Apple Incorporation - Case Analysis

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Apple Incorporation

Case Analysis

Submitted by:

Billy Sainz

MGT 6359

Dr. Jifu Wang

University of Houston - Victoria

Fall 2004

Table of Contents

Executive summary 04

Company history 04

Company Strategy 05

External analysis 07

General environment analysis 07

Demographic segment 07

Economic segment 09

Political/legal segment 10

Socio-cultural segment 11

Technological segment 12

Five forces model of competition 12

Threat of new entrants 12

Bargaining power of suppliers 13

Bargaining power of buyers 13

Threat of substitute products 13

Rivalry among competing firms 13

Opportunities 13

Threats 14

Industry Structure 16

Market size 16

Industries' dominant economic features 16

Distribution channels 16

Competitors: strongest - weakest 16

Rivals anticipated strategic moves 17

Economies of scale 17

Key success factors 17

Technology related 17

Manufacturing related 18

Distribution related 18

Marketing related 18

Skills related 19

Organizational capabilities 19

Driving Forces 20

Internal Analysis 22

Organizational description 22

Corporate Vision/Mission 23

Long and short range objectives 23

Financial objectives 23

Strategic performance 24

Employee relations 25

Products and services 25

Corporate culture, values, and morals 26

Core competencies 26

Financial Performance 27

Liquidity 27

Merchandise inventory turnover

Current ratio

Inventory turnover in days

Operating cycle

Profitability 28

Return on assets

Return on operating assets

Return on total equity

Net profit margin

Gross profit margin

Long Term 29

Debt ratio

Debt Equity

Debt to tangible net worth

Investor 30

Earnings per share

Price/earnings ratio

Percent of retained earnings

Dividend payout

Dividend yield

Year-end market price 30

Strengths 31

Weaknesses 33

Recommendations 34

References 38

Executive Summary

Apple Computers started the movement into the personal computing arena in 1977 but through changes in management and differences of opinion together with missed opportunities it lost its competitive advantage to companies like Microsoft, Dell, and Gateway. Apple operates in various lines of the computer and music industry today and its operations include not only the designing but also the manufacturing of its computers and software. Apple continues to pursue the personal computer market but not as intently as in the years before. It has opted to change directions a little by venturing into the music world through the marketing of iPod, a digital music player, and iTunes. The opening of 65 new retail outlets, including one in Japan, has precipitated its move into this new world.

Apple continues to work on providing innovative products for its customers but marketing to such as small market has caused some problems. Its market share has been reduced to below 5% and its operating system differs considerably from the Wintel operating system used my dominant Microsoft. Costs of maintaining this difference have increased in comparison to those utilizing the competitive operating system. Software designers are not as enthused about writing programs to support Apple's operating system because of limited potential sales. The advantages that seem to come into Apple's laps are quickly removed because competitors are able to copy, steal, and share them. The one advantage that Apple possesses is its operating system but it has failed to convince the world of its superiority. The operating system in possession has not encountered the problems that Microsoft and its fellow operating systems have encountered. Microsoft upgrades have been plagued with virus and other programming problems, including the ability of hackers breaking into the system and accessing ones computer from another remote spot.

Apple has not capitalized on these problems. It has gained a few customers but nothing in the numbers required to turn the company upwards in reclaiming considerable market share. Apple customers are a devoted group that understand the superiority that they possess but convincing the other 95% of the world because a rather large task.

This case study is to begin with a general environmental analysis that will encompass the demographic, economic, political/legal, socio-cultural, and technological segments. It will cover Porter's five forces and provide insight of the opportunities and threats that Apple faces. The industry structure will be dismantled so that market size, distribution channels, strongest and weakest competitors, and anticipated strategic moves of rivals is captured. Economies of scale and key success factors will be listed along with financials so that a direction can be logically surmised. An internal analysis will also be included so that Apple's mission, vision, and financial objectives are understood. Products and services will be dissected, as will its corporate culture, values, and morals. The core competencies will be noted together with value chain analysis so that Apple can better define it true advantages for continued successful operation in the future. Recommendations will be provided, listing the pros and cons of each, so that Apple management can consider implementation for strengthening their position within the computer and digital music industries.

Company History History of Apple, (2004); History of Apple, Inc. (2004)

In April 1976, college dropouts, Steve Wozniak (26 years old) and Steve Jobs (21 years old) founded Apple Computer. They actually partnered up a few years before when Wozniak, was a self-taught engineer, began building boxes that allowed people to make long-distance phone calls for free. The sell of a few hundred of the boxes led to a continuation that resulted in Wozniak working on the Apple I computer box. The team had sold their van and two calculators to raise the $1300 in start-up money prior to building them in Job's garage. The team sold over 200 to computer hobbyists in the San Francisco Bay area. Wozniak began working on the Apple II and Jobs hired high school computer enthusiasts for building of circuit boards and for designing software. Steve Jobs came up with the idea of placing the circuitry into an attractive modular beige plastic container. Both were trying to provide customers (computer enthusiasts) with a smaller user-friendly computer.

Jobs sought the help of Regis McKenna, a successful advertising relations firm owner, to develop an advertising strategy for the company. McKenna designed the Apple logo and advertised it personal computer magazines. By June 1977 sales reached $1 million and in 1978 they increased to over 35,000 computer sales. Growth continued at miraculous rates that in 1980 the company went public and sales were up to $117 million. Wozniak left three years later and Steve Jobs hired Pepsi Company's John Scully as president. The company experienced a few failures and in 1984 the unveiling of the Macintosh set the stage for Apple's rise and recognition as a household name. Jobs and Scully difference of opinion led to Jobs leaving in 1985. This is about the time that Bill Gates and Microsoft were asking Apple to license its products and make the Microsoft platform an industry standard.

Apple had established itself as a player in the corporate world with entry into the desktop publishing world, with the Mac Plus and Laser Writer printers. Competition in the late 1980s from the Microsoft Windows operating system combined with Apple's failure of the Newton hand-held computers caused earnings to drop dramatically. John Scully resignation and the workforce reductions took its toll as the company tried to shift gears to licensing its operating system to Macintosh clone producers. The strategy of marketing the licenses with intent of building market share actually backfired and lost Apple considerable amount of money and market share. Software was created to allow the Macintosh to connect to IBM-based systems and Apple's sales soared to over $4.07 billion.

In 1997, CEO Gilbert Amelio purchased Steve Job's company NeXT software with hope of creating Apple's next generation operating system. The move did not work and in 1998 CEO Amelio was thrown out and Jobs was placed back into the CEO position. Jobs quickly moved into a deal with Microsoft, cut cloning company licenses, stopped production of Newton handheld devices and printer products, and integrated its Claris software into its main offices. During this timeframe, Apple successfully introduced the iMac and iBook product lines and continues to push them in the consumers and education markets. It also has G4 portable and desktop versions that are marketed with focus on the designing and publish markets.

Company Strategy History of Apple, (2004); History of Apple, Inc. (2004)

The transformations that occurred during the years from inception to present day have included many strategic management variations that drove the equipment and software changes. Wozniak and Jobs initial strategy was to create a small desktop user-friendly computer for the computer enthusiasts. Strategy shifted to manufacturing of the Apple II for the consumer industry. As sales increased, management continued to alter its strategy in order to capture as much market share as possible. It decided to work on the Apple III so that it could break into the office market dominated by IBM. This drive became so strong that Apple prematurely released the Apple III without it undergoing extensive line testing. The product was defective, production was halted and problems repaired but Apple never sold as many of the Apple IIIs as it did of the Apple II. Some management decisions in strategic direction do prove to be wrong so Apple management regrouped and increased R&D spending to the tune of $21 million. Jobs was determined to create an un-intimidating computer that anyone could use and he pushed this strategic concept by introducing the Lisa computer complete with mouse, hand-controlled pointer, and displayed pictures that substituted for keyboard commands.

The strategy shifts can easily be compared with the increase in the customer focus. The move of the spotlight from the computer enthusiasts to the office market consumer is a large increase in directional focus. Jobs vision was to create a "people's computer" designed for people with little technical knowledge. During this trek it was suppose to take away some of IBM's business office market share. The introduction of the Macintosh in 1989 did do that but it was a short-lived core competency that could easily be duplicated. In fact, in the same year, IBM marketed a new operating system that mimicked the Macintosh's ease of use so Apple began to look at multi-tasking functions. During his time as CEO, John Scully had moved the company into the consumer and education computer industry. Apple had also expanded into the global markets during its first few years.

The best of strategies cannot overcome the problems that result due to management unrest or battle of strength amongst management. When Scully was forced out, Michael Spindler licensed Apple's technology to outside firms that eventually ate away at profits. Spindler was also responsible for the introduction of the Power Macintosh in the mid 90s that served as another example of Apple having the right products needed by the market but not the right people to help promote them. Management under Spindler grossly underestimated demand and the resulting $1 billion of unfilled orders caught the eyes of Wall Street and the stock plummeted 15 percent.

Gil Amelio replaced Scully and drastic directional change ensued but even his best-cost cutting strategy took the company from a $70 per share price to $14 and market share decreased from 16 percent to 4 percent. The strategy was good but management was not. Amelio did accomplish the purchase of NeXT along with bring Steve Jobs back as the advisor that eventually took his job. Strategy was realigned with the intent of what had once been. Jobs cut out the licenses, eliminated 15 of 19 products, and withdrew Apple from the printer, scanner, and portable digital assistant business. Apple, under the direction of Jobs, became focused on desktop and portable Macintoshes for professional and consumer customers.

The move was a refocusing of Apple's strategy to supplying a computer that was not only reasonably priced but also popular. Ten months of hard work resulted in the introduction of the iMAC so as the 1990s exited Apple had refocused its strategy as a pared-down version of its previous self. Apple is presently concentrating its business strategy on the digital hub, retail, and the educational sectors. Apple's 2003 annual reports noted that it is committed to bringing the best possible personal computing experience to students, educators, creative professionals, businesses and consumers around the world. It will do this through it innovative hardware, software, peripherals and Internet offerings, including Mac(tm) and the iTunes(r) Music Store(tm). Apple believes that personal computing has entered a new era. It seeks to provide a pathway for linking digital devices so that the consumer can add value through the interconnectivity. Apple feels that its position in being the only personal computer company that designs and manufactures the entire computer provides it an advantage in positioning to offer digital hub products and solutions.

Apple continues with its 2001 program of retailing. It opened 65 retail stores in 2003 and nine during the first quarter of 2004. One of the stores in 2004 was Apple's first international store located in Tokyo, Japan. Stores are strategically located in quality shopping malls and in urban shopping districts. The retail outlets are intended to expand its customer base by bringing in first time computer buyers and attracting those wanting to switch to the Macintosh platform. It can control the retail experience and enhance it by employing knowledgeable personnel and by providing post-sale advice and support. It also offers many third-party products that complement the Company's own products.

Apple continues to provide technological products for the educational sector. It feels that classroom instruction will be enhanced through the integration of technology and that students will be able to attain higher levels of achievement while schools maximize their investments. The last important business strategy sector is the creative profession. This sector is one of the most important markets for Apple's hardware and software products. The company designs its hardware solutions with the creative professional in mind. Specific customer focus is part of Apple's strategy.

External Analysis

General environment analysis

Companies engaged in manufacturing electronic computers are listed under SIC code 3571 and/or NAICS code 334111. Electronic computers are machines that 1) store processing programs and data necessary for program execution, 2) can be freely programmed to user requirements, 3) perform arithmetic computations, and 4) execute processing programs that requires modification of execution by logical decision without human intervention. Personal computers fall into this category (OSHA, 2004).

The electronic computer industry has been struggling since early 2000 when the economy weakened. The US Census Bureau reported a decrease in computer shipments from 1999 $64.7 billion to 62.9 billion in 2000 and continued downward to $49.3 billion in 2001. Unit shipments also declined from 27.2 million (2000) to 22.7 million in 2001.

Rising unemployment and anticipated war with Iraq assisted in reducing the number of computer purchases. The terrorist attack on the Pentagon and the Twin Towers in New York City also added to the decrease. Much equipment was available at reduced costs due to the bankruptcy of many Internet companies in the early 2000s. IDC also reported in 2001 that Dell, Compaq, Hewlett-Packard, and IBM controlled over 40 percent of the world PC shipments. Hewlett-Packard purchased Compaq and became a formidable power competitor for Dell. The control of this large a portion of market share is something Apple would have to contend with each step of the way (Electronic Computer Industry, 2004).

Demographic segment

The United States population 2003 census data was estimated at 281,421,906 inhabitants and Oct. 05, 2004 is estimated at 294,444,408. This is an increase of 13 million people in just a little over four years. Increases in population combined with the advances in technology will continue to drive increased sales in future computer markets (Factfinder.census, 2004).

The same Census bureau report broke down the ages into the groups listed in the Table01 below. Americans begin using computers in the early years so the younger age data are listed on Table 02. Survey of the numbers easily points out that a majority of the American population is of age to readily use a computer in some form or fashion. Even some of the older generations are experimenting with computer use. USA Today back in September 1997 published an article that claimed that 10% of seniors own a PC and that 25% of those have Internet access (USA today, 1997 and www. census.gov, 2004).

Table 01

Median age (years)

36.0

35.8

36.2

8 years and over

210,275,463

210,248,306

210,302,620

21 years and over

99,698,589

99,625,188

99,771,990

62 years and over

40,626,693

40,553,362

40,700,024

65 years and over

33,896,172

33,867,171

33,925,173

Male

4,380,551

4,359,090

4,402,012

Female

9,515,621

9,494,235

9,537,007

Table 02

Under 5 years

9,679,781

9,653,996

9,705,566

5 to 9 years

9,741,730

9,636,901

9,846,559

0 to 14 years

21,144,669

21,038,575

21,250,763

5 to 19 years

8,856,479

8,810,858

8,902,100

Tables taken from U.S. Census data http://www.census.gov/acs/www/Products/Profiles/Single/2003/ACS/Tabular/010/01000US1.htm

The domestic populace included 84 percent of people 25 years and over who had at least graduated from high school and 27 percent had a bachelor's degree or higher. The group also included approximately 8 percent dropout rate of the 16 to 19 year old group. Enrollment for 2003 was 75.1 million students. The median income was $43,564 of which 80 percent of the households received earnings and 17 percent received retire income other than Social Security. Thirteen percent of the population was considered to be living in poverty.

The group's occupational status was broken down into the following categories by percentage.

34 % Management, professional, and related occupations,

36% Sales and office occupations,

16% Service occupations,

13% Production, transportation, and material moving occupations,

10% Construction, extraction, and maintenance occupations (Census.gov, 2004)

The world population estimation for 2005 is 6,449,000,000 people and for 2010 it is 6,812,000,000. Increases for the future can be see in Table 03. The computer industry will be required to support the increases. The computer industry is growing rapidly in the Asian market and number indicates that a majority of the population growth will be concentrated into that area.

Table 03

Economic segment

Computer requirements are increasing across the globe. Data collected and shown on Table 04 has all but 4 countries increasing the number of computers being used per 1000 individuals within each respective country. The data was not restricted to PC type computers but listed computer use in general so Apple computers were included within the data gathered even though it is undergoing a market share loss of computer sales. Table 05 further supports the increased use.

Table 04

Computer by Country

Rates per 1,000 persons. See text of this section for general comments about the data.

YEAR

2000

2001

YEAR

2000

2001

YEAR

2000

2001

Algeria

6

7

Guatemala

0

3

Panama

32

36

Argentina

51

91

Honduras

0

2

Peru

36

49

Australia

465

516

Hungary

85

00

Philippines

20

22

AustriA

276

335

India

5

6

Poland

69

85

Belgium

344

233

Indonesia

0

1

Portugal

05

17

Brazil

44

63

Iran

56

70

Puerto Rico

(NA)

(NA)

Bulgaria

27

(NA)

Iraq

(NA)

(NA)

Romania

27

36

Canada

390

460

Ireland

365

391

Russia

43

50

Chile

85

07

Israel

254

246

Saudi Arabia

57

63

China

6

9

Italy

209

95

Singapore

483

508

Colombia

34

42

Jamaica

43

50

South Africa

62

70

Cuba

0

20

Japan

315

349

Spain

43

58

Czech Republic

22

46

Korea, South

90

461

Sweden

507

561

Denmark

432

540

Kuwait

21

20

Switzerland

502

538

Dominican Republic

(NA)

(NA)

Lebanon

46

60

Syria

4

6

Ecuador

20

23

Malaysia

05

26

Taiwan

225

253

Egypt

2

6

Mexico

51

69

Thailand

24

28

Finland

396

424

Morocco

1

4

Turkey

38

41

France

305

337

Netherlands

395

429

United Kingdom

338

366

Germany

336

382

New Zealand

360

393

United States

585

625

Ghana

3

3

Norway

491

508

Uruguay

00

10

Greece

70

81

Pakistan

4

4

Venezuela

46

53

http://www.census.gov/acs/www/Products/Profiles/Single/2003/ACS/Tabular/010/01000US1.htm

Table 05

Exports felled from $9.6 billion in 2000 to $8.8 billion in 2001 with Canada being the largest regional market for US computer sales (23% of U.S. exports). Asia and Europe accounted for two-thirds of the total exports. Imports of computers dropped from $13.6 billion in 2000 to $12.2 billion, a 15 percent drop. Most of the imports are from Asian sources with Latin America and Europe serving as secondary sources (Electronic Computer Industry, 2004).

Political/legal segment

Apple faces political/legal segment issues both domestically and abroad. Domestically the Federal and State government continues to tighten up on the environmental issues that constrain manufacturing and disposal of the units.

Environmental concerns are issues that directly affect each computer manufacturer. The Environmental Protection Agency updated EPA/310-R-95-002 "Profile of the Electronics and Computer Industry Code in the September 1995. This document provides directives that must be adhered to by companies manufacturing computer components (EPA site, 2004). Apple has willfully promoted the buyback and proper disposal of computer parts in effort to promote product stewardship (Table 06) from the environmental perspective (Apple website, 2004).

Table 06

Apple Environmental Programs

990

Apple's environmental policy released and implemented

991

Phase-out of lead in batteries in advance of the 1996 European battery directive

992

Phase-out of chlorofluorocarbons (CFCs) in Apple manufacturing, as stipulated in the Montreal Protocol on Substances That Deplete the Ozone Layer
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Founding member of the U.S EPA ENERGY STAR(r) product labeling program, developed to identify and promote energy efficient computers and monitors

994

Phase-out of NiCad batteries in advance of the 1996 European battery directive

996

First voluntary Apple product take-back program initiated in Germany (gradual expansion to other regions)

First Apple manufacturing site (Sacramento, CA) ISO 14001 certified

997

First Apple products TCO (Swedish Confederation of Professional Employees) certified

999

Introduction of the Apple Product Environmental Specification (APES) files

2000

All Apple manufacturing sites ISO 14001 certified ...

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