capstone paper 1 apple

Running Head: Strategic analysis of Apple 1

Strategic analysis of Apple

Adam Mellott

March 02, 2015

MGMT 1451

University of

Pittsburgh, Bradford

Strategic analysis of Apple 2

Abstract

This paper is on Apple Case #16 called Apple INC.: Still taking a bite out of the competition?

Identification of Apple INC will be provided, as well as their industry, market placement and

presence, and current issues for the company. An evaluation and strategic analysis of Apple via

SWOT Analysis, Porter’s Five Forces, and a financial evaluation via cross sectional and time

series analysis will also be included, as well as a financial ratio analysis and benchmarking.

Apple’s discovery, implementation into the market, important people such as founders and

creators, and innovative inventions will also be introduced. Located at the end of this paper will

be a conclusion and my own personal recommendation on how to successfully continue one of

the most successful U.S. publically traded companies that the world has ever seen. Located on

the last page will be the sources used in completing this paper.


Strategic analysis of Apple

Indentification

Apple INC is an American multinational technology company was founded in Mountain

View, California, on April 1, 1976 by Steve Jobs and Steve Wozniak. Under CEO Tim Cook,

Apple designs, develops, and sells consumer electronics, computer software, and online services.

Their best-known hardware products are their line of Macintosh computers (Mac, Mini, iMac,

Macbook Pro, Mac Pro, Macbook Air), the iPhone (iPhone, iPhone 3G, iPhone 3GS, iPhone 4,

iPhone 4S, iPhone 5, iPhone 5C, iPhone 5S, iPhone 6, iPhone 6 Plus, iPhone 6S, iPhone 6S

Plus), which is their version of a cellular phone, the iPad (iPad, iPad 2, iPad 3, iPad 4, iPad Air,

iPad Air 2, iPad Pro), which is a tablet computer, the iPod (iPod, iPod Shuffle, iPod Nano, iPod

Touch), which is Apple’s version of an MP3 player, the Macbook, which is Apple’s laptop, and

different variations of said products. Apple’s most popular software includes Mac OS X, which

is their PC operating system, iOS, a mobile operating system, the iLife software package which

provides applications that allows a computer to become a home studio, and iTunes, which is a

media store that sells music, movies, books, and television shows. A few of Apples other

products, services, and software are iCloud, Apple TV, and Apple Pay (Wood, 2010).

Since Apple’s start up in 1976, they were always known as the premier provider of

technology solutions for graphic artists, educators, and web designers. After the release of the

iPhone and iPad in 2007, Apple decided to enter the cell phone/smartphone and digital

entertainment industry, instead of just being known in the personal computer industry. Apple’s

iPod Touch and iPhone incorporated Wi-Fi connectivity, which allowed the user to access


iTunes to purchase music and stream the internet via Safari (Apple’s internet browser) without a

computer. In 2008, Apple introduced the App Store, where users could purchase applications

created by third-party developers that were specifically made for Apple products. Applications

included games, which meant Apple was introduced into the gaming market. Apple’s newest

hardware product is the Apple Watch, which incorporates fitness tracking and health statistics

with integration with iOS operating system, included in the iPad, iPod, iPhone, and Apple

computers (Wood, 2010).

Like all businesses, Apple faces multiple problems in today’s market. With innovation

and creation comes much room for error, something that has plagued Apple in the last 10 years.

One major problem for Apple is their iCloud services, which is an internet-based cloud storage

and cloud computing service. When iCloud was first introduced, Apple relied heavily on

Amazon Web Services and Microsoft to deliver a functional cloud service. With Facebook and

Google’s cloud being developed, Apple has a lack of knowledge in this area, something the other

two do not (Jackson, 2013).

Another current problem Apple faces is growth beyond the iPhone. Apple is known more

now as being “the iPhone corporation,” is relying on that single product now more than ever.

Currently, the iPhone is selling well, mainly due to Apple’s new market opening in China. Once

everyone who wants an iPhone has one, sales will slow, as they did previously with the iPad and

iPod. History tells us that products go through a lifecycle of birth, growth, and decline.

Currently, the iPhone is in the growth phase, but with the iPhone 6S as a ninth-generation

product, sales decline in the near future is inevitable (Kingsley-Hughes, 2015).

One major problem Apple faces today is managing its media and consumer expectations.

With Apple being such a secretive company, extreme levels of speculation, predictions, rumors,


hysteria, and fabrication are sure to hit Apple more than once. Consumers have a problem with

getting caught up in the pre-release hype of Apple’s products, and if Apple disappoints a

majority, this could have a devastating effect on the company.

Evaluation and Analysis

Strengths

Apple, INC. has many strengths that have helped them become the first U.S. publicly

traded company to close above $700 billion in market value. This put Apple’s value nearly

double that of the net three largest companies in the S&P 500 Index. Since Apple’s initial public

offering in December of 1980, their market value has grown over 50,600 percent. The five major

forces that helped Apple to do this are effective innovation process, customer loyalty, cash flow

abundance, and strong brand image (Wood, 2010).

Innovation has always kept Apple ahead of the game and ahead of its competitors. In

2012, Global Innovation 1000 ranked Apple, INC. first overall for the third year in a row (Wood,

2010). Innovation includes nine generations of iPhones and various options for each generation

(example: iPhone 5, 5C, 5S), the explosion of tablet computers and Apple’s ability to create a

boom with iPads, and Apple’s consistency to always release new products (most recently the

Apple Watch) with amazing quality. A rumor surfaced in 2015 that Apple had acquired

engineers and technology to produce the Apple Car, a fully functional Apple automobile that

would be ready for market by the year 2020. Speculation was that Apple would not assemble the

cars, but instead pass the job on to its own supply chain to outsource manufacturing and focus on

creating a car that is fully compatible with other Apple devices (Wood, 2010). Another new

program Apple has introduced in 2015 is Apple Music, which takes a “Spotify” approach to


iTunes. Instead of paying for every song, you pay a monthly price that grants you access to

100% of Apple’s licensed music

Customer loyalty is one of the biggest reasons Apple sits where it does in the market

today. Apple’s brilliant use of their Apple retail stores and marketing team has helped them

create millions of loyal customers. With programs such as Apple Care that replaces or fixes your

iPhone free of charge, compatibility between all their devices and software programs, free

giveaways via the App Store and iTunes, and their marketing strategy which focuses on quality,

branding and customer care, Apple has pulled ahead of the game in customer loyalty.

What separates Apple from almost any other company in the world is their abundance of

cash flow. With Apple recently making history by becoming the first U.S. publicly traded

company to close above $700 billion in market value, Apple has broken away from competitors.

Revenue and profit have both jumped tremendously in recent years. Revenue climbed 27.85%

from 2014 to 2015, rising from $182.795 billion to $233.715 billion. Profit also exploded in the

last year, soaring 35.14% from $39.510 billion (2014) to $53.394 billion (2015). From 2013 to

2014, sales jumped 7%, going from $170,910 million to $182,795 million (AAPL Financial

Statistics). This also allows Apple to have great purchasing power, which gives them the option

of purchasing businesses that have programs or products that will benefit Apple. With those

kinds of financials, it is easy to see why Apple can afford to be so innovative year after year.

Strong brand image is a huge strength for Apple as well. It is difficult to think of a more

inspirational branding success story than Apple. Founded by Jobs and Wozniak, two college

drop outs who relied on faith and resilience to create their first computers and explode in the

market. With Apple becoming America’s first $700 billion company, they have molded

themselves into one of the most recognized, iconic, respected brands in the entire world.


Weaknesses

With any great company comes great challenges, and they will be plentiful and

promising. The grass isn’t always greener on the other side for Apple, and this is due to many

reasons. Like strengths, there are many weaknesses that have plagued Apple over the years, and

the biggest and potentially the most devastating to the company are premium and expensive

pricing, lawsuits, operating systems incompatibility, and new product defects.

Apple has always been known to have extremely high quality products. With high quality

products, however, comes high pricing. This has not seemed to affect them drastically, however,

with sales still increasing year to year. There are many similar products with similar functions to

those of Apple’s products, however, and this could eventually have a negative impact on sales.

Apple is aware of their high prices, though. In September 2013, Apple launched its cheaper,

more affordable iPhone 5C smartphone (Wood, 2010). This phone, made with a plastic body,

had not seen the success that other models did, and eventually was discontinued.

Lawsuits have also plagued Apple for many years. Apple has always kept the specifics of

its research, development, and innovation a heavily-guarded secret in today’s world. As one of

Steve Jobs’ legacies, Apple has also gone great measures to protect its product patents. With

great innovation and great success, however, comes lawsuits and enemies. In 2012, a series of

lawsuits came about between Apple and Samsung, both a rival and a supplier. Apple accused

Samsung of copying designs because Samsung had captured more market share than Apple’s

iPhones in the beginning of 2012. Samsung responded, of course, by accusing Apple of invading

on original Samsung patents. United States intellectual property courts found in favor of Apple,

but courts in Japan sided with Samsung. This had a big hit on Apple because Samsung was a

huge provider of Apple’s chips and displays. In November of 2014, supply chain watchers stated


that Apple had a major challenge ahead in finding reliable suppliers for the increasingly scarce

components (Wood, 2010). Apple has had many lawsuits since the one with Samsung in 2012,

and many more are to be expected with the creation of patents and different innovative Apple

products.

Operating systems incompatibility has also recently been a big problem for Apple.

Because Apple entered the mobile market later than most other companies, they had to create

their own products that would be compatible with older products. This has been a problem for

Apple in recent years, with compatibility issues between Apple mobile devices such as iPhones

and iPods and Microsoft operating systems. Other compatibility issues include Apple’s operating

system that uses iOS and OD X, which are different than other operating systems and are

incompatible with products such as Adobe. Apple has gotten better at becoming compatible with

more products over recent years, however (Smithson, 2015).

One major problem Apple constantly faces is new product defects. With Apple constantly

coming up with new, innovative products and software, there is also an abundance of flaws. iOS

operating systems for mobile Apple devices are constantly being updated due to multiple bugs

and errors being reported from millions of people. Other product defects have included faulty

touch screens, steadily diminishing battery life over time, and more recently, the iPhone 6’s

major issue of heating up and bending in consumer’s pockets. With any manufacturing company,

however, bugs and defects are to be expected (Satariano, 2014).

Opportunities

With an abundance of cash, a foot in the door in multiple markets, and a huge customer

base, Apple’s opportunities will continue to be endless. During CEO Tim Cook’s first year in


2012, he had to deal with many problems, including a diminishing economy, supplier troubles,

management transition, investor panic, and unrealistic expectations due to the death of founder

Steve Jobs’ death. Yet, the company grew by 60%, and has since doubled (Jurevicius, 2016).

Because each market Apple has entered has not been first marketed by Apple itself, opportunities

to enter other markets are endless. Market-Share growth and creation of new product lines are

two huge areas of opportunity for Apple.

Although the overall growth rate for sales of smartphones slowed in 2015, this did not

stop Apple in increasing their share of global smartphone sales. In the second quarter of 2015,

Apple’s share increased 14.6%, compared to 12.2% a year earlier. Apple still has tons of room to

extend its share, holding on to around a 20% piece of the global PC/tablet market (Jurevicius,

2016). As Apple gains ground in China and the rest of the Asian region, this number can expect

to climb. With Apple having retail stores in 18 countries and online stores in 120 countries,

growth is almost inevitable.

With Apple’s history of quickly releasing new products every year, innovation and new

releases will continue to be an opportunity for Apple. Apple has branched out from a computer

designer and manufacturer to a technological mastermind in the last ten years, and this can

expect to be continued. Apple has never stinted on attacking markets head on, like their recent

release of the Apple Watch and induction into the fitness industry (Apple Watch). Apple loves

designing and creating new things, and more products should be expected in the near future.

Some ideas that are listed in our case study are automobiles, enterprise software, solar power

systems, and magnetic locks (Wood, 2010). Apple also does a great job of vastly improving

current products like the iPhone and releasing new variations of products on a yearly basis. With

Apple constantly coming up with new, innovative ideas, products, and technology, and


possessing a massive amount of cash flows, one should expect Apple to enter many new markets

in the near future.

Threats

With Apple being invested and implemented in so many different markets, many threats

are affecting Apple in today’s world. The number of competitors Apple faces are endless, and

one slip up on Apple’s part could cost them a huge portion of consumers. Aggressive

competition and the internet are two major threats that could negatively affect Apple.

Apple is constantly looked at as the front-runner in many technological markets, and with

this status also comes the pressure to come up with the newest, coolest gadget. Competitors such

as Samsung, Amazon, International Business Machines Corporation, Google, Microsoft,

Hewlett-Packard, Sony, and LG are working around the clock to try and gain a competitive

advantage on Apple (Jurevicius, 2016). If anything, competition can expect to increase when

Apple decides to enter more markets. Because Apple has higher prices, one innovative product

created by another company and sold at a cheaper price could be devastating for Apple.

Although Apple has been able to get away with their “high-quality, high-price” scheme in recent

years, I would not rule out the possibility of a newer, cooler, cheaper product being put on the

market by a competitor.

Although the internet is a blessing, it also can act as a huge threat to Apple. With Apple

being established mainly in the music industry, the internet in general is a major threat. Besides

the competitors of music such as Pandora and Spotify, the illegal streaming, uploading, and

downloading of music files can take away millions of dollars of revenue for Apple each and

every year. I believe that Apple Music will have a positive impact on the company because it is


so easy to access and stream, much like illegal music files. Internet reviews can also be a huge

threat for Apple. You can’t produce a faulty product without catching major backlash on the

internet via customer reviews, blogs, and magazine articles, and one wrong move by Apple could

have many consumers moving on to another brand.

Porter’s Five Forces

Porter’s five forces are: threat of new entry, buyer power, supplier power, competitive

rivalry, and threat of substitution. These forces, named after Harvard professor Michael E.

Porter, identifies opportunities and threats within an industry.

The first force is the threat of new entry. In order for a new entrant or new competitor,

one must find out a way to provide better products and services at more affordable prices. Since

Apple has such a vastly recognized, strong brand image, all combined with incredible customer

service and top notch innovation and billions of dollars, it would be extremely difficult for any

new entrant to compete. This threat is extremely low to Apple.

The next force we will discuss is buyer power. In business, the more customers a

company has, the less negotiating power one solo customer will have. Apple does a good job at

keeping switching costs high, which is the negative cost that a consumer suffers as a result of

changing suppliers. Apple does this by keeping all products under the same operating system,

and by making all products extremely compatible. Apple also carefully broadens its product flow

and innovation by making sure each product runs on iOS. Changing operating systems would

force a major change in the entire company. Just like threat of new entry, this threat is also low.

Supplier power is another force that we will discuss. Supplier power is the bargaining

power of suppliers which is determined by the uniqueness and demand of the supplier’s


products. Apple neutralized a major portion of this threat by designing their own chips after

lawsuits with Samsung, taking away Samsung’s supplier power (Wood, 2010). Apple also

reduced the power of manufacturers such as Foxconn by buying manufacturing equipment and

only utilizing that equipment for Apple products. Another threat that was eliminated by Apple

was the power of distributors, and this was done by selling products and services through their

own Apple store. Supplier power threat is extremely low against Apple as well.

Competitive rivalry, which is the number of companies that Apple is up against, is a bit

more of a threat than the previous three. Companies struggle to make themselves unique,

however, and Apple has not. Apple has done a wonderful job at avoiding price-based

competition by staying away from low-end markets where the price is the main differentiator.

Apple has separated itself from other companies by creating extremely high-end products, and

customers have noticed. Although prices are high, customers stay consistent at purchasing Apple

products and keeping them at the top of the market. However, it only takes one product release

from another company that is just as functional and more affordable to knock Apple down a few

notches.

The last force is threat of substitution. This is when a product satisfies the same needs as

Apple’s products being offered. Threat of substitution can be tied in with competitive rivalry,

and that is why this threat is also medium. Apple has dealt with this in the past by manufacturing

cheaper alternatives of their higher-end products, like the plastic-framed iPhone 5C, for example.

However, as similar to the threat of competitive rivalry, it only takes one more affordable

product that satisfies the same needs as Apple’s products to step above Apple in any market.


Apple Financial Evaluation

Apple has been one of the most successful, respected and profitable companies in the

business world for quite some time. However, over the last three years or so, Apple’s sales

growth has slowed down a considerable amount. This can probably be related to the explosion of

smartphone and tablet market in 2013 finally coming to a halt. The numbers now point more

toward moderate growth levels. From 2011 to 2012, Apple’s net sales soared from $108 billion

to $157 billion, a 45% increase. In 2013, sales climbed only 9%, reaching $171 billion, and a 7%

increase in 2014, coming to $183 billion (Wood, 2010). As stated before, this can be blamed on

the smartphone and tablet explosion finally slowing down and leveling out.

Apple’s Gross Margin was fairly consistent since 2012. Gross margin indicates the

percentage of revenue available to cover expenses. In 2012, Apple’s Gross Margin was $68

billion. In 2013, it lowered to 37.6%, or $64 billion. In 2014, Apple’s Gross Margin was $70

billion, or a 38.6% gross margin percentage. Overall, Apple’s gross margin improved from 2013

to 2014 (Wood, 2012).

Apple has done a good job at expanding their target market internationally. In the United

States from 2012 to 2013, Apple’s net sales went from $57 billion to $62 billion, a 9% change.

From 2013 to 2014, net sales climbed 4%, from $62 billion to $65 billion. From 2012 to 2013 in

Japan, net sales rose at a tremendous level of 27%, from $10 billion to $13.5 billion. The next

year, they climbed 11%, from $13.5 billion to almost $15 billion. The greater China are also saw

an increase in net sales from 2012 to 2013, rising 13% from $22.5 billion to $25.4 billion. The

next year, sales in China rose 17%, from $25.4 billion to $29.8 billion. The only time Apple saw

negative net sales was from 2013 to 2014 in the Asia-Pacific region. Sales in 2013 registered at


$11.1 billion and fell by 7% to $10.3 billion in 2014 (Wood, 2010). Overall, Apple has done a

good job both nationally and internationally at keeping their sales on the rise.

Apple has also done a good job at keeping their operating expenses under control. From

2012 to 2013, Apple used only 9% of their net sales for operating expenses, $13.4 billion and

$15.3 billion. 2014’s percentage rose slightly to 10%, when apple used $18 billion for total

operating expenses (Wood, 2010). Currently, Apple (AAPL) stock via NASDAQ sits at $96.85 a

share. Apple’s profitability gross margin is 38.49, operating margin is 28.81, net margin is 23.09,

and ROE is 46.25. Apple’s current liquidity ratio is 1.11, while their quick ratio is 1.08 and cash

ratio is 0.52. Apple has a strong price to sales ratio at 2.87, and a strong price to book ratio at

5.36. Apple’s price to cash flow ratio is extraordinary, at 8.18 (NASDAQ, 2016).

Conclusion

Apple has been one of, if not the most successful company in the world for the last

decade. Being America’s first publicly traded company to close above $700 billion in market

value and sitting on billions of dollars in cash and assets with zero debt, Apple has worked very

hard to get where it is today as a company. However, in order for Apple to grow financially and

internationally, key aspects like market competition, continued innovation and brand recognition

must be focused on.

The more markets Apple decides to invest products and services in, the more competitors

they will face as a company. Apple already faces a massive amount of competitors in the

technology industry, in locations such as computers, cellular devices, fitness, applications,

music, and gaming. If Apple decides to pursue the idea of the Apple Car, they will enter a

massive automotive industry that can be ruthless. In my mind, Apple must tread lightly in what


markets they intend to enter in the future. One wrong move could cost Apple billions of dollars

and millions of customers.

Continued innovation should also be a huge focus in the future. Apple has always done a

wonderful job at staying ahead of the game in both the computer and cell phone market by

creating high quality products with excellent customer service. Although their products are sold

at high prices, Apple’s dedicated customers are willing to pay for the quality and services they

get. Since Apple is constantly coming up with new, innovative technology and remodeled

versions of older products, customer increase can be expected. As long as Apple continues their

yearly releases of new versions of iPhones, iPads and Macbooks, they will continue to succeed in

the technology industry.

Apple’s brand recognition must be used to their advantage in order to stay a successful

company. One Apple’s biggest strengths is its brand recognition and strong brand image. Brand

and customer loyalty is what helps keep them at such a high level: the strength of customer

loyalty means that not only do they retain customers, but they also receive millions of new ones

via current customer recommendations. These recommendations are usually taken seriously too,

because of their strong brand image. As long as Apple continues to retain loyal, happy

customers, they will be successful.

One recommendation I have for Apple is that it should attempt to enter the lower end of

the cellular market. Because the smartphone boom has almost come to a halt and sales have

slowed, Apple won’t be seeing another major spike in iPhone sales unless they come up with

something extremely innovative and semi-affordable. If Apple can sustain moderate growth

levels in the smartphone industry by selling their current products at high prices, they may want

to consider targeting a lower income market. Although the iPhone 5C didn’t work out as Apple


planned, it was only a trial. If Apple can come up with another smartphone that is more

affordable, they should be able to generate new customers. My recommendation would be to

attack this new idea when sales start to even out year to year. With a 7% increase of sales from

2013 to 2014, I would not recommend Apple consider this move just yet (Wood, 2010). Apple is

one of the world’s most respected, iconic companies and is highly successful because of their

methods in innovation, sales, marketing, distribution, investment and creation. I believe that

Apple will only continue in success as technology continues to improve.


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