Apple Computer, Inc. Annual Profit Plan MNGT 3280 Alex Milovic

Introduction History of Innovation Many changes over the last 20 years                                                                                                                                  History of Innovation Many changes over the last 20 years New Direction iPod iTunes OS X Operating System

Situation Analysis Strengths Brand Name: Known for Innovation Steve Jobs: “Forward Thinking” Market leader in MP3 Sales (59% market share) Market leader in legal music downloads (62% market share) Cupertino, CA plant: in-house production Large amount of cash reserves ($6.5 billion) Apple on-line store, retail stores

Situation Analysis Opportunities OS X operating system is currently only available on Macintosh computers OS X only has a 5% market share in operating systems market Downloading only represents 2% of overall music sales

Situation Analysis Weaknesses Many bad strategies over the last 20 years Only a 3% market share in computer sales Do not have the resources to compete head-to-head with Microsoft

Situation Analysis Threats OS X vs. Microsoft Napster Paying for downloads vs. piracy Licensing arrangements with music companies                             

Mission Our goal is to provide innovative computer products(both hardware and software) to consumers of all ages through retail stores, online stores and through our Apple retail locations.

Objective Continue success of iPod line iTunes vs. Napster Launch OS X on all computer platforms

Market Size 2004 $55 billion Projected 2005 $63.525 billion Operating Systems Market Size 2004 $55 billion Projected 2005 $63.525 billion

Market Size 2004 $2.37 billion Projected 2005 $5.7 billion MP3 Players Market Size 2004 $2.37 billion Projected 2005 $5.7 billion

Market Size 2004 $1.61 billion Projected 2005 $3.765 billion Downloaded Music Market Size 2004 $1.61 billion Projected 2005 $3.765 billion

Competitive Analysis OS X Operating System Microsoft Windows Apple iPod Dell Pocket DJ, Samsung, Gateway Apple iTunes Napster, Walmart

Potential Variable Margin (per unit) Cost Price VM OS X (Panther) $287.99 $399.99 $112.00 iPod  143.99 199.99 56.00 iTunes  0.10 0.99 0.89

Competitive/Pricing/Promotions Strategies: OS X Offensive Strategy Windows security has been an issue Failure to come out with updated Windows Develop separate application of software compatible with non-Macs iPod/iTunes Defensive Strategy Block Napster’s attempt to gain market share through subscription service Promote the iPod and iTunes as package Develop subscription service for iTunes

Product Features OS X iPod Increased security iLife program bundle iWork program bundle Frequent update availability iPod Several available versions iPod photo iPod mini iPod shuffle iPod U2 special edition

Promotions/Distribution Strategies and Supporting Action Plans: Partner with PC leader (Dell, IBM, eMachines, etc.) to offer OS X as primary operating system Sold through major retail chains (Best Buy), Apple retail stores, online store Targeted to consumers with focus toward age 15-50 Promotion of iLife and iWork Heavy promotion of new subscription service for iPod and iTunes to counter Napster

Product Promotions Timeline Q1 2005: Continue to focus on iPod advertising Print advertising: Sports Illustrated, Maxim, People, Popular Science, Us Weekly, Runner’s World, Men’s Health Product review in Consumer Reports Television Advertising: CBS, NBC, ABC, FOX, UPN, WB, MTV, VH1, ESPN, TechTV, CNN, Lifetime, Oxygen, E! Entertainment Sales force begins to sell iPods to more retail outlets

Promotions Timeline (cont.) Q2 2005 Begin advertising new iTunes subscription plan through above media Begin advertising OS X operating system Print Advertising: PC Magazine, PC World, Computer Edge, Computer Weekly, Computer World Product review in Consumer Reports Television Advertising: CBS, NBC, ABC, FOX, TechTV, CNN, Bloomberg, Lifetime, E! Entertainment, Headline News, TBS Sales force meets with retailers to propose iPod/OS X plan (reduced cost of OS X when iPods are purchased)

Promotions Timeline cont. Q3 2005 Increase advertising of iPod and OS X Q4 2005 Continue to advertise during Christmas season Meeting between Senior Marketing and International Business interests concerning international promotion/distribution of OS X and iPod in 2006

Distribution Timeline Q1 2005: Sales reps continue to sell iPod line to retailers Senior marketing secures shelf space for newest lines of iPods Q2 2005 Sales reps begin to discuss OS X/iPod package Senior marketing meets with Dell management to discuss adding OS X to online store

Distribution Timeline (cont.) Q3 2005 Sales force makes preliminary Christmas orders; communicates with Operations to ensure demand will be met Q4 2005 Sales force makes additional Christmas orders as necessary

Operations New Product: Innovated Existing Product: OS X Operating System Innovated Existing Product: iPod

Manufacturing/Suppliers We will add extra equipment in our Cupertino, CA plant, as well as increase labor Since our supply demands will increase, we must make sure our materials are available for production

OS X Timeline Q1 2005: Design and final testing of the OS X software is complete Operations Managers and labor are hired and trained to mass produce the new OS X Operating System Q2 2005: Accommodations are made in the plant and additional machinery is in place to begin production Production of OS X begins Q3 2005: Marketing completes product design and software is ready to be packaged Meetings between marketing and key retailers used to determine ordering OS X is shipped by truck fleets to retailers and stocked on retailer’s shelves, ready for the 2005 Christmas season Online retailers are also stocked and ready to sell Q4 2005: Product is sold through retailers

iPod Timeline Q1 2005: Q2 2005: Q3 2005: Q4 2005: Production of iPods continues in order to meet orders Production begins on newest iPod lines Q2 2005: Meet with Product team to discuss future iPod products, meet with operations management to discuss production needs of new lines Use current forecasts to project Q3 and Q4 sales, see if we can meet demand Q3 2005: Use retail pre-order forecasts to guide production schedule for Q3 and Q4 Begin 24/7 schedule to increase production Q4 2005: Continue to process orders Begin production of new iPod lines for 2006

Quality Control ISO 9002- quality in procurement, production, and installation Six-Sigma - reduces our overall defect rate

Repair/Technical Support We outsource our repair and technical support programs Mac Service - repair work and training. Technical support is available online and at our Apple retail locations

Shipping/Retailers Shipping Retailers Online customers - United Parcel Service Retailers - outsourced trucking fleet Retailers OS X - sold everywhere computers are sold Packaged with Dell iPod Department stores, Discount stores, Music stores, our website

Income Statement

Balance Sheet

Key Ratios

Revenue and Gross Margin iPod/iTunes: 4.38 Billion OS X: 6.05 Billion Other: 2.57 Billion Total Sales: 13 Billion Gross Margin: 28.5% 1.5% increase from 2004 Factors: more favorable pricing on certain commodity components, higher revenue which provided for strong leveraging of fixed production costs and a more favorable mix of direct sales.

Fixed Costs R/D: $750 Million 34.8% increase from 2004 5.76% revenue SG&A: $1700 Million 16.4% increase from 2004 13.1% of revenue Total: $2.45 Billion Source: cash, equivalents, and short-term investments Why: to ensure a continuing and timely flow of innovative and competitive products and technologies to the marketplace

Net Profit 2004: $276 Million 2005: $929 Million 236.5% increase in Net Profit 19% return on invested capital 9.4% return on assets