Apple Inc.'s business model, product ecosystem, and competitive strategy

Apple Inc.

An Assessment and Profile of Apple Inc.

Apple's primary business is the development, manufacturing and selling of personal computers, accessories, peripherals, networking and personal MP3 players including the best-selling iPod and complimentary music download service, iTunes. The introduction of their digital music players, the iPod Series, and have both revolutionized the entire personal MP3 player industry while also successfully monetizing the concept of a downloadable entertainment with iTunes. Apple's iTunes Service has sold over 1 billion songs as of 2006, and now includes music videos, movies, ABC TV television programs, and audio books. The company's ability to successfully foster innovation as part of its culture is well-noted and has been the subject of research by both academicians and practitioners (Reppel, Szmigin, Gruber, 2006). From an analysis of the company's cumulative filings with the U.S. Securities and Exchange Commission, the company is actively building an Apple product and service ecosystem to serve as the foundation for future growth (Apple Investor Relations, 2008). As this ecosystem serves as the foundation for many of the strategic plans and programs of the company, its definition and implications are included in this paper.

Apple's distribution channels are unique in that the company continues to invest in its own retail chains while also partnering with selected single- and multi-tier distribution channel partners as well (Apple Investor Relations, 2008). One of Apple's competitive advantages from an operational standpoint is integration of their supply chains with their distribution channels to more accurately sense demand, integrate forecasts, and define collaborative inventory management (Prudential Equity Group LLC, 2006). Apple's competitive strength is in accurately and completely integrating new product requirements to the Bill of Materials (BOM) level throughout their global network of suppliers while at the same time enforcing high process and product quality standards (Cole, Matsumiya, 2007) (Prudential Equity Group LLC, 2006) and (Apple Investor Relations, 2008). The intent of this paper is to evaluate the type of organization, strategic direction, planning, market assessment, marketing strategy, organizational structure and culture, operating locations, and business operations of Apple. Each of these aspects of the company are significantly changing as the business model Apple relies on continues to rely increasingly on the digital music side of their business, specifically the rapid introduction of new iPod product lines and iTunes.

Organizational Structure

Apple is organized into four operating segments, which include the Americas, Japan, Europe, and Retail Operations. The three geographic segments of the Americas, Japan and Europe are operated independently of the Retail Operations segment. Americas is comprised of both South and North America, and the European region comprises all Northern, Western and Central European counties in addition to Africa and the Middle East. Apple relies on an extensively cross-functional organizational structure to support this specific geographically-based organizational structure (Schrage, 1995) (Holt, 2003).

Apple is unique in that it has successfully been able to create a profitable retail channel without relying on a joint venture or acquisition strategy of playing the role of industry consolidator of high tech retail chains (Prudential Equity Group LLC, 2006). Apple has in fact grown their entire retail chain organically without acquiring additional chains; this is one of the core strategic advantages the company has today (Simmons, 2007) (Apple Investor Relations, 2008).

The retail segment of Apple operations stores globally today has 209 open globally (Apple Investor Relations, 2008), with 15 operating in the United Kingdom, 181 in the United States, seven in Japan and four in Canada. Apple will also be launching their stores in Australia in 2008 (Apple Investor Relations, 2008). The following table derived from SEC filings by the company (Apple Investor Relations, 2008) further explains the geographic distribution of the Apple store chain. Table 1, distribution of Apple Stores by Country, shows the expansion plans announced by the company through 2008 (Apple Investor Relations, 2008).

Table 1:

Apple Store Current and Future Stores by Country

Country

First Store Opened

Future Stores

Total Open Stores

United States

United Kingdom

Japan

Canada

Italy

Mexico

Projected 2008

Australia

Projected 2008

Germany

Projected 2008

Switzerland

Projected 2008

Apple's organizational structure is organized into product divisions and relies heavily on cross-functional teams to accomplish the intensive level of effort need to keep up with the new iPod product introductions in addition to the refreshes of the iMac laptop product lines. The launch of the Mac X operating system which has implications across all Apple products, the coordination of each functional area of the company, from supply chains through quality management, to production scheduling and fulfillment, were included in the teams. Apple strives to create a highly entrepreneurial organization culture through the use of more agile and market-driven organizational culture.

Organizational Culture

Apple Computer has always had one of the strongest work ethics in the Silicon Valley, with it being commonplace to find product design and software engineers working well past 9pm each night, having to be literally prodded to go home. The messianic vision of Apple transforming the world one desktop at a time, and the ability of the culture to translate this strategic vision into something intensively personal that could be so readily transformed into a passion is the fuel that kept Apple alive throughout the early 1990s and during its transition from hard-working renegade to a force in several key markets the company helped discover in the first place. Despite the image the company projects of being very hip, there is a very strong work ethic and a commitment to deadlines that isn't common across other high tech companies globally.

The company attracts workaholics looking for a cause to completely commit themselves to. As a result of this dynamic and the fact that in many of the company's years it has been thinly staffed, there is almost always more work to be done than people to do it. As the company has at times fought for its survival and had to rely on unconventional approaches to getting work done, it has earned as reputation for being nonconformist. As the brand thrives on this image the fact is that Apple is one of the hardest working and most driven PC companies in the world, an attribute that is responsible for their survival as others have fallen. A sixty or seventy hour work week is average for the typical Apple employee, and the higher the position the greater the commitment required. Guy Kawasaki (1990), head of Software Evangelism, writes in his book the Macintosh Way, of the hours that he would invest in planning software developer visits to convince them to write applications for the Apple Macintosh. Kawasaki was a big reason the Apple Macintosh succeeded as he created a very strong and reliable group of software developers that provided Apple with the necessary software applications to make the Macintosh usable. The company would eventually adopt an Open Source platform approach to software development and greatly increase the options for its loyal customers in the process

As all cultures change over time, so has the one inside Apple. This is most prevalent in their perception of customers. Seen literally for decades as consumers, hobbyists, educators and in short one of the most rabidly passionate customer bases for PCs on the planet, Apple has had to continually learn what it means to support an enterprise customer. It is common for enterprise-level customers to get an 800 number and be asked to bring their systems into a store for support. When a corporation has literally thousands of them this is clearly not feasible, and it has only been recently that Apple has addressed this with an enterprise-level support plan.

The bottom line is that Apple still attracts those workaholics looking for a cause to fully commit themselves to, and despite the shortcomings of scaling to the enterprise area, their introduction of iTunes and iPods have revolutionized personal digital entertainment, and continue to propel the company to the highest levels of financial performance it has ever attained both in terms of profitability and sales performance.

Locations of the Organization

The company's headquarters are in Cupertino, California, where the company was founded. Apple has over the last decade increasingly focused on China, opening major offices in Beijing and also in Hong Kong. Apple also has expanded its development centers in India with a major center in Bangalore, in addition to development and service centers in Kuala Lumpur. In addition, the company operates service, development and marketing centers in Taipei, Taiwan and Sydney, Australia in addition to Bangkok, Thailand. Apple expects the majority of future growth and development to be based on the efficiencies and growth of software development throughout the pacific Rim, hence their intensive investments in this region of the world.

Apple's Strategy

The music side of the Apple business contributes nearly 50% of total revenues, yet is also the aspect of their business that requires the greatest level of effort and attention to keep products current in their product lifecycles while also continually improving and launching new iMac portable PCs as well. Table 2 quantifies this dynamic from SEC filings of the company in 2007 and 2008.

Table 2: Distribution of Revenue by Product Area

Source: (Apple Investor Relations, 2008) (Prudential Equity Group LLC, 2006)

Planning

The cornerstone of Apple's planning processes is the continual development of products and services that compliment the product and services ecosystem shown in Figure 1 (Apple Investor Relations, 2008) (Prudential Equity Group LLC, 2006).

Figure 1: Apple Product and Services Ecosystem

Source: (Apple Investor Relations, 2008) (Prudential Equity Group LLC, 2006)

For Apple, their future planning revolves around the following opportunities the company needs to capitalize on. First, the broader development of digitization of video across iPod and iTunes needs to be a catalyst of future growth for the company. Second, the development of Apple TV platforms including the development of an Apple Personal Video Recorder (PVR) is critical. Apple TV needs to also have an HDTV equivalent and the ability to receive, not just play back recorded content. Third, there is significant expansion in the area of video-capable mobile devices. Approximately 80% of all Apple iPod units sold in calendar Q407 are capable of playing video, expanding the installed base of video-enabled devices to nearly 50 million units in 2007, increasing from 19 million through all of calendar 2006. Fourth, the company has significant potential to completely re-define their content provider and partnership strategies by concentrating on populating iTunes with fresh musical and video content. The existing laptop business is 50% of iTunes revenue and shows potential through 2010 through the existing product roadmap (Prudential Equity Group LLC, 2006) and through SEC filings (Apple Investor Relations, 2008). The laptop product line is analyzed in the Market Assessment section of this paper, showing the competitive advantages Apple has in this aspect of their business, in addition to the challenges of competing with market leaders in each specific segment.

Market Assessment

The most urgent requirement the company has today is to capitalize on the extensive installed base of video-compatible iPods. Figure 2 compares Video-capable iPods and iPhones unit shipments and forecast (Apple Investor Relations, 2008).

Figure 2: Market Assessment of Video-Capable iPods

Figure 2 graphically illustrates how critical it is for Apple to capitalize on the expanding installed base of iPods and iPhones capable of receiving and displaying video content. Apple needs to create a much greater breadth of video content to capitalize on this emerging installed base and capture this catalyst of growth for portable MP3 players.

In addition, Apple needs to concentrate their efforts staying competitive on their iPhone and iMac platforms. Table 3, Apple iPhone Competitive Analysis illustrates the unique differentiators of Apple with their iPhone and iPod Touch. Their use of the Mac OS X significantly reduces the royalties they have to pay relative to their competitors, who must pay royalties on the operating systems they use.

Table 3: Apple iPhone Competitive Analysis

Source: (Apple Investor Relations, 2008) (Prudential Equity Group LLC, 2006)

The competition within the laptop business is not as rapidly changing as the area of iPod, iPhone and iPod Touch, as personal MP3 players capable of also playing video content is the most rapidly growing market Apple competes in today. Apple's supply chain is a major competitive advantage for their laptop and personal computer products however. The supply chain partnerships and extensive levels of collaboration that Apple has with their suppliers make it possible for them to rapidly gain new components, often having them customized specifically for their laptops and systems. In addition, Apple has greater supply chain visibility relative to competitors in the laptop business, further giving them a significant competitive advantage.

Table 4: Apple iPhone Competitive Analysis

Source: (Apple Investor Relations, 2008) (Prudential Equity Group LLC, 2006)

Apple's Marketing Strategy

Apples' strongest segments are state & local government, schools and universities, small and medium businesses, and after several major attempts to move into enterprise computing have led the company to focus on graphic design and higher end animation, including their contributions to film making with collaborations with Pixar. The majority of the customers however are consumers who are purchasing Apple iPods, accessories and music, videos, television shows and other forms of digital entertainment from Apples' iTunes online store. Underscoring all these segments however are those brand loyal customers who have only used Apple personal computer products and insist that, in either a personal or professional context, it will be the only system they will use. This "cult of Apple" as it has been called by industry analysts, is on the one hand the company's greatest strength in terms of recurring revenue. Yet on the other, the "cult of Apple" has at times led the product strategy to become insular and less focused on innovation that will capture new converts. Steve Jobs' return to Apple in 1997 began an entirely new approach to delivering innovative products to capture greater market share in previously untapped markets, including digital music players, the company had not competed in before. As a result of this graphics expertise the company also has grown significantly in the Scientific/Engineering marketplace as well.

Figure 3 is derived from multiple sources to illustrate the core values of Apple's highly loyal customer base:

Figure 3: A Profile of Apple's Customer Base Characteristics

Sources: Cuneo (2003), Marketing Week (2004)

Summary

Apple's transition from relying on a small but very customer base that served as the catalyst of profits and survival through the transition of the company away form being a purely systems and software company to revolutionizing online music continues to generate noteworthy financial results. Tables 1 through 4 in the appendix provide five-year analyses of the company's income states, balance sheets, key financial ratios and segment-based financial analysis. What emerges from the financial analysis and the overview in this report is the Apple product ecosystem is highly effective in generating highly profitable sales in both established markets (Americas) in addition to new channels (Retail Division).

Most telling from the financial analysis is the growth in ROI from the company from -0.02 in 2003 to 30.34 in FY2007. Pretax margin has grown from 1.48 in 2003 to 14.56 in FY2007. Table 3 provides eighteen financial ratios that further underscore how the ecosystem of iPods, iTunes and the Apple laptops form a unique platform that Apple now needs to bring additional video and musical content to fully realize the potential of the company's current strengths today.

Appendices

Table 1: Apple Inc. Income Statement Analysis

Net sales

Cost of sales

Gross margin

Research & development expense

Selling, general & administrative expense

Special charges: restructuring costs

Total operating expenses

Operating income (loss)

Gain (losses) on non-current investments, net

Interest income

Interest expense

Gains on sales of short-term investments

Other income (expense), net

Interest & other income, net

Other income & expenses

Interest & other income, net

Total interest & other income, net

Income (loss) before provision for income tax

Current federal income taxes expense (benefit

Deferred federal income taxes expense (benefi

Total federal income taxes expense (benefit)

Current state income taxes expense (benefit)

Deferred state income taxes expense (benefit)

Total state income taxes expense (benefit)

Current foreign income expense (benefit)

Deferred foreign income taxes expense (benefi

Total foreign income taxes expense (benefit)

Provision for (benefit from) income taxes

Income (loss) before accounting change

Cumulative effect of accounting change, net

Net income (loss)

Weighted average shares outstanding - basic

Weighted average shares outstanding - diluted

Year end shares outstanding

Earnings (loss) per share-before accounting c

Earnings (loss) per common share - basic

Earnings (loss) per share-before accounting c

Earnings (loss) per common share - diluted

Total number of employees

Number of common stockholders

Table 2: Apple Inc. Balance Sheet Analysis 2003-2007

Cash

Cash equivalents-U.S. Treasury & Agency secur

Cash equivalents-U.S. corporate securities

Cash equivalents-foreign securities

Total cash equivalents

Cash & cash equivalents

Short-term investments-U.S. Treasury & agency

Short-term investments-U.S. corporate securit

Short-term investments-foreign securities

Short-term investments

Accounts receivable, gross

Allowances

Accounts receivable, net

Purchased parts

Work in process

Finished goods

Inventories

Deferred tax assets

Vendor non-trade receivables

NAND flash memory prepayments

Other current assets

Other current assets, net

Total current assets

Land & buildings

Machinery, equipment, & internal-use software

Office furniture & equipment

Leasehold improvements

Property, plant & equipment, gross

Accumulated depreciation & amortization

Property, plant & equipment, net

Goodwill

Acquired intangible assets, net

Long-term NAND flash memory prepayments

Non-current deferred tax assets

Capitalized software development costs, net

Other assets

Total other assets

Other assets, net

Total assets

Accounts payable

Deferred revenue - current

Deferred margin on component sales

Other accrued tax liabilities

Accrued marketing & distribution

Accrued compensation & employee benefits

Accrued warranty & related costs

Other current liabilities

Accrued expenses

Current debt

Total current liabilities

Deferred tax liabilities

Deferred tax liabil & oth non-current liabil

Deferred revenue - non-current

Deferred tax liabilities

Other non-current liabilities

Non-current liabilities

Total liabilities

Common stock

Deferred stock compensation

Retained earnings (accumulated deficit)

Unrealized gains (losses) on available-for-sa

Unrealized gains (losses) on derivative inves

Cumulative foreign currency translation

Accumulated other comprehensive income (loss)

Total shareholders' equity

Table 3: Apple Inc. Financial Ratio Analysis

Profitability Ratios

Return on Equity (%)

Return on Assets (%)

Return on Investment

Gross Margin

EBITDA of Revenue (%)

Operating Margin (%)

Pre-Tax Margin

Net Profit Margin (%)

Effective Tax Rate (%)

Liquidity Indicators

Quick Ratio

Current Ratio

Working Capital/Total Assets

Debt Management

Current Liabilities/Equity

Total Debt to Equity

Asset Management

Revenues/Total Assets

Revenues/Working Capital

Interest Coverage

Table 4: Business Segment Analysis 2003-2007

Revenues

Americas

Europe

Japan

Other Segments

Retail

Operating Income

Americas

Europe

Japan

Other Segments

Retail