The Apple iPhone idis 619 Capstone Assignment By
Innovative Brand Reputation: Apple had a history of producing innovative products such as Macintosh and iPod through their Humane Engineering goals
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- Please see earlier section II (D) 3h for Apple’s value cost drivers, etc.
- Please see earlier section Exhibit II (D) 4 – Part A (g)
Innovative Brand Reputation: Apple had a history of producing innovative products such as Macintosh and iPod through their Humane Engineering goalsQuality Sales: Apple offers high quality pre- and post-sales support through its Apple Store. Apple “believes a high-quality buying experience with knowledgeable salespersons that can convey the value of the Company’s products and services greatly enhances its ability to attract and retain customersConfidentiality: By having a very tight control in Apple’s development strategy, Apple is able to take its time to develop the product, and have total control of the announcement of the product.Cost drivers: Economies of scope – Apple tries to achieve economies of scope. For example, it first introduced iPod and then introduced lower versions of the product using the same technology. Similarly in personal computing side, Apple uses the same technology in the backend. Vertical integration- Apple achieves vertical integration by developing its own operating system, hardware, application software, and services and strives to provide superior ease-of-use, seamless integration, and innovative industrial design Lawsuits: Apple incurs costs from potential or current lawsuits such as consumers not being able to play purchased songs from iTunes across devices. Resources and capabilities: (see Exhibit II (D) 4 – Part A (g) – VRIO Analysis for Apple) Products and number of product markets served: Apple’s products include Hardware (e.g. Macintosh line), Music Products and Services (iPod line, iTunes), Peripheral products (e.g. displays), Software products (e.g. Mac OS), and Professional Applications (e.g. video editing software) II (D) 5: Compare firms using Value minus Cost (Willingness to Pay) framework Please see Exhibit II (D) 5a for the WTP analysis. The Value portion for each of the manufacturers was calculated based on surveys that were sent to around 80 participants across a diverse demographic (different age groups, professions, social interests, etc.). A copy of the surveys are available in Exhibit II (D) 5c (Part A & B), and a graphical breakdown of V, P & C in Exhibit II (D) 5b. However, we faced some challenges in trying to ascertain the costs associated with smartphone manufacture. Most companies don’t break their costs down at this level of detail. Some do present relevant financial information for their mobile business unit but this wouldn’t be a reliable measure to perform an apples-to-apples comparison since some companies such as Palm and RIM focus almost exclusively on smartphones while others like Nokia and Motorola focus on a broad range of mobile handsets across multiple segments. We has also not been able to get any reliable information on what Apple’s cost structures related to the iPhone might look like. We did come across one reportli from iSuppli that tries to estimate what the input costs for the iPhone might be and estimate margins based on this. However, we haven’t considered this report for the V-C analysis since (i) it is a single data point from one analyst (ii) it doesn’t account for other costs that Apple will incur as part of its iPhone business including marketing costs, labor costs, etc. As a result, the WTP exhibit is primarily useful for two purposes: (i) to provide an insight into the type of value that customers attribute to these different handset manufacturers and their products (ii) get a sense of what margins Apple’s competitors in the smartphone space (if we were to assume that RIM & Palm’s data was indicative) are experiencing. II (D) 6: Comparative Financial Analysis Financial ratio analysis provides us an opportunity to quantify and analyze operational performance of the handset and wireless service industries. The financial analysis for the handset (Exhibit II (G) – Part A – Comparative analysis of handset manufacturers) involved the following categories of ratios and financial numbers which were closely analyzed over a period of five yearslii, dependent on the financial data available:
Apple has experienced unprecedented sales and income growth in years 2004 (33.38% and 68.27% sales growth and 285.51% and 399.25% in income growth over 2004 and 2005) on account of its portable digital music player iPod success, followed by the video iPod in 2005. But with the commoditization of iPod with its reduced iPod Nano price, low price iPod shuffle offering and increased competition from handset manufacturers with built in mp3 players in handsets, the sales and income in 2006 have shown a flattening trend. By successfully keeping its Cost of Sales increase, comparatively lower than its revenue growth, Apple has further strengthened its income growth. Apple displays favorable Current Ratio (averaged 2.72 over last five years), and Quick Ratio (averaged 2.69 over last five years) as compared to its competitors and also the industry standards, providing a favorable liquidity position. Looking at comparable firm, Motorola is a close second in these ratios to Apple, with Nokia close behind. RIM has higher liquidity ratios than Apple, Motorola and Nokia, although that can be attributed to its comparatively smaller firm size and fewer product lines, leading to lower inventory levels. Apple’s inventory turnover is an area of potential improvement for Apple. Although its inventory turnover is favorably much higher than the industry standards, it has been gradually declining over years, while the ratio for its competitors like Motorola, RIM and Palm has been increasing. Some plausible reasons for this decline could be Apple’s introduction of Intel-based Macintosh computersliii and increased store openingsliv. Also, Apple’s Debt to Equity (0.723 for Apple in 2006) and Debt Ratios (0.42 for Apple in 2006) are increasing although they are less than its competitors like Motorola, Sony, Nokia and LG, though RIM and Palm are better positioned than Apple for the same ratios. The increase is primarily driven due to increase in Accounts Payable and Non-current liabilities, year-over-year for Apple, indicating that Apple is increasingly funding its operations through Debt rather than Equity. These ratios are critical for long term solvency of the firm, are closely watched by the investor community and hence need to be paid close attention by Apple. Gross Profit Margins (average of 28.14% over last five years) for Apple are below the industry average (34.2%). Apple continues to strive for increased Gross Profit Margins over last five years improving from 27.9% in 2002 to 29% in 2006, primarily driven by increased sales. Motorola’s Gross Profit Margins which stand at 29.7% as of 2006, while Nokia is ahead of the two at about 35% gross profit margin as of 2006. RIM continues to enjoy the highest level of Gross Profit Margin at about 55.2% as of 2006, primarily driven by the worldwide expansion of its Blackberry handset which is now available over 160 networks in over 60 countrieslv.The growing gross profit margin attractiveness of the high end handset segment as shown by Nokia and RIM, may have been one of the drivers for Apple to enter this industry. The Return on Assets (average of 5.69% over last five years) and Return on Equity (average of 9.25% over last five years) ratios also are attractive for Apple as compared to the competitors and the industry (1.5% and 5.5% respectively for the industry). Again for Apple this has been due to the immense success of the iPod. Over 2006, Apple’s ROA has been reasonably flat (11.5% in 2005 and 11.6% in 2006), as income increases at the same rate as the assets, in line with its move to commoditize iPod. Hence overall, financially, Apple is strongly positioned in the handset industry to compete aggressively with its competitors like RIM, Palm, Nokia and Motorola etc., with the caveat that this favorable position has been achieved by Apple, primarily on account of its tremendous success with the iPod music and video player series. II (D) 7: Implications Apple has entered the highly competitive smartphone industry with its new offering, iPhone.. It is set to change the dynamics of the smartphone industry by creating a new consumer segment for smartphones. So far, smartphones were mainly used by corporate users to access office applications such as Email, web browsing and have the device integrated with cell phone. On the other end of spectrum are mainstream consumers who would like to have one device to play MP3 songs and to make calls. With Apple’s iPhone, it has integrated the two segments with its product offering and has designed the product to appeal to users for whom “Experience” matters most. Competitors such as LG Prada are already marketing mobile phones with the look and feel of an iPhone (although they lack many applications and OS integration that iPhone promises. Other competitors such as RIMlvi are increasing their offering in consumer space and for the business users (Pearl and BlackBerry 8800) and have a reach with 225 network carrierslvii who earn hefty profits on selling blackberry devices. RIM is also expanding its offering through additional network carriers worldwide. Palm is a close contender since its TREO is regarded as a feature rich product among consumers. However, its recent announcementslviii of exploring options and hiring a former Apple engineer send mixed messages and it is unclear if Palm will stay in the competition or quit. The industry is clearly evolving to offer cell phones with better user experience and feature rich products and competitors are trying to tie up complementary offerings. For example, a music company in Europe started offering its music through streaming audio directly into cell phones thereby freeing up the drag on revenues caused by credit card processinglix. So Apple has caused a shakeup in the handset industry and in the service provider industry in the way in which they offer services. Apple will meet stiff competition from RIM which currently holds 50% of smartphone segment and from Nokia and Motorola (who are traditionally market share leaders in handset industry) as they introduce smartphones to protect their market shares. If Apple Inc. is successful in developing a whole new consumer segment of smartphone users, it would have the first mover advantage and capture the market share while traditional players work on bringing a similar user experience to penetrate this new segment. Although RIM may still continue to be a leader in the enterprise smartphone business, since enterprises generally move slowly towards a new product due to switching costs, there may be a small segment of powerful players in the enterprise segment who may strongly recommend that iPhone be supported on their corporate networks. This will be a challenge for RIM as Apple gains entry into the enterprise market. Also, as Cisco and Apple settled their trademark dispute, they agreed to work together “in the areas of in the areas of security, and consumer and enterprise communications."lx This partnership with Cisco may further strengthen Apple’s ties in the enterprises. Apple’s exclusive partnership with Cingular (or the new at&t) may also open doors for new ways to share music, download music as Apple and Cingular continue to work closely to offer new product feature and service offerings to their consumers. Thus Apple is strongly positioned against competition with its strong product offering, and partnerships with Cingular and Cisco. Apple made a calculated judgment to unveil its iPhone 6 months before entering the market. This has helped created product and brand awareness and lot of speculation and hype about the product. As Apple studies the competition and strategic moves by competitors during this time frame, Apple gets to make the final call of what new “cool” features will be introduced in the first version of iPhone thereby taking the industry by a storm. Apple’s iPhone is driven by software, so adding new features is a comparatively smaller incremental effort. However, Apple has to live up to its expectations and brand image for the product to be successful. II (E): Intra-Industry Analysis II (E) 1: Strategic groups in the industry Strategic groups in the smartphone manufacturer industry can be analyzed along two dimensions- Mobile Operating Systems (Exhibit II (E) 1a – Smartphone Operating System Adoption Landscape )and Features/Applications available on the phone. Mobile Operating Systems (Exhibit II (E) 1b – Smartphone Industry Map) Along this dimension, the smartphone devices are arranged according to the extent of their integration (tight, proprietary) with the mobile operating systems. The major mobile Operating Systemslxi are as follows:
There are three subgroups within the smartphone producer industry based on the choice of operating system. There is some overlap among these categories, i.e. a device manufacturer may belong to more than one subgroup simultaneously.
Features/Applications Along this dimension, the smartphone producers are arranged according to the relative strength and multiplicity of features and applications available on their smartphone devices. Based on this criterion, phone devices can be divided into the following three groups-
Smartphone devices normally correspond to the Medium or High categories of features and applications. Exhibit II (E) 1 depicts the positions of various smartphones producers on these two dimensions. The strategic groups resulting from this analysis are as follows-
II (E) 2: Threats, Opportunities & Mobility Barriers of Strategic Groups The following sections describe the particulars of these strategic groups, like size, threats, opportunities and mobility barriers. Group 1- Medium feature, very high integration (e.g. Apple): This strategic group is currently unique to Apple iPhone. Although the size of this group is presently 0 (since the launch of the iPhone is still about 3 months away), the iPhone aims to capture 1% of the worldwide mobile phone market. The threats to this strategic group, which may potentially cause the mobile phone subscribers to opt for other smartphones, are as follows-
Opportunities for this strategic group:
Mobility barriers: Movement across operating systems strategic groups (i.e. to high/very high feature, high integration) to capture additional customers, especially corporate customers, would require investments in software applications that work on its proprietary operating system OS X. The cost to develop such software in-house would be high. Apple does not possess a strong relationship with ISVs and so that option would require time and effort. Group 2- High feature low integration (e.g. LG): This group comprises companies that provide most features associated with smartphones but they have not invested in an operating system (proprietary or collaborative) themselves. These companies use commercially available ‘independent’ operating systems like Windows Mobile and Linux. The threats to these companies are –
Opportunities for this strategic group:
Mobility Barriers:
Group 3- High feature medium integration (e.g. Motorola, Sony Ericsson): This group is comprised of companies that provide features and applications similar to group 2, but have a higher level of integration (i.e. medium level) between the devices and the mobile operating system. These companies have a foothold in group 2 as well as group 4, i.e. their devices can work with multiple operating systems (collaborative like Symbian as well as ‘independent’ like Windows Mobile and Linux) Threats to group 3:
Opportunities for group 3:
Mobility Barriers: This is the best group to be in from a mobility perspective, since these companies have invested in collaborative OS, and at the same time they have expertise in making devices that can work with ‘independent’ operating systems like Windows Mobile and Linux. These companies can easily switch to very high feature, low integration group. Group 4- High feature very high integration (e.g. RIM): This group is currently unique to RIM due to its proprietary BlackBerry OS and the BlackBerry device. It accounted for 53%lxii of the 5.2 million smartphones shipped in the US last year. Blackberry provides high features but lacks word processor, spreadsheet and PDF capabilities. The software on the BlackBerry is mostly proprietary and developed in-house. Threats to group 4:
Opportunities for group 4:
Mobility barriers:
Group 5- Very high feature, medium integration (e.g. Samsung, Palm): This strategic group is comprised of firms that make feature- and application-rich devices, have invested in collaborative operating systems and at the same time support ‘independent’ operating systems as well. For examples, Samsung is part of the consortium supporting the Symbian operating system. It also supports Windows Mobile operating system on its devices. Since its divestiture of Palm OS as part of Palm Source to Access, Palm has moved from very high integration to medium integration. This shift is evidenced in Palm’s use of Palm OS for Treo 650 and Windows Mobile for Treo 700. In an interesting move, Palm has acquired the rights to a version of Palm OS (Garnet) from Access and has said it will continue development of Palm OS. Threats to group 5:
Opportunities for group 5:
Mobility barriers: This group can move to either side of the H/W-S/W integration spectrum, and therefore enjoys that flexibility. Group 6- Very high feature, high integration (e.g. Nokia): This groups is comprised of companies that make feature- and application-rich devices and have also invested in a common mobile operating system (Symbian in the case of Nokia). Threats to group 6:
Opportunities for group 6:
Mobility Barriers:
II (E) 3: Other Competitive Dynamics Disruptive Technologies
Standards
Growing Market Opportunity/Industry Trends
Competitive Dynamics
II (E) 4: The firm’s competitive position before and after the strategic move Prior to its iPhone announcement, Apple had never been a player in the mobile phone maker industry. Apple’s claims to fame have been its Mac line of computers with its Mac OS operating system and user-friendly graphical user interface, and more recently, its iPod line of music players and the iTunes music download service. In the former, it was competing with other computer manufacturers like IBM, HP, Dell etc, and in the latter, its competitors are Creative, Rio, Sandisk, Rhapsody, etc. Of late, almost all major mobile phone manufacturers have begun to integrate a digital music player (MP3 player) in their devices. Although iPod was a huge success for Apple, this device convergence (of mobile phones with music playing capabilities) was posing a long term threat to Apple. The introduction of the iPhone provides a higher-end extension to Apple’s iPod product line and allows Apple to take on mobile phone manufacturers on their own turf. This widens Apple’s competitive landscape significantly. This seems to be a well thought-out and carefully orchestrated strategy on Apple’s part as evidenced by its name change to Apple Inc that was announced along with its iPhone introduction. II (F): Threats and Opportunities Analysis II (F) 1: Emerging threats and opportunities In addition to those covered under six forces analysis and the macro environmental analysis, the following are the threats and opportunities for the smartphone industry- Threats
Opportunities
II (F) 2: Implications for strategy The threats described above would limit the profitability of the smartphone manufacturers. However, the opportunities listed above would allow them to enter new markets and reach new users. This would necessitate the need on the part of smartphone makers to utilize the business strategy of mass differentiation while holding on to their advantages in their niche markets. For example, RIM's Blackberry smartphone devices have been targeted mainly at business users. However, of late, RIM has been making efforts to reach out to consumers by enhancing its user interface while still retaining its business user base by enhancing its corporate-friendly features. II (G): Summary of External Analysis The Industry analysis indicates that the handset industry in general is moderately unfavorable. However, the smartphone industry, a sub-segment of handset industry, is under penetrated. The competitor analysis indicates that handset manufacturers of smartphone industry concentrate their efforts on corporate users. Apple has found a segment within smartphone segment whose needs are not met by the current handset players. Apple has chosen to enter the consumer smartphone segment where it faces little or no competition in terms of the unique offering that it brings to the table. With the iPhone offering, Apple has positioned itself according to the needs to the consumer segment. However, consumers in general are price sensitive and Apple can initially cater to the needs to early adopters and tech-savvy consumers due to their technical expertise and high price point. During this phase, other smartphone competitors can use the cross-elasticity of demand to attract mainstream smartphone consumers due to their low price points. Our analysis indicates that all handset manufacturers (both general and smartphone) follow the leader and try to imitate their products and enter the new market segments and there is little differentiation between the existing products (Please see Exhibit II (G) – Part A for a comparison of the handset manufacturers). Apple is in a financially stronger position compared to its competitors. Its financial ratios fare better than competitors and industry standards. III: INTERNAL ANALYSIS Internal Analysis – Part A – Apple III (A): Business Definition/Mission In 1987, Apple’s goal was as followslxiv: “Our goal is to enhance our position as the innovator and premiere manufacturer of personal computer – the value leader, not the price leader. We intend to continue our strong sales growth worldwide. We will do this by concentrating on two key strengths:
Today, Apple’s goal is not much different from 1987 except it has extended its business from computers to digital devices. Apple wants to extend its Human Engineering into integrating today’s digital devices, and creating a Digital Lifestylelxv. This is reflected in Apple’s mission statementlxvi: “Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and will enter the mobile phone market this year with its revolutionary iPhone.”
Steve Jobs’ management style is reflective of the company’s management style – Apple is a very entrepreneurial and aggressive. Through various ex-Apple employee interviews with the media, we found out that Steve Jobs is a very tough boss to work for. He is a strong critique of product designs, due to the importance he places on the usability of their devices. The designers continue to work hard to improve their designs. Upon product completion, Steve Jobs would tell marketing that they have this wonderful thinglxvii. By motivating people through constructive criticism, Steve Jobs is able to get the best out of his employees. However, much of the Apple internal management details are very confidential. “Most of what Apple's engineers are fiddling with won't make it out of the lab, of course. Jobs himself will determine what does. Though he has ceded some control to trusted aides as he has matured as a manager, he still makes the final call on products” lxviii. Steve Jobs is fanatical about leaking company information. One of things that they tell new employees is “If you leak, we will find you, we will fire you, we will sue you and we will prosecute you”lxix. This culture seems to be reflected in employee behavior when we attempt to interview them. They simply refuse to give any information about Apple. "Apple has sued several suspected leakers or their abettors. Jobs also compartmentalized the company so that the vast majority of employees, even most managers, don't know what their colleagues are working on. Each product has several code names--a different one in each department. "Teams doing components have no idea what product they're for," says an Apple engineer. Jobs, former execs say, also has been known to plant false rumors internally; if they leak, he knows who talked."lxx III (C): Organizational Structure, Controls and Values III (C) 1: Firm’s organizational structure Apple claims to be organized along functional lineslxxi (please see exhibit Exhibit III (C) 1). However, one of the direct-report to the Apple CEO is the Senior Vice President of iPod Division. This suggests that Apple has a Hybrid, Matrix or Network Organizational Structure. However, we do know that Steve Jobs has compartmentalized the company so that majority of the employees and managers don’t know what other groups are working onlxxii. This further reinforces Steve Jobs’ efforts in maintaining confidentiality within the company. III (C) 2: Controls used to monitor/appraise employee behavior and performance As advised by a former VP of Apple, the company has an "in your face" culture. Employees are expected to have "a lot of face time" with their managers. The managers monitor the performance of their employees very closely and hold them "really really accountable" . As an example, product managers are expected to provide precise customer requirements for products and features to the engineering team based on which products are designed. Also, they are expected to provide reasonably accurate sales quantity forecasts to the operations organization based on which products are manufactured. If the customers do not like the product or features and the sales forecasts are "way off", the product marketing manager could be fired. III (C) 3: Firm’s organizational values From Apple’s 1987 Value Statement documentlxxiii, we can see that they have retained most of their values to-date. These values are reflective of the innovative products and services that Apple is providing today. III (D): Strategic Position Definition III (D) 1a: Corporate Level – Firm’s business portfolio Apple is in the following businesses: Macintosh Computers, iPod, other music related products, peripherals, software and services. Apple’s core competence is leveraging its human engineering to deliver stylish and user friendly electronic products, and in effectively marketing these products.
Please see Exhibit III (D) 1b for Apple’s 2006 revenue (in $ million) in its respective businesses. Although the Macintosh and iPod may be developed in isolation, the end product shows that there is tight integration between the software and hardware. And in the software area, it had to work on Macintosh, Window PC and iPod. So, the hardware development of iPod and Macintosh may be separated, but the software is the glue. This suggests that Apple’s corporate strategy is one of as ‘Related Linked’. Given the fact that the iPhone is an iPod with added mobile phone capability, its introduction will not change Apple’s Related Linked corporate strategy. III (D) 1c: Corporate Level – Recent acquisitions, mergers or divestments Apple believes in organic growth. According to jobs, “Software is the user experience” and Apple doesn’t like to depend on Independent Software Vendors to design that experience. As such there have been no major acquisitions in the past. For example, many of the applications developed by Apple were for MAC based applications that attempt to cater to the creative and entertainment aspects of the user community. As such, when Apple’s request to create a video editing program was rejected by Adobe systems, Apple launched its own project to create Final Cut Prolxxiv. Apple also ventured into the retail space and opened about 160 stores in USA, Canada, UK and Japan. Many times, people would walk into a retail store to buy an iPod, test drive other MAC products and would end up buying a computer to go with the iPod. Apple estimated that the foot traffic in its stores totaled 50 million in fiscal year of 2005. lxxv III (D) 1d: Corporate Level – Recent alliances, partnerships or joint ventures Apple has allied with Cingular as the sole service provider for the iPhone within the US. Please see Exhibit III (D) 1d-1 for the analysis of synergies between Apple & Cingular As part of trademark settlement dispute over iPhone, Cisco and Apple have decided to work together in the areas of security, consumer and enterprise communications. Please see Exhibit III (D) 1d-2 for the analysis of synergies between Apple & Cingular
Please refer to Exhibit III (D) 1e for Apple’s BCG matrix. Apple’s Macintosh business has a minor share of the personal computer marketlxxvi while the market is slowing down in growthlxxvii. This puts Apple’s Macintosh in the Dog category (Exhibit III (D) 1e – Apple’s Business Portfolio Analysis using the BCG matrix). However, Macintosh generates 38% of Apple’s FY’06 revenuelxxviii. So the Mac is really a Pet. Apple’s iPod business had 28% market share of all MP3 players in 2005lxxix. It is expected that the MP3 player market will grow from 26.4 million units from 2004 to 700 million units in 2009lxxx. This puts the iPod in the Stars category. According to Steve Jobs, Apple wants to capture 1% of the mobile handset market by 2008. This is a relatively small market share. And the mobile phone market had grown 22.5% from 2005 to 2006lxxxi. Hence, iPhone is in the ‘Question Mark’ category. Although iTunes was originally created to fit into the iPod sales and offer a way to download music legally, iTunes was originally referred to as the “razor-and-blade” model with “variable element (iTunes) serving as the loss leader for profit-driving durable good”lxxxii. However, for iTunes to be profitable, it needs a large number of users of iPod and iPhone. iTunes fits well into the concept of scalability continuum where iTunes content is “Information intensive without labor intensive customization”. Media companies are rushing to offer their content on iTunes and size (in terms if media available) adds to the value of the network. Thus with iTunes, Apple has created a network effect and with more users of iPod and iPhone, iTunes will move from a ‘Question Mark’ to a Cash Cow.
Apple’s business level strategy is Broad Differentiation. Apple’s goal is to be a “value leader, not price leaderlxxxiii” for “students, educators, creative professionals, businesses, government agencies, and consumers”lxxxiv. Apple can only provide value leadership through product differentiation. Although Apple has been trying to set Macintosh’s business level strategy to Broad Differentiation, it has traditionally been sold to mainly students and creative professional, which realistically put Macintosh’s business level strategy to be Focused Differentiation. The iPod and music related businesses are truly a Broad Differentiation business level strategy. By offering iTunes to be available on both Macintosh and Window PC, the iPod is usable by more diverse masses. The simple design of iPod, and easy access to large list of on-line music and other iTunes media content such as videos, audiobooks, TV shows truly differentiates the iPod from other MP3 players. The iPhone is intent to replicate the success of iPod and also address the concern that handsets with integrated MP3 player are eating away the market share of iPod and iTunes. III (D) 2b: Business Level – Fit between business level and corporate level strategy Apple’s strategy is to be 2nd to market and focus on enhancing the “user experience” of the products. Apple single mindedly focuses building easy-to-use products such as the MAC, iPod and now the iPhone. Apple’s fit between business level and corporate level strategy can be classified as a “Simple Consistency” fit. III (D) 2c: Business Level – Change in business level strategy based on strategic move Although Apple intends the iPhone to be a ‘Focused Differentiation’ product with its high price point and catering to users who want to have a converged device for the iPod, handset and internet communicator, initially, the iPhone is restricted to a limited group of users. The limitations are price and service provider. iPhone is relatively expensive compared to currently available handsets, and will be only with Cingular service. Apple may imitate its strategy of iPod and move from focused to broad differentiation with its iPhone offering as mainstream consumers start gaining interest in the product. Since Apple is defining a new customer segment in the consumer space of “consumer smartphones”, it will be at an added advantage if it quickly moves the iPhone from focused differentiation to broad differentiation and starts subsidizing the iPhone early on to gain market share in an already competitive handset industry. III (D) 3a: Resources & Capabilities – Analyze to determine V-P, Value & cost drivers, etc. Please see earlier section II (D) 3h for Apple’s value & cost drivers, etc.III (D) 3b: Resources & Capabilities – How V-C will change based on strategic move Although an iSuppli analyst estimates that 4GB iPhone would cost $246lxxxv, it is not clear what the real cost is since Apple has not sold any iPhones to add to its COGS. However, we do know that the 4GB iPhone will be sold for $499. According to Steve Jobs, today’s users have to buy an iPod and smartphone to get close to the features of iPhone. A 4GB iPod costs consumers $199, and an average smartphone with 2 year contract costs $299lxxxvi. So, Apple is pricing 4GB iPhone at $499 with 2 year contract. However, iPhone provides more value than a iPod and smartphone combined. iPhone Values: Please see exhibit III (D) 3b – Part AWith the additional features and ease of use, iPhone definitely increases the buyer surplus (V-P). III (D) 3c: Resources & Capabilities – Value Chain exhibit Please see Exhibit III (D) 3c – Part A for the Value Chain Analysis for Apple III (D) 3d: Resources & Capabilities – VRIO Analysis Please see earlier section Exhibit II (D) 4 – Part A (g)III (D) 3e: Resources & Capabilities – How is the firm retaining customers? Traditionally Apple has retained its customers through a cult-like following. However, with the introduction of iPod, their customer segment has expanded rapidly outside of their cult followers. Apple is able to retain this new segment of customers through its excellent “human engineered” products and after-sale support. Apple seems to be able to retain customers through its excellent user interfaces. However, this is impeded by the relatively higher price of its products. Take the Macintosh computer for example. For a relatively similar performing computer, a consumer will pick a Windows PC. However, if the consumer had a chance to really use a Macintosh extensively, the superior user experience for would compel the consumer to stay with the Macintosh in spite of its higher cost. Therefore, to entice users to use the Macintosh, Apple focuses on educational institutes. Apple either donates or sells to educational institutes, where future computer users get their first exposure to computer. This builds on their positive experiences and promotes usage of Apple products. Starting with the iPod, Apple has also well understood its product life cycle and has continuously innovated its product lines to cater to a wider segment of customers. III (D) 3f: Resources & Capabilities – Apply frameworks from other classes Apple focuses on value-driven product development, rather than price leadership. Apple closely watches unmet market needs in terms of usability of devices and develops products to make complex tasks simple. It then charges a premium for these products and usually is successful at it, due to the convenience factor of its products as compared to the substitutes. Apple develops consumer products which compete on basis of their form and possession factors in terms of sources of utility framework. For example with the iPod, Apple introduced a slim version of a music player with lots of disk space and an easy-to-use interface. It soon became a fashion accessory to carry around when listening music and became a substitute phrase for MP3 players (possession factor). Although with the iPod, Apple started with a push strategy of product positioning, with the iPhone there seem to be more elements of pull than push, with a lot of curiosity driving the pre-launch demand for iPhone. This has happened due to the immense success with the product design of iPod and its mass appeal. Apple is also using analysts, partners, bloggers and its website as a means of promoting its product line and has pre-empted the competitors in the handset market with its innovative design and new features like touch keypad, visual voicemail and wide screen LCD format with its iPhone. It continues to use direct and distribution channels depending upon the product. If the product is sophisticated such as Macintosh computers, the product is sold through Apple Stores in addition to its online store, where there are knowledgeable experts that can demonstrate the value of the Macintosh. If the product is simple like iPod, which does not required technical experts, then they are sold through major retailers, along with its own Apple Stores and online store. Apple has also developed complementary platforms like iTunes for its consumer products like iPod, iPod Video and now iPhone, to provide exclusive content for its products driving their appeal for the end consumer. This also provides an incremental revenue stream for Apple in the long run and helps positions itself as a leading provider of consumer needs in music, video and wireless communication businesses, in terms of devices and content. An analysis of Apple’s strategy using the 4Ps framework shows that it develops products that exploit an unmet market demand, and prices the products based on the value proposition of these devices. Apple typically will price its product higher than competitors with comparable functionalities. This is because Apple believes its human engineering of its products adds additional value. To promote its premium values, Apple’s message from advertisements to its Apple Stores is “simplicity”. Its background for its ads and stores is just plain white. There are no flashy colors or a flashy environment. It is just plain white, which accents on the simplicity of its product solutions. III (E): Financial Analysis III (E) 1: Financial Analysis – Analyze performance over past 5 years Please see section II D 6 III (E) 2: Financial Analysis – Conduct valuation using an alternative technique Relative Valuation for Apple Choice of Comparables Apple, Inc. operates in multiple industries- digital music players (iPod), personal computers (Mac desktops and laptops), music download service (iTunes), Operating Systems (OS X) and with the announcement of iPhone, in the smartphone maker industry as well. Therefore, the following comparables, which are used for Apple’s relative valuation, represent all of these industry sectors-
Estimating Valuation Ratios for the Comparables We have used four valuation ratios in comparing Apple with the comparable companies: Enterprise value to Sales, Enterprise value to EBITDA, Market value of equity to Book value of equity, and PE (price to earnings per share). Enterprise value is the adjusted market value of the firm, sometimes referred to as the true value of the firm. Enterprise value is obtained by adding debt to the market value and subtracting the cash and cash equivalents. To estimate Apple’s enterprise value in comparison with its comparables, we use the ratios Enterprise value to Sales and Enterprise value to EBITDA. The relationship between market value of equity to book value of equity is often used as a measure of how over or undervalued a stock is. The ratio of price to earnings per share (PE ratio) is mostly used to compare different companies to see how expensive they are as compared to their comparables. In estimating Apple’s market value, we use the ratios market value to book value and price to earnings per share. We have used Yahoo finance to obtain values for computing the valuation ratios (see Exhibit 2). The trailing twelve months data is used for sales, EBITDA and book value. Most recent quarter data is used for shares outstanding, debt, cash and cash equivalents. Estimation of Enterprise Value and Equity Value for Apple The enterprise value and equity value for Apple are calculated as follows: For each set of ratios determined for the comparables in Exhibit III (E) 2, the average is computed. This average value is then multiplied with the value of the denominator of the ratio for Apple, to compute the value of the numerator of the ratio. Enterprise Value The average for the ratio of Enterprise Value/Sales is multiplied with the Sales for Apple to estimate the Enterprise Value for Apple. Similarly, another value of Enterprise Value for Apple is calculated by using the average of the ratio Enterprise Value/EBITDA for the comparables and multiplying it with the EBITDA for Apple. The Enterprise Value of Apple is computed as the average of these two values. Equity Value The average of the ratio Market Value/Book Value for the comparables is multiplied with the Book Value for Apple to determine one measurement of the Equity Value for Apple. The average of the Price/Earnings (PE) ratio for the comparables is multiplied with the earnings per Share (EPS) to obtain an estimate of the PE ratio for Apple, which in turn in multiplied with the number of shares outstanding for Apple to derive the second measure of Equity Value for Apple. The average of these two values is determined to be the Equity Value for Apple. Adjustments The section ‘Adjustments’ of Exhibit III (E) 2 shows the median metrics for Revenue Growth, Projected EPS Growth (for 2007 and 2008) and Operating Margin for the comparables, along with the percentage by which these measures for comparables differ from those for Apple. We notice that, relative to the median for comparables, Apple exceeds the revenue growth and operating margin growth but trails in EPS growth. Subjective adjustments of 5%, -5%, -5% and 5% respectively are applied to these measures to arrive at a net adjustment of 0%. Final Values for Enterprise Value and Equity Value for Apple The Enterprise Value and the Equity Value for Apple computed above are increased by the adjustment factor of 5% derived in the previous section, to determine the adjusted estimates of these values for Apple. These computations are depicted in the table below.
Please see Exhibit III (E) 2 for detailed explanation of the comparable analysis III (E) 3: Financial Analysis – Scenario Analysis (Exhibit II (D) 6 – Apple’s valuation using scenario analysis) We used EVALlxxxvii to value Apple Inc. using DCF valuation under the following scenarios. The rationale for choosing the scenarios is given below. (Please see Exhibits II (D) 6, a-g for the scenarios below)
The summary of assumptions made for coming up with DCF valuation is given in Exhibit III (E) 3b. Weighted Average Cost of Capital (WACC): Broadly speaking, a firm uses either debt or equity to finance its assets. WACC is the average of the costs of these two sources of financing, each of which is weighted based on its respective proportion. WACC can be considered as the overall required return on the firm as a whole. WACC = Re * E/V + Rd * D/V * (1 - T) Cost of Equity: “A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership” lxxxviii. Cost of Equity is calculated using the Capital Asset Pricing Model (CAPM). Per the CAPM, Cost of Equity = Risk-Free rate + Beta x (Market Risk Premium) ke = rf + β*(rm – rf) Computing Cost of Equity
The WACC is taken as Cost of Equity since Apple Inc. has zero debt and we anticipate that Apple will continue to follow the strategy of having no debt in its books. Apple Inc does have some operating leases which can potentially be classified as long term debt and total minimum lease payments for the next five years and thereafter is given as $1154 millionxcii. Even if we assumed a conservative number of 5% as cost of debt, given the operating lease is $1154 million and market cap for Apple Inc. is 77 Billion, it has a very minor impact on the WACC. (WACC changes to 15.32% from 15.48% if we assume Debt). So all the valuations in different scenarios, we have used cost of equity as the WACC (15.48%). The valuation of Apple under these various scenarios is given below Directory: groups groups -> What is ascaa? groups -> Tiger Leaps Progress Update from Tenafly High School March 28, 2012 English groups -> Personal Data: Name : Prasanna. S educational Qualification groups -> Traffic alert and Collision Avoidance System or tcas groups -> 1980s Type Card Master List from Standard Catalog 1980 Burger King Phillies groups -> Lima Site 85 Personnel List groups -> General knowledge groups -> Kenneth pomeranz the great himalayan watershed groups -> Christina Maria Bergqvist Download 7.3 Mb. Share with your friends:
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