John Morgan, Danelle Herman BAMG 456- Strategic Management Apple Inc.

Case Study

I. Current Strategic Position a. Introduction

i. Apple Inc. began as the brainchild of intrepid businessman Steven Jobs

and tech guru Steve Wozniak. The business started in the early days of the computer revolution as a hobby selling custom-built machines to technology enthusiasts. Incorporated in January of 1977 (Apple, 1), the firm has grown from a garage business into one of the worlds leading suppliers of personal computers, portable digital music players, and mobile communication devices [also selling] a variety of related software, services, peripherals, and networking solutions (Apple, 1). Apple Inc. is a unique case in the business world worthy of study due to their curious knack for producing extremely well received products to their risky, yet highly successful business strategies. (John) b. Current Mission and Need for Change i. Under the investor relations portion of their website, Apple lists the following as their mission 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. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market with its revolutionary iPhone. (Apple, 2)

Though the mission statement is poor- indicating neither a direction nor a purpose, it does not reflect the condition of the firm itself. Despite the recent recession, Apple Inc. has turned a substantial profit for the past five years and is consistently one of the top performing firms in the Fortune 500. In order to maintain their success streak, Apple must maintain their strategic practices with nominal changes. (John) II. Evaluation of the External Environment a. Top Opportunities Macro Environment
Technological Innovation- (T) (9) Global Modernization- (T) (10) Increased Computer Use- (T/S) (9)

Industrial Environment
Microsoft Compatibility- (7) Green Products- (7) Expanding Markets- (8)

Competitive Environment
Innovation Opportunity- (9) Mobile Media Usage- (8) Growing Counterculture- (7)

i. All the opportunities listed above are open doors for Apple Inc. Global modernization and increased computer usage worldwide mean fresh markets for new Apple computer users. Technological innovations on the macro and competitive level hold as yet unforeseen competitive advantages for a firm that makes its name by creating the next best product. Green products, mobile media usage, and a growing counterculture represent ideals, needs, and personalities to which Apple

can cater. These many and varied opportunities present unique business opportunities for a firm that has nowhere to go but up. (John) b. Top Threats Macro Environment
Recession- (E) (10) SEC Intervention- (E) (9) Credit Crisis- (E) (9)

Industrial Environment
Product Substitution- (8) Green Legislation- (6) New Viruses- (7)

Competitive Environment
Microsoft Monopoly- (6) Product Poaching- (8) Cheaper Competition- (7)

i. Despite the ample opportunities available to Apple, the market is rife with

dangerous threats as well. The current recession is the foremost threat facing Apple. Increased materials prices, difficulty in finding financing and credit, as well as tighter scrutiny from the SEC cloud the future with uncertainty. From the industrial environment, Apple must battle product substitution from the legions of other computer manufacturers. The possibility of green legislation requiring stricter environmental practices could complicate Apples business as well as emerging OSX viruses targeted at Apples operating system. Competition is a continuing threat facing the firm. Competing against the Microsoft Empire while trying to keep other firms from riding on the coattails of Apples technological innovations and marketing an expensive product in an industry saturated with cheap alternatives could challenge the businesses future success. (John) c. Opportunities-Threats Score
i. Opportunities = 8.22 Threats = 7.77

O-T Score = +.45 (John)

III. Identification of the Internal Environments

a. Financial Data (Apple, 1)
Comparative Balance Sheet in millions of dollars AAPL DELL 6% $ 1% $ 346 1,180 68% $ 87% $ 21,956 19,880 12% $ 11% $ 2,841 4,614 100 $ 100 $ % 25,347 % 27,561 46% 6% $ 9,299 $ $ 10,815 $ 14,532 $ 25,347 37% 0% $ 18,526 $ 362 $ 23,732 $ 3,829 $ 27,561

Inventories Total Current Assets Equipment Total Assets

Industry $ 6,759 $ 72,295 $ 12,496 $ 106,514 $ 49,522 $ 6,465 $ 69,339 $ 37,175 $ 106,514

4% 72% 17% 100 % 67% 1%

HPQ $ 8,033 $ 6,342 $ 7,798 $ 88,699 $ 39,260 $ 4,997 $ 50,173 $ 38,526 $ 88,699

9% 7% 9% 100 % 44% 6%

Total Current Liabilities Long Term Debt

Total Liabilities

65%

43%

86%

57%

Total Equity Total Liab. & Equity

35% 100 %

57% 100 %

14% 100 %

43% 100 %

i. The above table compares the balance sheet of Apple Inc to that of the industry and the firms two major competitors. From this information we can glean some of the financial strategy Apple employs. Compared to the industry and Dell and HP, Apple keeps a very low level of inventory. Stored inventory is an expense to a firm so Apple keeps their capital invested in assets that perform rather than loiter. Also, of the four data sets above, Apple is the only one to keep a higher level of equity in relation to their liabilities. In doing so, Apple is assured the resources to pay off their debts. In addition, the firm carries no long term debt- again keeping their capital in actively performing liability structures. This

indicates that, in financial terms, Apple is a more conservative company than the rest of the industry. They experience enough risk in being the prospector of the industry so they choose not to take extra chances when it comes to financial strategy. (John)
Comparative Income Statement in millions of dollars Industry AAPL DELL $ 100 $ 100 $ 147,428.52 % 24,006.00 % 61,133.00 $ 102,193.29 $ 31,480.26 $ 3,578.52 $ 240.22 $ 3,343.18 $ 7,180.91 $ 2.94 69.3 % 21.4 % 2.4% $ 15,568.00 $ 3,745.00 $ 284.00 $ $ 1,512.00 $ 3,496.00 $ 4.04 64.9 % 15.6 % 1.2% $ 48,893.00 $ 7,896.00 $ 599.00 $ 45.00 $ 880.00 $ 2,947.00 $ 1.33

Sales COGS Admin. Exp. Depreciatio n Interest Income Tax Net Income

100 % 80.0 % 12.9 % 1.0%

HPQ $ 104,286.0 0 $ 76,987.00 $ 15,837.00 $ 2,683.00 $ 531.00 $ 1,913.00 $ 7,264.00 $ 2.76

100% 73.8 % 15.2 % 2.6%

0.2% 2.3% 4.9%

0.0% 6.3% 14.6 %

0.1% 1.4% 4.8%

0.5% 1.8% 7.0%

EPS

ii. This comparative income statement for Apple, the industry, and two major competitors, displays why Apple is such a top performing firm. Compared to Dell and HP, Apples sales do not look that impressive- but it is a much smaller firm. Surprisingly, Apples cost of goods sold is relatively lower than the industry and individual competitors. This could indicate that whereas Apple products are typically more expensive than those of HP or Dell, the firm has devised a way to produce them cheaply. Apple does have a high percentage for income tax- a necessary evil, but an indication that the company is making money. Lastly, the earnings per

share is well above the industry and the two competitors which speaks to the strength of the firm. (John)
Apple 5 Year Cash Flows Statement in Millions of Dollars 2007 2006 2005 2004 $ $ $ $ 5,470.00 2,220.00 2,535.00 934.00 $ $ $ $ (3,249.00) 357.00 (2,556.00) (1,488.00) $ $ $ $ 739.00 324.00 543.00 127.00 $ $ $ $ 2,960.00 2,901.00 522.00 (427.00)

2003 $ 289.00 $ 828.00 $ 27.00 $ 1,144.00

Operating Activities Investing Activities Financing Activities Cash Change

iii. This five year statement of cash flows indicates that Apple is maintaining

a positive cash flow. Their major expense comes from investing activities, primarily short-term investments- which follows with their strategy of minimizing long-term debt. Also, the fact that the majority of Apples cash inflow comes from operating activities suggests that capital is reinvested into the company instead of outside financial instruments. This indicates that management believes the firm is in a strong position to grow. (John) b. Marketing Position

Apple Growth Rate: 8.51% Industry Growth Rate: 5.33%

i. Currently Apple is growing faster than the industry. The industry itself is strong, but Apple is growing faster because of their innovative strategy. (Danelle)

ii. Market Share

Year 2003 2004 2005 2006 2007 .0534 .0537 .1000 .1060 .1310 Apple .4144 .4651 .6938 .4841 .4572 Dell

iii. The companys current market position is strong. Apple has created a niche for themselves with the younger generation. They have come out

with great marketing techniques and have become the new trend for young adults down to kids. Apple has come out with new products over the years, and almost everyone has been a hit. These new innovations have resulted in high annual profits and a strong stock price as well as a healthy company. The only fall back that Apple currently has is relying so much on innovation. Dell and Hewlett Packard, some of Apples top competitors, have created a strong name for themselves over many years, while Apple has just recently become a large player in the industry. Apple dropped off for a while, but has come back strong and taken the industry by storm. They have created a strong name for themselves and proven to have quality products. (Danelle)

c. Management Position Key Executives Pay Exercised Mr. Steven P. Jobs , 53 $1 $ 14.64M Co-Founder, Chief Exec. Officer Mr. Peter Oppenheimer , 46 $ 1.20M $ 55.85M Chief Financial Officer and Sr. VP Mr. Timothy D. Cook , 48 N/A N/A Chief Operating Officer Mr. Robert Mansfield , 48 $ 898.00K $ 13.56M Sr. VP of Mac Hardware Engineering Mr. Sina Tamaddon , 52 N/A N/A Sr. VP of Applications i. We think that Apple has a good ethical compensation package to their top executives. Steve Jobs salary is $1.00 and then a share of the companys profits. He makes his salary based on how well he is running the

company. Ethically the key executives of Apple could be getting paid a lot more, they are a thriving company, but are keeping their salaries reasonable. We have talked about many other companies that are not performing as well in the current economic situation, and are still paying their key executives excessive bonuses. (Danelle)
ii. The vision statement of Apple in the upper level management is to

continue innovation. Currently Apple is one of the most dominant companies in innovation, and every product they create is a hit with the younger generation. Their strategic plan is not very strong if they are solely relying on innovation, but so far it has not failed them. Apple has not really broken through the international barrier and taken any other countries by storm. Apples products are mainly seen in Europe and Japan, but have not really gone international. Some of Apples future plans would be to go international and market to their younger generations like they have in the United States. Many countrys youth like to replicate American youth, so if Apple penetrated their markets like they have the United States, they could probably increase their market share. (Danelle)
iii. Apples stock is very strong. It is currently $164.54 per share and positive

(Yahoo). Like many other stocks, Apples stock is very reliant on current news and new products hitting the stores. When Apple is releasing a new product into stores their stock prices are way up and stay pretty steady. But, when negative news hits the media about Apple, their stock prices have fallen in the past. One of the main concerns on everyones mind is

Steve Jobs health. Because he is such a key aspect and innovator for Apple, their stock has been depending on his condition. Apple is very good at keeping his health issues private, as to not affect their stock. (Danelle) iv. Since we dont think that Apples mission statement is strong enough, it has not direction or purpose, this is one that we have created:
Through continued innovation and commitment to quality products and services, Apple will attain a 20% market share in 20 years.

We think this mission statement is stronger because it has a direction and a purpose and is more to the point of what they want to do. Apples current mission statement just states the things they have accomplished in the past, but doesnt have any direction. As part of Apples future strategic plan they should revise their mission statement to have more of a direction and a purpose to let consumers know where they would like to go. (Danelle) v. Currently Apple is successful because of their CEO Steve Jobs. For the time being that strategy is alright, but with the recent events and Steve Jobs health issues, such as cancer, Apple needs to have a new plan set in place. They need to make sure that they have more people on their management team with the same passion and drive for the company as Steve Jobs. Apple has been successful thus far because they have had Steve Jobs who has built Apple up to what it is today. Apple needs a

stronger management strategy and figure out the right way to implement the plan to keep Apple on the road to success. (Danelle)
vi. Apple is joining the Green movement and taking responsibility as a

global citizen. They recognize the environment impact on the work they do and the products they create. Apple strives at reducing their carbon footprint. They have found the best way to do that is to make energy efficient products. Apples environment team has created a carbon emission test to let their customers know how much CO2 is created by the use of their products (Apple, 3). Apple feels it is important to have an innovative way to report their carbon emissions to their customers, so their customers can make informed decisions about their carbon footprint. Apples prides themselves at being environmentally sound and helping everyone to a greener way of life. Apple has created recycling centers for electronic waste; they have created their products more energy efficient, and have removed toxic chemicals from the manufacturing of their products. According to the Carbon Disclosure Project, Apple has been active in the development of global industry standards and quality measures. Apple is an active member of the World Resources Institute California Green Power Group, a partnership of fifteen of Californias most prominent energy buyers to achieve far reaching environmental goals, reduce exposure to volatile electricity prices and support new technologies in renewable energy generation as an integral part of doing business in California. (Carbon)

Going Green is such an important aspect to a company. It has become so relevant and important to consumers that if a company is not green, it really suffers. Apple has done a great job at reducing their carbon footprint and making sure that they are energy efficient and leaving as little waste as possible. (Danelle) d. Assessment of Capabilities
i. Apple is on the forefront of the information age. A lot of innovations in

technology are coming from this firm which makes them as information ready as anyone. Apple is incredibly integrated in the internet and computer technology, which allows them to react to changes in the market as soon as new information is made available. (Danelle) IV. Strategic Position a. Competitive Advantages
i. In an industry of vicious competition and price wars, Apple relies heavily

upon their competitive advantages to survive. The greatest competitive advantage Apple possesses is the differentiation of their products. Apple computers and digital accessories set the standard for quality and innovation. The price tag on these products is high but the consumer knows that they are purchasing quality, reliable, and fashionable products. Being the industry innovator is another great advantage for the firm. Though the position carries with it a measure of risk, Apple always gives customers state of the art, cutting edge products that are not available

anywhere else. Additionally, Apple has managed to create legions of fiercely brand loyal consumers. These consumers who subscribe to the Apple culture stand by their purchases with pride and commitment. Whether their motivation is quality or simply buying a computer that is not Windows based, these Apple enthusiasts present the company with a unique competitive advantage as they have significant influence on what the world views as trendy. (John) b. Top Strengths Financial Low Debt- (8) High R&D- (9) Marketing Strong Image- (9) Celebrity- (8) Guerilla Marketing(8) Management Steve Jobs (10) Multi-Divisional- (8) Secrecy- (7) Technological Innovation- (10)

i. The above table lists some of the top strengths that Apple possesses. Their financial policy of keeping long-term debt to a minimum keeps their capital free for other uses. High devotion to research and development keeps the Apple innovation system working at full capacity, ensuring Apple access to the latest technology. In the marketing environment, Apple has managed to create a very strong brand image for themselvesone that espouses quality and reliability. Also, their use of celebrity advertising as well as popular guerilla tactics for marketing their products makes the brand memorable in the consumers mind. In the management realm, Steve Jobs is their most valuable asset. His commitment and drive has created a strong and vibrant firm that would not be where it is now

without him. Also, the use of a multi-divisional structure keeps the various portions of the company working at what they do best rather than stretching top management too thin. Yet another management strength is Apples commitment to secrecy when it comes to their products, software, and new gadgets in development. Tight lips keep Apples innovations from being pirated by rival firms. Innovation is the strongest trait in Apples technological environment. They are on the forefront of the computer technology, actually creating what would be considered state-ofthe-art. (John) c. Top Weaknesses Financial High Beta- (7) Marketing One Cohort- (8) Management Technological

Steve Jobs- (10) Incompatibility- (6) Ill CEO- (9) Secrecy- (8) Recalls- (6)

High R&D- (6) Social Responsibility(6)

i. Despite all the strengths of the firm, Apple does have weaknesses that need addressing. The companys stock has a high beta and they spend a great deal of money on research and development. This could be perceived as a risky company because of the beta and the fact that so much is devoted to R&D instead of some other aspect of the infrastructure. Nonetheless, Apple would not be able to innovate without using this strategy; therefore it is an acceptable risk. In their marketing efforts, Apple mainly targets young consumers instead of a broad spectrum plus they do not highlight their efforts towards social responsibility- something

that may be important to consumers. As well as being one of their greatest strengths, Steve Jobs is a weakness for Apple too. Apple relies too much on Steve Jobs, which is a risky tactic. Not only that, but concerns have been raised about his health. Should such a key figure in the firm fail to perform, Apple could be in dire straits. Though the secrecy culture protects Apples golden ideas, it has also gotten them into trouble with the SEC regarding sensitive information that should have been released to stock holders. In the technology sector, Apples incompatibility with Windows platforms poses a very slight risk and the company has faced a few recalls due to poor battery performance but nothing too worrisome. (John) d. Strengths-Weaknesses Score i. Strengths = 8.55 Weaknesses = 7.33 O-T Score = +1.22 (John) V. Conclusion a. Long-Term Strategic Options
i. The best course for the firm to follow in order to maintain their current

position is to continue following the strategies in place with only a few minor changes. (John) Long-Term Strategies 1) Maintain position as industry innovator 2) Vertical Integration

3) Concentric Diversification 4) New CEO 5) International expansion b. SBU-Level Strategies SBU Strategy- Miles & Snow Prospector
i. The prospector strategy is what Apple has employed since their first

computer. Innovation is what gave them their name and reputation and it is the best suggestion for SBU-level strategy for the future. (John) SBU Strategy- Porter Differentiation
ii. The best possible suggestion of a Porter strategy for Apple to subscribe to

is again the one they have been using all along. Differentiation keeps Apple alive in an industry sated with cheap alternatives. Apple does a very good job at maintaining high perceived quality which makes their higher than average prices acceptable to the consumer. The continued use of this strategy will help the firm survive. (John) c. Short-Term Strategic Options i. There are no suggestions for short-term strategic options for Apple. d. Recommendations for Long-Term Survival

i. Maintaining their position as the industry innovator means that Apple will continue to reap the rewards of having the latest and greatest new gadget. Throughout the history of the firm, innovation has set Apple apart from the rest of the industry and propelled them into the success they are today. Therefore, if the strategy works, keep on using it. Apple has already begun the process of vertical integration with the purchase of a microprocessor supplier. Most all the vertical integration Apple should consider would be backwards in the value chain. If they can gain control of their suppliers they will have more power over their cost structure, opening the doors to saving money for the firm. With the success of all the Apple products, a number of firms have popped up to sell accessory products or services similar to what Apple offers. These smaller companies draw revenue away from Apple as they offer the same products or services at greatly reduced prices. Should Apple buy out these competitors they could reclaim lost revenue and exact a measure of quality control to protect their brand image from imitators. Steve Jobs is an integral part of Apples success. Unfortunately, his failing health has made him a liability to the future of the company. Apple should start the process of searching for a new CEO with the same drive and ambitions but keep Jobs on in an advisory role so that Apple may still benefit from his singular talents. In doing so, Apple will be prepared

should Jobs be unable to perform his duties and continue business as usual. (John) Currently Apple is not present in many foreign markets besides Europe and Japan. Apples competitors, Dell and Hewlett Packard, are both sold throughout the world. For Apple to continue to grow and stay competitive they need to expand to the international market. We think that the international market would increase their market share. Most teens in foreign countries are interested in immolating the younger American generation. If Apple used the same marketing strategies that they have captured the American youth with, Apple could be very successful in the foreign market and grow to an even stronger company. (Danelle) e. Recommendations for Environmental Fit
i. If Apple follows our recommendations then they will become a bigger

player in the industry. Apple is the leader in innovation and currently one of the leaders in the consumer market. If Apple implemented some of our recommendations hopefully they could increase their market share and expand into other thriving markets. Apple has not be a big player in the international or business market, so if they tweaked their strategic plan to include these areas it would really help them grow in profits and as a company. (Danelle)

References
1. Retrieved July 31, 2009, from Apple Web site: http://phx.corporate-ir.net/phoenix.zhtml? c=107357&p=irolSECText&TEXT=aHR0cDovL2NjYm4uMTBrd2l6YXJkLmNvbS94bWwvZmlsaW5nLnhtbD9yZXBvPX RlbmsmaXBhZ2U9NTk1NjYzOCZhdHRhY2g9T04mc1hCUkw9MQ%3d%3d 2. Retrieved July 31, 2009, from Apple Web site: http://phx.corporate-ir.net/phoenix.zhtml? c=107357&p=irol-faq 3. Retrieved July 31, 2009, from Apple Web site: http://www.apple.com/environment/ 4. Retrieved July 31, 2009, from Yahoo Web site: http://finance.yahoo.com/q?s=aapl 5. Retrieved July 31, 2009, from Carbon Disclosure Web site: http://www.cdproject.net/companyhomepage2.asp?id=897

Appendix

Apple Inc.
AAPL Sales $7,081.0 0 $5,941.0 0 $6,134.0 0 $7,983.0 0 $5,363.0 0 $5,742.0 0 $6,207.0 0 $8,279.0 0 $13,931. 00 $19,315. 00 Sales Comparisons (All figures in Millions) AAPL Normalized Regression Industry $3,911.82 $4,953.10 $5,994.39 $7,035.67 $8,076.96 $9,118.24 $10,159.53 $11,200.81 $12,242.10 $13,283.38 $7,081.00 $8,351.16 $10,688.54 $10,840.63 $9,639.26 $11,623.65 $12,472.84 $8,937.93 $14,194.55 $15,922.43 Industry Regression $7,740.53 $8,459.35 $9,178.16 $9,896.98 $10,615.79 $11,334.61 $12,053.42 $12,772.24 $13,491.05 $14,209.87 Industry Sales $65,564.1 8 $77,324.8 5 $98,967.0 3 $100,375. 26 $89,251.5 9 $107,625. 38 $115,488. 14 $82,757.8 2 $131,429. 74 $147,428. 52 0.1080010 41

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

8.51%

5.33%

SUMMARY OUTPUT Regression Statistics 0.698110 Multiple R 252 0.487357 R Square 924 Adjusted R 0.423277 Square 664 3429.530 Standard Error 256 Observations ANOVA df Regression Residual Total 1 8 9 Coefficien ts 2076575. 309 1041.284 848 SS 89452616.1 9 94093422.2 1 183546038. 4 Standard Error 756102.433 5 377.578854 3 MS 89452616 .19 11761677 .78 F 7.605429 931 Significanc eF 0.0247589 77 10

t Stat 2.746420 613 2.757794 396 Upper 95% 332999.9 722 1911.983 247

P-value 0.025197 918 0.024758 977 Lower 95.0% 3820150. 65 170.5864 498

Lower 95% 3820150.6 46 170.58644 98 Upper 95.0% 332999.97 22 1911.9832 47

Intercept X Variable 1

SUMMARY OUTPUT

Regression Statistics 0.806176 Multiple R 743

R Square Adjusted R Square Standard Error Observations ANOVA

0.649920 941 0.606161 058 1694.151 163 10 Significanc eF 0.0048511 53

df Regression Residual Total 1 8 9 Coefficien ts 1428452. 647 718.8154 047

SS 42627385.8 5 22961185.3 65588571.1 5 Standard Error 373506.492 5 186.519904 3

MS 42627385 .85 2870148. 162

F 14.85198 096

t Stat 3.824438 6 3.853826 794 Upper 95% 567145.1 316 1148.931 075

P-value 0.005057 716 0.004851 153 Lower 95.0% 2289760. 16 288.6997 345

Lower 95% 2289760.1 63 288.69973 45 Upper 95.0% 567145.13 16 1148.9310 75

Intercept X Variable 1