APPLE Strategic Management

Central Washington University Management 489: Kayla Horning, Mary Orthmann, Brady Rusch and Carolyn Vining

Abstract Identifying Apple’s Critical Problem, Analyzing and Evaluating

Business Practices and Implementing an Action Plan

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MGT489 Team # _1_ Assignment #3 – [Apple] Due Tuesday, 03-04-14

Members: Carolyn Vining, Kayla Horning, Mary Orthmann, Brady Rusch

1. Apple’s critical problems

Apple’s main critical problem is competitors underselling Apple while introducing new technologies before Apple. This involves substitute products and easy entry for new competitors into the same market. Apple’s reputation is being a first acting and fast acting company but other companies are outdoing Apple and it shows with their falling market share and revenues. This problem can be seen within each of its three main product divisions: Mac desktops, Apple software like iTunes, and mobile devices like iPhone and iPod. This problem should be addressed overall, but we also need to focus divisionally due to differing products and overall plans for those products. Also, we see more drastic differences in actual decline between divisions. Lastly, the markets for each division differ slightly in their environmental factors based on customer patterns, trends and industrial factors.

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2. External analysis

Table 1 Opportunities Threats Rationale

Factors General Environment Analysis

Demographic

Interactive customer experiences x

Apple believes in creating a retail environment where customers can be educated rather than just sold to

Customer Centricism x

Apple is customer centric allowing for testing before purchase decisions are made, customers have begun to demand this

Cannibalization of own products

x Because of the fast paced nature of Apple's updates, it is very possible to cannibalize existing products

Sociocultural

Celebrates Diversity x

Apple appeals to a wide variety of cultural backgrounds more effectively than competitors

Physical Environment

Plugged in Way of Life x

Customers are adapting a plugged in lifestyle always looking for convenient computing sources

Technological

Staying Relevant

x Apple's products are fast acting and set technological trends but as of lately they are being undercut

Increasing Technology in Schools x

There are many opportunities with schools to provide their technology and kick start education

The iTunes Store generated a total of $9.3 billion in net sales during 2013, a 24% increase from 2012 x

Apple can ride this increase in sales to push for a continuing increase in the following year

cloud music services x

Apple's cloud music services provide an easy way to access music from any source

Economic

Profit margins affected greatly by fluctuations in price of components

x

Apple holds a higher price point with their technology which can affect their profits if customers look for low price provider

Business Seasonality

x Depending on the seasons, business can spike up or down for specific products

Poor economic conditions affect demand of the products

x

Poor economic conditions shrink customer disposable income so Apple products are left out of decisions

Global

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Strongest growth in Asian markets x

Globalization success shows continual success in other avenues if decided to venture into

International net sales accounted for 61% of total net sales x

Globalization is effective and can continue to contribute significantly to ROI

Political/Legal

Product Introductions x x

Product introductions bring a spike in sales and new customers, legal considerations must be studied as well as patent infringement is frequently sued for

92 patent lawsuits against Apple in the last 3 years

x This contributes to high legal costs and takes away from profits

Industry Analysis

Substitute Products

PC to other sources for computing x

Personal computers are being cannibalized by tablets and other sources

Differentiation beyond products

x Apple has specific product categories that they don't differentiate beyond and competitors are undercutting them in these categories

Short Trends/Constantly Changing Tech x x Technology is constantly changing and Apple must always update to stay ahead

Unique Product Design

x Apple's product set the standard but isn't competing as significantly anymore

OS nominal share in market

x People avoid Mac OS because it is a lot harder to create documents and use on non Mac products

Windows Media Player gaining on iTunes

x

Windows Media player is permanently on all PC's so iTunes must be downloaded

Subscription Music Services

x Subscription music services have become a substitute for iTunes

Significant pressure from other digital content providers who give away their product for free

x

Customers have the option to get the products for free so Apple has pressures to stick to their guns or try to do the same

Potential Entrants Easy Entry for New Competitors

x Many competitors look to provide lower price

R&D Costs High to Stay Ahead

x Any technology firm must spend money to stay on top of changes

Invest in programs to enhance resellers selling opportunities x

Apple has its own retail stores but also must provide programs for third party providers

Suppliers

Components obtained from limited or single sources

x High quality resources are not easy to find and cost more to provide

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Components from foreign suppliers affected by foreign currency exchange rates and trade regulations

x

Globalization has its benefits but purchasing lower priced resources is harder when currency exchange is involved

Purchase agreements cover 150 days

x The purchase agreements only cover a short time period

Rivalry Among Competing Firms

Dell sales declined by 7.5 percent for the quarter x

Apple has had an increase so this is an easy opportunity to capitalize on

Fluctuations in costs and availability for patents and other intellectual property

x

Apple has had many legal struggles protecting its patents while many competitors look to copy them with a lower price

Decline in Mac market reflects an overall decline in personal computer sales

x

This becomes an internal symptom based on the industry drop in personal computer sales

Software compatibility

x Microsoft has much higher compatibility and the Mac OS is only compatible with Apple products

Dell drives down costs effectively

x Apple has trouble competing to be a low cost provider because their products are quality for higher price

Buyers

Integration of Apple products in the education and medical fields x

This present large opportunities because if Apple can provide their computing services to firms it will increase sales

Competitor Analysis

Samsung and Google Google higher EPS

x Google may be giving more return to and pleasing their stakeholders

Samsung Watch Product Introduction

x This is one of the first times Samsung beat Apple to a product introduction

Samsung Increasing Market Share

x

Samsung has increased their market share by introducing their own products undercutting Apple

Google Cloud Computing

x

Google is constantly updating and using their internet market share to enhance customer experience

Google Glass Introduction

x

Google introduced glasses that will revolutionize the technology that Apple seeks to produce

Android OS Growth

x

Google phone, the Android, has become more effective and the operating system is growing

Google has Open Source Software and Services

x Google's wide variety of sources and software is much more than that of Apple

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EFE Mobile Devices Opportunities Weights Rating Score

Growth of tablet and smartphone markets 0.06 4 0.24

Runs on its own operating system (IOS) 0.03 3 0.09

Growing Globalization 0.05 4 0.2

Increasing Presence in schools, universities, hospitals, etc. 0.04 4 0.16

Maintain Relationships with cellular providers 0.03 2 0.06

Obtaining patents through acquisitions 0.02 2 0.04

Runs on its own Cloud 0.04 4 0.16

Threats Rapid technology change 0.15 3 0.45

Problems with Outsourcing work to other countries 0.10 2 0.20

Less control over product, sold by multiple vendors 0.12 2 0.24

Android (Google) OS growth 0.09 1 0.09

Competitor's comparison advertising 0.08 2 0.16

Patent Lawsuits against Apple 0.07 1 0.07

Very Similar products being produced by competitors 0.02 2 0.04

More Expensive Product than Competitors 0.06 1 0.06

Easy for Potential New Entrants 0.04 3 0.12

1.00

2.38

Desktops (Mac) Opportunities Weights Rating Score

Increasing Presence in schools, universities, hospitals, etc. 0.04 3 0.12

Plugged in way of life 0.06 2 0.12

Touch-screen popularity 0.09 1 0.09

Customer centricism 0.03 2 0.06

Product Introductions 0.05 3 0.15

Businesses preferring desktops 0.1 3 0.3

Unique product design 0.07 2 0.14

Dell sales declined by 7.5 percent for the quarter 0.08 3 0.24

Threats Poor economic conditions affect demand of the products 0.04 1 0.04

Popularity of tablets rising 0.09 1 0.09

Non-portability of desktops 0.05 1 0.05

"Smaller is better" way of thinking 0.03 2 0.06

Short Trends/Constantly Changing Tech 0.06 3 0.18 Components from foreign suppliers affected by foreign currency exchange rates and trade regulations 0.04 2 0.08

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Decline in Mac market reflects an overall decline in personal computer sales 0.1 2 0.2

Dell drives down costs effectively 0.07 1 0.07

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1.99

Software (iTunes) Opportunities Weights Rating Score

Cloud music services 0.05 4 0.2 The iTunes Store generated a total of $9.3 billion in net sales during 2013, a 24% increase from 2012 0.1 4 0.4

Staying Relevant 0.09 3 0.27

Invest in programs to enhance resellers selling opportunities 0.05 2 0.1

Digital album downloads popularity 0.08 3 0.24

iTunes gift cards 0.11 4 0.44

iTunes exclusives 0.06 4 0.24

Threats Software compatibility 0.07 2 0.14

OS nominal share in market 0.1 1 0.1

Windows Media Player gaining on iTunes 0.06 2 0.12

Subscription Music Services 0.05 2 0.1

Fee Based Support Services 0.05 2 0.1 Significant pressure from other digital content providers who give away their product for free 0.07 1 0.07

Illegal music download sites 0.06 1 0.06

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2.58

For the EFE matrix, we compared Apple’s 3 main divisions: mobile devices, desktops (Mac), and software (iTunes). Two of the divisions received below average total weighted scores. These two divisions were mobile devices with a score of 2.38 and desktops (Mac) with a score of 1.99. A score of 2.5 is about average, so anything below that is not responding well to the threats they have encountered, and similarly are not capitalizing on the opportunities they have. Mobile Devices score of 2.38 and Desktops score of 1.99 clearly shows that both of these divisions are doing quite poorly according to their respective total weighted scores under the mark of 2.5. However, despite two of Apple’s divisions scoring poorly in the EFE, Apple’s third division, software (iTunes), received an EFE score of 2.58, slightly above the average. Although, it is in fact above average, it barely made the mark and Apple will need to focus on raising its Software performance as well.

CPM

Apple Samsung Google

Critical Success Factors Weight Rating Weighted Score

Rating Weighted Score

Rating Weighted Score

Advertising .07 2 0.14 4 0.28 3 0.21

Market Share .08 4 0.32 3 0.24 2 0.16

Financial Position .06 4 0.24 3 0.18 2 0.12

Product Reliability .12 4 0.48 2 0.24 3 0.36

Consumer Loyalty .08 4 0.32 3 0.24 2 0.16

Customer Service .13 4 0.52 2 0.26 3 0.39

E-Commerce .05 3 0.15 2 0.10 4 0.20

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Global Expansion .08 3 0.24 4 0.32 2 0.16

Price Competitiveness .02 1 0.02 4 0.08 3 0.06

Research & Development .14 4 0.56 2 0.28 3 0.42

Supplier Relations .10 1 0.10 3 0.30 2 0.20

Patent Availability .07 2 0.14 4 0.28 3 0.21

Total 1.00 3.23 2.80 2.65

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3. Internal analysis

Table 2 Internal Factors Strengths Weaknesses Rationale

Management First Mover Company x

They are always setting the standard and have built a reputation for doing so

Functional Structure x

This allows for open lines of communication and easy flow between departments

Goals are current and well defined x

Apple understands why they exist and what their goals are in regards to their short and long term business

Finance/Accounting Revenue Increase of 52 percent x

Positive diagnosis of company's actions

Net Income Increase of 70 percent x

Even with costs, company is seeing an increase in their actual profits.

Direct Channels (30%) and Indirect Channels (70%) of Net Sales x

Decent Spread through both channels classifying them as effective

Earnings per share decrease by 10.33%

x This affects stockholder confidence and actual investments if they are getting the return they desire

Poor financial performance during downtime

x When Apple is stagnant in their innovation, the financial condition they are in is low

Profit margins higher than competing firms x

In the end Apple has a higher profit they can pull in when all other factors are supporting them

Marketing

Direct Contact Selling x

Personable customer interactions help customers make the best educated decision and feel cared for

Willing to pay more for sales personnel to promote a knowledgeable staff x

This is a good investment as we can see in increases in sales

Decrease in sales when new products are not launched

x

Apple always runs the risk of not launching a product due to different factors which will break a certain trust in customers

Placement of company stores in high traffic locations x

Placement of stores is vital to appeal to the right customers at the right times

Management Information Systems

iWork vs. Microsoft Office

x Microsoft Office has a higher market share

Dependence upon third party software providers

x This is always a risk because you have to be held by their effectiveness and if they fail, you fail

Research and Development

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Invest 3% of sales (4.5 billion) back into research and development x

R&D makes it possible to be innovative and fast acting

Prices Being Undercut

x Many competitors look to undercut Apple by providing lowest prices

Component Availability

x There are only specific ways to gain components for their products

Products Include Intellectual Property from Third Parties

x This can lead to legal issues when products are successful with other parties

Production and Operations

Cannibalization

x To keep up with changing trends, Apple introduces new products which cannibalizes their old ones

Designs and develops its own operating systems, hardware, application software, and services x

There will be no patent infringement with third parties because it is all designed internally

Focus on of third-party digital content and applications through the iTunes Store x

This allows for third party involvement to push their products, add variety and still bring revenue to Apple

Supports third-party software and hardware products and digital content that complement products x

Having support for your software helps customers get a full experience beyond the purchase

Financial condition dependent on ability to develop new products and services rapidly

x

This is a diagnosis but if there is a period of downtime, Apple can find themselves in poor financial condition

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VCA Analysis

Department: Management

Checklist Items: Functional department structure

Goals are current and well defined

Premier "first mover" company in any industry

Strategically placed store locations

Department: Marketing

Checklist Items: Loyal customer base

Premier "first mover" company in any industry

Apple brand well established

Direct Contact Selling

Strong marketing and advertising teams

Department: Finance/Accounting

Checklist Items: Revenue Increase of 52 percent

Net Income Increase of 70 percent

Direct Channels (30%) and Indirect Channels (70%) of Net Sales

Earnings per share decrease by 10.33%

Decreasing market share

Department: Production/Operations

Checklist Items: Knowledgeable sales staff

Cannibalization of own products

3rd party software providers

Designs and develops its own operating systems, hardware, application software, and services

Department: Research and Development

Checklist Items: Apple has a strong R&D department (receives 3% of sales)

Apple iTunes store (3rd party content)

Competitors undercutting prices

Availability of components

Defects of new products

Department: Management Information Systems

Checklist Items: IOS operating system has smaller market share compared to competing operating systems

Cloud music system

Data is updated regularly (real-time information)

Dependence upon third party software providers

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IFE Matrix Mobile Devices

Key Internal Factors Weight Rating Weighted Score

Strengths

Premier "first mover" company in any industry 0.04 3 0.12

Functional department structure 0.03 3 0.09

Increase in revenues (52%) and net income (70%) 0.08 4 0.32

Apple brand well established 0.1 4 0.4

Apple has a strong R&D department (receives 3% of sales) 0.08 3 0.24

Apple iTunes store (3rd party content) 0.05 3 0.15

Strategically placed store locations 0.06 4 0.24

Designs and develops its own operating systems, hardware, application software, and services 0.08 4 0.32

Weaknesses

Cannibalization of own products 0.03 2 0.06

Earnings per share decrease by 10.33% 0.07 1 0.07

Decreasing market share 0.08 1 0.08

IOS operating system has smaller market share compared to competing operating systems 0.08 1 0.08

3rd party software providers 0.05 2 0.1

Competitors undercutting prices 0.04 1 0.04

Availability of components 0.07 1 0.07

Defects of new products 0.06 2 0.12

1 2.5

Desktops (Mac)

Key Internal Factors Weight Rating Weighted Score

Strengths

Each product designed similarly 0.05 3 0.15

Computer built into monitor 0.08 4 0.32

Large screen options 0.07 3 0.21

Easy to transport 0.04 3 0.12

$21.5 million in revenue 0.08 3 0.24

Unique Apple programs 0.06 4 0.24

Designs and develops its own operating systems, hardware, application software, and services 0.1 4 0.4

Weaknesses

iWork vs. Microsoft Office 0.1 1 0.1

Component Availability 0.06 2 0.12

Products Include Intellectual Property from Third Parties 0.08 2 0.16

Dependence upon third party software providers 0.08 2 0.16

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Negative profits 0.11 1 0.11

(5%) Industry Growth Rate 0.06 1 0.06

Irrelevance of Desktops 0.03 2 0.06

1 2.45

Software (iTunes)

Key Internal Factors Weight Rating Weighted Score

Strengths

Focus on of third-party digital content and applications through the iTunes Store 0.05 3 0.15

Supports third-party software and hardware products and digital content that complement products 0.06 3 0.18

iTunes wide variety of selection 0.07 4 0.28

Design of iTunes store 0.05 3 0.15

Ease of use 0.07 3 0.21

Positive profits 0.1 3 0.3

High relative market share 0.1 4 0.4

Weaknesses

Products Include Intellectual Property from Third Parties 0.06 1 0.06

Dependence upon third party software providers 0.08 1 0.08

Constant updates 0.04 2 0.08

Requires desktop installment 0.05 2 0.1

Compatibility with non-Apple products 0.1 1 0.1

Increasing fees for products (from $0.99/song to $1.29) 0.08 2 0.16

9% revenues 0.09 1 0.09

1 2.34

For the IFE, we also compared the three divisions. The division that received the highest IFE score was the mobile division, with a score of 2.5. Following the mobile division was the desktop (Mac) division, with a score of 2.45. Finally, the software (iTunes) division received an IFE total weighted score of 2.34.

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4. Feasible alternative strategies

SWOT Matrix Strengths Weaknesses

Increase in revenues (52%) and net income (70%) Cannibalization of own products

Apple brand well established Earnings per share decrease by 10.33%

Apple has a strong R&D department (receives 3% of sales) Decreasing market share

Apple iTunes store (3rd party content) IOS operating system has smaller market share compared to competing operating systems

Strategically placed store locations Competitors undercutting prices

Designs and develops its own operating systems, hardware, application software, and services

Availability of components

Opportunities SO Strategies WO Strategies

Growth of tablet and smartphone markets 1. Utilize strong brand recognition to increase presence in global markets.

1. Increase market share by leasing out cloud space.

Runs on its own operating system (IOS) 2. Increase amount of funds that are channeled towards R&D department to focus on establishing new and innovative mobile devices and software.

2. Grow market share in specific industries to become premier software provider.

Growing Globalization 3. Develop new operating systems that are specific to certain industries (schools, universities, hospitals, etc.)

3. Implement backward integration.

iTunes Store Growth in 2013 of 24%

Increasing Presence in schools, universities, hospitals, etc.

Maintain Relationships with partners (cellular providers, suppliers, etc.)

Obtaining patents through acquisitions

Runs on its own Cloud

Threats ST Strategies WT Strategies

Rapid technology change 1. Direct increased profits towards manufacturing in the United States (insourcing).

1. Use excess profits to fund strong defense against any potential patent lawsuits.

Problems with Outsourcing work to other countries

2. Focus on increasing customer retention by developing a loyalty program.

2. Develop specific time frame for restructuring of existing products and introduction of new products.

Less control over product, sold by multiple vendors

3. Increasing Apple store locations. 3. Highlight value of products and services compared to competitor's similar products and services.

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Android (Google) OS growth

Competitor's comparison advertising

Patent Lawsuits against Apple

Very Similar products being produced by competitors

More Expensive Product than Competitors

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SPACE Matrix

Internal Analysis External Analysis

Financial Position (FP)

Stability Position (SP) Net Profit Margin 7 Technological Changes -4

Return on Equity 5 Competitive Pressures -7

Earnings Per Share 5 Barriers to Entry into Market -3

Debt to Equity Ratio 5 Price Elasticity of Demand -2

Revenues 7 Patent Restrictions -6

Financial Position (FP) Average 5.8 Stability Position (SP) Average -4.4

Internal Analysis External Analysis

Competitive Position (CP)

Industry Position (IP) Market Share -6 Financial Stability 7

Customer Loyalty -1 International Growth Potential 7

Product Quality -3 Ease of Entry into Market 2

Control over Suppliers/Distributors -4 Profit Potential 6

Product Diversification -3 Resource Utilization 3

Competitive Position (CP) Average -3.4 Industry Position (IP) Average 5

1.6 x-axis CP + IP

1.4 y-axis FP + SP

-5

-4

-3

-2

-1

0

1

2

3

4

5

-5 -4 -3 -2 -1 0 1 2 3 4 5

Conservative Aggressive Competitive Defensive

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BCG Matrix

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The BCG Matrix gives a look into the cash flows into our specific divisions, which we are

analyzing. Based on the sales growth and relative market share of each product division, we can categorize it and recommend strategies to help improve its position. Mobile Devices and Software are the strongest divisions as of now both with high industry growth rates and market shares. This classifies them as Stars. To put them in the scope of our critical problem, we would need to look at product development or market penetration to effectively uphold our competitive advantage which has been dwindling due to easy market entry and competitor product offerings. Apple needs to reclaim the fast acting status they developed and give consumers products that they cannot deny as being the best value and highest technology available. They need to define the newest innovation not try to keep up with it. Their Desktops (Mac) division has a low market share and negative industry sales growth rate. We can attribute that to all of their other innovations in mobile and software. Unfortunately, we believe there is some cannibalization of Mac sales due to the consumer shift to mobile computing. This position classifies the division as a Dog. The strategies associated with this category are retrenchment, divestiture, and liquidation. We don’t think we need to consider selling off parts or all of this division because it still has potential to be profitable and innovative. Looking at retrenching, Apple would want to consider which parts of the division still produce the highest potential and focus their attention to developing those products. There are many opportunities in schools and other professional environments where desktops are very much a part of their everyday functions. Apple should look into investing in providing all desktop and software needs for these schools, firms, etc. to help boost usage and in turn boost profits.

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IE Matrix

The IE matrix compares the IFE scores and the EFE scores for each division. Both the mobile device and software (iTunes) divisions were placed in quadrant V, which falls into the hold and maintain category. Market penetration and product development are strategies that should be considered for divisions that fall into the hold and maintain category. The third division, desktops (Mac), scored in the VII quadrant, which is in the harvest or divest category. Typical strategies that are implemented in this category include retrenchment and divestiture activites.

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5. Relative attractiveness of the alternative strategies

QSPM

Strategic Alternatives

1

2

Increase amount of funds that are channeled towards R&D department to focus on establishing new and innovative mobile devices and software.

Focus on increasing customer retention by developing a loyalty program.

Key Factors Weight AS TAS AS TAS

Opportunities Growth of tablet and smartphone markets 0.06 4 0.24 3 0.18

Runs on its own operating system (IOS) 0.03 3 0.09 1 0.03

Growing Globalization 0.05 4 0.2 4 0.2

iTunes Store Growth in 2013 of 24% 0.06 - - - -

Increasing Presence in schools, universities, hospitals, etc. 0.04 4 0.16 4 0.16 Maintain Relationships with cellular providers 0.01 2 0.02 3 0.03

Obtaining patents through acquisitions 0.02 4 0.08 1 0.02

Runs on its own Cloud 0.01 -

Threats Rapid technology change 0.15 4 0.6 4 0.6

Problems with Outsourcing work to other countries 0.10 - - - -

Less control over product, sold by multiple vendors 0.12 - - - -

Android (Google) OS growth 0.09 3 0.27 4 0.36

Competitor's comparison advertising 0.08 - - - -

Patent Lawsuits against Apple 0.07 3 0.21 1 0.07

Very Similar products being produced by competitors 0.02 4 0.08 4 0.08

More Expensive Product than Competitors 0.06 4 0.24 4 0.24

Easy for Potential New Entrants 0.03 - - -

Strengths Premier "first mover" company in any

industry 0.04 3 0.12 3 0.12

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Functional department structure 0.03 1 0.03 1 0.03

Increase in revenues (52%) and net income (70%) 0.08 4 0.32 3 0.24

Apple brand well established 0.1 4 0.4 4 0.4

Apple has a strong R&D department (receives 3% of sales) 0.08 4 0.32 3 0.24

Apple iTunes store (3rd party content) 0.05 - - - -

Strategically placed store locations 0.06 1 0.06 4 0.24

Designs and develops its own operating systems, hardware, application software, and services 0.08 4 0.32 4 0.32

Weaknesses Cannibalization of own products 0.03 1 0.03 2 0.06

Earnings per share decrease by 10.33% 0.07 2 0.14 3 0.21

Decreasing market share 0.08 3 0.24 3 0.24

IOS has smaller market share compared to competing operating systems 0.08 2 0.16 3 0.24

3rd party software providers 0.05 - - - -

Competitors undercutting prices 0.04 1 0.04 3 0.12

Availability of components 0.07 3 0.21 1 0.07

Defects of new products 0.06 4 0.24 4 0.24

Total 2.00

4.82

4.74

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6. Implementation of the most attractive alternative strategy

We chose to pursue strategy 1 based on its higher total attractiveness score of 4.82. Strategy 1 includes increasing the amount of funds that are channeled towards the Resource and Development department to focus on establishing new and innovative mobile devices and software. Apple’s R&D department will play a significant role in successfully implementing this strategy. Their main task will be to design effective and cutting-edge mobile devices and software. To do this, the R&D department will receive an increased budget; a total of 6% of Apple’s total sales, instead of 3%. The goal of the R&D department and Apple as a company will be to efficiently utilize this increased budget to design the newest and most innovative technological products. Apple already has a well-established brand and products that they can improve upon. Although they were the premier “first mover” company in the industry, Apple’s competition is increasing significantly by developing and releasing innovative products. An example of this includes Samsung’s new product, the Galaxy Gear smart watch. While developing these new and innovative products, or improving the existing products, it is very crucial to Apple’s investors that the R&D department keeps their plans classified. Any leak could lead to competitors learning of their new products, and developing cheaper substitute products to compete against Apple’s on the market. Implementing this strategy and raising the Research and Development budget from 3% of sales to 6% of sales could potentially cause Apple’s total sales to increase by 15% in 2014 and 25% in 2015.

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7. An anticipation of the outcomes of the strategy you have suggested

Projected Income Statement (in Millions) Prior Year 2013 Projected Year 2014 Projected Year 2015

Net Sales 170,910$ 196,547$ 245,683$

Cost of Sales 106,606$ 122,597$ 153,246$

Gross Margin 64,304$ 73,950$ 92,437$

Operating Expenses

Research and Development 4,475$ 11,793$ 14,741$

Selling, General and Administrative 10,830$ 12,455$ 15,568$

Total Operating Expenses 15,305$ 24,247$ 30,309$

Operating Income 48,999$ 49,702$ 62,128$

Other Income/(expense); net 1,156$ 1,329$ 1,662$

Income before Provision for Income Tax 50,155$ 51,032$ 63,790$

Provision for Income Tax 13,118$ 13,347$ 16,684$

Net Income 37,037$ 37,684$ 47,106$

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Projected Balance Sheet (in Millions) Prior Year 2013 Projected Year 2014 Projected Year 2015

ASSETS

Current Assets:

Cash and cash equivalents 14,259$ 16,398$ 20,497$

Short-term Marketable Securities 26,287$ 30,230$ 37,788$

Accounts Receivable 13,102$ 15,067$ 18,834$

Inventories 1,764$ 2,029$ 2,536$

Deferred Tax Assets 3,453$ 3,971$ 4,964$

Vendor Non-trade Receivables 7,539$ 8,670$ 10,837$

Other Current Assets 6,882$ 7,914$ 9,893$

Total Current Assets 73,286$ 84,279$ 105,349$

Long-term Marketable Securities 106,215$ 122,147$ 152,684.05$

Property, Plant and Equipment, net 16,597$ 19,087$ 23,858.17$

Goodwill 1,577$ 1,814$ 2,266.95$

Acquired Intangible Assets, net 4,179$ 4,806$ 6,007.31$

Other Assets 5,146$ 5,918$ 7,397.37$

Total Assets 207,000$ 238,050$ 297,563$

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Accounts Payable 22,367$ 25,722$ 32,152.61$

Accrued Expense 13,856$ 15,934$ 19,918.03$

Deferred Revenue 7,435$ 8,550$ 10,687.83$

Total Current Liabilities 43,658$ 50,207$ 62,758$

Deferred Revenue - Non-Current 2,625$ 3,427$ 4,772$

Long-Term Debt 16,960$ 17,200$ 17,440$

Other Non-Current Liabilities 20,208$ 25,135$ 34,991$

Total Liabilities 83,451$ 95,969$ 119,961$

Commitments and Contingencies

Shareholders' Equity:

Common Stock 19,764$ 25,874$ 33,430$

Retained Earnings 104,256$ 135,838$ 175,508$

Accumulated Other Comprehensive

Income/(Loss) (471)$ (479)$ (599)$

Total Shareholders' Equity 123,549$ 161,233$ 208,339$

Total Liabilities and Shareholders' Equity 207,000$ 238,050$ 297,563$

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Comparative Ratios for Apple

% Change in Revenue

2013-2012 9.20% 19.79% 19.23% -6.70% 5.44%

2012-2011 44.58% 11.43% 32.37% -5.41% 11.84%

2011-2010 65.96% 22.19% 29.28% 0.96% 7.02%

2010-2009 52.02% -0.64% 23.97% 10.02% -3.31%

Liquidity Ratios Apple Samsung Google HP Microsoft

Current Ratio 1.68 1.86 4.58 1.11 2.71

Quick Ratio 1.40 1.48 4.28 0.69 2.53

Leverage Ratios

Debt-to-Equity Ratio 0.14 0.12 0.03 0.61 0.16

Financial Leverage 1.68 1.51 1.27 3.88 1.80

Activity Ratio

Inventory Turnover 83.45 7.57 55.55 13.97 13.17

Asset Turnover 0.89 1.19 0.58 1.05 0.59

Accounts Receivable Turnover 14.22 7.91 7.14 6.96 4.68

Fixed Asset Turnover 10.67 3.08 4.22 9.59 8.53

Profitability Ratios

Gross Profit Margin 37.62 37.02 56.78 23.08 73.99

Operating Profit Margin 28.67 14.44 23.34 6.35 34.38

Net Profit Margin 21.67 11.53 21.6 4.55 28.08

Return on Total Assets 17.89 13.77 12.62 4.77 16.58

Return on Stockholders' Equity 29.98 20.80 16.25 20.57 30.09

Earnings per Share 39.75 N/A 38.13 2.62 2.58

Price-Earnings Ratio 13.21 N/A 31.57 11.37 14.72

Growth Ratios

Sales 9.20% 19.79% 19.23% -6.70% 5.44%

Net Income -11.25% 68.82% 20.33% N/A* 28.77%

Earnings per Share 0.00% 0.00% 18.01% 0.00% 0.00%

Dividends per Share 330.19% 45.45% 0.00% 10.00% 17.11%

* NI negative 2012

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Our project involves increasing Apple research and development spending to match that of the competition. The proposed amount of increase at this time is 6% of revenue. Our goal is that this increase in spending will lead to new product development, which in the past has led to large increases in revenue and a larger increase of stockholder’s wealth. In order to increase research and development we propose an increase in funding by a method of 100% debt financing. To fund our project, Apple will need to secure funding of $12 billion to stay competitive. An EPS of 49.58 is projected at this amount with an interest rate of 2% and a tax base of 26%. This method of financing is subject to changes in the stock market, concerns of stock devaluation, and interest rate fluctuations. Because research and development is a long-term project, we propose to track our results over a multi-year period. Our calculations show an increase of 15% based on our first year results. This takes into account that in the previous year Apple had a 9% increase from their previous year revenue. In past years the revenue increases were greater but this was based on new product releases. We feel 15% is competitive based on what we expect in comparison with what our competition is achieving with increased research and development spending. Our projection for the second year is set at 25% because at this stage Apple should see some of the benefits of the extra spending realized.

8. A proposal to evaluate the strategy you have suggested

Strategy Evaluation

SWOT Analysis: Through the use of the SWOT analysis we have come up with the following

strategies to help in the firm’s success:

o SO Strategies:

1. Utilize strong brand recognition to increase presence in global markets.

2. Increase amount of funds that are channeled towards R&D department to focus

on establishing new and innovative mobile devices, desktops, and software.

3. Develop new operating systems that are specific to certain industries (schools,

universities, hospitals, etc.)

o ST Strategies

1. Direct increased profits towards manufacturing in the United States

(insourcing).

2. Focus on increasing customer retention by developing a loyalty program.

3. Increasing Apple store locations.

o WO Strategies

1. Increase market share by leasing out cloud space.

2. Grow market share in specific industries to become premier software provider.

3. Implement backward integration.

o WT Strategies:

1. Use excess profits to fund strong defense against any potential patent lawsuits.

2. Develop specific time frame for restructuring of existing products and

introduction of new products.

3. Highlight value of products and services compared to competitor's similar

products and services.

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Corrective Action: According to our QSPM, our strategies scored relatively high, so as long as

Apple continues to perform in such a manner and continually improve, there is no need for

them to take corrective action.

Firm Performance at Time 1 vs. Time 2 vs. Time 3…: We will evaluate the implemented

strategy’s effectiveness quarterly.

Firm Performance vs. competitors’ performance: According to the CPM, Apple’s weighted score

was the highest when compared to Samsung and Google, with total weighted scores of 3.23,

2.80 and 2.65 respectively. So although their market share may be decreasing and they have

major competitors that they must deal with constantly, Apple is still performing very well.

Firm Performance vs. industry averages:

o Mobile Devices: As of 2012, the mobile devices market share showed percentages of

Apple’s iPhone claiming 31.08%, iPod Touch had 4.41%, and iPad 29.28%. These

percentages made up most of the market share, and prove that Apple is dominating in

the industry (Barrientos, 2012).

o Desktops: Because of the huge increase in tablet and laptop purchases, desktops are

becoming a thing of the past. In 2013, Apple’s share of the market had them sitting at

11.6% with HP in the lead at 24.2% and Dell at 20.8% (Stevenson, 2013).

o Software: After researching the many companies that hold market share in the software

industry, we found an article placing Apple in the 62 percentile against Android’s 35%

and Windows Mobile’s 3% (Casteleyn, 2013).

Contingency Planning:

o Unfavorable events such as a major competitor introducing a ground breaking product

that has never been seen before.

o A trigger point would be when the product reached the testing phase.

o This contingent event would have the potential to harm Apple by losing loyal customers.

o Our contingency plan involves increasing the amount of funds that are channeled

towards R&D department to focus on establishing new and innovative mobile devices

and software.

o The Counter-Impact against the competitors introduction of a new innovative product is

that Apple has also been pulling resources and putting them directly into R&D and will

have their own product to launch and rebuttal the competitor’s product.

o Warning Signals such as chatter on blogs about a new innovative technology being

tested and soon to be launched, stock prices changing and loss of loyal customers would

throw up red flags for Apple.

o Our recommended Action Plan to Apple is that they re-evaluate their performance

quarterly, so as not to miss anything important and catch problems and potential

problems right away. Furthermore, to increase the amount of funding going towards

R&D so that they may stay on top of the market in creating new and innovative products

before their competitors have the chance to.

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9. References

Barrientos, Miguel. Phonemarketshare.com. Mobile Device Market Share April 2012. Retrieved

from: http://www.phonemarketshare.com/

Casteleyn, Jonathan. Market Realist.com. Citrix enterprise access software shows Apple’s iOS

has the best global share. Retrieved from: http://marketrealist.com/2013/04/citrixs-enterprise-

access-software-show-apples-ios-has-the-best-global-share/

Farber, Dan. Cnet.com. Why Apples 2014 won’t be like 2013. Retrieved from

http://news.cnet.com/8301-13579_3-57615293-37/why-apples-2014-wont-be-like-2013/

Farber, D. (2013, December 17). Why Apple's 2014 won't be like 2013. CNET News. Retrieved

February 24, 2014, from http://news.cnet.com/8301-13579_3-57615293-37/why-apples-2014-

wont-be-like-2013/

http://appleinsider.com/articles/14/01/09/apples-domestic-mac-sales-surge-285-as-overall-pc-

market-shrinks-75mac market share

Hughes, N. (2014, January 14). Apple's domestic Mac sales surge 28.5% as overall PC market

shrinks 7.5% [u]. Apple Insider. Retrieved February 24, 2014, from

http://appleinsider.com/articles/14/01/09/apples-domestic-mac-sales-surge-285-as-overall-pc-

market-shrinks-75

http://www.inquisitr.com/622067/itunes-loses-marketshare-but-maintains-lead/itunes market

share

Johnson, J. (2013, April 17). iTunes Loses Marketshare But Maintains Lead. The Inquisitr News.

Retrieved February 24, 2014, from http://www.inquisitr.com/622067/itunes-loses-marketshare-

but-maintains-lead/

Stevenson, Andrew. Neowin.net. Apple’s PC Market share rises. Or falls, who knows. The

analysts clearly don’t! Retrieved from: http://www.neowin.net/news/apples-pc-market-share-

rises-or-falls-who-knows-the-analysts-clearly-dont