Apple Computer Inc.

2005
A Strategic Management Case Study
Graphics are the property of Apple Computer

® 2007, Tony Gauvin, UMFK

Overview
• • • • A brief history of Apple Computer EOY 2004
– Mission, Vision, Objectives, Strategies New Vision and Mission
Opportunities & Threats CPM EFE Financial Data Strengths and weaknesses IFE Financial ratios

• •

Possible alternative strategies Our Recommendation
– – – Strategies Long range objectives EPS/EBIT

2005

– – –

External Analysis

• • • • • • •

Internal Analysis
– – – –

Strategic Analysis
– – – – – – – SWOT Matrix SPACE BCG IE matrix Grand Strategy Matrix Matrix Analysis QSPM

Implementation Issues Proposed annual objectives (goal) and polices Proposed procedures for evaluation Epilogue Current Performance Questions Resources Utilized

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History of Apple
• 1976
– Apple started in a garage in Santa Clara, CA by Steve Wozniak and Steve Jobs – A easy to use PC for small computer users

• 1980
– $117,000,000 in sales – IPO

• 1983
– Wozniak quits – Jobs hires John Sculley From Pepsi Co. to become President of Apple

• 1984
– Macintosh PC
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History of Apple
• 1985
– – – – Jobs and Sculley have a “falling out” Jobs fired Sculley becomes CEO Bill Gates wants to buy Mac O/S, Sculley says No, Gates buys DOS from IBM, Microsoft kicks Apple's butt (90% market share)

• 1993
– Apple release Newton, the first PDA – Earnings Plunge, Apple restructures, Sculley Resigns

• 1997
– Apple CEO Gilbert Amelio buys NextStep from Steve Jobs – Earnings Plunge, Apple restructures, Amelio Resigns

• 1998
– Steve Jobs returns as iCEO
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History of Apple
• 1998
– Jobs restructures Apple along two products lines
• Consumer “i”Mac
– “i” for internet

• Professional “Power”Mac
– “power” for power user

– Sales return, Brand emerges, Innovation rules
• USB, Firewire, Airport • iPod and iTunes

– Stock price takes off like a rocket!

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Lesson learned

+
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2004 Vision Statement
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Apple is committed to bringing the beast personal computing experience to students, educators, creative professional, and consumers around the world through its innovative hardware, software, and Internet offerings

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2004 Mission
Apple Computer is committed to protecting the environment, health and safety of our employees, customers and the global communities where we operate. We recognize that by integrating sound environmental, health and safety management practices into all aspects of our business, we can offer technologically innovative products and services while conserving and enhancing resources for future generations. Apple strives for continuous improvement in our environmental, health and safety management systems and in the environmental quality of our products, processes and services.
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2004 Strategies
• Market Penetration
– Branding – Niche player

• New Product Development
– Speech recognition – Virtual reality

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2004 objectives
• Double market Share from 5% to 10% • Remain as the most profitable computer company in the industry

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2004 Issues
• How can apple best capitalize on the needs of the business world for a safer, virus-free, wormfree system? • Should Apple enter the consumer electronics business like Dell and Gateway did? • Should Apple remain a lone wolf in Operating Systems or adopt a cross-platform format compatible with Windows and Intel • How much emphasis should Apple place on developing the next generation of voice recognition computers?
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A new vision

To become the global leader in computer and digital music products.
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A New Mission
• The Apple commitment to excellence is its mission to provide computers and service (2) for people (1) that meet the highest standards of value and reliability. Apple is one of the leaders in the computer industry and produces some of the best-selling computers and digital music products in the world (3). Apple provides the highest level of quality and value for our customers (7). Those are timeless fundamentals. We also apply innovative technology to our core business (4) to make our products irresistible to customers, beneficial to society, and profitable to our company (5). We strive to provide additional opportunities for growth and enrichment of company personnel while maintaining a work environment for all employees (9) that encourages personal commitment and participation in support of achieving excellence. We are committed to being a good corporate citizen, and being openly honest with all of our stakeholders (6). We support activities that enable people to improve their lives and reinforce their commitment to society (8).

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Apple’s New Mission
The new mission answers the following questions  Customers: Who are the firm’s customers?  Products or services: What are the firm’s major products?  Markets: Geographically, where does the firm compete?  Technology: Is the firm technologically current?  Concern for survival, growth, and profitability: Is the firm committed to growth and financial soundness?  Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities of the firm?  Self-concept: What is the firm’s distinctive competence or major competitive advantage?  Concern for public image: Is the firm responsive to social, community, and environmental concerns?  Concern for employees: Are employees a valuable asset of the firm?
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External Audit (Opportunities)
1. Increase in worms and viruses on PCs. 2. Large population (Gen X & Y) which are extremely individualistic and name brand conscious. 3. Government crackdown on pirating music off the Internet. 4. Much of the world is still without computers. 5. People enjoy small electronic gadgets.
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External Audit (Threats)
1. Companies not seeing Apple as compatible with their software. 2. Dell and HP are major competitors. 3. Increasing competition with music downloads. 4. Competition produces similar products at often half the price. 5. The population at large unwilling to use Macintosh.
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Apple CPM
Apple
Critical Success Factors Market Share Price Financial Position Product Quality Consumer Loyalty Advertising Management Global Expansion Innovation Web Development Total Weight 0.10 0.10 0.15 0.15 0.15 0.04 0.06 0.06 0.14 0.05 1.00 Rating 2 2 3 4 4 4 4 2 4 3 Weighted Score 0.20 0.20 0.45 0.60 0.60 0.16 0.24 0.12 0.56 0.15 3.28 Rating 3 3 4 3 2 2 3 2 2 2

HP
Weighted Score 0.30 0.30 0.60 0.45 0.30 0.08 0.18 0.12 0.28 0.10 2.71 Rating 4 4 3 3 3 3 3 3 2 3

Dell
Weighted Score 0.40 0.40 0.45 0.45 0.45 0.12 0.18 0.18 0.28 0.15 3.06

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Apple EFE
Key External Factors

Weight

Rating

Weighted Score

Opportunities
Increase in worms and virus on PCs. Large population (Gen X & Y) which are extremely individualistic and name brand conscious. Government crackdown on pirating music off the Internet. Much of the world is still without computers. People enjoy small electronic gadgets. Threats Companies not seeing Apple as compatible with their software. Dell and HP are major competitors. Increasing competition with music downloads. Competition produces similar products at often half the price. The population at large unwilling to use Macintosh. TOTAL 0.10 0.10 0.05 0.10 0.10 1.00 2 3 4 3 2 0.20 0.30 0.20 0.30 0.20 3.20 0.15 0.15 0.05 0.10 0.10 4 4 4 2 4 0.60 0.60 0.20 0.20 0.40

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Consolidated Balance Sheet

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Consolidated statement of operations

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Internal Audit (Strengths)
1. iTunes Music Store is a good source of revenue, especially with the iPod and its availability on Windows platform. 2. Developing own software and hardware. 3. Apple’s niche audience provides the company with some insulation from the direct price competition. 4. Revamping desktop and notebook lines. 5. Web technology can be used to improve product awareness and sales. 6. Low debt—more maneuverable.
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Internal Audit (weaknesses)
1. Weak relationship with Intel and Microsoft. 2. Weak presence globally. 3. Dependency on new product launches. 4. Weak presence in markets other than education and publishing. 5. Slow turnaround on high demand products.
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Apple IFE
Key Internal Factors Strengths iTunes Music Store is a good source of revenue, especially with the iPod and the availability on Windows platform. Apple’s niche audience provides the company with some insulation from the direct price competition. Revamping desktop and notebook lines. Low debt—more maneuverable. Developing own software and hardware. Good brand loyalty. Web technology can be used to improve product awareness and sales. Weaknesses Dependency on new product launches. Weak presence globally. Slow turnaround on high demand products. Weak relationship with Intel and Microsoft. Weak presence in markets other than education and publishing. Total 0.06 0.07 0.03 0.10 0.04 1.00 1 1 2 1 2 0.06 0.07 0.06 0.10 0.08 2.78 0.15 0.10 0.10 0.06 0.14 0.05 0.10 4 3 3 4 3 3 4 0.60 0.30 0.30 0.24 0.42 0.15 0.40 Weight Rating Weighted Score

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Financial Ratio Analysis
(January 2006)
Growth Rates % Sales (Qtr vs. year ago qtr) Net Income (YTD vs. YTD) Net Income (Qtr vs. year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Price Ratios Current P/E Ratio P/E Ratio 5-Year High P/E Ratio 5-Year Low Price/Sales Ratio Price/Book Value Price/Cash Flow Ratio Profit Margins Gross Margin Pre-Tax Margin Net Profit Margin 5-Yr Gross Margin (5-Year Avg.) 5-Yr Pre-Tax Margin (5-Year Avg.) 5-Yr Net Profit Margin (5-Year Avg.) 30.3 13.0 9.6 29.1 5.9 20.2 8.5 6.2 20.3 5.8 3.8 47.2 11.9 8.0 47.3 9.4 5.8 46.1 NA NA 4.35 8.11 39.90 31.6 NA NA 1.88 10.57 26.80 18.8 64.8 17.4 1.48 2.83 12.40 Apple Computer 56.50 383.70 305.70 12.64 NA NA Industry 18.00 78.90 17.40 5.00 NA NA SP-500 14.20 16.30 17.00 4.93 10.40 4.27

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Financial Ratio Analysis
(January 2006)
Financial Condition Debt/Equity Ratio Current Ratio Quick Ratio Interest Coverage Leverage Ratio Book Value/Share Investment Returns % Return on Equity Return on Assets Return on Capital Return on Equity (5-Year Avg.) Return on Assets (5-Year Avg.) Return on Capital (5-Year Avg.) Management Efficiency Income/Employee Revenue/Employee Receivable Turnover Inventory Turnover Asset Turnover 90,000 941,000 16.7 73.0 1.4 63,000 1 Mil 12.2 66.8 2.1 29,000 367,000 7.7 7.8 0.4 17.9 11.6 17.9 6.9 4.4 6.7 34.6 12.0 32.6 17.0 7.1 15.7 15.3 2.7 7.4 11.9 2.0 5.6 0.00 3.0 2.6 NA 1.5 8.86 0.06 1.5 1.2 NA 2.9 3.50 1.06 1.4 0.9 3.5 5.7 13.26

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Financial Trends
Date 2005 2004 2003 2002 2001 Avg. P/E 23.5 40.6 90.1 111 NA Price/Sales 3.21 1.83 1.22 0.91 1.02 Price/Book 6 2.99 1.8 1.27 1.39 Net Profit Margin (%) 9.6 3.3 1.1 1.1 -0.7

Date 2005 2004 2003 2002 2001

Book Value/ Share $8.94 $6.48 $5.76 $5.70 $5.59

Debt/Equity 0 0 0 0.08 0.08

ROE (%) 17.9 5.4 1.6 1.6 NA

ROA (%) 11.6 3.4 NA NA -0.6

Interest Coverage NA NA NA NA N

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Apple Stock Performance

® 2007, Tony Gauvin, UMFK http://moneycentral.msn.com/investor/charts/charting.asp?symbol=AAPL

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Apple Net Worth
(January 2006 in millions)

1. Stockholders’ Equity + Goodwill = 7,466 + 69 2. Net Income x 5 = $1,355 x 5= 3. Share price = $72.00/EPS(1.56) = 46.15 x Net Income $1,335 = 4. Number of Shares Outstanding x Share Price = 842 x $72.00 = Method Average

$ 7,535 $ 6,775 $ 61,610 $ 60,624 $34,136

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Strategic Analysis Swot Matrix
Strengths 1.iTunes Music Store is a good source of revenue, especially with the iPod and the availability on Windows platform. 2.Developing own software and hardware. 3.Apple’s niche audience provides the company with some insulation from the direct price competition. 4.Revamping desktop and notebook lines. 5.Web technology can be used to improve product awareness and sales. 6.Low debt—more maneuverable. 7.Good brand loyalty. Opportunities 1.Increase in worms and viruses on PCs. 2.Large population (Gen X & Y) which are extremely individualistic and name brand conscious. 3.Government crackdown on pirating music off the Internet. 4.Much of the world is still without computers. 5.People enjoy small electronic gadgets. S-O Strategies 1.Increase awareness through the Web of the immunity of Mac products to worms and viruses. (S5, O1) 3.Advertise using individuals that will link Generation X & Y to the iTunes and other related products. (S1, O2, O4, O5) 4.Use movies and music groups that are geared towards Gen X and Y to promote computers and laptops. (S3, S5, O2, O5) Weaknesses 1.Weak relationship with Intel and Microsoft. 2.Weak presence in business arena. 3.Dependency on new product launches. 4.Weak presence in markets other than education and publishing. 5.Slow turnaround on high demand products.

W-O Strategies 1.Increase ties with Microsoft and Intel and their products.(W1, W2, W4 O2, O3) 2.Promote to business the safety of having a worm and virus free computer by using Mac. (W2, W4, O1, O5). 3.Expand production into Asia (W2, O4).

Threats 1.Companies not seeing Apple as compatible with their software. 2.Dell and HP are major competitors. 3.Increasing competition with music downloads. 4.Competition produces similar products at often half the price. 5.The population at large unwilling to use Macintosh.

S-T Strategies 1.Increase and promote the compatibility to Windows operating system. (S5,T1) 2.Promote the originality of Apple computers and the different style and stable system that is worth the price difference in style, stability and speed. (S2, S5, T2, T4, T5)

W-T Strategies 1.Improve relationship with Microsoft and Intel so that companies will see them as compatible. (W1, W2 T1) 2.Produce Wintel Compatible products (W1, T1).

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Strategic Analysis Space Matrix
Financial Strength rating is 1 (worst) to 6 (best) 1 Leverage 2 Working Capital 3 Liquidity 4 Return on Investment 5 3 Year NEW income Industry Strength rating is 1 (worst) to 6 (best) 1 Growth Potential 2 Profit Potential 3 Financial Stability 4 Ease of Entry into Market 5 Labor Cost Environmental Stability rating is -1 (best) to -6 (worst) 1 Rate of Inflation 2 Technological Changes 3 Price elasticity of Demand 4 Competitive Pressure 5 Barriers to Entry into Market Competitive advantage rating is -1 (best) to -6 (worst) 1 Market Share 2 Product Quality 3 Customer Laylaity 4 Technological Know-How 5 Control over Suppliers and Ditribuors Ratings 3.0 3.0 4.0 5.0 5.0 20.0 4.0 4.0 5.0 2.0 3.0 18.0 -2.0 -5.0 -2.0 -6.0 -2.0 -17.0 -5.0 -1.0 -1.0 -1.0 -2.0 -10.0

FS Total

IS Total

ES Total

CS total

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Strategic Analysis Space Matrix
Conservative FS 6 5 4 3 2 1 CA IS Aggressive

­6

­5

­4

­3

­2

­1

­1 ­2 ­3 ­4 ­5 ­6 ES

1

2

3

4

5

6

Defensive

Competitive

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Strategic Analysis Grand Strategy Matrix
Rapid Market Growth Quadrant II Quadrant I

Weak  Competitive  Position

Strong  Competitive  Position

Quadrant III Slow Market Growth

Quadrant IV

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Apple IE Matrix
Grow and Build Hold and Maintain Harvest or Divest High 3-4 Strong 3-4

IFE Scores
Average 2-2.99 Weak 1-1.99

I
International

II

Domestic

III VI IX

EFE Scores

IV VII
Low 1-1.99

V VIII

Medium 2-2.99

Segments RevenueProfit EFE Domestic ® 2007, Tony Gauvin, UMFK 52% 54% International 46% 48%

IFE 3.5 3.0

2.6 3.0

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Apple BCG Matrix
High 1.0 High +20 Medium .50 Low 0.0

Stars

Domestic Question Marks

II
Medium

IInternational
Dogs

0
Cash Cows

III
Low -20
Segments Domestic International

IV
Revenue Profit Growth Rate 54% 52% 17 46% 48% 5 ® 2007, Tony Gauvin, UMFK Relative Market Share 0.3 0.2

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Matrix Analysis
Alternative Strategies
Forward Integration Backward Integration Horizontal Integration Market Penetration Market Development Product Development Concentric Diversification Conglomerate Diversification Horizontal Diversification Joint Venture Retrenchment Divestiture Liquidation X 1 X X X

BCG

IE
X X X X X X

SPACE
X X X X X X X X X

GRAND

COUNT
2 2 2 3 3

X X X X X

4 2 2 2 1

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Apple QSPM
Strategic Alternatives Key Internal Factors Strengths iTunes Music Store is a good source of revenue, especially with the iPod and the availability on Windows platform. Apple’s niche audience provides the company with some insulation from the direct price competition. Revamping desktop and notebook lines. Low debt—more maneuverable. Developing own software and hardware. Good brand loyalty. Web technology can be used to improve product awareness and sales. Weaknesses Dependency on new product launches. Weak presence in business arena. Slow turnaround on high demand products. Weak relationship with Intel and Microsoft. Weak presence in markets other than education and publishing. SUBTOTAL 0.06 0.07 0.03 0.10 0.04 1.00 --1.00 --4.00 2.00 --0.07 --0.40 0.14 1.87 --3.00 --1.00 4.00 --0.21 --0.10 0.28 1.73 0.15 0.10 0.10 0.06 0.14 0.05 0.10 Weight Produce Wintel compatible products AS 4.00 ----1.00 --4.00 4.00 TAS 0.60 ----0.06 --0.20 0.40 Expand production into Asia AS 3.00 ----4.00 --3.00 3.00 TAS 0.45 ----0.24 --0.15 0.30

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Apple QSPM
Key External Factors Weight Produce Wintel compatible products TAS 0.15 0.15 0.05 0.10 0.10 1.00 1.00 1.00 1.00 --0.15 0.15 0.05 0.10 --Expand production into Asia AS 3.00 4.00 4.00 4.00 --TAS 0.45 0.60 0.20 0.40 --Opportunities Increase in worms and virus on PCs. Large population (Gen X & Y) which are extremely individualistic and name brand conscious. Government crackdown on pirating music off the Internet. Much of the world is still without computers. People enjoy small electronic gadgets. Threats Companies not seeing Apple as compatible with their software. Dell and HP are major competitors. Increasing competition with music downloads. Competition produces similar products at often half the price. The population at large unwilling to use Macintosh. SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE 0.10 0.10 0.05 0.10 0.10 1.00 0.95 2.83 2.15 3.88 4.00 1.00 ----0.40 0.10 ----2.00 3.00 ----0.20 0.30 -----

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Possible alternative Strategies
• Market Penetration
– Go after Dell, HP and Microsoft (the Wintel alliance) markets Shares

• Market Development
– Asia & Europe

• New Product development
– New consumer electronics products

• Related Diversification
– Peripherals

• Retrenchment
– Reengineer to lower cost of goods sold in reaction to commoditization pricing of PC market
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Recommendations
• Strategy 1
– Open twenty computer retail stores (not just peripherals and accessories). Apple currently operates stores throughout the United States with only peripherals and accessories for their computers. Adding the hardware should generate more handson awareness and use already established locations. – This will increase product accessibility for those who wish to view items other than just accessories and increase awareness of the originality of Apple’s products. – Two percent increase in sales representatives for the computer hardware. – Estimated cost of $ 5 million per store = $100 Million Total.

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Recommendations
• Strategy 2
– Expand into the Asian market over a five-year period by building a manufacturing facility and headquarters in Hong Kong and expanding sales throughout Asia. Estimated cost $5 billion.

• Strategy 3
– Add more features to current products including new iPod, Shuffle, and Macintosh enhancements and power. – $50 million is the estimated cost for Research and Development.

• While it is usually prudent to embark on just one strategy at a time, Apple cash reserves (~$8 billion) and managerial talents (Steve Jobs) makes embarking on 3 strategies at one time is not only possible but recommended.
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EPS/EBIT
• $ Amount Needed: $5,100 M
– Strategy 1 & 2

• • • •

Stock Price: $75 Tax Rate: 26% Interest Rate: 5% (2006) # Shares Outstanding: 842M

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EPS/EBIT
EBIT Interest  EBT Taxes EAT # Shares EPS Common Stock Financing Recession Normal Boom $500,000,000 $1,500,000,000 $3,000,000,000 0 0 0 500,000,000 1,500,000,000 3,000,000,000 130,000,000 390,000,000 780,000,000 370,000,000 1,110,000,000 2,220,000,000 910,666,667 910,666,667 910,666,667 0.41 1.22 2.44 Recession $500,000,000 257,500,000 242,500,000 63,050,000 179,450,000 842,000,000 0.21 Debt Financing Normal Boom $1,500,000,000 $3,000,000,000 257,500,000 257,500,000 1,242,500,000 2,742,500,000 323,050,000 713,050,000 919,450,000 2,029,450,000 842,000,000 842,000,000 1.09 2.41

EBIT Interest  EBT Taxes EAT # Shares EPS

70 Percent Stock ­ 30 Percent Debt 70 Percent Debt ­ 30 Percent Stock Recession Normal Boom Recession Normal Boom $500,000,000 $1,500,000,000 $3,000,000,000 $500,000,000 $1,500,000,000 $3,000,000,000 77,250,000 77,250,000 77,250,000 180,250,000 180,250,000 180,250,000 422,750,000 1,422,750,000 2,922,750,000 319,750,000 1,319,750,000 2,819,750,000 109,915,000 369,915,000 759,915,000 83,135,000 343,135,000 733,135,000 312,835,000 1,052,835,000 2,162,835,000 236,615,000 976,615,000 2,086,615,000 890,066,667 890,066,667 890,066,667 862,600,000 862,600,000 862,600,000 0.35 1.18 2.43 0.27 1.13 2.42

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Implementation Issues
• Moving production overseas
– – – – – Unsettling for current workforce MIS Integration problems Change in culture May damage brand (Made in USA) Environmental outlook

• New marketing strategies
– Paradox of marketing to deficiencies of Wintel platform while becoming cross platform capable

• Forward integration issues
– Do we have the talent to become direct sellers – Cross selling competitors peripherals >> Brand Dilution?
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Proposed annual objectives (goal) and polices
• Double sales revenue in 3 years
– 1st year 50%, 2 year 25, 3 year 25% – Write division polices stating exact gains and marketing approaches to achieve gains

• •

Reduce unit cost of goods sold by 10% annually for next 3 years
– Leverage low cost labor overseas

Introduce one new consumer product each year
– Provide adequate funding to R&D – Provide funding for market research – Insure strong communication ties between marketing and R&D

Either provide functional enhancements to existing products each year or obsolesce product
– Assign R&D project teams to each existing product – Have market research produce product maturity curves for existing products

Create Chief scientist position on Corporate Board to reflect the importance of R&D to Apple Computer

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Proposed procedures for evaluation
• Qtr & Yearly financial reports • Track Industry & market Reponses to new product development • Balanced Scorecard • Yearly strategic meeting of division management and corporate management

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Epilogue
• 2006
– – – – iPods add Video Content from Disney, ABC, ESPN, SOAPnet Stock soars by 120% iPod morphs to
• Shuffle • Nano

– Goes to Intel Architecture – Sales increase by 45% – Gross margin increase by 8%

• 2007
– iPhone – Sales predicted to increase by 35% – Gross profit margin predicted to increase by 8%
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Current Stock Performance

http://moneycentral.msn.com/investor/charts/charting.asp?symbol=AAPL
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Resources
• Case Notes
– Forest David; Francis Marion University

• Form 10-K SEC Filing, Sept. 25, 2005 • Datamonitor
– – – – SWOT Apple 2004 & 2005 PCs in the United States 2005 Consumer Electronics in the United States 2005 Market Watch
• Apple: Unix for the people, Unix for the masses 2005

• Value line Investment survey
– Apple 2007 – Computer Peripherals 2007
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Questions

http://seriouslygood.kdweeks.com/images/apple-question.gif
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