Apple's Competitive Advantage: Brand, Innovation & Strategy

Introduction

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 experienced rapid growth over the past several years. In its last fiscal year, ended September 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 stood at $315 per share (MSN Moneycentral, 2010).

Apple's primary business is in consumer electronics. The company's core businesses span 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 was also growing its market in Asia rapidly (Apple Fiscal 2010 Form 10-K).

This paper examines Apple as a company, including its history and finances. The sources of competitive advantage are discussed, as are 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 and current financial position are also examined. The objective is to gain an understanding of the reasons for Apple's tremendous success over the past twenty years.

History

Apple Computer was formed in the 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 completed 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 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. 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 $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, and while it was too early at the time of writing to judge it as having the same spinoff success as the iPod and iPhone, Apple had been able to emerge as a dominant competitor in consumer electronics as a result of its recent product launches and its ability to convert 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 recorded impressive financial results for several years running, and as a result Apple's stock price skyrocketed from $34.63 at the beginning of 2005 to $315.00 (MSN Moneycentral, 2010). Apple earned a net profit of $14.013 billion in 2010, up from $8.235 billion the previous year 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 reached $15.41, although the company still did not pay a dividend (2010 Form 10-K).

Apple has an impeccable balance sheet. In the five years prior to this writing, Apple carried no long-term debt. The company held $25.62 billion in cash and a further $25.391 billion in long-term investments. The firm's current ratio is 2.01, its quick ratio is 1.71, and its cash ratio is 1.23 — all very strong figures consistent with the company's historic liquidity ratios (MSN Moneycentral, 2010).

Apple also earns strong margins and demonstrates good operating efficiency. Apple's gross margin is 39.3%, up from 28.9% five years earlier, indicating greater pricing power and the ability to introduce higher-margin products. The rapid growth in iTunes and the iPhone App Store helps explain this margin expansion, as the cost of goods sold for third-party content and software is relatively low. The firm's operating margin is 28.1% and its net margin is 21.4%. It is also 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 had grown stronger, requiring less marketing spend to generate sales. The marginal advertising cost of a new sale was declining, suggesting that improvements to the operating margin were sustainable.

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, though within the normal range for the industry. Apple may be uniquely successful, but part of its success reflects the fact that the consumer electronics industry in general is a favorable one in which to operate. The firm's margins are only slightly higher than industry averages, as are its liquidity ratios. There is no doubt that Apple is exceptional, but the favorable industry environment also explains some of its strong financial condition.

Conclusion

Apple is today one of the strongest consumer products manufacturers in the world. The company builds on the strengths it established in the 1980s and early 1990s as a differentiated player in personal computing. Steve Jobs recognized that any Apple product or agreement that did not improve the aspirational value of the brand's associations was ultimately harmful to the company. He therefore understood how central the brand was to Apple's success. Product introductions over the past decade illustrated the value of building a brand around a series of complementary products, each reinforcing the brand while simultaneously driving consumers toward other products within the family. The brand associations form a feedback loop: Apple's brand has grown stronger with each major strategic action, as every success has added to the sustainable competitive advantage of the brand. Today's higher margins, record revenues, and record profits are all indicative of the success of this strategy.

Works Cited

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