Apple Computer / Steve Jobs Business Case Study

Steve Link

Case 10

Apple Computer and Steve P. Jobs


· Performance

The current performance at Apple Inc. shows a slightly higher gross margin percentage of 33.9 compared to 32.9 for the previous year. This is based on figures from the quarterly report ending March 29, 2008 and the date for the comparison figure is the previous year ending March 31, 2007.

The revenue for that same quarter was $7.51 billion with a net quarterly profit of $1.05 billion. The Macintosh computers unit showed a 51% unit growth while the IPOD unit showed a 1% unit growth. According to Steve Jobs, Apple’s CEO, “We’re delighted to report 43 percent revenue growth and the strongest March quarter revenue and earnings in Apple’s history.”

· Strategic Posture o Current Mission

“Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market with its revolutionary iPhone.”

o Current Objectives

The company’s objectives show through the plans and marketing that are currently in place.

§ Increase Macintosh presence in the areas of education and business. § Improve sales of IPOD music devices. § Introduce and market new devices and concepts such as Apple TV. § Show a pressing concern to be “green.” Apple’s environmental policy has taken quite a bit of flack in the press in the past few years. That is being worked on from multiple angles. § The main objective of any business is to make money for the shareholders so it can stay in business. o Current Strategies § One important strategy is the “principles of business conduct” statement which outlines five strategic principles – honesty, respect, confidentiality, community, and compliance. § Design, manufacture, and market computers, music players, and communication devices on a worldwide scale. § Provide innovative products and solutions to the professional, consumer, and education market to run complex applications using a high quality user interface. § Create products that connect to a wide range of digital devices with the least amount of user interaction possible. § Maintain the unique position of being the only computer industry participant who controls the design and development of the entire line of personal computer hardware and software along with this control over music players and mobile communication devices. § Increase product awareness through increased investment and marketing and advertising programs. § Utilize direct and indirect distribution channels properly staffed in order to produce a quality sales experience and after sales support. o Current Policies § Comply with federal laws enacted for the protection of the environment. § Research and adhere to individual local and state regulations regarding environmentally sound recycling and disposal methods. § Discard back orders as a method of determining any particular level of revenue or financial performance. § Accept seasonal business as an opportunity instead of an indicator of a possible trend in sales. § Use sole-sourcing for critical components from vendors in the U.S., Singapore, China, Korea, and Japan. § Continually develop innovations into all product lines to remain competitive in the markets and stay ahead of or surpass the leader in each market in which we are involved.


· Board of Directors o Eight members on Apple Inc’s board (minimum of five, no more than nine). o Board members are elected to one year terms. o If a director’s position changes through retirement of acceptance of a position other than that held when elected to the board, resignation from the board is expected to be tendered. This will give the nominating and governance committee an opportunity to consider the effects of the new responsibilities. o Diversified qualifications and experience on board. o Board members take a proactive and focused approach to ensure competent and ethical operation of Apple, Inc. o No policies in place to separate the roles of CEO and Chairman of the Board. Additionally, no policies specify whether the selected Chairman will be an external or internal member. o Three board members are also tied to Google’s board. o Only internal member of the board is Steve P. Jobs, CEO. · Top Management o Timothy D. Cook, Chief Operating Officer, formerly served as Exec VP of Worldwide Sales and Operations along with other Vice President positions held at Apple. Prior positions held were with Compaq and IBM. Mr. Cook is a member of the board of directors at Nike, Inc. o Daniel Cooperman, Senior Vice President served in the same position at Oracle since February 1997 before joining Apple in 2007. o Six other Senior Vice Presidents listed as Executive Officers of the Registrant. o Varied top management experience includes a law firm partner (Cooperman), retail merchandising (Ronald Johnson), and research engineering (Bertrand Serlet), among other computer hardware, software, and services related positions. o The average age of these officers is 47.


· Societal Environment o Opportunities § The ability to hire and retain qualified staff is a necessity in maintaining competitiveness in the marketplace. § Increasing the number of patents and copyrights awarded to representatives of the company touts the innovative attitude of Apple and its staff. § Improving sourcing procedures for the raw materials used in Apple’s products can reduce costs and assist competitiveness when those savings are passed to the customer. § Searching for and taking advantage of foreign opportunities are a large opportunity as long as the associated costs are not insurmountable. § The increasing worldwide number of computer savvy citizens provides an ever-widening base to target for advertising and new product developments. o Threats § The numerous lawsuits and other litigation in progress against Apple, Inc. seems like a distraction from the necessities of running a business. The financial outcome of the lawsuits could have a negative effect on the company’s profits. § Losing market share to competitors in today’s business world is always a consideration. Dedicating as much in resources as possible to R&D and new developments still does not guarantee success. § Inventory and other assets could become a potential threat with the volatile pricing and short lifespan of new technology. If you inventory a high volume of components or finished product it could become obsolete while sitting on the shelf. § With instability in many current foreign economies the future supply of raw materials and components produced overseas could pose a threat to continued manufacture and sales of electronics products. § The availability of digital content to be supplied by Apple services received a low threat rating due to the fact that licensing songs, videos, and other digital products provides a revenue stream to the licensor. § Another low-rate risk is occasional revenue fluctuations. This is an anticipated occurrence and it can be recuperated in the following stronger months. § Technology failures and security breaches are a serious concern. Without strong security in place a company’s network can be compromised and details of products currently in development released. These security breaches could also be caused by failure of a firewall or other detection software. § The currently volatile U.S. economy and currency are a heavy concern for businesses. If, a year ago, fifty dollars bought the same components that seventy dollars buys now; that increased cost will either have to be absorbed or passed to the customer. § The previous threat also leads into the credit risks of current accounts receivable. If businesses are failing due to their increased costs that causes defaults, write-offs, and negative income for your own company. § Microsoft and PCs have larger presence in the business market than Apple’s computer systems.


· Corporate Structure o Four geographic operating segments consisting of the Americas, Europe, Japan, and the retail sector. o Americas segment covers both North and South America. o The European segment includes the Middle East and Africa in addition to the European countries. o The retail segment, although within the country’s borders, is considered separate from other revenue streams in the country. For example, the retail sector includes Apple-owned stores whether they are in Tupelo, Mississippi or Milan, Italy. o In 2007 the retail segment was revamped to fall more in line with the other operating segments. o Two additional segments include Asia Pacific and FileMaker operations. · Corporate Culture o “Apple conducts business ethically, honestly, and in full compliance with all laws and regulations.” o The approach is to encourage good judgment on the part of every company representative. o Managers, HR representatives, and legal department representatives are available to answer any questions that may come up. o “Apple’s business conduct policy and principles apply to employees, independent contractors, consultants, and others who do business with Apple. All such individuals are expected to comply with Apple’s business conduct policy and principles and with all applicable legal requirements. ” o Customers are the focus in every product and service made available at Apple, Inc. o Policy against awarding or receiving large gifts which could be perceived as bribery. Corporate Resources o Marketing Strengths § Large scale and effective advertising campaigns. § Environmental awareness is a part of the product design and manufacturing of Apple’s products. Energy efficiency while using the products and recycling after a product has reached the end of its useful life round out the company’s environmentally sound product cycle. § Well known and highly regarded for innovative products such as iPhone, IPOD, Macintosh, and a plethora of other products. § Compare reliability of Apple’s computer operating system to its toughest competitor – Microsoft’s Windows versions. § Beat out Dell as preferred laptop in higher education as of early 2008. o Marketing Weaknesses

§ Lower overall sales volume in computer market compared to Dell and other competitors. § Because of close-knit mentality of their development approach, there are fewer hardware and software components in the marketplace to choose from versus the PC-based architecture. § Hard to overcome the “I am a PC guy” mentality. This type of person will not even look at a Macintosh because the user interface is so different from Windows and many files cannot easily be moved from one platform to the other. § Price point of IPOD is high compared to other media players. § IPHONE is a relatively new entry in the cell phone market. o Finance § Net income has increased over 6000% when comparing 2007 to 2003 figures. § Steadily climbing stock price indicates financial strength – $19 in 2005 up to $155 in 2007 and $178 as of June 2008. § Regularly increasing earnings per share is an additional strength indicator. § No long term debt since 2003. § 5 year average return on equity of 17.4%. § Payables period has increased over last ten years. o Research and Development § Continually increasing budget for research and development. § Increasing R&D personnel. § “Although total R&D expense increased 49 percent, it remained relatively flat as a percentage of net sales given the 43 percent and 38 percent increases in revenue in the second quarter and first six months of 2008 compared to the same periods in 2007.” § Apple spends the least as a percentage of revenue out of the heaviest corporate R&D investors. § Apple has realized a good return on the capital invested in R&D in recent years. o Operations § Excellent support network including online, email, and phone. § Market wide reputation for quality service of their products. § Worldwide corporate-owned retail stores sell Apple’s complete product offering. § Steve Jobs’ health has been called into question – he has battled cancer previously. § It is unknown if there is a solid CEO succession plan in case of Jobs’ inability to perform his duties. Given the failed years of 1985 – 1997 under various professional managers a succession plan is eagerly hoped for.


Increased opportunities abroad Qualified staff hiring and retention Effective advertising campaigns Increasing financial performance No long term debt Numerous lawsuits and litigation Volatility of foreign suppliers and economies Credit risks of accounts receivable Higher comparison price point of Apple products Current CEO health and succession plan for CEO


Lawsuits and Litigation – A Sleeping Giant? o The numerous lawsuits in progress are one of the biggest concerns at the forefront of this case. These could put an end to the numerous successes of this company. The possible financial negative effect combined with potential negative publicity and public opinion could erode the basis for all companies – sales and profits. A downward spiral begins here and leads to lowered investor confidence, lower stock prices, and could result in a company that is struggling to survive. Leadership Of The Company o A second potential source of problems within Apple would seem to be the health concerns of Steve Jobs, their CEO, and the apparent lack of a well-planned “heir to the throne.” After the failed stint of professional managers during the 1985 – 1997 years, investors have a concern that the company could falter once more should Steve Jobs be unable to perform his duties as CEO. Since forecasting is based on historical facts, this is a truly valid concern in the absence of a known succession plan. Economic, Supplier, and Accounts Receivable Concerns o The only other major concern that I have involves all businesses worldwide – economy. Since Apple is an international company, they have to be concerned about and deal with businesses in an economic environment that is much more fragile than our own. Rising costs coupled with a weakening dollar are our main economic concerns while some other businesses and citizens have to deal with triple digit inflation and other destabilizing effects. As the saying goes, “things are bad all over.” This is true from a worldwide economic standpoint. The affect that worldwide economic concern has on raw materials and suppliers is easy to spot. A second, somewhat subtle affect, is on collecting debts that are due. Bad economic conditions have an effect on consumers and businesses paying the bills. Widespread defaults on debt tend to have a snowball effect.

The Future Of Apple, Inc. o Apple has the R&D funding in place to put new innovations in the marketplace for many years. Following the history of focusing on research and Development new, innovative products will continue to be introduced well beyond that. They also have the opportunity to expand into foreign markets and increase sales tremendously. This increase will be helped by ad campaigns such as the current Macintosh series of ads that tout the Mac operating system’s reliability over Windows Vista’s erratic behavior. Additionally, the unique product offerings in personal music players, communications, iTunes store, and other areas provide a reliable, constant revenue stream. o Now for the rest of the story. Apple is a financially strong company. The combination of the historically increasing financial performance with zero debt load should help to combat any negatives from two of the previously mentioned concerns. As long as Apple is able to continue the current course of growth and development, I believe the strength will remain. Whenever Steve Jobs steps down as CEO the steady course can continue with an appropriately groomed successor in line. If Apple were placed back in the hands of professional managers who do not understand and adhere to the unique methodology that has led to its many successes, history may repeat itself and we could see another decline for Apple Inc.

Exhibit 1

EFAS (External Factor Analysis Summary) External Strategic Factors Weight Rating Weighted Score Comments Opportunities Obtain and retain qualified technical staff .15 5 .75 Req’d for competitiveness Increase in number of patents and copyrights .10 5 .50 Stay ahead in technology Improved sourcing methodologies for raw materials .08 3 .24 Increase availability, decrease cost Increased opportunities abroad .13 4 .52 Search for new opportunities Threats Numerous lawsuits and other litigation .10 4 .40 These could endanger profits Possible loss of competitiveness in markets .06 2 .12 This concern is always present in any corporation Volatility of foreign suppliers and economies .11 4 .44 Another looming presence in most high tech industries Availability of third-party digital content .03 2 .06 I don’t consider this a big prob Technology failures and data security breaches .04 2 .08 Another concern for most high tech industries Volatility of the US economy and strength of dollar .10 3 .30 Both of these are a concern due to the current US economic problems coupled with high transportation costs Credit risks of accounts receivable .10 3 .30 Total Scores 1.00 3.71

Exhibit 2

IFAS (Internal Factor Analysis Summary)

Internal Strategic Factors Weight Rating Weighted Score Comments Strengths Large scale and effective advertising campaigns .20 5 1.00 Excellent, memorable campaigns Diversified and innovative product line .18 5 .90 High tech items draw consumer attention and purchases Steadily increasing financial figures .10 3 .30 Excellent indicators of a strong company No long term debt .10 5 .50 Increasing research and development budget .07 5 .35 Commitment to improving product line and new products Weaknesses Behind Dell and other PC manufacturers in overall computer sales .06 3 .18 Lagging comparative sales in computer area High price point of IPOD / iPhone .06 3 .18 Barrier to purchase by younger consumers Increase in payables period .03 2 .06 Not a huge concern Steve Jobs’ health / CEO succession plan .20 4 .80 Considering the previous performance of professional managers this is a large concern Total Scores 1.00 4.27

Exhibit 3

SFAS (Strategic Factor Analysis Summary)

Key Strategic Factors Weight Rating Weighted Score Comments Increased opportunities in foreign markets .10 5 .50 Opportunity to expand sales Hiring and retention of qualified staff .06 4 .24 Necessary to provide quality sales and support Effective advertising campaigns .16 5 .80 Necessary to expand sales and move into new areas Increasing financial performance .12 4 .48 Financial strength promotes confidence for investors No long term debt .12 4 .48 Shows strength and probable longevity of company Numerous lawsuits and litigation .10 4 .40 Acts as a detractor from focus on company performance Volatility of foreign suppliers and economies .08 3 .24 Always present and a looming concern Credit risks of accounts receivable .08 3 .24 As worldwide economies worsen, this becomes more of a concern Higher price point of products .06 2 .12 Negative in appealing to younger, less funded, consumers Current CEO health / succession plan .12 4 .48 Cyclical, can be anticipated Total Scores 1.00 3.98

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