Case 3: Apple Inc.
I. Introduction
Apple Computer is an innovative company evolving on the multimedia and high technology market. It is present on hardware and software markets, as well as in the on-line services market. Its highly diversified offer makes Apple Computers a company that is very hard to manage.
Steve Jobs and Steve Wozniak created the company in 1976. They wanted to “change the world through technology” by creating the personal computer (PC). The launch of Apple II in 1978 was the beginning of Apple’s leadership on the PC industry. Nevertheless, Apple had to face quickly with face competitors, who imposed their standards on the market. First IMB first, and then Windows and Intel, posing posed the problem of non-compatibility with Apple compatibility.
Apple was successively headed by a number of leaders who performed very well. Lots of performing leaders followed one another at the head of Apple Computer, such as Steve Jobs, Sculley, Spindler or Amelio, and each of them had a different vision on of what the Apple computer strategy of Apple should be. After many years of irregular results, Steve Jobs came back to Apple Computer as CEO and his strategy had immediate positive effects on company results and market positioning.

II. Generic and Complementary Strategies
Apple without a doubt uses a focused differentiation strategy. They are able to command premium prices by strategically marketing their products and adding features and functionality that customers highly value, such as the “plug and play” ability of many devices when connected to Apple products. The iPod’s average selling price in the height of its success was $50-$100 higher than the products competing with it. When the iPod nano was released, it grossed margins of around 40% - unheard of in the industry. When Apple released the iPhone, it was estimated that Apple generated over 50% of the cellphone industry’s total profits from the less than 4% unit market share the iPhone gained. The iPad collected a 25% gross margin while competitors such as Amazon’s Kindle were only able to collect 15% gross margins. Apple’s reputation for innovation and design have established it as a focused differentiator, but this strategy has remained so sustainable for them because of the secrecy with which the company and its employees guard Apple’s research. Over its history, Apple has implemented a number of complementary strategies. In its earlier years, Apple partook in two joint venture projects with its main rival, IBM. One of these joint ventures sought to create a new PC operating system and the other was intended to develop multimedia applications. At the same time, Apple formed a strategic alliance with Novell and Intel aimed at redesigning the Mac to run on Intel chips. When Spindler replaced Scully as CEO in 1993, he broke apart the alliance with Novell and Intel and instead began licensing companies to make Mac clones. Shortly after, when Amelio took charge of the company in 1996, he pledged a return to Apple’s “premium price differentiation strategy” by discontinuing the licensing agreements and instead acquiring NeXT Software. These attempts did not fare well for the company, and it was close to bankruptcy when Steve Jobs took over at the end of 1997. Jobs absolutely refused to license to other companies and insisted on tightening Apple’s focus of products. Jobs re-structured Apple’s distribution chain by vertically forward. Apple set up it own chain of retail stores which allowed customers to have the hands on “Apple experience” and greatly influenced sales for the better. When Apple initially released the iPhone, they did so according to an alliance with AT&T, giving the company exclusive rights to sell the iPhone. This was short-lived, however, because Apple discovered that it was losing revenues to the grey market from people “unlocking” phones to be used on other carriers’ networks.

III. Nature of Competition within the Industry Apple competes in several different branches of the technology industry. These branches are vastly different, ranging from personal computers to home entertainment. Because of the scope of industries Apple competes in, it follows naturally to assume the discussion of the nature of competition within these industries would be quite lengthy. The matter is actually quite simple, though – Apple faces fierce competition in every industry it competes in. Despite the numerous lawsuits it has survived, whether initiated or not, Apple has come out on top in the majority of the industries in which the company competes. Often times, industry margins were low. In the PC industry, excluding Apple, the net profit was only 5%. Regarding the distribution of PC’s, the top four vendors were responsible for 54% of worldwide shipments. In the field of operating systems, Apple faced stark competition from Windows because more than 90% of computers ran on some form of Windows OS. Outlooks were perhaps just as gloomy in the mobile phone arena, where the top three competitors – Nokia, Motorola, and Samsung – commanded roughly 60% of the market share. In addition, the product life cycles in the cellphone industry were incredibly short (less than a year). Apple would also have to face the dominators of the mobile networks who had difficult rules and often times “locked” networks, meaning that their mobile phones would only work on their mobile networks. In most of its industries, but especially in the smartphone industry, Apple faced both horizontal and vertical competition. Samsung, HTC and the like were developing smartphones to compete with the iPhone and Google and other software companies developed software such as the Android platform and the Windows Phone software. Never has Apple entered an industry in which it did not face formidable competition from entrenched competitors.

IV. Value Creation
Apple has created value in all of its products by using new and cutting-edge technology. The company was constantly purchasing new technology to get the consumer the easiest and quickest technology on the market. Other competitors would take ages to release a new product but apple moved very quickly (usually 12 to 18 months) to put the latest and greatest products on the market. They also took pride in their design of products. Apple “…relied on its own proprietary designs and refused to license its hardware to third parties” (Woffie, 2). Apple kept a very tight grip on who could use their technology to maintain as much control of sales as possible.

Jobs also made it clear that his goal “has been to build an enduring company where people were motivated to make great products” (Woffie, 4). The heart of apple has been a quality, up-to-date, user friendly, functional product. Apples “digital hub” is a great example of this concept. Jobs was able to add value to already existing devices, which allowed him to capture more market share. The ability to use both hardware and software gave Apple a “unique strength” (woffie, 7). Whether it was a phone, mp3 player, or laptop, Apple wanted to be an industry leader.

V. Competitive Advantage
One advantage Apple has had was their devotion to secrecy. Technology would be an easy thing to copy or clone, so Jobs went the extra mile to keep new developments secret, “even among the companies own employees” (Woffie, 9). By keeping their projects secret, apple was able to work on development that would surpass their competitors and quickly gain market share upon announcement of their new products. The iPhone had been in the making for nearly 2 years and due to the research, Apple was able to capitalize on touch-screen technology. Secrecy is a competitive advantage because it buys Apple time. Once the new Apple product is released, others have to take time to clone the technology, and remake and remarket their products. In the technology industry, time is very precious since everything changes so quickly.

VI. Sustainability
Apple has achieved meteoric growth in the last three decades. The company has been able to achieve this as a result of having built an impressive competitive advantage. However, the competitors of the company are slowly catching up with it in terms of design, quality and performance of alternative products. The growth and success of the company does not seem as sustainable as it did a few years ago. It is necessary to assess the sustainability. Apple has a different operating system and Apple can take advantage of its system difference by turning it into an opportunity to develop improvements over the platforms. Also, Companies are surfacing in the global markets, and Apple should capture a large market share in other countries by designing different products to meet customers’ needs. Since the product innovations and technological change fast now and customers have a design to process the latest and greatest product. Apple should continue on their improvement of technology.

VII. General Company Analysis
This section will include financial ratio analysis for Apple. The major purpose of using financial data in ratio form is making the results comparable across firms and over time by controlling for size. After computing the selected ratios, we will be able to compare Apple to its top competitors within the technology industry.

2000
Profit Margin (NI/S) = 9.8%
Total Asset Turnover (S/TA) = 1.17
Return on Assets (NI/TA) =6%
Equity Multiplier (TA/TE) = 1.65
Return on Equity (NI/TE) = 22%

2002
Profit Margin (NI/S) = 0.023 = 1.13%
Total Asset Turnover (S/TA) = 0.91
Return on Assets (NI/TA) = 1%
Equity Multiplier (TA/TE) = 1.54
Return on Equity (NI/TE) = 2%

2004
Profit Margin (NI/S) = 0.0002 = 3.2%
Total Asset Turnover (S/TA) = 1.03
Return on Assets (NI/TA) = 3%
Equity Multiplier (TA/TE) = 1.59
Return on Equity (NI/TE) = 6%

2006
Profit Margin (NI/S) = 0.015 = 10.3%
Total Asset Turnover (S/TA) = 1.12
Return on Assets (NI/TA) = 11%
Equity Multiplier (TA/TE) = 1.72
Return on Equity (NI/TE) = 23%

2008
Profit Margin (NI/S) = 0.038 = 16.3%
Total Asset Turnover (S/TA) = 1.04
Return on Assets (NI/TA) = 0.094 = 17%
Equity Multiplier (TA/TE) = 1.62
Return on Equity (NI/TE) = 0.41 = 3%

2010
Profit Margin (NI/S) = 0.038 = 21.5%
Total Asset Turnover (S/TA) = 0.87
Return on Assets (NI/TA) =19%
Equity Multiplier (TA/TE) = 1.57
Return on Equity (NI/TE) =35%

2011
Profit Margin (NI/S) = 0.038 = 23.9%
Total Asset Turnover (S/TA) = 0.93
Return on Assets (NI/TA) = 22%
Equity Multiplier (TA/TE) = 1.51
Return on Equity (NI/TE) = 42%

The gross profit margin for Apple has been relatively steady since 2000, showing no concerns for an increased cost of goods. Since 2002, Apple has been slowly increasing the ratios concerning asset turnover, return on assets, and return on equity. These increases are favorable, showing the companies ability to increase its earnings in proportion to the overall investment in the company.
In order to accurately gauge the company’s financial position and operation performance, it is very useful to conduct a ration comparison between apple and its top competitors over the same periods of time.

(Gross margin) | 1997 | 2000 | 2003 | 2006 | 2008 | 2009 | 2010 | 2011 | Apple | 21% | 27% | 29% | 29% | 35% | 40% | 39% | 41% | Dell | 23% | 21% | 19% | 17% | 18% | 18% | 19% | 22% | HP | 38% | 31% | 29% | 24% | 24% | 24% | 23% | 23% |
Apple’s gross margin has been consistently increasing in the past several years and is much higher than its competitors’ since 2006. Overall Apple has enjoyed higher gross margins as a result of their pricing strategy, not as a result of cost control measures over materials, labor, and overhead. This is primarily a reflection of its key success factors -creativity and innovation.

(Return on Asset) | 2002 | 2004 | 2006 | 2008 | 2010 | 2011 | Apple | 1% | 3% | 11% | 17% | 19% | 22% | Dell | | 13% | 10% | 9% | 7% | 8% | HP | | 5% | 8% | 7% | 7% | 5% |
Apple’s return on assets ratio is an indication of the company’s struggle to recover from a history of losses. The ratio itself shows how well Apple is utilizing its assets after costs are figured in. Compared to Dell, the ration is very high between 2004 and 2006 and the number is the goal that Apple should be striving to achieve. Between 2008 and 2011, change in numbers is showing a positive movement for Apple.

(Return on Equity) | 2002 | 2004 | 2006 | 2008 | 2010 | 2011 | Apple | 2% | 6% | 23% | 33% | 42% | 47% | Dell | | 46% | 59% | 58% | 34% | 39% | HP | | 9% | 16% | 21% | 21% | 18% |
Return on Equity shows how effectively a company is at using investors’ money. Dell has glowing numbers from 2004 to 2008 and Apple is only a fraction of Dell’s numbers. However, when Apple was suffering a loss the early years, it can still keep the ration positive and increase it step by step. Overall, the positive movement in the last four years is a good indicator of Apple’s business strategy moving forward with relative success.

In addition to financial analysis, it is useful to evaluate Apple in light of Porter’s Five Forces model.

Buyers
Buyers usually exercise more relative bargaining power when they are more prices sensitive. A buyer can become price sensitive if the item he is buying is: undifferentiated, expensive relative to his other costs or income, inconsequential to his own performance. When Apple first hit the market in the early 1980s, it had a product that differentiated it from all other computer products on the market. Also, Apple’s system for graphic and architectural production and design is far superior to any Windows application. When buyers require special customizations, they are less likely to switch to producers who have difficulty meeting their demands and buyer customization positively affects Apple.

Suppliers
Apple uses a large variety of suppliers for manufacturing its computers and portable music players. In most cases, Apple is not limited to a single supplier for the various components used in the process of assembly for its products. This leaves Apple’s suppliers with less bargaining power concerning price.

Substitutes
A substitute is defined by Magretta as a “product or service that meets the same basic need as the industry’s product in a different way” (Magretta, 46). By this definition, on the personal computing side of Apple’s market, there are a number of products from various competitors. Each of these competitors has a wide range of computing systems designed for various types of users like Dell and HP. Within the portable music market, Apple’s hard-drive based MP3 player has many possible substitutes within the market and for the music online, online music store such as Amazon.com, Napster and Walmart.com offered individual songs downloads at competitive price to iTunes. Substitute products are readily available so this threat is very high.

New Entrants
Within the personal computer market there are a few well-established companies that consume most of the market share. These companies are: Dell and HP. The existing companies have capitalized on the distribution channels and have created strong branding awareness that makes it limited for new entrants to complete. Apple positioned itself years before so it has created its space in the computer industry.

Rivalry
Apple has many competitors that have the advantage of processing the large portion of market share. Apple is faced to compete with companies like HP and Dell in the early years. With iPhone getting more popular recently, the smartphone rivals also promote their own phones and by the year of 2011, smartphones with Android operating system got the most market share.

VIII. Conclusion and Recommendations
Apple has truly put the “personal” in personal computing. In 1984, the Macintosh proved to be the company’s foundation-laying product. The Macintosh began the desktop publishing revolution with its cutting-edge graphical user interface and laser writer printer capability. Today, Apple continues to lead the industry with their outstanding and award winning products and services. Apple is also credited with leading the digital media revolution with their iPod portable music and video players and iTunes online media store, creating the first sustainable music-downloading business model in history. The company has also entered the mobile phone industry with an altogether different business strategy known as value innovation with the iPhone. Value innovation focuses on making the competition irrelevant by opening up new and untapped markets, creating a leap in value for consumers. The iPhone is yet another product that has changed the way the industry defines new product standards and possibilities. With growing demand for high-quality, powerful, user-friendly, and cost effective products, Apple is undoubtedly the leader in terms of bringing these ideas to life. The company realizes that rather than publicly announcing product development plans years in advance, products are better-received with an “awe” response if they are simply released when they’re finished as opposed to providing “beta” or “demo” versions to the public. This is an excellent strategy when the goal is to keep consumers eager for the latest products. But, everybody is eager to know “What will happen to Apple after Jobs gone?”, “What could they possibly improve next?”, “Can Apple cannibalize itself again?”.