1. A Strategic Management Case Study
Apple Computer Inc. 2005
A Strategic Management
Case Study
Graphics are the property of
Apple Computer
® 2007, Tony Gauvin, UMFK

2. Overview Possible alternative strategies Our Recommendation
A brief history of Apple Computer
EOY 2004
Mission, Vision, Objectives, Strategies
2005
New Vision and Mission
External Analysis
Opportunities & Threats
CPM
EFE
Internal Analysis
Financial Data
Strengths and weaknesses
IFE
Financial ratios
Strategic Analysis
SWOT Matrix
SPACE
BCG
IE matrix
Grand Strategy Matrix
Matrix Analysis
QSPM
Possible alternative strategies
Our Recommendation
Strategies
Long range objectives
EPS/EBIT
Implementation Issues
Proposed annual objectives (goal) and polices
Proposed procedures for evaluation
Epilogue
Current Performance
Questions
Resources Utilized
® 2007, Tony Gauvin, UMFK

3. History of Apple
1976
Apple started in a garage in Santa Clara, CA by Steve Wozniak and Steve Jobs
A easy to use PC for small computer users
1980
$117,000,000 in sales
IPO
1983
Wozniak quits
Jobs hires John Sculley From Pepsi Co. to become President of Apple
1984
Macintosh PC
® 2007, Tony Gauvin, UMFK

4. History of Apple
1985
Jobs and Sculley have a “falling out”
Jobs fired
Sculley becomes CEO
Bill Gates wants to buy Mac O/S, Sculley says No, Gates buys DOS from IBM, Microsoft kicks Apple's butt (90% market share)
1993
Apple release Newton, the first PDA
Earnings Plunge, Apple restructures, Sculley Resigns
1997
Apple CEO Gilbert Amelio buys NextStep from Steve Jobs
Earnings Plunge, Apple restructures, Amelio Resigns
1998
Steve Jobs returns as iCEO
® 2007, Tony Gauvin, UMFK

5. History of Apple 1998 Jobs restructures Apple along two products lines
Consumer “i”Mac
“i” for internet
Professional “Power”Mac
“power” for power user
Sales return, Brand emerges, Innovation rules
USB, Firewire, Airport
iPod and iTunes
Stock price takes off like a rocket!
® 2007, Tony Gauvin, UMFK

6. Lesson learned + = $
® 2007, Tony Gauvin, UMFK

7. 2004 Vision Statement
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Apple is committed to bringing the beast personal computing experience to students, educators, creative professional, and consumers around the world through its innovative hardware, software, and Internet offerings
® 2007, Tony Gauvin, UMFK

8. 2004 Mission
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.
® 2007, Tony Gauvin, UMFK

9. 2004 Strategies Market Penetration New Product Development Branding
Niche player
New Product Development
Speech recognition
Virtual reality
® 2007, Tony Gauvin, UMFK

10. 2004 objectives Double market Share from 5% to 10%
Remain as the most profitable computer company in the industry
® 2007, Tony Gauvin, UMFK

11. 2004 Issues
How can apple best capitalize on the needs of the business world for a safer, virus-free, worm-free system?
Should Apple enter the consumer electronics business like Dell and Gateway did?
Should Apple remain a lone wolf in Operating Systems or adopt a cross-platform format compatible with Windows and Intel
How much emphasis should Apple place on developing the next generation of voice recognition computers?
® 2007, Tony Gauvin, UMFK

12. To become the global leader in computer and digital music products.
A new vision
To become the global leader in computer and digital music products.
® 2007, Tony Gauvin, UMFK

13. A New Mission
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).
® 2007, Tony Gauvin, UMFK

14. Apple’s New Mission The new mission answers the following questions
Customers: Who are the firm’s customers?
Products or services: What are the firm’s major products?
Markets: Geographically, where does the firm compete?
Technology: Is the firm technologically current?
Concern for survival, growth, and profitability: Is the firm committed to growth and financial soundness?
Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
Self-concept: What is the firm’s distinctive competence or major competitive advantage?
Concern for public image: Is the firm responsive to social, community, and environmental concerns?
Concern for employees: Are employees a valuable asset of the firm?
® 2007, Tony Gauvin, UMFK

15. External Audit (Opportunities)
Increase in worms and viruses 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.
® 2007, Tony Gauvin, UMFK

16. External Audit (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.
® 2007, Tony Gauvin, UMFK

17. Apple CPM Apple HP Dell ® 2007, Tony Gauvin, UMFK
Critical Success Factors
Weight
Rating
Weighted Score
Market Share
Price
Financial Position
Product Quality
Consumer Loyalty
Advertising
Management
Global Expansion
Innovation
Web Development
0.10
0.15
0.04
0.06
0.14
0.05 2 3 4
0.20
0.45
0.60
0.16
0.24
0.12
0.56
0.30
0.08
0.18
0.28
0.40
Total
1.00
3.28
2.71
3.06
® 2007, Tony Gauvin, UMFK

18. Apple EFE ® 2007, Tony Gauvin, UMFK Weight Rating Weighted Score
Key External Factors
Weight
Rating
Weighted
Score
Opportunities
Increase in worms and virus on PCs.
0.15 4
0.60
Large population (Gen X & Y) which are extremely individualistic and name brand conscious.
Government crackdown on pirating music off the Internet.
0.05
0.20
Much of the world is still without computers.
0.10 2
People enjoy small electronic gadgets.
0.40
Threats
Companies not seeing Apple as compatible with their software.
Dell and HP are major competitors. 3
0.30
Increasing competition with music downloads.
Competition produces similar products at often half the price.
The population at large unwilling to use Macintosh.
TOTAL
1.00
3.20
® 2007, Tony Gauvin, UMFK

19. Consolidated Balance Sheet
® 2007, Tony Gauvin, UMFK

20. Consolidated statement of operations
® 2007, Tony Gauvin, UMFK

21. Internal Audit (Strengths)
iTunes Music Store is a good source of revenue, especially with the iPod and its availability on Windows platform.
Developing own software and hardware.
Apple’s niche audience provides the company with some insulation from the direct price competition.
Revamping desktop and notebook lines.
Web technology can be used to improve product awareness and sales.
Low debt—more maneuverable.
® 2007, Tony Gauvin, UMFK

22. Internal Audit (weaknesses)
Weak relationship with Intel and Microsoft.
Weak presence globally.
Dependency on new product launches.
Weak presence in markets other than education and publishing.
Slow turnaround on high demand products.
® 2007, Tony Gauvin, UMFK

23. Apple IFE ® 2007, Tony Gauvin, UMFK Key Internal Factors Weight Rating
Weighted Score
Strengths
iTunes Music Store is a good source of revenue, especially with the iPod and the availability on Windows platform.
0.15 4
0.60
Apple’s niche audience provides the company with some insulation from the direct price competition.
0.10 3
0.30
Revamping desktop and notebook lines.
Low debt—more maneuverable.
0.06
0.24
Developing own software and hardware.
0.14
0.42
Good brand loyalty.
0.05
Web technology can be used to improve product awareness and sales.
0.40
Weaknesses
Dependency on new product launches. 1
Weak presence globally.
0.07
Slow turnaround on high demand products.
0.03 2
Weak relationship with Intel and Microsoft.
Weak presence in markets other than education and publishing.
0.04
0.08
Total
1.00
2.78
® 2007, Tony Gauvin, UMFK

24. Financial Ratio Analysis (January 2006)
Growth Rates %
Apple Computer
Industry
SP-500
Sales (Qtr vs. year ago qtr)
56.50
18.00
14.20
Net Income (YTD vs. YTD)
383.70
78.90
16.30
Net Income (Qtr vs. year ago qtr)
305.70
17.40
17.00
Sales (5-Year Annual Avg.)
12.64
5.00
4.93
Net Income (5-Year Annual Avg.) NA
10.40
Dividends (5-Year Annual Avg.)
4.27
Price Ratios
Current P/E Ratio
46.1
31.6
18.8
P/E Ratio 5-Year High
64.8
P/E Ratio 5-Year Low
17.4
Price/Sales Ratio
4.35
1.88
1.48
Price/Book Value
8.11
10.57
2.83
Price/Cash Flow Ratio
39.90
26.80
12.40
Profit Margins
Gross Margin
30.3
20.2
47.2
Pre-Tax Margin
13.0
8.5
11.9
Net Profit Margin
9.6
6.2
8.0
5-Yr Gross Margin (5-Year Avg.)
29.1
20.3
47.3
5-Yr Pre-Tax Margin (5-Year Avg.)
5.9
5.8
9.4
5-Yr Net Profit Margin (5-Year Avg.)
4.3
3.8
® 2007, Tony Gauvin, UMFK

25. Financial Ratio Analysis (January 2006)
Financial Condition
Debt/Equity Ratio
0.00
0.06
1.06
Current Ratio
3.0
1.5
1.4
Quick Ratio
2.6
1.2
0.9
Interest Coverage NA
3.5
Leverage Ratio
2.9
5.7
Book Value/Share
8.86
3.50
13.26
Investment Returns %
Return on Equity
17.9
34.6
15.3
Return on Assets
11.6
12.0
2.7
Return on Capital
32.6
7.4
Return on Equity (5-Year Avg.)
6.9
17.0
11.9
Return on Assets (5-Year Avg.)
4.4
7.1
2.0
Return on Capital (5-Year Avg.)
6.7
15.7
5.6
Management Efficiency
Income/Employee
90,000
63,000
29,000
Revenue/Employee
941,000
1 Mil
367,000
Receivable Turnover
16.7
12.2
7.7
Inventory Turnover
73.0
66.8
7.8
Asset Turnover
2.1
0.4
® 2007, Tony Gauvin, UMFK

26. Financial Trends ® 2007, Tony Gauvin, UMFK Date Avg. P/E Price/Sales
Price/Book
Net Profit Margin (%)
2005
23.5
3.21 6
9.6
2004
40.6
1.83
2.99
3.3
2003
90.1
1.22
1.8
1.1
2002
111
0.91
1.27
2001 NA
1.02
1.39
-0.7
Date
Book Value/ Share
Debt/Equity
ROE (%)
ROA (%)
Interest Coverage
2005
$8.94
17.9
11.6 NA
2004
$6.48
5.4
3.4
2003
$5.76
1.6
2002
$5.70
0.08
2001
$5.59
-0.6 N
® 2007, Tony Gauvin, UMFK

27. Apple Stock Performance
® 2007, Tony Gauvin, UMFK

28. Apple Net Worth (January 2006 in millions)
1. Stockholders’ Equity + Goodwill = 7,
$ 7,535
2. Net Income x 5 = $1,355 x 5=
$ 6,775
3. Share price = $72.00/EPS(1.56) = x Net Income $1,335 =
$ 61,610
4. Number of Shares Outstanding x Share Price = 842 x $72.00 =
$ 60,624
Method Average
$34,136
® 2007, Tony Gauvin, UMFK

29. Strategic Analysis Swot Matrix
F. SWOT Matrix
Strategic Analysis Swot Matrix
Strengths
Weaknesses
iTunes Music Store is a good source of revenue, especially with the iPod and the availability on Windows platform.
Developing own software and hardware.
Apple’s niche audience provides the company with some insulation from the direct price competition.
Revamping desktop and notebook lines.
Web technology can be used to improve product awareness and sales.
Low debt—more maneuverable.
Good brand loyalty.
Weak relationship with Intel and Microsoft.
Weak presence in business arena.
Dependency on new product launches.
Weak presence in markets other than education and publishing.
Slow turnaround on high demand products.
Opportunities
S-O Strategies
W-O Strategies
Increase in worms and viruses 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.
Increase awareness through the Web of the immunity of Mac products to worms and viruses.
(S5, O1)
Advertise using individuals that will link Generation X & Y to the iTunes and other related products. (S1, O2, O4, O5)
Use movies and music groups that are geared towards Gen X
and Y to promote computers and laptops. (S3, S5, O2, O5)
Increase ties with Microsoft and Intel and their products.(W1, W2, W4 O2, O3)
Promote to business the safety of having a worm and virus free computer by using Mac. (W2, W4, O1, O5).
Expand production into Asia (W2, O4).
Threats
S-T Strategies
W-T Strategies
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.
Increase and promote the compatibility to Windows operating system. (S5,T1)
Promote the originality of Apple computers and the different style and stable system that is worth the price difference in style, stability and speed. (S2, S5, T2, T4, T5)
Improve relationship with Microsoft and Intel so that companies will see them as compatible. (W1, W2 T1)
Produce Wintel Compatible products (W1, T1).
® 2007, Tony Gauvin, UMFK

30. Strategic Analysis Space Matrix
® 2007, Tony Gauvin, UMFK

31. Strategic Analysis Space Matrix
® 2007, Tony Gauvin, UMFK

32. Strategic Analysis Grand Strategy Matrix
® 2007, Tony Gauvin, UMFK

33. Apple IE Matrix I II III IV V VI VII VIII IX IFE Scores Domestic
Grow and Build
IFE Scores
Strong Average Weak
Hold and Maintain
Harvest or Divest I II
III IV V VI
VII
VIII IX
High
3-4
Medium
Low
1-1.99
Domestic
International
EFE Scores
Segments Revenue Profit EFE IFE
Domestic 54% 52%
International 46% 48%
® 2007, Tony Gauvin, UMFK

34. Apple BCG Matrix IV III I II Dogs Question Marks Stars Domestic
Medium
.50
High
1.0
Low
0.0
High
+20
Dogs IV
Cash Cows
III
Question Marks I
Stars II
Domestic
International
Medium
Low
-20
Segments Revenue Profit Growth Rate Relative Market Share
Domestic 54% 52%
International 46% 48%
® 2007, Tony Gauvin, UMFK

35. Matrix Analysis ® 2007, Tony Gauvin, UMFK Alternative Strategies BCG
SPACE
GRAND
COUNT
Forward Integration X 2
Backward Integration
Horizontal Integration
Market Penetration 3
Market Development
Product Development 4
Concentric Diversification
Conglomerate Diversification
Horizontal Diversification
Joint Venture 1
Retrenchment
Divestiture
Liquidation
® 2007, Tony Gauvin, UMFK

36. Expand production into Asia
Apple QSPM
Strategic Alternatives
Key Internal Factors Weight
Produce Wintel
compatible products
Expand production into Asia
Strengths AS
TAS
iTunes Music Store is a good source of revenue, especially with the iPod and the availability on Windows platform.
0.15
4.00
0.60
3.00
0.45
Apple’s niche audience provides the company with some insulation from the direct price competition.
0.10
---
Revamping desktop and notebook lines.
Low debt—more maneuverable.
0.06
1.00
0.24
Developing own software and hardware.
0.14
Good brand loyalty.
0.05
0.20
Web technology can be used to improve product awareness and sales.
0.40
0.30
Weaknesses
Dependency on new product launches.
Weak presence in business arena.
0.07
0.21
Slow turnaround on high demand products.
0.03
Weak relationship with Intel and Microsoft.
Weak presence in markets other than education and publishing.
0.04
2.00
0.28
SUBTOTAL
1.87
1.73
® 2007, Tony Gauvin, UMFK

37. Expand production into Asia
Apple QSPM
Key External Factors Weight
Produce Wintel
compatible products
Expand production into Asia
Opportunities
TAS AS
Increase in worms and virus on PCs.
0.15
1.00
3.00
0.45
Large population (Gen X & Y) which are extremely individualistic and name brand conscious.
4.00
0.60
Government crackdown on pirating music off the Internet.
0.05
0.20
Much of the world is still without computers.
0.10
0.40
People enjoy small electronic gadgets.
---
Threats
Companies not seeing Apple as compatible with their software.
2.00
Dell and HP are major competitors.
0.30
Increasing competition with music downloads.
Competition produces similar products at often half the price.
The population at large unwilling to use Macintosh.
SUBTOTAL
0.95
2.15
SUM TOTAL ATTRACTIVENESS SCORE
2.83
3.88
® 2007, Tony Gauvin, UMFK

38. Possible alternative Strategies
Market Penetration
Go after Dell, HP and Microsoft (the Wintel alliance) markets Shares
Market Development
Asia & Europe
New Product development
New consumer electronics products
Related Diversification
Peripherals
Retrenchment
Reengineer to lower cost of goods sold in reaction to commoditization pricing of PC market
® 2007, Tony Gauvin, UMFK

39. 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 Apple’s products.
Two percent increase in sales representatives for the computer hardware.
Estimated cost of $ 5 million per store = $100 Million Total.
® 2007, Tony Gauvin, UMFK

40. Recommendations Strategy 2 Strategy 3
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.
$50 million is the estimated cost for Research and Development.
While it is usually prudent to embark on just one strategy at a time, Apple cash reserves (~$8 billion) and managerial talents (Steve Jobs) makes embarking on 3 strategies at one time is not only possible but recommended.
® 2007, Tony Gauvin, UMFK

41. EPS/EBIT $ Amount Needed: $5,100 M Stock Price: $75 Tax Rate: 26%
Strategy 1 & 2
Stock Price: $75
Tax Rate: 26%
Interest Rate: 5% (2006)
# Shares Outstanding: 842M
® 2007, Tony Gauvin, UMFK

42. EPS/EBIT
® 2007, Tony Gauvin, UMFK

43. Implementation Issues
Moving production overseas
Unsettling for current workforce
MIS Integration problems
Change in culture
May damage brand (Made in USA)
Environmental outlook
New marketing strategies
Paradox of marketing to deficiencies of Wintel platform while becoming cross platform capable
Forward integration issues
Do we have the talent to become direct sellers
Cross selling competitors peripherals >> Brand Dilution?
® 2007, Tony Gauvin, UMFK

44. Proposed annual objectives (goal) and polices
Double sales revenue in 3 years
1st year 50%, 2 year 25, 3 year 25%
Write division polices stating exact gains and marketing approaches to achieve gains
Reduce unit cost of goods sold by 10% annually for next 3 years
Leverage low cost labor overseas
Introduce one new consumer product each year
Provide adequate funding to R&D
Provide funding for market research
Insure strong communication ties between marketing and R&D
Either provide functional enhancements to existing products each year or obsolesce product
Assign R&D project teams to each existing product
Have market research produce product maturity curves for existing products
Create Chief scientist position on Corporate Board to reflect the importance of R&D to Apple Computer
® 2007, Tony Gauvin, UMFK

45. Proposed procedures for evaluation
Qtr & Yearly financial reports
Track Industry & market Reponses to new product development
Balanced Scorecard
Yearly strategic meeting of division management and corporate management
® 2007, Tony Gauvin, UMFK

46. Epilogue 2006 2007 iPods add Video
Content from Disney, ABC, ESPN, SOAPnet
Stock soars by 120%
iPod morphs to
Shuffle
Nano
Goes to Intel Architecture
Sales increase by 45%
Gross margin increase by 8%
2007
iPhone
Sales predicted to increase by 35%
Gross profit margin predicted to increase by 8%
® 2007, Tony Gauvin, UMFK

47. Current Stock Performance
® 2007, Tony Gauvin, UMFK

48. Resources Case Notes Form 10-K SEC Filing, Sept. 25, 2005 Datamonitor
Forest David; Francis Marion University
Form 10-K SEC Filing, Sept. 25, 2005
Datamonitor
SWOT Apple 2004 & 2005
PCs in the United States 2005
Consumer Electronics in the United States 2005
Market Watch
Apple: Unix for the people, Unix for the masses 2005
Value line Investment survey
Apple 2007
Computer Peripherals 2007
® 2007, Tony Gauvin, UMFK

49. Questions http://seriouslygood.kdweeks.com/images/apple-question.gif
® 2007, Tony Gauvin, UMFK