended that Apple license Macintosh technology to 3-5 significant manufacturers, listing companies and contacts such as AT&T, DEC, Texas Instruments, Hewlett-Packard, Xerox, and Motorola. (Linzmayer, 245-8) After not receiving a response, Gates wrote another memo on July 29, naming three other companies and stating, “I want to help in any way I can with the licensing. Please give me a call.” In 1987, Sculley refused to sign licensing contracts with Apollo Computer. He felt that up-and-coming rival Sun Microsystems would overtake Apollo Computer, which did happen. Then, Sculley and Michael Spindler (COO) partnered Apple with IBM and Motorola on the PowerPC chip. Sculley and Spindler were hoping IBM would buy Apple and put them in charge of the PC business. That never came to fruition, because Apple (with Spindler as the CEO) seemed contradictory and was extraordinarily difficult in business dealings.Apple turned the corner in 1993. Spindler begrudgingly licensed the Mac to Power Computing in 1993 and to 67
  • 68. Radius (who made Mac monitors) in 1995. However, Spindler nixed Gateway in 1995 due to cannibalization fears. Gil Amelio, an avid supporter of licensing, took over as CEO in 1996. Under Amelio, Apple licensed to Motorola and IBM. In 1996, Apple announced the $427 million purchase of NeXT Software, marking the return of Steve Jobs. Amelio suddenly resigned in 1997, and the stage was set for Jobs to resume power. Jobs despised licensing, calling cloners “leeches”. He pulled the plug, essentially killing its largest licensee (Power Computing). Apple subsequently acquired Power Computing’s customer database, Mac OS license, and key employees for $100 million of Apple stock and $10 million to cover debt and closing costs. The business was worth $400 million. There is economic value in strategic alliances. In the case of Apple, there was the opportunity to manage risk and share costs facilitate tacit collusion , and manage uncertainty. It would have been applicable to the industries in which Apple operated. Tacit collusion is a valid source of economic value in network industries, which the computer industry is. Managing uncertainty, managing risk, and sharing costs are sources of economic value in any industry. Although Apple eventually realized the economic value of strategic alliances, it should have occurred earlier. The following are some comments about Apple’s no-licensing policy. “If Apple had licensed the Mac OS when it first came out, Window wouldn’t exist today.”—Jon van Bronkhorst, “The computer was never the problem. The company’s strategy was. Apple saw itself as a hardware company; in order to protect our hardware profits, we didn’t license our operating system. We had the most beautiful operating system, but to get it you had to buy our hardware at twice 68
  • 69. the price. That was a mistake. What we should have done was calculate an appropriate price to license the operating system. We were also naïve to think that the best technology would prevail. It often doesn’t.”—Steve Wozniak, Apple cofounder “If we had licensed earlier, we would be the Microsoft of today.”—Ian W. Diery, Apple Executive VP, I am aware that I am known as the Great Satan on licensing…I was never for or against licensing. I just did not see how it would make sense. But my approach was stupid. We were just fat cats living off a business that had no competition.”—Jean-Louis Gassée, Be CEO and ex-CEO of Apple, admitting he made a strategic mistake A strategic alliance can be a sustained competitive advantage if it is rare, difficult to imitate, and the company has an organization to exploit it. If the number of competing firms implementing a similar strategic alliance is relatively few, the strategy is rare. If there are socially complex relations among partners and there is no direct duplication, the strategy is difficult to imitate. When organizing for strategic alliances, a firm must consider whether the alliance is non-equity or equity. A non-equity alliance should have explicit contracts and legal sanctions. An equity alliance should have contracts describing the equity investment. There are some substitutes for an equity alliance, such as internal development and acquisitions. However, the difficulties with these drive the formation of strategic alliances. It is vital to remember, “Commitment, coordination, and trust are all important determinants of alliance success.” Apple avoids competition 69
  • 70. If you look at the history of Apple, you'll see that instead of rising to competition, they often ignore it, or try to use legal means, or bundling clout, to erase it. When challenged by a larger market force, as with the IBM PC and its clones in the early 80s, and with Windows 3.0, 95 and then NT 4.0 in the 90s, they miss obvious marketing opportunities, ways to make their products stronger by participating in markets that others develop. This is an art that Microsoft has mastered, there's no reason Apple couldn't have learned the same lessons, but they didn't. And when dealing with smaller competitors, Apple routinely and often unconsciously forced them out of business by bundling, or declaring that they will bundle a competitive offering. When the Internet happened, Apple struggled against it instead of embracing it, preferring to invest in technologies that eventually ended up on the scrap heap. A wasted lead in content development, developers going to Windows, a poor Java implementation on the Mac. The bottom line, the strategy of avoiding competition has been disastrous for Apple. But they want to do it again. The same old strategy The cloners, Motorola, Power Computing, UMAX, IBM and others, are poised to ship products that would take Apple out of the hardware business, because they're cheaper, faster, bigger, more powerful machines than Apple's new products. These are the computers that Mac users want and are, in my opinion, entitled to. 70
  • 71. Even though we haven't seen the license agreements with the cloners, it appears that Apple has the contractual right to forbid them to ship the computers, for any reason at all. Apple wants to keep their hardware business, so they exercise that right. I despise companies that use hardball tactics to put their competitors out of business. I admire companies that rise to competition. I happily buy new products when I have a choice. I don't like to buy products that I'm forced to buy. Is it a nice business? If you don't have anyone to compare with, if you aren't subject to customer choice, your product loses direction, you focus inward, and eventually (as now for Apple) your interests become out of synch with the interests of your customers. Focus on that for a moment. A company whose interests are against their customers. Is that a nice business? Does it have much of a future? Is it legal? The customer's interest here is clearly served by competition. The usual benefits apply -- lower prices, more realistic configurations, more diversity. Apple's complaint that the cloners weren't growing the market can be explained by Apple's licensing policy that kept them from making fundamentally different products than Apple. Where's the cheap sub-notebook Mac? Where's the handheld Mac? The Mac built into the dashboard of my car? Apple wouldn't let the cloners 71
  • 72. make these products. Apple is an economic disaster area. They want Mac users to put all their eggs in Apple's crumbling basket. RECOMMENDATIONS: For Company • Lowering the cost of products and maintaining the same quality standards. • Can form joint – ventures. • Knowledge Management. • More number of retail stores for easy access. • Continuous innovation to expand. For Others • Do not compromise on price for quality. • Choose the products based on individual needs. 72
  • 73. • Be unique and different. Conclusion I feel that Apple must focus on several key aspects to continue to grow and succeed. They must continue a stable commitment to licensing, push for economies of scope between media and computers, and become a learning organization. Although it should continue, Apple may want to consider other forms of strategic alliances. An equity strategic alliance may offer Apple the opportunity to obtain additional competencies. An effective way for a company like Apple to accomplish this would be in the form of a joint venture. Apple should continue pushing the new line of media-centric products. Meanwhile, Apple should not lose focus on its computers. Macintosh computers were 59% of Apple’s sales in 2012. (Burrows)This very innovative company exploits its second-mover position. In the future, they will need to continue innovating to expand the boundaries of both media and computers. 73
  • 74. Apple apparently made a commitment to licensing. Although it should continue, Apple may want to consider other forms of strategic alliances. An equity strategic alliance may offer Apple the opportunity to obtain additional competencies. An effective way for a company like Apple to accomplish this would be in the form of a joint venture.Apple should continue push for economies of scope between media and computers, and become a learning organization, pushing the new line of media-centric products. This very innovative company exploits its second-mover position. In the future, they will need to continue innovating to expand the boundaries of both media and computers.This will allow the company to withstand a departure by Jobs. Based on the actions of the organization, we feel that the mid- term performance of Apple will be strong. This period allows Apple time to overcome their challenges if they move swiftly. For this reason, we feel that they will continue to succeed and will continue to outperform their peers. Project References and Reading: • http://www.nasdaq.com/symbol/aapl/financials?query=ratios#ixzz2Vv2kKj • http://www.nasdaq.com/symbol/aapl/financials?query=income- statement#ixzz2Vv1MZyY4 • Paul Kunkel, AppleDesign: The Work of the Apple Industrial Design Group ISBN 978-1-888001-25-9 • Steven Levy (1994), Insanely Great: The Life and Times of Macintosh, the Computer That Changed Everything ISBN 978-0-14-029177-3 • Owen Linzmayer (2010), Apple Confidential 2.0, No Starch Press ISBN 978-1-59327-010-0 • Michael S. Malone (1999), Infinite Loop ISBN 978-0-385-48684-2 • Frank Rose (1990), West of Eden: The End of Innocence at Apple Computer, Penguin Books ISBN 978-0-14-009372-8 74
  • 75. • John Sculley, John A. Byrne (1987) Odyssey: Pepsi to Apple, HarperCollins, ISBN 978-0-06-015780-7 • Apple Inc. SEC filings at SECDatabase.com • Apple Inc. SEC filings at the Securities and Exchange Commission • Jim Carlton, Apple: The Inside Story of Intrigue, Egomania and Business Blunders ISBN 978-0-88730-965-6 • Alan Deutschman (2000), The Second Coming of Steve Jobs, Broadway, ISBN 978-0-7679-0432-2 • Andy Hertzfeld (2004), Revolution in the Valley, O'Reilly Books ISBN 978-0-596-00719-5 o "Apple – Environment – Environmental Progress". Archived from the original on November 22, 2010. Retrieved November 22, 2010. o "Apple — Mac — Green Notebooks". Apple Inc. 2008. Archived from the original on December 22, 2008. Retrieved December 24, 2008. o "Apple: MacBook Pro Graphics". Archived from the original on June 2, 2007. Retrieved June 8, 2007. o "Apple – Environment – Reports". Apple Inc. o "iMac and the Environment". Apple Inc. Archived from the original on November 29, 2010. Retrieved November 29, 2010. o "Climate Counts scorecard". Climatecounts.org. Retrieved October 7, 2011. o "China orders Apple supplier plant closure over environmental concerns- The Inquirer mobile". M.theinquirer.net. Retrieved December 24, 2011. o "Guide to Greener Electronics". Greenpeace International. Retrieved November 14, 2011. 75
  • 76. o Anderson, Ash. "Apple Power Cables to Become Even More Environmentally Friendly". KeyNoodle. Retrieved January 14, 2012. • "Apple's 2012 Annual Report: More Employees, More Office Space, More Sales". • Apple Inc. at Hoover's • http://www.nasdaq.com/symbol/aapl/financials?query=cash- flow#ixzz2Vv2cutjL • http://www.nasdaq.com/symbol/aapl/financials?query=balance- sheet#ixzz2Vv2F6q7x 76