Apple Corporation Essay Samples

Apple Corporation

...dramatic change. In the past, most songs were sold through music stores on CDs. Apple is leading the forefront in the new wave of (legally) downloading music from the internet. It is an industry that has great promise, but also has few barriers to entry. Evidence of this is that Wal-Mart has entered the market with lower prices (but inferior song selection), and Microsoft is reportedly considering doing so as well. Another big question is whether or not web based retailers will be able to compete with those companies that own music content. For example, what’s to stop Time Warner from opening its own website, and selling Warner music only from its own site? Apple has so far avoided this problem by dominating the market, through superior business positioning and through effective linking with the iPod. It will remain to be seen whether or not Apple’s success in this will continue. The PC industry has gone through recurrent shifts in competitive dynamics since its inception in the mid-1970s. Familiar brands such as Packard Bell, AST, DEC, and Micron Electronics have followed early leaders such as Osborne and Tandy into oblivion. One-time industry leader IBM has scaled back its PC business after losing billions of dollars and long-time innovator Apple holds on to a shrinking niche market. Meanwhile, Dell Computer, which held less than 4% of the worldwide PC market as recently as 1995, is now the number one PC vendor worldwide with 13 percent of the global market, and holds nearly a quarter of the U.S. market. 3.3.1. Product Life Cycle Domestically, the PC market seems to be in its maturity stage characterized by a slowdown in sales growth as a result of mass acceptance. Following its worst year ever in 2001, unit growth is expected to exceed revenue growth, indicative of falling prices and profit erosion, both characteristics of a mature market. The industry consists of well entrenched competitors whose basic drive is to gain or maintain market share. A frequently used statistic to measure market structure is the Herfindahl index. The Herfindahl index equals the sum of the squared market shares of all the firms in the market. If perfect or monopolistic competition exists, then index should be below .2. Anything above .2 reflects either an oligopoly any anything above .6 usually points to a monopoly. The Herfindahl index for the PC industry in 2001 is .05 or 5%. The top 9 market share leaders dominate 60% of the world wide industry. Firms with a market share of .01 or lower are too small to significantly affect the final calculation. 3.2.2. COMPETITIVE ENVIRONMENT The Company is confronted by insistent competition in all areas of its business. The market for the design, manufacture, and sale of personal computers and related software and peripheral products is highly competitive. This market continues to be characterized by rapid technological advances in both hardware and software development, which have substantially increased the capabilities and applications of these products, and have resulted in the frequent introduction of new products and significant price, feature, and performance competition. Over the past several years, price competition in the market for personal computers has been particularly intense. The Company’s competitors who sell personal computers based on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. The Company’s results of operations and financial condition have been, and in the future may continue to be, adversely affected by these and other industry-wide downward pressures on gross margins. The principal competitive factors in the market for personal computers comprise relative price/performance, product quality and reliability, design innovation, availability of software, product features, marketing and distribution capability, service and support, availability of hardware peripherals, and corporate reputation. Further, as the personal computer industry and its customers place more reliance on the Internet, an increasing number of Internet devices that are smaller, simpler, and less expensive than traditional personal computers may compete for market share with the Company’s existing products. The Company ranks ninth in sales in the Computer Hardware Industry, Technology Sector in the U.S., most of its competition coming from Hewlett-Packard Co. (HPQ), Dell Inc (DELL), and Microsoft Corp. (MSFT). The Company’s Revenue Growth at 8.10% is on par with the industry. Relative to its competitors, AAPL only trails MSFT in its Gross Margin at 27.18% (Industry Gross Margin- 20.09%). Of the top ten companies in its industry in the U.S., The Company ranks third in its share price after International Bus Machine (IBM ) and NCR Corp. (NCR), eighth in Market Capitalization above Seagate Tech (STX) and NCR, and first in its price to earnings ratio. Apple Computers run on its own UNIX-based Operating System, which thus limiting its market, but also eliminating direct competitors in this specified market. This is evidenced by the Company’s significantly lower level of employees, total revenue, EBITDA, and Net Income relative to its competitors. Hewlett-Packard Company Hewlett-Packard is the third largest competitor of Apple in term of market cap after Microsoft and Dell. Its main business market is computing and imaging solutions for both business and home office. Hewlett-Packard business strategies are to provide customers with superior products, services and overall experiences by providing leading technologies that work seamlessly together; to deliver to business customers the best return on IT investments in the industry; to build world class cost structures and processes across the entire portfolio of businesses; and to focus on innovations and research and development. Hewlett-Packard has four main group business segments: the Technology Solution Group (TSG) which consist of Enterprise Storage and Servers (ESS), HP Services (HPS), and Software and Corporate Investments; the Personal Systems Group (PSG), the Imaging and Printing Group (IPG), and HP Financial Services (HPFS). Its $79.905 billion revenue in 2004 (as of October 31) came from 37.3% Technology Solution Group, 30.8% Personal Systems Group, 30.2% Imaging and Printing Group, and 2.3% HP Financial Services. The company total revenue increased by 9% from 2003 to 2004; and by 29% from 2002 to 2003 due to acquisition of Compaq. In 2004, its international sales cover 60% of total revenue and 40% from the United States. The company gains its market share by acquisition of Compaq in 2002. It also expands its imaging and printing group especially in printer that capable to the needs of digital printing. Dell Inc. Dell has a position as the second largest Apple competitor after Microsoft. Its business covers servers, storage, networking products, workstations, notebook computers, desktop computer systems, printing and imaging systems, software and peripheral products and IT services. Dell’s market area is corporate business and institutional customers. Its marketing strategy includes television and internet advertisement, publication, and special promotions. Dell maintains a field sales force throughout the world. Its worldwide operation covers the Americas (U.S., Canada and Latin America), Europe and Asia Pacific-Japan regions. Dell has five business strategies: direct relationship is the most efficient path to the customer; availability of custom-built products and custom-tailored services; low-cost leader; provides a single point of accountability for its customers; and standards-based technologies deliver the best value to customers. In 2004, Dell made total revenue of $41.4 billion, which came from Americas market $28.6 billion, Europe $8.5 billion, and Asia Pacific-Japan $4.3 billion. Dell’s market growth higher in international market compare to Americas market. Asia Pacific-Japan has the highest growth from 2003 to 2004 as 26%, followed by Europe 23%, and Americas 14%. In 2004, Dell maintained the No.1 position of market share of its desktop product; and held No.2 market share position of notebooks. The market for notebooks grew higher in 2004 (35%), compared to 2003 (20%); this situation as a result of the demand for mobile computer is increasing. Dell believes that the models will benefit the company in all environments and all product segment and regions. Dell also has bright future to continue the profitable growth by increasing its market, entering new market, and add products and services. Microsoft Incorporation Microsoft is the main competitor of Apple. Microsoft’s core mission statement: To enable people and businesses throughout the world to realize their full potential. The company was started by a college graduate, Bill Gates, who later on went to dominate the computer industry. Microsoft is also owned by NBC which has 50% ownership. Major geographic sales and marketing organizations represent a majority of all the global continents. Microsoft localizes many of their products to reflect local languages and conventions. Research and development facilities are located in Redmond, Fargo, Beijing, Dublin, Vedbaek, etc. Microsoft is able to generate revenue and other income related segments by creating a wide range of software products for computing devices. The company for the past few years laid a foundation for long-term growth, by capitalizing on vital areas such as customers, innovative new products, and improving internal processes. In 2004, PC unit growth was strong which increased 13% from 2003. Forecast for 2005 does not look good, with forecast of 7% to 9% growth. Revenue growth for 2004 was driven by licensing of Windows Client operating systems through OEMs and other server applications. Growth in PC shipments was 13% in 2004. The company also estimates that total server hardware shipments grew 16%. Operating income declined in 2004, a decline of $11 million which was from court settlements with Sun Microsystems. Operating income was improved by revenue growth by operational improvements in MSN business. PC and server unit shipment growth rates are expected to decline in 2005. The company is expecting to lose market share to Linux because Linux share of server units grew at a faster rate. Microsoft is anticipating a decline in future sales. At present Apple Computer is but a fraction of it’s past market strength. In part this is due to the company’s intense competition. The competition includes computer companies that develop hardware as well as software. Some of these companies include IBM, Gateway, Dell, Hewlett Packard, Packard Bell, Sony, Toshiba, and Compaq. This is not to mention the endless flow of PC clones that commonplace in the market. Such companies like Dell can illustrate the popularity and dominance of the PC. According to USA Today, Dell Computer Company has multiplied its annual revenue more than five-fold in the past five years to $18.2 billion from $3.5 billion by assembling and selling PCs. Earnings per share have grown at a 94% annual rate during the same period. As a result of Dell’s direct customer selling strategy it has been able to increase its $3.2 billion revenue. All of this activity has resulted good fortune to shareholders whose stock has increased up to 4,200% in the past three years (2004). One factor that all of these systems have in common is their dependence on software manufacturers to provide programs to run these machines. A key player in this arena is Microsoft with Windows XP and Windows 2000 operating systems, which devastated the stronghold Apple once had with their GUI (graphical user interface) interface. Although XP has been highly touted, it has also received its fair share of criticism for its built in activation and authentication process that requires the PC to log on to a Microsoft server every time it boots up in an attempt to eliminate the ever growing software piracy problem. Despite the criticism Microsoft’s Windows operating system continues to dominate the market while software developers continue to generate a plethora of applications for the PC. In the meanwhile Apple attempts to generate more enthusiasm, with its iMac comeback, to lure customer and software developers. Another factor that plays a considerable role in the computer industry is the computer chip manufacturer. Today the primary player is Intel, the maker of the famous Pentium chips. Intel released its less-expensive Celeron chip in 1999, and has recently released its new Pentium 4 chip. The new chip is touted as being a game lover’s dream because of the ability to generate realistic effects. Aside from the chips processing functions it has been criticized for its ability to send the serial number of an individual computer across the Internet. This tactic was initially designed for the purpose of controlling high thefts of computer chips. Intel has indicated that the serial number will only be transmitted only with the user’s permission. At this point Intel’s only real competition in the upcoming year will come from AMD’s new K7 processor that uses the 3D Now technology. In Apple Computer’s present struggle to compete in the marketplace the company is stressing improvement in compatibility with Windows applications. The future direction of Mac’s cross-platform suggests that there will be support for Windows applications directly, instead of requiring a separate emulation application or hardware coprocessor card. 3.3.3. Five Forces Competitive Analysis To effectively develop an appropriate strategy, it is helpful to analyze the intensity of competition between firms. Porter’s five forces analysis can provide important insight into the level of competition in a particular industry. "Rivalry among competing firms is usually the most powerful of the five forces." The computer industry has many players, each attempting to gain competitive advantage over the other. They compete on price and features and when one firm makes a change in their price or package features, the others are quick to respond. This response makes it difficult to maintain any competitive advantage based on price or product features. The computer industry also has new competition entering the market. Although there are a few highly recognized companies that have the majority of the market share, new smaller firms are still able to enter this industry. The potential for substitute products is also beginning to become a factor. AT&T recently announced plans to provide products that will adapt the television into an internet monitor. This device will provide an alternative to using a computer to access the Internet. Competition in the computer industry is also affected by the bargaining power of suppliers. Because there are many suppliers of component parts in this industry, manufacturers are able to make favorable purchasing agreements allowing their manufacturing cost to be reduced. This puts competitive pressure on manufactures to pass on this cost savings to consumers. Computer prices are always declining in this very competitive market. The bargaining power of consumers is also high due to the large number of computer manufacturers. This requires each computer firm to constantly offer new features and services to gain customer loyalty. Consumers have many choices and can often bargain with sellers to get the most competitive price. The effectiveness of Apple Computer, Inc. in responding to these forces will determine their future survival. Apple must be extremely aware of these forces and be prepared to respond appropriately if it is to regain being a major player in this industry. In order to identify and assess the strength of external competitive forces on the computer industry, Porter’s Five Forces Model of Competition was used to evaluate five factors related to external conditions: rivalry among competing sellers, bargaining power of buyers, bargaining power of suppliers of key inputs, substitute products and potential new entrants to the market. Rivalry among competitors: There is intense rivalry with its competitors; forcing them to differentiate their products anyway they can to gain a strategic advantage. Apple has a number of competitors in the areas of hardware, software, and operating systems. Apple’s major competitors in the hardware market are Compaq, IBM, and Dell. Apple’s major competitor in the operating system market is Microsoft. Price competition, the ease of adaptability of IBM compatible machines and additional equipment, and increased customer service by other firms are the major rival areas with Apple’s products. The main competitors in the computer hardware industry vary from large, diversified companies like IBM, Hewlett-Packard and Dell, to smaller more focused companies like Gateway. Rivalry is intense given that Apple relies on a competing operating system, competitors have large market shares, and the cost of switching to rival manufacturers is low. Moreover, Apple’s marketing strategy (“digital hub”) is easily reproduced, and has already been copied by Gateway and to some extent by Dell. Unfortunately, the PC industry is presently experiencing a contraction period after achieving impressive expansion during the last two decades. Demand has been stagnating with a 5% drop in sales for 2001. Accordingly, each individual firm has been experiencing larger than average excess capacity. These two factors have elicited intensified competition among current incumbents. Factors such as the ability for consumers to switch from one competitor to the other with relative ease, the absence of any cooperative pricing, and the ability of incumbents to adjust prices quickly all attribute to intense internal rivalry within this industry. And as a result, these factors have exerted a downward pressure on prices. In fact, prices are expected decline by 6% going forward to 2005. This is consistent with the internal rival theory, where increases in rivalry will result in further price competition and erosion. Aside from Apple, there is little differentiation among sellers and cost differences among sellers are relatively low. Buyer Power: The buying power of Apple’s customer is relatively high. The customer, whether it is an individual, an educational institution, a business, or an IT network, has many computer companies to choose from. This allows the buyer leverage for bargaining price, quality and service, as well as enabling the customer to switch companies at a low cost. Consequently, buyer power is strong force acting upon any computer company. In order to counter this competitive force, a company’s strategy must include strong product differentiation, which ensures that buyers are less likely to switch companies without incurring large costs. For example, Apple’s unique Operating System makes it difficult for a buyer to switch computer companies and promotes brand loyalty. Supplier Power: The power of Apple’s suppliers is relatively low. The supplier must compete with several other companies that can produce similar products at competitive prices. The bargaining power of Apple’s suppliers includes, but is not limited to, the price of raw materials or decrease in the quality of those materials, availability of substitute products, and the importance of volume to the supplier. Apple would not have problems with any assembly suppliers as they manufacture the complete PC themselves. In the computer industry there are plenty of suppliers that offer complementary products. Therefore it does not have to increase its prices in order to recover for cost increases. Apples also offers its’ own software that comes standard with every computer. The Company distributes its products through wholesalers, resellers, national and regional retailers and cataloguers, many of whom distribute products from competing manufacturers. In addition, the Company also sells many of its products and resells certain third-party products in most of its major markets directly to end users, certain education customers, and certain resellers through its online stores around the world and its retail stores. Many of the Company's significant resellers operate on narrow product margins and have been negatively affected by recent economic conditions. Considerable trade receivables that are not covered by collateral or credit insurance are outstanding with the Company's distribution and retail channel partners. The Company's business and financial results could be adversely affected if the financial condition of these resellers weakens, if resellers within consumer channels were to cease distribution of the Company's products, or if uncertainty regarding demand for the Company's products caused resellers to reduce their ordering and marketing of the Company's products. The Company has invested and will continue to invest in various programs to enhance reseller sales, including staffing selected resellers' stores with Company employees. These programs could require a substantial investment from the Company, while providing no assurance of return or incremental revenue to offset this investment. Substitute Products: In today’s society being first to market is one of the best ways to obtain market share and it forces competitors to catch up while you continue to innovate. With so many different computer companies in the industry, the threat of substitutes is very high. With Apple’s product differentiation they can decrease the deleterious effects of this force, but they must convince their customers that their product has better features to justify the higher price. Currently, substitutes are becoming more of a realized threat to the industry as they become closer in functionality to the PC. With the ability of PDAs, WebTV, and Smart Phones to handle email, word processing, communication, and other ancillary functions, the demand for a bulky home desktop or laptop computer is being flanked. One could argue that these some of these devices are complements to the PC an one should pursue a differentiation strategy that incorporates these devices into a product offering such as Apple’s strategy. Nevertheless, as computer technology continues to evolve and bandwidth increases, a PDA may soon be able to duplicate most of the functions inherent to the PC. (See Exhibit 1) Potential New Entrants: Threat of entry into this industry is relatively low for this industry. With an industry consisting of over 100 incumbents ranging from powerful brand names such as Dell and Compaq to no name cloners, it is reasonable to conclude that the industry has reached a certain saturation point. This accompanied by several structural barriers to entry make it highly unfeasible for new companies to enter the market unless significant consolidation or exit occurs within the incumbent group. Economies of scale, learning curve advantages, access to distribution channels, and relationship specific investments into direct sales channels all make the threat of entry highly unlikely. (See Exhibit 1) Newcomers in the computer industry face many obstacles including high capital requirements for start up, difficulty in accessing distribution channels, strong brand preferences, and large economies of scale. These obstacles make it very difficult for new computer companies to survive and flourish. Apple has an advantage because they are well established and have many resources to rely on, ensuring a successful business. In the software industry barriers for entry are extremely high; Microsoft and Apple hold access to the distribution channels and the large capital requirements needed to enter. Also as new entrants try to enter the market both companies would retaliate in order to hold on to their market share. In the hardware industry newer firms can revolutionize a industry causing others to catch up. When Dell began offering computer online reduce their cost while also offering value to the customer while companies such as HP/Compaq are unable to offer the same product and service. 3.3.4. Key Success Factors Understanding key success factors allows the following questions to be answered about a company or industry: • On what basis do customers choose between competing brands of sellers? • What must a seller do to be competitively successful? • What does it take for sellers to achieve a sustainable competitive advantage? In the computer industry the key factors of success comprise product differentiation, pricing, technology used, market segments, and brand image / loyalty. Apple succeeds incredibly well on all of these points except for pricing. However, within the last 9 months it has dropped its prices while maintaining its technological and innovative advantages. The key success factors associated with this industry can also be generalized into rapid technological innovation. Technological innovation has consistently stimulated the demand for more powerful products in the areas of performance (computing speed), reliability, and data storage. The proliferation of the Internet has also been a major factor affecting PC adoption rates. Likewise, a steady and continual flow of complementary products that enhance the “computing experience” also has positively affected the industry’s success. PC companies must keep up with the pace of technological innovation to remain competitively viable. Systems must be able to comply with new and innovative complementary products and performance must match what component suppliers such as Intel are providing. With that said, is Apple’s competitive strategy aligned with the industry’s dynamics? I would argue that Apple’s differentiation strategy is uniquely aligned with the changing dynamics of the industry. The following industry characteristics serve as supporting premises to this argument. Firstly, Apple owns the only viable alternative to a “Wintel” machine. All other major computer manufacturers are only slightly differentiated because they are forced to conform to the “Wintel” standards of an Intel chip and Microsoft operating system. They are limited to differentiating themselves based on accessibility, service, and marketing. Differentiation has been realized by the way the industry evolved and Apple is positioned as the only alternative to the PC. If differentiation results in a highly inferior yet differentiated product, then this strategy is doomed to fail. However, Apple has developed a superior product because it controls a large degree of input components, peripherals, and the operating system. The result is a differentiated product that outperforms PC competitors on speed, design, style, ease of use, and peripheral integration. Additionally, Apple is not subjected to the same degree of supplier power as PCs. It has the advantage of picking and choosing which technological innovations to pursue based on what will perform best on their system whereas PC’s are forced to deal with Windows and the associated software incompatibilities that may arise with new releases. Long term, PCs are subjected to increased competition from small brands that use alternate, yet inferior components, allowing these manufacturers to offer comparable products at discounted prices. Companies like eMachines and other small brands are undercutting costs by adopting alternative components from lesser well know brands such as AMD versus Intel. You can’t clone an Apple. Therefore Apple is not directly subjected to the same threats as PC manufacturers are. A major weakness in Apple’s differentiation strategy is in its operating costs. As PC prices fall, Apple must remain somewhat competitive by narrowing the gap in production costs. This provides a continuous challenge for Apple. How high of a premium can Apple justify for their differentiation strategy? In times of economic contraction, large discrepancies between the selling prices of a PC and an Apple can result in a loss of market share for the company. An additional weakness to Apple’s differentiation strategy is that by adopting its own operating system, the company limits itself to the availability of software. With a significantly dwarfed customer base, software developers are more inclined to save costs by not developing Mac compatible versions. This remains a critical competitive issue that needs to be addressed. 4.0.0. Internal Environment Analysis 4.1.0. Organizational Analysis 4.1.1. Corporate Mission Apple Computer’s 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. 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. (“Our Mission,” 2004)” As the final goal of organizations is to make money, the mission statement details its strategic position to achieve profitability and the competitive advantage. Apple’s strategic position is to give users the best computing experience by innovating in hardware, software, and Internet offerings. This strategy leads to several smaller strategies which will help Apple achieve its mission statement. Apple’s corporate mission or vision is to deliver a highly innovative and superior solution to a customer’s personal computing needs. This vision is strategically accomplished by differentiating Apple from its competitors on the basis of quality, design, performance, and peripheral integration, hence the term “Digital Hub.” 4.1.2. Products and Services The Company is divided into different sectors: Applications, Finance, Hardware Engineering, Retail, Software Engineering, Software Technology, Worldwide Product Marketing, and Worldwide Sales. Through these various sectors, the Company produces, markets, and sells hardware products, peripheral products, and software products and computer technologies. Hardware Products The Company offers a extensive range of personal computing products including desktop and notebook personal computers, related devices and peripherals, and various third-party hardware products. The Power Mac line of desktop personal computers is targeted at business and professional users and is designed to meet the speed, expansion and networking needs of the most demanding Macintosh user. Powered by the PowerPC G5 processor, the Power Mac G5 utilizes 64-bit processing technology for memory expansion up to 8GB, and advanced 64-bit computation while also running existing 32-bit applications natively. The Power Mac G5 product line comes in four processor configurations—single 1.8GHz, dual 1.8GHz, dual 2.0GHz and dual 2.5GHz. All Power Mac G5 desktops feature a SuperDrive and either the NVIDIA GeForceFX 5200 Ultra or the ATI Radeon 9600 XT graphics card. Additionally, all Power Mac G5 desktops deliver connectivity and high-performance input/output (I/O), including Gigabit Ethernet, FireWire 800 and FireWire 400 ports, USB 2.0 ports, optical digital audio input and output, built-in support for 54 Mbps AirPort Extreme wireless networking, and optional Bluetooth connectivity. Xserve and Xserve RAID Storage System Xserve, the Company’s first rack-mount server product, was designed for simple setup and remote management of intensive I/O applications such as digital video, high-resolution digital imagery, and large databases. In January 2004, the Company announced Xserve G5, which is available with either a single or dual 2.0 GHz PowerPC G5 processor. Xserve G5 includes a system controller with up to 8GB of PC3200 error correcting code memory; three hot-plug Serial ATA drive modules that deliver up to 750GB of storage; and dual on-board Gigabit Ethernet for high-performance networking. In January 2004, the Company also introduced its Xserve RAID storage system, a 3U high-availability rack storage system, along with support for Windows and Linux-based computing environments. In October 2004, the Company updated its Xserve RAID storage system to deliver 5.6 terabytes of storage capacity and also expanded support for heterogeneous environments. The dual independent RAID controllers with 512MB cache per controller offer sustained throughput of over 380MBps—high enough to support two streams of uncompressed 10-bit HD video editing using protected RAID level 5. PowerBook The PowerBook family of portable computers is designed to meet the mobile computing needs of professionals and advanced consumer users. In April 2004, the Company restructured its PowerBook G4 notebooks with faster PowerPC G4 processors. Both the 15-inch and 17-inch PowerBook G4 offer up to a 1.5 GHz PowerPC G4 processor, an available SuperDrive and the ATI Mobility Radeon 9700 graphics processor. The 12-inch PowerBook G4 features a 1.33 GHz PowerPC processor, an available SuperDrive, and NVIDIA GeForce FX Go5200 graphics. Every PowerBook G4 notebook comes with built-in AirPort Extreme wireless networking, an internal Bluetooth module for wireless connectivity, as well as a full complement of I/O ports including Firewire 400, USB 2.0., a built-in 56K v.92 modem and Ethernet (10/100BASE-T), for connectivity to a wide range of peripherals. The 15-inch and 17-inch PowerBook G4 models also include built-in Gigabit Ethernet and Firewire 800. The iMac line of desktop computers is targeted to consumer and education markets. In August 2004, the Company introduced the iMac G5, featuring the PowerPC G5 processor and a design that integrates the entire computer into the flat panel display. The line offers 17- or 20-inch active matrix widescreen LCDs and PowerPC G5 processors running up to 1.8 GHz. The 17-inch models come with either a 1.8 GHz PowerPC G5 processor and a SuperDrive, or a 1.6 GHz PowerPC G5 processor and a Combo drive. The 20-inch model has a 1.8 GHz PowerPC G5 processor and a SuperDrive. The iMac G5 offers up to a 600 MHz front-side bus, 400 MHz DDR memory expandable to 2GB, AGP 8X graphics and 7200 rpm Serial ATA drives holding up to 250GB. The iMac G5 comes standard with NVIDIA graphics with dedicated video memory. The iMac G5 desktops offer a total of five USB ports (three USB 2.0) and two FireWire 400 ports, an optional internal Bluetooth module, a built-in antenna and card slot to support an optional AirPort Extreme Card for 54 Mbps 802.11g wireless networking, and also includes built-in Ethernet (10/100BASE-T) and a 56K V.92 modem. The eMac, which is targeted first and foremost at the Company’s education and consumer customers, features a PowerPC G4 processor, a high resolution 17-inch flat cathode ray tube display, and preserves the all-in-one compact design of the original iMac favored by many of the Company’s education and consumer customers. In April 2004, the Company updated its eMac, which now has a suggested retail price starting at $799 and is available with a SuperDrive for a suggested retail price starting at $999. The eMac offers PowerPC G4 processors running at up to 1.25 GHz, 333 MHz DDR memory, ATI Radeon graphics and USB 2.0 connectivity to peripherals. The iBook is intended to meet the portable computing needs of education and consumer users. In October 2004, the Company upgraded its iBook G4 line to include faster PowerPC G4 processors running up to 1.33 GHz, built-in AirPort Extreme 54 Mpbs 802.11g wireless networking and an available slot-load SuperDrive. The 12-inch model features a 1.2 GHz PowerPC G4 processor and a slot-load Combo drive, while the 14-inch models include a 1.33GHz G4 processor and either a Combo or SuperDrive optical drive. All iBook G4 models offer a full complement of I/O ports including FireWire 400, USB 2.0, a built-in 56K v.92 modem and Ethernet (10/100BASE-T), as well as an optional internal wireless Bluetooth module, for connectivity to a wide range of peripherals. Music Products and Services Apple offers its iPod line of digital music players and related accessories to Macintosh and Windows users. The Company also provides an online service to distribute third-party music and audio books through its iTunes Music Store. Net sales of iPods and other music products and services generated year-over-year revenue growth of 316% and accounted for 19% of the Company’s total net sales in fiscal 2004. In July 2004, Apple introduced the fourth generation of the iPod, the Company’s portable digital music player, featuring Apple’s patent pending click wheel, which combines a touch-sensitive wheel with five push buttons for one handed navigation, and up to 12 hours of battery life. The iPod features Apple’s patent pending Auto-Sync technology that automatically downloads an entire digital music library onto the iPod and keeps it up-to-date whenever it is plugged into a Macintosh or Windows computer using FireWire or USB. The iPod also features Shuffle Songs, which randomly plays songs in a selected play list or across the entire library. All iPods work with Apple’s iTunes digital music management software on either a Macintosh or Windows computer. The iPod is available in 20GB and 40GB models. The iPod’s functionality extends beyond playing music and listening to audio books. Other key capabilities include data storage, calendar and contact information utility, and a selection of games. With the addition of third-party iPod peripherals, the capabilities of certain iPods can be enhanced to include voice recording and photo downloading directly from certain digital cameras. Along with the iPod, the Company offers a seamless end-to-end music solution with the Company’s iTunes software and the iTunes Music Store, a service that consumers may use to purchase third-party music and audio books over the Internet. The Company has entered into a strategic alliance with Hewlett-Packard Company (HP), which provides for a HP-branded digital music player based on the iPod, the pre-installation of iTunes software on HP’s consumer PCs and notebooks and access to the iTunes Music Store. The Company has also entered into an alliance with BMW Group for the BMW iPod Adapter, a device that offers seamless integration of the iPod and certain BMW automobiles in North America. In addition, the Company formed an alliance with Founder Technology Group Corporation, a supplier of PCs to the Chinese market that provides for the pre-installation of iTunes on all Founder Technology Windows-based PCs. A similar alliance was formed with Synnex Technology International Corporation, a Taiwan-based wholesaler and distributor of personal computers, for the pre-installation of iTunes on its Windows-based laptop and desktop PCs. In October 2004, the Company introduced the iPod U2 Special Edition as part of a strategic alliance with the musical band, U2, and Universal Music Group. The U2 iPod holds up to 5,000 songs, features a black enclosure with a red click wheel and custom engraving of U2 band member signatures. iPod photo In October 2004, the Company introduced iPod photo. The iPod photo holds digital photos alongside the music library and displays them on its high-resolution color screen, which allows users to scroll through the photo library almost instantly using iPod’s patent pending click wheel. iPod photo can auto sync music and photos with a Macintosh or Windows-based computer. The iPod photo also allows users to simultaneously play music and view photo slideshows on the iPod, as well as on televisions and projectors. The iPod photo comes in 40GB or 60GB models and has an extended battery life that gives users up to 15 hours of music playback or up to 5 hours of slideshows. The iPod photo can hold up to 25,000 digital photos or 15,000 digital songs. iPod mini. In January 2004, the Company started offering the iPod mini. Smaller and lighter than the iPod, the iPod mini has storage capacity of 4GB and holds up to 1,000 songs, utilizes the patent pending click wheel and is encased in an anodized aluminum case available in a selection of five colors: silver, gold, pink, blue or green. The iPod mini retains the same user interface as the iPod and works seamlessly with the Company’s iTunes, Music Store and the iTunes software for buying, managing and listening to digital music on either a Macintosh or Windows-based computer. iTunes Music Store. The Company’s iTunes Music Store, available for both Windows-based and Macintosh computers, is an online music download store that allows customers to find, purchase, and download third-party digital music and audio books. Users can easily search the contents of the music store catalog to locate works by title, artist, or album, or browse the entire contents of the store by genre and artist. Users can also listen to a free 30-second preview of any song in the store. Since April 2003, the iTunes Music Store has also been available to U.S. customers. A similar store became available in the U.K., France and Germany in June 2004 and was followed by the October 2004 launch of an English language music store covering nine additional European countries. The Company has also announced its intention to open an iTunes Music Store in Canada during fiscal 2005. The iTunes Music Store is fully integrated directly into the latest version of the iTunes software, allowing customers to preview, purchase, download, organize, share, and transfer their digital music to an iPod using a single software application. Requiring no subscription fee, the iTunes Music Store with iTunes software provides customers a broad range of personal rights to the third-party content they have purchased, including playing songs on up to five personal computers, burning a single song onto CDs an unlimited number of times, burning the same playlist up to seven times, listening to their music on an unlimited number of iPod’s, and using songs in certain media applications such as iPhoto, iMovie, and iDVD. The iTunes Music Store also features availability of audio books for purchase directly from the iTunes Music Store. Additional features currently available within the U.S. iTunes Music Store include gift certificates that can be sent via e-mail, prepaid gift cards, an ‘‘allowance’’ feature that enables users to automatically deposit funds into an iTunes Music Store account every month; and ‘‘Radio Charts,’’ a feature that allows users to search and buy the top songs played on radio stations in major U.S. markets. Peripheral Products The Company sells certain associated Apple-branded computer hardware peripherals, including iSight digital video cameras, and a range of high quality flat panel TFT active-matrix digital color displays. The Company also sells a variety of third-party Macintosh compatible hardware products directly to end users through both its retail and online stores, including computer printers and printing supplies, storage devices, computer memory, digital video and still cameras, personal digital assistants, and various other computing products and supplies. iSight. The Company’s iSight digital video camera enables video conferencing over broadband. iSight is a small, portable aluminum alloy camera with all audio, video and power provided by a single FireWire cable. iSight is designed to be center-mounted on the top of a computer screen and uses its integrated tilt and rotate mechanism to easily position the camera for natural, face-to-face video conferencing. iSight features an auto focusing auto exposure F/2.8 lens which captures high-quality pictures and full-motion video. With its on-board processor, iSight automatically adjusts color, white balance, sharpness and contrast to provide high-quality images with accurate color reproduction in most lighting conditions. iSight also includes a dual-element microphone that suppresses ambient noise for clear digital audio. In June 2004, the Company announced a family of widescreen flat panel displays featuring the 30-inch Apple Cinema HD Display, a widescreen active-matrix LCD with 2560-by-1600 pixel resolution, a 23-inch widescreen Apple Cinema Display with 1920-by-1200 pixel resolution and a 20-inch widescreen Apple Cinema Display with 1680-by-1050 pixel resolution. The displays feature dual FireWire and dual USB 2.0 ports built into the display and use the industry standard DVI interface for a pure digital connection with the Company’s latest Power Mac and PowerBook systems. The Cinema Displays feature an aluminum design with a very thin bezel, suspended by an aluminum stand that allows viewing angle adjustment. Software Products and Computer Technologies The Company offers a range of software products for education, creative, consumer and business customers, including Mac OS X, the Company’s proprietary operating system software for the Macintosh; server software and related solutions; professional application software; and consumer, education and business oriented application software. The Company released Mac OS X version 10.3 (code-named ‘‘Panther’’), the Company’s current version of Mac OS X, in October 2003. Panther incorporates features including a new version of Finder; Expos ìe, a way to organize windows and instantly see all open windows at once; FileVault, a feature that secures the contents of a home directory with 128-bit AES encryption; iChat AV; and enhanced support for use on Windows-based networks. In June 2004, the Company previewed Mac OS X version 10.4 (code-named ‘‘Tiger’’), the fifth major version of Mac OS X that is expected to ship in the first half of calendar 2005. Tiger will contain new features including Spotlight, a new way to instantly find any file, document or information on a Macintosh created by any application on the Macintosh; Safari RSS, a new version of Apple’s web browser that incorporates instant access to Really Simple Syndication (RSS) data feeds on the web; Dashboard, a new way to instantly access ‘‘Widgets,’’ a new collection of desktop mini application accessories, including a date book, stock ticker, calculator, address book and iTunes controller; and a new version of iChat instant messaging client with multi-person audio and video conferencing in a 3D interface. (2004-10k annual report) 4.1.3. Leadership Leaders are measured by their ability to set strategy and motivate people, which really amount to making good decisions. Team leaders, group leaders and managers hold the most responsibility for ensuring that the group performs well and makes good and timely decisions. To facilitate a successful group decision-making process, managers must equip the group for success. “In order for firms to perform well, managers must make decisions efficiently, and simultaneously build consensus in order to facilitate implementation (Roberto,2000).” Being a creative leader, Steve Jobs, the Chief Executive Officer at Apple Computer, Inc., is always thinking of a different way to deal with things. He once said: "Think different", a reaction to IBM's employee motto, "Think" (Wikipedia. The Free Encyclopedia, 2004). Jobs is an “independent innovator”. He has unique ideas for new breakthrough products as well as existing products. With these ideas, he created Apple Computer to further develop new innovations, produce them and sell them. The ‘creative culture’ of Apple had also nurtured many innovative intrapreneurs who desire to be a part of the creative Apple and have helped in the company’s growth. Steve Jobs appreciates employees who embrace his vision for Apple as passionately as he does. The Human Resources policy of Apple is to try as hard to retain the top talents of the company. The following are examples of Apple’s current successful intrapreneurs: -  Jon Rubinstein is the senior vice president of Hardware Engineering at Apple, where he leads the hardware engineering team that is responsible for the development, industrial design and low-level software of all Apple hardware products. Rubinstein brings over 25 years of industry experience to this role.  Bertrand Serlet is Apple's senior vice president of Software Engineering, and is responsible for leading Apple's Software Engineering group. Serlet joined Apple in 1997, and has been a key player in the definition, development and creation of Mac OS X, the world's most advanced operating system. As the vice president of Platform Technology, Serlet managed the largest part of the Mac OS software engineering group.  Avadis “Avie” Tevanian is the chief software technology officer. He focuses on setting company-wide software technology directions for Apple. Tevanian joined Apple in February of 1997 as senior vice president of Software Engineering and is a recognized pioneer in creating cross-platform development environments used worldwide. (Apple.com, Executive Profiles, 2004)  Philip Schiller is Apple’s senior vice president of Worldwide Product Marketing. He is responsible for the company’s Product Marketing, Developer Relations, Education and Business marketing programs. Since rejoining Apple in April 1997, Schiller has helped the company return to its role as a technology innovator, delivering breakthrough products such as the iMac, the iBook, the Titanium PowerBook G4, the iPod, and Mac OS X.  Timothy D. Cook is Apple’s executive vice president of Worldwide Sales and Operations. Cook leads the global sales and plays a key role in the continued development of strategic reseller and supplier relationships and flexibility in response to an increasingly demanding marketplace. (Apple.com, Executive Profiles, 2004) 4.1.4. Organizational Culture Since its founding in 1976, Apple Computer Inc. has been a leader of creativity and innovation in the personal computer industry, and it is not surprising to know that Apple also displays its creativity in the culture of its working environment. The company projects a humanistic corporate culture and a strong corporate ethic, characterized by volunteerism, support of good causes or involvement in the community. The work environment at Apple strikes a balance between the casual and the structured. First of all, all employees need not adhere to any dress code policies, thus allowing employees to dress comfortably, even expressively. Moreover, employees need not follow a routine “nine to five” working schedule, as they are given the freedom to manage their own time schedule. However, there are some exceptions to this seemingly unrestrictive work environment. Certain activities like smoking and bringing pets to the workplace are not allowed as these activities can disrupt the working environment. Hence, the underlying principle guiding the behavior of Apple employees is that employees can do what they want, provided that they do not disrupt the workplace. An informal and unstructured working environment avoids corporate rules and bureaucracy, two factors that stifle creativity in the workplace. (Linzmayer, 1999) Beyond the daily working culture at Apple, employees are given the opportunity for growth outside of the company. After five years of full-time work at Apple, employees can go on a vacation in order to step back and assess their professional goals. This policy promotes creativity at Apple by giving employees the opportunity to re-energize and pursue any other interests, enabling them to return with a refreshed attitude and perspective towards their work. (Linzmayer, 1999) One of Job’s technopreneurial traits was the practice of empowerment, and thus decision-making authority and responsibility were given from the managers to the group members. In addition, at the team level of Apple, employees experiment with different methods of coming up with creative solutions to a problem. One of the organizational methods used by Apple to enhance creativity is by way of brainstorming where ideas are generated through an unstructured brainstorming process. Fellow workers value ideas that are generated during these brainstorming sessions. Great respect is given to “fire-starters”, individuals who come up with a totally original idea to a problem. In addition, employees are encouraged to challenge the viewpoints of their peers and their managers, provided that their suggestions are viable. (Linzmayer, 1999) In doing so, the company is trying to create a culture of openness, where coworkers can share and appraise whatever ideas they have. This results in workers’ gain and understanding of knowledge, which they can apply to their daily work context, leading to effective decision-making. This environment of open communication is a norm that promotes innovation within a company. (O’Reilly, 1989) Thus, the technopreneurial environment of Apple is then the fruit of ‘knowledge management’. This environment allows workers to learn, innovate and act creatively, forming a learning organization. 4.1.5. Structure Apple’s operations and facilities can be divided between its manufacturing, corporate, and retail sites. Apple’s manufacturing sites are located in Cork, Ireland; Sacramento, California; and Singapore. These sites perform final assembly as well as offer engineering and development support, and are all ISO 14001 and ISO 9002 certified. Actual hardware production is outsourced to third party manufacturers that Apple either has a direct financial investment in (Samsung in Korea for flat panel displays) or strategic relationships with (several manufacturers in Southeast Asia). Apple’s corporate headquarters are located in Cupertino, California, and are complemented by Apple logistic centers in Europe, Asia and the Americas. Beginning last year Apple opened several mid-size retail centers that aim to sell Apple hardware, software, and complimentary third party products (printers, digital consumer electronics, and software), as well as serve as a means to educate the public on Apple’s “digital-hub” technology and its product’s ease of use. 4.2.0. Analysis of Firm Resources Resources are the sources of a firm’s capabilities covering a spectrum of individual, social, and organizational phenomena that can be considered a competitive advantage only when grouped with several other unique resources the company has. Capabilities are the source of a firm’s core competencies, which are the basis of competitive advantage that emerge over time through complex interactions among tangible and intangible resources (Hitt, et al. 2005). 4.2.1. Tangible Resources Tangible resources are firm’s financial, organizational, physical, and technological resources that can be seen and quantified as production equipment, plants, physical structure, firm’s borrowing capacity (financial), stock of technology, access to raw material, etc (Hitt et al., 2005). Apple’s primary tangible resources include the following (Apple Annual Report, 2004): Land and buildings are valued at $351 million. Land includes the property that houses the distribution facilities and offices. Apple’s buildings include a host of facilities located in the following areas: Head Office Apple Computer, Inc. 1 Infinite Loop Cupertino CA 95014 United States P: 1 408 996 1010 F: 1 408 996 2113 www.apple.com Other Locations and Subsidiaries 1. Santa Clara, San Francisco, CA United States 2. Apple Computer Australia, Sydney Office 3. Apple i Danmark 4. Apple Computer International, Bangalore, India 5. Apple Computer Korea, Seoul, Korea 6. Apple Computer GmbH, Dornacher, Germany 7. Apple Computer France, France 8. Apple Computer Ges.m.b.H., Germany 9. Apple Computer International, Hong Kong 10. Apple Computer International, Beijing Office, China 11. Apple Computer Systems Malaysia Sdn Bhd, Malaysia 12. Apple Philippines Incorporated, Philippines 13. Apple Computer South Asia, Singapore 14. Apple Computer Asia, Taiwan 15. Apple Computer International, Ireland 16. Apple Computer Italia, Italy 17. Apple Sweden, Sweden 18. Apple Computer, Norway 19. Apple SA, South Africa 20. Apple Canada, Canada • Machine, Equipment and internal use software come around to $ 422 million. • Cash and cash equivalents are $2969 million in 2004. This cash is available to Apple for financing, purchasing equipment, purchasing land, or building facilities. 4.2.2. Intangible Resources Intangible resources include assets that are rooted deeply in the firm’s history and have accumulated over time (Hitt, et al. 2004). Apple’s greatest intangible resource is its employees. The employee’s work together to ensure the success of the organization and do whatever possible to follow the mission of helping its customers’ succeed. The marketing associates continually improve their knowledge base to keep customers ahead of trends in technology, market analysis, and other facets of the industry. Always available to help the customer, Apple could not be as successful without its knowledgeable and devoted sales professionals. Another intangible resource is Apple’s brand name and recognition along with its Patents, Trademarks, Copyrights and Licenses. The brand was voted brand of the year by Inter-brand in 2001, came a close second to branding ‘wonderkid’ Google in 2002 and continues to command amazing loyalty amongst users. The value of the brand to a company such as Apple is almost incalculable; so much so that it prompted Wired News to claim recently that ‘without the brand, Apple would be dead… The power of their branding is all that keeps them alive’. (www.wirednews.com) The equity produced by this powerful branding is without a doubt Apple’s key asset. Competitors such as Commodore and Amstrad were slain by the growth of the PC but the loyalty and affection that the Apple brand commanded allowed it to keep its head above water and become the success it is today. In a faceless market, Apple showed character and built an image. When former CEO John Scully talks of his time in the company during the late 1980s and early 1990s he has no illusions about Apple’s role, pointing out that ‘people talk about technology but Apple was a marketing company. It was the marketing company of the decade.’ This kind of thinking built the brand equity Apple enjoys today – the brand equity that both kept Apple afloat and promises future profits. This asset may be intangible but it is also truly invaluable. The Company presently holds rights to patents and copyrights relating to certain aspects of its computer systems, iPods, peripherals and software. In addition, the Company has registered, and/or has applied to register, trademarks and service marks in the U.S. and a number of foreign countries for ‘‘Apple,’’ the Apple logo, ‘‘Macintosh,’’ and numerous other trademarks and service marks. Although the Company believes the ownership of such patents, copyrights, trademarks and service marks is an important factor in its business and that its success does depend in part on the ownership thereof, the Company relies primarily on the innovative skills, technical competence, and marketing abilities of its personnel. Many of the Company’s products are designed to include intellectual property obtained from third-parties. 4.2.3. Capabilities Capabilities are the firms’ capacity to deploy resources that have been purposely integrated to achieve a desired end state (Hit, Ireland, and Hoskisson, p.81).In the case for Apple the firm’s unique marketing abilities, engineering skills, creativity, and R&D. Apple’s distinctive core competencies lie within their ability to provide quality products through their vertically integrated inbound activities. Not only are Apple’s finished goods differentiated by quality, they are innovative and cutting edge. Innovation is driven by consistent investment in R&D. Apple has also shown competencies in building brand reputation and generating buzz for its products. Their marketing campaigns have been successful and remain a value added activity. One of Apple’s key capabilities comes from co-founders, Steve Jobs, who has effectively manage to steer Apple into a new market and gain new market share. Apple has effectively integrated its supply chain and distribution channels with the installation of SAP R/3. It now offers built to order machines that can compete with Dell. Apple also has become a key innovator with products such as the i-Mac and i-Pod each has effectively boosted Apples sales. Apple also has brand recognition as being one of the oldest hardware manufacturers. Software and hardware integration allowed Apple products to be more “versatile,” reliable, and superior in performance, and it allow Apple to have complete control over the products. 4.2.4. Core Competencies and Sustainable Advantages Core competencies are capabilities that give a firm a competitive advantage over its rivals. Apple’s core competencies include, but are not limited to, management, research and development, manufacturing, and distribution. Historically, Apple’s source of competitive advantage is focused differentiation. The personal computers that Apple manufactured in its hay days offered far more functionalities and ease of use to users than personal computers based on the DOS/Intel platform at that time. Apple computers were mostly sold in a narrow market (schools and home users with relatively high-level of income). The ability to design a highly differentiated superior computer product that appealed to targeted consumers can also be defined as the company’s core competence. This ability was valuable in terms of high profit margin generated. It was unique because Apple’s competitors were not able to provide products that even came close. It was difficult and costly to copy given the time and capital needed. It was also non-substitutable at that time. With this core competence, Apple became the most profitable personal computer company in the world by 1990. Now Apple’s distinctive core competencies lie within their ability to provide quality products through their vertically integrated inbound activities. Not only are Apple’s finished goods differentiated by quality, they are innovative and cutting edge. Innovation is driven by consistent investment in R&D. Apple has also shown competencies in building brand reputation and generating buzz for its products. Their marketing campaigns have been successful and remain a value added activity. Financially, the company remains liquid with substantial cash reserves and is not highly leveraged in debt. Apple’s differentiation strategy is uniquely aligned with the changing dynamics of the industry. Firstly, Apple owns the only viable alternative to a “Wintel” machine. All other major computer manufacturers are only slightly differentiated because they are forced to conform to the “Wintel” standards of an Intel chip and Microsoft operating system. They are limited to differentiating themselves based on accessibility, service, and marketing. Apple has successfully differentiated itself as the only viable alternative to the PC standard. The two major forces that have affected market share loss are the misconception that Apple computers are incompatible with available software for Wintel machines and buying one will result in losses in functionality. This can be overcome with aggressive marketing campaigns in which Apple has demonstrated value added competencies. The second major factor contributing to Apple loss in market share is the unmatched price erosion from the PC market. Apple has failed to narrow the gap because of its operational inefficiencies. If Apple can narrow this price gap and overcome the negative software perception, it will undoubtedly regain market share. Management With the return of Apple’s leader Steve Jobs, he brought with him a vision for the future. He ended the licensing program of the Apple format, refused to lease Apple’s latest OS (operating system) to major clone manufacturers, strengthened and consolidated Apple’s product range reducing the number of lines from 15 to three, and introduced the iMac which focused on the Internet and the simplicity of the Mac. Research and development Apple invests extensively in R & D as their products are developed and produced in-house. Apple invests extensively in R & D so that they will have the most technological advance PCs on the market. Manufacturing Apple’s manufacturing yields reliable products that are high in quality and possess technologically superior. Steve Jobs eliminated units that duplicated efforts centralized responsibility for functions, which made the company more lean. Steve Job’s strategy regarding Apple’s network servers was to develop and manufacture a new system operating system for high-end products such as network servers. Distribution Jobs revamped Apple’s distribution system by launching a Web site to sell Macs directly to consumers for the first time. This allowed their customers to design their own systems based on individual needs. The application of Apple’s core competencies points out that Apple’s core competencies, with many initiatives initiated after the return of Apple’s leader, Steve Jobs, indicate that Apple is on its way to regaining a competitive advantage in the PC industry. Cash & Cash Equivalents Analysis An analysis of cash and cash equivalents indicates whether the company is using their cash wisely and operating efficiently. A summary of Apple Computer’s most recent three years of cash and cash equivalents indicates the following: 2004 2003 2002 Cash & Cash equivalents, beginning of the year $3,396 $2,252 $2,310 Cash generated by operating activities 934 289 89 Cash generated by (used for) investing activities -1488 828 -252 Cash generated by financing activities 127 27 105 Cash & Cash equivalents, ending of the year 2,969 $3,396 $2,252 It is noteworthy to mention that Apple Computer’s cash generated from operating activities increased significantly from 2002 to 2004, a 47% increase, which indicates that the company is operating efficiently in the area of their intended business – manufacturing and selling PCs. There cash generated from financing activities has decreased, which is largely due to the drop in interest rates. 4.2.5. Summary of Firm Resources To summarize, Apple’s core competencies lie within their ability to provide quality products through their vertically integrated inbound activities. Not only are Apple’s finished goods differentiated by quality, they are innovative and cutting edge. Innovation is driven by consistent investment in R&D. Although the company has excelled in delivery and order processing, it still has yet to prove its operational efficiency. Therein lies Apple’s principal weakness. In the past, Apple has failed to reconcile the added cost of differentiation with operational efficiencies in production and distribution. Apple has also shown competencies in building brand reputation and generating buzz for its products. Their marketing campaigns have been successful and remain a value added activity. Financially, the company remains liquid with substantial cash reserves and is not highly leveraged in debt. Opportunities exist for Apple to emerge as a leader in providing a complete system that seamlessly integrates peripherals as these complements become more prevalent and adopted. By horizontally integrating, Apple can maintain stringent conformity standards and ensure all its peripheral offerings are compatible with its PC offering. 4.3.0. Financial Analysis- (all data for financial sections taken from www.fidelity.com; www.morningstar.com, http://finance.yahoo.com/; www.apple.com) 4.3.1. Historical Analysis An analysis of Apple’s financial performance shows a declining trend. In 1995, Apple Computer was turning a profit for their shareholders even though overall sales were declining. However, declining sales resulted in poor performance in 1996 and 1997. Sales declined by 12.5% and 38.86% over this two year period, resulting in net losses. To keep Apple operating, their long term debt load increased by a staggering 213% ($303 to $951). This new debt load adversely affected their Debt/Equity ratio by increasing it from 10.4% to 79.25% over the two year period. This problem was further compounded by losses in retained earnings. This would make further financing for Apple very difficult in the future. Historical Growth Rates Growth Rates(%) Company Industry Sector S&P 500 Sales (MRQ) vs Qtr. 1 Yr. Ago 74.78 14.77 15.96 16.09 Sales (TTM) vs TTM 1 Yr. Ago 64.87 17.04 18.68 15.32 Sales - 5 Yr. Growth Rate 6.18 5.81 10.23 9.71 EPS (MRQ) vs Qtr. 1 Yr. Ago 376.92 13.61 17.97 20.34 EPS (TTM) vs TTM 1 Yr. Ago 327.96 15.27 26.77 20.67 EPS - 5 Yr. Growth Rate -16.99 3.30 10.90 13.60 Capital Spending - 5 Yr. Growth Rate 19.91 0.29 -0.15 3.70 4.3.2. Firm Liquidity Analysis These ratios indicate the ease of turning assets into cash. They include the Current Ratio, Quick Ratio, and Working Capital. Current Ratio: The Current Ratio is one of the best known measures of financial strength. It is figured as shown below: Current Ratio = Total Current Assets / Total Current Liabilities The main question this ratio addresses is: "Does your business have sufficient current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets, such as inventory shrinkage or collectable accounts?" A generally acceptable current ratio is 2 to 1. But whether or not a specific ratio is satisfactory depends on the nature of the business and the characteristics of its current assets and liabilities. For each dollar of current liabilities, Apple has $2.63 of current assets. Is this necessary good or bad? It depends. Creditors like to see a higher current ratio but shareholders may not. From a shareholder perspective, a high current ratio could mean that the company has a lot of money tied up in non-productive assets such as excess cash. Since Apple does have a high current ratio, it appears that it has not been utilizing excess cash in productive ways, which may not be good news for shareholders. Also, it does appear as though Apple’s current ratio has been slightly fluctuating over the past ten past years. Overall, Apple’s current ratio is below the S&P average which is 1.75, so the company’s liquidity position can be described as relatively weak. Quick Ratios: The Quick Ratio is occasionally called the "acid-test" ratio and is one of the best measures of liquidity. It is figured as shown below: Quick Ratio = Cash + Government Securities + Receivables / Total Current Liabilities The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, it concentrates on the really liquid assets, with value that is fairly certain. It helps answer the question: "If all sales revenues should disappear, could my business meet its current obligations with the readily convertible `quick' funds on hand?" An acid-test of 1:1 is considered satisfactory unless the majority of a company’s "quick assets" are in accounts receivable, and the pattern of accounts receivable collection lags behind the schedule for paying current liabilities. Apple’s quick ratio has been fluctuating from 1.24 in 1995 to 2.33 in 2005. Days of Sales Outstanding equals the average collection period. It is a measure of how long it takes to collect receivables. The general criteria is the shorter this number, the better. Apple is getting better at collecting their receivables. It took them only 34 days in 2005 versus 63.6 days in 1996. Inventory Turnover: This ratio reveals how well inventory is being managed. It is important because the more times inventory can be turned in a given operating cycle, the greater the profit. The Inventory Turnover Ratio is calculated as follows: Inventory Turnover Ratio = Net Sales / Average Inventory at Cost 4.3.3. Operating Profitability Analysis The objective of the internal financial ratios is to determine the profitability of Apple Computer Inc. by doing a time series ratio analysis in which we compare current ratios to prior year levels in order to identify improvement or deterioration of financial performance. Gross Margin Ratio: This ratio is the percentage of sales dollars left after subtracting the cost of goods sold from net sales. It measures the percentage of sales dollars remaining (after obtaining or manufacturing the goods sold) available to pay the overhead expenses of the company. Comparison of the company’ ratios to those of similar businesses will reveal the relative strengths or weaknesses in the business. The Gross Margin Ratio is calculated as follows: Gross Margin Ratio = Gross Profit / Net Sales So for each dollar of revenue in 2004, Apple earns 27.30% profit, or $0.27 back. Apple’s percentage is below the S&P average which is 30.37% and its competitors’ averages, so it is earning less profit per dollar revenue than the S&P and its competitors. Net Profit Margin represents the amount of each dollar of revenue that results in total net income. For Apple, for each dollar of revenue, $.03 results in total net income. Apple is below the Industry and S&P averages Total Asset Turnover measures how efficiently a firm uses its assets to generate sales. General criteria is that the larger the number, the better. Apple was somewhat below the Industry average of 1.50, indicating that the company may not be generating a sufficient volume of business given its total asset investments. Return on Assets Ratio: is a good indicator of a firm’s profitability. ROA measures the amount earned on each dollar invested in assets. In general, the larger the number, the better. Apple’s ROA is above the Industry average of 9.91%. So for each dollar Apple invested in assets, $.037 was earned. Apple has been increasing this ratio over the past three years, earning more each dollar invested in assets. 4.3.4. Return on Common Equity Analysis Return on Equity: This is also called return on investment (ROI). It determines the rate of return on the invested capital. It is used to compare investment in the company against other investment opportunities, such as stocks, real estate, savings, etc. Apple is well below the Industry average. The more debt a firm uses, the higher is its return on equity. Apple’s return on equity has been decreasing with the years indicating less use of debt in its investment. 4.3.5. Valuation Ratios Analysis RATIO COMPARISON Valuation Ratios Company Industry Sector S&P 500 P/E Ratio (TTM) 44.9 24.08 29.61 20.8 P/E High - Last 5 Yrs. 268.04 41.69 52.51 39.23 P/E Low - Last 5 Yrs. 6.84 15.75 18.54 15.12 Beta 1.75 1.7 1.97 1 Price to Sales (TTM) 3.58 1.8 5.17 2.91 Price to Book (MRQ) 6.51 7.56 5.64 3.93 Price to Tangible Book (MRQ) 6.61 8.75 7.37 6.87 Price to Cash Flow (TTM) 38.21 18.95 22.92 14.7 Price to Free Cash Flow (TTM) 22.5 18.71 28.9 27.48 % Owned Institutions 75.3 55.5 45.27 66.21 The Price-to-Earnings (P/E) ratio is the single most widely used measure of a stock's value. That's because the key to stock ownership is the shareholder's stake in a portion of the company's profit stream. The P/E ratio is calculated by dividing the current Price by the sum of the Diluted Earnings Per Share from continuing operations before Extraordinary Items and Accounting Changes over the last four quarters. Apples’ P/E ratio is above the Industry average of 24.08. This suggests that Apple is regarded as having strong growth prospects, other things held constant. Price to Sales is generally used to evaluate companies that don't have earnings and don't pay dividends. For these companies, one may consider that high multiples of sales and high growth rates suggest optimistic future earnings expectations on the part of investors. Also, Sales trends tend to be less volatile than Earnings trends, because earnings can vary widely from one year to the next due to temporary issues such as reserves or gains and losses on asset divestitures. Apple has a Price/Sales Ratio of 3.58 and is above the Industry average of 1.8. The Price to Cash Flow ratio is the current Price divided by Cash Flow Per Share for the Trailing Twelve Months (TTM). When measuring a company's operating performance, Cash Flow is an alternative to Net Income, which is calculated by subtracting all expenses from revenues. This ratio further emphasizes that Apple has strong growth prospects because its ratio is quite higher than the Industry average 4.5.0. Strategic Analysis 4.5.1. Corporate-Level Strategy and International Strategy Corporate strategy addresses two main issues: in what businesses should a company compete, and how should these portfolios of businesses be run (Hitt, et al., 2005). Apple’s general corporate strategy is: “Welcome to the new era in the life of the personal computer - the era of the Digital Lifestyle.” (www.apple.com) According to Plunkett’s Research, the personal computer (PC) is becoming the focus of home entertainment and information (1998). When well equipped, a PC now functions as a CD player for music, a DVD player for movies, a video game machine, a storage and viewing device for family photos, an email enabler, and a gateway to the Internet . Apple’s answer to the emergence of this new type of PC involves a strategy that blends all of these features into an aesthetically pleasing and innovative computer that runs incredibly easy to use application software. More importantly, it is Apple’s belief that because their own engineers design most of the hardware and virtually all the key software for Macintosh computers, Apple hardware and software are more tightly integrated, and thus easier and more fun to use. The result is a distinctive line of computers that are more stylish, reliable and easier to use than PC / Wintel machines, and subsequently have become the de-facto standard for what is technically and aesthetically acceptable for a computer . Other than using product differentiation and branding to set itself apart from the competition, Apple has established has several other strategies to help complement its consumer and professional lines. Education: Apple’s uses a two-fold approach to serve education markets: it bundles educational software and services (both fixed and via the internet) with specialized hardware (computers, servers, and wireless networks) while offering technical support and educational pricing on its products. Moreover, it has recently increased the services it provides to schools via a program called Power School. This service allows K-12 schools and school districts to provide web-based information to educators and parents, and has become the leading provider of such services in the last year. Retail: In 2001 Apple opened 25 retail stores across the U.S. in order to demonstrate the benefits of using and owning an Apple computer. The idea is to connect the customer directly to Apple’s overall strategy of the “digital hub” and demonstrate the ease of use of Apple computers. Within each store computers are connected to the web, digital cameras, digital camcorders, MP3 players, and handheld organizers, and are aided by a knowledgeable staff. Enterprise: Apple recently released a rack mount server for its professional (graphic design), commercial (biotech, etc.), and educational customers. Up to now customers had no way to build large networks using Apple technology, and instead had to rely on other vendors to supply their server needs. Brand Loyalty: Although not necessarily a strategy, Apple enjoys an incredibly strong devotion amongst its users. Apple's machines have legions of loyal and sometimes demented fans, and its inventors are often treated like rock stars . In the past this has allowed Apple to weather several financial storms, established dependent customers to receive input and suggestions from, and automatically gives it a secure and reliable user base to try out new ideas and products on. 4.5.2. Business-Level Strategy Business level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets (Hitt, et al., 2005). The Company's business strategy leverages its ability, through the design and development of its own operating system, hardware and many software applications and technologies, to bring to its customers around the world compelling new products and solutions with superior ease-of-use, seamless integration and innovative industrial design. Apple started with the mission to “change the world through technology.” More specifically, the company sought out to make the personal computer an accessible and affordable device to the mass market. The proliferation of new software and hardware technology drastically changed the landscape of the industry and Apple adopted a differentiation strategy. Software and hardware integration allowed Apple products to be more “versatile,” reliable, and superior in performance. Rapidly changing industry dynamics determined Apple’s competitive strategy. In essence, the intended strategy did not develop into the “realized” strategy. In fact, empirical evidence shows us that realized strategy tends to be about 10-30 percent of intended strategy. What really determines strategy is the “patterns of decisions that emerge from individual managers adapting to changing external circumstances and the ways in which the intended strategy was interpreted.” What is Apple’s mission and strategy today? Apple’s mission is to deliver a highly innovative and superior solution to a customer’s personal computing needs. Apple’s current competitive strategy is a return to differentiation. Key elements to this strategy are an emphasis on design, service, branding through advertising, and quality. Drivers needed to attain these objectives are through the firm’s unique marketing abilities, engineering skills, creativity, and R&D. Apple is dedicated to bringing the best personal computing and music experience to students, educators, creative professionals, businesses and consumers around the world through its innovative hardware, software, peripherals and Internet offerings. The Company’s business strategy leverages its unique ability, through the design and development of its own operating system, hardware and many software applications and technologies, to bring to its customers around the world meaningful new products and solutions with superior ease-of-use, seamless integration and innovative industrial design. The Company believes continual investment in research and development is critical to facilitate innovation of new and improved products and technologies. Besides updates to its existing line of personal computers and related software, services, and peripherals, the Company continues to capitalize on the convergence of digital consumer electronics and the computer by creating product innovations like the iPod and iTunes Music Store. The Company has also invested in new product areas such as rack-mount servers, RAID storage systems and wireless technologies. Apple’s strategy also includes expanding its distribution network to effectively reach more of its targeted customers. 4.5.3. Value Chain Analysis Using Porter’s value chain analysis differentiation potential for Apple can be identified. Porter’s method divides a firm’s endeavors into 5 primary activities encompassing inbound logistics, operations, outbound logistics, marketing and sales, and service. Inbound logistics entail relationships with suppliers and include all the activities required to receive, store, and disseminate inputs. Inputs for an Apple personal computer include an operating system, chassis, memory, CPU, etc. Apple practices horizontal and vertical integration of computer components to a greater extend than any other PC manufacturer. As a result, the firm’s ability to influence quality control of inputs and intermediate processes such as logistics is greater. Apple can specifically define its specifications for product form and features and can logistically control where and when they are manufactured. A higher degree of quality of components and materials is therefore perceived by the end user as a differentiating factor and to the company, a key value added activity. Supporting activities such as technology development also plays a key role in developing value added activities in the inbound logistic environment. Apple allocates the most amount of capital to R&D when benchmarked against competitors. This allows Apple to produce highly innovate products and technologies. With an R&D rate of 8% in 2001, Apple has introduced several successful products such as the iBook and iPod, technologies like Fire Wire and Blue Tooth, and a superior operating system. Historically, Apple hasn’t been on the forefront of integrating efficiencies into the manufacturing process. Operation activities refer to all the activities required to transform inputs into outputs. In general, operation activities refer to production or assembly. It is here where assembly line innovations, inventory management, and supply chain management drive down costs and act as value added activities. However, as mentioned, Apple has made significant improvements to its operations, streamlining them to a great extent. Restructuring efforts such as closing facilities, outsourcing specific manufacturing tasks, and centralizing core functions improved Apple’s operating efficiency. From 1997 to 1998, operating margins improved by 20% and continued to approve in 1999 and 2000. Human resource management plays a significant supporting role in operations. By downsizing, more is expected from workers and productivity has to increase per employee. Training and hiring skilled employees that can immediately contribute their skills to the production process is in itself a value added activity. Jobs also recruited an executive team that instituted and managed these drastic operational improvements. Outbound logistics refer to the activities required to collect, store, and distribute the output. Apple specifically excels in these activities. Their efficient web site order processing allows them to have the highest inventory turnover rate in the industry. The firm infrastructure supports these fast response capabilities through investments in MIS and knowledge sharing systems. Apple also eliminated thousands of resource draining distribution outlets and complemented their direct selling efforts with wholly owned retail boutiques. Additionally, Apple expanded their presence in national chains. These value added outbound activities translated into reduced distribution time and increased delivery reliability to the end user. The Company utilizes a variety of direct and indirect distribution channels. The Company believes that sales of its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the value of the hardware, software and peripheral integration, demonstrate the unique digital lifestyle solutions that are available only on Macintosh computers, and demonstrate the compatibility of the Macintosh with the Windows platform and networks. The Company further believes that providing a high-quality sales and after-sales support experience is critical to attracting and retaining customers. To ensure a high-quality buying experience for its products in which service and education are emphasized, the Company has expanded and improved its distribution capabilities by opening its own retail stores in the U.S. and internationally. The Company had 110 stores open as of June 25, 2005. Marketing and sales activities act to build brand reputation and stimulate sales. In 1998, Apple demonstrated its competencies in marketing with the unveiling of the iMac. Backed by a $100 million campaign, clever strategic advertising helped sell 278,000 iMacs in just six weeks and 6 million in 3.5 years. This massive advertising campaign generated positive buzz for Apple and helped reinvigorate its image. This campaigned strategically targeted young and contemporary market segments and helped position Apple as a differentiated product with plug and play multimedia peripherals that seamlessly complemented the PC. This advertised differentiation was by no means an accident. The iMac sold 6 million units at premium prices compared to its PC counterparts because the marketing campaign succeeded in communicating the differentiation advantages of the iMac over the cheaper PCs. Service represents the last primary company activity in Porter’s value chain analysis. Service activities include all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered. Here, Apple demonstrated value by creating nation wide support groups. Leveraging the ubiquitous attributes inherent to the Internet, Apple was able to establish regional and local software and technical support groups for its installed customer base. Strategically, Apple forged alliances with over 400 software developers to provide more than 1200 new software applications for Apple. The company’s ability to continually add functionality to its PC line via new software availability is a key value driving activity. 4.6.0. SWOT Analysis Conducting a SWOT Analysis is a way of identifying a business’s strengths and weaknesses in the internal environment of a company and the opportunities and threats in the external environment. By examining the strengths and weaknesses of Apple’s internal resources, it is possible to better understand the external threats and opportunities confronting them. By trying to understand the factors that Apple faces, it is easier to address the strategic problems facing the company. Based on our analysis we feel that much of the company’s internal strengths and external opportunities lie within its corporate strategy. 4.6.1. Strengths Professional notebooks Sales of Apple’s professional notebooks have been strong in recent times. The company’s sales in this area have been boosted by sales of its 12 and 17-inch models. The continued strong sales performance of Apple’s 15-inch notebook has also boosted the company’s sales in this area. In 2003 sales of Apple’s PowerBook increased by 56% to $1,299 million overtaking PowerMac as the single largest product contributor to total revenues, helping to drive overall growth for the company. Financial position Although IT spending is expected to remain low in...

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