CASE STUDY Apple Inc: Performance in a Zero-Sum World EconomyON NOVEMBER1, 2010, JOHN TARPEY, SENIOR FINANCIAL ANALYST at a securitiesfirm, was sitting at his conference table to begin the task of fully analyzing the 2010 financialperformance and strategic strategies of Apple Inc. On his table were hundreds of articles, reports,SEC documents, and company documents. The basic question he sought answers to with this indepth analysis was how Apple’s performance continued to be out-standing, while the world andU.S. economy was flat to negative.A second, and more important question, was if Apple could sustain this high level ofperformance and major innovation. Exhibit 1 shows unit sales by key products, net sales by thesame products, net sales by the company’s operating segments, and Mac unit sales by operatingsegments. John noted that there were nine positive increases versus three negative ones. He sawthat the positive increases outnumbered the negative changes by three to one. In 2010, there wereonly three negative changes compared with nine changes for 2009. Net sales of desktopcomputers were up 43% in 2010, compared with a 23% drop in sales in 2009.John considered Apple’s Consolidated Statement of Operations (see Exhibit 2) and BalanceSheet (see Exhibit 3).[SEE BELOW FOR MORE INFO]1.0 Management’s View of the CompanyJohn searched and found in the 10-K report management’s views on the company’s performancein 2010 as stated below.First, the company designed, manufactured, and marketed a range of personal computers,mobile communication and media devices, and portable digital music players, and sold a varietyof related software, services, peripherals, networking solutions, and third-party digital contentand applications. The company’s products and services included Mac computers, iPhone, iPad,iPod, Apple TV, Xserve, a portfolio of consumer and professional software applications, the MacOS X and iOS operating systems, third-party digital content and applications through the iTunesStore, and a variety of accessory, service, and support offerings. The company sold its productsworldwide through its retail stores, online stores, and direct sales force, as well as third-partycellular network carriers, wholesalers, retailers, and value-added resellers. In addition, thecompany sold a variety of third-party Mac, iPhone, iPad, and iPod compatible products,including application software, printers, storage devices, speakers, headphones, and various otheraccessories and peripherals through its online and retail stores. The company sold to SMB,education, enterprise, government, and creative markets.Second, the company was committed to bringing the best user experience to its customersthrough its innovative hardware, software, peripherals, services, and Internet offerings. Thecompany’s business strategy leverages its unique ability to design and develop its own operatingsystems, hardware, application software, and services to provide its customers new products andsolutions with superior ease-of-use, seamless integration, and innovative industrial design. Thecompany believed continual investment in research and development was critical to thedevelopment and enhancement of innovative products and technologies. In conjunction with itsstrategy, the company continued to build and host a robust platform for the discovery anddelivery of third-party digital content and applications through the iTunes Store. Within theiTunes Store, the company expanded its offerings through the App Store and iBookstore, whichallowed customers to browse, search for, and purchase third-party applications and booksthrough either a Mac or Windows-based computer or by wirelessly downloading directly to aniPhone, iPad, or iPod touch. The company also worked to support a community for thedevelopment of third-party software and hard-ware products and digital content that complementthe company’s offerings. Additionally, the company’s strategy included expanding its distributionnetwork to effectively reach more customers and provide them with a high-quality sales andpost-sales support experience. The company was therefore uniquely positioned to offer superiorand well-integrated digital lifestyle and productivity solutions.Third, the company participated in several highly competitive markets, including personalcomputers with its Mac computers; mobile communications and media devices with its iPhone,iPad, and iPod product families; and distribution of third-party digital content and applicationswith its online iTunes Store. While the company was widely recognized as a leading innovator inthe markets where it competes, these markets were highly competitive and subject to aggressivepricing. To remain competitive, the company believed that increased investment in research anddevelopment, marketing, and advertising was necessary to maintain or expand its position inthese markets. The company’s research and development spending was focused on furtherdeveloping its existing Mac line of personal computers; the Mac OS X and iOS operatingSystems; application software for the Mac; iPhone, iPad, and iPod and related software;development of new digital lifestyle consumer and professional software applications; andinvestments in new product areas and technologies. The company also believed increasedinvestment in marketing and advertising programs was critical to increasing product and brandawareness.The company utilized a variety of direct and indirect distribution channels, including its re-tailstores, online stores, and direct sales force, as well as third-party cellular network carriers,wholesalers, retailers, and value-added resellers. The company believed that sales of itsinnovative and differentiated products were enhanced by knowledgeable salespersons who couldconvey the value of the hardware, software, and peripheral integration; demonstrate the uniquedigital lifestyle solutions that were available on its products; and demonstrate the compatibilityof the Mac with the Windows platform and networks. The company further believed providingdirect contact with its targeted customers was an effective way to demonstrate the advantages ofits products over those of its competitors, and that providing a high-quality sales and after-salessupport experience is critical to attracting new—and retaining existing—customers. To ensure ahigh-quality buying experience for its products in which service and education were emphasized,the company continued to expand and improve its distribution capabilities by expanding thenumber of its own retail stores worldwide. Additionally, the company invested in programs toenhance reseller sales by placing high-quality Apple fixtures, merchandising materials, and otherresources within selected third-party reseller locations. Through the Apple Premium ResellerProgram, certain third-party resellers focused on the Apple platform by pro-viding a high level ofintegration and support services, as well as product expertise.2.0 History of Apple IncThe history of Apple can be broken into five separate time periods, each with its own strategicissues and concerns.(2.1) 1976–1984: The Founders Build a CompanyFounded in a California garage on April 1, 1976, Apple created the personal computer revolutionwith powerful yet easy-to-use machines for the desktop. Steve Jobs sold his Volkswagen bus andSteve Wozniak hocked his HP programmable calculator to raise $1,300 in seed money to starttheir new company. Not long afterward, a mutual friend helped recruit A. C. “Mike” Markkula tohelp market the company and give it a million-dollar image. Even though all three founders hadleft the company’s management team during the 1980s, Markkula continued serving on Apple’sBoard of Directors until August 1997.The early success of Apple was attributed largely to marketing and technological innovation. Inthe high-growth industry of personal computers in the early 1980s, Apple grew quickly, stayingahead of competitors by contributing key products that stimulated the development of softwarefor the computer. Landmark programs such as Visicalc (forerunner to Lotus 1-2-3 and otherspreadsheet programs) were developed first for the Apple II. Apple also secured early dominancein the education and consumer markets by awarding hundreds of thousands of dollars in grants toschools and individuals for the development of education software.Even with enormous competition, Apple revenues continued to grow at an unprecedented rate,reaching $583.3 million by fiscal 1982. The introduction of the Macintosh graphical userinterface in 1984, which included icons, pull-down menus, and windows, became the catalyst fordesktop publishing and instigated the second technological revolution attributable to Apple.Apple kept the architecture of the Macintosh proprietary; that is, it could not be cloned like the“open system” IBM PC. This allowed the company to charge a premium for its distinctive “userfriendly” features.A shakeout in the personal computer industry began in 1983 when IBM entered the PC market,initially affecting companies selling low-priced machines to consumers. Companies that madestrategic blunders or that lacked sufficient distribution or brand awareness of their productsdisappeared.(2.2) 1985–1997: Professional Managers Fail to Extend the CompanyIn 1985, amid a slumping market, Apple saw the departure of its founders, Jobs and Wozniak. AsChairman of the Board, Jobs had recruited John Sculley, an experienced executive from PepsiCo,to replace him as Apple’s CEO in 1983. Jobs had challenged Sculley when recruiting him bysaying, “Do you want to spend the rest of your life selling sugared water, or do you want tochange the world?” Jobs willingly gave up his title as CEO so that he could have Sculley as hismentor. In 1985, a power struggle took place between Sculley and Jobs. With his entrepreneurialorientation, Jobs wanted to continue taking the company in risky new directions. Sculley, incontrast, felt that Apple had grown to the point where it needed not only to be more careful in itsstrategic moves, but also better organized and rationally managed. The board of directorssupported Sculley’s request to strip Jobs of his duties, since it felt that the company needed anexperienced executive to lead Apple into its next stage of development.Jobs then resigned from the company he had founded and sold all but one share of his Applestock. Under the leadership of John Sculley, CEO and Chairman, the company engineered aremarkable turnaround. He instituted a massive reorganization to streamline operations andexpenses. During this time Wozniak left the company. Macintosh sales gained momentumthroughout 1986 and 1987. Sales increased 40% from $1.9 billion to $2.7 billion in fiscal 1987,and earnings jumped 41% to $217 million.In the early 1990s, Apple sold more personal computers than any other computer company. Netsales grew to over $7 billion, net income to over $540 million, and earnings per share to $4.33.The period from 1993 to 1995 was, however, a time of considerable change in the managementof Apple. The industry was rapidly changing. Personal computers using Microsoft’s Windowsoperating system and Office software plus Intel microprocessors began to dominate the personalcomputer marketplace. (The alliance between Microsoft and Intel was known in the trade asWintel.) Dell, Hewlett-Packard, Compaq, and Gateway replaced both IBM and Apple as theprimary makers of PCs. The new Windows system had successfully imitated the user-friendly“look and feel” of Apple’s Macintosh operating system. As a result, Apple lost its competitiveedge. In June 1993, Sculley was forced to resign and Michael H. Spindler was appointed CEO ofthe company. At this time, Apple was receiving a number of offers to acquire the company. Manyof the company’s executives advocated Apple’s merging with another company. However, whenno merger took place, many executives chose to resign.Unable to reverse the company’s falling sales, Spindler was soon forced out and Gilbert Ameliowas hired from outside Apple to serve as CEO. Amelio’s regime presided over an acceleratedloss of market share, deteriorating earnings, and stock that had lost half of its value. Apple’srefusal to license the Mac operating system to other manufacturers had given Microsoft theopening it needed to take the market with its Windows operating system. Wintel PCs nowdominated the market—pushing Apple into a steadily declining market niche composedprimarily of artisans and teachers. By 1996, Apple’s management seemed to be in utter disarray.Looking for a new product with which Apple could retake the initiative in personal computers,the company bought NeXT for $402 million on December 20, 1996. Steve Jobs, who formed theNeXT computer company when he left Apple, had envisioned his new company as the developerof the “next generation” in personal computers. Part of the purchase agreement was that Jobswould return to Apple as a consultant. In July of 1997, Amelio resigned and was replaced bySteve Jobs as Apple’s interim CEO (iCEO). This ended Steve Jobs’ 14-year exile from thecompany that he and Wozniak had founded. In addition to being iCEO of Apple, Jobs also servedas CEO of Pixar, a company he had personally purchased from Lucasfilm for $5 million.Receiving only $1.00 a year as CEO of both Pixar and Apple, Jobs held the Guinness WorldRecord as the “Lowest Paid Chief Executive Officer.”(2.3) 1998–2001: Jobs Leads Apple “Back to the Future”Once in position as Apple’s CEO, Steve Jobs terminated many of the company’s existingprojects. Dropped were the iBook and the AirPort products series, which had helped popularizethe use of wireless LAN technology to connect a computer to a network.In May 2001, the company announced the reopening of Apple Retail Stores. Like IBM andXerox, Apple had opened its own retail stores to market its computers during the 1980s. All suchstores had been closed however, when Wintel-type computers began being sold by massmerchandisers, such as Sears and Circuit City, as well as through corporate websites.Apple introduced the iPod portable digital audio player, and the company opened its own iTunesmusic store to provide downloaded music to iPod users. Given the thorny copyright issuesinherent in the music business, analysts doubted if the new product would be successful.(2.4) 2002–2006: A Corporate Renaissance?In 2002, Apple introduced a redesigned iMac using a 64-bit processor. The iMac had a hemispherical base and a flat-panel all-digital display. Although it received a lot of press, the iMacfailed to live up to the company’s sales expectations.In 2004 and 2005, Apple opened its first retail stores in Europe and Canada. By November 2006,the company had 149 stores in the United States, 4 stores in Canada, 7 stores in the UnitedKingdom, and 7 stores in Japan.In 2006, Jobs announced that Apple would sell an Intel-based Macintosh. Previously, Microsofthad purchased all of its microprocessors from Motorola. By this time, Microsoft’s operatingsystem with Intel microprocessors was running on 97.5% of the personal computers sold, withApple having only a 2.5% share of the market. The company also introduced its first Intel-basedmachines, the iMac and MacBook Pro.By this time, Apple’s iPod had emerged as the market leader of a completely new industrycategory, which it had created. In 2006, Apple controlled 75.6% of the market, followed bySunDisk with 9.7%, and Creative Technology in third place with 4.3%. Although one analystpredicted that more than 30 million iPods would be sold in fiscal 2006, Apple actually sold41,385,000. Taking advantage of its lead in music downloading, the company’s next strategicmove was to extend its iTunes music stores by offering movies for $9.99 each. An analystreviewing this strategic move said that Apple was able to create a $1 billion-a-year market for thelegal sale of music. Apple may be able to provide the movie industry with a similar formula.(2.5) 2007–Present: Mobile Consumer Electronics EraWhile delivering his keynote speech at the Macworld Expo on January 9, 2007, Jobs announcedthat Apple Computer, Inc. would from that point on be known as Apple Inc., due to the fact thatcomputers were no longer the singular focus for the company. This change reflected thecompany’s shift of emphasis to mobile electronic devices from personal computers. The eventalso saw the announcement of the iPhone and the Apple TV. The following day, Apple shares hit$97.80, an all-time high at that point. In May, Apple’s share price passed the $100 mark. In anarticle posted on Apple’s website on February 6, 2007, Steve Jobs wrote that Apple would bewilling to sell music on the iTunes Store with DRM (which would allow tracks to be played onthird-party players) if record labels would agree to drop the technology. On April 2, 2007, Appleand EMI jointly announced the removal of DMR technology from EMI’s catalog in the iTunesStore, effective in May. Other record labels followed later that year.In July of the following year, Apple launched the App Store to sell third-party applications forthe iPhone and iPod Touch. Within a month, the store sold 60 million applications and brought in$1 million daily on average, with Jobs speculating that the App Store could become a billiondollar business for Apple. Three months later, it was announced that Apple had become the thirdlargest mobile handset supplier in the world due to the popularity of the iPhoneOn December 16, 2008, Apple announced that, after over 20 years, 2009 would be the last yearSteve Jobs would be attending the Macworld Expo, and that Phil Schiller would deliver the 2009keynote speech in lieu of the expected Jobs. Almost exactly one month later, on January 14,2009, an internal Apple memo from Jobs announced that he would be taking a six-month leaveof absence, until the end of June 2009, to allow him to better focus on his health and to allow thecompany to better focus on its products without having the rampant media speculating about hishealth. Despite Jobs’ absence, Apple recorded its best non-holiday quarter (q1 FY 2009) duringthe recession with revenue of $8.16 billion and a profit of $1.21 billion.After years of speculation and multiple rumored “leaks,” Apple announced a large screen, tabletlike media device known as the iPad on January 27, 2010. The iPad ran the same touch-basedoperating system that the iPhone used and many of the same iPhone apps were compat-ible withthe iPad. This gave the iPad a large app catalog on launch even with very little development timebefore the release. Later that year on April 3, 2010, the iPad was launched in the United Statesand sold more than 300,000 units on that day, reaching 500,000 by the end of the first week. InMay 2010, Apple’s market cap exceeded that of competitor Microsoft for the first time since1989.In June 2010, Apple released the fourth generation iPhone, which introduced video calling,multitasking, and a new insulated stainless steel design which served as the phone’s antenna.Because of this antenna implementation, some iPhone 4 users reported a reduction in signalstrength when the phone was held in specific ways. Apple offered buyers a free rubber “bumper”case until September 30, 2010, as cases had been developed to solve/improve the signal strengthissue.In September 2010, Apple refreshed its iPod line of MP3 players, introducing a multi-touch iPodNano, iPod Touch with FaceTime, and iPod Shuffle with buttons. In October 2010, Apple shareshit an all-time high, eclipsing $300. Additionally, on October 20, Apple updated its MacBook Airlaptop, iLife suite of applications, and unveiled Mac OS X Lion, the latest installment in its MacOS X operating system. On November 16, 2010, Apple Inc., after years of negotiations, finalizeda deal to allow iTunes to sell The Beatles’ music at $1.29 per song. The five major Web-TVboxes were (1) Apple TV, (2) Boxee, (3) Google TV, (4) WD TV Hub, and (5) Roku.3.0 Steven P. Jobs: Entrepreneur and Corporate ExecutiveIn 2010, Steve Jobs was chosen as “Executive of the Decade” by Fortunemagazine. He has alsobeen referred to as the “Henry Ford” of the current world business market. Steven P. Jobs wasborn on February 24, 1955, in San Francisco. He was adopted by Paul and Clara Jobs inFebruary 1955. In 1972, Jobs graduated from Homestead High School in Los Altos, California.His high school electronics teacher said, “He was somewhat of a loner and always had a different way of looking at things.” After graduation, Jobs was hired by Hewlett-Packard as a sum-meremployee. This is where he met Steve Wozniak, a recent dropout from The University ofCalifornia at Berkeley. Wozniak had a genius IQ and was an engineering whiz with a passion forinventing electronic gadgets. At this time, Wozniak was perfecting his “blue box,” an illegalpocket-size telephone attachment that allowed the user to make free long-distance calls. Jobshelped Wozniak sell this device to customers.In 1972, Jobs enrolled at Reed College in Portland, Oregon, but dropped out after one semester.He remained around Reed for a year and became involved in the counterculture. During thatyear, he enrolled in various classes in philosophy and other topics. In a later speech at StanfordUniversity, Jobs explained, “If I had never dropped in on that single course (calligraphy), thatMac would have never had multiple typefaces or proportionally spaced fonts.”In early 1974, Jobs took a job as a video-game designer for Atari, a pioneer in electronic arcadegames. After earning enough money, Jobs went to India in search of personal spiritualenlightenment. Later that year, Jobs returned to California and began attending meetings of SteveWozniak’s “Homebrew Computer Club.” Wozniak converted his TV monitor into what wouldbecome a computer. Wozniak was a very good engineer and extremely interested in creating newelectronic devices. Although Jobs was not interested in developing new devices, he realized themarketability of Wozniak’s converted TV. Together they designed the Apple I computer in Jobs’bedroom and built the first prototype in Jobs’ garage. Jobs showed the Apple I to a localelectronics retailer, the Byte Shop, and received a $25,000 order for 50 computers. Jobs took thispurchase order to Cramer Electronics to order the components needed to assemble the 50computers.The local credit manager asked Jobs how he was going to pay for the parts and he replied, “Ihave this purchase order from the Byte Shop chain of computer stores for 50 of my computersand the payment terms are COD. If you give me the parts on net 30 day terms, I can build anddeliver the computers in that time frame, collect my money from Turrell at the Byte Shop andpay you.” With that, the credit manager called Paul Turrell, who was attending an IEEEcomputer conference, and verified the validity of the purchase order. Amazed at the tenacity ofJobs, Turrell assured the credit manager that if the computers showed up in his stores Jobs wouldbe paid and would have more than enough money to pay for the parts order. The two Steves andtheir small crew spent day and night building and testing the computers and delivered them toTurrell on time to pay his suppliers and have a tidy profit left over for their celebration and nextorder. Steve Jobs had found a way to finance his soon-to-be multimillion dollar company withoutgiving away one share of stock or ownership.Jobs and Wozniak decided to start a computer company to manufacture and sell personalcomputers. They contributed $1,300 of their own money to start the business. Jobs selected thename Apple for the company based on his memories of a summer job as an orchard worker. OnApril 1, 1976, Apple Computer company was formed as a partnership.During Jobs’ early tenure at Apple, he was a persuasive and charismatic evangelist for thecompany. Some of his employees have described him at that time as an erratic and tempestuousmanager. An analyst said that many persons who look at Jobs’ management style forget that hewas 30 years old in 1985 and he received his management and leadership education on the job.Jobs guided the company’s revenues to $1,515,616,000 and profits of $64,055,000 in 1984. Jobswas cited in several articles as having a demanding and aggressive personality. One analyst saidthat these two attributes described most of the successful entrepreneurs. Jobs strategicallymanaged the company through a period of new product introduction, rapidly changingtechnology, and intense competition—a time during which many companies have failed.In 1985, after leaving Apple, Jobs formed a new computer company, NeXT C…



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