Apple 2005

® 2007, Tony Gauvin, UMFK

Apple Computer Inc.2005

A Strategic Management Case Study

Graphics are the property ofApple Computer

® 2007, Tony Gauvin, UMFK2

Overview• A brief history of Apple Computer• EOY 2004

– Mission, Vision, Objectives, Strategies• 2005

– New Vision and Mission• External Analysis

– Opportunities & Threats – CPM– EFE

• Internal Analysis– Financial Data– Strengths and weaknesses – IFE– Financial ratios

• Strategic Analysis – SWOT Matrix– SPACE– BCG– IE matrix– Grand Strategy Matrix– Matrix Analysis– QSPM

• Possible alternative strategies• Our Recommendation

– Strategies – Long range objectives– EPS/EBIT

• Implementation Issues• Proposed annual objectives (goal) and

polices• Proposed procedures for evaluation• Epilogue• Current Performance• Questions • Resources Utilized


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


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


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!


Lesson learned

+ =


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


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.


2004 Strategies

• Market Penetration– Branding– Niche player

• New Product Development – Speech recognition– Virtual reality


2004 objectives

• Double market Share from 5% to 10%

• Remain as the most profitable computer company in the industry


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?


A new vision

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


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).


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?


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.


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.


Apple CPM

Apple HP Dell

Critical Success Factors

Weight Rating Weighted Score

Rating Weighted Score

Rating Weighted Score

Market SharePriceFinancial PositionProduct QualityConsumer LoyaltyAdvertisingManagementGlobal ExpansionInnovationWeb Development

0.100.100.150.150.150.040.060.060.140.05

2234444243

0.200.200.450.600.600.160.240.120.560.15

3343223222

0.300.300.600.450.300.080.180.120.280.10

4433333323

0.400.400.450.450.450.120.180.180.280.15

Total 1.00 3.28 2.71 3.06


Apple EFEKey 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 individualistic and name brand conscious.

0.15 4 0.60

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 software.

0.10 2 0.20

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 price.

0.10 3 0.30

The population at large unwilling to use Macintosh. 0.10 2 0.20

TOTAL 1.00 3.20


Consolidated Balance Sheet


Consolidated statement of operations


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.


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.


Apple IFE Key Internal Factors Weight Rating Weighted Score

Strengths

iTunes Music Store is a good source of revenue, especially with the iPod and the availability on Windows platform.

0.15 4 0.60

Apple’s niche audience provides the company with some insulation from the direct price competition.

0.10 3 0.30

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 and sales.

0.10 4 0.40

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 publishing.

0.04 2 0.08

Total 1.00 2.78


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.) 4.3 3.8 5.8


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


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


Apple Stock Performance

http://moneycentral.msn.com/investor/charts/charting.asp?symbol=AAPL



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


Strategic Analysis Swot Matrix

F. SWOT Matrix

Strengths Weaknesses

1.iTunes Music Store is a good source of revenue, especially with the iPod and the 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.7.Good brand loyalty.

1.Weak relationship with Intel and Microsoft.2.Weak presence in business arena.3.Dependency on new product launches.4.Weak presence in markets other than education and publishing.5.Slow turnaround on high demand products.

Opportunities S-O Strategies W-O Strategies

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.

1.Increase awareness through the Web of the immunity of Mac products to worms and viruses. (S5, O1)1.Advertise using individuals that will link Generation X & Y to the iTunes and other related products. (S1, O2, O4, O5)2.Use movies and music groups that are geared towards Gen X and Y to promote computers and laptops. (S3, S5, O2, O5)

1.Increase ties with Microsoft and Intel and their products.(W1, W2, W4 O2, O3)2.Promote to business the safety of having a worm and virus free computer by using Mac. (W2, W4, O1, O5).3.Expand production into Asia (W2, O4).

Threats S-T Strategies W-T Strategies

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.

1.Increase and promote the compatibility to Windows operating system. (S5,T1)2.Promote the originality of Apple computers and the different style and stable system that is worth the price difference in style, stability and speed. (S2, S5, T2, T4, T5)

1.Improve relationship with Microsoft and Intel so that companies will see them as compatible. (W1, W2 T1)2.Produce Wintel Compatible products (W1, T1).


Strategic Analysis Space Matrix

Financial Strength rating is 1 (worst) to 6 (best) Ratings1 3.02 3.03 4.04 5.05 5.0

Industry Strength rating is 1 (worst) to 6 (best) FS Total 20.01 4.02 4.03 5.04 2.05 3.0

Environmental Stability rating is -1 (best) to -6 (worst) IS Total 18.01 -2.02 -5.03 -2.04 -6.05 -2.0

Competitive advantage rating is -1 (best) to -6 (worst) ES Total -17.01 -5.02 -1.03 -1.04 -1.05 -2.0

CS total -10.0

LeverageWorking CapitalLiquidityReturn on Investment3 Year NEW income

Growth PotentialProfit PotentialFinancial StabilityEase of Entry into MarketLabor Cost

Rate of InflationTechnological ChangesPrice elasticity of DemandCompetitive PressureBarriers to Entry into Market

Market ShareProduct QualityCustomer LaylaityTechnological Know-HowControl over Suppliers and Ditribuors


Strategic Analysis Space Matrix

6

5

4

3

2

1

-6 -5 -4 -3 -2 -1 1 2 3 4 5 6-1

-2

-3

-4

-5

-6

IS

ES

CA

FSConservative Aggressive

Defensive Competitive


Strategic Analysis Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Strong Competitive

Position

Slow Market Growth

Weak Competitive

Position

Quadrant III Quadrant IV


Apple IE Matrix

I II III

IV V VI

VII VIII IX

IFE ScoresStrong Average Weak3-4 2-2.99 1-1.99

High3-4

Medium

2-2.99

Low

1-1.99

EF

E S

core

sGrow and Build

Hold and Maintain

Harvest or Divest

Segments RevenueProfit EFE IFEDomestic 54% 52% 3.5 2.6International 46% 48% 3.0 3.0

InternationalDomestic


Dogs

IVCash Cows

III

Question Marks

IStars

II

High1.0

Medium.50

Low0.0

High+20

Low-20

Medium0

Segments Revenue Profit Growth Rate Relative Market ShareDomestic 54% 52% 17 0.3International 46% 48% 5 0.2

Domestic

International

Apple BCG Matrix


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


Apple QSPMStrategic Alternatives

Key Internal Factors Weight Produce Wintelcompatible products

Expand production into Asia

Strengths AS TAS AS TAS

iTunes Music Store is a good source of revenue, especially with the iPod and the availability on Windows platform.

0.15 4.00 0.60 3.00 0.45

Apple’s niche audience provides the company with some insulation from the direct price competition.

0.10 --- --- --- ---

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


Apple QSPM

Key External Factors Weight

Produce Wintelcompatible products

Expand production into 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 brand conscious.

0.15 1.00 0.15 4.00 0.60

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


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


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.


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.


EPS/EBIT

• $ Amount Needed: $5,100 M– Strategy 1 & 2

• Stock Price: $75

• Tax Rate: 26%

• Interest Rate: 5% (2006)

• # Shares Outstanding: 842M


EPS/EBIT

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 $3,000,000,000Interest 0 0 0 257,500,000 257,500,000 257,500,000EBT 500,000,000 1,500,000,000 3,000,000,000 242,500,000 1,242,500,000 2,742,500,000Taxes 130,000,000 390,000,000 780,000,000 63,050,000 323,050,000 713,050,000EAT 370,000,000 1,110,000,000 2,220,000,000 179,450,000 919,450,000 2,029,450,000# Shares 910,666,667 910,666,667 910,666,667 842,000,000 842,000,000 842,000,000EPS 0.41 1.22 2.44 0.21 1.09 2.41

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

70 Percent Debt - 30 Percent Stock70 Percent Stock - 30 Percent Debt


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?


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


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


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%


Current Stock Performance




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


Questions

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Documents

Apple 2005