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Apple Computer is one of the great corporate success stories of the past decade. On the back of a successive string of hit products, the company has experience rapid growth over the past several years. In its last fiscal year, ended 9/25/2010, Apple earned $14 billion on revenues of $65.2 billion (Apple Inc. Fiscal 2010 Form 10-K). These figures increased 70% and 52% respectively in fiscal 2010. Apple has a stellar balance sheet and its stock price is now at a lofty $315 per share (MSN Moneycentral, 2010).
Apple's primary business is in consumer electronics. The company's core businesses are in personal computers, mp3 players, smartphones and electronic media. Apple's leading products include the Mac line of computers, the iPod, the iPhone and the iPad tablet computer. The company's media properties include the iTunes music store and the iPhone App Store. Apple operates a number of proprietary retail outlets and markets its products through third-party vendors and online. Around one-third of Apple's business is domestic, with the largest component of international business coming from Europe. The firm is growing its market in Asia rapidly as well (Apple Fiscal 2010 Form 10-K).
This paper will examine Apple as a company, including its history and its finances. The sources of competitive advantage will be discussed, as will the timing of the company's strategic moves and its use of innovation to re-invigorate its competitive advantage in the marketplace. The company's recent business moves will be examined, as will its current financial position. The objective of the paper will be to gain an understanding of the reasons for Apple's tremendous success over the past twenty years.
Apple Computer was formed in 1970s and spent most of its early years focused on the personal computer market. One of the firm's co-founders, Steve Jobs, led Apple to its first glory years, highlighted by the successful MacIntosh computer. By 1982, Apple was the first personal computer company to reach the $1 billion sales mark and had already had its IPO in 1980. In 1985, a management shakeup occurred and Jobs left the company. The new management had difficulty recapturing the success of the original management team and Apple began to lose market share and industry prestige.
At the outset of the 1990s, Apple management believed that the personal computer industry had changed dramatically from its early days, and designed new strategies around this vision of reality. The company enjoyed initial success with a line of new, more affordable computers, building up to a 19% market share by 1992. The most serious strategic misstep of this era was the licensing of the Apple brand to other firms, following the model that had made Windows a successful operating system. This move backfired, as cheap clones diluted Apple's brand value. Another miscue in the 1990s was underestimating demand for PowerBook laptops, leading to the firm having $1 billion in unfilled orders, which cost Apple dearly in terms of potential market share. By 1997, Steve Jobs had returned to the company and renewed the firm's focus on desktops and laptops. This move dramatically reduced the size of the company's product line and resulted in plant closures and thousands of layoffs (Funding Universe, 2010).
The 2000s saw Apple branch out again into new consumer product areas. In this decade, Apple began to leverage its powerful brand to launch products such as mp3 players. This product, the iPod, would come to lead Apple's resurgence. The iPod dominated the mp3 player industry and brought millions of new consumers to the company. Apple was able to convert many of these new consumers to its computing products. The iPhone smartphone had a similar effect. Where the iPod succeeded by quickly becoming ubiquitous, the iPhone succeeded by being genuinely innovative as a consumer-centric smartphone. The iPhone again brought new consumers to the company. The iPad is a more recent development for the company, and while it is too early to judge it as having the same spinoff success as the iPod and the iPhone, Apple has been able to emerge as a dominant competitor in consumer electronics as a result of its recent product launches and its ability to convert new customers of one product into consumers of the entire Apple family of products.
It would be difficult to find a firm with the financial health of Apple. The company has recorded impressive financial results for several years running and the result is that Apple's stock price has skyrocketed from $34.63 at the beginning of 2005 to $315.00 today (MSN Moneycentral, 2010). Apple earned a net profit of $14.013 billion in 2010, up from $8.235 billion a year previous and $6.119 billion in 2008. The company had revenues of $65.225 billion in fiscal 2010, compared to $42.905 billion in 2009 and $37.491 billion in 2008. Apple's earnings per share have now reached $15.41, although curiously it still does not pay a dividend (2010 Form 10-K). The company's key financial results for the past five years are as follows:
Apple has an impeccable balance sheet. In the past five years, Apple has not carried any long-term debt. The company currently as $25.62 billion in cash and a further $25.391 billion in long-term investments. Apple makes so much money it does not have time to spend it. The firm's current ratio is 2.01, its quick ratio is 1.71 and its cash ratio is 1.23, all of which are very strong figures and are all in line with the company's historic liquidity ratios (MSN Moneycentral, 2010).
Apple also earns strong margins and has good metrics with respect to operating efficiency. Apple's gross margin is 39.3% and this is up from 28.9% five years ago, indicating that Apple has greater pricing power today than it did five years ago, and has been able to introduce higher-margin products as well. The rapid growth in iTunes and the iPhone App Store may help to explain the increase in gross margin, and the cost of goods sold for third party content and software is relatively low for Apple. The firm's operating margin is 28.1% and its net margin is 21.4%. Apple has built much of its success in the past few years around its marketing efforts. Thus, it is worth noting that selling, general and administrative expenses in 2010 were 8.45% of revenues, compared to 12.5% of revenues in 2006 (MSN Moneycentral, 2010). This implies that Apple's brand power is stronger now, in that the company no longer needs to market as heavily in order to gain sales. The marginal advertising cost of a new sale is declining for Apple, which implies that improvements to the operating margin are sustainable over the coming years.
Apple's managerial efficiency is also strong. The company has an inventory turn of 52.5, an accounts receivable turn of 14.7 and an asset turn of 1.1. (MSN Moneycentral, 2010) These figures are all strong, but they are all within the normal range for the industry. Apple may be a highly successful firm, but part of its success is that the industry in general is a very favorable one in which to operate. The firm's margins are also only slightly higher than the industry averages, as are the firm's liquidity ratios. While there is no doubt that Apple is uniquely successful, the industry in general is a great one in which to operate at present, and that also explains some of Apple's presently strong financial condition.
The consumer electronics industry is in general highly fragmented. In most of Apple's main business lines, there is intense competition from a number of wealthy, powerful and high profile companies. The personal computing industry is the most highly fragmented, with major manufacturers coming from a wide range of countries. Some of the major competitors are Lenovo, Acer, Dell, Hewlett-Packard and Sony. There are a number of lower-end players in the market as well. There are a number of points of competition in this industry. Price and performance are each considered to be important points of competition by consumers in the personal computing industry. Increasingly, cost leaders have gained significant market share, with HP and Sony competing with Apple in the differentiated segment of the market. The competitive dynamic within the personal computer industry has changed substantially over the past fifteen years, first with the domination of generic brands from Asia and then with the re-emergence of differentiated competitors in the market. Some former generic firms, such as Taiwan's Acer and China's Lenovo, have become major industry brand names in recent years, but for the most part still compete as cost leaders rather than differentiated players. For its part, Apple has retained its strong brand positioning over this time and has therefore been able to continue strong sales. The company has also benefited significantly from later product introductions that have introduced new consumers to the company, many of whom have switched to Apple computer products in the past decade.
Apple is differentiated from the other competitors in the industry by two…[continue]
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