Apple Strategic Analysis The Technology Industry and Apple

Apple Strategic Analysis: The Technology Industry and Apple Inc. Team #1 Jade Black Lauren Heldreth Taylor Hutcherson Roger May Kody Roach

Hardware and Software Industry Analysis

Industry Analysis � Is a blue ocean possible? � How to compete in difficult times? � Current changes and trends.

Chief Business and Economic Characteristics � Moore’s Law � Customers � Strategic alliances � Resources

Driving Forces for Change � Pricing pressure � Consumer � Computers � Rising preferences as a commodity markets

Five Forces Model � Apple V. The rest � Barriers may create leverage � Substitutes � Power of the buyers � Power of suppliers

Industry Competitive Positioning � Microsoft �Product depth �Product advancement �Google competition

Industry Competitive Positioning � HP �Comprehensiveness �Technology Solutions Group, Personal Systems Group, Imaging and Printing Group �Doing everything may cause doing nothing

Industry Competitive Positioning � Dell �Moves against HP and IBM �International focus �Expansion of products

Industry Competitive Positioning � Apple �Constant innovation �Products �Marketing

Key Success Factors � Finances � Differentiations � E-Commerce � Distribution Channels � Constant innovation

Overall Industry Attractiveness � Apple competes within two industries; Electronic Computer Manufacturing and Software Publishing. Within these two industries there are many different competitors that embody many different characteristics.

Overall Industry Attractiveness Computer Manufacturing Industry � The immediate short term lasting through most of 2010 has forecasted sales declining initially with a moderate increase to pre-recession levels later in the year. � The key for future sales in the computer manufacturing industry is in smaller, more portable, wireless devices such as smartphones, netbooks, and pdas. � Netbooks represent major growth. � Stripped down laptop without bells and whistles. � Cellular based wireless internet. � The manufacturer with the largest growth in netbook shipments is Asus. Tek. ○ Asus is the lead provider of netbooks. ○ In 2008 Asus. Tek had an annual growth of 115% from the year previous. This is more than double the growth of the nearest competitor, Acer.

Overall Industry Attractiveness Software Publishing Industry � The software industry is closely linked with the computer manufacturing industry. � The main areas of opportunity fall within those of the developing countries. � The strategy for focusing on developing markets is still a bit stunted by the current economic state. � Through the recession as companies downsize and productiveness drops so does the need for software. Overall sales are predicted to decline close to 2% from 2008 levels but will increase over 1% by 2010. � Operating systems account for a relative large portion as there are only 2 main players for the personal computer market. � The issue of piracy for the industry as a whole is becoming an increasingly important issue as one third of all moneys spent on software was pirated. � The two major players are Microsoft’s Windows platform and Apple’s Os X. � The main advantage that Microsoft has is that it allows flexibility for other manufacturers to license its operating system for use whereas Apple will only allow their operating system to be used on Apple computers. � This vertical type integration has allowed for Apple to excel in some areas but its major downfall still remains product price and market penetration, something that Microsoft is well ahead of everyone else in.

Apple, Inc. Company Analysis

Company History � � � � Apple was founded in 1976 by Steve Jobs and Steve Wozniak in Santa Clara Valley, CA. The two built the first Apple computer in a garage and sold it without a monitor, keyboard, or casing. By 1977, Apple added a keyboard, color monitor, and eight peripheral device slots; this caused sales to jump from $7. 8 million in 1978 to $117 million in 1980. In 1984, Apple introduced the Macintosh in order to rebound from earlier failed products. Jobs pushed out of Apple in 1985. That same year, Sculley ignored Bill Gates' request for Apple to license its products and make Microsoft an industry standard. The late 1980 s brought new competition from Microsoft, whose Windows operating system featured a graphical interface similar to Apple's. Apple sued but lost its claim to copyright protection. In the early 1990 s, Apple’s earnings fell considerably. In 1994 Apple began licensing ‘clones’ of its OS. By 1996, Apple realized Mac clones were stealing sales.

Company History Cont. � � � � � In 1997 Jobs resumed the position of CEO. Jobs formed an alliance with Microsoft, and to protect market share, Jobs also stopped the cloning license to get rid of the Mac Clones. In 1998, Apple reentered the industry with its colorful array of i. Macs. In 1999, Apple introduced a laptop (i. Book) and began selling built-to -order systems online. Apple started 2001 Apple opened a chain of retail stores in the US. Also in 2001 Apple introduced the i. Pod. Over the past few years, Apple has introduced many new products. In 2005, it was the i. Pod nano, as well as the video i. Pod. In 2007, Apple unveiled the i. Phone. The company began 2008 with the release of an Apple TV device with a new i. Tunes movie rental service. Also, in 2008 to reflect the increasing span of its product types, the company announced it would change its name from Apple Computer to just Apple.

Product Mix � “Apple offers a wide range of personal computing products, mobile communication devices, and portable digital music and video players, as well as a variety of related software, services, peripherals, networking solutions and various third-party hardware and software products. Apple also designs, develops, and markets the i. Phone and its family of i. Pod digital music devices along with related accessories and servies, which include third-party digital content and applications through i. Tunes. Apple also offers its own software products, including operating systems server software, professional application software, consumer software, education software and business oriented software. ” (Apple 10 K)

Product Mix � The Mac desktop and portable systems feature Intel microprocessors, and Mac OS X Snow Leopard operating system and the i. Life suite of software for creating and managing digital photography, music, movies, DVD’s and websites �Mac. Book Pro �Mac. Book Air �Mac Pro �i. Mac �Mac Mini

Product Mix i. Phone � The i. Phone is basically a combination of an i. Pod, an internet communication device and a mobile phone. The i. Phone’s design and interface is based on the Multi. Touch user interface of the i. Pod. The i. Phone features email, web browsing, maps and is compatible with both Macs and Windows-based computers. The i. Phone automatically syncs users content from their i. Tunes libraries, as well as contacts, bookmarks and email accounts. The i. Phone also allows users to wirelessly access, in 3 G areas, the i. Tunes store to purchase and download audio, video, and applications Apple TV � Apple TV is a device that allows users to wirelessly play i. Tunes content on a widescreen television. The Apple TV includes a 160 GB hard drive capable of storing up to 200 hours of video, 36, 00 songs, or 25, 000 photos. The Apple TV is also compatible with high definition televisions with resolution up to 1080 p.

Product Mix Music Products and Services � Apple offers various products in the i. Pod family of portable digital music and video players. The i. Pod line comes with Apples i. Tunes. Apple’s i. Tunes sells music, audio books, music videos, short films, television shows, movies, podcasts and applications. Apple also sells i. Pod accessories through their online store, their retail stores and also through third parties. � i. Pod Shuffle � i. Pod Nano � i. Pod Classic � i. Pod Touch � i. Tunes 9

Present Strategy Overview Apple’s mission statement says that Apple, “is committed to bringing the best personal computing, mobile, communication, and portable music and video experience to consumers, students, educators, businesses, and government agencies through its innovative hardware, software, peripherals, services and internet offerings”. (Apple 10 -K) � Apples strategy is seen throughout all areas of business touching on Finance, Accounting, Marketing, HRM, and Management. � Apple’s vision statement is, “Man is the creator of change in this world. As such he should be above systems and structures, and not subordinate to them". Apple’s goal is to align these two. � Every Apple employee lives out this mission and vision in their everyday work. This contributes to the ultimate success of Apple’s business strategy. �

Present Strategy � Financial Analysis �Accounting and finance play a vital role as the lifeblood of a company; without responsible financial care a company will be unable to survive. Sustainable success requires a strategy that integrates finance with other key departments (e. g. management, marketing, etc…).

Present Strategy Key Financial Factors Sales Growth �Simplest way to determine who has the most desirable product. �Sales is relative to competitors and the industry. 80. 00% Apple 2005 2006 2007 2008 2009 68. 30% 38. 70% 24. 30% 35. 30% 12. 50% 70. 00% Microsoft 8. 00% 11. 30% 15. 50% 18. 20% -3. 30% 60. 00% Dell 18. 70% 13. 60% 2. 70% 6. 50% -0. 10% HP 8. 50% 5. 70% 13. 80% 13. 50% -2. 26% 50. 00% Apple 40. 00% Microsoft 30. 00% Dell 20. 00% HP 10. 00% -10. 00% 2005 2006 2007 2008 2009 • Apple increases its sales on a yearly basis by higher percentage than competitors. • Increase in sales in 2009. • Growth in 2009 can be attributed to increasingly strong sales of the i. Phone and i. Tunes.

Present Strategy Key Financial Factors Net Profit Margin � Measure of the net earnings in relation to the net sales. � Measures how much net profit remains out of each dollar of sales. � Gives us an indication of how well a company is controlling its costs and tells us how effective a company is at converting sales into actual profit. 35. 00% Apple Microsoft Dell HP 30. 00% 25. 00% 2005 9. 00% 32% 6. 80% 5. 40% 2006 10. 30% 28. 50% 4. 50% 6. 30% 2007 14. 60% 27. 50% 4. 80% 7. 00% 2008 14. 90% 29. 30% 4. 10% 7. 00% 2009 14. 80% 24. 90% 3. 10% 6. 70% Apple 20. 00% Microsoft 15. 00% Dell 10. 00% HP 5. 00% 0. 00% 2005 2006 2007 2008 2009 • Apple’s computers are assembled using mostly other company’s hardware; however, Apple writes their own operating systems. • Apple's software is only minor percentage of revenue, it plays an important part in their net profit margin because Apple does not have to pay a licensing fee for other company’s operating systems.

Present Strategy Key Financial Factors Net Cash Cycle � The net cash cycle is the number of days that cash is tied up in the operations of a business. � How long it takes for a company to turn raw materials or inputs into a product and then subsequently to turn that product into revenues and then to turn those revenues into cash at which point the process starts over again. 2005 2006 2007 2008 2009 72. 63 85. 49 96. 78 104. 07 75. 74 -25. 20 -4. 20 13. 10 -6. 00 -7. 50 Dell 5. 38 21. 09 37. 68 30. 63 43. 92 HP 96. 91 100. 99 82. 13 71. 15 79. 94 120. 00 Apple 100. 00 Microsoft 80. 00 Apple 60. 00 Microsoft 40. 00 Dell 20. 00 HP 0. 00 2005 -20. 00 -40. 00 2006 2007 2008 2009 • Apple's high net cash cycle due to not paying dividends and retaining a significant portion of profits as cash. • Holding significant amounts of cash makes Apple appear less efficient, it gives the company flexibility to invest in new companies or product lines, such as the i. Pod, i. Tunes, and the i. Phone. • Apple also has a large net cash cycle because the company has a large number of differentiated products which translates into a large number of suppliers and thus accounts payable.

Present Strategy Key Financial Factors Operating Cash Leverage � Deals with how an additional amount of sales will affect the net profits. � Sales volume changes have a lever effect on profit because a relative small increase or decrease in sales can have a much larger increase or decrease in profit. 2005 2006 2007 2008 2009 13. 10% 13. 90% 19. 70% 20. 80% 20. 50% 44% 39. 20% 39. 10% 40. 60% 39. 20% Dell 9. 30% 6. 20% 6. 60% 6. 50% 6. 00% HP 9. 10% 9. 70% 12. 00% 13. 10% 13. 00% 50. 00% Apple 45. 00% Microsoft 40. 00% 35. 00% 30. 00% Apple 25. 00% Microsoft 20. 00% Dell 15. 00% HP 10. 00% 5. 00% 0. 00% 2005 2006 2007 2008 2009 • Apple's sales have a high profit margin and thus a high degree of operating cash leverage.

Present Strategy Key Financial Factors Du. Pont Chart Model for determining return on equity (ROE). Return on equity measures corporations’ profitability by revealing how much profit a company generates with the money shareholders have invested. � Found by multiplying profit margin, assets turnover ratio, and the leverage ratio. � � 100. 00% 90. 00% 80. 00% 70. 00% 60. 00% Apple 50. 00% Microsoft 40. 00% Dell 30. 00% HP 20. 00% 10. 00% 2005 2006 2007 2008 2009 Apple 21. 09% 23. 74% 28. 63% 27. 97% 23. 50% Microsoft 22. 19% 31. 19% 43. 00% 52. 34% 38. 31% Dell 51. 11% 86. 24% 62. 87% 81. 81% 56. 89% HP 6. 51% 16. 71% 19. 56% 23. 97% 20. 85% • Apple has the second lowest return on equity; however, a ROE in the upper 20 s is still an extremely respectable number. • Apple’s low Du. Pont number is because of high cash reserves and no dividends. • Apple’s growth is more internally focused.

Present Strategy Key Financial Factors Index of Sustainable Growth Measures a company's ability to grow using external sources of funds. The larger the sustainable growth rate the greater ability the company has to generate growth through external financing. � The sustainable growth can be calculated by multiplying the internal growth rate by total debt over total equity. � A company can increase their sustainable growth rate by increasing their debt leveraging. However involves significant risk. � � 100. 00% 2005 2006 2007 2008 2009 10. 75% 14. 16% 13. 54% 15. 00% 11. 88% 8. 90% 10. 31% 8. 53% 7. 22% 5. 46% Dell 15. 69% 17. 48% 14. 26% 25. 66% 4. 17% HP 11. 87% 23. 02% 10. 41% 15. 51% 8. 98% Apple 90. 00% Microsoft 80. 00% 70. 00% 60. 00% Apple 50. 00% Microsoft 40. 00% Dell 30. 00% HP 20. 00% 10. 00% 2005 2006 2007 2008 2009 • Apple has highest potential growth through external funds. • Part of Apple's high level of sustainable growth is due to their not paying dividends. • Allows Apple to roll the money back into the company which gives them more room to invest their available funds into growth.

Present Strategy Cont. � Marketing Criteria � Clear and clever print ads, TV ads, and online communication ○ Create brand value/identity ○ “I am a Mac” campaign � Create interest in one product to gain full loyalty ○ EX: i. Pod showing ease of use � “Mac Experience” at Retail ○ Position business in a completely different way then competition � Highlight competitors flaws light-heartedly by attacking whole category � Provide Apple. Care � Expand into different areas to reach more customers ○ EX: China � Focus on Creative and Consumer Markets ○ Integrate both worlds: Hardware and Software

Present Strategy Cont. � Management/HRM Criteria � Recruit and retain the brightest people ○ University campuses �Career fairs, information sessions, interviews, and internship programs ○ Retail Stores ○ Knowledge of products and training ○ Culture �Not 9 -5 job �“Apple Fellows” ○ Degree of Secrecy ○ Hedgehog Concept �Passion- Innovation

SWOT Analysis � Strengths �Innovative style ○ OS developed by employees ○ Compatibility with other PC’s software ○ Research Intensive environment � 1 st to release new creative ideas - EX: i. Phone ○ High financial performance: net income from $69 million in 2003 to $3, 496 million in 2007

SWOT Analysis � Weaknesses �High Research and Development Costs ○ Less cost effective in technology market �Consumers ideas of Mac’s abilities ○ Marketing Issues: “not compatible” ○ Too expensive

SWOT Analysis � Opportunities �Expanding music industry ○ i. Tunes �Expanding marketing techniques ○ Informational advertising ○ Charismatic sales people ○ Adaptable managers

SWOT Analysis � Threats �Participate in the fastest growing market �R&D’s ability to keep up �Competitors innovation capabilities � Core Capabilities �Innovation within R&D �Brand Management ○ i. Tunes, i. Pod, i. Phone, and PC’s �Efficient distribution channel usage ○ Internet, retail stores (EX: Bestbuy), and Apple stores

Relative Competitive Strength � Brand Image �Attractive to all target consumers � Superior performance �Ease of use �Hard to compete (EX: Windows 7) � Excess of cash �Ability to react to market changes faster then competition �Different financial position then competitors � � Largest music retailer Steve Jobs: Founder and CEO

Relative Cost Position � Ratio interpretation � Integrated products improves cost position � Cost position

Cost Position 30. 00% 25. 00% 20. 00% Apple Microsoft 15. 00% Dell HP 10. 00% 5. 00% 0. 00% 2005 2006 2007 2008 2009

Strategic Issues and Problems � i. Phone demand is driving Apple’s fundamentals � C-level management � Product imitation � Consumer barriers � Research and development

Going Forward Future Industry and competitive Outlook

Chief business and economic characteristics • Competing on price • Market saturation • Product imitation

Key Success Factors � Short term strategy to limit the systematic impact of the economic contraction � Internet integrated business model � Combating software piracy

Industry Attractiveness and Future Profitability � PC sales � Software sales and services � Multimedia devices � Sustainability � Industry growth rate

Evaluating Apple’s Options: Forming a Strategy

Prospective Future Strategy � Leadership and employees �Steve Jobs: Level 4 executive—years of dedication and ingenious brand management, but company must realize the need for modesty and humility to become great �First who, then what: hire the ‘right people’ (selfmotivated) then add their strategy and organization �Duality: Apple needs to continue this—Consistent system, but freedom to think and innovate ○ Value innovation speaks for itself when referring to duality

Prospective Future Strategy � Brutal Facts and Hedgehog Concept � Brutal Fact: Steve Jobs probably not going to be around much longer (health issues)—cannot repeat from the late 80 s-early 90 s � Future CEO very important (smart and modest): Tim Cook (COO) vs. Jonathan Ive (VP of Design) vs. Phil Schiller (VP of Marketing) ○ Best two: Cook or Ive � Hedgehog Concept: Innovation within their hardware and software for PCs and portable music ○ Keep focus on value innovation for these products ○ Apple has no debt, and $31 billion in cash; should invest this money into other technologies and more in R&D ○ Also invest in marketing and advertising; focus on themselves rather than competitors (i. e. Apple vs. Microsoft commercials)

Prospective Future Strategy � Retail and Production Expansion �Retail stores should continue to go global and hire people for specific purposes ○ Concierge, Specialist, Genius, Creative, Theatre Presenter �Manufacturing obsolete if only in China ○ Build production site in S. America so lower lead times and operating costs—continue to focus on supply chain relationships, channel distribution, and logistics ○ Create contractual/outsourcing relationships with as few vendors as possible to lessen the amount of POs; create strong trust with suppliers and customers so that information is shared, and demand can be predicted better, or a flux in demand can be remedied easier

PC/Notebook Strategy � Continue to increase product differentiation gap —constant value innovation and quality improvement �Increase R&D budget; continue to hire creative thinkers � Expand market to educational institutions �Elementary to college �Tutorial sessions to show ease of use �If students use Apple’s PCs at school, they will want a Mac at home too (increase competitive advantage) � Create a netbook �Portability is important; i. Phone is closest Apple has to a netbook but need to adapt to consumer wants/needs

Music and Multimedia Market Strategy � i. Tunes could be used to compete against Netflix, Blockbuster, and Red Box—watch unlimited amount of times within 24 hr period � Expand film library (less than 1, 000 right now) � Can be applied to TV shows as well Expand to video games (make i. Tunes compatible with game consoles) � Fight piracy--design i. Pod software to only sync purchased music (pirated downloads incompatible); Apple customers would also purchase more (boost i. Tunes sales) � If Apple made downloads compatible with non-Apple devices (e. g. Microsoft’s Zune) then it would be possible to sell more music; the amount of additional music sold would have to compensate for the potential loss in i. Pod/i. Touch sales �

Software Strategy Inter-operating system interaction: Make Apple software able to be used on different operating systems (e. g. windows) � Make PC software available over purchase over the internet � �Lessen raw materials—more ‘green’ �Keep software updates free (and DL over internet) � Increase R&D budget �Increase value and ease of use

Final Thoughts � Apple has continued to please their loyal followers and persuade many who had previously disassociated themselves from the company: � To continue/increase their success-focus on the customer; do this by continuous improvement and product differentiation. � If they can achieve these goals while adhering to their philosophies, there is no limit to Apple’s future (and maybe regain their long lost position as an overall industry leader in PCs) � Apple on a path from good to great: Dramatic and fast changes are almost certainly going to fail to make it to a BOS � No single defining action for a company to become great � Slow process in which a company must uniquely strategize in order to build momentum until a realistic point of breakthrough � Apple: Ups and downs, but with the intelligence and innovation over past decade, and with strong leaders and knowledgeable future decisions for the company, Apple is more than capable of breaking away from the red ocean swimmers and creating a sustainable BOS (even in the dynamic technology industry)