Apple Page | 1

Strategic Management
Case 1
Bobby Zimmerman
February 22nd 2017
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Mission and Vision Evaluation

Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork

and professional software. Apple leads the digital music revolution with its iPods and iTunes

online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App store,

and is defining the future of mobile media and computing devices with iPad. This reads more

like a product list then a mission statement. It has changed a few times over the years but for a

company of this size this seems very weak. The theme of the mission statement is geared toward

advance in technology, but fails to address workplace safety for Apples employees, markets, or

consumers. It also fails to discuss profitability, growth financially, and the self-concept of Apple.

The mission statement could be cleaned up by adding a few sentences that address these things.

With the addition of the following statement Apple is dedicated to increasing its profitability by

continuing the aggressive approach to innovation that has produced the standard for many

products in our industry. This would help to give a bigger picture of what they are about.

Table 1. Apple Inc. Mission Statement Evaluation Table

Apple Inc. 1. 2. 3. 4. 5.
Technology
Customers Products / Markets Concern for
Survival,
Services
Growth,
Profitability
Yes Yes Yes Yes No

6. 7. 8. 9.
Philosophy Self- Concern Concern for
Concept for Public Employees
Image
Yes No Yes Yes

Milestones
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Apple turned the personal computer world upside down in the 1970s with the Apple II and

reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to

dominate the industry in innovation with its best-selling notebook computers and tablets, IOS

operating system, and iPhones. Apple is also still leading the digital music revolution with its

Apple Music app and iTunes online store.

Apple Inc. Milestones

1984 Lisa ad aired during Super Bowl XVIII it is one of the most popular ads ever aired on
television. This introduced Macintosh to the world.
1997 After reviewing various operating systems, Apple ironically chose NeXTStep to be the
next step in their development. This move brought Steve Jobs back to Apple.
1998 The iMac release brought upon the first profitable fiscal year for Apple since 1993. The
iMac sold nearly 800,000 units in the first 5 months following its release.
2001 Apple announced the opening of Apple retail stores.
2001 Apple introduces the iPod and it is instantaneously is accepted by the market.
2010 The first generation IPad is launched Apple would sell 500,000 units the first week.
2012 Apples stock rises enough to make the company the largest in the world in terms of
value.
2014 The new iPhone 6 is re-designed selling 10 million in just three days
2016 The Apple watch goes on sale and sells 1 million units the first year
(Apple Computer, Inc., 2016)

Table 2. External Assessment

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KEY EXTERNAL FACTORS Weight Rating

Opportunities

There are currently no import or export trade restrictions 0.07 2

Offer complete package of hardware, software, and distribution. 0.11 4
Tablets, cell phones, & computers have become a necessity worldwide. 0.07 4
App and mobile gaming sales were almost $100 billion in 2016 0.12 3
A total of 438 million cell phones were sold in 2016 0.12 4
Tablet users range from toddlers to baby boomers 0.16 4

Threats

Dependence on suppliers from other nations creates a high vulnerability to change

in foreign regulations under new administration. 0.09 4
Uncertainty of global economic conditions. 0.06 2
Large budget for R&D a necessity for continued success. 0.10 3
Extremely intense competition. 0.06 4
Challenge of new product ideas. 0.06 3
Totals 1.00
No import or export trade restrictions

With no trade restrictions Apple is free to make their product overseas for pennies on the dollar

import to the US and sell them for an insane markup. Currently it costs Apple $259 to make an

iPad and they are selling the iPad pro for $799 thats a 208% markup. That is why this was

ranked a 2 with a weighted score of 0.14.

Offer complete package of hardware, software, and distribution

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With Apple able to offer the hardware, software, and distribute their product in Apple stores they

have a huge leg up on the competition. They dont need to outsource any of this and can use their

proprietary product. With iTunes, iCloud, safari Apple web browser, IOS, and Mac OS software.

This is a major strength and that is why it was given a rating of 4.

Tablets, cell phones, & computers have become a necessity worldwide

Business cant function without them and we have all grown dependent on them for not only the

most basic of uses but they are used largely for entertainment. The brand of Apple is well known

and respected to help capture a large part of that market. In 2016 40% of all cell phone in the

world were iPhones. This is huge opportunity for Apple and this is why it was given a rating of

4.

App and mobile gaming sales were almost $100 billion in 2016

In 2005 this market had $700 million in sales now we are at the $100 billion range. This is huge

growth in a market that still has potential for more, as more user leave traditional game systems

for easy to use phones and tablets. Apple needs to continue to get exclusive deals with companies

so their apps are only available on iTunes as well as creating their own to continue to dominate

this seemly unstoppable growth. With the brand loyalty so strong this market could be topping

off so it was given a weight of .12 and a rating of 3.

A total of 438 million cell phones were sold in 2016

With the brand loyalty to Apple staying strong as they topped over 48 million iPhone 6s being

sold they grabbed over a 10% of the sales with just one of their phone models. They have to be

cautious of the constant yearly upgrades of their phone and keep the public hungry for the new

model. This was given a 0.12 weight and a rating of 4 based on how quickly this could change.
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Tablet users range from toddlers to baby boomers

With so many people able to stay connected via the internet and people using skype and facetime

to stay in touch all over the world, exposure to this products start at a much early age and are still

used for those later in life as well. With Apples easy to use product they have done an excellent

job diversifying their user market. This is a major thing in an unusual way this product are for

and used by everyone.

Dependence on suppliers from other nations creates a high vulnerability to change in

foreign regulations under the new administration.

President Trump has made it clear he is going to not allow many countries immigrant to come

into the US. This could cause some problems with the foreign import and export business. This

could not only hurt the supply of product but could put them in position for a price increase. This

received a weight of 0.09 and because it is very important currently and since it is a major threat

a rating of 4.

Uncertainty of global economic conditions

With the US stock market having positive returns four out of the last 5 years and interest rates at

historical lows things could be set up for a slowdown. On January 3rd 2012 the Dow Jones closed

at 12,367 five years later the Dow was at 19,732 an increase of 59%. Even the most novice

investor would believe the stock market is due for a down year. There has already been one

interest rate increase in the US with the projection of 3 more in 2017 which tends to slow

economic growth. Since this is all speculation it was given a rating of 2.

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Large Budget for research and development a necessity for continued success

In 2016 Apple spent $10 billion for research and development which is more money than some

companies make in a year (Apple Computer, Inc., 2016). It is hard to allocate that much money if

the company needs to make cuts. It has a rating of 3 and a weight of 0.06 because of that.

Extremely intense competition

The growth out of Samsung making them the number one cell phone company in market share

and sales in 2016 is definitely a cause for concern. Not to mention with sales in the cell phone

market have way to a billion units sold a year things are going to get much harder. Apple brand

loyalty will only get them so far if they cant keep up with the competition that is why this is

rated a 4.

Challenge of new product ideas

As they have learned with the failure of the newton and recently the Apple watch that even when

youre Apple you dont just hit home runs. There is a lot the goes into mass creating the next big

thing. They must make this a priority to continue the growth and because of this it has a weight

of 0.18.

The external factors surrounding Apple are currently in its favor. However, the significance

of the challenges facing them must not be downplayed. The economy and market for

technology-based items is still very much on the rise, and their competitors are always closing in

on them.
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Table 3. Internal Assessment

Weighted
KEY INTERNAL FACTORS Weight Rating Score
Strengths

Research and Development budget $10 billion 2016 0.14 3 0.42

Dedicated employees. 0.10 2 0.20
Dedication to the use of technology in education. 0.10 3 0.30
Apple stores worldwide. 0.13 3 0.39

Weaknesses

Quality problems in the past decreased sales, and

increased operating costs 0.12 2 0.24
R&D very costly, hard cost to recover. 0.15 3 0.45
Apple Watch failure 0.12 2 0.24
Leadership without Steve Jobs 0.14 2 0.28
Total 1.00 2.52

Research and Development budget $10 billion 2016

As mentioned previously in the EFE matrix, R&D is a very important factor to the

technology businesses. Spending $10 billion on Apples R&D is essential to the company being

able to progress with new products, this is why it was given a weight 0.09(Apple Computer, Inc.,

2016).
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Dedicated employees

Apple has honored the proper treatment of employees and the environment. In 2016 Forbes

magazine ranked Apple as the 10th best company to work for in the United States. This insight

makes Apple a company that is seen in a positive light. With over 66,000 full-time, there is no

shortage in people wanting to work for such a leader in innovation. Each of these employees is

held to a standard explained in the ethics manual, which is the way Apple conducts its business

so a weighted score of 0.20 is fitting.

Dedication to the use of technology in education

Apple throughout its history, has worked to make technology a tool for education. Apple

offers exclusive education channels on Apple TV as well as ITunes University where user can get

educated from hundreds of free courses. This not only helps the brand image but also generates

profit from another market many schools are now using iPads with the textbooks downloaded on

them instead of children carrying all of those books around.

Apple stores worldwide

Apple boasts a distribution network that is constantly expanding and includes 490 stores

worldwide, the majority of which are in the United States. Apple believes that a high-quality

buying experience with knowledgeable salespersons that can convey the value of the Companys

products and services greatly enhances its ability to attract and retain customers (Apple

Computer, Inc., 2016). Because of this process it creates one of the most loyal customer bases

found in any industry which gives them a rating of a 3.

Quality problems in the past decreased sales, and increased operating costs

Quality problems in the past have led to decreased sales of product lines as well as

increased cost in operations. Managers have to return to correct problems, which takes money
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and time away from current operations. This is a problem all companies experience and that

needs to be addressed because of that is only given a rating of a 2.

R&D very costly, hard cost to recover

Apple is investing almost a billion dollars a month into research in development and from that

cost you get huge hits like the iPhone and products that still need more work like the Apple

watch. This is a very long and expensive process and sometimes ends up losing the company

money.

Apple watch failure

Touching back on R & D and seeing the time and the money that went into the Apple

watch as they were banking on this being the next big thing. After a good start sales dropped

70%. Now to find out that sales have been very low compared to Apples iPhone sales put them

back to the drawing board. Do they scrap the whole project? Or investment more money into it to

improve it and make it more attractive to consumers.

Leadership without Steve Jobs

Steve Jobs was not only the creator of Apple but also was a well-respected leader of the company

two different times. He brought them back from the brink of failure and made them what they are

today. With him gone they have continued to grow but will his absence end up hurting the

company?

SWOT Analysis

Apple Inc. is one of the world leaders in product innovation for digital music, personal

computing, and the smart phone. Opportunities moving forward for Apple include the

domination multibillion dollar markets that include mobile gaming and smart phones. The cost

to move into these new markets has been part of the large R&D budget of the last few years.
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Maintaining that budget is one of the major threats for continued success against another major

threat, the strong competition. Nevertheless, Apple will continue to reap the benefits from those

two ventures and will likely be able to reinvest with profit generated by them to create the next

big thing.

The strengths of Apple include the ability to increase that ever so important R&D budget

as well as the ability to introduce new products into the market. These two strengths combined

with the dedication to employees and business products will help balance the current

weaknesses. These weaknesses include many activities that are taking time away from

management, namely the legal proceedings, internal accounting reviews, and the quality

problems of past projects.

PORTERS FIVE FORCES MODEL OF COMPETITION

Porters model is based on five key forces that impact the competition in the industry. These

forces are:

1. Rivalry among competing firms

2. Potential entry of new competitors

3. Bargaining power of suppliers

4. Potential development of substitute products

5. Bargaining power of consumers

The competition in the technology business is tremendous. Even though there are only a few

firms that are truly competitive at the time, these firms have been in constant competition with

each other over the last few decades. Currently, Apple is continuing their dominance of this

sector. The table below demonstrates the recent success of Apple over its direct competitors.
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Table 4. Direct Competitor Comparison

AAPL DVMT HPQ MSFT IBM

Market Cap: 727.43B 39.52B 29.40B 268.70B 167.12B
Employees: 116,000 101,800 49,000 71,000 380,300
Qtrly Rev Growth (yoy): -2.60% 28.20% 3.60% 6.00% -1.30%
Revenue (ttm): 218.12B 58.22B 48.68B 46.06B 79.92B
EBITDA (ttm): 10.85B 7.04B 7.04B 17.94B 18.55B
Oper Margins (ttm): 27.15% -1.94% 8.05% 36.20% 17.73%
Net Income (ttm): $45.68B N/A 2.49B 11.91B 11.87B
EPS (ttm): 8.33 -2.68 1.47 1.170 12.38
P/E (ttm): 16.64 -23.58 11.84 23.45 14.31
PEG (5 yr expected): 1.68 N/A 6.06 1.34 5.08
P/S (ttm): 3.34 0.68 .60 5.80 2.09

DVMT = Dell Technology

HPQ = Hewlett Packard
MSFT = Microsoft Corp.
IBM= International Business Machines

*Table data was taken from Yahoo! Finance website March 8th, 2017.

This chart shows Apple has become a giant in comparison to other technology firms in terms

of market cap, total revenue, and net income. Apples reputation is directly linked to the ability to

consistently raise the bar in innovation and to build off their strong brand loyalty. It is extremely

important that Apple continues finding new ways to generate business due to the dramatic

increase of price competition in the market for personal computers, tablets, & cell phones.

The potential entry of new competitors is not as likely as in other industry the major players

in the tech sector have been around for decades. Making computers, tablets, and cell phones

takes a lot of capital to turn out a quality product. That is not including the time and money in

spent on research and development. Since the main competitors in this industry already have

very reputable products, market penetration becomes even more difficult for new companies.

Samsungs galaxy7s phone accounted for 39% of the worldwide cellphone sales while the

iPhone7 saw only 29%. This is a realistic threat Apple is facing is challenges from its long time
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competitors tapping into its cell phone and tablet business. Apple needs to be aware of this threat

particularly in the cell phone industry as many consumers are becoming bored with Apples new

IPhone every 12 months with limited changes to the product. This is why sales the iPhone 7 sales

were down over 3%.

The bargaining power of suppliers is a challenge that is very relevant to Apple. The parts

and support provided by international suppliers leaves Apple vulnerable to many potential

problems. This issues need to be addressed as soon as possible.

The potential development of substitute products exists but so far Apple has been able to

overcome this with remarkable marketing effectiveness. An example of this is the iPad, which is

a tablet based hybrid of a personal computer and cell phone. The iPad offers the portability of a

cell phone and the power and flexibility of a laptop computer. This product has continued to

grow and with the addition of the iPad pro it has not only become more user friendly but more

compatible with other software for Pc users. This has helped them with a bigger push in the

tablet market with the addition of the keyboard and pencil this has helped user make the

transition from a computer to the iPad with apple. With Apple having established a lot of

followers over the years and that loyalty has spilled into their cell phone market. The problem is

Apple has become lazy and issued a new phone with little changes and the customers have gotten

fed up. In 2015 Apple sold 74.5 million iPhones, through the third quarter of 2016 Apple had

only sold 45.5 million units and have yet to release the 2016 numbers, but there clearly has been

a major decrease.

Lastly, the bargaining power of consumers is a force that has little impact on Apple. Products

are often sold to the individual user from Apples increased distribution network that includes its

own retail stores, electronic stores, and retail stores. Since Apples products are unique from the
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competition in many ways, the bargaining power of consumers is limited. Rarely are prices

changed on items such as the iPad or the price of iPhones.

Where the bargaining power of consumers can be seen as the indirect pressure to lower prices

on their competitors but Apple remains standing strong. This pressure comes from other

companies lowering margins as the competition for market share grows. Consumers are

becoming more knowledgeable and available to receive a products are seemingly endless. Apple

has no choice but to adapt to these changes by either offering more competitive advantages

justifying the high prices or by lowering the cost and margins on the computer hardware.

Table 5. SWOT Matrix

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STRENGTHSS WEAKNESSW
1. R&D budget $10 1. Quality problems in
billion the past, decreased
sales, and increased
operating costs
2. Dedicated
employees
2. R & D very costly, hard
to recover cost
3. Dedication to the use
of technology in
education 3. Apple Watch failure

4. Apple Stores 4. Leadership without

Worldwide Steve Jobs
OPPORTUNITIESO THREATST SO STRATAGIES
1.There are currently no 1. Dependence on 1. There are so many
import or export trade suppliers users of cell phones now
restrictions find a way to get deeper
2. Uncertainty of global
into that market.
2. Offer complete economic conditions
Cheaper iPhone, or IOS
package of hardware,
3. Large budget for updates on older models
software, and
R&D a necessity for to make them more
distribution
continued success attractive.
3. Tablets, cell phones, &
4. Extremely intense
computers have become
competition
a necessity worldwide 2. Continue to push
5. Challenge of new innovations and create
4. App & Mobile gaming
product ideas more products that
sales were almost $100
appeal to the masses.
billion in 2016
5. A total of 438 million
cell phones were sold in
2016
WO STRATAGIES ST STRATAGIES WT STRATEGIES
1. Strong leadership in 1. Apple needs to 1. Apple needs to have
the company to stay on exploit their huge R&D better quality control and
top budget and develop make new models of
innovative products their products with more
2. Smarter use of the
attractive upgrades.
R&D Budget
2. Dedicated
employees 2. Apple needs to
further develop the Apple
Watch and make a push
in this market.
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SO Strategies

With the market for cell phone and tablet users continuing to grow, they have to find a

way to reach new markets. Finding a way to offer cheaper products can really open up their

business to lower income families as well as third world countries. To be able to do this they will

have to figure out a way to build these phones cheaper and simplify the product. For example

they have made mini iPad at a lower price point maybe they could take older iPhone cell models

and make them with the capability to just be used to connect to the internet. This would not need

the cellular technology and could be sold as a just a game based model for kids. Already having

access to materials to make these older models and attach new consumers that previously could

not afford these products into this market.

The ability to upgrade current products, adapt products to respond to ever changing

market needs, and invent completely new products are the staples for Apples success. The

iPhone, mobile gaming on iPads, and the Apple watch are the latest additions to Apples

seemingly never ending progression.

The Apple watch is an example of a product that is completely new to the company. The

development of this watch is needs to generate considerable profit and further the brand

recognition and development of Apple. The addition of app gaming for the iPad and iPhone are

an example of responding to the market needs. There has been a substantial increase in that

market and it would be foolish for Apple not to respond by offering exclusive games their users.

Regardless of the approach, the constant innovation of product lines will allow Apple to thrive in

a market where relentless consumers are looking for the latest break in technology.
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Developing these products is extremely important for its continued success in the market

place. The marketing of new products is as important, if not more important than the product

itself, for continued interest and loyalty from users. The timing of product release and the follow

through with clever, catchy campaigns have made for a combination that sets Apple products

apart.

ST Strategies

Their innovative products, supported by the huge research and development budget,

being introduced at the right time is a key strength for Apple. If a product is released before the

market wants it, marketing must create a demand. If a product is released after the market wants

it, it will be worthless. If a product is released and is not up to snuff it is not only a waste of time

and money but can damage the brand. Apple has always had a knack for creating demands for

new products as well as being responsive to current demands. The mobile game market is again

an example of this. When the iPad was released it was set up to meet the demand of the app &

mobile gaming market unlike the iPod which original not set up to be a gaming device just

music. With the app and mobile gamin market over $100 billion they have made the necessary

changes. This understanding of product target demographics will allow Apple to continue

success in product launches.

All of profit generated from these new products is the result of dedicated employees that

continuously look for ways to better their products. Currently Apple has an employees retention

rate of 81%, this a very nice positive for any company. This factors allows Apple to generate the

profit needed to fund the R&D budget. As the R&D budget increases the products that are being
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developed are then used to maintain or gain market share against the competition. A portion of

the money made from new products then goes back into fund the next batch. Ideas have to be

made into a tangible product. That takes trial and error and without the budget the innovation

would stop R&D in its tracks.

WO Strategies

Apple needs to establish itself with strong leadership not only for the public but internally

for their employees and shareowners. There was always such a passion that came from Steve

Jobs and it wasnt just from his creation of the company but his belief in what they were trying to

accomplish. They need to find a leader with that same passion and power to inspire and motivate.

Current CEO Tim Cook has done a fine job of taking over this company but has seem to lack the

leadership and left many to question if he is the right leader for them. He needs to be more in the

spotlight and show his passion for the company and its products.

The R&D budget is a huge factor for the future of Apple, the emphasis on the ways to

produce the money to maintain and increase that budget. R&D is a struggle in any industry in

which success revolves around the ability to consistently produce changed product. New product

offerings generate the profits necessary to continue the development process for future products.

Apple has to ensure that this process does not stop. The products and ideas that are continually

being developed must contain a significant amount of value to the public they will fail. Figuring

out which products will do this has been a strength and will continue to hold its importance for

Apple in the future. Apple must concentrate on the realistic opportunities in their target

demographics. In the past Apples product has become more personal use in the computer and

cell phone sector. Offering product such as the Apple watch and iPad Air will soon balance some

of the gaps that currently exist.

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WT Strategies

With so much of the company money being invested in the Apple watch they need to

continue to develop it through updates or a new version of the Apple watch all together. This

market has become very large with Fitbit revenue numbers topping almost $800 million Apple

loyal customers could help them grab a large part of that market. They need to do this by staying

on top of their quality control not only with the Apple watch but the other products that they have

recently had problems with. By being proactive, Apple can continue to move forward in

acquiring the revenue from their competitors to eliminate any possible loss of market share.

Case Statement

Apple faces a super competitive industry in which research and development, product

innovation, and brand loyalty are the key factors in succeeding against intensifying competition

in a booming economy.

Financial Analysis

After a review of Apples Income Statement it clearly displays the companys recent

resurgence to a healthy financial state. The revenue has increased steadily over the last five

years, as well as the gross profit. The decisions that are being made and the products that are

being made available are having great success. The Net Income of nearly $46 billion in 2016

displays this fact clearly. The table below shows the strength of Apple financially using the

financial ratios derived from the Income Statement and Balance Sheet.

Table 6. Analysis of Financial Ratios

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Ratio 2016 2015

Current Ratio 1.23 1.11
Quick Ratio 1.22 0.89
Fixed Asset Turnover 8.70 10.80
Total Asset Turnover 0.70 0.89
Debt to Equity Ratio 0.68 0.54
Return on Assets 14.93% 20.45%
Return on Equity 36.90% 46.25%
Earnings per share 8.31 9.22
P/E Ratio (avg) 16.83 13.48
Net Profit Margin 21.19% 22.85%

Financial Strengths and Weaknesses

This demonstrates that Apple is performing very well over the last two years. The recent

resurgence of the stock price can be accredited to various factors but the overall performance of

Apple financially votes well. Also with them being and industry leader the boom in the overall

market has helped to push them forward even though some of the financials are down. The

Current and Quick Ratios display that Apple has the ability to meet its short-term obligations

with far more comfort than the rest of the industry. Although that gap is narrowing as its ratios

are declining. The Fixed Asset Turnover Ratio and Total Asset Turnover Ratio suggest that the

firm is operating efficiently in terms of using its assets to generate sales, especially speaking in

terms of the fixed assets. Turnover Ratios may also indicate that Apple uses a pricing strategy

that incorporates low margins to induce a higher buying volume.

It is difficult to get a solid grasp on where Apple is in terms of leverage. Nevertheless, it

must be kept in mind the personal computer industry usually has a Debt-to-Equity Ratio of lower

than .50, where manufacturing industries are more notorious for having Debt-to-Equity Ratios of
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over two. The ratios do display that Apple is not in danger of financing with an excessive

amount of debt and is on par with the industry average.

The Return on Assets displays much of the same as the turnover ratios. The ratio is again

showing Apples ability to use its assets to turn a profit. In comparison, its latest Return on Asset

Ratio of over 14.93% is a sizably larger than the industry average.

These ratios then lead us to the Return on Equity Ratio. The Return on Equity (ROE) Ratio

is designed to demonstrate the profitability of a corporation in terms of profits generated using

shareholders money. Apple, displays a decrease from the previous years number by almost

10%. Apples Earnings per Share has decreased year by over 9% since 2015. But with all this

being said at the last day of the year in 2016 Apple stock closed @ $115.82 a share. As of March

2, 2017, the stock price stood at $141.42 a 22% increase in less than four months. This higher

stock price has led to a Price-Earnings Ratio of nearly 17. However, the industry average shows

that this is not as alarming for the industry as it may be for a company in a different sector.

A further example to the operating efficiency Apple has been able to execute is shown in

Table below.

Table 7. Profit Margin Percentage

Apple Industry
Gross Margin 38.51 28.9
Pre-Tax Margin 30.86 19.4
Net Profit Margin 22.83 10.5
5Yr Gross Margin (5-Year Avg.) 39.46 29.6

Dividend Payouts

Apple is paying $2.28 a share in dividends, they have been paying dividends since 2012. This

money could be reinvested into the company to increase the value of the stock. This would be
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contingent upon maintaining the recent level of success and growth. With the demand for

research and development, the money that would be used for dividends may produce a greater

return on investment if put back into the companys working capital instead of paid to

shareowners.

Capital Budgeting

The increase of operating efficiency shown by the financial ratios exhibit Apples ability to

handle budgeting. The decisions are made after evaluation and determined on the basis of

popular methods such as net present value, internal rate of return, and discounted cash flow

analysis.

Investor and Stockholder Relations

Apple offers a great deal of support for investors at the investing website

www.apple.com/investor/. On this site investors can read though FAQ page, as well as see all

the earnings releases, listen to quarterly earnings calls, visit the latest SEC filings, and see up to

date stock information. Apple has been able to attract investors with its dedication to doing

business by selective policies for which businesses are used as suppliers.

Raising Short-Term Capital

Apple currently paying $2.28 a share in dividends, but shareholder loyalty goes deeper than a

1.68% dividend yield. They could cut or get rid of that dividend to raise some extra money. The

retained earnings offer a source of short-term capital that is reinvested in various ways with the

purpose of further growth.

Raising Long-Term Capital

Apple has the flexibility to use stock financing or debt financing to raise any capital that is

necessary for a long-term basis.

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Table 7. Quantitative Strategic Planning Matrix (QSPM)

Weig
Opportunities ht AS TAS AS TAS AS TAS
1. No trade restrictions 0.07 0.07 0.07 0.07
2. Complete package 0.11 3 0.18 4 0.24 4 0.24
3. Products become Necessity 0.07 3 0.21 4 0.28 4 0.28
4. Apps & Mobile $100 Billon
Market 0.12 2 0.24 4 0.48 2 0.24
5. 438 Million Cell phone sold
2016 0.12 2 0.24 4 0.48 2 0.24

Threats
1. Dependence on Suppliers 0.09 0.09 0.09 0.09
2. Uncertainty of global
economy 0.06 0.06 0.06 0.06
3. R&D budget needed 0.10 4 0.40 2 0.20 3 0.30
4. Intense Competition 0.06 3 0.18 4 0.24 4 0.24
5. Challenge of New Product 0.06 2 0.12 3 0.18 4 0.24

Strengths
1. R&D budget $10 billon 0.09 2 0.18 4 0.36 4 0.36
2. Dedicated employees 0.06 4 0.24 4 0.24 2 0.12
3. Dedication to the use of
technology 0.07 2 0.14 4 0.28 4 0.28
4.Apple stores worldwide 0.08 2 0.16 4 0.32 4 0.32

Weaknesses
1.Quality problems 0.06 4 0.24 2 0.12 2 0.12
2. R & D cost hard to recover 0.05 2 0.1 4 0.2 4 0.2
3. Apple Watch struggles 0.08 2 0.16 3 0.24 4 0.32
4. Leadership 0.07 0.07 0.07 0.07
 A p p l e P a g e | 24

After examining the QSPM the conclusion can be made that alternative two, new product

innovation, will be the strategy that best serves Apple at this time. It offers the most potential for

long term profit and, although it is most costly, it is also most beneficial. This strategy addresses

the opportunities in the market by using the strengths of the corporation while addressing the

weaknesses of Apple and the threats in the industry environment. The strategy of expanding the

Apple Watch and iPad products warrants serious consideration and may be an important aspect

of moving forward. However, it should not be the sole focus of resource and effort in

progressing forward. The internal issues do indeed need addressing. Though they do not

deserve the full attention of management. Solution of these internal issues will be important to

forward movement but this effort will need to be a secondary focus.

Recommended Solution

Apple Inc. historically has been the leader in innovation. For many decades Apple has

introduced products that have become integrated into society as a way of life. Personal

computers, tablets, and cell phones have taken off after their initial introductions. Apple faces

the never-ending challenge of maintaining its position as the leader in an industry that has grown

exponentially over the last 30 years. To do this Apple must continue to anticipate the needs of

consumers and constantly plan for what is next.

Maintaining its position in an ultra-competitive market will require Apple to employ the

offensive strategy that makes the competition react by inventing new and better technology and

further stretching the industry standards. The three alternatives all contribute to this goal in

different ways.
 A p p l e P a g e | 25

Addressing internal issues may lead to changes with products or deletion depending on the

discoveries of investigations and other issue discoveries that result from the analysis. The goal

here is to put Apple in a more advantageous position for the future by addressing learning from

past mistakes.

Product development, market development, related diversification, and unrelated

diversification are the strategies that are employed by the second alternative of new product

innovation and upgrading of current product lines. Apple must focus on the Apple Watch and

iPad Pro to help grow these new products to become staples for the brand. Increase profit by the

penetration into new markets with these products is a path that requires a great deal of

reinvestment and planning. However, this goal is very realistic and has the potential to boost

Apples earnings and stability in the future.

Lastly, forward integration and market penetration would be the strategies used by Apple in

an attempt to obtain an increased market share with the Apple watch and further development of

the iPad Pro. The cost incurred here would be two fold. If the Parallel line is obtainable it would

be an investment that would offer a variable return. That would depend upon the success of the

second portion of the plan, the marketing of the Apple Watch and the upgrades to make it more

attractive to consumers. These initial costs would provide the opportunity to generate more

profit from an existing line, ultimately leaving more resources available for other opportunities

further down the line.

Apples staffs size and dedication makes it easier to implement all of these strategies at the

same time. Each of them presents different opportunities and addresses different strengths and

weaknesses. The scale of performing the three strategies would be imposing at first but it is

possible. At this point, however, Apple may be better served to focus solely on the
 A p p l e P a g e | 26

implementation of the second alternative. This alternative unfortunately, is not the most cost

effective and by far offers the greatest risk. Nevertheless, it presents the greatest opportunity for

continued long-term success. The capital is available for the R&D budget needed to support the

introduction of new ideas as well as modifications of exciting products. The successful

introduction of the right new product could result in sustained profit for years past its release.

The profit will be needed for future reinvestment and the continuance of the process that has

made Apple the successful company that it is to date.

STRATEGY IMPLEMENTATION
Apple faces many difficult tasks to successfully implement the strategy selected.

Research and development, human resource management, marketing, and financing are all

crucial phases of the implementation. If anyone phase is not executed in a timely and efficient

manner the plan as a whole could face danger of failure. Company leadership will have to work

together in the coordination, and communication is of the utmost importance.

Furthermore, to be successful Apple must complete the following tasks:

Research and Development

The generation of two or three new product ideas developed from market research on

consumer wants, external and internal contests, and competitor benchmarking.

Feasibility and attraction of the new ideas must be measured by production of an

initial idea to a necessary product.

 A p p l e P a g e | 27

Research on the cost of bringing that product to mass production.

Marketing

Marketing of worldwide contests to stimulate new ideas that turn into potential new

products.

Marketing contests to encourage internal efficiency and competition for the company.

Product introduction based on demographic research, solid marketing plans, and

promotional plans.

Human Resource Management

Recruiting of personnel that showcase fresh thoughts and out of the box thinking.

Increased testing to find creative minds in places outside the normal selection

process.

Continued dedication to strong employee retention.

Financing

Ensure that capital is being reinvested in most intelligent way, and anticipate future

return on investments.

All parts play a very important role in the implementation process, but it is the research

and development that will tell the company if an idea can in fact be not only profitable but game
 A p p l e P a g e | 28

changing. Generation of these ideals will be encouraged by annual contests in worldwide that

offer a $250,000 prize as well as a job in Apples research and development department. This

could be presented where the idea selected is chosen and moved to production. Additional

personnel will be hired to sort the ideas from realistic to not and pass those that have a chance

along to the R&D department. A committee including members from the board of directors that

will decide which ideas match the needs and wants of consumers and progress them accordingly.

Competitors will also be watched during this process for ideas that could lead to the next product

of high public demand. Internal contests will be held as well with a smaller prize of $100,000 to

any product moved to production. This process will cost approximately $100 million.

Once the ideas are received a SWOT analysis will be performed to determine which

products are feasible to produce, and which products, once deemed useful, will have the potential

to increase the companys profit. This part of research and development will take coordination

between accounting, operations, and marketing to ensure that the product is realistic, has a large

market, and will pass a cost benefit analysis. Included here is the process of bringing the product

to the lines of production. This will cost approximately $500 million. This number is largely

dependent upon the complexity of the products production. If the plans do not meet Apples

ability to handle production the cost of new equipment may exceed the cost listed for this

strategy.

Once the ideas have been selected and pass the tests of the accounting and operations

departments, the success will be left with those in marketing. The marketing department will be

involved with the organization and promotion of the new product contests, but the greatest

challenge will be to introduce the new products to the public. Product introduction has been a

staple of Apples success and nothing short of excellent will be acceptable for the campaign of a
 A p p l e P a g e | 29

new product. Television commercials, viral advertisements, print ads, and mobile marketing will

play a part in the introduction of the products. Once introduced, the products will be further

marketed with sales promotions including rebates and other incentives. The marketing is again

crucial in the success and will cost approximately $300 million.

Human resource management will play a large part in the overall implementation. It is

important that the right people are hired to support the new processes and that the current staff

continue to be retained. Employee retention and satisfaction are major aspects of a positive

organizational culture. Organizational culture is crucial to a productive work force in any

business. Apples workforce displays a great amount of loyalty and has been a vital part of past

successes. Employee incentive packages for sales and new ideas will be increased with a goal of

increasing performance. Other employee appreciation efforts will be put forth to maintain

Apples positive work environment.

The development and implementation of new testing to find creative minds in the hiring

process will be very important in further developing the staff that is constantly encouraged to see

things differently. Psychological research will be blended with traditional interview processes

and aptitude tests to determine the best future employees. Recruiting visits to technical schools

and top universities will be taken to find future top engineers who can help put the ideas of the

creative minds to realistic production. The costs anticipated for the further development of

human capital are approximately $100 million.

Arguably the most important part of the process is the financing. Without money, the

other processes cannot be performed. Due to past successes, Apple is in a position where

financing is not going to be a problem. The table below was taken directly from the 2016 10-K

Annual Report of Apple. It displays the liquidity and capital resources of the company in
 A p p l e P a g e | 30

millions. Notice there is a significant amount of working capital to fund the future purposed

plans as cash has increased by over 15% in the last year.

Table 8. Liquidity and Capital

*All numbers in millions, the table was taken from Apples 2016 10-k

Table 9. Projected Income Statement

Fiscal year is October-September. All values USD 2017 2016 2015 2014 2013 2012
millions.
Sales/Revenue 200 214.23 231.28 183.24 170.87 155.9
B B B B B B
Cost of Goods Sold (COGS) incl. D&A 140 131.51 142.26 112.55 107.24 87.92
B B B B B
COGS excluding D&A 130 121B 131B 104.61 100.48 84.64
B B B
Depreciation & Amortization Expense 10.5 10.51B 11.26B 7.95B 6.76B 3.28B
 A p p l e P a g e | 31

B
Depreciation 10 9.03B 10.01B 6.86B 5.8B 2.67B
B
Amortization of Intangibles 1.30B 1.47B 1.25B 1.08B 960M 605M
Gross Income 80 82.72B 89.03B 70.69B 63.63B 68.06
B
2017 2016 2015 2014 2013 2012
SG&A Expense 22 24.24B 22.4B 18.03B 15.31B 13.42
B
Research & Development 11 10.05B 8.07B 6.04B 4.48B 3.38B
B
Other SG&A 14.5 14.19B 14.33B 11.99B 10.83B 10.04
B
Other Operating Expense - - - - - -
Unusual Expense - (548M) - - 300M 655M
EBIT after Unusual Expense - 59.03B - - 48.02B 53.98
Non Operating Income/Expense 205 (200M) 3.7B (585M) 652M 696M
M
Non-Operating Interest Income 4B 4B 2.92B 1.8B 1.62B 1.09B
Equity in Affiliates (Pretax) - - - - - -
Interest Expense 1.50B 1.46B 733M 384M 136M -
Gross Interest Expense 1.50B 1.46B 733M 384M 136M -
Interest Capitalized - - - - - -
Pretax Income 60 61.37B 72.52B 53.48B 50.16B 55.76
B
Income Tax 15.6 15.69B 19.12B 13.97B 13.12B 14.03
B
Income Tax - Current Domestic 8B 8.64B 13B 9.48B 10.42B 8.42B
Income Tax - Current Foreign 2.0B 2.11B 4.74B 2.15B 1.56B 1.2B
Income Tax - Deferred Domestic 4.90B 4.91B 3.19B 3.01B 1.57B 4.9B
Income Tax - Deferred Foreign 34M 33M (1.81B) (658M) (426M) (490M
Consolidated Net Income 40B 45.69B 53.39B 39.51B 37.04B 41.73
Minority Interest Expense - - - - - -
Net Income 40 45.69B 53.39B 39.51B 37.04B 41.73
Net Income After Extraordinaries 44B 45.69B 53.39B 39.51B 37.04B 41.73
Preferred Dividends - - - - - -
Net Income Available to Common 44B 45.69B 53.39B 39.51B 37.04B 41.73
EPS (Basic) .46 8.35 9.28 6.49 5.72 6.38
Basic Shares Outstanding 5.25B 5.47B 5.75B 6.09B 6.48B 6.54B
EPS (Diluted) .44 8.31 9.22 6.45 5.68 6.31
Diluted Shares Outstanding 5.25B 5.5B 5.79B 6.12B 6.52B 6.62B
EBITDA 67B 68.99B 77.89B 60.6B 55.08B 57.91
Copyright 2017 FactSet Research Systems Inc. All rights reserved. Source FactSet
 A p p l e P a g e | 32

Fundamentals

Although the net income is lower on this projected Income Statement consideration must

be given to the very conservative estimates, in terms of what Apple currently produces. It only

takes into consideration the effect of this new proposed strategic plan and does not address the

massive growth Apple has been experiencing in the past year. With over $10 billion in R&D and

nearly $14 billion in SG&A expenses it is a safe assumption that these large increases would

show growth in sales well above the current increase of the new products. In other words, the

assumption does not account for any growth from recent operations. This was done for the sole

purpose of highlighting the effect of the strategy. Also, it should be noted that the first year of

the product introductions will generally be lower than the years to follow. For instance, the

iPhone has had net sales grown from selling 1.4 million units in 2008 to 321 million units in

2015 with growth in sales its first 8 years of product life. What this shows is that the future

benefits from this project will continue to increase making the investment well worth it.

The finance team has the stressful job of finding out how Apple is going to pay for the

implementation of this strategy. In order to finance this project, Apple finance team will need to

develop the budget to satisfy the financial requirements for these strategies. The biggest chunk of

the expense can come from internal funds that have been set aside for project like this. The

remainder will need to come from somewhere outside of Apple. Management has determined

that cost of this strategy will be $1 billion. The company used an EPS/EBIT Analysis to

determine the best method for Apple to finance the project. The options reviewed were to take

incur more debt by borrowing the money needed. Another option is to raise the needed funds by

selling additional shares of stock in a secondary offering, or to look at doing a combination of

these two methods. The company will examine the results during normal economic conditions,
 A p p l e P a g e | 33

times of a booming economy and also during a recession. The table below will show the results

of the analysis based on the following assumptions used:

Amount required $1 billion

EBIT Range $3.5b $4.5 billion
Interest Rate 5%
Tax Rate 37%
Stock Price $142
Number Of shares outstanding = 5.25 billon
Table 10. EPS/EBIT

CONCLUSION

In conclusion, Apple can achieve its continued excellence in product innovation and

continue to set the standard for advances in the technology industry. A large investment of

working capital will give each department the financial resources necessary to help the

outstanding human resource capability that is currently needed. A combination of financial and
 A p p l e P a g e | 34

human resources, along with a careful execution of the strategic plan proposed, will allow Apple

to work toward the goal of introducing new products that are consumers not only need but will

want to stay on top of technology advancements.

This strategy addresses Apples needs directly by recognizing the challenge that faces

Apple to grow financially. By taking advantage of the large research and development for

product innovation, and combining these results with strong marketing efforts, Apple will be able

to thrive in this highly competitive industry. Currently, many things are being done to increase

growth with the existing product lines. These things, combined with a strategy that does not

place its success on just current products, but with the development of new products will

guarantee Apple future success and continued dominance as a top technology company. It is

important to remember planning is an ongoing process, in which on the fly adjustments must be

made to new challenges, market conditions, and unforeseen obstacles. However, the foundation

has been laid for success with this proposed plan.

 A p p l e P a g e | 35

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