The CTL EURO COLLEGE

Title: Research project on Apple Inc

Student name: Yogesh Karande
Registration no. 12-2012
Course: MBA

Supervisor: Dr.Andreas Constantinou

Date: August 20, 2013

Table of Contents
Title
Introduction
History Apple Inc:
Vision Statement of Apple:
Explanation of Vision Statement:
Mission Statement of Apple:
Review of Literature
The PC Industry
The Online Music Industry
The Future of Apple
Strategic Alliances and Entertainment
External Aanalysis
Industry Analysis Using Porters Five Forces Model
Which External Threats are Most Significant
Additional External Threats
Vertical Integration of Competitors
Value Chain Analysis
SWOT Analysis of Apple Inc:
BCG Model:
What is driving Macintosh acceptance?
Removing Barriers for Users
Application Preferences
Apple profit makes huge rise due to iPod success
Apple Beats Competitors at Inventory Turn Over
IPod: The Marketing of an Idea Project
Financial Analysis
Historical Performance
Profitability Measures
Liquidity and Leverage Measures
Product Unit Sales
Operating Segments
Market Value Analysis
Apple 2012 1Q financial analysis
Share value
Pro-Forma Income Statement
Projected Free Cash Flow and Equity Valuation
Strategy
2

Page
04
05
05
05
06
06
11
12
12
14
15
18
23
24
25
26
28
31
33
33
34
34
37
38
41
42
43
44
45
46
46
47
50
57
58
59

Product Differentiation
Strategic Alliances
Recommendations
Conclusion

59
63
66
67

Introduction
Apple Computers 30-year history is full of highs and lows, which is what we
would expect in a highly innovative company. They evolved throughout the years
into an organization that is very much a representation of its leader, Steven Jobs.
Apple made several hugely successful product introductions over the years. They
have also completely fallen on their face on several occasions. They struggled
mightily while Jobs was not a part of the organization. Apple reached a point
where many thought they would not survive. When asked in late 1997 what Jobs
should do as head of Apple, Dell Inc.'s (DELL) then-CEO Michael S. Dell said at
an investor conference: "I'd shut it down and give the money back to the
shareholders. (Burrows, Grover, and Green).
Well, times changed. Less than 10 years later, Business Week ranked Apple as the
top performer in its 2012 Business Week 50. Apple attributes their recent success
to robust sales of iPod music players (79 million in 2011). They are optimistic
about the economies of scope with media giants, such as Disney and Pixar.
Apple rarely introduces a new type of product. Thus, instead of being the pioneer,
they are an expert second mover by refining existing products. Portable music
players and notebook computers are examples.
Apple increases the appeal of these products by making them stylish and more
functional.

They now appear poised to make significant strides in the home

computer market and to creating a total digital lifestyle whereby the home is a
multimedia hub.

History of Apple Inc:

Apple Inc formerly known as Apple Computer Inc which provides corporate
Server, MAC OS Systems and Operating System. Apples core product lines are
the iPhone, iPod and Macintosh System. Steve Jobs and Steve Wozniak, The
founder of Apple has created the Apple Computer on 1st April 1976 and integrated
in the company on 3rd January 1977, in Cupertino California. It has driven the
Computer manufacturing market for more than two decades. Mr. Steve Jobs who
was expelled in 1985 was return as CEO of the APPLE Inc in 1996 with new Ideas
and corporate philosophy. With introduction of successful IPod Player in to 2001
Apple has again proved itself as a Market leader in consumer electronics. Latest
era of extraordinary success of the company is in iOS based Apple products like I
Phone, IPod slim, I Pad and now I Pad 2. Now a days Apple is a biggest
technology corporation in the planet with the profits of more than $65 billion. It
has about 49,400 employs all over the world. Fortune Magazine most Admired
company in United State in 2012 and in the world in 2012, 2009 and 2009.
Apple has over 240 Store all over the world and the bifurcation of these store in
different countries are as below.
Vision Statement of Apple:
Man is the creator of change in this world. As such he should be above systems
and structures, and not subordinate to them.
Explanation of Vision Statement:
Apple lives this vision through the technologies it develops for consumers and
corporations. It strives to make its customers masters of the products they have
bought. Apple doesnt simply make a statement. It lives it by ensuring that its
employees understand the vision and strive to reach it. It has put systems in place
to enable smooth customer interaction. It has put objectives in place to
continuously move forward; implemented strategies to fulfil these objectives; and
ensured that the right marketing, financial and operational structures are in place to
apply the strategies.

Mission Statement of Apple:

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 best personal computing experience to students,
educators, creative professionals and consumers around the world through its
innovative hardware, software and Internet offerings.
Review of Literature
Steve Jobs and Steve Wozniak founded Apple on April 1, 1976. The two Steves,
Jobs and Woz (as he is commonly referred to see woz.org), have personalities
that persist throughout Apples products. Jobs was the consummate salesperson
and visionary while Woz was the inquisitive technical genius. Woz developed his
own homemade computer and Jobs saw its commercial potential. After selling 50
Apple I computer kits to Paul Terrells Byte Shop in Mountain View, CA, Jobs and
Woz sought financing to sell their improved version, the Apple II.
They found their financier in Mike Markkula, who in turn hired Michael Scott to
be CEO. The company introduced the Apple II on April 17, 1977, at the same time
Commodore released their PET computer. Once the Apple II came with Visicalc,
the progenitor of the modern spreadsheet program, sales increased dramatically. In
1979, Apple initiated three projects in order to stay ahead of the competition: 1) the
Apple III their business oriented machine, 2) the Lisa the planned successor to
the Apple III, and 3) Macintosh.
In 1980, the company released the Apple III to the public and was a commercial
flop. It was too expensive and had several design flaws that made for less-thanstellar quality. One design flaw was a lack of cooling fans, which allowed chips to
overheat. In late 1980, Apple went public, making the two Steves and Markkula
wealthy to the tune of nine figures. By 1981, the Apple III was not selling well
6

and Scott infamously fired 40 people on Feb 25 (Black Wednesday). Scotts

direct management style conflicted with the culture Jobs and Markkula preferred,
and Scott resigned in July. Markkula stepped into his position as CEO. In August
1981, IBM released their PC. Unimpressed and unafraid, Apple welcomed IBM to
the PC market with a slightly smug full-page ad in the Wall Street Journal. It would
not be long before IBMs PC dominated the market.
The Xerox Alto was the inspiration for Apples Lisa. Apple employees were able
to examine the Alto in exchange for allowing Xerox to invest in Apple before
Apples initial public offering (IPO). Apple released the Lisa in January 1983 and
was notable for being the first computer sold to the public that utilized a Graphic
User Interface (GUI). Unfortunately, the Lisa was not compatible with existing
computers, and therefore came bundled with everything and a list price to match.
At $9,995 (over $21,000 in 2012 dollars), the Lisa missed its target market by a
wide margin.
Apple introduced the Macintosh with great fanfare during the 1984 Super Bowl.
The Orwellian-themed commercial (directed by Ridley Scott, of Alien fame)
portrayed IBM as Big Brother and embodied Macintosh and Apple as freedomseeking individuals breaking away from this oppressive regime.The commercial
was largely successful and sales for the Mac started strong. However, Mac sales
later faded. John Sculley left PepsiCo to join Apple in April 1983. He was famous
for engineering the Pepsi Challenge, in which blinded testers tasted both Coke
and Pepsi to unveil the truth of the taste of Pepsi. In response to lagging Mac
sales, Sculley contrived the Test Drive a Macintosh campaign. In this promotion,
prospective users could take home a Macintosh with only a refundable deposit on
their credit card. While lauded by the public and the advertising industry, this
campaign was a burden on dealers and significantly impeded the availability of
7

Macs to serious buyers. In 1985, Apple tried to have lightening strike twice with
their Lemmings commercial during the Super Bowl. In what was becoming
Apples typical patronizing fashion, this commercial insulted current PC users by
portraying them as witless lemmings, unthinkingly doing harm to themselves.
Although Jobs attempted to overthrow Sculley, the board backed Sculley. Jobs left
Apple to form NeXT computer. After Jobs left in 1985, sales of the Mac exploded
when Apples LaserWriter met Aldus PageMaker. Apple dominated the desktop
publishing market for years to come. Under Sculley, Apple grew from $600
million in annual sales to $8 billion in annual sales by 1993. Apple introduced Mac
Portables in 1989 and the first PowerBooks in 1991. By 1992, PC competition ate
into Apples margins and earnings were falling. Sculley was under pressure to
have Apple produce another breakout product. He focused his energy on the
Newton Apples introduction of the Personal Digital Assistant (PDA). Despite
Sculley generating substantial demand for Newton, it did not live up to the hype
due to it being severely underdeveloped. Sculley resigned in 1993 and Michael
Spindler replaced him.
Spindler spent most of his time and energies on regaining profitability, with the end
goal of finding a buyer for Apple. Over the next several years, Spindler shopped
Apple to Sun Microsystems, Eastman Kodak, AT&T, and IBM. Meanwhile, Apple
was unable to meet the growing demand for its products due to supplier problems
and faulty demand predictions.

To add insult to injury, Microsoft released

Windows 95 with great fanfare in 1995. After significant quarterly losses in 1996,
the board replaced Spindler with Dr. Gil Amelio, CEO of National Semiconductor.
Dr. Amelio tried to bring Apple back to basics, simplifying the product lines and
restructuring the company. One of Apples most pressing issues at the time was
releasing their next generation operating system (code named Copland) to

compete with Windows 95.

Amelio and his technology officers found that

Copland was so behind schedule that they looked outside the company to purchase
a new OS. Ultimately, and somewhat ironically, they decided to purchase NeXT
computer from Jobs. Naturally, Apple welcomed Jobs back into the fold. The
board became increasingly impatient with Amelio due to sales not rebounding
quickly enough. Apple bought out Amelios contract after just 1 years on the
job. Jobs eventually claimed the CEO position.

Then, he cleaned house by

revamping the board of directors and even replacing Mike Markkula.Jobs

simultaneously put an end to the fledgling clone licensing agreements (which
created a few Mac clones) and entered into cross-licensing agreements with
Microsoft. On May 6, 1998, Apple introduced the new iMac, a product so secret
that most Apple employees had never heard of it. The new iMac was a runaway
success with its translucent case, all-in-one architecture, and ease of use.

It

brought Apple to a new market of users those who had never owned a computer
before. Jobs further simplified the product lines into four quadrants along two
axes: Desktop and Portable on one, Professional and Consumer on the other.
Apple completed the matrix with the introduction of the consumer-based iBook in
1999.
The year 2001 was an important year for consumers of Apple products. Apple
opened their first 25 retail stores (totaling 163 stores in 4 countries as of May
2001). In September 2001, Apple introduced the new iMac featuring a screen on
a swivel.The new iPods (portable music players) were a tremendous success.
Apple sold so many that Apples dependence on Mac sales was significantly less.
This was no small feat considering that the 2001 iMac became Apples best-selling
product by a long shot. Apple offered iTunes (a free application) to help their
consumers organize music on iPods and Macs.

In 2003, Apple expanded iTunes by 1) opening the iTunes music store to allow
Mac users to purchase music online and 2) expanding iTunes to Windows users.
Sales of iPods skyrocketed and currently provide the bulk of product sales to
Apple. In 2012, Apple announced that it would start using Intel-based chips to run
Macintosh computers.

In April 2005, Apple announced Boot Camp, which

allows users of Intel-based Macs to boot either Mac or Windows OS.

This

functionality allows users who may need both OSs to own just one machine to run
both, albeit not simultaneously.

10

The PC Industry
We can glean Insight into the history and composition of the PC Industry from its
eponymous title. In the late 1970s, as Wozniak and Jobs were starting Apple
computer, personal computers were an emerging product. The following chart
(Reimer) gives an overall view of the major market players since the mid-1970s.

By 1983, the market share of the Apple II fell to 8% while the PC had 26%.
Market share of Macintosh peaked at slightly more than 10% in the early 1990s
and has since tapered to between 2-3%. The IBM PC and its clones became the
standard due to the success of the open nature of the PC. This allows product
developers to offer vastly more products for the platform.
Some argue that not licensing the Mac OS was a mistake. Bill Gates and Microsoft
were encouraging Apple to license their OS in the early 1980s, because they were
developing software for Apple and had much riding on the success of the company.

11

When Apple did not license, Microsoft began developing their operating system,
Windows.
The Online Music Industry
While Apple clearly dominates the online music industry, the battle for domination
is not over. Although digital music sales are growing rapidly, the Recording
Industry Association of America (RIAA) states that digital sales account for only
4% of all music sales. (Borland) Analysts at Forrester (Bartiromo) and Gartner
(Bruno) validate this. Apples sales are between 66% and 75% of downloads and
80% of music players. (Bruno) Apple is part to a suit alleging monopolistic
practices concerning their market share dominance of players and downloads. The
other players in the download market are (the revised) Napster, Yahoo Music,
Rhapsody, and illegitimate file-sharing services. Portable music players competing
with the iPod include those made by Creative, Samsung, iRiver, and Sony. A
major point of contention between these services and player manufacturers is the
control of a variety of incompatible Digital Rights Management (DRM) schemes.
The Future of Apple
Personal Computers A Shift in Strategy
Apple has historically taken a far different path than the traditional Windows and
Intel combination. Microsoft provides the Windows operating system to separate
downstream hardware producers such as Dell. Apple vertically integrated both the
operating system software and hardware completely under Apple. A consumer
running Microsoft Windows can choose from a myriad of systems based on the

12

Intel processor, while a consumer running Apples OS X must purchase Apple

hardware.
Apple is adjusting this strategy by migrating their microprocessors from IBM and
Motorola PowerPC to Intel. Analysts believe that the Intel-based Macintosh may
be able to run Microsoft Windows applications by the end of 2009. (Burrows)
In addition to switching processors, Apple positioned their computers as an
immediate option for the traditional Microsoft Windows user. With Apple Boot
Camp, users may now use Mac OS X or Windows on an Apple computer.
(Sutherland).By allowing users to run Windows on an Intel Mac, Apple reduced
the switching costs for traditional PC users. Apple may steal away customers that
are willing to pay a premium for a system that runs both Windows and Mac OS X.
Apple continues to retain a strategic option to license its technology to clone
makers such as Dell. Past attempts at licensing Apple technology (to IBM,
Gateway, and others) failed on accord of Apples rigid demands. Many technology
leaders (such as a 1985 letter by Bill Gates to Apple CEO John Sculley) criticized
Apple for keeping a closed architecture. Apple cofounder Steve Wozniak criticizes
this strategy, We had the most beautiful operating system, but to get it you had to
buy our hardware at twice the price. That was a mistake.Whether Apple would be
willing to pursue this reversal of vertical integration is unclear. Although such a
move would cannibalize a portion of Apples own hardware sales, it would also
provide royalty-based revenue that could approach $1 billion annually.

Strategic Alliances and Entertainment

13

Jobs had the early strategic vision to complement computing with movie
entertainment. After founding NeXT, he personally acquired a majority interest in
the young movie company Pixar in February 1986. Jobs went on to invest of his
personal wealth into Pixar.
In 1995, Pixar solidified its position within animated movies with the debut of Toy
Story. Grossing $358 million worldwide, it became the 3 rd-largest grossing
animated movie in history. After this success, Jobs took Pixar public and
negotiated far better terms with Disney. Later successes included Toy Story 2,
Monsters Inc., and Finding Nemo. The alliance between Pixar and Disney has
tremendous potential for economies of scope. As CEO of Apple and Disneys
largest shareholder, Jobs is the strategic link between Disney, Apple, and Pixar.
Opportunities include combining the animated movie expertise of Disney and
Pixar, as well as sharing the content of Disneys ABC or ESPN networks over
Apples digital offerings. (Burrows, Grover, and Green)
A current example of the fusion between Disney, Jobs, Apple, and technology is
video on the iPod. Disneys Desperate Housewives was one of the first television
programs available for purchase and download to the newer video-enabled iPod.
There are concerns about whether these synergies will come to fruition. There are
fears that the personality and style of Jobs may conflict with Disney, and that
Disney CEO Iger could be Amelioed -- driven out of office by Jobs in a manner
similar to how Jobs drove Amelio out of the CEO post at Apple. (Burrows, Grover,
and Green).

External Aanalysis

14

Technological Environment
Brand Awareness Style at a Premium
Apples products are trendy and stylish.

After Jobs returned in 1997, Apple

retained designer Jonathan Ive to differentiate their computers from the typical
beige box. Ives design of the iMac included clear colorful cases that distinguished
Apple computers. Apples iPod (with the trademark white ear buds and simple
track wheel) commands a 15%-20% premium over other MP3 players.
Apple and Pixar limit the number of computer products and movies that they sell.
Product differentiation with focused quality and style also extend to the Jobs Pixar
Pixar's executives focus on making sure there are no B teams, that every
movie gets the best efforts of Pixar's brainy staff of animators, storytellers, and
technologists. (Burrows, Grover, and Green)
Apple positions its Macintosh computers as higher quality and higher price. HP,
Dell, and other PC manufacturers are pricing many systems under the $1,000
threshold. Apple is struggling to meet demand for its new MacBook Pro laptop
despite a $1,900 price tag that is nearly twice that of garden-variety rivals. Apple
has only recently entered the low-end (below $500) consumer market with the Mac
Mini. Although the Mac Mini is a base model with few features, it comes encased
in a very small and distinctive package. Apple portrays this computer as Small is
Beautiful. (Apple) Likewise, the iPod Shuffle was Apples first entry into the
lower-end ($100 range) of flash-memory-based portable music players.

Interoperability

15

Although Apple competes directly with Microsoft for operating systems, the
release of iTunes for Windows in 2002 was a key strategic move. This decision
expanded the potential customer base to nearly all personal computer owners, even
though Apple only has 2%-3% of all personal computer sales.

Conversely, Apple

depends on Microsoft for a version of Microsoft Office. As the most widely used
office suite of applications, Macintosh users rely on Office to correspond with
companies that standardized on Windows.

This is from a strategic alliance

between Apple and Microsoft after Jobs returned in 1997.

Apples

iTunes

service has a technological hook (asset specificity) to Apples iPod. Although

versions of iTunes exist for both Apple and Microsoft operating systems, the
iTunes AAC file format prevents other portable music players (such as iRiver or
Samsung) from playing purchased songs.

Technology and the Digital Lifestyle

Apple not only dominates the music player market, its iLife suite provides
consumers with easy-to-use software for music and video composition. With
podcast a household word, Apples Garage Band application makes the recording
of podcasts and music very easy.

Regulatory Environment

16

While introducing new technologies, there is a persistent threat of legal action by

competitors. For example, Apple sued Microsoft in 1988 (settled in 1997 for an
undisclosed amount) for perceived similarities between Microsoft Windows and
Macintosh audiovisual works.Microsoft has generally been the focus for
government antitrust charges (such as U.S. v. Microsoft) (US DOJ, 2009). Both
federal and state governments assert that Microsofts dominance blocked fair
competition within the software industry. This is an advantage for Apple, because
its operating systems are a viable substitute for Windows.

Furthermore,

Microsofts continued support for Office for Macintosh reduces the perceived level
of market monopoly and abuse. Manufacturers will continue to trespass on Apples
intellectual property. In 2002, Apple took legal action against tex9, who then
altered the programme and renamed it sumi. Legal threats can surface from
somewhat unusual sources. Apple Corps Ltd. is the London-based company that
owns the rights to the music of the Beatles. Paul McCartney and Ringo Starr
recently sued Apple over the use of the Apple logo in iTunes, claiming that it
violated Apples agreement not to produce music under an apple-based logo.
Research and development is a key component to Apples sustained competitive
advantage. Apple is currently taking legal action against several popular technical
web sites for releasing proprietary product research.

Sites such as

appleinsider.com have allegedly posted verbatim content from documents

protected by employee non-disclosure agreements. (McCullagh)

Release of

critical insider information could give Apples competitors a jump in producing

rival products.

Industry Analysis Using Porters Five Forces Model

17

Apple operates in two primary industries:

Computing - Hardware and Software
Delivery of Entertainment and Media
Apple has always been under intense competition within the computer,
software, and entertainment industries. Looking to 2012...Every time that Apple
had jumped into the lead in a product category during the past two decades, it had
had difficulty in sustaining its leadership position. We use Porters Five Forces
Model to understand why Apples industries are so competitive.
Figure: Porters Five Forces Model
Threat of New Entrants

Bargaining power
of Suppliers
Level
of Threat in anBargaining
Industry power of Buyers

Threat of Substitutes

Figure: Summary of Industry Threats (Computer Equipment and Entertainment

Distribution)
18

Type and Organization

Severity of
Threat
Entry
High
Threat

Verizon

Streaming audio and video with V CAST.

Amazon

On demand online services to purchase music

(similar to iTunes).

Google

They make everything.

The
Next New entrants with disruptive technology.
Google
Rivalry Microsoft
High
Threat

Windows Operating System, Windows Media

Player for playing music and video.

Linux

Competition to Mac OS X Operating System.

Napster,
Rhapsody

Online music sources alternatives to iTunes

Music Store.

Dell,
Lenovo

HP, Alternate sources for computer hardware.

iRiver,
Samsung,
Creative

Small, stylish MP3 Players.

DreamWorks

Animated movies.

YouTube.com

Online video.

Substitute XM, Sirius

s

Moderate
Threat

Satellite Radio for music.

19

XBox, PS2

Entertainment Media, Media and Music.

Various

Internet Streaming Radio and Podcasts.

Music
CDs, Alternative means to acquire music.
DVD-Audio
and
SuperAudio
CD
Broadcast,
Alternative sources for video.
Cable,
Satellite,
NetFlix, TiVo,
Theatres
Suppliers Motorola,
Suppliers of Processors and computer memory.

High IBM,
Intel,
Threat
Samsung
Microsoft

Strategic Alliance / Supplier of Office for Mac.

The Big Five BMG,

EMI,
Sony,
Universal, and
Warner

Sources of music. Will they raise prices and break

the dollar per song model? Some in the record
industry resent Apples distribution model. Apple
reaps billions from selling its hit music player, but
there are sparse profits from the songs being sold
over the Net. (Burrows, Grover, and Green)

Disney, ABC, Suppliers of Television and Movies. Will they sign

NBC,
CBS, exclusive contracts with other online services?
Fox,
Pixar, Note that this threat is reduced for Disney / Pixar.
Sony
Buyers Consumers and Consumers share music using
Moderate Illegal peer-to- networks without paying for music.
Threat
peer
file

20

peer-to-peer

sharing
Distributors

Apple retailers may pressure for lower prices or

better terms. For example, the release of the Apple
Store in 2001 infuriated longtime independent
Apple retailers that didnt appreciate Cupertino
cannibalizing their sales. (Linzmayer, 300)

Consumer
Consumers or businesses may reduce spending on
Attitudes and personal computers or non-essential (potentially
Behaviors
high elasticity of demand) music players if they
fear economic downturns.
Consumer
Consumers and businesses may continue to use
Refresh Cycles previous-model iPods and Macs rather than
upgrade to current iPods, iMacs, or OS
The total industry threat for the industry space that Apple occupies is a high threat
industry.Apple must continue to pursue product differentiation (i.e. the style and
ease-of-use of an iPod) and economies of scope (i.e. offering ABC television
shows on iTunes) to maintain their sustained competitive advantage in this
industry.

Which External Threats are Most Significant

Computer Hardware and Software: Open Source software such as the Linux
Operating System and Open Office applications threaten both Apple and

21

Microsoft.

The low (often, free) cost of the software may allow it to

overtake Apple and Microsoft, especially in developing markets such as

China.
Music Products: Major online retailers such as Amazon are considering
entry into the online music market. With a wide internet presence and a
household name, Amazon could present a formidable challenge to Apple. If
the major record labels (Universal, Sony BMG, EMI, and Warner) negotiate
better terms with new competitors to iTunes, Apple may be unable to
provide some of the music content that they currently offer. The major
music labels dislike Apples dollar per song pricing. They would prefer to
earn higher profits with variable pricing.
Suppliers: The recent shift to Intel processors could present a significant
threat to Apple. With only two companies (Intel and AMD) producing Intelcompatible processors, there is a strong potential for tacit collusion and
oligopoly power between these suppliers.

Apple purchasing must now

directly compete with HP, Lenovo, and Dell. If shortages or exclusive

agreements materialize, Apple could face problems with obtaining raw
materials.

Apple should consider additional sources such as Advanced

Micro Devices (AMD).

Figure: CPU Market Share

22

Additional External Threats

Security
Apple software, like all large software products, has security vulnerabilities that
hackers may exploit. A significant exploitation in the future could damage many
businesses and households using Apple computers.

This would affect future

customer purchasing decisions. Apple enjoys a competitive advantage, because

their OS X is mature and stable due to its basis on BSD Unix. In fact, computer
security folks back at FBI HQ use Macs running OS X. However, the increased
use of Apple computers is prompting hackers to target the platform. In February
2009, there was documentation of the first known Apple OS X worm. By using
iChat instant messaging, it spreads to other users and deletes files from their Mac
computers.

If Mac OS X becomes as wide of a target as Windows, Apples

perceived differentiation as the more secure platform may disappear.

23

Vertical Integration of Competitors

Sony is an example of a competitor with a unique position against Apple. Sony

Music supplies Apple with many of the songs for iTunes. Sony also creates a
version of the Walkman portable music player that is a direct competitor to the
iPod.
Sony is attempting to vertically integrate forward directly to the music buyer.
Sony integrated their music system (Mora) into the Sony Walkman. Sony is
exclusively distributing certain songs on Mora. (Hall)

Mora currently targets

Japanese consumers. If Sony can gain additional momentum (such as collaborating

with other record labels), their service could present a formidable challenge to
iTunes in additional markets.

Value Chain Analysis

24

To determine where Apple developed distinctive capabilities, Porters generic

value chain model provides a systematic framework for identifying Apples
utilization of resources.

Primary activities for Apple include Technology and

Product Design, Production, Sales and Marketing, Customer Service, and Legal
Services.
Technology and Product Design
This component represents the true core (no pun intended) of Apples capability.
From being the first platform to run an electronic spreadsheet (VisiCalc on the
Apple II Plus) to the first to establish a digital lifestyle hub (the Macintosh
product lines), Apples history is rich with cutting-edge technology development.
Apple drives to be the best, no simply the first. The Apple operating system is
universally regarded as more stable and reliable than Windows, while the desktop
publishing software bundles (iMovie, iPhoto, iTunes, etc.) are the most
comprehensive available to end users. Ives best summarizes the entrepreneurial
culture within Apple by saying that its very easy to be different, but very difficult
to be better.
Production
Because Apple had long refused to license its operating system to external entities,
the bundled packages of Apple-developed hardware and software became the
cornerstone of Apples production process.

Apple achieved unparalleled

performance via 64-bit architecture, integrated distinctive styling with the multicolored translucent iMac cases, and redefined intuitive operation with the iPod.
While every product introduction has not been a success (Lisa, Newton, etc.),
Apple treats component production as a natural extension of the design process.
Sales and Marketing

25

We could simply title this section Steve Jobs. Since his return as CEO in 1997,
Jobs personally unveils all new product introductions, reviews corresponding
marketing campaigns, and approves new product development guidelines. In a
departure from their turbulent history, Jobs entered into patent cross-licensing and
technology agreements with Microsoft. (Linzmayer Pg. no. 290) After years of
unimpressive market share growth and cannibalization of a loyal consumer base,
the door to the expansive PC market was now more accessible to Apple than ever
before. Apple continued to command a market premium for producing a better
mousetrap throughout its history.
Customer Service
How has Apple retained substantial cash reserves during the explosive growth and
dominance of PCs worldwide? Apple created a virtual love affair with their
customer base by delivering technically superior products (iPods vs. other MP3
players, Macs vs. PCs, etc.), and aggressively pursuing hardware and software
updates. Apple integrated their primary activities so well that it is transparent to
the consumer where one activity begins and the other ends. A perfect example of
this is Apples willingness to develop software to run Windows XP on its new
Intel-based iMac and then post it online free to iMac users. (Wingfield) In such an
environment, customer service merely becomes the realization of receiving a little
more than expected. Although Apple employs many resources and capabilities to
support their primary activities (human resources, supply procurement, etc.), the
most strategically relevant would be Legal Services.

Legal Services
26

In a market climate of constant change and innovation, it is inevitable that the drive
to expand product and service offerings will subject Apple to patent and copyright
infringement claims. The dispute over the Apple logo on its iTunes Music Store,
for example, continues despite a previously reached settlement with Beatles Apple
Corps Ltd. in 1991. (Dow Jones Newswires) While such litigation as Microsofts
Windows infringement on Mac OS patents has been highly publicized, use of legal
guidance to drive acquisition versus internal development strategies for such
products as GarageBand and iMusic have proven highly valuable.
SWOT Analysis of Apple Inc:
Although participation in such activities may add value, they may not be a source
of competitive advantage. Ultimately, the value, rarity, inimitability, and/or
organization (VRIO) of an activity or resource determine its sustainability as a
source of competitive advantage. Within this context, we can identify a firms
strengths, weaknesses, opportunities, and threats (SWOT).
In SWOT analysis Strength and Weaknesses are depends on Internal factors and
Opportunities and Threats Depends on External Factors of and Organization.
SWOT analysis is useful in decision making about the organization going for any
new or existing project.

Apple SWOT Analysis

Strength:

27

 iTunes Music Store is a excellent source of revenue, especially with the iPod
and the accessibility on Windows platform.
Apple Computer are expert in Developing own software and hardware.
Apples niche audience provides the company with some lagging from the
direct price competition.
Giving a face-lift to desktop and notebook lines.
technology can be used to improve product awareness and sales.
Low debtmore maneuverable.
Apple Computers have good brand loyalty.
Strong Research & Development Department.
Weaknesses:
Weak relationship with Intel and Microsoft.
Weak presence in business arena.
The product life cycle of Apple products are very small for that reasons
revenues are more depend on launch of new products and services.
Weak presence in markets other than education and publishing.
Slow turn around on high demand products.
Apples market share is far behind from major competitor Microsoft.
In past the relationship between Steve jobs and employee were not good
which result in reputation loss.

Opportunities:
28

 Increase in worms and viruses on PCs so the antivirus solution can be

developed by Apple
Large population (Gen X&Y) which are extremely individualistic and name
brand conscious.
The ties of apple other companies are weak, Apple can develop good
relationship for joint ventures
Downloadable music and MP3 players are highly marketable.
The online sales of computer are increasing with rapid speed.
The laptop market growth is high; Apple Computers should focus to develop
new models to cater the need of customers.
Threats:
Companies not seeing Apple as compatible with their software.
Apple facing strong competition from Dell, HP, Sony and Toshiba in laptop
segment.
Downloading free music from other online source without paying cost is
common it may impact the iTunes sales.
Apple software, Cell phone and hardware are expensive as compared to
other competitors such as Dell.
The long lasting recession may impact the sales of the company due to
higher prices of the products and services
Microsoft launched Microsoft Vista, Windows 7 which is gaining market
share.
The switching in technology is very fast

29

BCG Model of Apple Inc.

30

Boston Consulting Group (BCG) model is a technique developed by BRUCE

HENDERSON of the Boston Consulting Group in early 1970s. According to this
technique businesses or products are classified as low or high performers
depending upon their market growth rate and relative market share. It is very
useful tool to identify the product line of an organization.
BCG model classified in four main categories are

31

1.)

Star

2.) Cash Cow 3.) Question Mark 4.) DogWhat is driving

Macintosh acceptance?

Supporters agree that it is the product's easy to use graphic interface. "Once a user
sits down and works with a Macintosh, they never go back to an IBM Personal
Computer," proclaimed Price Collins, a programming manager at General Electric
Co. in Bridgeport, Conn.The ease of use features translate into substantial savings
for many corporations. "We spend much less time training Macintosh users than

32

we do training IBM microcomputer users," noted Pearson at the New York Daily
News.
Studies comparing Macintosh and IBM microcomputer training costs found that it
takes twice as long for an IBM user to learn how to operate his machine and three
times longer for the user to understand how to opeate a second application. A
survey commissioned by Apple found the average cost of training an IBM user was
$765 compared to $294 for a Macintosh user.The Macintosh's graphics capabilities
also offer many middle managers their own strategic weapons in the battle for
upper management's attention.
"An employee will use a Macintosh to generate slides and charts for an important
presentation," GE's Collins explained. "The output is far superior to anything
generated on an IBM microcomputer, so other managers immediately want to
produce the same quality output. Quickly, use of Macintoshes spreads through the
company."

Removing Barriers for Users

Analysts reported that another reason for acceptance was aggressive Apple actions.
"Apple removed barriers that corporations erected to keep Macintoshes out of
users' hands," said Richard Kollmeyer, the director of marketing and technical
services at The Support Group Inc., a Wellesley, Mass., microcomputer reseller.

33

"One of the initial concerns was the inability to run MS-DOS software on a
Macintosh. Quickly, Apple delivered hardware so users could run those
applications."
To date, Macintoshes have been relegated to personal productivity tools in most
companies. "Most users purchase a Macintosh to more efficiently do their own
work," noted Michael Masterson, a microcomputer systems specialist at Arthur
Young & Co. in San Jose, Calif.
Users are primarily working with traditional microcomputer applications, such as
spreadsheet and word processing. However, there are nuances in the types of
applications employed by IBM PC and Macintosh users.
Application Preferences
In a survey of 1,216 large companies (each having more than 500 employees),
Dataquest Corp., a market research firm in San Jose, Calif., reported that word
processing was the Macintosh's most widely used application--named by 54% of
respondents. Graphics applications followed with 46%, and spreadsheets placed
third with 38%.On the IBM Personal Computer, the response was as follows: 65%
used spreadsheets; 57%, word processing; and 35%, database management
systems. Few of the companies that dominate the IBM microcomputer software
market have had much success plying Macintosh wares. For example, Lotus
Development Corp. of Cambridge, Mass., and Ashton-Tate of Torrance, CAlif.,
have had little success in the market. The most notable exception, Microsoft Corp.,
Redmond, Wash., offers the three bestselling applications: Excel, a spreadsheet;
Word, a word processing package; and Works, an integrated spreadsheet, word
processing and database application.

34

AppleInsider reports on a research note from BMO analyst Keith Bachman that
could have been written for Crazy Apple Rumorsif they hadn't gone ghost-site
on us. It turns out the success of the Mac in recent years isn't because of Mac OS
X, or Intel CPUs, or the iPod Halo Effect; rather, it's because Microsoft sucks.
"Thus far, user satisfaction ratings for Vista have been weak, and startup times for
Vista have been known to be much slower than the Mac OS X," Bachman says.

35

"Thus, more than 50% of recent customers buying Macs in Apple retail stores are
first-time buyers."
While it's great that the six-figure analyst projects 2.4 to 2.5 million Macs sold for
the quarter just ended, his rationale is, well, crazy. Setting aside the image of some
grandma dropping $2,600 for a MacBook Air with SSD, there's nothing "recent"
about half of Mac buyers in Apple Stores being new to the platform. It's been that
way since before Vista was released.
Further, as the chart by the four-figure analyst clearly shows, the surge in Mac
sales started around the time Apple transitioned to Intel CPUs. Ironically, one
could argue that Mac sales are rising because of Vista, but not in the way Bachman
suggests. Prior to the release of Leopard and the discontinuation of Boot Camp as a
separate product, Apple reported huge downloads of the program that let Mac users
launch Windows Vista very, very slowly.

Apple Beats Competitors at Inventory Turn Over

Despite a weakening economy and a need to meet customer demand, Apple has
been able to maintain a fast inventory turnover rate. The Mac and iPhone maker is
sitting at five days worth of inventory on any given day, beating Dell's seven days
worth of inventory, according to data from UBS.

36

Other PC makers are having even more trouble matching Apple's inventory
efficiency. Lenovo, for example, is averaging 15 days of inventory, and HP is
sitting at 32 days. Intel, however, is showing a much slower inventory turnover rate
at 89 days, and D-Link is sitting on a staggering 131 days worth of inventory.
Apple's quick turnover rate may have been due in part to preparing for its just
announced iMac, Mac mini and Mac Pro updates. The company released new
desktop computer models on March 3, and keeping inventory low helped assure
that there would be fewer of the previous model machines sitting on store shelves.
While maintaining a higher inventory level can help a company cope with sudden
increases in demand, it can also show a company's inability to adequately gauge
market interest in their products. For now, it looks like Apple is managing
inventory better than its competition.
IPod: The Marketing of an Idea Project
Apples iPod has taken the world by storm. Nearly ubiquitous, it has changed not
only the way people listen to music, but it has transformed its parent company
Apple into an entertainment giant. In order to understand how this change came
about, well take a look at Apples ongoing efforts to make iPod synonymous with
hip. Well also discuss exactly what customers are buying when they buy an iPod,
and we will take a deep look at several aspects of Apples marketing of this
exciting new product, from the iPod itself, Apples strategic planning, possible
research findings that supported their approach, segmentation strategies that may
have been employed and why, as well as pricing strategy across these segments.
Like Magrittes surrealist painting of a pipe with the caption Ceci nest pas une
pipe (This is not a pipe), the iPod is not merely an MP3 player. It is a symbol
which encompasses many grand ideas; ideas that involve world change, and how
37

cool we all can be if we are part of that change. Apples careful and deliberate
exploitation of this concept, comprising an entire marketing ecosystem which
nurtures that idea will be the subject of this paper. On January 9th, 2010, Steve
Jobs, renowned CEO of Apple, announced that the company which he founded
would no longer be known as Apple Computer, Inc. Its new name would just be
Apple, Inc.1 This seemingly trivial change represents a fundamental shift with
deep implications that were the result of many changes Apple had engineered over
the past six or seven years; transitioning itself from a computer company slugging
it out for a meager share of an increasingly competitive hardware and software
market, to a business that promoted an entirely new concept: the digital lifestyle.
Before we dig down into what this radical shift entailed, both for the company and
the world, a company already firmly rooted in several notions that allowed this
transition to make sense. Apple made a name for itself by being instrumental in
ushering in the home PC revolution. For millions, Apple was single-handedly
responsible for this revolution by virtue of the fact that it created radical new
features such as windows-type graphical user interfaces, pull-down menus and
simplified computer control via the mouse. The history of the PC revolution is a
history of war between Apple, a number of losers that no one remembers any more,
and archrival Microsoft with its dubious counterclaims of having pioneered the
concept of Windows. Frustrating to anyone who owned a Mac back in the 1980s is
the knowledge that Apple did indeed pioneer the windows metaphor as a distinct
feature of its operating system. This was at a time when Microsoft users were still
struggling with text-based DOS commands, and yet the commercial success of
Microsoft has served to rewrite history to some degree. Battles ensued over the
years, but no matter whose side you were on, by the late 90s it was clear that
Apple was not gaining any ground whatsoever as a computer and software

38

manufacturer. In fact due to many external events, Apples position was in clear
threat.
The leading device at the time was Sonicblue RioVolt MP3 CD Player, which
retailed for less than $100. Creative's Nomad Jukebox was selling its recently
introduced 6GB hard drive for about $250, and e.Digital Corp. was touting its
walloping 10GB palm-size Treo 10 for $ 249 Treo. Against these contenders,
iPods $399 price tag for a mere 5 GB of storage doesnt seem to make sense16.
Also, at this time, iPod was only compatible with Macs, which amused Bill Gates,
and continued to do so even as late as 2012 when USA today quoted him as
saying: I think you can draw parallels here with the computer here, too, Apple
was once extremely strong with its Macintosh and graphic user interface, like with
the iPod today, and then lost its position.17 It is our contention that the initial
release of iTunes 1.0, which as noted was practically laughed at, was a Trojan
Horse that delivered quite a bit of business intelligence to Apple.

Historical Performance
Although sales remained stagnant during 1998-2002, sales more than
doubled since (see graph below). This dramatic shift in performance is primarily
due to the increase in sales from the iPod product line.

39

Stock Price Performance

Another interesting way to consider the financial performance is to evaluate how

Apples stock price performed against the market and against its main competitors.
Apples performance has been inconsistent over the last 20 years compared to the
S&P 500. It also has not performed at the same level as its main competitors, Dell
and Microsoft. However, performance improved since then.

40

Profitability Measures
Apple substantially improved in its key measures of profitability in the last few
fiscal years. In terms of return on assets, return on equity and profit margin, Apple
strengthened financially and now has similar ratios to that of its competitors and
the overall computer hardware industry .
20
09

201 201
0
2

Microso
ft '10

Dell
'10

Return on 1.01
Assets
%

3.43
%

11.56
%

19.75%

15.42 11.98% 8.13%

%

Return on 1.63
Equity
%

5.44
%

17.88 28.56%
%

67.31 36.61% 19.61%

%

Profit
Margin

3.33
%

9.58
%

6.39
%

P/E Ratio

1.11
%

31.57%

33.89 22.63

Indust
ry '10

6.36%

18.51 26.32

S&P
500

13.75%
22.09

In reviewing Apples 1st and 2nd quarter 2012 earnings releases, gross margins
dropped slightly.Apple attributes this decline primarily to price pressures,
especially in the iPod product line. (1st Quarter 10Q) This will continue to affect
performance over time. However, Apples ability to maintain the momentum it
built in the marketplace will control the speed with which erosion will occur.
Liquidity and Leverage Measures
Apple historically held very little long-term debt. The table below compares
Apples liquidity measures to their competitors, their industry, and the general
market. During the period of strong financial performance, Apple accumulated

41

cash. This strengthens Apples position should they choose to access the capital
markets.

20
09

20
10

20
12

Microsof
t '10

Dell
'10

Industry
'10

S&P
500

Current
Ratio

2.5

2.6

2.88

1.11

1.81

1.82

Quick
Ratio

2.47

2.59

2.9

2.85

1.08

1.45

1.31

Product Unit Sales

In the last several years, there have been dramatic changes to Apples product sales
by category. Apple breaks its unit sales into four primary categories: desktops,
notebooks, iPods, and peripherals. The graph below shows the product mix for

42

Apple in 2002. Note the domination by desktops and notebooks and the small
contribution by iPods.

Comparing the same graph, you see dramatic differences in the product mix for
Apple. The iPod sales now account for 32.5% compared to 2.5% for 2002. The
combined sales of computers (desktop/notebook) lost share, dropping from 79% to
45% of sales. This drop merely represents a shift in Apples product mix, not their
global computer market share (which remains stable in the 2-3% range).
Meanwhile, sales of peripherals (including wireless connectivity and networking
solutions), remained stable. (Hoovers)

Operating Segments
Apple breaks its sales into five operating segments. The chart below shows the
sales by segment for each year 2002-2012. On a percentage basis, only the retail
segment appears to be outperforming the others.
43

Net sales in the retail segment grew to $15.35 billion in 2009. In the 1st quarter
2009, sales growth continued in the retail segment to $1.1 billion (a 91% increase
over the same period last year). This increase was due to growth in the number of
stores (from 101 to 135) and to a 41% same-store sales growth. (1st Quarter 10Q)
Although the retail segment was the only segment to realize growth as a percentage
of total sales, all of the segments had solid growth.

In the Americas, sales

increased 65% and continued to represent approximately 47% of total worldwide

sales. Sales in Japan and Europe grew by 92% and 47%, respectively. (1 st Quarter
10Q)

Market Value Analysis

We used Discounted Cash Flow (DCF) analysis to assess the appropriate equity
value of Apple. To complete this analysis, we developed a pro-forma income
statement and extracted free cash flow. We then discounted these cash flows using
44

a calculated Weighted Average Cost of Capital (WACC). Apples WACC equaled

their cost of equity since they carry no long-term debt. We used the Capital Asset
Pricing Model (CAPM) to calculate the cost of equity.
CAPM consists of a risk-free rate, a market risk premium, and a company Beta.
The yield on the 10-year Treasury is the standard for a risk-free rate. To determine
the market risk premium, we used the average return that an investor would require
for an investment with average risk. We used data available online to determine
Apples Beta, projected to be 1.46. The below chart summarizes Apples cost of
equity.
Cost of Equity/WACC

Note

Value

Risk Free Rate

10 Yr Treasury

5.12

Market Risk Premium

(Analysis)

Beta

From Google

1.46

Adjusted
Premium

Apple

Risk

5.84

Cost of Equity/WACC

10.96

Financial Analysis
Apples financial performance continued to strengthen over the last several
quarters. In the most recent earnings announcement, Apple reported significant

45

growth in net revenues driven by the strong performance of its iPod product line.
Net sales for the 2nd quarter grew to $4.36 billion, which is a 34% increase over 2 nd
quarter 2012 results. Net income increased by 41% to $410 million.
The iPod product line continues to drive the financial performance of the company.
In the 2nd quarter alone, Apple sold 8.5 million iPods, representing a 61% increase
over the 5.3 million units sold in the 2 nd quarter of the prior year. Mac sales
showed slight growth of only 4%.
Apples year-to-date revenues total just over $10 billion and earnings total just
under $1 billion. For the 3rd quarter, CFO Peter Oppenheimer stated, we expect
revenue of about $4.2 to $4.4 billion which will push total sales above last terms
annual numbers.

Apple 2012 1Q financial analysis

2012 April 25 Posted by admin under 2012 1Q, Apple, Technology, USA

46

Apple 2012 1Q results continues to impress. Revenue has jumped from 24,7 bn.$
to 39,2 bn.$ or by 59% compared to 2011 Q1. High revenue increase lead to even
more rapid Net Income before depreciation increase. Which has risen from 6,4 bn.
$ to 12,4 bn.$ or almost dubbed. This was lead by slower revenue cost (+43%) and
operating cost increase (+36%) then revenue.

Companies sales by geography is good. 1/3 of sales are from US and 1/3 is from
Asia which are the regions with highest estimated growth. Europe takes 22% of
sales. Asia sales has dubbed compared to last year so this market has grown the
most. Most of companies revenue is generated by iPhone 58% which sales has
increased by +85%. Most rise was in iPad where revenue has increased by +132%
and now contains 17% of companies income, this is a defiantly income growth
segment while Mac and special y iPod (-25%) are the products of the past.

47

According to http://www.netmarketshare.com Apple share in mobile and tabled

marked has increased from 48% to 60% and is better than its main competitors
Google Android, which share has increased from 15% to 19%. But never the less
big battle is projected in the future at this marked between Google and Apple
In general companies results are positive.

Balance sheet continue to be very strong. Equity level has increased to 68%. That
did not effect high return on Equity level which is 45% at Q1. Since
company announced dividend payments and share repurchases companies Equity
should not increase in the future. Liquidity ratio is 1,6 which is good. Company has
cash surplus of 110 bn.$ which has increased from 97 bn.$ from Q4. Companies
inventory and Account receivables are minimal so as liabilities.

48

No other major changes at the balance sheet. In general companies balance

structure is strong.
Share value:
Common Stocks

14,9 bn.$

0,935 bn. 15,9 $

+ Retained earnings

87,1 bn.$ + 93,2 $

109,1 $

41,1 bn.$ + 44,0 $

+ 1 year Net income before Depreciation

(52 bn.$)

(+55,6 $)

153,1 $

Companies share basic value is ~109$ (+13,5%/96$ compared with

Q4). Current market price is ~610$ (+12,1%/544$). which shows that market is
paying ~500$ more or 11,4 years of Net income before Depreciation earnings,
which shows that companies shares are a bit over evaluated. If calculating Net
income before Depreciation according to last quarter yearly earnings should be
around 52 bn.$/year (13 bn./quarter) or 55,6$/share which makes it ~9 year, never
the less indicator is quit high. Share profitability (Share market price/Net income
before Depreciation) if calculating projected income (52 bn.$/year) is 9,1% which
is a bit over average.

Annual Income statement(value in 000s)

Get Quarterly Data
Period Ending: Trend 9/29/2012
9/24/2011 9/25/2009 9/26/2009

Total Revenue

$156,508,000 $108,249,000 $65,225,000 $42,905,000

Cost of Revenue

$87,846,000 $64,431,000 $39,541,000 $25,683,000

49

Gross Profit

$68,662,000 $43,818,000 $25,684,000 $17,222,000

Operating Expenses
Research and
Development

$3,381,000

$2,429,000

$1,782,000 $1,333,000

Sales, General and

Admin.

$10,040,000 $7,599,000

$5,517,000 $4,149,000

Non-Recurring Items

$0

$0

$0

$0

Other Operating
Items

$0

$0

$0

$0

Operating Income

$55,241,000 $33,790,000 $18,385,000 $11,740,000

Add'l
income/expense
items

$522,000

Earnings Before
Interest and Tax

$415,000

$155,000

$326,000

$55,763,000 $34,205,000 $18,540,000 $12,066,000

50

Interest Expense

$0

$0

Earnings Before Tax

$55,763,000 $34,205,000 $18,540,000 $12,066,000

Income Tax

$14,030,000 $8,283,000

$4,527,000 $3,831,000

Minority Interest

$0

$0

$0

$0

Equity Earnings/Loss
Unconsolidated
Subsidiary

$0

$0

$0

$0

Net Income-Cont.
Operations

$41,733,000 $25,922,000 $14,013,000 $8,235,000

Net Income

$41,733,000 $25,922,000 $14,013,000 $8,235,000

Net Income
Applicable to
Common

$41,733,000 $25,922,000 $14,013,000 $8,235,000

51

$0

$0

Shareholders

Statement
Bt (values in 00
Period Ending:

Trend

9/29/2012

9/24/2011 9/25/2009 9/26/2009

Current Assets
Cash and Cash
Equivalents

$10,746,000 $9,815,000

Short-Term
Investments

$18,383,000 $16,137,000 $14,359,000 $18,201,000

Net Receivables

$21,275,000 $13,731,000 $11,560,000 $6,192,000

Inventory

$791,000

$776,000

$1,051,000 $455,000

Other Current Assets

$6,458,000

$4,529,000

$3,447,000 $1,444,000

Total Current Assets

$57,653,000 $44,988,000 $41,678,000 $31,555,000

52

$11,261,000 $5,263,000

Long-Term Assets
Long-Term
Investments

$92,122,000 $55,618,000 $25,391,000 $10,528,000

Fixed Assets

$15,452,000 $7,777,000

$4,768,000 $2,954,000

Goodwill

$1,135,000

$896,000

$741,000

$206,000

Intangible Assets

$4,224,000

$3,536,000

$342,000

$247,000

Other Assets

$5,478,000

$3,556,000

$2,263,000 $2,011,000

Deferred Asset
Charges

$0

$0

$0

Total Assets

$176,064,000 $116,371,000 $75,183,000 $47,501,000

53

$1,727,000

Current Liabilities

Accounts Payable

$32,589,000 $23,879,000 $17,738,000 $9,453,000

Short-Term Debt /
Current Portion of
Long-Term Debt

$0

$0

$0

Other Current
Liabilities

$5,953,000

$4,091,000

$2,984,000 $2,053,000

Total Current
Liabilities

$38,542,000 $27,970,000 $20,722,000 $11,506,000

Long-Term Debt

$0

Other Liabilities

$16,664,000 $10,100,000 $5,531,000 $3,502,000

Deferred Liability
Charges

$2,648,000

$1,686,000

$1,139,000 $853,000

Misc. Stocks

$0

$0

$0

$0

54

$0

$0

$0

$0

Minority Interest

$0

$0

$0

$0

Total Liabilities

$57,854,000 $39,756,000 $27,392,000 $15,861,000

Stock Holders
Equity

Common Stocks

$16,422,000 $13,331,000 $10,668,000 $8,210,000

Capital Surplus

$0

Retained Earnings

$101,289,000 $62,841,000 $37,169,000 $23,353,000

Treasury Stock

$0

$0

$0

$0

Other Equity

$499,000

$443,000

($46,000)

$77,000

Total Equity

$118,210,000 $76,615,000 $47,791,000 $31,640,000

$0

55

$0

$0

Total Liabilities &

Equity

$176,064,000 $116,371,000 $75,183,000 $47,501,000

http://www.nasdaq.com/symbol/aapl/financials?query=ratios#ixzz2Vv2kKj

Period Ending: Trend 9/29/2012

Net Income

9/24/2011

9/25/2009 9/26/2009

$41,733,000 $25,922,000 $14,013,000 $8,235,000

Cash FlowsOperating
Activities
Depreciation

$3,277,000

$1,814,000

56

$1,027,000

$734,000

Net Income
Adjustments

$6,145,000

$4,036,000

$2,319,000

$1,750,000

Changes in
Operating
Activities
Accounts
Receivable

($6,965,000) ($1,791,000) ($4,860,000) ($353,000)

Changes in
Inventories

($15,000)

Other Operating
Activities

($3,162,000) ($1,391,000) ($1,610,000) ($713,000)

Liabilities

$9,843,000

Net Cash FlowOperating

$50,856,000 $37,529,000 $18,595,000 $10,159,000

$275,000

$8,664,000

57

($596,000)

$8,302,000

$54,000

$452,000

Cash FlowsInvesting
Activities
Capital
Expenditures

($8,295,000) ($4,260,000) ($2,005,000) ($1,144,000)

Investments

($38,427,000) ($32,464,000) ($11,075,000) ($16,046,000)

Other Investing
Activities

($1,505,000) ($3,695,000) ($774,000)

Net Cash FlowsInvesting

($48,227,000) ($40,419,000) ($13,854,000) ($17,434,000)

($244,000)

Cash FlowsFinancing
Activities
Sale and
Purchase of
Stock

$665,000

$831,000

$912,000

$475,000

Net Borrowings

$0

$0

$0

$0

Other Financing
Activities

($1,226,000) ($520,000)

($406,000)

($82,000)

Net Cash FlowsFinancing

($1,698,000) $1,444,000

$1,257,000

$663,000

58

Effect of
Exchange Rate

$0

$0

Net Cash Flow

$931,000

($1,446,000) $5,998,000

59

$0

$0

($6,612,000)

Period Ending:

Trend

9/29/2012 9/24/2011 9/25/2009 9/26/2009

Liquidity Ratios

Current Ratio

150%

161%

201%

274%

Quick Ratio

148%

158%

196%

270%

Cash Ratio

76%

93%

124%

204%

Gross Margin

44%

40%

39%

40%

Operating Margin

35%

31%

28%

27%

Pre-Tax Margin

36%

32%

28%

28%

Profit Margin

27%

24%

21%

19%

Pre-Tax ROE

47%

45%

39%

38%

34%

29%

26%

Profitability Ratios

35%
After Tax ROE

60

An
Income Statement (values i 000'shttp://www.nasdaq.com/symbol/aapl/financials?
query=income-statement#ixzz2Vv1MZyY4

Pro-Forma Income Statement

Firm made several key assumptions in compiling a pro-forma income statement.
First, to complete the estimate for the 2009 data,Company merely annualized the
earnings for the first two quarters. They then projected a declining rate of growth
in sales for the next four fiscal terms of 30%, 20%, 15%, and 10%, respectively.
We do not believe that the growth in iPods is sustainable for the long-term. They
also used the percent-of-sales method to calculate cost of goods sold, research &
development, SG&A, and interest.As applied the 2012 tax rate for all future
periods. As the table below shows, the mid-term earnings growth is positive.
Projected Free Cash Flow and Equity Valuation
Apple will continue without long-term debt. There will be no significant changes
in capital expenditures and net working capital. Thus, free cash flow will equal net

61

income plus depreciation. Given WACC, we are able to discount cash flows back
using half-year PV factors (we are through the first half of 2009).Calculated
terminal value using a perpetual annual growth rate of 7%, which is slightly above
the industry growth rate of 5.6%.
Given intrinsic equity value, we estimate the per share stock price. Given their
particular market condition, Apple appears undervalued.

Equity Value
Total Shares (000's)

848612

Value (000's)

71629000

Value/Share

$84

Current Price

$71.89

Strategy
Firm can describe Apples strategy in terms of product differentiation and strategic
alliances. In each of these strategies, we examine what Apple did historically and
then discuss alternatives for Apples future.

Product Differentiation
Apple prides itself on its innovation. When reviewing the history of Apple, it is
evident that this attitude permeated the company during its peaks of success. For
62

instance, Apple pioneered the PDA market by introducing the Newton in 1993.
Later, Apple introduced the easy-to-use iMac in 1998, and updates following 1998.
It released a highly stable operating system in 1999, and updates following 1999.
Apple had one of its critical points in history in 1999 when it introduced the iBook.
This completed their product matrix, a simplified product mix strategy
formulated by Jobs. This move allowed Apple to have a desktop and a portable
computer in both the professional and the consumer segments. The matrix is as
follows:
In 2001, Apple hit another important historical point by launching iTunes. This
marked the beginning of Apples new strategy of making the Mac the hub for the
digital lifestyle. Apple then opened its own stores, in spite of protests by
independent Apple retailers voicing cannibalization concerns. Then Apple
introduced the iPod, central to the digital lifestyle strategy. Philip W. Schiller,
VP of Worldwide Product Marketing for Apple, stated, iPod is going to change
the way people listen to music. He was right.
Apple continued their innovative streak with advancements in flat-panel LCDs for
desktops in 2002 and improved notebooks in 2003. In 2003, Apple released the
iLife package, containing improved versions of iDVD, iMovie, iPhoto, and iTunes.
In reference to Apples recent advancements, Jobs said, We are going to do for
digital creation what Microsoft did for the office suite productivity. That is indeed
a bold statement. Time will tell whether that happens.
Apple continued its digital lifestyle strategy by launching iTunes Music Store
online in 2003, obtaining cooperation from The Big 5 Music companiesBMG,
EMI, Sony Entertainment, Universal, Warner. This allowed iTunes Music Store

63

online to offer over 200,000 songs at introduction. In 2003, Apple released the
worlds fastest PC (Mac G5), which had dual 2.0GHz PowerPC G5 processors.
Product differentiation is a viable strategy, especially if the company exploits the
conceptual distinctions for product differentiation. Those that are relevant to Apple
are product features, product mix, links with other firms, and reputation. Apple
established a reputation as an innovator by offering an array of easy-to-use
products that cover a broad range of segments. However, its links with other firms
have been limited, as we will discuss in the next section on strategic alliances.
There is economic value in product differentiation, especially in the case of
monopolistic competition. The primary economic value of product differentiation
comes from reducing environmental threats. The cost of product differentiation
acts as a barrier to entry, thus reducing the threat of new entrants. Not only does a
company have to bear the cost of standard business, it also must bear the costs
associated with overcoming the differentiation inherent in the incumbent. Since
companies pursue niche markets, there is a reduced threat of rivalry among
industry competitors.
A companys differentiated product will appear more attractive relative to
substitutes, thus reducing the threat of substitutes.

If suppliers increase their

prices, a company with a differentiated product can pass that cost to its customers,
thus reducing the threat of suppliers.

Since a company with a differentiated

product competes as a quasi-monopoly in its market segment, there is a reduced

threat of buyers. With all of Porters Five Forces lower, a company may see
economic value from a product differentiation strategy.
A company attempts to make its strategy a sustained competitive advantage. For
this to occur, a product differentiation strategy that is economically valuable must

64

also be rare, difficult to imitate, and the company must have the organization to
exploit this. If there are fewer firms differentiating than the number required for
perfect competition dynamics, the strategy is rare. If there is no direct, easy
duplication and there are no easy substitutes, the strategy is difficult to imitate.
There are four primary organizing dilemmas when considering product
differentiation as a strategy.
To resolve these dilemmas, there must be an appropriate organization structure. A
U-Form organization resolves the inter-functional collaboration dilemma if there
are product development and product management teams. Combining the old with
the new resolves the connection to the past dilemma.

Having a policy of

experimentation and a tolerance for failure resolves the commitment to market

vision dilemma. Managerial freedom within broad decision-making guidelines
will resolve the institutional control dilemma.
Five leadership roles will facilitate the innovation process: Institutional Leader,
Critic, Entrepreneur, Sponsor, and Mentor. The institutional leader creates the
organizational infrastructure necessary for innovation. This role also resolves
disputes, particularly among the other leaders. The critic challenges investments,
goals, and progress.

The entrepreneur manages the innovative unit(s).

The

sponsor procures, advocates, and champions. The mentor coaches, counsels, and
advises.
Apple had issues within its organization. In 1997, when Apple was seeking a CEO
acceptable to Jobs, Jean-Louis Gasse (then-CEO of Be, ex-Products President at
Apple) commented, Right now the job is so difficult, it would require a bisexual,
blond Japanese who is 25 years old and has 15 years experience! Charles
Haggerty, then-CEO of Western Digital, said, Apple is a company that still has

65

opportunity written all over it. But youd need to recruit God to get it done.
Michael Murphy, then-editor of California Technology Stock Letter, stated, Apple
desperately needs a great day-to-day manager, visionary, leader and politician. The
only person whos qualified to run this company was crucified 2,000 years ago.To
continue a product differentiation strategy, Apple must continue its appropriate
management of innovation dilemmas and maintain the five leadership roles that
facilitate the innovation process.

Strategic Alliances
Apple has a history of shunning strategic alliances. On June 25, 1985, Bill Gates
sent a memo to John Sculley (then-CEO of Apple) and Jean-Louis Gasse (thenProducts President). Gates recommended that Apple license Macintosh technology
to 3-5 significant manufacturers, listing companies and contacts such as AT&T,
DEC, Texas Instruments, Hewlett-Packard, Xerox, and Motorola. (Linzmayer, 2458) After not receiving a response, Gates wrote another memo on July 29, naming
three other companies and stating, I want to help in any way I can with the
licensing. Please give me a call.
contracts with Apollo Computer.

In 1987, Sculley refused to sign licensing

He felt that up-and-coming rival Sun

Microsystems would overtake Apollo Computer, which did happen.

Then, Sculley and Michael Spindler (COO) partnered Apple with IBM and
Motorola on the PowerPC chip. Sculley and Spindler were hoping IBM would buy
Apple and put them in charge of the PC business. That never came to fruition,
because Apple (with Spindler as the CEO) seemed contradictory and was
extraordinarily difficult in business dealings. Apple turned the corner in 1993.
Spindler begrudgingly licensed the Mac to Power Computing in 1993 and to

66

Radius (who made Mac monitors) in 1995. However, Spindler nixed Gateway in
1995 due to cannibalization fears. Gil Amelio, an avid supporter of licensing, took
over as CEO in 1996. Under Amelio, Apple licensed to Motorola and IBM. In
1996, Apple announced the $427 million purchase of NeXT Software, marking the
return of Steve Jobs. Amelio suddenly resigned in 1997, and the stage was set for
Jobs to resume power.
Jobs despised licensing, calling cloners leeches. He pulled the plug, essentially
killing its largest licensee (Power Computing).

Apple subsequently acquired

Power Computings customer database, Mac OS license, and key employees for
$100 million of Apple stock and $10 million to cover debt and closing costs. The
business was worth $400 million.
There is economic value in strategic alliances. In the case of Apple, there was the
opportunity to manage risk and share costs facilitate tacit collusion , and manage
uncertainty. It would have been applicable to the industries in which Apple
operated. Tacit collusion is a valid source of economic value in network industries,
which the computer industry is. Managing uncertainty, managing risk, and sharing
costs are sources of economic value in any industry. Although Apple eventually
realized the economic value of strategic alliances, it should have occurred earlier.
The following are some comments about Apples no-licensing policy.
If Apple had licensed the Mac OS when it first came out, Window wouldnt exist
today.Jon van Bronkhorst, The computer was never the problem.

The

companys strategy was. Apple saw itself as a hardware company; in order to

protect our hardware profits, we didnt license our operating system. We had the
most beautiful operating system, but to get it you had to buy our hardware at twice
the price. That was a mistake. What we should have done was calculate an

67

appropriate price to license the operating system. We were also nave to think that
the best technology would prevail. It often doesnt.Steve Wozniak, Apple
cofounder
If we had licensed earlier, we would be the Microsoft of today.Ian W. Diery,
Apple Executive VP, I am aware that I am known as the Great Satan on licensing
I was never for or against licensing. I just did not see how it would make sense.
But my approach was stupid. We were just fat cats living off a business that had
no competition.Jean-Louis Gasse, Be CEO and ex-CEO of Apple, admitting
he made a strategic mistake
A strategic alliance can be a sustained competitive advantage if it is rare, difficult
to imitate, and the company has an organization to exploit it. If the number of
competing firms implementing a similar strategic alliance is relatively few, the
strategy is rare. If there are socially complex relations among partners and there is
no direct duplication, the strategy is difficult to imitate. When organizing for
strategic alliances, a firm must consider whether the alliance is non-equity or
equity. A non-equity alliance should have explicit contracts and legal sanctions.
An equity alliance should have contracts describing the equity investment. There
are some substitutes for an equity alliance, such as internal development and
acquisitions. However, the difficulties with these drive the formation of strategic
alliances. It is vital to remember, Commitment, coordination, and trust are all
important determinants of alliance success.

Apple avoids competition

If you look at the history of Apple, you'll see that instead of rising to competition,
they often ignore it, or try to use legal means, or bundling clout, to erase it.

68

When challenged by a larger market force, as with the IBM PC and its clones in
the early 80s, and with Windows 3.0, 95 and then NT 4.0 in the 90s, they miss
obvious marketing opportunities, ways to make their products stronger by
participating in markets that others develop. This is an art that Microsoft has
mastered, there's no reason Apple couldn't have learned the same lessons, but they
didn't.
And when dealing with smaller competitors, Apple routinely and often
unconsciously forced them out of business by bundling, or declaring that they will
bundle a competitive offering.
When the Internet happened, Apple struggled against it instead of embracing it,
preferring to invest in technologies that eventually ended up on the scrap heap. A
wasted lead in content development, developers going to Windows, a poor Java
implementation on the Mac.
The bottom line, the strategy of avoiding competition has been disastrous for
Apple. But they want to do it again.
The same old strategy
The cloners, Motorola, Power Computing, UMAX, IBM and others, are poised to
ship products that would take Apple out of the hardware business, because they're
cheaper, faster, bigger, more powerful machines than Apple's new products. These
are the computers that Mac users want and are, in my opinion, entitled to.
Even though we haven't seen the license agreements with the cloners, it appears
that Apple has the contractual right to forbid them to ship the computers, for any
reason at all. Apple wants to keep their hardware business, so they exercise that
right.
69

I despise companies that use hardball tactics to put their competitors out of
business. I admire companies that rise to competition. I happily buy new products
when I have a choice. I don't like to buy products that I'm forced to buy.

Is it a nice business?
If you don't have anyone to compare with, if you aren't subject to customer choice,
your product loses direction, you focus inward, and eventually (as now for Apple)
your interests become out of synch with the interests of your customers.
Focus on that for a moment. A company whose interests are against their
customers. Is that a nice business? Does it have much of a future?
Is it legal?
The customer's interest here is clearly served by competition. The usual benefits
apply -- lower prices, more realistic configurations, more diversity.
Apple's complaint that the cloners weren't growing the market can be explained by
Apple's licensing policy that kept them from making fundamentally different
products than Apple. Where's the cheap sub-notebook Mac? Where's the handheld
Mac? The Mac built into the dashboard of my car? Apple wouldn't let the cloners
make these products. Apple is an economic disaster area. They want Mac users to
put all their eggs in Apple's crumbling basket.

70

RECOMMENDATIONS:
For Company
Lowering the cost of products and maintaining the same quality standards.
Can form joint ventures.
Knowledge Management.
More number of retail stores for easy access.
Continuous innovation to expand.

For Others
Do not compromise on price for quality.
Choose the products based on individual needs.
Be unique and different.

71

Conclusion
I feel that Apple must focus on several key aspects to continue to grow and
succeed. They must continue a stable commitment to licensing, push for economies
of scope between media and computers, and become a learning organization.
Although it should continue, Apple may want to consider other forms of strategic
alliances. An equity strategic alliance may offer Apple the opportunity to obtain
additional competencies. An effective way for a company like Apple to accomplish
this would be in the form of a joint venture.
Apple should continue pushing the new line of media-centric products. Meanwhile,
Apple should not lose focus on its computers. Macintosh computers were 59% of
Apples sales in 2012. (Burrows)This very innovative company exploits its secondmover position. In the future, they will need to continue innovating to expand the
boundaries of both media and computers.
Apple apparently made a commitment to licensing. Although it should continue,
Apple may want to consider other forms of strategic alliances. An equity strategic
alliance may offer Apple the opportunity to obtain additional competencies. An
effective way for a company like Apple to accomplish this would be in the form of
a joint venture.Apple should continue push for economies of scope between media
and computers, and become a learning organization, pushing the new line of
media-centric products. This very innovative company exploits its second-mover
position. In the future, they will need to continue innovating to expand the
boundaries of both media and computers.This will allow the company to withstand

72

a departure by Jobs. Based on the actions of the organization, we feel that the midterm performance of Apple will be strong. This period allows Apple time to
overcome their challenges if they move swiftly. For this reason, we feel that they
will continue to succeed and will continue to outperform their peers.
Project References and Reading:
http://www.nasdaq.com/symbol/aapl/financials?query=ratios#ixzz2Vv2kKj
http://www.nasdaq.com/symbol/aapl/financials?query=incomestatement#ixzz2Vv1MZyY4
Paul Kunkel, AppleDesign: The Work of the Apple Industrial Design Group
ISBN 978-1-888001-25-9
Steven Levy (1994), Insanely Great: The Life and Times of Macintosh, the
Computer That Changed Everything ISBN 978-0-14-029177-3
Owen Linzmayer (2010), Apple Confidential 2.0, No Starch Press ISBN
978-1-59327-010-0
Michael S. Malone (1999), Infinite Loop ISBN 978-0-385-48684-2
Frank Rose (1990), West of Eden: The End of Innocence at Apple Computer,
Penguin Books ISBN 978-0-14-009372-8
John Sculley, John A. Byrne (1987) Odyssey: Pepsi to Apple, HarperCollins,
ISBN 978-0-06-015780-7
Apple Inc. SEC filings at SECDatabase.com
Apple Inc. SEC filings at the Securities and Exchange Commission
Jim Carlton, Apple: The Inside Story of Intrigue, Egomania and Business
Blunders ISBN 978-0-88730-965-6

73

 Alan Deutschman (2000), The Second Coming of Steve Jobs, Broadway,

ISBN 978-0-7679-0432-2
Andy Hertzfeld (2004), Revolution in the Valley, O'Reilly Books ISBN 9780-596-00719-5
o "Apple Environment Environmental Progress". Archived from the
original on November 22, 2010. Retrieved November 22, 2010.
o "Apple Mac Green Notebooks". Apple Inc. 2008. Archived
from the original on December 22, 2008. Retrieved December 24,
2008.
o "Apple: MacBook Pro Graphics". Archived from the original on June
2, 2007. Retrieved June 8, 2007.
o "Apple Environment Reports". Apple Inc.
o "iMac and the Environment". Apple Inc. Archived from the original
on November 29, 2010. Retrieved November 29, 2010.
o "Climate Counts scorecard". Climatecounts.org. Retrieved October 7,
2011.
o "China orders Apple supplier plant closure over environmental
concerns- The Inquirer mobile". M.theinquirer.net. Retrieved
December 24, 2011.
o "Guide to Greener Electronics". Greenpeace International. Retrieved
November 14, 2011.
o Anderson, Ash. "Apple Power Cables to Become Even More
Environmentally Friendly". KeyNoodle. Retrieved January 14, 2012.
"Apple's 2012 Annual Report: More Employees, More Office Space, More
Sales".

74

 Apple Inc. at Hoover's

http://www.nasdaq.com/symbol/aapl/financials?query=cashflow#ixzz2Vv2cutjL
http://www.nasdaq.com/symbol/aapl/financials?query=balancesheet#ixzz2Vv2F6q7x

75