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Apple Computer Inc.
                               2005

                               A Strategic Management
                                     Case Study

Graphics are the property of        ® 2007, Tony Gauvin, UMFK
Apple Computer
Overview
•   A brief history of Apple Computer                    •   Possible alternative strategies
•   EOY 2004                                             •   Our Recommendation
     –     Mission, Vision, Objectives, Strategies
                                                              –   Strategies
•   2005                                                      –   Long range objectives
     –     New Vision and Mission
                                                              –   EPS/EBIT
•   External Analysis
     –     Opportunities & Threats                       •   Implementation Issues
     –     CPM                                           •   Proposed annual objectives (goal) and
     –     EFE                                               polices
•   Internal Analysis
     –     Financial Data                                •   Proposed procedures for evaluation
     –     Strengths and weaknesses                      •   Epilogue
     –     IFE
     –     Financial ratios
                                                         •   Current Performance
•   Strategic Analysis                                   •   Questions
     –     SWOT Matrix                                   •   Resources Utilized
     –     SPACE
     –      BCG
     –     IE matrix
     –     Grand Strategy Matrix
     –     Matrix Analysis
     –     QSPM




                                           ® 2007, Tony Gauvin, UMFK
                                                                                                     2
History of Apple
• 1976
  – Apple started in a garage in Santa Clara, CA by Steve Wozniak
    and Steve Jobs
  – A easy to use PC for small computer users
• 1980
  – $117,000,000 in sales
  – IPO
• 1983
  – Wozniak quits
  – Jobs hires John Sculley From Pepsi Co. to become President of
    Apple
• 1984
  – Macintosh PC


                      ® 2007, Tony Gauvin, UMFK
                                                                    3
History of Apple
• 1985
  –   Jobs and Sculley have a ―falling out‖
  –   Jobs fired
  –   Sculley becomes CEO
  –   Bill Gates wants to buy Mac O/S, Sculley says No, Gates buys
      DOS from IBM, Microsoft kicks Apple's butt (90% market share)
• 1993
  – Apple release Newton, the first PDA
  – Earnings Plunge, Apple restructures, Sculley Resigns
• 1997
  – Apple CEO Gilbert Amelio buys NextStep from Steve Jobs
  – Earnings Plunge, Apple restructures, Amelio Resigns
• 1998
  – Steve Jobs returns as iCEO
                        ® 2007, Tony Gauvin, UMFK
                                                                      4
History of Apple
• 1998
  – Jobs restructures Apple along two products lines
     • Consumer ―i‖Mac
         – ―i‖ for internet
     • Professional ―Power‖Mac
         – ―power‖ for power user
  – Sales return, Brand emerges, Innovation rules
     • USB, Firewire, Airport
     • iPod and iTunes
  – Stock price takes off like a rocket!


                          ® 2007, Tony Gauvin, UMFK
                                                       5
Lesson learned




+                               =

    ® 2007, Tony Gauvin, UMFK
                                    6
2004 Vision Statement
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
beast personal computing experience to students,
educators, creative professional, and consumers
around the world through its innovative hardware,
software, and Internet offerings


                 ® 2007, Tony Gauvin, UMFK
                                                    7
2004 Mission
Apple Computer is committed to protecting the
environment, health and safety of our employees,
customers and the global communities where we
operate. 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 continuous
improvement in our environmental, health and safety
management systems and in the environmental
quality of our products, processes and services.


                 ® 2007, Tony Gauvin, UMFK
                                                       8
2004 Strategies
• Market Penetration
  – Branding
  – Niche player
• New Product Development
  – Speech recognition
  – Virtual reality




                   ® 2007, Tony Gauvin, UMFK
                                               9
2004 objectives
• Double market Share from 5% to 10%
• Remain as the most profitable computer
  company in the industry




               ® 2007, Tony Gauvin, UMFK
                                           10
2004 Issues
• How can apple best capitalize on the needs of
  the business world for a safer, virus-free, worm-
  free system?
• Should Apple enter the consumer electronics
  business like Dell and Gateway did?
• Should Apple remain a lone wolf in Operating
  Systems or adopt a cross-platform format
  compatible with Windows and Intel
• How much emphasis should Apple place on
  developing the next generation of voice
  recognition computers?

                  ® 2007, Tony Gauvin, UMFK
                                                      11
A new vision



To become the global
 leader in computer and
 digital music products.

         ® 2007, Tony Gauvin, UMFK
                                     12
A New Mission
• The Apple commitment to excellence is its mission to provide
  computers and service (2) for people (1) that meet the highest
  standards of value and reliability. Apple is one of the leaders in the
  computer industry and produces some of the best-selling computers
  and digital music products in the world (3). Apple provides the
  highest level of quality and value for our customers (7). Those are
  timeless fundamentals. We also apply innovative technology to our
  core business (4) to make our products irresistible to customers,
  beneficial to society, and profitable to our company (5). We strive to
  provide additional opportunities for growth and enrichment of
  company personnel while maintaining a work environment for all
  employees (9) that encourages personal commitment and
  participation in support of achieving excellence. We are committed
  to being a good corporate citizen, and being openly honest with all
  of our stakeholders (6). We support activities that enable people to
  improve their lives and reinforce their commitment to society (8).


                          ® 2007, Tony Gauvin, UMFK
                                                                           13
Apple’s New Mission
The new mission answers the following questions
1.   Customers: Who are the firm’s customers?
2.   Products or services: What are the firm’s major products?
3.   Markets: Geographically, where does the firm compete?
4.   Technology: Is the firm technologically current?
5.   Concern for survival, growth, and profitability: Is the firm
     committed to growth and financial soundness?
6.   Philosophy: What are the basic beliefs, values, aspirations, and
     ethical priorities of the firm?
7.   Self-concept: What is the firm’s distinctive competence or major
     competitive advantage?
8.   Concern for public image: Is the firm responsive to social,
     community, and environmental concerns?
9.   Concern for employees: Are employees a valuable asset of the
     firm?

                        ® 2007, Tony Gauvin, UMFK
                                                                        14
External Audit (Opportunities)
1. Increase in worms and viruses on PCs.
2. Large population (Gen X & Y) which are
   extremely individualistic and name brand
   conscious.
3. Government crackdown on pirating
   music off the Internet.
4. Much of the world is still without
   computers.
5. People enjoy small electronic gadgets.
               ® 2007, Tony Gauvin, UMFK
                                              15
External Audit (Threats)
1. Companies not seeing Apple as
   compatible with their software.
2. Dell and HP are major competitors.
3. Increasing competition with music
   downloads.
4. Competition produces similar products at
   often half the price.
5. The population at large unwilling to use
   Macintosh.
               ® 2007, Tony Gauvin, UMFK
                                              16
Apple CPM
                                       Apple                    HP               Dell
Critical Success     Weight   Rating    Weighted   Rating   Weighted   Rating   Weighted
Factors                                  Score               Score               Score

Market Share          0.10      2         0.20       3          0.30     4        0.40
Price                 0.10      2         0.20       3          0.30     4        0.40
Financial Position    0.15      3         0.45       4          0.60     3        0.45
Product Quality       0.15      4         0.60       3          0.45     3        0.45
Consumer Loyalty      0.15      4         0.60       2          0.30     3        0.45
Advertising           0.04      4         0.16       2          0.08     3        0.12
Management            0.06      4         0.24       3          0.18     3        0.18
Global Expansion      0.06      2         0.12       2          0.12     3        0.18
Innovation            0.14      4         0.56       2          0.28     2        0.28
Web Development       0.05      3         0.15       2          0.10     3        0.15


Total                 1.00                3.28                  2.71              3.06




                                    ® 2007, Tony Gauvin, UMFK
                                                                                           17
Apple EFE
Key External Factors                                       Weight    Rating   Weighted
                                                                               Score
Opportunities

Increase in worms and virus on PCs.                         0.15       4        0.60
Large population (Gen X & Y) which are extremely            0.15       4        0.60
individualistic and name brand conscious.
Government crackdown on pirating music off the Internet.    0.05       4        0.20

Much of the world is still without computers.               0.10       2        0.20
People enjoy small electronic gadgets.                      0.10       4        0.40
Threats

Companies not seeing Apple as compatible with their         0.10       2        0.20
software.
Dell and HP are major competitors.                          0.10       3        0.30
Increasing competition with music downloads.                0.05       4        0.20
Competition produces similar products at often half the     0.10       3        0.30
price.
The population at large unwilling to use Macintosh.         0.10       2        0.20

TOTAL                                                       1.00                3.20



                                         ® 2007, Tony Gauvin, UMFK
                                                                                         18
Consolidated Balance Sheet




        ® 2007, Tony Gauvin, UMFK
                                    19
Consolidated statement of
       operations




       ® 2007, Tony Gauvin, UMFK
                                   20
Internal Audit (Strengths)
1. iTunes Music Store is a good source of
   revenue, especially with the iPod and its
   availability on Windows platform.
2. Developing own software and hardware.
3. Apple’s niche audience provides the company
   with some insulation from the direct price
   competition.
4. Revamping desktop and notebook lines.
5. Web technology can be used to improve
   product awareness and sales.
6. Low debt—more maneuverable.

                ® 2007, Tony Gauvin, UMFK
                                                 21
Internal Audit (weaknesses)
1. Weak relationship with Intel and
   Microsoft.
2. Weak presence globally.
3. Dependency on new product launches.
4. Weak presence in markets other than
   education and publishing.
5. Slow turnaround on high demand
   products.
              ® 2007, Tony Gauvin, UMFK
                                          22
Apple IFE
Key Internal Factors                                         Weight    Rating   Weighted Score
Strengths
iTunes Music Store is a good source of revenue, especially    0.15       4           0.60
with the iPod and the availability on Windows platform.
Apple’s niche audience provides the company with some         0.10       3           0.30
insulation from the direct price competition.
Revamping desktop and notebook lines.                         0.10       3           0.30
Low debt—more maneuverable.                                   0.06       4           0.24
Developing own software and hardware.                         0.14       3           0.42
Good brand loyalty.                                           0.05       3           0.15
Web technology can be used to improve product awareness       0.10       4           0.40
and sales.
Weaknesses

Dependency on new product launches.                           0.06       1           0.06
Weak presence globally.                                       0.07       1           0.07
Slow turnaround on high demand products.                      0.03       2           0.06
Weak relationship with Intel and Microsoft.                   0.10       1           0.10
Weak presence in markets other than education and             0.04       2           0.08
publishing.
Total                                                         1.00                   2.78


                                           ® 2007, Tony Gauvin, UMFK
                                                                                                 23
Financial Ratio Analysis
                                       (January 2006)
Growth Rates %                                 Apple Computer       Industry   SP-500

Sales (Qtr vs. year ago qtr)                       56.50             18.00     14.20
Net Income (YTD vs. YTD)                           383.70            78.90     16.30
Net Income (Qtr vs. year ago qtr)                  305.70            17.40     17.00
Sales (5-Year Annual Avg.)                         12.64              5.00      4.93
Net Income (5-Year Annual Avg.)                     NA                NA       10.40
Dividends (5-Year Annual Avg.)                      NA                NA        4.27
Price Ratios
Current P/E Ratio                                   46.1              31.6      18.8
P/E Ratio 5-Year High                               NA                NA        64.8
P/E Ratio 5-Year Low                                NA                NA        17.4
Price/Sales Ratio                                   4.35              1.88      1.48
Price/Book Value                                    8.11             10.57      2.83
Price/Cash Flow Ratio                              39.90             26.80     12.40
Profit Margins
Gross Margin                                        30.3              20.2      47.2
Pre-Tax Margin                                      13.0              8.5       11.9
Net Profit Margin                                   9.6               6.2       8.0
5-Yr Gross Margin (5-Year Avg.)                     29.1              20.3      47.3
5-Yr Pre-Tax Margin (5-Year Avg.)                   5.9               5.8       9.4
5-Yr Net Profit Margin (5-Year Avg.)    ® 2007, Tony4.3
                                                     Gauvin, UMFK     3.8       5.8
                                                                                        24
Financial Ratio Analysis
                                  (January 2006)
Financial Condition
Debt/Equity Ratio                             0.00              0.06     1.06
Current Ratio                                 3.0               1.5       1.4
Quick Ratio                                   2.6               1.2       0.9
Interest Coverage                             NA                NA        3.5
Leverage Ratio                                1.5               2.9       5.7
Book Value/Share                              8.86              3.50     13.26
Investment Returns %

Return on Equity                              17.9              34.6     15.3
Return on Assets                              11.6              12.0      2.7
Return on Capital                             17.9              32.6      7.4
Return on Equity (5-Year Avg.)                6.9               17.0     11.9
Return on Assets (5-Year Avg.)                4.4               7.1       2.0
Return on Capital (5-Year Avg.)               6.7               15.7      5.6
Management Efficiency
Income/Employee                              90,000            63,000   29,000
Revenue/Employee                            941,000            1 Mil    367,000
Receivable Turnover                           16.7              12.2      7.7
Inventory Turnover                            73.0              66.8      7.8
Asset Turnover                                1.4               2.1       0.4
                                   ® 2007, Tony Gauvin, UMFK
                                                                                  25
Financial Trends
Date   Avg. P/E   Price/Sales     Price/Book        Net Profit Margin (%)

2005     23.5        3.21             6                       9.6


2004     40.6        1.83            2.99                     3.3

2003     90.1        1.22            1.8                      1.1


2002     111         0.91            1.27                     1.1


2001     NA          1.02            1.39                     -0.7




                  Date          Book Value/ Share   Debt/Equity      ROE (%)      ROA (%)   Interest Coverage


                  2005                $8.94              0              17.9       11.6           NA


                  2004                $6.48              0                  5.4     3.4           NA


                  2003                $5.76              0                  1.6     NA            NA

                  2002                $5.70            0.08                 1.6     NA            NA

                  2001                $5.59            0.08             NA          -0.6           N

                                  ® 2007, Tony Gauvin, UMFK
                                                                                                                26
Apple Stock Performance




                        ® 2007, Tony Gauvin, UMFK
http://moneycentral.msn.com/investor/charts/charting.asp?symbol=AAPL
                                                                       27
Apple Net Worth
                (January 2006 in millions)



1. Stockholders’ Equity + Goodwill = 7,466 + 69                   $ 7,535
2. Net Income x 5 = $1,355 x 5=                                   $ 6,775
3. Share price = $72.00/EPS(1.56) = 46.15 x Net Income $1,335 =   $ 61,610
4. Number of Shares Outstanding x Share Price = 842 x $72.00 =    $ 60,624
Method Average                                                    $34,136




                           ® 2007, Tony Gauvin, UMFK
                                                                             28
Strategic Analysis
                                                 Swot Matrix
                                                        Strengths                                                                  Weaknesses

                                                        1.iTunes Music Store is a good source of revenue, especially with the      1.Weak relationship with Intel and Microsoft.
                                                        iPod and the availability on Windows platform.                             2.Weak presence in business arena.
                                                        2.Developing own software and hardware.                                    3.Dependency on new product launches.
                                                        3.Apple’s niche audience provides the company with some insulation         4.Weak presence in markets other than education
                                                        from the direct price competition.                                         and publishing.
                                                        4.Revamping desktop and notebook lines.                                    5.Slow turnaround on high demand products.
                                                        5.Web technology can be used to improve product awareness and sales.
                                                        6.Low debt—more maneuverable.
                                                        7.Good brand loyalty.
Opportunities                                           S-O Strategies                                                             W-O Strategies

1.Increase in worms and viruses on PCs.                 1.Increase awareness through the Web of the immunity of Mac                1.Increase ties with Microsoft and Intel and their
2.Large population (Gen X & Y) which are extremely      products to worms and viruses.                                             products.(W1, W2, W4 O2, O3)
individualistic and name brand conscious.                   (S5, O1)                                                               2.Promote to business the safety of having a worm
3.Government crackdown on pirating music off the        1.Advertise using individuals that will link Generation X & Y to the       and virus free computer by using Mac. (W2, W4,
Internet.                                               iTunes and other related products. (S1, O2, O4, O5)                        O1, O5).
4.Much of the world is still without computers.         2.Use movies and music groups that are geared towards Gen X                3.Expand production into Asia (W2, O4).
5.People enjoy small electronic gadgets.                     and Y to promote computers and laptops. (S3, S5, O2, O5)


Threats                                                 S-T Strategies                                                             W-T Strategies

1.Companies not seeing Apple as compatible with their   1.Increase and promote the compatibility to Windows operating              1.Improve relationship with Microsoft and Intel so
software.                                               system. (S5,T1)                                                            that companies will see them as compatible. (W1,
2.Dell and HP are major competitors.                    2.Promote the originality of Apple computers and the different style       W2 T1)
3.Increasing competition with music downloads.          and stable system that is worth the price difference in style, stability   2.Produce Wintel Compatible products (W1, T1).
4.Competition produces similar products at often half   and speed. (S2, S5, T2, T4, T5)
the price.
5.The population at large unwilling to use Macintosh.



                                                               ® 2007, Tony Gauvin, UMFK
                                                                                                                                                                                29
Strategic Analysis
                            Space Matrix
Financial Strength              rating is 1 (worst) to 6 (best)                   Ratings
      1 Leverage                                                                      3.0
      2 Working Capital                                                               3.0
      3 Liquidity                                                                     4.0
      4 Return on Investment                                                          5.0
      5 3 Year NEW income                                                             5.0
Industry Strength               rating is 1 (worst) to 6 (best)        FS Total      20.0
      1 Growth Potential                                                              4.0
      2 Profit Potential                                                              4.0
      3 Financial Stability                                                           5.0
      4 Ease of Entry into Market                                                     2.0
      5 Labor Cost                                                                    3.0
Environmental Stability         rating is -1 (best) to -6 (worst)      IS Total      18.0
      1 Rate of Inflation                                                            -2.0
      2 Technological Changes                                                        -5.0
      3 Price elasticity of Demand                                                   -2.0
      4 Competitive Pressure                                                         -6.0
      5 Barriers to Entry into Market                                                -2.0
Competitive advantage           rating is -1 (best) to -6 (worst)      ES Total     -17.0
      1 Market Share                                                                 -5.0
      2 Product Quality                                                              -1.0
      3 Customer Laylaity                                                            -1.0
      4 Technological Know-How                                                       -1.0
      5 Control over Suppliers and Ditribuors                                        -2.0
                                                                       CS total     -10.0


                                           ® 2007, Tony Gauvin, UMFK
                                                                                            30
Strategic Analysis
                      Space Matrix
                                              FS
               Conservative                                    Aggressive
                                             6

                                             5

                                             4

                                             3

                                             2

                                             1


CA                                                                                   IS
     -6   -5         -4       -3   -2   -1         1   2   3        4        5   6
                                             -1

                                             -2

                                             -3

                                             -4

                                             -5

                                             -6
                Defensive                                      Competitive
                                              ES




                                   ® 2007, Tony Gauvin, UMFK
                                                                                          31
Strategic Analysis
     Grand Strategy Matrix
                                   Rapid Market Growth


              Quadrant II                                Quadrant I




  Weak                                                                   Strong
Competitive                                                            Competitive
 Position                                                               Position




              Quadrant III                               Quadrant IV


                                   Slow Market Growth

                            ® 2007, Tony Gauvin, UMFK
                                                                                     32
Apple IE Matrix
Grow and Build
                                                 IFE Scores
Hold and Maintain
                            Strong               Average      Weak
Harvest or Divest           3-4                  2-2.99       1-1.99
                    High
                     3-4
                            I                    II            III
                                                   Domestic
                                 International
     EFE Scores




                            IV                   V             VI
                  Medium
                   2-2.99


                            VII                  VIII          IX
                     Low
                   1-1.99


                      Segments        Revenue            Profit        EFE   IFE
                      Domestic ® 2007, Tony Gauvin, UMFK 52%
                                        54%                            3.5   2.6
                                                                                   33
                      International     46%              48%           3.0   3.0
Apple BCG Matrix
          High                              Medium                                    Low
           1.0                                .50                                      0.0
 High
 +20                                                      Domestic
                           Stars                          Question Marks

                            II                                       IInternational
Medium
  0
                         Cash Cows                              Dogs

                            III                                 IV
 Low
 -20

          Segments                Revenue Profit       Growth Rate    Relative Market Share
         Domestic                 54%        52%           17                 0.3
         International            46%        48%            5                 0.2
                                    ® 2007, Tony Gauvin, UMFK
                                                                                              34
Matrix Analysis
Alternative Strategies            BCG      IE      SPACE      GRAND   COUNT
Forward Integration                        X         X                  2

Backward Integration                       X         X                  2

Horizontal Integration                     X         X                  2

Market Penetration                 X       X         X                  3

Market Development                 X       X         X                  3

Product Development                X       X         X          X       4

Concentric Diversification                           X          X       2

Conglomerate Diversification                         X          X       2

Horizontal Diversification                           X          X       2

Joint Venture                                                   X       1

Retrenchment

Divestiture                        X                                    1

Liquidation


                                  ® 2007, Tony Gauvin, UMFK
                                                                              35
Apple QSPM
Strategic Alternatives
Key Internal Factors                                      Weight                      Produce Wintel      Expand production into
                                                                                    compatible products           Asia
Strengths                                                                             AS          TAS         AS           TAS
iTunes Music Store is a good source of revenue, especially with the iPod   0.15      4.00          0.60      3.00          0.45
and the availability on Windows platform.
Apple’s niche audience provides the company with some insulation from      0.10       ---          ---        ---           ---
the direct price competition.
Revamping desktop and notebook lines.                                      0.10       ---          ---        ---           ---
Low debt—more maneuverable.                                                0.06      1.00          0.06      4.00          0.24
Developing own software and hardware.                                      0.14       ---          ---        ---           ---
Good brand loyalty.                                                        0.05      4.00          0.20      3.00          0.15
Web technology can be used to improve product awareness and sales.         0.10      4.00          0.40      3.00          0.30
Weaknesses

Dependency on new product launches.                                        0.06       ---          ---        ---           ---
Weak presence in business arena.                                           0.07      1.00          0.07      3.00          0.21
Slow turnaround on high demand products.                                   0.03       ---          ---        ---           ---
Weak relationship with Intel and Microsoft.                                0.10      4.00          0.40      1.00          0.10
Weak presence in markets other than education and publishing.              0.04      2.00          0.14      4.00          0.28
SUBTOTAL                                                                   1.00                    1.87                    1.73

                                                        ® 2007, Tony Gauvin, UMFK
                                                                                                                                   36
Apple QSPM
Key External Factors                                                        Weight            Produce Wintel      Expand production into
                                                                                            compatible products              Asia

Opportunities                                                                                             TAS       AS            TAS

Increase in worms and virus on PCs.                                                  0.15   1.00          0.15     3.00           0.45
Large population (Gen X & Y) which are extremely individualistic and name            0.15   1.00          0.15     4.00           0.60
      brand conscious.
Government crackdown on pirating music off the Internet.                             0.05   1.00          0.05     4.00           0.20
Much of the world is still without computers.                                        0.10   1.00          0.10     4.00           0.40
People enjoy small electronic gadgets.                                               0.10    ---           ---      ---            ---
Threats

Companies not seeing Apple as compatible with their software.                        0.10   4.00          0.40     2.00           0.20
Dell and HP are major competitors.                                                   0.10   1.00          0.10     3.00           0.30
Increasing competition with music downloads.                                         0.05    ---           ---      ---            ---
Competition produces similar products at often half the price.                       0.10    ---           ---      ---            ---
The population at large unwilling to use Macintosh.                                  0.10

SUBTOTAL                                                                             1.00                 0.95                    2.15

SUM TOTAL ATTRACTIVENESS SCORE                                                                            2.83                    3.88

                                                             ® 2007, Tony Gauvin, UMFK
                                                                                                                                         37
Possible alternative Strategies
• Market Penetration
   – Go after Dell, HP and Microsoft (the Wintel alliance) markets
     Shares
• Market Development
   – Asia & Europe
• New Product development
   – New consumer electronics products
• Related Diversification
   – Peripherals
• Retrenchment
   – Reengineer to lower cost of goods sold in reaction to
     commoditization pricing of PC market

                        ® 2007, Tony Gauvin, UMFK
                                                                     38
Recommendations
• Strategy 1
   – Open twenty computer retail stores (not just peripherals and
     accessories). Apple currently operates stores throughout the
     United States with only peripherals and accessories for their
     computers. Adding the hardware should generate more hands-
     on awareness and use already established locations.
   – This will increase product accessibility for those who wish to
     view items other than just accessories and increase awareness
     of the originality of Apple’s products.
   – Two percent increase in sales representatives for the computer
     hardware.
   – Estimated cost of $ 5 million per store = $100 Million Total.




                        ® 2007, Tony Gauvin, UMFK
                                                                      39
Recommendations
• Strategy 2
   – Expand into the Asian market over a five-year period by building
     a manufacturing facility and headquarters in Hong Kong and
     expanding sales throughout Asia. Estimated cost $5 billion.
• Strategy 3
   – Add more features to current products including new iPod,
     Shuffle, and Macintosh enhancements and power.
   – $50 million is the estimated cost for Research and Development.
• While it is usually prudent to embark on just one strategy
  at a time, Apple cash reserves (~$8 billion) and
  managerial talents (Steve Jobs) makes embarking on 3
  strategies at one time is not only possible but
  recommended.

                        ® 2007, Tony Gauvin, UMFK
                                                                        40
EPS/EBIT
• $ Amount Needed: $5,100 M
    – Strategy 1 & 2
•   Stock Price: $75
•   Tax Rate: 26%
•   Interest Rate: 5% (2006)
•   # Shares Outstanding: 842M


                   ® 2007, Tony Gauvin, UMFK
                                               41
EPS/EBIT
                        Common Stock Financing                          Debt Financing
                Recession      Normal          Boom          Recession      Normal          Boom
EBIT          $500,000,000 $1,500,000,000 $3,000,000,000   $500,000,000 $1,500,000,000 $3,000,000,000
Interest            0             0              0          257,500,000   257,500,000    257,500,000
EBT            500,000,000  1,500,000,000 3,000,000,000     242,500,000  1,242,500,000 2,742,500,000
Taxes          130,000,000   390,000,000    780,000,000      63,050,000   323,050,000    713,050,000
EAT            370,000,000  1,110,000,000 2,220,000,000     179,450,000   919,450,000   2,029,450,000
# Shares       910,666,667   910,666,667    910,666,667     842,000,000   842,000,000    842,000,000
EPS                0.41          1.22           2.44            0.21          1.09           2.41



                      70 Percent Stock - 30 Percent Debt          70 Percent Debt - 30 Percent Stock
                  Recession        Normal           Boom      Recession        Normal           Boom
   EBIT         $500,000,000 $1,500,000,000 $3,000,000,000 $500,000,000 $1,500,000,000 $3,000,000,000
   Interest       77,250,000      77,250,000      77,250,000 180,250,000     180,250,000     180,250,000
   EBT           422,750,000 1,422,750,000 2,922,750,000 319,750,000 1,319,750,000 2,819,750,000
   Taxes         109,915,000     369,915,000     759,915,000  83,135,000     343,135,000     733,135,000
   EAT           312,835,000 1,052,835,000 2,162,835,000 236,615,000         976,615,000 2,086,615,000
   # Shares      890,066,667     890,066,667     890,066,667 862,600,000     862,600,000     862,600,000
   EPS               0.35            1.18            2.43        0.27            1.13            2.42

                                  ® 2007, Tony Gauvin, UMFK
                                                                                                           42
Implementation Issues
• Moving production overseas
   –   Unsettling for current workforce
   –   MIS Integration problems
   –   Change in culture
   –   May damage brand (Made in USA)
   –   Environmental outlook
• New marketing strategies
   – Paradox of marketing to deficiencies of Wintel platform while
     becoming cross platform capable
• Forward integration issues
   – Do we have the talent to become direct sellers
   – Cross selling competitors peripherals >> Brand Dilution?


                        ® 2007, Tony Gauvin, UMFK
                                                                     43
Proposed annual objectives (goal)
              and polices
•   Double sales revenue in 3 years
     – 1st year 50%, 2 year 25, 3 year 25%
     – Write division polices stating exact gains and marketing approaches to achieve
       gains
•   Reduce unit cost of goods sold by 10% annually for next 3 years
     – Leverage low cost labor overseas
•   Introduce one new consumer product each year
     – Provide adequate funding to R&D
     – Provide funding for market research
     – Insure strong communication ties between marketing and R&D
•   Either provide functional enhancements to existing products each year or
    obsolesce product
     – Assign R&D project teams to each existing product
     – Have market research produce product maturity curves for existing products
•   Create Chief scientist position on Corporate Board to reflect the importance
    of R&D to Apple Computer



                               ® 2007, Tony Gauvin, UMFK
                                                                                        44
Proposed procedures for
            evaluation
• Qtr & Yearly financial reports
• Track Industry & market Reponses to new
  product development
• Balanced Scorecard
• Yearly strategic meeting of division
  management and corporate management



               ® 2007, Tony Gauvin, UMFK
                                            45
Epilogue

• 2006
  –   iPods add Video
  –   Content from Disney, ABC, ESPN, SOAPnet
  –   Stock soars by 120%
  –   iPod morphs to
       • Shuffle
       • Nano
  – Goes to Intel Architecture
  – Sales increase by 45%
  – Gross margin increase by 8%
• 2007
  – iPhone
  – Sales predicted to increase by 35%
  – Gross profit margin predicted to increase by 8%

                       ® 2007, Tony Gauvin, UMFK
                                                      46
Current Stock Performance




http://moneycentral.msn.com/investor/charts/charting.asp?symbol=AAPL
                       ® 2007, Tony Gauvin, UMFK
                                                                       47
Resources
• Case Notes
   – Forest David; Francis Marion University
• Form 10-K SEC Filing, Sept. 25, 2005
• Datamonitor
   –   SWOT Apple 2004 & 2005
   –   PCs in the United States 2005
   –   Consumer Electronics in the United States 2005
   –   Market Watch
        • Apple: Unix for the people, Unix for the masses 2005
• Value line Investment survey
   – Apple 2007
   – Computer Peripherals 2007

                           ® 2007, Tony Gauvin, UMFK
                                                                 48
Questions




http://seriouslygood.kdweeks.com/images/apple-question.gif
            ® 2007, Tony Gauvin, UMFK
                                                             49

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Apple 2005 slide

  • 1. Apple Computer Inc. 2005 A Strategic Management Case Study Graphics are the property of ® 2007, Tony Gauvin, UMFK Apple Computer
  • 2. Overview • A brief history of Apple Computer • Possible alternative strategies • EOY 2004 • Our Recommendation – Mission, Vision, Objectives, Strategies – Strategies • 2005 – Long range objectives – New Vision and Mission – EPS/EBIT • External Analysis – Opportunities & Threats • Implementation Issues – CPM • Proposed annual objectives (goal) and – EFE polices • Internal Analysis – Financial Data • Proposed procedures for evaluation – Strengths and weaknesses • Epilogue – IFE – Financial ratios • Current Performance • Strategic Analysis • Questions – SWOT Matrix • Resources Utilized – SPACE – BCG – IE matrix – Grand Strategy Matrix – Matrix Analysis – QSPM ® 2007, Tony Gauvin, UMFK 2
  • 3. History of Apple • 1976 – Apple started in a garage in Santa Clara, CA by Steve Wozniak and Steve Jobs – A easy to use PC for small computer users • 1980 – $117,000,000 in sales – IPO • 1983 – Wozniak quits – Jobs hires John Sculley From Pepsi Co. to become President of Apple • 1984 – Macintosh PC ® 2007, Tony Gauvin, UMFK 3
  • 4. History of Apple • 1985 – Jobs and Sculley have a ―falling out‖ – Jobs fired – Sculley becomes CEO – Bill Gates wants to buy Mac O/S, Sculley says No, Gates buys DOS from IBM, Microsoft kicks Apple's butt (90% market share) • 1993 – Apple release Newton, the first PDA – Earnings Plunge, Apple restructures, Sculley Resigns • 1997 – Apple CEO Gilbert Amelio buys NextStep from Steve Jobs – Earnings Plunge, Apple restructures, Amelio Resigns • 1998 – Steve Jobs returns as iCEO ® 2007, Tony Gauvin, UMFK 4
  • 5. History of Apple • 1998 – Jobs restructures Apple along two products lines • Consumer ―i‖Mac – ―i‖ for internet • Professional ―Power‖Mac – ―power‖ for power user – Sales return, Brand emerges, Innovation rules • USB, Firewire, Airport • iPod and iTunes – Stock price takes off like a rocket! ® 2007, Tony Gauvin, UMFK 5
  • 6. Lesson learned + = ® 2007, Tony Gauvin, UMFK 6
  • 7. 2004 Vision Statement 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 beast personal computing experience to students, educators, creative professional, and consumers around the world through its innovative hardware, software, and Internet offerings ® 2007, Tony Gauvin, UMFK 7
  • 8. 2004 Mission Apple Computer is committed to protecting the environment, health and safety of our employees, customers and the global communities where we operate. 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 continuous improvement in our environmental, health and safety management systems and in the environmental quality of our products, processes and services. ® 2007, Tony Gauvin, UMFK 8
  • 9. 2004 Strategies • Market Penetration – Branding – Niche player • New Product Development – Speech recognition – Virtual reality ® 2007, Tony Gauvin, UMFK 9
  • 10. 2004 objectives • Double market Share from 5% to 10% • Remain as the most profitable computer company in the industry ® 2007, Tony Gauvin, UMFK 10
  • 11. 2004 Issues • How can apple best capitalize on the needs of the business world for a safer, virus-free, worm- free system? • Should Apple enter the consumer electronics business like Dell and Gateway did? • Should Apple remain a lone wolf in Operating Systems or adopt a cross-platform format compatible with Windows and Intel • How much emphasis should Apple place on developing the next generation of voice recognition computers? ® 2007, Tony Gauvin, UMFK 11
  • 12. A new vision To become the global leader in computer and digital music products. ® 2007, Tony Gauvin, UMFK 12
  • 13. A New Mission • The Apple commitment to excellence is its mission to provide computers and service (2) for people (1) that meet the highest standards of value and reliability. Apple is one of the leaders in the computer industry and produces some of the best-selling computers and digital music products in the world (3). Apple provides the highest level of quality and value for our customers (7). Those are timeless fundamentals. We also apply innovative technology to our core business (4) to make our products irresistible to customers, beneficial to society, and profitable to our company (5). We strive to provide additional opportunities for growth and enrichment of company personnel while maintaining a work environment for all employees (9) that encourages personal commitment and participation in support of achieving excellence. We are committed to being a good corporate citizen, and being openly honest with all of our stakeholders (6). We support activities that enable people to improve their lives and reinforce their commitment to society (8). ® 2007, Tony Gauvin, UMFK 13
  • 14. Apple’s New Mission The new mission answers the following questions 1. Customers: Who are the firm’s customers? 2. Products or services: What are the firm’s major products? 3. Markets: Geographically, where does the firm compete? 4. Technology: Is the firm technologically current? 5. Concern for survival, growth, and profitability: Is the firm committed to growth and financial soundness? 6. Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities of the firm? 7. Self-concept: What is the firm’s distinctive competence or major competitive advantage? 8. Concern for public image: Is the firm responsive to social, community, and environmental concerns? 9. Concern for employees: Are employees a valuable asset of the firm? ® 2007, Tony Gauvin, UMFK 14
  • 15. External Audit (Opportunities) 1. Increase in worms and viruses on PCs. 2. Large population (Gen X & Y) which are extremely individualistic and name brand conscious. 3. Government crackdown on pirating music off the Internet. 4. Much of the world is still without computers. 5. People enjoy small electronic gadgets. ® 2007, Tony Gauvin, UMFK 15
  • 16. External Audit (Threats) 1. Companies not seeing Apple as compatible with their software. 2. Dell and HP are major competitors. 3. Increasing competition with music downloads. 4. Competition produces similar products at often half the price. 5. The population at large unwilling to use Macintosh. ® 2007, Tony Gauvin, UMFK 16
  • 17. Apple CPM Apple HP Dell Critical Success Weight Rating Weighted Rating Weighted Rating Weighted Factors Score Score Score Market Share 0.10 2 0.20 3 0.30 4 0.40 Price 0.10 2 0.20 3 0.30 4 0.40 Financial Position 0.15 3 0.45 4 0.60 3 0.45 Product Quality 0.15 4 0.60 3 0.45 3 0.45 Consumer Loyalty 0.15 4 0.60 2 0.30 3 0.45 Advertising 0.04 4 0.16 2 0.08 3 0.12 Management 0.06 4 0.24 3 0.18 3 0.18 Global Expansion 0.06 2 0.12 2 0.12 3 0.18 Innovation 0.14 4 0.56 2 0.28 2 0.28 Web Development 0.05 3 0.15 2 0.10 3 0.15 Total 1.00 3.28 2.71 3.06 ® 2007, Tony Gauvin, UMFK 17
  • 18. Apple EFE Key External Factors Weight Rating Weighted Score Opportunities Increase in worms and virus on PCs. 0.15 4 0.60 Large population (Gen X & Y) which are extremely 0.15 4 0.60 individualistic and name brand conscious. Government crackdown on pirating music off the Internet. 0.05 4 0.20 Much of the world is still without computers. 0.10 2 0.20 People enjoy small electronic gadgets. 0.10 4 0.40 Threats Companies not seeing Apple as compatible with their 0.10 2 0.20 software. Dell and HP are major competitors. 0.10 3 0.30 Increasing competition with music downloads. 0.05 4 0.20 Competition produces similar products at often half the 0.10 3 0.30 price. The population at large unwilling to use Macintosh. 0.10 2 0.20 TOTAL 1.00 3.20 ® 2007, Tony Gauvin, UMFK 18
  • 19. Consolidated Balance Sheet ® 2007, Tony Gauvin, UMFK 19
  • 20. Consolidated statement of operations ® 2007, Tony Gauvin, UMFK 20
  • 21. Internal Audit (Strengths) 1. iTunes Music Store is a good source of revenue, especially with the iPod and its availability on Windows platform. 2. Developing own software and hardware. 3. Apple’s niche audience provides the company with some insulation from the direct price competition. 4. Revamping desktop and notebook lines. 5. Web technology can be used to improve product awareness and sales. 6. Low debt—more maneuverable. ® 2007, Tony Gauvin, UMFK 21
  • 22. Internal Audit (weaknesses) 1. Weak relationship with Intel and Microsoft. 2. Weak presence globally. 3. Dependency on new product launches. 4. Weak presence in markets other than education and publishing. 5. Slow turnaround on high demand products. ® 2007, Tony Gauvin, UMFK 22
  • 23. Apple IFE Key Internal Factors Weight Rating Weighted Score Strengths iTunes Music Store is a good source of revenue, especially 0.15 4 0.60 with the iPod and the availability on Windows platform. Apple’s niche audience provides the company with some 0.10 3 0.30 insulation from the direct price competition. Revamping desktop and notebook lines. 0.10 3 0.30 Low debt—more maneuverable. 0.06 4 0.24 Developing own software and hardware. 0.14 3 0.42 Good brand loyalty. 0.05 3 0.15 Web technology can be used to improve product awareness 0.10 4 0.40 and sales. Weaknesses Dependency on new product launches. 0.06 1 0.06 Weak presence globally. 0.07 1 0.07 Slow turnaround on high demand products. 0.03 2 0.06 Weak relationship with Intel and Microsoft. 0.10 1 0.10 Weak presence in markets other than education and 0.04 2 0.08 publishing. Total 1.00 2.78 ® 2007, Tony Gauvin, UMFK 23
  • 24. Financial Ratio Analysis (January 2006) Growth Rates % Apple Computer Industry SP-500 Sales (Qtr vs. year ago qtr) 56.50 18.00 14.20 Net Income (YTD vs. YTD) 383.70 78.90 16.30 Net Income (Qtr vs. year ago qtr) 305.70 17.40 17.00 Sales (5-Year Annual Avg.) 12.64 5.00 4.93 Net Income (5-Year Annual Avg.) NA NA 10.40 Dividends (5-Year Annual Avg.) NA NA 4.27 Price Ratios Current P/E Ratio 46.1 31.6 18.8 P/E Ratio 5-Year High NA NA 64.8 P/E Ratio 5-Year Low NA NA 17.4 Price/Sales Ratio 4.35 1.88 1.48 Price/Book Value 8.11 10.57 2.83 Price/Cash Flow Ratio 39.90 26.80 12.40 Profit Margins Gross Margin 30.3 20.2 47.2 Pre-Tax Margin 13.0 8.5 11.9 Net Profit Margin 9.6 6.2 8.0 5-Yr Gross Margin (5-Year Avg.) 29.1 20.3 47.3 5-Yr Pre-Tax Margin (5-Year Avg.) 5.9 5.8 9.4 5-Yr Net Profit Margin (5-Year Avg.) ® 2007, Tony4.3 Gauvin, UMFK 3.8 5.8 24
  • 25. Financial Ratio Analysis (January 2006) Financial Condition Debt/Equity Ratio 0.00 0.06 1.06 Current Ratio 3.0 1.5 1.4 Quick Ratio 2.6 1.2 0.9 Interest Coverage NA NA 3.5 Leverage Ratio 1.5 2.9 5.7 Book Value/Share 8.86 3.50 13.26 Investment Returns % Return on Equity 17.9 34.6 15.3 Return on Assets 11.6 12.0 2.7 Return on Capital 17.9 32.6 7.4 Return on Equity (5-Year Avg.) 6.9 17.0 11.9 Return on Assets (5-Year Avg.) 4.4 7.1 2.0 Return on Capital (5-Year Avg.) 6.7 15.7 5.6 Management Efficiency Income/Employee 90,000 63,000 29,000 Revenue/Employee 941,000 1 Mil 367,000 Receivable Turnover 16.7 12.2 7.7 Inventory Turnover 73.0 66.8 7.8 Asset Turnover 1.4 2.1 0.4 ® 2007, Tony Gauvin, UMFK 25
  • 26. Financial Trends Date Avg. P/E Price/Sales Price/Book Net Profit Margin (%) 2005 23.5 3.21 6 9.6 2004 40.6 1.83 2.99 3.3 2003 90.1 1.22 1.8 1.1 2002 111 0.91 1.27 1.1 2001 NA 1.02 1.39 -0.7 Date Book Value/ Share Debt/Equity ROE (%) ROA (%) Interest Coverage 2005 $8.94 0 17.9 11.6 NA 2004 $6.48 0 5.4 3.4 NA 2003 $5.76 0 1.6 NA NA 2002 $5.70 0.08 1.6 NA NA 2001 $5.59 0.08 NA -0.6 N ® 2007, Tony Gauvin, UMFK 26
  • 27. Apple Stock Performance ® 2007, Tony Gauvin, UMFK http://moneycentral.msn.com/investor/charts/charting.asp?symbol=AAPL 27
  • 28. Apple Net Worth (January 2006 in millions) 1. Stockholders’ Equity + Goodwill = 7,466 + 69 $ 7,535 2. Net Income x 5 = $1,355 x 5= $ 6,775 3. Share price = $72.00/EPS(1.56) = 46.15 x Net Income $1,335 = $ 61,610 4. Number of Shares Outstanding x Share Price = 842 x $72.00 = $ 60,624 Method Average $34,136 ® 2007, Tony Gauvin, UMFK 28
  • 29. Strategic Analysis Swot Matrix Strengths Weaknesses 1.iTunes Music Store is a good source of revenue, especially with the 1.Weak relationship with Intel and Microsoft. iPod and the availability on Windows platform. 2.Weak presence in business arena. 2.Developing own software and hardware. 3.Dependency on new product launches. 3.Apple’s niche audience provides the company with some insulation 4.Weak presence in markets other than education from the direct price competition. and publishing. 4.Revamping desktop and notebook lines. 5.Slow turnaround on high demand products. 5.Web technology can be used to improve product awareness and sales. 6.Low debt—more maneuverable. 7.Good brand loyalty. Opportunities S-O Strategies W-O Strategies 1.Increase in worms and viruses on PCs. 1.Increase awareness through the Web of the immunity of Mac 1.Increase ties with Microsoft and Intel and their 2.Large population (Gen X & Y) which are extremely products to worms and viruses. products.(W1, W2, W4 O2, O3) individualistic and name brand conscious. (S5, O1) 2.Promote to business the safety of having a worm 3.Government crackdown on pirating music off the 1.Advertise using individuals that will link Generation X & Y to the and virus free computer by using Mac. (W2, W4, Internet. iTunes and other related products. (S1, O2, O4, O5) O1, O5). 4.Much of the world is still without computers. 2.Use movies and music groups that are geared towards Gen X 3.Expand production into Asia (W2, O4). 5.People enjoy small electronic gadgets. and Y to promote computers and laptops. (S3, S5, O2, O5) Threats S-T Strategies W-T Strategies 1.Companies not seeing Apple as compatible with their 1.Increase and promote the compatibility to Windows operating 1.Improve relationship with Microsoft and Intel so software. system. (S5,T1) that companies will see them as compatible. (W1, 2.Dell and HP are major competitors. 2.Promote the originality of Apple computers and the different style W2 T1) 3.Increasing competition with music downloads. and stable system that is worth the price difference in style, stability 2.Produce Wintel Compatible products (W1, T1). 4.Competition produces similar products at often half and speed. (S2, S5, T2, T4, T5) the price. 5.The population at large unwilling to use Macintosh. ® 2007, Tony Gauvin, UMFK 29
  • 30. Strategic Analysis Space Matrix Financial Strength rating is 1 (worst) to 6 (best) Ratings 1 Leverage 3.0 2 Working Capital 3.0 3 Liquidity 4.0 4 Return on Investment 5.0 5 3 Year NEW income 5.0 Industry Strength rating is 1 (worst) to 6 (best) FS Total 20.0 1 Growth Potential 4.0 2 Profit Potential 4.0 3 Financial Stability 5.0 4 Ease of Entry into Market 2.0 5 Labor Cost 3.0 Environmental Stability rating is -1 (best) to -6 (worst) IS Total 18.0 1 Rate of Inflation -2.0 2 Technological Changes -5.0 3 Price elasticity of Demand -2.0 4 Competitive Pressure -6.0 5 Barriers to Entry into Market -2.0 Competitive advantage rating is -1 (best) to -6 (worst) ES Total -17.0 1 Market Share -5.0 2 Product Quality -1.0 3 Customer Laylaity -1.0 4 Technological Know-How -1.0 5 Control over Suppliers and Ditribuors -2.0 CS total -10.0 ® 2007, Tony Gauvin, UMFK 30
  • 31. Strategic Analysis Space Matrix FS Conservative Aggressive 6 5 4 3 2 1 CA IS -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 -1 -2 -3 -4 -5 -6 Defensive Competitive ES ® 2007, Tony Gauvin, UMFK 31
  • 32. Strategic Analysis Grand Strategy Matrix Rapid Market Growth Quadrant II Quadrant I Weak Strong Competitive Competitive Position Position Quadrant III Quadrant IV Slow Market Growth ® 2007, Tony Gauvin, UMFK 32
  • 33. Apple IE Matrix Grow and Build IFE Scores Hold and Maintain Strong Average Weak Harvest or Divest 3-4 2-2.99 1-1.99 High 3-4 I II III Domestic International EFE Scores IV V VI Medium 2-2.99 VII VIII IX Low 1-1.99 Segments Revenue Profit EFE IFE Domestic ® 2007, Tony Gauvin, UMFK 52% 54% 3.5 2.6 33 International 46% 48% 3.0 3.0
  • 34. Apple BCG Matrix High Medium Low 1.0 .50 0.0 High +20 Domestic Stars Question Marks II IInternational Medium 0 Cash Cows Dogs III IV Low -20 Segments Revenue Profit Growth Rate Relative Market Share Domestic 54% 52% 17 0.3 International 46% 48% 5 0.2 ® 2007, Tony Gauvin, UMFK 34
  • 35. Matrix Analysis Alternative Strategies BCG IE SPACE GRAND COUNT Forward Integration X X 2 Backward Integration X X 2 Horizontal Integration X X 2 Market Penetration X X X 3 Market Development X X X 3 Product Development X X X X 4 Concentric Diversification X X 2 Conglomerate Diversification X X 2 Horizontal Diversification X X 2 Joint Venture X 1 Retrenchment Divestiture X 1 Liquidation ® 2007, Tony Gauvin, UMFK 35
  • 36. Apple QSPM Strategic Alternatives Key Internal Factors Weight Produce Wintel Expand production into compatible products Asia Strengths AS TAS AS TAS iTunes Music Store is a good source of revenue, especially with the iPod 0.15 4.00 0.60 3.00 0.45 and the availability on Windows platform. Apple’s niche audience provides the company with some insulation from 0.10 --- --- --- --- the direct price competition. Revamping desktop and notebook lines. 0.10 --- --- --- --- Low debt—more maneuverable. 0.06 1.00 0.06 4.00 0.24 Developing own software and hardware. 0.14 --- --- --- --- Good brand loyalty. 0.05 4.00 0.20 3.00 0.15 Web technology can be used to improve product awareness and sales. 0.10 4.00 0.40 3.00 0.30 Weaknesses Dependency on new product launches. 0.06 --- --- --- --- Weak presence in business arena. 0.07 1.00 0.07 3.00 0.21 Slow turnaround on high demand products. 0.03 --- --- --- --- Weak relationship with Intel and Microsoft. 0.10 4.00 0.40 1.00 0.10 Weak presence in markets other than education and publishing. 0.04 2.00 0.14 4.00 0.28 SUBTOTAL 1.00 1.87 1.73 ® 2007, Tony Gauvin, UMFK 36
  • 37. Apple QSPM Key External Factors Weight Produce Wintel Expand production into compatible products Asia Opportunities TAS AS TAS Increase in worms and virus on PCs. 0.15 1.00 0.15 3.00 0.45 Large population (Gen X & Y) which are extremely individualistic and name 0.15 1.00 0.15 4.00 0.60 brand conscious. Government crackdown on pirating music off the Internet. 0.05 1.00 0.05 4.00 0.20 Much of the world is still without computers. 0.10 1.00 0.10 4.00 0.40 People enjoy small electronic gadgets. 0.10 --- --- --- --- Threats Companies not seeing Apple as compatible with their software. 0.10 4.00 0.40 2.00 0.20 Dell and HP are major competitors. 0.10 1.00 0.10 3.00 0.30 Increasing competition with music downloads. 0.05 --- --- --- --- Competition produces similar products at often half the price. 0.10 --- --- --- --- The population at large unwilling to use Macintosh. 0.10 SUBTOTAL 1.00 0.95 2.15 SUM TOTAL ATTRACTIVENESS SCORE 2.83 3.88 ® 2007, Tony Gauvin, UMFK 37
  • 38. Possible alternative Strategies • Market Penetration – Go after Dell, HP and Microsoft (the Wintel alliance) markets Shares • Market Development – Asia & Europe • New Product development – New consumer electronics products • Related Diversification – Peripherals • Retrenchment – Reengineer to lower cost of goods sold in reaction to commoditization pricing of PC market ® 2007, Tony Gauvin, UMFK 38
  • 39. Recommendations • Strategy 1 – Open twenty computer retail stores (not just peripherals and accessories). Apple currently operates stores throughout the United States with only peripherals and accessories for their computers. Adding the hardware should generate more hands- on awareness and use already established locations. – This will increase product accessibility for those who wish to view items other than just accessories and increase awareness of the originality of Apple’s products. – Two percent increase in sales representatives for the computer hardware. – Estimated cost of $ 5 million per store = $100 Million Total. ® 2007, Tony Gauvin, UMFK 39
  • 40. Recommendations • Strategy 2 – Expand into the Asian market over a five-year period by building a manufacturing facility and headquarters in Hong Kong and expanding sales throughout Asia. Estimated cost $5 billion. • Strategy 3 – Add more features to current products including new iPod, Shuffle, and Macintosh enhancements and power. – $50 million is the estimated cost for Research and Development. • While it is usually prudent to embark on just one strategy at a time, Apple cash reserves (~$8 billion) and managerial talents (Steve Jobs) makes embarking on 3 strategies at one time is not only possible but recommended. ® 2007, Tony Gauvin, UMFK 40
  • 41. EPS/EBIT • $ Amount Needed: $5,100 M – Strategy 1 & 2 • Stock Price: $75 • Tax Rate: 26% • Interest Rate: 5% (2006) • # Shares Outstanding: 842M ® 2007, Tony Gauvin, UMFK 41
  • 42. EPS/EBIT Common Stock Financing Debt Financing Recession Normal Boom Recession Normal Boom EBIT $500,000,000 $1,500,000,000 $3,000,000,000 $500,000,000 $1,500,000,000 $3,000,000,000 Interest 0 0 0 257,500,000 257,500,000 257,500,000 EBT 500,000,000 1,500,000,000 3,000,000,000 242,500,000 1,242,500,000 2,742,500,000 Taxes 130,000,000 390,000,000 780,000,000 63,050,000 323,050,000 713,050,000 EAT 370,000,000 1,110,000,000 2,220,000,000 179,450,000 919,450,000 2,029,450,000 # Shares 910,666,667 910,666,667 910,666,667 842,000,000 842,000,000 842,000,000 EPS 0.41 1.22 2.44 0.21 1.09 2.41 70 Percent Stock - 30 Percent Debt 70 Percent Debt - 30 Percent Stock Recession Normal Boom Recession Normal Boom EBIT $500,000,000 $1,500,000,000 $3,000,000,000 $500,000,000 $1,500,000,000 $3,000,000,000 Interest 77,250,000 77,250,000 77,250,000 180,250,000 180,250,000 180,250,000 EBT 422,750,000 1,422,750,000 2,922,750,000 319,750,000 1,319,750,000 2,819,750,000 Taxes 109,915,000 369,915,000 759,915,000 83,135,000 343,135,000 733,135,000 EAT 312,835,000 1,052,835,000 2,162,835,000 236,615,000 976,615,000 2,086,615,000 # Shares 890,066,667 890,066,667 890,066,667 862,600,000 862,600,000 862,600,000 EPS 0.35 1.18 2.43 0.27 1.13 2.42 ® 2007, Tony Gauvin, UMFK 42
  • 43. Implementation Issues • Moving production overseas – Unsettling for current workforce – MIS Integration problems – Change in culture – May damage brand (Made in USA) – Environmental outlook • New marketing strategies – Paradox of marketing to deficiencies of Wintel platform while becoming cross platform capable • Forward integration issues – Do we have the talent to become direct sellers – Cross selling competitors peripherals >> Brand Dilution? ® 2007, Tony Gauvin, UMFK 43
  • 44. Proposed annual objectives (goal) and polices • Double sales revenue in 3 years – 1st year 50%, 2 year 25, 3 year 25% – Write division polices stating exact gains and marketing approaches to achieve gains • Reduce unit cost of goods sold by 10% annually for next 3 years – Leverage low cost labor overseas • Introduce one new consumer product each year – Provide adequate funding to R&D – Provide funding for market research – Insure strong communication ties between marketing and R&D • Either provide functional enhancements to existing products each year or obsolesce product – Assign R&D project teams to each existing product – Have market research produce product maturity curves for existing products • Create Chief scientist position on Corporate Board to reflect the importance of R&D to Apple Computer ® 2007, Tony Gauvin, UMFK 44
  • 45. Proposed procedures for evaluation • Qtr & Yearly financial reports • Track Industry & market Reponses to new product development • Balanced Scorecard • Yearly strategic meeting of division management and corporate management ® 2007, Tony Gauvin, UMFK 45
  • 46. Epilogue • 2006 – iPods add Video – Content from Disney, ABC, ESPN, SOAPnet – Stock soars by 120% – iPod morphs to • Shuffle • Nano – Goes to Intel Architecture – Sales increase by 45% – Gross margin increase by 8% • 2007 – iPhone – Sales predicted to increase by 35% – Gross profit margin predicted to increase by 8% ® 2007, Tony Gauvin, UMFK 46
  • 48. Resources • Case Notes – Forest David; Francis Marion University • Form 10-K SEC Filing, Sept. 25, 2005 • Datamonitor – SWOT Apple 2004 & 2005 – PCs in the United States 2005 – Consumer Electronics in the United States 2005 – Market Watch • Apple: Unix for the people, Unix for the masses 2005 • Value line Investment survey – Apple 2007 – Computer Peripherals 2007 ® 2007, Tony Gauvin, UMFK 48