In 1982 Apples revenue was below that of Microsoft indicating a loss of market leadership in the laptop and personal

computer industry. However as at 2012 following a sharp rise in revenue in 2010, Apples revenue is about 200% that of Microsoft as shown below. A major reason for this is Apples focus on innovation giving it leadership in an emerging tablet market via its Ipad product while Microsoft remains focused on providing software for personal computers in a PC market that is set to decline as consumers adopt tablets extensively. In essence it identified opportunity in the tablet market and had early mover advantage premised on a strategy of innovation and uniqueness.

Comparison of Apple and Microsoft Revenue

180000 160000 140000 120000 100000 $ 80000 60000 40000 20000 0 2009 2010 Year 2011 2012 Apple Revenue($mil) Microsoft Revenue ($mil)

Source: googlefinance.com, yahoofinance.com Apples mission statement a clear reflection of its strategy is to design the best personal computers in the world, along with professional software. It is focused on leadership in the digital music revolution. Apple emphasizes reinvention and defining the future of mobile media and computing devices. Its operations are guided by the aforementioned strategy hence its focus on quality and flexibility in order to retain leadership in innovation. The value of the firms strategy is reflected in the share price movement of the company as against its competitors. This is because the market bids on the companys share price on basis of
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its estimates of its future cash flows and its belief in the potential of the companys strategy and operations to yield cash flow. Apples share price as at year end 2011 was about 300% higher than its competitors. This is a clear indication that the companys strategy is successful in maximizing shareholder returns as determined by positive market sentiment that is driving demand for the stock. The chart below reflects that the financial market is aligned with the real market performance of the firms. This is because from Table 1 Apples revenue growth as at 2012 is more than 4000% higher than that of its competitors hence reason why its share price is way higher by 300%.

Share Price of Apple vs. Competitors

160 140 120 100 80 60 40 20 0 Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 100 $ 400 Sony Share Price HP Share Price 300 $ Dell share Price Apple Share Price 600 500

200

Source:googlefinance.com, yahoofinance.com (accessed 22/04/13) Its aforementioned mission defines its strategy. Its operations is expected to be in line with its focus on quality and innovation and its emphasis on these is reflected in its financial performance. From Table 1, revenue growth for Apple grew but gross profit margin increased even more indicating that it has managed to keep rate of increase in cost of goods lower than rate of increase in volume and prices of goods sold. Its high rate of revenue growth indicates market leadership as represented by large number of units sold as well as higher prices indicating that customers value its products for their innovation.

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Apple
2004 2012

Dell
2004 2012

HP
2004 2012

Sony
2004 2012 -9.58132 -23.7439 32.44565 -7.03288 3.885889 295.0158 0.828913 0.672831 0.347792 -3.43465 -22.5079 655.317 48.83705

Growth ratios Revenue growth y/y (%) 33.38167 44.58147 0.938303 0.093675 -0.05413 0.686577 Sustainable growth rate (%) 5.437352 33.19939 42.11783 39.16115 6.721861 -60.9066 2.750929 Profitability ratios Gross Profit Margin (%) 27.2859 43.87124 18.22218 22.25033 24.48533 23.24086 32.52452 Net Profit Margin 3.333736 26.66509 6.382106 5.625816 4.376447 -10.5104 1.180616 EBITDA Margin 5.749487 37.38978 9.185889 8.64655 8.287341 -4.9536 10.28426 Interest/EBITDA ratio (%) 11.13445 1.859257 0.367744 3.689212 0.528541 14.69306 1.187104 Liquidity ratios Current Ratio 2.632463 1.495849 0.975863 1.338485 1.500665 1.085094 1.127812 Acid Ratio 2.594776 1.475326 0.945852 1.274669 1.253323 0.949728 0.904307 Cash Ratio 203.8806 75.57729 0.472834 0.673515 3.400028 2.175031 0.376879 Efficiency ratios ROA (%) 3.428571 23.70331 13.69686 7.841376 4.592976 -11.6303 0.973573 ROE(%) 5.437352 35.30412 42.11783 39.16115 9.309445 -56.3826 3.721846 Equity multiplier (%) 158.5894 148.9417 307.5 499.4168 202.6887 484.7923 382.2873 Asset Turnover(%) 102.8447 88.89268 214.6134 139.382 104.9476 110.6548 82.4631 Working capital management ratios Collection Period (days) 34.12369 43.59253 32.01368 57.6452 82.26832 59.61876 54.71886 Payable Period(days) 162.4917 135.4072 117.3445 103.5553 116.154 128.5017 62.78327 Gearing ratios Short term debt/Total Assets Ratio 0 0 0 0.064379 0.03298 0.061112 0.137925 Long term debt/Total Assets Ratio 0 0 0.026151 0.143422 0.060719 0.200325 0.085539 Debt/Equity Ratio 0.585894 0.489417 2.075 3.994168 1.026887 3.847923 2.822873 Table1: Source-www.dell.com, hp.com, sony.com, googlefinance.com, www.yahoo.com, apple.com

54.63629 94.58054 0.087926 0.057329 5.55317

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Its performance is even more impressive given that revenue growth rates for Dell 0.9%while that of Sony and HP are negative. This strong growth in revenue between 2004 and 2012 accounts for its strong share price growth. Its gross profit margin of 44% is much higher than that of Dell 22%, Sony 32% and HP 23% indicating that it commands far higher price on its products given their uniqueness and emphasis on quality and leadership. Its much higher gross profit margin also indicates better cost control in the cost incurred on the product it sells. Apple, Sony and HP are growing faster than their sustainable growth rate while Dell is growing slower than its sustainable growth rate. However Sony and HPs growth i s negative. This negative growth indicates that Sony and HP will heavily rely on external financing since revenues generated from operations are declining. This is indicated by the high increase in their interest expense to EBITDA between 2004 and 2012. This indicates that they have taken up more debt to sustain their operations and the interest expense is eating into their EBITDA margins which have dropped significantly in the period. However Apples strong growth is financed by cash generated from its operations hence its non-dependence on interest bearing debt. Its EBITDA has grown by more than 600% in the period and thus its operations have been able to sustain its high growth. Its decreased need for interest bearing debts due is indicated by the reduction in its equity multiplier. Its growth in ROE indicates that returns from investments in assets and operations are high. Apple however relies heavily on non-interest bearing debt from suppliers as indicated by its payable period (whose length has reduced) which is three times longer than its collection period. This indicates that it rolls over funds from its suppliers three times in running its operations before paying them. It thus saves itself from paying interest expense arising from borrowing working capital and indicates a strong cost control culture. On the other hand the decrease in EBITDA margin for HP and Sony makes them reliant on interest bearing debt. Hence their interest expense has increased and has further decreased their operating profit margins. The increase in their accounts payable reflects the tight liquidity situation arising from poor returns from operations hence needs to use supplier financing. The steep increase in their equity multiplier indicates that returns from investment and operations is poor hence its increased need for external financing. This is further explained the increase in their debt-equity ratio indicating increased of external financing. The reduction in their cash ratio further highlights the tight working capital situation. Dells EBITDA and net profit margin reduced despite an increase in gross profit margin. This reflects poor cost control. Hence it increasingly made use of short term debt as working capital thus increasing its interest expense and short term debt. A possible explanation, asides from poor cost control, for its tight liquidity is that its payable period reduced and collection period increased. Hence it extended the time required to collect receivables while reducing the time it paid payables. As a result, it worsened its liquidity state making it rely more on short term debt.
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Conclusion Apples performance is the best in in its sector because it attempts to achieve leadership in innovating new products. Hence it charges higher prices on its product while reducing the cost of goods it sells. Rather than use short term debt it makes use of supplier credit reducing its expense. It will however need to introduce more innovative products to sustain its market growth which has declined. Otherwise, earnings from operations will continue to reduce and this will put the business in jeopardy by increasing its need to borrow short term debt. This will add to its costs and reduce the value retained in the business. It can also reverse the decline in revenue growth by cutting the prices of its product in order to boost sales volume and increase growth.

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