A Strategic Analysis of Apple Corporation

A STRATEGIC ANALYSIS OF APPLE CORPORATION

A project study submitted in the partial fulfillment of the requirements for the subject “Organizational “Organizational Event Analysis for Experiential Learning”

Submitted By Huzefa A. N. Deepti Dinesh Gaurav Vinay Harmanjeet Singh

Under the guidance of  PROF. DEBAJYOTI MAJUMDAR 

THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT HYDERABAD

CERTIFICATE This is to certify that this is a project report on “ A STRATEGIC ANALYSIS OF APPLE CORPORATION ” submitted by Mr. Huzefa, Ms. A. N. Deepti, Mr. Dinesh Gaurav, Mr. Vinay and Mr. Harmanjeet Singh (PGP/SS/2007-09) as a part of the curriculum for the first trimester. The work has been undertaken and completed under the guidance of Prof. Debajyoti Majumdar  and is satisfactory.

Prof: Date:

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ACKNOWLEDGEMENT

It gives us great pleasure in presenting our project work on “A STRATEGIC ANALYSIS OF studentss of PGP/SS PGP/SS/20 /200707-09, 09, IIPM-H IIPM-HYDE YDERAB RABAD AD APPLE CORPORA CORPORATION TION”. We, the student successfully completed our project and would like to thank Prof. Debajyoti Majumdar for his timely encouragement, guidance and support. We, as co-workers are also grateful to each other for the team work without which this study could not have been completed successfully.

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PREFACE

The primary objective of this report is to provide the readers the insight into the success of apple industry. We hope that the report has made the text interesting and lucid. In writing this report, we have  benefited immensely by referring to many publications and articles. We express our gratitude to all such authors and publishers. Any suggestions to improve this report in contents or in style are always welcome and will be appreciated and acknowledged.

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DECLARATION We hereby declare that all the information that has been collected, analyzed and documented for  the project is authentic possession of us. We would like to categorically mention that the work here has neither been purchased nor  acquired by any other unfair means. However, for the purpose of the project, information already compiled in many sources has been utilized.

(Huzefa)

(Deepti)

(Dinesh)

(Vinay)

(Harmanjeet)

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CONTENTS EXECUTIVE SUMMARY…………………………………………………………… SUMMARY………………………………………………………………………. …………. 7 HISTORY OF APPLE……………………………………………… APPLE………………………………………………………............... ………............... ................. .............. ... 8 MISSION AND VISION……………………………………………………………………….. .15 THE PC INDUSTRY……………… INDUSTRY………………………………………………………………… ……………………………………………………………..16 …………..16 THE ONLINE MUSIC INDUSTRY…………………………………………………............ INDUSTRY…………………………………………………..................17 ......17 THE FUTURE OF APPLE……………………………………………………………………… APPLE……………………………………………………………………… 17 PERSONAL COMPUTERS- A SHIFT IN STRATERGY……………………………. STRATERGY……………………………. 17 APPLE IN THE LIVING ROOM……………………………………………………… 19 STRATEGIC STRATEGIC ALLIANCES………………………………………………… ALLIANCES……………………………………………………………..20 …………..20 EXTERNAL ANAL AN ALYSIS………………………………………………………… YSIS…………………………………………………………….............. …....................21 ......21 TECHNOLOGICAL ENVIRONMENT……………………………………....................21 PERSONAL AWARENESS-STYLE AT A PREMIUM……………………... 21 INTEROPERABILITY……………………………………………………….22 TECHNOLOGY AND THE DIGITAL DIGITAL LIFESTYLE………………………..23 REGULATORY REGULATORY ENVIRONMENT…………………………………………………… ENVIRONMENT……………………………………………………24 24 INDUSTRY ANALYSIS ANALYSIS USING PORTER’S FIVE FORCES MODEL………………………25 WHICH EXTERNAL THREATS THREATS ARE MORE SIGNIFICANT……………..............26 S IGNIFICANT……………..............26 ADDITIONAL EXTERNAL THREATS…………………………………………… THREATS……………………………………………………….28 ………….28 SECUTITY…………………………………………………………………………….28 VERTICAL INTEGRATION INTEGRATION OF COMPETITORS………………………… COMPETITORS…………………………………..29 ………..29 VALUE CHAIN ANALYSIS……………………………………………………………… ANALYSIS…………………………………………………………………...30 …...30 TECHNOLOGY AND PRODUCT DES IGN………………………………………… IGN…………………………………………30 30 PRODUCTION………………………………………………………………………..31 SALES AND MARKETING…………………………………………… MARKETING………………………………………………………….31 …………….31 CUSTOMER SERVICE…………………………………………………………… SERVICE…………………………………………………………… ..31 .. 31 LEGAL SERVICES…………………………………………………………… SERVICES…………………………………………………………………...32 ……...32 SWOT ANALYSIS…………………………………………………………… ANALYSIS……………………………………………………………………………..33 ………………..33 STRENGTHS………………………………………………………………………….33 WEAKNESSES………………………………………………………………………..34 OPPORTUNITIES………………………………………………………………..……34 THREATS……………………………………………… THREATS…………………………………………………………………….………36 …………………….………36 FINANCIAL ANALYSIS………………………………………………………… ANALYSIS…………………………………………………………….………..36 ….………..36  ND 2 QUARTER 2006……………………………………… 2006…………………………………………………………………36 …………………………36 HISTORICAL PERFORMANCE……………………………………………… PERFORMANCE……………………………………………………36 ……36 STOCK PRICE PERFORMANCE……………………………………………… PERFORMANCE…………………………………………………..37 …..37 PROFITABILITY PROFITABILITY MEASURES…………………………………....………………..38 LIQUIDITY AND LEVERAGE MEASURES………………………………………38 PRODUCT UNIT UN IT SALES……………………………………………………………39 SALES……………………………………………………………39 OPERATING OPERATING SEGMENTS…………………………………………… SEGMENTS………………………………………………………….39 …………….39 MARKET VALUE ANALYSIS………………………………………………………………40 PROFORMA INCOME STATEMENT……………………………………………...41 PROJECTED FREE CASHFLOW&EQUITY VALUATION………………………42 VALUATION………………………42 STRATEGY………………………………………………… STRATEGY……………………………………………………………………………………43 …………………………………43 PRODUCT DIFFERENTIATION………………………………………………… DIFFERENTIATION…………………………………………………....43 ....43 STRATEGIC STRATEGIC ALLIANCES…………………………………………………… ALLIANCES………………………………………………………….47 …….47 RECOMMENDATIONS………………………………………… RECOMMENDATIONS………………………………………………………………………50 ……………………………50 CONCLUSION………………………………………………………………………………..51 INDEX…………………………………………………………………………………………52 BIBLIOGRAPHY……………………………………………………………………………..53

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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. company. They evolved throughout the years into an organization that that is very much a repres represent entati ation on of its leader leader,, Steven Steven Jobs. Apple Apple made made severa severall hug hugely ely successful product introductions over the years. They have also completely fallen fallen on their face on several occasions. occasions. They struggled struggled mightily mightily while Jobs was not a part of the organization. organization. Apple reached reached a point where many thought thought they would not survive. 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 the money back to the shareholders.” (Burrows, (Burrows, Grover, and Green) Well, times times changed. Less than than 10 years later, later,  BusinessWeek  ranked Apple as the top  performer in its 2006 BusinessWeek BusinessWeek 50. Apple attributes their recent success to robust sales sales of  iPod music players (32 million million in 2005). They are optimistic about the economies of scope with media giants, such as Disney Disne y and Pixar. (BusinessWeek) (BusinessWeek) Apple rarely introduces a new type type of product. Thus, instead of being the pioneer, pioneer, they are an expert expert “second “second mover” mover” by refini refining ng existing existing products products..

Portab Portable le music players players and

notebook computers are examples. Apple increases the appeal of these products by making them them stylish stylish and more functional. functional. They now appear poised poised to make significant significant strides strides in the home computer market and to creating a total digital lifestyle whereby the home is a multimedia hub.

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HISTORY OF APPLE Steve Jobs and Steve Wozniak Wozniak founded founded Apple Apple on April 1, 1976. The two Steves, Jobs and and Woz (as (as he is comm commonl only y refe referr rred ed to – see see woz. woz.or org) g),, have have perso persona nali liti ties es that that pers persis istt throughout Apple’s Apple’s products, even today. today. Jobs was the consummate salesperson and visionary visionary while Woz Woz was the inquisitive inquisitive technical genius. genius. Woz developed his own homemade computer  and Jobs saw its commercial potential. After selling 50 Apple I computer kits to Paul Terrell’ Terrell’ss Byte Shop in Mountain View, View, CA, Jobs and Woz sought financing to sell their improved version, v ersion, 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 introduced the Apple Apple II on April 17, 1977, at the same time Commodore releas released ed their their PET compute computerr.

Once Once the Apple Apple II came with Visi Visicalc calc,, the progenit progenitor or of the

modern modern spreads spreadsheet heet progra program, m, sales sales increas increased ed dramati dramatical cally ly..

In 1979, 1979, Apple Apple initia initiated ted three 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, 145) In 1980, the company released the the Apple Apple III to the public and was a commercial flop. It was too expensive and had several design flaws that made for less-than-st less-than-stellar ellar quality quality.. One design design flaw was a lack of cooling fans, fans, which allowed allowed chips to overheat. In late 1980, Apple Apple went public, public, making the two Steves Steves and Markkula Markkula wealthy 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 Markkula  preferred, and Scott resigned in July. July. Markkula stepped into his position as CEO. (Linzmayer, 15-6)

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In August 1981, IBM released their PC. Unimpressed and unafraid, Apple welcomed IBM to the PC market with a slightly smug full-page ad in the Wall Street Journal. It would not  be long before IBM’s PC dominated the market.

The Xerox Alto Alto was the inspiration inspiration for Apple’ Apple’ss Lisa. Apple employees employees were able to examine the Alto in exchange for allowing Xerox to invest in Apple before Apple’s initial public offering offering (IPO). (IPO). Apple released released the Lisa in January 1983 1983 and was notable for being the first first computer sold to the public that utilized a Graphic Graphic User Interface (GUI). Unfortunately, Unfortunately, the Lisa was not compatible with existing computers, and therefore came bundled “with everything and a list price to match.” (Linzmayer, 77) At $9,995 (over $21,000 in 2005 dollars), the Lisa Lisa missed its target market by a wide margin.

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Jobs attempted attempted to control the Lisa project. project. Scott, unimpress unimpressed ed with the performance performance of  Jobs on the Apple III project, had Jobs head up the dog-and-pony show for the pending IPO. Jobs, looking for a project project to lead, inserted himself himself into the Macintosh Macintosh development team. Using his considerable influence, Jobs was able to procure the resources to produce a computer that was faster than Lisa, used a GUI, had a mouse, and sold for ¼th of Lisa’s Lisa’s price. Apple introduced the the Maci Macint ntos osh h with with great great fanf fanfar aree duri during ng the the 198 1984 4 Super Super Bowl Bowl..

Thee Orwe Th Orwell llia iann-th them emed ed

commercial (directed by Ridley Scott, of ‘Alien’ fame) portrayed IBM as Big Brother and embodie embodied d Macint Macintosh osh and Apple Apple as freedom freedom-se -seeki eking ng indivi individua duals ls breaki breaking ng away from from this this oppressive regime. The commercial was largely successful and sales for the Mac Mac started strong. However, Mac sales later faded. (Linzmayer, 76-93, 109-14)

John Sculley left left PepsiCo PepsiCo to join Apple in April April 1983. He was famous for engineering engineering the “Pepsi Challenge”, in which blinded testers tasted both Coke and Pepsi to unveil u nveil the ‘truth’ of  the taste taste of Pepsi. Pepsi.

In response response to laggin lagging g Mac sales, sales, Sculley Sculley contrive contrived d the ‘Test ‘Test Drive Drive a

Macintosh’ campaign. In this promotion, prospective users users could take home a Macintosh with only a refundable refundable deposit on their credit card. card. While lauded lauded by the public and the advertising advertising

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industry, this campaign was a burden on dealers and significantly impeded the availability of  Macs Macs to seriou seriouss buyers. buyers.

In 1985, Apple Apple tried tried to have have lighte lightenin ning g strike strike twice twice with their  their 

‘Lemmi ‘Lemmings ngs’’ commerci commercial al during during the Super Super Bowl. Bowl.

In what what was becoming becoming Apple’ Apple’s typical typical

 patronizing fashion, this commercial insulted current PC users by portraying them as witless lemmings, lemmings, unthinkingly unthinkingly doing doing harm to themselves. themselves. Although Although Jobs attempted attempted to overthrow overthrow Sculley, Sculley, the board backed Sculley. Jobs left Apple to form NeXT computer. computer. (Linzmayer, 143-5, 153-8, 207)

After Jobs left in 1985, sales of the Mac “exploded when Apple’s LaserWriter met Aldus PageMaker.” (Linzmayer (Linzmayer,, 159) Apple dominated dominated the desktop publishin publishing g market for years to come. Under Sculley, Sculley, Apple grew from $600 million in annual sales to $8 billion in annual sales  by 1993. Apple introduced Mac Portables Portables in 1989 and the first PowerBooks in 1991. By 1992, PC competition ate into Apple’s margins and earnings were falling. falling. Sculley was under pressure to have Apple Apple produce produce another another breakout breakout product product.. He focused focused his energy energy on the Newton Newton –  Apple’s Apple’s introduction introduction of the Personal Digital Digital Assistan Assistantt (PDA).

Despite Despite Sculley generating generating

subs substa tant ntial ial demand demand for for Newt Newton on,, it did did not not live live up to the the hyp hypee due due to it bein being g sever severely ely underdeveloped. Sculley resigned in 1993 and Michael Spindler replaced him. (Linzmayer, 158, 161, 183-96)

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Spindler spent most of his time and energies on regaining profitability, with the end goal of finding finding a buy buyer er for Apple. Apple. Over Over the next several several years, years, Spindler Spindler shopped shopped Apple Apple to Sun Microsystems, Eastman Kodak, AT&T, and IBM. Meanwhile, Apple was unable to meet the growing growing demand for its products due to supplier supplier problems and faulty demand prediction predictions. s. To add insult to injury, injury, Microsoft released Windows 95 with great fanfare in 1995. After significant quarterly losses in 1996, the board replaced Spindler with Dr. Gil Amelio, CEO of National Semiconductor. (Linzmayer, 233-40) Dr. Dr. Amelio Amelio tried tried to bring bring Apple back back to basics basics,, simpli simplify fying ing the product product lines and restructuring the company. company. One of Apple’s Apple’s most most pressing issues at the time was releasing their  next next generat generation ion operat operating ing syste system m (code (code named named “Copla “Copland”) nd”) to compete compete with with Windows indows 95. Amelio and his technology officers found that Copland was so behind schedule that they looked outside the company to purchase a new OS. Ultimately, Ultimately, and somewhat ironically, ironically, they decided to purchase NeXT computer from Jobs. Naturally, Naturally, Apple Apple welcomed Jobs back into the fold. The  board became increasingly increasingly impatient with Amelio Amelio due to sales not rebounding quickly enough. Apple bought out Amelio’s Amelio’s contract after just 1 ½ years on the job. (Linzmayer, 240) Jobs eventually eventually claimed claimed the CEO position. position. Then, he cleaned house by revamping revamping the  board of directors and even replacing Mike Markkula (who had been with the company since the  beginning). Jobs simultaneously put an end to the the fledgling clone licensing licensing agreements (which created a few Mac clones) and entered into cross-licensing agreements with Microsoft. On May 6, 1998, Apple introduced the new iMac, a product so secret that most Apple employees had never heard of it. (Linzmayer, 289-95) The new iMac was a runaway success with its translucent case, all-in-one architecture, and ease of use. It brought Apple to a new market of users – those who had never owned a computer before. Jobs further further simplified simplified the product product lines into four 

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quadrants quadrants along two axes: Desktop Desktop and Portable on one, Professional Professional and Consumer Consumer on the other. Apple completed the matrix with the introduction of the consumer-based iBook in 1999.

The year 2001 was an important important year for consumers consumers of Apple Apple products. Apple opened their first 25 retail stores (totaling 163 stores in 4 countries as of May 2006). In September 2001, Apple introduced the new iMac featuring a screen on a swivel.

The new iPods (portable music players) players) were a tremendous success. Apple sold so many that Apple’s Apple’s dependence on Mac sales was significantly significantly less. This was no small feat considering that the 2001 iMac became Apple’s best-selling product “by a long shot”. (Linzmayer (Linzmayer,, 301)

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Apple offered offered iTunes iTunes (a free application) application) to help their consumers organize organize music on iPods and Macs.

In 2003, Apple expanded iTunes by 1) opening the iTunes music store to allow Mac users to purchase music online and 2) expanding iTunes to Windows Windows users. Sales of iPods skyrocketed and currently provide the bulk of product sales to Apple. (Apple) In 2005, Apple announced that it would start using Intel-based chips to run Macintosh computers. In April April 2006, Apple Apple announced Boot Camp, which allows users of Intel-based Macs to boot either Mac or Windows Windows OS. This functionality allows users who who may need both OSs to own just one machine to run both, albeit not simultaneously. simultaneously.

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VISION ST STA ATEMENT "Man is the creator of change in this world. As such he should be above systems and structures, and not subordinate to them."

Explanation of vision Apple lives this vision through the technologies it develops for consumers and corporations. It strives to make its customers masters of the products they have bought. Apple doesn't simply make a statement. It lives it by ensuring that its employees understand the vision and strive to reach it. It has put pu t systems in place to enable smooth customer interaction. It has put object objective ivess in place place to continu continuous ously ly move forwar forward; d; implem implement ented ed strate strategie giess to fulfil fulfil these these objectives; and ensured that the right marketing, financial and operational structures are in place to apply the strategies.

MISSION ISS ION STATE STATEMEN MENT T "Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, ha rdware, software and internet offerings."

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The PC Industry We can glean Insight into the history and composition of the PC Industry from its eponymous title. In the late 1970s, as Wozniak and Jobs were starting Apple computer, personal computers were an emerging product. The following chart (Reimer) gives an overall view of the major market players since the mid-1970s.

PC Share of Market 100% 90% 80%    t   e    k   r   a    M    f   o   e   r   a    h    S

IBM SOM

70%

Apple II SOM

60%

Mac SOM Amiga SOM

50%

C64 SOM TRS 80 SOM

40% 30% 20% 10% 0%   r   6    8   0    2   4   6    8   0    2   4   6    8   0    2    7    9    7    9    8    9    8    9    8    9    8    9    8    9    9    9    9    9    9    9    9    9    9   0   0   e  a    9    Y   1   1   1   1   1   1   1   1   1   1   1   1    2  0    2  0

By 1983, the market market share of the Apple II fell fell to 8% while the PC had 26%. Market share of Macintosh peaked at slightly more than 10% in the early 1990s and has since tapered to  between  between 2-3%. The IBM PC and its clones became became the standard due to the success success of the open nature of the PC. This allows product developers to offer vastly more products for the platform. Some argue that not licensing licensing the Mac OS was a mistake. Bill Gates and Microsoft Microsoft were encouraging Apple to license their OS in the early 1980s, because they were developing software for Apple and had much riding on the success of the company. When Apple did not license, Microsoft began developing their operating system, Windows. (Linzmayer, (Linzmayer, 169-75, 245-9)

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The Online Music Industry While Apple clearly dominates the online music industry, the battle for domination is not over. Although digital music sales are growing rapidly, rapidly, the Recording Industry Association Association of  America (RIAA) states that digital sales account for only 4% of all music sales. (Borland) Analysts at Forrester (Bartiromo) (Bartiromo) and Gartner (Bruno) validate this. Apple’s Apple’s sales are between 66% and 75% of downloads and 80% of music players. players. (Bruno) Apple is part to a suit alleging alleging monopolistic practices concerning their market share dominance of players and downloads. (Grundner) The other other players players in the downlo download ad market market are (the (the revise revised) d) Napste Napsterr, Yahoo Music, Music, Rhapsody, Rhapsody, and illegitimate file-sharing services. services. Portable music players competing with with the iPod includ includee those those made made by Creative Creative,, Samsun Samsung, g, iRiver iRiver,, and Sony. Sony. A major major point point of content contention ion   between these services and player manufacturers is the control of a variety of incompatible Digital Rights Management (DRM) schemes.

The Future of Apple Personal Computers – A Shift in Strategy Apple has historically taken a far different path than the traditional Windows and Intel combina combinatio tion. n.

Micros Microsoft oft provid provides es the Windows Windows operatin operating g system system to separa separate te downst downstream ream

hardware producers such as Dell. Apple vertically integrated both the operating system system software and hardware completely completely under Apple. Apple. A consumer consumer running Microsoft Microsoft Windows Windows can choose from a myriad of systems based on the Intel processor, while a consumer running Apple’s OS X must purchase Apple hardware.

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Apple Apple is adjust adjusting ing this this strate strategy gy by migrat migrating ing their their microp microproc rocess essors ors from from IBM and Motorola PowerPC to Intel. Analysts believe that the the Intel-based Macintosh may be able to run Microsoft Windows Windows applications by the end of 2006. (Burrows) In addition to switching processors, Apple positioned their computers as an immediate option for the traditional Microsoft Windows Windows user. user. With Apple Boot Camp, users may now use Mac OS X or Windows on an Apple computer. (Sutherland) Figure 1: Apple Boot Camp – Allowing Mac OS X or Windows

By allowing users to run Windows on an Intel Mac, Apple reduced the switching costs for  traditional traditional PC users. users. Apple may steal away customers customers that are willing willing to pay a premium premium for a system that runs both Windows Windows and Mac OS X. Figure 2: IBM PowerPC Processor, Intel Processor Core Duo / Pentium M

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Apple continues to retain a strategic option to license its technology to clone makers such as Dell. Past attempts attempts at licensing Apple Apple technology technology (to IBM, Gateway, Gateway, and others) others) failed on accord of Apple’s Apple’s rigid demands. Many technology leaders (such as a 1985 letter by Bill Gates Gates to Apple Apple CEO John Sculley) criticized Apple for keeping a closed architecture. Apple cofounder  Steve Wozniak criticizes this strategy, “We had the most beautiful operating system, but to get it you had to buy our hardware at twice the price. That was a mistake.” (Linzmayer, (Linzmayer, 245-57) Whether Apple would be willing to pursue this reversal of vertical integration is unclear. Although such a move would cannibalize a portion of Apple’s own hardware sales, it would also   provi provide de royalt royaltyy-bas based ed revenue revenue that could could approach approach $1 billio billion n annuall annually y. (Burro (Burrows) ws)

Jobs Jobs

traditional traditionally ly sided against licensing licensing Apple technology technology.. He referred to Mac clone producers producers as “leeches” and he personally killed Power Computing (a Mac clone producer) by terminating their license in 1997. (Linzmayer, 255)

Apple in the Living Room Apple’s iPod and iTunes are a powerful combination that fosters a network style of  increasing increasing returns. returns. (Barney, (Barney, 124) By selling iPods, Apple Apple increases increases the consumer consumer demand for  music music from iTunes. iTunes. By placing more musical choices choices on iTunes iTunes (including (including less popular songs that appeal to niche audiences) audiences),, there is more demand for iPods. iPods. Apple had 70% of the legal music download market in early 2005. (Yoffie) (Yoffie) Apple Apple is shooti shooting ng for the digital digital living living room of the future. future. For example, example, Apple Apple just released released a “boom box” portable portable version version of the iPod. This iPod (the iPod Hi-Fi) Hi-Fi) comes with a remote remote control. Instead Instead of forming a strategic strategic alliance, Apple engineered engineered the iPod Hi-Fi and designed it with high-fidelity features. features. (Burrows) Apple is clearly trying trying to develop a stronger  core competency in the entertainment area.

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Figure 3: The Apple Hi-Fi

Apple may also release an Apple-branded cell phone and iPod combination device by the end end of 2006. 2006. (Burro (Burrows ws))

This Th is produ product ct woul would d agai again n posit positio ion n Apple Apple as a “sec “secon ond d move mover” r”

responding to Palm’s Treo and Verizon’s VCAST technology.

Strategic Alliances and Entertainment Entertainment Jobs had the early strategic strategic vision to complement complement computing with movie entertainment. entertainment. After founding NeXT, he personally acquired a majority interest in the young movie company Pixar in February 1986. (Linzmayer, (Linzmayer, 219) Jobs went on to invest ¼ of his personal wealth into Pixar. In 1995, Pixar solidified its position within animated movies with the debut of Toy Story. Grossing $358 million worldwide, it became the 3rd-largest grossing animated movie in history. (Linzmayer, 222) After this success, Jobs took Pixar public and negotiated far better terms with Disney. Disney. Later successes included Toy Story 2, Monsters Inc., and Finding Nemo. Ironically Ironica lly,, Jobs stated in the November 23, 1998 BusinessWeek , “I Think Pixar has the opportunity to be the next Disney – not replace Disney – but be the next Disney.” (Linzmayer, (Linzmayer, 222-4) The alliance between Pixar and Disney has tremendous potential for economies of scope. As CEO of Apple and Disney’s largest shareholder, Jobs is the strategic link between Disney,

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Apple, and Pixar. Pixar. Opportunities include combining the animated movie expertise expertise of Disney and Pixar, as well as sharing the content of Disney’s ABC or ESPN networks over Apple’s digital offerings. (Burrows, Grover, and Green) A current example of the fusion between Disney, Jobs, Apple, and technology is video on the iPod. Disney’s Disney’s  Desperate Housewives was one of the first television programs available for   purchase and download to the newer video-enabled iPod. There are concerns about whether these synergies will come to fruition. fruition. There are fears that the personality and style of Jobs may conflict with Disney, and that Disney CEO Iger could  be “Amelioed” -- driven out of office by Jobs in a manner similar to how Jobs drove Amelio out of the CEO post at Apple. (Burrows, Grover, and Green)

EXTERNAL ANALYSIS ANALYSIS Technological Environment Brand Awareness – Style at a Premium Apple’s Apple’s products are trendy and stylish. stylish. After Jobs Jobs returned in 1997, Apple Apple retained designer Jonathan Ive to differentiate their computers from the typical typical beige box. Ive’s Ive’s design of  the iMac included clear colorful cases that distinguished distinguished Apple computers. (Linzmayer (Linzmayer,, 295-6) Apple’s iPod (with the trademark white ear buds and simple track wheel) commands a 15%-20%  premium over other MP3 players. (Yoffie) (Yoffie) Apple and Pixar limit the number of computer products and movies that they sell. Product differentiation with focused quality and style also extend to the Jobs Pixar – “Pixar's executives focus on making sure there are no ‘B teams,’ that every movie gets the best efforts of  Pixar's brainy staff of animators, storytellers, and technologists.” (Burrows, Grover, and Green)

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Figure 4: The Stylish Design Design of the iMac and Mac Mini

Apple positions positions its Macintosh computers computers as higher quality and higher price. HP, HP, Dell, and other PC manufacturers manufacturers are pricing many systems systems under the $1,000 threshold. threshold. “Apple “Apple is struggling to meet demand for its new MacBook Pro laptop despite a $1,900 price tag that is nearly twice that of garden-variety rivals.” (Burrows) Apple has only recently entered the low-end (below $500) consumer market with the Mac Mini. Although the Mac Mini is a base model with few features, features, it comes encased in a very small and distinctive distinctive package. package. Apple portrays portrays this computer computer as “Small “Small is Beautiful”. Beautiful”. (Apple) Likewise, the iPod Shuffle was Apple’s first entry into the lower-end ($100 range) of flashmemory-based portable music players.

Interoperability Although Apple competes directly with Microsoft for operating systems, the release of  iTunes iTunes for Windows Windows in 2002 was a key strategic strategic move. This decision decision expanded the potential potential customer base to nearly all personal computer owners, even though Apple only has 2%-3% of all  personal computer sales. (Yoffie) (Yoffie) Conversely, Conversely, Apple depends on Microsoft for a version version of Microsoft Office. As the most widely used office suite of applications, Macintosh users rely on Office to correspond with companies companies that standardized standardized on Windows Windows.. This is from a strategic strategic alliance between between Apple and Microsoft after Jobs returned in 1997. (Linzmayer, 290)

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Apple’s Apple’s iTunes iTunes service has a technologica technologicall hook (asset (asset specificity specificity)) to Apple’s Apple’s iPod. Although versions of iTunes exist for both Apple and Microsoft operating systems, the iTune’s AAC file format prevents other portable music players (such as iRiver or Samsung) from playing  purchased songs. (Yoffie)

Technology and the Digital Lifestyle Apple not only dominates the music player market, its iLife suite provides consumers with easy-to-use software software for music and video composition. With “podcast” “podcast” a household word, Apple’s Apple’s Garage Band application makes mak es the recording of podcasts and music very easy. easy. (Boddie) Figure 5: The GarageBand Music and Podcast Application

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Regulatory Environment While While introd introduci ucing ng new technol technologi ogies, es, there there is a persis persisten tentt threat threat of legal legal action action by competitors competitors.. For example, example, Apple sued Microsoft Microsoft in 1988 (settled in 1997 for an undisclosed undisclosed amount) amount) for perceived perceived similariti similarities es between between Microsoft Microsoft Windows Windows and Macintosh Macintosh audiovisual audiovisual works. (Linzmayer, 172-4) Microsoft has generally been the focus for government antitrust charges (such as U.S. v. Micros Microsoft oft)) (US DOJ, 200 2006). 6).

Both Both federal federal and state state governm government entss assert assert that Micros Microsoft oft’’s

dominance dominance blocked fair competition competition within within the software software industry industry.. This is an advantage for  Apple, Apple, because because its operatin operating g system systemss are a viable viable substitu substitute te for Window Windows. s.

Furthe Furthermo rmore, re,

Microsoft’s continued support for Office for Macintosh reduces the perceived level of market monopoly and abuse. (Linzmayer, 290-1) Manufacturers will continue to trespass on Apple’s Apple’s intellectual property. property. For example, the company tex9 released an open source music program called xtunes that was very similar to iTunes iTunes..

In 2002, Apple Apple took legal action action agains againstt tex9, tex9, who then then altere altered d the program program and

renamed it sumi (pronounced, “sue me”). (Linzmayer, 300) Legal Legal threats threats can surface surface from somewhat somewhat unusual unusual sources. sources. Apple Apple Corps Ltd. is the London-based London-based company that that owns the rights to the music of the Beatles. Paul McCartney McCartney and Ringo Starr recently sued Apple over the use of the Apple logo in iTunes, claiming that it violated Apple’s Apple’s agreement not to produce music under an apple-based logo. (Associated Press) Rese Resear arch ch and devel develop opme ment nt is a key compon component ent to Appl Apple’ e’ss sust sustai aine ned d compe competi titi tive ve advantage. Apple is currently taking legal legal action against several popular technical web sites for  for  releasing releasing proprietary proprietary product research. research. Sites such as appleinsider appleinsider.com .com have allegedly allegedly posted verb verbat atim im conte content nt from from docum document entss prot protect ected ed by empl employ oyee ee non non-d -dis iscl clos osur uree agreem agreemen ents ts..

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(McCullagh) (McCullagh) Release Release of critical critical insider informatio information n could give Apple’ Apple’ss competitors competitors a jump in  producing rival products.

Industry Analysis Using Porter’s Five Forces Model Apple operates in two primary industries: •

Computing - Hardware and Software

•

Delivery of Entertainment and Media Apple has always been under intense competition within the computer, software, and

entertainment industries. “Looking to 2005...Every time that Apple had jumped into the lead in a  product category during the past two decades, it had had difficulty in sustaining its leadership  position.” (Yoffie) (Yoffie) We use Porter’s Five Forces Model to understand u nderstand why Apple’s Apple’s industries are so competitive. Figure 6: Porter’s Five Forces Model

Threat of New Entrants

Bargaining  power of  Suppliers

Level of Threat in an Industry

Threat of  Substitutes

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Bargaining  power of  Buyers

Figure 7: Summary of Industry Threats (Computer Equipment and Entertainment Entertainment Distribution) Typ ypee and an d Organization Seve Se veri rity ty of  Threat Entry – High Verizon Threat Amazon

Examples

Streaming audio and video with V CAST. On de demand online services to purchase music (similar to iTunes).

Google

They make everything.

The The “Nex “Nextt Goog Google le””

New New entr entran ants ts wit with h disr disrup upti tive ve tec techn hnol olog ogy y.

Rivalry –  Microsoft High Threat Linux

Windows Op Operating Sy System, Wi Windows Me Media Pl Player fo for pl pla y yiing mu music and video. Competition to Mac OS X Operating System.

 Napst  Napster er,, Rhaps Rhapsody ody

Online Online music music source sourcess – altern alternati atives ves to iTune iTuness Musi Musicc Store Store..

Dell Dell,, HP HP, Len Lenov ovo o

Alte Altern rnat atee sou sourc rces es for for com compu pute terr har hardw dwar are. e.

iRive Riverr, Sams Samsun ung, g, Creative DreamWorks

Small, stylish MP3 Players. Animated mo movies.

YouTube.com

Online video.

Substitutes –  XM, Sirius Moderate Threat XBox, PS2

Satellite Radio for music.

Entertainment Media, Media and Music.

Various

Internet Streaming Radio and Podcasts.

Musicc CDs, Musi CDs, DVDDVDAudio and SuperAudio CD Broa Broadc dcas ast, t, Cabl Cable, e, Sate Satell llit ite, e, NetF NetFli lix, x, TiVo, TiVo, Theatres T heatres Suppliers –  Motorola, IBM, Intel, Samsung High Threat Microsoft

Alternative means to acquire music.

Alternative sources for video.

Suppliers of Processors and computer memory. memory. Strategic Alliance / Supplier of Office fo for Mac.

The Big Five - BMG, Sources of music. Will they raise prices and break the dollar per song EMI, Sony, model? Some in the record industry resent Apple’s distribution model. Universal, and “Apple reaps billions from selling its hit music player, but there are sparse Warner   profits from the songs being sold over the Net.” (Burrows, Grover, and Green)

Buyers Moderate Threat

Disney Disney,, ABC, NBC, NBC, CBS, Fox, Pixar, Sony and –  Consumers Illega Illegall peerpeer-toto-pee peer  r  file sharing Dis Distrib tribu utor tors

Consum Consumer er Attitu Attitudes des and Behaviors Consumer Consumer

Refresh Refresh

Suppliers of Television Television and Movies. Movies. Will they sign exclusive contracts contracts with other online services? Note that this threat is reduced for Disney / Pixar. Consumers share music using peer-to-peer networks without paying for  music. Appl Applee re retai tailers ers may may pres pressu sure re for for low lower er pric prices es or bet better ter ter term ms. For For exa exam mple, ple, the release of the Apple Store in 2001 “infuriated longtime independent Apple retailers that didn’t appreciate Cupertino cannibalizing their sales.” (Linzmayer, (Linzmayer, 300) Consumers or businesses may reduce spending on personal computers or  non-essential (potentially high elasticity of demand) music players if they fear economic downturns. Consumers Consumers and businesse businessess may continue continue to use previous-m previous-model odel iPods and

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Cycles

Macs rather than upgrade to current iPods, iMacs, or OS

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The total industry threat for the industry space that Apple occupies (computer equipment and distribution of entertainment) is a high threat industry . Apple must continue continue to pursue pursue  product differentiation (i.e. the style and ease-of-use of an iPod) and economies of scope (i.e. offering ABC television shows on iTunes) to maintain their sustained competitive advantage in this industry.

Which External Threats are Most Significant •

Computer Computer Hardware Hardware and Software: Open Source software software such as the Linux Operating Operating System and Open Office applications threaten both Apple and Microsoft. The low (often, free) cost of the software may allow it to overtake Apple and Microsoft, especially in developing markets such as China.

•

Music Products: Products: Major online online retailers retailers such as Amazon are considering considering entry into the online music music market. With With a wide internet presence presence and a household household name, Amazon Amazon could present present a formidable formidable challenge challenge to Apple. Apple. If the major record labels (Univers (Universal, al, Sony BMG, EMI, and Warner) negotiate better terms with new competitors to iTunes, Apple may be unable to provide some of the music content that they currently offer. offer. The major music labels labels dislike Apple’ Apple’ss dollar per song pricing. They would prefer to earn higher profits profits with “variable “variable pricing”. pricing”. (Wingfiel (Wingfield) d)

With variable variable pricing, the most

 popular songs would be greater than $1, and less popular songs would be less than $1. Although the labels recently renewed their contracts with Apple, there may be provisions that allow future changes in the pricing model. (Wingfield and Smith) •

Suppliers: The recent shift to Intel processors could present a significant threat to Apple. With only two companies (Intel and AMD) producing Intel-compatible processors, there is a strong potential for tacit collusion and oligopoly power between these suppliers. Apple purchasing must now directly compete compete with HP, HP, Lenovo, and Dell. If shortages or 

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exclusi exclusive ve agreem agreements ents materi materiali alize, ze, Apple could could face face proble problems ms with with obtain obtaining ing raw materials. materials. Apple should consider consider additional sources sources such as Advanced Micro Devices (AMD). Figure 8: CPU Market Market Share

Additional External Threats Security Apple software, like all large software products, has security vulnerabilities that hackers may exploit. exploit.

A signifi significant cant exploit exploitati ation on in the future future could could damage damage many busines businesses ses and

households households using Apple Apple computers. This would affect future future customer purchasing purchasing decisions. decisions. Apple enjoys a competitive advantage, because their OS X is mature and stable due to its basis on BSD Unix. In fact, “computer “computer security security folks folks back at FBI HQ use Macs running running OS X”. (Granneman)

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However However,, the increa increased sed use of Apple comput computers ers is prompti prompting ng hackers hackers to target target the  platform. In February 2006, there was documentation of the first known Apple OS X worm. By using using iChat iChat instan instantt messag messaging ing,, it spread spreadss to other other users users and deletes deletes files files from from their their Mac computers. (Sophos) If Mac OS X becomes as wide of a target as Windows, Apple’s Apple’s perceived differentiation as the more secure platform may disappear.

Vertical Integration of Competitors Sony is an example of a competitor competitor with a unique position position against Apple. Apple. Sony Music Music supplies Apple with many of the songs for iTunes. iTunes. Sony also creates a version of the Walkman Walkman  portable music player that is a direct competitor to the iPod. (Hall) Sony is attempting attempting to vertically vertically integrate integrate forward directly directly to the music buyer. buyer. Sony integrated their music system system (Mora) into the Sony Walkman. Walkman. Sony is exclusively distributing distributing certain certain songs on Mora. (Hall) Mora currently currently targets targets Japanese Japanese consumers. consumers. If Sony can gain additional momentum (such as collaborating with other record labels), their service could present a formidable challenge to iTunes in additional markets. Figure 9: The Sony 20GB Walkman Walkman and Mora (only available in in Japanese)

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Value Chain Analysis To determine where Apple developed distinctive capabilities, Porter’s generic value chain model provides a systematic framework for identifying identifying Apple’s Apple’s utilization of resources. Primary activities activities for Apple include include Technology echnology and Product Design, Production, Production, Sales and Marketing, Marketing, Customer Service, and Legal Services.

Technology and Product Design This component represents the true core (no pun intended) of Apple’s Apple’s capability. capability. From  being the first platform to run an electronic spreadsheet (VisiCalc on the Apple II Plus) to the first to establish a “digital lifestyle” hub (the Macintosh product lines), Apple’s history is rich with cutting-edge technology development. (Linzmayer) Apple drives to be the best, no simply simply the first. first. The Apple Apple operating system system is universally universally regarded as more stable and reliable than Windows, while the desktop publishing software bundles (iMovie, iPhoto, iTunes, etc.) are the most comprehensiv comprehensivee available to end users. users. Ives best summarizes summarizes the entrepreneuria entrepreneuriall culture

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within Apple by saying that “it’s very easy to be different, but very difficult to be better.” (Linzmayer, 301)

Production Because Apple had long refused to license its operating system to external entities, the  bundled packages of Apple-developed hardware and software became the cornerstone of Apple’s  production process. Apple achieved unparalleled performance via via 64-bit architecture, integrated integrated distin distincti ctive ve stylin styling g with with the multimulti-col colore ored d transl translucen ucentt iMac iMac cases, cases, and redefi redefined ned intuit intuitive ive operation with the iPod. While every product introduction introduction has not been a success (Lisa, Newton, etc.), Apple treats component production as a natural extension of the design process.

Sales and Marketing We could simply title title this section “Steve “Steve Jobs”. Since his return return as CEO in 1997, Jobs   personally unveils all new product introductions, reviews corresponding marketing campaigns, and approves new product development guidelines. In a departure from their turbulent history, history, Jobs Jobs “ent “enter ered ed into into paten patentt cros crosss-li lice cens nsin ing g and and techn technol ology ogy agre agreem ement entss with with Micr Micros osof oft. t.”” (Linzmayer (Linzmayer,, 290) After years years of unimpressiv unimpressivee market share growth and cannibalization cannibalization of a loyal consumer base, the door to the expansive PC market was now more accessible to Apple than than ever ever before before.. Apple Apple continued continued to comman command d a market market premium premium for produc producing ing a “bette “better  r  mousetrap” throughout its history. history.

Customer Service How has Apple retain retained ed substa substanti ntial al cash cash reserv reserves es during during the explosi explosive ve growth growth and dominance dominance of PCs worldwide? worldwide? Apple created created a virtual virtual love affair with their their customer base by delivering delivering technically technically superior products (iPods (iPods vs. other MP3 players, players, Macs vs. PCs, etc.), and

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aggressively pursuing hardware hardware and software updates. Apple integrated their primary primary activities so well that it is transparent transparent to the consumer consumer where one activity activity begins and the other ends. ends. A  perfect example of this is Apple’s Apple’s willingness to develop software to run Windows XP on its new Intel-based iMac and then post it online free to iMac users. (Wingfield) (Wingfield) In such an environment, customer service merely becomes the realization of receiving a little more than expected. Althoug Although h Apple Apple employ employss many many resour resources ces and capabil capabiliti ities es to suppor supportt their their primar primary y activities (human resources, supply procurement, etc.), the most strategically relevant would be Legal Services.

Legal Services In a market climate of constant change and innovation, it is inevitable that the drive to expand product and service offerings will subject Apple to patent and copyright infringement claims. claims. The dispute over the Apple logo on its iTunes iTunes Music Music Store, for example, example, continues despite a previously reached settlement with Beatles’ Apple Corps Ltd. in 1991. ( Dow Jones Microsoft’ss Windows Windows infringement on Mac OS patents has  Newswires) While such litigation as Microsoft’  been highly publicized, use of legal guidance to drive acquisition versus internal development stra strateg tegie iess for for such such prod product uctss as Gara Garage geBan Band d and iMus iMusic ic have have prove proven n highl highly y valuab valuable le.. (Linzmayer, 172-4, 250) Intellectual property is sacred to Apple. There was a recent recent attempt to uncover uncover the identi identitie tiess of intern internal al “sourc “sources es who leaked leaked confide confidenti ntial al inform informati ation on about about an unreleased product to online media outlets in 2004.” (Wong) (Wong)

SWOT Analysis

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Although participation in such activities may add value, they may not be a source of  competitive advantage. Ultimately, Ultimately, the value, rarity, inimitability, inimitability, and/or organization (VRIO) of  an activity or resource determine its sustainability sustainability as a source of competitive competitive advantage. Within this context, we can identify a firm’s strengths, weaknesses, opportunities, and threats (SWOT).

Strengths 

Technical echnical savvy – Product lines lines are easy to use and stable. Recent integrati integration on with Microsoft products lines and Intel processors demonstrate ability and willingness to adapt to a divers diversee custom customer er base. (Mossbe (Mossberg rg))

Such innovat innovation ion,, however however,, would would not be

sustainable without a learning environment tolerant of mistakes. While the pure technical expertise alone is not a valuable or rare resource, it becomes very costly to imitate when it exists within the socially complex, entrepreneurial culture of Apple. 

Financial vitality – Cash reserves remained robust and stable despite stagnant market share growth growth in the computer hardware hardware and software arenas. arenas. Apple exploited exploited this by resisting market pressures to reduce costs, tightly integrating product packages, and forming strategic alliances (i.e. securing the backing of all major music distributors in the support of iTunes).



Brand loyalty – The only way that Apple Apple could maintain the financial vitality described described above above is via a fanati fanatical cal,, almost almost cult-li cult-like, ke, affair affair with its customer customer base. Such brand brand loyalty is extremely costly and time-consuming to imitate.



Steve Jobs – As discussed earlier e arlier,, Jobs proved to be a vital component to Apple’s Apple’s success. During his absence (1985-1996), Apple experienced the most turbulent (financial and innovative) timeline in its history. history. Immediately upon his return, he replaced most of the Board of Directors, pruned and focused the new product ideas, and delivered seven

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consecutive quarters of positive earnings to shareholders. (Linzmayer, (Linzmayer, 289-99) As such, Jobs is certainly a valuable, rare, and hard to imitate resource that Apple fully exploits.

Weaknesses 

Mark Market et shar sharee – Appl Applee has hist histor oric ical ally ly been been stro strong nges estt in the the US geogr geograp aphi hical cal and educational educational vertical vertical markets. markets.

With the educational educational market facing tightening tightening budget

constraints constraints and the US approaching a PC saturation saturation point, Apple may need to burn cash more quickly and succumb to market cost pressures on its products without a strategic innovation, integration, or divesture. 

Steve Jobs – For virtually the same reasons Jobs is a strength, he is simultaneously a weakness. The aggressive drive to bring innovative visions visions to life was noticeably absent and painfully painfully felt (especia (especially lly by shareh sharehold olders ers)) during during his departu departure. re.

The apparent apparent

absence of succession planning coupled with a lust for the limelight positioned Jobs as Apple’s Apple’s single consciousness in the eyes of consumers and shareholders.

Opportunities 

Consumer electronics – With the startling success of the iPod and iTunes, Apple entered the consumer consumer electronics electronics market. market. By expanding expanding the iTunes concept concept to downloadable downloadable mobile phone features and movies (podcasts), the door is now open to develop new and   potent potential ially ly profit profitabl ablee strat strategi egicc allian alliances ces with with periph periphera erall compon component ent manufa manufactu cturer rerss (speaker, home stereo, etc.) e tc.) and media transmission giants (Disney, TBS, Verizon, Verizon, etc.).



PC hardware and software market growth – With cross-licensing of operating system  platforms in place, Apple entered the high-volume business environment traditionally dominated by Windows-based Windows-based PCs. The introduction of Intel-based processors processors prompted

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 busine  businesse ssess to replac replacee PCs with iMacs. iMacs. They did this to gain a level level of stabil stability ity and reliability in their business applications that PCs failed to provide. An example is Japan’s Japan’s Aozora Bank Ltd., who is replacing replacing 2,300 PCs with iMacs. (Wingfi (Wingfield) eld) Apple must establish themselves as a credible player in business desktop applications to overcome the “desktop publishing” stereotype.

Threats 

Legal risks – In a market that literally changes at the speed of thought, patent and copyright copyright infringement infringement risks risks remain high. As long as operating operating systems systems and support software packages continue to converge and remain relatively easy to imitate, present and future future lawsuits lawsuits are inevit inevitabl able. e.

The Apple Apple record recordss claim claim against against iTunes iTunes remains remains

unresolved. 

Competition Competition – This threat threat occurs primarily primarily on two fronts: PC hardware/sof hardware/software tware and consumer consumer electronics. electronics. For the same reasons discussed discussed in the opportunitie opportunitiess section, the threat of imitabilit imitability y (cloning, (cloning, pirating, etc.) increases increases.. As relative relative newcomers to the consumer consumer electronics arena, will Apple retain a competitive competitive advantage as they diversify diversify their offerings (speakers, home entertainment systems, s ystems, etc.)?

Financial Analysis 2nd Quarter 2006 Apple’s Apple’s financial performance continued to strengthen over the last several quarters. In the most recent earnings announcement, Apple reported significant growth in net revenues driven

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 by the strong strong performance performance of its iPod product product line. line. Net sales for for the 2nd quarter grew to $4.36  billion, which is a 34% increase over 2nd quarter 2005 results. results. Net income increased increased by 41% to $410 million. (Apple Reports) The iPod product line continues continues to drive the financial financial performance performance of the company. company. In the 2nd quarter alone, Apple sold 8.5 million iPods, representing a 61% increase over the 5.3 million units sold in the 2 nd quarter quarter of the prior year. year. Mac sales showed showed slight growth growth of only 4%. (Apple Reports) Apple’s year-to-date revenues total just over $10 billion and earnings total just under $1   billion. For the 3rd quarter, CFO Peter Oppenheimer stated, “…we expect revenue of about $4.2 to $4.4 billion” which will push total sales above ab ove last term’s annual numbers. (Apple Reports)

Historical Performance Although sales remained stagnant during 1998-2002, sales more than doubled since (see graph below). This dramatic shift in performance performance is primarily due to the increase in in sales from the iPod product line.

Apple Revenue Growth 16000 14000 12000

  a    S    t   e    N

10000 8000 6000 4000

(Apple Computer, 2005) 2000 0 1998

1999

2000

2001

Stock Price Performance

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2002

2003

2004

2005

Another interesting way to consider the financial performance is to evaluate how Apple’s stock price performed against the market and against its its main competitors. As we see from the chart above, Apple’s Apple’s performance performance has been inconsistent inconsistent over the last 20 years compared compared to the S&P 500. 500.

It also has not perform performed ed at the same level level as its main main compet competito itors, rs, Dell Dell and

Microsoft. However, performance improved since 2003.

Profitability Measures Apple substantially improved in its key measures of profitability in the last few fiscal years. years. In terms of return on assets, assets, return on equity and profit margin, margin, Apple Apple strengthened strengthened financi financiall ally y and now has simila similarr ratios ratios to that of its competito competitors rs and the overal overalll compute computer  r  hardware industry (see table below).

Return Assets Return Equity

2003

2004

2005

11.56%

Microsoft '05 19.75%

on

1.01%

3.43%

on

1.63%

5.44%

17.88%

28.56%

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Dell '0 '05

15.42%

Industry '05 11.98%

S&P 500

8.13%

67.31%

36.61%

19.61%

Profit Margin P/E Ratio

1.11%

3.33%

9.58% 33.89

31.57% 22.63

6.39% 18.51

6.36% 26.32

13.75% 22.09

In reviewing reviewing Apple’s Apple’s 1st and 2nd quarter 2006 earnings releases, gross margins dropped slightly. slightly. Apple attributes this decline primarily to price pressures, pressures, especially in the iPod product line. (1st Quarter 10Q) 10Q) This will continue to affect performance over time. However, Apple’s Apple’s ability to maintain the momentum it built in the marketplace will control the speed with which erosion will occur.

Liquidity and Leverage Measures Apple historical historically ly held very little long-term long-term debt. The table below compares Apple’s Apple’s liquidity measures to their competitors, their industry, industry, and the general market. During the period of strong financial performance, performance, Apple Apple accumulated cash. This strengthens strengthens Apple’ Apple’ss position should they choose to access the capital markets.

Current Ratio Quick Ratio

2003

2004

2005

2.5 2.47

2.6 2.59

3 2.9

Microsoft '05 2.88 2.85

Dell '05

Industry '05

1.11 1.08

1.81 1.45

S&P 500 1.82 1.31

Product Unit Sales In the last several years, there have been dramatic changes to Apple’s product sales by category. category. Apple breaks its unit sales into four primary categories: desktops, notebooks, iPods, and and perip periphe hera rals ls..

The graph graph below below shows shows the produc productt mix for Appl Applee in 2002. 2002.

Note Note the

domination by desktops and notebooks and an d the small contribution by iPods. (Apple Computer) 2005 Product Sales

2002 Product Sales

Desktops

Desktops

Notebooks

Notebooks

iPod

iPod

Page 39 of 54 Peripherals

Peripherals

When you compare the same graph for 2005, you see dramatic differences in the product mix for for Appl Apple. e. The iPod iPod sales sales now account account for for 32.5% compa compared red to 2.5% 2.5% for 2002. 2002. The combined sales of computers (desktop/notebook) lost share, dropping from 79% to 45% of sales. This drop merely represents a shift in Apple’s product mix, not their global computer market share (which (which remains stable stable in the 2-3% range). Meanwhile, Meanwhile, sales of peripherals peripherals (including (including wireless connectivity and networking solutions), remained stable. (Hoover’ (Hoover ’s)

Operating Segments Apple breaks its sales sales into five “operating “operating segments”. segments”. The chart below shows the sales  by segment for each year year 2002-2005. On a percentage basis, only the retail segment appears to  be outperforming the others. (Apple Computer, Hoover’s)

Sales by Region Segment 16000 14000 12000

  s   e 10000    l   a    S 8000    l   a    t 6000   o    T 4000

Other  Retail Japan Europe America's

2000

 Net sales in the retail segment segment grew to $2.35 billion in 2005. In the 1st quarter 2006, sales 0

2002

2003

2004

2005

growth continued in the retail segment to $1.1 billion (a 91% increase over the same period last  Year 

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year). This increase was due to growth in the number of stores stores (from 101 to 135) and to a 41% same-store sales growth. (1st Quarter 10Q) Although the retail segment was the only segment to realize growth as a percentage of  total sales, sales, all of the segments had solid solid growth. In the Americas Americas,, sales increased increased 65% and continued to represent approximately 47% of total worldwide sales. Sales in Japan and Europe grew by 92% and 47%, respectively. (1st Quarter 10Q)

Market Value Analysis We used Discounted Cash Flow (DCF) analysis to assess the appropriate equity value of  Apple. To complete this analysis, analysis, we developed a pro-forma pro-forma income statement statement and extracted free cash flow. We then discounted these cash flows using a calculated Weighted Weighted Average Average Cost of Capital (WACC). (WACC). Apple’s Apple’s WACC WACC equaled their cost co st of equity since they carry c arry no long-term debt. We used the Capital Asset Pricing Model (CAPM) to calculate the cost of equ ity. ity. CAPM consists consists of a risk-free risk-free rate, a market risk risk premium, premium, and a company Beta. Beta. The yield on the 10-year Treasury is the standard for a risk-free rate. To determine the market risk    premium, we used the average return that an investor would require for an investment with average risk. (Higgins) We used data available online to determine Apple’s Apple’s Beta, projected to be 1.46. (Google, 4/21/06) The below chart summarizes Apple’s cost of equity. equity. Cost of Equity/WACC Risk Free Rate Market Risk Premium Beta Adjusted Apple Risk Premium Cost of Equity/WACC Equity/WACC

Note 10 Yr Treasury (Analysis) From Google

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Value 5.12 4 1.46 5.84 10.96

Pro-Forma Income Statement We made several key assumptions in compiling compiling a pro-forma income statement. First, to complete the estimate for the 2006 data, we merely annualized the earnings for the first two quarters. We then projected a declining rate of growth in sales for the next four fiscal terms of  30%, 30%, 20%, 20%, 15%, 15%, and and 10%, 10%, resp respect ectiv ivel ely y.

We do not not beli believ evee that that the the grow growth th in iPod iPodss is

sustainable sustainable for the long-term. long-term. We also used the percent-of-s percent-of-sales ales method to calculate calculate cost of  goods sold, research & development, SG&A, and interest. interest. We applied the 2005 tax rate for all future periods. As the table below shows, the mid-term earnings growth is positive. positive. 2005

Annualized 2006

2007P

2008P

2009P

2010P

Net Sales

13931

20216

26280.8

31536.96

36267.50

39894.25

Cost Of Sales

9 8 88

14353

18659

22391

25750

28325

R&D

534

80 9

1051

1261

1 4 51

1 5 96

S,G,A

1 8 59

2628

3417

4100

4 71 5

51 8 6

Operating Income

1 6 50

2426

3154

3784

4 35 2

47 8 7

Interest Income

165

23 9

311

374

430

473

Taxes

480

70 5

916

1100

1265

1 39 1

Net Income

1 3 35

1960

2548

3058

3 51 7

38 6 9

EPS

1.57

2.31

3.00

3.60

4.14

4.56

Shares Out (000's)

848,612

848,612

848,612

848,612

848,612

848,612

Projected Free Cash Flow and Equity Valuation We assume that Apple will continue without long-term debt. We also assume that there will be no significant significant changes in capital expenditures expenditures and net working capital. capital. Thus, free cash flow will equal net income plus depreciation. depreciation. Given WACC, WACC, we are able to discount cash flows flows   back using half-year half-year PV factors factors (we are through the first first half of 2006). We calculated calculated our  terminal terminal value using a perpetual annual growth rate of 7%, which is slightly slightly above the industry industry growth rate of 5.6%. (Datamonitor)

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Free Cash Flows

2006 A

2007P

2008P

2009P

2010P

Net Income Depreciation Free Cash Flows WACC PV Factor Terminal Value PV FCF Sum of PV of CF PV of Terminal Value FMV of Invested Capital Less Existing Cash Balance Intrinsic Value Value of Equity

1960.00 239.00 2199.00 10.96 0.9505

2548.00 310.70 2858.70 10.96 0.8565

3058.00 372.89 3430.89 10.96 0.7715

3517.00 428.86 3945.86 10.96 0.695

3869.00 471.78 4340.78 10.96 0.626

1862.98 11270.90 68619.42 79890.32 8261 71629.32

2182.36

2359.25

2444.32

2421.99

Terminal

0.626 109615.6 68619.42

Given intrinsic equity value, we estimate the per share stock price. Given their particular  market condition, Apple appears undervalued (see table below).

Equity Value Total Shares (000's) Value (000's) Value/Share Current Price (5/5/06)

848612 71629000 $84 $71.89

Strategy We can descri describe be Apple’ Apple’ss strate strategy gy in terms terms of product product differ different entiat iation ion and strate strategic gic alliances. alliances. In each of these strategies strategies,, we examine what Apple Apple did historically historically and then discuss alternatives for Apple’s future.

Product Differentiation Apple prides itself on its its innovation. When reviewing the history of Apple, Apple, it is evident that that this this attitu attitude de permeated permeated the company company during during its peaks of succes success. s. For instance, instance, Apple Apple  pioneered the PDA market by introducing the Newton in 1993. (Linzmayer, (Linzmayer, 203) Later, Apple introduced introduced the easy-to-use easy-to-use iMac in 1998, and updates following following 1998. (Linzmayer (Linzmayer,, 294-6) It released a highly stable operating system in 1999, and a nd updates following 1999. (Linzmayer, 297) Apple had one of its critical critical points in history history in 1999 when it introduced the iBook. This completed completed their “product “product matrix”, a simplified simplified product mix strategy formulat formulated ed by Jobs. This

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move allowed Apple to have a desktop and a portable computer in both the professional and the consumer segments. The matrix is as follows (Linzmayer, (Linzmayer, 297):

Desktop Portable

Professional Segment G3 PowerBook

Consumer Segment

iMac iBook  

In 2001, Apple Apple hit another important historical point by launching iTunes. iTunes. This marked the beginning of Apple’s new strategy of making the Mac the hub for the “digital lifestyle”. (Linzmayer (Linzmayer,, 299) Apple then opened its own stores, stores, in spite of protests protests by independent Apple Apple retailers retailers voicing cannibalizati cannibalization on concerns. (Linzmayer (Linzmayer,, 300) Then Apple Apple introduced introduced the iPod, central to the “digital lifestyle” strategy. strategy. Philip W. W. Schiller, VP of Worldwide Worldwide Product Marketing for Apple, stated, “iPod is going to change the way people listen to music.” (Linzmayer, (Linzmayer, 300) He was right. Apple Apple continu continued ed their their innovat innovative ive streak streak with with advance advancemen ments ts in flatflat-pane panell LCDs LCDs for  desktops in 2002 and improved notebooks in 2003. (Linzmayer, (Linzmayer, 301-2) In 2003, Apple released the iLife iLife package package,, contain containing ing improv improved ed versi versions ons of iDVD, iDVD, iMovie iMovie,, iPhoto iPhoto,, and iTunes iTunes.. (Linzmayer, 302) In reference to Apple’s Apple’s recent advancements, Jobs said, “We “We are going to do for digital creation what Microsoft did for for the office suite productivity.” productivity.” (Linzmayer, 302) That is indeed a bold statement. Time will will tell whether that happens. Apple continued its digital digital lifestyl lifestylee strategy strategy by launching launching iTunes iTunes Music Store online in 2003, 2003, obtai obtaini ning ng coope coopera rati tion on from from “The “The Big Big 5” Mu Musi sicc compa compani nies es—B —BMG MG,, EM EMI, I, Sony Sony Entertainment, Universal, Warner. Warner. This allowed iTunes Music Store online to offer over 200,000 songs at introduction. introduction. (Linzmayer (Linzmayer,, 302) In 2003, Apple released released the world’s world’s fastest PC (Mac G5), which had dual 2.0GHz PowerPC G5 processors.

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Product Product differ differenti entiati ation on is a viable viable strate strategy gy,, especia especially lly if the company company exploit exploitss the conceptual distinctions for product differentiation. differentiation. Those that are relevant to Apple are product features, product mix, links with other firms, and reputation. (Barney, (Barney, 266-71) Apple established a reputation as an innovator by offering an array of easy-to-use products that cover a broad range of segments. However, its links with other firms have been limited, as we will discuss in the next section on strategic alliances. There is economic value in product differentiation, especially in the case of monopolistic competition competition..

The primary economic economic value of product differenti differentiation ation comes from reducing reducing

environmental threats. The cost of product differentiation differentiation acts as a barrier to entry, entry, thus reducing the threat of new entrants. entrants. Not only does a company have to bear the cost of standard business, it also also must must bear bear the costs costs associ associated ated with with overcomi overcoming ng the differ different entiat iation ion inhere inherent nt in the incumbent. incumbent. Since companies companies pursue pursue niche markets, markets, there is a reduced threat of rivalry rivalry among industry competitors. A company’s company’s differentiated differentiated product will appear more attractive relative to substitutes, thus reducing reducing the threat of substitutes. substitutes. If suppliers increase increase their prices, a company with a differentiated product can pass that cost to its customers, thus reducing the threat of  suppliers. suppliers. Since a company with a differentiate differentiated d product competes as a quasi-monopoly quasi-monopoly in its market segment, segment, there is a reduced threat of buyers. With all of Porter’s Porter’s Five Forces lower, lower, a company may see economic value from a product differentiation strategy. strategy. (Barney, 277-81) A company attempts to make its its strategy a sustained sustained competitive advantage. For this to occur, a product differentiation strategy that is economically valuable must also be rare, difficult to imitate, and the company must have the organization organization to exploit this. If there are fewer firms differentiating than the number required for perfect competition dynamics, the strategy is rare. rare. If 

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there is no direct, easy duplication and there are no easy substitutes, the strategy is difficult to imitate. (Barney, 281-7)

There are four primary organizing dilemmas when considering product differentiation as a strategy. strategy. They are as depicted below. below. Organizing Dilemmas Inter-Functional Collaboration Too Little (No Collaboration) No learning makes implementation difficult

Too Much (Lockstep) Slows Innovation Connection to the Past Too Much (History as Constraint) Stifles Innovation

Too Little (No History) Lack of Direction in Innovation

Commitment to Market Vision Too Much (Foresight) No Innovation Can Take Place

Too Little (No Sight) Fail to Exploit Historical Advantage

Institutional Control Too Much (Bureaucracy) Lack of Flexibility in Uncertain Market

Too Little (Chaos) Lack of Direction in Innovation

Source: Barney, 290

To resolve these dilemmas, dilemmas, there must be an appropriate appropriate organization organization structure. structure. A U-Form U-Form orga organi nizat zatio ion n reso resolv lves es the the inte interr-fu func ncti tion onal al colla collabo bora rati tion on dile dilemm mmaa if ther theree are are produ product ct development development and product product management management teams. Combining Combining the old with the new resolves resolves the connection to the past dilemma. dilemma. Having a policy of experimentation and a tolerance for failure resolves the commitment commitment to market vision vision dilemma. Managerial freedom within broad decisionmaking guidelines will resolve the institutional control dilemma. (Barney (Barne y, 294) Five leadership roles will facilitate the innovation process: Institutional Leader, Leader, Critic, Entrepr Entrepreneu eneurr, Sponsor Sponsor,, and Mentor Mentor..

The instit instituti utiona onall leader leader create createss the organi organizat zation ional al

infrastructure necessary for innovation. This role also resolves disputes, particularly particularly among the other leaders. The critic challenges investments, goals, and progress. The entrepreneur manages

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the innovative unit(s). The sponsor sponsor procures, advocates, and champions. The mentor coaches, counsels, and advises. (Barney, (Barney, 295) Apple Apple had issue issuess within its organi organizat zation ion.. In 1997, when Apple Apple was seeking seeking a CEO accepta acceptable ble to Jobs, Jobs, Jean-L Jean-Loui ouiss Gassée Gassée (then(then-CEO CEO of Be, ex-Pro ex-Product ductss Presid President ent at Apple) Apple) commented, “Right now the job is so difficult, it would require a bisexual, blond Japanese who is 25 years old and has 15 years’ experienc experience!” e!” Charles Charles Haggerty, Haggerty, then-CEO then-CEO of Western estern Digital, Digital, said, “Apple is a company that that still has opportunity written all over it. But you’d need to recruit God to get it done.” Michael Murphy, Murphy, then-editor of California Technology Stock Letter , stated, “Apple desperately needs a great day-to-day manager, manager, visionary, visionary, leader and politician. The only  person who’s qualified to run this company was crucified 2,000 years ago.” (Linzmayer, 289) Since Jobs took over as CEO in 1997, Apple seems to have resolved the innovation dilemmas, dilemmas, evidenced by their numerous numerous innovations. innovations.

To continue a product product differentiat differentiation ion

strategy, Apple must continue its appropriate management of innovation dilemmas and maintain the five leadership roles that facilitate the innovation process.

Strategic Alliances Apple has a history of shunning strategic alliances. On June 25, 1985, Bill Gates sent a memo to John Sculley (then-CEO of Apple) and Jean-Louis Gassée (then-Products President). Gates recommended that Apple license Macintosh technology to 3-5 significant manufacturers, listing companies and contacts such as AT&T AT&T,, DEC, Texas Instruments, Hewlett-Packard, Xerox, and Motorola. (Linzmayer, (Linzmayer, 245-8) After not receiving a response, Gates wrote another memo memo on July 29, naming three other companies and stating, “I want to help in any way I can with the licensing. Please give me a call.” (Linzmayer, (Linzmayer, 249)

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In 1987, Sculley refused to sign sign licensing contracts with Apollo Computer. Computer. He felt that up-and-coming rival Sun Microsystems would overtake Apollo Computer, which did happen. (Linzmayer, 249-50) Then, Sculley and Michael Spindler (COO) partnered Apple with IBM and Motorola Motorola on the PowerPC chip. Sculley Sculley and Spindler were were hoping IBM would buy Apple Apple and  put them in charge of the PC business. business. (Linzmayer (Linzmayer,, 250) That never came to fruition, fruition, because Apple (with Spindler as the CEO) seemed contradictory and was extraordinarily difficult in  business dealings. (Linzmayer, 251-2) Apple Apple turned turned the corner corner in 1993. 1993. Spindle Spindlerr begrud begrudgin gingly gly license licensed d the Mac to Power  Computing in 1993 and to Radius (who made Mac monitors) monitors) in 1995. However, Spindler nixed Gateway in 1995 due to cannibalization fears. (Linzmayer, 252-3) Gil Amelio, an avid supporter  of licensing, licensing, took over as CEO in 1996. Under Amelio Amelio,, Apple Apple licensed to Motorola Motorola and IBM. (Linzmayer (Linzmayer,, 253-4) In 1996, Apple Apple announced the $427 million million purchase of NeXT Software, Software, marking the return of Steve Jobs. Jobs. (Linzmayer, 216) Amelio suddenly resigned in 1997, and the stage was set for Jobs to resume power. Jobs despised licensing, licensing, calling cloners “leeches”. “leeches”. He pulled the plug, essentially killing killing its largest largest licensee licensee (Power Computing). Computing).

Apple subsequently subsequently acquired acquired Power Computing’ Computing’ss

customer database, Mac OS license, and key employees for $100 million of Apple stock and $10 million to cover debt and closing costs. costs. The business was worth $400 million. million. (Linzmayer, (Linzmayer, 2557) A massive massive reversal reversal occurred occurred in 1997 and 1998. In 1997, Jobs overhauled overhauled the board of  directors and then entered Apple into patent cross-licensing and technology agreements with Microsoft. (Linzmayer, (Linzmayer, 289-90) In 1998, Jobs stated that Apple’s Apple’s strategy is to “focus all of our  software software development development resources resources on extending extending the Macintosh Macintosh operating operating system. To realize our 

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ambiti ambitious ous plans we must must focus focus all of our effor efforts ts in one directio direction.” n.” (Linzmay (Linzmayer er,, 293) This This statement was in the wake of Apple divesting significant software holdings (Claris/FileMaker  and Newton). There is economic value in strategic strategic alliances. alliances. (Barney, (Barney, 370-84) In the case of Apple, Apple, there there was the opp opport ortuni unity ty to manage manage risk risk and share share costs costs (Barney (Barney,, 373 373-4) -4),, facili facilitat tatee tacit tacit collus collusion ion (Barney (Barney,, 374-5), 374-5), and manage manage uncert uncertain ainty ty (Barney (Barney,, 378-9). 378-9). applic applicabl ablee to the industri industries es in which which Apple Apple operat operated. ed.

It would would have have been

Tacit acit collus collusion ion is a valid valid source source of 

economic value in network industries industries (Barney, (Barney, 380), which the computer industry industry is. Managing uncertainty, managing risk, and sharing costs are sources of economic value in any industry (Barney, (Barney, 380). Although Apple eventually realized the economic value of strategic alliances, it should have occurred oc curred earlier. The following are a re some comments c omments about Apple’s no-licensing policy. policy. (Linzmayer, 245-9) “If Apple had licensed the Mac OS when it first came out, Windows wouldn’t exist today.”—Jon van Bronkhorst, Robertson Stephens analyst, San Francisco Chronicle, August 8, 1994

“The computer was never the problem. The company’s company’s strategy was. Apple saw itself itself as a hardware company; in order to protect our hardware profits, we didn’t license our  operating operating system. system. We had the most beautiful beautiful operating operating system, system, but to get it you had to  buy our hardwar hardwaree at twice twice the price. price. That was was a mistake. mistake. What we should should have have done was calculate an appropriate price to license the operating system. We were also naïve to think that the best technology would prevail. prevail. It often doesn’t.”—Steve doesn’t.”—Steve Wozniak, Wozniak, Apple cofounder 

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“If we had licensed earlier, we would be the Microsoft of today.”—Ian W. Diery, Apple Executive VP, Newsweek , August 29, 1994

“I am aware that I am known as the Great Satan on licensing…I was never for or against licensing. I just did not see how it would make sense. But my approach was stupid. We were just fat cats living off a business that had no competition.”—Jean-Louis Gassée, Be CEO and ex-CEO of Apple, admitting he made a strategic mistake A strategic alliance can be a sustained competitive advantage if it is rare, difficult to imitate, imitate, and the company has an organizati organization on to exploit it. If the number of competing competing firms implementing implementing a similar strategic strategic alliance alliance is relatively relatively few, few, the strategy strategy is rare. If there are socially complex relations among partners and there is no direct duplication, the strategy is difficult to imitate. (Barney, 384-9) When organizing for strategic alliances, a firm must consider whether the alliance is nonequity or equity. equity. A non-equity non-equity alliance alliance should have explicit contracts contracts and legal sanctions. sanctions. (Barney (Barney,, 390 390))

An equity equity allian alliance ce should should have contrac contracts ts descri describin bing g the equity investme investment. nt.

(Barney, (Barney, 392-5) There are some substitutes for an equity alliance, such as internal development and acquisitions. However, the difficulties difficulties with these drive the the formation of strategic alliances. It is vital to remember, “Commitment, coordination, and trust are all important determinants of  alliance success.” (Barney, 395)

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RECOMMENDATIONS

FOR COMPANY:

Lowering the cost of products and maintaining the same quality standards Can form joint – ventures Knowledge Management More number of retail stores for easy access Continuous innovation to expand

FOR OTHERS:

Do not compromise on price for quality Choose the products based on individual needs Be unique and different

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CONCLUSION We feel that Apple Apple must focus on several several key aspects to continue continue to grow and succeed. They must continue a stable commitment to licensing, push for economies of scope between media and computers, and become a learning organization. Apple apparently apparently made a commitment commitment to licensing. licensing. Although Although it should continue, continue, Apple Apple may want to consider consider other forms of strategic strategic alliances. alliances. An equity strategic strategic alliance may offer  Apple the opportunity to obtain additional competencies. An effective way for a company like Apple to accomplish this would be in the form of a joint venture. Apple should should continue continue pushing the new line of media-cent media-centric ric products. products. Meanwhile, Meanwhile, Apple should not lose focus on its computers. Macintosh computers were 39% of Apple’s Apple’s sales in 2005. (Burrows (Burrows)) This very innovative innovative company exploit exploitss its second-move second-moverr position. position. In the future, they will need to continue innovating to expand the boundaries of both media and computers. One persistent element of both competitive advantage and risk is Steve Jobs. He is both synonymous with Apple’s Apple’s success and has a large equity interest in Apple and Disney. Disney. If he were to divest his leadership position, the reaction of both the market and consumers would be uncertain. Given his position within the organization organization as well as the history of the company when he was gone, Apple must find a way to to learn as an organization. This will allow the company to withstand a departure by Jobs. Based on the actions of the organization, we feel that the mid-term performance of Apple will be strong. This period allows Apple time to overcome their challenges if they move swiftly. For this reason, we feel that they will continue to succeed and will continue to outperform their   peers.

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INDEX HISTORY OF APPLE……………………………………….8 EXTERNAL ANALYSIS…………………………………..21 PORTER’S FIVE FORCES MODEL………………………25 VALUE CHAIN ANALYSIS………………………………30 SWOT ANALYSIS…………………………………………33 FINANCIAL ANALYSIS………………………………….36 MARKET VALUE ANALYSIS…………………………...40 STRATERGIES…………………………………………....43

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BIBLOGRAPHY www.appleinc.com www.google.com http://trad.org http://www.divisiontwo.com/articles http://www.cnet.com

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