CASE STUDY Apple Inc: Performance in a Zero-Sum World Economy
ON NOVEMBER1, 2010, JOHN TARPEY, SENIOR FINANCIAL ANALYST at a securities
firm, was sitting at his conference table to begin the task of fully analyzing the 2010 financial
performance and strategic strategies of Apple Inc. On his table were hundreds of articles, reports,
SEC documents, and company documents. The basic question he sought answers to with this indepth analysis was how Apple’s performance continued to be out-standing, while the world and
U.S. economy was flat to negative.
A second, and more important question, was if Apple could sustain this high level of
performance and major innovation. Exhibit 1 shows unit sales by key products, net sales by the
same products, net sales by the company’s operating segments, and Mac unit sales by operating
segments. John noted that there were nine positive increases versus three negative ones. He saw
that the positive increases outnumbered the negative changes by three to one. In 2010, there were
only three negative changes compared with nine changes for 2009. Net sales of desktop
computers were up 43% in 2010, compared with a 23% drop in sales in 2009.
John considered Apple’s Consolidated Statement of Operations (see Exhibit 2) and Balance
Sheet (see Exhibit 3).
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1.0 Management’s View of the Company
John searched and found in the 10-K report management’s views on the company’s performance
in 2010 as stated below.
First, the company designed, manufactured, and marketed a range of personal computers,
mobile communication and media devices, and portable digital music players, and sold a variety
of related software, services, peripherals, networking solutions, and third-party digital content
and applications. The company’s products and services included Mac computers, iPhone, iPad,
iPod, Apple TV, Xserve, a portfolio of consumer and professional software applications, the Mac
OS X and iOS operating systems, third-party digital content and applications through the iTunes
Store, and a variety of accessory, service, and support offerings. The company sold its products
worldwide through its retail stores, online stores, and direct sales force, as well as third-party
cellular network carriers, wholesalers, retailers, and value-added resellers. In addition, the
company sold a variety of third-party Mac, iPhone, iPad, and iPod compatible products,
including application software, printers, storage devices, speakers, headphones, and various other
accessories and peripherals through its online and retail stores. The company sold to SMB,
education, enterprise, government, and creative markets.
Second, the company was committed to bringing the best user experience to its customers
through its innovative hardware, software, peripherals, services, and Internet offerings. The
company’s business strategy leverages its unique ability to design and develop its own operating
systems, hardware, application software, and services to provide its customers new products and
solutions with superior ease-of-use, seamless integration, and innovative industrial design. The
company believed continual investment in research and development was critical to the
development and enhancement of innovative products and technologies. In conjunction with its
strategy, the company continued to build and host a robust platform for the discovery and
delivery of third-party digital content and applications through the iTunes Store. Within the
iTunes Store, the company expanded its offerings through the App Store and iBookstore, which
allowed customers to browse, search for, and purchase third-party applications and books
through either a Mac or Windows-based computer or by wirelessly downloading directly to an
iPhone, iPad, or iPod touch. The company also worked to support a community for the
development of third-party software and hard-ware products and digital content that complement
the company’s offerings. Additionally, the company’s strategy included expanding its distribution
network to effectively reach more customers and provide them with a high-quality sales and
post-sales support experience. The company was therefore uniquely positioned to offer superior
and well-integrated digital lifestyle and productivity solutions.
Third, the company participated in several highly competitive markets, including personal
computers with its Mac computers; mobile communications and media devices with its iPhone,
iPad, and iPod product families; and distribution of third-party digital content and applications
with its online iTunes Store. While the company was widely recognized as a leading innovator in
the markets where it competes, these markets were highly competitive and subject to aggressive
pricing. To remain competitive, the company believed that increased investment in research and
development, marketing, and advertising was necessary to maintain or expand its position in
these markets. The company’s research and development spending was focused on further
developing its existing Mac line of personal computers; the Mac OS X and iOS operating
Systems; application software for the Mac; iPhone, iPad, and iPod and related software;
development of new digital lifestyle consumer and professional software applications; and
investments in new product areas and technologies. The company also believed increased
investment in marketing and advertising programs was critical to increasing product and brand
awareness.
The company utilized a variety of direct and indirect distribution channels, including its re-tail
stores, online stores, and direct sales force, as well as third-party cellular network carriers,
wholesalers, retailers, and value-added resellers. The company believed that sales of its
innovative and differentiated products were enhanced by knowledgeable salespersons who could
convey the value of the hardware, software, and peripheral integration; demonstrate the unique
digital lifestyle solutions that were available on its products; and demonstrate the compatibility
of the Mac with the Windows platform and networks. The company further believed providing
direct contact with its targeted customers was an effective way to demonstrate the advantages of
its products over those of its competitors, and that providing a high-quality sales and after-sales
support experience is critical to attracting new—and retaining existing—customers. To ensure a
high-quality buying experience for its products in which service and education were emphasized,
the company continued to expand and improve its distribution capabilities by expanding the
number of its own retail stores worldwide. Additionally, the company invested in programs to
enhance reseller sales by placing high-quality Apple fixtures, merchandising materials, and other
resources within selected third-party reseller locations. Through the Apple Premium Reseller
Program, certain third-party resellers focused on the Apple platform by pro-viding a high level of
integration and support services, as well as product expertise.
2.0 History of Apple Inc
The history of Apple can be broken into five separate time periods, each with its own strategic
issues and concerns.
(2.1) 1976–1984: The Founders Build a Company
Founded in a California garage on April 1, 1976, Apple created the personal computer revolution
with powerful yet easy-to-use machines for the desktop. Steve Jobs sold his Volkswagen bus and
Steve Wozniak hocked his HP programmable calculator to raise $1,300 in seed money to start
their new company. Not long afterward, a mutual friend helped recruit A. C. “Mike” Markkula to
help market the company and give it a million-dollar image. Even though all three founders had
left the company’s management team during the 1980s, Markkula continued serving on Apple’s
Board of Directors until August 1997.
The early success of Apple was attributed largely to marketing and technological innovation. In
the high-growth industry of personal computers in the early 1980s, Apple grew quickly, staying
ahead of competitors by contributing key products that stimulated the development of software
for the computer. Landmark programs such as Visicalc (forerunner to Lotus 1-2-3 and other
spreadsheet programs) were developed first for the Apple II. Apple also secured early dominance
in the education and consumer markets by awarding hundreds of thousands of dollars in grants to
schools and individuals for the development of education software.
Even with enormous competition, Apple revenues continued to grow at an unprecedented rate,
reaching $583.3 million by fiscal 1982. The introduction of the Macintosh graphical user
interface in 1984, which included icons, pull-down menus, and windows, became the catalyst for
desktop publishing and instigated the second technological revolution attributable to Apple.
Apple kept the architecture of the Macintosh proprietary; that is, it could not be cloned like the
“open system” IBM PC. This allowed the company to charge a premium for its distinctive “userfriendly” features.
A shakeout in the personal computer industry began in 1983 when IBM entered the PC market,
initially affecting companies selling low-priced machines to consumers. Companies that made
strategic blunders or that lacked sufficient distribution or brand awareness of their products
disappeared.
(2.2) 1985–1997: Professional Managers Fail to Extend the Company
In 1985, amid a slumping market, Apple saw the departure of its founders, Jobs and Wozniak. As
Chairman of the Board, Jobs had recruited John Sculley, an experienced executive from PepsiCo,
to replace him as Apple’s CEO in 1983. Jobs had challenged Sculley when recruiting him by
saying, “Do you want to spend the rest of your life selling sugared water, or do you want to
change the world?” Jobs willingly gave up his title as CEO so that he could have Sculley as his
mentor. In 1985, a power struggle took place between Sculley and Jobs. With his entrepreneurial
orientation, Jobs wanted to continue taking the company in risky new directions. Sculley, in
contrast, felt that Apple had grown to the point where it needed not only to be more careful in its
strategic moves, but also better organized and rationally managed. The board of directors
supported Sculley’s request to strip Jobs of his duties, since it felt that the company needed an
experienced executive to lead Apple into its next stage of development.
Jobs then resigned from the company he had founded and sold all but one share of his Apple
stock. Under the leadership of John Sculley, CEO and Chairman, the company engineered a
remarkable turnaround. He instituted a massive reorganization to streamline operations and
expenses. During this time Wozniak left the company. Macintosh sales gained momentum
throughout 1986 and 1987. Sales increased 40% from $1.9 billion to $2.7 billion in fiscal 1987,
and earnings jumped 41% to $217 million.
In the early 1990s, Apple sold more personal computers than any other computer company. Net
sales grew to over $7 billion, net income to over $540 million, and earnings per share to $4.33.
The period from 1993 to 1995 was, however, a time of considerable change in the management
of Apple. The industry was rapidly changing. Personal computers using Microsoft’s Windows
operating system and Office software plus Intel microprocessors began to dominate the personal
computer marketplace. (The alliance between Microsoft and Intel was known in the trade as
Wintel.) Dell, Hewlett-Packard, Compaq, and Gateway replaced both IBM and Apple as the
primary makers of PCs. The new Windows system had successfully imitated the user-friendly
“look and feel” of Apple’s Macintosh operating system. As a result, Apple lost its competitive
edge. In June 1993, Sculley was forced to resign and Michael H. Spindler was appointed CEO of
the company. At this time, Apple was receiving a number of offers to acquire the company. Many
of the company’s executives advocated Apple’s merging with another company. However, when
no merger took place, many executives chose to resign.
Unable to reverse the company’s falling sales, Spindler was soon forced out and Gilbert Amelio
was hired from outside Apple to serve as CEO. Amelio’s regime presided over an accelerated
loss of market share, deteriorating earnings, and stock that had lost half of its value. Apple’s
refusal to license the Mac operating system to other manufacturers had given Microsoft the
opening it needed to take the market with its Windows operating system. Wintel PCs now
dominated the market—pushing Apple into a steadily declining market niche composed
primarily of artisans and teachers. By 1996, Apple’s management seemed to be in utter disarray.
Looking for a new product with which Apple could retake the initiative in personal computers,
the company bought NeXT for $402 million on December 20, 1996. Steve Jobs, who formed the
NeXT computer company when he left Apple, had envisioned his new company as the developer
of the “next generation” in personal computers. Part of the purchase agreement was that Jobs
would return to Apple as a consultant. In July of 1997, Amelio resigned and was replaced by
Steve Jobs as Apple’s interim CEO (iCEO). This ended Steve Jobs’ 14-year exile from the
company that he and Wozniak had founded. In addition to being iCEO of Apple, Jobs also served
as CEO of Pixar, a company he had personally purchased from Lucasfilm for $5 million.
Receiving only $1.00 a year as CEO of both Pixar and Apple, Jobs held the Guinness World
Record as the “Lowest Paid Chief Executive Officer.”
(2.3) 1998–2001: Jobs Leads Apple “Back to the Future”
Once in position as Apple’s CEO, Steve Jobs terminated many of the company’s existing
projects. Dropped were the iBook and the AirPort products series, which had helped popularize
the use of wireless LAN technology to connect a computer to a network.
In May 2001, the company announced the reopening of Apple Retail Stores. Like IBM and
Xerox, Apple had opened its own retail stores to market its computers during the 1980s. All such
stores had been closed however, when Wintel-type computers began being sold by mass
merchandisers, such as Sears and Circuit City, as well as through corporate websites.
Apple introduced the iPod portable digital audio player, and the company opened its own iTunes
music store to provide downloaded music to iPod users. Given the thorny copyright issues
inherent in the music business, analysts doubted if the new product would be successful.
(2.4) 2002–2006: A Corporate Renaissance?
In 2002, Apple introduced a redesigned iMac using a 64-bit processor. The iMac had a hemispherical base and a flat-panel all-digital display. Although it received a lot of press, the iMac
failed to live up to the company’s sales expectations.
In 2004 and 2005, Apple opened its first retail stores in Europe and Canada. By November 2006,
the company had 149 stores in the United States, 4 stores in Canada, 7 stores in the United
Kingdom, and 7 stores in Japan.
In 2006, Jobs announced that Apple would sell an Intel-based Macintosh. Previously, Microsoft
had purchased all of its microprocessors from Motorola. By this time, Microsoft’s operating
system with Intel microprocessors was running on 97.5% of the personal computers sold, with
Apple having only a 2.5% share of the market. The company also introduced its first Intel-based
machines, the iMac and MacBook Pro.
By this time, Apple’s iPod had emerged as the market leader of a completely new industry
category, which it had created. In 2006, Apple controlled 75.6% of the market, followed by
SunDisk with 9.7%, and Creative Technology in third place with 4.3%. Although one analyst
predicted that more than 30 million iPods would be sold in fiscal 2006, Apple actually sold
41,385,000. Taking advantage of its lead in music downloading, the company’s next strategic
move was to extend its iTunes music stores by offering movies for $9.99 each. An analyst
reviewing this strategic move said that Apple was able to create a $1 billion-a-year market for the
legal sale of music. Apple may be able to provide the movie industry with a similar formula.
(2.5) 2007–Present: Mobile Consumer Electronics Era
While delivering his keynote speech at the Macworld Expo on January 9, 2007, Jobs announced
that Apple Computer, Inc. would from that point on be known as Apple Inc., due to the fact that
computers were no longer the singular focus for the company. This change reflected the
company’s shift of emphasis to mobile electronic devices from personal computers. The event
also saw the announcement of the iPhone and the Apple TV. The following day, Apple shares hit
$97.80, an all-time high at that point. In May, Apple’s share price passed the $100 mark. In an
article posted on Apple’s website on February 6, 2007, Steve Jobs wrote that Apple would be
willing to sell music on the iTunes Store with DRM (which would allow tracks to be played on
third-party players) if record labels would agree to drop the technology. On April 2, 2007, Apple
and EMI jointly announced the removal of DMR technology from EMI’s catalog in the iTunes
Store, effective in May. Other record labels followed later that year.
In July of the following year, Apple launched the App Store to sell third-party applications for
the iPhone and iPod Touch. Within a month, the store sold 60 million applications and brought in
$1 million daily on average, with Jobs speculating that the App Store could become a billiondollar business for Apple. Three months later, it was announced that Apple had become the thirdlargest mobile handset supplier in the world due to the popularity of the iPhone
On December 16, 2008, Apple announced that, after over 20 years, 2009 would be the last year
Steve Jobs would be attending the Macworld Expo, and that Phil Schiller would deliver the 2009
keynote speech in lieu of the expected Jobs. Almost exactly one month later, on January 14,
2009, an internal Apple memo from Jobs announced that he would be taking a six-month leave
of absence, until the end of June 2009, to allow him to better focus on his health and to allow the
company to better focus on its products without having the rampant media speculating about his
health. Despite Jobs’ absence, Apple recorded its best non-holiday quarter (q1 FY 2009) during
the recession with revenue of $8.16 billion and a profit of $1.21 billion.
After years of speculation and multiple rumored “leaks,” Apple announced a large screen, tabletlike media device known as the iPad on January 27, 2010. The iPad ran the same touch-based
operating system that the iPhone used and many of the same iPhone apps were compat-ible with
the iPad. This gave the iPad a large app catalog on launch even with very little development time
before the release. Later that year on April 3, 2010, the iPad was launched in the United States
and sold more than 300,000 units on that day, reaching 500,000 by the end of the first week. In
May 2010, Apple’s market cap exceeded that of competitor Microsoft for the first time since
1989.
In June 2010, Apple released the fourth generation iPhone, which introduced video calling,
multitasking, and a new insulated stainless steel design which served as the phone’s antenna.
Because of this antenna implementation, some iPhone 4 users reported a reduction in signal
strength when the phone was held in specific ways. Apple offered buyers a free rubber “bumper”
case until September 30, 2010, as cases had been developed to solve/improve the signal strength
issue.
In September 2010, Apple refreshed its iPod line of MP3 players, introducing a multi-touch iPod
Nano, iPod Touch with FaceTime, and iPod Shuffle with buttons. In October 2010, Apple shares
hit an all-time high, eclipsing $300. Additionally, on October 20, Apple updated its MacBook Air
laptop, iLife suite of applications, and unveiled Mac OS X Lion, the latest installment in its Mac
OS X operating system. On November 16, 2010, Apple Inc., after years of negotiations, finalized
a deal to allow iTunes to sell The Beatles’ music at $1.29 per song. The five major Web-TV
boxes were (1) Apple TV, (2) Boxee, (3) Google TV, (4) WD TV Hub, and (5) Roku.
3.0 Steven P. Jobs: Entrepreneur and Corporate Executive
In 2010, Steve Jobs was chosen as “Executive of the Decade” by Fortunemagazine. He has also
been referred to as the “Henry Ford” of the current world business market. Steven P. Jobs was
born on February 24, 1955, in San Francisco. He was adopted by Paul and Clara Jobs in
February 1955. In 1972, Jobs graduated from Homestead High School in Los Altos, California.
His high school electronics teacher said, “He was somewhat of a loner and always had a different way of looking at things.” After graduation, Jobs was hired by Hewlett-Packard as a sum-mer
employee. This is where he met Steve Wozniak, a recent dropout from The University of
California at Berkeley. Wozniak had a genius IQ and was an engineering whiz with a passion for
inventing electronic gadgets. At this time, Wozniak was perfecting his “blue box,” an illegal
pocket-size telephone attachment that allowed the user to make free long-distance calls. Jobs
helped Wozniak sell this device to customers.
In 1972, Jobs enrolled at Reed College in Portland, Oregon, but dropped out after one semester.
He remained around Reed for a year and became involved in the counterculture. During that
year, he enrolled in various classes in philosophy and other topics. In a later speech at Stanford
University, Jobs explained, “If I had never dropped in on that single course (calligraphy), that
Mac would have never had multiple typefaces or proportionally spaced fonts.”
In early 1974, Jobs took a job as a video-game designer for Atari, a pioneer in electronic arcade
games. After earning enough money, Jobs went to India in search of personal spiritual
enlightenment. Later that year, Jobs returned to California and began attending meetings of Steve
Wozniak’s “Homebrew Computer Club.” Wozniak converted his TV monitor into what would
become a computer. Wozniak was a very good engineer and extremely interested in creating new
electronic devices. Although Jobs was not interested in developing new devices, he realized the
marketability of Wozniak’s converted TV. Together they designed the Apple I computer in Jobs’
bedroom and built the first prototype in Jobs’ garage. Jobs showed the Apple I to a local
electronics retailer, the Byte Shop, and received a $25,000 order for 50 computers. Jobs took this
purchase order to Cramer Electronics to order the components needed to assemble the 50
computers.
The local credit manager asked Jobs how he was going to pay for the parts and he replied, “I
have this purchase order from the Byte Shop chain of computer stores for 50 of my computers
and the payment terms are COD. If you give me the parts on net 30 day terms, I can build and
deliver the computers in that time frame, collect my money from Turrell at the Byte Shop and
pay you.” With that, the credit manager called Paul Turrell, who was attending an IEEE
computer conference, and verified the validity of the purchase order. Amazed at the tenacity of
Jobs, Turrell assured the credit manager that if the computers showed up in his stores Jobs would
be paid and would have more than enough money to pay for the parts order. The two Steves and
their small crew spent day and night building and testing the computers and delivered them to
Turrell on time to pay his suppliers and have a tidy profit left over for their celebration and next
order. Steve Jobs had found a way to finance his soon-to-be multimillion dollar company without
giving away one share of stock or ownership.
Jobs and Wozniak decided to start a computer company to manufacture and sell personal
computers. They contributed $1,300 of their own money to start the business. Jobs selected the
name Apple for the company based on his memories of a summer job as an orchard worker. On
April 1, 1976, Apple Computer company was formed as a partnership.
During Jobs’ early tenure at Apple, he was a persuasive and charismatic evangelist for the
company. Some of his employees have described him at that time as an erratic and tempestuous
manager. An analyst said that many persons who look at Jobs’ management style forget that he
was 30 years old in 1985 and he received his management and leadership education on the job.
Jobs guided the company’s revenues to $1,515,616,000 and profits of $64,055,000 in 1984. Jobs
was cited in several articles as having a demanding and aggressive personality. One analyst said
that these two attributes described most of the successful entrepreneurs. Jobs strategically
managed the company through a period of new product introduction, rapidly changing
technology, and intense competition—a time during which many companies have failed.
In 1985, after leaving Apple, Jobs formed a new computer company, NeXT C…
