Apple Computer Is One of the Great

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.

History

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.

Financial Information

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.

Industry Structure

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 main factors. The first is the company's brand, which has strong associations and is a point of differentiation across the entire product line; the second is the operating system. While all of the other major competitors rely on the Windows operating system from Microsoft, Apple has always utilized a proprietary operating system that it feels is superior. This differentiates the computer on the basis of function and feel, and also in terms of the software options that are available. Some types of software are more prevalent on the Apple operating system, others on Windows.

The mp3 player industry is fragmented, but it is dominated by Apple. The company has over 70% share of the mp3 player market (Delahunty, 2009) with most competitors being having small shares and predominantly operating in the cost leadership category. Apple dominates the market with a wide variety of different brand extensions for the iPod, covering a wide range of consumer needs.

The smartphone market when the iPhone was introduced was virtually an oligopoly but has since expanded dramatically to encompass a wide range of players. The older, stronger firms in the industry such as Apple and Blackberry typically utilize a differentiated strategy, while many of the newer players compete on price. Some, however, compete on the basis of features and quality as well. The smartphone industry is subject to the most rapid pace of innovation, and there are four or five major operating systems, including Apple's competing for industry dominance. This intense competition has spurred a rapid pace of innovation and aggressive competition to establish market share as smartphones become the norm among Western consumers, replacing conventional mobile phones. Apple is at present the #2 player in smartphones with a 17.4% share, behind Nokia but ahead of Blackberry, Samsung and HTC. Apple's sales grew 90.5% year over year for the third quarter of 2010, a rapid pace but less than that of more recent industry entrants such as Samsung and HTC (Petrou, 2010). Overall growth in the smartphone market is 89.5%, so Apple's growth was in line with industry growth overall.

Apple currently dominates the tablet market. The concept of the tablet computer is old, and never caught on with the market until the launch of the iPad. First mover advantages gave Apple a dominant market share, but other firms are now entering the market to challenge this market share. It remains to be seen what the growth of the tablet industry will be like and what Apple's final market share will be.

In software and media vending, Apple sells products to the company's installed base of Mac, iPod, iPhone and iPad users. The company essentially has a monopoly on the sale of media and software for these devices, but allows third party vendors to utilize the Apple stores in order to reach consumers. This gives Apple substantial pricing power on software and media, enhancing the firm's margins.

Sustained Competitive Advantage

Apple's financial success seems to indicate that the firm has found a source of sustainable competitive advantage. All successful firms have competitive advantages, but for those advantages to be sustainable they must be able to withstand shifts over time, and be advantages that competitors cannot negate. In the case of Apple, there are two major sources of sustained competitive advantage. The first is the company's brand. When analyzing the success of Apple over the past decade, the decade before must be considered. Apple built its brand in the 1980s and early 1990s when a series of successful products. When the PC industry became dominated by the Windows platform in the mid-1990s, Apple maintained its independence. The company offered the one viable alternative to Windows. It also believed that its operating system was superior. What this did for Apple was it reinforced the brand's image as a differentiated player in the industry. It also allowed Apple to become something of a counterculture symbol, the computer for people who did not want the standard computer.

When Steve Jobs returned to the company, he utilized this brand image to rebuild the company. At that point, Apple had decided to "fight fire with fire," so to speak, in the PC industry by licensing its brand. This has resulted in the same situation with Apple computers as had occurred in PCs, with generics entering the market on a cost leadership platform. Jobs cancelled the licensing of Apple products because he felt that the licensees were diluting the company's brand value (Funding Universe, 2010). While the Apple brand retained some of its aspirational qualities and counterculture image, it was losing its association with quality. Since that move, Apple has been able to rebuild its brand image with respect to everything from quality to the aspirational associations of the brand. While the massive success of the company may diminish its counterculture status, the other positive associations remain to this day. The other major PC manufacturers do not have the same level of brand value that Apple has. Even firms like Sony or HP that have a high reputation for quality do not have the aspirational image associated with their brand.

Apple has been able to leverage this brand image across the rest of its product line. The same qualities with which consumers association Apple PCs are the same qualities that they associate with other Apple products as well. The iPod is not dramatically different from other mp3 players, but other players simply did not have the positive brand association that Apple created. The iPad is perhaps the best example of the power of the Apple brand. The tablet computer is not a new product, but never resonated with the public until one appeared with an Apple logo on it. Then, the tablet was revolutionary and there appeared to be substantial pent-up demand based on the huge initial sales of the iPad. Indeed, it was not pent-up demand for tablet computers, it was pent-up demand for the next Apple hit product (BBC, 2010). Thus, the Apple brand is the primary source of sustainable competitive advantage for the company, to the extent that the brand is not diluted.

The second major source of sustainable competitive advantage at Apple is leadership. The company has enjoyed the vast majority of its success under the leadership of Steve Jobs, the co-founder who has become the spiritual leader of the company. Jobs has a singular vision of what Apple should be and is able to keep the entire company focused on that vision. He instilled that vision into the company immediately upon his return to the CEO post in 1997 (Burrows, Grover & Green, 2006). As a result, Apple is a focused firm with highly integrated brand strategies. When Jobs returned to Apple, he cut nearly all of the products from the company's portfolio in order to focus only on the core Apple products. This move showed that he had vision that his predecessors simply did not have. As a result, Apple has succeeded brilliantly under his leadership. As long as Jobs runs Apple, it is doubtful that the company will falter, so leadership remains a source of sustainable competitive advantage, at least for the medium-term while Jobs is still in the CEO role.

Innovation has also played a role in restoring Apple's competitive advantages. The brand has been supported by the innovation associated with the new myriad new product launches of Apple over the past decade. Even when the products were not genuinely innovative, Apple marketed them as though they were. The Apple brand has long had an innovative image due to its refusal to accept the Windows platform. With the new product introductions, Apple played on that image and was able to build upon it. The competitive advantage that the Apple brand had in 1999 was strong once the product line was reduced, but it was not so strong that today's success could have been envisioned. Today's success has only come through the use of new product introductions to bolster the existing brand associations.

An example of this can be seen with the iPod, a key element of Apple's success. The mp3 player was a relatively new technology when the iPod was introduced. There were a number of players on the market but in general market share was low, lagging behind compact disc players. The iPod was marketed as a revolutionary version of the mp3 player, in particular with respect to the way that the product interfaced with one's computer. The iTunes software, complementary to the iPod, was available to form this interface. The success of the iPod introduced many new customers to Apple's products, its vision of consumer electronics and its software. As a result, Apple was able to use the strong market share in mp3 players it quickly achieved to drive business to its personal computers. This was the beginning of the company's current success. The iPod also served to bring consumers to the iPhone, and the iPhone as a standalone product brought consumers to the computers as well as the iPod. Those three elements of the product line proved complementary to one another, both reinforcing the brand's associations and driving business between the different products.

Timing of Strategic Moves

Apple has enjoyed significant success with the timing of its strategic moves. In its early years, Apple largely operated on the fringe of the personal computer industry, not moving in lockstep with the competition. Indeed, the one time that it did move in line with the competition was when it allowed licensing, which was an industry trend that at the time was helping Microsoft build a 90% market share for Windows. The ending of these licensing agreements and the rationalization of the product line was done when Jobs returned to the CEO post, rather than on the basis of any particular strategic timing decision. However, the timing of the licensing move was fortuitous, because while Apple's brand value was becoming diluted, the company had not lost its luster entirely at that point. Had the move come a year or two later, Apple may have had a tougher time restoring its brand image.