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3 Apple: Company Analysis

Executive Summary

Apple, Inc. is a global brand that was incorporated in the state of California in 1977. Over last

three decades, the company has invented a series of products that have changed the way

consumers use technology in the everyday world. Apple continues to transform products, and

follows a mission of providing the best computers in the world, along with revolutionary phones,

and media devices made for the future. By building high-quality products with a closed-market

operating system, the company has been able to create a sustained competitive advantage in the

market of computers and phones alike. Over the course of five years, Apple has revolutionized

the smartphone market, and has created a presence for itself within the computer market. Apple

will continue to design unique products and enhance their operating system in order to keep an

advantage in an intense and competitive environment. In addition to phones, multimedia players,

and computers, Apple has diversified its product line by expanding into tablets, TVs, and soon,

watches. Through market research and placement, Apple will gain opportunities to grow globally

and increase profits that will entertain their customers and their shareholders.

Introduction

Apple is a company located in several different industries, with products and services ranging

from the music industry to the computer/mobile industry. This report will focus on the

computer/mo bile industry, and will analyze facts regarding the industry and Apple’s position

within. Apple is a company that shows great profitability, however recently, due to fierce

competition and loss of key employees, has been on the radar for financial analysts. The report

will detail the general environment of the industry and the direction Apple will need to take in

order to continue to sustain the growth that they have had over the course of three years. This

includes demographic, political, and technological factors that may affect the company’s growth.






specific aged demographics. Over the last five years, Apple has worked tremendously to shift

their image to the “cool and hipster” product it is today.

In addition to the overall world population, there are several different geologic regions around

the world that the personal computers/mobile industry targets. The United States leads the world

by far in terms of personal computing. The US has a 19.4% market share in terms of PCs In-Use

around the world (equates to 310 million computers). This is followed shortly by China at 195

million, Japan at 98 million, Germany at 71 million, and India at 57 million. This data shows that

there is plenty of room for personal computing to grow globally. In addition to saturated markets

such as U.S, Japan, and Germany, the computer/mobile market has a lot of room to segment into

developing countries such as China and India in order to capitalize on their large populations.

Political Segment

Politics change the world every day, and securities installed by political movements create a

foundation for what’s ethical and legal within the computer /mobile industry. Domestically,

companies such as Apple have to ensure that they are within boundaries set by the U.S.

Government, and that the company is actively participating in laws that may affect its business.

An example of domestic changes is the Sarbanes-Oxley Act of 2002. The law forced companies

such as Apple to increase funding to ensure accounts were handled properly.

In 2011, the Stop Online Piracy Act (SOPA) was brought up in Congress. The bill would allow

the government to censor the internet and prevent the use of many foreign websites by citizens of

the United States. The bill did not pass, as companies and citizens alike rejected the act. The act

could have affected Apple’s sales as censoring could potentially reduce the usability of many

Apple products. The Cyber Intelligence Sharing and Protection Act of 2013 (CISPA), on the

other hand, is created to prevent cyber-attacks on large corporations by giving the U.S.




government access to consumer’s personal information. The act is supported by Apple, as the

law will allow the government to handle a lot of work that is done by security teams currently

hired by the company. These acts and laws could change the way business is done throughout the

U.S. and bring changes to the market globally.

On a global scale, the computer industry has to incorporate many laws in order to make sure that

their global business is running as intended. In China and many other countries, companies have

to follow strict business policies and research censorship laws that may require business to be

handled differently.

Technological Segment

The computer/mobile industry is part of the high-tech sector. Companies within this industry are

those that use technological innovation to create products that entice the customer. From the

year 2000 to 2012, the number of internet users around the world has gone from approximately

360 million, to 2.4 billion users. As shown in Figure 2, this is a 566% growth in as little as 12

years. In comparison, it took 38 years for the “radio” to reach just 50 million users. The internet

is a part of the core for every company, especially one within the computer/mobile industry.

Apple’s business depends on the internet, and technological advancements globally, in terms of

equipment and speed, will allow the company to further penetrate their market. The development

of fiber-optic cable will allow data to be transferred a hundred times faster than the average

coaxial cable. These changes should open new opportunities for technology giants, as faster data

transfer will make their products and services more marketable.




Stakeholder Analysis

The stakeholder analysis can be broken into two categories: internal stakeholders and external

stakeholders. The internal stakeholders are those that work at the company currently and

influence the direction the company takes. The external stakeholders are institutions, customers,

and suppliers that have a say about the companies motives.

Internal Stakeholders

The internal stakeholders are employees that currently work at Apple. They influence the culture

and decisions that the company makes, and work as a community to help the company prosper.

Figure 3A consists of the key executives at Apple that are the most influential in terms of power.

Tim Cook is the current CEO of Apple. His goal is to create long term growth for the company,

as well as please the board of directors. There are many other internal stakeholders that

influence the environment. Additional key decision makers are listed in the Appendix.

External Stakeholders

The external stakeholders consist of a large variety of people. The most influential are

institutions that own a significant stake in the company. Figure 3B shows the top institutions and

the number of shares that they currently hold. Of course, as many shareholders, the goal of these

stakeholders is to support the company in any way that will increase the bottom line for Apple.

In addition to institutions, other external shareholders include customers and suppliers. Even

though they may not own a percent of the company, these are people that give Apple an idea of

what direction to take and what the general population is currently demanding. For example, if

customers wanted an iPhone that was more slick and thin than its predecessor, talking to the

customers would allow the key executives to decide exactly how to approach it.






Therefore, the bargaining power of buyers remains low. Apple products can be seen as a niche

product in the computer/mobile market.

Threat of Substitute products

In recent years, the threat of substitute products can be labeled as high. Many different

companies, as noted in the next section, have created products that can be seen as strong

substitutes to Apple’s operating system. In the mobile industry, Android and Windows phones

are substitutes to Apple phones. In the computer industry, products that use the Windows

operating system can be considered substitutes.

Rivalry among Competitors

There is moderate competition between rivals in Apple’s market. Like the substitute products,

rivalry among competitors can be split into two different industries: the computer industry, and

the mobile industry. The computer industry consists of competition from companies such as

Dell, Lenovo, HP and Asus. These companies all use the Windows operating system on their

products. As stated in the bargaining power of buyers section, Apple products can be seen as a

niche product because they have their own, closed operating system. The mobile industry

consists of competition from companies such as Samsung, Microsoft, Nokia, and Sony. These

companies use two different operating systems; Android, or Windows. As of 2013, Android

holds a 51% market share lead over Apple’s iOS, at 43%. In comparison, Samsung holds a 29%

market share in the smartphone market, versus Apple at 22%. These statistics show that Apple

may be losing market share to its competitors. This does not, however , affect Apple’s business

because the company focuses on a niche market, and the competitors compete with themselves

due to open source operating systems.




Opportunities and Threats

Opportunities

Government and Education Markets

The government and education markets are adapting in terms of devices used by their

employees. More and more agencies are creating trends of allowing their employees to bring

their own devices. Until recently, the iPhone had been seen as a “social” device which could only

be used by students and the younger generation. Apple has taken the opportunity to market the

device as something used by “professionals”, therefore allowing the company to tap into the

government and educational sectors. The availability of different apps on the iPhone and iOS

market, compared to BlackBerry (the leader in professional devices), has encouraged employees

to switch devices. A recent study found that large corporations, such as Halliburton, are phasing

out BlackBerry devices and purchasing iPhones for their employees.

Developing nations catchi ng up in technology

Developing nations are a huge market for Apple. Countries such as China, India, and Brazil

show huge potential because of vast populations and rapid technology development. Due to the

nature of technology upgrades, countries are able to “skip” existing technology and create an

infrastructure built for the future. For example, many countries are installing fiber-optic cables,

as they do not have a preexisting coaxial cable network. This poses as a huge opportunity for

Apple to market their products worldwide. In fact, Apple products are so popular worldwide that

people are willing to pay a premium in order to get an “iPad” or “iPhone” from a supplier in the

United States.




Threats

Android and Windows Phone

The competition in the market is increasing, with companies such as Google and Microsoft using

diverse research and development to attract existing Apple customers. The market share for both

Android and Windows is expected to grow significantly over the next 3 years. The open source

Android software is also catching up in terms of technology and competing with iOS in

incentives and support.

Secur ity of operating system

With the growth of Mac OS and iOS in the past decade, security has been a major issue for the

operating systems. In the past, due to small market share, the OS did not attract criminals and

hackers as the information they were looking for was much easier to get on Windows. Security

measures will ensure that Apple is able to grow into new sectors, especially the government

agencies and educational institutions.

Internal Analysis

Financial Analysis

Income Statement

Figure 4A and 4B show the key details of Apple’s income statement for the last three years,

along with profitability ratios used to analyze Apple’s current development path. Over the

period, Apple’s general and administrative expenses, when compared to Sales, have decreased

from 8.5% to 6.4%. This indicates that Apple is controlling its growth and limiting itself from

spending lavishly. This can also mean that Apple is limiting opening new stores, or increasing




efficiency of administrative workers. In addition to the G&A expenses, research and

development funding decreased from 2.73% in 2010 to 2.24% in 2011, and 2.16% in 2012. The

large shift in funding decrease in the year 2010 can be explained by the release of the iPad. The

product was introduced in 2010 and launched in 2011. Over the last year, funding has remained

relatively the same. This indicates that Apple is keeping to its traditional research methods.

Android has created significant challenges for Apple, and Samsung’s Galaxy phone is taking a

significant chunk of Apple’s market share. Apple will have to enter new markets and create new

innovations in order to reflect the image that has been created of the company in the last ten

years. With the creation of new products such as Apple TV and iWatch, research and

development funding is expected to increase to counteract to the increase in competition. As

shown on the Income Statement, Apple has seen a 167% profit growth over the last three years.

The growth can be credited to the release of the iPad, as well as iPhone 4, one of the most

successful phones in Apple’s lineup. To continue to provide such strong growth, Apple will have

to reinvent their existing line of products, and move into new products that may attract different

markets.

Shareholder’s Equity Statement

Figure 5 shows the shareholder’s equity statement for the last three years. Apple has shown a

tremendous growth in retained earnings over the course of the last three years, mostly due to the

launch of iPad and the result of globalization. From 2010 to 2011, Apple’s retained earnings

increased by 69%. The following year, it increased an additional 61%. Retained earnings show a

healthy and bullish growth for the company, because the retained earnings are steadily increasing

year out. The retained earnings can be used to create growth opportunities for Apple, not only






pay short term debts. Compared to Apple’s average ratio, it can be concluded that the company is

managing their funds strictly in order to capitalize on growth and innovation, whereas the

competition has extra money available for future use. This can be shown on Google’s Chart. The

company had a ratio of 5.92 in the year 2011, indicating that too many assets are available and

that they are not being properly managed and used to help the company grow.

Strengths and Weaknesses

Strengths

Successful product l ines

Today, Apple is known to be the creator of innovation and an industry leader in new products.

Starting from the iPod, the company has slowly and gradually increased their line of products by

integrating features created by past products into new lines of products for different markets,

such as the iPhone and iPad. In 2011, Apple had a 20% market share in the mobile market with

their iPhone 4 launch. In the same year, the iPad acquired 70% of the tablet computing market

share. The chain of successful products has brought attention to not only the new products, but

also existing lines of Macs that are sold at every Apple store. The success of these products has

created reliability and dependability for Apple products, and will allow the company to launch

new products with market authority.

Loyal customers

With the creation of successful product lines, Apple has created a foundation for loyal customers.

Over the last five years, Apple products have been marketed and branded as products that are

“niche”, and better then the “average” market product. This has created strong emotional

attachment to Apple customers by loyal fans of the company. The loyal customer base is




considered a strength for Apple because their price range is significantly higher than many other

products available in the market, and the backing of loyal customers allows Apple to bring in

more customers at their own price point.

Weaknesses

Pri ce points

Even though the price point set by Apple is validated by the uniqueness of the products, Apple

lacks products that meet the demands of customers with different price points. The competitors

of Apple, such as Microsoft and Google, have created products that are available at different

price points for customers with different needs. Apple will need to compete in these markets in

order to not only hold its reputation, but also to ensure that the new and untapped markets are not

lost to its competitors. In 2012, Apple launched the iPad Mini in order to reach a new market of

Apple product fans.

Competi tors products

The competition in the smartphone and tablet market is fierce. Competitors such as Google and

Microsoft are creating products that reach to every market that is not contaminated by Apple

products. These markets are much larger then what Apple currently possesses. In the overall

mobile handset segment (all handheld devices) of the market, Apple only commands 5% of the

market.

VRIO Analysis

Value

One of Apple’s biggest assets is the name alone. Apple is a product manufacturer known to have

high-quality products that satisfy the needs of customers. In comparison to their competitors,




Apple’s value can be seen in both the hardware they provide, and the software included in their

products. In comparison to competitor products, Apple builds high-quality products that are built

to sustain damage and to make the customer feel that they are paying for the good quality. The

competitors, on the other hand, create low profile products that can reach the market at a lower

cost. Apple uses their customized and closed market iOS, while every other phone on the market

uses Android or Windows, or a similar open market operating system.

Rarity

Apple’s rarity is simple; iOS and Mac. The company has created an operating system through

decades of ideas and now has an advantage over competitors due to the nature of their closed

market product. iOS creates a competitive advantage for Apple because the functionality of the

operating system has been proven and witnessed by many customers, and the success of the

software can be seen through reviews and loyal fan bases.

Imitability

Apple products are part of a niche market. Even though they have been imitated by new products

with different operating systems, these new products can be seen as substitutes instead of direct

competitors to Apple’s products. The cost of imitation is high, however, over the last five years,

large companies such as Google have invested a significant amount of assets in order to compete

with Apple in both the smartphone and the tablet market.

Organization

Apple continues to be innovative with their products thanks to the intelligence of their

employees. Following the leadership of Steve Jobs, the company has continued to use their

traditional methods to create new products in the market that are different from those that their






Strategy Identification

Apple’s current strategy rotates around the high quality and high price product line. With a large

loyal customer base, the company currently feels the need to continue charging a premium for

their products and services because they are “different” from other products available in the

market. Unlike Google or Microsoft, Apple does not have to compete with companies running

Apple’s software as the software is limited to only their own products. The prices of products

running the Android software have gradually decreased over the last five years; however the

prices of iOS products have remained untainted. Apple continues to use the traditional strategy

of innovating and enhancing the quality of life of their products in exchange for high prices.

Over the last three years, Apple has brought forth multiple different products, each building upon

its predecessor. Products that have been brought forth in the market include iPad, iPad 2, iPad

Mini, iPhone 4, iPhone 4S, and iPhone 5. This is a wide range of products over the course of just

three years. All the products are priced at a premium when compared to its largest competitor.

iPad Mini was brought into the market to compete with the Nexus 7 and Kindle Fire. In

comparison to Kindle Fire, iPad Mini is at a price gap of $129 dollars more. As noted previously,

this price gap is largely due to Apple valuing their software highly when compared to the open

source Android. Also, the high price range has aided Apple in creating loyal customers who

favor Apple products over any other due to dependency and credibility.

As stated by Apple’s mission statement, the company has “reinvented the mobile phone with its

revolutionary iPhone and App store, and is defining the future of mobile media and computing

devices with iPad”. The strategy is tied in with the mission statement, as it clearly answers why

Apple has remained different and revolutionary when compared to competitors. In order to meet




the demands of the stakeholders, Apple continues to bring out innovative products at a price

margin attractive to high-end and loyal customers.

Recommendations

In addition to the current strategy, there are several paths that Apple can take in order to show

growth.

The first path would be vertically integrating their products downward, and launching new

products that meet the needs of different markets at different price points. For example, the

company could launch a “Slim” version of every new product that they bring into the market.

These products would include bare bone hardware, which can be afforded by people at all price

points. The strategy can be compared to a car dealer. The base model would be the lowest price

and be absent of any features. The user would get complete customization on what features they

feel are necessary and thus have the power to control their price. Lowering the price could result

in Apple’s image getting significantly tarnished, as users that are using the products because of

the high-end quality will lose faith in the company.

The second path Apple can potentially use to gather a larger market base would be to license

their operating system to key manufacturers and gain a larger market share for their iOS

software, as well as the App Store. In comparison to Google’s Play Store, even though there are

more Android devices in the market then iOS, the App Store contributes 80% of the profits in the

app market. Allowing different manufacturers, such as Asus, to produce products that use

Apple’s operating system will allow the company to reach a larger market share without the need

of investing large funds into research and development of bare bone hardware that entangles with

the spirit of Apple’s products. The licensed operating system can be slightly altered to keep

Apple’s own line of products different, however it would allow Apple to gain back market share






the route Apple should take in addition to their current route while globalizing into different

markets.

Strategic implementation

A. Establish retail segments in BRIC countries (Brazil, Russia, India, China), as well asniche developing countries within the regions.

a. Work with other companies to assist the countries in setting up a technologyinfrastructure.

b. Use existing price points and set prices that are equal, globally.c. Enhance the image of “high quality” in untapped markets d. Use aggressive advertising campaigns on customers new to “computing”.

B. Continue to innovatea. Create new products that are different and out of the ordinary b. Continue creating products even if the “line of successful products” breaks and a

failure happens.c. Continue to use time and money to research new products prior to rushing

production.d. Continue to read market movements and create products that meet the customer ’s

needs (iPad Mini, for example).C. Expand infrastructure

a. Promote valuable staff and globalize the valued staff (in other words, send themto regions where expertise is needed).

b. Create administrative efficiency and production efficiency in factoriesD. Create new price points, but keep the “high-quality” nature

a. Go smaller and more convenient, keeping high quality parts and software.

This implementation plan builds upon Apple’s existing plan of providing “unique” and “high-

quality” products at a premium price. The establishment of retail segments globally, along with

expansions in infrastructure and innovation will allow Apple to not only meet different price

points, but also keep the nature of their “high-quality” business.




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Appendix

Figure 1






Figure 4A

Figure 4B




Figure 5

Figure 6

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