Capstone Paper 1 Apple

Running Head: Strategic analysis of Apple 1
Strategic analysis of Apple
Adam Mellott
March 02, 2015
MGMT 1451
University of
Pittsburgh, Bradford

Strategic analysis of Apple 2
Abstract
This paper is on Apple Case #16 called Apple INC.: Still taking a bite out of the competition?
Identification of Apple INC will be provided, as well as their industry, market placement and
presence, and current issues for the company. An evaluation and strategic analysis of Apple via
SWOT Analysis, Porter’s Five Forces, and a financial evaluation via cross sectional and time
series analysis will also be included, as well as a financial ratio analysis and benchmarking.
Apple’s discovery, implementation into the market, important people such as founders and
creators, and innovative inventions will also be introduced. Located at the end of this paper will
be a conclusion and my own personal recommendation on how to successfully continue one of
the most successful U.S. publically traded companies that the world has ever seen. Located on
the last page will be the sources used in completing this paper.

Strategic analysis of Apple
Indentification
Apple INC is an American multinational technology company was founded in Mountain
View, California, on April 1, 1976 by Steve Jobs and Steve Wozniak. Under CEO Tim Cook,
Apple designs, develops, and sells consumer electronics, computer software, and online services.
Their best-known hardware products are their line of Macintosh computers (Mac, Mini, iMac,
Macbook Pro, Mac Pro, Macbook Air), the iPhone (iPhone, iPhone 3G, iPhone 3GS, iPhone 4,
iPhone 4S, iPhone 5, iPhone 5C, iPhone 5S, iPhone 6, iPhone 6 Plus, iPhone 6S, iPhone 6S
Plus), which is their version of a cellular phone, the iPad (iPad, iPad 2, iPad 3, iPad 4, iPad Air,
iPad Air 2, iPad Pro), which is a tablet computer, the iPod (iPod, iPod Shuffle, iPod Nano, iPod
Touch), which is Apple’s version of an MP3 player, the Macbook, which is Apple’s laptop, and
different variations of said products. Apple’s most popular software includes Mac OS X, which
is their PC operating system, iOS, a mobile operating system, the iLife software package which
provides applications that allows a computer to become a home studio, and iTunes, which is a
media store that sells music, movies, books, and television shows. A few of Apples other
products, services, and software are iCloud, Apple TV, and Apple Pay (Wood, 2010).
Since Apple’s start up in 1976, they were always known as the premier provider of
technology solutions for graphic artists, educators, and web designers. After the release of the
iPhone and iPad in 2007, Apple decided to enter the cell phone/smartphone and digital
entertainment industry, instead of just being known in the personal computer industry. Apple’s
iPod Touch and iPhone incorporated Wi-Fi connectivity, which allowed the user to access

iTunes to purchase music and stream the internet via Safari (Apple’s internet browser) without a
computer. In 2008, Apple introduced the App Store, where users could purchase applications
created by third-party developers that were specifically made for Apple products. Applications
included games, which meant Apple was introduced into the gaming market. Apple’s newest
hardware product is the Apple Watch, which incorporates fitness tracking and health statistics
with integration with iOS operating system, included in the iPad, iPod, iPhone, and Apple
computers (Wood, 2010).
Like all businesses, Apple faces multiple problems in today’s market. With innovation
and creation comes much room for error, something that has plagued Apple in the last 10 years.
One major problem for Apple is their iCloud services, which is an internet-based cloud storage
and cloud computing service. When iCloud was first introduced, Apple relied heavily on
Amazon Web Services and Microsoft to deliver a functional cloud service. With Facebook and
Google’s cloud being developed, Apple has a lack of knowledge in this area, something the other
two do not (Jackson, 2013).
Another current problem Apple faces is growth beyond the iPhone. Apple is known more
now as being “the iPhone corporation,” is relying on that single product now more than ever.
Currently, the iPhone is selling well, mainly due to Apple’s new market opening in China. Once
everyone who wants an iPhone has one, sales will slow, as they did previously with the iPad and
iPod. History tells us that products go through a lifecycle of birth, growth, and decline.
Currently, the iPhone is in the growth phase, but with the iPhone 6S as a ninth-generation
product, sales decline in the near future is inevitable (Kingsley-Hughes, 2015).
One major problem Apple faces today is managing its media and consumer expectations.
With Apple being such a secretive company, extreme levels of speculation, predictions, rumors,

hysteria, and fabrication are sure to hit Apple more than once. Consumers have a problem with
getting caught up in the pre-release hype of Apple’s products, and if Apple disappoints a
majority, this could have a devastating effect on the company.
Evaluation and Analysis
Strengths
Apple, INC. has many strengths that have helped them become the first U.S. publicly
traded company to close above $700 billion in market value. This put Apple’s value nearly
double that of the net three largest companies in the S&P 500 Index. Since Apple’s initial public
offering in December of 1980, their market value has grown over 50,600 percent. The five major
forces that helped Apple to do this are effective innovation process, customer loyalty, cash flow
abundance, and strong brand image (Wood, 2010).
Innovation has always kept Apple ahead of the game and ahead of its competitors. In
2012, Global Innovation 1000 ranked Apple, INC. first overall for the third year in a row (Wood,
2010). Innovation includes nine generations of iPhones and various options for each generation
(example: iPhone 5, 5C, 5S), the explosion of tablet computers and Apple’s ability to create a
boom with iPads, and Apple’s consistency to always release new products (most recently the
Apple Watch) with amazing quality. A rumor surfaced in 2015 that Apple had acquired
engineers and technology to produce the Apple Car, a fully functional Apple automobile that
would be ready for market by the year 2020. Speculation was that Apple would not assemble the
cars, but instead pass the job on to its own supply chain to outsource manufacturing and focus on
creating a car that is fully compatible with other Apple devices (Wood, 2010). Another new
program Apple has introduced in 2015 is Apple Music, which takes a “Spotify” approach to

iTunes. Instead of paying for every song, you pay a monthly price that grants you access to
100% of Apple’s licensed music
Customer loyalty is one of the biggest reasons Apple sits where it does in the market
today. Apple’s brilliant use of their Apple retail stores and marketing team has helped them
create millions of loyal customers. With programs such as Apple Care that replaces or fixes your
iPhone free of charge, compatibility between all their devices and software programs, free
giveaways via the App Store and iTunes, and their marketing strategy which focuses on quality,
branding and customer care, Apple has pulled ahead of the game in customer loyalty.
What separates Apple from almost any other company in the world is their abundance of
cash flow. With Apple recently making history by becoming the first U.S. publicly traded
company to close above $700 billion in market value, Apple has broken away from competitors.
Revenue and profit have both jumped tremendously in recent years. Revenue climbed 27.85%
from 2014 to 2015, rising from $182.795 billion to $233.715 billion. Profit also exploded in the
last year, soaring 35.14% from $39.510 billion (2014) to $53.394 billion (2015). From 2013 to
2014, sales jumped 7%, going from $170,910 million to $182,795 million (AAPL Financial
Statistics). This also allows Apple to have great purchasing power, which gives them the option
of purchasing businesses that have programs or products that will benefit Apple. With those
kinds of financials, it is easy to see why Apple can afford to be so innovative year after year.
Strong brand image is a huge strength for Apple as well. It is difficult to think of a more
inspirational branding success story than Apple. Founded by Jobs and Wozniak, two college
drop outs who relied on faith and resilience to create their first computers and explode in the
market. With Apple becoming America’s first $700 billion company, they have molded
themselves into one of the most recognized, iconic, respected brands in the entire world.

Weaknesses
With any great company comes great challenges, and they will be plentiful and
promising. The grass isn’t always greener on the other side for Apple, and this is due to many
reasons. Like strengths, there are many weaknesses that have plagued Apple over the years, and
the biggest and potentially the most devastating to the company are premium and expensive
pricing, lawsuits, operating systems incompatibility, and new product defects.
Apple has always been known to have extremely high quality products. With high quality
products, however, comes high pricing. This has not seemed to affect them drastically, however,
with sales still increasing year to year. There are many similar products with similar functions to
those of Apple’s products, however, and this could eventually have a negative impact on sales.
Apple is aware of their high prices, though. In September 2013, Apple launched its cheaper,
more affordable iPhone 5C smartphone (Wood, 2010). This phone, made with a plastic body,
had not seen the success that other models did, and eventually was discontinued.
Lawsuits have also plagued Apple for many years. Apple has always kept the specifics of
its research, development, and innovation a heavily-guarded secret in today’s world. As one of
Steve Jobs’ legacies, Apple has also gone great measures to protect its product patents. With
great innovation and great success, however, comes lawsuits and enemies. In 2012, a series of
lawsuits came about between Apple and Samsung, both a rival and a supplier. Apple accused
Samsung of copying designs because Samsung had captured more market share than Apple’s
iPhones in the beginning of 2012. Samsung responded, of course, by accusing Apple of invading
on original Samsung patents. United States intellectual property courts found in favor of Apple,
but courts in Japan sided with Samsung. This had a big hit on Apple because Samsung was a
huge provider of Apple’s chips and displays. In November of 2014, supply chain watchers stated

that Apple had a major challenge ahead in finding reliable suppliers for the increasingly scarce
components (Wood, 2010). Apple has had many lawsuits since the one with Samsung in 2012,
and many more are to be expected with the creation of patents and different innovative Apple
products.
Operating systems incompatibility has also recently been a big problem for Apple.
Because Apple entered the mobile market later than most other companies, they had to create
their own products that would be compatible with older products. This has been a problem for
Apple in recent years, with compatibility issues between Apple mobile devices such as iPhones
and iPods and Microsoft operating systems. Other compatibility issues include Apple’s operating
system that uses iOS and OD X, which are different than other operating systems and are
incompatible with products such as Adobe. Apple has gotten better at becoming compatible with
more products over recent years, however (Smithson, 2015).
One major problem Apple constantly faces is new product defects. With Apple constantly
coming up with new, innovative products and software, there is also an abundance of flaws. iOS
operating systems for mobile Apple devices are constantly being updated due to multiple bugs
and errors being reported from millions of people. Other product defects have included faulty
touch screens, steadily diminishing battery life over time, and more recently, the iPhone 6’s
major issue of heating up and bending in consumer’s pockets. With any manufacturing company,
however, bugs and defects are to be expected (Satariano, 2014).
Opportunities
With an abundance of cash, a foot in the door in multiple markets, and a huge customer
base, Apple’s opportunities will continue to be endless. During CEO Tim Cook’s first year in

2012, he had to deal with many problems, including a diminishing economy, supplier troubles,
management transition, investor panic, and unrealistic expectations due to the death of founder
Steve Jobs’ death. Yet, the company grew by 60%, and has since doubled (Jurevicius, 2016).
Because each market Apple has entered has not been first marketed by Apple itself, opportunities
to enter other markets are endless. Market-Share growth and creation of new product lines are
two huge areas of opportunity for Apple.
Although the overall growth rate for sales of smartphones slowed in 2015, this did not
stop Apple in increasing their share of global smartphone sales. In the second quarter of 2015,
Apple’s share increased 14.6%, compared to 12.2% a year earlier. Apple still has tons of room to
extend its share, holding on to around a 20% piece of the global PC/tablet market (Jurevicius,
2016). As Apple gains ground in China and the rest of the Asian region, this number can expect
to climb. With Apple having retail stores in 18 countries and online stores in 120 countries,
growth is almost inevitable.
With Apple’s history of quickly releasing new products every year, innovation and new
releases will continue to be an opportunity for Apple. Apple has branched out from a computer
designer and manufacturer to a technological mastermind in the last ten years, and this can
expect to be continued. Apple has never stinted on attacking markets head on, like their recent
release of the Apple Watch and induction into the fitness industry (Apple Watch). Apple loves
designing and creating new things, and more products should be expected in the near future.
Some ideas that are listed in our case study are automobiles, enterprise software, solar power
systems, and magnetic locks (Wood, 2010). Apple also does a great job of vastly improving
current products like the iPhone and releasing new variations of products on a yearly basis. With
Apple constantly coming up with new, innovative ideas, products, and technology, and

possessing a massive amount of cash flows, one should expect Apple to enter many new markets
in the near future.
Threats
With Apple being invested and implemented in so many different markets, many threats
are affecting Apple in today’s world. The number of competitors Apple faces are endless, and
one slip up on Apple’s part could cost them a huge portion of consumers. Aggressive
competition and the internet are two major threats that could negatively affect Apple.
Apple is constantly looked at as the front-runner in many technological markets, and with
this status also comes the pressure to come up with the newest, coolest gadget. Competitors such
as Samsung, Amazon, International Business Machines Corporation, Google, Microsoft,
Hewlett-Packard, Sony, and LG are working around the clock to try and gain a competitive
advantage on Apple (Jurevicius, 2016). If anything, competition can expect to increase when
Apple decides to enter more markets. Because Apple has higher prices, one innovative product
created by another company and sold at a cheaper price could be devastating for Apple.
Although Apple has been able to get away with their “high-quality, high-price” scheme in recent
years, I would not rule out the possibility of a newer, cooler, cheaper product being put on the
market by a competitor.
Although the internet is a blessing, it also can act as a huge threat to Apple. With Apple
being established mainly in the music industry, the internet in general is a major threat. Besides
the competitors of music such as Pandora and Spotify, the illegal streaming, uploading, and
downloading of music files can take away millions of dollars of revenue for Apple each and
every year. I believe that Apple Music will have a positive impact on the company because it is

so easy to access and stream, much like illegal music files. Internet reviews can also be a huge
threat for Apple. You can’t produce a faulty product without catching major backlash on the
internet via customer reviews, blogs, and magazine articles, and one wrong move by Apple could
have many consumers moving on to another brand.
Porter’s Five Forces
Porter’s five forces are: threat of new entry, buyer power, supplier power, competitive
rivalry, and threat of substitution. These forces, named after Harvard professor Michael E.
Porter, identifies opportunities and threats within an industry.
The first force is the threat of new entry. In order for a new entrant or new competitor,
one must find out a way to provide better products and services at more affordable prices. Since
Apple has such a vastly recognized, strong brand image, all combined with incredible customer
service and top notch innovation and billions of dollars, it would be extremely difficult for any
new entrant to compete. This threat is extremely low to Apple.
The next force we will discuss is buyer power. In business, the more customers a
company has, the less negotiating power one solo customer will have. Apple does a good job at
keeping switching costs high, which is the negative cost that a consumer suffers as a result of
changing suppliers. Apple does this by keeping all products under the same operating system,
and by making all products extremely compatible. Apple also carefully broadens its product flow
and innovation by making sure each product runs on iOS. Changing operating systems would
force a major change in the entire company. Just like threat of new entry, this threat is also low.
Supplier power is another force that we will discuss. Supplier power is the bargaining
power of suppliers which is determined by the uniqueness and demand of the supplier’s

products. Apple neutralized a major portion of this threat by designing their own chips after
lawsuits with Samsung, taking away Samsung’s supplier power (Wood, 2010). Apple also
reduced the power of manufacturers such as Foxconn by buying manufacturing equipment and
only utilizing that equipment for Apple products. Another threat that was eliminated by Apple
was the power of distributors, and this was done by selling products and services through their
own Apple store. Supplier power threat is extremely low against Apple as well.
Competitive rivalry, which is the number of companies that Apple is up against, is a bit
more of a threat than the previous three. Companies struggle to make themselves unique,
however, and Apple has not. Apple has done a wonderful job at avoiding price-based
competition by staying away from low-end markets where the price is the main differentiator.
Apple has separated itself from other companies by creating extremely high-end products, and
customers have noticed. Although prices are high, customers stay consistent at purchasing Apple
products and keeping them at the top of the market. However, it only takes one product release
from another company that is just as functional and more affordable to knock Apple down a few
notches.
The last force is threat of substitution. This is when a product satisfies the same needs as
Apple’s products being offered. Threat of substitution can be tied in with competitive rivalry,
and that is why this threat is also medium. Apple has dealt with this in the past by manufacturing
cheaper alternatives of their higher-end products, like the plastic-framed iPhone 5C, for example.
However, as similar to the threat of competitive rivalry, it only takes one more affordable
product that satisfies the same needs as Apple’s products to step above Apple in any market.

Apple Financial Evaluation
Apple has been one of the most successful, respected and profitable companies in the
business world for quite some time. However, over the last three years or so, Apple’s sales
growth has slowed down a considerable amount. This can probably be related to the explosion of
smartphone and tablet market in 2013 finally coming to a halt. The numbers now point more
toward moderate growth levels. From 2011 to 2012, Apple’s net sales soared from $108 billion
to $157 billion, a 45% increase. In 2013, sales climbed only 9%, reaching $171 billion, and a 7%
increase in 2014, coming to $183 billion (Wood, 2010). As stated before, this can be blamed on
the smartphone and tablet explosion finally slowing down and leveling out.
Apple’s Gross Margin was fairly consistent since 2012. Gross margin indicates the
percentage of revenue available to cover expenses. In 2012, Apple’s Gross Margin was $68
billion. In 2013, it lowered to 37.6%, or $64 billion. In 2014, Apple’s Gross Margin was $70
billion, or a 38.6% gross margin percentage. Overall, Apple’s gross margin improved from 2013
to 2014 (Wood, 2012).
Apple has done a good job at expanding their target market internationally. In the United
States from 2012 to 2013, Apple’s net sales went from $57 billion to $62 billion, a 9% change.
From 2013 to 2014, net sales climbed 4%, from $62 billion to $65 billion. From 2012 to 2013 in
Japan, net sales rose at a tremendous level of 27%, from $10 billion to $13.5 billion. The next
year, they climbed 11%, from $13.5 billion to almost $15 billion. The greater China are also saw
an increase in net sales from 2012 to 2013, rising 13% from $22.5 billion to $25.4 billion. The
next year, sales in China rose 17%, from $25.4 billion to $29.8 billion. The only time Apple saw
negative net sales was from 2013 to 2014 in the Asia-Pacific region. Sales in 2013 registered at

$11.1 billion and fell by 7% to $10.3 billion in 2014 (Wood, 2010). Overall, Apple has done a
good job both nationally and internationally at keeping their sales on the rise.
Apple has also done a good job at keeping their operating expenses under control. From
2012 to 2013, Apple used only 9% of their net sales for operating expenses, $13.4 billion and
$15.3 billion. 2014’s percentage rose slightly to 10%, when apple used $18 billion for total
operating expenses (Wood, 2010). Currently, Apple (AAPL) stock via NASDAQ sits at $96.85 a
share. Apple’s profitability gross margin is 38.49, operating margin is 28.81, net margin is 23.09,
and ROE is 46.25. Apple’s current liquidity ratio is 1.11, while their quick ratio is 1.08 and cash
ratio is 0.52. Apple has a strong price to sales ratio at 2.87, and a strong price to book ratio at
5.36. Apple’s price to cash flow ratio is extraordinary, at 8.18 (NASDAQ, 2016).
Conclusion
Apple has been one of, if not the most successful company in the world for the last
decade. Being America’s first publicly traded company to close above $700 billion in market
value and sitting on billions of dollars in cash and assets with zero debt, Apple has worked very
hard to get where it is today as a company. However, in order for Apple to grow financially and
internationally, key aspects like market competition, continued innovation and brand recognition
must be focused on.
The more markets Apple decides to invest products and services in, the more competitors
they will face as a company. Apple already faces a massive amount of competitors in the
technology industry, in locations such as computers, cellular devices, fitness, applications,
music, and gaming. If Apple decides to pursue the idea of the Apple Car, they will enter a
massive automotive industry that can be ruthless. In my mind, Apple must tread lightly in what

markets they intend to enter in the future. One wrong move could cost Apple billions of dollars
and millions of customers.
Continued innovation should also be a huge focus in the future. Apple has always done a
wonderful job at staying ahead of the game in both the computer and cell phone market by
creating high quality products with excellent customer service. Although their products are sold
at high prices, Apple’s dedicated customers are willing to pay for the quality and services they
get. Since Apple is constantly coming up with new, innovative technology and remodeled
versions of older products, customer increase can be expected. As long as Apple continues their
yearly releases of new versions of iPhones, iPads and Macbooks, they will continue to succeed in
the technology industry.
Apple’s brand recognition must be used to their advantage in order to stay a successful
company. One Apple’s biggest strengths is its brand recognition and strong brand image. Brand
and customer loyalty is what helps keep them at such a high level: the strength of customer
loyalty means that not only do they retain customers, but they also receive millions of new ones
via current customer recommendations. These recommendations are usually taken seriously too,
because of their strong brand image. As long as Apple continues to retain loyal, happy
customers, they will be successful.
One recommendation I have for Apple is that it should attempt to enter the lower end of
the cellular market. Because the smartphone boom has almost come to a halt and sales have
slowed, Apple won’t be seeing another major spike in iPhone sales unless they come up with
something extremely innovative and semi-affordable. If Apple can sustain moderate growth
levels in the smartphone industry by selling their current products at high prices, they may want
to consider targeting a lower income market. Although the iPhone 5C didn’t work out as Apple

planned, it was only a trial. If Apple can come up with another smartphone that is more
affordable, they should be able to generate new customers. My recommendation would be to
attack this new idea when sales start to even out year to year. With a 7% increase of sales from
2013 to 2014, I would not recommend Apple consider this move just yet (Wood, 2010). Apple is
one of the world’s most respected, iconic companies and is highly successful because of their
methods in innovation, sales, marketing, distribution, investment and creation. I believe that
Apple will only continue in success as technology continues to improve.

References
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2016, from http://www.stock-analysis-on.net
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http://www.apple.com/watch
Jackson, E. (2013, February 26). The 5 big problems facing Apple – none of which is too much
cash. Forbes. Retrieved February 28, 2016, from http://www.forbes.com
Jurevicius, O. (2016, January 4). Apple SWOT analysis 2016. Strategic Management Insight.
Retrieved February 28, 2016, from http://strategicmanagementinsight.com
Kingsley-Hughes, A. (2015, December 7). Three huge challenges facing Apple in 2016. ZDNet.
Retrieved February 28, 2016, from http://www.zdnet.com
NASDAQ. (2016, February 28). [AAPL Investing]. Unpublished raw data. Retrieved February
28, 2016, from http://www.marketwatch.com
Satariano, A. (2014, September 4). For iPhone 6 defects, Apple has failure analysis team ready.
Bloomberg Business. Retrieved February 28, 2016, from http://www.bloomberg.com
Smithson, N. (2015, September 07). Apple. Inc. SWOT analysis & recommendations. Panmore
Institute. Retrieved February 28, 2016, from http://www.panmore.com
Wood, M. B. (2010, February 11). Case 16. The Marketing Plan Handbook (4th ed.). Prentice
Education.

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