Strategic Analysis Of Apple

A Strategic Analysis

of

Apple Corporation

Timothy Pivovarnik

Jeff Shaver

Adam Siler

Richard Sterling

Dave Strubbe

 

EXECUTIVE SUMMARY 3

HISTORY OF APPLE 4

THE PC INDUSTRY 10

THE ONLINE MUSIC INDUSTRY 12

THE FUTURE OF APPLE 12

PERSONAL COMPUTERS - A SHIFT IN STRATEGY 12

APPLE IN THE LIVING ROOM 14

STRATEGIC ALLIANCES AND ENTERTAINMENT 15

EXTERNAL ANALYSIS 17

TECHNOLOGICAL ENVIRONMENT 17

Brand Awareness - Style at a Premium 17

Interoperability 18

Technology and the Digital Lifestyle 18

REGULATORY ENVIRONMENT 20

INDUSTRY ANALYSIS USING PORTER'S FIVE FORCES MODEL 21

WHICH EXTERNAL THREATS ARE MOST SIGNIFICANT 23

ADDITIONAL EXTERNAL THREATS 25

SECURITY 25

VERTICAL INTEGRATION OF COMPETITORS 25

VALUE CHAIN ANALYSIS 26

TECHNOLOGY AND PRODUCT DESIGN 27

PRODUCTION 27

SALES AND MARKETING 27

CUSTOMER SERVICE 28

LEGAL SERVICES 28

SWOT ANALYSIS 29

STRENGTHS 29

WEAKNESSES 30

OPPORTUNITIES 31

THREATS 31

FINANCIAL ANALYSIS 32

2ND QUARTER 2006 32

HISTORICAL PERFORMANCE 33

STOCK PRICE PERFORMANCE 34

PROFITABILITY MEASURES 35

LIQUIDITY AND LEVERAGE MEASURES 35

PRODUCT UNIT SALES 36

OPERATING SEGMENTS 36

MARKET VALUE ANALYSIS 37

PRO-FORMA INCOME STATEMENT 38

PROJECTED FREE CASH FLOW AND EQUITY VALUATION 39

STRATEGY 40

PRODUCT DIFFERENTIATION 40

STRATEGIC ALLIANCES 44

CONCLUSIONS 48

REFERENCES 49

 

Executive Summary

Apple Computer's 30-year history is full of highs and lows, which is what we would expect in a highly innovative company. They evolved throughout the years into an organization that is very much a representation of its leader, Steven Jobs. Apple made several hugely successful product introductions over the years. They have also completely fallen on their face on several occasions. They struggled mightily while Jobs was not a part of the organization. Apple reached a point where many thought they would not survive. When asked in late 1997 what Jobs should do as head of Apple, Dell Inc.'s (DELL) then-CEO Michael S. Dell said at an investor conference: "I'd shut it down and give the money back to the shareholders." (Burrows, Grover, and Green)

Well, times changed. Less than 10 years later, BusinessWeek ranked Apple as the top performer in its 2006 BusinessWeek 50. Apple attributes their recent success to robust sales of iPod music players (32 million in 2005). They are optimistic about the economies of scope with media giants, such as Disney and Pixar. (BusinessWeek)

Apple rarely introduces a new type of product. Thus, instead of being the pioneer, they are an expert "second mover" by refining existing products. Portable music players and notebook computers are examples. Apple increases the appeal of these products by making them stylish and more functional. They now appear poised to make significant strides in the home computer market and to creating a total digital lifestyle whereby the home is a multimedia hub.

History of Apple

Steve Jobs and Steve Wozniak founded Apple on April 1, 1976. The two Steves, Jobs and Woz (as he is commonly referred to - see woz.org), have personalities that persist throughout Apple's products, even today. Jobs was the consummate salesperson and visionary while Woz was the inquisitive technical genius. Woz developed his own homemade computer and Jobs saw its commercial potential. After selling 50 Apple I computer kits to Paul Terrell's Byte Shop in Mountain View, CA, Jobs and Woz sought financing to sell their improved version, the Apple II. (Linzmayer, 7-9)

They found their financier in Mike Markkula, who in turn hired Michael Scott to be CEO. The company introduced the Apple II on April 17, 1977, at the same time Commodore released their PET computer. Once the Apple II came with Visicalc, the progenitor of the modern spreadsheet program, sales increased dramatically. In 1979, Apple initiated three projects in order to stay ahead of the competition: 1) the Apple III - their business oriented machine, 2) the Lisa - the planned successor to the Apple III, and 3) Macintosh. (Linzmayer, 14-5)

In 1980, the company released the Apple III to the public and was a commercial flop. It was too expensive and had several design flaws that made for less-than-stellar quality. One design flaw was a lack of cooling fans, which allowed chips to overheat. In late 1980, Apple went public, making the two Steves and Markkula wealthy - to the tune of nine figures. By 1981, the Apple III was not selling well and Scott infamously fired 40 people on Feb 25 ("Black Wednesday"). Scott's direct management style conflicted with the culture Jobs and