Apple Computer 2005

Forest David: Francis Marion University

A.

Case Abstract
This is a comprehensive strategic management case that includes the companys
financial statements, organization chart, competitor information, and industry trends.
Sufficient internal and external data are provided to enable students to evaluate current
strategies and recommend a three-year strategic plan for the company.
Apple Computer, Inc., located in Cupertino, California, designs, manufactures,
and markets personal computers (PCs) and related software, peripherals, and personal
computing and communicating solutions. Apple is a member of the S&P 500 and the
NASDAQ 100. Its products include the Macintosh line of desktop and notebook
computers, the Mac OS X operating system, the iPod digital music player, and a portfolio
of software and peripheral products for education, creative, consumer, and business
customers. Apple sells its products through its online stores, direct sales force, thirdparty wholesalers and resellers, and its own retail stores. As of September 24, 2005,
Apple operated 116 stores in the United States, and 8 additional stores in Canada, Japan,
and the UK. In addition to its own hardware and software products, Apples retail stores
carry a variety of third-party hardware and software products. Revenues for the period
ending September 2005 were $13.9 billion, up 69 percent from September 2004 and up
124 percent from September 2003.

B.

Vision Statement (proposed)

To become the global leader in computer and digital music products.

C.

Mission Statement (actual)

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

(Proposed)
The Apple commitment to excellence is its mission to provide computers and service (2)
for people (1) that meet the highest standards of value and reliability. Apple is one of the
leaders in the computer industry and produces some of the best-selling computers and
digital music products in the world (3). Apple provides the highest level of quality and
value for our customers (7). Those are timeless fundamentals. We also apply innovative
technology to our core business (4) to make our products irresistible to customers,
beneficial to society, and profitable to our company (5). We strive to provide additional
opportunities for growth and enrichment of company personnel while maintaining a work
environment for all employees (9) that encourages personal commitment and
participation in support of achieving excellence. We are committed to being a good
corporate citizen, and being openly honest with all of our stakeholders (6). We support
activities that enable people to improve their lives and reinforce their commitment to
society (8).
1.
2.
3.
4.
5.
6.
7.
8.
9.

D.

Customer
Products or services
Markets
Technology
Concern for survival, profitability, growth
Philosophy
Self-concept
Concern for public image
Concern for employees

External Audit
Opportunities
1. Increase in worms and viruses on PCs.
2. Large population (Gen X & Y) which are extremely individualistic and name brand
conscious.
3. Government crackdown on pirating music off the Internet.
4. Much of the world is still without computers.
5. People enjoy small electronic gadgets.
Threats
1.
2.
3.
4.
5.

Companies not seeing Apple as compatible with their software.

Dell and HP are major competitors.
Increasing competition with music downloads.
Competition produces similar products at often half the price.
The population at large unwilling to use Macintosh.

CPM Competitive Profile Matrix

Critical Success
Factors
Market Share
Price
Financial Position
Product Quality
Consumer Loyalty
Advertising
Management
Global Expansion
Innovation
Web Development
Total

Weight
0.10
0.10
0.15
0.15
0.15
0.04
0.06
0.06
0.14
0.05
1.00

Apple
Rating
Weighted
Score
2
0.20
2
0.20
3
0.45
4
0.60
4
0.60
4
0.16
4
0.24
2
0.12
4
0.56
3
0.15
3.28

HP
Rating
3
3
4
3
2
2
3
2
2
2

Weighted
Score
0.30
0.30
0.60
0.45
0.30
0.08
0.18
0.12
0.28
0.10
2.71

Dell
Rating
Weighted
Score
4
0.40
4
0.40
3
0.45
3
0.45
3
0.45
3
0.12
3
0.18
3
0.18
2
0.28
3
0.15
3.06

External Factor Evaluation (EFE) Matrix

Key External Factors
Opportunities
Increase in worms and virus on PCs.
Large population (Gen X & Y) which are extremely
individualistic and name brand conscious.
Government crackdown on pirating music off the Internet.
Much of the world is still without computers.
People enjoy small electronic gadgets.
Threats
Companies not seeing Apple as compatible with their
software.
Dell and HP are major competitors.
Increasing competition with music downloads.
Competition produces similar products at often half the price.
The population at large unwilling to use Macintosh.
TOTAL

E.

Weight

Rating

Weighted
Score

0.15
0.15

4
4

0.60
0.60

0.05
0.10
0.10

4
2
4

0.20
0.20
0.40

0.10

0.20

0.10
0.05
0.10
0.10
1.00

3
4
3
2

0.30
0.20
0.30
0.20
3.20

Internal Audit
Strengths
1. iTunes Music Store is a good source of revenue, especially with the iPod and its
availability on Windows platform.
2. Developing own software and hardware.
3. Apples niche audience provides the company with some insulation from the direct
price competition.
4. Revamping desktop and notebook lines.
5. Web technology can be used to improve product awareness and sales.
6. Low debtmore maneuverable.

7. Good brand loyalty.

Weaknesses
1. Weak relationship with Intel and Microsoft.
2. Weak presence globally.
3. Dependency on new product launches.
4. Weak presence in markets other than education and publishing.
5. Slow turnaround on high demand products.
Financial Ratio Analysis (January 2006)
Growth Rates %
Sales (Qtr vs year ago qtr)
Net Income (YTD vs YTD)
Net Income (Qtr vs year ago qtr)
Sales (5-Year Annual Avg.)
Net Income (5-Year Annual Avg.)
Dividends (5-Year Annual Avg.)
Price Ratios
Current P/E Ratio
P/E Ratio 5-Year High
P/E Ratio 5-Year Low
Price/Sales Ratio
Price/Book Value
Price/Cash Flow Ratio
Profit Margins
Gross Margin
Pre-Tax Margin
Net Profit Margin
5-Yr Gross Margin (5-Year Avg.)
5-Yr Pre-Tax Margin (5-Year Avg.)
5-Yr Net Profit Margin (5-Year Avg.)
Financial Condition
Debt/Equity Ratio
Current Ratio
Quick Ratio
Interest Coverage
Leverage Ratio
Book Value/Share
Investment Returns %
Return on Equity
Return on Assets
Return on Capital
Return on Equity (5-Year Avg.)
Return on Assets (5-Year Avg.)
Return on Capital (5-Year Avg.)
Management Efficiency
Income/Employee
Revenue/Employee
Receivable Turnover
Inventory Turnover
Asset Turnover

Apple Computer
56.50
383.70
305.70
12.64
NA
NA

Industry
18.00
78.90
17.40
5.00
NA
NA

SP-500
14.20
16.30
17.00
4.93
10.40
4.27

46.1
NA
NA
4.35
8.11
39.90

31.6
NA
NA
1.88
10.57
26.80

18.8
64.8
17.4
1.48
2.83
12.40

30.3
13.0
9.6
29.1
5.9
4.3

20.2
8.5
6.2
20.3
5.8
3.8

47.2
11.9
8.0
47.3
9.4
5.8

0.00
3.0
2.6
NA
1.5
8.86

0.06
1.5
1.2
NA
2.9
3.50

1.06
1.4
0.9
3.5
5.7
13.26

17.9
11.6
17.9
6.9
4.4
6.7

34.6
12.0
32.6
17.0
7.1
15.7

15.3
2.7
7.4
11.9
2.0
5.6

90,000
941,000
16.7
73.0
1.4

63,000
1 Mil
12.2
66.8
2.1

29,000
367,000
7.7
7.8
0.4

Adapted from www.cnbc.com

Date
Avg. P/E
09/05
23.50
09/04
40.60
09/03
90.10
09/02
111.00
09/01
NA
Adapted from www.cnbc.com

Price/Sales
3.21
1.83
1.22
0.91
1.02

Price/Book
6.00
2.99
1.80
1.27
1.39

Date
Book Value/ Share
09/05
$8.94
09/04
$6.48
09/03
$5.76
09/02
$5.70
09/01
$5.59
Adapted from www.cnbc.com

Debt/Equity
0.00
0.00
0.00
0.08
0.08

ROE (%)
17.9
5.4
1.6
1.6
NA

Net Profit Margin (%)

9.6
3.3
1.1
1.1
-0.7
ROA (%)
11.6
3.4
NA
NA
-0.6

Interest Coverage
NA
NA
NA
NA
N

Net Worth Analysis (January 2006 in millions)

1. Stockholders Equity + Goodwill = 7,466 + 69
2. Net Income x 5 = $1,355 x 5=
3. Share price = $72.00/EPS(1.56) = 46.15 x Net Income $1,335 =
4. Number of Shares Outstanding x Share Price = 842 x $72.00 =
Method Average

$ 7,535
$ 6,775
$ 61,610
$ 60,624
$34,136

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors
Strengths
iTunes Music Store is a good source of revenue,
especially with the iPod and the availability on
Windows platform.
Apples niche audience provides the company with
some insulation from the direct price competition.
Revamping desktop and notebook lines.
Low debtmore maneuverable.
Developing own software and hardware.
Good brand loyalty.
Web technology can be used to improve product
awareness and sales.
Weaknesses
Dependency on new product launches.
Weak presence globally.
Slow turnaround on high demand products.
Weak relationship with Intel and Microsoft.
Weak presence in markets other than education and
publishing.
Total

Weight

Rating

Weighted Score

0.15

0.60

0.10

0.30

0.10
0.06
0.14
0.05
0.10

3
4
3
3
4

0.30
0.24
0.42
0.15
0.40

0.06
0.07
0.03
0.10
0.04

1
1
2
1
2

0.06
0.07
0.06
0.10
0.08

1.00

2.78

F.

SWOT Matrix

Opportunities
1. Increase in worms and viruses
on PCs.
2. Large population (Gen X & Y)
which are extremely
individualistic and name brand
conscious.
3. Government crackdown on
pirating music off the Internet.
4. Much of the world is still
without computers.
5. People enjoy small electronic
gadgets.
Threats
1. Companies not seeing Apple as
compatible with their software.
2. Dell and HP are major
competitors.
3. Increasing competition with
music downloads.
4. Competition produces similar
products at often half the price.
5. The population at large
unwilling to use Macintosh.

G.

Strengths
Weaknesses
1. iTunes Music Store is a good
1. Weak relationship with Intel and
source of revenue, especially
Microsoft.
with the iPod and the availability 2. Weak presence in business
on Windows platform.
arena.
2. Developing own software and
3. Dependency on new product
hardware.
launches.
3. Apples niche audience provides 4. Weak presence in markets other
the company with some
than education and publishing.
insulation from the direct price
5. Slow turnaround on high
competition.
demand products.
4. Revamping desktop and
notebook lines.
5. Web technology can be used to
improve product awareness and
sales.
6. Low debtmore maneuverable.
7. Good brand loyalty.
S-O Strategies
W-O Strategies
1. Increase awareness through the
1. Increase ties with Microsoft and
Web of the immunity of Mac
Intel and their products.(W1,
products to worms and viruses.
W2, W4 O2, O3)
(S5, O1)
2. Promote to business the safety
2. Advertise using individuals that
of having a worm and virus free
will link Generation X & Y to
computer by using Mac. (W2,
the iTunes and other related
W4, O1, O5).
products. (S1, O2, O4, O5)
3. Expand production into Asia
3. Use movies and music groups
(W2, O4).
that are geared towards Gen X
and Y to promote computers
and laptops. (S3, S5, O2, O5)
S-T Strategies
W-T Strategies
1. Increase and promote the
1. Improve relationship with
compatibility to Windows
Microsoft and Intel so that
operating system. (S5,T1)
companies will see them as
2. Promote the originality of Apple
compatible. (W1, W2 T1)
computers and the different
2. Produce Wintel Compatible
style and stable system that is
products (W1, T1).
worth the price difference in
style, stability and speed. (S2,
S5, T2, T4, T5)

SPACE Matrix
6

Financial Strength (FS)

Leverage
Working Capital
Liquidity
Return on Investment
Three year New Income
Financial Strength (FS) Average

Competitive Advantage (CA)

Market Share
Product Quality
Customer Loyalty
Technological Know-how
Control over Suppliers and Distributors
Competitive Advantage (CA) Average

3
3
4
5
5

Environmental Stability (ES)

Rate of Inflation
Technological Changes
Price Elasticity of Demand
Competitive Pressure
Barriers to Entry into Market

4.0 Environmental Stability (ES) Average

-5
-1
-1
-1
-2
-2.0

Industry Strength (IS)

Growth Potential
Profit Potential
Financial Stability
Ease of Entry into Market
Labor Cost
Industry Strength (IS) Average

y-axis = FS + ES = 4.0 + (-3.4) = 0.6

x-axis = CA + IS = -2.0 + (+3.6) = 2.6

H.

Grand Strategy Matrix

7

-2
-5
-2
-6
-2
-3.4

4
4
5
2
3
3.6

1.
2.
3.
4.
5.

Retrenchment
Related diversification
Unrelated diversification
Divestiture
Liquidation

I.

The Internal-External (IE) Matrix

The IFE Total Weighted Score
Strong
3.0 to 4.0

Average
2.0 to 2.99

Weak
1.0 to 1.99

II

III

Medium
The EFE Total 2.0 to 2.99
Weighted Score

IV

Apple
V

VI

Low
1.0 to 1.99

VII

VIII

IX

High
3.0 to 3.99

Grow and Build

Segments
Domestic
International

Revenue
54%
46%

Profit
52%
48%

EFE
3.5
3.0

IFE
2.6
3.0

J.

Boston Consulting Group (BCG) Matrix

Relative Market Share
High 1.0

Medium .50

Low 0.0

High +20

Stars

Question Marks

Medium 0

Cash Cows

Dogs

Industry Sales
Growth Rate

Low -20

Segments
Domestic
International

Revenue
54%
46%

Profit
52%
48%

Question Marks
EFE IFE Growth Rate
3.5
2.6
17
3.0
3.0
5

10

Relative Market Share

0.3
0.2

K.

QSPM

Strategic Alternatives
Key Internal Factors

Weight

Strengths
iTunes Music Store is a good source of revenue,
especially with the iPod and the availability on
Windows platform.
Apples niche audience provides the company with
some insulation from the direct price competition.
Revamping desktop and notebook lines.
Low debtmore maneuverable.
Developing own software and hardware.
Good brand loyalty.
Web technology can be used to improve product
awareness and sales.
Weaknesses
Dependency on new product launches.
Weak presence in business arena.
Slow turnaround on high demand products.
Weak relationship with Intel and Microsoft.
Weak presence in markets other than education and
publishing.
SUBTOTAL

0.15

Produce Wintel
compatible
products
AS
TAS
4.00
0.60
---

---

---

0.10
0.06
0.14
0.05
0.10

--1.00
--4.00
4.00

--0.06
--0.20
0.40

--4.00
--3.00
3.00

--0.24
--0.15
0.30

0.06
0.07
0.03
0.10
0.04

--1.00
--4.00
2.00

--0.07
--0.40
0.14

--3.00
--1.00
4.00

--0.21
--0.10
0.28

1.87

0.15
0.15

Produce Wintel
compatible
products
TAS
1.00
0.15
1.00
0.15

0.05

1.00

0.10
0.10

1.73
Expand production
into Asia
AS
3.00
4.00

TAS
0.45
0.60

0.05

4.00

0.20

1.00
---

0.10
---

4.00
---

0.40
---

0.10

4.00

0.40

2.00

0.20

0.10
0.05
0.10

1.00
-----

0.10
-----

3.00
-----

0.30
-----

0.10
1.00

11

TAS
0.45

---

Weight

Opportunities
Increase in worms and virus on PCs.
Large population (Gen X & Y) which are extremely
individualistic and name brand conscious.
Government crackdown on pirating music off the
Internet.
Much of the world is still without computers.
People enjoy small electronic gadgets.
Threats
Companies not seeing Apple as compatible with their
software.
Dell and HP are major competitors.
Increasing competition with music downloads.
Competition produces similar products at often half the
price.
The population at large unwilling to use Macintosh.
SUBTOTAL
SUM TOTAL ATTRACTIVENESS SCORE

AS
3.00

0.10

1.00

Key External Factors

Expand production
into Asia

0.95
2.83

2.15
3.88

L.

Recommendations

Strategy 1
Open twenty computer retail stores (not just peripherals and accessories). Apple currently
operates stores throughout the United States with only peripherals and accessories for their
computers. Adding the hardware should generate more hands-on awareness and use already
established locations.

This will increase product accessibility for those who wish to view items other than just
accessories and increase awareness of the originality of Apples products.
Two percent increase in sales representatives for the computer hardware.
Estimated cost of $ 5 million per store = $100 Million Total.

Strategy 2
Expand into the Asian market over a five-year period by building a manufacturing facility and
headquarters in Hong Kong and expanding sales throughout Asia. Estimated cost $5 billion.
Strategy 3
Add more features to current products including new iPod, Shuffle, and Macintosh
enhancements and power.

M.

$50 million is the estimated cost for Research and Development.

EPS/EBIT Analysis
$ Amount Needed: $5,100 M
Stock Price: $75
Tax Rate: 26%
Interest Rate: 5%
# Shares Outstanding: 842M

12

N.

Epilogue
In January 2006, Disney announced that it would be selling even more video
downloads through Apple's iTunes storefront than the parties had agreed to in October
2005. Video iPod owners will now be able to purchase a wider spectrum of content from
ABC, ESPN, Disney Channel, and SOAPnet. From condensed college football bowl
games broadcast on ABC to classic animated shorts from Disney's thick vault, Disney is
backing Apple all the way. Disney CEO Bob Iger is best friends with Steve Jobs, who
happens to own a majority stake in Pixar. Surging sales of Apple's iPod digital music
player, which now also plays videos, in 2005 helped lift the company's stock by more
than 120%. Many analysts expect a repeat in Apples stock performance in 2006.
CEO Steve Jobs unveiled Apple's newest products at the annual Macworld
Conference and Expo in San Francisco in mid-January 2006. Apple is offering a new
iPod Shuffle, a PC that runs on Intel chips and an iMac PC that acts much like a digital
television tuner and recorder. The new Shuffle includes a small screen that shows what
song the device is playing. One of the knocks against the Shuffle is that since it doesn't
have a screen, a listener can't see the name of what song is playing, or which song is next
in the device's listening queue. Apple may not expand the size of the Shuffle's memory
beyond 1gigabyte, or 240 songs, as the company wouldn't want to cannibalize on its
popular iPod Nano player, which comes in 2GB and 4GB models. Apple also sells a 512megabyte Shuffle that hold up to 120 songs.
Apple sold 22.5 million iPods in its 2005 fiscal year, and could come close to
doubling those sales in its 2006 fiscal year, which began in October 2005. Apple says it
has sold more than 28 million iPods since unveiling the device in late 2001. Apple began
moving to an all-Intel processor lineup in 2006 and plans to complete the move by mid2007. In Apple Macintosh computers, the Intel chips will replace microprocessors
provided by International Business Machines Corp. Roger Kay, president of Endpoint
Technology Associates, said Apple could debut its first Intel chips in a new iBook or
PowerBooks laptop computer. "Apple has long touted its strength in the consumer
(notebook) market, but moving to Intel could provide a big gain in expanding its presence
in the business (laptop) market," Kay said.
Also in 2006, Apple is to release some version of an iMac computer that acts like
a digital television tuner and recorder. Apple took a step in that direction in October 2005,
when it revamped the iMac to include FrontRow, a software application that includes a
remote control to manage and run the computer's digital video and audio content.

13

Apple reports its first-quarter results on January 18. Analysts estimate Apple will
earn 53 cents a share, on $5 billion in revenue, up from 35 cents a share, on sales of $3.5
billion in the same period a year ago.

14