Business Analysis of Apple Inc. On April 1, 1976 Steve Jobs, Steve Wozniak, and Ronald Wayne joined together to form Apple Computer Incorporated. The concept behind their company was the creation of an inexpensive, simple to use personal computer kit. Working out of Jobs’ garage in Cupertino, California the trio designed and manufactured their first product in three months. They named this product the Apple I and it went on sale in July 1976 for $666. 66. Six months after the release of the Apple I, Ronald Wayne opted to sell his share of the company back to Jobs and Wozniak for a meager $800.
Soon thereafter multimillionaire Mike Markkula joined Apple and on January 3, 1977 the company was incorporated. Apple continued to gain momentum and was one of the fastest growing companies by the end of 1978. With the introduction of the Apple II plus, the company enjoyed a 400 percent increase in sales in 1979. In December of 1980 the company went public and within minutes the 4. 6 million shares sold out at a price of $22 per share. An additional 2. 6 million shares was also sold out by May 1981. However, the firm suffered its first major fallback with the release of the Apple III in September of 1980.
The newest version had not undergone necessary testing due to time constraints and pressure from upper management. This proved to be extremely costly mistake and by 1984 the Apple III was discontinued. Below is a timeline with some of Apple’s key dates from the company’s short history. 1976: With $1,300, Steve Jobs and Steve Wozniak found Apple Computer, Inc. 1980: Apple converts to public ownership. 1982: Apple becomes the first personal computer company to reach $1 billion in annual sales. 1985: John Sculley assumes the helm after a management shakeup that causes the departure of Jobs and several other Apple executives. 991: PowerBook line of notebook computers is released. 1994: Power Macintosh line is released. 1996: Acquisition of NeXT brings Steve Jobs back to Apple as a special advisor. 1997: Steve Jobs is named interim chief executive officer. 1998: The all-in-one iMac is released. 2000: Jobs, now firmly in command as CEO, oversees a leaner, more tightly focused Apple. The company underwent some major changes in leadership in 1985. Despite being recruited by Jobs himself in 1983, John Sculley takes over as president of Apple and Steve Jobs leaves the company and builds another computer company called NeXT Incorporated.
However, it was not until the 1990’s that the company’s poor management became a major problem. In 1993 John Sculley was forced out of presidency by the company’s board of directors. Sculley was replaced by Michael Spindler. It was not long before Spindler made his first major mistake. Spindler’s first major oversight was the new Power Macintosh line in 1994. Consumer demand for the new Macintosh line was much higher than the company anticipated and by 1995 Apple had an estimated $1 billion worth of unfilled orders (International Directory of Company Histories, 2001).
This massive underestimation caused Apple’s stock to drop 15% over a two-day period and ultimately spelled the end of Spindler’s run as leader of Apple. In February of 1996 Apple introduced Gil Amelio as the new chief executive officer. With mounting financial losses throughout Amelio’s 17 month reign as chief executive, the firm once again decided to go in another direction with their leadership. However, before Amelio’s dismissal in July of 1997, Apple paid $377 million for a small company called NeXT. This happened to be the same company that was started by Steve Jobs twelve years ago in 1985.
Jobs was immediately named interim chief executive officer following Amelio’s dismissal and the company’s return to profitability began. Jobs’ first major decision was to put an end to the licensing agreement that former chief executive Michael Spindler had initiated. The next smart decision Jobs made was to focus the company’s resources away from printers, scanners, portable digital assistants, and other product lines. Instead, Jobs decided for Apple to concentrate exclusively on desktop and portable Macintoshes for professional and consumer customers (International Directory of Company Histories, 2001).
With guidance and oversight from Jobs, Apple released the successful iMAC in August of 1998. This marked Apple’s return to profitability. In 2005 the company underwent another period of change. From 2005-07 Apple transitioned from PowerPC processors to Intel x86 processors. While the former PowerPC processors were supplied by Motorola and IBM, Steve Jobs stated Apple’s lack of faith in Intel to meet the company’s needs for the future. In January of 2007, Steve Jobs announced that the company would now be known as Apple Inc. during the Macworld Expo in San Francisco, California.
The change in name signaled the company’s change in focus from personal computers to mobile electronic devices (Macworld 2007). Apple Incorporated’s primary NAICS code is 334111. The company falls under the electronic computer manufacturing category. This U. S. industry’s primary function is in manufacturing and/or assembling electronic computers. According to the U. S. Census Bureau from 2002 the industry has 489 establishments. The industry net selling values for 2002 were $47,728,633,000. The annual payroll in this industry was $3,274,317,000 distributed among 62,253 employees (U.
S. Census Bureau 2002). A geographic distribution of the industry shows that approximately one third of the industry is located in the state of California. Of the 489 total employers, 151 of them are located in California and make up 33. 68% of the industry net selling value. Texas has the second most establishments with forty-three, however North Carolina is the second highest state behind California, with 1. 15% of the industry net selling value coming from the Tar Heel state. The top ten states comprise 281 of the 489 total establishments of the industry.
These states include California, N. Carolina, Florida, Michigan, Washington, New York, Minnesota, Ohio, New Hampshire, and Maryland. These ten states make up 36. 93% of the net selling value of the industry. Despite a reasonable number of employers in Texas, Massachusetts, Georgia, Pennsylvania, Colorado, and New Jersey these states only make up a minimal fraction of the industry net selling value. IBISWorld Apple falls under the NAICS code 33411. This category includes all computer and peripheral manufacturing in the U. S. The industry enjoyed revenues of $56 billion and a profit of $7. billion in 2009. The annual growth of this industry from 2005-10 was -5. 1% with a predicted annual growth of -0. 3% from 2010-15. The major players of the industry include Dell Inc. , International Business Machines Corporation, Hewlett-Packard Company, Oracle Corporation, and EMC Corporation. The top five players of the industry hold 48% of the market share, with industry leader Dell Inc. holding an 18% market share. This industry is currently in the decline life cycle stage, while enduring a medium level of revenue volatility.
Despite light regulation, the industry experiences high levels of technology change, barriers to entry, industry globalization, and competition level. According to a U. S. Census Bureau Manufacturing Survey the industry revenue has been in steady decline since 1998 with the exception of a fractional growth in 2006. The survey suggests that “recent decline in capital expenditure was mainly due to falling revenue, relatively low profitability and an increase in outsourcing of production (mainly to overseas firms), particularly of components.
With decreasing capital expenditure, the industry’s potential for future growth does not look promising within the United States. Apple Inc. primary strengths include a strong brand image, robust financial performance, and focused Research & Design driving innovation. The strength of their brand image has allowed Apple Inc. to charge a premium price for its product offerings. Apple’s brand image is highly recognizable to the majority of consumers. Across all of the firm’s markets, Apple holds a high level of brand awareness and recognition.
Since 2007, Apple’s brand ranking has risen from 35th to 20th position in 2009. During that same three year period from 2007-09 the company has also increased its’ brand value from $11,037 million in 2007 to $15,433 in 2009. Through their strong brand image, the company is able to create increasing demand for its products including the iMac, iPhone, and iPod and separate themselves from regional and global competitors. During the same three year time period, Apple has also enjoyed a 32. 1% annual growth rate. The company’s total revenue went from $24,578 million in 2007 to $42,905 million in 2009.
The firm’s operating profit margin has also increased from 17. 9% to 27. 4% during that same three year period. Apple has shown immense profitability improvement, going from an operating loss in 2003 to operating profit of $11,740 million in 2009. This strong growth pattern has provided investors’ with renewed confidence in the company and also allowed Apple to invest in future products and offerings. Another major strength of Apple Inc. is their focused R&D driving innovation. The firm has increased their annual R&D expenditure from $782 million in 2007 to $1,333 million in 2009.
The primary focus has been on further advancements to Apple’s existing Mac line of PCs, operating system, application software, iPhone and iPods (Apple Computer, Inc. SWOT Analysis May 1, 2010). The success of their innovated products has helped strengthen the company’s brand image and consolidate its market position. Two major weaknesses of Apple Inc. are their product recalls and patent infringement violations. Due to the high nature of innovation and technology of Apple products, customers’ have experienced defects in both design and manufacture.
This frequent recall procedure can weaken the company’s reputation among consumers along with significantly increase the cost of warranty for Apple products. Another area of concern involves the company’s multiple patent infringement cases. At the end of 2009 Apple had 47 ongoing patent infringement cases. While the majority of these cases are in the preliminary stages, if the company is found guilty of these allegations it will suffer financial consequences and negatively affect the firm’s financial standing. Two major areas of opportunity exist for Apple Inc.
The recent growth in smartphones market segment has created an opportunity for Apple to increase its market share. Forecasts predict that the demand for worldwide touch-screen devices will almost double in 2010 and will account for more than half of total mobile phones shipments in 2013 (Apple Computer, Inc. SWOT Analysis May 1,2010). This success in the smartphone market segment can be credited towards the widely successful iPhone. Initially launched in 2007, Apple has become the third largest player in the smartphone segment. The iPhone alone generated $13,033 million in revenue in 2009 (Apple Computer, Inc.
SWOT Analysis May 1, 2010). Another opportunity for Apple exists in the continuing growth in demand for mobile PCs. While sales of desktop PCs has declined in recent years, the market for mobile PCs (laptops, notebooks, netbooks and tablet PCs) has increased by over 15% from 2008-09. Not only is the market for mobile PCs increasing, but forecasts predict Compound Annual Growth Rate (CAGR) of 19% for the next five years while the overall PC market growth will only be 12% during that same period. This is a strong indicator of growth in the segment.
Apple will look to use their status as a top five player to their advantage and launch new products and enhance existing ones. An example of this is the popular iPad. This high-resolution, Multi-Touch display device sold 300,000 on the first day in the United States alone. Despite multiple areas of opportunity, Apple Inc. also faces a number of serious threats. The first is the intense competition the firm will face. Not only is the technology industry highly competitive but the industry is also rapidly evolving. Some of Apple’s competitors include Microsoft, Dell, Hewlett-Packard, Fujitsu, Samsung Electronics, Sony and Toshiba.
Since the release of the iPhone, the demand for smartphones with touch functionality has increased causing Apple’s competitors to release their own smartphones with similar capabilities. Another threat lies in Apple’s dependence on specific suppliers. The company relies on third party suppliers for some of the components used for their products (Apple Computer, Inc. SWOT Analysis May 1, 2010). After taking a closer look at Apple Inc. ’s financial reports I have come to the conclusion that the firm is currently in good financial standing. The analysis measured Apple’s financial position across four different categories.
The first category is a liquidity ratio. A liquidity ratio is used to test a firm’s liquidity. I chose to calculate the current ratio. This ratio is calculated by dividing current assets by current liabilities. The current ratio reveals whether a company’s short-term assets (cash, receivables, inventory, etc. ) are readily available to pay off its short-term liabilities (notes payable, accrued expenses and taxes). When looking at Apple across a three year period from September of 2007-September of 2009, the firm showed a steadily increasing current ratio.
This shows that Apple is increasing its current assets at a faster rate than their current liabilities. The second category of the financial analysis is the leverage ratio. A leverage ratio is used to calculate the financial leverage of a company along with measuring its ability to meet financial obligations. The debt-to-equity ratio is calculated by dividing total liabilities by shareholders equity. Over a three year span starting in September of 2007 through September of 2009 Apple Inc. has maintained a debt-to-equity ratio between 0. 50-0. 88.
This means that the firm has maintained at least twice as much equity as debt during this period. The third category of analysis is the profitability ratio. A profitability ratio is used to evaluate a firm’s ability to generate earnings compared to its expenses. The net profit margin is calculated by dividing net income by total revenues. From September 2007 to September 2008, Apple Inc. enjoyed just under a 15% net profit margin, however in 2009 the firm enjoyed an increase in net profit margin to 19. 19%. This means that for every dollar of sales Apple Inc. earns $0. 919 of net income. The last category of the financial analysis is the efficiency ratio. An efficiency ratio is used to evaluate how well a company uses its assets and liabilities internally. The asset turnover is calculated by dividing revenue by assets. This measure illustrates a firm’s efficiency at using its assets to create sales or revenue. Although Apple Inc. experienced a slight dip in total asset turnover in 2008, the firm rebounded nicely in 2009. From 2007-2009 the firm averaged a 0. 89 total asset turnover. This means that from 2007-09 for every $1 in assets, Apple Inc. old $0. 89 on average worth of products and services. When comparing Apple Inc. to two of its biggest competitors, Dell Inc. and Hewlett-Packard, Apple outperforms the competition in measures of liquidity and profitability. From Chart 1. 2, Apple Inc. has nearly twice as high of a current ratio than Dell Inc. and Hewlett-Packard. This means that Apple is increasing its current assets compared to its current liabilities, at nearly two times the rate of its competition. Another glaring advantage Apple holds against its competition is the net profit margin. From Chart 1. , it is clear that from 2007-09 Apple Inc. is much more profitable than both Dell Inc. and Hewlett-Packard. After completing the financial analysis, it is clear that Apple Inc. is far more profitable in recent years than its competition. After completing the business analysis of Apple Inc. I have discovered a few areas of improvement and recommendations which will help Apple Inc. remain an industry leader and major player in the electronic computer manufacturing industry. In the immediate future Apple Inc. can enforce a stricter product-testing procedure and policy.
By doing this, it will help eliminate the frequent product recalls. Another immediate change can be made in the firm’s legal department. With multiple on-going charges and dozen more accusations, it is clear that Apple Inc. needs a new team of legal advisors in order to avoid legal problems in the future. One of the short-term recommendations I have for Apple Inc. is to reduce the firm’s dependencies on smaller third-party manufacturers of important components. Perhaps working on a contract with a major supplier will decrease the number of recalls and manufacturing issues the company has suffered from in the past.
Another short-term recommendation for Apple would be to re-focus their attention to the growing market of smartphones. While the iPhone dominates the market, competitors such as Android and Blackberry, are releasing competitive smartphones available across multiple cell phone providers. A major long-term concern of mine for the company stems from their troubled past. If not for Steve Jobs’ return in 1997, would the company still enjoy the success of today? I would recommend that Apple create a training program for the leaders of the future. History has shown how important the right management can be. Bibliography
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