Apple Computer – 2011

Forest David

A. Case Abstract
Apple is a comprehensive strategic management case that includes the company’s year-end 2010 financial
statements, organizational chart, competitor information and more. The case time setting is the year 2011.
Sufficient internal and external data are provided to enable students to evaluate current strategies and
recommend a three-year strategic plan for the company. Headquartered in Cupertino, California, Apple’s
common stock is publicly traded under the ticker symbol AAPL.

Apple’s newest iPhone has spurred a revolution in cell phones and mobile computing. Even though founder
and CEO Steve Jobs has recently died, Apple continues to innovate its core Mac desktop and laptop
computers -- all of which feature its OS X operating system -- including the iMac all-in-one desktop and
MacBook portable for the consumer and education markets, and the high-end Mac Pro and MacBook Pro
for consumers and professionals involved in design and publishing. Apple has been immensely successful
with its digital music players (iPod) and online music store (iTunes). The company’s iPad tablet
omputer could become another revolutionary technological breakthrough. Apple gets more than half of its
sales from outside the US.

B. Vision Statement (proposed)

To be the most innovative computer, phone, and tablet company in the world.

C. Mission Statement (actual)

Apple Computer is committed to protecting the environment, health, and safety of our employees (9),
customers (1) and the global communities (3) where we operate. We recognize that by integrating sound
environmental, health, and safety management practices into all aspects of our business, we can offer
technologically innovative products (4) and services while conserving and enhancing resources for future
generations (6). Apple strives for continuous improvement in our environmental, health and safety
management systems and in the environmental quality (8) of our products, processes, and services.

1. Customers
2. Products or services
3. Markets
4. Technology
5. Concern for survival, growth, and profitability
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees

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D. External Audit
Opportunities

1. Corporate demand for PCs is increasing.

2. Asia-Pacific sales increased 5.6% in first quarter 2011 and are expected to grow 32 percent in 2011.
3. Shipments to the Middle East, Eastern Europe and Latin America are expected to grow 19 percent in
2011.
4. Consumers prefer phones and tables today to desk top PCs and laptops.
5. Business analytic service industry is still in the development phase.
6. The US malware infection rate is 58.25%.
7. PCs are still the best option for typing, spreadsheets, and activities that require more processing power.

Threats

1. Hewlett-Packard is currently the #1 PC seller with 18.9 percent market share.

2. Competing firms using second and late mover strategies let Apple burden much of the R&D expense.
3. Acer and Lenovo based in Asia are impacting price and increasing their market share in the United
States.
4. Oracle, SAP, and IBM are well entrenched in the business analytics service industry.
5. Rapid technology advancement in the industry.
6. Slowly an increase in viruses created for Apple products.
7. Slowdowns in the global economy.
8. Volatile nature of currency rates.

Competitive Profile Matrix

Apple HP Dell

Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0.05 4 0.20 2 0.10 3 0.15
Market Penetration 0.08 2 0.16 4 0.32 3 0.24
Customer Service 0.05 4 0.20 2 0.10 3 0.15
Store Locations 0.01 4 0.04 2 0.02 1 0.01
R&D 0.12 4 0.48 2 0.24 1 0.12
Employee Dedication 0.05 4 0.20 1 0.05 2 0.10
Financial Profit 0.13 4 0.52 2 0.26 1 0.13
Customer Loyalty 0.08 4 0.32 1 0.08 2 0.16
Market Share 0.10 1 0.10 4 0.40 3 0.30
Product Quality 0.13 4 0.52 2 0.26 1 0.13
Top Management 0.10 4 0.40 2 0.20 3 0.30
Price Competitiveness 0.10 1 0.10 3 0.30 4 0.40
Totals 1.00 3.24 2.33 2.19

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 EFE Matrix

Opportunities Weight Rating Weighted Score

1. Corporate demand for PCs is increasing. 0.10 1 0.10
2. Asia-Pacific sales increased 5.6% in first quarter 2011 and are 0.05 2 0.10
expected to grow 32 percent in 2011.
3. Shipments to the Middle East, Eastern Europe and Latin America 0.05 2 0.10
are expected to grow 19 percent in 2011.
4. Consumers prefer phones and tables today to desk top PCs and 0.10 4 0.40
laptops.
5. Business analytic service industry is still in the development 0.05 1 0.05
phase.
6. The US malware infection rate is 58.25%. 0.04 4 0.16
7. PCs are still the best option for typing, spreadsheets, and 0.08 2 0.16
activities that require more processing power.

Threats Weight Rating Weighted Score

1. Hewlett-Packard is currently the #1 PC seller with 18.9 percent
0.10 4 0.40
market share.
2. Competing firms using second and late mover strategies let
0.09 4 0.36
Apple burden much of the R&D expense.
3. Acer and Lenovo based in Asia are impacting price and
0.06 3 0.18
increasing their market share in the United States.
4. Oracle, SAP, and IBM are well entrenched in the business
0.06 1 0.06
analytics service industry.
5. Rapid technology advancement in the industry. 0.08 4 0.32
6. Slowly an increase in viruses created for Apple products. 0.06 4 0.24
7. Slowdowns in the global economy. 0.06 3 0.18
8. Volatile nature of currency rates. 0.02 3 0.06
TOTALS 1.00 2.87

E. Internal Audit
Strengths

1. Apple has sold 20 million iPads since the products April 2010 debut.
2. Products include Mac, iPhone, iPad, iPod, Xserve and more.
3. Sells products through retail stores, online stores, and direct sales force.
4. Operate 233 retail stores in the US and 84 internationally.
5. In 2010, Apple’s market capitalization surpassed Microsoft.
6. Employ a first mover approach and considered the best first mover ever.
7. Sales in the Americas and Europe increased 29% and 58% respectively.
8. iPhone sales increased 93% in 2010.
9. Desktop sales increased 43% in 2010.
10. Inventory turnover of 70.

Weaknesses

1. Lack a developed vision or mission statement.

2. Functional business structure.

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3. Unwillingness to use debt to finance.
4. Products are the most expensive in their class.

Financial Ratio Analysis

Growth Rate Percent Apple Industry S&P 500

Sales (Qtr vs year ago qtr) 39.00 36.30 14.50
Net Income (YTD vs YTD) NA NA NA
Net Income (Qtr vs year ago qtr) 53.70 54.40 47.50
Sales (5-Year Annual Avg.) 41.16 38.38 8.27
Net Income (5-Year Annual Avg.) 67.11 61.93 8.68
Dividends (5-Year Annual Avg.) NA NA 5.68

Profit Margin Percent

Gross Margin 40.5 39.1 39.9
Pre-Tax Margin 31.6 29.9 18.1
Net Profit Margin 24.0 22.7 13.2
5Yr Gross Margin (5-Year Avg.) 38.8 37.3 39.8

Liquidity Ratios
Debt/Equity Ratio 0.00 0.07 1.01
Current Ratio 1.6 1.6 1.4
Quick Ratio 1.6 1.6 0.9

Profitability Ratios
Return On Equity 41.7 42.2 26.0
Return On Assets 27.1 25.8 8.9
Return On Capital 36.3 35.1 11.8
Return On Equity (5-Year Avg.) 36.2 37.2 23.8
Return On Assets (5-Year Avg.) 23.0 22.0 8.0
Return On Capital (5-Year Avg.) 31.9 31.2 10.8

Efficiency Ratios
Income/Employee 429,172 401,304 126,213
Revenue/Employee 2 Mil 2 Mil 1 Mil
Receivable Turnover 19.9 19.1 15.7
Inventory Turnover 70.5 68.0 12.4

Net Worth Analysis (in millions)

Stockholders Equity $76,615

Net Income x 5 $129,610
(Share Price/EPS) x Net Income $361,615
Number of Shares Outstanding x Share Price $358,594
Method Average $231,609

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 IFE Matrix

Strengths Weight Rating Weighted Score

1. Apple has sold 20 million iPads since the products April 2010
0.10 4 0.40
debut.
2. Products include Mac, iPhone, iPad, iPod, Xserve and more. 0.10 4 0.40
3. Sells products through retail stores, online stores, and direct
0.04 4 0.16
sales force.
4. Operate 233 retail stores in the US and 84 internationally. 0.04 4 0.16
5. In 2010, Apple’s market capitalization surpassed Microsoft. 0.11 4 0.44
6. Employ a first mover approach and considered the best first
0.11 4 0.44
mover ever.
7. Sales in the Americas and Europe increased 29% and 58%
0.07 4 0.28
respectively.
8. iPhone sales increased 93% in 2010. 0.10 4 0.40
9. Desktop sales increased 43% in 2010. 0.06 4 0.24
10. Inventory turnover of 70. 0.08 4 0.32

Weaknesses Weight Rating Weighted Score

1. Lack a developed vision or mission statement. 0.03 2 0.06
2. Functional business structure. 0.03 2 0.06
3. Unwillingness to use debt to finance. 0.03 2 0.06
4. Products are the most expensive in their class. 0.10 2 0.20

TOTALS 1.00 3.62

F. SWOT
SO Strategies
1. Build two new plants in India for the sole production of Powerbooks and Desktop machines at $400M
each (S9, O1).
2. Produce a new iPhone every 6 months (S8, O4).

WO Strategies
1. Publish a pubic vision and mission statement stressing desk top units as a vital part of the
business (W1, O1).

ST Strategies
1. Increase R&D by $300M (S6, T2).
2. Design automatically updating virus protection for all Apple products (S5, T6).

WT Strategies
1. Switch to a SBU structure (W1, T7).

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G. SPACE Matrix

FP
Conservative Aggressive
7

CP IP
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7
-1

-2

-3

-4

-5

-6

-7
Defensive Competitive
SP

Internal Analysis: External Analysis:

Financial Position (FP) Stability Position (SP)
Sales 7 Rate of Inflation -2
Gross Margin 7 Technological Changes -7
Debt/Equity 7 Substitute Products -5
ROE 6 Competitive Pressure -6
ROA 7 Barriers to Entry into Market -4
Financial Position (FP) Average 6.8 Stability Position (SP) Average -4.8

Internal Analysis: External Analysis:

Competitive Position (CP) Industry Position (IP)
Market Share -1 Growth Potential 6
Product Quality -1 Financial Stability 6
Customer Loyalty -1 Ease of Entry into Market 3
Technological know-how -1 Resource Utilization 5
Control over Suppliers and Distributors -1 Profit Potential 7
Competitive Position (CP) Average -1.0 Industry Position (IP) Average 5.4

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H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Apple

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

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I. The Internal-External (IE) Matrix

The Total IFE Weighted Scores

Strong Average Weak
4.0 to 3.0 2.99 to 2.0 1.99 to 1.0
4.0 I II III

High

3.0 IV V VI

The
EFE Apple
Total Medium
Weighted
Scores

2.0 VII VIII IX

Low

1.0

Segment 2010 Revenue (millions)

Desktops $6,201
Portables 11,278
iPod 8,274
Music related 4,948
iPhone 25,179
iPad 4,958

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Peripherals 1,814
Software 2,573
Total 65,225

J. QSPM

Build two Increase

new plants R&D
Opportunities Weight AS TAS AS TAS
1. Corporate demand for PCs is increasing. 0.10 4 0.40 2 0.20
2. Asia-Pacific sales increased 5.6% in first quarter 2011 and are
0.05 4 0.20 2 0.10
expected to grow 32 percent in 2011.
3. Shipments to the Middle East, Eastern Europe and Latin America 0.05 4 0.20 2 0.10
4. Consumers prefer phones and tables today to desk top PCs and
0.10 2 0.20 4 0.40
laptops.
5. Business analytic service industry is still in the development 0.05 0 0.00 0 0.00
6. The US malware infection rate is 58.25%. 0.04 2 0.08 4 0.16
7. PCs are still the best option for typing, spreadsheets, and
activities that require more processing power. 0.08 4 0.32 3 0.24

Threats Weight AS TAS AS TAS

1. Hewlett-Packard is currently the #1 PC seller with 18.9 percent
0.10 4 0.40 2 0.20
market share.
2. Competing firms using second and late mover strategies let
0.09 2 0.18 4 0.36
Apple burden much of the R&D expense.
3. Acer and Lenovo based in Asia are impacting price and
0.06 3 0.18 2 0.12
increasing their market share in the United States.
4. Oracle, SAP, and IBM are well entrenched in the business
0.06 0 0.00 0 0.00
analytics service industry.
5. Rapid technology advancement in the industry. 0.08 2 0.16 4 0.32
6. Slowly an increase in viruses created for Apple products. 0.06 1 0.06 4 0.24
7. Slowdowns in the global economy. 0.06 0 0.00 0 0.00
8. Volatile nature of currency rates. 0.02 0 0.00 0 0.00

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 Build two Increase
new plants R&D
Strengths Weight AS TAS AS TAS
1. Apple has sold 20 million iPads since the products April 2010
0.10 4 0.40 3 0.30
debut.
2. Products include Mac, iPhone, iPad, iPod, Xserve and more. 0.10 2 0.20 4 0.40
3. Sells products through retail stores, online stores, and direct
0.04 0 0.00 0 0.00
sales force.
4. Operate 233 retail stores in the US and 84 internationally. 0.04 0 0.00 0 0.00
5. In 2010, Apple’s market capitalization surpassed Microsoft. 0.11 4 0.44 3 0.33
6. Employ a first mover approach and considered the best first
0.11 1 0.11 4 0.44
mover ever.
7. Sales in the Americas and Europe increased 29% and 58%
0.07 4 0.28 3 0.21
respectively.
8. iPhone sales increased 93% in 2010. 0.10 3 0.30 4 0.40
9. Desktop sales increased 43% in 2010. 0.06 4 0.24 2 0.12
10. Inventory turnover of 70. 0.08 0 0.00 0 0.00

Weaknesses Weight AS TAS AS TAS

1. Lack a developed vision or mission statement. 0.03 0 0.00 0 0.00
2. Functional business structure. 0.03 0 0.00 0 0.00
3. Unwillingness to use debt to finance. 0.03 0 0.00 0 0.00
4. Products are the most expensive in their class. 0.10 3 0.30 4 0.40
TOTALS 4.65 5.04

K. Recommendations

1. Build two new plants in India for the sole production of Powerbooks and Desktop machines at $400M
each.
2. Produce a new iPhone every 6 months.
3. Publish a pubic vision and mission statement stressing desk top units as a vital part of the business.
4. Increase R&D by $300M.
5. Design automatically updating virus protection for all Apple products at $100M.

L. EPS/EBIT Analysis (in millions)

Amount Needed: $1,200M
Stock Price: $382
Shares Outstanding: 929
Interest Rate: 5%
Tax Rate: 24%

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 Common Stock Financing Debt Financing
Recession Normal Boom Recession Normal Boom
EBIT $20,000 $35,000 $50,000 $20,000 $35,000 $50,000
Interest 0 0 0 60 60 60
EBT 20,000 35,000 50,000 19,940 34,940 49,940
Taxes 4,800 8,400 12,000 4,786 8,386 11,986
EAT 15,200 26,600 38,000 15,154 26,554 37,954
# Shares 932 932 932 929 929 929
EPS 16.31 28.54 40.77 16.31 28.58 40.86

20 Percent Stock 80 Percent Stock

Recession Normal Boom Recession Normal Boom
EBIT $20,000 $35,000 $50,000 $20,000 $35,000 $50,000
Interest 48 48 48 12 12 12
EBT 19,952 34,952 49,952 19,988 34,988 49,988
Taxes 4,788 8,388 11,988 4,797 8,397 11,997
EAT 15,164 26,564 37,964 15,191 26,591 37,991
# Shares 930 930 930 932 932 932
EPS 16.31 28.57 40.84 16.31 28.55 40.78

M. Epilogue
Apple continues to post impressive financial results. The only minor issue for Apple in their fiscal Q4 2011
was slightly lower-than-expected iPhone sales, as many customers delayed purchases over rumors of an
iPhone 5. Now that the iPhone 4S has been released, Apple sales are again surging. Apple's dominance in
the tablet market may however come under pressure in 2012 since two of the largest computer
manufacturers in the world, including Dell Inc., have begun working on new tablets that will run on
Windows 8, Microsoft's newest operating system set to be released in the second half of next year.

Apple’s net income for Q4 of 2011 that ended September 24, 2011 rose to $6.6 billion, or $7.05 per share,
up 54 percent from a year earlier. Apple's sales rose 39 percent to $28.3 billion. The company's sales for its
full fiscal year of 2011 were $108.2 billion -- a giant leap ahead of the $65.2 billion Apple raked in last
year.

As of November 1, 2011, Apple again edged out Exxon Mobil in the tight race to be the stock market's
most valuable company in the world. In its Q4 2011, Apple sold more than 17 million iPhones, falling
short of the previous two quarters' sales figures, as some consumers held out in anticipation of the new
iPhone 4S. That's still impressive, however, considering the iPhone 4 had already been on sale for more
than a year during the past quarter.

Apple’s iPad and Mac both set sales records during the company’s fiscal Q4 2011. IPad sales rose to 11.1
million, and Mac sales soared 4.89 million -- the first time Apple has even sold more than 4 million Macs
in a quarter. A recent Gartner survey of personal computer shipments showed that Apple's third-place PC
market share is growing, nibbling away at No. 2 Dell. However, the company’s iPod continued to slump,
with sales falling 27 percent to just 6.6 million units on Q4. That represented the fewest number of iPods
Apple has sold in six years.

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Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.