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External Analysis ================= General environment analysis Companies engaged in manufacturing electronic computers are listed under SIC code 3571 and/or NAICS code 334111. Electronic computers are machines that 1) store processing programs and data necessary for program execution, 2) can be freely programmed to user requirements, 3) perform arithmetic computations, and 4) execute processing programsthat requires modification of execution by logical decision without human intervention. Personal computers fall into this category (OSHA, 2004). The electronic computer industry has been struggling since early 2000 when the economy weakened. The US Census Bureau reported a decrease in computer shipments from 1999 $64.7 billion to 62.9 billion in 2000 and continued downward to $49.3 billion in 2001. Unit shipments also declined from 27.2 million (2000) to 22.7 million in 2001. Rising unemployment and anticipated war with Iraq assisted in reducing the number of computer purchases. The terrorist attack on the Pentagon and the Twin Towers in New York City also added to the decrease. Much equipment was available at reduced costs due to the bankruptcy of many Internet companies in the early 2000s. IDC also reported in 2001 that Dell, Compaq, Hewlett-Packard, and IBM controlled over 40 percent of the world PC shipments. Hewlett- Packard purchased Compaq and became a formidable power competitor for Dell. The control of this large a portion of market share is something Apple would have to contend with each step of the way (Electronic Computer Industry, 2004). Economic segment Computer requirements are increasing across the globe. Data collected and shown on Table 04 has all but 4 countries increasing the number of computers being used per 1000 individuals within each respective country. The data was not restricted to PC type computers but listed computer use in general so Apple computers were included within the data gathered even though it is undergoing a market share loss of computer sales. Table 05 further supports the increased use. Political/legal segment ======================= Apple faces political/legal segment issues both domestically and abroad. Domestically the Federal and State government continues to tighten up on the environmental issues that constrain manufacturing and disposal of the units. Environmental concerns are issues that directly affect each computer manufacturer. The Environmental Protection Agency updated EPA/310-R-95-002 "Profile of the Electronics and Computer Industry Code in the September 1995. This document provides directives that must be adhered to by companies manufacturing computer components (EPA site, 2004). Apple has willfully promoted the buyback and proper disposal of computer parts in effort to promote product stewardship (Table 06) from the environmental perspective (Apple website, 2004). Socio-cultural segment Cultures are restrictive and the restrictions have effects on company profitability. China Internet traffic increased by 71% from 1997 to 1998 and continues to do so as we approach 2005. Some technological changes are more readily accepted than others. Chinese people still have trouble accepting credit card transactions since the initial cost of computerization is high. Internet sales in many overseas countries are not as successful as in the United States and Europe because many of the customers prefer to view the products they are purchasing. The same applies to other parts of the world so the computer companies have to adjust according to the cultural differences being encountered within the different countries in which they chose to market and sell. Adapting to the differences in culture is not very easy and some manufacturers are trying to build value into their company name. This is being done in hopes that branding will eventually equate with honesty, integrity, quality, and good service so that storefronts will not be as necessary as they presenting are. Apple computer began opening storefronts in the United States in effort to compete against the PC based companies. Their thought is that by having it available for the customers some will eventually make the switch away from the PC-based systems. The largest socio-cultural hurdle for companies such as Apple is the lower educational standards of many countries. While many are making great progress, they are limited in number. Those that are progressing can take advantage of the outsourcing that is being done by American companies. Technological segment (Electronic computer industry, 2004) The governmental has always favored the computer industry's research and development and it has shown favor by the amount of funding that is made available. This trend has held true since the Cold War. It was just recently that any significant cutbacks occurred and the industry has been unable to make up the difference. Most computer companies began to cut back the amounts of R&D funding in the early to mid-1990s and also began to focus on the short term. Product life cycles have been shortened and the computer has become an everyday commodity. Many of today's technology driven innovations that are being developed affect the microprocessors, semiconductor, memory storage, and speed capabilities of the computer units. Miniaturization is definitely on top of the required changes for the future. Everything seems to be getting smaller and with the decrease in size comes integration of multiple technologies. Phone, PDA, and Internet modules are being combined into one piece of equipment. Telephones, video players, answering machines, and televisions sets are being intermeshed. The future of technology seems endless. Five Forces Model of Competition ================================ Every market including the financial industry can be evaluated through the use of Porter's five- force theory. Porter's uses the five forces, supplier power, barriers to entry, threat of substitutes, buyer power, and the degree of rivalry, as tools that help analyze a company's position against its competitors (QuickMBA site, 2003). Threat of New Entrants: Startup costs are extremely high so the probability of new entrants is low. The existing companies have capitalized on the distribution channels and have created strong branding awareness that makes it difficult for new comers to compete. The probability of success is so low that competitors pursue niche markets rather than trying to compete with the bigger companies. Apple positioned itself years before so it has created its space in the computer industry just as IBM, Hewlett-Packard, Gateway and Dell. Bargaining Power of Suppliers: The suppliers are plentiful and must compete with others to ensure that they will be able to retain the business of the computer companies. The position is low especially since the larger companies can readily switch to another supplier without any major repercussions. Suppliers adjust pricing and quality to make their products more attractive so competition is high leaving them in a low supplier power position. Bargaining Power of Buyers: All of Apple's customers have a variety of computer companies from which to chose when it comes to purchasing hardware, software, or peripherals. Switching costs are low. The buyer has the ability to switch when quality, service or price offered elsewhere is better or cheaper. This situation places the buyer power in a strong position that can only be countered by companies with strong product differentiation that would increase the switching costs. The computer operating systems differentiation makes it difficult for companies to switch but individuals will find it rather easy to change from one computer system to another. The same difficulties and cost apply to the education facilities that have committed to a single operating system. Threat of Substitute Products: Substitute products are readily available so this threat is very high. Competitors work to convince their customers that their product is superior to its competitors. The more differentiation of product the less likely the switch to a substitute will occur. If prices are higher then the company with the higher price has to provide justification for the increase. Apple's operating system differentiation can command higher pricing when it is presented to the creative designer community but not to the individual computer buyer unless they are specifically looking for such enhanced graphic capabilities. The market is favorable for the companies that have locked a business or educational facility since substitution will require a change of each computer within the facility and in some cases more than one location. Internet connectivity has increased the ability of switching individual units while the others remain the same. Rivalry among competing Firms: Apple has many competitors that have the advantage of possessing the larger portion of market share. Apple is faced to compete against companies like IBM, Hewlett-Packard, and Dell. Even a smaller company like Gateway poses a threat. Competition is fierce in the computer hardware industry and switching costs are low. Apple is also reliant on promoting its own operating system. The digital hub being pursued by Apple has already been copied by Gateway. Opportunities Apple's different operating system Apple can take advantage of its operating system differences by turning it into an opportunity to develop improvements to the Macintosh platform in order to achiever greater perceived functional and design advantages over competing platforms. Various computer worms and other hacker anomalies that provide a grand opportunity for Apple to take advantage and garnish some small sectors of this frustrated market. With such a widespread system the vulnerability increases and fixes are not easy to make in short time periods. Micro-soft bashers love to point out that Linux or Apple's OS X are not vulnerable to whatever the exploit du jour is on the Microsoft platform (Bradley, 2004).The Apple Mac OS X is seen as a stable, reliable, and secure system that is also very easy to use (Brainyencyclopedia, 2004). Apple's pursuit of music industry Apple's pursuit of the music industry through its iTunes also provides a good opportunity to increase Apple's bottom line and also increase brand awareness. The launching of the iTunes Music Store resulted in over 2 million downloads in only 16 days. All of the downloads were all done on Macintosh computers. Apple's opening of its music store worldwide will be a great opportunity (Brainyencyclopedia, 2004). Microsoft upgrade costs versus benefit Microsoft users are finding it less feasible to continually upgrade software packages unless they can truly see a benefit for the money being spent. The last few Microsoft upgrades have been plagued with glitches that provide another grand opportunity that Apple can use to its advantage so long as it doesn't make the same mistake with its issues of upgrades. The customer will continue to look for value when money is spent. Threats Very competitive industry The market for design, manufacturing, and sales are all extremely competitively aggressive in Apple's business. The rapid technological advances made by competitors in the hardware and software segments has increased the number products offered in shorter time spans. Price competition, including sellers with computers with other operating systems, has been very intense as the battles for increased market share rise. All of these affect gross margin, especially when combined with increased reliance on the Internet and the miniaturization of components that decrease prices since they are smaller and simpler. Competitor's copying programs Companies such as Future Power USA copied Apples Imac and have been selling it. These copies pose a major threat to Apple sales. The copies look identical to the iMac even to the point of making the colors the same but under different names. These copycat computers can even be considered as substitutes for an iMac. Website www.lowendmac.com states that many other companies are copying the iMac either because they are too lazy to come up with a different design or because the iMac is such a great idea everyone wants to copy it (LowendMac, 1999). Competitors are quickly mimicking the unique presentations of digital music products. Entry into these markets is costly but unfortunately for Apple the competitors have an abundant supply of funding to address marketing, manufacturing, and technical resource requirements that may arise. Consolidation of major players has made for larger and potentially stronger competitors. Competitors are even promoting free peer-to-peer services. Microsoft dominance Microsoft Windows continues to dominate the market. More than 90% of the world's computers use the Microsoft operating system. Apple needs to work on convincing the world that its system is better than Microsoft. This dominance and need to overcome the world's mental state of thought about Windows operating systems is a major threat to Apple (ProComp, 2004). Windows based PCs have cut prices and lowered product margins to maintain market share since demand has been declining during the past few years. This pattern does not seem any brighter in the near future so these practices are very likely to continue. PC technological advances in software and hardware, and miniaturization of parts, together with a more reliant Internet movement make the competition for market share even hotter. Apple's operating system has lost some of its market share during the past few years but is working to regain its losses. The introduction of the G5 has helped with sales, as have the Powerbook portables. Apple's operating system has provided graphics and creative designers with a useful tool that is not comparable to Windows operating system applications. This difference must be managed with continued improvements that allow the public to perceive design and functional advantages over the competitors' operating system platforms. Failure to compete effectively could cause a negative affect on Apple's financial and operating results. Software Piracy Software piracy has been a problem for software and operating systems producing companies. As the technology advances the more susceptible the companies become to additional piracy. The piracy issue has grown to global proportions and stopping unlawful copying and distribution of copyrighted software does not seem to have a remedy for prevention in the future. Governmental regulatory increases Governmental regulations and potential litigation from non-compliance has persisted as a threat from the early years. In 1991, Apple phased out the lead in the batteries and in 1992 dealt with the chloroflurocarbons (CFCs) in manufacturing. The years 1996 brought about implementation of ISO 14000 quality standards and by 2000 all Apple manufacturing sites were ISO 14001 certified as having a structured environmental management system (EMS). Tetrabisphenol A (TBBA) was voluntarily phased-out of all plastic enclosure parts in quantities greater than 25 grams. These are just a few examples of how the governmental regulatory requirements continue to pose a threat to the computer and electronic industry. Apple has initiated a lot of environmental safe programs voluntarily but each is costly to implement even though compliance far outweighs the cost of non-compliance. Global competition increases Competition continues to increase worldwide. Other countries are getting into the manufacturing as the expansions of existing companies occur. Cheap labor and parts manufacturing in less privileged countries provide opportunities for larger companies with extra capital to spare for expansion. Pursuit of savings drives them into the other countries and with labor and parts costing less they utilize that as a means for cutting costs making them more competitive. The amount of product introductions hitting the market requires that each company continue pursuing more innovative products in a shorter period of time. Lack of newly enhanced product will reduce customer demand even more than what is being affected by the weakened economy. Companies must hope that the product introductions will be well received by the consumers. If the product is well received then the company must be in a position to ramp up production in short order but not enough to be overwhelmed by large inventories when the sales regress. This need for judging demand is critical and must be determined as accurately as possible because over supply will lead to dead inventory and not enough supply will lead to unhappy customers. Finding the balance is very difficult. Innovations within the operating systems must continue to support the existing systems at the risk of losing customers should this not occur. World epidemics affecting distribution and manufacturing The world has been riddled by a few major epidemics that have disrupted the normal distribution and manufacturing channels of much industry. Some reached proportions that even affected travel into and out of the country. Year ago this type of epidemic would not have created the effects that it presently does in this global system. China, Hong Kong and other Asian countries were subjected to quarantines implemented by the World Health Organization and Centers for Disease Control and Prevention when severe acute respiratory syndrome (SARS) advanced to epedemic proportions. Apple utilizes these countries for manufacture and production of its iPod so diseases such as this affected employee travel, limit freight services, instill governmental restrictions in product movement, and can delay production and operations. Aggressive pricing practices Competition in this highly competitive market faces overcoming aggressive pricing practices, frequent new product introductions, shortened product life cycles, new industry standards, continuous product improvements, rapid technological changes, consumer price sensitivity and abundance of competitors. Each section is intense and staying on top of each is difficult for any company to manage. Those with considerable market share continue to battle to prevent relinquishing any while those with little push with the items above to take any amount of market share they can get. Industry Structure Market Size The PC market has spread into nearly 80% of U.S. households. A survey conducted by the Gartner Group predicts that global PC sales will increase to 187,000,000 units (13.9%) this year. This follows an 11% increase in 2003. Price declines have contributed to the robust growth (Fuji-keizai, 2004). Industries' dominant economic features The versatility of the computer industry allows a few dominant economic features to stand out. The market size mentioned above is one of these dominant features. It has increased to a range between $890 million to $2 billion. The competitive rivalry is another dominant feature. The national and global levels are in the early maturity stage, which is nice considering that, the local and regional markets a completely saturated. A third dominant economic feature is the technological innovations that continually surface from the many competitors. Innovations such as software advancements, 32 bit and 64 bit chips, networking expansions, and improved design technologies. Each has a direct link to the economic structures of the company and its competitors. Distribution channels The distribution channels for PCs have been changing considerably in the past couple of years. The changes are being driven by price declines and the 'mature product' phase of the computer life cycle. Many of the expansions involve channels that already carry PCs or other sources not previously used. A few examples of those not previously used are cable TV firms, telephone companies, and bookstores. Competitors: strongest - weakest The focus on the strongest competitor extends beyond Microsoft but that will become clearer in a few sentences. Microsoft's control of the PC market speaks for itself so they can easily been seen as the strongest competitor. Apple will eventually have to tackle trying to take away market share but a head-on battle may not be the best approach (Machanick, 1998). Another side of competition is the music side that Apple is presently doing well in. Samsung and Napster 2.0 have teamed up to release a new service/hardware combination that is intended to compete directly with iTunes Music Store and iPod. The scheduled release is to offer unlimited downloads and services that the iTunes Music Stores offer. The combined powerhouses present a formidable foe for Apple (SpyMac, 2003). Rivals anticipated strategic moves Apple's strategy has not gone unnoticed. Its rivalry has created an air of 'bad blood' between itself and digital rival RealNetworks. Apple management was quoted as stating: "We are stunned that RealNetworks has adopted the tactics and ethics of a hacker to break into the iPod, and we are investigating the implications of their actions under the DMCA and other laws." The move has prompted Apple to consider restricting iPod software updates so that Real's Harmony technology would no longer be supported (Naraine, 2004). AOL is tight-lipped on how it intends to use ICQ, which they purchased in 1998. ICQ instant messaging users number to 235 million and Microsoft and AOL were warring over whether Microsoft messenger can access AOL messenger's user base. Apple teamed up with AOL on the messaging offsetting the battled strategic moves that Microsoft intended. The move was a very well planned strategic move for Apple. Speculation has surfaced that video conferencing functionality may be added to iChat (Geek.com, 2002). The move has been seen as being gutsy. Economies of scale Expense of software creation was be extremely expensive and but once it has been refined the cost of producing copies for sale is minimized. The difference in expense between Apple and Microsoft is the systems put into place. Apple chose to go with a closed system that not have any others assist with programming, testing, and bugging as did Microsoft. Microsoft gobbled other companies that had made sustainable improvements to their operating system up. This reduced some of Microsoft up front costs and multiplied the progress. Key success factors Technology related The iMac release in 1998 introduced the Unified hardware architecture which featured the new ROM. The first Macintosh computers were equipped with a physical chip on the logic board because RAM and HD space were costly and ROM contained routines required for computer startup and other higher-level Mac OS code. The iMac release divided ROM into boot ROM and Mac OS ROM. The startup and higher-level code routines were separated. The Mac OS ROM no longer needed to be in a chip form but instead is now an image file inside of the MacOS system folder. This change updates with the use of firmware feasible for both ROMs. Each Mac also had a unique machine identification number (Apple museum, 2004). Apple also offers a better-integrated computer operating system than its competitors. It is also not easily copied so Apple could offer a superior computing solution free of any troubled operating system. The GUI (graphic user interface) system design is better than anything that has been placed onto any Windows platform so Apple has continued to appeal to the creative and professional graphics sector. Apple has put audio, print spooler, bridging, and Ethernet into one small package call AirPort Express. The system works with any Wi-Fi device and supports streaming music through analog and digital audio jacks and USB printer spooling through USB ports on Mac OS X and Windows XP and 2000. The introduction of AirPort Express raises the bar on these combined features (Technology updates.com, (2004). Manufacturing related Apple subcontracts it's manufacturing to third parties so it can focus on its core competencies of testing and developing software. It can also concentrate on ensuring that what is manufactured meets required specifications so quality remains a top focus. Management can ensure that the computers meet customer's requirements by concentrating on their needs instead of fighting line production problems. Other companies (eg. Texas Instruments and Nortel) have begun to follow this lead more than before since they are finding that savings can be high. Distribution related Apple has always been a leader in the use of automated systems and the distribution phase is not any different. Apple operates some of its facilities round the clock and after manufacturing they are automatically feed to a system though a case taper where it is prioritized and sorted prior to being palletized. The FloStor system can divert the product for shipment or audit before it is released from the warehouse. Apple's use of this system minimizes the intervention and monitoring time cycles. It even has the capability of paging a maintenance mechanic when problems occur within the system (Flostor, 2004). Apple not only contends with the physical distribution of its computers but it must also address distribution of its music and iTunes software products. The AirPort Express system is one of Apple's new methods of staying on top of the distribution of its innovations. Marketing related Apple has created computers that are aesthetically pleasing when compared to PC and their clones. The company has also produced many great products but it continues to lose market share. Michael Hillmeyer, with Merrill Lynch, commented about Apple by stating that "A product differentiation strategy is difficult in a business increasingly commoditizing." He followed that with comments about the weak state of IT demand and the staleness of Apple product together with the higher costs were affecting financial forecasts (Wilcox, 2003). Apple had survived rather well through the use of its aesthetics and user-friendly systems but the computer's position changing to a commodity eliminates much of the differentiation. Its opening of the retail stores has also assisted with marketing of product since more people can readily see the name on company storefronts. Branding and logo help keep the name fresh in people's minds and Apple has designed some very creative commercials that help this (Yahoo finance.com, 2004). Apple's product differentiation in the iPod and iTunes sector will be short- lived since it has a dependency on third parties and also because competitors can easily enter the market. Apple must position itself as the only competitor in the market with stem-to- stern computing solutions. They can be done because the Macintosh and the Mac operating system is better integrated than other computer operating systems, including Windows. The differentiation is not easily copied by competitors and can provide Apple user with a superior computing solution. It can offer a trouble free operation, rapid response to technological change, and a direct link to customer concerns. Apple differentiation offers a clean, simple product line with a single controlling company dedicated to the production of quality products (Miller, 2000). Skills related Apple has spent much of its hiring practices dealing with upper level managers, computer technologists and specialists, programmers, engineers, and R&D scientists. They have gain a reasonable understanding of the skills required to sustain a competitive advantage in their areas of expertise. Apple has chosen to follow other companies in employing engineers as business managers and they have seen the fall out from having done so just as other companies have also seen. Apple's expansion into the retail store business has been a change to what they are accustomed to hiring. The storefronts use three key employee levels for selling product and providing expert support for customers. The three levels include the store manager, 'genius' position, and 'keyholder'. The company pays the store manager well but lacks in providing a reasonable pay for the 'genius' and 'keyholder' leading to high levels of turnover. 'Keyholders' stay when they are presented with the opportunity of moving up to the 'genius' level but leave soon after since they can command more money working for someone else after gaining experience. Some have even switch to work for other companies earning $50,000 annually after leaving the Apple store (dePlume, 2004). As Apple transitioned into team building in the late 1990s they soon found that they management staff was lacking in managerial skills required to lead cross-functional teams. As before many of them were engineers with little to no business management experience or academic background. Organizational capabilities (Beer, 1991) Evaluating Apple's organizational capabilities requires reviewing environmental/strategy, work system, management process, principles and values, human resources system, and the leadership team. Michael Beer, in his Harvard Business Review, document noted that Apple lacked the capability of developing effective teamwork between its talented engineers in R&D and the sales and marketing people who understood needs for lower cost products. Apple also lacked a work system of cross-functional product development teams and needed business-oriented managers with leadership skills to lead teams that could agree on new businesses. This put Apple in a position of not being able to fulfill its requirements for: 1) Defining its environment and understanding its strategy, 2) Lacked a work system, 3) Needed a management process for specifying workable goals and objectives, and 4) Lacked leadership teams to provide direction. Apple was missing four out of the seven segments from Michael Beer's Organizational Fit Model. Employees were not sure of the company's strategic directions and were receiving different priorities from R&D and marketing. This again came from lack of functional leadership team cohesiveness in setting one direction for the company. Managers did not want to lose control of their power and moving into cross-functional business teams meant just that plus not having an effective leadership retarded any efforts in that direction. The work system and management process require that communications lines be effective and Apple's was not. Trust and communication were extremely low in the Apple world. In 1991, John Scully came in and gathered the top 70 managers for an off-site. Lack of lower management involvement made it more difficult to solve problems. Apple's work on the iPod has shown the improvements of its organizational fit. Teams within Apple have been able to coordinate the work so that they are able to go to market ads and provide packaging that is not only aesthetic but also functional. iPods serve as THE digital music play and provide an avenue where Apple can market the Reflective level with messages and images designed within the Apple culture (800ceoread, 2004). Driving forces Companies are often faced with the affects of the driving forces. Driving forces are part of the external analysis and provide the company with insight on opportunity and threats that it must contend with. Some of the examples of driving forces are: Industry growth rate (short or long-term) Changes in who buys the product and how it is used Changes in society - different concerns, attitudes, and lifestyles Product innovation and technological change Firms - entering, exiting or mergers Increased globalization of industry Changes in cost and efficiency Regulatory influence and policy changes Changes in degree of risk and uncertainty Apple does have to contend with a few of those listed. Industry growth rate (short or long-term) The computer industry has been slow for the past number of years. It is affected by a weak economy and less disposable income within the households due to lay offs and outsourcing of jobs outside of the United States. Upgrades have not been technologically advanced enough to warrant constant change so many consumers wait until a few upgrades are offered before purchasing one. The industry has usually been supported by big business and since the slow down big business has not been expanding so need for additional computer and software is not required. Apple has to face another hurdle when viewing this because big business is more Wintel operating system driven and with the cost of cloned PCs, they are just more affordable. Changes in who buys the product and how it is used Changes in society - different concerns, attitudes, and lifestyles The people purchasing computer have been become accustom to using Windows operating systems. The population growth has increased and all of those individuals that come into computer using modes are being subjected to the Windows environment. Many are not knowledgeable of the Apple operating system and have only heard of Macintosh computers. The younger generations are coming to know of Apple with the onset of iTunes, iSync, and iPods. This is bringing a younger generation into Apple's marketing world but Apple has yet to convince them that the computer systems provide the quality and ease of use just as the music materials that Apple is able to supply for them. The products and how they are presented change continuously. The changes also are affected by the different concerns, attitudes, and lifestyle adjustments that continuously occur. The economic changes that have resulted from the 9/11 incidents have created change in attitudes and lifestyles. The economic outfall affected the spending habits of many people. The losses incurred by those directly involved has affected the immediate families and in many cases changed their lifestyles and attitudes. Product innovations and technological changes Microprocessors, semiconductors, memory storage, and speeds of computers is ever changing and as the technology improves so must Apple. Many product innovations are being driven in the areas of miniaturization. Companies are spending millions of dollars to provide themselves a position in being the one to make the next innovative improvement. Customers have a desire to possess the latest and greatest so the combination of the companies trying to create the new and the customers desire to be first 'on the block' with the new certainly creates a major driving force. Firms - entering, exiting, or mergers Entry into the microprocessor and semiconductor world would be rather difficult especially since the main players have already staked their territories. Much of the computer hardware industry has defined players and market share percentages allotted with a few shuffles taking place among them. Niche companies are being mergered or bought out by the larger companies so the larger ones make some small gains from time to time. The music industry is different since it does not require the capital outlay that would be incurred if entering a hardware market. The same applies to the software developers. New software developers can infiltrate the industry and music related equipment providers can easily provider newer systems or a different avenue for accessing the music clips. The need to remain competitive on both fronts keeps everyone moving forward. The differentiation in the Apple operating system can hinder the amount of software being created but this works against the company because few products are available to use on their computers. Competitors that can affect the direction of the company can easily copy the iPod and iTunes sectors. Increased globalization of industry Companies are surfacing in the global markets. Many companies in other countries are driven by their desire to capture a large market share on their side of the world or by governments pushing them to enter into the global systems. China is a country that is pushing their companies to compete in the global world. These operations affect the direction of the companies that have been trying to infiltrate these foreign places, especially when the governments impose tariffs against the foreign entrants. An American company selling in China cannot promote product differentiation when the consumers know that the same Chinese company is making the parts for both computers but the parts just receive different labels as they exit the facility. Changes in cost and efficiency The product life cycles have become shorter as technology advances and consumer whimsical purchasing changes. The mode forces increases in need for being innovative. Innovation and competitiveness cost the companies a considerable amount of money that has a direct affect on the profits. Matters worsen as competitors cut costs when providing their products to market. Apple moved into the retail world by opening 65 stores so costs increased considerably but it will take time to learn if the efficiency of their sales increased proportionately. Apple's different operating system also incurs addition costs in the selling and administrative costing realms. Apple must provide consumers with superior or value added equivalents to justify the higher prices for their products. Regulatory influence and policy changes Government regulations will continue to change domestically and abroad. Environmental issues have been part of Apple's proactive approach to being environmental stewards. This cost must be absorbed into the products being manufactured. Money spent on cleaning up or providing cleaner operations does not add to the value of the product production so it is a negative affecting cost that must be incurred. The choice of not being a good environmental steward could backfire and be far more costly than the amount being spent to do it up front. Entry into the global markets will encounter regulations imposed by the different governments. Changes in degree of risk and uncertainty Apple components and products are ordered before manufacturing begins so forecasted sales dictate how much should be ordered. If the sales do not occur then the orders may have been more plentiful than required and excess inventory could adversely affect the company. New innovative product may be presented to the consumer and make the present inventory obsolete so the company again stands to incur all the risk and face uncertainty of the future. Apple components may not be as plentiful when ordered from third parties because their systems control only 2% of the world market share so many suppliers would want to focus on the Wintel operating system that controls 90% of market share. Their ability to sell products would be much easier even with the additional competition. Apple's control of those that do produce components for them is limited and subject to much risk and uncertainty. Third parties also provide the music and manufacturing of iPods for Apple. Material restriction or higher cost of licensing materials could adversely affect the company. Forecasting availability of product or music clips could be risky since these third party members hold control. Internal Analysis ================= Organizational description -------------------------- Apple's employee count in October 2004 was approximately 10,912 with sales per employee documented at $770,513. The company is located at: 1 Infinite Loop Cupertino, CA 95014 United States Telephone: (408) 996-1010 Facsimile: (408) 996-0275 The officers and their positions to date are listed as: Steven P. Jobs Chief Executive Officer and Director Peter Oppenheimer Chief Financial Officer Timothy D. Cook Executive Vice President, Worldwide Sales and Operations Nancy R. Heinen Senior Vice President, General Counsel and Secretary Philip W. Schiller Senior Vice President, Worldwide Product Marketing Ronald B. Johnson Senior Vice President, Retail Jonathan Rubinstein Senior Vice President, Hardware Engineering Bertrand Serlet, Ph.D Senior Vice President of Software Engineering Sina Tamaddon Senior Vice President, Applications Avadis Tevanian, Jr., Ph.D Senior Vice President, Chief Software Technology Officer Its stock is divided as follows 1,063 institutions own 67.5% of the 387.93 million common shares outstanding. This is higher than the average institutional ownership of the Computer Hardware Industry at 50.7%, and higher than the average of the S&P 500 as a whole which is 65.2%. Corporate Vision/Mission ------------------------ A computer for every man, woman, and child on the planet. Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings (Apple website, 2004). Long and short range objectives (S&P Apple financial report, 2004) ------------------------------------------------------------------ Financial objectives Apple's revenues have risen 32% to $5.93 billion during its last 3 quarters of operation. This is an increase of $170 million compared to $27 million from previous year. The change is attributed to increased sales of iPod and Macintosh units and decreases in restructuring costs. Revenue for fiscal year end 2004 is expected to be 27% and an additional 13% is forecasted for 2005 end year. This is contingent to a continued economic recovery, new product introductions and additional retail store openings. Apple's introduction of its iBook has been favorable but Power Mac sales have been disappointing. Continued store opening may accelerate increases in revenue. Apple projected 88 stores by end of fiscal year 2004. The introduction of the iPod mini is expected to reduce sales of the iPOd, reducing gross margins slightly. The computer hardware environment continues to be weak but Apple has fared well during the downturn and is anticipated to improve as the economic sectors trend upward. New products and retail store strategy have been paying off in terms of earnings. Technological spending levels might continue to deteriorate and additional challengers to Apple's iPod are expected. Market share losses in the PC segment might continue. Apple must continue to watch competitor's entry into the music sector in effort to protect its iPod market share. The introduction of the mini-iPod and future developments can counter competitor entry. The PC sector must develop an innovative technological breakthrough that will surpass Wintel operating system performance so as to enhance product sales. Focus might be directed to improvements in the graphic and creative design segments of the Macintosh platform. Apple continues to fare well against the industry (as illustrated in Table 07 below). [IMAGE] Strategic performance Continued store opening may accelerate increases in revenue and while the introduction of the iPod mini is expected to reduce sales of the iPOd it is an innovative introduction that stays ahead of competitors. The company continues it restructuring. The termination of manufacturing operating in Singapore and associated headcount reduction was favorable. PowerSchool product elimination also helped with the recovery. This restructuring will save about $6 million in quarterly operating expenses. Business Strategy (2003 Apple Annual report, 2004) Digital Hub Apple provides personal computing experiences to students, educators, creative professionals, businesses and consumers around the world through its innovative hardware, software, peripherals and Internet offerings, including .Mac and the iTunes Music Store. It believes that the attributes of the personal computer, including its ability to run complex applications, possess a high quality user interface, contain large and relatively inexpensive storage, and easily connect to the Internet in multiple ways and at varying speeds, can individually add value to these devices and interconnect them as well. Apple designs and manufactures the entire personal computer - from the hardware and operating system to sophisticated applications and provides innovative industrial design, intuitive ease-of-use, and built-in networking, graphics, and multimedia capabilities. It offers digital hub products and solutions and provides interoperability with peripherals and devices from other companies. Retail The Company has opened 65 U. S. retail stores by end of fiscal year 2003. It opened and additional 9 stores during the first quarter of 2004, including its first international store in Japan. The stores are opened in high traffic locations in quality shopping malls and urban shopping districts. The company's main goal is to bring new customers to the Company and expand its installed base through sales to both first time personal computer buyers and those switching to the Macintosh platform from competing operating system platforms. It can do this by controlling the customer experience. Store employees are experienced and knowledgeable. The retail stores provide a medium for presenting entire computing solutions to users in areas such as digital photography, digital video, music, children's software, and home and small business computing. Education The company has spent 25 years focused on the use of technology in education. Apple believes that integrating technology into the classroom will result in higher levels of student achievement. Products such as eMac and iBook that are designed to meet the needs of education customers, video-editing solutions, wireless networking capabilities, student information systems, one-to-one learning solutions, and high-quality curriculum and professional development solutions. Creative Professionals The creative professional makes up the most important market for Apple and third party developer products. These customers use the Company's products for a variety of creative activities including digital video and film production and editing; digital video and film special effects, compositing, and titling; digital still photography; graphic design, publishing, and print production; music performance and production; audio production and sound design; and web design, development, and administration. The Company's operating system, Mac OS X, incorporates powerful graphics and audio technologies and features developer tools to optimize system and application performance when running powerful creative solutions provided by the Company or by third-party developers. Employee relations ------------------ It has been said that apart from Macintosh, Apple's greatest contribution to the computer industry was its talented engineers, who carried the torch to other firms. Steve Jobs predicted it well, saying, just before Macintosh's introduction, "Going out of the eighties, you know there won't be a Mac group. Burrell will be off in Oregon playing his guitar. Andy will be writing the next great American novel. Who knows what? But we'll be scattered all over the globe doing other amazing stuff." (Macintosh, 2004). Apple employees are still dedicated, loyal, and honest to date. The bosses have changed a few times but the main leader is back and he works hard on taking care of those that work with him. Apple maintains a a stable employee relationship environment. Partnership is firmly embedded in Apple but resources are continually needed to sustain it as the existence of viable partnership arrangements and processes remain long-term goals (Apple case study, 2004). Products and services --------------------- Apple Computer, Inc. designs, manufactures and markets personal computers (PCs) and related software, peripherals and personal computing and communicating solutions. Its products include the Macintosh line of desktop and notebook computers, the Mac OS X operating system, the iPod digital music player and a portfolio of software and peripheral products for education, creative, consumer and business customers. The Company sells its products through its online stores; direct sales force, third-party wholesalers and resellers and its own retail stores. As of September 2003, Apple operated 65 retail stores. In addition to its own hardware and software products, the Company's retail stores carry a variety of third-party hardware and software products. (Reuters, 2004). Hardware Products Power Mac® Xserve® and Xserve RAID Storage System PowerBook® iMac® eMac iBook® Peripheral Products iPod™ Displays Software Products and Computer Technologies Operating System Software Server Software and Server Solutions Professional Application Software Consumer, Education and Business Oriented Application Software iPhoto™ iChat AV iSight Corporate culture, values, and morals ------------------------------------- Steve Jobs is Apple. The company began with him as leader and then lost him during the middle years as the company fell on its face. His return has rejuvenated the Company. While he believes in strong leadership he operates in a laid back fashion but still gets the job done. The entire company is passionate about its desires to succeed and return to what it once was technologically. Clicking on the poster below will provide a greater insight on Apple's culture - think different (Macintosh, 2004). #10. Corporate culture The company logo is a rather odd thing. Who would have considered an apple after it had a bite taken out of it. What does this have to do with computers? The people involved in the development of the Macintosh were artists rather than engineers. They inscribed their names on the inside of the machines much like an artist would his/her painting. In 1988, Apple began its 'Think different' campaign and it signified what Apple people were about. Employees were loyal and devoted computer fans, sometimes bordering on the fanatic. They continuous push to work outside of their standard paradigm. Apple's culture is innovation, proud and loyal. Gina Caamano expressed her thoughts of what Apple was in 2000. Her comment follows: When I began my journey at Apple I was young and passionate about what "Apple" stood for. It was a company that valued it's people and offered an abundance of opportunities I knew it was unique and special and I wanted to be a part of it. Throughout the years, there were many lessons I learned. It taught me to be adaptable, pushing me to the limit, at times, to grow with it's rapidly changing environment. With Apple, nothing was ever secure nor predictable. When things became too comfortable I knew they would change soon enough. I've seen Apple at it's best and I've seen it at it's worst I've grieved for Apple's failures and I've cheered it's successes. I always felt proud to be a part of such a special and innovative company. There was never a dull moment. Fifteen years later, as I close this last chapter And prepare to move onto a new path I look back at all the gifts Apple has given me And I give thanks for all of them -the incredible people I met whom some are now cherished friends, -And others who have shared the "Apple" experience with me. Apple will always hold a special place in my heart. Since so much of my heart went into Apple (Caamano, 2000). Core Competencies ----------------- Apple's core competencies are focused in the markets of education and the creative professional worlds. Apple has proved its superiority in both of these areas and continues to focus on them. Apple has built an unquestionable strategic position in the K-12 grade educational programs. It has begun to expand its retail outlets to bring the computers to the people and is making great strides in the iPod and iTunes music world. The innovations have been retaining customer's focus and have returned healthy profits. Apple's focus on its key factors of success is driven to improving and retaining the iPod segment. It is also determined to continue improvements in the creative professional software and hardware realms. Operations are in tune with the company and with third party suppliers and designers. Apple knows that it has a superior product and it hoping to bring this superior product to the people through its retail outlets. Apple controls the hardware and software production so it can determine its own future especially since it is not stuck in the Wintel operating system world and battling all of the competitors for a share of that particular market. It can proceed to corner its own niche while pursing increased growth in its own operating system. It must find a way to convince others to join in the promotion of hardware and software components for this reliable operating system. Financial Performance (Morningstar.com, 2004) and (Moneycental.msn.com, 2004). ================================================= Liquidity Inventory Turnover measures how quickly a company sells the products it produces, i.e., how efficient its marketing efforts are. It is a measure of basic efficiency. Inventory Turnover went from a weak 17.3 times annually to a high of 219.5 times in 2000 but has since regressed to about 89.1 times annually mainly due to the slow economy and other outlying factors since the computer industry began heading 'south' in 2001. Apple continues to rank extremely well when compared to industry at 48 times, sector at 14.4 times and S&P 500 companies at 12.3 times. It ranks at the 93rd percentile in its industry. Efficiency Ratios (TTM) AAPL Industry Sector S&P 500 Rank in Industry Inventory Turnover 87.5 48.0 14.4 12.3 93 Current Ratio 2.9 1.3 3.1 1.8 73 Information taken from Fidelity.com A company operating cycle indicates the time between the acquisition of inventory and the realization of cash from sales of inventory. The shorter the time the better the company is able to turn inventory into cash in hand for continued operations. In 1998, Apple use to take up to 115.49 days to turn the inventory into cash. In 2000 they were able to get money into their hands at a very quick turn of 9.11 days. The market slowdown has lengthened the inventory to cash turnaround to 22.5 days. The current ratio (current assets / current liabilities) has increased gradually since 1998 to its 2003 number of 3.25. The higher number indicates that the company would be more than able to meet short-term obligations. The higher the number the more liquid the company is. Industry standards for the computer sector are at 3.1 so Apple is better in comparison. It is in much better position when compared to industry and S&P 500 companies. Apple ranks in the 73rd percentile in current ratio documentation. Inventory turnover in days took a very long time in 1998 but showed drastic improvements into its best year (2000 with 1.7). Turning over inventory in 4.1 days is still great. Strengths Product differentiation When Apple first hit the market in the early 1980s it had a product that differentiated it from all other computer products on the market but it failed to capitalize on what it had. The system continues to be strength for the company since its closed operating system is not subject to the computer viruses and hacking that affects the Microsoft Windows operating system. The small market share controlled by Apple can be increased every time Microsoft encounters problems. Apple's system for graphic and architectural production and design is far superior to any Windows application and this strength should receive considerable advertising to capture more of that niche market. Apple cannot not continue to make the mistakes it has made in the past when it could have countered the Windows upgrades as they occurred. The Macintosh's high-resolution graphics and ease of advantage over MS-DOS had made it a natural for software developers who created the "desktop publishing" segment, which was widely credited as saving Apple and the Macintosh (Kawasaki, 1990) The iPod and iTunes markets are strengths but they can be easily copied by competitors and are subject to the control of third parties. At present it does control the market but without pursuit of a core competency that cannot be easily imitated by others it will fall off of the strength category. Brand name and image Branding of products help in keeping consumers abreast of the company products. Whenever a company established a popular brand name or image it can reap some benefits. Some of the benefits associated with the name recognition is the ability to reduce advertising from the recognition perspective. Apple computers got its name from Steve Job's favorite fruit. He has run three months late in filing for a name for his company and threatened his colleagues that he would call the company Apple Computers if they were unable to come up with something better by 5:00 pm that day. His friends didn't so the name stuck. The brand has some to be known for its superior quality and aesthetics. It is valued in the graphic world for having an operating system superior to any Windel platform. The innovations in the music industry have been linked with Apple's brand name and its quality products and services. Manufacturing both hardware and software Steve Jobs is pursuing the combination of hardware and software manufacturing and does not intend to lay off any of his employees since they are what make Apple successful. Apple will continue to run lean while management pursues the business of making machines and applications that even their most stringent critics regard as some of the best in the business (Barker, 2003). Apple does manufacture both hardware and software for its computers so it has the ability of controlling design so that it appeals to the functional uses and aesthetics required by consumers. Some of Apple's clients are web designers and its computers provide the specific hardware and software needs to accommodate them. Output is found to be impressive both for customers and their clients. Apple is providing the most affordable 64-bit technology and a new operating system OS X in effort to position itself in the scientific and academic high performance computing tasks (Robe & Circlaeys, 2004). Diversified markets Apple has built an alliance with Sony and Ericsson with aims at capitalizing on the broadband wireless market in the future. Apple's launch of iSync software in 2003 allows synchronizing of personal information management applications and devices such as mobile phones and hand-held computers (PDAs) (Barker, 2003). Weaknesses Economic and political uncertainty Apple's operating performance is affected by the economic and political uncertainty that shadows the United States. Education entities have postponed purchases due to budget cutbacks and shortfalls. Businesses are not expanding and employment reductions in force have provided less disposable income reducing sales. Failure to improve could continue to affect the company and its suppliers negatively. The entire tech market has been weakened by the economic and political uncertainty as well as other constraints. War, terrorism and public health issues The wars in Iraq and Afghanistan have caused economic unrest that has melded into the computer and electronic sector and slowed sales. The warring factions have gone beyond the borders and disrupted commerce through terrorist actions such as bombings. The best example is the attack on the New York Twin Towers, the Pentagon, and Spain's railway station. These aggressive acts cause a negative impact the economy that directly affects Apple and its competitor's sales and distribution channels. Research and development costs higher than competitors The market requires that participants continually provide innovations and competitive products and technologies. Apple has been working extremely hard to accomplish this and in doing so is spending more money for research and development that its competitors. This increased spending negatively affects its profit margin and with competitors cutting prices on their products it makes it difficult to compete on the same playing field. Selling, general, and administrative costs are higher than competitors Expansion into the retail 'bricks and click' world has increased Apple's costs. Marketing fees for advertising its unique operating system and new equipment again affects the bottom line, even though they are necessary expenditures. Competitors are able to enjoy the luxury of utilizing operating systems, in Windows users case, that controls a considerable amount of market share so they do not have to spend anywhere near as much to promote their operating system. Apple has to focus on creating more awareness not only of its products but also of its operating system. It must continue to develop innovative products that offset the expenditures of these group costs. Component order placement places company at risk Components and products are ordered before the computers are manufactured so if something occurs that represses sales the company is vulnerable because of the high priced inventory that it retains. This occurs because pricing competition is ever going so to purchases of components and products at present day cost would usually be lower than prices paid for what is presently in inventory. The worst-case scenario is having inventory become obsolete and then having to be written off of the financials. Cancellations of orders usually result in cancellation fees that still affect the companies' financial position. The process of production requires that a company forecast possible sales so that they can order the products and components necessary for being able to manufacture a desired output. If they are not ordered then the competitor will have the upper hand in getting product to the consumer first. The risk is in making incorrect forecasts. Apple components may not be as plentiful from vendors since their market share is smaller and the operating systems are different. This puts the companies with the Windows operating systems at an advantage since Apple could run into a problem procuring a sufficient supply of components. Apple relies on third parties Apple relies on third parties for music and for manufacturing. This can affect the costs being relayed to the consumer. The music sales have been profitable for Apple but they have to contend with the fact that the material is in the control of third party representatives. The fees for having access to these materials can be extremely expensive. Another concern is being outbid or restricted from being able to provide the contents previously provided. Most of the licensing agreements are short-term and do not come with a guarantee that the materials will be licensed in the future. Some music industry parties have announced that consolidation of their distribution might occur in the future. A move such as this would restrict availability of material for Apple's iTunes Music Store and drive costs upward so that they might not be as attractive as they are now. iPod sales could decrease rapidly if material restrictions occurred and Apple would remain at the mercy of these third-party controllers. The music coming from third parties is not the only thing that Apple should be concerned with. It also has third parties manufacture it products. The company also out sources much of its transportation and logistics management. Outsourcing does lower the fixed operating costs but this is at risk of not having any or at most restricted control. Quantity output and quality of manufacturing are in the control of the third party supplier/manufacturer. The company is ultimately held responsible in the end, especially when defects or other liabilities surface. This is another risk that Apple must contend with. Apple is also reliant on Motorola and IBM for processor chips so if these companies run short or increase the price on the chips Apple must either absorb the cost or pass it along to consumers. Either of the two scenarios is highly likely especially when the tech market is recessed. Apple is faced with multiple weaknesses that it cannot control. Each of them or a group of them could affect its operations in a negative direction and Apple will be faced with more hardships than what it encountered in the past. Management must look at how these weaknesses can either be bridged in effort to minimize risk or turned into strengths.